The Superior Court of New Jersey, Law Division, Camden County recently granted summary judgment to one of our banking clients, dismissing a class action suit involving our client's purchase of collateral protection insurance ("CPI"). There have been numerous class action suits brought throughout the nation challenging the purchase of "CPI" or "force-placed" insurance. These suits have had varying results. To our knowledge, the Law Division's grant of summary judgment to our client in the matter entitled Loatman v. Summit Bank, Docket No. L-3527-96, represents the first time that a New Jersey court has had the opportunity to determine the propriety of a bank's CPI program.
In Loatman, plaintiffs had entered into retail installment sales agreements that had been assigned to Summit Bank's predecessor. The subject retail installment sales agreements required plaintiffs to maintain property insurance on the property that they had purchased - a tent camper and a van. The agreements further provided that if plaintiffs failed to maintain their own property insurance, Summit would purchase CPI insurance. Plaintiffs agreed that they would "repay on demand the cost of [the CPI] to [Summit] with interest at the Annual Percentage Rate in effect."
Both plaintiffs failed to maintain property insurance on Summit's collateral. Thereafter, Summit purchased CPI through an insurance company with whom it had entered into an agency agreement. Summit added the exact amount of the premiums for CPI to plaintiffs' account.
Thereafter, plaintiffs commenced a class action in federal court. The crux of plaintiffs' argument was that Summit had improperly added the full amount of the premiums for CPI to their respective accounts, although it had received a 20% commission from the insurance company for the placement of the CPI insurance. Plaintiffs contended that Summit should only have charged them the net amount of the CPI premium, minus commissions. They alleged that Summit's receipt of commissions constituted a breach of the retail installment sales agreement, a violation of the New Jersey Consumer Fraud Act, N.J.S.A. § 56:8-1, et seq., unjust enrichment, a breach of Summit's fiduciary duties, and a violation of the National Bank Act, 12 U.S.C. § 85 (the "NBA") and/or the Depositary Institution Deregulation and Monetary Control Act of 1980, 12 U.S.C. § 1831(a), (b) (the "DIDMCA").
The United States District Court granted summary judgment dismissing plaintiffs' claims for violations of NBA and DIDMCA. The District Court, in an unpublished opinion, held, among other things, that the premiums for CPI did not constitute interest under federal banking laws. The District Court relied on a regulation promulgated by the Office of the Comptroller of the Currency, 12 C.F.R. § 7.4001(a), that excluded from the definition of interest "premiums and commissions attributable to insurance guaranteeing repayment of any extension of credit . . ." The District Court refused to exercise supplemental jurisdiction over plaintiffs' state law claims.
Thereafter, plaintiffs proceeded with their class action in New Jersey State Court and subsequently moved for partial summary judgment on their claim that Summit's receipt of commissions for CPI violated the Consumer Fraud Act. Plaintiffs argued that Summit had misrepresented in the retail installment sales contracts that Summit would only charge plaintiffs the net amount of the premiums for CPI, minus any commissions that Summit received. Plaintiffs further argued that Summit had knowingly concealed that it would receive commissions from the insurance company. Summit cross-moved for partial summary judgment on plaintiffs' Consumer Fraud Act claims.
On July 23, 1999, Hon. John A. Fratto, J.S.C. granted Summit's cross-motion for partial summary judgment dismissing the Consumer Fraud Act claim and denied plaintiffs' motion.
First, Judge Fratto adopted Summit's construction of the retail installment sales agreements as authorizing Summit to add the full amount of the CPI premiums to plaintiff's respective loan balance; therefore, the addition of those charges was not an unconscionable commercial practice under the Consumer Fraud Act. Judge Fratto also ruled that the "cost" of insurance was the "gross amount of the premiums, including commissions."
Second, Judge Fratto relied upon the recently enacted New Jersey Collateral Protection Insurance Act, N.J.S.A. § 17:16V-1 et seq. Although the CPI Act took effect in May 1999, its legislative history provided that it was intended to clarify the practices relating to CPI; therefore, the judge utilized it to construe what constituted the "cost" of CPI insurance. The CPI Act defined the cost of CPI as "the premium paid which premium includes commissions and fees paid by the insurer whether the commission is paid to the creditor [or] to a person or entity that is an affiliate of the creditor . . . ." N.J.S.A. 17:16V-2. This definition was consistent with the definition contained in the case law.
Third, Judge Fratto found that Summit had not attempted to "induce" plaintiffs to purchase CPI; therefore, for this independent reason, it could not be held liable for a violation of the Consumer Fraud Act. See Gennari v. Weichert Realtors, 148 N.J. 582, 607 (1997) (stating that only misrepresentations that are "made to induce the buyer to make the purchase" are actionable under the Consumer Fraud Act). Summit, through the insurer, had provided several notices to plaintiffs advising them of their failure to maintain their own property insurance and stating that Summit would purchase CPI to protect its interest in the collateral if plaintiffs did not immediately purchase property insurance. Judge Fratto found that such notices barred any possible finding that Summit had sought to induce plaintiffs not to purchase their own insurance.
Finally, Judge Fratto rejected plaintiffs' contention that Summit had violated the Consumer Fraud Act by knowingly failing to disclose to plaintiff its receipt of commissions. Among other things, the relationship between Summit and plaintiffs was an "arms-length," creditor-debtor relationship and did not impose any obligation upon Summit to disclose to plaintiffs its receipt of commission. Further, the clarifying CPI Act provided that a creditor could not be held liable for a failure to disclose its receipt of commissions. N.J.S.A. § 17:16V-7(b)(5).
Following Judge Fratto's dismissal of plaintiffs' claims under the Consumer Fraud Act, Summit moved for summary judgment dismissing plaintiffs' remaining common law claims. On February 4, 2000, Judge Fratto affirmed his prior construction of the contract and dismissed plaintiffs' remaining claims for breach of contract, unjust enrichment and breach of fiduciary duty. Judge Fratto further found one plaintiff's failure to pay any portion of the CPI charges deprived her of standing to assert her claims.
We believe that these recent rulings may be useful to banks and other financial institutions in defending against claims arising out of the purchase of CPI and, more generally, in defending against alleged violations of the Consumer Fraud Act.
