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Court of Appeal, First District, Division 4, California.

Jessie KING and Mary Ann King, Plaintiffs and Appellants, v. CENTRAL BANK NATIONAL ASSOC., Defendant and Respondent.

Civ. 36716.

Decided: February 18, 1976

Robert A Goldstein, Oakland, James R. McCall, Jr., Professor of Law, Hastings College of Law, for plaintiffs and appellants. Roy C. Zukernam, Long Beach, for defendant and respondent.

This is an appeal from a judgment entered following the sustaining of a demurrer without leave to amend to a second amended complaint. Appellants Jessie and Mary Ann King, commenced this action for damages and injunctive relief on behalf of themselves and all others similarly situated. The first cause of action alleged that respondent Central Bank National Association (hereinafter Bank) and John P. Roberts Co.1 (hereinafter Roberts) had violated the finance charge limitations contained in the Unruh Act (Civ.Code, § 1801 et seq.) in a retail installment contract for the sale of automobile insurance to appellants. The second cause of action alleged noncompliance with applicable disclosure requirements of the Federal Truth in Lending Act (15 U.S.C., § 1601 et seq.).

The second amended complaint contains numerous conclusions of law and fact. Such conclusionary language, as well as the construction placed on the contract by appellants, may be disregarded in evaluating the complaint. (Page v. Insurance Co. of North America, 256 Cal.App.2d 374, 377–378, 64 Cal.Rptr. 89.)

The complaint sets forth the following factual allegations: 1. Respondent is a bank licensed to do business in California and engaged in the financing of automobile insurance policies through its subsidiary, Coast Program. Roberts is a licensed insurance broker, selling insurance on credit. On January 15, 1973, appellants, husband and wife, agreed to purchase automobile insurance on credit from Roberts and respondent. Wife consented to the contract and was a party thereto although her name was not on the contract.

2. The contract, a copy of which was attached to the complaint as Exhibit ‘A’ (the reverse side of the contract was stipulated to be a part of the complaint for purposes of the demurrer), provided that the cost of the insurance was $301, the downpayment by appellants was $71, and the balance was $230. The latter sum was payable in 10 monthly installments of $27.58, with a finance charge of $45.50. This finance charge is in excess of 5/6 of one percent of the amount financed.

3. In its regular course of business, respondent supplied Roberts with contract forms on which credit sales of insurance were and are written. These forms provide for: a downpayment of at least 20 percent of the cost of the insurance (which is consideration for respondent agreeing to finance the insurance purchase); assignment of the policy to respondent as security, with a right in respondent to cancel the policy if payments are not timely made by appellants; exemption of respondent from liability for cancelling the insurance policy; payments for the purchases to be made to respondent.

4. Roberts uses such forms in the regular course of its business, and acts as a conduit for placing such contracts with respondent. Roberts requires that purchasers on credit make payments of respondent; they are not permitted to choose the financier. When insurance purchases are made on credit, all arrangements are made directly with Roberts; no negotiations or arrangements take place between respondent and a purchaser at the time the insurance is bought.

5. Respondent exercises a substantive degree of control over Roberts in determining the types, conditions, and terms of policies which can be purchased on credit. Respondent requires Roberts to select only policies that contain certain provisions, and to collect the downpayment. Respondent shares the profits of credit sales of insurance with Proberts. Respondent pays Roberts a fee on contracts produced by Roberts that meet respondent's requirements.

6. In view of these ‘and other acts unknown’ to appellants, respondent and Roberts are engaged in the retail sale of insurance for credit, and each acts as agent for the other.

‘Services' Within the Meaning of Civil Code Section 1802.2 Include ‘The Providing of Insurance’

The court below ruled that ‘the sale of insurance by installment payments is not a transaction within the purview of the Unruh Act.’ This conclusion was based in part, on an opinion of the legislative counsel, addressed to the author of the Act. (4 California Assembly Journal (1959) 5429–5430.)

Section 1802.2 provides: “Services' means work, labor and services, for other than a commercial or business use, including services furnished in connection with the sale or repair of goods as defined in Section 1802.1 or furnished in connection with the repair of motor vehicles or in connection with the improvement of real property or the providing of insurance, but does not include the services of physicians or dentists, nor services for which the tariffs, rates, charges, costs or expenses, including in each instance the deferred payment price, are required by law to be filed with and approved by the federal government or any official, department, division, commission or agency of the United States.'

The legislative counsel was asked whether ‘services' would cover the arrangement by which an insurer permits an insured to pay insurance premiums in installments, including an additional fee to cover the greater expense to the insurer. This question was answered in the negative. The counsel characterized the code definition as encompassing ‘services furnished in connection with . . . the providing of insurance’ rather than the insurance sale transaction itself, and stated that where the sole basis for imposition of the additional fee is the added expense to the company of installment collection, it is a legitimate component of the premium. As appellants observe, the later-enacted ‘Four Installment Rule’ (Civ.Code, § 1802.6, as amended in 1969) might well have affected the counsel's opinion, which states that ‘determination of the question here presented must then turn upon whether the essential nature of the arrangement entered into by the insured and the insurer is one primarily of installment financing or rather simply the sale of insurance for a different ‘price’ or premium depending on the time paid.' The Four Installment Rule was designed to avoid such distinctions.

In any event, we disagree with the counsel's and the trial court's reading of the statutory definition. The question posed is whether the Legislature intended to include ‘services . . . furnished in connection with . . . the providing of insurance’ or ‘the providing of insurance’ itself.

A literal reading of the paragraph suggests the former. The absence of a comma after the phrase ‘in connection with the improvement of real property’ indicates that such a construction was intended. Punctuation, while not controlling, should be considered in the interpretation of a statute. (Paris v. County of Santa Clara, 270 Cal.App.2d 691, 699, 76 Cal.Rptr. 66.) However, the use of the words ‘furnished in connection with’ and ‘in connection with’ in conjunction with the other activities described by the statute suggests the contrary result. Suffice it to say that the legislative intent, which is of course our objective here (East Bay Garbage Co. v. Washington Township Sanitation Co., 52 Cal.2d 708, 713, 344 P.2d 289), cannot be easily ascertained by a mere reading of the statute.

Nor does the legislative history of the relevant language provide significant guidance. The phrase ‘the providing of insurance’ was not included in the assembly bill as introduced (see A.B. 500 (1959); 15 Assembly Interim Comm. Reports #22, Final Report of Subcommittee on Lending & Fiscal Agencies (1959) at p. 27), nor is there any discussion of the subject in the available records of hearings on the bill. (Id.) The phrase was added by an amendment in the senate (2 California Assembly Journal (1959) 2590, Amend. #1), and there is no mention in the legislative records of its intended effect.

In construing the ambiguous language of the statute, however, we find most helpful the following opinion of the state Attorney General: ‘Here it would appear that a construction of section 1802.2 of the Civil Code to include ‘services furnished in connection with the providing of insurance’ but not the ‘providing of insurance’ would be relatively meaningless. No such service comes to mind for which in the ordinary course of business one receives compensation, the payment of which would be financed in a time sale contract. An insurance broker or agent performs such services but his compensation therefor is generally paid directly by the insurer as commission, and such services or payment therefor by the insurer do not become part of retail installment contracts. Conceivably a business exists or might be formed which furnishes as a service factual information about available insurance to prospective insureds. It seems most doubtful that a purchaser of such a service would resort to installment payments for the service. The cost of such a service (for other than a commercial or business use) would probably by quite small and not lend itself to installment payments.

‘Since to construe section 1802.2 of the Civil Code to include merely services furnished in connection with the providing of insurance and not the providing of insurance itself would mean that the phrase ‘providing of insurance’ would have no effective meaning whatsoever, it is our opinion that the only other construction available, it being a reasonable construction, is that ‘services' includes the providing of insurance itself.’ (50 Ops.Cal.Atty.Gen. 110, 113.)

We agree that to otherwise construe the statute would render the relevant language virtually meaningless, a result to be avoided if possible. (Select Base Materials v. Board of Equal., 51 Cal.2d 640, 645, 647, 335 P.2d 672.) To effectuate the legislative purpose, the phrase must be read: “Services' means work, labor and services, for other than a commercial or business use, including . . . the providing of insurance . . ..'

Appellants Failed to State a Cause of Action in Their Second Amended Complaint, And the Demurrer Was Properly Sustained

In ruling on the demurrer, the court further found that as a matter of law the transaction between the parties was a loan, not an installment sale of insurance, and inferentially concluded that it therefore was not governed by either the Unruh Act or section 1639 of the Consumer Credit Protection Act,2 the basis of appellants' two alleged causes of action.

‘In assessing the sufficiency of a complaint against a general demurrer, we must treat the demurrer as admitting all material facts properly pleaded. Furthermore, we bear in mind our well established policy of liberality in reviewing a demurrer sustained without leave to amend: ‘the allegations of the complaint must be liberally construed with a view to attaining substantial justice among the parties.’' (Glaire v. LaLanne-Paris Health Spa, Inc., 12 Cal.3d 915, 918, 117 Cal.Rptr. 541, 542, 528 P.2d 357, 358 (citations omitted).) Viewed in even this most favorable light, however, appellants' allegations do not state a cause of action under either of the statutory schemes relied upon.

As both parties acknowledge, the substance and circumstances, rather than the form, of the transaction must govern its legal effect. (Glaire, supra, 12 Cal.3d at p. 925, 117 Cal.Rptr. 541, 528 P.2d 357; West Pico Furniture Co. v. Pacific Finance Loans, 2 Cal.3d 594, 603, 86 Cal.Rptr. 793, 469 P.2d 665.) The flaw in appellants' case rests in their failure to allege the existence of any facts beyond the contract to support their assertions that respondent or Roberts sold them insurance on credit.

The only agreement between appellants and either respondents or Roberts that is alleged to exist is Exhibit ‘A.’ ‘The general rule is that when a written instrument which is the foundation of a cause of action or defense is attached to a pleading as an exhibit and incorporated into it by proper reference, the court may, upon demurrer, examine the exhibit and treat the pleader's allegations of its legal effect as surplusage.’ (Washer v. Bank of America, 21 Cal.2d 822, 829–830, 136 P.2d 297, 302 [overruled on another point in MacLeod v. Tribune Publishing Co., 52 Cal.2d 536, 551, 343 P.2d 36], quoted in Weitzerkorn v. Lesser, 40 Cal.2d 778, 785–786, 256 P.2d 947 and Kronsberg v. Milton J. Wershow Co., 238 Cal.App.2d 170, 173, 47 Cal.Rptr. 592; Peak v. Republic Truck Sales Corp., 194 Cal. 782, 790, 230 P. 948.) As noted erlier, a court is not bound by the pleader's designation or construction of an unambiguous contract, nor the pleader's conception of its legal nature or effect. (Ephraim v. Metroplitan Trust Co., Cal.2d 824, 835, 172 P.2d 501; Peak, supra; Schlageter v. Cutting, 116 Cal.App. 489, 493, 2 P.2d 875; Producers Fruit Co. v. Goddard, 75 Cal.App. 737, 758, 243 P. 686.)

Appellants first urge that the rule stated in Washer, supra, is not relevant to this case, as the writing is not the ‘foundation’ of their causes of action. Had they alleged the existence of any other or additional agreement between the parties, this might be arguable. However, the claimed statutory violations consist of failure of that contract (Exhibit ‘A’) to disclose certain terms, and a finance charge in that contract which is in excess of the amount permitted by statute. The action is thus clearly based upon the unambiguous written instrument attached to the pleading.

In substance, appellants alleged that although Exhibit ‘A’ purports to be a loan, it is a retail installment contract for the sale of automobile insurance. Allegations as to the general practices of respondent and Roberts in making other ‘credit sales of insurance’ add nothing to the alleged transaction involving these parties. Certain allegations must also be disregarded, as they are in conflict with the writing. For example, appellants allege that the form contract provides that payment ‘for insurance purchases' is to be made to respondent. This is not supported by, and indeed is contrary to, the written document. Similarly, appellants allege that the downpayment is ‘consideration for’ respondent's agreement to finance the insurance purchase. This is entirely inconsistent with the agreement stated in writing.

The appellants have not alleged any facts to support their allegation that the contract is for the sale of insurance or their legal conclusion that the agreement constitutes a retail installment contract within the meaning of Civil Code section 1802.6, a retail installment sale (Civ.Code, § 1802.5), or a credit sale (15 U.S.C., § 1602(g)). the contract itself cannot possibly be so characterized, as it simply does not concern any sale of insurance. No transfer to appellants of any interest in an insurance policy is contained therein. (Cf. Melana v. Credit Discount Co., 27 Cal.2d 335, 339–340, 163 P.2d 869.) While we are not bound by either the title or form of the written instrument, we cannot ignore its plain language and import in the absence of some allegation by appellants that the substance of their agreement consisted of something more than is contained in that document.

It may well be true, as appellants allege, that respondent and Roberts are generally ‘retail sellers' of insurance on credit. It may also be true that respondent, though purporting to engage only in the financing of insurance policies, is in fact so closely related to a seller that it may be treated as a party to sales transactions, and be subjected to applicable disclosure and liability statutes thereby. (Cf. Glaire, supra; Morgan v. Reasor Corp., 69 Cal.2d 881, 894, 73 Cal.Rptr. 398, 447 P.2d 638; 50 Ops.Cal.Atty.Gen., supra, at pp. 113–114.) However, appellants have totally failed to allege any facts indicating that respondent or Roberts, to whom they allege respondent was integrally related, was a seller of insurance to them, on installment credit or otherwise.3 Nor have they alleged any relationship between respondent and the insurance company. As a sale is prerequisite to a cause of action under either the state (‘the retail installment sale,’ Civ.Code, § 1802.5) or federal (‘consumer credit sale,’ 15 U.S.C., § 160(g)) provisions relied upon, the demurrer was properly sustained.

The judgment is affirmed.


1.  Roberts is not a party to this appeal. Appellants' second amended complaint is still pending in Alameda County Superior Court against Roberts, whose general demurrer to the previously filed first amended complaint was overruled.

2.  The contract apparently complies with the federal disclosure requirements and applicable regulations for ‘consumer loans' (15 U.S.C., § 1639), but not for ‘consumer credit sales.’ (15 U.S.C., § 1638.)

3.  There is no allegation that Roberts was acting as an agent of any insurance company in the instant transaction, either in selling a policy to appellants or arranging for an extension of credit to them. In the absence of such allegations, we cannot presume such an agency in fact existed. A licensed insurance broker generally is an agent of the insured, not the insurer. (Ins.Code, § 33.)

CALDECOTT, Presiding Justice.