Eugene Roosevelt Powers and Lila Virginia Powers v. Sims and Levin

542 F.2d 1216, 1976 U.S. App. LEXIS 6834

• Court: Court of Appeals for the Fourth Circuit
• Decided: October 1, 1976
• Docket: 75-1768
• Status: Published

Opinions

HAYNSWORTH, Chief Judge:

Under the Truth-in-Lending Act¹ and the regulations known as Regulation Z,² the plaintiffs, husband and wife, by this action sought the maximum civil penalties, rescission of the home improvement loan contract and vesting of the property constituting home improvements in them without further obligation on their part to repay any of the funds advanced to them or in their behalf. The district court granted summary judgment for the plaintiffs upon findings and conclusions that the defendant had violated the Act in four respects. It awarded the maximum civil penalty of $1,000 to each of the plaintiffs, declared their home improvement loan contract rescinded and title to the home improvements vested in the plaintiffs without further obligation of repayment. It also ordered the defendant to pay the plaintiffs’ attorneys’ fees in the amount of $1,500. Powers v. Sims and Levin Realtors, E.D.Va., 396 F.Supp. 12.

Upon a different ground, we think the Truth-in-Lending Act was violated, though we think the plaintiffs were entitled to only one civil penalty, not two. We take a different view of the matter of the rescission and vesting of the title of the home improvements in the plaintiffs.

The plaintiffs, desiring to effect improvements to their home at an estimated cost of $1250, negotiated a loan to themselves from the defendant for $5,000. The extra money was needed to repay a previous loan upon which a balance of $2,758.13 was then due to the First & Merchants National Bank and to pay delinquent fire insurance premiums and outstanding real estate taxes. Including $5.50, the fee for cancellation of the earlier mortgage, the total sum to be disbursed in satisfaction of outstanding debts of the Powers was $3,303.85.

As the first monthly installment, plaintiffs made a payment of $50, whereupon a dispute developed among the parties whether the monthly installments negotiated by the parties were to be $50 or $65. Meanwhile, the Powers had also become involved in a dispute with the contractor whom they had obtained to effect the improvements. This led them to seek legal advice.

Upon advice of counsel, Mr. Powers wrote to the defendant on September 20, 1974 giving notice of cancellation of the loan agreement upon the ground that neither he nor his wife had been furnished a disclosure statement as required by the Act. The defendant responded that its papers showed that the plaintiffs had been furnished the disclosure statement and rejected the attempted cancellation.³ On October 1, 1974, Mr. Powers again wrote to the defendant offering to rescind the loan transaction and this time offering to return the property constituting the improvements. The defendant responded that it would not agree to a rescission unless plaintiffs returned the home improvements or their reasonable value and the amount which had been expended in satisfaction of the earlier debts. Alternatively, the defendant offered to recast the note and deed of trust to provide a longer period of repayment during which the monthly payments would be $50 rather than $65. These alternative proposals were rejected by the plaintiffs, who contended that they were not required to reimburse the defendant for the amount it had spent to discharge the earlier indebtedness.

This litigation followed.

There is an unresolved dispute as to whether the defendant furnished the plaintiffs with any disclosure statement, though the defendant produced a disclosure statement purportedly signed by the plaintiffs. The district court examined that statement and concluded that it violated the requirements of the Act in four respects:

1) It failed to identify the method of computing any unearned portion of the finance charge in the event of pre-payment of the obligation.⁴

2) It failed to print the terms “finance charge” and the “annual percentage rate” more conspicuously than other terms.⁵

3) It failed to clearly disclose the total number of payments for the repayment of the indebtedness.⁶

4) It failed to use the term “finance charge.”⁷

We need not consider the correctness of any of these rulings, for there is another matter, noticed by the district court sua sponte,⁸ which clearly supports a finding and conclusion of a violation of the disclosure requirements.

In any transaction in which a security interest is to be acquired in one’s home, the Act requires that the debtor be given the right to rescind the transaction through “midnight of the third business day following the consummation of the transaction or the delivery of the disclosures required under this section . . ., whichever is later .⁹ The same section also requires the lender to give the debtor written notice of the right of rescission within the three business day period.

The Powers were notified of the right to rescind within two days, not three. The disclosure statement and the rescission notice indicate that delivery to the plaintiffs was on July 24, 1974. The rescission notice stated that they would have until July 26 to exercise the right of rescission. What the Powers might or might not have done is unknown, but the Act requires that they be given three days to think about it, and giving them only two is a clear violation of the Act’s requirements. This violation of the Act supports the imposition of the statutory penalty and an award of attorneys’ fees as provided in 15 U.S.C.A. § 1640.

The district court held that husband and wife were each entitled to the statutory penalty of $1,000.¹⁰ Literally read, § 1640 does provide that when a creditor fails to disclose to any person any information required to be disclosed to that person, the creditor is liable to that person for the statutory penalty. In this home improvement loan to the husband and wife, subject to their right of rescission, the creditor was required to make disclosure to each of them. Thus the district court reasoned that each was entitled to $1,000 as the statutory penalty. But this neglects the fact that there was but one credit transaction, and the plaintiffs were joint obligors of that joint obligation. The Congress was careful to provide a maximum to the statutory penalty, and it is not to be lightly supposed that that statutory maximum is to be doubled, trebled, or quadrupled, depending upon the number of the joint obligors in a single consumer credit transaction. That we should treat husband and wife, when joint obligors, as one is indicated by the legislative history. In House Report Number 1040 it is stated:

“Any creditor failing to disclose required information would be subject to a civil suit with a penalty equal to twice the amount of the finance charge, with a minimum penalty of $100 and a maximum penalty not to exceed $1,000 on any individual credit transaction.” 1968 U.S. Code Cong, and Adm.News p. 1976 (Emphasis added).

Since there was here only one credit transaction, we think only one civil penalty should have been imposed. See Rivers v. Century Finance Company, 4 CCH Con. Credit Guide, 198,771 (N.D.Ga.1974); St. Marie v. Southland Mobile Homes, Inc., 376 F.Supp. 996 (E.D.La.1974). But see, Simmons v. American Budget Plan, Inc., 386 F.Supp. 194 (E.D.La.1974).

Under 15 U.S.C.A. § 1635 the debtors must be allowed a right of rescission within three business days following consummation of the transaction, or the delivery of the required disclosures, whichever is later. Since, as we have held, the borrowers were not given the necessary disclosure of the three day right of rescission, their right of rescission continued, but we find the attempt of the plaintiffs to rescind in September and October 1974 fatally deficient, amounting instead to an anticipatory breach of contract.

The Powers, in attempting to rescind the transaction, stated they would tender delivery of the home improvements, but that they would not reimburse the defendant for the money it had expended in satisfying the other indebtedness of the Powers.¹¹ In demanding such reimbursement, the defendant was not imposing unwarranted preconditions on the rescission right, as the district court held, but was simply pointing out a glaring deficiency in the proposal of the Powers and insisting upon what was its legal due.

At the time the transaction was consummated, the Powers owed the First & Merchants Bank $2,758.13. They also owed delinquent fire insurance premiums and real estate taxes. The debt to the Bank was secured by a valid first mortgage. Supposedly, the unpaid taxes were a lien on the property. With its funds, the defendant satisfied the plaintiffs’ debt to the Bank and cancelled that mortgage. The plaintiffs are no longer obligated to pay $2,758.13 to the Bank, the accrued taxes to public officials or the delinquent premiums to the insurance company, and there is no equitable or legal principal which relieves them of the obligation to reimburse the defendant if the plaintiffs are permitted to rescind the transaction.

Section 1635 does not require a different result. Subsection (a) of that section simply provides for the right of rescission, while subsection (b) relieves the rescinding obligor of any need to pay any “finance or other charge.” It does not relieve him of any other obligation or of a duty to proffer full restoration. Indeed, it is specifically provided that if the creditor has delivered any property to the obligor, the obligor must tender its return. The money paid to the Bank to discharge plaintiffs’ indebtedness was delivered to the obligors as surely as if the defendant had delivered its check payable to the plaintiffs to them, and the plaintiffs, in turn, had endorsed it over to the Bank. Moreover, 12 C.F.R. § 226.903 provides that if there is a refinancing of an existing indebtedness the right of rescission applies only to the extent the amount of the new loan exceeds the amount of the old, unless the refinancing creditor is not the existing creditor, in which latter event the entire new transaction is subject to rescission. This, of course, indicates that the amount of the old loan is to remain an outstanding obligation-of the obligors and is subject to tender by the obligors to a new creditor after it has discharged the old obligation.

Upon the receipt of a valid notice of rescission, § 1635(b) requires the creditor to take the first steps within ten days of receipt of that notice.¹² Here the defendant, within the ten day period, if the notice was valid, would have been required to return the $50 payment it had received and cancel its security interest in the home. Thereupon, the plaintiffs would have been obligated to tender the home improvements, or their value, plus the amount of all funds expended by the defendant in discharging other debts of the plaintiffs, including their indebtedness to the Bank. Within the ten day period, however, the plaintiffs informed the defendant that they would not comply with their obligations under the statute, and that they would tender only the home improvements and not the money which they lawfully had owed to the Bank and now owed to the defendant for having discharged the earlier obligation.¹³

After having given a notice of rescission, but within the ten days within which the creditor must act, when the debtors committed an anticipatory breach of contract, taking the position that they would not make full restitution but only partial restitution, the creditor was no longer obligated to return the $50 payment or to cancel his security interest. What the debtors accomplished was not a rescission under the stat-In the face of such an anticipatory breach, the creditor was entitled to retain both the payment and its security interest. ute.

We may well have been too technical in considering whether or not there was an anticipatory breach of contract under traditional contract principles. Rescission is an equitable doctrine, and there is nothing in the statutory provision of the right of rescission or in § 1635(b)’s provision of the procedural steps in effecting the right of rescission which limits the power of a court of equity to circumscribe the right of rescission to avoid the perpetration of stark inequity or to require that that be done now which ought to have been done in the first place. Section 1635(b), in its provision of a sequence of events, may work well in the normal ease when both parties are properly advised and acting in full recognition of their rights and obligations. But surely the Congress did not intend to require a lender to relinquish its security interest when it is now known that the borrowers did not intend and were not prepared to tender restitution of the funds expended by the lender in discharging the prior obligations of the borrowers. In equity, the lender here was entitled to the protection of the bank’s earlier first mortgage and of the tax lien which it discharged. If it did not promptly satisfy and release its new mortgage, the penalty should not have been a release of the borrowers from an obligation of restitution which they were unprepared to discharge in the first place and had no intention of attempting to do so. The district court, and we, exercising traditional equity powers, may condition the borrowers’ continuing right of rescission upon their tender to the lender of all of the funds spent by the lender in discharging the earlier indebtedness of the borrowers as well as the value of the home improvements.

This is not to excuse the lender from the penalties for violation of the Act. We have affirmed the imposition of the statutory penalties and the assessment of attorneys’ fees in favor of the plaintiffs. What we do hold is that when rescission is attempted under circumstances which would deprive the lender of its legal due, the attempted rescission will not be judicially enforced unless it is so conditioned that the lender will be assured of receiving its legal due.

We affirm the imposition of one civil penalty of $1,000 upon the defendant to be jointly paid to the plaintiffs. The judgment below is reversed insofar as it holds that the plaintiffs may rescind, or validly did rescind, without making full restitution. The judgment as to the attorneys’ fees is vacated, for the district court may wish to reconsider the amount of that award in light of subsequent developments, and the case is remanded to the district court for further proceedings not inconsistent with this opinion.

AFFIRMED IN PART; REVERSED IN PART; AND REMANDED.

1 . 15 U.S.C. § 1601, et seq.

2 . 12 C.F.R. § 226.1 et seq.

3 . The language in the letter from the plaintiff was, “To date none of the disclosures required by the Truth-in-Lending Act have been given to me or my wife.” It is clear that the defendant understood this to be an assertion that neither Mr. Powers nor Mrs. Powers had been given the papers required to be given them. That this was correct is confirmed by the complaint in which the first two deficiencies alleged are that the defendant failed (1) “to furnish each plaintiff with a duplicate of the instrument or a statement upon which the required disclosures are made . . .” and (2) “to furnish each plaintiff with two copies of the rescission notice . . The unresolved factual issue, clearly left open by court and counsel, was whether or not any papers had been given to the Powers at or before the closing.

Whether or not a borrower, when undertaking to rescind such a transaction must disclose his grounds, fairness strongly suggests that he should. When he does disclose a ground for which there is no factual basis, surely the lender may dispute it. If, as the defendant claims and the written acknowledgments indicate, Mr. and Mrs. Powers were furnished with copies of the papers, the lender was not bound to acquiesce in the attempted rescission, though, of course, this would not preclude a later effective rescission upon some other valid ground.

4 . The disclosure statement provided that the “borrower should have the right of anticipation in whole or in part at any time with interest to be abated on the amount paid.” Apparently it was not contemplated that any “finance charge” would be prepaid which, at the time of the payment, would be unearned.

5 . Those terms were printed in all capital letters as were the components of the finance charge, the interest and the brokerage. So also was the heading “payments.”

6 . The paragraph under the caption “payments” provided for 59 monthly payments of $65 and a final “balloon payment” of $3,258.15. It did not state that the 59 monthly payments plus the one balloon payment would total 60 payments.

7 . The term was used in the plural, “finance charges,” and the interest and brokerage charge, components were separately stated, as was the total.

8 . 396 F.Supp. 21 at 23, n. 14.

9 . 15 U.S.C.A. § 1635(a). Reasons for the provision of a three day “cooling off period” are stated in Gardner and North Roofing and Siding Corp. v. Board of Governors Federal Reserve System, 150 U.S.App.D.C. 329, 464 F.2d 838.

10 . The statutory penalty is twice the amount of the finance charge, but not less than $100 nor more than $1,000. The statutory maximum is applicable here.

11 . Were there nothing else in the case, the letter would be ambiguous. It said the Powers would tender the home improvements or their value. It said nothing of funds expended by the defendant in satisfaction of the prior mortgage and payment of the past due taxes and insurance premiums. The defendant read the letter to mean that reimbursement of such sums would not be tendered, and that was exactly what the letter was intended to say. This is shown implicitly by the plaintiffs’ rejection of the offer to rescind if those monies were repaid and explicitly by the plaintiffs’ answers to the defendant’s Requests for Admission Nos. 4 and 9. “. . (T)he plaintiffs did not intend and were unprepared to tender to defendant as part of their rescission any money they might owe on a prior mortgage which was not the subject of their rescission.” “. The plaintiffs admit . . . that they did not intend and were not prepared to tender, as part of their rescission of the subject transaction, any amount owing on a prior mortgage or any taxes or insurance paid for by the defendant prior to giving notice of rescission.”

The plaintiffs may not be heard to say that the defendant’s reading of the letter of October 1 was unreasonable when they admit their intent coincided with the reading. Indeed, the plaintiffs take no such position. Theirs was simply the untenable legal position that they could rescind without obligation to make such a tender.

12 . We assume that the notice of rescission, premised on the factual claim that no written disclosure had been made, was valid. Of course, we do not decide that it was, for the factual premise is unresolved.

13 . The first notice of rescission was dated September 20, 1974, a Friday. The next business day was Monday, September 23, so that the defendant would have had until Thursday, October 3, within which to refund the $50 and cancel its security interest. The plaintiffs, however, mailed their second letter on Tuesday, October 1, which presumably was received on October 2, and it was that letter which gave the defendant notice that the plaintiffs would not perform their obligation of tendering both the home improvements and reimbursement of funds expended in discharging the debts of the plaintiffs.

As to the intent of the letter of October 1st, see fn. 11.