Reagan v. Racal Mortg., Inc.

• Decision Date: 29 January 1998
• Docket Number: No. 97-1676,97-1676
• Parties: Margo REAGAN, et al., Plaintiffs, Appellees, v. RACAL MORTGAGE, INC., et al., Defendants, Appellants.
• Court: U.S. Court of Appeals — First Circuit

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135 F.3d 37

Margo REAGAN, et al., Plaintiffs, Appellees, v. RACAL MORTGAGE, INC., et al., Defendants, Appellants.

No. 97-1676.

United States Court of Appeals First Circuit.

Jan. 29, 1998.

Richard L. O'Meara, with whom Charles P. Piacentini, Jr. and Murray, Plumb & Murray, Portland, ME, were on brief, for appellants.

Kurt E. Olafsen, with whom Olafsen & Butterfield, Portland, ME, was on brief, for appellees St. Jean, et al.

John G. Connor, with whom Law Office of John G. Connor, Portland, ME, was on brief, for appellee Bruce Goulette.

Before TORRUELLA, Chief Judge, LYNCH, Circuit Judge, and STEARNS, ^* District Judge.

PER CURIAM.

The proper resolution of this appeal depends on three controlling questions of Maine law. Because we find no clear guidance in Maine statutes or case law, we conclude that the best course of action is to certify these questions to the Supreme Judicial Court of Maine. See Me. R. Civ. P. 76B; Me.Rev.Stat. Ann. tit. 4, § 57 (West 1997).

Background

On April 30, 1992, Racal Mortgage, Inc. ("Racal") lent a certain sum to plaintiffs Gregg and Kathleen Bullock, who in exchange executed and delivered to Racal a promissory note and mortgage deed on their residence in Auburn, Maine. Racal entered into similar mortgage loan transactions with plaintiff Bruce Goulette on July 30, 1992, and with plaintiffs Robin and Stephen St. Jean on September 21, 1992.

All three loans were made for the purpose of financing the purchase of the plaintiffs' residences, and were closed in Racal's name, as lender. However, the loans were "table-funded," which means that a third party, Chemical Residential Mortgage Corporation ("Chemical"), provided the funds that Racal lent to the plaintiffs; after the loans were closed, Racal immediately assigned the loans to Chemical. Racal alleges that the borrowers knew that the loans were table-funded. In any case, Chemical thereafter serviced the loans and collected any amounts due from the borrowers.

From 1991 to 1994, Racal was registered with the Maine Bureau of Consumer Credit Protection ("BCCP") as a credit services organization ("CSO"), rather than as a supervised lender. ¹ The Maine Consumer Credit Code distinguishes between supervised lenders, which are authorized to extend credit to Maine consumers, and CSOs, which simply arrange for the extension of credit to consumers. Me.Rev.Stat. Ann. tit. 9-A, §§ 1-301(39), 10-102(1)(A) (West 1997). Only supervised financial organizations or licensed lenders may engage in the business of making supervised loans. See Me.Rev.Stat. Ann. tit. 9-A, § 2-301 (West 1997). "Supervised loans" are consumer loans that either are subject to an interest rate exceeding 12 1/4% per year, or are secured by an interest in real estate. See Me.Rev.Stat. Ann. tit. 9-A, § 1-301(40) (West 1997). In contrast, CSOs are only authorized to "(1) [i]mprov[e] a consumer's credit record, history or rating; (2)[a]rrang[e] for or obtain[ ] an extension of credit for a consumer; or (3)[p]rovid[e] advice or assistance to a consumer with respect to subparagraph 1 or 2." Me.Rev.Stat. Ann. tit. 9-A, § 10-102(1)(A) (West 1997).

Maine law penalizes a creditor who violates the regulations pertaining to the making of supervised loans by relieving the debtor from the obligation to pay certain loan charges. However, the specific penalty imposed upon violators has varied. Prior to its amendment in 1994, the Maine Consumer Credit Code provided that if a creditor who was not a supervised lender made a supervised loan, the debtor was not obligated to pay the loan finance charges and was entitled to recover any such charges paid at any point up to 12 months after the last payment due under the loan. Me.Rev.Stat. Ann. tit. 9-A, § 9-405(4) (West Supp.1992). ² Thus, as a practical matter, the Consumer Credit Code forced a creditor who violated the supervised lending provisions to make an interest-free loan. Nevertheless, the Code also tempered the penalty by providing that a creditor could avoid liability if he or she could establish that "the violation was unintentional or the result of a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such violations or error." Me.Rev.Stat. Ann. tit. 9-A, § 9-405(7) (West Supp.1992).

On March 9, 1994, section 9-405(4) was amended to limit the penalty imposed upon the creditor to recovery of the application fee, prepaid finance charges, closing costs, and the finance charges for the first twelve months of the loan. See 1994 Me. Legis. Serv. 496 (West) (entitled "An Act to Promote Equitable Penalties for Unlicensed Consumer Lending"), codified at Me.Rev.Stat. Ann. tit. 9-A, § 9-405(4) (1997). ³ However, the 1994 amendment also eliminated the affirmative defense at section 9-405(7) for violations of section 9-405(4). Thus, the amendment mitigated the severity of the penalty, but made its imposition more likely. ⁴

Proceedings Below

Because Racal was a CSO, rather than a supervised lender, it was barred from making supervised loans. Me.Rev.Stat. Ann. tit. 9-A, §§ 2-301, 10-102(1)(B). The mortgage loans made to the plaintiffs were supervised loans because they were secured by an interest in real estate. Me.Rev.Stat. Ann. tit. 9-A, § 1-301(40). After discovering that Racal was not a supervised lender, the plaintiffs sued for relief under section 9-405(4) in late 1995 in the Maine Superior Court. The plaintiffs filed their suits separately, but Racal later removed the actions to the U.S. District Court for the District of Maine, where they were consolidated for discovery and trial.

Ruling on the parties' motions for summary judgment, the district court first held that there had been no violation of the Consumer Credit Code in the course of the Bullock loan transaction. St. Jean v. Racal Mortgage, 952 F.Supp. 22, 26 (D.Me.1997). The district court began by noting that provisions of Article 9 apply only to "creditors." Me.Rev.Stat. Ann. tit. 9-A, § 9-101 (1997). A creditor is defined by the Maine Consumer Credit Code as "a person who both: (A) [r]egularly extends credit in consumer credit transactions; and (B) [i]s the person to whom the debt arising from the consumer credit transaction is initially payable on the face of the evidence of indebtedness...." Me.Rev.Stat. Ann. tit. 9-A, § 1-301(17) (1997). Section 1-301(17) further provides that "[a] person regularly extends consumer credit only if that person extended credit more than 25 times, or more than 5 times for transactions secured by a dwelling in the preceding calendar year." Racal made more than 5 consumer loans during the 1992 calendar year. Nevertheless, the district court interpreted section 1-301(17) to mean that a person's status as a creditor, and thus, the applicability of Article 9's provisions, was not retroactive to the first 5 supervised loans made during a given calendar year. Accordingly, the district court found that Racal was not a "creditor" when it made the Bullock loan because it was the first one made by Racal in Maine during the 1992. ⁵

In contrast, the district court held that the St. Jean and Goulette loans were subject to the provisions of Article 9 because by the time that those loans were made, Racal was a "creditor," having already made more than five loans during the calendar year. The district court also rejected various affirmative defenses raised by Racal, including the argument that section 9-405(7) protected it from liability because any violation of the Consumer Credit Code had been unintentional or the result of a bona fide error. The district court found that any error committed by Racal had been an error of law, which the court determined was not a bona fide error for purposes of section 9-405(7). The court concluded by finding Racal liable to the St. Jean and Goulette plaintiffs under section 9-405(4). In doing so, the district court rejected Racal's argument that the plaintiffs' recovery was limited to the penalties set forth in the 1994 amendment to section 9-405(4), and applied, instead, the version of section 9-405(4) that had been in effect in 1992. The district court therefore awarded Mr. Goulette a rebate of $50,903 and relief from future interest payments in the amount of $163,744, and awarded the St. Jeans a rebate of $24,829 and relief from future interest payments in the amount of $55,351.

The Appeal

In its appeal, Racal challenges the district court's entry of summary judgment on three different grounds. First, Racal contends that the district court erred in holding that it had violated the Maine Consumer Credit Code, because the Code does not require a lender's license for the making of table-funded loans. Second, Racal argues that, even if it did violate the Maine Consumer Credit Code, the district court erred in holding that the plaintiffs are entitled to remedies provided by a section of the Code that was repealed before they filed their suits. Third, Racal argues that even if it did violate the Maine Consumer Credit Code, and even if the pre-1994 version of section 9-405 were applicable to this case, the district court erred in entering summary judgment on the statutory defense of unintentional or bona fide error because there were genuine issues of material fact that required a trial for their resolution. The appellees, in turn, contest each of Racal's arguments.

A.

Reviewing de novo the district court's entry of summary judgment, we reject Racal's first argument. Racal is registered in Maine as a CSO rather than as a licensed lender. As noted above, section 2-301 of the Maine Consumer Credit Code provides that "unless a person is a supervised financial organization or has first obtained a license pursuant to this Act ..., he shall not engage in the business of making supervised loans." Supervised loans include "consumer loans that ... are secured by an interest in real estate...." Me.Rev.Stat. Ann. tit. 9-A, § 1-301(40). The loans made to the plaintiffs were...