Williams v. Public Finance Corp.

Decision Date05 July 1979
Docket Number77-2112 and 77-3213,77-1706,Nos. 77-1337,s. 77-1337
Citation598 F.2d 349
PartiesMattie WILLIAMS, Plaintiff-Appellee, Cross-Appellant, v. PUBLIC FINANCE CORPORATION, Defendant-Appellant, Cross-Appellee. Ruth A. JACKSON, Plaintiff-Appellee, Cross-Appellant, v. USLIFE CREDIT CORPORATION, Defendant-Appellant, Cross-Appellee. Linda L. SMITH, Plaintiff-Appellee, v. PUBLIC FINANCE CORPORATION, Defendant-Appellant. Leonard and Cora SINGLETARY, Plaintiffs-Appellees, v. PUBLIC FINANCE CORPORATION, Defendant-Appellant.
CourtU.S. Court of Appeals — Fifth Circuit

Lewis N. Jones, Atlanta, Ga., for defendant-appellant in No. 77-1706.

Charles L. Gregory, Allen I. Hirsch, Atlanta, Ga., for defendants-appellants in Nos. 77-1337, 77-2112 and 77-3213.

Joseph H. King, Jr., Atlanta, Ga., for plaintiffs-appellees in Nos. 77-1337, 77-1706 and 77-2112.

Ralph Goldberg, Atlanta, Ga., for plaintiff-appellee in No. 77-3213.

Appeals from the United States District Court for the Northern District of Georgia.

Before GOLDBERG, SIMPSON and CLARK, Circuit Judges.

GOLDBERG, Circuit Judge:

These four consolidated cases all involve the same question of federal law. The question is whether a loan which is void because it violates a Georgia usury law, the Georgia Industrial Loan Act (ILA), Ga.Code Ann. §§ 25-301, et seq., § 25-9903, can also violate the federal Truth-in-Lending (TIL) Act, 15 U.S.C. §§ 1601, Et seq. (Consumer Credit Protection Act). All four cases also involve a second, more narrow federal law question. If a loan void under state law can and does violate the TIL Act, is the penalty under the Act the statutory minimum fine of $100, or is the penalty twice the finance charge that was contracted for, but which could not be legally collected because of the ILA violation? Finally, three of the four cases also involve a question of state law whether a loan at non-usurious rates violates Georgia's usury law because part of the consideration for the loan was a prior usurious loan. To put the question another way, the issue is whether a loan which refinances a usurious loan at non-usurious rates is also usurious under Georgia's ILA.

These cases reach this court with identical histories. In each case the borrower filed a complaint against the lender alleging the lender violated the TIL Act. The lender in each case then counterclaimed for the amount still owed on the loan. 1 And in each case the borrower defended against the counterclaim by alleging that the loan was void because it violated the ILA. The borrowers in all four cases were granted summary judgment on both the TIL Act complaint and the ILA defense to the counterclaim.

I.

Before reaching the federal law questions of how the TIL Act applies to loans void under state law, we must first determine whether the loans in these cases violated Georgia's ILA. 2 In essence, the state law question is this: does a loan violate the ILA simply because it refinances a loan which itself violated the ILA?

Two of the instant cases, Williams v. Public Finance Corp. and Smith v. Public Finance Corp., involve loan contracts which partially refinanced loans which violated the ILA. A third case, Public Finance Corp. v. Singletary, involves a loan which refinanced a loan which, in turn, refinanced a loan which violated the ILA. In other words, Singletary involves the grandchild of an ILA violator. The fourth case, Jackson v. U. S. Life Credit Corp., involves a loan which itself violates the ILA, so it does not raise the state law question concerning the inheritance through refinancing of ILA violations.

The lenders in Williams, Smith, and Singletary all concede that the ancestors of the current loans were illegal. Their argument focuses on whether that original sin was inherited. The lenders concede that they cannot recover money lent in violation of the ILA. Hodges v. Community Loan & Investment Corp., 216 S.E.2d 274 (1975). The lenders also concede that a loan which violated the ILA can not be "valid" consideration for a second refinancing loan. Douglas v. Dixie Finance Corp., 139 Ga.App. 251, 228 S.E.2d 144 (1976). However, the lenders argue that they should be allowed to recover the new money they gave the borrowers on the refinancing loans on a theory of unjust enrichment. They argue that the invalidity of the first loan simply means that the second loan fails for lack of consideration, and is not itself illegal. The remedy for a loan which fails for "lack of consideration," the lenders argue, should not be the harsh ILA penalty of full forfeiture, but rather one of the more traditional common law remedies of rescission, restitution, or severance. However, we read Georgia state law as stating that a lender can not recover money lent on the refinancing of a loan which violated the ILA. The controlling case is Douglas v. Dixie Finance Corp., supra, which held that a loan contract which violated the ILA and was thus illegal " could not be valid consideration for the execution" of a second, refinancing contract. The Douglas court said the second loan was unenforceable and permitted the borrower to keep the unrepaid portion of the second loan.

The instant lenders attempt first to limit, and then to distinguish Douglas. We think the attempts fail. First, the lenders argue that Douglas did not hold that the refinancing loan itself violated the ILA, but only that it "failed" because part of the consideration was an earlier loan which violated the ILA. However, we do not see this distinction as making any difference on the question of whether the borrower must repay any money under an "unjust enrichment" theory. We note that the Douglas court said it was basing its ruling on the case of Hanley v. Savannah Bank & Trust Co., 208 Ga. 585, 68 S.E.2d 581, 582 (1952), which held that a promise based in part on illegal consideration fails entirely. Hanley clearly stated that, for reasons of public policy, money paid pursuant to such a contract cannot be recovered. Hanley did not distinguish between illegal contracts and contracts based on illegal consideration, perhaps because both would seem to be similarly against public policy. Thus, under Georgia law public policy dictates that a loan based partly on illegal consideration is void and money paid pursuant to the contract need not be repaid. Since this is the same remedy as provided in the ILA for loans which themselves violate the ILA, we need not concern ourselves with the distinction urged by the lenders between illegal loans and loans based in part on illegal consideration. 3 Whichever way we classify the instant loans, they are void and the borrowers can keep what they still owe. 4

Secondly, the lenders attempt to distinguish Douglas by noting that it involved two separate misdeeds the refinancing of an illegal loan and the failure to rebate unearned interest upon the acceleration of the loan. The lenders argue that only the latter violated the ILA, and that the court permitted the borrower to keep unrepaid loan money solely because of this violation. While it is true that the instant cases do not involve interest rebate violations, we note that Georgia law does not allow a borrower to keep unrepaid loan money where the only ILA violation is the failure to rebate unearned interest. Liberty Loan Corp. of Shoals v. Childs, 140 Ga.App. 473, 231 S.E.2d 352 (1976). 5

Thus, since Douglas did allow the borrower to keep unpaid loan money and Childs did not, it seems logical to assume that the Douglas court applied the full forfeiture penalty because of the refinancing violation. Since the same violation exists in the instant cases, we think Georgia law requires us to order forfeiture also.

The essence of the lenders' argument is their claim that the refinancing loan incorporated a usurious loan without itself charging usurious rates. While we can imagine hypotheticals in which this would be the case, 6 we think that none of the instant cases fit this description. In each of the instant cases the loan in issue was made at the maximum rates allowable under the law. A loan at maximum rates is effectively usurious if part of the consideration for the debt is invalid. For example, assuming the usury limit is 10%, if a lender makes a $100 loan at 10% Which in part refinances an illegal $1 debt, the lender is effectively charging the borrower $10 on a.$99 loan. That is usury and a violation of the ILA. 7

Under Georgia law the remedy for such a violation of the ILA is that the entire loan is rendered void and the borrower can keep whatever he still owes. Hodges, supra. 8

II.

We next consider the major federal law question in these cases, which is whether the federal Truth-in-Lending Act applies to loans which are void because they violate Georgia's ILA. The lenders in all four of the instant cases argue that the TIL Act does not apply to loans which violate the ILA because the ILA renders such loans "null and void." The lenders argue that since the loans are void Ab initio under state law, the loans do not comprise consumer credit transactions within the meaning of 15 U.S.C. § 1639(a) of the TIL Act, or "credit . . . extended" within the meaning of § 1631(a). The lenders concede their loans contain misleading disclosures which would constitute violations of the TIL Act if the loans were not rendered void by state law. They argue, however, that state law must be seen as, in a sense, preempting federal law in this context because generally the TIL Act leaves to state law the legal definition of a loan contract. In effect, the lenders are asking us to give special lenient treatment to lenders who violate two laws instead of just one. We decline to do so.

We do not think it appropriate or especially helpful to engage in an extended and rather formalistic debate over the definitions of voidness and nullification. Rather, we think the real question in this case is a relatively standard one of statutory interpretation. More specifically, we think the...

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