Barrett v. Vernie Jones Ford, Inc.

• Decision Date: 08 May 1975
• Docket Number: Civ. A. No. C74-1502A.
• Citation: 395 F. Supp. 904
• Parties: James R. BARRETT and Sue Barrett v. VERNIE JONES FORD, INC., and Peoples Financial Corp. of Canton d/b/a Peoples Financial Corp. of Jasper.
• Court: U.S. District Court — Northern District of Georgia

395 F. Supp. 904

James R. BARRETT and Sue Barrett v. VERNIE JONES FORD, INC., and Peoples Financial Corp. of Canton d/b/a Peoples Financial Corp. of Jasper.

Civ. A. No. C74-1502A.

United States District Court, N. D. Georgia, Atlanta Division.

March 5, 1975.

On Motion to Reconsider May 8, 1975.

James H. Morawetz and David Buffington, Atlanta, Ga., for plaintiffs.

Albert C. Ruehmann, III of Kilpatrick, Cody, Rogers, McClatchey & Regenstein, Atlanta, Ga., for defendants.

ORDER

EDENFIELD, Chief Judge.

Under the provisions of Local Rule 250, this action brought pursuant to the Truth in Lending Act, 15 U.S.C. § 1640(e), was referenced to a bankruptcy judge designated as a special master to determine the issues and to make a written report of findings of fact and conclusions of law with a recommendation to this court on final action. This court has now received the special master's report, has reviewed that report, and has concluded that although the court ADOPTS the special master's findings of fact, the court will substitute its own opinion on the proper application of the law to those facts.

When a consumer credit sale is entered into which is not made under an open-end credit plan, the Truth in Lending Act requires disclosure of, inter alia, "(9) The default, delinquency, or similar charges payable in the event of late payments." 15 U.S.C. § 1638 (a) (9).

The regulation which implements that statute requires disclosure of "(4) The amount, or method of computing the amount, of any default, delinquency, or similar charges payable in the event of late payments." Regulation Z, 12 C.F.R. § 226.8(b)(4) (1974).

The regulation also requires disclosure of the amount or method of computation of the amount of any rebate which will be due in the event of prepayment of the note in full. Regulation Z, 12 C.F.R. § 226.8(b) (7) (1974).

The question presented by this case is under what circumstances the creditor is required to disclose the existence of a right of acceleration. The note on which this action is based contained a clause giving the seller a right to accelerate upon default. The acceleration clause was not, however, included in the disclosure section of the note.¹ The special master concluded that this omission violated both § 226.8(b)(4) and (b)(7). As this court concludes that there was in fact a (b)(4) violation, the plaintiff is entitled to the statutory damages, and it will be unnecessary to reach the issue of possible existence of a (b)(7) violation.

The preprinted form used by Peoples Financial Corporation for its loans contains three provisions pertinent to this litigation. Two of these appear in that section of the form devoted to Truth in Lending disclosures:

"(13) Delinquency Charges: Buyer hereby agrees to pay a Delinquency Charge on each installment in default for more than 10 days in the amount of 5% of each such installment or $5.00, whichever is less, plus attorneys' fees in an amount equal to 15% of the entire amount due hereunder, plus all court costs, sheriff's costs and other legal fees incurred if this contract is placed for collection or enforcement in the hands of, or collected or enforced by or through an Attorney-at-Law.

. . . . . .

"(15) If this contract is prepaid in full by cash, refinancing or otherwise before the final installment date, the Purchaser shall receive a rebate of the unearned Finance Charge as computed under the Rule of 78's less an acquisition cost of $25, provided that no refund of less than $1 will be made."

The third provision appears on the back of the note and provides that:

"In the event of a default: Seller shall have the right to: (i) declare all unpaid installments immediately due . . . ."

The precise question presented to the court is whether the failure to include this right of acceleration in the Truth in Lending disclosures constitutes a violation of Regulation Z, 12 C.F.R. § 226.8(b)(4) (1974).

The Federal Reserve Board has recently issued a Staff Opinion letter setting forth the agency's position on required disclosures with respect to acceleration of payments clauses.² The text of that letter is set forth below:

"No. 851

"§ 226.8(b) The rebate effects of an acceleration of payments clause should be disclosed in the same manner as if prepayment were voluntary and such clause does not constitute a charge for late payment except to the extent that the creditor retains unearned finance charges in excess of that which was disclosed as being rebated

October 22, 1974

This is in response to your letter of . . . . . inquiring whether an acceleration clause in an instalment contract is a `charge' payable in the event of late payment within the meaning of § 226.8(b)(4) of Regulation Z and therefore must be disclosed with other required items.

For the purposes of Truth in Lending disclosures, this staff views an acceleration of payments as essentially a prepayment of the contract obligation. As such, the disclosure provisions of § 226.8(b) (7) of the Regulation, which require the creditor to identify the method of rebating any unearned portion of the finance charge or to disclose that no rebate would be made, apply. If the creditor rebates under one method for acceleration and another for voluntary prepayment, both methods would need to be identified under § 226.8(b)(7). Failure to disclose the method of rebate or nonrebate would be a violation of the Truth in Lending Act.

If, under the acceleration provision, a rebate is made by the creditor in accordance with the disclosure of the rebate provisions of § 226.8(b) (7), we believe that there is no additional `charge' for late payments made by the customer and therefore no need to disclose under the provisions of § 226.8(b)(4). On the other hand, if upon acceleration of the unpaid remainder of the total of payments, the creditor does not rebate unearned finance charges in accordance with the rebate provisions disclosed in § 226.8(b)(7), any amounts retained beyond those which would have been rebated under the disclosed rebate provisions represent a `charge' which should be disclosed under § 226.8(b)(4).

Sincerely yours Frederic Solomon Director"

It is apparent from the face of the note that the acceleration clause has no provision for any rebate of the unearned portion of future installments and that this note therefore falls under the last sentence of the FRB Staff Opinion. This leads inevitably to the conclusion that a (b)(4) disclosure is required, and, that no such disclosure having been made, there is a violation of the Act.

The defendant, however, argues that even if there is a violation under the terms of this Staff Opinion letter there was no such violation prior to issuance of the Staff Opinion. The gravamen of this argument is that since the total amount due on the note would be unchanged after exercise of the acceleration clause there is no "charge" within the meaning of the Act. This court holds, as other courts have held before it, that where, as here, the note makes no provision for rebate of unearned interest upon acceleration, the diminution of the period over which the finance charge would be spread constitutes a "charge" which is passed on to the consumer as a result of default. Johnson v. McCrackin-Sturman Ford, Inc., 381 F. Supp. 153 (W.D.Pa.1974); Garza v. Chicago Health Clubs, Inc., 347 F.Supp. 955 (N.D.Ill.1972).

The defendants' next argument is that the acceleration clause does not mean what it says. The heart of this argument is the contention that even if Johnson and its predecessor cases were correctly decided, peculiarities of Georgia commercial law require a different result in this state. The core of the defendants' contention is that Georgia law reads into the otherwise silent acceleration clause a requirement that the creditor rebate all unearned finance charges. Robert P. McDaniel v. Fulton National Bank of Atlanta, C.A. No. C74-244A (N.D.Ga. Dec. 18, 1974). Although McDaniel does, apparently, stand for the proposition for which it is cited, this court must respectfully disagree with the interpretation of the current Georgia law set forth in McDaniel.

McDaniel advances the proposition that "in Georgia no additional amount is to be paid by the debtor in the event of default and ensuing acceleration. The debtor's balance due is adjusted by any unearned Finance Charge or unearned credit life insurance premium and the debtor is charged only for actual earned portions thereof." In support of this proposition McDaniel cites only one Georgia case: Garrett v. G.A.C. Finance Corp., 129 Ga.App. 96, 198 S.E.2d 717 (1973).

In order to demonstrate the fallacy of the proposition set forth in McDaniel it will be necessary to briefly review recent developments in the Georgia law dealing with the effect of the state usury laws upon enforceability of acceleration clauses. Perhaps the best starting point is the holding that if the effect of the acceleration clause is to render the note as a whole usurious, the note is unenforceable in the Georgia courts. Lewis v. Termplan, Inc., 124 Ga.App. 507, 184 S.E.2d 473 (1971).³ The decision in Lewis was amplified by the Court of Appeals sitting en banc in Roberts v. Allied Finance Co., 129 Ga.App. 10, 198 S.E.2d 416 (1973). In Roberts the court held that if the effect of an exercise of an acceleration clause is to render the contract usurious, then the entire contract is void and unenforceable in the Georgia courts. The Court explicitly noted, however, that it was not outlawing any form of acceleration per se, merely refusing to enforce such a clause if it rendered the contract usurious: "We do not hold that there can be no acceleration of the debt—we simply hold that the acceleration, combined with a claim of unearned interest, renders the obligation usurious and void under the provisions of the Industrial Loan Act." Roberts, supra at 11, 198 S.E.2d at 418. Thus under Georgia law an acceleration clause which does not contain a provision...