Clay v. Johnson

• Decision Date: 05 September 2001
• Docket Number: No. 00-1203,00-1203
• Citation: 264 F.3d 744
• Parties: (7th Cir. 2001) REE CLAY and RUBY CHIVERS, Plaintiffs-Appellees, v. IVER R. JOHNSON and MARVIN BILFELD, d/b/a DAVENPORT CONSTRUCTION COMPANY, Defendants-Appellants
• Court: U.S. Court of Appeals — Seventh Circuit

Page 744

264 F.3d 744 (7th Cir. 2001)

REE CLAY and RUBY CHIVERS, Plaintiffs-Appellees, v. IVER R. JOHNSON and MARVIN BILFELD, d/b/a DAVENPORT CONSTRUCTION COMPANY, Defendants-Appellants.

No. 00-1203

In the United States Court of Appeals For the Seventh Circuit

ARGUED JANUARY 12, 2001

DECIDED September 5, 2001

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 97 C 6007--Morton Denlow, Magistrate Judge.

Before RIPPLE, ROVNER and EVANS, Circuit Judges.

RIPPLE, Circuit Judge.

Ree Clay and Ruby Chivers (collectively "the plaintiffs") entered into a series of retail installment contracts and mortgages to finance home improvements provided by Davenport Construction Company ("Davenport"). Marvin Bilfeld, Davenport's owner, assigned Davenport's interest in the contracts to Iver Johnson, who became the mortgagee. The plaintiffs filed this suit against Bilfeld, Johnson, and Davenport (collectively "the defendants") to obtain damages and a recision of their contracts based on the defendants' alleged failure to make a proper disclosure under the Truth in Lending Act ("TILA"), 15 U.S.C. sec. 1601 et seq. The district court granted partial summary judgment in favor of the plaintiffs on the issue of liability and awarded them statutory damages and attorneys' fees. The defendants have appealed the district court's judgment. For the reasons set forth in the following opinion we reverse the judgment of the district court.

I BACKGROUND

A. Facts

The plaintiffs are sisters who live together in a home owned by Ms. Clay. On three separate occasions in 1995, the plaintiffs executed retail installment contracts in which they mortgaged the house to finance the purchase of home improvements from Davenport.¹ Davenport assigned its interest in each of these contracts to Johnson, making Johnson the mortgagee.

Each of the retail installment contracts the plaintiffs signed contained a "Federal Truth-In-Lending Disclosure Statement," otherwise known as a "federal box," which contained the disclosures required by TILA. R.23, Ex.E at 1, Ex.G at 1; R.68, Ex.7 at 1. One of the disclosures required by TILA is the debtor's payment schedule, which includes the date on which the debtor must begin making payments. See 15 U.S.C. sec. 1638(a)(6); 12 C.F.R. sec. 226.18(g) (2001). According to the information the defendants wrote in the federal box, the plaintiffs' monthly payments would begin "30 days from completion" of the construction work on the house. R.23, Ex.E at 1, Ex.G at 1; R.68, Ex.7 at 1. Approximately one month after the plaintiffs signed each of their contracts, Johnson sent them a letter informing them that he had purchased the contract and mortgage from Davenport and that the plaintiffs should begin making payments to him thirty days after they signed a completion certificate confirming the value of the work Davenport had done. As the time of completion neared, the parties were able to determine the start date of the plaintiffs' payments more precisely, and they typed the specific date on which the plaintiffs' first payment was due onto the contract.

For several months, the plaintiffs made their monthly payments on one of the three contracts. These payments stopped in December 1995. The plaintiffs never made any payments on the other two contracts. The plaintiffs eventually notified the defendants in writing that they "rescind[ed] any obligation to [the defendants] for failure to comply with the Truth in Lending Act." R.23, Ex.D. Five days after the plaintiffs sent their recision notice to the defendants, Ms. Clay filed for bankruptcy.

B. Earlier Proceedings

On the same day that Ms. Clay filed for bankruptcy, the plaintiffs filed this TILA action in the district court. The plaintiffs sought to rescind their contracts and to recover statutory damages and attorneys' fees based on the defendants' alleged failure to disclose properly the payment schedule. The district court granted summary judgment to the plaintiffs on the issue of liability. It held that TILA required the defendants to provide an exact date on which the plaintiffs' payments would be due or to provide an estimate of the due date if they could not determine a precise calendar date. Therefore, the district court believed that the defendants' disclosure of "30 days from completion" did not comply with TILA. The court also held that, even though the defendants had provided the plaintiffs with an exact date after the contracts had been signed, that disclosure did not comply with TILA's mandate that the required disclosures be grouped together and segregated from other information. See 15 U.S.C. sec. 1638(b)(1); 12 C.F.R. sec. 226.17(a)(1) (2001). The court believed that the defendants' failure to comply with TILA constituted a technical violation of the statute that entitled the plaintiffs to rescind their contracts, which they had done adequately by providing written notice of the recision to the defendants.

The defendants filed a motion for reconsideration following the district court's grant of partial summary judgment to the plaintiffs. The defendants' argument was based on Comment 18(g)-4 to Regulation Z, which was promulgated by the Board of Governors of the Federal Reserve System ("the Board") to interpret the provisions of TILA. The defendants maintained that Comment 18(g)-4 specifically stated that a creditor could satisfy TILA by defining the beginning payment date by reference to the occurrence of a particular event rather than by disclosing a precise calendar date. The district court rejected the defendants' argument because Comment 18(g)-4 had not been issued at the time the defendants made their disclosures to the plaintiffs. The court did not believe that the comment could be applied retroactively to validate the defendants' disclosure in this case.

In light of its judgment in favor of the plaintiffs on liability, the district court granted the plaintiffs the recision they requested and awarded them $6,000 in statutory damages for the defendants' violation of their recision rights. The court did not award damages for the defendants' disclosure violation because it determined that the plaintiffs' claims in this regard were time barred. The court also concluded that TILA required the plaintiffs to return the defendants' property--in this case, the fair market value of the work the defendants had performed on the house--and it therefore ordered the plaintiffs to return $32,000 to the defendants.² Lastly, the court awarded the plaintiffs $38,000 in attorneys' fees.

II DISCUSSION

The defendants have appealed the district court's grant of summary judgment and the concomitant award of statutory damages and attorneys' fees. The defendants argue that the district court erred in holding that Comment 18(g)-4 could not be given retroactive effect. The defendants also maintain that their subsequent disclosure of an exact beginning payment date was sufficient to satisfy TILA and that the plaintiffs did not properly preserve or exercise their recision rights. The plaintiffs respond by arguing that Comment 18(g)-4 is inconsistent with a previous position adopted by the Board and therefore cannot be applied retroactively. The plaintiffs also submit that the defendants' subsequent disclosure of an exact date on which their payments were due did not satisfy TILA because TILA does not allow piecemeal disclosures and because the defendants did not send them a new notice of their right to rescind. Lastly, the plaintiffs assert that they exercised their right to rescind in a timely and proper fashion. Because the issue of the retroactive application of Comment 18(g)- 4 is potentially dispositive of this case, we turn to it first.

The disclosures a creditor must make at the time he extends credit to a consumer are governed by TILA and its implementing regulation, Regulation Z. See 15 U.S.C. sec. 1638; 12 C.F.R. sec. 226.18 (2001). The Board publishes official staff commentary to Regulation Z that is dispositive in TILA cases unless the commentary is demonstrably irrational. See Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 565 (1980). Because the date on which a debtor must begin making payments is a required disclosure under TILA, the manner in which the creditor must make the disclosure is governed by Regulation Z and its commentary. See 15 U.S.C. sec. 1638(a)(6); 12 C.F.R. sec. 226.18(g) (2001).

While this case was pending in the district court, the Board undertook the process of issuing Comment 18(g)-4, its official staff interpretation of TILA's payment schedule disclosure requirement. In December 1997, the Board published a proposed version of Comment 18(g)-4 for public comment. The proposed comment provided:

Timing of payments. Creditors must disclose when payments are due, including the calendar date that the beginning payment is due. For example, a creditor may disclose that payments are due "monthly beginning on July 1, 1998." A reference to the occurrence of a particular event, for example, disclosing that the first payment is due "30 days after the completion of construction," is not sufficient. If the beginning-payment date is unknown, the creditor must use an estimated date and label the disclosure as an estimate pursuant to sec. 226.17(c).

62 Fed. Reg. 64769, 64775 (proposed Dec. 9, 1997). The Board stated in its notice of proposed rulemaking that "[p]roposed comment 18(g)-4 clarifies the requirements for disclosing the timing of payments." Id. at 64771.

The Board received about 110 comments in response to its proposed amendments to the commentary. See 63 Fed. Reg. 16669, 16670 (Apr. 6, 1998). It published the final version of Comment 18(g)-4 in April 1998. See id. at 16673. The final version of Comment 18(g)-4 establishes a general rule requiring that creditors disclose a specific date on which the debtor's payments will begin. See 12 C.F.R. pt. 226, Supp. I, Par. 18(g)(4)(i) (2001)....