Cox v. First Nat. Bank of Cincinnati

• Decision Date: 02 January 1985
• Docket Number: No. 83-3834,83-3834
• Citation: 751 F.2d 815
• Parties: Margie COX, Plaintiff-Appellant, v. FIRST NATIONAL BANK OF CINCINNATI, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 815

751 F.2d 815

Margie COX, Plaintiff-Appellant, v. FIRST NATIONAL BANK OF CINCINNATI, Defendant-Appellee.

No. 83-3834.

United States Court of Appeals, Sixth Circuit.

Argued Sept. 26, 1984.

Decided Jan. 2, 1985.

Frank J. Wassermann (argued), Legal Aid Society of Cincinnati, Cincinnati, Ohio, for plaintiff-appellant.

Paul J. Vesper, Covington, Ky., for defendant-appellee.

Before CONTIE, Circuit Judge, PHILLIPS, Senior Circuit Judge, and GILMORE, District Judge. ^*

CONTIE, Circuit Judge.

Plaintiff Margie Cox appeals the district court's grant of summary judgment in favor of Defendant First National Bank of Cincinnati in this Truth in Lending Act case. We reverse and remand to the district court because it applied the wrong law.

The general problem in this case is whether the Truth in Lending Act as it existed before Congress amended it in 1980, with the Truth in Lending Simplification and Reform Act, see Truth in Lending Simplification and Reform Act, Pub.L. No. 96-221, 94 Stat. 168 (1980), or the Act as amended or selected provisions of both the amended and unamended Acts must govern this case. Similarly, it must be determined which interpretive regulation, the one commonly known as Regulation Z or the one known as Revised Regulation Z, is to be applied. The problem occurs because Congress, when amending the Act in 1980, provided that creditors could choose to comply with the amended Act, rather than the presimplification Act, prior to the effective date of the amendments. A period of alternative compliance was thus created. The disclosures which underlie this case occurred during this transitional period.

I.

In October 1981 Cox entered into a contract with Cincinnati Home Insulation in which Home Insulation undertook to perform certain improvements on Cox's residence. The cost of the goods and services to be supplied by Home Insulation was financed by that company. The total cost, excluding finance charges, was $4,500. Cox alleges that she made a $400 downpayment, but the contract and accompanying disclosure statement did not mention any downpayment and provided that the entire bill, $4,500, was to be financed. Home Insulation obtained a second mortgage on the residence and the contract provided for a waiver of Cox's homestead exemption. ¹ The statement disclosed that Cox's residence might become subject to "construction liens." ² At some later date, Home Insulation assigned the contract and mortgage to First National Bank of Cincinnati.

On July 12, 1982 Cox sent First National formal notice of her desire to rescind the contract, a remedy available for certain violations of the Truth in Lending Act. On July 16, 1982 Cox filed the instant action. Her complaint alleged three violations of the Act: the failure to disclose the downpayment, the failure to disclose properly a security interest created by the waiver of Cox's homestead exemption and the failure to disclose properly and fully possible security interests in the nature of mechanics' and materialmen's liens. Cox subsequently filed a supplemental complaint under Federal Rule of Civil Procedure 15(d) to add a claim for wrongful failure to allow rescission.

Cox sought the following relief. Under the presimplification version of 15 U.S.C. Sec. 1640, a successful plaintiff could receive statutory damages equal to twice the finance charge, but not less than $100 nor greater than $1,000, for "any" violation of the relevant portions of the Act. See Truth in Lending Act, Pub.L. No. 90-321, Sec. 130, 82 Stat. 146, 157 (1968), amended by Pub.L. No. 93-495, Sec. 408(a), 88 Stat. 1500, 1518 (1974), amended by Pub.L. No. 94-240, Sec. 4, 90 Stat. 257, 260 (1976) (current version at 15 U.S.C. Sec. 1640(a)(2)). ³ Cox sought to impose this statutory liability. Cox also sought rescission, which, under both the presimplification and current version of 15 U.S.C. Sec. 1635, is available in any transaction in which a security interest is retained in the consumer's residence. The right of rescission must be exercised within three days of the later of the consummation of the transaction or the delivery of all "material disclosures" and notice of the consumer's right to rescind. See 15 U.S.C. Sec. 1635(a); Truth in Lending Act, Pub.L. No. 90-321, Sec. 125, 82 Stat. 146, 153 (1968), amended by Pub.L. No. 93-495, Sec. 404, 88 Stat. 1500, 1517 (1974). When there is a failure to make all material disclosures, the consumer has a continuing right of rescission which does not lapse until the residence is sold or three years have elapsed from the consummation of the transaction, whichever is earlier. See id., added by Pub.L. No. 93-495, Sec. 405, 88 Stat. 1500, 1517 (1974) (current version at 15 U.S.C. Sec. 1635(f)). Finally, Cox sought costs and attorneys' fees. See 15 U.S.C. Sec. 1640(a)(3); Truth in Lending Act, Pub.L. No. 90-321, Sec. 130, 82 Stat. 146, 157 (1968).

In determining whether the presimplification or current Act applied, the district court relied on a stipulation which provided that Cox's "contract is subject to the federal Truth-In-Lending Act, 15 U.S.C. Sec. 1601 et. seq. and Federal Reserve Board Regulation Z, 12 C.F.R. Sec. 226.01 et seq." The court held that "[c]learly, under this stipulation, the provisions of TILA, not TILSRA, govern the Court's decision." ⁴ The district court also relied on the fact that the current version of the Act was not effective "until approximately one year after the transaction herein." ⁵ The district court also held, however, that the stipulation did not clearly resolve whether Regulation Z or Revised Regulation Z was to apply. It therefore held that,

conduct that conforms with the requirements of either Regulation Z or Revised Regulation Z is acceptable. It would be anomalous to find that defendant violated TILA when its conduct in fact conformed to at least one set of regulations in effect thereunder. As long as defendant can point to one or more subsections of Regulation Z, old or new, under which its actions are proper, it will not be held liable.

The district court then proceeded to dismiss Cox's claims in reliance on the presimplification Act, Regulation Z and Revised Regulation Z. On the downpayment issue, the court held that Cox could receive no damages because the presimplification Act provided that an assignee is liable only for violations which are "apparent on the fact of the instrument assigned." ⁶ The district court did not clearly explain why a failure to disclose a downpayment does not give right to a continuing power to rescind. Rather, it merely stated that "a failure to disclose a downpayment is not among the circumstances giving rise to a right of rescission. See 15 U.S.C. Sec. 1635(a)."

The district court relied on Revised Regulation Z to dismiss Cox's security interest claims. Revised Regulation Z expressly excludes "incidental interests" from the definition of security interests, see 12 C.F.R. Sec. 226.2(a)(25) (1984), and the Federal Reserve Board's Official Staff Commentary indicates that an "incidental interest" includes a "[w]aiver of homestead or personal property rights," see 46 Fed.Reg. 50288, 50296 (Oct. 9, 1981). ⁷ Thus, creditors have no duty to disclose such a waiver and Cox could base neither her damages nor rescission claim on this nondisclosure. Similarly, the district court noted that for purposes of disclosure Revised Regulation Z also excludes "interests that arise solely by operation of law" from the definition of a security interest. See 12 C.F.R. Sec. 226.2(a)(25) (1984). Since disclosing the possibility of mechanics' or materialmen's liens is not required, ⁸ this nondisclosure provided no support for either the damages or rescission claim.

II.

There are three distinct errors in the district court's resolution of this case. Although any of these errors standing alone would require reversal, we believe that the interplay between the presimplification Act and the current version of the Act can be fully understood only through explaining each error.

First. Although the court determined that, by force of the stipulation, the presimplification Act applied, it also held that the regulation interpreting the current version of the Act applies. ⁹ This necessarily leads to incongruous results.

Cox's claim that the disclosure statement inadequately disclosed the possibility of mechanics' and materialmen's liens provides an example of the confusion that can result from wedding the revised regulation to the presimplification Act. The presimplification Act required a "description of any security interest" and a "clear identification" of the subject property. See Truth in Lending Act, Pub.L. No. 90-321, Sec. 128, 82 Stat. 146, 155 (1968) (formerly 15 U.S.C. Sec. 1638(a)(10) (current version at 15 U.S.C. Sec. 1638(a)(9)). The term "security interest" was not defined in the prior version of the Act, but the original Regulation Z defined the term to include "mechanic's, materialmen's, artisan's, and other similar liens." See Regulation Z Sec. 226.2(gg). See also Rudisell v. Fifth Third Bank, 622 F.2d 243 (6th Cir.1980). Although the current version of the Act still requires a disclosure of security interests, the requirement has been relaxed. A creditor need now disclose only,

[w]here the credit is secured, a statement that a security interest has been taken in (A) the property which is purchased as part of the credit transaction, or (B) property not purchased as part of the credit transaction identified by item or type.

See 15 U.S.C. Sec. 1638(a)(9). The legislative history makes it clear that this language was intended to limit the type of security interests which are to be disclosed.

When a security interest is being taken in property not purchased as part of the credit transaction, the Committee intends this provision to require a listing by item or type of property securing the transaction, but not a listing of related or incidental interests in the property. For example, a loan...