de la Fuente v. Home Sav. Ass'n

• Decision Date: 15 March 1984
• Docket Number: No. 13-83-014-CV,13-83-014-CV
• Citation: 669 S.W.2d 137
• Parties: 38 UCC Rep.Serv. 196 Pedro DE LA FUENTE, et al., Appellants, v. HOME SAVINGS ASSOCIATION, Appellee.
• Court: Texas Court of Appeals

Page 137

669 S.W.2d 137

38 UCC Rep.Serv. 196

Pedro DE LA FUENTE, et al., Appellants, v. HOME SAVINGS ASSOCIATION, Appellee.

No. 13-83-014-CV.

Court of Appeals of Texas,

Corpus Christi.

March 15, 1984.

Selvino Padilla, Texas Rural Legal Aid, Inc., Edinburg, for appellants.

LaMonte Scott Freerks, Pena, McDonald, Prestia & Ibanez, Edinburg, for appellee.

Before KENNEDY, BISSETT and GONZALEZ, JJ.

OPINION

KENNEDY, Justice.

This is an appeal from a suit on a note, brought by appellee, Home Savings, against appellants, Pedro and Paula de la Fuente. The transaction underlying the note was the sale of materials and services for the installation of aluminum siding for the de la Fuentes' home. We reverse and render judgment for appellants.

Trial was to the court, and findings of fact and conclusions of law were filed. The court's findings of fact are summarized as follows. In late April or early May of 1978, Roberto Gonzales, a representative of Aluminum Industries, Inc., visited the de la Fuente home to sell them aluminum siding. As a result, on May 3, 1978, the de la Fuentes executed, in their residence, a number of documents, including a contract and promissory note for improvements to their home. The contract granted a first lien on appellants' home. The total contract amount was $9,138.24, with 96 monthly installments of $95.19 and an annual percentage rate of 12%. The contract included a trust deed to Aluminum Industries which granted a first lien on the de la Fuentes' residence. Aluminum Industries, Inc. is no longer in existence.

Appellants, by their fourth, sixth and seventh points of error, complain of violations of the Texas Consumer Credit Code, TEX.REV.CIV.STAT.ANN. art. 5069, et seq. (Vernon 1971).

By their fourth point of error, appellants assert that the trial court erred in concluding that the lien taken in the transaction was not unlawful and, therefore, there was no violation of the Texas Consumer Credit Code. The version of art. 5069-6.05 of the Texas Consumer Credit Code in effect on May 3, 1978 read:

Art. 6.05 Prohibited Provisions

No retail installment contract ... shall:

(7) Provide for or grant a first lien upon real estate to secure such obligation, except, (a) such lien as is created by law upon the recording of an abstract of judgment or (b) such lien as is provided for or granted by a contract or series of contracts for the sale or construction and sale of a structure to be used as a residence so long as the time price differential does not exceed an annual percentage rate of 10 percent.

Act of May 4, 1977; ch. 104, § 1, 1977 Tex.Gen.Laws, Local and Spec. 212, amended by Act of May 8, 1981, ch. 111, § 18, 1981 Tex.Gen.Laws, Local and Spec. 284. See TEX.REV.CIV.STAT.ANN. art. 5069-6.05 (Vernon Supp.1984).

The trial court, in the findings of fact, found that the contract for Labor and Materials and Trust Deed granted a first lien on appellants' residence. We agree. See Jim Walter Homes v. Chapa, 614 S.W.2d 838 (Tex.Civ.App.--Corpus Christi 1981, writ ref'd n.r.e.). The contract and Trust Deed clearly grant a lien, and both the credit report filled out by Robert Gonzalez, the salesman, and the undisputed testimony of Pedro de la Fuente show that there was no lien on the appellants' home at the time of the transaction. However, even if we did not agree with this finding, it was not challenged and is binding upon the appellate court. Texas Real Estate Commission v. Hood, 617 S.W.2d 838 (Tex.Civ.App.--Eastland 1981, writ ref'd n.r.e.); Bilek v. Tupa, 549 S.W.2d 217 (Tex.Civ.App.--Corpus Christi 1977, writ ref'd n.r.e.); McKenzie v. Carte, 385 S.W.2d 520 (Tex.Civ.App.--Corpus Christi 1964, writ ref'd n.r.e.). The retail installment contract signed by the de la Fuentes is in violation of the Texas Consumer Credit Code, art. 5069-6.05 in that the contract provided for a first lien on the de la Fuentes' home. See Anguiano v. Jim Walter Homes, Inc., 561 S.W.2d 249 (Tex.Civ.App.--San Antonio 1978, writ ref'd n.r.e.).

Appellee asserts that, even if the contract is in violation of the Credit Code, appellee is not liable because of its status as a holder in due course under TEX.BUS. & COM.CODE ANN. § 3.302 (Vernon 1968). The trial court found in its conclusions of law both that appellee, as an assignee of the contract, is derivatively liable for all claims against the contract and that appellee is not liable to appellants on the counterclaim because of its status as a holder in due course of appellants' note. We agree that an obligor may assert against the assignee the defenses he could have asserted against the assignor. York v. McNutt, 16 Tex. 13, 14 (1856); Glass v. Carpenter, 330 S.W.2d 530 (Tex.Civ.App.--San Antonio 1959, writ ref'd n.r.e.); 7 Tex.Jur.2d Assignments § 52 (1980); J. Calamari & J. Perillo, Contracts § 269 (1970). However, we disagree that appellee was entitled to the protection of a holder in due course of a negotiable instrument, because (1) the holder in due course doctrine has been abolished in consumer credit transactions by FTC regulations; and, (2) the appellee did not conform to the notice requirements of the Texas Credit Code so as to cut off the rights of action and defenses of the buyer. The note in question contained a notice in bold face type which reads in part:

NOTICE

ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED PURSUANT HERETO OR WITH THE PROCEEDS HEREOF.... ¹

This FTC Rule, subjecting the holder of the note to the claims and defenses of the debtor, is in direct conflict with the doctrine of the holder in due course. ² The Federal Courts have stated, without so holding, that the effect of this FTC Rule is to abolish the holder in due course doctrine. Federal Trade Commission v. Winters National Bank & Trust Co., 601 F.2d 395 397 (6th Cir.1979). ³ National Automobile Dealers Association v. Federal Trade Commission, 421 F.Supp. 31, 33 (M.D.La.1976). ⁴ See also J. White and R. Summers, Uniform Commercial Code § 14-8 (2d Ed.1980), T. Quinn, Uniform Commercial Code Commentary and Law Digest § 3-302[A][a] (1978); Anderson, Uniform Commercial Code § 3-302:29 (2d Ed.Supp.1981); F. Hart and W. Willier, Commercial Paper Under the Uniform Commercial Code, Bender's Uniform Commercial Code Service Vol. 2 § 11.08 (1983); S. Kanwit, Federal Trade Commission, Vol. 2, Shepard's Regulatory Manual Series, § 19.08 (1983); Note, the new FTC Trade Regulation Rule on Holder in Due Course. Preservation of Consumers' Claims and Defenses, 13 Houston L.Rev. 789 (1976).

The FTC, in its Statement of Basis and Purpose, specifically named the holder in due course doctrine as the evil addressed by 16 C.F.R. § 433.2. "[A] consumer's duty to pay for goods and services must not be separated from a seller's duty to perform as promised ..." 40 Fed.Reg. 53,506, 53,523 (November 18, 1975). The FTC intended the Rule to compel creditors to either absorb the costs of the seller misconduct or return them to sellers. 40 F.R. at 53,523. The FTC "reach[ed] a determination that it constitutes an unfair and deceptive practice to use contractual boiler plate to separate a buyer's duty to pay from a seller's duty to perform." 40 F.R. at 53,524. The effect of this Rule is to "give the courts the authority to examine the equities in an underlying sale, and it will prevent sellers from foreclosing judicial review of their conduct. Seller and creditors will be responsible for seller misconduct." 40 F.R. at 53,524 (emphasis added). It was clearly the intention of the FTC Rule to have the holder of the paper bear the losses occasioned by the actions of the seller; therefore, the benefits of the holder in due course doctrine under TEX.BUS. & COM.CODE ANN. § 3.302 are not available when the notice required by the FTC in 16 C.F.R. § 433.2 is placed on a consumer credit contract.

In addition, the holder of a note subject to the Credit Code has an independent duty to ensure that the retail installment contract conforms to the statutory requirements of the Credit Code Art. 5069-6.07 of the Credit Code provides in part:

No right of action or defense of a buyer arising out of a retail installment transaction which would be cut off by negotiation, shall be cut off by negotiation of the retail installment contract or retail charge agreement to any third party unless such holder acquires the contract relying in good faith upon a certificate of completion or certificate of satisfaction, if required by the provisions of Article 6.06; and such holder gives notice of the negotiation to the buyer as provided in this Article, and within thirty days of the mailing of such notice receives no written notice from the buyer of any facts giving rise to any claim or defense of the buyer. (emphasis added)

See TEX.REV.CIV.STAT.ANN. art. 5069-8.01 (Vernon Supp.1984); Horn v. Nationwide Financial Corp., 574 S.W.2d 218 (Tex.Civ.App.--San Antonio 1978, writ ref'd n.r.e.) (interpreting art. 5069-7.07(b) to impose this duty).

We find that appellee is liable under the Texas Consumer Credit Code as a "person who violates this Subtitle ... by (ii) committing any act or practice prohibited by this Subtitle ...." TEX.REV.CIV.STAT.ANN. art. 5069-8.01(b) (Vernon Supp.1984). Appellee is therefore liable to appellant under art. 5069-8.01(b) for an amount equal to twice the time price differential or interest contracted for, charged, or received but not to exceed $4,000 in a transaction in which the amount financed is in excess of $5,000 and reasonable attorneys' fees fixed by the court. Appellants' fourth point of error is sustained.

By their sixth point of error, appellants complain of the trial court's finding that appellants had not been promised compensation for referrals of additional customers in violation of TEX.REV.CIV.STAT.ANN. art. 5069-6.02(5)(e) (Vernon Supp.1984). This statute requires such promises to be...