Glover v. Doe Valley Development Corp.

• Decision Date: 20 November 1975
• Docket Number: Civ. A. No. C 74-402 L(A).
• Citation: 408 F. Supp. 699
• Parties: Ewell GLOVER and Bessie Glover, Plaintiffs, v. DOE VALLEY DEVELOPMENT CORPORATION, Defendant.
• Court: U.S. District Court — Western District of Kentucky

408 F. Supp. 699

Ewell GLOVER and Bessie Glover, Plaintiffs, v. DOE VALLEY DEVELOPMENT CORPORATION, Defendant.

Civ. A. No. C 74-402 L(A).

United States District Court, W. D. Kentucky, Louisville Division.

November 20, 1975.

COPYRIGHT MATERIAL OMITTED

Lloyd C. Anderson, Louisville, Ky., for plaintiffs.

Robert L. Sloss, Wyatt, Grafton & Sloss, Louisville, Ky., for defendant.

MEMORANDUM OPINION

ALLEN, District Judge.

This action is submitted to the Court for decision upon the cross-motions of the parties for summary judgment as to all issues raised in Counts I, II and III of plaintiffs' complaint.

COUNT I

In Count I, plaintiffs allege six violations of the disclosure requirements of the Truth-in-Lending Act (hereinafter the Act), 15 U.S.C. § 1601 et seq., and of Regulation Z. 12 C.F.R. Part 226, issued pursuant thereto.

First, plaintiffs argue that the manner of disclosing the following provision of the Acquisition Agreement, entered into between plaintiffs and defendant for the purchase and sale, respectively, of an unimproved lot, violates Regulation Z as it relates to credit sales which are not open ended:

"In case of failure of the Purchaser to make any payments provided for herein, or perform any of the covenants on his part made and herein entered into, the Seller, in addition to the rights granted to Seller on the other side of this Agreement resulting from a default of the Purchaser, may declare this Agreement to be forfeited and terminated and the Purchaser shall forfeit all payments made by him pursuant to this Agreement, and said payments shall be retained by Seller to full satisfaction of all damages by it sustained to the date of default . . .."

The defendant does not deny that if the above forfeiture and liquidated damage clause is required to be disclosed by the Act, that the manner of its disclosure, on the back side of the Acquisition Agreement and Promissory Note, and not above or adjacent to the plaintiffs' signatures, violates Regulation Z, 12 C.F.R. § 226.8(a).

However, the defendant argues that the clause does not fall within the class of "default, delinquency, or similar charges payable in the event of late payments," the amount or method for computing the amount of which must be disclosed in connection with consumer credit sales not under open end credit plans, according to the Act, 15 U.S.C. § 1638(a)(9), and Regulation Z, 12 C.F.R. § 226.8(b)(4), because (1) the forfeiture and liquidated damage provision is not a charge within the meaning of the Act, since it does not constitute a sum of money payable in addition to other finance charges, and (2) the forfeiture and liquidated damage provision is not payable under Kentucky law since Kentucky courts do not uphold such clauses but allow purchasers, like mortgagors, to demand judicial sale of the property purchased.

We are not persuaded by defendant's arguments and find that a forfeiture and liquidated damage clause, such as was incorporated in the contract in question, is a default or similar charge payable in the event of late payments.

Neither the Act nor Regulation Z defines the term "charge," but the courts have interpreted this term, in a line of cases dealing with acceleration clauses, in one of two ways. Those courts which have held that an acceleration clause is a "default, delinquency, or similar charge payable in the event of late payments" have taken a broad view of the term "charge," interpreting it to mean any "pecuniary burden or expense," Garza v. Chicago Health Clubs, Inc., 347 F.Supp. 955, 959 (N.D.Ill.1972); Meyers v. Clearview Dodge Sales, Inc., 384 F.Supp. 722, 727 (E.D.La.1974), or "obligation or claim," Garza, supra; Johnson v. McCrackin Sturman Ford, Inc., 381 F.Supp. 153, 155 (W.D.Pa.1974). Those courts which have held that an acceleration clause is not such a "charge" have taken a narrow view of the term, interpreting it to mean an "additional cost above an existing obligation," Morris v. First National Bank, 4 CCH Consumer Credit Guide ¶ 98,568, p. 2 (N.D.Ga.1975), or a "monetary amount added to the amount due," McDaniel v. Fulton National Bank, 4 CCH Consumer Credit Guide ¶ 98,683, p. 6 (N.D.Ga.1974).

Although a forfeiture and liquidated damage clause does not create a cost payable in addition to the purchase amount already due by contract, since the existing obligation is cancelled by the creditor's exercise of this option, it may operate to create a cost payable in addition to the amount of damages otherwise due by law upon purchaser's default, since, presumably, the creditor would exercise this option where the forfeiture and liquidated damages would exceed his actual damages.

Further, forfeiture and liquidated damage clauses have been regularly enforced by Kentucky courts, in cases involving land sale contracts, upon the purchaser's default. See, Robert F. Simmons & Associates v. Urban Renewal & Community Development Agency, 497 S.W.2d 705 (Ky.1973); Graves v. Winer, 351 S.W.2d 193 (Ky.1961); Miles v. Proffitt, 266 S.W.2d 333 (Ky.1954); Kravitz v. Grimm, 273 Ky. 18, 115 S.W.2d 368 (1938). In the two cases, Mercer v. Federal Land Bank, 300 Ky. 311, 188 S.W.2d 489 (1945) and Youngblood v. Gholson, 255 S.W.2d 603 (Ky.1953), cited by the defendant for the proposition that forfeiture and liquidated damages will not be awarded for any amount in excess of the reasonable rental of the property, the vendor, and not the purchaser, was in breach of the contract of sale.

Although there are strong equitable reasons for treating an installment land sale contract, where the vendor retains title until the purchaser has paid the principle with interest in full, like an equitable mortgage, to allow a purchaser, like a mortgagor, a right of redemption and the right to enforce a judicial sale of the property to satisfy his debt, and although in some jurisdictions courts will exercise their equity powers to order such a sale, see Annotation, 51 A.L.R.2d 672 (Supp.1975), this is not clearly the practice in Kentucky, as alleged by the defendant.

In a case involving a contract for sale of personal property, to the effect that no title was to pass to the purchaser until after payment in full of the purchase money and that, in the event of default by the purchaser, seller could retain all amounts paid as "rent and use of and damage to" the chattel, a Kentucky court did hold that the contract for sale would be treated as creating a chattel mortgage so that, upon resale of the personalty, the original purchaser was entitled to the excess of the resale price over the amount of his obligation still owing, Montenegro-Riehm Music Company v. Beuris, 160 Ky. 557, 169 S.W. 986 (1914).

In a later Kentucky case, however, involving a contract for sale of real property, to the effect that title was to remain with the vendor until the purchaser had made all the required installments with interest and that, in the event of default by the purchaser, the money he had paid at that time would be considered as rent for the use of the property and liquidated damages, the Court dismissed the purchaser's suit in equity for the return of money paid and for an order that the property be sold to satisfy his debt, holding that the forfeiture and liquidated damage clause was enforceable where a purchaser was in default, Kravitz v. Grimm, supra; followed in Miles v. Proffitt, supra.

Therefore, we hold that because a forfeiture and liquidated damage clause is a default or similar charge payable within the meaning of the Act and Regulation Z, defendant violated the intent of the Act and Regulation Z, 12 C.F.R. § 226.8(a), through its failure to properly disclose the method of computing the potential charge by placing the clause on the same side of the sheet with the other default provisions and required disclosures and above or adjacent to plaintiffs' signatures.

We find no merit to plaintiffs' second allegation, that the defendant violated Regulation Z, 12 C.F.R. § 226.8(b)(1), requiring disclosure of the date on which the finance charge begins to accrue if different from the date of the transaction, inasmuch as defendant, by an amended answer to plaintiffs' interrogatories, has stated that the date on which the finance charge began to run in this case was June 25, 1974, the date of the transaction, and the promissory note signed by plaintiffs clearly states that interest would run from the date thereof, which was June 25, 1974. Since all the evidence of record supports the fact that the finance charge did not begin to accrue on a date different from the date of the transaction, plaintiffs' mere allegation that this "cannot possibly be correct" is not sufficient to create an issue of fact for trial. See Rule 56(e), Federal Rules of Civil Procedure.

Further we find no merit to plaintiffs' third allegation, that the defendant violated the intent of the Act and Regulation Z, 12 C.F.R. §§ 226.6(a) and 226.8(b)(3), in disclosing the total of payments due. Although Regulation Z, in 12 C.F.R. § 226.6(a), states that disclosures shall be made "in the terminology prescribed in applicable sections," and, in 12 C.F.R. § 226.8(b)(3), that in a credit sale transaction the sum of the payments scheduled to repay the indebtedness shall be disclosed using the term "total of payments," we find that the defendant did not violate the above provisions of Regulation Z by using the term "total payment of" to disclose the sum of the payments scheduled to repay the indebtedness.

By so finding we do not deny that Regulation Z, 12 C.F.R. § 226.6(a), sets out a "uniform terminology rule," nor do we refute the power of the Board of Governors of the Federal Reserve System to interpret the Act to require the use of uniform terminology by creditors in consumer credit transactions or the wisdom of the District Court's holding in Kristiansen v. John Mullins & Sons, Inc., 59 F.R.D. 99 (E.D.N.Y.1973), to the effect that strict compliance with the terminology required by...