In re Armstrong
| Decision Date | 24 January 2003 |
| Docket Number | Adversary No. 01-014.,Bankruptcy No. 00-16579 SR. |
| Citation | 288 B.R. 404 |
| Parties | In re Kenya ARMSTRONG, Debtor. Kenya Armstrong, Plaintiff, v. Nationwide Mortgage Plan/Trust, Mego Mortgage Corp, and Classic Exteriors, Inc., Defendants. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Marian C. Nowell, Philadelphia, PA, for debtor.
Judith T. Romano, Philadelphia, PA, for creditor.
The Debtor has filed a multi-count Complaint alleging violations of State and Federal consumer lending law. Among the Defendants, only Nationwide has defended. A trial on this matter was held on September 19, 2002. For the reasons set forth in the following Opinion, judgment will be entered in favor of Debtor consistent with the terms of the attached Order.1
The Debtor has filed suit against Classic Exteriors, Inc. (Classic), Mego Mortgage Corp. (Mego), and Nationwide Mortgage Plan/Trust (Nationwide) arising out of a home improvement contract. It is alleged that all of the Defendants violated the Truth in Lending Act2 (TILA), the Equal Credit Opportunity Act3 (ECOA), and Pennsylvania Consumer Protection law4 (UDAP). Classic alone is alleged to have breach its duty to perform under Pennsylvania contract law. A fifth count is directed to all defendants alleging unconscionability and a sixth to Nationwide seeking avoidance of its security interest under the Trustee's strong arm powers.5
Classic and Mego have not responded to the Complaint and are in default. Nationwide opposes the Complaint claiming that as an assignee of the contract, it is not liable for the violations committed by the other defendants. Trial was held on September 19, 2002. The parties were given the opportunity to brief the issues. The Debtor submitted a brief and Nationwide offered proposed findings of fact and conclusions of law. The matter was then taken under advisement.
Facts:
Classic, a home improvement contractor, solicited Debtor at her house offering repairs and improvements. N.T. 34. Debtor and Classic signed a contract on July 24, 1997 for improvements to her kitchen and bathroom. N.T. 35; see J1-a. The cost of the work was $24,795.00 all of which would be financed through Classic. N.T. 36.
About one week later, Classic returned to Debtor's house "with documents for her to sign." N.T. 36. Among those documents was a Home Improvement Contract (See J2-a), two Notices of Intent to Cancel (See J4a-1 and 2), and a Mortgage (See J3). It is these documents which concern the Court chiefly. The Home Improvement Contract6 was represented to Debtor to have been "approved by the loan people for [Debtor] to get the money for [Classic] to do work on [Debtor's home]." N.T. 37. That contract contains payment terms which vary from those terms contained in the contract which she signed on July 24, 1997. See J2-a. Under this contract, the number of monthly payments would increase by 60. Id.
Debtor also received at Classic's second visit two documents entitled "Notice of Right to Cancel."7 Both notices recite the following verbatim:
Your are entering into a transaction that will result in (mortgage/lien/security interest) (on/in) your home. You have a legal right under federal law to cancel this transaction, without cost, within three business days from whichever of the following events occurs last
(1) the date of the transaction, which is ____________________; or
(2) the Date you received your Truth in Lending disclosures; or
(3) the date you received this notice of your right to cancel.
...
If you cancel by mail or telegram, you must send the notice no later than midnight of ___________, 19 __ (or midnight of the third business day following the latest of the three events listed above). If you send or deliver your written notice to cancel some other way, it must be DELIVERED to the above address no later than that time.
See J4a-1 and J4a-2.
Finally, the Debtor granted Classic a mortgage on her home as collateral. See J3-a. Her copy of the mortgage does not appear to bear a notary seal even though the copy produced by Nationwide does. Significantly, the Debtor recalls that no notary was present at the July 30 closing at her home; only the Debtor and Classic's representative attended. N.T. 38-40.
The day after Classic's second visit, Debtor called Classic to rescind the loan. N.T. 42. She explained that she would not be able to afford the loan because she had become unemployed due to a knee injury and complications of pregnancy. Id. But Classic refused, claiming that the deadline for her to rescind had passed. N.T. 43. Debtor apparently accepted this explanation and the work on her house proceeded. Id.
Upon completion, the work appeared, superficially at least, to have been done well. Id. But it was only after the improvements were tested that the true quality of the work became evident. Debtor reported that the new toilet flooded; that the dishwasher did not function; and that the roof repairs, instead of channeling rain away from the sides of the house, collected it above the kitchen window where it seeped inside. N.T. 44. To make matters worse, Classic's attempts to remedy its defective work served only to cause more problems. Id. Thereafter, Debtor stopped paying on the loan. N.T. 45.
Debtor's refusal to pay caused Nationwide8 to begin foreclosure in September 1999. See J8, J13. Debtor sent a written rescission demand to Nationwide. The basis for the rescission was alleged to be Truth in Lending violations. Nationwide refused the Debtor's demand. The Debtor next filed this bankruptcy and Nationwide filed a secured proof of claim. This Adversary Proceeding followed.
This count alleges violations of §§ 1635 and 1638 of TILA. The Debtor maintains that she was not given notice of her right to rescind the contract (§ 1635) nor disclosure of the payment terms of the loan (§ 1638). In that regard, TILA provides:
(a) Disclosure of obligor's right to rescind
Except as otherwise provided in this section, in the case of any consumer credit transaction (including opening or increasing the credit limit for an open end credit plan) in which a security interest, including any such interest arising by operation of law, is or will be retained or acquired in any property which is used as the principal dwelling of the person to whom credit is extended, the obligor shall have the right to rescind the transaction until midnight of the third business day following the consummation of the transaction after delivery of the information and rescission forms required under this section together with a statement containing the material disclosure required under this subchapter, which ever is later, by notifying the creditor, in accordance with the regulation of the Board, of his intention to do so. The creditor shall clearly and conspicuously disclose, in accordance with regulations of the Board, to any obligor in a transaction subject to this section the rights of the obligor under this section. The creditor shall also provide, in accordance with regulations of the Board, appropriate forms for the obligor to exercise his right to rescind any transaction subject to this section.
and
(a) Required disclosures by creditor
For each consumer credit transaction other than under an open end credit plan, the creditor shall disclose each of the following items, to the extent applicable:
...
(6) The number, amount and due dates or period of payments scheduled to repay the total of payments.
15 U.S.C. §§ 1635(a), 1638(a)(6) (emphasis added).
Emphasis in the above citations in required because the parties are unable to agree that the loan is covered by TILA. Compare PreTrial Statements. The Court's analysis must start with the basic elements of a TILA transaction. From there, it works upwards to the substantive TILA claims.
Both §§ 1635 and 1638 speak of "consumer credit transactions." There is no one single definition for that term; instead, it is defined in parts. "Consumer" is defined as follows:
(h) The adjective "consumer", used with reference to a credit transaction, characterizes the transaction as one in which the party to whom credit is offered or extended is a natural person, and the money, property, or services which are the subject of the transaction are primarily for personal, family, or household purposes.
15 U.S.C. § 1602(h)
There would appear then to be two elements to "consumer." First, the consumer must be a natural person. That is alleged, and admitted, at ¶ 4 of the Complaint. See Complaint, ¶ 4. Second, the subject of the credit transaction must primarily be for personal, family or household use. The Home Improvement Contract indicates that the financing would pay for home improvements. See Ex. P-2a.
Having determined that the Debtor is a consumer, we next analyze whether the financing constitutes a "credit transaction." The term "credit" is simply defined as "the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment." 15 U.S.C. § 1602(e). The Home Improvement Installment Contract plainly indicates that the loan will be paid over time. See Ex. P-2a. It would appear beyond doubt that this loan is a consumer credit transaction as defined by TILA.9
Having determined that the loan is a consumer credit transaction, we proceed to the next element mutual to both TILA sections: that a "creditor" extended the financing. A "creditor" is defined as:
a person who both (1) regularly extends, whether in connection with loans, sales of property or services, or otherwise, consumer credit which is payable by agreement in more than four installments or for which the payment of a...
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