In re Donohue

• Decision Date: 27 January 2020
• Docket Number: Case No. 19-41271 CN
• Court: U.S. Bankruptcy Court — Northern District of California
• Parties: In re: AMANDA DONOHUE, Debtor.

In re: AMANDA DONOHUE, Debtor.

Case No. 19-41271 CN

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF CALIFORNIA

January 27, 2020

The following constitutes the order of the Court.

Chapter 13

ORDER ON OBJECTION TO CLAIM

On January 10, 2020 this court conducted a hearing on Debtor Amanda Donohue's objection to the proof of claim filed by Gaia Finance, LLC. Donohue contends that the 240% interest rate that Gaia charged on its pre-petition line of credit is unconscionable under California law. Gaia did not respond to the objection and did not appear at the January 10^th hearing. For the reasons stated below, this court concurs with Donohue's assessment.

Donohue filed her Chapter 13 bankruptcy on May 31, 2019, and listed Gaia as holding a $4,000 general, unsecured claim on her Schedule E/F¹. Donohue's confirmed Chapter 13 plan will pay her unsecured creditors in full. On August 7, 2019 Gaia timely filed a proof of claim for $8,023.30. Gaia attached to its claim a copy of the finance agreement executed by Donohue and an itemized statement of the interest and fees. The proof of claim discloses that Gaia provided Donohue with a $4,000 line of credit on December 27, 2017. The "Line of Credit Disclosure And Account Agreement" (the "Agreement") states (in large print) that Gaia would charge a 240% annualpercentage rate on its cash advances, and that Donohue could rescind any requested cash advance by returning the funds within a certain time frame. Donohue electronically signed the Agreement and thereafter was wired the full $4,000 credit line. The Agreement does not indicate that Donohue requested the full $4,000 in a single cash advance. Gaia's proof of claim consists of the $4,000 cash advance and $4,023.90 in accrued interest. Given when she received the funds, the 240% interest rate, and the Chapter 13 petition date, Donohue made some payments on the line of credit before she filed her bankruptcy.

Unfortunately, Donohue's Schedule E/F indicates that she is no stranger to high interest consumer loans. In this instance, Donohue needed funds to repair her car, washer and dryer, and to pay for certain family and pet expenses. She received a "snail-mail" solicitation from Gaia stating that she was "pre-approved" for a cash advance, and she was directed to Gaia's website where she could, after providing additional information, finalize the transaction. Donohue provided the required personal information, electronically signed the Agreement, and received the full $4,000 in a single cash advance, notwithstanding that Gaia never asked how much of an initial cash advance she required. While Donohue does not recall reviewing the actual loan terms, the Agreement clearly states the 240% interest rate. She contends, however, that while she was somewhat familiar with the cost of consumer borrowing and anticipated that the loan would be costly (given her credit history and prior bankruptcy filing), she never would have borrowed the funds if she knew that the loan carried a 240% interest rate.

Donohue contends that Gaia's loan is unconscionable under California law. Donohue's argument must be construed in the context of a claim objection under Bankruptcy Code § 502. Bankruptcy Code § 502(a) provides in pertinent part that "A claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party interest . . . objects." Section 502(b), in turn, lists the many grounds upon which a debtor may object to a claim, including that the claim is "unenforceable against the debtor . . . under any agreement or applicable law for a reason other than because such claim is contingent or unmatured."

In other words, once a creditor files a proof of claim, the objecting party must provide acognizable ground to disallow the claim.² Generally, ". . .the claimant must allege facts sufficient to support the claim. If the averments in his filed claim meet this standard of sufficiency, it is "prima facie" valid. . . . The burden of going forward then shifts to the objector to produce evidence sufficient to negate the prima facie validity of the filed claim." Ashford v. Consolidated Pioneer Mortg. (In re Consolidated Pioneer Mortg.), 178 B.R. 222, 226 (Bankr.9th Cir. 1995). In instances where the objection is premised on an affirmative defense, the objecting party retains the burden. Raleigh v. Ill. Dep't of Revenue, 530 U.S. 15, 120 S.Ct. 1951, 147 L.Ed. 2d 13 (2000).

The doctrine of unconscionability is an affirmative defense under California law and California courts have applied the doctrine to high interest consumer loans. See Cal. Civ. Code § 1670.5; Cal. Fin. Code § 22302; De La Torre v. CashCall, Inc., 5 Cal.5th 966 (2018); Grand Prospect Partners, L.P. v. Ross Dress for Less, Inc., 232 Cal.App.4th 1332, 1347 (2015). "As long established under California law, the doctrine of unconscionability reaches contract terms relating to the price of goods or services exchanged. . . . Whether the price of a bargain is 'unreasonably and unexpectedly harsh' depends on more than just a single printed number, so we examine not only the price term itself but other provisions and circumstances affecting a transactions benefits and burdens. Allegations that the price exceeds cost or fair value, standing alone, do not state a cause of action." [citations omitted.] De La Torre v. CashCall, Inc., 5 Cal.5th 966, 975-76.

The California Supreme Court in CashCall thoroughly described the challenges of applying the doctrine of unconscionability to high interest consumer loans.

"Unconscionability is a flexible doctrine. It is meant to ensure that in circumstances indicating an absence of meaningful choice, contracts do not specify terms that are "overly harsh," "unduly oppressive," or "so one-sided as to shock the conscience." It is true that unconscionability has been subject to "various nonexclusive formulations" and differing analytical approaches. Nonetheless, at least one thing about the doctrine is clear: it requires more than just looking at one particular term in a contract, comparing it to a fixed benchmark, and declaring the term unconscionable. [¶] Instead, unconscionability requires oppression or surprise that is, procedural unconscionability along with the overly harsh or one-sided results that epitomize substantive unconscionability. Some measure of both procedural and substantive unconscionability must be present although given the sliding-scale nature of thedoctrine, more of one kind mitigates how much of the other kind is needed. Even where a party complains of a single contract clause, the court usually must still examine the bargaining process for any procedural unfairness. The court must consider whether

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