In re Garcia, Bankruptcy No. 03-10844.
| Decision Date | 17 March 2006 |
| Docket Number | Bankruptcy No. 03-10844.,Adversary No. 04-0029. |
| Citation | 340 B.R. 680 |
| Parties | In re Enelia Falu GARCIA, Debtor. R-G Financial Corporation, et al., Plaintiffs, v. Enelia Falu Garcia, Defendants. |
| Court | U.S. Bankruptcy Court — District of Puerto Rico |
Leonides Graulau Quinones, Lares, PR, for Debtor.
Before the court is plaintiff's motion for judgment on the pleadings and the debtor/defendant's opposition thereto. For the reasons set forth below, the motion for judgment on the pleadings is granted as to Count I of the complaint, rendering judgment on the remaining counts unnecessary.
Plaintiffs, R-G Financial Corporation, et al. ("R-G") filed the complaint commencing this adversary proceeding on August 27, 2003.1 The plaintiffs in this action are R-G Financial Corporation, R-G Mortgage Corporation ("R-G Mortgage") and Mortgage Store of Puerto Rico, Inc. ("Mortgage Store"). R-G Financial is the holding corporation of R-G Mortgage, Mortgage Store and R-G Premier Bank of Puerto Rico.
Debtor and Champion Mortgage (now the Mortgage Store)2 entered into a non-purchase loan transaction3 guaranteed by real property, debtor's residence, on December 20, 2000, which was arranged by a mortgage broker known at Priority Mortgage Brokers. The loan was for the principal amount of $71,250, with an annual interest rate of 14%, and was obtained by debtor to refinance a $37,599.24 second mortgage with R-G Premier Bank of Puerto Rico and a $24,859.98 first mortgage with Banco Popular de Puerto Rico.
According to R-G, the TILA and HOEPA disclosures were delivered to debtor prior to the consummation of the loan transaction, and disclosed settlement charges in the amount of $8,580.78, which were financed as part of the loan transaction.
The Mortgage Store assigned the servicing rights of the loan to R-G Mortgage. The first monthly payment was due in February 2001, but was made along with the March payment on March 21, 2001. No other monthly payments were received until August 30, 2002. Accordingly, R-G filed a collection of money and foreclosure action against debtor in the Superior Court of Puerto Rico, Carolina part, case no. FCD 2001-1661(405). Debtor did not answer the complaint, default judgment was entered against her, and the court ordered the public sale of the property for July 10, 2002.
Debtor filed a petition for reorganization under Chapter 13 of the Bankruptcy Code on July 9, 2002, thereby staying the public sale of the property. On July 16, 2003, debtor send a letter to R-G, alleging that Champion Mortgage failed to provide disclosures under TILA and HOEPA, or provided inaccurate disclosures, and seeking rescission of the loan transaction. Specifically, debtor alleged that Champion failed to deduce prepaid finance charges from the amount of the loan principal in calculating the amount financed for TILA purposes, and did not deliver the disclosures three days in advance of consummation of the loan, in violation of 15 U.S.C. §§ 1602(u), 1638 and 1639(a). Debtor indicated in the notice of rescission that if R-G failed to rescind the loan she would file an action for declaratory judgment, statutory and actual damages, attorney's fees and costs.
R-G answered the debtor's demand for rescission within the statutory twenty-day period by filing the instant complaint. Count I of the complaint alleges that the debtor's attempt to rescind the loan transaction is barred by the doctrine of res judicata because she did not raise rescission in the commonwealth court action, nor did she appeal the default judgment entered against her. Count II of the complaint alleges that the court should modify the three-step rescission process set out in TILA and Regulation Z by conditioning the voiding of R-G's security interest in the property on Debtor's tender of payment of the loan proceeds. Count III of the complaint alleges that the notice of rescission did not automatically void the loan transaction. Count IV of the complaint alleges that the debtors claims for statutory and actual damages are time barred by the TILA one-year statute of limitation, 15 U.S.C. § 1640(e). Count V of the complaint alleges that the loan at issue is an exempted transaction pursuant to 15 U.S.C. § 1635(e)(2), which exempts transactions which constitute refinancing or consolidation with no new advances of principle.
Debtor/defendant filed an answer to the complaint on June 4, 2004, then filed a cross-complaint against all plaintiffs pursuant to 15 U.S.C. §§ 1635, 1639 and 1640 for multiple violations of TILA, Regulation Z and HOEPA on June 10, 2004. Count I of the counterclaim seeks actual and statutory damages for violation of HOEPA. Count II seeks to rescind the loan transaction. Debtor argues that the TILA disclosures were provided on the date of the closing of the loan transaction — December 20, 2000 — and not before that date. According to Debtor, it was disclosed that the annual percentage rate was 15.3488%, the monthly payments were $844.22, and the total settlement charges were $8,580.78. Debtor alleges the following disclosure errors:
Failure to make an accurate disclosure pursuant to 15 U.S.C. § 1638(a)(3) by failing to include prepaid finance charges and fees in the finance charge as required by 15 U.S.C. § 1605(a).
Failure to accurately disclose the amount financed pursuant to 15 U.S.C. § 1638(a)(2)(A) by failing to deduct all applicable prepaid finance charges from the total principal amount of the loan in order to determine the amount financed. Failure to accurately disclose the amount financed pursuant to 15 U.S.C. § 1638(a)(2)(A) by failing to deduct, from the total principal amount of the loan, charges and/or portions of finance charges which are excludable pursuant to Reg. Z, § 226.4(c)(7) because they do not meet the criteria of bonafide or reasonable.
Failure to accurately disclose the annual percentage rate due to failure to include all applicable finance charges, thereby exceeding the calculation error allowance for this type of loan.
Inaccurately disclosing the cancellation deadline for the transaction, thereby extending the deadline.
Failure to properly classify the loan as a high rate mortgage within the meaning of HOEPA, 15 U.S.C. § 1602(aa)(1)(B) and Regulation Z § 226.32(a)(1)(ii), by not including all applicable finance charges, in that the total points and fees charged exceed 8% of the total loan amount. As a result of said classification, additional disclosures should have been provided three days in advance of the consummation of the transaction pursuant to 15 U.S.C. § 1639(b).
Including prohibited terms and conditions in the loan transaction, namely loan prepayment penalties.
As a result of these failure, debtor alleges that she was misled as to the consequences of executing the mortgage documents, executed a mortgage with improper terms and conditions, paid inflated and unnecessary mortgage payments and has been threatened with the loss of her home through foreclosure.
Debtor further argues that, by filing the mortgage foreclosure complaint, R-G triggered the TILA provision that the tolerance for error in this type of transaction is $35 pursuant to 15 U.S.C. § 1635(I)(2). According to debtor, she did not waived the continuing right to rescind the transaction pursuant to 15 U.S.C. §§ 1635 and 1639(j), and exercised said right on July 16, 2003.
R-G answered the counterclaim on July 9, 2004. Among other arguments, they allege that the claim for damages is time barred; the alleged failures to comply with 15 U.S.C. § 1639 were not material; the alleged violates of TILA and HOEPA were de minimis; the extended right of rescission is not applicable in this case; R-G, as an assignee of the loan, is entitled to the limitation of damages and offset provisions of TILA found in 15 U.S.C. § 1641(d)(2) and (3); the claim for rescission is time barred; the mortgage was not a consumer credit transaction; the court should modify the statutory process to condition rescission on tender of the loan proceeds; and R-G, as assignee of the loan, is not liable for damages or attorney's fees.
R-G filed a motion for judgment on the pleadings on October 15, 2004. R-G seeks declaratory judgment on these grounds; (1) the commonwealth court default judgment is res judicata to the issues herein; (2) the debtor's rescission claim is exempted by § 1635(e)(2); and (3) any damage claim by debtor is precluded by the one-year statute of limitations.
Debtor/defendant filed an objection to the motion for judgment on the pleadings on December 10, 2004. She argues that the doctrine of res judicata does not apply in this case and, even if it does, there are public policy considerations which should prevent its application in this case. Additionally, debtor argues that R-G has made contradictory allegations in their complaint, answer to the counterclaim and request for judgment on the pleadings, which prevents the entry of judgment on the pleadings.
R-G filed a reply to the debtor/defendant's opposition on March 23, 2005, reiterating their request that the counterclaim be dismissed and declaratory judgment be entered on their complaint, finding that the commonwealth court judgment is res judicata to debtor's TILA claim or, in the alternative, that the transaction at issue herein is exempt from TILA.
On May 20, 2005, the debtor filed an informative motion and request for stay of proceedings. The court entered an order on July 26, 2005, granting the debtor's motion and staying the adversary proceeding pending the resolution of R & G Financial v. Pedro Vergara by the United States Court of Appeals for the First Circuit. R-G filed a motion for reconsideration of the court's order on August 10, 2005, which was granted by order of the court on December 21, 2005; the court deemed the matter submitted.
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