In re Gillespie

Decision Date14 February 1990
Docket NumberBankruptcy No. 89-10042S.
Citation110 BR 742
PartiesIn re Shirley Mary GILLESPIE, Debtor.
CourtU.S. Bankruptcy Court — Eastern District of Pennsylvania

Geoffrey Walsh, Community Legal Services, Inc., Philadelphia, Pa., for debtor.

Dolores L. Keegan, Sp. Asst. U.S. Atty., Office of Regional Counsel, U.S. Dept. of Housing & Urban Development, Virginia

R. Powel, Asst. U.S. Atty., Philadelphia, Pa., for HUD.

David B. Comroe, Philadelphia, Pa., for Lomas Mortgage U.S.A.

Edward Sparkman, Philadelphia, Pa., standing chapter 13 Trustee.

OPINION

DAVID A. SCHOLL, Bankruptcy Judge.

A. INTRODUCTION

The instant contested matter obliges us to revisit an issue which we previously addressed in In re Pinder, 83 B.R. 905, 908-12 (Bankr.E.D.Pa.1988); and In re Caster, 77 B.R. 8, 14 (Bankr.E.D.Pa.1987): the scope of 15 U.S.C. § 1612(b), a provision of the federal Truth-in-Lending Act, 15 U.S.C. § 1601, et seq. (hereinafter "TILA"), which exempts political subdivisions from monetary liability under the TILA. We conclude, consistently with Caster, that the exemption applies irrespective of whether the particular political subdivision has waived its sovereign immunity generally. We further conclude, consistently with Pinder, that political subdivisions are not exempt from compliance with the TILA, only from monetary liability for breaches of compliance therewith. Hence, the exemption cannot itself be assigned by a political subdivision along with a consumer credit contract. This conclusion renders the assignee of contract involving a political subdivision subject to liability.

However, while the factual pattern her is similar to that of Pinder, Lomas Mortgage USA, Inc. (hereinafter "Lomas") the assignee of the mortgages in issue from the United States Department of Housing and Urban Development (hereinafter "HUD"), and HUD itself, have herein presented evidence not on the Pinder record regarding the terms of a contract between Lomas and HUD, which supports the conclusion that the ultimate liability for the TILA violations will fall upon HUD. However, we follow a line of decisions holding that the fact that HUD will ultimately bear the cost of the TILA violations in issue does not vest Lomas with the § 1612(b) exemption, since it is an independent contractor rather than a servant of HUD.

Therefore, we conclude that the Debtor, SHIRLEY MARY GILLESPIE (hereinafter "the Debtor"), is entitled to the $2,000 recoupment which she seeks, reducing Lomas' secured proof of claim to $5,298.40.

B. PROCEDURAL AND FACTUAL HISTORY

The Debtor filed the instant Chapter 13 bankruptcy case on January 6, 1989. On August 25, 1989, the Debtor filed an Objection to the secured Proof of Claim filed by Lomas in this case (Claim No. 1), on February 17, 1989, in the amount of $11,524.10. The bases of the Objection were the Debtor's alleged right to two separate $1,000 TILA recoupment penalties arising from two separate contracts held by Lomas and the alleged failure of Lomas to properly credit certain payments made to it by the Debtor. After two continuances, during which time the parties engaged in discovery, we ordered that the matter must be tried on November 21, 1989, also the date of a continued confirmation hearing on the Debtor's Plan of Reorganization in her main Chapter 13 case.

On November 21, 1989, the parties presented us with a comprehensive Stipulation of Facts which they agreed would constitute the record, and we ordered that Briefs were to be submitted by December 1, 1989 (Debtor), and December 11, 1989 (Lomas), respectively.

The Stipulation of Facts provided that, on March 22, 1972, the Debtor purchased her home, located at 2333 North Fawn Street, Philadelphia Pennsylvania (hereinafter "the Home"), for a purchase price of $13,000.00, financing it with a note and mortgage insured by the Federal Housing Administration (hereinafter "FHA") of HUD. Subsequently, the mortgage on the Home was foreclosed upon and HUD acquired the Home at a sheriff's sale. However, in accordance with a program established pursuant to a consent decree in a nationwide class action involving FHA-insured mortgages, Ferrell v. Hills, No. 73-C-344 (N.D.Ill.), HUD reconveyed the Home to the Debtor in a transaction consummated on April 29, 1982, for a price established at $17,475.87.

Because this purchase price exceeded the Debtor's 1972 purchase price of $13,000, HUD, pursuant to this program and its policy and practice at the time, took back two notes and accompanying mortgages from the Debtor, the first in the amount of $13,900.00, apparently covering the purchase price plus costs of settlement, and the second in the amount of $3,550.00, covering the excess of the 1982 purchase price over the 1972 purchase price. No payments towards either principal or interest were required on the second mortgage until after the last scheduled payment date on the first mortgage was scheduled to be made on May 1, 2022.

Apparently some time prior to the settlement date of the repurchase, April 29, 1982, HUD provided the Debtor with a document captioned "Statement of Cost of Loan" (hereinafter "the Statement"). The Statement is the only document which Lomas (or HUD) has been able to produce which is even a facsimile of a TILA disclosure statement that was given to the Debtor by HUD in connection with the transaction. See Pinder, supra, 83 B.R. at 913 (lender (HUD) has burden of proving compliance with the requirements of the TILA).

What renders the Statement a TILA disclosure facsimile is its use of several TILA terms, i.e., "finance charge," "annual percentage rate," and "total of payments." However, the Statement is in several glaring respects insufficient in supplying the disclosures required by the TILA. Firstly, it is undated. The only date appearing on it is an "estimated date of loan funding" of May 1, 1981, suggesting that the Statement preceded the settlement by at least a year. Secondly, it combines the two mortgage loans together in a "gross loan" of $17,450.00, which figure is, per the parties' Stipulation of the sale price of the Home, slightly inaccurate. Although reference is made to a "2nd mortgage," the separate terms of neither the first nor the second mortgage are described. The only place on the Statement for the recitation of the annual percentage rate ("APR"), in addition to being inconspicuous, is totally blank. The only disclosure of the security interest taken is a statement that it "includes a first mortgage (and possibly a second mortgage)" on the Home. However, both of the mortgages recite that a security interest is taken not only on the Home itself, but also on "any and all appliances, machinery, furniture and equipment (whether fixtures or not) of any nature whatsoever now or hereafter installed in or upon" the Home.

The Stipulation further provides that, between April 29, 1982, and April 9, 1986, the Debtor made payments to HUD on the first mortgage, but, as early as 1983, fell behind on same. Consequently, on May 19, 1987, HUD assigned the first and second mortgages to the Lomas' predecessor, the Lomas and Nettleton Co. (hereinafter "L & N"). This assignment of the Debtor's mortgage was transacted pursuant to an Award/Contract between HUD and L & N signed by an officer of L & N on October 26, 1984, and by a federal representative on December 6, 1984 (hereinafter this document is referred to as "the Contract"). The terms of the Contract remained in effect at all times relevant to this proceeding.

On August 2, 1988, L & N filed a state-court mortgage foreclosure action against the Debtor, obtained judgment by default, and scheduled a sheriff's sale of the Home on January 9, 1989. This sale was stayed by the Debtor's bankruptcy filing.

Finally, the Stipulation recited that

the parties have resolved prior disagreements between them as to the calculation of the Debtor\'s pre-petition arrears with the exception of the applicability of the Debtor\'s recoupment claim under the Truth-in-Lending Act. It is agreed that (without allowing for any recoupment) the correct figure for prepetition arrears is $7,298.40. The correct pay off amount (for both mortgages) as of the January 6, 1989 petition date is $24,320.15 . . .
. . . The only issue remaining for adjudication by the court is to what extent, if any, the arrears amount of $7,298.40 and the pay-off amount of $24,320.15 should be reduced for the Truth-in-Lending recoupment claim raised in the debtor\'s objection to proof of claim.

Upon receipt of the Briefs, we immediately noted disagreements regarding the content of the Stipulation and the meaning of the Contract. Lomas stated that the claim of $1,714.50 for attorneys' fees and costs should be added to the $7,298.40 arrearages figure despite the wording of the Stipulation, while the Debtor stated that $7,298.40 constituted the entire arrearages figure. The most pertinent dispute over the meaning of the Contract was whether any TILA recoupment penalty would be ultimately borne by Lomas or by HUD. Relevant to this latter point, we noted that, upon appeal of our Pinder decision, HUD had participated as an amicus curiae in the district court and had introduced the presence of the Contract to the district court, prompting that court to remand the matter to us to "consider the Contract . . . to determine if a penalty assessed against Lomas would be on imposition of a penalty against HUD in violation of 15 U.S.C. § 1612(b)." C.A. No. 88-3528 (E.D.Pa. Sept. 22, 1988).1 Therefore, we scheduled a conference of counsel in the matter on December 14, 1989, and directed HUD to appear at that conference as well.

The result of that conference was an agreement by Lomas that $7,298.40 did constitute its entire maximum allowed secured claim and a directive from this court to Lomas and HUD to move to add HUD as a party in this court and/or to reopen the record made by the Stipulation on or before December 15, 1989, or be bound by the record as it stood....

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