In re Groat

• Decision Date: 24 May 2007
• Docket Number: No. 06-6071NE.,06-6071NE.
• Citation: 369 B.R. 413
• Parties: In re Craig Edward GROAT, Debtor. Craig Edward Groat, Debtor-Appellant, v. Donald R. Carlson, Creditor-Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Eighth Circuit

Page 413

369 B.R. 413

In re Craig Edward GROAT, Debtor Craig Edward Groat, Debtor-Appellant, v. Donald R. Carlson, Creditor-Appellee.

No. 06-6071NE.

United States Bankruptcy Appellate Panel for the Eighth Circuit.

Submitted: May 11, 2007.

Filed: May 24, 2007.

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KRESSEL, Chief Judge, FEDERMAN and McDONALD, Bankruptcy Judges.

FEDERMAN, Bankruptcy Judge.

Debtor Craig Edward Groat appeals from the Bankruptcy Court's¹ Judgment finding against him, and in favor of creditor Donald R. Carlson, in Groat's adversary action based on Carlson's alleged violations of the Truth in Lending Act ("TILA"). For the reasons that follow, we affirm.

FACTUAL BACKGROUND

On September 5, 2002, Groat borrowed $22,500 from First Security Mortgage Company. At that time, he signed a promissory note in the original principal amount of $22,500, and granted First Security a deed of trust on his residence. First Security later assigned the promissory note and deed of trust to Donald R. Carlson. On April 15, 2004, Carlson made a second loan to Groat, in the amount of $24,000, evidenced by a promissory note and secured by another deed of trust on the residence. At some point thereafter, Groat defaulted on the payments under. both loans.²

On July 8, 2005, after receiving the Lender's notice of default, Groat filed a pro se Chapter 13 bankruptcy petition. At the time he filed his petition, Groat owed the Lender approximately $27,000 on the first loan and approximately $25,000 on the second. Subsequently, by letter dated July 21, 2005, Groat notified the Lender and its attorney that, due to alleged defects in the loan documents, he was rescinding both loans under unspecified federal laws, regulations and case law.

The Lender moved for relief from the stay in the Bankruptcy Court, and Groat filed an adversary action against the Lender, seeking to rescind both loan transactions, cancel the debts under both loans, and set aside the Lender's deeds of trust under TILA. He also sought damages from the Lender. On February 21, 2006, the Bankruptcy Court denied the Lender's motion for relief from stay, pending resolution of the adversary action, because the issues appeared to be related. Both sides moved for summary judgment in the adversary action, and the Bankruptcy Court entered Judgment and a Memorandum finding in the Lender's favor. Groat appeals.³

STANDARD OF REVIEW

Our review of the bankruptcy court's entry of summary judgment is de novo.⁴ Summary judgment is appropriate when the evidence, viewed in the light most favorable to the non-moving party, demonstrates that there is no genuine issue of material fact in dispute so the moving party is entitled to judgment as a matter of law.⁵

DISCUSSION

Congress enacted the Truth in Lending Act⁶ to promote the informed use of credit by consumers by requiring meaningful disclosure of credit terms.⁷ Congress has designated the Board of Governors of the Federal Reserve as the primary source for interpretation and application of the TILA, empowering it to formulate policy and to create rules for administering the statute.⁸ The Federal Reserve Board has issued an implementing regulation, commonly known as Regulation Z, which governs, among other things, the disclosures that lenders must make to consumers in various credit transactions.⁹

With certain exceptions not relevant here,¹⁰ when a loan made in a consumer credit transaction is secured by the borrower's principal residence, TILA permits the borrower to rescind the loan agreement up to three business days after the transaction.¹¹ When a lender fails to deliver certain forms or to accurately disclose important terms to the borrower, TILA extends the borrower's right to rescind to three years.¹²

Groat asserts that the Bankruptcy Court improperly ignored TILA's three-year rescission period which, he says, applies to him. As discussed above, Groat is correct that TILA provides for a three-year period in which to rescind, but only if the lender fails to comply with one of the disclosure requirements. Therefore, since Groat's July 21, 2005 letter was tendered to the Lender well after the expiration of the three-day periods as to both loans, he must demonstrate that the Lender's disclosures or notices were defective, thereby triggering the three-year period.

Groat does not complain about the Lender's disclosures of the material loan terms as required under TILA. Rather, his dispute arises from the notices of his right to cancel, or rescind, the transaction. On that issue, TILA requires that the notice to the consumer "clearly and conspicuously" disclose the following:

(i) The retention or acquisition of a security interest in the consumer's principal dwelling.

(ii) The consumer's right to rescind the transaction.

(iii) How to exercise the right to rescind, with a form for that purpose, designating the address of the creditor's place of business.

(iv) The effects of rescission....

(v) The date the rescission period expires.¹³

In order to satisfy the foregoing disclosure requirements, "the creditor shall provide the appropriate model form in Appendix H of this part or a substantially similar notice."¹⁴

Groat acknowledges that, at the time he entered into each loan transaction, he signed, dated, and received a copy of a Notice of Right to Cancel under TILA (the "Notices"). As the Bankruptcy Court noted, the substance of both Notices conform to the model notice found in Appendix H-8. However, Groat asserts that the Notices were defective in two respects. First, he asserts that the' Lender was required to sign the Notices in its capacity as the lender, but did not do so. Second, the 2002 Notice contained a typographical error in the year in which the rescission had to be received by the Lender. Specifically, the Notice was given on September 5, 2002 (the date the loan was consummated), and three business days, following September 5, 2002, was September 10, 2002. The Notice identified the deadline to be September 10, 2001 instead.¹⁵

Groat points us to no authority in support of his theory that lenders are required to sign these notices, and we found none. Indeed, requiring a lender to sign these notices would do nothing to further their purpose of ensuring that the borrower is informed of his rights.¹⁶ As a result, Groat is simply incorrect in his assertion that the three-year rescission period was triggered by the Lender's failure to sign the Notices.

The Notice given with the 2002 loan, however, does contain a typographical error as to the date for the expiration of the three-day rescission period. Such an error might have been fatal prior to 1995, but after Congress amended TILA, "[m]ost courts have concluded that the TILA's clear and conspicuous standard is less demanding than a requirement of perfect notice."¹⁷ "[T]he 1995 TILA amendments ... were intended by Congress to provide higher tolerance levels for what it viewed as honest mistakes in carrying out disclosure obligations."¹⁸ As the Bankruptcy Court in this case pointed out, TILA now provides a safe harbor for creditors who commit unintentional notice violations:

A creditor or assignee may not be held liable in any action brought under this section or section 1635 of this title for a violation of this subchapter if the creditor or assignee shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error. Examples of a bona fide error include, but are not limited to, clerical, calculation, computer malfunction and programing, and printing errors, except that an error of legal judgment with respect to a person's obligations under this subchapter is not a bona fide error.¹⁹

In order to receive this protection, a creditor must show that the error was a "bona fide error," and that the creditor maintains procedures "reasonably adapted to avoid such errors."

Here, the Lender's attorney involved in the 2002 loan transaction, Larry Ohs, submitted an affidavit in which he described his procedures regarding the consummation of loan transactions in his office. Ohs said that his assistant, who is trained in the preparation of such documents, prepares their loan documents. Ohs then proofreads the documents before the borrower signs them. In Groat's case, Ohs said he or his assistant reviewed each loan document with Groat before he signed them, specifically pointing to the date of the transaction so that Groat could verify that was the correct date of the transaction. Groat then signed the document. None of them noticed the incorrect year in the deadline date for rescission.

The Bankruptcy Court determined that the typographical error in this particular case was not the type of notice defect that constitutes a TILA violation, and we find no error in that determination. There was no evidence that the Lender or its attorney intended to deceive Groat. And, viewing the Lender's disclosure from the vantage point of the hypothetical average consumer,²⁰ we cannot say that the Bankruptcy Court erred in finding that the defect was not misleading because anyone reading the document would know that the cancellation deadline could not have passed a year, before the document was even executed. It was, therefore, a bona fide error. Further, Ohs' procedures, with two people reviewing the documents prior to having the borrower sign them, and then explaining the form to the borrower, were reasonably adapted to avoid the error.

We recognize that TILA is a remedial statute and should be construed liberally in favor of the consumer. However, the 1995 amendments to TILA embodied Congress' desire to eliminate situations in which "small violations of the disclosure requirements of the Truth-in-Lending Act triggered the right of rescission provided by the Act."²¹ As the Bankruptcy Court noted, cases which have denied creditors the protection of § 1640(c) have...