In re Harrington

• Decision Date: 22 October 1980
• Docket Number: AP 80-0020.,Bankruptcy No. BK-7900378
• Citation: In re Harrington, 6 B.R. 655 (Bankr. R.I. 1980)
• Parties: In re Thomas HARRINGTON and Diana Harrington, Debtors. John BOYAJIAN, Trustee, Plaintiff, v. UNION CAPITAL CORPORATION and Marquette Credit Union, Defendants.
• Court: U.S. Bankruptcy Court — District of Rhode Island

6 B.R. 655 (1980)

In re Thomas HARRINGTON and Diana Harrington, Debtors John BOYAJIAN, Trustee, Plaintiff, v. UNION CAPITAL CORPORATION and Marquette Credit Union, Defendants.

Bankruptcy No. BK-7900378, AP 80-0020.

United States Bankruptcy Court, D. Rhode Island.

October 22, 1980.

John Boyajian, North Providence, R.I., trustee.

Joseph T. Little, East Providence, R.I., for Marquette Credit Union.

Owen B. Landman, Providence, R.I., for Union Capital Corporation.

ORDER ON DEFENDANTS' MOTION TO DISMISS

ARTHUR N. VOTOLATO, Jr., Bankruptcy Judge.

Heard on the Defendants' motion to dismiss the Trustee's complaint which seeks: (1) to set aside a loan made to the debtors as void under the Rhode Island Secondary Mortgage Loans Act, R.I.G.L. § 19-25.2-1, et seq., and (2) the return of all principal, interest, and other charges paid under the loan in question.

The relevant facts are undisputed: On April 18, 1977, Union Capital Corporation loaned $4,200 to Thomas and Diana Harrington, secured by an equity mortgage covering their home in Coventry, Rhode Island. Union thereafter assigned the loan to the Marquette Credit Union, and the Harringtons paid the loan in full on December 16, 1977. On November 1, 1979, the Harringtons filed a Chapter 13 petition with this Court.

On February 4, 1980, the Chapter 13 Trustee filed this complaint alleging that Union, in making the loan to the Harringtons, demanded, collected, or received unauthorized charges in violation of the Rhode Island Secondary Mortgage Loans Act, R.I.G.L. § 19-25.2-1, et seq., and seeks the return of all monies paid under the loan originally made by Union and later assigned to Marquette. Marquette and Union join in a motion to dismiss, based on three grounds: (1) that the Secondary Mortgage Loans Act requires the lender's conviction of a misdemeanor as a condition precedent to bringing a civil action; (2) that the remedy section of the statute does not provide the relief requested; (3) that the Complaint is barred by the doctrine of laches. Marquette argues in its own behalf, that as a credit union, it is exempt from the provisions of the statute.

This dispute involves the interpretation of several provisions of the Rhode Island Secondary Mortgage Loans Act. Our research, as well as that of the parties, discloses no cases by either the Rhode Island Supreme Court or the Rhode Island Superior Courts construing this statute. As this appears to be a question of first impression, it must be resolved in light of analogous case law and the general principles of statutory construction as articulated by the Rhode Island Supreme Court.

Since this is a motion to dismiss, we are not to determine any question of fact. We must accept the allegations of the complaint as true. Gardner v. Toilet Goods Assn., 387 U.S. 167, 87 S.Ct. 1526, 18 L.Ed.2d 704 (1967).

The issues raised in this dispute are:

1. Whether conviction of a misdemeanor is a condition precedent to the maintenance of a civil action under R.I.G.L. § 19-25.2-29.

2. Whether R.I.G.L. § 19-25.2-29 allows recovery of funds paid to a lender who has violated that Act;

3. Whether the defense of laches applies in this case; and

4. Whether Marquette, because it is an assignee of the loan, is exempt from the provisions of R.I.G.L. § 19-25.2-29.

For the reasons discussed as to each issue separately below, the motion to dismiss is denied.

I. The Availability of a Civil Remedy under the Act

The section of the Secondary Mortgage Loans Act dealing with remedies for violation of the statute is § 19-25.2-29:

Any person . . . who shall violate . . . any of the provisions of this chapter, shall be guilty of a misdemeanor and upon conviction thereof shall be punished by a fine of not more than five hundred dollars ($500) or by imprisonment of not more than six months. . . . Complaints . . . may be made by the director. . . . The attorney-general shall prosecute all complaints under this chapter.

Any secondary mortgage not invalid for any other reason, in the making or collection of which any act shall have been done which constitutes a misdemeanor under this section, shall be void and the lender shall have no right to collect or receive any principal, interest, or charges whatsoever, unless the licensee shall prove that such act was the result of an accidental or bona fide error. R.I.G.L. § 19-25.2-29.

The plaintiff's position is that the statute provides two separate remedies: one criminal and one civil. The criminal remedy, fine or imprisonment for conviction of a misdemeanor, is available only to the state through an action brought by the Attorney-General. The civil remedy, in the plaintiff's view, is available to borrowers for acts "constituting misdemeanors", which include any violation of the section, but that a conviction is not necessary before the civil action can be maintained.

Union and Marquette argue that criminal conviction of a misdemeanor is a condition precedent to civil liability under the Act, and that criminal prosecution for a misdemeanor can only be brought by the State in a court of competent jurisdiction, not the bankruptcy court. Defendants then argue that in this case, the bankruptcy court is being asked to determine whether a misdemeanor has been committed, and could be in the position of finding the defendant "guilty", only to discover that the defendants are later acquitted in a criminal prosecution.

In resolving the question of the scope of the statute's remedy provisions for violation of the Act, we note that the Rhode Island Supreme Court has enunciated several principals of statutory construction which, although stated in other contexts, are pertinent to our inquiry. In construing a statute where the intent of the legislature is in issue, a court must consider the statute in its entirety, viewing the language in light of the purpose and nature of the legislation. See Mason v. Bowerman Bros., Inc., 95 R.I. 425, 187 A.2d 772 (1963); Chaharyn v. Department of Employment Sec., 85 R.I. 75, 125 A.2d 241 (1956). Where the language is ambiguous, the court must give due regard to legislation relating to the same subject matter, so that there will be consistency among similar laws. See Pickering v. American Empl. Ins. Co., 109 R.I. 143, 282 A.2d 584 (1971). Additionally, language which is not defined in the statute should be given its ordinary and customary meaning in light of the purposes which motivated the enactment of the statute, see Shulton, Inc. v. Apex, Inc., 103 R.I. 131, 235 A.2d 88 (1967), unless a contrary intention is clear on the face of the legislation. See Potowomut Golf Club Inc. v. Norberg, 337 A.2d 226, 114 R.I. 589 (1975); Pacheco v. Lachapelle, 91 R.I. 359, 163 A.2d 38 (1960).

The Rhode Island Secondary Mortgage Loans Act was passed as part of a package of legislation apparently designed to regulate several types of commercial transactions, with consumer protection in mind. Three new statutes, the Education Lending Act, R.I.G.L. § 19-25.1-1 et seq., the Loan Business Act, R.I.G.L. § 19-25.3-1 et seq., and the Secondary Mortgage Loans Act, were adopted together as Chapter 269 of the Public Laws of 1966. The legislation included amendments to strengthen the existing usury statute, R.I.G.L. § 6-26-2, and the Small Loan Business Act, R.I.G.L. § 19-25-1 et seq. A comparison of the three new statutes with the Small Loan Business Act indicates that many of the provisions of these statutes were modeled after the Small Loan Business Act. All require licensing by the Department of Business Regulation, record keeping and annual reports, and have similar grounds for revocation of licenses. Additionally, the penalties for violation of both the Secondary Mortgage Loans Act and the Loan Business Act are almost identical to those in the Small Loan Business Act.¹

The intent of the Legislature, in our view, in adopting the Secondary Mortgage Loans Act and its companion statutes, was to provide for a comprehensive scheme of state regulation of secondary mortgage transactions for the protection of consumer borrowers. A "secondary mortgage loan" is defined in the statute to exclude loans secured by commercial real estate, or by dwellings with more than four units. § 19-25.2-1. The comprehensive scope of the Act includes provisions governing interest rates, licensing of lenders, maximum service charges, acceleration clauses, waiver of rights by a borrower, installment payments, assignment of wages, a prohibition of confessions of judgment, a requirement that a borrower be given a statement of account, and that the lender refrain from false representations. The clear legislative intent to protect consumer-borrowers from overreaching by lenders runs all through the statute in question.

This conclusion is bolstered by the Rhode Island Supreme Court's interpretation of the Small Loan Business Act, which, as noted earlier, creates a similar regulatory scheme. In Colonial Plan Co. v. Tartaglione, 50 R.I. 342, 147 A. 880 (1929),² where intent to violate the Small Loan Business Act was completely absent, the court construed the purpose of the statute as follows:

The statute does not permit the lender to make such an arrangement violative of the statute even with a willing borrower. To permit it would open the door to the very abuses and opportunities to take advantage of small borrowers which the statute is designed to prevent. . . . Our statute is drastic, it plainly is intended to prevent advantage being taken of small borrowers, who often are driven into improvident arrangements by their necessities. Supra at 344-45, 147 A. 880.

The Secondary Mortgage Loan Act's penalty section 19-25.2-29, provides: (1) that anyone violating any of the provisions of the Act shall be guilty of a misdemeanor, punishable by a fine of not more than $500 or up to six months imprisonment, or both, and (2) that in the case of an act which "constitutes a misdemeanor under this section," the second mortgage is...