In re Russell
| Decision Date | 23 April 1987 |
| Docket Number | Bankruptcy No. 86-00995K,Adv. No. 86-0712K. |
| Parties | In re Cora RUSSELL, Debtor. Cora RUSSELL, Plaintiff, v. FIDELITY CONSUMER DISCOUNT COMPANY, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
COPYRIGHT MATERIAL OMITTED
Gary Klein, Philadelphia, Pa., for debtor.
Lawrence T. Phelan, Philadelphia, Pa., for Fidelity Consumer Discount Co.
James J. O'Connell, Philadelphia, Pa., Standing Chapter 13 Trustee.
The instant adversarial proceeding presents to us a number of questions which are both provocative and are apparently of first impression, at least in this jurisdiction. The issues presented, and our decisions as to each of them, are as follows:
1. Is a consumer who has alleged material violations of the federal Truth-in-Lending Act, 15 U.S.C. § 1601, et seq. (), entitled to recover actual damages without having to show his or her "detrimental reliance" on an errant disclosure statement; and, if so, how are those damages to be computed? We hold that the proof by the consumer here that the lender materially understated the applicable finance charge entitles the consumer to actual damages measured by the amount of the undisclosed finance charges, without requiring the consumer to further prove her "detrimental reliance" on the disclosure statement.
2. Is a loan in which the finance charge exceeds the maximum allowed under state law insulated from a claim of usury by federal pre-emptive legislation where the lender fails to establish on the factual record that the conditions for federal preemption exist; and, if usury is found, how are the damages computed under pertinent Pennsylvania law? We hold that the lender has a strict burden of proof if it desires to establish federal pre-emption of state usury laws, and, since the lender here failed to meet this burden, we must find the loan usurious. However, we will measure the "excess interest paid" by the difference between the interest charged and the lawful rate under the state loan act with which we believe that the lender should have complied, instead of the "legal rate of interest" in this state, especially since the consumer is entitled to treble damages.
3. Does the Pennsylvania "unfair or deceptive acts and practices" (hereinafter referred to as "UDAP") statute extend to alleged unfair trade practices by lenders? We find that the remedial nature of the Pennsylvania UDAP statute supports its application to loan transactions.
4. Does the federal Real Estate Settlement Procedures Act, 12 U.S.C. § 2601, et seq. (), apply to non-purchase-money loans? We hold that it does not.
On February 28, 1986, CORA RUSSELL, the Debtor, filed the instant Chapter 13 bankruptcy case, and, on March 26, 1986, the Defendant, FIDELITY CONSUMER DISCOUNT COMPANY, filed an itemized Proof of Claim alleging a debt, secured by a mortgage, totalling $14,709.29 owed to it by the Debtor. Included among the items claimed, as abridged by us, for the purposes of clarity, were the following:
Principal Balance $ 5,639.39
Interest and Late Charges 7/24/85 to
2/28/86 1,220.52
Fees and Costs, mostly arising from a
state court foreclosure action 2,174.85
Interest "at contract rate for
60-month term of plan" 5,674.53
__________
TOTAL $14,709.29
This Proof of Claim elicited, from the Debtor, on July 16, 1986, a response in the form of an eight-count "Complaint Objecting to Secured Claim and Seeking Damages." On August 15, 1986, the Defendant filed an Answer denying virtually all of the allegations of the Complaint and asserting several "affirmative defenses." On February 28, 1987, subsequent to the trial, we granted an unopposed Motion permitting the Debtor to add claims under the Pennsylvania UDAP and RESPA, placing before us at this time a ten-count Complaint.
The matter initially was listed for trial on November 13, 1986. At that time, the Defendant conceded a TILA statutory liability of $1,000.00 pursuant to 15 U.S.C. § 1640(a)(2)(A)(i) and also allowed that, since service in the state court foreclosure proceeding had been defective, the fees and costs would be reduced from $2,174.85 to $352.35. In addition, the assertions set forth in the Debtor's unanswered requests for admissions, which consisted of a number of documents relevant to the parties' loan transaction of December 8, 1982, were admitted into the record.
In order to presumably resolve certain remaining factual issues, the Debtor took the witness stand, with the understanding that the Defendant could produce responsive testimony at a subsequent hearing. At the close of the testimony, by agreement of Counsel, the Court issued an Order directing Counsel to produce a further Stipulation of Facts on or before December 1, 1986; scheduling the supplemental hearing, if necessary, on December 2, 1986; and requesting the parties to file their Briefs on the merits on or before January 5, 1987, and February 5, 1987, respectively.
The December 2, 1986, hearing date was rescheduled, being finally conducted, per an Order of December 17, 1986, on January 7, 1987. On that date, a further Stipulated Statement of the Case was submitted, confining the issues to TILA actual damages, usury, inclusion of unearned interest in the Proof of Claim, and the legality of the application of certain proceeds of the loan. The date for submissions of Briefs by the parties was set back until February 6, 1987, and March 5, 1987, respectively.
On January 7, 1987, the Defendant again declined our invitation to present testimony. However, the Debtor testified once again, about another aspect of the transaction, and the Debtor also called one Edward Pressman as an additional brief witness. In all, the complete record of testimony in this case, which elicited this Opinion of fifty typewritten pages, consisted of less than thirty-five pages.
After the completion of the ordered briefing, the Debtor favored us with a Reply Brief on March 20, 1987.
Although most of the facts are not in dispute, we are nevertheless proceeding to make several specific Findings of Fact, which we shall follow with specific Conclusions of Law and a rather extended Discussion, rendered necessary because of the first-impression status of many of the issues raised.
1. The Debtor, apparently a single, middle-aged woman, resides in a property owned by her sister at 2713 North Judson Street, Philadelphia, Pennsylvania, but owns realty located at 6060 Vine Street, Philadelphia, Pennsylvania 19139, which was, at the time of the hearings, vacant.
2. In late 1982, the Debtor was confronted with several delinquent bills, including taxes and water and sewer charges, mostly relative to her Vine Street realty, and she consulted the telephone directory to attempt to find a company to make a loan to her to pay these bills.
3. The Debtor is a totally honest and sincere individual, whose testimony we fully credit. However, we also believe her to be totally unsophisticated in financial affairs and her ability to recall and comprehend the details of her loan transaction were limited. Her principal occupation appears to have been the operation of a laundromat in West Philadelphia.
4. The Debtor testified that she called several lending institutions before coming into the office of the Defendant in Upper Darby and filling out an application for the loan in issue.
5. The Debtor had no recollection of the involvement of any mortgage brokers in the loan transaction, nor did she agree that any proceeds of her loan would be distributed to any such parties. She stated that she had never heard of Suburban Financial Services or City and Suburban Land Development Company, and was totally unaware of any role that these companies played in this transaction.
6. After her initial visit to the Defendant's office to make a written application, an agent from the Defendant came to the Debtor's laundromat, asked her several additional questions, and arranged for the Debtor to come to the Defendant's office to sign the final loan papers.
7. When the Debtor arrived at Fidelity's office on the second occasion, which was on December 8, 1982, all of the papers were completely prepared and ready for her signature.
8. The Debtor, being an unsophisticated borrower who was obtaining a loan from which the proceeds would be distributed to other creditors, did not know precisely how much she was actually borrowing and what was in fact set forth in the papers that she signed.
9. The Debtor did note that the papers indicated that the her loan was for the amount of $7,000.00, and she therefore initially assumed that $7,000.00 was to be distributed to her creditors. She did state, however, that, at some point during the execution of the papers on December 8, 1982, she realized that deductions had been made from the $7,000.00 in the distribution to her creditors, which she protested. However, she also ultimately signed the papers, apparently without asking and certainly without understanding the nature of these deductions.
10. While the Debtor testified that she would not have made the loan if she had known about the deductions beforehand, she also testified that she needed the money badly and hence the implication arises that she would have agreed to almost any terms, even at interest rates which were very high, to get the money needed.
11. The Debtor was presented with a Federal Truth-in-Lending Disclosure and Insurance Statement (hereinafter referred to as "the TILA Statement") in the transaction. The TILA Statement included, inter alia, the following information:
Amount Financed (at top) $7,000.00
An "Itemization of Amount
Financed" (a...To continue reading
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