In re Russell

• Decision Date: 07 February 1995
• Docket Number: Civ. A. No. 94-T-110-N.
• Citation: 181 BR 616
• Parties: In re Mellonie RUSSELL, Debtor. GERALD DUNCAN AUTO SALES, INC., Appellant and Cross-Appellee, v. Mellonie RUSSELL, Appellee and Cross-Appellant.
• Court: U.S. District Court — Middle District of Alabama

181 B.R. 616 (1995)

In re Mellonie RUSSELL, Debtor GERALD DUNCAN AUTO SALES, INC., Appellant and Cross-Appellee, v. Mellonie RUSSELL, Appellee and Cross-Appellant.

Civ. A. No. 94-T-110-N.

United States District Court, M.D. Alabama, Northern Division.

February 7, 1995.

Lawrence F. Gardella, Legal Services Corp. of Ala., Montgomery, AL, for Mellonie Russell.

Alex L. Holtsford, Jr., Floyd R. Gilliland, Jr., Nix, Holtsford & Vercelli, P.C., Montgomery, AL, for Gerald Duncan Auto Sales, Inc.

Curtis Cleveland Reding, Jr., Montgomery, AL, for Curtis Cleveland Reding, Jr.

MEMORANDUM OPINION

MYRON H. THOMPSON, Chief Judge.

Appellant Gerald Duncan Auto Sales, Inc. appeals a judgment by the bankruptcy court holding that it violated various consumer protection laws by failing to disclose previous damage to an automobile it sold to appellee Mellonie Russell, and by then selling the vehicle with hidden and excessive finance charges. Duncan Auto also appeals the bankruptcy court's decision not to impose sanctions on Russell pursuant to Rule 11 of the Federal Rules of Civil Procedure. Russell has filed a cross-appeal on the grounds that the bankruptcy court did not properly calculate the damages it awarded for the excessive finance charge and that the court failed to award additional damages for unconscionable trading practices.¹ For the reasons that follow, the decision of the bankruptcy court will be affirmed in part and vacated and remanded in part.

I. BACKGROUND

In November 1992, Russell purchased a 1984 Oldsmobile Cutlass from Duncan Auto, a used car dealership located between Wetumpka and Montgomery, Alabama. The salesperson told her that the price of the car was $3,995.00, with additional charges for tax, title, and fees, for a total sales price to $4,118.89. Russell asked if Duncan Auto would finance the car, and the dealership agreed to work out a financing arrangement in which Russell would make a sizable down-payment in return for paying the balance off on a monthly basis. The negotiated arrangement was that Russell would make a down-payment of $1,518.89, leaving a balance of $2,600.00; that she would be assessed a finance charge of $544.60, which would be added to the balance for a total payment due of $3,144,60; and that this amount would be paid at a rate of $174.70 a month for 18 months.

Duncan Auto issued several documents in connection with this transaction. These included a credit application for financing by the dealership, a bill of sale listing the terms of the sale and disclaiming all warranties except valid title, and a disclosure of damage form revealing that the car had been painted and that the engine had been replaced. The disclosure form made no reference to any other damage to the automobile. Russell immediately fell behind on her monthly payments. One check she wrote was made on a closed checking account, and another was returned for insufficient funds.

In June 1993, Russell filed for personal bankruptcy under Chapter 13 of the Bankruptcy Code. 11 U.S.C.A. §§ 1301-1330. As part of the bankruptcy proceedings, she filed a complaint against Duncan Auto charging that the sale of the automobile violated several consumer protection statutes. Russell claimed that the dealership had violated the Alabama Deceptive Trade Practices Act, 1975 Ala.Code §§ 8-19-1 through 8-19-15, by failing to disclose damage to the automobile from a previous collision and by charging her an unconscionable price; violated the Alabama Mini-Code, §§ 5-19-1 through 5-19-31, by charging an excessive finance charge; and violated the federal Truth-in-Lending Act, 15 U.S.C.A. §§ 1601 through 1665a, by assessing a hidden finance charge.

The bankruptcy court found that Duncan Auto knowingly failed to disclose previous damage to the body and frame of the automobile in violation of the Alabama Deceptive Trade Practices Act. 1975 Ala.Code § 8-19-5(12). The court concluded, however, that, because Russell could not demonstrate the actual extent of any damages she suffered from this non-disclosure, her recovery would be limited to $100.00. § 8-19-10(a)(1). The bankruptcy court did not address Russell's unconscionability claim. § 8-19-5(23).

The bankruptcy court also found that Duncan Auto had illegally imposed hidden and excessive finance charges, and the court awarded damages under both the Truth-in-Lending Act and the Alabama Mini-Code. The Truth-in-Lending Act requires disclosure of a finance charge not made under an "open end credit plan," 15 U.S.C.A. § 1638(a)(3), and penalizes nondisclosure by awarding damages of double the total finance charge, § 1640(a)(2)(A)(i), hidden and disclosed, § 1605(a). The bankruptcy court determined that the hidden finance charge was $732.39, the difference between the sales price of $3,995.00 and the amount Duncan Auto had spent to acquire the car and make necessary repairs, $3,262.61.² The court added this amount to the $544.60 finance charge Duncan Auto admitted charging Russell, for a total finance charge of $1,276.99.³ The court then doubled this amount, as required by the Truth-in-Lending Act, for a total damage award of $2,553.98.

The bankruptcy court determined that damages were also appropriate under the Alabama Mini-Code. The Mini-Code allows for excess finance charge penalties on transactions that do not exceed $2,000.00. 1975 Ala.Code §§ 5-19-3 & 8-8-5. Williams v. E.F. Hutton Mortg. Corp., 555 So.2d 158, 160 (Ala.1989); Casey v. Travelers Ins. Co., 531 So.2d 846, 848 (Ala.1988); Marshall v. Mercury Finance Co., 550 So.2d 1026, 1027 (Ala. Civ.App.1989). Although the principal financed by the loan totaled $2,600.00, the court reasoned that the hidden finance charge, $732.39, should be deducted to reflect an actual loan of $1,867.61, an amount which brought Russell's claim within the Mini-Code's $2,000 limit. The bankruptcy court then calculated damages under the Mini-Code. First, the court determined that the legitimate finance charge on $1,867.61 would have been $336.16. 1975 Ala.Code § 5-19-3.⁴ Under the court's reasoning, the correct excess finance charge would be $940.83, the difference between the permissible finance charge, $336.16, and the $1,276.99 that the bankruptcy court determined was the actual finance charge.⁵ Next, as the Mini-Code requires, the court multiplied the excess charge by ten, which, calculated correctly, would entitle Russell to damages of $9,408.30.⁶ § 5-19-19.

II. DISCUSSION

A. Standard of Review

The applicable standard of review for findings of fact is the "clearly erroneous" standard. Rule 8013 of the Bankruptcy Rules; Green Tree Acceptance, Inc. v. Calvert, 907 F.2d 1069, 1071 (11th Cir.1990). Thus, the bankruptcy court's findings of fact are subject to reversal only when "the reviewing court ... is left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948). As to conclusions of law, the standard of review is de novo, and the district court may independently examine the applicable law and draw its own conclusions after applying the law to the facts without regard to the decision of the bankruptcy court. In re Chase & Sanborn Corp., 904 F.2d 588, 593 (11th Cir.1990). Under this standard, the court examines each of the issues on appeal.

B. Truth-in-Lending Act and Alabama Mini-Code

Duncan Auto appeals the bankruptcy court's holdings that it imposed a hidden finance charge in violation the federal Truth-in-Lending Act and an excessive finance charge in violation of the Alabama Mini-Code. Duncan Auto argues that, by treating the difference between its investment in the car and the sales price as a hidden finance charge for purposes of calculating damages under the Truth-in-Lending Act and the Alabama Mini-Code, the bankruptcy court eliminated any possibility for profit or even recovery of costs for items such as general business overhead. Russell's cross-appeal contends that additional damages should have been awarded for imposing an excessive finance charge under the Alabama Mini-Code. Under her calculations, her damages under the Alabama Mini-Code would total $25,093.50, instead of $9,408.30 as determined by the bankruptcy court.⁷

The Truth-in-Lending Act seeks to "to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit." 15 U.S.C.A. § 1601(a). The Act requires, among other things, that any "finance charge" on a credit transaction be disclosed to the consumer. § 1638(a)(3). The Act reflected "a transition in Congressional policy from a philosophy of `Let they buyer beware' to one of `Let the seller disclose.'" Mourning v. Family Publications Serv., Inc., 411 U.S. 356, 377, 93 S.Ct. 1652, 1664, 36 L.Ed.2d 318 (1973). The Alabama Mini-Code also addresses the need to protect consumers and limits the total finance charge businesses can charge consumers on certain credit transactions. 1975 Ala.Code § 5-19-3.

The definition of a "finance charge" under both the Truth-in-Lending Act and the Alabama Mini-Code is similar. Under the Truth-in-Lending Act a finance charge is "the sum of all charges, payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the creditor as an incident to the extension of credit." 15 U.S.C.A. § 1605(a). Under the Alabama Mini-Code a finance charge includes "all charges payable directly or indirectly by the debtor and imposed directly or indirectly by the creditor as an incident to the extension of credit." 1975 Ala.Code § 5-19-1(1). The Truth-in-Lending Act specifically includes in this definition a "Premium or other charge for any guarantee or insurance protecting the creditor against the obligor's default or other credit loss." 15 U.S.C.A. § 1605(a)(5).⁸

Duncan Auto disclosed to Russell a finance charge of...