In re Steinbrecher
| Decision Date | 05 January 1990 |
| Docket Number | Adv. No. 88-2147F.,Bankruptcy No. 88-11724F |
| Citation | 110 BR 155 |
| Parties | In re Louis STEINBRECHER, Elizabeth Steinbrecher, Debtors. Louis STEINBRECHER, Elizabeth Steinbrecher, Plaintiffs, v. MID-PENN CONSUMER DISCOUNT CO., Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
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Henry J. Sommer, Community Legal Services, Inc., Philadelphia, Pa., for debtors, Louis A. Steinbrecher, Jr., Elizabeth M. Steinbrecher.
Arthur Matausow, Wissow, Odza, Steckiw & Gindhart, Philadelphia, Pa., for defendant, Mid-Penn Consumer Discount Co.
Edward Sparkman, Philadelphia, Pa., Standing Chapter 13 Trustee.
The debtors, Louis and Elizabeth Steinbrecher, have initiated an adversary proceeding challenging a secured proof of claim filed by Mid-Penn Consumer Discount Company. The claim was filed in the amount of $8,441.11 and is based upon a series of loan agreements which began in August 1985 between these parties. The debtors contend in their complaint that the claim of Mid-Penn is unsecured because the value of the collateral is less than the sum total of prior liens. 11 U.S.C. § 506(a), (d). See generally Gaglia v. First Federal Savings & Loan Association, 889 F.2d 1304 (3d Cir.1989). The debtors also allege that this creditor violated provisions of the federal Truth-in-Lending Act (TILA), 15 U.S.C. §§ 1601 et seq., as well as violated provisions of Pennsylvania's usury and unfair trade practices statutes. They seek to rescind the loan transactions, recover damages both statutory and actual, and have the unsecured claim of Mid-Penn reduced or eliminated. Mid-Penn opposes all relief sought with one exception: it concedes that its claim should be classified as unsecured due to the provisions of § 506(a), (d). Therefore, what is before me now is to determine Mid-Penn's allowed unsecured claim and whether any damage judgment in favor of the debtors is warranted.
The underlying facts are much simpler than the analysis of the legal issues.
In August 1985, the debtors decided that certain repairs and improvements to their home were needed. They invited All-Star Remodelers to provide them with an offer to perform the necessary work. The All-Star cost was $2,970.00, Ex. P-13, a sum which the debtors could only afford by financing. All-Star then obtained certain financial information from the debtors and submitted that to the defendant, Mid-Penn Consumer Discount Co. Mid-Penn had been a prior regular source of financing of All-Star home repair customers.1
Mid-Penn then conducted its own analysis of the information, obtained a title and credit report concerning the debtors, obtained appraisal information concerning the value of the debtors' residence (which did not require an actual inspection) and informed All-Star of its decision to finance, subject to certain conditions. The debtors, who were unfamiliar with Mid-Penn, were subsequently informed that they could obtain financing of the home repair contract by this entity. They were then taken by an All-Star employee to Mid-Penn's offices on August 21, 1985. Once there they were notified of the loan conditions (e.g., their home would serve as collateral for the loan; the residence had to be insured against damage with the lender as loss payee) and they agreed to immediate financing by Mid-Penn.
All loan documents were signed that day, including the proceeds checks which were made payable to the debtors. One check, in the amount of $2,970.00, was endorsed by them and distributed by Mid-Penn to All-Star upon completion of its work on the debtors' home. Another check, in the amount of $69.09, was also endorsed that day by the debtors and mailed to them approximately three days later. Part of the loan proceeds went to record a mortgage in favor of Mid-Penn against the debtors' home; another portion was paid by Mid-Penn to Sidney Rosenfeld, Inc. for fire insurance on the residence with Mid-Penn as loss payee.
The loan called for payments of $115.00 monthly for 48 months, beginning October 5, 1985. The debtors made all required monthly payments through May 1986. On May 23, 1986, the loan was refinanced. The debtors received $1,037.35 in new funds and agreed to repay Mid-Penn $152.00 per month for 48 months beginning July 5, 1986. A portion of the proceeds went to Mid-Penn to record a new mortgage, since the home was still serving as collateral, and to satisfy the old one. This mortgage satisfaction occurred on July 25, 1986. Again, property insurance on the realty was a precondition for this loan.
Two additional refinancings occurred. On January 14, 1987 the debtors entered into a new loan agreement with Mid-Penn on terms similar to the prior loans. They received additional funds of $561.31 and were then obligated to repay the debt at the rate of $170.00 per month for 48 months, beginning February 5, 1987. They again paid Mid-Penn to record a new mortgage and satisfy the old one. This mortgage satisfaction occurred on February 11, 1987.
The fourth loan (third refinancing) occurred on February 22, 1988. The debtors received $290.70 in new funds and agreed to repay Mid-Penn $170.00 per month for 48 months beginning April 5, 1988. The previous mortgage was satisfied on March 17, 1988.
In Appendix A to this memorandum opinion I note certain additional aspects of these loan transactions. For example, the disclosed annual percentage rates ranged from 27% to 27.58%. The disclosed amounts financed ranged from $2,197.60 to $3,200.80. The significance of these disclosures, and others, shall be detailed below.
Finally, the record before me shows that the debtors made all required payments to Mid-Penn on each of the four loans through April 5, 1988. On April 19, 1988, the debtors ceased making loan payments and sent a letter to Mid-Penn declaring their election to rescind all four loan agreements and demanding that Mid-Penn take all necessary steps to do so, including vacating its remaining mortgage on the debtors' realty. Mid-Penn replied by stating that the debtors no longer had any right to rescind, and it refused to comply with the debtors' demands.
On May 18, 1988, the debtors filed a voluntary petition in bankruptcy under chapter 13. Mid-Penn filed a secured proof of claim in the amount of $8,441.11 on July 12, 1988. The debtors then initiated the instant adversary proceeding to challenge this proof.
Although the debtors' claims against Mid-Penn overlap to some degree, they may broadly be classified into three groups. First, the debtors contend that this creditor violated the provisions of TILA as to each and every loan transaction, which entitles them to rescind all four agreements and which yields recoupment and an affirmative recovery due to statutory and actual damages. Among the alleged violations are misdisclosure of the true finance charge and annual percentage rate, misdisclosure of the security interest taken, misdisclosure of the debtors' recision rights, and misdisclosure of repayment terms.
Second, the debtors argue that the initial loan transaction involved borrowing sums for home improvement work. They assert that the loan agreement should have been governed by the provisions of the Pennsylvania Home Improvement Finance Act (HIFA), 73 P.S. §§ 500-101 et seq. Not only could the applicability of HIFA yield various protections to these borrowers which were not included in the loan documents they signed, but the interest ceiling for such loans is considerably lower than the finance charge assessed by this lender. As a result, they claim that the loan agreements were usurious and seek statutory treble damages as a result.
Finally, the debtors maintain that certain lender practices — not complying with HIFA, not satisfying prior mortgages promptly, refinancing loans repeatedly, or not informing customers that less expensive borrowing might be achieved from Mid-Penn (or others) by structuring the loans differently — violate the provisions of the Pennsylvania Unfair Trade Practices and Consumer Protection Law (generically known as an unfair or deceptive act or practice law, or UDAP), 73 P.S. §§ 201-1 et seq. UDAP violations and usury violations may yield treble damages, see 73 P.S. § 201-9.2(a); 41 P.S. § 503, and the debtors request such an award.
The usury and UDAP claims are conceptually and factually complicated. For example, only the first loan agreement in August 1985 involved the use of loan proceeds for home repairs. All the other loan agreements involved refinancings of prior loans with the new loan proceeds generally being paid to the borrowers or to the lender for repayment of the prior outstanding balances. If HIFA should have been applicable to the first loan, the debtors assume that it would also be applicable to refinancings. Accord 73 P.S. § 500-305.
In addition, the applicability of HIFA to the first loan agreement (and possibly subsequent agreements) depends upon a careful analysis of that statute, another loan statute known as the Pennsylvania Consumer Discount Company Act, 7 P.S. § 6201 et seq., and decisions such as In re Joyce, 41 B.R. 249 (Bankr.E.D.Pa.1984); Anderson v. Automobile Fund, 258 Pa.Super. 1, 391 A.2d 642 (1978); Iron & Glass Bank v. Franz, 9 Pa.D. & C.3d 419 (Allegheny 1978), and Transnational Consumer Discount Co. of Erie v. Weaver, 52 Erie Leg.J. 4 (C.P. Erie 1968). Whether such an analysis need be undertaken should follow a determination of whether some or all of the loan agreements must be rescinded.
I note that both the Pennsylvania usury and UDAP statutes condition the award of damages upon proof of actual harm. See In re Russell, 72 B.R. 855, 865 (Bankr.E.D. Pa.1987) (). Under Title 41, damages in the amount of the excessive interest or charges actually paid, or triple that amount, may be recovered. 41 P.S....
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