In re Underwood
| Decision Date | 04 November 1986 |
| Docket Number | Bankruptcy No. 7-85-00125-R,Adv. No. 7-86-0077,7-86-0160. |
| Citation | 66 BR 656 |
| Parties | In re Walter UNDERWOOD, Mary Linda B. Underwood, Debtors. Walter UNDERWOOD, et ux., Plaintiffs, v. AMERICAN HOME MORTGAGE CORP., Defendant. (Two Cases) |
| Court | U.S. Bankruptcy Court — Western District of Virginia |
William G. Anderson, Roanoke, Va., for debtor/plaintiffs.
Lutins & Shapiro, Roanoke, Va., for defendant.
J. Glenwood Strickler, Roanoke, Va., trustee.
The Complaint raises the following issues:
(1) Whether the loan of the Defendant, American Home Mortgage Corporation, to the Debtor/Plaintiffs violated the Consumer Credit Protection Act, 15 U.S.C. § 1601, et seq., commonly known as the Truth In Lending Act, and the regulations promulgated thereunder, 12 C.F.R. § 226.1;
(2) Whether the loan violated Virginia usury laws; and
(3) Whether the Plaintiffs may sell free of liens the real estate in question.
Walter and Mary Linda Underwood (Debtors) filed their Chapter 13 case in this Court on February 5, 1985, and this adversary proceeding on March 26, 1986. Upon trial, the relevant facts appeared as follows.
The Debtors applied to Valley Acceptance Corporation, Roanoke, Virginia, for a loan. They needed approximately $10,000.00, the proceeds of which were to be used to purchase the equity interest of Mr. Underwood's former wife in the residence and real estate in question. At the time of the application, there existed upon this real estate a regular low interest amortized first Deed of Trust lien and note in favor of First American Bank with a remaining balance of $6,901.04. The application for loan was ultimately processed by employees of Valley Acceptance Corporation, representing loan proceeds of $24,520.00.
The testimony, primarily of Mrs. Underwood, reflects that sundry documents were signed by the Underwoods at Valley Acceptance's office. Some documents show a date of July 25, 1984, and others, July 26, 1984, although the testimony indicates that the Underwoods appeared at Valley Acceptance's office only once. Once Ms. Simmons, employee of Valley Acceptance, apparently worked up the loan information and prepared the documentation, which documents were signed by the Underwoods in a hurried fashion. Mrs. Underwood testified that the documents were in blank, and when inquiry was made of Ms. Simmons as to why the forms were blank, she replied that they would be filled in later. She testified that she was given an incomplete copy of the federal Truth In Lending Act Disclosure Statement.
The loan proceeds, as appears from the settlement statement apparently prepared by the closing attorney, reflects disbursements as follows:
with a remaining sum to the borrowers of $3,502.47, making a total of $32,200.00.
The Defendant introduced at trial only one witness, one Zane Frye, custodian of records, who was employed as Operations and Servicing Manager of the Defendant on October 9, 1985. Frye's employment date was long past the date of the transactions involved herein, and the witness had no personal knowledge of any facts relating to the events, documents, or transactions involved.
Among documents introduced was the Disclosure Statement which contains the signatures of the Underwoods, dated July 25, 1984. The Defendant also introduced a copy of a form entitled "Notice of Right to Cancel". This document was dated July 26, 1984, and also reflects the signatures of Mr. and Mrs. Underwood. Mrs. Underwood testified that Ms. Simmons at Valley Acceptance did not give them a copy of the Notice of Right to Cancel, nor had they received this document. As herein noted, neither Ms. Simmons nor anyone else at Valley Acceptance was called as a witness.
The copy of the Deed of Trust dated July 26, 1984 introduced by the Defendant noted at the top thereof, "DEL. Cranwell Law Firm", apparently indicating that the loan would be closed by the Cranwell firm, as was, in fact, so done, apparently on the date of August 3, 1984. Defendant's Exhibit # 6 was headed "Amount Financed Itemization" and, on a line designated "Itemization of Amount Financed", there appears the figure of $32,500.00. Defendant's Exhibit # 1, the "Disclosure Statement", notes, under "Amount Financed", the sum of $24,520.00.
Defendant further introduced, through Frye, as a part of its official records Exhibit # 5, which appeared to be a letter over the name of Edward P. Burdick, a quality assurance officer, dated June 5, 1985. This letter was written approximately ten or eleven months after the loan was closed. This letter allegedly called attention to the erroneous Disclosure Statement and acknowledged its error, setting forth that the correct amount of finance charge should have been $68,820.80 instead of the sum set forth of $61,140.80. This letter merely requested that the Underwoods place it among their loan papers and that they need not reply. There was no offer or notice of any rescission rights set forth. The Underwoods deny ever receiving a copy of the letter and, of course, the witness Frye could testify only that the letter was a part of the Defendant's file bearing on this transaction.
The closing of the loan transaction, as above noted, occurred on August 3, 1984 at the law firm of CRANWELL, FLORA & MOORE. At that time, the Underwoods learned for the first time that American Home Mortgage Corporation, not Valley Acceptance Corporation, was the lender. The Underwoods executed a note for $32,200.00 with an interest rate of eighteen per cent (18%) per annum and annual percentage rate of 24.73%. The $32,200.00 included a $7,200.00 "Discount" and a "Service Charge" of $480.00, as well as the $24,520.00 financed. The Service Charge and Discount were not included in the "Finance Charge" portion of the Disclosure Statement. The Disclosure Statement stated a Finance Charge of $61,140.80, an understatement of $7,680.00.
The copy of an unsigned letter dated June 5, 1985 indicated that a computer error had resulted in the understatement of Finance Charge on the Disclosure Statement. It contained no language regarding an adjustment of the Finance Charge or payment schedule. The letter refers to computer error, although the amount financed error and the amount of finance charge appearing on the Disclosure Statement were items apparently typed thereon by Valley Acceptance. Mr. Burdick, the alleged author of the letter, did not appear as a witness.
On June 2, 1986, the Plaintiffs served on the Defendant a letter notifying it of their rescission of the loan transaction. The rescission was based on alleged violations of the Truth In Lending Act and Regulation Z 12 C.F.R. § 226.1, et seq. (1986). The Defendant has not responded to the rescission letter. Defendant seeks to foreclose its Deed of Trust to satisfy Debtors' obligation.
Plaintiffs have a contract for the sale of the residence, free of liens, for which they seek approval of this Court. Defendant objects to the private sale by Debtors. The contract price is $49,000.00, which appears to be a fair price.
The Plaintiffs propose that the standing Chapter 13 Trustee pay the Defendant's liability from the proceeds of the sale. The Defendant claims that it is entitled to a $41,668.56 payoff, which includes the principal balance, late charges, and a per diem interest charge. The Plaintiffs claim that due to the alleged Truth In Lending Act and Regulation Z violations and the alleged violations of Virginia usury laws, the Defendant is entitled to receive only $22,912.96, the amount financed, less their payments on the account.
Finally, the Plaintiffs have prayed that the Court order the Defendant to pay reasonable attorney's fees to counsel for the Plaintiffs.
The transaction between the parties was a consumer transaction subject to the Truth In Lending Act and Regulation Z. See 15 U.S.C.S. § 1602(h) (Law.Co-op.1982 & Supp.1986). The Underwoods are "consumers". Id. American Home Mortgage Corporation is regularly in the business of extending credit for which the payment of a finance charge is required, and is the person to whom the debt was initially owed and is, therefore, a "creditor" as defined by 15 U.S.C.S. § 1602(f) (Law.Co-op.1982 and Supp.1986).
The stated purpose of the Truth In Lending Act is "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.S. § 1601(a) (Law.Co-op. 1982); see Powers v. Sims & Levin Realtors, 396 F.Supp. 12 (E.D.Va.1975), aff'd in part and rev'd in part on other grounds, 542 F.2d 1216 (4th Cir.1976). An objective of the Truth In Lending Act is to inform the consumer not only of the true cost of credit, but also of the nature of the terms of credit offered to him, including a description of the components of finance charge. Meyers v. Clearview Dodge Sales, Inc., 384 F.Supp. 722, 726 (E.D.La.1974), aff'd in part and rev'd in part on other grounds, 539 F.2d 511 (5th Cir.1976), cert. denied, 431 U.S. 929, 97 S.Ct. 2633, 53 L.Ed.2d 245 (1977). To this end, the Truth In Lending Act requires clear and conspicuous disclosure to the consumer of certain information.1 "Disclosure" under the Truth In Lending Act is a term of art which refers to the manner in which a creditor must convey the information which Congress deemed basic to an intelligent assessment of a credit transaction. Smith v. U.S. Credit Corp., 801 F.2d 661 (4th Cir.1986) (slip opinion); Doggett v. Ritter Finance Co., 384 F.Supp. 150, 153 (W.D. Va.1974)....
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