Ljepava v. M. L. S. C. Properties, Inc.

• Decision Date: 12 February 1975
• Docket Number: 73--1756,Nos. 73--1707,s. 73--1707
• Citation: 511 F.2d 935
• Parties: Nick LJEPAVA and Chris Ljepava, Jr., Plaintiffs and Appellants, v. M.L.S.C. PROPERTIES, INC., et al., Defendants and Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 935

511 F.2d 935

Nick LJEPAVA and Chris Ljepava, Jr., Plaintiffs and Appellants, v. M.L.S.C. PROPERTIES, INC., et al., Defendants and Appellees.

Nos. 73--1707, 73--1756.

United States Court of Appeals Ninth Circuit.

Feb. 12, 1975.

James W. Funsten (argued), San Francisco, Cal., for plaintiffs and appellants.

Sanford N. Diller (argued), Cupertino, Cal., for defendants and appellees.

OPINION

Before LUMBARD, ^* KOELSCH and DUNIWAY, Circuit Judges. ^* United States Court of Appeals for the Second Circuit, sitting by designation.

LUMBARD, Circuit Judge:

Plaintiffs appeal from an order of the Northern District of California, entered by Judge Charles E. Wyzanski, Jr., sitting by designation, which denied them most of the relief that they had sought under the Truth in Lending Act, 15 U.S.C. § 1601 et seq., and Regulation Z issued thereunder. 12 C.F.R. part 226 (1974). We reverse and remand.

The plaintiffs are two brothers, Nick and Chris Ljepava, who lived in Saratoga, California, in a five-room house on a fifteen-acre prune farm which they had inherited from their parents. The Ljepavas had lived on the land since 1923. In addition to raising prunes on their own property, the brothers, who had only eighth-grade educations, did piece work of an agricultural nature for surrounding farmers. The Ljepava farm was located in an area of new residential development, and there were potentially fourteen building lots on the tract. The trial judge found that since 1970 the property had had a market value of $225,000. Immediately prior to the arrangement of the mortgage loan which is the subject of this suit, there were two encumbrances on the land: a first deed of trust in favor of Ira and Antonie Brotzman in the amount of $92,771.29 and a second deed of trust in favor of Henry L. and Nadine B. Ethier in an original amount of $18,000. On April 18, 1972, a notice of default was recorded by Mrs. Ruth C. Armes, the assignee of the Ethier deed of trust.

Since their equity in the land of some $100,000 was jeopardized by the possibility of a foreclosure sale pursuant to the notice of default, the Ljepavas sought to refinance the second deed of trust. It appears from the evidence and the trial judge's findings that the Ljepavas were afraid that Mrs. Armes was out to take their land from them in some nefarious way. ¹

Prior to the filing of the notice of default, the Ljepavas had been contacted by Norman S. Lopes, an agent of Paul O. Paulson, a mortgage loan broker doing business as the Paulson Mortgage Company. ² Paulson tentatively arranged a $30,000 loan for the Ljepavas in early April 1972, but at the last minute the Ljepavas decided not to go through with the deal. In early May the Paulson organization began arranging a new loan to pay off the second deed of trust. On May 9, Lopes told the Ljepavas that he was having serious difficulties and that it would be necessary for another mortgage loan broker, HLC Financial, a subsidiary of M.L.S.C. Properties, Inc., to be brought into the transaction. The trial judge found, and we agree, that while Lopes told the Ljepavas that an increased commission would be required, he did not indicate the amount of that commission.

On May 11, the deal was closed. The disclosure statement required by the Truth in Lending Act and the Federal Reserve Board's Regulation Z that was presented to the Ljepavas indicated that the face amount of the promissory note was $36,000. ³ Of that amount $24,480 was paid to Mrs. Armes or to or on behalf of the Ljepavas. ⁴ The statement indicated that a commission of $5,400 was to be paid to Paulson Mortgage Company and a commission of $6,120 was to be paid to HLC Financial. The Loan was for one year at 10% interest, which amounted to $3,600. A sum of $200 was payable in addition to the interest which the statement included in the total interest charge. Thus the total finance charge was $15,320--the sum of the commissions, the 10% interest, and the extra payment of $200. The disclosure statement showed that the annual percentage rate charged for the loan was 43%. That number was obtained by comparing the finance charge for the one-year loan--$15,320--to the face amount of the note--$36,000. In addition, the statement indicated that if the loan was paid off before maturity, all unaccrued interest would be cancelled, but that there would be a 'pre-payment charge' of twelve months' unearned interest.

The disclosure statement did not indicate that there were actually ten promissory notes involved--not one. The obligees of the notes and their respective amounts were as follows: Donald E. and Louise Slusher, $3,500; Robert A. Lewis, $4,000; Collier N. and Theresa V. Gallucci, $2,500; John P. and Roberta E. Briano, $1,500; Mrs. Roy M. Austin, $10,000; George M. Boyd, $1,000; Murray M. and Anne D. Montgomery, $2,000; Charles P.R. and Lois C. Short, $5,000; Irma Smith Van Riesen, $5,000; Vera T. Lynly, $1,500. There was only one deed of trust in which M.L.S.C. Properties, Inc., was named the trustee for the benefit of the promisees.

In addition to signing the ten notes, the deed of trust, and the disclosure statement, both brothers signed a statement waiving their right to rescind the transaction. The statement was written by Chris Ljepava as dictated to him by Lopes. The statement said: '5/11/72 In order to expedite this loan we wish to waive our three day right of rescission as our property is in default and we are close to foreclosure.'

At trial Nick Ljepava indicated that he did not understand all of the loan's terms and that the brothers expected to get about $5,000 in cash instead of the $1,000 they actually received.

After the Ljepavas failed to make the payments required by the notes, M.L.S.C. Properties, Inc., recorded a notice of default and proposed to sell the property at a foreclosure sale on November 15, 1972. In order to prevent this sale, the Ljepavas filed this suit in the district court on November 2, 1972. Their complaint asked for an injunction restraining M.L.S.C. Properties, Inc., from selling the land at a foreclosure sale, for rescission of the transaction, and for the civil penalties and attorneys' fees provided by the Truth in Lending Act. The district court issued a preliminary injunction, and a trial was held on January 15 and 16, 1973.

On the basis of the facts outlined above, the trial judge found that the Truth in Lending Act had been violated in that the disclosure statement failed to comply with section 129(a)(2) of the Act, 15 U.S.C. § 1639(a)(2), because HLC Financial's role in the transaction was not explained. The trial court granted judgments of $1,000 in favor of the Ljepavas against each of defendants Lopes and Paulson, and jointly against HLC Financial, M.L.S.C. Properties, Inc., and Mortgage Loan Servicing Corporation, and awarded the Ljepavas attorneys' fees of $3,000 against the same defendants, Ljepya (sic) v. M.L.S.C. Properties, 353 F.Supp. 866 (N.D.Calif.1973). In addition, the district judge held that plaintiffs could rescind the loan contract if plaintiffs tendered to defendants, within ten days, an amount equal to the proceeds of the loan disbursed to them or for their account ($24,480) plus the amounts subsequently advanced by defendants to the holders of the first deed of trust ($8,681.49). Id.

At the expiration of the ten-day period provided in the court's order, the defendants moved to dissolve the preliminary injunction against holding a foreclosure sale on the ground that the plaintiffs had failed to avail themselves of the court's rescission order. At a hearing on the motion, the judge insisted on a yes or no answer to the question of whether a tender had been made--a question plaintiff's counsel found difficult to answer. Although the trial judge scarcely allowed the Ljepavas' counsel to get a word in edgewise, ⁵ it appears that counsel was attempting to argue that defendants' failure to cooperate had frustrated plaintiffs' attempts to arrange a tender.

While there is no evidence in the record concerning events subsequent to the trial, ⁶ it appears that within the ten-day period in question the Ljepavas had finalized arrangements to sell their property to Anthony Cansano for $180,000 and that an escrow account had been set up to facilitate the sale. It appears that defendants refused to agree to release their mortgage subject to the subsequent payment to them of $33,161.49 from the escrow account. Instead they apparently maintained that the rescission order permitted them to insist upon payment prior to their release of the mortgage. The trial judge, concluding that plaintiffs had failed to tender in accordance with his rescission order, dissolved the injunction and cancelled the award of attorneys' fees. It is from this action that plaintiffs appeal.

Within three weeks after the post-trial hearing, it appears that the Ljepavas successfully completed the sale of their property for $180,000, and paid the defendants $67,356.62 so that they would release their deed of trust. Of the amount paid defendants, $33,161.49 represented the amount which would have been payable under the court's order; the remainder covered, inter alia, the commissions to HLC Financial and Paulson Mortgage of $11,520.00, a prepayment penalty of one year's interest ($3,600.00), and attorneys' fees of $10,000.

The Ljepavas contend that the trial judge's view of the rescission remedy provided by the Truth in Lending Act was too restrictive in that they should not have been required to tender $33,161.49 before defendants were under an obligation to release their mortgage. In light of events since trial, the Ljepavas maintain that they should be allowed to recover all of the monies they paid to defendants in excess of $33,161.49. In addition, they claim that the trial judge did not have the power to and should not have revoked his initial award of attorneys' fees and that the trial court should have awarded them damages under...