Matter of Smith
| Decision Date | 13 October 1981 |
| Docket Number | Adv. No. 80-0504A.,Bankruptcy No. 80-00960A |
| Citation | 14 BR 712 |
| Parties | In the Matter of Patricia G. SMITH, Debtor. Patricia G. SMITH, Plaintiff, v. AMERICAN FINANCE SYSTEM OF GEORGIA, INC., Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Georgia |
Dwight D. Bowen, Atlanta, Ga., for plaintiff.
Lowell H. Hughen, Hansell, Post, Brandon & Dorsey, Atlanta, Ga., for defendant.
The subject of this opinion is cross-motions for summary judgment filed by Plaintiff-Debtor Patricia G. Smith and Defendant-Creditor American Finance System of Georgia, Inc. ("American") regarding Plaintiff's Complaint, which alleges violations of the Truth in Lending Act ("TILA"), 15 U.S.C. §§ 1601 et seq., and the "Secondary Security Deed Act," (the "Act"), Ga.Code Ann. §§ 57-201 et seq., in connection with a loan transaction in 1977.
Plaintiff filed a petition for relief pursuant to Chapter 13 of the Bankruptcy Reform Act of 1978 (the "Code") on March 24, 1980. She scheduled as a disputed claim a debt of $5,800.00 owed to the Defendant, which was secured by a second mortgage on Plaintiff's residence. In connection with the claim she initiated this adversary action "for rescission and money damages," seeking: as to Count I of her Complaint, $1,000.00 in damages for Defendant's alleged material nondisclosures in violation of the TILA; as to Count II, $1,000.00 in damages for Defendant's failure to respond to Plaintiff's attempted rescission of the loan transaction, also allegedly in violation of the TILA; and, as to Count III, a determination that the subject loan was void and unenforceable as a result of alleged violations of the Act. Defendant answered and counterclaimed. Plaintiff then replied, and included in her Reply a Counterclaim that incorporated by reference Count I of her Complaint. In the Counterclaim Plaintiff alleged that she was entitled to recoup TILA statutory damages, and alleged damages of $8,000.00. Subsequently Plaintiff filed a motion for summary judgment.
By order of this Court on July 7, 1980, the hearing in the bankruptcy proceeding on Ms. Smith's formal objection to American's Proof of Claim was consolidated with the hearing in the instant adversary action.
The material facts are not in dispute.
On or about September 2, 1977, Plaintiff executed and delivered a Deed to Secure Debt covering certain improved realty in Gwinnett County, Georgia, to Defendant to secure a loan of $8,400.00, which Plaintiff obtained from Defendant for personal, family, and household use. The property was Plaintiff's residence and subject to a first mortgage. Defendant also took as security for the loan a security interest in household consumer goods, a designated motor vehicle, and credit life insurance. Defendant is the loss payee of the aforementioned insurance policy.
Plaintiff did not rescind the loan transaction within three (3) business days of the transaction. However, on or about April 24, 1980, after having filed her bankruptcy petition, Plaintiff sent a letter to Defendant to rescind the "purchase agreement pursuant to 15 U.S.C. § 1639." This letter is part of the record in this proceeding.
The Court will now address the issues raised by the parties' motions for summary judgment.
It is not disputed that Plaintiff's claim for damages as alleged in Count I pursuant to 15 U.S.C. § 1640 is barred by the one-year statute of limitations, 15 U.S.C. § 1640(e).
In a plain effort to avoid the statutory bar Plaintiff counterclaimed in her reply and asserted that she was entitled to recoup Truth in Lending damages, relying on Bull v. United States, 295 U.S. 247, 55 S.Ct. 695, 79 L.Ed. 1421 (1935), and Plant v. Blazer Financial Services, 598 F.2d 1357, 1358 (5th Cir. 1979). In its motion for summary judgment Defendant asserted that Plaintiff's claim for recoupment is simply a restatement of her claim for statutory damages, is barred by the statute of limitations, and is procedurally incorrect. In a supplemental brief Defendant urged dismissal of the recoupment claim based on Hodges v. Community Loan & Investment Corp. of North Georgia, 133 Ga.App. 336, 210 S.E.2d 826 (1974), rev'd in part on other grounds, 234 Ga. 427, 216 S.E.2d 274 (1975). The issue is whether Plaintiff is entitled to recoup damages in an action she herself initiated.
Plaintiff cannot avoid the statute of limitations by simply restating, in her Reply, Count I of her Complaint, which is itself barred by the statute, and calling it a "recoupment." Plaintiff is attempting to manipulate the Federal Rules of Civil Procedure to vitiate the statute of limitations, and this cannot be permitted.
In addition, Plaintiff has ignored one element of the recoupment doctrine, which requires that the main action itself be timely. See Bull v. United States, 295 U.S. 247, 55 S.Ct. 695, 79 L.Ed. 1421 (1935). In the main action Plaintiff is seeking damages pursuant to 15 U.S.C. § 1640, and it is clear that the damages claim has not been timely filed. Hence one requirement for recoupment has not been met.
Finally, there is yet another reason why Plaintiff's recoupment claim must fail. The Georgia Court of Appeals has held that a Truth in Lending counterclaim is not in the nature of a recoupment defense, but is a setoff, and is subject to the statute of limitations. Hodges v. Community Loan, supra. The reasoning of the Court of Appeals is sound and this Court will follow the Hodges rule in this case.
As to Count I of her Complaint and her attempted recoupment, Plaintiff's motion for summary judgment should be denied, and Defendant's motion should be granted.
The second major issue raised by the motions for summary judgment arises from Count II of Plaintiff's Complaint, in which Plaintiff showed that Defendant took a second mortgage in Plaintiff's residence in connection with the 1977 loan transaction; that Plaintiff sent a letter to Defendant pursuant to 15 U.S.C. § 19331 (sic) and Regulation Z, rescinding the 1977 transaction, on or about April 24, 1980; and, that Defendant failed to return within ten (10) days the money paid under the loan in question or to release its security interest in Plaintiff's residence. Plaintiff specifically prayed that, as to Count II, Plaintiff be granted $1,000.00 plus court costs and reasonable attorney's fees. Plaintiff has not specifically prayed for rescission of the transaction in her Complaint. From the pleadings it appears that Plaintiff is seeking only damages and attorney's fees pursuant to § 1640 of the TILA because Defendant failed to respond to Plaintiff's letter of April 24, 1980, in violation of the TILA, which requires the creditor, inter alia, to take appropriate steps to terminate his security interest, 15 U.S.C. § 1635(b).
Defendant has neither conceded nor disputed that Plaintiff's letter of April 24, 1980, was sufficient notice of intent to rescind the transaction as required by 15 U.S.C. § 1635. The court concludes, however, that the letter was sufficient.
In order for Plaintiff to collect damages for the Defendant's failure to respond to Plaintiff's letter of intent to rescind, Plaintiff must first establish that she is entitled to rescind the transaction because of Defendant's material nondisclosures. See, e.g., Gerasta v. Hibernia National Bank, 575 F.2d 580 (5th Cir. 1978). See also 15 U.S.C. § 1635(a).
Thus, the next issue is whether Plaintiff is entitled to rescind the transaction by virtue of Defendant's material nondisclosures. Only after deciding this can the court consider the question of damages.
Before addressing the question whether Plaintiff is entitled to rescind the loan transaction, however, the court notes the Defendant's argument in its motion for summary judgment, that it was prohibited from responding to the letter of rescission because the automatic stay was in effect. Defendant further argues that the ten-day period allowed for the Defendant's response to rescission, 15 U.S.C. § 1635(b), will begin to run from the day that the automatic stay is lifted, whether by Plaintiff's discharge or by specific order, if Plaintiff established material nondisclosure. Defendant argues that Plaintiff cannot recover any sums against Defendant nor rescind the transaction, until the ten-day period runs outside the bounds of the automatic stay.
In response the Debtor has argued that the rescission action is a freeing of the property of the estate from a security interest, and not subject to the automatic stay.
The question thus presented is whether the Debtor may recover damages from Defendant for its allegedly violating the TILA by failing to respond to the Debtor's notice of rescission while the automatic stay is in effect. This question must be examined in the context of both the Truth in Lending and the Bankruptcy Act.
This court believes that the Defendant's argument that the automatic stay prohibited it from responding to the notice of rescission is without merit. The stay prohibits actions to collect debts. 11 U.S.C. § 362. Response to the notice of rescission would have required the Defendant to free the Debtor's property of the Defendant's security interest, for the TILA states in part:
(b) Effect of rescission. When an obligor exercises his right to rescind under subsection (a), he is not liable for any finance or other charge, and any security interest given by the obligor, including any such interest arising by operation of law, becomes void upon such a rescission. Within ten days after receipt of a notice of rescission, the creditor shall return to the obligor any money or property given as earnest money, downpayment, or otherwise, and shall take any action necessary or...
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