Murphy v. Household Finance Corp.

• Decision Date: 08 August 1977
• Docket Number: No. 76-2106,76-2106
• Citation: 560 F.2d 206
• Parties: Denis J. MURPHY, Trustee, Plaintiff-Appellee, v. HOUSEHOLD FINANCE CORPORATION, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 206

560 F.2d 206

Denis J. MURPHY, Trustee, Plaintiff-Appellee, v. HOUSEHOLD FINANCE CORPORATION, Defendant-Appellant.

No. 76-2106.

United States Court of Appeals, Sixth Circuit.

Argued April 21, 1977.

Decided and Filed August 8, 1977.

Robert W. Werth, Vorys, Sater, Seymour & Pease, John C. Elam, James M. Ball, Columbus, Ohio, for defendant-appellant.

Denis J. Murphy, Craig M. Stewart, Carlile, Patchen, Murphy & Allison, Columbus, Ohio, for plaintiff-appellee.

Before PHILLIPS, Chief Judge, WEICK and EDWARDS, Circuit Judges.

PHILLIPS, Chief Judge.

This case presents the question whether a bankrupt's cause of action against a lending company for recovery under § 130(a)(2)(A) of the Truth in Lending Act ¹ passes to the trustee in bankruptcy pursuant to § 70a of the Bankruptcy Act. ² We hold that it does.

I.

The facts were stipulated. On June 26, 1973, Mr. and Mrs. Randy Westbrook procured a consumer loan in the principal amount of $894.91 from Household Finance Corporation (HFC). At the time of closing the loan, HFC provided the Westbrooks the disclosure forms required by the Truth in Lending Act and Regulation Z promulgated thereunder, 12 C.F.R. § 226 et seq. The disclosures provided by HFC were illegible and HFC has stipulated that, for purposes of the present action, the disclosures to the Westbrooks did not comply with the applicable provisions of the Truth in Lending Act and Regulation Z.

On April 19, 1974, the Westbrooks filed a voluntary petition in bankruptcy. Denis J. Murphy, trustee in bankruptcy for the estate of the Westbrooks, filed a civil action in the district court alleging that HFC had violated the Truth in Lending Act and Regulation Z by failing to supply the Westbrooks with proper credit disclosures. The complaint sought recovery in the sum of twice the finance charge, with a minimum of $10 and a maximum of $1,000, as provided in § 130(a)(2)(A) of the Truth in Lending Act. ³ In its answer to the complaint HFC raised the affirmative defense that the trustee in bankruptcy did not have standing to sue, contending that the cause of action for statutory recovery under the Truth in Lending Act did not pass to the trustee under § 70a of the Bankruptcy Act.

Following stipulations of the parties as to all the factual matters summarized above, trustee Murphy moved the district court for summary judgment. The only issue before the district court was whether the Westbrooks' cause of action passed to the trustee as part of the estate in bankruptcy. On four different theories the district court held that the trustee has standing to assert the Truth in Lending action against HFC. HFC appeals.

II.

Section 70a of the Bankruptcy Act, 11 U.S.C. § 110(a), ⁴ sets forth the forms of property which pass to the trustee as part of the bankrupt's estate upon adjudication. With certain stated exceptions, § 70a(5) provides that the trustee in bankruptcy acquires title to property, including rights of action, 1) which the bankrupt "could by any means have transferred"; or 2) which "might have been levied upon and sold under judicial process . . . or otherwise seized, impounded or sequestered." Section 70a(6) gives the trustee title to 1) "Rights of action arising upon contracts"; and to 2) "Rights of action arising upon . . . usury . . .."

The district court, relying on Porter v. Household Finance Corporation, 385 F.Supp. 336 (S.D.Ohio 1974), held that the Westbrooks' cause of action under the Truth in Lending Act falls within each of the four described forms of property which pass to the trustee in bankruptcy pursuant to §§ 70a(5) and 70a(6). Since we find that the cause of action herein is a right of action which the bankrupt "could . . . have transferred" prior to bankruptcy within the meaning of § 70a(5), we do not reach the alternative bases for the holding of the district court.

The Truth in Lending Act and Regulation Z are both silent as to the transferrability of a claim under § 130(a)(2)(A). The parties to this appeal are in agreement, based on Schreiber v. Sharpless, 110 U.S. 76, 3 S.Ct. 423, 28 L.Ed. 65 (1884); Bowles v. Farmers National Bank of Lebanon, Ky., 147 F.2d 425 (6th Cir. 1945), and In re Schmelzer, 350 F.Supp. 429 (S.D.Ohio 1972), aff'd, 480 F.2d 1074 (6th Cir. 1973), that a cause of action is transferrable for Bankruptcy Act purposes if the action would "survive" the death of the holder, but that actions for penalties or forfeitures do not survive and thus are not transferrable. The question of survivability and the question whether the cause of action seeks to recover a penalty are matters of federal law. Bowles, supra, 147 F.2d at 430. Adopting the rationale of the Porter, supra, 385 F.Supp. 336, decision, the district court concluded that § 130(a)(2)(A) of the Truth in Lending Act was remedial and not penal in nature. The district court held that the cause of action survived according to general principles of common law, and was thus transferrable for purposes of § 70(a)(5) of the Bankruptcy Act. HFC contests the district court's finding that a § 130(a)(2) (A) cause of action is remedial rather than penal in nature.

Mr. Justice Gray discussed the problem of identifying penal laws at some length in Huntington v. Attrill, 146 U.S. 657, 13 S.Ct. 224, 36 L.Ed. 1123 (1892):

In the municipal law of England and America, the words "penal" and "penalty" have been used in various senses. Strictly and primarily, they denote punishment, whether corporal or pecuniary, imposed and enforced by the State, for a crime or offence against its laws. United States v. Reisinger, 128 U.S. 398, 402, 9 S.Ct. 99, 32 L.Ed. 480; United States v. Chouteau, 102 U.S. 603, 611, 26 L.Ed. 246. But they are also commonly used as including any extraordinary liability to which the law subjects a wrongdoer in favor of the person wronged, not limited to the damages suffered. They are so elastic in meaning as even to be familiarly applied to cases of private contracts, wholly independent of statutes, as when we speak of the "penal sum" or "penalty" of a bond. In the words of Chief Justice Marshall: "In general, a sum of money in gross, to be paid for the non-performance of an agreement, is considered as a penalty, the legal operation of which is to cover the damages which the party, in whose favor the stipulation is made, may have sustained from the breach of contract by the opposite party." Tayloe v. Sandiford, 7 Wheat. 13, 17, 5 L.Ed. 384.

Penal laws, strictly and properly, are those imposing punishment for an offence committed against the State, and which, by the English and American constitutions, the executive of the State has the power to pardon. Statutes giving a private action against the wrongdoer are sometimes spoken of as penal in their nature, but in such cases it has been pointed out that neither the liability imposed nor the remedy given is strictly penal.

146 U.S. at 666-67, 13 S.Ct. at 227.

Although the context of the above quotation was peculiar to the issues presented in the Huntington case, Mr. Justice Gray's observations and the interpretations and applications of Huntington in later cases give us some guidelines for assessing the extent to which the statutory provisions here involved are penal in nature. Three factors in particular deserve attention: 1) whether the purpose of the statute was to redress individual wrongs or more general wrongs to the public; 2) whether recovery under the statute runs to the harmed individual or to the public; and 3) whether the recovery authorized by the statute is wholly disproportionate to the harm suffered. See Huntington, supra, 146 U.S. at 666-69, 13 S.Ct. 224; Bowles, supra, 147 F.2d at 428; Porter, supra, 385 F.Supp. at 340-42.

The Supreme Court reviewed the history and purposes of the Truth in Lending Act in Mourning v. Family Publications Service, Inc., 411 U.S. 356, 363-65, 93 S.Ct. 1652, 1657, 36 L.Ed.2d 318 (1973) as follows:

Passage of the Truth in Lending Act in 1968 culminated several years of congressional study and debate as to the propriety and usefulness of imposing mandatory disclosure requirements on those who extend credit to consumers in the American market. By the time of passage, it had become abundantly clear that the use of consumer credit was expanding at an extremely rapid rate. From the end of World War II through 1967, the amount of such credit outstanding had increased from $5.6 billion to $95.9 billion, a rate of growth more than 41/2 times as great as that of the economy. Yet, as the congressional hearings revealed, consumers remained remarkably ignorant of the nature of their credit obligations and of the cost of deferring payment. Because of the divergent, and at times fraudulent, practices by which consumers were informed of the terms of the credit extended to them, many consumers were prevented from shopping for the best terms available and, at times, were prompted to assume liabilities they could not meet.

The Truth in Lending Act was designed to remedy the problems which had developed. The House Committee on Banking and Currency reported, in regard to the then proposed legislation:

"(B)y requiring all creditors to disclose credit information in a uniform manner, and by requiring all additional mandatory charges imposed by the creditor as an incident to credit be included in the computation of the applicable percentage rate, the American consumer will be given the information he needs to compare the cost of credit and to make the best informed decision on the use of credit."

This purpose was stated explicitly in § 102 of the legislation enacted:

"The Congress finds that economic stabilization would be enhanced and the competition among the various financial institutions and other firms engaged in the extension of consumer credit would be strengthened by the informed use of credit. The informed use of credit results from an awareness of the cost thereof by consumers. It is the purpose of this subchapter to assure a...