Palmer v. Wilson

• Decision Date: 16 August 1974
• Docket Number: 73-2706,73-2705,Nos. 73-1936,s. 73-1936
• Citation: 502 F.2d 860
• Parties: Austin C. PALMER and Helen M. Palmer, husband and wife, Appellees, v. Gladys S. WILSON et al., Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 860

502 F.2d 860

Austin C. PALMER and Helen M. Palmer, husband and wife, Appellees, v. Gladys S. WILSON et al., Appellants.

Nos. 73-1936, 73-2705, 73-2706.

United States Court of Appeals, Ninth Circuit.

Aug. 16, 1974.

Sanford N. Diller (argued), San Jose, Cal., for appellants.

Ronald Senoway (argued), San Francisco, Cal., for appellees.

Before HUFSTEDLER and WRIGHT, Circuit Judges, and THOMPSON, District Judge. ^*

HUFSTEDLER, Circuit Judge:

Plaintiffs Austin and Helen Palmer brought this action under the Truth in Lending Act, 15 U.S.C. 1601-1665, to recover the statutory penalty and attorney fees provided in section 1640 and to enforce their right of rescission pursuant to section 1635. The district court granted plaintiffs' motion for summary judgment and awarded both forms of relief requested; the defendants appeal.

The record before the district court at the time of plaintiffs' motion for summary judgment revealed that the note signed by the Palmers and the Broker's Loan Statement with which they were supplied omitted several credit terms required to be disclosed by the Truth in Lending Act, as implemented by Federal Reserve Board Regulation Z (12 C.F.R. 226). The documents given to the Palmers failed to state the 'total of payments' due (12 C.F.R. 226.8(b)(3)) and failed to disclose the 'amount financed' (id. 226.8(d)(1)). Finance charges were not described in the uniform terms required by the regulations. (See, e.g., id. 226.8(d)(2).) The defendants also failed to disclose properly the details of plaintiffs' right to rescind. ¹

The district court correctly held that these omissions violated the Truth in Lending Act and that plaintiffs were entitled to summary judgment. The defendants do not contest the fact that they omitted credit terms required to be disclosed by the Act, but rather argue that they are entitled to the benefits of the statutory exemption for violations that are 'not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.' (15 U.S.C. 1640(c).) The defendants' omissions and mislabeling of terms were not the result of clerical errors, which are the only violations this section was designed to excuse. (See Ratner v. Chemical Bank New York Trust Co. (S.D.N.Y.1971), 329 F.Supp. 270, 281-282 & n. 17.) Both the Broker's Loan Statement and the Installment Note in issue were printed, standard form instruments. The omissions and misstatements were part of defendants' usual credit practice and did not occur in spite of procedures designed to avoid unintentional violations of the Act.

In Eby v. Reb Realty, Inc. (9th Cir. 1974), 495 F.2d 646, we rejected defendants' contention that plaintiffs cannot successfully pursue both damages under section 1640 and rescission under section 1635. No election of remedies is required. The liability provision of section 1640 is a 'civil penalty,' which, unlike section 1635, is not intended to make the borrower whole.

Defendants also argue that the district court erred in enforcing plaintiffs' right of rescission because plaintiffs failed to tender the money loaned them at the time they notified defendants of their decision to exercise their right to rescind. Although tender of consideration received is an equitable prerequisite to rescission, the requirement was abolished by the Truth in Lending Act. Section 1635(a) provides that an obligor exercises his right of rescission solely by notifying the creditor within prescribed time limits of his intention to rescind. Section 1635(b) provides that upon exercise by the debtor of his right of rescission, 'any security interest given by the obligor becomes void . . ..' Within ten days after receipt of 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 appropriate to reflect the termination of any security interest created under the transaction.' Only then, 'upon the performance of the creditor's obligations under (section 1635),' must the obligor tender the property to the creditor. Section 1635(b) expressly provides that prior to performance of the required actions by the creditor, 'if the creditor has delivered any property to the obligor, the obligor may retain possession of it.' ²

In Eby v. Reb Realty, Inc., supra, we recognized that interaction of the right of rescission and the civil penalty provision of section 1640 can sometimes result in an unduly harsh penalty for violations of the Truth in Lending Act. This is particularly true where, as appears to be the case here, the decree granting rescission does not condition the relief upon the debtor's restoration of consideration, the creditor is reduced to the status of an unsecured creditor, and the debtors are judgment proof. Accordingly, in Eby we concluded that, although 'sections 1635 and 1640 do not set forth exclusive remedies, we do not say that a court must always grant both forms of relief when requested . . .. In the absence of any clear congressional statement, we think a request for both forms of relief is addressed to a court's sence of equity and may properly be denied in appropriate cases.' Similarly, when an obligor seeks both to rescind and to recover statutory penalty and attorney fees, the district court has equitable power to grant both forms of relief; the court may condition the granting of rescission on the debtor's compliance with the court's order to tender to the creditor the principal of the loan that the debtor has received. The propriety of such a conditional decree of rescission, of course, will depend on the equities present in a particular case, as well as consideration of the legislative policy of full disclosure that underlies the Truth in Lending Act and the remedial-penal nature of the private enforcement provisions of the Act.

Although some district courts have conditioned rescission on tender of repayment by the debtor when both rescission and damages were sought (e.g., Ljepya v. M.L.S.C. Properties (N.D.Cal.1973), 353 F.Supp. 866), the court below apparently was unaware that it had the equitable power to condition its decree. Accordingly, we vacate the judgment and remand the case for consideration of the propriety of conditioning the grant of rescission on repayment by the Palmers. Upon remand the district court may decide to invite submission of additional affidavits or may hold an evidentiary hearing on this point. It may also require the defendants to submit a proposed plan for repayment that is consistent both with the defendants' desire to recover the amount of principal loaned to the Palmers and with the Palmers' current financial situation.

The judgment is vacated and the cause remanded for further proceedings consistent with the views herein expressed.

BRUCE R. THOMPSON, District Judge (concurring):

I concur with Judge Hufstedler but go farther. I believe that a court fashioning a decree in this type of case under the Truth in Lending Act must do equity and cannot ignore the plaintiffs' unpaid obligation for the principal sum of $9,300. Section 1635(b), Title 15, United States Code. If a rescission is demanded and effectuated without litigation, this Section requires the obligor to return the property or its reasonable value to the creditor. This, together with the Act's failure to void the principal obligation along with the security, is, for me, clear indication of Congressional intent that a complete windfall to the victim was not intended.

In the present case, defendants did not counterclaim for $9,300. Under Rule 13(a) of the Federal Rules of Civil Procedure, this is a compulsory counterclaim and the cause of action is lost if not asserted. Whatever tactical considerations may have influenced defendants' pleading, the net result of the judgment appealed from would be that plaintiffs have received $9,300 plus a judgment for $5,400 and are free from any obligation. This is so obviously inequitable and not in conformity with the intent of the legislation that it cannot be countenanced.

EUGENE A. WRIGHT, Circuit Judge (concurring in part and dissenting in part):

I concur in the majority opinion insofar as it holds that the defendants are not entitled to the protection of 15 U.S.C. 1640(c). I respectfully dissent, however, from that portion of the majority opinion dealing with the equitable power of the district court to condition rescission on repayment by the plaintiffs. I would affirm the judgment of the district court.

Section 1635(b) provides that upon the debtor's election to rescind, the creditor's security interest in the debtor's home becomes void. There is no requirement...