Palmer v. Wilson, C-73-0235.

• Decision Date: 21 June 1973
• Docket Number: No. C-73-0235.,C-73-0235.
• Court: U.S. District Court — Northern District of California
• Parties: Austin C. PALMER and Helen M. Palmer, husband and wife, Plaintiffs, v. Gladys W. WILSON et al., Defendants.

359 F. Supp. 1099

Austin C. PALMER and Helen M. Palmer, husband and wife, Plaintiffs, v. Gladys W. WILSON et al., Defendants.

No. C-73-0235.

United States District Court, N. D. California.

March 29, 1973.

Supplemental Opinion June 21, 1973.

Irving L. Berg, San Francisco, Cal., for plaintiffs.

John A. Colistra, Palo Alto, Cal., for defendants.

ORDER GRANTING MOTION FOR SUMMARY JUDGMENT

ZIRPOLI, District Judge.

In this action, brought pursuant to the Truth-in-Lending Act, 15 U.S.C. §§ 1601-65, plaintiffs seek to recover the statutory penalty provided in § 1640 and to enforce their right of rescission pursuant to § 1635. On February 15, 1973, the court issued a temporary restraining order preventing defendants from proceeding with an impending foreclosure sale of plaintiffs' home. This order was continued in effect pursuant to stipulation of counsel pending the final outcome of this litigation. Plaintiffs now move for summary judgment.

The dealings between the parties began when Michael Neth, a salesman for defendant Homeowners Loan Corporation, mailed plaintiffs a letter soliciting their business. Plaintiffs responded by telephone, and on June 14, 1972, Mr. Neth went to plaintiffs' home to arrange the loan. At that time plaintiffs signed a contract granting Homeowners Loan Corporation an exclusive right to procure a loan for them and a form requesting the trustee under a prior Deed of Trust to supply Homeowners Loan Corporation with information about that prior loan. During this meeting, Mr. Neth presented plaintiffs with a "Broker's Loan Statement" and two copies of a notice of right of rescission (these documents are described in detail below). On June 16 Mr. Neth wrote plaintiffs informing them that their loan had been approved. Plaintiffs went to the offices of Homeowners Loan Corporation four days later and signed a note in the amount of $9300 and a Deed of Trust securing the note. The proceeds of the loan were dispersed for the benefit of plaintiffs on June 27. Five and one-half months after that, on December 11, plaintiffs mailed defendants letters informing them of plaintiffs' decision to exercise their right to rescind the transaction pursuant to 15 U.S.C. § 1635.

I. DEFENDANTS' FAILURE TO DISCLOSE

The Truth-in-Lending Act and the regulations enacted pursuant to it require that certain disclosures be made in connection with consumer credit transactions. The purpose of requiring these disclosures, as stated by Congress in § 1601, is:

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 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.

See also S.Rep.No.392, 90th Cong., 1st Sess. 1-3 (1967); H.R.Rep.No.1040, 90th Cong., 2d Sess. 7, 13 (1968). The key to assuring that the required disclosures will provide for the knowledgeable use of credit and make "comparison shopping" possible is standardization of what certain credit terms mean. In order to avoid violation of the Truth-in-Lending Act, a creditor must calculate these terms in compliance with technical statutes and regulations. This technical precision is, however, necessary if the congressional purpose is to be fulfilled. Recognizing this, the courts have found violations of the act based upon slight deviations. See, e. g., Buford v. American Finance Co., 333 F.Supp. 1243 (N. D.Ga.1971) (failure to include one dollar notary fee in "finance charge").

In the present case there is no question that defendants failed to make the required disclosures in proper form. A creditor must disclose the necessary information, except the right to rescind, in a single document, either in the note "on the same side of the page and above or adjacent to the place for the customer's signature," or on one side of a separate statement. 12 C.F.R. § 226.8(a). The note signed on June 20 contains very little of the required information. While the Broker's Loan Statement is more complete, it, too, has several omissions.

Nowhere does the Broker's Loan Statement — or any other document given plaintiffs — state the "total of payments due," as required by 12 C.F.R. § 226.8(b)(3), or the "amount financed," as required by 15 U.S.C. § 1639(a)(3); 12 C.F.R. § 226.8(d)(1). Although information concerning the "finance charge" is provided, it is not set forth in accordance with the uniform system prescribed: the heading "finance charge" is used to refer to the "prepaid finance charge," as defined in 12 C.F.R. § 226.8(d)(2), and the true "finance charge," as defined by 15 U.S.C. § 1605; 12 C.F. R. § 226.4, is labeled "total amount of finance charge." Not only does this violate the express requirement that the "finance charge" be set forth labeled as such, 15 U.S.C. § 1639(a)(4); 12 C.F.R. § 226.8(d)(3), but this confusing misuse of the key term "finance charge" substantially undercuts fulfillment of the statutory purpose of making possible meaningful comparisons of alternative sources of credit. See Buford v. American Finance Co., supra at 1247. Finally, the Broker's Loan Statement contains several less significant deviations from the statutory requirements: the names of the principal creditors are omitted contrary to 12 C.F.R. § 226.6(d); the statement concerning the prepayment penalty charge is incomplete contrary to 12 C.F.R. § 226.8(b)(6); the statement concerning late payment penalties is incomplete contrary to 12 C.F.R. § 226.8(b)(4); and the disclosure statement fails to segregate the required disclosures from the additional information provided contrary to 12 C.F.R. § 226.6(c). Thus, there are several material omissions in the Broker's Loan Statement.

In addition to the failure to disclose information concerning the terms of the loan, defendants failed to properly inform plaintiffs of their right to rescind. As discussed, when plaintiffs applied for a loan, they were provided with a notice of their right to rescind in the form prescribed by 12 C.F.R. § 226.9(b). The form, however, states that the loan was consummated and the three day rescission period began to run on June 14, and that plaintiffs had to rescind by June 19. In fact, as defendants themselves have argued in this proceeding, the loan was not consummated until June 20. Thus, this statement failed to properly disclose the details of plaintiffs' right to rescind contrary to 15 U. S.C. § 1635(a); 12 C.F.R. § 226.9(b).

II. REMEDY

Plaintiffs ask that the court declare the lien on their property void, award damages in the sum of $1000, and award their attorney's fees and costs. Defendants argue that rescission in this case would be improper, because plaintiffs' notice of rescission was untimely, because the disclosures omitted were not material, and because plaintiffs have not tendered the money they received. In response to plaintiffs' request for damages, defendants argue that any violation of the disclosure requirements was unintentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid error; alternatively defendants argue that plaintiffs must elect between the remedies of rescission and damages.

Clearly plaintiffs had a right to rescind in this case and they properly exercised that right on December 11, 1972. The right of rescission continues until "midnight of the third business day following the consummation of the transaction or the delivery of the disclosures required under this section and all other material disclosures required under this part, whichever is later." 15 U.S.C. § 1635; 12 C.F.R. § 226.9(a). Here plaintiffs notified defendants of their election to rescind before defendants disclosed several material matters. As discussed in the previous section several items, including the correct amount of the "finance charge," have not been disclosed. The notice was, therefore, timely. By sending their notice to defendants, plaintiffs did all that was required of them. Defendants' claim that along with the notice plaintiffs ought to have tendered the money loaned them is expressly rejected by 15 U.S.C. § 1635(b), which provides:

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 appropriate to reflect the termination of any security interest created under the transaction. If the creditor has delivered any property to the obligor, the obligor may retain possession of it. Upon the performance of the creditor's obligations under this section, the obligor shall tender the property to the creditor.

Although this pattern is inconsistent with the traditional common law requirements of rescission, Congress, of course, has the power to alter the common law.

The question whether this is an appropriate case for an award of damages is a more difficult one. The first argument — that any violation of the disclosure requirements was unintentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error — attempts to raise the defense in § 1640(c). This defense, however, only applies to clerical errors, not to good faith failures to disclose required information. See Douglas v. Beneficial Finance Co., 334 F.Supp. 1166, 1178 (D.Alaska 1971); Buford v. American Finance Co., supra, 333 F. Supp. at 1247; Ratner v. Chemical Bank N. Y. Trust Co., 329 F.Supp. 270, 281-282 (S.D.N.Y.1971). Thus, this defense is not available to the defendants in this case. The second defense — that plaintiffs must elect between rescission and damages — however, raises a substantial issue. Previous decisions considering who has standing to sue for damages are inconsistent. Compare Bostwick v. Cohen, 319 F.Supp. 875, 878 (N.D.Ohio 1970), with Ratner...