Riggs v. Government Employees Financial Corp.

• Decision Date: 04 June 1980
• Docket Number: No. 77-3857,77-3857
• Citation: 623 F.2d 68
• Parties: James RIGGS, Trustee in Bankruptcy, Plaintiff-Appellee, v. GOVERNMENT EMPLOYEES FINANCIAL CORPORATION, etc., Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 68

623 F.2d 68

6 Bankr.Ct.Dec. 818

James RIGGS, Trustee in Bankruptcy, Plaintiff-Appellee, v. GOVERNMENT EMPLOYEES FINANCIAL CORPORATION, etc., Defendant-Appellant.

No. 77-3857.

United States Court of Appeals Ninth Circuit.

June 4, 1980.

Rehearing Denied July 21, 1980.

Bernardus J. Smit, Severson, Werson, Berke & Melchior, San Francisco, Cal., for defendant-appellant.

Robert A. Goldstein, Oakland, Cal., for plaintiff-appellee.

Appeal from the United States District Court for the Northern District of California.

Before TRASK and WALLACE, Circuit Judges, and EAST, ^* District Judge.

WALLACE, Circuit Judge:

Riggs, in his capacity as bankruptcy trustee for John and Gloria Ferguson, brought suit against Government Employees Financial Corporation (GEFCO) for violating the Truth-in-Lending Act (Act), 15 U.S.C. § 1601 et seq., in a 1975 loan to the Fergusons. The district judge granted Riggs' motion for summary judgment and awarded $2,000 in damages and $2,500 in attorney's fees to the bankrupt estate pursuant to 15 U.S.C. § 1640(a). GEFCO appeals, claiming that the district court erred in permitting the bankruptcy trustee to sue for a Truth-in-Lending violation while denying GEFCO's counterclaim that the award be set off against the debt owed to GEFCO by the Fergusons. GEFCO also contends that the district court erred in granting a separate $1,000 recovery for each of the two debtors involved. We affirm the bankruptcy trustee's right to sue and the denial of the setoff, but reverse the grant of two $1,000 recoveries.

I.

GEFCO does not contest the district court's finding of a Truth-in-Lending violation in its loan to the Fergusons, nor does it contest the grant of $2,500 in attorney's fees. Rather, GEFCO contends that the district judge's ruling that the Fergusons' Truth-in-Lending claim was transferable to their bankruptcy trustee is logically inconsistent with his refusal to satisfy the award by setting it off against the larger debt that the Fergusons owed to GEFCO. To support this contention, GEFCO argues that both the transfer and the setoff rulings depend upon whether the court characterizes the Act recovery provision, 15 U.S.C. § 1640(a), ¹ as a penalty, or instead as a remedy. If the recovery provision is a penalty, GEFCO contends that the right to sue would not transfer to a bankruptcy trustee, because it would not survive the death of its original owner, and survivability is an essential element of transferability. If the recovery provision is remedial, GEFCO concedes the transferability of the Truth-in-Lending cause of action to the trustee, but contends that any recovery should be set off against the preexisting debt. Thus, whether the Act is penal or remedial, GEFCO contends that the district court erred by permitting the transfer but denying the setoff. GEFCO asks us to characterize the Act one way or the other, reverse the district court, and direct that the chosen characterization be applied consistently.

GEFCO acknowledges that case law concerning the proper characterization of section 1640 is inconsistent. Some courts, asked to determine the transferability of a Truth-in-Lending claim to a bankruptcy trustee, have concluded that section 1640 is remedial. E. g., Murphy v. Household Finance Corp., 560 F.2d 206 (6th Cir. 1977); Porter v. Household Finance Corp., 385 F.Supp. 336 (S.D.Ohio 1974). See also Smith v. Galesburg Crown Finance Corp., 615 F.2d 407, 414, 415 (7th Cir. Jan. 15, 1980) (concluding that Truth-in-Lending claim survives death of holder because it is remedial). At least one court, faced with the single question whether a Truth-in-Lending award should be set off against a preexisting debt, has characterized section 1640 as penal. See Newton v. Beneficial Finance Co., 558 F.2d 731 (5th Cir. 1977). No cases have been called to our attention, and we have found none, in which a court characterized section 1640 while considering both the transferability and setoff questions. Thus, we are faced with an issue of first impression, portions of which have been decided inconsistently by various courts.

Our efforts to resolve this novel question have convinced us that section 1640 is neither wholly remedial nor wholly penal. We have reached the conclusion, as have other courts before us, that "(t)he use of labels such as 'penal' or 'remedial' is (only) a shorthand way of expressing relevant considerations," Derdiarian v. Futterman Corp., 223 F.Supp. 265, 271 (S.D.N.Y.1963), and that an inquiry as to whether a statute "is penal or remedial seems bound to result in the conclusion that . . . it is both." Epstein v. Shindler, 200 F.Supp. 836, 837 (S.D.N.Y.1961).

A.

Section 1640 has clear remedial purposes. Congressional hearings that preceded enactment of the Act revealed that the exponential growth of consumer credit following World War II was accompanied by widespread consumer ignorance of the nature and scope of credit transactions. Mourning v. Family Publications Service, Inc., 411 U.S. 356, 363, 93 S.Ct. 1652, 1658, 36 L.Ed.2d 318 (1973). "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." Id. By passing the Act, Congress sought "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 . . .." 15 U.S.C. § 1601. Congress' primary intent was "to remedy abuses resulting from consumer ignorance of the nature of credit arrangements by requiring disclosures . . . ." Smith v. Galesburg Crown Finance Corp., supra, 615 F.2d at 414.

The Act provides that upon proof of a Truth-in-Lending violation, the individual consumer may recover actual damages and an amount equal to twice the finance charge of the transaction up to $1,000. 15 U.S.C. § 1640(a). "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." Huntington v. Attrill, 146 U.S. 657, 667, 13 S.Ct. 224, 227, 36 L.Ed. 1123 (1892). Indeed, those courts which have characterized the Act as a remedial statute have relied upon the civil damages provision. E. g., Smith v. Galesburg Crown Finance Corp., supra, 615 F.2d at 415; Murphy v. Household Finance Corp., supra, 560 F.2d at 210; New York Credit Men's Adjustment Bureau v. Bruno-New York, Inc., 120 F.Supp. 495, 497 (S.D.N.Y.1954). That a portion of such damages is statutorily set rather than being subject to proof like most remedial damages, does not necessarily make the statute penal. The liquidated nature of section 1640(a)(2)(A) damages is consistent with a remedial objective, for when an uninformed consumer loses the opportunity to secure better credit terms elsewhere, actual damages may be difficult to ascertain. Smith v. Galesburg Crown Finance Corp., supra, 615 F.2d at 415; Murphy v. Household Finance Corp., supra, 560 F.2d at 210; Porter v. Household Finance Corp., supra, 385 F.Supp. at 342.

The generally remedial nature of the Act as a whole, as suggested by the statements of congressional purpose and by its damage provisions, has been widely recognized in the courts. It is well established that the Act is to be liberally construed to effectuate its remedial purpose. Murphy v. Household Finance Corp., supra, 560 F.2d at 210 (and cases cited therein); Hannon v. Security Nat'l Bank, 537 F.2d 327, 328 (9th Cir. 1976); Eby v. Reb Realty, Inc., 495 F.2d 646, 650 (9th Cir. 1974); Ratner v. Chemical Bank New York Trust Co., 329 F.Supp. 270, 280 (S.D.N.Y.1971).

B.

Despite these indicators of remedial purpose and nature, the Act's civil recovery provisions cannot be considered wholly remedial: the Act also furthers significant penal objectives. In Eby v. Reb Realty, Inc., supra, 495 F.2d 646, we considered the question whether a consumer must elect one of the two "remedy" provisions of the Act when proceeding against a lender. We concluded that, because of various penal characteristics of the Act's civil recovery provisions, section 1640(a)(2)(A)(i), is not a "remedy" for election of remedy purposes. We stated:

By providing a minimum recovery of $100 regardless of the presence of a finance charge or its de minimis amount, Congress indicated that the finance charge was to be no more than a convenient measure for damages and not a remedial trigger upon which liability was to depend. Equally inconsistent with a view of section 1640 as remedial is the recovery limit of $1,000. If the finance charge, for example, should exceed $1,000, civil liability would obviously be inadequate to compensate a debtor. Finally, a defense to section 1640 is that the creditor's violation of the Act was unintentional. 15 U.S.C. § 1640(c). Since liability is thereby dependent to some degree on culpability, this is another index that the section could not be wholly remedial in character.

Id. at 651-52. In addition, we observed in Reb Realty that the Supreme Court, in Mourning v. Family Publications Service, Inc., supra, 411 U.S. at 376, 93 S.Ct. at 1664, had "characterized section 1640's damage provision as a 'civil penalty' the applicability of which depends not on the finance charge levied, but on the failure to make disclosures." Id. at 651. These factors preclude any characterization of section 1640 as wholly remedial.

C.

Thus, an examination of the Act and interpretive case law indicates that it "ultimately serves the dual purpose of providing a remedy for harm to the monetary interests of individuals while serving to deter socially undesirable lending practices" by penalizing those who violate its provisions. Murphy v. Household Finance Corp., supra, 560 F.2d at 211; see ...