Skinner v. WT Grant Co.

• Decision Date: 02 August 1979
• Docket Number: 74-3473.,Civ. A. No. 73-3257
• Citation: 1 BR 484
• Parties: Alvin SKINNER, and all others similarly situated v. W.T. GRANT COMPANY. Laurence A. DANKO v. W.T. GRANT COMPANY.
• Court: U.S. District Court — Eastern District of Louisiana

1 B.R. 484 (1979)

Alvin SKINNER, and all others similarly situated v. W.T. GRANT COMPANY.

Laurence A. DANKO v. W.T. GRANT COMPANY.

Civ. A. Nos. 73-3257, 74-3473.

United States District Court, E.D. Louisiana.

April 12, 1979.

On Motion for Certification August 2, 1979.

Patrick D. Breeden, John M. Holahan, New Orleans, La., for plaintiffs.

Harry S. Hardin, III, Keith A. Rodriguez, New Orleans, La., for defendant.

ORDER AND REASONS FOR RULING

CHARLES SCHWARTZ, Jr., District Judge.

This matter is before the Court solely on defendant Federal Financial Corporation's motion to dismiss for failure to state a claim under Rule 12(b)(6), or in the alternative, for summary judgment pursuant to Rule 56, and plaintiffs' opposition memorandum, pending receipt of further memoranda from counsel on the issue of set-offs under the federal bankruptcy law and further factual information as to whether Federal Financial Corporation is presently charging and collecting interest on the coupon accounts which are part of the accounts receivable that were transferred from the W.T. Grant Company trustee in bankruptcy and the contracts that are the underlying transactions of plaintiff Skinner's claims.¹ Having received same and having carefully considered the oral and written arguments of counsel, the record and the law, the Court rules as follows:

On December 12, 1973 plaintiff Alvin Skinner filed suit for penalties and damages against W.T. Grant Company ("Grant") alleging a violation of the Consumer Credit Protection Act § 302 et seq., 15 U.S.C. § 1601 et seq. ("Truth in Lending Act"), Regulation "Z" effective July 1, 1969, 12 C.F.R. § 226.1 et seq. ("Regulation Z"), promulgated by the Federal Reserve Board pursuant to Consumer Credit Protection Act § 105, 15 U.S.C. § 1604, La.Rev.Stat. Ann. § 9:3501 (West 1951),² and La.Civ.Code Ann. art. 2924 (West 1952);³ on April 3, 1974 plaintiff Laurence A. Danko filed a complaint against Grant solely alleging Truth-in-Lending violations.

Plaintiffs' claims are based on alleged violations of the lending laws by Grant in connection with Grant's offer and extension of credit to customers in the ordinary course of its business for which a finance charge could be imposed. Plaintiff Skinner brought suit on the retail installment credit contract signed on December 12, 1972 for the purchase of some coupon books and miscellaneous merchandise, which on December 22, 1972 was extended to the credit purchase of a washing machine. Plaintiff, who was charged both a finance charge on the purchases and a "late" or "default" charge, argues that defendant W.T. Grant failed to make the necessary Truth-in-Lending disclosures and made deceptive disclosures relative to late charges or default charges. Plaintiff also alleges that the actual rate of interest charged was usurious, and included a class action allegation on behalf of all the class who were charged and received actual damage from the usurious rate of interest.

On October 2, 1975 Grant filed a petition for arrangement under Chapter 11, section 322 of the Bankruptcy Act, 11 U.S.C. § 722, and Bankruptcy Rule 11-6, 11 U.S.C. Rule 11-6, in the United States District Court for the Southern District of New York. By order of the Bankruptcy Court for the Southern District of New York dated April 13, 1976, Grant was adjudicated a bankrupt. On April 13, 1976 Charles D. Rodman was qualified as trustee of the bankrupt estate of Grant and since that date has acted in that capacity.

On October 18, 1976, after the bankruptcy adjudication of Grant, Trustee Rodman and Federal Financial Corporation ("FFC"), a Minnesota corporation incorporated on October 13, 1976, entered into a purchase agreement for the sale of the customer accounts receivable of Grant for $44 million. The customer accounts receivable which were the subjects of the sale are described in section 1.1(a), (b) of the Purchase Agreement.⁴ This original agreement was amended by written agreement on November 17, 1976. The sale was authorized on November 17, 1976, by order of Judge John J. Galgay, the bankruptcy judge in the Grant Proceedings, providing for the sale of the accounts receivable "free and clear of all liens, security interests and encumbrances (including without limitation, any liens, security interests or encumbrances in respect of taxes, priority claims, creditors' claims and claims of governmental agencies)." This order was later amended on November 26, 1979 to provide further that

Federal\'s purchase of the aforesaid property shall not constitute an assumption by Federal of any liability or any obligation of the Trustee (including, without limitation, any liability or obligation in respect of any outstanding net credit balance or any litigation pending against the Bankrupt or the Trustee), provided, however, that (a) the aggregate outstanding balance of each Receivable shall be subject to certain reductions as provided in the Purchase Agreement, without recourse to the Trustee, and (b) any net credit balance due to any Receivable debtors remain the responsibility of the bankrupt estate.

(Emphasis added.) The crucial provision regarding the assumption of liabilities by FFC through the purchase of the accounts receivable from the trustee is contained in section 1.7 of the Purchase Agreement.⁵

The bill of sale between Trustee Rodman and FFC conveying the accounts receivable was executed on December 2, 1976. It, like the amended purchase agreement and the order of November 17, 1976, recited that in consideration of the purchase price, the sale of the Grant customer accounts receivable is made "free and clear of all liens, security interests and encumbrances."⁶

On January 23, 1976 plaintiffs Skinner and Danko filed proofs of claim in the amount of $400,000.00 in the Grant bankruptcy proceeding. Plaintiff Skinner filed an amended proof of claim in the amount of $2,000,000.00 dated April 6, 1976; plaintiff Danko filed an amended proof of claim in the amount of $2,000,000.00 on April 8, 1976. On July 29, 1976 plaintiffs filed a second proof of claim in the Grant bankruptcy proceedings in the amount of $2,000,000.00.

With regard to the complaints filed against Grant which are before this Court, plaintiffs filed amended complaints on October 17, 1977, adding FFC as a defendant and alleging liability of FFC as a voluntary assignee under section 115 of the Consumer Protection Act, 15 U.S.C. § 1614 (1970 & Supp. IV 1974) for the Truth-in-Lending violations of Grant in the credit contracts and as a voluntary assignee under state law of the claims arising under state law.

At no time did plaintiffs Danko and Skinner challenge directly the jurisdiction of the Bankruptcy Court over the accounts receivable or its order authorizing the sale of these accounts.

Plaintiff's claim that defendant FFC is liable under 15 U.S.C. § 1614 as the subsequent assignee of Grant for the alleged Truth-in-Lending violations on the customer accounts receivable is within the jurisdiction of this Court under 15 U.S.C. 1640(e). Additionally, plaintiff Skinner's claims under La.Rev.Stat.Ann. § 9:3501 (West 1951) and La.Civ.Code Ann. art. 2924 (West 1952) are alleged to arise out of the same transactions, and therefore are within the pendent jurisdiction of this Court.

Section 115 of the Consumer Credit Protection Act, provides for a qualified immunity under the act for assignees of an original creditor's accounts tainted with alleged violations of Truth in Lending:

Except as otherwise specifically provided in this subchapter, any civil action for a violation of this subchapter which may be brought against the original creditor in any credit transaction may be maintained against any subsequent assignee of the original creditor where the violation from which the alleged liability arose is apparent on the face of the instrument unless the assignment is involuntary.

15 U.S.C. § 1614 (1970 & Supp. IV 1974) (emphasis added). FFC asserts that section 115 of the Act shields it from any of Grant's alleged Truth-in-Lending violations on the customer accounts receivable since it contends that both the original transfer of the accounts from the alleged bankrupt to the trustee pursuant to section 70(a) of the Bankruptcy Act, 11 U.S.C. § 110(a), and the court-approved sale of the accounts by the trustee were "involuntary assignments." Plaintiffs, on the other hand, argue that the initial transference was not involuntary and secondly that notwithstanding the language of section 115, when a purchase agreement from the trustee provides, in part, for set-offs on the accounts, the language in the agreement should be given effect and provide for set-offs of the allegedly illegally retained monies and the remaining debit balance. Thus, this Court must consider the twin prongs of the characterization of the transferred Grant customer accounts receivable, i.e., whether the accounts receivable transferred to the trustee and then purchased by FFC pursuant to the sale agreement with the trustee were "involuntary assignments" under 15 U.S.C. § 1614. Secondly, the Court must consider whether the set-off provisions of Louisiana law and/or section 68 of the Bankruptcy Act, 11 U.S.C. § 108, tainted the accounts receivable with liability for the alleged Truth-in-Lending and state law usury violations (a position which is advocated by plaintiffs) notwithstanding the express terms of the purchase agreement, order and amended order of sale, and bill of sale. Finally, a determination must be made as to whether FFC voluntarily assumed any possible past Truth-in-Lending or state law usury liability on the accounts.

I. Involuntary Assignments under 15 U.S.C. § 1614

The limited case law construing section 115 of the Act⁷ gives this Court little guidance in determining whether the initial transfer to the trustee or the trustee's sale are per se "involuntary assignments" within the meaning of that section. Yet, in reviewing the case law and the policies of...