Smith, In re

• Decision Date: 06 August 1984
• Docket Number: No. 82-8753,82-8753
• Citation: 737 F.2d 1549
• Parties: In re Patricia G. SMITH, Debtor. Patricia G. SMITH, Plaintiff-Appellant, v. AMERICAN FINANCIAL SYSTEMS, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1549

737 F.2d 1549

In re Patricia G. SMITH, Debtor.

Patricia G. SMITH, Plaintiff-Appellant, v. AMERICAN FINANCIAL SYSTEMS, INC., Defendant-Appellee.

No. 82-8753.

United States Court of Appeals, Eleventh Circuit.

Aug. 6, 1984.

Ralph Goldberg, Atlanta, Ga., for plaintiff-appellant.

W. Rhett Tanner, Atlanta, Ga., for defendant-appellee.

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

Before TJOFLAT and FAY, Circuit Judges, and WISDOM ^*, Senior Circuit Judge.

WISDOM, Senior Circuit Judge:

This appeal raises two issues under the Truth In Lending Act (TILA). 15 U.S.C. Sec. 1601 (1979). The district court granted summary judgment in favor of the creditor, American Financial Systems, Inc., against the debtor, Patricia Smith, on the grounds that her time-barred cause of action for monetary damages cannot be maintained by way of recoupment and that her request for rescission of the loan transaction under section 1635 fails to show material nondisclosure warranting rescission. First, this Court must determine whether Smith may recover damages for a violation of TILA on a recoupment theory when an affirmative action for damages is barred by the one-year limitation period. See id. Sec. 1640(e). Second, this Court must decide whether the failure to disclose in the TILA disclosure statement that a debtor's residence secures future advances is material when the future advances provision is contained in a simultaneously executed Deed of Trust. The district court answered both questions in the negative. We affirm.

I. FACTS

On September 2, 1977, Patricia Smith borrowed $5,323.95 from American Financial Systems, Inc. (AFS) and executed a Deed to Secure Debt granting AFS a security interest in her principal place of residence. ¹ The Deed indicated that the residence secured "present and future indebtedness". The TILA disclosure statement identified the security interest in the residence, but failed to reveal that the residence secured future advances, as well as the present indebtedness. This nondisclosure is the basis for the present suit.

On March 24, 1980, Smith instituted a Chapter 13 bankruptcy proceeding. One month later, Smith sent a rescission notice to AFS seeking to rescind the loan transaction on the basis of a material nondisclosure, that is, that her residence secured future advances. AFS did not reply to the request for rescission. ² Thereafter, Smith scheduled the debt owed to AFS as a disputed claim in the bankruptcy court, contending that she was entitled to rescission and to statutory damages both for AFS's failure to respond to her request for rescission and for its failure to disclose the extent of the security interest. See 15 U.S.C. Secs. 1635, 1640 (1979). AFS counterclaimed for the amount of the debt, which was in default. Smith filed a "counterclaim" to AFS's counterclaim seeking "recoupment" of money damages for violations of TILA from any judgment that might be awarded to AFS on the debt.

The bankruptcy court held that Smith's original cause of action for money damages was time-barred by section 1640(e), that she could not recoup the time-barred damages from AFS's recovery on the debt, and that she was not entitled to rescission because the failure to disclose the future advances provision in the disclosure statement was not material when the relevant information was disclosed in the Deed. The district court affirmed.

We agree with the district court's conclusion that Smith cannot recoup time-barred money damages from any judgment that might be awarded to AFS on the debt. Unlike the district court, we find that it is neither necessary nor advisable, in the circumstances of this case, to decide whether a debtor generally may recoup such damages. We also concur with the district court's finding that the nondisclosure is not material and therefore that Smith is not entitled to rescission of the loan transaction.

II. MONEY DAMAGES

A. The Availability of Money Damages Under TILA

Smith contends that she is entitled to damages under section 1640 for AFS's nondisclosure and for AFS's failure to rescind the loan transaction upon her request that it do so. A creditor is liable for money damages for any failure to comply with the requirements of the Act. ³ Nondisclosure of a fact required to be disclosed by the Act is a violation of the Act, and the omitted fact need not be material for the creditor to be liable for money damages. ⁴ Cf. 15 U.S.C. Sec. 1635 (1979), requiring material nondisclosure for rescission.

AFS concedes that it violated the Act by failing to disclose on the disclosure statement that Smith's residence secured future advances. When credit is secured, the Act requires that the property which secures the debt be disclosed. Id. Sec. 1638(a)(9). In determining the extent of disclosure required by this section, the regulations provide that "if other or future indebtedness is or may be secured by such property, this fact shall be clearly set forth in conjunction with the description or identification of the type of security interest held". 12 C.F.R. Sec. 226.8(b)(5) (1977) (emphasis added). AFS clearly failed to meet this requirement. Nor can AFS argue that the requirement was satisfied by disclosure on a separate document, in this case the deed showing the security interest. The TILA mandates disclosure of the nature of the security interest on the disclosure statement. See id. Sec. 226.8(a); Smothers v. Fulton Federal Savings & Loan Association, 5 Cir.1981, 653 F.2d 977, 979; Matter of Garner, 5 Cir.1977, 556 F.2d 772, 777-78. AFS violated the Act, therefore, by failing to disclose the nature of its security interest on the disclosure statement given to Smith.

The failure to rescind when a debtor is entitled to rescission also violates the Act. Section 1635 provides a right of rescission in specified circumstances when a debtor gives a security interest in his principal residence. ⁵ 15 U.S.C. Sec. 1635(a) (1979). When the debtor exercises the right to rescind by notifying the creditor, the creditor must terminate its security interest in the debtor's property within twenty days. Id. Sec. 1635(b). AFS did not respond to Smith's request and failed to terminate its security interest in Smith's residence. If Smith had a right to rescind in the circumstances of this case--and we find that she did not--AFS could be liable for monetary damages under section 1640. Gerasta v. Hibernia National Bank, 5 Cir.1978, 575 F.2d 580.

B. Maintaining an Action for Monetary Damages

To bring an affirmative action against a creditor for statutory damages, the debtor must bring the action "within one year from the date of the occurrence of the violation". ⁶ 15 U.S.C. Sec. 1640(e) (1979). The violation "occurs" when the transaction is consummated. Wachtel v. West, 6 Cir., 476 F.2d 1062, cert. denied, 1973, 414 U.S. 874, 94 S.Ct. 161, 38 L.Ed.2d 114. Nondisclosure is not a continuing violation for purposes of the statute of limitations. Id. Accordingly, Smith's affirmative action for monetary damage, brought with her request for rescission in 1980, was clearly time-barred.

To avoid the time bar, Smith asserts that she can maintain her action for monetary damages defensively on a theory of recoupment. ⁷ AFS contends that a TILA counterclaim to a creditor's cause of action for the debt is a setoff, ⁸ not a recoupment. A setoff, unlike a recoupment, is subject to the statute of limitations. E.g., Hodges v. Community Loan & Investment Corp., 1975, 133 Ga.App. 336, 210 S.E.2d 826. The courts that have considered the question whether a TILA counterclaim is in the nature of setoff or recoupment have divided on the issue. Compare Household Finance Corp. v. Hobbs, 1978, Del.Super., 387 A.2d 198; Pacific Concrete Federal Credit Union v. Kauanoe, 1980, 62 Hawaii 334, 614 P.2d 936; Wood Acceptance Co. v. King, 1974, 18 Ill.App.3d 149, 309 N.E.2d 403; Termplan Mid-City, Inc. v. Laughlin, 1976, La.Ct.App., 333 So.2d 738; Garza v. Allied Finance Co., 1978, Tex.Civ.App., 566 S.W.2d 57, holding that a TILA counterclaim is in the nature of recoupment with Basham v. Finance America Corp., 7 Cir.1978, 583 F.2d 918; Hewlett v. John Blue Employees Federal Credit Union, 1976, Ala.App., 344 So.2d 505; Hodges v. Community Loan & Investment Corp., 1974, 133 Ga.App. 336, 210 S.E.2d 826, aff'd in part and rev'd in part on other grounds, 1975, 234 Ga. 427, 216 S.E.2d 274; Public Loan v. Hyde, 1977, 89 Misc.2d 226, 390 N.Y.S.2d 971, holding that a TILA counterclaim is in the nature of a setoff.

We leave this complex question for another day, because we find that on the facts of this case Smith cannot maintain her claim for monetary damages whether that claim is classified as a recoupment or as a setoff.

In Bull v. United States, 1935, 295 U.S. 247, 55 S.Ct. 695, 79 L.Ed. 1421, the Supreme Court held that

"recoupment is in the nature of a defense arising out of some feature of the transaction upon which the plaintiff's action is grounded. Such a defense is never barred by the statute of limitations so long as the main action itself is timely."

295 U.S. at 262, 55 S.Ct. at 700 (footnote omitted). Thus, to maintain her claim for monetary damages under Bull, Smith must show that (1) the TILA violation and the creditor's debt claim arose from the same transaction, (2) she is asserting her claim as a defense, and (3) the "main action" is timely. All three requirements must be satisfied.

The first requirement--that the TILA violation and the state law debt claim arise from the "same transaction"--is the subject of much dispute. In Hodges v. Community Loan & Investment Corp., 1974, 133 Ga.App. 336, 210 S.E.2d 826, the Georgia appeals court applying Georgia law held that a TILA counterclaim is in the nature of setoff, not recoupment, because the causes of action do not arise from the mutual obligations or covenants of the loan transaction. The court found that the TILA cause of action was an...