Smith v. No. 2 Galesburg Crown Finance Corp.

• Citation: 615 F.2d 407
• Decision Date: 15 January 1980
• Docket Number: 78-1718 and 78-1441,78-2027,78-1528,78-1236,78-1238,78-1796,78-1443,78-1263,Nos. 78-2145,78-1609,s. 78-2145
• Parties: , 28 UCC Rep.Serv. 212 Richard L. SMITH and Deborah L. Smith et al., Plaintiffs-Appellants, v. NO. 2 GALESBURG CROWN FINANCE CORPORATION et al., Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 407

615 F.2d 407

53 A.L.R.Fed. 406, 28 UCC Rep.Serv. 212

Richard L. SMITH and Deborah L. Smith et al., Plaintiffs-Appellants, v. NO. 2 GALESBURG CROWN FINANCE CORPORATION et al.,

Defendants-Appellees.

Nos. 78-2145, 78-1263, 78-2027, 78-1443, 78-1796, 78-1236,

78-1609, 78-1528, 78-1238, 78-1718 and 78-1441.

United States Court of Appeals, Seventh Circuit.

Argued April 16, 1979.

Decided Jan. 15, 1980.

Barry M. Barash, Galesburg, Ill., for plaintiffs-appellants.

Aaron J. Kramer, Wm. T. Kirby, Chicago, Ill., Barney Olson II, Galesburg, Ill., Wm. V. Altenberger, Peoria, Ill., for defendants-appellees.

Before SWYGERT, SPRECHER and BAUER, Circuit Judges.

SWYGERT, Circuit Judge.

In this proceeding we consider eleven ¹ consolidated appeals arising out of cases decided under the Truth in Lending Act ("TILA"), 15 U.S.C. §§ 1601 et seq. Ten different substantive issues are presented, in varying combinations, in these cases. ² The creditors prevailed in each case, and the debtors are the appellants. In the interest of brevity, we will not discuss the facts of the individual cases except to the extent necessary. Rather, we will discuss each of the substantive issues raised, indicating in the margin the cases affected by our resolution of the issue being discussed. ³

I.

Two of the cases ⁴ raise the issue whether debtors may respond to a creditor's suit by filing a counterclaim alleging TILA violations, even though the alleged violations occurred more than one year prior to the filing of the counterclaim, so as to be time-barred under 15 U.S.C. § 1640(e). The appellants recognize that this issue has been determined adversely to their position in Basham v. Finance America Corp., 583 F.2d 918 (7th Cir. 1978), cert. denied, DeJaynes v Gen. Finance Corp. of Ill., 439 U.S. 1128, 99 S.Ct. 1046, 59 L.Ed.2d 89 (1979), but they urge that we reexamine our holding on that issue. The primary argument presented is simply a rehash of the argument in the Basham case, and we reject it for the reasons stated in the Basham opinion.

The only argument on this issue which needs to be addressed separately is the appellants' reference to the pending "Truth in Lending Simplification Act," introduced in the 95th Congress as S. 2802 (this bill passed the Senate on May 10, 1978). The bill has been reintroduced in the 96th Congress as S. 108. Section 15(a)(7) of the bill would, according to the appellants, have the effect of amending 15 U.S.C. § 1640 to allow a TILA counterclaim even after the one year period has expired. Without the slightest shred of support in the history of the bill, the appellants claim that this amendment, rather than creating new rights, simply codifies their position as a recognized legal principle. ⁵ We reject this interpretation of the pending bill, and conclude that the district court properly dismissed these counterclaims as time-barred under 15 U.S.C. § 1640(e).

II

The second issue, presented in one case, ⁶ is whether the district court improperly failed to give effect to the terms of a Wage Earner's Plan under Chapter XIII of the Bankruptcy Act, 11 U.S.C. §§ 1001 et seq. In this case the creditor filed a reclamation complaint. The debtors, as an affirmative defense, asserted that a Wage Earner's Plan had been set up under the terms of which the creditor was to receive $1,000 of the debt owed as a secured creditor, with the balance of the debt to be treated as unsecured. It was further alleged that the creditor's secured interest had been valued by the bankruptcy court at $1,000 under Bankruptcy Rule 13-307, and that the $1,000 portion of the debt which was treated as secured under the plan was in fact paid. Under the debtors' interpretation, the balance of the debt was unsecured, so that when the debtors subsequently converted their Chapter XIII proceeding to a straight bankruptcy proceeding, the creditor was left with nothing but an unsecured balance, and that this balance was discharged by the subsequent discharge in the straight bankruptcy proceeding. The bankruptcy court denied this defense, without explanation, in an order entered January 30, 1978. The district court affirmed the bankruptcy court, making the following statement:

The appeal upon this issue rests upon the gratuitous assumption by the debtors that the bankruptcy court had theretofore determined the value of Avco's security interest to be the sum of $1,000. No such determination by that court appears in the record before the court.

Avco did accept the Chapter XIII plan, which proposed that it would receive $1,000 on account of its security interest and the payment of the balance of its account in the course of the Chapter XIII administration of the bankrupts' estates. That plan was abandoned by the debtors when they amended the proceeding to a straight bankruptcy. We cannot say that the bankruptcy court erred in allowing reclamation.

We agree with the district court on both grounds stated. The record is indeed inadequate to determine whether or not the bankruptcy court ever valued the secured interest at $1,000. Even assuming that it had, however, the more fundamental objection stated by the district court remains: the plan was abandoned by the debtors when they converted to a straight bankruptcy proceeding. The debtors attempt to take advantage of the provisions of their plan, without having completed their own payments under the plan. The Bankruptcy Act does not allow such a one-sided use of the terms of a Wage Earner's Plan. The debtors in effect argue that the security interest was discharged when they paid the $1,000 secured portion of the debt under the plan. However, under Chapter XIII, the discharge of debts occurs only "(u)pon compliance by the debtor with the provisions of the plan and upon completion of all payments to be made thereunder . . . ." 11 U.S.C. § 1060. Consequently, when a debtor fails to complete payments under a Wage Earner's Plan, the entire original claim of the creditor is revived. 10 Collier on Bankruptcy P 29.07, p. 342 (14th ed. 1978). The Plan having been abandoned by the debtors prior to discharge, the original claim was revived, less payments actually received, and the terms of the abandoned plan were not controlling so as to convert part of the secured debt into an unsecured debt. Accordingly, no error has been shown in allowing reclamation, and we affirm the district court on this issue. ⁷

III

The next issue, presented in six cases, ⁸ is whether a creditor's failure to disclose the actual proceeds of a loan on the loan statement constitutes a violation of 15 U.S.C. § 1639(a)(1). ⁹ The debtors have used the metaphorical term "net cash in fist" in identifying this issue. Two of our recent opinions discuss this issue and we begin with a discussion of the ramifications of those opinions.

In Basham v. Finance America Corp., supra, we discussed the inconsistency between the requirements of the statute, 15 U.S.C. § 1639(a), and the requirements of Regulation Z § 226.8(d)(1). ¹⁰ We noted that the regulation only requires the disclosures listed in sections 1639(a)(2) and (a)(3) of the statute, implicitly allowing the actual proceeds of the loan, required under section 1639(a)(1) of the statute, to remain undisclosed. 583 F.2d at 922. We went on to assume without deciding that creditors must comply with the statute even where it differs from Regulation Z. 583 F.2d at 923. Finally, we applied 15 U.S.C. § 1640(f), which precludes liability for any act done or omitted in good faith in conformity with any regulation of the Federal Reserve Board. Id. We held that since the creditors had followed the requirements of Regulation Z, no civil liability could be imposed for failure to make the disclosure required by section 1639(a)(1). In a footnote the following comment was added:

We do not reach the issue of whether continued adherence by the creditors to their present form of disclosure after at least one circuit has ruled that it is illegal vitiates their "good faith."

Id., n. 7. This footnote is crucial to the debtors' argument here because of the Fifth Circuit's opinions in Pollock v. General Finance Corp., 535 F.2d 295 (5th Cir. 1976), aff'd on rehearing, 552 F.2d 1142 (5th Cir.), cert. denied, 434 U.S. 891, 98 S.Ct. 265, 54 L.Ed.2d 176 (1977).

In Pollock the Fifth Circuit tended to agree with our view that Regulation Z did not require the disclosure of the actual proceeds of the loan, but held that such disclosure was nevertheless required under the statute itself, and that the regulation must be read in conjunction with the statute. 535 F.2d at 298. In neither of its opinions did the Fifth Circuit have occasion to apply the "good faith conformity" defense which we applied in Basham. The debtors in the present appeals argue that creditors are not entitled to the application of the good faith conformity defense for any loan transaction occurring after the Fifth Circuit decision in Pollock, at least in the absence of an affirmative showing of good faith.

Our recent opinion in Warren v. Credithrift of America, Inc., 599 F.2d 829 (7th Cir. 1979), sheds some additional light on this question. In that case we reaffirmed our holding in Basham, and again applied the good faith conformity defense under section 1640(f) so as to preclude liability. 599 F.2d at 831-32. In Warren the debtor argued, as do the debtors here, that the good faith conformity defense has no application after the Fifth Circuit's decision in Pollock. Our opinion in Warren does not explicitly discuss this point, but simply applies the defense. We take note of the fact, however, that the loan transaction in Warren took place after the Fifth Circuit's initial opinion in Pollock, but before its opinion on rehearing. For this reason we read the Warren case as holding, albeit implicitly, that the good faith conformity defense continues to apply with full force at least until the Fifth Circuit reaffirmed its position on rehearing in Pollock on ...