Wood, Matter of, 79-1504

• Decision Date: 22 August 1980
• Docket Number: No. 79-1504,79-1504
• Parties: In the Matter of: Betty Lou WOOD, Bankrupt. FIRST NATIONAL BANK & TRUST COMPANY IN MACON, Plaintiff-Appellee, v. William M. FLATAU, Trustee, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 188

643 F.2d 188

In the Matter of: Betty Lou WOOD, Bankrupt.

FIRST NATIONAL BANK & TRUST COMPANY IN MACON, Plaintiff-Appellee, v. William M. FLATAU, Trustee, Defendant-Appellant.

No. 79-1504.

United States Court of Appeals, Fifth Circuit.

Aug. 22, 1980.

William M. Flatau, pro se.

Arthur L. Phillips, Macon, Ga., for plaintiff-appellee.

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

Before GEE, FAY and RANDALL, Circuit Judges.

GEE, Circuit Judge:

This case presents a question of first impression in this circuit: whether a bankrupt's cause of action against a lending institution for statutory damages under section 130(a)(2) of the Truth in Lending Act ("TILA"), 15 U.S.C. § 1640(a) (1976), ¹ passes to the trustee in bankruptcy pursuant to section 70a of the Bankruptcy Act, 11 U.S.C. § 110(a) (1976) ² (repealed 1978). ³ In accord with other courts that have considered the precise issue before us, Murphy v. Household Finance Corp., 560 F.2d 206 (6th Cir. 1977), and Porter v. Household Finance Corp., 385 F.Supp. 336 (S.D.Ohio 1974), ⁴ we hold that it does.

The material facts of this case are not in dispute. On November 16, 1976, Betty Lou Wood ("debtor") received a signature loan from the First National Bank & Trust Company in Macon ("lender" or "plaintiff"). On May 9, 1977, she obtained a second loan from the plaintiff and transferred to plaintiff as security a 1977 Honda automobile. On closing this second loan, she signed an "Installment Note and Disclosure Statement," as well as a security agreement.

Subsequently, on October 21, 1977, Ms. Wood was adjudicated a bankrupt upon the filing of her voluntary petition in bankruptcy. As of that date, the sum of $42.44 remained outstanding on the first loan, and the sum of $2,848.59 remained outstanding on the second loan. The 1977 Honda was scheduled as an asset of her estate, subject to the perfected security interest of the plaintiff.

On November 18, 1977, plaintiff filed a complaint against William M. Flatau ("trustee" or "defendant") as trustee of the debtor's estate, seeking reclamation of the Honda. The defendant filed his answer, generally denying the pertinent allegations of the reclamation complaint, and filed a counterclaim for statutory damages and attorneys' fees, but no actual damages, from the plaintiff for an alleged violation of the TILA and applicable regulations.

The bankruptcy judge granted the plaintiff's reclamation complaint but dismissed the trustee's counterclaim on the ground that the trustee had no standing to file a TILA counterclaim against the lender. In so holding, he relied upon an unreported district court decision, Flatau v. Bone, Civ. No. 77-8-Ath (M.D.Ga. Feb. 4, 1977), which held that TILA claims are not transferable to the trustee in bankruptcy under section 70a(5) of the Bankruptcy Act. On appeal, the trustee urged the district judge who had rendered the decision in Flatau v. Bone, supra, to reexamine its holding in that case in light of the subsequent contrary decision of the Sixth Circuit in Murphy v. Household Finance Corp., supra. The district court, however, unpersuaded by the Sixth Circuit's reasoning in Murphy, reiterated its view that a TILA claim is not transferable to a trustee in bankruptcy under section 70a of the Bankruptcy Act and that therefore the trustee had no standing to file a TILA counterclaim. Accordingly, it affirmed the decision of the bankruptcy judge.

Section 70a(5) of the Bankruptcy Act vests the trustee with the debtor's title to "property, including rights of action, which prior to the filing of the petition he (the debtor) could by any means have transferred . . . ." Bankruptcy Act, § 70a(5), 11 U.S.C. § 110(a)(5) (emphasis added). Neither the TILA nor the regulations promulgated thereunder discuss the transferability of a claim for statutory damages under section 130(a)(2)(A). For the purposes of the Bankruptcy Act, a cause of action is transferable if the action would "survive" the death of the debtor. Murphy v. Household Finance Corp., 560 F.2d at 208. The question of survivability is a matter of federal law. Id. See also Smith v. No. 2 Galesburg Crown Finance Corp., 615 F.2d 407, 413 (7th Cir. 1980); Heikkila v. Barber, 308 F.2d 558, 561 (9th Cir. 1962). It has long been established that causes of action predicated on penal statutes do not survive the death of the debtor, see Schreiber v. Sharpless, 110 U.S. 76, 28 L.Ed. 65 (1884), whereas remedial damage actions do survive. Thus, only if we are able to characterize the civil liability provisions of the TILA, see n. 1, supra, as being remedial will the trustee here have standing to press the debtor's TILA claim. ⁵

The TILA affords a debtor statutory damages of twice the amount of any finance charge ⁶ for a creditor's failure to disclose required information, regardless of whether the debtor has suffered any actual damages. There can be no doubt that this provision effectively imposes a penalty on the creditor. In fact, both Congress ⁷ and the Supreme Court ⁸ have used the term "civil penalty" to describe these statutory damages. That a penalty is imposed, however, does not end our inquiry. We must still determine whether a TILA action for statutory damages is penal for the purpose of survival. "The problem, simply put, is that the term 'penal' is used in different contexts to mean different things." Smith v. No. 2 Galesburg Crown Finance Corp., 615 F.2d at 414 (footnote omitted).

The Supreme Court discussed the multifarious meanings of the words "penal" and "penalty" in Huntington v. Attrill, 146 U.S. 567, 13 S.Ct. 224, 36 L.Ed. 1123 (1892):

In the municipal law of England and America, the words "penal" and "penalty" have been used in various senses. Strictly and primarily, they denote punishment, whether corporal or pecuniary, imposed and enforced by the State, for a crime or offense against its laws. (citations omitted). But they are also commonly used as including any extraordinary liability to which the law subjects a wrongdoer in favor of the person wronged, not limited to the damages suffered. They are so elastic in meaning as even to be familiarly applied to cases of private contracts, wholly independent of statutes, as when we speak of the "penal sum" or "penalty" of a bond.

Penal laws, strictly and properly, are those imposing punishment for an offense committed against the State, and which, by the English and American constitutions, the executive of the State has the power to pardon. 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.

The test whether a law is penal, in the strict and primary sense, is whether the wrong sought to be redressed is a wrong to the public, or a wrong to the individual, according to the familiar classification of Blackstone: "Wrongs are divisible into two sorts of species: private wrongs and public wrongs. The former are an infringement or privation of the private or civil rights belonging to individuals, considered as individuals; and are thereupon frequently termed civil injuries : the latter are a breach and violation of public rights and duties, which affect the whole community, considered as a community; and are distinguished by the harsher appellation of crimes and misdemeanors." 3 Bl. Com. 2.

Id. at 666-69, 13 S.Ct. at 227-228 (emphasis in original). This passage makes manifest that statutory damages under the TILA, even though they may commonly be characterized as a "penalty," are not necessarily "penal" for survival purposes. In fact, both of the courts that have considered the precise issue before us, citing Huntington, have concluded that such damages are remedial for the purpose of determining survivability.

The Sixth Circuit in Murphy v. Household Finance Corp., supra, distilled three factors from Huntington and its progeny to be used in determining whether a statute is penal or remedial: "(1) whether the purpose of the statute was to redress individual wrongs or more general wrongs to the public; (2) whether recovery under the statute runs to the harmed individual or to the public; and (3) whether the recovery authorized by the statute is wholly disproportionate to the harm suffered." 560 F.2d at 209. An examination of those factors ⁹ led the court to conclude that a cause of action under section 130 of the TILA is remedial in nature:

The Truth in Lending Act 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. Congress focused on the individual consumer of credit as a person primarily injured who should be encouraged to prosecute actions and should be allowed to recover directly and adequately for harms done. This is not the sort of statutory scheme properly characterized as penal.

Id. at 211. In reaching this conclusion the court placed particular reliance on Mourning v. Family Publications Service, Inc., 411 U.S. 356, 93 S.Ct. 1652, 36 L.Ed.2d 318 (1973), in which the Supreme Court stated that section 130 liability was not the kind of penalty that courts were required to construe within the narrow limits reserved for strictly penal enactments. ¹⁰ See Murphy, 560 F.2d at 209-10.

Murphy also drew liberally from Porter v. Household Finance Corp., supra, the seminal case on the issue of a trustee in bankruptcy's standing to bring the bankrupt debtor's section 130 claim. The district court in Porter divined in Huntington the "true test" of whether a statutorily imposed liability is penal or remedial in nature: "whether the wrong to be remedied or punished is primarily to an individual or to the State." 385 F.Supp. at 341. Candidly acknowledging that TILA liability under section 130 "does not fall neatly within the common law categories of either a...