Dawson v. ThomasDawson v. Thomas
MEMORANDUM DECISION
(FINDINGS OF FACT AND CONCLUSIONS OF LAW)
By her amended complaint, the plaintiff, Ethel J. Dawson, objects to the proof of claim filed by James B. Thomas (who made a $35,000 loan to Dawson secured by her residence pursuant to a deed of trust, a form of mortgage utilized in the District of Columbia) and seeks affirmative relief against Thomas and Jack Merwin (the broker of the loan from Thomas) under various statutes regulating consumer lending activity. This constitutes
I
BASIC FACTS
Dawson owns real property (“the Property“) which is a single family residence located at 500 23d Place, N.E., Washington, D.C. Dawson has resided there since at least the early 1990s, and has continuously resided there. The tax assessment records reflect that despite the property being her only residence, she has never availed herself of the homestead deduction for real estate tax purposes. She was unaware that she was not taking the deduction, a reflection of her sophistication level. Dawson has never bought or owned rental real estate.
Sometime prior to September 2003, Dawson fell into arrears in paying the holder of a note secured by the first deed of trust on the Property, and the trustees under that deed of trust issued a notice of foreclosure sale to be held on September 18, 2003. By the eve of the foreclosure sale, the reinstatement amount was $8,629.77.
Thomas is a real estate agent who has also, for some time, engaged in making real estate loans. By the end of 1999, he
Starting in approximately 1998, Merwin and Thomas began a business relationship in which Merwin would act as a mortgage broker to originate borrowers for real-estate-secured loans to be extended by Thomas, with Merwin receiving a commission for loans that went to closing. Merwin became aware of the imminent foreclosure sale of Dawson‘s Property by consulting public notices of such sales. Acting as Thomas‘s agent, Merwin mailed a flyer to Dawson at the Property address. The flyer offered Thomas‘s help in avoiding foreclosure. The precise contents of that flyer are unknown, but such flyers generally offered to help avoid foreclosure by way of a loan, meeting Thomas‘s criteria for commercial non-owner occupied property loans, to bring current the payments on the note secured by the deed of trust which was the subject of the foreclosure. Within three or four days before the scheduled foreclosure sale, Dawson placed a telephone call to the number provided on the flyer and spoke to Merwin.
The next day, Merwin met with Dawson at the Property. Present at the Property when Merwin arrived were Dawson, a woman introduced as a neighbor, and a man introduced as a tenant. Merwin cannot recall what words were used to introduce the man as a tenant other than that the word “roomer” was not used. Dawson has, on occasion, rented out a room in the Property, and at the time of the meeting with Merwin she was renting a room to a Mr. Spencer. Dawson has never rented the entire Property. Merwin engaged in no conversation with the tenant separate from Dawson.
Dawson told Merwin that she was living with her daughter, and gave Merwin the daughter‘s address, which was within walking distance of the Property. Dawson‘s daughter has from time to time lived with Dawson in the Property, and was doing so at the time that the foreclosure sale was imminent. Dawson has never lived with her daughter elsewhere, as the daughter has never had a place of her own where Dawson could live with her. Her daughter lives “here and there,” as Dawson put it, living for free with various persons. Merwin did not inquire whether Dawson‘s stated arrangement of living with her daughter was only temporary. Nor did Merwin request any statement from the daughter verifying the arrangement, or verifying that the daughter was rightfully in possession of a residence at which Dawson could live. Nor did Merwin request bank account
On the one occasion that Merwin visited the Property, he went into the Property with Dawson, stood in the kitchen and looked in the living room. He outlined to Dawson Thomas‘s normal lending terms, and asked Dawson if she thought she would be successful in repaying the loan. Dawson said that she was going to sell the Property and move in with her son, that she regretted having to sell the Property but that she and her son had determined that she should move in with her son. Merwin apparently did not probe Dawson as to why she regretted selling the Property if it was rented out to someone else and she was already living elsewhere with her daughter. In fact, Dawson had no intention of renting the Property, selling the Property, or moving out of the Property. Merwin never explained to Dawson the meaning of the term commercial loan.
Either before or after the visit, Merwin examined the tax assessment record for the Property as posted on the internet by the District of Columbia government. It revealed the Property‘s assessed value, and also that Dawson was not receiving the homestead deduction. However, it also listed Dawson‘s mailing address as being the same as the Property‘s address. Merwin did not inquire of Dawson why she was using the Property as her mailing address if she was renting it out to someone else. Nor
Merwin contacted Thomas to refer Dawson as a borrower, and reported to Thomas what he, Merwin, had learned. Thomas‘s file contains a note reciting:
Referral from Jack
500 23rd Pl NE
Owner Ethel Dawson
Facing foreclosure
Rental
No Homestead Exemption in the record, son (attorney) says she will sell
Needs: $15,000 for repairs
= $9,000 to reinstate
Thomas, who is a real estate broker, did a so-called competitive market analysis and satisfied himself that there was sufficient equity in the property to cover the existing secured debt as well as the loan he would make. Accordingly, Thomas approved a loan for $35,000 which was to cover reinstatement of the note secured by the first deed of trust, settlement charges, and any cash to be received by Dawson.
Either before or after he called Thomas to refer the requested loan for Thomas‘s approval, Merwin called Cosmopolitan Real Estate Settlements, Inc. (“Cosmopolitan“) to order a title
The closing of the loan occurred on September 17, 2003, at Cosmopolitan‘s office in Silver Spring, Maryland. Thomas delivered a check for the loan amount to Cosmopolitan‘s offices on the morning of the day the loan was to close, but he did not stay for the closing. Included in the closing costs were a $5,000 “Lender‘s Fee” to be paid to Thomas and a $5,000 “Consulting Fee” to be paid to Merwin.
Dawson‘s son, who lives in Philadelphia, Pennsylvania, called Merwin the day of the closing and explained that Dawson was still planning to borrow, but wanted to know if additional dollars could be lent to prepare the Property for sale (e.g., for carpet replacement). This is a confusing aspect of the evidence. Thomas testified that when Merwin called him sometime prior to the day of the closing he learned of a statement by Dawson‘s son that Dawson was going to sell (as reflected by Thomas‘s file note). However, Merwin never testified to any conversations with Dawson‘s son other than on the morning of the day of the closing. It is possible that Thomas is in error in thinking that he had only one conversation with Merwin. In other words, it is possible that Merwin called Thomas the morning of the closing and
The closing was conducted by an attorney, Ralph A. Bernardo, acting as Thomas‘s agent. No one asked Dawson to bring any documents to the closing, and she was not furnished with any of the closing documents until the closing was held. At the closing, Dawson was accompanied by Samuel S. Logan, a close friend who has known her since the late 1980s, sometime after Dawson‘s husband had died. Only Dawson, Logan, and Bernardo were present at the closing.
Bernardo asked Dawson where she lived and she told him she resided at 500 23d Place, N.E. (that is, at the Property). Moreover, the HUD-1 form (Settlement Statement) indicates that Dawson‘s address is the same as the Property‘s. Dawson presented her driver‘s license which listed her address as being the same as the Property‘s, and Bernardo made a copy for the closing files, and transmitted a copy with the loan documents to Thomas on September 28, 2003.
- a Commercial Loan Balloon Deed of Trust (Second Trust);
- a Ballon Deed of Trust Note (Second Trust); and
- a Business and Investment Affidavit.
The loan documents also included an Assignment of Contracts, Income Leases, Rents and Profits. Merwin and Thomas point to no other loan documents that bear on the issue of whether this was acknowledged by Dawson to be a non-owner-occupied or commercial or business or investment purpose loan.
Bernardo briefly described each document to Dawson and Logan before Dawson signed the document. Neither Dawson nor Logan fully understood the documents.
None of the loan documents indicate that Dawson resided anywhere other than at the Property. Nor do they indicate that Dawson did not intend to occupy the Property after the loan was made. Nor do they indicate that Dawson intended to sell the Property.
The Business and Investment Affidavit indicated that Dawson “agrees that the . . . loan . . . is for business and investment purposes only: Stop foreclosure/renovate.” Dawson indeed was borrowing for the stated purpose of stopping the foreclosure sale and renovating the Property. However, that does not necessarily
Dawson, who is extremely unsophisticated in financial affairs, could view saving her house from foreclosure as serving a business and investment purpose in the sense of saving the house from foreclosure so that she would not lose the equity in the Property and allowing her to renovate the Property so as to enhance the property‘s value or fitness for sale. The Affidavit did not extract a sworn statement by her that she was not residing in the Property and did not intend to reside in the Property, and her statement that the loan was for only the stated business and investment purposes of stopping foreclosure and renovating the Property could be viewed by her as truthful.
In any event, her signing of the Affidavit did not negate the personal, household character of the loan. Bernardo, as an attorney, should have been well aware that this loan, which was secured by owner-occupied property, had to be characterized as one for personal, household purposes. That knowledge must be charged to Thomas.
Finally, the Commercial Loan Balloon Deed of Trust (Second Trust) included a similar reference to section 28-3301 of the D.C. Code but like the Note did not include any representation that Dawson was not residing in the Property and did not intend to reside in the Property. Indeed, the Commercial Loan Balloon Deed of Trust (Second Trust) included a paragraph 20 entitled “OCCUPANCY” which contained no text whatsoever and was followed by a Cross Collateralization provision of no relevance to the owner-occupancy issue.
Although Dawson signed an Assignment of Contracts, Income Leases, Rents and Profits, she made no representation in the Assignment or in any other document or even orally to Bernardo that she was not occupying the Property, or that she was renting the Property to anyone.4
Thomas is charged with Bernardo‘s knowledge that Dawson resided in the Property. Once Bernardo was told that Dawson occupied the Property, Thomas (acting through Bernardo), ought
Moreover, Thomas‘s other agent, Merwin, failed on behalf of Thomas to observe the standard of care applicable to making commercial loans for non-owner-occupied property. Merwin willfully and unreasonably failed to make additional inquiries that a lender reasonably ought to make to assure that Dawson‘s statements to him regarding occupancy were accurate. As Dawson‘s expert explained, a failure to claim a homestead deduction does not suffice to demonstrate that a property is non-owner-occupied, and the standard of care in the case of loans secured by non-owner-occupied real property requires something more than the oral statements upon which Merwin relied. At a minimum, Merwin should have inquired into the terms of the lease with the tenant, requested a copy of the lease, and probed Dawson more extensively regarding her living arrangement with her daughter and what documentation she could furnish to verify that arrangement. He willfully turned a blind eye to those matters.
Thomas did not follow the standard of care necessary to ascertain that, aside from her equity in the Property, Dawson could reasonably be expected to make the scheduled payments required by the loan. In this regard, Dawson received only $14,206.76 in cash from the loan, but Thomas‘s note indicates that $15,000 was needed for repairs. Accordingly, Thomas could
Dawson received, directly or indirectly, a total of only $23,340.50 in property as a result of the transaction: $8,629.77 used to reinstate her existing mortgage obligation; $14,206.76 in cash; and payment of $503.97 in property taxes. In other words, a staggering $11,659.50 of the $35,000.00 loan proceeds went to fees and finance charges constituting previously non-existent obligations of Dawson. Dawson subsequently made $2,841.34 in payments to Thomas on the new debt owed him. Reducing the $23,340.50 by the $2,841.34 in payments Dawson made, she has received a net amount of $20,499.16 in the transaction.
The promissory note Dawson executed called for interest only payments of $466.67 per month, with the entire loan to be paid by March 17, 2004, six months after the closing of the loan. The note bore interest at the rate of 16% per annum, but with the interest rate to be automatically increased to 24% per annum if Dawson should ever be in default.
II
CONTINUED JURISDICTION OF THE BANKRUPTCY COURT
Although the bankruptcy case in which this adversary proceeding is being pursued was dismissed on March 15, 2006, the court concludes that it has continued jurisdiction over this
Judicial economy and convenience to the parties are both served by this court‘s retention of jurisdiction given that the matter has been fully tried and a dismissal without resolution would require the parties to commence a new proceeding in another forum, an undertaking that would be both costly and time-consuming. Furthermore, it would require another court to engage in the duplicative effort of adjudicating the entire dispute.
Fairness likewise weighs is favor of retained jurisdiction. Not only has neither party sought dismissal of the adversary proceeding based upon dismissal of the bankruptcy case, but a re-adjudication of this dispute in another forum would inevitably result in a further accumulation of legal fees, provide the
Finally, as in Swinson, the court finds that comity weighs in favor of retained jurisdiction given that the difficult issues involved are mostly factual, the legal issues are relatively straightforward, and little purpose would be served by unloading this litigation on another busy court. Id. at * 5.
Accordingly, the court determines that it would be an abuse of its discretion to dismiss this adversary proceeding based solely upon the prior dismissal of the bankruptcy case.
III
PROPRIETY OF DETERMINING THOMAS‘S CLAIM
In her objection to Thomas‘s proof of claim, Dawson contends that the proof of claim was untimely and failed to attach the necessary support documents. Dawson‘s objection further disputes the amount of the claim and its secured status. The court need not consider the question of whether Thomas‘s claim should be disallowed as untimely and lacking the necessary supporting documents. The underlying bankruptcy case was dismissed without the debtor having received a discharge, mooting the legal significance of allowance or disallowance of the claim for purposes of Dawson‘s Chapter 13 bankruptcy case.
The amount of the claim and its secured status, however,
IV
DAWSON‘S TRUTH IN LENDING ACT CLAIMS
ARE NOT BARRED BY THE STATUTE OF LIMITATIONS
Some of Dawson‘s claims in her amended complaint are pursued under the Truth in Lending Act (“TILA“),
A.
WAIVER
Both defendants raised the limitations defense in their respective answers to the amended complaint. The joint pretrial statement, however, which pursuant to the scheduling order was required to “contain . . . a statement of defenses raised by the parties . . . .“, states only as follows:
Defendants generally deny the factual allegations of the amended complaint. They assert that the Loan was brokered and made to Dawson with the express understanding that Dawson, who was on the verge of foreclosure, was moving out of the House, and sought the Loan in order to (1) avoid a forced sale that would not give fair value, (2) pay off the arrearage on and reinstate the first deed of trust, (3) obtain funds to renovate the House, and (4) offer the House for sale on the market in order to obtain fair value.
Consequently, Defendants contend that the House was investment property not subject to the statutory provisions and common law with respect to which Dawson complains. If the House is not such investment property, Defendants contend that Dawson intentionally or negligently misrepresented it as such to Defendants, Defendants had no reason to know otherwise, and Dawson cannot therefore be heard to complain.
The Pretrial Statements are hereby incorporated by reference into this Pretrial Order. This Pretrial Order supersedes the pleadings, governs the future course of proceedings in this adversary proceeding and may not be amended except by Order of this Court to prevent manifest injustice.
[Emphasis added.] Neither the joint pretrial statement nor the pretrial order addresses the defendants’ previously asserted statute of limitations defense, and the defendants never sought to have the pretrial order amended to preserve that defense. The pretrial order having superseded the previously filed pleadings in this adversary proceeding, and the defendants having neglected to take any steps between the entry of the pretrial order and the
B.
RECOUPMENT
Moreover, even if Thomas had shown that Dawson is time-barred from seeking affirmative relief under TILA, Dawson is not time-barred from defensively asserting TILA violations in
C.
TIMELINESS UNDER THE TOLLING PROVISIONS OF 11 U.S.C. § 108(a)
The affirmative claims pursued by Dawson include claims under TILA. Even if the defendants had not waived the statute of
Affirmative actions under TILA, are generally required to be brought within one year of the violation,
Violations of the disclosure requirements under TILA accrue no later than the settlement date, which in this case was September 17, 2003. See Lawson v. Nationwide Mortgage Corp., 628 F. Supp. 804, 807 (D.D.C. 1986) (“In this circuit, violation of
Section 108(a) provides:
(a) If applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period within which the debtor may commence an action, and such period has not expired before the date of the filing of the petition, the trustee may commence such action only before the later of –
(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
(2) two years after the order for relief.
On its face, the tolling provision of § 108(a) is available only
Some courts hold that the provisions of § 108 apply to a chapter 13 debtor if the cause of action involved is property of the estate. See In re Murray, 276 B.R. 869, 874 (Bankr. N.D. Ill. 2002)(analogizing chapter 13 debtors to chapter 11 and chapter 12 debtors-in-possession and concluding that “§ 108(b)
The order confirming Dawson‘s chapter 13 plan specifically provided that the property of the estate would not re-vest in Dawson until payments under the plan were completed and she received a discharge. When Dawson commenced this adversary proceeding, she had not completed plan payments and her claims in this adversary proceeding remained property of the estate. The critical issue is whether Dawson exercised a trustee‘s power in pursuing those claims. If she did so act, it stands to reason that she may invoke § 108(a).
To determine whether § 108(a)‘s tolling provision is
Under
Beyond § 323, another provision,
Who is the entity empowered to utilize a trustee‘s powers under § 363 in chapters 11, 12, and 13, and to sue pursuant to
Chapter 13 is the odd duck when it comes to pursuit of a prepetition cause of action that is property of the estate. As in chapter 12, a trustee serves in every chapter 13 case, and receives and disposes of the payments the debtor makes under a plan.
Instead, a chapter 13 debtor is vested with only some of the powers of a trustee. The debtor remains in possession of the property of the estate, except as provided in a confirmed plan or the order confirming a plan.
Subject to any limitations on a trustee under this chapter, the debtor shall have, exclusive of the trustee, the rights and powers of a trustee under sections 363(b), 363(d), 363(e), 363(f), and 363(l), of this title.
Unless the court orders otherwise, a debtor engaged in business may operate the business of the debtor and, subject to any limitations on a trustee under sections 363(c) and 364 of this title and to such limitations or conditions as the court prescribes, shall have, exclusive of the trustee, the rights and powers of the trustee under such sections.
Based on a chapter 13 debtor‘s right pursuant to § 1303 to utilize a trustee‘s power under § 363 to “use” the property of the estate in the debtor‘s possession under § 1306, a chapter 13 debtor steps into the shoes of a trustee and may sue on a cause of action that is property of the estate. This was the conclusion reached by the first Court of Appeals decision to
The chapter 13 debtor may sue as representative of the estate on a cause of action that became property of the estate even though § 323 does not expressly vest a debtor with a trustee‘s capacity to sue. As noted in the legislative history to § 323:
Subsection (a) of this section makes the trustee the representative of the estate. Subsection (b) grants the trustee the capacity to sue and to be sued. If the debtor remains in possession in a chapter 11 case,
section 1107 gives the debtor in possession these rights of the trustee: the debtor in possession becomes the representative of the estate, and may sue and be sued. The same applies in a chapter 13 case.
H.R. Rep. No. 95-595, at 326 (1977), as reprinted in 1978 U.S.C.C.A.N. 5963, 6283; S. Rep. No. 95-989, at 37 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787, 5824. Having remained in possession of the property of the estate, and being vested by other provisions with a trustee‘s power to sue on causes of action that are such property, the chapter 13 debtor implicitly is vested with a trustee‘s capacity to sue on those causes of action. Congress viewed the chapter 13 debtor as exercising a trustee‘s authority to sue when pursuing such causes of action.
Accordingly, a debtor in a chapter 13 case is entitled to invoke § 363 with respect to the “use” of a cause of action that is property of the estate. The better reasoned decisions hold that, in contrast to the provisions authorizing a chapter 13 debtor to pursue causes of action that are property of the estate, none of the provisions of chapter 13 authorize a chapter 13 debtor to sue on a trustee‘s avoidance powers (under, for example, 11 U.S.C. §§ 544 (unperfected liens), 547 (preferences), or 548 (fraudulent conveyances)) other than pursuant to
The difference in statutory structure also explains the meaning of the statement in the legislative history to § 1303 that the debtor possesses certain powers “concurrently with the trustee,” and in particular the power to sue under § 323 despite
It being clear that in chapter 13, a debtor who is in possession of a cause of action that is property of the estate enjoys the powers of a trustee to sue on such a cause of action, the critical issue is whether § 108(a) applies to a debtor‘s exercise of such trustee powers.21 Section 1303 confers on a chapter 13 debtor, to the exclusion of the chapter 13 trustee, the power of a trustee under § 363 to pursue such a cause of
Even though the term “use” in § 363 is construed as including the trustee‘s power to sue on such a cause of action, some courts have held that § 1303 confers on the debtor only the
The § 363 power to sue, when exercised by a chapter 13 debtor, is exercised in the words of § 1303 as “a right[] and power[] of a trustee” and “subject to the limitations on a trustee under this chapter,” meaning the limitations that would apply to a chapter 13 trustee if the § 363 power were vested in the chapter 13 trustee instead of the debtor. That this is the proper interpretation of the “subject to the limitations” language is made clear by the legislative history to § 1303:
A chapter 13 debtor is vested with the identical rights and powers, and is subject to the same limitations in regard to their exercise, as those given a liquidation trustee by virtue of section 363(b), (d), (e), (f), and (h) of title 11, relating to the . . . use . . . of property.
S. Rep. No. 95-989, at 140 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787, 5926 (1978) (emphasis added).24
If § 108(a) provided that a trustee must sue on causes of action that are property of the estate only within 180 days after the commencement of the case, regardless of any longer statute of limitations available under nonbankruptcy law, there could be no doubt that the chapter 13 debtor would be subject to the same restriction, particularly because § 1303 provides that the debtor in suing under § 363 is “[s]ubject to any limitations on a trustee under . . . chapter [13] . . . .” When the limitations on a trustee are modified by § 108(a) (to enlarge the statute of limitations), the debtor should similarly be subject to the same
In In re Ranasinghe, 341 B.R. at 567, the court acknowledged that in suing on a cause of action that is property of the estate, the debtor is utilizing a trustee‘s power of “use” under § 363 pursuant to the § 363 power conferred on the debtor by § 1303. The court nevertheless held that the § 108(a) power is implicitly negated because it is not one of the powers listed in § 1303. However, the court failed to acknowledge that the chapter 13 debtor‘s utilization of § 363 is “[s]ubject to any limitation on a trustee,” and thus includes the provisions of the Bankruptcy Code that govern when a trustee may employ § 363.
This is not a question of conferring on the debtor a trustee‘s power to sue that the Bankruptcy Code plainly does not confer on the debtor. See Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 13-14 (2000) (holder of
Several contextual features here support the conclusion that exclusivity is intended. First, a situation in which a statute authorizes specific action and designates a particular party empowered to take it is surely among the least appropriate in which to presume nonexclusivity. “Where a statute ... names the parties granted [the] right to invoke its provisions, ... such parties only may act.” 2A N. Singer, Sutherland on Statutory Construction § 47.23, p. 217 (5th ed. 1992) (internal quotation marks omitted); see also Federal Election Comm‘n v. National Conservative Political Action Comm., 470 U.S. 480, 486, 105 S.Ct. 1459, 84 L.Ed.2d 455 (1985). Second, the fact that the sole party named--the trustee--has a unique role in bankruptcy proceedings makes it entirely plausible that Congress would provide a power to him and not to others.
. . . .
Because we believe that by far the most natural reading of § 506(c) is that it extends only to the trustee, petitioner‘s burden of persuading us that the section must be read to allow its use by other parties is “‘exceptionally heavy.‘” Patterson v. Shumate, 504 U.S. 753, 760, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992) (quoting Union Bank v. Wolas, 502 U.S. 151, 156, 112 S.Ct. 527, 116 L.Ed.2d 514 (1991)).
Hartford Underwriters, 530 U.S. at 6-7, 9.
However, Hartford Underwriters and Stangel involved the issue of who had the power to sue (to either surcharge a creditor‘s collateral or to avoid a transfer). In contrast, the power of a chapter 13 debtor to sue on estate causes of action that became property of the estate on the petition date is unquestioned, and the issues are different than in Stangel and Hartford Underwriters.
The first issue is whether the provisions of § 108(a) govern the statute of limitations for when a trustee may exercise the trustee‘s powers under § 363. The answer to that being in the affirmative, the second issue is whether it follows that when exercising a trustee‘s power to sue under § 363, a chapter 13 debtor may sue within the time that § 108(a) provides for the trustee to sue. The answer to that issue must similarly be in the affirmative. If a statute (here, § 1303) confers on an
A similar approach has been taken permitting a chapter 13 debtor to enforce
[A]n entity . . . in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title . . . shall deliver to the trustee . . . such property or the value of such property . . . .
Courts have recognized that the chapter 13 debtor, by virtue of his right to possess and use the property of the estate, may sue to enforce the turnover obligation under § 542(a). See TranSouth Fin. Corp. v. Sharon (In re Sharon), 234 B.R. 676, 687 (B.A.P. 6th Cir. 1999):
To the extent a Chapter 13 debtor can . . . use property of the estate under § 363, the debtor succeeds to the mandate in § 542(a) that compels delivery of property that is usable under § 363. TranSouth‘s alternative reading produces an absurd result: § 542(a) would mandate delivery of a debtor‘s car to a Chapter 13 trustee who is prohibit[ed] by § 1306(b) to possess the car and is prohibited by § 1303 to use, sell or lease the car.
See also Coleman v. Grand Nat‘l Bank (In re Coleman), 229 B.R. 428, 429-30 (Bankr. N.D. Ill. 1999).
Similarly, my interpretation of the statute is not a case of enlarging § 108(a) to add the missing words “chapter 13 debtor” to § 108(a), and this case is thus distinguishable from Lamie v. U.S. Trustee, 540 U.S. 526, 538 (2004). Instead, my interpretation reads § 108(a) as modifying the limitations on a trustee‘s powers under § 363, and as thus modifying the limitations applicable to the powers of a chapter 13 debtor (who by reason of § 1303 is subject to the same limitations) when suing pursuant to the powers of a trustee under § 363.
Finally, § 108(a) applies in chapter 13 pursuant to
In contrast, a trustee‘s avoidance powers under chapter 5 of the Bankruptcy Code, which similarly are applicable in chapter 13 by virtue of § 103(a), remain available (at the very least) to the chapter 13 trustee,28 thus not falling into a black hole of being unavailable for anyone to utilize should the avoidance
Viewing § 108(a) in the context of other provisions of chapter 13 of the Bankruptcy Code, and because the chapter 13 debtor has exclusive authority to sue on the causes of action that are property of the estate, there are additional reasons to think that Congress could not have intended to bar the applicability of § 108(a) when a chapter 13 debtor sues on such causes of action.29 Among those reasons are these. Congress did not intend to make creditors worse off in chapter 13 than in chapter 7. See
Indeed, Congress intended to encourage individuals to utilize chapter 13, devoting future disposable income to paying creditors, instead of utilizing a chapter 7 case in which creditors would often receive much less, if anything. See, e.g., In re Lybrook, 951 F.2d 136, 137 (7th Cir. 1991);
Moreover, an anomalous result would flow from depriving a chapter 13 debtor of § 108(a) rights. If the debtor‘s action were not timely when filed because § 108(a) is unavailable, nevertheless, upon conversion to chapter 7, 11, or 12, the § 108(a) power would be available, even though the action was time-barred while in chapter 13. If the debtor‘s pursuit of a claim, pursuant to exercising a trustee‘s powers under § 363, had already been dismissed as untimely while the bankruptcy case was in chapter 13, that dismissal would raise a vexing issue of whether the chapter 7 trustee is now barred from pursuing the claim even though the claim would be timely under § 108(a) had there not been a prior dismissal. Congress did not likely intend to complicate the pursuit of estate causes of action in that fashion.
APPLICABILITY OF 15 U.S.C. § 1602(aa) TO DAWSON‘S LOAN
TILA and its implementing regulation, Regulation Z (
When § 1602(aa) applies, it triggers
A.
THE LOAN IS SUBJECT TO 15 U.S.C. § 1602(aa) IF IT WAS A CONSUMER CREDIT TRANSACTION
Section 1602(aa)(1) provides:
A mortgage referred to in this subsection means a consumer credit transaction that is secured by the consumer‘s principal dwelling, other than a residential mortgage transaction, a reverse mortgage transaction, or a transaction under an open end credit plan, if--
(A) the annual percentage rate at consummation of the transaction will exceed by more than 10 percentage points the yield on Treasury securities having comparable periods of maturity on the fifteenth day of the month immediately preceding the month in which the application for the extension of
credit is received by the creditor; or (B) the total points and fees payable by the consumer at or before closing will exceed the greater of -
(i) 8 percent of the total loan amount; or
(ii) $400.
Thomas‘s loan to Dawson fits within the opening clause of the provision if the transaction was a “consumer credit transaction.” The property securing the loan was Dawson‘s principal dwelling, and the transaction does not fall within any of the categories of transactions expressly excluded under § 1602(aa)(1) because the loan was not a “residential mortgage
Then, for Thomas‘s loan to Dawson, if it was a “consumer credit transaction,” to be covered by § 1602(aa), it suffices under § 1602(aa)(1)(B)(i) that the total “points and fees” payable by the consumer at or before closing will exceed the greater of 8 percent of the total loan amount or $400.00 as adjusted since HOEPA was enacted in 1994 for annual changes in the Consumer Price Index. Here, the “fees and points” associated with this loan well exceeded the $400 amount as annually adjusted, and are a sufficiently high percentage of the loan amount to bring it within the purview of § 1602(aa)(1). Pursuant
Thus, the applicability of § 1602(aa) to the instant transaction turns on whether Dawson has shown that the transaction was a “consumer credit transaction” within the meaning of § 1602(aa). As explained in more detail below, the loan was, in fact, a consumer credit transaction, and it was therefore subject to the disclosure requirements of HOEPA absent a valid estoppel defense.
THE LOAN WAS A “CONSUMER CREDIT TRANSACTION” EVEN IF THE PROCEEDS OF THIS LOAN RELATING TO THE DEBTOR‘S PRINCIPAL RESIDENCE WERE USED IN PART TO STOP A FORECLOSURE SALE OF THE PROPERTY AND TO RENOVATE THE PROPERTY TO BE ABLE TO SELL IT
The meaning of “consumer credit transaction” is explained by
The adjective “consumer“, used with reference to a credit transaction, characterizes the transaction as one in which the party to whom credit is offered or extended is a natural person, and the money, property, or services which are the subject of the transaction are primarily for personal, family, or household purposes.
As found earlier, Dawson borrowed the money primarily for the purpose of saving her home from foreclosure, which would seem to make this a “consumer credit transaction,” at least when Dawson‘s actual reasons for the loan are the focus. However, pointing to representations that Dawson made to them, the defendants contend that the loan is not a consumer credit transaction and is exempt under
Although Dawson and the defendants disagree on whether the loan was obtained primarily for a business or personal purpose, they do agree that of the $35,000 loan, $8,629.77 was intended and was in fact used to reinstate the first deed of trust and prevent a foreclosure sale of the house, that $12,163.47 of the
The case law does not support and this court rejects the argument that this loan was obtained for primarily business purposes merely because Dawson sought to halt the foreclosure sale of a property in which she occasionally rented out rooms. The primary motivation and purpose for obtaining the instant loan was the personal purpose of preventing the foreclosure sale of Dawson‘s primary residence. See Anderson v. Lester, 382 So. 2d 1019, 1023-25 (La. Ct. App. 1980) (loan obtained to prevent foreclosure sale of primary residence held to be obtained primarily for personal purposes even though foreclosure was halted by using the loan to pay business debts).
The defendants also contend that the property was rental property, and that a loan obtained to reinstate the first deed of trust as to such investment property constitutes a business purpose. The incidental rental of rooms in Dawson‘s home does not convert the otherwise personal purpose for obtaining the loan
Assuming without deciding that Dawson intended to renovate the property for purposes of sale (or is chargeable with her stated intention to do so), the court is nevertheless faced with the argument that a loan obtained for the purpose of halting a foreclosure sale on a borrower‘s primary residence with a concomitant purpose of renovating and selling the property converts the would-be personal purpose of preventing the foreclosure sale of one‘s primary residence into a business and commercial purpose of allowing for the orderly sale of the home such that the borrower can realize the full value of her unencumbered equity in the property. The court rejects this argument. To characterize the loan at issue as having a primarily business or commercial purpose on such basis requires a tortured interpretation of the facts and an equally implausible reading of the statute. Dawson did not convert her primary residence into investment property even if she did intend to use
The court having found that the loan was a consumer credit transaction within the meaning of HOEPA and TILA, and having already found that the loan otherwise qualifies as a loan governed by those statutes, the court holds that the loan is subject to the disclosure requirements of and the restrictions imposed by TILA and HOEPA, unless Dawson is estopped from contending that the transaction was a consumer credit transaction.
C.
THE DEFENDANTS DID NOT REASONABLY RELY UPON ANY OF DAWSON‘S STATEMENTS THAT ALLEGEDLY MISLED THE DEFENDANTS INTO BELIEVING THAT THE LOAN WAS A COMMERCIAL RATHER THAN A CONSUMER TRANSACTION
Thomas complains that he and Merwin were misled by Dawson into believing that the loan was being obtained for a commercial purpose, and that Dawson is estopped from now asserting that the
The Official Commentary to Regulation Z provides that lenders “must determine in each case if the transaction is primarily for an exempt purpose.”
When a sophisticated borrower takes deliberate and calculated steps to mislead a lender into believing that a loan is being obtained for commercial purposes, the borrower is not entitled to later invoke the protections of TILA based upon an assertion that, notwithstanding what the lender was led to believe, the loan was actually obtained for personal purposes. See Conrad v. Smith, 712 P.2d 866 (Wash. Ct. App. 1986). Although the court agrees that a borrower‘s statement of purpose is relevant to a determination of whether a loan is being obtained for a business or consumer purpose, the reliability and
In Conrad, a case addressing the rights of lenders when borrowers misrepresent the purpose of a loan, the borrower made numerous representations to the lender during the loan process regarding the purpose of the loan with the “apparent intention of obfuscating matters.” Id. at 566. In determining that the loan was for a business rather than a consumer purpose, the Conrad court found it relevant that the borrower, whose representations contributed to the lender‘s belief that the loan was for a business purpose, had a background that included “2 years of college and knowledge of the TILA through his occupation as a siding salesman. . . .” Id. at 868. Furthermore, the borrower in Conrad testified that he intentionally did not seek to have deleted a provision stating that the loan was for a business purpose “[b]ecause that was the only way I could get the loan, and I was desperate.” Id. at 869.
The instant case is easily distinguishable from cases such as Conrad. Dawson is far from sophisticated and any effort to mislead the defendants was poorly executed at best. Thomas and Merwin were not entitled to selectively rely upon unconfirmed and unsubstantiated verbal statements regarding the nature of the property securing a loan and the purpose for which the loan was being acquired when such statements did not comport with reality
The court need not decide the more difficult question of how it would treat a loan arising from a sophisticated borrower‘s clever and calculated deception of a lender, or how it would treat a loan arising from a collusive arrangement between equally sophisticated parties who together determine to disregard the
Accordingly, the court rejects the defendants’ estoppel argument because neither defendant could have reasonably relied upon Dawson‘s allegedly misleading statements to conclude that the transaction was exempt from the disclosure requirements of TILA.
THE AFFIDAVIT OF BUSINESS PURPOSE AND RELATED LOAN DOCUMENTS DO NOT ESTABLISH WHETHER THE LOAN WAS FOR A PERSONAL OR BUSINESS PURPOSE
The court gives little weight to the business purpose affidavit and related documents signed by Dawson at settlement in determining whether Dawson entered into a commercial loan transaction. It is well-established that an affidavit stating that a loan is for a business purpose is not legally conclusive as to the purpose of that loan. Indeed, “[t]he business or personal nature of [a] loan is a factual question to be answered after evaluating the circumstances surrounding the transaction.” McGovern v. Smith, 801 P.2d 250, 256 (Wash. Ct. App. 1991). The same principle holds true with respect to the other documents purporting to put Dawson on notice that she was engaging in a commercial rather than a consumer transaction. The instrument consummating the loan may have included provisions that gave it the superficial appearance of a commercial loan, yet the court finds that the inclusion of such provisions was insufficient to overcome the true character of the loan as a consumer loan. As in the case of other representations made by Dawson (and when combined with those other representations), the business purpose affidavit and related closing documents do not suffice to establish that equitable estoppel should apply (particularly when other closing documents raised red flags regarding the true
VI
MERWIN IS NOT A CREDITOR AND IS THEREFORE NOT SUBJECT TO LIABILITY UNDER TILA
Only “creditors” are subject to liability under TILA,
refers only to a person who both (1) regularly extends, whether in connection with loans, sales of property or services, or otherwise, consumer credit which is payable by agreement in more than four installments or for which the payment of a finance charge is or may be required, and (2) is the person to whom the debt arising from the consumer credit transaction is initially payable on the face of the evidence of indebtedness or, if there is no such evidence of indebtedness, by agreement . . . . Any person who originates 2 or more mortgages referred to in subsection (aa) of this section in any 12-month period or any person who originates 1 or more such mortgages through a mortgage broker shall be considered to be a creditor for purposes of this subchapter.
Dawson has not, however, shown that Merwin is a creditor within the meaning of TILA. She has not shown that the loan was originally payable to Merwin, that Merwin regularly extends consumer credit, or that Merwin otherwise qualifies as a creditor under TILA. Dawson having failed to show that Merwin is a
VII
THOMAS IS LIABLE FOR VIOLATING TILA
Having determined that the loan is a consumer credit transaction subject to the requirements of TILA, and that Thomas is a creditor subject to liability under TILA, including its HOEPA amendments, the court now considers the question of Thomas‘s liability under those provisions. The defendants having consistently taken the position that TILA and HOEPA are inapplicable to the transaction rather than alleging compliance, it is no surprise that a finding that the loan was a consumer credit transaction carries with it a corresponding finding that
A.
THE LOAN INCLUDED TERMS PROHIBITED UNDER TILA AND THOMAS FAILED TO MAKE THE REQUISITE DISCLOSURES UNDER TILA
Loans subject to
HOEPA also prohibits lenders from extending loans subject to the requirements of HOEPA “without regard to the consumers’ repayment ability, including the consumers’ current and expected income, current obligations, and employment.”
In addition to violating the HOEPA amendments to TILA, Thomas also violated the general provisions of TILA, which require lenders to make numerous disclosures, most if not all of which Thomas concedes were not made. The finding of even one violation of TILA, no mater how technical, gives rise to
B.
RESCISSION
TILA requires that a borrower‘s rescission rights be clearly and conspicuously disclosed by the lender in accordance with regulations promulgated by the Board.
The record reflects that Dawson‘s only rescission “demand” was made by way of the complaint. The complaint having clearly
The procedure for undoing a transaction after a borrower exercises her right to rescind is set forth in
When an obligor exercises his right to rescind under subsection (a) of this section, he is not liable for any finance or other charge, and any security interest given by the obligor, including any such interest arising by operation of law, becomes void upon such a rescission. Within 20 days after receipt of a notice of rescission, the creditor shall return to the obligor any money or property given as earnest money, downpayment, or otherwise, and shall take any action necessary or appropriate to reflect the termination of any security interest created under the transaction. If the creditor has delivered any property to the obligor, the obligor may retain possession of it. Upon the performance of the creditor‘s obligations under this section, the obligor shall tender the property to the creditor, except that if return of the property in kind would be impracticable or inequitable, the obligor shall tender its reasonable value. Tender shall be made at the location of the property or at the residence of the obligor, at the option of the obligor. If the creditor does not take possession of the property within 20 days after tender by the obligor, ownership of the property vests in the obligor without obligation on his part to pay for it. The procedures prescribed by this subsection shall apply except when otherwise ordered by a court.
As a preliminary matter, the court determines that, notwithstanding
Second, the court determines that, notwithstanding the court‘s finding that Dawson is entitled to rescission, to the extent Dawson still wishes to exercise her right of rescission, the court will require Dawson to return to Thomas the proceeds of the loan before requiring that Thomas void his security interest in Dawson‘s real property.
The court is mindful that the express language of TILA contemplates that, unless the court orders otherwise, after a borrower notifies a creditor of its intent to exercise its right to rescission, the borrower may retain possession of the creditor‘s property until the lender has taken the necessary steps to void the security interest. The TILA rescission remedy, however, despite being statutorily granted, “remains an equitable doctrine subject to equitable considerations.” Brown v. Nat. Permanent Fed. Sav. & Loan Assoc‘n, 683 F.2d 444, 447 (D.C. Cir. 1982). Recognizing that rescission is an equitable remedy, the court of appeals for this circuit has twice concluded that, notwithstanding that TILA does not make the borrower‘s return of funds a prerequisite to rescission under TILA, the trial court has the equitable power to condition rescission upon the return
At the time of trial, Dawson was in bankruptcy and had already exhausted all of the proceeds from the loan. The court is skeptical of Dawson‘s ability to return the loan proceeds, unless she were to sell her home, and it would be inequitable to require Thomas to terminate his security interest in Dawson‘s property if Dawson refuses to take that step in order to raise the funds necessary to fulfill her reciprocal duty to return the loan proceeds to Thomas and otherwise has no ability to effect such a return. It is “[t]he equitable goal of rescission under
Accordingly, Thomas will be required within 20 days after entry of this decision to deposit in the registry of the court a release of his deed of trust, but that release may recite that it is effective only when the original is recorded with the Recorder of Deeds of the District of Columbia. Once Dawson has performed her reciprocal duty to return the net loan proceeds she received to Thomas, the court will direct the clerk to deliver the release to Dawson and, because
Once a court determines that rescission is appropriate, the court may allow the borrower a time certain to tender the net loan proceeds. American Mortgage Network, Inc. v. Shelton, 486 F.3d at 821. Bearing in mind that rescission is an equitable remedy, and that Thomas woefully neglected his duties under TILA, it is appropriate to give Dawson a reasonable period of time
Because I am giving Dawson a generous period of time within which to sell her home, I will, as in Sterten, require that, commencing on the date that Thomas deposits the release of his security interest with the court, the repayment of the net loan proceeds shall include interest not at the contract rate, but at a rate otherwise provided by law for the use of money, as an equitable requirement for permitting Dawson‘s delay in making her tender as part of the rescission remedy. Were I not to impose a provision for interest, Dawson would have every incentive to delay tendering repayment until just prior to the end of the 18-month period for making tender. Under
In making a return of the loan proceeds not yet repaid, the amount Dawson must repay may be reduced by the amounts of statutory damages and attorney‘s fees that she recovers. See Mayfield, 710 F. Supp. at 149. Cf. Harris v. Tower Loan of Miss., Inc., 609 F.2d 120, 123 (5th Cir.), cert. denied, 449 U.S. 826 (1980) (when (unlike here) a lender has received sums from the obligor as part of the transaction, the lender must refund such sums as part of the rescission process, but
However, Dawson may continue to need the services of her attorney in order to bring this proceeding to a successful conclusion, and requiring a setoff of her attorney fee award against her rescission tender obligation might prevent a recovery of moneys she needs to fund continued litigation of this matter (including any appeals). Because TILA should be construed in a manner that advances its enforcement goals, I will not require such a setoff, and I will direct Dawson within 20 days after entry of this decision to advise whether she wishes to exercise such a setoff (in whole or in part). (To the extent that she exercises such setoff, the setoff shall be effective as of the date of this decision.) The same will apply to the $2,000 statutory damage award that the court will make, below, pursuant to
C.
ACTUAL AND STATUTORY DAMAGES
Dawson has shown that Thomas committed multiple violations of TILA in connection with this loan. Section 1640 of 15 U.S.C., which governs civil liability for violations of TILA, provides in pertinent part that:
(a) Except as otherwise provided in this section, any creditor who fails to comply with any requirement imposed under this part, including any requirement under section 1635 of this title, or part D or E of this subchapter with respect to any person is liable to such person in an amount equal to the sum of –-
(1) any actual damage sustained by such person as a result of the failure;
(2)(A)(i) in the case of an individual action twice the amount of any finance charge in connection with the transaction, (ii) in the case of an individual action relating to a consumer lease under part E of this subchapter, 25 per centum of the total amount of monthly payments under the lease, except that the liability under this subparagraph shall not be less than $100 nor greater than $1,000, or (iii) in the case of an individual action relating to a credit transaction not under an open end credit plan that is secured by real property or a dwelling, not less than $200 or greater than $2,000; . . . .
(3) in the case of any successful action to
enforce the foregoing liability or in any action which a person is determined to have a right of rescission under section 1635 of this title, the costs of the action, together with a reasonable attorney’s fee as determined by the court; and (4) in the case of a failure to comply with any requirement under section 1639 of this title, an amount equal to the sum of all finance charges and fees paid by the consumer, unless the creditor demonstrates that the failure to comply is not material.
Having established numerous violations of TILA, Dawson is entitled to: (1) actual damages,
Dawson has not established actual damages. The court will, however, award Dawson $2,000 in statutory damages under
That leaves the question of whether Dawson is entitled to a recovery under
Section 1635(b) expressly provides that in rescinding under
Because rescission is an equitable remedy of restoring the status quo, it makes sense to treat any recovery of the $11,659.50 in paid finance charges pursuant to
Dawson is entitled to both rescind under
If Dawson fails to file notice that she intends to proceed with rescission, then she will be entitled to either recover finance fees and charges paid incident to the transaction or to set those amounts off against the existing debt. The finance charges paid totaled $14,500.84. Dawson is entitled to recover that $14,500.84 pursuant to
Within 20 days after entry of this decision, if Dawson does not file a notice that she intends to proceed with rescission, she shall file a notice stating whether she desires entry of a judgment to recover the $14,500.84 or, instead, a judgment decreeing that the $14,500.84 is set off against the mortgage debt.
If Dawson does not effect a rescission (either by electing not to file a notice of her intention to proceed with rescission or by reason of failing timely to pay the amount required to effect a rescission), she nevertheless will have no liability under the note for finance charges and fees financed via the loan. The loan’s eye-popping interest rate of 16% (which
Even if Dawson’s action had been untimely, she is entitled to a declaration of whether she no longer owes finance charges and fees. Once Thomas filed a proof of claim, Dawson was entitled to raise the TILA violations as a defense to the proof of claim. Section 1640(h) bars a debtor from setting off statutory double damages under
does not bar a person from asserting a violation of this subchapter in an action to collect the debt which was brought more than one year from the date of the occurrence of the violation as a matter of defense by recoupment or set-off in such action, except as otherwise provided by State law.
See also
VIII
VIOLATION OF THE D.C. HOME LOAN PROTECTION ACT
The D.C. Home Loan Protection Act,
a mortgage loan, secured by property located in the District (including an open-end line of credit, but not including a mortgage loan insured or guaranteed by a state or local authority, the District of Columbia Housing Finance Agency, the Federal Housing Administration, or the Department of Veteran Affairs, or a reverse mortgage transaction), in which the terms of the mortgage loan exceed one or more of the following thresholds:
(i) The loan is secured by a first mortgage on the borrower’s principal dwelling and the annual percentage rate at closing will exceed by more than 6 percentage points the yield on United States Treasury securities having comparable periods of maturity to the loan maturity measured as of the 15th day of the month immediately preceding the month in which the application for the residential mortgage loan is
received by the creditor; (ii) The loan is secured by a junior mortgage on the borrower’s principal dwelling and the annual percentage rate at closing will exceed by more than 7 percentage points the yield on United States Treasury securities having comparable periods of maturity to the loan maturity measured as of the 15th day of the month immediately preceding the month in which the application for the residential mortgage loan is received by the creditor; or
(iii) The origination/discount points and fees payable by the borrower at or before loan closing exceed 5% of the total loan amount.
A mortgage loan, in turn, is defined in
Any loan or other extension of credit:
(i) To a natural person primarily for personal, family, or household purposes;
(ii) That is secured by a lien instrument secured, in whole or in part, by residential real property located within the District which there is located, or there is to be located, a structure, intended principally for occupancy of from one to 4 families, and which is, or will be, occupied by the borrower as the borrower’s principal dwelling; and
(iii) For which the principal amount does not exceed the conforming loan size limit for a comparable dwelling as established and revised from time to time by the Federal National Mortgage Association or the Federal Home Loan Corporation.
The defendants concede that if the court determines that the loan was obtained primarily for personal, family or household purposes, the loan falls within the statute’s definition of a covered loan. See
A.
THE LOAN WAS OBTAINED PRIMARILY FOR PERSONAL, FAMILY, OR HOUSEHOLD PURPOSES AND IS A COVERED LOAN WITHIN THE MEANING OF THE D.C. HOME LOAN PROTECTION ACT
As discussed earlier in this opinion, Dawson obtained the loan for primarily personal rather than business purposes. Having so found, and there being no dispute that the fees associated with the loan exceed 5% of the amount of the loan, the court concludes that the loan is a covered loan within the meaning of the D.C. Home Loan Protection Act,
B.
DAWSON IS NOT EQUITABLY ESTOPPED FROM ASSERTING A CLAIM UNDER THE D.C. HOME LOAN PROTECTION ACT
Although the court rejects the defendants’ contention that the loan was obtained primarily for business or commercial purposes, the defendants argue that Dawson is nevertheless
THE DEFENDANTS VIOLATED THE D.C. HOME LOAN PROTECTION ACT
(1) The defendants failed to make an independent determination of the debtor’s ability to repay under § 26-1152.02.
Section 26-1152.02(a) of the D.C. Home Loan Protection Act prohibits lenders from making covered loans “if the borrower, at the time that the covered loan is closed, cannot reasonably be expected to make the scheduled payments.” The statute further provides that “[t]he lender’s consideration shall include the ability to make any payments for mortgage insurance premiums, escrow deposits, or direct payment of real estate taxes and property insurance premiums (in addition to the payments of interest and principal) and the employment status of the borrower. The lender may consider the current and expected income, current obligations, and other financial resources of the borrower (other than the borrower’s equity in the dwelling which secures repayment of the loan).”
At trial, Thomas emphasized his expectation that the Property would be sold and the proceeds thus made available to Dawson to pay the balloon payment called for under the loan. Thomas took the position that this satisfied his obligation to verify Dawson’s ability to repay the loan. Although such consideration is appropriate in determining whether a borrower can reasonably be expected to make the required balloon payment,
(2) The terms of the loan included several provisions prohibited under the D.C. Home Loan Protection Act, and the defendants failed to take various actions required to be taken with respect to covered loans.
The loan instrument includes various provisions prohibited under HLPA, including, inter alia, a provision that provides, in violation of
The statute likewise provides that lenders “shall send to the borrower a Red Flag Warning Disclosure Notice” in making a covered loan that “shall be received by the borrower at least 3 business days prior to the closing of the loan. . . [and] [i]f the loan is originated with the assistance of a mortgage broker, the mortgage broker shall provide the Red Flag Warning Disclosure Notice.”
Similarly, Thomas failed to satisfy the filing requirements of
Finally, Thomas concedes that he failed to verify that Merwin was licensed at the time of the transaction, and Merwin concedes that he was, in fact, not licensed. This constitutes a
Dawson has further alleged that the loan included impermissible charges for services not actually performed or for loan discount points which are not bona fide discount points. See
Likewise, Dawson has not demonstrated that the loan was extended with the intent to foreclose. The court is mindful that, in some instances, loans based solely upon the value of the property securing a loan may be designed to fail, with the lender’s anticipated profit arising from acquisition of the property on default rather than through loan payments.55 See Hargraves v. Capital City Mortgage Corp., 140 F. Supp. 2d 7, 20-21 (D.D.C. 2000). According to
(3) Damages
HLPA permits borrowers to seek
(1) Reformation of the covered loan to correct or remove an unfair term or a term obtained in violation of § 26-1151.02 of subchater II of this chapter . . . ;
(2) Actual damages;
(3) Injunctive relief;
(4) Reasonable attorneys’ fees and costs; or
(5) Statutory damages in an amount to be determined by the finder of fact if the finder of fact determines that the lender has engaged in a systematic pattern of practices and acted in violation of § 26-1151.02 or subchapter II of this chapter.
The court determines that Dawson is entitled to reformation of the loan on terms consistent with acceptable consumer lending
[I]n the event of Default and at the sole discretion of the Lender, if said note is modified, extended, default cured, or fully paid and satisfied, there shall be an administrative / reinstatement fee equal to two and one-half percent (2.5%) of the principal balance and all outstanding interest and penalties.
On its face, that provision is unfair in charging a fee on the
As in the case of TILA, Dawson has not shown any actual damages arising from the violations of HLPA. There is no evidence that Thomas has engaged in a systematic pattern of practices, and, accordingly, no statutory damages can be awarded. There being no actual or statutory damages, the only relief being granted (reformation of the terms of the loan) runs against Thomas, not Merwin. The court determines that Dawson is entitled to recover reasonable attorney’s fees from Thomas based upon his violations of HLPA.58 As to Merwin, no relief is being granted and, accordingly, it would be inappropriate to award attorney’s fees against him.
IX
THE D.C. CONSUMER PROTECTION PROCEDURES ACT
The D.C. Consumer Protection and Procedures Act,
The amended complaint alleges that the defendants violated
Dawson has not shown that the defendants violated
Dawson has likewise failed to show that the defendants violated
This does not, however, end the court’s inquiry. Section 28-3904(r)(5) further provides that, in applying this subsection, consideration shall also be given to a person having “knowingly taken advantage of the inability of the consumer reasonably to protect his interests by reason of age, physical or mental infirmities, ignorance, illiteracy, or inability to understand the language of the agreement, or similar factors.” Whether the defendants knowingly took advantage of Dawson’s lack of sophistication such that they should be found to have committed a violation of
X
CONCLUSION
An order follows.
[Signed and dated above.]
Copies to:
All counsel and parties of record;
Cynthia A. Niklas, Chapter 13 Trustee;
Office of United States Trustee.
Notes
124 Cong. Rec. H11106 (daily ed. Sept. 28, 1978) (remarks of Rep. Edwards); S17423 (daily ed. Oct. 6, 1978) (remarks of Sen. DeConcini).Section 1303 of the House amendment specifies rights and powers that the debtor has exclusive of the trustees. The section does not imply that the debtor does not also possess other powers concurrently with the trustee. For example, although section 1323 [sic, presumably 323] is not specified in section 1303, certainly it is intended that the debtor has the power to sue and be sued.
Had the defendants raised a statute of limitations defense in their pretrial statement based on lack of notice and a hearing under § 363(b), Dawson could have taken steps to satisfy the requirement of notice and a hearing, if not already satisfied, because the bankruptcy case was still pending. This illustrates the prejudice that Dawson would suffer were the defendants allowed belatedly to assert the statute of limitations defense.
Pursuant to § 1602(aa)(4), the term “points and fees” in § 1602(aa)(1)(B) includes, in addition to certain other charges:
(A) all items included in the finance charge, except interest or the time-price differential; [and]
(B) all compensation paid to mortgage brokers[.]
Although a determination of which items to include in the calculation of points and fees is not always straightforward, see, e.g., Cooper v. First Gov‘t Mortgage & Investors Corp., 238 F. Supp. 2d 50 (D.D.C. 2002), in the instant case the size of Merwin‘s broker fee and Thomas‘s lender‘s fee obviate the need to determine which of the other fees and expenses charged in connection with this loan qualify as points and fees under § 1602(aa).
Example of finance charge. The finance charge includes the following types of charges, except for charges specifically excluded by paragraphs (c) through (e) of this section:
. . .
(3) Points, loan fees, assumption fees, finder‘s fees, and similar charges.
. . .
In pertinent part,
(i) All items required to be disclosed under § 226.4(a) and 226.4(b), except interest or the time-price differential; [and]
(ii) All compensation paid to mortgage brokers[.]
Definition. The finance charge is the cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit. It does not include any charge of a type payable in a comparable cash transaction.
. . .
(3) Special rule; mortgage broker fees. Fees charged by a mortgage broker (including fees paid by the consumer directly to the broker or to the creditor for delivery to the broker) are finance charges even if the creditor does not require the consumer to use a mortgage broker and even if the creditor does not retain any portion of the charge.
A person regularly extends consumer credit only if it extended credit (other than credit subject to the requirements of § 226.32) more than 25 times (or more than 5 times for transactions secured by a dwelling) in the preceding calendar year. If a person did not meet these numerical standards in the preceding calendar year, the numerical standards shall be applied to the current calendar year. A person regularly extends consumer credit if, in any 12-month period, the person originates more than one credit extension that is subject to the requirements of § 226.32 or one or more such credit extensions through a mortgage broker. [Emphasis added.]
Even when double damages under what is now
[W]hile we hold that sections 1635 and 1640 do not set forth exclusive remedies, we do not say that a court must always grant both forms of relief when requested. These two separate provisions can result in a sometimes harsh penalty. In the absence of any clear congressional statement, we think a request for both forms of relief is addressed to a court‘s sense of equity and may properly be denied in appropriate cases.
Eby, 495 F.2d at 652. It readily follows that when both rescission and
The parties have not addressed the impact of such a reduction of the loan obligation via setoff on the repayment terms. If Dawson timely announces that she will pursue rescission and effects the rescission, then the issue will be academic. If she does not, then the obligation is treated as having been $35,000, and if the $14,500.84 recovery under
The loan terms required payments of $466.67, and, as explored later, under TILA, Dawson is not liable for interest charges. Consequently, the $14,500.84 in monthly payments would be applied to principal as the note provided that “[e]ach installment when so paid [is] to be applied first to the payment of late charges, second to the payment of interest . . ., and the balance thereof . . . to the principal.” Monthly payments that Dawson made or makes in addition to that $14,500.84 would be applied first to late charges, if any, and then to principal.
In making this argument, the defendants are not entitled to rely on
Although the defendants may, in fact, be required to look to this express provision if they wish to defend on the basis that Dawson is guilty of misrepresenting the purpose of the loan, the court need not resolve the question of whether an equitable remedy is available notwithstanding
Where a covered loan “includes payment terms under which the aggregate amount of the scheduled payments will not fully amortize the outstanding principal balance, the lender’s determination of the ability of the borrowers to make an expected balloon payment at the scheduled maturity date may include consideration of the borrowers’ equity interest in the residential real property and the borrowers’ ability, based on current market conditions, to refinance the covered loan without penalty, hardship, or material loss of equity.”
Defendant Merwin testified that borrowers often use disbursed funds to meet their payment obligations. It would have been unreasonable, however, for the defendants to assume that Dawson would use the disbursed funds to make her monthly payments. There is no evidence that the defendants ever discussed such use of the funds with Dawson and there is likewise no evidence that Dawson ever indicated an intention to use the loan proceeds to meet her payment obligations. Furthermore, if the defendants were expecting Dawson to use the disbursed funds to meet her monthly payment obligations, such a belief directly contradicts the defendants’ stated belief that the intended use of those proceeds was the renovation of the Property.
This practice is commonly referred to as equity-stripping.
Under TILA, by reason of
The HLPA remedies will be academic if Dawson rescinds the loan transaction. Accordingly, the court will not attempt to fix with exactitude the amounts that Dawson would owe under a note reformed pursuant to HLPA, but will instead simply declare the provisions that are to be reformed, and retain jurisdiction to enforce the court’s decree if there is a dispute regarding the proper accounting of amounts that were improperly charged to Dawson as a result of the interest rate increase triggered by the provision calling for an impermissible balloon payment.
To the extent any damages or attorney’s fees awarded under HLPA are duplicative of those already awarded Dawson under TILA, Dawson is only entitled to claim one such recovery or offset.