Lead Opinion
In this truth-in-lending case, we resolve two important issues to this field of the law. First, we decide that an action on the underlying debt in default is a compulsory counterclaim that must be asserted in a suit by the debtor on a truth-in-lending cause of action. Second, we hold that a successful plaintiff in a truth-in-lending suit is entitled to have her attorneys paid from the award for attorney’s fees and not have those fees setoff against a counterclaim judgment on the debt in favor of the defendant against the plaintiff creditor.
On July 17, 1975 plaintiff Theresa Plant executed a note in favor of defendant Blazer Financial Services, Inc. for $2,520.00 to be paid in monthly installments of $105.00. No payments were made on the note. In March 1976 plaintiff commenced a civil action under § 1640 of the Truth-in-Lending Act, 15 U.S.C.A. § 1601 et seq., for failure to make disclosures required by the Act and by Regulation Z, 12 C.F.R. § 226.1 et seq. (1978), promulgated thereunder.
The trial court, however, offset the plaintiff’s award and the attorney’s fee award against the judgment for defendant on the counterclaim. From this judgment and set-off, plaintiff appeals on three issues: (1) the jurisdiction of the court to entertain the counterclaim, (2) defenses to the counterclaim under Georgia law, and (3) the offset of attorney’s fees.
I. Counterclaim
Plaintiff challenges the trial court’s ruling that defendant’s counterclaim on the underlying debt was compulsory.
The issue of whether a state debt counterclaim in a truth-in-lending action is compulsory or permissive is one of first impression in this Circuit, has never, to our knowledge, been decided by a court of appeals, and has received diverse treatment from a great number of district courts.
Two cases decided by different panels of this Court contain dicta which address this issue but are not controlling. The cases were related and arose in a procedural setting opposite from this action, that is, a truth-in-lending counterclaim was asserted in an action on the debt.
In the first decision, Spartan Grain & Mill Co. v. Ayers,
In the second case, Spartan Grain & Mill Co. v. Ayers,
Rule 13(a), Fed.R.Civ.P., provides that a counterclaim is compulsory if it “arises out of the transaction or occurrence” that is the subject matter of plaintiff’s claim.
1) Are the issues of fact and law raised by the claim and counterclaim largely the same?
2) Would res judicata bar a subsequent suit on defendant’s claim absent the compulsory counterclaim rule?
3) Will substantially the same evidence support or refute plaintiff’s claim as well as defendant’s counterclaim?
4) Is there any logical relation between the claim and the counterclaim?
6 Wright & Miller, Federal Practice and Procedure § 1410 at 42 (1971). An affirma
The test which has commended itself to most courts, including our own, is the logical relation test. Revere Copper & Brass, Inc. v. Aetna Casualty & Surety Co.,
In Revere Copper & Brass this Court added a third tier to the counterclaim analysis by further defining “logical relationship” to exist when the counterclaim arises from the same “aggregate of operative facts” in that the same operative facts serves as the basis of both claims or the aggregate core of facts upon which the claim rests activates additional legal rights, otherwise dormant, in the defendant.
Applying the logical relationship test literally to the counterclaim in this case clearly suggests its compulsory character because a single aggregate of operative facts, the loan transaction, gave rise to both plaintiff’s and defendant’s claim. Because a tallying of the results from the district courts which have decided this question, however, shows that a greater number have found such a counterclaim merely permissive, we subject the relationship between the claims to further analysis.
The split of opinion on the nature of debt counterclaims in truth-in-lending actions appears to be, in large part, the product of competing policy considerations between the objectives of Rule 13(a) and the policies of the Truth-in-Lending Act, and disagreement over the extent to which federal courts should be involved in state causes of action for debt. While Rule 13(a) is intended to avoid multiple litigation by consolidating all controversies between the parties, several courts and commentators have observed that accepting creditors’ debt counterclaims may obstruct achievement of the goals of the Truth-in-Lending Act.
Various arguments are made compositely as follows: The purpose of the Act is
to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit.
15 U.S.C.A. § 1601. This purpose is effectuated by debtors’ standing in the role of private attorneys general not merely to redress individual injuries but to enforce federal policy. The success of this private enforcement scheme would be undermined if debtors were faced with counterclaims on debts often exceeding the limits of their potential recovery under the Act. See Hooks v. Jefferson Chevrolet Co., CCH Consumer Credit Guide ¶ 98,152 (E.D.Mich. 1977); Ball v. Connecticut Bank & Trust Co.,
Several other factors have been cited to offset the attractiveness of treating all related disputes in a single action under Rule 13. For example, courts have predicted a flood of debt counterclaims, greatly increasing the federal court workload. See, e. g., Gammons v. Domestic Loans of Winston-Salem, Inc.,
Courts which have concluded debt counterclaims to be permissive have found the nexus between the truth-in-lending violation and debt obligation too abstract or tenuous to regard the claims as logically related. One claim, they reason, involves the violation of federal law designed to deter lender nondisclosure and facilitate credit shopping and the other concerns merely a default on a private duty. See, e. g., Ball v. Connecticut Bank & Trust Co.,
After careful consideration of the factors relied upon in these cases to find counterclaims permissive, we opt for the analysis applied by district courts in Louisiana, Alabama, Texas and Georgia in determining debt counterclaims to be compulsory.
In Rollins v. Sears, Roebuck & Co.,
In Carter v. Public Finance Corp.,
The results reached in Carter were found “inescapable” in George v. Beneficial Finance Co. of Dallas,
Finally, in Mims v. Dixie Finance Corp.,
We add to these arguments the observation that one of the purposes of the compulsory counterclaim rule is to provide complete relief to the defendant who has been brought involuntarily into the federal court. See Revere Copper & Brass, Inc. v. Aetna Casualty & Surety Co.,
To permit the debtor to recover from the creditor without taking the original loan into account would be a serious departure from the evenhanded treatment afforded both parties under the Act. Truth-in-lending claims can be brought in either state or federal court. To the extent this dual jurisdiction was intended to permit litigation of truth-in-lending claims in actions on the debt, it reflects a purpose that the debt claim and the truth-in-lending claims be handled together. To the extent it was intended to relieve federal courts of any of this litigation, the purpose would be frustrated by providing a sanctuary from the creditor’s claims in'one jurisdiction but not in the other. State courts would always have jurisdiction of a creditor’s counterclaim. Had Congress intended to insulate recovery in truth-in-lending actions in federal court from the counterclaims of creditors, of which it surely was aware, it could have easily done so.
We conclude that the obvious interrelationship of the claims and rights of the parties, coupled with the common factual basis of the claims, demonstrates a logical relationship between the claim and counterclaim under the test of Revere Copper & Brass.
Plaintiff challenges the trial court’s order that attorney’s fees be included in the set-off against the amount owed defendant.
15 U.S.C.A. § 1640 provides for attorney’s fees as follows:
(a) Except as otherwise provided in this section, any creditor who fails in connection with any consumer credit transaction to disclose to any person any information required under this part to be disclosed to that person is liable to that person in an amount equal to the sum of
(2) in the case of any successful action to enforce the foregoing liability, the costs of the action together with a reasonable attorney’s fee as determined by the court.14
Neither the language nor the legislative history of the statute providing for the award of attorney’s fees sheds any light on whether these fees are subject to setoff. Nor have we found any authoritative judicial interpretation of this provision from this Circuit or any other. Cf. In re Garner,
We hold that in a truth-in-lending action an award of attorney’s fees is not subject to setoff against the debtor’s outstanding debt to the creditor. No discretion is available to the trial court in this matter and the attorney is entitled to the fee that is awarded him regardless of any controversy regarding the underlying debt.
This conclusion is based upon careful consideration of the purpose of the Truth-in-Lending Act. The truth-in-lending legislation was enacted to assure debtors of accurate and uniform disclosure of the material features of credit obligations. An important enforcement mechanism of the Act is the provision in 15 U.S.C.A. § 1640 making available double civil damages with a maximum ceiling of $1,000.00. As a practical matter, the award of attorney’s fees is a critical and integral part of this section. Because of the small amounts involved, many potential truth-in-lending plaintiffs are either unable to afford an attorney or unable to justify the expense of an attor
Were the attorney’s fee award subject to setoff, the expectation of fees from a successful action might well be limited to the resources of the debtor in any case where the outstanding debt, being in default and subject to counterclaim, exceeded the recovery. To allow a setoff would in effect relieve the creditors in violation of the Act of the attorney’s fee expense in the case of an insolvent debtor. Such a result would thwart the statute’s individual enforcement scheme and its remedial objectives.
In support of the trial court’s order, defendant argues that the statute mandates a personal award to the plaintiff and not to his attorney and points to analogous provisions for attorney’s fees in other statutory schemes. Defendant relies upon the literal language of 15 U.S.C.A. § 1640(a) which provides for liability for amounts including attorney’s fees “to that person” to whom disclosure was not made. It is suggested that by this language Congress has required that plaintiff be paid directly and therefore this payment is subject to setoff.
Such an approach misstates the issue before the Court, places greater emphasis upon form than substance, and attaches to this phrase an unintended significance. The issue with which the Court is concerned is not whether plaintiff is nominally to receive the money but whether ultimately it is to go to her attorney or to be credited toward defendant in repayment of plaintiff’s debt.
We are similarly unpersuaded by defendant’s recitation of dicta in Smith v. South Side Loan Co.,
Based on the same underlying rationale, defendant also suggests that an award of fees directly to the attorney creates ethical problems under the canon of legal ethics which prohibits an attorney from having a property interest in the outcome of the litigation. Code of Professional Responsibility, Rule 5-103(A). In this decision we make no comment on the means by which the mechanics of payment are to be worked out. Such a matter is quite properly left to the judgment of the district court. We do suggest that a direct payment to the attorney such as that ordered by the Court in the companion case of Carr v. Blazer Financial Services, Inc.,
Defendant also cites statutes which contain an attorney’s fee provision such as Title VII of the Civil Rights Act, the Fair Labor Standards Act, and the Clayton Act. These statutes and the cases interpreting them appear to regard the attorney’s fees as the property of the plaintiff. None of the eases, however, addresses the problem of setoff. Indeed, a question of setoff rarely arises because there rarely exists a counterclaim for an outstanding debt. These acts, then, are of little aid in interpreting the Truth-in-Lending Act problem.
III. Plaintiff’s Defenses to the Counterclaim
Plaintiff raises two defenses to the counterclaim, arguing that the note was null and void under the Georgia Industrial Loan Act. The district court adopted the findings of the Special Master that the note was valid and granted judgment on the counterclaim. We agree.
First, plaintiff contends the note fails to provide for a rebate of unearned interest, thereby rendering the agreement
Should any party to the note fail in business or become bankrupt, or should have an action filed against him, or any proceedings for the appointment of a Receiver, this note shall immediately become due and payable, at the option of the holder.
Plaintiff argues that the right to accelerate “this note” purported to enable defendant to accelerate the full amount of unpaid installments which, under Georgia law, included both interest and principal. A contract for unearned interest upon acceleration violates the Georgia Industrial Loan Act. Lawrimore v. Sun Finance Co.,
In the Lawrimore line of cases relied on by plaintiff, however, the contractual language unambiguously indicates that the amount to be paid upon acceleration includes unearned interest. For example, the security agreement in In re Sprouse,
By contrast, in the instant case the term “note” in the insolvency clause does not clearly provide for unearned interest. In such a situation the documents must be considered as a whole. A preceding acceleration clause in the note correctly provides that
A default in the making of any payment or part thereof shall at the option of the Creditor render the entire unpaid balance, less unearned interest and charges, due and payable and acceptance of payment after default shall not constitute a waiver of such default.
Plaintiff argues that this clause cannot be relied upon in interpreting the challenged clause because it treats only acceleration caused by nonpayment. Even if such a distinction were warranted, the disclosure statement contains a clause applicable to all acceleration clauses which specifies that unearned interest is not included. Added by typewriter and initialed by plaintiff, it states:
METHOD OF REBATE ON ACCELERATION IS PRO RATA.
Considering the disfavor with which forfeitures are met, we conclude that the note as a whole, together with the disclosure statement, does not contract for unearned interest. See Freeman v. Decatur Loan & Finance Corp.,
Second, plaintiff challenges the validity of the note because of two blank spaces in the upper right had corner of the note entitled “amount of note” and “amount of property insurance.” Although failure to fill in these spaces does not constitute a violation of the Industrial Loan Act, it does violate state regulations promulgated pur
The regulations provide that violations shall be punished under Chapter 25-3 of the Georgia Code. This section empowers the Commissioner only to sue and punish violations. Illegal loan agreements are rendered null and void not in Chapter 25-3 but in Chapter 25-99. Therefore the district court correctly held that violation of these regulations does not render the agreement void and properly entered judgment for defendant on the counterclaim.
The judgment of the district court is affirmed, except that the ruling of the district court setting off the attorney’s fees against the counterclaim is reversed and remanded for an order not inconsistent with this opinion.
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.
Notes
. 15 U.S.C.A. § 1640(a) provides:
§ 1640. Civil liability — Failure to disclose
(a) Except as otherwise provided in this section, any creditor who fails in connection with any consumer credit transaction to disclose to any person any information required under this part to be disclosed to that person is liable to that person in an amount equal to the sum of
(1) twice the amount of the finance charge in connection with the transaction, except that the liability under this paragraph shall not be less than $100 nor greater than $1,000; and
(2) in the case of any successful action to enforce the foregoing liability, the costs of the action together with a reasonable attorney’s fee as determined by the court.
. The ruling of the district court was based on the en banc decision of the United States District Court for the Northern District of Georgia in Mims v. Dixie Finance Corp.,
. It should be noted that only a debt in default is involved. No counterclaim could be brought on a debt not currently due.
. The Court was not considering the nature of the counterclaim in a jurisdictional context because, of course, independent federal question jurisdiction would have supported even a permissive truth-in-lending counterclaim.
. Fed.R.Civ.P. 13(a) provides:
Compulsory Counterclaims. A pleading shall state as a counterclaim any claim which at the time of serving the pleading the pleader has against any opposing party, if it arises out of the transaction or occurrence that is the subject matter of the opposing party’s claim and does not require for its adjudication the presence of third parties of whom the court cannot acquire jurisdiction. But the pleader need not state the claim if (1) at the time the action was commenced the claim was the subject of another pending action, or (2) the opposing party brought suit upon his claim by attachment or other process by which the court did not acquire jurisdiction to render a personal judgment on that claim, and the pleader is not stating any counterclaim under this Rule 13.
. A thorough treatment of the underlying policies of the Truth-in-Lending Act is found, along with a strong argument for treating such counterclaims as permissive, in Note, Truth-in-Lending Act — Defendant’s Debt Counterclaim— Compulsory or Permissive?, 28 Case Western Reserve L.Rev. 434 (1978). The enormity of the threat to the Act’s objectives perceived by the author as posed by debt counterclaims should be reduced by recognition that such counterclaims may be brought only where truth-in-lending plaintiffs have defaulted on their debt obligations and of the ease with which debt counterclaims can normally be proved.
. The general remedial policies of the Act have also been considered in several different procedural context. For example, in Grey v. European Health Spas, Inc.,
In Drew v. Flagship First National Bank of Titusville,
. While concern about the ramifications of our decision on class action cases is premature since that issue is not properly before this Court, we note that a number of cases have considered the complications posed by debt counterclaims against individual class members. See, e. g., Haynes v. Logan Furniture Mart, Inc.,
It has been suggested that where debt counterclaims were asserted against class members, the court would exclude those members from the proposed class in order to preserve commonality of questions of law and fact. See, e. g., Rollins v. Sears, Roebuck & Co.,
. This concern overlooks the fact that the vast majority of debt actions pose issues of fact and are handled on summary judgment.
. The following cases also held a debt counterclaim permissive: Perry v. Beneficial Fin. Co. of N. Y.,
. Other cases which have indicated debt counterclaims would receive compulsory consideration are: Palmer v. Wilson,
. See, e. g., Mayer Paving & Asphalt Co. v. General Dynamics Corp.,
. State courts, which share jurisdiction over truth-in-lending actions, have considered the nexus between such claims in the opposite procedural posture. Where creditors bring actions on the debt, state courts have split on the question of whether the debtor may assert a truth-in-lending counterclaim otherwise barred by the Act’s one-year statute of limitations. 15 U.S.C.A. § 1640(e). Where the counterclaim can be regarded as arising from the same transaction as the claim, courts have permitted the counterclaim as a “recoupment” or “setoff” without regard to the statute of limitations. See generally, Comment, Truth-in-Lending and the Statute of Limitations, 21 Villanova L.Rev. 904 (1975); 20 Am.Jur.2d, Counterclaim, Recoupment and Setoff §§ 1-73 (1965). The similarity between the requirements for recoupment and those for Rule 13(a) compulsory counterclaims has been noted. See Comment, 21 Villanova L.Rev. at 917 n.72; Household Fin. Corp. v. Hobbs,
Cases which have found the truth-in-lending counterclaim to arise from the same transaction for recoupment or setoff purposes include: Household Fin. Corp. v. Hobbs,
. Subsequently 15 U.S.C.A. § 1640(a) was amended. The amendments do not have any bearing upon the provision of attorney’s fees.
. Ga.Code Ann. § 25-9903 provides:
Penalty for violation of Industrial Loan Act
(a) Any person who shall make loans under the provisions of Chapter 25-3 without first obtaining a license or who shall make a false statement under oath in an application for a license hereunder, or who shall do business while the license of such person under Chapter 25-3 is finally suspended or revoked, or who shall knowingly charge, contract for, receive and collect charges in excess of those permitted by Chapter 25-3 shall be punished as for a misdemeanor. Any loan contract made in violation of Chapter 25-3 shall be null and void: Provided, however, there shall be no forfeiture of the principal amount of the loan contract if the lender shows by a preponderance of the evidence that the violation is the result of a bona fide clerical or typographical error.
. Regulation 120-1-14-.09 provides:
Prohibition of Blank Agreements. Every agreement evidencing a consumer credit transaction shall be completed as to all essential provisions prior to the signing thereof by the parties. No creditor shall induce, encourage or otherwise permit the consumer to sign an agreement containing blank spaces. Blank spaces inapplicable to a transaction must be completed in a manner which reveals their inapplicability.
Regulation 120-l-10-.03(4) provides:
The licensee shall fill in all spaces on every document which the borrower is required to sign in obtaining a loan prior to the borrower affixing his signature thereto.
Rule 120-1-14-.09 provides:
Any person who fails to comply with the requirements of this Regulation shall be subject to such penalties as may be appropriate under Chapter 25-3 of the Georgia Code Annotated and the Rules and Regulations promulgated hereunder.
Concurrence Opinion
dissenting in part and concurring in part.
The majority opinion contains a fair statement of the issue whether defendant’s counterclaim is compulsory or permissive. I do not agree, however, that the pertinent portion of our opinion in Spartan Grain & Mill Co. v. Ayers,
In all other respects, I concur in the majority opinion.