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decided: May 30, 1980.


Nos. 149 and 150 March Term, 1978, Consolidated Appeals from the Orders of the Superior Court of Pennsylvania Nos. 482 and 483, April Term, 1977, Affirming the Orders of the Court of Common Pleas, Civil Division, of Beaver County, Pennsylvania, Nos. 1832 of 1976 and 1616 of 1976.


John W. Dineen, Neighborhood Legal Services, Aliquippa, for appellant.

John H. Morgan, Howard D. Schwartz, Eckert, Seamans, Cherin & Mellott, Pittsburgh, for Household Consumer Discount.

Reed J. Davis, Davis & Mazzotta, P.C., Pittsburgh, for American Finance Corp.

Eagen, C. J., and O'Brien, Roberts, Nix, Manderino, Larsen, and Flaherty, JJ. Manderino, J., did not participate in the consideration of this case. Roberts, J., filed a concurring opinion.

Author: Nix

[ 490 Pa. Page 211]


The instant appeal comes to this Court by a grant of allowance of appeal from the Superior Court order affirming the dismissal of appellant's counterclaim by the Common Pleas Court of Beaver County.*fn1

In 1972, appellant and her husband entered into two separate loan agreements, one with American Finance Corporation and the other with Household Consumer Discount Company, appellees. Both loans were to be repaid over a thirty-six month period. After her husband's death, appellant was unable to continue payments on the loans and in 1976, two separate actions were filed in assumpsit by appellees to collect on those loans.*fn2

By way of Answer, appellant asserted violations of the federal Truth in Lending Act, 15 U.S.C.A. § 1601, et seq., as amended, and Regulation Z, 12 C.F.R. sec. 226, as a common law recoupment. Appellees filed preliminary objections contending that the one year statute of limitations contained in the Act, 15 U.S.C.A. § 1640(e) barred the counterclaim.*fn3 These objections were sustained by the trial court and after consolidation for appeal the Superior Court affirmed.*fn4 255 Pa. Super. 367, 387 A.2d 93 (1978).

[ 490 Pa. Page 212]

The Truth in Lending Act (TILA) requires prospective creditors to fully disclose the credit costs of a given loan to prospective debtors in order to ensure the consumer's ability to readily compare the various credit avenues open prior to contracting, and to "protect the consumer against inaccurate and unfair credit billing and credit card practices." 15 U.S.C.A. § 1601 (Supp.1980). In order to further that aim, Congress created a civil cause of action which in effect established each debtor as a private attorney general to enforce the disclosure provisions. See 15 U.S.C.A. § 1640(a) (Supp.1980). For reasons which go unexplained in the legislation, the remedy was coupled with a one year statute of limitation. Thus, any affirmative action beyond that period is barred.

Any action under this section may be brought in any United States district court, or in any other court of competent jurisdiction, within one year from the date of the occurrence of the violation.

15 U.S.C.A. § 1640(e). (emphasis added).

The ultimate issue presented in this appeal is whether this "built-in" statute of limitations bars a debtor-defendant from asserting a TILA claim against the creditor-plaintiff. Before we may reach this ultimate issue, two preliminary concerns must first be resolved. These are (1) whether state or federal law governs our determination of the ultimate issue, and (2) may a TILA claim be asserted by the debtor-defendant in a defensive posture.

I. Choice of Law

We begin our analysis with the proposition that state courts may not discriminate against a federal cause of action. State courts are required to enforce federal law or violate the supremacy clause of Article VI of the United States Constitution. Testa v. Katt, 330 U.S. 386, 67 S.Ct. 810, 91 L.Ed. 967 (1947). Once obliged by congressional grant*fn5 to provide a forum for the vindication of that right,

[ 490 Pa. Page 213]

    we must determine whether federal or state law governs the resolution of a given question concerning the federally created cause of action, especially where it is raised as a defense.

In Dice v. Akron, Canton & Youngstown R.R., 342 U.S. 359, 72 S.Ct. 312, 96 L.Ed. 398 (1952), a railroad employee instituted an action in state court under the Federal Employers' Liability Act, 45 U.S.C.A. §§ 51 et seq., alleging the negligence of his employer caused his on-the-job injuries. The employer asserted as a defense, a writing signed by the employee, claimed to be a written release from liability. The Ohio Supreme Court ruled that the "release defense" was governed by state law. The United States Supreme Court reversed, saying:

Id. at 361, 72 S.Ct. at 314. See also Herb v. Pitcairn, 325 U.S. 77, 65 S.Ct. 954, 89 L.Ed. 1483 (1945).

In Clearfield Trust Co. et al. v. United States, 318 U.S. 363, 63 S.Ct. 573, 87 L.Ed. 838 (1943), the United States initiated a suit in federal District Court pursuant to 28 U.S.C.A. § 41(1), against Clearfield Trust Co. to obtain reimbursement for monies the Federal Reserve Bank had paid to the defendant on a check which was subsequently determined to be a forgery. Clearfield defended claiming that "since the United States unreasonably delayed in giving notice of the forgery . . ., it was barred from recovery under" Pennsylvania law. The United States Supreme Court affirmed the Circuit Court of Appeals' reversal holding that federal, not state law, governed the "notice defense."

[ 490 Pa. Page 214]

The rights and duties of the United States on commercial paper which it issues are governed by federal rather than local law. . . . The authority to issue the check had its origin in the Constitution and the statutes of the United States and was in no way dependent on the laws of Pennsylvania or any other state. . . . In absence of an applicable Act of Congress it is for the federal courts to fashion the governing rule of law according to their own standards.

The application of state law . . . would subject the rights and duties of the United States to exceptional uncertainty. It would lead to great diversity in results by making identical transactions subject to the vagaries of the laws of the several states.

Id. at 366-367, 63 S.Ct. at 575.

A later decision in Bank of America National Trust & Savings Association v. Parnell, 352 U.S. 29, 77 S.Ct. 119, 1 L.Ed.2d 93 (1956) may at first glance place some question on the applicability of Clearfield to an action between solely private litigants. The holding, however, is extremely narrow, and a close reading discloses that the preeminent position of federal law concerning the rights and duties of a federally created action has not been reduced. There, a diversity action was begun in the United States District Court for the Western District of Pennsylvania between solely private litigants*fn6 on a conversion of federal bonds claim. The Court affirmed the application of state law to govern which party had the burden of proving good faith or the lack thereof in a conversion action. At the same time, however, the Court recognized the limits of this ruling and that federal law would still govern the "interpretation of rights and duties" surrounding a federal instrument or obligation.

[ 490 Pa. Page 215]

We do not mean to imply that litigation with respect to Government paper necessarily precludes the presence of a federal interest, to be governed by federal law, in all situations merely because it is a suit between private parties, or that it is beyond the range of federal legislation to deal comprehensively with Government paper. We do not of course foreclose such judicial or legislative action in appropriate situations by concluding that this controversy over burden of proof and good faith represents too essentially a private transaction not to be dealt with by the local law of Pennsylvania where the transactions took place. Federal law of course governs the interpretation of the nature of the rights and obligations created by the Government bonds themselves. . . .

Id. at 34, 77 S.Ct. at 121.

This affirms the earlier statement in Clearfield, supra at 366-67, 63 S.Ct. at 574-75 that the nature of the litigants or parties does not lessen the control of federal law. The determinative factor is the origin and nature of the right that is being asserted.

The fact that the drawee is the United States and the laches those of its employees are not material. Cooke v. United States, 91 U.S. 389, 398, 23 L.Ed. 237. The United States as drawee of commercial paper stands in no different light than any other drawee. As stated in United States v. National Exchange Bank, 270 U.S. 527, 534 [46 S.Ct. 388, 389, 70 L.Ed. 717], "The United States does business on business terms." It is not excepted from the general rules governing the rights and duties of drawees . . . Id. at 369, 63 S.Ct. at 576.

While these cases deal with other federally created causes of action, there appears no reason to so limit the doctrine enunciated. The federal right created by the Truth in Lending Act (15 U.S.C.A. § 1640 in particular) against those who improperly disclose lending information, requires the same uniformity of application and protection from local animosities if it is to achieve its purpose of assuring a "meaningful disclosure of credit terms so that the consumer

[ 490 Pa. Page 216]

    will be able to compare more readily the various credit terms available to him . . . ." 15 U.S.C.A. § 1601(a) (Supp. 1980).*fn7

Having concluded that the rights conferred upon the consumer under the Truth in Lending Act are controlled by federal law, the only remaining question as to the choice of law is whether there is a basis for reaching a different result where those rights are asserted in a defensive rather than offensive posture. The factual predicate of the cases previously noted indicate that federal law governs even where the federal right is asserted in a defensive posture. See Dice v. Akron, Canton & Youngstown R.R., supra (the validity of a written release as a defense to a Federal Employers' Liability claim is governed by federal law); Clearfield Trust Co. v. United States, supra (the propriety of the delay in giving notice of a forgery asserted as a defense to suit by the federal government for reimbursement of monies paid out is governed by federal law). We therefore conclude that the decision as to whether or not the TILA may be asserted defensively and whether it was barred in the instant case by the statute of limitations must be based upon federal law.

II. May the TILA claim be asserted defensively.

The second preliminary issue we must resolve is whether a defendant may assert a TILA claim defensively. While the United States Supreme Court has not decided the issue, those federal courts that have grappled with the problem have recognized the propriety of its use in a defensive posture.

In Ballew v. Associates Financial Services Company of Nebraska, 450 F.Supp. 253 (D.C.Neb.1976), a debtor initiated an action in federal court only to have the creditor counterclaim seeking the unpaid portion of the underlying debt obligation. In answer to that counterclaim, the debtor

[ 490 Pa. Page 217]

    asserted a violation of the TILA. Not only was the TILA claim recognized as appropriate in a defensive posture, but it was allowed in the face of the statutory time bar. And even in Basham v. Finance American Corp., 583 F.2d 918 (7th Cir. 1978), cert. denied, 444 U.S. 825, 100 S.Ct. 47, 62 L.Ed.2d 32 (1979), a case heavily relied on by appellee, the court had no difficulty in finding that a TILA claim can be asserted defensively. Moreover, our research has failed to produce any federal decision which has reached a contrary conclusion on this issue. Therefore, we find that federal law allows the TILA claim to be raised defensively.

III. Does the statute of limitations bar the debtor from asserting the TILA claim

A. The Statute of Limitation Does Not Preclude Recoupment.

Appellant argues that the TILA claim is not barred by the "built-in" one year statute of limitations in that it is not an affirmative setoff but rather a recoupment which, being solely defensive in nature, remains vibrant as long as the underlying suit exists.

The doctrine of recoupment has been a recognized part of the federal common law since the Court's decision in Bull v. United States, 295 U.S. 247, 55 S.Ct. 695, 79 L.Ed. 1421 (1934). See Rothensies v. Electric Battery Co., 329 U.S. 296, 67 S.Ct. 271, 91 L.Ed. 296 (1946); Pennsylvania R. Co. v. Miller, 124 F.2d 160 (5th Cir. 1942) cert. denied 316 U.S. 676, 62 S.Ct. 1047, 86 L.Ed. 1750. See also, Luckenbach S.S. Co. v. United States, 312 F.2d 545 (2d Cir. 1963); City of Grand Rapids v. McCurdy, 136 F.2d 615 (6th Cir. 1943); Multivision Northwest, Inc. v. Jerrold Electronics Corp., 356 F.Supp. 207 (N.D.Ga.1972). The Supreme Court's discussion of the doctrine, however, has been very limited and the decisions rendered only involved the area of tax liability.

In Bull v. United States, a decedent's estate was assessed a tax by the United States government which was subsequently determined to be in excess of the actual liability, yet no action could be brought by the estate for a refund because the statute of limitations had run. In a later

[ 490 Pa. Page 218]

    proceeding brought by the government against the estate to obtain a tax owed by the decedent for income received as proceeds of a partnership agreement, the estate demanded that the excess tax previously paid be credited against the income tax liability. In allowing the estate's claim, the Court explained the effect of a recoupment on a statute of limitation.

If the claim for income tax deficiency had been the subject of a suit, any counter demand for recoupment of the overpayment of estate tax could have been asserted by way of defense and credit obtained notwithstanding the statute of limitations had barred an independent suit against the government therefor. This is because recoupment is in the nature of a defense arising out of some feature of the transaction upon which the plaintiff's action is grounded. Such a defense is never barred by the statute of limitations so long as the main action itself is timely. Id. at 262, 55 S.Ct. at 700.

In an attempt to delineate the boundaries of recoupment, the Court in Roethensies v. Electric Battery Co., supra, juxtaposed the factual setting in that case with the one presented in Bull. There the government treated a refund received by a business concern for excise taxes paid by the company on the sale of its wares as income because the company had previously counted it as a deduction. After paying the additional tax, the company filed suit, asserting in the alternative that the additional tax be credited as a recoupment against the excise tax paid for previous periods. The Supreme Court rejected the contention, holding that the bar of the statute applied and pointed to Bull as an appropriate application of the recoupment doctrine. There "a single transaction constituted the taxable event claimed upon and the one considered in recoupment." The "one taxable event was receipt by executors of a sum of money." Rothensies v. Electric Battery Co., supra 329 U.S. at 299, 300, 67 S.Ct. at 272. While in Rothensies the taxable event claimed upon for recoupment and the one which is part of the main action arose out of different transactions.

[ 490 Pa. Page 219]

A further explanation of the doctrine under federal law can be found in Pennsylvania R. Co. v. Miller, supra at 162.

The doctrine of recoupment was derived from the civil law, and was adopted as a part of the common law. Under it a defendant is entitled to claim, by way of deduction, all just allowances or demands, accruing to him in respect of the same transaction that forms the ground of the action. This is not a set-off . . . in the strict sense, because it is not in the nature of a cross demand, but rather it lessens or defeats any recovery by the plaintiff. It goes to the existence of plaintiff's claim, and is limited to the amount thereof. . . .

Recoupment goes to the foundation of the plaintiff's claim; it is available as a defense, although as an affirmative cause of action it may be barred by limitation. The defense of recoupment, which arises out of the same transaction as plaintiff's claim, survives as long as the cause of action upon the claim exists. It is a doctrine of an intrinsically defensive nature founded upon an equitable reason, inhering in the same transaction, why the plaintiff's claim in equity and good conscience should be reduced.*fn8

[ 490 Pa. Page 220]

B. Was This An Attempted Recoupment.

To date, the Supreme Court has not decided whether the TILA counterclaim constitutes setoff or recoupment. While at first blush the decisions rendered on the matter by the circuit courts appear conflicting, a close reading finds them reconcilable and holding that the TILA counterclaim is in the nature of a recoupment.

In Ballew v. Associates Financial Services Company of Nebraska, Inc., Memorandum and Order No. CV 75-L-119 filed August 18, 1976 (D.C.Neb.), C.C.H.Cons.Cred. Guide para. 98,327,*fn9 the court concluded that the TILA counterclaim was in the nature of recoupment and as such was not barred by the statute of limitations.

[ 490 Pa. Page 221]

    renegotiation of the 1972 note. As such, it may well be a recoupment of monies due the defendant and should properly be examined so that judgment may be rendered so as to do justice in view of the transaction as a whole.

Further support for the proposition that the TILA claim and the corresponding debt arise from the same transaction may be found in Plant v. Blazer Financial Services, Inc. of Georgia, 598 F.2d 1357 (5th Cir. 1979). The case applies "the same transaction test" to a TILA action in federal court to determine whether the creditor's counterclaim, alleging default in the loan by debtor, is compulsory or permissive for purposes of Fed.R.C.P. 13(a). The two claims were deemed to have arisen from "a single aggregate of operative facts, the loan transaction, gave rise to both the plaintiff's and defendant's claim." Id. at 1361.*fn10

Appellee relies heavily upon the recent rulings of the United States Court of Appeals for the Seventh Circuit for its assertion that the TILA claim is not in the nature of recoupment. A close reading of the decisions reveals a misplaced reliance. The court in Basham v. Finance American Corp., 583 F.2d 918 (7th Cir. 1978), cert. denied, 439 U.S. 1128, 99 S.Ct. 1046, 59 L.Ed.2d 89 (1979) disallowed a TILA counterclaim by the debtors because the statute of limitation had run. Yet the decision rested on the fact that the debtors sought "affirmative damages" and not a mere reduction in their loan obligation, and thus was not recoupment.

We express no opinion concerning the availability of a counterclaim after the limitation period where debtors would seek to have the recovery by creditor reduced by the amount of actual damages sustained by debtors in, for example, overpayment of finance charges. . . . Certainly, however, such a claim is much closer to the concept of "recouping" something unlawfully taken by the creditor.

Id. at 927-928 n. 16.

[ 490 Pa. Page 222]

The more recent decision by that same court urged by appellee, Smith et al. v. No. 2 Galesburg Crown Finance Corporation et al., 615 F.2d 407, (7th Cir. 1980) merely rejects the assertion of a TILA counterclaim as time barred "for the reasons stated in the Basham opinion." Id. at 410. Since no further explanation is given, there is no reason to conclude that this decision goes any further than Basham towards a total rejection of the concept.

The federal decisions*fn11 noted dictate a finding that the TILA claim arose out of the same transaction as the underlying debt and as such is a recoupment and not a setoff.*fn12 And this is appropriate for the disclosure requirement is a vital and integral part of the loan contract. It is in fact the cost of the loan (or finance charge) that is often determinative from the borrower's perspective. This information goes to the very heart of the bargain and, if not properly set forth, the borrower's position is weakened, his choice made with less than adequate information, and good faith which lies at the foundation of all commercial transactions is offended. Often the debtor does not know of the improper disclosure until the creditor's action forces legal

[ 490 Pa. Page 223]

    assistance. The superior position of the lender in today's market may cause a consumer to be so elated over the ability to obtain the loan proceeds, that detailed analysis of the cost if not properly disclosed would be inadvertently overlooked. Further, a fear that the loan may be "called in" after a period of faithful payments or of the lender's hostile retaliation often renders the debtor incapable of initiating the action. Finally, by allowing the statute of limitation to preclude a TILA counterclaim, instead of encouraging prompt action on claims, we would ironically "discourage creditors from prompt vindication of their contractual rights."*fn13 Thus, the TILA counterclaim, asserted in such a situation, becomes purely defensive in nature, "founded upon an equitable reason, inhering in the same transaction," which explains "why the plaintiff's claim in equity and good conscience should be reduced." Pennsylvania R. Co. v. Miller, supra at 162.*fn14

[ 490 Pa. Page 224]

In summary, the federal decisions dictate a finding that the Truth in Lending Act counterclaim, as it is presented in the instant appeal, constitutes recoupment and not an affirmative setoff. The one year statute of limitation, 15 U.S.C.A. § 1640(e), therefore may not bar its assertion.

Accordingly, we reverse the order of the Superior Court and remand the matter to the trial court with instructions that appellant be permitted to present evidence on their Truth in Lending Act counterclaim.

ROBERTS, Justice, concurring.

Unlike the majority, I believe this private litigation, which in no respect affects substantial rights or duties of the United States government, is governed not by federal but by state common law. See Miree v. DeKalb County, 433 U.S. 25, 97 S.Ct. 2490, 53 L.Ed.2d 557 (1977). I am, however, of the view that appellant can present appellees' alleged Truth in Lending Act violations by way of recoupment. As Standard Pennsylvania Practice points out,

"Recoupment is the act of rebating or recouping a part of a claim upon which one is sued by means of a legal or equitable right resulting from a counterclaim arising out of the same transaction. It is the right of the defendant to claim in the same action damages from the plaintiff, either because he has not complied with some cross obligation of the contract upon which he sues, or because he has violated some duty which the law imposed upon him in the making or performance of that contract . . . ."

4 Std.Pa.Prac. Ch. 15 § 2 pp. 391-92 (1955) (footnotes omitted). Thus, I would reverse the order of the Superior Court and remand the proceedings to permit appellant to present the alleged Truth in Lending Act violations.

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