Appeal from the United States District Court for the Eastern District of Pennsylvania, D.C. Civ. No. 87-2026.
Seitz,*fn* Stapleton and Cowen, Circuit Judges.
Fidelity Consumer Discount Corporation ("Fidelity") appeals from the final judgment of the district court, specifically the order of the district court granting the motion of Annabelle Smith, Charles Coplin, Margaret Coplin, Gloria Young and Tito Manor (herein denominated "plaintiffs" unless otherwise indicated) for summary judgment on their claims under the Truth-in-Lending Act ("TILA"), 15 U.S.C. 1601 et seq. The plaintiffs cross-appeal from the final judgment of the district court granting the motion of Fidelity, Jerry Silver ("Silver"), and Marshall Gorson ("Gorson") for summary judgment on plaintiffs' claims under the Racketeer Influenced Corrupt Organizations Act ("RICO"), 18 U.S.C. 1961, et seq., the Pennsylvania Usury Law, 41 P.S. 502-504 and the Pennsylvania Unfair Trade Practice and Consumer Protection Law, 73 P.S. 201-1, et seq. The district court had jurisdiction pursuant to 28 U.S.C. § 1331 as well as the doctrine of pendent jurisdiction. We have jurisdiction under 28 U.S.C. § 1291.
Fidelity, a Pennsylvania corporation in the business of making loans to the general public, is a wholly owned subsidiary of Equitable Credit and Discount Company ("Equitable"). Silver is the President and chief operating officer of Fidelity. Gorson is the majority stockholder of Equitable. For the purposes of the cross-appeal, they will be referred to collectively as "Fidelity" unless otherwise indicated.
The claims of the plaintiffs arose in connection with three loans extended by Fidelity. In each of the three loan transactions, Fidelity extended credit for the purchase of an automobile and held as security the buyer's, or in one case the buyer's cosigner's, home as security for the car loan. Because the district court entered judgment on cross-motions for summary judgment, our review is plenary. Solomon v. Klein, 770 F.2d 352, 353 (3d Cir. 1985).
We begin by addressing plaintiffs' TILA claims and later discuss plaintiffs' usury, RICO and Unfair Trade Practice claims.
A. PLAINTIFF'S TILA CLAIMS
Through TILA, Congress sought to remedy the "divergent and often fraudulent practices by which credit customers were apprised of the terms of the credit extended to them." Johnson v. McCrackin-Sturman Ford Inc., 527 F.2d 257, 262 (3d Cir. 1975). Indeed, the congressionally stated purpose of TILA 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." 15 U.S.C. § 1601(a). TILA, as a remedial statute which is designed to balance the scales "thought to be weighed in favor of lenders," is to be liberally construed in favor of borrowers. Bizier v. Globe Financial Services, 654 F.2d 1, 3 (1st Cir. 1981). See Johnson, 527 F.2d at 262.
TILA achieves its remedial goals by a system of strict liability in favor of the consumers when mandated disclosures have not been made. 15 U.S.C. § 1640(a). A creditor who fails to comply with TILA in any respect is liable to the consumer under the statute regardless of the nature of the violation or the creditor's intent. Thomka v. A.Z. Chevrolet Inc., 619 F.2d 246, 249-250 (3d Cir. 1980). "[Once] the court finds a violation, no matter how technical, it has no discretion with respect to liability." Grant v. Imperial Motors, 539 F.2d 506, 510 (5th Cir. 1976).
A single violation of TILA gives rise to full liability for statutory damages. Damages include actual damages incurred by the debtor plus a civil penalty equal to double the finance charge up to a maximum of $1,000. 15 U.S.C. 1640(a)(1) and (a)(2)(A)(i). Multiple violations of TILA in the course of a single loan transaction do not yield multiple civil penalties but result in only a single penalty. 15 U.S.C. § 1640(g).
In addition, when a creditor takes a security interest against property which is the principal dwelling of the debtor, the debtor has the right to rescind the transaction until the later of (1) midnight of the third day following the transaction or (2) the date on which the creditor delivers to the consumer the notice of the right to rescission and the material disclosures that TILA requires. 15 U.S.C. § 1635. Exercise of the right to rescind under § 1635 results in discharge of the consumer's liability for any finance or other charge and in a discharge of any security interest taken in conjunction with the extension of credit. 15 U.S.C. § 1635(b).
To implement TILA, Congress "delegated expansive authority to the Federal Reserve Board to elaborate and expand the legal framework governing commerce in credit." Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 560, 63 L. Ed. 2d 22, 100 S. Ct. 790 (1980). "The Board exerted its responsibility by promulgating Regulation Z, 12 C.F.R. Part 226 (1979)," Id., which "absent some obvious repugnance to the statute should be accepted by the courts, as should the Board's interpretation of its own regulation." Anderson Brothers Ford v. Valencia, 452 U.S. 205, 219, 68 L. Ed. 2d 783, 101 S. Ct. 2266 (1981). As the Supreme Court has noted, "traditional acquiescence in administrative expertise is particularly apt under TILA, because the Federal Reserve Board has played a pivotal role in setting the statutory machinery in motion [and] . . . the Act is best construed by those who gave it substance in promulgating regulations thereunder." Ford Motor Credit Co. v. Milhollin, 444 U.S. at 566.
Here Smith as well as Charles and Margaret Coplin requested, and the district court awarded them, both statutory and rescissory damages. Young and Manor sought and were awarded only statutory damages. We will address Fidelity's attack on each liability determination in order.
Herbert Smith is the son of Annabelle Smith. On January 27, 1984, the Smiths and Fidelity entered into a loan transaction to enable Herbert to buy a used car. Annabelle Smith used her house as collateral for the loan.
The total amount of financing was $5,500. Of the $5,500, $4,216.59 was given directly to Herbert and Annabelle in the form of a check made out to the two of them. In addition, $1,008.34 was charged as an "origination fee:" $990 as prepaid finance charges and $18.34 as prepaid interest. Finally, $257.07 was used to record the fact that the title to Annabelle Smith's house was clear and for other related costs. Among the $257.07 charges, was a charge of $13. This $13 was to be used to pay the filing fee to clear Smith's title of record and establish that Troy Acceptance Corporation, which previously held a lien on Smith's property, no longer had a lien on Smith's property. Fidelity, however, was never able to obtain the necessary release from Troy and the filing was never made; the $13 was not returned to Annabelle Smith.
In May, 1986, Annabelle Smith sought to rescind the transaction pursuant to TILA but Fidelity refused. Annabelle Smith then brought this action seeking both rescissory relief and monetary damages under TILA. Specifically, Smith claims, and the district court found, that Fidelity violated TILA (1) by failing to disclose the $13 fee as a finance charge; and (2) by failing to properly itemize in its disclosure form the amount financed. On appeal, Smith continues to rely on the above bases for TILA liability found by the district court as well as several other grounds for imposing liability. The district court did not consider the merits of these additional grounds. Fidelity challenges each of the findings of liability and asks us in the exercise of our discretion not to review the additional grounds.
Finance charges are defined at 15 U.S.C. 1605(a) as "the sum of all charges, payable directly or indirectly by the person to whom credit is extended, and is imposed directly or indirectly by the creditor as an incident to the extension of credit." Failure to disclose the total finance charge not only affords the consumer a remedy of statutory damages but also constitutes a material violation entitling the consumer to rescind the loan. 15 U.S.C. 1640(a); 12 C.F.R. 226.23(a)(3) n. 48.
In the Smith transaction, Fidelity withheld certain money from the loan proceeds distributed to Smith in order to pay for filing fees to clear title to Smith's house. Under 12 C.F.R. 226.4(e)(2) "[taxes] and fees prescribed by law that actually are or will be paid to public officials for determining the existence of or for perfecting, releasing or satisfying a security claim" are not finance charges. In this case, however, Fidelity was unable to obtain a signed release from Troy Acceptance because Troy was no longer in business and Fidelity simply retained the money, i.e. $13, which it had planned to use to clear Smith's title of Troy's lien. On these facts the district court found that the $13 was an undisclosed finance charge because the funds were never used to release a security interest.
We conclude, on the facts of this case, that the $13 charge cannot properly be considered a "finance charge." The effect of subsequent events on the accuracy of disclosures is dealt with in 12 C.F.R. 226.17(e) which states:
If a disclosure becomes inaccurate because of an event that occurs after the creditor delivers the required disclosures, the inaccuracy is not a violation of this regulation.
The purpose of this regulation is to relieve creditors from making disclosures regarding every contingency which might arise. Cf. Greer v. General Motors Acceptance Corp., 505 F. Supp. 692, 694 (N.D.Ga. 1980). Indeed, the Official Staff Interpretation of 226.17(e) states:
Inaccuracies in disclosures are not violations if attributable to events occurring after the disclosures are made. For example, when the consumer fails to fulfill a prior commitment to keep collateral insured and the creditor provides the coverage and charges the consumer for it, such a charge does not make the original disclosure inaccurate.
12 C.F.R. 226.17(e) (Supp. I 1988).
It is undisputed that the $13, when charged by Fidelity, was taken by Fidelity for the purpose of releasing the lien of Troy of record. There is no contention that Fidelity, at the time when it charged the $13, knew that Troy was no longer in business or that it would be unable to obtain a signed release from a Troy representative.*fn1 Therefore, when Fidelity disclosed to Smith that $13 was being charged to release Troy's lien of record, the disclosure was accurate. It was only the subsequent inability on the part of Fidelity to obtain the release, despite diligent efforts, that prevented compliance with TILA. We conclude that because Fidelity charged $13, intending to use it to release a lien of record, Fidelity's subsequent inability to obtain this release, due to no fault of its own, does not render the fee a "finance charge" within the meaning of the statute. Fidelity therefore did not violate the statute when it failed to include the sum as a finance charge. Thus, we find ourselves in disagreement with the district court.
b. Inaccuracy In Itemization of Amount Financed
In the Smith transaction the TILA disclosure statement listed the "amount given to me directly" as $5,224.93 while the actual amount given directly to Annabelle Smith was only $4,216.59. Based on this inaccuracy Smith asks for both statutory and rescissory relief.
Section 226.18 of Regulation Z sets forth the disclosures required to be made by a creditor in a closed-end credit transaction. In enumerating more than fifteen items to be disclosed, 226.18 provides in pertinent part:
For each transaction, the creditor shall disclose the following information, as applicable:
(b) Amount Financed. The "amount financed" using the term, and a brief description such as "the amount of credit provided to you or on your behalf."
(c) Itemization of amount financed.
(1) A separate written itemization of the amount financed including:
(i) The amount of any proceeds distributed directly to the consumer.
The district court concluded that Fidelity violated 226.18(c)(1) of Regulation Z in failing to disclose accurately the amount distributed directly to Smith. The district court then determined that this violation entitled Smith both to statutory damages and to rescind the loan transaction. Fidelity does not dispute the fact that it violated 226.18 and that Smith is entitled to the $1,000 in statutory damages which the district court awarded to her. Fidelity, however, claims that Smith is not entitled to rescission based on this violation.
Smith's right to rescission is found at 15 U.S.C. 1635. This section allows a borrower to rescind a loan transaction until all "material disclosures" are delivered to him or her. Footnote 48 to 12 C.F.R. § 226.23 (a) (3) states that "[the] term 'material disclosures' means the required disclosures of annual percent rate, the finance charge, the amount financed, the total of payments, and the payment schedule."*fn2 Thus, on its face the applicable regulation appears to foreclose Smith's argument that the itemization of the amount financed is a material disclosure.
Moreover, in using the term "means" in defining material disclosures, rather than a phrase such as "including but not limited to" or "among other things," one is driven to the conclusion that the list of material disclosures was meant to be exhaustive rather then illustrative. Cf. Official Staff Interpretations, 12 C.F.R. 226(4)(a) (Supp. I 1988). The language of the regulation therefore appears to leave no room for a construction which expands upon the stated language. See Official Staff Interpretation 12 C.F.R. 226.23(a)(3) (Supp. I 1988) ("Footnote 48 sets forth the material disclosures which must be provided before the rescission period can begin to run. . . . Failure to give the other required disclosures does not prevent the running of the rescission period, although that failure may result in civil liability or administrative sanctions.").
In an attempt to circumvent the language of 226.18, Smith argues that the disclosure of the finance charges and the disclosure of the itemization of the amount financed are in reality indistinguishable as the former merely requires disclosure of the sum while the latter requires disclosure of the parts. Thus, Smith argues, it is anomalous to treat a breach of one of the disclosure requirements differently from the other.
While Smith's position is superficially attractive, it is analytically flawed. The Federal Reserve Board in promulgating § 226.18 created, as separate disclosure requirements, the need to disclose the amount financed and the need to disclose the itemization of the amount financed. Furthermore, as discussed above, the Board decided that different consequences would flow from the failure to adhere to the different disclosure requirements. To accept Smith's argument would be tantamount to a rejection of the Board's decision to promulgate and treat as separate the two disclosure requirements in question. While we do not know for certain the reason for the Board's decision, we cannot find that the choice is "obviously repugnant" to TILA, and it must therefore carry the day. See Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 560, 63 L. Ed. 2d 22, 100 S. Ct. 790 (1980).
Accordingly, we conclude, contrary to the district court's ruling, that Fidelity's inaccurate disclosure of the itemization of the "amount given to me directly" does not warrant rescissory relief. Fidelity's inaccurate disclosure does, however, entitle Smith to statutory damages pursuant to 15 U.S.C. 1640.
c. Additional Grounds For Relief
Smith proffers two additional grounds which were raised before the district court and which, she contends, this Court could employ to afford her relief. The merits of neither of these grounds was addressed by the district court. While neither of the grounds can enable Smith to collect additional statutory damages under 15 U.S.C. § 1640 because multiple awards are prohibited, these grounds are pertinent insofar as they might provide the predicate for granting rescissory relief.
First, Smith asserts that Fidelity violated 12 C.F.R. § 226.18(b) in failing to disclose a $50 document preparation fee as a finance charge. Smith argues that while document preparation fees which are "bona fide and reasonable in amount" are excludable from the finance charge calculus, 12 C.F.R. § 226.4(c)(7)(ii), the charges in question were not so excludable because they were neither bona fide nor reasonable in amount. Second, Smith argues that Fidelity improperly set out the payment schedule of her loan in violation of 12 C.F.R. § 226.18(g).*fn3 In making this contention Smith acknowledges that a creditor is not liable for a TILA violation which "resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adopted to avoid any such error," 15 U.S.C. § 1640(c), but contends that Fidelity failed to produce evidence that it maintained any procedures designed to avoid error.
In addressing these questions, the district court found that the record was insufficient to determine whether the document preparation fee was reasonable and found that a material fact existed as to whether there was a bona fide error in the disclosure of the payment schedule. We agree with the district court's conclusions and accordingly we will remand these claims to the district court for resolution of the factual disputes.
2. Gloria Young and Tito Manor
Tito Manor is the nephew of Gloria Young. Manor sought to purchase a car from Samson Motors and was told by a Samson Motors salesman that in order to obtain financing for the purchase he would need a co-signer for the loan. His aunt, Gloria Young, agreed to act as his co-signer. The Samson Motors salesman then took a credit application from Young over the telephone; this credit information was passed on to Fidelity. Later, the salesman called Manor and told him that the credit had gone through and asked Manor and Young to come to Samson Motors. The salesman also asked that Young bring the deed to her house when she came.
On July 9, 1986, after arriving at Samson Motors, Manor and Young were driven by a Samson Motors employee to Fidelity's office in order to sign the loan documents, including the execution of a mortgage on Young's house. While at Fidelity's office, Young and Manor signed the loan documents and were issued a check dated July 15, 1986 in both their names for the purchase price of the car, i.e. $3,613.87. Young and Manor immediately endorsed the check to the order of Samson Motors and delivered the check to a Fidelity representative.*fn4 The total loan to Manor and Young was for $4,537.01 which included a $544.44 origination fee and other related administrative costs. Thereafter, the Samson Motors employee drove Manor and Young back to Samson Motors and Manor was allowed to drive away with the car for which he had just arranged financing. Subsequently, Manor lost his job, ceased making his loan payments and Fidelity began foreclosure proceedings against Young's house.
In the action filed by Manor and Young, they do not seek rescission of the loan transaction but rather seek statutory damages under TILA. The district court held that Young and Manor's endorsement of the loan check prior to the expiration of the three day rescission period violated 15 U.S.C. 1635 and the regulations promulgated thereunder in that it constituted premature disbursal of loan proceeds and undermined the plaintiffs' perception of their right to rescind. The district court also found that the record was insufficient to determine whether the fees charged by Fidelity for document preparation and for a credit report were bona fide and reasonable. Fidelity attacks the district court's finding of liability on Young and Manor's premature performance claim and asks that this Court refrain from ruling on the merits of Young and Manor's other claim.
a. Delay of Creditor's Performance
In a transaction such as the instant one, where a security interest is granted by a borrower against the borrower's principal dwelling, TILA requires that the borrower be given a right to rescind the loan transaction for three business days. 15 U.S.C. 1635. Pursuant to 1635, 12 C.F.R. 226.23(c) has been promulgated by the Board of Governors of the Federal Reserve System and provides in pertinent part:
(c) Delay of creditor's performance.
Unless a consumer waives the right of rescission under paragraph (e) of this section, no money shall be disbursed other than in escrow, no services shall be performed and no materials shall be delivered until the rescission period has expired and the creditor is reasonably satisfied that the consumer has not rescinded.
The meaning of this regulation is elucidated by the relevant Official Staff Interpretation which provides in pertinent part:
23(c) Delay of creditor's performance.
1. General Rule. Until the rescission period has expired and the creditor is reasonably satisfied that the consumer has not rescinded, the creditor must not, either directly or through a third party:
* Disburse the loan proceeds to the consumer
* Begin performing services for the ...