Opinion
Case No. 03-42373, Adversary No. 03-7120.
January 21, 2005
Thomas C. Martin, Fox Rothschild LLP, Citizens Bank Center, Wilmington, DE, Michael J. Connolly, Bressler, Amery Ross, P.C., Morristown, NJ, Counsel for Longwood Elastomers, Inc.
Timothy Jay Houseal, Curtis J. Crowther, Sean T. Greecher, Young Conaway Stargatt Taylor, LLP, Wilmington, DE, Counsel for Zenith Industrial Corporation.
MEMORANDUM AND ORDER DENYING PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT
This matter is before the Court on Plaintiffs' Motion for Partial Summary Judgment on the issue of Plaintiff's right to extend the period to rescind a consumer credit transaction under the Truth in Lending Act. This matter constitutes a core proceeding, and the Court has jurisdiction to decide it. I. FINDINGS OF FACT
The following facts are either uncontroverted or viewed in the light most favorable to Household Finance Corporation III, the non-moving party. On March 14, 2001, Plaintiffs, Scott David Cushing and Lisa Diane Cushing (the "Cushings"), entered into a consumer credit transaction with Fieldstone Mortgage Company for the purchase of their home located at 5300 SW 12th Street in Topeka, Kansas. The note and mortgage from that transaction were eventually assigned to Defendant, Household Finance Corporation III ("Household").
In March 2003, an employee of Household telephoned the Cushings and asked if they would like to refinance their current home mortgage at a lower interest rate and with lower monthly payments. On April 14, 2003, the Cushings entered into a consumer credit transaction with Household to refinance the mortgage. The Cushings apparently received some cash from the refinancing, as well as a three percent (3%) reduction in their interest rate.
There is no dispute that at the time the Cushings refinanced their mortgage with Household, the property was the principal dwelling for Mrs. Cushing. The parties disagree, however, whether Mr. Cushing lived there at that time. On their initial Statement of Financial Affairs filed in this bankruptcy proceeding, the Cushings indicated, under penalty of perjury, that he lived at 1107 SW Osborne, Topeka, Kansas from "06-01 to Present," and that he lived at 113 West Hall Avenue, Burlingame, Kansas from "02-03 to Present." The 5300 SW 12th Street address was not mentioned. On November 4, 2004, the Cushings amended their Statement of Financial Affairs to claim that he instead lived at the residence from 1994 through May 26, 2003. They filed this amendment only after Household filed its response to Plaintiffs' summary judgment motion, wherein it argued Cushing's original Statement of Financial Affairs should be deemed an admission that he was not residing in the Topeka property at the time of the refinancing.
Doc. 45.
The parties also dispute the number of copies the parties received of certain disclosures at the closing on the refinancing transaction. At closing, the Cushings signed a statement indicating they each received two copies of the Notice of Right to Cancel, which is required by the Truth in Lending Act (TILA) to inform consumers of their right to rescind the transaction. The Cushings have now submitted sworn affidavits indicating that this prior statement is incorrect, and that in fact, they only received one copy each.
II. STANDARDS FOR SUMMARY JUDGMENT
Summary judgment is appropriate if the moving party demonstrates that there is "no genuine issue as to any material fact" and that the moving party is "entitled to a judgment as a matter of law." The rule provides that "the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact." The substantive law identifies which facts are material. A dispute over a material fact is genuine when the evidence is such that a reasonable jury could find for the nonmovant. "Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment."
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986) (emphasis in original).
Id. at 248.
Id.
Id.
The movant has the initial burden of showing the absence of a genuine issue of material fact. The movant may discharge its burden "by `showing' — that is, pointing out to the . . . court — that there is an absence of evidence to support the nonmoving party's case." The movant need not negate the nonmovant's claim. Once the movant makes a properly supported motion, the nonmovant must do more than merely show there is some metaphysical doubt as to the material facts. The nonmovant must go beyond the pleadings and, by affidavits or depositions, answers to interrogatories, and admissions on file, designate specific facts showing there is a genuine issue for trial. Rule 7056(e) requires the Court to enter summary judgment against a nonmovant who fails to make a showing sufficient to establish the existence of an essential element to that party's case, and on which that party will bear the burden of proof.
Shapolia v. Los Alamos Nat'l Lab., 992 F.2d 1033, 1036 (10th Cir. 1993).
Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986).
Id. at 323.
Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986).
Celotex, 477 U.S. at 324.
Id. at 322.
III. CONCLUSIONS OF LAWA. Background information on the TILA
Congress enacted the TILA to regulate the disclosure of the terms of consumer credit transactions in order "to aid unsophisticated consumers and to prevent creditors from misleading consumers as to the actual cost of financing." Adequate disclosure allows consumers to compare different financing options and their costs. To encourage compliance, TILA violations are measured by a strict liability standard, so even minor or technical violations impose liability on the creditor. The consumer-borrower can prevail in a TILA suit without showing that he or she suffered any actual damage as a result of the creditor's violation of the TILA.
Morris v. Lomas Nettleton Co., 708 F. Supp. 1198, 1203 (D. Kan. 1989) (citing Mourning v. Family Publ'ns Serv., Inc., 411 U.S. 356, 363-69 (1973)).
See, e.g., Mars v. Spartanburg Chrysler Plymouth, Inc., 713 F.2d 65, 67 (4th Cir. 1983) ("To insure that the consumer is protected, as Congress envisioned, requires that the provisions of [the TILA and Regulation Z] be absolutely complied with and strictly enforced"); Davison v. Bank One Home Loan Services, 2003 WL 124542, *6 (D. Kan. 2003).
Herrera v. First Northern Savings Loan Ass'n, 805 F.2d 896, 900 (10th Cir. 1986).
The Board of Governors of the Federal Reserve System ("the Fed") is the agency charged with administering the TILA, and has adopted extensive regulations implementing the TILA, referred to as "Regulation Z." When the agency charged with enforcing a statute has promulgated a regulation that adopts a permissible construction of the statute, the courts must defer to that interpretation and not impose their own. Furthermore, the Supreme Court has indicated this requirement is especially strong in the context of the TILA and Regulation Z, where even official staff interpretations of the statute and regulation should control unless shown to be irrational. B. The TILA right to rescind a home mortgage transaction
15 U.S.C. §§ 1602(a) and 1604(a).
12 C.F.R. Part 226 (2003).
See id. § 226.1(a).
Chevron U.S.A., Inc., v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-44 (1984).
Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 559-70 (1980); see also Anderson Brothers Ford v. Valencia, 452 U.S. 205, 219 (1981) (citing Milhollin, Court indicated that absent "obvious repugnance" to statute, Fed's regulation implementing TILA and interpretation of that regulation should be accepted by courts) and Davison v. Bank One Home Loan Services, 2003 WL 124542, at *5 (D. Kan. 2003) (holding there existed unmistakable congressional decision to treat administrative rulemaking and interpretation under TILA as authoritative).
This proceeding involves a non-purchase-money loan secured by a consumer-borrower's home. In such non-purchase-money transactions, the consumer-borrower has a right to rescind established by TILA § 1635. It provides:
See 15 U.S.C. §§ 1635(e)(1) and 1602(2) (excluding from rescission rights given by § 1635 liens against consumer-borrowers' homes that secure financing of acquisition or initial construction).
(a) Disclosure of obligor's right to rescind
Except as otherwise provided in this section, in the case of any consumer credit transaction . . . in which a security interest . . . is or will be retained or acquired in any property which is used as the principal dwelling of the person to whom credit is extended, the obligor shall have the right to rescind the transaction until midnight of the third business day following the consummation of the transaction or the delivery of the information and rescission forms required under this section together with a statement containing the material disclosures required under this subchapter, whichever is later, by notifying the creditor, in accordance with regulations of the Board, of his intention to do so. The creditor shall clearly and conspicuously disclose, in accordance with regulations of the Board, to any obligor in a transaction subject to this section the rights of the obligor under this section. The creditor shall also provide, in accordance with regulations of the Board, appropriate forms for the obligor to exercise his right to rescind any transaction subject to this section.
15 U.S.C. § 1635(a).(Emphasis added).
So long as the creditor has not given the obligor the items specified in this provision, the obligor's right to rescind will last three years from the consummation of the transaction, with certain exceptions that do not apply here. The main part of Regulation Z that implements TILA § 1635 is 12 C.F.R. § 226.23. Relevant parts of that provision and other parts of Regulation Z will be discussed below.
See TILA § 1635(f), 15 U.S.C. § 1635(f).
The Cushings seek to exercise a right to rescind the transaction with Household well after the normal three-day rescission period expired. They contend that they are entitled to an extended rescission period because the errors committed by Household in providing the required TILA disclosures entitle them to a three-year rescission period provided by TILA § 1635(f).
C. The Notice of Right to Cancel supplied by Household to the Cushings complies with TILA requirements.
The Cushings first claim that they are entitled to an extended right to rescind the transaction because the Notice of Right to Cancel supplied by Household did not comply with TILA regulations. Specifically, the Cushings claim that Household's use of a "hybridized" Notice of Right to Cancel form(1) violated the TILA, by rearranging the format of the disclosure, thereby adversely affecting the substance, clarity, or meaningful sequence of the disclosure; (2) violated Regulation Z, by failing to provide the appropriate model form contained in the regulations, or a substantially similar notice; and (3) violated the requirements of the TILA, and Regulation Z, which require the disclosures to be made "clearly and conspicuously."
Regulation Z § 226.23(b)(2).
Regulation Z § 226.23(b)(1)(I), (ii) and (iv).
Subsection (h) of TILA § 1635 provides:
(h) Limitation on rescission
An obligor shall have no rescission rights arising solely from the form of written notice used by the creditor to inform the obligor of the rights of the obligor under this section, if the creditor provided the obligor the appropriate form of written notice published and adopted by the Board, or a comparable written notice of the rights of the obligor, that was properly completed by the creditor, and otherwise complied with all other requirements of this section regarding notice.
15 U.S.C. § 1635(h) (emphasis added).
Regulation Z § 226.23(b)(2) provides: " Proper form of notice. To satisfy the disclosure requirements of paragraph (b)(1) of this section, the creditor shall provide the appropriate model form in Appendix H of this part or a substantially similar notice."
This regulation implements TILA § 1604(b), which directs the Fed to publish model forms and provides that creditors are deemed to have complied with non-numerical TILA disclosure requirements if they use the appropriate model form. Section 1604(b) also provides that a creditor shall be deemed to have complied if it: "(2) uses any such model form . . . and changes it by (A) deleting any information which is not required by this subchapter, or (B) rearranging the format, if in making such deletion or rearranging the format, the creditor . . . does not affect the substance, clarity, or meaningful sequence of the disclosure." Household could, therefore, have satisfied the requirement that it give the Cushings proper notice of their right to rescind the transaction if it had simply used the correct model form, the New Loan Form (H-8) or the Refinancing Form (H-9).
15 U.S.C. § 1604(b)(2)(A) and (B).
This finding assumes the property was, in fact, Mr. Cushing's principal dwelling on the date the transaction closed, as discussed below.
Because Household chose not to use the model forms provided in Regulation Z, the Court must determine whether Household's Notice constituted "a substantially similar notice," as required by 12 C.F.R. § 226.23(b)(2). A careful reading of the Notice used by Household in this transaction reveals that it is substantially similar to the model form, the disclosures remain clear and conspicuous, and the changes did not affect the substance, clarity or meaningful sequence of the disclosure.
The only substantive change made by Household was the inclusion of the following sentence: "If this transaction is a refinance of a loan you have with us and you cancel, it will not affect any amount you presently owe." The Court does not believe that this additional language makes the disclosure unclear or inconspicuous. In fact, the additional information provides the borrower with positive information that they will not be penalized on their existing loan if they choose to rescind the refinancing loan. The Court finds this information to be valuable to potential borrowers, because they then do not have to worry that their original mortgage will be jeopardized if they opt to rescind. This disclosure in no way takes away from the other disclosures contained in the form.
As for stylistic changes to the form, the creation of the hybrid form (providing the appropriate box is checked on the form to inform borrowers what paragraph applies to them, which it was here) and the rearrangement of the disclosures do not take away from the clarity, substance, or meaningful sequence of the disclosures. The Court finds the disclosures in the form used by Household to be as clear and conspicuous as the disclosures in the model form, and the substance has not been altered. Therefore, the Notice used by Household does not violate the TILA or Regulation Z.
The form used by Household clearly varies from the model forms in that it combines the two forms into one, rearranges certain information, and adds other information not contained in the model form. However, these changes simply make Household's form different, not improper. The Court finds that Household's use of the hybrid form they created, however litigation-inviting it might be, did not violate the TILA or Regulation Z. Therefore, the use of that form does not entitle the Cushings to an extended period wherein they could rescind the transaction.
D. Household was required to supply two copies of the notice of the right to rescind the transaction to each consumer entitled to rescind.
The Cushings next claim that they are entitled to an extended right of recision because Household only provided each of them with one copy of the right to rescind. Although Household disputes the fact that it only provided each Plaintiff with one copy, which issue is addressed below, it alternatively asks the Court to rule that the failure to provide two copies of the notice does not result in the Cushings receiving an extended right of recision.
Under TILA regulations, a creditor must "deliver two copies of the notice of the right to rescind to each consumer entitled to rescind." As noted above, the regulation is absolutely clear in requiring two copies for each consumer, and, absent a finding that the regulation is irrational, the Court must apply the regulation promulgated by the Fed. Household asks this Court to adopt Judge Pusateri's decisions in Ramirez v. Household Finance Corporation III, and Merriman v. Beneficial Mortgage Co. of Kansas, Inc., wherein he found that Regulation Z was irrational to the extent it allowed a debtor to rescind a transaction for up to three years based upon the failure of the lender to provide two copies of the notice of right to cancel to each consumer. In that Order, Judge Pusateri held that although providing one copy of the Notice did constitute a violation of the TILA, the debtors were not entitled to an extended right of recision based upon what he deemed a minuscule violation of the Act.
Regulation Z § 226.23(b)(1).
See Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 559-70 (1980).
Adversary Proceeding No. 01-7122 (Bankr. D. Kan. May 28, 2003).
Adversary Proceeding No. 01-7142 (Bankr. D. Kan. May 28, 2003).
Although this Court tends to agree with Judge Pusateri's reasoning that the "punishment doesn't fit the crime," this Court declines to adopt his ruling on this issue, and finds that the clear TILA regulations, as they relate to this issue, are not demonstrably irrational. As explained by Judge Vratil in Davison v. Bank One Home Loan Services, the Fed included this provision in the regulation to make it easier for consumers to rescind the transaction. It allows the consumer to return one copy of the notice to the lender while retaining one copy.
In this day and age of inexpensive copy machines at most grocery stores, some gasoline stations, libraries and even within many home printers, and given that both Debtors are employed by employers who probably have copy machines accessible to them, this Court agrees the Regulations' two copy requirement seems unnecessary, especially if coupled with a potential windfall remedy. But it is not this Court's role to tell Congress and the Fed that they are being overly protective of consumers in today's technologically-advanced world. Enacting legislation, and promulgating the rule changes connected thereto, are not proper court functions.
2003 WL 124542 (D. Kan.) (holding "The regulations as to the required number of copies of the right to cancel and TILA disclosure forms are not demonstrably irrational"). See also Stone v. Mehlberg, 728 F. Supp. 1341, 1353 (W.D. Mich. 1989) (holding that the "TILA's requirement of two rescission notice copies to each obligor is not a mere technicality," because "[e]ffective exercise of the right to rescind obviously depends upon the delivery of one copy of the rescission form to the creditor and the retention by the obligor of the other copy.").
The Court finds that the two-copy TILA regulation is not irrational. Household was required to give each of the Cushings two copies of the notice of their right to rescind this transaction, provided each of them was otherwise entitled to such disclosure. Similarly, the Court finds that the three year rescission period afforded by the TILA for a failure to comply with the noticing requirements, albeit harsh, is not irrational, as it clearly furthers the policy and goals of the TILA. Thus, if Household failed to give the required number of copies of the Notice, the right to rescind this transaction shall be extended to three years.
E. The issue of how many copies of the notice of the right to rescind the Cushings received cannot be decided on summary judgment.
One basis for the Cushings' claim that they are entitled to an extended right to rescind the transaction is that they did not each receive two copies of the notice informing them of their right to rescind. Household disputes the fact that the Cushings did not receive two copies of the notice.
At the closing of the transaction, the Cushings signed a Notice of Right to Cancel, which unequivocally stated "The undersigned each acknowledge receipt of two copies of the NOTICE OF RIGHT TO CANCEL." The Cushings' signatures on this Notice create a legal presumption that they received two copies of the Notice. That presumption, however, is rebuttable, and the Cushings can present evidence to prove that, despite stating otherwise on the Notice, they only received one copy of the Notice. The Cushings have now submitted evidence, in the form of sworn affidavits, indicating that they did not receive two copies of the Notice.
See 15 U.S.C. § 1635(c).
The Court realizes that, in document-intensive loan closings where many forms containing legal language are presented for quick signatures, the reality is that many borrowers typically sign whatever paper is put in front of them to obtain the requested financing. That is one of the reasons Congress has provided a rescission period.
The Court finds that a genuine question of fact exists on this issue, as both parties have presented conflicting evidence in support of their position. Therefore, summary judgment is not appropriate on this issue. F. Whether Mr. Cushing has a right to rescind the transaction cannot be decided on summary judgment.
Because Household's loan closer has indicated, by affidavit, that she has no independent memory of this transaction, the Court could theoretically have found that there is no genuine issue of fact if this was the only issue remaining for trial. Because there must be a trial, anyway, caused by a second instance where Debtors must try to explain away their inconsistent statements, the Court declines to find summary judgment for Plaintiffs on this issue, under the precise facts of this case. Household will be given the opportunity to cross-examine Debtors on these inconsistencies.
Household claims that it provided the parties with the appropriate number of disclosures based, in part, on the fact that Mr. Cushing was not entitled to receive separate copies of the TILA disclosures due to his non-resident status. Because the Cushings admit they jointly received one copy of the TILA disclosures, and each admit they received one copy of the notice of the right to rescind, Household claims that the documents received would be sufficient if Mrs. Cushing was the only consumer entitled to the notice.
In support of its contention, Household points to Regulation Z § 226.17, which sets out some general disclosure requirements. Subsection (d) addresses transactions involving multiple creditors or multiple consumers, and provides:
(d) Multiple creditors, multiple consumers. If a transaction involves more than one creditor, only one set of disclosures shall be given and the creditors shall agree among themselves which creditor must comply with the requirements that this regulation imposes on any or all of them. If there is more than one consumer, the disclosures may be made to any consumer who is primarily liable on the obligation. If the transaction is rescindable under § 226.23, however, the disclosures shall be made to each consumer who has the right to rescind.
Regulation Z § 226.17(d).
Household then points to § 226.23(a)(1), which provides:
(a) Consumer's right to rescind. (1) In a credit transaction in which a security interest is or will be retained or acquired in a consumer's principal dwelling, each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind the transaction [with exceptions not applicable here].
Regulation Z § 226.23(a)(1).
Household suggests that Mr. Cushing had no right to rescind because the property being mortgaged was not his principal dwelling.
The Cushings claim that the property was the principal dwelling of Mr. Cushing and, even if it was not his principal dwelling, he was still entitled to the notice because he was a consumer whose ownership interest was subject to the security interest. Household does not dispute that Mr. Cushing is a title owner of the subject real estate.
In 1981, the Fed extensively revised Regulation Z, and adopted §§ 226.2(a)(11) and 226.23(a)(1) in their present forms. The Fed included this comment about § 226.23:
See Truth in Lending; Revised Regulation Z, 46 Fed. Reg. 20848, 20893 and 20904 (Apr. 7, 1981).
Under paragraph(a)(1), a consumer has the right to rescind only if the transaction involves the consumer's principal dwelling and the consumer's ownership interest in that dwelling is or will be subject to a security interest. A number of commenters contended that the language in the December proposal could be interpreted to provide the right to rescind to a nonresident co-owner of a dwelling. To avoid such interpretations, the definition of "consumer" in § 226.2 has been expanded to clarify that, for purposes of rescission, a consumer is any natural person who is both an owner and a resident of a dwelling that is or will be subject to a security interest as part of the credit transaction. The definition therefore encompasses persons who are not parties to the credit agreement but who have signed the security agreement. As a signatory to the security agreement, that person is a party to the credit transaction and is obligated to the extent that his or her ownership interest is encumbered by the creditor's security interest. Accordingly, joint owners in this situation must be given the right of rescission, so long as the property represents the joint owners' principal dwelling.
Truth in Lending; Revised Regulation Z, 46 Fed. Reg. 20848, 20884 (Apr. 7, 1981) (emphasis added).
Thus, in response to comments it had received about an earlier draft of the regulation, the Fed revised § 226.2 to make clear that "a nonresident co-owner of a dwelling" would not have a right to rescind a transaction creating a mortgage on property, even though the resident co-owner would have the right. Therefore, if the home was not Mr. Cushing's principal residence at the time the loan documents were signed, thence was not entitled to rescind the transaction. Obviously, if that is the case, he was not entitled to receive a second set of disclosures.
The Court finds that summary judgment is not appropriate on this issue, because the location of Mr. Cushing's principal residence during the relevant time period is a genuine issue of material fact about which there is dispute. The Cushings' original response to Question No. 15 of the sworn Statement of Financial Affairs, signed August 21, 2003, which asks debtors to disclose where they were residing during the two years prior to filing, indicates that he lived at 1107 SW Osborne, Topeka, Kansas from "6-01 to Present," and 113 West Hall Avenue, Burlingame, Kansas from "02-03 to Present." Neither of these addresses match the address of the real property that Household refinanced (5300 SW 12th).
Because the location of Mr. Cushing's "principal residence" is critical to whether he was entitled to certain disclosures, Household has understandably seized on the Cushings' original sworn statement to conclude that Mr. Cushing was not residing with Ms. Cushing in the 12th Street property when the refinancing closed. Debtors responded to this inconsistency by amending their Statement of Financial Affairs, on November 4, 2004, to indicate that Mr. Cushing moved out of the 12th Street property on May 26, 2003, and into the Osborne property the next day. This would mean that the refinanced property was his principal dwelling on the date of the refinancing transaction with Household. Debtors' brief suggests this was merely a petition drafting error of no consequence, and because Household has no information to refute the Cushings' sworn affidavits, which say Mr. Cushing moved from the residence May 26, 2003, a month after the transaction was closed with Household, there is no genuine issue.
It is certainly possible that the Cushings' affidavits on the issue of Mr. Cushing's principal residence are true, and their original Statement of Financial Affairs was a mere scrivener's error, given their divorce date of September 18, 2003. The Court can take judicial notice that it is common for divorcing spouses to physically separate residences pending a divorce, although no party has provided this Court the date the divorce was filed, only a case number with an "03" prefix. Further, the evidence reflects that the Cushings paid their monthly mortgage payments to Household with a joint checking account, which included both their names, until the payment of June 10, 2003. That check, paid less than two weeks after both Cushings now swear Mr. Cushing moved away, was paid from an account in Lisa Cushing's name only.
Debtors also argue, in their responsive brief, that "06-01" actually meant June 1 of 2003 — the year of the bankruptcy petition, presumably the closest month to the date he left the home. This is also believable, because the question specifically asks about addresses where Debtors resided within two years of the date of filing. June 2001 is more than two years after the date of filing, and Debtors would not have even been required to disclose that address in their Statement of Financial Affairs.
But the Court is speculating in suggesting that one of the Cushings' sworn statements is more believable than another, contradictory, sworn statement. Further, the Cushings didn't even try to explain away the sworn statement saying Mr. Cushing was living in a Burlingame, Kansas address from "02-03 to Present," and that is important, because the Household transaction occurred during that time period. Accordingly, the Court finds that there is a genuine issue of material fact as to the location of Mr. Cushing's principal residence on the date this transaction was closed, and that Household should be entitled to cross-examine Debtors about their conflicting sworn testimony.
IV. CONCLUSION
For the reasons set forth above, the Court finds that Plaintiffs' Motion for Partial Summary Judgment on the issue of whether they have an extended right to rescind must be denied. The Court finds that the TILA disclosures made by Household satisfy the requirements of the TILA and Regulation Z, despite their variance from the model forms authorized by the Fed. Factual issues remain, however, as to whether Mr. Cushing was entitled to rescind the transaction, and thus whether he was entitled to receive a copy of the TILA disclosures and two copies of the notice of his right to rescind, and whether the Cushings actually received the appropriate number of copies of the notice of the right to rescind the transaction. These factual issues preclude summary judgment.
IT IS, THEREFORE, BY THIS COURT ORDERED that Plaintiffs' Motion for Partial Summary Judgment (Extended Right to Rescind) is denied. Furthermore, the Court does not accept Household's invitation to decide, at this juncture, what rights and obligations Plaintiffs may have if they ultimately prevail in their TILA action. That issue is expressly not the subject of Plaintiff's partial summary judgment motion. In addition, that issue is presently being litigated in two appeals in two District Courts, and the parties to those proceedings claim they will appeal any adverse ruling to the Tenth Circuit Court of Appeals. This Court has stayed the resolution of the "remedy" issue in several cases, pending guidance from the Circuit. Accordingly, this issue is not today addressed or resolved.
IT IS FURTHER ORDERED that the trial of the liability issues in this case is set to a two-day stacked docket beginning March 15, 2005. The Court will contact counsel for the parties to set the exact date and time for trial.
SO ORDERED.
MEMORANDUM OPINION
This opinion is with respect to defendant Longwood Elastomers, Inc.'s ("Longwood") motion (Adv. Doc. # 28) seeking reconsideration of this Court's order entered November 4, 2004 (the "Order"), which granted Zenith Industrial Corporation's ("Zenith") motion to strike a defense asserted by Longwood in its answer. For the reasons set forth below, Longwood's motion will be granted to the extent that I will reconsider the Order, but I will ratify the Order on the merits.
Because this opinion refers to documents from both the adversary proceeding and the chapter 11 case dockets, I will designate documents from the adversary proceeding as "Adv. Doc. # ____" and those from the chapter case as "Case Doc. # ____".
BACKGROUND
Zenith and its affiliates are leading suppliers of highly engineered metal-formed components, complex modules and mechanical assemblies for automotive original equipment manufacturers. Zenith manufactures components for approximately 127 modules on 94 platforms from plants in Europe and North America. Longwood is a supplier of goods that are used in the production of Zenith's products.
On March 12, 2002, Zenith filed a petition for relief under chapter 11 of title 11 of the United States Code, 11 U.S.C. §§ 101 et seq. (the "Bankruptcy Code"). With the filing of its petition, Zenith filed a motion seeking authority to pay pre-petition claims of certain vendors that, in Zenith's estimation, were essential to Zenith's on-going business. On March 14, 2002, the Court entered an order granting the relief sought by Zenith (the "Essential Vendor Order"). The essential vendor motion stated that Zenith "is seeking the entry of an order authorizing, but not requiring, it to pay, in the reasonable exercise of its business judgment, the pre-petition Date claims of certain essential vendors on the terms described herein in an aggregate amount not to exceed $1,000,000. . . ." (Case Doc. # 8, ¶ 14.) The motion further stated that "[f]or all the foregoing reasons, the Debtor believes that payment of the pre-petition Date Essential Vendor Claims, in the Debtor's sole discretion, is appropriate and necessary." (Case Doc. # 8, ¶ 25 (emphasis in original).) The Essential Vendor Order likewise stated that Zenith "is authorized, but not required, in its sole discretion, to pay the prepetition Essential Vendor Claims, in the aggregate amount of up to $1,000,000 on the terms and conditions described in the Motion." (Case Doc. # 30, p. 1.)
Individual sections of the Bankruptcy Code will be cited herein as "§ ____".
On March 10, 2004, Zenith commenced this adversary proceeding against Longwood seeking to recover $1,317,587 of alleged § 547 preference transfers that were made during the ninety days prior to the petition date. The $1,317,587 figure comprises twelve separate transfers, including a $506,035 wire transfer made on the eve of the petition date. On May 7, 2004, Longwood filed an answer in which it advanced twenty-four affirmative defenses. The twenty-first affirmative defense asserted that Longwood was a critical vendor of Zenith and was protected pursuant to the Essential Vendor Order (the "Essential Vendor Defense").
While Longwood's reconsideration motion papers are not clear on the point, it appears that its argument is only directed to the $506,035 wire transfer and not the aggregate amount alleged in the complaint. (See Adv. Doc. # 28, ¶¶ 15 and 29.)
On October 5, 2004, Longwood sent a notice to Zenith requesting to take depositions related to the Essential Vendor Defense. In response to that notice, Zenith filed a motion to strike the Essential Vendor Defense pursuant to Federal Rule of Civil Procedure 12(f) and for a protective order from the discovery pursuant to Federal Rule of Civil Procedure 26(c). Longwood did not timely respond to the motion to strike and the Court entered the Order striking the Essential Vendor Defense.
Bankruptcy Rules 7012 and 7026 incorporate by reference Rules 12(f) and 26(c).
Upon learning of the Order, Longwood filed the instant motion seeking reconsideration of the Order, claiming that its failure to timely object is excusable and that there is merit to its Essential Vendor Defense. Zenith contests both of these positions.
DISCUSSION
Longwood's failure to respond to the motion to strike was "due to the mistake and confusion on the part of local counsel as to the deadline for submitting the opposition." (Adv. Doc. # 28, ¶ 7.) After discovering its error, Longwood promptly filed the instant motion. The Court will excuse the error and consider the merits of the motion to strike to determine whether the Order should be vacated.
Timeliness of the Motion to Strike
The first issue raised by Longwood with respect to the motion to strike is that it was untimely and therefore should be denied. With regard to the timing of a motion to strike, Federal Rule of Civil Procedure 12(f) provides, in relevant part, that "upon motion made by a party within 20 days after the service of the pleading upon the party or upon the court's own initiative at any time, the court may order stricken from any pleading any insufficient defense. . . ." Fed.R.Civ.P. 12(f). Courts have generally found that the 20 day period is not a limiting factor.Wine Mkts. Int'l, Inc. v. Bass, 177 F.R.D. 128, 133 (E.D.N.Y. 1998) ("In effect, the Court's discretion renders the twenty (20) day rule `essentially unimportant.'"); FDIC v. Pelletreau Pelletreau, 965 F. Supp. 381, 390 (E.D.N.Y. 1997) ("[T]he time limitations in Rule 12(f) should not be applied strictly when the motion seems to have merit." (quoting 5A Wright Miller, Federal Practice and Procedure 2d, § 1380 (1990)); Sheridan v. E.I. duPont de Nemours Co., No. CIV. A. 93-46-SLR, 1994 WL 468711, at *11 (D. Del. March 28, 1994) ("Given that this motion raises significant issues of the rights of both the defendants and the plaintiff, in the interest of justice, the Court will entertain defendants' motion to strike." (citation omitted)).
In this case, it is understandable that Zenith did not file the motion to strike until over five months after Longwood filed its answer. Longwood included twenty-four affirmative defenses in its answer, none of which contained an explanation longer than one sentence. There was no activity with respect to this defense for nearly five months until Longwood filed its notice of discovery on October 5, 2004. Through the notice, Longwood sought to depose numerous current and former Zenith employees on "the facts and circumstances surrounding [Zenith]'s decision to seek post-petition relief on behalf of `Single Source Vendors.'" (Adv. Doc. # 22, Exhibit D, p. 4.) In response, Zenith filed the motion to strike nine days later on October 14, 2004. There was no reason for Zenith to focus on the Essential Vendor Defense or any particular affirmative defense until it received the discovery notice. For these reasons, I conclude that it is appropriate to consider the motion to strike on the merits. Merits of the Motion to Strike
"A motion to strike under Rule 12(f) is the `primary procedure' for objecting to an insufficient defense." Cmty. Banks v. Start Props., II, LLC (In re Jarjisian), 314 B.R. 318, 321 (Bankr. E.D. Pa. 2004) (citations omitted). "A court can strike an affirmative defense `when it is legally insufficient to prevent recovery under any state of facts reasonably able to be inferred from the well pleaded allegations of the answer.'" United States v. Geppert Bros., Inc., 638 F.Supp. 996, 998 (E.D. Pa. 1986) (citation omitted).
Longwood asserts that the Essential Vendor Defense is "legally cognizable" and "negates the requisite showing under 11 U.S.C. § 547(b)(5)." (Adv. Doc. # 28, ¶¶ 18-19.) Longwood articulates the application of this defense as follows:
Section 547(b)(5) provides:
Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property —
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(5) that enables such creditor to receive more than such creditor would receive if —
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
Longwood seeks through its affirmative defense only to be treated equitably with other similarly situated vendors.
(Adv. Doc. # 28, ¶ 2.)
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[H]ad the pre-petition transfers not been made to the Defendant, the Defendant would have received payment from the Debtor under the Essential Vendor Order. The critical vendor defense thereby negates the requisite showing under 11 U.S.C. § 547(b)(5).
(Adv. Doc. # 28, ¶ 19.)
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If Longwood can establish that the Debtor would have paid it under the Essential Vendor Order if it had not paid it the day before the petition, then the payments to Longwood were not preferential. This conclusion may be supported by several separate legal theories, including but not limited to, estoppel, the critical vendor theory and the earmark doctrine.
While Longwood asserts a right to have the transfer protected by virtue of estoppel and the earmark doctrine, its motion papers address only the critical vendor theory; there is no discussion of the other two theories.
(Doc. # 28, ¶ 29.)
In support of its position, Longwood relies principally on two reported decisions: Kimmelman v. Port Authority of N.Y. N.J. (In re Kiwi Int'l Air Lines, Inc.), 344 F.3d 311 (3d Cir. 2003) and Official Committee of Unsecured Creditors v. Medical Mutual of Ohio (In re Primary Health Systems, Inc.), 275 B.R. 709 (Bankr. D. Del. 2002) (Fitzgerald, J.).
I find those two cases to be distinguishable. Moreover, as discussed in detail below, it is too speculative to determine that had Longwood not received the preferential transfer pre-petition, it would have been paid pursuant to an essential vendor payment authorization.
According to Longwood, the Third Circuit espoused an analysis similar to that of Longwood's in Kimmelman v. Port Authority of N.Y. N.J. (In re Kiwi Int'l Air Lines, Inc.), 344 F.3d 311 (3d Cir. 2003). In Kiwi, the debtor made payments within ninety days of its bankruptcy filing to various creditors who were parties to executory contracts (including a lease). During its chapter 11 case, the debtor obtained an order from the Bankruptcy Court authorizing it to sell substantially all of its assets.Id. As part of the sale, the debtor also obtained court approval pursuant to § 365 to assume and assign the executory contracts with those various creditors. Pursuant to § 365, those creditors were entitled to receive payment for the unpaid pre-petition amounts owed by the debtor. Subsequently, a Chapter 11 trustee was appointed. The trustee filed preference complaints against those executory contract creditors. The defendants moved to dismiss the actions. The Bankruptcy Court granted the motions. The District Court affirmed the Bankruptcy Court. The Third Circuit affirmed the District Court.
In pertinent part § 365 provides:
(b) (1) If there has been a default in an executory contract or unexpired lease of the debtor, the trustee may not assume such contract or lease unless, at the time of assumption of such contract or lease, the trustee —
(A) cures, or provides adequate assurance that the trustee will promptly cure, such default;
(B) compensates, or provides adequate assurance that the trustee will promptly compensate, a party other than the debtor to such contract or lease, for any actual pecuniary loss to such party resulting from such default; and
(C) provides adequate assurance of future performance under such contract or lease.
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(f) (2) The trustee may assign an executory contract or unexpired lease of the debtor only if —
(A) the trustee assumes such contract or lease in accordance with the provisions of this section; and
(B) adequate assurance of future performance by the assignee of such contract or lease is provided, whether or not there has been a default in such contract or lease.
In sum, the payments to all three of the defendants here are not recoverable as preferences because, had the creditors not received the payments pre-petition, they would have received amounts reflecting those sums, in any event, when the Bankruptcy Court approved the cures of the assumed agreements.
Kiwi, 344 F.3d at 321.
I find Kiwi to be inapposite to the facts here. In order for a debtor to assume and assign an executory contract under § 365, a debtor is required to cure all defaults (including prepetition defaults). By moving to assume and assign, the debtor in Kiwi sought authority to pay all pre-petition obligations to the contract parties. Here, Zenith did not seek, nor did it receive, an order from this Court requiring it to pay vendors through the Essential Vendor Order. Rather, Zenith sought and received, through the Essential Vendor Order, the right, not the obligation, to pay certain discrete pre-petition claims at Zenith's own discretion. In contrast to an order to assume and assign an executory contract, in which cure payments are mandatory, the Essential Vendor Order provided that payment of pre-petition obligations was wholly discretionary.
In Kiwi, the Third Circuit held that because the debtor elected to assume the executory contracts in the chapter 11 case, the hypothetical liquidation analysis under § 547(b)(5) should be applied differently to the parties whose contracts were assumed and assigned, stating that "the trustee's analysis [of such lessors' rights as being no greater than that of general unsecured creditors] disregards the unique set of rights provided to the defendants by § 365. . . ." Kiwi, 344 F.3d at 317. Fundamental to the order authorizing the debtor to assume the contracts in the Kiwi case was the § 365 requirement that the contract parties be paid in full with respect to pre-petition obligations. By filing a preference action against the contract parties in Kiwi, the chapter 7 trustee was improperly seeking to vitiate the right that § 365 accorded the parties whose contracts were assumed — a right to a complete cure of all pre-petition obligations. The circumstances are entirely different here. The Essential Vendor Order did not require that any payments be made, did not identify any vendors who might be beneficiaries of the order, and because Longwood had been paid pre-petition it could not possibly be deemed a beneficiary of that order.
Longwood cites Official Committee of Unsecured Creditors v. Medical Mutual of Ohio (In re Primary Health Systems, Inc.), 275 B.R. 709 (Bankr. D. Del. 2002) (Fitzgerald, J.) as a case that, by implication, stands for the proposition that the Essential Vendor Defense is legally sufficient. In that case, the debtor sought and obtained an order authorizing it to pay pre-petition claims related to wages and benefits. Thereafter, the creditors' committee filed a preference action against a creditor (the administrator of an employee benefits plan) that received payments from the debtor pursuant to the order. The court ruled that because of the order authorizing payment, a preference action could not be sustained to avoid those payments. I find the Primary Health case to be inapplicable to whether a preference action is barred by the entry of a critical vendor order that may implicate the preference action defendant. Indeed, in a subsequent ruling Judge Fitzgerald rejected the argument that her ruling in Primary Health supports a defense for preference defendants where a critical vendor order has been entered.
In Vistar Corp. v. USOP Liquidating LLC and USOP Liquidating LLC v. United Stationers, Inc. (In re U.S. Office Products Co.), Adv. Nos. 02-7192 and 03-50990, Tr. of Hr'g (Bankr. D. Del. October 15, 2004) (Fitzgerald, J.), Judge Fitzgerald rejected the arguments of preference defendants that the entry of a critical vendor order absolved the defendants from preference liability. In U.S. Office Products, the two defendants were both explicitly named in the critical vendor motion. They were subsequently paid pursuant to the order entered by the court approving payments to critical vendors. Later, preference actions were brought against the defendants to recover payments made pre-petition. The defendants argued that the Primary Health decision stood for the proposition that the entry of a critical vendor order foreclosed subsequent preference liability.
Judge Fitzgerald rejected the notion that her ruling inPrimary Health stood for this general proposition. The most significant difference between the circumstances in Primary Health and in U.S. Office Products was that the order authorizing payment of pre-petition obligations in Primary Health authorized the debtor to pay claims of employees who held priority claims. (U.S. Office Products, Tr. at p. 8 ("myPrimary Health decision was based on the fact that those were employees with priority claims. It's an entirely different thing.").) In U.S. Office Products, the critical vendor order authorized the debtor to pay general unsecured claims. Judge Fitzgerald noted that in Primary Health,
the payments that were made pursuant to the order in that case were within the priorities. Not one person got a dime more than the priority amounts. They would've been entitled to those priority amounts in any event in the Chapter 7 ahead of the unsecured creditors. . . . You're looking here [in U.S. Office Products] at simply having one unsecured creditor as a opposed to another unsecured creditor. That wasn't the situation in Primary Health. It was a creditor group that had priority claims as opposed to unsecured priority claims, and in the pecking order of the Bankruptcy Code the priorities get paid first.
(U.S. Office Products, Tr. at pp. 48-49.)
The matter before me is quite similar to that addressed in HLI Creditor Trust v. Export Corp. (In re Hayes Lemmerz International, Inc.), 313 B.R. 189 (Bankr. D. Del. 2004) (Walrath, J.) where the court denied a motion to dismiss a preference action against a vendor who claimed it was protected by a critical vendor order. In doing so, the court made several important points for present consideration. First, the payments that were the subject of the preference action were made before the critical vendor order was entered and, therefore, not pursuant to that order. Second, because the critical vendor order was permissive, the court stated that "even if [the defendant] had received some payments under the Critical Vendor Order, it does not follow that it was entitled to receive payment of all pre-petition claims." Id. at 193. In this regard, the court noted that the defendant was not designated as a critical vendor in the order and that there was no analysis of preference actions in connection to entry of the critical vendor order. As stated above, the Essential Vendor Order before me provides that Zenith was "authorized, but not required, in its sole discretion, to pay the prepetition Essential Vendor Claims. . . ." (Case Doc. # 30 at 1.) Finally, the Hayes court rejected the analogy to a situation where a debtor assumes a contract pursuant to § 365. The court stated that "the Critical Vendor Order was permissive and not mandatory. In contrast, section 365 mandates that all pre-petition obligations be paid before a contract is assumed." Id. at 194.
In its reply brief, Longwood amplifies the theory of its Essential Vendor Defense as follows:
Through discovery, Longwood will be able to establish that it was an "essential vendor" of the Debtor within the meaning of the Essential Vendor Order. Longwood also will establish that, as an essential vendor, the Debtor would have paid Longwood under the terms of the Essential Vendor Order had Longwood not received payments shortly before the commencement of this case. Longwood will demonstrate that the Debtor would have had to pay Longwood "in order to preserve the enterprise value" of the Debtor's business in connection with the sale of the Debtor just as the Debtor felt it necessary to pay other vendors. . . . Thus, Longwood will demonstrate that it would have received no more as a result of the alleged preferential payments then it would have received through this case.
(Adv. Doc. # 31, ¶ 3.)
Approval of a critical vendor motion is discretionary based upon the facts and circumstances presented. See In re Just for Feet, Inc., 242 B.R. 821, 824-26 (D. Del. 1999).
Even if Longwood establishes through discovery that Zenith understood Longwood to be an essential vendor and that absent the pre-petition payment of $506,035 Zenith would have intended to pay Longwood as a beneficiary of the Essential Vendor Order, Longwood would still fall short of its burden. Indeed, even if Zenith were to now stipulate with Longwood that Longwood was an essential vendor as contemplated by the essential vendor motion, and that absent the pre-petition payment it would have included the $506,035 in the relief requested, that would not be sufficient. This is so because if the preference payment had not been made and the $506,035 amount was included in Zenith's motion, Longwood would still have to prove that the Court would have approved the motion. It is speculation to conclude that no party in interest, including the pre-petition secured lender in this case and the U.S. Trustee, would have objected or that the Court would have granted a motion that had not been made, i.e., a motion embodying facts different from those set forth in the motion that was approved.
With respect to the essential vendor motion, Zenith's counsel made the following representation at the first day hearing: "We've advised the U.S. Trustee's office that that covers approximately 50 vendors, the essential vendor program. And, again, we seek only up to $1M." The Court then observed: "Okay. The million dollar cap seems appropriate or reasonable under these circumstances." (Case Doc. # 107, pp. 7-8.) In connection with essential vendor motions, the U.S. Trustee often queries the debtor prior to the hearing as to the identity of targeted creditors and the individual amounts proposed to be paid. These inquiries often bring out relevant facts not set forth in the motion itself. The Court obviously welcomes the U.S. Trustee's position on critical vendor motions and debtors often modify their request in order to avoid a courtroom dispute on a U.S. Trustee's objection to such a motion. From Zenith's counsel's statement at the first-day hearing, it seems clear that an inquiry was made by the U.S. Trustee and the U.S. Trustee was satisfied that the details given to her justified taking a no objection position. Whether Zenith would have been able to obtain the U.S. Trustee's acquiescence to the Essential Vendor Order if it added $506,035 to the $1,000,000 is problematic. Adding a fifty percent increase to the amount originally sought obviously changes the facts underlying the motion and makes it uncertain that the U.S. Trustee would have taken the same position.
Furthermore, how are we to know that the pre-petition secured lender (who consented to the use of cash collateral pursuant to an agreed budget) would not have objected to such a large payment? And, of course, assuming that the U.S. Trustee and the pre-petition secured lender would not have opposed such a payment to Longwood, how does one prove that the Court, acting within its discretion, would have approved the request?
It is important to note the significance of the $506,035 transaction relative to the relief granted by the Essential Vendor Order. For example, the Debtor's petition lists the twenty largest unsecured claims. (See Case Doc. # 1, Form 4.) Excluding claims by noteholders, Ford Motor Co. and General Motors Corp. (the latter two both being purchasers of Zenith's products), the remaining eleven creditors appear to be trade vendors with claims ranging from a high of $93,985 to a low of $21,815. The aggregate amount of the eleven claims is $498,499, or an average claim of $45,318. Assuming that some or all of those eleven trade creditors received essential vendor payments, the individual amounts going to the remaining fifty vendors would be very small. If all fifty creditors received an equal share of the $1,000,000 each would have received $20,000 (i.e., $1,000,000 ÷ 50 = $20,000). It is obvious that adding the $506,035 claim would materially alter the facts upon which the Essential Vendor Order is based. Thus, it is speculation to assume that absent the pre-petition payment of $506,035 the Court would have authorized a payment of that magnitude to one creditor, Longwood. If the $506,035 preference payment amount had been included in the relief requested by the Debtor, the simple fact is the relief may have been denied, or granted as to vendors other than Longwood.
The record does not disclose whether in fact Zenith made payments up to the full authorized amount of $1,000,000.
The issue presented here is similar to an issue addressed by the Third Circuit in Kiwi. There the Court found that "[t]he trustee's characterization of the defendants' claims as unsecured on the filing date seems to presuppose that a hypothetical Chapter 7 trustee would have elected to reject the debtor's agreements with them." Kiwi, 344 F.3d at 318. As to that position, the Court observed: "However, the agreements here were not rejected and they would not necessarily have been rejected in a hypothetical Chapter 7 liquidation." Id. at 318-19 (footnote omitted) (emphasis added). Similarly here, Longwood is arguing that the Court would have approved the motion that Zenith would have made absent the pre-petition payment to Longwood. This is not necessarily so and I know of no conceivable way that Longwood could present evidence to show that it would be so.
Finally, I note that one could hypothesize that Zenith wire transferred the $506,035 on the eve of the petition date because of its perceived risk that including in the motion such a large payment to one vendor would produce an objection that could result in a complete or partial denial of the motion.
For the foregoing reasons, the twenty-first affirmative defense was properly struck because "it is legally insufficient to prevent recovery under any state of facts reasonably able to be inferred from the well pleaded allegations of the answer."Geppert Bros., Inc., 638 F.Supp. at 998 (emphasis added). Therefore, after reconsidering the merits of the motion to strike, the Order is ratified on the merits.