Opinion
Case No. 00-10164-SSM, Adversary Proceeding No. 00-1054
November 8, 2000
Richard G. Hall, Esquire, Annandale, VA, for the Plaintiff
Carmen A. Jacobs, Esquire, Alexandria, VA, for the Defendant
MEMORANDUM OPINION
This is an action to determine whether the debtor's automobile, given as collateral for a car loan, also secures a credit card account, and whether the credit card issuer violated the Truth in Lending Act ("TILA") by failing to disclose, at the time the account was opened, that the automobile would secure the credit card charges as well. A trial was held in open court without a jury on November 2, 2000, with each of the parties — the debtor and the credit card issuer — being represented by counsel. For the reasons stated in this opinion, the declaratory judgment count will be dismissed as moot. With respect to the TILA count, the court determines that the debtor does not have standing to prosecute the claim because it remains part of the bankruptcy estate; however, rather than dismiss the count on that basis, the court will order the substitution of the chapter 7 trustee as plaintiff.
The court ruled at trial that Count II was a non-core proceeding with respect to which a bankruptcy judge may conduct the trial but may issue a dispositive order only with the consent of the parties. 28 U.S.C. § 157(c). The defendant does not consent to a final judgment being entered by a bankruptcy judge. Accordingly, after the chapter 7 trustee has been substituted and any further evidence taken, the court will submit proposed findings of fact and conclusions of law to the United States District Court for the Eastern District of Virginia in accordance with F.R.Bankr.P. 9033.
Facts and Procedural Background
The plaintiff, Mahlon Parker Moore ("the debtor"), filed a joint voluntary chapter 7 petition with his wife, Valerie June Moore, in this court on January 14, 2000, and received a discharge on May 10, 2000. The trustee had previously filed a report of no distribution on April 13, 2000, and the bankruptcy case was closed on May 18, 2000.
Among the debts listed on the debtor's schedules were two liabilities to the Treasury Department Federal Credit Union ("the credit union"): an automobile loan and a Visa credit card account. The automobile loan was listed as being secured by a 1995 Honda Odyssey mini van and the credit card account as an unsecured debt. The value of the Odyssey was listed as $3,500, and the debtor's equity was claimed exempt in the amount of $2,365.00.
The car loan was taken out on February 9, 1995, in the amount of $24,513.41 to purchase the Odyssey. The loan was repayable in bi-weekly installments of $230.28, with the final payment being due March 7, 2000. On the date the debtor filed his bankruptcy petition, he still owed $921.10 on the car loan. He continued to make payments subsequent to the filing of the bankruptcy and made the final payment on or about March 8, 2000.
The car loan is evidenced by a written "Loan Agreement and Consumer Credit Disclosure Statement" signed by the debtor and his wife and dated February 9, 1995. (The box checked under the wife's signature reflects her status as "owner of collateral" rather than "borrower.") The front or signature side of the agreement contains the following language:
Security Interest. To secure all obligations of Borrowers) hereunder to the Credit Union, You give a security interest and lien in and upon the following property, including any and all accessions, related insurance proceeds or insurance premium refunds:
Year Make Model V.I.N./Serial No.
1995 HONDA ODYSSEY JHMRA1879SC002311
On the rear of the agreement are additional printed provisions, including the following:
4. Collateral. The Credit Union has been granted a security interest or lien in or upon the collateral designated on the reverse side[.] * * * Personal property given as Security under this Agreement (other than household goods or Your principal dwelling) secures the repayment of all amounts You may owe us in the future if that status is reflected in the "Security" section under the "Truth-in-Lending Disclosure " in any particular agreement evidencing such future debt.
* * *
7. Default. Your loan shall be in default if any of the following things occur: (a) You do not make any payment or perform any obligation under the Agreement or any other Agreement that You may have with the Credit Union; * * *.
(emphasis added).
The Visa credit card account was opened by the debtor some 18 months later on August 16, 1996. The credit card application, which was signed by the debtor on August 14, 1996, contains a box captioned "IMPORTANT CREDIT CARD DISCLOSURE" which sets forth an Annual Percentage Rate of 10.40% and other information, but makes no reference whatsoever to any security interest or collateral. An 8-page printed brochure entitled "VISA Credit Card Agreement and Disclosure" provided to the debtor at the time the account was opened similarly contains a box captioned "IMPORTANT CREDIT CARD DISCLOSURE" with the Annual Percentage Rate and other information but no mention of any collateral or security interest. Nor is there any mention or discussion of a security interest or collateral anywhere else in the brochure.
The amount due on the Visa credit card account on the date the bankruptcy petition was filed was $5,437.48. The last payment that had been made by the debtor was on October 27, 1999 (which was also the date of the last charge to the account) and no payments were made by the debtor subsequent to the bankruptcy filing. During the period the account was opened, the debtor paid a total of $1,856.61 in finance charges.
After the bankruptcy case was filed, Alfred Lawrence Toombs, an attorney retained by the credit union to represent it in connection with the bankruptcy, wrote a letter to the debtor's bankruptcy attorney dated February 7, 2000. That letter, after reviewing the status of the car loan and credit card accounts, took the following position:
It is TFCU's position that the indebtedness due under Account 141 [the credit card account] is fully secured against the vehicle and that the Credit Union will retain a valid and enforceable lien on the vehicle notwithstanding the future discharge of Debtors' personal liability for either account.
* * *
After you have reviewed the enclosures and discussed the matter with your clients, please inform me whether they intend to surrender the vehicle or resume payments on Account 141 until the remaining indebtedness is paid.
(emphasis added). Attached to the letter were a copy of the car loan agreement and two unpublished opinions, Martin v. Virginia League Central Credit Union, No. 98-0058-L (W.D. Va., Dec. 11, 1998) (Moon, J.) and In re Alien, No. 7-98-01521 (Bankr. W.D. Va., Jul. 8, 1999) (Pearson, J.), which according to the letter supported the credit union's position. A copy of the letter was sent to the credit union at or about the time it was mailed to debtor's counsel.
After debtor's bankruptcy counsel telephoned Mr. Toombs, taking issue with the credit union's position and requesting a copy of the credit card agreement, Mr. Toombs again wrote debtor's counsel on February 29, 2000. This letter included a copy of the credit card application and the credit card agreement and concluded:
It continues to be TDFCU's position that the indebtedness due under Account 141 [the credit card account] is fully secured against the vehicle and that the Credit Union will retain a valid and enforceable lien on the vehicle notwithstanding the future discharge of Debtor's personal liability for either account. Please advise me of your clients' intentions after you have reviewed this letter with them.
A copy of this letter was likewise provided to the credit union at or around the time it was mailed to the debtor's attorney.
The final payment on the car loan was made on or about March 8, 2000. The debtor made the payment in person but does not recall whether the payment was in cash or by check. The complaint in this adversary proceeding was filed the next day, March 9, 2000. It seeks a determination in Count I that the balance due on the credit card account is unsecured, and in Count II statutory damages and attorneys fees for violation of the Truth in Lending Act. Service of the summons and complaint was made by first-class mail on March 13, 2000. A few days after the debtor made the final payment on the car loan, he went to the credit union office to request the title for the vehicle. He was told by an employee, whom he believes to be the credit manager, Paula Diggs, that he could not have the title and that the credit union was reviewing the matter. Ms. Diggs testified that she does not remember the meeting, and that it is not unusual for the release of a title for an automobile loan to take as long as a month after the loan is paid off. She admitted, however, that she had seen copies of the two letters sent by Mr. Toombs, and the court finds it more likely than not that she did make the statements attributed to her by the debtor.
At some point shortly thereafter, however, the credit union management made a decision not to follow the advice it was receiving from Mr. Toombs. On March 31, 2000, the credit union released its lien on the face of the title certificate. The title certificate was mailed that day or shortly thereafter to the debtor's bankruptcy counsel, who delivered it to the debtor. The credit union did not file any pleadings in this court seeking relief from the automatic stay or otherwise asserting a security interest. The letters from Mr. Toombs were the only attempt to demand payment on the credit card account. The debtor testified that he took two half-days off from work to consult with his bankruptcy attorney about bringing this action, and that he made two visits to the bank to attempt to collect documents concerning the claimed security interest. Although the debtor testified that his time off from work came to approximately 44 hours, the court cannot find from the evidence that the debtor lost more than 8 hours. Accepting the debtor's testimony that his rate of pay equated to $44.82 per hour, the court finds that his actual lost wages are $358.56. The debtor paid his attorney $400.00 as a retainer to bring the present action, and the attorney provided at trial a billing statement for time and expenses up to the trial totaling $2,096.10.
Astonishingly, Mr. Toombs denied at trial that the purpose of the letters was to obtain payment of the credit card account. However, his February 7, 2000, letter plainly states, "After you have reviewed the enclosures and discussed the matter with your clients, please inform me whether they intend to surrender the vehicle or resume payments on Account 141 until the remaining indebtedness is paid' (emphasis added). The court would have to be naive, indeed, not to read that concluding sentence as a demand for payment of the credit card account.
Conclusions of Law and Discussion I.
Count I of the complaint seeks a determination that the credit card account is not secured by the Honda Odyssey. This court has subject-matter jurisdiction over Count I under 28 U.S.C. § 1334 and 157(a) and the general order of reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. Count I is a core proceeding in which a final judgment or order may be entered by a bankruptcy judge. 28 U.S.C. § 157(b)(2)(K). Venue is proper in this district under 28 U.S.C. § 1409(a). The defendant has been properly served and has appeared generally.
A.
The credit union asserts that this entire adversary proceeding is moot, since the credit union has now released its lien against the Odyssey and has delivered the title certificate to the debtor, particularly as the debtor made no payments on the Visa account after filing the bankruptcy petition. With respect to Count I, the court concurs that the controversy framed by the pleadings is moot. The relief sought by the debtor was a lien-free title to the Odyssey. The debtor now has that. No sums of money were paid by the debtor to the credit union as a result of the challenged lien. There is simply no further relief the court can decree.
B.
In response to the mootness argument, the debtor urged at trial that the credit union's assertion, through Mr. Toombs, that the Odyssey secured the credit card account was not only legally unjustified but was at the very least reckless and indeed simply an attempt to deceive the debtor into reaffirming and paying a dischargeable debt. The problem with this argument, however, is that even under the most liberal view of notice pleading, Count I does not set forth a cause of action for tortious conduct.
At trial, Mr. Toombs admitted that, although the car loan agreement states that the collateral pledged for the car loan would secure future loans "if" that status is reflected in the `Security' section under the `Truth-in-Lending Disclosure' in any particular agreement evidencing such future debt" (emphasis added), he did not, before writing the debtor's counsel, review the Truth in Lending disclosures for the credit card account.
The court recognizes, of course, that Rule 15(b), Fed.R.Civ.P., which is applicable to this adversary proceeding through F.R.Bankr.P. 7015, permits, and indeed liberally encourages, amendment of the pleadings to conform to the evidence at trial. Nevertheless, an amendment that would treat Count I as asserting a tort-like ground of recovery (analogous to slander of title), or, as also suggested in oral argument, a violation of the automatic stay, would go beyond merely permitting an alternative legal theory for the relief originally sought. That relief was not damages, but a simple declaratory judgment that the credit card account was unsecured. Whether the credit card account was indeed secured by the Odyssey is a pure issue of law, and no prejudice could result to the defendant from the court deciding that issue. Assuming, however, that the court were to determine as a legal matter that the Odyssey did not stand as collateral for the credit card account, the factual issue of whether the credit union's position was nevertheless advanced in good faith or instead in reckless disregard for its merits, was not clearly raised by the pleadings, and the court cannot find that the credit union had fair notice that it would have to defend against such a claim. Additionally, the testimony presented at trial was simply not focused on such a claim. As a consequence, the court does not have an adequate basis upon which to make a confident ruling even if the pleadings were amended. For that reason, the court declines to allow the pleadings to be amended at this late stage to assert a claim for wrongful assertion of a lien or for violation of the automatic stay.
On the theory that the unjustified assertion of a lien was a prohibited "act" under § 362(a)(6), Bankruptcy Code, "to collect, assess, or recover a claim against the debtor that arose before the commencement of the case," thereby giving rise to a claim for damages under § 362(h), Bankruptcy Code.
That leaves only the original request for a determination that the credit card account was not secured by the Odyssey. The release of the lien and the delivery of the title have mooted that issue. Even if the court were to find, as seems likely, that the commencement of this litigation was the major reason the credit union reversed itself and released the lien, there is no apparent legal basis upon which the court could award the debtor counsel fees incurred in bringing suit. Since there is no meaningful relief the court can grant with respect to Count I, and no possible future controversy with respect to the reach of the credit union's lien, an order will be entered dismissing Count I as moot.
II.
Count II, as noted, seeks damages under the Truth in Lending Act ("TILA") for failing to disclose, at the time the Visa card was issued, that the account was to be secured by the Odyssey. 15 U.S.C. § 1637(a)(6). The claimed damages include twice the finance charge. 15 U.S.C. § 1640(a)(2)(A)(i). The debtor did not learn that the credit union was asserting a security interest until approximately a month or so after the bankruptcy filing. Nevertheless, the acts giving rise to Count II occurred well prior to the filing of the petition, and the cause of action therefore falls within the broad definition of property of the bankruptcy estate. Segal v. Rochelle, 382 U.S. 375, 380, 86 S.Ct. 511, 515, 15 L.Ed.2d 428 (1966) (test is whether the cause of action is "sufficiently rooted in the pre-bankruptcy past"); Field v. Transcontinental Ins. Co., 219 B.R. 115 (E.D. Va. 1998) (Ellis, J.) (debtor's bad faith claim against insurance company that refused to indemnify him with respect to automobile accident occurring 4 months prepetition was sufficiently rooted in pre-bankruptcy past to constitute property of the bankruptcy estate). The TILA claim was not listed as an asset on the debtor's schedules, and has not been exempted.
At the time this adversary proceeding was commenced, the bankruptcy case was still open and the trustee had not yet filed a report of no distribution. The debtor could easily have filed with the court, and served on the chapter 7 trustee, amended schedules listing the TILA claim. The court is satisfied, however, that debtor's counsel simply did not focus on the issue, and the court does not impute any bad faith to the debtor from failure to amend the schedules before the case was closed.
Under well-settled law, the failure to schedule the Truth in Lending claim means that it remains property of the bankruptcy estate even after the bankruptcy case is closed. Tyler House Apts., Ltd. v. U.S., 38 Fed.Cl. 1, 6 (1997). The problem, then, is one of standing, since the trustee is the sole representative of the bankruptcy estate. § 323, Bankruptcy Code. See In re Educators Group Health Trust, 25 F.3d 1281, 1284 (5th Cir. 1994) ("If a cause of action belongs to the estate, then the trustee has exclusive standing to assert the claim."); Honigman v. Comerica Bank (In re Van Dresser Corp.), 128 F.3d 945, 947 (6th Cir. 1997); Detrick v. Panalpina, Inc., 108 F.3d 529, 535-36 (4th Cir. 1997), cert. denied 522 U.S. 810, 118 S.Ct.52, 139 L.Ed.2d 17 (1997). It has been held, moreover, that "[s]tanding goes to the court's jurisdiction and must exist at the time the action was filed." Ball v. Nationscredit Fin. Svcs. Corp., 207 B.R. 869, 871 (N.D. Ill. 1997), citing Arizonans for Official English v. Arizona, 520 U.S. 43, 68 n. 22, 117 S.Ct. 1055, 1069 n. 22, 137 L.Ed.2d 170 (1997). In Ball, a debtor's TILA action was dismissed without prejudice for lack of standing where, at the time the action was filed, her claim of exemption with respect to the TILA claim had not yet been allowed, although by the time the motion to dismiss was heard, the exemption had been allowed in part.
The question remains, though, whether it is actually necessary to dismiss the present action. In Detrick, the Fourth Circuit addressed a very similar factual situation. The plaintiffs, husband and wife, had filed separate bankruptcy petitions approximately two years before filing a Federal district court action on RICO and civil conspiracy claims. 108 F.3d at 535 n. 9. Those claims were not listed on their bankruptcy schedules, even though all the events giving rise to the claims had occurred prior to the bankruptcy filings, and, indeed, the debtors had even consulted with counsel concerning a possible lawsuit. Id. at 534. After the RICO and civil conspiracy claims were dismissed on summary judgment, the debtors appealed and — the defendants having raised the issue of standing — moved to substitute the chapter 7 trustees in their respective cases as the appellants. Id. at 535. The Fourth Circuit, after noting that only the trustee "may . . . attempt to reduce to judgment causes of action which are the property of the debtors' estate," explained,
In exercising his/her judgment and discretion, the Trustee has three choices with respect to pending actions by the debtor: (1) intervene and assume prosecution as trustee, (2) consent to prosecution by the debtor for the benefit of the estate, or (3) decline prosecution.
Id. The Court further observed that, even though there had been no formal intervention by the trustees in the lower court, "the judgment entered . . . by the district court was a judgment entered on behalf of the Detricks's estate, not on behalf of the Detricks in their individual capacity." Id. at 536. On that basis, the Court allowed the trustees to be substituted for the Detricks on appeal.
A similar resolution is appropriate here. The waste of time, money, and judicial resources that would attend a dismissal without prejudice and a subsequent refiling of the case by the trustee or the debtor (depending on who then had standing) is palpable. The parties have each incurred substantial expense preparing for and litigating this action; and the court has likewise devoted substantial time to reviewing the legal issues prior to trial and conducting the trial itself. There can plainly be no benefit even to the defendant — which never objected to the debtor's standing until the court brought the issue up during opening statements — from having to try this action a second time. At the same time, it seems clear that the court lacks jurisdiction over Count II in the absence of the only party who has standing to assert it, and that such lack of jurisdiction is not subject to waiver.
The trustee could, for example, abandon the cause of action as burdensome or of inconsequential value, in which event it would revert to the debtor. § 554(a), Bankruptcy Code. Alternatively, the debtor might be entitled to exempt the cause of action under Virginia's "personal injury" exemption, with the result that it would no longer be part of the bankruptcy estate. § 522(b)(2)(A), Bankruptcy Code; Va. Code Ann. § 34-28.1. See In re Webb, 214 B.R. 553 (E.D. Va. 1997) (allowing exemption of gender discrimination claim as a personal injury).
During oral argument, the court suggested that lack of standing, as opposed to lack of subject-matter jurisdiction, was subject to waiver if not timely asserted. Upon further review, however, it seems clear that lack of standing is not waived by failure to object. See Juidice v. Vail, 430 U.S. 327, 331, 97 S.Ct. 1211, 1215, 51 L.Ed.2d 376 (1977) ("Although raised by neither of the parties, we are first obliged to consider the standing of appellees, as a matter of the case-or-controversy requirement associated with Art. Ill"); Dan River, Inc. v. Unitex, Ltd., 624 F.2d 1216, 1223 (4th Cir. 1980) ("whether raised or not, jurisdictional standing is an issue to be considered sua sponte by the court").
The appropriate solution, the court concludes, is to suspend further proceedings with respect to Count II until the chapter 7 trustee is substituted as the real party in interest. See Fed.R.Civ.P. 17(a), made applicable by F.R.Bankr.P. 7017. Although Rule 17 requires that every action be prosecuted in the name of the real party in interest, it further provides,
No action shall be dismissed on the ground that it is not prosecuted in the name of the real party in interest until a reasonable time has been allowed after objection for ratification of commencement of the action by, or joinder or substitution of, the real party in interest; and such ratification, joinder, or substitution shall have the same effect as if the action had been commenced in the name of the real party in interest.
(emphasis added). Thus, the court concludes that it has discretion in a case such as this — where a debtor has mistakenly but in good faith brought a cause of action belonging to the bankruptcy estate — to direct the substitution of the bankruptcy trustee as the party plaintiff. Accordingly, orders will be entered (a) reopening the debtor's bankruptcy case and directing appointment of a trustee, and (b) suspending proceedings with respect to Count II and substituting the chapter 7 trustee as the party plaintiff. The court will set a status hearing approximately 30 days in the future to determine whether further trial proceedings are required. If the trustee does not enter a timely appearance, the court will recommend that the District Court dismiss Count II without prejudice based on lack of standing.
Ball is not to the contrary. In that case, the trustee (after the debtor amended her schedules to list her TILA claim) did not seek to be substituted as plaintiff but simply reached an out-of-court monetary settlement with the lender. The debtor opposed the settlement and sought to pursue the cause of action in her own name.