Opinion
No. 02-41619 J, Adv. No. 02-4896 J
June 12, 2003
DECISION
By this action and counterclaim, the parties seek a determination as to the validity of a certain deed of trust which defendant Guy Philip Egerton, the above debtor ("Egerton"), executed in favor of plaintiff Frederick Ashouri ("Ashouri"), and related relief. Egerton has moved for summary judgment or partial summary judgment pursuant to Fed.R.Civ.P. 56, applicable herein via F.R.Bankr.P. 7056. The primary issue presented is whether Ashouri violated the Federal Truth in Lending Act, 15 U.S.C. § 1601 et. seq. ("TILA"), Home Ownership and Equity Protection Act, 15 U.S.C. § 1639 ("HOEPA"), and Regulation Z, 12 C.F.R. § 226.31 and 226.32 in connection with the loan secured by the subject deed of trust such as to entitle Egerton to rescind the deed of trust. The court will grant partial summary judgment in favor of Egerton, and permit him to rescind the deed of trust at issue, subject to his compliance with his proposal set forth at pages 7 — 8 of his Supplemental Memorandum filed May 16, 2003, modified as provided below.
A. Background
Although some facts are in dispute, those material to the motion before the court are undisputed. On June 4, 2001, Egerton signed a promissory note in favor of Ashouri in the principal sum of $35,000, together with a third-priority deed of trust to secure the note, which deed of trust encumbered Egerton's residence in Pleasanton, California. After certain deductions, Egerton received loan proceeds totaling $31,700. Ashouri did not furnish Egerton with any of the disclosures required by TILA, HOEPA, or Regulation Z.
Egerton defaulted on senior notes, and on March 26, 2002, filed a chapter 13 petition herein. Approximately three months later, Egerton, through counsel, notified Ashouri that Egerton had elected to rescind the loan, see 15 U.S.C. § 1635 (a) , because Ashouri had violated the TILA, HOEPA, and Regulation Z by failing to provide Egerton with the disclosures and notices required thereunder. The letter demanded that Ashouri release his deed of trust within 20 days pursuant to 15 U.S.C. § 1635 (b).
15 U.S.C. § 1635 (a) provides in relevant part:
Except as otherwise provided in this section, in the case of any consumer credit transaction . . . in which a security interest, including any such 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.
15 U.S.C. § 1635 (b) provides in relevant part:
When an obligor exercises his right to rescind under subsection (a) of this section, he is not liable for any finance or other charge, and any security interest given by the obligor, including any such interest arising by operation of law, becomes void upon such a rescission. Within 20 days after receipt of a notice of rescission, the creditor shall return to the obligor any money or property given as earnest money, downpayment, or otherwise, and shall take any action necessary or appropriate to reflect the termination of any security interest created under the transaction.
Ashouri refused to release his deed of trust, taking the position that the loan transaction was exempted from TILA and HOEPA because Ashouri was not a "creditor" that was subject to the statutes, and because the loan to Egerton was not "consumer credit" that entitled Egerton to the protections of the statutes. Thereafter, Ashouri filed the present adversary proceeding.
The issues presented by Egerton's motion for summary judgment are whether, at the time of the loan, Ashouri was a "creditor" as defined for purposes of TILA and HOEPA, and whether the loan qualifies as "consumer credit" thereunder. To prevail on his motion for summary judgment, Egerton must prevail as to both these issues.
B. Ashouri Was a "Creditor" 15 U.S.C. § 1602 (f) sets forth a lengthy and complex definition of "creditor." For present purposes, the relevant portion reads as follows:
The term "creditor" refers only to a person who both (1) regularly extends, whether in connection with loans, sales of property or services, or otherwise, consumer credit which is payable by agreement in more than four installments or for which the payment of a finance charge is or may be required, and (2) is the person to whom the debt arising from the consumer credit transaction is initially payable on the face of the evidence of indebtedness or, if there is no such evidence of indebtedness, by agreement.
. . . .
Any person who originates 2 or more mortgages referred to in subsection (aa) of this section in any 12-month period or any person who originates 1 or more such mortgages through a mortgage broker shall be considered to be a creditor for purposes of this subchapter.
The statute is supplemented by 12 C.F.R. § 226.2 (a) (17), which clarifies that a person regularly extends credit if, in any 12-month period, the person originates more than one credit extension that is subject to the requirements of § 226.32 . . . 12 C.F.R. § 226.2 (a) (17) n. 3.
Thus, Ashouri was a "creditor" if the loan to Egerton and at least one extension of credit by Ashouri within the preceding year fall within the requirements of 15 U.S.C. § 1602 (aa) (1) and 12 C.F.R. § 226.32 (which essentially parallels 15 U.S.C. § 1602 (aa) (1)). The uncontroverted declaration and amended declaration of Lori A. Wickam ("Wickam"), who borrowed $25,000 from Ashouri on December 1, 2000 (within the one year period prior to Ashouri's loan to Egerton) on the security of her principal residence, and the uncontroverted declaration and supplemental declaration of Charles H. Oliver, who analyzed Ashouri's loans to Wickam and Egerton with reference to the alternate "triggers" under 15 U.S.C. § 1602 (aa) (1)(A) and (B), establish that Ashouri's loans to Wickam and Egerton satisfied at least one of the triggers, and that Ashouri was therefore a "creditor" with respect to his loan to Egerton.
15 U.S.C. § 1602 (aa) (1) provides:
A mortgage referred to in this subsection means a consumer credit transaction that is secured by the consumer's principal dwelling, other than a residential mortgage transaction, a reverse mortgage transaction, or a transaction under an open end credit plan, if —
(A) the annual percentage rate at consummation of the transaction will exceed by more than 10 percentage points the yield on Treasury securities having comparable periods of maturity on the fifteenth day of the month immediately preceding the month in which the application for the extension of credit is received by the creditor; or
(B) the total points and fees payable by the consumer at or before closing will exceed the greater of —
(i) 8 percent of the total loan amount; or
(ii) $400.
The court so holds.
C. Ashouri Extended "Consumer Credit" to Egerton
Egerton would have no right of rescission if the loan at issue was not a "consumer credit" transaction. 15 U.S.C. § 1635 (a). 15 U.S.C. § 1602 (h) defines "consumer" as follows:
The adjective "consumer", used with reference to a credit transaction, characterizes the transaction as one in which the party to whom credit is offered or extended is a natural person, and the money, property, or services which are the subject of the transaction are primarily for personal, family, or household purposes.
15 U.S.C. § 1602 (h) is supplemented by 12 C.F.R. § 226.2 (11) and (12) which, in relevant part, defines "consumer" and "consumer credit" as follows:
(11) Consumer means a . . . natural person to whom consumer credit is offered or extended. However, for purposes of rescission under §§ 226.15 and 226.23, the term also includes a natural person in whose principal dwelling a security interest is or will be retained or acquired, if that person's ownership interest in the dwelling is or will be subject to the security interest.
(12) Consumer credit means credit offered or extended to a consumer primarily for personal, family, or household purposes.
Id. Thus, the next issue is whether Ashouri extended "consumer credit" to Egerton, which turns on the question whether the loan was "primarily for personal, family, or household purposes." 12 C.F.R. § 226.2 (12).
It is undisputed that at the time of the loan, Egerton was self-employed, doing business out of his home as a recruiter in the computer technology field. As to the loan at issue, the parties agree that Egerton dealt primarily with Mr. Tom Givens ("Givens") of Equity Share Plus, Ashouri's agent. At this point, the declarations diverge. Egerton's declarations state that: (a) Egerton advised Givens when he requested the loan that the loan was to cover "living expenses", and (b) Egerton deposited the loan proceeds in his personal checking account, transferred $5,000 to his business checking account, and used the balance of the proceeds exclusively for living expenses, including mortgage payments, utility bills, and groceries. Givens's declaration is to contrary, and states that Egerton "wanted a construction loan to fix up his house for sale."
Declarations of Ashouri and Mr. Ken Beasley state that the purpose of the loan was to fix up the house, but these statements appear to be hearsay, and are thus inadmissible.
In the summary judgment context, the court must view the evidence in the light most favorable to the nonmoving party. See, e.g., Jesinger v. Nevada Fed. Credit Union, 24 F.3d 1127, 1130 (9th Cir. 1994); Summers v. A. Teichert Son, Inc., 127 F.3d 1150, 1152 (9th Cir. 1997). The court will therefore assume, without deciding, that Egerton in fact told Givens that the purpose of the loan to fix up his house for sale.
It does not follow, however, that the loan was not "primarily for personal, family, or household purposes." Rather, the court must examine the transaction as a whole to determine whether it was primarily consumer or commercial in nature. See, e.g., Tower v. Moss, 625 F.2d 1161, 1166 (5th Cir. 1980). In doing so, the court is not without guidance; the Federal Reserve Board ("FRB") official staff interpretation to 12 C.F.R. § 226.3 (a)(1) is relevant, Thorns v. Sundance Properties, 726 F.2d 1417, 1419 (9th Cir. 1984), and instructive.
12 C.F.R. § 226.3 (a)(1) provides that "[b]usiness, commercial, agricultural, or organizational credit" are exempt from Regulation Z, following 15 U.S.C. § 1603 (1), which exempts from TILA "Credit transactions involving extensions of credit primarily for business, commercial, or agricultural purposes."
The Federal Reserve Board staff interpretation states:
1. Primary purposes. A creditor must determine in each case if the transaction is primarily for an exempt purpose. If some question exists as to the primary purpose for a credit extension, the creditor is, of course, free to make the disclosures, and the fact that disclosures are made under such circumstances is not controlling on the question of whether the transaction was exempt.
2. Factors. In determining whether credit to finance an acquisition — such as securities, antiques, or art — is primarily for business or commercial purposes (as opposed to a consumer purpose), the following factors should be considered:
. The relationship of the borrower's primary occupation to the acquisition. The more closely related, the more likely it is to be business purpose.
. The degree to which the borrower will personally manage the acquisition. The more personal involvement there is, the more likely it is to be business purpose.
. The ratio of income from the acquisition to the total income of the borrower. The higher the ratio, the more likely it is to be business purpose.
. The size of the transaction. The larger the transaction, the more likely it is to be business purpose.
. The borrower's statement of purpose for the loan. Examples of business-purpose credit include:
. A loan to expand a business, even if it is secured by the borrower's residence or personal property.
. A loan to improve a principal residence by putting in a business office.
. A business account used occasionally for consumer purposes.
Examples of consumer-purpose credit include:
. Credit extensions by a company to its employees or agents if the loans are used for personal purposes.
. A loan secured by a mechanic's tools to pay a child's tuition.
. A personal account used occasionally for business purposes.
3. Non-owner-occupied rental property. Credit extended to acquire, improve, or maintain rental property (regardless of the number of housing units) that is not owner-occupied is deemed to be for business purposes. This includes, for example, the acquisition of a warehouse that will be leased or a single-family house that will be rented to another person to live in. If the owner expects to occupy the property for more than 14 days during the coming year, the property cannot be considered non-owner-occupied and this special rule will not apply. For example, a beach house that the owner will occupy for a month in the coming summer and rent out the rest of the year is owner occupied and is not governed by this special rule. See Comment 3(a)-4, however, for rules relating to owner-occupied rental property.
4. Owner-occupied rental property. If credit is extended to acquire, improve, or maintain rental property that is or will be owner-occupied within the coming year, different rules apply:
. Credit extended to acquire the rental property is deemed to be for business purposes if it contains more than 2 housing units.
. Credit extended to improve or maintain the rental property is deemed to be for business purposes if it contains more than 4 housing units. Since the amended statute defines dwelling to include 1 to 4 housing units, this rule preserves the right of rescission for credit extended for purposes other than acquisition.
Neither of these rules means that an extension of credit for property containing fewer than the requisite number of units is necessarily consumer credit. In such cases, the determination of whether it is business or consumer credit should be made by considering the factors listed in Comment 3(a)-2.
Here, examination of the FRB's staff interpretation leads the court to conclude that, even if Givens's declaration is taken as fact, Ashouri's loan to Egerton was primarily for personal, family, or household purposes. The loan had absolutely no relationship to Egerton's primary occupation. The loan was not a large one. There is no evidence before the court that the loan was for the primary purpose of placing a business office in the residence. The size of the loan suggests that any enhanced value of Egerton's residence resulting from any improvements funded by the loan would not constitute the major portion of the value of the residence, or that any such value enhancement would be a sizable portion of Egerton's income. (According to Egerton's Supplemental Declaration, filed April 29, 2003, at the time of the loan, Egerton had listed the residence for sale at a price of $589,000, almost 19 times the amount of the net loan proceeds in the sum of $31,700.) Indeed, the FRB's staff interpretation makes clear that even if Egerton hoped to derive a profit from the sale of his home, this would not necessarily transform the loan into one that was for commercial purposes. See Thorns, 726 F.2d at 1418-19. For example, the FRB staff opines that credit to improve owner-occupied rental property is deemed to be
for business purposes if it contains more than 4 housing units. Since the amended statute defines dwelling to include 1 to 4 housing units, this rule preserves the right of rescission for credit extended for purposes other than acquisition
thus suggesting that some profit motive for improving an owner-occupied dwelling containing four or fewer units does not necessarily transform the loan into one for business purposes. Here, the property was not even rental property, and did not have any housing units other than the portion occupied by Egerton. A fortiori, the loan to Egerton was not necessarily a business loan.
All factors considered, the court holds that even if the loan was to improve Egerton residence in anticipation of sale, as alleged by Ashouri and as denied by Egerton, it was a loan primarily for personal, family, or household purposes.
D. When and on What Conditions Must Ashouri Release the Deed of Trust?
Because Ashouri was a "creditor" who made the loan to Egerton primarily for personal, family, or household purposes, Egerton is entitled to rescind the deed of trust. 15 U.S.C. § 1635 (a). But that is not the end of the story. 15 U.S.C. § 1635 (b) provides that upon the obligor's exercise of the right to rescind, the "creditor shall take any action necessary or appropriate to reflect the termination of any security interest created under the transaction." The statute further provides, however, that the prescribed rescission procedures apply "except when otherwise ordered by the court." Id.
The provision authorizing the court to modify the rescission procedures is consistent with numerous reported decisions holding that a court may condition the obligor's right to rescind on repayment of the loan proceeds. See, e.g., LaGrone v. Johnson, 534 F.2d 1360, 1362 (9th Cir. 1976); Palmer v. Wilson, 502 F.2d 860 (9th Cir. 1974). Here, Egerton agrees that rescission should not be ordered until he has tendered to Ashouri the required sums, which Egerton contends is to be an amount equal to the loan principal, is U.S.C. § 1635(b), less the $3,500 loan fee, id., less a civil penalty, 15 U.S.C. § 1640 (a)(2), plus the amount Ashouri advanced to cure defaults on the senior loan.
These decisions preceded the addition of the amendment that added the "except when otherwise ordered by the court" exception to TILA's rescission procedures in 15 U.S.C. § 1635 (b).
Ashouri argues that if the loan is rescinded, Egerton must tender the funds immediately, that Egerton has made no loan payments since the inception of the loan, that Egerton has suffered no damage, and that Egerton obtained the loan through various misrepresentations as to his intented use of the loan proceeds.
These arguments are not well grounded. As to Egerton's alleged misrepresentations Ashouri has established none in the present context, and Ashouri has cited no authority that any misrepresentations of the type alleged abrogate an otherwise valid right of rescission under TILA and HOEPA.
As to the timing issue, the conditions that the court may place on rescission are essentially equitable. Lagrone, 534 F.2d at 1362; Quezner v. Advanta Mortgage Corp., USA, 288 B.R. 884, 888-89 (D. Kan. 2003) ("the bankruptcy court may impose conditions that run with the voiding of a creditor's security interest upon terms that would be equitable and just to the parties in view of all the surrounding circumstances").
The court has not been directed to any authority mandating that a debtor in chapter 13 must tender the required amounts back to the lender immediately as a condition to rescission. Most of the cases cited by the parties mention no time limit beyond those applicable to the plan itself.See, e.g., In re Wespic, 231 B.R. 768 (S.D. Cal. 1998); In re Lynch, 170 B.R. 26 (Bankr. D.N.H. 1994).
Here, Egerton proposes to treat Ashouri's claim as secured, and to pay Ashouri the amounts needed for rescission no later than June 30, 2004. Egerton agrees that absent timely compliance, Ashouri's deed of trust will remain on the property, and that no further rescission claims will be brought. Egerton further proposes to continue the adequate protection payments previously ordered by the court to be made during the pendency of this litigation, and other protections that inure to Ashouri's benefet. The court finds the conditions proposed the Egerton to be equitable and reasonable.
With respect to the amount of the tender, Ashouri argues that Egerton has shown no actual damages. In re Smith, 289 F.3d 1155 (9th Cir. 2002). The court agrees, and notes that Egerton has not included actual damages in his calculation of the amount he would need to tender to obtain a release of the deed of trust.
Egerton argues that he is entitled to a civil penalty pursuant to 15 U.S.C. § 1640 (a)(2). That provision imposes a mandatory penalty against a creditor who fails to comply with TILA in connection with a debt secured by real property of "not less than $200 or greater than $2,000." Egerton suggests a $2,000 penalty. The court finds that $200 is more equitable, given the absence of any showing of malice or intentional wrongdoing by Ashouri, and the fact that, as Ashouri notes, he has lost and will lose significant interest income in his transaction with Egerton.
E. Conclusion
The court will grant partial summary judgment in favor of Egerton as provided in the order filed herewith.