Austin C. Palmer and Helen M. Palmer, Husband and Wife v. Gladys S. Wilson

HUFSTEDLER, Circuit Judge:

Plaintiffs Austin and Helen Palmer brought this action under the Truth in Lending Act, 15 U.S.C. §§ 1601-1665, to recover the statutory penalty and attorney fees provided in section 1640 and to enforce their right of rescission pursuant to section 1635. The district court granted plaintiffs’ motion for summary judgment and awarded both forms of relief requested; the defendants appeal.

The record before the district court at the time of plaintiffs’ motion for summary judgment revealed that the note signed by the Palmers and the Broker’s Loan Statement with which they were supplied omitted several credit terms required to be disclosed by the Truth in Lending Act, as implemented by Federal Reserve Board Regulation Z (12 C.F.R. § 226). The documents given to the Palmers failed to state the “total of payments” due (12 C.F.R. § 226.8(b)(3)) and failed to disclose the “amount financed” (id. § 226.8(d)(1)). Finance charges were not described in the uniform terms required by the regulations. (See, e. g., id. § 226.8(d)(2).) The defendants also failed to disclose properly the details of plaintiffs’ right to rescind.¹

The district court correctly held that these omissions violated the Truth in Lending Act and that plaintiffs were entitled to summary judgment. The defendants do not contest the fact that they omitted credit terms required to be disclosed by the Act, but rather argue that they are entitled to the benefits of the statutory exemption for violations that are “not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.” (15 U.S.C. § 1640(c).) The defendants’ omissions and mislabeling of terms were not the result of clerical errors, which are the only violations this section was designed to excuse. (See Ratner v. Chemical Bank New York Trust Co. (S.D.N.Y.1971), 329 F.Supp. 270, 281-282 & n. 17.) Both the Broker’s Loan Statement and the Installment Note in issue were printed, standard form instruments. The omissions and misstatements were part of defendants’ usual credit practice and did not occur in spite of procedures designed to avoid unintentional violations of the Act.

In Eby v. Reb Realty, Inc. (9th Cir. 1974), 495 F.2d 646, we rejected defendants’ contention that plaintiffs cannot successfully pursue both damages under section 1640 and rescission under section 1635. No election of remedies is required. The liability provision of section 1640 is a “civil penalty,” which, unlike section 1635, is not intended to make the borrower whole.

Defendants also argue that the district court erred in enforcing plaintiffs’ right of rescission because plaintiffs failed to tender the money loaned them at the time they notified defendants of their decision to exercise their right to rescind. Although tender of consideration received is an equitable prerequisite to rescission, the requirement was abolished by the Truth in Lending Act. Section 1635(a) provides that an obligor exercises his right of rescission solely by notifying the creditor within prescribed time limits of his intention to rescind. Section 1635(b) provides that upon exercise by the debtor of his right of rescission, “any security interest given by the obligor becomes void . . . . ” Within ten days after receipt of 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.” Only then, “[u]pon the performance of the creditor’s obligations under [section 1635],” must the obligor tender the property to the creditor. Section 1635(b) expressly provides that prior to performance of the required actions by the creditor, “[i]f the creditor has delivered any property to the obligor, the obligor may retain possession of it.” ²

In Eby v. Reb Realty, Inc., supra, we recognized that interaction of the right of rescission and the civil penalty provision of section 1640 can sometimes result in an unduly harsh penalty for violations of the Truth in Lending Act. This, is particularly true where, as appears to be the case here, the decree granting rescission does not condition the relief upon the debtor’s restoration of consideration, the creditor is reduced to the status of an unsecured creditor, and the debtors are judgment proof. Accordingly, in Eby we concluded that, although “sections 1635 and 1640 do not set forth exclusive remedies, we do' not say that a court must always grant both forms of relief when requested. . . In the absence of any clear congressional statement, we think a request for both forms of relief is addressed to a court’s sense of equity and may properly be denied in appropriate cases.” Similarly, when an obligor seeks both to rescind and to recover statutory penalty and attorney fees, the district court has equitable power to grant both forms of relief; the court may condition the granting of rescission on the debtor’s compliance with the court’s order to tender to the creditor the principal of the loan that the debtor has received. The propriety of such a conditional decree of rescission, of course, will depend on the equities present in a particular case, as well as consideration of the legislative policy of full disclosure that underlies the Truth in Lending Act and the remedial-penal nature of the private enforcement provisions of the Act.

“When an obligor exercises his right to rescind under subsection (a), lie is not liable for any finance or other charge, and any security interest given by the obligor becomes void upon such a rescission. Within ten 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. If the creditor has delivered any property to the obligor, the obligor may retain possession of it. Upon the performance of the creditor’s obligations under this section, the obligor shall tender the property to the creditor, except that if return of the property in kind would be impracticable or inequitable, the obligor shall tender its reasonable value. Tender shall be made at the location of the property or at the residence of the obligor, at the option of the obligor. If the creditor does not take possession of the property within ten days after tender by the obli-gor, ownership of the property vests in the obligor without obligation on his part to pay for it.”

Although some district courts have conditioned rescission on tender of repayment by the debtor when both rescission and damages were sought (e. g., Ljepya v. M. L. S. C. Properties (N.D. Cal.1973), 353 F.Supp. 866), the court below apparently was unaware that it had the equitable power to condition its decree. Accordingly, we vacate the judgment and remand the case for consideration of the propriety of conditioning the grant of rescission on repayment by the Palmers. Upon remand the district court may decide to invite submission of additional affidavits or may hold an evidentiary hearing on this point. It may also require the defendants to submit a proposed plan for repayment that is consistent both with the defendants’ desire to recover the amount of principal loaned to the Palmers and with the Palmers’ current financial situation.

The judgment is vacated and the cause remanded for further proceedings consistent with the views herein expressed.

1 . Other violations of the Act’s disclosure provisions committed by defendants are described in the opinion of the district court, Palmer v. Wilson (N.D.Cal.1973), 359 F.Supp. 1099, 1101-1102.

2 . 15 U.S.C. § 1635(b) provides in full: