9th Circuit 8/22/08 Opinion: Ch. 13 Trustee NOT Entitled to Actual or Statutory Damages, Atty. Fees or Costs Under Portions of Truth in Lending Act

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

McDonald v. Checks-N-Advance, Inc. (In re Ferrell)

Ninth Circuit Case No. 06-17243

In this per curiam decision published on August 22, 2008, the Ninth Circuit Court of Appeals held that certain specific violations of the federal Truth in Lending Act (TILA) do not result in the award of actual damages, statutory damages, or attorney fees and costs for the consumer, or specifically in this case for the Chapter 13 trustee acting on behalf of the consumer. The court affirmed the ruling of the Bankruptcy Appellate Panel, which had affirmed the judgment of the bankruptcy court. This was a case of first impression for the Ninth Circuit as to the issue of statutory damages, and precisely as to whether the specific TILA violations.here fell within any of TILA's exceptions to statutory damages.

Although almost the entire opinion was devoted to the Truth in Lending issues, the Court also ruled against awarding attorney fees and costs to plaintiff under Nevada's consumer fraud act apparently because of a pleading error by the plaintiff. More about this shortly.

The plaintiff (again, the Chapter 13 trustee acting on behalf of the debtor) claimed that the defendant, a payday loan creditor, failed to provide TILA-required disclosures before the transaction (15 U.S.C Section 1638(b)(1)) , and failed to conspicuously disclose the finance charge and annual percentage rate (15 U.S.C. Section 1632(a)). (All statutory references hereafter are to Title 15.) Defendant did not timely respond to the complaint, and the bankruptcy court entered a default judgment against defendant and granted plaintiff-trustee's objection to this creditor's proof of claim. The primary issue on appeal was whether the particular TILA violations pled by trustee are of the type entitling it to statutory damages.

(Note: although at least in Oregon payday lenders have greatly restricted their business activity since new state laws went into effect a couple years ago, these TILA issues remain pertinent to any closed-end consumer loans.)

The court held that that these two violations were not of the type resulting in statutory damages because they fit within the scope of the exceptions to such damages in Section 1640(a). The detailed statutory construction the court used to arrive at this conclusion is beyond the scope of this summary, other than to note that in doing so it rejected the contrary analysis of a Michigan U.S. District Court and followed the 6th and 7th Circuit opinions upon which the Bankruptcy Appellate Panel decision on appeal had also relied.

Based on TILA's statutory scheme, once the trustee could not show any liability entitling her to statutory damages under Section 1640(a)(2), she was also not entitled to attorney fees and costs under Section 1640(a)(3).

As for actual damages, the court followed its own holding in Smith v. Gold Country Lenders (In re Smith), 289 F.3d 1155 (9th Cir. 2000) that to be awarded actual damages under TILA, a borrower has to show "detrimental reliance," that he could have gotten a better interest rate elsewhere or would have not gotten the loan at all. The trustee could not establish these facts as to the debtor, so she was not entitled to any actual damages.

The trustee's pleading error I referred to above resulted in her being unable to separately recover attorney fees and costs under a Nevada consumer fraud statute. Had she not made this error, it appears she would have been so entitled. In her adversary proceeding complaint the trustee asked for attorney fees and costs under a particular Nevada statute. After defendant did not appear to defend the complaint and the bankruptcy court found that defendant had violated the Truth in Lending Act, the trustee asserted the right to attorney fees and costs under a different Nevada statute, one that made violations of the Truth in Lending Act a "deceptive trade practice" under Nevada law . Because the judgment ended up being entered by default against defendant, under Fed. R. Bankr.P 7054(a), following Fed. R. Civ. P. 54, the trustee had "to plead with specificity the statute under which she now claims to be entitled to costs and fees." The standard "for such other relief as the court deems appropriate" prayer was too general to help here. Failure to plead with specificity meant that defendant was not put on notice as to the basis for an award of attorney fees and costs, and so the trustee was not entitled to attorney fees and costs under the Nevada statute.

BOTTOM LINE: 1) The specific TILA violations referred to here will not result in awards for statutory damages, or attorney fees and costs. 2) To be awarded actual damages the consumer must meet the "detrimental reliance" standard. 3) Consumer must plead the accurate statutory basis for the requested damages or else better not plan on being awarded those damages, especially if the lender does not answer and a default judgment is entered.

by Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

© 2008 Bankruptcy Litigation Support for Attorneys