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05/09/86 Pearline E. Freeman, Et Al v. B & B Associates

May 9, 1986




Before: WRIGHT, WALD and SILBERMAN, Circuit Judges.



Opinion for the Court filed by Circuit Judge WALD.

WALD, Circuit Judge: This case arises out of a petition for an award of attorney's fees under the Truth-in-Lending Act, 15 U.S.C. §§ 1601-1667e. Pearline and Bailey Freeman brought suit under the Truth-in-Lending Act and other statutes seeking damages and rescission of a loan made to them by B & B Associates. They also sought attorney's fees under section 1640 of TILA, which permits a court to award attorney's fees whenever a borrower has a right of rescission under TILA. The Freemans' suit was resolved when the Freemans accepted an offer of judgment by B & B Associates which granted rescission but specifically excluded all liability for attorneys' fees. B & B Associates now appeals from the District Court's holding that its offer of judgment did not preclude the Freemans' attorney, David Fox, from recovering under an independent cause of action for attorneys' fees under TILA. Because we conclude that TILA creates no such independent cause of action in an attorney, we now reverse the District Court. I. BACKGROUND

In February of 1981, Pearline and Bailey Freeman obtained a loan at a stated interest rate of 22% from B & B Associates, a partnership consisting of W. Lawrence Brantley and Beatrice E. Brantley. The Freemans executed a promissory note payable to B & B Associates and secured this note by a second mortgage on their home. Although the loan purported to be for $16,000.00, the Freemans in fact received only $8,465.57 from B & B Associates. The face amount of the loan was reduced by (1) a $3,500.00 discount fee; (2) a $3,520.00 finders' fee; and (3) closing costs of $514.43. Moreover, under the terms of the agreement, the Freemans would pay back $29,596.00 on this $8,465.57 loan, making the loan's effective interest rate 62% per annum rather than the announced rate of 22%.

By May of 1983, the Freemans had repayed $8,105.00 to B & B Associates. After seeking legal advice, the Freemans in June of 1983 sent B & B Associates a "Notice of Intent to Rescind" under the Truth-in-Lending Act, 15 U.S.C. § 1635. B & B Associates thereupon declared the Freemans' note to be in default and demanded immediate payment of the remaining principal and interest. The Freemans brought suit in District Court to prevent foreclosure on the deed of trust and the sale of their home.

The Freemans' complaint set forth nine claims for relief. Important for purposes of this appeal are Counts I and II of their complaint, which sought relief under TILA. Specifically, the Freemans sought rescission under 15 U.S.C. § 1635 on the ground that B & B Associates had failed to make certain statutorily mandated disclosures. They also sought penalties, attorneys' fees and costs for this failure under 15 U.S.C. 1640.

One year after the Freemans filed suit, and three months prior to trial, B & B Associates made an offer of judgment pursuant to Rule 68 of the Federal Rules of Civil Procedure. This offer allowed judgment to be taken against B & B Associates for rescission of the note and deed of trust. The offer also provided for restitution to B & B Associates of the difference between their original loan of $8,465.57 and the $8,105.00 which the Freemans had to date repaid. The offer of judgment included an offer to pay costs incurred, as all offers of judgment must under Rule 68, but provided that the offer "specifically excludes all liability for attorneys' fees as well as all other claims made in the Amended Complaint herein."

The Freemans accepted the offer of judgment through their counsel, Fox. On the same day, the Freemans applied to the District Court for an award of attorneys' fee under TILA. After permitting Fox to intervene as a party plaintiff for purposes of the attorneys' fees claim, the District Court held that although the Freemans had waived their claim for attorneys' fee, Fox had a claim against B & B Associates for fees independent of the claim of the Freemans and unaffected by the Freemans' acceptance of the offer of judgment. The District Court strictly construed the offer of judgment against its drafter and found that the offer did not explicitly bar the attorney's independent claim. The District Court also noted that because Fox's fee agreement with the Freemans was cast in terms of a cash recovery, Fox's recovery of attorneys' fees from B & B Associates did not create a windfall for the Freemans. *fn1 The District Court then awarded $31,860.00 in attorneys' fees under TILA. II. AN ATTORNEY'S INDEPENDENT RIGHT UNDER TILA

A. The Statutory Scheme

The Truth-in-Lending Act imposes mandatory disclosure requirements on lenders who extend credit to consumers. The purpose of the Act is to promote the informed use of credit by ensuring "a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit. . . ." 15 U.S.C. § 1601(a). As the Supreme Court has explained, "The Truth in Lending Act reflects a transition in congressional policy from a philosophy of 'Let the buyer beware' to one of 'Let the seller dislose.'" Mourning v. Family Publications Service, Inc., 411 U.S. 356, 377, 36 L. Ed. 2d 318, 93 S. Ct. 1652 (1973). Pursuant to this goal, section 1635 of the Truth-in-Lending Act provides a right of rescission to a borrower who enters a consumer credit transaction in which the lender acquires a security interest in the borrower's residence. The borrower may exercise this right to rescind within three business days of either (1) the consummation of the transaction or (2) "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. . . ." 15 U.S.C. § 1635(a). Section 1635 also provides that "[i]n any action in which it is determined that a creditor has violated this section, in addition to rescission the court may award relief under section 1640. . . ." 15 U.S.C. § 1635(g). Section 1640 in turn provides that:

any creditor who fails to comply with any requirement imposed under this part . . . with respect to any person is liable to such person in an amount equal to the sum of --

(3) in the case of any action to enforce the foregoing liability or in any action in which a person is determined to have a right of rescission under section 1635 of this title, the costs of the action, together with a reasonable attorney's fee as determined by the court.

15 U.S.C. § 1640(a). The statutory scheme of TILA thus enables a borrower to recover attorney's fees if he has a right to ...

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