JURISDICTION AND PRECEDENTIAL EFFECT: The bankruptcy courts, and Bankruptcy Appellate Panel, are Article I Courts under the US Constitution. The district courts and courts of appeal are Article III courts. As such, the Courts of Appeal are not bound by the decisions of the bankruptcy appellate panel, but considers such decisions as advisory only. In fact, district courts and courts of appeal routinely perform a de novo analysis (considering the facts and law anew) of the Bankruptcy Appellate Panel’s findings. In re Silverman 616 F.3rd 1001 (9th Circuit 2010).
BANKRUPTCY LAW (Preferential Transfer): A preferential transfer is a payment made within 90 days before the filing of bankruptcy, which is not made in the ordinary course of business. WHEN the trustee or Court finds that the debtor has made such a transfer, the transfer may be unwound, and the money ordered returned to the bankruptcy estate. The creditor who received the money will have to dig into its pockets and return the funds to the court.
In determining whether a payment is a preference, the court can conduct a hypothetical payment analysis to determine whether that payment would have been made had bankruptcy had not been filed. If the creditor received more via the questioned transaction than it would have received in the bankruptcy, then the payment is a preference (“preferential transfer”). In re Tenderloin Health 849 F 3rd 1231, 9th Circuit 2017
When representing clients, attorneys rely on the words of the law (a “statute”) and ask the court to implement the plain, obvious meaning of its words. When it comes to federal statutes, however, it is easy to overlook the “comments” by the lawyers for the Congressional committees that draft the statutes, or the agencies which implement them.
In a recent unanimous 9th Circuit decision by the Honorable Mary M. Schroeder, the comments to a consumer lending statute were critical to holding a bank accountable.
In Gilliam v. Levine, Case No. 18-56373 (9th Circuit, 2020), the court recounts that the borrower obtained a loan as trustee for a family trust. The purpose of the loan was to make home repairs. the home itself was the sole asset of the trust. Another family member, who occupied the home, with the trust beneficiary.
The home, i.e., the asset of the family trust, secured the loan.
The borrower later discovered that the due date for the final loan payment was 1 year earlier than she had been led to believe. The borrower was alarmed, and sued to cancel (rescind) the loan under federal law, Truth in Lending Act (TILA), 15 U.S.C. § 1601, et seq., and the Real Estate Settlement Practices Act (RESPA), 12 U.S.C. § 2601. The borrower also asserted a claim under California’s Fair Lending Law [Rosenthal Act], 1788.1(b) of California’s Rosenthal Act, California Civil Code §§ 1788.1(b).
This relief is only available where the borrower is a consumer. 15 U.S.C. § 1635(i)(4); 12 U.S.C. § 2606(a); Cal. Civ. Code § 1788.2(e). The trial court, Hon. Philip Gutierrez, concluded that because the loan went to the trust, it was not a consumer loan. The trial court dismissed the case.
The 9th Circuit reversed the trial judge. The appellate court noted federal Consumer Financial Protection Bureau’s Official Staff Commentary to Regulation Z (mortgage loans), which suggested the opposite result in this case. The Commentary, for example, stated that “[c]redit extended for consumer purposes to certain trusts is considered to be credit extended to a natural person rather than credit extended to an organization.” 12 C.F.R. pt.1026, Supp. 1, § 1026.3 Comment 3(a)-10.
The “certain trusts” that fall under the rubric of “natural persons,” entitled to protection for loans made to benefit a natural person, and not an organization, include the trust in this case, which was formed for tax or estate planning purposes [which benefit people]. As a result, where individuals invest assets in the trust, the regulation thus effectuates TILA’s definition of consumer credit transactions. 12 C.F.R. pt.1026, Supp. 1, § 1026.3 Comment 3(a)-10.
The trust in question was “primarily for personal, family, or household purposes.” 15 U.S.C. § 1602(i). The borrower was the aunt (as Trustee); the niece was the beneficiary; and the trust property was a private home. As a result, the loan was a “consumer credit transaction,” which was subject to the Fair Lending Laws. And the Comment makes the point: Look to the substance of the transaction. Here it was to benefit a consumer, not a company. 12 C.F.R. pt. 1026, Supp. 1, and § 1026.3 Comment 3(a)-10.i.
For as much as it has been vilified by certain political interests, the CFPB remains in force, and fortunately, it remains a source of protection for consumers. It will be interesting to see if the case if appealed to the Supreme Court (quite likely), and whether it will be upheld.
WARNING: THIS POST DOES NOT CONSTITUTE LEGAL ADVICE; PLEASE CONSULT AN ATTORNEY
#law #fairlending #mortgages #truthinlending #codeoffederalregulations #courts