Court: District Court, D. Rhode Island; November 20, 1980; Federal District Court
On September 17, 1980, Bankruptcy Judge Arthur N. Votolato considered the Trustee's complaint against FinanceAmerica, alleging violations of the Rhode Island Secondary Mortgage Loans Act. The Trustee sought to have a loan made to Herbert Mandell declared void. In 1976, Mandell initially contacted William J. McGovern for home mortgage refinancing, but McGovern could not assist him. A year later, McGovern referenced FinanceAmerica, leading to a loan application process initiated by Kenneth Periera, a FinanceAmerica branch manager. After an appraisal by Herbert Mason, a second mortgage of $14,751.91 was approved, with a substantial portion disbursed to Mandell’s creditors and the remainder allocated to various fees, including a finder’s fee for McGovern.
Mandell later complained about overcharging for the appraisal and the finder’s fee, ultimately signing a release for one dollar and further consideration, which FinanceAmerica claimed included the return of funds from McGovern and Mason to Mandell. The Trustee alleged multiple violations of the Secondary Mortgage Loans Act, including failure to provide an accurate itemized schedule of charges, unauthorized charge collection, and failure to inform borrowers of maximum permissible charges at the time of application. While FinanceAmerica denied most allegations, it acknowledged the oversight regarding the charges schedule, attributing it to a bona fide error as per R.I.Gen. Laws. 19-25.2-29. The Trustee seeks a court ruling to void the loan and prevent FinanceAmerica from collecting any related principal, interest, or charges.
FinanceAmerica argues that the releases signed by Mandell protect it from the lawsuit and assert that its loan is valid under R.I. Gen. Laws 19-25.2-29, as it has not faced a misdemeanor conviction, which it claims is a necessary condition to void the loan. In response, the Trustee claims the releases are voidable preferences under the Bankruptcy Act.
The Secondary Mortgage Loans Act mandates that lenders provide borrowers with an itemized schedule of maximum charges for secondary loans, which must be accurate and up-to-date. The original schedule became effective in 1966, with an amended schedule issued on September 3, 1975, which raised the maximum fees for certain services. Mandell's loan, dated February 3, 1978, was accompanied by the outdated 1966 schedule instead of the amended version.
FinanceAmerica contends that providing the old schedule still informed Mandell of potential overcharges. However, the court finds this argument unconvincing, emphasizing that lenders have an affirmative duty to provide accurate information. FinanceAmerica also claims its failure to update the schedule was a "bona fide error" under R.I. Gen. Laws 12-25.2-29, which the court rejects, citing the Act's focus on consumer protection. The court agrees with the precedent set in Mirabel v. General Motors Acceptance Corp., stating that a "bona fide error" requires evidence of good faith compliance, which was not demonstrated here, as FinanceAmerica had been negligent for over two years following the regulatory changes.
The defendant, FinanceAmerica, failed to establish procedures for regularly verifying the accuracy of its forms, despite substantial government oversight in the finance sector. Even after being notified of updated regulations, the defendant took no steps to ensure compliance, demonstrating a lack of good faith in adhering to legal requirements.
Under R.I. Gen. Laws 19-25.2-24, the Act prohibits any licensee from demanding or collecting unauthorized charges related to secondary mortgage loans. The authorized fees, as defined by the amended regulations, include specific maximum amounts for various services. If FinanceAmerica charged a finder’s fee, it would be in violation of the Act.
Evidence presented indicates a business relationship between William McGovern, who facilitated the loan, and Mr. Mason, who appraised the property. Mason, who had a finder’s fee agreement with FinanceAmerica, was also involved in the loan transaction. McGovern anticipated receiving a $300 fee, and during the closing, Mandell was issued a check for $458.96, with instructions to exchange it for a $300 check made out to McGovern, indicating an indirect demand for an unauthorized charge by FinanceAmerica.
Additionally, the Secondary Mortgage Loans Act prohibits charging amounts beyond those specified in the schedule. Mandell was charged $50 for an appraisal, while the maximum allowed charge was $15. The court determined that Mason, who had a long-standing relationship with FinanceAmerica, was acting as its agent, making FinanceAmerica liable for the excess fee charged to Mandell. Thus, FinanceAmerica indirectly collected an unauthorized charge, violating the Act.
Failure to provide a schedule of maximum charges at the time of loan application constitutes a violation of the Secondary Mortgage Loans Act, which mandates that licensees supply this information to applicants at the time of application. In this case, the maximum fee schedule was only provided to Mandell at loan closing, which does not comply with the Act. FinanceAmerica contends that an application is only made once all matters are resolved, but the ordinary definition of "application" indicates it is the initial request for a loan. By the time a loan is approved, borrowers typically no longer seek other credit options, underscoring that the application occurs at the request stage. Reasonable exceptions exist for applications taken by phone, where the schedule should be provided promptly. No such circumstances were present here, leading the Court to conclude that FinanceAmerica violated the Act.
Additionally, while FinanceAmerica has been found to have engaged in unauthorized charges, the Court will not consider alleged violations by individuals McGovern and Mason, as they are not parties to this case.
Lastly, Mandell's release agreement with FinanceAmerica is regarded as a voidable preference under the Bankruptcy Act, given that it was executed shortly before Mandell filed for bankruptcy. The Trustee argues that this agreement should be deemed ineffective as it may constitute a fraudulent transfer, as defined by the Bankruptcy Act, because it was made without fair consideration and could render the debtor insolvent.
Under the Bankruptcy Act, any transfer or obligation incurred by a debtor deemed bankrupt can be declared null and void if it is found to be fraudulent against creditors. For a release to be considered fraudulent and voidable, four criteria must be met: (a) a transfer or obligation must be executed by the debtor; (b) this must occur within one year of filing a bankruptcy petition; (c) it must be made without fair consideration; and (d) the debtor must be rendered insolvent as a result. In this case, the Chapter XIII petition was filed within the required timeframe, and the debtor, Mandell, was insolvent, as his debts exceeded the fair market value of his assets.
The primary dispute centers around whether the release was supported by fair consideration. Mandell received $1 and purportedly "other good and valuable consideration," which FinanceAmerica claims included payments made to Mandell by third parties. However, fair consideration is defined under the Act as a transfer made in good faith that is proportionate to the value exchanged. The amounts received by Mandell ($335) were found to be insufficient compared to the value relinquished, thus failing the fair consideration test. As a result, the release to FinanceAmerica is classified as a voidable preference and is void with respect to the Trustee.
Additionally, concerning the Secondary Mortgage Loan, the Trustee seeks to declare the loan void, citing FinanceAmerica’s violations of the Secondary Mortgage Loans Act. FinanceAmerica contends that a misdemeanor conviction is necessary for the Trustee to pursue this action. However, precedent from the case Boyjian v. Union Capital Credit Union establishes that civil and criminal remedies under the Act are separate, meaning that a misdemeanor conviction is not a prerequisite for initiating a civil suit.
FinanceAmerica has violated the Rhode Island Secondary Mortgage Loans Act through several actions: failing to provide an accurate schedule of maximum charges, demanding unauthorized charges, collecting excessive charges, and not supplying the borrower with the required schedule when the loan application was submitted. These violations constitute a misdemeanor under the Act, rendering the loan void and denying FinanceAmerica any right to collect principal, interest, or charges. A judgment is to be entered within seven days, requiring FinanceAmerica to return all received amounts to the Trustee. Additionally, the Trustee has retracted allegations regarding excessive interest rates charged by FinanceAmerica. There are no Rhode Island cases interpreting the term "bona fide error," and the cited case regarding "bona fide attempt" in a different context is deemed inapplicable. Furthermore, no Rhode Island Supreme or Superior Court cases have interpreted the Secondary Mortgage Loans Act, with the only relevant case being Boyajian v. Union Capital Credit Union, which emphasizes a holistic interpretation of legislative intent. The Court will apply these interpretative principles in its decision regarding the current matter.
