UNITED STATES BANKRUPTCY JUDGE

____________________________________________________________

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS

MEMORANDUM AND ORDER GRANTING

TRUSTEE'S OBJECTION TO EXEMPTION OF TRUTH-IN LENDING ACT CLAIM

The matter before the Court is the Trustee's Objection to Debtors' Amended Exemptions1

in which they claim as exempt "possible TILA [Truth in Lending Act] 2violations on 1st & 2nd

Mortgage" pursuant to K.S.A. 60-2301, the Kansas homestead exemption.3 The Trustee, Robert

L. Baer, appears by John T. Houston, Cosgrove, Webb & Oman. The Debtors, Daniel Lee Ross

and Mary Gina Ross, appear by their counsel Dan M. McCulley, Hornbaker, Alterhoffen,

McCulley & Alt, Chartered. There are no other appearances. The Court has jurisdiction.4

At the request of the parties, the matter has been submitted on the briefs.5 The Court,

having studied the briefs and conducted its own research, sustains the objection.

The property at issue is a potential, but as yet undetermined, claim that the Debtors'

mortgage lender violated the Federal Truth in Lending Act (TILA) because of failure to deliver

multiple copies of the Notice of Right to Rescind. Debtors contend that the statutory penalties

imposed for violation of TILA "are so intertwined with the equity of the Debtors in their

homestead" that the claim is exempt. Debtors' primary authority is In re Stroble,6 in which Judge

Berger of this court held that a settlement awarded in an unfair and deceptive mortgage practices

class action lawsuit was exempt under the Kansas homestead exemption. The Trustee asserts that

Stroble is distinguishable, that the TILA claim is unrelated to damage to Debtors' homestead,

and that exemption of the claim would not further the purpose of the Kansas homestead

exemption.

4 An objection to a claim of exemption is a core proceeding. 28 U.S.C.A. § 157(b)(2)(B). This Court has jurisdiction pursuant to 28 U.S.C.A. § 157(a) and §§ 1334(a) and (b) and the Standing Order of the United States District Court for the District of Kansas that exercised authority conferred by § 157(a) to refer to the District's Bankruptcy judges all matters under the Bankruptcy Code and all proceedings arising under the Code or arising in or related to a case under the Code, effective July 10, 1984. There is no objection to venue or jurisdiction over the parties.

5 See Docs. 22, 36, & 38.

6 No.03-24926-7 (Bankr. D. Kan. Sept. 7, 2005)(Berger, J.).

2

"Congress enacted the TILA to regulate the disclosure of the terms of consumer credit

transactions in order 'to aid unsophisticated consumers and to prevent creditors from misleading

consumers as to the actual costs of financing.'"7 "To encourage lender compliance, TILA

violations are measured by a strict liability standard, so even minor or technical violations

impose liability upon the creditor."8 A consumer may recover actual damages, statutory

damages, costs, and attorney fees.9 In addition, in some TILA transactions involving loans

secured by a consumer borrower's principal dwelling, the consumer may have a right to rescind

the transaction,10 for up to three years after the date of consummation, if the lender fails to give

the required disclosure and notice of the right to rescind.11 In the event of rescission, any

security interest given by the consumer is void, and the consumer is not liable for finance

charges, interest, and other charges, such as closing costs and broker fees. 12 A court may order

that amounts awarded to the consumer be offset from the principal amount of the loan for which

the consumer remains liable not withstanding the rescission.13 The creditor's lien in the financed

property is not released until the consumer has paid the post-rescission obligation.14

7 Merriman v. Beneficial Mortgage Co. of Kansas, Inc. (In re Merriman), 329 B.R. 710, 714 
(D.Kan. 2005) (quoting Morris v. Lomas & Nettleton Co., 708 F. Supp. 1198, 1203 (D. Kan. 1989).

8 Id., 329 BR. at 715.

9 15 U.S.C.A. §§ 1640(a)(1), (a)(2)(A), & (a)(3).

10 15 U.S.C.A. § 1635(a).

11 15 U.S.C.A. § 1635(f).

12 15 U.S.C.A. § 1635(b).

13 In re Merriman, 329 B.R. at 717-18.

14 In re Merriman, 329 B.R. at 727.

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In a chapter 7 case, all prepetition causes of action held by the debtor are property of the

estate under 11 U.S.C.A. 541(a).15 TILA claims are included in this rule.16 Absent a showing that

the claim is exempt or was abandoned by the trustee, the debtor lacks standing to bring a TILA

action that arose before filing.17 This Court's ruling on the exemption question therefore

determines not only ownership of the proceeds from settlement or litigation of the TILA claim,

but also who has standing to pursue the matter. Courts have found some causes of action against

creditors for wrongful lending practices exempt under wildcard statutes and have held that the

exemption, even if partial, sufficient to confer standing upon the debtor to pursue that action. In

this circumstance, however, the estate retains an interest in the claim if it has value above the

exempt amount, thereby retaining the trustee's standing to conduct In re Polis, 217 F.3d at 904.

the litigation. For example, a claim alleging bad-faith banking practices and outrage was held

exempt up to the value of $7,900 under the West Virginia state wild card exemption statute.18 As

to standing, the court held the debtors could bring the action because of the exemption, but the

15 See United States v. Whiting Pools, Inc., 462 U.S. 198, 205 n.9 (1983) (estate property includes causes of action). This case was filed before October 17, 2005, when most provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 become effective. All statutory references to the Bankruptcy Code are to 11 U.S.C.A. §§ 101 - 1330 (2004), unless otherwise specified. Future references to the Code in the text shall be to the Code section only. Any references to the Federal Rules of Bankruptcy Procedure are to Fed. R. Bankr. P. (2004), unless otherwise specified.

16 Polis v. Getaways, Inc. (In re Polis), 217 F.3d 899, 902 (7th Cir. 2000); and Rowland v. Novus Fin. Corp., 949 F. Supp. 1447, 1443 (D. Haw. 1996).

17 Rowland v. Novus Fin. Corp., 949 F. Supp. at 1453-54.

18 Wissman v. Pittsburgh Nat. Bank, 942 F.2d 867 (4th Cir. 1991)

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trustee should have an opportunity to intervene in the action because of the estate's interest in

any recovery above the exempt amount.19

In Stroble, the case relied upon by the Debtors, Judge Berger held that $950.83 exempt

under the Kansas homestead law where the funds were received in settlement of a class action

suit initiated by officials of fifty states and the District of Columbia.20 The settlement resolved

"concerns about unfair and deceptive mortgage lending practices raised by an investigation into

the lending practices of [debtors'] mortgage lender." 21 The court reasoned that the moneys were

restitution “for abusive mortgage lending practices regarding loan points and origination fees,

interest rates, monthly payment amounts, prepayment amounts, balloon payments, etc.,"22,

which,

if not charged, would have increased the debtors' equity in their exempt homestead. Equitable

considerations were found to warrant application of the doctrine of equitable conversion. The

exemption was allowed because denial would have been “incongruous with the Kansas

homestead exemption's basic applied effect of protecting equity in the homestead.”23

19 Id. at 873; see In re Polis, 217 F.3d at 904 (holding when a debtor was entitled to claim up to $900 of a TILA claim as exempt under the Illinois wildcard statute, the exemption conferred standing on the debtor to bring a class action suit; but, because of the trustee's lack of interest in suing the creditor, the court would decline to examine the question of whether the debtor or the trustee should control the litigation).

20 In re Stroble, sl. op. at 2.

21 Id. at 2.

22 Id. at 5.

23 Id.

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This Court finds the reasoning of Stroble convincing as to proceeds from claims relating

to abusive lending practices which increased the cost of credit secured by a homestead and

where the recovery is applied to the debt secured by the homestead. However, the posture of this

case is materially different form Stroble, and the Court declines to hold the TILA claim

described by Debtors exempt under the authority of Stroble. In Stroble the issue was the

exemption of known proceeds for specific wrongful lending practices from the settlement of a

class action initiated by government officials. Here the exemption is claimed in a cause of action,

where the litigation has not been commenced and perhaps no demand has been made against the

creditor. In Stroble the elements of the recovery were known. Here, the Debtors have provided

no details as to the recovery they seek or about the transactions, other than to allege in their brief

that the "lender failed to deliver multiple copies of the Notice of the Right to Rescind."24 It

would appear that Debtors hope to rescind one or more consumer transactions, but the

transactions are not identified, and neither the elements of such a claim nor the remedies sought

are disclosed.

As pointed out by the Trustee, some of the remedies permitted by TILA, such as statutory

damages, have to do with what the lender failed to do, not any damage suffered by the debtors in

their homestead. Other damages, such as the actual damages and attorney fees and costs, have to

do with personal loss to the Debtors, not damage to the homestead. It appears unlikely to this

Court, if the issue were presented, that a debtor's claim of homestead exemption for such

damages would survive an objection. On the other hand, if the TILA remedy of rescission were

ordered and a court were to hold that the Debtors were entitled to credit against the principal

24 Doc. 36.

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debt secured by the homestead of the finance changes, interest, and so forth, such an order

would increase the Debtors' equity in the homestead. It appears more likely, if that issue were

presented, that a court would hold that such an increase in equity would come within the

purpose of the Kansas homestead exemption. In other words, there is a likelihood that the

Debtors' TILA claim has both exempt and nonexempt aspects, which, as examined above, raises

issues as to the ownership of the claim, standing, and control of litigation. Neither the Debtors

nor the Trustee has briefed these issues. The Court does not wish to rule on the issue of partial

exemption and questions relating to control of litigation without input from the parties.

For the forgoing reason, the Court sustains the Trustee's objection to the Debtors' claimed

homestead exemption for "possible TILA violations on 1st & 2nd Mortgage." Such denial is

without prejudice to the Debtors' amendment of their claimed exemption consistent with this

opinion, in which case, if the Trustee objects, the Court will expect the Debtors and the Trustee

to address the issues identified in this opinion.

The foregoing constitute Findings of Fact and Conclusions of Law under Rule 7052 of

the Federal Rules of Bankruptcy Procedure and Rule 52(a) of the Federal Rules of Civil

Procedure. A judgment based upon this ruling will be entered on a separate documents as

required by Federal Rule of Bankruptcy Procedure 9021 and Federal Rule of Civil Procedure 58.

IT IS SO ORDERED.

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