The relief described hereinbelow is SO ORDERED.

Signed January 26, 2005.

United States Bankruptcy Judge

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS

MEMORANDUM AND ORDER1

This matter is before the Court on the plaintiffs' adversary complaint (Doc. No. 1) which

seeks a determination that the plaintiffs, Ricky D. Poppitz and Yvonne S. Poppitz (“the

1 The plaintiffs appear by their attorney, Kenneth M. Gay, Lenexa, Kansas. The defendant appears by its attorneys, Todd W. Ruskamp and Clayton T. Norkey of Shook, Hardy & Bacon, L.L.P., Kansas City, Missouri.

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Poppitzes”), are entitled to enforce certain rights under the Truth-in-Lending Act (“TILA”)

against the defendant, Ameriquest Mortgage Company (“Ameriquest”). The Court has

conducted a trial on this matter, reviewed all the evidence submitted in this case, and is now

prepared to rule. The Court has jurisdiction to hear this matter.2

1.      FINDINGS OF FACT

   Based upon the testimony and evidence presented at trial, the Court makes the following

findings of fact:

On May 24, 2002, the parties entered into an agreement wherein Ameriquest loaned the

Poppitzes $99,800.00 to refinance an existing loan secured by their residence. To secure the

obligation, the Poppitzes granted the defendant a mortgage on their home (the loan and mortgage

events are hereinafter referred to as the “Transaction”).

Gerald D. Luke (“Mr. Luke”), a retired mortgage loan officer and remote loan closer for

Ameriquest, met the Poppitzes at their home on May 24, 2002, to close the Transaction on behalf

of Ameriquest. At the closing, Mr. Luke brought with him two packets of Transaction

documents provided by Ameriquest that he believed were identical. He gave the Poppitzes one

of the packets as their copy and went over with them the documents that were contained in the

packet that remained in his possession, including certain disclosures required by the TILA. Mr.

Luke did not review the packet of Transaction documents he gave to the Poppitzes to determine

whether it was identical to the one in his possession.

During the closing and in Mr. Luke's presence, the Poppitzes signed a declaration on

Ameriquest's copy of a Truth-in-Lending Disclosure Statement (the “Disclosure Statement”)

2 The parties do not dispute the Court's jurisdiction. The Court finds it has jurisdiction over this proceeding under 28 U.S.C. § 1334 and 28 U.S.C. § 157.

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that, as required by the TILA, they had received their copy of the Disclosure Statement.

Although Mr. Luke, who closes 50 to 85 mortgages a month, testified that he provided the

Poppitzes with a copy of the Disclosure Statement from his packet of Transaction documents, the

Court lends little credence to his testimony on the specific details of the Transaction. Mr. Luke

was unable to convincingly explain why he could remember with specificity the Poppitzes'

Transaction, but could not do the same for any of the other mortgages he closed that day.

After the closing, Mr. Poppitz put the Poppitzes' packet of Transaction documents, which

were bound with a large paper clip or binder clip, on a desk in his office where the packet was

undisturbed for two or three days. At no time did anyone in the Poppitzes' family or any guests

in their home, aside from Mr. and Mrs. Poppitz, handle the packet of Transaction documents.

On or around May 27 and 28, 2002, Mr. Poppitz examined the packet of Transaction

documents two or three times, primarily to review the settlement statement included therein.

Although Mr. Poppitz's desk was covered with work-related documents and other papers, he

took proper care to maintain the original order of the Transaction documents and to avoid

confusing the Transaction documents with the other documents and papers on his desk. On or

around May 29, 2002, Mr. Poppitz removed the Notice of Right to Rescind from the Transaction

document packet for Mrs. Poppitz to sign in case they elected to rescind the Transaction later

that day and she was unavailable to sign the document at that time. The signed Notice of Right

to Rescind was retained with the other Transaction documents. The Poppitzes did not elect to

rescind the Transaction at that time.

Mr. Poppitz eventually contacted an attorney, Bradley D. Dillon (“Mr. Dillon”), because

Mr. Poppitz was concerned with inconsistencies in the Transaction settlement statement. Only

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through Mr. Poppitz's initial telephone conversations with Mr. Dillon, in which Mr. Dillon

directed Mr. Poppitz to look for specific items, did he discover that the set of Transaction

documents in their possession did not include a Disclosure Statement. After mailing certain

copies of the Transaction documents to Mr. Dillon for further review, Mr. Poppitz agreed to

deliver to Mr. Dillon a complete copy of the Transaction documents. They met at a copy shop

and Mr. Dillon copied the Transaction documents, which the Court finds were complete and

unaltered from the time Mr. Luke delivered them to the Poppitzes.

In addition to the complete and unaltered set of Transaction documents, Mr. Dillon

copied a number of documents from the Poppitzes that related to a previous refinancing of their

home. The Transaction documents were at all times physically segregated or clearly discernable

from the documents related to the previous refinancing. After review of the Transaction

document copies, Mr. Dillon concluded that the Poppitzes had not received the Disclosure

Statement that was required by the TILA.

On or about July 2, 2002, Mr. Dillon, as counsel for the Poppitzes, notified Ameriquest's

counsel by letter of the Poppitzes' intent to rescind the Transaction because Ameriquest had

failed to provide the material disclosures required by the TILA. Counsel for Ameriquest

received the rescission demand letter. More than 20 days have passed since counsel for

Ameriquest received the rescission demand letter, and neither party has taken further action in

response thereto outside this adversary proceeding.

The Poppitzes filed for protection under Chapter 13 of the Bankruptcy Code on

October 4, 2002. They commenced this adversary proceeding on December 10, 2002, to

determine whether they are entitled to certain remedies under the TILA. A trial on the

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underlying complaint was held by this Court on October 22, 2004.

2.     Conclusions of Law and Discussion

   1.     TILA Background

3. Some background knowledge regarding the TILA is helpful when evaluating claims

made under it. 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 cost of financing.”3 Disclosure allows consumers to

compare different financing options and their costs.4 To encourage compliance, TILA violations

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

on the creditor.5 The consumer-borrower can prevail in a TILA suit without showing that he or

she suffered any actual damage as a result of the creditor's violation.6

The TILA is applicable to consumer credit transactions “in which a security interest is or

will be acquired in real property... used or expected to be used as the principal dwelling of the

consumer, in which the total amount financed exceeds $25,000.00.”7 Because the Poppitzes

granted Ameriquest a mortgage on their principal dwelling to secure a loan in the amount of

$99,800.00 and because the parties agree that the Transaction was a consumer credit transaction

3 Morris v. Lomas & Nettleton Co., 708 F. Supp. 1198, 1203 (D. Kan. 1989) (citing Mourning v. Family

Publ'ns Serv., Inc., 411 U.S. 356, 363-69 (1973)).

4 See 15 U.S.C. § 1601(a).

5 See, e.g., Mars v. Spartanburg Chrysler Plymouth, Inc., 713 F.2d 65, 67 (4th Cir. 1983) (“To insure that the

consumer is protected, as Congress envisioned, requires that the provisions of [TILA and Reg. Z] be absolutely complied

with and strictly enforced.”).

6 Herrera v. First N. Sav. & Loan Ass'n, 805 F.2d 896, 900 (10th Cir. 1986).

7 15 U.S.C. § 1603(3).

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within the meaning of the TILA, the Court concludes that the Transaction constituted a

consumer credit transaction governed by the TILA and its accompanying regulations (commonly

referred to as “Regulation Z”). While certain types of transactions are exempt from the

application of the TILA, the Transaction is not one of them.8

2.     TILA Disclosure Statement

The TILA and Regulation Z require lenders to give the borrower a Disclosure Statement

specifying the credit terms in clear and straightforward language that the consumer may examine

and retain for reference.9 Those required disclosures include: the identity of the creditor required

to make the disclosures, the amount financed, the amount of the finance charge, the annual

percentage rate, the total of payments, and the number, amount, and due dates or period of the

payments scheduled to repay the total of payments.10 The TILA mandates that the required

disclosures must be made before credit is extended and reflect the actual terms of the legal

obligation between the parties.11

1.      Signed Acknowledgment of Receipt

The Poppitzes concede that they signed an acknowledgment that indicated their receipt of

the required TILA Disclosure Statement. However, a written acknowledgment of receipt “does

no more than create a rebuttable presumption of delivery” of the documents.12 Because the

8 See 15 U.S.C. § 1635(e).

9 15 U.S.C. § 1638(b)(1) and 12 C.F.R. § 226.17(a)(1); see also 15 U.S.C. § 1632(a).

10 For the complete requirements, see 15 U.S.C. § 1638(a).

11 15 U.S.C. § 1638(b)(1); 12 C.F.R. § 226.17(b) and (c)(1).

12 15 U.S.C. § 1635(c).

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Poppitzes' testimony is credible and Mr. Luke's less so, the Court finds that any presumption in

favor of delivery has been overcome. The Court also finds that a true and accurate copy of the

complete and unaltered packet of Transaction documents presented by Ameriquest to the

Poppitzes was admitted into evidence at trial and that the Disclosure Statement was not included

with the packet of Transaction documents.

2.      Bona Fide Error Defense

Although not specifically mentioned at trial, the Final Pretrial Order (Doc. No. 18)

identifies the bona fide error defense as an issue remaining for the Court's consideration. The

subsection governing the bona fide error defense provides that:

[a] creditor ... may not be held liable ... for a violation of this subchapter if the creditor ... shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.13

While it may be inferred from the testimony elicited at trial that Ameriquest did not

intentionally violate the TILA by failing to provide the Poppitzes with a Disclosure Statement,

Ameriquest otherwise provided no evidence at trial of what maintenance procedures, if any, it

has adapted to avoid the violation in question. This is significant because “Congress required

more than just the maintenance of procedures which were designed to provide proper

disclosure[s] .... Rather it required procedures designed to avoid and prevent the errors which

might slip through procedures aimed at good faith compliance.”14 Accordingly, because

Ameriquest did not present evidence of the procedures it has adapted to avoid the violation in

13 15 U.S.C. § 1640(c).

14 Davison v. Bank One Home Loan Servs., 2003 WL 124542 at * 7 (D. Kan. Jan. 13, 2003) (citing Mirabal v.

General Motors Acceptance Corp., 537 F.2d 871, 878-79 (7th Cir. 1976), cert. denied, 439 U.S. 1039 (1978), overruled on other grounds by Brown v. Marquette Sav. and Loan Ass'n, 686 F.2d 608 (7th Cir. 1982)).

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question, it cannot satisfy its burden in establishing its entitlement to the bona fide error defense.

3.     Rescission

Although the TILA and Regulation Z ordinarily provide only a three-day period in which

a consumer may rescind a transaction, where a Disclosure Statement fails to comply with the

TILA's specified disclosure requirements, a consumer has a continuous right to rescind the

underlying transaction for as long as the creditor fails to comply, to a maximum of three years.15

1.      Sufficiency of Notice of Rescission

Pursuant to Regulation Z, “[t]o exercise the right to rescind, the consumer shall notify the

creditor of the rescission by mail, telegram or other means of written communication.”16 Here,

where Ameriquest failed to provide the Poppitzes with the Disclosure Statement required by the

TILA, the Poppitzes timely exercised their right to rescind the Transaction by sending a

rescission demand letter on or about July 2, 2002, well within three years of the May 24, 2002,

Transaction closing, to counsel engaged by Ameriquest to represent its interests in the

Transaction. In addition, even if the Poppitzes' rescission demand letter were insufficient, a

complaint against a mortgagor also serves as proper notice of rescission if timely filed and if it

specifically addresses rescission.17 In the case at hand, the Poppitzes filed a complaint against

Ameriquest within three years from the date of the mortgage and clearly expressed their intent to

rescind the Transaction. Accordingly, the filing of this complaint was timely and effectively

notified Ameriquest that the Poppitzes wished to exercise their right to rescind the Transaction.

15 15 U.S.C. § 1635(f).

16 12 C.F.R. § 226.23(a)(2).

17 See In re Rodrigues, 278 B.R. 683, 689 (Bankr. D.R.I. 2002) (citations omitted).

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2.      Effecting Rescission

The framework to effect rescission upon a consumer's valid notice of his or her intent to

rescind a transaction is provided by 15 U.S.C. § 1635(b). First, when a consumer exercises his

right to rescind, he is not liable for any finance or other charge, and any security interest given

by the obligor, including any such interest arising by operation of law, becomes void.18 Second,

within 20 days after receipt of a notice of rescission, the creditor must return to the consumer any

money or property given as earnest money, down payment, or otherwise, and shall take any

action necessary or appropriate to reflect the termination of any security interest created under

the transaction.19 Third, if the creditor has delivered any property to the consumer, the consumer

may retain possession of it until the performance of the creditor's obligations.20 Once the

creditor has performed its obligations, the consumer must then tender the property to the

creditor, except that if return of the property in kind would be impracticable, or inequitable, the

consumer shall tender its reasonable value.21

However, these procedures may be equitably modified by this Court to ensure that the

consumer meets his obligations after the creditor has performed its obligations as required by the

Act.22 Because the record is insufficient to determine whether deviating from the TILA's

statutory framework is warranted, the parties will be afforded an opportunity to present evidence

18 15 U.S.C. § 1635(b).

19 Id.

20 Id.

21 Id.

22 In re Stanley, 315 B.R. 602, 615-16 (Bankr. D. Kan. 2004).

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at a hearing to be set at a later date on the financial circumstances surrounding the Transaction

and the propriety of equitably modifying the rescission procedures set forth in 15 U.S.C.

§ 1635(b).

4.     Statutory Damages

The Poppitzes argue that they are entitled to an award of statutory damages for

Ameriquest's failure to honor their notice of rescission. The Court agrees. The TILA entitles

borrowers not only to rescission, but also to statutory damages under 15 U.S.C. § 1640 for the

creditor's failure to honor a notice of rescission.23 Section 1640(a)(2)(A)(iii) provides that

statutory damages of “not less than $200.00 or greater than $2,000.00” may be awarded to the

plaintiff for the defendant's failure to honor his notice of rescission. The Court reserves

judgment on statutory damages until such time it issues judgment on the equitable modifications,

if any, it places on the rescission procedures set forth in 15 U.S.C. § 1635(b).

5.     Attorney's Fees and Costs

Pursuant to 15 U.S.C. § 1640(a)(3), the Poppitzes seek to recover the costs of this action

together with a reasonable attorney's fee. Having successfully established that Ameriquest

violated the TILA in the Transaction, they are entitled to such relief. The Court reserves

judgment on an award of attorney's fees and costs until such time it issues judgment on the

equitable modifications, if any, it places on the rescission procedures set forth in 15 U.S.C.

§ 1635(b).

Conclusion

For the reasons set forth above, the Court concludes that Ameriquest did not provide the

23 15 U.S.C. § 1635(g) (“[I]n addition to rescission, the court may award relief under section 1640 ... for

violations of this subchapter not relating to the right to rescind.”).

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Poppitzes with a TILA Disclosure Statement. As a result, the Poppitzes effectively exercised

their right to rescind the Transaction and are entitled to both statutory damages and to attorney's

fees and costs. The Court is unable to determine at this time whether deviating from the TILA's

statutory framework and equitably modifying the rescission procedures set forth in 15 U.S.C.

§ 1635(b) is warranted.24 Therefore, a supplemental order shall be entered forthwith setting an

evidentiary hearing on the equitable modifications, if any, that should be made to the rescission

procedures set forth in 15 U.S.C. § 1635(b).

###

ROBERT D. BERGER

U.S. BANKRUPTCY JUDGE

DISTRICT OF KANSAS

24 This Court may but does not have to impose conditions that run with the voiding of the mortgage.

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