Norman
W. Cole and Judy B. Cole v. J. L. Lovett D/B/A
Capitol Roofing and Insulation Company and United Companies Mortgage of
Mississippi, Inc.
UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF MISSISSIPPI,
JACKSON DIVISION
672 F. Supp. 947; 1987 U.S. Dist. LEXIS 9945
February 2, 1987, Decided
This cause came before the court on the complaint of the plaintiffs,
Norman and Judy Cole, alleging violations of the Truth-in-Lending Act
and the Mississippi Home Sales Solicitation Act by the defendants, J.
L. Lovett, doing business as Capitol Roofing and Insulation Company
(Capitol Roofing), and United Companies Mortgage of Mississippi (UCM),
and further alleging breach of express and implied warranties by
Capitol Roofing.
On Tuesday, November 9, 1982, at approximately six
o'clock p.m., plaintiffs Norman and Judy Cole were visited by two
representatives of Capitol Roofing, Tony Stepp and Ken Smith. After
describing the siding proposed to be sold to the Coles and installed on
their home, Stepp estimated the cost of covering the Cole home at $
4900. This sales call resulted in plaintiffs', on the same evening,
signing a contract for the installation of vinyl siding on their home.
During this transaction, Stepp presented a number of documents to the
Coles for their signatures, including a work order contract, home
improvement retail installment contract security agreement and
disclosure statement (disclosure statement), loan application, notice
of right to cancel, and deed of trust. Although all of the documents
were signed by plaintiffs, they both testified that the only document
they actually saw was the work order contract. Stepp had represented to
them that the papers they were signing included a work order, credit
application and insurance papers. According to the Coles, the papers
were arranged one on top of the other, with the contract being the top
paper. As Stepp presented the papers for their signature, he lifted
only so much of a document as was necessary to obtain
their signatures at the bottom of each page. When the transaction was
completed, the Coles were given a single carbon copy of the work order
contract and a copy of the disclosure statement. According to the
Coles' testimony, which the court credits, they received no copies of
the remaining documents.
Shortly after Stepp and Smith left the home, plaintiffs discussed the
matter and decided to hold off on the transaction with Capitol Roofing.
They wished to obtain more estimates and have time to decide if they
really wanted the siding. Early the next morning, Judy Cole called
Capitol Roofing and informed Stepp that she and her husband had decided
to wait, to which Stepp replied that the papers had been processed, the
workers would be out at the end of the week, and there was nothing he
could do.
Frustrated and not knowing what else to do, Mrs. Cole accepted Stepp's
explanation. Upon returning home from work that day, she discovered the
Capitol Roofing installation crew putting siding on the home. She did
not tell them to leave because she believed that she and her husband
were bound since they had signed the contract. Subsequently, on
November 27, after the job was completed, plaintiffs
signed a completion certificate acknowledging their satisfaction with
the work which had been done. Immediately upon completion of the
paperwork, including the completion certificate, Capitol Roofing
assigned the contract to defendant UCM. n3 At trial, there was
testimony from two UCM employees, John Nowell and Marvin Murray,
regarding UCM's normal procedure for handling the purchase of a retail
installment contract from Capitol Roofing. According to their
testimony, once an application for a potential customer was approved,
Capitol Roofing would furnish UCM with the disclosure statement and
notice of right to rescind. Then UCM employees would communicate with
the customer to verify that the customer had received the required
forms, and that they understood the terms and knew with whom they were
dealing. Although it was established at trial that
this was UCM's normal procedure, the Coles firmly denied having been
contacted by anyone from UCM and the court so finds.
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n3 United Companies Mortgage, as Capitol Roofing's assignee, became
subject to all of the Coles' claims and defenses against Capitol
Roofing by virtue of a provision in the contract that, "any holder of
this consumer credit contract is subject to all claims and defenses
which the debtor could assert against the seller of goods or services
obtained pursuant hereto or with the proceeds hereof. Recovery
hereunder by the debtor shall not exceed amounts paid by the debtor
hereunder." This provision was contained in the contract pursuant to
the Federal Trade Commission Holder in Due Course Rule, 16 C.F.R.
§ 433.2 (1986).
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Despite continuing problems with the siding and repeated unsuccessful
calls by Judy Cole to Capitol Roofing requesting that the problems be
remedied, plaintiffs made monthly payments to UCM. However, after
having made eleven payments, the Coles became totally frustrated and
discontinued further payment. They subsequently retained counsel who,
by letter dated December 19, 1984, informed both J.
L. Lovett and UCM that the Coles desired to exercise their right of
rescission under the Truth-In-Lending Act (TILA), 15 U.S.C.
§§ 1601-1693 (1982), and their right of cancellation pursuant
to the Mississippi Home Sales Solicitation Act (MHSSA), Miss. Code Ann.
§§ 75-66-1-11 (Supp. 1986). Upon receiving no response from
defendants, plaintiffs instituted this action on November 7, 1985,
seeking to enforce their right of rescission and alleging breach of
express and implied warranties by defendants. UCM counterclaimed
alleging the Coles' default under the contract.
TRUTH-IN-LENDING ACT
The TILA and its implementing Regulation Z require that prior to the
consummation of a consumer credit sale, the creditor make certain
disclosures to the obligor and give the obligor notice of his right to
rescind the transaction. The consumer has until midnight of the third
business day following consummation of the transaction or delivery of
notice of the right to rescind, or delivery of all material
disclosures, whichever occurs last, to rescind the transaction. 12
C.F.R. § 226.23(a)(3) (1986). If the required notice or material
disclosures are not delivered, the right to rescission extends
for three years following consummation of the
transaction. 15 U.S.C. § 1635(f); 12 C.F.R. § 226.23(a)(3).
The first violation which plaintiffs contend entitles them to rescind
the transaction under TILA is the failure of Capitol Roofing to
disclose the security interest that was being acquired in their home.
Under TILA, the right to rescind is available in any "credit
transaction in which a security interest is or will be retained or
acquired in the consumer's principal dwelling." 12 C.F.R. §
226.23(a)(1). The testimony of the parties regarding the deed of trust
signed by the Coles was in direct contradiction. Stepp testified that
he explained to the Coles that they were granting a security interest
in their home, and further said that either he or Smith completed the
relevant portions of the deed of trust, with the exception of the
property description, before the Coles signed the document. Judy Cole,
he claimed, had been unable to find the legal description of the
property and, consequently, the description was later inserted after a
title search had been completed. According to Stepp,
both of the Coles knew they were granting a second mortgage on their
home. Plaintiffs, on the other hand, testified that
neither Smith nor Stepp informed them that their home would be security
for the siding contract. Neither of them recalled having signed a deed
of trust. The disclosure statement signed by the Coles did not mention
a deed of trust but contained the following language:
Security: Buyers are giving a security
interest in:
--the goods or property being purchased.
X land located at P.O. Box D'Lo, MS.
Norman and Judy Cole denied any knowledge of the existence of a deed of
trust against their home and stated affirmatively that they did not
learn of the deed of trust until approximately a year later when they
applied for credit to make interior improvements on their home and the
deed of trust was discovered in the land records. While the Coles did
not deny having signed the deed of trust, they insisted that they never
saw the deed of trust, as Stepp had them sign the bottom of the page
without showing the remainder of the document. Both plaintiffs
testified that they were never furnished with a copy of the deed of
trust, and Norman Cole said that had he known he was granting Capitol
Roofing a security interest in his home, he would
never have entered into the transaction. The court credits the
testimony of the Coles and is of the opinion that Capitol Roofing did
not disclose to them the fact that a security interest was being
acquired in their home. Therefore, under the rationale of Williamson,
this constituted a material violation of TILA and Regulation Z, 15
U.S.C. § 1635(a), 12 C.F.R. §§ 226.18(m), 226.23(a)(1)
and (3), and plaintiffs are entitled to rescind.
The plaintiffs next charge that Capitol Roofing failed to furnish them
with notice of their right to rescind as required by
TILA. TILA and Regulation Z expressly require the creditor in a
consumer credit transaction, in which a security interest is being
conveyed in the property used by the consumers as their principal
dwelling, to provide each consumer who own an interest in the property
two copies of a notice of the right to rescind. 15 U.S.C. §
1635(a); 12 C.F.R. § 226.23(a) and (b). n4 At trial, Stepp
testified that he verbally informed the Coles of their right to rescind
the transaction and gave them each two copies of a notice of right to
cancel form which contained the required information. Capitol
Roofing introduced a document entitled "notice of
right to cancel" with an acknowledgement of receipt of form signed by
both plaintiffs and dated November 9, 1982. However, the Coles claimed
that they had never seen the notice of right to cancel and that,
despite their having signed the acknowledgement portion of the
document, neither of them ever received copies of the notice form.
Moreover, both testified that Stepp never explained the right of
rescission and, in fact, after her discussion with Stepp on November
10, Judy Cole was under the impression that she and her husband were
bound by having signed the contract. The effect of the Coles'
signatures on the acknowledgment is governed by 15 U.S.C. §
1635(c) which provides that a written acknowledgement of receipt of
disclosures by a TILA creditor "does no more than create a rebuttable
presumption of delivery thereof." As it appears from the testimony that
the Coles were unaware of any right of recission and did not learn of
their right until much later upon consulting with an attorney, the
court is of the opinion that the Coles have effectively rebutted the
presumption of delivery. The court finds that plaintiffs were not
informed of their right to rescind and that,
notwithstanding their signing an acknowledgement of receipt of forms,
they never received copies of the notice. The failure by Capitol
Roofing to provide each of the plaintiffs with the required notice
constituted a violation of TILA and entitled them to rescind the
transaction. 15 U.S.C. § 1635(a); 12 C.F.R. §§ 226.17(d)
and 226.23(a)(3). As they were never given proper notice of their right
to rescind, they timely exercised this right, having notified
defendants of their rescission within three years following
consummation of the transaction. See 15 U.S.C. § 1635(f).n5
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n4 The notice is required to be on a separate document and
conspicuously disclose the retention or acquisition of the security
interest in the consumer's principal dwelling and the consumer's right
to rescind the transaction, give an explanation of how the right to
rescind may be exercised together with a form for that purpose, explain
the effects of rescission, and include the date the rescission period
expires. 12 C.F.R. § 226.23(b).
n5 While TILA provides for the assessment of civil penalty damages
against creditors for noncompliance with the Act, an action to recover
such damages must be brought within one year from the date of the
violation. 15 U.S.C. § 1640(a) and (c). Because the Coles did not
file their lawsuit until more than one year following the consummation
of their transaction, no penalty damages lie under the Act.
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As a result of Capitol Roofing's violations of TILA, plaintiffs were
entitled to rescind the transaction. After the Coles served notice on
defendants of their election to cancel the transaction, defendants were
required to "return to the [Coles] any money or property given as
earnest money, down payment, or otherwise, and [were required to] take
any action necessary or appropriate to reflect the termination of any
security interest created under the transaction." 15 U.S.C. §
1635(b); 12 C.F.R. § 226.23(d)(2). Plaintiffs' attempt at
cancellation was met with total inaction by defendants. Consequently,
the Coles are entitled to the cancellation of the finance charges in
their transaction, and to have the security interest in their home
voided. 15 U.S.C. § 1635(b); 12 C.F.R. § 226.23(d)(1) and
(2).
MISSISSIPPI HOME SOLICITATION SALES ACT
In addition to their TILA claims, plaintiffs have alleged violations of
the MHSSA. Like TILA, the MHSSA imposes notice and disclosure
requirements upon a seller in a transaction which is a "home
solicitation sale." A home solicitation sale is defined as "a consumer
credit sale of goods or services in which the seller . . . engages in a
personal solicitation of the sale at a residence of the buyer and the
buyer's agreement or offer to purchase is there given to the seller . .
. ." Miss. Code Ann. § 75-66-1. This section excludes from
coverage sales which are initiated by the buyer.
In the present case, there was substantial disagreement between the
parties as to the manner in which the initial contact between Capitol
Roofing and the Coles occurred. Stepp testified that in November 1982
Capitol Roofing had installed siding on the home of Wanda Collins, a
neighbor of the Coles. He claimed that while the
crew was working at the Collins home, Judy Cole approached a member of
the installation crew and, as a result of a conversation between them,
the applicator told Ken Smith to see if the Coles wanted siding.
According to Stepp's version, the sales call was at the instance of
Judy Cole. The Coles' testimony that their first
contact with anyone from Capitol Roofing occurred when Smith and Stepp
came to their home on November 9 was corroborated by Wanda Collins, who
explained that she had suggested to Stepp that Judy Cole might be
interested in purchasing siding. Mrs. Cole had commented on the
improved appearance of the Collins home after the siding was applied,
and Stepp promised Wanda Collins a $ 100 commission on any referrals by
her which resulted in sales. The court finds that the sales call by
Stepp and Smith was the result of a referral by Wanda Collins and was
not at the Coles' request. Consequently, this transaction constituted a
"home solicitation sale" within the meaning of MHSSA.
Section 75-66-3 of MHSSA provides the buyer a right to cancel a home
solicitation sale until midnight of the third business day following
the day on which the buyer signs an agreement or offer to purchase.
With limited exceptions, none of which are applicable here, the seller
is required to obtain the buyer's signature on a statement, executed
simultaneously with the agreement to purchase, which must conspicuously
inform the buyer of his rights under the Act. Until the seller has
complied with the notice provisions of the Act, the buyer may cancel
the home solicitation sale by notifying the seller "in any manner and
by any means of his intention to cancel." Miss. Code Ann. §
75-66-5(4). Defendants did not suggest that they provided the Coles
with the notice required by MHSSA. Rather, their sole defense to
plaintiffs' MHSSA claim was that the transaction was not a home
solicitation sale and compliance was therefore unnecessary. As the
court has concluded that the transaction constituted a home
solicitation sale, and as Capitol Roofing never informed the Coles of
their right to cancel under the Mississippi Act, the Coles properly and
timely exercised their right to cancel by letter
from their attorney to defendants dated December 19, 1984.
The obligations of the parties to a home solicitation sale upon
cancellation are set forth in part at Miss. Code Ann. § 75-66-7(1)
which requires the seller, within ten days of cancellation of a home
solicitation sale, to tender to the buyer "any
payments made by the buyer and any note or other evidence of
indebtedness." If the seller complies with this obligation, he is
allowed to retain a cancellation fee of five percent
of the cash price, not to exceed any cash down payment. Miss. Code Ann.
§ 75-66-7(3). Until the seller complies, "the buyer may retain
possession of the goods delivered to him by the seller or has a lien on
the goods in his possession or control for any recovery to which he is
entitled." Miss. Code Ann. § 75-66-7(4). Section 75-66-9 provides
in pertinent part that
(1) Except as provided in section
75-66-7, within a reasonable time
after a home solicitation sale has been cancelled or an offer to
purchase revoked, the buyer upon demand must tender to the seller any
goods delivered by the seller pursuant to the sale . . . . If the
seller fails to demand possession of goods within a reasonable time
after cancellation or revocation, the goods become the property of the
buyer without obligation to pay for them. For the purpose of this
section, forty (40) days is presumed to be a reasonable time. (emphasis
supplied)
. . .
(3) If the seller has performed any services pursuant to a home
solicitation sale prior to its cancellation, the
seller is entitled to no compensation except the cancellation fee
provided in this chapter.
Although MHSSA was enacted in 1974, there has been no construction of
the provisions relating to the various rights and obligations of the
buyer and seller upon cancellation. Under TILA, as construed by the
Fifth Circuit, a creditor forfeits any interest in the property
delivered an obligor if the obligor tenders the property or its
reasonable value and the seller fails to take possession of the
property within twenty days of tender. In order for the forfeiture
provision to apply, the obligor must make tender, irrespective of any
actions on the part of the creditor. See Gerasta v. Hibernia, 575 F.2d
580 (5th Cir. 1978). Under the clear wording of MHSSA, however, if
within a reasonable time of cancellation, the seller fails to demand a
return of the property from the buyer, the property becomes that of the
buyer, and the buyer is no longer obligated to pay for it. In addition,
the buyer is entitled to a return of all sums paid and cancellation of
any security interest granted to the seller. In the present case,
neither Capitol Roofing nor UCM demanded a return of
the property from plaintiffs within a reasonable time or at any time.
Hence, as a result of defendants' noncompliance with the requirements
of MHSSA, they are required to cancel the deed of trust and to return
to plaintiffs payments made in the amount of $ 1703.57. The Coles are
also entitled to cancellation of the underlying contract. Finally, as a
result of Capitol Roofing's failure to demand possession of the siding
within a reasonable time after cancellation, the siding became the
property of the Coles and they are relieved of any further obligation
to pay for it.
While the transaction that included installation of the siding on the
home of the Coles was a sale of services, as well as a sale of goods, a
seller who has performed services pursuant to a home solicitation sale
prior to its cancellation is entitled to no compensation except the
five percent cancellation fee provided by Miss. Code Ann. §
75-66-7(3). The cancellation fee is not available if the seller fails
to comply with his duties upon cancellation, or if the buyer voids the
sale on any ground independent of his right to cancel. Miss. Code Ann.
§ 75-66-7(3). In this case, Capitol Roofing failed to comply with
the requirement in section 75-66-7(1) to tender to
the buyer payments made and the evidence of indebtedness within ten
days after cancellation of the sale. Thus, Capitol Roofing is not
entitled to any cancellation fee.
Defendants have urged that the court condition rescission or
cancellation upon the Coles' payment to defendants of the reasonable
value of the siding. The defendants could have avoided what may seem
like a harsh result in the first instance, if they had complied with
the clear requirements of MHSSA. At the time of the transaction with
the Coles, the defendants wholly failed to inform the Coles of their
rights, thus leaving them vulnerable to subsequent actions by Capitol
Roofing. Then, Capitol Roofing, despite Judy Coles' request to hold off
on the siding, began work immediately, before the
expiration of the three-day cancellation period, thus placing the Coles
in a position of accepting goods and services they were not certain
they wanted. Capitol Roofing attempted to deprive plaintiffs of their
right to rescind, first, by failing to inform them of the right and,
secondly, by subtly forcing them to accept the siding. For those
reasons, the court concludes that, although
rescission is an equitable remedy and conditions may be placed on the
exercise of that right, the equity in this case does not lie with the
defendants. As one court has observed,
If this result appears to deal harshly
with merchants who have fully
performed under their contracts, it seems clear to this court that the
message which the legislature has attempted to convey by the enactment
of [The California Solicitation Sale Act] is "Caveat Vendor".
Merchants, put on notice by the statute, can easily and inexpensively
protect themselves, . . ., by including a right to cancel provision and
an accompanying notice of cancellation as a matter of course in all
contracts signed outside their trade premises.
Weatherall Aluminum Products Company v. Scott, 71 Cal. App. 3d 245,
249, 139 Cal. Rptr. 329, 331 (1977); see also Louis Luskin and Sons,
Inc. v. Samovitz, 166 Cal. App. 3d 533, 539, 212 Cal. Rptr. 612, 615
(1985) (attempt to pressure buyers by part performance within three-day
cancellation period was precisely conduct home solicitation sales act
was intended to prevent).
As the court has concluded that plaintiffs have established
violations of both TILA and MHSSA, and that under
MHSSA the Coles have no obligation to pay for the siding on their home,
this court need not consider the breach of warranty claims alleged by
plaintiffs. Further, plaintiffs are entitled to cancellation of the
transaction under both MHSSA and TILA, and UCM is entitled to no relief
on its counterclaim for damages as a result of plaintiffs' default on
the underlying contract. Defendants are also required, pursuant to
Miss. Code Ann. § 75-66-7(3), to return to the Coles the sum of $
1703.57, representing the total of payments made by the Coles.