Dear members of the constituency list of the Commercial Transactions Committee:
The following is an update analyzing a recent case of interest:
In a case of first impression, the United States Court of Appeals for the Ninth Circuit held recently that a trust created by an individual for tax and estate planning purposes is entitled to receive all state and federal consumer disclosure protections for a consumer credit transaction. Gilliam v Levine, 2020 WL 1861977 (9th Cir. 4/14/20). To view the full opinion, click here.
Maxine Gilliam (Borrower) was the trustee of the Lou Ross Easter Trust, created by her sister Lou for the benefit of Lou’s daughter. Borrower became the trustee of the trust after Lou died. In that capacity, she obtained a loan from Joel Levine (Lender) to finance repairs to residential property, the main asset of the trust, occupied by her niece, the trust beneficiary.
Borrower filed suit against the Lender, asserting that it failed to comply with disclosure requirements and other provisions of the federal Truth-in-Lending Act (TILA), the Real Estate Settlement Procedures Act (RESPA), Regulation Z, and the California Rosenthal Fair Debt Collection Practices Act, all of which provide certain protections to borrowers in consumer credit transactions. The district court dismissed the complaint, ruling that since the Borrower did not herself reside in the house, the loan was not a consumer credit transaction and not entitled to the protections in those acts.
Borrower appealed and in a case of first impression in the Ninth Circuit – and apparently in the country – the circuit court reversed.
Under TILA in a consumer credit transaction, the creditor must disclose to the borrower, among other items, the number and amounts of payments and when each is due. The Borrower alleged the Lender’s disclosures were materially inconsistent with the terms of the loan, leading her to believe the final payment was due a year later than the date in the loan documents. The district court in dismissing the complaint had been persuaded by the Lender’s assertion that the trust property securing the loan must be the Borrower’s primary residence for the loan to qualify as a consumer credit transaction. The circuit court found no statutory or regulatory support for this argument. It found more persuasive the argument of the Borrower, who relied on the Official Staff Commentary to Regulation Z, which provides that loans to trusts such as the one here should be treated as consumer credit transactions. See, 12 C.F.R. pt. 1026, Supp. 1, § 1026.3 Comment 3(a)-10.
The circuit court gave considerable weight to the federal regulations as “important tools to implement consumer protection statutes,” noting that the Consumer Financial Protection Bureau (CFPB) has interpretive authority over the provisions of TILA and RESPA. Citing both Ninth Circuit and Supreme Court authority, it found that courts should defer to CFPB’s Official Staff Commentary “absent some obvious repugnance to the statute.” The interpretive guidance here was 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. Critical to the analysis is the substance of the transaction, rather than the capacity in which the loan documents are executed. Here, the purpose of the loan was to make repairs to the residence of the trust beneficiary, which had all the trappings of a consumer credit transaction, entitled to the consumer protections of TILA.
The circuit court further held that the definitions of consumer credit transactions under RESPA and the Rosenthal Act were sufficiently similar to the TILA definition such that the loan here also was entitled to those act’s protective elements.
The opinion did not cite to any other circuit authority on this issue, nor could I find any other published opinion. If this is the only circuit to weigh in, the Ninth Circuit’s straight forward analysis and deference to the CFPB’s interpretive authority as set forth in the regulations should provide persuasive arguments to litigants throughout the country. Certainly, the reasoning makes sense. A significant percentage of the population has created family or living trusts as an estate planning tool to avoid the time delays and costs of probate upon the death of a family member. Commonly, the family residence is among the assets transferred to the trust, often along with the other household assets of a family such as cars and bank accounts. Transactions affecting such assets are clearly consumer credit transactions because they have nothing to do with business or commercial ventures, affecting primarily simple necessities of life. There is no sound reason to deprive the trustee of such a trust of the consumer protections afforded by both federal and state consumer protection laws.
The treatment of the trust assets in this case is consistent with their treatment in consumer bankruptcy cases. The existence of a living trust is disregarded in consumer bankruptcy schedules. The assets of the trust are considered assets of the debtors, qualifying them for individual exemptions but also exposing them to administration by the bankruptcy estate. This consistency reinforces the correctness of the circuit court’s decision.
The Commercial Finance Newsletter is written by an ad hoc group of the California Lawyers Association (CLA) Business Law Section. These materials were authored by the Hon. Meredith Jury (United Sates Bankruptcy Judge, C.D. Cal. Ret.) a member of the ad hoc group, with editorial contributions by Monique D. Jewett-Brewster, an attorney with Hopkins & Carley, ALC, a member of the ad hoc group and 2018-19 Chair of the CLA Business Law Section. The opinions expressed herein are solely those of the author. Thomson Reuters holds the copyright to these materials and has permitted the Commercial Transactions Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.