MAURO v. COUNTRYWIDE HOME LOANS, INC. (E.D.N.Y. 7-22-2010)

any way."); Arias v. NASDAQ/AMEX Mkt. Group, No. 00 Civ. 9827 (MBM), 2003 WL 354978, at *13 (S.D.N.Y. Feb. 18, 2003) (dismissing claims as "abandoned" where plaintiff's summary judgment opposition "neither refute[d] nor even mention[ed]" defendant's argument for summary judgment on two of his claims); see also Local Civ. Rule 7.1 ("[A]ll oppositions thereto shall be supported by a memorandum of law, setting forth the points and authorities relied upon . . . in opposition to the motion. . . . Willful failure to comply with this rule may be deemed sufficient cause for the . . . granting of a motion by default.").

Nevertheless, in an abundance of caution, the Court has considered the substance of defendants' arguments. For the reasons set forth below, the Court concludes that TILA is inapplicable in this case given the uncontroverted facts and, accordingly, grants defendants' motions for summary judgment on plaintiff's TILA claim.

1. TILA Framework

"[TILA] was enacted to assure meaningful disclosure of credit terms, avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices." See McAnaney v. Astoria Fin. Corp., 357 F. Supp. 2d 578, 583 (E.D.N.Y. 2005) (citing, inter alia, 15 U.S.C. §§ 1601- 65(b) (2004) and Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 559 (1980)). "Failure to make a required disclosure and satisfy the Act may subject a lender to statutory and actual damages that are traceable to the lender's failure." Id. When it enacted TILA, "Congress delegated authority to the Federal Reserve Board of Governors to promulgate implementing regulations and interpretations known as Regulation Z." Id. (citing 15 U.S.C. § 1604(a)). "These regulations, which are located at 12 C.F.R. Part 226 may be relied upon by creditors for protection from any civil or criminal liability." Id. (citing Household Credit Servs., Inc. v. Pfennig, 541 U.S. 232 (2004)).

2. Analysis a. Purpose of Loan

TILA applies only to consumer credit transactions and, therefore, does not apply to credit extended for "business, commercial, or agricultural purposes." 15 U.S.C. § 1603(1); see also Regulation Z, 12 C.F.R. § 226.3(a)(1) (stating that Regulation Z does not apply to "[a]n extension of credit primarily for a business, commercial or agricultural purpose"). The Second Circuit has not articulated a standard for determining whether a loan is obtained for personal or business purposes under TILA. Most other courts that have addressed the issue have held that a court must look at the entire transaction and surrounding circumstances to determine a borrower's primary motive. For instance, in the Ninth Circuit:

"Whether an investment loan is for a personal or a business purpose requires a case by case analysis." Thorns v. Sundance Properties, 726 F.2d 1417, 1419 (9th Cir. 1984). This analysis requires an examination of:

(1) The relationship of the borrower's primary occupation to the acquisition. The more closely related, the more likely it is to be business purpose.

(2) The degree to which the borrower will personally manage the acquisition. The more personal involvement there is, the more likely it is to be business purpose.

(3) The ratio of income from the acquisition to the total income of the borrower. The higher the ratio, the more likely it is to be business purpose.

(4) The size of the transaction. The larger the transaction, the more likely it is to be business purpose.

(5) The borrower's statement of purpose for the loan.

Daniels v. SCME Mortg. Bankers, Inc., 680 F. Supp. 2d 1126, 1129 (N.D. Cal. 2010) (citing Thorns, 726 F.2d at 1419). Other courts have taken a similar approach. See, e.g., Hinchliffe v. Option One Mortg. Corp., Civ. No. 08-2094, 2009 WL 1708007, at *3 (E.D. Pa. June 16, 2009) ("In order to determine whether the loan was primarily personal or commercial in nature, we must look at the entire transaction and determine the borrower's primary motive for seeking the loan." (citation omitted)); Shames-Yeakel v. Citizens Fin. Bank, 677 F. Supp. 2d 994, 1002 (N.D.N.Y. 2009) ("In determining whether a particular transaction had a primarily consumer or business nature within the meaning of the TILA, courts look to the entire surrounding factual circumstances." (quotation omitted)); Macheda v. Household Fin. Realty Corp. of N.Y., No. 04-CV-0325 (GTS/GJD), 2009 WL 113474, at *5 (N.D.N.Y. Jan. 15, 2009) (collecting cases).

As a general matter, the burden is on plaintiff to show that the loan in question was obtained for personal, as opposed to business, purposes. See, e.g., Hinchliffe, 2009 WL 1708007, at *3 ("[Plaintiff] has the burden of evidencing his intent and showing that the loan was entered into primarily for personal purposes, as opposed to financing his businesses." (citing Katz v. Carte Blanche Corp., 496 F.2d 747, 751 (3d Cir. 1974))) (granting summary judgment for defendant creditor); see also, e.g., Macheda, 2009 WL 113474, at *5 ("When there is a dispute between parties as to the type of transaction, `[t]he plaintiff has the burden of showing that the disputed transaction was a consumer credit transaction, not a business transaction.'" (quoting Searles v. Clarion Mortg. Co., 87-CV-3495, 1987 WL 61932, at *3 (E.D. Pa. Dec. 7, 1987))).

In the instant case, there is no dispute that plaintiff obtained the Fulton Street and Grant Street mortgage loans for investment purposes. Plaintiff alleges in the amended complaint that the proceeds of the loan were to be used to pay off the mortgages on the rental properties and for investment. (Am. Compl. ¶¶ 15-17.) Plaintiff repeatedly testified in her deposition that the loans were obtained for investment purposes. ( See, e.g., Mauro Dep. at 39, 42-43, 47-49.) For instance, plaintiff testified:

Q. [D]id you talk to Peter Dawson about the Countrywide loans?

A. He kept saying he wanted to invest our money.

Q. And was it your understanding that he was investing the money?

A. That's what we thought.

Q. And did you have an idea precisely what type of investment he had selected to place the money?

A. He was saying he would double our money, but I don't know what he was doing with it.

Q. And was that proposal something that was appealing to you?

A. Well, if he could earn that money for us, of course, but I didn't think he would go under.

(Mauro Dep. at 79-80; see also Mauro Dep. at 49 ("Q. Did Dawson tell you that he would invest your money in a hedge fund that would earn a higher rate of interest? A. Yes, that's why we trusted him, yes.").) It is also undisputed that plaintiff did not reside in either of the mortgaged properties, which plaintiff rented out for investment purposes. ( See Mauro Dep. at 12-13; Countrywide Exs. E, F.)

As a general matter, when a party obtains a loan in order to make a profit, that loan is not considered a "personal" loan under TILA. See, e.g., In re Booth, 858 F.2d 1051, 1054-55 (5th Cir. 1988) ("Cases decided under the Truth in Lending Act indicate that when the credit transaction involves a profit motive, it is outside the definition of consumer credit." (collecting cases)). In particular, it is well settled that a loan obtained in order to invest in non-owner occupied rental properties is a loan for business purposes. See Official Staff Commentary, Board of Governors of the Federal Reserve System, Section 226.3, Commentary 3(a)(3), 46 Fed. Reg. 50288, 50297 (Oct. 9, 1981) ("Credit extended to acquire, improve, or maintain rental property (regardless of the number of housing units) that is not owner-occupied is deemed to be for business purposes."); see, e.g., Corcoran v. Saxon Mortg. Servs., Inc., Civ. No. 09-11468-NMG, 2010 WL 2106179, at *3 (D. Mass. May 24, 2010) (holding TILA inapplicable where "[a]t the time the plaintiff obtained the loan, he represented to the lender that it would be used to purchase an `investment property' and that he did not intend to occupy the premises personally"); Lind v. New Hope Prop., LLC, Civil No. 09-3757 (JBS/KMW), 2010 WL 1493003, at *5 (D.N.J. Apr. 13, 2010) ("[C]ourts have consistently held that loans obtained to purchase non-owner occupied rental property are for a `business purpose' and are not covered by TILA." (collecting cases)); Daniels, 680 F. Supp. 2d at 1131 (granting motion to dismiss TILA claim, reasoning that "[b]ecause the property at issue was clearly not owner occupied, Plaintiff's loan was not for a personal purpose under TILA"); Goff v. Utah Funding Commercial, Inc., No. 2:09-CV-00680, 2009 WL 4665800, at *3 (D. Utah Dec. 2, 2009) (granting summary judgment on TILA claim where loans were secured by a rental property that plaintiff owned for commercial purposes and the loans were obtained to further plaintiff's investment in that property); In re Macklin, Nos. 05-12750-BGC-13, 08-00013-BGC-13, 2009 WL 3080461, at *6 (Bankr. N.D. Ala. Sept. 23, 2009) ("[T]he debtor purchased [the properties at issue] for business purposes, did not intend to occupy either of them, and has in fact not occupied them. Consequently, the defendant was not required to make the disclosures described in [ 15 U.S.C. § 1638] to the debtor in connection with either of the loans."); LaPorte v. Countrywide Home Loans, Inc., No. 3:08-cv-408, 2009 WL 2905934, at *2 (E.D. Tenn. Sept. 3, 2009) ("Similarly, the court

finds that plaintiff in the instant action obtained the property for commercial rental purposes; RESPA and TILA therefore do not apply to the mortgage."). Therefore, to the extent plaintiff obtained the loans in order to further her investment in the rental properties, the loan was clearly a "business" loan as a matter of law and, therefore, exempt from the coverage of TILA.

The Court recognizes that the fact that the properties securing the loans were rental properties is not dispositive on the question of plaintiff's purpose in obtaining the loan. See, e.g., Hinchliffe v. Option One Mortg. Corp., Civ. No. 08-2094, 2009 WL 1708007, at *4 (E.D. Pa. June 16, 2009) ("[I]n determining whether the loan qualifies for TILA [or] RESPA, . . . the focus is not on the nature of the property securing the loan, but on the use of the loan proceeds."). However, for the reasons discussed above, because the plaintiff intended to use the proceeds of the loans for investment by Dawson, the loans were obtained for business purposes as a matter of law.

To the extent plaintiff argues that the loans were obtained in order to invest for some unspecified personal purpose, plaintiff has failed to meet her burden in opposing the instant motion for summary judgment. At oral argument, plaintiff's counsel pointed to no evidence of a personal purpose for the loans and acknowledged that the loans were specifically designed for plaintiff to give the loan proceeds directly to Dawson for investment purposes. Thus, plaintiff has failed to meet her burden of producing any evidence that would create a genuine issue of disputed fact as to the purpose of the loan. In the absence of any evidence whatsoever that plaintiff's loans were obtained for personal purposes, defendants are entitled to summary judgment. See, e.g., Daniels, 680 F. Supp. 2d at 1129 ("Plaintiff does not allege any facts relevant to the five-factor inquiry required under Thorns v. Sundance Properties, 726 F.2d at 419. This failure to allege any facts precludes plaintiff from availing himself of the protections contained in TILA and RESPA." (granting motion to dismiss)); Goff, 2009 WL 4665800, at *3 ("Looking at the underlying credit transaction as a whole, the court finds that the loan transaction was undertaken for commercial purposes. First, . . . both loans were secured by a rental property that [plaintiff] owned for commercial purposes. Additionally, the proceeds from the loans were used to pay off obligations related to the rental property. Finally, [defendant] provided a copy of an Affidavit of Commercial Purpose, signed by [plaintiff], stating that the loan would be used for a business or commercial purpose only. [Plaintiff] was unable to provide any competent evidence that the proceeds were used for personal, family, or household purposes in order to establish an issue of fact. Therefore, the court concludes that the loan was for commercial purposes and not subject to TILA."); Galindo v. Financo Fin., Inc., No. C 07-3991 (WHA), 2008 WL 4452344, at *4 (N.D. Cal. Oct. 3, 2008) ("[Plaintiff] contends that there is no way to tell whether or not the loan was made for a business or personal purpose because she has not alleged any facts one way or the other in the complaint. That much is true. Without any such allegations detailing the purposes of the loans, [plaintiff] has stated no claim. Her TILA claim is therefore dismissed."); cf. Shames-Yeakel, 677 F. Supp. 2d at 1002-03 ("Looking to the substance of the transactions on Plaintiffs' home equity line of credit, Plaintiffs have produced sufficient evidence that the account was held for `consumer' purposes. . . . For example, their loft serves as their son's personal residence. . . .") (denying motion for summary judgment); Macheda v. Household Fin. Realty Corp. of N.Y., 631 F. Supp. 2d 181, 185-87 (N.D.N.Y. 2008) (denying motion for summary judgment on TILA claim where plaintiffs alleged that the purpose of the loan was "personal"; the fact that 16.65% of plaintiffs' home was used for day care business did not establish a business purpose as a matter of law).

Plaintiff's counsel asserted at oral argument that, as alleged in the complaint (Am. Compl. ¶ 15) and alluded to in plaintiff's declaration (Mauro Decl. ¶ 8), plaintiff also obtained the loans because of tax-related issues on her rental properties. However, to the extent plaintiff obtained the loans to address tax-related issues on her investment rental properties, that would also be a business purpose as a matter of law.

Accordingly, because it is uncontroverted that plaintiff obtained the Grant Street and Fulton Street mortgages in order to give the proceeds directly to Dawson for investment purposes, used non-owner occupied rental property as security for the loans, and has failed to point to any evidence indicating that the loans were obtained for a personal purpose, Countrywide's motion for summary judgment on plaintiff's TILA claim is granted.

The Court does not hold that every loan obtained for investment purposes is necessarily a business loan exempt from the coverage of TILA. See Thorns, 726 F.2d at 1419 ("[I]n some circumstances, a loan for the purpose of purchasing a limited partnership interest for investment may be covered by the TILA.") (reversing summary judgment where district court held that any loan obtained in order to invest was necessarily a loan for business purposes). Instead, as discussed above, the Court grants defendants' motion for summary judgment in this case because it is uncontroverted that plaintiff obtained the loans for investment purposes, used investment rental property as security for the loans, and has failed to point to any evidence to show that the loans were obtained for personal purposes.

b. TILA's Application to Creditors

The Kaplan defendants argue that they are entitled to summary judgment on plaintiff's TILA claims because they are not "creditors" within the meaning of the statute. For the reasons set forth below, the Court agrees.

Because the Court concludes, as discussed supra, that the loans were obtained for investment business purposes, plaintiff's TILA claim against the Kaplan defendants must fail as well. However, as discussed infra, the Court concludes that plaintiff's TILA claims fail against the Kaplan defendants for the additional reason that the Kaplan defendants are not "creditors" under the statute.

TILA's disclosure obligations apply only to "creditors," which the statute defines as

only . . . a person who both (1) regularly extends, whether in connection with loans, sales of property or services, or otherwise, consumer credit which is payable by agreement in more than four installments or for which the payment of a finance charge is or may be required, and

(2) is the person to whom the debt arising from the consumer credit transaction is initially payable on the face of the evidence of indebtedness or, if there is no such evidence of indebtedness, by agreement.

15 U.S.C. § 1602(f) (emphasis added).

Regulation Z defines a "creditor" as: "[a] person who regularly extends consumer credit that is subject to a finance charge or is payable by written agreement in more than 4 installments (not including a downpayment), and to whom the obligation is initially payable, either on the face of the note or contract, or by agreement when there is no note or contract." 12 C.F.R. § 226.2(a)(17)(i).

In several cases, courts have found that attorneys do not qualify as "creditors" under TILA, and this Court agrees with the analysis in these decisions. See, e.g., Riethman v. Berry, 287 F.3d 274, 279 (3d Cir. 2002) (holding that law firm was not creditor under TILA because it did not "regularly" extend credit to its clients); Davis v. Wilmington Fin., Inc., Civ. No. PJM 09-1505, 2010 WL 1375363, at *4 (D. Md. Mar. 26, 2010) ("[Defendants] cannot violate TILA or HOEPA by acting as Substitute Trustees or as a law firm because they are not creditors as defined by those statutes." (citation omitted)); Maus v. Toder, 681 F. Supp. 2d 1007, 1018 n. 2 (D. Minn. 2010) ("Other issues not raised cast doubt on the viability of a Truth in Lending Act/Regulation Z claim as well. A good argument could be made that a law firm [] is not a creditor as defined in the Truth in Lending Act and Regulation Z." (citation omitted)); Langenfeld v. Chase Bank U.S.A., N.A., 537 F. Supp. 2d 1181, 1205 (N.D. Okla. 2008) (holding that law firm was not "creditor" under TILA, nor was it agent of creditor); Smith v. Argent Mortg. Co., LLC, 447 F. Supp. 2d 1200, 1204 (D. Colo. 2006) (holding that plaintiff had failed to sufficiently allege that law firm hired by creditor to institute foreclosure proceedings was itself a creditor).

Because of the general absence of applicable TILA case law in the Second Circuit on this issue, district courts have looked to other circuits for guidance on this issue. See Diaz v. Paragon Motors of Woodside, Inc., 424 F. Supp. 2d 519, 529 n. 17 (E.D.N.Y. 2006); see generally Ringenback v. Crabtree Cadillac-Oldsmobile, Inc., 99 F. Supp. 2d 199 (D. Conn. 2000).

Similarly, numerous courts have held that mortgage brokers are not creditors under TILA. See, e.g., Viernes v. Executive Mortg., Inc., 372 F. Supp. 2d 576, 580-82 (D. Haw. 2004) (discussing TILA's definition of "creditor" and concluding that the defendant mortgage broker was not a creditor within the meaning of TILA because broker did not regularly extend consumer credit and was not the person to whom the loan obligation is payable); see also Robey-Harcourt v. Bencorp Fin. Co., 326 F.3d 1140, 1142-43 (10th Cir. 2003); Wilson v. Homecomings Fin. Network, Inc., 407 F. Supp. 2d 893, 896 (N.D. Ohio 2005); Noel v. Fleet Fin., 971 F. Supp. 1102, 1109 (E.D. Mich. 1997); Sweeney v. Savings First Mortg., LLC, 879 A.2d 1037, 1046-48 (Md. 2005) (finding that "[o]ne thing is certain, mortgage brokers are not included in the definition of `creditor' under the TILA" and therefore holding that TILA does not preempt state laws that regulate mortgage brokers).

Plaintiff argues that the Kaplan defendants are creditors because they collected "finance charges" at the closing in the form of attorneys' fees. Plaintiff cites no authority for the proposition that a lender's attorney becomes a creditor by collecting attorneys' fees from the lender, which passes the cost on to the borrower. The Kaplan defendants argue that, even assuming arguendo that they collected "finance charges" and that such charges were payable to the Kaplan defendants, plaintiff does not point to any evidence that the Kaplan defendants regularly extend credit. Instead, plaintiff asserts: "Conceivably as an experienced closer of loans, Kaplan regularly extends credit in this manner." (Pl.'s Kaplan Opp. Br. at 7-8.) At oral argument, plaintiff's counsel conceded that there was no evidence in the record that the Kaplan defendants regularly extend credit. Plaintiff's conclusory assertion in her brief is insufficient to defeat the Kaplan defendants' motion for summary judgment on this point. See, e.g., Robey-Harcourt v. BenCorp Fin. Co., 212 F. Supp. 2d 1332, 1334 (W.D. Okla. 2002) ("The plaintiff has failed to produce adequate evidence indicating that the defendants regularly extend consumer credit or were the `persons' to whom the debt was to be payable. Because the plaintiff has failed to produce sufficient evidence that the defendants are creditors under TILA and Regulation Z, the court finds that the TILA claim against them fails as a matter of law."), aff'd, 326 F.3d 1140, 1142 (10th Cir. 2003). Because plaintiff has failed to point to any evidence that the Kaplan defendants regularly extend credit, the Kaplan defendants are entitled to summary judgment on plaintiff's TILA claim.

To the extent plaintiff argues that the Kaplan defendants can be liable under TILA as Countrywide's agents, the Court rejects that argument. See, e.g., Iannuzzi v. Washington Mut. Bank, No. 07-cv-964 (JFB) (WDW), 2008 WL 3978189, at *8 n. 5 (E.D.N.Y. Aug. 21, 2008) (holding that alleged agency relationship between lender and broker did not give plaintiffs a TILA claim against broker); see also Vallies v. Sky Bank, 432 F.3d 493, 495 (3d Cir. 2006) ("On its face, [TILA] clearly vests the duty of disclosure on the, and only the, actual creditor and not on any third party to the credit transaction.").

***

In short, plaintiff's TILA claim fails as a matter of law because the uncontroverted evidence in the record demonstrates that the loans in question were obtained for business purposes. The Kaplan defendants are also entitled to summary judgment on plaintiff's TILA claim for the additional reason that they are not creditors within the meaning of the statute. Accordingly, the moving defendants' motions for summary judgment on plaintiff's TILA claim are granted.

Because the Court concludes, as a matter of law, that TILA does not apply in this case, the Court does not address the parties' arguments as to whether defendants did, in fact, comply with the statute's disclosure requirements.

B. State Law Claims

Having determined that plaintiff's only federal claim in this action does not survive defendants' motions for summary judgment, the Court concludes that retaining jurisdiction over any state law claims is unwarranted. 28 U.S.C. § 1367(c)(3) ("The district courts may decline to exercise supplemental jurisdiction [] if . . . the district court has dismissed all claims over which it has original jurisdiction. . . ."); see also United Mine Workers of Am. v. Gibbs, 383 U.S. 715, 726 (1966). "In the interest of comity, the Second Circuit instructs that `absent exceptional circumstances,' where federal claims can be disposed of pursuant to Rule 12(b)(6) or summary judgment grounds, courts should `abstain from exercising pendent jurisdiction.'" Birch v. Pioneer Credit Recovery, Inc., No. 06-cv-6497T, 2007 WL 1703914, at *5 (W.D.N.Y. June 8, 2007) (quoting Walker v. Time Life Films, Inc., 784 F.2d 44, 53 (2d Cir. 1986)).

Therefore, in the instant case, the Court, in its discretion, declines to exercise supplemental jurisdiction over plaintiff's state law claims. Kolari v. N.Y.-Presbyterian Hosp., 455 F.3d 118, 122 (2d Cir. 2006); see also Cave v. E. Meadow Union Free Sch. Dist., 514 F.3d 240, 250 (2d Cir. 2008) ("We have already found that the district court lacks subject matter jurisdiction over appellants' federal claims. It would thus be clearly inappropriate for the district court to retain jurisdiction over the state law claims when there is no basis for supplemental jurisdiction.") (citing 28 U.S.C. § 1367(c)(3)); Karmel v. Claiborne, Inc., No. 99 Civ. 3608 (WK), 2002 WL 1561126, at *4 (S.D.N.Y. July 15, 2002) ("Where a court is reluctant to exercise supplemental jurisdiction because of one of the reasons put forth by § 1367(c), or when the interests of judicial economy, convenience, comity and fairness to litigants are not violated by refusing to entertain matters of state law, it should decline supplemental jurisdiction and allow the plaintiff to decide whether or not to pursue the matter in state court.").

Accordingly, pursuant to 28 U.S.C. § 1367(c)(3), the Court declines to retain jurisdiction over the remaining state law claims given the absence of any federal claims that survive the motions for summary judgment and dismisses such claims without prejudice.

As plaintiff's counsel conceded at oral argument, plaintiff asserts no federal claims against defendants Dawson and BMG. Thus, the Court declines to exercise supplemental jurisdiction over plaintiff's state law claims against Dawson and BMG and, therefore, dismisses those claims without prejudice.

C. Defendants' Cross-Claims

Because defendants' motions for summary judgment are granted with respect to plaintiff's TILA claim, and because the Court declines to exercise supplemental jurisdiction over plaintiff's state law claims, the moving defendants' cross-claims, which seek indemnification on plaintiff's claims, are dismissed as moot.

Countrywide conceded in its papers and at oral argument that its cross-claims would be moot if the Court granted its motion for summary judgment on plaintiff's claims.

IV. CONCLUSION

For the foregoing reasons, defendants' motions for summary judgment are granted with respect to plaintiff's federal TILA claim. The Court declines to retain jurisdiction over plaintiff's remaining state law claims and dismisses such claims without prejudice. The Clerk of the Court shall enter judgment accordingly and close this case.

SO ORDERED.