Robert and Christine Lapetina, Plaintiffs-appellants, v. Metro Ford Truck Sales, Inc., Defendant-appellee, 648 F.2d 283 (5th Cir. 1978)

This appeal arises from a judgment in favor of the defendant in an action brought under the Texas Consumer Credit Code (the Code), Tex.Rev.Civ.Stat.Ann. art. 5069 (Vernon 1980 Supp.). Although the defendant does not contest the fact that it contracted for an excessive time-price differential in a motor vehicle retail installment contract, the defendant did successfully maintain in the district court that this excessive rate was the result of a "bona fide error" and was therefore protected from Code penalties by Tex.Rev.Civ.Stat.Ann. art. 5069-8.01(f). We find, however, that the defendant's mistake resulted from its agent's misreading of the applicable provision of the Code; since the bona fide error defense extends only to clerical errors, we reverse the judgment of the district court and remand this case for proceedings consistent with this opinion.

On May 1, 1978, Robert LaPetina contracted with Metro Ford Truck Sales, Inc. (Metro) for the purchase of a 1974 commercial tractor truck; the purchase order signed by LaPetina named both himself and his wife, Christine LaPetina, as purchasers and was conditioned on a favorable credit check. At this time Christine LaPetina was at the LaPetinas' residence in New York, but on May 12, Metro informed Robert LaPetina that, because of an unfavorable credit report, his wife would be required to come from New York to Texas to sign the purchase documents.

A retail installment contract and a new purchase order were thereupon prepared by Robert Keever, the salesman handling the transaction. In computing the maximum allowable time-price differential, Keever (who had been employed by Metro for less than one month) erroneously calculated the age of the truck¹  and consequently employed a rate (15%) in excess of the statutory maximum (121/2%) applicable to this retail installment contract under Tex.Rev.Civ.Stat.Ann. art. 5069-7.03(1).²  The total time-price differential added to the contract price by Keever was $4,774.75; the maximum legal amount would have been $3,979.39. A retail installment contract and a new purchase order (both of which included the erroneous rate) were executed by Christine LaPetina on May 20 and by Robert LaPetina on or about May 22.

Sometime between May 20 and May 26, Metro discovered Keever's error through internal procedures designed by Metro to catch such errors,³  and returned the retail installment contract to Keever for correction. Keever thereupon took the following actions: (1) he changed the time-price differentials in both documents to the correct legal maximum and had Robert LaPetina initial the changes on May 26; and (2) he mailed to Christine LaPetina soon afterwards a payment booklet correctly reflecting the lowered monthly payment as the actual obligation, although the fact that the rate had been lowered was not itself noted in the booklet. Keever did not, however, undertake several other important actions: (1) he did not request Christine LaPetina to initial the interest rate changes on the two documents; (2) he did not send a copy of either of the modified documents to either of the LaPetinas; and (3) he did not send written notice to either of the LaPetinas that a violation of the Consumer Credit Code had been committed.

On May 26, Robert LaPetina paid Metro the remaining down payment and took possession of the truck. On July 6, Christine LaPetina sent to Metro the first and only monthly payment check; the LaPetinas subsequently defaulted in their payments and Metro foreclosed its security interest in the truck. In accordance with the payment booklet, the one check sent by the LaPetinas did not include any excessive interest. At no time, in fact, did either Robert or Christine LaPetina make any payment of excessive interest, and neither had any knowledge of the erroneous rate until it was corrected.

In this action⁴  the LaPetinas have asserted two alternative claims under the Texas Consumer Credit Code.⁵  First, they allege that Metro contracted for a time-price differential in excess of the maximum permitted by Tex.Rev.Civ.Stat.Ann. art. 5069-7.03(1), supra at note 2; for this violation they seek as a statutory penalty twice the amount of the time-price differential contracted for plus their attorneys fees, all in accordance with Tex.Rev.Civ.Stat.Ann. art. 5069-8.01(a).⁶  Second, the LaPetinas allege that Metro violated Tex.Rev.Civ.Stat.Ann. arts. 5069-7.02(4) and 7.05(1) (b) by failing to deliver to the LaPetinas a copy of the amended contract after Metro discovered and corrected the erroneous time-price differential; for this violation they seek a statutory penalty of $4,000, the maximum amount allowed for this violation under Tex.Rev.Civ.Stat.Ann. art. 5069-8.01(b).⁷ 

The district court ruled in Metro's favor on both counts, despite its conclusions that Metro had indeed violated both article 5069-7.03(1) and article 5069-7.02(4). With respect to the first count, as to which we reverse the judgment of the district court, the court held that Metro had a valid defense by virtue of Tex.Rev.Civ.Stat.Ann. art. 5069-8.01(f), which exempts from the penalties of the Code all unintentional bona fide errors committed notwithstanding the maintenance of procedures reasonably adopted to avoid such errors.⁸  Since the LaPetinas do not challenge the court's conclusion that Metro maintained procedures reasonably adopted to correct errors such as that made by Keever in this case, the validity of the court's decision rests on its characterization of Keever's mistake as an unintentional "bona fide error" under the Code. We now turn to that characterization.

II. WAS KEEVER'S MISTAKE A "BONA FIDE ERROR" UNDER ARTICLE

5069-8.01(f)?

Metro stipulated before trial that Keever's initial calculation of the time-price differential was in excess of the statutory maximum under article 5069-7.03(1), supra at note 2; the district court found (and Metro does not contest on appeal) that this excessive rate initially was incorporated into Metro's contract with the LaPetinas. Therefore Metro's sole defense to this violation is that Keever's miscalculation was a "bona fide error" under article 5069-8.01(f), supra at note 8.⁹  As noted above, the district court accepted this defense and ruled in favor of Metro. In particular, the court found that Keever had "determined the truck's age by counting erroneously," and characterized the mistake as "a clerical counting error" which, because the other requirements of the article were met, was a "bona fide error" under article 5069-8.01(f).¹⁰ 

On appeal, the LaPetinas' argument is two-fold: first, they contend that article 5069-8.01(f) provides a defense only for clerical errors and not for a good-faith misreading of the Code; and second, they contend that the mistake made by Keever was not a clerical error (as characterized by the district court) but was instead the result of his admittedly good-faith misreading of article 5069-7.03(1). We agree with both parts of the LaPetinas' argument.

The Texas courts have not reached the precise question whether a good-faith misreading of the Code constitutes a defense under article 5069-8.01(f), but recent cases indicate that the defense does not protect creditors who intended to contract for, charge or receive the interest rate at issue in the case merely because those creditors did not understand that the rate was in fact excessive. As one court of civil appeals has explained:

If (the creditor) intended to do the acts which constituted the charging of the excessive time-price differential, then those acts were not the result of an accidental or bona fide error. A creditor may not excuse its violation of the statute by a showing that it did not intend to violate the act.

Moore v. Sabine National Bank of Port Arthur, 527 S.W.2d 209, 213 (Tex.Civ.App. Austin 1975, writ ref'd n. r. e.) (citations omitted). See also Hight v. Jim Bass Ford, Inc., 552 S.W.2d 490, 492 (Tex.Civ.App. Austin 1977, writ ref'd n. r. e.). The Texas Supreme Court used similar language in a recent case involving article 5069-1.06(1), in which an analogous bona fide error defense is allowed to the general usury statute.¹¹  Although the defendant had not directly raised that defense, the court underscored the irrelevance of the creditor's subjective intent, an issue which was specifically raised by the creditor:

(T)he jury's responses to the issues concerning (the creditor's) intent to obtain interest in excess of ten percent are immaterial. Intent in usury cases does not mean intent to charge a usurious rate of interest. Rather, it means intent to make the bargain made.

Cochran v. American Savings & Loan Association of Houston, 586 S.W.2d 849, 850 (Tex.1979) (on rehearing). If, as these cases indicate, the determinative question is whether the creditor intended to charge the rate at issue and not whether the creditor intended that the rate be excessive, then a creditor's good-faith mistake as to the rate allowed by the statute cannot constitute a defense. Such a good faith misreading of the statute may indicate a lack of intent to contract for, charge or receive an illegal rate of interest or time-price differential, but it does not implicate the creditor's "intent to make the bargain made" and therefore does not appear to constitute a defense under article 5069-8.01(f).

This conclusion is buttressed by the result reached in federal cases involving the bona fide error defense provided in the federal Truth In Lending Act. See 15 U.S.C. § 1640(c) (1976). That provision, which is identical in all relevant respects to the state provision at issue here, has uniformly been held applicable only to clerical errors and inapplicable to errors resulting from a good-faith misreading of the relevant statutes. See, e. g., Thomka v. A. Z. Chevrolet, Inc., 619 F.2d 246, 250-51 (3d Cir. 1980); McGowan v. King, Inc., 569 F.2d 845, 849 (5th Cir. 1978); Mirabal v. General Motors Acceptance Corp., 537 F.2d 871, 879 (7th Cir. 1976); Ives v. W. T. Grant Co., 522 F.2d 749, 757-58 (2d Cir. 1975); Palmer v. Wilson, 502 F.2d 860 (9th Cir. 1974).¹²  This interpretation rests heavily on the legislative history of the statute, which originally was intended to create strict liability for its violation. The bona fide error defense was added only to protect against liability for mathematical and transcription errors; these mistakes are inevitable in complex interest calculations such as those required by the statute and therefore could not be prevented by any threat of strict liability. See Thomka v. A. Z. Chevrolet, Inc., supra at 250-51; Ratner v. Chemical Bank New York Trust Co., 329 F. Supp. 270, 281-82 & 281 n.17 (S.D.N.Y. 1971).

As we read the bona fide error defense, therefore, the determinative question is whether Keever's mistake was a clerical error (as characterized by the district court) or was instead an erroneous reading of the statute (as urged by the LaPetinas). The sole evidence introduced on this question is the relevant portion of Keever's testimony, Trial Transcript at 51-52, supra at note 1. That testimony clearly demonstrates that the source of Keever's mistake was his misunderstanding of the proper method to calculate the age of a motor vehicle under article 5069-7.03(1), supra at note 2. The maximum allowable time-price differential under that statute depends on the age of the vehicle: a creditor may charge only 121/2% on the sale of a four-year-old vehicle but may charge 15% on the sale of a five-year-old vehicle. Although Keever's somewhat confusing testimony does not clearly explain how he computed the age of the truck sold to the LaPetinas, it does demonstrate that his error was not a mere mis-addition of the low numbers involved; the emphasis in Keever's testimony is rather on the confusion surrounding proper calculations of age under the article i. e., on Keever's misunderstanding of the operation of the statute. We conclude therefore that Keever's mistake arose from a good-faith misreading of the statute and not from a clerical error, and that consequently the bona fide error defense of article 5069-8.01(f) is not available in this case.¹³ 

This result may seem unjust, for Metro corrected its mistake before any excessive interest was charged and the LaPetinas suffered no harm by virtue of this transaction. However, our holding must be read in the context of an alternative Code defense and of the legislative purpose behind the rigorous penalty provisions of the Code. In the first place, the Code does provide a defense which is sufficient to protect those creditors in situations like that now before us who carefully comply with a statutory provision allowing creditors to correct their mistakes. Article 5069-8.01(c) (1) allows a creditor who has discovered a violation of the Code to correct that violation if he does so within sixty days of its discovery and before the consumer either files an action on the violation or provides written notice thereof to the creditor.¹⁴  However, this article requires written notice to the consumer of the creditor's violation. See, e. g., Portland Tradewinds Ford v. Lugo, 613 S.W.2d 26, 29-30 (Tex.Civ.App. Corpus Christi 1981, no writ); Jim Walter Homes, Inc. v. Gibbens, 608 S.W.2d 706, 710-12 (Tex.Civ.App. San Antonio 1980, writ ref'd n. r. e.). No such notice was provided by Metro to the LaPetinas and Metro does not raise this defense on appeal.¹⁵ 

In the second place, the penalty provisions of the Code are not designed to compensate consumers for damages actually incurred, but are instead "purely penal in nature." Zapata v. Ford Motor Credit Co., 615 S.W.2d 198, 199 (Tex.1981). This system is intended to facilitate enforcement of the Code by individual consumers despite the small sums ordinarily at stake. As one court of civil appeals has explained:

The penalty provision is not designed to compensate the consumer for actual damages but instead is to deter violators and to encourage enforcement of the Code by private litigants, rather than placing the entire enforcement burden on the Consumer Credit Commissioner. In this manner, the expense of enforcement is placed on those who violate the law rather than on the taxpaying public.

Anguiano v. Jim Walter Homes, Inc., 561 S.W.2d 249, 254 (Tex.Civ.App. San Antonio 1978, writ ref'd n. r. e.). See also Ford Motor Credit Co. v. Blocker, 558 S.W.2d 493, 498 (Tex.Civ.App. El Paso 1977, writ ref'd n. r. e.). The penalties imposed by the Code can indeed be harsh in relation to the damage caused the consumer as a result of any particular violation, but that harshness is an intended part of the enforcement scheme envisioned by the legislature.¹⁶ 

Since Metro's contract with the LaPetinas for an excessive time-price differential was not the result of a "bona fide error" within the meaning of article 5069-8.01(f), the LaPetinas are entitled to the statutory penalty prescribed by article 5069-8.01(a). We need not consider the LaPetinas' alternative claims under articles 5069-7.02(4) and 7.05(1) (b), for a single violation of the Code is sufficient to trigger a penalty under the Code. E. g., Zapata v. Ford Motor Credit Co., supra, at 199. We therefore reverse the judgment of the district court. Article 5069-8.01(a) entitles the LaPetinas to twice the time-price differential contracted for and to "reasonable attorneys' fees fixed by the court." We remand this case to the district court so that it may determine such fees and enter judgment consistent with this opinion.

REVERSED and REMANDED.