Peter P Quali and Cecilia J. Quali

I N THE U NITED STATES B ANKRUPTCY C OURT
FOR THE E ASTERN DISTRICT OF PENNSYLVANIA
I N RE : 	: CHAPTER 13
:
PETER AND CECILIA Q UALI 	:
:
D EBTOR( S) 	: B ANKRUPTCY NO. 08-15853 SR
OPINION
B Y: STEPHEN RASLAVICH, CHIEF UNITED STATES B ANKRUPTCY JUDGE .
Introduction
Before the Court is the Debtor’s Objection to the Proof of Claim of CitiFinancial,
Inc. (Citi) Citi opposes the objection. A hearing on the Objection was held on March
25, 2009, after which the parties submitted letter briefs. The Court has taken the
matter under advisement.
Grounds for Objection
Although the parties originally disagreed over the number of payments in
arrears, the sole remaining issue is a line item for interest in the Proof of Claim.1 That
charge is for $16,719 in interest due. Debtors contend that the separate line item for
interest constitutes an impermissible default rate of interest.
	See generally Debtors’
Brief, 3-4.
1The parties agree that Debtors are 19 payments in arrears at $1,115.76 per month.
Transcript, 5.
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Citi’s Response
Citi disputes Debtors’ contention that it is charging a default rate of interest. It
explains that the interest provided for by the note is “daily simple interest.” Such
interest accrues on a daily basis. Where a payment is not made on time, interest
accrues for each late day. As a result, it is a separate line item on the Proof of Claim.
See Citi’s Letter Brief, 3-5.
Applicable Law
As to what body of law applies, only Citi offers guidance. It maintains that this
method of interest computation is provided for under the federal Truth in Lending Act
(TILA). 2 For their part, Debtors rely on federal bankruptcy case law regarding “default
rate” interest and Pennsylvania common law regarding contract interpretation.
The Court finds that Citi has identified the applicable law. As a general matter,
TILA applies to “consumer credit.” 15 U.S.C. § 1601, 1602. That term is defined as
“credit offered or extended to a consumer primarily for personal, family, or household
purposes.” 12 C.F.R. § 226.2(12). There is no dispute that this obligation is a closed-
end, 3 consumer loan or that it was extended on a secured basis: Citi took a mortgage in
the Debtors’ home as security.
	See 15 U.S.C. § 1638(b) (including “residential
mortgage transaction” as subject to TILA disclosure requirements)
215 U.S.C. § 1601 et seq.
3The loan is for a fixed amount and for a definite term ($167,650.51 payable over 360
months). See Note attached to Proof of Claim.
2
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The answer to
how a lender may
compute interest on such a loan is found
indirectly in the statute, its interpretative regulation, various appendices, as well agency
commentary. This begins with the term “finance charge” and how that term must be
disclosed to a borrower.
	See 15 U.S.C. § 1638(a)(3) (requiring disclosure of the finance
charge) Among the types of charges which make up the “finance charge” is,
inter alia,
interest.
	See 15 U.S.C. § 1605(a)(1). TILA requires that the “finance charge” be
expressed as an “annual percentage rate,” or APR. 15 U.S.C. § 1638(a)(4) The APR
must be determined in either one of two ways: the “actuarial method” or a different
method authorized by the Board “which materially simplifies the computation while
retaining reasonable accuracy” as compared to the actuarial method. 15 U.S.C. §
1606(a). Likewise, Regulation Z provides that “[t]he annual percentage rate shall be
determined in accordance with either the actuarial method or the United States Rule
method.” 12 C.F.R. § 226.22(a)(1) The regulation goes on to provide that
“[e]xplanations, equations and instructions for determining the annual percentage rate
in accordance with the actuarial method are set forth in Appendix J to this regulation.”
Id. Appendix J provides, in pertinent part:
(1) Section 226.22(a) of Regulation Z provides that the
annual percentage rate for other than open end credit
transactions shall be determined in accordance with either
the actuarial method or the United States Rule method. This
appendix contains an explanation of the actuarial method as
well as equations, instructions and examples of how this
method applies to single advance and multiple advance transactions.
(2) Under the actuarial method,
at the end of each unit-
period (or fractional unit-period) the unpaid balance of the
amount financed is increased by the finance charge earned
3
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during that period and is decreased by the total payment (if
any) made at the end of that period. The determination of
unit-periods and fractional unit-periods shall be consistent
with the definitions and rules in paragraphs (b)(3), (4) and
(5) of this section and the general equation in paragraph
(b)(8) of this section.
(3) In contrast, under the United States Rule method,
at
the end of each payment period, the unpaid balance of the
amount financed is increased by the finance charge earned
during that payment period and is decreased by the
payment made at the end of that payment period. If the
payment is less than the finance charge earned, the
adjustment of the unpaid balance of the amount financed is
postponed until the end of the next payment period. If at
that time the sum of the two payments is still less than the
total earned finance charge for the two payment periods,
the adjustment of the unpaid balance of the amount
financed is postponed still another payment period, and so forth.
12 C.F.R. Pt. 226, App.J (emphasis added). One District Court has observed that “[t]he
essential difference seems to be that the U.S. Rule does not add the interest to the
principal amount if the payment is less than the interest.
	Haynes v. Homeq Servicing
Corp. (In re Haynes), 2006 WL 2167375 *8 n.9 (M.D.Tenn.) The Official Staff
Commentary concludes accordingly: “The U.S. Rule produces no compounding of
interest in that any unpaid accrued interest is accumulated separately and is not added
to principal.” 12 C.F.R. § 226 (Supp.I, ¶ 22(a)(1)). By which method is Citi calculating
interest under this note?
The note provides the following with regard to the payment of interest:
Payment Schedule:
Number of 	Amount of 	When Payments
Payments 	Payments 	Are Due
4
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360 	$1,230.25 	Monthly Beginning
9/1/2003
…
PROMISE TO PAY: In return for a loan that Borrower has
received,
Borrower promises to pay to the order of Lender
the Principal amount shown above,
plus interest on the
unpaid Principal balance from the Date Charges Begin
shown above until fully paid at the following Rate of
Interest:
RATE OF INTEREST:
07.99% per annum on the entire unpaid Principal balance.
Lender will compute interest on the unpaid Principal balance
on a daily basis from the date charges begin until Borrower
repays the loan. If Borrower does not make sufficient or
timely payments according to the payment schedule above
Borrower will
incur greater interest charges on the loan.
…
Each payment shall be applied as follows: (1) monthly loan
payments due (first to interest, then principal), insurance
premiums due, (3) unpaid interest to the date of payment, if
any, then (4) principal.
See Proof of Claim, Disclosure Statement, Note and Security Agreement, Ex. A,
attached to Debtors’ Objection (emphasis added)
The emphasized terms illuminate how interest is to be calculated: first, the note
plainly states that interest accrues daily; and second, the failure to “make sufficient and
timely payments … will result in greater interest
” due on the loan. It does not provide
for any compounding of unpaid interest into principal.
	Id. Neither does the note
provide for any grace period. Under the note, if the borrower is but one day late in
making a payment, then one day’s worth of interest accrues. That daily accrual of
interest will continue until a payment is made which is sufficient to pay any unpaid
interest accrued to that date. So long as there is unpaid, accrued interest on the loan,
5
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no amortization of principal will occur. Under the U.S. Rule Method, adjustment of the
principal (i.e., the “amount financed”) occurs from payment to payment only when the
payment amount is sufficient to satisfy any unpaid accrued interest first.
	See Haynes,
supra, *8 n.9. (citing the Official Commentary to the effect that under the U.S. Rule, no
calculation is made until a payment is received. 12 C.F.R. § 226 (Supp.I, ¶ 22(a)(1))
In sum, the Court finds that this note permissibly calls for the calculation of interest
under the U.S. Rule Method.4
The Line Item
for Interest
The foregoing speaks to the legal authority for the separate line item of
$16,719.46 of past due interest. Citi’s Letter Brief, 3-4. However, while Citi’s
explanation accurately states the law, the issue of exactly how much interest is due Citi
is not yet proven. There is no supporting documentation attached to the Citi claim.
Debtors’ contention that some or all past due interest is already accounted for in the 19
missed payments is reasonable and has shifted to Citi the burden of proving its
entitlement to the amount of interest claimed on the separate line item.5 What is
4That is corroborated by the prepayment penalty in the Note. TILA requires disclosure of
such a charge “if the obligation involves a finance charge computed from time to time by
application of a rate to the unpaid principal balance.” 15 U.S.C. § 1638(a)(11)(emphasis added)
The note penalizes prepayment within the first three (3) years of the note’s term.
5The filing of a proof of claim constitutes prima facie evidence of the validity of the claim.
11 U.S.C. § 502(a). However, once an objecting party submits sufficient evidence to place the
claimants entitlement at issue, the burden of going forward with the evidence to sustain the
claim shifts to the claimant or its assignee. The burden of persuasion is always on the claimant
to establish its entitlement to its claim. See In re Allegheny Intern., Inc., 954 F.2d 167, 173-74
(3d Cir.1992).
6
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necessary for Citi to establish its right to this separate interest charge is the arithmetic
calculations underlying the $16,719.46 figure. In other words, before its claim will be
allowed in the amount sought, Citi must demonstrate how it arrived at its numbers and
that they are accurate. Merely inserting a cumulative total is not sufficient, particularly
where, as here, the method of interest calculation, while permitted, is, in the Court’s
experience, the method less typically employed by lenders, and where, as here, the
additional interest sought is such a large sum.
An evidentiary hearing will apparently be necessary to bring this matter to a
resolution and the accompanying Order will therefore schedule one.
By the Court:
Stephen Raslavich
Chief U.S. Bankruptcy Judge
Dated: May 26, 2009
7
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I N THE U NITED S TATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
I N RE : 	: CHAPTER 13
:
PETER AND CECILIA Q UALI 	:
:
D EBTOR( S) 	: B ANKRUPTCY NO. 08-15853 SR
O RDER
AND NOW, upon consideration of the Debtors’ Objection to the Proof of Claim of
Citifinancial, Inc., (Citi) the claimant’s response thereto, the parties’ briefs, and after a
hearing held on March 25, 2009, it is hereby
ORDERED that a further hearing in this matter shall be held on Wednesday, June
17, 2009, at 10:00 a.m., Courtroom 4, United States Bankruptcy Court, 900 Market
Street, Philadelphia, PA 19107, at which time Citi, if it chooses to do so, may present
evidence in support of the components of its Proof of Claim. The Debtors, likewise,
should they choose, may present rebuttal evidence.
By the Court:
Stephen Raslavich
Chief U.S. Bankruptcy Judge
Dated: May 26, 2009
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Counsel for Debtors
Jeffrey A. Fournier, Esquire
FOURNIER LAW OFFICES
2480-B Durham Road
Bristol, PA 19007
Counsel for Citifinancial, Inc.
Ann E. Schwartz, Esquire
GOLDBECK McCAFFERTY & McKEEVER
Mellon Independence Center
701 Market Street
Suite 5000
Philadelphia, PA 19106
George Conway, Esquire
Office of the United States Trustee
833 Chestnut Street
Suite 500
Philadelphia PA 19106
Nancy Mulvehill, Courtroom Deputy to Judge Raslavich
2
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