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Beneficial Finance Company of Atlantic City v. Swaggerty

Decided: July 21, 1981.


On certification to the Superior Court, Appellate Division, whose opinion is reported at 170 N.J. Super. 398 (1979).

For reversal and remandment -- Chief Justice Wilentz, and Justices Sullivan, Pashman, Clifford, Handler and Pollock. For affirmance -- Justice Schreiber. The opinion of the Court was delivered by Pollock, J. Schreiber, J., dissenting.


[86 NJ Page 604] This case presents the question whether a debtor can assert a defense of recoupment under the federal Truth In Lending Act (TILA), 15 U.S.C.A. § 1601 et seq. (1974 & Supp.1981), to reduce her liability in a suit brought by a creditor on the debt, although an affirmative action for relief on the same claim would be barred by the applicable one-year statute of limitations. Both the trial court and Appellate Division ruled that a debtor cannot

assert a recoupment defense in these circumstances. We reverse and remand.


On October 7, 1974, defendant Taylor executed a promissory note with plaintiff Consumers Financial Services (CFS) whereby she borrowed $750 to be repaid over a three-year period at 23.68% interest. Taylor made monthly payments through July 1976 and then defaulted. CFS brought suit in December 1976 to recover the balance due on the note. By way of counterclaim filed September 23, 1977, Taylor alleged violations of the TILA, 15 U.S.C.A. § 1601 et seq. (1974 & Supp.1981), and related federal regulations. These violations arose from a failure to disclose "clearly and conspicuously" the nature of the security interest retained contrary to 15 U.S.C.A. §§ 1631(a), 1639(a)(8) (1974).

At trial, the parties agreed there was no factual dispute and each moved for summary judgment. CFS admitted the existence of a TILA violation but argued that Taylor's counterclaim was time-barred. Taylor urged that the statutory penalties for failure to disclose could be raised as a defense to reduce recovery by CFS.

The trial court dismissed Taylor's counterclaim and entered judgment for CFS on the note. The trial judge reasoned that the TILA was not a "procedural" statute of limitations that bars only the remedy after expiration of the filing period, but a "substantive" statute of limitations that extinguishes the right as well as the remedy if the claim is untimely brought. In affirming, the Appellate Division ruled that recoupment was also unavailable on the ground that the debtor's counterclaim did not arise out of the same transaction as the lender's claim on the note. 170 N.J. Super. 398 (1979). We granted certification. 84 N.J. 439 (1980).

In the Appellate Division, Consumers Financial Services v. Taylor was consolidated with another case raising the same

issue, Beneficial Fin. Co. of Atlantic City v. Swaggerty, 159 N.J. Super. 507. No petition for certification, however, was filed on behalf of Swaggerty. Consequently, on the appeal before us, we shall consider the judgment of the Appellate Division only insofar as it pertains to Consumers Financial Services v. Taylor.

Our determination to reverse the judgment below rests upon an analysis of the following issues: (a) whether federal law or state law governs Taylor's right to press the TILA counterclaim; (b) whether the TILA counterclaim is embraced within the definition of recoupment; (c) whether 15 U.S.C.A. § 1640(h) (Supp.1981) precludes Taylor's recoupment counterclaim; and (d) whether Taylor's right to recoupment is lost because 15 U.S.C.A. § 1640(e) (1974) is a "substantive" statute of limitations that requires timely filing of the action as a condition precedent to the existence of the right. For the reasons expressed below we conclude that, although in this instance both federal and New Jersey law permit the defense, federal law governs the validity of a TILA counterclaim. We conclude further, consistent with congressional intent underlying the TILA, that a TILA defense is a form of recoupment that survives the one-year limitations period as long as the main action is timely brought.


The TILA, enacted by Congress in 1968, is designed to promote an "informed use of credit" and to protect the borrower from unscrupulous creditor practices by requiring the lender to disclose clearly and fully the credit terms of a loan. 15 U.S.C.A. § 1601(a) (Supp.1981). A lender who fails to satisfy the Act's disclosure requirements is subject to civil liability to the debtor for twice the amount of the finance charge, but not less than $100 nor more than $1,000. 15 U.S.C.A. § 1640(a)(2) (Supp.1981). Affirmative action by the debtor is barred if instituted after the one-year period of limitations. 15 U.S.C.A. § 1640(e) (1974).

The issue whether a TILA recoupment claim may survive the one-year statute of limitations as a defense to reduce a creditor's

recovery has not been decided previously in New Jersey, and has received diverse treatment in other state and federal courts. The division of authority among state courts often springs from an application of state law as opposed to federal common law. See Darrow v. Beneficial Fin. Co., 370 So. 2d 1001 (Civ.App.1979), cert. den., 370 So. 2d 1005 (Sup.Ct.1979) (under Alabama law a counterclaim for a TILA violation is for set-off, not recoupment); Hodges v. Community Loan & Investment Corp., 133 Ga.App. 336, 210 S.E. 2d 826 (Ga.App.1974), aff'd in part and rev'd in part, 234 Ga. 427, 216 S.E. 2d 274 (Sup.Ct.1975) (under Georgia law a counterclaim for a TILA violation is barred after one year); Empire Fin. Co. of Louisville v. Ewing, Ky., 558 S.W. 2d 619 (Sup.Ct.1977) (under Kentucky law a counterclaim for a TILA violation is for recoupment, not setoff); Public Loan Co. v. Hyde, 47 N.Y. 2d 182, 417 N.Y.S. 2d 238, 390 N.E. 2d 1162 (Ct.App.1979) (under New York law a counterclaim is not barred by the statute of limitations if it arises from the underlying transactions sued upon); Stephens v. Household Fin. Corp., 566 P. 2d 1163 (Okl.1977) (under Oklahoma law a counterclaim is not barred by the statute of limitations until the principal claim is so barred). But compare Shannon v. Carter, 282 Or. 449, 579 P. 2d 1288 (Sup.Ct.1978), cert. den., 439 U.S. 1090, 99 S. Ct. 873, 59 L. Ed. 2d 57 (1979) (applying federal law and denying recoupment) with Household Consumer Discount v. Vespaziani, 490 Pa. 209, 415 A.2d 689 (Sup.Ct.1980) (applying federal law and permitting recoupment).

The supremacy clause of the United States Constitution dictates, however, that federal law is paramount and contrary state law must yield. U.S.Const. art. VI, cl. 2. The United States Supreme Court has held that a state court must apply federal law in determining when a litigant may assert a claim or defense originating in a federal statute. See Burnett v. New York Central R. Co., 380 U.S. 424, 85 S. Ct. 1050, 13 L. Ed. 2d 941 (1965) (whether period of limitations is tolled for Federal Employers' Liability Act (FELA) action brought before state court is determined by federal law); Dice v. Akron, Canton &

Youngstown R.R., 342 U.S. 359, 72 S. Ct. 312, 96 L. Ed. 398 (1952) (validity of "release defense" under the FELA asserted in state court is question of federal law). Thus, a state court hearing a cause of action arising under a federal statute must apply the relevant federal statute of limitations. Household Consumer Discount v. Vespaziani, supra, 490 Pa. at 212-17, 415 A.2d at 691-693. In this case, the right of the defendant to assert a TILA recoupment defense flows directly from the statute. We conclude that we are bound to construe the TILA defense of recoupment in light of the one-year federal period of limitations and the surrounding constellation of federal common law.

Our decision is consistent with the policy of the TILA to ensure a uniform application of the federal Act. See Mourning v. Family Publications Service, Inc., 411 U.S. 356, 93 S. Ct. 1652, 36 L. Ed. 2d 318 (1973); N.C. Freed Co. v. Board of Governors of Fed. Res. Sys., 473 F.2d 1210 (2 Cir. 1973), cert. den., 414 U.S. 827, 94 S. Ct. 48, 38 L. Ed. 2d 61 (1973); "Board of Governors' Examiners' Manual of Regulation Z and Truth-in-Lending Act," reprinted in 2 R. Clontz, Truth-in-Lending Manual C-163 (4 ed. 1976). A right created by federal statute should receive uniform interpretation from state courts throughout the country. Otherwise, local differences can lead to divergent interpretation of rights that should ...

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