In the Matter of HENRIETTA FRITZ, Petitioner

HUDBCA No. 90-5063-L586 Claim No. 7-65362360-0

DECISION and ORDER

Petitioner was notified by a Notice of Intent that, pursuant to 31 U.S.C. § 3720A, the Secretary of the U.S. Department of Housing and Urban Development ("HUD") intended to seek offset by the Internal Revenue Service ("IRS") of any Federal income tax refund due to Petitioner against a claimed past-due, legally enforceable debt of Petitioner to HUD. Petitioner filed a request to present evidence that the debt was not past-due or not legally enforceable. As a result of that request, referral of the debt for offset by the IRS was temporarily stayed.

Discussion

The Deficit Reduction Act of 1984, 31 U.S.C. § 3720A ("the Act") provides Federal agencies with a remedy for the collection of debts owed to the United States Government. The Act places the primary burden of proof on the debtor to establish by documentary evidence or application of law that the claimed debt is not past-due or not enforceable. 31 U.S.C. S 3720A(b)(2); Ronald Durr, HUDBCA No. 86-1422-F413 (Mar. 28, 1986); see also 24 C.F.R. § 17.152(b) and (c).

The Secretary seeks to enforce a debt arising from an installment note which Petitioner executed and delivered to Tandem Development, Inc. ("Tandem") on April 4, 1984. (Secy. Ex IL. A). The installment note was insured against nonpayment by the Secretary of HUD pursuant to Title I of the National Housing Act, 12 U.S.C. § 1703. Upon Petitioner's default, Tandem assigned the note to HUD on July 1, 1986 pursuant to 24 C.F.R. § 201.54. Id. The claimed amount of the outstanding debt is $8,095.44 in principal and $4,116.48 in unpaid interest. (Secy. Statement, para. 4 and Exh. B).

Petitioner contends the debt is unenforceable because she was induced to enter into the agreement by a misrepresentation from a Tandem representative that "... he would facilitate a consolidation loan with much lower payments over a longer period of time." Petitioner expected the lender to prepare a new agreement that would consolidate two home improvement loans. This did not happen and the only contract signed by the parties is for a loan in the amount of $7,900. The balance due on the $7,900 loan is the debt which the Secretary seeks to enforce. (Secy. Exhs. A, C, D; Pet. Submission).

If proven, misrepresentation or fraud in the inducement to execute a contract is a valid defense to contract formation. Celeste Bly, HUDBCA No. 87-1693-G30 (Dec. 22, 1986). Here, however, Petitioner has neither provided documentary evidence of the Tandem promise nor established that such a promise would make the debt unenforceable. Petitioner's signature appears on the promissory note dated April 10, 1984, and the note clearly specifies a debt obligation in the principal amount of $7900. (Secy. Exh. A). Petitioner admits that she did not read the contract before she signed it. (Pet. Submission). However, this is not a defense to the Secretary's claim. Petitioner's claim of misrepresentation fails for lack of proof.

Petitioner also asserts that the debt is unenforceable because the home improvement work performed under the note was unsatisfactory. The Secretary contends that Petitioner cannot assert a warranty defense because the loan documents contain a waiver of liability for materials or workmanship. Petitioner has submitted evidence that her roof leaks now and that she must sleep on the first floor of her house to avoid leaking water. (Pet. Letter from Alliance for Consumer Protection Board).

The promissory note dated April 10, 1984 specifies in bold, capitalized print:

ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED PURSUANT HERETO OR WITH THE PROCEEDS HEREOF. RECOVERY HEREUNDER SHALL NOT EXCEED THE AMOUNTS PAID BY THE DEBTOR HEREUNDER. (Secy. Exh. A).

Petitioner signed a "Completion Certificate for Property Improvement Loan" on April 10, 1984 which states in large, bold print:

DO NOT SIGN THIS CERTIFICATE UNTIL THE DEALER HAS COMPLETED THE WORK AND/OR DELIVERED THE MATERIALS IN ACCORDANCE WITH THE TERMS OF YOUR CONTRACT OR SALES AGREEMENT. (Secy. Exh. E).

The Certificate also contains a clause in small print which provides:

I (we) understand that the selection of the dealer and the acceptance of the materials used and the work performed is my (our) responsibility and that neither the FHA nor the financial institution guarantees the material or workmanship or inspects the work performed.

The language visually emphasized on the Completion Certificate shows that its main purpose is to certify that the work was satisfactorily completed. This Board has previously held that in these circumstances the loan agreement itself is superior to the Completion Certificate although both were signed the same day. Idolina Munoz, HUDBCA No. 89-4544-L32 (July 27, 1990). I find that the Secretary of HUD has the same liability in this case as the seller would have for breaches of express or implied warranties of workmanship and materials. Therefore, the fact that Petitioner signed the Completion Certificate accepting the work and materials will not, per se, defeat her rights to assert an implied warranty of merchantability for a latent defect that became manifest after installation.

The Pennsylvania Commercial Code provides an implied warranty of merchantability which requires that the goods must be at least as such as are fit for the ordinary purpose for which such goods are used. 13 Pa C.S.A. § 2314 (1984). Petitioner still retains the burden of proving that such a breach of warranty occurred.

The Alliance for Consumer Protection ("A.C.P"), representing Petitioner, claims the work performed was unsatisfactory because:

[i]nspection by this office [A.C.P.] revealed a very marginal house and a leaking roof causing Mrs. Fritz to sleep on the first floor. (Pet. Letter from the Alliance for Consumer Protection Board, page 2) .7

However, Petitioner has not introduced into the record evidence that the leaking roof resulted from the work performed under the promissory note. I cannot extrapolate such a finding from the evidence submitted by Petitioner. Therefore, Petitioner's breach of warranty claim must also fail for lack of proof.

For the foregoing reasons, I find that the debt is past-due and enforceable in the amount claimed by the Secretary.

Order

The Order imposing the stay of referral of this matter to the Internal Revenue Service is vacated. It is hereby Ordered that the Secretary is authorized to refer the debt to the Internal Revenue Service for offset against any Federal income tax refund which is otherwise due to Petitioner.

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Date: September 10, 1990