Sunday, August 19, 2012

FYI: 1st Cir Holds No Rescission Right for Delivering Only One Copy of Notice of Right to Cancel, Under MCCCDA

The U.S. Court of Appeals for the First Circuit recently held that, under Massachusetts law, a borrower's right to rescind a mortgage loan was not extended where the lender provided a borrower with only one copy of the Notice of Right to Cancel.
When a borrower defaulted on her home loan for a property located in Massachusetts, the lending bank (the "bank") successfully foreclosed using the "limited judicial procedure" permitted under Massachusetts law.  The bank then informed the borrower of its intention proceed with a foreclosure sale.  The borrower responded by asserting a right to rescind the mortgage, and sued to stop the foreclosure sale.  The borrower's right to rescind was premised on her allegation that (1) the bank had provided her with one copy of the notice of right to cancel, rather than two; and (2) that the bank understated the finance charge.
The lower court granted a preliminary injunction preventing the bank from selling the home.  The bank then moved to remove the matter to federal court, contending that jurisdiction was appropriate given the borrower's federal claims, as well as diversity of citizenship.  In the federal district court, the bank's motion to dismiss the borrower's complaint for failure to state a claim was granted.  The borrower filed a motion for reconsideration, which was denied. The borrower then appealed.  
On appeal, the First Circuit first considered whether the federal district court had subject matter jurisdiction to consider the matter.  This analysis was complicated by the fact that although the borrower's claims were styled as arising under state law, the bank's primary assertion in motioning to removing the matter was that the claims raised federal questions.   The First Circuit noted that  "unsettled questions as to what federal rights are displaced and what others remain where...the Federal Reserve has exempted a state from various [of] TILA's provisions" where, as here, state law establishes requirements substantially similar to those of TILA.  However, the Court found resolving those questions to be unnecessary, given that under the facts at issue here, "removal can be supported by diversity jurisdiction..." 
Turning to the merits of the matter, the First Circuit examined the borrower's two central claims: (1) that the bank could no longer foreclosure, because it was not the holder of the note; and (2) that the borrower had the right to rescind the loan.
The Court found for the bank in both instances.  It began by noting that the Supreme Judicial Court of Massachusetts recently held that a foreclosing entity must demonstrate that it holds both the mortgage and the note.  Eaton v. Federal National Mortgage Association, 969 N.E. 2d 1118, 1129-31 (2012) ("Eaton").  However, that same opinion provided that the rule would apply only to foreclosures where the notice of sale was given after the date of the opinion.  Id. at 1133.  Therefore, the First Circuit held that Eaton provided the borrower with no protection, and accordingly found the borrower's related contentions to be without merit. 
Next, the Court turned to the borrower's right of rescission claim, which were brought under the Massachusetts Consumer Credit Cost Disclosure Act ("MCCCDA"), which as you may recall is substantially similar to the federal Truth in Lending Act.  Like TILA, under the MCCCDA, the right of rescission is extended where the borrower is not provided with certain disclosures.
Here, the borrower alleged that she received only one copy of her "Notice of Right to Cancel," rather than two as required by statute.  The lower court held that where a borrower receives one such notice, the rescission period is not extended.  The Court agreed, noting that although the MCCCDA says "nothing about the lack of multiple copies being a basis for rescission," the language concerning the extension of the rescission period refers to "written notice," which the Court observed was singular rather than plural.  Therefore, the Court held that "lack of notice, not the number of copies" is the "predicate for rescission." 
Finally, the Court examined the borrower's claims that the closing attorney overcharged her for title insurance, and therefore that the bank underdisclosed the cost of the transaction in violation of Massachusetts law.  The Court affirmed the lower court's dismissal of this claim as well, finding that "[n]othing in [the borrower's] complaint provided any...factual basis" for that claim.  The Court therefore deemed the borrower's allegations "wholly conclusory." 
Accordingly, the First Circuit affirmed the judgment of the lower court. 

Ralph T. Wutscher
McGinnis Wutscher LLP
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Chicago, Illinois 60602
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