The Courts of Appeals for the Seventh Circuit recently affirmed a district court’s modification of the federal Truth in Lending Act (“TILA”) rescission process to require a borrower to tender the amounts advanced prior to a lender releasing its security interest. The Court also affirmed the district court’s reduction of the borrower’s attorneys’ fees award.
In so ruling, the Appeals Court held it is within a court’s discretion to require a borrower to tender repayment before a lender is required to release its security interest and return all money paid by the borrower under TILA, because rescission is an equitable remedy involving mutual obligations. The Court further held a TILA rescission action is properly dismissed when a borrower fails to tender repayment.
Additionally, the Court held that an award of attorneys’ fees should be based on a party’s success on each claim alleged as opposed whether the party’s theory of liability is fully vindicated.
A copy of this opinion is available at:
As you may recall, the default procedures of TILA (15 U.S.C. 1635(b)) and Regulation Z require a creditor to release its security interest and return all money paid in connection with the subject transaction before a borrower has to tender full repayment. However, a court may change this procedure if the alteration does not interfere with a borrower’s substantive right to rescind.
In October of 2006, plaintiff borrowers (“Borrowers”) closed on two separately documented loans provided by a lender (“Original Lender”). The first loan was in the amount of $192,000.00 (“first loan”), and the second loan was for $36,000.00 (“second loan”). These loans were secured by the Borrowers’ home. The first loan was sold and assigned to a lender (“First Loan Assignee”), and the second loan was sold and assigned to a different lender (“Second Loan Assignee”).
In April of 2008, the Borrowers ceased making payments on the second loan, and one month later, ceased making payments on the first loan. The Original Lender initiated foreclosure proceedings and the Borrowers responded by sending a rescission notice to the Original Lender for the first loan claiming deficient disclosure statements in violation of TILA. The Original Lender denied it violated TILA, but offered to rescind the loan if the Borrowers tendered $169,015.30. The Borrowers refused the offer and sent rescission notices to the Original Lender and the Second Loan Assignee. Neither party responded to the rescission notices.
The Borrowers proceeded to file a complaint against the Original Lender, First Loan Assignee, and Second Loan Assignee (collectively “Defendants”) alleging TILA violations as to both the first and second loan, seeking rescission, statutory damages, attorneys’ fees and costs.
Specifically, the Borrowers asserted the first and second loan documents violated TILA by: (1) failing to adequately disclose the frequency of payments because they did not specifically include the word “monthly” in the payment schedule; and (2) failing to supply the correct number of copies of the notice of right to cancel the loans. The Borrowers also alleged the Defendants violated TILA by failing to properly respond to the initial demand for rescission.
Both the Borrowers and Defendants eventually moved for summary judgment. The Defendants alternatively requested the district court to set reasonable rescission procedures. All motions were granted and denied in part.
The Borrowers prevailed in arguing that the disclosure statements violated TILA. Thus, the Borrowers’ right of rescission, which would have been limited to three days in the absence of a TILA violation, was extended to three years making their lawsuit timely. The Borrowers’ claim for statutory damages concerning the disclosure violations was denied because TILA imposes a one-year limitations period, which had run prior to the Borrowers’ having filed suit.
Borrowers also prevailed on their claim that the Original Lender and the Second Loan Assignee’s failure to respond to their rescission notices violated TILA. The Borrowers were awarded statutory damages and actual damages in the form of attorneys’ fees incurred while defending against the state court foreclosure action.
The district court also determined that modifying the rescission process by requiring the Borrowers to tender the amounts advanced to them, before Defendants were required to release their security interests, was a proper exercise of discretion under TILA. The district court determined the tender amount for the first loan to be $162,215.30, and $26,037.10 for the second loan.
The Borrowers requested they be allowed to repay the loans in installments over the life of the original loans, which the Court rejected. The Borrowers then requested they be given six months to obtain financing in order to make tender while the Defendants requested the Borrowers be given thirty days to make tender. The district court gave the Borrowers 90 days, and explained if they succeeded in obtaining financing, it would order a rescission, but if they could not, it would render judgment for the Defendants on the TILA rescission claims.
Finally, the district court reduced the Borrowers’ request for $38,812.00 in attorneys’ fees and costs against First Loan Assignee and $33,849.00 against Second Loan Assignee to $16,433.00 against First Loan Assignee and $13,433.00 against Second Loan Assignee respectively. The district court reduced the Borrowers’ fee request because a majority of the fees were incurred litigating unsuccessful claims.
The Borrowers failed to make tender within the 90-day time frame and, the district court entered judgment for Defendants on the rescission claims. The Borrowers appealed the district court's ability to condition rescission on tender, its rejection of their proposed installment plan, the imposition of the ninety day repayment term, and its award of attorneys’ fees.
On appeal, the Court examined the following issues: (1) whether the district court could condition rescission on tender; (2) whether the district court’s rejection of the Borrowers’ proposed installment plan and its imposition of a 90-day repayment period was proper; and (3) the amount of attorneys’ fees awarded by the district court.
In regards to the first issue, the Borrowers made two made arguments. In their brief to the Court, the Borrowers argued that if a consumer chooses to exercise the right to rescind, then under TILA and Regulation Z the security interest and obligation to pay finance and other charges are automatically voided. The Borrowers’ brief further asserted that even if there were a failure to repay the principal, a court could not refrain from voiding the security interest.
At oral argument, the Borrowers changed the position taken in their brief, and instead argued they were entitled to a reduction of the original loan by the amount of interest and fees paid. In essence, the Borrowers claimed the district court was not permitted to dismiss their rescission claim because they were automatically entitled to rescission, even though they expressly conceded the primary benefit of rescission -- voiding the security interest -- is not available without repayment. In other words, the Borrowers argued that once a court determines rescission under TILA is available, it must rescind regardless of whether or not the principal is repaid.
The Seventh Circuit held that the Borrowers’ arguments fail because they ignore the role of their own tender obligations in the process of rescission as “tender is inherently part of rescission, not an occasional effect of it.” Marr v. Bank of America, N.A., 662 F.3d 963, 966-67 (7th Cir. 2011). The Court explained, “a borrower's inability to satisfy his tender obligations may make rescission, even if based on a TILA violation, impossible. … Rescission is fundamentally meant to unwind the entire transaction, not merely change the amount of the loan.” Handy v. Anchor Mortg. Corp., 464 F.3d 760, 765-66 (7th Cir. 2006).
The Court explained if the Borrowers’ security interest remains intact and their loan “continues to exist or if repayment is impossible, then rescission, by any definition, has not taken place and there is no benefit to claim.” Because rescission is an equitable remedy involving mutual obligations, the Court affirmed the district court’s rejection of the Borrowers’ interpretation of rescission under TILA.
The Borrowers next challenged the district court’s rejection of their proposed installment plan, and the district court’s 90-day repayment period. In regards to the their proposed installment plan, the Court agreed with the district court’s determination that the Borrowers’ installment plan would be inequitable.
The Seventh Circuit explained there were several factors supporting the district court’s holding that the Borrowers’ proposed installment plan was inequitable. First, the Defendants were not the wrongdoers, but instead were subject to liability as assignees. Second, the Borrowers’ alleged TILA violations were technical disclosure deficiencies, which they admitted caused no actual harm. Third, the Borrowers benefitted from the alleged TILA violations as they remained in their home for years without making any mortgage payments. Lastly, the Borrowers’ proposed installment plan was extremely inequitable to the Defendants, because it effectively created an interest free loan. Thus, the Court affirmed the district court’s rejection of the Borrowers’ installment plan.
As to the district court’s implementation of a 90-day repayment plan, the Borrowers argued it was “unworkable,” and thus an abuse of discretion. The Court explained that while the Borrowers are entitled to an equitable plan, they are not necessarily entitled to one that circumstances will accommodate. Moreover, the Court noted there was no evidence that the Borrowers attempted to secure financing, nor did they make any showing how the district court’s 90-day repayment plan rendered their attempt to secure financing impossible. As a result, the Seventh Circuit held the district court’s implementation of the 90-day repayment plan.
The final issue the Borrowers challenged was the amount of attorneys’ fees awarded by the district court. Specifically, the Borrowers argued the district court erred by reducing the award on the basis of their limited success as their theory of liability was fully vindicated.
The Court rejected the Borrowers’ argument because “when a party has success on some grounds, but not others, a court has discretion to reduce the lodestar accordingly.” Hensley v. Eckerhart, 461 U.S. 424 (1983). Here, the district court was correct in reducing the Borrowers’ attorneys’ fee award because they were only successful on one claim. Therefore, the Borrowers’ theory of the case was not fully vindicated and the district court acted properly in reducing their attorneys’ fee award.
The Seventh Circuit thus affirmed the district court’s ruling.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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