Tuesday, July 24, 2012

FYI: 10th Cir Holds Mere Demand for TILA Rescission Not Sufficient to Stop 3-Yr Deadline from Running, MERS Can Assign DOT and Related Right to Foreclose

The U.S. Court of Appeals for the Tenth Circuit recently held that Utah law does not prevent MERS from assigning a deed of trust and the related right to foreclose, and that the sending a letter to a lender, without more, is insufficient for a borrower to timely assert a right of rescission under the Truth in Lending Act ("TILA") within the three-year deadline.
A copy of the opinion is available at:
The Plaintiffs ("Borrowers") entered into a home loan agreement with the lender ("Lender") in February of 2007 by executing a note secured by a deed of trust. Mortgage Electronic Registration Systems, Inc. ("MERS") was named as the beneficiary of the deed of trust with the power to foreclose and sell the property.  Subsequently, two separate assignments were made to materially identical assignees, and the assignments of the deed of trust were recorded.  In August of 2009, the Borrowers sent notice of rescission to the Lender, MERS, and the assignees claiming that the Lender failed to provide required disclosures under TILA.  The Borrowers stopped paying the mortgage and an amended notice of default was recorded in June of 2010.
In September of 2010, the Borrowers filed an action seeking to quiet title and a TILA claim seeking rescission and monetary damages. The district court dismissed the Borrowers' quiet title count because the Borrowers failed to allege they held clear title to the property, had not alleged that they were not in default on the note, and had admitted to conveying their interest in the property for purpose of securing the loan. 
The district court also rejected the Borrowers' claim that MERS lacked standing to authorize the assignment of the deed of trust and resulting foreclosure, because the Borrowers had agreed that MERS was the beneficiary, and its successors and assigns had foreclosure authority.
The district court dismissed the TILA claim on two grounds: (1) the transaction at issue was a "residential mortgage transaction", thus exempt from TILA; and (2) the Borrowers had failed to allege that they had tendered or had the ability to tender the amounts owed under the note.
On appeal, the Borrowers argued that the district court misinterpreted Utah Code Ann. § 57-1-35, which provides: "The transfer of any debt secured by a trust deed shall operate as a transfer of the security therefor." The Borrowers claimed that under the statute, once the promissory note was transferred, the benefit of the deed of trust was transferred to the holder of the note, and only the holder of the note or its agent could transfer the beneficial interest in the deed of trust.  Thus, the Borrowers argued that the defendants were not beneficiaries of the deed of trust because they were not holders of the note.
In rejecting the Borrowers argument, the Tenth Circuit noted that Utah Code Ann. § 57-1-35 simply describes the long-applied principle that when a debt is transferred, the underlying security continues to secure the debt. Further, the Court agreed with a prior Utah state court case holding that § 57-1-35 does not prevent the original parties to the note and deed of trust from contracting at the outset to have a party, other than the beneficial owner of the debt, act on behalf of that owner to enforce the rights granted in the note and deed of trust.  Finally, the Court noted that the deed of trust explicitly gave MERS the right to foreclose on behalf  of 'Lender and Lender's successors and assigns' which is permissible under  § 57-1-35.
The Tenth Circuit also upheld the dismissal of the Borrowers' TILA claim, but did so on the grounds that the Borrowers had failed to give notice of their intent to rescind within three years of the consummation of the transaction, as required under TILA. The Court held that written notice sent to the Lender, without more, is insufficient to be a timely exercise of the right to rescind under TILA. Thus, the Court upheld the district court's dismissal, because the Borrowers had failed to file the court action within TILA's three year statute of limitations. 

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
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