Tuesday, August 21, 2012

FYI: 6th Cir Rules Borrowers Failed to Overcome TILA's Presumption of Delivery of Rescission Disclosures, Lender Owed No Fiduciary Duty Under Ohio Law

The U.S. Court of Appeals for the Sixth Circuit recently upheld summary judgment in favor of a bank defendant, rejecting the so-called "envelope theory" and ruling that the borrowers had no extended right to rescind their loan under the federal Truth in Lending Act, where the borrowers were unable to overcome the presumption under TILA that they received the required number of copies of the Notice of Right to Cancel. 
The Court also ruled that, under Ohio law:  (1) the bank was not liable for fraud because the bank owed no fiduciary duty to borrowers to disclose the yield spread premium; and  (2) borrowers' claim that a bank engaged in a civil conspiracy could proceed to trial, where questions of fact existed as to whether the bank knew of or aided a mortgage broker's improper concealment of a yield spread premium ultimately paid by borrowers. 
A copy of the opinion is available at:  http://www.ca6.uscourts.gov/opinions.pdf/12a0261p-06.pdf.
Using a mortgage broker ("Broker"), plaintiffs-borrowers ("Borrowers") refinanced their mortgage with a debt-consolidation loan from a bank ("Bank").  Two of Broker's employees had supposedly promised Borrowers that their mortgage payments would go down as a result of the loan. 
When Borrowers applied for the loan, they signed a number of documents without reading them, one of which was a "Mortgage Brokerage Business Disclosure" ("Brokerage Disclosure").  According to Brokerage Disclosure, Borrowers agreed to pay a brokerage fee of $7,000 to Broker and "additional compensation" to Bank.  The "additional compensation" consisted of the Yield Spread Premium ("YSP") that Bank would pay to Broker, the exact amount of which was to be disclosed to Borrowers at the loan closing. 
Broker submitted the completed loan application and Brokerage Disclosure to Bank for its review.   At the loan closing, Borrowers were supposedly informed that Broker had waived its fee, and a representative of the title company that had prepared the closing documents confirmed that such a waiver was a common practice for brokers.  As part of the closing, Borrowers signed a final settlement statement that allegedly indicated in supposedly "cryptic language" that a YSP would be paid to Broker.  Borrowers also signed the TILA Notice of Right to Cancel form acknowledging that they each received two copies of the Notice. 
Supposedly because of the YSP, Borrowers ended up with a variable interest-rate loan with a significantly higher interest rate than they had on their previous fixed-rate loan. 
Borrowers filed suit in Ohio state court against Bank, Broker, and two of Broker's employees, alleging that Broker's employees had indicated that the YSP would be waived; that Bank conspired with Broker to further Broker's alleged breach of its fiduciary duty to Borrowers to disclose the terms of the YSP; that Bank committed fraud by failing to disclose the YSP; and that Borrowers were entitled to rescind the loan under TILA because they did not receive the requisite number of copies of the Notice.
Bank removed the case to federal court.  All parties filed motions for summary judgment.  The court granted Bank's motion on all claims, but only granted summary judgment to Broker as to the civil conspiracy claim.  Following these rulings, Borrowers entered into a settlement with all the defendants except Bank.   
Borrowers appealed the grant of summary judgment in favor of Bank and the denial of their own motion.  The Sixth Circuit reversed in part, and affirmed in part.
As you may recall, in Ohio a civil conspiracy consists of four elements: "(1) a malicious combination; (2) two or more persons; (3) injury to person or property; and (4) existence of an unlawful act independent from the actual conspiracy."  Universal Coach, Inc. v. New York City Transit. Auth., Inc., 629 N.E.2d 28, 33 (Ohio Ct. App. 1993).  
In addition, under TILA "[a] creditor shall deliver two copies of the notice of the right to rescind to each consumer entitled to rescind" and ["i]f the required notice or material disclosures are not delivered, the right to rescind shall expire 3 years after consummation. . . ."  See 15 U.S.C. § 1635(a); 12 C.F.R. § 226.23(b)(1); 12 C.F.R. § 226.23(a)(3). 
TILA also creates a rebuttable presumption of the delivery of required disclosures when a written acknowledgement of receipt of such disclosures is presented.  See 15 U.S.C. § 1635(c).
Noting that in order to show Bank's participation in a civil conspiracy, Borrowers were only required to show an understanding or common design between Bank and Broker to commit an improper act, which in this case, the Sixth Circuit explained, was Broker's alleged breach of its fiduciary duty to Borrowers.  See Gosden v. Louis, 687 N.E.2 481, 496 (Ohio Ct. App. 1996); Swayne v. Beebles Invs., Inc., 891 N.E.2d 1216, 1226 (Ohio Ct. App. 2008).  Accordingly, the Court ruled that Borrowers needed to show that Bank was aware of and aided in Broker's improper conduct of concealing the YSP. 
The Sixth Circuit pointed to a number of pieces of evidence suggesting that Bank had knowledge of Broker's concealment of the YSP, including the Brokerage Disclosure that Bank reviewed and which specifically stated that the amount of the additional compensation would be disclosed at closing.  This, the Court reasoned, showed in part that Bank knew that the YSP would not be disclosed until closing, a fact from which a juror could infer that Broker concealed the YSP prior to the closing.   The Court pointed out that Broker's failure to disclose the YSP during the pre-closing loan application process violated its fiduciary obligations to Borrowers and that disclosure of the YSP at the time of closing on the final settlement statement, even if the YSP notation on the settlement statement had been clear, was improperly "after-the-fact." 
The Sixth Circuit thus concluded that Borrowers had raised sufficient factual questions as to whether Bank knew of and aided Broker's concealment of the full terms of the mortgage to allow Borrowers to proceed to trial on the civil conspiracy claim.  
In so ruling, the Sixth Circuit disagreed with the district court's conclusion that finding in favor of Borrowers would create new obligations for lenders and pointed out that Ohio case law allows for lender liability based on a theory of civil conspiracy in a case such as this one.  See, e.g., Carver v. Disc. Funding Assocs., Inc., No CVH 20040126, 2004 WL 2827229, at *4 (Ohio Ct. Comm. Pl.  2004); Williams v. Aetna, 700 N.E.2d 859, 867 (Ohio 1998)(indicating that a lender could be liable for civil conspiracy by providing funds to a fiduciary whom lender knew breached his fiduciary duty).
As to Borrowers' fraud claim, the Sixth Circuit rejected Borrowers' assertion that Bank breached a fiduciary duty to them for its failure to disclose the YSP to them, because Bank had no fiduciary duty to disclose under Ohio law.  See Ohio Rev. Code §§ 1109.15(E), 1322(081(B)(creating detached relationship between lenders and borrowers and exempting lenders from most mortgage brokers' fiduciary duties).
With regard to Borrowers' TILA rescission claim, the Sixth Circuit noted that TILA created a rebuttable presumption that Borrowers had received the required disclosures when Bank produced a copy of the Notice of Right to Cancel signed by both Borrowers at closing.  That Notice, the Court stressed, clearly explained the significance of Borrowers' signatures on the form.  Observing in part that Borrowers had submitted affidavits that swore only that their package of disclosure forms remained unaltered since closing -- the so-called "envelope theory," the Court ruled that Borrowers' "envelope theory" was insufficient to rebut the presumption of proper delivery created by the signed Notice. 
Accordingly, the Sixth Circuit affirmed the district court's grant of summary judgment on the fraud and TILA claims.

Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
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Chicago, Illinois 60602
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