The U.S. Court of Appeals for the Eighth Circuit recently ruled that a mere demand for rescission was insufficient to exercise the right to rescind under the federal Truth in Lending Act, and that the borrowers' right of rescission expired upon the foreclosure sale of the mortgaged property even though the borrowers demanded rescission prior to the foreclosure sale.
In so ruling, the Court opined that the giving of notice was a "necessary predicate" to exercising the right of rescission, but that the filing of a rescission lawsuit prior to the foreclosure sale was required to "complete the exercise of that right."
A copy of the opinion is available at: http://media.ca8.uscourts.gov/opndir/13/08/121947P.pdf.
A married couple owned property that was recorded only in the name of the wife ("Wife"), who later quitclaimed the property to their daughter ("Daughter"). The husband ("Husband") did not sign the quitclaim deed.
While building an extension to the house he had built on the property, Husband encountered financial difficulties, but was unable to procure financing through traditional lenders. Consequently, Wife, Husband, and Daughter (collectively, "Plaintiffs"), entered into a number of transactions with defendants lending consultants (collectively, "Lender") whereby (1) Plaintiffs transferred the property to Lender by warranty deed; (2) Lender obtained a loan from a bank and in turn loaned Plaintiffs $280,000 secured by a mortgage on the property for the same amount; (3) Plaintiffs entered into a contract for deed with Lender; and (4) Lender agreed to reconvey the property back to Wife and Daughter once Plaintiffs paid off the loan. Under the contract for deed, Lender reserved the right to place a mortgage on the property for the amount of any future remaining loan balance.
Several months later, requiring additional funds to complete the project, Plaintiffs amended the contract for deed to increase the principal amount of the loan to almost $500,000. Having paid off the original loan and obtaining a new loan from defendant bank ("Bank"), Lender, pursuant to the original contract for deed, placed a mortgage on the property to secure the new loan from Bank. Plaintiffs and Lender also assigned their respective interests in the contract for deed and the underlying property to Bank.
Eventually, Plaintiffs increased the amount of the loan to over $650,000. This time, Lender, and only Wife and Daughter modified the contract for deed to reflect the new amount. Lender modified the note and mortgage with Bank, with all Plaintiffs joining in the modification as they had done previously.
Wife and Daughter fell behind on their payments on the contract for deed with Lender. Lender served a statutory notice of cancellation of the contract for deed. Shortly thereafter, Plaintiffs sent a letter to Lender and Bank, stating that they cancelled and rescinded all the loan transactions. Bank responded that it could not rescind because it had no transactions with Plaintiffs. Plaintiffs took no action to reinstate the contract for deed.
Lender stopped making payments to Bank and Bank foreclosed. The property was later sold at a sheriff's sale.
Plaintiffs filed suit in a federal district court against Lender and Bank, seeking damages and rescission of all the transactions under the federal Truth in Lending Act, 15 U.S.C. § 1602 et seq. ("TILA"), as well as a declaratory judgment that the transactions constituted an equitable mortgage. Bank and Lender filed answers and affirmative defenses, and Lender counterclaimed for unjust enrichment.
Bank and Plaintiffs filed cross-motions for summary judgment. Bank argued among other things that Plaintiffs' right to rescind under TILA was barred because they had not filed a timely lawsuit, the property had been sold at the foreclosure sale, and Daughter had no rescission rights because the property was not her primary residence.
Ruling in favor of Plaintiffs only as to the equitable mortgage issue, the lower court held that neither Husband nor Wife could rescind, as they no longer had an ownership interest in the property and Daughter was the sole owner of the property. The lower court also concluded that Daughter had no rescission rights under TILA because the property was not her principal dwelling at the time of the transactions. Bank and Plaintiffs moved for reconsideration, which the lower court denied.
The trial court also dismissed the TILA damages claim against Bank, reasoning that Bank was not an "assignee" for purposes of that claim. After a jury trial on the remaining claims, the lower court entered judgment in favor of Bank and Lender, but ruled that Plaintiff's rescission notice was sufficient to exercise the TILA right of rescission.
Plaintiffs appealed the dismissal of their various claims. Bank cross-appealed, arguing that the lower court improperly concluded that Plaintiffs' notice was sufficient to rescind the transactions under TILA and that Plaintiffs no longer had the right to rescind because they failed to file a rescission action prior to the foreclosure sale.
The Eighth Circuit reversed on the notice issue, but affirmed in all other respects, concluding that the foreclosure sale cut off Plaintiffs' right to rescind because they failed to file a rescission lawsuit prior to the sale.
As you may recall, TILA provides that "in the case of any consumer credit transaction . . . in which a security interest . . . is or will be retained or acquired in any property which is used as the principal dwelling of the person to whom credit is extended, the obligor shall have the right to rescind the transaction . . . by notifying the creditor . . . of his intention to do so." 15 U.S.C. § 1635(a). TILA further provides that a borrower's right of rescission expires three years from the date of the loan transaction or upon the sale of the property, whichever occurs first. 15 U.S.C § 1635(f). In addition, TILA provides in pertinent part that "any civil action against a creditor for a violation of this subchapter . . . with respect to a consumer credit transaction secured by real property may be maintained against any assignee of such creditor." 15 U.S.C. § 1641(e)(1).
Noting the split of authority among the federal circuits over whether filing a lawsuit is necessary to exercise rescission rights under TILA, the Eighth Circuit joined the Ninth and Tenth Circuits in concluding that while notice is necessary to exercise the right of rescission, it is not sufficient.
In so ruling, the Eighth Circuit concluded that "the giving of notice is a necessary predicate act to the ultimate exercise of the right [to rescind]" but that "[g]iving notice, as the means by which one comes to 'have the right to rescind,' is not sufficient, in itself, to complete the exercise of that right." See Rosenfeld v. HSBC Bank, 681 F.3d 1172, 1185 (10th Cir. 2012).
Faulting the lower court for its finding that Plaintiffs' notice was sufficient to exercise the right of rescission under section 1635, the Eighth Circuit concluded that Plaintiffs' right of rescission expired on the date of the foreclosure sale, and that their claim was barred because they had failed to file a rescission lawsuit prior to the sale. In reaching this conclusion, the Court pointed out that the Official Staff Commentary to Regulation Z, TILA's implementing regulation, provides that a foreclosure sale would terminate an unexpired right to rescind. See 12 C.F.R. §226.23(a)(3)(Supp. I 1195).
Turning to Plaintiffs' claim against Bank for damages under TILA, the Court noted that the Plaintiffs' claim could not survive the lower court's judgment against them. Based on the record before it, the Court determined that Plaintiffs' damages claim against Lender had no merit, and that because Bank's liability could be no greater than that of Lender Plaintiffs' claim against Bank could not be maintained.
The Eighth Circuit thus reversed the lower court's finding that Plaintiffs' rescission notice was sufficient to exercise the right to rescission under TILA, but affirmed the dismissal of their claims.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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