FYI: Fed Dist Court Rejects Insurer's Argument That Cyber-Attack Reimbursements by Financial Institution to Its Customer Were Excluded from Coverage as "Voluntary Payments"

The U.S. District Court for the Western District of Pennsylvania recently denied an insurer’s motion to dismiss, rejecting the insurer’s argument that its insured-bank’s refund payment to one of its clients for losses resulting from an international cyber-hacking attack violated the pertinent provisions of the operative insurance policy. 

 

In sum, the district court held that an insured-bank’s refund issued pursuant to the express requirement of law was not subject to the liability policy’s “voluntary payments” coverage defense, even where the insured-bank did not obtain the consent of the insurer prior to issuing the refund. Instead, the court held the payment was not voluntarily given, because it was required by an applicable Pennsylvania statute.

 

A copy of the opinion is available at:  Link to Opinion

 

In this breach of contract action arising from an insurer’s denial of coverage, an insured-bank sought the recovery of damages resulting from its refunding a client’s losses as the result of an international cyber-hacking attack.

 

According to the insured-bank’s complaint, its insurer breached the terms of the operative policy by asserting that, having “voluntarily” refunded the lost monies without the insurer’s consent, the insured-bank relieved the insurer of its otherwise undisputed obligation to provide coverage under the terms of the policy.

 

Here, in 2012, one of the insured-bank’s customers became the victim of an international cyber-hacking attack. The hacker was somehow able to obtain the online log-in details for the customer’s bank account, and utilized this information to process three transfers from the account in the aggregate amount of approximately $3.5 million dollars.  Most of these funds ended up in Russia and could not ultimately be recovered.

 

Following the attack, the insured bank quickly reimbursed its customer for the full amount that the customer had lost. The reimbursement was made pursuant to the express provisions of 13 Pa. C.S.A. § 4A204(a), which provides, in pertinent part, that if a receiving bank receives a payment order that was not authorized by its client, the bank “shall refund any payment of the payment order … to the extent that the bank is not entitled to enforce payment … [.]”

 

Thereafter, about a month following the refund payment, the insured-bank placed the insurer on notice of the loss, and claimed recovery of the funds under the terms of its policy. However, the insurer denied coverage, stating that “by refunding the monies to their client without [the insurer’s] prior consent, that [the insured-bank] relieved [the insurer] of its obligation to provide coverage … [.]”

 

However, in its opinion denying the insurer’s motion to dismiss, the district court rejected the insurer’s argument that the refund payment was voluntary.

 

Citing to the definition of the term “voluntary” in Black’s Law Dictionary, the district court opined that a voluntary payment is one that is “[u]nconstrained by interference; not impelled by outside influence.” Following from this definition, it further held that the mandate of 13 Pa. C.S.A. § 4A204(a) was certainly a “outside influence.”  Accordingly, the court rejected the insurer’s position that by making the subject payment as required by applicable statute, that the insured-bank did not qualify for coverage under the terms of the policy.

 

Accordingly, the district court denied the insurer’s motion to dismiss.

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

 

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FYI: Cal App Ct Confirms Borrower Cannot Pursue Foreclosure Standing Before Foreclosure Completed, Cannot Assert Violations of Pooling and Servicing Agreement

The California Court of Appeals, Second District, recently affirmed a lower court’s dismissal of a borrower’s complaint, that a borrower cannot pursue preemptive judicial action challenging the right, power, and authority of a foreclosing party to initiate and pursue foreclosure.  The Court further held that a borrower lacks standing to challenge any alleged violations of an investment trust’s pooling and servicing agreement. 

 

A copy of the opinion as available at:  http://www.courts.ca.gov/opinions/documents/B254007.PDF

 

In July of 2007, the plaintiff borrower (“Borrower”) executed a first note for $516,000.00 (the “First Note”), which was secured by a deed of trust (the First Deed of Trust”) on real estate (the “Property”).  Borrower also executed a second note for $64,500.00 (the “Second Note”) secured by a deed of trust (the “Second Deed of Trust”) on the Subject Property.  Both trust deeds named Defendant Lender (“Lender”) as trustee, and MERS as the beneficiary acting as nominee for Trustee, its successors, and assigns. 

 

Over two years later, Borrower recorded two instruments that purported to “modify” the First and Second Deeds of Trust to “correctly reflect” an indebtedness of zero dollars.  These instruments further stated the First and Second Deeds of Trust “were modified to eliminate any further payments, and to reflect a status of ‘paid as agreed.’”  Thereafter, a trust, which Borrower created, recorded two documents called “full reconveyance,” allegedly reconveying the First and Second Deeds of Trust to Borrower and declaring them void at inception.  Borrower then deeded the property to his trust. 

 

Despite Borrower’s transfer activity, MERS assigned all beneficial interest under the First Deed of Trust to another financial institution (the “Assignee of the First Deed of Trust”).  The Assignee of the First Deed of Trust recorded a notice of default and served a notice of trustee’s sale in March of 2012.  The foreclosure had yet to occur. 

 

As to the Second Deed of Trust, MERS assigned it to a different financial institution (the “Assignee of the Second Deed of Trust”) in July of 2012.

 

In October of 2012, Borrower, in his capacity as trustee of his trust, filed a complaint against Lender alleging, among other things, that the loans securing the Subject Property were improperly securitized, resulting in Lender’s interest in the Subject Property being extinguished and discharged.  Borrower’s complaint also alleged that all debt had been satisfied and the securitization process was deficient because the transfer of the promissory notes to a securitized trust did not comply with the terms of the pooling and servicing agreement governing the securitized trust.

 

Borrower did not name the Assignees of the First or Second Deeds of Trust as defendants, and thus they filed a motion to intervene.  The trial court granted their motions. 

 

The Assignee defendants promptly demurred to Borrower’s complaint.  The demurrers were sustained and Borrower’s complaint was dismissed without leave to amend.  Borrower appealed the trial court’s ruling.

 

On appeal, Borrower only argued that he stated a valid cause of action to quiet title.   Specifically, Borrower claimed that the attempt to transfer the First Deed of Trust to the mortgage backed investment trust did not comply with the trust’s servicing and pooling agreement, and thus was void.

 

Moreover, Borrower proposed that he should be allowed to amend his complaint to make the following the allegations: (1) the investment trust was created under New York law; (2) the trust is subject to the requirements imposed by the Internal Revenue Code on real estate investment trusts; (3) New York law requires that all trust deeds be transferred to such an investment trust before the trust closes; (4) the transfer of the subject trust deed to the investment trust occurred after the trust closed in 2007; and (5) the attempted transfer to the investment trust was therefore void.

 

The Court rejected Borrower’s argument noting that the “argument that a defendant lacks standing to foreclose because of an improper securitization process has recently become particularly popular in regards to the wave of real estate defaults over the past decade.” 

 

The Court explained that Borrower’s exact argument was recently addressed in Jenkins v. JPMorgan Chase Bank, N.A., 216 Cal. App. 4th 497, 511 (2013) (Jenkins).  In Jenkins, the plaintiff alleged that her loan was pooled with other home loans in a securitized investment trust in a way that violated the trust’s pooling and servicing agreement, and thus any security interest in her home was extinguished. 

 

The Jenkins’ Court rejected plaintiff’s argument stating that “California courts have refused to delay the non-judicial foreclosure process by allowing trustor-debtors to pursue preemptive judicial actions to challenge the right, power, and authority of a foreclosing ‘beneficiary’ or beneficiary’s ‘agent’ to initiate and pursue foreclosure.”  Id. at p. 511.  A preemptive action by a borrower “seeks to create ‘the additional requirement’ that the foreclosing entity must ‘demonstrate in court that it is authorized to initiate a foreclosure’ before the foreclosure can proceed, a process not contemplated by the non-judicial foreclosure statutes.”  Id. at 512-513, quoting Gomes v. Countrywide Home Loans, Inc., 192 Cal. App. 4th 1149, 1154 (2011). 

 

The Jenkins court distinguished a borrower’s preemptive action to delay a foreclosure from a factual situation involving misconduct during a non-judicial foreclosure sale, which could provide a basis for a post-foreclosure cause of action.

 

Additionally, the Jenkins court held the plaintiff did not have standing to challenge any alleged violations of the investment trust’s pooling and servicing agreement.  Id. at 514-515.  The Jenkins court explained the plaintiff was an unrelated third party to the securitization, and even if any transfers were invalid, the plaintiff would not be injured as she would still be obligated to make payments under the promissory note.  Id.  Rather, a party who could assert violations of the pooling and servicing agreement would be someone who believed it held a beneficial interest in the promissory note.  Id. 

 

Borrower argued that Jenkins was incorrectly decided, and instead, the Court should apply the holding of Glaski v. Bank of America, 218 Cal. App. 4th 1079 (2013) (“Glaski”).  In Glaski, the court held a plaintiff “could properly allege a valid cause of action for wrongful foreclosure by stating facts showing the defendant who invoked the power of sale was not the true beneficiary, and a plaintiff’s allegations detailing the faulty transfer to the trust met this pleading standard.”  Glaski, 218 Cal. App. 4th at 1094.

 

The Glaski court also held that a borrower has standing to contest a defective assignment to a real estate investment trust, and explicitly rejected the view that a borrower’s status as a nonparty or non-third party beneficiary to an assignment agreement prevents the borrower from challenging the transfer.  Id. at 1094-1095. The Glaski court justified its holding by explaining that “it protects the beneficiaries of the investment trust from the potential adverse tax consequence of the trust losing its status as a REMIC trust under the Internal Revenue Code.”  Id. at 1097. 

 

The Court rejected Borrower’s argument that Glaski applied to his claims for several reasons.  First, Glaski involved a claim for wrongful foreclosure, but Borrower asserted a cause of action for pre-foreclosure quiet title.  Second, Glaski did not address other case law which held that “preemptive action is not authorized by the non-judicial foreclosure statutes because it creates an additional requirement that a foreclosing entity first demonstrate in court that it is entitled to foreclose.”  Gomes at 192 Cal. App. 4th at 1154-1156. 

 

Second, if Borrower was allowed to assert a preemptive action, it “would result in the impermissible interjection of the courts into a non-judicial scheme enacted by the California Legislature,” which “‘would be inconsistent with the policy behind non-judicial foreclosure of providing a quick, inexpensive, and efficient remedy.’”  Jenkins, 216 Cal. App. 4th at 512-513.

 

Thirdly, the Court explained that Jenkins involved essentially the same allegations as Borrower’s proposed amended allegations—that the subject deed of trust was not assigned to the investment trust prior to its closing date.  Thus, and just as Jenkins decided, the Court held that Borrower’s allegations did “not give rise to a viable preemptive action that overrides California’s non-judicial foreclosure rules.”

 

The Court noted a number of other courts that have criticized Glaski, including Keshtgar v. U.S. Bank, N.A., 226 Cal. App. 4th 1201 (2014) (“Keshtgar”), which involved similar facts as Borrower alleged here.  The Keshtgar court, citing to Gomes and Jenkins, held there was “no basis under the non-judicial foreclosure scheme for the plaintiff to challenge the authority of the party initiating foreclosure.”  Keshtgar, 226 Cal. App. 4th, at 1205-1206. 

 

The Keshtgar court also distinguished Glaski, stating that Glaski involved a post-foreclosure action for damages and not an action to prevent a foreclosure.  Id. at 1206.  The Keshtgar court went even further and specifically rejected Glaski’s holding because “an assignment of a deed of trust and promissory note do not change the borrower’s obligations and therefore do not create prejudice.” Id. at 1207.

 

Despite acknowledging the amount of criticism of Glaski, the Court saw no reason to expressly determine whether Glaski was correctly decided because it has “no direct applicability to this pre-foreclosure action.”  Borrower did not dispute whether the deed of trust allowed for its assignment, nor did Borrower dispute that his loan was in default.  Thus, California non-judicial foreclosure statutes did not provide Borrower with any basis to challenge the entity that initiated the foreclosure process. 

 

Accordingly, the Court held that the lower court properly sustained the demurrer and affirmed the lower court’s judgment. 

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

 

          McGinnis Wutscher Beiramee LLP

CALIFORNIA    |  FLORIDA   |   ILLINOIS   |   INDIANA   |   WASHINGTON, D. C.

                                www.mwbllp.com

 

 

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FYI: DC District Court Vacates HUD's "Disparate Impact" Rule

The U.S. District Court for the District of Columbia recently vacated HUD’s expansion of the Fair Housing Act, 42 U.S.C. § 3601, et seq. (“FHA”), to include disparate impact liability. 

 

Although the Court based its decision on several grounds, it determined that the language of the FHA was unambiguous and did not include “disparate impact” or “effects discrimination” liability.  The Court held that HUD had acted outside of its statutory authority in promulgating the so-called “Disparate-Impact Rule.”

 

A copy of the opinion is attached.

 

This action arises from a rule promulgated by the U.S. Department of Housing and Urban Development (“HUD”) in February, 2013, which provided for liability under the FHA based on a practice’s “discriminatory effects” even if not motivated by a “discriminatory intent.”  Despite multiple comments explaining the harmful effect of this “Disparate-Impact Rule,” HUD promulgated the rule without substantial change.

 

Notably, the rule itself defines a practice as having a “discriminatory effect” where “it actually or predictably results in a disparate impact on a group of persons or creates, increases, reinforces, or perpetuates segregated housing patterns because of race, color, religion, sex, handicap, familial status, or national origin.”  24 C.F.R. § 100.500(a).  Moreover, in the preamble to the Disparate-Impact Rule, HUD “expressly extended the availability of disparate-impact liability to the provision and pricing of homeowner’s insurance for the first time.”  Slip. Op. at 6 (emphasis in opinion). 

 

Plaintiffs – two non-profit trade associations whose members sell homeowner’s insurance within the United States (for convenience, the “Insurance Providers”) – filed the present action against HUD and the HUD Secretary challenging the Disparate-Impact Rule, and seeking to have it vacated. 

 

In their complaint, the Insurance Providers contended that the Disparate-Impact Rule violated the Administrative Procedure Act, 5 U.S.C. § 551, et seq. (“APA”).  Specifically, they argued that HUD exceeded its statutory authority by expanding the scope of the FHA to recognize not just “disparate-treatment” claims (claims for intentional discrimination) but also “disparate-impact” claims (claims for facially neutral practices that have discriminatory effects).

 

In light of a case pending before the United States Supreme Court that would resolve the same statutory question, the Court stayed this action.  After the Supreme Court dismissed the writ of certiorari due to settlement, the Insurance Providers filed a motion for summary judgment.  In response, HUD filed a motion to dismiss or, in the alternative, for summary judgment.  Following full briefing of the issues, and oral argument, the D.C. federal district court entered judgment in favor of the Insurance Providers, and vacated the Disparate-Impact Rule.

 

As you may recall, under the APA, courts must set aside any agency action that is in excess of that agency’s “statutory jurisdiction, authority, or limitations.”  5 U.S.C. § 706(2)(C).  Judicial review of an agency’s interpretation of a statute is subject to the two-step analysis laid out by the Supreme Court in Chevron, U.S.A., Inc. v. Natural Resources Def. Council, Inc., 467 U.S. 837 (1984).  For the first step of Chevron analysis, a court “must give effect to the unambiguously expressed intent of Congress.”  Chevron, 467 U.S. at 842-43.  For the second Chevron step, where the statute is “silent or ambiguous with respect to the specific issue,” the court must determine whether the agency’s interpretation is “based on a permissible construction of the statute.”  Id. at 843.

 

Considering the cross-motions before it, the U.S. District Court for the District of Columbia first rejected HUD’s argument that the Insurance Providers lacked standing to assert this action.  Noting that the Disparate-Impact Rule “clearly intended to apply” to the business engaged in by Insurance Providers, the Court determined that they were objects of HUD rulemaking, and that therefore, standing was “self-evident.”  See Slip. Op. at 12-14 (citing Sierra Club v. EPA, 292 F.3d 895, 899-900 (D.C. Cir. 2002).

 

Moving to HUD’s interpretation of the FHA, the Court determined that only disparate-treatment or intentional discrimination claims are unambiguously cognizable under the plain text of the FHA.  Although HUD argued that Congress’s intent to recognize disparate impact under the FHA is evidenced throughout the statute’s language, the Court disagreed.  Notably, the Court observed that “[w]hen Congress intends to expand liability to claims of discrimination based on disparate impact, it uses language focused on the result or effect of particular conduct, rather than the conduct itself.”  Slip. Op. at 19.  However, in the FHA, Congress did not include any “effects-based language.”  Id. at 20.  Rather, the statutory language of the FHA focuses on the motivation for the conduct itself.  See id.

 

Even if the statutory text were ambiguous, according to the Court, Congress’s intent to limit the FHA is still “readily discernable.”  Slip. Op. at 22.  Pointing to several statutes enacted contemporaneously with the FHA, the Court observed that “Congress knows how to craft statutory language providing for disparate-impact liability when it intends to do so.”  Id. at 23.  As to HUD’s arguments that certain provisions of the FHA presupposed the existence of disparate-impact liability, the Court deemed them to be “nothing more than wishful thinking on steroids!”  Slip. Op. at 26.

 

Additionally, the Court determined the “the expansion of the FHA to include disparate-impact liability against insurers would run afoul of previously enacted federal law.”  Slip. Op. at 25.  Specifically, the McCarran-Ferguson Act, 15 U.S.C. § 1011, et seq., provides that no federal law may supersede state law “regulating the business of insurance. . .”  15 U.S.C. § 1012(b).  The Court noted that expanding the FHA to include disparate-impact liability would not only have a “wide-ranging disruptive effect on the pricing and provision of homeowner’s insurance,” but would also require insurers to collect and analyze certain types of race-based data, such collection being expressly prohibited in many states.  See Slip. Op. at 26-27.

 

Finally, the Court addressed HUD’s argument that previous holdings of other federal circuit courts precludes it from finding that the FHA unambiguously prohibits disparate-impact treatment.  The Court was quick to reject this argument, stating that a lack of judicial consensus does not render a statute ambiguous.  See Deal v. United States, 508 U.S. 129, 136 (1993) (“judges cannot cause a clear text to become ambiguous by ignoring it”).  Moreover, it noted that no federal circuit court has recognized disparate impact in the FHA subsequent to the Smith v. City of Jackson decision, “where the Supreme Court made it clear than inquiry into the availability of disparate-impact liability turns on the presence, or absence, of effects-based language.”  Slip. Op. at 30; see also Smith v. City of Jackson, 544 U.S. 228, 235-36 (2004).

 

Accordingly, the D.C. federal district court granted the Insurance Providers’ motion for summary judgment, denied HUD’s motion, and vacated HUD’s Disparate-Impact Rule.

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

 

          McGinnis Wutscher Beiramee LLP

CALIFORNIA    |  FLORIDA   |   ILLINOIS   |   INDIANA   |   WASHINGTON, D. C.

                                www.mwbllp.com

 

 

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FYI: MD Highest Ct Rejects Borrower's Argument That He Had Rescinded Loan Under TILA Before Closing

Maryland’s highest court recently rejected a borrower’s argument that he had rescinded a loan transaction under the Truth-in-Lending Act, 15 U.S.C. § 1601, et seq. (“TILA”), before closing.

 

Upholding an order ratifying a foreclosure sale, the Court of Appeals of Maryland reasoned that a borrower cannot claim a TILA right to rescind a transaction which does not yet exist. 

 

A copy of the opinion is available at:  http://www.mdcourts.gov/opinions/coa/2014/2a14.pdf

 

Appellee (“Borrower”) obtained a refinance loan in the amount of $350,000 (the “Loan”), which was evidenced by an adjustable rate note and secured by a deed of trust (the “Loan Documents”).  The Loan Documents were dated April 17, 2007.  One or two days earlier, Borrower allegedly transmitted a notice of rescission of the Loan to their refinance lender.  Despite this, Borrower accepted the benefits of the Loan, which were used to satisfy a prior mortgage and Borrower’s credit card debts, with an additional sum of money given directly to Borrower.

 

Regarding his purported cancellation of the Loan under TILA, Borrower claimed that he sent a Notice of Right to Cancel on April 16, 2007, which matched the date of the notice itself.  However, the transmission verification report indicated that the notice was faxed on April 15, 2007.  Borrower further alleged that, at some point after he faxed this notice, the lender told him that his rescission was not effective, and that he could not rescind.

 

Nevertheless, the closing went through.  For two years after closing, Borrower paid according to the terms of the Loan documents.  After he experienced financial difficulty, he defaulted on the Loan, and a foreclosure action was filed.

 

In the foreclosure action, Borrower filed a Motion to Stay or Dismiss, in which he argued that he had rescinded his loan under TILA.  Borrower also filed a third-party complaint against his lender and loan servicer, again arguing that he timely exercised his to rescind.  After Borrowers’ Motion to Stay or Dismiss was denied, and his third-party complaint dismissed, the property was sold.

 

Borrower filed exceptions to the foreclosure sale, claiming again that he had rescinded the Loan under TILA.  Borrower’s argument was again denied, and the exceptions overruled.  Following the Court’s entry of an order ratifying the sale, Borrower appealed.

 

The Court of Special Appeals reversed, determining that the three-day window for rescinding under TILA “remained open throughout the negotiation process for a loan commitment leading up to closing and lapsed at the end of three days after closing.”  Slip. Op. at pp. 9-10.  Thereafter, the substitute trustees under the deed of trust filed a petition for certiorari to Maryland’s highest court, which resulted in the present appeal.

 

As you may recall, TILA grants homeowners a right to rescission under certain circumstances.  Specifically, “in the case of any consumer credit transaction. . . the obligor shall have the right to rescind the transaction until midnight of the third business day following the consummation of the transaction.”  15 U.S.C. § 1635(a); see also 12 C.F.R. § 226.15(a)(3) (same).  Once the right to rescission has been exercised timely and properly, the consumer is “not liable for any finance or other charge, and any security interest given by the obligor, including any such interest arising by operation of law, becomes void upon such a rescission.”  15 U.S.C. § 1635(b); see also 12 C.F.R. § 226.15(d)(1) (“When a consumer rescinds a transaction, the security interest giving rise to the right of rescission becomes void, and the consumer shall not be liable for any amount, including any finance charge.”).

 

On appeal before Maryland’s highest court, the Court of Appeals held that Borrower’s exercise of his right to rescind was invalid because the Loan had not yet consummated.  According to the Court, “[u]nder TILA, a borrower cannot rescind that which has not occurred yet.”  Slip. Op. at p. 20.

 

On this issue, the Court first considered the language of the statute and its implementing regulations.  The Court noted that federal law provides that the right exists only with a “consumer credit transaction” and that the right lasts until midnight of the third business day following the “consummation” of the transaction, or three years following consummation in certain circumstances not relevant here.  See 15 U.S.C. § 1635(a).

 

Regulation Z defines “consummation” as “the time that a consumer becomes contractually obligated on a credit transaction.”  12 C.F.R. § 226.2(a)(13).  Notably, here, the Court observed that, “neither party alleged that the consummation date was some date in the negotiation process other than the date that the [Loan Documents] were signed and dated.”  Slip. Op. at p. 19 n. 20.  Accordingly, the Court determined that the consummation date was April 17, 2007.  See id.

 

Likewise, although TILA does not define the terms “consumer credit transaction,” or “transaction,” the Court noted that definitions of similar terms each “presuppose that the ‘transaction’ must be consummated.”  Slip. Op. at p. 19 (citing Weintraub v. Quicken Loans, Inc., 594 F.3d 270, 273 (4th Cir. 2010)).  As held in Weintraub, both the definitions of the terms “residential mortgage transaction” and “reverse mortgage transaction” indicate that “any credit transaction under § 1635(a) must be consummated for the right to rescind to attach.”  Weintraub, 594 F.3d at 275.

 

The Court also reasoned that Regulation Z presumes that, at the time a borrower wishes to exercise his or her rescission right, there is something to rescind.  See Slip. Op. at p. 20; 12 C.F.R. § 226.15(d)(1) (explaining that the effect of rescission is to render void “the security interest giving rise to the right of rescission.”).  According to the Court, there must be a security interest in being to rescind in order for it to be rendered void.  See Slip. Op. at p. 20; see also 12 C.F.R. Pt. 226, Supp. I, pp. 709-10 (Official Staff Commentary) (“In order for the right of rescission to apply, the security interest must be retained as part of the credit transaction.”).

 

Ultimately, the Court determined that the Loan consummated at closing, or “the moment when the note and deed of trust or mortgage are signed.”  Slip. Op. at p. 20.  Thus, until Borrower consummated the Loan, there is no consumer credit transaction, and the consumer has no right of rescission under TILA.  See id.  As noted by the Court, “[i]f the loan was not consummated yet, the borrower could decline simply to sign the loan documents and avoid liability.”  Id.

 

Accordingly, the Court of Appeals of Maryland reversed the Court of Special Appeals, and affirmed the judgment of the circuit court, which denied Borrower’s rescission defense.

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

 

          McGinnis Wutscher Beiramee LLP

CALIFORNIA    |  FLORIDA   |   ILLINOIS   |   INDIANA   |   WASHINGTON, D. C.

                                www.mwbllp.com

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

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