Tag Archives: SCOTUS

U.S. Supreme Court Holds Foreclosure Firms Conducting Nonjudicial Foreclosures Are Not Debt Collectors Under the FDCPA

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By: Wayne Streibich, Diana M. Eng, Cheryl S. Chang, Jonathan M. Robbin, and Namrata Loomba

The United States Supreme Court holds businesses conducting nonjudicial foreclosures are not “debt collectors” under the FDCPA, but lenders and foreclosure firms should take note that the Court specifically chose to leave open the question of whether businesses that conduct judicial foreclosures are “debt collectors” under the statute. 

On March 20, 2019, in Obduskey v. McCarthy, the Supreme Court of the United States issued an opinion holding businesses conducting nonjudicial foreclosures are not “debt collectors” under the Fair Debt Collection Practices Act (“FDCPA”). The Supreme Court limited its decision to nonjudicial foreclosures.1 The Justices ruled 9-0 in the case, with Justice Breyer writing the opinion and Justice Sotomayor concurring.

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U.S. Supreme Court Excludes Banks Collecting Purchased Delinquent Debt from Definition of “Debt Collector” under the FDCPA

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By: Diana M. Eng and Louise Marencik

Banks and other consumer finance firms that purchase delinquent debt and then collect on their own behalf are not “debt collectors” under the Fair Debt Collection Practices Act. However, this limitation still does not apply to those institutions that collect on behalf of another.

In a unanimous decision in Henson et al. v. Santander Consumer USA Inc., the United States Supreme Court held that the Fair Debt Collection Practices Act (“FDCPA”) does not apply to banks and other consumer finance firms that purchase and then collect on defaulted debt that they own. No. 16-349, ____ U.S. ____ (2017).

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U.S. Supreme Court Rules that New York General Business Law § 518 Regulates Free Speech Provided for in the First Amendment

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By: Jonathan M. Robbin

In a unanimous decision in Expressions Hair Design, et. al. v. Schneiderman, Attorney General of New York, et al., the United States Supreme Court held that New York General Business Law (“GBL”) § 518, which prohibits the ability of a merchant to impose a surcharge on a credit card user in lieu of payment of cash, regulates free speech. In sum, the Court concluded that § 518 specifically restricts how a merchant communicates prices of items, rather than the actual price and surcharge.

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Magistrate Judge Declines to Apply Spokeo to FCRA Case Against TransUnion

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By: Louise Bowes Marencik

On January 18, 2017, a federal magistrate judge concluded that the ruling in Spokeo does not apply to a putative class action brought against TransUnion.

In Miller v. TransUnion, LLC, the plaintiff alleged that TransUnion violated Section 1681g(a) of the Fair Credit Reporting Act by providing misleading and confusing information to consumers which suggested that their names appear on the Office of Foreign Assets Control’s (OFAC) list of terrorists, money launderers, drug traffickers, and other enemies of the United States.  No. 3:12-CV-1715, 2017 U.S. Dist. LEXIS 7622 (M.D. Pa. Jan. 18, 2017).  On August 3, 2015, the United States District Court for the Middle District of Pennsylvania stayed the proceedings because the United States Supreme Court had granted certiorari in Spokeo Inc. v. Robins. On May 16, 2016, the Spokeo Court opined on the standard for the injury-in-fact requirement to establish standing under Article III of the United States Constitution, which requires that plaintiffs must show “concrete” and “particularized” injuries, as it relates to claims under the Fair Credit Reporting Act (FCRA). 136 S. Ct. 1540 (2016). The Court held that the appellate court’s standing analysis was incomplete because it failed to consider the distinction between concreteness and particularization, and it did not address whether the particular procedural violations alleged in the case caused sufficient risk to meet the concreteness requirement.

In the instant case, the Court lifted the stay on May 31, 2016, and allowed for briefing on the issue of whether the Spokeo decision had any impact on the plaintiff’s motion for class certification. TransUnion argued that Miller failed to argue a sufficiently “concrete” injury to support standing under Article III.  In his January 18, 2017 Report and Recommendation, Magistrate Judge Martin C. Carlson noted that, in Spokeo, the Court explained that a bare procedural violation does not satisfy this requirement, using the example of a credit report containing an incorrect zip code as a FCRA violation that would not constitute a concrete harm. However, the Spokeo Court clarified that an intangible harm may be sufficiently concrete to allow standing under Article III. The Judge chose to follow the United States District Court for the Northern District of California’s decision in a similar case involving OFAC disclosures, where the Court found that the confusing disclosure could cause concrete harm in the form of emotional distress about whether the recipient is listed in the OFAC database. Larson v. TransUnion, LLC, 2016 WL 4367253, *2 (N.D. Cal. Aug. 11, 2016).   Accordingly, the Judge recommended that the United States District Court for the Middle District of Pennsylvania decline to accept TransUnion’s interpretation of Spokeo, and find that Miller’s alleged injuries were sufficiently particularized and concrete to establish standing under Article III.  Assuming the Court follows this recommendation, the decision could suggest that Spokeo’s impact on a plaintiffs’ ability to show injuries caused by FCRA violations will be less substantial than originally thought.

 

 

 

Spokeo: Not the Result Many Hoped (or Feared)

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By Joe Patry

The United States Supreme Court’s decision in Spokeo v. Robbins re-emphasized the Constitutional requirement that a plaintiff must show a particularized and concrete injury to show standing to sue in federal court. In remanding a Fair Credit Reporting Act (“FCRA”), 15 U.S.C. § 1681 et seq. complaint to the Ninth Circuit, the Supreme Court found that the lower court failed to sufficiently analyze both requirements. This decision was widely anticipated to potentially cause a sea change in complaints based on violations of federal consumer statutes. Some had feared that this decision would potentially eliminate lawsuits based on statutory violations where the consumer suffers no actual damages. However, the decision merely requires the lower court to more fully analyze whether the consumer sufficiently alleged a concrete and actual injury.

In Spokeo, a six justice majority of the Supreme Court[1] examined whether a consumer had standing to bring a claim under the FCRA. Spokeo operates a “people search engine,” which allows visitors to the site to input a person’s name, phone number or email address, and then provides information about the subject of the search. See Spokeo at 1.[2] Mr. Thomas Robins learned that some of the information which Spokeo had on file for him was incorrect. Specifically, Spokeo states that he is married, has children, is in his 50s, has a job, is relatively affluent, and holds a graduate degree. Id. at 4. According to Mr. Robins, all of that information is incorrect. Id.

Mr. Robins filed sued in the United States District Court for the Central District of California and alleged that Spokeo had violated a provision of the FCRA which requires companies that provide consumer information to follow reasonable procedures to ensure that the information is accurate. Id. at 3. This particular provision of the FCRA allows actual damages or statutory damages of $1,000 per violation. Id. The trial court found that Mr. Robins did not have standing to bring his claim because he had not pled an injury in fact, which is required, as federal courts may decide only actual cases or controversies under Article III of the United States Constitution. Id. at 6. The Ninth Circuit reversed the dismissal, and found that the statutory violation was in and of itself sufficient to confer standing. Id. at 5. Spokeo appealed to the Supreme Court.

The Supreme Court began by briefly discussing the concept of standing, noting that the doctrine of standing developed to ensure that federal courts do not exceed their authority. Id. at 6. Further, the Supreme Court recited the three elements for plaintiff to have standing in federal court: (1) an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be addressed by a favorable judicial decision. Id. To survive a motion to dismiss, a complaint must allege facts to support each element. Id.

Focusing on the injury in fact requirement, the Supreme Court highlighted that plaintiff must have suffered “an invasion of a legally protected interest,” which is “concrete and particularized, and “actual or imminent, not conjectural or hypothetical.” Id. at 7 (internal citations omitted). To be particularized, an injury must affect the plaintiff in a personal way. Id. However, an injury must also be concrete. Id. at 8.

In remanding, the Supreme Court found that the Ninth Circuit had not sufficiently analyzed whether Mr. Robins’ injury caused by the alleged FCRA violation was concrete and actually existed. Id. Although Congress can create statutory violations for intangible harms, Article III still requires a concrete injury in the context of a statutory violation. Id. It is not enough for a plaintiff to allege solely that a statute has been violated. Id. at 10. For example, a provision of the FCRA requires the credit reporting agencies to inform consumers when it has provided information to third parties such as Spokeo. Id. at 10-11. There may be no statutory violation if the credit reporting agency fails to provide the notice to the consumer but the information provided to Spokeo or other third parties was accurate. Id. Or, there may be no harm from even incorrect information – i.e., if an incorrect zip code was provided, the Court found that a consumer could not possibly suffer any harm from this harmless incorrect information. Id.

Ultimately, depending on what happens on remand, this issue may be back before the Supreme Court. Depending on the Ninth Circuit’s decision on remand, the Supreme Court may again have the opportunity to issue an opinion that significantly impacts consumers’ ability to sue for statutory violations for which they have no actual damages. However, Spokeo was not the potential sea change that some had predicted.

[1] Justice Alito wrote the opinion, joined by Chief Justice Roberts, and Justices Kennedy, Thomas and Breyer. Justice Thomas concurred and Justices Ginsburg and Sotomayor dissented.

[2] All references to pages are to as the opinion is paginated in the version available on the Supreme Court’s website.

U.S. Supreme Court Holds Disparate Impact Claims Can Be Brought Under Fair Housing Act

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By: Louise Bowes Marencik

In Texas Dept. of Housing and Community Affairs v. Inclusive Communities Project, Inc., decided on June 25, 2015, the United States Supreme Court held that disparate impact claims are cognizable under the Fair Housing Act. No. 13-1371, ____ U.S. ____ (2015). The Inclusive Communities Project (“ICP”) alleged that the Texas Department of Housing and Community Affairs (“DOH”) disproportionately allocated low-income housing tax credits to developers of properties in areas highly populated by minorities, resulting in a disparate impact on the availability of low-income housing in minority areas versus nonminority areas in violation of the Fair Housing Act (“FHA”).

Previously, the District Court of Texas ruled in favor of ICP on its disparate impact claim and imposed a structural injunction on the DOH after it found that ICP had established a prima facie case of disparate impact, and the DOH failed to show that no less discriminatory alternatives for the allocation of tax credits were available. In 2013, the U.S. Department of Housing and Urban Development (“HUD”) issued a new regulation interpreting the FHA to include disparate impact liability, and implementing a new burden-shifting framework for adjudication of such claims. The United States Court of Appeals for the Fifth Circuit upheld the District Court’s decision, but reversed and remanded the case in light of HUD’s new regulation, because the District Court had improperly required the DOH to demonstrate that no less discriminatory alternatives were available.

In the Supreme Court’s 5-4 opinion, Justice Kennedy opined that although the language of the FHA does not expressly allow for disparate impact claims, such claims are consistent with the policy behind the FHA. But, the Court clarified that a disparate impact claim under the FHA cannot be proved based on statistical disparity alone. Plaintiffs must be able to point to a defendant’s policy or policies that cause the disparate impact in order to establish their prima facie case. Specifically, Justice Kennedy quoted Griggs v. Duke Power Co., 401 U.S. 424 (1971), which established the disparate impact cause of action under Title VII of the Civil Rights Act of 1964, noting that policies are not subject to disparate impact liability unless they are “artificial, arbitrary, and unnecessary barriers.” Justice Kennedy further noted that these limitations are in place to prevent potential defendants from making race-based decisions to avoid disparate impact litigation. Without such limitations on disparate impact claims, developers may be deterred from building low-income housing, which would undermine the purpose of the Act. Despite these limitations, with this decision the Supreme Court has resolved any controversy regarding whether disparate impact claims can be brought under the FHA.

 

U.S. Supreme Court Rules That Chapter 7 Debtors Cannot Void Wholly Unsecured Liens

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By: Diana M. Eng and Joshua B. Alper

In Bank of America v. Caulkett, No. 13-1421, 575 U.S. __ (2015) and Bank of America v. Toledo-Cardona, No. 14-163, 575 U.S. __ (2015), the Supreme Court of the United States recently held that a Chapter 7 debtor cannot void a junior mortgage, where the value of the collateral securing the debt is less than the outstanding indebtedness owed on the first mortgage.  In essence, even though a junior lien may be wholly unsecured, Section 506(d) of the Bankruptcy Code (the “Code”) does not permit the debtor to void the lien.  Moreover, these Supreme Court decisions resolved a conflict amongst many courts across the country, both at the Bankruptcy Court and Circuit Court levels.

Section 506(d) of the Code states that “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.”  11 U.S.C. § 506(d) (2015).  By its terms, an allowed claim generally has been construed to mean (with certain exceptions not relevant here) a claim to which no objection has been made or a claim that is adjudicated as allowed despite a party objecting to the claim. See 11 U.S.C. § 502(a)–(b).

Significantly, Caulkett and Toledo-Cardona involved substantially similar facts. Both debtors had two mortgage liens on their homes and the mortgages held by Bank of America were both subordinate liens.  Furthermore, the total outstanding indebtedness the debtors owed to the senior lenders exceeded the fair market value of the property. In this posture, the liens held by Bank of America were characterized as “totally underwater.”

In 2013, both debtors filed petitions for relief under Chapter 7 of the Code. Likewise, they each moved to void or “strip off” the junior liens, relying on Section 506(d) of the Code.  In both cases, the Bankruptcy Court granted the debtors’ motions, which were subsequently affirmed by the District Courts and the Eleventh Circuit.  The Supreme Court of the United States granted certiorari to consider “whether a debtor in a Chapter 7 bankruptcy proceeding may void a junior mortgage under 11 U.S.C. § 506(d) when the debt owed on the senior mortgage exceeds the present value of the property.” Caulkett, No. 1341, slip op. at 1 (2015).

Notably, in Caulkett and Toledo-Cardona, there was no dispute regarding whether Bank of America’s claims were allowed.  Instead, the crux of the dispute, and the focus of the Supreme Court’s opinion, centered on the definition of a “secured claim” for purposes of Section 506(d).

As an initial matter, the Supreme Court noted that Section 506(a) of the Code appeared to provide support for the debtors’ position.  In this regard, Section 506(a) (1) states that “[a]n allowed claim of a creditor secured by a lien on property . . . is a secured claim to the extent of the value of such creditor’s interest in . . . such property . . . and . . . an unsecured claim to the extent that the value of such creditor’s interest . . . is less than the amount of such allowed claim.”  11 U.S.C. § 506(a).  As a result, the Supreme Court acknowledged that a straightforward textual application of Section 506(a) appeared to support the conclusion that a claim cannot be classified as secured if the value of the creditor’s interest in the collateral is zero.  However, the Supreme Court emphasized that it had previously considered this textual application and had rejected it in Dewsnup v. Tim, 502 U.S. 410 (1992).

In Dewsnup, the Supreme Court held that a Chapter 7 debtor could not reduce or “strip” down a partially underwater lien to the value of the collateral securing the claim.  In reaching this conclusion, the Dewsnup Court found that pursuant to Section 506(d), a ”secured claim” is simply “a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim.” Caulkett, No. 1341, slip op. at 4.  Moreover, if a claim is “allowed” and otherwise “secured with recourse to the underlying collateral, it does not come within the scope of 11 U.S.C. §506(d).” Id. (citing Dewsnup, 502 U.S. at 415, 417-20).

Among other arguments, the debtors attempted to persuade the Court that Dewsnup should be limited to the facts of that case, mainly instances involving partially secured or under-secured liens. Caulkett, No. 1341, slip op. at 5.  Additionally, the debtors also posited that the definition of “secured claim” could be redefined to mean “any claim that is backed by collateral with some value,” but the Supreme Court ultimately rejected both arguments. Id.  The Supreme Court refused to limit Dewsnup’s general application and it also declined to adopt an alternative definition of “secured claim” than what was already decided by prior Supreme Court precedent.  In its final analysis, the Supreme Court held that the construction of “secured claim” under Dewsnup mandated the conclusion that a Chapter 7 debtor cannot void a wholly unsecured junior mortgage lien.

In light of this decision, lenders and the banking industry can be reassured that wholly underwater junior liens generally will not be stripped off in a Chapter 7 bankruptcy case. Previously, Chapter 7 debtors in various jurisdictions had success with voiding junior liens where the property was underwater.  Caulkett and Toledo-Cardona are particularly significant because as the value of real property fluctuates over time, the value of a junior lien can change when the property increases in value.  As a result, debtors will not be able to obtain a windfall by taking advantage of the value of their real property at the time of the filing of the Chapter 7 petition.

U.S. Supreme Court to Decide ECOA Circuit Split: Can Spouses be Required to Sign Personal Guaranties?

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By: Joe Patry

The Equal Credit Opportunity Act (“ECOA”), 15 U.S.C. § 1691 et seq. was enacted in 1974 “to eradicate credit discrimination waged against women, especially married women whom creditors traditionally refused to consider for individual credit.” Mays v. Buckeye Rural Elec. Coop., 273 F.3d 837 (6th Cir. 2002), at 5 (all references to pagination is to the pagination in the .PDF copies of the cases to which this post links). Under ECOA, a creditor cannot discriminate deny an application for credit solely because of that person’s marital status. See 15 U.S.C. § 1691(a).

Based on recent decisions, the Courts of Appeal for the Eighth Circuit and Sixth Circuit are split on the question of whether a creditor may require a spouse to execute a personal guaranty for a loan. If a guarantor is considered an “applicant” under ECOA, then requiring a spouse to guarantee a loan violates ECOA and may allow the spouse to use the affirmative defense of recoupment to avoid enforcement of the personal guaranty.  Last month, the Supreme Court of the United States granted the writ of certiorari to resolve this circuit split.  The case has not yet been set for argument.

In Hawkins v. Community Bank of Raymore 761 F.3d 937 (8th Cir. 2014), the husbands of Plaintiffs Valerie J. Hawkins and Janice A. Patterson were the two members of PHC Development, LLC (“PHC”).  Id. at 2. Patterson and Hawkins themselves had no interest in PHC.  Id.  From 2005 to 2008, Community Bank of Raymore (“Community”) made four loans to PHC, totaling $2,000,000. Id.  Hawkins, Patterson and their husbands signed personal guaranties on the loans.  Id.  The loans went into default and Community demanded payment not only from PHC but also from Hawkins and Patterson as guarantors.  Id.

Hawkins and Patterson sued Community, asserting that Community violated ECOA when it forced them to execute the guaranties solely because they were married to their husbands – the members of PHC.  Id.  Further, Hawkins and Paterson claimed that because of the alleged ECOA violation, the personal guaranties were unenforceable against them.  Id.  The trial court found that Hawkins and Patterson were not “applicants” within the meaning of ECOA and thus there was no ECOA violation, and granted summary judgment for Community.  Id.

On appeal, the Eighth Circuit noted that ECOA makes it “unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction . . . on the basis of . . . marital status.”  Id. at 3 (citing 15 U.S.C. § 1691(a)).  An applicant is any person who applies “directly” to a creditor for “an extension, renewal, or continuation of credit . . . .”  Id. (citing 15 U.S.C. § 1691a(b)).  Interpreting this definition, the Federal Reserve Bank promulgated 12 C.F.R. § 202.2(e), which provides that the definition of “applicant” under ECOA includes guarantors.  Id. 

Under the Chevron doctrine, federal courts typically defer to a federal agency’s interpretation of a statute if (1) the statute is ambiguous or unclear and (2) if the agency’s reading is reasonable in light of Congress’s intent.  Id.  at 4; Chevron U.S.A. v. Natural Resources Defense Counsel, 467 U.S. 837 (1984). If the statute is clear, then the analysis stops and the second step is irrelevant. Hawkins at 4. Applying the first step of the Chevron doctrine, the Eighth Circuit found that ECOA was clear that a guarantor is not an applicant because ECOA requires that, to be an applicant, a person must request credit directly from a creditor.  Id.   However, when making a guaranty, a person does not request credit.  Id.  Rather, a guaranty is collateral and security for an underlying loan; although a guarantor makes the guaranty so that credit will be extended to a borrower, providing a guarantee does not constitute a request for credit.  Id.

The Hawkins court noted that the Sixth Circuit recently reached a contrary conclusion in RL BB Acquisition, LLC v. Bridgemill Commons Dev. Grp., 754 F.3d 380 (6th Cir. 2014), where BB&T required the borrower’s wife to execute a guaranty on a commercial loan.  Id. at 3.  In RL BB, the borrower’s wife claimed that this requirement violated ECOA, and she argued that the personal guaranty was thus unenforceable.  Id. at 4.  The trial court in RL BB ruled against the borrower’s wife and found that the guaranty was enforceable.  Id.

On appeal, the Sixth Circuit noted that the Federal Reserve has interpreted ECOA as prohibiting a creditor from requiring an applicant’s spouse from guaranteeing a security instrument.  Id. at 5.  While the Sixth Circuit noted that ECOA does not explicitly define an applicant to include a guarantor, the Sixth Circuit highlighted that the Federal Reserve’s regulations define an applicant as a guarantor (meaning that a guarantor would be able to sue for an ECOA violation).  Id. 

Applying the first prong of the Chevron doctrine, the Sixth Circuit found that an ambiguity existed in ECOA’s definition of “applicant” because a guarantor approaches a creditor in the sense that she offers her own personal liability if the borrower defaults.  Id.  Further, the Sixth Circuit explained that a guaranty is made in consideration of the borrower’s receiving credit.  Id.  The Sixth Circuit explained that an “applicant” requests credit, but credit is the right granted by a creditor to a debtor to defer payment of debt.  Id.  Thus, the Sixth Circuit found that an applicant requests credit but the debtor enjoys the benefit of the credit, and as a result, an applicant and the debtor could be different persons.  Id.  Looking at the larger purpose of ECOA to prevent discrimination “in any respect” of a credit transaction, the RL BB court reasoned that the broad remedial goal of the statute meant that the term applicant could be ambiguous.  Id. 

Because the Sixth Circuit found that the term “applicant” could be ambiguous, the court continued from where the Eighth Circuit stopped and moved on to the second prong of the Chevron analysis.  Id. With respect to the second prong, the Sixth Circuit found that because an “applicant” could include a guarantor (and that a creditor could not require a spouse to be a guarantor), the Federal Reserve’s interpretation in Regulation B was reasonable and thus entitled to deference.  Id.  Because the borrower’s wife impermissibly had been required to execute a personal guaranty, the personal guaranty was not enforceable and the Sixth Circuit reversed the lower court’s finding and allowed the borrower to use the affirmative defense of recoupment to prevent the enforcement of the guaranty.  Id. at 12.

Lenders that require a personal guaranty from a spouse should monitor the Supreme Court’s resolution of this circuit split. If the Supreme Court agrees with the Sixth Circuit, creditors should ensure that spouses are not required to execute personal guaranties on loans, as such guaranties may well be unenforceable.

Supreme Court Rules that Written Notice Is Sufficient to Rescind Under TILA

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By: Daniel A. Cozzi and Diana M. Eng

The Supreme Court of the United States recently held that a borrower can exercise its right to rescind a loan pursuant to the federal Truth in Lending Act (TILA) by providing written notice to the lender within three (3) years of the loan closing date. In doing so, the Supreme Court reversed the Court of Appeals for the Eighth Circuit’s affirmation of the District Court of Minnesota’s decision, which had held that a borrower must file a lawsuit within three (3) years of the consummation of the loan to exercise his/her rescission rights.

In Jesinoski v. Countrywide Home Loans, Inc., the United States Supreme Court considered “whether a borrower exercises this right by providing written notice to his lender, or whether he must also file a lawsuit before the 3-year period elapses.” Jesinoski v. Countrywide Home Loans, Inc., No. 13-684, 574 U.S. _____ (2015).

Under TILA, borrowers have the right to rescind certain consumer mortgage transactions up to three days after the loan closes. Specifically, TILA grants borrowers the right to rescind a loan transaction, “until midnight of the third business day following the consummation of the transaction or the delivery of the [disclosures required by the Act], whichever is later, by notifying the creditor, in accordance with regulations of the [Federal Reserve] Board, of his intention to do so.” 15 U.S.C. 1635(a). However, if the creditor fails to provide requisite TILA disclosures, a borrower may rescind the transaction up to three years from the date the loan closes. 15 U.S.C. 1635(f).

On February 23, 2007, Larry and Cheryle Jesinoski (“Petitioners” or “Jesinoskis”) refinanced their home loan and obtained a mortgage from Countrywide Home Loans, Inc. (“Respondent” or “Lender”) in the amount of $611,000. Exactly three years later, the Jesinoskis mailed a purported rescission notice to Lender. The Lender responded on March 12, 2010 and refused to acknowledge the validity of the rescission. On February 24, 2011 – one year after the Jesinoskis sent their notice of rescission, the Jesinoskis filed suit in the District Court of Minnesota, seeking rescission of the mortgage and damages.

The District Court agreed with the Lender and held that the Petitioners were barred from exercising rescission pursuant to TILA, as they had failed to file a lawsuit within three years of the consummation of the loan. Jesinoski v. Countrywide Home Loans, Inc., 2012 WL 1365751 (D. Minn. Apr. 19, 2012). The District Court found that the Petitioners’ written notice within three years was insufficient to exercise their rescission rights. The Eighth Circuit affirmed. Jesinoski v. Countrywide Home Loans, Inc., 729 F. 3d 1092 (8th Cir. 2013) (per curiam). The Eighth Circuit relied on its prior decision in Keiran v. Home Capital, Inc., 720 F. 3d 721 (8th Cir. 2013), which held that a borrower must file a lawsuit for rescission within three years of the loan’s consummation to exercise rescission rights under TILA.

The Supreme Court disagreed with the District Court and the Eighth Circuit, holding that “Section 1635(a) explains in unequivocal terms how the right to rescind is to be exercised: It provides that a borrower ‘shall have the right to rescind . . . by notifying the creditor’ . . . of his intention to do so’ (emphasis added). The language leaves no doubt that rescission is effected when the borrower notifies the creditor of his intention to rescind.” The Supreme Court further declared that the “statute does not also require him to sue within three years.”

Lender raised several additional arguments that the Supreme Court ultimately dismissed. First, Lender argued that TILA rescission only requires written notice (and not legal action) when the parties dispute the adequacy of the TILA disclosures (e.g., whether the borrower is actually entitled to the three-year rescission period rather than the three-day rescission period). The Supreme Court found that Section 1635(a) makes no distinction between disputed and undisputed rescissions. Second, Lender argued that pursuant to the common law, rescission requires that a borrower tender the proceeds received under the transaction prior to rescission. The Supreme Court also dismissed this argument, finding that TILA rescission need not follow the rules and procedures of “its closest common-law analogue.” The Supreme Court further stated, “[t]o the extent §1635(b) alters the traditional process for unwinding such a unilaterally rescinded transaction, this is simply a case in which statutory law modifies common-law practice.”

In light of this decision, lenders should be aware that a written notice provided by the borrower, within three years of the loan consummation is sufficient to exercise his/her right to rescission under TILA. However, the Supreme Court provided no guidance on when a lawsuit must be commenced after written notice of rescission is sent.