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Rescission Rights_Sequential Procedures Following Rescission_Arguments_Case Law (1)

Rescission Rights_Sequential Procedures Following Rescission_Arguments_Case Law (1)

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09/24/2010

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In Williams v. Homestake Mortgage Company, 968 F.2d 1137 (11th Cir. 1992) the Eleventh Circuit recognized that TILA reverses the common-law rescission process- placing the burden of first action on the creditor, not the consumer, which puts the consumer in a stronger bargaining position than under common law. [Williams, 968 F.2d at 1140 (unlike common law rescission, the consumer need only notify the creditor of his or her intent to rescind. "The agreement is then automatically

rescinded, and the creditor must, ordinarily, tender first." [Emphasis added.]). See
also Family Financial Services v. Spencer, 677 A.2d 479 (Conn. App. 1996)]

Accordingly, “The courts, at any time during the rescission process, may impose equitable conditions to ensure that the consumer meets its obligationsa f t e r the creditor has performed his obligations as required under the act.” S. Rep. No. 368, 96th Cong., 2d Sess. at 29, reprinted in 1980 U.S.C.C.A.N. 236, 265.

Also see Willis v. Friedman, Clearinghouse No. 54, 564 (Md. Ct. Spec. App. May 2, 2002)(“[o]nce the right to rescind is exercised, the security interest in the debtor’s property becomes void ab initio”) The promissory note is also voided, since it is part of the same “transaction.” Arnold v. W.D.L. Investments, Inc., 703 F.2d 848, 849 (5th Cir. 1983); Elsner v. Albrecht, 185 Mich. App. 72, 460 N.W.2d 232 (1990)

It is clear from the statutory language that the Court’s modification authority extends to the “procedures” specified in 15 USC § 1635(b). The voiding of the security interest is not a “procedure.” Instead, it is expressed in 15 USC § 1635(b) as a consequence of an action that has already been taken

TheW i ll i a m s court further recognized the importance of making rescission a "painless remedy" for the consumer ("placing all burdens on the creditor") in acting "as an important enforcement tool, insuring creditor compliance with TILA's disclosure requirements." [Williams, 968 F.2d at 1140.]

You can argue that in the extended right context, achieving the status quo ante must take a secondary role to the enforcement role. By definition, the creditor has "unclean hands" (a "traditional equitable factor") since the dispute arises by virtue of a TILA violation; especially since the triggering violations are, by statutory definition,m a t e r i a l ones. Courts have also recognized that it is important that the integrity and accuracy of the notice of right to cancel, a violation which triggers the continuing right, be protected so as not to undermine the consumer's rights. Therefore the creditor should start out with one equitable strike against it.

TheW il li a m s decision does recognize that Regulation Z allows courts to modify only step 2 (creditor's duty to return of money or property and reflect termination of security interest) and step 3 (consumer's tender). It also cites with approval one commentator's statement that "[i]t is clear there is no such thing as conditional rescission." [Id. at 1142, citing Daniel Morgan, Rescission Under the Simplification Act: What’s New (And Not So New) for Creditors, 7 Okla. City U.L. Rev. 355 (1982). See also Family Financial Services v. Spencer, 677 A.2d 479 (Conn. App. 1996) (rejecting creditor's argument that effective rescission was conditioned upon consumer's tender; court held that creditor's failure to respond to rescission notice nullified debtor's duty to tender]

But, even while admitting that the consumer's reading of the law that the court's modification authority did not extend to the automatic voiding was "technically correct," theW i ll i a m s court nonetheless states that it is not a "realistic recognition of the full scope of the statutory scheme." [Williams, 968 F.2d at 1141]

The ultimate holding is that "a court may impose conditions that run with the voiding of a creditor's security interest upon terms that would be equitable and just to the parties in view of all surrounding circumstances." [Id. at 1142]

InW il li a m s, the court remanded the case to the lower court for determination as to the propriety of conditioning the voiding of the security interest. (The creditor had not advanced any arguments as to why equity should warrant any modification, as it had argued rather that conditional rescission was mandatory.) See also FDIC v.

Hughes Dev. Co., 684 F. Supp. 616 (D. Minn. 1988) (though phrased as a conditional

rescission, the specific relief ordered was simply an adjustment of step 2, permitting the creditor to file the release of the security interest after payment of tender; the debtors were also given a year to make tender)

These cases suggest that the trial court might consider requiring the debtor to execute a substitute security instrument. Arguably the way to reconcile the inconsistencies in theW i ll i a m s case is to say that both the original note and security agreement are void as soon as the consumer sends a valid rescission

notice,but that the court may order a new security interest solely on the consumer's

post-rescission tender obligation, when the creditor proves that equities warrant a modification of the normal rescission process. The substitute security instrument may take into account the "circumstances and changed status of the parties."

Williams v. Homestake Mortgage Co., 968 F.2d 1137 n.9 (11th Cir. 1992)]

Despite the rhetoric of conditional rescission, the court in: In re Lynch, 170 B.R. 26 (Bankr. D.N.H. 1994) essentially did this, granting a "continuing" security interest but only on the amount remaining after deducting interest, fees, and charges, and allowing recoupment of statutory damages.

Furthermore, a consumer who "is determined to have a right of rescission" can claim reasonable attorney fees; 15 U.S.C. § 1640(a)(3). This would presumably be the case even if court enforcement of the rescission remedy were made conditional (and perhaps even if the conditions were not met).

A creditor, on the other hand, would then argue that a court's conditioning of rescission preserves the creditor's ability to seek attorney fees under a mortgage provision allowing reimbursement for any fees incurred in defending the creditor's interest in the property. The borrower could counter argue as follows: (1) the voiding of the security interest can be conditioned underW i ll i a m s but all other aspects of the security agreement, including an attorney fees clause, are unconditionally and finally voided upon the mailing of a timely notice of rescission; (2) even if a court's conditioning of rescission tentatively preserves the creditor's attorney fees clause, the clause cannot be enforced unless the consumer ultimately fails to meet the conditions (which presumably can be later altered to accommodate any unexpected financial hardship that the consumer might face).

Yamamoto's more extreme holding is its approval of requiring tender as a

preliminary matter and denying rescission on summary judgment. No other court has required borrowers to tender as a pretrial matter, prior to adjudicating the validity of rescission. [See, e.g., Semar v. Platte Valley Federal Sav. & Loan Ass'n, 791 F.2d 699 (9th Cir. 1986); Brown v. Nat’l Permanent Sav. & Loan, 683 F.2d 444 (D.C. Cir. 1982); Rudisell v. Fifth Third Bank, 622 F.2d 243 (6th Cir. 1980); LaGrone v.

Johnson, 534 F.2d 1360 (9th Cir. 1976); Powers v. Sims, 542 F.2d 1216 (4th Cir. 1976)

(remanding case with instructions to condition rescission upon tender of net proceeds where debtors initially took position that they would only tender part of net proceeds); Ljepava v. M.L.S.C. Properties, Inc., 511 F.2d 935 (9th Cir. 1975);

Palmer v. Wilson, 502 F.2d 860 (9th Cir. 1974); Velazquez v. Homeamerican Credit,
Inc., 254 F. Supp. 2d 1043 (N.D. III. 2003); Quenzer v. Advanta Mortg. Corp., 288
B.R. 884 (D. Kan. 2003); New Maine Nat'l Bank v. Gendron, 780 F. Supp. 52, 57 (D.
Me. 1991); Mayfield v. Vanguard Sav. & Loan, 710 F. Supp. 143 (E.D. Pa. 1989);
FDIC v. Hughes Dev. Co., 684 F. Supp. 616 (D. Minn. 1988), aff'd, 938 F.2d 889 (8th
Cir. 1991)]

In Rudisell v. Fifth Third Bank, 622 F.2d 243, 254 (6th Cir. 1980), for example, the Sixth Circuit concluded "[s]ince Congress clearly intended to give a right to rescind to persons in appellants' situation, this Court feels it must grant them that right." Only then did the court condition rescission upon the consumer's tender of the reasonable value of the aluminum siding. Similarly, in FDIC v. Hughes Dev. CO., 684 F. Supp. 616(D. Minn. 1988),a f f 'd, 938 F.2d 889 (8th Cir. 1991), the court first determined that the rescission claim was valid, and directed the tender of net principal within one year, followed by release of the security interest.

The Ninth Circuit should have required the trial court to determine whether rescission was justified, if it was, the tender amount would be the principal minus finance charges and closing costs. Even assuming that the statute allows conditional rescission, the consumer is absolutely entitled to a reduction in the lien to reflect the reduced tender amount. According to the Ninth Circuit, the consumer did not dispute the tender amount; did not ask the trial court for extra time to pay the tender amount; did not propose any tender options such as refinancing or sale of the property, and indicatedn o ability to paya n y tender amount.

Finally, their citation of 15 U.S.C. § 1640(c) is misapplied and falls extensively short so as to undermine the actual interpretation. TILA’s “bona fide error” defense provides that a creditor or assignee will not be held liable where it “shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.” See Warren v. Darnell, 164 Ill. App. 3d 273, 115 Ill. Dec. 225, 517 N.E.2d 636 (1987); Semar v. Platte Valley Fed. Sav. & Loan Ass’n, 791 F.2d 699 (9th Cir.) TILA explicitly states that the creditor has the burden of proving the defense and has the burden of establishing all three necessary elements of the bona fide error defense.See e.g., Pedro v. Pacific Plan of California, 393 F. Supp. 315 (N.D. Cal. 1975); Underwood, In re, 66 B.R. 656 (Bankr. W.D. Va. 1986); Ellis v. Hensley, 1979 WL 52452 (Ohio Ct. App. Aug. 16, 1979)

Once a creditor has demonstrated that the error was unintentional and falls within
the statutory category of bona fide errors, they must then show that it maintained

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