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Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 

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1

 The Honorable Timothy J. Mahoney, United States Bankruptcy Judge for

the District of Nebraska.

United States Bankruptcy Appellate Panel

FOR THE EIGHTH CIRCUIT

___________________

No. 06-6071NE

___________________

In re: Craig Edward Groat, *

*

Debtor. *

*

Craig Edward Groat, * Appeal from the United States

* Bankruptcy Court for the 

Debtor - Appellant, * District of Nebraska

*

v. *

*

Donald R. Carlson, *

*

Creditor - Appellee. *

___________________

Submitted: May 11, 2007

Filed: May 24, 2007

___________________

KRESSEL, Chief Judge, FEDERMAN and McDONALD, Bankruptcy Judges

FEDERMAN, Bankruptcy Judge

Debtor Craig Edward Groat appeals from the Bankruptcy Court’s1

 Judgment

finding against him, and in favor of creditor Donald R. Carlson, in Groat’s adversary

Appellate Case: 06-6071 Page: 1 Date Filed: 05/24/2007 Entry ID: 3312784
2

 Hereafter, we will refer to First Security and Carlson collectively as the

“Lender.” 

2

action based on Carlson’s alleged violations of the Truth in Lending Act (“TILA”).

For the reasons that follow, we affirm.

FACTUAL BACKGROUND

On September 5, 2002, Groat borrowed $22,500 from First Security Mortgage

Company. At that time, he signed a promissory note in the original principal amount

of $22,500, and granted First Security a deed of trust on his residence. First Security

later assigned the promissory note and deed of trust to Donald R. Carlson. On April

15, 2004, Carlson made a second loan to Groat, in the amount of $24,000, evidenced

by a promissory note and secured by another deed of trust on the residence. At some

point thereafter, Groat defaulted on the payments under both loans.2

 

On July 8, 2005, after receiving the Lender’s notice of default, Groat filed a pro

se Chapter 13 bankruptcy petition. At the time he filed his petition, Groat owed the

Lender approximately $27,000 on the first loan and approximately $25,000 on the

second. Subsequently, by letter dated July 21, 2005, Groat notified the Lender and

its attorney that, due to alleged defects in the loan documents, he was rescinding both

loans under unspecified federal laws, regulations and case law. 

The Lender moved for relief from the stay in the Bankruptcy Court, and Groat

filed an adversary action against the Lender, seeking to rescind both loan transactions,

cancel the debts under both loans, and set aside the Lender’s deeds of trust under

TILA. He also sought damages from the Lender. On February 21, 2006, the

Bankruptcy Court denied the Lender’s motion for relief from stay, pending resolution

of the adversary action, because the issues appeared to be related. Both

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3 Meanwhile, after the Bankruptcy Court entered judgment in the Lender’s

favor in the adversary action, the Lender filed a second motion for relief from stay,

which the Bankruptcy Court granted because Groat failed to respond to it. The

Lender has since conducted a foreclosure sale of the property. 

4

 A&L Laboratories, Inc. v. Bou-Matic LLC, 429 F.3d 775, 778 (8th Cir.

2005). 

5

 Id.; Freyermuth v. Credit Bureau Servs., Inc., 248 F.3d 767, 770 (8th Cir.

2001); Fed. R. Civ. P. 56(c).

6

 Pub. L. No. 90-321, 82 Stat. 146 (codified as amended at 15 U.S.C. §

1601, et seq.).

7 Barrett v. JP Morgan Chase Bank, N.A., 445 F.3d 874, 875 (6th Cir. 2006)

(citation omitted). See also 12 C.F.R. § 226.1(b) (“The purpose of this regulation

is to promote the informed use of consumer credit by requiring disclosures about

its terms and cost.”).

3

sides moved for summary judgment in the adversary action, and the Bankruptcy Court

entered Judgment and a Memorandum finding in the Lender’s favor. Groat appeals.3

STANDARD OF REVIEW

Our review of the bankruptcy court’s entry of summary judgment is de novo.

4

Summary judgment is appropriate when the evidence, viewed in the light most

favorable to the non-moving party, demonstrates that there is no genuine issue of

material fact in dispute so the moving party is entitled to judgment as a matter of law.5

DISCUSSION

Congress enacted the Truth in Lending Act6

 to promote the informed use of

credit by consumers by requiring meaningful disclosure of credit terms.7

 Congress

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8

 Hess v. Citibank, (South Dakota), N.A., 459 F.3d 837, 842 (8th Cir. 2006)

(citing Household Credit Servs., Inc. v. Pfennig, 541 U.S. 232, 238, 124 S.Ct.

1741, 158 L.Ed.2d 450 (2004)); 15 U.S.C. § 1604(a).

9

 12 C.F.R. § 226.1 et seq.; Santos-Rodriguez v. Doral Mtg. Corp., __ F.3d

___, 2007 WL 1153052 at *2 (1st Cir. April 19, 2007).

10 Generally, a residential mortgage transaction or the refinance of a

residential mortgage transaction is not rescindable. However, Regulation Z

provides an exception which allows rescission of a refinance of a residential

mortgage by a creditor other than the original creditor. See Regulation Z §

226.23(f); Commentary to § 226.23(f). No one disputes that TILA applies to

Groat’s transactions with the Lender.

11 Barrett v. JP Morgan Chase Bank, 445 F.3d at 877 (citations omitted); 15

U.S.C. § 1635(a) (“Except as otherwise provided in this section, 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 until midnight of the third business day following the consummation of

the transaction or the delivery of the information and rescission forms required

under this section together with a statement containing the material disclosures

required under this subchapter, whichever is later, by notifying the creditor, in

4

has designated the Board of Governors of the Federal Reserve as the primary source

for interpretation and application of the TILA, empowering it to formulate policy and

to create rules for administering the statute.8

 The Federal Reserve Board has issued

an implementing regulation, commonly known as Regulation Z, which governs,

among other things, the disclosures that lenders must make to consumers in various

credit transactions.9

With certain exceptions not relevant here,10 when a loan made in a consumer

credit transaction is secured by the borrower’s principal residence, TILA permits the

borrower to rescind the loan agreement up to three business days after the

transaction.11 When a lender fails to deliver certain forms or to accurately disclose

Appellate Case: 06-6071 Page: 4 Date Filed: 05/24/2007 Entry ID: 3312784
accordance with regulations of the Board, of his intention to do so. . . .”).

12 Id. (citation omitted); 1635(f); 12 C.F.R. § 226.23(a)(3) (“If the required

notice or material disclosures are not delivered, the right to rescind shall expire 3

years after consummation, upon transfer of all of the consumer’s interest in the

property, or upon sale of the property, whichever occurs first.”).

13 12 C.F.R. § 226.23(b)(1).

5

important terms to the borrower, TILA extends the borrower’s right to rescind to three

years.12 

Groat asserts that the Bankruptcy Court improperly ignored TILA’s three-year

rescission period which, he says, applies to him. As discussed above, Groat is correct

that TILA provides for a three-year period in which to rescind, but only if the lender

fails to comply with one of the disclosure requirements. Therefore, since Groat’s July

21, 2005 letter was tendered to the Lender well after the expiration of the three-day

periods as to both loans, he must demonstrate that the Lender’s disclosures or notices

were defective, thereby triggering the three-year period.

Groat does not complain about the Lender’s disclosures of the material loan

terms as required under TILA. Rather, his dispute arises from the notices of his right

to cancel, or rescind, the transaction. On that issue, TILA requires that the notice to

the consumer “clearly and conspicuously” disclose the following:

(i) The retention or acquisition of a security interest in the consumer’s

principal dwelling.

(ii) The consumer’s right to rescind the transaction.

(iii) How to exercise the right to rescind, with a form for that purpose,

designating the address of the creditor’s place of business.

(iv) The effects of rescission . . . .

(v) The date the rescission period expires.13 

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14 12 C.F.R. § 226.23(b)(2); see also 15 U.S.C. § 1604(b) (a creditor shall be

deemed to be in compliance with the disclosure provisions of TILA with respect to

non-numerical disclosures if the creditor uses any appropriate model form as

published by the Federal Reserve Board, or a modified model form if the

modification does not affect the substance, clarity, or meaningful sequence of the

disclosure). 

15 In a motion filed with the BAP on March 16, 2007 (entitled “Motion to

Amend Pleading to Add Pleading”), Groat raises a new alleged defect in the

Notices, i.e., he now asserts that he recently discovered that he was supposed to

received two copies of each Notice, and he thinks he may have only been given

one copy of each Notice. TILA requires lenders to tender two copies of the notice,

and failure to do so can invoke the three-year rescission period. 12 C.F.R. §

226.23(b)(1). However, Groat did not raise this issue before the Bankruptcy Court,

and he cannot raise it for the first time on appeal. First Bank Investors’ Trust v.

Tarkio College, 129 F.3d 471, 477 (8th Cir. 1997) (holding that, particularly as to

factual issues, an appellate court will generally not consider issues not presented to

6

In order to satisfy the foregoing disclosure requirements, “the creditor shall provide

the appropriate model form in Appendix H of this part or a substantially similar

notice.”14

Groat acknowledges that, at the time he entered into each loan transaction, he

signed, dated, and received a copy of a Notice of Right to Cancel under TILA (the

“Notices”). As the Bankruptcy Court noted, the substance of both Notices conform

to the model notice found in Appendix H-8. However, Groat asserts that the Notices

were defective in two respects. First, he asserts that the Lender was required to sign

the Notices in its capacity as the lender, but did not do so. Second, the 2002 Notice

contained a typographical error in the year in which the rescission had to be received

by the Lender. Specifically, the Notice was given on September 5, 2002 (the date the

loan was consummated), and three business days following September 5, 2002, was

September 10, 2002. The Notice identified the deadline to be September 10, 2001

instead.15

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the bankruptcy court in the first instance). Since the issue of whether Groat

received two copies of the TILA Notices is a factual issue not raised before the

Bankruptcy Court, we decline to consider it in this appeal.

16 In fact, the forms complying with Rescission Model Form H-8 do not

contain a line for the lender’s signature. 

17 Santos-Rodriguez, 2007 WL 1153052 at *4 (citations omitted).

18 Id. (citations omitted).

7

Groat points us to no authority in support of his theory that lenders are required

to sign these notices, and we found none. Indeed, requiring a lender to sign these

notices would do nothing to further their purpose of ensuring that the borrower is

informed of his rights.16 As a result, Groat is simply incorrect in his assertion that the

three-year rescission period was triggered by the Lender’s failure to sign the Notices.

The Notice given with the 2002 loan, however, does contain a typographical

error as to the date for the expiration of the three-day rescission period. Such an error

might have been fatal prior to 1995, but after Congress amended TILA, “[m]ost courts

have concluded that the TILA’s clear and conspicuous standard is less demanding

than a requirement of perfect notice.”17 “[T]he 1995 TILA amendments . . . were

intended by Congress to provide higher tolerance levels for what it viewed as honest

mistakes in carrying out disclosure obligations.”18 As the Bankruptcy Court in this

case pointed out, TILA now provides a safe harbor for creditors who commit

unintentional notice violations:

A creditor or assignee may not be held liable in any action brought under

this section or section 1635 of this title for a violation of this subchapter

if the creditor or assignee 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. Examples of a bona fide error include, but are not

limited to, clerical, calculation, computer malfunction and programing,

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19 15 U.S.C. § 1640(c).

20 Palmer v. Champion Mtg., 465 F.3d 24, 27 (1st Cir. 2006).

8

and printing errors, except that an error of legal judgment with respect

to a person's obligations under this subchapter is not a bona fide error.19

In order to receive this protection, a creditor must show that the error was a “bona fide

error,” and that the creditor maintains procedures “reasonably adapted to avoid such

errors.” 

Here, the Lender’s attorney involved in the 2002 loan transaction, Larry Ohs,

submitted an affidavit in which he described his procedures regarding the

consummation of loan transactions in his office. Ohs said that his assistant, who is

trained in the preparation of such documents, prepares their loan documents. Ohs then

proofreads the documents before the borrower signs them. In Groat’s case, Ohs said

he or his assistant reviewed each loan document with Groat before he signed them,

specifically pointing to the date of the transaction so that Groat could verify that was

the correct date of the transaction. Groat then signed the document. None of them

noticed the incorrect year in the deadline date for rescission. 

The Bankruptcy Court determined that the typographical error in this particular

case was not the type of notice defect that constitutes a TILA violation, and we find

no error in that determination. There was no evidence that the Lender or its attorney

intended to deceive Groat. And, viewing the Lender’s disclosure from the vantage

point of the hypothetical average consumer,20 we cannot say that the Bankruptcy Court

erred in finding that the defect was not misleading because anyone reading the

document would know that the cancellation deadline could not have passed a year

before the document was even executed. It was, therefore, a bona fide error. Further,

Ohs’ procedures, with two people reviewing the documents prior to having the

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21 141 Cong. Rec. No. 153 S14567 (September 28, 1995). Truth in Lending

Act Amendments of 1995, Pub. L. No. 104-29, 109 Stat. 271, 272-73.

22 See, e.g., Semar v. Platte Valley Federal Savings & Loan Assoc., 791 F.2d

699, 704 (9th Cir. 1986) (holding that an error in omitting the expiration date from

the notice was a technical violation of TILA’s notice requirements); Reynolds v.

D&N Bank, 792 F.Supp. 1035, 1037-38 (E.D. Mich. 1992) (holding notice

deficient in several respects, one of which was the omission of the expiration date).

9

borrower sign them, and then explaining the form to the borrower, were reasonably

adapted to avoid the error. 

We recognize that TILA is a remedial statute and should be construed liberally

in favor of the consumer. However, the 1995 amendments to TILA embodied

Congress’ desire to eliminate situations in which “small violations of the disclosure

requirements of the Truth-in-Lending Act triggered the right of rescission provided

by the Act.”21 As the Bankruptcy Court noted, cases which have denied creditors the

protection of § 1640(c) have generally done so for errors more substantive than an

obviously incorrect year, such as omitting the rescission expiration date altogether.22

 Because the error in the date here was obvious and not misleading, we agree with the

Bankruptcy Court that it was an error of the type contemplated in § 1640(c)’s safe

harbor. 

We find, therefore, that the Lender’s Notices sufficiently complied with TILA

and Regulation Z. Nevertheless, Groat argues that, once he tendered his notice of

rescission to the Lender, the rescission was, in effect, automatic. And, based on the

automatic nature of the statute, upon his tender of the notice of rescission, it was then

incumbent on the Lender to file a declaratory judgment action in order to challenge

the rescission. 

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10

Groat relies on § 1635 of TILA, § 226.23 of Regulation Z, and case law in

support of this argument. Section 1635(b) and Regulation Z require that, when a

borrower exercises his right to rescind, the security interest becomes void and, within

twenty days after receipt of a notice of rescission, the creditor shall return to the

borrower any money or property given as earnest money or deposit and take whatever

action is necessary to show the security interest as void. Upon performance of the

creditor’s obligations, the borrower is required to tender the loan proceeds to the

creditor. Groat asserts that, since the Lender neither voided the security interest and

returned the money he had paid, nor filed a declaratory judgment action to challenge

the rescission within twenty days after the July 21, 2005 letter, the Lender is

effectively prohibited from presenting a defense here. In fact, he argues here that the

Bankruptcy Court’s findings concerning the alleged defects in the TILA Notices are

irrelevant.

We disagree. First, although the statute provides for immediate voiding of the

security interest and return of the money within twenty days of the notice of

rescission, we believe this assumes that the notice of rescission was proper in the first

place. As discussed above, since Groat was not entitled to the extended three-year

rescission period, his notice of rescission was out of time and was, therefore,

ineffective. 

Second, assuming that the Lender was required to respond to the ineffective

notice of rescission, the Lender says he attempted to promptly respond to Groat’s July

21 letter, but was unable to reach Groat for several months. Based on a review of the

Bankruptcy Court’s docket, and Groat’s own frequently expressed frustration with the

fact that he is unable to receive mail, the Lender’s statement that he was unable to

immediately respond to Groat is entirely credible. 

Third, if the Lender violated TILA for failing to promptly or properly respond

to Groat’s July 21 letter, the consequences for failing to respond to a notice of

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23 Palmer v. Champion Mtg., 465 F.3d at 27 (emphasis added).

24 See, e.g., In re Quenzer, 266 B.R. 760 (Bankr. D. Kan 2001), rev’d

Quenzer v. Advanta Mtg. Co. USA, 288 B.R. 884 (D. Kan. 2003); In re Williams,

291 B.R. 636 (Bankr. E.D. Pa. 2003).

25 Federal Deposit Ins. Corp. v. Hughes Dev. Co., 938 F.2d 889, 890 (8th

Cir. 1991), cert. denied, Hughes Dev. Co. v. Great Plains Capital Corp., 502 U.S.

1099, 112 S.Ct. 1183, 117 L.Ed.2d 426 (1992).

11

rescission, found at § 1640 of TILA, include damages, but not the elimination of any

defense whatsoever. And, contrary to Groat’s assertion that the Lender was required

to file a declaratory judgment action to avoid automatic rescission, according to at

least one court, “[i]f a creditor does not respond to a rescission request within twenty

days, the debtor may file suit in federal court to enforce the rescission right.”23

Finally, although Groat cites cases which have held that rescission is automatic

upon tender of the notice,24 the Eighth Circuit has held to the contrary, expressly

concluding that a court may condition rescission upon the borrower’s prior return of

the principal.25 Therefore, as the Bankruptcy Court indicated, it could have

conditioned the rescission on Groat’s tender of the principal, and Groat did not offer

any evidence that he was able to do so.

CONCLUSION

For the reasons stated above, the Bankruptcy Court did not err in finding that

the Lender’s Notices of Groat’s right to rescind the loan transactions complied with

TILA and Regulation Z. Therefore, Groat’s time in which to rescind those loans

expired three days after each respective loan transaction. His attempts to rescind the

loans after the expiration of those rescission periods were, therefore, ineffective. The

Bankruptcy Court’s Judgment is AFFIRMED. Groat’s Motion to Amend Pleadings

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12

to Add Pleading is DENIED because that issue was not raised in the Bankruptcy

Court. All other pending Motions in this case are DENIED.

______________________ 

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