Opinion ID: 2820142
Heading Depth: 4
Heading Rank: 1

Heading: TILA Rescission Process

Text: Typically, when a consumer exercises the TILA rescission right, the security interest “becomes void,” the consumer is not “liable for any amount, including any finance charges,” and “[w]ithin 20 calendar days after receipt of a notice of rescission,” the creditor is required to “return any money or property that has been given to anyone in connection with the transaction and [to] take any action necessary to reflect the termination of the security interest.” 12 C.F.R. § 226.23(d)(1), (2). The borrower may retain possession of “any money or property” that the creditor had delivered until the creditor complies with those statutory obligations. Id. § 226.23(d)(3). But once the creditor complies with its obligations, the consumer must “tender the money or property to the creditor.” Id. Where, as here, a creditor has delivered money to a consumer that is used to finance real property, the consumer must tender money to the creditor, not the real property. See Sanders, 689 F.3d at 1145 (holding that “the borrower cannot satisfy its rescission obligations by simply -8- surrendering the property purchased with the loan proceeds regardless of whether doing it will restore the creditor to the status quo ante”). This process works well when the consumer exercises the rescission right within the three-day period. Id. at 1142. But when the consumer seeks to exercise that right later, “TILA rescission often imposes an unfair risk on creditors: it requires the creditor to release its security interest without assurance that the consumer stands ready to honor his or her own rescission obligations.” Id. at 1142-43. “This problem is particularly acute when the consumer resorts to TILA rescission because of an impending foreclosure or bankruptcy. Thus, courts routinely exercise their equitable powers to ensure consumers can honor their rescission obligations before requiring creditors to release their security interests.” Id. at 1143; see also 15 U.S.C. § 1635(b) (providing that the ordinary TILA rescission procedure applies “except when otherwise ordered by a court”). Hence, “in an appropriate case,” a district court may reorder the sequence by “us[ing] its equitable powers to protect a creditor’s interests during the TILA rescission process.” Id. at 1144. Further, a majority of circuit courts have held “that unilateral notification of cancellation does not automatically void the loan contract” or the security interest. Am. Mortg. Network, Inc. v. Shelton, 486 F.3d 815, 821 (4th Cir. 2007). As the Fourth Circuit explained, more is required to void the security interest: “[T]he security interest becomes void when the obligor exercises a right to rescind that is available in the particular case, either because the creditor acknowledges that the right of rescission is available, or because the -9- appropriate decision maker has so determined. Until such decision is made, the borrowers have only advanced a claim seeking rescission.” Id. (ellipsis and brackets omitted) (quoting Large v. Conseco Fin. Servicing Corp., 292 F.3d 49, 54-55 (1st Cir. 2002)); see also Yamamoto, 329 F.3d 1172 (rejecting notion that consumer can unilaterally cause security interest to become void by simply tendering notice of rescission because “[o]therwise, a borrower could get out from under a secured loan by simply claiming TILA violations, whether or not the lender had actually committed any”); cf. Iroanyah v. Bank of Am., 753 F.3d 686, 69192 & n.4 (7th Cir. 2014) (stating that TILA gives a “borrower the ability to unilaterally initiate rescission” but “not . . . the right to rescind their own obligations without also making the lender whole through tender”); but see Williams v. Homestake Mortg. Co., 968 F.2d 1137, 1140-42 (11th Cir. 1992) (concluding that rescission is “automatic” but holding that the voiding of a security interest may be judicially conditioned on borrower’s tender of amount due). We agree with the majority approach, at least where, as here, the consumer provides notice of an intent to rescind outside of TILA’s three-day period. 2. District Court’s Equitable Reordering Decision In this case, the district court invoked its equitable powers and reordered the rescission process by requiring the Sanderses to show they could repay MACU. As the court noted, they never expressly alleged that ability. It rejected the Sanderses’ arguments that the equities for reordering were not in MACU’s favor. The court accepted Ms. Smoyer’s declaration testimony that MACU had not pursued a - 10 - deficiency judgment against the Sanderses for the approximate $100,000 difference between what MACU bid on the foreclosure sale and the amount the Sanderses owed on the loan.5 The court also observed that MACU had let the Sanderses live in the house for almost two years rent-free. It rejected the Sanderses’ argument that by foreclosing and initiating the eviction proceedings, MACU waived its right to the Sanderses’ tender obligation and was estopped from claiming that tender was impossible. The court observed that MACU was within its rights to initiate eviction proceedings because the Sanderses never sought a stay pending appeal of the district court’s initial dismissal of their TILA claims. It found that it was not improper for MACU to initiate the eviction proceeding because MACU’s counsel did not believe that the parties’ agreement to allow the Sanderses to live in the house during the pendency of the case extended to the first appeal. The court further rejected the argument that the present value of the property (circa mid-2014, after some rebound in the real estate market) might be used to complete the rescission process, explaining that the current owner could have added to the house or the house could have fallen 5 The court denied the motion to strike Ms. Smoyer’s declaration because she was a records custodian for MACU and had knowledge of MACU’s actions surrounding the foreclosure and sale of the property. In their appellate briefs, the Sanderses refer to the denial of their motion to strike Ms. Smoyer’s declaration but have not raised it as a separate issue or provided any grounds for concluding that the district court abused its discretion in denying their motion, see Nielsen v. Moroni Feed Co., 162 F.3d 604, 606 n.3 (10th Cir. 1998) (stating that we review the denial of a motion to strike a summary-judgment witness’s affidavit for an abuse of discretion). - 11 - into disrepair. Thus, the court found that strict adherence to the TILA rescission process would be impossible or impracticable. 3. Abuse of Discretion Review We review a district court’s equitable reordering of the TILA rescission process for abuse of discretion. See Yamamoto v. Bank of N.Y., 329 F.3d 1167, 1173 (9th Cir. 2003). A district court abuses its discretion when it commits an error of law or relies on clearly erroneous factual findings. Wyandotte Nation v. Sebelius, 443 F.3d 1247, 1252 (10th Cir. 2006). It can also abuse its discretion by issuing “an arbitrary, capricious, whimsical, or manifestly unreasonable judgment.” Prairie Band Potawatomi Nation v. Wagnon, 476 F.3d 818, 822 (10th Cir. 2007) (internal quotation marks omitted). We perform our review in this case by addressing the Sanderses’ arguments. They must show the district court abused its discretion, and they attempt to do so by arguing the district court overlooked a number of equitable factors that favor them. First, the Sanderses point to the dozen erroneous credit lines SLCCU placed on their credit reports and allege the reports were not repaired for years. But they advanced no viable claim on that matter (we affirmed the dismissal of their Fair Credit Reporting claim in the first appeal, see Sanders, 689 F.3d at 1147), and there is no evidence from which any equitable determination could be made about whether SLCCU acted with improper purpose. Second, they claim MACU’s foreclosure on the house after they sought to rescind was a TILA violation because the security interest was voided. But this - 12 - argument misunderstands the effect of a notice of rescission. As explained above, merely giving notice to the creditor that the borrower wishes to rescind does not automatically and immediately void the creditor’s security interest. Thus, MACU fairly pursued its foreclosure rights after the Sanderses filed their action and sought rescission. This also forecloses the Sanderses’ further argument that the district court abused its discretion in considering that MACU did not charge them rent while they were living in the house after the foreclosure sale because they no longer had title. Third, the Sanderses contend that MACU wrongly refused to honor their tender of the house as full or partial satisfaction of their tender obligation. But MACU had no obligation to accept that tender. See Sanders, 689 F.3d at 1145 (rejecting notion that mere tender of property bought with proceeds of a loan subject to TILA satisfies obligation to restore creditor to status quo ante). Fourth, they complain that MACU wrongly evicted them while their judicial case was ongoing and despite a representation by its counsel that it would allow them to prosecute their claim. But as the district court pointed out, they did not seek to stay the order dismissing their TILA claim, and MACU’s counsel did not believe any such agreement extended to the first appeal. The Sanderses’ contention that they could not afford to post an appeal bond does not render MACU’s eviction action inequitable. Fifth, the Sanderses dispute the district court’s reliance on MACU’s decision not to pursue a deficiency judgment against them, arguing that a Utah statute of limitations would now bar any such claim and that the claim should have been (but - 13 - never was) raised as an offset, affirmative defense, or counterclaim in this action. These arguments ignore that MACU’s election not to seek a deficiency judgment when it could have done so weighs in its favor on the scales of equity—the Sanderses benefitted by MACU’s decision to forego seeking the approximately $100,000 deficiency. Sixth, they contend that when MACU sold the house, it waived its right to seek tender from them (or was equitably estopped from doing so), and they summarily state it “was always false” that they could not tender. Aplt. Opening Br. at 35 (emphasis omitted). We disagree. In the absence of a stay pending the prior appeal, nothing prevented MACU from pursuing eviction proceedings and selling the house. The Sanderses’ arguments lack legal foundation: that MACU should have permitted them to stay in the house until market conditions were favorable enough for them to sell it at a price that would cover their debt, or that the current market value of the house could somehow be used to constructively satisfy their obligation to restore MACU to the status quo ante. Further, the Sanderses have never provided any evidence that they could have satisfied even the difference between whatever MACU recovered through selling the house and the amount they owed. In sum, we see no abuse of discretion in the district court’s weighing of the equities, its decision to reorder TILA’s rescission process, and its finding that the Sanderses could not meet their tender obligation. The Sanderses defaulted on their loan and failed to protect their possessory interests through a stay-pending-appeal of the district court’s initial dismissal of their TILA claim. MACU did not pursue a - 14 - deficiency judgment against them, did not seek rent from them post-foreclosure, and waited until their TILA claims were dismissed before initiating eviction proceedings. In essence, the Sanderses ask us to reweigh the equities, but that is not our role under the abuse-of-discretion standard of review. The judgment of the district court is affirmed. ENTERED FOR THE COURT Scott M. Matheson, Jr.