Opinion ID: 489933
Heading Depth: 2
Heading Rank: 3

Heading: failure to state a truth in lending act claim

Text: 13 We review de novo a dismissal for failure to state a claim. Rae v. Union Bank, 725 F.2d 478, 479 (9th Cir.1984). A motion to dismiss should not be granted unless it appears to a certainty that the plaintiffs can prove no set of facts in support of their claim that would entitle them to relief. Id. 14 The Fund argues that the Creviers' transfer of a trust deed on the Property is not covered by TILA because the Creviers did not own the Property at the time of the transfer. We agree. 15 The Truth in Lending Act provides that in any consumer credit transaction 1 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 consumer has the right to rescind the loan three days after the later of the date of the transaction or the date the lender delivers notice of the consumer's TILA rights. 15 U.S.C. Sec. 1635(a). The implementing regulation, issued by the Board of Governors of the Federal Reserve Board under 15 U.S.C. Sec. 1607(d), clarifies the scope of the consumer's right to rescind: 16 In a credit transaction in which a security interest is or will be retained or acquired in a consumer's principal dwelling, each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind the transaction, except for transactions described in paragraph (f) of this section. 17 12 C.F.F. Sec. 226.23(a)(1). Under 15 U.S.C. Sec. 1635, consumers have the right to rescind a security interest in property which is their principal dwelling only if they possess an ownership interest in the dwelling and thus have the right to convey the security interest. 2 18 The Creviers contend that their ownership of an interest in the property on which they conveyed a security interest is not necessary to bring the transaction within the confines of TILA. They argue that it is only necessary that they used the property as their principal dwelling. We disagree. Section 1635 has an implicit ownership requirement. It grants a consumer the right to rescind only if a security interest is or will be retained in the dwelling. Congress was certainly aware that a debtor cannot convey a security interest in property owned by a third person. See, e.g., Hodge v. Norton, 133 Cal. 99, 65 P. 123 (1901). Further, 12 C.F.R. Sec. 226.23(a)(1) makes the ownership requirement express. 19 At the commencement of the Chapter 7 proceeding, the Property passed by operation of law to the Chapter 7 estate. 11 U.S.C. Sec. 541(a)(1) (with some exceptions, the estate consists of all legal or equitable interests of the debtor in property as of the commencement of the case); see Sierra Switchboard Co. v. Westinghouse Elec. Corp., 789 F.2d 705, 707-09 (9th Cir.1986) (debtor's pre-petition emotional distress claim belongs to estate). The trustee has the power to avoid any transfer of an interest in estate property without the trustee's or court's consent, except in favor of a bona fide purchaser for value. 11 U.S.C. Sec. 549(a), (c). Accordingly, upon the Property passing to the control of the estate, the Creviers were divested of ownership rights in the Property and had no right to transfer a security interest in it. 3 20 The Creviers raise several arguments against this conclusion. First, they argue that they kept title to the Property and hence ownership. They rely on the fact that the Bankruptcy Code of 1978 (Code) eliminated the concept under prior law of vesting of title to the debtor's property in the trustee. See generally 4 Collier on Bankruptcy p 541.02 (L. King 15th ed.1987). This argument is without merit. While the Code abandoned the use of semantic niceties such as title or vesting in the trustee, it reinforced the concept of transfer of ownership to the estate--the trustee takes control of the use and disposition of all the property of the estate as defined under 11 U.S.C. Sec. 541. Butz v. Blue (In re Blue), 5 B.R. 723, 725 (Bankr.S.D. Ohio 1980); see H.R.Rep. 595, 95th Cong., 2d Sess. 175 reprinted in 1978 U.S. Code Cong. & Admin. News 5787, 6136 (Code abolishes reliance on complicated melange of references to State law and determines the estate property by a simple reference to what interests in property the debtor has at the commencement of the case). 21 Second, the Creviers argue that since all property not administered by the trustee is abandoned to the debtor upon the completion of the Chapter 7 case, 11 U.S.C. Sec. 554(c), they had a species of reversionary interest in the Property. Thus, they argue, they ahd an ownership interest [that] is or will be subject to the security interest as required under 12 C.F.R. Sec. 226.23(a)(1). Even assuming that the Creviers had some reversionary interest, they had no right to convey a trust deed secured not by the reversionary interest, but rather by the estate's interest in the Property. 22 Finally, the Creviers maintain that they had the right to encumber the Property because 11 U.S.C. Sec. 549 renders their transfer of the trust deed voidable, not void, and the trustee later ratified the transaction. The trustee's ratification of the deed, however, did nto retroactively confer upon the Creviers the right to transfer it. Instead, the trustee adopted the trust deed as his own, exacting a $50,000 settlement from OMNI to do so. 23 Because the Creviers attempted to convey, as security for the loan, estate property which they did not own and had no right to convey, the loan is not a transaction secured by their property interest in their residence as required under TILA. Thus, the Creviers fail to state a claim under 24 TILA for rescission of the loan and deed of trust. 4