Opinion ID: 465257
Heading Depth: 2
Heading Rank: 3

Heading: Claims under the Truth-in-Lending Act

Text: 14 King brings two sets of claims under TILA, one for rescission and one for damages for each of the three loans dated June 1979, March 1981, and November 1981.
15 If a lender fails to make the required material disclosures, TILA gives an obligor the right to rescind any credit transaction in which a security interest is created in the obligor's home. 15 U.S.C. Section 1635. King's claim for rescission of the June 1979 loan is barred by the three-year absolute limitation on rescission actions set out in 15 U.S.C. Sec. 1635(f). The three years begin at the consummation of the transaction or upon the sale of the property, whichever occurs first; the period applicable to King began in June 1979 and expired in June 1982, more than a year before she filed suit. 16 The loan of March 1981 cannot be rescinded, because there is nothing to rescind. King refinanced that loan in November 1981, and the deed of trust underlying the March 1981 loan has been superseded. 17 As for the November 1981 loan, King's claim for rescission fails, because Congress amended the TILA and Regulation Z, effective April 1, 1981, in such a way as to eliminate her cause of action for material nondisclosure. King contends that failure to disclose all third-party lenders was material nondisclosure. The amended Regulation Z did not include a general disclosure provision, but classified the disclosure requirement according to whether the credit transaction was open-end or closed-end. The transaction here would qualify as closed-end, because it does not fit any of the definitions of an open-end credit transactions. See C.F.R. Sec. 226.2(20) (1985). I closed-end transactions when there are multiple creditors, only the creditor making the disclosures need be identified on the disclosure statement. Id. Sec. 226.18(a). In addition, the new Regulation Z defines the term material disclosures as the required disclosures of annual percentage rate, the finance charge, the amount financed, the total of payments and the payment schedule. Id. Sec. 226.23 n. 48. Under the new regulations, therefore, the identity of each creditor in a multiple creditor transaction is not a material disclosure. Integrity's November 1981 loan thus did not violate the new Regulation Z, and King cannot rescind.
18 King contends that she can recover damages from Integrity for failing to disclose the identity of the third-party lenders. 19 Damages are not available for the November 1981 loan for the same reason that rescission is not available. Under the amended regulations, it is not a material nondisclosure for Integrity to fail to disclose the identity of each creditor in this transaction. 20 The June 1979 and March 1981 loans, however, are subject to the old regulations, under which nondisclosure of the identity of a lender does give rise to civil liability. Boncyk v. Cavanaugh Motors, 673 F.2d 256, 260 (9th Cir.1981); 15 U.S.C. Sec. 1640(a). Integrity does not dispute this but contends that King's claims are barred by the one-year statute of limitations set out in 15 U.S.C. Sec. 1640(e). 21 Section 1640(e) provides that [a]ny action under this section may be brought within one year from the date of the occurrance of the violation. We have not yet determined when a violation occurs so as to commence the one-year statutory period. See Katz v. Bank of California, 640 F.2d 1024, 1025 (9th Cir.), cert. denied, 454 U.S. 860, 102 S.Ct. 314, 70 L.Ed.2d 157 (1981). Three theories have been used by other circuits to determine when the statutory period commences: (1) when the credit contract is executed; (2) when the disclosures are actually made (a continuing violation theory); (3) when the contract is executed, subject to the doctrines of equitable tolling and fraudulent concealment (limitations period runs from the date on which the borrower discovers or should reasonably have discovered the violation). See Postow v. OBA Federal S & L Ass'n, 627 F.2d 1370, 1379 (D.C.Cir.1980) (adopting continuing violation theory in some situations); Wachtel v. West, 476 F.2d 1062, 1066-67 (6th Cir.), cert. denied, 414 U.S. 874, 94 S.Ct. 161, 38 L.Ed.2d 114 (1973) (rejecting continuing violation theory, statutory period commences upon execution of loan contract); Stevens v. Rock Springs National Bank, 497 F.2d 307, 310 (10th Cir.1974) (rejecting continuing violation theory); Jones v. TransOhio Savings Ass'n., 747 F.2d 1037, 1043 (6th Cir.1984) (applying equitable tolling and fraudulent concealment). 22 There are thus at least three ways to interpret Section 1640(e) so as to implement the purposes underlying TILA. Proponents of the continuing violation theory criticize a limitations period that runs from the consummation of the transaction because it would relieve lenders of liability even when their nondisclosures or fraud are continuing. Furthermore, lenders could structure the transaction so that borrowers could not discover the nondisclosure until one year from consummation had elapsed. See Jones v. TransOhio Sav. Ass'n., 569 F.Supp. 1188, 1190-91 (N.D.Ohio 1983), rev'd 747 F.2d 1037 (6th Cir.1984). Because borrowers may not discover the TILA violations until more than one year after the execution of the original contract, the continuing violation theory argues that it is inconsistent with the remedial and consumer-protection goals of the statute to bar suit when there is no reasonable way for the borrower to discover the wrong within the limitations period. See Postow, 627 F.2d at 1380. 23 On the other hand, those who favor a limitations period running from the execution of the contract contend that the language of Sec. 1640(e), the TILA regulations, and the legislative history evince a congressional intent to terminate liability one year after consummation of the loan contract. See Stevens, 497 F.2d at 309. Congress did not intend, so the theory goes, to expose lenders to unpredictable and indefinite liability, stretching the length of a long-term mortgage, for example. This theory is bolstered by several arguments, none of which alone is dispositive but which taken together make a persuasive case against the continuing violation theory. First, the one-year limitation applies only to damage actions; rescission is available for three years. See 15 U.S.C. Sec. 1635(f). Second, Congress placed a three year absolute limit on rescission actions, demonstrating its willingness to put a limit on some types of TILA actions. Third, the three year bar on rescission actions in Section 1635(f) begins at the consummation of the transaction or upon the sale of the property, whichever occurs first, so at least in the rescission context, Congress did not intend to prolong the limitations period under a continuing violation theory. Last, the very existence of TILA imputes to the borrower knowledge of his rights. The burden then falls on the borrower to bring suit within a year from consummation if he or she suspects any violations. 24 We reject the continuing violation theory as unrealistically open-ended. It exposes the lender to a prolonged and unforeseeable liability that Congress did not intend. See Harvey v. Housing Development Corp., 451 F.Supp. 1198, 1202-3 (W.D.Mo.1978). Moreover, the Postow case, which is the only Court of Appeals case to adopt the continuing violation theory, was careful to distinguish its facts from the facts of the cases which reject the continuing violation theory. 627 F.2d at 1380 n. 22. In Postow, there was a gap between commitment and settlement, with the lender disclosing the required information only at settlement. Id. In the instant case, as in Wachtel and Stevens, the disclosures were not made until after settlement (i.e., consummation). Postow is thus not direct authority for applying the continuing violation theory to these facts. 25 On the other hand, an inflexible rule that bars suit one year after consummation is equally inconsistent with legislative intent. Although the Act may impute to borrowers knowledge of their rights as consumers of credit, there may be situations in which a borrower consummates his loan and passes a year without knowing of his lender's fraud or nondisclosures. 26 We agree with the Sixth Circuit that equitable tolling might be appropriate in certain circumstances. To decide whether equitable tolling should apply to Section 1640(e), our basic inquiry is whether tolling the statute in certain situations will effectuate the congressional purpose of the Truth-in-Lending Act. See Burnett v. New York Central R.R. Co., 380 U.S. 424, 427, 85 S.Ct. 1050, 1054, 13 L.Ed.2d 941 (1965). The Supreme Court has repeatedly applied equitable tolling to statutes of limitations to prevent unjust results or to maintain the integrity of a statute. See Bailey v. Glover, 88 U.S. (21 Wall.) 342, 349-50, 22 L.Ed. 636 (1874) (Bankruptcy Act of 1867); Exploration Co. Ltd. v. United States, 247 U.S. 435, 449-50, 38 S.Ct. 571, 573-74, 62 L.Ed. 1200 (1918) (Act of March 3, 1891, 26 Stat. 1093, to vacate land patents); Holmberg v. Armbrecht, 327 U.S. 392, 396-97, 66 S.Ct. 582, 584-85, 90 L.Ed. 743 (1946) (Federal Farm Loan Act); Glus v. Brooklyn Eastern District Terminal, 359 U.S. 231, 234-35, 79 S.Ct. 760, 762-63, 3 L.Ed.2d 770 (1959) (Federal Employers' Liability Act). Cf. Zipes v. Trans World Airlines, 455 U.S. 385, 393, 102 S.Ct. 1127, 1132, 71 L.Ed.2d 234 (1982) (Title VII time requirement for filing charges with Equal Employment Opportunity Commission). 27 Section 1601 of TILA sets forth the purpose of the Act: 28 (a) The Congress finds that economic stabilization would be enhanced and the competition among the various financial institutions and other firms engaged in the extension of consumer credit would be strengthened by the informed use of credit. The informed use of credit results from an awareness of the cost thereof by consumers. It is the purpose of this subchapter to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit.... 29 15 U.S.C. Sec. 1601(a). Thus, Congress through TILA sought to protect consumers' choice through full disclosure and to guard against the divergent and at times fraudulent practices stemming from uninformed use of credit. See Mourning v. Family Publications Service, Inc., 411 U.S. 356, 363-64 nn. 18, 19, 93 S.Ct. 1652, 1657-58 nn. 18, 19, 36 L.Ed.2d 318 (1973) (citing H.R.Rep. No. 1040, 90th Cong., 1st Sess., 13 (1967); S.Rep. No. 392, 90th Cong., 1st Sess. 1-2 (1967) U.S.Cong. & Admin.News 1968, p. 1962). The courts have construed TILA as a remedial statute, interpreting it liberally for the consumer. Riggs v. Government Employees Financial Corp., 623 F.2d 68, 70-71 (9th Cir.1980). As the Sixth Circuit noted, [o]nly if Congress clearly manifests its intent to limit the federal court's jurisdiction will it be precluded from addressing allegations of fraudulent concealment which by their very nature, if true, serve to make compliance with the limitation period imposed by Congress an impossibility. Jones v. TransOhio Savings Ass'n., 747 F.2d at 1041. 30 For these reasons, we hold that the limitations period in Section 1640(e) runs from the date of consummation of the transaction but that the doctrine of equitable tolling may, in the appropriate circumstances, suspend the limitations period until the borrower discovers or had reasonable opportunity to discover the fraud or nondisclosures that form the basis of the TILA action. Therefore, as a general rule the limitations period starts at the consummation of the transaction. The district courts, however, can evaluate specific claims of fraudulent concealment and equitable tolling to determine if the general rule would be unjust or frustrate the purpose of the Act and adjust the limitations period accordingly. 31 Since fraudulent concealment and equitable tolling involve factual determinations, we remand King's damage claims for the June 1979 loan and the March 1981 loan. The district court should consider such evidence as it deems appropriate to decide whether the claims as to these two transactions are time barred.