Beach v. Ocwen Federal Bank

• Decision Date: 21 April 1998
• Docket Number: 975310
• Parties: David R. BEACH, et ux., Petitioners, v. OCWEN FEDERAL BANK
• Court: U.S. Supreme Court

523 U.S. 410

118 S.Ct. 1408

140 L.Ed.2d 566

David R. BEACH, et ux., Petitioners,

v OCWEN FEDERAL BANK.

No. 97-5310.

Supreme Court of the United States

Argued March 2, 1998.

Decided April 21, 1998.

Syllabus^*

Petitioners David and Linda Beach refinanced their Florida house in 1986 with a loan from Great Western Bank. In 1991, they stopped making mortgage payments, and in 1992 Great Western began this foreclosure proceeding. Respondent bank was thereafter substituted as the plaintiff. The Beaches acknowledged their default but raised affirmative defenses, alleging, inter alia, that the bank's failure to make disclosures required by the Truth in Lending Act gave them the right under 15 U.S.C. §1635 to rescind the mortgage agreement. The Florida trial court rejected that defense, holding, among other things, that any right to rescind had expired in 1989 under §1635(f), which provides that the right of rescission "shall expire'' three years after the loan closes. The State's intermediate appellate court affirmed, as did the Florida Supreme Court. That court remarked that §1635(f)'s plain language evidences an unconditional congressional intent to limit the right of rescission to three years and distinguished its prior cases permitting a recoupment defense by ostensibly barred claims as involving statutes of limitation, not statutes extinguishing rights defensively asserted.

Held: A borrower may not assert the §1635 right to rescind as an affirmative defense in a collection action brought by the lender after §1635(f)'s 3-year period has run. Absent "the clearest congressional language'' to the contrary, Reiter v. Cooper, 507 U.S. 258, 264, 113 S.Ct. 1213, 1218, 122 L.Ed.2d 604, a defendant may raise a claim in recoupment, a ""defense arising out of some feature of the transaction upon which the plaintiff's action is grounded,''' Rothensies v. Electric Storage Battery Co., 329 U.S. 296, 299, 67 S.Ct. 271, 272, 91 L.Ed. 296 (quoting Bull v. United States, 295 U.S. 247, 262, 55 S.Ct. 695, 700, 79 L.Ed. 1421), even if the applicable statute of limitation would otherwise bar the claim as an independent cause of action. The 3-year period of §1635(f), however, is not a statute of limitation that governs only the institution of suit; instead, it operates, with the lapse of time, to extinguish the right of rescission. The section's uncompromising statement that the borrower's right "shall expire'' with the running of time manifests a congressional intent to extinguish completely the right of rescission at the end of the 3-year period. The absence of a provision authorizing rescission as a defense stands in stark contrast to §1640(e), which expressly provides that the Act's 1-year limitation on actions for recovery of damages "does not bar . . . assert[ion of] a violation . . . in an action . . . brought more than one year from the date of the . . . violation as a matter of defense by recoupment.'' This quite different treatment of recoupment of damages and rescission in the nature of recoupment must be understood to reflect a deliberate intent on the part of Congress, see Bates v. United States, 522 U.S. ----, ----, 118 S.Ct. 285, ----, 139 L.Ed.2d 215 and makes perfectly good sense. Since a statutory rescission right could cloud a bank's title on foreclosure, Congress may well have chosen to circumscribe that risk, while permitting recoupment of damages regardless of the date a collection action may be brought. Pp. ____-____.

692 So.2d 146, affirmed.

SOUTER, J., delivered the opinion for a unanimous Court.

Bruce S. Rogow, Ft. Lauderdale, FL, for petitioners.

Carter G. Phillips, Washington, DC, for respondent.

Justice SOUTER delivered the opinion of the Court.

Under the Truth in Lending Act, 82 Stat. 146, 15 U.S.C. §1601 et seq., when a loan made in a consumer credit transaction is secured by the borrower's principal dwelling, the borrower may rescind the loan agreement if the lender fails to deliver certain forms or to disclose important terms accurately. See 15 U.S.C. §1635. Under §1635(f) of the statute, this right of rescission "shall expire'' in the usual case three years after the loan closes or upon the sale of the secured property, whichever date is earlier. The question here is whether a borrower may assert this right to rescind as an affirmative defense in a collection action brought by the lender more than three years after the consummation of the transaction. We answer no and hold that §1635(f) completely extinguishes the right of rescission at the end of the 3-year period.

I

The declared purpose of the Act is "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, and to protect the consumer against inaccurate and unfair credit billing and credit card practices.'' 15 U.S.C. §1601(a); see Mourning v. Family Publications Service, Inc., 411 U.S. 356, 363-368, 93 S.Ct. 1652, 1657-1660, 36 L.Ed.2d 318 (1973). Accordingly, the Act requires creditors to provide borrowers with clear and accurate disclosures of terms dealing with things like finance charges, annual percentage rates of interest, and the borrower's rights. See §§1631, 1632, 1635, 1638. Failure to satisfy the Act subjects a lender to criminal penalties for noncompliance, see §1611, as well as to statutory and actual damages traceable to a lender's failure to make the requisite disclosures, see §1640. Section 1640(e) provides that an action for such damages "may be brought'' within one year after a violation of the Act, but that a borrower may assert the right to damages "as a matter of defense by recoupment or set-off'' in a collection action brought by the lender even after the one year is up.

Going beyond these rights to damages, the Act also authorizes a borrower whose loan is secured with his "principal dwelling,'' and who has been denied the requisite disclosures, to rescind the loan transaction entirely "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.'' §1635(a). A borrower who exercises this right to rescind "is not liable for any finance or other charge, and any security interest given by [him], including any such interest arising by operation of law, becomes void'' upon rescission. §1635(b). Within 20 days after receiving notice of rescission, the lender must "return to the [borrower] any money or property given as earnest money, downpayment, or otherwise, and shall take any action necessary or appropriate to reflect the termination of any security interest created under the transaction.'' Ibid. The Act provides, however, that the borrower's right of rescission "shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first,'' even if the required disclosures have never been made. §1635(f). ¹ The Act gives a borrower no express permission to assert the right of rescission as an affirmative defense after the expiration of the 3-year period.

The borrowers in this case, petitioners David and Linda Beach, built a house in Jupiter, Florida, in 1986 with a secured $85,000 construction loan from Fidelity Federal Savings Bank of Florida. In the same year, the Beaches refinanced the house with a loan from Great Western Bank. ² In 1991, the Beaches stopped making mortgage payments, and in 1992 the bank began this foreclosure proceeding. The Beaches acknowledged their default but raised affirmative defenses, alleging that the bank's failure to make disclosures required by the Act³ gave them rights under §1635 and §1640 to rescind the mortgage agreement and to reduce the bank's claim by the amount of their actual and statutory damages.

The Circuit Court of the 15th Judicial Circuit of Florida agreed that under §1640 the Beaches were entitled to "off-set the amount owed to Great Western'' by $396.00 in actual damages and $1,000.00 in statutory damages because the bank had overstated the monthly mortgage payment by $0.58 and the finance charge by $201.84. But the court rejected the Beaches' effort to rescind the mortgage under §1635, holding that the loan at issue was immune to rescission as part of a "residential mortgage transaction'' (defined in §1602(w)) and, in the alternative, that any right to rescind had expired after three years, in 1989. The court found it telling that Congress had included no savings clause to revive an expired right of rescission as a defense in the nature of recoupment or set-off.

The State's intermediate appellate court affirmed, Beach v. Great Western Bank, 670 So.2d 986 (Fla. 4th Dist.Ct.App.1996), and so did the Supreme Court of Florida, which addressed only the issue of rescission as a defense, Beach v. Great Western Bank, 692 So.2d 146 (1997). ⁴ That court remarked on the plain language of §1635(f) as evidence of unconditional congressional intent to limit the right of rescission to three years and explained that its prior cases permitting a defense of recoupment by an ostensibly barred claim were distinguishable because, among other things, they involved statutes of limitation, not statutes extinguishing rights defensively asserted.

Because the reading of §1635(f) given by the Supreme Court of Florida conflicts with the decisions of several other courts, ⁵ we granted certiorari, 522 U.S. ----, 118 S.Ct. 294, 139 L.Ed.2d 226 (1997), to determine whether under federal law the statutory right of rescission provided by §1635 may be revived as an affirmative defense after its expiration under §1635(f). We affirm.

II

The Beaches concede that any right they may have had to institute an independent proceeding for rescission under §1635 lapsed in 1989, three years after they closed...