Rudisell v. Fifth Third Bank

• Decision Date: 20 May 1980
• Docket Number: No. 77-3206,77-3206
• Citation: 622 F.2d 243
• Parties: James A. RUDISELL et al., Plaintiffs-Appellants, v. The FIFTH THIRD BANK, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 243

622 F.2d 243

James A. RUDISELL et al., Plaintiffs-Appellants, v. The FIFTH THIRD BANK, Defendant-Appellee.

No. 77-3206.

United States Court of Appeals, Sixth Circuit.

Argued Oct. 15, 1979.

Decided May 20, 1980.

Thomas F. Phalen, Gary M. Eby, Cincinnati, Ohio, for plaintiffs-appellants.

William R. Hardy, Stephen L. Black, Cincinnati, Ohio, for defendant-appellee.

Before CELEBREZZE, MERRITT and KENNEDY, Circuit Judges.

CORNELIA G. KENNEDY, Circuit Judge.

Appellants, James and Jeanette Rudisell, sued appellee, Fifth Third Bank, for rescission of a home improvement contract for aluminum siding and accompanying promissory note and for statutory damages for violations of the Truth in Lending Act, 15 U.S.C. § 1601, et seq. (hereinafter, TILA). Appellee counterclaimed for judgment on the note. On cross-motions for summary judgment, the Magistrate made recommendations largely in favor of appellee, finding that appellee did violate TILA in one instance but that the damage claim was barred by the statute of limitations and appellants had no right to rescind. Both sides filed exceptions. The District Court found for appellee on all claims. The Rudisells appealed.

The Rudisells contracted for installation of aluminum siding by Aluminum Wholesale Distributors, Inc. (hereinafter, A.W.D.) on or about December 5, 1972. ¹ A.W.D. suggested financing through its bank, but appellants preferred to use one of the banks they used locally. A.W.D. then went to Fifth Third Bank and on December 7, 1972, Fifth Third agreed to extend credit to the Rudisells. A.W.D. returned to the Rudisells with the documents a promissory note, which included the TILA disclosures, and a separate Notice of Right to Rescind.

Work commenced sometime in January 1973. Mr. Rudisell signed a completion certificate February 9, 1973, although appellants claim the work was not complete until February 12, 1973. A.W.D. assigned the promissory note to Fifth Third on February 9, 1973 and received payment from Fifth Third that same day. Later, appellants became dissatisfied with their siding. After unsuccessfully trying to contact A.W.D., they filed suit February 11, 1974. In August, 1974, they notified Fifth Third that they rescinded their contract. Upon motion by appellants, the District Court, by Order dated January 6, 1975, granted leave to appellants to amend the complaint to include a prayer for rescission.

Appellants claim multiple violations of TILA, viz.: failure to disclose the multiple creditors; failure to identify which creditor was responsible for each disclosure; failure to itemize each amount included in the finance charge; failure to describe the terms and amount of premiums of the credit life insurance; failure to disclose the cost of the credit report, the "unpaid balance of the cash price", the "unpaid balance", the method for calculating the amount due on default, and a definition of the "Rule of 78s"; failure to describe the security interest; and failure to make all disclosures on one side of one page. Because of these failures appellants claim they are entitled to statutory damages and rescission of the contract.

Appellee claims no TILA violations occurred. Even if TILA was violated, they argue, appellants have no claim for relief because their right to damages is barred by the statutory limitations period and their right to rescission does not exist as no security interest was created in fact.

I. RIGHT TO DAMAGES.

TILA provides, 15 U.S.C. § 1640, for statutory penalties equal to twice the finance charge if the creditor fails to disclose any information required under TILA. However, that right is subject to a one year limitations period which starts running "from the date of the occurrence of the violation." 15 U.S.C. § 1640(e).

In Wachtel v. West, 476 F.2d 1062 (6th Cir.), cert. denied, 414 U.S. 874, 94 S.Ct. 161, 38 L.Ed.2d 114 (1973), this Court was presented with a similar problem. There, plaintiffs borrowed money from the defendants, giving a second mortgage on their home as security. Plaintiffs later sued for damages and rescission, claiming TILA violations. Defendants moved for dismissal, asserting the one year limitations as a bar to plaintiffs' claim. The District Court granted the motion and this Court affirmed. The Act does not define "occurrence" of the violation, but TILA requires that disclosures be made "before the credit is extended". See 15 U.S.C. § 1639(b). Regulation Z, 12 C.F.R. § 226.1, et seq., promulgated by the Federal Reserve Board under the authority granted in 15 U.S.C. § 1604, gives further guidance. Section 226.8(a) provides that the disclosures "shall be made before the transaction is consummated," which occurs "at the time a contractual relationship is created between a creditor and a customer or a lessor and lessee irrespective of the time of performance of either party," 12 C.F.R. § 226.2(kk). Since the "purpose of disclosure is clearly to give the borrower an opportunity to do some comparative shopping for credit terms", 476 F.2d at 1064, this Court held:

a credit transaction which requires disclosures under the Act (TILA) is completed when the lender and borrower contract for the extension of credit. The disclosures must be made sometime before this event occurs. If the disclosures are not made, this violation of the Act occurs, at the latest, when the parties perform their contract.

476 F.2d at 1065. In Wachtel, the performance of the contract and the violation of the disclosure requirement took place the date the plaintiffs borrowed money and signed the second mortgage. See also Harvey v. Housing Development Corp. & Information Center, 451 F.Supp. 1198 (W.D.Mo.1978).

In the present case, one could argue appellee performed on either of two dates: December 7, 1972, the date appellee agreed to extend credit, or February 9, 1973, the date appellee paid A.W.D. for the assignment of the Note. Although Fifth Third did not actually pay any money until February 9, 1973, it was December 7, 1972 that it obligated itself to pay A.W.D. when the work was completed. The credit transaction was completed when the Rudisells signed the promissory note. Thus, the disclosures should have been given at least by the time the Rudisells signed the promissory note. Although the actual date of signing this promissory note is not clear, ² it was signed sometime in December 1972. Thus, the statute ran in December 1973 and appellants' claim for damages, filed February 12, 1974, is barred by the statute of limitations. The District Court must be affirmed on this ground. ³

II. RIGHT TO RESCISSION.

TILA provides a right to rescind a transaction involving a security interest on the residence of the debtor until midnight of the third business day following the consummation of the transaction or the delivery of the disclosures required regarding the right to rescind and all other material disclosures, whichever is later. 15 U.S.C. § 1635. ⁴ If the disclosures are never made, the debtor has a continuing right to rescind.

See Sosa v. Fite, 498 F.2d 114, 117-18 (5th Cir. 1974); Eby v. Reb Realty, Inc., 495 F.2d 646, 648 (9th Cir. 1974); Pedro v. Pacific Plan of California, 393 F.Supp. 315, 323 (N.D.Cal.1975). The right to rescind is not dependent upon the one year statute of limitations period for a claim for damages. See Littlefield v. Walt Flanagan & Co., 498 F.2d 1133, 1136 (10th Cir. 1974). ⁵ Thus, appellants may have a right to rescind even though their claim for damages is barred by the statute of limitations in 15 U.S.C. § 1640(e).

Appellants claim that as the contractor had a right to a mechanic's lien under Ohio law, which is a security interest arising by operation of law and which was never disclosed, they had a continuing right to rescind even though the three day period for rescission has passed. Appellee argues that appellants do not have the right to rescind because no security interest was created in fact. Even if appellants had a right to rescind, appellee argues that appellants forfeited that right by not acting within the three day period as appellee disclosed all it had to disclose. Finally, appellee argues rescission should be denied because rescission is an equitable remedy and the appellants should not be allowed to keep their aluminum siding without paying for it as the appellee has already paid the contractor.

A. Mechanic's Lien as a Security Interest.

The Magistrate recommended appellants be denied the right of rescission as TILA and Regulation Z gave such a right only when the situation involved a security interest in fact, not where a right to a security interest existed with only a mere possibility that the right would be asserted. Since no security interest was created by any of the financing agreements, appellants had no right to a security interest.

The District Court agreed with the Magistrate that the documents did not create a security interest. The court rejected appellants' argument that the contractor could have perfected a mechanic's lien and that this constituted a security interest. It held that the applicable regulation, 12 C.F.R. § 226.2(gg), which defined a security interest as including "other consensual or confessed liens whether or not recorded, mechanic's, materialmen's, artisan's, and other similar liens," implied a requirement that a mechanic's lien be recorded by the proximity of "whether or not recorded" to "consensual or confessed liens." The court also noted that under Ohio law a mechanic's lien was not effective prior to recording. Since the mechanic's lien was neither recorded nor created by the financing agreement, the District Court held it was not a security interest and thus appellants had no right to rescind. ⁶ An unrecorded mechanic's lien is not outside the definition of a security interest solely because it was not created by the financing documents. The regulation includes in the definition of security interest "any lien on property arising by...