American Mortg. Network, Inc. v. Shelton

Decision Date14 May 2007
Docket NumberNo. 06-1576.,06-1576.
Citation486 F.3d 815
PartiesAMERICAN MORTGAGE NETWORK, INCORPORATED, Plaintiff-Appellee, v. Michael D. SHELTON; Pamela Shelton, Defendants-Appellants.
CourtU.S. Court of Appeals — Fourth Circuit

ARGUED: Brett E. Dressler, Sellers, Hinshaw, Ayers, Dortch & Lyons, P.A., Charlotte, North Carolina, for Appellants. Kenneth B. Oettinger, Jr., Womble, Carlyle, SanDridge & Rice, P.L.L.C., Charlotte, North Carolina, for Appellee. ON BRIEF: Robert C. Dortch, Sellers, Hinshaw, Ayers, Dortch & Lyons, P.A., Charlotte, North Carolina, for Appellants.

Before WILKINSON and MOTZ, Circuit Judges, and HENRY E. HUDSON, United States District Judge for the Eastern District of Virginia, sitting by designation.

Affirmed by published opinion. Judge HUDSON wrote the opinion, in which Judge WILKINSON and Judge MOTZ joined.

OPINION

HUDSON, District Judge:

This declaratory judgment dispute presents a number of issues concerning the procedural requirements associated with the right of rescission under the Truth in Lending Act (TILA), 15 U.S.C. § 1601, et seq. American Mortgage Network, Inc. ("Amnet") petitioned the district court for a declaratory finding that its processing of appellants Michael and Pamela Shelton's notice of cancellation of their home refinancing loan was consistent with TILA. In addition to seeking damages for TILA violations, the Sheltons counterclaimed for rescission and urged the district court to declare that Amnet's failure to unconditionally release their security interest warranted forfeiture of the loan principal under TILA. The district court disagreed and awarded summary judgment for Amnet. Because we find that Amnet complied with all applicable provisions of TILA, we affirm the judgment of the district court.

Amnet is a residential mortgage lender that conducts business throughout the United States. Amnet sells the loans it makes on the secondary market to banks and institutional investors.

In December 2004, Michael D. Shelton ("Shelton"), a self-employed real estate appraiser, borrowed approximately $317,000 from Amnet to refinance an existing note on his primary residence. His wife, Pamela Shelton, was not a co-borrower and did not execute any of the loan documents. However, she executed a Deed of Trust in Amnet's favor to secure the loan. There is no dispute that Shelton was provided with all required TILA disclosures and a HUD-1 statement at the time of closing.

The record further revealed that, in July 2004, the Sheltons signed a contract to purchase a custom-built home. In order to place him in a more creditworthy position to finance his new home, the Sheltons sought to consolidate a number of debts including the preexisting loan secured by their residence. Their residence, located in Gastonia, North Carolina, had been purchased in March 2000 for $253,000.

The building permit for the Sheltons' custom-built home was issued on December 13, 2004. The Sheltons went to settlement on their new home on April 29, 2005, and moved in on May 1, 2005. It is undisputed that the debt service on both the mortgage secured by the custom home and the preexisting Amnet loan at issue in this case was beyond the financial means of the Sheltons. It is also clear that among the closing documents signed by Shelton in connection with the Amnet loan was an Occupancy Agreement in which he represented that he would occupy the house secured by that refinancing as his primary residence throughout the twelve-month period immediately following the loan closing.

Approximately one month after executing the closing documents on the refinancing in controversy, the Sheltons received a package of documents from Amnet. The cover letter accompanying the package stated that "the Truth-In-Lending Disclosure Statement was inadvertently under-disclosed in the amount of prepaid finance charges." (J.A. 14.) The letter further revealed that Shelton had been charged $100 more than the amount disclosed on the TILA form. The package did not contain a refund check for $100 as indicated. The package also included a single copy of a Notice of Right to Cancel, a copy of the same TILA financial disclosures given to Shelton at closing, and a copy of the Errors & Omissions Compliance Agreement that Shelton signed at closing. The Errors & Omissions Compliance Agreement required Shelton to execute a reformed loan document to cure the previous clerical error.

In support of his counterclaim alleging noncompliance with TILA, Shelton points out a number of perceived discrepancies in the Notice of Right to Cancel. Shelton believes that he was entitled to receive four copies of the notice document. The package apparently contained only one copy while the cover letter referenced three copies. Although Shelton was himself in the real estate business, he purported to find the Notice of Right to Cancel confusing because a removable sticker covered the line designated for signature to effectuate cancellation. Lastly, Shelton did not believe that the $100 discrepancy was in fact a clerical error and questioned why the $100 check was not included in the package. Disturbed by these discrepancies, the Sheltons decided to cancel the transaction.

Amnet does not dispute that Shelton timely executed the cancellation documents indicating a desire to rescind the transaction. Three days later, on January 31, 2005, Shelton retained an attorney to represent him in connection with the loan rescission. In the interim, Amnet acknowledged receipt of Shelton's decision to rescind the loan transaction. Within 20 days of receipt of the notice of cancellation, Amnet confirmed that it was prepared to unwind the transaction in accordance with TILA, upon receipt of confirmation from Shelton that he was prepared to return the net loan proceeds, i.e., the original principal amount of the loan less all amounts charged to Shelton in connection with the transaction. The net loan proceeds totaled $313,468.39.

Amnet was subsequently advised by Shelton's attorney that his client was unable to return the net loan proceeds.1 The Sheltons offered instead to sell the house to Amnet for the difference between an appraised value of the house, $370,000, and the net loan proceeds, $313,468.39. Amnet declined the offer and countered that it did not believe that the Sheltons' offer to sell their house to Amnet constituted a proper tender under TILA. Shelton's counsel replied that, in his opinion, Amnet was required under TILA to release its security interest on the house immediately without a specific agreement on the Sheltons' part to return the net loan proceeds. Amnet refused to release its security interest without any provision for repayment of the loan proceeds.

Shortly thereafter, the Sheltons retained new counsel, who notified Amnet by letter that Amnet had forfeited the loan proceeds by refusing to unconditionally release its security interest within 20 days of cancellation of the loan as required by TILA.

Unable to consensually unwind the loan transaction, Amnet filed this lawsuit seeking modification of the TILA rescission procedures and an order declaring its full compliance with TILA. The Sheltons counterclaimed for declaratory relief and monetary damages.2 During the course of the ensuing discovery, several facts emerged that were pertinent to the trial court's analysis.

First, it appeared to the trial court that Shelton significantly overstated his income in the initial loan application submitted on his behalf by Waterford Financial Services Inc. ("Waterford Financial"). The application stated that Shelton's annual income in 2004 was $97,200. Subsequent examination of Shelton's 2004 tax return revealed an income of $34,236. According to Amnet, if Shelton's application had disclosed his actual 2004 net income, he would not have qualified for the loan.

Second, the Uniform Residential Appraisal Report received from Waterford Financial and purportedly prepared by an independent appraiser was in fact prepared by an appraiser operating under Shelton's supervision. Although the appraiser was technically an independent contractor, he had been trained by Shelton and worked exclusively for Shelton's company. The report estimated the fair market value of the house as of November 15, 2004, to be $370,000. Amnet contends that the appraisal was inflated and that a "truly independent" appraiser assessed its fair market value at closer to $300,000. Irrespective of the numbers, it appeared to be uncontroverted that the Sheltons' appraiser was not independent.

Third, despite signing an Occupancy Agreement at closing, representing that he intended to occupy the house as his primary residence throughout the twelve-month period immediately following the loan closing, Shelton was in fact in the process of building another home that would serve as his primary residence. The Sheltons could not afford to finance the custom home and continue payments on the Amnet loan.

The Sheltons argue that the above-described alleged misrepresentations, which were found by the district court to constitute inequitable conduct, were material facts "hotly in dispute." The Sheltons maintain that the resolution of these factual disputes was critical to the issues of rescission and forfeiture. In their view, the trial court erred by refusing to conduct an evidentiary hearing to address these disputed facts. We disagree.

Despite the Sheltons' protestation, many of the facts underlying the inequitable conduct were uncontroverted. For example, Shelton's 2004 tax return reflected income far below that represented to Amnet. There is also no dispute that the appraiser who conducted the appraisal on the property was affiliated with Shelton and operated under his supervision. Although we do not believe that Shelton's inequitable conduct necessarily controlled the outcome of this case, it was appropriately considered by the trial judge.3 As the United States Court of...

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