Barrett v. Jp Morgan Chase Bank, N.A.

• Decision Date: 18 April 2006
• Docket Number: No. 05-5035.,No. 05-5146.,05-5035.,05-5146.
• Citation: 445 F.3d 874
• Parties: William R. BARRETT and Sandra Barrett, Plaintiffs-Appellants/Cross-Appellees, v. JP MORGAN CHASE BANK, N.A., as successor by merger to Bank One, N.A., Defendant-Appellee/Cross-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

445 F.3d 874

William R. BARRETT and Sandra Barrett, Plaintiffs-Appellants/Cross-Appellees, v. JP MORGAN CHASE BANK, N.A., as successor by merger to Bank One, N.A., Defendant-Appellee/Cross-Appellant.

No. 05-5035.

No. 05-5146.

United States Court of Appeals, Sixth Circuit.

Argued: January 27, 2006.

Decided and Filed: April 18, 2006.

ARGUED: Katherine K. Yunker, Yunker & Associates, Lexington, Kentucky, for Appellants. Dustin E. Meek, Tachau, Maddox, Hovious & Dickens, Louisville, Kentucky, for Appellee. ON BRIEF: Katherine K. Yunker, Katherine Shelby Sanford, Benjamin D. Allen, Yunker & Associates, Lexington, Kentucky, for Appellants. Dustin E. Meek, Phillip A. Martin, Tachau, Maddox, Hovious & Dickens, Louisville, Kentucky, James M. Meredith, JP Morgan Chase Legal Department, Dallas, Texas, for Appellee.

Before: GUY, SUTTON, and McKEAGUE, Circuit Judges.

OPINION

SUTTON, Circuit Judge.

The Truth in Lending Act, Pub.L. No. 90-321, 82 Stat. 146 (codified as amended at 15 U.S.C. § 1601, et seq.), "was enacted to promote the informed use of credit by consumers by requiring meaningful disclosure of credit terms," Begala v. PNC Bank, Ohio, N. A., 163 F.3d 948, 950 '(6th Cir.1998). "[W]hen a loan made in a consumer credit transaction is secured by the borrower's principal dwelling," the Act permits the borrower to "rescind the loan agreement," Beach v. Ocwen Fed. Bank, 523 U.S. 410, 411, 118 S.Ct. 1408, 140 L.Ed.2d 566 (1998), up to three business days after the transaction, see 15 U.S.C. § 1635(a). When the lender "fails to deliver certain forms or to disclose important terms accurately" to the borrower, the Act extends the borrower's right to rescind the transaction to three years. Beach, 523 U.S. at 411, 118 S.Ct. 1408. And when the Act permits borrowers to rescind "the transaction," 15 U.S.C. § 1635(a), it permits them not only to remove the security interest on their home but also to recover certain fees incurred in the transaction, id. § 1635(b).

Seeking to benefit from declining interest rates, William and Sandra Barrett refinanced a mortgage on their home several times in 2000 and 2001. In May 2000 and again in January 2001, the Barretts borrowed money from Bank One, securing the loan in each instance with a security interest in their home. In May 2001, they refinanced their obligations with Bank One with a loan from another lender, prompting Bank One to release its security interest in the Barretts' home.

Roughly two years later, the Barretts complained that Bank One had violated the Act's disclosure requirements in lending them money in May 2000 and January 2001 and sought to rescind both transactions. Bank One refused, claiming that both loans had been refinanced and that both security interests had been removed, leaving nothing for the bank to rescind. The district court agreed with the bank. We reverse because nothing in the legislation or its implementing regulations says that the act of refinancing extinguishes a borrower's unexpired right to rescind a loan transaction and because the right to rescind a transaction under the Act not only gives consumers the right to release the security interest in their home but also gives them the right to recover certain fees incurred in the transaction.

I.

In 1989, the Barretts bought their home in Lexington, Kentucky, relying in part on funds obtained through a loan from Cumberland Bank. They eventually refinanced this loan with National City Bank. And in March 2000, they upgraded their home's furnace and electrical system through a loan from a local governmental housing assistance program.

Shortly thereafter, the Barretts borrowed money from Bank One (now JP Morgan Chase) through two loan transactions that form the crux of this dispute. In May 2000, Bank One helped the Barretts refinance the National City Bank loan. The refinancing called for the Barretts to sign a $20,864.40 note, which paid off the balance on the earlier mortgage and covered a $2,404.40 credit life insurance premium. Bank One violated the Truth in Lending Act in processing this loan, the Barretts claim, most notably by allegedly telling them that they had to purchase credit life insurance to obtain the loan.

In January 2001, the Barretts consolidated and refinanced all of their outstanding debts — including the May 2000 loan from Bank One and the March 2000 local governmental loan — with a new loan from Bank One. As a result of this refinancing, Bank One released all prior security interests it held in the Barretts' home and replaced them with a new mortgage on the Barretts' residence. According to the Barretts, Bank One violated the Act's disclosure requirements in processing this loan because it did not timely give the Barretts copies of the closing documents and because Bank One's notice of their three-day right to rescind the loan transaction was inaccurate.

In May 2001, the Barretts refinanced the January 2001 Bank One loan with a new loan from ABN AMRO Mortgage Group, Inc. As a result of this last refinancing, the parties agree, Bank One released all of its security interests in the Barretts' home.

In September 2002, the Barretts asked Bank One to rescind the January 2001 loan transaction, and in January 2003 they asked the bank to rescind the May 2000 loan transaction. The bank refused to rescind either transaction, and the Barretts filed this lawsuit in federal court on January 22, 2003. In doing so, they sought relief (1) under the Truth in Lending Act; (2) under state law for fraud and misrepresentation; and (3) under the Kentucky Consumer Protection Act (KCPA), Ky. Rev.Stat. § 367.110, et seq.

As pertinent here, the district court granted Bank One summary judgment on the Barretts' rescission claims under the Truth in Lending Act. It held that their right to rescind was extinguished by the refinancing of all of the Bank One loans, leaving no security interest on their home for the bank to rescind. As the district court later explained in denying plaintiffs' Rule 59 motion to alter the judgment:

The [Barretts] ... were not entitled to rescission because both loans with [Bank One] were paid in full, through refinancing with another company, and [Bank One] no longer had a security interest in [the Barretts'] home.... Th[is] Court [has] adopted the reasoning of King v. State of California, 784 F.2d 910, 913 (9th Cir.1986), in holding that rescission was no longer possible after refinancing.... [The] prepayment penalties, finance charges and other charges ... are incidents of rescission not available until the right of rescission is triggered.

D. Ct. Op. at 3-4 (Dec. 7, 2004). Having dismissed all of the federal claims in the case, the district court ultimately declined to exercise supplemental jurisdiction over the Barretts' state-law claims.

II.

A.

To ensure that "consumer[s] will be able to compare more readily the various credit terms available to [them] and avoid the uninformed use of credit," 15 U.S.C. § 1601(a), the Truth in Lending 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," Beach, 523 U.S. at 412, 118 S.Ct. 1408. See also 12 C.F.R. § 226.1(b) ("The purpose of this regulation is to promote the informed use of consumer credit by requiring disclosures about its terms and cost.").

Several provisions of the Act further these disclosure objectives. "[W]hen a loan made in a consumer credit transaction is secured by the borrower's principal dwelling, the borrower may rescind the loan agreement," Beach, 523 U.S. at 411, 118 S.Ct. 1408 (citation omitted), "until mid-night of the third business day following the consummation of the transaction or the delivery of [the disclosures required under the Act], whichever is later," 15 U.S.C. § 1635(a). In the event a bank does not comply with the Act's disclosure requirements, the three-day right to rescind becomes a three-year right to rescind, which expires three years "after the date of consummation of the transaction or upon the sale of the property, whichever occurs first." Id. § 1635(f).

Like the district court, Bank One reasons that the Barretts extinguished their statutory right to rescind the May 2000 and January 2001 loan transactions when they refinanced these loans because "there was nothing left to rescind after Bank One had released all security interests it had once held in [the Barretts'] property." Bank One Br. at 15. The Barretts respond that rescinding a loan transaction requires unwinding the transaction in its entirety and thus requires returning the borrowers to the position they occupied prior to the loan agreement, which can be accomplished only by voiding the security interest and returning "prepayment penalties..., mortgage filing fees, loan transaction fees, appraisal fees, and closing costs." Barrett Br. at 10-11.

The Barretts, it seems to us, have the better argument. "[E]xcept as otherwise provided in this section," the Act says that the borrower "shall have the right to rescind the transaction." 15 U.S.C. § 1635(a). It then says that "[w]hen an obligor exercises his right to rescind ..., he is not liable for any finance or other charge, and any security interest given by the obligor ... becomes void upon such a rescission" and that "the creditor shall return to the obligor any money or property given as earnest money, downpayment, or otherwise." Id. § 1635(b). By its terms, then, the Act gives the borrower who rescinds an eligible loan transaction the right to void the security interest and the right to recover statutorily identified finance charges incurred in the transaction.

Nothing about the word "rescission," moreover, limits its applicability to the removal of a security interest alone. While neither the Act nor the implementing regulations define the term, common definitions of "rescission" indicate that it covers more than simply...