Beach v. Great Western Bank

• Citation: 692 So.2d 146
• Decision Date: 13 February 1997
• Docket Number: No. 87835,87835
• Parties: , 22 Fla. L. Weekly S71 David R. BEACH, et ux., Petitioners, v. GREAT WESTERN BANK, etc., Respondent.
• Court: United States State Supreme Court of Florida

Page 146

692 So.2d 146

65 USLW 2599, 22 Fla. L. Weekly S71

David R. BEACH, et ux., Petitioners, v. GREAT WESTERN BANK, etc., Respondent.

No. 87835.

Supreme Court of Florida.

Feb. 13, 1997.

Rehearing Denied April 25, 1997.

James A. Bonfiglio, Boynton Beach, for Petitioners.

Steven Ellison of Broad and Cassel, West Palm Beach, for Respondent.

PER CURIAM.

We have for review Beach v. Great Western Bank, 670 So.2d 986 (Fla. 4th DCA 1996). We accepted jurisdiction to answer the following question certified to be of great public importance: ¹

UNDER FLORIDA LAW, MAY AN ACTION FOR STATUTORY RIGHT OF RESCISSION PURSUANT TO THE TRUTH IN LENDING ACT, 15 U.S.C.A. SECTION 1635, BE REVIVED AS A DEFENSE IN RECOUPMENT BEYOND THE THREE-YEAR LIMIT ON THE RIGHT OF RESCISSION SET FORTH IN SECTION 1635(f)?

670 So.2d at 994.

For the reasons expressed below, we answer the certified question in the negative and approve the Fourth District's decision. We find the majority's opinion persuasive and well-reasoned. The dissent is equally cogent; however, we believe the cases relied upon therein simply use the inappropriate analysis for statutory rescission by equating the expiration period with a statute of limitations. Nevertheless, we commend both the majority and the dissent for their thoughtful and comprehensive examination of the issue before us.

MATERIAL FACTS

Petitioners David and Linda Beach (the Beaches) obtained a bank mortgage to finance their home construction in 1985. The loan was a hybrid construction/home loan mortgage as it reflected a thirty-year payout. Beach v. Great Western Bank, 670 So.2d 986, 989 (Fla. 4th DCA 1996). Upon completion of construction, the Beaches moved in, made two payments, and then secured another loan from Respondent Great Western Bank (Great Western) in August 1986. The Beaches used those loan proceeds to pay off and satisfy the initial loan. Id. at 989. Great Western provided the Beaches with Truth in Lending Act (TILA), 15 U.S.C. §§ 1601-1667 (1994), disclosure documents and, at the closing, notified them of their absolute right to rescind the agreement within three business days following the transaction. ²

Five years later on December 1, 1991, the Beaches defaulted on their mortgage after failing to make their installment payments. 670 So.2d at 989. Subsequently, Great Western instituted a foreclosure action in June 1992. In response, the Beaches raised several affirmative defenses, including their right to rescind and TILA damage claims. The basis of the Beaches' rescission claim was several overstatements made by Great Western on the disclosure documents. The trial court found that Great Western overstated the Beaches' monthly mortgage payment by On appeal to the Fourth District, the Beaches contended that they could assert their rescission right as a defense in recoupment for TILA violations even beyond the three-year period fixed by the statute. Id. at 990. The district court disagreed, concluding that recoupment is primarily an equitable remedy designed to prevent unjust enrichment. Id. Recognizing that the statute already provides borrowers a right to assert damages as a defense in recoupment, the court deemed the further remedy of rescission as a penalty provision to creditors and further noted that the rescission right was purely a creation of the statute itself and the statute specifically fixed a time limitation on the right. Id. at 990-93. Consequently, the district court affirmed the trial court's final judgment, holding that under Florida law the statutory right of rescission in TILA expires three years after the transaction's closing date and may not be revived as a defense in recoupment in a creditor's foreclosure action. Id. at 993. Finally, recognizing the potential significance of its decision to thousands of other Florida borrowers, the district court certified the above question for our review. Id. at 994.

                fifty-eight cents ($.58), resulting in a $201.84 overcharge.  The court also found that Great Western overstated the finance charge by $7.24 ($176,519.21 rather than $176,511.97).  The trial court ruled for Great Western on the rescission issue, finding that the loan was an exempt transaction not subject to rescission, 3 and that the Beaches' failure to assert their rescission right within three years of closing precluded their claim.  670 So.2d at 989.   However, the trial court awarded the Beaches $396 in actual damages and $1000 in statutory damages as provided by TILA 4 to remedy the overstatements, set them off against the balance due Great Western, and found Great Western's lien superior to all other encumbrances.  670 So.2d at 989
                

LAW AND ANALYSIS

As the district court acknowledges, there is a "split of authority in the country on this issue," Beach, 670 So.2d at 990 n. 2, of whether the right of rescission may be asserted as a defense in recoupment for TILA violations beyond the statute's three-year expiration period. We begin our analysis with an overview of TILA and the relevant caselaw.

In 1968, Congress enacted TILA with the broad purpose of ensuring "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." See 15 U.S.C. § 1601(a)(1994). As part of the Act, Congress provided the consumer with the absolute right to rescind the secured transaction within three business days following closing for any reason, and up to three years from the same closing date if the creditor failed to make all material disclosures. Section 1635(f) of 15 U.S.C. (1994), expressly provides: "An obligor's right of rescission shall expire three years after the date of consummation of the transaction or upon sale of the property, whichever occurs first...." When a borrower exercises his or her right to rescind in either of the above circumstances, he or she is not liable for any finance or other charges, and any security interest given by the borrower becomes void upon rescission. ⁵ The end result is that the lender can only collect on the loan principal and loses any security for the loan's collection. Beach, 670 So.2d at 989.

TILA also provides for actual and statutory damages in section 1640(a). Furthermore, while section 1640(e) includes a one-year statute of limitations, it also specifically "does not bar a person from asserting a violation ... in an action to collect the debt ... as a matter of defense by recoupment or set-off in such action, except as otherwise provided by State law." This savings clause is only found in this section relating to damages; no corresponding clause accompanies the expiration of the statutory right of rescission in section 1635.

Congress also recognized that the complexity and variety of credit transactions precluded comprehensive regulation by a single statute. Accordingly, it delegated extensive authority to the Federal Reserve Board to implement regulations governing commerce in credit. 15 U.S.C. § 1604(a). In this case, the result was Part 226 of Title 12 of the Code of Federal Regulations, better known as Regulation Z. Selected Commercial Statutes 1543 (West Publishing Co., 1995 ed.).

The United States Supreme Court has stated that "deference is especially appropriate in the process of interpreting the Truth in Lending Act and Regulation Z." Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 565, 100 S.Ct. 790, 797, 63 L.Ed.2d 22 (1980). Administrative expertise in this highly technical area should be recognized "[u]nless demonstrably irrational." Milhollin, 444 U.S. at 565, 100 S.Ct. at 797. While an agency's interpretation of its own regulations has traditionally been accorded considerable respect, see Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 65 S.Ct. 1215, 89 L.Ed. 1700 (1945), deference is all the more appropriate in this case as "Congress has specifically designated the Federal Reserve Board and staff as the primary source for interpretation and application of truth-in-lending law." Milhollin, 444 U.S. at 566, 100 S.Ct. at 797. Thus, any analysis of a TILA issue should include Regulation Z and the Official Commentary thereto, see Anderson Bros. Ford v. Valencia, 452 U.S. 205, 219, 101 S.Ct. 2266, 2273-74, 68 L.Ed.2d 783 (1981), in addition to the statute's plain language.

Regulation Z treats the right of rescission as follows:

The consumer may exercise the right to rescind until midnight of the third business day following consummation, delivery of the notice required by paragraph (b) of this section, or delivery of all material disclosures, whichever occurs last. If the required notice or material disclosures are not delivered, the right to rescind shall expire 3 years after consummation, upon transfer of all of the consumer's interest in the property, or upon sale of the property, whichever occurs first. In the case of certain administrative proceedings, the rescission period shall be extended in accordance with section 125(f) of the Act.

12 C.F.R. § 226.23(a)(3) (1996) (footnote omitted).

Similarly, the Official Staff Commentary concisely states that "the right to rescind automatically lapses on the occurrence of the earliest of the following three events: [t]he expiration of 3 years after consummation of the transaction...." 12 C.F.R. § 226.23, para. 23(a)(3)3. (Supp. I 1996). Likewise, as previously noted, the statute itself provides:

An obligor's right of rescission shall expire three years after the date of consummation of the transaction or upon sale of the property, whichever occurs first

....

15 U.S.C. § 1635(f) (1994). In conjunction, these three authorities reflect Congress's intent regarding rights of rescission under TILA. Their clarity and plain meaning support the majority opinion below. ⁶ However, that does not end our inquiry.

In Florida, "[i]t is well established that the defense of recoupment may be asserted defensively where the underlying claim is barred by the...