Belini v. Washington Mut. Bank, Fa

• Decision Date: 15 June 2005
• Docket Number: No. 04-2533.,No. 04-2532.,04-2532.,04-2533.
• Parties: Richard BELINI; Theresa Luscier-Belini, Plaintiffs, Appellants, v. WASHINGTON MUTUAL BANK, FA, Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

412 F.3d 17

Richard BELINI; Theresa Luscier-Belini, Plaintiffs, Appellants, v. WASHINGTON MUTUAL BANK, FA, Defendant, Appellee.

No. 04-2532.

No. 04-2533.

United States Court of Appeals, First Circuit.

Heard May 3, 2005.

Decided June 15, 2005.

COPYRIGHT MATERIAL OMITTED

Christopher M. Lefebvre, with whom Family and Consumer Law Center was on brief, for appellant.

Kevin C. Maynard, with whom Bulkley, Richardson and Gelinas, LLP was on brief, for appellee.

Before BOUDIN, Chief Judge, LYNCH and LIPEZ, Circuit Judges.

LYNCH, Circuit Judge.

This Truth in Lending Act (TILA) case raises difficult and rarely seen issues that arise when transactions regulated by a given state — here, Massachusetts — have been exempted by the Federal Reserve from most of the Act's requirements. See 15 U.S.C. § 1633; see also Bizier v. Globe Fin. Servs., Inc., 654 F.2d 1, 2 (1st Cir.1981). Only five states have received such exemptions. See 12 C.F.R. Pt. 226, Supp. I. In the end, however, this case turns on a narrower issue, one of first impression for this court under TILA. The question is whether TILA permits a damages claim to be stated by the debtor under 15 U.S.C. § 1640 based on the creditor's alleged failure to respond properly to the debtor's notice of rescission. We hold that it does. In doing so, we join the approach of four other circuits, and we know of no circuit which has held to the contrary.

The plaintiffs, Richard and Theresa Belini, alleged that the defendant, Washington Mutual Bank, sold them a high-cost mortgage without making disclosures required by TILA and equivalent Massachusetts law. They sued in federal court, asserting claims for damages for failure to make these disclosures, for rescission, and for damages for Washington Mutual's alleged failure to respond properly to their notice of rescission, under both TILA and similar Massachusetts law. The district court held that all of the Belinis' damages claims were time barred, without discussing separately their claim for Washington Mutual's alleged failure to respond to their notice of rescission. This left the rescission claim itself and the question of whether there was either federal question jurisdiction or diversity jurisdiction. The court found that the amount-in-controversy requirement was not met, so there was no diversity jurisdiction, and that there was no federal question jurisdiction over a claim for rescission (as opposed to a claim for damages) because of the Massachusetts exemption from certain TILA requirements.

Although it is clear from the Federal Reserve regulations that a debtor's ability to bring a federal damages action under 15 U.S.C. § 1640 is preserved despite the Massachusetts exemption, see 12 C.F.R. § 226.29(b), it is much murkier, given the current drafting of these regulations, whether a debtor's right to sue for rescission under federal law is preserved. Similarly, the question of how to measure the amount in controversy in an action for rescission is difficult.

We reverse. We find it unnecessary to resolve the difficult question of whether the federal court had either federal question jurisdiction or diversity jurisdiction over the rescission claim, because we find that the Belinis have a viable, non-time-barred federal damages claim under TILA based on the defendant's alleged failure to respond properly to the Belinis' notice of rescission. This damages claim provides a basis for federal question jurisdiction. That means that the Belinis' claim for rescission, which has virtually identical elements under TILA and Massachusetts law, is within the court's supplemental jurisdiction. This case does not fall into a category that would render the district court's exercise of supplemental jurisdiction discretionary.

I.

We begin with a brief overview of the relevant provisions of TILA, which was passed in 1968. The purpose of TILA 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). The Act requires creditors to make "clear and accurate disclosures of terms dealing with things like finance charges, annual percentage rates of interest, and the borrower's rights." Beach v. Ocwen Fed. Bank, 523 U.S. 410, 412, 118 S.Ct. 1408, 140 L.Ed.2d 566 (1998).

If the creditor fails to do so, it can be held liable for criminal penalties, see 15 U.S.C. § 1611, and a debtor can sue for damages (including a statutory penalty of twice the finance charge), see 15 U.S.C. § 1640(a). Beach, 523 U.S. at 412, 118 S.Ct. 1408. Further, for certain loan transactions—those involving security interests in a debtor's primary residence—the debtor can demand that the creditor rescind the mortgage if certain material disclosures are not made. See 15 U.S.C. § 1635(a). If the creditor does not take steps to do so within twenty days, the debtor can bring suit in federal court to enforce her right of rescission. Id. § 1635(b). Several agencies have administrative authority under TILA, but the relevant implementing agency for our purposes is the Federal Reserve, which has promulgated a set of regulations ("Regulation Z") in this area. See 12 C.F.R. Pt. 226.

The Federal Reserve can allow exemptions from some federal requirements if it finds that a state has adequately regulated in the area:

The [Federal Reserve] shall by regulation exempt from the requirements of this part any class of credit transactions within any State if it determines that under the law of that State that class of transactions is subject to requirements substantially similar to those imposed under this part, and that there is adequate provision for enforcement.

15 U.S.C. § 1633. The Federal Reserve has granted exemptions under section 1633 to certain classes of credit transactions in Maine, Massachusetts, Connecticut, Wyoming, and Oklahoma. 12 C.F.R. Pt. 226, Supp. I. In these few states, as to certain TILA requirements the federal provisions have no force and creditors are subject to state requirements that are generally quite similar and often identical to the federal requirements. See Ives v. W.T. Grant Co., 522 F.2d 749, 755 (2d Cir.1975).

However, according to the Federal Reserve's regulations, the exemption's displacement of federal law in favor of state law is not absolute. See 12 C.F.R. § 226.29(b). It is well established that debtors retain at least the ability to file federal suits for damages in federal court under 15 U.S.C. § 1640, regardless of the exemption. See id.; Ives, 522 F.2d at 752-56.

II.

The Belinis reside in a home in North Adams, Massachusetts, which they have owned since before the transaction at issue here. On December 29, 2000, plaintiffs obtained a $102,750 loan from a now defunct company, Foundation Funding Group, Inc., secured by this home. Defendant Washington Mutual Bank is, according to the complaint, the assignee and current owner of the mortgage obtained by the Belinis from Foundation Funding Group, Inc.

The Belinis allege that they were not provided with various disclosures prior to closing this mortgage transaction, which are required under both TILA and its Massachusetts equivalent. In particular, they allege that the mortgage was a high-cost mortgage under both TILA (as amended by the Home Ownership Equity Protection Act of 1994 (HOEPA)) and its implementing regulations, see 15 U.S.C. § 1602(aa); 12 C.F.R. § 226.32, as well as the relevant Massachusetts regulations, see Mass. Regs.Code tit. 209, § 32.32(1). They further allege that Foundation Funding did not furnish the Belinis with all the required disclosures for such high-cost mortgages, including the following required disclosure:

You are not required to complete this agreement merely because you have received these disclosures or have signed a loan application. If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obligations under the loan.

15 U.S.C. § 1639(a)(1)(A),(B); 12 C.F.R. § 226.32(c)(1); Mass. Regs.Code tit. 209, § 32.32(3)(a).

The Belinis allege that under both federal and Massachusetts law, the failure by Foundation to make the required disclosures, which — they allege — were "material," gave the Belinis the right to rescind the mortgage until such time as the disclosures were actually delivered. See 15 U.S.C. § 1635(a); Mass. Gen. Laws ch. 140D, § 10(a). United States Code section 1635(a) and Massachusetts General Laws section 10(a), which contain essentially identical language, provide that in any consumer credit transaction

in which a security interest ... is or will be retained or acquired in any property which is used as the principal dwelling of the person to whom credit is extended, the [debtor] shall have the right to rescind the transaction 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 by this subchapter, whichever is later....

15 U.S.C. § 1635(a).

On May 9, 2003, counsel for the Belinis sent a letter to Washington Mutual Bank, giving it notice that the Belinis were asserting their right to rescind the mortgage transaction. This rescission notice read in part:

Please be advised that I have been authorized by my clients to rescind [the mortgage] transaction and hereby exercise that right pursuant to [TILA], 15 U.S.C. Section 1635 and Regulation Z, [15 C.F.R.] Section 226.23.

The primary basis for the rescission is that Mr. and Mrs. Belini were not provided with a completed copy of the notice of their right to rescind the above consumer credit transaction, in violation of 15 U.S.C. Section 1635(a) and Regulation...