Kocsis v. Pierce

• Decision Date: 19 November 1991
• Docket Number: No. 121634,121634
• Parties: Joseph A. KOCSIS and Mary Ann Kocsis, Plaintiffs-Appellants, v. Theodore D. PIERCE and Russell D. Pierce, Defendants-Appellees, and Neal Sutherland, Trustee in Bankruptcy of Diamond Mortgage Corporation, Defendants. 192 Mich.App. 92, 480 N.W.2d 598
• Court: Court of Appeal of Michigan — District of US

Page 598

480 N.W.2d 598

Joseph A. KOCSIS and Mary Ann Kocsis Plaintiffs-Appellants, v. Theodore D. PIERCE and Russell D. Pierce Defendants-Appellees and Neal Sutherland, Trustee in Bankruptcy of Diamond Mortgage Corporation, Defendants.

No. 121634.

192 Mich.App. 92, 480 N.W.2d 598

Court of Appeals of Michigan.

Submitted June 12, 1991, at Detroit.

Decided Nov. 19, 1991, at 9:40 a.m.

Released for Publication March 10, 1992.

[192 MICHAPP 93] Norman E. Conn and E. Donald Goodman, Southfield, for plaintiffs-appellants.

David F. Carpenter, Grand Rapids, for the Pierces.

Before GILLIS, P.J., and SAWYER and REILLY, JJ.

PER CURIAM.

This case involves more victims of the fraudulent practices of the now-defunct Diamond Mortgage Corporation and its subsidiaries and affiliates. This Court is again called upon to decide which of the innocent parties should bear the loss resulting from an increasingly familiar pattern of Diamond's conduct. Plaintiffs herein sought a loan from Diamond to pay off their existing residential mortgage and to finance home improvements. They executed a note and secured this obligation with a new mortgage on their residence. The note and mortgage were assigned to defendants Pierce. Diamond never disbursed the loan proceeds to plaintiffs, and plaintiffs, of course, never made the installment payments under the [192 MICHAPP 94] note. When they learned that the loan documents had been assigned to defendants Pierce and that the Pierces were demanding payment, plaintiffs commenced this action in the Wayne Circuit Court, seeking to have the note canceled and the mortgage discharged. Plaintiffs appeal as of right from the trial court's September 22, 1989, order denying reconsideration of its decision granting summary disposition in favor of defendants and dismissing the case. We reverse.

The facts are undisputed. On July 2, 1986, plaintiffs executed a note in the principal amount of $28,000 payable over fifteen years at 14.875 percent interest and, to secure payment of the note, a mortgage on their residence in Westland, Michigan. Plaintiffs were required to execute the loan documents before receiving the loan proceeds.

Seven days later, the note was endorsed by Diamond and made payable to defendants Pierce, and the mortgage was assigned to them in exchange for $28,000. However, the loan proceeds, which were supposed to be disbursed within ninety days of the closing, were never disbursed to plaintiffs, nor was the plaintiffs' $4,400 existing mortgage paid off.

Plaintiffs' complaint alleged that the loan transaction was usurious, in violation of the Truth in Lending Act (TILA), 15 U.S.C. Sec. 1601 et seq., and lacked consideration. The plaintiffs further claimed that the Pierces were not holders in due course because the transaction was based upon Diamond's misrepresentation and fraud, which caused the note and mortgage to be defective and unenforceable. Plaintiffs sought summary disposition under MCR 2.116(C)(9) and (10). The Pierces countered with their motion under MCR 2.116(I)(2), claiming they were holders in due course. They submitted an affidavit stating that they paid [192 MICHAPP 95] $28,000 for the note and mortgage in good faith, without knowledge that plaintiffs had not received the loan proceeds or notice of any other defense. In response, plaintiffs argued that the Pierces could not be holders is due course because the UCC did not apply to real estate transactions. Plaintiffs also expounded upon the TILA argument and submitted an affidavit dated May 20, 1988, stating that "[d]eponent and his wife only received 2 copies of the notice to re[s]cind, and not 4" and that he "has this date sent a notice to cancel to Diamond Mortgage (Trustee) and the Defendants."

The trial judge granted defendants' motion, concluding that plaintiffs had the better opportunity to avoid the fraud. A motion for reconsideration was denied.

All parties conceded that the material facts were not in dispute and that the questions presented in the motions were matters of law for the trial court. Accordingly, this Court's function is to review the trial court's conclusion of law de novo. Cardinal Mooney High School v. Michigan High School Athletic Ass'n, 437 Mich. 75, 80, 467 N.W.2d 21 (1991).

I RIGHT TO RESCISSION UNDER THE TILA

Plaintiffs contend that, because the disclosures made to them were false and they received only one copy each of the notice of right to rescind, they were entitled to rescind the note and mortgage even as late as May 20, 1988, under the TILA, which provides:

[T]he obligor shall have the right to rescind the transaction until midnight of the third business day following the consummation of the transaction [192 MICHAPP 96] or the delivery of the information and rescission forms required under this section together with a statement containing the material disclosures required under this subchapter, whichever is later, by notifying the creditor, in accordance with regulations of the Board, of his intention to do so. The creditor shall clearly and conspicuously disclose, in accordance with regulations of the Board, to any obligor in a transaction subject to this section the rights of the obligor under this section. The creditor shall also provide, in accordance with regulations of the Board, appropriate forms for the obligor to exercise his right to rescind any transaction subject to this section. [15 U.S.C. Sec. 1635(a).]

A

Right to Rescind for Inadequate Disclosure

15 U.S.C. Sec. 1602(u) provides:

The term "material disclosures" means the disclosure, as required by this subchapter, of the annual percentage rate, the method of determining the finance charge and the balance upon which a finance charge will be imposed, the amount of the finance charge, the amount to be financed, the total of payments, the number and amount of payments, and the due dates or periods of payments scheduled to repay the indebtedness.

Plaintiffs do not argue that any of the items described above were inaccurately disclosed. Rather, plaintiffs argue that the disclosure was patently false because funds that were promised were never disbursed. Given that plaintiffs' argument more properly addresses a failure to perform rather than a failure to disclose, and that actual disbursement of funds does not fall within the definition of material disclosures under the statute[192 MICHAPP 97] , we reject plaintiffs' claim that the three-day period had not commenced because Diamond failed to deliver all material disclosures.

B Right to Rescind for Failure to Provide Required Notice

12 C.F.R. Sec. 226.23(a)(3) provides that a "consumer may exercise the right to rescind until midnight of the third business day following ... delivery of the notice required by paragraph (b) of this section." Paragraph b of Sec. 226.23 provides:

Notice of right to rescind. In a transaction subject to rescission, a creditor shall deliver 2 copies of the notice of the right to rescind to each consumer entitled to rescind. The notice shall be on a separate document that identifies the transaction and shall clearly and conspicuously disclose the following:

(1) The retention or acquisition of a security interest in the consumer's principal dwelling.

(2) The consumer's right to rescind the transaction.

(3) How to exercise the right to rescind, with a form for that purpose, designating the address of the creditor's place of business.

(4) The effects of rescission, as described in paragraph (d) of this section.

(5) The date the rescission period expires.

The defendants have acknowledged that each of the plaintiffs were provided with only one copy of the notice of right to rescind. The trial court ruled in defendants' favor, reasoning that the failure to provide two copies of the notice was a mere technical violation.

Subsequently, in Elsner v. Albrecht, 185 mich.app[192 MICHAPP 98] . 72, 75-76, 460 N.W.2d 232 (1990), another panel of this Court, relying on the federal district court decision in Stone v. Mehlberg, 728 F.Supp. 1341, 1348 (W.D.Mich., 1989), explicitly held that failure to deliver two copies to each borrower entitled the borrowers to rescind the transaction under the TILA. However, inStone, the district court did not reach the issue whether compliance with the statute required the giving of two copies of the notice. The district court specifically found that "[n]one of the documents given to the [mortgagors] ... contained any disclosure of their right to rescind the transaction within TILA's three-day 'cooling off' period." Id. at 1347. We are, however, persuaded that the decision in Elsner is correct.

Michigan adheres to the rule that a state court is bound by the authoritative holdings of federal courts on federal questions when there is no conflict. Schueler v. Weintrob, 360 Mich. 621, 105 N.W.2d 42 (1960); Cook v. Detroit, 125 Mich.App. 724, 337 N.W.2d 277 (1983). Our review of the recent federal decisions interpreting 15 U.S.C. Sec. 1635(a) and 12 C.F.R. Sec. 226.23(a) and related sections indicate a consensus that the TILA must be liberally construed in favor of the borrower in order to effectuate the purpose of the statute, i.e., to avoid the uninformed use of...