May v. Suntrust Mortg., Inc.

• Decision Date: 14 April 2014
• Docket Number: SJC–11439.
• Citation: 467 Mass. 756,7 N.E.3d 1036
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court
• Parties: Kenneth D. MAY & another v. SUNTRUST MORTGAGE, INC.

467 Mass. 756

7 N.E.3d 1036

Kenneth D. MAY & another¹

v.SUNTRUST MORTGAGE, INC.

SJC–11439.

Supreme Judicial Court of Massachusetts, Suffolk.

Submitted Dec. 3, 2013.

Decided April 14, 2014.

Kenneth D. Quat, Cambridge, for the plaintiffs.

Nathalie K. Salomon, Newton, for the defendant.

Jeremiah Battle of New Jersey, & Stuart Rossman, Boston, for National Consumer Law Center, amicus curiae, submitted a brief.

Present: IRELAND, C.J., SPINA, CORDY, BOTSFORD, GANTS, DUFFLY, & LENK, JJ.

BOTSFORD, J.

The Massachusetts Consumer Credit Cost Disclosure Act (MCCCDA), G.L. c. 140D, §§ 1–35, governs the rights and duties of creditors and obligors (borrowers or consumers) engaged in consumer credit transactions. One type of consumer credit transaction to which the MCCCDA applies is the refinancing of a consumer's home where the consumer grants a mortgage to the creditor to secure the refinancing loan. Pursuant to S.J.C. Rule 1: 03, as appearing in 382 Mass. 700 (1981), a judge in the United States Bankruptcy Court for the District of Massachusetts ² has certified the following question:

“May an obligor [borrower] who grants a mortgage in a consumer credit transaction rescind the transaction under the Massachusetts Consumer Credit Cost Disclosure Act, [G.L. c.] 140D, § 1 et seq. (the ‘MCCCDA’), defensively by way of common law recoupment after the expiration of the four year statute of limitations set forth in [§ ] 10 ( f ) of the MCCCDA?”

For the reasons we discuss hereafter, we answer no to the question.³

1. Background. The essential background facts are undisputed by the parties. On October 7, 2005, Kenneth May and Valerie Corbin–May, the plaintiffs, refinanced their home in Brockton in a mortgage loan transaction with Summit Mortgage (Summit), for $300,000. The mortgage later was assigned to and is held currently by the defendant here, SunTrust Mortgage, Inc. (SunTrust). ⁴ On January 28, 2010, the plaintiffs, facing foreclosure, filed a petition under Chapter 13 of the Bankruptcy Code, 11 U.S.C. §§ 101 et seq., in the United States Bankruptcy Court for the District of Massachusetts. In response, SunTrust filed a proof of claim alleging that the plaintiffs owed $329,965.80, including $49,704.47 in arrears, on the mortgage note.⁵ On June 4, 2010, the plaintiffs sent a letter to SunTrust notifying it of their election to rescind the loan transaction. When SunTrust took no action to terminate its security interest (e.g., by discharging the mortgage), on June 28, the plaintiffs filed an adversary proceeding against SunTrust in the pending Chapter 13 bankruptcy case, seeking rescission of the loan transaction and damages.⁶ The allegations of the plaintiffs' claim for rescission in count III of their adversary complaint may be summarized as follows: Summit, the original creditor, violated the mandatory notice provisions of § 10 ( a ) of the MCCCDA by presenting the plaintiffs with, and instructing them to postdate and sign, a “Statement of Non–Rescission”; because the notice provision did not comply with those mandatory notice provisions of the MCCCDA, the plaintiffs did not receive the clear and conspicuous disclosure of their right to cancel the transaction required by the MCCCDA; and under c. 140D, § 10 ( i ) (3), the plaintiffs may seek to rescind the transaction by way of recoupment as a complete or partial defense to SunTrust's claim to recover monies allegedly owed under the mortgage note.

On July 13, 2012, SunTrust moved for summary judgment, arguing that because the plaintiffs filed their adversary complaint more than four years after the mortgage loan transaction, their defensive rescission-by-way-of-recoupment claim is time barred by § 10 ( f ) of the MCCCDA. The plaintiffs have asserted in response that the time limits of the MCCCDA do not apply when rescission is claimed defensively by way of recoupment because § 10 ( i ) (3) of the MCCCDA allows for recoupment claims at any time. A judge in the Bankruptcy Court, noting conflicting interpretations of the MCCCDA in a number of Bankruptcy Court decisions and a lack of controlling Massachusetts precedent, reported the question set forth above.

2. Statutory scheme. The MCCCDA is modeled after the consumer protection provisions contained in the Federal Truth in Lending Act (TILA), 15 U.S.C. §§ 1601 et seq. (2012).⁷ See O'Connell v. Wells Fargo Bank, N.A., U.S. Bankruptcy Court, No. 11–10940–FJB, slip op. at 5, 2012 WL 2685149 (Bankr.D.Mass. July 6, 2012) ( O'Connell ). Both the MCCCDA and TILA were enacted “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.” Fidler v. Central Coop. Bank, 226 B.R. 734, 736 (Bankr.D.Mass.1998), quoting 15 U.S.C. § 1601(a).

Although a consumer credit transaction in theory could be governed by both TILA and the MCCCDA, the board of governors of the Federal Reserve System has deemed certain types of Massachusetts consumer credit transactions exempt from TILA, including the one at issue here; as a consequence, such transactions are governed solely by the MCCCDA. See DiVittorio v. HSBC Bank USA, NA, 670 F.3d 273, 282 (1st Cir.2012); Laudani v. Tribeca Lending Corp., 401 B.R. 9, 25 n. 13 (Bankr.D.Mass.2009). Nevertheless, because of the close relationship between TILA and the MCCCDA, we interpret the MCCCDA mindful of TILA's presence and influence. See Fidler, supra at 736 (“Because TILA was the model on which [M]CCCDA was based, federal court decisions construing TILA are instructive in construing parallel provisions of [M]CCCDA”). See also O'Connell, supra at 5 (“Although the MCCCDA is the operative law in Massachusetts, its similarity to the TILA requires that the former be construed in accordance with the latter”).

a. The right to rescind. Under the MCCCDA, as is true of TILA, see 15 U.S.C. § 1635, in any consumer credit transaction in which a security interest in the borrower's principal dwelling is granted, the borrower has an automatic right to rescind the transaction within three business days of the transaction's closing or within three business days of receiving the required rescission forms and other material disclosures from the creditor, whichever is later. G.L. c. 140D, § 10 ( a ).⁸ Accordingly, if the creditor does not make the required disclosures or properly notify the borrower of his right to rescind at the time the transaction closes, the borrower remains entitled to seek rescission until three days after the creditor does so. This right, however, is subject to a limitation set out in § 10 ( f ), which provides that the extended period for exercise of the right of rescission completely ends after four years.^9,10 But § 10 also contains a provision, § 10 ( i ) (3), that, notwithstanding the four-year limitation period in § 10 ( f ), preserves a consumer's “right of recoupment under the laws of the [C]ommonwealth.” ¹¹ As we discuss infra, we understand § 10 ( i ) (3) to be the focus of the Bankruptcy Court judge's reported question.

b. The effects of rescission.Section 10 ( b ) of the MCCCDA and its implementing regulations define the process and effect of rescission of a consumer credit transaction involving a security interest in the borrower's principal dwelling. See 209 Code Mass. Regs. § 32.23(4)(a)-(d) (2010). When a borrower rescinds such a transaction, the underlying security interest in the dwelling—the mortgage—becomes void and the borrower is no longer liable for finance charges. See G.L. c. 140D, § 10 ( b ); 209 Code Mass. Regs. § 32.23(4)(a). Within twenty days thereafter, the creditor is required to return any monies or property given in relation to the transaction and must also take any additional action necessary to terminate the mortgage. See G.L. c. 140D, § 10 ( b ); 209 Code Mass. Regs. § 32.23(4)(b). The borrower may retain the property until the creditor has performed these obligations, after which time the borrower “shall tender the property to the creditor, except that if return of the property in kind would be impracticable or inequitable, the [borrower] shall tender its reasonable value.” G.L. c. 140D, § 10 ( b ). See 209 Code Mass. Regs. § 32.23(4)(c).

3. Discussion. We repeat the reported question:

“May [a borrower] who grants a mortgage in a consumer credit transaction rescind the transaction under the [MCCCDA, G.L. c. 140D], defensively by way of common law recoupment after the expiration of the four year statute of limitations set forth in [c. 140D, § 10 ( f ) ]?”

Although the Bankruptcy Court judge refers to the common law in framing it, we understand her question to pose an issue of statutory interpretation: does G.L. c. 140D, § 10 ( i ) (3), which provides that “[n]othing in this section shall be construed so as to affect a consumer's right of recoupment under the laws of the commonwealth[,]” entitle the consumer to exercise the right of rescission set out in § 10 ( a ) after the four-year limitation periodin § 10 ( f ) has expired, as a form of defensive recoupment against the amount the creditor claims to be owed? ¹²

As is obvious, § 10( i)(3) does not provide explicitly for rescission by way of recoupment, or include the word “rescission” at all. ¹³ Nor does § 10 ( i ) (3), or any other section of the MCCCDA, define the word “recoupment.” Accordingly, the question we need to answer is whether, apart from § 10 ( i ) (3) and the MCCCDA, any “laws of the Commonwealth” pertaining to recoupment provide for or recognize rescission as a form of recoupment, at least where rescission is used defensively to meet an obligation due. The parties do not suggest, and we have not found, any Massachusetts statute that does so, or even touches on this issue. We turn, therefore, to the common law. See Commonwealth v. Stokes, 440 Mass. 741, 747, 802 N.E.2d 88 (...