Sanders v. Mountain Am. Fed. Credit Union

• Decision Date: 30 July 2012
• Docket Number: No. 11–4008.,11–4008.
• Citation: 689 F.3d 1138
• Parties: Scott SANDERS; Lisa Sanders, Plaintiff–Appellant, v. MOUNTAIN AMERICA FEDERAL CREDIT UNION, Defendant–Appellee. Bruce Ethington, Defendant.
• Court: U.S. Court of Appeals — Tenth Circuit

689 F.3d 1138

Scott SANDERS; Lisa Sanders, Plaintiff–Appellant,

v.MOUNTAIN AMERICA FEDERAL CREDIT UNION, Defendant–Appellee.

Bruce Ethington, Defendant.

No. 11–4008.

United States Court of Appeals,Tenth Circuit.

July 30, 2012.

Matt Wadsworth (Brian E. Arnold with him on the brief), of Arnold & Wadsworth, South Ogden, UT, for Plaintiff–Appellant.

Joseph A. Skinner of Scalley Reading Bates Hansen & Rasmussen, P.C., Salt Lake City, UT, for Defendant–Appellee.

Before KELLY, McKAY, and O'BRIEN, Circuit Judges.

O'BRIEN, Circuit Judge.

For certain mortgage loans covered by the Truth–in–Lending Act (TILA), a timely written notice of rescission triggers the creditors duty to release its security interest and refund any finance charges. Once the creditor satisfies this duty, the borrower must return the loan proceeds. Although we have not spoken authoritatively on the issue, several circuits allow district courts to equitably condition the creditor's duty on the borrower's ability to repay the loan proceeds.

In this case, however, the district court went further by concluding a borrower seeking to compel rescission must plead ability to repay. The court invoked this rule to dismiss the TILA rescission claim of the appellants, Scott and Lisa Sanders. It also dismissed the Sanderses' claims under the Equal Credit Opportunity Act and Fair Credit Reporting Act. We affirm in part, reverse in part, and remand for further proceedings.

I. BACKGROUND AND PROCEDURAL HISTORY

In 2007, while the Sanderses were attempting to refinance their home, they discovered Salt Lake City Credit Union had “reported twelve new maxed-out accounts on the Sanders[es]' credit [reports].” (Aplt. App'x 139.) They say this “destroyed [their] credit and made it impossible to refinance.” ( Id.) Afterward, the credit union “apologized for the misreporting” and “offered to make amends by providing [them] with a ‘free’ refinance.” ( Id.) They accepted this conciliatory offer and closed on the refinancing loan in July 2007. Salt Lake City Credit Union later merged with appellee Mountain America. In March 2009, the Sanderses applied to Mountain America to again refinance their loan. They completed the application by phone, but Mountain America denied their application at the end of the call.

As pertinent to this appeal, the Sanderses' complaint alleges: (1) they had not been provided with the disclosures required under the Truth–in–Lending Act (TILA) thereby entitling them to invoke statutory rescission; (2) Mountain America violated the Equal Credit Opportunity Act (ECOA) when it failed to provide a notice of adverse action after denying their application for refinancing; and (3) Mountain America's inaccurate credit reporting violated the Fair Credit Report Act (FCRA). The district court dismissed these claims on the pleadings. SeeFed.R.Civ.P. 12(c).

II. STANDARD OF REVIEW

An order dismissing a case on the pleadings is reviewed de novo. Park Univ. Enters., Inc. v. Am. Cas. Co., 442 F.3d 1239, 1244 (10th Cir.2006). In this review, “we accept all facts pleaded by the non-moving party as true and grant all reasonable inferences from the pleadings” in that party's favor. Id. Judgment on the pleadings is appropriate only when “the moving party has clearly established that no material issue of fact remains to be resolved and the party is entitled to judgment as a matter of law.” Id. (quotations omitted).

III. TRUTH–IN–LENDING ACT RESCISSION CLAIM

The Sanderses correctly contend the district court erred when it concluded they were not entitled to TILA rescission of their mortgage loan because they failed to plead their ability to repay the loan proceeds.¹

Congress enacted TILA in 1968 “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.” 15 U.S.C. § 1601(a). TILA gives consumers the right to rescind certain consumer credit transactions secured by the “principal dwelling” of the credit applicant. 12 C.F.R. § 226.23(a)(1). Creditors are required to give consumers two copies of a disclosure advising them about the right of rescission. 15 U.S.C. § 1635(a); 12 C.F.R. § 226.23(b)(1).

TILA and its implementing regulation (known as Regulation Z, which is codified at 12 C.F.R. § 226) explain how and when a consumer may rescind. To exercise the TILA right to rescind, a consumer need only timely notify the creditor in writing. 12 C.F.R. § 226.23(a)(2). TILA's right of rescission expires the midnight of the third business day ² following the later of the “consummation of the transaction” or the delivery of the required disclosures. 15 U.S.C. § 1635(a), (f). In any case, the right to rescind expires three years after the transaction is completed. 15 U.S.C. § 1635(f).

Here, according to the factual allegations in the Sanderses' complaint, which we accept as true, see Park Univ. Enters., 442 F.3d at 1244, Mountain America provided only one copy (rather than the required two copies) of TILA's required disclosures. The Sanderses consummated their loan refinance on July 6, 2007. They timely notified Mountain America in writing of their rescission on March 2, 2010, before the TILA rescission right expired on July 6, 2010.

A. Consumer's Obligation to Plead Ability to Repay

Nonetheless, Mountain America responds that, even if the Sanderses timely sought rescission, the district court properly used its equitable authority to reject their rescission because the Sanderses did not allege they can repay the loan proceeds. We disagree.

“Rescission essentially restores the status quo ante; the creditor terminates its security interest and returns any [money] paid by the debtor in exchange for the latter's return of all disbursed funds or property interests.” McKenna v. First Horizon Home Loan Corp., 475 F.3d 418, 421 (1st Cir.2007). When a consumer rescinds under TILA, the creditor must—within 20 calendar days after receipt of a valid notice of rescission—return “any money or property that has been given to anyone,” including any finance charges collected from the consumer. 12 C.F.R. § 226.23(d). It must also “take any action necessary to reflect the termination of [its] security interest.” Id. Until this has been done, the consumer may keep the loan proceeds. See id. § 226.23(d)(3). After the creditor satisfies these rescission obligations, the consumer must tender to the creditor the loan proceeds or their “reasonable value.” Id.

When consumers rescind during the three-day period following the consummation of the loan transaction, this process is clear and functions well. See Board of Governors of the Federal Reserve System, Proposed Rule; Request for Public Comment, 75 Fed. Reg. 58539, 58629 (proposed Sep. 24, 2010). On the other hand, as the Federal Reserve Board of Governors acknowledged in a proposal to change Regulation Z:

The process ... does not work well ... after the initial three-day period when the creditor has disbursed funds and perfected its lien, and the consumer's right to rescind may have expired. Most creditors are reluctant to release a lien under these conditions, particularly if the consumer is in default or in bankruptcy and would have difficulty tendering. Thus, when a creditor receives a consumer's notice after the initial three-day period, the rescission process is unclear and courts are frequently called upon to resolve rescission claims.

Id. When initiated after the initial three-day period, TILA rescission often imposes an unfair risk on creditors: it requires the creditor to release its security interest without assurance that the consumer stands ready to honor his or her own rescission obligations. See Am. Mortg. Network, Inc. v. Shelton, 486 F.3d 815, 820–21 (4th Cir.2007); see also In re Stanley, 315 B.R. 602, 615–16 (Bankr.D.Kan.2004) (explaining the rationale for equitable intervention in the TILA rescission process). This problem is particularly acute when the consumer resorts to TILA rescission because of an impending foreclosure or bankruptcy.³See Shelton, 486 F.3d at 820–21;see also Board of Governors of Federal Reserve System, supra, at 58628 (“[C]onsumers often assert the right to rescind in foreclosure or bankruptcy proceedings.”). Thus, courts routinely exercise their equitable powers to ensure consumers can honor their rescission obligations before requiring creditors to release their security interests. See, e.g., Shelton, 486 F.3d at 820–21;Yamamoto v. Bank of New York, 329 F.3d 1167, 1172–73, 1172 n. 5 (9th Cir.2003); Williams v. Homestake Mortg., 968 F.2d 1137, 1142 (11th Cir.1992). In light of this judicial practice, TILA and Regulation Z were amended in 1980 and 1981, respectively, to explicitly recognize that a court may entertain a creditor's petition for an order equitably modifying the rescission procedure. Yamamoto, 329 F.3d at 1171.

But here, the district court created a pleading rule that would require all consumers who seek to compel TILA rescission to plead their ability to repay the loan:

[A]llowing the Sanders[es] to rescind the loan simply by stating their intent to rescind would place [Mountain America] in the position of an unsecured creditor. Thus equity requires that the Sanders[es] allege their ability to repay the loan amount. [They] have not alleged their ability to repay the loan.... Because the [Sanderses] have not alleged their ability to repay the loan, their rescission claim fails and must be dismissed.

(Aplt. App'x 143–44 (emphasis added).) The court's view impermissibly alters the rescission procedure for two reasons.

First, it adds a condition to the remedy not found in the statute or the regulation: it requires consumers to allege that they can repay the loan proceeds. This requires them to determine and plead information that may not be easily ascertainable, such as the value of the property obtained with the loan proceeds—a difficult task in a fluctuating...