Smith v. Wells Fargo Credit Corp., CIV 88-541 PHX PGR.

• Decision Date: 12 May 1989
• Docket Number: No. CIV 88-541 PHX PGR.,CIV 88-541 PHX PGR.
• Parties: Harold N. and Barbara Elaine SMITH, husband and wife, Plaintiffs, v. WELLS FARGO CREDIT CORP., et al., Defendants.
• Court: U.S. District Court — District of Arizona

713 F. Supp. 354

Harold N. and Barbara Elaine SMITH, husband and wife, Plaintiffs, v. WELLS FARGO CREDIT CORP., et al., Defendants.

No. CIV 88-541 PHX PGR.

United States District Court, D. Arizona.

May 12, 1989.

Brunn W. Roysden, Jr., Phoenix, Ariz., for plaintiffs.

Judith M. Prakel, Phoenix, Ariz., for defendants.

ORDER

ROSENBLATT, District Judge.

Defendants' motion for summary judgment and plaintiffs' cross-motion for partial summary judgment are pending before the Court. After consideration of the entire record and the oral argument of counsel, the Court finds that the plaintiffs' partial summary judgment motion should be granted because the Court concludes that the plaintiffs have the right to rescind and that res judicata does not bar this action.

The dispute in this lawsuit concerns an alleged statutory right to rescission pursuant to 15 U.S.C. Sec. 1635, a provision of the Truth in Lending Act (TILA). On June 13, 1985, the Smiths obtained a loan from Justice Mortgage Company, Inc. who then assigned the loan to Wells Fargo Credit Corporation. All disclosures required by the TILA were made at the loan closing, and the Smiths at that time signed a disclosure form and a form which was an acknowledgement of notice of right to rescind. However, due to a clerical error in the preparation of the loan documents, the amount of the monthly payment noted on the promissory note and disclosure statement was only one-half of the correct amount. The documents otherwise correctly stated the principal amount, the interest rate, the number of payments, the finance charge, and the total amount of payments. The Smiths were notified of the error in a letter dated July 22, 1985 and were asked to sign corrected loan documents and to make the correct monthly payments.

When the Smiths refused to comply with these requests, Wells Fargo and Justice Mortgage filed suit in state court seeking reformation of the contract to reflect the correct monthly payment and a declaratory judgment that they had been entitled to the correct monthly payments from the commencement of the loan. The Smiths responded with a counterclaim against Wells Fargo and a third-party complaint against Justice Mortgage which were based upon common law theories and the TILA provisions dealing with disclosure. The Smiths did not then seek to rescind the contract and the rescission issue was not litigated. The state court entered summary judgment in favor of Wells Fargo and Justice Mortgage and ordered the Smiths to make correct monthly payments, make a balloon payment representing those payments not made during the pendency of the dispute, and pay the attorneys' fees and costs incurred by Wells Fargo and Justice Mortgage, a part of which was a sanction against the attorneys then representing the Smiths.

On March 17, 1988, the Smiths notified Wells Fargo and Justice Mortgage by letter that they were rescinding the loan agreement pursuant to 15 U.S.C. Sec. 1635. On April 5, 1988, the Smiths instituted the instant action against Wells Fargo and Justice Mortgage (hereinafter "Wells Fargo") seeking to enforce their right of rescission.

RESCISSION RIGHT

The Court finds no issue of material fact as to the rescission issue. The parties agree that a disclosure form, though incorrect, and an acknowledgement of notice of the right to rescind were reviewed and signed by the Smiths at closing. They agree that Wells Fargo promptly gave notice of the incorrect payment amount. All parties also agree that no new rescission form was provided to the Smiths with the amended disclosure. The disagreement concerns a question of law as to whether the Smiths have a rescission right. Wells Fargo's defense is that no new rescission form is required by either the Truth in Lending Act or Regulation Z. There is no validity to this claim.

In the case of closed-end credit, the material disclosures required of the lender are as follows: annual percentage rate, the finance charge, the amount financed, total of payments, and the payment schedule. TILA Sec. 103(u), 15 U.S.C. Sec. 1602(u). "Payment schedule" is defined as the number, amounts, and timing of payments scheduled to repay the obligation. Reg. Z, 12 C.F.R. Sec. 226.18(g); TILA Sec. 128(a)(6). The payment amount (which was stated incorrectly) on the original disclosure form is considered a "material" disclosure.

The consumer may exercise the right to rescind until midnight of the third business day following the latest of the following events:

1) consummation of the transaction;

2) delivery of notice of the right to rescind, or

3) delivery of all material disclosures.

See TILA Sec. 125(a), 15 U.S.C. Sec. 1635(a)

The consumer has a continuing right to rescind until the creditor provides the rescission notice and also supplies a copy of the TIL disclosure statement with all material information correctly disclosed. National Consumer Law Center, Truth in Lending (1986), para. 6.3.2 at 137.

Technical or minor violations of TILA, or Regulation Z, as well as major violations impose liability on the creditor and entitle the borrower to rescind. Semar v. Platte Valley Fed. S & L Assoc., 791 F.2d 699, 704 (9th Cir.1986) (notice to rescind was in error because it did not list the actual day of expiration, but said "three business days after July 16").

Congress made it clear that rescission suits are allowed after disclosure suits, and explicitly provided a statutory damages penalty for rescission violations. Aquino v. Public Finance Consumer Discount Co. 606 F.Supp 504, 511 (E.D.Pa.1985), based on S.Rep. No. 96-368, reprinted in 1980 U.S.Code Cong. & Admin.News at 236, 267.

If a mathematical error occurs with regard to a material disclosure, the three day rescission period will not commence, and thus the right to rescind will not expire three days later. Indeed, it will not expire until three business days after the correct disclosure is finally provided or until the earlier of three years after consummation. Rohrer, The Law of Truth in Lending (1984) at 8-33.

The rescission form that Wells Fargo had the Smiths sign at closing was not sufficient because the correct date of rescission must be stated. Reg. Z Sec. 226.23(b); TILA Sec. 125(a, f). To comply with this regulation, Wells Fargo was required to provide new rescission forms with the correct expiration date when the corrected material disclosure was made. Rohrer at 8-43.

There is a continuing right to rescind the transaction when the creditor makes an error regarding a material disclosure on the disclosure statement. In re Underwood, 66 B.R. 656 (Bkrtcy.W.D.Va.1986). In the Underwood case, the plaintiffs never received rescission forms—not when they initially closed, nor when the new finance charge data arrived. The court said "they would have had a continuing right to rescind the transaction even if they had initially been given copies of the Notice of the Right to Cancel because the defendant failed to make what now appears an admittedly erroneous and material disclosure on the disclosure statement." Id. at 662. The court further stated that the Underwoods were entitled to rescind the transaction at any time within three years of the consummation of the transaction unless provided a statement containing the correct finance charge along with rescission forms. Id.

It is apparent that the courts have interpreted the right to rescind as being a continuing one in situations such as this. Here, Wells Fargo stated an incorrect payment amount (a material disclosure), and when the corrected amount was disclosed, they should have provided new rescission forms in compliance with the Truth in Lending Act. Because the Smiths were not given the new forms, they have a continuing right to rescind, within the statute of limitations of three years. 15 U.S.C. Sec. 1635(f).

Several defenses against TILA actions are available to creditors. There are three types of defenses: the TILA itself, common law, and standard procedural and jurisdictional defenses. NCLC at 146. The interpretation of the TILA defenses lies exclusively with the courts; Regulation Z and the Commentary of the Federal Reserve Board do not interpret them. Id.

As to the right to rescind, Wells Fargo raises the defense of good faith conformity with the FRB rules, regulations, or interpretations. TILA Sec. 130(f), 15 U.S. C. Sec. 1640(f). Under the New Act, the creditor's good-faith conformity is limited to the Regulations and the Commentary which supersede all previous formal and informal FRB staff interpretations, and the defense provides no protection for reliance on court decisions. Hamilton v. Southern Discount Co., 656 F.2d 150 (5th Cir.1981).

A creditor may not merely allege good faith conformity; it must point to the specific regulation, ruling, or interpretation with which it claims conformity. Valencia v. Anderson Bros. Ford, 617 F.2d 1278, 1287 (7th Cir.1980), rev'd on other grounds, 452 U.S. 205, 101 S.Ct. 2266, 68 L.Ed.2d 783 (1981). Wells Fargo relies on the lack of a requirement for a new rescission form in the regulations as its defense, but fails to cite any specific authority to support its position. In this situation, courts have concluded that if a creditor misreads or misconstrues the provision, it is not entitled to the defense, even if the mistake is a reasonable one. Id. at 1278 (creditor's mistaken interpretation of Regulation Z, even if honest and reasonable, is not a defense under Sec. 1640(f); see also Kessler v. Associates Fin. Services Co., 573 F.2d 577, 579 (9th Cir.1977).

However, where the provision is ambiguous and the creditor reasonably construes the provision as applying to its act or omission, it may be entitled to the conformity defense. Charles v. Krauss Co., 572 F.2d 544 (5th Cir.1978) (creditor's good faith belief that its contract form complied with the literal language of Sec. 226.801 forms exception provided a good faith defense). A case by case interpretation is required....