Yamamoto v. Bank of New York

• Decision Date: 29 May 2003
• Docket Number: No. 01-16427.,01-16427.
• Citation: 329 F.3d 1167
• Parties: Melvin T. YAMAMOTO; Elaine S. Yamamoto; Maxine H. Tampon, Plaintiffs-Appellants, v. BANK OF NEW YORK; BNC Mortgage; U.S. Financial Corporation, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

329 F.3d 1167

Melvin T. YAMAMOTO; Elaine S. Yamamoto; Maxine H. Tampon, Plaintiffs-Appellants, v. BANK OF NEW YORK; BNC Mortgage; U.S. Financial Corporation, Defendants-Appellees.

No. 01-16427.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted May 9, 2003.

Filed May 29, 2003.

Gary Victor Dubin, Honolulu, HI, for the Plaintiffs-Appellants.

Mark D. Bernstein, Honolulu, HI, for Defendant-Appellee, U.S. Financial Mortgage Corp.

Steven K.S. Chung, Oshima Chun Fong & Chung, Honolulu, HI, for Defendant-Appellee, BNC Mortgage, Inc.

Mary Martin, Stanton Clay Chapman Crumpton & Iwamura, Honolulu, HI, and Gary Y. Okuda, Leu & Okuda, Honolulu, HI, for Defendant-Appellee, Bank of New York.

Appeal from the United States District Court for the District of Hawaii; Samuel P. King, Senior District Judge, Presiding. D.C. No. CV-99-00360-SPK(BMK).

Before GOODWIN, RYMER, and T.G. NELSON, Circuit Judges.

RYMER, Circuit Judge:

This appeal requires us to decide whether a court may order borrowers who seek recission of a mortgage under the Truth in Lending Act (TILA), 15 U.S.C. § 1635, to show that proceeds can be tendered if they prevail. Here, the borrowers testified that they could not fulfill TILA's tender requirement, and the district court gave them sixty days before dismissing their recission claim to attempt to do so. When they were unable to provide evidence that they could tender the proceeds, the court granted summary judgment in favor of the lender. We hold that a district court has discretion to modify the sequence of rescission events in these circumstances, and affirm.

I

On January 23, 1997, Melvin and Elaine Yamamoto, through their mortgage broker U.S. Financial Mortgage Corp. (USF), borrowed $172,500 from BNC Mortgage, Inc. (BNC) to refinance an existing mortgage on their home. The loan was co-signed by their daughter, Maxine Tampon. On February 3, 1997, BNC assigned the Yamamoto/Tampon mortgage to the Bank of New York (BNY).

After making eight payments (totaling approximately $12,000), the Yamamotos and Tampon defaulted. In March 1998, the Yamamotos filed for Chapter 7 bankruptcy relief. BNY subsequently obtained a stipulation for relief from the bankruptcy stay and instituted foreclosure proceedings on the Yamamotos' home, the property secured by the loan. The Yamamotos received a discharge in bankruptcy June 15, 1998.

In July 1998 the Yamamotos and Tampon notified BNC that they were exercising their right to cancel the loan due to BNC's failure to provide them with notice of right to cancel forms required under TILA. They claimed that upon receipt of the letter the mortgage was automatically void and BNC was required to release its security interest in their home within 20 days. BNC responded that a timely Notice of Right to Cancel had been provided on January 24, 1997. The Yamamotos/Tampon mailed a similar letter to BNY on September 30, 1998. BNY then discontinued the foreclosure proceedings.

The Yamamotos and Tampon brought suit against BNY, seeking statutory damages and recission on account of the failure to disclose the right to cancel and an inaccurate disclosure of appraisal fees in violation of TILA. BNY filed a third-party complaint against BNC, the original lender, who in turn filed a fourth-party action against USF, the Yamamotos' mortgage broker. The parties brought cross-motions for summary judgment. The district court determined that the damages claim was barred by TILA's one-year statute of limitations, 15 U.S.C. § 1640(e), but it found a triable issue of fact as to whether Yamamotos/Tampon received the proper disclosures. The court also held that the bankruptcy trustee was the proper plaintiff to pursue recission rather than the Yamamotos, and that the Yamamotos and Tampon, who had indicated that they were unable to tender the proceeds, could have sixty days to try to do so.¹ When the Yamamotos/Tampon failed to comply with either condition, the court dismissed the action and entered judgment for BNY. This appeal followed.²

II

Tampon argues that the district court could not deny her recission for failure to pay back loan proceeds without first determining whether TILA was violated, and without recognizing that TILA, and Federal Reserve Board Regulation Z implementing it, 12 C.F.R. § 226.23(d), automatically voided BNY's security interest in her property once she exercised her right to rescind.³ She posits that language added in 1981 to Regulation Z indicates that a court has no discretion to change the substantive provisions of the Act, which is what she contends that the court did when it required tender prematurely. BNY counters that courts have long had equitable discretion to make repayment of loan proceeds a prerequisite to rescission under TILA, and that discretion to alter the sequence of recission events is expressly preserved by Regulation Z.

TILA was enacted 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). If required disclosures are not made, the consumer may rescind. See 15 U.S.C. § 1635(a). Section 1635(b) governs the return of money or property when a borrower exercises the right to rescind.⁴ It provides that the borrower is not liable for any finance or other charge, and that any security interest becomes void upon such a rescission. The statute adopts a sequence of rescission and tender that must be followed unless the court orders otherwise: within twenty days of receiving a notice of rescission, the creditor is to return any money or property and reflect termination of the security interest; when the creditor has met these obligations, the borrower is to tender the property.

Section 226.23 of Regulation Z implements § 1635(b). It tracks the statute and states:

(d) Effects of rescission.

(1) When a consumer rescinds a transaction, the security interest giving rise to the right of rescission becomes void and the consumer shall not be liable for any amount, including any finance charge.

(2) Within 20 calendar days after receipt of a notice of rescission, the creditor shall return any money or property that has been given to anyone in connection with the transaction and shall take any action necessary to reflect the termination of the security interest.

(3) If the creditor has delivered any money or property, the consumer may retain possession until the creditor has met its obligation under paragraph (d)(2) of this section. When the creditor has complied with that paragraph, the consumer shall tender the money or property to the creditor....

(4) The procedures outlined in paragraphs (d)(2) and (3) of this section may be modified by court order.

12 C.F.R. § 226.23.

TILA's provision permitting a court to modify procedures was added in 1980 as part of the Truth in Lending Simplification and Reform Act, Pub.L. No. 96-221, tit. VI, § 612(a)(4), 94 Stat. 168, 175 (1980) (codified as amended at 15 U.S.C. § 1635(b) (1988)). See Williams v. Homestake Mortgage Co., 968 F.2d 1137, 1139-40 (11th Cir.1992) (explaining background). In turn, subsection (d)(4) was added to Regulation Z in 1981. These changes followed in the wake of decisions by this court and others which held that the statute need not be interpreted literally as always requiring the creditor to remove its security interest prior to the borrower's tender of proceeds. See, e.g., Palmer v. Wilson, 502 F.2d 860, 862-63 (9th Cir.1974); Ljepava v. M.L.S.C. Props., Inc., 511 F.2d 935, 944 (9th Cir.1975); LaGrone v. Johnson, 534 F.2d 1360, 1361-62 (9th Cir.1976); Rudisell v. Fifth Third Bank, 622 F.2d 243, 253-54 (6th Cir.1980); Powers v. Sims & Levin, 542 F.2d 1216, 1220-22 (4th Cir.1976); but see Gerasta v. Hibernia Nat'l Bank, 575 F.2d 580, 585 (5th Cir.1978).

Since Palmer we have recognized that in applying TILA, "a trial judge ha[s] the discretion to condition rescission on tender by the borrower of the property he had received from the lender." Ljepava, 511 F.2d at 944 (citing Palmer, 502 F.2d at 863-64). As we explained, whether a decree of rescission should be conditional depends upon "the equities present in a particular case, as well as consideration of the legislative policy of full disclosure that underlies the Truth in Lending Act and the remedial-penal nature of the private enforcement provisions of the Act." Palmer, 502 F.2d at 862. Indeed, in LaGrone we held that rescission should be conditioned on repayment of the amounts advanced by the lender. LaGrone, 534 F.2d at 1362. We noted that the TILA violations there were not egregious (failure to disclose an acceleration clause and amount financed in the broker's statement, and to delineate additional data from mandatory data), and that the equities favored the creditor who would otherwise have been left in an unsecured position in the borrower's intervening bankruptcy. Id.

Tampon correctly points out that we made it clear in Semar v. Platte Valley Federal Savings & Loan Association, 791 F.2d 699, 705-06 (9th Cir.1986), that courts have no discretion to alter TILA's substantive provisions. However, Semar left intact the discretion to alter TILA's procedural provisions. In Semar, the district court had made the borrowers responsible for interest and other charges listed on the closing statement contrary to § 1635(b), which states that the borrower "is not liable for any finance or other charge." We rejected the creditor's argument, based on Palmer, that the court had equitable discretion to alter the statute in this way. In so doing, we distinguished the Palmer line of authority on the footing that in those cases, the courts had simply altered TILA's procedures whereas the modification in Semar was substantive. See Semar, 791 F.2d at 706 n. 15.

Trying to fit within Semar, Tampon argues that subsection (d)(4) of Regulation Z is a substantive provision that does...