S. MARTIN TEEL, JR., Bankruptcy Judge.
The instant adversary proceeding was commenced by the filing of a five-count complaint on September 23, 2004, which sought, inter alia, rescission of a loan extended by the defendant, James Thomas, to the plaintiff, Ethel Dawson, as well as damages, based upon violations of the Truth in Lending Act ("TILA"). More than three years after this proceeding was commenced, the court ruled that Thomas did, in fact, violate the Truth in Lending Act, and that the plaintiff was entitled to both rescission and damages with respect to finance charges paid. Dawson v. Thomas (In re Dawson), 411 B.R. 1 (Bankr. D.D.C.2008). Because the two remedies are largely duplicative, yet somewhat different in their mechanics, and in order to prevent a double recovery, the court's memorandum decision and interim order instructed the plaintiff to elect which of these remedies she intends to pursue. This memorandum decision addresses developments
On April 29, 2008, Thomas filed a status report contending that because Dawson "apparently sold" the real property securing the loan in question, she has waived any right of rescission (Dkt. No. 63). According to the certificate of satisfaction attached to Thomas's status report, by August 30, 2006, Dawson had fully satisfied her loan obligation to Thomas. On April 29, 2008, the same day on which Thomas filed his status report, the debtor filed a notice of election to rescind, advising the court that she sold her house on June 13, 2006, and further stating that approximately $50,000 was placed into escrow by the settlement company pending the resolution of this adversary proceeding (Dkt. No. 64). The debtor likewise filed a statement of attorney fees, specifying that she wishes to have those fees paid from the aforementioned escrow account.
On May 15, 2008, apparently surprised by Thomas's assertion that the loan had been satisfied from the proceeds of the sale, Dawson filed a Motion to Compel Compliance with Court Order of April 9, 2008 (Dkt. No. 66). In that motion, Dawson explains that she believed that the sale proceeds were being held in escrow pending resolution of this adversary proceeding, and that she did not intend to waive any of her claims. Dawson further states that, in response to Thomas's April 29, 2008 filing, she attempted to contact the settlement company, only to learn that the settlement company has apparently gone out of business and the attorney who conducted the settlement has apparently had his license revoked. By her motion, Dawson asks that the court require Thomas to pay the $50,000 he received upon the sale of Dawson's property into the court's registry so that it may be distributed according to the court's April 9, 2008 order.
Thomas opposes Dawson's motion to compel on several grounds. First, Thomas contends that he is already in compliance with the order, observing that the April 9, 2008 order did not require segregation of funds. Second, Thomas notes that, in consultation with Dawson's son, Thomas discounted the pay off amount of the note by approximately 15% and, upon satisfaction of that reduced amount through the sale proceeds, Thomas ultimately recorded a release of the deed of trust. Thomas contends that this constituted a settlement of the dispute, although he acknowledges that Dawson refused to sign a release of her claims in this proceeding in exchange for a release of the deed of trust. Third, Thomas contends that there was no agreement among Thomas, Dawson, and/or the settlement agent that would require the funds used to pay off the note to be escrowed pending resolution of this proceeding. Likewise, there was nothing in this court's April 9, 2008 order that would have required Thomas to pay any money into the court's registry. As such, Thomas states that he is in compliance with the court's order and the requested relief is inappropriate. Finally, Thomas contends that because the property was sold and the deed of trust released, there is nothing left to rescind. As an additional matter, and of unclear legal significance, Thomas takes issue with Dawson's failure to disclose that the sale of the property was to Dawson's son.
Section 1635(f) of 15 U.S.C. provides that "[a]n obligor's right of rescission shall
As noted in the court's memorandum decision, "Dawson's right to rescission was subject to legitimate dispute in this litigation, and Thomas was under no obligation to honor Dawson's request until this court determined that Dawson actually possessed a right of rescission." Dawson v. Thomas, 411 B.R. at 41. As the court also noted, however, by insisting upon judicial resolution of whether he violated TILA, Thomas engendered delay. Dawson v. Thomas, 411 B.R. at 43. To strip Dawson of the right to rescind after she duly sought to vindicate that right in this adversary proceeding, and when it was Thomas whose challenge to that asserted right necessitated a trial before this court, would be an anomalous result. As a practical matter, however, because the remedy of damages under TILA provides monetary relief equal to that provided for under rescission,
Several courts have considered the question of whether and under what circumstances a borrower's sale of her property terminates her right to rescission under 15 U.S.C. § 1635(f). The cases, however, provide only limited guidance as to the circumstances under which a sale definitively terminates the right to rescind in the event the borrower has made at least some attempt to rescind prior to the sale. At least one court concluded that, in order to preserve the right to rescind notwithstanding § 1635, the borrower was required, at the very least, to send notice of rescission before contracting to sell her home. See Hefferman v. Bitton, 882 F.2d 379, 383-84 (9th Cir.1989) (declining to reach the more difficult question of whether a "sale" under § 1635(f) establishes a deadline for sending a notice or for bringing a lawsuit); Blough v. Young, 1998 WL 1993382 (Mich.App. Jan.23, 1998) (unpublished) (following Bitton and holding that the right to rescission terminated when the borrower contracted to sell the property). In Meyer v. Ameriquest Mortg. Co., 342 F.3d 899 (9th Cir.2003), the court expanded upon the holding in Bitton, concluding that a sale of the property, even if it occurs after the borrower sends a notice of rescission and after the borrower commences litigation seeking to vindicate the right, terminates rescission as a cause of action. Id. at 902-03 (borrowers amended their complaint after the sale in order to seek damages rather than rescission under TILA, and their claim was ultimately dismissed because the one-year limitation on the damages claim had expired). But see Semar v. Platte Valley Fed. S & L Ass'n, 791 F.2d 699 (9th Cir.1986) (permitting the borrower to continue prosecution of a TILA rescission claim notwithstanding a post-complaint sale of the property, requiring that the proceeds of the sale be held by the court in escrow, but failing to reach the question of when a sale or a contract of sale would terminate the right to rescission under § 1635). The court has found no case in which the borrower at issue fully prosecuted her rescission claim at trial, yet sold the property prior to the court's issuing a decision.
To the extent cases such as Meyer interpret § 1635(f) to mean that, regardless of what steps a borrower takes to invoke his right to rescission, that right always terminates once the borrower contracts to sell his home, this court respectfully disagrees. Section 1635 ought not be understood as providing for termination of the borrower's entitlements arising from rescission when a sale occurs after that right of rescission has been properly exercised and preserved through the timely commencement of an action to enforce the right.
In other words, if a borrower has given timely notice of rescission and sued to enforce that right prior to the expiration of three years without having sold the property, the right of rescission has been
Furthermore, treating a timely exercised right of rescission as terminated by a subsequent sale would deprive the borrower of its right to recover damages for the lender's failure to comply with its rescission obligations. A timely exercise of the right of rescission triggers obligations on the lender's part, and if the lender wrongfully fails to comply with those rescission obligations, the borrower may sue for damages based on that breach. See Mount v. LaSalle Bank Lake View, 886 F.Supp. 650, 651-52 (N.D.Ill.1995); Malfa v. Household Bank, F.S.B., 825 F.Supp. 1018, 1020 (S.D.Fla.1993). Treating a subsequent sale as terminating a timely exercised rescission right, thereby eliminating the right to recover damages for breach of the lender's rescission obligations arising from the timely exercise of rescission, only awards the lender for dragging its heels.
Under the Meyer interpretation of § 1635, Dawson's right to rescind would have expired while this matter was under advisement regardless of any sale, given that § 1635 provides that the right expires "three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first. ...," and it has been more than three years since the consummation of the transaction. That would be an absurd result, and it stands to reason that if the passage of three years did not terminate Dawson's rescission rights in this case, neither did her sale of the property.
The Court's decision in Beach v. Ocwen Federal Bank, 523 U.S. 410, 118 S.Ct. 1408, 140 L.Ed.2d 566 (1998), demonstrates that the passage of three years does not terminate the right of rescission if, within that three years, the right has been properly invoked and preserved through the commencement and prosecution of a claim. In Beach, the Court held that § 1635(f) is a statute of repose, not merely a statute of limitation, and thus that when a borrower failed within three years of the consummation of the loan transaction to give notice of rescission, the rights of rescission could not later be asserted
If the obligor sues to enforce an exercised rescission right, the procedures prescribed by § 1635(b) apply "except when otherwise ordered by a court." Accordingly, when timely notice of rescission has been made under § 1635(a), but the lender questions whether the obligor was entitled to rescind, forcing the obligor to sue to enforce the rescission, the court may alter the procedures under § 1635(b). But a necessity to seek court enforcement, and the court's authority to modify the rescission procedures when such court enforcement is sought, do not destroy the timeliness of the exercise of the right of rescission. Indeed, the court's authority to modify the procedures under § 1635(b) is evidence that the court possesses the discretion to frame a rescission remedy that takes into account the effects of a sale of the property that occurs after the timely filing of a complaint for rescission. For example, when the borrower proceeds to sell the property, the court can still order that the lender is obligated to return any downpayment (part of the rescission obligations to which the lender is subject under § 1635(b)), even though voiding the security interest may be a moot issue. There is no reason why, after the borrower timely exercises his right of rescission, a subsequent sale should obliterate all of the lender's obligations arising from the rescission. At most, the sale language in § 1635(f) can be viewed as setting forth a condition precedent (no prior sale) for exercising and, perhaps, for suing on the right of rescission.
The Court in Beach, 523 U.S. at 418-19, 118 S.Ct. 1408, offered an explanation for why Congress might have decided to make § 1635(f) a statute of repose instead of only a statute of limitations for asserting rescission claims (in contrast to the different treatment of damage claims under TILA):
This makes sense. In a foreclosure sale context, a mortgage that remains subject to rescission could result in a cloud on the purchaser's title. Section 1635(f) provides assurances that the bank can sell the property at foreclosure without there being a risk of rescission clouding the purchaser's title, a risk that could depress the amount that might be bid at the foreclosure sale. As noted in the reports cited in Beach, this ultimately can hurt borrowers (because they will be liable for any deficiency arising at a foreclosure sale).
In Bitton, 882 F.2d at 384, the court of appeals reasoned:
The two reports cited in Beach and the report cited in Bitton addressed the clouds on title that could arise from the lack of a fixed time for exercising the right of rescission, and on the harm that such clouds on title cause borrowers in the long run.
Even if the execution of a contract of sale should be treated as the point at which the right of rescission is lost, what is lost at that point is the right to exercise the right of rescission, not the entitlements arising from a prior exercise of the right of rescission. Nothing in the report Bitton cites, or in the two reports cited in Beach, suggests, as was held in Meyer, that once rescission is timely exercised the rights arising from rescission are nevertheless deemed lost if the property is later sold. If the lender sells the property at foreclosure, it has only itself to blame for subjecting the property to a depressed sales price based on the cloud on title arising from the exercised right of rescission.
Treating a sale as terminating the borrower's entitlements arising from a timely exercised right of rescission will deprive the debtor of one avenue for raising funds with which to comply with his tender obligation upon rescission being effected in order to preserve his entitlement, arising from rescission, to a return of his downpayment. Congress did not likely intend that result.
The court had required Dawson to elect to proceed by way of either rescission or a monetary judgment to recover finance charges and fees paid, lest she obtain a double recovery. Dawson elected to proceed by way of rescission with respect to the recovery of finance charges and fees, but that was prior to Thomas making the assertion that the property's sale terminated the right of rescission. The court will not hold Dawson to her election given the uncertainty in the case law as to whether rescission is still available. In addition to recovery of finance charges and fees via rescission under § 1635(b), Dawson is entitled alternatively under 15 U.S.C. § 1640(a)(4) to a money judgment for recovery of all finance charges and fees paid. The court can frame its judgment as permitting Dawson to recover such amounts via rescission, and, in the alternative,
The court already determined the amount of finance charges and fees paid prior to the commencement of this adversary proceeding as equaling $14,500.84. Because Thomas was paid an additional sum out of the proceeds of the sale of the property, it will be necessary to fix the amount of finance charges and fees paid incident to that sale. The record does not permit the court to fix the amount of finance charges and fees paid incident to the sale.
At the scheduling conference, Dawson may request the court to enter a final judgment under Fed.R.Civ.P. 54(b) awarding to Dawson the finance charges and fees paid prior to the commencement of this adversary proceeding, as well as attorney's fees incurred through April 29, 2008, the issue next addressed.
The court has determined that Dawson is entitled to recover attorney's fees incurred in connection with this adversary proceeding. This court's order of April 9, 2008, directed Dawson to file a statement of reasonable attorney's fees within 20 days, and provided that Thomas was required to file an objection within 15 days thereafter. In compliance with this court's order, on April 29, 2008, Dawson filed a statement reflecting attorney's fees in the amount of $17,393.16 and costs and expenses in the amount of $1,106.00. Thomas has not opposed the statement of fees and costs. Accordingly, after addressing at the scheduling conference whether the judgment should be made a final judgment under Rule 54(b), the court will enter a monetary judgment for those amounts.
Although Thomas has not directly challenged Dawson's statement of attorney's fees, his May 22, 2008 response to Dawson's motion to compel asserts that this adversary proceeding should be dismissed in its entirety based upon a settlement of the dispute. If Thomas seeks dismissal of this adversary proceeding based upon a settlement of all claims, however, he must file the appropriate motion seeking relief from the court. Having failed to do so, the
An order follows.