Under Federal Truth in Lending Law you can rescind your loan in Bankruptcy – Some things to think about in regard to validity of the lien, borrower and lender tender obligations and the like.
By Steve Vondran
Services for Real Estate Pros with The Law Offices of Steven C. Vondran, P.C. CA#232337 AZ#025911
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September 11, 2010 07:38 PM
The following is general legal information only and not intended as legal advice or a substitute for obtaining legal advice. For specific answers to your questions please consult a real estate attorney. Steve Vondran, Esq., is a real estate attorney licensed to practice law in California and Arizona. He can be reached at email@example.com or by phone at (877) 276-5084. There is no representation that this article is 100% accurate or up-to-date as the law is constantly evolving.
(1) If a borrower has a forensic loan analysis done and uncovers a “material truth in lending violation” in their loan file, and if the loan was originated within the last three years, then an “extended three year right to rescind” the loan is raised. The extended right to rescind exists only for refinance transactions on consumer loans (not for purchase loans or commercial or business loans unfortunately).
NOTE: There are several different ways to get a “material TILA violation.” The main ones I will mention are failure of each borrower or person with security interest in the property to get two (2) properly executed notices of right to cancel. Another one is under-disclosure (outside permitted tolerance leves) or the Annual Percentage Rate (APR) and under-disclosure of Finance Charges / Amount Financed. There are other potential violations, and you should consult a forensic loan examiner if you have loan within the last three years.
(2) In this event, a Rescission letter must be sent to the lender, and all parties who at ay time may have had a financial interest in the loan. The letter should set forth that “I wish to cancel” the loan, state the loan number, and all other pertinent information about the loan, including specific TILA violations (although this is not a legal requirement). Your letter should also discuss the lenders legal obligations under TILA law. To be safe, you should have a Federal Truth in Lending Lawyer review your file and draft this letter for you.
(3) What are the legal obligations of the parties after the TILA rescission letter is sent (loan rescinded)? Let’s take a look:
(a) If the Lender disputes the right to rescind, they have 20 days to file a legal action for declaratory relief. See 15 U.S.C. 1625(b). I have not seen that they will go to this extent for the most part. Rather, they will either respond to your letter telling you that you do not have a valid claim, or, they just blow you off all together. Assuming they don’t file for declaratory relief, here is what TILA Law (also known as Reg Z) says must happen next.
NOTE: TILA rescission applies to ALL ASSIGNEES OF THE LOAN. There is no “holder in due course” argument or anything like that. See 15 U.S.C. 1641(c), Belini w. Washington Mutual Bank, 412 F.3d 17 (1st Cir. 2005), and Ocwen Fed. Bank v. Russell, 53 P.3d 312 (Haw Ct. App. 2002).
(b) STEP ONE, by operation of law, the security interest and promissory note automatically becomes void and the consumer is relieved of any obligation to pay any finance or other charges (15 USC 1635(b); Reg. Z-226.15(d)(1),226.23(d)(1). . See Official Staff Commentary § 226.23(d)(2)-1. (See Willis v. Friedman, Clearinghouse No. 54,564 (Md. Ct. Spec. App. May 2, 2002) (Once the right to rescind is exercised, the security interest in the property becomes void ab initio). Thus, the security interest is void and of no legal effect irrespective of whether the creditor makes any affirmative response to the notice. (See Family Financial Services v. Spencer, 677 A.2d 479 (Conn. App. 1996) (all that is required is notification of the intent to rescind, and the agreement is automatically rescinded).
(c) STEP TWO, THE LENDER HAS A TENDER OBLIGATION TO THE BORROWER. YES, YOU HEARD THAT RIGHT, BY STATUTE, IT IS THE LENDER WHO MUST TENDER FIRST. NOT THE BORROWER. THE QUESTION OF WHO HAS TO TENDER FIRST CAN ONLY BE MODIFIED BY THE JUDGE. As part of the lender’s legal tender obligation under TILA, the lender must return any money, including that which may have been passed on to a third party, such as a broker or an appraiser and to take any action necessary to reflect the termination of the security interest within 20 calendar days of receiving the rescission notice. See 15 USC 1635(b); Reg. Z-226.15(d)(2),226.23(d)(2).
(d) STEP THREE: After the Lender has fulfilled their obligations under TILA, the borrower must then TENDER all proceeds they received in connection with the loan transaction. That is, they must pay the lender back what they got. There are no free lunches, and you cannot get something for nothing or your house for free.
NOTE: Under TILA, the Courts are given the EQUITABLE POWER to modify Steps One and Two (technically speaking, the Court cannot revive the security instrument that was voided when the borrower rescinded) but the Court can condition the ability to rescind on tender, based upon a balance of the equities in the case. You will need a foreclosure or TILA rescission attorney to explain this to you, and there are a bunch of cases that discusses the tender obligations and who should have to tender first, the borrower or the lender.
NOTE: One you send the TILA rescission letter to your creditor, you may want to try to prepare a recordable document and see if you can record it so the rest of the world is on notice that the loan has been rescinded. You do this because the lender will likely be licking its chops and setting the stage for foreclosure once it gets your letter (often times the borrower is in foreclosure and the lender has been unwilling to provide a loan modification, or a meaningful loan modification which compels the borrower to explore and assert its other legal rights) and you would like to try to prevent a Sale or transfer of the property. Again, you are wise to discuss this with a foreclosure or real estate lawyer with knowledge of truth in lending law.
SPECIAL ISSUES WHEN RESCINDING YOUR LOAN UNDER TRUTH IN LENDING (“TILA”) AND FILING BANKRUPTCY.
(1) Filing Chapter 7 or Chapter 13 Bankruptcy does not terminate your right to rescind your loan. You can still do it. However, there are a few things to keep in mind. In most cases, the rescission right belongs to the trustee to bring the action, that is, the right to rescind the loan is one held by the estate (rather than the debtor’s right to exercise – unless the proceeds are exempt to the debtor). If the proceeds are exempt, the debtor should be able to file the case. See in re Polis, 217 F.3d 899 (7th Cir. 2000) and Christy v. Heights Financial Corp., 101 B.R. 542 (C.D. Ill. 1987).
If there is no exemption to cover the cause of action or the proceeds, then the Trustee will have to bring the claim or has standing to bring the claim. In these cases, if the Trustee does not want to bring the claim, make sure you get a determination (or stipulation) that the Trustee has abandoned the Claim so you can bring it in the current bankruptcy case or at a later district court case yourself. See Bryson v. Bank of N.Y., 584 F. Supp. 1306 (S.D.N.Y. 1984) for authority that the TILA case must abandoned by the Bankruptcy Trustee. In Bryson the Court said:
Upon a filing of bankruptcy, title to the bankrupt’s property vests in the trustee in bankruptcy. “Property” includes the right to pursue causes of action formerly belonging to the debtor. Hanover Insurance Co. v. Tyco Industries, Inc., 500 F.2d 654, 656 (3d Cir.1974). Bryson thus was not a proper plaintiff when this suit was instituted. However, a trustee may abandon his claim to any asset which he deems to be less valuable than the cost of recovering it. Id. at 657; 11 U.S.C. § 554(a). This is exactly the statement plaintiff’s trustee makes in the submitted affidavit. An effective abandonment would relate back to the time of filing of the petition, thereby retroactively making plaintiff a proper party. Brown v. O’Keefe, 300 U.S. 598, 602, 57 S.Ct. 543, 546, 81 L.Ed. 827 (1937).
“Abandonment, however, is not effectuated by an affidavit from the trustee. The Bankruptcy Code, specifically 11 U.S.C. § 554, authorizes a trustee to abandon any property of the estate “[a]fter notice and a hearing.” Implementing this, Fed.R. Bankruptcy 608 provides for approval by the Bankruptcy Court of such abandonment. The Advisory Committee Note to Rule 608 states that the rule “codifies the preferred practice developed under case law.” See, e.g., Lincoln Nat. Life Ins. Co. v. Seales, 62 F.2d 582, 585 (5th Cir.1933). According to Collier on Bankruptcy, which is cited by the Advisory Committee as authority for the case law practice, the preferred practice is to require court approval as a “condition prerequisite” to abandonment by the trustee. 4 Colliers on Bankruptcy, ¶ 554.01 (15th Ed.1982). Rule 608 and § 554 must therefore be read to require court approval before a trustee can abandon property otherwise within the estate. This rule assures that the creditors of the bankrupt, for whom the trustee must conserve the estate, are given an opportunity to object to the returning of any property to the bankrupt. In the absence of court approval of trustee abandonment of plaintiff Bryson’s claims, they must be dismissed in their entirety.
(2) Also realize, if you file a district court case to rescind your loan BEFORE you go into bankruptcy (or where your TILA claim arose prior to filing bankruptcy but was not filed – for example, the TILA rescission cause of action relates to a loan entered into PRIOR to filing BK but you have not filed suit before filing your BK petition), if you filed a TILA state or federal case your TILA claim can be removed to the bankruptcy Court and your TILA claim can become part of (property of) the bankruptcy estate. Even if you haven’t filed the case yet, if the cause of action arose before the BK petition, there is a good argument the TILA cause of action is part of the bankruptcy estate. Again, you may want to contact the trustee to have the trustee stipulate to abandoning the case or letting you bring it so you have standing to file it (a common objection the opponent may raise).
As was said in the Polis case cited above:
On the date Polis filed her petition in bankruptcy, she had not yet sued Getaways, but the legal claim on which the suit was based, having arisen out of a transaction (the sale of the travel package) that had occurred before the petition was filed, was already “property” of the debtor and hence of the debtor’s estate in bankruptcy. Cable v. Ivy Tech State College, 200 F.3d 467, 472-73 (7th Cir.1999); In re Carousel Int’l Corp., 89 F.3d 359, 362 (7th Cir.1996); In re Smith, 640 F.2d 888, 890 (7th Cir.1981) (Truth in Lending Act claims-just as here); Northview Motors, Inc. v. Chrysler Motors Corp., 186 F.3d 346, 350 (3d Cir.1999); In re Wischan, 77 F.3d 875, 877 (5th Cir.1996); Wissman v. Pittsburgh National Bank, 942 F.2d 867, 869-71 (4th Cir.1991). The question is what its value was then.
As to the value question the court held:
“The Code provides that the “value” of property sought to be exempted “means fair market value” on the date the petition for bankruptcy was filed, 11 U.S.C. § 522(a)(2), unless the debtor’s estate acquires the property later.” Although we may assume (without having any case law to go on) that a Truth in Lending Act claim is not assignable and so cannot be the subject of a “market” transaction in the literal sense, that is irrelevant. Legal claims are assets whether or not they are assignable, especially when they are claims for money; as a first approximation, the value of Polis’s claim is the judgment that she will obtain if she litigates and wins multiplied by the probability of that (to her) happy outcome. That is roughly how parties to money cases value them for purposes of determining whether to settle in advance of trial. They do so whether or not the claim is assignable; unassignable claims (tort claims, for example) command positive prices in the settlement “market.”
NOTE: In a Chapter 7 (or Chapter 11 bankruptcy case), the Bankruptcy Trustee, (or the Debtor in possession in a Chapter 11 case), can file a motion to sell property of the estate “outside the ordinary course of business” by seeking to conduct a “363 Asset Sale”. We are writing a separate blog on this rather interesting topic. In general, what does that mean? It means, that in many cases, the Bankruptcy Trustee has the right and legal authority to sell your property (including your TILA lawsuit) to the highest bidder, and may even sell your TILA case at a Bankruptcy Auction under 11 U.S.C. 363. Yes, that means they can attempt to sell and seek court approval of the sale of the asset subject to an “auction” of the claim to any potential over-bidders. So your TILA claim could be sold-off to the highest bidder in a Bankruptcy Court. Yes, that is right – Judge turned auctioneer – it really is interesting).
Can you guess who might be interested in bidding (paying cash to settle your TILA case at 363 Sale/bankruptcy auction? If you said the lender who is being sued for rescission and TILA statutory damages, you are a TILA pro. That is right, and that is exactly what happened in one case. The lender (“creditor” under TILA) effectively bid about 5k to “buy” and “settle” – meaning the debtor had to dismiss adversary proceeding with prejudice – the TILA case filed by the Debtor. Wait, that seems strange right? The lender who is being sued gets to buy the lawsuit (unless someone bids higher of course and as long as the court approves the sale as being in good faith and at arms length) and the Trustee is more than happy to generate some revenue – for both themselves (yes, the BK trustee earns a commission on assets recovered for the estate) and the rest goes to the unsecured creditors. So, you need to at least understand that there is a potential the lenders being sued will want to bid on the lawsuit (“asset” of the estate) and try to cash out the Chapter 7 Trustee. You will have a chance to over-bid and different types of financial bids will have to be considered by the judge including contingency type bids. This is certainly a consideration to be made when thinking of filing an adversary proceeding to rescind your loan under TILA when the claim arose, or was filed before bankruptcy.
Note: As stated above as borrower/debtor, you can bid on your own case being auctioned off. And you do not have to bid ALL CASH or anything like that. There is another blog we will be writing that discusses the Lahijani case which discusses the different types of bids the judge can consider in deciding whether a bid is in good faith. Google “Vondran discusses Lahijani case.”
(3) In regard to the bankruptcy petition itself, the TILA damages should be listed as an asset (property) of the estate and if there is a homestead exemption at play (ex. the 704 exemption in California) or other exemption, this should be listed as exempt. Being exempt may permit the borrower to bring the TILA action. A dollar value to the claim should also be stated, and the “statement of intent” of the debtor should list the intent to rescind the loan. Again, a Truth in Lending lawyer can help you craft good language for your statement of intent which will put the lenders and the banks on notice of your plans. People have asked whether filing a chapter 7 bankruptcy petition, and then filing an adversary proceeding seeking a determination that the “lien is invalid” will compel a loan workout. I have not seen that result being forthcoming. If you go to rescind your loan, plan on following through which again normally will require (a) equity in the property and (b) some inequity on part of the lender and (c) sale of the property. Those are the harsh realities of TILA rescission in Bankruptcy.
NOTE: A lot of people miss this (including opposing counsel for Banks). IF A BANK FAILS TO HONOR YOUR RESCISSION LETTER, THAT IS A LEGAL VIOLATION TRIGGERING A ONE-YEAR RIGHT TO SUE FOR STATUTORY MONEY DAMAGES. MOST LENDERS FAIL TO BELIEVE THEY CAN BE HELD ACCOUNTABLE FOR THIS. If your loan was originated within one year, there is also a separate statutory damage claim that can be brought. If the loan was transferred from the originating lender to a new “lender” on the secondary market, then the TILA violation must be “apparent on the face of the documents” (ex. Notice of Right to Cancel that has no dates filled in) to trigger lender liability.
NOTE: Another trick to avoid…….all assignees of the loan are subject to TILA rescission. I have seen some really bizarre arguments by lenders for big banks such as Wells Fargo and One West bank who do not seem to understand this relatively simple concept. If they are a loan assignee, they should audit the files they purchase and if there is a material TILA violation they should decline the purchase of that particular loan. That is their problem to deal with.
(4) Another thing to consider is some courts may deem the TILA claim property of the estate and that ONLY THE TRUSTEE HAS STANDING to bring the TILA claim. Again, if the Trustee won’t bring the claim, get a determination that they abandoned it so you, as debtor, can bring the claim in the current BK case or at a later date.
(5) What does the Borrower get back from the creditor when it rescinds the loan (remember, STEP ONE of TILA is the LENDER MUST TENDER – unless the Court later modifies or conditions this step). You should pretty much argue that all fees, costs, finance charges, and “other charges” paid in connection with the loan should be refunded or credited to the consumer. For example, the following fees, costs, finance charges and other charges should be considered:
FEES THAT SHOULD BE REFUNDED TO BORROWER FOLLOWING TILA RESCISSION – “ALL FINANCE AND OTHER CHARGES”\
√ All Finance charges paid in connection with the credit transaction
√ All late fees paid
√ Any pre-payment penalty fees paid
√ Any fees paid to any third party in connection with the loan (ex. appraisal fees, credit report fees, filing fees, doc prep fees, loan origination fees, points, rate lock fees, etc.)
√ Any money or property given to anyone in connection with the consumer credit transaction
√ Any attorney fees paid by the consumer
√ Yield Spread Premium (YSP)
NOTE: Generally these fees are treated as an offset to the borrower’s tender obligation, and you can basically create a new payoff amount by figuring out what you are owed from the lender versus the amount of the loan owed (the borrowers tender obligation). It should be argued that the Court has NO POWER to modify what amounts are owed the borrower. See Semar v. Platte Valley Federal Sav. & Loan Ass’n, 791 F.2d 699, C.A.9 (Cal.),1986. In Platte, the Court held:
“On rescission, the security interest is dissolved and the borrower returns “the property”-in this case the loan proceeds-to the lender. 15 U.S.C. § 1635(b). TILA specifically states that the borrower “is not liable for any finance or other charge.” Id. Interest is a finance charge. 15 U.S.C. § 1605(a); see Ljepava v. M.L.S.C. Properties, Inc., 511 F.2d 935, 938 (9th Cir.1975) (district court subtracted from amount borrower owed lender under a TILA rescission “finance charge” that included 10% interest, commissions, and “extra payment”); 12 C.F.R. § 226.4(b)(1). The district court erred by making the Semars responsible for interest and many of the charges listed on the Closing Statement. The proper formula under the statute is the one suggested by the Semars: the loan amount less all charges in the loan agreement. Therefore, they owe Platte Valley $92,290.65. 15 U.S.C. § 1605(a) provides: “Except as otherwise provided in this section, the amount of the finance charge in connection with any consumer credit transaction shall be determined as the sum of all charges, payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the creditor as an incident to the extension of credit. The finance charge does not include charges of a type payable in a comparable cash transaction. Examples of charges which are included in the finance charge include any of the following types of charges which are applicable:
(1) Interest, time price differential, and any amount payable under a point, discount, or other system of additional charges.
(2) Service or carrying charge.
(3) Loan fee, finder’s fee, or similar charge.
(4) Fee for an investigation or credit report.
(5) Premium or other charge for any guarantee or insurance protecting the creditor against the obligor’s default or other credit loss.
“Platte Valley concedes that the Semars’ formula is correct under TILA but argues that the district court has equitable discretion to alter the statute. Platte Valley cites Rachbach v. Cogswell, 547 F.2d 502 (10th Cir.1976), which held that the district court did not abuse its discretion by requiring the borrower to repay principal and interest in a TILA rescission. However, this decision contravenes 15 U.S.C. § 1635(b), which states that a borrower is not liable for any finance charge, and 15 U.S.C. § 1605(a), which lists interest as an example of a finance charge. We defer to Congress’ method of enforcing TILA and follow the plain language of the statutes.”
NOTE: As set forth above, the Creditor should also return any money or property even if it was given to a third party in connection with the loan transaction. For example, fees paid to the broker, appraisers, closing costs, etc., even if such fees and costs “don’t represent profit to the creditor” See Official Staff Commentary 226.23(d)(2)(1). Here is a good link to review http://www.bankersonline.com/regs/226/suppi226-23.html.
As it says here:
- Refunds to consumer. The consumer cannot be required to pay any amount in the form of money or property either to the creditor or to a third party as part of the credit transaction. Any amounts of this nature already paid by the consumer must be refunded. “Any amount” includes finance charges already accrued, as well as other charges, such as broker fees, application and commitment fees, or fees for a title search or appraisal, whether paid to the creditor, paid directly to a third party, or passed on from the creditor to the third party. It is irrelevant that these amounts may not represent profit to the creditor.
- Amounts not refundable to consumer. Creditors need not return any money given by the consumer to a third party outside of the credit transaction, such as costs incurred for a building permit or for a zoning variance. Similarly, the term any amount does not apply to any money or property given by the creditor to the consumer; those amounts must be tendered by the consumer to the creditor under §226.23(d)(3).
Citations to borrower refund provisions are: Reg Z 226.15(d)(1), 226.23(d)(1), 15 U.S.C. 1635(b).
NOTE: Again, make sure you ask for just about everything. As one Court put it: “the creditor bears the risk of loss and they can limit their loss by complying with TILA. See French v. Wilson, 446 F. Supp. 216 which held:
The Truth in Lending Act has been interpreted as being “remedial in nature” and “must be construed in liberal fashion if the underlying Congressional purpose is to be effectuated.” N. C. Freed Company, Inc. v. Board of Governors of Federal Reserve System, 473 F.2d 1210, 1214 (2nd Cir. 1973), cert. denied, 414 U.S. 827, 94 S.Ct. 48, 38 L.Ed.2d 61 (1973). See also Littlefield v. Walt Flanagan and Company, 498 F.2d 1133, 1136 (10th Cir. 1974); Ratner v. Chemical Bank New York Trust Company, 329 F.Supp. 270 (S.D.N.Y.1971). As the Court in Starks v. Orleans Motors, Inc., 372 F.Supp. 928, 932 (E.D.La.1974), aff’d mem., 500 F.2d 1182 (5th Cir. 1974) aptly stated: “Where the nature of an act is remedial, as here, it should be construed liberally in an attempt to provide the remedy, not avoid it………“Congress’ intended operation of the statute, as evidenced by the 1635(b) creditor-forfeiture provision, therefore clearly calls for a debtor windfall if the creditor does not set about to rectify his earlier nondisclosures in the manner envisaged by the statute. In fact, the Act flatly provides that if his creditor continues in his untoward ways, the debtor incurs no obligation to pay for property which he is at the same time entitled to keep.”
(6) TOLLING OF THREE YEAR PERIOD TO RESCIND (or one year damages provision under TILA) – is possible if you file for Bankruptcy. For example, if the three-year right to rescind is about to expire, it may be possible that you can file Bankruptcy and then rescind in the bankruptcy court even if the rescission exercise comes after the three year period (for example, you might get an extra sixty days to rescind – see Thomas v. GMAC Residential Funding Corp., 309 B.R. 453 (D. MD. 2004). The same is probably true if the one year statute for statutory damages is about to expire. See Section 11 U.S.C. 108(a) for authority. Just note, it may require the trustee to bring the action. But see In re Gaskins, 98 B.R. 328 which permits a claim brought by the debtor on behalf of the estate. Just something to keep in mind.
(7) BORROWER’S “TENDER” REQUIREMENT IN BANKRUPTCY:
COURTS CAN (OR ARGUABLE “SHOULD”) TAKE INTO ACCOUNT A BORROWERS ABILITY TO TENDER THE LOAN BALANCE IN BANKRUPTCY COURT AND DETERMINE THE AMOUNT OF TENDER – See In re Giza 428 B.R. 266 (Bkrtcy.D.Mass.2010). In Giza, the Court discussed:
“When a security interest is voided, the underlying claim becomes unsecured, and the Bankruptcy Code provides for how all unsecured claims must be treated in bankruptcy by the Chapter 13 plan under 11 U.S.C. § 1322(a)(3). The debtor may designate unsecured claims into different classes, but only if the designation does not discriminate unfairly against any class so designated. 11 U.S.C. § 1322(b)(1). And once a class is designated, the plan must “provide the same treatment for each claim within a particular class …” 11 U.S.C. § 1322(a)(3). Tender in full of the Gizas’ obligation to Deutsche Bank–should this Court otherwise find that the conditions for rescission have been met–would violate the requirements of § 1322(a)(3) by giving Deutsche Bank’s unsecured claim preferential treatment. Even if practical, such a payment would rob other unsecured creditors of most, if not all, of the dividends on their unsecured claims. Inasmuch as Deutsche Bank’s unsecured claim would be no different in character as any other, classifying the claim differently would be just the type of unfair discrimination as is expressly prohibited by § 1322(a)(3).
The Giza Court continued:
“Even if the Jaaskelainen view is correct and tender is a requirement for rescission, the outcome should be the same. In Jaaskelainen, the court still emphasized that “traditional equitable notions” were an important factor to consider when crafting appropriate tender. Wells Fargo Bank, N.A., 407 B.R. at 462. In remanding the case back to the bankruptcy court, the court urged: “consideration of the appropriate conditions to impose on Debtors’ exercise of rescission. In undertaking this evaluation the bankruptcy court should consider traditional equitable notions, including such factors as the severity of Appellants’ MCCCDA violation and the degree to which Debtors are able to pay the principal amount.”
“Indeed, in a Chapter 13 case, this Court, sitting as a court of equity, is well-suited to decide a debtor’s ability to pay his or her creditors, including those creditors whose claims may be repaid in whole or in part on account of their violations of TILA and MCCCDA. And, to the extent that such discretion is itself limited by the provisions of Chapter 13, that limitation is one prescribed by Congress in 11 U.S.C. § 1322(a)(3). To hold otherwise also would strike at the goals Congress sought to achieve in both the Bankruptcy Code and TILA.
“As the court stated in In re Piercy, “[i]t would be palpably unfair to deny the relief to which a consumer is entitled under TIL [A] because that consumer has also availed himself of bankruptcy relief. To do so would require that the consumer choose between bankruptcy and TIL[A], something neither form of statutory relief contemplates.” In re Piercy, 18 B.R. 1004, 1007 (Bankr.W.D.Ky.1982). Accordingly, the Court will not dismiss the Gizas’ claim for rescission but will, if the conditions for rescission are otherwise met, determine the amount of tender and order the Gizas to classify that claim and treat it consistently with those of other unsecured creditors of these debtors.”
Note: we have written another Brief about balancing the Equities of a Case and Determining whether or not (outside the bankruptcy court for the most part) the Courts can condition full tender on the ability of borrower to tender. (Google Vondran Equities must be balanced in a TILA case including a lender forcing you into court to assert rights that are supposed to be self-enforcing).
WHAT YOU NEED TO CONSIDER IF YOU THINK YOU HAVE A TRUTH IN LENDING (CASE FOR LOAN RESCISSION):
(1) HAVE YOUR LOAN FILE AUDITED FOR MATERIAL TRUTH IN LENDING VIOLATIONS BY A REAL ESTATE LAWYER (YOU CAN REACH US AT 877-276-5084). LOAN NEEDS TO BE A REFINANCE TRANSACTION WITHIN THE LAST THREE YEARS TO BE WORTH THE TIME, MONEY, AND EFFORT.
(2) DRAFT AND SERVE A TILA RESCISSION NOTICE TO YOUR LENDERS (AS MENTIONED ABOVE, THERE ARE MANY REQUIREMENTS TO TAKE INTO ACCOUNT, AND YOU WILL PROBABLY WANT TO INCLUDE OTHER LEGAL REQUESTS AT THE SAME TIME). YOU MAY WANT TO TRY TO RECORD THE LETTER IN THE COUNTY RECORDER’S OFFICE WHERE THE REAL PROPERTY IS LOCATED. NOTE: THEY MAY NOT ACCEPT IT FOR RECORDING. YOU NEED TO CHEK THEIR RULES FOR RECORDABLE DOCUMENTS.
(3) IF THE LENDER FAILS TO TENDER, OR FAILS TO FILE A DECLARATORY RELIEF ACTION CHALLENGING YOUR RIGHT TO RESCIND, THEY ARE BASICALLY SPITTING ON YOUR FEDERAL TILA RIGHTS AND FORCING YOU INTO COURT (AND FORCING YOU TO INCUR LEGAL FEES TO ENFORCE YOUR LEGAL RIGHTS). THIS IS INEQUITABLE BECAUSE TILA IS SUPPOSED TO BE SELF-ENFORCING, BUT THEY ARE HOPING EITHER: (A) YOU WONT FILE BANKRUPTCY (OR A STATE OR FEDERAL PREDATORY LENDING LAWSUIT), (B) YOU CAN’T AFFORD TO LITIGATE YOUR TILA CLAIM – OR HAVE NO VALID TILA CLAIM, OR (3) THAT YOU WILL JUST DISAPPEAR AND WALK AWAY FROM YOUR HOME AND DEAL WITH THE FORECLOSURE ON YOUR CREDIT.
(4) IF YOU HAVE VALID DEBTS TO DISCHARGE OR REORGANIZE, YOU MAY WANT TO CONSIDER WHETHER A CHAPTER 7 OR CHAPTER 13 BANKRUPTCY IS RIGHT FOR YOU. IF SO, THE TILA CLAIM MAY BE BROUGHT IN A BANKRUPTCY COURT (USUALLY FILED AS AN ADVERSARY PROCEEDING).
(5) WHEN YOU GET INTO A BANKRUPTCY COURT, YOU WILL LIKELY HAVE TO FILE AN “ADVERSARY PROCEEDING” (WHICH IS A COMPLAINT IN THE BANKRUPTCY COURT) CHALLENGING THE EXTENT OR VALIDITY OF THE LIEN. THE IDEA IS ONCE YOU HAVE RESCINDED YOUR LOAN, THAT LOAN IS UNSECURED, AND IF YOU ARE IN BANKRUPTCY, THE LIEN SHOULD BE TREATED AS UNSECURED AND THE LENDER SHOULD BE LUMPED IN, AND TREATED THE SAME AS ALL OTHER UNSECURED LENDERS. WHY IS THIS? UNDER TILA, THE STEP REQUIRING THAT “THE SECURITY INSTRUMENT IS VOID BY OPERATION OF LAW” TECHNICALLY SPEAKING, SHOULD NOT (OR PERHAPS CANNOT) BE ALTERED BY THE COURTS. ONLY THE QUESTION OF WHO TENDERS FIRST, OR WHETHER RESCISSION SHOULD BE CONDITIONED ON TENDER SHOULD BE THE ISSUE. THE LOAN ITSELF SHOULD BE TREATED AS UNSECURED. OF COURSE, IT IS PROBABLY THE CASE THAT YOU NEED TO PROVE THE VALIDITY OF THE TILA VIOLATION CLAIM TO REACH THIS RESULT. See Williams v. BankOne, N.A. See In re Williams, 291 B.R. 636, 657-58 (Bankr.E.D.Pa.2003) (“The language of § 1635(b) and Regulation Z as supported by the legislative history to § 1635(b) informs that, while courts can modify the procedures set forth in § 1635(b), they cannot modify the voiding of a creditor’s security interest.”).
NOTE: IF YOU FILE FOR BANKRUPTCY YOU WILL GET AN AUTOMATIC STAY, BUT THE LENDER MAY TRY TO FILE A MOTION TO LIFT THE AUTOMATIC STAY. AS SUCH, YOU MIGHT ALSO WANT TO CONSIDER FILING A LIS PENDENS (YES, WE HAVE SEEN ACTS SUCH AS TRYING TO SELL YOUR PROPERTY AFTER A CREDITOR’S HEARING BUT BEFORE YOUR ADVERSARY PROCEEDING CASE IS HEARD ON THE MERITS), AND SEEKING AN INJUNCTION AGAINST FORECLOSURE IN THE ADVERSARY PROCEEDING IS PROBABLY A WISE IDEA.
NOTE: WE TALK MORE ABOUT ADVERSARY PROCEEDINGS ON OTHER BLOGS (GOOGLE “VONDRAN ADVERSARY PROCEEDINGS IN BANKRUPTCY”).
(6) IN BANKRUPTCY, THE COURT SHOULD APPLY EQUITABLE PRINCIPLES, INCLUDING EQUITABLE CONSIDERATIONS TO THE UNSECURED CREDITORS, AND THE INEQUITY OF DEFENDANTS CONDUCT IN FORCING YOU INTO COURT TO ASSERT YOUR TILA RIGHTS, WHEN DETERMINING WHAT AMOUNT OF TENDER THE BORROWER IS ABLE TO PAY, OR SHOULD PAY, AND HOW AND WHEN THOSE PAYMENTS SHOULD BE MADE (EX. OVER 60 MONTHS IN A CHAPTER 13 CASE, ALLOWING SALE OF THE HOUSE IN A CHAPTER 7 CASE ETC.). See In re Giza 428 B.R. 266 (Bkrtcy.D.Mass.2010) discussed further above. Also see Ray v. Citifinancial Inc., 228 F.Supp 2d 664, 670 (D. Md. 2002) which held: “courts can take into account the equities of the case including those affecting unsecured creditors.” And in re Bell, 309 B.R. 139 (Bankr. E.D. Pa 2004) where the Court permitted borrower to pay tender, after offsets for lender tender, over 60 month bankruptcy plan in Chapter 13 case.
(7) Also, if the lenders conduct is particularly reprehensible, oppressive or shocking to the conscience, consider whether the obligation to tender should be completed eliminated. As the court said in one case: “My research reveals that although some courts have recognized that such a remedy may be imposed under § 1635(b), it is viewed as a harsh one and therefore to be confined to “situations where creditors have tried to deceive or cheat the consumer.” Michel v. Beneficial Consumer Discount Co. (In re Michel), 140 B.R. 92, 101 (Bankr.E.D.Pa.1992) (refusing to allow debtors to eliminate debt where creditor had “committed substantial TILA violations” but no “serious overreaching or improper conduct”). See also Shepard v. Quality Siding & Window Factory, 730 F.Supp. 1295, 1306-07 (D.Del.1990) (ruling that if a “creditor does not properly respond to the consumer’s notice of rescission,” the consumer’s obligation to the creditor can be eliminated but noting that “courts have avoided such a harsh result when there is no evidence that the creditor tried to cheat or deceive the consumer.”). I need not decide whether or under what circumstance release of the debt is an available remedy under § 1635(b) since there is no evidence in the record before me that Aames or BankOne tried to deceive or cheat the Williams. Consequently, I find no merit in Debtor’s contention that she should be relieved of her tender obligation. See In re Williams 291 B.R. 636 (Bkrtcy.E.D.Pa.,2003).
(8) Also, there is some legal authority where the borrower has offered to tender, and the creditor has refused to accept tender, that no obligation to tender exists. The situations where this applies will probably be limited in that the Bankruptcy Courts are Courts of “equity” and may not be willing to go this far.
What there is legal precedence for is tendering (all or some of the amounts due) over 3 months, 60 months, or even longer in a Chapter 13 setting or reaching some other type of “middle ground” or “compromise result”. Again, the Courts have the equitable authority to do this in a TILA rescission case in bankruptcy. See 2004 Bankr. LEXIS 2366 (Bankr. E.D. Pa. Nov. 1, 2004); Williams v. Bank One, 291 B.R. 636 (Bankr. E.D. Pa. 2003) and Clay v. Johnson, 77 F. Supp 2d, 879 (N.D. ILL. 1999). If the payments are not made in the Chapter 13 plan, then the creditor may still retain the lien (although there is a good argument that the loan must still be treated as rescinded). See Bell v. Parkway Mortgage, Inc. (in re Bell) 314 B.R. 54, 60-61 (Bankr. E.D. Pa 2004).
(9) Just a quick note on TILA statutory damage awards (ex. for failing to honor your TILA rescission letter), the award may go the Trustee for the benefit of unsecured creditors, unless such amounts are exempt to the debtor in Bankruptcy. See in re Perkins, 106 B.R. 863, 875, (Bankr.E.D.Pa 1989). There is also legal authority that proceeds under a TILA lawsuit should be paid to the debtor in cash and should not be offset against a debt discharged in bankruptcy. See in re Riggs, 623 F.2d 68 (9th Cir. 1980).