Geraghty v. BAC Home Loans Servicing LP et al
Filing
22
ORDER granting in part and denying in part 11 Motion to Dismiss/General (Written Opinion). Signed by Judge Joan N. Ericksen on September 7, 2011. (slf)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Michael J. Geraghty,
Plaintiff,
v.
Civil No. 11-336 (JNE/TNL)
ORDER
BAC Home Loans Servicing LP; Mortgage
Electronic Registration Systems, Inc.; John
and Jane Does 1-10,
Defendants.
Jeffrey R. Vesel, Esq., and Andy Dosdall, Esq., appeared for Plaintiff Michael J. Geraghty.
Andre T. Hanson, Esq., and Sparrowleaf Dilts McGregor, Esq., Fulbright & Jaworski, LLP,
appeared for Defendants BAC Home Loans Servicing LP and Mortgage Electronic Registration
Systems, Inc.
Plaintiff Michael Geraghty brought this lawsuit against Defendants BAC Home Loans
Servicing LP (BAC) and Mortgage Electronic Registration Systems, Inc. (MERS), alleging that
Defendants violated the Truth in Lending Act (TILA), 15 U.S.C. § 1635 (2006), by failing to
make required disclosures and failing to rescind the subject mortgage upon receipt of Plaintiff’s
demand for rescission. Pending before the Court is Defendants’ motion to dismiss counts I and II
of the Amended Complaint. See Fed. R. Civ. P. 12(b)(6). Defendants argue that Plaintiff’s
claims under TILA are time barred, and if they are not time barred, that they are contradicted by
a signed document demonstrating Plaintiff’s receipt of all necessary disclosures. Lastly,
Defendants argue that Plaintiff’s demand for a declaratory judgment should be dismissed
because it is premised on non-actionable claims and therefore fails as a matter of law. For the
1
reasons stated below, the Court accepts Defendants’ argument that two of the three claims
alleged by Plaintiff are time barred and grants in part and denies in part the motion to dismiss.1
I.
ALLEGATIONS
The Amended Complaint alleges as follows:2 On February 14, 2007, Plaintiff closed a
mortgage loan for $332,000 that refinanced his principal dwelling. The loan was through
Countrywide Bank, and subsequently, Countrywide’s assets and obligations were purchased by
Bank of America. BAC is an affiliate of Bank of America. MERS was named as the assignee of
the mortgage. Plaintiff signed all documents at the closing but received only single unsigned
copies of the Notice of Right to Cancel and the Truth in Lending Disclosure Statement. Plaintiff
maintained all document disclosures provided in connection with the transaction in a secure file
at his home.
Defendants’ memorandum in support of their motion to dismiss under Rule 12(b)(6)
included copies of a Notice of Right to Cancel and the Truth in Lending Disclosure Statement
signed by the Plaintiff and dated February 14, 2007. (Def.’s Mem. Supp. Mot. to Dismiss Exs. A
and C)
On February 11, 2010, Plaintiff sent notice of rescission by letter to Countrywide and
BAC. Plaintiff’s rescission notice was received by Countrywide on February 12, 2010 and by
BAC on February 20, 2010. Defendants responded with letters on March 1, 2010 and March 9,
1
Plaintiff’s complaint is divided into two counts. The first count contains all three claims
under TILA. Despite the poor organization of count I of the complaint, Defendants addressed all
three potential claims in their memorandum in support of their Rule 12(b)(6) motion. The Court
notes that Plaintiff’s complaint is identical in format and in much of its language to at least one
other complaint filed in this district. See Complaint, Tacheny v. Marshall & Ilsley Bank, No. 10CV-02067 (D. Minn. Apr. 29, 2011), ECF No. 1.
2
The facts stated below are as pled in the Amended Complaint unless otherwise annotated.
2
20103 refusing to rescind, and took no other action. Plaintiff brought this action on February 9,
2011.
II.
DISCUSSION
When ruling on a motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6)
of the Federal Rules of Civil Procedure, a court must accept the facts alleged in the complaint as
true and grant all reasonable inferences in favor of the plaintiff. Crooks v. Lynch, 557 F.3d 846,
848 (8th Cir. 2009). Although a complaint is not required to contain detailed factual allegations,
“[a] pleading that offers ‘labels and conclusions’ or ‘a formulaic recitation of the elements of a
cause of action will not do.’” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (quoting Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 555 (2007)). “To survive a motion to dismiss, a complaint
must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible
on its face.’” Id. (quoting Twombly, 550 U.S. at 570). “A claim has facial plausibility when the
plaintiff pleads factual content that allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.” Id.
A.
TILA
TILA was designed to protect borrowers, and it is “remedial legislation, to be construed
broadly in favor of consumers.” Rand Corp. v. Moua, 559 F.3d 842, 845 (8th Cir. 2009). The
statute “requires creditors to provide borrowers with clear and accurate disclosures of terms
dealing with things like finance charges, annual percentage rates of interest, and the borrower’s
rights.” Beach v. Ocwen Fed. Bank, 523 U.S. 410, 412 (1998). The creditor’s disclosure
obligation, among other things, requires a creditor to provide the borrower with two copies of a
3
Plaintiff states the response letter from BAC’s attorney was dated March 8, 2010 in his
Amended Complaint. The actual letter, included as Exhibit 5 to Plaintiff’s Amended Complaint,
is dated March 9, 2010.
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notice of the right to rescind. 12 C.F.R. § 226.23(b) (2009). A violation of the disclosure
requirements creates two potential remedies for borrowers. A borrower can seek monetary
damages under 15 U.S.C. § 1640 (2006) and can rescind the loan under 15 U.S.C. § 1635 (2006).
1.
Monetary Damages
TILA allows for monetary damages: “In any action in which it is determined that a
creditor has violated this section, in addition to rescission the court may award relief under
section 1640 of this title for violations of this subchapter not relating to the right to rescind.” 15
U.S.C. § 1635(g). A claim for monetary relief must be brought “within one year from the date of
the occurrence of the violation.” 15 U.S.C. § 1640(e).
In the Amended Complaint, Plaintiff alleges that Defendants committed two violations of
TILA for which he is entitled to monetary damages. First, Defendants failed to provide Plaintiff
with two copies of the Notice of Right to Cancel at the time of the loan transaction. Plaintiff did
not file an action within one year of this violation: he would have needed to file suit by February
14, 2008 in order to preserve that claim. Thus, Plaintiff’s claim for monetary damages due to
Defendants’ failure to make adequate disclosures is time barred.
Second, after receiving Plaintiff’s letter of rescission, Defendants failed to rescind the
loan. Defendants’ second alleged violation did not occur until March 8, 2010, twenty days after
Defendants received Plaintiff’s letter of rescission.4 See 15 U.S.C. § 1635(b). Failure to rescind
constitutes a separate violation of TILA. See, e.g., Tacheny v. Marshall & Ilsley Bank, No. 10CV-2067, 2011 WL 1657877, at *5 (D. Minn. Apr. 29, 2011) (“If defendants acted unlawfully in
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Plaintiff agrees to March 8, 2010 as the twentieth day after Defendants received
Plaintiff’s rescission letter. (Pl.’s Mem. Supp. Pl.’s Opp’n to Def.’s Mot. To Dismiss, at 4, No.
18) The Court notes that Plaintiff used the date March 8, 2011 instead of March 8, 2010
throughout his Memorandum of Law Opposing the Defendants’ Motion to Dismiss. The Court
assumes this is a typographical error, and Plaintiff intended March 8, 2010.
4
refusing to rescind the Loan, their refusal was an independent TILA violation.” (citing Miguel v.
Country Funding Corp., 309 F.3d 1161, 1165 (9th Cir. 2002); De Vary v. Countrywide Home
Loans, Inc., 701 F. Supp. 2d 1096, 1103 (D. Minn. 2010))).
Plaintiff sent his notice of rescission on February 11, 2010, within the three-year statute
of repose. Twenty days passed on March 8, 2010, and Plaintiff filed this lawsuit on February 9,
2011. As this is within one year of Defendants’ alleged TILA violation, Plaintiff timely brought
the damages claim. As to Plaintiff’s claim for monetary damages due to Defendants’ alleged
March 8, 2010 violation of TILA, the motion to dismiss as time barred is denied.
2.
Rescission
Plaintiff alleges that he has the right to rescind the loan based on Defendants’ failure to
properly disclose. A residential mortgage debtor has three days after the loan transaction to
rescind for any reason. 15 U.S.C. § 1635(a). But a creditor’s failure to comply with the
disclosure provisions in 15 U.S.C. § 1635 “extends the debtor’s right to rescind for up to three
years following the transaction.” Rand Corp., 559 F.3d at 846. Thus, only a subset—probably a
small subset, unless non-compliant TILA disclosures have been rampant—of borrowers will
qualify for the three-year right of rescission. Plaintiff claims to be a member of this subset and
claims that because he sent Defendants a notice of rescission letter within three years of the loan
transaction, his four-year post-transaction lawsuit was timely pled. At issue in this case is what
action is required to exercise the right of rescission under 15 U.S.C. § 1635: Is extending a letter
enough, or must a suit be filed within the three years?
The Eighth Circuit is one of many Circuits yet to address whether a borrower who has
filed a notice of rescission within three years of closing may then file a lawsuit to enforce that
right after the expiration of the three-year statute of repose. Among courts to have faced the
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precise issue, there is a split. The majority hold that suit must be filed within the three-year time
period. See, e.g., Williams v. Wells Fargo Home Mortg., Inc., 410 F. App’x 495, 499 (3d Cir.
2011) (“[A] legal action to enforce the right must be filed within the three-year period or the
right will be ‘completely extinguishe[d].’” (citation omitted)); accord Rosenfeld v. HSBC Bank,
USA, No. 10-CV-00058, 2010 WL 3489926, at *5 (D. Colo. Aug. 31, 2010); Gilbert v. Deutsche
Bank Trust Co. Ams., No. 09-CV-181-D, 2010 WL 2696763, at *5 (E.D.N.C. July 7, 2010); Sam
v. Am. Home Mortg. Servicing, No. 09-CV-2177, 2010 WL 761228, at *2 (E.D. Cal. Mar. 3,
2010). Others hold that TILA’s three-year limit does not apply to the filing of a lawsuit. See In re
Hunter, 400 B.R. 651, 662 (Bankr. N.D. Ill. 2009) (“TILA does not require the consumer to file
a lawsuit to exercise the right to rescind.”); accord Stewart v. BAC Home Loans Servicing, LP,
No. 10-CV-2033, 2011 WL 862938, at *5 (N.D. Ill. Mar. 10, 2011); Pearce v. Bank of Am.
Home Loans, No. 09-CV-3988, 2010 WL 2348637, at *4 (N.D. Cal. June 8, 2010); Santos v.
Countrywide Home Loans, No. 09-CV-00912, 2009 WL 2500710, at *5 (E.D. Cal. Aug. 14,
2009).5
This Court sides with the majority: a legal claim for rescission under 15 U.S.C. § 1635
must be filed within the three-year statute of repose. This approach is most consistent with the
Supreme Court’s unanimous opinion in Beach v. Ocwen Federal Bank, 523 U.S. 410 (1998). In
Beach, the Supreme Court held that a borrower could not claim a right of rescission as an
affirmative defense outside of the three-year statutory window. Id. at 417-18. The plaintiffs in
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Plaintiff argues that Belini v. Washington Mutual Bank, FA, 412 F.3d 17 (1st Cir. 2005),
stands for the proposition that a suit for rescission may be filed after three years. But Belini
only—and explicitly—concerns monetary damages, not rescission. Id. at 17. Plaintiff also points
to Hartman v. Smith, No. 09-CV-01618, 2010 WL 3735724 (D. Minn. Sept. 17, 2010). In the
Hartman case, a claim for rescission was rejected because the plaintiffs did not have the requisite
ownership interest in the property. Id. at *9. The Court does not find Hartman persuasive on the
issue squarely before this Court.
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Beach conceded that they could not bring an independent action as three years had passed since
the loan closing, and the Supreme Court did not contend otherwise. Id. at 415. The Court went
further and determined that the three-year limit in § 1635(f) limits the duration of the right. Id. at
417. It stated:
[Section 1635(f)] says nothing in terms of bringing an action but
instead provides that the “right of rescission [under the Act] shall
expire” at the end of the time period. It talks not of a suit’s
commencement but of a right’s duration, which it addresses in
terms so straightforward as to render any limitation on the time for
seeking a remedy superfluous.
Id. The Court concluded that “the Act permits no federal right to rescind, defensively or
otherwise, after the 3-year period of § 1635(f) has run.” Id. at 419 (emphasis added). The Third
Circuit, citing Beach, stated “the Court implicitly recognized that any claim for rescission under
§ 1635 must be filed within the three-year period.” Williams, 410 F. App’x at 499. The Ninth
Circuit also relied on Beach in holding that Ҥ 1635(f) is a statute of repose, depriving the courts
of subject matter jurisdiction when a § 1635 claim is brought outside the three-year limitation
period. Because [Plaintiff] did not attempt to rescind against the proper entity within the threeyear limitation period, her right to rescind expired.” Miguel v. Country Funding Corp., 309 F.3d
1161, 1164-65 (9th Cir. 2002). Although Miguel contained a factual twist,6 the majority of the
district courts within the Ninth Circuit have relied on the Miguel reasoning to deny rescission
after the three-year period of repose in cases where the fact patterns are similar to the one at issue
in this case. See, e.g., Sam, 2010 WL 761228, at *2; Gates v. Wachovia Mortg., FSB, No. 09CV-02464, 2010 WL 902818, at *4 (E.D. Cal. Feb. 19, 2010); Falcocchia v. Saxon Mortg., Inc.,
6
In Miguel, the plaintiff provided notice and filed suit prior to the end of the three-year
period, but she failed to sue her actual creditor. 309 F.3d at 1162-63. When the plaintiff
eventually sued the correct party, after the three-year time period, the court held that the statute
of repose creates an absolute limit on rescission. Id. at 1164-65.
7
709 F. Supp. 2d 860, 867-69 (E.D. Cal. 2010); Ramos v. Citimortgage, Inc., No. 08-CV-02250,
2009 WL 86744, at *3 (E.D. Cal. Jan. 8, 2009); Caligiuri v. Columbia River Bank Mortg. Grp.,
No. 07-CV-3003, 2007 WL 1560623, at *5 (D. Or. May 22, 2007). But see Pearce, 2010 WL
2348637, *4; Santos, 2009 WL 2500710, at *5.
The plain language of TILA and the associated regulations support rejecting suits for
rescission filed outside of the three-year window. The statute provides that the “right of
rescission shall expire three years after the date of consummation of the transaction.” 15 U.S.C.
§ 1635(f). It goes on to provide an exception to that time limitation, but that is for recoupment.
15 U.S.C. § 1635(i)(3). “[R]ecoupment of damages and rescission in the nature of recoupment
receive unmistakably different treatments, which under the normal rule of construction are
understood to reflect a deliberate intent on the part of Congress.” Beach, 523 U.S. at 418.
Congress’s exclusion of other exceptions to the three-year limit and the absence of a time limit
other than the three-year bar further indicate that Congress intended the right of rescission to
expire at three years.
Regulation Z states that “[t]o exercise the right to rescind, the consumer shall notify the
creditor of the rescission by mail, telegram or other means of written communication.” 12 C.F.R.
§ 226.23 (2009). “Mere invocation without more, however, will not preserve the right beyond the
three-year period.” Williams, 410 F. App’x at 499. Because § 1635(f) is, after Beach,
unquestionably a statute of repose, notification may be sufficient to invoke the right of rescission
but a lawsuit to enforce the right must still be filed prior to the end of the three-year period.7 The
7
Unlike a statute of limitations, which begins to run at the time of an injury or discovery of
an injury, a statute of repose expires after the stated period of time regardless of whether the
grounds to assert a claim have emerged. See In re Exxon Mobil Corp. Sec. Litig., 500 F.3d 189,
199-200 (3d Cir. 2007) (“[S]tatutes of repose start upon the occurrence of a specific event and
may expire before a plaintiff discovers he has been wronged or even before damages have been
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Supreme Court decided that the three year window was more (not less) than the time for bringing
a suit: “Section 1635(f), however, takes us beyond any question whether it limits more than the
time for bringing a suit, by governing the life of the underlying right as well.” Beach, 523 U.S. at
417 (emphasis added).
Plaintiff’s proffered interpretation creates the additional problem of an indefinite time in
which to bring a suit for rescission. The courts allowing rescission after the three-year period
have typically borrowed a one-year statute of limitations from 15 U.S.C. § 1640(e). See, e.g., In
re Hunter, 400 B.R. at 662. Although this solves the indefiniteness problem, it is not at all clear
that this is what Congress intended: § 1640(e) speaks to monetary damages and not to rescission.
Congress chose to treat rescission and claims for monetary damages separately, and differently.
“[I]n addition to rescission the court may award relief under section 1640 of this title for
violations of this subchapter not relating to the right to rescind.” 15 U.S.C. § 1635(g) (emphasis
added). It seems doubtful that Congress intended to allow stacking of the limitation periods in
§ 1635(f) and § 1640(e) where the statutory language specifies that they are separate and distinct
remedies. “‘When Congress enacts statutes creating public rights or benefits, it can impose time
limits on their availability.’” Miguel, 309 F.3d at 1164 (quoting Ellis v. Gen. Motors Acceptance
Corp., 160 F.3d 703, 706 (11th Cir. 1998); accord Shendock v. Dir., Office of Workers’ Comp.
Programs, 893 F.2d 1458, 1462 (3d Cir. 1990)). Mindful of the Supreme Court’s observation
about the “unmistakably different treatment[]” of damages and rescission, the more
straightforward statutory construction is that Congress intended the three-year time limit to apply
suffered at all.”); Nesladek v. Ford Motor Co., 46 F.3d 734, 736 (8th Cir. 1995) (“[A statute of
repose] operates as a statutory bar independent of the actions (or inaction) of the litigants—often
before those litigants can even be identified.”). A statute of repose is more categorical than a
statute of limitations. See In re Exxon Mobil, 500 F.3d at 200 (“[S]tatutes of repose pursue
similar goals as do statutes of limitations (protecting defendants from defending against stale
claims), but strike a stronger defendant-friendly balance.”).
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to the lawsuit. Beach, 523 U.S. at 418. Otherwise the Court would be reading into the statute a
three-year limit (for a letter) followed by a further limit that is either entirely indefinite or else
borrowed from § 1635(f)’s statutory neighbor, § 1640(e), in which to bring suit.
As the Court recognized in Beach, allowing a borrower to unilaterally rescind a loan
negatively affects the certainty of title in a foreclosure sale. 523 U.S. at 418-19 (“Since a
statutory right of rescission could cloud a bank’s title on foreclosure, Congress may well have
chosen to circumscribe that risk.”). Allowing title uncertainty to drag on past an already generous
period, where the plaintiff may not even belong to the subset of borrowers who qualify for the
extended right of rescission, runs counter to this important policy concern. It is not accurate to
say without qualification that borrowers, after three days, have a “right” of rescission. While
TILA gives any borrower three days to rescind, only a subset of those borrowers—those who did
not receive adequate disclosures regarding their right of rescission—qualify for the extended
three-year statute of repose. In order to determine disputes about whether a particular plaintiff
falls into the three-day or three-year category, court action will likely be necessary. It is unlikely
that Congress intended parties—some number of whom will not ultimately turn out to have
qualified for the extended three-year right of rescission—to be permitted to accomplish
rescission three years after the loan closing merely with a letter. This, along with the Supreme
Court’s holding in Beach that, § 1635(f) is unavailable as an affirmative defense after three years
from closing, lends further support to the majority view that Congress intended that any lawsuit
to enforce the right of rescission be brought within the three-year repose period.
Taking the facts alleged in the complaint as true, Plaintiff did not receive two copies of
the notice of his right to rescind thereby triggering the three-year statute of repose for rescission
of the loan. Plaintiff sent notice of rescission to Defendants on February 11, 2010, within three
10
years of the loan transaction. But Plaintiff did not initiate a lawsuit to enforce rescission until
February 9, 2011, close to one year after the expiration of the three-year statute of repose and
almost four years following the loan transaction. Plaintiff did not bring a lawsuit to enforce his
right of rescission within the three-year statutory period. Based on the foregoing reasons,
Plaintiff’s claim for rescission is time barred under 15 U.S.C. § 1635(f).
B.
Defendants’ Signed Documents Contradicting Plaintiff’s Claim
Defendants submit a Notice of Right to Cancel signed by Plaintiff acknowledging that he
received two copies of the notice of his right to rescind. (Decl. McGregor Ex. C) Relying on this
acknowledgment, Defendants argue this document contradicts Plaintiff’s claim that he only
received one unsigned copy of the notice. A signature on a document acknowledging receipt
“does no more than create a rebuttable presumption of delivery thereof.” 15 U.S.C. § 1635(c).
Defendants may ultimately prevail on this argument, but it is premature. In ruling on a motion to
dismiss under Rule 12(b)(6), the Court may not consider matters outside of the pleadings and
must treat the factual allegations in the complaint as true. See Crooks, 557 F.3d at 848. Plaintiff
will need an opportunity to rebut the presumption of receipt created by Defendants’ signed
acknowledgement. This factual debate is not appropriate under a Rule 12(b)(6) motion. The
Amended Complaint alleges that Plaintiff did not receive two signed copies of the notice of his
right to rescind. The Court must assume that this allegation is true, and thus the Court cannot
dismiss Plaintiff’s claims on the basis of the signed acknowledgment provided by Defendants.
C.
Declaratory Judgment
A federal court may declare the rights of interested parties “[i]n a case of actual
controversy.” 28 U.S.C. § 2201(a) (2006). “In general, an actual controversy is ‘a substantial
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controversy, between parties having adverse legal interests, of sufficient immediacy and reality
to warrant the issuance of a declaratory judgment.’” Diagnostic Unit Inmate Council v. Films
Inc., 88 F.3d 651, 653 (8th Cir. 1996) (quoting Md. Cas. Co. v. Pac. Coal & Oil Co., 312 U.S.
270, 273 (1941)). Defendants argue that Plaintiff’s demand for declaratory judgment fails as a
matter of law because he cannot show violations of TILA or Regulation Z and hence an actual
controversy. Again, this may prove to be correct. But at this early stage of the case, it must be
assumed that the facts pled by Plaintiff are true. Thus, Defendants’ motion to dismiss based on
the argument that Plaintiff did in fact receive all required disclosures must be denied.
III.
CONCLUSION
Based on the files, records, and proceedings herein, and for the reasons stated above,
Defendants’ motion to dismiss Plaintiff’s First Amended Complaint [Docket No. 11] is
GRANTED IN PART and DENIED IN PART. IT IS ORDERED THAT:
1. Plaintiff’s claim for rescission of his loan is DISMISSED.
2. Plaintiff’s claim for monetary damages due to Defendants’ failure to disclose
at the time of the loan transaction is DISMISSED.
3. Defendants’ motion to dismiss Plaintiff’s claim for monetary damages due to
Defendants’ failure to rescind within twenty days of receipt of notice and
motion to dismiss Plaintiff’s demand for declaratory judgment are DENIED.
Dated: September 7, 2011
s/ Joan N. Ericksen
JOAN N. ERICKSEN
United States District Judge
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