Jesinoski v. Countrywide Home Loans: The U.S. Supreme Court Seems Ready to Hold that a Borrower’s Right of Rescission Under TILA Need Only be Exercised by Timely Notice, not a Lawsuit

By Stephen A. Fogdall

On November 4, 2014, the U.S. Supreme Court heard argument in Jesinoski v. Countrywide Home Loans, the case that will decide whether a borrower can timely exercise the right of rescission under the Truth in Lending Act simply by sending written notice of intent to rescind to the creditor within the three-year period set forth in the statute, or whether the borrower must instead file a lawsuit within that time period.  The Third, Fourth and Eleventh Circuits have held that written notice to the lender alone is sufficient to preserve the rescission claim. The First, Sixth, Eighth, Ninth and Tenth Circuits have held that filing a lawsuit within the three-year period is required. (You can find more on this issue here and here.)

At the argument, the creditor’s counsel focused heavily on TILA’s statement that the borrower’s right to rescind “shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first,” even if the forms and disclosures required by TILA were never delivered. In an earlier decision, Beach v. Ocwen Federal Bank, the Court had held that this provision “limits more than the time for bringing a suit, by governing the life of the underlying right [to rescind] as well.” The creditor’s counsel argued that, under Beach, a borrower who failed to file a lawsuit to obtain a rescission within three years would no longer have any right to rescind at all, regardless of whether the borrower had sent the creditor a notice within the three-year period. Thus, the failure to file a lawsuit should mean that the claim for rescission is extinguished.

Justices Ginsburg, Breyer, Sotomayor and Kagan were openly skeptical. They repeatedly returned to the fact that TILA itself refers only to written notice as the trigger for exercising the right to rescind. TILA states that “the obligor shall have the right to rescind the transaction until midnight of the third business day following consummation of the transaction,” or after the required disclosures and rescission forms are delivered by the creditor, whichever is later, simply “by notifying the creditor . . . of his intention to do so.” These four Justices seemed convinced that, given this language, a borrower’s right of rescission is exercised simply by sending such a notice. While litigation might ultimately be necessary to resolve whether the borrower in fact has a valid basis to rescind, filing such litigation is not necessary to preserve the right. Justice Ginsburg pointed out that in Beach the borrowers had never sent the creditor a notice of intent to rescind within the three-year period. Therefore, Beach could not have held that a notice of intent to rescind is insufficient to preserve the borrower’s rescission right.

In contrast to these four Justices, Justices Scalia and Alito emphasized that a rescission, by definition, requires that the parties be returned to where they were before the transaction was consummated. If the borrower lacks the ability to return the funds, then the rescission cannot be effectuated, regardless of whether the borrower sent the creditor a notice of intent to rescind. Thus, it seems, mere notice by the borrower could not be sufficient to accomplish a rescission. The implication, presumably, is that only a lawsuit could achieve that result, and thus filing a lawsuit within the three-year period is necessary.

The positions of Chief Justice Roberts and Justice Kennedy (the only other Justices who spoke during the argument) are much more difficult to read. Justice Kennedy’s questions largely dealt with situations in which the creditor disputes the borrower’s right to rescind. Some of his questions seemed sympathetic to the position apparently endorsed by Justices Ginsburg, Breyer, Sotomayor and Kagan — that litigation might be necessary to resolve the dispute, but is not needed to preserve the right to rescind itself. However, he also focused on an issue that these four Justices seemed not to be concerned with, namely, how long after giving notice the borrower can wait before bringing a lawsuit to rescind. The creditor’s counsel argued that one advantage of requiring the filing of a lawsuit to preserve the rescission right is that it clearly limits the time in which such a suit can be brought to three years from the date the loan is consummated, whereas the borrower’s position that notice is sufficient seems to leave that question unanswered. Justice Kennedy appeared to think that this consideration had some force.

Chief Justice Roberts made a single comment during the argument. At one point, the creditor’s counsel was attempting to find support for his position in a provision of TILA which provides that in “any action in which it is determined that a creditor has violated this section, in addition to rescission the court may award” other relief available under TILA, such as actual and statutory damages. The Chief Justice remarked that “you’re putting an awful lot of weight on a tiny, one-sentence provision,” and that “it would be very odd if that’s where Congress decided to place” a requirement that the borrower must bring a lawsuit within the three-year period.

Thus, at least five members of the Court (Justices Ginsburg, Breyer, Sotomayor and Kagan, and Chief Justice Roberts) seemed skeptical, to one degree or another, of the creditor’s position that timely notice alone is insufficient to preserve a borrower’s right to rescind under TILA. We will report on the outcome as soon as the case is decided.

NJ Banks May Not Face Common Law Tort Claims for Improper Electronic Funds Transfers

By Edward J. Sholinsky

The New Jersey Supreme Court in a matter of first impression held that a non-customer of a bank cannot bring a common law negligence claim against that bank for an improper money transfer via the Internet.  In ADS Associates Group, Inc. v. Oritani Savings Bank, the court held that the state legislature intended Article 4A of the UCC to create the exclusive remedy for an alleged breach of a duty when a bank makes an electronic funds transfer and preempts any common law remedies.

At issue in ADS was whether New Jersey’s version of the UCC provides the exclusive remedy when a non-customer alleged an unauthorized electronic funds transfer via online banking, or whether the non-customer could bring a common law negligence claim against the bank.  The trial court held that a non-customer could not bring a common law negligence claim; the state’s intermediate appellate court reversed in an unpublished opinion.  The Supreme Court reversed the appellate court and reinstated the judgment of the trial court.

Plaintiff Brendan Allen entered into a business relationship with co-defendant Asnel Diaz Sanchez to bid on a large construction project.  Rather than creating a new entity, Allen and Sanchez used Sanchez’s then-existing business ADS Associates, Inc., to bid because ADS was an established minority-owned business.  The pair went to Oritani Savings Bank and opened an account.  The account agreement required both Allen and Sanchez to sign checks drawn on the account.  The account agreement also allowed both Allen and Sanchez, as authorized signatories, to use online banking to transfer funds.  Sanchez had other ADS accounts at the bank, and eventually began to electronically transfer money from the ADS account he opened with Allen to other ADS accounts without Allen’s permission.

When Allen discovered the allegedly unauthorized transfers, he brought suit, in his own name and in the name of ADS, against both the bank and Sanchez.  The suit stated claims alleging violations of Article 4A of the UCC, as well as common law claims.  It was undisputed that ADS, and not Allen, was the bank’s customer.  At issue in the Supreme Court was “whether Allen may maintain a common law non-customer negligence claim against Oritani.”

Article 4A of the UCC (codified in New Jersey at N.J.S.A. 12A:4A-101, et seq.) controls the electronic transfer of funds.  The statute sets out a detailed regime for properly authorized electronic transfers, including online banking transfers, and allocates the risk of loss between the bank and the customer.  Per the court, “Article 4A thus defines in detail the rights and obligations of banks and their customers in the event that funds are transferred in accordance with a payment order that the customer has not authorized.”  Relying on the commentary to Article 4A, the court determined that only a customer could pursue a remedy under Article 4A.

In reaching its conclusion, the court distinguished City Check Cashing, Inc. v. Manufacturers Hanover Trust Co., which held that, in the limited circumstances where a non-customer could show that he had a special relationship with the bank, the non-customer could assert a common law tort claim against the bank. The ADS court held that, regardless of any alleged special relationship, when a dispute arises out of “a bank’s acceptance of an order transferring funds from one account held by its customer to another of that customer’s accounts” that the “Legislature intended Article 4A to constitute the exclusive means of determining the rights, duties and liabilities of affected parties.”

Permitting a non-customer to bring a common law negligence action would “contravene” the risk allocation and redefine bank’s duties, which the court declared the “essential objective of Article 4A.” Indeed, the court reasoned that permitting non-customers to bring common law claims could give them more rights than bank customers in unauthorized transfer cases.

After ADS, in New Jersey only bank customers may bring claims against banks relating to unauthorized electronic transfers – including those made through online banking – and those claims only may be brought under Article 4A of the UCC.  Non-customers may not bring claims alleging breaches under the common law, because the exclusive remedy for those transfers is set out in Article 4A.

NJ Supreme Court: Consumer Contract Arbitration Clauses are Unenforceable Unless Consumers Are Clearly Notified that Court Redress is Waived

By Edward J. Sholinsky

Arbitration clauses in consumer contracts are unenforceable in New Jersey unless they specifically state that a consumer is waiving the right to pursue statutory and constitutional remedies in court, the New Jersey Supreme Court held. The court in Atalese v. U.S. Legal Services Group, L.P., reversed decisions by the trial and intermediate appellate courts that an arbitration clause calling for binding arbitration, but not specifically waiving the right to bring an action in court, was enforceable.

The plaintiff in Atalese entered into a contract with the defendant for debt-adjustment services.  The contract contained an arbitration clause that stated that any dispute between the parties would be submitted to binding arbitration, that the parties had to agree to the arbitrator, and that the judgment would be enforceable in court.  The plaintiff brought an action in state court alleging violations of New Jersey’s Consumer Fraud Act and Truth-in-Consumer Contract, Warranty, and Notice Act.  The defendant moved to compel arbitration, and the trial court granted the motion.  The Appellate Division, in an unpublished opinion, affirmed.

The defendant argued that consumers “universally understood” that arbitration is different than litigation.  It also invoked the Federal Arbitration Act’s (FAA) policy in favor of arbitration to support its argument that the contract required arbitration. The court rejected those arguments. Relying on Section 2 of the FAA, the court reasoned that arbitration agreements could “be invalidated by generally applicable contract defenses.”

Starting with the principal that contracts require mutual assent, the court reasoned that both parties to an arbitration clause had to understand the terms to which they were agreeing. Additionally, before a party can waive a legal right by contract, under New Jersey law, she must have “full knowledge” of the right and intend to give up that right.  Also, under New Jersey law, the terms of a consumer contract must be clear to the average consumer.

Rejecting the defendant’s argument, the court stated that the “average member of the public may not know – without some explanatory comment – that arbitration is a substitute for the right to have one’s claim adjudicated in a court of law.” Thus, the defendant’s failure to include clear and unambiguous language that the consumer was waiving her right to pursue her claims in court by agreeing to arbitrate rendered the arbitration clause unenforceable.

The court stressed that there was no “magic language” required in an arbitration clause. Rather, the clause must contain “clear and unambiguous” language that alerts the parties to the distinction between resorting to arbitration and bringing a claim in court.  The court did not require that an agreement specify which statutory or constitutional rights consumers were agreeing to arbitrate. In the contract at issue, the defendant did not use plain language that was “clear and understandable to the average consumer” that she was waiving her right to bring a claim in court, even though the contract referred to binding arbitration.

The Atalese decision should prompt companies doing business in New Jersey and using arbitration clauses in consumer contracts to review those contracts.  Businesses wishing to invoke arbitration must make sure that any arbitration clause contains clear, layman’s terms that a consumer is giving up the right to bring an action in court and agreeing to arbitration, which is an alternative to a lawsuit in court.  The clause must put the consumer on notice that by agreeing to the contract that she is giving up a legal right to a jury (or bench) trial on any dispute arising between the parties.

Eighth Circuit Opens Circuit Split on the Scope of the Equal Credit Opportunity Act

By Aaron J. Fickes

The Equal Credit Opportunity Act (ECOA) makes it unlawful for any creditor “to discriminate against any applicant, with respect to any aspect of a credit transaction . . . on the basis of . . . marital status.” The statute was designed to prevent, in part, creditors from refusing to grant a wife’s credit application without a guaranty from her husband. However, one must be an “applicant” for the statute’s protections to apply. While Congress defined “applicant,” the Federal Reserve Bank expanded the definition by regulation to include guarantors. Is that regulation entitled to deference under the familiar Chevron two-step framework? The question is important because it determines the scope of the ECOA.

The two courts of appeals that have squarely addressed this issue have reached opposite conclusions. Earlier this year, the Sixth Circuit in RL BB Acquisition, LLC v. Bridgemill Commons Development Group enforced the regulation, effectively expanding the scope of the ECOA. According to the Sixth Circuit, because the ECOA does not specify whether a guarantor qualifies as an applicant, and because the Federal Reserve’s interpretation — that a guarantor is a credit applicant — is reasonable in light of the statute, the Federal Reserve’s definition is entitled to deference and therefore enforceable.

Recently, the Eighth Circuit in Hawkins v. Community Bank of Raymore expressly disagreed with the Sixth Circuit. In that case, the plaintiffs, two wives, alleged that Community Bank required them to execute guaranties securing loans to a company that their husbands owned solely because they are married to their respective husbands. The plaintiffs claimed that this requirement constituted discrimination against them on the basis of their marital status, in violation of the ECOA, so their guaranties were void and unenforceable. Community Bank moved for summary judgment. The trial court granted the motion, holding that the plaintiffs, as guarantors, were not “applicants” within the meaning of the ECOA. As such, Community Bank could not violate the ECOA by requiring the plaintiffs to execute guaranties.

The Eighth Circuit affirmed. At Chevron step one the court held that the plain language of the ECOA provides that a person is an applicant only if she requests credit. A guarantor does not request credit, but rather assumes a secondary, contingent liability on behalf of the person requesting credit. So, a guarantor cannot be an applicant under the ECOA. As a result, a guarantor is not protected from marital-status discrimination by the ECOA.

The Supreme Court may intervene to resolve this circuit split. Until then, it may be prudent for creditors outside of the Eighth Circuit to assume that the Sixth Circuit rule applies to avoid potential liability under the ECOA.

The Third Circuit Limits the “Benign Language” Exception to the FDCPA Without Endorsing It

By Stephen A. Fogdall

Among other things, the Fair Debt Collection Practices Act prohibits a debt collector from using “any language or symbol, other than the debt collector’s address, on any envelope when communicating with a consumer by use of the mails.” (The debt collector may include, in addition to its address, its business name if the name does not indicate that it is in the business of collecting debts.) Some courts, such as the Fifth and Eighth Circuits, have read into this provision an exception for so-called “benign language,” and have allowed debt collectors to include additional phrases on envelopes such as “priority letter,” “personal and confidential,” or “immediate reply requested.”

In a recent Third Circuit case, Douglas v. Convergent Outsourcing, the debtor’s account number, while not printed on the envelope, was visible on the letter inside through a window. The court had to decide: (1) whether the account number was “on” the envelope when it was merely visible through the window, and (2) whether the account number was “any language or symbol, other than the debt collector’s address,” and thus prohibited by the FDCPA. The Third Circuit answered both questions “yes.”

As to the first question, the Third Circuit reasoned that “[l]ike language printed on the envelope itself, language appearing through a windowed envelope can be seen by anyone handling the mail.” Thus, such language “appears on the face” of the envelope and is therefore “on” it for purposes of the FDCPA.

As to the second question, the Third Circuit rejected the debt collector’s suggestion that the debtor’s account number was “benign language.” The Third Circuit “express[ed] no opinion” on whether the FDCPA in fact allows for such an exception, but held that even if it does, the account number was not “benign.” Rather, the court found, an account number is “a core piece of information pertaining to [the debtor’s] status as a debtor and [the debt collector’s] collection effort.” Because the account number “implicates core privacy concerns, it cannot be deemed benign.” The Third Circuit distinguished the types of language held to be benign by the Fifth and Eighth Circuits on the basis that the language in those cases was not “capable of identifying [the debtor] as a debtor.”

The U.S. Supreme Court has yet to offer guidance in this area. Until it does so, the best practice for debt collectors in the wake of this Third Circuit decision may be to assume that any language that might identify a letter’s recipient as a debtor, and which is in any way visible to a person handling the mail, violates the FDCPA and should be avoided.

Eleventh Circuit Holds That Filing a Time-Barred Proof of Claim in a Bankruptcy Proceeding Violates the FDCPA

By Christian Sheehan

The Fair Debt Collection Practices Act (FDCPA) provides that debt collectors “may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt.” Nor may a debt collector “use unfair or unconscionable means to collect or attempt to collect any debt.”  In determining whether a debt collector’s conduct was deceptive, misleading, unfair or unconscionable, courts apply a “least-sophisticated consumer” standard.

In Crawford v. LVNV Funding, LLC, the plaintiff owed roughly $2,000 to a furniture company, which assigned the debt to the defendant, LVNV Funding, LLC.  The last transaction on the plaintiff’s account occurred in 2001, and so, under Alabama’s three-year statute of limitations, the debt became unenforceable in 2004.  In 2008, the plaintiff filed a Chapter 13 bankruptcy petition.  During the bankruptcy proceeding, LVNV filed a proof of claim to collect on the time-barred debt.  The plaintiff filed a counterclaim via an adversary proceeding, alleging that LVNV’s conduct violated the FDCPA.

The Eleventh Circuit held that a debt collector engages in deceptive, misleading, unfair, and/or unconscionable conduct (and therefore, violates the FDCPA) when it files a proof of claim in a bankruptcy proceeding to collect a time-barred debt.  The Court reasoned that the “least-sophisticated” debtor may be unaware that the debt is unenforceable, and thus, fail to object (as the plaintiff did in this case).  And if the debtor fails to object, under the Bankruptcy Code, the otherwise unenforceable debt is resurrected and will be paid from the debtor’s future wages, thereby reducing the funds available to satisfy creditors with legitimate and enforceable claims.

Prior to Crawford, several circuits had held that lawsuits to collect time-barred debts violate the FDCPA.  Crawford is significant because it extends the holdings of those cases to the bankruptcy context.

Ninth Circuit addresses TILA tender requirement and RESPA statute of limitations

By Stephen J. Shapiro

Under the Truth in Lending Act (TILA), a borrower may seek to rescind a loan under certain circumstances. The rescission process under TILA is as follows: (1) the borrower notifies his lender that he intends to rescind the loan; (2) the lender returns any security interest to the borrower; and (3) upon return of the security interest, the borrower tenders the loan proceeds to the lender.  The Ninth Circuit recently held that a borrower need not plead that he has tendered the loan proceeds or has the ability to do so in order to state a rescission claim under TILA.

In Merritt v. Countrywide Financial Corp., the plaintiffs obtained a mortgage and took out a home equity line of credit from the defendant lender in connection with a home they purchased.  The plaintiffs alleged that, despite repeated requests, their lender did not send them the loan documentation required by TILA for almost three years. When they finally received the documents, the plaintiffs concluded that they were the victims of “predatory lending” and notified the lender that they were invoking their right to rescind the loan under TILA. When the lender did not respond to the rescission request, plaintiffs sued the lender under TILA, requesting rescission of the loan. The district court dismissed the TILA claim because the plaintiffs had not pled that they tendered the loan proceeds to the lender or had the ability to do so at the time they sought rescission.

On appeal, the Ninth Circuit reversed. The Court acknowledged that, in a prior case, it held that the district courts may require a TILA plaintiff to produce evidence of his ability to tender the loan proceeds in response to a summary judgment motion brought by the lender.  However, the Court held that its prior holding does not extend to motions to dismiss. In other words, if warranted by the circumstances, a borrower may be required to present evidence that he is able to tender to defeat a motion for summary judgment on a TILA claim, but he is not required to plead that he has the ability to tender in order to state a claim under TILA.

The plaintiffs also alleged that the lender violated Section 8 of the Real Estate Settlement Procedures Act (RESPA).  The district court dismissed the claims as time barred because plaintiffs filed their claims after RESPA’s one-year statute of limitations had expired. On appeal, the Court, addressing an issue of first impression in the Ninth Circuit, held that under the appropriate circumstances RESPA’s statute of limitations may be equitably tolled. Because the district court did not address whether the plaintiffs were entitled to equitable tolling, the Court remanded for consideration of that issue.

The Court also remanded, for initial consideration by the district court, another issue of first impression in the Ninth Circuit. Plaintiffs alleged that the defendant violated Section 8(b) of RESPA, which prohibits the “giv[ing] . . . [of] any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service . . . other than for services actually performed.” Plaintiffs alleged that the defendant violated this provision by charging them more for services provided by third parties in connection with the mortgage transaction than defendant paid for those services. The Court noted the split among the Circuits as to whether such allegations – claims that a defendant “marked up” the cost of services provided by third parties – are actionable under Section 8(b) of RESPA. Specifically, the Second and Third Circuits have held that such allegations state a claim under Section 8(b), while the Fourth, Fifth, Seventh and Eighth Circuits have held that they do not.  Because the “complicated issues of statutory interpretation and administrative law” involved in these decisions were not addressed by the district court, the Court remanded the issue for further development.

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