Financial Freedom Acquisition, LLC v. Standard Bank and Trust Company , 2015 IL 117950 ( 2015 )

2015 IL 117950IN THE
SUPREME COURT
OF
THE STATE OF ILLINOIS
(Docket No. 117950)
FINANCIAL FREEDOM ACQUISITION, LLC (OneWest Bank N.A., Appellee),
v. STANDARD BANK AND TRUST COMPANY et al., Appellant.
Opinion filed September 24, 2015.
JUSTICE BURKE delivered the judgment of the court, with opinion.
Chief Justice Garman and Justices Freeman, Thomas, Kilbride, Karmeier, and
Theis concurred in the judgment and opinion.
OPINION
¶1 On October 14, 2010, plaintiff, OneWest Bank N.A. 1 filed a complaint against
defendant, Standard Bank and Trust Company, as Trustee u/t/a dated 03/18.1991
a/k/a Trust No. 5193 (Standard), along with unknown beneficiaries of that trust to
foreclose a mortgage on property held by the trust. In response, Standard filed an
answer and counterclaim on July 19, 2011. In the counterclaim, Standard sought to
rescind the mortgage, alleging violations of the Truth in Lending Act (TILA). 15
U.S.C. § 1601 et seq. (2006). The circuit court of Cook County granted plaintiff’s
motion to dismiss the counterclaim pursuant to section 2-619.1 of the Code of Civil
1
This action was originally filed by Financial Freedom Acquisitions, LLC. On November 2,
2011, OneWest Bank N.A. was substituted as party plaintiff.
Procedure (Code) (735 ILCS 5/2-619.1 (West 2010)) and Standard appealed. The
appellate court affirmed, with one justice dissenting. 2014 IL App (1st) 120982.
We granted Standard’s petition for leave to appeal. For the reasons that follow, we
reverse the judgment of the appellate court and remand this cause for proceedings
consistent with this opinion.
¶2 BACKGROUND
¶3 On July 9, 2009, Mary Jane Muraida (Mary) and Standard entered into a
consumer credit transaction for an adjustable rate home equity conversion
mortgage, also known as a reverse mortgage, along with an adjustable rate note
with Marquette National Bank. 2 The note was secured by a condominium located at
10420 South Circle Drive, Unit 21B, Oak Lawn, Illinois, which was the property
held in Trust No. 5193 and Mary’s principal dwelling.
¶4 The mortgage identified the mortgagor and borrower as “Standard Bank &
Trust as Trustee under trust agreement dated March 18 1991 and known as Trust
No. 5193” and the note was signed by both Mary and Standard. Attached to and
made a part of the mortgage was an exculpatory clause, which provided:
“This MORTGAGE is executed by STANDARD BANK & TRUST
COMPANY, not personally but as Trustee as aforesaid in the exercise of the
power and authority conferred upon and vested in it as such Trustee (and said
STANDARD BANK & TRUST COMPANY, hereby warrants that it possesses
full power and authority to execute this instrument), and it is expressly
understood and agreed that nothing herein or in said Note contained shall be
construed as creating any liability on the said Trustee or on said STANDARD
BANK & TRUST COMPANY personally to pay the said Note or any interest
that may accrue thereon, or any indebtedness accruing hereunder, or to perform
any covenant either express or implied herein contained, or on account of any
warranty or indemnification made hereunder, all such liability, if any, being
expressly waived by Mortgagee and by every person now or hereafter claiming
any right or security hereunder, and that so far as the Trustee and its successors
and said STANDARD BANK & TRUST COMPANY personally are
concerned, the legal holder or holders of said Note and the owner or owners of
2
Marquette subsequently transferred its interests to Financial Freedom, which later transferred
its interest to OneWest Bank.
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any indebtedness accruing hereunder should look solely to the premises hereby
conveyed for the payment thereof, by the enforcement of the lien hereby
created, in the manner herein and in said Note provided or by action to enforce
the personal liability of any guarantor, if any.”
¶5 Under the terms of the note, Standard had no personal liability and the only
means of enforcing a security interest was through the property itself. In addition,
the note provided that the loan became immediately due upon the death of the
borrower, the sale of the property by the borrower, or if the borrower failed to use
the property as his/her principal dwelling for more than 12 consecutive months.
¶6 Under TILA, in all consumer credit transactions in which a security interest is
retained in any property which is used as the principal dwelling of the person to
whom credit is extended, the lender is required to provide the borrower with certain
disclosure statements, including a notice that the borrower has a right to rescind the
transaction until midnight of the third business day following consummation of the
transaction. 15 U.S.C. § 1635(a) (2006). A failure to provide such information is a
violation which gives the consumer an extended right to rescind for up to three
years after the consummation of the transaction. Mary received the TILA
disclosures. Although the same documents were prepared for Standard as trustee,
plaintiff never delivered them to Standard.
¶7 On May 20, 2010, Mary died. On October 14, 2010, plaintiff filed a complaint
against Standard to foreclose the mortgage. On June 2, 2011, Standard sent plaintiff
a notice that it was exercising its right to rescind the transaction. Plaintiff did not
respond. Thereafter, on July 19, 2011, Standard filed an answer to plaintiff’s
complaint and a counterclaim. In the counterclaim, Standard alleged violations of
TILA and sought rescission of the transaction, termination of the security interest,
statutory damages for the TILA violations, statutory damages for plaintiff’s failure
to respond to the rescission notice, and reasonable attorney fees. In response,
plaintiff filed a combined motion to dismiss under section 2-619.1 of the Code. 735
ILCS 5/2-619.1 (West 2010). On January 5, 2012, following a hearing, the circuit
court ordered the dismissal of Standard’s counterclaim with prejudice.
¶8 It appears from the record that, on January 18, 2012, Standard provided plaintiff
with the full amount due on the mortgage and note and then terminated the trust,
deeding its interest in the subject property to a third party. Thereafter, plaintiff filed
a motion to voluntarily dismiss its complaint for foreclosure, and on March 2, 2012,
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the court dismissed the action with prejudice. Standard then appealed the dismissal
of its counterclaim.
¶9 In the appellate court, Standard argued that, as trustee, it had the right to rescind
and it timely exercised that right. In addition, Standard argued it had a contractual
right to rescind. 2014 IL App (1st) 120982, ¶ 13. Plaintiff disagreed, arguing that a
land trust is not a “consumer” as that term is defined in TILA and, therefore,
Standard, as trustee, had no standing to rescind. Plaintiff also argued that Standard
had no right to rescind because the property was not Standard’s principal dwelling
and because Standard was not a party to the transaction. Id. In a divided opinion,
the appellate court affirmed the circuit court’s judgment. Id. ¶ 14.
¶ 10 The appellate court majority analyzed the circuit court’s dismissal order under
section 2-615 (id. ¶ 16) and concluded there were no set of facts under which
Standard could assert a claim for rescission under TILA. The majority concluded
that, although Standard’s counterclaim was timely filed, Standard was not an
“obligor” under TILA and, therefore, was not entitled to rescind the transaction. Id.
¶ 24. Noting that neither TILA nor Regulation Z (the regulations interpreting
TILA) define “obligor,” the appellate court looked to the dictionary definition, to
find that an “obligor” is “ ‘[o]ne who has undertaken an obligation; a promisor or
debtor.’ ” Id. (quoting Black’s Law Dictionary 1181 (9th ed. 2009)). Relying on
Ferreira v. Mortgage Electronic Registration Systems, Inc., 794 F. Supp. 2d 297(D. Mass. 2011), the appellate court then held that the right to rescind can “be
exercised only by the obligor, i.e. the person to whom credit is extended.”
(Emphasis omitted.) 2014 IL App (1st) 120982, ¶ 24.
¶ 11 According to the appellate court, although both Mary and Standard signed the
note, Standard “executed an exculpatory clause expressly disclaiming” any
obligations under the loan documents. Id. ¶ 26. Thus, the appellate court held
“[t]his complete disclaimer of all liability left Standard Bank ‘free of any reciprocal
responsibilities whatever.’ ” Id. Moreover, the court held there was no evidence
Standard received any benefit from the transaction. Accordingly, the appellate
court reasoned that Standard’s disclaimer of all liability left Mary as the only
obligor and because TILA only gives obligors the right to rescind, Standard had no
right to rescind. Id. For these reasons, the appellate court concluded there were no
set of facts Standard could assert to state a claim for rescission. Id.-4-
¶ 12 The appellate court also held that Standard forfeited any right it might have had
to statutory damages because of its failure to raise the issue on appeal. Id. ¶ 28. In a
footnote, the appellate court suggested this claim might be barred by the statute of
limitations. Id. ¶ 28 n.8. Accordingly, the appellate court affirmed the circuit
court’s dismissal of Standard’s counterclaim with prejudice.
¶ 13 Justice Gordon dissented, finding Standard alleged sufficient facts to support its
claim for rescission. Relying on the plain language of section 1635(a) of TILA,
Justice Gordon wrote that to assert a claim for rescission, Standard needed to allege
that: “(1) ‘in the case of any consumer credit transaction,’ (2) ‘a security interest
*** is or will be retained or acquired in any property’ and (3) the property ‘is used
as the principal dwelling of the person to whom credit is extended.’ [Citation.]” Id.
¶ 36 (Gordon, J., dissenting).
¶ 14 With respect to the first element, Justice Gordon opined that, while Standard
had to allege a “consumer credit transaction” was involved, this was different than
requiring Standard to show it was a consumer in that transaction. Noting that
“consumer” is used as an adjective to describe the type of transaction, Justice
Gordon concluded that, because a reverse mortgage is clearly a consumer credit
transaction, the first element was established. Id. ¶ 38.
¶ 15 Justice Gordon found that the second element also was satisfied because
Standard attached a copy of the mortgage to its counterclaim which showed that a
security interest was acquired in the property. Id. ¶ 39. With respect to the third
element, Justice Gordon reasoned that the property need not be the principal
dwelling of the obligor, but rather the principal dwelling of the party to whom
credit was extended. Id. ¶ 40. Finding that “the statute uses the word ‘obligor’ to
describe the entity that has the right to rescind, and the words ‘the person to whom
credit is extended’ to denote the consumer who lives in the dwelling as his or her
principal dwelling place,” Justice Gordon concluded that TILA’s “use of two very
different terms indicates—contrary to the majority’s assumption—that these terms
are not interchangeable.” Id. Thus, Justice Gordon found that all three elements of a
claim for rescission had been alleged by Standard. Id.¶ 16 Justice Gordon also found the majority erred by denying Standard’s claim on
the basis that Standard was not an “obligor.” Id. ¶ 41. TILA provides: “in a
consumer credit transaction where a security interest is retained ‘in any property
which is used as the principal dwelling of the person to whom credit is extended,
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the obligor shall have the right to rescind.’ ” (Emphasis in original.) Id. (quoting 15
U.S.C. § 1635(a) (2006)). Justice Gordon concluded that, because the statute
juxtaposes the term “the person to whom credit is extended” against the term “the
obligor,” these terms are not identical. Id.¶ 17 Finally, Justice Gordon pointed out that the transaction here is a reverse
mortgage, which means the consumer pays nothing to the bank and, therefore, has
no obligations under the transaction. Id. ¶ 42. Thus, he concluded that the appellate
court majority erred in denying Standard’s claim on the ground it had no obligation.
¶ 18 We granted Standard’s petition for leave to appeal.
¶ 19 ANALYSIS
¶ 20 Before addressing the issues, we find it helpful to provide some background on
TILA. In 1968, Congress enacted TILA (15 U.S.C. § 1601 et seq. (2006)) to ensure
credit terms are disclosed in a meaningful way so consumers can readily and
knowledgeably compare the credit options available to them. Lanier v. Associates
Finance, Inc., 114 Ill. 2d 1, 11 (1986). From the time of its enactment, Congress
granted the Federal Reserve Board (Board) the authority to prescribe regulations to
carry out the purposes of TILA. 15 U.S.C. § 1604 (2006). Pursuant to that
authority, the Board enacted a comprehensive set of rules, known as Regulation Z
(12 C.F.R. pt. 226 et seq. (2010)). Lanier, 114 Ill. 2d at 11. 3 In addition, official
staff interpretations of Regulation Z are published in a commentary. 12 C.F.R. pt.
226, Supp. I (2010). See also FDIC Compliance Examination Manual V-1.4 (May
2015), https://www.fdic.gov/regulations/compliance/manual/5/V-1.1.pdf. The
commentary provides more detailed information on disclosures and other actions
required of creditors. See id. The Compliance Examination Manual, itself, provides
“[i]t is virtually impossible to comply with Regulation Z without reference to and
reliance on the commentary.” Id.3
Following the events in this case, Congress transferred the authority to promulgate rules
implementing TILA to the Consumer Finance Protection Bureau. See Dodd-Frank Wall Street
Reform and Consumer Protection Act, §§1061(b)(1), 1100A(2), 1100H, 124 Stat. 1376, 2036, 2107,
2113. Thereafter, the Bureau issued an interim final rule, which added Part 1026 to Chapter X and
established a new Regulation Z. Truth in Lending (Regulation Z), 76 Fed. Reg. 79,768-832 (Dec.
22, 2011). We cite to the version in effect at the time of the occurrence here.
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¶ 21 Although not binding on the courts, we have held that the Board’s
interpretations of TILA are entitled to a great degree of deference. Lanier, 114 Ill.
2d at 13. In Ford Motor Credit Co. v. Milhollin, 444 U.S. 555 (1980), the United
States Supreme Court noted that deference to administrative views is founded upon
respect for the expertise of the agency. Id. at 566 n.9. For this reason, the Supreme
Court has stated that “[u]nless demonstrably irrational, Federal Reserve Board staff
opinions construing the Act or Regulation [Z] should be dispositive.” Id. at 565.
See also Anderson Bros. Ford v. Valencia, 452 U.S. 205, 219 (1981) (Board’s
interpretation of its own regulation should be accepted by the courts absent some
obvious repugnance to TILA). In addition, Congress has expressed that compliance
with Regulation Z and the official staff interpretations must be accorded substantial
weight. We recognized in Lanier, “[s]ection 1640 evinces a clear congressional
determination to treat the Board’s administrative interpretations under [TILA] as
authoritative.” Lanier, 114 Ill. 2d at 14. With these principles in mind, we turn to
the relevant TILA provisions and the corresponding provisions in Regulation Z, as
well as the Official Staff Commentary.
¶ 22 Section 1635 of TILA provides, in relevant part:
“(a) Disclosure of obligor’s right to rescind
Except as otherwise provided in this section, in the case of any
consumer credit transaction *** in which a security interest *** is or will be
retained or acquired in any property which is used as the principal dwelling
of the person to whom credit is extended, the obligor shall have the right to
rescind the transaction ***.” 15 U.S.C. § 1635(a) (2006).
The corresponding provision of Regulation Z relating to rescission provides:
“(a) Consumer’s right to rescind. (1) In a credit transaction in which a
security interest is or will be retained or acquired in a consumer’s principal
dwelling, each consumer whose ownership interest is or will be subject to the
security interest shall have the right to rescind the transaction ***.” (Emphasis
added.) 12 C.F.R. § 226.23(a)(1) (2010). 4
Regulation Z defines “consumer” as:
4
The parties also cite to section 226.15 of Regulation Z which contains almost identical
wording. This provision, however, relates to open-end credit transactions, not closed-end
transactions as the type here.
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“a cardholder or a natural person to whom consumer credit is offered or
extended. However, for purposes of rescission under §§226.15 and 226.23, the
term also includes a natural person in whose principal dwelling a security
interest is or will be retained or acquired, if that person’s ownership interest in
the dwelling is or will be subject to the security interest.” 12 C.F.R.
§ 226.2(a)(11) (2010).
The Official Staff Commentary provides a further definition of “consumer” in this
context:
“2. Rescission rules. For purposes of rescission under §§ 226.15 and
226.23, a consumer includes any natural person whose ownership interest in his
or her principal dwelling is subject to the risk of loss. Thus, if a security interest
is taken in A’s ownership interest in a house and that house is A’s principal
dwelling, A is a consumer for purposes of rescission, even if A is not liable,
either primarily or secondarily, on the underlying consumer credit transaction.”
12 C.F.R. pt. 226, Supp. I, § 226.2(a)(11), Note 2 (2010).
¶ 23 As the appellate court pointed out, TILA states that an “obligor” has the right to
rescind but does not define the term. However, based on the corresponding
provisions in Regulation Z and the commentary, we conclude Congress did not
intend to limit rescission rights to only obligors, as that term is generally defined.
Regulation Z and the commentary provide that “each consumer whose ownership
interest is or will be subject to the security interest” (emphasis added) (12 C.F.R.
§ 226.23(a)(1) (2010)) or “is subject to the risk of loss” (12 C.F.R. pt. 226, Supp. I,
§ 226.2(a)(11), Note 2 (2010)) is entitled to rescind. More particularly, the
commentary makes it evident that to possess the right to rescind one need not be
liable (i.e., an obligor) on the underlying consumer credit transaction. See 12
C.F.R. pt. 226, Supp. I, § 226.2(a)(11), Note 2 (2010).
¶ 24 Section 226.2(a)(11) along with the commentary related to that section have
been in existence since 1968. More importantly, Congress has not amended TILA
to exclude consumers who are not liable on the underlying credit transaction from
having the right to rescind. Accordingly, we must presume Congress agrees with
the expanded definition of “obligor” with respect to the right to rescind.
¶ 25 We note, further, that Congress recently moved authority from the Federal
Reserve Board to the Consumer Finance Protection Bureau to oversee TILA. The
Bureau has adopted a new Regulation Z which includes the identical definitions
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and commentary. Certainly, had Congress disagreed with Regulation Z or the
Official Staff Commentary it would have taken appropriate action to rectify the
matter in conformity with its intent.
¶ 26 Moreover, it is important to remember this case involves a reverse mortgage. A
reverse mortgage is a nonrecourse consumer credit transaction, secured by the
consumer’s principal dwelling. Dee Pridgen & Richard M. Alderman, Consumer
Credit and the Law § 9A:11 (2014). This type of mortgage is known as “reverse”
“because the lender makes the payments to the consumer over a period of years,
rather than the consumer making payments to the lender.” Id. In the case of reverse
mortgages, the borrower has not undertaken any obligation to make payments.
There is no personal liability of any kind in such a transaction since the only
recourse is against the property itself. As such, there is no obligor within the
ordinary meaning of that term.
¶ 27 The appellate court majority failed to take into account the fact a reverse
mortgage was at issue in this case and the nature of such mortgages. Under the
appellate court’s reasoning, which limits disclosure and the right to rescind to an
obligor in the narrow sense, there would be no disclosure requirements at all when a
reverse mortgage is involved because, as explained above, there is no person or
organization that is liable for the underlying credit transaction. Reverse mortgages
are consumer credit transactions and clearly covered by TILA. In fact, reverse
mortgages have disclosure requirements in addition to those applicable to other
consumer credit transactions. See 12 C.F.R. §§ 1026.31-1026.45 (2015). Thus, the
appellate court erred in affirming the circuit court’s finding that Standard has no
right to rescind because it was not an “obligor” within the meaning of TILA.
¶ 28 We note, further, that because of the nature of reverse mortgages, the
exculpatory clause contained in the mortgage, and relied upon heavily by the
appellate court, is simply irrelevant. Standard was not personally liable nor did it
undertake any type of obligation because the only recourse in a reverse mortgage is
against the property itself.
¶ 29 Finally, we find the appellate court’s reliance on Ferreira v. Mortgage
Electronic Registration Systems, Inc., 794 F. Supp. 2d 297 (D. Mass. 2011)
misplaced. In Ferreira and the cases it relied upon, the party seeking to rescind was
not a party to the transaction and had not signed the note. Therefore, the cases are
factually distinguishable. Further, none of these cases examined or interpreted
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Regulation Z or the commentary. Thus, we find their lack of relevant analysis
renders them unpersuasive.
¶ 30 Based on Regulation Z and the commentary, we hold the right to rescind
extends to “each consumer whose ownership interest is or will be subject to the
security interest” or “is subject to the risk of loss.” We now consider whether a
trustee under a land trust maintains an ownership interest subject to the security
interest such that it is entitled to TILA disclosures and may exercise the right to
rescind.
¶ 31 A land trust is “a unique creation of the Illinois bar.” (Internal quotation marks
omitted.) Passalino v. City of Zion, 237 Ill. 2d 118, 132 (2009) (Freeman, J.,
dissenting, joined by Burke, J.). It is a form of land ownership where a trustee holds
title to property for the benefit of the true owner/beneficiary of the trust. 5 Illinois
Real Property Service, Land Trusts § 31:1, at 9-10 (1989). Over the years, land
trusts have “served as *** useful vehicle[s] in real estate transactions for
maintaining secrecy of ownership and allowing ease of transfer.” (Internal
quotation marks omitted.) Passalino, 237 Ill. 2d at 132 (Freeman, J., dissenting,
joined by Burke, J.).
¶ 32 Generally, the land is deeded by the property owner to the trustee, which is
normally a corporate entity. 17 Robert S. Hunter, Illinois Practice § 51:2 (4th ed.
2007). Legal and equitable title of the property rests with the trustee, including the
right to transfer and encumber the property. Passalino, 237 Ill. 2d at 132 (Freeman,
J., dissenting, joined by Burke, J.). However, the trustee must deal with the
property and title as the beneficiary directs. 17 Robert S. Hunter, Illinois Practice
§ 51:2 (4th ed. 2007). The trustee is responsible for maintaining trust documents,
including an updated list of beneficiaries. It must respond to directions from the
beneficiary and receive communications for the beneficiary from third parties. 5
Illinois Real Property Service, Land Trusts § 32:1, at 9 (1989). The trustee is
similarly responsible for giving the beneficiary prompt notice of loans, defaults,
foreclosures, and other judicial proceedings. Id. § 32:21, at 26. Additionally, the
trustee owes fiduciary duties to the beneficiary. 16 Solomon Gutstein & Eileen
Murphy, Illinois Practice § 15:237 (3d ed. 2006). Ordinarily, trust documents
contain an exculpatory clause which protects the trustee from any personal liability.
Id. Similarly, trustees “almost universally” require that any contracts, notes, or
mortgages they sign on behalf of the trust contain an exculpatory or nonrecourse
clause relieving them from personal liability. Id.
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¶ 33 Conversely, the beneficiary’s interest in the real property changes to a personal
property interest in the trust. Passalino, 237 Ill. 2d at 132. The beneficiary’s name
does not appear publicly as an owner of record either in title documents or tax
records and generally the trustee is required to keep the beneficiary name(s)
confidential. Id. The beneficiary retains certain ownership rights such as the right
of possession, operation, maintenance and control along with the right to use and
enjoy the property. Id.; 17 Robert S. Hunter, Illinois Practice § 51:2 (4th ed. 2007).
¶ 34 The Official Staff Commentary to Regulation Z addresses land trusts in two
provisions: section 226.2(a) which provides: “[c]redit extended to land trusts, as
described in the commentary to §226.3(a), is considered to be extended to a natural
person for purposes of the definition of consumer” (12 C.F.R. pt. 226, Supp. I,
§ 226.2(a)(11), Note 3 (2010)), and section 226.3(a), which states:
“10. Land trusts. Credit extended for consumer purposes to a land trust is
considered to be credit extended to a natural person rather than credit extended
to an organization. In some jurisdictions, a financial institution financing a
residential real estate transaction for an individual uses a land trust mechanism.
Title to the property is conveyed to the land trust for which the financial
institution itself is trustee. The underlying installment note is executed by the
financial institution in its capacity as trustee and payment is secured by a trust
deed, reflecting title in the financial institution as trustee. In some instances, the
consumer executes a personal guaranty of the indebtedness. The note provides
that it is payable only out of the property specifically described in the trust deed
and that the trustee has no personal liability on the note. Assuming the
transactions are for personal, family, or household purposes, these transactions
are subject to the regulation since in substance (if not form) consumer credit is
being extended.” 12 C.F.R. pt. 226, Supp. I, § 226.3, Note 10 (2010).
¶ 35 In section 226.23(a)(1) of Regulation Z, the right to rescind extends to “each
consumer whose ownership interest is or will be subject to the security interest.”
(Emphasis added.) 12 C.F.R. § 226.23(a)(1) (2010).
¶ 36 As set forth above, the trustee has legal and equitable title to the property. In
fact, the trustee is the only party with an ownership interest in the property since the
beneficiary’s interest is in the trust itself and is considered personal property. As
such, it is the trustee’s ownership interest which is subject to the security interest.
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¶ 37 Credit extended to a land trust is credit extended to a natural person. Thus, the
trustee of the land trust is a consumer, whose ownership interest is subject to the
security interest. Accordingly, we conclude Standard, as trustee, was entitled to
TILA disclosures and has the right to rescind the transaction. We reverse the
appellate court’s holding to the contrary.
¶ 38 In this appeal, plaintiff argues in the alternative that any right to rescind which
Standard possessed was terminated upon the sale of the property. We disagree.
Section 1635(f) of TILA, entitled “Time limit for exercise of right” provides: “An
obligor’s right of rescission shall expire three years after the date of consummation
of the transaction or upon the sale of the property, whichever occurs first ***.” 15
U.S.C. § 1635(f) (2006). Section 226.23 of Regulation Z provides:
“(3) *** If the required notice or material disclosures are not delivered, the
right to rescind shall expire 3 years after consummation, upon transfer of all of
the consumer’s interest in the property, or upon sale of the property, whichever
occurs first.” 12 C.F.R. § 226.23(a)(3) (2010). See also 12 C.F.R. pt. 226, Supp.
I, § 226.23(a)(3), Note 3 (2010).
However, as Standard argues, section 1635(f) addresses only the time for
exercising the right to rescind. Because Standard gave notice to plaintiff that it was
exercising that right, its right to rescind did not terminate upon the sale of the
property.
¶ 39 Dawson v. Thomas (In re Dawson), 437 B.R. 15 (Bankr. D.D.C. 2010), is
instructive. In Dawson, the plaintiff filed suit to rescind a loan transaction on
September 23, 2004. Id. at 16. Thereafter, on July 13, 2006, Dawson sold the
property securing the loan. Id. at 17. Thomas maintained the sale of the property
terminated Dawson’s right to rescind. Id. The court disagreed, concluding that,
because Dawson timely exercised her right to rescind, the subsequent sale did not
extinguish that right. Id. at 18. As the Dawson court explained, if the right to
rescind terminated because of a sale subsequent to exercise of the right to rescind,
the borrower would be deprived of its rights, under paragraph (b) of section 1635,
to recover damages from the lender for a breach of the lender’s obligations under
that paragraph and the lender would be rewarded “for dragging its heels.” Id. at 20.
¶ 40 We conclude, as the Dawson court did, that when the lender fails to comply
with its obligations under paragraph (b), and the borrower timely sues to enforce
his rescission rights, “those rights are not subject to loss at a subsequent date by
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reason of the passage of three years or, it logically follows, by reason of a sale of
the property.” Id. at 21. If a sale of the property subsequent to the exercise of the
right to rescind served to extinguish the right, a consumer would lose the right to
damages based on the creditor’s failure to rescind when it was legally required to
do so.
¶ 41 For the foregoing reasons, we conclude that when a consumer timely exercises
its right to rescind a consumer credit transaction through proper notice to the
creditor, a sale of the property does not terminate a consumer’s right to rescind.
¶ 42 Finally, we address Standard’s contention that it has a right to statutory
damages for plaintiff’s breach of its obligations. Because the circuit court
dismissed Standard’s counterclaim, it did not address this question.
¶ 43 Section 1640 of TILA provides in pertinent part:
“(a) Individual or class action for damages; amount of award; factors
determining amount of award
Except as otherwise provided in this section, any creditor who fails to
comply with any requirement imposed under this part, including any
requirement under section 1635 of this title, *** with respect to any person is
liable to such person in an amount equal to the sum of—
(1) any actual damage sustained by such person as a result of the failure;
(2)(A)(i) in the case of an individual action twice the amount of any
finance charge in connection with the transaction, *** (iv) in the case of an
individual action relating to a credit transaction not under an open end
credit plan that is secured by real property or a dwelling, not less than $400
or greater than $4,000; or
***
(3) in the case of any successful action to enforce the foregoing liability
or in any action in which a person is determined to have a right of rescission
under section 1635 or 1638(e)(7) of this title, the costs of the action,
together with a reasonable attorney’s fee as determined by the court;
***
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(e) Jurisdiction of courts; limitations on actions; State attorney general
enforcement
Except as provided in the subsequent sentence, any action under this
section may be brought in any United States district court, or in any other
court of competent jurisdiction, within one year from the date of the
occurrence of the violation ***. *** This subsection does not bar a person
from asserting a violation of this subchapter in an action to collect the debt
which was brought more than one year from the date of the occurrence of
the violation as a matter of defense by recoupment or set-off in such action,
except as otherwise provided by State law.” 15 U.S.C. § 1640 (2012).
¶ 44 Initially, we find that the appellate court erred in holding Standard forfeited its
claim for statutory damages. The circuit court never addressed this issue and,
therefore, there was no order from which Standard could appeal. Further, we find
Standard’s claim for damages resulting from plaintiff’s failure to rescind is not
time-barred as plaintiff contends. In Herzog v. Countrywide Home Loans (In re
Hunter), 400 B.R. 651 (Bankr. N.D. Ill. 2009), the court held “[f]or claims of
failure to effectuate rescission, the date of the occurrence of the violation is the
earlier of when the creditor refuses to effectuate rescission, or twenty days after it
receives the notice of rescission.” Id. at 657. Here, notice of rescission was sent to
plaintiff on June 2, 2011. Plaintiff did not respond to the notice. Standard then filed
its counterclaim in the foreclosure proceeding on July 19, 2011. Clearly, Standard’s
claim for statutory damages was brought within one year of the occurrence.
Accordingly, Standard’s claim for statutory damages based on plaintiff’s failure to
rescind is not time-barred.
¶ 45 CONCLUSION
¶ 46 As set forth above, we hold that Standard, as Trustee u/t/a dated 03/18.1991
a/k/a Trust No. 5193, was entitled to receive TILA disclosures, including notice of
the right to rescind after it entered into the consumer credit transaction with
plaintiff on October 14, 2010. Because TILA disclosures were not provided to
Standard, the three-day right to rescind period was extended to three years.
Standard timely exercised its right to rescind when it gave notice to plaintiff on
June 2, 2011. Further, because sale of the subject property subsequent to timely and
proper notice of the right to rescind does not terminate the right to rescind, Standard
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may proceed on its claim for damages. We reverse the appellate court judgment and
remand this cause to the circuit court for further proceedings consistent with this
opinion.
¶ 47 Appellate court judgment reversed.
¶ 48 Cause remanded.
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