Assignee Liability - Through the Minefield
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Transcript of Assignee Liability - Through the Minefield
QUARTERLY REPORT
Assignee Liability: Through the Minefield
By Eugene J. Ke!le.}', Jr., John L. ROI>icquct ••md Gcorgi'l Logothetis
279
~;"l:ene J. li:elk~ •.lr." a f'anllcr alltl C\~Chairof ,he Lillgallo" Group "I' AnI'!ein & Lchr LLP.Chi,·ag". "here he ha' pr:.(lI~ed ,i'K"e 19f>ti. 1·1"area, or prne'ICe indllde hllga';"" and ,,"rll'"rale coun,.dillg, He h", t\1('",ivc C\Ili:ricncc IIIa bro:'d n"'gc of trinl, in\(.I''''g commercialdi,pn1c, and cO/"umer flllance. in ,t,"c alKl tet!c",,1 ...",n, thougho"l Ihe eUlln11), 1\-1r Iselley "a gr.•dllale ,,1 ,he l:"'''<'.... II) "f Notre Dame a"dNonhwe'lcrn Uni"crsll)' $<:h",,1 uf L,\\ Ik i'a member of Ihe Go\Crning Commiuee of theCo"fer,'"ee oil COllwlIler Fillall~e La" and a'I>caker f"r nun",n,," C""te",""" pr"j:m"". liehas "I", lJ,.·cn all i",lnlCl(>r of 'he lilinoi' InswllicofCu"!lIIl1ing Legal hlllclI!ioo. the I'nu:ti<'inl: I"""Ins1l!1l1e. a"d the An"'rican Bar A'''''''ia1ion, Ikh;" served a, an ad"\llr 0" IlIifa1;On a",1 daill"for '<C\Cral pllblk enlille, and Wi""e ,",,"'~"'IC·,
John L. K\.pklIUd" :.I'a"ner in Ih<· I.lllg.:"'o"Groopof AnlS'cin & Lchr tLP. Chica~o. where heha' pr:K'!in'd ,mee 1973. I·;, Iiligaliun npcriencc",d"'k, ",,,,,onle,r fi'lall"c da~' :1<·lion. allii Im,1.en' ,ro""lClIlal.nnd t,;nIllIHCI\',al (':'SC, ,n ,,,"'''',,,,,,,tOIle and fedcml eUlln,. Mr ROP'C<J"e1 i, a g.,....dll:l'"ofn", J"hn, l1op~i,,' Uni'c.... il} and Nonhwc,lcrnl:nl\'C.... 'I) Seh,,,,1 of L'''' IIc' '''lie, .ilId 'p'-'ahfr"'luell,l) "u i"ue, "I\oi''''1; <'I"',lIoner nedlldIs" :'e\;on'. e'ideI11i:'1) priv;lege. icg.al elhinand mhcr mane..... lie i, eo-au,hor of the two-"ol""'" It , ,...-", I'll "-1'1(', G, Ill,' 1',."",-" \I. I~J' M\. ;1
et>ntrib"tllno Ro,,'1 H& 1\-1." H__h, "'" I~ N'~".•and :III,h"r of ",,,,,,'roLl' an,~k, "' ,Il\" e",,,,,,",,,Fi'l<"'re /."" QU"NCr/I' Her<m :lIId otllt"r public,,·li'llh. lie i, a member of tho: Go'''n,,"g. Comnm.Icc "f 1lit,; Co"lerc,".'e "n (.\I,,,,,,,,,r hna"ce l~,,,
G,..,q:i" I.ogulhelis " a Iilij:mi"n ,\",,,·,meat Am,tc;n & uhr LLI", Chicagu office. SIl<: i,a gr;.dll'ole of NOO1hea'H,m IlIin"i, U"I\e,-.,i,) and[)cl':'lol llni'ersil> C"lkge "f L,,,,. The ,"'Ih"....""prc'Cm"d deti,"dall" in /I"Id""", l'. Cil,. ell,.,.·rolel. B""t & G!:,O, "U,. 215 F3d 8~9 (7lh Cir200m; IIi/Iter ", \\;/lIrI('( Alii" S,lIn. 1,,<'.. I~5I' .~I ,)!7 (7,h Cir, 19')1'11; "'""/,/,,, IlllaiC,,',Ji,
Fi'llltH'i,,1 Serl'i,"·.', It,,' .. 2~5 F SII!'p,ld MJI(s.n.\\ \'a. 2(l()-,); J""~i,,, ... M",umli/r \Iorl'
~lIee C".. lJI F SlIpp.1d 7J7 (:'<0 Ill. 20011;and Ir/,,.,Gret"ll< ", \' 0.1< .. /1/<'. 7'1 1', S"flp·2df>.'t, (LD. V". 20(M'). ""'"'If,"ed ,,' 'h" article,
I. Introduction
CotlsUlllCr CrC(tit tran~acliol1~. fromretail inQ"Jll11ent conlract, to mortgage,. autoillobile Ica,~,. and ("fcdilcard:,. often generale assignmenls. Thea~~ignees-those who a"ume rightsand ~Oll1e Obligation' from the originalcreditors-often face a mincfield ofslate and federal laws which may lrigger liability. This aniclc discusses and
280
contrasts various liability theories whichassignees may fae<: in these situations.
II. TlLA Limitation On AssigneeLiability'
The protection conferred on assigneesby the limitation on assignee liability provision afthe Truth in LendingAct (TILA)1is a bulwark of assignee liability law thatlargely prevents consumer disputes withthe original creditors from affectingthe fights of their assignees to enforcecontractual obligations. But it may potentially be undermined in several situations.
The TILA was enacted "to assure ameaningful disclosure of credit terms solhat the consumer will be able to compare more readily the various credit termsavailable to him and avoid the uninformeduse ofcredit, and to protect the consumeragainst inaccurate and unfair billing andcredit card practices.'" Significantly,however, Congress deliberately limitedassignee liability when it amended theTILA in the early 1980s, to provide asfoHows in 15 U.S.C. section 1641(a):
Except as otherwise specificallyprovided in this subchapter, anycivil action for a violation of thissubchapteror proceeding under Section 1607 of this title which may bebrought against a creditor may bemaintained against any assignee ofsuch creditoronly if the violation forwhich such action or proceeding isbrought is apparent on the face ofthedisclosure statement, except wherethe assignment was involuntary.
In enacting these amendments,Congress expressed its purpose asnarrowing "considerably the potentialscope of assignee liability," to "makecompliance easier for creditors" and
I. S<:e pI..",Uy Mu. B. o.p;",. ""S"" J. Kell<,. Jr,. JolonL. Ropieq....,.•0><1 Cllri>topl>et s. N.ve». AssiS""" UtJbjHryUrnk,the TllA .. Is ,he Ct>ndu;/ "T'ktMy R<t>lly 0<a<1'. :\4eon",..., F;n. L.Q. Rep. 242 (20001. t'Cpt';m<ttl;,' RO"M' '"M'u..rl.T~" II' Ul<aotG' IHl6111 (2006 S"~,l.
2. IS US.C- , 1(,41(.1. TIt.A S«,..... h=in ore ",fe",need byd,.,lo... "'!lie UnilOd S..... Code mhet ""on to ,fie A...
3. IS U,S.C. i 1601(0),
QUARTERLY REPORT
to limit civil liability for statutory penalties to only significant violations.4
Beginning in 1998, an unbroken lineof U.S. court of appeals and federal district court decisions has recognized thatan assignee is liable for the TILA disclosure violations of the creditor who originated the credit transaction only wherethe violations are "apparent on the face"of the documents assigned. S The policybehind these decisions was succinctlystated in [rby-Greene v. M.O.R., [nc.:
This limit on assignee liability issensible, as a duty to inquire beyond the assigned documents wouldimpede commerce, which dependsupon the established practice ofassigning commercial paper at adiscount to financial institutions.In general, assignees are not in aposition to know whether a givenprice was set in violation of TILA,as assignees often are not presentat the transaction (which may haveoccurred much earlier than the assignment), do not participate in thenegotiation, and may not be awareof a seBer's mode of conductingbusiness. Assignees are in a positionto examine the documents assignedfor irregularities, and they usuallymake pricing decisions based onthose documents. Thus, 15 U.S.c.section I64I(a) "enable[sJ an assignee fO know with fa reasonabledegree of] certainty upon receiptof assigned documents whether itwould be subject to possible liability for the actions of the vendor.'~
4, Ramadon v. C!Iue Mon""... Corp.. 229 F,3<I 194.200 (3<1Ci,. 20(0). citinl S. Rep. Nc. 96·7) {1979J . ..(>t;ntod;n 1980U,S,(;.C,A,N.10.2.)(;.10.281.
~. Toyl'" v. Quoli', HfU"".i.loc.. l~ F.3<l689. 69S (7'h Ci,.1993); W.lke, v. Wall..,. A,IO Sa.... Inc.. 1~5 F.ld 927, 9~(JII, Ci,. 19'98); EHi. v. e-t>.1 _ Acce_ CO!]l.•It\l,) EX! 703. 709 (11,h Ci·. 19'98); Creen v. I.A:vi. MO<OtS.Inc.. 179 E34 286. 29S (S'h Ci,.). ecrt. tknlod. S20 U.S, 1020(19\19): U.'<lerw v. e"y 0 ..,,","'. Bu ........ Ve<>. Inc.• l'4F.ld 849. 853 (7th Ci,. 2(100): Ro,ntIIi<I". 229 F.ld ot 193:hby.G,ee". v. M.O.R.. 100.. 79 E SUW. 2d 630. 633·).4(B.D, va. 2QOO): K..~ >. AmeriCre<ll1 Fin.nci.1 s.",ie<.,Inc.. 24S F. Supp. 2d 841. &4S (S.D.W. Yo. 20(3): Cole"",">. G."....I MO<OtS ACC<ptO<Ce Corp.• 196 F.R.D. JIS (M.D.Te"n. 2QOO).
Despite this firmly established law,however, the limitation on assigneeliability is not always absolute. An assignee may lose the protection of section 164I(a) when other laws intervene.Assignees should always beware ofsuch "mines" lurking under the surfaceof consumer credit transactions. Someof these mines are discussed below.
III. The Mines
A. The Consumer Leasing Act
The federal Consumer LeasingAct (CLAY was enacted in 1976 asan amendment to the TILA. Like theTILA, "the CLA is a disclosure ratherthan a regulatory statute."s The CLAbroadens the reach of the TILA andapplies to all leases for the use of personal property having a term exceedingfour months that have a "total contractual obligation not exceeding $25,000.'>9
As it did when it passed the TILA,Congress delegated to the Federal Reserve Board (FRB) the task of draftingregulations with respect to the CLA, giving it the authority to "update and clarifythe requirements and definitions application to lease disclosures."'o Those regulations are collectively referred to as Regulation M. The regulations, along with theFRB Staff Commentary on RegulationM, are codified at 12 C.F.R. section 213.
The FRB StaffCommentary states that"an assignee may be a lessor for the purposes of the regulation in circumstanceswhere the assignee has substantial involvement in the lease transaction.""Thus, the assignee can lose the protectionof the limitation on assignee liability insection 1641 (a) where the assignee is directly involved, in certain circumstances.
The interplay between Regulation Mand section 1641(a) was brought into
1 ISUSC.tll667c1kq
8, Turne, >. C<""tOl _ Acce",an« Corp.. 180 F.Jd 451.4~(2dCi,.199\I~
9, IS U,SC., 1661(11.
10. 1,1.' 16671(0)(1),
II 12 CFR, 213.2lhl, Sup!> I (emph.a.i' 'u""Iie<l)
sharp focus in Kennedy \/. BMW Financial ~ervices, NAil There, the plaintiffwas a lessee who had entered into a m0
tor vehicle lease agreement with an autodealer which assigned the lease to BMWFinancial Services (BMW). He allegedthat lhe lease agreement was inaccurateon several points. claiming: (I) the agreement overstated the title. registration,and license fees due on the automobile(resulting in an increased total payment);and (2) BMW miscalculated the excessmileage and sales tax at lease termination. Based on these inaccuracies, theplaintiff alleged that BMW violated theCLA. BMW claimed that it was immunefrom liability under the CLA because, asan assignee of the original lessor. its liability was limited by section 164I(a).
The Kennedy court began by examining the definition of a "lessor" underthe CLA, which is "a person who isregularly engaging in leasing, offeringto lease, or arranging to lease under aconsumer lease."I) Regulation M, thecourt pointed out, defines an arrangerof a lease as one who "has knowledgeof the lease terms and participates in thepreparation of the contract documentsrequired in connection with the lease."14The FRB Staff Commentary also statesthat "an assignee may be a lessor for thepurposes of the regulation in circumstances where the assignee has substantialinvolvement in the lease trallsaclion."ls
The Kennedy court noted thill BMW'suse of section 1641(a) as a defense in theleasing context was essentially an issueof first impression. While the plaintiff argued that section 1641(a) was inapplicablein the CLA context, the court disagreed:
The CLA itself is enforced throughthe larger statutory scheme ofTlLA.15 U.S.c. [section) 1667(d) of theCLA, discussing the civil liabilityof lessors, specifically states that
12. :l6JF. $l>pp.2d 1I0CD.C.... J(lOiI
I). 15U.S.C.11667(4~
14. ~l F. S~pp.1d" 115.<fI""'i"ll 11 CFl\ f 2Il.1Chl. s~w. I,
I~. )6J F. S~pp,ld .. liS (o."pl",i, ,n 00,'""1),
QUARTERLY REPORT
the "grounds for maintenance of (acivil] action" is provided by "[15U.S.c. section] 1640 of [fILA}."Section 1641, obviously, directlyfollows 15 US.C. (section] 1640,and limits what claims under the former Section may be pursued againstassignees. There is nothing to suggest that, in the context ofconsumerleases, a lessee may avail himselfof the remedies provided by TlLAthrough [sectioo)1640 but ignore therestrictions of (section] 164I(a).16
The Kennedy court went on to citethe FRB Staff Corrunentary as supportfor its holding that section 164I(a) doesnot by its terms exclude lease assignees:
Nor does the staff commentaryto Regulation M, to which courtsmust defer in interpreting theCLA, suggest that lease assigneesare excluded from the protectionsof (section] 164I(a). That commentary says that assignees whoare substantially involved in leasearrangements may be consideredlessors for purposes of regulation.See 12 C.P.R. [section} 2l3.4(h),Supp. I. That language impliesboth thal it is nul mandatory forsubstantially involved assignees tobe treated as such, and that assigneesless involved in lease arrangementsshould not be considered lessors. 17
Having concluded that BMW couldavail itself of the section 1641(a) defensein the lease context, the Kennedy courtthen examined BMW's level of participation to determine if it merited holdingBMW liable. As to the miscalculation ofthe amount due for title, registration, andlicensing, the court found that BMW was"shielded from liability on these violations as an assignee, as BMW did ootcalculate these figures and any errors incalculations were not apparent on the face
16. Id... 116.
28\
of the lease."I' In reaching this conclusion, the Kennedy court relied on Taylorv. Qualily Hyundai" and emphasizedthat BMW merely provided the formsto the dealer. 1bere was no evidence ofany involvement by BMW in calculating those fees, much less any evidenceof the "substantial involvement" reoquired by [he Commentary to triggerassignee liability. Accordingly, becausethe miscalculations were not apparent onthe face of the assigned documents, thecourt held that section 1641(a) shieldedBMW from liability on that charge.21l
As to the miscalculation of excessmileage fees and sales tax at lease ler·mination, however, the court found thatBMW did indeed participate at such alevel as to warrant treating it as a lessorfor Regulation M purposes. BMW "participates in setting the mileage allowanceand excess mileage charges for vehicleleases thaI it assumes from a dealer," and"at the time of lease termination (whenthese fees are calculated), BMW was theonly lessor."11 Nevertheless, the plaintiff'sfailure to plead this claim Jed the court togrant summary judgment dismissing itZl
B. Credit Cards
A similar theory was advanced unsuccessfully to try to circumvent the limitation on assignee liability in a credit cardcase, Neff v. Capital Acquisitions &Management Co?' The plaintiffs assetledthat a purchaser of credit card debt fromthe original creditor was liable under theTILA as a "creditor" for failure to issuemonlhly billing statements. PlaintiffNeff had fallen behind on his credit cardpayments to Citibank. His account wassold as a delinquent account to CapitalOne. In 1997, a collection agency sentNeff a leller stating that his balance was
I'. 1<1•• Ill.
20. K.-dy. J6l F. s..pp.ld .. 119.
21. 1<1.
22. /d." 120.
2l. UJ F.:ld 1111(7l11Cir. 2(03),
282
SI,133 but that he could settle by paying $536. Neff paid that amount with amoney order marked "payment in full,"
For the next five years, Neff did notreceive any monthly billing statements.and assumed that his Citibank debt wassatisfied. But in 2002., he received a letter from Capiral Acquisitions & Management Company (CAMeO), an assigneeof Capital One which had purchased hisaccount, informing him that he owed$2.835.32. Another plaintiff in the casewas similarly situated, claiming that, although. he settled his account, he receiveda letter from CAMeO years later demanding that he satisfy a debt of $7.000.
The plaintiffs charged that by notsending monthly billing statements,CAMeO violated the TILA. The trialcourt dismissed this claim on motion.The Seventh Circuit U.S. Court of Appeals affirmed., reasoning that the "oor4
mal rule" that the assignee assumes theduties of the assigning party does notapply to obligations under the TfLAbecause the TlLA and Regulation Zspecifically address the obligations ofassignees. Any liability would have tobe asserted within theTILAframework.2oI
Although the Neff plaintiffs claimedthai CAMCO was a "creditor" so as10 avoid the application of section1641(a), the Seventh Circuit did nocagree. The actions of the assignee didnot bring it within the definition of"creditor" under the TlLA since it onlypurchased the credit card accounts.2S
C. HOEPA26
For standard mortgage transactions.as discussed above. the assignee is liableonly for violations that are apparent onthe face of the disclosure statement, under15 U.S.c. section 164I(a). However. thisprotection of the TILA does nOl apply to
QUARTERLY REPORT
assignees of loans which come under theHome Ownership Equity Protection Act(HOEPA).l1The HOEPAcomes into playif the APR on a seoond·lien loan is moreIhan ten percentage points over the applicable U.S. Treasury security rate (the"APR trigger") or the points and fees paidby the consumer are more than the greaterof eight percent of the principal amountof the loan or $400 (the "points and feestrigger").2t If either of these tests is mel.special disclosures must be made and a series of statutory prohibitions will apply.29
As floted. the limitation on assigneeliability under section 1641(a) of theTILA does not apply to HOEPA loans.Additionally. under section 164I(d). anassignee is subject to all claims and defenses that theconsumercould assert withrespect to that mortgage against thecreditor "unless the assignee demonstrates. bya preponderance of the evidence. that areasonable person exercising ordinarydue diligence. could not determine.based on the documentation required bythis subchapter. the itemization of theamount financed. and other disclosureofdisbursements that the mortgage" is amortgage subject to HOEPA. Likewise.the consumer's right of rescission survives assignmem. and can be assertedagainst any assiglll:e of lhe obligalion.JO
In Mason v. Fieldstone MortgageCO}I the assignee argued that it was aholder in due course and therefore couldnot be hcld liable because the plaintiff'sfraud claim was not a claim "with respect to" the mortgage. Citing the "plainlanguage" of seclion 1641(d)(I). thecourt simply stated: "I find that it is:·n
Similarly, in two other cases dealingwith assignee liability. the couns foundthat the "unmistakable effect" of section
27. s... IS U.s.C.1 16011ld~
164I(d) was to eliminate holder in duecourse defenses for HOEPA mortgages.)J
More recently. in DurlUJm Y. The LoanStore.Iru:.,3-I the court held that two successive assignees of a HOEPA mortgagecould be held liable for the original mortgagee's HOEPA violations. The plaintiffalleged that the original creditor exceededthe HOEPA threshold and thaI inclusionof a HOEPA Notice to Assignee madeit apparent on the face of the documentthat it was subject to the HOEPA. The assignees therefore had no protection fromassignee liability under section 1641(a).3s
D. TheECOA
Claims of race discrimination violative of the Equal Credit Opportunity Act(ECOA)lIi have made use of the broaderdefinition of "creditor'" in the ECOA,which includes "any person who regularly extends. renews. or continues credit;any person wllo regularly arranges forthe extension. renewal. or continuationof credit; or any assignee 0/an originalcreditor who participates in the decisionto exrend. renew, or continue credit,"JJto avoid the limitation on assignee liability in section 164I(a) of the TlLA.Assignees may fall within this definition by participating in the decision toextend credit when they agree to acceptan assignment at the same time that theoriginating TlLA "creditor" extendscredit. But an assignee call avoid thistrap by avoiding any such participation.
An assignee can be excluded fromthe ECOA definition of "creditor" andthereby avoid liability for discriminatory acts or practices by the person
J). •.......ood •.~ Car;>.. SJ f. s."..ld 96S._ (W.o. Midi. 1999J: ..... -...,.. U9 8.ll. m (6.0... '''''
2l. ISU.s.ClltiCf!t.~TIoo_""""oo_..;..a..-.__...,....... n...... •...·_;...... _lriUUIo.-r.....--_""",lw_,_s..._g_
Z•. 14... IIZ1. :!6.
~. hi. N. IS U.S.C I 1(>]9.
~6. oS«~ Eu_ J. Kelley. k .. JoM L Rop;equa. and :00. 1<1. t 16011«).A,.,.·Kalri"", S. OMi"at". "" 0...,..,;.... <if HOEPA. OIJa,."".",. S9 e-""" Fia, LQ, RqI, ZOl(ZOOSI."'/I'i.l<<I ll. lOOO wl.1I5a)$I9\N.O. 111.2(101)1.i. R....""." M".LU. Tol"" '" W,""'" 11,G6PI (2006SuP\l,I. )2. 1<1.01 ••.
l$. "'....J.
:l6. ISU.s.C-Hlt9I .......
37. IS U.S.c. t 169I.o(.I(........... <wppIi••Il. TlIis ,,_Una<...r...... 10 Il$ ItIo -nwkiple cmlilOr ......- ....icIo ...re..-nwltiple credi.........i ,,,,,- • ..-q_ ......i·lOr who pouclIaas. c i'.-,... (.",.. '"" ...i l"..,.o -cmlilCf" ........ llle £COA <-JlI P<'SSibly • c ;".- '0<"dl'" p..."o'''l u,,1no Ih< .oI>o<q_ .....~... "*",,,ipll<d ia,lie If3IIsa<lion ori,iftalin, d..c....it «)nuxl. s..."',,,, ReI" I.·lion 8. 11 CFR t ZOl.2(/), i"jm lki"... , 01 ""'" 31.
who deals directly with the consumerunder Regulation B only if it did notknow or have reasonable notice of theoriginal creditor's discrimination beforeit accepted the assignment.:l8 Althoughthis would appear on its face not toodifficult to establish under most circumstances, the "effects test" referred to ina footnote to Regulation Bl9 has provento be quite a (;hallenge for assignees.
Many class actions have been filedin recent years against deep-pocket assignees of automobile retail installmentcontracts, which do not even name theauto dealers who allegedly discriminatedagainst the protected classes as defendants. All ofthe reported cases have nowbeen settled for large amounts of fees paidto the plaintiffs' attorneys, and benefitsof more dubious value to the class members. Unfortunately, because they weresettled rather than litigated to a conclusion, these cases give little guidance asto what the ECOA requires of assignees.
This subject and the ramificationsfor future litigation against assigneesare discussed at greater length in twofC(;enl artides by one of your authors. 40
E. The FTC "Holder" Rule"
1. Federal Holder Rule Cases
The FfC "Holder" Rule4~ requiresthat the following language be indudedin at least ten point bold type in allconsumer retail installment contracts: .
:lll. 11 CFR • 201.1(1). Iu"""". 'ha;, """.'i...... C"1e<! ....-multiple c<edi!¢<- ROle
39. 11CFR~m6(.).fOOlMl.2.
40. Jolm L R<:>pieqU<l.nd N..t.an O. I..undby. APR $p/il Cit",,\<1...... Unde, t!le £q;Hl1 C,<Ji, Opport""i", Ad: TI.. £lid0/1';'''''7<'.6 Teonsu""" ~;~. L,O. Rep. 49 {:lOCI?), Jo'm LRopieqU<l .nd N.lIw> O. l.<>ndhy. tko/or RaI< P,,"idflO'.....OW> .....'i"'" Um1<' ,!Ie £COA.; Ik"" II'< R<ach<d ,I>" &01,,/th. Rfl<Jfi!, 61 Bus. Law. 663 (:lOCI?),
41. 5<1. A."""",1I,0 M.rt E. 0.,;.,. Eua"'" J. Koll.y. I,.. JohnL. R.,..,...,.,,,,,.••" On".-.pheo S, N"oj>. ",<.•i6"'" U"hilir.Un4" ,I,. TIUo.' I. ,10< C<>n4,,;' TIr<",,' R...II! l><a<I~. S4Coot...""" Fin. L.O. R<p, 24~ (ZOOll). ..pri"r<d iIP Roo...... &:M,uH. To"," '" LENoo"'" 11.(16141 (lOO6 Su.....).
42. '6CFR t 4)).2. Thi, i, """""""'y c.ll<~ ,he ..HQIde.... ",I.becau.. i, arr""" It>e ,iShU of hoklets k..l....,ivoces)of e<ell;'<o<>1fKU, ..", wo> ~i<e<:l<:<l i. "..~ .. P<CVCOl'inS holde, in duo
COUlt< "at", u""", ,lie Uunif""" Com"",,,,i.1 Code WCC).Su.•.,., UCC If 3·:102..105(h). ).J06.
QUARTERLY REPORT
NOTICE
ANY HOLDER OF THIS CONSUMER CREDIT CONTRACf ISSUBJECfTO ALL CLAIMS ANDDEFENSES WHICH THE DEBTOR COULD ASSERT AGAINSTTHE SELLER OF GOODS ORSERVICES OBTAINED PURSUANT HERETO OR WITHTHE PROCEEDS HEREOF.RECOVERY HEREUNDER BYTHE DEBTOR SHALL NOTEXCEED AMOUNTS PAID BYTHE DEBTOR HEREUNDER.
By its terms, this "Holder Notice"would allow a consumer to assertagainst the assignee all claims and defenses to which the Original creditor wassubject. This creates a conflict betweenthe FTC Holder Rule, which states thatan assignee is liable to the consumer,and TlLA section 164I(a), which precludes such liability for TILA errors notapparent on the disclosure statement.However, this apparent conflict wasfirmly resolved in favor of limiting liability by the line of cases consideringthe issue, starting with Taylor v. Quality Hyundai, Inc.4l That case held thatthe language in the FTC IIolder Noticecannot override the limitation on assignee liability in TILA section 164I(a):
The plaintiffs initially argued thatthe TILA actually has nothing todo with the assignee's liabilityin these cases, because they arebound under the terms of the contracts they accepted, wholly apartfrom the statute ... .In our view,however, this misconstrues theeffect of the Holder Notice insofaras it governs TlLA-based claims....The Holder Notice, even Ihoughcontained within the contract,was not the subject of bargaining
n. 1~F.:ld669(7'hCi"1m).
283
between the parties, and indeedcould not have been. It is part ofthe contract by force of law, andit must be read in light of otherlaws that modify its reach. [citation omitted] We therefore rejectthe plaintiffs' contract-based effortto side-step [section] 1641(a).44
2, Holder Rule Cases UnderState Law
The holding in Taylor was followedin numerous other cases each time thatan appellate court considered the issueof limitation on assignee liability under TILA section 164I(a).4s However,many state court decisions which weredecided prior to the seminal Taylordecision applied the FTC Holder Rulecontract language without consideringthe limitation on assignee liability inTILA section 164 I(a). For example, theAlabama court in Eachen v. Scott Housing Systems, Inc.#' was faced with the issue of whether mobile home buyers couldsue both the mobile home manufacturerand the finance company to which theirretail installment contract was assignedfor breach of warranty. Instead of relyingon section 1641(a) to defend the TILAissues, the finance company argued thatthe FTC Holder Rule does not provide abasis for making a claim directly againstthe assignee, but rather only applies ifthe plaintiff were defending a suit filedagainst it by the assignee. The Eachencourt rejected this argument, holdingthat the FfC Holder Notice languageimposed liability on the finance company because it was a subsequent holderof the contract.·7 Similar rulings were
44. Id", 69),
4S. WIlke< Y. W.lloee "'U", S.,... I..... ISS F.ld 927. 93S (7'hCO,. Im.'EII".,Ge""..IMolon.'u:C<ptor»oC....,. I60F..Jd703. 709 (11th CO,. 1991); 0""• •. L<",i, M<>to«. h", .. 179F.3d 286. 29.\ (Sth Ci,.). «". d<ni<J. S20 U.S. 1020 (1m):R:LrN<bn Y. au.. M.nh..,.. C",p.• 219 F,Jd 194. 199 (3dCi,. WOO): Bal<le"", •. C;'yCheY<oIeI. Buick &0 Ceo.I"".. 214F.Jd 849. an P'h Cu. WOO): lrby.o..-. Y M.OR.. In<. 79F. Sup{>. 2d 630. 63.1':16 (E,D, VI. 20(0).
#. 630 r. S"Pf'. '62 (N,D, AI•. ,98(;),
47. Id." 164-6S
284
handed down in other state cou~ andfederal courts'"' in the yean preceedingthe Tayibrdecision. However, these casesare called into question by the courts'failure to consider the impact of TILAsection 164I(a), especially after Taylor.
Following the federal court decisions in Taylor and numerous casessubsequently confinning Taylor, therestill remained the issue of whether thesame rule would be applied to state lawclaims. This issue was carefully ana~
Iyzed by the Illinois Supreme Court inan important decision, Jackson v. SoulhHofland Dodge, Inc.5O In addition to following Taylor on the issue of whetherthe limitation on assignee liability inTILA section 164I(a) affects liabilityunder state laws, discussed immediatelybelow at Pan UtE, the Jockson court addressed whether the FTC Holder Noticelanguage nevertheless imposed liabilityon a subsequent holder of the contractNoting that all of the federal courts thathad addressed the issue rejected thatargument, the Jackson court likewisefound that the FTC Holder Notice language could not impose such liability.51
Nonelheless,lhe trealment oflhe FTCHolder Rule in subsequent cases, bothstate and federal, has not always beenconsistent. For ex:ample, in Alexiouv. Brad Benson Mitsubishi,51 a federal district court followed Ramadanin holding that the New Jersey state lawHolder Rule was·expressly preemptedby TlLA section 1641(a) and thereforethe Slate law could not be the basisfor imposing liability on an assigneefor state law claims under the New
4L S-. ~..~ -. _ s,-. •. Jeuop.. .... ,~ 14)lAloob I9I:J);~_aT.- ..~ Jl4Sa.:z.l)ll (1..a. l~no- ........ _ CNdiI Coop.. ....
NcI. ""' 617••19~ m Cl9lIl; _ .. -.1.... 560t1i0""' Jd IQ565 N.E.2oIIott(llU),.
.&t. s",. ~.._ ".",. •. _ ~ S<rvias. loe.. 951 F.Suw 010. 1)'1).16 (IoU). Ala. 1996):~ •• Said.911 F. Sopp. OllJ. loI01.f1) 10. KaL 1",1; Coa •• "...N.._.~ of C"__ 6J} F s..w !:I6. Ull (S.D.
011... 1\1161.
'0. 1971U. ld)9. 755 N.E.ld061 (2OOb
51. hi.• 53·55. 755 N.E.ld. 411-71.c~i... TQ._. ISO FJd 0169'l-'l3: Em•. 160 F.ld .. 101-09; and e..-. 119 l'.:l<l M
'"51. 111 F. s"PI'.2d 557 (O.N.J.lOOOl.
QUARTERLY REPORT
Jersey Consumer Fraud ACI,SJ breach ofcontract, or money paid by an estate.S4
On the other hand, in Cavette v.MasterCard Int'l, Inc.,ss a federaldistrict court completely ignored theissue of federal preemption of conflicting state law under the TILA. At issuewas whether the plaintiff's claim, thatMasterCard's failure to disclose its currency conversion fee violated the Tennessee Consumer Protection Act,56 was inconflict with the disclosure requirementsof the TlLA, which include no duty todisclost:: such information. The courtfound that no federal question jurisdiction was present under the artful pleading doctrine, and remanded the case tostate court without reviewing the TILA'srequirements for open-end credit disclosures or the federal preemption issues.
In Psensky v. American Honda FjtlQIl,Ce Corp..57 the New Jersey SuperiorCourt, Appellate Division, overruledan earlier decision)lj in which a lowercourt had held that while TILA section 1641(a) applies to TILA claims,it does not apply to claims under theNew Jersey Consumer Fraud Act" ThePsensky court held that in the absence ofan allegation that the defendant assigneeactively participated in the wrongdoingby the original creditor, in that casean auto dealer, the assignee's compliance with the TILA was "a completedefense to the [related] state c1aims."6O
A similar ruling was issued in Vickersv.lnterstate Dodge, Inc." In Vickers, thetrial court had found both the originalcreditor, again an auto dealer, and itsassignee liable on a claim that the dealer
II N.J.-.IVta.H560I-I ......
"- 1:11 F_Soopp.2Jd '1),'19(N.0. T_1OO}~
S6. T.... CookNaH~1.1•. IOI .._
n. m"'J.s..""'.nl.I7' ....2<I9)(lOll-SI.
.sa. Soou •. ~_I_CGrp..)6Jl'U.s.--.145.')1 ....2-cl-S64 (2001).
-SIl. NJ. Sooo. "'nn, n .56:'·1 .. Hf.
60. )11 NJ. S"fl<'. 01231. 115 "',ld M196. c;l;ftIJ(>(;s.-. 75-SN.E.2-cl462.
61. SS2So.2<l1136(L4....PI','2005},
had forged the plaintiff's initials on anoption to purchase credit life insurance.On appeal, the Louisiana Court of Appeals followed Ramadan and Ale:ciou infinding that the definition of "creditor"and "extender of credit" under a statestatute could not extend liability toan assignee in contravention of TILAsection 1641(a), and that the FTCHolder Notice language in the contracialso could not extend such liability.61
One commentator has recently recommended that consumers rely on the FTCHolder Rule language to seek redressagainst both original creditors and assignees for any type of claim that theymay have." He advocates this since thelanguage in the FTC Holder Notice isdesigned to make all subsequent assignees essentially "stand in the shoesof the seller.'''''' However, in support hecited onJy pre-Taylor cases and casesinvolving rescission, a special circumstance discussed below in Part IlI.G.He did not discuss Taylor or the casesfollowing it Such arguments may swaycourts that are unfamiliar with the nowwell-settled rule that the TILA section164I(a) limitation on assignee liabilitytrumps tbe FfC Holder Notice language.
This approach to the issue may haveinfluenced the court in the recent case ofGlovier v Barton Homes, lLC,65 findingthat no federal question was presentedin a situation similar to that presentedin Cayeae. The Gluy;er cast:: had bec:nremoved to federal court on the groundthat plaintiff's claim under the FTCHolder Rule presented a claim arisingunder federal law. The Glovier courtruled that bringing breach of contractand other state law claims against an assignee pursuant to the FTC Holder Noticelanguage did not create federal questionjurisdiction since the FTC Holder Ruledoes not create a federal private righl
6l. u.• 12oIl.
6:1. Oo.vidA.SIwU. ~fTC -Hold<>-- 1I-k.60Conounoo.F...L.Q. R<fI.)61 (2006~
64. Id.• l64.citi•• 1'fC 0'id<1...... 41 Fed. Rq.lOPl1.lOPl)(Ma, 1•• 1916).
65. lOO6l,1.$. 0iJI. w;.65115 (W.O. 1.4. scpo, lJ.lOO6).
of action.1It As in Cavette, the Gloviucourt gave no consideration to whetherthe claims implicated me limitation on as~
signee liability in TILA section 1641(a).Whether thai issue will be raised afterremand to state court remains to be seen.
F. State UDAP Laws67
The FTC Holder Rule cases also dealwith the question of whether a consumer's claims against the original creditorare preserved or extinguished upon assignment of the credit inslrumell{. If Ult~
claims are preserved, and are not otherwise preempted by federal law or barredby state law, they can be asserted against
the assignee. If they are extinguished orbarred by the assignment, they cannot be.Such claims may involve the question ofwhether disclosures required by the TILAhave been given by the original creditor.
As discussed above, under section164 I(a), TILA disclosure claims maynot be asserled against an assigneeunless they are "apparent on the face"of the disclosure statement. A relatedand significant question is whether theoriginal creditor may have done something underhanded or fraudulent thatmay subject it to liability under a stateUnifonn Deceptive Acts and Practices(UDAP) statute but which cannot be determilled simply by looking at the face ofthe loan documentation being assigned.Can such claims be brought against anassignee under the UDAP statute, ordoes the limitation on assignee: liabilityin TlLA section 164I(a) also absolvean assignee of liability for such claims?
This was the most imponant questionthat faced the Illinois .supreme Court inJackson v. South Holland Dodge, Inc."At issue was whether an assignee couldbe held liable under the Illinois Consumer
6l. .sn,~ e..- J. Ko,JIty. J'_ MIl _ L. It-.~~u-.s-u-~ '""'*- "" SooodoHolJanil DodIC>' S6 e--.. Fi•. LQ. R.... 16 (1OOll...,.-.. -.. a IotIua. T_ .."-, 11.06lS)--,
QUARTERLY REPORT
Fraud Ad" where me auto dealer assignor violated the TILA by failing to disclosethat it retained part ofthe price being paidfor an extended warranty insteadofentering the full amount of the purchase priceas an "amount paid to others" in the TILAdisclosure statement. This would presenta TILA violation on the part of the dealer,but under federal circuit court of appealsdecisions, an assignee who purchasedthe retail installment contract from thedealer could not beliable under the TILAbecause the violation was not apparenton the face of the disclosure statement.
Drawing on its earlier decision infAnier v. Associates Finanr:e, Inc.,70 theJackson court found that the assignee:fully complied with its TILA obliga.tions by purchasing a contract that hadno TILA disclosure violations apparenton its face." The court further foundthat holding an assignee liable under theIllinois Consumer Fraud Act where theTILA exempted it from liability wouldviolate the state's public policy because:
If an assignee were liable underthe Consumer Fraud Act, thoughexempted from liability underTILA, it would impose disclosurerequirements on assignees beyondthose mandated by federal law.This would frustrate the overarching reasons put forth by Congressin enacting the assignee exemption,i.e., to narrow assignee liability, to
make compliance easier for creditors and to eliminate confusion as tothe responsibilities of assignees. [ci.tation omittedl Thus, we concludethat an assignee is not responsiblefor the misrepresentations made bythe dealer to the consumer outsideof reviewing the face of me assigneddocument for apparent defects. Accordingly, we will follow lAnierand hold that compliance with the
69. liS IlCS Xliii ......
11. 1911.. :101••1-&1. m f'(L1I<l. __anooc.",..... 1:10 f.Jol.69I._,-'n9f.Jol.19'l.31l;Gtftow.I19f.Jol• m-96: fllo. 160 f.Jol_ 709-10.
28S
disclosure requirements ofTILA is adefense to the Consumer Fraud Actclaim against Chrysler in this case.n
As noted above at Part lU.E.2., thisholding in Jackson was followed in NewJersey in Psensky v. American HondaFinrlnce Corp./J overruling the earlierdecision in Scott v. Mayflower HomeImprovement Corp. I. The Psensky courtagreed that absent some allegation thatthe assignee actively participated inwrongdoing by the dealer that assignedthe contract to it, so that only a failure todisclose was present, there could be no liability, adopting the rationale ofJadson.7)
TIle same result occurred in Californiain Silvas v. PTrOOe Mortgage Corp.76In Silvas, the plaintiffs claimed that thedefendant mortgage lender failed torescind the transaction after receiving aproper notice of rescission and violatedthe TILA in other respects. They failedto file suit within the one-year statute oflimitations provided by the TlLA, sothey sued only under sections 17200 and17500 of the California Unfair Competition Law (UCL),n which had a four-yearstatute. 1be rnongage lender asserted thatallowing the plaintiffs to prosecute claimsunder the California statute when theirclaims would be barred by the TILAconflicted with the TILA's federalregulatory scheme. Thus, the state lawclaims should be preempted. The Silvascourt agret:d that the VCL claims couldnot be brought where equivalent TlLAclaims were barred because to allow suchclaims would defer to conflicting stateregulation of the defendant's activitiesas to issues where federal law and banking regulations occupy the entire field.1I
n. )7!NJ.S........ lll.!1S ....ldl9O(200S~
14. .16J NJ. s.p'" 1.5. 13 I A.2<l 56'l (tOOl).
H. 311 N.J. $op'" Ill. lJI. In A.ld 290. 296. ci".1......l6. .~ I F Supp.2d III 5(S.O. Cal. 2llO6~
T1. Cal. 8ool. .. hol.CodoH Inco. lnoo.
"JI,. .ll F. SIw.ld. 13:!O.Ooiooos I~ CPR I *..1. no.~~ ... kdmII_...-,._.-",,- ...~TI~
286
The Silvas court distinguished a recentCalifornia state court decision, Smith v.Wells Fargo Bank, N.A.,7'! because theSmith court dealt with "a different,narrower, preemption regulation, andit also did not apply field preemptionprinciples. "80 Smith involved VeL claimsconcerning fees for ATM and check cardoverdrafts. The Silvas court stated thatSmith only involved a predicate act ofviolating federal disclosure requirements,but did "not involve or seek to impose anystate law [imitation or other state requirement regarding disclosure."s, The Smithruling therefore did not conflict with fede~l regulations or implicate federal preemption of the state law causes of action.
Under these cases and others, it isclear that the limitation on assignee liability in llLA section 1641(a) appliesto bar state law claims if the state law liability is merely derivative of the originalcreditor's wrongful act against the consumer. Forexample, the lllinois SupremeCourt ruled in Zekman v. Direct AmericanMarketers, lnc.n that an assignee has noderivative liability under the state UDAPstatute for the act of another person whodirectly defrauded a consumer, even if theassignee knowingly received the benefitof the other's fraud.33 Derivative UDAPIiability has also been rejected elsewhere.S4
If, however, the assignee can be foundto have participated "directly" in theclaimed wrongdoing, a UDAP claim maystill be possible. For example, in Knappv. AmeriCredit Financial Services, Inc.,8sit was alleged that the assignee's branchmanager conspired with an auto dealerto create false documents and to hide afinance charge in the vehicle price statedon the retail installment contract. Thiswould make the assignee directly rather
19. 13SCal."~.41h 141\3. J8CaI.Rptr.3<16$3(2OOS\.
80. 421 F. SoW.24 .. 1320·21.
82. 182 111.2<1 3S9. 69S N,E.2<I ISJ (1m).
83, Id." J69.695 N.E.2d ot 159,
S4 h. ~-t:.. Ilon>e S..in;< " ..·n., Coe"". 1)3 S.W.2d 134.1)(i{Te<. 1987); H"""y •. r....-d Mo«>rC«di, Co.• 8 S.W.3d273. 275{Tenn. "'1'1'. (999).
85. 245 F. S0I'l'.2<1841 (S.O.W. Va. 2OO3~
QUARTERLY REPORT
than derivatively liable for a UDAPviolation. The Knappcourt accordingly did notdismiss the UDAP claim against the assignee, although it did dismiss the claimsbrought against it under the TILA. 86
This issue was addressed more recently in Cazares v. Pacific Shore Funding. 81
The Cazares plaintiffs sued a mortgagebroker and its assignees under the UClfor TIlA and HOEPA violations, alleging that the assignees participated directlyin the broker's loan transactions by dictating the mortgage broker's loan tenns,financing the loans issued by the broker,and paying a premium for including prepayment penalty provisions that violatedthe HOEPA prohibition on such termsin high cost mortgage loans. The courtagreed that "secondary liability cannot beimposed under the UCL," but found thatthese allegations of the assignees' directinvolvement in wrongful conduct weresufficient to state a claim under the VCL.sa
The Knapp plaintiffs also asserted thatthe assignee was liable for the dealer'salleged violation of the West Virginiausury law.'9 Although the court foundthat there was no usury violation,90 such aclaim could clearly have created liabilityfor both the dealer and the assignee if ithad merit, since the TILA does not preempt this type of stare regulation. UnderTlLAsection 161O(a)(1),91 theTfLAonlypreempts state laws that are "inconsistentwith the provisions ofthe rrfLAj and thenonly to the extent of the inconsistency."Since the TILA docs not regulate interestrates, this is one type of state law claimthat can clearly be brought against an assignee as well as the original creditor.92
17. 2006 w~ 149I(1(;(C.0. Cal. Jon.). 2(06),
II. /d. at '9.
89. W, V:l. Cod< ~H6.0.·3·'OI '''«I'
90. 245 F, S0I'l'.2d at 850·51.
9L IS U.S.C. ~ 1610(.~11. S.. "I", 12CFR f 226.28(a~I).
92. F<>r. o;><u..;on 01 federal pm:mption 01 OIO'y I.~ wilh=POX! ,,, ""'""1"'< l<OO;nl. _ JoII" t. Ropi<qu<! ond Eo·30"" J. Kolle).J,__ Un,rySr..i..,. 8",t, Ret·..., £J.<o.<k",,,,,,,,,U"J" ,,,, 111•...,;-, I",~" A<I. 59 Coouom." Fin. LQ. Rep,118 (2005); Jolin L Ropi<qlltlan<l EoiC"" 1. Kelley.J,.. UsuryR<o-;,II«I: Th, /1/;"";> $up,..,,, C""" K;~h" 1M Sa/U'k', inMf,"....~. L<"Ji"~. 60 COloomorfin. '-.Q. Rep. 131 (2006).
G. Rescission
1. Intr-oduction
Where a plaintiff claims a right torescind a credit transaction, the ruleschange. This is true in two differentrespects. First, the FTC Holder Noticelanguage will be given effect against anassignee where the consumer seeks torescind the transaction after receiving"little or nothing of value." Second,mortgage borrowers are given a statutoryright to rescind which is made expresslyeffective against assignees under theTILA,93 Both types of rescission havebeen the subject of substantial litigation.
2. Consumer Received NoValue
In the Taylor decision, the court statedthat it was not interpreting the limitation ofassignee liability in TILA section 1641(a)in such a way as to make the FTC HolderRule a nullity. It took note of a line ofcases providing that where the consumerhas received "little or nothing of value,"there is a common law right to rescindthe transaction. The court therefore held:
As a legally required part of everyconsumer financing contract, theHolder Notice continues to perfonnan important function even in thecontracts between the plaintiffs andtheir respective assignees. If the carsturn out to be lemons and they asserta right to withhold payment againstthe sellers, they may also assert thesame right against the assignees.94
This ruling followed from earlier caselaw which held that the FTC HolderNotice language allows a consumer topursue affirmative claims, as opposedto mounting a defense, "only if theseller's breach was so substantial that
93. S.. ISU.S.Cll64I«),
94. 150F3rI.,693.
rescission and restitution were justifiedunder applicable state law principles.~
Claims for rescission outside of lhemortgage finance arena are unusual,since TD...A plaintiffs typically seek onlyactual or statutory damages. Occasionally, a TILA claim will be coupled witha claim under the Odometer Act.96 Forexample. the plaintiff in Irby-Greene v.M.O.R.• /ru:.97 claimed thal a 40,000 mileodometer discrepancy entitled her to rescission and restitution. While the courtdismissed the TILA claim against the assignee, it did not dismiss the OdometerAct claim, although it did cast doubt onwhether such a discrepancy could entitlethe plaintiff 10 rescission in a decision onthe merits of the case.9I Similar rulingshave been issued in a few other cases."
3. TILA StatutoryRescission Rights
The TILA permits a mortgage borrower to rescind the transaction for threebusiness days after the transaction is consummated or delivery of the material disclosures required by lhe TlLA, whicheveris later. IGO If, however, the creditor failsto provide the required disclosures orfails to make them clearly and conspicuously, as the TILA requires, the right torescind does not expire until three yearsafter the consummation of the transaction or the sale of the property, whicheveroccurs first. 10I A failure to comply withthese requirements can create substantial difficulty for mortgage lenders.
Forexample, in Hammox v. HeartlandHome Finance, lnc.,I01. the plaintiffssought to rescind the mortgage loan be-
91. _ •. Las.-._UhV_.916F.s-.m.1'6).6ftN·D.IL 1996~
96. ., u..s.c. I :mm.
91. 79F.s.w.:!d6lO(E.D.Va.2lIIlO).
QUARTERLY REPORT
cause they allegedly did not receive therequisite two copies of the disclosurestatement. even though they had signeda document indicating that they had received them. 1lle court dismissed theirclaim for actual and statutory damagesagainst the assignee because such a violation was not "apparent on the face" of thedocuments that were assigned.103 However, since their signatures on the documentonly created a "rebuttable presumptionof delivery," which they might be ableto disprove at trial, the court did not dismiss their rescission claim. t~ In anothercase, Oscar v. Bank One,I05 signing thedisclosure statement at the loan closingwas sufficient for the court to grant summary judgment dismissing the plaintiffs'rescission claim since it was not rebutted.
The issue of damages in connectionwith a rescission claim arose again inBelini v. Washington Mutual BanJc, F.A. 106
In that case, the plaintiffs sent the assignee bank a notice of rescission whichasserted that lhe mortgage was subject tothe HOEPA and that the original creditor had not made the disclosures that theHOEPA requires. When the bank failedto return any of plaintiffs' payments or toterminate its security interest, the plaintiffs sought damages for the monies thatwere not returned as well as rescission.The trial court found that the damageclaims were barred by the TILA's oneyear statute of limitations and that theycould not rescind becausc ofan exceptionin the TILA with respect to their state.
The First Circuit U.S. Court of Appeals reversed. It found that the one-yearstatute of limitations underTILA section1640 began to run from the "date of theoccurrence of the violation," which wasthe date when the plaintiffs sent theirrescission notice, not the earlier datewhen the loan closed. The plaintiffs'claims for damages for failure to comply with the rescission notice therefore
287
were not barred. IOl The court also foundthat there was no basis to deny plaintiffsthe right to rescind the transaction. IOI
In three recent cases, courts havefound that the statutory right to rescind,when extended beyond the initial threeday period by failure to make timely disclosures, will survive a refinancing of theloan. An earlier case from the Ninth Cir·cuit U.S. Court of Appeals, King v. Slat~ofCalifornia, lOll held that rescission wasnot possible when a mortgage has beenrefinanced because once the mortgagehas been paid off, there is nothing left torescind. The Sixth Circuit U.S. Court ofAppeals took a fresh look at this issue inBarrett v. lP Morgan Chase Bank, N.A. IIO
After noting a split in the district courtdecisions subsequent to King, with somecourts following it,ll I andsomenol, I12 theBarrett coun emphasized the mandatorynature of the TILA requirement that theright to rescind be disclosed in findingthat rescission rights survive refinancing:
To the extent banks wish to avoida three-year window for bringingrescission claims. the Act offersthem a fail-safe way of doing so: satisfy the disclosure requirements. II)
The Barrett court cautioned that therehad still been no detennination on themerits, as to "whether the bank failed tomake the required material disclosures orfailed to disclose adequately the Barretts'right to rescind, which are the types ofdisclosure errors that must be present to trigger the three-year right of rescissicn.'·114
107. U•• 2S.
10l. .w..n.
Ito. 445 F.3d tl4 (... Or. :lOO6~
III. s.... e.,~ __ •. Mor<.blo Mot1:pc<. Co.. 231 F. S2d m. 745-06(N.D.llL 200:!):e- '.~ eo.,.of A.eeri<:o. 2001. WLU750 _ '1 (N.D. II. 2001.~
99. s...e.,.c" AItI..... -..I..... 65F.SUPfl.2dlU.J'iIO(w.o 19991: Ilaa« Y. t-is Roint$ -..1.....:lOP.S_2d919(S.D.W.Ya.I_l. 10). 1<1._'1.
100. 15 U.S.C f 16J5/.0' lOt. /d." '2.
101. 101. f 16:15(0. lOS. 2lXI(i WL 4OllS.l (liD. Po. Fell. 17. 2OO6l,
t02. :lOO5 WL IIJOJ471E.O. r ...n. M'r 1.l.2(05). 106. 412 F.3d 17{1.. Ci<. 200.1,
112. s... e.... Mcl_ y.l<wio. u-.. Bonk a T..... 0... 2151'....0. 26. Xl (D. 104.... 2OO1I: Par- Y. New C.......,.Marl,.,. Corp.• 2001 WL n]4911.... '2 _ .. I (N.D. Ill.:lOOll: ""lpIlus •• s..ni_. 200) WL 19641JJ _ °11 (N,D.11l.2OOl).
Ill. t1wrtll.445F.Jd .. UI·32
114. 1<1... 882.I.........i. in onlioul).
288
Just nine days later, the CaliforniaCoon of Appeal declined to follow theNinth Circuit decision in King and instead followed Barretl. in Pcu:ifi.c ShoreFunding ",.l.o40.lUciting the Kingcoun'slack of analysis and its failure to supportits decision by referring to the languageof the TILA and Regulation Z. whichcontain "an enumerated list of eventsthai cut off rescission rights-and do nOIinclude lhe payment in full of the loan asone of those events."ll6 The Pacific Sfwrecourt also distinguished King because,unlike Ihe facts there, the Low plaintiffscontinued to hold title subject to a security interest, so that "something doesremain to be rescinded in this case."lI7
Finally, the Seventh Circuit U.S.Court of Appeals followed Barrell inHandy v. Anchor Mortgage Corp. III fnthat case, the original mortgage lenderprovided two conflicting forms notifyingthe borrower of her righl to rescind. Thetrial court dismissed the case on the basisthat either one of the forms would havegiven her notice of her rescission righlS.1be Seventh Circuit reversed because, although one of the forms was the correclone and gave her notice that the entireloan could be rescinded, the other form,which was not the correct one for thetransaction, suggested thatshe could onlyrescind the additional amount being refinanced, $5.500 out of the entire $80,500loan. This was legally insufficient to givethe requisite notice of right to rescind. 1I9
The court noted that "TILA does noteasily forgive 'technical'errors."llOWithrespect to the argument that because theloan had been paid off, rescission wasnot an available remedy, the court followed Barrett because there is a right
II}. 1)1 Col""""'" lloll.~ CaLRfI'LloI m {1(l(l6~
116. u.• 1~l..1C,UI"""Jd. 29ll. ciIioo:I Mtl-ar. •. I.....u."", B.._. T.... Co.. ll~ F.Il.D. l6.)1 (0. Man_
"""117. U.• 1]5).501••2 CoUlp"_:Jd. m.
III. ~ F.:lcl 7fjl) (1th C;'_l_
119. 1<1... 164.
QUARTERLY REPORT
to rescind the lranS3Ction, not merely aright to rescind the security interest III
On the other hand, and despite the"technical errors" admonition in Handy,the courts do not always show an eagerness to find in favor of rescission claimswhere they are based on mere technicali~
ties. In Mills v. EquiCredir Corp.,ln theplaintiffs asserted that the defendant'suse of an incorrect disclosure form wasa material misdisclosure that triggered theextension of their right to rescind beyondthe three-day period. The Sixth Circuitrejected this argument and affirmeddismissal of their T1LA claims becausethey received actual notice of their rightto rescind, as the TlLA requires, even ifan incorrect fonn was used. However, inRollins v. Drive·] ofNorfolk. ]nc.,III thecourt found that the FTC Holder Noticelanguage in the mortgage documentsformed the basis for an affirmativeclaim for rescission against the assigneeeven where the plaintiff failed to pleada claim for rescission, so long as suf~
ficient facts were pleaded to justify it.
IV. Conclusion
The limitation on assignee liability in TlLA section 164I(a) has withstood many attacks. It continues tobe recognized as affording broad andmeaningful protection to all assignees.
But there are exceptions, and these canl,;reate a minefield of risks for assignees.The CLAallows an assignee to be taintedwith the status of 3 "'essor," analogousto the "creditor" under the TlLA, wherethere has been substantial involvementin the lease transaction. And, whilean attack on assignee protection wasrejected in an important credit cardcase, the protection provided by section164I(a) is not available where HOEPAapplies. There is potential exposurein an ECOA sening as well, althoughthe parameters of the multiple creditor
Ill. /d_ .. MS-66.<~;.1BItT....,.us P.ld ,,'71,
rule and Regulation B "effects" testhave never been settled in this context
Section 164I(a) protection has survived claims under the FTC Holder Rulethat do not involve rescission, but thereis always the danger that courts whichare not made aware of the relevantfederal case law will fail to recognizethat protection. Claims under other statelaws may also circumvent the protection. Finally, rescission claims, whileoften difficult to substantiate, may havevitality since they present yet anotherexception to section 1641(a) protection.
So, assignees must walk carefully inthis minefield. Direct participation in theoriginal creditor's operations can anddoes lead to liability. It should be avoidedwherever possible, because it may sufficiently entangle the assignee to conferassignee liability in one of the situationsdiscussed above. Assignees should nevertake the protection from assignee liability under section 164I(a) for granted.
FTC PostponesProhibition...
In the October, 2006 Notice, theFTC made several announ<:ements relating to the issue of whether prerecordedtelemarketing calls are subject to theTelemarketing Sales Rule's regulationof "call abandonment" when there is ancsllblished business reJaiionship betweenthe selltt responsible fur the call and thecalled consumer. In the October 2006 Notie:e, the FTC !Wed !ha£, begiDnirtg JanUill)'2.1JXJ1, sellen would 00 Iongtt be able totake advantage of the safe harbor allowingprem::orded Iekmam:ting messages basedon an eSlilblished business relationship.
In the December, 2006 announce~
ment, lhe FTC swed thaI il had receivedfour petitions requesting Ihal the fTCexlend the lYail.ibility dale of this safeharbor until the FrC completes its eum:nlrulemaking proceeding regarding the oseof prerecorded telemarketing messagesbased on an established busiroess relalionship. The FTC granted these requesls.
11<1, Id.. <"i•• (;C>Wefl ". ",nk United of T..... fSB. 10 F,ld 122. tn Fed.AI'!"'. 6S2(6<h Ci,.F<b.l'.lOO6).93', ""11"h Ci,. 199~1 (··hno<no<....;,;.Ii,~ ..i.n," in TlLA<,..s), 1U :!006 U.S. DiOl, Le.i, 61191 (E.O. 'IL AUI- 19. :!006,
"Assignee Liability: Through the Minefield," Consumer Finance Law Quarterly Report 261 (Vol. 61, No. 2, Summer, 2007) (with Eugene J. Kelley, Jr. and Georgia Logothetis) This document is republished with permission.