Should TILA Rescission Tender Become a Condition of Lien Removal?

Regarding the voiding of security interest in 12 CFR §1026.23(d)(1) upon notice of rescission, I have made the point that it is plain inequitable to allow the borrower to keep the house and deprive the creditor of any plausible tool to force the borrower to repay the loan (such as through foreclosure sale), and I cannot believe Congress intended such a stupid outcome.  Multiply that tenfold in the case of notice of rescission where no actual breach occurred.  It does seem clear from reading (4) that the court may modify the unwinding process of (2) and (3), not condition release of security interest in (1) upon the unwinding, and yet that seems totally inequitable.

I understand the point that the creditor must remove the security interest in order to allow the borrower to arrange financing for the purpose of tendering.  But that puts the security interest squarely in the domain of unwinding.

Well, the 11th Circuit rambled on about the inviolate nature of (1) in removing the security interest, as a hammer against the creditor, and then it broke down and saw it my way.  Apparently.  Through this somewhat ambiguous part of the opinion.  The last sentence makes my point that the court MUST get involved, and the security interest has to have involvement with the unwinding, lest the borrower NEVER repay.

Did I get it wrong?

Williams v. Homestake Mortg. Co., 968 F. 2d 1137 – Court of Appeals, 11th Circuit 1992

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Where “the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.” Chevron U.S.A. v. Natural Resources Defense Council, 467 U.S. 837, 843, 104 S.Ct. 2778, 2781, 81 L.Ed.2d 694 (1984). In this instance, Congress, through its legislative history, has made it quite clear that “the courts, at any time during the rescission process, may impose equitable conditions to insure that the consumer meets his obligations after the creditor has performed his obligations as required by the act.” S.Rep. No. 368, 96th Cong., 2d Sess. 29 (1980) (emphasis added), reprinted in 1980 U.S.C.C.A.N. 236, 265. Furthermore, the plain language of § 1635(b) leaves little room for narrowing the court’s ability to modify the process of effecting rescission, as Congress’ grant of authority covers all “procedures prescribed by [the] subsection.” Thus, we hold that a court may impose conditions that run with the voiding of a creditor’s security interest upon terms that would be equitable and just to the parties in view of all surrounding circumstances.[8] By relying on the holdings of Harrisand Gerasta, it appears that the district court mistakenly believed that such modification was outside the scope of its authority. We, therefore, vacate the judgment of the district court and remand the case for consideration of the propriety of conditioning the voiding of Homestake’s security interest.[9]

In deciding whether or not to impose conditions upon Williams, the district court should consider traditional equitable notions, including such factors as the severity of Homestake’s TILA violations and whether Williams has the ability to repay the principal amount.[10] While the goal should always be to “restor[e] the parties to the status quo ante,” Harris, 609 F.2d at 123; Gerasta, 575 F.2d at 584, rescission must also maintain its vitality as an enforcement tool.

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The PA Bankruptcy court agonized over the foregoing issue at

IN RE WILLIAMS, 291 BR 636 (Pennsylvania A Bankr., 2003)

The court concluded as follows on that point, but I consider the whole opinion a worthy read because it also addresses rather strictly the requirement of two Right to Rescind disclosures per borrower:

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While I have expressed my disagreement with those courts which have found authority to order conditional rescission, I would not choose to exercise such authority in this bankruptcy case even if such authority should exist. In Williams v. Gelt Financial Corporation, 237 B.R. 590, 598 (E.D.Pa.1999), the district court affirmed the decision of the bankruptcy court not to impose conditional rescission stating “[w]hile several courts have conditioned the creditor’s duty to satisfy the lien of record on the obligor’s prior tender of the original principal amount of the loan, none suggests that there is a requirement to do so.” See also Whitley v. Rhodes Financial Services, Inc. (In re Whitley), 177 B.R. 142, 152 (Bankr.D.Mass.1995) (court need not decide whether it lacks the ability to condition rescission on a customer’s tender because in this case the Court chooses not to do so but rather to follow In re Myers, 175 B.R. 122, 128 (Bankr.D.Mass.1994), which held that “rescission by an obligor is not conditioned by tender or payment in the context of a bankruptcy case.”).

The underlying premise of the circuit authority which supports conditional rescission is that equity demands this remedy. Equitable considerations are quite different in a non-bankruptcy setting than in the bankruptcy context where state law rights and remedies are altered. The Court in Celona v. Equitable National Bank, 98 B.R. 705 (E.D.Pa.1989), recognized that while there might be some validity to conditioning rescission on tender in a non-bankruptcy context, that validity was lost and the conditioning was inappropriate in bankruptcy cases. Id. at 707. Quoting from In re Piercy, 18 B.R. 1004, 1007 (Bankr.W.D.Ky.1982), it reiterated:

In a non-bankruptcy setting, the rights and duties of the parties upon TILA rescission are clear and absolute. Each party must make the other as whole as he would have been had the contract never been entered into. In the absence of bankruptcy, there is no legal impediment to either party doing what is required 662*662 to restore the status quo ante. Consequently, the creditor’s statutory duty to perform first merely establishes the order of performance; it does not alter the ultimate effect on the remedy.
98 B.R. at 707. In bankruptcy, Debtor has the right to satisfy claims over the life of her Chapter 13 plan. Conditioning rescission on repayment thus extracts a price — i.e., the loss of this statutorily granted bankruptcy right. While every other unsecured creditor’s ability to collect is modified by the bankruptcy law, the TILA violator would be insulated under BankOne’s theory.

I conclude that it is possible to fashion a remedy that does not require a debtor to forgo the statutory rights conferred by the Bankruptcy Code in order to fulfill her duty to tender payment to the creditor after its lien has been voided. Thus, while I refuse to condition rescission on tender of payment, I will prescribe the procedures by which BankOne’s claim shall be treated in this bankruptcy case to ensure that Debtor satisfies her tender obligation to the extent to which she is legally obligated. In so doing, the legislative objectives of both federal statutes are harmonized, i.e., the parties are brought to the status quo ante consistent with § 1635(b) and § 226.23(d) and the Debtor does not forfeit her bankruptcy rights. To this end, I shall order the Debtor to file an amended plan that classifies BankOne’s unsecured claim separately and provides for the amount I have now liquidated, i.e., $9,574.74, in full over the remaining plan life.[27] I find no unfairness from relegating BankOne to unsecured status as that is the precise consequence Congress intended by § 1635(b). The unfairness arises only if bankruptcy is utilized to permit payment of anything less than the full amount of the claim. The fact that full payment may be deferred while the Debtor is under court protection is a consequence of bankruptcy and not an inequitable result. BankOne’s unsecured claim of $9,274.72 will be memorialized in a judgment and the stay will be modified for the limited purpose of allowing BankOne to record it as protection against potential future creditors of the Debtor.

Absent a plan providing for the payment of BankOne’s claim as so noted, confirmation will elude this Debtor. If confirmation cannot be secured in the time frame set forth below, this case will be dismissed. BankOne will then be free of the automatic stay and may exercise its state court remedies in connection with its judgment. These procedures, in my view, are consistent with TILA’s regulatory scheme while ameliorating the potential of an inequitable result to BankOne.

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Bob Hurt

See Consumer advocate helping borrowers in foreclosure save their homes and obtain compensation for their injuries.

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