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Noonan and Lieberman keeps you current on litigation news with its regular Case Law Update focusing on important and emerging trends in federal and state case law. Case Law Update is edited by attorney James V. Noonan.

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April 2008

Claim for false advertising of mortgage terms not preempted by HOLA.

The Court declined to dismiss a mortgagors’ claim against mortgagee in Reyes v. Downey Savings and Loan Ass’n, F.A., No. SACV 07-0615-AG (March 29, 2008 C.D.Cal.) alleging that mortgagee violated the California Unfair Competition Law (UCL) by promising them a lower interest rate than was delivered, misrepresenting the loan terms, and breaching the loan contract. The court ruled the claim was not preempted by the Home Owners’ Loan Act (HOLA). The mortgagors alleged that the mortgagee promised them a lower interest rate than was delivered. They also alleged that the mortgagee misrepresented the contract terms and breached the contract. By these allegations the court concluded that the mortgagors were seeking to use the UCL to apply general contract law. The principles of breach of contract and fraud in the inducement are not specific to lending activities. Further, application of these principles requires no affirmative action or representation by a lending institution. Thus, HOLA did not preempt this claim.

Mortgagor’s self-serving testimony that he did not receive TILA disclosures insufficient to rebut presumption of delivery.

In Chiles v. Ameriquest Mortg. Co. Slip Copy, 2008 WL 724612 (March 17, 2008 E.D.Pa. 2008.) the mortgagor contended that he was entitled to rescission under TILA due to the mortgagee’s failure provide the variable rate disclosures. The mortgagee produced evidence that Plaintiff acknowledged receipt of documents containing the variable rate in the form of the Federal Truth In Lending Disclosure Statement. This created the rebuttable presumption that the mortgagor was then obliged to overcome. 15 USC § 1635©. The only evidence the mortgagor had to rebut that presumption was his own testimony. The court held that the mortgagor’s statement to the contrary was not, by itself, sufficient to rebut the presumption. The mortgagor did not present any evidence that he did not receive these documents. Instead, he admitted to receiving them, but claims he did not understand the documents he signed.

Even though mortgage was properly rescinded after closing the debtors in Bankruptcy could not claim they were free of all secured debt where the prior mortgage was mistakenly paid off.

In In re Thayer, 07-6045, (March 31, 2008. 8th Cir. BAP (Minn.)) Chapter 7 debtors/mortgagors timely cancelled their prepetition refinancing transaction with lender pursuant to the Truth in Lending Act (TILA). However, the closing agent, unaware of the cancellation, paid off the debtor’s prior mortgage. The mortgagee then assigned its rights under the note and mortgage to the lender/creditor. When the debtors filed a Chapter 7 bankruptcy they listed the creditor as an unsecured non-priority creditor. The debtors argued that creditor’s mortgage had been released pre-petition and whatever in personam liability it may have had on the debt was dischargeable in bankruptcy. They also argued that the closing agent’s payment to mortgagee extinguished their obligation on creditor’s note such that they had no further payment obligations. The appellate panel for the bankruptcy court found that the bankruptcy court properly unwound the rescinded transaction by setting aside the release of the prior mortgage and reinstating it. To unwind the rescinded transaction, the pay-off of the prior mortgage was treated as a purchase of the original lender’s rights under the original mortgage. That purchase created a new creditor-debtor relationship between creditor’s and the debtors. The bankruptcy court’s focus on the substance of the transaction and the windfall that debtors would have received if the prior mortgage was released and the creditor’s mortgage was extinguished was correct and consistent with equitable principles involving rescission. The court found this was the only way the debtors were returned to the status quo ante.