Case Law Newsletter

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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August 2009

The existence of only one copy of the Notice of the Right to Cancel in borrower’s file was not a plausible reason to believe that two copies were not delivered where he signed an acknowledgement of that fact.

The Plaintiff in Burgueno v. GMAC Bank, NO. CV-08-1642-PHX-ROS (D.Ariz., July 23, 2009) alleged that he did not receive a proper Notice of Right to Rescind. As is customary at closing the Plaintiff signed an acknowledgment that he had received two copies of the notice. However, he also asserted there was only one copy of the notice in the documents he retained, and thus his acknowledgment of receiving two copies was “patently” false. Plaintiff asserted that because that acknowledgment was false, the lender could not adequately demonstrate it delivered two copies of the notice to Plaintiff. The court held that because the courts have recognized that one copy of the Notice of Right to Rescind is intended to be retained by the creditor coupled with the presumption created by the signed acknowledgment, the presence of only one copy of the notice in the records retained by the Plaintiff was not by itself provide a plausible reason to believe that two copies were not delivered to the Plaintiff at closing. From this the court found that the Plaintiff’s alleged facts stopped short of establishing the plausibility of the allegation of improper notice of his right to rescind the transaction.

Consumer has no TILA claim if her signature was forged.

In Anthony v. Anthony, NO. 08-21520-CIV (S.D.Fla., July 27, 2009) the evidence that the loan documents are forgeries was undisputed. It was also undisputed that the Plaintiff was not present at a closing and did not execute the forged documents. The question the court had to resolve then was whether Plaintiff can recover under TILA for the lender’s failure to make mandated disclosures prior to the fraudulent execution of forged loan documents. The court noted that the Eleventh Circuit has not directly addressed this issue and that the case law from other circuits is divided. But the Court found the reasoning of the Seventh Circuit persuasive. In Jensen v. Ray Kim Ford, Inc., 920 F.2d 3 (7th Cir.1990), the Seventh Circuit reasoned that disclosures under TILA must be made before a contract is consummated, and consummation occurs when “a consumer becomes contractually obligated on a credit transaction.” 12 C.F.R. § 226.2(a)(13). Because TILA requires disclosures only “to the person who is obligated,” the Seventh Circuit concluded that TILA did not provide a remedy when loan documents are forged. Thus where there is no evidence before the Court that the Plaintiff was contractually obligated under the forged mortgages at issue here, the transaction was not consummated, and the lender had no obligation to provide disclosures. The Court acknowledged that Plaintiff should have a remedy for the forgery of the contracts at issue. That remedy, however, is not provided in TILA.

The risk of negative amortization was not a material disclosure triggering the right to rescind under TILA.

In Jordan v. Paul Financial, LLC, NO. C 07-04496 SI (N.D.Cal., July 01, 2009) the plaintiff sued for rescission under TILA contending that the creditor’s alleged failure to adequately disclose the risk of negative amortization is a “material” disclosure for purposes of the extended three-year statute of limitations for rescission. The Court disagreed. It started its analysis by recognizing that with respect to variable-rate loans TILA requires two sets of disclosures. The first set of disclosures, which generally concern features of the particular variable-rate loan, must be made “at the time an application form is provided or before the consumer pays a non-refundable fee, whichever is earlier.” 12 C.F.R. § 226.19(b). The second set is required “before consummation of the transaction” and must include a statement “that the transaction contains a variable-rate feature” and a statement “that [the] variable-rate disclosures have been provided earlier.” 12 C.F.R. § 226.18(b) & (f)(2). It then determined that Regulation Z provides that “[t]he term ‘material disclosures’ means the required disclosures of the annual percentage rate, the finance charge, the amount financed, the total payments, the payment schedule, and the disclosures and limitations referred to in § 226.32© and (d).” 12 C.F.R. § 226.23(a)(3) n. 48. The Commentary on this regulation states that only one of the required disclosures regarding variable-rate loans-that the transaction contains a variable-rate feature-is considered “material” such that it triggers the extended rescission period. 12 C.F.R. Pt. 226, Supp. I ¶ 23(a)(3)-2 (emphasis added). Thus, because the box labeled “Variable Rate Mortgage” was checked on plaintiff’s TILDS, there is no disputing that the creditor disclosed to plaintiff that his loan contained a variable-rate feature. Thus, even if plaintiff is correct that defendants otherwise violated TILA by failing to adequately disclose the risk of negative amortization, such a violation was not “material” and did not entitle plaintiff to the extended three-year statute of limitations for rescission of the loan. The complaint, however, was sustained on other grounds.

The Eighth Circuit refused to apply a Minnesota statute that invalidates a mortgage unless both spouses sign the loan documents

On July 17 the U.S. Court of Appeals for the Eighth Circuit refused to apply a Minnesota statute that invalidates a mortgage unless both spouses sign the loan documents, saying the case qualifies for an exception under Minnesota case law. In Karnitz v. Wells Fargo Bank NA, No. 08-2100, (8th Cir., July 17, 2009) the Eighth Circuit reversed the district court which found the mortgage was invalid and granted summary judgment in favor of the borrowers. According to the Eighth Circuit, despite the clear language of the statute, the Minnesota Supreme Court applied the doctrine of equitable estoppel to block challenges to certain transactions under § 507.02, even in the absence of a signature by a spouse, as long as: the non-signing spouse consents to the transaction; the non-signing spouse benefits from it; and the other party changed its position to a significant degree. Because the borrowers did not dispute any of these facts, and never questioned the validity of the mortgage “until four years after it was executed and they were facing foreclosure because they could not keep up with the obligations of the accompanying note,” the court determined they should be estopped from now claiming that the mortgage is void in order to keep their home. The Eighth Circuit said that “strict compliance with the statute in these circumstances does not further the policy behind the statute; rather, it flaunts it by converting what the Legislature intended as a shield into a sword.” One judge dissented, saying the problem is the lender’s fault. It did not rely on conduct by the spouse who did not sign, but simply failed to require both signatures as the law demands.