Ninth Circuit holds that obligor need not allege the ability to tender to state a TILA rescission claim

The Ninth Circuit held in Merritt v. Countrywide Fin. Corp., 09-17678 (9th Cir. July 16, 2014) that an obligor is not required to allege that he or she has the ability to tender the non-rescindable balance of a loan to state a claim for rescission under Section 1635 of TILA. The court observed that the sequence of rescission and tender set forth in 15 U.S.C. § 1635(b) is a reordering of the common law rules governing rescission. Although tender is an equitable prerequisite to rescission, the requirement was abolished by TILA. Under TILA, the obligor need only notify the creditor of his intent to rescind. The agreement is then automatically rescinded and the creditor must, ordinarily, tender first. Thus, rescission under § 1635 places the consumer in a much stronger bargaining position than he enjoys under the traditional rules of rescission. But another goal of § 1635(b) is to return the parties to the position they held prior to entering into the transaction. Thus, the case law construing TILA has long recognized courts’ equitable power to modify the TILA’s rescission process. Based on this understanding of how TILA rescission works, the Ninth Circuit held that the district court impermissibly extended the Ninth Circuit’s holding in _Yamamoto v. Bank of New York_, 329 F.3d 1167 (9th Cir.2003) to require that plaintiffs plead ability to tender. _Yamamoto_ was decided in the procedural context of summary judgment, when the district court was in a position to consider a full range of evidence in deciding whether to condition rescission on tender. Without such evidentiary development, a district court is in no position to evaluate equitable considerations such as the nature of the TILA violations; whether the obligor had gone into bankruptcy; and the borrower’s ability to repay the proceeds. To prescribe the pleading of ability to tender in every TILA rescission case would be inconsistent with this case-by-case approach. The court’s approach also better comports with the TILA statutory text which prescribes an enforcement sequence except when otherwise ordered by a court. If obligors had to allege ability to tender payment when seeking rescission, then (1) the requirement of doing so would no longer be an exception, and (2) the requirement would not be otherwise ordered by a court, as a complaint initiates suit before any court order issues. Automatically to require tender in the pleadings before any colorable defense has been presented would also encourage creditors to refuse to honor indisputably valid rescission requests, because doing so would allow the security interest to remain in place absent tender. The result would be to allow creditors to vary the statutory sequence simply through intransigence.

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