Friday, March 25, 2011

Virginia Is Not The Only Place Where Aurora Gets The Boot...

Aurora Loan Services LLC, Plaintiff-Respondent, 
David J. Carlsen and Nancy L. Carlsen, Defendants-Appellants.
Appeal No. 2010AP1909
Cir. Ct. No. 2008CV2441
Dated and Filed: March 24, 2011
        This opinion is subject to further editing. If published, the official version will appear in the bound volume of the Official Reports.
        A party may file with the Supreme Court a petition to review an adverse decision by the Court of Appeals. See WIS. STAT. § 808.10 and RULE 809.62.
        APPEAL from a judgment of the circuit court for Rock County: JAMES WELKER, Judge. Reversed.
        Before Vergeront, P.J., Lundsten and Blanchard, JJ.
        ¶1 LUNDSTEN, J. This appeal involves a foreclosure action initiated by Aurora Loan Services against David and Nancy Carlsen. Following a court trial, the circuit court granted judgment of foreclosure in favor of Aurora, finding that Aurora is the holder of the note and owner of the mortgage and that the
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Carlsens were in default. We conclude that the circuit court's finding that Aurora was the holder of the note, a finding essential to the judgment, is not supported by admissible evidence. We therefore reverse the judgment.
        ¶2 Aurora Loan Services brought a foreclosure suit against David and Nancy Carlsen, alleging that Aurora was the holder of a note and owner of a mortgage signed by the Carlsens encumbering the Carlsens' property. The Carlsens denied several allegations in the complaint and, especially pertinent here, denied that Aurora was the holder of the note. Aurora moved for summary judgment, but that motion was denied.
        ¶3 A trial to the court was held on June 9, 2010. Aurora called one of its employees, Kelly Conner, as its only witness. Aurora attempted to elicit testimony from Conner establishing a foundation for the admission of several documents purportedly showing that Aurora was the holder of a note that obligated the Carlsens to make payments and that the Carlsens were in default. It is sufficient here to say that the Carlsens' attorney repeatedly objected to questions and answers based on a lack of personal knowledge and lack of foundation, and that the circuit court, for the most part, sustained the objections. Aurora's counsel did not move for admission of any of the documents into evidence. After the evidentiary portion of the trial, and after hearing argument, the circuit court made findings of fact and entered a foreclosure judgment in favor of Aurora. The Carlsens appeal. Additional facts will be presented below as necessary.
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        ¶4 It is undisputed that, at the foreclosure trial, Aurora had the burden of proving, among other things, that Aurora was the current "holder" of a note obligating the Carlsens to make payments to Aurora. Because Aurora was not the original note holder, Aurora needed to prove that it was the current holder, which meant proving that it had been assigned the note. There appear to be other failures of proof, but in this opinion we focus our attention solely on whether Aurora presented evidence supporting the circuit court's findings that "the business records of Aurora Loan Services show... a chain of assignment of that... note" and that "Aurora is the holder of the note."
        ¶5 As to assignment of the note, the Carlsens' argument is simple: the circuit court's findings are clearly erroneous because there was no admissible evidence supporting a finding that Aurora had been assigned the note. The Carlsens contend that, during the evidentiary portion of the trial, the circuit court properly sustained objections to Aurora's assignment evidence, but the court then appears to have relied on mere argument of Aurora's counsel to make factual findings on that topic. We agree.
        ¶6 We focus our attention on a document purporting to be an assignment of the note and mortgage from Mortgage Electronic Registration Systems to Aurora. At trial, this document was marked as Exhibit D. Although Aurora's counsel seemed to suggest at one point that certain documents, perhaps including Exhibit D, were certified, the circuit court determined that the
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documents were not certified. Under WIS. STAT. § 889.17, 1 certified copies of certain documents are admissible in evidence based on the certification alone. Aurora does not contend that Exhibit D is admissible on this basis.
        ¶7 Aurora argues that Conner's testimony is sufficient to support the circuit court's finding that Aurora had been assigned the note. Our review of her testimony, however, reveals that Conner lacked the personal knowledge needed to authenticate Exhibit D. See WIS. STAT. § 909.01 (documents must be authenticated to be admissible, and this requirement is satisfied "by evidence sufficient to support a finding that the matter in question is what its proponent claims"). Relevant here, Conner made general assertions covering several documents. Conner either affirmatively testified or agreed to leading questions with respect to the following:
        • She works for Aurora.
        • She "handle[s] legal files" and she "attend[s] trials."
        • "Aurora provided those documents that are in [her] possession."
        • She "reviewed the subject file" in preparing for the hearing.
        • She declined to agree that she is the "custodian of records for Aurora."
        • She "look[s] at documentation... [does] not physically handle original notes and documents, but [she does] acquire documentation."
        • "Aurora [is] the custodian of records for this loan."
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        • She is "familiar with records that are prepared in the ordinary course of business."
        • She has "authority from Aurora to testify as to the documents, of [Aurora's] records."
As it specifically pertains to Exhibit D, the document purporting to evidence the assignment of the note and mortgage from Mortgage Electronic Registration Systems to Aurora, Conner testified:
        • Aurora has "possession of Exhibit D."
        • Exhibit D is "an assignment of mortgage."
With respect to possession of Exhibit D, Conner did not assert that Exhibit D was an original or that Aurora had possession of the original document. For that matter, Conner did not provide a basis for a finding that any original document she might have previously viewed was what it purported to be.2
        ¶8 Thus, Conner did no more than identify herself as an Aurora employee who was familiar with some unspecified Aurora documents, who had reviewed some Aurora documents, and who had brought some documents, including Exhibit D, to court. Although Conner was able to say that Exhibit D, on its face, was an assignment, she had no apparent personal knowledge giving her a basis to authenticate that document. See WIS. STAT. § 909.01.
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        ¶9 Aurora points to various provisions in WIS. STAT. chs. 401 and 403, such as those relating to the definition of a "holder" (WIS. STAT. § 401.201(2)(km)), to a person entitled to enforce negotiable instruments (WIS. STAT. § 403.301), and to the assignment of negotiable instruments (WIS. STAT. §§ 403.203, 403.204, and 403.205). This part of Aurora's argument addresses the underlying substantive law regarding persons entitled to enforce negotiable instruments, such as the type of note at issue here, but it says nothing about Aurora's proof problems. That is, Aurora's discussion of the underlying law does not demonstrate why Exhibit D was admissible to prove that Aurora had been assigned the note and was, under the substantive law Aurora discusses, a party entitled to enforce the note.
        ¶10 Similarly, Aurora discusses the relationship between a note and a mortgage and, in particular, the equitable assignment doctrine. But here again Aurora's discussion fails to come to grips with Aurora's failure to authenticate Exhibit D, the document purporting to be an assignment of the note to Aurora. Aurora points to testimony in which Conner asserted that Aurora acquired and possessed Exhibit D, but possession of Exhibit D is meaningless without authentication of the exhibit.
        ¶11 Aurora argues that we may look at the "record as a whole," including summary judgment materials, to sustain the circuit court's factual findings. Thus, for example, Aurora asks us to consider an affidavit filed with its summary judgment motion. In that affidavit, an Aurora senior vice-president avers that the note was assigned to Aurora, that the assignment was recorded with the Rock County Register of Deeds, and that Aurora is the holder of the note. This argument is meritless. Aurora was obliged to present its evidence at trial. It could not rely on the "record as a whole" and, in particular, it could not rely on summary
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judgment materials that were not introduced at trial. See Holzinger v. Prudential Ins. Co., 222 Wis. 456, 461269 N.W. 306 (1936). For that matter, even if Aurora had, at trial, proffered the affidavit of its senior vice-president, the affidavit would have been inadmissible hearsay. See WIS. STAT. § 908.01(3) ("'Hearsay' is a statement, other than one made by the declarant while testifying at the trial or hearing, offered in evidence to prove the truth of the matter asserted.").
        ¶12 In sum, Aurora failed to authenticate Exhibit D, the document purporting to be an assignment of the note. Thus, regardless of other alleged proof problems relating to that note and the Carlsens' alleged default, the circuit court's finding that Aurora was the holder of the note is clearly erroneous—no admissible evidence supports that finding. Aurora failed to prove its case, and it was not entitled to a judgment of foreclosure.
        By the Court.—Judgment reversed.
        Not recommended for publication in the official reports.

        1. All references to the Wisconsin Statutes are to the 2009-10 version unless otherwise noted.
        2. Our summary of Conner's testimony omits several assertions Conner made that were stricken by the circuit court. Similarly, we have not included examples of the circuit court repeatedly sustaining hearsay and foundation objections. For example, the court repeatedly sustained objections to Aurora's attempts to have Conner testify that Aurora "owns" the note. Aurora does not and could not reasonably argue that the Carlsens have not preserved their authentication objections. The Carlsens' attorney repeatedly and vigorously objected on hearsay, foundation, and authentication grounds. The record clearly reflects that the Carlsens were objecting to the admission of all of Aurora's proffered documents on the ground that Conner lacked sufficient knowledge to lay a foundation for admission.


Wednesday, March 23, 2011

Free and Clear: It's Possible

Couple Owns Home After One Payment Due to Foreclosure Glitch

Facing foreclosure and fed up with the banks trying to take back your home?Well, a foreclosure loophole that helped an Ankeny, Ia., home construction worker and his mortgageloan originator wife win a 2009 court judgment against CitiMortgage, giving them title to their $278,000 house free and clear after only one mortgagepayment, just might apply to you, too, even if you live in Arizona, Florida, Nevada or one of several other states.

The Iowa couple, Matt and Jamie Rae Danielson, are now under scrutiny from skeptics who are wondering if perhaps the couple devised a "win-a-free-home" scheme from the get-go.

There was no pre-planning, the couple told AOL Real Estate during a phone interviewMonday night, but they wish they can convince their bashers who "are spreading gossip and making accusations" after they became aware of this nearly three-year-old issue when the Des Moines Register wrote about the couple twice last week.

"People are threatening to burn our house down. There are nasty blogs going around where people are outraged," a distraught-sounding Matt, 33, said as a baby cried softly in the background. He says he and his wife didn't seek this loophole when theypurchased their house (pictured) in May 2007. "You don't make this kind of thing happen. It happens to you."
It all started when Matt Danielson and his broker, Jason Larson, arranged an impromptu meeting at a mall food court to sign the CitiMortgage financing documents for their new construction 3-bedroom, 2½-bath home that they had been negotiating for a while. Matt dialed his wife's cell 
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phone, but didn't reach her; so in a rushed session he signed the papers without her, finalizing a $320,000mortgage for 100 percent of the sale price, which included an additional $50,000 to finish the basement.

It was that circumstance that got them off the hook for a defaulted mortgage loan; and you might just be surprised at how that led to them now owning the home outright without having paid but one mortgage payment. In Iowa, if only one spouse signs a mortgage document, creditors have little recourse of coming after the home. The state's homestead law dating back nearly 125 years to 1888 -- a law which might soon get rewritten -- says mortgages are not valid until they are signed by both spouses.

Iowa's law, which is meant to protect an innocent spouse from hidden assets related torefinancing a mortgage to hide the cash, or selling the home out from under one's spouse's nose, has the inadvertent affect of also not allowing mortgage lenders to collect on a loan if the signature of an applicant's spouse is never obtained, but they've taken possession of said home. (Investment property tends not to be homesteaded, just primary residences.)

Surprised? If not, maybe you will be to learn that a similar law exists in Alaska, Arizona, Arkansas, California, Colorado, Georgia, Hawaii, and Illinois, among others. States where it doesn't apply: Delaware, New Jersey, Pennsylvania and Rhode Island.

There are slight differences to each state's law, and precedence from case law can also make a difference, but check out this list from Law Check to see where your state stands and to find applicable state codes. Then be sure to consult with an attorney before you try to sue your lender based on the homestead code.

Matt acknowledges that at the time they bought a larger, previous house in 2003 "we couldn't afford the property." But like many Americans, they say they were a product of the mortgage industry, which at the time was handing out loans to almost anyone with a pulse. And also like many Americans, they used their home like an ATM, refinancing into a larger mortgage as equity climbed with rising home prices (and the extensiveremodeling they did) just so that they could have money to pay for the upgrades as well as purchase the vacant adjoining lot.

Eventually the couple was forced to put their 6,000-square-foot dream home up for sale, as well as the vacant adjoining lakefront lot they had acquired subsequently. The vacant land sold, reportedly to relatives, but the lake home was ultimately lost to foreclosurewhen they couldn't find a buyer before the bank swooped in. First Horizon sold the REO property in June 2008 for $339,500, about a year after the Danielsons had last made a payment.

Not only did the foreclosure take its toll on Jamie's credit, but it also strained her work environment, since the loan was obtained through her employer, First Horizon. "I had a conversation with HR about it," Jamie told me during our phone conversation. It didn't affect her employment status, as she continued on there, but it was awkward.

"I owed them money and I defaulted, so I didn't want to pursue another loan through them again." The 32-year-old was also embarrassed and decided it would be better to keep her personal finances separate from her workplace.

The new home -- the one at the center of the court case -- was a reasonable size at a reasonable price, especially for a couple who had been used to pulling in an annual joint household income in the six figures.

"We went from a position of high income to like no income," says Jamie. "We didn't anticipate the sharp decline in income we have. If we would've known that five years later our income would've been cut by 75 percent, we wouldn't have done all that."

The couple then moved into the 1,800-square-foot house, but only had time to make one mortgage payment before Matt Danielson's business went under. Knowing they'd be faced with yet another foreclosure, the couple said they made plans to downsize even further.

"My boxes were packed and we were ready to move to an apartment," said Jamie. Matt added, "We had moved a lot of stuff to a rental because foreclosure was coming down upon us."

During this same time, the couple consulted with a bankruptcy attorney who pointed out the loop hole in the documents that were not signed by Jamie. Attorney Jerrold Wanek of Garten & Wanek believed as a result he could save their home, and advised the couple to move back home, so they did.

The lower court, and subsequently the appellate court, ruled that the mortgage was "invalid-that is, void-without the signature of both spouses, not merely voidable by the spouse who did not sign."
Read the rest here.

Thursday, March 17, 2011

Another Useful TILA Opinion

Case No. 10 C 2033
DATED: March 10, 2011
        Judge Virginia M. Kendall
        On April 1, 2010, plaintiff Ellie Stewart ("Stewart") filed the current complaint against Defendants BAC Home Loans Servicing ("BAC"),Deutsche Bank National Trust Company ("Deutsche Bank") and Mortgage Electronic Registration Systems ("MERS") (together, "Defendants") alleging violations of the Truth In Lending Act ("TILA") (15 U.S.C. §§ 1601-1667f) and its implementing regulation, 12 C.F.R. § 226 ("Regulation Z"), and demanded rescission of the mortgage on her residence.
        Defendants moved to dismiss the Complaint, asserting BAC and MERS are improper defendants under TILA, the Complaint is time-barred and the Complaint fails to state a claim. For the reasons stated below, Defendants' motion is granted in part and denied in part. The Court dismissesStewart's failure to disclose claim because it is untimely, but denies dismissal of Stewart's rescission claim. The motion to dismiss is denied with regard to the failure to honor rescission claim against defendants Deutsche Bank and BAC.
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        A. Complaint Allegations.
        Stewart owns her residence in Chicago, Illinois. (Compl., Doc. 1, ¶ 4.) On October 24, 2006, Stewart refinanced her mortgage on this residence through Home 123 Corporation ("Home 123"). (Compl. ¶¶ 5-8, 10.) Home 123 filed for Chapter 11 bankruptcy in April 2007 and Deutsche Bank is the current assignee of this loan. (Compl. 5, 8, 21.) BAC services this loan and MERS is the nominee. (Compl. ¶¶ 7-9; Ex. C.)
        This case stems from a dispute concerning the documentation provided at the closing of Stewart's refinance back in 2006. Stewart alleges that Home 123 violated TILA twice in regards to these documents. First, she claims that Home 123 did not provide her with a copy of the Notice of Right to Cancel ("NORTC"). (Compl. ¶¶ 19-20.) Second, she claims that Home 123 provided a Truth in Lending Disclosure Statement ("TILDS") that was incomplete because it did not include the timing of the required loan payments. (Compl.¶¶ 17-18.)
        Due to these deficiencies, on October 14, 2009, Stewart's attorneys sent a letter entitled "Notice of Rescission and Lien" to Home 123 andBAC. (Compl. ¶ 23.) The letter stated that "Ms. Stewart hereby elects to cancel the loan of October 24, 2006 for failure to comply with the Truth In Lending Act, " and specified that Home 123 failed to provide the NORTC and a complete TILDS. (See Doc. 23-1.) The letter also demanded the identity of the owner of the mortgage. (Id.) On January 26, 2010, BAC sent a letter to Stewart which denied her rescission claim. (See Doc. 23-2.) BACasserted that Stewart's right to rescind had expired and attached copies of the NORTC and TILDS purportedly signed by Stewart and dated October 24, 2006. (Id.)
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        B. Procedural History.
        On April 1, 2010, Stewart filed this suit and it was assigned to Judge Harry Leinenweber. Defendants filed the present motion to dismiss on August 11 and briefing was completed on October 5. On October 28, Judge Leinenweber requested that the parties provide a copy of Stewart's rescission letter and submit a supplemental brief addressing whether Stewart's election to rescind constituted proper notice to Deutsche Bank as assignee of Home 123. Supplemental briefing was completed on November 8. The case was transferred to this Court on December 8.
        A motion to dismiss should be granted if the complaint fails to satisfy Rule 8's pleading requirement of "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8. "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (quoting BellAtl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)); see also Tamayo v. Blagojevich, 536 F.3d 1074, 1081 (7th Cir. 2008) (holding well-leaded allegation of the complaint must be accepted as true).
        Although a complaint does not need detailed factual allegations, it must provide the grounds of the claimant's entitlement to relief, contain more than labels, conclusions, or formulaic recitations of the elements of a cause of action, and allege enough to raise a right to relief above the speculative level. Twombly, 550 U.S. at 555. Legal conclusions can provide a complaint's framework, but unless well-pleaded factual allegations move the claims from conceivable to plausible, they are insufficient to state a claim. Iqbal, 129 S. Ct. at 1950-51.
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        The complaint has three core claims. First, Stewart claims that Home 123 violated TILA by failing to provide her with the NORTC and a complete TILDS. For this "failure to disclose" claim, Stewart seeks statutory damages of $4,000 from Deutsche Bank as Home 123's assignee. (Doc. 1, Prayer for Relief.) Second, Stewart seeks recession of the loan based on this disclosure violation. For this "loan rescission" claim, Stewart seeks a judgment forcing Defendants to void the loan and return her to the position she occupied before entering into the mortgage. (Id.) Third, Stewartalleges that Defendants failed to honor her election to rescind, which is itself a violation of TILA. For this "failure to honor rescission" claim,Stewart seeks actual damages and statutory damages of $4,000 from Defendants. As an additional remedy for all three claims, Stewart seeks an order requiring Defendants to delete all adverse credit information relating to the loan. (Id.)
        The present motion presents four legal issues that need to be resolved to determine which, if any, of these three claims may stand. First, Defendants seek to dismiss BAC and MERS, asserting that servicers and nominees are improper defendants in a TILA action. Turning to Stewart's individual claims, Defendants argue that the failure to disclose claim is barred by a one year statute of limitations because the alleged violation occurred over three years ago. Next, Defendants assert that the rescission claim is barred by a three-year statute of repose because the loan closed on October 24, 2006 but this suit was not filed until April 1, 2010. Finally, Defendants argue that the failure to honor rescission claim fails because assignees are not liable for TILA violations which are not apparent on the face of the loan disclosures.
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        A. Liability of MERS and BAC Under TILA.
        Only creditors and assignees are subject to liability under TILA. See 15 U.S.C. §§ 1640, 1641(a). Stewart acknowledges that MERS is not a creditor or assignee. (See Doc. 15 at 4).1Therefore, MERS is not subject to damages under TILA and Stewarts' failure to disclose and failure to honor rescission damages claims against MERS are dismissed. See 15 U.S.C. §§ 1640, 1641(a); see also Horton v. Country Mortg. Servs., Inc., No. 07 C 6530, 2010 U.S. Dist. LEXIS 67, at *3 (N.D. Ill. Jan 4, 2010) (granting summary judgment to MERS because the plaintiff provided no evidence that MERS was a creditor or assignee). Stewart claims MERS is still a proper party based on the non-monetary relief requested in connection with the rescission. Stewart seeks an order "voiding" her mortgage, (see Doc. 1 at Prayer) and, according to her, "this Court may directly order MERS to record a release or take other actions in connection with the mortgage document that was recorded." (Doc. 15 at 4.)
        The Court notes that courts in this District are split on whether such a party, usually a servicer, may be kept in a case based on such contingent, or future, relief. Compare Miranda v. Universal Fin. Grp., Inc., 459 F. Supp. 2d 760, 765-66 (N.D. Ill. 2006) (denying dismissal of loan servicer as an indispensable party under Rule 19 because a rescission would require return of payments made on the loan and "could impair the borrower's ability to fully protect his or her interest in rescinding the loan because the servicer could improperly report to credit bureaus") with Bills v. BNCMort., Inc.,502 F. Supp. 2d 773, 776 (N.D. Ill. 2007) (finding "a concern that [the
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servicer] might thereafter engage in improper reporting to the credit agencies or attempt to foreclose on a rescinded loan is purely speculative and does not warrant retaining [the servicer] as a defendant"). The Court agrees with Miranda and the cases it cites because they appear more consistent with the Seventh Circuit's holding in Handy v. Anchor Mortgage Corporation, 464 F.3d 760, 765-66 (7th Cir. 2006). There, the Seventh Circuit held "more generally... the right to rescission 'encompasses a right to return to the status quo that existed before the loan.'" Id. (internal citation omitted). Handy makes clear that rescission under TILA entirely unwinds the transaction. Because Stewart alleges, albeit generally, that MERS may be necessary to get her back to that status quo if her rescission is enforced by the Court, MERS cannot be dismissed entirely at this time. Rather,Stewart's rescission claim stands as to MERS.
        As to defendant BAC, TILA expressly disclaims liability for servicers "unless the servicer is or was the owner of the obligation." 15 U.S.C. § 1641(f)(1). Stewart alleges that BAC "has an interest" in the loan and, as a result, is subject to liability. (Compl. t 7.) While Stewart does not provide any specifics on how a loan servicer gained an interest in the loan, on a motion to dismiss, the Court must accept this allegation as true. See Tamayo, 526 F.3d at 1081. Even if the Court could ignore this allegation, BAC must remain a defendant in any event. The pleadings reveal that the January 26 letter refusing Stewart's rescission was sent by BAC, not Deutsche Bank. BAC is a necessary defendant on the failure to honor rescission claim because it is not clear whether BAC independently refused rescission, refused as an agent of Deutsche Bank, or merely communicatedDeutsche Bank's refusal. As such, BAC cannot be dismissed outright as it may be liable on this claim.
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        B. Failure to Disclose Claims.
        Stewart asserts that Home 123 committed two disclosure violations during the refinance closing: (1) it failed to provide two copies of the NORTC and (2) it failed to provide a complete TILDS. Although this claim alleges violations by Home 123, the claim is currently against Deutsche Bank based on its status as the assignee of Home 123. TILA permits an individual to assert a claim against a creditor for disclosure violations so long as such action is brought within one year from the occurrence of the violation. See 15 U.S.C. §§ 1640(a), 1640(e); see also Garcia v. HSBCBank USA, N.A.,No. 09 C 1369, 2009 U.S. Dist. LEXIS 114299, at *9-10 (N.D. Ill. Dec. 7, 2009) (finding the § 1635's three year period for rescission does not extend the one-year period available under § 1640(e) to assert damages claims for disclosure violations and noting that the majority of courts in this District have found "affirmative damage claims for disclosure violations must be brought within one year of the closing of any credit transaction"). Stewartfiled this claim on April 1, 2010, over three years after the October 24, 2006 loan closing and well past the one year statute of limitations. Stewart's failure to disclose claim is time-barred and dismissed with prejudice against all defendants.
        C. Loan Rescission Claim.
        The next issue in this case is whether Stewart is time-barred from seeking rescission in court. "Under the Truth in Lending Act, [ ] 15 U.S.C. § 1601et seq., when a loan made in a consumer credit transaction is secured by the borrower's principal dwelling, the borrower may rescind the loan agreement" under certain conditions. Beach v. Ocwen Fed. Bank, 523 U.S. 410, 411 (1998). A borrower typically has three days to rescind following execution of the transaction or delivery of the required disclosures. See 15 U.S.C. § 1635(a). However, under § 1635(f) of TILA, the right of rescission is extended to "three years after the date of consummation of the transaction or upon the
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sale of the property, whichever occurs first, " if any of the required disclosures are not delivered to the borrower. See 15 U.S.C. § 1635(f). Stewartalleges that she did not receive the required disclosures, so this case involves the extended three year period. Here, the loan transaction occurred on October 24, 2006; Stewart sent a letter electing to rescind the transaction on October 14, 2009, and then filed her complaint in court on April 1, 2010. This time line presents the legal question of whether a claim for rescission filed after the three-year time period is timely if a rescission letter is sent within the three-year time period.
        Stewart argues that she exercised her right to rescind within the three years, as required by § 1635(f), because her letter actually rescinded the loan. According to Stewart, this suit is just the legal remedy to force Defendants to accept her rescission. Stewart argues that she is entitled to an additional year after Defendants' failure to accept the rescission to file suit under § 1640(e). Defendants argue that the language of § 1635(f) creates a statute of repose that completely extinguishes the right to rescind after the three year-time period. As Stewart filed suit over three years after the closing, Defendants assert that Stewart's recession claim under TILA is barred.
        Both parties cite authority for their respective positions from many different jurisdictions. E.g., compare Falcocchia v. Saxon Mortg., Inc., 709 F. Supp. 2d 860, 868 (E.D. Cal. 2010)with Sherzer v. Homestar Mortg. Servs., No. 07-5040, 2010 WL 1947042, at *11 (E.D. Pa. July 1, 2010); see also Obi v. Chase Home Fin., LLC, No. 10-C-5747, 2011 WL 529481, *4 (N.D. Ill. Feb. 8, 2011) (Kendall, J.) (noting "[t]here is a split of authority as to whether § 1635(f) requires a borrower to file a rescission claim within three years after the consummation of a transaction or whether the borrower need only assert his right to rescind to a creditor within that three year period" and collecting cases.) Stewart's authority concludes that a borrower exercises her right of rescission when she mails a
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notice of rescission to the creditor, so rescission occurs at the time of the letter. See 12 C.F.R. § 226.23(a)(2). Defendants' authority, on the other hand, holds that a borrower cannot unilaterally rescind a loan, and therefore can only preserve her rights by filing a suit for rescission within the three-year time period. The Seventh Circuit has not yet addressed this issue so this Court has no binding guidance.
        As the Court indicated in Obi (albeit in dicta), the Court is persuaded by the authority finding that a borrower may assert his rescission rights under § 1635(f) through notice to the creditor. See Obi, 2011 WL 529481 at *4; see also In re Hunter, 400 B.R. 651, 661-62 (N.D. Ill. 2009) (finding "[t]he three-year period limits only the consumer's right to rescind, not the consumer's right to seek judicial enforcement of the rescission" (internal citation omitted)). The approach in Hunter is more consistent with the language of § 1635 and Regulation Z than the approach advocated by Defendants. Section (a)(2) of Regulation Z provides explicit instructions to the consumer as to how to exercise her right to rescind: "[t]o exercise the right to rescind, the consumer shall notify the creditor of rescission by mail, telegram, or other means of written communication." See 12 C.F.R. § 226.23(a)(2). The next provision of Regulation Z, § (a)(3), describes when a consumer may exercise that right: either within the three-day "cool off^' period, if all proper disclosures are made, or within the three-year period, if they are not. See 12 C.F.R. § 226.23(a)(3). The more reasonable interpretation of Regulation Z is that § (2)(a)'s method of exercising the right to rescission applies to both scenarios under § (3)(a). Indeed, this approach is consistent with the wording of the statute. Even if a consumer received all necessary disclosures, § 1635(a) allows a consumer to rescind within the three-day "cool off" period after closing "by notifying the creditor, in accordance with regulations of the [Federal Reserve Board ("FSB")], of his intention to do so." 15 U.S.C. § 1635(a).
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Though § 1635(f) has no comparable reference to the FSB regulations, it seems incongruous for the FSB to allow rescission via letter during the "cool off'' period—in accordance with Regulation Z—but require a consumer to bring a suit to exercise that same right to rescind under § 1635(f).
        The Court's approach is not inconsistent with Beach. In that case, the Supreme Court found a defendant could not assert rescission as an affirmative defense under TILA beyond the three-year period. See Beach, 523 U.S. at 418. The Court noted that § 1635(f) "says nothing in terms of bringing an action but instead provides that the 'right of rescission [under TILA] shall expire' at the end of the time period... it talks not of a suit's commencement but of a right's duration...." Id. at 417. Beach addresses when the right to rescind expires and whether it can be tolled. It leaves unresolved the question of how a consumer must exercise that right to rescind-suit, or notice via letter.
        The Court turns to the question of when a consumer, having exercised her right to rescind by sending a letter to her creditor, must bring suit to enforce that exercise. In Hunter, the debtor, like Stewart, sent notice to the creditor before the three-year period expired, but his trustee filed suit after expiration. Hunter, 400 B.R. at 659. As Stewart did here, the trustee brought suit within a year after the creditor allegedly failed to respond to the rescission notice. Id. Hunter, citing the one-year limitations period in § 1640(e), found that the trustee's action for rescission was timely, as it was brought within a year of the alleged violation of TILA, namely the refusal to respond to the rescission request. Id.; see 15 U.S.C. 1635(b) (requiring a creditor to "take any action necessary or appropriate to reflect the termination of any security interest created under the transaction"). The Court adopts the Hunter approach. Under this approach, the last day a borrower may send notice to rescind is the three-year anniversary of the transaction. If the borrower has not sent notice by that
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time, her right to rescind expires under § 1636(f). If the borrower sends timely notice, the creditor then would have 20 days to respond after receipt of that notice. See 15 U.S.C. § 1635(b). The borrower then has one year from the end of that 20-day period to bring a suit to enforce the rescission under § 1640(e)'s limitations period. Hunter, 400 B.R. at 660-61see also Johnson v. Long Beach Mort. Loan Trust 2001-4, 451 F. Supp. 2d 16, 39-41 (D.D.C. 2006) (applying § 1640(e)'s one year period to enforce rescission claim after notice); Sherzer, 2010 WL 1947042, at *11 (following Hunter).This approach balances the creditor's need for certainty (the borrower cannot indefinitely fail to bring suit to enforce the right to rescind she exercised) with the express language of Regulation Z (which states that a borrower may exercise the right to rescind through notice by mail). Because Stewartbrought suit within five months of her recession notice, Stewart's claim for recession is timely.
        D. Failure to Honor Rescission Claim.
        A claim for damages for failure to honor rescission is based on § 1635(b) of TILA, which requires a creditor to respond to a notice of rescission within twenty days of receipt. If a creditor does not respond within the statutorily-mandated period, TILA permits an individual to bring a claim for damages against the creditor. 15 U.S.C. § 1640(a). An action for damages must be brought "within one year from the date of the occurrence of the violation." 15 U.S.C. § 1640(e). An assignee's failure to honor a valid rescission notice made pursuant to § 1635 may subject the assignee to actual and statutory damages. 15 U.S.C. § 1640(a).
        Stewart asserts that she did not receive a NORTC or a complete TILDS as required by TILA, so she had a right to rescind her loan. Specifically, the TILDS does not state the timing of payments, as Regulation Z requires. See 12 C.F.R. § 226.18. Defendants respond that they were not the
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original creditor, and as assignees (at best), they are only required to rescind if the violations were apparent on the face of the documentation and that they were not in this case. See 15 U.S.C. § 1641(a) (assignee is only liable if the violation "is apparent on the face of the disclosure statement").
        The Seventh Circuit has specifically addressed the requirements for the payment schedule in the TILDS. In Hamm, the TILDS listed the payment schedule as 359 payments of $541.92 beginning on March 1, 2002 and one payment of $536.01 on February 1, 2032. Hamm v. Ameriquest Mortg. Co., 506 F.3d 525, 527 (7th Cir. 2007). The court found that this violated TILA because it did not list all payment dates or state that payments were to be made monthly, and TILA requires such specificity in the TILDS even though "many (or most) borrowers would understand that a mortgage with 360 payments due over approximately 30 years contemplates a payment by the borrower each month during those 30 years." Id. This case is no different.Stewart alleges that her TILDS listed 359 payments at $3,103.53 but failed to mention that these payments would be made monthly. Exhibit A ofStewart's complaint, her TILDS, shows the incomplete payment schedule on the face of the document. That schedule is almost exactly the same as the one the Seventh Circuit found insufficient in Hamm. Id. at 527. Consequently, Stewart alleges a disclosure violation apparent on the face of the documents which would grant Stewart the right to rescind against Defendants as assignees. Stewart's NORTC claim does not need to be evaluated at this time because her failure to honor rescission claim could be based on either a NORTC or TILDS violation, and the TILDS allegations stand.
        The final issue is whether Defendants are responsible for refusing to respond and for rejecting rescission. This turns on whether Stewart's notice of rescission was properly sent to Defendants. In response to a request from Judge Leinenweber prior to reassignment of this case to this Court, the
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parties addressed whether Stewart properly noticed defendant Deutsche Bank of her election to rescind when she sent letters to only BAC and Home 123, which filed for Chapter 11 bankruptcy in 2007. Courts within the District have reached different conclusions under similar factual scenarios.Compare Harris v. OSIFin. Servs. Inc., 595 F. Supp. 2d 885, 897-98 (N.D. Ill. 2009) (finding that notice of election to rescind sent to the original creditor did not suffice as notice to the assignee), with Hubbard v. Ameriquest Mortg. Co., 624 F. Supp. 2d 913, 921-22 (N.D. Ill. 2008) (concluding that an election to rescind sent to the original creditor is sufficient to seek rescission against an assignee) and Schmit v. Bank United FSB et al., No. 08 C 4575, 2009 WL 320490, at *3 (N.D. Ill. Feb. 6, 2009) (acknowledging disagreement between Harris and Hubbard and following Hubbard).
        Stewart acknowledges that she did not send a notice of rescission to defendant Deutsche Bank. (See Doc. 23-1.) She alleges that she, like many borrowers, was unaware who owned her mortgage note. She did not know that Deutsche Bank was the assignee of her loan, and so she requested notice of the "identity of the owner of this note" from Home 123 and BAC in her rescission letter. (Id.) Stewart argues that she complied with TILA and Regulation Z by mailing notice to the original creditor, Home 123, and the loan servicer, BACStewart distinguishes Harris from the current case because "there is no mention of whether the consumer in Harris mailed a notice to the loan servicer or another party who may be the agent of the holder of the note." (Doc. 23 at 4). Deutsche Bank concurs that mortgage ownership changes make communication difficult, but suggests that this actually supports the approach of the Harris court. Harris noted that "adopting Stewart's interpretation of the notice requirement... would have the absurd effect of subjecting to rescission and damages assignees that, in some case, have absolutely no means of discovering that a rescission demand has been made." (Doc. 22 at 2 (quoting Harris).)
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        The split between Harris and Hubbard does not need to be resolved at this stage of litigation due to the particular facts of this case. Stewartalleges that she sent BAC the rescission notice on October 14, 2009, ten days before the three-year deadline. BAC denied the rescission in a letter sent to Stewart on January 26, 2010. While Harris was concerned that an innocent party with no notice could be subject to damages, this case involves clear notice to at least one party that Stewart seeks to hold responsible. BAC received notice, did not respond within 20 days, and then refused to rescind the transaction. Deutsche Bank's involvement is less clear, but Stewart alleged sufficient facts to proceed with her case under the theory thatBAC either forwarded the notice to Deutsche Bank or acted as its agent in the transaction. This is a reasonable inference given that BAC, the loan servicer, actually responded to the rescission notice and refused it without referring to whether the assignee, Deutsche Bank, assented to the decision.BACDeutsche Bank, or both refused to rescind the transaction and discovery is necessary to sort out who is responsible for the decision to deny the rescission.
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        For the reasons stated herein, Defendants' motion to dismiss (Doc. 10) is:
        1. Granted as to Stewart's failure to disclose claim against all Defendants;
        2. Denied as to Stewart's rescission claim against all Defendants; and
        3. Denied as to Stewart's failure to honor rescission claim against defendants Deutsche Bank and BAC, but granted as to defendant MERS.
        SO ORDERED.
        virgima.M Kendal
        United States District Court Judge
        Northern District of Illinois
        Date: March 10, 2011
        1. The Court also notes that the mortgage instrument attached to the complaint identifies MERS as "a separate corporation that is acting solely as a nominee for Lender and Lender's assigns." (See Doc. 1, Ex. C at 1.) Though Stewart alleges MERS has an interest in the loan (see Compl. *\ 7), the exhibits contradict that pleading and the exhibits control. See N. Ind. Gun & Outdoor Shows, Inc. v. City of S. Bend, 163 F.3d 449, 454 (7th Cir. 1998).