Jesinoski Dissected

The unanimous Supreme Court made clear in Jesinoski that the "language [of §1635(a)] leaves no doubt that rescission is effected when the borrower notifies."  Jesinoski v. Countrywide Home Loans, Inc., 574 U.S. ___, 135 S.Ct. 790, at *5 (2015).  Thus, "so long as the borrower notifies within three years after the transaction is consummated, his rescission is timely."  Id.

The phrase "rescission is effected" in the Court's opinion means that the transaction is rescinded, and that the security interest has become "void upon such a rescission."  15 U.S.C. § 1635(a).  Specifically, in addressing the lender's argument that a rescission notice alone would not suffice, the Court specifically noted that it "is true that rescission traditionally required . . . that the rescinding party return what he receives before a rescission could be effected."  Id. at *6.  But that is not the case under TILA because "it is also true that the Act disclaims the common-law condition precedent to rescission at law" and does not "codif[y] rescission in equity."  Id.  Instead, the "clear import of §1635(a) is that a borrower need only provide written notice to a lender in order to exercise his right to rescind", which exercise results in a "unilaterally rescinded transaction" where "§1635(b) alters the traditional process for unwinding [the] transaction."  Id. at *7.  In other words, while it used to be the case that the rescinding party was required to tender "before a rescission could be effected," id. at *6, "the Act disclaims [that] condition precedent," so that "the borrower need only provide written notice," id. at *7, and "rescission is effected when the borrower notifies," id. at *5.  The exercise of the right to rescind pursuant to statute results in rescission itself.

Further, it doesn't matter if the lender disputes the effected rescission.  Although the lender in Jesinoski "argue[d] that if the parties dispute the adequacy of the disclosures—and thus the continued availability of the right to rescind—then written notice does not suffice," the Supreme Court disagreed and remarked that "section 1635(a) nowhere suggests a distinction between disputed and undisputed rescissions."  135 S. Ct. at *5.  The unanimous Supreme Court explained that "the fact that [rescission] can be a consequence of judicial action when §1635(g) is triggered in no way suggests that it can only follow from such action," and that TILA's neighboring provisions have "no bearing upon whether and how borrower-rescission under §1635(a) may occur."  Id. at *6.  Thus, a lender's disagreement per se cannot undo a non-judicially effected borrower-rescission triggered by operation of §§1635(a) and (b), just like a borrower's disagreement with an effected not-judicial foreclosure sale cannot undo such a sale.

Lastly, both TILA and Jesinoski equate the "exercise of [one's] right to rescind" with "rescission" of that transaction.  Specifically, §1635(b) states that "[w]hen an obligor exercises his right to rescind under subsection (a) [by notifying the creditor], any security interest given by the obligor . . . becomes void upon such a rescission."  The word "such" would be rendered superfluous if the phrase "becomes void upon such a rescission" were read to refer not to the obligor's exercise of his right to rescind, but to some other rescission to be accomplished later.  This reading would convert the phrase "becomes void upon such a rescission" into "becomes void upon rescission".  However, the statute does not say "becomes void upon rescission," but rather "becomes void upon such a rescission," harkening back to the obligor's exercise of his right to rescind and demonstrating that the exercise of the right results in a rescission of the transaction.

The unanimous Jesinoski opinion tracks this structure of TILA and likewise treats the exercise of the right to rescind as rescission itself.  See 135 S.Ct. at *5, *7 ("a borrower need only provide written notice to a lender in order to exercise his right to rescind"; "rescission is effected when the borrower notifies"; "so long as the borrower notifies within three years . . ., his rescission is timely").

For the above reasons, the statutory scheme and the unanimous Supreme Court are clear that rescission is effected solely by providing the creditor with a notice of rescission, in derogation of the prior "common law practice."  The necessary implication is that, once rescission was effected by operation of the statutory scheme, no judicial action is necessary "to award rescission."  Moreover, where a servicer failed to timely challenge the effected rescission, that rescission stands, just like an accomplished non-judicial sale would stand after the appeal time has passed.  To the extent that a servicer wishes to challenge the statutorily-accomplished rescission, it must demonstrate that the Court still has jurisdiction and authority to undo such a rescission and to reinstate the voided security interest.  To the extent that a servicer may, in light of the effected rescission, seek modification of the procedures spelled out in §1635(b) and re-order the steps remaining in unwinding the unilaterally rescinded transaction, it again must provide valid reasons for such a judicial modification.

Indeed,"section 1635(a) nowhere suggests a distinction between disputed and undisputed rescissions."  Jesinoski, 135 S.Ct. at *5.  Thus, if for example, the borrower notifies the servicer within three days that they rescinded the loan and the servicer disregards that notice for 20 days, the borrower can then file an action seeking to compel the bank to perform its statutory obligations in order to unwind "such a unilaterally rescinded transaction," id. at *7.

All the borrower would need to allege is that (1) they took out a TILA loan, that (2) they notified the servicer within the statutory period of their decision to rescind, and that (3) the servicer did not "return to the obligor any money or property given" and did not "take any action necessary or appropriate to reflect the termination of any security interest created under the transaction."  15 U.S.C. § 1635(b).  Nothing else would need to be alleged because "[w]hen an obligor exercises his right to rescind under subsection (a) of this section [by notifying the creditor], he is not liable for any finance or other charge, and any security interest given by the obligor . . . becomes void upon such a rescission."  Id.  In other words, rescission occurs not as a result of judicial action, but by operation of statutory law, namely, sections 1635(a) & (b).

The same applies to a notification to rescind mailed within three years of the consummation of the loan transaction.  If the servicer fails to act upon such a notification and the resulting nonjudicial rescission within 20 days as set forth in the statute, it does so at its own peril and puts itself into the same position as an unwitting homeowner who fails to challenge a nonjudicial sale until after it's already accomplished by operation of the statutory foreclosure scheme.

The crux of the matter is, post-rescission the burden is on the servicer to challenge the statutorily accomplished rescission, just as it would be on the unwitting homeowner post-foreclosure.

TILA Rescission: How Much of a Game Changer is Jesinoski?

A lot of people got excited when Jesinoski came out last January.  Some of my clients stood, and still stand, to benefit from that decision.  The best part about Jesinoski is that it is extremely concise, yet methodical in its application of the law, bringing both judges and lawyers "back to basics."  The opinion stands in stark contrast to a huge body of result-oriented jurisprudence, where judges would refuse to follow the plain letter of the statute and instead would invent their own concepts on the spot, while often resorting to made-up distinctions without a difference.  Just look at Yamamoto in the 9th Circuit (applicable in California) and Sheldon and Gilbert in the 4th Circuit (applicable in Virginia).

Result-oriented judicial decision-making is probably the worst feature of our judicial system.  Indeed, if it is the result that is important and that controls, there is no need for the law.  The rules are set after the game, so to speak, not before, in order to adjust the final score.  In reality therefore, you are almost never on safe ground in America unless and until a judge says so.

Back to Jesinoski.  While I have seen some quotes from that opinion in a number of recent articles, it seems that the most important quotes have been omitted.  Another debate is already springing up about the effect of one's "exercise of the right to rescind" and whether the mailing of a rescission notice results in a rescinded transaction or in something less.

But Jesinoski already answers most of these questions.  First and foremost, rescission is possible without a court order.  As the Supreme Court made clear, "the fact that [rescission] can be a consequence of judicial action . . . in no way suggests that it can only follow from such action."  This is so, at least in part, because "Section 1635(a) nowhere suggests a distinction between disputed and undisputed rescissions" and because "§ 1635(b) alters the traditional process for unwinding such a unilaterally rescinded transaction".

Because TILA rescission can occur apart from any judicial action, i.e., nonjudicially, it may be considered a borrower's counterpart to the bank's remedy of nonjudicial foreclosure.

So what about the argument that "We must not conflate the issue of whether a borrower has exercised her right to rescind with the issue of whether the rescission has, in fact, been completed and the contract voided. The former is the concern of § 1635(f) and Regulation Z, and a borrower exercises her right of rescission by merely communicating in writing to her creditor her intention to rescind. To complete the rescission and void the contract, however, more is required. Either the creditor must 'acknowledge[ ] that the right of rescission is available' and the parties must unwind the transaction amongst themselves, or the borrower must file a lawsuit so that the court may enforce the right to rescind."  -- This is what the Fourth Circuit judicially legislated in Gilbert.

I say "judicially legislated" because TILA's plain text belies the proposition that "to complete rescission and void the contract, ... more is required", and TILA nowhere suggests that "the creditor must acknowledge that the right of rescission is available".  Jesinoski overrules this portion of Gilbert to the extent that it departs from the plain language of the statute.  Consider this quote from Jesinoski:

"It is true that rescission traditionally required either that the rescinding party return what he received before a rescission could be effected (rescission at law), or else that a court affirmatively decree rescission (rescission in equity).  It is also true that the Act disclaims the common-law condition precedent to rescission at law that the borrower tender the proceeds received under the transaction.  15 U. S. C. §1635(b).  But the negation of rescission-at-law's tender requirement hardly implies that the Act codifies rescission in equity.  Nothing in our jurisprudence, and no tool of statutory interpretation, requires that a congressional Act must be construed as implementing its closest common-law analogue.  The clear import of §1635(a) is that a borrower need only provide written notice to a lender in order to exercise his right to rescind.  To the extent §1635(b) alters the traditional process for unwinding such a unilaterally rescinded transaction, this is simply a case in which statutory law modifies common-law practice."  

Compare this with the express language of § 1635(b): "When an obligor exercises his right to rescind . . ., any security interest . . . becomes void".  Based on this, Jesinoski, rightfully admonishes that "rescission is effected when the borrower notifies", which results in "a unilaterally rescinded transaction" where "§1635(b) alters the traditional process".  In other words, upon the mailing of a rescission notice, the security interest becomes void even where borrower does not tender first because 1635(b) alters the process to unwind an already "unilaterally rescinded transaction."  It used to be the case that a borrower had to tender "before a rescission could be effected".  Now such a condition has been "disclaimed," i.e. discarded by TILA, "rescission is effected when the borrower notifies".

Of course, courts are given power to modify this result, but if choosing to do so, a court would be restoring the void security interest (that became void by operation of a federal statute) as opposed to preventing such interest from becoming void, as most judges purport to do without authority.  See, e.g., In re Brown, No. 15-12027-RGM (Bankr. E.D.Va. Sept. 21, 2015) (relying on the above-addressed passage of Gilbert without analyzing whether that passage is now foreclosed by Jesinoski).

Thus, to the extent that cases like Gilbert in the Fourth Circuit and Yamamoto and its progeny in the Ninth Circuit read into the statute requirements not found there, they have been overruled by Jesinoski. Rescission is effected (i.e., happens) upon the mailing of the rescission notice and the security interest becomes void upon such an effected rescission.  If a bank wants to change this result, it must sue within the applicable time frames.  If it fails to do so, the rescission obtained by operation of the statute remains in place.  The bank may still sue to compel tender, but it can no longer automatically revive a dead security interest.