Thursday, October 10, 2019

The U.S. Court of Appeals for the Ninth Circuit recently affirmed a trial court's summary judgment ruling in favor of the financial services defendants in an action to rescind the mortgage under the federal Truth in Lending Act, 15 U.S.C. § 1601, et seq. (TILA).

In so ruling, the Ninth Circuit held that the plaintiff consumer did not have a right of rescission under TILA because he previously quitclaimed his interest in the property to his ex-wife, and his new loan to acquire the property from his ex-wife was a "residential mortgage transaction".

A copy of the opinion is available at:  Link to Opinion

The plaintiff and his now ex-wife obtained title to the subject property in 1990.  In 2003, Plaintiff quitclaimed the property to his wife, and she then encumbered the property with a series of deeds of trust listing her as the sole owner.

The couple divorced in 2007.  The divorce judgment awarded the property to Plaintiff, and ordered him to among other things "immediately refinance the mortgage owning on said property in order to remove Wife's name from said financial obligation."  The judgment also ordered Plaintiff to pay his ex-wife $100,000.

The lender extended a loan to Plaintiff, who executed a deed of trust securing the note on the property.  Plaintiff used the proceeds from the loan to pay off his ex-wife's outstanding loan balance and to satisfy the money judgment. 

Plaintiff filed suit against the lender and its successors (Defendants) seeking rescission of the loan and other relief.  The trial court dismissed his claim for rescission as time-barred, and granted summary judgment against him on his claims for declaratory and injunctive relief and damages. 

The Ninth Circuit vacated the trial court's judgment and remanded, holding that Plaintiff's letter to the loan servicer gave proper, timely notice of rescission within three years of the loan transaction under TILA.

On remand, the trial court again granted summary judgment in favor of Defendants, holding that Plaintiff had no statutory right under TILA to rescind the mortgage because his loan was a residential mortgage transaction.

As you may recall, TILA defines a residential mortgage as "a transaction in which a mortgage is created or retained against the consumer's dwelling to finance the acquisition or initial construction of such dwelling."  15 U.S.C. § 1602(x).

The trial court concluded that, although Plaintiff had "a partial interest in the property from 1990 to 1997 and was the sole owner from 1997 to 2003, his interest in the property was fully extinguished in 2003 when he conveyed the entirety of his interest to his wife via quitclaim deed."

The trial court further found that pursuant to his obligations under the divorce judgment, Plaintiff entered into the loan in question specifically to acquire ownership interest in the property, and thus "[the loan] was a residential mortgage transaction as to which TILA provide[d] no statutory right of rescission."

This appeal followed. 

Plaintiff argued that the issue of whether his loan was a residential mortgage transaction was not properly before the trial court on remand because Defendants waived the issue by failing to raise it until after the prior appeal, and because defendants' argument was barred by law of the case and the Ninth Circuit's mandate in the prior appeal.

The Ninth Circuit disagreed, holding that "a defendant need not raise every possible argument in a motion for summary judgment and may make a different argument on remand if a grant of summary judgment in its favor is reversed on appeal."

In the prior appeal, the Ninth Circuit never ruled on the issue whether Plaintiff had a right of rescission.  Instead, it merely held that Plaintiff's letter to the servicer provided sufficient notice that he was exercising his right to rescind, and the trial court therefore erred in dismissing his claims for rescission on the ground of improper notice. 

Thus, the Ninth Circuit held that "neither law of the case nor the mandate on appeal barred the district court from addressing defendants' 'residential mortgage transaction' argument."

Plaintiff also argued that the trial court misinterpreted the statute by including in the definition of a residential mortgage transaction an initial acquisition and a reacquisition of the property.

Plaintiff cited the Official Staff Interpretations to Regulation Z, which provides that the term residential mortgage transaction "does not include a transaction involving a consumer's principal dwelling if the consumer had previously purchased and acquired some interest to the dwelling, even though the consumer had not acquired full legal title."  12 C.F.R. Pt. 226, Supp. I, Subpt. A § 226.2(a)(24)-5(i) ().

The Ninth Circuit observed that the "refinance" ordered by the divorce judgment allowed Plaintiff to pay off his ex-wife's outstanding mortgage and then made it possible for Plaintiff to acquire the property in his own right.  The loan was not a refinance where the borrower changed from the ex-wife to Plaintiff, and Plaintiff did not acquire title until the day after he signed the loan. 

Thus, the Ninth Circuit held, the trial court correctly concluded that the Official Staff Interpretations to Regulation Z refers to a situation where the borrower increases an existing ownership interest using loan proceeds, rather than the situation where the borrower reacquires a property after he had given up all ownership interest.

Next, Plaintiff argued that the 2003 quitclaim deed did not establish his subsequent lack of ownership interest in the property because upon the filing of the dissolution of marriage, the property took on communal attributes and he acquired a "species of co-ownership." 

The Ninth Circuit held, without deciding the issue, that assuming Plaintiff gained an interest in the property by operation of Oregon law, he still "acquired" his interest for purposes of TILA's "residential mortgage transaction" provision.  As the Ninth Circuit explained, the plain language of the statute requires a transaction in which a mortgage is created "to finance the acquisition or initial construction of such dwelling."

Plaintiff also argued that the language used in the loan documents showed that he already owned an interest in the property before he took out the loan.

However, the Ninth Circuit stated that the lender's characterization of the transaction was not determinative, and even if Plaintiff believed the purpose of the loan was to comply with the divorce judgment, the fact remained that he had no interest in the property when he took out the mortgage.

Accordingly, the Ninth Circuit affirmed the trial court's grant of summary judgment in favor of the Defendants.

Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000

Admitted to practice law in California, Nevada and Oregon