10th Cir. Rejects Action to Void Foreclosure Sale Based on Prior TILA Cancellation Demand

The U.S. Court of Appeals for the Tenth Circuit recently held that a borrowers’ federal court claim attempting to void a foreclosure sale based on a prior demand to cancel the loan under the federal Truth in Lending Act (TILA) was barred by claim preclusion for failure to raise the issue in a prior state court action.

A copy of the opinion in Pohl v. US Bank is available at:  Link to Opinion.

The plaintiff borrowers refinanced the loan on their home in May 2007.  In 2009, the borrowers defaulted on their loan.  In March 2010, believing that their lender had failed to make TILA-required disclosures, the borrowers delivered a notice of intent to rescind.

The lender responded it did not afford any significance to the notice, and that it would “exercise all appropriate remedies under the promissory note and security instrument in the event of the borrowers’ default.”  The lender took no further action.

In June 2011, the lender assigned the deed of trust to a trustee for a mortgage loan trust, which commenced foreclosure proceedings in July 2011.

The borrowers promptly filed a Chapter 7 bankruptcy, and the trustee also filed a motion to lift the automatic stay in the bankruptcy so it could move forward with the foreclosure proceedings.

In August 2012, the borrowers filed a separate state court action seeking to quiet title, alleging they had tendered a valid instrument in payment of the note, which the trustee had rejected.  The trustee moved to dismiss the complaint for failure to state a cause of action, which motion was granted.

The borrowers ultimately received a discharge and the bankruptcy case was closed in December 2012.  The property sold in a foreclosure sale in January 2013, with the trustee being the highest bidder.

The borrowers then commenced a federal court action in August 2014, asserting a claim seeking to rescind the 2014 foreclosure in light of the 2010 notice of intent to rescind the transaction.  Both parties moved for summary judgment, and the trial court granted the trustee’s motion and denied the borrowers’ motion.

In so ruling, the trial court relied on claim preclusion, concluding that the borrowers could have raised their contention that the loan was rescinded due to the 2010 notice of rescission in the 2012 state court action.

On appeal, the Tenth Circuit first noted: “For a claim in a second judicial proceeding to be precluded by a previous judgment, there must exist: (1) finality of the first judgment, (2) identity of subject matter, (3) identity of claims for relief, and (4) identity or privity between parties to the actions.”

The borrowers argued that claim preclusion did not apply because their current claim challenged the 2013 foreclosure sale, which had not yet occurred when they filed the 2012 state court action.

However, the Tenth Circuit noted that the trustee “had commenced the foreclosure proceedings in 2011, well before the 2012 state litigation.”  In addition, the facts underlying their challenge to the foreclosure sale “certainly were known to them at the time of the 2012 state litigation.  Therefore, [the borrowers] could have used the state litigation to challenge the lender’s failure to follow the TILA rescission process.”

The borrowers next argued that the 2010 rescission was not itself a legal claim, and that the holding of the trial court improperly converted it to a claim, contrary to the Supreme Court of the United States’ holding in Jesinoski v. Countrywide Homes Loans, Inc., 135 S. Ct. 790 (2015).

The Tenth Circuit again disagreed, noting that “Jesinoski concerned whether a borrower effects rescission simply by giving notice within the three-year conditional rescission period, or whether the borrower must both give notice and file suit within that period.”  However, it did not “preclude a lender from taking the position that a tendered notice of rescission is invalid.”

The Tenth Circuit further held: “Nor are we persuaded by the [borrowers’] suggestion that under Jesinoski, a notice of rescission tendered during the conditional rescission period becomes incontestable if a lender fails to bring a lawsuit to invalidate it.”

Moreover, “it is apparent that once the lender rejected the [borrowers’] notice, they had a ‘claim’ for rescission and a ‘claim’ for TILA violations.”

Finally, the borrowers argued that the identity of claims element was not met, because the injuries in the litigations differed.  In so arguing, the borrowers alleged: “The injury alleged here is foreclosure on a deed the homeowners voided under TILA.  The injury alleged there—having nothing to do with TILA or rescission—was [the lender] rejecting purported payment of the note.”

The Tenth Circuit rejected the borrowers’ argument, noting that the “state action and the current action challenged the same mortgage loan on the same property,” that the “underlying facts are related in origin and motivation and would form a convenient trial unit,” and that in the state court action the borrowers “sought to quiet title to the property and to have the deed of trust reconveyed to them.”

The Tenth Circuit therefore held that the identity of claims element was also met, and claim preclusion applied.  Accordingly, the ruling of the district court was affirmed.

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Jeffrey Karek practices in Maurice Wutscher's Commercial Litigation, Consumer Credit Litigation, and Appellate groups. He has substantial experience in defending consumer finance lawsuits in both state and federal trial courts, and on appeal. Such litigation includes allegations brought under TILA, HOEPA, RESPA, FDCPA, TCPA, FCRA, and state consumer protection statutes, including in the defense of putative class actions. Jeff received his Juris Doctor from the University of Michigan Law School, and graduated magna cum laude with a Bachelor of Business Administration degree from Western Michigan University.