8th Cir. Rejects ‘Envelope Theory’ in TILA Rescission Action

The U.S. Court of Appeals for the Eighth Circuit held that the plaintiff borrowers did not offer sufficient evidence to defeat the rebuttable presumption created by the signed acknowledgement that they received the required number of copies of the federal Truth in Lending Act (TILA) notice of right to cancel disclosures.

In so ruling, the Court noted that the plaintiff borrowers did not claim personal knowledge of the number of copies of the disclosure provided at closing, but instead relied on the so-called “envelope theory,” which the Court held was inadmissible hearsay.

Accordingly, the ruling of the trial court granting summary judgment in favor of the lender was affirmed.

A copy of the opinion in Jesinoski v. Countrywide Home Loans, Inc. is available at:  Link to Opinion.

The borrowers received TILA disclosures at their loan closing.  As you will recall, under TILA borrowers may rescind certain loans within three days of closing, but the rescission period extends to three years if the lender fails to deliver “the required notice or material disclosures.”  12 C.F.R. 1026.23(a)(3)(i); see also 15 U.S.C. § 1635(a), (f).

The borrowers admitted that the lender delivered the required notice, but denied they received the required number of copies, so they attempted to rescind the loan on a date just before three years lapsed from the execution of the loan.  The lender denied rescission, and the borrowers sued more than three years after the loan closing.

The trial court dismissed the lawsuit as untimely, and it was ultimately appealed to the Supreme Court of the United States, which reversed the ruling and held that the three-year limitation period applied to the provision of notice rather than the filing of suit.  See Jesinoski v. Countrywide Home Loans, Inc., 135 S. Ct. 790, 792 (2015).

On remand, the trial court granted summary judgment in favor of the lender concluding that a signed acknowledgment of the receipt of the correct number of copies of the notice created a rebuttable presumption, and that the borrowers failed to create a triable question of fact rebutting that presumption.

The matter was then appealed.

In affirming the ruling of the trial court, the Eighth Circuit analyzed the facts contained in the record.

At the loan closing, the borrowers signed their names to an acknowledgment form stating in pertinent part: “The undersigned each acknowledge receipt of two copies of NOTICE OF RIGHT TO CANCEL, and one copy of the Federal Truth in Lending Disclosure Statement.  Each borrower/owner in this transaction has the right to cancel.  The exercise of this right by one borrower/owner shall be effective to all borrowers/owners.”

As you may recall, under TILA, a signed acknowledgment that the borrowers received the required notice creates a rebuttable presumption of proper delivery.  15 U.S.C. § 1635(c).

The borrowers first argued that the presumption should not apply because since the acknowledgment did not state “each acknowledge receipt of two copies each,” the acknowledgment shows receipt of only two copies total, or at least results in ambiguity that must be construed against the lender.

The Eighth Circuit disagreed, viewing the “argument as a tortured attempt to create an ambiguity where none exists.”

Next, the Court analyzed whether the borrowers rebutted the presumption.  The Court noted that the borrowers did not claim to have personal knowledge of the number of copies they received at the closing.  Instead, the borrowers relied on the so-called “closed-envelope theory” by “focusing on the contents of their closing-document folder as it purportedly existed two years and nine months after closing.”

However, to prove the contents of their file, the borrowers relied only on their own recitation of a third party’s description of their file.  Specifically, the borrowers stated that after the closing of the loan they took the file containing the closing documents and placed it in an inconvenient to access filing cabinet.  More than two years later, in an attempt to negotiate better loan terms, they contacted a mortgage specialist.

The borrowers stated that the specialist asked them to look in their mortgage file for certain documents, which they did, but they did not understand what they were looking for.  The borrowers therefore brought the file to the specialist, who analyzed the contents and told them they were entitled to rescind their loan because their file did not contain all necessary copies of the disclosure documents.

The borrowers did not agree on whether they left the file with the specialist, and they did not claim they produced their entire file in discovery.  Even as to documents they did produce, the borrowers did not claim knowledge of or have an explanation for missing pages.

Based on these facts, the Eighth Circuit concluded that “[a] party may not defeat summary judgment with evidence that will be inadmissible at trial, and the [borrowers’] representation about what [the specialist] described is textbook inadmissible hearsay.”  Moreover, “[g]iven the other indicia of unreliability surrounding the [borrowers’] closing file, there exist no exceptions that might permit a court to consider the hearsay.”

Accordingly, the Eighth Circuit affirmed the ruling of the trial court granting summary judgment in favor of the lender.

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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.