The U.S. Court of Appeals for the Ninth Circuit recently held that Washington’s six-year statute of limitations governing contracts instead of the Truth in Lending Act’s one-year statute of limitations applies to claims to enforce rescission under TILA, after a notice of right to cancel was timely submitted.
The Ninth Circuit also held that the trial court should have given the borrowers leave to amend the complaint because the borrower’s rescission claim under TILA was not time barred, and amending the complaint would not be futile.
A copy of the opinion in Hoang v. Bank of America is available at: Link to Opinion.
Husband and wife borrowers obtained a refinance mortgage loan in April 2010, but the bank that extended the loan allegedly failed to provide notice of the borrowers’ right to rescind the loan under TILA. As a result, the borrowers could rescind the loan within three years after the loan was made in April 2010 under TILA section 1635(f). Two weeks prior to the expiration of the three-year period, the borrowers sent the bank a notice of intent to rescind the loan. The bank did not respond.
In February 2017, the bank filed a non-judicial foreclosure action. The borrowers responded by filing suit in the U.S. District Court for the Western District of Washington, seeking rescission of the loan under TILA section 1635(f), declaratory and injunctive relief, and damages under the Washington Consumer Protection Act (WCPA).
The bank moved to dismiss the complaint, arguing that the claims were time barred because the borrowers failed to sue within three years after the loan was made.
The trial court found that the borrowers “timely rescinded the loan by sending the notice of rescission to the bank within three years of the loan’s consummation,” but still granted the motion to dismiss because the borrowers did not file suit within one year as required by section 1640 of TILA, which applies to claims for damages.
The trial court “acknowledged that the limitations period applicable to TILA rescission enforcement claims is an ‘unsettled issue of law’” after the Supreme Court’s decision in Jesinowski v. Countrywide Home Loans in 2015 but, because “some statute of limitations must apply … borrowed the limitations period for monetary damages under TILA, 15 U.S.C. § 1640(3)…. ,” concluded that all of the borrowers’ claims were time barred and dismissed the complaint without leave to amend. The borrowers appealed.
On appeal, the Ninth Circuit explained that “TILA gives borrowers the right to rescind certain loans within 3 business days after consummation of the loan. 15 U.S.C. § 1635(a). However, if the creditor fails to make required TILA disclosures to the borrower, the window for rescission is expanded to three years from consummation of the loan. 15 U.S.C. § 1635(f). Once a borrower rescinds a loan under TILA, the borrower ‘is not liable for any finance or other charge, and any security interest given by the [borrower] … becomes void upon such rescission.’ 15 U.S.C. § 1635(b); see 12 C.F.R. § 226.23(a)(3). Within 20 days after the creditor receives a notice of rescission, the creditor must take steps to wind up the loan. 15 U.S.C. § 1635(b). ‘Upon the performance of the creditor’s obligations under this section, the [borrower] shall tender the property to the creditor … [or] tender its reasonable value.’ Id. Once both creditor and borrower have so acted, the loan has been wound up.”
The Court further explained that, until Jesinowski, it “required that borrowers effectuate TILA loan rescissions by giving lenders their notice of rescission and also bringing suit to enforce that rescission … within the three-year window set forth in 15 U.S.C. § 1635(f).”
However, the Supreme Court of the United States in Jesinowski “eliminated the need for a borrower to bring suit within the three-year window to exercise TILA rescission. Instead, ‘rescission is effected when the borrower notifies the creditor of his intention to rescind.’” In so ruling, the Supreme Court “did not clarify when a suit to enforce the rescission must be brought after a lender’s failure to act on that notice of rescission.”
Thus, the Ninth Circuit was confronted with the following question: “when a borrower effectively rescinds a loan under TILA, but no steps are taken to wind up the loan, when must suit be brought to enforce that rescission?”
The borrowers argued that no statute of limitations applies to a rescission action given the Jesinowski decision. The bank argued that the applicable statute of limitations was “Washington’s two-year catchall statute of limitations.”
The Court agreed with the trial court that some statute of limitations applied, but rejected the trial court’s and the parties’ “arguments as to what that limitation period should be.”
First, the Court reasoned that where “there is no statute of limitations expressly applicable to a federal statute, … ‘the general rule is that a state limitations period for an analogous cause of action is borrowed and applied to the federal claim.’ … As a ‘narrow exception to the general rule,’ courts may ‘decline to borrow a state statute of limitations only when a rule from elsewhere in federal law clearly provides a closer analogy than available state statutes ….”
The Court concluded that because “TILA does not provide a statute of limitations for rescission enforcement claims[,] we borrow from analogous Washington state law. … Under Washington’s general contract law, the statute of limitations sets forth a six-year limitation period for an ‘action upon a contract in writing, or liability express or implied arising out of a written agreement.’”
Because the loan documents were written agreements and the right to rescind under TILA “arises out of that written agreement[,] … contract law provides the best analogy” and the Court borrowed “the general contract law statute of limitations. … There is no federal law that provides a closer analogy, nor to TILA policies at stake and the practicalities of TILA rescission litigation make federal law a more appropriate vehicle for interstitial lawmaking.”
The Court rejected the trial court’s holding that “TILA’s one-year statute of limitations for legal damages claims” applied to the case at bar for two reasons.
First, the district court’s decision “was based primarily on a misreading of [the borrowers’] complaint as requesting TILA relief rather than relief under the WCPA.”
Second, “TILA provides for both legal damages and equitable relief but only includes a statute of limitations for legal damages relief.” Because the statute does not provide that the same one-year limitation applies to both damages claims and claims for equitable relief and “Congress surely knew how to draft the statute [to so provide but didn’t]” the trial court erred when it refused to borrow the analogous limitations statute from state law. “Only when a state statute of limitations would ‘frustrate or significantly interfere with federal policies’ do we turn instead to federal law to supply the limitation period.
The Ninth Circuit held that applying “Washington’s longer six-year contract statute of limitations would actually further TILA’s purpose, which is to protect consumers from predatory lending practices and promote the informed use of credit. 15 U.S.C. § 1601(a).”
The Court rejected the bank’s argument that Washington’s two-year catch-all limitations statute applied because “[i]n similar contexts, the Supreme Court previously determined that catchall statutes were not substantively analogous and declined to borrow them.” There was no need to resort to the catchall statute when Washington’s contract statute was more closely analogous.
Finally, since courts “‘do not ordinarily assume that Congress intended that there be no time limit on actions at all,’ the Ninth Circuit rejected the borrowers’ “argument that no statute of limitations applies to TILA rescission enforcement claims.”
The Ninth Circuit concluded that because the borrowers’ “cause of action arose in May of 2013 when the Bank failed to take any action to wind up the loan within 20 days of receiving [the] notice of rescission[,] … the district court erred in dismissing the claim as time barred.” The trial court also erred by dismissing with prejudice because the borrowers’ rescission enforcement claim was not time barred under Washington’s six-year statute of limitations.
Thus, the order of dismissal was reversed and the case was remanded for further proceedings.
