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Illinois App. Court (1st Dist.) Holds TILA ‘Failure to Rescind After Notice’ Claims Subject to 1-Yr Statute of Limitations

The Appellate Court of Illinois, First District, recently affirmed a trial court order dismissing a foreclosure counterclaim by two borrowers seeking rescission under the federal Truth in Lending Act (TILA), 15 U.S.C. § 1601 et seq., holding that section 1640(e)’s one-year statute of limitation for legal damages applied to bar the borrower’s section 1635 equitable claim, when the borrowers demanded rescission within three years of closing but did not file suit within one year after the lender failed to respond.

A copy of the opinion in U.S. Bank National Ass’n v. Miller is available at:  Link to Opinion.

On July 2, 2007, two borrowers refinanced their mortgage. On Aug. 14, 2009, after an alleged default, their mortgage lender bank filed a complaint to foreclose the mortgage.

In response, on Nov. 16, 2011 the borrowers filed a counterclaim alleging that “the initial lender violated TILA by materially changing the terms and type of the loan on the date of closing and also failing to provide [one borrower] with a Real Estate Settlement Procedures Act of 1974, 12 U.S.C. § 2601 et seq., statement at the closing.” The borrowers alleged that they “rescinded the loan, in writing, on June 28, 2010,” but the bank did not respond to the rescission request. 

The borrowers claimed that this alleged violation allowed them to rescind their loan under “section 1635(f) of TILA (15 U.S.C. § 1635(f)), within three years from the date the loan was executed.” On June 30, 2010, the borrowers’ counsel allegedly mailed the notice of rescission to the bank and to the original lender. The borrowers also sought a “termination of the security interest, return of money given by them in connection with the transaction, and reasonable attorney fees.”

The bank moved to dismiss the counterclaim for failure to commence the action “within the time limited by law.” The trial court granted the motion finding that the TILA claim was untimely and dismissed the counterclaim with prejudice. This appeal followed.

The Appellate Court initially examined sections 1635 and 1640 of TILA. As you may recall, section 1635 provides an equitable remedy of rescission “under certain circumstances including where, as alleged here, the lender failed to deliver certain notices or disclosures.” Under section 1635, after a borrower timely notifies a lender that it is exercising its right to rescind the loan, the lender must within 20 days return to the borrower any earnest money held and “take any action necessary or appropriate to reflect the termination of any security interest created under the transaction.” 15 U.S.C. § 1635(b).

In contrast, section 1640 allows a borrower to recover “legal damages where the lender has failed to comply with the requirements of section 1635.”  Specifically, the lender may be “liable for, inter alia, the costs of suit to enforce the rescission rights and attorney fees.” 15 U.S.C. § 1640(a) (2006).

As the Appellate Court noted, “section 1640 explicitly states that an action brought under it must be commenced within one year from the date of the occurrence of the violation.” 15 U.S.C. § 1640(e).  The Appellate Court held that the borrowers’ claim under section 1640 was untimely because they filed it on Nov. 16, 2011, over one year after the bank allegedly let the 20-day notice of rescission sent on June 30, 2010 lapse without responding.

The Appellate Court next examined the bank’s argument that section 1640’s one-year limitations period should also apply to the borrower’s section 1635 “failure to rescind after notice” claim even though section 1635 itself contains no such limitations period.

The Appellate Court observed that before the Supreme Court of the United States’s ruling in Jesinoski v. Countrywide Home Loans, Inc., 574 U.S. 259, 135 S. Ct. 790 (2015), many lower courts applied a three-year limitations period to rescission claims brought under section 1635 meaning that a borrower had three years from the consummation of the loan to file suit. Jesinoski eliminated this approach, holding that after a borrower notifies the lender of their intent to rescind within three years of consummation, the borrower does not have to file suit to enforce the rescission within the three-year period. 

After Jesinoski, courts have been split on the limitations period to apply to a section 1635 rescission claim.

In Hoang v. Bank of America, 910 F.3d 1096 (9th Cir. 2018), the Ninth Circuit examined a TILA rescission claim and borrowed the limitations period for a breach of contract claim from state law instead of using section 1640(e)’s one-year limitations period because TILA provides for legal damages and equitable relief, but only included a limitations period for legal damages. The Ninth Circuit concluded that nothing in TILA suggests that the limitations period for legal damages also applies to equitable remedy claims. Further, if Congress had intended the limitations period to apply to equitable remedies, then it would have drafted TILA to achieve this. 

However, in a number of federal trial court cases, the courts borrowed section 1640(e)’s one-year limitations period and applied it to section 1635 equitable remedy claims. See, e.g. U.S. Bank National Ass’n v. Gerber, 380 F. Supp. – 10 – 1-19-1029 3d 429, 438 (M.D. Pa. 2018).

The Appellate Court found the application of section 1640(e)’s one-year limitations period to be the more persuasive approach. 

Illinois has a 10-year statute of limitation for a breach of a written contract claim. Permitting a borrower to “sit on a claim” for such a lengthy period before seeking “to enforce a rescission of the mortgage while keeping both the property and the loan proceeds” made little sense to the Appellate Court. In the event that a rescission is enforced, “the lender will be entitled to no interest for this period.”  This result is more generous to borrowers than is required to enforce TILA’s purpose.

Moreover, 20 days after sending the notice of rescission, the borrower should know if the lender will honor the notice. The Appellate Court found no justification for such “a lengthy statute of limitations, where the accrual of a claim is so straight forward.”  This is especially true because in the Appellate Court’s view the equitable rescission claim “is inextricably intertwined” with the legal damage claims which has a one-year statute of limitation. Congress could not have intended for a borrower to sue for rescission after their ability to obtain their costs and attorneys’ fees expired.

Finally, the Appellate Court found that it was not proper to apply the state’s breach of contract statute of limitation because TILA’s rescission remedy has little in common with common law contract rights.

In Illinois, a party may only rescind a contract under an equitable theory in certain limited situations like where “there has been some fraud or misconduct in the contract formation.” This common law framework is unlike TILA’s statutory scheme where a borrower with a valid claim that submits a timely notice has an absolute right to rescind regardless of whether the lender engaged in any fraud or misconduct.

Thus, the Appellate Court held, “section 1640(e) provides a closer analogy for a statute of limitations for actions to enforce a rescission than the 10-year statute for written contracts in Illinois.” Applying this one-year statute of limitation here bars the borrowers’ untimely TILA claim for “rescission after notice.”

Therefore, the Appellate Court affirmed the judgment of the trial court.

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Ernest Wagner practices in Maurice Wutscher's Commercial Litigation and Consumer Litigation groups, and leads the firm’s Insurance Recovery and Advisory group. Based in Chicago, he also supports the firm’s litigation matters in its Florida office. Ernest has substantial experience in various types of commercial and insurance recovery litigation. He has conducted more than 35 jury trials, and more than 150 arbitrations for plaintiffs and defendants. He has also successfully represented clients in numerous appeals, in various jurisdictions. Ernest earned his Juris Doctor from Emory University School of Law in Atlanta, Georgia, and his Bachelor of the Arts from the University of Iowa. For more information, see https://mauricewutscher.com/attorneys/ernest-p-wagner/

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