Argument preview: High-powered counsel spar in Truth in Lending Act timeliness dispute
on Oct 29, 2014 at 8:00 am
A recitation of the facts in Jesinoski v. Countrywide Home Loans suggests a scenario typical of the most fact-bound petition imaginable, bound for prompt denial because of its technicality. A borrower receives a mortgage loan. Among the dozens of papers that the borrower signs at the closing is a document in which the borrower acknowledges that the lender has provided the disclosures required by the Truth in Lending Act (commonly known as TILA). Fast forward to three years later, long after the borrower has received and spent the funds for the loan, when the borrower is facing foreclosure and no longer able to make monthly mortgage payments. At that point, the borrower sends a letter to the lender stating that the lender in fact did not provide the required disclosures and purporting to rescind the entire loan transaction. When the lender ignores the letter, another year passes, and then the borrower files suit to rescind the loan.
The specific dates matter because the right of rescission that TILA creates “expire[s] three years after the date of consummation of the transaction.” The dispute is over whether the borrower’s suit is timely: does the borrower have to file suit within the three years or is it enough simply to send the letter? Surprisingly, this timing problem comes up so often that there is a distinct circuit conflict. And the problem is sufficiently serious that Countrywide (the lender in this case) did not oppose the petition filed by the borrowers (petitioners Larry and Cheryle Jesinoski) but instead recommended that the Court grant review. And so, here we are in the November session with a case about rescission under TILA.
The briefs are masterful. The Jesinoskis are represented by David Frederick (among others); former Solicitor General Seth Waxman (among others) represents Countrywide. Collectively, the pair have argued more than a hundred cases before the Court. So it should be no surprise that neither side manages to gain a dominant advantage in the briefing, which presents a fine example of conflicting yet powerful counter-presentations. If anything is clear, it is that the statute is poorly executed; a good part of the Justices’ thoughts about the case are likely to involve the relative benefits of the Justices going out of their way to make sense of the statute themselves, as opposed to adopting a view that would more or less force Congress to take action to repair the statute.
At bottom, the case turns on the interaction of two sentences, adopted decades apart and plainly not crafted with a view to interaction. The first states that a borrower “shall have the right to rescind the transaction [in specified circumstances] by notifying the creditor . . . of his intention to do so.” The second states that the “right of rescission shall expire three years after the date of consummation of the transaction [even if the lender did not provide the required disclosures].”
The Jesinoskis hammer mercifully on the plain meaning of the first part of the first sentence, which states that a borrower “ha[s] the right to rescind . . . by notifying the creditor”; the phrase “by notifying” strongly suggests that it is the notification itself that rescinds the loan. Countrywide, on the other hand, emphasizes the latter part of the sentence – which describes the notification as conveying the borrower’s “intention to” rescind. Certainly, the more natural phrasing for the Jesinoskis’ construction would require a “notif[ication] that the borrower has rescinded” or “is rescinding.” But it still seems clear that the Jesinoskis have the better argument on that central question of statutory reading.
What Countrywide has on its side is the difficult practical implications of the borrowers’ reading, which it spins out in a variety of different directions. This idea of rescinding by notice works simply enough when it is done in the first three days – the lender doesn’t advance the money until the three days have passed. If the borrower rescinds, the lender simply throws all the signed documents in the trash and the parties go their separate ways, with the environment a little worse for wear from the masses of wasted paper. It is a little harder to swallow how rescission is supposed to work months and years later – after the funds have been disbursed (and presumably spent). How many of us would be able to write our mortgage lender a check for the face amount of our mortgage – at a time in our life when we are facing foreclosure?
One thread Countrywide pushes successfully relates to the history of rescission. It argues persuasively that there is no species of rescission known to the common law in which a party can unilaterally rescind without tendering the funds received in the transaction. In this context, that would require the borrower, as a condition of the rescission, to return the funds to the lender (something that rarely if ever is going to happen). Countrywide argues (and persuades me) that the only context in which unilateral rescission ever happened was in “rescission at law,” which unquestionably requires tender at the time of the rescission. The other common form of rescission – rescission in equity – could not be accomplished unilaterally, but rather required adjudication.
For good measure, Countrywide has an amicus brief from my colleague at Columbia (Rick Brooks) supporting its reading of the common-law principles; indeed, Brooks goes on to say that even at law unilateral rescission was rare and impractical because of the near-impossibility of a rescinding party being in a position to make perfect tender.
Accordingly, Countrywide argues, it makes sense to read the statute through a lens in which the baseline, expected procedure would be a lawsuit to effect rescission in any case in which the lender would not voluntarily rescind. The Jesinoskis (supported by the Solicitor General and an amicus brief from twenty-odd states) can argue that Congress obviously intended to depart from the common-law process. But the “hitherto unknown” aspect of the process they discern in the statute does weigh against their reading.
Countrywide also can bring to bear the history behind Congress’s decision to add the provision that the right to rescind “expires” after three years. Originally, the TILA rescission right had no outer time boundary. Responding to the complaints of lenders and others in the financial industry that this left title clouded far into an indefinite future, Congress responded with the strongly worded statement of expiration quoted above. Because the practical consequences of the Jesinoskis’ reading indisputably extend the risk that a loan will be unwound far past the three-year mark, that provision casts more doubt on their reading. On the other hand, as they point out, even under his reading every lender at risk will have received a formal notice of rescission before the three-year window has closed; if the lenders choose to ignore those notices that of course is a decision they might regret.
At that point, both sides can descend into a dispute about who should bear the burden of litigation. In the abstract, it generally makes sense to put the burden of litigation on institutions rather than individuals – their status as repeat players and presumptively greater resources makes that easier for them. On the other hand, the rule that the Jesinoskis propose leaves a lender exposed more or less indefinitely to the risk of rescission unless it adopts a policy of seeking a declaratory judgment of invalidity in response to each such letter. If the Justices believe that the great majority of the noncompliance letters are likely to be frivolous (and my guess is that they will take that view), then they will regard a decision for the Jesinoskis as a decision to summon a lot of pointless declaratory judgment litigation into the federal district courts.
Playing up that point, Countrywide points out that there is no legal sanction for a frivolous letter – the borrowers can send the letter with no factual basis whatsoever. But filing a law suit is quite a different thing; Rule 11 sanctions deter borrowers from claiming they didn’t receive disclosures without some reasonable basis for the claim. So putting the burden of litigation on the borrowers would bring some dose of reality to the cases that end up bringing the disputes to fruition.
It may seem strange, but the central problem for me with the Jesinoskis’ reading is what happens in the odd case when the rescission in fact is valid (the lender in fact didn’t provide enough copies of the disclosures). Their reading allows the borrower to rescind – forcing the transaction to be unwound and the lender to disgorge in a lump sum all of the interest and fees it has received over the entire course of the loan – even if there is no reasonable prospect that a judgment-proof borrower ever will tender the original loan amount back to the lender. To be sure, the Jesinoskis allow the lender to bring an action challenging the rescission, but if the evidence ends up supporting the borrower, the rescission will not be overturned. There is, so far as I can tell, nothing in the Jesinoskis’ vision of the statute that will protect the lender from writing an immense check to a borrower that unquestionably received funds from a loan that it will not and cannot ever return. It is that outcome on which I expect at least some of the Justices to balk.
I have gone on much longer than normal about this case, primarily to display the deft counterplay on both sides by their advocates. I also should admit a self-conscious concern about my own bias. I have every reason to think that the lens through which I view the practicalities of this case reflects my own experience – I represented lenders in my former life (and have only rarely represented mortgage borrowers). I hope that a more protracted discussion of both sides of the issues lessens the impact of that bias, but of course I am the last person to judge whether it has done so.