U.S. Bank Nat'l Ass'n v Manzo (IL)

Summary: Neither letters sent by borrowers to a mortgage lender’s assignee nor the borrower's motion for leave to file a counterclaim for rescission were sufficient notification of rescission under TILA section 1635(a).

U.S. Bank Nat’l Ass'n v Manzo, 2011 IL App (1st) 103115, 960 NE2d 1238, 356 Ill Dec 115 (1st D, 2011), app’l den’d, Table, No. 113509, 968 NE2d 89, 360 Ill Dec 10 (Ill., 2012).

Facts:  In November 2005, the Manzos obtained a loan from BNC Mortgage, Inc., using their home as security on the loan. On August 11, 2006, US Bank (holder of the BNC note and mortgage) filed a foreclosure action against the Manzos. US Bank’s action was brought within one year of the loan transaction. In response to the action, between April and December of 2007, the Manzos’ attorney sent four letters to US Bank requesting negotiations before Manzos filed a counterclaim/affirmative defense arising from US Bank’s alleged violations of The Truth in Lending Act (“TILA”) pursuant to section 1635 and 1640.

Exactly three years and one day after entering the loan agreement with BNC, the Manzos filed a counterclaim in the foreclosure case, seeking rescission and damages for the lender’s failure to clearly and conspicuously disclose the borrower’s right to cancel a mortgage loan. The circuit court dismissed the claims in the entirety for untimeliness.

The Manzos appealed the circuit court's dismissal, maintaining that the decision was improper because they notified the bank of their intent to rescind through several letters sent to the bank prior to the expiration of the three years allowed by TILA. The Manzos further contended that, even if notification was not in time, their rescission claim survived, pursuant to the “right of rescission in recoupment under State law” exception of TILA, and Section 13–207 of the Illinois Code of Civil Procedure.

Holding:   The appellate court affirmed in part, and reversed and remanded in part.  The court affirmed that the borrowers failed to unequivocally rescind their loan within the three-year statute of repose imposed by TILA. Regulation Z of section 1635 of TILA requires the written communication to clearly state that the borrower is rescinding the mortgage in the present; it nowhere speaks of merely notifying the creditor of an intention to rescind at some unspecified point in the future. Neither of the letters, nor the motion for leave to file the counterclaim, affirmatively and clearly stated the Manzos’ unqualified and present intent to rescind the loan. Rather, the language of the letters was conditional, using the potential TILA rescission claim as leverage to modify the loan agreement. Therefore the three-year limitations period had expired before a clear intent to rescind was given to US Bank.

The appellate court held that the Illinois Code of Civil Procedure does not permit a rescission claim to be brought if it was not made during TILA’s three-year period. That ruling applied even where the rescission claim was maintained as a defense to a mortgage foreclosure. The court held that Section 13-207 of Civil Procedure allows defendants to plead a set-off or counterclaim on claims barred by the statute of limitations, but TILA’s three-year rescission period is a statute of repose and therefore Section 13-207 does not apply to recoupment on the rescission.

The appellate court did, however, find Section 13-207 applies to the borrowers' counterclaim for damages under TILA Section 1640 pursuant to the state law recoupment provision.  Civil liability claims, as expressed in the language of TILA Section 1640(e), have a one-year statute of limitations (as opposed to the statute of repose language of section 1635(a)). Therefore, civil claims for damages brought in recoupment to the foreclosure action pursuant to Section 13-207 have life after the statute of limitations. The court reversed the dismissal of the claim for damages and remanded it for separate evaluation.

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By: ATG Underwriting Department | Posted on: Fri, 07/06/2012 - 2:51pm