Gilbert v. Residential Funding, LLC, No. 10-2295

Decided: May 3, 2012

The Fourth Circuit Court of Appeals held that for purposes of a Truth in Lending Act (“TILA”) claim, a borrower’s right to rescind may be exercised by providing notice within the three year statutory period, and does not require filing suit by the expiration of the three years.  Finding that the borrower’s notice of rescission was timely filed, the Court of Appeals held that the district court erred by considering the refusal to rescind TILA claim time barred.  Additionally, the Fourth Circuit held that the borrower’s sufficiently plead a usury claim because the lender charged an interest rate higher than what was allowed by North Carolina law.  Further, the District Court dismissed all of the borrower’s North Carolina Unfair Deceptive Trade Practices Act (“NCUDTPA”) claims because violations of the relevant section cannot be assigned, but only some of their claims related to the original creditor who is not a party to the suit.  Therefore, this Court held that the claims concerning the Appellees should proceed.  Finally, the District Court erred by holding that res judicata prevented the borrower’s from litigating their claims because the North Carolina Superior Court confirmed the clerk’s finding that the foreclosure action could proceed.  However, the North Carolina Court of Appeals reversed the Superior Court’s judgment, and their claims are no longer barred by res judicata.

This action arose out of a May 5, 2006 adjustable rate mortgage the Gilberts (“borrowers”) executed with First National Arizona to refinance the existing lien on the property.  First National Arizona’s interest was subsequently transferred through several entities; Deutsche Bank is the current holder of the deed of trust on the subject property.  RFL is the master servicer, and GMAC is the subservicer.  The borrower’s defaulted on the mortgage in 2008; foreclosure proceedings were instituted on March 12, 2009.  On April 5, 2009, the borrower’s counsel wrote a letter to GMAC alleging TILA violations and providing notice the borrowers were rescinding the transaction.  On April 14, 2009, GMAC responded that they found no material disclosure errors that would entitle the borrower’s to an extended right of rescission.  While the foreclosure action was pending appeal in the North Carolina Court of Appeals, the borrowers instituted this action and the Appellee’s removed it to federal court.

The interpretation of the notice requirement for a TILA claim has generated a split in authority.  The Ninth Circuit previously held that a suit must be filed within three years to meet the statutory requirement.  However, the Fourth Circuit, relying on the plain language of the relevant regulation, found that writing a letter to the servicer met the notice requirement.  The District Court had relied on a previous Fourth Circuit case, American Mortgage Network, Inc. v. Shelton, to interpret the notice requirement as mandating a lawsuit within the three year period.  However, the Fourth Circuit held in Shelton that a borrower cannot unilaterally rescind a transaction by providing notice, which is distinct from this case where the issue was whether a borrower has properly exercised her right to rescind in the required time period.  The case is remanded for the District Court to determine whether the transaction should be voided and to consider the claims improperly dismissed.

Full Opinion

-Jennifer Routh

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