On July 16, the Ninth Circuit Court of Appeals issued its decision in Merritt v. Countrywide Financial Corporation NA, No. 09–17678 (July 16, 2014). The court held that an allegation of tender or ability to tender is not required to support a Truth in Lending Act (TILA) rescission claim and that the doctrine of equitable tolling may suspend the statute of limitations to bring a Real Estate Settlement Procedures Act (RESPA) claim.
The Merritts took out an adjustable-rate mortgage and a home equity line of credit with Countrywide to purchase a home in March 2006. Prior to the loan closing, the Countrywide agent allegedly provided the Merritts their initial monthly payment amount but failed to disclose that the payment was based on a “teaser” rate rather than a fixed rate, and that the Merritts’ monthly payment would be much higher once the teaser rate expired. Countrywide thereafter allegedly failed to provide the Merritts with completed disclosures pertaining to the sale until 2009, three years after the loan was originated.
The Merritts filed their pro se complaint on March 18, 2009, alleging violations of numerous federal statutes relating to both of their loans. Countrywide moved to dismiss the complaint in its entirety, which the District Court granted, with prejudice. The Court dismissed the Merritts’ claim for rescission under TILA because the Merritts did not tender the value of their loan to Countrywide before filing suit, and dismissed their RESPA Section 8 claims as time-barred. The Merritts’ appeal followed, and the Ninth Circuit reversed.
The court said in a split decision that the District Court wrongly dismissed the complaint at the pleading stage before considering a range of evidence over whether to condition rescission on tender. The court criticized the District Court’s application of the Ninth Circuit’s holding in Yamamoto v. Bank of New York, 329 F.3d 1167 (9th Cir. 2003) that courts may require an obligor to provide evidence of ability to tender at the summary judgment stage. The court instead held that borrowers can state a TILA rescission claim without pleading tender or that they have the ability to tender the value of their loan. The panel reasoned that while a District Court has latitude to alter the statutory sequence of a rescission claim and require tender, it can only do so after evaluating the evidence and after the creditor has established a potentially viable defense.
The Ninth Circuit also applied the equitable tolling doctrine to suspend the one-year limitation period applicable to the Merritts’ claims under the RESPA, which prohibits payment of kickbacks and unearned fees in connection with certain lending transactions. Although the one-year period ordinarily runs from the date of the alleged violation, the court held that the doctrine of equitable tolling may, in appropriate circumstances, suspend the limitations period until the borrower discovers or has reasonable opportunity to discover the violation.
The Ninth Circuit’s decision departs from the Fourth Circuit’s unpublished decision requiring an allegation of tender, but falls in line with the Tenth Circuit in holding that an allegation of tender is not necessary to plead a TILA rescission claim. It will be interesting to see how the remaining circuits address the issue and whether the U.S. Supreme Court ultimately takes review to resolve the conflict in the circuits.