Summary
holding that trial court did not abuse its discretion when ordering rescission without restitution to a bad-faith creditor
Summary of this case from In re O'BrienOpinion
Docket No. 111566.
Decided April 25, 1990. Leave to appeal applied for.
UAW-GM Legal Services Plan (by Jennifer S. Bidwell), for plaintiffs.
Vestevich, Dritsas, McManus, Evans, Payne Vlcko, P.C. (by William J. Lamping), for defendant.
Before: NEFF, P.J., and MacKENZIE and JANSEN, JJ.
The present case involves two parties who were victimized by the Diamond-Obie mortgage scheme. Diamond Mortgage, ostensibly as a loan broker, arranged for a mortgage on plaintiffs' property, which was in turn funded by defendants as investors. Although Diamond Mortgage failed to disburse the funds to plaintiffs, Diamond assigned the mortgage and note to defendants for the sum of $26,500. Since plaintiffs never received any money, plaintiffs sued to quiet title and remove the mortgage. Defendants claim status as holders in due course, and claim they are entitled to payment on the mortgage and note regardless of Diamond's fraudulent actions. Upon cross-motions for summary disposition, the circuit court ruled from the bench on August 3, 1988, that plaintiffs could, and did, rescind the transaction under the federal Truth in Lending Act (TILA), 15 U.S.C. § 1601 et seq. Defendants appeal as of right the order granting plaintiffs' motion for summary disposition and denying defendants' motion for summary disposition.
In 1986, plaintiffs decided to borrow money from Diamond Mortgage in order to pay the balance on their land contract, as well as pay for home improvements. Plaintiffs met with a representative at Diamond's office in February, 1986. At a second meeting, plaintiffs signed a note and mortgage along with a loan application. At this meeting, plaintiffs each received one copy of a "Notice of Right to Cancel." Plaintiffs claim they were told that the documents they signed were only preliminary documents and that they would not sign the final binding papers until they received the money.
On March 28, 1986, Diamond assigned the note and mortgage to defendants in exchange for $26,500. Plaintiffs never received any disbursements from their loan and did not learn of the assignment until approximately March 16, 1987. On or about that date, defendants wrote to plaintiffs citing the mortgage and note and demanding payment. Plaintiffs filed their complaint on July 9, 1987, naming only defendants, but alleging violations by Diamond Mortgage of the TILA and Michigan Consumer Protection Act, MCL 445.901 et seq.; MSA 19.418(1) et seq. Plaintiffs' complaint sought injunctive and declaratory relief which would, in sum, void the entire transaction, mortgage, note, and other documents. Plaintiffs also requested various fees and costs authorized by federal and state statutes. Plaintiffs specifically elected to rescind the transaction pursuant to the TILA.
First, we find that plaintiffs were entitled to rescind the mortgage contract under the TILA and Regulation Z, 12 C.F.R. § 226.1 et seq., 15 U.S.C. Foll 1700 (Reg Z). The TILA and Reg Z provide for rescission until three days after the latest of the following events: (1) consummation of the transaction, (2) delivery of two copies to each borrower of the notice of right to cancel, or (3) delivery of all "material disclosures." We find that plaintiffs were entitled to rescind the transaction because Diamond Mortgage failed to deliver two copies to each borrower of the notice of right to cancel.
This case is virtually identical to a federal district court case involving two other parties victimized by the Diamond-Obie mortgage scheme. In Stone v Mehlberg, 728 F. Supp. 1341 (WD Mich, 1989), the federal district court granted summary disposition to plaintiffs who had rescinded their mortgage transaction. In Stone, as in the present case, the trial court found that each plaintiff had not received two copies of their right to cancel as required under 15 U.S.C. § 1635(a), 12 C.F.R. § 226.23(b). As the Stone court held, this requirement is not a mere technicality and requires that two copies be provided to each spouse since both had an ownership interest in the residence. Stone, 1353. "The fact that joint obligors may be husband and wife is irrelevant. Spouses are no more interchangeable under the TILA'S rescission provisions than any other group of persons." Id. Where the notice of right to cancel is not delivered, plaintiffs' right to rescind continues, subject to the statute of limitations. Rudisell v Fifth Third Bank, 622 F.2d 243, 247 (CA 6, 1980). The Stone court went on to note that plaintiffs were not prevented from rescinding their mortgage agreement because of defendants' status as holders in due course, holding the TILA'S rescission remedy preempts the holder in due course doctrine. Stone, supra at 1348.
We choose to follow the holding in Stone and find that the trial court did not err in allowing plaintiffs to rescind their mortgage transaction. This Court follows Sixth Circuit cases on federal matters. Dundee v Puerto Rico Marine Management, Inc, 147 Mich. App. 254, 258; 383 N.W.2d 176 (1985), lv den 425 Mich. 858 (1986). Therefore, the trial court properly granted plaintiffs' motion for summary disposition. Dumas v Auto Club Ins Ass'n, 168 Mich. App. 619, 626; 425 N.W.2d 480 (1988).
We are not persuaded by defendants' contention that the transaction, as a "residential mortgage transaction," is exempt from the rescission provisions of the TILA and Reg Z under 15 U.S.C. § 1635(e) (1), 12 C.F.R. § 226.23(f)(1). Official staff commentary to 12 C.F.R. § 226.2(a)(24) specifically sets forth that the "residential mortgage transaction" does not include the financing of a balloon payment due under a land contract sale as is the situation in the present case.
Considering our disposition on the above issue, we do not address the question whether there was a failure to deliver all "material disclosures" or whether the transaction was "consummated" under the TILA and Reg Z sufficient to extend the period of rescission.
Second, defendants argue that, even if rescission is proper, plaintiffs owe defendants restitution. We disagree. 15 U.S.C. § 1635(a) and 12 C.F.R. § 223.26(a)(1) allow the borrower to rescind "the transaction" including pendent documents such as the promissory note. 15 U.S.C. § 1635(b) provides that the obligor shall tender the property received back to the creditor. This section "clearly contemplates a return to the status quo ante and thus the extinguishment of the underlying obligation." Stone, supra at 1348. Further, rescission is an equitable remedy within the discretion of the court. Rudisell, supra at 254. We find that the trial court did not abuse its discretion in ordering rescission without restitution where plaintiffs had not received any money from Diamond Mortgage.
Affirmed.