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Regency Savings Bank v. Chavis

September 20, 2002


Appeal from the Circuit Court of Lake County. No. 00-CH-8 Honorable Wallace B. Dunn and Mitchell L. Hoffman, Judges, Presiding.

The opinion of the court was delivered by: Justice Byrne

This appeal arose from an action brought by plaintiff, Regency Savings Bank, to foreclose its mortgage on the residence of defendants, Sigmund J. Chavis and Harriet Chavis. The trial court found that defendants were entitled to rescind the note and mortgage because they were not provided with proper documentation regarding their rescission rights pursuant to section 1635 of the Truth in Lending Act (Act) (15 U.S.C. §1635 (1982)). The trial court conditioned defendants' grant to rescind on their tender of $349,572 to plaintiff, which represented, inter alia, the principal loan amount. Defendants failed to make the required tender, and the trial court entered a judgment of foreclosure and sale. Following the sale of the mortgaged real estate, the trial court entered an order approving the sale and distribution.

Defendants raise three contentions in this timely appeal. They contend that (1) the trial court had no authority to condition their right to rescind; (2) even if the trial court had the authority, the trial court failed to give them sufficient time in which to tender the payment; and (3) the sheriff's sale of the mortgaged property was held in violation of the automatic stay imposed in defendant Harriet Chavis's bankruptcy case. For the reasons that follow, we affirm. We will recite other relevant facts as they relate to the issues on appeal.

Turning to the first issue, defendants contend that the trial court erred in "conditioning their right to rescind" the note and mortgage on the return of the monies lent or advanced on defendants' behalf. Relying on a minority interpretation of section 1635 of the Act embraced by the court in In re Quenzer, 266 B.R. 760 (Bankr. D. Kan. 2001), defendants maintain that a plain reading of the statute mandates that, when an obligor exercises his right to rescind, any security interest in the subject property becomes immediately void and no procedure is required by the obligor to effectuate this result. Defendants assert that the statute gives the trial court the authority only to govern the transfer of money and property between the obligor and the creditor after the voiding of the security interest.

Defendants raise an issue of statutory construction. Well-established principles guide us in resolving an issue of statutory construction. The primary rule of statutory construction is to ascertain and give effect to the legislature's intent. In re Marriage of Mitchell, 181 Ill. 2d 169, 173 (1998). To determine the legislature's intent, a court first should look to the statute's plain language and should accord the language its plain and commonly understood meaning. Department of Public Aid v. Brewer, 183 Ill. 2d 540, 554 (1998). The court must not read into the plain language exceptions, limitation, or conditions that the legislature did not intend. Statutory construction is a question of law in which we employ a de novo standard of review. Brewer, 183 Ill. 2d at 554.

In this case, we must construe section 1635(b) of the Act, which is the statutory basis for a consumer's right to rescind. It provides, in relevant part:

"(b) Return of money or property following rescission

When an obligor exercises his right to rescind under subsection (a) of this section, he is not liable for any finance or other charge, and any security interest given by the obligor, including any such interest arising by operation of law, becomes void upon such a rescission. Within 20 days after receipt of a notice of rescission, the creditor shall return to the [obligor] any money or property given as earnest money, downpayment, or otherwise, and shall take any action necessary or appropriate to reflect the termination of any security interest created under the transaction. If the creditor has delivered any property to the obligor, the obligor may retain possession of it. Upon the performance of the creditor's obligations under this section, the obligor shall tender the property to the creditor, except that if return of the property in kind would be impracticable or inequitable, the obligor shall tender its reasonable value. *** The procedures prescribed by this subsection shall apply except when otherwise ordered by a court." (Emphasis added.) 15 U.S.C. §1635(b) (1994).

The sequence of rescission and tender set forth in section 1635(b) places the consumer in a much stronger bargaining position than the consumer enjoys under the traditional rules of rescission. Under the common law, the rescinding party must first tender the property that he has received under the agreement before the contract may be considered void. 17A Am. Jur. 2d Contracts §590 (1991). After the rescinding party has performed his obligations, the contract becomes void and the rescinding party may then bring an action in replevin or assumpsit to insure that the non-rescinding party will restore him to the position that he was in prior to entering into the agreement. Under section 1635(b), however, the consumer only needs to notify the creditor of his intent to rescind. The agreement is then automatically rescinded and the creditor must, ordinarily, tender first.

"Though one goal of the statutory rescission process is to place the consumer in a much stronger bargaining position, another goal of §1635(b) is to return the parties most nearly to the position they held prior to entering into the transaction." Williams v. Homestake Mortgage Co., 968 F.2d 1137, 1140 (11th Cir. 1992). The plain language at the end of section 1635(b) is a reflection of this equitable goal. The language set forth in the statute clearly and unambiguously expresses a legislative intent to allow the trial court "at any time during the rescission process, [to] impose equitable conditions to insure that the consumer meets his obligations after the creditor has performed his obligations as required under the act." S. Rep. No. 96--368, at 29 (1980), reprinted in 1980 U.S.C.C.A.N. 236, 265.

It is now well-settled that a court, in the exercise of its equitable discretion, can condition the right of rescission upon the tender of the amounts previously advanced, so that the security interest is left in place until the tender is made. See, e.g., AFS Financial, Inc. v. Burdette, 105 F. Supp. 2d 881 (N.D. Ill. 2000); Williams, 968 F.2d at 1142 (courts may impose conditions that run with the voiding of creditors' security interests upon terms that would be equitable and just under surrounding circumstances); Palmer v. Wilson, 502 F.2d 860 (9th Cir. 1974)(circuit court conditioning right of consumer to rescind loan transaction on repayment of principal received must do equity and cannot ignore debtor's unpaid obligation for the principal sum, as a complete windfall was not intended); Lynch v. GMAC Mortgage Corp. of Iowa, 170 B.R. 26, 29 (Bankr. D. N.H. 1994)(majority of courts have held that courts have inherent equitable power to condition right of rescission, as Congress could not have intended that security interest of lender be voided when obligors were unable to tender payment to it).

This principle was espoused by this court in Westbank v. Maurer, 276 Ill. App. 3d 553 (1995), wherein we held that the trial court had the authority to order the defendant to return to the plaintiff all property which the defendant had received in the subject transaction. We based our holding on traditional equitable principles that a court in equity has the power to circumscribe the right of rescission to avoid the perpetration of stark inequity. Westbank, 276 Ill. App. 3d at 565-66.

Defendants argue that the Federal Reserve Board has interpreted section 1635 of the Act to mean that the voiding of the creditor's security interest may not be conditioned on the consumer's tender. See 12 C.F.R. §226.23(d) (2002). While a technical reading of the regulation appears to lend credence to defendants' argument, "it is not a realistic recognition of the full scope of the statutory scheme." Williams, 968 F.2d at 1141. The regulations simply recognize that rescission is complete at the time of notice and that the courts have the power to modify the statutory procedures outlined in section 1635(b). Contrary to defendants' assertion, the courts have the power to modify the procedure to effect the grant of rescission. We are not persuaded by defendants' arguments.

In this case, plaintiff saved defendants from losing their home in foreclosure by paying the amount owed on their initial debt. Additionally, plaintiff advanced money to defendants to pay their real estate taxes and insurance debts. We agree that it would be particularly egregious for defendants to be enriched at plaintiff's expense. Under these circumstances, the trial court found rescission was warranted and justly held that equitable considerations mandated that the security interest remain in place until the obligation was fully paid. Accordingly, we find that the trial court had the equitable authority to modify the procedure to ...

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