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Harris v. OSI Financial Services

January 29, 2009

TOMMIE LEE HARRIS, ET AL., PLAINTIFFS,
v.
OSI FINANCIAL SERVICES, INC., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Samuel Der-yeghiayan, District Judge

MEMORANDUM OPINION

This matter is before the court on Plaintiff Tommie Lee Harris' ("Tommie"), Plaintiff Louise Harris' ("Louise"), Plaintiff Jeffrey Harris' ("Jeffrey"), and Plaintiff Donna Harris' ("Donna") motion for partial summary judgment. This matter is also before the court on Defendant Bank of New York's ("BONY") motion for summary judgment. For the reasons stated below, we grant in part and deny in part Plaintiffs' motion for partial summary judgment and we grant BONY's motion for summary judgment.

BACKGROUND

Plaintiffs allege that Tommie and Louise are a retired couple who own a home in Chicago, Illinois ("Residence"). Plaintiffs allege that Jeffrey and Donna are the adult children of Tommie and Louise and that Jeffrey and Donna also have an ownership interest in the Residence. Plaintiffs claim that they were the victims of a scheme by Defendant Mark Diamond ("M. Diamond") and his company OSI Financial Services, Inc. ("OSI") to broker high-cost mortgages for home repair loans in order to finance shoddy home repair work that would be performed by Defendant United Construction of America, Inc. ("United") which, unbeknownst to Plaintiffs, was owned by M. Diamond's brother, Defendant Terry Diamond ("T. Diamond").

Plaintiffs allege that M. Diamond arranged for two separate loans on Plaintiffs' behalf from Defendant Encore Credit Corp. (which has since changed its name to Performance Credit Corporation) ("Encore"). First, on June 30, 2004, Tommie, Louise, and Jeffrey (collectively referred to as "Original Borrowers") allegedly closed on a $354,000 mortgage loan from Encore ("2004 Loan"). Plaintiffs allege that on the date of the closing for the 2004 Loan, no loan documents were provided to the Original Borrowers, including disclosure statements or Notice of Right to Cancel ("NORTC") forms. Plaintiffs claim that an NORTC form was later provided to them, but that it was the wrong form which did not fully and accurately disclose the Original Borrowers' right to rescind the 2004 Loan. Second, on January 7, 2005, the Original Borrowers, along with Donna, allegedly closed on another mortgage loan through Encore in the amount of $500,000 ("2005 Loan"). Plaintiffs claim that the 2005 Loan was necessitated by the fact that T. Diamond and United had stopped in the middle of renovations to the Residence and had demanded more money. The 2005 Loan allegedly went to pay off the 2004 Loan and the additional amount was to be used to complete the renovations. Plaintiffs allege that, with respect to the 2005 Loan, they were provided with incorrect NORTC forms that did not fully and accurately disclose Plaintiffs' right to cancel the 2005 Loan.

Plaintiffs brought the instant action and include in their corrected second amended complaint Truth in Lending Act, 15 U.S.C. 1601, et seq. ("TILA") claims brought against Encore, Defendant Mortgage Electronic Registration Systems, Inc, Defendant HSBC Bank, USA, as Trustee for Friedman, Billings, Ramsey Group, Inc. ("HSBC"), and BONY (Count I), Credit Repair Organization Act, 15 U.S.C. § 1679g, et seq.,claims brought against M. Diamond and OSI (Count II), breach of fiduciary duty claims brought against OSI, M. Diamond, and Defendant Lawyers' Title Insurance Corporation ("LTIC") (Count III), breach of contract claims brought against M. Diamond, T. Diamond, OSI and United (collectively referred to as "Diamond Defendants") (Count IV), Illinois Consumer Fraud Act, 815 ILCS 505/2, et seq., claims brought against the Diamond Defendants (Count V), common law fraud claims brought against the Diamond Defendants (Count VI), common law civil conspiracy claims brought against the Diamond Defendants (Count VII), race discrimination claims under 42 U.S.C. § 1981 ("Section 1981") brought against the Diamond Defendants and Encore (Count VIII), Fair Housing Act, 42 U.S.C. § 3601 et seq., claims brought against the Diamond Defendants and Encore (Count IX), and Equal Credit Opportunity Act, 15 U.S.C. § 1691 et seq., claims brought against the Diamond Defendants and Encore (Count X).

Plaintiffs subsequently filed a stipulation to dismiss the Diamond Defendants and the court also granted Plaintiffs' oral motion to dismiss LTIC without prejudice. Plaintiffs filed a motion for partial summary judgment on the TILA claims in Count I. BONY, which is only named in Count I, has also moved for summary judgment.

LEGAL STANDARD

Summary judgment is appropriate when the record, viewed in the light most favorable to the non-moving party, reveals that there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c). In seeking a grant of summary judgment the moving party must identify "those portions of 'the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,' which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986)(quoting Fed. R. Civ. P. 56(c)). This initial burden may be satisfied by presenting specific evidence on a particular issue or by pointing out "an absence of evidence to support the non-moving party's case." Id. at 325. Once the movant has met this burden, the non-moving party cannot simply rest on the allegations in the pleadings, but, "by affidavits or as otherwise provided for in [Rule 56], must set forth specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e). A "genuine issue" in the context of a motion for summary judgment is not simply a "metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). Rather, a genuine issue of material fact exists when "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Insolia v. Philip Morris, Inc., 216 F.3d 596, 599 (7th Cir. 2000). The court must consider the record as a whole, in a light most favorable to the non-moving party, and draw all reasonable inferences that favor the non-moving party. Anderson, 477 U.S. at 255; Bay v. Cassens Transport Co., 212 F.3d 969, 972 (7th Cir. 2000). When there are cross motions for summary judgment, the court should "construe the evidence and all reasonable inferences in favor of the party against whom the motion under consideration is made." Premcor USA, Inc. v. American Home Assurance Co., 400 F.3d 523, 526-27 (7th Cir. 2005).

DISCUSSION

The instant motions before the court only implicate Plaintiffs' claims under TILA for rescission of the 2004 Loan and the 2005 Loan and for damages under TILA. The issue before the court is whether the NORTC documents provided to Plaintiffs in connection with both loans provided Plaintiffs with sufficient notice of their rights to cancel the loans and, if not, whether Plaintiffs timely elected to rescind the two loans.

The relevant provision of TILA in this case is 15 U.S.C. § 1635 ("Section 1635"), which provides certain borrowers with a three-day "cooling off" period after a loan transaction is completed, during which time such borrowers have a right to rescind certain loan transactions. Andrews v. Chevy Chase Bank, 545 F.3d 570, 573 (7th Cir. 2008); 15 U.S.C. § 1635(a). TILA provides that, in the event that a borrower does timely elect to rescind a loan, the creditor has an obligation, within 20 days, to "return to the obligor any money or property given as earnest money, downpayment, or otherwise, and . . . take any action necessary or appropriate to reflect the termination of any security interest created under the transaction." 15 U.S.C. § 1635(b). The borrower's right of rescission "encompasses a right to return to the status quo that existed before the loan." Handy v. Anchor Mortg. Corp., 464 F.3d 760, 766 (7th Cir. 2006). A creditor's failure to honor a valid rescission request made pursuant to Section 1635 can subject that creditor to actual and statutory damages as enumerated in TILA. See 15 U.S.C. § 1640(a)(stating that "any creditor who fails to comply with any requirement imposed under . . . section 1635, . . . is liable to such person . . ." for statutory damages, including "the costs of the action, together with a reasonable attorney's fee as determined by the court")

Section 1635 also requires creditors to "clearly and conspicuously disclose" to the borrower the borrower's rescission rights under TILA. 15 U.S.C. § 1635(a). In the event that a creditor fails to adequately inform the borrower of the precise rescission rights available, the period in which the borrower is entitled to rescind the loan extends until the creditor does provide all proper disclosures and adequate notice of the right to rescind the loan or for three years from the date of the completion of the loan transaction, whichever is sooner. Andrews, 545 F.3d at 573; 15 U.S.C. § 1635(a), (f).

A borrower's right of rescission varies depending on the type of transaction at issue. In a first-time loan transaction between a borrower and creditor, the borrower is free under Section 1635 to rescind the entire amount of the loan. 12 C.F.R. § 226.23(a)(1); 15 U.S.C. § 1635(a). This right to rescind the entire amount of the loan applies even in a case where the borrower is seeking a loan to refinance an existing loan from a different prior creditor. 12 C.F.R. § 226.23(a)(1). However, an exception exists where a borrower is seeking a second loan from the same creditor in an amount that exceeds a previous loan from that same creditor ("Modification Exemption"). 12 C.F.R. § 226.23(f)(2). In the case of a refinancing with an existing creditor, the Modification Exemption acts to limit the borrower's right to rescind only to the value of the difference between the first and second loans, along with certain costs associated with the second loan. Id.; Handy, 464 F.3d at 762-63.

In an effort to curtail any confusion to consumers potentially caused by these differing rights of rescission, the Federal Reserve Board ("FRB"), which is the agency responsible for implementing the provisions of TILA, has created model NORTC forms which contain all of the necessary disclosures for each type of loan transaction. Handy, 464 F.3d at 763; 12 C.F.R. § 226.23(b)(2)(stating that creditors must either supply the proper model form or else supply some other form that provides "substantially similar notice"). The model NORTC form that applies to ordinary transactions involving first-time creditors is known as the FRB Rescission Model Form H-8 ("H-8 Form"). 12 C.F.R. § 226 Appx. H-8. The H-8 Form notifies borrowers of their right to rescind the entire amount of the loan. Id. The model NORTC form that applies to loans that are subject to the Modification Exemption is known as the FRB Rescission Model Form H-9 ("H-9 Form"). 12 C.F.R. § 226 Appx. H-9. The H-9 Form notifies borrowers that the right of rescission applies only to the value of the difference between the first and second loans, along with certain costs associated with the second loan. Id.

I. Plaintiffs' Motion for Partial Summary Judgment

In their motion for partial summary judgment, Plaintiffs contend that the undisputed facts establish that Encore violated TILA when it provided incorrect NORTC forms to Plaintiffs with respect to both the 2004 Loan and the 2005 Loan. The undisputed facts establish that, in connection with the 2004 Loan, Encore provided the Original Borrowers with an NORTC form that is identical to the H-9 Form. (HSBC R Pl. SF Par. 39, 41, 43-44); (Enc. R. Pl. SF 1). As indicated above, the H-9 Form applies to Modification Exemption loans and notifies borrowers that they are only entitled to rescind the difference between the second loan and the first loan with the same creditor. 12 C.F.R. § 226 Appx. H-9. The undisputed facts also establish that, in connection with the 2005 Loan, Encore provided Plaintiffs with an NORTC form that is substantially identical to the H-8 Form. (HSBC R Pl. SMF Par. 71-72); (Enc. R. Pl. SF 1). As indicated above, the H-8 Form applies to first-time loans between a given borrower and a given lender, and the H-8 Form indicates that the borrower has the right to rescind the entire amount of the loan. 12 C.F.R. § 226 Appx. H-8.

Plaintiffs argue that, with respect to both loans, Encore provided them with the incorrect form and Plaintiffs were, thus, never appropriately notified of their TILA rescission rights. Plaintiffs further argue that, since the instant action seeking rescission was filed less than three years from the dates of the closings of both loans and the undisputed facts establish that no Defendant has effectuated a rescission of either loan, Plaintiffs are entitled to rescission and statutory damages under TILA.

Encore, HSBC, and BONY have each filed briefs in opposition to Plaintiffs' motion for partial summary judgment and have argued that the NORTC forms provided to Plaintiffs were either correct or sufficient to provide notice of rescission under TILA. Encore and BONY have also raised the argument that, even if TILA violations occurred, Plaintiffs never timely and properly elected to rescind the loans in the manner prescribed by TILA.

A. The 2004 Loan

Plaintiffs dispute with Encore the issue of whether the provision of the H-9 Form in connection with the 2004 Loan failed to adequately inform the Original Borrowers of their right to rescind the 2004 Loan. Encore admits with respect to the 2004 Loan that it did provide the wrong form. (Enc. R. Pl. SF 1). It is undisputed that the Original Borrowers were financing for the first time with Encore as the creditor. (Enc. R. Pl. SF 1). Therefore, the H-8 Form, which would have informed them of their right to rescind the entire amount of the 2004 Loan would have been the appropriate form. 12 C.F.R. ยง 226 Appx. H-8. The NORTC form that was provided to them, the H-9 Form, incorrectly indicated that the Modification Exemption applied and that the Original Borrowers could only rescind the difference between the 2004 Loan and a prior existing loan. (Enc. R. Pl. SF 1); 12 ...


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