New Tenth Circuit TILA Rescission Case Has Instructive Language on Legal vs. Equitable Relief

I think this new case has good reminders about when it is appropriate for the court to grant equitable relief to a defendant and upon what basis and at what stage in the proceedings.  Too often I see bank servicers argue that borrowers must be dismissed on the pleadings because they have not offered to pay off a lien that the case is clearly challenging under a state statute as fraudulent and void.  The servicers show no facts to demonstrate why legal relief is inadequate, or why the court should employ equitable relief in its favor without any showing, or when it is in direct contravention of the plain terms of the statute (legal relief).

Sanders-v-Mountain-America-Fed-Cr-Union-July-2012

But here, the district court created a pleading rule that would require all consumers

who seek to compel TILA rescission to plead their ability to repay the loan:
[A]llowing the Sanders[es] to rescind the loan simply by stating their intent
to rescind would place [Mountain America] in the position of an unsecured
creditor. Thus equity requires that the Sanders[es] allege their ability to
repay the loan amount. [They] have not alleged their ability to repay the
loan. . . . Because the [Sanderses] have not alleged their ability to repay the
loan, their rescission claim fails and must be dismissed.
(Aplt. App’x 143-44 (emphasis added).) The court’s view impermissibly alters the
rescission procedure for two reasons.
First, it adds a condition to the remedy not found in the statute or the regulation: it
requires consumers to allege that they can repay the loan proceeds. This requires them to
determine and plead information that may not be easily ascertainable, such as the value of
the property obtained with the loan proceeds — a difficult task in a fluctuating market —
and the exact dollar amount of any refund of finance charges due to them. Compare 12
C.F.R. § 226.23(a)(2) (requiring only that the consumer give the creditor written notice of
rescission). Moreover, because this condition would apply only in court proceedings to
– 8 –
compel rescission, it encourages creditors to ignore TILA rescission notifications until
the consumer petitions a court to compel the rescission. This delays the rescission
process, makes it more expensive for consumers, and transforms what Congress intended
to be a private remedial scheme into a courthouse showdown. See McKenna, 475 F.3d at
421-22 (“The rescission process is intended to be private, with the creditor and debtor
working out the logistics of a given rescission.”).
Second, the district court’s pleading rule is impermissible because categorical
relief is beyond the reach of the courts’ equitable powers, both as a matter of equitable
tradition and respect for the law. As tradition goes, the equitable power of the courts is
available only when legal remedies are demonstrably inadequate. Beacon Theatres, Inc.
v. Westover, 359 U.S. 500, 509 (1959) (“[I]n the federal courts equity has always acted
only when legal remedies were inadequate.”). Even when legal remedies are inadequate,
courts must also weigh the case-specific equities in favor of both parties and the public
interest before granting equitable relief. See eBay Inc v. MercExchange, L.L.C., 547 U.S.
388, 391 (2006); see also RoDa Drilling Co. v. Siegal, 552 F.3d 1203, 1210 (10th Cir.
2009) (“[T]he Supreme Court has rejected the application of categorical rules in
injunction cases.”); Yamamoto, 329 F.3d at 1171 (noting relief from the TILA procedure
depends on “the equities present in a particular case”) (quotation omitted); S. Rep. No.
96-368, 96th Cong., 1st Sess. 29 (1979), reprinted in 1980 U.S.C.C.A.N. 236, 264 (“[A]
court is authorized to modify [TILA’s] procedures where appropriate.”) (emphasis
added). The district court’s pleading rule would give all creditors the benefit of the more
– 9 –
burdensome pleading rule without requiring them to first show a need for equitable relief.
Further, out of respect for the rule of law, we must adhere to the procedure duly
enacted by Congress and the responsible administrative agency except when the equities
of a particular case require otherwise. “It is a longstanding maxim that equity follows the
law.” Douglas v. Indep. Living Ctr. of S. Cal., Inc., 132 S. Ct. 1204, 1213 (2012)
(Roberts, J. dissenting) (quotation omitted). This maxim is a reminder that courts may
not invoke equity to craft a remedy inconsistent with the law. See id. Our equitable
powers to “make an independent assessment of the equities and public interest [are]
circumscribed to the extent Congress has already made such assessments with respect to
the type of case before the court.” United States v. Mass. Water Res. Auth., 256 F.3d 36,
47 (1st Cir. 2001). Our respect for TILA and Regulation Z require us to refrain from
invoking equitable powers except when there is a demonstrated need to depart from the
procedure designated by law.
Although the rescinding consumer need not plead an ability to repay the proceeds
of the loan, the district court may nevertheless, in an appropriate case, use its equitable
powers to protect a creditor’s interests during the TILA rescission process.4 See Brown v.
Nat’l Permanent Fed. Sav. & Loan Ass’n, 683 F.2d 444, 448 (D.C. Cir. 1982). The
4 Indeed, we have gone so far as to affirm a district court’s equitable decision to
protect a creditor against forfeiture by awarding it interest for the time value of its money.
See Rachbach v. Cogswell, 547 F.2d 502, 505 (10th Cir. 1976). But see Semar v. Platte
Valley Fed. Sav. & Loan Ass’n, 791 F.2d 699, 705-06 (9th Cir. 1986) (concluding a court
may not use its equitable powers to award lenders finance charges and suggesting
Rachbach contravenes TILA’s plain language).
– 10 –
pleadings here do not establish, however, whether this is an appropriate case. Mountain
America never requested an order from the court altering the TILA rescission procedure.
It merely asserted, in its motion for judgment on the pleadings, that “[c]ourts must look at
equitable factors in determining what the parties must do to rescind a loan, including ‘the
borrower’s ability to repay the proceeds.’” (Aplt. App’x 69.) Further, its motion to
dismiss did not itself plead any facts justifying relief; it merely asserted, contrary to TILA
and Regulation Z, the Sanderses were not entitled to rescission until they tendered “the
loan proceeds.” (Aplt. App’x 69.)
Thus, the district court erred in dismissing the Sanderses’ rescission claim. We
reverse its judgment on this issue and remand the case for further proceedings.

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