968 F.

2d 1137

Annie Mae WILLIAMS, Plaintiff-Appellee,

v.
HOMESTAKE MORTGAGE CO., Ignacio Goldemberg and
Adriana
Goldemberg, Defendants-Appellants.
No. 89-5163.

United States Court of Appeals,

Eleventh Circuit.
Aug. 14, 1992.

R. Hugh Lumpkin, Keith, Mack, Lewis, Allison & Cohen, Miami, Fla.,
for defendants-appellants.
Peter H. Barber, Charles M. Baird, Legal Services of Greater Miami, Inc.,
Miami, Fla., for plaintiff-appellee.
Appeal from the United States District Court for the Southern District of
Florida.
Before FAY and EDMONDSON, Circuit Judges, and HALTOM* , Senior
District Judge.
FAY, Circuit Judge:

In this appeal we consider the issue of whether the courts may impose
conditions upon the voiding of a creditor's security interest in a rescinded
consumer credit transaction pursuant to the Truth in Lending Act, 15 U.S.C.
1635(b) and Regulation Z, 12 C.F.R. 226.23(d). For the reasons that follow,
we hold that a court may modify the procedures for rescission pursuant to the
specific language of the statute and the regulations.

2I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY

3

On September 23, 1986, Appellee Annie Mae Williams entered into a

consumer credit transaction with Appellant Homestake Mortgage Company

("Homestake") in which Williams incurred an obligation that included a finance

charge initially payable to Homestake.1 As part of the transaction, Homestake
retained a security interest in Williams' home.
4

Williams entered into the loan agreement primarily to obtain the necessary
funds to remodel a bathroom and to consolidate pre-existing mortgages on her
home into a single mortgage debt providing for one monthly payment. Thus, as
part of the transaction, Homestake handed Williams a check for $3,434.73 for
remodeling purposes and satisfied the three existing mortgages on Williams'
home totalling $19,420.56.

Williams' major concern in entering into the September 23 agreement with

Homestake was keeping the monthly mortgage payments roughly equivalent to
what they were prior to entering into the agreement. On the three pre-existing
mortgages, Williams was paying approximately $460.00 per month. Under the
September 23, 1986 agreement, her monthly payments grew to $530.00 per
month. Unhappy with the larger monthly payments, Williams eventually sought
legal advice and on September 21, 1987, filed this action alleging numerous
disclosure violations of the Truth in Lending Act, 15 U.S.C. 1601-1662
(1988) ("TILA" or "Act"), and Regulation Z, 12 C.F.R. 226.1-.1002 (1992). 2

On October 27, 1987, one month after initiating the present action and one year
after entering into the consumer credit transaction with Homestake, Williams
delivered a letter to Homestake purporting to rescind the September 23, 1986
agreement. Homestake did not respond to the rescission letter, took no action to
reflect the termination of the mortgage, and returned no part of the monthly
payments made by Williams.

On April 18 and May 5, 1988, respectively, Homestake and Williams filed

cross motions for summary judgment in the district court. Based on the alleged
disclosure violations, Williams' summary judgment motion sought: (1)
rescission of the consumer credit transaction; (2) statutory damages both for
Homestake's failure to disclose necessary information as part of the transaction
and for Homestake's failure to respond to Williams' notice of rescission; and (3)
reasonable attorneys' fees. In its motion, Homestake conceded that rescission
was an appropriate remedy under the circumstances of this case. However,
Homestake sought modification of the normal statutory rescission provisions
arguing that, in order to effectuate a return of the parties to the status quo ante,
the voiding of its security interest in Williams' home should be conditioned
upon the return of $12,917.793 that Williams owes in unpaid principal.

On July 29, 1988, the district court entered an order in which Williams' motion

On July 29, 1988, the district court entered an order in which Williams' motion
for summary judgment was granted and Homestake's motion was denied. The
court found that Homestake had committed "three distinct [TILA] disclosure
violations: (a) improper disclosure of the effects of rescission, (b) understatement of the finance charge and (c) failure to disclose all security interests
taken." (R41 at 9). Relying on 12 C.F.R. 226.23(d)(1), Harris v. Tower Loan
of Mississippi, Inc., 609 F.2d 120 (5th Cir.), cert. denied, 449 U.S. 826, 101
S.Ct. 89, 66 L.Ed.2d 30 (1980), and Gerasta v. Hibernia Nat'l Bank, 575 F.2d
580 (5th Cir.1978), the district court then determined that Homestake's " 'status
quo ante' argument was addressed and foreclosed by the holdings in the Harris
and Gerasta cases, and by 12 C.F.R. 226.23(d)." (R41 at 10 n. 10).

Based on its finding that Homestake had committed three disclosure violations
and its conclusion that the type of judicial modification requested by
Homestake was not contemplated by 1635(b), the district court declared the
consumer credit transaction of September 23, 1986 rescinded upon Williams'
written notice to Homestake. Homestake was ordered to immediately terminate
its security interest in Williams' home, "with such termination to be fully and
effectively reflected in the public records," id., and to pay Williams "$1,000.00
in connection with the disclosure violations and $1,000.00 in connection with
the rescission notice violation," id., in addition to reasonable attorneys' fees.

10

Homestake filed a motion to amend judgment on August 8, 1988, and a motion

for leave to file a counterclaim on October 27, 1988. Both motions were denied
by the district court's order of February 8, 1989, and Homestake filed a notice
of appeal on February 16, 1989.

II. ISSUES
11

On appeal, Homestake raises two issues. First, Homestake argues that the
district court erred in failing to exercise its authority under 15 U.S.C. 1635(b)
to condition voiding of the security interest upon Williams' return of the loan
proceeds. Second, Homestake argues that the district court abused its discretion
in denying Homestake leave to file a counterclaim.4

III. DISCUSSION
12

We note at the outset that a district court's rulings "on the interpretation and
application of [a] statute are conclusions of law subject to de novo review."
Young v. Commissioner, 926 F.2d 1083, 1089 (11th Cir.1991). The statute at
issue in this appeal is 15 U.S.C. 1635(b).

Rescission

13

In 1968, Congress enacted TILA "to assure a meaningful disclosure of credit

terms so that the consumer will be able to compare more readily the various
credit terms available to him and avoid the uninformed use of credit." 15
U.S.C. 1601. As part of the Act, Congress provided the consumer with the
right to rescind a credit transaction under 1635(a) solely by notifying the
creditor within set time limits of his intent to rescind.5 Once the consumer
exercises his right to rescind, the effect of that decision and the subsequent
exchange of property is then governed by 15 U.S.C. 1635(b), which provides:

14

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 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. Tender shall be
made at the location of the property or at the residence of the obligor, at the
option of the obligor. If the creditor does not take possession of the property
within 20 days after tender by the obligor, ownership of the property vests in
the obligor without obligation on his part to pay for it. The procedures
prescribed by this subsection shall apply except when otherwise ordered by a
court.

15

The sequence of rescission and tender set forth in 1635(b) is a reordering of

common law rules governing rescission. Under common law rescission, 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, at 600-01 (1991). Once 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,
i.e., return earnest money or monthly payments and void all security interests.
Id. 604, at 610-13. Under 1635(b), however, all that the consumer need do
is notify the creditor of his intent to rescind. The agreement is then
automatically rescinded and the creditor must, ordinarily, tender first. Thus,
rescission under 1635 "place[s] the consumer in a much stronger bargaining
position than he enjoys under the traditional rules of rescission." Note, Truth-

in-Lending: Judicial Modification of the Right of Rescission, 1974 Duke L.J.

1227, 1234 (1974). Furthermore, because rescission is such a painless remedy
under the statute (placing all burdens on the creditor), it acts as an important
enforcement tool, insuring creditor compliance with TILA's disclosure
requirements.
16

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. The addition of the last sentence of 1635(b), stating that "[t]he
procedures prescribed by this subsection shall apply except when otherwise
ordered by a court," was added by the Truth in Lending Simplification and
Reform Act, Pub.L. No. 96-221, tit. VI, 612(a)(4), 94 Stat. 168, 175 (1980)
(codified as amended at 15 U.S.C. 1635(b) (1988)) ("Simplification and
Reform Act"), and is a reflection of this equitable goal. Prior to the statute's
amendment,6 the majority of circuit courts that addressed this issue permitted
judicial modification of the statutory rescission process. Rudisell v. Fifth Third
Bank, 622 F.2d 243 (6th Cir.1980); Powers v. Sims & Levin, 542 F.2d 1216
(4th Cir.1976); Rachbach v. Cogswell, 547 F.2d 502 (10th Cir.1976); LaGrone
v. Johnson, 534 F.2d 1360 (9th Cir.1976); Palmer v. Wilson, 502 F.2d 860 (9th
Cir.1974). Despite a lack of Congressional sanction for such action, these
courts relied on their equity powers to fashion rescission procedures not
contemplated by the Act. Only the Fifth Circuit, in precedent which is binding
on this court, see Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th
Cir.1981) (en banc) (all decisions of the Former Fifth Circuit handed down
prior to October 1, 1981 adopted as binding precedent), refused to permit
judicial modification where Congress had provided for none. In Gerasta, the
Fifth Circuit first addressed the issue finding that "the [creditor's] duties are in
no way conditional upon the [consumer's] tender of the loan proceeds." 575
F.2d at 585. The court revisited the issue in Harris and again determined that a
creditor's duties could not be conditioned upon the consumer's tender. 609 F.2d
at 123.

17

Homestake argues that the Simplification and Reform Act resolved the circuit
split against the Fifth Circuit decisions by giving the courts the ability to
modify the statutory rescission process, including the ability to condition the
voiding of the creditor's security interest upon the consumer's tender.7 Williams
counters that 1635(b), as it is written today, while permitting some
modification, does not permit the type of modification Homestake seeks. Thus,
Williams contends that the Simplification and Reform Act does not
fundamentally alter the holdings of Gerasta and Harris. In support of her
argument, Williams relies primarily on 12 C.F.R. 226.23(d) and the great

deference given to the Federal Reserve Board in interpreting TILA. See Ford
Motor Credit Co. v. Milhollin, 444 U.S. 555, 565, 100 S.Ct. 790, 797, 63
L.Ed.2d 22 (1980) ("Unless demonstrably irrational, Federal Reserve Board
staff opinions construing the Act or Regulation should be dispositive....").
Section 226.23(d) states:
18

(d) Effects of rescission. (1) When a consumer rescinds a transaction, the

security interest giving rise to the right of rescission becomes void, and the
consumer shall not be liable for any amount, including any finance charge.

19

(2) Within 20 calendar days after receipt of a notice of rescission, the creditor
shall return any money or property that has been given to anyone in connection
with the transaction and shall take any action necessary to reflect the
termination of the security interest.

20

(3) If the creditor has delivered any money or property, the consumer may
retain possession until the creditor has met its obligation under paragraph (d)(2)
of this section. When the creditor has complied with that paragraph, the
consumer shall tender the money or property to the creditor or, where the latter
would be impracticable or inequitable, tender its reasonable value. At the
consumer's option, tender of property may be made at the location of the
property or at the consumer's residence. Tender of money must be made at the
creditor's designated place of business. If the creditor does not take possession
of the money or property within 20 calendar days after the consumer's tender,
the consumer may keep it without further obligation.

21

(4) The procedures outlined in paragraphs (d)(2) and (3) of this section may be
modified by court order.

22

Williams reads this section of the regulations to mean that "the court
modification provision in subsection (d)(4) applies only to subsections (d)(2)
and (d)(3) and does not apply to the first step of the rescission process, given in
subsection (d)(1)." Brief for Appellee at 10. Thus, according to Williams, the
voiding of the creditor's security interest, which Williams argues is guaranteed
by the mandate of subsection (d)(1), may not be conditioned on the consumer's
tender. Although this is technically correct, it is not a realistic recognition of the
full scope of the statutory scheme.

23

Like the statute from which it was drawn almost word for word, 226.23(d)
does basically three things: first, it provides in subsection (d)(1) that rescission
is automatic upon the consumer's notice; second, in subsections (d)(2) and (d)

(3) it establishes a framework for the exchange of property; and third, in

subsection (d)(4), it gives the courts the power to modify that framework
consistent with the statutory objective. Subsection 226.23(d)(4)'s
acknowledgment that the courts may modify the procedures prescribed in
subsections (d)(2) and (d)(3), but not those of subsection (d)(1), is at once,
then, both a recognition of the court's power to change the statutory framework
for effecting rescission and a reaffirmation of the Act's intent to make rescission
automatic upon notification. As one commentator has noted:
24
Paragraph
1 [of 226.23(d) ] simply recognizes the statutory mandate that
rescission is complete at the time of notice. Paragraph 4 restates the power given to
courts under 1635(b) to modify the statutory procedures outlined in paragraphs 2
and 3. Therefore, it is clear that there is no such thing as conditional rescission.
Rather, there is simply recognition of the power of the courts to modify the
procedure to effect the rescission.
25

Daniel J. Morgan, Rescission Under the Simplification Act: What's New (And
Not So New) for Creditors, 7 Okla.City U.L.Rev. 355, 395 n. 265 (1982).

26

Where "the intent of Congress is clear, that is the end of the matter; for the
court, as well as the agency, must give effect to the unambiguously expressed
intent of Congress." Chevron U.S.A. v. Natural Resources Defense Council,
467 U.S. 837, 843, 104 S.Ct. 2778, 2781, 81 L.Ed.2d 694 (1984). In this
instance, Congress, through its legislative history, has made it quite clear that
"the courts, at any time during the rescission process, may impose equitable
conditions to insure that the consumer meets his obligations after the creditor
has performed his obligations as required by the act." S.Rep. No. 368, 96th
Cong., 2d Sess. 29 (1980) (emphasis added), reprinted in 1980 U.S.C.C.A.N.
236, 265. Furthermore, the plain language of 1635(b) leaves little room for
narrowing the court's ability to modify the process of effecting rescission, as
Congress' grant of authority covers all "procedures prescribed by [the]
subsection." Thus, we hold that a court may impose conditions that run with the
voiding of a creditor's security interest upon terms that would be equitable and
just to the parties in view of all surrounding circumstances.8 By relying on the
holdings of Harris and Gerasta, it appears that the district court mistakenly
believed that such modification was outside the scope of its authority. We,
therefore, vacate the judgment of the district court and remand the case for
consideration of the propriety of conditioning the voiding of Homestake's
security interest.9

27

In deciding whether or not to impose conditions upon Williams, the district

court should consider traditional equitable notions, including such factors as the

severity of Homestake's TILA violations and whether Williams has the ability
to repay the principal amount.10 While the goal should always be to "restor[e]
the parties to the status quo ante," Harris, 609 F.2d at 123; Gerasta, 575 F.2d at
584, rescission must also maintain its vitality as an enforcement tool.
IV. CONCLUSION
28

For the reasons set forth above, we VACATE the judgment of the district court
and REMAND the case for further proceedings consistent with the views
herein expressed.

Honorable E.B. Haltom, Jr., Senior U.S. District Judge for the Northern District
of Alabama, sitting by designation

Homestake assigned its interest in the transaction to Appellants Ignacio

Goldemberg and Adriana Goldemberg. Throughout this opinion, the court will
refer to all Appellants simply as Homestake

Prior to bringing suit and throughout the course of most of the litigation in the
district court, Williams remained current on her loan repayments. However,
following the district court's order of July 29, 1988 granting her motion for
summary judgment, Williams stopped making the monthly payments. In all,
Williams paid $9,937.50 to Homestake

Homestake arrives at the $12,917.79 figure by first deducting all finance

charges from the $28,300.00 loaned to Williams and then offsetting the
$2,000.00 in statutory penalties imposed by the district court and the $9,937.50
Williams paid to Homestake prior to the district court's summary judgment
order

Homestake does not seek review of that part of the district court's order which
found three TILA disclosure violations, nor does it seek review of the court's
award of reasonable attorneys' fees and $2,000.00 in statutory penalties. These
matters are, therefore, not before this court and remain unaffected by our
judgment today. Homestake does seek review of the denial of leave to file the
counterclaim. We find no abuse of discretion in this ruling as to the untimely
request

Rescission under 1635(a) applies to those transactions in which the creditor

retains a security interest, other than a first mortgage, on the consumer's
principal residence. The consumer has an absolute right to rescind the
agreement for three business days following the finalization of the transaction.

Furthermore, the consumer's ability to rescind an agreement may be extended

for up to three years if the creditor fails to make all material disclosures,
including disclosure of the right to rescind
6

The Simplification and Reform Act was enacted on March 31, 1980, and
became effective October 1, 1982

As part of its argument that the district court erred in failing to condition the
voiding of its security interest upon Williams' tender, Homestake contends that
the district court has sanctioned a forfeiture of its property. We find this
argument wholly without merit. The district court's July 29 summary judgment
order does not state that Homestake is no longer entitled to its principal loan
amount. Instead, the court's order merely requires Homestake to comply with
its duties under the statute

Insofar as the Harris and Gerasta decisions restrict a court's ability to modify
the statutory procedures for effecting rescission, they are no longer valid in
light of the changes that Congress has made to 1635(b)

The amended statute gives the courts the authority to restructure these loans.
This could range from ordering the immediate return of the full principal
amount to leaving the creditor to whatever other legal procedures might be
available under state law. District courts might consider the requiring of the
execution of substitute security instruments depending upon the circumstances
and the changed status of the parties, i.e., has the bathroom remodeling been
completed, etc

10

The fact that Williams stopped making payments on her contract with
Homestake does not necessarily indicate an unwillingness to pay, as that
contract and her obligation under it were rescinded and declared a nullity by the
district court. It should also be remembered that until the district court's
judgment, Williams was current on her loan repayments, despite the fact that
she was not obligated to make those payments