As Matter of First Impression, Massachusetts Federal Court Holds that Rider Creates Security Interest in Property Required to be Disclosed under Federal Truth in Lending Act (TILA)
Plaintiff filed a putative class action against his mortgage lender, Long Beach Mortgage Company, for alleged violations of the federal Truth in Lending Act (TILA), later amending the class action complaint to add two additional party plaintiffs and two additional claims – a class action claim under TILA’s state law counterpart, the Massachusetts Consumer Cost Disclosure Act (MCCDA), and an individual claim for under TILA and MCCDA for rescission. Carye v. Long Beach Mortgage Co., 470 F.Supp.2d 3, 5 (D. Mass. 2007). Defense attorneys moved to dismiss the class action claim and plaintiff Carye’s individual claims for rescission pursuant Rule 12(b)(6), and moved also to sever the claims of the newly added plaintiffs. Id. The defense argued that the class action claim failed because TILA does not require the disclosure of the security interest created by Id.
As the district court explained, TILA requires that a creditor disclose to the borrower any security interest taken in property purchased as part of the loan transaction and in any property not purchased as part of the transaction but separately identified. Carye, at 6-7. In this case, plaintiffs borrowed money from Long Beach Mortgage secured by their residences, and each of them signed a 1-4 Family Rider/Assignment of Rents (Rider) as part of their loan documentation. Carye, at 5-6. The Riders created a security interest in property separately identified in detail (see Note, below). Plaintiffs urged that this constituted a violation of TILA; Long Beach argued that the interest was merely “incidental” and, accordingly, was not required to be disclosed under TILA. Id., at 7. Plaintiffs countered that the Rider “created a security interest in virtually all of the plaintiffs’ personal property” and had to be disclosed. Id., at 7-8.
The district court stated that the issue presented was a matter of first impression in the circuit, that is, “whether the Rider creates security interests, requiring disclosure, or only incidental interests, prohibiting disclosure.” Carye, at 8. The court held as follows, “A reasonable interpretation of the Rider is that it creates a security interest in ‘goods of every nature whatsoever now or hereafter located in, on, or used, or intended to be used in connection with the property.’ Further, other courts addressing the very language contained in the Rider have held that such language creates security interests that must be disclosed. . . . For these reasons, this Court cannot conclude that the only reasonable interpretation of the Rider is that it creates only incidental interests that cannot be disclosed. The Court here expresses no opinion, beyond denying the motion to dismiss Counts I and II, as to the proper construction of the Rider.” Id. Accordingly, the motion to dismiss the class action claim was denied. Id., at 10.
However, the district court granted the defense motion to dismiss the individual claim for rescission under TILA and MCCDA. Defense attorneys argued that because plaintiff Carye admits that he received two copies of the Notice of Right to Cancel, each of which included a 3-day rescission period, he had waived his right to rescind. Carye, at 9. The court agreed. TILA assures a borrower the right to rescind “within three business days of the transaction’s consummation or three business days from the delivery of the information and rescission forms together with material disclosures, whichever occurs later,” and this right must be disclosed clearly to the borrower. Id. (citing 15 U.S.C. § 1635(a)). If the lender fails to provide the borrower with notice of the right to rescind, then “the debtor may rescind at any time up to three years following the consummation of the transaction, transfer of the debtor’s entire interest in the property, or sale of the property, whichever occurs first,” id. (citing 12 C.F.R. § 226.23(a)(3)). The only deficiency in the Notices provided by Long Beach to Carye was that the transaction date was not identified. Id. The district court rejected the argument of plaintiff’s lawyer that this omission extended the rescission period, noting that an objective standard applies to TILA claims, see id., at 9 n.5, and holding that “as matter of law that the average person would be aware that the rescission period expired three days after receiving the Notices,” id., at 9. The federal court therefore granted the motion to dismiss this claim, id., at 10.
NOTE: Defense attorneys also moved to sever the claims of the newly added plaintiffs, Carye, at 5; Long Beach argued that severance was warranted because these individuals had been “improperly joined as parties in this action,” id., at 8. The district court denied the motion, noting similarity in the loan documents, including the fact that “each loan contained an identical Rider,” and in the conduct of Long Beach. Id. The court also noted that the commonality of the claims asserted by these plaintiffs will be reviewed at the class certification stage, id. Accordingly, it denied the motion to sever without prejudice, id., at 10.
NOTE: The Riders provided as follows: “ADDITIONAL PROPERTY SUBJECT TO THE SECURITY INSTRUMENT. In addition to the Property described in the Security Instrument, the following items are added to the Property description, and shall also constitute the Property covered by the Security Instrument: building materials, appliances and goods of every nature whatsoever now or hereafter located in, on, or used, or intended to be used in connection with the Property, including, but not limited to, those for the purposes of supplying or distributing heating, cooling, electricity, gas, water, air and light, fire prevention and extinguishing apparatus, security and access control apparatus, plumbing, bath tubs, water heaters, water closets, sinks, ranges, stoves, refrigerators, dishwashers, disposals, washers, dryers, awnings, storm windows, storm doors, screens, blinds, shades, curtains and curtain rods, attached mirrors, cabinets, panelling and attached floor coverings now or hereafter attached to the Property, all of which, including replacements and additions thereto, shall be deemed to be and remain a part of the Property covered by the Security Instrument. All of the foregoing together with the Property described in the Security Instrument (or the leasehold estate if the Security Instrument is on a leasehold) are referred to in this 1-4 Family Rider and the Security Instrument as the ‘Property.’” Carye, at 7.