United States District Court for the Southern District of California Provides Powerful Tool to Stop Foreclosures

I. FACTS

Last month, the United States District Court for the Southern District of California provided a powerful tool to delay foreclosure pending a trial to determine rescission rights under the Truth in Lending Act (“TILA”).

In Horton v. Calif. Credit Corp., 2009 WL 700223 (S.D.Cal. Mar. 16, 2009), Mr. and Mrs. Horton took out a $70,000 second deed of trust with the California Credit Corp. Retirement Plan (“CCCRP”). The deed of trust was secured by their primary residence.

During closing, the lenders provided the Hortons with a number of documents including the TILA required notice of right to cancel. However, on the notice of right to cancel, the date the cancellation period ended was not filled in, nor was the document signed by any of the parties.

While in repayment, the CCCRP lost the Horton’s payment and refused to accept a replacement payment. CCCRP then caused a notice of default to be recorded in the country recorder’s office and initiated the foreclosure process. After unsuccessfully sending a replacement payment, the Hortons attempted to rescind the loan contract. The Hortons finally filed a complaint seeking an injunction for the foreclosure, pending the outcome of a trial.

II. ANALYSIS

The Court began its analysis by laying out the two tests the 9th Circuit uses to evaluate a motion for TRO or a preliminary injunction. Under the “traditional test,” the court evaluates four factors to determine whether to issue a TRO or a preliminary injunction: (1) the likelihood of success on the merits; (2) the possibility of irreparable injury if relief is not granted; (3) the extent to which the balance of hardships favors each party; (4) in certain cases, whether the public interest is advanced by granting the injunction. Under the alternative test, the courts require the party seeking the injunction to demonstrate “either probable success on the merits combined with the possibility of irreparable injury or (b) that he has raised serious questions going to the merits and that the balance of hardships tips in his favor.

The Court based its decision on the merits of the motion for preliminary injunction by evaluating the elements of the traditional test.
1. Likelihood of Success on the Merits – TILA and its regulations issued by the Federal Reserve System, require the lender to provide a form stating the specific date on which the three-day rescission period expires. If the lending institution omits the expiration date and fails to cure the omission, the borrower may rescind the loan within three years after it was consummated.

1. Irreparable Injury – A loss of primary residence is irreparable harm. Because the Horton residence is the plaintiffs primary residence, plaintiffs have shown irreparable harm.

2. Balance of Hardships – The balance of hardships tips towards Plaintiffs….[E]ven if the injunction is improperly issued, CCCRP will retain its secured status and will be able to foreclose if victorious on the merits. It is churlish to suggest the delayed payment of a debt outweighs loss of the family home. Accordingly, the Court finds the balance of hardships weighs in favor of plaintiff.

3. Public Interest – The economy aside, the public interest still favors keeping families in their homes until they have been heard on the merits. Certainly, defendants do not contend the public interest favors wrongful eviction over delay in loan repayment.

III. CONCLUSION

This is a fantastic result for those who are able to demonstrate a TILA violation and are still within the extended foreclosure period provided by the Act. Importantly, the Court shot down several defenses the lender raised to overcome the overwhelming defeat in the courts evaluation of the merits of the motion. First, the court held that a disclosure form left blank in the section informing the lender of the applicable date to rescind, is not covered by the typographical error exception under TILA. Second, under certain circumstances it is not necessary for the borrower to be able to demonstrate the ability to refund the loan proceeds prior to rescission. Third, so long as the motion for injunction is filed within one year of notice of rescission, the case will not be barred by TILA’s statute of limitations. This result is clearly a significant weapon in a borrower’s arsenal to protect his home from foreclosure and it indicates that courts are not willing to entertain notions that an onslaught of litigation due to economic conditions will not prevent the court from granting injunctions where they are warranted.

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