Beach v. Ocwen Federal Bank

PETITIONER:Beach
RESPONDENT:Ocwen Federal Bank
LOCATION:The White House

DOCKET NO.: 97-5310
DECIDED BY: Rehnquist Court (1986-2005)
LOWER COURT: Florida Supreme Court

CITATION: 523 US 410 (1998)
ARGUED: Mar 02, 1998
DECIDED: Apr 21, 1998

ADVOCATES:
Bruce S. Rogow – Argued the cause for the petitioners
Carter G. Phillips – Argued the cause for the respondents

Facts of the case

David and Linda Beach refinanced their Florida house in 1986 with a loan from Great Western Bank. In 1991, they stopped making mortgage payments. In 1992, Great Western began foreclosure proceedings. While the Beach’s acknowledged their default, they alleged that the bank’s failure to make disclosures required by the Truth in Lending Act gave them the right under federal law to rescind the mortgage agreement. The Florida trial court rejected that defense, holding that any right to rescind had expired in 1989 under federal law which provides that the right of rescission shall expire three years after the loan closes. The state’s intermediate appellate court affirmed, as did the Florida Supreme Court.

Question

Can homeowners who face foreclosure rescind a mortgage loan on the ground that the lender violated the federal truth-in-lending law?

William H. Rehnquist:

We’ll hear argument now in Number 97-5310, David R. Beach v. the Ocwen Federal Bank.

Mr. Rogow.

Bruce S. Rogow:

Mr. Chief Justice, and may it please the Court:

Ocwen Bank agrees that there is a right of rescission in recoupment after 3 years.

Ocwen, however, says that that right in recoupment is a State safety net, that one can rescind in recoupment only if there is fraud or duress or coercion under State law principles.

Anthony M. Kennedy:

Is right of rescission in recoupment, is that a term peculiar to Florida law, or is that how we speak of it generally?

I always thought it… recoupment as simply being offset to damages, but rescission is an action of an equitable nature.

I don’t… and your brief talks in the same way.

You seem to conflate the two terms.

Bruce S. Rogow:

Justice Kennedy, rescission in this situation is statutory rescission, and I think it’s important to note, too, that the right to rescind within 3 years is not an action in rescission under the truth-in-lending law.

It is merely sending a notice of rescission within the 3 years.

Anthony M. Kennedy:

Well, can’t we say that without coupling it with the term of recoupment, or does that somehow help your case to talk about recoupment?

Bruce S. Rogow:

It helps our case to talk about recoupment and, indeed, 1635(i)(3) talks about rescission in recoupment, a statute that the supreme court of Florida absolutely ignored in this analysis.

Anthony M. Kennedy:

The statute itself talks about rescission in recoupment?

Bruce S. Rogow:

Under State law, but the caption of (i)(3) is the right to recoupment under State law, and then the statute says, nothing in this section shall affect the right to rescission in recoupment under State law.

Ocwen suggests that that only means State law rescission for fraud, duress, or coercion, and our position is, is it means more than that.

It means the Federal Truth-in-Lending Act right to rescission, and several reasons support our position.

The first is the notion that, when one looks at this statute, the word rescission used throughout the statute is Federal TILA rescission, and this Court’s decision last week in National Credit Union reasserted a principle that, when one looks at statutes and the same words are used throughout the statute, then the word has the same meaning, and here the word rescission is used throughout section 1635 and it is referring to TILA rescission, Truth-in-Lending Act rescission, so under that–

Sandra Day O’Connor:

Mr. Rogow, under the statute I guess, regardless of the timing of the discovery of a failure to comply with TILA, that the homeowner, your client, in effect, could in any event obtain damages that result from whatever failure to disclose was involved, is that right?

Bruce S. Rogow:

–That is–

Sandra Day O’Connor:

Without any time limit on that.

You can get actual damages.

Bruce S. Rogow:

–You can get actual damages, Justice O’Connor, and statutory–

Sandra Day O’Connor:

And also twice the amount of any finance charge.

Bruce S. Rogow:

–A statutory penalty with a maximum… in this case it was $1,000, and there was $1,000, in effect a penalty under 1640, plus the overcharge, and plus another amount of–

Sandra Day O’Connor:

So that’s available without time limit.

Bruce S. Rogow:

–That is available.

Sandra Day O’Connor:

But your client asserts in addition a right to rescind and recover all of the interest paid for the period of time that the mortgage was in effect and payments were made on it, is that right?

Bruce S. Rogow:

That is right, Justice O’Connor, recover the interest paid, on the other hand have to pay back the principal.

The rescission–

Sandra Day O’Connor:

Yes.

I mean, it could have been 20 years of payment under the mortgage, presumably–

Bruce S. Rogow:

–It could be–

Sandra Day O’Connor:

–when you discover there’s some $7 deficiency here.

Bruce S. Rogow:

–Well, a $7 deficiency–

Sandra Day O’Connor:

I mean, that would be enough, wouldn’t it–

Bruce S. Rogow:

–No, it would not–

Sandra Day O’Connor:

–under your theory?

Bruce S. Rogow:

–It wouldn’t be enough, Justice O’Connor, because under Congress’ construct it would have to be more, but I think the answer to this is… because I understand–

Sandra Day O’Connor:

Well, no matter how small the failing, and this was pretty small, and no matter how much time has elapsed, it’s your position that there’s this indefinite right of rescission to get back all of the interest paid, in addition to the damages and in addition to the statutory penalty, right?

Bruce S. Rogow:

–Yes, Justice O’Connor, because Congress has said that is right, because the remedy–

Sandra Day O’Connor:

Well, that’s what we’re here to decide.

I’m not a bit sure that’s what they said, but that’s your position.

Bruce S. Rogow:

–That is our position, Justice O’Connor, but we think it’s informed by how one construes these statutes.

Beginning with the first point that I make, Congress certainly has said rescission in recoupment, nothing in this section, which would be–

John Paul Stevens:

Mr. Rogow, can I ask just one other detailed practical question?

You do have to tender back the amount of the loan to principal, don’t you?

Bruce S. Rogow:

–Yes.

John Paul Stevens:

And your client is here in forma pauperis, as I understand it.

Bruce S. Rogow:

Yes.

John Paul Stevens:

Does he have the money to do that?

Bruce S. Rogow:

Well, at this moment, of course, he doesn’t have the money to do that and what happens in these cases generally is, is that if the right to rescission is invoked, then the borrower is entitled to the return of the interest, but the borrower has to pay the principal back.

John Paul Stevens:

Right.

Bruce S. Rogow:

And in some situations, indeed, if one’s house has appreciated in value, you can then refinance your house and pay back the principal.

But I think the important thing here, Justice Stevens, is is that whatever the remedy is, is a remedy that Congress has constructed not as a penalty to the lender, but to force the lender to conform to the truth-in-lending law.

The truth-in-lending law, its purpose is to protect consumers.

Ruth Bader Ginsburg:

Mr. Rogow, you are so stressing the word rescission… you say that’s used over repeatedly, and yet Congress used such distinctly different language in dealing with the 1-year time limit for damages.

It says no action should be brought, traditional statute of limitations.

Here, it talks about the right to rescind shall expire.

One sounds like it’s simply a typical statute of limitations and you can raise… and defensively you can recoup.

Ruth Bader Ginsburg:

The other, it sounds like expire, dead, over, after 3 years it’s gone, and you make… how do you explain that Congress picked this word expire to describe the right of rescission, and then talking about the 1-year limitation, used traditional statute of limitations language?

Bruce S. Rogow:

Two ways, Justice Ginsburg.

The first is the right that expires is the right to affirmatively rescind.

That right that they’re talking about is the right within 3 years to say to the lender, I am rescinding this transaction.

That is the right that expires.

Ruth Bader Ginsburg:

Well, you say so, but what is there in the statute that indicates that, and anything that indicates that it’s only… the same thing… what you’re saying is, it is the same thing as the extension of the statute of limitations, which doesn’t count if you’re seeking only to recoup.

Bruce S. Rogow:

Justice Ginsburg, (i)(3) says the right to rescission in recoupment shall not be affected and is available under State law, so even if one looks at 1635(f), the shall expire language, that is revived by (i)(3).

Antonin Scalia:

Mr. Rogow, can I ask you about that?

Do you want us to determine what Florida law says?

I mean, let’s assume we agree with you as to the meaning of (i)(3), should we determine that there is such a right of rescission in recoupment under Florida law?

Bruce S. Rogow:

No, Justice Scalia.

Antonin Scalia:

You would want us to remand–

Bruce S. Rogow:

Yes.

Antonin Scalia:

–to let the Florida supreme court decide that?

Bruce S. Rogow:

Yes, because–

Antonin Scalia:

So is that the most you’re asking for?

Bruce S. Rogow:

–It is.

Antonin Scalia:

A right to remand to let the Florida court decide whether, under Florida law, there is such a right?

Bruce S. Rogow:

To let the Florida court decide whether or not, under Florida law properly applying Federal law.

The difficulty with the supreme court of Florida decision was–

Antonin Scalia:

Well, wait, wait, wait.

That’s not what it says.

It says, under State law, affects a consumer’s right of rescission and recoupment under State law.

Bruce S. Rogow:

–It says the right to… the caption of it says, the right to recoupment under State law.

The question then becomes whether or not Florida permits recoupment under State law and whether or not it would permit rescission.

Florida, in–

Antonin Scalia:

But I mean, Florida may decide that this is a peculiar sort of an action, this rescission action, for which it will not allow recoupment.

Is that not within the realm of permissibility?

Bruce S. Rogow:

–It is not if it misapplies Federal law.

The supreme court of Florida–

Antonin Scalia:

Well, why would it say under State law, then?

Bruce S. Rogow:

–Well, because–

Antonin Scalia:

I mean, if it’s a matter of Federal law they could have left out the phrase in (i)(3) nothing… it could have just said, nothing in this subsection affects a consumer’s right of rescission and recoupment, period.

Bruce S. Rogow:

–In (i)(3), the caption, I come back, that says the right of recoupment under State law–

Antonin Scalia:

I don’t care about the caption.

I’m talking about the text.

We don’t go by captions.

We go by the text.

Bruce S. Rogow:

–And the right of rescission, Justice Scalia, is the right of rescission… TILA rescission and State law rescission.

What Ocwen is… Ocwen agrees there is a right of rescission.

They’re claiming that that right of rescission is strictly a State law right of rescission, and when one reads a supreme court of Florida opinion, it is driven by its view that Congress has said that there shall be no right of rescission under Federal law.

That’s the heart of our argument, that was a mistake.

Antonin Scalia:

I understand that.

They say that under Federal law there can be no State law of… right of rescission, and you say that’s wrong, but can’t we… if we send it back, couldn’t they still find that under State law, regardless of what the Federal law said, we don’t think this is the kind of matter on which there should be recoupment?

Bruce S. Rogow:

Not if they applied neutral principles of Florida law, because Florida law permits rescission in recoupment–

Antonin Scalia:

Okay–

Mr. Rogow–

–But it’s a question of Florida law.

Bruce S. Rogow:

It’s an ultimate question of Florida law applying–

Antonin Scalia:

And what you say is neutral principles of Florida law may not be what the Florida supreme court thinks are neutral principles.

Bruce S. Rogow:

–And they would not be if the Florida supreme court properly addressed 1635(f).

By misconstruing 1635(f) and 1635(i)(3) the supreme court of Florida came to the conclusion really on two foundations, 1) that 1635(f) is a statute of repose.

The right shall expire.

It failed to address… indeed, it said that (i)(3) is not even relevant to this inquiry, and clearly–

Ruth Bader Ginsburg:

May I clarify one thing, Mr. Rogow, because I think we lost a piece of this that’s essential.

I think… you said at the very beginning that the bank agrees there is a right to rescission in recoupment, whatever you–

Bruce S. Rogow:

–Yes.

Ruth Bader Ginsburg:

–But solely under State law.

That is, as Justice Scalia asked the question, the… there is a concession, whatever, that whatever Florida law would be apart from TILA, TILA doesn’t exist, if there’s a right to rescission under State law that would apply here, but I think you’re urging the double… the two things.

That is, you must get TILA into it, otherwise there’s no difference in your position.

Bruce S. Rogow:

That is exactly right.

Our position is, is that 1635 (i)(3) embraces TILA rescission and State law rescission.

It leaves the door open–

Ruth Bader Ginsburg:

But if you’re right about TILA having this right of rescission in recoupment, then why do you need the provision that talks about State law?

You’ve got… you say that under TILA in 3 years or 10 years, it doesn’t matter, you can rescind if you’re sued.

Now, what extra does this add?

If you have your right under Federal law, then what does the addition of the State law–

Bruce S. Rogow:

–It makes it clear that Federal law is not preempting the field, but rescission in recoupment under State law would also be available for fraud, duress, or coercion.

Anthony M. Kennedy:

–It’s not a matter of preemption.

It’s a matter of ultimate source.

You’re saying, I think, that the obligation to make these disclosures and to make these calculations correctly arises under Federal law.

Bruce S. Rogow:

It does, Justice Kennedy.

Anthony M. Kennedy:

And it’s for that Federal law Congress has provided a remedy for breach, rescission, but it says it can only be for 3 years.

Bruce S. Rogow:

It says it can only be–

Anthony M. Kennedy:

So it seems to me, as Justice Ginsburg is indicating, you’re trying to have it both ways, but that’s quite different from saying that there is simply a State law cause of action.

Bruce S. Rogow:

–Well, what we’re saying, Justice Kennedy, is… and the supreme court of Florida came to the conclusion that there is no Federal right to rescission after 3 years.

If they are wrong about that, then their decision is not properly informed, and that’s what we’re arguing, that they are wrong about that.

William H. Rehnquist:

But certainly section… subsection, or double subsection (3) of 1635(i), which says nothing in this subsection affects a consumer’s right of rescission in recoupment… that does not give any Federal right.

Bruce S. Rogow:

It leaves open the door to the Federal right.

William H. Rehnquist:

It leaves… well, it leaves open the possibility that the State may give you a right.

Bruce S. Rogow:

It certainly leaves open the State giving you a right, but it does not preclude, and I think that’s the key to this case, is it does not preclude the use of the Federal right.

William H. Rehnquist:

No, but it seems to me that your Federal right of rescission goes when it says an obligor’s right of rescission shall expire 3 years after the date of consummation.

Bruce S. Rogow:

That’s 1635(f).

William H. Rehnquist:

Well, and that is your right of rescission under this statute.

Bruce S. Rogow:

That is your right to affirmatively–

William H. Rehnquist:

What do you mean, affirmatively rescind?

Bruce S. Rogow:

–By–

William H. Rehnquist:

It doesn’t say affirmatively rescind.

Bruce S. Rogow:

–When one reads 1635(a) and 1635(b) in that section, they’re talking about sending a notice of rescission within 3 years, affirmatively rescinding.

We are talking about rescinding in recoupment, something that happens after 3 years when one has been sued in foreclosure.

William H. Rehnquist:

And that’s a State law right.

Bruce S. Rogow:

That is, if State law permits recoupment, then there is a right to rescission and the question is, which right to rescission, State law rescission, or State law rescission and the Federal TILA rescission?

Sandra Day O’Connor:

Mr. Rogow, did the petitioner ask for a rescission remedy as a matter of State law in the proceedings below?

Bruce S. Rogow:

As a… the petitioner raised 1635 rescission, which was Federal rescission.

Sandra Day O’Connor:

But not State law–

Bruce S. Rogow:

At the… that’s right.

Sandra Day O’Connor:

–rescission.

That was not raised.

Bruce S. Rogow:

It was not, and at the time (i)(3) was not in existence when the petitioner filed his… his and her affirmative defenses, so they were relying upon the right to rescission, which every court that had addressed this since 1984 found that there was a right to rescission in recoupment after 3 years.

David H. Souter:

Why is–

–May I… no, please.

May I go back, though, to an earlier question.

Leaving aside the fact that the word affirmative does not appear in 1635(f), how do you explain the distinction between the shall-not-be-brought language with respect to the damages remedy, which sounds like a normal statute of limitations, and the shall-expire language with respect to this rescission right?

What is the reason, in effect, that I think you’re telling us we should ignore that distinction?

Bruce S. Rogow:

No.

The cases, Bull, Reiter, Western Pacific, clearly make it plain that Congress… only the clearest congressional language would prevent a statute of limitations from being used in recoupment, and the language here, shall expire, is being read now as something other than a statute of limitations.

I don’t think the nomenclature makes any difference in this situation.

David H. Souter:

Well, but my question is, why shouldn’t it make some difference?

The shall… the shall not be brought is standard limitation language.

Shall expire is not, and on its face it suggests that in fact a distinction is being made, and I don’t know why we should ignore that distinction in language and find it of no significance, and I don’t think you’ve answered that.

Bruce S. Rogow:

I think, Justice Souter, that the answer lies in (i)(3), that if one views, as is right, as having expired, then (i)(3) revived it by its language that leaves open the notion that there can be rescission in recoupment.

Antonin Scalia:

Well, (i)(3) doesn’t have to be read that way.

Cannot (i)(3) refer to State law recoupment permissions that do not rely upon this Federal statute?

That is to say, if the same failure to provide information under this Federal statute also constitutes a fraud under State law, this provision can be read to say, recoupment and rescission for that fraud is not affected by our 3-dyear termination of the rescission for violation of this act.

Bruce S. Rogow:

But the question–

Antonin Scalia:

Violation of the act is also a fraud.

Bruce S. Rogow:

–But the question, Justice Scalia, is whether or not it can only be read that way.

Congress had the opportunity–

Antonin Scalia:

No, it need not only be read that way.

I’m saying, when you put that together with the indication that Justice Souter was just referring to, the indication that they use language different from the statute of limitations, those two go together very nicely.

Bruce S. Rogow:

–But the supreme court of Florida said it can only be read one way, and that, we think, is their error.

It can be read… unless there’s clear language that says there is no rescission in recoupment under Reiter, Bull, and Western Pacific, then the Court should conclude that–

Ruth Bader Ginsburg:

But Mr. Rogow why isn’t the word expire here?

I mean, I dimly recall learning in law school that there were two kinds of time bars.

One extinguished the remedy, and that’s no action shall be brought, and one was supposed to extinguish the right, and that was the right terminates, not just the remedy.

Now, that’s what the difference in language triggered in my mind immediately, that expire sounds like the one you’ve got no more right, and the other is, well, too bad you can’t sue on it.

Bruce S. Rogow:

–And (i)(3) addresses that when it says that nothing in this section, which includes the 3-year limitation which is referred to in section (i), shall affect the right to rescission in recoupment under State law, so while that… your reading would be the usual reading, the fact that (i)(3) is added to this changes this from being that kind of statute of repose where the right has expired, died as often is suggested, into something that now has been revived.

David H. Souter:

No, but your argument, as I understand it, is that the reason (i) revives it is that (i), in effect… or State law looks to… would look to Federal law, and specifically this act, but when Federal… when State law does look to Federal law under this act, what it sees is what Justice Ginsburg just described.

It sees language that seems to say, with respect to the 1635 right, it expires, so whether (i) is there or whether (i) isn’t there, you’ve got to deal with the expire language and I do not see that the formulaic incorpora… or reservation of State law has any bearing one way or the other on the significance of that distinction.

Bruce S. Rogow:

Justice Souter, Congress had the opportunity to make it specific that there will be no rescission in recoupment.

The AARP brief has in its appendix the four different bills, I think it was, that were offered to accomplish what Ocwen is now asking this Court.

Congress rejected that.

Congress did not include that language that made it clear that this right shall–

Antonin Scalia:

Did they take a vote on that, the whole Congress said we do not want these statutes?

Bruce S. Rogow:

–No, but by–

Antonin Scalia:

Just a committee, right?

Bruce S. Rogow:

–But by rejecting the bill, Justice Scalia, by rejecting the bill–

Antonin Scalia:

Did the whole Congress reject the bill?

Bruce S. Rogow:

–Well, in terms of how Congress voted, obviously the end result was (i)(3).

Antonin Scalia:

Those bills were never presented to the whole Congress, were they?

Bruce S. Rogow:

They did not come out of committee, but in this legislative process there has been no showing by Congress that this is what it intended, that this right shall expire.

I think it’s–

William H. Rehnquist:

But it says in so many words that it shall expire.

Bruce S. Rogow:

–It does for the affirmative right to rescind–

William H. Rehnquist:

It doesn’t say affirmative, Mr. Rogow.

You’ve been putting that word in front of rescission all during this argument and the statute simply doesn’t say it.

Bruce S. Rogow:

–Justice… Chief Justice Rehnquist, by talking about that right in that section they are dealing specifically with that affirmative right to rescind within 3 years.

I think it’s important to note that the lender controls everything here.

If the lender conforms to Federal law, then there is no potential for rescission.

Stephen G. Breyer:

Is the… I’m back with Justice Kennedy.

Stephen G. Breyer:

That is, this seems like such an odd legal animal, rescission in recoupment.

I don’t understand what it is, that… is there any other place it exists in the law?

My understanding is that if you give me $2,000… suppose you gave me $2,000, and I was supposed to give it back to you.

I never did, and you forgot about it.

20 years later, I sue you for $10,000 on something else, and even though there’s a statute of limitations you could say, wait, Breyer has my $2,000.

Deduct it from the 10.

That’s recoupment, isn’t it?

Bruce S. Rogow:

That is, Justice Breyer.

Stephen G. Breyer:

All right.

Well, by analogy that would here permit the borrower, the homeowner to deduct, when 20 years later they try to foreclose on the mortgage, the bank tries to get its money back, it would permit him to deduct however much he was hurt by a failure to disclose, but everybody concedes he gets that.

Now what he wants is something more.

He wants something he never gave me.

He wants me not to collect any interest over 20 years, so that doesn’t sound like anything to do with recoupment, and it’s something else.

It’s like a penalty or something.

So is there… if TILA never existed, if you look across all State law, is there any other instance you came across where something like that sounded as if it was part of recoupment?

It just doesn’t sound like recoupment.

Everybody’s saying, rescission in recoupment.

I know it’s written in a statute, but I want to know, is this like a normal legal animal, or is it something they invented out of TILA, or where did it ever come from?

Bruce S. Rogow:

I’m not aware of it anywhere else, Justice Breyer, but–

Stephen G. Breyer:

All right.

So if it’s nowhere else in the law, and if it starts out by saying, nothing in this subchapter shall, you know, have any effect on something called rescission and recoupment, then it sounds like, if nothing in this subchapter, then, forget it, it’s gone, because there is no such thing.

Bruce S. Rogow:

–Well, then I think those words would be meaningless, the (i)(3) language would be meaningless.

Stephen G. Breyer:

No, but it’s possible… you know, you go to Congress, people get all mixed up and somebody comes and tells them there’s something called rescission in recoupment under State law, and everybody says well, we don’t want to touch that.

I mean–

[Laughter]

Bruce S. Rogow:

Well, this was considered and it was rejected, and I think two points I want to make before I reserve the rest of my time is, is that not only do the lenders have the right to cure this defect, because they can cure it and therefore render them not liable in rescission in recoupment, but they can conform to the law.

And I think the beginning point of this is, this is a unique statute.

It is a consumer protection statute.

It’s to inform and project the consumer, and rescission is not a penalty.

It puts the parties back in their original position.

David H. Souter:

May I ask you just to comment on one thing before you sit down, Mr. Rogow?

It’s a point that I came across and I thought I answered it, and then it occurred to me, maybe I didn’t.

You’ve mentioned 1635(i)(3).

What I have in mind is the significance of 1635 (i)(1).

I could read it, but you probably know it.

Does that have any significance for your position?

Bruce S. Rogow:

No.

Those provisions in 1635(i) give the consumer a right to rescind within 3 years in certain conditions and the 1995 amendments actually limited the right to rescission.

This made clear that there was a right to rescind within those 3 years for those reasons.

A mortgage broker fee was not disclosed, those kinds of things.

David H. Souter:

But it’s referring to the right which occurs at the time of foreclosure.

Bruce S. Rogow:

Yes.

David H. Souter:

So it’s a defensive… I assume it’s a defensive right which functionally is being employed in the same way that you’re arguing the general rescission right should be employed.

Bruce S. Rogow:

It is, within 3 years, but that doesn’t address recoupment, and recoupment is addressed in (i)(3)–

David H. Souter:

Okay–

Bruce S. Rogow:

–and (i)(4) makes it–

Stephen G. Breyer:

–I have a technical question.

If they do rescind 30 years later, the borrower, does he actually have to tender the value of the money, or is it that the bank simply has a legal claim to the value of the principal?

Bruce S. Rogow:

–Well, there are equitable principles here, and the court could adjust the–

Stephen G. Breyer:

Well, when you say… in other words, is it possible that 30 years later the homeowner comes back and says, yes, you are entitled, bank, to my original principal, $100,000.

By the way, I’m in bankruptcy, and you don’t have any security.

Good luck.

I mean, has that happened?

Is that possible, in your interpretation that would happen?

Bruce S. Rogow:

–There is no record of that happening.

Stephen G. Breyer:

No, ever in the country?

I mean, I’m trying to figure out–

Bruce S. Rogow:

I’m not aware of any, Justice Breyer.

Stephen G. Breyer:

–So they’d actually have to have the $100,000 and give it back to the bank, otherwise they couldn’t do the rescission.

Bruce S. Rogow:

The rescission requires a give-and-take.

Antonin Scalia:

Is there any reason why a borrower would act within 3 years instead of just sitting back, once he knows there’s been a mistake in the original transaction, and waiting for foreclosure?

Meanwhile, he’s using the money interest-free.

Bruce S. Rogow:

Because if that were a strategic default, then under equitable recoupment principles and even, indeed, under the rescission principles, the court could take into consideration if there were some bad faith in the way the borrower had addressed this.

David H. Souter:

And I take it the court could also take into consideration the fact that there’s a provision in here that mere computational errors in fact do not support any rescission right at all.

I mean, one of the things that surprises me about this case is what is described as the error here sounds like somebody’s adding machine mistake to me, and I presume that if the bank comes forward and affirmatively shows that that’s the case, this whole discussion is academic, isn’t it?

Bruce S. Rogow:

You would only have the right to rescind if there have been material disclosure errors that the court found were in clear violation of TILA, yes, Justice Souter.

William H. Rehnquist:

Mr. Phillips, we’ll hear from you.

Carter G. Phillips:

Thank you, Mr. Chief Justice, and may it please the Court:

Given the presentation in the first half-an-hour I’m not sure I’m going to gild this lily at great length, but a couple of points seem to me to warrant attention at this stage.

First, Justice Breyer, in response to your question, the industry amicus brief talks about the problems that arise in the bankruptcy setting and the fact that there are lots of lenders who end up not being able to recover anywhere near the full amount of the outstanding loan in the rescission context, so that’s some evidence of–

Stephen G. Breyer:

Why would that be?

I mean, that’s… I’m trying to figure out legally why would that be?

If, in order to rescind, the homeowner has to tender back the principal of the loan, why would the bank not get the principal of the loan?

That’s what was confusing me.

Carter G. Phillips:

–As I under… because the principal of the loan is essentially an unsecured debt–

Stephen G. Breyer:

No, but tendering back, I take it, means like you have a certified check and you hand it to the bank, and–

Carter G. Phillips:

–Well, the question is going to be then, as a matter of equity, whether the tender-back rule has to be applied in the first instance or whether the bankruptcy protections ought to apply in the first instance, and I think a lower court’s probably divided with respect to that particular question–

Stephen G. Breyer:

–That’s what I found out.

It sounds to me this is an empirical question that should have an answer–

Carter G. Phillips:

–Well, we know in the Bothelo case–

Stephen G. Breyer:

–and it doesn’t sound to me as if people know, particularly.

Carter G. Phillips:

–Right.

But the Bothelo case was the one case in which that actually happened and they did, in fact, eliminate the tender-back requirement in its full measure.

That’s the only one I know about that’s cited in the briefs and that’s a bankruptcy case, Your Honor.

With respect to where their case stands at this point, we begin with the language of the statute and section 1635 says as plainly as it can that the right that the petitioners seek to assert here expired, and it expired in 1989, and they came in 1991 and they sought to raise it again.

And what they were able to do in 1991, that they were able to do specifically because of section 1640, is they were able to get actual compensatory damages and they were able to get statutory damages, in point of fact, even though the statute of limitations on violations of TILA had already run, and that’s because Congress was very careful in devising the remedial scheme that it adopted here.

It recognized that that was an equitable response that frankly tracked this Court’s decisions in Bull and Reiter v. Cooper and Western Pacific.

Congress recognized that that was equitable to allow the borrower under those circumstances to come in and to assert that particular right, and they received that, and the question which Justice O’Connor began the argument with I think is really the one that we have to focus on.

Under these circumstances, where you’ve received full recompense, what sense does it make for Congress to go further and ask you to grant a right of rescission, and the petitioners say that we have to find something in the statute that says you cannot have a right of rescission, and we submit to you that the more reasonable assessment of the equities of the relationship between the parties is, we ought to be looking in this statute for some evidence that a right of rescission in recoupment should exist under the circumstances of this case.

Stephen G. Breyer:

His argument I think was, look at the language.

Stephen G. Breyer:

It says nothing in this subsection affects a consumer’s right of rescission in recoupment under State law.

He says, that’s an odd legal animal.

The only thing he’s ever found that that exists is this kind of a case, so Congress must have had something in mind, and if they didn’t have this thing in mind, which distinguishes between affirmative rescissions and rescissions later on in recoupment, what could they have had in mind, so it’s either meaningless, or what he says.

That’s what I take–

Carter G. Phillips:

Justice Breyer, I can’t improve on your characterization of what probably happened in Congress, which is that somebody identified the possibility of a State law right in rescission and recoupment and the Congress quite rightly reacted negatively and said, wait a second, in this subsection we certainly don’t mean to withdraw any of those kinds of State remedies.

Remember, this is a statute that is very solicitous of State law in general, and all of these–

John Paul Stevens:

–Florida–

–Do you think there’s any possibility that Congress meant rescission or recoupment?

Rescission in recoupment just sounds crazy to me and it would–

Carter G. Phillips:

–Well, I–

John Paul Stevens:

–make perfect sense if it said rescission or recoupment.

Carter G. Phillips:

–Well, I think it would have made more sense if they had simply said State law rescission and recoupment.

Again, I think all they wanted to make clear of was that State law would be protected.

John Paul Stevens:

But is there such an animal in State law as rescission in recoupment?

Carter G. Phillips:

There is a reference to that language in one of the… actually, one of the earlier Florida cases, where… it’s not actually that language, but there is recoupment action, and they do talk about rescission, but you know, our footnote 6 in our brief goes to great lengths… we looked in vain for this to try to figure out where Congress came up with this particular animal and frankly couldn’t find it.

John Paul Stevens:

Nobody thought of the possibility of a scrivener’s error?

Carter G. Phillips:

Well, I’m always reluctant to press that as the basis for interpretation, Your Honor.

[Laughter]

Anthony M. Kennedy:

If it said or–

Thank you.

Carter G. Phillips:

[Laughter]

Anthony M. Kennedy:

–How would the case come out if it said or?

Carter G. Phillips:

Rescission or recoupment under State law?

It depends on whether State law applies to both.

You see, I think it’s clear–

Anthony M. Kennedy:

And what’s the answer to that?

Carter G. Phillips:

–Well, I still think that Congress would have meant for State law to apply to both, so it wouldn’t have made a difference.

John Paul Stevens:

But Mr. Phillips, as I understand your position, you’re just saying there’s no Federal right here, but I don’t think you take the position that if Florida said we’re going to treat even a trivial violation of TILA as a ground for State law rescission, you aren’t saying that it would be preempted–

Carter G. Phillips:

No, I’m not arguing it would be preempted, but I do think it’s important in that regard, a la Justice Scalia’s question about a remand in this case, is that the first half of the Florida supreme court’s opinion analyzes the Federal statutory issue.

The second half of it analyzes it as a matter of State recoupment law and conclusively says that in our judgment this kind of a statute is not the kind of a statute in which we would exercise recoupment and therefore, as a matter of State law, there’s no basis for recovery.

Carter G. Phillips:

That’s over and above the fact that they’ve never asked for recovery under State law at any time.

John Paul Stevens:

–Well, that’s the other point I was going to ask is, when did their claim for a State law recoupment first assert itself?

I didn’t find it in the early opinion.

Carter G. Phillips:

It never asserted itself, to this day.

I mean, there is a single sentence in the reply brief in which they make reference to seeking rescission under State law.

There’s no support for it in the citations in the reply brief and there’s nothing in the record and actually I heard counsel for petitioner today to effectively concede that the complaint clearly says nothing about State law, and nothing else arose throughout this litigation in–

Sandra Day O’Connor:

But you think that nonetheless, as you read the opinion of the Florida supreme court, it rejected any State law recovery, right?

Carter G. Phillips:

–Absolutely.

Absolutely, because at the end of the–

Sandra Day O’Connor:

Even though it wasn’t requested.

Carter G. Phillips:

–That’s correct, Justice O’Connor, because the question that was certified to the Florida supreme court was whether or not there was this kind of a right under State law, and if you look at the joint appendix on 164 to 165, the last line of 164 says, after analyzing all of the traditional grounds for statutory interpretation as to why this provision doesn’t grant a Federal right it says, but that does not end our inquiry, and then it turns, in Florida, and I take the rest of that analysis really–

Sandra Day O’Connor:

And you don’t think that the Florida court thought that it was simply not at liberty to confer some State law right of rescission on the theory that TILA had preempted State law.

Carter G. Phillips:

–I don’t see anything in the Court’s opinion that remotely suggested that to be the case, Justice O’Connor.

William H. Rehnquist:

Well, the question presented here is, may an action for the statutory right of rescission provided by TILA be revived as a defense in recoupment beyond the 3-year limit on the right of rescission set forth in section 13… 1635(f).

I’m not sure that even includes that question.

Carter G. Phillips:

Well, I… no question about it, Mr. Chief Justice, it doesn’t include that question, and–

John Paul Stevens:

That certainly wasn’t… that wasn’t the question framed in the petition.

Carter G. Phillips:

–I’m sorry.

John Paul Stevens:

We rewrote the question.

Carter G. Phillips:

Right.

Yes, Justice Stevens.

John Paul Stevens:

So that’s not what they present… yes.

Carter G. Phillips:

Right, but the bottom line is, in terms of I think what is before this Court, is simply a question of Federal law and I think, based on all that’s happened today, the question… the Federal question of law is unmistakable.

That is, the right expired.

There is nothing in this statute that remotely revives that right and certainly nothing in (i)(3), which as I think we’ve discussed now at sufficient length, which simply retains certain protection for State law.

It was a peculiar way, if all you’re trying to do is… if what you were really trying to do was to revive a Federal right that you categorically declare to be expired, this is not the way you’d do it, and therefore I don’t think that’s a fair interpretation of that language of the statute.

If the Court has no further questions, I’ll waive back the rest of my time.

William H. Rehnquist:

Thank you, Mr. Phillips.

Mr. Rogow, you have 1 minute remaining.

Bruce S. Rogow:

Several things.

Bruce S. Rogow:

The Florida supreme court opinion clearly is premised on its view that under 1635 there is no right to rescission, and that informed its view of State law also, and that’s at page 171 of the joint appendix.

The courts that have looked at this… Dawes, Colorado, Massachusetts, New York, New Jersey, Illinois… have all decided that there is a right to rescission in recoupment consistent with the Federal TILA right that could be asserted affirmatively within the first 3 years.

This Court has talked generally about recoupment.

It is an equitable remedy.

There is nothing inequitable here.

This is a consumer protection statute, and the lender controls both at the outset the duty to conform to the law and throughout the life of the loan the ability to cure the defect and, in this situation, the… without clear congressional language saying there shall be no recoupment, there is recoupment in rescission, and Florida permits rescission in recoupment and it should have permitted it in this case under Federal law.

William H. Rehnquist:

Thank you, Mr. Rogow.

The case is submitted.