Opinion
No. C99-160 MJM
June 21, 2000
ORDER
I.
Plaintiff, Ronald Schumacher ("Schumacher"), filed the present lawsuit against Defendant, ContiMortgage Corporation ("ContiMortgage"), for alleged violations of the Truth in Lending Act, 15 U.S.C. § 1601, et. seq. ("TILA"). The TILA, and its implementing regulations, require that prior to the consummation of a loan, the creditor make certain disclosures to the debtor and give the debtor notice of his or her right to rescind the transaction. Schumacher alleges in his complaint that ContiMortgage: (1) failed to deliver to Schumacher notice of his right to rescind the transaction in accordance with § 1635(a) of the TILA and 15 C.F.R. § 226.23; (2) failed to deliver all "material" disclosures required by the TILA and its accompanying regulations; and (3) failed to make certain additional disclosures required by the TILA and its accompanying regulations. (Doc. 1)
Prior to filing this complaint, Schumacher filed a Voluntary Petition under Chapter 7 of the Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Iowa. The United States Bankruptcy Court entered an order discharging Schumacher from bankruptcy on July 16, 1999.
Stemming from Schumacher's bankruptcy filing was an action filed by ContiMortgage in the Iowa District Court for Iowa County, on January 4, 2000, requesting foreclosure of the mortgage lien on Schumacher's homestead. There are two motions presently before the Court. First, Schumacher seeks a preliminary injunction enjoining ContiMortgage from "instituting, prosecuting or maintaining a foreclosure action regarding the subject real estate, or engaging in any other acts to deprive [Schumacher] of the ownership of his homestead" until the resolution of the TILA claim. (Doc. 9) Second, ContiMortgage seeks dismissal of Schumacher's TILA claim. (Doc. 6).
II.
When determining whether a party is entitled to a preliminary injunction, a court must consider the four well established factors of Dataphase Systems, Inc. v. CL Systems, Inc., 640 F.2d 109, 113 (8th Cir. 1981) (en banc). Those factors, now known as the Dataphase factors, include:
(1) The probability of success on the merits;
(2) The threat of irreparable harm to the movant;
(3) The balance between this harm and the injury that granting the injunction will inflict on other interested parties; and
(4) Whether the issuance of an injunction is in the public interest.United Industries Corp., v. Clorox Co., 140 F.3d 1175, 1179 (8th Cir. 1998). "No single factor in itself is dispositive; rather, each factor must be considered to determine whether the balance of equities weighs toward granting the injunction." Id. "[T]he inquiry is an equitable one, requiring that [the court] consider `whether the balance of equities so favors the movant that justice requires the court to intervene to preserve the status quo until the merits are determined.'" Glenwood Bridge, Inc. v. Minneapolis, 940 F.2d 367, 370 (8th Cir. 1991), quoting, Dataphase, 640 F.2d at 113 (footnote omitted). The burden, however, on the movant is a heavy one. See United Industries, 140 F.3d at 1179. "Caution must therefore be exercised in a court's deliberation, and `the essential inquiry in weighing the propriety of issuing a preliminary injunction is whether the balance of other factors tips decidedly toward the movant and the movant has also raised questions so serious and difficult as to call for more deliberate investigation.'" Id., quoting General Mills, Inc. v. Kellogg Co., 824 F.2d 622, 624-25 (8th Cir. 1987). With this framework in mind, the Court turns to the present motion, considering each factor seriatim.
A.
The Court begins with Schumacher's probability of success on the merits. In its resistence to Schumacher's motion for preliminary injunction ContiMortgage gives three reasons why Schumacher is unlikely to succeed on the merits. First, ContiMortgage argues Schumacher lacks standing to bring any causes of action related to his property because such causes of action are exclusively reserved for the Bankruptcy Trustee (the basis of ContiMortgage's Motion to Dismiss). Secondly, ContiMortgage contends the evidence does not support his contention that ContiMortgage did not comply with the disclosure requirements of the TILA. Finally, ContiMortgage argues that the relief Schumacher seeks is prohibited as a matter of law.
With regards to ContiMortgage's first argument, in an Order dated February 25, 2000, the Court denied ContiMortgage's Motion to Dismiss as it relates to Schumacher's ability to seek recission of the mortgage, thereby rejecting the argument that he lacks standing to do so. (Doc. 13). Additionally, Schumacher has since moved for, and the Court has granted, the joinder of the Bankruptcy Trustee as a party plaintiff. (Doc. 22). ContiMortgage's standing argument is therefore moot with regards to Schumacher's pursuit of his civil liability claims asserted pursuant to 15 U.S.C. § 1640(a).
In its February Order the Court left open whether Schumacher's claim for statutory penalties and attorney's fees should be dismissed. The reasoning here applies equally to the issue remaining in ContiMortgage's Motion to Dismiss. That is, the addition of the Bankruptcy Trustee as the real party in interest renders the issue of standing moot and ContiMortgage's Motion to Dismiss is therefore denied.
The Court therefore moves to ContiMortgage's second line of argument — that the evidence cannot support a finding that a violation of the TILA's disclosure requirements occurred. Schumacher alleges in his complaint that neither he nor his wife, who is now deceased, received the proper notice of his right to rescind. Likewise, Schumacher alleges ContiMortgage did not deliver all the material disclosures required by the TILA. Finally, Schumacher alleges that ContiMortgage did not make certain additional disclosures he claims are required by the TILA.
In response, ContiMortgage produced the following documents: (1) "RECISSION NOTICE/RIGHT TO CANCEL" document detailing one's right to cancel the transaction, (2) a Federal Truth and Lending Disclosure Statement itemizing the amount financed, and (3) "HOEPA Acknowledgment" issued pursuant to the Home Ownership and Equity Protection Act stating the obtainment of the present loan means the lender will have the mortgage of your loan and failure to pay could result in the loss of your home. Each of the aforementioned documents bear Schumacher's signature. These signed documents create a rebuttable presumption that ContiMortgage complied with the disclosure requirements of the TILA. See 15 U.S.C. § 1635(c), ("Notwithstanding any rule of evidence, written acknowledgment of receipt of any disclosures required under this subchapter by a person to whom information, forms, and a statement is required to be given pursuant to this section does no more than create a rebuttable presumption of delivery thereof.")
Schumacher contends, however, that he was hurried into signing the papers without reading their content and was not told of his right to rescind. He maintains he signed the papers without having read them on the presupposition that the paperwork would later be sent to the Schumachers by mail and he could assess their content then. According to Schumacher, he never received said papers in the mail.
ContiMortgage submits the affidavit of Carol Bonello, the custodian of records maintained by ContiMortgage. While she testifies to the accuracy of the signed documents in question, she sheds no light on whether those documents were indeed mailed to the Schumacher's or whether the Schumacher's were explained the import of said documents.
Courts have consistently held that a debtor's testimony that he/she did not receive the TILA disclosure statement is sufficient to rebut the presumption that he/she did. See In re Williams, 232 B.R. 629, 641 (Bankr.E.D.Pa. 1999) (finding debtor's testimony of nonreceipt of TILA disclosure statement sufficient to rebut presumption); Stone v. Mehlberg, 728 F. Supp. 1341, 1354 (W.D.Mich. 1990) (finding affidavit testimony rebutted presumption and failure of lender to provide additional evidence of receipt entitled debtor to judgment as a matter of law); Pinder v. Lomas Nettleton Co., 83 B.R. 905, 913 (Bankr.E.D.Pa. 1988) (finding testimony by debtor that she received a "stack of papers" but could not find TILA disclosure statement among them, along with similar testimony from her attorney, was sufficient to rebut presumption of receipt); Jenkins v. Landmark Mortgage Corp., 696 F. Supp. 1089, 1093 (W.D.Va. 1988) (finding that testimony that debtor did not leave attorney's office with disclosure statement and did not receive a form she could actually keep until much later was sufficient to rebut presumption); Cole v. J.L. Lovett, 672 F. Supp. 947, 952 (S.D.Miss.), aff'd, 833 F.2d 1008 (5th Cir. 1987) (finding debtors' testimony that they did not receive TILA disclosure statement and did not know they could rescind contract until they consulted with attorney was sufficient to rebut presumption and found debtors were not informed of their right to rescind). This Court is not inclined to diverge from this line of precedent and concludes Schumacher has successfully created a question of fact as to whether he received the disclosure statements at issue in the present action.
ContiMortgage's final and most persuasive argument is that Schumacher is not entitled to a preliminary injunction because Schumacher's request for relief fails as a matter of law. Essentially Schumacher maintains that upon proving ContiMortgage failed to comply with the disclosure requirements of the TILA, he is entitled to both the proceeds of the loan, as well as the property, free and clear of ContiMortgage's interest. Such an outcome is not supported by the TILA or case law interpreting the Act.
The TILA provides where rescission is warranted "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." 15 U.S.C. § 1635(b). The Act goes on to state that "[u]pon 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." Id.
The Eighth Circuit has found an inherent power of the court to condition rescission. FDIC v. Hughes Dev. Con., 938 F.2d 889 (8th Cir. 1991), cert. den. 502 U.S. 1099 (1992). In Hughes the court summarily held ". . . . however, the Act gives courts discretion to devise other procedures, 15 U.S.C. § 1635(b), including conditioning rescissions upon the debtor's prior return of the principal." Id. at 890. Indeed, many courts have consistently conditioned the return of monies to the debtor upon the return of the property. See Rudisell v. Fifth Third Bank, 622 F.2d 243, 254 (6th Cir. 1980) (stating "since rescission is an equitable remedy, the court may condition the return of monies to the debtor upon the return of property to the creditor"); Powers v. Sims and Levin, 542 F.2d 1216, 1221 (4th Cir. 1976) (stating "[b]ut surely the Congress did not intend to require a lender to relinquish its security interest when it is now known that the borrowers did not intend and were not prepared to tender restitution of the funds expended by the lender in discharging the prior obligations of the borrowers."); In re Cox, 162 B.R. 191, 197 (Bankr.C.D.Il. 1993) (finding where the "debtors are not proposing to repay the loan, they may not rescind the loan"); Rowland v. Magna Millikin Bank of Decatur, 812 F. Supp. 875, 880-81 (C.D. Il. 1992) (rejecting argument that bankruptcy relieves movant from tendering value of property as condition of rescission); See generally, In re Piercy, 18 B.R. 1004, 1008 (Bankr.W.D.Ken. 1982) (finding where mutual performance after rescission cannot be assured, creditor is not prevented from offsetting what debtors owe to it); But see Rowland v. Novus Financial Corp., 949 F. Supp. 1447, 1458 (D. Haw. 1996) (finding fact that plaintiff's assets have passed to bankruptcy estate does not conclusively bar right to rescind; however, court could condition rescission on plaintiff's tender of funds to defendant).
Schumacher cites Celona v. Equitable Nat'l Bank, 98 B.R. 705 (Bankr.E.D.Pa. 1989) for the proposition that this Court can grant rescission without conditioning the right on the return of the loan proceeds. This Court joins other courts in rejecting the reasoning used by the Celona court and adopts instead the reasoning of the courts previously cited which conditioned the right to rescind on the return of the monies borrowed. "[W]hen rescission is attempted under circumstances which would deprive the lender of its legal due" as is the case in the present suit "the attempted rescission will not be judicially enforced unless it is so conditioned that the lender will be assured of receiving its legal due." Brown v. National Permanent Federal Savings Loan Assn., 683 F.2d 444, 448 (D.C. Cir. 1982). This reasoning is premised, in part, on the fact that the object of rescission is to put the parties back in their original positions prior to the contract. See Williams v. Homestake Mortgage Co. 968 F.2d 1137, 1142 (11th Cir. 1992). Instead, Schumacher seeks to unfairly benefit from the rescission of the contract by being relieved of paying off his loan, as well as keeping his homestead upon which the loan was garnered. This is an untenable position that would deprive ContiMortgage of what it is legally due.
See e.g. Lynch, 170 B.R. 26, 30 (Bankr.D.N.H. 1994); In re Cox, 162 B.R. at 196-97; In re Foster, 105 B.R. 67 (Bankr.N.D.Okla. 1989).
B.
The remaining three factors of the Dataphase test do little to save Schumacher's motion for a preliminary injunction. With regards to the irreparable harm factor, Schumacher contends that if the Court were to deny the preliminary injunction and thereby allow ContiMortgage to prosecute its foreclosure action, he is threatened with the loss of his homestead. ContiMortgage, on the other hand, argues it would suffer continued harm with the grant of an injunction because Schumacher, having failed to make payments on his loan since January of 1999, would continue to fail to do so. Thus, ContiMortgage contends, it would continue to incur carrying costs, including interest, taxes and insurance.
The Court is aware that the loss of one's home is indeed a significant deprivation. However, the Court is likely to condition the rescission of the loan on Schumacher's ability to return the funds borrowed; and in the event he can not tender those funds, the interest in his homestead would remain with ContiMortgage. Therefore, it appears the harm he would suffer — the loss of his home — is likely an inevitable harm and therefore does not help to tip the balance of equities in his favor. See generally United Industries, 140 F.3d at 1184, (finding where harm is highly speculative, balance of harm does not tip in movant's favor).
The Court notes that Schumacher's "failure to demonstrate irreparable harm is, by itself, a sufficient ground upon which to deny a preliminary injunction." United Industries, 140 F.3d at 1183.
Finally, as to the public interest factor, the Court agrees that the public has a significant interest in the effective enforcement of the TILA. However, "absent a more substantial showing that [Schumacher] has a viable claim, this factor likewise does not tilt the equities toward granting preliminary injunctive relief." See id.
III.
Alternatively, ContiMortgage requests that the Court abstain from hearing Schumacher's TILA claim until the resolution of the state foreclosure proceedings. "Abstention from the exercise of federal jurisdiction is the exception, not the rule. The doctrine of abstention, under which a District Court may decline to exercise or postpone the exercise of its jurisdiction, is an extraordinary and narrow exception to the duty of a District Court to adjudicate a controversy properly before it." Colorado River Water Conservation Dist. V. United States, 424 U.S. 800, 813 (1976) (internal quotations omitted). There are four types of abstention; (1) Pullman abstention where a federal court abstains when a federal issue can be avoided by answering questions of state law ; (2) Burford abstention where a federal court abstains to avoid conflict with the state in the administration of its own affairs; (3) Younger abstention where a federal court abstains to allow states to resolve unsettled questions of state law; and (4) Colorado River abstention where a federal court abstains to avoid duplicative litigation. While ContiMortgage does not specifically state which abstention doctrine it believes applies to this case, it cites to both Younger and Colorado River to support its request for abstention. The Court will address each in turn.
Initially, the Court points out that ContiMortgage is raising the issue of abstention for the first time in a supplemental reply brief, which, under normal circumstances, precludes the Court's review. See State Automobile Mutual Ins., Co. v. Mitchell, 179 F.3d 590, 591 (8th Cir 1999) (stating courts "generally do not address issues and arguments asserted for the first time in a reply brief.") However, because the issue of abstention is premised on important concepts of comity and respect for state judicial proceedings, and implicates the Court's exercise of jurisdiction, the Court will consider whether abstention is warranted in the present suit.
See Texas v. Pullman, 312 U.S. 496 (1941); Burford v. Sun Oil Co., 319 U.S. 315 (1943); Younger v. Harris, 401 U.S. 37 (1971); Colorado River, 424 U.S. 800.
The Younger abstention doctrine, which originally applied only to criminal proceedings, is applied to state civil proceedings when important state interests are involved. See Middlesex County Ethics Commission v. Garden State Bar Assoc., 457 U.S. 423, 432 (1982). The inquiry is threefold: (1) is there an on going state proceeding, (2) is there a sufficient state interest to warrant abstention, (3) and is there an adequate opportunity to raise constitutional challenges in state court? Id.
The present case involves an ongoing state foreclosure proceeding where there are no federal constitutional challenges to the state proceeding. Schumacher has however, alleged a TILA violation, central to the pending federal suit, as an affirmative defense to the state foreclosure proceedings. For this reason, ContiMortgage contends this Court should abstain from hearing Schumacher's TILA claim until the conclusion of the state court proceedings. ContiMortgage maintains that the State of Iowa has sufficient enough interest in Schumacher's foreclosure proceeding to warrant abstention. This Court disagrees.
The state foreclosure proceedings are purely private proceedings. While the outcome of this case could have an impact on the state court proceedings, that in and of itself is not enough to warrant federal abstention. The present federal suit does not directly attack the validity of the state foreclosure proceeding, but rather involves a claim of rescission that could ultimately affect the final distribution of the bankruptcy estate. This is not a state interest sufficient enough to warrant abstention under Younger. See Rowland, 949 F. Supp. at 1456-7, Trimmel v. General Elec. Credit. Corp., 555 F. Supp. 264, 271 (D.Conn. 1983).
The Colorado River abstention doctrine justifies abstention in "exceptional circumstances." Colorado River, 424 U.S. at 818-819; Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 16 (1983). The first factor to consider in determining whether exceptional circumstances exist is "whether there is a res over which one court has established jurisdiction." Federated Rural Electric Ins. Corp. v. Arkansas Electric Cooperatives, Inc., 48 F.3d 294, 297 (8th Cir. 1995). This factor is dispositive. See Federal Deposit Insurance Corp. v. Four Star Holding Co., 178 F.3d 97, 102 (2d Cir. 1999); 40235 Washington St. Corp. v. Lusardi, 976 F.2d 587, 589 (9th Cir. 1992) (per curiam). Because a TILA claim is not considered an in rem proceeding, the Colorado River abstention doctrine is not applicable. See Rowland, 949 F. Supp. at 1457.
ORDER
For the reasons stated herein, Ronald Schumacher's Motion for a Preliminary Injunction is DENIED.
ContiMortgage's Motion to Dismiss is DENIED.
Done and so ordered this 21st day of June, 2000.
Judge Michael J. Melloy United States District Court for the Northern District of Iowa