to accept the rescission demand, whereas Sheehy settled out of court. Sometime in July, 1983, after reexamining the records of the Aquino transaction, Public acknowledged Aquino's right to rescind and cancelled the mortgage on her home.
Section 125(b) of the TILA required Public to "take any action necessary or appropriate to reflect the termination of any security interest created under the transaction", and also required Public to return any money or property paid by Aquino in connection with the transaction, both within twenty days after receiving Aquino's notice of rescission. 15 U.S.C. § 1635(b). Public, however, waited approximately five months before taking any action to reflect the termination of Aquino's mortgage, and has yet to return its security interest in Aquino's household goods or any of the money paid by her in connection with the transaction.
II. Plaintiff's Right to Rescind
There is no doubt that Public is correct in acknowledging Aquino's right to rescind. Whenever a consumer credit transaction results in a creditor acquiring a security interest in an obligor's home, § 1635(a) gives the obligor "the right to rescind the transaction until midnight of the third business day following the consummation of the transaction or the delivery of the disclosures required under this section and all other material disclosures required under this part, whichever is later . . ." 15 U.S.C. § 1635(a) (1976) (amended in other respects effective Oct. 1, 1982). Moreover, § 1635(a) requires the creditor to disclose this right to rescind in accordance with regulations promulgated by the Federal Reserve Board. Id. According to the Board's regulations, creditors are required to provide customers with a notice of their right to rescind that specifies the precise date upon which the three day rescission period expires. 12 C.F.R. 226.9(b) (1982) (replaced effective Oct. 1, 1982). Although Public provided the proper notice form, it failed to specify the date upon which the three day period expired. Since Public failed to make this required disclosure, Aquino had the right to rescind the transaction.
III. The Validity of Plaintiff's Rescission Notice and of Defendant's Response
Public, however, argues that its tardy acknowledgement of plaintiff's right to rescind should not be construed as a violation of the TILA. After receiving plaintiff's notice of rescission, Public undertook a "thorough review" of its records but failed to discover any disclosure violation which would have justified rescission. When Public discovered the defective notice it had provided Aquino, it acted promptly to fulfill its obligations under § 1635(b). Since Aquino did not specify any particular disclosure violation which she believed entitled her to rescind the transaction, Public argues that it would be inequitable to penalize it for failing to ascertain the validity of her rescission notice within the twenty day period provided by § 1635(b).
Neither the law nor the facts of this case support Public's position. Section 1635(a) only requires the obligor to notify the creditor of his or her intention to rescind in accordance with regulations promulgated by the Board. See § 1635(a). If Congress had wished either to place an additional burden on the obligor or to grant the creditor additional time to respond to this type of rescission notice, it would have done so. Congress believed that § 1635(b)'s initial ten day response period was too short for creditors to ascertain the validity of a rescission notice, and that is one of the reasons why it increased the response period to twenty days. S. REP. NO. 96-368, 96th Cong., 2d Sess. 29 reprinted in 1980 U.S. CODE CONG. & AD. NEWS 236, 264. I do not have the authority to second guess Congress and increase the response period further. Similarly, the Board's regulations simply require the customer to notify the creditor of his or her intention to rescind the transaction. See 12 C.F.R. § 226.23(a)(2)(1983). The only court to consider this issue held that a notice of rescission was effective even though it failed to notify the creditor of the alleged grounds upon which the rescission was based. Jackson v. Universal Guardian Consumer Discount Co., 15 Clearinghouse Rev. 863 (C.A. No. 80-1191, M.D. Pa. Oct. 27, 1981).
Public's equitable argument is also undercut by its complete lack of initiative in seeking to determine its rights and obligations under the TILA. For no apparent reason, Public failed to contact plaintiff's counsel and inquire into the alleged basis of her notice of rescission. Although aware of the twenty day deadline, Public also failed to petition the court for a declaration of its rights and obligations under the TILA. A party's appeal to the court's conscience to excuse its delay in fulfilling statutory obligations must fall upon deaf ears when that party failed to take obvious steps to fulfill those obligations in a timely fashion.
Public also argues that Aquino's notice of rescission constituted an anticipatory breach of her obligations under the TILA, thereby relieving Public of its obligation to perform.
Public acknowledges that upon notice of rescission § 1635(b) requires the creditor to return to the obligor "any money or property given as earnest money, down payment, or otherwise," but notes that upon performance of its obligations § 1635(b) then requires the obligor to tender to the creditor any property the creditor has delivered to the obligor. According to Public, Aquino would therefore be required to return the $5,000 loan.
Aquino, however, in her notice of rescission, implied that she would not comply with Public's interpretation of § 1635(b). She stated that her only obligation under § 1635(b) was to return the car she had received in the underlying transaction. Since Public had already repossessed the car, she felt that her obligations under § 1635(b) were satisfied.
In support of its position, Public points to Powers v. Sims and Levin, 542 F.2d 1216 (4th Cir. 1976), where a divided panel of the Fourth Circuit held "that when rescission is attempted under circumstances which would deprive the lender of its legal due, the attempted rescission will not be judicially enforced unless it is so conditioned that the lender will be assured of receiving its legal due." Id. at 1222. More specifically, the court held that a creditor could ignore its obligations under § 1635(b) when it is no longer assured of receiving its legal due from debtors who have announced their intention to make only partial restitution. Id. at 1221.
Rescission is an equitable doctrine, and there is nothing in the statutory provision of the right of rescission or in § 1635(b)'s provision of the procedural steps in effecting the right of rescission which limits the power of a court of equity to circumscribe the right of rescission to avoid the perpetration of stark inequity . . . .
Several courts of appeals have agreed with "the gist" of the Powers case and held that "although the right to rescind is statutorily granted [by the TILA], it remains an equitable doctrine subject to equitable considerations." Brown v. Nat. Permanent Fed. Sav. & Loan Ass'n, 221 U.S. App. D.C. 125, 683 F.2d 444, 447-48 (D.C. Cir. 1982) (cases cited therein). When equity demands it, a rescission may be conditioned upon the return of property by the obligor. Id. at 447-48.
Equity also permits a creditor to offset the amount owed to it by an obligor pursuant to § 1635(b), rather than tendering those sums and awaiting a court's conditioning of rescission upon the return of property by the obligor.
Nothing in section 1635(b) prevents the creditor from offsetting the value owed to it by the obligor from the sum it initially tenders to the obligor. Such an arrangement prevents a perfunctory exchange of funds and protects the lender from a dissipation of the money while it is in the hands of the obligor.
Harris v. Tower Loan of Mississippi, Inc., 609 F.2d 120, 123 (5th Cir.), cert. denied, 449 U.S. 826, 66 L. Ed. 2d 30, 101 S. Ct. 89 (1980).
However, courts in their effort to insure a just result should not forget that the TILA "was passed primarily to aid the unsophisticated consumer," Thomka v. A.Z. Chevrolet, Inc., 619 F.2d 246, 248 (3d Cir. 1980), and that "courts have consistently recognized [that] the act is intended to balance scales thought to be weighed in favor of lenders and is thus to be liberally construed in the favor of borrowers." Bizier v. Globe Financial Services, Inc., 654 F.2d 1, 3 (1st Cir. 1981) (cases cited therein).
Upon notice of rescission, § 1635(b) clearly places the burden of first performance on the creditor, the party who has violated the law. Under most circumstances a creditor is not permitted "to refuse to perform unless or until the obligor tenders payment." Harris v. Tower Loan of Mississippi, Inc., supra, at 123. Only when it is necessary to prevent a "stark inequity" or to guarantee a creditor its "legal due," should a creditor be allowed to ignore its obligations under § 1635(b).
When offsetting by a creditor will clearly protect its legal due, a creditor will not be permitted to ignore its obligations under the TILA, even if an obligor has made a technical error in demanding rescission.
If a creditor feels uncomfortable about its ability to calculate properly the offset, it is free to petition the court within the twenty day statutory period to determine the rights and obligations of the parties under § 1635(b).
Public, however, chose to ignore its obligations under the TILA for more than four months. It failed to calculate an offset or petition the court for a declaration of its rights and obligations. When it finally decided to calculate the difference between what it owed plaintiff and what she would have owed Public if it had performed its obligations under § 1635(b), it properly concluded that its security interest in Aquino's home was unnecessary to protect its legal due.
I therefore hold that Public's failure to take steps "necessary or appropriate to reflect the termination" of its security interest in plaintiff's home within the twenty day period prescribed by statute, constituted a violation of § 1635(b).
IV. Statutory Damages and Attorney's Fees
Section 130(a) of the TILA clearly states that any creditor who violates § 1635(b) is liable for statutory damages and attorney's fees.
Except as otherwise provided in this section, any creditor who fails to comply with any requirement imposed under this part, including any requirement under section 1635 of this title, . . . with respect to any person is liable to such person in an amount equal to the sum of --
. . . .