TILA Rescission Claim May Be Precluded Based on Res Judicata
Recently, the Maryland Court of Special Appeals, Maryland’s intermediate appellate court, considered issues related to the right of rescission under the federal Truth in Lending Act (TILA).
Essentially, the borrowers argued that giving a TILA notice of rescission immediately makes the lien on their property null and void, and because the lien on the property is null and void, the doctrine of res judicata cannot preclude the rescission.
In its decision issued August 30, 2017, the Court of Special Appeals disagreed.
Under a theory of res judicata, a claim will be precluded (not allowed) if: (1) the parties in the current litigation are the same or in privity with the parties to prior litigation; (2) the claim presented in the current litigation is identical or substantially identical to a claim litigated or that could have been litigated in the prior litigation; and (3) there was a final judgment on the merits in the prior litigation.
The Court of Special Appeals observed that in December 2008, the borrowers filed a lawsuit claiming, among other issues, that TILA was violated and that the lien on their property was unenforceable.
While that lawsuit was pending, the borrowers sent letters in March 2009 and August 2009 stating that they were rescinding the loans secured by their property. That lawsuit was dismissed with prejudice in April 2010 and was not appealed.
The borrowers pursued no fewer than tw additional lawsuits and defended no fewer than two foreclosure actions over the next seven years, all relating to the same loans and the same property, claiming in some of these actions that the letters they sent in 2009 had the effect of rescinding the loans and making the lien on their property null and void.
In its August 30, 2017 decision, the Court of Special Appeals agreed with the lower court that, based on the first lawsuit (and perhaps based on claims in the subsequent actions), all of the elements for applying the doctrine of res judicata to the TILA rescission claim existed. The Court concluded that “[a]ll of the TILA claims the [borrowers] attempted to raise in the current case clearly ‘could have been litigated in the’ December 30, 2008, suit” and “under the principles applicable to claim preclusion, . . . [the borrowers were] required to assert all claims that ‘could have been litigated’ in a proceeding once they voluntarily initiated suit on December 30, 2008.”
The Court rejected the borrowers’ contention that the Supreme Court’s decision in Jesinoski et al. v. Countrywide Home Loans, Inc. et al. established that regardless of whether they had a legitimate basis for rescission, the lien against their property became void as soon as they gave notice of their demand for rescission in 2009.
The borrowers further contended that because under Jesinoski there is no obligation to bring a lawsuit in order to rescind a loan, the claim of rescission cannot be subject to the preclusive effect of res judicata. The Court found that nothing in Jesinoski alters the common law requirement that once litigation is initiated by a party, the party must assert all claims that pertain to the particular subject matter of that litigation to ensure courts do not waste time adjudicating matters that have already been decided or could have been decided fully and fairly.
The borrowers filed a Petition for Writ of Certiorari with the Maryland Court of Appeals on October 4, 2017. Stay tuned and please contact Margie Corwin if you would like to discuss the impact of this decision.