Borrowers who rescind their loans pursuant to the Truth in Lending Act (TILA) must return to the creditor what they borrowed. But a July 16, 2014 ruling by the Court of Appeals for the Ninth Circuit in Merritt v. Countrywide Financial Corp. makes it more difficult for lenders to win early dismissal when borrowers cannot tender the money they borrowed.
TILA specifies that a borrower need not tender until after the creditor performs its rescission obligations, but allows the court to alter the procedure (we recently discussed how the Seventh Circuit upheld a decision that altered the creditor’s rescission obligations). 15 U.S.C. § 1635(b). Many district courts thus required borrowers seeking rescission to allege in their complaints that they could tender the outstanding loan balance.
That’s what happened in Merritt. The lawsuit stemmed from a rescission request made by David and Salma Merritt to their lender almost three years after receiving a home equity line of credit. The lender denied the request, and the Merritts sued seeking rescission under TILA. The district court dismissed the Meritts’ TILA rescission claim because their complaint did not “allege that they tendered the Home Equity Line of Credit or its reasonable value to [the lender] when they sought rescission.”
On appeal, the Ninth Circuit reversed the dismissal, ruling that district courts may not “require that plaintiffs plead ability to tender in their complaint.”
The Court acknowledged that district courts can ultimately condition rescission on a borrower’s ability to tender. After all, one goal of rescission “is to return the parties most nearly to the position they held prior to entering into the transaction,” as the Court noted. But the Court ruled that, to determine whether and when tender is required, district courts must “evaluate equitable considerations” based on the evidence, which is premature on a motion to dismiss. As a result, the Court held that “plaintiffs can state a claim for rescission under TILA without pleading that they have tendered, or that they have the ability to tender, the value of their loan.”
Although not mentioned in the Merritt opinion, an earlier unpublished Ninth Circuit decision took the opposite view. In Hogan v. Northwester Trust Services, the Court ruled that a “district court properly dismissed appellants’ TILA claim seeking rescission because appellants did not allege the ability to tender the proceeds of the loan.” But that was a non-precedential decision, whereas Merritt was designated for publication.