Some 18 months into the economic recession that originated in the subprime mortgage market, homeowners facing foreclosure have used every tactic available to them to save their homes. Recently, the United States Court of Appeals for the 11th Circuit handed a victory to mortgage lenders and servicers seeking foreclosure in state court, only to face a homeowner subsequently trying in federal court to rescind the defaulted mortgage loan for Truth in Lending Act violations.
The litigation in Parker v. Potter began when Gary Parker refinanced the mortgage on his home through Money Consultants, Inc. At closing, Parker signed various documents as “Gary K. Parker, a single man.” Money Consultants then assigned the mortgage and note to Nancy Potter, an unsophisticated mortgage creditor. Gary Parker received all proper Truth in Lending Act disclosures at closing, including two copies of the right to cancel notice required for all nonpurchase money transactions secured by the borrower’s principal dwelling. As further evidence that Gary Parker was a single man at the time of closing, he submitted a loan application indicating that he was unmarried. However, Parker actually had a wife – Yolanda Parker – at the time he refinanced the loan.
Three months after the closing, Potter, the assignee, learned of Yolanda’s existence. Potter asked Yolanda to sign the mortgage, and Yolanda complied. At the time she signed the mortgage, Gary alone held title to the property. The mortgage was thus changed to read “Gary K. Parker and Yolanda Parker, husband and wife” and was re-recorded with Yolanda’s signature on it. Yolanda was not an obligor on the note, but at the time she signed the mortgage, the property was Yolanda’s principal residence. TILA requires creditors to provide right to cancel notices to “each consumer” whose ownership interest is or will be subject to a security interest in the consumer’s principal dwelling. For purposes of rescission, “consumer” means all natural persons “in whose principal dwelling a security interest is or will be retained or acquired, if that person’s ownership interest in the dwelling is or will be subject to the security interest.” As the wife of Gary on title, Yolanda was a “consumer” who should have received a rescission notice. Unfortunately, Potter failed to give Yolanda any TILA disclosures or the required notice of the right to rescind.
When the Parkers defaulted on the mortgages, Potter sued them in state court and foreclosed on the home. Yolanda subsequently sought a restraining order in federal court to stop the foreclosure sale. After the foreclosure sale, Yolanda amended her federal lawsuit to include a claim to rescind the transaction in federal court because she did not receive the proper “right to cancel” or rescission notices. Potter argued that because this was the first time she had ever extended consumer credit through a loan, she was not required to give Yolanda the TILA disclosures. Yolanda and Potter both moved for summary judgment.
The lower court sided with Yolanda. The court noted that Potter, as an assignee, should have given the notice and was thus subject to TILA’s rescission remedies. The court held that although Yolanda did not hold title to the property, she had homestead status by virtue of her marriage to Gary Parker, and cited the Florida law principle that a possessory interest is sufficient to demonstrate homestead rights. The court concluded that Yolanda’s homestead rights in the property constituted an ownership interest for purposes of TILA and permitted her to rescind the transaction because of Potter’s failure to provide her with the requisite TILA disclosures and notice of the right to rescind. On appeal, the 11th Circuit held that Yolanda was out of luck, as the Rooker-Feldman doctrine prohibits “state court losers” from subsequently going into federal court to ask the federal court to reject the state court judgment.
The 11th Circuit noted that the Rooker-Feldman doctrine, so named for two U.S. Supreme Court cases, deprives federal courts (other than the U.S. Supreme Court) of subject-matter jurisdiction over cases brought by “state-court losers complaining of injuries caused by state court judgments rendered before the federal district court proceedings commenced and inviting district court review and rejection of those judgments.” The Rooker-Feldman doctrine applies where (1) the parties in both the state and federal courts are the same; (2) the state court rendered a final or conclusive judgment on the merits; (3) the party seeking relief in federal court could have reasonably raised its federal claims in the state court proceeding; and (4) the state court either adjudicated the issue before the federal court or such issue was “inextricably intertwined” with the state court judgment.
The 11th Circuit concluded that the Rooker-Feldman doctrine barred the federal trial court from hearing Parker’s TILA rescission claim. The appellate court noted that the parties were the same in both the state and federal court actions. Parker first sought a restraining order in the federal trial court to prevent the sale of the foreclosed property more than a year after the state court’s final judgment, and Parker produced no evidence that she did not have a chance to raise the rescission claim in state court. Finally, the state court adjudicated the underlying issue before the federal trial court – “the legal effect of the mortgage.” Although Parker based her rescission claim on Potter’s failure to give her the required TILA notices, the 11th Circuit held that the effect of the federal trial court’s judgment favoring Parker invalidated the state court judgment for Potter in violation of the Rooker-Feldman doctrine. As a result, the 11th Circuit vacated the trial court decision and directed the court to dismiss Parker’s rescission claim.
What is the lesson for mortgage lenders and servicers? First, order is important. A state court action, which is always where a lender or servicer will bring a foreclosure action, can have the first shot at all issues, and a judgment there will not be disturbed under the Rooker-Feldman doctrine, assuming the lender can meet all required conditions. Finally, although Potter was an unsophisticated lender, all lenders and servicers should take care to ensure that they have established policies to ensure all consumers receive required rescission notices.
Catherine Brennan is a partner in the Maryland office of Hudson Cook, LLP. Basis Points readers can reach Cathy at 410-865-5405 or by email at cbrennan@hudco.com.