The Tenth Circuit holds that ability to repay is not a pleading requirement for a TILA rescission claim

by Saul Ewing Arnstein & Lehr LLP

The U.S. Court of Appeals for the Tenth Circuit held that a TILA rescission claim is not subject to dismissal on an initial motion to dismiss for failure to expressly plead the ability to repay loan proceeds.

The U.S. Court of Appeals for the Tenth Circuit recently reversed a district court's grant of defendant's initial motion to dismiss the plaintiffs' Truth in Lending Act ("TILA") rescission claim, holding that plaintiffs were not required to expressly plead their ability to repay loan proceeds when asserting such a claim. The issue of whether a borrower is required to plead the ability to repay in order to avoid dismissal has resulted in disagreement among the district and circuit courts, however, Sanders v. Mountain America Federal Credit Union, 2012 WL 3064741 (10th Cir., July 30, 2012), makes clear that failure to plead the ability to repay is not grounds for dismissal of a TILA rescission claim in the Tenth Circuit, as it is in other circuits. By way of example, district courts in both the Fourth and Ninth Circuits have found that plaintiffs failed to state a TILA rescission claim because they failed to plead their ability to repay the loan proceeds.

In Sanders, the plaintiffs asserted, among other things, a claim for statutory rescission under TILA. On an initial motion to dismiss filed by the defendant, the district court determined that while the statute does not make repayment of the loan proceeds a prerequisite for rescission, it does allow courts to, at any time during the rescission process, "impose equitable conditions to ensure that the consumer meets his obligations after the creditor has performed his obligations as required by the act." Based on this reasoning, the district court held that equity required the plaintiffs to allege their ability to repay the loan, and their failure to do so constituted grounds for dismissal.

The Tenth Circuit reversed, holding the district court erred when it concluded plaintiffs failed to state a TILA rescission claim because they failed to plead their ability to repay the loan proceeds. The Tenth Circuit found while courts routinely exercise their equitable powers to ensure consumers can honor their rescission obligations before requiring creditors to release their security claims, the creation of a pleading rule alters the rescission procedure. In reaching this decision, the Tenth Circuit gave two primary reasons: (1) the pleading requirement adds a condition to the remedy not found in the statute or the regulation; and (2) the pleading rule is impermissible because categorical relief is beyond the reach of the courts' equitable powers, both as a matter of equitable tradition and respect for the law. Thus, while a court may require a borrower to prove the ability to tender payment before allowing the borrower to rescind, this issue is appropriately addressed at the summary judgment stage, not as a pleading requirement.

In rendering this decision, the Tenth Circuit resolved the split at the district court level. Specifically, in McGinnis v. GMAC Mortgage Corporation, 2010 WL 3418204 (D. Utah, August 27, 2010), the district court found that while a court may equitably require a borrower to prove the ability to tender before allowing the borrower to rescind, such a requirement is not part of the statute, and thus, not an appropriate consideration on a motion to dismiss. However, in another district court decision, Black v. First Choice Financial, LLC, 2011 WL 5834292 (D. Utah, November 18, 2011), the court held that equity requires the plaintiff to allege the ability to repay the loan amount and failure to do so results in dismissal.

Accordingly, in the Tenth Circuit this issue has been resolved by Sanders and ability to repay is not a pleading requirement for a TILA rescission claim. Lenders will be required to wait until later in the proceeding, namely at the summary judgment stage, to raise the borrowers' inability to repay as a grounds for dismissal of a TILA rescission claim.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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