Monday, April 1, 2013

Home Loan Borrower Prohibited From Exercising TILA Rescission Rights Despite Unexpired 3-Year Time Limit Where Earlier-Obtained Foreclosure Judgment Becomes Final

From US Law:

  • Plaintiffs granted Eastern Savings Bank, FSB (Eastern) a mortgage on property as security for a loan. Plaintiffs defaulted on the loan, and Eastern filed an action to foreclose the mortgage.

    The circuit court foreclosed on the mortgage, and a public auction was held to sell the property.

    Eastern purchased the property and filed a motion for confirmation of sale.

    Plaintiffs subsequently filed a complaint in the U.S. district court seeking a declaratory judgment that the promissory note and mortgage had been timely cancelled pursuant to the federal Trust-in-Lending Act (TILA).

    The circuit court took judicial notice of Plaintiffs' pending federal case but declined to stay confirmation of the foreclosure sale in the meantime.

    Thereafter, the circuit court concluded Plaintiffs' pending TILA case did not bar confirmation of the sale of the property, confirmed the sale of the property to Eastern, and entered a deficiency judgment against Plaintiffs.

    The Supreme Court affirmed, holding that res judicata principles prohibit a debtor from asserting TILA rescission rights after a foreclosure judgment has become final, despite the rescission attempt being held within the time limit provided by TILA.(1)
Source: Opinion Summary - Eastern Savings Bank, FSB v. Esteban.

For the ruling, see Eastern Savings Bank, FSB v. Esteban, SCAP-30686 (March 15, 2013).

(1) A portion of the court's reasoning follows:
  • [T]he party asserting claim preclusion has the burden of establishing that (1) there was a final judgment on the merits, (2) both parties are the same or in privity with the parties in the original suit, and (3) the claim presented in the action in question is identical to the one decided in the original suit, or to a claim or defense that might have been properly litigated in the first action but was not litigated or decidedBremer, 104 Hawai'i at 54, 85 P.3d at 161.

    Applying these requirements to the facts at hand, we conclude that the Estebans’ TILA rescission claims are barred by res judicata principles.

    First, under Hawai'i law, there was a final judgment on the merits when the time to appeal the Foreclosure Judgment expired. See Glover, Ltd. v. Fong, 42 Haw. 560, 574 (1958).10 Moreover, under Hawai'i law, res judicata principles apply to default judgments. Fuller v. Pac. Med. Collections, Inc., 78 Hawai'i 213, 219, 891 P.2d 300, 306 (App. 1995).

    Second, both the Estebans and Eastern were parties to the prior foreclosure proceeding.

    Third, a TILA rescission claim would have been properly litigated in the foreclosure action, whether as a counterclaim or as an affirmative defense.

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