American Mortgage v. Shelton ( 2007 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
AMERICAN MORTGAGE NETWORK, 
INCORPORATED,
Plaintiff-Appellee,
v.  No. 06-1576
MICHAEL D. SHELTON; PAMELA D.
SHELTON,
Defendants-Appellants.

Appeal from the United States District Court
for the Western District of North Carolina, at Charlotte.
Carl Horn, III, Chief Magistrate Judge.
(3:05-cv-00083)
Argued: March 15, 2007
Decided: May 14, 2007
Before WILKINSON and MOTZ, Circuit Judges, and
Henry E. HUDSON, United States District Judge for the
Eastern District of Virginia, sitting by designation.
Affirmed by published opinion. Judge Hudson wrote the opinion, in
which Judge Wilkinson and Judge Motz joined.
COUNSEL
ARGUED: Brett E. Dressler, SELLERS, HINSHAW, AYERS,
DORTCH & LYONS, P.A., Charlotte, North Carolina, for Appel-
lants. Kenneth B. Oettinger, Jr., WOMBLE, CARLYLE, SAN-
2 AMERICAN MORTGAGE NETWORK v. SHELTON
DRIDGE & RICE, P.L.L.C., Charlotte, North Carolina, for Appellee.
ON BRIEF: Robert C. Dortch, SELLERS, HINSHAW, AYERS,
DORTCH & LYONS, P.A., Charlotte, North Carolina, for Appel-
lants.
OPINION
HUDSON, District Judge:
This declaratory judgment dispute presents a number of issues con-
cerning the procedural requirements associated with the right of
rescission under the Truth in Lending Act (TILA), 15 U.S.C. § 1601,
et seq. American Mortgage Network, Inc. ("Amnet") petitioned the
district court for a declaratory finding that its processing of appellants
Michael and Pamela Shelton’s notice of cancellation of their home
refinancing loan was consistent with TILA. In addition to seeking
damages for TILA violations, the Sheltons counterclaimed for rescis-
sion and urged the district court to declare that Amnet’s failure to
unconditionally release their security interest warranted forfeiture of
the loan principal under TILA. The district court disagreed and
awarded summary judgment for Amnet. Because we find that Amnet
complied with all applicable provisions of TILA, we affirm the judg-
ment of the district court.
Amnet is a residential mortgage lender that conducts business
throughout the United States. Amnet sells the loans it makes on the
secondary market to banks and institutional investors.
In December 2004, Michael D. Shelton ("Shelton"), a self-
employed real estate appraiser, borrowed approximately $317,000
from Amnet to refinance an existing note on his primary residence.
His wife, Pamela Shelton, was not a co-borrower and did not execute
any of the loan documents. However, she executed a Deed of Trust
in Amnet’s favor to secure the loan. There is no dispute that Shelton
was provided with all required TILA disclosures and a HUD-1 state-
ment at the time of closing.
The record further revealed that, in July 2004, the Sheltons signed
a contract to purchase a custom-built home. In order to place him in
AMERICAN MORTGAGE NETWORK v. SHELTON 3
a more creditworthy position to finance his new home, the Sheltons
sought to consolidate a number of debts including the preexisting loan
secured by their residence. Their residence, located in Gastonia, North
Carolina, had been purchased in March 2000 for $253,000.
The building permit for the Sheltons’ custom-built home was
issued on December 13, 2004. The Sheltons went to settlement on
their new home on April 29, 2005, and moved in on May 1, 2005. It
is undisputed that the debt service on both the mortgage secured by
the custom home and the preexisting Amnet loan at issue in this case
was beyond the financial means of the Sheltons. It is also clear that
among the closing documents signed by Shelton in connection with
the Amnet loan was an Occupancy Agreement in which he repre-
sented that he would occupy the house secured by that refinancing as
his primary residence throughout the twelve-month period immedi-
ately following the loan closing.
Approximately one month after executing the closing documents
on the refinancing in controversy, the Sheltons received a package of
documents from Amnet. The cover letter accompanying the package
stated that "the Truth-In-Lending Disclosure Statement was inadver-
tently under-disclosed in the amount of prepaid finance charges."
(J.A. 14.) The letter further revealed that Shelton had been charged
$100 more than the amount disclosed on the TILA form. The package
did not contain a refund check for $100 as indicated. The package
also included a single copy of a Notice of Right to Cancel, a copy of
the same TILA financial disclosures given to Shelton at closing, and
a copy of the Errors & Omissions Compliance Agreement that Shel-
ton signed at closing. The Errors & Omissions Compliance Agree-
ment required Shelton to execute a reformed loan document to cure
the previous clerical error.
In support of his counterclaim alleging noncompliance with TILA,
Shelton points out a number of perceived discrepancies in the Notice
of Right to Cancel. Shelton believes that he was entitled to receive
four copies of the notice document. The package apparently contained
only one copy while the cover letter referenced three copies.
Although Shelton was himself in the real estate business, he purported
to find the Notice of Right to Cancel confusing because a removable
sticker covered the line designated for signature to effectuate cancel-
4 AMERICAN MORTGAGE NETWORK v. SHELTON
lation. Lastly, Shelton did not believe that the $100 discrepancy was
in fact a clerical error and questioned why the $100 check was not
included in the package. Disturbed by these discrepancies, the Shel-
tons decided to cancel the transaction.
Amnet does not dispute that Shelton timely executed the cancella-
tion documents indicating a desire to rescind the transaction. Three
days later, on January 31, 2005, Shelton retained an attorney to repre-
sent him in connection with the loan rescission. In the interim, Amnet
acknowledged receipt of Shelton’s decision to rescind the loan trans-
action. Within 20 days of receipt of the notice of cancellation, Amnet
confirmed that it was prepared to unwind the transaction in accor-
dance with TILA, upon receipt of confirmation from Shelton that he
was prepared to return the net loan proceeds, i.e., the original princi-
pal amount of the loan less all amounts charged to Shelton in connec-
tion with the transaction. The net loan proceeds totaled $313,468.39.
Amnet was subsequently advised by Shelton’s attorney that his cli-
ent was unable to return the net loan proceeds.1 The Sheltons offered
instead to sell the house to Amnet for the difference between an
appraised value of the house, $370,000, and the net loan proceeds,
$313,468.39. Amnet declined the offer and countered that it did not
believe that the Sheltons’ offer to sell their house to Amnet consti-
tuted a proper tender under TILA. Shelton’s counsel replied that, in
his opinion, Amnet was required under TILA to release its security
interest on the house immediately without a specific agreement on the
Sheltons’ part to return the net loan proceeds. Amnet refused to
release its security interest without any provision for repayment of the
loan proceeds.
Shortly thereafter, the Sheltons retained new counsel, who notified
Amnet by letter that Amnet had forfeited the loan proceeds by refus-
ing to unconditionally release its security interest within 20 days of
cancellation of the loan as required by TILA.
1
Shelton admitted in his deposition that he did not disclose the exis-
tence of the Amnet loan when he applied for the loan on the custom
home. Am. Mortgage Network, Inc. v. Shelton, No. 3:05CV83H, 2006
WL 909415, at *2 (W.D.N.C. Apr. 6, 2006).
AMERICAN MORTGAGE NETWORK v. SHELTON 5
Unable to consensually unwind the loan transaction, Amnet filed
this lawsuit seeking modification of the TILA rescission procedures
and an order declaring its full compliance with TILA. The Sheltons
counterclaimed for declaratory relief and monetary damages.2 During
the course of the ensuing discovery, several facts emerged that were
pertinent to the trial court’s analysis.
First, it appeared to the trial court that Shelton significantly over-
stated his income in the initial loan application submitted on his
behalf by Waterford Financial Services, Inc. ("Waterford Financial").
The application stated that Shelton’s annual income in 2004 was
$97,200. Subsequent examination of Shelton’s 2004 tax return
revealed an income of $34,236. According to Amnet, if Shelton’s
application had disclosed his actual 2004 net income, he would not
have qualified for the loan.
Second, the Uniform Residential Appraisal Report received from
Waterford Financial and purportedly prepared by an independent
appraiser was in fact prepared by an appraiser operating under Shel-
ton’s supervision. Although the appraiser was technically an indepen-
dent contractor, he had been trained by Shelton and worked
exclusively for Shelton’s company. The report estimated the fair mar-
ket value of the house as of November 15, 2004, to be $370,000.
Amnet contends that the appraisal was inflated and that a "truly inde-
pendent" appraiser assessed its fair market value at closer to
$300,000. Irrespective of the numbers, it appeared to be uncontro-
verted that the Sheltons’ appraiser was not independent.
Third, despite signing an Occupancy Agreement at closing, repre-
senting that he intended to occupy the house as his primary residence
throughout the twelve-month period immediately following the loan
closing, Shelton was in fact in the process of building another home
that would serve as his primary residence. The Sheltons could not
afford to finance the custom home and continue payments on the
Amnet loan.
2
The Sheltons asked the trial court to cancel the Deed of Trust and
allow them an indefinite period of time to sell the house to a buyer at a
price of their choosing.
6 AMERICAN MORTGAGE NETWORK v. SHELTON
The Sheltons argue that the above-described alleged misrepresenta-
tions, which were found by the district court to constitute inequitable
conduct, were material facts "hotly in dispute." The Sheltons maintain
that the resolution of these factual disputes was critical to the issues
of rescission and forfeiture. In their view, the trial court erred by
refusing to conduct an evidentiary hearing to address these disputed
facts. We disagree.
Despite the Sheltons’ protestation, many of the facts underlying the
inequitable conduct were uncontroverted. For example, Shelton’s
2004 tax return reflected income far below that represented to Amnet.
There is also no dispute that the appraiser who conducted the
appraisal on the property was affiliated with Shelton and operated
under his supervision. Although we do not believe that Shelton’s
inequitable conduct necessarily controlled the outcome of this case,
it was appropriately considered by the trial judge.3 As the United
States Court of Appeals for the District of Columbia noted in Brown
v. National Permanent Federal Savings & Loan Ass’n, 683 F.2d 444
(1982), "[a]lthough the right to rescind is [statutory], it remains an
equitable doctrine subject to equitable considerations."4 Id. at 447.
In this case, both parties seek equitable relief. The Sheltons elected
to cancel the loan transaction and seek the release of Amnet’s security
interest in their property, pursuant to Title 15, United States Code,
§ 1635(b). This subsection of TILA reads as follows:
When an obligor exercises his right to rescind under subsec-
tion (a) of this section, he is not liable for any finance or
other charge, and any security interest given by the obligor,
including any such interest arising by operation of law,
3
The trial court characterized the Sheltons’ misstatements as not only
materially false, but sufficiently egregious to potentially warrant criminal
prosecution. See Am. Mortgage Network, Inc., 2006 WL 909415, at *2
n.3.
4
In Mars v. Spartanburg Chrysler Plymouth, Inc., 713 F.2d 65 (4th
Cir. 1983), this Court held that the provisions of TILA must be "abso-
lutely complied with and strictly enforced." Id. at 67. This was not to
imply, however, that the Act’s requirements should not be reasonably
construed and equitably applied.
AMERICAN MORTGAGE NETWORK v. SHELTON 7
becomes void upon such a rescission. Within 20 days after
receipt of a notice of rescission, the creditor shall return to
the obligor any money or property given as earnest money,
downpayment, or otherwise, and shall take any action neces-
sary or appropriate to reflect the termination of any security
interest created under the transaction. If the creditor has
delivered any property to the obligor, the obligor may retain
possession of it. Upon the performance of the creditor’s
obligations under this section, the obligor shall tender the
property to the creditor, except that if return of the property
in kind would be impracticable or inequitable, the obligor
shall tender its reasonable value. Tender shall be made at the
location of the property or at the residence of the obligor, at
the option of the obligor. If the creditor does not take pos-
session of the property within 20 days after tender by the
obligor, ownership of the property vests in the obligor with-
out obligation on his part to pay for it. The procedures pre-
scribed by this subsection shall apply except when otherwise
ordered by a court.
15 U.S.C. § 1635(b).
The Sheltons construe § 1635(b) as requiring Amnet to uncondi-
tionally release the security interest on the Sheltons’ residence within
20 days of notification of cancellation, regardless of the Sheltons’
admitted inability to tender the balance due on the loan, or reasonable
value thereof.5 In fact, the Sheltons argue that the trial court erred in
not declaring the loan balance forfeited by reason of Amnet’s refusal
to unconditionally remove the mortgage lien. In essence, the Sheltons
claim the right to simply walk away with a windfall of $313,468 with-
out any further obligation. This construction not only offends tradi-
tional notions of equity, but misinterprets the procedural requirements
of § 1635(b).
5
This Court does not believe that the Sheltons’ offer to sell their resi-
dence to Amnet for an amount determined by a non-independent
appraiser constituted "reasonable value." Amnet was not in the business
of selling real estate.
8 AMERICAN MORTGAGE NETWORK v. SHELTON
In Powers v. Sims & Levin, 542 F.2d 1216 (4th Cir. 1976), this
Court rejected the argument that § 1635 compelled a creditor to
remove a mortgage lien in the absence of the debtor’s tender of the
loan proceeds. Id. at 1220. This Court held in Powers that, "when
rescission is attempted under circumstances which would deprive the
lender of its legal due, the attempted rescission will not be judicially
enforced unless it is so conditioned that the lender will be assured of
receiving its legal due." Id. at 1222.
We further noted in Powers that "Congress did not intend to
require a lender to relinquish its security interest when it is now
known that the borrowers did not intend and were not prepared to ten-
der restitution of the funds expended by the lender in discharging the
prior obligations of the borrowers." Id. at 1221.
The same rationale controls the case at hand. The trial court, in
exercising its powers of equity, could have either denied rescission or
based the unwinding of the transaction on the borrowers’ reasonable
tender of the loan proceeds. The equitable goal of rescission under
TILA is to restore the parties to the "status quo ante." See Yamamoto
v. Bank of New York, 329 F.3d 1167, 1172 (9th Cir. 2003); Williams
v. Homestake Mortgage Co., 968 F.2d 1137, 1140 (11th Cir. 1992).
The Sheltons appear to misconstrue the procedural mechanics of
§ 1635. Clearly it was not the intent of Congress to reduce the mort-
gage company to an unsecured creditor or to simply permit the debtor
to indefinitely extend the loan without interest.
This Court adopts the majority view of reviewing courts that unilat-
eral notification of cancellation does not automatically void the loan
contract. As the Ninth Circuit observed in Yamamoto, "[o]therwise,
a borrower could get out from under a secured loan simply by claim-
ing TILA violations, whether or not the lender had actually commit-
ted any." Yamamoto, 329 F.3d at 1172. "The natural reading of
[§ 1635(b)] is that the security interest becomes void when the obligor
exercises a right to rescind that is available in the particular case,
either because the creditor acknowledges that the right of rescission
is available, or because the appropriate decision maker has so deter-
mined. . . . Until such decision is made, the [borrowers] have only
advanced a claim seeking rescission." Large v. Conseco Fin. Servic-
ing Corp., 292 F.3d 49, 54-55 (1st Cir. 2002). This Court declines to
AMERICAN MORTGAGE NETWORK v. SHELTON 9
adopt the reasoning of the Eleventh Circuit in Williams v. Homestake
Mortgage Co., espousing the minority position that rescission is auto-
matic, but holding that the voiding of a security interest may be judi-
cially conditioned on debtor’s tender of amount due under the loan.
See Williams, 968 F.2d at 1141-42.
Once the trial judge in this case determined that the Sheltons were
unable to tender the loan proceeds, the remedy of unconditional
rescission was inappropriate. Although the better practice may have
been for the trial judge to set terms for rescission by allowing the
Sheltons a time certain to tender the net loan proceeds, it was unnec-
essary under the facts of this case. Aside from the Sheltons’ acknowl-
edged inability to repay the loan, almost a year had passed from the
date of exercising the cancellation of the loan. During that year, the
Sheltons made no payments of principal or accrued interest on the
loan. The trial court properly exercised its discretion in denying
rescission.
Lastly, the Sheltons contend the trial court improperly granted
summary judgment in finding that Amnet’s Notice of Right to Cancel
complied with TILA. The Sheltons maintain that there was a genuine
issue as to whether Amnet provided "clear and conspicuous" notice
of their right to rescind under TILA. They highlight a number of pur-
ported irregularities in the correction package sent by Amnet follow-
ing notification that Amnet had inadvertently under-disclosed the
amount of prepaid finance charges by $100.
Specifically, the Sheltons allege that pertinent portions of the
Notice of Right to Cancel were obstructed by removable "Sign Here"
stickers. They assert that the stickers obscured the cancellation signa-
ture blocks and the language indicating where to sign in order to
rescind the transaction. It is, however, interesting to note that the
Sheltons executed the cancellation documents almost immediately
upon receipt and returned them to Amnet in a timely manner. The
Sheltons also complain that they received only one copy of the new
Notice of Right to Cancel as opposed to the four copies they argue
are required by statute — two for each of the Sheltons. See 12 C.F.R.
§ 226.23(b) ("[A] creditor shall deliver two copies of the notice of the
right to rescind to each consumer entitled to rescind.")
10 AMERICAN MORTGAGE NETWORK v. SHELTON
Although this Court believes that Amnet substantially complied
with all requirements of TILA in notifying the Sheltons of their right
of rescission, this Court need not address each alleged hyper-technical
violation. Here, Amnet had no obligation under TILA to provide a
renewed notice of right of rescission or to reopen the cancellation
period. This obligation is only triggered under TILA when the finan-
cial discrepancy is over $100. See 15 U.S.C. § 1605(f)(1)(A); 12
C.F.R. § 226.18(d)(1)(i). The notice provided to the Sheltons in this
case was strictly voluntary and therefore needed not meet the techni-
cal requirements of 12 C.F.R. § 226.23(b).
In summary, we find that Amnet fully complied with all of the
requirements of TILA in connection with this loan. The trial court
properly denied rescission, given the appellants’ inability to tender
payment of the loan amount. For the foregoing reasons, we affirm the
judgment of the trial court.
AFFIRMED