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532 N.E.2d 379 Page 1177 Ill.App.3d 390, 532 N.E.2d 379, 126 Ill.Dec. 694(Cite as: 177 Ill.App.3d 390, 532 N.E.2d 379, 126 Ill.Dec. 694)

Appellate Court of Illinois,First District, Third Division.

FEDERAL DEPOSIT INSURANCECORPORATION, as Receiver of United of America

Bank, Plaintiff, Counter-Defendant Appellee,v.

Barry ABLIN, Esther Ablin a/k/a Esther Barry, HisWife, Defendants (Barry Ablin et at.,

Counterplaintiffs- Appellants).No. 88-0424.

Dec. 14, 1988.

FDIC, as receiver of mortgagee bank, brought actionto foreclose mortgage. The Circuit Court, Cook County, Albert Green, J., granted summary judgmentfor FDIC, and mortgagors appealed. The AppellateCourt, McNamara, J., held that mortgagors couldrescind transaction for mortgagee's failure to informthem of their right to rescind, as required in Truth inLending Act, though more than three years hadpassed since consummation of transaction, in thatmortgagors raised issue as counterclaim toforeclosure action brought by mortgagee's successor in interest.

Reversed and remanded.

West Headnotes

Consumer Credit 92B 60

92B Consumer Credit  92BII Federal Regulation  92BII(C) Effect of Violation of Regulations  92Bk60 k. In General; Validity of 

Transactions. Most Cited CasesMortgagors could rescind transaction for mortgagee'sfailure to inform them of their right to rescind, asrequired in Truth in Lending Act, though more thanthree years had passed since consummation of transaction, in that mortgagors raised issue ascounterclaim to foreclosure action brought bymortgagee's successor in interest. Truth in Lending

Act, § 125(a, f), as amended, 15 U.S.C.A. § 1635(a, f); Ill.Rev.Stat.1971, ch. 83, § 18.**379*391***694 Ralph A. Mantynband, Arvey,Hodes, Costello & Burman, Chicago, for defendants,counter-plaintiffs appellants.

David L. Hazan, DeHaan & Richter, P.C. Chicago,for plaintiff, counter-defendant appellee.

Justice McNAMARA delivered the opinion of thecourt:

Plaintiff, FDIC, as receiver of United of AmericaBank, (the Bank), brought this action againstdefendants Barry and Esther Ablin to foreclose amortgage on their residential real estate. The trialcourt granted summary judgment in favor of plaintiff and ordered the foreclosure and sale of defendants'home, and granted plaintiff's petition for attorneyfees. On appeal, defendants contend the trial courterred in entering summary judgment because materialfacts were in dispute regarding the rate of interest tobe applied to the note secured by the real estate.Defendants further maintain that the trial courtabused its discretion in dismissing their counterclaimand prohibiting an amended answer asserting anaffirmative defense under the Federal Truth inLending Act (“TILA”). Defendants also challenge theaward of attorney fees to plaintiff.

On May 12, 1983, defendants executed a note withthe Bank for $107,000, putting up a mortgage ontheir home as collateral. The interest rate to becharged on the mortgage note was “2% over thebank's prime rate as it may change from time to time,with a floor on loan rate of 12 1/2 %.” Between May12, 1983 and April 2, 1984, defendants paid$10,973.43 as interest on the mortgage.

On April 24, 1984, the Bank failed and plaintiff wasappointed as receiver. At the time of the Bank'sfailure, the unpaid principal balance on defendants'loan was $107,000. On February 7, 1986, plaintiff filed a complaint for foreclosure and other relief.

On February 6, 1987, defendants rescinded the

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532 N.E.2d 379 Page 2177 Ill.App.3d 390, 532 N.E.2d 379, 126 Ill.Dec. 694(Cite as: 177 Ill.App.3d 390, 532 N.E.2d 379, 126 Ill.Dec. 694)

transaction and demanded return of all the moneythey had paid. On February 13, 1987, defendants

filed a counterclaim alleging that neither the Bank nor plaintiff as receiver provided defendants withnotice of the right to rescind the loan transaction**380***695 as required by TILA. (15 U.S.C. § 1601et seq. (1982), and the regulations promulgatedthereunder, 12 C.F.R. § 226.1et seq.) Defendantssought return of all interest and other fees paid on theloan. Defendants also alleged the above *392

violation as an affirmative defense in their firstamended answer.

The trial court dismissed defendants' counterclaimwith prejudice on the grounds that the claim was

barred by the three year statute of limitations stated in15 U.S.C. § 1635(f). The trial court granteddefendants leave to file a second amended answer provided that the second amended answer did notcontain affirmative matters previously ruled on by thecourt. Defendants filed a notice of reservation of rights of appeal to ensure that by tendering a secondamended answer with affirmative defenses, they werenot waiving the rights or claims set forth in the initialaffirmative defenses.

Defendants' second amended answer asserted that therate of interest being charged by plaintiff was based

on a nonexistent prime rate and was further barred bythe Illinois usury statute, Ill.Rev.Stat.1985, ch. 17,par. 6413.

Plaintiff filed a motion for summary judgment andattached the affidavit of John Donovan, a bank liquidation specialist with plaintiff, who attested tothe fact that defendants failed to make payments dueunder the note. Plaintiff's motion for summaryjudgment listed the amount of principal and interestoutstanding on defendants' note.

Defendants filed a response to the motion for 

summary judgment challenging the calculation of interest owed. Defendants filed the affidavit of Professor William Bryan, former director of the Bank for more than three years prior to its closing. Bryanattested that at all times while he was director, theBank officers determined the Bank's prime rate. TheBank had no fixed formula or standard for determining the prime rate but rather observed the

rates being announced by other Chicago area banks.Defendants maintained that because the Bank 

determined its own prime rate, there was no primerate after the date that the Bank closed.

Plaintiff filed an additional affidavit of Donovan inwhich he attested that with regard to liquidation of the Bank, it was determined that the Bank wouldfollow the prime rate declared by Continental IllinoisBank in setting the Bank's prime rate. Thus, plaintiff used Continental's prime rate for computations of amounts due plaintiff as receiver. Plaintiff used a rateof between 20 and 21% to determine the amount of interest defendants owed plaintiff. The trial courtgranted summary judgment in favor of plaintiff.

Defendants contend on appeal that the trial courterred in dismissing their counterclaim allegingviolations of TILA. The counterclaim asserted thateither the Bank or plaintiff was obligated under theprovisions of TILA to deliver two copies of a noticeof the right to rescind the transaction in a separatedocument. Defendants also *393 stated that plaintiff or the Bank failed to advise them as to the correctannual percentage rate of interest. On plaintiff'smotion, the trial court dismissed the counterclaim for failure to file the claim within three years of the dateof the transaction as required by the Act. 15 U.S.C. § 

1635 (1982).

TILA states:

“Section 1635. Right of recission as to certaintransactions. (a) Except as otherwise provided inthis section, in the case of any consumer credittransaction * * * in which a security interest,including any such interest arising by operation of law, is or will be retained or acquired in anyproperty which is used as the principal dwelling of the person to whom credit is extended, the obligor shall have the right to rescind the transaction until

midnight of the third business day following theconsummation of the transaction or the delivery of the information and recission forms required under this section together with a statement containingthe material disclosures required under thissubchapter, whichever is later, by notifying thecreditor, in accordance with regulations of theBoard, of his intention to **381***696 do so. The

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532 N.E.2d 379 Page 3177 Ill.App.3d 390, 532 N.E.2d 379, 126 Ill.Dec. 694(Cite as: 177 Ill.App.3d 390, 532 N.E.2d 379, 126 Ill.Dec. 694)

creditor shall clearly and conspicuously disclose, inaccordance with the regulations of the Board, to

any obligor in a transaction subject to this sectionthe rights of the obligor under this section. Thecreditor shall also provide * * * appropriate formsfor the obligor to exercise his right to rescind anytransaction subject to this section.” 15 U.S.C. § 1635(a) (1982).

Section 125(f), however, states that an obligor's rightof recission shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first, notwithstandingthe fact that the information and forms required under this section have not been delivered to the obligor. 15 

U.S.C. § 1635(f) (1982).

Plaintiff sought dismissal of defendants' counterclaimon the basis that it was filed more than three yearsafter the date of the execution of the note. Defendantsargue that their claim is not barred by this statute of limitations because it was pled in the form of acounterclaim and setoff. No Illinois court has ruledon whether a claim under section 125 of TILAasserted in the form of a counterclaim or setoff survives the three year time limitation. However, asimilar claim was made in regard to the one year statute of limitations expressed in section 130(e) of 

the same Act in  Wood Acceptance Co. v. King  (1974), 18 Ill.App.3d 149, 309 N.E.2d 403.  In *394

Wood, the trial court dismissed a counterclaim for civil damages under section 130 of the Act for failureto file the claim within one year from the date of theoccurrence of the alleged violations as required bythe Act. (15 U.S.C. § 1640(e) (1973).) On appeal, thiscourt permitted the counterclaim after the one year time limitation, relying on section 17 of the IllinoisLimitations Act, Ill.Rev.Stat.1971, ch. 83, § 18,which allows a defendant to plead a setoff or counterclaim barred by the statute of limitations. Thecourt looked to the purpose of the Limitations Act

and the purpose of TILA and found that the one year limitation in which to bring the federal right is notsuch an integral part of TILA as to outweigh thecombined purposes of that Act and section 17 of theLimitations Act. The  Wood   court emphasized thatTILA is intended to safeguard the consumer inconnection with the utilization of credit and itsenforcement is accomplished largely through the

institution of civil actions. The court therefore statedthat the placement of such responsibility on the often

unknowledgeable consumer lends support for theconclusion that the penalty sought to be imposed onviolators of the Act should not be circumventedwhere the debtor's obligation is not stale and is raisedin a counterclaim arising out of the same occurrence.See also  Public Finance Corp. v. Riddle  (1980), 83 

Ill.App.3d 417, 38 Ill.Dec. 712, 403 N.E.2d 1316;  National Boulevard Bank of Chicago v. Thompson  (1980), 85 Ill.App.3d 1145, 41 Ill.Dec. 241, 407 N.E.2d 739.

In 1980, section 130 of TILA was amended to cover the situation presented in  Wood Acceptance.  The

statute now reads:

“(e) Any action under this section may be brought inany United States district court, or in any other court of competent jurisdiction, within one year from the date of the occurrence of the violation.This subsection does not bar a person fromasserting a violation of this subchapter in an actionto collect the debt which was brought more thanone year from the date of the occurrence of theviolation as a matter of defense by recoupment or setoff in such action, except as otherwise providedby State law.” 15 U.S.C. § 1640(e) (1982).

Plaintiff acknowledges this exception to thelimitation clause in section 130 and attempts todistinguish the limitation clause of section 125 andthe situation in the present case. Plaintiff relies on thedifference in types of disclosure between the twosections which may form the basis for relief. Plaintiff also emphasizes the fact that courts have useddifferent treatment in applying the remedies of recission and damages in accordance with sections125 and 130 respectively. Finally, plaintiff placesheavy emphasis on the fact that *395 both sectionswere amended in 1980, and the section 125

amendment did not include **382***697 language,as did the section 130 amendment, specificallystating that a defense in the way of a recoupment or setoff is not barred.

Although we have found no Illinois authority, theprecise question before us was decided by theColorado Supreme Court in Dawe v. Merchants 

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532 N.E.2d 379 Page 4177 Ill.App.3d 390, 532 N.E.2d 379, 126 Ill.Dec. 694(Cite as: 177 Ill.App.3d 390, 532 N.E.2d 379, 126 Ill.Dec. 694)

Mortgage and Trust Corp.  (Colo.1984), 683 P.2d 796.  There, a lender filed a complaint seeking

judgment on the unpaid principal of a note. Theborrowers then notified the lenders of their intentionto exercise their right to rescind the land saleagreement under section 125 of TILA. The trial courtheld that the borrowers' right to rescind was barred bythe three year statute of limitations contained insection 125(f).

On review, the court in Dawe noted the general rulethat a statute of limitations, although barring the useof a claim for affirmative relief after the limitationsperiod has run, is not a bar to asserting that claim as adefense. The court compared the situation to the

related question of whether the one year statute of limitations contained in section 130 may be useddefensively to defeat a claim for damages under thatsection. The Dawe court found that the borrowers'defense emerges from the transaction upon which thelender's complaint was based, and their claim was inthe nature of recoupment. The court looked to thepurpose of TILA, and concluded that if recoupmentclaims were barred by the relevant statute of limitations, lenders could avoid the penalties of theAct by waiting three years or more to sue on theborrowers' default, and thereby frustrate thefundamental policy of TILA. Thus, the court held

that the petitioners' demand for recission was notbarred by the limitations period set forth in section125(f).

The present case is subject to the same analysis.Defendants' counterclaim under section 125 of TILAemerges from the transaction upon which plaintiff'sclaim is based. The counterclaim seeks recission of the transaction for a violation of the Act. We believethat the three year limitation in section 125 does notbar defendants' counterclaim in the present case, andwe reverse its dismissal.

Based on our holding regarding the counterclaim, wemust also reverse the granting of summary judgmentand remand the case to the trial court. It would beanomalous to allow summary judgment in favor of plaintiff based upon defendants' nonpayment of their debt when the possibility exists that the transactionmay be rescinded. See Amato v. Edmonds  (1980), 87 Ill.App.3d 68, 42 Ill.Dec. 463, 408 N.E.2d 1172.

In view of our holding, it is, of course unnecessary toconsider *396 the propriety of the award of attorneyfees to plaintiff.

For the reasons stated, the judgment of the circuitcourt of Cook County dismissing defendants'counterclaim and granting summary judgment infavor of plaintiff is reversed, and the cause isremanded for further proceedings not inconsistentwith the holdings of this opinion.

JUDGMENT REVERSED AND REMANDED.

RIZZI and FREEMAN, JJ., concur.Ill.App. 1 Dist.,1988.Federal Deposit Ins. Corp. v. Ablin177 Ill.App.3d 390, 532 N.E.2d 379, 126 Ill.Dec. 694

END OF DOCUMENT

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