KENNETH D. MAY & another [Note 1] vs. SUNTRUST MORTGAGE, INC.

BOTSFORD, J. The Massachusetts Consumer Credit Cost Disclosure Act (MCCCDA), G. L. c. 140D, §§ 1- 35, governs the rights and duties of creditors and obligors (borrowers, or consumers) engaged in consumer credit transactions. One type of consumer credit transaction to which the MCCCDA applies is the refinancing of a consumer's home where the consumer grants a mortgage to the creditor to secure the refinancing loan.

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Pursuant to S.J.C. Rule 1:03, as appearing in 382 Mass. 700 (1981), a judge in the United States Bankruptcy Court for the District of Massachusetts [Note 2] has certified the following question:

"May an obligor [borrower] who grants a mortgage in a consumer credit transaction rescind the transaction under the Massachusetts Consumer Credit Cost Disclosure Act, [G. L. c.] 140D, § 1 et seq. (the 'MCCCDA'), defensively by way of common law recoupment after the expiration of the four year statute of limitations set forth in [§] 10 (f) of the MCCCDA?"

For the reasons we discuss hereafter, we answer no to the question. [Note 3]

1. Background. The essential background facts are undisputed by the parties. On October 7, 2005, Kenneth May and Valerie Corbin-May, the plaintiffs, refinanced their home in Brockton in a mortgage loan transaction with Summit Mortgage (Summit), for $300,000. The mortgage later was assigned to and is held currently by the defendant here, SunTrust Mortgage, Inc. (SunTrust). [Note 4] On January 28, 2010, the plaintiffs, facing foreclosure, filed a petition under Chapter 13 of the Bankruptcy Code, 11 U.S.C. §§ 101 et seq., in the United States Bankruptcy Court for the District of Massachusetts. In response, SunTrust filed a proof of claim alleging that the plaintiffs owed $329,965.80, including $49,704.47 in arrears, on the mortgage note. [Note 5] On June 4, 2010, the plaintiffs sent a letter to SunTrust notifying it of their election to rescind the loan transaction. When SunTrust took no action to terminate its security interest (e.g., by discharging the mortgage), on June 28, the plaintiffs filed an adversary proceeding against SunTrust in the pending Chapter 13 bankruptcy

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case, seeking rescission of the loan transaction and damages. [Note 6] The allegations of the plaintiffs' claim for rescission in count III of their adversary complaint may be summarized as follows: Summit, the original creditor, violated the mandatory notice provisions of § 10 (a) of the MCCCDA by presenting the plaintiffs with, and instructing them to postdate and sign, a "Statement of Non-Rescission"; because the notice provision did not comply with those mandatory notice provisions of the MCCCDA, the plaintiffs did not receive the clear and conspicuous disclosure of their right to cancel the transaction required by the MCCCDA; and under c. 140D, § 10 (i) (3), the plaintiffs may seek to rescind the transaction by way of recoupment as a complete or partial defense to SunTrust's claim to recover monies allegedly owed under the mortgage note.

On July 13, 2012, SunTrust moved for summary judgment, arguing that because the plaintiffs filed their adversary complaint more than four years after the mortgage loan transaction, their defensive rescission-by-way-of-recoupment claim is time barred by § 10 (f) of the MCCCDA. The plaintiffs have asserted in response that the time limits of the MCCCDA do not apply when rescission is claimed defensively by way of recoupment because § 10 (i) (3) of the MCCCDA allows for recoupment claims at any time. A judge in the Bankruptcy Court, noting conflicting interpretations of the MCCCDA in a number of Bankruptcy Court decisions and a lack of controlling Massachusetts precedent, reported the question set forth above.

2. Statutory scheme. The MCCCDA is modeled after the consumer protection provisions contained in the Federal Truth-in-Lending Act (TILA), 15 U.S.C. §§ 1601 et seq. (2013). [Note 7] See O'Connell vs. Wells Fargo Bank, N.A., U.S. Bankruptcy

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Court, No. 11-10940-FJB, slip op. at 5 (D. Mass. July 6, 2012) (O'Connell). Both the MCCCDA and TILA were enacted "to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices." Fidler v. Central Coop. Bank, 226 B.R. 734, 736 (Bankr. D. Mass. 1998), quoting 15 U.S.C. § 1601(a).

Although a consumer credit transaction in theory could be governed by both TILA and the MCCCDA, the board of governors of the Federal Reserve System has deemed certain types of Massachusetts consumer credit transactions exempt from TILA, including the one at issue here; as a consequence, such transactions are governed solely by the MCCCDA. See DiVittorio v. HSBC Bank USA, NA, 670 F.3d 273, 282 (1st Cir. 2012); Laudani v. Tribeca Lending Corp., 401 B.R. 9, 25 n.13 (Bankr. D. Mass. 2009). Nevertheless, because of the close relationship between TILA and the MCCCDA, we interpret the MCCCDA mindful of TILA's presence and influence. See Fidler, supra at 736 ("Because TILA was the model on which [M]CCCDA was based, federal court decisions construing TILA are instructive in construing parallel provisions of [M]CCCDA"). See also O'Connell, supra at 5 ("Although the MCCCDA is the operative law in Massachusetts, its similarity to the TILA requires that the former be construed in accordance with the latter").

a. The right to rescind. Under the MCCCDA, as is true of TILA, see 15 U.S.C. § 1635, in any consumer credit transaction in which a security interest in the borrower's principal dwelling is granted, the borrower has an automatic right to rescind the transaction within three business days of the transaction's closing or within three business days of receiving the required rescission forms and other material disclosures from the creditor, whichever is later. G. L. c. 140D, § 10 (a). [Note 8] Accordingly,

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if the creditor does not make the required disclosures or properly notify the borrower of his right to rescind at the time the transaction closes, the borrower remains entitled to seek rescission until three days after the creditor does so. This right, however, is subject to a limitation set out in § 10 (f), which provides that the extended period for exercise of the right of rescission completely ends after four years. [Note 9], [Note 10] But § 10 also contains a provision, § 10 (i) (3), that, notwithstanding the four-year limitation period in § 10 (f), preserves a consumer's "right of recoupment under the laws of the [C]ommonwealth." [Note 11] As we discuss infra, we understand § 10 (i) (3) to be the focus of the Bankruptcy Court judge's reported question.

b. The effects of rescission. Section 10 (b) of the MCCCDA and its implementing regulations define the process and effect of rescission of a consumer credit transaction involving a security interest in the borrower's principal dwelling. See 209 Code

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Mass. Regs. § 32.23(4)(a)-(d) (2010). When a borrower rescinds such a transaction, the underlying security interest in the dwelling -- the mortgage -- becomes void and the borrower is no longer liable for finance charges. G. L. c. 140D, § 10 (b); 209 Code Mass. Regs. § 32.23(4)(a). Within twenty days thereafter, the creditor is required to return any monies or property given in relation to the transaction and must also take any additional action necessary to terminate the mortgage. G. L. c. 140D, § 10 (b); 209 Code Mass. Regs. § 32.23(4)(b). The borrower may retain the property until the creditor has performed these obligations, after which time the borrower "shall tender the property to the creditor, except that if return of the property in kind would be impracticable or inequitable, the [borrower] shall tender its reasonable value." G. L. c. 140D, § 10 (b). See 209 Code Mass. Regs. § 32.23(4)(c).

3. Discussion. We repeat the reported question:

"May [a borrower] who grants a mortgage in a consumer credit transaction rescind the transaction under the [MCCCDA, G. L. c. 140D], defensively by way of common law recoupment after the expiration of the four year statute of limitations set forth in [c. 140D, § 10 (f)]?"

Although the Bankruptcy Court judge refers to the common law in framing it, we understand her question to pose an issue of statutory interpretation: does G. L. c. 140D, § 10 (i) (3), which provides that "[n]othing in this section shall be construed so as to affect a consumer's right of recoupment under the laws of the commonwealth[,]" entitle the consumer to exercise the right of rescission set out in § 10 (a) after the four-year limitation period in § 10 (f) has expired, as a form of defensive recoupment against the amount the creditor claims to be owed? [Note 12]

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As is obvious, § 10 (i) (3) does not provide explicitly for rescission by way of recoupment, or include the word "rescission" at all. [Note 13] Nor does § 10 (i) (3), or any other section of the MCCCDA, define the word "recoupment." Accordingly, the question we need to answer is whether, apart from § 10 (i) (3) and the MCCCDA, any "laws of the Commonwealth" pertaining to recoupment provide for or recognize rescission as a form of recoupment, at least where rescission is used defensively to meet an obligation due. The parties do not suggest, and we have not found, any Massachusetts statute that does so, or even touches on this issue. We turn, therefore, to the common law. See Commonwealth v. Stokes, 440 Mass. 741, 747 (2004), quoting Commonwealth v. Burke, 392 Mass. 688, 690 (1984) ("Where the Legislature does not define a term, we presume that its intent is to incorporate the common law definition of the term, 'unless the intent to alter it is clearly expressed' ").

Both recoupment and rescission find their origins in the common law. "Recoupment was a common law concept, a defendant's claim arising out of the transaction that formed the basis

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of the plaintiff's claim; . . . it served, if the defendant succeeded on it, to reduce or extinguish the plaintiff's claim, but it could not result in an affirmative recovery for the defendant." Bose Corp. v. Consumers Union of U.S., Inc., 367 Mass. 424, 427- 428 (1975). Beginning in the early Nineteenth Century, this court applied the doctrine to contract actions, recognizing the right of a defendant, facing suit for nonpayment on a contract, to assert defensively within the same action a claim for damages due to the plaintiff's own nonperformance of the same contract. See Taft v. Inhabitants of Montague, 14 Mass. 282, 285 (1817), overruling Everett v. Gray, 1 Mass. 101 (1804). See also Carey v. Guillow, 105 Mass. 18, 19-20 (1870) (discussing cases). [Note 14] The concept of recoupment subsequently was extended beyond cases concerning the sale of goods to actions on promissory notes "given in payment of property sold or exchanged." Harrington v. Stratton, 22 Pick. 510, 513 (1839). See Stacy v. Kemp, 97 Mass. 166, 168 (1867) (defining recoupment as "an equitable set-off of damages which ought to be deducted from the plaintiff's demand" and allowing it in action on promissory note). Overall, recoupment was a significant development in the law because it allowed for "full and complete justice [to] be done to the parties in a single suit," thus "avoid[ing] circuity of action" caused when parties had no alternative but to bring a separate cross action to assert their defensive claims. Harrington, supra at 517.

Rescission is fundamentally different from recoupment. Rescission is the "unmaking" or "voidance" of a contract. Black's Law Dictionary 1420-1421 (9th ed. 2009). Its primary purpose is to "effect[] a return to the status quo." Schwartz v. Rose, 418 Mass. 41, 47 (1994). "Ordinarily one seeking rescission of a transaction must restore or offer to restore all that he received under it." Bellefeuille v. Medeiros, 335 Mass. 262, 266 (1957).

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See Ann & Hope, Inc. v. Muratore, 42 Mass. App. Ct. 223, 230 (1997). However, "where complete restoration is not possible, rescission may . . . be granted upon such equitable conditions as would amply protect the rights of the defendant." Bellefeuille v. Medeiros, supra. See J.C. Penny Co. v. Schulte Real Estate Co., 292 Mass. 42, 45 (1935) (strict return to status quo not essential in suit for rescission -- court may "insert whatever conditions, if any, justice and equity may require").

Further, at common law, recoupment and rescission were consistently treated as separate, nonoverlapping, remedies. See Roche v. Gryzmish, 277 Mass. 575, 579- 580 (1931) (buyer defrauded in purchase of property may seek rescission or recoupment, not both: "[a]s these are inconsistent remedies, a person who has once elected to pursue one of them cannot afterwards seek the other"; claim for recoupment requires showing of damages by which debt is limited or reduced accordingly); Gilmore v. Williams, 162 Mass. 351, 352 (1894) ("When the plaintiff discovered the breach of warranty, he could avail himself of his rights in either [sic] of three ways. He might rescind the contract, return the property, and recover back his money; he might set up the breach of warranty as a defence in whole or in part to a claim upon the note, and have his damages allowed by way of recoupment; or he might pay the whole amount of the note and bring a suit for his damages" [citations omitted]); Cox v. Wiley, 183 Mass. 410, 412 (1903) (affirming rule of Gilmore). Whiteside v. Brawley, 152 Mass. 133, 134 (1890) ("Of course an action for the breach of a contract goes on the footing of affirming the contract relied on, and therefore is inconsistent with an action going on the footing of rescission"). See Ohl v. A.L. Smith Iron Works, 66 F.2d 93, 99 (1st Cir. 1933) (party pleading breach of warranty by way of recoupment also cannot bring affirmative cross action for same claim).

The language and structure of § 10 appear to reflect these common-law differences between rescission and recoupment. In particular, the separate treatment of rescission and recoupment by § 10 is in harmony with the common-law concepts of each, as well as with the common-law premise that the two are separate remedies. Thus, § 10 (a), (b), and (f) deal exclusively with rescission, and § 10 (i) (3) deals separately with recoupment.

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Section 10 (a) and (f) impose strict time requirements on exercise of the right to rescind: § 10 (a) requires a borrower to rescind within three days of the transaction, extended if the creditor fails to comply fully with its disclosure requirements, but § 10 (f) terminates the right to rescind completely after four years. Moreover, consistent with the common-law concept of rescission generally, as set out in § 10 (b), rescinding a transaction under the MCCCDA essentially undoes the transaction: the security interest held by the creditor is cancelled, any money or property given in relation to the transaction (such as a down payment) is returned to the borrower, and the borrower then must return the property or, if that is inequitable, its reasonable value. See id.; 209 Code Mass. Regs. § 32.23(4)(a)-(d). In other words, as is true of common-law rescission principles, the apparent intent and effect of rescission under § 10 (b) is to return the creditor and the borrower to the status quo ante -- i.e., to how things were before the transaction existed -- or as reasonably close to it as fairness permits. In contrast, under § 10 (i) (3), the right of recoupment contains no time limitations on assertion of the right. This accords with the common-law understanding of recoupment as a defensive mechanism whereby a defendant may, at any time, assert claims against the plaintiff in reduction of the plaintiff's claims when those claims arise out of the same transaction; it is an offsetting of liabilities within a transaction. See Bose Corp., 367 Mass. at 427-428.

Recognizing that our common-law definition and understanding of recoupment is consistent with the language and structure of § 10, we are bound to conclude that insofar as the MCCCDA's provision for the right of recoupment in § 10 (i) (3) looks to and incorporates the common law, it does not include rescission as one type of defensive recoupment.

The plaintiffs argue against this conclusion because "much of the relief available to a borrower through rescission . . . has the effect of reducing amounts sought by a creditor that is foreclosing a mortgage, suing on a promissory note, or pursuing a claim against a bankruptcy estate." That may be so, but it is beside the point here because rescission and recoupment are separate, and common-law recoupment does not include the use of rescission as a form of recoupment.

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Although we have answered the reported question, we address briefly the plaintiffs' statutory arguments. They first argue that legislative intent for rescission to be available by way of recoupment is "evident" because § 10 deals only with rescission rights, while damages for violations of the MCCCDA are addressed in G. L. c. 140D, § 32, a "wholly separate" section of the MCCCDA. This is not the case. Section 10 states explicitly that if a creditor violates any part of the section a court may award damages "under [§ 32] not relating to the right to rescind" (emphasis added). G. L. c. 140D, § 10 (g). [Note 15]

The plaintiffs contend also that prohibiting them from rescinding their transaction by way of recoupment would render § 10 (i) (3) ineffective as a savings clause and ultimately superfluous because, without rescission, there would be no more claims to save. See Geier v. American Honda Motor Co., 529 U.S. 861, 868 (2000). However, we agree with SunTrust that our reading of § 10 (i) (3) does not render the section meaningless. Rather, because § 10 (g) explicitly allows for damages as a form of relief for violations of § 10 in addition to rescission, a party clearly may seek those damages defensively, via recoupment, after expiration of the statutory period in § 10 (f). See O'Connell, supra at 17 n.11. [Note 16] Therefore,

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even though rescission is not a form of recoupment, § 10 (i) (3) remains a viable and relevant provision of the MCCCDA.

Moreover, borrowers like the plaintiffs who may have a claim for damages to assert defensively in recoupment against a creditor's claim are not limited to the statutory damages provided in § 32 in the MCCCDA. For example, borrowers can assert a claim for unfair or deceptive acts or practices in violation of G. L. c. 93A against the creditor, so long as the alleged c. 93A violation is connected to the underlying credit transaction. [Note 17] The fact that borrowers may assert any available damages claim in recoupment after expiration of the four-year period for rescission underscores the point that § 10 (i) (3) is not rendered meaningless without the ability to claim rescission in recoupment. [Note 18]

4. Conclusion. For the reasons discussed, we answer the reported question in the negative. The Reporter of Decisions is directed to furnish attested copies of this opinion to the clerk of this court. The clerk in turn will transmit one copy, under the seal of the court, to the clerk of the United States Bankruptcy Court for the District of Massachusetts, as the answer to the question certified, and will also transmit a copy to each party.