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Liability for Payment of Note Required to Rescind Mortgage

A mortgagor who is not personally liable for payment of the note securing a property loan cannot rescind the loan transaction or mortgage, the United States Bankruptcy Court for the District of Massachusetts has held.  In re Smith-Pena v. Wells Fargo Bank, N.A.In re Smith-Pena v. Wells Fargo Bank, N.A., 2013 WL 28696 (Bankr. D. Mass. Jan. 2, 2013).

The debtor and her husband refinanced their home in 2006.  The debtor's husband signed the promissory note and the mortgage, but the debtor signed only the mortgage on the property.  The mortgage defined both husband and wife as borrowers, but stated that a borrower who signed only the mortgage was not obligated on the note, and that the other borrower and the lender could alter the terms of the note without the consent of the borrower who did not sign the note.

In 2011, the debtor filed a petition for relief under chapter 13 of the Bankruptcy Code, and later filed an adversary proceeding against Wells Fargo seeking to rescind the mortgage transaction under the Massachusetts Consumer Credit Cost Disclosure Act, Mass. Gen. L. c. 140D, which is analogous to the federal Truth in Lending Act, 15 U.S.C. ยง 1601 et seq.

Both statutes provide an "obligor" a right to rescind a credit transaction, including a mortgage transaction, under certain circumstances.  Neither statute, however, defines "obligor."  The debtor urged the Court to find that any person who had pledged a security interest was an "obligor," and such an interpretation found support in the relevant Massachusetts Code of Regulations sections. After an examination of the relevant regulations and statutory history, the Bankruptcy Court concluded that insofar as the regulations allowed for rescission by a mortgagor who was not personally liable on the note, those regulations exceeded the scope of Mass. Gen. L. c. 140D and could not be enforced.

The Court determined that an "obligor" could not include a person who provided a security interest without incurring personal liability on the debt.  Rescission is a contractual remedy.  In order to have a contractual remedy, a party must have been liable on the contract.  Without having signed the note the debtor received nothing from the lender and incurred no obligations to the lender. Without the duty to perform under the contract, no contractual remedy was available.

While a party can avoid personal liability on a promissory note by failing to sign the note, that lack of liability also renders a party unable rescind the loan transaction, whether or not it signed the mortgage or other security interest underlying the transaction.

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