In Re Angelo Divittorio 05-20854 Eastern Div MA

The U.S. Bankruptcy Court for the District of Massachusetts, Eastern Division, recently held that: (1) a debtor failed to state a claim under the Massachusetts Consumer Credit Cost Disclosure Act (“CCCDA”) based on an alleged inaccuracy in the disclosure of an interest rate reduction feature contingent upon future timely payments; and (2) the debtor waived his CCCDA claims against a mortgage lender and its successors and assigns by signing and subsequently defaulting on a loan modification agreement which included specific waiver language.

After a debtor filed his Chapter 13 bankruptcy petition, the mortgage loan on his primary residence became the subject of a significant amount of litigation. The debtor first opposed the loan servicer’s motion for relief from stay, and the parties eventually entered a modification agreement as to the loan. The modification agreement included a release provision pursuant to which the debtor agreed that by executing the modification he "irrevocably waived and relinquished" any claims of any kind related to the loan documents in existence at the time of the modification, whether known or not known, against all prior and subsequent parties or predecessors in interest to both the loan servicer and the loan investor.


The debtor redefaulted by falling behind on his modified payments. He then sent a notice of rescission and shortly thereafter filed the instant adversary action against the loan investor for rescission of the mortgage loan under the CCCDA. The debtor sought rescission of the loan in part on the grounds that the APR disclosure provided at the closing of the loan was inaccurate because it was calculated presuming the borrower would eventually qualify for an interest rate reduction feature that would kick in only after the debtor made twenty-two timely payments, that this presumption was not clearly and conspicuously disclosed, and that the presumption was not statistically likely to come about. The bankruptcy court granted the investor’s motion to dismiss the adversary claim. The debtor appealed and the district court remanded the matter back to the bankruptcy court for reconsideration.

On remand, the investor filed a motion for summary judgment to be consolidated with its prior motion to dismiss. The investor argued in its summary judgment motion that (1) the debtor should be judicially estopped from asserting any loan origination claims because he failed to assert those claims earlier in his bankruptcy schedules; and (2) that the debtor waived his claims against the investor through the release provision of the modification agreement. This opinion followed.

The bankruptcy court first addressed the motion to dismiss, finding that the FRB's Official Staff Commentary to Regulation Z is silent as to whether a lender can factor an assumption of timely payments into an APR calculation at the time of assumption and ultimately holding that the debtor failed to state a claim under the CCCDA because the TIL disclosure was “based upon what the regulations required,” and the debtor was wrongfully attempting to re-characterize a time-barred predatory lending claim as a rescission claim in recoupment under the CCCDA.

The court next looked to the judicial estoppel claim made by the investor in its motion for summary judgment, finding that the investor “failed to satisfy one of the mandatory conditions …of judicial estoppel,” namely, that the party “succeeded in the prior proceeding.” In this matter no relief, such as a discharge, had been granted in the prior proceeding, such that application of judicial estoppel was not appropriate.

The bankruptcy court did, however, rule that the debtor had waived his CCCDA claim through his execution of the loan modification agreement. The bankruptcy court agreed with the investor’s contention that the waiver provision under TILA, 12 C.F.R. § 226.23(e)(1), which provides that a consumer may waive his or her right to rescind if the extension of credit is a bona fide personal financial emergency, applies only to the initial three-day rescission period and does not any extended period arising from the failure to provide material disclosures.

Further, the bankruptcy court found that, contrary to the debtor’s assertions, it is possible to waive the right of rescission after the expiration of the initial rescission period but before the underlying claim is raised. The bankruptcy court reviewed the few cases on this issue and disagreed with those cases that applied a hyper-technical standard with respect to TILA violations, which has been rejected by the First Circuit. The bankruptcy court applied the First Circuit’s “totality of circumstances” approach to determining the validity of waivers as "knowing and voluntary," ultimately finding that in this matter the debtor’s “possession of the loan documents put him on inquiry notice of his purported CCCDA claims.” The bankruptcy court also found that the language in the release at issue referencing claims arising in connection with the “making, closing, administration collection, or the enforcement … of the loan documents,” was clear and conspicuous and should have compelled the debtor, who was notably represented by counsel, to investigate the possibilities of such claims.