By: Ryan Sawyer – Codilis & Associates, P.C.
Section 1640(e) of the Truth in Lending Act provides that any action under the TILA may be brought “within one year from the date of the occurrence of the violation . . . [except that] [t]his subsection does not bar a person from asserting a violation of this title . . . in an action to collect the debt which was brought more than one year from the date of the occurrence of the violation as a matter of defense by recoupment or set-off in such action, except as otherwise provided by State law.” (emphasis added). In other words, while there is generally a one year statute of limitations for actions brought under the TILA, that statute of limitations may be extended indefinitely if the claim is brought as a counterclaim in recoupment or set-off to a debt collection action. Thus, in actions where state law does not apply (for example, filing a proof of claim in bankruptcy court), there is no statute of limitations for a TILA counterclaim for set-off or recoupment. See Coxson v. Commonwealth Mortgage Co. of America, 43 F.3d 189, 194 (5th Cir. 1995) (TILA counterclaim allowed despite the fact that the loan origination 15 years prior to the proof of claim being filed); In re Wentz, 393 B.R. 545 (Bankr. S.D. Ohio 2008) (TILA counterclaim allowed approximately 3 years after origination).
But what happens when a debt collector files a lawsuit in the State of Illinois? Despite the fact that this language has been a part of the TILA for decades, the Illinois Appellate Court has not previously ruled on the meaning of this language in the context of Illinois law. Historically, this has meant that any time a debt collector brought an action to collect a debt, the debt collector could have been opening itself to liability to a counterclaim for a violation of the TILA. Because the TILA provides for the payment of attorneys’ fees to the successful borrower, such a suit could easily become cost prohibitive to litigate. Thus, debt collectors filing lawsuits in Illinois were at risk of counterclaims from those debtors who were savvy enough to hire the right counsel to defend them. As one court noted, “[t]he problem is that an honest mistake of no consequence to any of the parties involved has become the subject of shark instincts to the plaintiff’s bar.” Smith v. Highland Bank, 108 F.3d 1325, 1327, n4 (11th Cir. 1997) (quoting 141 Cong. Rec. H9513, H9514 (daily ed. Sept. 27, 1995) (statement of Rep. Leach)). See also Hamm v. Ameriquest Mortg. Co., 506 F.3d 525, 530 (7th Cir. 2007) (requiring “punctilious” compliance with the TILA to avoid liability). Consequently, even unmeritorious TILA claims could result in a favorable settlement for the debtor.
Illinois law does provide two possible methods for a creditor to argue that claims brought under TILA may be otherwise barred under Illinois law. First, 735 ILCS 5/13-205 provides that “all civil actions not otherwise provided for, shall be commenced within 5 years next after the cause of action accrued.” This catch-all statute of limitations provides a possible method of arguing that there is not an unlimited statute of limitations for actions under the TILA. Thus, a TILA claim would be barred as untimely, even if brought as a counterclaim for set-off or recoupment, if the claim was brought more than five years after the accrual of the cause of action, and was not otherwise saved.
Illinois law also provides that claims that are otherwise time-barred may be saved under 735 ILCS 5/13-207 when the statute of limitations for the claim had not yet expired when the plaintiff owned its claim. Thus, if two parties enter into a transaction, and one party has a claim for fraud (which has a five year statute of limitations) and the other party a claim for breach of contract (which has a ten year statute of limitations for written contracts), the party with the longer statute of limitations cannot wait out the other party before filing suit. The purpose of section 13-207 is to protect parties who have shorter limitations periods than their opponents. “Thus . . . section 13-207 prevents plaintiffs from intentionally filing their claims as late as possible in order to preclude defendants from a reasonable opportunity to file their counterclaims within the original limitations period.” Barragan v. Casco Design Corp., 216 Ill. 2d 435, 446 (2005). Hence, “a party waives its statute of limitations defense against a set-off or counterclaim brought by his opponent, even if the counterclaim is not related to the claims in his primary complaint, as long as the counterclaim was not barred when the cause of action forming the basis of the claims in the primary complaint arose.” Cameron Gen. Corp. v. Hafnia Holdings, 289 Ill. App. 3d 495, 506 (1st Dist. 1997) (emphasis added).
Notwithstanding these two sections, at least some circuit court judges in Illinois had held that a TILA counterclaim to a debt collection action in Illinois was not time barred, because Illinois had not enacted a specific statute addressing section 1640(e) of the TILA. See e.g., Deutsche Bank Nat’l Trust Co. v. Olonilua, 2008 CH 17382 (Cir. Ct. Cook County, IL July 11, 2013). And at least one appellate court decision previously indicated that a TILA claim could be brought even when section 13-207 could not save the claim. See Associates Finance, Inc. v. Cedillo, 89 Ill. App. 3d 179, 182 (2d Dist. 1980) (finding that applying the statute of limitations would frustrate the purpose of the TILA and allowing the claim to proceed even though the borrower’s default occurred more than a year after the loan originated).
Recently, in Beneficial Illinois, Inc. v. Parker, 2016 IL App (1st) 160186, the First District clarified when Illinois law provides otherwise and found that section 13-207 is the sole method in Illinois for saving an otherwise untimely counterclaim under the TILA. In Beneficial Illinois, the defendants executed a loan agreement in July 2007. Id., ¶ 6. A little more than a year later, in October 2008, the defendants defaulted on their loan obligations. A year later, the plaintiff filed a lawsuit to foreclose the defendants’ mortgage in the Circuit Court of Cook County, Illinois. Subsequently, in June 2010, the defendants sent a letter to the plaintiff notifying the plaintiff that the defendants were electing to rescind the loan under 15 U.S.C. § 1635 [check cite]. Id., ¶ 8. The plaintiff did not respond to the letter. Id.
Subsequently, the defendants brought two counterclaims against the plaintiff, alleging a violation of the TILA. Id., ¶ 9. The counterclaims alleged two different TILA violations: first, it alleged a violation of the TILA when the loan was originated in July 2007. It alleged a second violation based on the plaintiff’s failure to respond to the rescission notice in June 2010. Id. Both counterclaims were dismissed by the trial court. Id., ¶ 9.
The appellate court, in upholding the dismissal of the TILA damages claim related to the origination of the loan, analyzed the intersection of section 1640(e) of the TILA and section 13-207 of the Illinois Code of Civil Procedure. Citing to the Supreme Court’s decision in Barragan, the First District held that “in order to bring a time-barred counterclaim pursuant to section 13-207, the counterclaim must not have been time barred when the cause of action forming the basis of the primary complaint arose.” Id., ¶ 19 (citing Canada Life Assurance Co. v. Salwan, 353 Ill. App. 3d 74, 80 (1990).
The defendants in Beneficial Illinois argued that section 13-207 could not bar the counterclaim because it represents an independent basis from section 1640(e) of the TILA to save the TILA counterclaim. The defendants cited to Barragan and a recent appellate court decision that had found a TILA counterclaim timely, U.S. Bank, N.A. v. Manzo, 2011 IL App (1st) 103115. The Beneficial Illinois court disagreed with that analysis, pointing out that in both Manzo and Barragan, the claims were properly saved under section 13-207. The appellate court also noted that prior appellate decisions (see Wood Acceptance Corp. v. King, 18 Ill. App. 3d 149 (1974) and Public Finance Corp. v. Riddle, 83 Ill. App. 3d 417 (1980)) had found that TILA claims were timely under section 13-207.
This ruling will provide that the filing of a debt collection lawsuit, years—or even decades—after the origination of a loan does not automatically open a lender or the lender’s successor to liability under the TILA. At the same time, it does not necessarily provide lenders with complete cover for liability under the TILA after one year. For example, if the failure to provide a proper TILA disclosure resulted in the borrower defaulting under the terms of the loan within the first year of the origination of the loan, the borrower’s potential TILA claim will still be saved under section 13-207. Further, TILA liability does not necessarily only occur at origination. In Beneficial Illinois, the appellate court reversed the circuit court, in part, because the defendants’ TILA counterclaim based on the plaintiff’s failure to timely respond to the rescission letter was not time barred. Beneficial Illinois, Inc., 2016 IL App (1st) 160186, ¶ 17. Entities engaged in debt collection should be aware that TILA liability can result from actions taken after origination. Further, TILA violations can also result in liability under other statutes with longer limitations periods, such as the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/1, et seq.; Gibson v. Bob Watson Chevrolet-Geo, Inc., 112 F.3d 283, 287 (7th Cir. 1997) (overturning dismissal of TILA and consumer fraud claims). Consequently, borrowers are not necessarily without recourse for bad acts committed by lenders at origination, even if the borrower does not assert a violation within the one year limitations period provided by the TILA and is unable to utilize section 13-207 to save the TILA claim. At the same time, this opinion puts to rest the idea that a borrower can sit on his potential TILA claim for years or even decades.