UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA
April 6, 2009
JOAN A. DEMAREST, AN INDIVIDUAL, PLAINTIFF,
QUICK LOAN FUNDING, INC., ET AL., DEFENDANTS.
The opinion of the court was delivered by: Margaret M. Morrow United States District Judge
ORDER GRANTING PLAINTIFF'S APPLICATION FOR PRELIMINARY INJUNCTION
Plaintiff Joan A. Demarest commenced this action in Los Angeles Superior Court on February 23, 2009 against defendants Quick Loan Funding, Inc.; Ocwen Loan Servicing, LLC; Aztec Foreclosure Corporation; Mortgage Electronic Registration System, Inc. ("MERS"); HSBC Bank USA; and Platinum Coast Escrow, Inc.*fn1 Ocwen, MERS, and HSBC removed the action to this court on March 10, 2009. On March 23, 2009, the court granted plaintiff's application for a temporary restraining order and order to show cause why a preliminary injunction should not issue. Plaintiff seeks a preliminary injunction restraining defendants from conducting a trustee's sale of the real property located at 6568 Sheltondale Avenue, West Hills, CA 91307 (the "property").
I. FACTUAL AND PROCEDURAL BACKGROUND
A. Factual Allegations in Plaintiff's Complaint
Plaintiff is the sole owner of the property, which is her primary residence.*fn2 She alleges that defendants violated the Truth in Lending Act ("TILA"), 15 U.S.C. § 1631 et seq., and various provisions of the California Civil Code related to mortgage loans and foreclosure sales.
On December 23, 2005, plaintiff applied to Quick Loan for an adjustable rate loan secured by a mortgage on the property.*fn3 Plaintiff contends that Quick Loan failed to give her a copy of the Consumer Handbook on Adjustable Rate Mortgages; documentation providing an example of the payment terms that would result from an increase in the interest rate on the loan; and notice of her right to rescind the loan.*fn4 She asserts that she received an "amended final loan statement" dated January 9, 2006, which showed a balance due her of $40,794.73. Correspondence dated that same day, sent by Platinum, referenced a wire transfer of $36,568.03. Plaintiff alleges that she never received the additional $4,226.70, and that Platinum never explained the discrepancy between the amount on the loan statement and the amount of the wire transfer.*fn5
Plaintiff admits that she "fell behind" on her loan payments.*fn6 Thereafter, on December 20, 2008, plaintiff sent a notice of rescission to Quick Loan and Ocwen.*fn7 Ocwen posted a notice of trustee's sale at the property on February 5, 2009, indicating a sale date of February 24, 2009.*fn8 Plaintiff asserts that, other than sending her "boilerplate mailings encouraging modification," defendants never contacted her to assess her financial situation and explore options for avoiding foreclosure.*fn9 She contends that she "attempted to contact Ocwen to explore options for modifying the loan" through her counsel, but received no response.*fn10
Plaintiff's complaint pleads claims for cancellation of written instrument; conversion; declaratory relief; injunctive relief; rescission of the loan agreement; and violation of TILA.
B. The State Court TRO
At the time plaintiff commenced the action in state court on February 23, 2009, she applied for a temporary restraining order. Although her attorney attempted to contact defendants, no opposition was filed, and Judge James Chalfant granted the application that same day. Defendants were ordered to show cause by March 17, 2009 why they should not be restrained from completing the trustee's sale pending adjudication of the case. On March 10, 2009, HSBC, Ocwen, and MERS removed the action to federal court.
C. The Federal Court TRO
On March 20, 2009 plaintiff filed an application for a temporary restraining order and order to show cause why a preliminary injunction should not issue. Defendants did not oppose plaintiff's application, and it was granted on March 23, 2009. The TRO restrained defendannts from conducting a trustee's sale pending a hearing on the order to show cause. HSBC, Ocwen, and MERS filed opposition to the application for preliminary injunction on March 27, 2009, and plaintiff replied on April 1, 2009.*fn11
D. Evidence Adduced by Plaintiff
In support of her application, plaintiff submits a declaration regarding the circumstances surrounding her entry into the loan agreement and defendants' alleged TILA violations;*fn12 a copy of the deed of trust, which states that the loan agreement was executed on December 25, 2005, and that the term of the loan was to run through 2036;*fn13 copies of correspondence with Platinum regarding the $4,226.70 discrepancy;*fn14 a hand-written letter to Ocwen and Quick Loan rescinding the transaction; and a copy of the notice of trustee's sale.*fn15
E. Defendants' Opposition
Defendants proffer the declaration of Ocwen's manager;*fn16 a copy of the Deed of Trust;*fn17 proof of plaintiff's delinquencies on her loan payments;*fn18 and copies of disclosure documents and notice of right to rescind that they contend were given to plaintiff at the time the loan documents were executed.*fn19 The copy of the deed of trust submitted by defendants contains various riders that are not attached to the version plaintiff submitted. Among these is an "Adjustable Rate Rider," which indicates that the interest rate on plaintiff's loan could vary from a minimum of 9.9% to a maximum of 15.9%.*fn20 Defendant also submits copies of "Ocwen system computer printouts," purportedly reflecting Ocwen's telephone contacts with plaintiff "to assess her financial situation and . . . explore alternative options to foreclosure."*fn21 As these documents are illegible, the court has not considered them.
Defendants assert that they have complied with the requirements of TILA and California Civil Code § 2923.5, and that plaintiff's statements to the contrary are "self-serving."*fn22 They also assert that the doctrine of unclean hands bars plaintiff from obtaining injunctive relief.*fn23
A. Standard Governing Preliminary Injunctive Relief
"The traditional equitable criteria for granting preliminary injunctive relief are (1) a strong likelihood of success on the merits, (2) the possibility of irreparable injury to plaintiff if the preliminary relief is not granted, (3) a balance of hardships favoring the plaintiff, and (4) advancement of the public interest (in certain cases)." Dollar Rent A Car of Washington, Inc. v. Travelers Indem. Co.,774 F.2d 1371, 1374 (9th Cir. 1985). A court may issue a preliminary injunction if plaintiff demonstrates "'either: (1) a likelihood of success on the merits and the possibility of irreparable injury; or (2) that serious questions going to the merits were raised and the balance of hardships tips sharply in its favor.'" Clear Channel Outdoor Inc., a Delaware Corp. v. City of Los Angeles, 340 F.3d 810, 813 (9th Cir. 2003) (quoting Walczak v. EPL Prolong, Inc., 198 F.3d 725, 731 (9th Cir. 1999)); see Miller v. California Pacific Medical Center, 19 F.3d 449, 456 (9th Cir. 1994).*fn24 "These two formulations represent two points on a sliding scale in which the required degree of irreparable harm increases as the probability of success decreases." Prudential Real Estate Affiliates, Inc. v. PPR Realty, Inc., 204 F.3d 867, 874 (9th Cir. 2000). "They are not separate tests but rather outer reaches of a single continuum." Baby Tam & Co. v. City of Las Vegas, 154 F.3d 1097, 1100 (9th Cir. 1998), abrogated by City of Littleton, Colo. v. Z.J. Gifts D-4, L.L.C., 541 U.S. 774 (2004). "Thus, 'the greater the relative hardship to the moving party, the less probability of success must be shown.'" Sun Microsystems, Inc. v. Microsoft Corp., 188 F.3d 1115, 1119 (9th Cir. 1999) (quoting National Ctr. for Immigrants Rights v. INS, 743 F.2d 1365, 1369 (9th Cir. 1984).
"Irreparable harm," for purposes of obtaining preliminary injunctive relief, is harm "that cannot be redressed by legal or equitable remedy following trial." Optinrealbig.com, LLC v. Ironport Systems, Inc., 323 F.Supp.2d 1037, 1050 (N.D. Cal. 2004) (citing Public Util. Comm'n v. FERC, 814 F.2d 560, 562 (9th Cir. 1987)). Because of this, "economic injury alone does not support a finding of irreparable harm, because such injury can be remedied by a damage award." Rent-A-Center, Inc. v. Canyon Television & Appliance Rental, Inc., 944 F.2d 597, 603 (9th Cir. 1991) (citing Los Angeles Mem'l Coliseum Comm'n, 634 F.2d at 1201); see also Sampson v. Murray, 415 U.S. 61, 90 (1974) ("Mere injuries, however substantial, in terms of money, time and energy necessarily expended are not enough [to constitute irreparable injury]" (internal quotation marks omitted)).
B. Plaintiff's Likelihood of Success on Her Rescission Claim Under TILA
Plaintiff's claims for cancellation of written instrument, declaratory relief, rescission and violation of TILA are all based on allegations that defendants violated TILA and/or provisions of the California Civil Code related to mortgage loans and foreclosure sales.*fn25 The court first examines whether plaintiff has demonstrated a likelihood that she is entitled to rescind the loan agreement because defendants violated TILA.
Plaintiff asserts that defendants violated TILA by failing to provide her with a copy of the Consumer Handbook on Adjustable Rate Mortgages; with documentation providing an example of the payment terms that would result from an increase in the interest rate on the loan; and with notice of her right to rescind the loan. She further alleges that defendants violated TILA by understating the annual percentage rate and finance charge for the loan, and "overstating the amount financed."*fn26
1. Whether Plaintiff's Loan Is an Open-End Credit Transaction or a Closed-End Credit Transaction
Under TILA and Regulation Z,*fn27 different disclosure requirements apply to lenders depending on whether the loan in question is an "open-end credit" transaction or a "closed-end credit" transaction. See Benion v. Bank One, Dayton, N.A., 144 F.3d 1056, 1057 (7th Cir. 1998) ("The Truth in Lending Act has separate disclosure requirements for 'open-end' and 'closed-end' credit transactions. The requirements for the latter are more onerous"). TILA defines an "open-end credit plan" as "a plan under which the creditor reasonably contemplates repeated transactions, which prescribes the terms of such transactions, and which provides for a finance charge which may be computed from time to time on the outstanding unpaid balance." 15 U.S.C. § 1602(i); see also 12 C.F.R. § 226.2 (20) ("Open-end credit means consumer credit extended by a creditor under a plan in which: (i) The creditor reasonably contemplates repeated transactions; (ii) The creditor may impose a finance charge from time to time on an outstanding unpaid balance; and (iii) The amount of credit that may be extended to the consumer during the term of the plan (up to any limit set by the creditor) is generally made available to the extent that any outstanding balance is repaid").*fn28 Examples of open-end credit include "credit-card credit and revolving credit more broadly." See Benion, 144 F.3d at 1058. "Closed-end credit," by contrast, "means consumer credit other than open-end credit." 12 C.F.R. § 226.2(10).
The parties do not directly address whether plaintiff's loan constituted an open-end or closed-end credit transaction. It appears, however, that the loan was a closed-end credit transaction. See, e.g., McAnaney v. Astoria Financial Corp., No. 04-CV-1101 (JFB)(WDW), 2007 WL 2702348, *6 (E.D.N.Y. Sept. 12, 2007) ("A 'closed-end credit' transaction . . . includes a completed loan like a mortgage or a car loan," citing Cardiello v. The Money Store, Inc., No. 00 CIV. 7332(NRB), 2001 WL 604007, *3 n. 8 (S.D.N.Y. June 1, 2001) and Baskin v. G. Fox & Co., 550 F.Supp. 64, 66-67 (D. Conn. 1982)); Wilkinson v. Wells Fargo Bank MN, No. 06-C-1288, 2007 WL 1414888, *3 n. 4 (E.D. Wis. May 9, 2007) ("To the extent that Wilkinson alleges a mortgage loan in the complaint, that loan creates a closed-end credit relationship"); see also Allen v. Homeq Servicing, Inc., No. C-08-1698 MMC, 2008 WL 2609801, *1 (N.D. Cal. June 30, 2008) (denying leave to amend to allege a claim for violation of 15 U.S.C. § 1637, which applies to open-end credit transactions, because plaintiff's complaint was based on a mortgage loan, citing McAnaney, 2008 WL 2702348 at *6).
2. Legal Standard Governing Borrowers' Right to Rescind Under TILA
15 U.S.C. § 1635 governs the borrower's right under TILA to rescind a "consumer credit transaction. . . in which a security interest. . . is or will be retained or acquired in any property which is used as the principal dwelling of the person to whom credit is extended." 15 U.S.C. § 1635(a). Under this section, the borrower has a right to rescind "until midnight of the third business day following the consummation of the transaction or the delivery of the information and rescission forms required under this section together with a statement containing the material disclosures required under this subchapter, whichever is later." Id. Until the lender makes all required "material disclosures," therefore, the three-day time rescission period does not begin to run. "The term 'material disclosures' means the required disclosures of the annual percentage rate, the finance charge, the amount financed, the total payments, the payment schedule, and the disclosures and limitations referred to in § 226.32(c) and (d)."*fn29 12 C.F.R. § 226.23(a)(3) n. 48.
Not every disclosure required by the statute is a "material disclosure" that, if not provided to the borrower, will prevent the three-day period from running. As explained in the Federal Reserve Board's Official Staff Interpretation of 12 C.F.R. § 226.23, "[f]ootnote 48 sets forth the material disclosures that must be provided before the rescission period can begin to run. . . . Failure to give the other required disclosures does not prevent the running of the rescission period, although that failure may result in civil liability or administrative sanctions."*fn30 See 12 C.F.R. Pt. 226, Supp. I; see also Ngwa v. Castle Point Mortgage, Inc., No. 08 Civ. 0859(AJP), 2008 WL 3891263, *7 (S.D.N.Y. Aug. 20, 2008) ("[T]he extended rescission right is only available when a creditor fails to provide the disclosures required by 15 U.S.C. § 1635(a) [which requires disclosure of the right to rescind] and 12 C.F.R. § 226.23(a)(3) n. 48" (footnotes omitted), citing Fiorenza v. Fremont Inv. & Loan, No. 08 Civ. 858, 2008 WL 2517139, *3 (S.D.N.Y. June 20, 2008) ("Only the failure to provide those disclosures required by section 1635 and set forth in footnote 48 will result in an extension of the rescission period") and Mayfield v. General Electric Capital Corp., No. 97 Civ. 2786, 1999 WL 182586, *7 (S.D.N.Y. Mar. 31, 1999) ("[O]nly failure to provide 'material disclosures' or failure to disclose a right to rescind, give rise to a right to rescind")). Even where the lender has not provided the disclosures necessary to trigger the three-day rescission period, however, the right to rescind "expire[s] three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first." See 15 U.S.C. § 1635(f).*fn31
3. Whether Defendants' Alleged Failure to Provide the Consumer Handbook on Adjustable Rate Mortgages Provides a Right to Rescind
TILA imposes additional disclosure requirements on transactions like the one at issue here, which have "a term greater than one year," are "secured by the consumer's principal dwelling with a term greater than one year," and provide that the "annual percentage rate may increase after consummation." These include a set of special early disclosure requirements. See 12 C.F.R. § 226.19(b). One of the early disclosure requirements mandates that the lender provide "[t]he booklet titled Consumer Handbook on Adjustable Rate Mortgages published by the [Federal Reserve] Board and the Federal Home Loan Bank Board, or a suitable substitute" "at the time an application form is provided or before the consumer pays a non-refundable fee, whichever is earlier." 12 C.F.R. § 226.19(b)(1).
The requirement that a lender provide the Handbook, however, is not "considered [a] 'material disclosure[ ]' which, if not provided before consummation of the transaction, will trigger the extended rescission period." Ngwa, 2008 WL 3891263 at *10 (citing 15 U.S.C. § 1635(f), 12 C.F.R. § 226.23(a)(3), and Pulphus v. Sullivan, No. 02 C 5794, 2003 WL 1964333, *14 (N.D. Ill. Apr. 28, 2003)); see also 12 C.F.R. Pt. 226, Supp. I. Thus, defendants' alleged failure to give plaintiff a copy of the Handbook, while a violation of TILA, does not extend plaintiff's rescission period. See Ngwa, 2008 WL 3891263 at *10 (citing Pulphus, 2003 WL 1964333 at *14); see also 12 C.F.R. Pt. 226, Supp. I. As a result, the court will not consider evidence concerning plaintiff's receipt or non-receipt of the Handbook in assessing her entitlement to a preliminary injunction.
4. Whether Defendants' Failure to Disclose Information Related to Potential Rate Increases Provides a Right to Rescind
i. Whether Plaintiff Has a Right to Rescind Based on Violation of 12 C.F.R. § 226.18
Plaintiff also alleges that defendants failed to give her documentation providing an example of the payment terms that would result from an increase in the interest rate on the loan. Plaintiff cites 12 C.F.R. § 226.18(f)(1), which requires disclosure of "[t]he circumstances under which the rate may increase," "[a]ny limitations on the increase," and "the effect of an increase."*fn32 Section 226.18(f)(1), however, applies only to "transaction[s] not secured by the consumer's principal dwelling or . . . transaction[s] secured by the consumer's principal dwelling with a term of one year or less," where "the annual percentage rate may increase after consummation." Because plaintiff's loan is secured by her principal dwelling and has a term longer than one year, § 226.18(f)(1) does not apply.
Subsection (f)(2) of § 226.18, rather than subsection (f)(1), applies to transactions "secured by the consumer's principal dwelling" that have "a term greater than one year" and an "annual percentage rate [that] may increase after consummation." Under subsection (f)(2), the lender must disclose "[t]he fact that the transaction contains a variable-rate feature," and "[a] statement that variable-rate disclosures have been provided earlier." Unlike a failure to make the early disclosures required by 12 C.F.R. § 226.19, failure to make the disclosures required by § 226.18(f) delays commencement of the rescission period. See Ngwa, 2008 WL 3891263 at *10 ("With variable-rate interest loans, TILA requires creditors to make two sets of disclosures. First, TILA requires lenders to provide the specific variable-rate program disclosures and the 'booklet titled Consumer Handbook on Adjustable Rate Mortgages.' The first set of disclosures are required 'at the time an application form is provided or before the consumer pays a non-refundable fee, whichever is earlier.' The second set of variable-rate disclosures are required 'before consummation of the transaction' and must include a statement 'that the transaction contains a variable-rate feature' and a statement 'that [the] variable-rate disclosures have been provided earlier.' Only the second set of disclosures are considered 'material disclosures' which, if not provided before consummation of the transaction, will trigger the extended rescission period" (citations omitted) (alteration original)).
The TILA disclosure statement plaintiff received and signed on December 23, 2005 states: "Your loan contains a variable rate feature. Disclosures about the variable rate feature have been provided to you earlier."*fn33 Because this satisfies § 226.18(f)(2)'s disclosure requirements, plaintiff cannot rescind for failure to comply with that regulation.
ii. Whether the Information Related to Potential Rate Increases Was a "Material Disclosure"
One of the "material disclosures" required by 12 C.F.R. § 226.32 is: "For variable-rate transactions, a statement that the interest rate and monthly payment may increase, and [a statement of] the amount of the single maximum monthly payment, based on the maximum interest rate required to be disclosed under § 226.30." 12 C.F.R. § 226.32(c)(4). Section 226.30 requires, in pertinent part, that "[a] creditor shall include in any consumer credit contract secured by a dwelling . . . the maximum interest rate that may be imposed during the term of the obligation when: [i]n the case of closed-end credit, the annual percentage rate may increase after consummation." (footnote omitted).
As noted, the interest rate on plaintiff's loan was variable and could be increased after consummation of the loan transaction. The maximum interest rate was disclosed in an "Adjustable Rate Rider" attached to the deed of trust.*fn34 The TILA disclosure documents submitted by defendants in support of their claim that they complied with all statutory requirements do not disclose the maximum interest rate or monthly payment, however. Nor do they include a statement that the interest rate or monthly payment might increase.*fn35 Plaintiff asserts in her declaration that "none of the documentation provided to [her] showed an example of the payment terms that would result [from] an increase in the rate."*fn36 The loan agreement and disclosure documents submitted by defendants support plaintiff's contention. Based on the evidence presently before the court, therefore, it appears that plaintiff is likely to succeed on the merits of her claim that she did not receive all material disclosures required by TILA, and that the three-day rescission period did not begin to run as a result.
5. Whether Plaintiff Properly Rescinded the Transaction
The loan transaction closed on December 23, 2005. Thus, plaintiff had until December 23, 2008 to rescind the transaction. See 15 U.S.C. § 1635(f). Plaintiff has submitted evidence that she mailed a letter to Ocwen and Quality Loan on December 20, 2008, rescindng the transaction because, inter alia, defendants failed to comply with TILA by "understating the APR" of the loan.*fn37 Defendants do not proffer any contradictory evidence or challenge plaintiff's assertion regarding the letter. Under 12 C.F.R. § 226.23(a)(2), a notice of rescission is effective when mailed. Thus, plaintiff's notice was timely.
The issue remains, however, whether plaintiff provided notice to the proper party. Plaintiff alleges that Ocwen is the servicer of her loan. Accordingly, Ocwen is not a "creditor" under TILA, and plaintiff could not effectively rescind by sending notice to Ocwen. See 15 U.S.C. § 1602(f) ("The term 'creditor' refers only to a person who both (1) regularly extends, whether in connection with loans, sales of property or services, or otherwise, consumer credit which is payable by agreement in more than four installments or for which the payment of a finance charge is or may be required, and (2) is the person to whom the debt arising from the consumer credit transaction is initially payable on the face of the evidence of indebtedness or, if there is no such evidence of indebtedness, by agreement"); 12 C.F.R. § 226.23(a)(2) ("To exercise the right to rescind, the consumer shall notify the creditor of the rescission by mail, telegram or other means of written communication" (emphasis added)).*fn38
Plaintiff's notice to Quick Loan, by contrast, may have been sufficient to rescind the transaction. Although it appears that HSBC, not Quick Loan, was the owner of plaintiff's debt at the time plaintiff attempted rescission, TILA provides that "[a]ny consumer who has the right to rescind a transaction under section 1635 of this title may rescind the transaction as against any assignee of the obligation." 15 U.S.C. § 1640. Although there is little precedent on the issue, courts in other circuits have found that timely notice to the original creditor is sufficient to rescind a transaction, whether or not that creditor has subsequently assigned the loan to another party. See Hubbard v. Ameriquest Mortgage Co., No. 05-CV-389, 2008 WL 4449888, *6 (N.D. Ill. Sept. 30, 2008) ("The question raised by Deutsche Bank's argument is whether Plaintiff's timely notice to the original lender is sufficient to effectuate rescission as to assignees who did not receive timely notice. Upon examination of the statutory language, its implementing regulations, the pertinent case law, and the role that rescission plays within the TILA scheme, the Court concludes that Hubbard's timely rescission request as to Ameriquest is equally effective against Deutsche Bank as assignee, despite lack of notice to Deutsche Bank within the three year window"); see also Schmit v. Bank United FSB, Civil Action No. 08 C 4575, 2009 WL 320490, *3 (N.D. Ill. Feb. 6, 2009) ("The reasoning in Hubbard is persuasive").
The court finds Hubbard convincing, and concludes there is a likelihood plaintiff will be able to establish that she properly rescinded the transaction.*fn39 Because the evidence before the court indicates that defendants failed to make all material disclosures required under TILA, and further that plaintiff timely rescinded the loan agreement, plaintiff has shown a likelihood that she will succeed on the merits of her TILA rescission claim.
C. Whether Defendants Have Demonstrated a Likelihood of Success on Their Affirmative Defense of Unclean Hands
Before concluding definitively that plaintiff has shown a likelihood of success on the merits of her TILA claim, however, the court must consider whether defendants have demonstrated that they are likely to succeed in proving their unclean hands defense. See Perfect 10, Inc. v. Amazon.com, Inc., 508 F.3d 1146, 1158 (9th Cir. 2007) ("Because 'the burdens at the preliminary injunction stage track the burdens at trial,' once the moving party has carried its burden of showing a likelihood of success on the merits, the burden shifts to the non-moving party to show a likelihood that its affirmative defense will succeed," quoting Gonzales v. O Centro Espirita Beneficente Uniao do Vegetal, 546 U.S. 418, 429 (2006)).
The equitable doctrine of unclean hands "closes the doors of a court of equity to one tainted with inequitableness or bad faith relative to the matter in which he seeks relief, however improper may have been the behavior of the [other party.]" Ellenburg v. Brockway, Inc., 763 F.2d 1091, 1097 (9th Cir. 1985) (quoting Precision Inst. Mfg. Co. v. Automotive Maintenance Mach. Co., 324 U.S. 806, 814 (1945)). "To establish unclean hands, a defendant must demonstrate (1) inequitable conduct by the plaintiff; (2) that the plaintiff's conduct directly relates to the claim which it has asserted against the defendant; and (3) plaintiff's conduct injured the defendant." Survivor Productions LLC v. Fox Broadcasting Co., No. CV01-3234 LGB (SHX), 2001 WL 35829270, *3 (C.D. Cal. June 12, 2001) (citing JTH Tax, Inc. v. H & R Block Eastern Tax Services, Inc., 128 F.Supp.2d 926, 949 (E.D.Va.2001)). "In applying the doctrine, '[w]hat is material is not that the plaintiff's hands are dirty, but that he dirtied them in acquiring the right he now asserts, or that the manner of dirtying renders inequitable the assertion of such rights against the defendants.'" Ellenburg, 763 F.2d at 1097 (quoting Republic Molding Corp. v. B.W. Photo Utilities, 319 F.2d 347, 349 (9th Cir.1963); see also Fuddruckers, Inc. v. Doc's B.R. Others, Inc., 826 F.2d 837, 847 (9th Cir.1987) (to establish unclean hands, "the defendant must demonstrate that the plaintiff's conduct is inequitable and that the conduct relates to the subject matter of its claims").
Defendants assert that plaintiff has unclean hands because she failed to make her loan payments. Plaintiff acquired the right at issue, i.e., the right to rescind the loan transaction, at the time transaction was consummated, based on defendants' failure to make all necessary TILA disclosures. Plaintiff's failure to pay occurred after execution of the loan agreement, and thus does not affect her right to rescission. See Dollar Systems, Inc. v. Avcar Leasing Systems, Inc., 890 F.2d 165, 174 (9th Cir. 1989) ("Avcar's alleged misconduct (failure to perform under the franchise agreement) is unrelated to the issue of whether Avcar is entitled to rescind the franchise agreement. Avcar's misconduct occurred after the execution of the franchise agreement. Based on DSI's preceding franchise violations, the sale of the franchise was unlawful and thus Avcar had the right to rescind the franchise agreement immediately upon its execution. Therefore, any subsequent nonperformance of the franchise agreement did not affect Avcar's right to rescission. Accordingly, Avcar's rescission claim is not barred by the doctrine of unclean hands"); see also Floyd v. Security Finance Corp. of Nevada, 181 F.Supp.2d 1137, 1142 (D. Nev. 2001) ("Defendants state that even if their behavior is found to be in violation of TILA and Regulation Z, Plaintiff should be barred from relief because of the unclean hands doctrine. Defendants allege that Plaintiff defaulted on the January 1999 loan and is therefore not entitled to relief. Whether or not Plaintiff actually defaulted on the January 1999 loan is immaterial to the determination here, however. The Ninth Circuit has followed a general trend that interprets TILA to require strict adherence to its directives. Semar v. Platte Valley Federal Savings and Loan Ass'n, 791 F.2d 699, 703-04 (9th Cir.1986) ('TILA and Reg[ulation] Z contain detailed disclosure requirements for consumer loans. . . . Technical or minor violations of TILA or Reg[ulation] Z, as well as major violations, impose liability on the creditor and entitle the borrower to rescind'). . . .
Further, the Ninth Circuit has pointed out that 'Congress did not intend for TILA to apply only to sympathetic consumers; Congress designed the law to apply to all consumers, who are inherently at a disadvantage in loan and credit transactions.' Jackson v. Grant, 890 F.2d 118, 122 (9th Cir.1989)"); Clay v. Johnson, 22 F.Supp.2d 832 (N.D. Ill. 1998) ("Defendants assert the equitable defense of unclean hands in that they allege that the Plaintiffs never had any intention of paying what they owed under the contract. TILA and the associated regulations provide for waiver of the consumer's right to rescind under only a very limited number of circumstances. . . . This implies that, under all circumstances except for the ones outlined in 12 C.F.R. § 226.23(e)(1), the consumer retains all of her rights under the Act including the right to rescind when she has not received all the required disclosures under the Act"). Consequently, the court concludes that defendants have not carried their burden of showing that they will likely prevail on their unclean hands defense.
D. Whether Plaintiff Has Demonstrated a Likelihood of Irreparable Harm
The loss of one's personal residence due to foreclosure constitutes irreparable injury. See, Avila v. Stearns Lending, Inc., No. CV 08-0419-AG(CTx), 2008 WL 1378231, *3 (C.D. Cal. Apr. 7, 2008) ("Plaintiffs cite many cases for the proposition that '[l]osing one's home through foreclosure is an irreparable injury.' See, e.g., Wrobel v. S.L. Pope & Associates, [No. 07CV1591 IEG (BLM)], 2007 WL 2345036, *1 (S.D. Cal. June 15, 2007). Plaintiffs also point out that they will lose their right to rescission under 15 U.S.C. § 1635(f) if their home is foreclosed upon. The Court agrees. 'The imminent foreclosure of Plaintiff's residence presents a threat of irreparable harm.' Nichols v. Deutsche Bank Nat. Trust Co., [Civil No. 07cv2039-L(NLS)], 2007 WL 4181111, *3 (S.D. Cal. Nov. 21, 2007). Plaintiffs have shown the possibility of irreparable injury if the preliminary injunction does not issue"). Because defendants will almost certainly proceed with the trustee's sale if not enjoined from doing so, plaintiff has demonstrated a likelihood of irreparable harm.
E. Conclusion Regarding Preliminary Injunction
As noted, the court may issue an injunction if the moving party establishes either (1) a combination of probable success on the merits and the possibility of irreparable harm or (2) the existence of serious questions going to the merits, a demonstration that there is at least a fair chance the movant will prevail, and a balance of hardships that tips sharply in the movant's favor. Miller,19 F.3d at 456. Plaintiff has demonstrated a likelihood of success on the merits of her TILA rescission claim and a possibility of irreparable harm; defendants have failed to demonstrate that they are likely to succeed on their affirmative defense. In addition, the balance of hardships strongly favors plaintiff. Plaintiff will lose her home if an injunction does not issue. By contrast, defendants identify no serious hardship they will suffer if the trustee's sale is delayed until resolution of this matter. Consequently, plaintiff would be entitled to preliminary injunctive relief even if the court were to conclude that she had shown only "serious questions" going to the merits of her claim. See Sun Microsystems, 188 F.3d at 1119 ("[T]the greater the relative hardship to the moving party, the less probability of success must be shown"). As a result, plaintiff's motion should be granted unless defendants' assertion of unclean hands bars an injunction in this case.*fn40
For the foregoing reasons, plaintiff's motion for preliminary injunction is granted. Defendants are enjoined from proceeding with a trustee's sale of the property pending resolution of this action.