Franck v. Bedenfield

*318 Weaver, J. We have before us yet another of the cases arising from the Diamond Mortgage Corporation/A.J. Obie & Associates, Inc., mortgage-backed securities fraud. For a history of this scam, see Stone v Mehlberg, 728 F Supp 1341 (WD Mich, 1989). In this case, plaintiff, Robert Franck, purchased a mortgage that had been given to Diamond by Clark and Jessie Bedenfield (hereafter defendants). Miscreants at Diamond absconded with plaintiffs investment money after assigning him the note and mortgage but without disbursing the loan funds to the Bedenfields. Plaintiff brought suit to foreclose the Bedenfields’ mortgage. Following a bench trial, the court held the debt to be valid, plaintiff being a holder in due course, but the mortgage to be invalid, plaintiff not being a bona fide purchaser for value. Both sides appeal as of right. We amend in part and affirm. The first issue raised is whether defendants were obligated, contractually or otherwise, by execution of the note or the mortgage. Defendants contend there was no contract and also that they timely exercised their right of rescission. The federal Truth in Lending Act (tila), 15 USC 1601 et seq., and Regulation z, 12 CFR 226.1 et seq., both provide for rescission until three days after the latest of (1) consummation of the transaction, (2) delivery of two copies for each borrower of the notice of right to cancel, or (3) delivery of all "material disclosures.” Here, the question is whether consummation ever occurred. This Court has previously held that when the funds of a credit transaction are never distributed to the consumer, he cannot be said to have been contractually obligated as a result of the credit transaction, and, thus, consummation cannot be *319 said to have occurred. Thomas v Leja, 187 Mich App 418; 468 NW2d 58 (1991). Thus, even though the affirmative defense of the tila was not pleaded, the Bedenfields’ right to rescind the transaction remains effective under the tila. Thomas, supra. See also Kocsis v Pierce, 192 Mich App 92; 480 NW2d 598 (1991). Defendants sent a letter to Diamond on January 30, 1989, expressing their intent to rescind the contract. However, in denying defendants’ motion for summary disposition pursuant to MCR 2.116(C) (10), the court ruled that the letter intended to effectuate a rescission was unenforceable because Diamond was in the midst of bankruptcy proceedings, and all transactions were required to cease during the stay imposed by such proceedings. We agree with the court’s conclusion, and plaintiff’s argument on appeal, that the bankruptcy stay precluded defendants’ attempt to rescind the contract with regard to Diamond. However, shortly after March 15, 1986, Diamond assigned the Bedenfields’ mortgage to Franck. Any consumer who has the right to rescind a transaction under 15 USC 1635 may rescind the transaction with regard to any assignee of the obligation, 15 USC 1641(c). Thus, the Bedenfields could properly exercise their right to rescind by informing Franck of their intent to do so. See Stone, supra at 1347. We find that defendants’ motion for summary disposition alleging that they were allowed to rescind the contract under the tila effectively rescinded the transaction. See Thomas, supra at 423. Franck asserts that because he is a holder in due course, the tila rescission remedy is not effective against him. However, this Court has previously ruled to the contrary regarding this issue. Id at 423, and see Stone, supra at 1348. *320 After rescinding the loan transaction, the Bedenfields were not obligated to pay the note, and Franck was required to discharge the mortgage. 15 USC 1635(b); Stone, supra at 1347. This resolution renders all other issues raised by the parties moot. We amend the judgment of November 28, 1989, to strike that portion of the judgment granting Franck judgment against the Bedenfields. Amended in part and affirmed.