## Facts

- Joseph E. Gerasta and Josefina E. Gerasta obtained a home-improvement loan from Hibernia National Bank, secured by a second mortgage on their residence.
- About six months later, the Gerastas discovered Hibernia had not provided all disclosures required by the Truth in Lending Act (TILA).
- The Gerastas sent Hibernia a notice rescinding the transaction under 15 U.S.C. § 1635(a).
- Under 15 U.S.C. § 1635(b), after rescission the creditor must, within 10 days, return money or property received and take steps to reflect termination of the security interest; the borrower must then tender the property or its reasonable value.
- Hibernia did nothing after receiving the rescission notice and did not return any payments or act to cancel the mortgage.
- The Gerastas sued in federal district court seeking rescission and related relief under TILA and Regulation Z.
- The district court ruled the Gerastas had properly rescinded and that Hibernia failed to respond as required; it awarded costs and attorney’s fees, ordered cancellation of the mortgage records, and held the Gerastas were entitled to keep the loan proceeds because Hibernia failed to comply with § 1635(b).
- Hibernia appealed, challenging the remedy that denied it recovery of the loan proceeds.

## Issues

1. When a borrower validly rescinds a covered transaction under 15 U.S.C. § 1635, does a creditor’s failure to perform its post-rescission duties under § 1635(b) automatically forfeit the creditor’s right to recover the loan proceeds, or may a court condition rescission relief on borrower tender and structure the sequence of restitution?

## Decision

- The Fifth Circuit affirmed that the loan was subject to TILA and that Hibernia’s disclosure failures entitled the Gerastas to rescind under 15 U.S.C. § 1635.
- The Fifth Circuit reversed the district court’s remedy insofar as it treated Hibernia’s failure to act within the § 1635(b) period as a forfeiture of the bank’s right to recover the loan proceeds.
- The case was remanded for the district court to fashion a rescission remedy consistent with § 1635(b) and equitable restitution principles, including consideration of the borrowers’ tender of the proceeds (or their reasonable value).

## Legal Principles

- A borrower may rescind a covered consumer credit transaction secured by the borrower’s home when the creditor fails to provide required material disclosures under TILA.
- Section 1635(b) sets out post-rescission duties and a sequence of restitution, but the statute does not require a punitive result that lets the borrower retain the creditor’s principal solely because the creditor did not act within the specified time.
- Rescission under TILA remains rooted in equity; courts may condition rescission and the termination of the security interest on the borrower’s return (tender) of the loan proceeds or their reasonable value to prevent unjust enrichment.
- A creditor’s noncompliance with § 1635(b) can justify statutory remedies such as costs and attorney’s fees, but it does not, by itself, eliminate the creditor’s right to restitution of the amount advanced.

## Conclusion

Gerasta held that the borrowers validly rescinded a TILA-covered loan for disclosure violations, but the Fifth Circuit rejected a remedy that allowed them to keep the loan proceeds as a consequence of the bank’s failure to comply with § 1635(b). On remand, the district court was directed to structure rescission so that statutory protections are enforced while still requiring appropriate restitution, including borrower tender of the proceeds or their reasonable value.


Gerasta v. Hibernia National Bank, 575 F.2d 580 (1978)