Eastern Savings Bank, FSB v. Esteban.

***FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER***

Electronically Filed
Supreme Court
SCAP-30686
15-MAR-2013
08:36 AM

IN THE SUPREME COURT OF THE STATE OF HAWAI#I

--—o0o---
________________________________________________________________

EASTERN SAVINGS BANK, FSB,
Respondent/Plaintiff-Appellee,

vs.

EDUARDSON ESTEBAN and EMALYN P. GABRIEL-ESTEBAN,
Petitioners/Defendants-Appellants.
________________________________________________________________

SCAP-30686

APPEAL FROM THE CIRCUIT COURT OF THE FIFTH CIRCUIT
(ICA NO. 30686; CIV. NO. 09-1-0022)

March 15, 2013

RECKTENWALD, C.J., NAKAYAMA, ACOBA, AND MCKENNA, JJ.,
AND CIRCUIT JUDGE LEE, IN PLACE OF DUFFY, J., RECUSED

OPINION OF THE COURT BY MCKENNA, J.

I. Introduction

Defendants-Appellants Eduardson Esteban and Emalyn P.

Gabriel-Esteban (“the Estebans”), borrowers and mortgagors under

a residential mortgage loan, appeal the Circuit Court of the

Fifth Circuit’s (“circuit court”) judgment confirming the
 ***FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER***

foreclosure sale of real property to Plaintiff-Appellee Eastern

Savings Bank, FSB (“Eastern”).1 This court accepted a

discretionary transfer of the case.

The issue presented is whether Hawai#i res judicata

principles prohibit a debtor from asserting federal Truth in

Lending Act (“TILA”) rescission rights after a foreclosure

judgment has become final, even if TILA’s three-year time limit

for rescission has not expired.

For the reasons discussed below, we answer in the

affirmative. Therefore, we affirm the judgment of the circuit

court confirming sale of the foreclosed property to Eastern,

granting a writ of possession, and entering a deficiency judgment

against the Estebans.

II. Background

This case arises out of a foreclosure2 on a mortgage on

property located on Kaua#i (“the Property”), granted by the

Estebans to Eastern as security for a $489,000 loan obtained on

August 15, 2007. The Estebans defaulted on the loan and, on

1
The Honorable Randal Valenciano presided.

2
“The term ‘foreclosure’ is defined as a legal proceeding to
terminate a mortgagor’s interest in property, instituted by the mortgagee
either to gain title or to force a sale in order to satisfy the unpaid debt
secured by the property.” 55 Am. Jur. 2d Mortgages § 573.

2
 ***FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER***

January 27, 2009, Eastern filed a state court action to foreclose

the mortgage.

Although properly served, the Estebans failed to appear

before the court and the clerk of the court entered their

default. Eastern, thereafter, moved for summary judgment,

interlocutory decree of foreclosure, and order of sale.

On April 24, 2009, the court entered judgment in favor

of Eastern and against the Estebans, foreclosing on the mortgage

(“Foreclosure Judgment”). The Estebans did not appeal the

Foreclosure Judgment. On November 17, 2009, the foreclosure

commissioner held a public auction to sell the Property. Eastern

submitted the only bid, for $420,000. On December 14, 2009,

Eastern filed a Motion for Confirmation of Sale, Writ of

Possession, and Deficiency Judgment (“Motion for Confirmation of

Sale”). The motion was scheduled for hearing on April 22, 2010.

On April 22, 2010, the Estebans mailed Eastern a letter

stating they were exercising their alleged right to rescind the

residential mortgage transaction “based on numerous federal

Truth-in-Lending Act violations, including in part (1) the

failure to deliver to each of them at closing any copies of

notices of their right to cancel, [] (2) instead funding their

loan based upon an unlawfully inadequate and contrived so-called

hardship waiver of their right to cancel, and (3) the failure to

3
 ***FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER***

provide them with accurate good faith disclosures.” Four hours

before the confirmation hearing, the Estebans filed a complaint

against Eastern in the United States District Court for the

District of Hawai#i (Civ. No. 10-00234-HG-LEK), seeking a

declaratory judgment that the promissory note and mortgage had

been timely cancelled pursuant to TILA prior to any sale or

dispositive state court judgment.

On May 3, 2010, the Estebans submitted a brief opposing

the Motion for Confirmation of Sale and urging the circuit court

to await disposition of the federal case before confirming the

sale. They argued that their federal TILA case against Eastern

was not barred by res judicata principles and that they had

timely exercised their rescission rights by filing their federal

claim prior to the expiration of TILA’s three-year deadline and

before entry of the state court’s final confirmation of sale.3

The circuit court took judicial notice of the Estebans’

pending federal case, but declined to stay confirmation of the

foreclosure sale in the meantime. On May 20, 2010, the circuit

court held a hearing on the Motion for Confirmation of Sale.

3
In opposing confirmation of sale, the Estebans argued that “[t]he
question before this court . . . is . . . to determine whether in fact the
Estebans’ exercise of such consumer rights has been timely to the point where
this Court must await the judgment thereon of the United States District Court
before confirming the pending self-sale to [Eastern].”

4
 ***FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER***

Citing Albano v. Norwest Financial Hawai#i, Inc., 24

F.3d 1061, 1064 (9th Cir. 2001), Eastern argued that a judgment

of foreclosure had been entered on April 24, 2009, the Estebans

had not appealed that judgment and, therefore, the Estebans’ TILA

claim was barred by res judicata. The Estebans, on the other

hand, argued that the state court was not bound by the Ninth

Circuit’s interpretation of Hawai#i law in Albano and maintained

that a borrower retains the right to rescind a mortgage prior to

confirmation of sale despite a judgment of foreclosure. They

contended that Albano was unpersuasive because the Ninth

Circuit’s interpretation of Hawai#i res judicata law erroneously

relied on Pacific Concrete Federal Credit Union v. Kauanoe, 62

Haw. 334, 614 P.3d 936 (1980), a case that did not involve a

foreclosure action. In addition, they claimed that Albano

conflicted with federal decisions from other states. Finally,

they suggested that Albano should not be followed because it

misread Hawai#i res judicata law.

The circuit court acknowledged that Albano was not

binding on state courts but agreed with the Ninth Circuit’s

analysis of Hawai#i law and concluded that the Estebans’ pending

TILA case did not bar confirmation of the sale of the Property.

On July 15, 2010, the court entered a judgment confirming sale of

5
 ***FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER***

the Property to Eastern, granting a writ of possession, and

entering a deficiency judgment against the Estebans.4

The Estebans filed a notice of appeal on August 16,

2010. They posed the following question on appeal:
As a matter of Hawaii res judicata law, during judicial
foreclosures pending sale confirmation, does a Hawaii
borrower lose his or her federal Truth-in-Lending Act right
to rescind a mortgage loan refinancing transaction within
three years of loan consummation where there otherwise may
exist TILA violations and a timely notice of cancellation is
sent to lenders up to and until final judicial confirmation,
simply because of a prior entry of a decree of foreclosure,
whether appealed or not, and simply because of the
occurrence of a prior nonbinding auction sale?

This court accepted a discretionary transfer of the

appeal pursuant to HRS § 602-58(b)(1).

4
One week later, on July 22, 2010, the federal district court
granted Eastern’s motion to dismiss the Estebans’ TILA case and denied the
Estebans’ countermotion to certify a legal question to the Hawai #i Supreme
Court. Citing Pacific Concrete, 62 Haw. at 341, 614 P.2d at 940, and Albano,
244 F.3d at 1064, the district court held that there was clear, controlling
precedent as to Hawai#i law. The court concluded that the Estebans’ TILA
rescission claim arose out of the same transaction as the state foreclosure
action, the validity of the mortgage was decided in the prior foreclosure
proceeding, and the TILA claim was therefore barred by the state court’s final
judgment of foreclosure. The court explained, “As was true in Albano, the
[Estebans] here could have raised their TILA claim in the state foreclosure
proceedings. Doing so would have provided [them] with an affirmative defense
and precluded foreclosure if [their] claims were found to be meritorious.
Plaintiffs failed to raise the TILA claim.”
In addressing an alternative argument by Eastern, the court noted
that the Estebans were essentially appealing the state Foreclosure Judgment
through their TILA rescission claim. Because the Rooker-Feldman doctrine,
enunciated in Rooker v. Fid. Trust Co., 263 U.S. 413, 44 S.Ct. 149, 68 L.Ed.
362 (1923), and D.C. Court of Appeals v. Feldman, 460 U.S. 462, 103 S.Ct.
1303, 75 L.Ed.2d 206 (1983), deprives federal district courts of jurisdiction
to hear appeals from state court judgments, the court concluded that the TILA
claim was barred.
The district court denied the Estebans’ counter-motion to certify
a legal question to this court and held that the case did not present a novel
issue for which there was no clear, controlling precedent.
The Estebans did not contest or otherwise appeal the district
court’s order granting Eastern’s motion to dismiss and denying their counter-
motion to certify a legal question to this court.

6
 ***FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER***

III. Standard of Review

Application of res judicata is a question of law. See

Exotics Hawai#i-Kona, Inc. v. E.I. Dupont De Nemours & Co., 104

Hawai#i 358, 364, 90 P.3d 250, 256 (2004). Questions of law are

reviewed de novo under the right/wrong standard. Best Place,

Inc. v. Penn Am. Ins. Co., 82 Hawai#i 120, 123, 920 P.2d 334, 337

(1996).

IV. Discussion

The issue presented is whether Hawai#i res judicata

principles prohibit a debtor from asserting federal TILA

rescission rights5 after a Foreclosure Judgment has become final,

even if TILA’s three-year time limit for rescission has not

expired.
5
Rescission developed as an equitable remedy and has the effect of
cancelling, abrogating, or disaffirming a contract; it restores all parties to
their status quo positions prior to the agreement. Leslie v. Estate of
Tavares, 93 Hawai#i 1, 994 P.2d 1047 (2000). Over time, the term “rescission”
has been used to refer to a variety of remedies with different consequences:
Plainly stated, the remedy of rescission is an avoidance of
a transaction, the extinguishment of an agreement such that
in contemplation of law it never existed, even for the
purpose of being broken. In application, however, the term
rescission carries with it a confusion of vocabulary. The
meaning of rescission varies depending on what caused the
contract to end. For instance, if a contract ends because
of a party’s breach, damages are still owed. However, if a
contract is ended because of mistake, duress, or incapacity,
then only a right of restitution exists. If a contract ends
by mutual agreement, then the remedies available are shaped
by the terms of the agreement.
Bischoff v. Cook, 118 Hawai#i 154, 160, 185 P.3d 902, 908 (App. 2008)
(internal citations and quotation marks omitted). TILA rescission rights are
statutorily prescribed.
7
 ***FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER***

A. TILA Rescission Rights

TILA, as contained in Title I of the Consumer Credit

Protection Act, provides consumers with various protections “to

assure a meaningful disclosure of credit terms so that the

consumer will be able to compare more readily the various credit

terms available to him and avoid the uninformed use of credit,

and to protect the consumer against inaccurate and unfair credit

billing and credit card practices.” 15 U.S.C. § 1601(a).

One protection available to consumers under TILA is a

right of rescission in any consumer credit transaction in which a

security interest is acquired in property used as the principal

dwelling of the person to whom credit is extended; this “buyer’s

remorse” provision extends for three business days following

consummation of the transaction or delivery of the relevant

disclosures to the consumer.6 15 U.S.C. § 1635(a).

TILA requires that creditors clearly and conspicuously

disclose information regarding the right to rescind and provide

borrowers with appropriate forms to exercise this right. 15

U.S.C. § 1635(a). Where a creditor fails to make the required

6
Eastern also argued before the federal district court that the
Estebans had failed to state a TILA claim because the Property at issue was
not their principal dwelling. While the Estebans’ complaint in the federal
case stated that the Property was their principal dwelling, the attached loan
application stated the Property would be used for investment purposes and
their primary residence was on O#ahu. The federal district court found it
unnecessary to decide whether the Property was in fact the Estebans’ principal
dwelling. Based on our holding that res judicata prohibits the assertion of
TILA rescission rights, we likewise do not find it necessary to address this
issue.
8
 ***FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER***

disclosures under TILA, the act extends the borrower’s right to

rescind for three years after consummation of the subject

transaction.7 15 U.S.C. § 1635(f).

The Estebans’ attempt to rescind occurred within this

three-year time limit, but after a state court judgment

foreclosing on the subject Property. In order to determine

7
Regulation Z, issued by the Federal Reserve Board, implements
TILA’s requirements and describes the right of rescission as follows:
The consumer may exercise the right to rescind until
midnight of the third business day following the occurrence
described in paragraph (a)(1) of this section that gave rise
to the right of rescission, delivery of the notice required
by paragraph (b) of this section, or delivery of all
material disclosures, whichever occurs last. If the
required notice and material disclosures are not delivered,
the right to rescind shall expire 3 years after the
occurrence giving rise to the right of rescission, or upon
transfer of all of the consumer’s interest in the property,
or upon sale of the property, whichever occurs first. . . .
12 C.F.R. § 226.15(a)(3) (emphasis added).
This court previously described the contours of TILA’s
requirements and remedies in Hawaii Community Federal Credit Union v. Keka, 94
Hawai#i 213, 11 P.3d 1 (2000), where we explained:
[] TILA requires creditors to provide borrowers with
clear and accurate disclosures of terms dealing with things
like finance charges, annual percentage rates of interest,
and the borrower’s rights. Failure to satisfy TILA subjects
a lender to criminal penalties for noncompliance, . . . as
well as to statutory and actual damages traceable to a
lender’s failure to make the requisite disclosures . . . .
Going beyond these rights to damages, TILA also
authorizes a borrower whose loan is secured with his
principal dwelling, and who has been denied the requisite
disclosures, to rescind the loan transaction entirely, until
midnight of the third 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. TILA provides,
however, that the borrower’s right of rescission shall
expire three years after the date of consummation of the
transaction or upon the sale of the property, whichever
occurs first, even if the required disclosures have never
been made. TILA gives a borrower no express permission to
assert the right of rescission as an affirmative defense
after the expiration of the 3-year period.
94 Hawai#i at 223, 11 P.3d at 11 (internal citations, quotation marks,
and brackets omitted).
9
 ***FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER***

whether the circuit court erred in confirming sale of the

Property, this court must determine whether Hawai#i res judicata

law barred the Estebans from asserting a rescission claim after

the circuit court’s Foreclosure Judgment became final.

B. Res Judicata Principles

Res judicata, or claim preclusion, and collateral

estoppel, or issue preclusion, are doctrines that limit a

litigant to one opportunity to litigate aspects of the case to

prevent inconsistent results and multiplicity of suits and to

promote finality and judicial economy. Dorrance v. Lee, 90

Hawai#i 143, 148-49, 976 P.2d 904, 909-10 (1999).8 Claim

preclusion and issue preclusion are, however, separate doctrines

that involve distinct questions of law. Claim preclusion

prohibits the parties or their privies from relitigating a

previously adjudicated cause of action; issue preclusion, by

contrast, prevents the parties or their privies from relitigating

any issue that was actually litigated and finally decided in the

earlier action. Bremer v. Weeks, 104 Hawai#i 43, 54, 85 P.3d

150, 161 (2004) (internal brackets, citations, emphases, and

quotation marks omitted).

This court explained the purposes of the res judicata

doctrine in Kauhane v. Acutron Co., Inc.:
8
At times, Hawai#i appellate cases may have conflated the two
doctrines. See R. Endo, Res Judicata and Collateral Estoppel in Hawaii: One
of These Things is Not Like The Other, 3 H AW . B.J. No. 13, 1 (1999).

10
 ***FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER***

According to the doctrine of res judicata, the judgment of
a court of competent jurisdiction is a bar to a new action in any
court between the same parties or their privies concerning the
same subject matter, and precludes the relitigation, not only of
the claims which were actually litigated in the first action, but
also of all grounds of claim . . . which might have been properly
litigated in the first action but were not litigated or decided.

The purpose of the doctrine of res judicata is to prevent a
multiplicity of suits and to provide a limit to litigation. It
serves to relieve parties of the cost and vexation of multiple
lawsuits, conserve judicial resources, and, by preventing
inconsistent decisions, encourage reliance on adjudication. The
res judicata doctrine thus furthers the interests of litigants,
the judicial system and society by bringing an end to litigation
where matters have already been tried and decided on the merits.
It is a rule of fundamental and substantial justice, of public
policy and private peace.

The doctrine therefore permits every litigant to have an
opportunity to try his case on the merits; but it also requires
that he be limited to one such opportunity. Unsatisfied litigants
have a remedy: they can appeal through available channels. But
they cannot, even if the first suit may appear to have been
decided wrongly, file new suits.

71 Haw. 458, 463-64, 795 P.2d 276, 278-79 (1990) (internal

brackets, citations, and quotation marks omitted).

We further explained in Bremer:
Claim preclusion . . . prohibits a party from relitigating a
previously adjudicated cause of action. Moreover, the judgment of
a court of competent jurisdiction is a bar to a new action in any
court between the same parties or their privies concerning the
same subject matter, and precludes the relitigation, not only of
the issues which were actually litigated in the first action, but
also of all grounds of claim and defense which might have been
properly litigated in the first action but were not litigated or
decided. The party asserting claim preclusion has the burden of
establishing that (1) there was a final judgment on the merits,
(2) both parties are the same or in privity with the parties in
the original suit, and (3) the claim decided in the original suit
is identical with the one presented in the action in question.

104 Hawai#i at 54, 85 P.3d at 161 (emphasis added).

It is important to note that res judicata precludes not

only the relitigation of claims or defenses that were litigated

in a previous lawsuit, but also of all claims and defenses that

11
 ***FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER***

might have been properly litigated, but were not litigated or

decided. This part of the res judicata doctrine is reflected in

the Restatement (Second) of Judgments, Sections 18 and 22:

§ 18. Judgment For Plaintiff -- The General Rule Of Merger

When a valid and final personal judgment is rendered in favor of
the plaintiff:

(1) The plaintiff cannot thereafter maintain an action on the
original claim or any part thereof, although he may be able to
maintain an action upon the judgment; and

(2) In an action upon the judgment, the defendant cannot avail
himself of defenses he might have interposed, or did interpose, in
the first action.

§ 22. Effect Of Failure To Interpose Counterclaim

(1) Where the defendant may interpose a claim as a counterclaim
but he fails to do so, he is not thereby precluded from
subsequently maintaining an action on that claim, except as stated
in Subsection (2).

(2) A defendant who may interpose a claim as a counterclaim in an
action but fails to do so is precluded, after the rendition of
judgment in that action, from maintaining an action on the claim
if:

(a) The counterclaim is required to be interposed by a
compulsory counterclaim statute or rule of court, or

(b) The relationship between the counterclaim and the
plaintiff’s claim is such that successful prosecution of the
second action would nullify the initial judgment or would
impair rights established in the initial action.

C. The Estebans’ TILA Rescission Rights are Barred by Res
Judicata Principles

Eastern asserts that the Estebans’ TILA rescission

claim is barred by res judicata.9
9
This court previously addressed the effect of a foreclosure
judgment on a subsequent suit for common law rescission applying principles of
collateral estoppel, or issue preclusion, in Ellis v. Crockett, 51 Haw. 45,
451 P.2d 814 (1969). In Ellis, sellers of real property obtained summary
judgment in a mortgage foreclosure lawsuit. 51 Haw. at 48, 451 P.2d at 818.
In a subsequent suit, purchasers sued various parties for allegedly failing to
(continued...)
12
 ***FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER***

To reiterate, the party asserting claim preclusion has

the burden of establishing that (1) there was a final judgment on

the merits, (2) both parties are the same or in privity with the

parties in the original suit, and (3) the claim presented in the

action in question is identical to the one decided in the

original suit, or to a claim or defense that might have been

properly litigated in the first action but was not litigated or

decided. Bremer, 104 Hawai#i at 54, 85 P.3d at 161.

Applying these requirements to the facts at hand, we

conclude that the Estebans’ TILA rescission claims are barred by

res judicata principles.

(...continued)
disclose certain information when they demanded full payment of the principal
amount pursuant to an acceleration clause in the agreement. 51 Haw. at 47-48,
451 P.2d at 818. The trial court dismissed the suit for failure to state a
claim, and purchasers appealed. 51 Haw. at 49, 451 P.2d at 819.
This court affirmed the dismissal, holding, inter alia, that
various claims brought by purchasers, including a claim for rescission of the
underlying agreement, were barred by the doctrine of collateral estoppel. 51
Haw. at 56-58, 451 P.2d at 822-24. We noted that the subsequent claim for
fraud was clearly distinct from the claim raised in the foreclosure case, the
parties were cast in different roles as plaintiff and defendant, and the legal
consequence of each case was different. 51 Haw. at 56, 451 P.2d at 822.
Nonetheless, we held that collateral estoppel applied because all issues
regarding the validity of the mortgage instrument had been decided when the
court granted foreclosure in the prior case. 51 Haw. at 57, 451 P.2d at 823.
We concluded, “The rescission action is barred because the court granted the
foreclosure in the prior suit, thereby deciding all issues relating to the
mortgage instrument in favor of [the defendants-vendors]. The issue
underlying that judgment may not be collaterally attacked.” 51 Haw. at 57,
451 P.2d at 823 (emphasis added).
Although it could be argued that the Estebans’ claims may also be
precluded by issue preclusion based on Ellis and Section 27 of the Restatement
(Second) of Judgments (“When an issue of fact . . . is actually litigated and
determined by a valid and final judgment, and the determination is essential
to the judgment, the determination is conclusive in a subsequent action
between the parties, whether on the same or a different claim[]”), because the
parties have argued this case based on res judicata principles, we decide this
case on res judicata grounds.
13
 ***FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER***

First, under Hawai#i law, there was a final judgment on

the merits when the time to appeal the Foreclosure Judgment

expired. See Glover, Ltd. v. Fong, 42 Haw. 560, 574 (1958).10

Moreover, under Hawai#i law, res judicata principles apply to

default judgments. Fuller v. Pac. Med. Collections, Inc., 78

Hawai#i 213, 219, 891 P.2d 300, 306 (App. 1995).

Second, both the Estebans and Eastern were parties to

the prior foreclosure proceeding.

Third, a TILA rescission claim would have been properly

litigated in the foreclosure action, whether as a counterclaim or

as an affirmative defense.

In Pacific Concrete, 62 Haw. at 342, 614 P.2d at 941,

we recognized that TILA violations may be raised in a

counterclaim. In that case, a creditor sued a debtor for the

outstanding balance owed on two loans, and the debtor

counterclaimed, alleging that the creditor failed to satisfy

TILA’s disclosure requirements. 62 Haw. at 335, 614 P.2d at 934.

The lender asserted that the counterclaim was barred because it

10
It is well established that under Hawai#i law, “foreclosure cases
are bifurcated into two separately appealable parts: (1) the decree of
foreclosure and the order of sale, if the order of sale is incorporated within
the decree; and (2) all other orders.” Sec. Pac. Mortg. Corp. v. Miller, 71
Haw. 65, 70, 783 P.2d 855, 857 (1989) (holding that a judgment of foreclosure
and order of sale is final even though matters incident to its administration
remain, and a party seeking to challenge a foreclosure judgment must do so
within the thirty-day period following entry of the decree). The Estebans
contend that they may exercise their right to rescind up to and until the
court’s confirmation of sale. However, foreclosure has the legal effect of
terminating a mortgagor’s interest in the subject property, and therefore, a
foreclosure judgment constitutes a final judgment. See Ellis, 51 Haw. at 57,
451 P.2d at 823.
14
 ***FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER***

was not brought within one year, as allegedly required by

15.U.S.C. § 1640(e).11 Id.

This court reasoned that the debtor’s claims were “in

the nature of a recoupment defense,” which would diminish the

creditor’s recovery, and the alleged TILA violations “arose out

of the same loan transaction as [the creditor’s] suit[.]” 62

Haw. at 341, 614 P.2d at 940 (emphasis added). We noted that

“TILA seeks to protect the consumer by ensuring full disclosure

of credit cost” and concluded that “[d]enying debtors their

counterclaims in this situation could work an injustice and

undercut the aim of the TILA.”12 62 Haw. at 342, 614 P.2d at 941

(noting that consumers are typically unaware of their rights

under TILA until a creditor files suit to collect on the

outstanding loan). We recognized that a claim alleging

11
Section 1640 of TILA governs “Civil liability.” At the time of
our decision in Pacific Concrete, subsection (e) provided:
(e) Any action under this section may be brought . . .
within one year from the date of the occurrence of the
violation.
15 U.S.C. §1640(e) has since been amended, and it now specifically
contains the following sentence: “This subsection does not bar a person from
asserting a violation of this subchapter 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.”
12
In allowing the debtor to allege a TILA counterclaim, we
explained:
Section 1640(e), the statute of limitations provision of the
TILA serves to further enforcement of the Act’s civil
liability provisions by ensuring the prompt bringing of
suits. Deterrence of lenders’ violations rather than
compensation of borrowers is the goal. Thus, allowing a
borrower’s claim under the Act as a defense to the lender’s
original suit is in keeping with this overall scheme.
62 Haw. at 343, 614 P.2d at 942.

15
 ***FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER***

violations of TILA’s disclosure requirements arose out of the

same transaction as a suit seeking enforcement of the underlying

loan agreement. Id. Accordingly, we acknowledged that the

debtor’s TILA claim could be asserted as a counterclaim against

the lender. Id.

In Beach v. Ocwen Federal Bank, 523 U.S. 410, 118 S.Ct.

1408, 140 L.Ed.2d 566 (1998), the United States Supreme Court

alluded to the possibility of asserting the TILA rescission right

under 15 U.S.C. § 1635 as an affirmative or other defense. The

question presented in the case was “whether a borrower may assert

this right to rescind as an affirmative defense in a collection

action brought by the lender more than three years after the

consummation of the transaction.” 523 U.S. at 411, 118 S.Ct. at

1409.13 The Court held that TILA rescission rights could not be

asserted more than three years after consummation of the

13
Eastern asserts that a TILA rescission claim is a compulsory
counterclaim, which the Estebans failed to raise in the foreclosure
proceeding. The Estebans contend that it is a permissive counterclaim and
that the Albano court, discussed further in Section IV(D), infra, misread
Hawai#i law regarding compulsory counterclaims. However, the Ninth Circuit in
Albano did not characterize a TILA rescission claim as a compulsory
counterclaim; instead, it deemed it a “defense that would have ineluctably
precluded foreclosure if the Albanos’ claims are meritorious.” 244 F.3d at
1064.
Under Hawai#i law, a counterclaim is compulsory if there is a
logical relation between the original claim and the counterclaim—i.e., it
arises out of the same aggregate of operative facts as the original claim.
See Hawai#i Rules of Civil Procedure Rule 13(a). If a defendant fails to
assert a compulsory counterclaim, he is precluded from asserting it against
the plaintiff in a subsequent action. Booth v. Lewis, 8 Haw. App. 249, 252,
798 P.2d 447, 449 (1990).
We decide this case on res judicata grounds, and do not decide
whether a TILA rescission claim is a compulsory counterclaim, a permissive
counterclaim, an affirmative defense, or some other type of defense.
16
 ***FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER***

transaction, but did not question the propriety of defensively

asserting such rights, stating: “We respect Congress’s manifest

intent by concluding that the Act permits no federal right to

rescind, defensively or otherwise, after the 3-year period of §

1635(f) has run.” 523 U.S. at 415, 118 S.Ct. at 1413. After

Beach, Hawai#i appellate decisions have also referred to the TILA

rescission right as an affirmative defense. Hawaii Cmty. Fed.

Credit Union v. Keka, 94 Hawai#i 213, 223, 11 P.3d 1, 11 (2000)

(“[TILA] gives a borrower no express permission to assert the

right of rescission as an affirmative defense after the

expiration of the 3-year period.”); accord, Ocwen Fed. Bank, FSB

v. Russell, 99 Hawai#i 173, 188, 53 P.3d 312, 326 (2002).

Accordingly, TILA rescission rights could have been

raised by the Estebans in the foreclosure case, whether as a

counterclaim or as an affirmative or other defense.

We hold that under Hawai#i res judicata principles, a

debtor is prohibited from asserting alleged TILA violations in an

attempt to rescind a residential mortgage transaction after a

foreclosure judgment has become final, despite the rescission

attempt being within the three-year time limit provided by

TILA.14
14
In any event, as Eastern correctly asserts, the Estebans failed to
appeal the July 22, 2010 Judgment of the U.S. District Court in their federal
TILA case (Civ. No. 10-00234-HG-LEK). That decision is final and preclusive
of the claim that the Estebans now contend warrants reversal of the circuit
court’s judgment confirming sale of the Property. See Robi v. Five Platters,
Inc., 838 F.2d 318, 327 (9th Cir. 1988) (holding that a final judgment of a
(continued...)
17
 ***FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER***

D. The Ninth Circuit Correctly Construed the Effect of
Controlling Hawai#i Law, and Other Cases Cited by the
Estebans Are Distinguishable

The circuit court relied on the Ninth Circuit’s

decision in Albano, which it deemed persuasive. Based on our

reasoning above, Albano properly concluded that under Hawai#i

law, a final foreclosure judgment precludes a mortgagor from

subsequently bringing a TILA rescission claim. 244 F.3d at 1064.

In addition, cases from other jurisdictions are not controlling;

and the cases cited by the Estebans are distinguishable.

For example, the first two cases cited by the Estebans,

Smith v. Wells Fargo Credit Corp., 713 F. Supp. 354 (D. Ariz.

1989), and Laubach v. Fidelity Consumer Discount Co., 77 B.R. 483

(E.D. Pa. 1987), did not involve foreclosure proceedings; the

courts simply held that a debtor’s right of rescission under TILA

was not barred by an earlier action in which the borrower

asserted a claim based on TILA disclosure violations. In re

Apaydin, 201 B.R. 716 (E.D. Pa. 1996), is also distinguishable

because it held that, under Pennsylvania law, a TILA claim could

not be raised as a counterclaim in a mortgage foreclosure action;

as discussed above, this contrasts with the import of our

decisions in Pacific Concrete, 62 Haw. at 342, 614 P.2d at 941,

and Ellis, 51 Haw. at 57, 451 P.2d at 823. Finally, In re

(...continued)
federal district court is final for purposes of res judicata even if an appeal
is pending), cited in Wong v. Cayetano, 111 Hawai#i 462, 477, 143 P.3d 1, 16
(2006).
18
 ***FOR PUBLICATION IN WEST’S HAWAI#I REPORTS AND PACIFIC REPORTER***

Walker, 232 B.R. 725 (N.D. Ill. 1999), is factually

distinguishable because the debtor retained an equitable

redemption right after the state court entered its foreclosure

judgment.

The Estebans provide no other support for their

contention that “nearly every federal District Court and every

Bankruptcy Court that has examined that issue has held, contrary

to the Albano panel, that the federal TILA rescission right

survives a foreclosure judgment.” Therefore, we conclude that

their argument is without merit.

V. Conclusion

For the reasons stated above, the circuit court’s

judgment confirming sale of the Property to Eastern, granting a

writ of possession, and entering a deficiency judgment against

the Estebans is affirmed.

Gary Victor Dubin and /s/ Mark E. Recktenwald
Frederick J. Arensmeyer
for petitioners /s/ Paula A. Nakayama

Francis P. Hogan and /s/ Simeon R. Acoba, Jr.
Gary P. Quiming
for respondent /s/ Sabrina S. McKenna

/s/ Randal K.O. Lee

19