Mr. Rusnack and his then-wife, opened a home equity line of credit (HELOC) with Cardinal Bank in August 2003. Between 2003 and 2006, the Rusnacks periodically drew on the HELOC using checks issued by Cardinal Bank. On June 22, 2006, shortly after the Rusnacks separated, Mr. Rusnack directed Cardinal Bank in writing to freeze further advances from the HELOC and Cardinal Bank acknowledge such freeze. Despite this, Cardinal Bank honored two checks each in the amount of $10,000 from Ms. Rusnack on July 26, 2006, and September 12, 2006. Cardinal Bank sought repayment from Ms. Rusnack, but she did not comply. After the HELOC came due in August of 2014, Cardinal Bank began foreclosure proceedings and Mr. Rusnack filed a Chapter 13 bankruptcy, wherein Cardinal Bank filed a Proof of Claim for $70,804, which included the $20,000 illegally advanced by Cardinal Bank. Mr. Rusnack objected to $20,000 of the Proof of Claim, which the bankruptcy court ultimately did disallow, after finding Mr. Rusnack had provided “specific and credible” testimony that he had obtained no benefits from the funds obtained by Ms. Rusnack.
Cardinal Bank appealled and the district court reversed, holding both that the determination by bankruptcy court that Mr. Rusnack had not benefitted from the funds was clearly erroneous and also, in a argument that had not previously been raised, that the 5-year Virginia Statute of Limitations barred Mr. Rusnack’s breach of contract argument.
The Court of Appeals reversed the district court on both counts, finding that under the clearly erroneous standard there was “no ground for disturbing the bankruptcy court’s ‘plausible’ finding.” As to the Statute of Limitations, the Court of Appeals questioned why the district court even entertained such argument, as it had not been raised previously in the bankruptcy court. That aside, the Court of Appeals held that, as the HELOC was the only contract between Cardinal Bank and the Rusnacks, Mr. Rusnack’s right of recoupment, wherein he could seek to have Cardinal Bank’s “ monetary claim reduced by reason of some claim the defendant has against the plaintiff arising out of the very contract giving rise to the plaintiff’s claim.” First Nat’l Bank of Louisville v. Master Auto Serv. Corp., 693 F.2d 308, 310 n.1 (4th Cir. 1982), was not time-barred.
The right of a recoupment is not limited to breach of contract claims, but would also apply to nearly all defenses and counterclaims arising out of a single contract or transaction, including FDCPA violations, TILA recision actions, failure to provide mortgage notices, etc. This allows the claims objection process in Chapter 13 to take a particularly long view of any billing errors or violations of consumer protections, through the reduction of the allowed claim.
Cardinal Bank still has some time under the Statute of Limitations to proceed against Ms. Rusnack.
For a copy of the opinion, please see: