7th Cir.: No class rescission suits under Truth in Lending Act

The Seventh Circuit held 2-1 that the Truth in Lending Act (TILA) does not permit class action suits for rescission.

The statute does not explicitly provide for or prohibit such suits, but the panel concluded that class action suits are “fundamentally incompatible” with the remedy of rescission. Andrews v. Chevy Chase Bank, --- F.3d ---, 2008 WL 4330761 (7th Cir. Sep. 24, 2008) (No. 07-1326).

 

          Other appellate courts have reached the same conclusion. McKenna v. First Horizon Home Loan Corp., 475 F.3d 418 (1st Cir. 2007); LaLiberte v. Pac. Mercantile Bank, 147 Cal.App.4th 1 (2007); James v. Home Constr. Co. of Mobile, 621 F.2d 727 (5th Cir. 1980). But many district courts have certified these suits. E.g., In re Ameriquest Mortgage Lending Practices Litig., 2007 WL 1202544 (N.D.Ill. Apr.23, 2007); Rodrigues v. Members Mortg. Co., 226 F.R.D. 147 (D.Mass.2005); Latham v. Residential Loan Ctrs. of Am., 2004 WL 1093315 (N.D.Ill. May 6, 2004); McIntosh v. Irwin Union Bank & Trust, Co., 215 F.R.D. 26 (D.Mass.2003); Williams v. Empire Funding Corp., 183 F.R.D. 428 (E.D.Pa.1998); Hickey v. Great W. Mortgage Corp., 158 F.R.D. 603 (N.D.Ill.1994).

 

          Mr. and Mrs. Andrews claimed that Chevy Chase offered them a deceptive loan, leading them to believe they would have a fixed-rate note when in fact their initial “teaser” rate was adjusted monthly. (The panel majority calls this loan “a potential trap for the unwary,” while the dissent calls it “a booby trap waiting to explode.”) The district court granted summary judgment in their favor, authorized rescission, and granted class certification. 240 F.R.D. 612 (E.D. Wis. 2007).

 

          TILA allows borrowers to rescind a loan, and reclaim money or property given to the creditor, when they have not been provided with required disclosures. 15 U.S.C. § 1635. TILA also has a statutory damages provision (§ 1640) that covers certain situations – notably not disclosure violations like those here. Neither provision explicitly states that class actions are permitted or prohibited. However, unlike § 1635, § 1640 does contain some special rules, including a damages cap, governing class actions.

 

          Seizing on this ambiguity, the panel held that “the personal character of the [rescission] remedy makes it procedurally and substantively unsuited to deployment in a class action.” It reasoned that in a rescission case, the only possible class-wide “relief” would be a holding that class members are entitled to rescission. Beyond that, “a host of individual proceedings would almost certainly follow,” because not all class members will necessarily exercise the right of rescission, and courts are supposed to tailor the remedy (e.g. return of money or property) to individual circumstances. Additionally, the court found it unlikely that Congress intended to authorize class actions for rescission in the absence of a cap on recovery, when the statutory damages provision contains such a cap.

 

          The panel also said there were “serious questions as to whether a TILA rescission class could ever be properly certified” under Federal Rule 23(b), because that rule authorized certification only when “final” relief is appropriate for the class as a whole. It reasoned that because “the rescission remedy is so inherently personal,” a court could “do no more than simply declare that a certain group of plaintiffs have the right to initiate rescission, and that is not a form of ‘final’ declaratory relief under Rule 23(b)(2).”

 

          In dissent, Judge Evans argued that since § 1635 was ambiguous as to the availability of class suits, the proper question was “who should pay the price of an ambiguous statute?” He faulted the majority for placing that burden on victims of deceptive loans, rather than on violators of TILA:

True, withholding the class action mechanism is not the same as precluding relief altogether, but it still stands as a procedural obstacle. If Congress intended to preclude rescission class actions, it should amend the statute and correct the error itself. When a court cleans up Congress's mess, it only encourages poor drafting. And if the court gets it wrong-a hazard of judicial guesswork-then all suffer. Rather than forcing a statute to further a policy vision that may or may not be shared by Congress, it is better to acknowledge ambiguity and construe the statute in the way most supported by the statute's language and in a fashion that protects the innocent, not the guilty.

         

            In another noteworthy TILA decision earlier this year, New York’s highest court held that TILA does not preempt fraud claims under state law against credit card companies, so long as they do not seek to alter TILA-required disclosures or mandate additional disclosures. People v. Applied Card Systems, --- N.E.2d ----, 11 N.Y.3d 105 (2008).