Are rescission cases brought under the TILA certifiable as class actions?

Earl P. Underwood*

Courts began struggling with the question of whether class action rescission claims were allowable under the Truth in Lending Act within a decade after the TILA was enacted in 1968 by Congress. As early as 1978, the U.S. District Court, Eastern District of Louisiana in Nelson v. United Credit Plans, Inc., 77 F.R.D. 54 (E.D. La. 1978), questioned whether or not rescission class actions were maintainable under 15 U.S.C. § 1635.

“Class actions are not discouraged under the Truth in Lending Act any more than they are in any other context, but Congress has not evidenced an intent that class treatment is appropriate in actions seeking remedy of rescission under the Act,” the court wrote. Federal courts since have gone both ways on the same question that the Nelson court struggled to answer.

Whether rescission class actions are certifiable under the TILA remains a question unresolved. Today, however, with the current sub-prime foreclosure crisis moving into full swing, a trend seems to be emerging in which courts may be willing to certify TILA rescission classes where practitioners seek only a declaration that certain loans are rescindable.

The most recent example was In re Ameriquest Mortg. Co. Mortg. Lending Practices Litigation, No. 05-CV-7097 (N.D.Ill., 04/23/07). The U.S. District Court, Northern District of Illinois, refused to dismiss class allegations in a suit seeking a declaration that certain class members were entitled to rescind their loans.

A brief history of rescission class actions

What follows is a look at some of the TILA rescission class action holdings in various jurisdictions since Nelson. The review is instructive for both plaintiff’s and defense attorneys as the current subprime mortgage industry meltdown unfolds.

. Two years after Nelson, the 5th U.S. Circuit Court of Appeals in James v. Home Construction of Mobile, Inc., 621 F.2d. 727 (5th Cir. 1980), found that TILA rescission was not suitable for class treatment. Paradoxically a rescission class in the same circuit, Tower v. Moss, 625 F.2d 1161 (5th Cir. 1980), was later certified where some class members could choose rescission as an option to other remedies.

. In Elliott vs. ITT Corp., 150 F.R.D. 569 (N.D.Ill. 1992), class certification was denied by the Northern District of Illinois. However, the court stated: “Had plaintiff sought only an order directing ITT to correct specific deficiencies in its written disclosures, the court might readily find that certification is appropriate.”

. The U.S. District Court, Southern District of Ohio in Mayo v. Sears, Roebuck & Co., 148

F.R.D. 576 (S.D. Ohio 1993), said “the grant of attorney’s fees for individual actions brought pursuant to Section 1635 is somewhat inconsistent with the Rule 23(b)(3) requirement that ‘a class action [be] superior to other available methods for the fair and efficient adjudication of the controversy.’” Accordingly, the Court denied class certification to the plaintiffs’ rescission claim.

. In Hickey v. Great W. Mortgage Corp., 158 F.R.D. 603 (N.D.Ill. 1994), the District Court granted a motion to certify a class seeking damages and a declaration that the class had a right to rescind its transactions under TILA. The following year, in Jefferson vs. Security Pacific Financial Services, 161 F.R.D. 63 and 162 F.R.D. 123 (N.D. Ill. 1995), the same court reviewed the language of language of Section 1635(b), concluding that it “cuts strongly in favor of treating rescission as a personal, rather than a class, remedy.”.

. A rescission class was certified by the U.S. District Court, Eastern District of Pennsylvania in Williams vs. Empire Funding Corp., 183 F.R.D. 428 (E.D. Pa. 1998). employing the following reasoning:

“Plaintiffs only seek a declaration that the notices of rescission in the sales and financing contracts violate TILA, and thus that each member of the class is entitled to seek rescission,” the District Court wrote. “Should the Court declare that, indeed, plaintiffs are entitled to seek rescission because of certain infirmities in the TILA disclosure documents, then each class member, individually, and not as a member of the class, would have the option to exercise his or her right to seek rescission.

“As to any member of the class who triggered the statutory right to rescission,” the court continued, “the Empire defendants would have, in turn, the opportunity to exercise their rights to cure under TILA. Viewed in that light, the Court finds that there is nothing in the language of TILA which precludes the use of the class action mechanism provided by Rule 23 to obtain a judicial declaration whether an infirmity in the documents, common to all members of the class, entitles each member of the class individually to seek rescission.”

. Class certification was denied in Gibbons v. Interbank Funding Group, 208 F.3d. 278 (N.D. Cal. 2002). The U.S. District Court, Northern District of California found that common issues did not predominate, saying: “Plaintiff’s argument is that this particular notice may have been more misleading to him than to others. That highlights the problems with making this determination on a class-wide basis.”

. In MacIntosh v. Union Bank and Trust, 215 F.R.D. 26 (D. Mass. 2003), the U.S. District Court, District of Massachusetts allowed a rescission class of HOEPA borrowers to proceed. “This Court agrees with this latter line of cases holding permissible class actions seeking rescission,” the court wrote.

. A rescission class was certified in Mount vs. LaSalle Bank, 1994 WL 731006 (N.D. Ill. 1994), in which the plaintiffs sought a declaration that certain loans were rescindable. The court said in that case:

“Plaintiffs emphasize that in this action, their principal goal is to obtain a declaration that each class member is entitled to rescind his or her transaction. The TILA provides for additional relief, however, including ‘actual damages.’ Defendant, for its part, argues that any relief is potentially monetary, as improvements to class members’ homes are completed and in place.”

. Notably, in another case where the plaintiffs sought rescission of a TILA claim, Elliott v. ITT Corp., 150 F.R.D. 569, adopted, 150 B.R. 36 (N.D.Ill.1992), the same court had recommended that certification under Rule 23(b)(2) be denied.. In Elliott, though, the proposed nationwide class of potentially over a million members was also potentially unmanageable, and there had already been numerous lawsuits throughout the nation addressing the same practice on the part of the defendant. Declaratory or injunctive relief would not have the same impact as it would in this case, with its much smaller class.

At the same time, the Elliott court noted the 7th U.S. Circuit Court of Appeals holding in Goldman v. First Nat’l Bank of Chicago, 532 F.2d 10 (7th Cir. 1976), cert. denied, 429 U.S. 870 (S. Ct. 1976), that class treatment can be a superior means of adjudicating claims of defective disclosure under the TILA (see also Haynes v. Logan Furniture Mart, Inc., 503 F.2d 1161 (7th Cir.1974).

. A class was certified in Latham vs. Residential Loan Centers, 2004 W.L. 109335 (N.D. Ill. 2004), in which the court agreed with the line of cases “holding that a class claim under TILA seeking a declaration of the right to rescind can be maintained.”

. In Rodrigues v. Members Mortgage Co., Inc., 226 F.R.D. 147 (D. Mass. 2005), the District Court found “nothing in the language of TILA which precludes the use of the class action mechanisms provided by Rule 23 to obtain a judicial declaration whether an infirmity in the documents, common to all members of the class, entitles each member of the class individually to seek rescission.”

Current cases continue the controversy

As the federal courts greeted the year 2007, so too did they revisit the perennial question of whether rescission class actions were certifiable under the TILA. The answers, as might be expected, have fallen to either side, doing little — so far — to relieve the controversy.

. The 1st U.S. Circuit Court of Appeals released its opinion in McKenna, et al. v. First Horizon Home Loan Corp., 475 F.3d 418 (1st Cir. 01/29/07. In finding that class claims for rescission were not certifiable as class actions, the court stated: “We ground this holding primarily on our conclusion that Congress did not intend rescission suits to receive class-action treatment.”

. A rescission class was recently certified in the U.S. District Court, Eastern District of Wisconsin opinion in Andrews v. Chevy Chase Bank, FSB , No. 05C0454 (E.D. Wis. 02/14/07). The Andrews court stated:

“[A]ssuming a TILA plaintiff can satisfy the requirements of [Rule] 23, public policy strongly favors allowing class actions in cases like the present one. Class actions serve the purpose of providing compensation in cases involving public wrongs and widespread injuries. There is no

reason why a plaintiff who alleges that a defendant has violated TILA and caused widespread injuries should not be able to bring a class action.” Otherwise, defendants who may have committed wrongs would be rewarded and victims left uncompensated, the court said.

An answer on the way?

Andrews may provide an avenue for practitioners and parties to finally get an answer to their questions. In an order released on Valentines Day 2007, the Andrews court granted a stay while the defendant, Chevy Chase Bank FSB, pursued a Rule 23(f) petition to the Seventh Circuit. In granting the stay, the court specifically took issue with the 1st Circuit’s decision in McKenna.

The Andrews court declared that the McKenna court “used legislative history improperly,” pointing out that the 1974 and 1995 amendments to TILA showed that “Congress chose to accomplish the goal of limiting lender liability by means other than prohibiting courts from certifying classes whose members may seek rescission.” The court added: “By relying on legislative history to reach the contrary conclusion, the McKenna court engaged in “clairvoyance,” not “construction or interpretation.”

Full circle

Which brings us back to the Ameriquest opinion mentioned at the top of this article, in which the Northern District of Illinois refused to dismiss class allegations in a suit seeking a declaration that certain class members were entitled to rescind their loans. Ameriquest echoed the result reached by the Andrews court:

“The Seventh Circuit has not yet ruled on this issue, but we disagree with McKenna and agree with the district courts in this and other circuits that have found that neither [Rule 23] nor TILA prohibits the limited relief plaintiffs seek here.” the Ameriquest court wrote. “While we recognize that actual rescission is a personal remedy, we find nothing in TILA precluding declaratory relief authorizing class members to individually request rescission where they are legally entitled to do so.”

Whatever the outcome in the 7th Circuit, the current atmosphere in the mortgage lending arena portends an increase in the number of consumers seeking rescission of their mortgages. The history of litigation regarding class action rescission claims also suggests that practitioners should expect to see a lot of litigation in this area. q

*Earl P. Underwood, Jr. has practiced consumer law for over twenty years. He currently maintains his office in downtown Fairhope, Ala. He can be reached at epunderwood@alalaw.com.