California Court Surprisingly Holds that Under Certain Circumstances Plaintiffs need not be Members of Class to Serve as Class Representatives and that, as Matter of First Impression, Rescission Under TILA (Truth-in-Lending Act) is a Personal Remedy Unsuitable for Class Action Treatment
Plaintiffs filed a putative class-action lawsuit against their lender alleging inter alia violations of the federal Truth In Lending Act (TILA) arising from the lender’s failure to disclose certain closing fees charged in connection with refinance loans. LaLiberte v. Pacific Merc. Bank, 147 Cal.App.4th 1. 53 Cal.Rptr.3d 745, 746 (Cal.App. 2007). Defense attorneys demurred to the class-action complaint on the ground that the class allegations failed to establish commonality; the trial court agreed but granted plaintiffs leave to amend. After extensive motion practice, plaintiffs filed a third amended class-action complaint seeking to represent a single class of borrowers who obtained loans after November 20, 2002. Id., at 746-47. Defense attorneys again demurred, this time on the ground that because the putative class representatives secured their loans in April 2002, they were not members of the class they sought to represent. Id., at 747. The trial court agreed, and sustained the demurred to the class action allegations without leave to amend. Id. as a matter of first impression, the California appellate court affirmed the trial court’s order, holding that rescission under TILA was not suitable for class action treatment.
Under California law, “An order sustaining demurs to class action allegations ‘is appealable to the extent that it prevents further proceedings as a class action.’” LaLiberte, at 747 (citation omitted). In this case, two standards of review apply on appeal. The first involves the independent judgment exercised by an appellate court in reviewing an order sustaining a demurrer; the second involves whether the trial court abused its discretion in denying leave to amend. Id., at 747-48 (citations omitted). The trial court had relied upon Payne v. United California Bank, 23 Cal.App.3d 850 (Cal.App. 1972), in support of its conclusion that plaintiffs lacked standing to sue on behalf of the proposed class because they were never members of that class. See id., at 748. The Court of Appeal disagreed, holding that La Sala v. American Sav. & Loan Ass’n, 5 Cal.3d 864 (Cal. 1971), was more on point. Id.
Specifically, in La Sala the California Supreme Court held that plaintiffs-borrowers were adequate class representatives even though they were not members of the class because they shared “‘“a well-defined ‘community of interest’ in the questions of law and fact”’” underlying the action against the putative class action against the bank. LaLiberte, at 748 (quoting La Sala, at 875). The California Supreme Court went on to explain at page 875: “In sum, plaintiffs’ nonmembership in the class defined by the complaint stems not from the lack of a community of interest between plaintiffs and the class, but from arbitrary and inadvertent limitation of the class.” This “pleading defect” could be “easily cure[d] . . . by amendment” thus rendering it an abuse of discretion to deny leave to amend. Id., at 749 (citing La Sala, at 876). The Court of Appeal found this reasoning persuasive, explaining at page 749:
La Sala’s reasoning applies here as well. In their third amended complaint, plaintiffs allege that they obtained their loans in April 2002, and defined the class members as those obtaining loans after November 21, 2002. The complaint, however, alleges [the lender] failed to disclose closing fees charged to both the named plaintiffs and the class members. Because dates on which they obtained their loans do not in any way affect the community of interest alleged between the named plaintiffs and class members, it is of no significance. (Italics added.)
The appellate court also stressed that the proposed class representatives in Payne lacked standing “to bring individual claims mirroring those of the class members.” LaLiberte, at 750. Accordingly, the Court of Appeal concluded that denying plaintiffs leave to file a fourth amended complaint constituted an abuse of discretion. Id. to that extent, then, the trial court’s order was reversed.
However, the appellate court upheld the trial court’s order with respect to whether “either rescission or a declaration of entitlement to rescission on the class claims” is appropriate relief in a class action. LaLiberte, at 750. This presented a matter of first impression: “No California state court has addressed the question whether a right to rescind under TILA applies on a class-wide basis, and the issue remains a matter of sharp debate among other courts.” Id. after a careful analysis of cases on both sides of this debate, see id., at 750-52, the Court of Appeal came down on the side of those cases holding that the right of rescission under TILA is a “personal” remedy not suitable for class action treatment, id., at 752.
NOTE: Plaintiffs proposed to modify the class definition to include them by name. The appellate court agreed with defense attorneys that while such an act solves the issue of whether the named class representatives are technically “members” of the class, it “does not ipso facto make that person an adequate class representative.” LaLiberte, at 749. Rather, “The named plaintiffs’ adequacy as class representatives in the present case derives from the community of interest in the law and facts involved in the case, not merely because they add themselves to the class definition.” Id.