Truth-in-Lending Act (TILA) Class Action Lawsuit Erroneously Granted Class Action Status because TILA does not Permit Rescission as a Class Action Remedy only Damages Seventh Circuit Holds
Plaintiffs filed a putative class action against Chevy Chase Bank for violations of the federal Truth in Lending Act (TILA), 15 U.S.C. 1601 et seq.; the class action complaint alleged that, in connection with its adjustable rate mortgage loans, the Bank failed to make the disclosures required by federal law. Andrews v. Chevy Chase Bank, 545 F.3d 570 (7th Cir. 2008) [Slip Opn., at 3-4]. The class action sought not only statutory damages and attorney fees, but prayed for rescission as well, id., at 4.. The district court granted plaintiffs’ motion for class action certification, see Andrews v. Chevy Chase Bank, FSB, 240 F.R.D. 612 (E.D. Wis. 2007); our summary of that opinion may be found here. The author stated in that summary, “[T]he author notes that the court’s analysis is brief and superficial, and fails to address any of the cases that hold rescission to be unavailable on a class-wide basis. See, e.g., McKenna v. First Horizon Home Loan Corp., 475 F.3d 418, 423 (1st Cir. 2007) (holding that ‘as a matter of law, class certification is not available for rescission claims, direct or declaratory, under the TILA’).” Defense attorneys filed an interlocutory appeal: the Seventh Circuit explained, “we are called on to answer one question: May a class action be certified for claims seeking the remedy of rescission under the Truth in Lending Act (‘TILA’), 15 U.S.C. § 1635? The only two federal appellate courts to have addressed this question have answered ‘no,’ see McKenna v. First Horizon Home Loan Corp., 475 F.3d 418 (1st Cir. 2007); James v. Home Constr. Co. of Mobile, Inc., 621 F.2d 727 (5th Cir. 1980), and we agree. TILA’s statutory-damages remedy, § 1640(a)(2), specifically references class actions (by providing a damages cap), but TILA’s rescission remedy, § 1635, omits any reference to class actions. This omission, and the fundamental incompatibility between the statutory-rescission remedy set forth in § 1635 and the class form of action, persuade us as a matter of law that TILA rescission class actions may not be maintained.” Id., at 1-2. Accordingly, the Seventh Circuit reversed.
The Circuit Court noted that because the issue presented in the appeal is “purely legal” – viz., whether class action claims for rescission may be pursued under TILA – the district court order is subject to de novo review, rather than the “abuse of discretion” standard generally employed when reviewing an order granting class action certification. Andrews, at 5. The Seventh Court noted at page 6, “Whether TILA allows claims for rescission to be maintained in a class-action format is an issue of first impression in our circuit, but the First and Fifth Circuits, in addition to California’s court of appeals, have held as a matter of law that rescission class actions are unavailable under TILA.” (Citations omitted.) The problem, in the Circuit Court’s words, was simple: TILA provides borrowers with a right of rescission under certain circumstances: “Debtors may rescind under TILA by midnight of the third business day after the transaction for any reason whatsoever…. Rescinding a loan transaction under TILA ‘“requires unwinding the transaction in its entirety and thus requires returning the borrowers to the position they occupied prior to the loan agreement.”’ Id. (citations omitted). The remedy is considered “purely personal”: “It is intended to operate privately, at least initially, ‘with the creditor and debtor working out the logistics of a given rescission.’” Id., at 7 (citations omitted). Moreover, the rescission remedy provided for in TILA “appears to contemplate only individual proceedings; the personal character of the remedy makes it procedurally and substantively unsuited to deployment in a class action.” Id. (citation omitted). Put simply, “Rescission is a highly individualized remedy as a general matter, and rescission under TILA is no exception. The variations in the transactional ‘unwinding’ process that may arise from one rescission to the next make it an extremely poor fit for the class-action mechanism.” Id.
Based on this analysis, the Seventh Circuit held that class action treatment of TILA matters seeking rescission would be utterly unworkable: “Each class member individually would have the option of exercising his or her right to rescind, and not all class members will want to do so because it requires returning the loan principle in exchange for the release of the lien and any interest or other payments. Individual controversies would erupt and likely continue because ‘the equitable nature of rescission generally entitles the affected creditor to judicial consideration of the individual circumstances of the particular transaction.’ Accordingly, a host of individual proceedings would almost certainly follow in the wake of the certification of a class whose loan transactions are referable to rescission.” Andrews, at 8 (citation omitted). The Circuit Court therefore held at page 8 that “the rescission remedy prescribed by TILA is procedurally and substantively incompatible with the class-action device.” In support of this holding, the Seventh Circuit noted that TILA specifically provides for class actions in the “provision addressing claims for damages” in that Congress specifically capped such recoveries. Id., at 9. The Circuit Court believed that “the absence of a similar cap in § 1635 strongly suggests that class actions are not available for rescission.” Id., at 10 (citations omitted). The Court reasoned at page 10, “This direct contrast between the text of TILA’s damages and rescission provisions cannot be ignored.” (Citation omitted.)
The Seventh Circuit summarized its holding as follows: “We think the presence of a cap on class-action recovery in TILA’s damages provision, the absence of any reference at all to class recovery in its rescission provision, and the mechanics of the rescission process spelled out in § 1635, all point more plausibly to the opposite interpretation: that TILA’s rescission remedy—by its terms an individualized, restorative rather than compensatory remedy—is just that, a purely individual remedy that may not be pursued on behalf of a class.” Andrews, at 10-11. Accordingly, the Seventh Circuit joined the First and Fifth Circuits in holding that rescission may not be sought in TILA class action lawsuits. Id., at 12.
NOTE: The Seventh Circuit opinion was not unanimous: Circuit Judge Evans dissented, arguing that Congress’s failure to expressly exclude rescission as a class action remedy meant that class action complaints should be permitted to seek class-wide rescission until Congress expressly declares otherwise. See Andrews, at 16-18.