Right to Rescission Classes in Truth in Lending Actions

From PLI’s Course Handbook

14th Annual Consumer Financial Services Litigation Institute

#18521

6

Recent developments in consumer class action practice

Stuart Rossman

NationalConsumerLawCenter

December 31, 2008

RECENT DEVELOPMENTS IN CONSUMER CLASS ACTION PRACTICE

Stuart T. Rossman

NationalConsumerLawCenter

Boston, MA

December 31, 2008

Stuart T. Rossman

Stuart Rossman is a staff attorney at the NationalConsumerLawCenter (“NCLC”) and has served as its Director of Litigation since 1999. NCLC is a 38 year old national non-profit advocacy organization dedicated to the representation of low income and elderly consumers. It focuses its efforts on the areas of consumer credit, maintaining affordable home ownership and access to utilities. Stuart is the co-editor of the 6th Edition of the NCLC Consumer Class Actions manual and coordinates NCLC’s Consumer Class Action Symposium. He is a 1975 graduate of the University of Michigan, summa cum laud, and graduated from HarvardLawSchool, cum laud, in 1978. After 13 years of private trial practice in Boston, Stuart served as Chief of the Trial Division and Chief of the Business and Labor Protection Bureau at the Massachusetts Attorney General’s Office from 1991-1999. As founding chairman of the Boston Bar Association (BBA) Young Lawyers Section he coauthored and edited a handbook on the rights of the homeless in Massachusetts, which received the American Bar Association’s Young Lawyer’s Division Award of Achievement in 1989. Stuart is the former Chairman of the Volunteer Lawyers Project, Massachusetts’ largest pro bono legal referral service program. Since 1992 he has been a member of the adjunct faculty at the Northeastern University School of Law where he teaches courses in Civil Trial Advocacy. He also is a member of the adjunct faculty at the Suffolk University School of Law. In 2004, Stuart and his co-counsel were recognized as Finalists for Trial Lawyer of the Year by the Trial Lawyers for Public Justice for their contribution to the public interest through their work on the case of Coleman v. General Motors Acceptance Corporation. He also was awarded the 2005 Thurgood Marshall Award by the Rainbow/PUSH Coalition and its Wall Street Project. Stuart currently serves as the President of the Jewish Community Relations Council of Greater Boston.

I. Where Have All the Class Actions Gone?

In November, 2008, the Federal Judicial Center issued “Impact of the Class Action Fairness Act on the Federal Courts-Preliminary Findings from Phase Two’s Pre-CAFA Sample of Diversity Class Actions”, principally authored by Emery G. Lee II and Thomas E. Willging.[1] The report represents preliminary findings from Phase Two of the ongoing study of the Class Action Fairness Act of 2005 (“CAFA”).

Phase One of the study found that the number of class actions based on diversity of citizenship jurisdiction filed in or removed to the federal courts increased after CAFA’s effective date.[2]The most important findings of that study, issued in April, 2008, were:

• There has been a dramatic increase in the number of diversity class actions filed as original proceedings in the federal courts in the post-CAFA period;
• Diversity class action removals increased in the immediate post-CAFA period over their 2004 levels but have been trending downward since 2005; and
• The increase in diversity class actions is due largely to increases in the numbers of contracts, consumer protection/fraud and torts-property damage class actions being filed in or removed to federal court in the post-CAFA period.

Phase Two will measure CAFA’s impact on litigation activity and judicial rulings in class actions in the federal courts. As the first step in the Phase Two analysis, the FederalJudicialCenter attempted to study the litigation activity, outcomes and case characteristics of class actions based on diversity of citizenship jurisdiction filed in or removed to the federal courts in the two years preceding CAFA’s effective date. These findings are intended to serve as a base line for further comparisons--i.e. the “‘before’ portion of a ‘before and after’ study of CAFA’s impact on the courts.”

The initial results are fascinating. The Executive Summary of the Report indicates as principal findings,inter alia, that in the pre-CAFA sample of diversity class actions:

• Plaintiffs filed motions to certify a class in fewer than one in four class actions;
• Motions activity was relatively infrequent--56% of the class actions had one or zero motions filed;
• All cases where a class was certified resulted in a class settlement;
• Parties proposed class settlements in 9% of the diversity class actions filed and all were ultimately approved by the Court;
• Plaintiffs filed motion to remand in 75% of the removed cases and judges granted remand motions almost 70% of the time, resulting in the remand of more than half of the removed cases; and
• Voluntary dismissal was the most frequent disposition of cases not remanded, occurring 38% of the time.

In sum, the FederalJudicialCentersurprisingly concludes that “in diversity class actions there is less to class allegations than one would expect.” Most of the plaintiffs in cases that raised class allegations did not take the next step and move to certify a class. All class actions in the study that were certified, whether for litigation or settlement purposes, ended with class settlements. The majority of cases not remanded to state court ended in voluntary dismissal.

So where did all of the pre-CAFA diversity class actions go? The report speculates that the dismissals may represent a financialor equitable-relief settlement of individual claims of the named plaintiffs or a dismissal of claims without settlement. Dismissal without settlement could be from cases lacking merit or a solvent defendant, or with an eye toward litigating inanother jurisdiction, according to the study.

The simple answer would appear to be that pre-CAFA diversity class action cases that were voluntarily dismissed at an early stage and/or class certification motions were not pursued in cases where settlements occurred first. Whether these settlements constituted a legitimate outcome for the putative class members or represented a sell out by class counsel is unclear because, prior to 2003, the public scrutiny of settlements in federal class action cases was less focused.

Perhaps a comparison with post-CAFA diversity cases, with its more detailed settlement notice procedures, will uncover a reversal of this trend. Alternatively, it is unclear at this point if the same outcomes hold true for either pre-CAFA or post-CAFA class actions based on federal question jurisdiction.

Nonetheless, if there is, in fact, a more recent drop in voluntary dismissals in post-CAFA diversity class actions, maybe it is attributable not to the impact of the statute alone, but in combination with the amendments to Federal Rules of Civil Procedure in 2003, which in revising Rule 23 required greater transparency in the settlement process and mandated a more active role by the Courts in the settlement approval process.

II. Right to Rescission Classes in Truth in Lending Actions?[3]

The three Circuits that have now considered the issue have all held that a trial court may not certify a class seeking rescission under the Truth in Lending Act (“TILA”), whether mere declaratory relief or an injunction is requested. Andrews v. Chevy Chase Bank,545 F.3d 570(7th Cir. 2008) (one judge dissenting); McKenna v. First Horizon Home Loan Corp., 475 F.3d 418 (1st Cir., 2007); James v. Home Construction. Co., 621 F.2d 727, 731 (5th Cir. 1980). These courts have noted that the statutory scheme gives the creditor certain rights before a rescission claim can be brought before a court, and also that TILA’s statutory-damages remedy specifically references class actions (by providing a damages cap), while TILA’s rescission remedy does not. See also, Jefferson v. Sec. Pac. Fin. Servs., Inc., 161 F.R.D. 63 (N.D. Ill. 1995) (agreeing with rationale of James, and concluding that actions seeking rescission under TILA § 1635 should not be certified); and Nelson v. Unified Credit Plan, Inc., 77 F.R.D. 54, 58 (E.D. La. 1978) (having “found no evidence of congressional intent that class treatment is appropriate in actions seeking rescission in the Truth-in-Lending context,” casting doubt on the “propriety of ever pursuing rescission under” TILA).

The James Court, for example, found that the right of rescission was a purely personal remedy under TILA, exemplified as a unique transaction between each individual lender and borrower that differs each time the right is exercised. Therefore, the Court concluded, the remedy did not present the commonality, superiority and manageability features necessary to support a class certification under the federal rules. Furthermore, the Court noted

that without a cap on the rescission payments the creditor could be exposed to annihilating damages and insolvency if class rescissions were allowed. Finally, the Court found comfort in the fact that the availability of monetary recoveries and attorneys fees in individual rescission cases still would be available in individual enforcement actions under TILA.

Some contemporary cases subsequently held, however, that a rescission class could be certified, specifically when the relief sought was merely a declaration of the class members’ rights to individually pursue a rescission of their own transaction. See, e.g., Tower v. Moss, 625 F.2d 1161 (5th Cir. 1980) (class certified under TILA with option to rescind offered in settlement of common claim); Williams v. Empire Funding Corp., 183 F.R.D. 428 (E.D. Pa. 1998) (same), later opinion, 109 F. Supp. 2d 352 (E.D. Pa. 2000); In re Consol. Non-Filing Ins. Fee Litig., 195 F.R.D. 684, 692 (M.D. Ala. 2000) (same); Hickey v. Great W. Mortgage Corp., 158 F.R.D. 603 (N.D. Ill. 1994) (permitting certification of a 23(b)(3) class seeking, inter alia, “a declaration that the class has a continuing right to rescind its transactions,” having concluded that Nelson and its progeny were inapposite when the plaintiff had not rescinded his contract).

More recently, however, inMcKenna v. First Horizon Home Loan Corp., 475 F.3d 418 (1st Cir., 2007), the First Circuit Court of Appeals followed James, supra, and held that, as a matter of law, class certification is not available for rescission claims, direct or declaratory, under TILA and parallel state law because Congress did not intend rescission suits to receive class action treatment. Among other things, the Court disdained “the notion that Congress would limit liability to $500,000 with respect to one remedy while allowing the sky to be the limit with respect to another for the same violation.” Id., 475 F.3d at 424. Soon thereafter, the Seventh Circuit followed suit, in part because “creating a circuit split generally requires quite solid justification…[and] the Andrews have not persuaded us that the First and Fifth Circuits have misinterpreted the operative provisions of TILA.” Andrews v. Chevy Chase Bank,545 F.3d 570 (7th Cir. 2008).

Interestingly, the district court inAndrewsCourthad grantedclass certification for declaratory relief in part because while Congress had amended TILA to cap damages claims against creditors it did not, at the same time, limit or ban rescission

classes. Andrewsv. Chevy Chase Bank, FSB, 474 F.Supp. 2d 1006 (E.D. WI, 2007). As a result, the lower Court concluded, it should not infer a Congressional intent to limit or ban rescission classes in the face of a vacuum. The dissenting judge on the Court of Appeals agreed with this view, but the majority followed its sister circuits in rejecting it and inferring instead a lack of intent to permit rescission class actions, period.

Despite Andrews, counsel for a putative class of borrowers in In Re Ameriquest Mortgage Co. Mortgage Lending Practices Litigation, No. 1715, a multidistrict litigation case (MDL”) pending before Judge Aspen in the United States District Court for the Northern District of Illinois, have argued that while the court cannot certify a class of borrowers who have not yet rescinded in order to determine whether the option of rescission is available to those individuals, it may certify a class of those who have already made rescission requests in order to enforce these. (Doc. 2457, filed 10/15/08) The district court has not yet ruled on this contention.

III. AreState Court Nationwide Class Action Settlements Enforceable?

A question that continues to confront class action practitioners is whether nationwide class action settlements approved by a state court are effective and enforceable in all other jurisdictions where putative class members reside. Two recent state court rulings on this challenging issue are instructive.

In Simeron v. Dryvit Systems, 196 N.J. 316, 953 A.2d 478 (August 11, 2008), the New Jersey Supreme Court was asked to decide whether homeowner could bring a consumer fraud action under New Jersey law against the manufacturer of synthetic stucco used to cover his home. The manufacturer filed a motion to dismiss based on a settlement in a nationwide class action previously filed in the State of Tennessee. The motion had been allowed by the trial court, but reversed and remanded by an intermediate appeals court.

The New Jersey Supreme Court held that before New Jersey courts will give full faith and credit to a class action judgment of a sister state, class members in that action must have been afforded the minimum procedural requirement for the Fourteenth Amendment’s Due Process Clause, i.e., notice plus an opportunity to be heard and participate; the notice must be the best practicable,

reasonably calculated to apprise class members of the pendency of the action and afford them an opportunity to present their objections, and the notice should also describe the class members’ rights in the action and provide them an opportunity to remove themselves from the class. Furthermore, even when a sister state court provides the necessary notification to class members required by due process, New Jersey courts still will not accord full faith and credit to a judgment that is infirm for other reasons (i.e. courts are not compelled to give preclusive effect to a sister state’s judgment procured by fraud or misrepresentation since it is likely that such a judgment would not be upheld by the sister state’s courts either).

In Simeron, the New Jersey Supreme Court found that the Tennessee case’s notice to class members satisfied due process because the New Jersey homeowner’s action involved the same defendant and subject matter. Specifically, the Court noted that the first-class mailing of the Tennessee settlement notice to the home addresses of over 85,000 nationwide putative class members contained pertinent information about settlement and how awards would be structured, and included a form allowing for class members to opt out of the settlement. The settlement also was published in national periodicals and trade publications. Ultimately, the Tennessee court entertained challenges to the proposed settlement at three different fairness hearings.

On a separate issue of interest, the New Jersey Supreme Court confirmed an award of all litigation expenses, including attorney fees, as a sanction against the defendant for its improper failure to timely disclose the existence of the Tennessee class action in the homeowner’s New Jersey consumer fraud action involving the same subject matter because the manufacturer sought to gain an unfair advantage through the delay while the deadline for opting out of the nationwide class action settlement was expiring. On the other hand, the Court held that the failure to disclose was not a sufficient basis, in and of itself, to deny full faith and credit to the settlement of the Tennessee suit where the plaintiff homeowner, once he found out about the settlement, took no steps to intervene and seek relief in the Tennessee court and, therefore, did not suffer irreparable prejudice.

Compare the outcome in Simeron to the decision of the Massachusetts Supreme Judicial Court in the recent case of Moelis v. Berkshire Life Insurance Company, 451 Mass. 483, 887 N.E.2d 214 (May 22, 2008). In Moelis, a putative class of insurance policy holders sought to certify both a national and state-wide class action against an insurer based on alleged deceptive practices with respect to “disappearing premium” insurance policies that did not perform as expected. The trial court denied the motions to certify the classes and the matter was reported, on an interlocutory basis, to the Supreme Judicial Court.

There, on the issue of the denial of nationwide class certification, the Court affirmed the trial court’s decision on the grounds that the Commonwealth’s courts could not exercise personal jurisdiction over nonresident plaintiffs as required to certify a national class. Specifically, the Supreme Judicial Court recognized that the plaintiffs’ contact with the insurer via the contract for the insurance policy did not constitute sufficient minimum contacts with Massachusetts to justify an exercise of personal jurisdiction.

The Supreme Judicial Court went on to note that a state court nonetheless may bind an absent plaintiff in a class action for money damages even if he or she lacks minimum contacts with the forum so long as basic due process protections are provided. Such protections would include notice, an opportunity to be heard and to participate in the litigation and the opportunity for the plaintiff to remove himself or herself from the class. Here, however, the statute under which the action had been brought did not provide an opportunity for nonresident class plaintiffs to opt out and, therefore, would offend traditional notions of fair play and substantial justice.