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TILA Class Action Defense Cases–McCoy v. Chase: Ninth Circuit Reverses Dismissal Of TILA Class Action Holding Lender Must Give Notice Of Interest Rate Increase Based On Late Payments To Other Creditor

Mar 31, 2009 | By: Michael J. Hassen

District Court Erred in Dismissing TILA Class Action because Regulation Z Required Lender to Notify Credit Card Holder of Increase in Interest Rate Based on Late Payments to Other Creditor Ninth Circuit Holds

Plaintiff filed a class action against Chase Manhattan Bank alleging violations of the federal Truth in Lending Act (TILA); the class action complaint asserted that Chase violated TILA by “increase[ing] his interest rates retroactively to the beginning of his payment cycle after his account was closed to new transactions as a result of a late payment to Chase or another creditor,” but failing to give him notice of the increase until after it had already taken effect. McCoy v. Chase Manhattan Bank, USA, ___ F.3d ___ (9th Cir. March 16, 2009) [Slip Opn., at 3325, 3328]. Defense attorneys moved to dismiss the class action on the grounds that Chase was not required to give notice of the rate increase because it had disclosed in its Cardmember Agreement the highest rate that the Bank could apply in the event of a cardmember default. Id., at 3328. The district court agreed and dismissed the class action, id. Plaintiff appealed. The Ninth Circuit explained at page 3328, “This case presents the question of whether the notice requirements of [TILA] and Regulation Z…, as interpreted by the Federal Reserve Board’s Official Staff Commentary, apply to discretionary interest rate increases that occur because of consumer default. We hold that Regulation Z requires a creditor to provide contemporaneous notice of such rate increases.” The Circuit Court therefore affirmed in part and reversed in part.

The Ninth Circuit began its discussion by noting that “Congress enacted TILA to ‘assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices.’” McCoy, at 3329 (quoting 15 U.S.C. § 1601(a)). Toward that end, the Federal Reserve Board adopted Regulation Z, which addresses when and how notice of changes in terms must be given and which provides, in part, that written notice is required “[w]henever any term required to be disclosed under § 226.6 is changed or the required minimum periodic payment is increased,” 12 C.F.R. § 226.9©(1). Section 226.6, in turn, requires that creditors to disclose “each periodic rate that may be used to compute the finance charge.” 12 C.F.R. § 226.9(a)(2). The Circuit Court explained that the parties “dispute the meaning of the phrase ‘any term required to be disclosed under § 226.6’”; defense attorneys argued that “the phrase applies only to the contractual terms of Chase’s Cardmember Agreement,” while plaintiff argued that “the phrase also applies to the list of specific ‘items’ § 226.6(a)(2) requires be disclosed, which includes the interest rate that may be used.” McCoy, at 3329. The Ninth Circuit found the language of Regulation Z to be “ambiguous,” and noted that it would defer to the Federal Reserve’s “interpretation of its own ambiguous regulation” so long as that interpretation is not “‘plainly erroneous or inconsistent with the regulation.’” Id., at 3330 (citation omitted).

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RESPA Class Action Defense Cases–Hazewood v. Foundation Financial: Eighth Circuit Affirms Dismissal Of RESPA Class Action Holding Excess Title Premium Charged Not An Unearned Fee Under RESPA

Mar 24, 2009 | By: Michael J. Hassen

District Court Properly Dismissed RESPA Class Action Complaint because Title Insurers Provided Service (Title Insurance) for Fee Alleged Overcharged to Plaintiff, and Plaintiff cannot Manufacture RESPA Claim by Alleging “Portion” of Fee (Excess Premium) was “Unearned” Eighth Circuit Holds

Plaintiff filed a class action against her title insurer, Foundation Financial Group, and other title insurers and title insurance agents alleging inter alia violations of the Real Estate Settlement Procedures Act (RESPA) and Truth in Lending Act (TILA); the class action complaint asserted that defendants overcharged for title insurance in violation of Alabama law, and that they charged borrowers for “other than for services actually performed” in violation of RESPA. Hazewood v. Foundation Fin. Group, LLC, 551 F.3d 1223, 1224 (8th Cir. 2008). The theory of the class action is that the title insurer charged a premium in excess of that allowed by state law, and that the amount of the excess constituted a “portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service … other than for services actually performed” in violation of RESPA. Id., at 1225 (quoting 12 U.S.C. § 2607(b)). Put another way, the class action was premised on the theory that “the overcharge was, as a matter of law, ‘other than for services actually performed.’” Id. The class action also alleged that the title insurance premium “was, or may have been, split” between two defendants, id., at 1224. Defense attorneys moved to dismiss the class action; they argued that RESPA is violated “only when fees are charged in exchange for no services at all, not for mere overcharges or excessive fees.” Id., at 1225. The district court agreed, dismissing the RESPA claim because plaintiff in fact received title insurance, and dismissing the state law claims as barred by Alabama law because a private right of action does not exist for charging an insurance rate in excess of the filed rate. Id. The Eighth Circuit affirmed.

The Eighth Circuit noted that Alabama law “requires title insurers to submit their rates to the Insurance Commissioner, who must then approve the ‘fairness and justness’ of this ‘filed rate.’” Hazewood, at 1224 (citation omitted). Title insurers may not charge a premium in excess of the filed rate, but plaintiff allegedly was charged such a rate which was allegedly split between the settlement agent and the title insurer. Id., at 1224-25. Plaintiff argued on appeal that the class action’s RESPA claim should not have been dismissed because “a portion of her title insurance premium was unearned.” Id., at 1225. The Circuit Court cited well-settled Eighth Circuit authority holding that “RESPA § 8(b) does not provide a cause of action for excessive fees – that is, charges where a service was performed, but the plaintiff feels she was overcharged by the service provider.” Id. (citing Friedman v. Market Street Mortg. Corp., 520 F.3d 1289, 1296 (11th Cir. 2008)). If the fee is charged for a service that is actually rendered, then RESPA is not violated; the RESPA claim must allege that “no services were rendered in exchange for a settlement fee.” Id. (citation omitted). Further, the plaintiff cannot avoid this limitation by arguing, as the present class action does, that a portion of the fee charged – the “excess” portion – was “unearned.” Id., at 1225-26. Accordingly, her RESPA class action claim was properly dismissed, id., at 1226. The Eighth Circuit also rejected plaintiff’s invitation to “overrule, modify, or distinguish” its prior case law so that her class action claim could survive, id., at 1227. Accordingly, the Circuit Court affirmed the judgment of the district court dismissing the class action, id.

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TILA Class Action Defense Cases–Jordan v. Paul Financial: California Federal Court Denies Class Action Treatment To TILA Law Class Action Holding Plaintiff Lacks Standing And His Claims Lack Typicality

Mar 18, 2009 | By: Michael J. Hassen

Class Action Complaint Alleging Violations of Federal Truth in Lending Act (TILA) did not Warrant Class Action Treatment because Plaintiff Lacked Standing to Prosecute TILA Claim, Plaintiff was an Inadequate Representative because he could not Establish Traceability, and Plaintiff’s Claims were not Typical of the Putative Class Claims California Federal Court Holds

Plaintiff filed a putative class action against Paul Financial concerning option adjustable rate mortgages (Option ARMs); specifically, the class action complaint alleged that Option ARMs are “deceptively devised” in that they “promise that the loan [will] have a low, fixed interest rate” when in fact the loan carries a much higher interest rate. The class action alleged further that defendant “disguised” the fact that the Option ARM “was designed to cause negative amortization.” Jordan v. Paul Financial, LLC, ___ F.Supp.2d ___ (N.D. Cal. January 27, 2009) [Slip Opn., at 1-2]. The class action alleged, inter alia, violations of the federal Truth in Lending Act (TILA) and California’s Unfair Competition Law (UCL), id., at 2, and amendments to the class action complaint added HSBC and Luminent Capital Mortgage as defendants, id., at 1. Plaintiff sought to represent two classes of borrowers who received Option ARM loans secured by their primary residences: (1) a nationwide class, and (2) a California statewide class, id., at 1-2. Plaintiff’s attorney moved the district court to certify the litigation as a class action; defense attorneys argued against class action treatment. Id., at 1. The district court determined that class action treatment was not warranted and therefore denied plaintiff’s class action certification motion.

Paul Financial originated residential loans, and while it also serviced loans, Paul Financial sold 75% of its loans to third party investors and sold the servicing rights to other investors. Jordan, at 2. Defendant “sold the loans to about ten investors,” but does not have records of subsequent sales by those investors, id., at 2-3. Plaintiff’s loan, for example, was sold to defendant Luminent, and then pooled with other Option ARM loans into a mortgage-backed security pool; defendant HSBC was the trustee of the pool. Id., at 3. Defendant sold the servicing rights for plaintiff’s loan to yet another investor, Greenwich Capital, id. By December 2008, Paul Financial had less than $1000 and planned to cease operations on December 31, 2008. Id., at 2. After discussing the general rules regarding class action certification under Rule 23, see id., at 3-4, the district court turned to whether plaintiff had standing to represent the TILA class or the California class.

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Class Action Defense Cases–Hauk v. JP Morgan Chase: Ninth Circuit Affirms Summary Judgment On Class Action’s TILA Claim But Reverses As To Class Action’s UCL And False Advertising Claims

Feb 16, 2009 | By: Michael J. Hassen

District Court Properly Granted Summary Judgment in Favor of Bank as to Claim Alleging Violation of Federal Truth In Lending Act (TILA) because Bank’s Disclosures were Accurate, but Genuine Issue of Material Fact Precluded Summary Judgment as to Unfair Competition Law (UCL) and False Advertising Law (FAL) Claims Ninth Circuit Holds

Plaintiff filed a class action against JP Morgan Chase alleging violations of the federal Truth in Lending Act (TILA), the federal Fair Credit Reporting Act (FCRA) and California’s Consumers Legal Remedies Act (CLRA); plaintiff’s amended class action complaint added claims for alleged violations of California’s Unfair Competition Law (UCL) and False Advertising Law (FAL). Hauk v. JP Morgan Chase Bank USA, ___ F.3d ___ (9th Cir. January 23, 2009) [Slip Opn., at 827]. The class action complaint asserted that plaintiff opened a Chase credit card, subject to a Cardmember Agreement (CMA), and later took advantage of a “balance transfer offer” that promised a promotional fixed 4.99% APR by transferring $10,000 to his Chase card. Id., at 825. According to the allegations underlying the class action, the CMA allowed Chase to increase the interest rate if plaintiff made a late payment to Chase or any other creditor, id. The class action centered on the allegation that Chase charged plaintiff an APR of 28.74% because it maintained that “he was no longer eligible to receive the promotional 4.99% APR,” id., at 825-26; specifically, Chase argued that plaintiff had made a late payment to another creditor three months before he accepted the balance transfer offer from Chase, id., at 826. While Chase would have automatically canceled the balance transfer offer to plaintiff had it discovered the late payment as part of its monthly cardmember account review, which includes reviewing Experian credit reports, Chase claimed that it did not discover the late payment until after plaintiff had accepted the offer to transfer a balance to his credit card. Id. Defense attorneys removed the class action to federal court, and moved for summary judgment on the grounds that the class action’s state law claims were preempted by federal law and that plaintiff’s TILA and CLRA claims were defeated by the disclosures in Chase’s CMA. Id., at 827. The district court rejected the preemption argument, but agreed with the defense that plaintiff could not prove Chase knew of the late payment before accepting the balance transfer offer and so plaintiff’s state law claims could not survive. Id. The Ninth Circuit reversed as to the UCL and FAL claims for relief.

The Ninth Circuit noted that plaintiff voluntarily withdrew his FCRA claim and did not appeal from the dismissal of the class action’s CLRA claim; accordingly, the appeal was directed to the grant of summary judgment as to plaintiff’s TILA, UCL and FAL claims. Hauk, at 827. The Circuit Court devoted most of its attention to the TILA claim. The Ninth Circuit summarized TILA and Regulation Z, see id., at 828-29, and the disclosures made by Chase in conjunction with the balance transfer offer, see id., at 830-31. In pertinent part, Chase may waive its right to increase a cardholder’s APR because of a late payment if it knows of, but does not promptly act on, that default, id., at 830-31; however, Chase does not waive its right to increase the APR “based on a late payment it discovered after it mailed the [balance transfer offer], even if that late payment occurred before it mailed the [balance transfer offer],” id., at 831 (citations omitted). The Circuit Court noted further that “TILA is only a ‘disclosure statute’ and ‘does not substantively regulate consumer credit,’” id. In this case, then, the district court properly granted summary judgment on the class action’s TILA claim because “the injury [plaintiff] suffered neither resulted from any lack of TILA disclosures nor gave rise to a claim under TILA.” Id. The Ninth Circuit explained that “while an inaccurate disclosure that itself breaches a credit agreement may also violate TILA…, the breach of a credit agreement based on conduct independent of the disclosures does not necessarily give rise to a TILA claim.” Id., at 832-33 (citation omitted). In affirming the dismissal of the TILA claim, the Ninth Circuit recognized contrary authority out of the Third Circuit, see id., at 833-34 (citing Rossman v. Fleet Bank (R.I.) Nat’l Ass’n, 280 F.3d 384, 399-400 (3d Cir. 2002)), but rejected that circuit’s “expansive reading of Regulation Z,” id., at 833. Rather, the Ninth Circuit concluded at page 835, “We hold that a creditor’s undisclosed intent to act inconsistent with its disclosures is irrelevant in determining the sufficiency of those disclosures under sections 226.5, 226.6, and 226.9 of Regulation Z.” And because defendant’s disclosures complied with TILA and Regulation Z, summary judgment was proper, id.

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Class Action Defense Cases–Munoz v. Financial Freedom: California Federal Court Grants Defense Motion To Dismiss Class Action Claims As Preempted By HOLA But Grants Leave To File Amended Class Action Complaint

Nov 13, 2008 | By: Michael J. Hassen

Home Owners’ Loan Act (HOLA) Preempted Class Action Claims Premised on Scheme to Defraud Senior Citizens into Entering into Reverse Mortgages but Plaintiff given Leave to File Amended Class Action Complaint California Federal Court Holds

Plaintiff filed a putative class action against Financial Freedom Senior Funding Corporation alleging that “Financial Freedom instituted a complex scheme to defraud senior citizens in the structuring, origination, underwriting, marketing and sale of reverse mortgages.” Munoz v. Financial Freedom Senior Funding Corp., 567 F.Supp.2d 1156, 1158 (C.D. Cal. 2008). The class action complaint alleged ten claims for relief: elder abuse, violation of California’s Unfair Competition Law (UCL) practices by violating the Real Estate Settlement Procedures Act (RESPA) and Regulation X, false advertising, breach of fiduciary duty and aiding and abetting breach of fiduciary duty, fraudulent concealment, unjust enrichment and imposition of constructive trust, violation of the Consumer Legal Remedies Act (CLRA), breach of the implied covenant of good faith and fair dealing, and negligent misrepresentation. Id., at 1161. At bottom, the class action alleged that defendant “included a number of hidden costs and fees in the reverse mortgage transactions, and also to have paid brokers ‘kickbacks’ for directing borrowers to the company.” Id., at 1158. Defense attorneys moved the district court for judgment on the pleadings as to the class action claims under Rule 12© on the ground that the class action claims are preempted by federal law. Id., at 1159. The district court granted the motion in part and denied it in part.

The district court summarized the three ways in which federal law may preempt state law, and noted that while there is generally a presumption against federal presumption, that presumption does not apply to the banking industry because it is “‘an area where there has been a history of significant federal presence.’” Munoz, at 1159 (citation omitted). Defense attorneys argued that the class action claims were preempted by the Home Owners’ Loan Act of 1933 (HOLA), which gave “broad authority” to the Office of Thrift Supervision (OTS) to “promulgate regulations governing savings and loan institutions,” id., at 1160. The OTS regulations, in turn, expressly provide, “OTS hereby occupies the entire field of lending regulation for federal savings associations.” Id. (quoting 12 C.F.R. § 560.2(a)). Under Ninth Circuit authority, “HOLA preempts all state regulation of savings associations under the doctrine of field preemption.” Id. (citations omitted). Specifically, HOLA expressly preempts state laws governing “Loan-related fees, including without limitation, initial charges, late charges, prepayment penalties, servicing fees, and over limit fees,” § 560.2(b)(5), and “Disclosure and advertising, including laws requiring specific statements, information, or other content to be included in credit application forms, credit solicitations, billing statements, credit contracts, or other credit-related documents,” § 560.2(b)(9).

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TILA Class Action Defense Cases–Christ v. Beneficial: Eleventh Circuit Reverses Class Action Certification And Damage Award In Truth-In-Lending-Act Class Action Holding TILA Does Not Authorize Actions Seeking Private Injunctive Relief

Nov 4, 2008 | By: Michael J. Hassen

Private Injunctive Relief Unavailable Under Truth in Lending Act, so District Court in TILA Class Action Seeking such Relief Improperly Granted Class Action Treatment under Rule 23(b)(2) and Erred Further in Awarding $22 Million in Damages as “Restitution or Disgorgement” under Declaratory Judgment Act Eleventh Circuit Holds

Plaintiff filed a class action against Beneficial Florida, Inc. and numerous affiliates (the Bank) alleging violations of the federal Truth in Lending Act (TILA) in the disclosures made by the Bank in connection with a $2000 loan; the class action complaint alleged that the Bank violated TILA by listing the fee for non-filing insurance (NFI) in the wrong column on the disclosure form. Christ v. Beneficial Corp., ___ F.3d ___ (11th Cir. October 28, 2008) [Slip Opn., at 1-2]. Specifically, the class action alleged that the Bank disclosed the NFI as an “amount charged” when it should have been disclosed as a “finance charge,” id., at 4. In part, plaintiff’s class action complaint sought damages, injunctive relief, declaratory relief, and disgorgement, id., at 4-5. The Judicial Panel on Multi-District Litigation centralized the class action with other related class actions against the Bank in the Middle District of Alabama, and ultimately the Alabama federal court certified a nationwide class action against the Bank under Rule 23(b)(2), id., at 5-6, which authorizes class actions where a defendant acted “on grounds that apply generally to the class, so that injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole,” FRCP Rule 23(b)(2). In certifying the class action, the district court held that “[i]njunctive and declaratory relief are available under TILA,” id., at 6 (citation omitted). The district court later granted summary judgment in favor of the plaintiff class “and awarded injunctive relief and over $22 million in restitution and disgorgement pursuant to the Declaratory Judgment Act.” Id., at 3. The Eleventh Circuit reversed.

The Eleventh Circuit primarily addressed whether “private injunctive relief” is available under TILA: it noted that TILA is silent on the issue, neither expressly authorizing such relief nor prohibiting it, and that the district court “inferred from TILA’s silence that TILA provides private injunctive relief.” Christ, at 8. Based on its detailed analysis, the Circuit Court disagreed. See id., at 8-12. The Eleventh Circuit then held that certification of a Rule 23(b)(2) class action was inappropriate because the Declaratory Judgment Act, standing alone, would not support such an order. Id., at 12. The Court explained, “The relief sought under the Declaratory Judgment Act is essentially a declaration of liability under TILA, and can only ‘lay the basis for a damage award rather than injunctive relief.’” Id. (citation omitted). Accordingly, because it held that TILA did not authorize private injunctive relief, the Eleventh Circuit vacated the class action certification order. Id.

Certification of Class Actions Class Action Court Decisions Multidistrict Litigation RESPA/TILA Class Actions Uncategorized

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Class Action Defense Cases—In re Countrywide Financial: Judicial Panel On Multidistrict Litigation (MDL) Grants Defense Motion To Centralize Class Action Litigation But Transfers Class Actions To Southern District of California

Oct 24, 2008 | By: Michael J. Hassen

Judicial Panel Grants Defense Request for Pretrial Coordination of Class Action Lawsuits Pursuant to 28 U.S.C. § 1407, Opposed by Some Class Action Plaintiffs and Two Attorneys General, but Transfers Actions to Southern District of California Seven class actions – three in the Central District of California, two in the Southern District of California, one in Illinois and one in Kentucky – were filed against Countrywide Financial Corp. and affiliated entities; the various class action complaints “aris[e] out of allegations that Countrywide engaged in predatory lending practices by (1) originating and/or servicing residential mortgages in an unlawful, unfair or deceptive fashion, (2) misrepresenting or concealing the terms, risk, or suitability of the loans; and/or (3) placing borrowers in loans that they could not afford.

Class Action Court Decisions Multidistrict Litigation RESPA/TILA Class Actions Uncategorized

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Arbitration Class Action Defense Cases–Pleasants v. American Express: Eighth Circuit Affirms Order Dismissing Class Action And Compelling Arbitration Of Individual Claim Holding Class Action Waiver In Arbitration Clause Enforceable Under FAA

Oct 15, 2008 | By: Michael J. Hassen

District Court Properly Dismissed Class Action and Granted Defense Motion to Compel Plaintiff to Arbitrate her Claims on an Individual Basis, Rather than as a Class Action, because Class Action Waiver in Arbitration Clause was not Substantively or Procedurally Unconscionable Eighth Circuit Holds

Plaintiff filed a putative class action against American Express Company and American Express Incentive Services (AEIS) alleging violations of the federal Truth in Lending Act (TILA); specifically, the class action complaint alleged that American Express violated TILA by “issuing pre-loaded, stored-value cards without making the disclosures required under the TILA.” Pleasants v. American Express Co., 541 F.3d 853, 855 (8th Cir. 2008). Defense attorneys moved to dismiss American Express Company on the ground that it was not a “creditor” within the meaning of TILA; plaintiff did not oppose the motion and the district court dismissed American Express Company from the putative class action. Id. Defense attorneys then moved to compel arbitration of plaintiff’s claims pursuant to an arbitration provision governed by the Federal Arbitration Act (FAA) that contained a class action waiver, id. The district court rejected plaintiff’s claim that the class action waiver was unconscionable, dismissed the class action and compelled plaintiff to arbitrate her individual claims against AEIS. Id. The Eighth Circuit affirmed.

Briefly, AEIS sent plaintiff three pre-paid cards, in the amounts of $25, $10, and $5, in return for her participation in online surveys; the cards could be used at any establishment that accepted American Express credit cards. Pleasants, at 855. Along with the cards, AEIS sent plaintiff the “Card Terms and Conditions,” which included a “Participant Agreement” that provided in part that any claims would be resolved by arbitration and that the parties “WILL NOT HAVE THE RIGHT TO PARTICIPATE IN A REPRESENTATIVE CAPACITY OR AS A MEMBER OF ANY CLASS OF CLAIMANTS PERTAINING TO ANY CLAIM SUBJECT TO ARBITRATION,” id. A separate provision reiterated that all claims “shall be arbitrated on an individual basis” and that there “shall be no right” for any claims “to be arbitrated on a class action basis,” id., at 855-56. Plaintiff’s class action complaint alleged that at a time when the cards had a combined remaining balance of $25, she used the cards at a restaurant to pay for a $20 meal “but the restaurant processed one or more of the cards for $45 more than their stored value.” Id., at 856. AEIS demanded that plaintiff pay the $45 difference; when she failed to do so, AEIS sent her another letter requesting not only the $45 difference but, pursuant to the terms and conditions of the card usage agreement, a late fee of $10 and a transaction fee of $25. Id. Plaintiff disputed the charge and filed the class action when AEIS continued with collection efforts, id.

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TILA Class Action Defense Cases–Andrews v. Chevy Chase: Seventh Circuit Reverses Class Action Certification Of TILA Class Action Against Chevy Chase Bank Holding Rescission Not Available In Class Actions Under TILA

Sep 26, 2008 | By: Michael J. Hassen

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.

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TILA Class Action Defense Cases–Megitt v. IndyMac: Massachusetts Federal Court Dismisses Class Action Holding Technical Deficiencies In TILA 3-Day Notice Of Right To Cancel Underlying Class Action Claims Were Not Actionable

Jul 22, 2008 | By: Michael J. Hassen

Defense Motion to Dismiss Truth in Lending Act (TILA) Class Action Granted because Failure to Specify Date by which Right to Cancel must be Exercised was merely a Technical TILA Violation and, Viewed Objectively, a Reasonably Alert Borrower would have Understood her Rights Massachusetts Federal Holds

Plaintiffs filed a putative class action against IndyMac for violations of the federal Truth in Lending Act (TILA); the class action complaint alleged that IndyMac failed to provide the requisite notice of a borrower’s three-day right to cancel because the disclosure “[left] blank the specific date by which the notice of cancellation had to be sent.” Megitt v. IndyMac Bank, F.S.B., 547 F.Supp.2d 56, 56 (D.Mass. 2008). More specifically, the class action complaint revealed that IndyMac provided plaintiffs with a Notice of Right to Cancel, which stated in part that the borrower had “a legal right under federal law to cancel this transaction, without cost, within three (3) business days from whichever of the following events occurs last: (1) the date of the transaction, which is: June 16, 2006; or (2) the date you received your Truth in Lending disclosures; or (3) the date you received this notice of your right to cancel.” Id., at 57-58. However, the class action further alleged that IndyMac’s notices provided, “If you cancel by mail or telegram, you must send notice no later than midnight of, ______, (or midnight of the third business day following the latest of the three events listed above).” Id., at 58. Thus, the notices from IndyMac left the date blank, id. Defense attorneys moved to dismiss the class action: The chief magistrate issued and report and recommendation that the motion to dismiss should be granted, relying in part on Palmer v. Champion Mortgage, 465 F.3d 24 (1st Cir. 2006), and the district court adopted the recommendation. Id., at 57. The federal court explained at page 57, “The import of the First Circuit’s Palmer decision with regard to the purely technical omission in the document embodying the notice makes the ruling here compelling and inevitable.” Accordingly, the court dismissed the class action.

Defense attorneys argued that, under the First Circuit’s decision in Palmer, the “technical” deficiency underlying the class action is not actionable under TILA, Regulation Z or Massachusetts state law. Megitt, at 58. Palmer, from which the district court quoted at length, essentially holds that if a lender’s 3-day notice of a borrower’s right to cancel tracks the model form for such disclosures is “at the very least, prima facie evidence of the adequacy of the disclosure.” Id., at 59 (quoting Palmer, at 29). As the district court noted, “The court went so far as to recognize that there was both statutory and case law support for the proposition that adherence to a model form bars a TILA non-disclosure claim entirely” but “it left ‘for another day the question of whether such adherence invariably brings a creditor within a safe harbor.’” Id. n.2 (citations omitted). Palmer also explained that courts should rely on “the text of the disclosures themselves rather than on plaintiffs’ descriptions of their subjective understandings,” and base their decisions on objectively reasonable factors rather than the plaintiff’s subjective understanding, id., at 59 (citations omitted).

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