On September 24, 2008, the U.S. Circuit Court of Appeal for the Seventh Circuit issued its much-anticipated decision in Andrews v. Chevy Chase Bank, No. 07-1326 (7th Cir. Sept. 24, 2008), holding that class actions may not be certified for claims seeking rescission under the Truth in Lending Act, 15 U.S.C. § 1601, et. seq. (“TILA”). Slip Op. at. 1. In so doing, the Seventh Circuit joined the First and Fifth Circuits, and one California state appellate court, which previously held that the “purely personal remedy” of rescission under TILA is not appropriate for class treatment. 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); LaLiberte v. Pac. Mercantile Bank, 53 Cal. Rptr. 3d 745 (Cal. Ct. App. 2007).
In Andrews, plaintiff homeowners brought a class action suit against Chevy Chase Bank FSB, claiming that Chevy Chase failed to make certain disclosures required by TILA in connection with a mortgage loan obtained by plaintiffs. Plaintiffs moved to certify a class of borrowers who had received a similar type of loan and disclosures, and sought, inter alia, a declaration that the entire class was entitled to rescind their mortgage transactions. The district court certified the requested class, and (having found a TILA violation) declared that all class members were entitled to rescind their mortgages. Defendant sought interlocutory appeal of the class certification decision.
The Seventh Circuit accepted the appeal and reversed the district court, holding that “TILA rescission class actions may not be maintained.” Slip Op. at 2. The court began by noting that the rescission mechanism available under TILA is “intended to operate privately, at least initially, with the creditor and debtor working out the logistics of a given rescission.” Id. at 7. Those logistics include arranging a return of payments made by the borrower, a release of the lender’s security interest, and a return of the amount borrowed to the lender. Id. The court held that such an individualized process was not appropriate for class treatment:
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.
The court rejected plaintiffs’ argument that a class was appropriate because section 1635 of TILA does not explicitly prohibit class actions. Instead, the court held that given TILA’s $500,000 cap on statutory damages in a class action, and given the potential for vast recoveries in rescission class action claims (plaintiffs estimated that $210 million was potentially at issue in Andrews), “the absence of a similar cap in §1635 strongly suggests that class actions are not available for rescission.” Id. at 10. The court explained that “[t]he 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 strains credulity.” Id.
The court also did not believe that a TILA class action could meet the requirements for certification under Rule 23. The court first noted that class certification was inappropriate under Rule 23(b)(2), which authorizes a class action where “final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole,” because a declaration that the class could rescind their loans would begin, rather than end, the process:
As we have explained, a declaration of a “rescission class” would only initiate a process of individual rescission actions. Significant individual aspects of the remedy, varying with each consumer’s loan transaction, would remain to be worked out before each of the transactions could be unwound. Rather than settling the legal relations at issue, a judicial declaration in this situation would be essentially advisory.
Id. at 13-14 (emphasis in original).
The court also held that a rescission class failed to meet the predominance and superiority requirements of Rule 23(b)(3):
If the class certification only serves to give rise to hundreds or thousands of individual proceedings requiring individually tailored remedies, it is hard to see how common issues predominate or how a class action would be the superior means to adjudicate the claims.
Id. at 14.
The court also noted that, given the significant recovery typically available in rescission cases (the court estimated $50,000 plus fees and costs in a typical case), “TILA rescission is not the sort of remedy that would not otherwise be sought unless the class-action mechanism were available.” Id. at 15.
A dissenting judge in Andrews believed that a class action “can be squared with the idea that TILA rescission is a personal remedy.” Id. at 17. While “the ‘unwinding’ process the majority describes – may well prove too complicated to satisfy the Rule 23 dictates in a given case,” the dissent continued “that does not mean a TILA rescission class action may not be maintained as a mater of law.” Id. (emphasis in original).
Although plaintiffs’ attorneys have already pledged to seek a rehearing en banc, the Andrews decision is a significant and positive development for mortgage lenders and others operating in the primary and secondary consumer credit markets, many of whom are currently defending against cases similar to Andrews seeking class-wide rescission of loan transactions. Federal circuit courts that have considered the issue have all unanimously rejected class wide rescission claims.