Trade and Lending Act Violation Class Rescission - Essay Example

ment of Facts This memo addresses whether or not a action lawsuit can be brought for a Truth in Lending Act TILA violation in which the relief requested is a rescission. In September 2005, forty-nine families relocated to Seattle from New Orleans after their homes were destroyed by Hurricane Katrina ("KF"). The KF each purchased homes but later realized that due to lack of financial resources, each family would need to refinance their mortgages before falling behind on their payments. The KF refinanced their mortgages with Lending Flower Bank ("LFB") at a fixed 2.25% rate and their primary residence served as a security interest. LFB was in violation of the TILA because while the disclosure showed a 2.25% fixed interest rate for three months, it failed to show that the interest rate was both variable and increasing after the third month. The families now want to rescind their mortgages. The clinic has already sent a letter to LFB on behalf of all the families. The KF cannot afford individual lawyers and must sue as a class, requesting rescission of the mortgages. LFB has refused to rescind the mortgages, because the three day right of rescission period had passed. Issue Is class action rescission permissible under the TILA when one of the statutes' purposes is remedial but otherwise silent on the matter Brief Answer Probably. Class action rescissions under the TILA will likely be permissible because while the KF may not be successful in arguing that the plain language of the TILA included class rescissions, the KF will like prevail because of the Congressional intent in protecting consumers along with the KF seeking a judgment as a class in order to then individually seek rescission justify class rescissions under the TILA. The KF will also likely prevail because their particular situation can only be remedied by class rescissions. Discussion The TILA was enacted in 1968 to ensure that creditors provide a meaningful disclosure of credit terms giving the consumer the ability to easily compare the various credit terms available to them and avoid uniform uses of credit. Truth and Lending Act, 15 U.S.C. 1601 (1995). Creditors must clearly and conspicuously disclose certain key terms such as annual percentage rates, finance charges, and the total number of loan payments due before consummating a credit transaction. Elizabeth Renuart, Stop Predatory Lending 84 (National Consumer Law Center) (2002). The TILA allows the consumer a right to rescind a transaction for non-purchase money home-secured loans if a creditor fails to make specific disclosures for up to three years. Truth and Lending Act, 15 U.S.C. 1635(f) (1995). Rescission voids the security interest in the home and eliminates the obligation to pay interest or other finance charges or closing costs. Elizabeth Renuart, Stop Predatory Lending 99 (National Consumer Law Center) (2002). Courts have not accepted the TILA class actions lawsuits lightly. Williams v. Empire Funding Corp., 183 F.R.D. 428, 435 (1998). The TILA does create a right for debtors to rescind their contracts under 15 U.S.C.A. 1635, while the TILA addresses class action damages under 15 U.S.C.A. 1640, Truth and Lending Act, 15 U.S.C. 1635, 1640 (1995). It does not address class action suits for rescission explicitly. There is no controlling precedent on this issue; consequently, courts appear divided on this matter. Some courts say that class rescissions are inappropriate, while other courts have relied on carefully drafted complaints to assist in deciding on granting rescission. Elizabeth Renuart, Stop Predatory Lending 106 (National Consumer Law Center) (2002). The factors courts consider are considered in this memo: (1) the plain language of the TILA statute, (2) the legislative history of the TILA, (3) the approaches courts have taken in interpreting the TILA statute and, (4) the policy of each case. Williams, 183 F.R.D. 428 (1998). Plain Language of the TILA Statute The plain language of the statute is silent on the issue of whether a class action suit for rescission can be brought. In holding that the TILA language does not provide for class action rescissions, courts have relied on three main points. First, the plain language argument will fail because the TILA was never amended to include class rescissions. The TILA clearly provides for class actions under 1640, which governs damages, and 1635, which governs rescission. Laliberte v.Pacific Mercantile Bank, 147 Cal.App.4th 1, 745, 751 (2007). While the 1974 amendment acknowledged class action suits by adding a separate clause, the 1976 amendment chose only to add a cap on monetary damages and noticeably did not address class action rescissions. LFB will argue that because Congress did not explicitly forbid class action rescission, "it is risky business to attribute much significance to congressional inaction." McKenna v. First Horizon Home Loan Corp., 475 F.3d 418, 425 (2007). Second, the TILA was not designed to be punitive, but rather, to ensure that creditors provide a meaningful disclosure of terms. Courts should also look at the class action section at issue and interpret it to serve the TILA's public purpose. Brief of Petitioner-Appellant, Bobby Ferrel, Jr. v. CHECK- N-ADVANCE, No. 06-17243 (9th Cir. Jan. 30, 2006). Class rescissions are also not in line with the purpose of avoiding the punishment of lenders, and could in fact punish lenders so badly, that lenders could face bankruptcy. Third, the canons of statutory construction suggest that a court does not need to look past the language because when the statutory "language is clear and unambiguous it must be held to mean what it plainly expresses." Stewarts v. Seigel, 117 F. 13- C.C.A. 8th Cir. (1902). Any argument that the plain language of the TILA statute governing rescission includes a provision for class action lawsuits seems likely to fail because the TILA is silent regarding class action rescission. Laliberte, 147 Cal.App.4th 1, 745, 750 (2007). While LFB claims that the TILA amendment cap, purpose and cannons of construction do not maintain class rescissions, the KF will argue the contrary. The TILA's purpose is to be a remedial statute by protecting consumers against inaccurate and unfair practices. Truth and Lending Act, 15 U.S.C. 1601 (1995). Because the TILA's purpose is to protect consumers by providing remedy, its plain language should be construed in favor of consumers in order to further its said goals. Andrews v. Chevy Chase Bank, 474 F.Supp.2d 1006, 1008 (2007). Thus, while the TILA does not expressly mention class action rescission to include it as a remedy, it also does not forbid it. This taken together with the TILA's purpose, show that class rescissions are maintainable under the TILA. Thus, the plain language argument will fail because the TILA was amended to cap the recovery amount but not to include class action rescission, the act was not meant to be punitive, and the TILA language does not clearly include class action rescission. Legislative History Arguments Unlike the silence in the plain language, the TILA's legislative history suggests that Congress did intend to include class action rescission. Congress enacted the TILA to protect consumers against unfair credit practice and amended it in 1974 to add a separate provision for class action. McKenna, 475 F.3d 418, 421 (2007). The 1976 amendment to the TILA set a new cap of recovery, setting "a ceiling on class action liability" in order to limit the exposure for creditors and protect them. Truth and Lending Act of 1976, H.R. 2399, 94th Cong. 185 (2nd Sess. 1976). The KF will argue that this amendment, which made no mention affirmative or negative of class action rescission, is not a basis for congressional intent that rescissions were prohibited as class action suits. Petition for Writ of Certiorari 12, James Laliberte, et al. v. Pacific Merc. Bank, No. 07-160 (Sup. Ct. U.S., Aug. 7, 2007). Laliberte, 147 Cal.App.4th 1, 745, 750 (2007). Also, the KF will argue that the 1976 amendment increased the cap for recovery in order to make sure that the ceiling on class action damages would not discourage the use of class action, which supports class rescissions, and if anything, encourages them. Truth and Lending Act of 1976, H.R. 2399, 94th Cong. 185 (2nd Sess. 1976), However, LFB will likely rely on holdings from jurisdictions where the courts ruled against class action rescissions because class rescission "could be catastrophic." Laliberte, 147 Cal.App.4th 1, 745, 752 (2007). These courts have emphasized that rescission claims, unlike damages claims, are not subject to any aggregate statutory cap and, if permitted, class rescissions, could easily render a creditor insolvent. If class rescissions were included in the context in which the statute is written, then class action rescissions would not be subject to any limiting conditions since there is no maximum recovery amount under the class action section which "would open the door for vast recoveries." McKenna, 475 F.3d 418, 426 (2007). While the purpose of the TILA is to protect consumers, it must be balanced with not punishing lenders or rendering lenders insolvent. In the 1995 TILA amendment, Senator D'Amato said the amendment was to address "the threat of wholesale rescissions present[ing] a real danger to our modern system of home financing" and also to end the possible liability which the mortgage industry bears. Truth and Lending Act of 1976, H.R. 2399, 94th Cong. 185 (2nd Sess. 1976). Although the 1995 intent implies that Congress did not want class rescissions, Senator Roukema said the amendment addressed the needed changes in the TILA regarding finance charges. She also said that the amendment did not speak to class action rescission or the protection the TILA is intended to provide for consumers. Truth and Lending Act Amendments of 1995, 141 Cong. Rec. H9513-01 (Sept. 27, 1995) (statement of Rep. Roukema). Further, in the 1995 amendment, Congress did not choose to uniformly prohibit class-wide rescission claims. Petition for Writ of Certiorari 15, James, 07-160 (Sup. Ct. U.S., Aug. 7, 2007). In addition, foreclosure is such a valuable defense in protecting consumers that in enacting the 1995 amendments to TILA, Congress created specific rules which would benefit consumers. Id, at 15. Due to the ongoing debate, Congress proposed an amendment to the TILA to prohibit class action rescission in order to maintain economic stability. HR 3915, 110th Cong. 204 (2007). This proposed amendment, although still in committee, shows that the Congressional intent today is to exclude class action rescissions under the TILA. Until the 2007 proposed TILA amendment or something similar to it becomes law, the KF will likely win this argument because while the plain language and TILA amendments never addressed class action rescission, the most recent 1995 amendment allowed class rescissions because not only did it not prohibit class rescissions, but it was amended to change finance charges and not address class rescissions. Analogous Case Arguments Courts are divided on the issue and look to whether or not the TILA rescission remedy is personal in nature and thus incompatible with class action suits. Williams, 183 F.R.D. 428, 435 (1998). The KF will argue that the current set of circumstances are like those in Williams, where the defendants were sales people who targeted low-income areas, going door to door executing finance agreements in violation of the TILA. Id. In that case, the plaintiffs sought a judgment recognizing the violation of the TILA which would then allow each member to seek their own judgment for rescission. Id. When concluding that the plaintiffs were allowed to seek a declaration of the right to seek rescission under the TILA, the Williams court took into account that the TILA claims were "cohesive" because they were all affected by the same violation in the TILA, which meant they were all entitled to seek rescission of their financing contracts, and could seek the declaration as a class. Id, at 436. Further, the KF will argue that other jurisdictions have held that there is nothing in the language of the TILA which precludes the use of the class action mechanisms provided by Rule 23 to obtain a judicial declaration. Slip op. in re Ameriquest Mortg., 3 (2007) (No. 05-CV-7097). In re Ameriquest, where the defendants contended that because rescission is a purely personal right, a request for a declaration of rescission rights is improper in a class complaint, the court did acknowledge that rescission is a personal remedy; however the court found that the TILA did not prevent class members from individually requesting rescission. Id. Classes should be allowed under the TILA because courts should only consider whether the requirements of Rule 23 have been met in order to certify a class rescission. Andrews, 474 F.Supp.2d 1006, 1008 (2007). However, LFB will likely rely on holdings from jurisdictions where the courts have held that "class certification is not available for rescission claims, direct or declaratory under the TILA" because of the individual nature of the rescission remedy. McKenna, 475 F.3d 418, 423 (2007). These courts interpret rescission under the TILA to be a personal remedy where rescission should be worked out between the debtor and lender. Id. As a class, it would be impossible for the debtor and lender to individually work out rescissions especially because the notice the debtor is required to give the lender and other steps are not possible to be taken by a group in the aggregate. Id. Thus class rescission is incompatible with the rescission steps set forth in the statute. McKenna, 475 F.3d 418, 425 (2007). Because the KF meet the requirements of Rule 23 and are seeking a judgment as a class in order to then individually seek rescission, along with the Congressional intent in protecting consumers and allowing them remedies if harmed by a violation of the TILA, the KF will likely prevail. Slip op. in re Ameriquest Mortg., 2-3 (2007) (No. 05-CV-7097). Policy Argument In deciding whether class action rescission is permissible under the TILA, the court should consider the effects of their decision on two current situations: (1) the current financial crisis and (2) the lives of Katrina survivors. While the effect class rescissions could have on lenders and ultimately, the negative impact on the current financial crisis should not be ignored, this regrettable situation is not the only hardship facing our nation. Attempts to solve this problem must be balanced against the remedial purpose the TILA serves in allowing the Katrina victims who cannot afford to bring individual suits the remedy necessary to start their lives over. Petition for Writ of Certiorari 11-17, James, No. 07-160 (Sup. Ct. U.S., Aug. 7, 2007). The TILA was enacted to protect consumers by preventing lenders from taking advantage of ignorant debtors. Truth and Lending Act, 15 U.S.C. 1601 (1995). If a lender violates the TILA intentionally, in this case forty-nine times, the victims should not be expected to bear the cost of ruined credit and crippling debt and should have the right to remedy. "Class actions serve the purpose of providing compensation in cases involving public wrongs and widespread injuries" and grants the victims the chance to move on with their lives after they have been struck with so much misfortune. Petition for Writ of Certiorari 17, James, No. 07-160 (Sup. Ct. U.S., Aug. 7, 2007). In order to protect the TILA's goals, courts must ensure that all remedies are available to wronged consumers. Therefore, the statute would allow class action rescission. Id, 11-17. To disallow it, would represent a whole class of injured individuals who would unjustly be barred from a remedy they require. The KF cannot afford to bring individual claims and must rely on a class action suit. Slip op. in re Ameriquest Mortg., at 2-4 (2007) (No. 05-CV-7097. Conversely, Congress recognizes the stability that must be struck between applying the TILA to provide consumer protection, and applying the TILA too stringently, resulting in financial disaster for the mortgage industry. Petition for Writ of Certiorari 10, James, No. 07-160 (Sup. Ct. U.S., Sept. 7, 2007). It is important to acknowledge this in class action rescission suits because the more lenders rendered insolvent, the more significant the negative effect on the U.S. economy due to an unreasonable burden placed on lenders. Id. Because the current recession has been set off by the simultaneous bursting of real estate and credit bubbles, and there are signs that the housing rescission is turning into a full-fledged economic meltdown, a class rescission suit under the TILA could have a harsh effect on LFB, and more importantly, on the economy. Luke Mullins, Nightmare on Main Street, U.S. News and World Report, March 10, 2008, Cover Story. For this reason, courts have found rescission under the TILA to be a personal remedy that only individuals may seek, and deny class action rescissions. Petition for Writ of Certiorari 10, James, No. 07-160 (Sup. Ct. U.S., Sept. 7, 2007). The KF will probably prevail because their particular situation can be reconciled with the policy that denial of a class action rescission in this case would reward defendants who have committed wrongs and leave the Katrina victims who have been taken advantage of uncompensated. Slip op. in re Ameriquest Mortg., at 3 (2007) (No. 05-CV-7097). Conclusion The KF will most likely be successful in their class action rescission suit because the Ninth Circuit Court will probably find that class rescission is permissible under the TILA. While the KF will not be successful in arguing that the plain language of the TILA amendments allows class rescissions, the KF will prevail in showing class rescissions were never prohibited in the amendments, and specifically, the most recent 1995 amendment was amended to change finance charges and not address class action rescission. In addition, the KF meeting the requirement of F.R.C.P. Rule 23 and seeking a judgment as a class in order to later individually seek rescission taken together with the Congressional intent in protecting consumers and allowing them remedies if harmed by a violation of the TILA, allows the KF to prevail on their class suit because they were each victims of the same claim and should be granted remedial relief by the TILA in order to compensate them. Finally, the KF will likely prevail because policy is held in high regards in the courts as a first impression case, and their particular situation can be reconciled only by allowing class rescission since the KF cannot afford to bring individual actions, but were wronged and are deserving of the remedies set forth under the TILA. Is this a law school memorandum I only ask because I am in my third year of law here in NY, and I do this for extra money. If it is a law school paper, may I suggest that you use either of these two methods Issue Rule Analysis Conclusion OR Facts Issue Rule Reasoning- I have found these methods to be invaluable and they create excellent briefs. GOOD LUCK! Read More