Commercial and consumer credit law - class action remedy unavailable in First Circuit for plaintiffs seeking rescission under Truth in Lending Act.

• Author: MacInnis, Nicholas G.

Commercial and Consumer Credit Law--Class Action Remedy Unavailable in First Circuit for Plaintiffs Seeking Rescission Under Truth in Lending Act-McKenna v. First Horizon Home Loan Corp., 475 F.3d 418 (1st Cir. 2007)

The Truth in Lending Act (TILA) provides consumers with the right to rescind their loan agreements within three days of the closing of the transactions. (1) Beyond this statutory provision permitting consumer recovery, the federal courts remain split as to the availability of class certification for actions brought under TILA. (2) In McKenna v. First Horizon Home Loan Corp., (3) the United States Court of Appeals for the First Circuit considered, in a case of first impression, the legitimacy of class actions brought under the rescission provisions of TILA. (4) Relying on its interpretation of congressional intent and the personalized remedy provided by the rescission section, the court held that class certification is unavailable in rescission actions under TILA. (5)

Ralph McKenna and Christopher and Laurie Lillie received mortgage loans from First Horizon Home Loan Corporation (First Horizon) in June and August of 2003, respectively. (6) In March 2004, both parties filed a complaint in the United States District Court for the District of Massachusetts claiming the forms they received from First Horizon, which explained their rights of rescission, were defective. (7) Specifically, the plaintiffs argued that the forms violated TILA's disclosure requirements by failing to distinguish between the rescissory rights of those refinancing loans procured from a different lender and those initially received from First Horizon. (8) The plaintiffs also moved to certify a class of plaintiffs who acquired loans with similarly defective disclosures. (9)

The magistrate judge, finding that TILA does not preclude the use of the class action mechanism and that the proposed class met the requirements of Rule 23(b) of the Federal Rules of Civil Procedure, narrowed the class and recommended certification. (10) The district court adopted the magistrate's class certification recommendation and First Horizon sought interlocutory review. (11) The First Circuit reversed and held that class certification is unavailable for rescission claims under TILA. (12) In denying class certification, the court reasoned that Congress did not intend to permit class actions as a judicial vehicle for rescissory relief because such relief would expose lenders to "overwhelming liability." (13)

In 1968, Congress enacted TILA to protect consumers from potentially unfair credit practices by requiring lending institutions to disclose credit terms to consumers and encourage "informed use of credit." (14) Congress modified TILA in 1974 by placing a damages cap on actions brought under [section] 1640, the section of TILA authorizing civil liability. (15) Notably, Congress did not impose a cap on the amended version of [section] 1635, the section of TILA providing the rescission remedy. (16) Twenty-one years later, to alleviate concerns and ambiguity surrounding the legitimacy of class certification for rescission suits under TILA, Congress modified the statute again with the Truth in Lending Act Amendments of 1995 (Amendments). (17) Consistent with the Amendments' emphasis on creditor protection, Congress also imposed a six-month moratorium on class action suits prior to passing the TILA Amendments. (18) As enacted, the Amendments remained silent regarding the class action mechanism in suits brought pursuant to [section] 1635. (19)

Prior to the First Circuit's ruling in McKenna, the Fifth Circuit was the only circuit court to address whether rescission class actions are permissible under TILA. (20) In James v. Home Construction Co. of Mobile, Inc., (21) the Fifth Circuit held that the personalized provisions under [section] 1635(b) illustrated congressional opposition to class action rescission. (22) Subsequent district court decisions also focused on the individuated remedy of [section] 1635 when ruling against the availability of class treatment for rescission suits. (23) Additionally, district courts refusing class certification stressed that the inclusion of the cap in class actions brought under [section] 1640, coupled with the absence of similar language under [section] 1635, was demonstrative of congressional intent to withhold class treatment under [section] 1635. (24)

Conversely, district courts that have certified classes seeking rescission under [section] 1635(b) have relied on the absence of language precluding class treatment under TILA. (25) These courts have reasoned that the personalized remedy of the rescission statute further encourages certification. (26) Moreover, courts certifying classes under [section] 1635(b) have noted that the objectives of class actions--to redress and deter injurious conduct--are entirely consistent with claims seeking the right to rescission. (27)

In McKenna v. First Horizon Home Loan Corp., the First Circuit overturned the district court's class certification under [section] 1635(b), holding that class certification is unavailable, as a matter of law, for rescission claims under TILA. (28) Following the decision of the Fifth Circuit in James, the court concluded that congressional intent did not support class treatment of rescission suits, and instead intended for rescission to serve as a "purely personal remedy." (29) The court evaluated the legislative history of TILA and juxtaposed the presence of a class-action provision in [section] 1640 with its conspicuous absence in [section] 1635. (30) The court dichotomized the exclusion of the preclusive language under [section] 1640 as a decision by Congress to either categorically prohibit class actions in rescission claims or permit them unabashedly. (31) Maintaining that the former option was more plausible, the court concluded that the imposition of a modest cap on damages illustrated congressional intent to protect lenders from potentially devastating consequences, namely insolvency, which could result from class actions seeking rescission. (32)

In addition to the congressional intent manifested in the statute and TILA Amendments, the court held that the personalized language of the rescission subsection obviates the need for class treatment. (33) Specifically, the court reasoned that the individualized procedure for rescission, coupled with the various private remedies available to borrowers, illustrates the statute's tension with the class action vehicle. (34) Furthermore, the court refused to acknowledge a substantive difference between claims seeking rescission and those seeking the right to rescind. (35)

The First Circuit erred by following the Fifth Circuit's decision in James by denying the availability of class certification for rescission suits under TILA on the basis that Congress intended to withhold class certification from rescission actions. (36) In establishing its two-fold justification for withholding class certification, the court's determination of congressional intent ignored the underlying objectives of both TILA and class certification, while violating traditional canons of statutory construction. (37) First, the court disregarded previous applications of TILA by concluding that rescission conflicts with the class action vehicle. (38) Second, the court reached the conclusion that Congress...