Andrews v. Chevy Chase Bank

• Decision Date: 24 September 2008
• Docket Number: No. 07-1326.,07-1326.
• Parties: Bryan ANDREWS and Susan Andrews, Plaintiffs-Appellees, v. CHEVY CHASE BANK, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

545 F.3d 570

Bryan ANDREWS and Susan Andrews, Plaintiffs-Appellees, v. CHEVY CHASE BANK, Defendant-Appellant.

No. 07-1326.

United States Court of Appeals, Seventh Circuit.

Argued September 26, 2007.

Decided September 24, 2008.

Rehearing and Rehearing En Banc Denied October 31, 2008.^*

Kevin J. Demet (argued), Demet & Demet, Milwaukee, WI, for Plaintiffs-Appellees.

Jeffrey W. Sarles (argued), Mayer Brown, Chicago, IL, for Defendant-Appellant.

Nina F. Simon, AARP Foundation Litigation, Washington, DC, for American Ass'n of Retired Persons, Amicus Curiae.

Kathleen Keest Washington, DC, for Center for Responsible Lending, Amicus Curiae.

Stuart T. Rossman, National Consumer Law Center, Boston, MA for National Consumer Law Center, Inc., Amicus Curiae.

Deepak Gupta, Public Citizens Litigation Group, Washington, DC for Public citizen, Amicus Curiae.

Gary Edward Klein, Roddy, Klein & Ryan, Boston, MA, for Harriet Holder, Amicus Curiae.

Before MANION, EVANS, and SYKES, Circuit Judges.

SYKES, Circuit Judge.

In this interlocutory appeal, 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.

I. Background

In June 2004 plaintiffs Susan and Bryan Andrews obtained a loan from defendant Chevy Chase Bank, F.S.B., a federally chartered bank, to refinance their home in Cedarburg, Wisconsin. Bryan Andrews runs his own home-remodeling business, and the Andrews are experienced mortgagors, having previously taken out many original and refinancing mortgage loans for various residential and investment properties. This time, they opted for a unique type of loan product offered by Chevy Chase that allowed them to vary their payment, depending on their monthly cash flow. This "cashflow payment option," as Chevy Chase called it, was more flexible than a traditional fixed- or adjustable-rate mortgage because it allowed the debtor to choose between multiple payment options. It was also more complex, with a potential trap for the unwary. The debtor could pay a monthly minimum payment at a low interest rate for an initial term; under this option, while the interest rate would adjust monthly, the minimum payments would remain fixed at the low rate until the initial term expired or the outstanding balance exceeded 110 percent of the original loan (through "negative amortization"), whichever event occurred first. The debtor could also decide to make payments larger than the minimum monthly payment, pay interest only based on the fully indexed rate, pay an amount sufficient to amortize the loan over 15 years, or pay an amount sufficient to amortize the loan over 30 years.

Chevy Chase provided preliminary disclosures about the loan and, at closing, an adjustable-rate note, a truth-in-lending disclosure statement ("TILDS"), and an adjustable-rate rider. When the Andrews obtained the loan, they thought that the monthly payment and the interest rate were fixed for the initial term of five years and became variable thereafter. They were correct about the minimum monthly payment but not about the interest rate. The loan's discounted (or "teaser") interest rate of 1.95 percent applied only to the first monthly payment. After that, the interest rate adjusted every month, even though the minimum monthly payment remained fixed according to the initial rate. So as the interest rate climbed, an ever-increasing portion of the minimum monthly payment of $701.21 was required to cover the interest. Soon, the minimum monthly payment itself became insufficient to cover the accrued interest, and the "negative amortization" feature (adding the unpaid interest to the principal) kicked in.

In April 2005 the Andrews filed this purported class-action lawsuit against Chevy Chase claiming violations of TILA and seeking statutory damages under § 1640(a)(2), rescission under § 1635, and attorneys' fees under § 1640(a)(3).¹ The complaint alleged that certain of Chevy Chase's disclosures were misleading or unclear, particularly as to whether the initial interest rate was fixed and whether the payment periods were properly stated. More specifically, they alleged that Chevy Chase's payment schedule was not sufficiently detailed because it listed only the first and last payment dates; they also claimed that a computer-generated stamp on the top of one of Chevy Chase's disclosure forms made the disclosures misleading. This stamp, they asserted—which referred to the note as a "WS Cashflow 5-Year Fixed Note Interest Rate: 1.950%"— could be understood to identify the note as a fixed-rate note.

The district court granted summary judgment for the Andrews, authorizing rescission and awarding attorneys' fees, though it denied their claim for statutory damages because Chevy Chase's TILA violations were not those enumerated in § 1640(a), for which statutory damages are available. See Andrews v. Chevy Chase Bank, FSB, 240 F.R.D. 612 (E.D.Wis. 2007). In the same order, the district court granted the Andrews' motion for class certification under Rule 23(b)(2) of the Federal Rules of Civil Procedure, declaring that all class members would have the right to rescind their mortgages. The certified class includes anyone who obtained an adjustable-rate mortgage from Chevy Chase on a primary residence between April 20, 2004, and January 16, 2007, and who received a TILDS from Chevy Chase containing any of the language the court had found deficient under TILA.

In its decision on class certification, the district court relied heavily on the Massachusetts district court decision in McKenna. McKenna v. First Horizon Home Loan Corp., 429 F.Supp.2d 291, 296 (D.Mass.2006). But that decision was reversed by the Court of Appeals for the First Circuit less than two weeks after the court granted class certification. McKenna, 475 F.3d at 420. After we granted Chevy Chase's petition for leave to appeal pursuant to Rule 23(f), the district court agreed to stay its proceedings. The court then issued a memorandum explaining why its class-certification order should stand, despite the reversal of the district court's decision in McKenna. Andrews v. Chevy Chase Bank, FSB, 474 F.Supp.2d 1006 (E.D.Wis.2007). Also, recognizing that it had failed to consider TILA provisions that prohibit certain debtors from rescinding, see § 1635(e), the court stated that it would likely narrow the definition of the class, if its class-certification decision survived the appeal.

II. Discussion

We generally review a grant of class certification for an abuse of discretion, but "purely legal" determinations made in support of that decision are reviewed de novo. Mace v. Van Ru Credit Corp., 109 F.3d 338, 340 (7th Cir.1997). 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. See McKenna, 475 F.3d at 427; James, 621 F.2d at 731; see also LaLiberte v. Pac. Mercantile Bank, 147 Cal.App.4th 1, 53 Cal.Rptr.3d 745 (Cal.Ct.App.2007), cert. denied, ___ U.S. ___, 128 S.Ct. 393, 169 L.Ed.2d 264 (2007).

TILA was designed "to assure a meaningful disclosure of credit terms" to the consumer. § 1601(a). Creditors who violate the disclosure requirements may be ordered to pay actual damages or statutory damages, depending upon the nature of the violation. See § 1640(a)(1) & (a)(2). In certain loan transactions, TILA also provides debtors with a right of rescission—a process in which the creditor terminates its security interest and returns any payments made by the debtor in exchange for the debtor's return of all funds or property received from the creditor (usually, the loan proceeds). See § 1635. Debtors may rescind under TILA by midnight of the third business day after the transaction for any reason whatsoever. See § 1635(a). The three-day postclosing "cooling off" period is extended if the creditor does not deliver the required notice of the right to rescind and all material disclosures; in that instance, the right to rescind continues until the creditor provides the required notice and disclosures, or up to three years after consummation of the loan, whichever occurs first. See § 1635(f).

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.'" Handy v. Anchor Mortgage Corp., 464 F.3d 760, 765 (7th Cir.2006) (quoting Barrett v. JP Morgan Chase Bank, N.A., 445 F.3d 874, 877 (6th Cir. 2006)). TILA rescission is therefore considered a purely personal remedy. See, e.g., McKenna, 475 F.3d at 424-25; James, 621 F.2d at 731; LaLiberte, 53 Cal.Rptr.3d at 750-51. It is intended to operate privately, at least initially, "with the creditor and debtor working out the logistics of a given rescission." McKenna, 475 F.3d at 421; see also Belini v. Wash. Mut. Bank, FA, 412 F.3d 17, 25 (1st Cir. 2005). Section 1635 sets forth certain deadlines and duties that apply to the creditor upon receipt of a notice of rescission from the debtor (e.g., return of earnest money, down payment, or...