McKenna v. First Horizon Home Loan Corp.

• Decision Date: 29 January 2007
• Docket Number: No. 06-8018.,06-8018.
• Citation: 475 F.3d 418
• Parties: Ralph McKENNA et al., Plaintiffs, Appellees, v. FIRST HORIZON HOME LOAN CORP., Defendant, Appellant.
• Court: U.S. Court of Appeals — First Circuit

475 F.3d 418

Ralph McKENNA et al., Plaintiffs, Appellees, v. FIRST HORIZON HOME LOAN CORP., Defendant, Appellant.

No. 06-8018.

United States Court of Appeals, First Circuit.

Heard December 6, 2006.

Decided January 29, 2007.

Thomas M. Hefferon, with whom U. Gwyn Williams, Alisha R. Bloom, and Goodwin Procter LLP were on brief, for appellant.

Robert B. Serino and Buckley Kolar LLP on brief for American Bankers Association, American Financial Services Association, America's Community Bankers, Consumer Bankers Association, Consumer Mortgage Coalition, Housing Policy Council of the Financial Services Roundtable, and Mortgage Bankers Association, amici curiae.

Christopher M. Lefebvre, with whom Claude Lefebvre, P.C., Daniel A. Edelman, Heather A. Kolbus, and Edelman, Combs, Latturner & Goodwin, LLC were on brief, for appellees.

Before SELYA, Circuit Judge, STAHL, Senior Circuit Judge, and HOWARD, Circuit Judge.

SELYA, Circuit Judge.

This interlocutory appeal requires us to explore, for the first time, the crossroads at which class-action rules intersect with the rescission provisions of the federal Truth in Lending Act (TILA), 15 U.S.C. §§ 1601-1667, and its Massachusetts counterpart, the Massachusetts Consumer Credit Cost Disclosure Act (MCCCDA), Mass. Gen. Laws ch. 140D. After careful consideration of this nuanced terrain, we conclude that the district court lacked the authority to certify a class of residential borrowers who might potentially be eligible for rescissionary relief. Consequently, we reverse the decision appealed from, vacate the class certification order, and remand for further proceedings.

I. BACKGROUND

In March 2004, the plaintiffs, Ralph G. McKenna, Glenroy and Ilene Deane, and Christopher and Laurie Lillie, all Massachusetts homeowners, filed a complaint in the United States District Court for the District of Massachusetts alleging that the defendant, First Horizon Home Loan Corporation (First Horizon), had violated both the TILA and the MCCCDA in the course of various Massachusetts home-refinancing transactions. Specifically, the plaintiffs contended that First Horizon had inaccurately disclosed information pertaining to consumers' statutory rescission rights and, subsequently, had failed to respond appropriately to requests for the rescission of residential refinancings. In the plaintiffs' view, these violations of the TILA and the MCCCDA entitled them to rescission of their loans and statutory damages.

To that point, the action seems unremarkable. What makes it unusual is that, in addition to their claims for individualized relief, the plaintiffs asserted that First Horizon's practices had victimized countless others. Based on this premise, they purposed to sue on behalf of a class of Massachusetts consumers who had received similar loans and similar (allegedly defective) notices of rescissionary rights from First Horizon during a particular time frame. With respect to the putative class, the plaintiffs sought a declaration that any class member who elected to do so could rescind his or her credit transaction with First Horizon at any time during the extended three-year statutory default period (notwithstanding the expiration of the shorter three-day period described in the rescission notices). First Horizon denied the material allegations of the complaint and resisted any suggestion that class certification might be appropriate.

In due season, certain of the plaintiffs (McKenna and Laurie Lillie) moved for class certification. See Fed.R.Civ.P. 23. First Horizon opposed the motion. The district court referred the matter to a magistrate judge. After some skirmishing over the definition of the class, the magistrate judge recommended, in a clarifying report, that a class be certified as follows:

All natural persons who obtained non-purchase money loans from First Horizon . . . on or after April 1, 2003 and who received a Notice of Right to Cancel in [a described] form . . . where; (1) the loans were secured by the borrower's Massachusetts residence; (2) the loan was for purposes other than the initial construction or acquisition of the residence; and (3) all or part of the loan proceeds were used to refinance a loan made by someone other than First Horizon. . . . .

McKenna v. First Horizon Home Loan Corp., 429 F.Supp.2d 291, 316 (D.Mass. 2006).¹ The class definition contained certain exclusions, not material here; it also provided that "no person shall be excluded from the class simply because that person has refinanced or paid off the subject loan." Id. Finally, the magistrate judge's recommended order stipulated that, if the action succeeded, class relief would take the form of a "declaration that any class member who so desires may seek to rescind their transaction." Id. (quoting plaintiffs' amended complaint). Should such a declaration issue, members of the class who then elected to rescind could proceed to seek reimbursement of amounts previously paid, statutory damages, and attorneys' fees. See id. at 297.

First Horizon objected on divers grounds, but the district court nonetheless adopted the magistrate judge's clarified recommendation in full. See id. at 294. Undaunted, First Horizon sought interlocutory review of the class certification order pursuant to Fed.R.Civ.P. 23(f). Because of the important and unsettled legal issues involved and the substantial financial impact that the order portended, we granted the Rule 23(f) petition in the exercise of our discretion. See Waste Mgmt. Holdings, Inc. v. Mowbray, 208 F.3d 288, 293-94 (1st Cir.2000). We then issued an expedited briefing schedule and heard oral argument on December 6, 2006.

II. THE STATUTORY SCHEME

We begin our odyssey through the class-action wilderness by summarizing the statutory provisions that undergird the plaintiffs' claims. Congress enacted the TILA in 1968 "to assure a meaningful disclosure of credit terms" and "to protect the consumer against inaccurate and unfair credit . . . practices." 15 U.S.C. § 1601(a). To accomplish this goal, the TILA requires creditors to disclose, clearly and accurately, all the material terms of consumer credit transactions. See Beach v. Ocwen Fed. Bank, 523 U.S. 410, 412, 118 S.Ct. 1408, 140 L.Ed.2d 566 (1998). When creditors transgress this baseline rule, they are subject both to criminal penalties for willful and knowing violations, see 15 U.S.C. § 1611, and to debtors' claims for damages, see id. § 1640(a).

The TILA provides further protection to consumers by guaranteeing them a three-day cooling-off period within which they may, for any reason or for no reason, rescind certain types of credit transactions (including residential refinancings). See id. § 1635. Rescission essentially restores the status quo ante; the creditor terminates its security interest and returns any monies paid by the debtor in exchange for the latter's return of all disbursed funds or property interests. See id. § 1635(b). If the right to rescind is not adequately disclosed, however, the period within which the debtor may elect to rescind is extended for up to three years after consummation of the transaction. See Palmer v. Champion Mortg., 465 F.3d 24, 27 (1st Cir.2006); see also 12 C.F.R. § 226.23(a)(3). The plaintiffs claim that this elongated rescission period applies in this case.

The rescission process is intended to be private, with the creditor and debtor working out the logistics of a given rescission. See Belini v. Wash. Mut. Bank, 412 F.3d 17, 25 (1st Cir.2005). Not all debtors who suspect (or know) that they have been subjected to a TILA violation will choose to rescind, in large part because rescission entails the return of loan proceeds to the creditor. See Ralph J. Rohner & Fred H. Miller, Truth in Lending ¶ 12.08, at 881 (2000). If, however, a debtor elects to rescind, the mechanics of rescission are uncomplicated: the debtor notifies the creditor in writing of his or her desire to rescind, and the creditor must respond to that election within twenty days. See 15 U.S.C. § 1635(b). During this response period, the creditor may comply with the request, resist rescission entirely, or agree to rescission while seeking equitable modifications. See Rohner & Miller, supra ¶ 8.04, at 648-49. Should disagreements ensue or problems arise, either party may repair to a federal court. See Large v. Conseco Fin. Servicing. Corp., 292 F.3d 49, 52-53 (1st Cir.2002).

In addition to individual claims for rescission and statutory damages, the TILA expressly acknowledges the potential for damages class actions by capping statutory damages for a single violation, repeated in multiple cases, at the lesser of $500,000 or one percent of the creditor's net worth. See 15 U.S.C. § 1640(a)(2)(B). There is no comparable class-action provision in 15 U.S.C. § 1635 (the section of the TILA that deals with rescission).

Except for a modest variance in regard to the limitation period—a variance that is of no consequence here—the MCCCDA mirrors its federal counterpart. This is not an accident; the Massachusetts legislature closely modeled the state law after the TILA. See Lynch v. Signal Fin. Co., 367 Mass. 503, 327 N.E.2d 732, 734 (1975). It is, therefore, common ground that the MCCCDA should be construed in accordance with the TILA. See In re Desrosiers, 212 B.R. 716, 722 (Bankr.D.Mass. 1997); Mayo v. Key Fin. Servs., Inc., 424 Mass. 862, 678 N.E.2d 1311, 1313 (1997). Thus, even though the parties agree that the rescission claims in this case invoke the MCCCDA, they also agree that, given the congruence between the two statutes, the TILA supplies the applicable rules of decision.

III. ANALYSIS

We turn now to the operation of these statutes in the class-action context. On appeal, First Horizon advances a wide-ranging asseverational array. Its flagship claim is that the district court erred in certifying the class because, as a matter of law, class actions for rescission are unavailable under the TILA ...