200 ‘QUARTERLY REPORT Actual Damages Under the TILA: Collapsing Class Actions By Eugene J. Kelley, Jr. and John L. Ropiequet gene J Kelley Jes sir pier ad (Co-Chairman of he Litton Grp of Armin Let, n Chicego, whee he has practiced ice rond range of is and gated ates fv ing commercial dss an consumer anc. n Stan feral cont theuphothe ounry, M Kelle i gradaate ofthe University of Note lho hs Ber anise fr the ios ltt ‘of Coninuing Legal Education, he Pricing Law Jobe 1 Ropequet ssi tigation pn Practiced since 1973, Hepes inthe defese consumer ered clas actions a port pn tation and former ebro is Subcom on Badeting fo tigation Hey abo a former Chai ‘ofthe Chicago Bar Avexiton Commies om (Comments Etro te four Crimiotay an Plc in Univer Chal Lar ‘olume Mints Practice Sue om persian injry fa numerous aces the Conner Finance Law Quarterly por sed eer pbicions He ection marance ondary therein. He was Introduction For several reasons, Truth in Lending Act (TILA) class action suits generally focus on statutory damages. First, statu- tory damages are automatic. They do not require the often difficult-to-obsain evi- donee of actual rotianee, provimate ‘causation, actual injury oF measurable m1 ‘quantification of loss. Secondly, damage claims often involve individual: ized proof, which highlights the unique aspects of a host of transactions for which class action plaintiffs want to establish nelement of commonality. Finally, fo cus on aetual damages may place the Plaintiff—the purported representative ‘of a potentially huge class—under a mi- croscope which reveals inadequacy t represent a large group of others. A recent series of cases has unde scored the problems associated with ‘actual damages claims. The arisen in situations whe cases have contrary to the plaintiffs" attorneys’ expectations, statutory damages have been held to be unavailable Interestingly, the eases constitute are ‘minder that statutory damages are only available for certain classes of TILA vio lations, such as a misstatement of the amount financed. In the absence oF such claimed violations, itis arguable that 3c tual damages can still be awarded, But where this occurs a named plaintiff may recover only if he or she ean deal with the problems of proof set forth above, Not only may this involvea very difficult dderaking, it will most likely bring down, the class action structure of the case,QUARTERLY REPORT 201 Tl. TILA Damage Provisions ‘As amended in 1980, section 1640(@) of the TILA® provides that TILA plain- tiffs can recover, cumulatively: (1) any actual damage sustained by such person as a result of the failure: (2)(AYG) in the case ofan individual action twice the amount of any fi- nance charge in connection with the transaction, of (i) in the case of an individual setion relating to a con- sumet lease under part E of this subchapter, 25 per centum of the total amount of monthly payments under the lease, exeept that the T- ability under this subparagraph shall not be less than $100 nor greater than $1,000; or (Byinthe case ofaclass action, such amount as the court may allow, ex- cept that a8 to each member ofthe class no minimum recovery shall be applicable, and the total recovery under this subparagraph in any class action o series of class actions arising out of the same failure to comply by the same creditor shall not be more than the lesser of $500,000 or 1 per centum ofthe net worth ofthe creditor, and 8) in the ease of any snecessfel action to enforce the foregoing li ability or in any action in which a person is determined tohave aright of rescission under section 1635 of this ile, the costs ofthe action, to- gether with a reasonable attorney's fee as determined by the cour. However the provisions of subsection 1640(@)(2), commonly called “statutory” damages, are subject to an important though often overlooked limitation: In connection with the disclosures referted to in section 1637 of this title, a creditor shall have a liabil- ity determined under paragraph (2) only for failing 10 comply with the requirements of section 1635, sec- tion 1637(a), ar paragraph (4), (5), (6). (7) (8). (9). oF (10) of section 1637(b) ofthistile....In connection ‘with the disclosures referred to in section 1638 of this tide, a creditor shall have @ tiability determined under paragrcph (2) only for fait- ing to comply with the requirements of section 1625 of this title or of paragraph (2)insofar as it requires disclosure of the “amount fi- anced"), (3), (4), (5), (6), or (9) of section 1638 (0) of this title..> ‘This limitation on statutory damages ‘vas little explored until the Seventh Cir- cuit took a close look at it in Brown x Payday Check Advance, inc In three cases consolidated for appeal, the tral courts found that there were various ‘TILA violations inthe documentation of “payday loans.”* The payday lenders? forms deviated from the statutory model in several non-substantive respects, such as putting a single “total payment” in the federal box rather than putting only the “otal of payments” in the box as re- quied, putting the itemization of the amount financed in the federal box, and providing inadequate explanations of Although the p.aintiffs in all three cases established TILA violations, none ‘of the district cours awarded statutory damages. Since the plaintiff had aot claimed any actus. damages, all three ‘cases were dismissed. The Seventh Cir- cuit affirmed the dismissals because the closed-end payday loan documents, governed by TILA section 1638,*had no violations on the list in section 1640(a) and therefore none of the violations could give rise to statutory damages. The court found this to be entirely appropriate be- ‘cause the 1980 amendments to the TILA. were designed to “curtail damages awards for picky and inconsequential formal errors.”” It rejected the argument that Conaress intended al disclosure vio- lations to be encompassed within the defined list in section 1640(a) because “if they came in through the back door on the theory that all formal shortcomings infect the disclosures of the items that are ‘onthe list," the 1980amendmente would make no sense.* Accordingly, plaintiffs could claim nothing other than actuat ‘damages for the TILA violations they ‘established. Since they had declined to allege any actual injury, the cases were ‘correctly dismissed, Il, Earlier Actual Damages Decisions Prior to 2000, there were few decided ‘cases which discussed whata TILA plain- ‘iff must prove in order to recover actual damages under section 1640(a)(1). Most cases which did address this issue held that recovery of actual damages requires ‘proof that the plaintiff would have got- ten credit on more favorable terms but forthe violation. ‘The rule was first stated in McCoy w Salem Morigage Co.? a district court fecision in Michigan’ In that ease, the defendant mortgage company moved to decertfy the class after the named plain- tiffs moved to amend to include a claim for actual damages. This followed the 1974 amendments to TILA which placed $100,000 or one percent of net worth cap on statutory damages for class ac- tions. The original named plain died after testifying at her deposition that she had no interes in pursuing a classaction and sought only to maximize her personal recovery, which would be inconsistent 1 atonal,202 ‘with pursuing the tiny amount of statu- tory damages which would be available as her share of a class recovery under the cap. In addition to this ground for decestfication, the court considered what must be proved to establish actual dam- age claims for a plaintiff clas. It held: While the erat itgelf and the Ing islative history both suggest that ‘Congress intended actual damages as a class action remedy for ‘Truth in Lending Act violations. this Court is convinced that the actual damage claims of class members must be resolved on an individual basis. The “common issues of law or fact” which make a class action superior for resolving iseues of liability are ‘not present in the claims for actual ‘damages. Since each plaintiff will have to show that damages were sustained as a rent of the failure to properly disclose, ie., that he or ‘she would have gotten credit on ‘more favorable terms but forthe vio- lation, the proofs willnecessarily be different for each class member. Defendant correctly notes that the Senate Committoe Report on the 1974 amendment mentions several times the difficulty of proving or computing actual damages in a ‘Truth in Lending case. This diffi- caulty seems to have been the impe- tus tor establishing a scheme of statutory damages. and it seems likely that if actual damages could be computed by a simple formula, no statutory damage pro ‘would have been necessary." The contrary rule was announced in In re Russell," an adversary proceeding in bankruptey where the debtor pursued an individual TILA claim against a lender which was found to have made inadequate disclosures of fees and com- iissions which were deducted from the principel sum ofthe loan, "Ihe court tour 1 Quam in ee si QUARTERLY REPORT that this was a “substantial, as opposed {otechnical” vilatien ofthe TILA which understated the finance charges by $1,490, The debtor sought both statutory damages of $1,000 and actual damages ‘of 81,490. There was no proof of reliance ‘on the misdisclosure, ‘After noting that "cases in which con- coomereallage aetusl damages ave rare and...in those cases, there is a conces- sion on the pat of the consumer that no actual damages resulted from the viola- tion.” the court considered whether actual damages nevertheless arse“‘when ever a disclosure statement contains a substantial violation, as opposed 0 a mere technical violation, and the damages should be measured by the mag- nitude ofthe violation" The court found that the detrimentel reliance rule ex- pressed in McCoy was eroneous because of the remedial natare of TILA as dis- closure legislation, aa8ed on analagans securities and antitrast disclosure viola- tion cases.” The cout further found that the 1980 amendments to TILA section 1640), allowing creditors to escape TILA liability by cerectng erors, sug- gested that actual damages should be ‘measured by the anount of the undis- closed finance charge." Finally, the cour relied on suggestions in earlier cases that the corectrale was that no proof of detrimental reliance was necessary and that te measure of dam- age was the amount of the undisclosed finance charge.'* The court therefore awarded $1,490 in actual damages in Addition to $1,000 in statatory damages ‘The MfcCoy rule was followed in what became the leading district court deci- sion, Adiel » Chase Federal Savings & ue suse 46, oketchene eke St beet. esteem ‘Fh Sta hog. F888 Loan Assn." The trial cour there held an evidentiary hearing on damages after it certified a plaintiff class of mortgagors whose mortgages had been unilaterally amended by the defendant cavings and loan without providing new disclosure statements and then granted summary judgment on liability. The plaintiffs ‘onghst both setntncy damages and actual damages. Citing McCoy, the court held that recovery of actual damages required proof thateach class member would have gotten credit on more favorable terms but for the TILA violation." also relied on New York state cout decision’ to far- ther explain what the plaintiffs had to show! A plaintiff claiming actual damages must establish a causal connection between the inaccurate disclosure and his injury by demonstrating that he relied on the inaccurate diselo- sure and thereby was effectively prevented from obtaining better ‘credit terms elsewhere.” “The court found that this “bat for test cffectuated the purpose ofthe TILA and that the plaintifts had not made the req- iste showing. The court went on 19 award statutory damages in an amount less than one percent ofthe defendant's net worth, after carefully reviewing sev- eral factors.” The Adiel rule was followed in most subsequent cases. For example. in Cirone-Shadow v. Union Nissan of Waukegan,® the court considered whether actual damages could be ‘awarded on summary judgment. After it ‘granted class certification, the cout heard ‘ross motions for summary judgment on hen BHD Ma rears