California consumer class action certified after Wal-Mart

Schramm v. JPMorgan Chase Bank, N.A., 2011 WL 5034663 (C.D. Cal.)

The putative class plaintiffs sued JPMorgan Chase and Chase Home Finance over disclosure forms and mortgage notes in connection with ARMs they took out. They argued that these documents misrepresented the interest rates they’d be charged: that defendants told them that the rates would be calculated in one particular way but then charged plaintiffs higher rates than produced by that calculation. Most of their claims were dismissed on statute of limitations grounds, but their claims for recission based on fraud or mistake and for restitution and injunctive relief for alleged violations of Cal. Bus. & Prof.Code § 17200 survived. The court here certified a class for the § 17200 claim.

The initial proposed class of about 28,000 in California had to be reduced to deal with borrowers outside the limitations period.

Plaintiffs argued that, if proved, the conduct would violate the law, entitling each plaintiff to restitution of defendants’ ill-gotten gains: the difference between the interest each class member actually paid and the amount he or she would have paid if the rate had been calculated as disclosed. In addition, they argued that each class member was entitled to recission on the basis of mistake or fraud.

The court found that numerosity was not in dispute. Commonality requires a common question of such a nature that it can be resolved classwide: “determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke.” Wal-Mart, 131 S.Ct. at 2551. Ninth Circuit precedent allows findings of commonality when similar misrepresentations were allegedly made to all class members. The court thus found commonality for both causes of action.

As for the restitution claim under § 17200, plaintiffs argued that the case would turn on defendants’ misrepresentations and not on the states of mind or reliance of individual borrowers, making individual issues secondary. They further contended that, as the class was limited to borrowers who received loan disclosures with the same misleading language, there were common questions of fact on likely deception. Defendants rejoined that the case instead would turn on how each borrower interpreted the disclosures that he or she received, and whether each putative class member found the language material. The court held that the question was resolved by Ninth Circuit precedent applying Tobacco II, Stearns v. Ticketmaster Corp., --- F.3d ----, 2011 WL 3659354 (9th Cir. 2011).

Stearns said that a California UCL/FAL claim requires only that members of the public are likely to be deceived. Neither defendant’s knowledge of falsity nor plaintiff’s reasonable reliance are required. In particular, individual inquiries into reliance aren’t required, and trial will focus on whether the representations were likely to deceive a reasonable borrower, consistent with Wal-Mart.

Likewise, the recission claim also satisfied the commonality requirement. Commonality under Rule 23(a) is less exacting than predominance under Rule 23(b)(3), and requires only some common questions of fact or law that are potentially dispositive of the case. Given the factual similarity among the representations made to all class members, these issues included: (i) how a reasonable person would interpret Defendants' disclosures to mean that the initial interest rate would be the sum of an index and a margin; and (ii) whether the alleged misrepresentations would be material to a reasonable borrower. These both went to a dispositive issue of whether plaintiffs would be entitled to a class-wide presumption of reliance.

Defendants contested typicality because one of the named plaintiffs didn’t read the disclosures and the other had a “complicated and highly individualized method of shopping for ARM loans.” Not so; though failure to read the disclosures might be a defense to a claim for recission based on fraud, it wouldn’t be one that would make it difficult for the plaintiff to represent the class. Neither would a particular method of loan evaluation. “The core issue presented is whether the interest rates were as low as promised.”

Defendants failed to identify a problem with the adequacy of class counsel.

On to Rule 23(b)(3), predominance and superiority.

The court first found that common questions predominated in the § 17200 claim. Stearns held that because all putative class members encountered the same representations, common questions predominated over individual ones. The same was true here. Defendants, reflecting the trend to use standing as a separate weapon, argued that there were individual issues regarding standing and the statute of limitations that defeated predominance.

Standing requires injury in fact, a causal connection between the injury and the conduct complained of that’s fairly traceable to the defendant, and a likelihood that a favorable decision will redress the injury. Proximate cause is not required. Defendants argued that many putative class members would lack Article III standing because they suffered no injury from receiving the documents. They could have “interpreted the relevant language differently than the class representatives; failed to read the disclosures at all; or chosen a loan from Defendants for reasons unrelated to the allegedly misleading language.”

Plaintiffs responded that demonstrating the standing of one named plaintiff would suffice and that Stearns answered these questions as well. Defendants returned that Article III standing is required for all plaintiffs in any federal matter. The court found Stearns clear: in determining standing, the Ninth Circuit "keys on the representative party, not all of the class members, and has done so for many years." Stearns, 2011 WL 2659354 at *5.

Thus, the argument that individual questions about class members’ standing would predominate didn’t work—those individual questions weren’t central. “Accordingly, class certification can be determined without a more in-depth inquiry into the standing of individual unnamed class members.” In addition, the court found that each class member would satisfy Article III’s requirements. Stearn reasoned that, with respect to the entire class, injury must be concrete and particularized, and that a misrepresentation made to the class as part of a transaction that cost them money would count.

What about individual statute of limitations issues? Defendants identified two sets of documents that might have put reasonable people on notice of the existence of a claim: (i) the loan disclosure documents provided at the time of loan origination; and (ii) a Rate Change Notice sent to plaintiffs in April 2006. But the court already ruled that there was a triable issue of fact as to whether the origination documents were sufficient to provide inquiry notice, common to all class members. Since the standard is that of a reasonable person, once that question is resolved it will apply to all members. Similarly, the court alread held that the April 2006 letter did provide inquiry notice, so anyone who received that letter more than 4 years before the start of the action has time-barred claims. Thus, there were no significant individual issues related to when members should have known of the discrepancy between the represented interest rate and the rate actually charged. The time calculations required will be mechanical and provide no reason to deny class treatment.

What if class members had actual notice? Defendants argued they were entitled to investigate this on an individual basis. However, courts are all but unanimous in holding that possible differences in application of a statute of limitations to individual class members doesn’t preclude certification if common questions predominate, as here. Nor did defendants present evidence that any potential class members had actual notice outside the statutory period; their speculation was insufficient.

However, the court found that common questions didn’t predominate in the cause of action for recission based on fraud or mistake. There’s no precedent for finding mistake class-wide; mistake requires a showing that the party was subjectively mistaken about something important and that the mistake wasn’t caused by excessive carelessness. This individual state of mind inquiry was not appropriate for class treatment.

As for fraud, the question was whether the recission remedy could be applied class-wide and whether plaintiffs could get a class-wide presumption of reliance. Class certification can work for fraud if plaintiffs allege that an entire class has been defrauded by a common course of conduct.

Many Truth in Lending Act cases hold that rescission is a personal remedy that is not amenable to class treatment. Plaintiffs couldn’t identify a California case to the contrary. The court agreed with the TILA cases: recission is a remedy that restores the status quo ante, which requires inquiries into each individual borrower's situation because it generally includes the return of all interest, fees, finance charges, and commissions paid in connection with the loan. Plus, it’s an equitable remedy, and the creditor is generally entitled to consideration of individual circumstances, meaning that common questions wouldn’t predominate.

Another problem with a recission class is that some members might not be able to tender their loan proceeds to Chase as would be required as part of a rescission of their loans. Plaintiffs asked for a recission subclass limited to members who refinanced or paid off their Chase loans, as to whom all that would remain would be for defendants to refund them the difference between the amount of interest they actually paid and the amount they would have paid if their initial interest rate had been as allegedly promised.

This might fix the tender problem, but it wouldn’t solve the fundamental difficulties with class-wide recission. Also, when the loan has been paid off, there’s nothing to rescind. Anyway, recission isn’t just about recovering overpaid interest; there would have to be individualized inquiries into fees, finance charges, commissions, potential rescission of other associated agreements such as short sales, and so on. By contrast, the § 17200 remedy of restitution is designed to return amounts wrongfully taken, which was readily amenable to class treatment. If the interest rate was wrongly described, its calculation will be mechanical and readily determined from defendants’ records. (While I don’t disagree with the legal reasoning here, I am … somewhat skeptical that the defendants’ records will prove as detailed as the court hopes, given the known problems with servicers’ records. But since that’s a potential problem of defendants’ own creation, it shouldn’t affect the legal analysis.)

Superiority to individual actions: defendants didn’t expressly contest this for the restitution claims. Class action is the only plausible way these plaintiffs could seek a remedy because litigating the individual claims would be cost-prohibitive; there aren’t a bunch of other pending claims; the forum is fine; and there would be minimal case management issues because the proposed class members can be easily identified, the potential damages could be readily calculated from defendants' own records, and the class claims were centered on defendants' conduct.