Appeal from the United States District Court for the Northern District of Illinois, Eastern Division - No. 70 C 1827 Thomas R. McMillen, Judge.
Cummings, Pell, and Sprecher, Circuit Judges.
This is an action for damages brought by Luther Haynes and his wife, Lenita Haynes, alleging that a form retail installment contract of Logan Furniture Mart, Inc. (Logan) which was used by Logan in its installment sales during the period July 1 -- December 31, 1969, and one of which the plaintiffs had executed on July 24, 1969, violated numerous requirements of Regulation Z, 12 C.F.R. § 226, promulgated by the Federal Reserve Board pursuant to § 1604 of the Commercial Credit Protection Act, 15 U.S.C. § 1601 et seq., commonly known as the Truth in Lending Act. The district court denied the plaintiffs' motion to proceed as a class action, ruling that while the prerequisites of subdivision (a) of Rule 23, Fed. R. Civ. P., were satisfied, the suit was not of a type which could be maintained as a class action under subdivision (b) of that rule.
The district court then held, notwithstanding the fact that the Logan form contract failed to comply with at least nine applicable provisions of Regulation Z,*fn1 Logan was not liable because of its reliance on the opinion of its legal counsel that the contract complied with the pertinent aspects of the regulation. On this appeal the plaintiffs stressed three particular violations, to which Logan by way of concession responded that these violations were established by the court's order and required no further argument.
A suit may be maintained as a class action if in addition to satisfying the requisites of subdivision (a) of Rule 23, Fed. R. Civ. P.,*fn2 the action is of a type in which common questions of law or fact predominate and for which a class action is superior to other available means for adjudicating the controversy.*fn3 In denying the motion to proceed as a class action, the court below ruled that:
"a class action on this type of claim with liquidated or double damages and attorneys' fees is neither a fair nor an efficient method of adjudicating the controversy, particularly before the validity and interpretation of the controlling statute and regulations have become better tested and settled."
While it is true that trial courts are generally afforded great latitude in determining the fairest and most efficient mode of adjudication when such judgments are predicated on careful factual examination, e.g., City of New York v. International Pipe and Ceramics Corp., 410 F.2d 295, 300 (2d Cir. 1969), the trial court's decision to deny class action status in this case was posited on the legal theory that the procedural device of class actions is incompatible with the substantive ends to which the Truth in Lending Act is addressed. We cannot agree.
The Truth in Lending Act, as this appellation strongly suggests, was a legislative response to a public need to be fairly and honestly apprised of the actual cost of using someone else's money. The Act also, of course, serves the purpose of introducing uniformity among the methods which have been previously employed for the purported objective of stating interest rates. Borrowers and consumers are now hopefully enabled to compare credit terms and to avoid the uninformed and/or misinformed use of credit. If they are to be paying a maximum allowable rate they at least will be doing so on a choice basis predicated on knowledge of what they are doing.
In contrast with the statute's obvious purposes, the modes of enforcement embodied in the Act suggest a complex, somewhat confusing scheme. The Act incorporates both the Senate's reliance on private enforcement, including federal jurisdiction without regard to a minimal amount and an individual incentive to litigation in the form of statutory damages of twice the finance charges imposed in the transaction at issue but not less than $100, plus attorneys' fees and court costs, as well as the House provision for federal administrative enforcement of the Act. However, neither branch of the legislature apparently considered the possibility of class actions in Truth-in-Lending cases. Wilcox v. Commerce Bank of Kansas City, 474 F.2d 336, 343-344 (10th Cir. 1973). More particularly, "Congress never foresaw the problem class actions would present: Multiplication of the individual minimum recovery of $100 by the number of members of a large class makes potential liability astronomical." Note, Class Actions Under the Truth in Lending Act, 83 Yale L.J. 1410, 1411 (1974) (citation omitted).
The seminal case on denial of class action status is Ratner v. Chemical Bank New York Trust Co., 54 F.R.D. 412 (S.D.N.Y. 1972). The plaintiff in Ratner alleged that the bank had violated the Act's disclosure requirement by failing to show the annual percentage rate on a bank credit card monthly statement, even though no finance charge had been imposed and no interest rate had yet been applied. The alleged class was comprised of 130,000 cardholders, and under the terms of the statute, the bank's potential liability was at least thirteen million dollars. The court rested its holding that a class action was not the superior method for fairly and efficiently adjudicating the controversy on two grounds. First, the court found that the incentive of a class action was unnecessary to enforce the Act because the statute contemplated enforcement by a species of private attorney general and the statutory minimum recovery guaranteed the viability of individual actions and obviated the need for the incentive of a class action to enforce the Act. Second, the aggregate potential liability presented the spectre of a "horrendous, possibly annihilating punishment" for a mere "technical" violation. 54 F.R.D. at 416.
Relying on the reasoning in Ratner, Logan argues that the Truth in Lending Act's provision of incentives for individual litigation necessarily precludes the use of class actions in such cases. See, Goldman v. First National Bank of Chicago, 56 F.R.D. 587 (N.D. Ill. 1972); Roth v. Community National Bank, (N.D. Ohio 1973) (unpublished order). First, as a matter of legislative intent, it is not at all clear that Congress meant to bar the use of class actions in cases brought under the Act. Nothing in the legislative history of the Act or the Act itself expressly or impliedly prohibits the use of the class action. See generally, Note, 83 Yale L.J. 1410 (1974). Class actions have been extensively used in antitrust and securities litigation without specific legislative authorization, and Congress was certainly cognizant of the fact that class actions were a part of the existing body of law when the Truth in Lending statute was enacted. We thus concur with the Tenth Circuit's pronouncement in a recent Truth in Lending case, factually similar to Ratner, in which class action status was denied: "To find any congressional intent to preclude . . . treatment of such cases under Rule 23 would be a work of clairvoyance and not of construction or interpretation." Wilcox v. Commerce Bank of Kansas City, 474 F.2d 336, 343-344 (10th Cir. 1973). Second, the argument that the incentive for individual litigation precludes class action litigation assumes that the incentive solely relates to consumer motivation to sue rather than to creditor compliance with the Act. To the contrary, the purpose of enacting the statutory minimum damage provision was as much to induce creditor compliance with the Act as to provide incentives for private litigants. Note, 83 Yale L.J. at 1416. Therefore, "creditors disregarding their responsibilities under the Act and causing damages to members of a class however limited or extensive should have no assurance that their accumulated responsibility cannot be enforced through this means." Wilcox v. Commerce Bank of Kansas City, supra at 348. Third, while procedural fairness with respect to protecting defendants from crushing damages predicated on the statutory minimum recovery is an important consideration in determining the superiority of the class action mode of adjudication, it is at least equally important to prevent violators of the Act from limiting recovery to a few individuals where actual, wide-spread noncompliance is found to exist.
On balance, class actions might very well be superior to individual suits, because while the former would compel correction of disclosure errors and full collection of damages, the latter would result only in correction of errors, for collection damages would be sharply restricted by the short statute of limitations (15 U.S.C. § 1640 (e)), the inability of the poor or uninformed to enforce their rights, and the improbability that large numbers of ...