Author(s): Michael D. Wade

Commercial Law is a newsletter devoted to commercial law issues and published by Garan Lucow Miller, P.C.
This newsletter examines a recent Federal district court decision involving the damage exposure of minimal violations of the Federal Truth in Lending Act.

CONSEQUENCES OF MINIMAL VIOLATIONS OF THE FEDERAL TRUTH IN LENDING ACT

In Lozada v Dale Baker Oldsmobile, ___ F Supp 2d ___ (Western District Mich 2000), decided September 14, 2000, the dangers of technical violations of the Truth in Lending Act (TILA) were detailed in the context of the FRCP 23, the federal class action rule. In Lozada, the defendant/special finance department failed to provide at the signing a copy of the documents signed by the customer. Instead, the dealership waited until the third-party financing was in place to send out copies of the documents. Nothing was changed, no misrepresentations were involved, and the customer had the information, but not a copy of the document.

TILA was enacted to guarantee the accurate and meaningful disclosure of the costs of consumer credit to enable consumers to make informed choices in the credit marketplace. TILA itself has been augmented by the so-called Regulation Z, consisting of rules propounded by the Federal Trade Commission, as well as a commentary on Regulation Z. Regulation Z provides, and prior court cases have held, that the customer must be provided a copy of the signed documents at consummation of the transaction. Consummation means at the
time the consumer becomes obligated by the documents. The Dale Baker special finance department sought to postpone consummation through the use of a “rider” which stated that the transaction was in fact not finalized until third-party financing was in place. The Lozada court held that the use of such a rider violated TILA since the consumer became obligated upon signing, which became the time of consummation.

The four named plaintiffs were all provided with the documents without changes approximately one week post-signing. Accordingly, the trial court granted partial summary judgment to plaintiffs.
The grant of summary judgment accompanied a request for certifying the case for class action status under Federal Rule 23. Rule 23 contains certain requirements for class action status.

The first requirement is that of numerosity, i.e., the class must be so numerous that joinder of all members is impractical. In Lozada, the class numbered some 400 potential plaintiffs, and so the numerosity requirement was met. Next, there must be questions of law or fact common to the class, the
“commonality requirement” .

The Court found a common nucleus of facts and law as to the procedures followed by the defendant and whether violations of TILA occurred. Third, the “typicality requirement”, namely the class members must have the same event, practice, or course of conduct at issue, was met. And fourth, the Court addressed the “adequacy of representation” requirement, which involves the class representatives and the class members having common interests and also requires the class representatives to vigorously pursue the case through qualified counsel.

Rule 23 also contains other requirements, depending upon whether the plaintiffs seek money damages or injunctive relief. For money damages, the plaintiffs must show that common questions “predominate” over questions affecting individual members and that the class action is “superior” to other available methods for the fair and efficient adjudication of the controversy. The Lozada court found predominance and superiority as well and certified the class.

What started as a case with four named plaintiffs who had suffered no actual damages through a technical violation of TILA became a case with 400 class members now entitled to TILA damages including 1% of the net worth of the dealership, not to exceed $500,000, and actual attorney fees. State court claims could increase damages to equal the finance charges paid by the 400 customers.

The Lozada case is a pending case and may be appealed.

The TILA class action is a dangerous and costly case for a business and/or for its insurer. TILA coverage is available through several insurers. TILA claims frequently arise in the context of vehicle sales, consumer product sales, leasing of vehicles and products, as well as in many other areas of open and closed-end credit.

The authors of this article, Michael Wade and Lisa McDonald of Garan Lucow Miller, P.C.’s Grand Rapids office, concentrate their practice in TILA and class action litigation. For information regarding either TILA or class actions, Mr. Wade and Ms. McDonald may be reached at (616) 742-5500 or by FAX at (616) 742-5566.