Chapter 9

Suit to Enjoin U.S. Department of Educations Collection of Loans to Victims of a Fraudulent Vocational School
Irv Ackelsberg is a Managing Attorney with Community Legal Services, Inc., 3638 N. Broad Street, Philadelphia, PA 19140, (215) 2272400, FAX (215) 2272435, Iackelsberg@clsphila.org. He has extensive advocacy, litigation and teaching expe rience in diverse areas of consumer law affecting the poor. Most recently, his litigation work has targeted predatory lending practices and trade school fraud. He was the 1997 recipient of the Striving Towards Excellence Award presented by Pennsylvania Legal Services and is a member of the National Association of Con sumer Advocates. He provided the materials in section 9.1. Stephen H. Olden is a senior attorney at the Legal Aid Society of Cincinnati, 901 Elm Street, Cincinnati, OH 45202, (513) 2419400, FAX (513) 2419404, solden@justicemail.com, and has practiced in the consumer and housing fields for 20 years. He currently heads the offices consumer/homeowner practice team which includes a student loan and trade school project initiated in 1996. He has represented defrauded students in class action litigation as well as in proceedings with the U.S. Department of Education and has been a trainer at numerous consumer and studentloan discharge training events. Mr. Olden is a member of the Massachusetts, Ohio, and federal bars. He provided the material in section 9.2. Section 9.1.1 is a class action complaint filed by victims of a fraudulent vocational school against the U.S. Department of Education seeking declaratory and injunc tive relief and attorney fees. The complaint alleges that the plaintiffs student loans should have been discharged and collection abandoned because the loans were obtained as a result of the schools false certification that the students would benefit from the vocational training. A federal statute mandated the discharge of student loans obtained by a false certification.1 The claims are based on the schools commissioned sales people getting drug addicts to sign student loan forms for a token $25 or $35 payment without any intention that they would ever enroll in the school. The Department of Education denied the recovered addicts administra tive request to discharge the loans. This action is based on the Administrative Procedures Act and The Higher Education Act. Attorney fees are sought pursuant to the Equal Access for Justice Act. Section 9.1.2 is the first set of interrogatories and request for production of documents in the case. A memorandum of law in support of a students motion for summary judgment from a similar case is in cluded as 9.1.3.
1 20 15 U.S.C. 1087(c). See generally National Consumer Law Center, Unfair and Deceptive Acts and Practices Ch. 11 (4th ed. 1997 and Supp.). See also National Consumer Law Center, Consumer Law Pleadings With Disk, Number Two Chs. 13, 14 (1995) also containing student loan case materials.

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Section 9.2.1 is a request to the U.S. Department of Education (DOE) for a dis charge of all students of a fraudulent vocational because the schools pattern of admit ting students without regard to their ability to benefit (ATB) from the vocational instruction offered. Samples of extensive exhibits attached to the request are included here. Section 9.2.2 is students request and the DOEs ruling that the students loan should be discharged because of the schools false ATB certification. Section 9.2.3 is a students affidavit detailing some of abuses of the schools sales force. Section 9.2.4 is a DOE letter explaining its ATB certification requirements.

9.1 Class Action Against Department of Education

9.1.1 Complaint
UNITED STATES DISTRICT COURT EASTERN DISTRICT OF PENNSYLVANIA
) HOMER SIMPSON, ) MONTGOMERY BURNS, ) PATTY BOUVIER and WAYLON ) SMITHERS, on behalf of themselves ) and all others similarly situated, ) Plaintiffs, ) ) v. ) ) MOE SZYSLAK, Secretary, ) United States Department of ) Education, ) Defendant. ) )

JURISDICTION AND VENUE 2. This court has jurisdiction under 28 U.S.C. 1331 (federal question) and 20 U.S.C. 1082 (suits against Sec retary of Education). Venue is proper because a) this is a civil action in which the defendant is an officer of the United States, b) a substantial part of the events or omis sions giving rise to the claims occurred in this judicial dis trict and c) the plaintiffs reside in this district. 28 U.S.C. 1391(e). PARTIES 3. Plaintiff Homer Simpson is an individual residing at [Address]. He currently owes a student loan obligation that purportedly was used to pay the costs for participating in a commercial truck driving program run by a nowdefunct trade school known as Andover Tractor Trailer School (here inafter Andover). He never attended the school or par ticipated in any such studies. 4. Plaintiff Montgomery Burns is an individual residing at [Address]. He currently owes a student loan obligation that purportedly was used to pay the costs for participat ing in a commercial truck driving program run by Andover. He never attended the school or participated in any such studies. 5. Plaintiff Patty Bouvier is an individual residing at [Ad dress]. She currently owes a student loan obligation that purportedly was used to pay the costs for participating in a commercial truck driving program run by Andover. She never attended the school or participated in any such stud ies. 6. Plaintiff Waylon Smithers is an individual residing at [Address]. He currently owes a student loan obligation that purportedly was used to pay the costs for participating in a commercial truck driving program run by Andover. He never attended the school or participated in any such studies. 7. Defendant Moe Szyslak, the Secretary of the United States Department of Education (hereinafter the Secre tary), is responsible as the chief executive of the Depart ment of Education (hereinafter the Department) for the administration of the student financial aid programs estab lished by Title IV of the Higher Education Act, 20 U.S.C. 1070 et seq., including the Federal Family Education Loan (FFEL) program (formerly Guaranteed Student Loan Program, or GSL). Among other things, he and his pre decessors were responsible for, among other things, approv ing and monitoring the Title IV eligibility of the socalled school that perpetrated the underlying fraud, for enforc ing the eligibility requirements for student borrowers, and

AMENDED COMPLAINTCLASS ACTION PRELIMINARY STATEMENT 1. Plaintiffs Homer Simpson, Montgomery Burns, Patty Bouvier and Waylon Smithers bring this class action on behalf of several classes of student loan borrowers who were victimized by a fraudulent truckdrivingby correspondence school and who have been wrongfully de nied relief mandated by federal law. Congress expressly mandated that the Secretary of Education shall dis charge the loan obligations of all borrowers whose eligi bility for financial aid was falsely certified by schools participating in the financial aid system. 20 U.S.C. 1087(c). Plaintiffs are eligible for a false certification discharge be cause, among other things, Andover falsely certified their ability to benefit from the particular course of study. Plaintiffs seek declaratory and injunctive relief to enforce the said statutory mandate, including, a reversal of the Secretarys denial of their applications for loan discharges, notification to class members that may be entitled to dis charges and an order remedying his inaction on applica tions already submitted but not acted upon.

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for administering the loan discharge program enacted by Congress for the purpose of extending relief to FFEL bor rowers victimized by fraudulent schools. CLASS ACTION ALLEGATIONS 8. Plaintiffs bring this action on behalf of the following four classes of similarly situated individuals: a. Class A: All individuals who incurred FFEL obliga tions to attend Andover Tractor Trailer School and who did not, at the time of their enrollment, have a high school or high school equivalency diploma; b. Class B: All individuals who incurred FFEL obliga tions to attend Andover Tractor Trailer School and who did not, at the time of their enrollment, have a valid drivers license; c. Class C: All student loan borrowers who incurred FFEL obligations to attend correspondence courses accred ited by the National Home Study Council (now known as the Distance Education and Training Council) and who did not, at the time of their enrollment, have a high school or high school equivalency diploma; d. Class D: All FFEL borrowers who have submitted applications for false certification loan discharges or requests for review of denials of such applications to the United States Department of Education and who have not obtained a decision from the Department within ninety (90) days of such submission. 9. As to each of the abovespecified classes, and for the reasons set forth below: a. The class is so numerous that joinder is impractica ble. Plaintiffs believe there are thousands of individ uals in Classes A and B and tens of thousands of individuals in Classes C and D. b. There are questions of law and fact common to the class, as more fully set forth below. c. The claims of the named plaintiffs are typical of the claims of the class in that they all carry student loan obligations purportedly the result of attending the bogus truck driving program at Andover. Two of them (Simpson and Smithers) did not have high school cre dentials at the time they were admitted; all four were not licensed drivers; three (Simpson, Bouvier and Burns) were denied false certification discharges by the U.S. Department of Education and one of them (Smithers) filed an application for such a discharge but never got a decision rendered on the application. d. Plaintiffs will fairly and adequately assert and protect the interests of the class, in that: i. The attorney for Plaintiffs is an experienced liti gator, an expert in the federal student loan pro gram and has successfully managed consumer class actions before; ii. Neither plaintiff nor counsel have any conflict of interest in the maintenance of the class action; iii. Plaintiffs and their counsel have adequate finan cial resources available to ensure competent and aggressive representation of the class, namely the resources of Community Legal Services, Inc., a wellestablished, publicinterest legal services or Homer Simpson

9.1.1

ganization with an annual operating budget of ap proximately $5.5 million. FACTUAL ALLEGATIONS OF THE NAMED PLAINTIFFS

10. Sometime during the summer of 1989, Plaintiff Homer Simpson, who was at the time homeless and addicted to drugs, signed what he now believes were enrollment and financial aid documents and course test sheets for a com bined correspondence and resident commercial truck driv ing program supposedly being offered by a Massachusetts trade school named Andover Tractor Trailer School (An dover). He received $35 from an Andover recruiter in return for his signatures. 11. Mr. Simpson did not have a high school or GED diploma at the time he signed the various papers at the Andover recruiting office. His formal schooling ended dur ing the tenth grade. He also did not have a drivers license at the time so could not have legally participated in a truck driving course. 12. Plaintiff assumes and therefore avers that Andover received proceeds from a FFEL loan made on his behalf, despite the fact that he never attended Andover and never participated in any home study program. 13. Andover falsely certified Mr. Simpsons eligibility for the student loans based on his ability to benefit from a postsecondary course in commercial truck driving. Among the reasons this certification was false was that it implied his having passed a valid admission test or having com pleted a remedial course, federal requirements for obtain ing financial aid on behalf of a student who does not have a high school or equivalency diploma. He was not adminis tered a test and did not complete any remedial course. In addition, the enrollment ignored the fact that he was not a licensed driver and, therefore, could not legally get behind the wheel of a truck. 14. Andover also falsely certified on the guaranteed stu dent loan application that Mr. Simpson was in attendance at the school and was making satisfactory progress in his studies. This certification is a material part of the certifica tion process since it is an eligibility requirement under Title IV that the student borrower be in attendance at a school and that he be making satisfactory progress. 20 U.S.C. 1091(a)(2). 15. Years later, after he had recovered and was gainfully employed, Mr. Simpson began receiving student loan col lection notices from a FFEL guaranty agency, American Student Assistance (ASA) and, in 1995, $2,284 owed to him for a tax refund was taken and applied to the student loan obligation. 16. On March 3, 1995, Mr. Simpson submitted a sworn statement requesting a discharge of the student loan to ASA under 11 U.S.C. 1087(c). 17. While his application was pending before ASA, Mr. Simpson also began a correspondence with the Depart ment regarding his request for discharge. In particular, on November 6, 1995, he wrote to the official designated by the Secretary to accept requests for group discharges

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October 22, 1997 decision letter is attached hereto as Ex hibit A. [not reprinted herein]) 24. In the October 22, 1997 decision, the Secretary in vited Mr. Simpson to contest the decision by submitting corroboration in the form of statements made by other students who attended the school that are both sufficiently detailed and consistent with each other to appear reli able. 25. On August 18, 1998 Mr. Simpson submitted to the Secretary nine separate statements by individuals who were victimized during the summer of 1989 by the fraudulent recruiting office operated by Andover in North Philadel phia during that period. 26. The Secretarys adverse decision has caused and will continue to cause substantial harm to Mr. Simpson. He had his income tax refunds seized and is threatened by seizure of future refunds and earned income tax credits. In addition, because of his default he has adverse credit his tory barring him access to credit and is ineligible for fur ther financial aid to pursue legitimate education or job training. Montgomery Burns 27. Like Mr. Simpson, Plaintiff Burns was, during 1989, a homeless addict and he, too, was induced by the same fraudulent recruiting operation to sign papers pertaining to an enrollment into Andovers commercial truck driving program. He was paid $25 to sign the papers. 28. At the time, he did have a high school diploma. However, he did not have a drivers license. 29. Mr. Burns assumes and therefore avers that An dover received proceeds from a FFEL loan made on his behalf, despite the fact that he never attended Andover and never participated in any home study program. 30. Andover falsely certified Mr. Burnss eligibility for the student loans based on his ability to benefit from a postsecondary course in commercial truck driving in that it ignored the fact that he was not a licensed driver and there fore could not legally get behind the wheel of a truck. 31. Andover also falsely certified on the guaranteed stu dent loan application that Mr. Burns was in attendance at the school and was making satisfactory progress in his stud ies. This certification is a material part of the certification process since it is an eligibility requirement under Title IV that the student borrower be in attendance at a school and that he be making satisfactory progress. 20 U.S.C. 1091(a)(2). 32. Mr. Burns is now recovered and is being dunned by ASA on a account of student loan obligation. He is also now gainfully employed and, therefore, faces the prospect of wage garnishments and tax refund intercepts to enforce that obligation. 33. On December 20, 1996, Mr. Burns submitted a sworn statement to ASA, requesting a discharge of the student loan under 11 U.S.C. 1087(c). 34. On January 21, 1997 ASA denied the loan discharge request on the grounds that, according to the Secretary, a false certification discharge application could not be based

requesting that she consider granting a false certification discharge to all student loan borrowers whose loans origi nated from Andovers fraudulent Philadelphia recruiting office. 18. On March 11, 1996, after receiving no response from ASA and then, after learning that ASA could not locate his request for discharge, Mr. Simpson submitted the re quest again, this time on a form supplied by ASA. He asserted four separate grounds for discharge: 1) the ab sence of an abilitytobenefit admissions test; 2) his lack of a drivers license; 3) the schools false certification of his enrollment status; and 4) likely forgery of the loan pro ceeds check. 19. On March 21, 1996 ASA advised Mr. Simpson that his loan had been assigned to the Defendant Secretary and that the request for discharge had also been referred to the Secretary. 20. In the months that followed, Mr. Simpson contacted the Department various times in order to try to get some action on the pending discharge request. As part of one of these contacts, he submitted proof on August 1, 1996 that Andovers accrediting agency, the National Home Study Council (NHSC), required its accredited schools to ob tain advance approval of admissions tests or remedial pro grams they intended to use to admit students without high school credentials, and that Andover had never obtained such approval. He also followed up on the earlier request for group discharge, submitting in October and November 1996 investigative material from the criminal investigation surrounding Andover, audits and reviews by ASA and ad ditional declarations of other student loan borrowers who also had incurred their obligations under circumstances similar to those described by Mr. Simpson. 21. On or about May 20, 1997, in response to the mate rials submitted by Mr. Simpson, the Secretary notified him that he had indeed proved that Andover had engaged in serious and well documented violations of the Depart ments abilitytobenefit regulations, but, for reasons not stated, the Secretary also concluded that these violations occurred only during the time period June 1, 1986 to April 30, 1989. 22. On or about October 22, 1997, the Secretary issued a decision that Mr. Simpson is not eligible for a false certifi cation discharge and that he is responsible for paying any outstanding balance on the loan. The Secretarys stated reason for denying the discharge request was that the loan was issued in July 1989, i.e., after the April 30, 1989 cutoff referred to in the May 20, 1997 letter, and that, in the absence of any official reports or audits pertaining to activ ities after such date, [i]t is reasonable to conclude that . . . the school met the ability to benefit requirements for the enrollment period in question. The decision made no men tion of the evidence submitted showing that Andovers ac crediting agency had failed to approve any abilityto benefit admissions by Andover. 23. In addition, the Secretary stated that lack of a driv ers license was not a relevant ability to benefit factor. He made no decision on the additional false certification claims based on the false certification of his enrollment status or on the likely forgery of the check. (A copy of the

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solely on the absence of a drivers license. (A copy of that decision is attached hereto as Exhibit B [not reprinted herein].) 35. On January 27, 1997 Mr. Burns submitted a request for review of ASAs decision to the Secretary. 36. On May 23, 1997 the Secretary issued a written deci sion, denying Mr. Burns request for a loan discharge, on the grounds that the lacking of a valid drivers license could not be the basis for a false certification discharge. While acknowledging that a borrower would be eligible for a false certification discharge if he would not meet the require ments for employment . . . in the occupation for which the training program supported by the loan was intended be cause of a physical or mental condition, age, or criminal record or other reason accepted by the Secretary, 34 C.F.R. 682.402(e)(13)(iii)(B) (emphasis added), the Secretary de cided that not having a drivers license before enrolling in a commercial truck driving course was not an acceptable reason. (A copy of the May 23, 1997 decision is attached hereto [not reprinted herein].) 37. The Secretarys adverse decision has caused and will continue to cause substantial harm to Mr. Burns. He faces the threat of wage garnishments and tax refund intercepts and, because of his default, has an adverse credit history that bars him access to credit and renders him ineligible for further financial aid to pursue legitimate education or job training. Patty Bouvier 38. Like Mr. Simpson, Plaintiff Bouvier was, during 1989, a homeless addict and she, too, was induced by the same fraudulent recruiting operation to sign papers pertaining to an enrollment into Andovers commercial truck driving program. She was paid $25 to sign the papers. 39. At the time, she did have a high school diploma. However, she did not have a drivers license. 40. Ms. Bouvier assumes and therefore avers that An dover received proceeds from a FFEL loan made on her behalf, despite the fact that she never attended Andover and never participated in any home study program. 41. Andover falsely certified Ms. Bouviers eligibility for the student loans based on her ability to benefit from a postsecondary course in commercial truck driving in that it ignored the fact that she was not a licensed driver and therefore could not legally get behind the wheel of a truck. 42. Andover also falsely certified on the guaranteed stu dent loan application that Ms. Bouvier was in attendance at the school and was making satisfactory progress in her studies. This certification is a material part of the certifica tion process since it is an eligibility requirement under Title IV that the student borrower be in attendance at a school and that she be making satisfactory progress. 20 U.S.C. 1091(a)(2). 43. Years later, after she had recovered and was gain fully employed, Ms. Bouvier began receiving student loan collection notices from a student loan guaranty agency, American Student Assistance (ASA) and, in 1996 her tax refunds began getting seized and being applied to the stu dent loan obligation. Over the last three years, she esti mates that at least $5,000 has been paid on account of this

9.1.1

loan obligation from tax refunds owing to her. She believes that a balance still exists on the loan obligation and that, therefore, she continues to face seizure of future tax re funds. 44. On March 26, 1997, Ms. Bouvier submitted a sworn statement to ASA, requesting a discharge of the student loan under 11 U.S.C. 1087(c). 45. On September 11, 1997 ASA denied the loan dis charge request on the grounds that, according to the Sec retary, a false certification discharge application could not be based solely on the absence of a drivers license. (A copy of that decision is attached hereto as Exhibit C [not reprinted herein].) 46. Ms. Bouvier did not request the Secretary to review her case, since such a request for review would have been fruitless, given that the Secretary had already decided that Andover borrowers who had high school diplomas could not obtain false certification discharges based on their lack ing valid drivers licenses. 47. The Secretarys final decision regarding Andover bor rowers has caused and will continue to cause substantial harm to Ms. Bouvier. She had her income tax refunds seized and is threatened by seizure of future refunds and earned income tax credits, as well as wage garnishments. In addi tion, because of her default, she has adverse credit history barring her access to credit and is ineligible for further financial aid to pursue legitimate education or job train ing. Waylon Smithers 48. Like Mr. Simpson, Plaintiff Smithers was, during 1989, a homeless addict and he, too, was induced by the same fraudulent recruiting operation to sign papers pertaining to an enrollment into Andovers commercial truck driving program. He was paid about $20 to sign the papers. 49. At the time, he did not have a high school diploma or a G.E.D., nor did he have a drivers license. 50. Mr. Smithers assumes and therefore avers that An dover received proceeds from a FFEL loan made on his behalf, despite the fact that he never attended Andover and never participated in any home study program. 51. Andover falsely certified Mr. Fields eligibility for the student loan based on his ability to benefit from a postsecondary course in commercial truck driving. Among the reasons this certification was false was that it implied his having passed a valid admission test or having com pleted a remedial course, federal requirements for obtain ing financial aid on behalf of a student who does not have a high school or equivalency diploma. He was not adminis tered a test and did not complete any remedial course. In addition, the enrollment ignored the fact that he was not a licensed driver and, therefore, could not legally get behind the wheel of a truck. 52. Andover also falsely certified on the guaranteed stu dent loan application that Mr. Smithers was in attendance at the school and was making satisfactory progress in his studies. This certification is a material part of the certifica tion process since it is an eligibility requirement under

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Consumer Law Pleadings Number Five

ing the collection of defaulted loans, the handling of inquir ies from participants in the program and the conducting of program reviews of participating schools. 60. Under Title IV eligible students are students with high school diplomas or General Education Development certificates (GEDs). A student failing to meet this require ment may nonetheless qualify to receive a FFEL loan to attend an eligible vocational institution if that institution certifies that the student has the ability to benefit from the schools training. 20 U.S.C. 1085(c) (1990) and 1091(d) (1997). In 1989, when Plaintiffs incurred their education loans, institutions determined ability to benefit based on the students performance on a test, or based on the stu dents successful completion of a remedial education pro gram provided by the institution. 34 C.F.R. 668.7(b). (Ability to benefit will occasionally be referred to here after as ATB.) 61. An additional student eligibility requirement is that the student actually be in attendance at an eligible school and that he be making satisfactory progress in a program of study. 20 U.S.C. 1091(a)(2). 62. Around 1990, Congress began investigating wide spread allegations of fraud and abuse by vocational institu tions that wrongfully obtained Title IV funds by enrolling ineligible students who were not capable of benefitting from the training. See United States Senate, Permanent Subcom mittee on Investigations of the Senate Committee on Gov ernmental Affairs, Abuses in Federal Student Aid Pro grams, Senate Rep. No. 58, 102d Congress, 1st Session (1991) (Victimized by unscrupulous profiteers and their fraudulent schools, students have received neither the train ing nor the skills they hoped to acquire and, instead, have been left burdened with debts they cannot repay.). 63. Congress responded to this problem in the 1992 re authorization of the Higher Education Act. The 1992 amend ments mandated that the Secretary of Education discharge liability on a FFEL loan received on or after January 1, 1986 if the students eligibility to borrow . . . was falsely certified by the eligible institution. 20 U.S.C. 1087(c)(1). 64. In April 1994, the Secretary published regulations implementing the new false certification loan discharge provision. 34 C.F.R 682.402(e). Among those borrowers identified in the regulation as being eligible for the new discharge were those whose ability to benefit from the educational program was falsely certified by the school they attended. 65. The Secretarys false certification regulation pro vides that borrowers a) who were admitted without a high school diploma or G.E.D. and without a proper determina tion of ability to benefit, and b) those who would not meet the requirements for employment in the occupation for which the training program supported by the loan was in tended because of a condition or legal status approved by the Secretary, are entitled to have their student loans dis charged upon submission of a sworn statement establish ing their eligibility. 34 C.F.R. 682.402(e)(3), (13). 66. Under the regulation, a student borrower who was enrolled during the relevant time period in TitleIV funded education based on his having the requisite ability to benefit would meet the definition of false certifica

Title IV that the student borrower be in attendance at a school and that he be making satisfactory progress. 20 U.S.C. 1091(a)(2). 53. Mr. Smithers is now recovering and is being billed by an agent of either the Secretary or ASA regarding a FFEL obligation. He has already lost the benefit of a substantial tax refund was seized several years ago on account of the student loan. He faces the prospect of wage garnishments and tax refund intercepts to enforce the balance of that obligation. 54. During 1998 he learned from Plaintiff Simpson about the false certification discharge program and about his ef forts to get the Secretary to discharge the loans of An dover borrowers. Upon information and belief, Plaintiff avers that the Secretary did not attempt to notify him of the fact that his loan, because it was originated by An dover, was potentially dischargeable. 55. On August 17, 1998, Mr. Smithers submitted a sworn statement to the Secretary on his own behalf, requesting a discharge of the student loan under 11 U.S.C. 1087(c). By this time the Secretary should have either acted on his request, or, if the loan is held by ASA rather than the Secretary, should have been forwarded to ASA for its ac tion. Upon Plaintiffs information and belief, the Secretary has done neither. FACTUAL ALLEGATIONS PERTAINING TO THE CLASS A. The Title IV System 56. Title IV of the Higher Education Act, 20 U.S.C. 1070 et. seq., created a comprehensive program of educational grants and loans in which the Secretary, who is empowered to prescribe such regulations as may be necessary to carry out the Congressional purpose, 20 U.S.C. 1082, coordi nates the extension of Title IV grants and loans to certain eligible students for education at certain eligible institu tions, and also coordinates the collection of such loan obli gations. 57. Under Title IV of the HEA, financial assistance in the form of loans and grants is made available to students who enroll in a recognized institution of higher educa tion, 20 U.S.C. 1091(a). Originally designed to provide student aid to those attending the nations colleges and universities, Title IV was amended several times during the 1970s and 1980s so as to include within the definition of eligible institutions proprietary vocational and trade schools (hereinafter trade schools) offering training programs often less than a year in duration. 58. Title IV grants (Pell and SEOG grants) are gen erally issued directly from the federal treasury to the ap proved educational institution. FFEL program loans, on the other hand, are generally issued by eligible lenders, guaranteed by approved guaranty agencies such as ASA, and then reinsured by the Secretary. Lenders receive di rect interest subsidies from the Secretary and, in the event of default, receive repayment of the loans from the guar anty agencies, who, in turn, can by repaid by the Secretary. 59. The Secretary has contracted with ASA and the other guaranty agencies to administer the FFEL program, includ

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tion if he was admitted without a) passing an admissions test approved by the schools accrediting agency, or b) suc cessfully completing a program of developmental or reme dial education provided by the school. 34 C.F.R. 682.402(e)(13)(ii). 67. The regulation does not deal separately with a situa tion where a school enrolls individuals with the intent of not teaching them and signs FFEL certifications that the student is making satisfactory progress in an educational program. Accordingly, under the regulation, only such stu dents who did not have high school credentials could ob tain a false certification discharge even where the school falsely certified the fact that a high school graduate was in attendance making satisfactory progress in his studies. 68. Under the Secretarys regulations, in order to qualify for discharge of a falsely certified student loan, a bor rower is required to submit to the holder of the loan a written request that sets forth, under penalty of perjury, the factual basis for the request. 34 C.F.R. 682.402(e)(3). Within 90 days, a decision must be rendered on the re quest for discharge, 682.402(e)(6)(iv). 69. Where a loan is held by a guaranty agency, a dis charge request is submitted to such agency which has the power to make the eligibility determination in the first instance. In the event the guaranty agency denies the re quest, the borrower can seek a de novo review by the Sec retary. 34 C.F.R. 682.402(e)(9), (11). 70. Under his regulation, the Secretary has an indepen dent obligation to gather information about groups of bor rowers who might be eligible for a loan discharge and to notify such borrowers where reliable information suggests a pa ttern of fals e ce r tifi catio n. S ee 3 4 C.F.R. 682.402(e)(6)(I)(ii). 71. In September 1995, as part of a Dear Colleague letter to participants in the Title IV system, the Secretary announced the designation of a Department official who would accept and decide requests for group discharges for borrowers who are members of a cohort of students that were signed up by a school with serious and well documented ATB violations that could be considered to have affected every student admitted to the school based on ATB. Borrowers covered by such group discharges do not have to submit any additional evidence that the school was falsely certifying students and, assuming they provide a sworn statement that conforms to the other require ments of the regulation, are entitled to a discharge of their loan. B. The Andover Correspondence Course in Commercial Truck Driving 72. Andover Tractor Trailer School, Inc. was one of the most blatant and extensive trade school frauds perpetrated on the Title IV system. When it closed in 1990, it was taking in over $3 million annually in Title IV grants and loans, for the most part, for students who were not par ticipating in any educational program. Most, if not all of the FFEL loans arranged by Andover were guaranteed by the Massachusetts guaranty agency, ASA.

9.1.1

73. The essence of the Andover scheme was to recruit students by paying commissions to recruiters and to the students themselves, for a Commercial Tractor Trailer Driving course supposedly consisting of a correspondence segment and a residential ontheroad driving segment at the schools facility in Methuen, Massachusetts and suppos edly designed to enable graduates to sit for the commer cial truck driving exam. The owners did not intend for more than 10% of the students to show up in Massachu setts and purposely targeted their recruitment efforts to disadvantaged, vulnerable individuals who had no inten tion of enrolling in a course of study. Employees were trained, among other things, in falsifying drivers license informa tion, forging financial aid documentation and completing correspondence lessons on behalf of the students. 74. A 1990 audit by the Inspector General of the Depart ment of Education determined that the academic content of the correspondence segment was bogus. While Title IV requires such courses to involve at least 440 clock hours of study, the IG determined that the course material would take a student only 50 hours to complete. The audit also determined that 86% of sampled students withdrew before completing the course. 75. A 1990 program review by ASA noted that of an estimated 942 individuals scheduled to complete the Trac tor Trailer Driving course, at most 87 graduated, and four allegedly found jobs, although the agency found no evi dence that any of these four individuals were in fact em ployed as truck drivers. In this review the agency also found that Andover did not determine the abilitytobenefit of students enrolled without high school credentials. 76. In 1992 a federal grand jury in Boston indicted five former employees of Andover. U.S. v. Cotter et al., Crim. Act. 9210297K (D.Mass.). The grand jury included, as part of the indictment, the following charge: 39. It was further part of the conspiracy to ignore student eligibility requirements for fed eral financial aid, including, but not limited to, whether a student possessed a valid motor vehi cle license; whether a student possessed a high school diploma or GED equivalent and whether a student could successfully complete an ability to benefit examination. The indictment further charged the defendants with fabri cating drivers license numbers as part of the enrollment process. The defendants ultimately plead guilty and were sentenced. 77. During 199091 Andover lost its eligibility to partic ipate in Title IV, ceased operations and filed for bank ruptcy. 78. Andovers Commercial Tractor Trailer Driving course was accredited by a national accrediting commission called the National Home Study Council (NHSC) (now Dis tance Education and Training Council). During the rele vant time period, the NHSC prohibited its accredited schools from admitting abilitytobenefit students, i.e., those lack ing high school credentials, unless the school received prior

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Consumer Law Pleadings Number Five

fraud by Andover, but she limited the scope of the dis charge to cover only borrowers enrolled by Andover be tween June 1, 1986 and April 30, 1989. Since Plaintiff Sim pson and the other known victims of Andovers Philadel phia recruiting operation were enrolled after April 30, 1989, the decision effectively denied them the benefit of the Sec retarys group discharge approval. The decision did not reveal the significance of the mentioned dates, nor did it refer to any evidence supporting an inference that An dover changed its practices after April 30, 1989. 85. The May 20, 1997 decision also rejected one of the additional claims asserted in support of the request for a group discharge, namely, the argument that it constituted a false certification of financial aid eligibility to fabricate drivers licenses for individuals lacking valid licenses and to enroll them into a commercial truck driving program that assumed students were already licensed drivers. The Secretarys representative determined that the lack of a drivers license of a student enrolling in a commercial truck driving course is not a reason accepted by the Secretary to discharge a loan under 34 C.F.R. 682.402(e)(13)(iii)(B). 86. The Secretary has yet to render any decision regard ing the additional claim that NHSCaccredited correspon dence schools were not authorized to admit ATB students and that, therefore, ATB enrollments at such schools con stitute false certifications within the meaning of the Depart ments regulation, nor did he consider the additional argu ment that Andover falsely certified that its students were in attendance making satisfactory progress. 87. Plaintiffs believe and therefore aver that even the inexplicably limited discharge approval, for enrollments be tween June 1, 1986 and April 30, 1989, has not been imple mented in terms of actually notifying borrowers and dis charging individual loans. 88. Thousands of FFEL borrowers, who, like the Plain tiffs, went to fraudulent trade schools have applied to the Secretary for a false certification discharge or have re quested the Secretary review a discharge denial by a guar anty agency. 89. Despite the statutory mandate that falsely certified loans be discharged and despite the Departments own regulation that imposes a 90day decision period, the Sec retary has not assigned adequate staff to administer the program, resulting in a backlog of over 10,000 undecided applications that have been pending, in some cases, for years. 90. The discharge regulations provide that FFEL borrow ers who are eligible for a loan discharge are entitled to a refund of any payments made on the loan, including those made by enforced collection action, and to rehabilitation of their credit record. 34 C.F.R. 682.402(e)(2). The Sec retarys adverse decision and/or his inaction has deprived Plaintiffs and class members of these important rights.

approval for an admissions test or for a remedial course. No such approval was ever given to any school accredited by the NHSC. C. The Departments Actions regarding Plaintiffs Applications for Relief 79. On October 9, 1996 counsel for Plaintiffs submitted to the appropriate agent of the Secretary documentation supporting a request that Andover be designated as a group discharge school. This documentation consisted for the most part of documents already in the possession of the Secretary, including the Massachusetts indictment, investi gative memos from the Inspector General, and excerpts from the IG audit and the ASA program reviews men tioned above. 80. Counsel also submitted individual false certification discharge requests to ASA or to the Secretary (depending on who was holding the particular loan) in addition to the abovementioned applications submitted by the named Plain tiffs. Some were, like Plaintiffs, denied. One (Seymour Skin ner) was approved in November 1996 and another (Mil house Van Houten) has been awaiting a decision from the Secretary since October 1996. In total, the Secretary has at least nine sworn statements of Andover borrowers from Philadelphia who described circumstances surrounding their incurring of a FFEL obligation similar to those described by the Plaintiffs. 81. In August 1996 counsel also advised the Secretary of the facts surrounding abilitytobenefit admissions by cor respondence programs accredited by NHSC, namely, that, according to the NHSC, it had never provided the re quired advance approval for either a testing or remedial program for ATB admissions to any of its schools and, therefore, that any ATB admission in a NHSCaccredited program was by definition a false certification within the meaning of the Secretarys regulation. 82. On February 6, 1997 the Secretarys representative in charge of group discharges wrote to counsel for Plain tiffs, advising him that the Department was conducting a mass mailing directed to all FFEL borrowers who re ceived loans from Andover Tractor Trailer School between January 1986 and August 1990, to inform them about the existence of the false certification discharge program and to provide them with an application form. In addition, she advised, we are examining the information you pro vided in support of a request for a group discharge. (A copy of this letter is attached as Exhibit D [not reprinted herein].) 83. Plaintiffs believe and therefore aver that this mass mailing was mailed to only a fraction of the borrowers who should have received it. More specifically, they believe that the Secretary did not notify any borrowers whose loans are held by guaranty agencies, such as ASA. 84. On May 20, 1997 the Secretarys representative is sued a decision on the group discharge request. (A copy of this letter is also attached as Exhibit E [not reprinted herein].) First, she approved the group discharge of borrowers en rolled as ATB students, on the grounds that the submitted documentation did support a finding of widespread ATB

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CLAIMS FOR RELIEF COUNT I (Failure to Grant Discharge to Andover ATB StudentsClass A) 91. Plaintiffs reaver all previous allegations and incorpo rate them by this reference. 92. The Secretarys duty to discharge falsely certified loans is a mandatory and clear statutory duty. 93. Class members are suffering ongoing harm and the real threat of future harm by the Secretarys actions and inaction in complying with this duty. Since the targets of trade school fraud, in general, and in the Andover fraud, in particular, tend to be those living at the bottom of the economic scale, this harm is having substantial impact on the health and welfare of class members. Such harm in cludes having to pay student loan obligations they no longer owe out of their meager incomes; the continued threat of collection actions against them, including wage garnish ments and the seizure of their tax refunds and earned in come credits; bad credit reports; and an inability to obtain further Higher Education Act assistance, often critical to selfimprovement efforts to move out of poverty. 94. The Secretarys failure to act for the benefit of plain tiff and the class constitutes reviewable, final agency ac tion within the meaning of the Administrative Procedures Act (APA), 5 U.S.C. 704. Plaintiff and class members can compel agency action wrongfully withheld via an ac tion under the APA or, alternatively, under the Mandamus Act, 28 U.S.C. 1361. 95. The Secretarys adverse decision on Plaintiff Sim psons application for a false certification discharge of his loan was arbitrary, capricious, and not in accordance with law, and/or unsupported by substantial evidence and should be reversed under the Administrative Procedure Act, 5 U.S.C. 702 and 706. 96. The Secretarys adverse decision on Plaintiffs re quest for a group discharge covering all of Andovers ATB enrollments, was arbitrary, capricious, and not in accor dance with law, and/or unsupported by substantial evi dence and should therefore be reversed under the Admin istrative Procedure Act, 5 U.S.C. 706(2). Alternatively, the Secretarys failure to implement a group discharge for Andover borrowers should be compelled as being unlaw fully withheld or unreasonably delayed, under 706(1). COUNT II (Failure to Grant Discharge to Andover Students Who Lacked Drivers LicenseClass B) 97. Plaintiffs reaver all previous allegations and incorpo rate them by this reference. 98. The Secretarys adverse decision on Plaintiffs appli cations for a false certification discharge, based on their being enrolled into a truck driving course and the school fabricating a drivers license to justify the enrollment, was arbitrary, capricious, and not in accordance with law, and should be reversed under the Administrative Procedure Act, 5 U.S.C. 702 and 706. 99. The Secretarys adverse decision on Plaintiffs re quest for a group discharge covering all of Andovers stu

9.1.1

dents who lacked drivers licenses, was arbitrary, capri cious, and not in accordance with law, and should be re versed under the Administrative Procedure Act, 5 U.S.C. 702 and 706. Alternatively, the Secretarys failure to implement a group discharge for Andover borrowers should be compelled as being unlawfully withheld or unreason ably delayed, under 706(1). COUNT III (Failure to Treat Andovers False Certification that Borrowers Were Actually in Attendance and Making Satisfactory Progress as Sufficient to Trigger a Right to DischargeClasses A and B) 100. Plaintiffs reaver all previous allegations and incor porate them by this reference. 101. In pursuit of their criminal scheme, the employees of Andover repeatedly and systematically certified that FFEL applicants were participating in an educational program in which said applicants were making satisfactory progress. These certifications were false when made. 102. The Secretarys determination that such a false cer tification does not trigger his obligation to discharge falsely certified loans is arbitrary, capricious, and not in accor dance with the law. Alternatively, his failure to consider such a claim is unlawful and unreasonable. COUNT IV (Failure to Grant Discharge to ATB Borrowers that Enrolled in Correspondence ProgramsClass C) 103. Plaintiffs reaver all previous allegations and incor porate them by this reference. 104. The Secretarys failure to take any action to extend the benefits of his obligation to discharge falsely certified loans to ATB borrowers whose loans are attributable to correspondence programs accredited by the National Home Study Council is unlawful and unreasonable. COUNT V (Failure to Act on Submitted Applications for DischargeClass D) 105. Plaintiffs reaver all previous allegations and incor porate them by this reference. 106. The Secretarys failure to act on submitted applica tions for discharge is unlawful and unreasonable. PRAYER FOR RELIEF WHEREFORE, Plaintiffs request that this Honorable Court grant the following relief for themselves and for the class: A. Take jurisdiction and certify the four classes; B. Declaratory and injunctive relief, (i) requiring the Secretary to grant discharges and/or provide appro priate notices, (ii) imposing a deadline for the Secre tary to act on pending discharge requests, and/or (iii) granting interim relief to class members so as to pro tect them from further harm pending the action by the Secretary on their request for discharges; C. An award of attorneys fees and costs pursuant to the Equal Access for Justice Act; and

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(b) The form in which the information or document ex ists; (c) The general subject matter of the material; (d) The date of the document; and (e) Such other information as is sufficient to identify the document for a subpoena duces tecum including, where appropriate, the author of the document, the addressee of the document, any other recipients of the document and, where not apparent, the relationship of the author ad dressee and any recipients to one another. 5. If any requested document has been misplaced, de stroyed or discarded, or otherwise disposed of, please so state, and for each such document provide: (a) Its date; (b) The identity of the person(s) who prepared the doc ument; (c) The identity of all persons who participated in pre paring the document, to whom the document was sent or who have otherwise seen the document; (d) The length of the document; (e) The subject matter of the document; (f) If misplaced, the last time and place it was seen and a description of efforts made to locate the document; (g) If disposed of, the date of and reason for disposal, the identity of the person(s) who authorized disposal and the identity of the person who disposed of the document. 6. If Defendant is currently without information neces sary to respond to any Interrogatory or Document Re quest, such Interrogatory or Document Request shall be deemed to require a reasonable investigation and any re sponse thereto shall set forth the facts surrounding such investigation, including the identity of other individuals with knowledge. 7. If any requested document is not in the possession or control of Defendant, please so state, and for each such document provide the identity of the name of the individ ual, corporation, company or other entity who Defendant believes is likely to be in possession of the requested infor mation. B. DEFINITIONS 1. Defendant or the Secretary refers to Moe Szys lak, Secretary, United States Department of Education, his agents, officers, and employees. 2. The Department refers to the United States Depart ment of Education, its agents, officers, or employees. 3. Andover refers to Andover Tractor Trailer School, its agents, officers and employees. 4. ASA refers to American Student Assistance, the guaranty agency located in Boston, MA. 5. Title IV refers to the financial aid system estab lished under Title IV of the Higher Education Act and covers, more specifically, the Pell grant and FFEL pro grams. 6. Document is used in the broadest possible sense and means, without limitation, any written, printed, typed, photostated, photographic, computerized, recorded or oth erwise reproduced communication or representation, whether

D. Such other appropriate relief the Court deems nec essary and proper. [Attorney for Plaintiff]

9.1.2 First Set of Interrogatories and Request for Production of Documents

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA
) HOMER SIMPSON, ) MONTGOMERY BURNS, ) PATTY BOUVIER and WAYLON ) SMITHERS, on behalf of themselves ) and all others similarly situated, ) Plaintiffs ) ) v. ) ) MOE SZYSLAK, Secretary United ) States Department of Education, ) Defendant. ) )

PLAINTIFFS FIRST SET OF INTERROGATORIES AND REQUESTS FOR PRODUCTION OF DOCUMENTS Pursuant to Rules 4005, 4006 and 4009, Pa. Rules of Civil Procedure, Plaintiffs demand responses within thirty (30) days to the following interrogatories and requests for production of documents: A. INSTRUCTIONS 1. In answering, Defendant is requested to identify sep arately and in a manner suitable for use in a subpoena all sources of information (whether human, documentary or other) and all records maintained by him or by any other person, entity or organization on which Defendant relies in answering the Interrogatories or which pertain or relate to the information called for by the Interrogatories. 2. The Interrogatories and Document Requests are to be considered continuing. Supplemental answers and doc uments must be filed by Defendant upon discovering or becoming aware of additional responsive documents or of information rendering prior answers or any part thereof inaccurate, incomplete or untrue. 3. If any information called for by any Interrogatory is not available in the full detail requested, such Interroga tory shall be deemed to require the setting forth of the information related to the subject matter of the request in such detailed manner as is available. 4. If Defendant withholds any requested information or identification or production of any document on the basis of privilege, please so state, and for each such request or document provide: (a) The nature of the privilege(s) claimed;

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comprised of letters, words, numbers, pictures, sounds or symbols, or any combination thereof. 7. Identify or identity when used in connection with an individual presently or previously employed by the De partment of Education means to state his or her: (a) Full name; (b) Current job title, job description and location, and time period employed in this position; (c) All previous positions held by the individual in the Department and relevant time periods; and (d) If previously employed by Defendant, his/her final title and job description with Defendant, and the last known address and phone number and current employer. 8. Identify or identity when used in connection with an individual employed by someone other than the Depart ment of Education means to state his or her: (a) Full name and any aliases; (b) Employer and current job title and job description; and (c) Business address and phone number or last known business address and phone number. 9. Identify or identity when used in connection with a document or documents means to state the follow ing: (a) Its date; (b) The identity of its author; (c) The identity of its sender; (d) The identity of the person to whom it was addressed; (e) The identity of the recipient; (f) Its format; (g) Its title; (h) The number of pages or other measure of length or size; and (i) The identity of each person known or believed to have possession, custody, control of or access to any copy of the document having writings, notations, corrections or markings unique to such copy. 10. Identify or identity when used in connection with an entity or organization other than the Department of Education means to provide the name and address of such entity and the name of a contact person (with tele phone number) at such entity or organization who, accord ing to Defendant, would be the most knowledgeable about the subject matter of the interrogatory. 11. Identify when used in connection with a conversa tion means to provide the date of such conversations, the names of those individuals involved, their positions, and, for employees of other organizations or entities, their tele phone numbers. 12. To the extent documents requested exist as com puter files and it would be more convenient for you to provide it on disk rather than paper, you may do so, pro vided that: (a) When a document exists as a database or spread sheet file, defendant requests that the file be copied to a floppy disk in one of the following PC formats, preferably on a 3 1/4 disk, in descending order of preference: Quat troPro (WB*), Dbase (DBF), Excel (XLS), Lotus (WK*), ASCII (Delimited) or ASCII (Fixed Field).

9.1.2

(b) When a document exists as a word processing file, defendant request that the file be copied to a floppy disk in one of the following DOS formats, preferably on a 3 1/4 disk, in descending order of preference: WordPerfect, Word, or ASCII. INTERROGATORIES 1. State the number of FFEL loans currently held by the Department that are attributable to an enrollment in An dover, and state the total amount outstanding. 2. State the number of FFEL loans currently held by ASA that are attributable to an enrollment in Andover and state the total amount outstanding. 3. Identify any other holder of FFEL loans attributable to an enrollment in Andover and state the number of such loans held by that entity and state the total amount out standing. 4. Regarding the participation of Andover in the FFEL program, specify the time period during which Andover was Title IVeligible and identify all documents pertaining its institutional eligibility. 5. State the total amount of Title IV funds obtained by Andover during its period of participation in Title IV pro grams, and identify how much was in Pell grants and how much in FFEL loans. 6. According to the Departments records, state the fol lowing information regarding the FFEL obligations of the four named plaintiffs: a. The date(s) and amount of any disbursement; b. The lender and guaranty agency; c. The period of attendance; d. Payments made by the borrower; and e. The current holder and balance outstanding. 7. Identify all institutions besides Andover that partici pated in Title IV during the time period 19861990 and that were accredited by the National Home Study Council (now known as the Distance Education and Training Coun cil). 8. State the number of applications or requests for re view filed with the Department regarding requests for false certification discharges of FFEL obligations attributable to enrollment in Andover, and for each of these applica tions or requests for review provide the following informa tion: a. The borrowers name and the town and state of his residence; b. The date the loan was disbursed; c. The city where FFEL documents were signed; d. The date the application or request for review was submitted to the Department ; e. The status of the application or request for review (approved, denied or pending); and f. As to applications or requests for review denied by the Department, the reason for the denial. 9. State the facts upon which Defendant relied in deter mining that violations of its abilitytobenefit regulations occurred at Andover during the period June 1, 1986 to April 30, 1989, and identify all documents that pertain to or that were sources for this determination.

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18. As to all false certification discharges approved by the Department as of December 31, 1998, list the dis charges by school and by numbers of discharges attribut able to each school. 19. Identify the employee(s), present or past, including those who are currently holding different positions, who are most knowledgeable about: a. The Departments policies, procedures and practices regarding the false certification discharge program; b. The decisions that were made regarding the individ ual plaintiffs applications; c. The decisions made regarding the group discharge request pertaining to Andover; and d. The data utilized by or generated by the false certifi cation discharge program. 20. Identify all documents or other information that per tain to or were relied on in processing the applications or requests for review submitted to the Department by the four named plaintiffs. 21. State the number of people who were sent letters through the mass mailing directed to all FFEL borrowers who received loans from Andover Tractor Trailer School between January 1986 and August 1990, as stated in the February 6, 1997 letter from Barney Gumble to [Attorney for Plaintiff] (Exhibit D to the Amended Complaint) and explain how the Department selected the individual bor rowers who were sent such letters. 22. Did the Department include in its mass mailing to Andover borrowers those borrowers whose loans are held by guaranty agencies, such as ASA? If not, why not? 23. Describe and identify any conversations, correspon dence, directives, or other documents between employees of the Department and guaranty agencies regarding An dover or regarding false certification eligibility of borrow ers who attended Andover? 24. Describe all data that the Department has access to regarding the submission to and determination of false cer tification discharge applications by guaranty agencies from former students of Andover. To the extent it is available, provide the information requested in interrogatory 16 and 17. 25. Identify the employee of ASA who is most knowledge able about that agencys false certification discharge pro gram. 26. At the time the Department adopted its false certifi cation regulation, did it consider the applicability of a schools false certification that a borrower was in attendance and making satisfactory progress? If not, why not? If it was considered, identify all documents pertaining to such con sideration. 27. Did the Department contact the Distance Education and Training Council regarding the request for group dis charge of Andover borrowers, or regarding the discharge requests of the named plaintiffs? If not, why not? If so, identify the conversations that took place and all docu ments pertaining to such contact. 28. List any other civil actions filed against the Defen dant or the Department regarding the false certification

10. State the facts upon which Defendant relied in deter mining that circumstances regarding Andovers compli ance with abilitytobenefit regulations changed after April 30, 1989, and identify all documents that pertain to or that were sources for this determination. 11. Explain the basis for Defendants conclusion that a school purporting to run a commercial driving program, could, consistent with Title IV rules, enroll as students individuals who were not licensed drivers and fabricate drivers license credentials for them as part of the enroll ment process. 12. Describe the process by which the Department re ceives, reviews, and decides applications for false certifica tion discharge of student loans (and, if different, the pro cess regarding reviews of guaranty agency denials), includ ing in this description the following: a. The location of the office that does the work; b. The number of employees doing the work, expressed both in terms of the number of individuals involved and the peoplehours per week involved in the work; c. A description of the role or responsibility performed by each of the people included in the answer to b; d. The name and job title of each of the employees who has the authority to make a decision, and the name and job title of any employee(s) who review such decisions (and have the authority or responsibility of changing such deci sions); e. The information sources for making decisions, includ ing a description of any databases, document collections or other material routinely relied on; and f. A description of any system (formal or de facto) for prioritizing applications for decision. 13. Provide the same description called for in interroga tory #12 for the process concerning requests for group discharges. 14. Is the Department accumulating information gath ered through individual false certification requests, or from other sources, for the purpose of identifying problem schools and those borrowers who have not applied for but who are likely eligible for false certification discharges? If not, why not? If so, describe what the Department is doing, include a description of the nature of the information, how it is being organized, what is being done with the information and the individuals involved. 15. Regarding the Departments closedschool discharge program, describe and explain any differences between that program and the false certification discharge program, in cluding all of the aspects of the false certification program described in response to interrogatories 1214. 16. For each of the fiscal years 19961998, provide the following data: a. Number of false certification discharge requests (or requests for review of guaranty agency denials of false cer tification applications) received; b. Number of approvals and aggregate dollar amount of loan liabilities that were discharged; and c. Number of denials. 17. As of the end of December 1998, how many loans, representing how many loan dollars have been discharged pursuant to the false certification discharge program?

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discharge program, including the court and case number and the name and telephone number of the plaintiffs at torney. 29. Identify all individuals that participated in answer ing these interrogatories and specify the particular areas of their knowledge. 30. Identify all individuals Defendant intends to call as witnesses or that have knowledge of facts or policies rele vant to this case. REQUESTS FOR PRODUCTION OF DOCUMENTS 1. All documents referred to in the above Interrogato ries and all those identified or used in the prepara tion of answers to the above Interrogatories. 2. The Contract Services Branch Weekly Report for a) the last week of September 1998 and b) the week ending February 19, 1999. 3. The letter sent to Andover borrowers in the mass mailing referred to in interrogatory 21. 4. All documents pertaining to the false certification applications of the four named plaintiffs. 5. All documents pertaining to the group discharge re quest regarding Andover. 6. All documents pertaining to the Departments re view, audit, evaluation or planning of the false certifi cation discharge program. 7. Copies of the guaranty student loan application and promissory notes for each of the four named plain tiffs. [Attorney for Plaintiff]

9.1.3

trade school that at the time did business in Philadelphia. She thus was ineligible under the Higher Education Act and regulations of the defendant Secretary of Education (the Department) to participate in the financial aid pro gram unless AID determined through proper testing that she had the ability to benefit from the training program. The test that AID administered to Ms. Krabapple to make this determination was a simple alphabetizing and number comparison test that was completely unrelated to her Nurse Assistant training. This test was not administered in accor dance with the test publishers instructions, nor in accor dance with the requirements of AIDs accrediting agency. According to the Departments regulations, therefore, AIDs falsely certified Ms. Krabapples ability to benefit from its training. Hence, the Departments denial of Ms. Krabap ples request for a discharge of her student loans pursuant to the 1992 amendments to the Higher Education Act was arbitrary, capricious, and contrary to law. Ms. Krabapple seeks a judgment that she is entitled to a discharge of her student loans. I. REGULATORY BACKGROUND AND FACTS OF THE CASE A. HOW TRADE SCHOOLS PARTICIPATING IN THE FEDERAL FINANCIAL AID PROGRAM CAN ADMIT STUDENTS WHO LACK HIGH SCHOOL CREDENTIALS Title IV of the Higher Education Act of 1965 (HEA or Title IV), as amended, 20 U.S.C. 1070 et seq., cre ates various educational grant and loan programs designed to assist students in paying the cost of postsecondary edu cation. The guaranteed student loan (GSL) program, now known as the Federal Family Education Loan Program (FFEL), is one of those Title IV programs, providing loans for students to attend postsecondary institutions, in cluding colleges, universities, and vocational training schools. The loans are issued by banks and other lenders, guaran teed in most cases by a state or nonprofit guarantee agency such as the Pennsylvania Higher Education Assistance Agency (PHEAA) or United Student Aid Funds (USAF, now USAGroup Guarantee Services, Inc.) and ultimately reinsured by the federal government. If a student does not repay the loan, the United States eventually pays the holder of the loan, and then attempts to collect the unpaid amount from the student, often using the guarantee agencies as collection agents. 20 U.S.C.A. 1078, 1080 (1998). To qualify for a GSL, the student must be an eligible student, id. 1091; 34 C.F.R. 668.31668.39 (1997) (for merly 668.7), and the school must be an eligible institu tion, 34 C.F.R. 600.1600.11 (1997), under the Depart ments regulations. Ordinarily, one would expect students to obtain a high school diploma or its equivalent before enrolling in postsecondary education. However, many pro prietary trade schools, and some community colleges, ad mit students without high school diplomas or the equiva lent. In the late 1970s and early 1980s the Higher Educa tion Act was amended to allow more students without a high school diploma or G.E.D., and the schools that admit them, to qualify for financial aid by showing that the stu dents had the ability to benefit (ATB) from postsec

9.1.3 Memorandum of Law Supporting Summary Judgment

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF PENNSYLVANIA
) ) Plaintiff ) ) v. ) ) MOE SZYSLAK, Secretary, United ) States Department of Education, ) Defendant. ) ) EDNA KRABAPPLE,

MEMORANDUM OF LAW IN SUPPORT OF PLAINTIFFS MOTION FOR SUMMARY JUDGMENT Plaintiff Edna Krabapple brought this action for a dis charge of her federallyguaranteed student loans, pursuant to 20 U.S.C. 1087(c), because the trade school she at tended falsely certified her as eligible for the loans. Ms. Krabapple did not have a high school diploma or G.E.D. when she enrolled in a Nurse Assistant training program at the American Institute of Design (AID), a forprofit

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Consumer Law Pleadings Number Five

7).4 Adding these criteria to the federal financial aid re quirement that mandated the use of an established ATB test, AID was operating within a relatively clear regime for its ATB determinations. First, it had to follow the instruc tions accompanying the nationally recognized, standard ized or industry developed test itself. Second, it had to conduct periodic studies . . . to document the reliability of the test as an effective measure of students ability to benefit from the schools training programs, i.e., it had to study the extent to which the individuals it admitted ulti mately were able to complete the program and obtain em ployment in their field of training. As will be demon strated, AID failed to comply with each of these require ments. B. CONGRESSIONAL ENACTMENT OF THE FALSE CERTIFICATION DISCHARGE PROGRAM AS A RESPONSE TO WIDESPREAD ADMISSIONS ABUSES BY TRADE SCHOOLS From 1989 to 1991, the U.S. Senate Subcommittee on Investigations of the Committee on Governmental Affairs, chaired by Senator Sam Nunn, studied the rapid escala tion of loan default costs in the GSL program in the 1980s. United States Senate, Permanent Subcommittee on Inves tigations of the Committee on Governmental Affairs, Abuses in Federal Student Aid Programs, S. Rep. 10258 (1991) (Nunn Report) (attached hereto as Exhibit 1).5 The Subcommit tee focused on fraud and abuse by the forprofit trade schools, which accounted for a disproportionate share of GSL default dollars. The Subcommittees report identified several trade school practices that contributed to fraud, abuse, and waste of GSL funds, including fraudulent admis sion of ability to benefit students. Nunn Report at 13. The Subcommittee concluded that the mechanism on which [Guaranteed Student Loan Program] oversight of schools dependsthe Triad of licensure, accreditation, and certification/eligibilityprovides little or no assurance that schools are educating students efficiently and effectively. Id. at 33. Among the Subcommittees recommendations were the following: (2) Congress and the Administration must hold the U.S. Department of Education accountable for the regulation and oversight of the [Guaran teed Student Loan Program]. In the past, the Department has effectively abdicated its GSLP oversight responsibilities to private accrediting bodies, State licensing authorities, and guaranty
4 As can be seen by these criteria, NATTS did not itself require ATB testing, and instead listed testing as one of several allowable methods for making entrance decisions regarding ATB students, including, apparently, a bare interview. It did, however, require ongoing assessment by the school that measured whether the par ticular method used was effectively admitting only those individu als who had the ability to benefit. Of course, if a NATTS school wanted to obtain federal financial aid on the students behalf, its choice of methods was limited to those allowed by Title IV rules. 5 The court may take judicial notice of this report. Overfield v. Pennroad Corp., 146 F.2d 889, 898 (3d Cir. 1944); see also, e.g., Carolene Products Co. v. United States, 323 U.S. 18, 21 (1944).

ondary education or training. 20 U.S.C. 1091(d). The ability to benefit rules for financial aid eligibility have gotten progressively more strict, but they have generally allowed schools to use standardized ATB tests to deter mine whether a prospective student without high school credentials had the requisite ability to benefit. In July 1988, when plaintiff Edna Krabapple enrolled at AID, the statute required that the student first be administered a nationally recognized, standard ized or industry developed test, subject to crite ria developed by the appropriate accrediting as sociation, measuring the applicants aptitude to complete successfully the program to which the applicant has applied. . . . 20 U.S.C.A. 1091(d)(3)(A) (1990).2 Thus, during the time period at issue in this case, a trade school seeking to obtain financial aid for students lacking high school credentials was required to use en trance testing procedures that complied with two general requirements. First, the schools choice of tests was limited to only nationally recognized, standardized or industry developed ATB tests. And second, to the extent the schools accrediting criteria imposed additional requirements, those requirements, too, had to be followed. AID, the school involved in this case, was accredited by the National Association of Trade and Technical Schools (NATTS).3 As of July 1988, the NATTS accrediting cri teria pertaining to ATB testing provided as follows: If the school enrolls a person who does not have a high school diploma or a GED, but admits the individual based on ability to benefit, the school must document the basis on which ability is de termined. The documentation is left to the dis cretion of the institution and may use one or more of the following: standardized test, practi cum examination, interview, prior work experi ence, or other measurement indicators. Periodic studies are to be conducted to document the reli ability of the entrance requirements for all students. Accrediting Commission, National Association of Trade and Technical Schools, Standards for Accreditation, Document C, Section VI (A)(7) (Jan. 28, 1997) (emphasis added). Administrative Record (A.R.) 32 (as referenced at A.R.
2 In 1988, ATB students could also pass the eligibility threshold under two alternative methods: a student was eligible if she com pleted a program of remedial education from her school or if she obtained a G.E.D. before completing the program. 20 U.S.C.A. 1091(d)(1), (2) (1990). It is undisputed that AID used testing, rather than one of these alternative mechanisms, to determine ability to benefit. 3 This organization is currently named the Accrediting Commission of Career Schools of Colleges of Technology (ACCSCT). A.R. 1. It is one of seven accrediting entities that accredit the vast majority of trade schools receiving federallyguaranteed loan funds. See United States Senate, Permanent Subcommittee on Investiga tions of the Committee on Governmental Affairs, Abuses in Fed eral Student Aid Programs, S. Rep. 10258, at 4 (1991) (Nunn Report) (attached hereto as Exhibit 1).

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agencies. Experience has proven that those bod ies have neither the motivation nor the capabili ties to effectively police the program. .... (15) The Department of Education must de velop ways to assist those students who continue to be victimized by fraud and abuse within the GSLP. Because the Departments oversight sys tems have failed, students who have not re ceived the education promised have been left responsible for loans that they cannot repay and, therefore, on which they all too often default. The Department must not only increase efforts to prevent this type of abuse in the future, but also work with students to ease financial bur dens imposed as a result of past abuse. Id. at 34, 37. In response to the growing evidence of ATB fraud, as noted by the Nunn Committee and similar findings of the General Accounting Office and the Education Depart ments Inspector General,6 Congress began tightening the ATB eligibility rules in the early 1990s, mandating that admissions tests be administered by an independent tester. Congress also took review of ATB testing out of the hands of the accrediting agencies and mandated that the Depart ment itself approve the tests and the cutoff scores to be used. 20 U.S.C.A. 1091(d)(1) (1998). As required, the Department has since published lists of tests it has ap proved for determining a students ability to benefit from training. 55 Fed. Reg. 52160 (Dec. 19, 1990); 57 Fed. Reg. 62440 (Dec. 30, 1992); 61 Fed. Reg. 55542 (Oct. 25, 1996).7 In 1992 Congress also acted on the Nunn Reports rec ommendation regarding help for victims of admissions fraud by enacting the false certification loan discharge provision. Higher Education Act Amendments of 1992, Pub. L. 102 325, 428, 106 Stat. 551 (1992). The law as amended in 1993 provides that: If a borrower who received, on or after January 1, 1986, a loan made, insured, or guaranteed un der this part and the student borrower, or the stu dent on whose behalf a parent borrowed, is unable to complete the program in which such student is enrolled due to the closure of the institution or if such students eligibility to borrow under this part was falsely certified by the eligible institution, then the Secretary shall discharge the borrowers liability on the loan (including interest and collection fees) by repaying the amount owed on the loan and shall subsequently pursue any claim available to such borrower against the institution and its affiliates

9.1.3

and principals or settle the loan obligation pursu ant to the financial responsibility authority under subpart 3 of part G. 20 U.S.C.A. 1087(c)(1) (1998) (emphasis added). The law also provides that students entitled to this discharge shall not be precluded from receiving additional grants, loans, or work assistance . . . for which the borrower would be otherwise eligible (but for the default on such discharged loan), and requires the Secretary to report the discharges to credit bureaus. Id. 1087(c)(4), (5). In 1994, the Department issued regulations implement ing the false certification provision of section 1087(c). These regulations provide that [t]he Secretary reimburses the holder of a loan received by a borrower on or after January 1, 1986, and discharges a current or former borrow ers obligation with respect to the loan . . . if the borrowers . . . eligibility to receive the loan was falsely certified by an eligible school. . . . A stu dents eligibility to borrow shall be considered to have been falsely certified by the school if the school (A) Certified the students eligibility for a FFEL Program loan on the basis of ability to benefit from its training and the student did not meet the applicable requirements described in 34 CFR Part 668 and section 484(d) of the Act, as appli cable and as described in paragraph (e)(13) of this section. . . . 34 C.F.R. 682.402(e)(1)(i) (1997). Paragraph (e)(13) of section 682.402 then sets forth the relevant requirements for eligibility for federallyguaranteed student loans based on ability to benefit from training. Students such as the plaintiff in this case, who enrolled in training after July 1, 1987, are considered to have had the ability to benefit from training if they achieved a passing grade on a test (1) Approved by the Secretary, for periods of enrollment beginning on or after July 1, 1991, or by the accrediting agency for other periods; and (2) Administered substantially in accordance with the requirements for use of the test. . . . Id. 682.402(e)(13)(ii)(B). Under the Departments reg ulation, requests for false certification discharges must be directed at the first step to the guarantee agency holding the applicants loan. In the event the application is denied, the borrower can request a de novo review by the Depart ment. Id. 682.402(e)(9). C. PLAINTIFFS ADMISSION INTO A NURSE ASSISTANT PROGRAM BASED ON HER PERFORMANCE ON A CLERICAL APTITUDE TEST Plaintiff Edna Krabapple enrolled in a 6month Nurse Assistant program at AID on July 22, 1988. A.R. 13738. According to the school catalogue, the purpose of the pro

6 See, e.g., United States General Accounting Office, GAO/HRD91 82BR, Student Loans: Characteristics of Defaulted Borrowers in the Stafford Student Loan Program (1991); Office of Inspector General (United States Education Department) Audit Report 0300001 (1991) (audit of PTC Career Institute). 7 Not surprisingly, the Roeder testthe test involved in this case was not among the tests approved by the Department.

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suring because of her weakness in basic math skills. A.R. 183. In searching for a job after completing the AID pro gram, she discovered that prospective employers were not interested in hiring a 17yearold without a high school education. AID referred her to a nursing home for a try out, but she was unable to remain at that position because the nursing home expected her to do things she did not know how to do, such as taking blood pressure. A.R. 18384. Later testing revealed that Ms. Krabapples grade equiva lent in number operations was 7.9, meaning she had less than an eighth grade ability in this area. A.R. 184, 194. D. THE DEPARTMENTS DENIAL OF PLAINTIFFS REQUEST FOR A FALSE CERTIFICATION DISCHARGE On June 29, 1995, Ms. Krabapple applied for a false certification discharge to the two guarantee agencies hold ing her loans, USAGroup Guarantee Services, Inc. (for merly United Student Aid Funds) and the Pennsylvania Higher Education Assistance Authority. A.R. 176, 301. In support of her applications, she submitted, among other things, a declaration concerning her admission, a copy of the Roeder test that was administered to her and her an swer sheet, correspondence with AID, a news articles con cerning AID, copies of NATTS accrediting material, and an explanatory letter by her counsel. A.R. 176220, 301344. Both of these agencies denied her application, A.R. 70, 291. Ms. Krabapple appealed both denials to the Depart ment. A.R. 1, 76. On January 17, 1997, the Department issued a final decision denying Ms. Krabapples applica tion for a false certification discharge. A.R. 1 (also at tached as Exhibit A to the Complaint). The Department gave several reasons for its denial. It concluded that NATTS did not impose any requirements on AID regarding its use of the Roeder tests, and that the Roeder manual itself allows one of the six test batteries to be used without using others. It also relied on the facts that Ms. Krabapple ultimately completed the program and, upon completion, seemed satisfied with her experience at AID. Finally, after obtaining copies of reviews of AID con ducted by NATTS and by PHEAA, the Department stated that it is aware of no reviews conducted in 1988 which made adverse findings about the ATB testing at AID, apparently relying on this fact as evidence that AID was in fact complying with Title IV ATB requirements.9 As a re sult of this decision, the Department advised Ms. Krabap ple that she will continue to be responsible for repayment of her loans. This appeal followed.

gram was to prepare students to work as a nurse assistant or home health care aide for a hospital or other health care facility. A.R. 126. At the time she enrolled, she was 17 years old, had only an eighth grade education, and was dependent on public assistance for her income. A.R. 183, 440. She was attracted to the school by a flyer inviting people without high school degrees to apply. A.R. 183, 214. When she applied she was administered a brief test (described by AID as an aptitude evaluation, A.R. 189), ostensibly for the purpose of determining her ability to benefit from the Nurse Assistant course. A.R. 183. She correctly answered 57 of 64 questions on this test. A.R. 19093. Based on plaintiffs performance on this test, the school enrolled her, arranged a financial aid package, and, as a result, obtained approximately $5,000 in Title IV funds. A.R. 397, 449. The financial aid package included two GSLs, one guaranteed by PHEAA and one guaranteed by United Student Aid Funds (now USAGroup Guarantee Services, Inc.). (A.R. 231, 419, 421, 426).8 The aptitude evaluation used by AID was part of a commercially purchased series of tests called the Aptitude Tests for Occupations devised by Wesley S. Roeder (the Roeder tests). A.R. 190. These tests were not designed by their author as ATB tests; instead, they were devised as aids in the vocational counseling of high school stu dents, college students, and adults. A.R. 197. The overall test consisted of six parts, each part measuring a distinct area of aptitude: personalsocial, mechanical, gen eral sales, clerical routine, computational, and scien tific aptitude. A.R. 198. The manual for using the Roeder tests lists patterns of occupations related to each of the six areas of aptitude, and to combinations of aptitudes. A.R. 20103. The manual instructs that the test user to consider the occupations listed under each area of aptitude, or the combination of aptitudes, on which examinee scores the highest. A.R. 204. AID administered only the clerical routine portion of the Roeder tests to Ms. Krabapple. A.R. 37. This test mea sures four types of skills: namechecking, numberchecking, alphabetizing, and spelling. A.R. 198. Not surprisingly, the occupations listed in the test manual as being related to this form of aptitude are entirely clerical; none is related in any way to nursing or to health care. A.R. 20102. Al though the occupational patterns list does not include Nurse Assistant, it does include the similar occupations of Den tists Assistant, Doctors Assistant, and Nurse; each of these occupations is listed as related to personalsocial or sci entific aptitudes, or to both. Id. Ms. Krabapple completed her training, which involved the study of geriatrics, nursing procedures, anatomy, and physiology. A.R. 270, 126. However, she had difficulty in understanding and performing clinical tasks involving mea
8 In 1992 alone, nearly $2.3 million in Title IV loans and grants were paid to AID. More than 47 percent of the schools students defaulted on their loans that year, giving the school the dubious distinction of having the 5th highest default rate among career schools in the state of Pennsylvania. A.R. 217. As a result of AIDs high default rates, the Department eventually terminated the schools eligibility to participate in Title IV, resulting in the schools clo sure. See Complaint and Answer, k 9.

9 The Department also rejected an additional argument made by plaintiff regarding AIDs failure to follow the time requirements for administering the Roeder test. This aspect of the Depart ments decision is not being appealed.

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II. ARGUMENT THE DEPARTMENTS ACTION, IN DENYING PLAINTIFFS REQUEST FOR A FALSE CERTIFICATION DISCHARGE, WAS ARBITRARY AND CAPRICIOUS AND CONTRARY TO LAW BECAUSE THE DEPARTMENT DID NOT PROPERLY APPLY ITS OWN FALSE CERTIFICATION REGULATION AND BECAUSE THE DEPARTMENT RELIED ON IMPERMISSIBLE CONSIDERATIONS. Judicial review of informal agency adjudication, such as the Departments decision to deny Ms. Krabapples re quest for a false certification discharge, is governed by the Administrative Procedure Act. The pertinent section pro vides that the court shall hold unlawful and set aside agency action, find ings, and conclusions found to be (A) arbitrary, capricious, an abuse of discre tion, or otherwise not in accordance with law. . . . 5 U.S.C.A. 706(2)(A) (1998). Section 706 require[s] the reviewing court to engage in a substantial inquiry. Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 415 (1971); C.K. v. New Jersey Dept of Health & Human Services, 92 F.3d 171, 182 (3d Cir. 1996). In determining whether an agencys action was un lawful under 706(2)(A), the court must consider whether the decision was based on a consideration of the relevant factors and whether there has been a clear error in judg ment. Overton Park, 401 U.S. at 416 (citations omitted); C.K., 92 F.3d at 182. If the court determines that the agency relied on factors Congress did not intend for it to con sider, or has failed to consider an important as pect of the problem, then the action should be set aside as arbitrary and capricious. Frisby v. U.S. Dept of Housing and Urban Development, 755 F.2d 1052, 1055 (3d Cir. 1985) (citing Motor Vehicle Mfrs. Assn v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)). An agency is bound by its own regulations. See United States v. Nixon, 418 U.S. 683, 696 (1974). If an agencys action does not comport with its regulations, the action is contrary to law and should be reversed by a reviewing court. See Frisby, 755 F.2d at 105556; Kelly v. Railroad Retirement Board, 625 F.2d 486, 49192 (3d Cir. 1980). The governing standard for evaluating plaintiffs re quest for a false certification discharge under 20 U.S.C. 1087(c) is found at 34 C.F.R. 682.402(e)(13)(ii)(B) (1997). For the time period corresponding to AIDs enrollment of Plaintiff, the ATB test used to measure her ability to ben efit must have been (1) [a]pproved . . . by the accredit ing agency, and it must have been (2) [a]dministered substantially in accordance with the requirements for use of the test. Id. If the ATB test administered to her failed to meet either of these criteria, then, under the Depart

9.1.3

ments regulation, AID falsely certified her eligibility for Title IV funding, and she is entitled to a discharge. In denying plaintiffs application for a false certification discharge, the Department acted arbitrarily and capri ciously and contrary to law by failing to follow its own regulation. It ignored the regulations plain language and, instead, used an analysis that rendered the regulation mean ingless. The Departments analysis also departed from the statutory directions and intent concerning ATB admissions practices and concerning the consideration of false certifi cation discharge applications. That this was an arbitrary and capricious departure from governing law is demonstra ble in several ways. First, the Department collapsed the required inquiry into compliance with the standardized test publishers instructions into the totally separate inquiry into accrediting agency approval, effectively rendering the former inquiry meaningless. Second, the Department failed to an alyze the accrediting agencys ATB requirements and so ignored AIDs failure to comply with the NATTS require ment that schools conduct periodic studies documenting the reliability of their entrance testing practices. Finally, the Department improperly considered factors that were irrelevant to the criteria set forth in the regulation enti tling students to a discharge. 1. The Department Made a Clear Error in Judgment in Determining That the Roeder Test Was Administered Substantially in Accordance with the Requirements for the Use of the Test. Ms. Krabapple is entitled to a false certification dis charge if AID did not administer the Roeder test to her substantially in accordance with the requirements for the use of the test. 34 C.F.R. 682.402(e)(1)(i)(A), (e)(13)(ii)(B)(2) (1997).10 As she demonstrated in her ap plication, AID used a commercial test that on its face was not designed as an ATB test, and then ignored the test publishers explicit instructions regarding which parts of the test measure aptitude for which kinds of jobs. For a training program designed to prepare unskilled people for work as nurse assistants in nursing homes or hospitals, the school used only the Clerical Routine part of the Roeder test, testing such aptitudes as the ability to recognize which listed name or number matches a given name or number, A.R. 191, and the ability to alphabetize four listed names, A.R. 192. AID chose not to use the Scientific and PersonalSocial parts of the Roeder test, despite these being the parts that the test publisher stated were appropriate for measuring aptitude for jobs in health care fields. AID was seemingly more interested in making sure ATB applicants were admitted into the schooland in col lecting students financial aid awardsthan in conducting any sort of serious evaluation of their capabilities. As a result, Ms. Krabapple enrolled in the six month course, incurring $5,000 in student loan debt, only to learn upon
10 Under the regulation, proper ATB testing in July 1988 was contin gent on both the approval of the accrediting agency and on using the test in a manner substantially in accordance with the test requirements. Thus, if AID fell short regarding either of these factors, Ms. Krabapple is entitled to a discharge.

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rent regulation governing ATB testing requires that tests be properly administered, 34 C.F.R. 668.151(a)(2) (1997), and define that term as follows: [t]he Secretary considers that a test is prop erly administered if the test administrator ... (2) Administers the test in accordance with instructions provided by the test publisher, and in a manner that ensures the integrity and secu rity of the test. . . . Id. 668.151(d). Thus, it is the Roeder manual itself, not the action or inaction of NATTS, that provides the source material for determining whether or not AID administered the Roeder test substantially in accordance with the requirements of the test. Contrary to the Departments outofcontext quo tation from the manual, the Roeder test instructions pro vide no basis for using the clerical routine test to assess a students ability to benefit from training to be a Nurse Assistant. The design of the Roeder test is to test students for various aptitudes, so that students may consider occu pations in the areas of their strengths. The publishers man ual instructs examiners to convert the students raw scores into percentile ranks. A.R. 204. Then, [i]f an examinee has only one high percentile rank, the vocations in that particular field should be considered. If, for instance, he ranks high in Test 3, the occupational patterns listed under the number 3, on page 6 should be considered. If an examinee has two high percentile ranks, the numbers of the two fields in which he ranked highest should be combined, placing the smaller number first. For instance, if he is high in the Clerical Routine and Computational fields (num bers 4 and 5), the numbers of these two fields should be combined into the number 45. There fore, the occupational patterns listed under 4, 5, and 45 should be used by the counselor. Id. The instructions conclude that Regardless of where an individuals profile falls, the jobs of the occupational pattern list in which he has the highest aptitude should be considered. Id. The jobs in the occupational pattern listed as related to the clerical routine aptitude for which Ms. Krabapple was tested are, of course, clerical jobs with no relationship to the training in geriatrics, anatomy, physiology, and nursing procedures that AID provided. Although the occupation of Nurse Assistant does not appear on Roeders list of occupational patterns, the closelyrelated occupations of Nurse, Dentists Assistant, and Doctors Assistant appear under scientific or personalsocial aptitude, or a com bination of these aptitudes. A.R. 20102. If any of the Roeder teststests not designed to measure ability to benefit from training at all, but rather designed for vocational counseling were to be used to measure ability to benefit from Nurse

graduating that health care facilities were not interested in hiring a teenage high school dropout who, among other things, could not take simple measurements on medical equipment. The Departments explanation for denying Ms. Krabap ples claim for a discharge on the basis that AID did not administer its ATB test substantially in accordance with the requirements for use of the test was as follows: You also argue that your loans should be dis charged because AID did not comply with the test publishers requirements for use of the test as the school used the Roeder Clerical test to test students for admission on the basis of ATB. You suggest the school should have used the Per sonal Social and Scientific tests rather than the clerical test. . . . NATTS did not mandate how a school used the test instruments it selected in July, 1988. The manual for the Aptitude Test for Occupations submitted with your discharge ap plication provides that the tests, [sic] can be used as a basis for aiding the selection of subjects in high school and colleges. While the Aptitude Test for Occupations can be used as a battery of six tests, the manual states that [a]ny one test or a combination of test [sic] may be administered. Test Manual at 3. .... Based on a review of the accrediting agency standards and the materials submitted with your application, the Department cannot conclude that you were not tested substantially in accordance with the requirements for use of the test. A.R. 2. Thus, the Department gave two reasons for concluding that AID had substantially complied with the require ments of the Roeder test. The first was that NATTS did not mandate how a school used the test instruments it selected in July, 1988. The second was that the Roeder manual stated that it was possible to use one of the parts of the test or a combination of parts. Both of these reasons are patently capricious and contrary to law. As to the first reason articulated, the Departments anal ysis collapses into the inquiry regarding compliance with the requirements for the use of the test a second inquiry of whether the accrediting agency disapproved the test. Hav ing found no accrediting agency disapproval, the Depart ment apparently concluded that AID was essentially free to do what whatever it wanted. Under the Departments interpretation, a school could administer an untimed typ ing test, despite requirements built into the test that it be timed, as long as the accrediting agency never explicitly told the school not to. However, the structure of the regu lation itself makes the accrediting agencys approval or dis approval a separate question from whether the test require ments were followed. The Departments own regulations make clear that a test is not properly administered if it is not administered in accordance with the test publishers requirements. The cur

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Assistant training, it should have been the tests measuring these wholly different aptitudes. Although, as the Department notes, the manual does state that [a]ny one test or any combination of tests may be administered, the manual gives no suggestion that ex aminers could use one test to measure aptitude for unre lated occupations. Certainly, if a student shows an interest in a particular occupation, an examiner might choose to administer only one test to determine whether the student shows aptitude in the area of her interest. However, that one test tells nothing about the students aptitude for other occupations. The Departments logic would yield absurd results: if the score on one test used in isolation can dem onstrate ability to benefit from training in an unrelated field, then a school could use the general sales portion of the Roeder test to measure ability to benefit from train ing as an aeronautical engineer, or could use the me chanical aptitude test for to show ability to benefit from training to be a taxation accountant. Because the requirements for the use of the Roeder test instruct that each test only be used to measure aptitude for the related list of occupations, and because the occupation of Nurse Assistant is unrelated to clerical routine aptitude, the test given Ms. Krabapple was not administered substan tially in accordance with the requirements for use of the test. The test therefore did not meet the requirements of 34 C.F.R. 682.402(e)(13)(ii)(B)(2). By focusing only on the single state ment in the manual that any one test . . . may be adminis tered, the Department essentially ignored the manuals clear directions regarding which single test parts or combination of parts were relevant to measuring aptitude for which jobs. The conclusion that the Roeder publisher endorsed the prac tice of giving a simple clerical test to applicants for a health care training program was without any reasonable basis what soever, and, as such, was capricious and contrary to law. 2. The Department Made a Clear Error in Judgment in Determining that the Clerical Routine Portion of the Roeder Tests Was Approved by AIDs Accrediting Agency. The false certification regulation provides that a student is not considered to have had the requisite ability to bene fit unless she achieved a passing grade on a test . . . [a]p proved . . . by the accrediting agency. 34 C.F.R. 682.402(e)(13)(ii)(B)(1) (1997). In this case, as of July 1988, AIDs accrediting agency had neither approved nor disapproved the schools use of the Roeder clerical rou tine as an appropriate instrument for measuring ability to benefit. The meaning of this accrediting approval consid eration, however, comes from the abilitytobenefit rule that was in effect at the time of Plaintiffs admission to AID. The relevant statutory language limited ATB enroll ments to those individuals passing a nationally recog nized, standardized or industry developed test, subject to criteria developed by the appropriate accrediting association. 20 U.S.C.A. 1091(d)(3)(A) (1988) (emphasis added). The false certification regulation, by requiring separate reviews of the test publishers instructions and of the accrediting commission approval, corresponds to the statutes two part requirement for schools use of testing to admit ATB

9.1.3

students, that the test be an established test (and adminis tered in accordance with the requirements that accompany the test) and that it be used in a way that conforms to applicable accrediting criteria. In its denial of Ms. Krabapples application, the Depart ment implicitly agreed that the analysis of whether the accrediting agency approved the use of a particular ATB test involves a determination of whether the school com plied with applicable accrediting criteria regarding ATB testing. However, rather than actually applying the appro priate criteria to this case, the Department did little more than refute what plaintiff believed, at the time of her appli cation, to be the relevant accrediting criteria. A proper analysis of the actual NATTS standards shows that AID did not comply with even the lenient accrediting criteria in effect when it admitted Ms. Krabapple into the school. The Department, AID, and plaintiffs counsel have had some difficulty identifying NATTSs ATB requirements at the time of Ms. Krabapples application. After Ms. Krabap ple applied for a false certification discharge, the Depart ment obtained a chronology from NATTS of its ATB re quirements. This chronology provides the following sum mary of the ATB requirements at the relevant time: Document C, Section VI(A)(7) of the Accrediting Standards describes the criteria the Commission uses to determine a schools compliance with ac crediting standards. The Commission does not wish to be prescriptive in either the method or materi als that a school may use and encourages all accred ited schools to carefully study and select the most appropriate process for its students. A.R. 7. The referenced Section VI(A)(7)not provided to the Department by NATTS but included in an AID sub mission to the Departmentprovides: If the school enrolls a person who does not have a high school diploma or a GED, but admits the in dividual based on ability to benefit, the school must document the basis on which ability is deter mined. The documentation is left to the discretion of the institution and may use one or more of the following: standardized test, practicum examina tion, interview, prior work experience, or other mea surement indicators. Periodic studies are to be con ducted to document the reliability of the entrance requirements for all students. A.R. 32. Thus, at the time of Ms. Krabapples enrollment at AID, NATTS required schools seeking accreditation to conduct periodic studies . . . to document the reliability of the entrance requirements for all students. See also A.R. 67 (another statement of NATTSs ATB criteria, includ ing the requirement to conduct periodic studies).11
11 In January 1989, NATTS amended its accreditation criteria to require that ATB tests be reviewed by a qualified thirdparty, such as an expert in tests and measurements, for both the appro priateness of the test and the specific score levels required for admission into each program. A.R. 34. When in 1993 plaintiffs

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odic studies of the reliability of its entrance requirements is compelling evidence that AID was not in compliance with NATTSs criteria for use of the ATB tests. Conse quently, the test was not approved by the accrediting agency, and AID did not satisfy the requirements of 34 C.F.R. 682.402(e)(13)(ii)(B)(1). Rather than inferring from this absence of evidence of reliability studies that AID failed to comply with the NATTS criteria, the Department came to precisely the opposite conclusion: it essentially treated the absence of an explicit finding by NATTS that AID was in violation of its ATB requirements as NATTS approval of AIDs ATB testing. In other words, the Department failed to conduct its own independent analysis of whether AID was complying with its accrediting criteria, and, instead looked to the absence of some affirmative disapproval by NATTS as the critical fact. This was a clear departure from the kind of inquiry that the false certification regulation contemplates and, therefore, constituted an error of law. As will now be discussed, this complete reliance on the assumed integrity of oversight by the accrediting agencies is also unreasonable given the legislative context that gave rise to the false certification discharge in the first place. Specifically, Congresss adoption of the false certification discharge to provide relief to victimized students stemmed in part from the conclusion of the Nunn Report that ac crediting commissions had turned blind eyes to ATB abuses by trade schools. 3. The Department Relied on Irrelevant Factors in Denying Plaintiffs Application for a False Certification Discharge. In addition to its errors in judgment in considering the regulatory factors governing its decision whether to grant a false certification discharge, the Department also consid ered factors that are irrelevant to its decision. Its reliance on irrelevant factors constitutes separate grounds for set ting aside its action as arbitrary and capricious. Frisby v. U.S. Dept of Housing and Urban Development, 755 F.3d 1052, 1055 (3d Cir. 1985). Section 1087(c)(1) entitles students whose eligibility for student loans was falsely certified by their schools to a discharge of their loans. 20 U.S.C.A. 1087(c)(1) (1998). The Departments implementing regulations interpret this entitlement to apply to students whose eligibility for stu dent loans was based on purported ability to benefit from training, and who were administered a test that either (1) was not approved by the schools accrediting agency or (2) was not administered substantially in accordance with the requirements for use of the test. 34 C.F.R. 682.402(e)(1) (i)(A), (e)(13)(ii)(B) (1997). These criteria, addressing only whether the test given the student was appropriately se lected and administered, are the only factors that the stat utory and regulatory scheme makes relevant to a decision whether to discharge a students loans.12
12 The Departments regulations also authorize discharges for other false certifications besides false certification of ability to benefit, but these other forms of false certification are not at issue in Ms. Krabapples case. 34 C.F.R. 682.402(e)(1)(i)(B), (ii) (1997).

The Departments response to Ms. Krabapples applica tion for a discharge on the grounds that NATTS did not approve AIDs use of the Roeder test was as follows: During July, 1988 NATTS did not require schools it accredited to have ATB tests or scores re viewed by an independent third party. NATTS standards in effect at the time did not mandate the use of a particular test, and did not mandate that standardized or industry developed tests be used in a particular way. NATTS stated that it does not wish to be prescriptive in either the method or materials that a school may use and encourages all accredited schools to carefully study and select the most appropriate process for its students. The requirement cited in your dis charge application that the school have its test reviewed by a third party was not adopted until after you enrolled. Therefore, the fact that the third party validations used by the school were dated after you enrolled is not a basis to deter mine that the school failed to comply with accred iting agency requirements. A.R. 2. This analysis does not actually address the accred iting criteria that were in effect at the time Ms. Krabapple enrolled at AID. In particular, the Department does not address the requirement that schools conduct periodic stud ies to document the reliability of their entrance require ments. The Departments only reference to NATTSs ATB requirements is a reference to a statement in the sum mary that the Department quotes as supporting its posi tion that AID complied with NATTSs accrediting criteria. However, even this quoted statement encourages schools to carefully study and select the most appropriate pro cess for testing their students. The record contains no evidence that AID ever studied the reliability of the Roeder test to measure ability to benefit. Although given a full opportunity to do so, AID did not produce any documentation demonstrating that it con ducted any periodic studies regarding the reliability of its use of the Roeder clerical routine as its ATB test. Both the Department and plaintiffs counsel solicited documen tation from AID that it had complied with the applicable accrediting criteria. A.R. 49, 186. The Department also solicited such information from NATTS. A.R. 48. The only reasonable inference from NATTSs and AIDs failure to provide such documentation is that AID did not conduct the required studies. The absence of any documentation that AID complied with the requirement to conduct peri
counsel requested documentation from AID that its testing of Ms. Krabapple had complied with accrediting agency requirements, A.R. 186, AID stated that Ability to Benefit prior to the current regulations allowed schools to use a test which had been evalu ated by an independent third party. A.R. 187. AID also provided what now appears to be the January 1989 NATTS revision to its accrediting criteria, along with two letters purporting to satisfy the thirdparty evaluation requirement. A.R. 212, 213. Plaintiffs ap plication to the Department for a false certification discharge as sumed that AID had accurately described the applicable accredit ing criteria.

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The Departments decision denying Ms. Krabapples ap plication for a false certification discharge states that I also note that you did well at the school and graduated. In an evaluation of the school in your academic file you answered yes to the ques tions If you had it to do over again would you enroll in the same program? and Are the text books easy to understand? A.R. 2. Ms. Krabapples completion of the nurse assistant program and her stated satisfactionbefore she started her job search and discovered that her training was not sufficient to get work as a nurse assistanthave no bear ing on whether the test administered to Ms. Krabapple was proper.13 Indeed, the false certification regulation it self considers actual employment, not but graduation from the program, to undercut a claim of improper ATB admis sion. See 34 C.F.R. 682.402(3)(3)(ii)(C) (borrower who completes program and makes a reasonable, but unsuccess ful, attempt to obtain employment is still eligible for dis charge if ATB testing was improper). The Department should not have relied on these irrelevant comments as a basis for denying Ms. Krabapples application. The Departments denial letter also states that [b]ecause entities with oversight responsibility would typically have both the opportunity and responsibility to find and report improper ATB admission practices, the absence of such find ings raises an inference that improper practices were not reported because none were taking place. Id. In other words, the fact that the Department did not turn up any reference to improper ATB practices in the program reviews of AID that it obtained from NATTS, PHEAA, and its own files was determined to outweigh the actual evidence of improper practices contained in plain tiffs submissions. This is a remarkable inference. The actual text of the Departments program reviews, which the Department cites as evidence of an absence of ATB fraud at AID, reject any inference that its failure to identify particular forms of abuse means that such abuses did not occur: Although the review was thorough, it cannot be assumed to be allinclusive. The absence of statements in the report concerning the institu tions specific practices and procedures must not be construed as acceptance, approval or endorse ment of those specific practices and procedures. Furthermore, it does not relieve the institution
13 The Department reliance on Ms. Krabapples statements in her student evaluation was highly selective: in response to other ques tions, Ms. Krabapple stated that she found the school to be sort of as it was represented to her when she enrolled, and that maybe she would recommend the school to her friends. A.R. 147. The Department also neglected the context in which Ms. Krabapples comments were given: Ms. Krabapple was jobless and was relying on AID to find her a job; she consequently would have been reluc tant to offend the school.

9.1.3

of its obligation to comply with all of the statu tory or regulatory provisions governing the Title IV programs. A.R. 462, 493; see also A.R. 453, 475, 481 (similar disclaim ers in PHEAA reviews). Moreover, the Departments as sumption that program reviews were comprehensive and can be relied on to have uncovered any wrongdoing repre sents a complete inversion of the facts as Congress found them to be at the time the false certification discharge program was enacted. As stated in the Nunn Report, the mechanism on which [Guaranteed Student Loan Program] oversight of schools dependsthe Triad of licensure, accreditation, and certification/eligi bilityprovides little or no assurance that schools are educating students efficiently and effectively. Similarly, the investigation disclosed that the lure of fast and easy program profits, coupled with no effective government oversight, had already had devastating effects on the programs financial inter mediaries, with similar problems likely in the fu ture. Lastly, the Subcommittee found that through gross mismanagement, ineptitude, and neglect in carrying out its regulatory and oversight functions, the Department of Education had all but abdi cated its responsibility to the students it is sup posed to service and the taxpayers whose interests it is charged with protecting. Nunn Report at 33.14 As a direct result of this collapse in regulatory oversight, Congress felt compelled to extend re lief to some of the student victims who were left with worth less educations and loans they could not afford to repay. It would be a miscarriage of legislative intent if the failure of oversight agencies to notice that AID was ignoring Title IV ATB rules was used to defeat plaintiffs convincing case for a false certification discharge. If the court does not order the Department to discharge Ms. Krabapples stu dent loans pursuant to 34 C.F.R. 682.402(e)(1)(i)(A) and 682.402(e)(13)(ii)(B), the court should nonetheless re mand this matter to the Department for redetermination without considering these irrelevant factors. III. CONCLUSION For the foregoing reasons, Ms. Krabapple is entitled to a judgment that the Departments action was arbitrary and capricious and not in accordance with law. The court should therefore set the defendants action aside as unlawful pur suant to 5 U.S.C. 706(2)(A). This matter should be re manded to the Department for a discharge of her student loans and a refund of any payments made, with interest. [Attorney for Plaintiff]
14 The Nunn Report specifically questioned the validity of Depart mental and accrediting agency program reviews, noting testimony that both agency and NATTS review staff allowed schools to pro vide them with student files. This practice permitted schools to alter the student records or to hide problem cases. Nunn Report at 19, 32.

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Consumer Law Pleadings Number Five

by issuing an administrative decision whereby it declares Cambridges ATB testing and admissions procedures so pervasively fraudulent as to provide acrosstheboard proof that any applicant for a student loan discharge, based on ATB fraud, will have his or her application granted, pro vided he or she is otherwise eligible. II. Numerous Former Students Already Have Received a Discharge of Their Loans Based on Cambridges False Certification of Their Ability to Benefit. The U.S. Department of Education already has granted a discharge of student loans to numerous former Cam bridge students, based on Cambridges false certification of their ability to benefit. The following is a partial list of former Cambridge students who have had their loans dis charged based on such false certification. See the series A exhibits, attached hereto [not reprinted herein]. 1. Nelson Muntz: He did not possess a high school di ploma or a GED. He was given a tenquestion admis sions test, which is not consistent with Wonderlics (the test developers) test manual procedures. (Won derlic ATB tests contain 24 or 50 questions). Accord ing to Mr. Muntz, everyone he heard of passed the exam. After completing the Cambridge course, he could not get a job because of his extensive criminal record. 2. Selma Bouvier: She did not have a high school di ploma or a GED. She took a test, but she did not answer many questions. At the time of enrollment, she was suffering from the side effects of brain sur gery. 3. Martin Prince: He was not given any admissions test, even though he did not have a high school diploma or a GED. 4. Elizabeth Hoover: She was not given any admissions test, even though she had no high school diploma or GED. 5. Wendell Borton: He had three different Cambridge loans (all discharged). He did not have a high school diploma or a GED, yet was not given any admissions test. Mr. Borton was 67 years old, had a glass eye and back problems, and weighed about 100 pounds when he was enrolled for the private security course at Cam bridge. 6. Maude Flanders: She stated that she took the test with a group and they all were told they had passed the test even before it was graded. She did not have a high school diploma or a GED. 7. Doris Lunchlady: She had no high school diploma or GED. She was given an admissions test in a room with several other students also taking the test. The person giving the test left the room once the test started, and there was no time limit imposed. 8. Otto Mans: He was not given an admissions test nor did he possess a high school diploma or a GED. He also had an extensive criminal record of theft and drug abuse. 9. Jessica Lovejoy: She did not have a high school di ploma or a GED, and was not given an admissions test before enrolling.

9.2 Request for DischargeAbility to Benefit

9.2.1 Request for Discharge of All Students
REQUEST FOR DOE DETERMINATION OF ATB FRAUD BY CAMBRIDGE TECHNICAL INSTITUTE, INC. FOR USE IN STUDENT LOAN DISCHARGE APPLICATIONS I. Introduction This memorandum provides the basis for the U.S. De partment of Education (DOE) to rule that Cambridge Tech nical Institute, Inc., a forprofit, proprietary vocational school formerly operating four campuses in Ohio, committed such pervasive fraud and unlawful actions in its determination of students ability to benefit (ATB) from Cambridges courses, that all applications for a loan discharge, based on improper ATB determination, will be granted to otherwise eligible Cambridge students, without independent evi dence of ATB fraud. This request for DOEs decision as to Cambridges improper determination of ATB status for stu dents is being submitted pursuant to DOEs Dear Col league letter GEN9542, Section 10. Included herewith are: 1) previous decisions of DOE on former Cambridge students ATB discharge applications, 2) deposition and affidavit testimony by former students and employees of Cambridge, 3) findings by the Ohio Attorney Generals Office, 4) a sample of Cambridges ATB admissions scores compared with the requirements established by DOE, the accreditation agency for Cambridge, and the ATB test pub lisher, 5) findings by the Ohio State Board of Proprietary School Registration, and 6) generalized evidence of the widespread fraudulent and unlawful business practices of Cambridge, as set forth in various newspaper articles over the years. The Legal Aid Society of Cincinnati represented stu dents in a classaction lawsuit against Cambridge in the late 1980s. That lawsuit resulted in a consent decree whereby Cambridge agreed to close its Cincinnati campus as of Oc tober, 1990. Following that, the murder of Cambridges president, and the criminal indictment of one of Cam bridges other officers (who ultimately pleaded guilty), the other three campuses (in Middletown, Dayton, and Cleve land) were also closed or sold. As a result, Cambridge long ago closed its doors in Ohio. Nevertheless, hundreds of students who were lured into Cambridges classrooms with a promise of a good education and a good job, are now in a worse position than they were when they first heard about Cambridge. Many of them have had their selfesteem harmed and their credit records ruined, and they continue to be dunned for thousands of dollars allegedly owed on their defaulted student loans. Many of those students never should have attended Cambridge to begin with, given their inabil ity to benefit from what Cambridge offered them. DOE now should facilitate the loan discharge process for them

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10. Ned Flanders: He was not given an admissions test, nor did he have a high school diploma or a GED. 11. Lisa Simpson: She had neither a high school di ploma nor a GED when she enrolled. She had only the equivalent of a fifth grade education and did not take an admissions test. 12. Jackie Bouvier: She was not given an admissions test, nor did she have a high school diploma or a GED. See the enclosed Request for Discharge (False Certifi cation of Ability to Benefit) applications and decisions, Exhibits A1 through A12 [not reprinted herein]. III. Sworn Testimony of Numerous Former Cambridge Students Shows a Pattern of Testing and Admissions Fraud. In the course of litigating Brown, et al. v. Cambridge Tech nical Institute, Inc., et al., substantial pretrial discovery took place. Depositions were taken of former students, and affi davits were obtained from others. Although the lawsuit did not raise directly the abilitytobenefit issue, information given by former students to the attorneys shows that Cam bridges test procedures were very lax and, at times, unlaw ful or fraudulent. The following are summaries of the ATB problems revealed through depositions and/or affidavits given by the listed individuals. See the series B exhibits, attached hereto [not reprinted herein]. 1. Patty Brown (a former student and named plaintiff in the lawsuit): She could not read. She could not spell much, including her address. When she took the ad missions test, a lady from Cambridge had to read the questions to her. Ms. Brown was taking medication (Cogentin and Prolixin) for her nerves at that time and was being followed by a case manager at the Mental Health Services West office. Although the ap plication form for Ms. Brown states that she went to Taft High School, she did not; she did go to West High. She did not graduate from West High School or any high school. Her last years in school were spent at Gilford School (a school for developmentally de layed students). Ms. Brown is not good at math and numbers. Ms. Brown has a guardian, but she could not remember her name. Ms. Brown does not know the difference between a positive experience and a negative experience. Of all the questions on the Won derlic admissions test, Ms. Brown completed only six of them. She does not know who filled in the other blanks. When she handed in her test, there were only six answers given by her on her paper. She does not know what happened after that. Ms. Brown was ad mitted to Cambridge after the test, and enrolled for custodial maintenance, electronics, and computers. Af ter she attended school for a few days, she stopped going. 2. Marvin Monroe (a former student and former em ployee of Cambridge): Mr. Monroe states: At the Cambridge Admissions Office, I was told that I would have to take an admissions test. When I told [the

9.2.1

Cambridge person] that I didnt have time to take the test, he said he would take it for me, and he pro ceeded to do that. 3. Marge Simpson (a former student): While attending Cambridge, she met another student filling out loan papers. This other student had been enrolled for pri vate security, but had only one leg and had a de formed left hand with only two fingers on it. Ms. Simpson also heard another student boasting, in a serious way, that she had given birth last week to a baby which was going to be stuck back up inside her like all her other babies. This person did not seem to know where she was. Another student Ms. Simp son met seemed very slow or retarded. He would sit near the back window and stare into space. The in structors stated that he flunked every test. 4. Clancy Wiggum (a former student): Ms. Wiggum was given the admissions test. The woman at Cambridge giving the test gave Ms. Wiggum the answers to the first five questions. See the enclosed deposition excerpts and affidavits, Ex hibits B1 through B4 [not reprinted herein]. IV. The Ohio Attorney General Found Evidence of Admissions Test Fraud by Cambridge. The Ohio Attorney General also filed a separate lawsuit against Cambridge for its operations at the Cleveland cam pus. In its investigation of Cambridges practices at that campus, the Ohio Attorney Generals office determined that serious admissions test fraud had occurred. See the series C exhibits, attached hereto [not reprinted herein]. In responding to civil discovery requests propounded by Cambridges attorneys, the Ohio Attorney General stated the following in response to one of the interrogatories re garding admissions testing: The defendants [Cambridge] administered the test without supervision to students en masse. The test was an altered and simplified version of a valid test. Students were allowed to discuss the test with each other. The test was written, but illiterate students passed the test. The test was administered without time constraint. Additionally, in this same litigation, the Ohio Attorney General filed a memorandum with the court opposing Cam bridges motion to dismiss the lawsuit. Attached as exhibits to that memorandum were excerpts from depositions of Cambridge officials and affidavits from various other peo ple. The depositions of the Cambridge officials discussed examples of Cambridge enrolling students who obviously could not benefit from instruction. One discussion in volved the enrollment of a student when, by Cambridges own admission, it was obvious the student should not have been enrolled. The Cambridge official went on to testify that the student was extremely childlike, he did not seem to be able to carry through in conversation, communica tion skills were very poor. The students mannerisms and inability to communicate and comprehend in general con versation were acknowledged, as well as the fact that the student, when asked a question, would not respond or would talk about something that was totally different and unre

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Consumer Law Pleadings Number Five

For periods of enrollment from July 1, 1987 through June 30, 1991, the DOE required more stringent evaluation of students. During this time period, a school had to use stan dard admissions practices for any applicants without a high school diploma or a GED. These practices required the school to determine the following: (1) the student received a GED prior to the stu dents completion of the program or by the end of the first year of the program, whichever was earlier; (2) the student was counseled prior to admission and successfully completed the schools program of remedial or developmental education that did not exceed one academic year or its equiv alent; (3) the student passed a nationally recog nized, standardized, or industrydeveloped ATB test, subject to criteria developed by the schools accrediting association; or (4) if the student failed the ATB test, he or she successfully completed the schools program of remedial or developmental education that did not exceed one academic year or its equivalent. [Emphasis added]. See the enclosed Dear Colleague letter GEN9542, page 2, Exhibit D1 [not reprinted herein]. See also 34 C.F.R. 668.7. After June 30, 1987, DOE required that all ATB tests be used subject to criteria developed by the institutions nationally recognized accrediting agency or association. 34 C.F.R. 668.7(b)(1)(i). Cambridge was accredited by the Accrediting Council for Continuing Education and Train ing (ACCET), in Richmond, Virginia. ACCET standards for its accredited schools required that the admissions pol icy for all students be based on the institutions stated objectives; it must be administered for all applicants as written and published. ACCET also required each institu tion to document each students ability to benefit from the training offered. Finally, the school must determine a stu dents aptitude to complete successfully the . . . education by following the applicable standards, procedures, and scores established by the publisher. . . . No deviation in scoring or testing procedures are allowed without written approval of the test publisher and written concurrence by the ACCET Ac crediting Commission. [Emphasis added]. See the en closed 2/12/90 ACCET memorandum, with attachments of Document 32 (June, 1989), p. 1, and Document 32A (February, 1990), p. 2, Exhibit D2 [not reprinted herein]. Note that both of these memos state that they provide clarification (and thus do not change any policy); their instructions therefore are applicable back to 1986. See Ex hibit D2. Cambridge published its admissions policy in its Policy and Procedures Manual. It eventually published the policy on a separate document. See Learning to Learn docu ment, Exhibit D3. This document represented Cam bridges ATB policy, written to comply with DOEs and ACCETs standards. However, the policy failed to use the cutoff scores established by the publisher. Further, its scores did not correspond with an appropriate grade level of the materials utilized in the instructional program be

lated to the conversation. Another example testified to in deposition involved a Cambridge instructor reporting a secondquarter student whom the instructor had by then determined could not read his text books and could not read or comprehend the content of the midterm examina tion. The Attorney General also submitted affidavits exe cuted by two former students of the Cleveland branch of Cambridge. Each details improper testing procedures, in cluding administering the test in a crowded room of other students, giving no explanation of the exam or test proce dures, and allowing students to receive assistance on the test. See the enclosed excerpts from the Attorney Generals Supplemental Answers to Defendants Interrogatories and Appendix thereto, with attachments, and excerpts from the Attorney Generals court memorandum, with attachments, and affidavits (note: the above information has been high lighted for easy reference), Exhibits C1 through C2 [not reprinted herein].15 V. Cambridges Own Testing Documents Show Abilityto Benefit Fraud and Other Irregularities. Even a cursory review of Cambridges admissions test ing, taken from individual Cambridge files of former stu dents, shows significant violations of the proper test proce dures, scoring requirements, and remedial instruction op tions permitted by DOE and Cambridges accreditation agency. See the series D exhibits, attached hereto [not re printed herein]. In the 1980s, DOE promulgated regulations regarding the abilitytobenefit standards and the testing to be used by schools to determine whether prospective students actu ally had the ability to benefit from the schools training. The DOE summarized the ATB requirements in its Sep tember, 1995 Dear Colleague letter, GEN9542. Briefly, for enrollment periods from January 1, 1986 through June 30, 1987, a school could determine that a student had an ability to benefit in accordance with DOE regulations by using a fairly simple procedure. The school only had to: develop and consistently apply criteria to deter mine if regular students who did not have a high school diploma or GED, and who were beyond the age of compulsory attendance, had the abil ity to benefit from the schools training. [Empha sis added].

15 In a separate forum, Cambridge officials of the Cleveland campus admitted that Ernest Hall, the first example of improperly admit ted students cited in the deposition, took his admissions test simul taneously with several other individuals and that his sister not only attended the admissions test with him, but actually helped him with the answers. The deposed official also conceded that the testing employee of Cambridge did not notice any of this during the exam (or, apparently, chose not to do anything about it). This is documented in Cambridges own letter to a media reporter. See the enclosed Cambridge letter of 3/15/88, Exhibit C3 [not re printed herein].

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cause people admitted with scores as low as Cambridge permitted do not learn well from formalized training and often need to be explicitly taught through an apprentice ship program rather than from booklearning. This is ex plained next. In determining the threshold scores needed to show an ability to benefit, Cambridge set scores far below the min imum suggested by the test manufacturer, Wonderlic. The following chart shows five programs offered by Cam bridge, Cambridges conditional passing scores on the ATB test, Cambridges unconditional passing scores on the ATB test, and the test publishers (Wonderlics) mini mum passing scores. As explained in Cambridges admis sions policy, prospective students scoring in the condi tional range would be required to take the Learn to Learn course to gain admission. Those scoring in the uncondi tional range or higher would be admitted without condi tions. However, the conditional scores fall below the scores set by Wonderlic in its testing manual:
Cambridges Conditional Qualifying Score 8 9 9 9 9 Cambridges Uncondi tional Quali fying Score 14 15 15 15 15

9.2.1

Program Custodial Maintenance Data Entry Law Enforce ment/Security Nursing Assistant Word Processing

Wonderlics Passing Score 12 12 10 11 15

See Exhibit D3 and the enclosed Wonderlic ATB Test Score Registration Manual, pp. 11, 12, and 17, Exhibit D4 [not reprinted herein]. Further, the test publisher recom mends that schools recruit and select students that score well above the minimum. See the enclosed Wonderlic ATB Test Score Registration Manual, p. 5, Exhibit D5 [not re printed herein]. The reason for these suggested scores and recommenda tions are based on Wonderlics extensive testing and re search to demonstrate its tests validity, correlation, and reliability. Based on this research, including reviews with employers hiring people for various positions, Wonderlic explains that people in the test score ranges being used by Cambridge would not benefit from a formal training set ting and would likely not find employment. Students from these ranges of scores need to be explicitly taught, as with an apprenticeship program rather than attempting to learn through books and classroom training. See the en closed Wonderlic Users Manual, p. 26, Exhibit D6 [not reprinted herein]. As a result of Cambridges own cutoff scores for admis sion, many students admitted did not have the requisite ability to benefit from the programs offered. The following examples are taken from Cambridges own files. 1. Apu Nahasapeemapetelon: Mr. Nahasapeemapete lon was admitted in December, 1986 without having taken any admissions test. His enrollment agreement

and application papers show he attended a high school, but the Highest Grade Completed and Grad Date blanks have no answers. Similar blanks for this infor mation appear on the students untitled data sheet containing background data with the courses, credit hours, and grades given. No high school diploma or transcript appears in the file. 2. Jo Quimby. Ms. Quimby enrolled in Cambridge in October, 1987, and received a grade of 10 on the admissions test. Accordingly, she was required to take the Learn to Learn course, but she never did take that course. A review of the file shows no indication, on any document, of her enrolling, much less complet ing, the remedial learning program offered by Cambridge.16 3. Lionel Hutz: Mr. Hutz had to take the test twice in order to achieve what appears to be a passable score to gain admittance to Cambridges custodial mainte nance program. On his first try, Mr. Hutz scored a 7; on his second attempt he moved up to an 8. How ever, serious concerns exist as to whether Mr. Hutz, himself, actually filled in all of the answers which appear on the second test. Mr. Hutz handwriting in forming the numbers 1, 2, 3, and 4 can be gleaned from looking at the few answers he provided on the first test and most of the answers he provided on the second test. Comparing that to the two answers ap pearing in the second test for questions 21 and 22, it is seen that the handwriting is much lighter and the numbers are less shakythose two answers appear to have been written by a person with more graceful writing. Significantly, both of those answers are cor rect and bring what otherwise would have been a score of 6 (failing) to an 8 (barely within the passing range). Also significant is that this appears on the second, and last, test which Mr. Hutz would be per mitted to take.
16 With regard to the students who were in the conditional range, and thus required to take the Learn to Learn course, it is evident that where a file does not note the Learn to Learn program, the student did not take that course. Included herewith are examples from other student files which do indicate that the student was enrolled in the Learn to Learn program. For example, see the enclosed Cambridge files of Patty Marie Smith and Anthony Ad ams, Exhibits D7, D8 [not reprinted herein]. For ease of refer ence, documents indicating the student was enrolled in Learn to Learn have been highlighted. It is interesting to note, however, that even when students did take this course, many of them routinely withdrew with a failing grade. Thus, it is clear that Cambridge did not satisfy the require ment for the abilitytobenefit standard set forth in 34 C.F.R. 668.7(b)(3): successfully completes a remedial . . . program. . . . Both Mr. Adams and Ms. Smith, though ostensibly receiving reme dial instruction, withdrew from the Learn to Learn course. In fact, they each took the course twice, the second time after already withdrawing from it in an earlier quarter or semester. Neither, however, took a second admissions test, notwithstanding the fact that they were only conditionally eligible and had not satisfactorily completed the Learn to Learn program which they had been re quired to take in order to be admitted. Again, Cambridges prac tices show an acrosstheboard disregard for DOEs ATB require ments. Even when given the chance to admit students who failed the ATB test, Cambridge played fast and loose with the rules.

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Consumer Law Pleadings Number Five

tificate of Registration for Cambridge and imposed a civil penalty for Cambridges violations of various sections of the Ohio Revised Code governing proprietary schools. By the time of the license revocation, Cambridges default rate for mature student loans was an astounding 83.8%. See the enclosed SBPSR letter of 12/5/90, the SBPSR Final Resolution of 1/23/91, and the Higher Education Assis tance Foundation letter of 5/12/89, Exhibits E1 through E3 [not reprinted herein]. VII. Cambridge, and Its Officers, Have Been Involved in Other Fraud and Criminal Activity. Over the years, the Cincinnati newspapers and other media have documented numerous incidents of fraud and criminal activity by Cambridge and its employees or offic ers. See the series F exhibits, attached hereto [not reprinted herein]. Timothy Lovejoy, the former president of Cam bridge, was reported by CNN as having defrauded the U.S. government out of $5 million. It was alleged that he submit ted information to the DOE which falsely represented more students attending Cambridge than was true. It was fur ther alleged that Mr. Lovejoy kept the loan monies of stu dents who had dropped out of Cambridge instead of return ing it to the banks and/or DOE. In late 1990, Mr. Lovejoy was murdered in a telephone booth at a local airport be fore these allegations could be brought to trial. That mur der remains unsolved to this day. Pete McCallister, an other officer of Cambridge, was indicted on numerous counts of bribery, conspiracy to defraud, and lying to a grand jury, to cover up student aid fraud. Mr. McCallister was tried in federal court and eventually pleaded guilty to one count of conspiracy; he was sentenced to two years in prison. Former Ohio Congressman Donald Buz Lukens also was in dicted on various federal charges, some related to Cam bridge, and was tried in federal court. He was convicted of accepting bribes from Cambridge. The newspaper also reported that former Cambridge employees falsified student records before DOE investiga tors arrived at the school to check on various allegations of fraud. These employees also stated that many student records were destroyed. Additionally, numerous students com plained over the years of sharp recruitment practices, un qualified teachers, problems with the school equipment, problems with attendance and books, as well as describing their experiences in jobhunting. Many, many students were told by prospective employers that their Cambridge certif icates were worthless. Cambridges high loan repayment default rate can be attributed to its poor educational qual ity as well as its poor administrative and business practices. Further, physical violence was used against a former em ployee who went public with some of the fraudulent prac tices at Cambridge. Mr. Lovejoy was accused of hiring two people to physically assault Mark McClure in April, 1990 because Mr. McClure was talking to the media about Cam bridge and was aiding the Legal Aid Society of Cincinnati in its litigation against the school. These two men were sentenced to jail for beating Mr. McClure. And, as was explained earlier, the lawsuit filed by the Legal Aid Society

Further, because the score of 8 was the absolute minimum score, and left Mr. Hutz in the condi tional range of passing scores, he was required to take the remedial instruction program offered by Cam bridge in order to qualify for admission and federal loan assistance. This remedial course, entitled Learn to Learn, is nowhere noted in Mr. Hutz file or on the enrollment agreement or test cover sheet. This is in contrast to the next example below, Mr. Duncan, and other student files discussed later in which the Learn to Learn program is clearly documented. 4. Julius Hubbert: Mr. Hubbert sought admittance into Cambridges custodial maintenance program with a score of 8. This is the absolute minimum score for eligibility, and it requires that the student also take the Learn to Learn program. The Learn to Learn program is documented (as LL), but only for the second quarter. Inexplicably, Mr. Hubbert was not required to enroll in the Learn to Learn program for the first quarter. This violates Cambridges own policy promulgated to comply with DOE and ACCET man dateswhich requires the student to take the instruc tion in the first quarter of enrollment. The Learn to Learn program is also documented on the test cover sheet itself (as L&L), again, in contrast to Mr. Hutz file. 5. Hans Moleman: Mr. Moleman was admitted in No vember, 1988, after scoring only a 7 on his admissions test. A score of 7 does not meet Cambridges own admission requirements. Nevertheless, Mr. Moleman was admitted into the custodial maintenance pro gram (and apparently required to take Learn to Learn, as documented on the Master Attendance Record appearing in his file). 6. Troy McClure: Mr. McClure scored an 11 on his ad missions test, thus requiring that he take the Learn to Learn program in addition to the custodial mainte nance courses he wished to attend. However, his Mas ter Attendance Record, which notes the Learn to Learn program, indicates Mr. McClure would not have to take the remedial course until the following quarter. This violated Cambridges own policy which requires the student to take the instruction in the first quar ter of enrollment. 7. Dewey Largo: Mr. Largo took his admissions exam in December, 1988, and scored only a 6. Nevertheless, he was admitted into the custodial maintenance pro gram for three quarters, beginning January 2, 1989. A score of 6 does not even meet the conditional eligi bility minimum score set by Cambridge. See the enclosed student files, Exhibits D9 through D15 [not reprinted herein]. VI. Cambridge Conducted its Overall Business Practices in an Unlawful and Fraudulent Manner, Resulting in Revocation of Its License by the State of Ohio. In late 1990, the Ohio State Board of Proprietary School Registration (SBPSR), the licensing and oversight agency for proprietary, forprofit schools in Ohio, revoked the Cer

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was only the firstthe Attorney Generals Office filed its own. Both lawsuits succeeded in having Cambridge close its doors. See the enclosed copies of newspaper articles, Exhibits F1 through F8 [not reprinted herein]. CONCLUSION As has been demonstrated, Cambridges admissions prac tices were fraudulent across the board. The pervasive fraud and unlawful practices included all areas of the mandatory testing of students for their ability to benefit from Cam bridges purported educational programs. DOE already has seen numerous instances of Cambridges ATB fraud from individual students and thus has granted those students a discharge of their loans. These individual cases are merely representative of Cambridges broader approach to educa tion, namely enrolling as many students as could be fit into classrooms, with no regard to the students ability to learn from the programs. The Ohio State Board of Proprietary School Registration and the Ohio Attorney General found numerous instances of ATB fraud by Cambridge. Numer ous former students and employees have testified to the same unlawful practices. It is time for DOE to declare Cambridges admissions and testing practices so perva sively fraudulent and unlawful as to render their ATB cer tification meaningless for each and every one of its former students. DOE now should consider any application for a school loan discharge based on improper determination of the students ability to benefit as proven, so long as that former student did not have a high school diploma or a GED at the time of attending Cambridge. [Attorney for Plaintiff]

9.2.2.1

Did you (the student) or the school receive any part of the student loan money on or after January 1, 1986? X Yes No If the answer is no, do not fill out this form. It does not apply to you. If the answer is yes, you must complete both sides of this form, and return it to the current holder of your student loan(s). Keep a copy of your completed form for your records. I. BORROWER INFORMATION
Name: Nelson Muntz SSN: [Social Security Number] Address: [Address] If PLUS Loan Students Name Students SSN Phone: [Telephone Number]

II. STUDENTS SCHOOL INFORMATION School Name: Cambridge Technical Institute Course of Study (education program): Custodial Maintenance Address: [Address] Dates of Enrollment: 19883/11/89 1. Did you have a high school diploma before you began school? Yes X No 2. If no, did you have a GED (general education de velopment) before you completed the program at the school? Yes X No 3. Did the school give you a test before the school ac No cepted you for enrollment? X Yes 4. If yes, was there anything not proper about the way the test was given or scored? If yes, please briefly explain. Everyone that took the exam with me was told they passed it. The exam was only about 10 questions. 5. If no, did the school give you and did you complete a program of remedial or developmental education? Yes No N/A (A remedial or developmental educational pro gram means an extra program (beside the program you enrolled in at the school) to teach you basic subjects you should have learned in elementary or high school.) 6. Did you complete program you enrolled in at the No school? X Yes 7. Did you get a job in the occupation the program was Yes X No intended to prepare you for? 8. If yes, did you get the job only after you received more training besides what the school listed above gave Yes No N/A you? 9. If you answered Yes to question 6, and No to question 7, you must complete the following information: I have made attempts to secure fulltime employment at the following three places of employment:

9.2.2 Individuals Request for Discharge Ability to Benefit

9.2.2.1 Request
REQUEST FOR DISCHARGE AND BORROWER STATEMENT OF FALSE CERTIFICATION OF ABILITY TO BENEFIT INSTRUCTIONS If you borrowed a Stafford or SLS loan, or your parent borrowed a PLUS loan on your behalf and your eligibility was falsely certified by your school, you and/or your parent may be eligible for a discharge of your student loan obliga tion. To learn if you qualify to have your loan discharged, read and follow these instruction carefully. Falsely certified: A school falsely certified a students eligibility for a student loan if 1) the school enrolled a student who did not have a high school diploma or GED and did not properly determine the students ability to benefit as that term was defined at the time.

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Name: Casual Corners

Consumer Law Pleadings Number Five

Name: Aramark Uniforms Name: I stopped looking any fur ther because I saw that my criminal record would keep me from getting hired. See below. Street: Contact Person: Telephone: Postion Applied For: Reason Not Hired: criminal record

Please read the following statements carefully. If each of these statements is correct, sign and date this form and return it within 60 days to the current holder of your loan(s). 1 I received proceeds from any disbursement of a Stafford, SLS or PLUS loan, in whole or in part, on or after January 1, 1986. 1 I did not make a claim with respect to the schools false certification of my loan application with any third party, such as the holder of a performance bond or a tuition recovery program or if I did, the amount of any funds I received has been disclosed in question #11. If I did receive such funds, they will be deducted from any re fund for which I might be otherwise eligible. 1 I (or the student for whom I borrowed) was admitted to the school identified by me on this form on the basis of ability to benefit form its training and did not meet the applicable requirements for admission on the basis of ability to benefit. 1 I (or the student for whom I borrowed) either: 1. Withdrew from the school and did not find employ ment in the occupation for which the program was intended to provide training; or 2. Completed the training program for which the loan was made and I (or the student for whom I bor rowed) made a reasonable attempt to obtain employ ment in that occupation but was unable to find such employment. Complete #9Employment Attempt Certification Section; or 3. Obtained employment in that occupation only after receiving additional training that was not provided by the school that certified the loan. 1 I agree to provide upon request by the Department of Education (or its designee), other documentation reasonably available to me that demonstrates to the satisfaction of the Department, that I meet the false certification discharge criteria. I also agree to cooperate with Department (or its designee) in enforcement actions and to transfer any right to a loan refund (up to amount discharge) that I may have by contract or applicable law with respect to the loan or the enrollment agreement for the program for which the loan was received, against the school, its principals, affiliates and their successors, its sureties, and any private fund, including the portion of a private fund that represents funds received from a private party. I hereby certify, under penalty of perjury, that all state ments on this application are true including the certifica tion above. (Making a false statement on this application is punishable by imprisonment, fine or both) Applicant Signature Date

Street: [Address] City: [City] Contact Person: Telephone: [Tele phone Number] Position Applied For: custodian Reason Not Hired: worthless degree

Street: [Address] City: [City] Contact Person: Telephone: [Tele phone Number] Position Applied For: custodian Reason Not Hired: criminal record

10. When you enrolled at the school, did you have a status or condition that would have prevented you from being accepted into the educational program or from be No (A ing able to work in that occupation? X Yes status or condition preventing your acceptance into an ed ucational program or from performing the work in the oc cupation the program was designed to prepare you for in cludes, for example: 1 A criminal record, if that would prevent you from getting a state required license for the job you created for. 1 A physical or mental disability that would prevent you from doing the work in the occupation the program trained you for. 1 The lack of a high school diploma if the state required a high school diploma to take the license exam for the occupation the program trained you for. If yes, briefly explain: See question 12. If yes, you (the student) must provide evidence that the disqualifying status existed at the time of enrollment and evidence that a State prohibition (in the students state of residence) against employment in that occupation based on that status existed at the time of enrollment. 11. Did you receive a refund either personally or as a credit to the loan obligation from the holder of a perfor mance bond or a tuition recovery program with respect to Yes X No If yes, please indi the loan(s) in question? cate the amount received here: $ 12. Do you have any other reason we should consider in determining that your ability to benefit was falsely certi fied? Please explain. See below response. 13. Please complete and sign the attached Borrower Cer tification. See my attached criminal record. Many of my offenses were for theft, robbery, and other acts of violence. I realized after going to two employers that no one would trust me not to steal from them or from places I would be assigned to clean at night. I now regret my criminal activity.

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9.2.3

9.2.2.2 Discharge Letter

US DEPARTMENT OF EDUCATION OFFICE OF POSTSECONDARY EDUCATION 59 UNITED NATIONS PLAZAREGION IX SAN FRANCISCO, CA 941024987 SAN FRANCISCO SERVICE CENTER June 26, 1997 Mr. Nelson D. Muntz [Address] RE: [Social Security Number] Debt # [Account Number] Dr Mr. Muntz: This letter acknowledges receipt of your completed ap plication for student loan discharge due to the false certi fication of your ability to benefit from the training offered by the school attended with the loan. The U.S. Department of Education has determined that you qualify for false certificationability to benefit discharge of the Federal Family Education Loan which you obtained to attend Cambridge Technical Institute. As a result of this determination: 1 You will be relieved of the obligation to repay the loan; 1 You will be refunded all monies paid by you on the loan, which our records show to be $784.00. A check has been requested from the U.S. Treasury. Please allow 46 weeks for delivery; 1 You will no longer be regarded as in default on the loan and the past reporting of a default will not preclude you from receiving assistance under the Title IV, Higher Ed ucation Act Programs in the future; 1 The Department will report the discharge to all credit reporting agencies to which it previously reported so that any adverse credit history assigned to the loan may be deleted. This discharge covers only the loan held by the U.S. Department of Education, listed above, which was ob tained to attend Cambridge. The Department has made no determination regarding loans which may be held by guaranty agencies, services, lenders, or educational institu tions. If you believe that you may be eligible for the dis charge of other loans, you should contact the holder of those loans. If you need further assistance, you may contact this of fice by calling (415) 4875007. Sincerely, James C. Johnson Loan Analyst Contract Services Branch email: jimjohnson@ed.gov

9.2.3 Students Affidavit

AFFIDAVIT OF MARGE SIMPSON Marge Simpson, being duly sworn according to state law, deposes and states the following on the basis of personal knowledge: 1. My name is Marge Simpson. I live at [Address]. 2. I live there with two of my children. Our only source of income is ADC. 3. I was enrolled at Cambridge Technical Institute form Jan. 13, 1989 to June 28, 1989 in Private Security. 4. I passed all the courses in every quarter. 5. I heard about Cambridge from a friend, Nick Riviera, who at the time I signed up, was also a student at Cam bridge. 6. When I went down to sign up at Cambridge, in either Dec. or early Jan. 88, I mentioned my friends name and she received the $50 referral fee from Cambridge. 7. At the time I signed up, a Cambridge employee, a woman named Selma, working downstairs in the school building at [Address], told me that if I went to Cambridge, I would receive a free bus pass and free books. 8. This Cambridge employee also told me that when I got out, Cambridge would get me a job. She said private security jobs were plentiful and that Cambridge would have 35 places for me to go interview and that I could just choose which job was right for me. 9. On the basis of the promises made to me by the Cam bridge employee and my desire to learn a trade to better support my children, I decided to go to Cambridge and take out the necessary loans in order to do it. 10. I was given a short 10min. test and I was told I passed. 11. I never graduated from High School but I did finish the 11th grade. 12. After I passed the test, I went across the street to the corporate office to sign the loan papers so I could go to Cambridge. At no time did anyone from Cambridge give me any details about the loans. 13. While I was filling out the loan papers, another woman came in to also fill out loan papers. She was named Glo ria and had also been accepted to go to Cambridge in Private Security. Gloria had only one leg and a deformed left hand with only two fingers on it. When I asked her how she was going to manage being a security guard, she said she was going to get a prosthesis. 14. In my opinion based on all the classes I attended at Cambridge, some instructors seemed qualified and some did not. 15. In the final quarter especially, the instructors did not seem qualified. They gave us the answers before they gave us the tests including our final exams. Also, the language that the final quarter instructors used was the language of what I call street people. They seemed very unprofes sional. 16. Some of the students acted like they shouldnt be allowed to be there. For example, one women kept boast ing, in a serious way, that she had given birth last week to a

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Consumer Law Pleadings Number Five

When I asked him which part of the shooting he timed, he stated, a test is a test when I say it is and I say you flunked. 27. Throughout the day, Mr. Chalmus was rude and made racial slurs directly to me. For example, he said to me, If I stay out in the sun long enough today, Ill be as dark as you (I am African American). 28. Since completing my coursework, I have been back to Cambridge twice to find out about getting a security guard job (where you wouldnt have to carry a gun) and each time a secretary has told me there was no one in at that time who could help me with job placement and that I would have to speak with the Director who was, both times, not in. FURTHER AFFIANT SAYETH NAUGHT. Marge Simpson [Notary Public]

baby but because it was a boy, they stuck it back up inside her like all her other babies. She did not seem to know where she was. 17. Another student who was in my classes, Kent Brock man, also didnt seem capable of being a student. He seemed retarded or like a slow learner. He would always sit in the back near the window and stare into space. The instructors always commented out loud that Kent flunked every test. Still, he remained present in all the classes for all three quarters. 18. I passed all the courses in Private Security. If you want to receive a special certificate to carry a gun as a security guard, you need to pass a shooting test at a riffle range. 19. One Saturday, 9 students form Cambridge and a Cambridge instructor, Mr. Chalmus, and a female assis tant, went to a riffle range to take the extra test so we could carry guns on the job. We were directed by the Cam bridge instructor to go out in this field behind the rifle range and pick up Y shaped pipes across which Mr. Chalmus stretched the paper targets. We were then told to go out in the field and stick the pipes back in the ground. We did. 20. Then, instructor Chalmus and his assistant lined us all up next to each other with no partition between stu dents, put guns in our hands, and directed us to start shoot ing. 21. Pieces of shrapnel and exploding bullets went every where. Six of the nine students were hit by the bullet frag ments and I was one of them. I was shot (grazed) in the neck and received a bruised breast from the bullets that exploded from the gun operated by the woman next to me, named Darla. 22. I dont fault the woman who shot me. She looked like she had no idea what she was doing and was clearly under a lot of pressure, as we all were, to pass. The test that she shot me on was the test where you had to pull the gun from the holster and fire as soon as possible and she fired her gun too soon which is why the explosion injured me. 23. I complained so much about being shot and how dangerous this whole thing was for everybody that finally, the female instructor who was helping instructor Chalmus, took me into the ladies room to help me wash off all the blood and patch me up. 24. Nobody else received any first aid although other students were just as injured as I was: another woman got her thigh split open and a man named, Rainer Wolfcastle, got his whole arm opened up by shrapnel. 25. Although we had to try and pass a series of shooting tests, we were not allowed separate target paper for each test. At the conclusion of each test, we had to go out in the field, retrieve our pipe and put scotch tape over the holes in the paper and set it up again. I did not feel this was professional. 26. I passed all the shooting tests except for the last one where I was shooting against a stopwatch and suddenly Mr. Besham said that I flunked and I should go home.

9.2.4 Department Letter Explaining Ability to Benefit Requirements

UNITED STATES DEPARTMENT OF EDUCATION OFFICE OF POSTSECONDARY EDUCATION September 1995 GEN9542 SUBJECT: Loan discharges based on improper determina tion that a student had the abilitytobenefit (ATB) from the schools training REFERENCE: 34 CFR 682.402(e) AND 685.214(a) Dear Colleague: Section 437(c)(1) of the Higher Education Act of 1965, as amended (HEA) provides for the discharge of a borrow ers loan obligation under the Federal Family Education Loan (FFEL) Program, and 455(a)(1) makes this relief available under the William D. Ford Federal Direct Loan Program, if the students eligibility to borrow was falsely certified by the school. In September 1994, initial guid ance concerning these loan discharges was provided in Dear Colleague Letter 94L166/G256 issued to lenders and guaranty agencies in the FFEL Program. However, in the area of discharges based on a schools defective determina tion of a students abilitytobenefit (ATB), the Dear Col league Letter promised more detailed guidance concern ing those discharges. This letter addresses some common questions about dis charges based on improper ATB determinations that have been asked by borrowers, lenders, guaranty agencies, and other parties. The Department intends to apply the guid ance in this letter to similar false certification discharges in the William D. Ford Federal Direct Loan Program. Thank you for ensuring that the intent of the false certi fication discharge provision is achieved. For further infor mation, you may contact the Departments Customer Sup port Inquiry Service between hours of 9:00 am and 5:00

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pm Eastern Time, at 18004337327. After hours calls will be accepted by an automated voice response system. Call ers leaving their name and phone number will receive a return call the next business day. You may FAX your in quiry to the Customer Support Inquiry Service at any time by calling (202) 2604199. Sincerely, Elizabeth M. Hicks Deputy Assistant Secretary for Student Financial Assitance

9.2.5

9.2.5 Department Discharge Letter

UNITED STATES DEPARTMENT OF EDUCATION WASHINGTON, D.C. 20202 April 30, 1999 [Attorney for Plaintiff] Legal Aid Society of Cincinnati [Address] Re: Cambridge Technical School, OPE # [Number] Dear [Attorney for Plaintiff]: I am writing in response to your letter to me of Decem ber 4, 1997, in which you requested that the U.S. Depart ment of Education (Department) determine that Cam bridge Technical Institute (Cambridge) committed per vasive fraud and unlawful actions in its determination of students abilitytobenefit to justify granting abilityto

benefit discharges for Federal Family Education Loan (FFEL) Program borrowers who enrolled at Cambridge without high school diplomas or GEDs and who are oth erwise eligible for such discharges. I apologize for the de lay in responding to your request. The Department has reviewed the material you submit ted as well as some additional material and has concluded that serious and welldocumented violations of Depart ment abilitytobenefit regulations affected a group of stu dents who enrolled at Cambridge. Specifically, the Depart ment concludes that a civil judgment entered in the case State of Ohio ex rel. v, Cambridge Technical Institute et al., Case No. 155499 (Cuyahoga County, Ohio, May 1, 1991) as well as consistent, independent statements by Cambridge students regarding their abilitytobenefit determinations provide sufficient basis to discharge the loan obligations of borrowers who enrolled at Cambridge, if the borrowers who certify that their abilitytobenefit determinations were not properly made by the school are otherwise eligible for false certification discharge under applicable regulations. The Department will notify guaranty agencies that guar anteed loans of Cambridge borrowers of this decision. Please feel free to contact me at [Telephone Number], if I can be of further assistance in this matter. Sincerely, Carney M. McCullough Chief General Provisions Branch Policy Development Division Policy, Training, and Analysis Service

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Chapter 10

Exercising TIL Rescission Rights in a Class Action

David A. Searles is counsel to the firm of Donovan Miller, LLC in Philadelphia where his practice focuses on consumer and shareholder class actions. He is a 1975 graduate of the American University Law School, Washington, D.C., where he was a member of the law review. Following graduation from law school, Mr. Sear les was an attorney for Community Legal Services of Philadelphia, where he spe cialized in consumer and bankruptcy law. In 1990, he successfully argued the first consumer reorganization bankruptcy case considered by the U.S. Supreme Court, Pennsylvania v. Davenport, 495 U.S. 552 (1990) and has served a lead counsel and presented argument in numerous bankruptcy and consumer law cases before the United States Court of Appeals for the Third Circuit. From 1992 through 1997, Mr. Searles was associated with the Philadelphia law firm of Drinker Biddle & Reath LLP, where his practice focused on Chapter 11 bankruptcy and creditors rights. Mr. Searles is the author of Tips in Handling Individual Bankruptcy Cases, Pennsyl vania Bar Association Quarterly, January 1997, is coauthor of Preserving Judicial Recourse for Consumers: How to Combat Overreaching Arbitration Clauses, 10 Loy. Cons. L. Rev. 209 (1998), and is a contributing author of Pennsylvania Con sumer Law (1990). He has taught advanced bankruptcy law at Rutgers University School of LawCamden, business law at Widener University and bankruptcy law at Pierce Junior College, Philadelphia. He is past cochairperson of the Education Committee of the Eastern District of Pennsylvania Bankruptcy Conference. Where a home mortgage lender has engaged in systematic practices affecting numerous consumers, the question arises whether consumers rescission rights may be enforced in a class action. Although there are few reported decisions, some courts have certified such a class where the plaintiffs have sought only declaratory relief establishing class members entitlement to seek rescission. See National Consumer Law Center, Truth in Lending, 6.15 (3d ed. 1995 and Supp.) In this class action, the plaintiffs allege a scheme between a home improvement contractor and a lender to deprive class members of meaningful TIL disclosures and the right of rescission by violating the delay in performance rule. The chal lenged practice is described in the complaint reprinted at 10.1 as the two contract scheme. See National Consumer Law Center, Truth in Lending, 6.8.4.2.2 (3d ed. 1995 and Supp.). In a decision dated November 23, 1998 (Williams v. Empire Funding Corp. et al., 183 F.R.D. 428 (E.D. Pa.)), the judge conditionally certified a class under Rule 23(b)(2) for the purpose of determining whether plaintiffs are entitled to a declaration that each member of the class may seek rescission under TIL. Plaintiffs counsel reports that the defendants have sought an order redefining the class (the response to defen dants motion is reprinted at 10.6). This chapter also includes: Plaintiffs Motion for Class Certification at 10.2; Plaintiffs Memorandum in Support of Motion for Class Certification at 10.3; Plaintiffs Reply Memorandum In Support of Motion for Class Certification at 10.4; and Order Certifying Class at 10.5.
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3. The practices of Empires dealer, Fredmont, are char acteristic of the deceptive marketing and home improve ment financing scheme. Fredmont Defendant routinely tar geted unsophisticated, low to middleincome and senior citizen homeowners, including plaintiff. Working with or as a dealer for Empire, Fredmont often used false and mis leading advertisements, fliers and highpressure inhome sales solicitations to obtain from plaintiff and other Class members overreaching home improvement contracts se cured by socalled secondary mortgages that were sold and assigned to Empire. Empire engages in subprime lend ing, which includes extending loans to persons with lesser creditworthiness, often the lowincome and the elderly. 4. A consistent pattern, practice or course of conduct of the defendants deceptive marketing scheme with respect to many of the Class members was the misleading implica tion or outright misrepresentation that the home improve ment program and financing were directed, sponsored, pro moted or funded by government agencies such as FHA, HUD and others. Typically, Fredmont either would ap proach consumers in their homes with fliers deceptively labeled Public Notice and would then present business cards with the confusing business name of Neighborhood Updating Necessity Construction. During the inhome sales presentation, Fredmont would state or imply that govern ment funds had been made available for necessary home repairs or remodeling; that the work would be performed at a fair and affordable cost; that all construction would be guaranteed; that the work would be financed either through the government or through a loan; and that no payment would be required until the customer was completely satis fied. 5. Afterwards, with respect to many of the Class mem bers, Fredmont would not perform the construction work that was promised or would perform the work in an unsat isfactory and shoddy manner. Due to fear, lack of knowl edge, the absence of funds and the misleading standard form contracts, plaintiff and members of the Class have been forced to continue paying on these contracts, or to forgo other remedies, rather than risking the loss of their personal residences. 6. Despite the fact that Empire was aware of Fred monts use of the Work Order Contract. Empire also these practices and had received numerous complaints regard ing the misleading practices and/or the substandard work of Fredmont. Nonetheless, Empire continued to conduct business with and purchase contracts from Fredmont. The fact that Empire paid face value for many of the Fredmont originated loans and controlled the underwriting of those loans is further evidence of the agency relationship be tween Fredmont and Empire. Upon information and be lief, the practices of Empire and Fredmont are under inves tigation by various law enforcement offices, including state attorney general offices. See, e.g., Commonwealth of Penn sylvania v. Fredmont Builders, Inc., No. CD 976571 (C.P. Allegheny County, filed May 1, 1997). 7. Plaintiff, on behalf of herself and all others similarly situated, seeks damages, as well as declaratory and injunc tive relief, to remedy defendants actions scheme, conspir acy and common course of conduct in violation of the afore

10.1 Class Action Complaint

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA
) KIM BOSCH, on behalf of herself ) and all others similarly situated, ) Plaintiffs, ) ) v. ) ) EMPIRE FUNDING ) CORPORATION, FREDMONT ) BUILDERS, INC., STANLEY ) DEWALT, TMI FINANCIAL, ) INC., EFC SERVICING, LLC ) and FIRST BANK, N.A., Trustee, ) Defendants. ) )

REVISED SECOND AMENDED COMPLAINT CLASS ACTION I. BACKGROUND AND NATURE OF THE ACTION 1. This is a consumer class action brought on behalf of persons victimized by a deceptive two (2) contract sales and home improvement financing scheme that uniformly deprived class members of the ability to reject or rescind the transaction, and tricked them into tolerating and pay ing for substandard, incomplete and deceptively portrayed home improvement goods and services and financing that was marketed as a critical component of the home improve ment services. The overarching scheme, which did not vary materially among any of the approximately 350 class mem bers, was implemented by defendants Fredmont Builders, Inc. (Fredmont) and Empire Funding Corporation (Em pire) and their affiliates. 2. Throughout the Class Period (defined below), Fred mont, with Empires knowledge and approval, employed an initial work order home improvement contract (Work Order Contract) as part of an application for consumers to participate in a government program that would pro vide funding for necessary home improvements. The initial Work Order Contract, as well as a second Home Improve ment Installment Contract generated by Empire and typ ically presented after the work had already been started and representations made to the consumers, contained con fusing and contradictory language which violated the con sumers rights to adequate disclosure and rights to rescind their transactions under the federal Truth in Lending Act, 15 U.S.C. 1601, et seq. (TILA) and state unfair and deceptive acts and practices laws. Further, certain of the defendants attempts to collect on the debts arising from the scheme, including a variety of form collection letters mailed to the homeowners, violated the homeowners rights under the Pennsylvania Debt Collection Practices regula tions, 37 Pa. Code Ch. 303, and the federal Fair Debt Col lection Practices Act, 15 U.S.C. 1692 et seq. (FDCPA).

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mentioned federal laws, as well as the Pennsylvania Unfair Trade Practices and Consumer Protection Law, 73 P.S. 2011 et seq. (UTPCPL), similar consumer protection laws in other states and state tort law. II. JURISDICTION AND VENUE 8. This Court has jurisdiction over this action pursuant to 28 U.S.C. 1331, 1337 and 1367. 9. Venue lies in this district pursuant to 28 U.S.C. 1391(b). III. PARTIES 10. Plaintiff Kim Bosch is an individual homeowner who resides at [Address]. 11. Defendant Empire Funding Corporation (Em pire) is a corporation doing business at [Address]. At times material to the claims herein, Empire conducted regional operations for the Pennsylvania, Ohio and West Virginia territory in part through a branch office located in Pitts burgh, Pennsylvania. The manager of that office, Arthur Milwaukee, was responsible, at least in part, for supervis ing and approving the practices of Fredmont as a dealer for Empire. At no time during the Class Period did Mr. Milwaukee instruct or direct Fredmont to refrain from en gaging in the practices described herein. See Deposition of Arthur R. Milwaukee, March 3, 1998 (Milwaukee Depo sition), at pp. 46, 48, 83. Portions of the Milwaukee Dep osition are set forth below. 12. Defendant Fredmont Builders, Inc. (Fredmont) is a Pennsylvania corporation with headquarters at [Ad dress]. Fredmont has defaulted in this action and plaintiff has obtained a default judgment against Fredmont. By let ter dated January 27, beginning in 1993, Fredmont was approved by Empire as one of Empires dealer/contractors agents in connection with the solicitation, marketing, place ment and closing of home improvement loans assigned to and financed by Empire under the FHA Title I Property Improvement Loan Program. 13. Defendant Stanley DeWalt is the president of Fred mont. His last known address is [Address]. Defendant De Walt has defaulted in this action and plaintiff has obtained a default judgment against him. Defendant DeWalt is a person within the meaning of the UTPCPL. On informa tion and belief, DeWalt actively participated in the design and implementation of the deceptive home improvement financing scheme described herein and directed Fred monts employees, including Kenneth Black, Jeffrey Decker, Cosimo Skil, Edward J. Senco and others to engage in the practices complained of below. 14. Defendant TMI Financial, Inc. (TMI), an affiliate of Empire, is a corporation with offices at [Address]. 15. Defendant EFC Servicing, LLC (EFC), a subsid iary of Empire, is a corporation doing business at [Ad dress]. 16. Defendant First Bank, N.A. (First Bank), is a cor poration doing business at [Address], which serves as trustee for a pool of mortgage loans that includes a loan made to plaintiff.

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17. Defendants Empire, TMI, EFC and First Bank are hereinafter referred to collectively as the Empire Defen dants. IV. CLASS ACTION ALLEGATIONS 18. Plaintiff brings this action individually and as a class action, pursuant to Rules 23(a) and 23(b)(2) and (3) of the Federal Rules of Civil Procedure, on behalf of the follow ing Class: All persons who, from January 1993 through Oc tober 16, 1997 (the Class Period), were sub jected to a two (2) contract sales and financing scheme for the purchase of home repair and/or remodeling goods and services from Fredmont in which they first signed a standard form work order contract (Work Order Contract) in the form of Exhibit A or B hereto and, thereafter, signed a second Home Improvement Install ment Contract in the form of Exhibit C hereto, which was assigned by Fredmont to defendants Empire, TMI, EFC or First Bank. Excluded from the Class are the defendants and all officers and directors of defendants. 19. The Class includes the following overlapping Sub classes: (a) Subclass A: All Class Members who received tele phone calls, letters or other communications from Empire, TMI or EFC in violation of the FDCPA, UTPCPL or similar consumer protection laws in other states or state tort law (the Unfair Collection Prac tices Subclass). (b) Subclass B: All Class Members to whom Fredmont, in writing or orally, misrepresented, or made state ments causing a likelihood of confusion or of misun derstanding as to the source of funds, sponsorship, affiliation, approval, or certification for its home im provement services (the Government Affiliation Sub class). (c) Subclass C: All Class Members who received from Fredmont repairs, improvements or replacement goods and services that were substandard, misdescribed, incomplete and/or otherwise inferior to the good and workmanlike standard orally promised and agreed upon in writing (the Defective Work Subclass). 20. The members of the Class and Subclasses are so numerous that joinder of all members is impracticable. The approximate number of Class Members is between 300 and 400. The Class Members and the members of Subclass A will be readily identifiable from defendants records. The members of Subclasses B and C will also be readily identi fiable. 21. Plaintiff Boschs claims are typical of the claims of the members of the Class and Subclasses. The losses to plaintiff Bosch were caused by the same courses of con duct that give rise to the claims of other members of the Class and Subclasses. 22. Plaintiff will fairly and adequately protect the inter est of the Class and Subclasses. Plaintiff has no conflict of

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planation of this right. *** NOTICE OF CANCELLATION You may cancel this transaction, without any penalty or obligation, within three business days from the above date. If you cancel, any property traded in, any payments made by you under the contract or sale, and any negotiable instrument executed by you will be returned within ten busi ness days following receipt by the seller of your cancellation notice, and any security interest aris ing out of the transaction will be cancelled. If you cancel, you must make available to the seller at your residence in substantially as good condition as when received, any goods delivered to you under this contract or sale; or you may, if you wish, comply with the instructions of the seller regarding the return shipment of the goods at the sellers expense and risk. If you do make the goods available to the seller and the seller does not pick them up within twenty days of the date of your notice of cancellation, you may retain or dispose of the goods without any further obligation. If you fail to make the goods available to the seller, or if you agree to return the goods to the seller and fail to do so, then you remain liable for performance of all obligations under the contract. To cancel this transaction, mail or deliver a signed and dated copy of this cancellation or any other written notice, or send a telegram, to Fredmont Builders, Inc., [Address], no later than . midnight of (ii) The provisions on page 1 of the second Home Improvement Installment Contract, required by Empire and presented to consumers days or weeks after the first Work Order Contract had been signed and typically after Fredmont had spiked (started) the work: CANCELLATION AND LIQUIDATED DAM AGES. I may cancel this Contract, without cost or obligation, within 3 business days of the date of this Contract as explained on the attached Notice of Right to Cancel. You may cancel this Contract without cost or obligation, other than to return my down payment to me, only if you are unable to get financing approved for me on the terms disclosed above through Empire Funding Corp. (Empire), to whom you will assign this Contract. If financing is available through Empire, but at a higher cost to me, you will provide me with new contract documents disclosing the higher cost, and I will have the option of accepting or rejecting them. If I ac cept, I will again have the right to cancel that contract, without cost or obligation, within 3 busi ness days of the date of that contact. If I have not cancelled this or any subsequent Contract within the applicable 3 business days period and

interest with other members of the Class and Subclasses. Plaintiff has retained experienced counsel qualified in class action litigation who are competent to assert the interests of the Class and Subclasses. 23. Defendants have acted or refused to act on grounds generally applicable to the Class, as they have engaged in conduct giving rise to the right to rescind the Home Im provement Installment Contracts under federal and state laws. Accordingly, pursuant to Rule 23(b)(2), final declara tory or injunctive relief of rescission or declaratory relief that Class Members have the right to rescind, is appropri ate with respect to the Class as a whole. 24. In addition, there are many questions of law or fact common to the class including whether defendants en gaged in a deceptive two (2) contract sales and financing scheme and whether that scheme is violative of state and federal consumer laws. These common questions of law and fact, among others, predominate over questions which may affect only individual members of the Class or Sub classes. 25. Among the predominating questions of law and fact common to the members of the Class are: (a) Whether the two (2) contract sales and financing scheme uniformly utilized and advanced by defen dants constitutes a violation of the TILA and/or an unfair and deceptive act, practice and course of con duct in violation of state statutory and common law, giving Class members a right to damages or equita ble relief from defendants. (b) Whether defendants Empire, TMI, EFC and First Bank are liable to the members of the Class for eq uitable and monetary relief for defendant Fred monts actions by virtue of the uniform contractual provision required to be included in each contract pursuant to the rules of the Federal Trade Commis sion (known as the FTC Holder Rule), 16 C.F.R. 433.2, and stating: ANY HOLDER OF THIS CONSUMER CREDIT CON TRACT IS SUBJECT TO ALL CLAIMS AND DE FENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED PURSUANT HERETO OR WITH THE PROCEEDS HEREOF. RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER. (c) Whether Defendants Empire, TMI, EFC and First Bank are also liable to the members of the Class by virtue of the defaults of defendants Fredmont and DeWalt. (d) Whether defendants have violated the TILA and en gaged in an unfair and deceptive practice the effect of which was to confuse consumers as to their right to rescind the transaction by including in all of the contracts the following inconsistent provisions: (i) The provisions of Fredmonts first Work Order Contract: You, the Buyer, may cancel this transaction at any time prior to midnight of the third business day after the date of this transaction. See the attached notice of cancellation form for an ex

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I refuse to accept delivery of the goods or perfor mance of the services comprising the Home Im provement, or I refuse to permit you to con struct the Home Improvement, in addition to any other remedy you may have under this Con tract or applicable law, I agree that you shall be entitled to liquidated damages in the amount of 10% of the Cash Price of the Home Improve ment shown below. Despite this provision, you agree that I am still entitled to offer defenses in mitigation of damages, and I can pursue any rights of action or defenses that arise out of this Contract. and (iii) The provisions on page 3 of the second Home Im provement Installment Contract: BUYERS RIGHT TO CANCEL YOU, THE BUYER, MAY CANCEL THIS TRANS ACTION AT ANY TIME PRIOR TO MIDNIGHT OF THE THIRD BUSINESS DAY AFTER THE DATE OF THIS TRANSACTION. SEE THE AT TACHED NOTICE OF CANCELLATION FORM FOR AN EXPLANATION OF THIS RIGHT. NOTICE TO BUYER: * * * * YOU MAY RE SCIND THIS CONTRACT, SUBJECT TO LIABIL ITY FOR ANY LIQUIDATED DAMAGE PROVI SION THEREOF AUTHORIZED BY LAW, NOT LATER THAN FIVE (5) P.M. ON THE BUSINESS DAY FOLLOWING THE DATE THEREOF BY GIV ING WRITTEN NOTICE OF RESCISSION TO THE CONTRACTOR AT HIS PLACE OF BUSINESS GIVEN IN THE CONTRACT, BUT IF YOU RE SCIND AFTER FIVE (5) P.M. ON THE BUSINESS DAY FOLLOWING, YOU ARE STILL ENTITLED TO OFFER DEFENSES IN MITIGATION OF DAM AGES AND TO PURSUE ANY RIGHTS OF AC TIONS OR DEFENSES THAT ARISE OUT OF THE TRANSACTION. (e) Whether defendants engaged in a common scheme, conspiracy or course of conduct or whether defen dants Empire, TMI, EFC and First Bank recklessly disregarded the facts and rendered knowing and sub stantial assistance to Fredmont so as to enable, aid and abet Fredmonts violations of state and federal consumer protection laws. (f) Whether defendants are liable for breach of con tract including breach of the duty of good faith and fair dealing. (g) Whether members of the Class have sustained dam ages by reason of defendants wrongful conduct and, if so, the proper measure of damages. (h) Whether plaintiff Bosch and members of the Class are entitled to injunctive or declaratory relief in the form of rescission and/or quiet title, or in the alter native, declaratory relief that such Class Members who entered into transactions after October 17, 1994 have the right to rescind under the TILA. 26. Among the questions of law and fact common to the members of the Subclasses are: Subclass A

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(a) Whether defendants violated the FDCPA by send ing form letters to the members of the Subclass, on or after October 17, 1996, that violated or otherwise failed to contain the notices required by the FD CPA; (b) Whether defendants violated the UTPCPL or other state collection practices laws by utilizing improper form collection letters or other improper collection tactics; (c) Whether members of the Subclass have sustained damages as a result of defendants conduct and, if so, the proper measure of damages; and (d) Whether plaintiff Bosch and the Subclass are enti tled to injunctive relief. Subclass B (a) Whether Fredmont misrepresented or created a like lihood of confusion or of misunderstanding as to the government affiliation with the home improvement services; (b) Whether these actions took place with the knowl edge, approval or willful blindness of the Empire Defendants; (c) Whether the Empire Defendants are liable for Fred monts violations pursuant to the uniform contrac tual provision in each Home Improvement Install ment Contract required by a federal regulation known as the FTC Holder Rule; and (d) Whether members of the Subclass have suffered an ascertainable loss as a result of defendants con duct and, if so, the proper measure of damages. Subclass C (a) Whether Fredmont provided to members of the Sub class substandard, misdescribed, incomplete or oth erwise inferior home improvement goods and ser vices in violation of state statutory, tort and contract laws; (b) Whether these actions took place with the knowl edge, approval or willful blindness of the Empire Defendants; (c) Whether the Empire Defendants are liable for Fred monts violations pursuant to the uniform contrac tual provision required by federal regulation known as the FTC Holder Rule; and (d) Whether members of the Subclass have suffered an ascertainable loss as a result of defendants con duct and, if so, the proper measure of damages. 27. A class action is superior to all other available meth ods for the fair and efficient adjudication of this contro versy because such treatment will permit a large number of similarly situated persons to prosecute their common claims in a single forum simultaneously, efficiently and with out the unnecessary duplication of evidence, effort and expense that numerous individual actions would engender. Class treatment also will permit the adjudication of rela tively small claims by members of the Class and the Sub

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cance of the work order was? [Objection to form deleted] A. I dont quite understand what youre saying. In other words, did I know what a work order was? Q. Yes. What was it? A. Well, it was a dealer, they had, you know, that was another form to be approved when you signed up as a dealer, and every year their contract, we had to get a copy of that. Their names on it, their address and, you know, then there was a place where they had the detail for their detailed description, the cus tomer signed it. **** Q. Right, but thats something Empire would approve, that dealer contract, correct? A. Yes. Thats because this was provided by each indi vidual dealer, they had their name and address on it. Q. Right, but in the application process, you would get a form ofa version of their work order form and approve it, correct? A. Thats correct. Milwaukee Deposition at pp. 5557. Throughout the Class Period, Empire was aware and approved of Fredmonts uniform use of the Work Order Contract for each member of the Class. Empire was also aware, or should have been aware, of (and approved of) Fredmonts marketing tech niques and actions as an Empire dealer/contractor. 33. Fredmonts marketing followed a consistent pattern throughout the Class Period. Fredmont canvassers would target a lowincome area such as Chester, Pennsylvania and, often, would distribute brightly colored flyers substan tially in the form of Exhibit E hereto. The flyers decep tively and misleadingly represented that the dealer was affiliated with a government program that would provide funding for necessary home improvements to homeowners in the area. Fredmont salespeople would go doortodoor making presentations often claiming government sponsor ship of the homeimprovement program. The salespeople would write down on the Work Order Contract the work the homeowner would want pursuant to the government program. They would also obtain recent pay stubs and other creditrelated data, often based on the representation that such information was required to qualify the homeowner for the program. 34. The uniform Work Order Contract thus became the hook in defendants common scheme and course of con duct. Although initially portrayed as merely part of an ap plication subject to approval by another authority, Fred mont, with Empires consent and approval, later used the Work Order Contract as a device to coerce and trick home owners into accepting the financing as later presented or paying the cash price and reimbursing Fredmont for all its costs, plus Contractors loss of profits. Empire knew or should have known of Fredmonts actions but took no steps to prevent Fredmont from so acting. Of course, the homeowners targeted by Fredmont uniformly were unable to pay the cash price and had little choice but to accept the later presented Home Improvement Installment Con tract.

classes who could not otherwise afford to litigate individu ally such claims against sizeable corporate defendants. 28. Plaintiff knows of no difficulty to be encountered in the management of the action that would preclude mainte nance as a class action. Specific Substantive Allegations 29. In or about 1993, if not earlier, Fredmont became a dealer for the solicitation, placement and closing of FHA Title I Home Improvement Installment Contracts for Em pire and its affiliates. As a dealer for Empire, Fredmont was required by Empire to follow Empires loan solicita tion and approval standards, to conform with applicable FHA and HUD guidelines, to submit lists of its canvassers and salesmen, to verify its financial wherewithal to meet its obligations to customers as a dealercontractor, to pro vide Empire with examples of its home improvement adver tisements, and to submit to biannual reviews and verifica tions by Empire of Fredmonts compliance with the require ments of Empire and applicable state and federal con sumer and home improvement financing laws. 30. In particular, throughout the Class Period, applica ble regulations promulgated by the Department of Hous ing and Urban Development (HUD), pursuant to Title I of the National Housing Act, required Empire to visit Fred monts places of business at least once in every six months to review its Title I performance and compliance. 24 C.F.R. 201.27. The regulations also required Empire to termi nate any dealer, including Fredmont, who failed to satis factorily perform its contractual obligations to borrowers or comply otherwise with Title I program requirements, or when the dealer [was] unresponsive to the lenders super vision and monitoring requirements. Id. In essence, HUDs regulations created a selfregulatory framework that im posed a duty on lenders such as Empire to ensure the compliance of their dealercontractors with applicable fed eral and state consumer protection laws. 31. In or about 1993, if not earlier, Fredmont became a dealer for the solicitation, placement and closing of FHA Title I Home Improvement Installment Contracts for Em pire and its affiliates. As a dealer for Empire, Fredmont was required by Empire to follow Empires loan solicita tion and approval standards, to conform with applicable FHA and HUD guidelines, to submit lists of its canvassers and salesmen, to verify its financial wherewithal to meet its obligations to customers as a dealercontractor, to pro vide Empire with examples of its home improvement adver tisements, and to submit to biannual reviews and verifica tions by Empire of Fredmonts compliance with the require ments of Empire and applicable state and federal con sumer and home improvement financing laws. 32. In fulfilling this duty upon initially approving and thereafter reapproving Fredmont as one of its dealers, Em pire received and approved Fredmonts Work Order Con tract (Exhibit A hereto) as an acceptable form of contract and marketing device. Arthur Milwaukee, Empires Pitts burgh branch manager, testified under oath as follows: Q. Was there a policy or practice that you had while at Empire as to what the work order, what the signifi

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35. In particular, Fredmonts Work Order Contract form, used with all of the members of the Class at the initial salesapplication meeting, provided, in pertinent part, as follows: The owner will pay the contractor for the work, Dollars [sic] as the cash price of $ follows: DOWN PAYMENT OF $[typically zero] BAL ANCE OF $ DUE UPON COMPLE TION OF THE WORK. A LOAN CAN BE AR RANGED FOR THE OWNER (WHETHER ONE OR MORE PERSONS) FOR APPROXI A MONTH FOR MATELY $ MONTHS AT % APR. The Contractor shall perform and complete the work in a good and workmanlike manner. Work not written above but performed by the Contractor for the Owner shall be paid for by the Owner on a labor plus materials basis, priced by the Contractor in accordance with its pricing policies. If the Owner stops the Contractor from beginning the work after the end of any cancella tion period which the Owner has under Federal, State or local law and/or regulations or ordinances, the Owner will be liable to and pay the Contractor for all costs and expenses incurred by it arising out of or in connection with the work, including but not limited to the execution of this Contract, prepa rations and purchases made for the work, plus Con tractors loss of profits. The Contractor may, at any time, sell, assign or transfer its rights and/or duties under this contract and any monies paid or to be paid hereunder. (Emphasis added). 36. Typically, no down payments were required from the members of the Class in connection with the two (2) con tract sales and financing scheme. 37. In addition, the cancellation period provided by the first Work Order Contract typically expired before the class member was advised that he or she had qualified for the government sponsored funding for the work. 38. Shortly thereafter, the homeowner would receive a conditional commitment letter sent by Empire or one of its affiliates advising that the funding had been approved for the homeowner. Empire would also send a copy to Fred mont. 39. The Empire Defendants knew and approved of and took no steps to prevent Fredmonts pattern, practice and course of dealing to start work on a customers home, or to at least spike the job by either dropping off equipment and materials at the site or beginning demolition in prepa ration for reconstruction, almost immediately after the con ditional commitment letter was received by the home owner. For example, Arthur Milwaukee testified under oath in that respect as follows:

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Q. With regard to the commitment letter, when would the commitment letter be sent out to the customer in the process? A. When? Q. Yes. A. Once the loan was approved by me, then my girls type up the commitment letter and send it out. **** Q. After that, then the home improvement installment sales contract would be taken out to the customer to be competed and signed? [objection to form deleted] A. Youre saying at that point, no. In other words we would send out a contract. I mean, a preapproval letter or commitment. Its a synomyous [sic] term. That would be sent out to the customer and the dealer. At that point, the dealer, he could go out and start installing his job. Now, I dont know at what point they got any document signed. Thats the only thing I can tell you. I dont know what point other than they would bring the documents in. Once they had a completion signed. Okay. So, you know, I mean, I couldnt say it was one day into it, into them doing the job, or two days or they got them all signed at the end. I really dont know. Q. So it was after the approval or commitment letter went out that you permitted the contractor to start the job, correct? A. Yes. Because, you know, he knew he had the ap proval on that deal that he could go ahead, and that was his commitment, that he could go ahead and start installing the job. Q. That was the standard practice for Empire; is that right? [objection to form deleted] A. Yes. It was standard with any lender. Q. It was uniform, just as soon as the commitment let ter went out? A. Commitment letter went out, and the dealer got his copy, and he knew he could go ahead and start his work. Q. Did you ever give any dealer an instruction not to start the job until the rescission period had expired on the home improvement financing contract? A. No. I mean, they would get thethats all with the dealer, the rescission, because the dealer had the mortgage documents, and that was another form I didnt mention that he had the rescission. Each party to the loan had to sign a separate rescission form. **** Milwaukee Deposition at pp. 4447. Q. When that commitment letter went out, it was okay, in your mind, as Empire person for the dealer to start the job, correct? [Objection to form deleted]

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A. No. Q. So no lender ever told you there was anything wrong with that? [Objection to form deleted] A. Not that I would recall, no. Q. Had you had any discussions with any of the lender representatives about the proper timing for having these documents signed? A. No, not that I recall. Black Deposition, at pp. 3031. Regardless of whether any individual Class Member was persuaded or cajoled into signing the certificate of completion before the work was, in fact, completed, all Class Members were confronted with Fredmonts contention that the initial Work Order Con tract obligated the Class Member to either sign the pack age of funding documents, obtain alternative financing or pay cash to Fredmont under the Work Order Contract. 42. The experience of representative plaintiff Kim Bo sch is typical in this regard, and in all other respects perti nent to the Class claims and all Subclass claims. 43. On or about May 25, 1995, a man who identified himself as Lucky came to the home of plaintiff Bosch and stated that he was part of a government program mak ing funds available for home improvements and that plain tiff Bosch might be eligible for such funds. 44. Lucky, who is believed to be the former Fredmont employee named Cosimo J. Skil, asked about plaintiffs income and to see her pay stubs. He then had plaintiff sign the Work Order Contract with Fredmont, a copy of which is attached hereto as Exhibit A [not reprinted herein]. 45. When plaintiff asked about the language in the con tract referring to a loan, Lucky told her to disregard it because she was applying for a grant. 46. Shortly thereafter, plaintiff showed the papers to her employer. Her employer advised her that the transac tion appeared to be irregular and she should not go through with it. 47. On that advice, plaintiff sent notice to Fredmont that she was not interested in pursuing the transaction. 48. On or about May 30, 1995, Lucky contacted plaintiff and asked why she had cancelled. He again insisted that her repairs would be funded by a grant and not a loan, and convinced her to sign a new Work Order Contract, dated May 30, 1995, a copy of which is attached hereto as Exhibit B [not reprinted herein]. 49. At or about the same time, plaintiff received a copy of a conditional commitment letter from Empire. 50. Shortly thereafter, a man who identified himself as Fred Paslode and other men came to plaintiffs home to make repairs. 51. During the time the work was being done, a repre sentative of Fredmont asked plaintiff to sign a large stack of papers so the men from Fredmont could be paid. In cluded in the stack was a Home Improvement Installment Contract, a copy of which is attached hereto as Exhibit C [not reprinted herein]. 52. Also included in the stack of papers was a form Collateral Mortgage.

A. Well, in other words, what I said is the dealer could start the job because he got his approval. Thats com mon sense. He knows the loan has been approved. Hes going to start his job. Q. Right, right. Did you ever give any instruction to any dealer not to start the job until the rescission period for the loan had expired? A. No. Milwaukee Deposition at p. 48. **** Q. So if a dealer started work before the installment sales contract was signed by the borrower, that would be considered improper, right? A. For the installment sales, yes. Right. Q. Because they wouldnt have a right to rescind? A. Right. Thats correct, yes. Milwaukee Deposition, at pp. 161162. 40. The Empire Defendants also knew, or recklessly dis regarded the fact, that it was Fredmonts pattern, practice and course of dealing to present, after the work was under way, a large package of financing and related documents for the Class Member to sign at his or her home. See Milwaukee Deposition at p. 45 above. Among this stack of complicated forms was (i) the form of Home Improvement Installment Contract Empire required Fredmont to use; (ii) a form of Collateral Mortgage Empire required; (iii) another right to cancel notice; (iv) a credit application form; (v) a form of HUD notice; (vi) a settlement sheet; and (vii) a certificate of completion. 41. In many instances, Fredmont personnel would insist that the customers sign all of the documents during the Fredmont representatives visit, even though the work had not yet been completed. For example, Kenneth Black, a Fredmont employee during the Class Period, testified un der oath in the course of a deposition in this case on March 4, 1998 (the Black Deposition) as follows: Q. Did you include in the package that you took out to people completion certification? A. Completion, yes. Q. Was that included in all your packages? A. Yes. Q. Would you have the home owners sign the package of documents even if the work was not completed yet? A. Yes. Q. What about if the work hadnt started yet, would you also have them sign the whole package of docu ments? A. Yes. Black Deposition, at pp. 2728. Mr. Black also testified that no lender had ever instructed him that it was im proper to have the loan documents signed by the home owner after the work had commenced: Q. Did you ever, you yourself, ever receive any instruc tions from any of the lenders that indicated in words or substance that they would consider it improper to have the loan package of documents signed by the home owner after the work had already started?

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53. The Fredmont representatives impressed upon plain tiff that work had been performed and that she had to sign the papers for the government funding or pay for the work with cash, which plaintiff did not have. 54. The representations made by the Fredmont represen tatives throughout the transaction were intentionally false and plaintiff was deceived into signing two (2) contracts obligating her to pay for home improvements. In essence, plaintiff and all members of the Class had no reasonable opportunity to reject or rescind the transaction upon receiv ing the stack of documents, as the second contract stage was presented as a sign or pay cash option. 55. The Home Improvement Installment Contract and the Collateral Mortgage were immediately assigned to de fendant Empire or TMI, as servicer for defendant First Bank. 56. The work done by Fredmont soon proved to be de fective in many ways. For example, the window installation was never completely finished. To this day, the windows are not properly installed. The kitchen cabinets fell and separated from the wall. The kitchen sink plumbing was leaking underneath, causing substantial damage to the floor and supporting beams and resulting in rot and odors. The molding around the kitchen countertop was not properly installed and began to fall down. The bottom of a storm door broke off and was not properly replaced. A back door was removed and never replaced. After making a number of payments, plaintiff stopped paying and sought legal ad vice. 57. At various times, plaintiff was informed that her loan was being serviced by defendant TMI. At other times she was informed that it was being serviced by defendant Em pire or defendant EFC. 58. Defendants Empire, TMI, EFC and First Bank are either debt collectors or creditors within the meaning of the Pennsylvania Debt Collection Practices regulations, 37 Pa. Code Ch. 303. To the extent the servicing of the loan was transferred to TMI, EFC, or Empire after the loan was in default, those defendants were also collection agents subject to the FDCPA. 59. Representatives of defendants Empire, EFC and TMI conducted a campaign of telephone calls and letters to convince plaintiff to pay. 60. These calls included numerous calls to plaintiffs place of employment, including multiple calls per day, calls to plaintiffs home late at night, and deceptive letters. As a result, plaintiff lost two days of work, felt it necessary to change her phone number, and suffered other damages. 61. Letters sent to plaintiff, and to members of the Class, by defendants Empire, EFC and TMI after they became subject to the FDCPA failed to contain notices required by that Act and deceptively claimed that defendants would take action that they did not intend to take or that they could not legally take. In addition, several of the letters violated the requirements of the Pennsylvania Loan Inter est and Protection Law, 41 P.S. 101 et seq. by, among other things, accelerating the loan without notice. 62. The letters and telephone calls demanded charges that plaintiff did not owe, and made unfair, deceptive and misleading representations about the alleged debt. Many

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of the letters and calls were initiated by Empire after it had knowledge that plaintiff was represented by counsel. Calls to her place of employment continued even after Empire knew she was not to receive calls at her job. 63. On April 3, 1997, plaintiff, through her counsel, sent notice to defendant Empire that she was rescinding the transaction due to the failure to make numerous material disclosures under the TILA, including proper notice of the right to cancel the transaction. A copy of the notice of rescission is attached hereto as Exhibit D [not reprinted herein]. 64. Defendants received the plaintiffs notice of rescis sion on or about April 15, 1997, but none of the defen dants took the necessary steps to comply with their obliga tions under the UTPCPL or the TILA after a valid rescis sion. 65. Despite notice of her representation by counsel, rep resentatives of defendant Empire continued to call plain tiffs home numerous times after April 15, 1997, at hours very early in the morning and late at night. 66. Pursuant to the Home Improvement Installment Con tract attached hereto as Exhibit C and the FTC Holder Rule, any holder thereof is subject to all claims and de fenses which the plaintiff could assert against defendant Fredmont, up to the amount of the contract [not reprinted herein]. Accordingly, the Empire Defendants are, as a mat ter of law and contractual agreement, subject to all of the claims that Class Members have against Fredmont, up to the amount of each contract. 67. But for Empire continuing to fund loans originated by Fredmont, plaintiff and members of the Class would not have been injured as set forth herein. As such,In addi tion, the Empire Defendants have aided, abetted, acqui esced in and rendered material assistance to defendant Fredmont in furtherance of the fraudulent scheme and course of conduct alleged, while knowingly, or recklessly or negligently disregarding that Fredmont had engaged in and was engaging in the misleading sales practices de scribed above. In particular, the Empire Defendants ap proved of Fredmonts Work Order Contract and provided Fredmont with various Empire forms and documents used as part of the two (2) contract scheme. The Empire Defen dants also continued to underwrite, purchase, acquire, ser vice or accept assignments through and from Fredmont of contracts with other members of the Class and demand payment after receiving complaints from Fredmont custom ers. As a result, the Empire Defendants knowingly breached their selfregulatory duties and have failed to honor their contractual obligations under the FTC Holder Rule and d provision. V. CLAIMS COUNT ONETRUTH IN LENDING ACT 68. Plaintiff repeats and realleges the above paragraphs as if fully set forth herein. 69. Defendants actions, and actions for which defen dants are responsible as assignees, were in violation of the TILA.

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(c) Intentionally, knowingly, recklessly or negligently mak ing repairs, improvements or replacements on real property of members of Subclass C of a quality infe rior to and below the standard of that agreed upon in writing in violation of 73 P.S. 2012(4)(xvi) and the similar laws of other states. (d) Intentionally, knowingly, recklessly or negligently at tempting to collect from members of Subclass A a debt in violation of the Pennsylvania Debt Collec tion Practices regulations, 37 Pa. Code Chapter 303. (e) Intentionally, knowingly, recklessly or negligently de priving plaintiff and the members of the Class of their rights to cancel the transactions. (f) Intentionally, knowingly, recklessly or negligently en gaging in the fraudulent or deceptive conduct de scribed throughout this Complaint, including per se violations of other state and federal statutes, which created a likelihood of confusion or of misunderstand ing in violation of 73 P.S. 2012(4) (xxi) and the similar laws of other states. 78. As a result of the defendants violations of the UT PCPL and the similar laws of other states, plaintiff and the Class have suffered ascertainable losses entitling them to an award of treble damages and attorneys fees pursuant to 73 P.S. 2019.2 and damages and fees pursuant to the similar laws of other states. COUNT FOURBREACH OF CONTRACT 79. Plaintiff repeats and realleges the above paragraphs as if fully set forth herein. 80. The standard form contracts and all similar form contracts used by defendants contain language required by the FTC Holder Rule, an express covenant that any holder of the consumer credit contract shall be liable for all claims the consumer has against the seller, up to the amount of the contract. The Empire Defendants have breached and failed to abide by that provision. 81. In addition, each of the contracts contain an implied covenant that defendants named herein will deal with their customers fairly and in good faith in performing the obli gations required under the contract. Defendants breached that implied covenant of good faith and fair dealing with respect to members of the Class by failing to rescind, fail ing to respond to complaints about workmanship and fail ing to assume responsibility for defects in workmanship and complying with plaintiffs rescission demand. 82. All defendants named herein also breached the con tracts with respect to members of the Class by failing to complete or perform the promised home repairs. 83. As a consequence of defendants breaches of im plied and express contractual terms, plaintiff and members of the Class have sustained damages. COUNT FIVEUNJUST ENRICHMENT/MONEY HAD AND RECEIVED 84. Plaintiff repeats and realleges the above paragraphs as if fully set forth herein.

70. As a result of these violations, plaintiff Bosch and members of the Class who entered into transactions after October 17, 1994 are entitled to declaratory and injunctive relief to effectuate their right to rescind the transactions. 71. As a result of defendants violations of the TILA, plaintiff Bosch is entitled to statutory damages, actual dam ages, attorneys fees and costs. COUNT TWOFAIR DEBT COLLECTION PRACTICES ACT 72. Plaintiff repeats and realleges the above paragraphs as if fully set forth herein. 73. The actions of Empire, TMI and EFC described above violated the FDCPA. 74. As a result of those violations, each defendant is liable to plaintiff for actual damages and is liable to plain tiff and each member of Subclass A who received im proper collection notices or was subject to improper collec tion activities after October 17, 1996 for statutory damages in the amount of $1,000 each, actual damages, attorneys fees and costs. COUNT THREEUNFAIR AND DECEPTIVE ACTS AND PRACTICES 75. Plaintiff repeats and realleges the above paragraphs as if fully set forth herein. 76. Plaintiff and the members of the Class entered into the transactions described above and purchased goods and ser vices primarily for personal, family or household purposes. 77. Defendants engaged in numerous unfair methods of competition and unfair or deceptive acts or practices, as defined by the UTPCPL, 73 P.S. 2012(4) and 2013, as well as similar laws of other states, in connection with the purchase of home construction and repair services and goods and the entering into of standard form contracts in that they involved by engaging in the following acts: (a) Employing the deceptive two contract marketing scheme described above. (b) Intentionally, knowingly, recklessly or negligently mis representing to members of Subclass B that the home repair program was sponsored by or affiliated with the government, constituting an unfair and deceptive act or practice as defined by 73 P.S. 2013 and 2012(4) (ii) and (iii), and similar laws of other states, in that it caused the likelihood of confusion or misunderstand ing as to the source, sponsorship, approval, or certifica tion of the goods and services that were being pro vided and as to the defendants affiliation, connection or association with, or certification by another, namely, the United States government. Further, by represent ing that the repairs would be funded or assisted by government sponsored programs, when in fact the re pairs were to be financed by a loan to the homeowner, defendants violated 73 P.S. 2012(4) (ix) and similar laws of other states. Additionally, the defendants rep resentation that the home improvement program had the sponsorship and approval by the United States gov ernment when, in fact, there was no such approval or sponsorship, also violated 73 P.S. 2012(4) (v) and similar laws of other states.

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85. Defendants have been unjustly enriched at the ex pense of plaintiff and the Class by collecting money to which they are not entitled. 86. Plaintiff and the members of the Class are each enti tled to recover such money. COUNT SIXPROMISSORY ESTOPPEL 87. Plaintiff repeats and realleges the above paragraphs as if fully set forth herein. 88. Fredmont routinely promised to provide home im provement goods and services at promised prices which they did not provide to plaintiff and members of Subclass C. Fredmont Defendants deceptively presented ambigu ous contracts that did not conform to their oral promises and misled plaintiff and members of Subclass C as to the performance of those promises. Defendants breached their oral promises and failed to perform. 89. As a result, plaintiff and members of the Class have suffered substantial damages. COUNT SEVENBREACH OF FIDUCIARY DUTY/UNCONSCIONABILITY 90. Plaintiff repeats and realleges the above paragraphs as if fully set forth herein. 91. Each of the defendants sued herein had and has a special relationship with the plaintiff and Class members with whom they respectively contracted. Each defendant had superior knowledge and induced plaintiff and mem bers of the Class to repose trust and confidence in each defendant. Each defendant therefore owed the fiduciary duties of candor, full disclosure and loyalty to plaintiff and members of the Class. Each defendant breached that duty and acted unconscionably. 92. As a result of each defendants breach of their fidu ciary duties to plaintiff and each Class member, plaintiff and the Class have suffered damages. COUNT EIGHTFRAUDULENT MISREPRESENTATION AS AGAINST FREDMONT AND DEWALT ONLY 93. Plaintiff repeats and realleges the above paragraphs as if fully set forth herein. 94. Defendants Fredmont and DeWalt either on their own or through their agents, principals, dealers or affili ates intentionally, or with reckless disregard for the truth, made representations of material fact, including: (a) To members of Subclass B, that the home improve ment program was sponsored by or affiliated with the government or was otherwise beneficial because of a connection with the government; (b) To members of Subclass C, that the home improve ments would be performed in a good and workman like manner to those members satisfaction when, in fact, they were not; (c) That the home improvement repairs would be of reasonable quality and workmanship when, in fact, they were not; and (d)That the home improvements would be installed to plain tiffs complete satisfaction when, in fact, they were not.

10.1

95. Defendants Fredmont and DeWalt made these mis representations as part of a conspiracy to defraud. Plain tiff and the Class relied upon those defendants fraudulent misrepresentations of material facts, which were calcu lated to, and did, deceive plaintiff and the members of the Class, resulting in serious injury to plaintiff and the mem bers of the Class. COUNT NINENEGLIGENT MISREPRESENTATION 96. Plaintiff repeats and realleges the above paragraphs as if fully set forth herein. 97. Defendants either on their own or through their agents, assignees, principals, dealers or affiliates, where it was rea sonably foreseeable that Class members would act or re frain from acting intending for others to act in reliance on their representations, negligently made misrepresentations of and omitted to state material facts, including: (a) The representation that Class Members were not free to rescind or reject the transaction without obli gation or cost within three (3) days after receiving the Home Improvement Installment Contract; (b) To members of Subclass B, that the home improve ment program was sponsored by or affiliated with the government or was otherwise special because of a connection with the government; (c) To members of Subclass C, that the home improve ments would be performed in a good and workman like manner to those members satisfaction when, in fact, they were not; (d) To members of Subclass C, that the home improve ments would be of reasonable quality and workman ship when, in fact, they were not; (e) To members of Subclass C, that the home improve ments would be installed to plaintiffs complete sat isfaction when, in fact, they were not; and (f) To members of Subclass A, that certain collection action would be taken when, in fact, no such action was intended to be taken. 98. These misstatements and omissions of material facts were calculated to induce acceptance by plaintiff and the members of the Class. 99. As a result of defendants negligent misstatements and omissions of material facts plaintiff and members of the Class have suffered serious injury. VI. JURY TRIAL DEMAND 100. Plaintiff demands trial by jury as to all issues so triable. VII. PRAYER FOR RELIEF WHEREFORE, plaintiff, individually and on behalf of the Class and Subclasses, requests the following relief: (a) An order certifying the proposed Class, together with the appropriate Subclasses, under Rule 23 of the Fed eral Rules of Civil Procedure and appointing plaintiff and her counsel to represent the Class and Subclasses; (b) An order granting rescission or rescissory damages or restitution, entering declaratory relief and void

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Consumer Law Pleadings Number Five

certification of a class of all persons who, from October 17, 1991 through October 16, 1997, purchased home repair and/or remodeling goods and services from defendant Fred mont Builders, Inc. for a quoted amount, who executed a standard form contract and mortgage in favor of Fred mont which did not match the terms that had been agreed to orally with regard to the work to be done and/or the price to be paid, and/or for whom the goods and services either were not completely installed or were installed in an unsatisfactory manner, who were not provided with proper notice of their rights to rescind the transactions, whose loans and mortgages were assigned by Fredmont to defen dant Empire Funding Corporation, as servicer for defen dants TMI Financial, Inc., EFC Servicing, LLC or First Bank, N.A., Trustee and who were subjected by the defen dants to debt collection practices in violation of the debt collection practices laws of Pennsylvania or other states. Plaintiff also seeks certification of a subclass of all class members who, from October 18, 1996 through October 17, 1997, received telephone calls, letters and other communi cations from defendants Empire, TMI or EFC in violation of the federal Fair Debt Collection Practices Act. Excluded from the class and subclass are the defen dants, all officers and directors of the defendants and the immediate family of defendant Stanley DeWalt. [Attorney for Plaintiff]

ing any and all liens, judgments or other encum brances obtained by defendants, their agents or as signs against the property of plaintiffs or members of the Class; (c) In the alternative, an order declaring that all Class members who entered into transactions on or after October 17, 1994 have the right to rescind under the TILA; (d) An order enjoining defendants from continuing to engage in the fraudulent practices described in this Complaint; (e) Statutory damages under TILA for the named plain tiff, together with attorneys fees and costs; (f) Statutory damages under FDCPA for members of Subclass A, together with attorneys fees and costs; (g) Treble damages for defendants violations of the UT PCPL; (h) Compensatory damages; (i) Consequential damages; (j) General damages for all injuries resulting from the breaches of contract, unjust enrichment, promissory estoppel, breaches of fiduciary duty, fraudulent mis representation and negligent misrepresentation de scribed in this Complaint for the appropriate Sub classes; (k) Punitive damages; (l) Costs and disbursements of the action; (m) Reasonable attorneys fees; and (n) Such other relief at law or equity as this Court may deem just and proper. [Attorney for Plaintiff]

10.3 Memorandum Supporting Motion for Class Certification

IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA
) KIM BOSCH, on behalf of herself ) and all others similarly situated, ) Plaintiffs, ) ) v. ) ) FREDMONT BUILDERS, INC., ) STANLEY DEWALT., TMI ) FINANCIAL, INC., EFC ) SERVICING, LLC and FIRST ) BANK, N.A., Trustee, ) Defendants. ) )

10.2 Motion for Class Certification

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA
) KIM BOSCH, on behalf of herself ) and all others similarly situated, ) Plaintiffs, ) ) v. ) ) EMPIRE FUNDING ) CORPORATION, STANLEY ) DEWALT, FREDMONT ) BUILDERS, INC., TMI ) FINANCIAL, INC., EFC ) SERVICING, LLC and FIRST ) BANK, N.A., Trustee, ) Defendants. ) )

MEMORANDUM OF LAW IN SUPPORT OFPLAINTIFFS MOTION FOR CLASS CERTIFICATION I. PRELIMINARY STATEMENT A. BACKGROUND AND NATURE OF THE CASE Plaintiff, by and through her attorneys, respectfully sub mits this memorandum in support of her Motion for Class Certification pursuant to Rules 23(a), 23(b)(2) and (b)(3) of the Federal Rules of Civil Procedure (Fed.R.Civ.P.),

PLAINTIFFS MOTION FOR CLASS CERTIFICATION Plaintiff, by her attorneys, hereby moves this Court, pur suant to Rule 23 of the Federal Rules of Civil Procedure, to certify this action as a class action and plaintiff Kim Bosch as class and subclass representative. Plaintiff seeks

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seeking certification of this action as a class action and plaintiff Kim Bosch as a class representative and subclass representative. This is a consumer class action brought on behalf of victims of a classic twocontract scheme whereby defen dants first had plaintiffs agree to home improvement re pair workin the form of a work order contractand then later had them agree to the financing of the work in a standard form financing contract. The two contracts con tained materially conflicting language about the right to rescind the contracts. As a consequence, and because of the sequence of events, the contracts violated the consum ers rights under federal and state law to a clear and non misleading disclosure of their rights of rescission. Further, the effect of the twocontract deceit was to prevent the consumer from even attempting to exercise rescission rights under the second contract; consumers were led to believe that if cancellation were attempted, they would still be obligated to pay cash for the repair work ordered in the first contract, which typically had already commenced. The result of the scheme was uniformly to deprive the home owners of the ability to reject or rescind the transactions and to trick them into agreeing to and paying for home improvement repairs from defendant Fredmont and financ ing by the Empire Defendants that was marketed as a crit ical component of the home improvements.1 B. PROCEDURAL HISTORY Plaintiff filed a Class Action Complaint in this case on October 17, 1997. In response, the Empire Defendants (as hereafter defined) filed an Answer, CrossClaim and Coun terclaim, as well as a Motion to Strike Class Allegations and to Dismiss Counts III and VIII for Failure to Allege Fraud With Particularity (the Motion to Dismiss). The Motion to Dismiss was subsequently denied without preju dice. Thereafter, the parties entered into a Joint Proposed Case Management Plan pursuant to which documents were exchanged, depositions were taken and a briefing schedule developed for plaintiff to move for class certification and for the defendants to oppose such motion. Following the gathering of evidence during the discovery period, in order to meet the objections in the Motion to Dismiss with re spect to particularity, to conform the Complaint to the evidence gathered and to clarify that Count VIII was not directed to the Empire Defendants, plaintiff filed on March 12, 1998 a Motion for Leave to Amend Class Action Com
1 Courts that have considered similar twocontract schemes have concluded that they violate the rescission provisions of the federal Truth in Lending Act (TILA). See, e.g. Taylor v. Domestic Re modeling, Inc., 97 F.3d 96 (5th Cir. 1996) (contractors premature performance of remodeling before rescission period expired enti tled consumer to rescind transaction); Doggett v. County Savings & Loan Co., 373 F. Supp. 774, 777 (E.D. Tenn. 1973) (TILA vio lated by contractor who provided rescission notice after work was completed); In re Lombardi; 195 B.R. 569 (Bankr. D.R.I. 1996) (two contract dodge scheme violated TILA rescission right). In this case, in addition to the sequence of the two contracts, the language of the form contracts themselves violated TILA and was likely to lead to confusion in violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law and similar con sumer protection laws of other states.

10.3

plaint and attached as Exhibit A thereto a Second Amended ComplaintClass Action (the Amended Class Action Com plaint) [not reprinted herein]. C. THE CLASS AND SUBCLASSES As set forth in the Amended Class Action Complaint, plaintiff seeks certification of a class of all persons who, from January 1993 through October 16, 1997 (the Class Period), were subjected to a two contract sale and financ ing scheme for the purchase of home repair and/or remod eling goods and services from defendant Fredmont Build ers, Inc. (Fredmont) in which they first signed a stan dard form Work Order Contract and thereafter signed a second Home Improvement Installment Contract which was assigned by Fredmont to defendant Empire Funding Cor poration (Empire), defendant TMI Financial, Inc. (TMI), defendant EFC Servicing, LLC (EFC) or defendant First Bank, N.A., Trustee (First Bank) (Empire, TMI, EFC and First Bank, collectively the Empire Defendants). Ex cluded from the Class and Subclasses are the defendants, all officers and directors of the defendants and the imme diate family of defendant Stanley DeWalt (DeWalt). The Amended Class Action Complaint also seeks certi fication of three overlapping Subclasses defined as follows: Subclass AAll Class Members who received telephone calls, letters or other communications from Empire, TMI or EFC in violation of the federal Fair Debt Collection Practices Act (FD CPA), the Pennsylvania Unfair Trade Practices and Consumer Protection Law (UTPCPL) or similar consumer protection laws in other states or state tort law (the Unfair Collection Prac tices Subclass); Subclass BAll Class Members to whom Fred mont, in writing or orally, misrepresented or made statements causing a likelihood of confusion or of misunderstanding as to the source of funds, sponsorship, affiliation, approval or certification for its home improvement services (the Govern ment Affiliation Subclass); and Subclass CAll Class Members who received from Fredmont repairs, improvements or replace ment goods and services that were substandard, misdescribed, incomplete and/or otherwise infe rior to the good and workmanlike standard orally promised and agreed upon in writing (the De fective Work Subclass). D. THE CLAIMS OF THE CLASS AND SUBCLASSES The Amended Class Action Complaint sets forth vari ous claims on behalf of the Class and the Subclasses. Specifically, included among the claims of the Class are that the twocontract sales and financing scheme violated the UTPCPL. Members of the Class whose contracts were entered into after October 17, 1994 also seek, under the federal Truth in Lending Act (TILA), to obtain declara tory relief that they have the right to rescind.

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Consumer Law Pleadings Number Five

In particular, throughout the Class Period, applicable regulations promulgated by the Department of Housing and Urban Development (HUD), pursuant to Title I of the National Housing Act, required Empire to visit Fred monts places of business at least once in every six months to review its Title I performance and compliance. 24 C.F.R. 201.27. The regulations also required Empire to termi nate any dealer, including Fredmont, who failed to satis factorily perform its contractual obligations to borrowers or comply otherwise with Title I program requirements, or when the dealer [was] unresponsive to the lenders super vision and monitoring requirements. Id. In essence, HUDs regulations created a selfregulatory framework that im posed a duty on lenders such as Empire to ensure the compliance of their dealercontractors with applicable fed eral and state consumer protection laws. In fulfilling this duty upon initially approving and there after reapproving Fredmont as one of its dealers, Empire reviewed and approved Fredmonts Work Order Contract as an acceptable form of contract and marketing device. Throughout the Class Period, Empire was aware and ap proved of Fredmonts uniform use of the Work Order Con tract for each member of the Class. Copies of the Work Order Contract appeared in every Class members loan file that plaintiff has been permitted to examine. Empire was also aware of, and approved of, Fredmonts marketing techniques and actions as an Empire dealer. See deposi tion of Arthur Milwaukee, former Pittsburgh branch man ager for Empire, at pp. 5557, attached hereto as Exhibit B [not reprinted herein]. Fredmonts marketing followed a consistent pattern throughout the Class Period. Fredmont canvassers would target a lowincome area such as Chester, Pennsylvania and often would distribute brightly colored flyers substan tially in the form of Exhibit E to the Amended Class Ac tion Complaint. The flyers deceptively and misleadingly represented that the dealer was affiliated with a govern ment program that would provide funding for necessary home improvements to homeowners in the area. Fred mont salespeople would then go doortodoor often mak ing presentations that claimed government sponsorship of the homeimprovement program. In each case, the sales people would write down on the Work Order Contract the work the homeowner would want. They would also obtain recent pay stubs and other creditrelated data, often based on the representation that such information was required to qualify the homeowner. The uniform Work Order Contract thus became the hook in defendants common scheme and course of conduct. Al though initially portrayed as merely part of an application subject to approval by another authority, Fredmont, with Empires consent and approval, later used the Work Order Contract as a device to coerce and trick homeowners into accepting the financing as later presented, representing that the homeowners only alternative was seeking alterna tive financing or paying the cash price and reimbursing Fredmont for all its costs, plus Contractors loss of prof its. See deposition of Kenneth Black, former employee of Fredmont, at p. 39, attached hereto as Exhibit C [not re printed herein]. Of course, the homeowners targeted by Fred

Members of Subclass A, the Unfair Collection Practices Subclass, claim that the Empire Defendants improper col lection practices violate the UTPCPL. Members of Sub class A who, after October 17, 1996, received certain form collection letters or were subjected to other collection ac tivity that violated the federal Fair Debt Collection Prac tices Act (FDCPA) also seek relief under that statute. The members of Subclass A who received the form collec tion letters and were subjected to improper collection ac tivity are easily determined by reference to the Empire Defendants collection records which list all phone calls and form notices and letters that were sent to consumers. Members of Subclass B, the Government Affiliation Sub class, claim that Fredmonts oral and written misrepresen tations or statements causing a likelihood of confusion or of misunderstanding as to the source of funds, sponsor ship, affiliation, approval or certification for the home im provement services violated the UTPCPL. Members of Subclass C, the Defective Work Subclass, claim that the repairs, improvements or replacement goods and services provided by Fredmont were substandard, mis described, incomplete and/or otherwise inferior to the good and workmanlike standard that was promised, in violation of the UTPCPL. Further, all members of the Class assert claims for com mon law breach of contract, unjust enrichment, promissory estoppel, breach of fiduciary duty and fraudulent and neg ligent misrepresentation. Pursuant to contractual language in each of the Home Improvement Installment Contracts, which was required by a rule of the Federal Trade Commission, 16 C.F.R. 433.2 (the FTC Holder Rule), the Empire Defendants are sub ject to the claims which the members of the Class could assert against Fredmont.2 II. FACTS A. FACTS AS TO THE CLASS In or about January 1993, if not earlier, Fredmont be came a dealer for the solicitation, placement and closing of Home Improvement Installment Contracts for Empire and its affiliates. See deposition of Joe Ryobi, Empire Man ager, at p. 28, attached hereto as Exhibit A [not reprinted herein]. As a dealer for Empire, Fredmont was required by Empire to follow Empires loan solicitation and approval standards, to conform with applicable FHA and HUD guide lines, to submit lists of its canvassers and salesmen, to ver ify its financial wherewithal to meet its obligations to cus tomers as a dealercontractor, to provide Empire with ex amples of its home improvement advertisements, and to submit to biannual reviews and verifications by Empire of Fredmonts compliance with the requirements of Empire and applicable state and federal consumer and home im provement financing laws.
2 The FTC Holder Rule contract language allows a consumer to bring affirmative claims against a lender that he or she had against the seller of goods or services. Maberry v. Said, 911 F. Supp. 1393, 14011403 (D. Kan. 1995); Eachen v. Scott Housing Systems, Inc., 630 F. Supp. 162 (E.D. Ala. 1986).

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mont uniformly were unable to pay the cash price and had little choice but to accept the later presented Home Improvement Installment Contract. In particular, Fredmonts Work Order Contract form, used with all of the members of the Class at the initial salesapplication meeting, provided, in pertinent part, as follows: The owner will pay the contractor for the work, Dollars [sic] as fol the cash price of $ lows: DOWN PAYMENT OF $[typically zero] BAL ANCE OF $ DUE UPON COMPLE TION OF THE WORK. A LOAN CAN BE AR RANGED FOR THE OWNER (WHETHER ONE OR MORE PERSONS) FOR APPROXI A MONTH FOR MATELY $ MONTHS AT % APR. The Contractor shall perform and complete the work in a good and workmanlike manner. Work not written above but performed by the Contractor for the Owner shall be paid for by the Owner on a labor plus materials basis, priced by the Contractor in accordance with its pricing policies. If the Owner stops the Contractor from beginning the work after the end of any cancella tion period which the Owner has under Federal, State or local law and/or regulations or ordinances, the Owner will be liable to and pay the Contractor for all costs and expenses incurred by it arising out of or in connection with the work, including but not limited to the execution of this Contract, prepa rations and purchases made for the work, plus Con tractors loss of profits. The Contractor may, at any time, sell, assign or transfer its rights and/or duties under this contract and any monies paid or to be paid hereunder. (Emphasis added). The Work Order Contract also contained the following language with respect to cancellation rights: You, the Buyer, may cancel this transaction at any time prior to midnight of the third business day after the date of this transaction. See the attached notice of cancellation form for an expla nation of this right. **** NOTICE OF CANCELLATION You may cancel this transaction, without any penalty or obligation, within three business days from the above date. If you cancel, any property traded in, any payments made by you under the contract or sale, and any negotiable instrument executed by you will be returned within ten busi ness days following receipt by the seller of your cancellation notice, and any security interest aris ing out of the transaction will be cancelled.

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If you cancel, you must make available to the seller at your residence in substantially as good condition as when received, any goods delivered to you under this contract or sale; or you may, if you wish, comply with the instructions of the seller regarding the return shipment of the goods at the sellers expense and risk. If you do make the goods available to the seller and the seller does not pick them up within twenty days of the date of your notice of cancellation, you may retain or dispose of the goods without any further obligation. If you fail to make the goods available to the seller, or if you agree to return the goods to the seller and fail to do so, then you remain liable for performance of all obligations under the contract. To cancel this transaction, mail or deliver a signed and dated copy of this cancellation or any other written notice, or send a telegram, to Fred mont Builders, Inc., [Address], no later than mid . night of Typically, no down payments were required from the members of the Class in connection with the twocontract sales and financing scheme. In addition, the cancellation period provided by the first Work Order Contract typically expired before the Class member was advised that he or she had qualified for the government sponsored funding for the work. Shortly thereafter, the homeowner would receive a con ditional commitment letter sent by Empire or one of its affiliates advising that the funding had been approved for the homeowner. Empire would also send a copy to Fred mont. Fredmont would then immediately start work on a customers home, or at least spike the job by either drop ping off equipment and materials at the site or commenc ing demolition in preparation for reconstruction, almost immediately after the conditional commitment letter was received by the homeowner. The Empire Defendants knew and approved of this pattern and practice. The Empire Defendants also knew, or recklessly disre garded the fact, that it was Fredmonts pattern, practice and course of dealing to present, after the work was under way, a large package of financing and related documents for the Class Member to sign at his or her home. Among this stack of complicated forms was (i) the form of Home Improvement Installment Contract that Empire required Fredmont to use; (ii) a form of Collateral Mortgage Em pire required; (iii) another right to cancel notice; (iv) a credit application form; (v) a form of HUD notice; (vi) a settlement sheet; and (vii) a certificate of completion. These documents contained language about the right to cancel that was selfcontradictory and contradicted the provisions of the Work Order Contract, leaving consumers no way to know whether they could still cancel the Work Order Con tract. In many instances, Fredmont personnel would insist that the customers sign all of the documents during the Fred mont representatives visit, even though the work had not yet been completed. Regardless of whether any individual

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including a document entitled Home Improvement Install ment Contract dated June 8, 1995. A copy of the Home Improvement Installment Contract is attached to the Amended Class Action Complaint as Exhibit C thereto. Plaintiff was told that the documents had to be signed so that the workmen could be paid. The Home Improvement Installment Contract con tained the following language at page 1: CANCELLATION AND LIQUIDATED DAM AGES. I may cancel this Contract, without cost or obligation, within 3 business days of the date of this Contract as explained on the attached Notice of Right to Cancel. You may cancel this Contract without cost or obligation, other than to return my down payment to me, only if you are unable to get financing approved for me on the terms disclosed above through Empire Fund ing Corp. (Empire), to whom you will assign this Contract. If financing is available through Empire, but at a higher cost to me, you will pro vide me with new contract documents disclosing the higher cost, and I will have the option of accepting or rejecting them. If I accept, I will again have the right to cancel that contract, with out cost or obligation, within 3 business days of the date of that contact. If I have not cancelled this or any subsequent Contract within the appli cable 3 business days period and I refuse to ac cept delivery of the goods or performance of the services comprising the Home Improvement, or I refuse to permit you to construct the Home Improvement, in addition to any other remedy you may have under this Contract or applicable law, I agree that you shall be entitled to liqui dated damages in the amount of 10% of the Cash Price of the Home Improvement shown below. Despite this provision, you agree that I am still entitled to offer defenses in mitigation of dam ages, and I can pursue any rights of action or defenses that arise out of this Contract. and the following language at page 3: BUYERS RIGHT TO CANCEL YOU, THE BUYER, MAY CANCEL THIS TRANSACTION AT ANY TIME PRIOR TO MID NIGHT OF THE THIRD BUSINESS DAY AF TER THE DATE OF THIS TRANSACTION. SEE THE ATTACHED NOTICE OF CANCELLA TION FORM FOR AN EXPLANATION OF THIS RIGHT. NOTICE TO BUYER: * * * * YOU MAY RE SCIND THIS CONTRACT, SUBJECT TO LIA BILITY FOR ANY LIQUIDATED DAMAGE PROVISION THEREOF AUTHORIZED BY LAW, NOT LATER THAN FIVE (5) P.M. ON THE BUSINESS DAY FOLLOWING THE DATE THEREOF BY GIVING WRITTEN NOTICE OF RESCISSION TO THE CONTRACTOR AT HIS

Class member was persuaded or cajoled into signing the certificate of completion before the work was, in fact, com pleted, all Class members were confronted with Fred monts contention that the initial Work Order Contract, and the work already performed, obligated the Class mem ber to either sign the package of funding documents or pay cash to Fredmont under the Work Order Contract. In many cases, the repairs and improvements to mem bers homes soon proved to be substandard, shoddy, incom plete and otherwise defective. Further, when many mem bers refused to pay for the defective work, they were sub jected to improper collection practices, including form let ters and notices and other contacts that violated the FDCPA, the UTPCPL and similar consumer protection laws of other states. The experience of representative plaintiff Kim Bosch is typical in this regard, and in all other respects pertinent to the Class and Subclass claims. B. FACTS AS TO REPRESENTATIVE PLAINTIFF Plaintiff Kim Bosch is a single mother of two children. She obtained title to her home at [Address] in February 1993 through a special government subsidized program, following a period of being homeless. A purchase money mortgage which enabled her to purchase the home was recorded in favor of the Pennsylvania Housing Finance Agency. Plaintiff is employed as a seamstress in a box spring mattress factory. Plaintiff has a monthly income of approx imately $1,200, which is barely sufficient to provide for necessities for herself and her children. In May, 1995, a man visited the plaintiffs home and told her that he was involved with a government program that would make grants to low income homeowners for home improvements, and that the plaintiff was eligible for such a grant. The man identified himself as Lucky. He asked plaintiff about her income and to see her pay stubs, saying he needed them for his records. Lucky had the plaintiff sign the Work Order Contract with Fredmont, a copy of which is attached to the Amended Class Action Complaint as Exhibit A thereto. At the bottom of the Work Order Contract was the language regarding cancellation rights set forth above. Shortly thereafter, the plaintiff showed the Work Order Contract to her employer. Her employer advised her that the transaction appeared to be irregular and recom mended that she not go through with it. Following the advice of her employer, the plaintiff signed the notice of cancellation at the bottom of the Work Order Contract, thereby canceling the transaction. Several days later, Lucky contacted the plaintiff again and asked why she had canceled the transaction. He again insisted that the repairs to her home would be funded by a grant, not by a loan, and persuaded her to sign a new Work Order Contract, dated May 30, 1995, a copy of which is attached to the Amended Class Action Complaint as Exhibit B thereto. Thereafter, a number of men came to the plaintiffs home to make repairs. While the work was being done on plaintiffs home, she was presented with and asked to sign various documents,

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PLACE OF BUSINESS GIVEN IN THE CON TRACT, BUT IF YOU RESCIND AFTER FIVE (5) P.M. ON THE BUSINESS DAY FOLLOW ING, YOU ARE STILL ENTITLED TO OFFER DEFENSES IN MITIGATION OF DAMAGES AND TO PURSUE ANY RIGHTS OF ACTIONS OR DEFENSES THAT ARISE OUT OF THE TRANSACTION. Because the work on her house had begun, leaving it in a state of disrepair, because of the various representations that she would receive a grant to cover the cost of the repairs and because of the effectiveness of the defendants two contract deceit, plaintiff did not realize that she could rescind the transaction at that point and felt she was re quired to sign the papers that were presented to her. The Home Improvement Installment Contract was im mediately assigned from Fredmont to Empire or to TMI. It is unclear whether Empire is now the holder of the mortgage or merely a servicer. At various times, plaintiff has been informed that the loan was being serviced by Empire, TMI and by EFC. The work performed on plaintiffs home by Fredmont soon proved to be defective in many ways. Consequently, after making a number of payments, the plaintiff stopped paying and sought the advice of counsel. When the pay ments ceased, representatives of Empire, EFC and TMI began a campaign of telephone calls and letters to con vince the plaintiff to resume payments. The telephone calls included numerous calls to plaintiffs place of employ ment, several times a day, calls to her home late at night, and deceptive and confusing letters. As a result of the defendants improper debt collection practices, the plain tiff lost two days of work, felt compelled to change her phone number, and suffered other damages. On April 3, 1997, plaintiff, through counsel, sent a no tice to Empire that she was rescinding the transaction due to the failure to make numerous material disclosures un der the TILA, including the proper notice of her right to cancel the transaction. The defendants received the notice of rescission on or about April 15, 1997, but they did not take the necessary steps to comply with their obligations under the UTPCPL or the TILA after a valid rescission. Further, despite notice of her representation by counsel, Empire continued to telephone the plaintiff at her home in an attempt to collect the debt. Plaintiff believes that defendants Empire, TMI and EFC either knew or should have known that Fredmont had en gaged in or was engaging in the misleading sales practices to which the plaintiff and the members of the Class were subjected. As set forth above, as an approved Title I lender, Empire was required by the HUD regulations to approve and regularly monitor its dealers and to terminate dealers who failed to perform contractual obligations to borrowers satisfactorily. In initially approving Fredmont, and thereaf ter reapproving the dealer pursuant to its periodic review of the dealers activities, Empire approved Fredmonts Work Order Contract as an acceptable form of contract and mar keting device. Empire was also aware of, and approved of, Fredmonts marketing techniques as a dealer. However,

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despite such knowledge, Empire, TMI and EFC continued to purchase or accept assignments from Fredmont of con tracts with other homeowners, thereby aiding, abetting, ac quiescing to and rendering material assistance to Fred mont in furtherance of the fraudulent scheme and conduct described in the Amended Class Action Complaint. III. ARGUMENT A. GENERAL LEGAL STANDARDS GOVERNING CLASS CERTIFICATION In order for a suit to be maintained as a class action under Rule 23 of the Federal Rules of Civil Procedure, plaintiff must establish each of the four threshold require ments of subsection (a) of the Rule which provides: One or more members of a class may sue or be sued as representative parties on behalf of all only if (1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative par ties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class. Fed.R.Civ.P. 23(a). See Wetzel v. Liberty Mut. Ins. Co., 508 F.2d 239, 246 (3d Cir.), cert. denied, 421 U.S. 1011 (1975). The plaintiff must also demonstrate that this action qual ifies for class treatment under at least one of the subdivi sions of Rule 23(b). Under Rule 23(b)(2), a class action will be appropriate where the party opposing the class has acted or refused to act on grounds generally applicable to the class, thereby making appropriate final injunctive relief or corresponding declaratory relief with respect to the class as a whole. Fed.R.Civ.P. 23(b)(2). Under Rule 23(b)(3), a class action will be appropriate where the court finds that the questions of law or fact common to the mem bers of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudi cation of the controversy. Fed.R.Civ.P. 23(b)(3). Plaintiff bears the initial burden of advancing reasons why a putative class action meets the requirements of Rule 23. However, plaintiffs burden is not a heavy one. See Piel v. National Semiconductor Corp., 86 F.R.D. 357, 368 (E.D. Pa. 1980). See also Anderson v. City of Albuquerque, 690 F.2d 796, 799 (10th Cir. 1982); Paxton v. Union Natl Bank, 688 F.2d 552, 562 (8th Cir. 1982). Once plaintiff has demonstrated a preliminary legal showing that the requirements of Rule 23 have been met, the burden of proof is upon the defendants to demonstrate otherwise. 2 H. Newberg, Newberg on Class Actions (3d Ed. 1992) (Newberg) 7.22 at 774 to 775. Provided that plaintiffs contentions regarding the class is sues are based upon a reasonable foundation, the court should not deny certification because of a defendants challenge. See Sollenbarger v. Mountain States Tel. & Tel. Co., 121 F.R.D. 417 (D.N.M. 1988); In re Industrial Gas Antitrust Litig., 100 F.R.D. 280 (N.D. Ill. 1983); Kuck v. Berkey Photo, Inc., 81 F.R.D. 736 (S.D.N.Y. 1979).

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Lopp, 128 F.R.D. 624, 628 (E.D. Pa. 1989); Ettinger v. Mer rill Lynch Pierce, Fenner & Smith, Inc. , 122 F.R.D. 177, 179 (E.D. Pa. 1988). Further, judicial economy requires that this action pro ceed through the class action vehicle. The plaintiffs and the Class members only alternative to proceeding as a class action is to file individual claims. To do so would be time consuming and redundant, as each plaintiff would be required to conduct discovery into defendants business practices to prove exactly the same allegations and proffer exactly the same evidence demonstrating that the defen dants had homeowners enter into the Work Order Con tract and then, after the cancellation period had expired, the Home Improvement Installment Contract, thereby de priving them of their right to rescind the transaction. Class members would offer the same or substantially similar evi dence with respect to i) defendants employment of unfair collection practices, including the use of standard form collection letters that omit federally mandated language, ii) the deception utilized to lead the homeowners into en tering the home improvement transaction under the guise of offering government sponsored funding for the repairs and remodeling services and iii) the poor, shoddy and of ten valueless work done to the members homes. Each plain tiff would then be required to brief and argue the same questions of law. This action should be certified as a class action because, as discussed below, all of the requirements of Rule 23(a) have been met. 1. The Class Is So Numerous that Joinder of All Members Is Impracticable Rule 23(a)(1) requires that the proponent of a class ac tion demonstrate that the class is so numerous that join der of all members is impracticable. Fed.R.Civ.P. 23(a)(1). The Rule does not require that joinder be impossible; rather, joinder of all members is impracticable when the proce dure would be inefficient, costly, timeconsuming, and prob ably confusing. Ardrey v. Federal Kemper Ins. Co., 142 F.R.D. 105, 111 (E.D. Pa. 1992). This Court may make common sense assumptions in order to support the finding of nu merosity. Snider v. Upjohn Co., 115 F.R.D. 536, 539 (E.D. Pa. 1987) (quoting Wolgin v. Magic Marker Corp., 82 F.R.D. 168, 171 (E.D. Pa. 1979)). Moreover, precise enumeration of the members of a class is not necessary for the action to proceed as a class action. See, e.g., Epstein v. Moore, [198889 Transfer Binder] Fed. Sec. L. Rep. (CCH) k 93, 957 at 90,442 (D.N.J. 1988). It is permissible to estimate class size. In re ORFA Sec. Litig., 654 F. Supp. 1449, 1464 (D.N.J. 1987). In applying this rule, it has consistently been held that joinder is impracticable where the class is composed of hundreds of potential claimants; indeed, impracticability of joinder has often been found where the class is com posed of less than 100 members. See e.g., Eisenberg, 766 F.2d at 78586 (90 class members meets numerosity require ment); Weiss v. York Hospital, 745 F.2d 786, 808 (3d Cir. 1984) (92 class members meets numerosity requirement); Zeffiro v. First Pennsylvania Banking & Trust Co., 96 F.R.D.

B. THE PROPOSED CLASS AND SUBCLASSES SATISFY THE REQUIREMENTS OF RULE 23(A) OF THE FEDERAL RULES OF CIVIL PROCEDURE The Supreme Court has noted that [c]lass actions serve an important function in our system of civil justice. Gulf Oil Co. v. Bernard, 452 U.S. 89, 99 (1981). The Court has also recognized that the class action procedure is neces sary for private rights of action to be initiated. Deposit Guar. Natl Bank v. Roper, 445 U.S. 326, rehg. denied, 446 U.S. 947 (1980). As stated in Roper, class actions serve an important function in our system of civil justice because they permit plaintiffs to vindicat[e] the rights of individu als who otherwise might not consider it worth the candle to embark on litigation in which the optimum result might be more than consumed by the cost. Id. At 338. The determinations called for by Rule 23 are questions addressed to the sound discretion of the district court. Gulf Oil Co., 452 U.S. at 100. A decision to grant class certifica tion is not a final order; it may be altered or amended as the case progresses towards resolution on the merits. Fe d.R.Civ.P. 23(c)(1). A decision to grant class certification is not a final order; it may be altered or amended as the case progresses towards resolution on the merits. Fed.R.Civ.P. 23(c)(1); In re School Asbestos Litig., 789 F.2d 996, 1011 (3d Cir. 1986); 7B C. Wright & A. Miller, Federal Practice and Procedure, 1785, at 128 (1986) (Wright & Miller). More over, the Third Circuit has adopted a liberal construction of Rule 23. See, e.g., Eisenberg v. Gagnon, 766 F.2d 770, 785 (3d Cir.), cert. denied sub nom Wasserstrom v. Eisenberg, 474 U.S. 946 (1985); Kahan v. Rosenstiel, 424 F.2d 161 (3d Cir.) cert. denied, 398 U.S. 950 (1970); Peil v. Speiser, 97 F.R.D. 657 (E.D. Pa. 1983). Therefore, in a close case, the court should find the prerequisites to class certification estab lished. Kahan, 424 F.2d at 169. The focus is simply whether the prerequisites of Rule 23 have been met. Dawes v. The Philadelphia Gas Commis sion, 421 F. Supp. 806, 813 (E.D. Pa. 1976). In determining whether an action may be maintained as a class action, the issue is merely whether the representative plaintiffs have demonstrated the probability of the existence of a suffi cient number of persons inclined and similarly situated.). The court is not to conduct an exploration of the merits when deciding upon certification of a class. Eisen v. Carlisle & Jacqueline, 417 U.S. 156, 17778 (1974); Kahan, 424 F.2d at 168; Chestnut Fleet Rentals, Inc. v. Hertz Corp., 72 F.R.D. 541, 543 (E.D. Pa. 1976). Moreover, since class determina tion is made at the pleading stage of the action, the sub stantive allegations in the complaint are accepted as true for purposes of the class motion. Shelter Realty Corp. v. Allied Maintenance Corp., 574 F.2d 656, 661 n. 15 (2d Cir. 1978); Blackie v. Barrack, 524 F. 2d 891, 901 n. 16 (9th Cir. 1975), cert. denied, 429 U.S. 816 (1976); Vine v. Beneficial Fin. Co., 374 F. 2d 627, 63233 (2d Cir.), cert. denied, 389 U.S. 970 (1967), and if any doubt exists, any error, if there is to be one, should be committed in favor of allowing the class action. Hoffman Elec., Inc. v. Emerson Elec. Co., 754 F. Supp. 1070, 1075 (W.D. Pa. 1991). See also, Moskowitz v.

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567, 569 (E.D. Pa. 1983) (51 class members sufficient); Philadelphia Electric Co. v. Anaconda American Brass Co., 43 F.R.D. 452 (E.D. Pa. 1968) (certification of class with 25 members); Korn v. Franchard Corp., 456 F.2d 1206, 1209 (2d Cir. 1972) (70 members); Leyva v. Buley, 125 F.R.D. 512 (E.D. Wash. 1989) (joinder of 50 migrant workers imprac ticable); Basile v. Merrill Lynch Pierce, Fenner & Smith, Inc., 105 F.R.D. 506 (S.D. Ohio 1985) (23 members). Plaintiff seeks certification of a class of all persons who, during the Class Period, were subjected to the two con tract sales and financing scheme for the purchase of home repair and/or remodeling goods and services from Fred mont in which they first signed a standard Work Order Contract and thereafter signed a Home Improvement In stallment Contract which was immediately assigned by Fred mont to Empire, TMI, EFC or First Bank. Every Class member whose loan files have been produced by Empire was subject to the identical scheme. Attached hereto as Exhibit D are copies of both the Work Order Contract and the Home Improvement Installment Contract for eleven known members of the Class [not reprinted herein]. These are the same standard form contracts used by defendants in the transaction involving plaintiff Kim Bosch. See Amended Class Action Complaint, Exhibits AC. Further, defendants witnesses have testified that Em pire financed in excess of 300 Home Improvement Install ment Contracts that originated with Fredmont. See depo sition of Joe Ryobi, Empire Manager, at p. 39, and deposi tion of Jon Hitachi, Senior VicePresident in Charge of Originations, at p. 22, attached hereto as Exhibit A [not reprinted herein]. The same twocontract scheme existed with respect to all Class members. As to the exact number of Class members, defendants possess documents which will establish that figure. Accordingly, it is indisputable that the numerosity requirement is easily satisfied as to the Class. 2. There Are Questions of Law and Fact Common to the Class Rule 23(a)(2) requires a showing of the existence of ques tions of law or fact common to the class. Fed.R.Civ.P. 23 (a)(2). This threshold of commonality is not high. In re School Asbestos Litig., 789 F.2d at 1010 (quoting Jenkins v. Raymark Indus., Inc. 782 F.2d 468 (5th Cir. 1986), cert. de nied, 479 U.S. 852 (1987)). The rule does not require that all questions be common or event that common questions predominate. Hummel v. Brennan, 83 F.R.D. 141, 145 (E.D. Pa. 1979); Kuhn v. Philadelphia Electric Co., 80 F.R.D. 681, 684 (E.D. Pa. 1978). Indeed, a single common question is sufficient to satisfy the requirements of Rule 23(a)(2). Baby Neal v. Casey, 43 F.3d 48, 56 (3d. Cir. 1994); In re School Asbestos Litig., 104 F.R.D. 422, 429 (E.D. Pa. 1984); Simon v. Westinghouse Elec. Corp., 73 F.R.D. 480, 484 (E.D. Pa. 1977. A common question is one which arises from a com mon nucleus of operative facts regardless of whether the underlying facts fluctuate over the class period and vary as to individual claimants. In re School Asbestos Litig., 104 F.R.D. at 429; Cohen v. Uniroyal, Inc., 77 F.R.D. 685, 69091 (E.D. Pa. 1977); Muth v. Dechert, Price & Rhoads, 70 F.R.D.

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602, 607 (E.D. Pa. 1976); In re Corrugated Container Anti trust Litig., 80 F.R.D. 244, 250 (S.D. Tex. 1978). Courts have typically found a common nucleus of oper ative facts where, as in the present action, the defendants engaged in standardized conduct toward putative class mem bers. This Court, in Seidman v. American Mobile Systems, Inc., 157 F.R.D. 354, 360 (E.D. Pa. 1994), recognized that allegations of a common course of fraudulent conduct gen erally satisfy the commonality requirement. See also, e.g., Hanrahan v. Britt, 174 F.R.D. 356 (E.D. Pa. 1997) (common ality established where defendants engaged in a systematic and uniform course of fraudulent conduct; In re: Prudential Ins. Co. of America Sales Practices Litig., 962 F. Supp. 450, 517 (D.N.J. 1997) (Prudentials orchestrated sales presen tations, the plaintiffs common legal theories, Prudentials common defenses, and other common issues undoubtedly satisfy the commonality and predominance requirements); Chandler v. Southwest JeepEagle, 162 F.R.D. 302, 308 (N.D. Ill. 1995) (common nucleus of operative facts where defen dants engaged in standardized conduct toward members of the proposed class); Heartland Communications v. Sprint Corp., 161 F.R.D. 111 (D. Kan. 1995) (class certification granted where the contracts signed by all proposed class members, while not identical, contained virtually the same provision as that challenged by the named class represen tative); Fogie v. RentACenter, 867 F. Supp. 1398, 1402 (D. Minn. 1993) (common issues of fact and law where all class members signed the same contract); In re United Energy Corp. Solar Power Modules Tax Shelter Inv. Sec. Litigation, 122 F.R.D. 251 (C.D. Cal. 1988) (class certification appro priate where the class claims were primarily grounded on misrepresentations and omissions contained in a common core of documents); Lessard v. Metropolitan Life Ins. Co., 103 F.R.D. 608 (D. Me. 1984) (class certification granted where all proposed class members were parties to the same contract and subject to the same standardized conduct by the defendant). Moreover, it is well established that the presence of some individualized issues does not overshadow the common nu cleus of operative fact presented when the defendant has engaged in standardized conduct toward the Class. See Dawes, 421 F. Supp. at 814 (presence of individual damage claims does not justify denial of class treatment of common is sues); In re: Prudential Ins. Co. of America Sales Practices Litig., supra (individual damages do not undermine predom inance of common issues); Heartland Communications, 161 F.R.D. at 11415 (minor differences in contracts signed by class members did not suffice to preclude a finding of com monality); In re United Energy Corp. Solar Power Modules Tax Shelter Inv. Sec.Litigation, 122 F.R.D. at 254 (where the allegations concerning issues of common conduct, standard ized documents and common misrepresentations, individu alized issues of reliance, causation and damages do not render the case unsuitable for class certification). In this action, there is a common nucleus of operative facts since all Class members were subject to the same unfair and deceptive marketing and financing practices of defendants. All Class members signed the same or substan tially similar standard form contracts, which effectively nul

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Rule 23(a)(2)s requirement for the existence of common questions of fact or law is satisfied. 3. The Claims of the Representative Parties Are Typical of the Claims of the Class Rule 23(a)(3) requires that the claims of the class repre sentatives be typical of the claims . . . of the class. Fed. R.Civ.P. 23(a)(3). Rule 23(a)(3) and the adequacy of repre sentation requirement set forth in subsection (a)(4), are designed to assure that the interests of unnamed class mem bers will be adequately protected by the named class rep resentatives. See, e.g., General Telephone Co. of Southwest v. Falcon, 457 U.S. 147, 157 n. 13 (1982); Bogosian v. Gulf Oil Corp., 561 F.2d 434, 449 (3d Cir. 1977), cert. denied, 434 U.S. 1086 (1978); In re School Asbestos Litig., 104 F.R.D. at 42930. As this Court held in Seidman, 157 F.R.D. at 360, the threshold for establishing typicality is low. Typicality does not require that the claims of the class members be identi cal. Eisenberg, 766 F.2d at 786. Rule 23 does not require that the representative plaintiff have endured precisely the same injuries that have been sustained by the class mem bers, only that the harm complained of be common to the class . . . Hassine v. Jeffes, 846 F.2d 169, 177 (3d Cir. 1988) (emphasis in original). The measure of whether a plain tiffs claims are typical is whether the nature of plaintiffs claims, judged from both a factual and a legal perspective, are such that in litigating his personal claims he can reason ably be expected to advance the interest of absent class members. See, e.g., Falcon, 457 U.S. at 156157; Weiss, 745 F.2d at 80910 n. 36; Scott v. University of Delaware, 601 F.2d 76, 84 (3d Cir.), cert. denied, 444 U.S. 931 (1979). Under a frequently employed formulation, typicality is dem onstrated where the plaintiff can show that the issues of law or fact he or she shares in common with the class occupy the same degree of centrality to his or her claims as to those of unnamed class members. See Weiss, 745 F.2d at 80910 n. 36 (citing Donaldson v. Pillsbury, 554 F.2d 825 (8th Cir.), cert. denied, 434 U.S. 856 (1977)). Put another way, [c]laims [are considered] typical when the essence of the allegations concerning liability, and not the particu larities, suggest adequate representation of the interests of the proposed class members. In re School Asbestos Litig., 104 F.R.D. at 430 (citing Piel, 97 F.R.D. at 659). Where, as here, the plaintiff alleges a common pattern of wrongdoing, and will present the same evidence (based on the same legal theories) to support her claims as the Class members, courts have held the typicality require ment to be satisfied, notwithstanding factual variances in the position of each class member. As recently noted by Judge Bartle in Robinson v. Countrywide Credit Industries, 1997 U.S. Dist. LEXIS 15712 (E.D. Pa. October 8, 1997), relying on Advisory Committee Notes to 1966 amendments to Rule 23: A fraud perpetrated on numerous persons by the use of similar misrepresentations may be an appealing situation for a class action, and it may remain so despite the need, if liability is found,

lified their rights to rescind the transaction. Accordingly, there is a common nucleus of operative facts as to the Class. Commonality also exists with respect to the other claims. With respect to the unfair collection practices claims un der the UTPCPL and the FDCPA, Empires collection man ager has testified that until the date of his deposition in this case, Empire and TMI used four different notices and letters in the course of their collection activities that did not contain the language required by the FDCPA. See dep osition of Todd Makita and copies of the Empire Defen dants form collection letters, attached hereto as Exhibit E [not reprinted herein]. Some of the letters also violated the Pennsylvania Loan Interest and Protection Law, 41 P.S. 101 et seq., by among other things, accelerating loans without the requisite prior notice and otherwise failing to conform with the requirements of Act 6 and the Pennsylva nia Department of Banking regulations promulgated there under. Other letters threatened action that the Empire Defendants did not intend to take, such as filing a lawsuit against the borrower or filing a foreclosure action against his or her home. Plaintiff also asserts claims for violation of the UT PCPL, common law breach of contract, unjust enrichment, promissory estoppel, breach of fiduciary duty, unconsciona bility and fraudulent and negligent misrepresentation. Cer tification of these claims is also appropriate because these claims are based upon defendants uniform deceptive con duct in pursuing the twocontract scheme to induce con sumers into obtaining home improvement repairs from Fred mont financed by the Empire Defendants and to nullify consumers rights to rescind. Plaintiff also asserts on be half of two Subclasses the claims arising from defendants misrepresentation of government affiliations and making inferior home repairs. Thus, these claims all turn upon common issues of law and fact. See In re: Prudential Ins. Co. of America Sales Practices Litig., supra (court certified action for settlement which included claims for common law fraud, breach of contract, breach of the duty of good faith and fair dealing, negligent misrepresentation, negli gence, and unjust enrichment); Mathews v. Kidder Peabody & Co., 1996 U.S. Dist. LEXIS 17790 (W.D. Pa. 1996) (court certified class action for claims under breach of fiduciary duty and negligent misrepresentation). This action is appropriate for class certification because there are numerous questions of fact and law common to the Class. Each member of the proposed Class is a victim of defendants deceitful scheme and was victimized by the same or substantially similar unfair and deceptive conduct and standard form contracts.3 Accordingly, given the pres ence of so many common questions, it is indisputable that

3 Commonality is not defeated by slight differences in class mem bers positions, Blackie v. Barrack, 524 F.2d at 902, or because all of the allegations of the class do not fit together like pieces of a jigsaw puzzle. Green v. Wolf Corp., 406 F.2d 291, 300 (2d Cir. 1968), cert. denied, 395 U.S. 977 (1969). Rather than considering the merits of the substantive claims, the courts inquiry should be limited to verifying the existence of common questions of law or fact. Moskowitz v. Lopp, 128 F.R.D. at 629.

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for separate determination of the damages suf fered by individuals within the class. See also, Hanrahan v. Britt, supra (typicality established where claims of all class members are based on the same system atic conduct and legal theories); Mathews, 1996 U.S. Dist. LEXIS 17790 at *89 (plaintiffs allegations of common course of fraudulent conduct and large unitary scheme sat isfy the typicality requirement). The representative plaintiff is a typical victim of defen dants deceptive practices. Plaintiffs claims arise out of the same course of conduct and are based on the same legal theories as those of the Class members. The grava men of plaintiffs claims is that defendants twocontract deceit induced her and the Class members to enter into contracts for home improvements by means of unfair and deceptive solicitation practices and deceptive standard form contracts which effectively deprived them of their right to rescind. The essence of each putative Class members claims is precisely the same. Accordingly, the common issues necessarily share the same degree of centrality, Weiss, 745 F.2d at 80910 n. 36, to the named representatives claims such that in litigating the liability issues, the representative plaintiff can reason ably be expected to advance the interests of all Class mem bers toward a favorable determination with respect to each such issue. The claims of the representative plaintiff are typical of the claims of the Class. 4. The Plaintiff Will Fairly and Adequately Protect the Interests of the Class The requirement of Rule 23(a)(4) is met if it appears that (1) plaintiffs interests are not antagonistic to those of other members of the class she seeks to represent and (2) plaintiffs attorneys are qualified, experienced and gener ally able to conduct the litigation. See, e.g., Lewis v. Curtis, 671 F.2d 779, 788 (3d Cir.), cert. denied, 459 U.S. 880 (1982); Bogosian, 561 F.2d at 449; Wetzel, 508 F.2d at 247. The existence of the elements of adequate representa tion are presumed and [t]he burden is on the defendant to demonstrate that the representation will be inade quate. In re School Asbestos Litig., 104 F.R.D. at 430 (cit ing Lewis, 671 F.2d at 788). As the court explained in Cook v. Rockwell Intl Corp., 151 F.R.D. 378, 386 (D. Colo. 1993): [A]dequate representation presumptions are usu ally invoked in the absence of contrary evidence by the party opposing the class. On the issue of no conflict with the class, one of the tests for adequate representation, the presumption fairly arises because of the difficulty of proving nega tive facts. On the issue of professional compe tence of counsel for the class representative, the presumption fairly arises that all members of the bar in good standing are competent. Finally, on the issue of intent to prosecute the action vigor ously, the favorable presumption arises because the test involves future conduct of persons, which cannot fairly be prejudged adversely.

10.3

If there are any doubts about adequate repre sentation or potential conflicts, they should be resolved in favor of upholding the class, subject to later possible reconsideration, or subclasses might be created initially. Id., (quoting 2 Newberg, 7.24 at pp. 781, 782). Both prongs of the adequacy test are met here. First, there is nothing to suggest that the representative plaintiff has any interest antagonistic to the vigorous pursuit of the Class claims against defendants.4 Plaintiff shares with the Class the interest in establishing that defendants engaged in a uniform pattern of deceitful conduct to induce home owners to first enter into a Work Order Contract and, later, after that contract had become noncancelable, and often after work had already been started enter into the Home Improvement Installment Contract. Second, plain tiff has retained counsel highly experienced in class action litigation to prosecute her claims and those of the Class. Attached hereto as Exhibit F is a copy of the biographies of plaintiffs counsel [not reprinted herein]. Indeed, plain tiff, through counsel, has pursued, and will continue to vigorously pursue, this litigation to redress the wrongs per petuated by the defendants upon the entire Class. Accord ingly, the representative plaintiff adequately represents the interests of the Class. C. THE CONDITIONS OF RULE 23(B)(2) AND (3) HAVE BEEN MET In addition to meeting the prerequisites of Rule 23(a), an action must satisfy at least one of the three conditions of subdivision (b) of Rule 23. Plaintiff proceeds here under Rule 23(b) (2) and (3) which provide in pertinent part: (1) An action may be maintained as a class action if the prerequisites of subdivision (a) are satisfied, and in addition: *** (2) the party opposing the class has acted or refused to act on grounds generally applicable to the class, thereby making appropriate final injunctive relief or corresponding declaratory re lief with respect to the class as a whole; or (3) the court finds that the questions of law or fact common to the members of the class predom inate over any questions affecting only individ ual members. . . . Fed.R.Civ.P. 23(b)(2), (3). 1. Rule 23 (b)(2) This action qualifies as a class action under subdivision (b)(2) because the defendants use of the twocontract de ceit to induce homeowners into the home improvement transaction was an action of general applicability to all members of the Class. Thus, the equitable relief of rescis
4 Because of the difficulty in proving the negative, it is defendants burden to prove any antagonism. See Lewis, 671 F.2d at 788.

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2. Rule 23(b)(3) This action also qualifies for certification under Rule 23(b)(3).5 As discussed supra, there are numerous ques tions of law and fact common to the Class. Once common questions of liability are resolved, all that remains is the mechanical act of computing the amount of damages suf fered by each Class member. See Blackie v. Barrack, 524 F.2d at 905. Plaintiff has alleged a single, uniform deceptive scheme conducted by defendants against plaintiff and the Class members. Defendants through the twocontract scheme in duced plaintiff and the members of the Class to enter into a transaction that effectively denied them their rights to rescind. Accordingly, the issues of law and fact which flow from defendants uniform deceitful activity predominate over any individual issue.6 Numerous courts have found that common issues pre dominate over individual issues where plaintiffs have al leged a common course of deceptive conduct on the part of defendants. In the Robinson case, Judge Bartle consid ered Rule 23(b)(3) in an action against a finance company based on its use of standardized form documents and let ters to force place hazard insurance on class members homes. Defendant admitted that forced placed insurance was two to four times more expensive than a borrower could obtain on his own and affidavits from disinterested insurance agencies stated that the commissions received by the defendant far exceeded any commission they had ever received. Robinson, 1997 U.S. Dist. LEXIS 15712, at *1112. Judge Bartle recognized that the need to resolve individual questions after answering common questions would not prevent a class action, and concluded that common class issues of law and fact predominated over any individ ual issues in the case: While individual issues are present, especially in the context of damages, they do not predomi nate. Rather, the central issues revolve around whether the form contracts authorized place ment of the type of insurance purchased and whether Countrywide knowingly purchased in flated or expensive policies to generate commis sions. Robinson, 1997 U.S. Dist. LEXIS 15712 at *12. See also, Hanrahan v. Britt, supra (common questions predominate over individual questions where defendants engaged in a systematic and uniform fraudulent scheme involving scripted and uniform oral and written misrepresentations); Mathews, 1996 U.S. Dist LEXIS 17790 at *11 (court certified class
5 Courts have often certified classes for the purposes of both equi table relief and damages. Crempan v. Automobile Club, 22 FEP Cas (BNA) 180 (E.D. Mich. May 19, 1977) (in employment discrim ination case, (b)(2) class certified for injunctive relief and (b)(3) class certified for back pay). 6 Obviously, there will be individual differences in the amount of damages claimed by different Class members. However, as this Court has held, the need for individual damage calculations does not defeat class certification where common questions as to liabil ity predominate. Seidman, 157 F.R.D. at 360.

sion of each such members loan is appropriate under state law. In addition, for transactions entered into on or after October 17, 1994, Class members also have a right to seek rescission under the TILA. The appropriate procedure would be to enter a classwide judgment establishing the mem bers right of rescission. If any members do not want the remedy, they simply do not have to avail themselves of it. For example, in Tower v. Moss, 625 F.2d 1161 (5th Cir. 1980), a class was certified in a TILA case requesting that the class members receive either damages or the option to rescind. The court held that there was nothing in the re quested relief that made a class action inherently problem atic. An optiontorescind procedure like the one requested in this action has been followed under other state and federal consumer protection statutes. Richmond v. Dart In dustries, Inc., 29 Cal. 3d 462, 629 P.2d 23, 174 Cal. Rptr. 515 (1981) (expressly endorsing option procedure and rejecting argument that rescission claims can never be maintained on a class basis); Vasquez v. Superior Court, 4 Cal. 3d 800, 94 Cal. Rptr. 796, 484 P.2d 964 (1971) (relief sought was judgment permitting class members to rescind their con tracts); Olive v. Graceland Sales Corp., 61 N.J. 182, 293 A.2d 658 (1972) (permitting a class action for relief including rescission to be maintained, as long as each member was specifically asked if he or she desired rescission); Bryan v. Amrep Corp., 429 F. Supp. 313 (S.D.N.Y. 1977) (class certi fied in case arising under the antifraud provisions of the Interstate Land Sales Full Disclosure Act despite objec tion that relief sought for each class member was either damages or rescission, as that person might elect). The procedure has also been applied on numerous occasions in cases arising under the securities laws, which also provide a statutory rescission remedy. See, e.g., Tcherepnin v. Franz, 461 F.2d 544 (7th Cir. 1972) (affirming classwide judg ment providing that the plaintiffs and their class had been defrauded within the meaning of the antifraud provisions of the Securities Exchange Act and that [a]s defrauded purchasers of securities, they had a right to rescind their purchase agreements and, upon the rescission, were enti tled to assert a claim against [certain funds]); Harris v. Palm Springs Alpine Estates, Inc., 329 F.2d 909 (9th Cir. 1964) (reversing denial of class certification in securities case over objection that counts 2 and 3 seek rescission and return of consideration as to those investors who still own the securities, and damages as to those who do not); Pistoll v. Lynch, 96 F.R.D. 22 (D. Haw. 1982) (certifying class in 10b5 case where relief sought was, in the alterna tive, money damages or rescission for each class member). Employment of such a flexible and practicable remedy where the basis for the rescission claim is common to the Class is preferable to a denial of relief on the basis of some wooden and artificial notion that rescission is not available in class actions.

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action for claims under RICO, breach of fiduciary duty and negligent misrepresentation where plaintiffs alleged that they and putative class members were injured from a single fraudulent scheme, and common issues predomi nated over individual issues); McMahon Books, Inc. v. Wil low Grove Associates, 108 F.R.D. 32, 38 (E.D. Pa. 1995) (class action appropriate despite need for individualized proof of reliance where plaintiffs and putative class mem bers relied on standardized written confirmations with com mon misrepresentations); Heastie v. Community Bank of Greater Peoria, 125 F.R.D. 669 (N.D. Ill. 1989) (class certi fication granted due to fixed set of fraudulent statements presumed to be made to each class member); Smith v. MCI Telecommunications, Corp., 124 F.R.D. 665, 671 (D. Kan. 1989) (court presumed plaintiffs relied on uniform compen sation agreement presented to all class members). In addition to finding the predominance of common ques tions, Rule 23(b)(3) also requires that the Court deter mine that a class action is superior to other available methods for the fair and efficient adjudication of the con troversy. Fed.R.Civ.P. 23 (b)(3). It has been widely recog nized that a class action is superior to other available meth odsparticularly, individual lawsuitsfor the fair and ef ficient adjudication of a suit that affects a large number of persons injured by violations of consumer protection laws or common law. Consumer class actions such as the case at bar easily satisfy the superiority requirement of Rule 23. See Lake v. First Nationwide Bank, 156 F.R.D. 615, 626 (E.D. Pa. 1994) (public interest in seeing that rights of consumers are vindicated favors disposition of claims in a class action). Defendants have inflicted economic injury on a large number of geographically dispersed persons to such an ex tent that the cost of pursuing individual litigation to seek recovery against wellfinanced, multiple adversaries is not feasible. Thus, the alternatives to a class action are either no recourse for hundreds of injured consumers, or even in the unlikely event that they all become aware of their rights and could find counsel, a multiplicity of scattered suits resulting in the inefficient administration of litigation. Ac cordingly, a class action is superior to other available meth ods for the fair and efficient adjudication of this matter. There is no question but that this class action would be easily manageable. The proof of the twocontract scheme is found in the loan file of each Class member. The proof of the improper collection letters and other collection ac tivity is readily ascertainable from the collection history maintained on each Class member by the Empire Defen dants. The depositions taken to date establish the common scheme and pattern of conduct. Concentrating the litiga tion of the Class members claims in this particular forum is eminently sensible, given the presence in this district of so many members. To the extent there comes a need for determination of individual damages for the defective home repairs, those issues could be resolved before a master, a magistrate or some other appropriate trier in a minitrial or other setting. This case presents no manageability diffi culties that would preclude class certification.

10.3

D. PLAINTIFFS STATE LAW CLAIMS SHOULD BE CERTIFIED Class certification of plaintiffs pendent state claims un der the UTPCPL and for common law breach of contract, unjust enrichment, promissory estoppel, breach of fidu ciary duty, unconscionability and fraudulent and negligent misrepresentation is also appropriate. Certifying a class for the common law claims presents the same Rule 23 analysis as does certifying the federal law claims. Numer ous courts in this Circuit favor certifying classes with re spect to pendent common law claims. See, Eisenberg, 766 F.2d at 786; In re Fiddlers Wood Bondholders Litig., 102 F.R.D. 291, 292 (E.D. Pa. 1984); In re IGI Sec. Litig., 122 F.R.D. 451, 460 (D.N.J. 1988); In re ORFA Sec. Litig., 654 F. Supp. at 1461; Dekro v. Stern Bros. & Co., 540 F. Supp. 406, 418 (W.D. Mo. 1982). The same proof which will be intro duced to establish the TILA, FDCPA and UTPCPL viola tions is also highly relevant to the common law claims. Accordingly, common questions predominate as to those claims. Similarly, courts have certified UTPCPL claims. See Rosen v. Fidelity Fixed Income Trust, 169 F.R.D. 295, 302 (E.D. Pa. 1995) (court conditionally certified class as to plaintiffs claims under UTPCPL); Lake v. First Nationwide Bank, su pra (court certified a class for purposes of settlement which was based on claims under, inter alia, UTPCPL); LeBour geois v. Firsttrust Savings Bank, No. 3378, 22 Phila. 223, 1991 Phila. Cty. Rptr. LEXIS 22 at *25 (April 12, 1991) (class certification appropriate for claims pursuant to sec tions 2012 (4) (ix) and (xiv) of UTPCPL because plaintiffs not required to prove the elements of common law fraud); cf. Dilucido Terminix International, Inc., 676 A.2d 1237, 1241 (Pa. Super. 1996) (plaintiffs not required to prove the ele ments of common law fraud to establish violations of sec tions 2012(4)(ii), (v) and (xvi) of UTPCPL). All of the requirements of Rule 23 are met with respect to the UTPCPL and common law claims. The same system atic deceptive conduct which gave rise to the TILA rescis sion claims also gave rise to these pendent claims, and common questions exist as to whether defendants activi ties were fraudulent and conspiratorial. Hence, common questions of fact predominate over any individual ques tions, and certification of the pendent claims is superior to other available methods for litigating those claims. CONCLUSION For all the foregoing reasons, plaintiff respectfully re quests that this Court grant plaintiffs motion for an order certifying this action as a class action pursuant to Rule 23 of the Federal Rules of Civil Procedure on behalf of the pro posed Class of individuals defined herein, and certifying plain tiff Kim Bosch as a proper representative of the Class. [Attorney for Plaintiff]

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Defendants do not dispute, nor can they dispute, that all of the Fredmont customers whose loans were financed by the Empire Defendants signed both a Work Order Con tract and, thereafter, a second Home Improvement In stallment Contract. The records of the Empire Defen dants and, to the extent they still exist, of Fredmont, will identify each of the over 300 members of the general Class precisely. Indeed, for each of the ten (10) putative class members the Empire Defendants deposed, those defen dants were able to produce loan files containing both a Work Order Contract signed by the consumer on one date and a Home Improvement Installment Contract signed on a later date. There is similarly no lack of preciseness in the defini tions of the three Subclasses, which have been proposed, in part, in order to facilitate management of the case. Several of the Class claims are based upon the two form documents known as the Work Order Contract and the Home Improvement Installment Contract. By definition, the Class includes only those people who received both contracts, with the latter contract signed on a date after the former.7 In every case that was examined in discovery, at the time the Work Order Contract was signed, defen dant Fredmont Builders, Inc. (Fredmont) took financial information from the Class member which was recorded in credit information forms found in the files of the Empire Defendants.8 In every case, the standard practice was for Fredmont to commence work on the Class members home only after credit was approved by Empire.9 Plaintiff asserts that these common form documents and the common sequence of events (referred to as the two contract scheme) give rise to rescission rights under the Truth in Lending Act (TILA) and to rights to damages and equitable relief under the Pennsylvania Unfair Trade Practices and Consumer Protection Law (UTPCPL) and state law.10 It is also undisputed that many Class members have stated that the work done by Fredmont did not conform to its promises, including the written promise in the Work Order Contract of performance in a good and workmanlike man ner,11 thereby violating the UTPCPL and state law. Plaintiff asserts that, by virtue of language which ap peared in every Home Improvement Installment Contract, the current holder of the contract, in each case one of the Empire Defendants, is liable for these unfair trade prac
7 Examples of these contracts were attached to plaintiffs Motion for Class Certification as Exhibit D. 8 See, e.g., depositions of Class members Regina Metabo, pp. 4243; Louise Channellock, p. 33; Kimberly Chicago, pp. 3944; and Ver Lynn Ingersoll, p. 31, all with credit application exhibits attached thereto. These members deposition transcripts, insofar as rele vant herein, are attached hereto as Exhibits A, B, C and D, respec tively [not reprinted herein]. 9 See deposition of Arthur Milwaukee, pp. 4448, set forth in para graph 40 of Amended Class Action Complaint. 10 A small minority of Class members, numbering about 38, do not reside in Pennsylvania. Their claims based on state law are based on similar statutes and law in Ohio and New York. See note 24, infra. 11 See note 13, infra.

10.4 Reply to Brief Opposing Plaintiffs Motion for Class Certification

IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA
) KIM BOSCH, on behalf of herself ) and all others similarly situated, ) Plaintiffs, ) ) v. ) ) EMPIRE FUNDING ) CORPORATION, FREDMONT ) BUILDERS, INC., STANLEY ) DEWALT, TMI FINANCIAL, ) INC., EFC SERVICING, LLC ) and FIRST BANK, N.A., Trustee, ) Defendants. ) )

PLAINTIFFS MEMORANDUM IN REPLY TO BRIEF ON BEHALF OF EMPIRE DEFENDANTS IN OPPOSITION TO PLAINTIFFS MOTION FOR CLASS CERTIFICATION I. INTRODUCTION The Brief on Behalf of Empire Funding Corporation, TMI Financial, Inc., EFC Servicing, LLC and First Bank, N.A. (collectively, Empire or the Empire Defendants) in Opposition to Plaintiffs Motion for Class Certification (the Brief) makes a remarkable effort to obfuscate and confuse the straightforward predominating common issues asserted by plaintiff on behalf of a Class in this case. Through numerous excursions into arguments on the merits, refer ences to allegedly noncommon fact issues that are not essential to the underlying claims, complaints about minor discovery disputes, and other devices, the Brief attempts to obscure the facts and legal issues that are presented by plaintiff. This Memorandum in Reply to the Brief will set forth those common facts and the theories of liability based upon those facts. Several of those theories rely solely on stan dard form documents used in Class members transactions. Indeed, based on the discovery already conducted showing the common use of those forms, plaintiff expects to move for summary judgment on those theories at the conclusion of merits discovery. Empire begins its legal argument with an attack on the preciseness of the definitions of the Class and the three Subclasses. It would appear that defendants have ignored the general definition of the Class in the Amended Class Action Complaint: All persons who, from January 1993 through October 16, 1997 (the Class Period), were sub jected to a two (2) contract sales and financing scheme for the purchase of home repair and/or remodeling goods and services. . . .

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tices and defects in workmanship, regardless of the extent it participated in Fredmonts activities, up to the amount of the contract. Plaintiff also makes a separate claim that such liability extends beyond the amount of the contract based upon the common course of conduct through which Empire enabled Fredmont to continue such practices. While the amount of damages to each Class member will vary, the issues regarding liability on these claims are common issues. Not surprisingly, the Empire Defendants argue that the documents and sequence of events do not give rise to liabil ity. They also argue that they are not liable for Fredmonts activities or workmanship. However, these arguments go not to whether a class action is appropriate; they raise the com mon legal issues that must be decided for the Class. Finally, plaintiff asserts that various Empire Defendants themselves engaged in collection practices that violated the federal Fair Debt Collection Practices Act (FDCPA) and UTPCPL with respect to many Class members (Subclass A, the Unfair Collection Practices Subclass). Some of the vio lations consisted of form letters sent to Class members which on their face did not comply with those statutes and underly ing regulations. Discovery has produced a complete set of those form letters, which were sent on various Empire Defen dants letterheads, as well as examples of Empires collection records showing precisely which Class members received them. Other collection violations asserted by plaintiff include tele phone calls to Class members places of employment and calls made more often than permitted by applicable law, all documented in the collection records kept by Empire. Again, Empire asserts defenses to these claims, but those defenses simply join the common legal issues to be decided for these Class members. The remainder of this Memorandum in Reply will state more specifically the common facts upon which the Class claims are based12 and describe how each of those claims is amenable to resolution on a class basis. II. REPLY TO COUNTERSTATEMENT OF FACTS Empires CounterStatement of Facts13 is typical of its
12 The Empire Defendants begin their Brief by complaining about the amount of class discovery that took place in this matter. Aside from the fact that most of the depositions were conducted by Empire, which insisted on attempting to depose every known Class member, the discovery conducted by plaintiff was both appropriate and neces sary. It produced the evidence, discussed in this brief, of the number of Class members, the uniform use of standardized form contracts and collection letters, the business records kept by the Empire Defen dants from which collection letters and collection practices can be easily proved, and uniform procedures of Fredmont and Empire in handling various aspects of the transactions. 13 Empire begins its CounterStatement of Facts with an assertion that demonstrates its misapprehension of the class certification issues in this case. Contrary to the assertion, plaintiff did in fact attach to the Motion for Class Certification and did refer to vari ous exhibits containing deposition testimony and documents ob tained in discovery that show why this class action should be certi fied. The exhibits document, for example, the uniform application of the twocontract home improvement transaction scheme to all members of the Class and the uniform standard collection letters mailed to Class members that, as acknowledged by Empires col lection manager, failed to contain statutorily mandated language.

10.4

entire opposition to the Motion for Class Certification: it consistently confuses the legal merits of plaintiffs claims with the requirements plaintiff must meet in order to have the Class and Subclasses certified. Although it pays lip service to the concept, Empire has fallen short of fully comprehending the Supreme Courts admonition that a court should not consider the merits, but instead should determine whether the claim articulated by plaintiff, assum ing that it has merit, is of a type suitable for class treat ment. Eisen v. Carlisle & Jacqueline, 417 U.S. 156, 17778 (1974). As the Court of Appeals for the Third Circuit rec ognized before Eisen, the determination whether there is a proper class does not depend on the existence of a cause of action. A suit may be a proper class action, conforming to Rule 23, and still be dismissed for failure to state a cause of action. Kahan v. Rosensteil, 424 F.2d 161, 169 (3d Cir. 1970). Further, this Circuit has adopted a liberal con struction of Rule 23. In Eisenberg v. Gagnon, 766 F.2d 770 (3d. Cir.), cert. denied, 474 U.S. 946 (1985), the court de clared that the interests of justice require that in a doubt ful case . . . any error, if there is to be one, should be com mitted in favor of allowing a class action. Eisenberg, 766 F.2d at 785. This is because the Court always has the power to decertify the Class or amend the Class definition at a later date. By arguing legal merits in opposition to the Motion for Class Certification, Empire has put the cart before the horse. Plaintiff strongly believes that the legal merits of the claims set forth in the Amended Class Action Com plaint are sustainable and should go forward. If Empire disagrees, Empire is free, and has always been free, to take appropriate action, such as the filing of a Rule 12(b)(6) motion to dismiss or a motion for summary judgment. How ever, what Empire cannot do is what it has done in the present case: attempt to defeat class certification by con fusing Rule 23 issues with the merits of the plaintiffs claims. Thus, for purposes of ruling on the Motion for Class Certification, it is irrelevant to consider Empires relation ship with Fredmont, the degree of involvement of Empire in Fredmonts business or the extent to which Empire met its obligations to monitor Fredmont under applicable HUD regulations.14 Those are all questions going to the legal
14 Compounding the confusion created by Empires irrelevant empha sis on the legal merits of this case is the problem that the facts it recites are often inaccurate and incomplete. For example: Empire states at p. 13 of the Brief that it abso lutely prohibited the practice known as spiking. However, omit ted from the Delta Affidavit Exhibit F reference ostensibly provid ing support for that statement is a reference to other portions of the same deposition testimony which clearly showed Empires knowl edge that a contractor would begin work as soon as Empire ap proved the loan, but before the financing documents, including the notice to rescind, were presented to the homeowner. See dep osition testimony of Arthur Milwaukee at pp. 4448, referenced in paragraph 40 of the Amended Class Action Complaint. Empire states on page 14 of its Brief that it received no com plaints about Fredmont during the first 18 months of their relation ship. However, according to documents produced by Empire dur ing the course of this case, Empire received a complaint concern ing Fredmonts poor workmanship in September 1993, only eight months into the relationship, and three more complaints were received through June 1994, the first 18 months of the relation

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would approve the credit. See testimony of Arthur Mil waukee set forth in paragraph 40 of the Amended Class Action Complaint. That Empire had never instructed Fredmont personnel that it was improper to have loan documents signed by the homeowner after work on the home had commenced. See paragraph 42, Amended Class Action Complaint. That the Home Improvement Installment Contract was a form contract designed to be used by Empire for transac tions that took place in Pennsylvania. The Home Improvement Installment Contract, uni formly executed days after the Work Order Contract, contained the following provisions in the case of every Class member: 1 on page 1, that the homeowner could cancel this second contract within three business days; 1 on page 1, a notice that any rescission of the contract would be subject to the holders claim for liquidated damages in the amount of 10% of the cash price; 1 on page 3, a second notice of right to cancel, referring to yet another attached notice of cancellation form. That each Home Improvement Installment Contract contained a uniform contractual provision required by the FTC Holder Rule subjecting Empire to claims and defenses that could be asserted against Fredmont. That it was Fredmonts position that a homeowner who attempted to cancel the Home Improvement Installment Contract would still be obligated, pursuant to the earlier Work Order Contract, to either pay cash for the repairs or to find alternate financing. See Work Order Contract and deposition of Kenneth Black, attached to Motion for Class Certification as Exhibit C.

merits of the claims asserted in the Amended Class Action Complaint.15 Empires CounterStatement of Facts does spend some time on the Rule 23(b)(3) issue of whether common ques tions predominate over questions affecting only individu als. Unfortunately, however, the discussion is unhelpful be cause Empire directs its efforts toward highlighting minute and ultimately irrelevant distinctions in the factual back ground relating to the plaintiff and selected Class mem bers. In so doing, Empire totally avoids addressing the over arching unifying theme of this case: the common course of conduct in utilizing two contracts that together operated to uniformly deprive each Class member of the ability to rescind the home improvement transactions. Significantly, Empire does not dispute, and indeed could not dispute, the following facts common to every Class member: 1 Plaintiff and every Class member deposed by Empire entered into two contracts with Fredmont: a Work Order Contract which was followed later by a Home Improvement Installment Contract. See Amended Class Action Complaint, Exhibits A, B and C; Motion for Class Certification, Exhibit D. 1 The form of Fredmonts Work Order Contract was ap proved by Empire. See deposition of Arthur Milwaukee, Empires Pittsburgh branch manager, Amended Class Ac tion Complaint at paragraph 31. 1 The language of each Work Order Contract was virtually identical and provided, among other things, as follows: 1 the homeowner was obligated to pay a cash price for the repair work; 1 the contractor warranted performance and comple tion of the work in a good and workmanlike manner; 1 the homeowner could cancel, without any obligation, within three business days. 1 That, at the same time that the Work Order Contract was presented by Fredmont to the homeowner, Fredmont also obtained from the homeowner financial information that was used for a credit loan application. See note 2, supra. 1 That Fredmont would not begin work on a customers home until after Empire had notified Fredmont that it
ship. Thereafter, seven more complaints were received in the last six months of 1994; eleven more complaints were received in 1995, and 21 complaints were received thereafter. (The complaint files produced by Empire in this litigation, which are more than 800 pages in length, in addition to being irrelevant to class certifica tion, are too voluminous to attach to this pleading. The docu ments that reflect the dates and nature of the complaints about Fredmont received by Empire are labeled bates nos. Empire 1803.). Empire states at pp. 1112 of the Brief that Fredmont was only an active dealer for a period of two years, while at the same time admitting that Fredmont was approved by Empire as an indepen dent dealer contractor beginning in January 1993 and continuing through December 1995, a period of three full years. 15 Another reason that such factual assertions are to a large extent irrelevant is that, irrespective of Empires involvement in Fred monts affairs, Empire is still liable for all Fredmonts improper actions under the provision in every Class members Home Im provement Installment Contract that was required by the FTC Holder Rule, 16 C.F.R. 433.2.

Nor does Empires CounterStatement of Facts make any realistic effort to rebut the commonality of the unfair collection practices directed against members of Subclass A. Empire does not even address the deposition of its col lection manager, Todd Makita, wherein he admits that a number of form collection letters sent to Empire borrow ers did not contain language statutorily mandated by the federal Fair Debt Collection Practices Act. See Motion for Class Certification, Exhibit E. Also undisputed is the mail ing of the standard collection forms themselves, Exhibit PMakita 5 to the Todd Makita deposition, attached to Exhibit E to Motion for Class Certification. Plaintiff has alleged that many of those standard form collection letters contained other violations of federal and state debt collec tion laws. By focusing on minutiae, rather than on the uniform twocontract structure of the transactions, and trying to shift the emphasis to the relatively minor differences among Class members experiences with Fredmont and Empire, Empire has attempted to divert the Courts attention from the forest to the trees. Either Empire does not understand the straightforward definitions of the Class and the Sub classes, or it is deliberately attempting to obscure those definitions by focusing on irrelevant minor individual dif ferences. First, as to plaintiff Kim Bosch, Empire launches into a litany of supposed differences between her and the Class

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members that allegedly require denial of class certifica tion. But none of the alleged distinctions, even if true,16 goes to the heart of the definition of the Class and the Subclasses; rather, they only illustrate why the Amended Class Action Complaint sets forth the three proposed Sub classes. In addition to being a typical victim of the twocontract scheme, plaintiff also was subjected to practices that make her appropriate to represent each of the three Subclasses. She was subjected to improper collection practices, such as being sent form letters violative of state and federal law, making her an appropriate representative of Subclass A, the Unfair Collection Practices Subclass.17 The Fredmont salesman represented to her that the home improvements would be funded through a government program, while members of the Class testified to similar sales pitches from Fredmont about government sponsorship or involvement, thereby making plaintiff an appropriate representative of Subclass B, the Government Affiliation Subclass.18 Finally, the various breaches of warranty and the defective work

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16 Empires Brief, at pp. 1617, misleadingly describes plaintiffs dep osition testimony as to the sequence of work being started on her home and when she signed documents presented to her. The testi mony attached as Delta Affidavit Ex. K omits pages 124125 of the transcript wherein plaintiff unequivocally testifies that work was still being done on her home when she was told to sign docu ments so that the workers could get paid. The incomplete work included a halffinished kitchen, uninstalled windows and a half done storm door. The plaintiff also testified to the difficulty of reading the papers presented to her because the Fredmont repre sentative kept the papers in his lap and just instructed her to sign where he indicated. Deposition of Kim Bosch, pp. 124125, at tached hereto as Exhibit E [not reprinted herein]. 17 As discussed supra, Empire does not dispute that certain of its form collection letters did not contain the language specified by the Fair Debt Collection Practices Act. See deposition of Todd Makita, Exhibit E to Motion for Class Certification, including Ex hibit PMakita 5 attached thereto [not reprinted herein]. The fact that standard collection letters are sent to members of a proposed class easily satisfies the commonality requirement for class certifi cation. Gammon v. GC Services Ltd. Partnership, 162 F.R.D. 313 (N.D. Ill. 1995). 18 Empires Brief, at pp. 2126, in fact cites the testimony of some of the members in this regard: Class member Ernestine Rand testi fied that the Fredmont salesman told her she was entitled to a government subsidy of the home improvements because [w]e would get some kind of grant because we were senior citizens; Class member Virginia Oldforge testified she received a flyer that sug gested government involvement and was told she was eligible for a totally free HUD grant because she lived in a lowmoney area; Class member Marilyn Stanley was told that there was a government grant to enable people that cant afford it a chance to fix up or refinish your houses; Class member James Bostitch tes tified that he was told the work would be financed through a government sponsored program; and Class member Tracy Rigid testified to representations that the loan would be government backed or government approved. Other Class members, not cited in Empires Brief, also testified to similar representations from Fredmont. See, e.g., depositions of Regina Metabo, pp. 3840 (Exhibit A hereto) and Kimberly Chicago, pp. 2830 (Exhibit C hereto) [not reprinted herein]. Since the theme of the representa tions were so uniform, but not universally applicable to the Class, it made sense to group those members into their own Subclass.

done on her home make plaintiff suitable to represent Sub class C, the Defective Work Subclass.19 As to the members of the Class, Empires Counter Statement of Facts attempts to deny class certification by harping on various alleged differences among those individ uals. None of the differences requires denial of class certi fication. Empire argues that certain Class members were contacted directly by Fredmont salespersons, another re sponded to a newspaper advertisement and another re sponded to a flyer placed on the door of her home. But the method of contact is not material. The fact remains that all Class members came into contact with Fredmont and were thereafter subjected to the twocontract scheme. Also, the fact that Class members contact with Em pires collection department varied from no calls to multi ple calls and letters, Empires Brief at 21, only emphasizes why there is a need for the Unfair Collection Practices Subclass. An individual subjected to the twocontract scheme is a member of the Class; however, if that individual made all payments required under the loan documents, he or she would not be the object of any debt collection activity. But many members of the Class were in fact also subjected to Empires uniform improper and unfair collection letters and practices, thus creating a need for such a Subclass. Nor is it of any moment that some individuals were sub jected to more unfair collection practices than were oth ers; that simply presents a question of damages. The collec tion history that Empire maintains with respect to each member of Subclass A clearly sets forth the improper stan dardized form collection letters sent, as well as, depending on the case, multiple phone calls made to debtors resi dences and contacts over the telephone and in writing even after being notified that the debtor was represented by counsel. See, e.g., collection history maintained as to plain tiff, Exhibit F hereto and note 28, infra [not reprinted herein]. The possibility that Empire may have practiced different collection techniques as to different Subclass A members does not defeat class certification; at most, it would impact on the damages recoverable by each member under appli cable federal and state collection practices law. Finally, Empires emphasis on Class members not being able to recollect exact dates of events that took place more than three or four years ago is another red herring. The undisputed common theme is that two contracts were en tered into by each member, one at the outset of the trans
19 Virtually every Class member experienced problems as a result of Fredmonts shoddy workmanship. Though Empire attempts to min imize the problems, its Brief does describe, at pp. 2126, that members Bostitch, Rand, Rigid, Oldforge and Stanley all testified to substandard, incomplete or otherwise defective repairs. Fur ther, other Class members, not cited by Empire, testified similarly. See, e.g., depositions of Regina Metabo, pp. 8590; Louise Chan nellock, pp. 6068; Kimberly Chicago, pp. 7987; and Ver Lynn Ingersoll, pp. 5361, attached hereto as Exhibits A, B, C, and D, respectively [not reprinted herein]. The extent of the problem in each case is, of course, simply a question of damages. (Empires implication that Class members James and Ernestine Rand are no longer liable for the debt arising from their transaction as a result of a bankruptcy discharge, see Empire Brief at p. 22, is mislead ing. The mortgage on their home, and their obligation to pay if they wished to avoid foreclosure, was not changed by their dis charge. Johnson v. Home State Bank, 501 U.S. 78 (1991)).

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contract scheme, the standard form collection letters and other collection activities, the theme of government involve ment in the sales presentations and the defective repairs all predominate over questions affecting only individual Class and Subclass members. a. The rescission related claims. Plaintiffs claims under the Truth in Lending Act (TILA) exemplify the ease with which this case can be handled on a class basis. Plaintiffs claim is that, based on the docu ments in each class members file held by the Empire De fendants and the sequence of those documents which is determinable by their dates, plaintiff and all other Class members whose transactions occurred within three years prior to the filing of the Class Action Complaint had an ongoing right to rescind under 15 U.S.C. 1635.21 There is no difficulty in determining the identities of Class members who may raise these claims. They are sim ply all persons who had transactions with Fredmont within the relevant time period and whose contracts were as signed to Empire. In the case of every identified Class member, the relevant dated documents exist in Empires files. Indeed, there has been no allegation by Empire that there were any Fredmont cases in which the Work Order and Home Improvement Installment Contract do not exist. Plaintiff seeks relief that would determine that each such Class member has the right to rescind and give notice of that right so the Class member can then make a decision about whether to rescind. As with most of the class issues, many of Empires argu ments against class treatment of the TILA claims go to the merits, rather than to the requirements of Rule 23. Most significantly, Empire assumes that plaintiff must prove, for each Class member, that work on the home improvements began prior to signing of the Home Improvement Install ment Contract and that various oral representations were made. Plaintiff does not believe either fact need be proved to give rise to the right to rescind. Although commence ment of work before the rescission notice was given and the oral representations made undoubtedly would have fur ther confused many Class members including plaintiff about their rights to rescind, it is plaintiffs claim that the docu ments themselves, especially when combined with the se quence in which they were given and the taking of finan cial information when the Work Order Contract was signed, are more than sufficient to create a rescission right. In fact, it is plaintiffs position that a single standard form document given in each case, the Home Improve ment Installment Contract, contains violations of the TILA that by themselves are sufficient to give rise to the right to rescind. In ONeil v. Four States Builders, 484 F. Supp. 18 (E.D. Pa. 1979), for example, Judge Newcomer held that home improvement installment contract language which
21 Under 15 U.S.C. 1635(a), the normal three day rescission period does not begin to run until the borrower receives all material disclosures and proper notification of the right to rescind. The time period is limited to three years (or the date the property is sold, if earlier) by 15 U.S.C. 1635(f). Porter v. MidPenn Con sumer Discount Co., 961 F.2d 1066, 1073 (3d Cir. 1992).

action and one after credit approval. That is a fact that Empire does not bother denying and is clearly established by the contracts attached to the Motion for Class Certifica tion as Exhibit D.20 Membership in the general Class is easily defined by Empires records which show the two contract structure of each and every known transaction that Fredmont entered into with Class members and then assigned to Empire. The legal consequences flowing from the resulting limitation on members ability to rescind the transactions present the common issues that predominate over any questions affecting only individual members. III. REPLY ARGUMENT A. THE ACTION MAY BE MAINTAINED UNDER RULE 23(B)(3) 1. Common Questions Predominate Over Any Questions Affecting Only Individual Members. Courts and commentators have recognized that there are no bright lines for determining whether common ques tions predominate. In re Workers Compensation, 130 F.R.D. 99, 108 (D. Minn. 1990); 7A Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure, 1778 at 526 (2d ed. 1986 & Supp. 1994). But when the central issues in the action are common to the class and they can be re solved for all members of the class in a single adjudication, there is a clear justification for handling the dispute on a representative rather than on an individual basis. Id., 1778, at 528. Empires argument on predominance is yet another ex ample of its mischaracterization of the gravamen of the Amended Class Action Complaint. Rather than dealing straightforwardly with the common questions presented by the twocontract scheme, Empire attempts to divert the focus to questions of oral representations. Empire misses the point entirely. The legal questions involving the uni formly applied twocontract scheme arise from standard ized form contracts that speak for themselves, indepen dent of any oral representations. Contrary to Empires as sertion at p. 64 of its Brief, this Court indeed can simply look at the uniform use of the two contracts and deter mine whether liability flows from defendants use of that scheme. See Blair v. National Construction Company of the South, Inc., 611 F.2d 80, 83 (5th Cir. 1980) (consumer given two different contracts for one agreement to repair home stated claim under Truth in Lending Act). Empire fails to recognize that the thrust of the Amended Class Action Complaint is the common course of conduct the defendants directed toward members of the Class and Subclasses. As plaintiff will demonstrate below, the legal and factual issues posed by the uniformly applied two
20 Empire suggests at p. 34, n.18, of its Brief that if the Court accepts that these contracts were signed on the dates indicated thereon, the Court must also find as a fact that the home improvement work actually commenced on the anticipated start date stated on the contracts. This nonsequitur 1) assumes that a Class mem ber who dated and signed a contract was aware of the start date language and understood its consequences and 2) contradicts evi dence obtained in discovery.

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was inconsistent with the rescission notice language man dated by TILA constituted a violation of TILA giving rise to the right to rescind. Plaintiff alleges in this case that the Home Improvement Installment Contract contained the same types of inconsistent disclosures. In this case, however, plaintiff also alleges that the viola tion was even worse than in ONeil, in that it was com pounded by the sequence of events and other documents. Each borrower had previously signed a Work Order Con tract and had given financial information to Fredmont in anticipation of obtaining funding for the repairs as part of the transaction, as documented in the credit application forms in Empires records.22 See n. 2, supra. Indeed, Fred mont, having obtained credit information and submitted the loan application to Empire, would have no reason to proceed with any work until financing was approved. Yet, when the borrower was then presented with the Home Improvement Installment Contract, the rescission notice in the Home Improvement Installment Contract was con tradicted by the language of the Work Order Contract which indicated a cash transaction, and the rescission notice in the Work Order Contract stated a deadline which was dif ferent and in all or most cases had already expired by the date of the Home Improvement Installment Contract. In fact, it was Fredmonts position that the borrower was at that point bound to pay cash for the repairs based upon the Work Order Contract if the borrower did not go through with the Home Improvement Installment Contract. See deposition of Kenneth Black, at p. 39, attached as Exhibit C to Motion for Class Certification. This sequence of events, demonstrable from the dates of the various documents, and the documents themselves, would have further con fused any borrower about whether a right to rescind still existed and, if so, exactly what the consequences of rescis sion would be. Since this is a class action motion, the merits of these issues are not before the Court and they will be further briefed on summary judgment at the appropriate time.23 They are described simply to demonstrate how easily they can be decided on a class basis. In view of the documen tary nature of most TILA disclosure violations, including these, it is not surprising that Congress expressly antici pated class actions under TIL A. See 15 U.S.C. 1640(a)(2)(B).
22 On this issue, whether the source of the funding was believed by the borrower to be by way of a grant or a loan is immaterial. 23 Empires Brief, p.36, n.19, also argues that analogous cases cited in plaintiffs initial brief either were not class actions or involved different fact situations. These cases were cited simply to show that courts had found rescission violations in similar situations under the Truth in Lending Act; their weight as precedent in this case is an issue to be addressed when the Court reaches the mer its of plaintiffs claim. It should be noted, however, that Empire has misstated the holding of Smith v. Fidelity Consumer Discount Co., 898 F.2d 896 (3d Cir. 1989). That case did not involve a con tractor beginning to do work; instead, it held merely that disburse ment of loan proceeds during the threeday rescission period is not by itself a rescission violation, and expressly left open other issues of premature performance. Smith, 898 F.2d at 9045 (recog nizing that there may be a case in which the creditors acts or words effectively negate the written notice provided to a bor rower . . .).

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The Empire Defendants make several arguments against class treatment of this TILA claim. They first argue that Class membership can only be determined by reviewing the loan files to determine if Empire as assignee may be held liable. This argument is specious for at least three different reasons. First, the fact that one needs to look at a defendants records to determine who engaged in the trans actions described in the class action is hardly a barrier to class treatment. In most class actions, it is necessary to obtain a list of the defendants customers or of others who dealt with the defendant from the defendants records. Sec ond, Empire cites in support of this argument 15 U.S.C. 1641(a), which provides that an assignee is liable for TILA violations in damage actions only if the violations are apparent on the face of the documents. Rescission ac tions are not subject to this requirement, as Empire con cedes in its parenthetical description of the subsection on p. 35 of the Brief. See 15 U.S.C. 1641(c) (right to rescind available against any assignee); Mount v. LaSalle Bank Lake View, 926 F. Supp. 759, 765766 (N.D. Ill. 1996). Third, the TILA violations in this case described above are apparent on the face of the documents. Empire also argues that plaintiff cannot seek declara tory relief, pursuant to Rule 23(b)(2), that other Class mem bers have a right to rescind under TILA.24 Defendants first argue that such relief under Rule 23(b)(2) is not avail able because the action seeks predominantly monetary re lief. In support of this argument, Empire cites several cases that deny Rule 23(b)(2) treatment because monetary relief was the only relief that was truly sought in the action. That is not the case here. While plaintiff seeks monetary relief for the Class on other claims, she seeks only declaratory class relief and no monetary relief for the Class on the TILA claim. There is no prohibition in Rule 23 or any where else against the Court certifying different claims under different subsections of Rule 23(b). See, e.g., In re NASDAQ MarketMakers Antitrust Litigation, 169 F.R.D. 493, 515 (S.D.N.Y. 1996) (Nothing in the language of Rule 23 precludes certification of both an injunctive class and a damages class in the same action. (citing cases)); Heastie v. Community Bank of Peoria, 125 F.R.D. 669, 67980 (N.D. Ill. 1989). In any event, if the action is certified under Rule 23(b)(3), the injunctive and declaratory aspects may be de cided for a Rule 23(b)(3) class as easily as for a Rule 23(b)(2) class. See Bosch v. Lane, 129 F.R.D. 636 (N.D. Ill. 1990) (certification under Rule 23(b)(2) may be appropriate even where plaintiff seeks damages, as long as declaratory or injunctive relief is additionally appropriate). Empire also argues that the Court may not decide whether there is a right to rescind under TILA on a class basis. Empire first cites James v. Home Construction Co., 621 F.2d 727 (5th Cir. 1980). That case held that a court could not decide whether to actually rescind class members transac tions under TILA because the decision to rescind is one
24 Defendants Brief erroneously asserts, at p. 57, that plaintiff seeks this declaratory relief under TILA only as an alternative to actual rescission. With respect to the TILA claim, plaintiff does not seek actual rescission on behalf of Class members. Such rescission is sought in this case only to the extent it may be an appropriate equitable remedy under the UTPCPL or other state law claims.

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provides that the procedures prescribed by the subsection shall apply except when otherwise ordered by a court. (Em phasis supplied). Thus, it was erroneous for the Jefferson court to hold that a court had no power to even hear issues concerning class members because they had not al ready followed the normal steps for rescission, since it had the power to vary those procedures if appropriate. Therefore, contrary to Empires assertion that these cases go into detail regarding the legislative history and explicit language of TILA and should be followed, they in fact are notable primarily for being inapposite, (James and Nelson), ignoring the actual language of TILA, (Nelson and Jeffer son) and being contrary to later Supreme Court precedent (Nelson). In fact, class actions seeking the type of relief sought in this case, a declaration of the right to rescind, have often been found appropriate under the Truth in Lending Act as well as other consumer protection statutes. In Tower v. Moss, 625 F.2d 1161 (5th Cir. 1980), the same court that had decided James expressed no difficulties in enforcing a TILA class action settlement that gave class members an option to rescind their transactions. Similarly, in Hickey v. Great Western Mortgage Corp., 158 F.R.D. 603 (N.D. Ill. 1994), the court noted that Nelson, supra, was inapposite to a case seeking a declaration that class members have a right to rescind and rejected its other rationales, pointing out that there was no reason to believe Congress did not intend to permit TILA class actions con cerning rescission. It also rejected the rationale used in Jefferson, supra, that it could not consider class members cases because they had not followed the steps prescribed in 15 U.S.C. 1635(b). Yet another TILA case permitting class determination of the right to rescind was Mount v. LaSalle Bank Lake View, 1994 WL 731006, 1994 U.S. Dist. LEXIS 4027 (N.D. Ill. 1994), a case involving a twocontract scheme similar to that alleged here. The court in that case had no difficulty finding that it would be effective and appropriate to certify a class under Rule 23(b)(2) to determine whether class members had a right to rescind and then, if such a right existed, to give notice to class members of that right and administer the relief for those who opted to exercise the right under Rule 23(b)(3). See also, Simon v. World Omni Leasing, 146 F.R.D. 197 (S.D. Ala. 1992) (using analogous procedure to determine whether class members had right to refunds under lease provisions of TILA). As discussed in plaintiffs initial brief at p. 33, the same optiontorescind procedure has been followed under other state and federal consumer protection statutes. E.g, Bryan v. Amrep Corp., 429 F. Supp. 313 (S.D.N.Y. 1977); Rich mond v. Dart Industries, Inc., 629 P.2d 23, 174 Cal. Rptr. 515 (1981); Olive v. Graceland Sales Corp., 61 N.J. 182, 293 A.2d 658 (1972); Vasquez v. Superior Court, 4 Cal. 3d, 800, 810, 484 P.2d 964, 970 (1971). Hence, for all these reasons, the class declaratory and notice relief sought under the Truth in Lending Act, seek ing to establish the rights of Class members to rescind their transactions, is appropriate under Federal Rule of Civil Procedure 23.

which each class member must make. Plaintiff has not asked the court for this type of class relief, but rather only for a declaration that the right to rescind exists and notice of that right to class members. Therefore, Empires com plaints that it would not be able to respond to Class mem bers rescission requests after they are made are mistaken. Defendants cite Nelson v. United Credit Plan, 77 F.R.D. 54 (E.D. La. 1978), reversed without opinion, 795 F. 2d 1008 (5th Cir. 1986), another case in which actual rescis sion was sought on a class basis. The Nelson district court similarly ruled that class rescission relief was inappropri ate because some class members might not desire to re scind. In addition, the court denied certification because the named plaintiffs had already been awarded rescission relief and therefore no longer had common interests with the class. The court also opined that class rescission might be problematic because there would be no damage award from which attorneys fees or costs could be recovered, inexplicably ignoring the attorneys fees and costs provi sions of TILA itself. See 15 U.S.C. 1640(a)(3) (attorneys fees to be awarded in any action in which a person is deter mined to have a right to rescind). The Nelson court con ceded that Congress had indicated an intent that some TILA actions be pursued on a class basis, and even that class actions are not discouraged under the Truth in Lend ing Act any more than in other contexts, but then stated that it found no evidence of Congressional intent that class treatment is appropriate in actions seeking rescis sion, again basing this conclusion in part on the errone ous assumption that attorneys fees would not be available. Besides the fact that Nelson was reversed by the Fifth Circuit, a development omitted from Empires Brief, the case is unhelpful to the analysis here. The Nelson analysis is in derogation of the Federal Rules of Civil Procedure and has been overruled by the Supreme Court. In Califano v. Yamasaki, 442 U.S. 682, 700 (1979), the Supreme Court held that Rule 23 applies unless there is a clear expression of Congressional intent that a particular type of action not be brought as a class action. There is no requirement in Rule 23 or in case law that a court find evidence of Con gressional intent that class actions be maintained under a particular statute, and with respect to most statutes under which class actions are typically brought there is no such evidence. Rule 23 applies to civil actions generally and Congressional silence simply recognizes that fact. The only other case cited by Empire is Jefferson v. Secu rity Pacific Financial Services, 162 F.R.D. 63 (N.D. Ill. 1995). The only TILA cases cited by the Jefferson court were those in which the plaintiffs had sought to actually effectuate rescission for all class members which, as discussed above, were inapposite. The Jefferson court also denied class treatment because the class members had not followed the procedure for re scission described in 15 U.S.C. 1635(b). This finding again ignored the fact that the plaintiff was not seeking for class members the relief that would be granted if they had fol lowed that procedure, i.e, rescission, but rather was seek ing only a declaration of their right to rescind. More impor tantly, the Jefferson court ignored the language of the Act itself. The last sentence of 15 U.S.C. 1635(b) specifically

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b. The FDCPA claim. Like the Truth in Lending claims, most of the claims under the Fair Debt Collection Practices Act (FDCPA) and the Pennsylvania Debt Collection Practices Regula tions, 37 Pa. Code Ch. 303 (the Debt Collection Regula tions), can be decided based solely on documentary evi dence. Plaintiffs claim is that the Empire Defendants rou tinely sent a variety of different form letters that on their face did not comply with certain statutory and regulatory requirements.25 For example, several of the form letters threatened ac tions that could not lawfully be taken, such as acceleration and foreclosure of the mortgage within 10 days or 30 days when the borrower had not been given notices required under Pennsylvania Act 6 of 1974, 41 P.S. 403, 404 that are a condition precedent to acceleration and foreclosure; implied that the only way to forestall foreclosure was for the borrower to bring an affirmative court action; and failed to include specific language that is mandated for letters sent by collection agencies under the FDCPA, language sometimes dubbed the Miranda warning and the mini Miranda warning. Discovery revealed that the letters were sent, at various times not only by Empire, but also by TMI. There will be no difficulty in determining which Class members received which letters, since Empires computer ized collection records contain this information. (An exam ple of these computerized records, those of plaintiff Kim Bosch obtained in discovery, is attached hereto as Exhibit F [not reprinted herein]). While Empire will undoubtedly argue that the letters do not violate the relevant statutes and regulations, those arguments are arguments on the merits that can be decided on a class basis which will raise only issues of law or factual issues that are uniform for all Class members who received the letters. Among the legal issues would be the issue of whether the letters did indeed threaten actions that could not le gally be taken and whether those threats violated the appli cable law. See 37 Pa. Code 303.3(14). Under the FDCPA, there may be defenses that the Act is inapplicable because of the relationship of the Empire Defendants to each other, but that issue is a legal issue that depends simply on whether TMI or Empire began servicing a loan after default, and presents a common issue in and of itself. The facts under lying these issues are readily available from Empires files
25 Defendants argue that the definition of this Subclass is not suffi ciently precise because it describes the Subclass members as those Class members who received letters and other communications from defendants which violated certain specified statutes. As de fendants well know, and as described in plaintiffs initial brief, the letters in question are those attached to that brief in Exhibit E. Plaintiff certainly has no objection to defining the Subclass as those who received those letters if defendants feel that will clarify who is in the Subclass. A similarly defined class was certified in Gammon v. GC Services Ltd. Partnership, 162 F.R.D. 313 (N.D. Ill. 1995). In view of the fact that nine out of the ten Class mem bers who were deposed received such letters, the Subclass obvi ously has numerous members. Among them are many who also received phone calls at times and frequencies beyond those speci fied as reasonable in the applicable regulations, as well as those who received calls at work and after notice that they were repre sented by counsel.

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and will contain no more than a few different scenarios. In any event, the Debt Collection Regulations promulgated under the UTPCPL apply regardless of whether the sender of the letter is a debt collector as defined by federal law or the creditor to whom the debt is owed. 37 Pa. Code 303.2. See Jungkurth v. Eastern Financial Services, 74 B.R. 323 (Bankr. E.D. Pa. 1987), appeal on merits dismissed, 87 B.R. 333 (E.D. Pa. 1988). It is also true that not all of the violations occurred within the one year statute of limitations of the FDCPA, but this creates an issue (again, a common issue) only in the sense that Empires records will have to be consulted to determine when a particular act occurred. The statute of limitations for the UTPCPL is six years, so there will be no issue with regard to whether a collection violation un der that statute is timebarred. See Gabriel v. OHara, 368 Pa. Super. 383, 534 A.2d 488 (1987). With respect to any other states similar statutes (for the small number of Sub class members in two or three other states), there will sim ply be legal issues of whether those states statutes bar the same sorts of conduct. Defendants claim they will raise a good faith defense under the FDCPA,26 but with respect to the form letters, that would be a common defense that would presumably apply to all of the letters containing a particular violation, and is therefore a common issue. Moreover, such defenses are limited to clerical mistakes and not mistaken interpre tations of the law. See, e.g., Haynes v. Logan Furniture Mart., 503 F.2d 1161, 1164 (7th Cir. 1974) (interpreting same lan guage in Truth in Lending Act); Beasley v. Blatt, 1994 WL 362185 (N.D. Ill. 1994) (debt collector could not invoke defense when it was established that collector regularly mailed identical form collection letters); Scott v. Jones, 1991 WL 156060 (W.D. Va. 1991) (reliance on counsel does not establish defense), affd on other grounds, 964 F.2d 314 (4th Cir. 1992). It will also be difficult for defendants to estab lish this defense since they have admitted in discovery that they were not even aware of the applicable Pennsylvania laws and Department of Banking regulations which ren dered their letters inaccurate and deceptive under both the federal and state law. See depositions of Empire collec tion manager Todd Makita, at pp. 7677, and his supervi sor Leigh Ann PorterCable, at pp. 2425, attached hereto as Exhibit G [not reprinted herein]. Not surprisingly, Empires Brief focuses on the other collection violations, such as multiple calls to a debtor made more frequently than permitted by applicable law, but here too there are common patterns documented in Empires records. Empire claims that there will be individualized questions about whether the calls were exempted because they constituted reasonable follow up activity. But even assuming defendants introduce some evidence that the pro hibited calls were reasonable followup (and it is not clear such evidence exists), there will be a discrete and limited set of legal issues about what constitutes reasonable followup
26 Under 15 U.S.C. 1692k(c), a debt collector is not liable for a violation if the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.

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In any event, defendants argument, that plaintiff would have an incentive to sell out the FDCPA subclass to obtain greater damages for herself, has no merit. Defen dants cite no authority in support of the argument for the simple reason that such authority does not, to plaintiffs knowledge, exist. If defendants argument were to be ac cepted, every FDCPA class action would be barred be cause a similar potential conflict would always exist. In every case under 15 U.S.C. 1692k(a)(2)(B), a named plain tiffs damages are determined separately from those of the class and a named plaintiff could theoretically negotiate higher damages for herself at the expense of the class. Yet Congress undeniably contemplated that class actions would be brought under the FDCPA. It is nonsensical to argue that in enacting the class action damage provisions of the FDCPA, Congress thereby created a situation in which a class action could never be brought. c. The UTPCPL claim. Plaintiffs claim for relief from defendants unfair or de ceptive acts or practices is contained in Count Three of the Amended Class Action Complaint under the UT PCPL.28 Those acts or practices alleged include the two contract scheme, including the interference with Class mem bers rights of rescission, the improper debt collection prac tices, the unfair and misleading representations of govern ment involvement in the home improvement repairs and the making of the repairs to members homes of a quality inferior to and below the standard of a good and work manlike manner agreed upon in writing.29 These acts and practices are the common and predominating facts alleged in the Amended Class Action Complaint; any differences that may exist due to, for example, the number of im proper collection communications, or the extent of the dam age caused to a particular members home, would impact only the amount of that members damages, not whether the defendants actions were proper in the first instance. See, Lake v. First Nationwide Bank, 156 F.R.D. 615, 625 (E.D. Pa. 1994) (Robreno, J.); Wolgin v. Magic Marker Corp., 82 F.R.D. 168, 176 (E.D. Pa. 1979) (noting that the over whelming weight of authority holds that the need for indi vidual damages calculations does not diminish the appro priateness of class action certification where common ques tions as to liability predominate, quoting from 5 Newberg on Class Actions 8824(b), at 879 (1977)). These common patterns of conduct furnish the factual backdrop for iden tifying the applicable law.

sufficient to rebut the presumption of harassment. Simi larly, if a call was made to a debtors place of employment, it will be a ministerial task to determine if it was prohib ited because there had been a discussion with the debtor within 30 days before the call. See 37 Pa. Code 303.4(2). In light of the ease in which such form letters and rou tinized activities can be considered on a class basis, it is not surprising that numerous courts, in this district and elsewhere, have certified class actions alleging similar vio lations. E.g., Stewart v. Slaughter, 165 F.R.D. 696 (M.D. Ga. 1996) (form collection letters and standardized practices); Carr v. Trans Union Corp., 1995 WL 20865 (E.D. Pa. 1995) (individual factual issues regarding claims of some class members did not defeat commonality or predominance in case involving form collection notices); Gammon v. GC Ser vices Ltd. Partnership, 162 F.R.D. 313 (N.D. Ill. 1995) (class based upon form letter); Avila v. Van Ru Credit Corp., 1995 WL 683775 (N.D. Ill. 1995) (standard form letters and pro cedures), affd on other grounds 84 F.3d 222 (7th Cir. 1996); Beasley v. Blatt, 1994 WL 362185 (N.D. Ill. 1994) (same). In Keele v. Wexler, 1996 U.S. Dist. LEXIS 3255 (N.D. Ill. 1996), Judge Gettleman held that claims arising out of standard documents present a classic case for treatment as a class action and that the existence of individual ques tions does not defeat a class action if common questions predominate. He noted, as have other courts, that the small amount at stake for each individual plaintiff [under FDCPA] begs for a class action. Other courts have simi larly found that the small amounts of damages available under FDCPA make class actions particularly suitable both because class members have less interest in controlling their own actions and because class actions in such cases serve judicial economy and convenience. Carr, supra; Beasley, su pra. The final argument made by Empire with respect to certification of the FDCPA claims should be disregarded by the Court because defendants have breached an agree ment, made at a pretrial conference with the Court, that such an argument would not be made. At that conference, plaintiff brought before the Court Empires refusal to pro vide discovery regarding their net worth, discovery which plaintiff sought in anticipation of an argument against class certification based on the limit on FDCPA class damages to the lesser of 1% of a defendants net worth or $500,000. The Court stated that defendants could not have it both ways; they either had to provide the discovery or agree not to make an argument based on the net worth limitation. Defendants counsel agreed not to make an argument against class certification based upon the net worth limitation. The agreement was incorporated into the Modified Joint Pro posed Case Management Plan, paragraph 5(b), which was approved by the Court on February 11, 1998. In violation of that agreement, defendants make pre cisely such an argument on page 53 of their Brief.27
27 It is clear that the argument is based solely on the 1% of net worth limitation, since the Class has under 500 members and there fore, even if each Class member were awarded the maximum stat utory damages of $1000, the alternative $500,000 limit would not be reached.

28 The Pennsylvania Supreme Court has held that the UTPCPL must be liberally construed to effect its purpose of preventing unfair and deceptive practices. Commonwealth v. Monumental Proper ties, 359 A.2d 812, 82627 (Pa. 1974). 29 Empire emphasizes at p. 30 of its Brief the question of whether the good and workmanlike standard was orally promised to Class members. However, Empire cannot dispute that this also was the standard promised in writing. See Work Order Contracts attached as Exhibit D to Motion for Class Certification. As such, plaintiff need not show that the workmanlike standard was orally prom ised, though in fact it was in many cases.

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The UTPCPL, as well as the similar laws of other states,30 provides that it is an unfair or deceptive act or practice to engage in, inter alia, any of the following: 1 Causing likelihood of confusion or of misunderstanding as to the source, sponsorship, approval or certification of goods or services; 1 Causing likelihood of confusion or of misunderstanding as to affiliation, connection or association with, or certi fication by, another; 1 Representing that goods or services have sponsorship, approval, characteristics, ingredients, uses, benefits or quan tities that they do not have or that a person has a spon sorship, approval, status, affiliation or connection that he does not have; 1 Representing that goods or services are of a particular standard, quality or grade, or that goods are of a partic ular style or model, if they are of another; 1 Advertising goods or services with intent not to sell them as advertised; 1 Failing to comply with the terms of any written guaran tee or warranty given to the buyer at, prior to or after a contract for the purchase of goods or services is made; 1 Making repairs, improvements or replacements on tangi ble, real or personal property, of a nature or quality infe rior to or below the standard of that agreed to in writing; 1 Engaging in any other fraudulent or deceptive conduct which creates a likelihood of confusion or of misunder standing.31 73 P.S. 2012(4), 2013. Also violative of the UTPCPL is conduct prohibited by the Debt Collection Regulations, 37 Pa. Code Ch. 303, which establish what shall be considered unfair or decep tive acts or practices with regard to the collection of debts.
30 Document production by Empire has revealed that some 38 Class members reside in Ohio and in New York, and so have claims arising under their states laws. The statutes, the Ohio Consumer Sales Practices Act, Ohio R.C. 1345.01, et seq., the Ohio Decep tive Trade Practices Act, Ohio R.C. 4165.01, et seq., and the New York General Business Law, Art. 22A, 349, are substantively similar to the UTPCPL in their respective definitions of unfair or deceptive acts or practices. Where state laws are so similar, no obstacles to class certification are presented. See, e.g., In re School Asbestos Litig., 789 F.2d 996, 10101011 (3d. Cir.), cert. denied, 479 U.S. 852 (1986); Lake v. First Nationwide Bank, 156 F.R.D. 615, 625 (E.D. Pa. 1994) (common claims predominated over any differences in state laws); Coe v. Circle Express, Inc., 1991 U.S. Dist. LEXIS 2416 (N.D. Ill. 1991) (class certification of pendent claims appropriate where elements of claims not likely to vary significantly from state to state). 31 This last provision of the UTPCPL, 73 P.S. 2012(4)(xxi), is known as the catchall provision. The purpose of the catchall provision has been explained by the Pennsylvania Supreme Court: The Legislature realized, as has often been stated, that no sooner is one fraud specifically defined and outlawed than another vari ant of it appears. Rather than restricting courts and the enforcing authorities solely to narrowly specified types of unfair and decep tive practices, the Legislature wisely declared unlawful any other fraudulent conduct. This is a common and wellaccepted legisla tive response to the mischief caused by unfair and deceptive mar ket practices. Commonwealth v. Monumental Properties, 359 A.2d at 82627.

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The Debt Collection Regulations provide that it is an un fair or deceptive act or practice for either a creditor or a debt collector to engage in, inter alia, the following: 1 Threatening or representing, directly or by implication . . . that an action to effect dispossession of real or personal property will be taken, unless the action is lawful and the creditor intends to take the action; 1 Representing, directly or by implication, that certain ac tion will be taken if the action cannot legally be taken or if the action is not intended to be taken; 1 Visiting a person, causing a telephone to ring or engag ing a person in telephone conversation at an unusual time or place or a time or place known or which should be known to be inconvenient to the person called or visited; 1 Without the written consent of the debtor given directly to the creditor or debt collector subsequent to the com mencement of collection activities or without the express permission of a court of competent jurisdiction or as rea sonably necessary to effectuate a postjudgment judicial remedy, communicating, threatening to communicate or implying the fact of a debt to any person other than the debtor in any manner; 1 Abusing or harassing the debtor, directly or indirectly, through third party contacts; 1 Otherwise abusing or harassing a person in connection with the collection of a debt; 1 Abusing or harassing the debtor by telephone; 1 Placing telephone calls to the debtor at the place of em ployment of the debtor after the debtor has notified the creditor or debt collector in writing not to place the calls; 1 Communicating with or contacting a person other than the debtors attorney, if the creditor or debt collector knows or has reason to know that the debtor is repre sented by an attorney with respect to the debt, and has knowledge of or can readily ascertain the address of the attorney; 1 Failure by a debt collector to comply with Section 809(a) of the Fair Debt Collection Practices Act, 15 U.S.C. 1692g(a), regarding validation of debts. 37 Pa. Code 303.3, 303.4. These provisions of the UTPCPL and the Debt Collec tion Regulations set the parameters for the common ques tions of law presented by Count Three of the Amended Class Action Complaint; the predominance requirement is easily met because the issue of defendants compliance with these laws is common to the members of the Class and the Subclasses. As to the members of the Class, all were subjected to the same course of deceptive and confusing conduct inher ent in the twocontract scheme, which created a likelihood of confusion or of misunderstanding and unfairly limited the members rights of rescission. The deception and con fusion arising from the inconsistent wording of the two contracts was compounded by Fredmonts practice of com mencing work on a home only after notice that financing

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representations regarding government involvement or suf fered from the same defective work done on their homes, respectively, the fact that they were all subjected to unfair or deceptive acts or practices common to their Subclass membership presents the overriding common questions of liability that predominate over any individual differences in the treatment they suffered at defendants hands. For example, the possibility that Fredmonts representa tives may have misrepresented the home improvements as a government grant program to some and a government subsidized loan to others does not defeat predominance. Zacharjasz v. Lomas and Nettleton Co., 1988 U.S. Dist. LEXIS 4957 (E.D. Pa. 1988) (common questions may predominate where the oral representations were standardized or simi lar); McMahon Books, Inc. v. Willow Grove Associates, 108 F.R.D. 32, 3738 (E.D. Pa. 1985) (oral representations which appear similar or derived from same sales pitch would support a finding that common questions predominate). Or, the fact that one Class member had poor work done to her kitchen, while another suffered from a leaky roof, does not make for overriding individual issues. A class action will not be defeated solely because of some variation among class members grievances. Rosario v. Livaditis, 963 F.2d 1013 (7th Cir. 1992), cert. denied, 506 U.S. 1051 (1993) (affirming district courts finding that fact that some beauty school students were satisfied with their education was not sufficient to defeat class action claim under Illinois Con sumer Fraud Act). In Robinson v. Countrywide Credit Industries, 1997 U.S. Dist. LEXIS 15712 (E.D. Pa. October 8, 1997) (attached to the Delta Affidavit as Exhibit HH), a forced placed insur ance case involving inflated prices for forced placed haz ard insurance on the properties of its mortgagors, Judge Bartle held that the necessity of individual information regarding damages did not preclude certification of the class. In Robinson, as here, plaintiff relied on defendants own standardized form documents, letters and internal doc uments as the basis for his RICO claim. In Robinson, as here, defendant argued that plaintiff failed to meet Rule 23(b)(3) because resolution of the action would require inquiry into the circumstances surrounding the place ment of forced insurance for each plaintiff and into the underwriting criteria for each plaintiff just as the Empire Defendants argue here that the circumstances leading up to execution of the Work Order Contract and the Home Improvement Installment Contract and the nature and scope of the defective work are the predominating issues. Id. at *8. Judge Bartle in Robinson rejected these arguments and concluded that common issues predominated over any in dividual issues because the central issues revolved around the form contracts and whether defendants knowingly pur
lowing a telephone discussion at numerous times throughout 1995, 1996 and 1997 (Exhibit F, pp. 10721093), in violation of 37 Pa. Code 303.4(2). During her deposition, plaintiff testified to other instances of Empires harassing and abusive collection techniques, such as threat ening to take her home, calling her at midnight or 1 oclock a.m. and threatening to put her and her children on the street and using obscenities, all of which led her to missing days of work as a result of the distress she was caused. See Exhibit E, pp. 184192.

had been approved by Empire.32 All Class members, hav ing already signed the first Work Order Contract at that point, were thereby obligated to either pay cash for the work or obtain alternate financing.33 This uniform two contract structure was present in the case of every Class member, and clearly presents predominating legal and fac tual questions. The legal and factual questions with respect to the Sub class members also predominate over individual nuances. Members of Subclass A, the Unfair Collection Practices Subclass, were all subject to various debt collection activi ties, including uniform standardized form collection let ters, that violated the Debt Collection Regulations. Mem bers of Subclass B, the Government Affiliation Subclass, all received deceptive representations that caused likeli hood of confusion or misunderstanding as to the source, sponsorship or approval of the home improvement ser vices, as to government affiliation or association or that the home improvement services had sponsorship or ap proval that they in fact did not have. Members of Subclass C, the Defective Work Subclass, all received home improve ment services that were of a nature or quality inferior to or below a good and workmanlike standard. Although not every member of a Subclass was subjected to identical debt collection activity,34 or received identical
32 See deposition of Arthur Milwaukee at pp. 4448, quoted in para graph 40 of the Amended Class Action Complaint. 33 See deposition of Kenneth Black, at p. 39, attached as Exhibit C to Motion for Class Certification [not reprinted herein]. 34 Clearly, all Subclass A members received the form collection let ters that Empire has acknowledged failed to contain the language mandated by the FDCPA. See deposition of Todd Makita, at tached to the Motion for Class Certification as Exhibit E. Beyond that unfair collection practice, however, members were also sub jected to harassing phone calls, unpermitted contacts with their employers and other practices that violated the Debt Collection Regulations. The evidence of such practices is found in the collec tion history for each Class member maintained by Empire. For example, attached hereto as Exhibit F is the collection history maintained by Empire with respect to Kim Bosch, including a glossary of collector abbreviations [not reprinted herein]. That his tory shows, for example, the following violations of the Debt Col lection Regulations: That even though plaintiff gave Empire the name and number of her attorney on December 29, 1995 and Empire spoke with that attorney, who confirmed the representation on January 2, 1996, Empire nevertheless continued to contact plaintiff directly on Jan uary 10, 15, 17, 19, 27, 29 and 30 and February 7, 14 and 19, 1996 (Exhibit F, pp. 108690), in violation of 37 Pa. Code 303.4(10); Empire had received correspondence from plaintiffs counsel on July 15, 1996 stating that all correspondence should be di rected to him, but nonetheless continued to send plaintiff various collection letters, including letter nos. 18 and 19, the letters iden tified by Empires collection manager as not including required FDCPA language (Exhibit F, pp. 107677), in violation of 37 Pa. Code 303.4(10); Although Empire was informed by plaintiffs employer on May 30, 1996 that she was not allowed to receive calls at work, and was told by plaintiff herself on June 22, 1996 that she had got in trouble at work as a result of Empires call, Empire nonetheless continued to telephone her place of business on June 25, 26 and 27, 1996 and again on July 10 and 12, 1996 at which time Empire was told again that employee not allowed personal calls (Ex hibit F, pp. 10771080), in violation of 37 Pa. Code 303.4(2); Empire continued to contact plaintiff during a 7day period fol

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chased inflated or expensive policies to receive commis sions. Id. at *12. According to the Robinson court, the pres ence of individual issues, including damages, was an insuf ficient basis for denying class certification. Id. Here, too, the focus is on the common documents signed by all Class members and the violations arising therefrom, not on the damages resulting from defective work done on their indi vidual premises. The types of practices presented by defendants com mon course of conduct in this case are not new. Nine years ago, the District Court for the Northern District of Illinois certified a class of consumers who were subject to a similar twocontract scheme. Heastie v. Community Bank of Greater Peoria, 125 F.R.D. 669 (N.D. Ill. 1989). Mrs. Heastie had been talked into signing a cash sales contract for a satellite dish antenna that contained a stiff liquidated damages clause. The salesman told her he would find financing for her. After the passage of the statemandated cancellation pe riod, Mrs. Heastie was told that financing had been found with Community Bank. At that point, believing she was obligated to pay the cash price and being unable to afford to do so, Mrs. Heastie signed the loan papers. The allega tion of that common scheme was held sufficient to certify a class because the common issues predominated. Heastie, 125 F.R.D. at 675. This Court should rule similarly in this case. Mount v. LaSalle Bank Lake View, 1994 U.S. Dist. LEXIS 4027 (N.D. Ill. 1994) also involved a twocontract scheme that interfered with class members rights of rescission. The Mounts alleged that they first entered into an agree ment with a construction company for an addition to their home. The contractor took a credit application but then allegedly commenced work before the Mounts signed the second contract, for the financing. The Mounts alleged they were told that they would have to pay the contractor cash for the work if they did not sign the second contract. Such allegations of a uniform practice were held to satisfy the predominance requirement of Rule 23(b)(3). Mount, 1994 U.S. Dist. LEXIS at *18. Another illustrative class action case on this point was actually cited by the Empire Defendants in their Brief. In Mayo v. Sears, Roebuck & Company, 148 F.R.D. 576 (S.D. Ohio 1993), Sears had claimed that purchasers of furnaces or air conditioners could not represent purchasers of win dows and roofing in a class action challenging Sears financ ing methods. The court made short shrift of that argu ment, noting that plaintiffs allegations turned on Sears use of identical forms, common sales techniques and rou tinized procedures for extending credit; the difference in the items purchased by class members did not defeat the common elements of their claims. As such, Sears position was, at best, an issue to be resolved at trial, not a bar to class certification. Mayo, 148 F.R.D. at 580. Similarly here, the focus should be on defendants use of the identical two form contracts, the standard collection techniques, representations of government involvement and widespread defective work. Although there may have been minor differences in how these unfair and deceptive prac tices were applied in the case of individual Class members, the general conduct clearly predominates.

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2. A Class Action Is Superior To Other Available Methods For Adjudication Of This Controversy. Empire contends that a class action is not superior in this case because: (1) if certified this case would be unman ageable; (2) an agreement to arbitrate exists; and (3) Em pire speculates that truly aggrieved individuals would bring individual suits against the Empire Defendants. Em pires arguments once again ignore the factual allegations of the Amended Class Action Complaint and the legal ba sis of plaintiffs claims. a. This case is simple to manage as a class action. Empires attempt to portray this case as one implicating the same management difficulties as those presented in two of the largest class actions ever proposed for certifica tion, In re Ford Motor Co. Ignition Switch Prod. Liab. Litig., 174 F.R.D. 332 (D.N.J. 1997) and Georgine v. Amchem Prod., Inc., 83 F.3d 610 (3d Cir. 1996), is simply ludicrous. As set forth in detail above, unlike Ford and Georgine, all of plaintiffs claims are based on the standardized form contracts and credit application forms used by the Empire Defendants. Moreover, plaintiffs TILA claims, as well as many of the FDCPA and UTPCPL claims, can be decided for all Class members on a motion for summary judgment. Unlike Ford and Georgine, in this case there are hundreds, not millions, of potential class members. In addition, plain tiffs primary claims are federal and apply to all class mem bers. For the remaining claims, the laws of three states, Ohio, Pennsylvania and New York, not 51 jurisdictions, are implicated.35 Unlike in Georgine, in this case there are no jurisdictional impediments to class certification. Unlike in Ford, in this case plaintiff can and has demonstrated a suitable and realistic plan for a class trial. Defendants attempt to miscast plaintiffs claims and transform this case into an unwieldy amalgam of individual issues cannot be used as a substitute for facts that demonstrate that this case is unmanageable as a class action. Defendants have presented no such facts and their arguments should, there fore, be rejected.36 b. Arbitration is not feasible because Empire has no agreement to arbitrate and Fredmont has defaulted. Defendants argument that this case is subject to an agree ment to arbitrate is equally specious. Empire has no agree ment to arbitrate with plaintiff or any Class member. Fred mont, which arguably did have such an agreement,37 has defaulted in this case and there is a default judgment against
35 The state consumer protection statutes of Pennsylvania, Ohio and New York are virtually identical. See n. 24, supra. 36 Empires point about the Attorney General Complaint pending against Fredmont is puzzling. The Empire Defendants are not included in that action. The Attorney General seeks relief only against Fredmont and does not raise the same claims as the case at bar. 37 If Fredmonts arbitration clause were at issue, there would be a substantial question as to whether it was an unconscionable and invalid adhesion clause, especially in view of the oneyear limita tion on claims which purports to waive rights under federal and state law.

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ual basis. These financial barriers may be over come by permitting the suit to be brought by one or more consumers on behalf of others who are similarly situated. 7B Wright et al., 1778, at 59; see, e.g. Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 809, 86 L. Ed. 2d 628, 105 S. Ct. 2965 (1985) (Class actions . . . may permit the plain tiffs to pool claims which would be uneconomi cal to litigate individually.). The public interest in seeing that the rights of consumers are vindi cated favors the disposition of the instant claims in a class action form. Additionally, there is no indication that other litigation is pending, that there is any strong interest on the part of individ ual class members to control the proposed litiga tion interpose, or that concentrating the litiga tion form is in the least undesirable. 156 F.R.D. at 626. As in Lake, in this case, despite numerous Class mem bers stated problems with the work done on their homes, there is no other litigation pending. There is no indication that there is any interest on the part of individual Class members to control the proposed litigation. Moreover, the only undesirable aspect Empire can point to of this case proceeding as a class action is its desire that class certifica tion be denied. Even assuming, arguendo, that defendants speculation is correct that the Class members claims were of sufficient value to make individual actions feasible, which they are not, the inefficiency and unfairness of denying class certification on this basis is clear. As one court re cently noted in certifying an FDCPA class, [c]lass actions were designed not only to compensate victimized mem bers . . . but also to deter violations of the law, especially when small individual claims are involved. Gammon v. GC Services Ltd. Partnership, 162 F.R.D. at 321. Defen dants speculation that Class members would pursue indi vidual claims is just that and is not a sufficient basis to decline to certify a class. Id. at 322. See also Heastie v. Community Bank of Greater Peoria, 125 F.R.D. at 677 (su periority requirement was met when the individual claims were perhaps larger than in many consumer credit class actions, but still relatively small and therefore wellsuited for class action treatment). B. THE ACTION MAY BE MAINTAINED UNDER RULE 23(B)(2) Empires argument that this is a case purportedly seek ing primarily monetary damages, and so cannot be certi fied under Rule 23(b)(2), misses the obvious point: the Rule does not bar the certification of class actions under both (b)(2) and (b)(3). Mount v. LaSalle Bank Lake View, 1994 U.S. Dist. LEXIS at *2529; Heastie v. Community Bank of Greater Peoria, 125 F.R.D. at 679680; Patrykus v. Gomilla, 121 F.R.D. 357, 361 (N.D. Ill. 1988). Nor does Empire attempt to distinguish the cases cited by plaintiff in her initial brief in support of the Motion for Class Cer tification for the proposition that courts can certify class actions for the purposes of both equitable relief and dam

it. Therefore, not only is it impossible for plaintiff and the Class members to arbitrate their claims against Fredmont, there is also no reason for them to do so and the only issues that remain for trial are the claims against the Em pire Defendants. Under the circumstances, arbitration is not a viable alternative and cannot provide a remedy for plaintiff and the Class members. c. Empires speculation about Class members does not render a class action inferior. Defendants final argument, that Class members claims are of sufficient (though unspecified) value to make indi vidual claims viable, ignores not only the claims asserted by plaintiff but also applicable law in this Circuit. As this Court has noted in Lake v. First Nationwide Bank, 156 F.R.D. 615 (E.D. Pa. 1994), a mortgage overcharge case: The superiority finding requires at a minimum (1) an informed consideration of alternative avail able methods of adjudication of each issue, (2) a comparison of the fairness to all whose interests may be involved between such alternative meth ods and a class action, and (3) a comparison of the efficiency of adjudication of each method. . . . The interests that should be taken into ac count include those of the judicial system, the putative class, the instant plaintiffs and defen dant and their attorneys, and the general pub lic. . . . Furthermore, the four fairness and effi ciency criteria in 23(b)(3) should be considered in making the evaluation. 156 F.R.D. at 625 (citations omitted). In concluding that a class action was the superior method for resolving the claims asserted in Lake, this Court enumerated the advantages of litigating consumer cases, such as this one, as class actions: The Court has little difficulty in finding that the class action form is the superior method of re solving the claim that the Lakes seek to prose cute. The alternative to pursuing a class action is a series of state court actions by a large num ber of scattered plaintiffs, an inefficient alloca tion of judicial and public resources. Upon the representations of counsel, the actual amount due to each class member is small, amounting to no more than a few hundred dollars per mem ber. Given the relatively small amount recover able by each potential litigant, it is unlikely that, absent the class action mechanism, any one indi vidual would pursue his claim, or even be able to retain an attorney willing to bring the action. As Professors Wright, Miller, and Kane have dis cussed in analyzing consumer protection class actions such as the instant one, typically the individual claims are for small amounts, which means that the injured parties would not be able to bear the significant litigation expenses in volved in suing a large corporation on an indi vid

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ages. See, e.g., Crempan v. Automobile Club, 22 FEP Cas (BNA) 180 (E.D. Mich. May 19, 1977). As discussed earlier in this brief, the Mount court certi fied a class action under both paragraphs of Rule 23(b), endorsing the hybrid procedure followed by the court in Simon v. World Omni Leasing, Inc., 146 F.R.D. 197 (S.D. Ala. 1992), whereby a court would first determine whether there had been compliance with the TILA and then, if not, proceed to a determination for monetary damages. Such a procedure clearly makes sense here for plaintiffs claim under the TILA for declaratory relief permitting Class mem bers the option to rescind and for monetary damages flow ing from violations of other statutes. The existence of claims for monetary damages is not a bar to class certification under Rule 23(b)(2) where the defendant has acted on grounds generally applicable to the class as a whole. C. THE REQUIREMENTS OF RULE 23(A) HAVE BEEN ESTABLISHED 1. Numerosity. Defendants coyly contend that plaintiff has not satisfied the numerosity requirement because her Class and Sub class definitions purportedly are too vague and merits based. But the central class definition here stands in sharp contrast with the amorphous definitions deemed lacking in the cases cited by defendants. Invariably, the rejected de scriptions conditioned class membership on an individuals state of mind or on indefinite time parameters. See, e.g., Crosby v. Social Security Admin. of U.S., 796 F.2d 576, 580 (1st Cir. 1986) (membership depended on whether social security applicant failed to receive a hearing within a rea sonable time); Forman v. Data Transfer, Inc., 164 F.R.D. 400, 403 (E.D. Pa. 1995) (membership conditioned on re ceipt of an unsolicited facsimile advertisement); but see Barnett v. Bowen, 794 F.2d 17, 22 (2d Cir. 1986) (holding that it would still be appropriate to define a Class to include all applicants who may experience unreasonable delays). Here, however, Class membership is dictated by the objective existence of two form contracts signed at dif ferent times by the putative Class members. Empires records precisely identify these 300 or so Class members and con clusively demonstrate that the Class is both precise and welldefined. Contrary to defendants assertions, the Class definition here is akin to the definitions used in securities class ac tions, which commonly define a class to include all pur chasers of the defendant companys common stock during a specified period of time. In re Prudential Ins. Co. Sales Practices Litig., 962 F. Supp. 450, 506 (D.N.J. 1997) (citing Green v. Wolf Corp., 406 F.2d 291, 299 (2d Cir. 1968), cert. denied, 395 U.S. 977 (1969)), appeal pending, (3d Cir. ar gued Jan. 21, 1998). The central Class is also no different from antitrust or economic damages classes defined to in clude all purchasers of a specific product, where the court will defer the issues of whether individuals have suffered injury and what those injuries are to a subsequent proceed ing. Id., citing In re School Asbestos Litig., 104 F.R.D. 422, 424, 43334 (E.D. Pa. 1984), affd in pertinent part, 789 F.2d 996, 99899, 100811 (3d Cir. 1986); see also Moore v. Fidel

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ity Financial Services, Inc., 1998 U.S. Dist. LEXIS 3282 (N.D. Ill. Mar. 11, 1998) (certifying TILA and Consumer Fraud Act Classes defined as those consumers who entered into retail installment sales contracts and were charged for force placed insurance); Tylka v. Gerber Products Co., 1998 U.S. Dist. LEXIS 2321 (N.D. Ill. Mar. 3, 1998) (certifying state class pursuant to Rule 23(b)(2) and (b)(3) of All per sons . . . who have purchased or continue to purchase Ger bers secondstage and thirdstage baby food products. . . .). In sum, plaintiffs Class definition does not require any inquiry into the subjective beliefs or perceptions of puta tive Class members. Defendants contention that a minitrial would have to be held to determine Class membership is simply mis taken. Plaintiffs central claim is that the use of a two contract sales and financing method with defendants form documents in the uniform manner to which defendants have already admitted constitutes a violation of TILA and an unfair and deceptive trade practice. Resolution of that claim is a predominating issue that is common to all of the Fredmont/Empire customers. Because those customers are readily identifiable by objective, documentary facts, there is absolutely no need to resort to any merits analysis to determine the scope of the certified Class. Even if there were such a need, [a] preferable solution is to certify the class as defined, notifying by mail those individuals who have been identified, and notifying by publication those individuals who are as yet unidentified. Abramovitz v. Ahern, 96 F.R.D. 208, 213 (D. Conn. 1982) (certifying class of per sons whose phone calls were illegally intercepted).38 Defendants either misinterpret or misunderstand the na ture of plaintiffs Subclass definitions. Once the central Class has been defined, it is a simple matter to identify those members who received debt collection notices, sub standard workmanship or representations of government involvement either from defendants records or by class
38 Defendants insistence that the merits of the TILA, fraud and UTPCPL claims would have to be resolved to determine member ship in the Class is equally mistaken. The Work Order Contract itself specifies an obligation to pay the cash price. Regardless of when the work started, there was no practical means for a Class member to rescind or reject the transaction when later presented with the Home Improvement Financing Contract. Hence, that sec ond contracts representation of a rescission opportunity was illu sory and fraudulent on its face. Besides, resolution of that merits issue is common for every member of the Class and predominates over all other questions. It is, of course, also well settled that causation may be proved on a classwide basis, see DiLucido v. Terminix Intl, Inc., 676 A.2d 1237, 1241 (Pa. Super. 1996) (plain tiff must show either a causal connection to or reliance on the alleged misrepresentations (emphasis added)), alloc. denied, 684 A.2d 557 (Pa. 1996), and that it is to be presumed from the very materiality of the misrepresentation that the person deceived re lied upon it, LaCourse v. Kiesel, 77 A.2d 877, 880 (1951). Hence, numerous courts have concluded in cases alleging a common course of conduct by the defendants, as here, that individualized issues of causation and reliance do not preclude class certification. See, e.g., Tylka v. Gerber Products Co., 1998 U.S. Dist. LEXIS 2321 at *12*15 (citing cases). Indeed, the fact that a defendant may be able to defeat the showing of causation as to a few individual class mem bers does not transform the common question into a multitude of individual ones. In re NASDAQ MarketMakers Antitrust Litiga tion, 169 F.R.D. 493, 52324 (S.D.N.Y. 1996).

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Rule 23(e) (requiring court approval of class action settle ments). Second, courts have generally rejected efforts by Defendants to defeat certification by raising the possibility of hypothetical conflicts or antagonisms among class mem bers, especially regarding proof of damages. In re NAS DAQ, 169 F.R.D. at 513. After all, it is beyond disingenu ous for a party who would prefer to have no class certified to contend that the class proposed is inadequately repre sented, particularly where the result would mean the ab sence of recovery for the class members whose interests the defendant is pretending to protect. See Eggleston v. Chicago Journeymen Plumbers Local No. 130, 657 F.2d 890, 895 (7th Cir. 1981); Umbriac v. American Snacks, Inc., 388 F. Supp. 265, 275 (E.D. Pa. 1975). The imaginary conflicts defendants conjure up in this case are also entirely different from the facts the Supreme Court confronted in the asbestos settlement in Amchem Products, Inc. v. Windsor, 117 S. Ct. 2231 (1997). The Courts primary concern in that case was with the release of claims by future claimants who were not yet identified and who could not be identified fully for years to come. In particu lar, there was no class representative who was a member of the group of persons who had future claims. Here, by contrast, the Class members and claimants are finite and do not have future damages that depend on the passage of time to be quantified. Plaintiff will not be called upon to compromise or release future, unknown claims which she herself does not have to the detriment of unknown claim ants. Hence, there is no antagonism between plaintiff and the other members of the Class. Defendants challenge against plaintiffs counsel based on their pursuit of another case against Fredmont and a different lender and their filing of the Amended Class Ac tion Complaint only after class discovery was completed40 ignores the facts. For one, defendants disregard the con tractual provision mandated by the FTC Holder Rule that all claims that may be asserted against the seller, Fred mont, may also be asserted against the holder of the financ ing contract, in this case, the Empire Defendants. 16 C.F.R. 433.2. Since Fredmont has defaulted in both this case and in Harris v. Green Tree Financial Corp., No. 97CV1128 (E.D. Pa.) (Fullam, J.), appeal pending from District Court order invalidating arbitration clause, No. 972029 (3d Cir.), there is substantial doubt that Fredmont has any assets to fund a recovery in either case. Hence, the primary source of recovery in the two cases will likely be the lender defendants, which are entirely different in each case. For another, the notion that an advocate cannot repre sent two different plaintiffs or class of plaintiffs against the same defendant without risking a conflict is circular at best and contrary to the very purpose of Rule 23. Logically, defendants skewed rule would deprive consumers of the very lawyers most capable of providing them with the ser vices they need, as virtually any claim on a defendants
40 As discussed in plaintiffs brief attached to her Motion for Leave to File a Response to the Empire Defendants Brief in Opposition to Plaintiffs Motion for Leave to File Second Amended Com plaint, filed April 7, 1998, the proposed Amended Class Action Complaint was filed after Empire renewed its Motion to Dismiss and does not seek to change Class membership or add any claims.

notice procedures. In fact, the Subclasses are so defined to aid in the management and trial of the action. Courts rou tinely have approved and even directed the use of such techniques. See, e.g., In re NASDAQ, 169 F.R.D. at 510 (should some questions require individual inquiries, those issues can be resolved either by further defining the scope of the class action, by designating subclasses, or by decerti fying the class (emphasis added)). Hence, because the Class is precisely defined to include in excess of 300 per sons who may be identified from defendants records, nu merosity has been satisfied. 2. Commonality and Typicality. The commonality requirement of Rule 23(a) is clearly satisfied because this threshold is significantly less rigor ous than the Rule 23(b)(3) requirement that common ques tions of law or fact predominate over questions affecting only individual Class members. McMahon Books, Inc. v. Willow Grove Associates, 108 F.R.D. 32 (E.D. Pa. 1985). The common issues of law and fact are discussed exten sively above with respect to the predomination issue. Typicality is also easily satisfied. As this Court has stated, the heart of the typicality requirement is that the plaintiff and each member of the represented group have an inter est in prevailing on similar legal claims. Seidman v. Amer ican Mobile Systems, Inc., 157 F.R.D. 354, 360 (E.D. Pa. 1994). Empires protestations to the contrary, the factual posi tion of the plaintiff is not markedly different from that of the Class members. The purported differences listed at page 50 of Empires Brief are irrelevant to the claims of the Class or, at best, minor. It is irrelevant that plaintiff exercised her right to cancel the first Work Order Contract after consulting with her employer; the fact remains that she was then talked into a second Work Order Contract, followed by the Home Improvement Installment Contract, which is the same twocontract scheme perpetrated on all the other Class members. The fact that plaintiff ques tioned some of her signatures on the documents she was shown is immaterial for purposes of the Class claims. Sig nificantly, there is no question that she signed the two contracts that are the key documents in the case.39 3. Adequate Representation. Defendants attacks on the adequacy of representation are makeweights at best. First, defendants speculation that plaintiff might be inclined to compromise the recov ery of one Subclass at the expense of another Subclass is nonsensical. Not only do plaintiff and her counsel have fiduciary obligations to each of the Subclasses, but also the Court will be required to review and approve any compro mise of the claims to ensure that both the settlement and the allocations are fair and adequate. See Fed R. Civ. P.
39 Defendants attempt to raise questions about plaintiffs credibility because she admitted that telling the Empire representative on the phone that the work had been completed was not the truth. However, her deposition testimony makes clear that plaintiff felt she had to tell Empire that the work was finished so that it indeed would be completed. See Exhibit E, at pp. 170177.

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assets arguably could have an indirect impact on the recov ery of other claimants. This would mean that each plaintiff raising a claim against a common tortfeasor, such as asbes tos, tobacco, pharmaceutical, antitrust and toxic spill defen dants, would need to have different counsel. Defendants cases should not be read, as defendants suggest, to erect such an unworkable bar to the right to counsel. See United States v. Flannagan, 679 F.2d 1072, 1076 (3d Cir. 1983) (there is a presumption in favor of clients choice of coun sel which should not be interfered with where potential conflict is highly speculative or a mere tactic by opposing counsel). Properly understood, both cases cited by defendants, Kurczi v. Eli Lilly & Co., 160 F.R.D. 667 (N.D. Ohio 1995) and Sullivan v. Chase Inv. Serv. of Boston, Inc., 79 F.R.D. 246 (N.D. Cal. 1978), simply hold that it may be a conflict for one lawyer to represent both a class and a set of individual plaintiffs against the same defendant for the same claims. In both cases, the courts were fearful that the lawyers may be willing to compromise the interests of the class in favor of the individual claimants or vice versa. Here, by contrast, the lawyers are not representing individual, optout claim ants and the class against the same defendants concerning the same claims. Instead, they are representing two differ ent classes of Fredmont victims against Fredmont and the lenders for whom Fredmont worked. Because Fredmont has defaulted in both cases and because there is no chance that plaintiffs in one case will be able to compromise, limit or even impact the plaintiffs in the other case, there is absolutely no potential for any conflict among counsel in the cases. In fact, counsels presence in the two cases actu ally benefits the plaintiffs and the classes, as it enables efficiencies and economies of scale that would not be achieved by separate lawyers. In reality, the lenders are the primary defendants in the two cases, as the Class here and the plaintiffs in Green Tree are seeking rescission and recovery pursuant to the contractual language required by the FTC Holder Rule. Empire makes two other halfhearted arguments against plaintiff serving as class representative, but neither carries any weight. First, the Rules of Professional Conduct make clear that counsel may advance court costs and expenses of litigation, the repayment of which may be contingent. R.P.C. 1.8(e)(1). Second, as to the questions Empire raises about plaintiffs credibility, see n. 33 supra, there is no dispute that she signed the two key contracts. There is no dispute that Fredmont obtained credit information from her at the time she signed the Work Order Contract. See Exhibit E hereto, pp. 5257 [not reprinted herein]. With respect to whether the quality of the work done on her home or the work done on homes of Class members was defective, that presents issues of damages. The Empire Defendants do not dispute that Fredmont frequently performed poor qual ity work.41
41 Defendants claim that plaintiff is subject to unique defenses is equally without merit. Plaintiffs interpretation of Fredmonts sales pitch as one for a government grant has been repeated by other Class members and is reinforced by the flyers Fredmont used in marketing its services. Likewise, the fact that plaintiff has stopped

10.5

Thus, Empires arguments that the adequacy of repre sentation requirement has not been satisfied should be re jected. CONCLUSION For all the foregoing reasons, plaintiff requests that the Motion for Class Certification be granted. [Attorney for Plaintiff]

10.5 Order Certifying Class

IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA
) KIM BOSCH, on behalf of herself ) and all others similarly situated, ) Plaintiffs, ) ) v. ) ) EMPIRE FUNDING ) CORPORATION, FREDMONT ) BUILDERS, INC., STANLEY ) DEWALT, TMI FINANCIAL, ) INC., EFC SERVICING, LLC ) and FIRST BANK, N.A., Trustee, ) Defendants. ) )

ORDER AND NOW, upon consideration of Plaintiffs Motion for Class Certification and Memorandum of Law in sup port thereof, and defendants response thereto, IT IS, this day of , 1997, HEREBY ORDERED that this action shall be maintained as a class action in accordance with Federal Rule of civil Procedure 23(b)(3) pursuant to the following findings of fact: 1. The Class defined as all persons who, from Octo ber 17, 1991 through October 16, 1997, purchased home repair and/or remodeling goods and services from defendant Fredmont Builders, Inc. (Fred mont) for a quoted amount, who executed a stan dard form contract and mortgage in favor of Fred mont which did not match the terms that had been agreed to orally with regard to the work to be done

paying for the deficient goods and services she received and, in turn, has defaulted, is characteristic of other Class members and, in fact, provides the predicate for the FDCPA claims com mon to the Class. Indeed, in similar cases, courts have rejected such challenges to a plaintiffs adequacy. See, e.g., Gammon, 162 F.R.D. at 317318; Mayo, 148 F.R.D. at 58182; Heastie, 125 F.R.D. at 676. Defendants reliance on Lerch v. Citizens First Bancorp, Inc., 144 F.R.D. 247 (D.NJ. 1992), a certified securities class ac tion, cited at p.54, n. 25, of their Brief, is inexplicable. If anything, Lerch demonstrates that the present Class should be certified, as it too alleges a common course of conduct on the part of the defendants.

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2.

3. 4. 5. 6.

7.

and/or the price to be paid, and/or for whom the goods and services either were not completely installed or were installed in an unsatisfactory manner, who were not provided with proper notice of their rights to re scind the transactions and whose loans and mort gages were assigned by Fredmont to defendant Em pire Funding Corporation (Empire), as servicer for defendant TMI Financial, Inc. (TMI), defendant EFC Servicing, LLC (EFC) or defendant First Bank, N.A. is so numerous that joinder of all members is impracticable; The Subclass, defined as all members of the Class who, from October 18, 1996 through October 17, 1997, received telephone calls, letters and other communi cations from Empire, TMI and/or EFC in violation of the federal Fair Debt Collection Practices Act is so numerous that joinder of all members is impractica ble; There are questions of law and/or fact common to the Class and the Subclass; The claims of plaintiff Kim Bosch are typical of the claims of the Class and the Subclass; Plaintiff Kim Bosch will fairly and adequately protect the interests of the Class and the Subclass; The questions of law and/or fact common to the mem bers of the Class and the Subclass predominate over any questions affecting only individual members; A class action is superior to other available methods for the fair and efficient adjudication of this contro versy; and it is further ORDERED, that plaintiff Kim Bosch is certified as Class representative and Sub class representative; and it is further ORDERED, ; and it is that the certified class includes further ORDERED, that the certified Subclass in cludes all Class members who, from October 18, 1996 through October 17, 1997, received telephone calls, letters and other communications from Empire, TMI and EFC in violation of the federal Fair Debt Collec tion Practices Act; and it is further ORDERED, that excluded from the Class and Subclass are the defen dants, all officers and directors of the defendants and the immediate family of defendant Stanley DeWalt; and it is further ORDERED, that [Attorney for Plain tiff] of [Law Firm] and [Attorney for Plaintiff] of [Law Firm] shall serve as CoLead Counsel, with responsi bility for coordinating the work of other Class Coun sel.

10.6 Reply to Motion for Order to Redefine Plaintiff Class

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA
) KIM BOSCH, on behalf of herself ) and all others similarly situated, ) Plaintiffs, ) ) v. ) ) EMPIRE FUNDING ) CORPORATION, FREDMONT ) BUILDERS, INC., STANLEY ) DEWALT, TMI FINANCIAL, ) INC., EFC SERVICING, LLC ) and FIRST BANK, N.A., Trustee, ) Defendants. ) )

MEMORANDUM OF LAW IN ANSWER TO MOTION ON BEHALF OF EMPIRE FUNDING CORPORATION, TMI FINANCIAL, INC., EFC SERVICING, LLC AND FIRST BANK, N.A. FOR PARTIAL SUMMARY JUDGMENT OR, IN THE ALTERNATIVE, FOR AN ORDER REDEFINING THE PLAINTIFF CLASS PURSUANT TO RULE 23(c)(1) TABLE OF CONTENTS I. Introduction II. Facts Regarding Class Members Transactions III. Background on the Federal Truth in Lending Act IV. Defendants Failure to Clearly and Conspicuously Dis close Rescission Rights Extended the Normal Three Day Rescission Period V. Defendants are not Immunized From Rescission by the Federal Reserve Board Commentary or by any Provision of the Statute or Regulation Z VI. Defendants are not Entitled to an Order Redefining the Class VII. Conclusion Exhibits A. Declaration of Kim Bosch B. Declaration of Regina Metabo C. Declaration of Louise Channellock D. Declaration of Kimberly Chicago E. Depositions of Class Members Ernestine Rand, James Bostitch, Ver Lynn S. Ingersoll, Tracy Rigid, Virginia Old forge, Marilyn Stanley, Mary Ann Jepson G. Work Order Contracts, Credit Applications and Home Improvement Installment Contracts for transactions involv ing Class members James and Ernestine Rand, James Bostitch, Ver Lynn S. Ingersoll, Amos Mays, Tracy Rigid, Daniel and Virginia Oldforge, Marilyn Stanley, William and Mary Ann Jepson

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H. Affidavit of [Attorney for Plaintiff] Pursuant to Federal Rules of Civil Procedure 56(f) I. Deposition of Arthur R. Milwaukee J. Deposition of Kenneth Black K. Deposition of Jon Hitachi L. Ward v. Quality Homes Company, No. 1:92CV2644 RHH (N.D. Ga. October 20, 1993) I. INTRODUCTION On November 25, 1998 this Court certified a plaintiff class for the purpose of determining whether Class mem bers had the right to rescind their transactions with defen dants under the Truth in Lending Act, 15 U.S.C. 1601 et seq. (TILA). Plaintiff and the Class have argued in this case, and continue to argue, that their TILA claims arise from the uniform practices of using several separate forms in home improvement finance transactions. Although plain tiffs believe that use of these forms, in and of itself, vio lated TILAs rescission disclosure requirements, there were additional facts regarding the transactions that, combined with these forms, present an even stronger case for plain tiffs right to rescind their transactions.42 These additional facts, not mentioned in the Motion on Behalf of Empire Funding Corporation, TMI Financial, Inc., EFC Servicing, LLC and First Bank, N.A. for Partial Summary Judgment or, in the Alternative, for an Order Redefining the Plaintiff Class Pursuant to Rule 23(c)(1) (the Motion), are critical to understanding the full ex tent of the confusion caused by the use of the forms in volved. Many of these facts also form the basis for plain tiffs other claims, such as the claim for unfair and decep tive practices. Those claims will remain a part of this case regardless of the outcome of the Motion. However, those issues are not raised by the Motion and will not be argued here. Plaintiffs have attached declarations from several Class members43 describing these uniform practices. In addition, the depositions of other Class members and defendants employees indicate that the practices described were uni form.44 Other documents attached hereto,45 many of which were obtained in discovery, further evidence the uniform

10.6

sequence of events [not reprinted herein].46 Although some of these Class members did not have transactions within three years prior to the filing of the class action, their testimony and documents are nonetheless probative of the practices of defendants absent some reason to believe that those practices suddenly changed. Plaintiff does not know whether defendants will dispute the facts summarized below, or whether defendants will agree that they set forth uniform practices that applied to all Class members. If defendants agree to those facts, then plaintiffs will promptly file a cross motion for summary judgment. If defendants dispute the fact that these prac tices were classwide, there remain material facts in dis pute that preclude summary judgment in favor of defen dants. In that case, the Court may still decide that those facts which are not disputed are sufficient to warrant sum mary judgment for plaintiffs.47 Otherwise plaintiffs need additional discovery, which they have begun to seek, to demonstrate the uniformity of the practices, as set forth in the Rule 56(f) Affidavit attached hereto as Exhibit G [not reprinted herein]. II. FACTS REGARDING CLASS MEMBERS TRANSACTIONS Fredmont Builders transactions with Class members were initiated through doortodoor sales presentations by its salesmen, generally to individuals residing in lowincome neighborhoods. These salesmen approached homeowners, often representing that the homeowners would be eligible for a special program to provide home improvements.48 (Bosch Dec., Ex. A; Metabo Dec., Ex. B; Chicago Dec., Ex. D; depositions of Class members, Ex. E). In each case, the salesmen would meet with the customer, write down on the socalled Work Order49 the repairs or improve ments the homeowner would want done, and have the home owner sign the document. (Id.; Exhibit F). The salesman would also obtain recent pay stubs or other creditrelated data with the understanding that this data would be evalu ated to determine whether the homeowner qualified for the program. (Id.). The Work Order provided in part:
46 The presentation of evidence in support of plaintiffs factual claims distinguishes this case from Mount v. LaSalle Bank Lake View, 1998 U.S. Dist. LEXIS 10252 (N.D. Ill. 1998). In that case, plain tiffs failed to present evidence in support of their arguments. 47 Plaintiffs are not filing a cross motion for summary judgment at this time because they believe that some additional discovery would make their case for summary judgment even stronger than it now is. However, if the Court finds that the facts before it now warrant summary judgment for plaintiffs, for example due to the confusing nature of the documents themselves even without the standard practices that accompanied them, plaintiffs would if necessary promptly file a motion for summary judgment. 48 In some cases homeowners were told they were being offered a government program. Whether this representation was made or not is not relevant to the TILA claims. As discussed below, the relevant fact is that at the time the representations were made, the homeowners were led to believe that they were not entering into a cash deal to pay for the home improvements. 49 The Work Order form used by Fredmont had been approved by Empire. (Deposition of Arthur Milwaukee, Ex. H, p. 57).

42 Contrary to the statements in defendants Memorandum, plaintiff has never based her case solely on the documents and has consis tently asserted that these additional facts are a part of her claim. See, e.g., Memorandum of Law in Support of Plaintiffs Motion for Class Certification, p. 2 (contracts and sequence of events com bined to violate TILA); Plaintiffs Reply Memorandum in Sup port of Class Certification, p. 3 (common form documents and common sequence of events gave rise to TILA rescission rights). 43 Attached hereto are the declarations of plaintiff Kim Bosch (Ex hibit A) and Class members Regina Metabo (Exhibit B), Louise Channellock (Exhibit C) and Kimberly Chicago (Exhibit D) [not reprinted herein]. 44 Attached hereto as Exhibit E are portions of the depositions of Class members Ernestine Rand, James Bostitch, Ver Lynn Inger soll, Tracy Rigid, Virginia Oldforge, Marilyn Stanley and Mary Ann Jepson [not reprinted herein]. 45 Attached hereto as Exhibit F are the Work Order Contracts, credit applications and Home Improvement Installment Contracts per taining to various Class members [not reprinted herein].

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Fredmont Builders, Inc., [Address], no later than . midnight of Fredmont would then present the credit information and the Work Order to Empire, which evaluated it to deter mine whether it would finance the home improvements. If financing was approved, the homeowner would receive a conditional commitment letter sent by Empire or one of its affiliates advising that the funding had been approved. (Dep osition of Arthur Milwaukee, Exhibit H hereto, pp. 2629, 4446). Empire also sent a copy of this letter to Fredmont, which would often then start work or at least spike the job by either dropping off equipment or materials at the site or commencing demolition in the home in preparation for reconstruction. (Bosch Dec., Ex. A; Metabo Dec., Ex. B; deposition of Mary Ann Jepson contained in Ex. E, pp. 4251; deposition of Arthur Milwaukee, Ex. H, pp. 4448, 161; deposition of Kenneth Black, Exhibit I, pp. 2728, 3031). Fredmont would then present the homeowner with a package of documents which included, among many other documents, the Home Improvement Installment Contract (a form provided to Fredmont by Empire), a mortgage (on a form provided by Empire) and a Right to Cancel No tice.50 The Home Improvement Installment Contract pro vided in part: YOU MAY RESCIND THIS CONTRACT, SUB JECT TO LIABILITY FOR ANY LIQUIDATED DAMAGE PROVISION THEREOF AUTHO RIZED BY LAW, NOT LATER THAN FIVE (5) P.M. ON THE BUSINESS DAY FOLLOWING THE DATE THEREOF BY GIVING WRITTEN NOTICE OF RESCISSION TO THE CONTRAC TOR AT HIS PLACE OF BUSINESS GIVEN IN THE CONTRACT, BUT IF YOU RESCIND AF TER FIVE (5) P.M. ON THE BUSINESS DAY FOLLOWING, YOU ARE STILL ENTITLED TO OFFER DEFENSES IN MITIGATION OF DAM AGES AND TO PURSUE ANY RIGHTS OF AC TIONS OR DEFENSES THAT ARISE OUT OF THE TRANSACTION. (See copies attached to Declarations at Exhibits A, B, C, D and also contained in Exhibit F). Critical to an understanding of how these transactions functioned is the fact that when the Work Order was signed, neither the homeowner nor Fredmont contemplated that it would be a binding contract. It was always intended that it would be part of an ongoing process to complete the trans action. The homeowner was led to believe that it was part of an application process and that there would be no deal if the application (whether for financing or a grant) was approved. (Bosch Dec., Ex. A; Metabo Dec., Ex. B; Chan nellock Dec., Ex. C; Chicago Dec., Ex. D). The homeown ers, who were typically lowincome families, did not have the funds to pay for the work in cash and would never knowingly have agreed to do so. (Id.). Fredmont, for its
50 The form documents Fredmont used were provided and approved by Empire. (Deposition of Jon Hitachi, Exhibit J, pp. 9899, 120121).

The Contractor shall perform and complete the work in a good and workmanlike manner. Work not written above but performed by the Contrac tor for the Owner shall be paid for by the Owner on a labor plus materials basis, priced by the Contractor in accordance with its pricing poli cies. If the Owner stops the Contractor from begin ning the work after the end of any cancellation period which the Owner has under Federal, State or local law and/or regulations or ordinances, the Owner will be liable to and pay the Contractor for all costs and expenses incurred by it arising out of or in connection with the work, including but not limited to the execution of this Contract, prepara tions and purchases made for the work, plus Con tractors loss of profits. The Contractor may, at any time, sell, assign or transfer its rights and/or duties under this contract and any monies paid or to be paid hereunder. (Emphasis supplied). The Work Order also contained the following notice: You, the Buyer, may cancel this transaction at any time prior to midnight of the third business day after the date of this transaction. See the attached notice of cancellation form for an expla nation of this right. **** NOTICE OF CANCELLATION You may cancel this transaction, without any pen alty or obligation, within three business days from the above date. If you cancel, any property traded in, any payments made by you under the con tract or sale, and any negotiable instrument exe cuted by you will be returned within ten busi ness days following receipt by the seller of your cancellation notice, and any security interest aris ing out of the transaction will be cancelled. If you cancel, you must make available to the seller at your residence in substantially as good condition as when received, any goods delivered to you under this contract or sale; or you may, if you wish, comply with the instructions of the seller regarding the return shipment of the goods at the sellers expense and risk. If you do make the goods available to the seller and the seller does not pick them up within twenty days of the date of your notice of cancellation, you may retain or dispose of the goods without any further obligation. If you fail to make the goods available to the seller, or if you agree to return the goods to the seller and fail to do so, then you remain liable for performance of all obligations under the contract. To cancel this transaction, mail or deliver a signed and dated copy of this cancellation or any other written notice, or send a telegram, to

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part, had no plans to do the home improvements if financ ing was not arranged. (Deposition of Kenneth Black, Ex. I, pp. 2227; deposition of Arthur Milwaukee, Ex. H, pp. 5758). Fredmonts operations depended on being paid for the job at the time of the work, so much so that home owners were often pressured to sign a completion certifi cate before the work was complete so Fredmont could be paid and could pay its subcontractors. (Bosch Dec., Ex. A; Metabo Dec., Ex. B; depositions of Ernestine Rand at pp. 8590, Virginia Oldforge at pp. 101105, Tracy Rigid at pp. 5456, Marilyn Stanley at pp. 8286, all contained in Ex hibit E). As one of Fredmonts loan closers testified, [Fred mont] wanted those papers in place so that when the work was done, they could be paid. It was a large company that did a lot ofnot to have people sign the paperwork until the work was done, it would have been ridiculous. (Depo sition of K. Black, Ex. H, p. 49). In other words, there was no possible purpose in writing up the Work Order as a cash contract except to confuse the homeowners regarding their rights. The appropriate documentation based on the parties understandings would have been simply an application form and/or a proposal. Indeed, the applicable HUD regulations governing these loans required a credit application, which was taken by Fredmont in addition to the Work Order, further leading to the understanding that the only thing occurring was an application. Had only such a form been used, and another form simply describing the work proposed to be done, the likelihood of confusion and deception caused by the Work Order would not have existed. There was no need to have a separate contract to describe the repairs. Those repairs could have been described in the Home Improvement In stallment Contract. and indeed state law provides for the repairs to be described in the Home Improvement Install ment Contract. 73 P.S. 500202(a) (home improvement installment contract to contain entire agreement of the parties). By the time they had signed the home improvement in stallment contract, consumers were left with three sepa rate documents containing three completely contradictory disclosures about their right to rescind. Any consumer who attempted to determine from these documents whether the right to rescind existed, and what the consequences of rescinding would be, could not possibly make that determi nation. Indeed, absent recourse to statutes, case law and doctrines of federal preemption, it is doubtful that even a law professor could determine those rights with certainty. One notice (the TILA form) provided that the con sumer could rescind for three business days from the date of the Home Improvement Installment Contract, and that if the consumer rescinded there would be no liability, any funds paid would be returned to the consumer, and the consumer was required to return any money or property (or the value of property provided in the transaction) within 20 days. The second notice (on the Home Improvement Install ment Contract), received the same day, provided that the consumer could rescind the contract not later than 5 P.M.

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one business day after the transaction. Such rescission would leave the consumer liable for possible, but unspecified, liquidated damages. The third notice was in the Work Order. It provided for rescission within three business days of the signing of that document (a time which typically had expired by the date of the Home Improvement Contract and was always ear lier than the TILA notices deadline). The Work Order, quoted above, provided that if the consumer stopped the contractor from completing the work after expiration of the rescission period (or some other rescission period, not specified), the consumer would be liable for Fredmonts costs, expenses and lost profits. No one reading these combined clauses and notices would have any way of knowing which applied. A consumer could not, with any assurance, assume that the TILA notice of right to cancel would override the others. Could the con sumer rescind within a three day period when one notice said there was only one day to rescind and another notice said the three day rescission period (which sounded very similar to that in the TILA notice) had expired? If the consumer rescinded, did the consumer have a right to com plete rescission, or was the consumer possibly liable for liquidated damages, or liable for all of Fredmonts costs, expenses and lost profits? Put another way, there was no way for the consumer to know which notice overrode the others. And there was no necessity for the notices to be confusing and conflicting. As discussed above, the initial documents, which were part of an application process, did not need to be written as a contract and therefore did not need to contain any lan guage about cancellation or rescission. Moreover, the con flicting notice in Home Improvement Installment Contract need not and should not have been included in that con tract. Although that notice is provided for by state law, there is no doubt, as discussed below, that the state law is preempted by TILA to the extent that it is inconsistent with TILA. Even if for some reason Fredmont and Empire felt com pelled to include both other notices, the consumers situa tion could have been substantially clarified by simple ex planatory language in the Home Improvement Installment Contract. Presumably, the consumers federal Truth in Lend ing rights would prevail over any rights given to Fredmont or Empire in the other documents, and it would have been a simple matter to state this. Empire and Fredmont could easily have placed in the Home Improvement Installment Contract language clarifying this fact, such as: YOUR RIGHT TO CANCEL SET FORTH IN THE ATTACHED NOTICE OF RIGHT TO CAN CEL ALLOWS YOU TO CANCEL ALL AS PECTS OF ANY CONTRACT WITH FRED MONT BUILDERS. YOU HAVE ALL OF THE RIGHTS THAT ARE SET FORTH IN THAT NO TICE EVEN THOUGH OTHER PARTS OF THIS CONTRACT AND OTHER DOCUMENTS YOU HAVE RECEIVED SAY YOU HAVE DIFFER ENT RIGHTS.

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fact, Fredmonts salesman testified that the position he took with customers was that there was some obligation with the [Work Order], and I always explained to them that the papers I was executing was for the bank and that they always had a right to finance the loan any way they wanted to . . . whether they choose to finance it and pay cash or use a local lender. (Deposition of Kenneth Black, Ex. I, p. 39). The confusion was, of course, exacerbated when Fredmont started work or spiked the job before the financing contract was even presented, both because the consumer might fear liability for work already done and because often that work was demolition that left the home unlivable if the work was not completed. In fact, it is a confusion that even now Empires Memo randum perpetuates by insisting on the one hand that the Work Order was a separate cash contract and yet arguing, on the other hand, that the cancellation period for a differ ent contract would rescind that cash contract. The net result of this scheme was to completely under mine the TILA right to cancel.51 The basic purpose of this right is to allow consumers three days to cancel a transac tion in which a mortgage is taken after all of the material credit terms have been disclosed. To effectuate this right, the statute and regulations require a very clear notice of the right to cancel and of the consequences of cancella tion. The effect of the two contract scheme, along with the multiple contradictory notices about cancellation and its consequences, was to create enormous confusion about the consumers cancellation rights, when they would expire, and what the consequences of cancellation would be. They had the effect of trapping the consumer in a transaction based on the fear of liability for work that appeared to have been already contracted for in the cash contract, some of which had often already been performed, work which the consumer could not afford to pay for in cash, leaving the proffered financing as the only apparent alternative.52 Most importantly, it had the effect of trapping the con sumer in the transaction based on the first contract, the Work Order, even though at the time that document was signed the consumer had not been given all of the material disclosures required by TILA and had no disclosure that a mortgage was to be taken in the transaction. When the Work Order contract was presented, in conjunction with a process in which the consumer was to apply for funding of the transaction, the consumer had no reason to rescind, since the transaction was not understood to be final and many of the terms were not even known. Even if that first contract were considered to be a valid contract, it was un derstood by the consumer and by Fredmont as contingent
51 The scheme also violated unfair and deceptive trade practices laws by ensnaring consumers in transactions because they were con fused about whether they could still back out of the deal without penalty. That claim is a principal basis for plaintiffs unfair trade practices counts, which are not the subject of the Motion before the Court. 52 This basic confusion extended to the contracts entered into in states other than Pennsylvania. Indeed, the only distinction be tween Class members in those states and those in Pennsylvania is the lack of the one additional confusing notice that was in the Pennsylvania Home Improvement Installment Contract.

Empire argues that the confusion caused by the notice in the Work Order is cured by language which limits dam ages to stoppage of work after the end of any cancella tion period which the Owner has under Federal State or local law and/or regulations or ordinances. . . . However, this clause simply adds to the confusion caused by the no tices, for numerous reasons. First, the consumer cannot be expected to know what rescission periods are provided by federal, state or local law and/or ordinances or regulations. Only one of the can cellation notices refers to any of these sources and the quoted language leaves open the possibility that there are yet other cancellation periods not specified anywhere in the documents that might be provided by state or local law and/or ordinances and regulations. Certainly, no consumer could state with confidence after reading this notice that he or she knew the date after which the damages for costs, expenses and lost profits would be owed if work were stopped. Second, this language does nothing to ameliorate the confusion over the consequences of rescission. It does not say that the consumer would have no liability at all under the contract. It simply makes the clause about costs, ex penses and lost profits potentially inoperative. It does not resolve the issue of whether there might be some other damages, such as the liquidated damages referred to in the notice contained in the Home Improvement Installment Contract. Indeed, it refers only to the situation in which the owner stops the Contractor from beginning work. . . . What if the owner exercises a right to cancel? Is that con sidered stopping the Contractor from beginning work? This latter question in turn highlights the most signifi cant reason that such language adds to, rather than cures, the confusion. Which cancellation periods is the sentence referring to? Empire has argued in its Memorandum, at pp. 1112, that the Work Order constituted a separate cash contract for home improvements. If that were the case, why would the cancellation of a separate financing con tract have any effect on the cash contract? The language could easily be read as referring to any cancellation pe riod for the cash contract only. It certainly does not refer to cancellation periods for other contracts. Empire can argue that the notice in the Work Order refers to the TILA cancellation notice for the Home Im provement Installment Contract and mortgage only by con ceding that there was in fact but one unitary transaction contemplated by the parties that was dependent on ap proval of funding subsequent to the signing of the Work Order, and that the Work Order was never intended to stand on its own as a cash contract. Indeed, this is the essence of the deception and confu sion created by the two contract scheme. Although the understanding of the consumer is that the first contract is dependent on approval for funding of the repairs, its lan guage seems to provide otherwise. The consumer is con fronted by the language of the documents with the possibil ity that even if the financing contract is canceled, the con sumer will still be bound by the cash contract, which itself states a specific three day cancellation period. It is a con fusion that was used by Fredmont to assure that consum ers signed and did not cancel the financing contracts. In

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on financing, since both parties knew that the consumer did not have the money to pay for the work in cash. The fact that the contracts language provides otherwise cre ated confusion that entrapped the consumer, who might have believed that once financing had been obtained he or she would be obligated to pay Fredmont under the Work Order even if the financing was canceled. In sum, the documents themselves could have been in terpreted in numerous ways and created confusion that undermined class members TILA rescission rights. And even assuming, arguendo, that the documents, by them selves, were found to be in compliance with TILA, their use in the sequence of the two contract scheme described above, involving a credit application at the time of the first contract with the understanding that there would be no deal without funding, placed consumers in a position that made cancellation without liability seem impossible, and eviscerated any possibility that consumers could easily and intelligently determine their right to rescind. III. BACKGROUND ON THE FEDERAL TRUTH IN LENDING ACT The Truth in Lending Act, 15 U.S.C. 1601 et. seq., was passed by Congress as part of the Consumer Credit Protec tion Act in 1968. Its purpose is to assure that consumers understand the terms of the transactions they enter into. The Federal Reserve Board was given the authority to pro mulgate regulations to flesh out the Acts provisions and under that authority promulgated Regulation Z, 12 C.F.R. 226. The Board has also promulgated an extensive Com mentary further interpreting TILA and the regulations. With respect to home mortgage transactions (other than purchase money mortgages), Congress felt the stakes for consumers were so high that they should also be given a right to rescind the transaction. This right exists until the third business day following the consummation of the trans action or the delivery of the information and rescission disclosures required by TILA together with the material disclosures required by the Act, whichever is later. 15 U.S.C. 1635(a). The term material disclosures is de fined by 15 U.S.C. 1602(u) to include some, but not all of the disclosures required by TILA. If a consumer rescinds a transaction, the consumer is not liable for any charges aris ing from the transaction and any security interest arising from the transaction is void. 15 U.S.C. 1635(b). The cred itor must, within 20 days after receiving notice of the rescis sion, return to the consumer any money or property it received in the transaction and take any action necessary to reflect the termination of its security interest. Id. Both the damage provisions and the rescission provi sions of TILA were intended by Congress to create a pri vate attorney general scheme of enforcement which would obviate the need for a large federal bureaucracy to per form that task. See Ives v. W.T. Grant Co., 522 F.2d 749, 756 (2d Cir. 1975). While the remedies in a particular case may be disproportionate to the actual injury, the certainty of their assessment was intended to have a deterrent effect on creditors. There is strong evidence that this scheme has worked as intended, and has assured relatively widespread

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compliance with TILA. In 1973, when amendments to TILA were being considered, the two agencies principally charged with administrative enforcement of TILA both argued strongly that creditors exposure to civil remedies for viola tions was crucial to TILAs enforcement. According to the Federal Reserve Board, the threat of substantial remedies was necessary to insure that management will strive with diligence to achieve compliance. Hearings on S.1630 and S.914 before the Subcommittee on Consumer Credit of the Senate Committee on Banking, Housing and Urban Affairs, 93d Cong., 1st Sess., May 2124, 1974, p. 54. The Chair man of the Federal Trade Commission stated: Our experience in enforcing the Truth in Lend ing legislation persuades us that only a high de gree of civil liability can provide the deterrence essential to achieving compliance with these pro visions. Hence, it is not surprising that the Third Circuit Court of Appeals has repeatedly held that the literal language of TILA must be followed, and that civil remedies must be ordered whenever a violation exists, even in the face of creditor protestations that the violation was only uninten tional, technical or minor. In re Porter, 961 F.2d 1066, 1078 (3d Cir, 1992); Thomka v. A.Z. Chevrolet, 619 F.2d 246 (3d Cir. 1980); Gennuso v. Commercial Bank and Trust Co., 566 F.2d 4412 (3d Cir. 1977). TILA must be liberally con strued in favor of borrowers. Bizier v. Globe Financial Ser vices, 654 F.2d 1, 3 (1st Cir. 1981). Only such unswervingly strict enforcement by the courts can assure that creditors will continue to be diligent in complying with all of the requirements of TILA. Under the language of TILA, a single violation of a pertinent provision gives rise to the rescission or damage remedies of the statute, depending on the provision. See Thomka, supra, at 250. IV. DEFENDANTS FAILURE TO CLEARLY AND CONSPICUOUSLY DISCLOSE RESCISSION RIGHTS EXTENDED THE NORMAL THREE DAY RESCISSION PERIOD Because the right to rescind a home mortgage transac tion is of such great importance, courts have consistently held that the failure to disclose that right clearly and con spicuously, as required by 15 U.S.C. 1635(a), creates an extended period in which a transaction may be rescinded. Section 1635(a) provides that the rescission period runs until three days after the delivery of the information and the rescission forms required by section 1635. The creditor must both disclose the consumers rescission rights, clearly and conspicuously, and provide forms for the exercise of these rights. Id. Because the two obligations are separate and independent, the simple act of furnishing the rescis sion forms does not immunize a creditor who has failed to disclose rescission rights clearly and conspicuously. Courts in this circuit and elsewhere have recognized that there may be cases in which creditors, despite providing the TILA rescission forms, may nonetheless, by acts or words, effectively negate the written notice provided to a

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ulation Z that was promulgated when TILA was substan tially amended several years later. However, there is no reason to believe that the principle for which it stood was abandoned. Surely the Board did not intend by this omis sion to create a rule that creditors were now authorized to make statements and disclosures in ways that would contra dict, obscure, and detract from the required disclosures to whatever extent they chose. Regulation Z, like TILA, con tinues to require clear and conspicuous disclosure. 12 C.F.R. 226.17(a)(1). It simply fails to contain the previously stated prohibition of one practice that rendered disclosures not clear and conspicuous, perhaps because, as this case illus trates, it was underinclusive with respect to the ways a creditor might undercut the disclosures.55 Indeed, Jenkins v. Landmark Mortgage Corporation, 696 F. Supp. 1089 (W.D. Va. 1988) came to the same result in a transaction that occurred after the regulation relied upon in ONeil no longer existed. That case involved contradic tory statements that were not even in the contract docu ments. After the homeowner was given a proper rescission notice there were oral and written statements which con tradicted the rescission notice, and as in this case, sug gested a shorter rescission period than actually existed and specified the effects of rescission as less favorable to the consumer than those provided by TILA. The court found these statements to violate the requirement that rescission rights be disclosed clearly and conspicuously, and extended the rescission period to three years, even though there was no evidence that the violations were intentional or that the consumer was actually deceived. In addition, several courts have addressed the use of two contract schemes similar to this one and their impact on TILA rescission rights. Although their facts vary, the common thread running through all of these cases is that there was a home improvement contract, purporting to be a cash deal, followed by a financing contract, in a transac tion that was always intended to be a credit transaction. That practice, combined with various other facts, such as the commencement of construction before the end of the rescission period, was found to confuse consumers about whether they were so far committed that they could no longer rescind the transaction. In In re Taylor, 97 F.3d 96 (5th Cir. 1996) the homeown ers were approached by a contractor and agreed to a re modeling job for their home. At the same time, they signed a credit application to obtain financing. They later signed a financing contract with a lender based on that applica tion and received a TILA notice of right to cancel within three days of receiving the TILA disclosures. Thereafter, the work on their home was performed and only after it was completed did they receive the TILA disclosures of credit terms. The lender argued that the homeowners could have rescinded, pursuant to the notice of right to cancel, for three days after they received the disclosures and had been informed of that fact. The court found that, by the time they had received the notice of right to cancel and the
55 The defendants argument that they are authorized to include contradictory notices provided for in state law by the Federal Re serve Board Commentary on Regulation Z is addressed below.

borrower. Smith v. Fidelity Consumer Discount Co., 898 F.2d 896, 904905 (3d Cir. 1989). If the notice has been negated to the extent that it is not clear and conspicuous, the rescission right is continued beyond the normal three days. The determination of whether there has been clear and conspicuous disclosure of rescission rights is based on the facts and circumstances of the transaction. In re Porter, 961 F.2d 1066, 1076 (3d Cir. 1992). The creditors subjective intent is irrelevant to this deter mination, Porter, supra, and a consumer asserting the ex tended right to rescind need not prove that he or she was in fact deceived or confused. Porter, supra at 1078; Rodash v. AIB Mortgage Co., 16 F.3d 1142 (11th Cir. 1994).53 Plain tiffs have attached to this response several declarations of class members who were in fact deceived, but they have done so only as evidence that the sequence of events and documents had a tendency to deceive. Besides our own court of appeals, numerous courts have held that a con sumer asserting a TILA action need not prove actual con fusion or deception. E.g., Rodash, supra; Huff v. Stewart Gwinn Furniture, 713 F.2d 67 (4th Cir. 1983); Smith v. Chap man, 614 F.2d 968 (5th Cir. 1980). Therefore, there is no need for plaintiff to prove that all (or any) Class members were confused. The decision of the Eleventh Circuit Court of Appeals in Rodash, supra exemplifies the principle that a creditor has not complied with the requirement of clear and con spicuous disclosure of rescission rights by merely giving a TILA rescission notice when other aspects of the transac tion undercut the message of that notice. In Rodash, the creditor, at the same time the consumer received the rescis sion notice, had the consumer sign a separate sheet of paper that provided an Election Not to Cancel, a pre printed waiver of the right to rescind. The court found the putative waiver to be invalid and found also that the form Election Not to Cancel would confuse a borrower about whether the right to cancel over the following three days still existed and that therefore the borrower had not re ceived a clear and conspicuous disclosure of the three day right to rescind.54 Similar facts led to the same result in Curry v. Fidelity Consumer Discount Company, 656 F. Supp. 1129 (E.D. Pa. 1987). In ONeil v. Four States Builders, 484 F. Supp. 18 (E.D. Pa. 1979), Judge Newcomer dealt with the same basic prin ciple in a case that, like this one, involved a contract notice of rescission rights which conflicted with the TILA notice. The court found that the contradictory contract notice would confuse a consumer about the extent and nature of the right to rescind, even without the numerous additional con fusing circumstances and additional notices present in this case. As defendants point out, that decision relied on a portion of Regulation Z, specifically discussing contradic tory disclosures, that was not part of a totally revised Reg
53 Defendants Memorandum (p. 25, n. 11) states that Porter and Rodash require a court to determine if a consumer asserting a Truth in Lending claim was actually misled by the challenged dis closures. In fact, the cases hold precisely the opposite. 54 Defendants Memorandum notes that certain portions of the Ro dash decision have been overruled by Congress. This particular holding, however, was not affected by any subsequent legislation.

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disclosures, the homeowners were facing a fait accom pli. The combination of these facts was held to have been a material failure to disclose the right to rescind. In In re Lombardi, 195 B.R. 569 (Bankr. D.R.I. 1996) a contractor entered into a contract to provide home improve ments and, after the work was done, a later financing con tract (which was the only one accompanied by TILA disclo sures and a notice of right to cancel). The court found that the parties had always intended that the work would be financed and the two contracts constituted a single trans action. The debtors were effectively committed to the deal by the first contract, with the work being performed before the second contract. The court held that the debtors had not been given proper notice of their right to rescind. In In re Doggett, 373 F. Supp.774 (E.D. Tenn. 1973), the homeowners entered into a contract for home improve ments and applied for credit with a financing company on the same day. Although they were given rescission notices at the same time, they did not sign the financing agree ment or receive the TILA disclosures of credit terms until after the work was completed. As the court noted, the consumers were not informed of the financial repercus sions of their actions or their right to rescind until after the work was completed. Here, too, the consumers would have reasonably believed they had no way to back out of the transaction. The court found that the rescission provi sions had been violated. And in Ward v. Quality Homes Company, C.A. No. 1:92 CV2644 (N.D. Ga. 1993) (attached hereto as Exhibit K [not reprinted herein]), after the homeowner entered into a contract for home improvements with a contractor, the con tractor commenced work. While the work was in progress, the contractor presented a second financing contract and mortgage, along with the TILA notice of right to cancel. The work was completed during the three day rescission period. Presumably, the homeowner was concerned about the potential liability for the work if the financing was canceled. The court held that the homeowner was denied an effective opportunity to act on the notice of right to cancel.56
56 In Smith, supra, the Third Circuit Court of Appeals held that the premature disbursement of loan proceeds, by itself, was not a vio lation of TILA that would confuse a consumer about the three day right to rescind. 989 F.2d at 9045. It is not at all clear that this holding would apply to a case where irreversible construction was performed prior to the end of the rescission period that could leave the consumer unsure about whether, since the construction could not be undone, the deal could still be canceled without penalty. Although the TILA rescission notice states that the con sumer has the right to cancel without cost, it does not mention the sellers obligation under Regulation Z to delay performance. 12 C.F.R. 226.23(c). It does, however, describe the consumers obli gation to return property or goods (or their value) upon cancella tion, which could leave the consumer believing that he or she is required to pay for such construction if the transaction is re scinded. The court in Taylor, supra, distinguished its decision as involving more than merely premature disbursement of loan pro ceeds (which could easily be reversed by a consumer) and the case before this Court also involves far more egregious circumstances than those in Smith. In this case, there is also the confusion regard ing whether, even if the financing contract were rescinded, the Work Order would survive as a cash contract.

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The facts in this case do not exactly match those of any of the above cases, but the same principles apply and in many ways this case presents even clearer violations of TILA. As described at length above, each Class member signed a document that appeared to be a cash contract even though the Class member was led to believe that there would be no transaction without approval of funding for which the class member applied at the same time. That document, combined with the taking of credit information when it was signed, and combined with all of the other documents, created total confusion about whether the trans action could be rescinded, when the rescission period ended and what the consequences of rescission would be. As in the cases discussed above, the consumer could easily be lieve, and we know some Class members actually did be lieve, (Bosch Dec., Ex. A; Metabo Dec., Ex. B; Channel lock Dec. Ex. C; Chicago Dec., Ex. D), that after three days from the date of the Work Order there was no way to back out of the transaction. The fact that Fredmont had commenced the work in some cases would simply have strengthened such a belief and exacerbated this confu sion.57 V. DEFENDANTS ARE NOT IMMUNIZED FROM RESCISSION BY THE FEDERAL RESERVE BOARD COMMENTARY OR BY ANY PROVISION OF THE STATUTE OR REGULATION Z One of defendants principal arguments is that they were required to give the conflicting disclosures in the Home Improvement Installment Contract by Pennsylvania law and that the Federal Reserve Board, through its Commentary on Regulation Z, has permitted creditors to make disclo sures required by state law unless the Board has affirma tively determined they are preempted. This argument fails for numerous reasons. First, even if the Commentary were read to provide that giving the conflicting rescission disclosures, by itself, is not a per se violation of TILA, it does not address the situation presented here, where those disclosures were given in the context of the two contract scheme, where there were also additional statements and documents that added enor mously to the confusion over whether there was a right to rescind, when the right expired, and what the conse quences of rescission would be. While the Board could perhaps have thought that one set of conflicting disclo sures would not be sufficiently confusing to trigger rescis sion, that situation is not present here. In particular, this case presents the earlier Work Order which reinforced the
57 Fredmont commenced work prior to the signing of the home im provement installment contract and TILA notice of right to cancel in plaintiffs case and in the cases of some other Class members. However, some of the Class members who were deposed did not remember when work was commenced. Therefore, although this practice may have been fairly uniform, plaintiffs cannot prove that it was a standard practice, at least at this time. While the com mencement of work prior to the TILA disclosures undoubtedly added further to the confusion caused by the other practices de scribed above, those practices by themselves were more than suffi cient to confuse the homeowner about rescission rights even with out premature commencement of work.

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extent that those laws are inconsistent with the provisions of this subchapter and then only to the extent of the inconsistency. (Emphasis supplied). The section goes on to give interested parties the option of requesting a determination of whether a particular pro vision is preempted, but nowhere does it authorize a cred itor to give disclosures that are required by laws that are preempted because they are inconsistent with TILA. Nor does it authorize the Federal Reserve Board to grant cred itors permission to give such disclosures. Congress had good reason to preempt state laws requir ing inconsistent disclosures. Imagine a state law, drafted to ensure consumers read their contracts carefully and sign only if they are absolutely sure they wish to go through with the deal, requiring a notice in larger print than the TILA rescission notice on every contract document stat ing: READ THIS CONTRACT CAREFULLY. AF TER YOU SIGN IT YOU WILL NOT BE ABLE TO CANCEL IT NO MATTER WHAT YOU ARE TOLD ANYWHERE ELSE. Clearly, such a notice would completely undermine the federal rescission right. It is inconceivable that Congress, having specifically stated that inconsistent state laws are preempted, could have intended that such a notice is per missible. Yet defendants appear to argue that if a state law required such a notice and the Board had not determined it was preempted, it could be given by creditors with com plete impunity. If the Boards Commentary is read in this manner, then it cannot be a valid interpretation of a stat ute which states that inconsistent requirements are pre empted. It is true that the Supreme Court has held that in gen eral the Boards interpretations of the Act must be ac corded great deference, but that holding was addressed specifically to cases in which there are gaps or intersti tial silences in the statute or regulation. Ford Motor Credit v. Milhollin, 444 U.S. 555, 55960, 565 (1980). The Court stated: At the threshold, therefore, interpretation of TILA and Regulation Z demands an examination of their express language; absent a clear expres sion, it becomes necessary to consider the im plicit character of the regulatory scheme . . . and it is appropriate to defer to the Federal Reserve Board and staff in determining what resolution of that issue is implied by the truthinlending enactments. 444 U.S. at 55960. (Emphasis supplied). As set forth above, Congress clearly expressed that in consistent state disclosure requirements are preempted. There is no gap in the legislation which needed interpreta tion, and certainly no gap that could be interpreted to state the precise oppositethat inconsistent disclosure re quirements are not preempted and that creditors may give

statement in the Pennsylvania disclosures that the home owner could be liable for damages if the transaction were canceled, along with, in some cases, the commencement of work before the end of the rescission period. The Board has certainly not authorized the use of the Pennsylvania disclosures in the sequence of events that occurred in the transactions before the Court. Indeed, the Commentary repeats the rule that, in any transaction in which state disclosures are given, the required TILA disclosures must still be clear and conspicuous, which the totality of the disclosures and events in this case violates. However, it is more likely that the Board never meant to authorize creditors to give conflicting state disclosures on an ongoing basis. The Commentary interprets 12 C.F.R. 226.28(a), which provides that creditors may seek Board determinations of whether state laws are inconsistent. It appears that the Commentary was meant to address the situation in which a request for a Board preemption deter mination has been made and is still pending. Paragraph 4 of the Commentary, on which defendants rely, begins with the phrase Before the Board makes a determination about a specific state law. It does not state If the Board has not made a determination about a specific state law, and therefore seems to contemplate the creditors options while waiting for the Board to make a determination. This con clusion is reinforced by the next two sentences. The second sentence speaks of the period until the Board formally determines that the state law is inconsistent and the third sentence assures creditors that once the Board has com pleted the process contemplated by the Commentary it will give them time to revise forms. In other words, the entire paragraph is written in the context of the Boards procedures for determining whether state laws are incon sistent. Moreover, it is not clear that the Commentary even con templates disclosures of rescission rights. The first para graph of the Commentary on 226.28(a) refers to the general disclosure and advertising rules of the regulation as well as credit billing provisions not relevant here. The succeeding paragraphs give examples concerning disclo sure of terms concerning the finance charge, the an nual percentage rate, minimum periodic payments, item ization of the amount financed, and warnings not to sign a contract without reading it or if sections are left blank. It also discusses segregation of the federal disclosures under 226.17(a)(1). The segregation requirements have to do with the disclosures of credit terms, which may appear on the same paper as other information. See Commentary to 226.17(a)(1). In contrast, the rescission disclosures are always to be given on a separate sheet of paper. Most importantly, the Commentary should not be read to include the circumstances of this case because to do so would require the Court to hold it invalid. The plain lan guage of 15 U.S.C. 1610(a)(1) provides: Except as provided in subsection (e) of this sec tion, this part and parts B and C of this subchap ter, do not annul, alter, or affect the laws of any State relating to the disclosure of information in connection with credit transaction, except to the

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disclosures which flatly contradict TILA disclosures. In deed, such an interpretation would be demonstrably irra tional. Not only would it undercut the whole purpose of the rescission disclosures but it would also eliminate the incentive for any creditor or state to seek the individual Board preemption determinations which Congress envi sioned in 1610(a)(1) as the means to determine whether a state disclosure requirement was preempted. Why would a creditor or state ever seek such a determination if the disclosure could be given with no adverse consequences to the creditor? Thus, the Commentary provides no protection from re scission in this case, in which the Pennsylvania notice was only slightly less contradictory than the hypothetical notice posited above. Especially since that notice was part of a larger confusing sequence of events, documents, and state ments concerning rescission, the Commentary cannot be held to apply to it, and even if it were held to apply, the Commentary would have to be deemed invalid. Similarly, the defendants are given no protection from rescission by 15 U.S.C. 1640(f) or by section 1635(h). The former subsection provides a defense only to monetary dam ages under section 1640(a), as well as certain other sec tions of TILA not implicated here, if the defendant acts in good faith conformity with a Board interpretation. It has no applicability to whether a consumer has the right to rescind under section 1635. In addition, because this case involves much more than simply the conflicting disclosures provided for in Pennsylvania law, the section would not be applicable because the other aspects of the transaction went far beyond simply making those disclosures in good faith conformity with a Board interpretation. Section 1635(h) is inapplicable for much the same rea sons. That subsection addresses challenges directed solely to the form of the Notice of Right to Cancel if the creditor provided the obligor the appropriate form of notice adopted by the Board, properly completed,58 and otherwise com plied with all the requirements of [section 1635] regarding notice. This action is not based upon the form of the Notice of Right to Cancel. It is based upon all of the other circumstances and documents described above that consti tuted a failure of defendants to give clear and conspicuous notice of class members rights to rescind. VI. DEFENDANTS ARE NOT ENTITLED TO AN ORDER REDEFINING THE CLASS Defendants argue that the Order of this Court certify ing a class is overbroad and should be modified. This argu ment fails 1) because it fails to recognize the distinction between an order granting class certification and a deci sion on the merits of a case, 2) because the three year

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58 In this case, the notices were not properly completed, in that they failed to specify, by striking out or deleting inaccurate language as was obviously intended by the Official Form, whether the creditor was taking a mortgage, lien or security interest. While this defect might not have been enough, by itself, to justify rescission, it is probably sufficient to strip defendants of any protection that 1635(h) might otherwise provide.

rescission period is not jurisdictional and 3) because it is based on cases that do not address the issue before the Court. This Courts class certification order included in the Class all persons who were subjected to Fredmonts twocontract scheme and whose contracts were assigned to the Empire defendants. Those defendants now argue that some of those Class members may not have valid TILA rescission claims and that therefore they should be excluded from the Class. This is simply unnecessary and would create possible con troversies and litigation as the action proceeds to its later stages. If some Class members do not have valid rights to re scind under TILA, the Court can make that decision on the merits of their cases and declare that conclusion. There is no need to exclude them from the Class, especially since virtually all of the other claims which have been deferred by the Court apply to all members of the defined Class. Redefining the Class at this point might lead to disputes later in the case about whether, during the period that Class members were not included in the class, their stat utes of limitations on other claims continued to be tolled, as well as possible disputes about discovery and other mat ters. With respect to the right to rescind, defendants are cor rect with respect to only two issues. Plaintiffs agree that Class members who consummated their transactions prior to October 17, 1994 and Class members who sold their homes prior to that date no longer have the right to re scind under TILA due to the operation of 15 U.S.C. 1635(f). On the other hand, the statute contains no similar excep tion to the right to rescind for consumers who refinance or otherwise pay off their mortgages. It is clear that Class members who refinanced their transactions continue to have a right to rescind, as numerous courts have held. E.g., May field v. Vanguard Savings & Loan Assn., 710 F. Supp. 143 (E.D. Pa. 1989); Abele v. MidPenn Consumer Discount Co., 77 B.R. 460, 467 (E.D. Pa. 1987), affd mem., 845 F.2d 1009 (3d Cir. 1988); In re Milbourne, 108 B.R. 522 (Bankr. E.D. Pa. 1989). Defendants cite no case to the contrary. Therefore, except for Class members with transactions prior to October 17, 1994 and Class members who sold their homes prior to October 17, 1997, all other Class mem bers had the right to rescind on October 17, 1997 and the filing of a class action preserved that right, as discussed below. The fundamental error in defendants analysis is their insistence that the three year rescission period creates a jurisdictional bar to this Court determining this case. While plaintiffs agree that the Court must have jurisdiction over each Class members claim, defendants have cited no case holding that the three year rescission period is jurisdic tional, or that once jurisdiction is obtained it could then be lost due to the passage of time. Simply repeating that alle gation over and over in their Memorandum does not make it so. The principal cases relied upon by defendants are Zipes v. Trans World Airlines, Inc., 455 U.S. 385 (1982); Hunt v. Schweiker, 685 F.2d 121 (4th Cir. 1982); Lunsford v. United States, 570 F.2d 221 (8th Cir. 1977) and Beach v. Ocwen

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Put another way, the issue in this case is not whether a court action seeking to enforce rescission can be filed af ter the three year rescission period has run, as in Beach, nor is the issue whether a time period is tolled by the filing of a class action that was later dismissed as in the other cases cited by defendants. This class action has not been dismissed. This case was filed within three years of the transaction for those Class members with transactions on or after October 17, 1994, and that filing met the three year TILA rescission deadline, because it was an action to enforce the Class members rescission rights. That action put defendants on notice within the three year period that Class members mortgages were subject to rescission. In view of the fact that the filing of an action raising rescission rights accomplishes this purpose, it is not surpris ing that courts have uniformly held that, notwithstanding the lack of a separate precomplaint rescission notice, the time limit is met by the filing of a court action asserting that a right to rescind exists within three years of the trans action. Taylor v. Domestic Remodeling, 97 F.3d 96 (5th Cir. 1996); Chivers v. Johnson, 22 F. Supp. 2d 832 (N.D. Ill. 1998); Eveland v. Star Bank, N.A., 976 F. Supp. 721 (S.D. Ohio 1997); Hunter v. Richmond Equity, 1987 U.S. Dist. Lexis 16764 (N.D. Ala. 1987). In the only case directly on point, a case relied upon by the Fifth Circuit in Taylor, the court held that a class ac tion seeking to determine that class members who elected rescission would have the right to rescind satisfied the three year requirement for all such class members. Elliott v. ITT Corp., 764 F. Supp. 102, 1056 (N.D. Ill. 1991). This action is identical to Elliott in seeking the same relief for class membersrecognition of their rescission rights if they elect to rescind.59 Defendants seek to distinguish Elliott on the grounds that it was decided before Beach, but Beach con cerned a different issue, namely whether a rescission claim could be raised for the first time in litigation after the three year period had run. In this case, as in Elliott and the other cases cited immediately above, the issue is not toll ing of a statute of limitations, but rather whether the filing of a civil action is sufficient to assert a right to rescind. And because, as discussed above, Beach did not deal with the issue of jurisdiction, defendants citing of Fed. R. Civ. P. 82 is equally off the mark. This conclusion is supported by the principles of Ameri can Pipe & Construction v. Utah, 414 U.S. 538 (1974). As the Supreme Court held in that case, the filing of a timely class action commences the action for all members of the
59 Contrary to the representation in defendants memorandum, the original Amended Complaint did seek rescission for Class mem bers, as well as a declaration of the right to rescind. Paragraph 50 stated that Class members are entitled to declaratory and injunc tive relief to effectuate their right to rescind and the Prayer for Relief seeks rescission as well as an Order declaring Class mem bers right to rescind, as well as other relief at law and equity as may be proper. Basically the same language is contained in the Revised Second Amended Complaint, paragraph 71 and Prayer for Relief. The procedure adopted by the court simply recognizes that the declaration of the right to rescind must come first and that Class members will then be given the option to obtain the rescission relief that the Complaint requests. Thus, the relief sought is the same as in Elliottrescission for those who elect to rescind.

Federal Bank, 118 S. Ct. 1408 (1998). None of these cases supports defendants assertion that the running of the three year rescission period after a class action has been filed seeking enforcement of TILA rescission rights deprives this Court of jurisdiction over absent Class members. In Zipes, the Supreme Court held that filing a timely EEOC charge was not a jurisdictional prerequisite to suit in federal court. The case did not hold that a time limit for acting under other statutes is jurisdictional. In fact, it held that the requirement of a timely charge is not jurisdic tional because the statutory provision does not speak in jurisdictional terms or refer in any way to the jurisdiction of the district courts. Similarly, the section relied upon by defendants, 15 U.S.C. 1635(f), never mentions jurisdic tion or even a private lawsuit concerning rescission. In this regard, it should be noted that the Third Circuit Court of Appeals has held that even the provision of the Truth in Lending Act that does refer to jurisdiction, the one year time limit for bringing suit, is not jurisdictional. Ramadan v. Chase Manhattan Corp., 156 F.3d 499 (3d Cir. 1998). Hunt v. Schweiker held that the requirement that an ac tion under 205(g) of the Social Security Act be brought within 60 days was jurisdictional, hardly a novel result, and that a claimant who had not met that requirement was not exempted from it due to the filing of a class action. As the defendants note, the court cited Califano v. Yamasaki, 442 U.S. 682 (1970) for the proposition that a class action can not include persons over whose individual claims the court does not have jurisdiction. Thus, the plaintiff in Hunt was not a member of the class and therefore no time limit could have been tolled for him. Lunsford similarly involved a class action brought on be half of absent class members who had not met require ments for filing under the Federal Tort Claims Act that the court held were jurisdictional. The court held that the named plaintiffs did not have the authority to file adminis trative claims they had filed on behalf of those class mem bers and that the filing of such administrative claims was a jurisdictional prerequisite to suit. While each of these cases held that the court must have jurisdiction over absent class members, none of them in volved the Truth in Lending Act or even suggested in any way that the TILA three year rescission deadline is a juris dictional requirement. Similarly, the Beach case, while it did involve TILA rescission, nowhere mentioned jurisdic tion or suggested that jurisdiction was even an issue before the court. Beach held only that a TILA rescission claim could not be asserted in a lawsuit by way of recoupment after the three year deadline had run when there had never been any attempt to enforce the debtors rescission rights within the three years. Thus, the fundamental premise of defendants argu ment, that the three year rescission deadline is jurisdic tional, has no support. This court has jurisdiction over this action, and over each Class members claim under 28 U.S.C. 1331 and 1337. Indeed, as mentioned above, our Court of Appeals has held that not even the TILA provision that uses the word jurisdiction is jurisdictional. Ramadan, su pra.

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class as subsequently determined. 414 U.S. at 550. The members of the class stood as parties to the suit until and unless they ceased to be members of the certified class. 414 U.S. at 551. Thus the commencement of the action satisfied the purpose of the limitation provision as to all those who might subsequently participate in the suit as well as for the named plaintiffs. Id. As the Court noted, to hold otherwise would frustrate the principal function of class certification. The Court went on to hold that when the class action was later dismissed, class members stat utes of limitations were tolled because of the class action in which they had been parties. The important holding of American Pipe for this case is that the Class members must be considered parties to this suit.60 The issue of tolling became relevant in American Pipe only after the class action was dismissed. While the
60 This situation is therefore different from that in which an admin istrative agency files an enforcement proceeding. Congress ex tended the time period for borrowers with transactions implicated

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case was actually pending, the statute of limitations was satisfied, not tolled; no issue of tolling would have arisen if the class had been certified and judgment obtained for the class. Therefore, as the Elliott court properly held, the cases holding that the filing of a civil action meets the three year rescission requirement are fully applicable to all Class mem bers, who are parties to this suit. VII. CONCLUSION For all of the above reasons, defendants are not entitled to summary judgment, nor are they entitled to an order redefining the Class. The Motion should be denied.

by such a proceeding, 15 U.S.C. 1635(f), since those borrowers are not parties to that proceeding and cannot be said to have asserted their rescission rights in that proceeding. As this Court recognized in granting class certification, the fact that the statute does not specifically deal with class action rescission proceedings does not mean that the normal class action rules do not apply.

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