Thursday, February 15, 2018

FYI: Cal App (1st Dist) Holds Intent of Parties Determines Priority of Simultaneous Lien Recordings

The Court of Appeals of California, First District, recently concluded that if two deeds of trust are submitted at the same time for recording, the order in which they are indexed is not determinative of priority.  Instead, according the Court, the intent of the parties will determine priority. 

In this case, one originating lender extended two loans secured by the same real estate, and it was apparent that the expectation was that the larger mortgage loan would have priority. The trial court had held that the defendant was the senior lienholder even though the defendant's mortgage was indexed after the other mortgage.  The trial court then concluded that as a senior lienholder the defendant's lien would remain on the property, and the defendant was not entitled to any of the sale proceeds from the plaintiff's nonjudicial foreclosure under California Civil Code § 2924k. 

The Appellate Court also observed that the second lien was a home equity line of credit as further support that the defendant's lien was intended to have priority.  Accordingly, the Appellate Court affirmed the ruling of the trial court.

A copy of the opinion is available at:  Link to Opinion

In 2003, a borrower obtained two loans from the same lender, each of which was secured by a deed of trust on certain real property located in California. One loan was a closed-end mortgage in the principal amount of $205,080 and the other loan was a home equity line of credit in the principal amount of $15,000. Both deeds of trust were recorded with the county recorder's office at the same time on the same day.

The deed of trust for the equity line received a recorder's instrument number of 2003-0603657, and the deed of trust for the closed-end loan received a recorder's instrument number of 2003-0603058. Through a series of transfers, the HELOC subsequently was assigned to a bank, and the closed-end loan was assigned to another entity and serviced by the defendant.

After borrower defaulted on the equity line, the plaintiff trustee for the bank conducted a nonjudicial trustee sale of the property. The plaintiff received $105,000 from the sale. After payment of all funds due the bank and the fees and costs of the sale, a surplus of $73,085.50 remained.

Three parties claimed entitlement to the surplus: the borrower, the homeowners association, and the defendant. The trustee deposited the surplus funds with the court and commenced the action to resolve the conflict between the three claimants. The trial court concluded that the parties intended for the defendant's closed-end mortgage lien to have priority over the HELOC lien recorded simultaneously. 

Because the defendant's lien had priority, the trial court concluded the defendant closed-end mortgage servicer was not entitled to any of the proceeds from the HELOC lienholder's nonjudicial foreclosure.  Instead, according to the trial court, the property was sold subject to the defendant's senior lien.  The surplus was distributed to the homeowners association and borrower. 

The defendant closed-end mortgage lien servicer appealed the trial court's ruling.

On appeal, the defendant closed-end mortgage lien servicer argued that the deed of trust on the home equity line was assigned a lower instrument number than its mortgage lien.  According to the defendant, this made its lien junior to the home equity lien. 

Which lien had priority was a critical ruling because if defendant's lien was junior to the HELOC trustee's, the defendant would be entitled to some of the surplus proceeds from the trustee's sale of the property. 

As the Court of Appeal pointed out, under California Civil Code § 2924k(a), the proceeds of a trustee's sale must be distributed in the following order of priority: (1) to the costs and expenses of exercising the power of sale and of sale; (2) to the payment of the obligations secured by the deed of trust or mortgage which is the subject of the trustee's sale; (3) to satisfy the outstanding balance of obligations secured by any junior liens or encumbrances in the order of their priority; and (4) to the trustor or the trustor's successor in interest.  

"When a junior lienholder forecloses on a second deed of trust at a nonjudicial trustee's sale, the senior lienholder is not entitled to any proceeds from the sale because the property is purchased at the sale subject to the first deed of trust."

The Court of Appeal acknowledged California followed the "first in time, first in right" system of lien priorities, under which, as a general rule, liens "have relative priorities among themselves according to the time of their creation."  However, when liens are both signed on the same day, like they were in this case, "the time of their creation does not determine their priority."

The Court added, "the date of recording also is not determinative in this instance."  Even though liens that are recorded earlier take priority over subsequently recorded liens, both deeds of trust were deposited in the recorder's office at the same time on the same day.

The Court relied on prior rulings with similar facts to establish it is the intent of the parties that is determinative of the priority.  First, in Phelps v. American Mtg. Co. (1936) 6 Cal.2d 604, 609 [59 P.2d 95], overruled in part on other grounds, two deeds were both executed and recorded on the same day.  Although one of the trust deeds specifically stated it was to be the first lien trust deed, it was indexed by the recorder with a higher number than the other trust deed. 

The California Supreme Court rejected the trial court's finding that the priority of the deeds of trust was established based on the sequence in which the two documents were indexed. The Phelps court explained that if the deeds of trust "were filed at the same time or in their proper order and the reverse order of recordation was an inadvertence, that mistake should not be permitted to alter the intended relations of the parties when an examination of the recorded documents would provide notice of the true priorities."

Next, in First Bank vs. East West Bank, 199 Cal.App.4th 1309 [132 Cal. Rptr. 3d 267] (2011), two banks granted loans to a borrower and secured them with trust deeds on the same property.  Both deeds were executed and recorded on the same day.  Both banks sought a declaratory judgment on whose lien had priority.  The trial court concluded that both liens were recorded concurrently and, as a result, the liens had equal priority. The Court of Appeal in First Bank affirmed, holding that "because both trust deeds were executed on the same day and are deemed recorded simultaneously, neither bank is a subsequent [encumbrancer]."  The First Bank court further explained that it "would disrupt the statutory scheme to make priority turn on the random act of indexing, as defendant advocates, especially where banks and title insurers have no influence over when the recorder indexes trust deeds."

Relying on this precedent, the Court of Appeal here concluded that it is the intent of the parties that determines the priority of the two liens.  In this case, because the originating lender was the same on both loans, "the reasonable expectation is that it would secure the much larger mortgage loan in the primary position."  The Court stated that the usual understanding of the relationship between a closed-end mortgage and an equity line of credit also supports its conclusion. 

Finally, the First District rejected the defendant's argument that the borrower was given a windfall by receiving approximately $60,000 on the loss of her property. 

The defendant argued it should be entitled to those proceeds because it had no recourse against the party who purchased the property in the trustee's sale.  The Court, however, concluded that the record appears to give the purchaser notice of the defendant's lien. 

Moreover, the title report showed the two liens recorded simultaneously which, according the Appellate Court, gave the purchaser notice and he could have taken additional steps to determine their priority. The Court stopped short of concluding that the purchaser had actual notice he was purchasing the property subject to the defendant's lien.

Accordingly, the Court of Appeal affirmed the trial court's findings that the intent of the parties will determine the priority of liens that are recorded simultaneously.


Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon




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Tuesday, February 13, 2018

FYI: Cal App (1st Dist) Holds Assignee May Sue Title Company for Erroneous Release

The Court of Appeals of California, First District, recently held that an assignee of the original beneficiary of a deed of trust, as the current holder of an obligation, has the right under California Civil Code § 2941(b)(6) to prove damages against the title company that allegedly recorded a release of the deed of trust in error.

A copy of the opinion is available at:  Link to Opinion

In 2004, a bank made a business loan to an investment company.  The loan was guaranteed by the investment company's principals ("Guarantors") and secured by a second deed of trust on the real property the Guarantors owned. 

In 2011, the bank assigned the note and deed of trust to the plaintiff.  The plaintiff, the investment company, and the Guarantors later executed a forbearance agreement reciting that the loan was in default and agreed that the plaintiff would not exercise its right under the note, guaranty and deed of trust as long as the investment company made payments according to a schedule set forth in the agreement.

The investment company failed to make the required payment.  In 2014, the plaintiff began to initiate foreclosure when it learned that in 2007, without the knowledge of the bank, the defendant title company had executed and recorded a release of the obligation secured by the deed of trust. The release stated that it was prepared under the provisions of California Civil Code § 2941(b)(3).

The plaintiff alleged that the title company had no authority to prepare and record the release, and that contrary to the language in the release, the obligation secured by the deed of trust had not been paid, satisfied, or discharged.

The plaintiff sued the investment company, the Guarantors and the title company, seeking payment of the loan and a declaration that the release was void.  As an alternative, in the event the release was determined to be valid, in its fourth cause of action the plaintiff sought damages for the title company's negligence in executing and recording the release without complying with the provisions of California Civil Code § 2941(b)(3).

The plaintiff argued that as the successor to the bank, who was the original beneficiary of the deed of trust, it was entitled to damages, including attorney's fees, under California Civil Code § 2941(b)(6).

The title company demurred to the fourth case of action, and argued that the plaintiff failed to allege that the tort claims included in the cause of action were assigned to the plaintiff with the loan and deed of trust.

The trial court agreed and issued an order sustaining the title company's demurrer without leave to amend, and dismissed the title company from the case.

On appeal, the plaintiff argued that the trial court erred in sustaining the title company's demurrer to the damages claim and dismissing the title company from the case. 

Specifically, the plaintiff alleged that the title company prepared and recorded the release, which represented that the obligation secured by the deed of trust was paid in full and that the release was deemed the equivalent of a reconveyance under California Civil Code § 2941(b)(3).  Also, the plaintiff alleged that the title company was negligent in preparing the release without authorization from any person having the authority to authorize the release.

The plaintiff argued that these allegations stated a cause of action for damages under California Civil Code § 2941(b)(6). 

As you may recall, California Civil Code § 2941(b)(3) sets forth the procedure by which a title insurance company may prepare and record a release of a mortgage obligation:

(3)  If a full reconveyance has not been executed and recorded pursuant to either paragraph (1) or paragraph (2) within 75 calendar days of satisfaction of the obligation, then a title insurance company may prepare and record a release of the obligation. However, at least 10 days prior to the issuance and recording of a full release pursuant to this paragraph, the title insurance company shall mail by first-class mail with postage prepaid, the intention to release the obligation to the trustee, trustor, and beneficiary of record, or their successor in interest of record, at the last known address.
(A)  The release shall set forth:
(i)  The name of the beneficiary.
(ii)  The name of the trustor.
(iii)  The recording reference to the deed of trust.
(iv)  A recital that the obligation secured by the deed of trust has been paid in full.
(v)  The date and amount of payment.
(B)  The release issued pursuant to this subdivision shall be entitled to recordation and, when recorded, shall be deemed to be the equivalent of a reconveyance of a deed of trust.

See California Civil Code § 2941(b)(3).

Additionally, section 2941 provides that a title insurance company that prepares or records a release under Civil Code § 2941(b)(3) is "liable to any party for damages, including attorney's fees, which any person may sustain by reason of the issuance and recording of the release."  California Civil Code § 2941(b)(6).

Noting the broad language of the statute, the Appellate Court concluded that the plaintiff alleged facts sufficient to state a claim against the bank, as the beneficiary of the deed of trust.  And, the plaintiff alleged that the obligation secured by the deed of trust was released in error by the title company, which in the Appellate Court's view, presented a dispute as to whether the release was valid and whether the plaintiff will have lost security for the loan and will therefore have been damaged.

Accepting these allegations as true for purposes of the demurrer, the Appellate Court held that the plaintiff's allegations stated a claim for damages under California Civil Code § 2941(b)(6), and therefore the trial court error in sustaining the title company's demurrer to the plaintiff's cause of action for damages.

The title company argued that there was nothing in the statute to suggest that the bank, which held the loan and deed of trust at the time the title company filed the release, had any claim against the title company under section 2941, and therefore the bank had no claim to assign to the plaintiff with the note and deed of trust.

The title company also argued that, even assuming that section 2941 gave rights to the bank, it would be "unconscionable" if the bank could sue the title company for damages sustained by the release, and then assign the loan and deed of trust to the plaintiff, which could in turn sue the title company for damages it suffered by the release, and then assign the loan and deed of trust to some third party which could also sue the title company for damages it sustained by reason of the release.

The Appellate Court rejected these arguments.  First, the title company offered no authority to support its positions, which was contrary to the explicitly statutory language.  The Court noted that section 2941(b)(6) imposed broad liability on any title company that issues and records a release under Civil Code § 2941(b)(3).  And, under Civil Code § 2941(b)(6), the plaintiff, as the holder of an obligation, had the right to prove damages against the title company that recorded a release of that obligation. 

The title company relied on the Appellate Court's ruling in Heritage Pacific Financial, LLC v. Monroy (2013) 215 Cal. App. 4th 972, to argue that as a matter of law, the assignment of the bank's contractual rights to the plaintiff did not include the assignment of the bank's tort claim against the title company under section 2941.

As you may recall, Heritage Pacific concerned a promissory note that a borrower executed with a mortgage company.  Id., at 980.  The plaintiff in Heritage acquired the note from the mortgage company and then determined that the borrower had made false representations in her original loan application.  Id., at 982.  The plaintiff in Heritage sued the borrower based on representations she made in the original loan application with the mortgage company.  Id.  The trial court in Heritage sustained the borrower's demurrer, and the Appellate Court affirmed, concluding that the transfer of the promissory note to Heritage gave Heritage contractual rights, but not fraud rights, which were as a matter of law not incidental to the transfer of the promissory note.  Id., at 991.

However, the Appellate Court explained that it reached this conclusion based on the legal principal set forth in National Reserve Co. of America v. Metropolitan Trust Co. of California (1941) 17 Cal. 2d 827 -- that is, if the accrued cause of action can be asserted by the assignor independent of ownership of the contract, and if that that of action is not essential to continued enforcement of the contract, then the cause of action did not pass under the assignment as incidental to the contract unless the assignment specifically or impliedly designated the cause of action. 

In Heritage Pacific, the Appellate Court found that the language of the assignment did not specifically or impliedly designate tort claims.  The fraud claims that Heritage alleged against the borrower would pass under the assignment as incidental to the note if they could not be asserted by the mortgage company apart from the promissory note, or if they were essential to the enforcement of the contract.  However, the Appellate Court held that the fraud claims failed on both counts because they could be asserted by the mortgage company independently of its continued ownership of the promissory note, and they were not essential to the enforcement of the promissory note.

Relying on Heritage Pacific, the title company argued that the section 2941 claim was not assigned to the plaintiff with the deed of trust because the language of the assignment did not specifically or impliedly designate tort claims, because the bank could assert a claim against title company under section 2941 independent of its ownership of the deed of trust, and because the section 2941 claim was not essential to the enforcement of the deed of trust.

The Appellate Court distinguished Heritage Pacific, where it considered whether a lender's pre-existing fraud claims, arising from misrepresentations made to the lender in a loan application, were incidental to the transfer of the loan, and concluded that as a matter of law they were not. 

In contrast, the issue in this case is not whether the bank's pre-existing tort claim against title company was transferred from the bank to the plaintiff with the assignment of the note and deed of trust.  By virtue of holding the deed of trust by assignment from the bank, the plaintiff had its own potential claim against the title company under California Civil Code §  2941(b)(6), regardless of any claims that the bank may have been or may still be able to assert. 

In sum, the Appellate Court concluded that under California Civil Code § 2941(b)(6), the plaintiff, as the holder of an obligation had the right to prove damages against the title company that recorded a release of the obligation.

Accordingly, the Appellate Court reversed the trial court's order sustaining the demurrer and dismissing the title company from the case.


Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon




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Thursday, February 8, 2018

FYI: Cal App Ct (2nd Dist) Holds Correction Offer Under CLRA Did Not Preclude Other Claims

The California Court of Appeals for the Second District recently held that a correction offer under the California Consumer Legal Remedies Act, Civ. Code § 1750, et seq. (CLRA) did not prevent a consumer from pursuing causes of action for fraud and violation of the California Unfair Competition Law, Bus. & Prof. Code § 17200, et seq. (UCL) based on the same conduct because the CLRA's remedies are cumulative and non-exhaustive.

A copy of the opinion is available at:  Link to Opinion

An automotive dealer (Dealer) published print advertisements showing low prices for specific cars to attract customers to the dealership.  Small print at the bottom of the advertisements state that the price expired at 12:00 p.m. on the day of publication. 

A customer who called before noon to inquire about the car in an advertisement will be quoted the sale price.  If the customer arrived at the dealership in the afternoon, the advertisement expired and the car is sold for full price.  The Dealer also posted the advertisements online for about three hours.  The advertisements online do not contain expiration information and were simply taken down after three hours.

In April 2013, the plaintiff saw the Dealer's advertisement for a black 2009 Dodge Charger for $9,995.  The Dealer told the plaintiff over the phone that he might be able to drop the price to $9,000, that the car was in excellent condition, and there were no mechanical issues with the car.

The next day, the plaintiff drove to the dealership and the Dealer showed her a black 2009 Dodge Charger with body damage and substantially higher mileage than what she was told.  The Dealer said it was the only black Charger on the lot, but the dealership could repair the damage.  The plaintiff thought the car might still be worth purchasing and proceeded to discuss the paperwork.  The salesperson told her that the $9,000 price was for a cash payment and the plaintiff's purchase price would be the advertised price of $9,995.

However, one document listed the sale price as $16,995.  The plaintiff's mother noticed that another document stated the amount financed as $17,401 and asked why the document did not say $9,995.  The Dealer said not to worry about it because they were just throwing numbers out and that number would not stay.  Also, the plaintiff signed an optional gap insurance contract for $895 without reading it or receiving any explanation.

On the drive home, the check engine light went on and the plaintiff brought the car to a mechanic and obtained a list of repairs that were needed.  The Dealer said it would fix the car within three days, but it never fixed the car as promised.

In June 2013, the plaintiff filed a complaint against Dealer and the financing company (Finance Company) alleging several causes of action, including violation of the CLRA, violation of the UCL, fraud, violation of the Song-Beverly Consumer Warranty Act, Civ. Code § 1790, et seq. (Song-Beverly Act), and violation of the federal Magnuson-Moss Consumer Warranty Act, 15 U.S.C. § 2301, et seq. (Magnuson-Moss Act). 

The Dealer argued that the price stated in the print advertisements expired at noon on the day of publication and was subject to approved credit.  Because the plaintiff did not purchase the car in cash, on the day that the advertisement was published, the Dealer argued that the sale price had expired.

Dealer offered to fully rescind the contract, refund all payments, and provide an additional $1,500 for incidental costs.  In exchange, the plaintiff would have to return the car in substantially the same condition as she received it.  If plaintiff rejected the offer, Dealer would deposit with the court the amount that Dealer believed to be a full remedy and seek a determination that it was the prevailing party entitled to fees and costs, including attorney fees, for being forced to respond to a complaint after a full remedy was offered.

After a bench trial, the trial court held that the Dealer made a valid settlement offer to resolve the situation in good faith, and therefore, damages were not justified as to either defendant for violation of the CLRA.  The trial court also found in favor of Dealer and Finance Company on the cause of action for fraud.  However, the trial court found violations of the UCL, Song-Beverly Act, and the Magnuson-Moss Act based on breach of warranty.

The plaintiff filed a motion for an award of attorney fees of $80,927.25 under the Song-Beverly Act.  Dealer and Finance Company opposed the motion and filed a motion to set aside and vacate the judgment on several grounds. 

After a hearing, the trial court revised its finding and the judgment.  The trial court noted that injunctive relief, rescission, and restitution were available under the UCL.  The trial court found an injunction was proper to enjoin unfair competition under the UCL and did not change that portion of the judgment awarding injunctive relief under the UCL. 

However, the trial court declined to change its ruling of the CLRA cause of action in favor of Dealer and Finance Company.  The trial court noted that the remedies of the CLRA were cumulative of other types of relief. 

Additionally, the trial court reversed its ruling under the Song-Beverly Act because there had been only one attempt to have Dealer repair the car, and therefore, the trial court found no liability under the Song-Beverly Act or Magnuson-Moss Act.

The trial court also reconsidered its finding on the fraud cause of action.  Fraudulent misrepresentation had been made about the car in telephone conversations to induce the plaintiff to drive to the dealership, which violated the CLRA and the UCL; Dealer's misrepresentations of the terms of the sales contract violated the CLRA and the UCL; and Dealer's representation that the repairs were performed was a violation of the Song-Beverly Act.  Thus, the trial court found in favor of plaintiff on the fraud cause of action and awarded damages of $15,409.25.

The trial court also awarded attorney's fees for the plaintiff under California Code of Civil Procedure section 1021.5.  However, the trial court reduced the fees to $24,278.18 to reflect the causes of action eligible for fees under the statute on which the plaintiff had prevailed for the public benefit. 

This appeal followed.

The primary issue on appeal was whether the CLRA provided excusive relief for conduct encompassed by the CLRA.

Dealer and Finance Company argued that the plaintiff cannot recover for fraud or violation of the UCL based on the same conduct supporting her CLRA cause of action.  They also argued that the reasonable correction offer barred the plaintiff from maintaining an action for damages under the CLRA, and the plaintiff cannot maintain an action for damages based on the same conduct under another statutory or common law cause of action.

As you may recall, the remedies of the CLRA are cumulative of other rights.  The CLRA expressly states: 

The provisions of this title are not exclusive.  The remedies provided herein for violation of any section of this title or for conduct proscribed by any section of this title shall be in addition to any other procedures or remedies for any violation or conduct provided for in any other law  If any act or practice proscribed under this title also constitutes a cause of action in common law or a violation of another statute, the consumer may assert such common law or statutory cause of action under the under the procedures and with the remedies provided for in such law.

Cal. Civ. Code § 1752.

Additionally, the CLRA prohibits enumerated unfair methods of competition and deceptive practices that result in the sale or lease of goods or services to a consumer, including in pertinent part:

(7) Representing that goods or services are of a particular standard, quality, or grade, or that goods are of a particular style or model, if they are of another
(9) Advertising goods or services with intent not to sell them as advertised
(13) Making false or misleading statements of fact concerning reasons for, existence of, or amounts of, price reductions
(16) Representing that the subject of a transaction has been supplied in accordance with a previous representation when it has not
(17) Representing that the consumer will receive a rebate, discount, or other economic benefit, if the earning of the benefit is contingent on an event to occur subsequent to the consummation of the transaction
(19) Inserting an unconscionable provision in the contract.

Cal. Civ. Code § 1770(a).

Dealer and Finance Company relied on two opinions as support for their argument that the conduct described ins section 1770 was governed exclusively by the CLRA, notwithstanding the plain language of section 1752 stating that the remedies under the CLRA are not exclusive.

In Vasquez, the court concluded that class actions filed after the effective date of the CLRA which concern deceptive practices specified in the state were governed exclusively by the provisions of the CLRA and must follow the class action procedures specified in the act.  Vasquez v. Superior Court (1971) 4 Cal.3d 800, 818-19. 

In Outboard, the court relied on Vasquez and held that if a cause of action alleged conduct specified in the CLRA, the procedures of the CLRA must be followed regardless of the nature of the cause of action pled in the complaint.  Outboard Marine Corp. v. Superior Court (1975) 52 Cal.App.3d 30, 35. 

However, the Appellate Court here noted that both Vasquez and Outboard were decided prior to the California Legislature's amendment of section 1752 in 1975.  The 1975 amendment affirmed the non-exclusive nature of the remedies by adding that the remedies "for violation of any section of this title or for conduct proscribed by any section of this title" were in addition to any other procedures or remedies "for any violation or conduct" provided under any other law.  Stats 1975, ch. 615, § 1, p. 1344.

Dealer and Finance Company also argued that plaintiff cannot avoid the safe harbor provided for a reasonable correction offer under the CLRA by recasting her claim as a violation of the UCL. 

However, in the Appellate Court's view, the plaintiff's UCL claim was based directly on evidence of fraudulent advertising practices and was not dependent on filing an underlying violation of the CLRA.  The CLRA expressly states that the effect of a reasonable correction offer prevented the consumer from maintaining an action for damages under California Civil Code section 1780, but the remedies of the CLRA are cumulative and the consumer may assert other common law or statutory causes of action under the procedures and with the remedies provided for in those laws. 

Finally, for the first time on appeal Dealer and Finance Company argued that there was no cause of action before the trial court for violation of the UCL, because the plaintiff dismissed her cause of action and never amended the complaint to add a new cause of action under the UCL.  The Appellate Court concluded that Dealer and Lender did not raise this argument at trial or in the multiple post-judgment pleadings, Dealer and Finance Company forfeited the issue on appeal.

Accordingly, the Appellate Court affirmed the judgment.


Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon




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Friday, February 2, 2018

FYI: Cal App (4th Dist) Affirms Denial of Class Cert For Lack of Evidence Identifying Putative Class Members

The California Court of Appeals for the Fourth District recently affirmed an order denying class certification because the plaintiff did not present evidence to demonstrate that the how putative class members can be identified from the defendant's records.

A copy of the opinion is available at:  Link to Opinion

In July 2013, the plaintiff purchased an inflatable kids pool from a retail vendor.  The plaintiff based his decision to purchase the pool on the pool's packaging, which showed a photograph of a group of three adults and two children sitting and playing in the pool.  The plaintiff assumed the pool would be large enough to comfortably fit a group of equivalent size.  The box displayed the pool's dimensions: "8FT X 25IN".

The plaintiff discovered that the pool was "materially smaller" than the pool shown on the packaging.  Rather than fitting two adults and three children as pictured on the box, the pool was only capable of fitting one adult and four small children. 

In November 2013, the plaintiff filed this class action and alleged that the vendor violated the Consumers Legal Remedies Act, Civ. Code § 1750, et seq. ("CLRA"), Bus. & Prof. Code § 17200, et seq. (Unfair Competition Law or "UCL"), and Bus. & Prof. Code § 17500 (False Advertising Law or "FAL"), by selling the pool with deceptive advertising to consumers in its California retail stores.

As you may recall, the CLRA protects consumers against deceptive business practices in the sale of goods and prohibits a seller from representing that goods have characteristic they do not possess.  Civ. Code §  1770(a)(4), (a)(5), (a)(7).  The UCL prohibits acts of unfair competition, defined as "any unlawful, unfair or fraudulent business act or practice".  Bus. & Prof. Code § 17200.  The FAL is equally comprehensive within the smaller and narrower field of false advertising.  Bus. & Prof. Code § 17500.

The plaintiff sought restitution for all consumers who purchased the pool from the vendor located in California the four years prior to that date. 

In opposing the motion for class certification, the vendor submitted to the court a photograph of the pool properly inflated and filled, which appeared much closer to the size of the pool depicted on the box.  The photo submitted by the vendor showed three adults and two children in the pool.  The vendor's photo was accompanied by the declaration of an expert in photogrammetric analysis and photo interpretation, concluding that the plaintiff had not set up the pool properly. 

The plaintiff's deposition testimony reflected his belief that he had set up the pool properly, and the trial court accepted that testimony as true. 

However, the trial court found that the plaintiff presented "no evidence" to establish "what method or methods will be utilized to identify the class members, what records are available, (either from the [vendor], the manufacturer, or other entities such as banks or credit institutions), how those records would be obtained, what those records will show, and how burdensome their production would be."  The trial court also found "a class action is not superior to numerous individual actions" and "will be no more efficient than individual actions in light of the individual issues [sic] that must be presented on the issue of reliance and damages."

Additionally, due to the stricter proof requirements under the CLRA, the trial court found that the plaintiff had not shown the commonality of issues required for the CLRA. 

Because the plaintiff did not satisfy the class ascertainability and superiority requirements, the trial court denied the motion for class certification on all three causes of action.

On appeal, the plaintiff raised two arguments.

First, the plaintiff argued that trial court errored in denying his motion on the UCL and FAL causes of action, because he satisfied the class ascertainability requirement for certification under Code of Civil Procedure section 382. 

Second, he argued that the trial court's statement that the packing must be "materially misleading as a matter of law" to show common issues of reliance and causation for the CLRA was legally incorrect.

Two class action statutes were at issue. 

The first, Code of Civil Procedure section 382, which governed class actions generally, including actions under the UCL and FAL.  Under section 382, a certification motion may be granted where there was "an ascertainable class and a well-defined community of interest among class members."  Sav-On Drug Stores, Inc. v. Superior Court (2004) 34 Cal.4th 319, 326. 

Courts determine the existence of an ascertainable class using three factors: (1) class definition, (2) class size, and (3) means of identifying class members.  Sotelo v. Medianews Group, Inc. (2012) 207 Cal.App.4th 639, 648.  The community of interest inquiry depended on three criteria: (1) whether common issues predominate over individual issues; (2) whether the plaintiff's claims are typical of the class he or she seeks to represent; and (3) whether the plaintiff is an adequate class representative.  Id. at 651.

The CLRA contained its own provisions for class actions, similar in many respects to the requirements just cited, under which a court must certify a class when: "(1) [i]t is impracticable to bring all members of the class before the court. (2) The questions of law or fact common to the class are substantially similar and predominate over the questions affecting the individual members.  (3) The claims and defenses of the representative plaintiffs are typical of the claims or defenses of the class.  [and] (3) The representative plaintiffs will fairly and adequately protect the interests of the class."  Civ. Code § 1781(b).

The Appellate Court began its analysis by reviewing the plaintiff's evidence for ascertaining the identities of the putative class members. 

The plaintiff insisted that the class was ascertainable because the class definition was clear and simple:  "All persons who purchased the Ready Set Pool at a [vendor's] store located in California within the four years preceding the date of the filing of this action."  However, the Appellate Court explained that the class definition was not the issue.  Rather, the issue was the lack of business records through which to identify the class members, and plaintiff did not suggest a realistic method by which the class members might be identified. 

The plaintiff pointed to the vendor's interrogatory responses relating to the number of pools sold (20,752), the number of pools returned (2,479), and the vendor's gross revenue from sale of the pool ($949,279.34), but submitted nothing offering insight into who purchased the pools or how one might find that out.  The plaintiff did not describe or produce the vendor's records from which these numbers were derived, and he did not indicate how much other information these records might reveal. 

The Appellate Court noted that the plaintiff was not required to actually identify the 20,000-plus individuals who bought pools.  However, he had the burden to come up with any legitimate means of identifying the class members.  The plaintiff merely hypothesized that class members could be notified through the vendor's rewards program or email lists, without explaining, much less proving, how many cross-referencing between the class members' transactions and the names on those lists might be achieved to allow for personal notice.  In the Appellate Court's view, these under-inclusive or over-inclusive lists may not result in notice to the "vast majority" of class members as required for due process.

Because the likelihood of receiving notice decreases with fewer putative class members, the Appellate Court determined that the trial court may exercise its discretion and require personal notice based upon the stake for each individual class member and the size of the class. 

Thus, the Appellate Court held that the plaintiff failed to present sufficient evidence to demonstrate a means to identify and give notice to the putative class.

Next, the plaintiff argued that the trial court applied the wrong legal standard under the CLRA in determining that the class claims did not predominate over the individual claims.

As you may recall, "to obtain relief under the CLRA, both the named plaintiff and the unnamed class members must have suffered some damage caused by a practice deemed unlawful under" that act.  Steroid Hormone Product Cases (2010) 181 Cal. App. 4th 145, 156.

The trial court reasoned that some members of the class may not have relied on the photograph on the box in purchasing their pools, and might instead have relied on the advertised 8" x 25" size of the poll, which was also displayed on the box.  The trial court concluded it would need to find materiality of the photograph "as a matter of law" before it would be required to certify the class under the CLRA. 

The plaintiff argued that the trial court's ruling would, in effect, require him to prove the merits of his CLRA claim, which was not required at the certification stage.  However, the Appellate Court found that because the merits of his claims were intertwined with issues pertinent to class certification, there was no error in considering the vendor's evidence insofar as relevant to the question raised by the class certification motion. 

In other words, as the Appellate Court explained, the trial court's ruling did not require the plaintiff to prove the merits of his cause of action.  Rather, the ruling was an evidence-based prediction that disputed issues at trial were more likely to be individual than common. 

Therefore, the Appellate Court held that the plaintiff failed to demonstrate that class issues predominated over individual issues on the CLRA claim. 

Finally, the plaintiff argued that trial court should have granted a continuance to allow him to take additional discovery regarding what records the vendor kept or how the purchasers of the pools could be identified through those records. 

However, the Appellate Court did not find anything in the record showing that the plaintiff was not given an opportunity to conduct discovery before moving for class certification.  In fact, the Appellate Court noted that the plaintiff could have withdrawn his motion if he concluded insufficient discovery had been conducted, or if he did not have time to prepare for the hearing. 

Because the plaintiff was responsible for the timing of the motion, the Appellate Court concluded that the it was not an abuse of discretion to require the plaintiff to prove facts necessary to certify the class.

Accordingly, the Appellate Court affirmed the order denying class certification and denying a continuance of the taking of further discovery.  


Eric Tsai
Maurice Wutscher LLP 
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Email: etsai@MauriceWutscher.com

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