Wednesday, March 14, 2018

FYI: 9th Cir Affirms Dismissal of FCRA Putative Class Action for Lack of Standing

The U.S. Court of Appeals for the Ninth Circuit recently affirmed the dismissal of a consumer's putative class action alleging willful violations of the federal Fair Credit Reporting Act (FCRA) for lack of standing under Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016).

In so ruling, the Court held that merely printing a credit card receipt without redacting the card's full expiration date did not allege the concrete injury required, where no second receipt existed, the consumer did not lose the receipt, nobody stole the receipt, and nobody stole the consumer's identity. 

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

A consumer used his credit card at a parking garage and received a receipt displaying the credit card's full expiration date.  The consumer filed a putative class action lawsuit against the garage alleging willful violation of the FCRA.  Specifically, the consumer alleged that failing to redact the card's full expiration date violated 15 U.S.C. § 1681c(g).

The consumer only alleged a statutory violation and the potential for actual injury.  The consumer alleged that his injury was "exposure . . . to identity theft and credit/debit fraud," because he was at "imminent risk" that his "property would be stolen and/or misused by identity thieves."  However, he did not allege that a second receipt existed, that someone stole his receipt, that he lost his receipt, or that anyone stole his identity. Instead, he claimed that "the risk of harm created in printing the expiration date on the receipt" was a "sufficiently concrete" injury.

The garage moved to dismiss the complaint arguing that the consumer lacked Article III standing. The trial court concluded that the consumer only alleged "possible risk of [identity] theft." Following Spokeo, the trial court noted that "[s]omething more is necessary" to allege a concrete injury as not every procedural violation gives rise to standing.  Thus, the trial court granted the motion and dismissed the case with prejudice finding that the consumer did not allege a sufficiently concrete injury to establish standing.

This appeal followed.

The Ninth Circuit first examined the history of the relevant statutory framework because "the doctrine of standing derives from the case-or-controversy requirement, and because that requirement in turn is grounded in historical practice." Spokeo, 136 S. Ct. at 1549.

As you may recall, the Fair and Accurate Credit Transactions Act of 2003 (FACTA) amended the FCRA by limiting printed information on receipts:

[N]o person that accepts credit cards or debit cards for the transaction of business shall print more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of the sale or transaction.

115 U.S.C. § 1681c(g). The Ninth Circuit observed that the FCRA provides that "[a]ny person who willfully fails to comply with [that requirement] with respect to any consumer is liable to that consumer" for statutory damages of between $100 and $1,000 per violation or "any actual damages sustained by the consumer," costs and attorney's fees, and potential punitive damages.  See 15 U.S.C. § 1681n.

Additionally, since FACTA, Congress enacted the Credit and Debit Card Receipt Clarification Act (Clarification Act), which reiterated that the FCRA prohibits printing "receipts bearing a card's expiration date." Id. However, the Ninth Circuit noted that Congressional findings found "hundreds of lawsuits were filed alleging that the failure to remove the expiration date was a willful violation of the [FCRA] even where the account number was properly truncated," and "[n]one of these lawsuits contained an allegation of harm to any consumer's identity." Congress also found that "[e]xperts in the field agree that proper truncation of the card number, by itself as required by the [FCRA], regardless of the inclusion of the expiration date, prevents a potential fraudster from perpetrating identity theft or credit card fraud."

Thus, the Court noted, the Clarification Act ensures "that consumers suffering from any actual harm to their credit or identity are protected while simultaneously limiting abusive lawsuit." The Clarification Act also provided merchants with a temporary reprieve:  "[A]ny person who printed an expiration date on any receipt . . . between December 4, 2004, and [June 3, 2008]," but otherwise complied with the statute, did not willfully violate the FCRA.

The Ninth Circuit next turned to whether the consumer had standing in this case.  As you may recall, standing is "an essential and unchanging part of the case-or-controversy requirement of Article III."  Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992).  The Ninth Circuit recognized that the appeal turned on whether the consumer alleged a concrete injury in fact.

To establish standing, the consumer must allege he (1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision. Spokeo. 136 S. Ct. at 1547. Further a consumer suffers an injury where there is "an invasion of a legally protected interest" that is "concrete and particularized" and "actual or imminent, not conjectural or hypothetical."  Id. at 1548 (quoting Lujan, 504 U.S. at 560).

The Ninth Circuit observed that both Spokeo and this case involved a putative consumer class action alleging willful violations of the FCRA.  In Spokeo, the Supreme Court made clear that "Article III standing requires a concrete injury even in the context of a statutory violation." Id. at 1549. The plaintiff must establish that a concrete injury "actually exist[s]", and that it is "real, and not abstract." Id. at 1548. Intangible harms and a "risk of real harm" can demonstrate a concrete injury. Id. at 1549-50. However, "a bare procedural violation, divorced from any concrete harm," does not "satisfy the injury-in-fact requirement of Article III." Id. at 1549.

Thus, "[a] violation of one of the FCRA's procedural requirements may result in no harm" -- for example, "[i]t is difficult to imagine how the dissemination of an incorrect zip code, without more, could work any concrete harm." Id. at 1550. The Supreme Court therefore remanded to resolve "whether the particular procedural violations alleged . . . entail a degree of risk sufficient to meet the concreteness requirement." Id.

The Ninth Circuit noted that after Spokeo, two of its sister circuits dismissed identical consumer class actions that alleged violations of the FCRA's credit card expiration date redaction requirement for lack of standing. See Meyers v. Nicolet Restaurant of De Pere, 843 F.3d 724 (7th Cir. 2016) (consumer's allegations did satisfy the injury-in-fact requirement for Article III standing because printing the receipt did not harm the consumer and the violation did not create any appreciable risk of harm); Crupar-Weinmann v. Paris Baguette America, Inc., 861 F.3d 76 (2d Cir. 2017) (the alleged bare procedural violation did not create a material risk of harm to the underlying concrete interest Congress sought to protect in passing FACTA -- i.e., preventing identity theft and credit card fraud).

The Ninth Circuit agreed with its sister courts and found that the consumer failed to allege a concrete injury here. Specifically, the historical practice does not support the consumer's theory of injury because his alleged exposure to identity theft does not have "a close relationship to a harm that has traditionally been regarded as providing a basis for a lawsuit in English or American courts."

The Consumer argued that a close historical relationship exists between his claimed injury and privacy torts involving a wrongful disclosure of information.  The Ninth Circuit rejected this argument because the Garage did not disclose the consumer's information to anyone besides the consumer.  Thus, it doesn't matter that "[a]ctions to remedy . . . invasions of privacy . . . have long been heard by American courts, and the right of privacy is recognized by most state" because this case does not involve any such privacy-based injury.  Van Patten, 847 F.3d at 1043.

The Ninth Circuit declared that in adopting the FCRA's credit card expiration date requirement, Congress did not "elevat[e] to the status of legally cognizable injuries concrete, de facto injuries that were previously inadequate in law."  Lujan, 504 U.S. at 578. Congress's creating a prohibition "does not mean that a plaintiff automatically satisfies the injury-in-fact requirement" just because "a statute grants [him] a statutory right and purports to authorize [him] to sue to vindicate that right." Id. Thus, the consumer cannot merely allege a FCRA violation "divorced from any concrete harm, and satisfy the injury-in-fact requirement of Article III." Id. 

The Ninth Circuit also discerned that Spokeo made it clear that simply because the FCRA authorizes citizen suits and statutory damages, does not mean that allegations of a statutory violation meet the standing requirement. Although, "Congress did not eliminate the FCRA's card expiration date requirement in the Clarification Act," that does not confer standing here because "the Clarification Act's finding that a disclosed expiration date by itself poses minimal risk and the law's temporary elimination of liability for such violations counsel that [the consumer] did not allege a concrete injury."  The Ninth Circuit therefore concluded that "[o]n balance, congressional judgment weighs against" finding standing here.

The Ninth Circuit next examined the consumer's claims that his statutory violation by itself establishes concrete harm.  First, the consumer argued that the FCRA creates a "substantive right," and invading this right "is an injury that confers standing." See Eichenberger v. ESPN, Inc., 876 F.3d 979, 982-84 (9th Cir. 2017). Second, the consumer argued that the law at least "establishes a procedural right, the violation of which creates a material risk of harm sufficient to confer standing." The Ninth Circuit rejected both claims.

The Court held that the consumer's argument that Congress "created a substantive right that is invaded by a statutory violation" fails because even assuming the substantive right exists, it depends on disclosing a consumer's private financial information to third-parties.  Here, the garage only disclosed the consumer's private information to the consumer, not to any third-party. Thus, the Ninth Circuit held, printing the receipt did not invade any substantive right.

The consumer's FCRA procedural violations claim also fails to confer standing, the Court continued, because it does not "entail a degree of risk sufficient to meet the concreteness requirement."  Spokeo, 136 S. Ct. at 1550. Here, Ninth Circuit noted, the consumer did not adequately allege actual harm or a material risk of harm because no other copy of the receipt existed, he did not lose the receipt, nobody stole the receipt, and no thief stole his identity.  The consumer also failed to allege any real risk of harm that was "not conjectural or hypothetical," because he could shred the receipt and eliminate any remaining risk of disclosure. Lujan, 504 U.S. at 560.

The Ninth Circuit also held that providing a credit card receipt to the card owner with the expiration date, without more, did not create "any concrete harm." Spokeo, 136 S. Ct. at 1550. Congress found that receipts like the consumers with the expiration date and a truncated credit card number "prevent a potential fraudster from perpetrating identity theft or credit card fraud." 122 Stat. at 1565. The consumer's potential identity theft exposure theory is therefore "too speculative for Article III purposes." See Missouri ex rel. Koster v. Harris, 847 F.3d 646, 654 (9th Cir. 2017) (quoting Lujan, 504 U.S. at 564 n.2).

The Ninth Circuit therefore affirmed the trial court's dismissal of the consumer's putative class action for lack of Article III standing.

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

Admitted to practice law in California, Nevada and Oregon


Sunday, March 11, 2018

FYI: Cal App Ct (4th Dist) Holds "Always On" Call Recorder May Violate Calif Invasion of Privacy Act

The California Court of Appeals, Fourth District, recently reversed summary judgment awarded in favor of the defendant based on violations of the California Invasion of Privacy Act, Penal Code § 630, et seq. ("Privacy Act"), which prohibits the recording of confidential communications without the knowledge or consent of the other party, and the intentional recording of communications using a cellular or cordless telephone.

In so ruling, the Appellate Court held that the defendant could not establish that it lacked the requisite intent to violate the Privacy Act, because the defendant's full-time "always on" recording system recorded all calls on the company phones regardless of whether the calls were made for personal or business purpose.

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

From March 2009 through May 2012, the defendant employed a full-time "always on" telephone call recording system that was activated when an employee placed a telephone call. 

The defendant recorded 317 of the plaintiff's telephone conversations in calls made to the plaintiff on the defendant's company telephone.  The plaintiff's daughter, who was employed by the defendant, placed 316 of the calls, and the plaintiff's friend, who was also an employee of the defendant, placed one of the calls.  None of these calls involved defendant's business.
In defendant's "Electronic Monitoring and Device Use" written policy in effect at the time, the defendant authorized its employees to use company telephones for personal calls, expressly advising them in writing that their "personal calls may be recorded." 

The plaintiff sued the defendant for alleged violations of the California Invasion of Privacy Act, Penal Code § 630, et seq. ("Privacy Act"). 

Specifically, the plaintiff alleged that defendant intentionally recorded her confidential telephone conversations in violation of: (1) § 632(a), which prohibits one party to a telephone call from intentionally recording a confidential communication without the knowledge or consent of the other party, and (2) § 632.7(a), which prohibits the intentional recording of a communication using a cellular or cordless telephone.

The defendant filed a motion for summary judgment, arguing that both causes of action fail, because the defendant did not intentionally record any of the plaintiff's telephone calls.  The defendant argued that it did not intend to record each specific conversation at issue, and the plaintiff cannot establish that the defendant had the requisite intent for purposes of violating section 632(a) or section 632.7(a).

The plaintiff argued that the defendant did not meet its initial burden on establish its lack of intent, and even if it did, there were triable issues of material fact that precluded summary judgment in its favor. 

The trial court granted the defendant's motion for summary judgment.  This appeal followed.

The issue on appeal was, for purposes of determining a potential violation of section 632(a) or section 632.7(a), whether the defendant intentionally recorded the plaintiff's conversations with the defendant's employees.

The defendant argued that it did not "intentionally" record the 317 challenged calls, as required for purposes of §§ 632(a) and 632.7(a), because the mere act of installing a recording device on company phones did not satisfy the requirements for intent under the eavesdrop statutes.  The defendant argued that these recordings were made "by chance."

However, in the Appellate Court's view, the defendant did not record the 317 confidential conversations by chance.  Instead, these recordings were made by a full-time "always on" telephone call recording system that was always in operation, and the defendant recorded all calls made from the designed company telephone.  Additionally, the Appellate Court found that the defendant authorized its employees to use company telephones for personal calls and advised them that their "personal calls may be recorded."

Thus, the Appellate Court held that the defendant failed to meet its initial burden on summary judgment, because its call recording system recorded all calls during the period of time when the defendant recorded the 317 conversations at issue.  Because the defendant recorded the calls that contained the plaintiff's confidential communication, the Appellate Court concluded that the defendant may have violated both sections 632(a) and section 632.7(a).

Notwithstanding the automatic recording of all calls on company phones, the defendant argued that these eavesdrop statutes were designed to protect individuals against eavesdroppers without penalizing the innocent use of recording equipment. 

As support for this argument, the defendant cited People v. Superior Court of Los Angeles County (1969) 70 Cal.2d 123 ("Smith"), and People v. Buchanan (1972) 26 Cal.App.3d 274 ("Buchanan").

In Smith, a criminal case, the issue was whether certain tape recorded conversations were obtained in violation of former section 653j, the predecessor to section 632 under consideration in this case.  People v. Superior Court of Los Angeles County (1969) 70 Cal.2d 123, 125.  The defendant business owner in Smith hired a private investigator to install and test a voice-activated tape recorder that would record all conversations, including telephone conversations in its offices, both automatically (noise-activated) and manually.  Id., at 126.  The defendant in Smith was charged with a crime, the tapes were potential evidence, and it was defendant who argued that the tape recordings were made in violation of the applicable statute.  Id., at 126-27.

The court in Smith rejected the criminal defendant's statutory interpretation that "intent to record" meant merely putting the recording equipment in operation.  Id., at 132.  Rather, the court in Smith held that "the mere intent to activate a tape recorder which subsequently 'by chance' records a confidential communication" was insufficient to constitute an offense.

However, as the Appellate Court explained, the California Supreme Court later summarized its conclusion in Smith as follows: 

Former section 653j, subdivision (a) "required an intent to record a confidential communication, rather than simply an intent to turn on a recording system apparatus which happened to record a confidential communication." 

Estate of Kramme (1978) 20 Cal.3d 567, 572, fn. 5.

Applying this standard, the Appellate Court determined that the defendant's recordings were unlike the recording in Smith.  The defendant in this case did not merely record confidential communications while testing its recording equipment.  Rather, the defendant knew that it was recording all calls on company phones and told its employees that that were authorized to use company phones for personal use and that their personal calls might be recorded. 

Thus, based on the different timing, frequency, and purpose for using the equipment that recorded the challenged calls, the Appellate Court distinguished Smith.

In Buchanan, a switchboard operator "inadvertently" overheard a telephone conversation during the moment in time that she was required to stay on the line to ensure a proper connection.  People v. Buchanan (1972) 26 Cal.App.3d 274, 281.  The court in Buchanan held that the operator did not intentionally eavesdrop on a telephone call in violation of the Privacy Act.  Id., at 288.

The Appellate Court easily distinguished Buchanan because in the Court's view there was nothing inadvertent or momentary about the defendant's recording of the 317 challenged calls.  The Court found that the defendant was purposefully recording all calls on the company telephone lines from which the 317 challenged calls were recorded.  Moreover, the defendant's disclosures regarding the practice of recording calls, and the plaintiff's knowledge of the company policy of recording calls, weighed against a lack of intent for purposes of section 632(a) or section 632.7(a). 

In sum, the Appellate Court concluded that the defendant did not meet its burden of establishing as a matter of law that it did not have "knowledge to a substantial certainty that [its] use of the equipment w[ould] result in the recording of a confidential conversation" of an employee and a third party like the plaintiff.  Smith, 70 Cal.2d at 134.

Accordingly, the Appellate Court reversed the judgment, and instructed the trial court on remand to enter an order denying the defendant's motion for summary 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

Admitted to practice law in California, Nevada and Oregon


Thursday, February 22, 2018

FYI: Cal Sup Ct Holds Non-Intervening Unnamed Class Member Has No Right to Appeal

The California Supreme Court recently held that unnamed class members do not become parties of record under Cal. Code of Civil Procedure section 902, with the right to appeal the class settlement, judgment or attorney fees award, unless they formally intervene in the class litigation before the action is final.

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

In 2008, the plaintiff filed a class action law suit against defendant, alleging the furniture company committed numerous violations of the California Song-Beverly Credit Card Act, Cal. Civ. Code § 1747, et seq. , when it asked for and recorded zip codes from customers who used credit card in making purchases. 

As you may recall, Cal. Code Civ. Proc. § 1747.08(a) prohibits businesses from requiring the cardholder to write any personal identification information as a condition to accepting credit card payment for goods or services.

The trial court certified the case as a class action and appointed class representatives and class counsel.

In June 2013, a notice to potential class members advised them of the pending class action and presented them with the following options: (1) they could remain as part of the class and be bound by the judgment, or (2) they could exclude themselves from the class (opt out) and not be bound by the judgment. 

An unnamed class member (the "Appellant") received the June 2013 class action notice, but did not join the class as a party or opt out at that time.  Instead, Appellant's attorney filed a notice of an appearance on her behalf.

Following a bench trial, the trial court found defendant liable for "as many as" 1,213,745 violations of the California Song-Beverly Credit Card Act, set a penalty of $30 per violation, and rendered a judgment against the defendant in the amount of $36,412,350. 

The parties met and agreed that the judgment was based on the maximum number of violations $30 per violation, and that sum would be treated as a common fund inclusive of any attorney fees, costs, and class representative enhancements.  The Appellant never moved to intervene during the bench trial on the merits by filing a formal complaint in intervention under Cal. Code Civ. Proc. § 387.

The class counsel submitted a motion for attorney fees of nearly $2.7 million.  The defendant agreed not to oppose the fee award if class counsel sought no more than 25 percent of the total recovery.

The Appellant was served with the attorney fees motion, but did not object to the proposed total fee award.  Instead, she filed a "Request for Clarification" and asked to appear telephonically at the settlement fairness hearing on the fee proposal.  The request stated that "[t]he parties' pleadings do not indicate that class members were notified of the settlement of the attorney fee issue and of the hearing on September 5, 2014, to approve [c]lass [c]ounsel's fee request."  The trial court permitted the Appellant to file her request.

In September 2014, the trial court held a fairness hearing on the attorney fees application.  The Appellant objected to the court's consideration of the proposed fee award, because the class members were not given notice of their right to appear and comment on the proposed attorney fees settlement following bench trial on the merits.

The trial court noted, and the Appellant's counsel acknowledged, that there was no authority to support the claim that the court should have given the class additional notice (beyond the initial class certification notice) of the subsequent settlement fairness hearing on the proposed attorney fees award. 

The Appellant also argued that the trial court was required to calculate fee award using the "lodestar multiplier" approach, rather than a "percentage of the fund" approach, but did not argue that the fee ward was excessive.

After the hearing on the settlement of the proposed fee award, the trial court issued an order denying the Appellant's request for clarification and approved the fee and costs requests.  The trial court filed its final judgment and class counsel distributed a notice of the judgment to class members.

The Appellant filed a notice of appeal to the attorney fees award.  She renewed her claim that in failing to provide class members with notice of the fee negotiations and proposed settlement with defendant, class representatives and class counsel breached their fiduciary duties to the class.  The Appellant also reiterated her claims that the trial court should have used the lodestar multiplier approach to calculate the fee award.

On appeal, the class representatives argued that the Appellant lacked standing to file her appeal because she was neither a "party" nor "aggrieved" by the trial court's alleged erroneous judgment, as required under Cal. Code Civ. Proc. Section 902 and Eggert v. Pac. States S. & L. Co. (1942) 20 Cal.2d 199, 201.

The Appellate Court dismissed the Appellant's appeal for lack of standing, concluding that it was bound to follow Eggert under Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450, 450 (decisions of state supreme court are binding on all other state courts; courts of inferior jurisdiction may not overruled higher court decisions).

The California Supreme Court granted Appellant's petition for review on the right to appeal issue.

As you may recall, the class action vehicle is codified in Cal Code Civ. Proc. Section 382, and its procedural rules for class certification, notice, settlement, and judgment appear in California Rules of Court, rules 3.760-3.771. 

Case law imposes fiduciary duties on the trial courts, class counsel, and class representatives, who must ensure the action proceeds in the class members' best interest.  The class action structure relieves the unnamed class members of the burden of participating in the action.  Earley v. Superior Court (2000) 79 Cal.App.4th 1420, 1434.  Unnamed parties may be considered "parties" for the limited purpose of discovery, but those same unnamed parties are not considered "parties" to the litigation.  National Solar Equipment Owners' Assn. v. Grumman Corp. (1991) 235 Cal.App.3d 1273, 1282.

California Rules of Court, Rule 3.769 requires class representatives to notify class members of a pending settlement on the merits, and provide them with the opportunity to object at the final settlement fairness hearing. 

Rule 3.771(b) requires that notice of a pending judgment be provided to class members, and rule 3.769(f) provides that "notice of the final approval hearing must be given to the class members in the manner specified by the court.  The notice must contain an explanation of the proposed settlement and procedures for class members to follow in filing written objections to it and in arranging to appear at the settlement hearing and state any objections to the proposed settlement."

Under California rules, an unnamed class members may become parties of record to class actions in one of two generally acceptable ways. 

First, they may file a timely complaint in intervention before final judgment that set forth the grounds upon which the intervention rests.  See Cal. Code Civ. Proc. § 387.  If parties seek permissive intervention under section 387(a), they must show they have an interest in the litigation.  For intervention as a matter of right under section 387(b), intervenors must show they are class members whose interests are not adequately represented by the existing parties.

Second, although not a method of intervention, an unnamed party to the action may also become a named party by filing an appealable motion to set aside and vacate the class judgment under Cal. Code Civ. Proc. ' 663.

The class representatives argued that because the Appellant was an unnamed class member who never exercised her right to intervene during the class action by filing a complaint in intervention under Cal. Code Civ. Proc. § 387, she never became a party of record and the court should dismiss her appeal under Eggert.

The Appellant urged the Court to overrule Eggert as a "remnant of a bygone era" that is out of sync of the current class action practice.  She argued that Eggert's bright-line rule has been superseded by several more recent appellate court decisions that were influenced by the 1966 amendments to rule 23 of the Federal Rules of Civil Procedure, which created the federal opt-out damages class action.  These amendments, according to the Appellant, encouraged a rise in settlement class actions.

The Appellant argued that Rule 23 is persuasive authority that courts should not require unnamed class members to formally intervene in the underlying action to gain the right to appeal a trial court's order concerning the unnamed class members' objections to the proposed settlement.

As you may recall, the plaintiff in Eggert, as holder of a "Fidelity Definite Term Certificate" initiated a class action on behalf of himself and approximately 1,500 certificate holders against defendant in the amount of over $1.8 million.  Eggert, 20 Cal.2d at 199-200.  The court in Eggert awarded judgment to the plaintiff, but reserved jurisdiction to determent the amount of fees owed.  Id., at 200.  The complaint in Eggert incorporated by reference an exhibit containing the names of the outstanding certificate holders, as well as each certificate's number and face value.  Id.

The court in Eggert appointed a receiver to facilitate payment of the judgment and directed both the plaintiff and interested persons to show cause why it should not order fixed attorney fees.  Id.  At the hearing on the plaintiffs motion for the receiver to pay the judgment after deducting the attorney fees, an attorney representing the objectors appeared and contested the petition's attorney fees provision.  Id.  After the court in Eggert granted the petition in the plaintiff's favor, both objectors filed an appeal on behalf of themselves and all other certificate holders who were without legal representation.  Id.

Eggert dismissed the objectors' appeal, noting that "it is a settled rule of practice in this state that only a party to the record can appeal."  Id.  Eggert refused to grant party status to the objectors (who were never named parties of record to the class action), even though their names and interest in the action were included in the exhibit to the complaint, and their attorney had appeared at the hearing on petition for payment of attorney fees to object to the fee amount.  Id., at 201.

As the court in Eggert explained, the "[a]ppellants had ample opportunity even after the court had made its orders to become parties of record by moving to vacate the orders in which they objected.  They could have then appealed from the order denying the motion."  Id.

The Appellant relied on appellate court rulings that incorporated amended Rule 23 to give unnamed class member objectors who informally objected to settlement during fairness hearings the right to appeal their overruled objections.  See, e.g., Consumer Cause, Inc. v. Mrs. Goochs Natural Food Markets, Inc. (2005) 127 Cal.App.4th 387, 395-396 (class members who appeared at fairness hearing and objected to settlement had right to appeal even though hat member did not intervene in the action); Trotsky v. Los Angeles Fed. Sav. & Loan Assn. (1975) 48 Cal.App.3d 134, 137 (member of affected class whose objections to settlement were overruled was aggrieved party with right to appeal); Wershba v. Apple Computer, Inc. (2001) 91 Cal.App.4th 224, 253 (followed Trotsky, held unnamed class members who appeared at final fairness hearing and objected to proposed settlement had standing to appeal); Roos v. Honeywell Int'l., Inc. (2015) 241 Cal.App.4th 1472, 1486 (relied on Wershba for objector standing to appeal, but denied appeal to objectors who could not establish class membership).

The California Supreme Court analyzed these rulings as deriving their logic from Trotsky, which were decided after the 1966 amendments to Rule 23 and addressed the right of an unnamed class member to object to a settlement and prosecute an appeal. 

However, the California Supreme Court noted that Trotsky failed to examine section 902 s additional requirement that the objector must also be a "party" of record to the class action to gain the right to appeal the trial court's judgment.  In the Court's view, Trotsky never attempted to reconcile its conclusion with Eggert's rule that an objector must be an aggrieved party to gain the right to appeal an order of judgment in a class action.

Therefore, the Court held that Trotsky's failure to address section 902's requirements for the right to appeal a settlement, or to distinguish or otherwise reconcile its holding with Eggert, rendered the opinion unpersuasive and disapproved it along with its progeny.

The Appellant argued that even if Trotsky misinterpreted section 902's rules to establish the right to appeal a trial court's dismissal of informal objections to a settlement, the United States Supreme Court rejected the requirement of intervention in a class action in Devlin v. Scardelletti (2002) 536 U.S. 1.

In Devlin, the court held that unnamed class members of a mandatory class action (with no option to opt out), who made timely objections to the class settlement at the fairness hearing had a right to appeal without first intervening in the action because they were bound by the settlement.  Id.  A motion to intervene under Rule 24, according to the Devlin court, would serve the same purpose as an objection.  Id., at 11.  Because the "petitioner had no ability to opt out of the settlement" the court in Devlin held that the petitioner's only means of protecting himself from being bound by a disposition of his rights was to file an appeal.  Id., at 10-11.

However, the California Supreme Court noted that federal appellate courts have reached inconsistent conclusions on the issue of whether Devlin's rule applied to all class proceeding, including opt-out class actions.  Some courts limited Devlin to cases in which the unnamed class members have no ability to opt out of the class and either objected or intervened during the settlement proceedings.  See, e.g., Day v. Persels & Associates, LLC (11th Cir. 2013) 729 F.3d 1309, 1318-1319, 1321; Snell v. Allianz Life Ins. Co. of North America (8th Cir. 2003) 327 F.3d 665, 670, fn. 2.

Other courts have held that Devlin applied to all class actions, including opt-out class actions filed under Rule 23(b)(3).  See, e.g., Nat'l Ass 'n of Chain Drug Stores v. New England Carpenters Health Benefits Fund (1st Cir. 2009) 582 F.3d 30, 39-40; Fidel v. Farley (6th Cir. 2008) 534 F.3d 508, 512-13; In re Integra Realty Resources, Inc. (10th Cir. 2004) 354 F.3d 1246; Churchill Village, LLC v. Gen Elec. (9th Cir. 2004) 361 F.3d 566, 572-73.

The California Supreme Court was not persuaded by the courts that have adopted Devlin as their rule, because class members in California can opt out of the class action litigation and pursue their own litigation against the same class defendant, by timely intervention in the action or moving to set aside the judgment.  According to the Court, the California Legislature chose to continue Eggert's rule despite changes in federal class action rules.

The Appellant alternatively argued that because a class action settlement is generally binding on all class members (assuming class representative have complied with due process regarding notice and adequate representation), the Court should create an exception to Eggert that allows members to appeal their denied objections to settlement without formal intervention. 

The California Supreme Court rejected the argument because Eggert's bright-line rule promotes judicial economy by providing clear notice of a timely intent to challenge the class representative's settlement action.  Formal intervention also enabled the trial court to review the motion to intervene in a timely manner. 

In the Court's view, the Appellant had the opportunity to intervene in the trial court proceedings but chose not to do so.  Instead, she made a strategic choice to wait and see if she agreed with the settlement amount and attorney fees agreement.  By filing an appeal without first intervening in the action, the Court concluded that the Appellant never became an "aggrieved party" of record to the action as required by California law.

Accordingly, the California Supreme Court affirmed the judgment of the lower courts.

Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
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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
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Admitted to practice law in California, Nevada and Oregon