FYI: Cal App Ct (2nd Dist) Upholds Over 60% Reduction on Consumer Plaintiff's Attorney Fee Award

The Court of Appeals of California, Second District, recently upheld a trial court's ruling reducing the amount of a plaintiff's attorney's fee award in a consumer litigation action to less than 40% of the amount sought by the plaintiff's counsel.

A copy of the opinion is available at:  Link to Opinion.  The opinion was later revised slightly and certified for publication:  Link to Opinion

A car buyer sued the manufacturer of a used car she purchased under California's Song-Beverly Consumer Warranty Act, Civ. Code, § 1790 et seq., for alleged defects that the manufacturer refused to repurchase. The parties settled the litigation, with the manufacturer agreeing to pay the purchaser plaintiff $85,000 plus reasonable attorney fees and expenses.

The plaintiff purchaser moved for a fee award using the lodestar method that consisted of a $127,792.50 base amount with a 1.5 multiplier, for a total of $191,688.75. However, the trial court awarded only $73,864 in fees.

This appeal followed.

Just as with many consumer statutes that allow the successful consumer to recover attorney's fees, in an action under California's Song-Beverly Consumer Warranty Act, the prevailing buyer has the burden of "showing that the fees incurred were `allowable,' were `reasonably necessary to the conduct of the litigation,' and were `reasonable in amount'."

The Appellate Court noted the extensive case law establishing that:

- The "trial judge is the best judge of the value of professional services rendered in his [or her] court, and while his [or her] judgment is of course subject to review, it will not be disturbed unless the appellate court is convinced that it is clearly wrong."

- In addition, "the lodestar method vests the trial court with the discretion to decide which of the hours expended by the attorneys were `reasonably spent' on the litigation, and to determine the hourly rates that should be used in the lodestar calculus."

- While the trial court has broad discretion to increase or reduce the proposed lodestar amount based on the various factors identified in case law, including the complexity of the case and the results achieved, the court's analysis must begin with the `actual time expended, determined by the court to have been reasonably incurred.'"  

- "A trial court may not rubber stamp a request for attorney fees, but must determine the number of hours reasonably expended."

- In evaluating whether the attorney fee request is reasonable, the trial court should consider "`whether the case was overstaffed, how much time the attorneys spent on particular claims, and whether the hours were reasonably expended.'"

- "Reasonable compensation does not include compensation for `padding' in the form of inefficient or duplicative efforts." 

- "A reduced award might be fully justified by a general observation that an attorney overlitigated a case or submitted a padded bill or that the opposing party has stated valid objections.'"

- "In making its calculation [of a reasonable hourly rate], the court may rely on its own knowledge and familiarity with the legal market, as well as the experience, skill, and reputation of the attorney requesting fees, the difficulty or complexity of the litigation to which that skill was applied, and affidavits from other attorneys regarding prevailing fees in the community and rate determinations in other cases."

The Appellate Court also noted that "it is inappropriate and an abuse of a trial court's discretion to tie an attorney fee award to the amount of the prevailing buyer/plaintiff's damages or recovery in a Song-Beverly Act action.'"  A "'rule of proportionality' would make it difficult for individuals with meritorious consumer rights claims to obtain redress from the courts when they cannot expect a large damages award."

Pointing to various statements by the trial judge at the hearing on attorney's fees, the plaintiff argued that the trial court engaged in a prohibited proportionality analysis in setting the attorney fee award.

However, the Appellate Court noted that "the trial court's final written order in the instant case did not suggest in any respect that the court reduced the attorney fee award based on the size of the settlement award."

Instead, the Appellate Court noted that the trial court's order indicated a fee reduction was warranted because it was unreasonable to have 6 different lawyers from 2 different law firms for the plaintiff, "staffing a case that did not present complex or unique issues, did not involve discovery motions, and did not go to trial." In addition, the trial court found the attorneys' hourly rates of $500 per hour to over $600 per hour to be unreasonably high.

The plaintiff also argued that "the trial court arbitrarily cut 83.5 hours of reasonably incurred fees billed by six attorneys who worked on the case, citing concerns about inefficiencies and duplication," but without referencing "any specific examples of inefficiencies or redundancies as a result of the number of attorneys staffing the case."

The Appellate Court noted that "[a]n across-the-board reduction in hours claimed based on the percentage of total time entries that were flawed, without respect to the number of hours that were actually included in the flawed entries, is not a legitimate basis for determining a reasonable attorney fee award."

Nevertheless, the Appellate Court noted that the trial court "made clear that its approach was designed to reduce the total award to the reasonable amount that would have been billed had there been an appropriate number of attorneys on the case. The court could properly have made an across-the-board reduction of 30 percent to accomplish the same purpose."

Therefore, the Appellate Court rejected the plaintiff's argument here as well, holding that "[p]lainly, it is appropriate for a trial court to reduce a fee award based on its reasonable determination that a routine, non-complex case was overstaffed to a degree that significant inefficiencies and inflated fees resulted." 

The plaintiff also argued the trial court improperly reduced the hourly rates of $500 to $650 per hour for her attorneys to $300 per hour, even though she "submitted ample evidence, which Defendant failed to rebut, that her counsel's rates were reasonable and commensurate with other consumer attorneys' rates."

However, the Appellate Court again disagreed, noting that "even if Plaintiff established that her attorneys' rates were generally commensurate with other consumer law attorneys with the same level of experience and skill, Plaintiff ignores that there are a number of factors that the trial court may have taken into consideration in determining that reductions in the attorneys' hourly rates were warranted. The court reasonably could have reduced the rates based on its finding that the matter was not complex; that it did not go to trial; that the name partners were doing work that could have been done by lower-billing attorneys; and that all the attorneys were doing work that could have been done by paralegals."

In sum, the Appellate Court held that the plaintiff failed to meet "her burden to show an abuse of discretion in the trial court's reduction of the attorneys' hourly rates."

Therefore, the Appellate Court affirmed that trial court's order awarding fees and costs, and also allowed the defendant manufacturer to recover its costs on appeal.

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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FYI: Cal App Ct (2nd Dist) Rejects Claim That Loan Assignment During Default Was Void

The Court of Appeal for the Second District of California recently affirmed the dismissal of a borrower's claims for wrongful foreclosure alleging that the assignment of his mortgage to the foreclosing entity was invalid.

In so ruling, the Second District rejected the borrower's argument that a mortgage cannot be assigned to another entity while the loan is in default as illogical and incorrect, in part because this reasoning would allow borrowers to prevent lenders from assigning debt by refusing to make payments.

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

A borrower took out a mortgage loan secured by a deed of trust to his home (the "Loan").  After the initial lender was closed and placed into receivership by the federal government, the FDIC as receiver transferred the Loan to a new entity ("Assignor"), who in turn assigned the Loan to yet another entity ("Assignee") and recorded the assignment. 

Thereafter, a substitution of trustee was recorded declaring that Assignee was substituted for a new trustee ("Trustee") on the Loan.  The Assignee and Trustee foreclosed the Borrower's home in April 2017.

The borrower filed a wrongful foreclosure action against the Assignee and Trustee alleging that they had no rightful claim to foreclose on his home on the basis that: (i) the initial lender sold his mortgage to entities that were not named defendants to the foreclosure, and; (ii) that the Loan was not legally transferred, conveyed or assigned to Assignee because the borrower defaulted on the Loan nearly eight years prior to the time of assignment. 

The trial court sustained the Assignee and Trustee's demurrer to the borrower's complaint and the instant appeal followed.

On appeal, the appellate court reviewed the Borrower's chief argument that a financial institution may not validly assign a mortgage loan to another entity while the loan is in default, and that such an assignment is "void." 

Under California law, it is not enough for a homeowner merely to allege a mortgage assignment was voidable. See, e.g., Yhudai v. IMPAC Funding Corp. (2016) 1 Cal.App.5th 1252, 1256.  Rather, the homeowner must allege facts supporting a legally viable theory as to why the challenged assignment is void as a matter of law. See, e.g., Kalnoki v. First American Trustee Servicing Solutions, LLC (2017) 8 Cal.App.5th 23, 44; cf. Yvanova v. New Century Mortgage Corp. (2016) 62 Cal.4th 919, 929–930 [distinguishing between void and 4 voidable contracts].

Here, the Appellate Court noted that complaint asserted without any logical basis or supporting legal authority that a borrower, by refusing to pay, can prevent a lender from assigning the debt. 

Examining the Borrower's argument that the assignment was void, the Second District was unpersuaded by this "strange suggestion," concluding that the Borrower's argument was legally incorrect because he did not explain how the assignments were void as a matter of law.  See, e.g., Mendoza, supra, 6 Cal.App.5th at pp. 811– 820.). 

The other five claims raised in the borrower's complaint failed for not being within the jurisdiction of the appellate court (federal claims dismissed upon removal as invalid and remanded to state court), forfeited as not raised in the opening brief (claims for violation of Civil Code section 2934 or for cancellation of written instruments), or for want of an underlying claim (claim for unfair competition).

Because the Borrower failed to provide a logical basis for his argument suggesting that the assignment of his mortgage loan while in default was void, nor any supporting legal authority, the Second District concluded that the trial court's judgment sustaining the demurrer without leave to amend was proper, and 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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The U.S. Court of Appeals for the Ninth Circuit recently affirmed a trial court's summary judgment ruling in favor of the financial services defendants in an action to rescind the mortgage under the federal Truth in Lending Act, 15 U.S.C. § 1601, et seq. (TILA).

In so ruling, the Ninth Circuit held that the plaintiff consumer did not have a right of rescission under TILA because he previously quitclaimed his interest in the property to his ex-wife, and his new loan to acquire the property from his ex-wife was a "residential mortgage transaction".

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

The plaintiff and his now ex-wife obtained title to the subject property in 1990.  In 2003, Plaintiff quitclaimed the property to his wife, and she then encumbered the property with a series of deeds of trust listing her as the sole owner.

The couple divorced in 2007.  The divorce judgment awarded the property to Plaintiff, and ordered him to among other things "immediately refinance the mortgage owning on said property in order to remove Wife's name from said financial obligation."  The judgment also ordered Plaintiff to pay his ex-wife $100,000.

The lender extended a loan to Plaintiff, who executed a deed of trust securing the note on the property.  Plaintiff used the proceeds from the loan to pay off his ex-wife's outstanding loan balance and to satisfy the money judgment. 

Plaintiff filed suit against the lender and its successors (Defendants) seeking rescission of the loan and other relief.  The trial court dismissed his claim for rescission as time-barred, and granted summary judgment against him on his claims for declaratory and injunctive relief and damages. 

The Ninth Circuit vacated the trial court's judgment and remanded, holding that Plaintiff's letter to the loan servicer gave proper, timely notice of rescission within three years of the loan transaction under TILA.

On remand, the trial court again granted summary judgment in favor of Defendants, holding that Plaintiff had no statutory right under TILA to rescind the mortgage because his loan was a residential mortgage transaction.

As you may recall, TILA defines a residential mortgage as "a transaction in which a mortgage is created or retained against the consumer's dwelling to finance the acquisition or initial construction of such dwelling."  15 U.S.C. § 1602(x).

The trial court concluded that, although Plaintiff had "a partial interest in the property from 1990 to 1997 and was the sole owner from 1997 to 2003, his interest in the property was fully extinguished in 2003 when he conveyed the entirety of his interest to his wife via quitclaim deed."

The trial court further found that pursuant to his obligations under the divorce judgment, Plaintiff entered into the loan in question specifically to acquire ownership interest in the property, and thus "[the loan] was a residential mortgage transaction as to which TILA provide[d] no statutory right of rescission."

This appeal followed. 

Plaintiff argued that the issue of whether his loan was a residential mortgage transaction was not properly before the trial court on remand because Defendants waived the issue by failing to raise it until after the prior appeal, and because defendants' argument was barred by law of the case and the Ninth Circuit's mandate in the prior appeal.

The Ninth Circuit disagreed, holding that "a defendant need not raise every possible argument in a motion for summary judgment and may make a different argument on remand if a grant of summary judgment in its favor is reversed on appeal."

In the prior appeal, the Ninth Circuit never ruled on the issue whether Plaintiff had a right of rescission.  Instead, it merely held that Plaintiff's letter to the servicer provided sufficient notice that he was exercising his right to rescind, and the trial court therefore erred in dismissing his claims for rescission on the ground of improper notice. 

Thus, the Ninth Circuit held that "neither law of the case nor the mandate on appeal barred the district court from addressing defendants' 'residential mortgage transaction' argument."

Plaintiff also argued that the trial court misinterpreted the statute by including in the definition of a residential mortgage transaction an initial acquisition and a reacquisition of the property.

Plaintiff cited the Official Staff Interpretations to Regulation Z, which provides that the term residential mortgage transaction "does not include a transaction involving a consumer's principal dwelling if the consumer had previously purchased and acquired some interest to the dwelling, even though the consumer had not acquired full legal title."  12 C.F.R. Pt. 226, Supp. I, Subpt. A § 226.2(a)(24)-5(i) ().

The Ninth Circuit observed that the "refinance" ordered by the divorce judgment allowed Plaintiff to pay off his ex-wife's outstanding mortgage and then made it possible for Plaintiff to acquire the property in his own right.  The loan was not a refinance where the borrower changed from the ex-wife to Plaintiff, and Plaintiff did not acquire title until the day after he signed the loan. 

Thus, the Ninth Circuit held, the trial court correctly concluded that the Official Staff Interpretations to Regulation Z refers to a situation where the borrower increases an existing ownership interest using loan proceeds, rather than the situation where the borrower reacquires a property after he had given up all ownership interest.

Next, Plaintiff argued that the 2003 quitclaim deed did not establish his subsequent lack of ownership interest in the property because upon the filing of the dissolution of marriage, the property took on communal attributes and he acquired a "species of co-ownership." 

The Ninth Circuit held, without deciding the issue, that assuming Plaintiff gained an interest in the property by operation of Oregon law, he still "acquired" his interest for purposes of TILA's "residential mortgage transaction" provision.  As the Ninth Circuit explained, the plain language of the statute requires a transaction in which a mortgage is created "to finance the acquisition or initial construction of such dwelling."

Plaintiff also argued that the language used in the loan documents showed that he already owned an interest in the property before he took out the loan.

However, the Ninth Circuit stated that the lender's characterization of the transaction was not determinative, and even if Plaintiff believed the purpose of the loan was to comply with the divorce judgment, the fact remained that he had no interest in the property when he took out the mortgage.

Accordingly, the Ninth Circuit affirmed the trial court's grant of summary judgment in favor of the Defendants.

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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The U.S. Court of Appeals for the Ninth Circuit recently vacated an order sua sponte remanding to state court a putative class action removed under the federal Class Action Fairness Act.

In so ruling, the Ninth Circuit held:

1.         When a notice of removal plausibly alleges a basis for federal court jurisdiction, a federal trial court may not remand the case back to state court without giving the defendants an opportunity to demonstrate that the jurisdictional requirements were satisfied;

2.         The amount in controversy may be based on reasonable assumptions tied to the allegations in the complaint;

3.         When a statute or contract provides for the recovery for attorneys' fees, prospective attorneys' fees must be included in the assessment of the amount in controversy; and

4.         The defendants' summary judgment motion in state court, asserting that the plaintiffs' claims were barred by a release from a prior class action settlement, did not defeat federal court jurisdiction. 

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

An employee filed a putative class action against her employer in state court, alleging that the employer failed to compensate its employees for wages and missed meal breaks and failed to issue accurate itemized wage statements, all in violation of state wage and hour laws.

The employer removed the case to federal court alleging minimum diversity jurisdiction under the federal Class Action Fairness Act (CAFA). 

As you may recall, a federal trial court has original jurisdiction under CAFA if:  (1) any member of the class is a citizen of a state different from any defendant, (2) the class contains at least 100 members, and (3) the amount in controversy exceeds $5,000,000.  28 U.S.C. § 1332(d)(2), (d)(5)(B).

To show minimum diversity, the employer alleged that it was a citizen of Maryland and Delaware and the employee was a citizen of California.  To satisfy the class size requirement, the employer provided a declaration stating that it employed at least 2193 nonexempt employees during the period defined in the complaint.

To satisfy the amount in controversy requirement, the employer relied on its employee data (e.g., number of nonexempt employees, hourly rate of pay, and number of workweeks worked by putative class members), and then made assumptions about the frequency of the violations alleged in the complaint.

Using assumed violation rates, the employer alleged a potential amount in controversy exceeding $15 million, with its most "conservative estimate" totaling over $5.5 million, including attorneys' fees (which the employer asserted should be included to in the calculation).

After the employer filed the notice of removal, the trial court issued an order sua sponte remanding the case to state court.  The trial court stated that the employer's calculations of the amount in controversy was " unpersuasive"  and rested on "speculation and conjecture."

The trial court faulted the employer for not offering evidentiary support for its assumptions, and concluded that "prospective attorneys' fees are too speculative" to be included in the amount in controversy.

The litigation proceeded in state court.  The employer filed a motion for summary judgment, arguing that a release from a related class action settlement barred all of the employee's claims.

The employer filed a timely petition for permission to appeal under 28 U.S.C. § 1453(c)(1), which the Ninth Circuit granted.

The employer argued that the trial court imposed an erroneous burden of proof by sua sponte remanding the case to state court without allowing it an opportunity to support its allegations with evidence.

The Ninth Circuit observed that "when a defendant seeks federal-court adjudication, the defendant's amount-in-controversy allegation should be accepted when not contested by the plaintiff or questioned by the court."  Dart Cherokee Basin Operating Co., LLC v. Owens, 574 U.S. 81, 87 (2014).

The appellate court noted that the trial court did not conclude that the employer's allegations were implausible.  Instead, the trial court stated that the employer failed to meet its burden of proving the amount in controversy with evidence. 

The Ninth Circuit also noted that a notice of removal "need not contain evidentiary submissions."  Dark Cherokee, 574 U.S. at 84.  "[W]hen a defendant's assertion of the amount in controversy is challenged and both sides submit proof, the court decides by a preponderance of the evidence whether the amount-in-controversy requirement has been satisfied."  Id., at 88.

Thus, the appellate court held that the trial court's sua sponte order deprived the employer of "a fair opportunity to submit proof."

Next, the employer argued that the trial court erred in disallowing its assumptions in its estimate of the amount in controversy.

The Ninth Circuit explained that a removing defendant is permitted to rely on "a chain of reasoning that includes assumptions."  Ibarra v. Manheim Invs., Inc., 775 F.3d 1193, 1199 (9th Cir. 2015).  However, "assumptions cannot be pulled from thin air but need some reasonable ground underlying them."  Id.

The employee alleged that the employer " routinely" failed to provide overtime wages and compensation for rest and meal breaks.  The employer assumed six minutes of unpaid overtime per day and one missed rest break per week.

The employer assumed that 100% of wage statements were inaccurate because the employee alleged that "[n]ot one of the paystubs that Plaintiffs received complied with Labor Code § 226b."

Based on the allegations in the complaint, and noting that the amount in controversy was merely an estimate of the total amount in dispute, the Ninth Circuit determined that the trial court mischaracterized the employer's assumptions as being "speculation and conjecture."

The employer also argued that the trial court erred by "refusing to consider prospective attorneys' fees in the amount in controversy."

The Ninth Circuit agreed, stating that "[w]e have long held (and reiterated [in early 2018]) that attorneys' fees awarded under fee-shifting statutes or contracts are included in the amount in controversy."  Fritsch v. Swift Transp. Co. of Ariz., LLC, 899 F.3d 785, 794 (9th Cir. 2018).

Because the complaint sought recovery of attorneys' fees, and because there was no dispute that at least some of the California wage and hour laws in the complaint entitle a prevailing plaintiff to an award of attorneys' fees, the Ninth Circuit held that the trial court should not have excluded prospective attorneys' fees from the amount in controversy.

The employee argued that the employer's summary judgment motion in state court defeated federal court jurisdiction, because it argued that her claims were barred by a release from a prior class action settlement.

The Ninth Circuit disagreed, explaining that post-filing developments do not defeat jurisdiction if jurisdiction was properly invoked as of the time of filing of the complaint.  Further, the strength of any defense indicated the likelihood of the plaintiff prevailing, but is irrelevant to determining the amount at stake in the litigation.

The employee also suggested that jurisdiction was defeated because she stipulated that the amount in controversy did not exceed $5,000,000.

However, the U.S. Supreme Court has held that when "a class-action plaintiff stipulates, prior to certification of the class, that he, and the class he seeks to represent, will not seek damages that exceed $5 million in total," the trial court should ignore the stipulation when assessing the amount in controversy.  Std. Fire Ins. Co. v. Knowles, 568 U.S. 588, 590, 596 (2013).

Accordingly, the Ninth Circuit vacated the trial court's order refusing federal court jurisdiction, and remanded for further proceedings.

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

ALABAMA   |   CALIFORNIA   |   FLORIDA   |   ILLINOIS   |   MARYLAND   |   MASSACHUSETTS   |   NEW JERSEY   |   NEW YORK   |   OHIO   |   PENNSYLVANIA   |   TEXAS   |   WASHINGTON, D.C.