La Sala v. American Sav. & Loan Assn.

• Decision Date: 21 October 1971
• Court: California Supreme Court
• Parties: , 489 P.2d 1113 Frank LA SALA et al., Plaintiffs and Appellants, v. AMERICAN SAVINGS & LOAN ASSOCIATION et al., Defendants and Respondents. L.A. 29851. In Bank

Page 849

97 Cal.Rptr. 849

5 Cal.3d 864, 489 P.2d 1113

Frank LA SALA et al., Plaintiffs and Appellants, v. AMERICAN SAVINGS & LOAN ASSOCIATION et al., Defendants and Respondents.

L.A. 29851.

Supreme Court of California,

In Bank.

Oct. 21, 1971.

Rich & Ezer and Robert H. Somers, Beverly Hills, for plaintiffs and appellants.

Thomas C. Lynch, Atty. Gen., Anthony C. Joseph and Andrea Sheridan Ordin, Deputy Attys. Gen., as amici curiae on behalf of plaintiffs and appellants.

Daniel S. McDonald, Daniel L. Shafton, Mark Brandler, Beverly Hills, and John R. Hetland, Berkeley, for defendants and respondents.

TOBRINER, Justice.

Plaintiffs Frank La Sala, Grace La Sala, and Dorothy Iford brought a class action against American Savings & Loan Association, ¹ (hereinafter 'American') alleging that a provision in American's form of trust deed, which permits American to accelerate if the borrower executes a junior encumbrance on the secured property, constituted an invalid restraint upon alienation. American offered to waive enforcement of that provision as to Iford and the La Salas. The superior court then held that by reason of this waiver the named plaintiffs no longer represented the class, and dismissed the action.

We hold that whenever the dismissal of a class action stems from a defendant's grant of benefits to the representative plaintiffs, which are not provided to the class as a whole, the court may not dismiss the action without notice to the class; we therefore conclude that the court erred in the dismissal in the present case. We further inquire into the defendants' contentions that we should affirm the superior court's order of dismissal on the ground that the action is not a proper class action or that plaintiffs cannot prevail on the merits. We reject these contentions, and reach the following conclusions: (1) Although the named plaintiffs are not members of the class that they purport to represent as the complaint now stands, this fact cannot justify a dismissal of the action without affording plaintiffs an opportunity to amend their pleading. (2) Plaintiffs' reliance upon the contention that American's trust deeds are contracts of adhesion does not preclude the maintenance of this suit as a class action. (3) With respect to defendants' contention as to the disposition of the case on the merits, we hold that, although the clause in American's trust deed is not per se an illegal restraint upon alienation, the enforcement of that clause unlawfully restrains alienation whenever the borrower's execution of a junior encumbrance does not endanger the lender's security. We therefore reverse the judgment that dismisses the present action on behalf of the class, and remand to the superior court for further proceedings as set forth in this opinion.

1. Statement of facts.

In this appeal we assume as correct the allegations in plaintiffs' first amended complaint, and the declarations of Dorothy Iford, Frank La Sala, and Norman McLeod filed with the superior court, and base our statement of facts upon those allegations.

American utilizes a form deed of trust which contains, on the reverse side in fine print, a clause stating: 'Should Trustor sell, convey, transfer, dispose of or further encumber said property, or any part thereof, or any interest therein, or agree to do so without the written consent of Beneficiary being first obtained, then Beneficiary shall have the right, at its option, to declare all sums secured hereby forthwith due and payable.' We shall refer to this clause as a 'due-on-encumbrance' provision; we thereby distinguish it from clauses which provide for acceleration only upon the sale, but not upon the encumbering, of secured property.

On August 13, 1958, plaintiff Dorothy Iford and her late husband borrowed $9,500, at 6.6 percent interest, from American, and executed a promissory note and a trust deed which included the due-on-encumbrance provision. On November 20, 1963, Frank and Grace La Sala, the other named plaintiffs, borrowed $20,700 from American at 6 percent interest; they also executed a note and a trust deed with the due-on-encumbrance clause. ²

On June 9, 1969, the La Salas borrowed $3,800 from Fred D. Hudkins, and executed a note and second deed of trust; Statewide Home Mortgage Co. acted as loan broker. On June 11, 1969, Iford borrowed $2,500 from Edward and June Ulrich, and also gave a note and second trust deed; Lanco Mortgage Co. acted as broker. About July 7 of 1969 both Iford and La Salas received a form letter from American notifying them of American's right to accelerate. The letter to La Salas offered to waive American's right to accelerate in return for a payment of $150 and an increase in the rate of interest on the first deed of trust from 6 to 9 percent. The letter to Iford was identical in form, but asked a waiver fee of $50 and an increase in interest to 8.75 percent.

Plaintiffs then filed the present action for declaratory relief 'for themselves and all other persons similarly situated.' Paragraph IV of their first amended complaint described the class to be represented as persons meeting three criteria: (a) those who borrowed from defendants during the four years preceding the filing of the action; (b) executed trust deeds with due-on-encumbrance clauses; and (c) did not execute separate written acknowledgments of such clauses. The complaint sought an injunction against enforcement of the due-on-encumbrance clause, a declaration that the clause was void, compensatory damages in an unspecified amount, and punitive damages. Defendants demurred to the complaint; the demurrer was scheduled for hearing on August 25, 1969.

On August 15, apparently without noticed motion, the parties appeared in court. ³ Defendants' counsel orally offered to waive its right to accelerate against the named plaintiffs based upon the existing secondary loans. The court then, sua sponte, ruled that 'there is no justifiable issue * * * in respect to this litigation,' and ordered the matter placed off calendar. Defendants then requested the court to dismiss the action for lack of a representative plaintiff; plaintiffs opposed dismissal without prior notice to the class. The court ruled that 'there is no individual plaintiff remaining who is or could be construed to be a representative of the class,' and on that basis ordered dismissal without prejudice. ⁴

2. The superior court erred in dismissing the action on behalf of the class. ⁵

We begin our discussion of this issue by emphasizing the specific and narrow ground upon which the superior court dismissed the class action. The court did not determine that the complaint did not frame a proper class action, or that the named plaintiffs did not, at the commencement of the action, constitute suitable representatives of the class; defendants' demurrer alleged both such grounds but the court, without rendering a ruling, dropped it from the calendar. Apparently the court held only that the named plaintiffs, by reason of the benefits they received from defendants, no longer controverted the issue with defendants and thus became disqualified to represent the class.

When a plaintiff sues on behalf of a class, he assumes a fiduciary obligation to the members of the class, surrendering any right to compromise the group action in return for an individual gain. Even if the named plaintiff receives all the benefits that he seeks in the complaint, such success does not divest him of the duty to continue the action for the benefit of others similarly situated.

We find frequent examples of the above principle in the recent desegregation cases. In Buckner v. County School Board of Greene County, Virginia (4th Cir. 1964) 332 F.2d 452, named plaintiffs who sued in a class action to desegregate a school were promptly transferred to an integrated school. The trial court then dismissed the action as moot. The Court of Appeals reversed, holding that the plaintiffs could continue the action to obtain relief for the class they represented. (332 F.2d at p. 454; see Banks v. Lockheed-Georgia Co. (N.D.Ga.1968) 46 F.R.D. 442; cf. In re William M. (1970) 3 Cal.3d 16, 23--24, 89 Cal.Rptr. 33, 473 P.2d 737.) In a similar case, the court held that a black doctor, who brought a class action to end exclusion of blacks from hospital staff priviliges, could continue to prosecute the action even though the hospital admitted him to its staff. (Cypress v. Newport News General & Nonsectarian Hosp. Ass'n (4th Cir. 1967) 375 F.2d 648, 657--658.)

In Diaz v. Quitoriano (1969) 268 Cal.App.2d 807, 74 Cal.Rptr. 358, the only California case in point, the plaintiff filed a class action to mandate the county welfare department to notify welfare recipients of their right of administrative appeal. By the very institution of the action the named plaintiff demonstrated that he had himself learned of his right of appeal. The court, however, permitted plaintiff to prosecute the action on behalf of the class he represented.

We conclude that American's waiver of acceleration as to La Salas and Iford does not mechanically render those plaintiffs unfit per se to continue to represent the class. Whether the named plaintiffs will fairly and adequately protect that class frames an issue that rests in the discretion of the trial court (see 3B Moore, Federal Practice (2d ed. 1969) 23.50). In making that determination, the trial court may take into account that the named plaintiffs have already obtained their individual benefits from the action; plaintiffs who have nothing at stake often will not devote sufficient energy to the prosecution of the action; further, the receipt of benefits by the named plaintiffs may sometimes create a conflict of interest between the class and its would-be representatives. On the other hand, as in the cited cases, the court my find that the named plaintiffs will continue fairly to represent the class, and, therefore, permit them to continue the class...