First American Title Ins. v. Superior Court

• Citation: 146 Cal.App.4th 1564,53 Cal.Rptr.3d 734
• Decision Date: 25 January 2007
• Docket Number: No. B194004.,B194004.
• Court: California Court of Appeals
• Parties: FIRST AMERICAN TITLE INSURANCE COMPANY et al., Petitioners, v. The SUPERIOR COURT of Los Angeles County, Respondent; Jeffrey Albert Sjobring et al., Real Parties in Interest.

53 Cal.Rptr.3d 734

146 Cal.App.4th 1564

FIRST AMERICAN TITLE INSURANCE COMPANY et al., Petitioners, v. The SUPERIOR COURT of Los Angeles County, Respondent Jeffrey Albert Sjobring et al., Real Parties in Interest.

No. B194004.

Court of Appeal, Second District, Division 3.

January 25, 2007.

Bryan Cave, Charles A. Newman, Jason E. Maschmann, Howard O. Boltz and Jennifer A. Jackson, Santa Monica, for Petitioners.

Bernheim Law Firm, Bernie Bernheim, Justin A. Shiau; Kicklaw Firm, Taras Kick and Graig Woodburn for Real Parties in Interest, Jeffrey Albert Sjobring.

CROSKEY, J.

If a class action representative plaintiff is not—and never was—a member of the class he purports to represent, may he obtain precertification discovery from the defendants for the express purpose of identifying a member of the class who is willing to become a named plaintiff and pursue the action? As the current plaintiff is, in effect, a stranger to the action, we conclude the grant of such discovery would sanction an abuse of the class action procedure. We therefore conclude the trial court's order granting the discovery was an abuse of discretion, and grant the defendants' petition for writ relief.

FACTUAL AND PROCEDURAL BACKGROUND

In February 2004, plaintiff Jeffrey Albert Sjobring bought a house. The house was not newly constructed; Sjobring bought it from its then-current owners. Sjobring's loan broker obtained a purchase money loan for Sjobring from Wilmington Finance. The seller's real estate agent selected the escrow company, and the title insurer, First American.¹ Indeed, Sjobring had wanted to use a different title company, but the seller's agent and the escrow company selected by the seller's agent had been adamant about using First American. Sjobring suspected that the seller's agent might have received a kickback, either from the escrow company or First American. At some point, either during or immediately after closing, Sjobring's loan agent commented to Sjobring that several of the escrow costs for which he had been charged seemed suspiciously high, including the cost of title insurance. Sjobring made no complaint at this time.

In November 2004,² the Colorado Division of Insurance began an investigation into unlawful title insurance practices, in which it uncovered a reinsurance kickback scheme.³ Pursuant to the scheme, certain homebuilders, lenders and realtors formed their own reinsurance companies, known as "captive insurers." They would refer all of their title insurance business to a particular title company if that title company agreed to "reinsure" the title policies with the captive insurer. The title company would forward premiums to the reinsurer, yet, in practice, the reinsurer did not accept any risk and the premium payments far exceeded any minimal risk the reinsurer may have accepted. In short, the reinsurance agreement was simply a way for the title insurer to transfer funds to the captive insurer as a payment for the referral of customers. In January 2005, the California Department of Insurance began its own investigation into the same practice. On February 21, 2005, Colorado announced that it had reached a settlement with First American Title Insurance Company by which that entity agreed to refund $24 million to consumers nationwide, and also agreed to end the practice.

Four days later, Sjobring filed the instant action, purporting to sue on behalf of himself, all others similarly situated, and the general public. He named as defendants First American Title Company of Los Angeles, Wilmington Finance, and numerous Doe defendants. He alleged causes of action for breach of fiduciary duty, constructive fraud, unjust enrichment, violation of the Consumer Legal Remedies Act ("CLRA"), unfair business practices, and declaratory relief. Sjobring's "introductory allegations" explained, "This class action is brought by plaintiff charging that title insurers in the State of California are paying money for referral business from lenders. These payments to lenders are rewards for channeling business to them. These kickbacks may be disguised as payments for bogus reinsurance which is purchased from captive insurers operated by the firms sending business to the title insurers." (Emphasis added.) Sjobring alleged that he was "directed in part through his lender to purchase a title insurance policy from defendant First American Title Company of Los Angeles."⁴ He alleged, on information and belief, that First American Title Company of Los Angeles paid part of his premium to Wumington Finance as a payment for the referral of his business. Sjobring's class allegations defined the class as all persons "[w]ho paid in whole or in part for a title insurance policy, from First American Title Company of Los Angeles and/or Does 1 through 249, which provided coverage for property located in the State of California ... [f]or whom part of the premium paid for the title insurance policy was received by Wilmington Finance, Inc., and/or Does 250 through 500."

The California Department of Insurance investigation continued. On July 20, 2005, the Department of Insurance announced a $37.8 million settlement with nine different title insurance companies.⁵ First American Title Insurance Company accounted for $20 million of the settlement. Some $15 million of the First American Title Insurance Company settlement consisted of the share of the Colorado settlement payable to California consumers. This amount was described as "a full refund of the ceded premium," which was to be refunded to some 38,000 individuals.⁶ The remaining $5 million was a penalty obtained by the California Department of Insurance. The investigation and settlement encompassed reinsurance agreements in effect from January 1997 through December 2004. During this period, First American Title Insurance Company had issued more than five million title insurance policies in California. In other words, less than one percent of First American Title Insurance Company's customers were victims of the reinsurance scheme and entitled to refunds under the settlement. The press release announcing the settlement issued by the California Department of Insurance identified a list of builders, realtors and lenders who were implicated in the reinsurance scheme. Wilmington Finance was not among them.

On September 26, 2005, the President and Chief Executive Officer of Wilmington Finance executed a declaration stating that Wumington Finance had not entered into any reinsurance agreements with any First American entities and that Wilmington Finance had not been paid any compensation by First American entities for the referral of title insurance business. In light of this evidence, on October 24, 2005, Sjobring requested the dismissal of the action against Wilmington Finance, without prejudice.

On November 1, 2005, Sjobring filed his first amended complaint. The only difference between the first amended complaint and Sjobring's original pleading was the omission of the cause of action for breach of fiduciary duty. Despite Sjobring's apparent acknowledgement that Wilmington Finance was not involved, Sjobring still: (1) named Wilmington Finance as a defendant; (2) defined the class in terms of kickbacks to Wilmington Finance and Doe defendants; (3) alleged Wilmington Finance had directed him to use First American Title Company of Los Angeles; and (4) alleged First American Title Company of Los Angeles had paid a kickback to Wilmington Finance.

Concurrent with his first amended complaint, Sjobring filed a case management statement. In pertinent part, the statement read, "Plaintiffs counsel is considering the substitution or addition of a class representative. It is possible that no improper kickbacks were directly connected to ... Sjobring's purchase of title insurance. However, plaintiff may have suffered a direct injury if his title insurance premium was artificially inflated as a result of defendant's practice of paying improper kickbacks on other title insurance policies. [¶] If it is determined that plaintiff Sjobring cannot represent the class, the court should allow plaintiff the opportunity to amend the complaint to `redefine the class, or to add new individual plaintiffs, or both, in order to establish a suitable representative.' [Citation.]"

On November 30, 2005, Sjobring filed a Public Records Act request with the California Department of Insurance, seeking all documents relating to its investigation of the improper title insurance practices. Although several of the categories of information sought in Sjobring's request specifically referred to the investigation of the First American entities, it was in no way limited to such entities.⁷ Of particular note was Sjobring's request for "[a]ll documents which constitute, evidence, memorialize, relate to, and/or refer to the identity of any individual (i.e., consumer, homeowner or policyholder) who was allegedly injured by First American's improper title insurance rebating practices." On January 6, 2006, the Department of Insurance rejected Sjobring's request, indicating that the few public documents which his counsel already possessed were the only documents subject to disclosure.⁸

On March 6,2006, Sjobring amended his complaint to name five additional First American entities as Doe defendants.⁹ On April 21, 2006, Sjobring "served extensive discovery requests on the First American defendants.... The discovery requests were specifically designed to obtain information regarding the extensive reinsurance kickback scheme involving [the] First American [entities] that was the subject of the [California] Department of Insurance investigation. The discovery also sought basic information regarding the title insurance practices of [the] First American [entities]." Among other information, Sjobring sought the names and addresses of the 38,000 individuals who had received refunds pursuant to the California Department of Insurance settlement...