Fletcher v. Security Pacific National Bank

• Decision Date: 28 February 1979
• Citation: 153 Cal.Rptr. 28,23 Cal.3d 442
• Court: California Supreme Court
• Parties: , 591 P.2d 51 Harrell E. FLETCHER, Plaintiff and Appellant, v. SECURITY PACIFIC NATIONAL BANK, Defendant and Respondent. Gertrude CHERN, Plaintiff and Appellant, v. SECURITY PACIFIC NATIONAL BANK, Defendant and Respondent. 1 L.A. 30881.

Page 28

153 Cal.Rptr. 28

23 Cal.3d 442, 591 P.2d 51

Harrell E. FLETCHER, Plaintiff and Appellant, v. SECURITY PACIFIC NATIONAL BANK, Defendant and Respondent.

Gertrude CHERN, Plaintiff and Appellant, v. SECURITY PACIFIC NATIONAL BANK, Defendant and Respondent. ¹

L.A. 30881.

Supreme Court of California.

Feb. 28, 1979.

As Modified March 5, 1979.

Lawrence I. Schwartz and Michael R. Palley, Los Angeles, for plaintiffs and appellants.

Sheppard, Mullin, Richter & Hampton and Paul M. Reitler, Los Angeles, for defendant and respondent.

TOBRINER, Justice.

Two years ago, in Chern v. Bank of America (1976) 15 Cal.3d 866, 127 Cal.Rptr. 110, 544 P.2d 1310, our court determined that the industry-wide banking practice of computing so-called "per annum" interest rates on the basis of a 360-day year constituted an unfair trade practice under Business and Professions Code section 17500. ¹ We concluded that the practice as such, could, and should, be enjoined. In the instant case, instituted several years prior to our Chern decision, plaintiff challenged an identical practice of interest computation by another bank. Plaintiff sought, on behalf of himself and other similarly situated borrowers, restitution of the sums obtained through the use of this unfair business practice and damages for breach of contract and violation of the unfair trade practice statutes.

Subsequent to this court's filing of the decision in Chern, defendant bank moved in the trial court for dismissal of the suit as a class action. The trial court granted defendant's motion after a hearing, relying primarily on its conclusion that, with respect to the prayer for monetary damages, "the knowledge of each borrower . . . must be determined separately for each loan. . . ." Because the plaintiff class numbered over 50,000 persons, the court concluded that if a separate determination were necessary for each class member, maintenance of the action as a class action would be neither feasible nor efficient. The court accordingly ordered that the action on behalf of the class be dismissed.

Plaintiff appeals from the trial court order, contending that the court abused its discretion in foreclosing the suit from going forward as a class action. As we explain, although the trial court properly refused to permit plaintiff's claim for breach of contract to proceed as a class action, the trial court, resting on an erroneous legal assumption, improperly refused to permit plaintiff's claim of an unfair trade practice to proceed as a class action. We recognize that proof of each individual borrower's lack of knowledge may be required to sustain a recovery under the breach of contract theory. A trial court, however, pursuant to Business and Professions Code section 17535, possesses the authority to order restitution of moneys, in the absence of individualized proof of lack of knowledge, in order to preclude an entity which has engaged in an unlawful trade practice from improperly profiting from its wrongdoing. As the trial court's denial of class action status in the instant case rested upon an erroneous legal basis, we conclude that the order dismissing the class action should be reversed.

1. The facts and proceedings below.

On January 6, 1969, plaintiff Fletcher contracted with defendant Security Pacific National Bank for a short-term commercial loan. The promissory note executed in the transaction specified a 7 1/4 "per cent per annum" interest rate on the loan. Unbeknownst to plaintiff, such interest was to be calculated on the basis of a 360-day year, resulting in a small increase in the annual percentage rate.

On January 9, 1973, plaintiff commenced the instant action on behalf of himself and as representative of a class of approximately 50,000 similarly situated borrowers, alleging that defendant's practice of quoting interest calculated on the basis of a 360-day year as a "per annum" rate constituted a breach of contract and a violation of statutory unfair trade practice prohibitions. Plaintiff contended that a class action was essential to a full and fair adjudication of the issues presented in the complaint.

To support his contention favoring class action treatment for the instant complaint, plaintiff cites 14 issues of liability and methods of relief common to the class, and urges as well the impracticality of individual actions to resolve the controversy. Given the relatively small potential recovery (plaintiff alleges that he himself was overcharged $2.56), and a lack of awareness of legal rights on the part of most borrowers, plaintiff posits the infeasibility of individual actions. Moreover, if class members should see fit to institute legal actions to vindicate their alleged rights, the resultant multiplicity of suits would impose an egregious burden on the courts, and might conclude with inconsistent resolutions of the controversy. Finally, although individual recovery is potentially small, plaintiff contends that a class action is essential in order to assure that defendant does not retain the gains of its allegedly illicit practice.

Defendant takes exception to plaintiff's claim for class status, contending that individual issues predominate over the common questions. Relying on our decision in Chern v. Bank of America, supra, 15 Cal.3d 866, 127 Cal.Rptr. 110, 544 P.2d 1310, the trial court agreed, and dismissed the suit as a class action.

2. The trial court did not abuse its discretion in finding that the class action could not be maintained on the claim for breach of contract.

In Chern, supra, we considered a challenge to an identical practice of calculating "per annum" interest rates on a 360-day year. Plaintiff in Chern, as does plaintiff in the instant case, based a claim for damages and injunctive relief on breach of contract and unfair trade practice theories.

In Chern, however, unlike the instant case, the named plaintiff conceded that at the time she entered into the loan transaction with the bank she Knew that the "per annum" interest rate quoted by the bank would actually be computed upon a 360-day year. Although Chern protested the bank's use of the practice, she nevertheless entered into the agreement with full knowledge of the usage, and, consequently, of the meaning that the bank gave to the terms of the loan agreement.

In the initial portion of our Chern decision, we held that while a borrower who had no prior knowledge of the 360-day year computation practice might mount a valid breach of contract claim against the bank, plaintiff, who Had full knowledge of the meaning of the "per annum" interest rate in the contract provision, could not prevail in such a breach of contract action. Moreover, since plaintiff herself could muster no valid contract claim, we concluded that she could not properly pursue a class action on behalf of those borrowers who did not have knowledge of the banking practice. Accordingly, we affirmed the trial court decision dismissing plaintiff's class action for breach of contract.

Plaintiff in the instant case emphasizes that he has alleged that he did not have knowledge of the bank's practice, and thus that the critical defect that we found in Chern is not present here. Although plaintiff, unlike Chern, may be a proper class representative, that fact of itself does not demonstrate that the trial court erred in determining that, despite the presence of a proper representative, the contract claim should not properly proceed as a class action.

In reaching the conclusion that the action should not be pursued as a class action, the trial court relied principally upon our holding in Chern that a borrower's prior knowledge of the banking practice would defeat a claim for damages for breach of contract. Finding that defendant had freely explained its method of interest computation when asked, and that the practice of computing interest on the basis of a 360-day year had been followed for many years, the court inferred that "a number of" the estimated 50,000 class members would have such prior knowledge of the banking practice. The court further found that there was no ready method, other than examining each of the individual borrowers, to determine the number and identity of the class members who had valid contract claims. Given the large number of potential class members, the court found that in this context of contract the individual issues of knowledge predominated over the common questions of law, that the class was not readily ascertainable, and consequently that the action should not be maintained as a class action.

Under these circumstances, the trial court did not abuse its discretion in refusing to permit the contract claim to proceed as a class action.

3. Under Business and Professions Code section 17535, once an unfair trade practice has been established, a trial court has discretion to order restitution without requiring proof of each class member's lack of knowledge as to that unfair trade practice.

The trial court in the present case refused to permit plaintiff's claim of an unfair trade practice under Business and Professions Code section 17535 to proceed as a class action on the ground that proof of each individual borrower's lack of knowledge was required to sustain recovery of restitution under that section. As we shall explain, however, the trial court's denial of such class action status rested upon an erroneous legal basis. The general equitable principles underlying section 17535 as well as its express language arm the trial court with the cleansing power to order restitution to effect complete justice. Accordingly the statute clearly authorizes a trial court to order restitution in the absence of proof of lack of knowledge in order to deter future violations of the unfair trade practice statute and to foreclose retention by the violator of its ill-gotten gains.

In finding a class action infeasible in the present case, the trial court drew no distinction between the cause...