Granberry v. Islay Investments

• Decision Date: 06 March 1995
• Docket Number: No. S035591,S035591
• Citation: 889 P.2d 970,9 Cal.4th 738,38 Cal.Rptr.2d 650
• Court: California Supreme Court
• Parties: , 889 P.2d 970 Lisa GRANBERRY et al., Plaintiffs and Appellants, v. ISLAY INVESTMENTS et al., Defendants and Appellants.

Page 650

38 Cal.Rptr.2d 650

9 Cal.4th 738, 889 P.2d 970

Lisa GRANBERRY et al., Plaintiffs and Appellants, v. ISLAY INVESTMENTS et al., Defendants and Appellants.

No. S035591.

Supreme Court of California In Bank.

March 6, 1995.

Rehearing Denied April 20, 1995.

Hill, Schwartz & Stenson, David H. Schwartz, Michael P. Guta and Ernest L. Graves, San Francisco, for plaintiffs and appellants.

Daniel E. Lungren, Atty. Gen., Roderick E. Walston, Chief Asst. Atty. Gen., and Yeoryios C. Apallas, Deputy Atty. Gen., as amici curiae on behalf of plaintiffs and appellants.

Diane M. Matsinger, Betty L. Jeppesen, Antonio R. Romasanta, Santa Barbara, Crahan, Javelera, Ver Halen & Aull and Marcus E. Crahan, Jr., Los Angeles, for defendants and appellants.

MOSK, Justice.

An important provision of our statutory landlord-tenant law provides that within three weeks after the termination of tenancy a landlord must return the security deposit paid by a former tenant and provide a written accounting of any portion retained as compensation for unpaid rent, repairs, and cleaning. (Civ.Code, § 1950.5, subd. (f).) ¹ We granted review to determine whether a landlord who in good faith fails to comply with the requirements of this statute may nevertheless recover damages for unpaid rent, repairs, and cleaning in a subsequent judicial proceeding. We also consider whether the trial court abused its discretion by not requiring defendants to disgorge all security deposits received from the members of the plaintiff class and to pay this money into a fund. Finally, we consider whether the court abused its discretion by limiting the award of attorney fees and costs to 25 percent of the total class recovery.

We conclude that a good-faith failure to comply with section 1950.5, subdivision (f), does not bar a landlord from recovering damages for unpaid rent, repairs, and cleaning, and we agree with the Court of Appeal to the extent that it so held. We disagree with its view of the remaining issues, however, and hence reverse its judgment to permit the trial court to reconsider its choice of remedy and limitation on attorney fees.

FACTS

Defendants own or operate between 1200 and 1500 residential rental units in the Santa Barbara area. During the period relevant to this case, April 27, 1978, to April 27, 1981, it was defendants' practice to charge tenants an increased rental fee for the first 31 days of tenancy, but to charge a reduced fee for all subsequent months. ² Defendants never returned this fee in whole or in part; rather, they simply retained it as part of the rental payment for the first month. Approximately 10,000 tenants paid such fees during the relevant period, and the aggregate amount of such fees was approximately $1 million.

Plaintiffs, a class of former tenants, sued for a refund of the amount by which the rent they had paid for the first 31 days of their tenancy exceeded the amount they paid in each of the following months. The court entered summary judgment in favor of defendants on the ground that the increased rent paid during the first month was in fact rent and not a security deposit within the meaning of section 1950.5, subdivision (b), ³ and therefore plaintiffs were not entitled to a refund. In an earlier appeal the Court of Appeal reversed, holding that the character of the payment was a triable issue of fact. (Granberry v. Islay Investments, supra, 161 Cal.App.3d 382, 207 Cal.Rptr. 652.) On remand, the court granted defendants leave to amend their answer to allege they were entitled to set off amounts owed to them for unpaid rent, repair, and cleaning if a jury were to find the increased rental payment was a refundable security deposit.

Plaintiffs subsequently moved for summary judgment on the question whether defendants were entitled to a setoff in view of the fact that they had failed to comply with the requirements of section 1950.5, subdivision (f). The court granted the motion. A jury thereafter found that the excess rental payments were security deposits within the meaning of section 1950.5, subdivision (b), but that defendants had not retained them in bad faith. The court ruled that the excess fees must be refunded to the members of the class who made individual claims, but it did not require defendants to disgorge the aggregate amount of the security deposits they wrongfully retained and to pay that money into a fund. The judgment also awarded costs and attorney fees to plaintiffs, but provided that such items would be recovered from the aggregate amount paid by defendants and would not exceed 25 percent of the total amount claimed by the individual members of the class.

In a second appeal the Court of Appeal held (1) the trial court erred in ruling that defendants were not entitled to a setoff, (2) the court did not abuse its discretion in granting refunds only to those class members who came forward to claim them, and (3) it was not an abuse of discretion to limit the award of attorney fees and costs to 25 percent of the total amount paid to the class. Although the Court of Appeal purported to reverse the judgment in its entirety, it in fact impliedly affirmed the judgment as to the second and third of these issues. ⁴

I.

During the three-year period relevant to this litigation, plaintiffs vacated apartments rented from defendants but did not receive a written accounting of the basis for, or the amount of, the security deposits retained or the disposition of these security deposits. Nor did plaintiffs receive a refund of any portion of their security deposits. Accordingly, both the trial court and the Court of Appeal correctly concluded that defendants failed to comply with section 1950.5, subdivision (f). The issue now before us is whether, notwithstanding their good-faith lack of compliance, defendants may set off amounts allegedly due for unpaid rent, repairs, and cleaning against money due plaintiffs as a refund of their security deposits. We conclude that defendants may do so.

The English chancery courts allowed setoff to be raised as a defense as early as the 17th century. (Prudential Reinsurance Co. v. Superior Court (1992) 3 Cal.4th 1118, 1124, 14 Cal.Rptr.2d 749, 842 P.2d 48; 3 Story, Commentaries on Equity Jurisprudence (14th ed. 1918) § 1867, pp. 468-469; see also Tigar, Automatic Extinction of Cross-Demands: Compensatio from Rome to California (1965) 53 Cal.L.Rev. 224 [tracing the history of setoff to the Roman law concept of compensatio ].) It was founded on the equitable principle that "either party to a transaction involving mutual debts and credits can strike a balance, holding himself owing or entitled only to the net difference, ..." (Kruger v. Wells Fargo Bank (1974) 11 Cal.3d 352, 362, 113 Cal.Rptr. 449, 521 P.2d 441.) Setoff, as it applies to this case, is now codified as section 431.70 of the Code of Civil Procedure, which provides in pertinent part: "Where cross-demands for money have existed between persons at any point in time when neither demand was barred by the statute of limitations, and an action is thereafter commenced by one such person, the other person may assert in the answer the defense of payment in that the two demands are compensated for so far as they equal each other, ..." The quoted statute, however, does not create a substantive right to raise setoff as a defense to a claim for monetary relief, but merely describes the procedures to be followed in raising this defense. (Kruger v. Wells Fargo Bank, supra, 11 Cal.3d 352, 362, 113 Cal.Rptr. 449, 521 P.2d 441; Hauger v. Gates (1954) 42 Cal.2d 752, 755, 269 P.2d 609.) To determine whether setoff is available in this case, we must turn to section 1950.5.

We first consider whether to allow a landlord to raise setoff even though he has failed to comply with the requirements of section 1950.5, subdivision (f), is consistent with the legislative intent underlying that statute. (See Prudential Reinsurance Co. v. Superior Court, supra, 3 Cal.4th 1118, 1125, 14 Cal.Rptr.2d 749, 842 P.2d 48.) "In determining intent, we look first to the words themselves. [Citations.] When the language is clear and unambiguous, there is no need for construction. [Citations.] When the language is susceptible of more than one reasonable interpretation, however, we look to a variety of extrinsic aids, including the ostensible objects to be achieved, the evils to be remedied, the legislative history, public policy, contemporaneous administrative construction, and the statutory scheme of which the statute is a part. [Citations.]" (People v. Woodhead (1987) 43 Cal.3d 1002, 1007-1008, 239 Cal.Rptr. 656, 741 P.2d 154.)

Section 1950.5, subdivision (e), allows a landlord to claim any portion of the security deposit reasonably necessary to compensate for unpaid rent, repairs, and cleaning. Section 1950.5, subdivision (f), provides in pertinent part: "Within three weeks after the tenant has vacated the premises, the landlord shall furnish the tenant ... a copy of an itemized statement indicating the basis for, and the amount of, any security received and the disposition of the security and shall return any remaining portion of the security to the tenant." From the plain language of the statute we conclude that a landlord (1) must return a tenant's security deposit within the specified period after the termination of the tenancy, (2) may retain all or part of the security deposit as compensation for unpaid rent, repairs, and cleaning, and (3) must provide a written accounting of any amounts retained within the specified period. If, within the specified period, the landlord has not provided the tenant with a written accounting of the portion of the security deposit he plans to retain, the right to retain all or part of the security deposit under section 1950.5, subdivision (f), has not been perfected, and he must return the entire deposit to the tenant. Nevertheless, the mere fact that the landlord has lost the right to take advantage...