Home Sav. & Loan Assn. v. Superior Court

• Decision Date: 07 November 1974
• Citation: 117 Cal.Rptr. 485,42 Cal.App.3d 1006
• Court: California Court of Appeals Court of Appeals
• Parties: HOME SAVINGS AND LOAN ASSOCIATION, Petitioner, v. SUPERIOR COURT of the State of California, COUNTY OF LOS ANGELES, Respondent; Lawrence H. DEUTSCH and Rita G. Deutsch, Individually and on behalf of all others similarly situated, Real Parties in Interest. Civ. 44416.

Page 485

117 Cal.Rptr. 485

42 Cal.App.3d 1006

HOME SAVINGS AND LOAN ASSOCIATION, Petitioner, v. SUPERIOR COURT of the State of California, COUNTY OF LOS ANGELES, Respondent Lawrence H. DEUTSCH and Rita G. Deutsch, Individually and on behalf of all others similarly situated, Real Parties in Interest.

Civ. 44416.

Court of Appeal, Second District, Division 2, California.

Nov. 7, 1974.

Hearing Denied Jan. 8, 1975.

McKenna, Fitting & Finch, Aaron M. Peck and Roger P. Heyman, Los Angeles, for petitioner.

Lawrence H. Deutsch and Robert L. Finkel by Lawrence H. Deutsch, Encino, for real parties in interest.

Sheppard, Mullin, Richter & Hampton, George R. Richter, Jr., Pierce T. Selwood and Joseph M. Malinowski, Los Angeles, for amici curiae.

FLEMING, Associate Justice.

Home Savings and Loan Association, defendant in a class action for damages and declaratory relief arising from loan-agreement late charges, ¹ seeks to prohibit the superior court from determining the substantive validity of claims of the named plaintiffs, Lawrence and Rita Deutsch, prior to a determination of the suitability of the action as a class action and determination of the composition of the class, and prior to notification of members of the class of the pendency of the action.

We have concluded the sequence of events ordered by the superior court contravenes sound rules of procedure and unfairly prejudices defendant Home, and, accordingly, we issue the writ.

THE COMPLAINT

Filed in July 1973 by the law firm of plaintiff Lawrence Deutsch, the complaint alleges that the Deutsches bring the action on behalf of themselves and all persons similarly situated who borrowed money from Home and executed promissory notes secured by trust deeds to real property. The note and accompanying loan agreement by their terms impose an interest rate increase of two percent per year on the entire unpaid balance of the debt so long as payment of any installment remains in default. Within the last four years the Deutsches paid late charges of $530.88. ² Plaintiffs estimate that more than 10,000 persons paid similar late charges during the same four-year period. The complaint asserts the late charges constitute a penalty within the meaning of Civil Code section 1670 and a controversy exists between plaintiffs and Home over the validity of the charges. The prayer asks damages of $530.88, interest for the Deutsches, damages to the class according to proof, a declaration that the late charge provisions are void, and an award to plaintiffs of $250,000 for costs and attorneys' fees.

Seven other comparable class-action suits on late charges are pending against Home in this and other jurisdictions.

TRIAL COURT'S ORDER

On motion of the Deutsches the trial court, through a special department designated to conduct pretrial class action proceedings pursuant to a standardized Class Action Manual prepared by the Los Angeles Superior Court, entered an order bifurcating the trial and explaining its order thus:

'It is obvious that late charge provisions are a great and continuing concern to thousands of borrowers in the State of California as well as to the lending industry. Code of Civil Procedure Section 1048(b) ³ permits the Court to order a separate trial of any separate issue or issues when such trial will be conducive to expedition and economy. The Court finds that to be the case here. Section 441 of the Class Action Manual also authorizes an early trial of the issue of Defendant's liability. ⁴ The Court feels that it would be in the interest of justice to have a bifurcated liability trial herein to resolve, as quickly as possible, the various liability questions raised herein. Such determination will be of great benefit to borrowers and the lending industry. Also the public and the Courts will be benefited as there are a number of class action late charge cases pending throughout the state. Therefore, Defendant's objections to this Motion are overruled.'

The court ordered early trial on substantially the following issues: Whether the Deutsches' late charges were invalid penalties. Whether the Deutsches may recover $530.88 plus attorneys' fees under their note. Whether Home's affirmative defenses (account stated, due process of law, administrative authorization, prospective effect of Garrett ruling) bar the Deutsches' recovery. Whether Home is entitled to offset damages caused by the Deutsches' late payments. The court concluded, 'After trial of those issues, this matter shall be returned to this Department for all further procedures under the Class Action Manual, if any.'

DISCUSSION

A primary procedural question in a class action is, Who are Members of the Class? Prompt and early determination of the class is essential because until the composition of the class has been determined defendants cannot tell what the action involves, and until members of the class receive notice of the action they will not be bound by any judgment in the action. Once the composition of the class has been determined, its members are entitled to appropriate notice of the pendency of a class action that will affect their interests. Notice is particularly requisite when those purporting to represent the class seek payment of substantial compensation from all members of the class in the event of success. After the members of the class have been properly notified of the action, they are required to decide whether to remain members of the class represented by plaintiffs' counsel and become bound by a favorable or unfavorable judgment in the action, whether to intervene in the action through counsel of their own choosing, or whether to 'opt out' of the action and pursue their own independent remedies, such as negotiation with defendants, initiation of their own action, or intervention in some other action.

At bench, the trial court's order required defendant to go to trial on the major substantive issues in the lawsuit before any determination of (A) the suitability of the action as a class action, (B) the membership of the class, and (C) the form of notice to be given the members of the class. The trial court's order left hanging in the air the resolution of such critical questions as, (1) the typicality of the representative parties, (2) their adequacy to fairly represent the class, (3) the impracticability of separate actions or of direct intervention by individual members of the class, (4) the possibility of inconsistent adjudication as a result of separate actions by individual members of the class, (5) the necessity to resolve common questions of law or fact by means of class action, (6) the identity of the victims of the improperly-exacted late charges, (7) the period of time the cause of action for improperly-exacted late charges extends back, (8) the effect of assignment, renegotiation, assumption, or payment of a loan on which late charges have been exacted, (9) the effect of foreclosure or sale under deed of trust. Resolution of most of these questions is prerequisite to the determination of the suitability of the action as a class action, to determination of the composition of the class, and to appropriate notification of the members of the class--all to the goal that the substantive issues may be authoritatively and finally adjudicated.

The critical reason for notification of members of the class on whose behalf a class action has been brought is that notification makes possible a binding adjudication and an enforceable judgment with respect to the rights of the members of the class. Absent such notification no member of the class need be bound by the result of the litigation. Defendant, however, could find itself in an entirely different position. Under the doctrine of collateral estoppel a defendant who litigates and loses issues tendered in a class action filed by an individual member of the class may be estopped in subsequent litigation with other members of the class to deny the validity and binding effect of the judgment against him in the first action. Contrariwise, if defendant prevails in the first cause of action involving merely individual members of the class, no other members of the class need be bound by the outcome, for they were not parties to the lawsuit and received no notification about it. (Rest., Judgments, § 93; Blonder-Tongue Labs v. University Foundation, 402 U.S. 313, 91 S.Ct. 1434, 28 L.Ed.2d 788 (1971); Bruszewski v. United States, 181 F.2d 419 (3d Cir. 1950); Bernhard v. Bank of America, 19 Cal.2d 807, 122 P.2d 892; Nevarov v. Caldwell, 161 Cal.App.2d 762, 327 P.2d 111.) In the last case Ashburn, J. observed with respect to multivictim accident litigation: '(A) defendant who obtains a favorable judgment, or 10 of them, cannot use those judgments against other claimants because the want of mutuality would spell absence of due process if the judgments were pleadable in bar or estoppel. But the plaintiff in the eleventh case is fortunate enough to establish liability and the defendant is confronted by a conclusive adjudication of its own negligence in the next 10 or 20 cases,--this being due to the fact that mutuality is not necessary and it has had its day in court, in fact 11 of them (none of which resulted adversely except the eleventh). This looks like the scales of justice are weighted in favor of the plaintiff.' (P. 768, 327 P.2d p. 116.)

The vice in the procedure followed by the trial court is that it allows so-called 'one-way intervention,' a procedure under which potential members of the class can reserve their decision to become part of the class until the validity of the cause asserted by the named plaintiffs on behalf of the class has been determined. While one-way intervention has obvious attractions for members of the class on whose behalf an action has been brought in that it creates for them a no-lose situation, for a defendant it holds the terrors of a open-ended lawsuit that cannot be defeated, cannot be settled, and...