Howard Gunty Profit Sharing Plan v. Superior Court
| Decision Date | 18 April 2001 |
| Docket Number | No. B145270.,No. B145029.,B145029.,B145270. |
| Citation | 105 Cal.Rptr.2d 896,88 Cal.App.4th 572 |
| Court | California Court of Appeals Court of Appeals |
| Parties | HOWARD GUNTY PROFIT SHARING PLAN et al., Petitioners, v. The SUPERIOR COURT of Los Angeles County, Respondent; Richard M. Greenwood, et al., Real Parties in Interest. Richard M. Greenwood, et al., Petitioners, v. The Superior Court of Los Angeles County, Respondent; Howard Gunty Profit Sharing Plan et al., Real Parties in Interest. |
The Howard Gunty Profit Sharing Plan (the Plan) commenced this action in 1998 on behalf of itself and all others similarly situated, against Bank Plus Corporation, its chief executive officer, and its chief financial officer. The original complaint charged negligent misrepresentation, common-law fraud, deceit under Civil Code sections 1709 and 1710, and unlawful market manipulation activity under Corporations Code sections 25400 and 25500.1
In March 2000, the Plan brought a motion to be appointed lead plaintiff of the class, and for certification of the class only as to the fourth cause of action, alleging violations of Corporations Code sections 25400 and 25500. On May 3, 2000, the trial court found that the Plan was a "professional plaintiff," that it was not typical of the class, did not have sufficient knowledge of the facts of the case or involvement in it, and was not, therefore, an adequate class representative.2 The court refused to appoint the Plan as lead plaintiff, and continued the certification motion to an unspecified date.
On June 30, 2000, Gary Feldman sought leave to intervene in the action. The trial court denied the motion after finding Feldman's claims time-barred under Corporations Code section 25506.3 The matter was set for a status conference on July 18, 2000. At the status conference, plaintiffs were still without a candidate for lead plaintiff, and sought leave to notify the class of their need for alternative class representatives. The court allowed plaintiffsh to submit a draft of the proposed communication. The court proposed its own form of notice. Defendants then proposed to send a letter in response to plaintiffs', and the court proposed its own form of response.4
In a series of hearings, the court heard extensive argument for and against the wording of the letters, as well as testimony regarding the accuracy of statements made in them. The court heard and made suggested changes to language which it considered to be slanted, misleading, or inflammatory, and the parties eventually arrived at language approved by the court.
Plaintiffs and defendants then filed separate petitions for writ of mandate. Plaintiffs' petition asks that we set aside the trial court's imposed edits of its letter seeking a new class representative, and its order authorizing defendants to contact putative class members in response to the letter. Defendants seek to prohibit plaintiffs from any solicitation of a new representative by mass mailing; or, in the alternative, to eliminate from plaintiffs letter any reference to compensation, a boldface reference to loss of rights, and a boldface reference to a deadline; and if plaintiffs' letter is to be permitted, defendants ask that its responsive letter not be edited in any way, unless it is found to be materially inaccurate or incomplete.5
We consolidated the petitions and issued an order to show cause on December 1, 2000.6
Each party contends that the trial court should not have permitted the other to communicate with the potential class members under the circumstances presented here. Thus, defendants contend that plaintiffs should not be permitted to send a letter soliciting a new class representative, and plaintiffs contend that defendants should not be permitted to send a letter urging potential class members not to participate.
Plaintiffs and defendants both acknowledge that there is scant California authority regarding communication with potential class members prior to certification. Plaintiffs contend that their communication with the potential class members is constitutionally protected by the First Amendment, as commercial speech, so long as it is not false, misleading, or deceptive. (See Shapero v. Kentucky Bar Assn. ,(1988) 486 U.S. 466, 472, 108 S.Ct. 1916, 100 L.Ed.2d 475.)
Defendants contend that plaintiffs' proposed communication is improper solicitation, which should not be condoned by the court, because plaintiffs initiated this action with a "professional plaintiff whose credibility is questionable, under circumstances which make it apparent that the attorneys are in charge of the litigation, not a genuine plaintiff.
To put the issues into perspective, we must begin, not with contentions regarding limitations on speech, but by examining plaintiffs' motion to certify the class, and to approve the Plan as lead plaintiff, which was heard several months before the hearings on the proposed communications.
To obtain class certification, the proponents of a consumer class action have the burden to prove not only that there are questions of law or fact common to the class, and that the claims or defenses of the representative plaintiffs are typical of the claims or defenses of the class, they must also prove that the representative plaintiffs will fairly and adequately protect the interests of the class. (Richmond v. Dart Industries, Inc. (1981) 29 Cal.3d 462, 470, 174 Cal.Rptr. 515, 629 P.2d 23; Civ. Code, § 1781, subd. (b)(2)-(4).) After hearing the parties' argument and evidence in the form of declarations and excerpts from depositions, the trial court found that there were common questions of law or fact. However, the court found the Plan to be atypical of the class, and that it would not fairly or adequately protect its interests, and denied the Plan's motion for appointment as lead plaintiff. It did not, however, deny the motion for class certification. Instead, the court continued it indefinitely to give plaintiffs the opportunity to find a suitable representative.
In its written order, the court made extensive findings. It found that the Plan was a "professional plaintiff," having filed approximately 20 lawsuits alleging fraud and mismanagement in securities or derivative actions, and represented in substantially all of them by its attorneys in this action, Stull, Stull & Brody, with the assistance in some of them by Weiss & Yourman, also counsel in this action. The court also found the Plan, acting through its administrator, Caesar, to be an inadequate representative, because Caesar demonstrated inadequate knowledge about the case, and his credibility was weak. The court concluded, "It is clear to this court that the attorneys, rather than the Plan, are in control of this litigation."
As a general proposition, class actions are favored in California. (City of San Jose v. Superior Court (1974) 12 Cal.3d 447, 457, 115 Cal.Rptr. 797, 525 P.2d 701; see also, Vasquez v. Superior Court (1971) 4 Cal.3d 800, 807-808, 94 Cal.Rptr. 796, 484 P.2d 964.) Federal law also favors class actions. Rule 23 of the Federal Rules of Civil Procedure (28 U.S.C.) expresses (Gulf Oil Co. v. Bernard (1981) 452 U.S. 89, 99, fn. 11, 101 S.Ct. 2193, 68 L.Ed.2d 693.) In furtherance of the policy favoring class actions, courts have allowed plaintiffs the opportunity to amend their complaints to redefine the class, or to add new individual plaintiffs, or both, in order to establish a suitable representative, when the named plaintiff has been found inadequate. (See e.g., La Sala v. American Sav. & Loan Assn. (1971) 5 Cal.3d 864, 872, 97 Cal.Rptr. 849, 489 P.2d 1113.) For example, plaintiffs are permitted to conduct discovery to find a suitable representative (see e.g., Budget Finance Plan v. Superior Court (1973) 34 Cal.App.3d 794, 799, 110 Cal. Rptr. 302) and they are permitted precertification communication with potential class members for the purpose of investigation and preparation of their claims or defenses. (See e.g., Atari Inc. v. Superior Court (1985) 166 Cal.App.3d 867, 873, 212 Cal.Rptr. 773.)
But the tide has turned and not all class actions are favored. "In recent years, concern over potentially meritless securities lawsuits filed by `professional' plaintiffs abounded." (AUSA Life Ins. Co. v. Ernst and Young (2d Cir.2000) 206 F.3d 202, 218.) Companies choose to settle, "`rather than face the enormous expense of discovery and trial,'" which has created "`an in terrorem effect on Corporate America.'" (EP MedSystems, Inc. v. EchoCath, Inc. (3rd Cir.2000) 235 F.3d 865, 881.)
In 1995, Congress passed the Private Securities Litigation Reform Act which imposes stricter pleading requirements, limits precertification discovery, and limits the number of actions in which a person may be a lead plaintiff. (AUSA Life Ins. Co. v. Ernst and Young, supra, 206 F.3d at p. 218; see 15 U.S.C. §§ 77a et. seq.) The purpose of the Act was, among other things to empower investors to exercise primary control over private securities litigation, instead of their lawyers, and to encourage defendants to fight abusive claims. (AUSA Life Ins. Co. v. Ernst and Young, supra, 206 F.3d at p. 218; see also, S.G. Cowen Sec. v. U.S. Dist. Court for N.D. of CA (9th Cir.1999) 189 F.3d 909, 911...
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