Kraus v. Trinity Management Services, Inc.

• Decision Date: 05 June 2000
• Docket Number: No. S064870.,S064870.
• Citation: 999 P.2d 718,23 Cal.4th 116,96 Cal.Rptr.2d 485
• Court: California Supreme Court
• Parties: Vickey KRAUS et al., Plaintiffs and Respondents, v. TRINITY MANAGEMENT SERVICES, INC., et al., Defendants and Appellants.

96 Cal.Rptr.2d 485

23 Cal.4th 116

999 P.2d 718

Vickey KRAUS et al., Plaintiffs and Respondents, v. TRINITY MANAGEMENT SERVICES, INC., et al., Defendants and Appellants.

No. S064870.

Supreme Court of California.

June 5, 2000.

Rehearing Denied July 19, 2000.

William B. Boone, Santa Rosa; The Advani Law Firm, Kelly, Herlihy, Advani & Klein, Mukesh Advani, Reed E. Harvey; Sangster, Mannion & Curfman, Sangster, Mannion & Lowe, San Francisco, and Richard M. Sangster for Defendants and Appellants.

Fred J. Hiestand, Sacramento, for the Association for California Tort Reform as Amicus Curiae on behalf of Defendants and Appellants.

Gibson, Dunn & Crutcher, Gail E. Lees, Los Angeles, and Richard D. Gluck, San Diego, for ITT Educational Services, Inc., as Amicus Curiae on behalf of Defendants and Appellants.

Kimball, Tirey & St. John and Theodore C. Kimball, San Diego, for the California Apartment Association as Amicus Curiae on behalf of Defendants and Appellants.

Fred L. Main; Livingston & Mattesich Law Corporation, Carol Livingston and Gene Livingston, Sacramento, for the California Chamber of Commerce as Amicus Curiae on behalf of Defendants and Appellants.

Coblentz, Patch, Duffy & Bass, Jeffrey G. Knowles, Keith Evans-Orville and Clifford E. Yin, San Francisco, for Metropolitan Life Insurance Company as Amicus Curiae on behalf of Defendants and Appellants.

Severson & Werson, Jan T. Chilton and William L. Stern, San Francisco, for California Bankers Association and California Financial Services as Amici Curiae on behalf of Defendants and Appellants.

Phillip E. Stano; Mayer, Brown & Piatt, Evan M. Tager, Washington, DC, Donald M. Falk and Harold Smith Reeves, Nashville, TN, for American Council of Life Insurance as Amicus Curiae on behalf of Defendants and Appellants.

Manatt, Phelps & Phillips, Robert E. Hinerfeld, Barry S. Landsberg and Terri

D. Keville, Los Angeles, for First Healthcare Corporation as Amicus Curiae on behalf of Defendants and Appellants.

O'Melveny & Myers, Mark Wood, Oroville, and John F. Daum for State Farm Mutual Automobile Insurance Company

and State Farm General Insurance Company as Amici Curiae on behalf of Defendants and Appellants.

Horvitz & Levy, David M. Axelrad and Lisa Perrochet, Encino, for Truck Insurance Exchange as Amicus Curiae on behalf of Defendants and Appellants.

Robie & Matthai, Pamela E. Dunn, Los Angeles, and Daniel J. Koes for United Services Automobile Association as Amicus Curiae on behalf of Defendants and Appellants.

Stephen L. Collier, San Francisco; Chapman, Popik & White, Susan M. Popik, William B. Chapman and Mark A. White, San Francisco, for Plaintiffs and Respondents.

The Cartwright & Alexander Law Firm and Mary E. Alexander, San Francisco, for Consumer Attorneys of California as Amicus Curiae on behalf of Plaintiffs and Respondents.

Louise H. Renne, City Attorney (San Francisco), Dennis Aftergut, Chief Assistant City Attorney, Owen J. Clements, Andrew Y.S. Cheng, Jayne C. Lee and Rebecca Bedwell-Coll, Deputy City Attorneys, for the City and County of San Francisco, the City of San Jose, the Counties of Sacramento and San Bernardino and the American Heart Association, California Affiliate as Amici Curiae on behalf of Plaintiffs and Respondents.

Kenneth W. Babcock; Kathleen A. Michon; and Earl Lui, San Francisco, for Public Counsel Law Center and Consumers Union of U.S., Inc, as Amici Curiae on behalf of Plaintiffs and Respondents.

Lawrence G. Brown, Sacramento; Lydia Villarreal, Deputy District Attorney (Monterey); and Christopher G. Carpenter, Assistant District Attorney (Alameda) for the California District Attorneys Association as Amicus Curiae.

BAXTER, J.

We are asked to decide whether, in an action that is not certified as a class action, but is brought on behalf of absent persons by a private party under the unfair competition law (UCL) (Bus. & Prof.Code, § 17200 et seq.),¹ the court may order disgorgement into a fluid recovery fund, and whether permitting such UCL action denies due process to the defendants. We also address a claim that the Court of Appeal erred in upholding the trial court's construction and application of Civil Code section 1950.5 in this case.

We conclude that disgorgement into a fluid recovery fund is not a remedy available in such representative UCL actions and that Civil Code section 1950.5 does not apply to defendants' nonrefundable security and administrative fees. We also conclude that defendants in this case have not been denied due process.

We shall reverse the judgment of the Court of Appeal.

I FACTUAL AND PROCEDURAL BACKGROUND

Plaintiff Vickey Kraus and five other individual plaintiffs initiated this action on behalf of themselves and the present and former tenants of defendants. The action sought declaratory relief, restitution, and civil penalties for allegedly unlawful assessments of nonrefundable tenant charges for pre-lease administrative services, liquidated damages, and security for unpaid rent. The named defendants are Trinity Properties, which owns and leases residential rental properties in the City and County of San Francisco, Trinity Management Services, Inc., which manages and operates those properties, and various individuals who are officers and directors of those entities. The complaint alleged that plaintiffs were former tenants of properties owned and managed by defendants, each of whom, and all other past and present tenants, had been required to pay $100 as a nonrefundable security and administrative fee at the time they entered into the lease.² Those plaintiffs who had terminated their leases and vacated the leased apartments prior to the end of the term had been assessed liquidated damages equal to one month's rent and unpaid rent for the balance of the one-year lease term prior to sublease or re-lease of the apartments. A security deposit equal to one month's rent that each tenant was also required to pay was routinely applied to offset liquidated damages.

The first cause of action asserted a violation of Civil Code section 1950.5, which bans nonrefundable security deposits, and was addressed to defendants' TIER fees, a charge for pre-lease administrative services. The second cause of action asserted that the liquidated damages clause of the leases was void as a penalty banned by Civil Code section 1671, or, in the alternative, should be construed as authorizing termination of the lease prior to its expiration. The third cause of action alleged that defendants had been unjustly enriched to the extent that they had collected the security deposits and liquidated damages in violation of those statutes, and sought restitution of those tenant payments. Finally, the fourth cause of action, that with which we are principally concerned here, alleged that defendants' practice of assessing the TIER fees and their practice of assessing both liquidated damages and the remainder of the rent when tenants terminated their leases before the end of the term were unlawful and unfair business practices that violated the UCL.³

Plaintiffs sought (1) an order that defendants repay them and all other present and former tenants the full amount of all TIER fees collected from them with interest since the date of collection; (2) statutory damages of $600 pursuant to Civil Code section 1950.5, subdivision (k), for each former and present tenant from whom the administrative fee security deposit had been collected; (3) a declaration that the liquidated damages provision of the lease was void or that tenants might elect to treat the liquidated damages as consideration for early termination; (4) an order that defendant return all amounts collected as liquidated damages, or at the tenants' election, all amounts collected as rent for periods following early termination; (5) assessment of a civil penalty of $2,500 for each violation of the UCL;⁴ (6) an order that defendants cease the allegedly unlawful practices; and (7) attorney fees as well as any other appropriate relief.

At a pretrial hearing the court commented that disgorgement, rather than recovery for all injured persons, seemed to be the remedy authorized by the UCL, and that a defendant should disgorge profits obtained as a result of an unfair business practice. Plaintiffs' counsel concurred that equitable remedies of restitution or disgorgement were authorized, but argued that if there was to be disgorgement the monies should be paid to the tenants and former tenants from whom they had been obtained. He offered to submit a supplemental brief on the appropriate remedy if it was not possible to locate some of those people, but also agreed that the essential form of recovery was equitable and restitutionary in nature and should begin with disgorgement of the funds unlawfully collected. Counsel's opening statement then identified rescission or disgorgement as the relief sought on the UCL cause of action. Plaintiffs' counsel subsequently advised that he would propose equitable remedies beyond those identified in the complaint and asked that the court order disgorgement of the entire amount of the TIER fees and improperly retained liquidated damages/security deposit funds. Counsel also suggested that, to the extent that restitution could not be made to individual plaintiffs, defendants be ordered to disgorge the money unjustly collected to a fluid recovery fund.

The court found that the challenged practices violated the cited provisions of the Civil Code and constituted unfair business practices that violated the UCL. The court enjoined defendants from assessing TIER fees or any other nonrefundable charges as a condition of tenancy, collecting and retaining security deposits for the purpose of charging them against liquidated damages, and including liquidated damages provisions in the lease. It ordered Trinity Properties to disgorge $447,700 for liquidated damage/security fee assessments⁵ and Trinity Management Services, Inc., to disgorge $447,000...