Morris v. Redwood Empire Bancorp

• Decision Date: 29 April 2005
• Docket Number: No. G033649.,G033649.
• Citation: 128 Cal.App.4th 1305,27 Cal.Rptr.3d 797
• Court: California Court of Appeals Court of Appeals
• Parties: Carroll MORRIS, Plaintiff and Appellant, v. REDWOOD EMPIRE BANCORP et al., Defendants and Respondents.

27 Cal.Rptr.3d 797

128 Cal.App.4th 1305

Carroll MORRIS, Plaintiff and Appellant, v. REDWOOD EMPIRE BANCORP et al., Defendants and Respondents.

No. G033649.

Court of Appeal, Fourth District, Division 3.

April 29, 2005.

Certified for Partial Publication.^*

Review Denied August 24, 2005.

Lakeshore Law Center, Jeffrey Wilens, Yorba Linda; Law Office of Kenneth D. Quat and Kenneth D. Quat, for Plaintiff and Appellant.

Bill Lockyer, Attorney General, Tom Greene, Chief Assistant Attorney General, Albert Norman Shelden, Assistant Attorney General, Susan E. Henrichsen, Ronald A. Reiter and Michele R. Van Gelderen, Deputy Attorneys General, as Amicus Curiae on behalf of Plaintiff and Appellant.

Rutan & Tucker, John B. Hurlbut, Jr., Steven J. Goon and Treg A. Julander, Costa Mesa, for Defendants and Respondents.

OPINION

ARONSON, J.

Plaintiff Carroll Morris (Morris) appeals from a judgment of dismissal entered after the trial court sustained demurrers to his second amended complaint without leave to amend. The complaint alleged a single cause of action under the unfair competition law (UCL) (Bus. & Prof.Code, § 17200)¹ against defendants Redwood Empire Bancorp (Empire), National Bank of the Redwoods (National), Innovative Merchant Solutions (Innovative), and U.S. Merchant Systems (Merchant Systems), challenging a $150 fee charged by defendants upon termination of a credit card merchant account. In sustaining the demurrers, the trial court ruled the National Bank Act of 1864 (12 U.S.C. § 24 [Bank Act]) and associated regulations preempted Morris's unfair competition action. The court also ruled Morris did not allege facts demonstrating Empire's liability.

Although in the unpublished portion of this opinion we agree federal law does not preempt Morris's claims, we conclude the second amended complaint does not state a cause of action under the UCL. Because the court sustained the demurrers of National, Innovative, and Merchant Systems solely on federal preemption grounds, we reverse the judgment and remand to allow Morris the opportunity to plead facts stating a cause of action under the UCL. Because Morris has failed to allege facts sufficient to state any cause of action against Empire despite repeated attempts to do so, we affirm the trial court's dismissal of that defendant.

ALLEGATIONS AND PROCEDURAL BACKGROUND

Morris is an elderly disabled man subsisting on Social Security benefits. In 2001, he was persuaded to start a "work at home" business involving grocery coupons, and named the business "Coupons-R-Us." To process customers' credit cards, Morris obtained a "merchant account."² Accordingly, he executed a merchant application provided by Innovative, National's registered agent. Morris also executed a merchant agreement with National, again provided by Innovative acting as the bank's agent.

The merchant agreement provided that a "discount rate" would be charged for each credit card transaction and, if Morris did not achieve a certain monthly transaction volume, the bank would assess a minimum $25 processing fee. In addition, National charged Morris a monthly $9.50 "customer service fee." The agreement continued indefinitely until terminated. Either party could terminate the agreement with 30 days' notice without cause, or immediately under certain circumstances. Although the bank could terminate the agreement without compensation to Morris, termination by Morris required payment of the minimum processing fee for the following 30-day period and a $150 termination fee. The merchant agreement became effective in April 2001. Morris quickly concluded the coupon business was a "scam," canceled the merchant agreement, and paid the $150 termination fee.

Morris filed the present action, alleging in his original complaint the termination fee constituted an illegal business practice under the UCL. Specifically, he alleged the termination fee was a liquidated damages clause under Civil Code section 1671, subdivision (b), and void because the fee was unreasonable. Morris sought relief for himself, and injunctive relief and restitution as a "private attorney general" on behalf of the general public. Morris named as defendants National and National's parent holding company, Empire.

National and Empire demurred. In response, Morris filed a first amended complaint and attached portions of the merchant agreement, along with another merchant agreement used by National. The first amended complaint reiterated the contention the termination fee was an improper liquidated damages penalty, and also contended the fee was unconscionable under Civil Code section 1670.5. National and Empire again demurred, arguing (1) the merchant agreement's termination fee provision was not a liquidated damages provision, (2) California courts should not use the UCL to regulate complex matters of economic policy, (3) the UCL claim is preempted by the National Bank Act and associated regulations, and (4) Morris failed to allege liability against Empire. The trial court sustained the demurrers with leave to amend, on preemption and the lack of allegations showing Empire's liability. Shortly thereafter, Morris filed his second amended complaint, to which demurrers were again filed and sustained on identical grounds. This time, however, the trial court did not grant leave to amend.

Shortly before the hearing on the demurrers to the second amended complaint, Morris added by Doe amendment defendants Innovative and Merchant Systems, registered agents of National, alleging they were parties to merchant agreements assessing the $150 termination fee. Innovative demurred to the second amended complaint on the same grounds as National and Empire, and additionally argued it was not liable because it was a disclosed agent of National, and was not alleged to have acted tortiously. The trial court sustained Innovative's demurrers without leave to amend on the same grounds as those of National and Empire. Merchant Systems had not yet filed any response to the second amended complaint. At the court's suggestion, Morris and Merchant Systems entered into a stipulation deeming Merchant Systems to have filed a demurrer on the same grounds as the other defendants. The trial court sustained these demurrers without leave to amend on the same grounds.

STANDARD OF REVIEW

A demurrer tests the legal sufficiency of the complaint. (Traders Sports, Inc. v. City of San Leandro (2001) 93 Cal.App.4th 37, 43, 112 Cal.Rptr.2d 677.) Accordingly, in reviewing whether a trial court erred in sustaining a demurrer, we accept as true all facts properly pleaded along with those that might be implied or inferred from those expressly alleged. (Marshall v. Gibson, Dunn & Crutcher (1995) 37 Cal.App.4th 1397, 1403, 44 Cal. Rptr.2d 339.) We review the trial court's action de novo and exercise our own independent judgment whether a cause of action has been stated under any legal theory. (Ibid.; Moore v. Regents of University of California (1990) 51 Cal.3d 120, 125, 271 Cal.Rptr. 146, 793 P.2d 479.)

DISCUSSION

I^**

II

A. The Termination Fee Is Not a Liquidated Damage Under Civil Code Section 1671

The UCL defines "unfair competition" to include any "unlawful, unfair or fraudulent business act or practice...." (Bus. & Prof.Code, § 17200.) This language is intended to protect consumers as well as business competitors; its prohibitory reach is not limited to deceptive or fraudulent acts, but extends to any unlawful business conduct. (Committee on Children's Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 209-210, 197 Cal.Rptr. 783, 673 P.2d 660.) "By proscribing `any unlawful' business practice, `section 17200 "borrows" violations of other laws and treats them as unlawful practices' that the unfair competition law makes independently actionable." (Cel-Tech, supra, 20 Cal.4th 163, 180, 83 Cal.Rptr.2d 548, 973 P.2d 527.) In the second amended complaint, Morris alleges the termination fee runs afoul of two statutes. Specifically, he alleges the termination fee is an unreasonable liquidated damages provision in violation of Civil Code section 1671, and is unconscionable under Civil Code section 1670.5.

Civil Code section 1671, subdivision (b), provides in relevant part: "[A] provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made." Absent a relationship between the liquidated damages and the damages the parties anticipated would result from a breach, a liquidated damages clause will be construed as an unenforceable penalty. (Ridgley v. Topa Thrift & Loan Assn. (1998) 17 Cal.4th 970, 977, 73 Cal.Rptr.2d 378, 953 P.2d 484.) The question whether a contractual provision is an unenforceable liquidated damages provision is one for the court. (Beasley v. Wells Fargo Bank (1991) 235 Cal.App.3d 1383, 1393, 1 Cal. Rptr.2d 446 (Beasley).) Although on demurrer a reviewing court ordinarily assumes as true the facts alleged in the complaint, a pleader's legal characterization of a contract is not controlling, particularly when the contract is attached to the pleading. (See Barnett v. Fireman's Fund Ins. Co. (2001) 90 Cal.App.4th 500, 505, 108 Cal.Rptr.2d 657.)

The $150 termination fee in the merchant agreement is not expressly denominated a liquidated damages provision. Nonetheless, as Morris correctly points out, to determine the legality of a provision, we examine its true function and operation, not the manner in which it is characterized in the contract. (See Garrett v. Coast & Southern Fed. Sav. & Loan Assn. (1973) 9 Cal.3d 731, 737, 108 Cal. Rptr. 845, 511 P.2d 1197 ["We have consistently ignored form and sought out the substance of arrangements which purport to legitimate penalties and forfeitures"].) The merchant agreement's termination provision reads as follows: "Any party may terminate...