Petersen v. Bank of Am.
| Decision Date | 11 December 2014 |
| Docket Number | G048387 |
| Citation | 181 Cal.Rptr.3d 330,232 Cal.App.4th 238 |
| Court | California Court of Appeals Court of Appeals |
| Parties | Christina I. PETERSEN et al., Plaintiffs and Appellants, v. BANK OF AMERICA et al., Defendants and Respondents. |
Brookstone Law, Vito Torchia, Jr., Sasan Behnood, Newport Beach, Carlos E. MacManus, Sherman Oaks, and Deron Colby, Newport Beach, for Plaintiffs and Appellants.
Bryan Cave, Stuart W. Price, Trevor Allen, Irvine, and Douglas E. Winter, Washington, for Defendants and Respondents.
This appeal, after a successful demurrer for misjoinder, tests the limits of California's permissive joinder statute, section 378 of the Code of Civil Procedure.1 There are no less than 965 plaintiffs listed in the caption of the third amended complaint. Strictly speaking, though, this is a “mass action,” not a “class action.” Had this case been filed prior to 2005, in all probability it would have been filed as a class action. However, in 2005, Congress enacted the Class Action Fairness Act of 2005 (CAFA) codified at 28 United States Code section 1332(d). (See generally Visendi v. Bank of America (9th Cir.2013) 733 F.3d 863, 866–867.) CAFA allows the removal to federal court of state court class actions when there is a class with 100 or more class members, with at least one class member from a different state than at least one defendant, and there is more than $5 million at stake. (Newberg on Class Actions (5th ed. 2012) § 6:14, pp. 542-646) That is certainly this case—if it had been filed as a class action. And perhaps even if it had not been so pleaded.
We face two questions of state law: First, despite the rather staggering number of joined plaintiffs, does the third amended complaint allege, to track the statutory language of section 378, the “same ... series of transactions” that will entail litigation of at least one common question of law or fact?2 Focusing on the language of the statute and the applicable precedent construing it, we conclude it does. Just a few years after section 378's enactment in 1927, our Supreme Court declared the statute's same series of transactions language is to be construed broadly in favor of joinder. (Joerger v. Pacific Gas & Electric Co. (1929) 207 Cal. 8, 19, .) It has never retreated from that position.
The third amended complaint alleges that in the mid–2000's, defendant Countrywide Financial Corporation developed a two-pronged business strategy to increase its profits: First, Countrywide would use captive real estate appraisers to provide dishonest appraisals that would inflate home prices beyond levels that would otherwise prevail in an honest market; second, Countrywide would induce its borrowers—these plaintiffs in particular—to take loans Countrywide knew they could not afford by misleading them as to their ability to repay their loans, including misrepresenting key terms of the loans themselves. Countrywide did this because it had no intention of keeping the loans on its books, but intended to bundle them into saleable tranches and sell them to investors.
The 965 plaintiffs are people who borrowed money from Countrywide in the mid–2000's, to their ultimate chagrin. As we explain below, there are sufficient common questions of law and fact in this case to satisfy section 378, including whether a mortgage lender has a duty to its borrowers not to encourage “high ball,” dishonest appraisals and whether Countrywide really had a deliberate strategy of placing borrowers into loans it “knew”—and the word “knew” is a key part of plaintiffs' pleading—they could not afford?
It is important to note at the outset that this is a procedural case, so we express no opinion on the legal or factual merits of plaintiffs' claims vis-à-vis Countrywide's alleged two-pronged strategy. To draw a parallel to class action certification procedures, permissive joinder is fundamentally a procedural matter where the focus is not on the merits, but on whether there is sufficient commonality to satisfy the requirements of the relevant statute. (See Brinker Restaurant Corp. v. Superior Court (2012) 53 Cal.4th 1004, 1024–1025, [139 Cal.Rptr.3d 315, 273 P.3d 513].)
The applicability of section 378 is the comparatively easy question. Language and precedent dictate the result. The harder question is whether California's procedures governing permissive joinder are up to the task of managing mass actions like this one. Again, we answer in the affirmative. And again, Brinker provides the relevant template. While we reverse the judgment dismissing all but one plaintiff for misjoinder, we emphasize that on remand the trial court will have to consider a variety of procedural tools with which to organize this case into appropriate and manageable subclaims and subclasses. (Cf. Brinker, supra, 53 Cal.4th at p. 1004, 139 Cal.Rptr.3d 315, 273 P.3d 513 [].) While the irony of requiring the case to be divided into “tranches” has not escaped us, we are confident the trial court can handle the task.
The operative complaint here is the third amended one, filed June 2012. It is over 14 inches tall. The first page is found on page 5412 of volume 19 of the clerk's transcript and continues on until the proof of service after the last exhibit on page 8554 of volume 29. Yes, the third amended complaint is 3,142 pages long.
But its organization is more intuitive than that would suggest. The complaint consists of a main narrative body of allegations totaling 208 pages, followed by an appendix A that reads like a series of minicomplaints narrating the (rather similar) loan acquisition experiences of various plaintiffs. Most of those narratives are variations on the same theme: A couple went in for a loan; the amount needed was already an inflated figure because of Countrywide's prior price fixing of the relevant real estate market. The couple then relied on loan officers at Countrywide to place them in a loan they could afford, but the loan officers hid certain aspects of the loan from them, usually the existence of a balloon payment, sometimes negative amortization, sometimes a change in the terms or calculation of interest rates. And finally, when the Great Recession hit and the local real estate bubble burst decreasing everybody's home values, these plaintiffs discovered they could not afford their loans, could not afford to refinance, and sustained various kinds of ensuing financial damage.
Appendix A extends 1,771 pages from the end of volume 19 of the reporter's transcript through the middle of volume 25. Then begin the exhibits. Exhibit A consists of a series of e-mails acquired by plaintiffs, the upshot of which seems to be that there were plenty of people in Countrywide who were expressing misgivings about the firm's various loan products and loan strategies in the mid–2000's. Exhibit B consists of a few pages of Countrywide's own published description of its various loan products. (Exhibit B looks like a sales brochure.) Finally come exhibits C through MMM, which take up the better part of about four volumes of clerk's transcript, extending a total of 1,106 pages. These appear to be a series of files consisting of form foreclosure documents pertaining to a subset of the plaintiffs—namely 90 or so—who are alleging wrongful foreclosure. These documents mostly include notices of default and notices of sale in individual cases.3
While the third amended complaint lists six entities as defendants,4 they are now, essentially, one defendant—Countrywide as absorbed by Bank of America Corporation. That is, all six entities are either directly controlled by Bank of America, which had earlier absorbed Countrywide, or are owned by or affiliated with either Countrywide or Bank of America.5
Summarizing the complaint—even the abridged version consisting of just the 208 pages of traditional allegations—presents a challenge. Rhetorical flourishes abound, reminiscent of William Jennings Bryan's famous Cross of Gold speech from the late 19th century (which come to think of it, was also about banking).6 The basic narrative has been recounted in several court decisions,7 but it can, we think, be summarized in just one sentence: Sometime in the mid–2000's, Countrywide changed the normal game plan of any home mortgage lender from making a profitable loan that is paid back over time to a new game plan by which it would make its profits by originating loans, then tranching them (chopping them up into little bits and pieces) and selling them on the secondary market to unsuspecting investors who would themselves assume the risk the borrowers could not repay.8 At root, everything in the third amended complaint is an elaboration on that theme insofar as it directly affected these plaintiff-borrowers from Countrywide.
In order to make the new game plan work, Countrywide allegedly engaged in an interrelated series of transactions the net effect of which was to saddle plaintiffs with loans they could not afford. This series consisted of two identifiable phases: Phase 1 was to create an otherwise artificial upward spiral of appreciating property values. This upward spiral was allegedly accomplished by Countrywide using its own captive appraisal company, defendant Landsafe, to “falsely” inflate all valuations. The inflated values took on a life of their own which inflated all property values in California.9
Phase 2 was to induce borrowers to take improvident loans. Normally a prudent lender would want to lend to a creditworthy borrower who could pay back the loan at the stated interest rate. But given Countrywide's new model business plan in which the ultimate payees of the loans were going to be outside investors who would take the hindmost, Countrywide wanted to saddle borrowers with the maximum amount of debt possible—any risk of default would be borne by...
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