Saxer v. Philip Morris, Inc.

• Decision Date: 23 December 1975
• Citation: 54 Cal.App.3d 7,126 Cal.Rptr. 327
• Court: California Court of Appeals Court of Appeals
• Parties: Alton H. SAXER, etc., Plaintiff and Appellant, v. PHILIP MORRIS, INCORPORATED, et al., Defendants and Respondents. Civ. 15246.

Page 327

126 Cal.Rptr. 327

54 Cal.App.3d 7

Alton H. SAXER, etc., Plaintiff and Appellant, v. PHILIP MORRIS, INCORPORATED, et al., Defendants and Respondents.

Civ. 15246.

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

Dec. 23, 1975.

Hearing Denied March 3, 1976.

Hafif & Shernoff, Claremont, and Alton H. Saxer, San Pedro, for plaintiff and appellant.

McKenna & Fitting, Aaron M. Peck, Michael D. Berk and Michael R. Grzanka, Los Angeles, for defendants and respondents.

OPINION

THE COURT: ^*

Mission Viejo is a big, modern fast-growing, multi-million dollar complex in Orange County being developed by the Mission Viejo Company. It presently consists of 4,000 homes and nearly 20,000 people. When a person decides to buy a home, the sales force presents him with an attractive, complete package: financing is provided by M.V.C. Financial Corporation; title services and title policies are handled by M.V.C. Escrow Corporation; the standard carpeting installed in the new homes is furnished by the Mission Viejo Decorating Center; if the buyer wants a higher grade of carpeting, he may have the same installed and receive a credit for the value of the standard floor coverings, provided he purchases it from the Decorating Center.

Mission Viejo Company owns and controls the M.V.C. Escrow Corporation, the M.V.C. Financial Corporation and the Mission Viejo Decorating Center. In turn, Philip Morris, Inc. owns and controls Mission Viejo Company.

Alton H. Saxer purchased a home in Mission Viejo and subsequently filed a class action to recover damages under the Cartwright Act upon behalf of himself and the other homeowners ('Plaintiff' and 'Appellant') against Philip Morris, Inc., Mission Viejo Company, M.V.C. Financial Corporation and M.V.C. Escrow Corporation ('Defendants' and 'Respondents'). Demurrers were sustained and leave granted to amend the original, the first, second and third amended complaints. Following the filing of the fourth amended complaint, demurrers were sustained without leave to amend.

Saxer appeals on the basis that the three counts contained in the fourth amended complaint properly charge an unlawful combination in restraint of trade against all of the defendants.

We have determined that Saxer has stated a case against each corporate defendant and reverse the judgment of dismissal.

FACTS

Soon after its formation, the Mission Viejo Company ('Company') became a major developer and seller of new residential real estate in Orange County; in fact, it rapidly became one of the largest real estate development-sales firms in the county. The development consists of 11,000 acres, 4,000 homes, and 17,000 residents. For all practical purposes, it is a city, with all the business, commercial and cultural enterprises necessary to service a metropolitan area.,

In May 1969, Philip Morris commenced negotiations to acquire the Company. In January 1970, it consummated a series of agreements whereby it acquired (through a convertible note and option agreements) the right to purchase the capital stock of the firm and the right to select the majority of directors.

After acquiring voting control, the Company's board of directors was increased from 9 to 12 members and the 7 existing vacancies were filed by Philip Morris' own officials. In September 1972, Philip Morris acquired all of the remaining stock in Company.

In March 1970, M.V.C. Escrow Corporation was formed and ownership and control was assumed by the Company.

In May 1970, M.V.C. Financial Corporation, a corporation subject to control through the Company's directors, sought to qualify as an approved Veterans Administration lender. (It had been previously authorized to make F.H.A. loans.) In November 1971, Financial Corp. began making F.H.A. and V.A. loans.

All newly-built homes were furnished with standard floor coverings installed by the Company's Mission Viejo Decorating Center. However, in the event a homebuyer wanted a higher quality of floor covering ('upgraded floor covering') installed before the close of escrow, he had the right to select a better carpeting at a higher price; inasmuch as the standard floor coverings were included in the base price of the home, the Decorating Center would give him a credit for the standard floor coverings and deduct the same from the purchase price of the upgraded carpeting desired, providing the better carpeting was purchased exclusively from the Decorating Center.

In early 1972, Saxer purchased a new home built by the Company. The escrow was handled by Escrow Corp. The F.H.A. insured loan was provided by Financial Corp. at an 8 percent annual percentage rate (A.P.R.). Saxer selected a non-standard grade of carpeting and it was installed by the Decorating Center prior to the close of escrow.

At the time Saxer purchased his home, Philip Morris, by virtue of its stock ownership and control of the Company and, in turn, through the Company's ownership and control of Financial Corp., Escrow Corp., and its ownership of the Decorating Center, was in a position to supply an exclusive 'package deal' in connection with the sale of all homes within the Mission Viejo community, to wit, the land and improvements, the escrow service, the F.H.A. and V.A. financing, and the installation of the upgraded carpeting.

First Cause of Action

The fourth amended complaint contains the customary jurisdiction and venue allegations each of the corporate defendants is a California corporation, or is headquartered in Orange County, or is doing substantial business within Orange County, and has agents and employees therein.

It sets out the class action allegations: Saxer purchased a home in Mission Viejo from the Company; obtained an F.H.A. insured loan from Financial Corp.; utilized the escrow services of Escrow Corp.; and purchased upgraded floor coverings from the Decorating Center; the action is filed on behalf of all homeowners who purchased homes in the community of Mission Viejo during the four years immediately preceding the filing of the complaint and who have paid for escrow services provided by Escrow Corp.; have obtained F.H.A. or V.A. financing through Financial Corp.; have paid for upgraded (nonstandard) floor coverings which were purchased from the Decorating Center prior to the close of escrow; that joinder of all parties-plaintiff would be impracticable; that there are common questions of law and fact, with the principal questions all relating to the application of the Cartwright Act to the purchase of real property, escrow services, financing and nonstandard floor coverings by the plaintiff and members of the class from the defendants; that the common questions of law and fact predominate over any affecting individual members only; and that Saxer is a typical member of the class and can fairly represent the members thereof.

After pleading the jurisdictional, venue and class action essentials, plaintiff reached the heart of the lawsuit: Philip Morris, after acquiring control of the Company, Financial Corp. and Escrow Corp., entered into a conspiracy with its newly-acquired subsidiaries to restrain trade in the sale of escrow services required by purchasers of Company-built houses and to increase the price of such escrow services; the conspiratorial agreement to monopolize the escrow business and to charge higher prices than could be obtained at other reputable escrow firms involved the following practices: Salespersons were instructed to fill in and complete deposit receipts on new home sales for the purpose of designating Escrow Corp. as the escrow agent; Escrow Corp. was to be notified whenever a new home was sold by the Company; buyers were to be referred exclusively to Escrow Corp. for the purpose of opening escrows; and a corporate decision was made that no independent escrow company would be permitted to either buy land or lease space for the purpose of conducting an escrow business within the community of Mission Viejo; officers of the Company and the Escrow Corp. also agreed upon a price schedule for the services to be provided by Escrow Corp., which price schedule reflected prices in excess of those charged by 25 independent escrow firms situated within a 15-mile radius of Mission Viejo; by reason of Company's regular, systemized practice of channeling the purchasers to Escrow Corp., very rarely were outside firms contacted by buyers for the purpose of providing escrow services; independent firms were willing and able to provide escrow services to Mission Viejo buyers but were directly excluded from that home market and were prevented from competing for such business by virtue of the agreement between Company and Escrow Corp. not to allow said firms to buy or lease facilities and by the Company's practice of channeling all buyers directly to Escrow Corp.; by reason of said practices, Escrow Corp. was in a position to charge higher fees; that by virtue of the unlawful combination existing between Company and Escrow Corp. and as a consequence of it, Escrow Corp. has the only escrow service in Mission Viejo and exacts higher fees than independent escrow firms in the surrounding area.

Second Cause of Action

After Philip Morris acquired control of Mission Viejo's board and assets, the Company combined with Financial Corp. to restrain trade for two purposes: (1) To increase the price of new homes sold, enabling Company to reap a higher profit; and (2) to prevent outside lending institutions from making any F.H.A. and V.A. guaranteed loans to Mission Viejo homebuyers, thereby assuring Financial of a monopoly in lending.

Enhanced purchase prices were to be realized by the Company by a simple expedient: The first trust deed lender (Financial Corp.) merely charged the seller (Company) an excessive amount of points (loan discounts) for making the loan; the cost of the loan was passed on to the buyer in the form of a higher purchase price for the house.

To accomplish the second purpose of excluding all...