Walton v. Eu

• Decision Date: 27 May 1983
• Citation: 143 Cal.App.3d 403,191 Cal.Rptr. 779
• Court: California Court of Appeals Court of Appeals
• Parties: Michael D. WALTON, Linda A. Alexander, individually and on behalf of all other persons similarly situated, Plaintiffs and Appellants. v. MARCH FONG EU, as Secretary of State, and State of California, Defendants and Respondents. Civ. 22118.

Page 779

191 Cal.Rptr. 779

143 Cal.App.3d 403

Michael D. WALTON, Linda A. Alexander, individually and on behalf of all other persons similarly situated, Plaintiffs and Appellants. v. MARCH FONG EU, as Secretary of State, and State of California, Defendants and Respondents.

Civ. 22118.

Court of Appeal, Third District, California.

May 27, 1983.

[143 Cal.App.3d 404] Stephen J. Kennedy, Oakland, for plaintiffs and appellants.

George Deukmejian, Atty. Gen., Richard D. Martland, Asst. Atty. Gen., Susan P. Underwood, Deputy Atty. Gen., for defendants and respondents.

BLEASE, Associate Justice.

In this class action suit, the trial court granted summary judgment in favor of defendant. ¹ We will reverse the judgment.

Facts

Plaintiffs entered into a contract with National Buyers Association, Inc. (National), a discount buying organization. National breached its contract and on September 25, 1980, plaintiff obtained a judgment against National in the Alameda County Municipal Court.

In March 1977, National made a cash deposit, in lieu of bond, with defendant. (Former Civ.Code, § 1812.105.) ² The deposit took the form of an investment certificate issued by Home Savings and Loan Association in the face amount of $30,000. Plaintiffs sought, on October 1, 1980, to satisfy their judgment by demand upon defendant from this source. They were too late; the last of the funds from the certificate had been paid out by defendant three months earlier.

Prior thereto, on March 14, 1980, counsel for plaintiffs advised defendant that he was representing a claimant against National and was told a cash deposit had been filed. Apparently counsel did not inquire, nor was he informed, what method defendant would follow in satisfying the claims already on file.

Plaintiffs were not the only parties who were injured by National. Beginning in November 1979, numerous judgments were taken against National and were submitted to defendant for payment against the deposit which National had filed. Claims continued to be filed throughout the early months of 1980.

Beginning April 25, 1980, defendant paid claims against the deposit, apparently in the order of presentation. By June 30, 1980, defendants had paid a total of $29,316.30 to various claimants. Defendants forfeited the remaining balance of the investment certificate in the amount of $683.70 to Home Savings and Loan Association "for interest penalty for withdrawal prior to maturity of the investment certificate."

Plaintiffs filed this action alleging improper disbursement of the funds by defendant. Defendant answered and moved for summary judgment asserting, inter alia, that absent legislative direction, defendant was vested with the discretion to distribute the funds in any manner chosen by it. This appeal followed judgment for the defendant.

DISCUSSION

I

Discount buying organizations are regulated by the Civil Code section 1812.100 et seq. They must maintain a $30,000 surety bond in favor of the State of California (Civ.Code, §§ 1812.103, 1812.104 ³) or, in lieu thereof, make a cash deposit with defendant, which may include a bank certificate of deposit, which must be placed "in an interest-bearing trust account" (Former Civ.Code, § 1812.105 ⁴).

The bond is for the benefit of any person "who is damaged by any violation of [Title 2.6] or by fraud or dishonesty or failure" of the discount buying organization to provide the services which it has contracted to perform. (Civ.Code, § 1812.104.) The aggregate liability of the surety is limited to the amount of the bond or deposit. (Ibid.) The statutes do not specify the manner in which the sums are to be disbursed when the aggregate claims exceed the amounts deposited. Nor is express provision made for disposition of the interest earned on a cash deposit.

Plaintiffs contend that when the aggregate claims against the bond or cash deposit exceed the amounts deposited the surety has a duty to pay the claims on a pro rata basis. Defendant counters that, since section 1812.104 fails to prescribe any procedure for satisfying the claims, it may distribute the deposit in any expeditious manner including, as here, first-come-first-serve. We disagree.

Whether or not defendant has the authority to implement the statute by regulations specifying the method of distribution (see Gov.Code, § 11342.2), it does not have unfettered discretion over the manner in which it exercises its statutory authority. The statute sounds in surety relations. We conclude defendant must be held bound by the principles of law applicable to sureties, which are implicated by the Act.

Defendant seeks exemption from the surety principles because a cash deposit was made in lieu of a surety bond. We find nothing in the statutory scheme which suggests the rights of a creditor of a discount buying organization turn upon the form in which the surety has been provided. Defendant's status as a payee on a statutory bond or cash deposit for the benefit of others is that of agent or trustee for the persons damaged. (See Iowa State Commerce Com'n v. IGF Ins. Co. (Iowa 1981) 309 N.W.2d 445, 448.) Defendant assumes the position of surety and safeguards the proceeds deposited by the licensee solely for the benefit of injured persons. (See Ibid.)

"[W]here a bond is given to protect the individual members of the public who deal with the principal on the bond from injury caused by his fraud or negligence, and the extent of the surety's liability is limited to certain amount, when claims are made to the surety in excess of the amount of the penalty the total amount of the penalty should be prorated among the persons so damaged." (New Amsterdam Casualty Co., et al. v. Hyde, et al. (Or.1934) 148 Or. 229, 34 P.2d 930, 934; see Fidelity & Deposit Co. v. Stephenson (1938) 26 Cal.App.2d 241, 244-245, 79 P.2d 115; Western Surety Company v. Childers (Okl.1962) 372 P.2d 214, 218, overruled on other grounds in Barbero v. Equitable Gen. Ins. Co. (Okl.1980) 607 P.2d 670; Connors, California Surety & Fidelity Bond Practice (Cont.Ed.Bar 1969) § 28.15, p. 393, hereafter cited as Connors.) "The surety may go into a court of equity and have all claimants interpleaded, and have the court prorate the fund upon the claims established." (New Amsterdam Casualty Co. v. Hyde, supra, 34 P.2d at p. 934.) "A surety that pays one or more of these claims when it has notice that other claimants exist could be held liable to the remaining claimants even though it has already paid the full bond penalty. This rule is premised on the right of each claimant to share pro rata in the bond penalty." (Connors, supra, at p. 393; see Miles v. Fidelity and Casualty Co. of New York (La.App.1966) 185 So.2d 613, 618-619.)

These legal principles require the funds be distributed pro rata when the claims exceed the amount on the bond, and hold the surety liable beyond the bond amount if it has paid out the full amount of the deposit to one or more claimants with notice that other claimants exist.

Here, there is a triable issue of fact whether defendant had notice, at the time it began payment, of claimants whose claims remained unsatisfied. ⁵ The granting of summary judgment was erroneous.

II

Plaintiff also takes issue with defendant's decision to forfeit almost $700 interest penalty for withdrawal prior to maturity of the investment certificate, a decision which left defendant with approximately $29,300 to disburse to the numerous claimants. We find merit in the claim.

Former section 1812.105 provided in pertinent part: "In lieu of furnishing the [$30,000 surety] bond as required by section 1812.103, the seller may deposit with [defendant] a cash deposit in a like amount. This cash deposit may be satisfied by any of the following: [p] (b) Investment certificates for share accounts assigned to [defendant] and issued by a savings and loan association doing business in this state and insured by the Federal Savings & Loan Insurance Corporation ...." (Emphasis added.)

"[I]n a like amount" can only mean that, when made, the value of the cash deposit is at least $30,000--equal to the principal sum of a surety bond had a bond been filed. Here, defendant permitted National to deposit an investment certificate worth substantially less than $30,000, but with a face value of $30,000 at maturity. Compounding the error, plaintiffs withdrew the funds prior to maturity.

Defendant's action in accepting a cash deposit worth less than the statutorily...