Zigas v. Superior Court

• Citation: 120 Cal.App.3d 827,174 Cal.Rptr. 806
• Court: California Court of Appeals
• Decision Date: 24 June 1981
• Parties: Irma ZIGAS, Arthur L. Zigas, Constance C. Porter, Dan F. Porter, and Lee Glanzman, on behalf of themselves and all others similarly situated, Petitioners, v. SUPERIOR COURT OF the STATE OF CALIFORNIA IN AND FOR the CITY AND COUNTY OF SAN FRANCISCO, Respondent, Angelo SANGIACOMO; Two Thousand Broadway, a limited partnership; Trinity Properties, Inc., a corporation; Trinity Management Services, a corporation, Real Parties in Interest. Civ. 50140.

Page 806

174 Cal.Rptr. 806

120 Cal.App.3d 827

Irma ZIGAS, Arthur L. Zigas, Constance C. Porter, Dan F. Porter, and Lee Glanzman, on behalf of themselves and all others similarly situated, Petitioners, v. SUPERIOR COURT OF the STATE OF CALIFORNIA IN AND FOR the CITY AND COUNTY OF SAN FRANCISCO, Respondent, Angelo SANGIACOMO; Two Thousand Broadway, a limited partnership; Trinity Properties, Inc., a corporation; Trinity Management Services, a corporation, Real Parties in Interest.

Civ. 50140.

Court of Appeal, First District, Division 3, California.

June 24, 1981.

Rehearing Denied July 24, 1981.

Hearing Denied Sept. 10, 1981.

Jeffrey J. Parish, Robert L. Gorman, Robert J. Yorio, Rosenblum, Fenolio, Parish, Jack & Bacigalupi, San Francisco, for petitioners.

Lance C. Stryker, Meadows, Dorris, Harris & Stryker, San Francisco, for real parties in interest.

FEINBERG, Associate Justice.

This case is before us on a petition for writ of mandate. Because the issues involved appeared to be of considerable public importance and of first impression, we issued an alternative writ. We now hold that the relief sought should be granted.

Petitioners are tenants of an apartment building at 2000 Broadway in San Francisco, which was financed with a federally insured mortgage in excess of $5 million, pursuant to the National Housing Act (12 U.S.C. § 1701 et seq.) (the Act) and the regulations promulgated thereunder (24 C.F.R. § 207 et seq.). They seek in a class action, inter alia, damages for the landlords' (real parties in interest) violation of a provision of the financing agreement which requires that the landlords charge no more than the Department of Housing and Urban Development (HUD) approved schedule of rents. The trial court has sustained demurrers without leave to amend to 5 causes of action of 15 alleged, apparently on the ground that there is no right in the tenants to enforce the provisions of an agreement between their landlords and the federal government.

Petitioners allege that their landlords were required under their contract with HUD to file a maximum rental schedule with HUD and to refrain from charging more than those rents without the prior approval of the Secretary of HUD. Petitioners further allege that real parties are, and have been, charging rent in excess of the maximums set out in the rental schedule; the complaint avers that real parties have collected excessive rents and fees in an amount exceeding $2 million.

In addition to sustaining demurrers as to the third-party causes of action, the trial court granted real parties' motion to strike all references to the Act, the regulations promulgated thereunder, and the terms of the agreement between HUD and real parties. It is these orders sustaining the demurrers and granting the motion to strike that petitioners seek to have set aside.

The issues presented include: (1) whether federal or state law applies; (2) whether petitioners have standing to sue, and (3) whether the action has become moot as a result of real parties' repayment of the HUD insured loan.

Federal or State Law

Real parties appear to argue at one point that whether petitioners have standing to sue is to be determined by federal law because a federal contract arising under a federal statute is involved. In so arguing, real parties misconceive the nature of the complaint in the case at bar. The complaint does not allege a federal cause of action, i. e., arising out of the National Housing Act. What it alleges, in substance, is that pursuant to the Act, an agreement was entered into between HUD and real parties whereby real parties promised not to charge as rent more than that approved by HUD. Real parties did so charge and petitioners, under California law, seek redress as the parties aggrieved.

Thus, Touche Ross & Co. v. Redington (1979) 442 U.S. 560, 99 S.Ct. 2479, 61 L.Ed.2d 82, for example, relied upon by real parties, is inapposite. In Touche Ross, customers of security brokerage houses brought a federal action for damages against accountants who audited certain financial reports the security brokerage firms were required to file under section 17(a) of the Securities and Exchange Act of 1934, based on misstatements contained in the reports. Jurisdiction of the federal court was invoked under section 17(a).

The court held Congress did not create a federal statutory cause of action under section 17(a) in the customers of the brokerage houses for a violation of the section. ¹

In the case at bench, as we have said, petitioners do not contend that the National Housing Act created a federal statutory cause of action in the tenants.

In Cort et al. v. Ash (1975) 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26, a stockholder of a corporation brought an action for damages against the corporate directors on the ground that the corporation had made illegal contributions or expenditures in connection with a federal election in violation of 18 United States Code section 610.

The court held that no private cause of action was created by section 610 cognizable in federal court. However, the court did recognize that violation of section 610 could create the framework for a cause of action under state law. In this context, the court said, "(I)t is entirely appropriate ... to relegate respondent (the stockholder-plaintiff) and others in his situation to whatever remedy is created by state law. In addition to the ultra vires action pressed here, ... the use of corporate funds in violation of federal law may, under the law of some States, give rise to a cause of action for breach of fiduciary duty." (Id., 422 U.S. at p. 84, 95 S.Ct. at p. 2091.)

We now advert to Miree v. DeKalb County (1977) 433 U.S. 25, 97 S.Ct. 2490, 53 L.Ed.2d 557, a case more directly in point here.

In Miree, victims in an airplane crash sued DeKalb County, Georgia in federal court under a third-party-beneficiary theory. One of the terms of a contract between the county and the Federal Aviation Administration (FAA) provided that the county agreed to restrict land use in the vicinity of the airport to " 'activities and purposes compatible with normal airport operations including landing and takeoff of aircraft.' " (Id., at p. 27, 97 S.Ct. at p. 2492.) The lawsuit alleged that the county had breached the contract by maintaining a garbage dump adjacent to the airport and that the cause of the crash was the ingestion of birds swarming from the dump into the aircraft's jet engines. Federal jurisdiction was invoked under 28 United States Code section 1332, diversity of citizenship, only.

The Miree court determined that the controversy should have been decided under state law, and explained its ruling in the following terms: "The litigation before us raises no question regarding the liability of the United States or the responsibilities of the United States under the contracts. The relevant inquiry is a narrow one: whether petitioners as third-party beneficiaries of the contracts have standing to sue respondent. While federal common law may govern even in diversity cases where a uniform national rule is necessary to further the interests of the Federal Government, Clearfield Trust Co. v. United States, 318 U.S. 363, 63 S.Ct. 573, 87 L.Ed. 838 (1943), the application of federal common law to resolve the issue presented here would promote no federal interests even approaching the magnitude of those found in Clearfield Trust: ..." (Miree v. DeKalb County, supra, 433 U.S. at pp. 28-29, 97 S.Ct. at 2493, fn. omitted, emphasis added.)

The court also observed: "The operations of the United States in connection with FAA grants such as these are undoubtedly of considerable magnitude. However, we see no reason for concluding that these operations would be burdened or subjected to uncertainty by variant state-law interpretations regarding whether those with whom the United States contracts might be sued by third-party beneficiaries to the contracts. Since only the rights of private litigants are at issue here, we find the Clearfield Trust rationale inapplicable." (Id., at p. 30, 97 S.Ct. at p. 2494.)

Finally, the court noted that the federal interest was implicated "only insofar as such lawsuits might be thought to advance federal aviation policy by inducing compliance with FAA safety provisions." (Id., at p. 32, 97 S.Ct. at p. 2495.)

The parallel between Miree and this case compel the application of state law in all questions involving third-party beneficiary rights under the contract. The lawsuit is between private litigants, and raises no question regarding liability of the United States. Though the operations of HUD are of considerable magnitude, there is no reason to conclude that the operations of the department would be unduly burdened or subjected to uncertainty by variant state law interpretations. In fact, the primary effect which this case could have on federal housing policy would be to promote compliance with HUD requirements regarding HUD approved rent schedules.

Finally, in this aspect, real parties rely upon Martinez v. Socoma Companies, Inc. (1974) 11 Cal.3d 394, 113 Cal.Rptr. 585, 521 P.2d 841. That reliance is misplaced. Martinez does not hold as sweepingly as real parties assert "that the public beneficiaries of a federally funded program have no rights as third-party beneficiaries such as to enable them to sue for nonperformance thereof."

What Martinez held is that the determination of whether beneficiaries under a contract between a federal agency and a private party have standing to sue a private party for nonperformance of the agreement as third party beneficiaries "must be made in light of applicable federal statutes and other matters we (the court) must judicially notice." (Id., at p. 400, 113 Cal.Rptr. 585, 521 P.2d 841.)

At this juncture, we conclude as follows: Granted that the National Housing Act does not create a federal statutory right of action in petitioners, nevertheless, they may have...