Bank of America avoids some liability for Countrywide's evil, destruction of America

Slowly but surely, the fallout from the meltdown in the financial and real estate sectors is showing up in the Courts of Appeal.  This next sentence is a bit tricky, so watch my hands carefully.  In Bank of America v. Superior Court (Ronald) (August 24, 2011), the Court of Appeal (Second Appellate District, Division Three) considered whether borrowers that obtained Countrywide-originated home loans could state fraudulent concealment claims against Countrywide because Countrywide sold investors (not the borrowers) pools of mortgages at inflated values, resulting in the destruction of the housing market and subsequent loss of home values across California.  That is a spectucular theory.  But the Court of Appeal didn't think so:

Due to the generalized decline in home values which affects all homeowners (borrowers of Countrywide, borrowers who dealt with other lenders, and homeowners who owned their homes free and clear), there is no nexus between Countrywide's alleged fraudulent concealment of its scheme to bilk investors and the diminution in value of the instant borrowers' properties.

Slip op., at 2.  The Court examined the inentional tort of fraudulent concealment, finding that, on the facts, the theory failed for several reasons:

"Although 'inferentially, everyone has a duty to refrain from committing intentionally tortious conduct against another' [citation], it does not follow that one who intends to commit a tort owes a duty to disclose that intention to his or her intended victim. The general duty is not to warn of the intent to commit wrongful acts, but to refrain from committing them. We are aware of no authority supporting the imposition of additional liability on an intentional tortfeasor for failing to disclose his or her tortious intent before committing a tort." (Id. at p. 338; accord Deteresa v. American Broadcasting Companies, Inc. (9 th Cir. 1997) 121 F.3d 460, 467-468 [even if audiotaping and videotaping were wrongful, defendant was not liable for failing to disclose its intention to commit those wrongful acts]; In re MRU Holdings Securities Litigation (S.D.N.Y. 2011) 769 F.Supp.2d 500, 515 [it is "'rather circular' to say that . . . Defendants 'committed fraud by concealing their intent to commit fraud'"].)

Slip op., at 11.  The Court then found defects in causation, explaining that essentially all homeowers suffered a loss in equity when the overall market declined, whether borrower with Countrywide or not.  Although the comment at the end about how the holding is limited in nature, focused solely on the viability of the claim as alleged, suggests that, deep down, the Justices might actually believe that Countrywide had a major hand in the real estate implosion in some meaningful way.  Of course, that's my fantastical speculation and not reflective of any actual insight or knowledge on my part.

Strong-ARM tactics dealt a stunning setback in Boschma v. Home Loan Center, Inc.

After the great real estate implosion, lenders have been very busy, attempting to justify a number of questionable practices and products.  One such loan product, the Option ARM, has been challenged in state and federal courts.  Option ARM loans are complex forms of adjustable rate loans that generally include several payments options during the early years of the loan.  One payment option includes the ability to make a "minimum" payment for several years.  However, many Option ARM loan minimum payments are insufficient to pay accruing interest after an initial "teaser" interest rate that is very low.  Once the "teaser" rate period expires, the unpaid interest is added onto the loan, increasing the principal balance owed on the loan (negative amortization).  Because of their complexity, clear disclosures to borrowers are essential.  In Boschma v. Home Loan Center, Inc. (August 10, 2011), the Court of Appeal (Fourth Appellate District, Division Three) held that a complaint alleging a lender's failure to disclose that negative amortization would definitely occur (instead describing that scenario as merely possible), was sufficient to state violations of the UCL and common law fraud.

The Court described the claims of the Second Amended Complaint:

The gravamen of plaintiffs' operative complaint is that defendant failed to disclose prior to plaintiffs entering into their Option ARMs: (1) "the loans were designed to cause negative amortization to occur"; (2) "the monthly payment amounts listed in the loan documents for the first two to five years of the loans were based entirely upon a low 'teaser' interest rate (though not disclosed as such by Defendants) which existed for only a single month and which was substantially lower than the actual interest rate that would be charged, such that these payment amounts would never be sufficient to pay the interest due each month"; and (3) "when [plaintiffs] followed the contractual payment schedule in the loan documents, negative amortization was certain to occur, resulting in a significant loss of equity in borrowers' homes, and making it much more difficult for borrowers to refinance the loans [because of the prepayment penalty included in the loan for paying off the loan within the first three years of the loan]; thus, as each month passed, the homeowners would actually owe more money than they did at the outset of the loan, with less time to repay it."

Slip op., at 13.  The Court began its analysis by explaining what was not at issue in the case at this time:

It is important to demarcate the boundaries of this dispute. The following is not at issue in this case: (1) should it be legal to offer Option ARMs to typical mortgage borrowers; and (2) should it be legal to utilize "teaser" ("discounted") interest rates (here 1.25 percent for the first month of a 30 year loan), which bear no relation to the actual cost of credit? Our only concern in this case is whether plaintiffs stated a cause of action under state law based on defendant‘s allegedly misleading, incomplete, and/or inaccurate disclosures in the Option ARM documents provided to plaintiffs.

Slip op., at 15.  The Court then observed that no California state court had addressed the exact issues presented in the case.  However, the Court noted that a number of federal courts had examined similar issues.

The Court began by addressing the Defendant's contention that strict compliance with TILA provided it with a safe harbor of sorts:

A string of cases (involving strikingly similar Option ARM forms/disclosures to those used in the instant case) have held that a borrower states a claim for a violation of TILA based on, among other disclosure deficiencies, the failure of the lender to clearly state that making payments pursuant to the TILDS payment schedule will result in negative amortization during the initial years of the loan.

Slip op., at 18.  The Court concluded that, since the allegations could support a cause of action for TILA violations, it would be nonsensical to dismiss the claims at this stage, based on a claim of compliance with TILA disclosure obligations.  Note:  There was no TILA claim asserted in this action, only UCL and fraudulent concealment claims.

Next, the Court considered the state law fradulent concealment claims.  The Court began its discussion by citing a number of federal cases that allowed state law claims to proceed along with TILA claims.  The Court then turned to the sufficiency of the fraud pleading.  The Court found that the failure to disclose the exceedingly low teaser rate adequately was a sufficient omission to suppor the fraudulent concealment claim: "The teaser rate creates an artificially low (compared to the actual cost of credit) initial payment schedule and guarantees that the actual applicable interest rate (after the first month of the loan) will exceed the interest rate used to calculate the payment schedule for the initial years of the loan."  Slip op., at 24.

Turning to the UCL, the Court found that the allegations were sufficient to support a UCL under all three prongs.  The "unfair" prong discussion was the most interesting of the three:

As noted above in our discussion of damages, it may be difficult for plaintiffs to prove they could not have avoided any of the harm of negative amortization — they could have simply paid more each month once they discovered their required payment was not sufficient to pay off the interest accruing on the loan. But plaintiffs may show they were unable to avoid some substantial negative amortization. And we see no countervailing value in defendant's practice of providing general, byzantine descriptions of Option ARMs, with no clear disclosures explaining that, with regard to plaintiffs' particular loans, negative amortization would certainly occur if payments were made according to the payment schedule. To the contrary, a compelling argument can be made that lenders should be discouraged from competing by offering misleading teaser rates and low scheduled initial payments (rather than competing with regard to low effective interest rates, low fees, and economically sustainable payment schedules). Finally, to the extent an "unfair" claim must be "tethered" to specific statutory or regulatory provisions, TILA and Regulation Z provide an adequate tether even though plaintiffs are not directly relying on federal law to make their claims.

Slip op., at 29.

Fun fact: the Court cited Kwikset when rejecting the Defendant's contention that the Plaintiffs did not adequately allege standing under the UCL.

Disclosure:  J. Mark Moore of Spiro Moss argued this matter before the Court of Appeal and contributed significantly to the briefing on appeal.

In the "Pitts" of despair, a "Terrible" attempt to pick off a class representative fails

I remember when what was probably the first Terrible Herbst gas station opened a mere block from my home in Las Vegas.  Refilled a lot of bike tires there.  But enough about my childhood.  Terrible Herbst isn't the friendly local gas station of my youth.  Now it's just another corporate slave to the whisperings of defense counsel skilled in the dark arts.  In Pitts v. Terrible Herbst, Inc. (August 9, 2011), the Ninth Circuit considered whether a rejected offer of judgment for the full amount of a putative class representative's individual claim moots a class action complaint where the offer precedes the filing of a motion for class certification.  The Ninth Circuit concluded that it did not.

Pitts filed a hybrid FLSA and Nevada labor law class action.  The defendant removed it to federal court.  With a discovery motion pending, Terrible made a Rule 68 offer of judgment in the amount of $900.  Pitts claimed $88.00 in damages but rejected the offer.  Terrible then sought to have the matter dismissed.  The Ninth Circuit rejected this attempt to impede consideration of the class certification question:

An inherently transitory claim will certainly repeat as to the class, either because “[t]he individual could nonetheless suffer repeated [harm]” or because “it is certain that other persons similarly situated” will have the same complaint. Gerstein, 420 U.S. at 110 n.11. In such cases, the named plaintiff’s claim is “capable of repetition, yet evading review,” id., and “the ‘relation back’ doctrine is properly invoked to preserve the merits of the case for judicial resolution,” McLaughlin, 500 U.S. at 52; see also Geraghty, 445 U.S. at 398; Sosna, 419 U.S. at 402 n.11.

Slip op., at 10453.  The Court then discussed the argument that the claims in this matter were not "inherrently" transitory:

We recognize that the canonical relation-back case—such as Gerstein or McLaughlin—involves an “inherently transitory” claim and, correspondingly, “a constantly changing putative class.” Wade v. Kirkland, 118 F.3d 667, 670 (9th Cir. 1997). But we see no reason to restrict application of the relation-back doctrine only to cases involving inherently transitory claims. Where, as here, a defendant seeks to “buy off” the small individual claims of the named plaintiffs, the analogous claims of the class—though not inherently transitory—become no less transitory than inherently transitory claims. Thus, although Pitts’s claims “are not ‘inherently transitory’ as a result of being time sensitive, they are ‘acutely susceptible to mootness’ in light of [the defendant’s] tactic of ‘picking off’ lead plaintiffs with a Rule 68 offer to avoid a class action.”

Slip op., at 10454.  Interestingly, the Court essentially found that the right to certify a class was an additional right not satisfied by the Rule 68 offer, and that right could not be extinguished unless certification were denied and all appellate efforts were exhausted.

Next, the Court ruled that it was error to find that Pitts failed to timely file a motion for class certification when the trial court refused to rule on a pending discovery motion to obtain evidence necessary for certification.

Other issues raised in the appeal were not addressed by the Court once it concluded that the trial court erred in its ruling regarding the timing of certification.

In NAACP of Camden County East v. Foulke Management Corp., New Jersey appellate court finds reasons to distinguish Concepcion

When you stamp down too hard, stuff leaks out the sides.  AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) was the boot.  Since then, we've been waiting to see what would leak out the sides.  There has been a good deal of discussion about the ramifications of Concepcion.  While Concepcion may make things harder for class actions, the severity of the opinion is also inspiring interesting challenges to arbitration agreements on many fronts.  In NAACP of Camden  County East v. Foulke Management Corp. (August 2, 2011), the Appellate Division of the New Jersey Superior Court concluded that convoluted and inconsistent arbitration provisions in an automobile purchase contract could not be enforced, reversing the trial court's order directing the matter to individual arbitration.

The opinion focused heavily on the concurring opinion of Justice Thomas for its conclusion that a confusing consumer contract provision related to arbitration would not be enforced:

Thus, in the aftermath of AT&T Mobility, state courts remain free to decline to enforce an arbitration provision by invoking traditional legal doctrines governing the formation of a contract and its interpretation. Applying such core principles of contract law here, we must decide whether there was mutual assent to the arbitration provisions in the dealership's contract documents. As part of that assessment, we must examine whether the terms of the provisions were stated with sufficient clarity and consistency to be reasonably understood by the consumer who is being charged with waiving her right to litigate a dispute in court.

Slip op., at 31.  The Court found ample evidence for the proposition that the consumer could not have reasonably understood the arbitration provisions.  The Court did take a moment to opine that the trial court was correct when it found that a class action waiver could not be invalidated on public policy grounds.  But the Court then found that the issue was irrelevant to the outcome, since the provisions were unenforcable on formation grounds.

Court of Appeal construes Labor Code section 2810, which authorizes suits against contractors by certain employees of subcontractors

Labor Code section 2810 states that "[a] person or entity may not enter into a contract or agreement for labor or services with a construction, farm labor, garment, janitorial, or security guard contractor, where the person or entity knows or should know that the contract or agreement does not include funds sufficient to allow the contractor to comply with all applicable local, state, and federal laws or regulations governing the labor or services to be provided."   Section 2810 is a fairly new statute, and one that had not been the subject of any Court of Appeal decision.  But in Castillo v. Toll Brothers, Inc. (July 28, 2011), that changed.  I could tell you that this very exciting opportunity to read an opinion in a truly novel area of law prompted my review of the case.  But, in truth, it was just the defendant's name that caught my eye.

In any event, the trial court, dealing with summary judgment motions and lots of supplemental briefing, evidently had its hands full with a large number of arguments intersecting Labor Code section 2810.  The Court of Appeal commended the trial court's diligent efforts:

The order is a masterful synthesis of a sprawling factual record, reflecting the court's careful work with the parties over the course of several months. We recount the decision in some detail because it forms the foundation for our own ruling.

Slip op., at 6.

A key legal issue addressed in the appeal was determination of whether minimum wage or local prevailing wage sets the standard for insufficiency.  The Court also clarified that actual labor cost, and not the base wage, sets the correct standard.

As to the standard for insufficiency, the Court held that the "minimum wage" sets the standard:

Plaintiffs' position is untenable because there is no general law requiring an employer to pay its workers the average local wage for a particular skill or trade, if that average wage is higher than the legal minimum. Merely to pay less than the prevailing wage therefore violates no law. In the absence of a local, state, or federal law requiring the payment of a wage higher than the legal minimum, a contract cannot be insufficient under section 2810 merely because it does not provide sufficient funds to pay that higher wage, since section 2810 imposes nothing more than compliance with legal requirements.

Slip op., at 14.  (Note: Earlier in the opinion the Court clarified that "minimum wage" would depend upon the industry and wage order at issue in a particular case.)  While this soundbite quote seems clear enough, the opinion goes on for pages, reviewing legislative history and addressing, in detail, the contentions of the plaintiffs regarding the correct measure of sufficiency of funding.

On the second issue, the Court observed that compliance with all laws sets the standard for compliance, which requires analysis of total labor cost, not just the wage that would be paid to employees:

Because an employer is required to pay all of these costs to comply with applicable laws when employing a laborer, it is appropriate to use the total labor cost, rather than the worker‘s wage, in determining sufficiency under section 2810.

Slip op., at 7.

The second half of the opinion addresses (1) the sufficiency of evidence for summary judgement purposes on the issue of whether specific contracts were sufficiently funded, and (2) some over-reaching pre-emption arguments by Toll Brothers.  If that stuff floats your boat, this is a page turner.

Prevailing wage laws apply where a public entity provides a land rent credit to a private entity

Labor Code section 1720, subdivision (a)(1) of the Public Wage Law ("PWL") defines " 'public works'" to mean: "Construction, alteration, demolition, installation, or repair work done under contract and paid for in whole or in part out of public funds . . . ."  When public funds end up in the hands of private entities, it is not always clear whether the PWL applies.  In Hensel Phelps v. San Diego Unified Port District (July 26, 2011), the Court of Appeal (Fourth Appellate District, Division One) had no trouble following the money trail.  The Court considered whether a hotel construction project on land that the San Diego Unified Port District (the Port District) leases to the hotel owner qualified as a public work within the meaning of the PWL where the lease specified that the Port District would provide what the lease refers to as a "rent credit" in the total amount of $46.5 million during the first 11 years of the lease.  Characterizing the "rent credit" as a source of public funds flowing to the private hotel project, the Court concluded that the PWL applied:

In assessing CCCC's argument, we note that no case law exists interpreting the phrase "rents . . . that are . . . reduced, . . . waived, or forgiven" in section 1720, subdivision (b)(4). However, when interpreting a statute, "'"[t]he words of the statute should be given their ordinary and usual meaning and should be construed in their statutory context." [Citation.] If the plain, commonsense meaning of a statute's words is unambiguous, the plain meaning controls.' " (People v. King (2006) 38 Cal.4th 617, 622.) Here, we agree with CCCC that the phrase "rents . . . that are reduced" has a plain everyday meaning that is clear and unambiguous. Under a plain commonsense meaning, rent is reduced when the amount of the rental obligation is set at a certain amount by agreement or by operation of law, and a discount is given from that amount. Under a plain commonsense meaning, rents are waived or forgiven when a party agrees not to impose or demand rents.

Applying this plain commonsense meaning, we agree with CCCC that rents were reduced, waived or forgiven by the Port District. The Lease sets forth a monthly and minimum annual rent amount that OPB is obligated to pay to the Port District. The rent credit constitutes a reduction in that payment obligation. In addition, the 100 percent rent credit during the first 34 to 36 months of the Lease is not only a reduction, but also could be considered a waiver of the rent because no rent at all is due in that period.

Slip op., at 23-24.

Fourth Appellate District, Division Three, scoffs at notion that Concepcion preempts all state unconscionability law

As soon as a blockbuster decision hits the street, zealous litigators work to stretch it as far as it can go.   AT&T Mobility LLC v. Concepcion (April 27, 2011) is getting that elastic band treatment right now.  For example, AT&T Mobility (Concepcion) was the subject of a brief aside in Mission Viejo Emergency Medical Associates v. Beta Healthcare Group (July 25, 2007).  In a lawsuit between an insured and the insurer, a motion to compel arbitration of a dispute arising out of the policy was denied by the trial court.  The Court of Appeal reversed and remanded for further proceedings regarding a claim of unconscionability.  In the course of the discussion, the Court said:

We invited the parties to provide their comments on the recent United States Supreme Court case, AT&T Mobility LLC v. Concepcion (2011) __ U.S. __ [131 S.Ct. 1740] (AT&T). Defendants appear to argue that AT&T essentially preempts all California law relating to unconscionability. We disagree, as the case simply does not go that far. General state law doctrine pertaining to unconscionability is preserved unless it involves a defense that applies "only to arbitration or that derive[s] [its] meaning from the fact that an agreement to arbitrate is at issue." (Id. at p. __ [131 S.Ct. at p.1746].) This simply does not apply here.

Slip op., at 13, n. 4.  The Court then concluded that the asserted unconscionable provisions in the arbitration agreement could be dealt with by the trial court when it considered any motion to sever provisions:

The specific provisions that plaintiffs raise — regarding arbitration in San Francisco, the even split of the cost, and the nonarbitrability of discretionary decisions — can be the subject of a motion to sever before the trial court if the parties cannot reach agreement on the terms of arbitration. (Civ. Code, § 1670.5, subd. (a).) Although we may decide this issue as a matter of first impression (see Higgins v. Superior Court (2006) 140 Cal.App.4th 1238, 1251), given the relative lack of factual development as to these issues, we believe that deference to the trial court would better serve the ends of justice.

Slip op., at 15.

So there you have it from the Fourth Appellate District, Division Three: AT&T Mobility (Concepcion) doesn't preempt all California law on the subject of contractual unconscionability.  They didn't even break a sweat figuring that out.  Interestingly, this is the second decision (Brown v. Ralphs being the first) that asked for supplemental briefing on AT&T Mobility (Concepcion) but issued a decision that is relatively unaffected by it. 

California Grocers Association v. City of Los Angeles holds that City may regulate wholesale replacement of a workforce after purchase of a business

In California Grocers Association v. City of Los Angeles (July 18, 2011), the California Supreme Court considered whether a worker retention ordinance -- regulating the ability of some employers to summarily replace a workforce after purchasing the business -- is preempted as intruding upon either matters of health and safety already regulated by the state or matters of employee organization and collective bargaining fully occupied by federal law.  The six Justices in the majority explained in their 38-page opinion that the neutral ordinace promulaged by the City of Los Angeles did not run afoul of preemption landmines.  The dissenting opinion, all 27 pages of it, concluded otherwise, essentially on the ground that the NLRA is intended to confer upon employers the right to hire anyone they want.  The majority wasn't persuaded by this analysis, opining instead that the NLRA was actually passed to protect employees and regulate employers.  Crazy talk.

The City of Los Angeles passed an ordinance much like those passed in other municipalities.  The Los Angeles Ordinance, focused on grocery stores, was summarized by the Court:

For grocery stores of a specific size (15,000 square feet or larger) that undergo a change of ownership, the Ordinance vests current employees with certain individual rights during a 90-day transition period. First, the incumbent owner is to prepare a list of nonmanagerial employees with at least six months' employment as of the date of transfer in ownership, and the successor employer must hire from that list during the transition period. (L.A. Mun. Code, § 181.02.) Second, during that same period, the hired employees may be discharged only for cause. (Id., § 181.03(A)-(C).) Third, at the conclusion of the transition period, the successor employer must prepare a written evaluation of each employee's performance. The Ordinance does not require that anyone be retained, but if an employee's performance is satisfactory, the employer must "consider" offering continued employment. (Id., § 181.03(D).) If the workforce is unionized, however, the union and the employer may agree on terms that supersede the Ordinance. (Id., § 181.06.)

Slip op., at 2.  The California Grocers Association did not like this ordinance and sued to enjoin its implementation.

The Court began its analysis with state law preemption in the health and safety field.  The majority had little difficulty explaining why an ordinance regulating mass terminations had little direct impact on any health and safety regulations controlling how food is handled in grocery stores.

Next, the Court examined federal preemption:

We consider as well whether the Ordinance is preempted by the NLRA, a federal law enacted to protect "the right of employees to organize and bargain collectively." (29 U.S.C. § 151.)

Slip op., at 11.  Summarizing the post-Machinists preemption cases, the Court first explained that preemption was directed at regulations of bargaining process, not local employment laws setting substantive minimum labor standards for all employees.  Next, the Court considered whether there was evidence of a clear and manifest congressional intent to bar at any level the regulation of employee retention during ownership transitions.  Working their way through the history of such decisions, the Court found solid support for the notion that the NLRA was silent as to an obligation to hire the employees of a purchased business.  The Court finished its analysis by concluding that the retention ordinance should not have a meaningful impact on successorship obligations.

Finally, the Court declined to set aside the ordinance on equal protection grounds, observing that a rational relationship exists between the stated goal of the ordinance and the decision to focus on large grocery stores.

The dissent contested the majority's decision by asserting, again and again, that the NLRA provides employers with a protected right to hire as they see fit.  The majority directly dispatched this argument with great brevity, and the length of the dissent does not make it more persuasive in my view.

Brown v. Ralphs Grocery Company decided, but dodges the Gentry-Concepcion issue and the NLRA prohibition on concerted activity bans

The Court of Appeal (Second Appellate District, Division Five) issued its opinion today in Brown v. Ralphs Grocery Company (July 12, 2011).  The opinion is notable for what it doesn't address.  As mentioned previously here, the Court had requested supplemental briefing on the issue of whether Concepcion dished out the Discover Bank treatment to Gentry v. Superior Court (2007) 42 Cal.4th 443.  After a few feverish days of writing an amicus brief (for CAOC) focused primarily on the fact that the National Labor Relations Act prohibits enforcement of any contract that would impede concerted activity by employees (including class actions to improve wages and working conditions), I was disappointed to see that the Court dodged the entire question, deciding the matter on the ground that a factual showing had not been made in the trial court to support the Gentry factors.  There is also a split decision discussion of how PAGA claims interact with motions to compel arbitration.

On balance, this non-opinion doesn't do much to answer the question of how Concepcion interacts with wage & hour class actions and the Gentry decision.  It will take another appellate vehicle to properly present those questions for review.

Collaborative editing now available for the Microsoft Word Web App

Microsoft announced today that it is adding the ability for multiple authors to simultaneously edit Word documents on SkyDrive using the Word Web App.  Imagine sitting at a mediation, working on part of a settlement MOU while someone back at your office edits or adds content to some other part of the document.  You could even quietly collaborate on a settlement agreement with opposing counsel so that you had a long form agreement ready for signatures right there.  Crazy.  Microsoft has been slow to refocus on new areas of competition, but it is building a head of steam with Google in its sights.