Overreach results in rare class action dismissal via demurrer in Schermer v. Tatum

While getting a class certified is often a serious fight, defeating class allegations at the demurrer stage is generally rare.  But never say never.  In Schermer v. Tatum (March 18, 2016), the Fourth Appellate District, Division One, affirmed a trial court ruling sustaining a demurrer to class allegations in the plaintiffs' second amended complaint (SAC).  The plaintiffs brought a class action on behalf of residents who live in the 18 mobilehome parks.  The plaintiffs alleged they were subjected to uniform unconscionable lease agreements and leasing practices by a collection of related defendants.  The SAC involved 18 mobilehome parks allegedly owned and/or operated by two defendants (Tatums and Kaplan), and were managed through defendant Mobile Community Management Company (MCM).  The plaintiffs also named as defendants the 18 "single-purpose" business entities that are each described as the owners of one of the mobilehome park in California.

The Court of Appeal began by summarizing the first amended complaint, the demurrer hearing related to it, and the SAC. And that summary is all you need to read to know where things are headed.  The Court described the "highlights" of the FAC as follows:

In the FAC, plaintiffs again alleged defendants Tatum and Kaplan, through MCM, engaged in unlawful conduct at each of the 18 mobilehome parks.  Specifically, they alleged defendants "charg[ed] excessive rent, pursu[ed] arbitrary evictions, and implement[ed] unreasonable polices."  Plaintiffs further alleged in their FAC that defendants Tatum and Kaplan took "advantage of vulnerable prospective and current residents" including "non-[E]nglish speaking and elderly residents" who, plaintiffs claimed, were "especially susceptible" to defendants' unlawful business practices.  Plaintiffs alleged defendants "most egregious practice" was the use of a "one-sided, standardized lease" agreement.  Plaintiffs provided 32 examples of lease clauses that allegedly violated California's Mobilehome Residency Law (Civ. Code, § 798 et seq.; MRL).

 Plaintiffs' FAC also set forth about 11 "factors" that plaintiffs alleged showed procedural unconscionability between plaintiffs and the putative class, on the one hand, and defendants, on the other.  Such factors included among others "residents' poor socio-economic background" and defendants' "knowledge of residents' vulnerability to oppression."  Plaintiffs also listed about 17 examples of substantive unconscionability in their FAC in connection with defendants' use of the standardized lease agreement in the 18 mobilehome parks.  As before, plaintiffs' class action allegations included any person who had an ownership interest in a mobilehome in any of the 18 parks, and a senior citizen and non-English-speaking subclass. 

Slip op., at 3-4.  Then, discussing the hearing on the demurrer to the FAC, the Court said, "At the demurrer hearing, plaintiffs' counsel agreed with the court that plaintiffs' FAC was 'a mess' and counsel admitted they 'did a horrible job in succinctly and systematically putting forth facts that show what the [FAC] -- what the case is about and how it shows a pattern of conduct that is deserving of being treated in a class action.' "  Slip op., at 4.  Not looking good.

Describing the subsequently issued Order on the demurrer to the FAC, the Court set forth key parts of the trial court's ruling:

"Plaintiffs allege multiple causes of action, all of which related in some way to the Lease Agreements utilized at the Defendants['] parks.  Based upon the allegations in the [FAC], it appears that some of the claims involved the alleged unconscionability of the contracts themselves, while others involve each Defendant's alleged actions in executing or enforcing the individual contracts as to individual Plaintiffs.  [¶]  The Court finds that multiple factual allegations predominate.  Plaintiffs['] measure of damages will be unique to each park.  The proposed class does not all reside at the same location or under the same circumstances.  Each putative class member is/was a resident at one of the eighteen separate mobilehome parks located throughout the State of California, giving rise to individualized factual questions related to causation, liability, and damages.

"Example of the individualized issues include the remedy (determining excess rents paid at each space requires a factual showing of fair market values for rents in a particular area [at] a particular time and park-by[-]park appraisal).  Further, there appear to be multiple lease agreements.  Although Plaintiffs allege Defendants used a 'standardized' Lease Agreement, they attach at least five different variations of the Lease Agreement and/or Amendments to the Lease Agreement.  (See Exhibits 'A,' 'B,' 'C,' 'D,' and 'E,' attached to the [FAC].)

Slip op., at 5. The trial court went on to identify additional issues, including the fact that many class members would not be able to state certain claims if they had not attempted to sell their homes, and there were no putative class representative plaintiffs for many of the mobilehome parks.

The SAC filed by the plaintiffs attempted to address many of the trial court's concerns, but a number of its allegations were found by the trial court to be conclusory assertions about defendants, and not allegations of fact.  The SAC did not address damage issues that would arise, which included the fact that several of the mobilehome parks were in cities with their own rent control ordinances.  The trial court was particularly concerned by the fact that each agreement at each park with each potential class member was individually negotiated and by the fact that a unique damage calculation would be required for each park and each person at each park. Moreover, the trial court took notice of the fact that many individuals were involved in their own litigation with their own park.

After discussing the procedural background, the Court made sure to note that it is undisputed that class allegations can be decided on demurrer:

It is beyond dispute that trial courts are permitted to decide the issue of class certification on demurrer.  (Tucker, supra, 208 Cal.App.4th at p. 212; see Linder v. Thrifty Oil Co. (2000) 23 Cal.4th 429, 440 [noting the issue is "settled" that courts are authorized to "weed[] out" legally meritless class action suits prior to certification by demurrer or pretrial motion].)  A trial court may sustain a demurrer to class action allegations where " 'it concludes as a matter of law that, assuming the truth of the factual allegations in the complaint, there is no reasonable possibility that the requirements for class certification will be satisfied.  [Citations.]'  [Citations.]"  (Tucker, at p. 211, italics added; see Canon U.S.A., Inc. v. Superior Court (1998) 68 Cal.App.4th 1, 5 [noting that when the "invalidity of the class allegations is revealed on the face of the complaint, and/or by matters subject to judicial notice, the class issue may be properly disposed of by demurrer or motion to strike," and noting that "[i]n such circumstances, there is no need to incur the expense of an evidentiary hearing or class-related discovery"].)

Slip op., at 14. Much of the discussion that follows is unsurprising, given the discussion of the trial court's analysis.  The Court did wade into the murky waters of attempting to categorize an allegation as either an "ultimate fact" or a "conclusion":

We conclude plaintiffs' allegations in their SAC—which were noticeably absent from their original complaint—that defendants implemented a uniform policy and procedure in each and every lease transaction with plaintiffs and the putative class members over a four-year period (i.e., the proposed class period), in each of the 18 mobilehome parks owned and/or operated by Tatum and Kaplan, are not properly admitted for purposes of demurrer because such allegations are not ultimate facts but rather merely contentions and/or improper factual conclusions.

Slip op., at 17-18. In my experience, this is very much an eye-of-the-beholder call that deserves a clarifying opinion with more objective guidance as to how to distinguish between the two.

In any event, the Court agreed with the trial court's assessments, finding, in particular, that the individual nature of the transactions was such that each course of dealing is unique, and damages, because of different circumstances, park locations, and local ordinances, are also unique to each potential class member.  The Court declined to grant leave to amend to the plaintiffs, agreeing with the trial court that the problems were insurmountable.  The lesson here is that overreach can be fatal.  It might have been more workable to describe uniform leasing practices at one mobilehome park and seek class relief for the aspects of the transaction that were common to all of the residents, while, at the same time, addressing how damages will be calculated and distributed.

The "separate location" argument seems better suited to this sort of consumer circumstance than it is in the wage & hour context, where defendants nevertheless try the "each of our stores is unique and different" argument, as if they have no uniform policies regulating employees and allow each store to run their own affairs like the wild West. Hey, at least this Court cited Brinker (but it felt like an ironic cite to me).

Law-less Friday: Irony and Hipocrisy are no bar to standing

We all need a bit of levity on Friday, so take a moment and enjoy one paragraph from City of Palm Springs v. Luna Crest (March 17, 2016), a recent opinion from the Fourth Appellate District, Division Two, that captures the humor sometimes hidden in the law.

Luna Crest, Inc. opened a medical marijuana dispensary in the City of Palm Springs without obtaining a permit to test whether the Palm Springs ordinance requiring such a business to have a permit was invalid.  Luna Crest sought an injunction against further enforcement, claiming that federal drug laws preempt the City’s ordinance.  The Court observed:

To be sure, as the City points out, there is a certain irony, if not hypocrisy, in Luna’s invocation of federal drug laws as a basis for invalidating the City’s permitting requirements, given Luna’s intention to operate a medical marijuana dispensary in violation of those very federal drug laws.  The City cites no authority, however, for the proposition that irony or hypocrisy alone may vitiate standing, and we are aware of none.  We turn, therefore, to the merits of Luna’s claims.

Slip op., at 5.  Never let someone challenge your standing just because of the irony or hypocrisy of your position.  Never.

Have a great weekend, and, as they say, smoke 'em if you got 'em.

Hernandez v. Restoration Hardware, Inc. tells class action objectors to get party status or get lost

I frequently contemplate things without any real expectation that I will get an answer.  One thing I wonder about in the practice of law is whether California Courts of Appeal develop cultures as an institution (i.e., whether each Appellate District has a significant impact on its constituent members over time), or whether the tendencies are happenstance of the appointments (i.e., whether the tendencies of each Appellate District -- and Division therein -- is just the sum of random events like the preferences of the appointing administration and the timing of open seats). An application of this pondering occurred to me mere moments ago, when I read Hernandez v. Restoration Hardware, Inc. (March 14, 2016), in which the Fourth Appellate District, Division One, held that named party status is required to appeal a class action judgment. Jinkies!

In Hernandez v. Restoration Hardware, a bench trial resulted in a class recovery of up to $36,412,350.  The class representatives requested fees of $9,103,087.50 (25 percent of the total maximum fund). Francesca Muller, a class members, requested that the court order notice of the fee motion be sent to all class members.  The court denied the request, awarded the fees, and entered judgment.  Muller filed a notice of appeal. Class representative Hernandez substantively opposed the appeal but argued that Muller lacked standing to appeal at all. The Court of Appeal addressed the threshold issue of whether Muller had standing to appeal.

Recognizing that only an aggrieved party has standing to appeal, the Court began by recognizing the distinction between names class representatives and absent class members:

Indeed, "[t]he structure of the class action does not allow absent class members to become active parties, since 'to the extent the absent class members are compelled to participate in the trial of the lawsuit, the effectiveness of the class action device is destroyed.' "  (Ibid., fn. omitted.)  Although unnamed class members may be deemed "parties" for the limited purposes of discovery (Southern California Edison Co. v. Superior Court (1972) 7 Cal.3d 832, 840), unnamed class members are not otherwise considered "parties" to the litigation.  (Cf. National Solar Equipment Owners' Assn. v. Grumman Corp. (1991) 235 Cal.App.3d 1273, 1282 ["unnamed class members do not 'stand on the same footing as named parties' "].)

Slip op., at 9.  The Court then began its analysis by considering Eggert v. Pac. States S. & L. Co., 20 Cal. 2d 199 (1942), which considered the same issues presented here.  Concluding that Eggert was factually almost identical, theCourt concluded that Eggert required dismissal of the action:

Eggert appears to be on "all fours" with the present action: both involved a class action; both involved a matter litigated to judgment; both involved a challenge to the postjudgment attorney fee award to the counsel for the named plaintiff; both involved appellants who were members of the class, but not named parties, and who had appeared through counsel to object to the attorney fee award; and both involved members who took no steps to be added as named plaintiffs.  Accordingly, under Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450, we must adhere to Eggert and dismiss the appeal.

Slip op., at 11.  The Court then commented on several decisions from Courts of Appeal that permitted appeals by non-party class members:

Muller also cites several cases in which California appellate courts stated a class member who was not a party to the action obtains appellate standing to challenge the judgment merely by interposing an objection to the judgment below.  However, neither of the cases cited by Muller, Consumer Cause, Inc. v. Mrs. Gooch's Natural Food Markets, Inc. (2005) 127 Cal.App.4th 387 and Wershba v. Apple Computer, Inc. (2001) 91 Cal.App.4th 224, made any effort to reconcile their conclusions with Eggert, and instead rooted their conclusions in the analysis contained in Trotsky v. Los Angeles Fed. Sav. & Loan Assn. (1975) 48 Cal.App.3d 134 (Trotsky).  (See Wershba, at pp. 235-236 [citing only Trotsky on issue of standing]; Consumer Cause, at pp. 395-396 [citing Trotsky and Wershba on issue of standing].)  Accordingly, we examine Trotsky.

Slip op., at 12.  That examination of Trotsky was not flattering, and the Court quickly concluded that Trotsky had failed to consider the "party" element of section 902:

Trotsky focused primarily on whether an objector to a settlement was "aggrieved" within the meaning of Code of Civil Procedure section 902, concluding objectors were aggrieved because " '[i]t is possible that, within a class, a group of small claimants might be unfavorably treated by the terms of a proposed settlement. For them, the option to join is in reality no option at all,' " and reasoning that because those claimants might be forced to choose between "equally unpalatable alternatives"—of accepting either nothing or an unfair settlement—those parties were sufficiently aggrieved for purposes of the right to appeal.  (Trotsky, supra, 48 Cal.App.3d at pp. 139-140.)  However, Trotsky did not examine the distinct "party" element of Code of Civil Procedure section 902, nor make any effort to reconcile its conclusion with Eggert's holding that unnamed class members whose only appearance was to object to the attorneys' fees had no standing to appeal because they were not "parties" and did not avail themselves of the "ample opportunity . . . to become parties of record . . . ."  (Eggert, supra, 20 Cal.2d at p. 201.)  Because Eggert teaches the "party" requirement of Code of Civil Procedure section 902 is not met merely because the "aggrieved" requirement of section 902 might also be satisfied as to a nonparty class member, we conclude Trotsky's analysis of standing is flawed and that Trotsky and its progeny (which includes both Consumer Cause, Inc. v. Mrs. Gooch's Natural Food Markets, Inc., supra, 127 Cal.App.4th 387 and Wershba v. Apple Computer, Inc., supra, 91 Cal.App.4th 224) should not be followed.

Slip op., at 13-14.  Well now.  That's....interesting.  The Court went on to point out that federal courts handle this differently, but California courts aren't federal courts, and there is no requirement that California follow the federal approach.  You have to at least respect the cut of this Court's jib to state that they are bound to follow a factually similar 1942 decision and reject much more recent decisions for failing to address the California Supreme Court's Eggert decision. That said, of the many things I ponder, one is whether this case case more than 90 days of shelf life.

In DeSaulles v. Community Hospital of the Monterey Peninsula, the California Supreme Court explains what "prevailing party" means

You thought you could figure this one out all by yourself, right?  You can read Code of Civil Procedure section 1032.  It's written in English (sort of). You know what a "prevailing party" is without some Supreme Court telling you what it means.  But this is law, and when we are talking about the law, you can guarantee that somebody figures out how to find that exception that threads the needle.  Thus, we have DeSaulles v. Community Hospital of the Monterey Peninsula (March 10, 2016), in which the Supreme Court had to determine whether a plaintiff who voluntarily dismisses an action after obtaining a monetary settlement on a few of the claims remaining in the case is the "prevailing party" for purposes of section 1032.

The Court of Appeal held that the plaintiff was a prevailing party because he received a net monetary recovery as consideration for his dismissal.  In so holding, the Court of Appeal disapproved of Chinn v. KMR Property Management, 166 Cal. App. 4th 17 (2008), which held that settlements were not net monetary recoveries. The Supreme Court affirmed.  In affirming, the Supreme Court also did everyone a favor by saying that the presumption of section 1032 could be altered by agreement of the settling parties.  Regardless, it's a good thing the Supreme Court held as it did; given the sorry state of our court funding, we don't need more issues complicating settlement discussions.