Wednesday, February 6, 2013

FYI: Cal App Ct Rules in Favor of Defendant in Putative Class Action Challenging Notary Fees in Excess of $10 Statutory Limit

The California Court of Appeal, Fifth District, recently upheld summary judgment in favor of the defendant in a putative class action alleging unlawful overcharges of notary fees in excess of the $10 limit under California's notary fees statute. 


Additionally, the Court ruled that an attorney's fees provision contained in escrow instructions was unconscionable and thus unenforceable, concluding that the provision was among other things oppressive, completely one-sided, and encompassed all types of claims, even claims unrelated to the escrow agreement.


A copy of the opinion is available at:


At a closing for a mortgage refinancing loan, plaintiff borrower ("Borrower") was presented with about 40 documents, most of which required Borrower's signature.  A notary public, present at the loan closing to acknowledge Borrower's signature, charged Borrower a total of $75.  The $75 fee appeared on the closing statement as a non-itemized entry but supposedly included fees for taking two signature acknowledgments, one on a deed of trust and the other on a transfer deed, and for performing other services, such as: traveling to the loan closing site; making the necessary disclosures required by the loan documents; explaining the purpose of each loan document; answering Borrower's questions about the loan closing process or loan documents; and showing where to sign each document. 


One of the documents Borrower signed was a set of escrow instructions that contained an attorney fee provision providing that in the event Borrower filed a lawsuit he would  pay defendant escrow company ("Escrow Company") "all costs, expenses and reasonable attorney's fees which [Escrow Company] may expend or incur in said suit. . . ."


Borrower filed a putative class-action against Escrow Company, alleging that the notary charged fees in excess of the fees permitted by California's Government Code section 8211 providing that a notary may charge only $10 per signature for "taking an acknowledgment."    Explicitly premised on the alleged overcharge for notary fees in violation of Section 8211, Borrower's complaint, styled as a statewide, multi-year class action, set forth causes of action for violation of California's unfair competition law, Bus. & Prof. Code § 17200 et seq. ("UCL") and unjust enrichment. 


Prior to class certification, Escrow Company moved for summary judgment, contending that the $75 fee was not a violation of Section 8211 because Section 8211 only limited fees for taking acknowledgments, that the notary performed other services, and that the notary was an independent contractor and not an agent of Escrow Company, which merely disbursed the funds to the notary.


In opposing the motion for summary judgment, Borrower argued in part that: (1) the fees charged were unlawful under Section 8211 even if other services were provided, because the only notary function performed was the taking of two signature acknowledgments; (2) even if the fees were not unlawful, they were potentially unfair or fraudulent under the UCL because Escrow Company failed to itemize or disclose the various services being provided.


In further support of its motion, Escrow company also argued that all of Borrower's claims were premised on a supposed violation of Section 8211 and that, because no other theories were alleged in the complaint, Borrower was precluded from pursuing theories raised in his opposition.


The lower court granted Escrow Company's motion for summary judgment on both grounds.  Borrower appealed. 


Several months after the entry of judgment in favor of Escrow Company, Escrow Company moved for attorney fees, seeking $266,801 pursuant to the attorney's fees provision in the escrow instructions Borrower signed at the loan closing, and supposedly based on the extensive discovery and time spent defending the litigation.


The lower court granted the motion and awarded Escrow Company the requested attorney fees.  Plaintiff also appealed the order awarding attorney's fees.


The Appellate Court affirmed in part and reversed in part, concluding that the lower court properly granted Escrow Company's motion for summary judgment but that the attorney's fees provision in the escrow instructions was unconscionable and thus unenforceable.


As you may recall, Section 8211 provides:  "Fees charged by a notary public for the following services shall not exceed the fees prescribed by this section. (a) For taking an acknowledgment or proof of a deed, or other instrument, to include the seal and the writing of the certificate, the sum of [$10] for each signature taken." 


In addition, the UCL prohibits unfair competition and defines "unfair competition" as "any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising." See  Bus. & Prof. Code, § 17200; Pastoria v. Nationwide Ins. 112 Cal. App.4th 1490, 1496 (2003)(noting that the UCL prohibits practices that are either "unfair" or "unlawful" or "fraudulent").


Examining at length Escrow Company's motion for summary judgment, the Appellate Court focused on the function of pleadings in a motion for summary judgment, observing that "the burden of a defendant moving for summary judgment only requires that he . . . negate the plaintiff's theories of liability as alleged in the complaint" and not on other potential theories of liability not raised in the pleadings.


Thus, noting that Borrower never filed an amended complaint to include theories of liability for supposed UCL violations, and that his "declarations in opposition to a motion for summary judgment 'are not a substitute for amended pleadings,'" the Appellate Court repeatedly pointed out that the only theory of liability alleged in the complaint was that Escrow Company overcharged for notary fees in violation of Section 8211. 


Turning to the meaning of Section 8211, the Appellate Court rejected Borrower's assertion that the complaint did in fact assert a cause of action under the UCL, ultimately agreeing with the lower court that Section 8211 does not limit what may be charged for services which are not specifically listed in that statute.  In so doing, referring to Escrow Company's evidence that the fees also covered a variety of loan signing services that the notary provided, the Court noted that Section 8211 sets forth a list of notary services regulated by Section 8211, but that Section 8211 does not regulate fees for any services not mentioned in the statute, such as traveling to a loan closing or answering Borrower's questions about the loan documents.


Accordingly, having concluded that Borrower's entire complaint was based on the sole theory that Escrow Company engaged in unlawful conduct by supposedly violating Section 8211 fee provision, the Appellate Court ruled that Escrow Company had met its burden and that summary judgment was proper.


With respect to Escrow Company's motion for attorney fees, the Court looked at the specific language of the provision, its purpose, the respective bargaining positions of the parties, and the circumstances surrounding the document signing to determine whether the provision was unconscionable and thus unenforceable.


Pointing out that unconscionability, viewed on a so-called "sliding scale," consists of both procedural and substantive elements, the court concluded that Borrower had demonstrated both elements of unconscionability.  See Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC, 55 Cal.4th 223 (2012)("the procedural element addresses the circumstances of contract negotiation and formation, focusing on oppression or surprise due to unequal bargaining power.  . . . Substantive unconscionablity pertains to the fairness of an agreement's actual terms and to assessments of whether they are overly harsh or one sided.")


The Appellate Court based its conclusion as to procedural unconscionability on various factors, including:  (1) Escrow Company was in a superior bargaining position; (2) Borrower was presented with about  40 preprinted forms for his signature of which the escrow instructions was just one document; (3) the attorney's fees provision, written in a small font size and buried in the extensive verbiage of the boilerplate "general provisions," was hidden within the escrow instructions themselves;  (4) the escrow instructions were adhesive in that they were set forth in a standardized form contract "imposed on Borrower"; and (5) the unexpected attorney fees provision was neither known nor negotiated by Borrower.


Turning to the substantive prong of unconscionability, the court agreed that the attorney's fees provision was unfairly one-sided, well beyond the expectations of Borrower, the non-drafting party, and was not a standard attorney's fees provision providing a mutual right to attorney fees to the prevailing party.   Noting that the provision gave Escrow Company alone the right to recover attorney fees even for claims unrelated to the escrow instructions, the Appellate Court rejected Escrow Company's argument that a reciprocity provision in California's Civil Code automatically rendered the attorney's fees provision bilateral and mutual.  See Cal. Civ. Code § 1717 (allowing reasonable attorney's fees to prevailing party "[i]n any action 'on a contract,' . . . which [fees] are incurred to enforce that contract").  


Reasoning that Borrower's action was not "on the contract" but rather based entirely on enforcement of a specific statutory regulation of notary fees, the court concluded that Section 1717 did not apply to this case, as the contractual relationship formed between the parties as a result of the escrow agreement was merely incidental to Borrower's claims.


Accordingly, the Appellate Court upheld the lower court's order granting Escrow Company's motion for summary judgment, but reversed the award of attorney's fees.




Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874





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