Thursday, February 22, 2018

FYI: Cal Sup Ct Holds Non-Intervening Unnamed Class Member Has No Right to Appeal

The California Supreme Court recently held that unnamed class members do not become parties of record under Cal. Code of Civil Procedure section 902, with the right to appeal the class settlement, judgment or attorney fees award, unless they formally intervene in the class litigation before the action is final.

 

A copy of the opinion is available at:  Link to Opinion

 

In 2008, the plaintiff filed a class action law suit against defendant, alleging the furniture company committed numerous violations of the California Song-Beverly Credit Card Act, Cal. Civ. Code § 1747, et seq. , when it asked for and recorded zip codes from customers who used credit card in making purchases. 

 

As you may recall, Cal. Code Civ. Proc. § 1747.08(a) prohibits businesses from requiring the cardholder to write any personal identification information as a condition to accepting credit card payment for goods or services.

 

The trial court certified the case as a class action and appointed class representatives and class counsel.

 

In June 2013, a notice to potential class members advised them of the pending class action and presented them with the following options: (1) they could remain as part of the class and be bound by the judgment, or (2) they could exclude themselves from the class (opt out) and not be bound by the judgment. 

 

An unnamed class member (the "Appellant") received the June 2013 class action notice, but did not join the class as a party or opt out at that time.  Instead, Appellant's attorney filed a notice of an appearance on her behalf.

 

Following a bench trial, the trial court found defendant liable for "as many as" 1,213,745 violations of the California Song-Beverly Credit Card Act, set a penalty of $30 per violation, and rendered a judgment against the defendant in the amount of $36,412,350. 

 

The parties met and agreed that the judgment was based on the maximum number of violations $30 per violation, and that sum would be treated as a common fund inclusive of any attorney fees, costs, and class representative enhancements.  The Appellant never moved to intervene during the bench trial on the merits by filing a formal complaint in intervention under Cal. Code Civ. Proc. § 387.

 

The class counsel submitted a motion for attorney fees of nearly $2.7 million.  The defendant agreed not to oppose the fee award if class counsel sought no more than 25 percent of the total recovery.

 

The Appellant was served with the attorney fees motion, but did not object to the proposed total fee award.  Instead, she filed a "Request for Clarification" and asked to appear telephonically at the settlement fairness hearing on the fee proposal.  The request stated that "[t]he parties' pleadings do not indicate that class members were notified of the settlement of the attorney fee issue and of the hearing on September 5, 2014, to approve [c]lass [c]ounsel's fee request."  The trial court permitted the Appellant to file her request.

 

In September 2014, the trial court held a fairness hearing on the attorney fees application.  The Appellant objected to the court's consideration of the proposed fee award, because the class members were not given notice of their right to appear and comment on the proposed attorney fees settlement following bench trial on the merits.

 

The trial court noted, and the Appellant's counsel acknowledged, that there was no authority to support the claim that the court should have given the class additional notice (beyond the initial class certification notice) of the subsequent settlement fairness hearing on the proposed attorney fees award. 

 

The Appellant also argued that the trial court was required to calculate fee award using the "lodestar multiplier" approach, rather than a "percentage of the fund" approach, but did not argue that the fee ward was excessive.

 

After the hearing on the settlement of the proposed fee award, the trial court issued an order denying the Appellant's request for clarification and approved the fee and costs requests.  The trial court filed its final judgment and class counsel distributed a notice of the judgment to class members.

 

The Appellant filed a notice of appeal to the attorney fees award.  She renewed her claim that in failing to provide class members with notice of the fee negotiations and proposed settlement with defendant, class representatives and class counsel breached their fiduciary duties to the class.  The Appellant also reiterated her claims that the trial court should have used the lodestar multiplier approach to calculate the fee award.

 

On appeal, the class representatives argued that the Appellant lacked standing to file her appeal because she was neither a "party" nor "aggrieved" by the trial court's alleged erroneous judgment, as required under Cal. Code Civ. Proc. Section 902 and Eggert v. Pac. States S. & L. Co. (1942) 20 Cal.2d 199, 201.

 

The Appellate Court dismissed the Appellant's appeal for lack of standing, concluding that it was bound to follow Eggert under Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450, 450 (decisions of state supreme court are binding on all other state courts; courts of inferior jurisdiction may not overruled higher court decisions).

 

The California Supreme Court granted Appellant's petition for review on the right to appeal issue.

 

As you may recall, the class action vehicle is codified in Cal Code Civ. Proc. Section 382, and its procedural rules for class certification, notice, settlement, and judgment appear in California Rules of Court, rules 3.760-3.771. 

 

Case law imposes fiduciary duties on the trial courts, class counsel, and class representatives, who must ensure the action proceeds in the class members' best interest.  The class action structure relieves the unnamed class members of the burden of participating in the action.  Earley v. Superior Court (2000) 79 Cal.App.4th 1420, 1434.  Unnamed parties may be considered "parties" for the limited purpose of discovery, but those same unnamed parties are not considered "parties" to the litigation.  National Solar Equipment Owners' Assn. v. Grumman Corp. (1991) 235 Cal.App.3d 1273, 1282.

 

California Rules of Court, Rule 3.769 requires class representatives to notify class members of a pending settlement on the merits, and provide them with the opportunity to object at the final settlement fairness hearing. 

 

Rule 3.771(b) requires that notice of a pending judgment be provided to class members, and rule 3.769(f) provides that "notice of the final approval hearing must be given to the class members in the manner specified by the court.  The notice must contain an explanation of the proposed settlement and procedures for class members to follow in filing written objections to it and in arranging to appear at the settlement hearing and state any objections to the proposed settlement."

 

Under California rules, an unnamed class members may become parties of record to class actions in one of two generally acceptable ways. 

 

First, they may file a timely complaint in intervention before final judgment that set forth the grounds upon which the intervention rests.  See Cal. Code Civ. Proc. § 387.  If parties seek permissive intervention under section 387(a), they must show they have an interest in the litigation.  For intervention as a matter of right under section 387(b), intervenors must show they are class members whose interests are not adequately represented by the existing parties.

 

Second, although not a method of intervention, an unnamed party to the action may also become a named party by filing an appealable motion to set aside and vacate the class judgment under Cal. Code Civ. Proc. ' 663.

 

The class representatives argued that because the Appellant was an unnamed class member who never exercised her right to intervene during the class action by filing a complaint in intervention under Cal. Code Civ. Proc. § 387, she never became a party of record and the court should dismiss her appeal under Eggert.

 

The Appellant urged the Court to overrule Eggert as a "remnant of a bygone era" that is out of sync of the current class action practice.  She argued that Eggert's bright-line rule has been superseded by several more recent appellate court decisions that were influenced by the 1966 amendments to rule 23 of the Federal Rules of Civil Procedure, which created the federal opt-out damages class action.  These amendments, according to the Appellant, encouraged a rise in settlement class actions.

 

The Appellant argued that Rule 23 is persuasive authority that courts should not require unnamed class members to formally intervene in the underlying action to gain the right to appeal a trial court's order concerning the unnamed class members' objections to the proposed settlement.

 

As you may recall, the plaintiff in Eggert, as holder of a "Fidelity Definite Term Certificate" initiated a class action on behalf of himself and approximately 1,500 certificate holders against defendant in the amount of over $1.8 million.  Eggert, 20 Cal.2d at 199-200.  The court in Eggert awarded judgment to the plaintiff, but reserved jurisdiction to determent the amount of fees owed.  Id., at 200.  The complaint in Eggert incorporated by reference an exhibit containing the names of the outstanding certificate holders, as well as each certificate's number and face value.  Id.

 

The court in Eggert appointed a receiver to facilitate payment of the judgment and directed both the plaintiff and interested persons to show cause why it should not order fixed attorney fees.  Id.  At the hearing on the plaintiffs motion for the receiver to pay the judgment after deducting the attorney fees, an attorney representing the objectors appeared and contested the petition's attorney fees provision.  Id.  After the court in Eggert granted the petition in the plaintiff's favor, both objectors filed an appeal on behalf of themselves and all other certificate holders who were without legal representation.  Id.

 

Eggert dismissed the objectors' appeal, noting that "it is a settled rule of practice in this state that only a party to the record can appeal."  Id.  Eggert refused to grant party status to the objectors (who were never named parties of record to the class action), even though their names and interest in the action were included in the exhibit to the complaint, and their attorney had appeared at the hearing on petition for payment of attorney fees to object to the fee amount.  Id., at 201.

 

As the court in Eggert explained, the "[a]ppellants had ample opportunity even after the court had made its orders to become parties of record by moving to vacate the orders in which they objected.  They could have then appealed from the order denying the motion."  Id.

 

The Appellant relied on appellate court rulings that incorporated amended Rule 23 to give unnamed class member objectors who informally objected to settlement during fairness hearings the right to appeal their overruled objections.  See, e.g., Consumer Cause, Inc. v. Mrs. Goochs Natural Food Markets, Inc. (2005) 127 Cal.App.4th 387, 395-396 (class members who appeared at fairness hearing and objected to settlement had right to appeal even though hat member did not intervene in the action); Trotsky v. Los Angeles Fed. Sav. & Loan Assn. (1975) 48 Cal.App.3d 134, 137 (member of affected class whose objections to settlement were overruled was aggrieved party with right to appeal); Wershba v. Apple Computer, Inc. (2001) 91 Cal.App.4th 224, 253 (followed Trotsky, held unnamed class members who appeared at final fairness hearing and objected to proposed settlement had standing to appeal); Roos v. Honeywell Int'l., Inc. (2015) 241 Cal.App.4th 1472, 1486 (relied on Wershba for objector standing to appeal, but denied appeal to objectors who could not establish class membership).

 

The California Supreme Court analyzed these rulings as deriving their logic from Trotsky, which were decided after the 1966 amendments to Rule 23 and addressed the right of an unnamed class member to object to a settlement and prosecute an appeal. 

 

However, the California Supreme Court noted that Trotsky failed to examine section 902 s additional requirement that the objector must also be a "party" of record to the class action to gain the right to appeal the trial court's judgment.  In the Court's view, Trotsky never attempted to reconcile its conclusion with Eggert's rule that an objector must be an aggrieved party to gain the right to appeal an order of judgment in a class action.

 

Therefore, the Court held that Trotsky's failure to address section 902's requirements for the right to appeal a settlement, or to distinguish or otherwise reconcile its holding with Eggert, rendered the opinion unpersuasive and disapproved it along with its progeny.

 

The Appellant argued that even if Trotsky misinterpreted section 902's rules to establish the right to appeal a trial court's dismissal of informal objections to a settlement, the United States Supreme Court rejected the requirement of intervention in a class action in Devlin v. Scardelletti (2002) 536 U.S. 1.

 

In Devlin, the court held that unnamed class members of a mandatory class action (with no option to opt out), who made timely objections to the class settlement at the fairness hearing had a right to appeal without first intervening in the action because they were bound by the settlement.  Id.  A motion to intervene under Rule 24, according to the Devlin court, would serve the same purpose as an objection.  Id., at 11.  Because the "petitioner had no ability to opt out of the settlement" the court in Devlin held that the petitioner's only means of protecting himself from being bound by a disposition of his rights was to file an appeal.  Id., at 10-11.

 

However, the California Supreme Court noted that federal appellate courts have reached inconsistent conclusions on the issue of whether Devlin's rule applied to all class proceeding, including opt-out class actions.  Some courts limited Devlin to cases in which the unnamed class members have no ability to opt out of the class and either objected or intervened during the settlement proceedings.  See, e.g., Day v. Persels & Associates, LLC (11th Cir. 2013) 729 F.3d 1309, 1318-1319, 1321; Snell v. Allianz Life Ins. Co. of North America (8th Cir. 2003) 327 F.3d 665, 670, fn. 2.

 

Other courts have held that Devlin applied to all class actions, including opt-out class actions filed under Rule 23(b)(3).  See, e.g., Nat'l Ass 'n of Chain Drug Stores v. New England Carpenters Health Benefits Fund (1st Cir. 2009) 582 F.3d 30, 39-40; Fidel v. Farley (6th Cir. 2008) 534 F.3d 508, 512-13; In re Integra Realty Resources, Inc. (10th Cir. 2004) 354 F.3d 1246; Churchill Village, LLC v. Gen Elec. (9th Cir. 2004) 361 F.3d 566, 572-73.

 

The California Supreme Court was not persuaded by the courts that have adopted Devlin as their rule, because class members in California can opt out of the class action litigation and pursue their own litigation against the same class defendant, by timely intervention in the action or moving to set aside the judgment.  According to the Court, the California Legislature chose to continue Eggert's rule despite changes in federal class action rules.

 

The Appellant alternatively argued that because a class action settlement is generally binding on all class members (assuming class representative have complied with due process regarding notice and adequate representation), the Court should create an exception to Eggert that allows members to appeal their denied objections to settlement without formal intervention. 

 

The California Supreme Court rejected the argument because Eggert's bright-line rule promotes judicial economy by providing clear notice of a timely intent to challenge the class representative's settlement action.  Formal intervention also enabled the trial court to review the motion to intervene in a timely manner. 

 

In the Court's view, the Appellant had the opportunity to intervene in the trial court proceedings but chose not to do so.  Instead, she made a strategic choice to wait and see if she agreed with the settlement amount and attorney fees agreement.  By filing an appeal without first intervening in the action, the Court concluded that the Appellant never became an "aggrieved party" of record to the action as required by California law.

 

Accordingly, the California Supreme Court affirmed the judgment of the lower courts.

 

 

 

Ralph T. Wutscher
Maurice 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
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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Sunday, February 18, 2018

FYI: Ill Sup Ct Holds Foreclosure Deadline to Challenge Service Tolled While Action Dismissed

Reversing the rulings of both the appellate and the trial courts, the Supreme Court of the State of Illinois recently held that the deadline to file a motion to quash service under the Illinois Mortgage Foreclosure Law ("IMFL") did not run while the foreclosure action was dismissed for want of prosecution.

 

A copy of the opinion is available at:  Link to Opinion

 

The plaintiff mortgagee filed a residential mortgage foreclosure complaint against, among others, the borrower and a limited liability company ("Company").  The mortgagee filed an affidavit of service by publication indicating that, after a due diligence search, it was unable to locate or serve the Company.  Thereafter, the Company was served by publication. 

 

After the Company failed to appear, the trial court entered an order of default and judgment of foreclosure.  In February 2013, the subject property was sold at a sheriff's sale, and the mortgagee filed a motion to approve the sale in April 2013.

 

The motion was noticed up for April 18, 2013, on which date the Company's attorney showed up for the first time and filed an appearance.  However, because counsel for the mortgagee failed to appear, the trial court on its own motion dismissed the case for want of prosecution ("DWP"). 

 

The mortgagee subsequently filed a motion to reinstate the case, which was granted on May 30, 2013.

 

On July 18, 2013, the Company filed a motion to quash service of process, arguing that it was a foreign LLC registered in New Mexico and that it did not have a registered agent in Illinois.  The Company argued that this meant that service by publication was improper.

 

The trial court denied the Company's motion, finding that it was untimely under the 735 ILCS 5/15-1505.6(a) because it was filed more than 60 days after it field its appearance in the case, and because even if it was timely service by publication was proper. 

 

The Company appealed, and a divided appellate court determined that the motion to quash was untimely, and therefore affirmed the ruling of the trial court.  Because it affirmed the trial court's finding that the Company's motion was untimely, the appellate court did not reach the issue of whether service by publication was proper. 

 

The matter was then appealed to the Illinois Supreme Court, which first addressed the issue of timeliness of the motion to quash. 

 

In addressing the issue, the Court first looked to the language of the IMFL.  As you may recall, the IMFL provides as follows in relevant part: "In any residential foreclosure action, the deadline for filing a motion to *** quash service of process *** unless extended by the court for good cause shown, is 60 days after the earlier of these events: (i) the date that the moving party filed an appearance; or (ii) the date that the moving party participated in a hearing without filing an appearance."  735 ILCS 5/15-1505.6(a).

 

It was undisputed that the Company filed its motion to quash service on July 18, 2013, which was approximately 90 days after it filed its appearance.  However, the question before the Illinois Supreme Court was "whether the 60-day statutory clock continued to run while" the mortgagee's action was dismissed for want of prosecution.

 

The Company argued that it did not, because as long as the case was DWP, there was neither reason nor opportunity for it to file a motion to quash service.  The mortgagee disagreed, arguing that based on the clear and unambiguous language of section 15-1505.6(a), unless extended by the court for good cause, the deadline for filing a motion to quash service in a residential foreclosure action is 60 days after the moving party files its appearance.  The mortgagee argued that because the trial court did not extend the 60-day deadline, the Company's motion to quash was untimely.   

 

In siding with the Company, the Illinois Supreme Court determined that "the plain language of section 15-1505.6(a) supports the conclusion that the 60-day clock is tolled while the underlying case is DWP."  The Court noted that "[t]he key phrase here is '[i]n any residential foreclosure action,' because that phrase expressly defines the setting in which the passage of time will be measured." 

 

Further, "60 days cannot pass in a residential foreclosure action if no such action is pending.  Nor can a party comply with the statutory filing deadline in the absence of an active case, even if it wanted to." 

 

"Accordingly, we hold that the time that elapses between the DWP of a residential mortgage foreclosure action and its subsequent reinstatement is not to be counted in determining whether a motion to quash service is timely under section 15-1505.6(a)." 

 

The Court noted that an additional reason for its ruling was that the "courts will presume that the legislature did not intend absurd, inconvenient, or unjust results."  The Court stated that the mortgagee's "reading of section 15-1505.6(a) yields results that are at once absurd, inconvenient, and unjust." 

 

Having determined the proper way to apply section 1505.6(a), the Court next addressed whether the Company's motion to quash was timely.  The Company filed its appearance on April 18, 2013, the same day the court dismissed the case for want of prosecution, which meant that "once the DWP was vacated and the [mortgagee's] case reinstated, [the Company] had 60 days to file its motion to quash service." 

 

The case was reinstated on May 30, 2013, and the Company filed its motion to quash 49 days later on July 18, 2013.  Thus, the Illinois Supreme Court held that the Company's "motion to quash service was timely." 

 

As the appellate court did not reach the question of whether service by publication was proper, the matter was remanded to the appellate court for consideration of that issue.

   

 

 

Ralph T. Wutscher
Maurice 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
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.


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