Thursday, January 31, 2013

FYI: Cal App Ct Upholds Denial of Class Cert, Due in Part to Factual Issues as to "Consumer" or "Commercial" Nature of Debts at Issue

The California Court of Appeal, First District, recently affirmed the denial of class certification in a case involving setoffs against public benefit payments in deposit accounts.  Among other things, the Court ruled that there was no identifiable class of bank customers whose deposit accounts had been subjected to setoff for obligations arising in a separate account, in violation of California's statute governing the manner in which banks may exercise the right to set off consumer debts, due in part to factual issues as to the consumer or commercial nature of the debts being set off

A copy of the opinion is available at:
In a lawsuit first filed over 15 years ago, the named plaintiff ("Plaintiff") on behalf of a putative statewide class, sought to challenge the alleged practice of defendant bank ("Bank") of setting off funds from accounts into which public benefits payments had been deposited against overdraft and other bank fees related to separate deposit accounts.
The trial court had certified a class defined as "[a]ll California residents who have, have had or will have . . . a checking or savings deposit account with [Bank] into which payments of Social Security benefits or other public benefits are or have been directly deposited by the government or its agent."  After a trial that resulted in a jury verdict in favor of the class against Bank, the Court of Appeal reversed, ruling that the judgment hinged on an erroneous application of law to Bank's practice of internally setting off overdrafts and bank fees against funds within checking accounts that received government benefits that are statutorily exempt from execution and attachment ("Exempt Funds"). In that appeal, the court stressed that the practice of deducting overdrafts and bank fees within single deposit accounts containing Exempt Funds was both functionally and legally distinct from setoffs between separate accounts. See Kruger v. Wells Fargo Bank, 11 Cal.3d 352 (1974)("Kruger")(prohibiting a bank setoff for a credit card delinquency).
Affirming the ruling of the Court of Appeal, the California Supreme Court held that Kruger did not prohibit the practice of setting off overdrafts and bank fees within a single account.  The state Supreme Court further rejected Plaintiff's assertion that his claims included both setoffs between accounts and within a single account. 
On remand to the trial court, Plaintiff, seeking to extend Kruger to this case, argued that Bank's balancing and charging fees within a single account is indistinguishable from Bank's setoff of debt external to a customer's account, such as a separate credit card account.  He thus asserted that he was entitled to amend his complaint to add a new claim on behalf of a class of individuals with more than one deposit account at Bank that had been subject to setoff.  The parties filed cross-motions for entry of judgment, and the trial court allowed Plaintiff to amend his complaint to pursue the "two-account" theory. 
Accordingly, Plaintiff's amended complaint alleged among other things that Bank's practice and policy of setting off between two accounts violated California's Financial and Civil Codes.   Plaintiff also ultimately proposed a new class consisting of over "hundreds of thousands" of California residents who receive Exempt Funds into a deposit account, and whose deposit accounts at Bank were subject to setoff to "collect sums allegedly owed from a separate [Bank] account . . . also maintained by the individual."  In opposition, Bank argued that the proposed class was overbroad, that Plaintiff had failed to show that the proposed class was readily identifiable, and that there was no feasible way to differentiate between lawful and unlawful two-account setoffs. 
The lower court denied class certification, as well as Plaintiff's request for additional time to conduct more discovery, pointing out in part that Plaintiff had had ample opportunity to produce evidence on the certification issue.  Plaintiff appealed the denial of class certification for the "two-account class."  The Court of Appeal affirmed, ruling in part that Plaintiff failed after extended discovery to show that any means existed to identify a class of bank customers who had been subject to unlawful setoffs.
Disagreeing with Plaintiff's arguments that Bank was estopped from arguing that not all two-account seizures of Exempt Funds are unlawful, the Appellate Court examined requirements for class certification, judicial estoppel, and whether the lower court had improperly considered the merits of Plaintiff's claim.
Turning first to class certification requirements, the Court noted that in order to maintain a class action, there must be an ascertainable class, and a well-defined community of interest among the class members.  Such community of interest, the Court explained, embodies three factors:  (1) predominant questions of law or fact; (2) class representatives with claims or defenses typical of the class; and (3) class representatives who can adequately represent the class.  See Kennedy v. Baxter Healthcare Corp., 43 Cal. App.4th 799, 808 (1996).  When the proposed class is overbroad and the plaintiff provides no means for distinguishing between proposed class members who belong in the class from those who do not so belong, class certification is properly denied, the Court reasoned. 
Applying this test, the Court noted that Plaintiff failed to define an identifiable class of accounts that were unlawfully set off against amounts owing to Bank.  Noting in part that legislation enacted a year after Kruger governs the manner in which banks exercise the right to set off debts, and expressly limits its regulatory scope to consumer debt, such as that concerned in Kruger, the Court observed that Plaintiff's proposed class potentially includes a much broader range of banking transactions than the consumer debt subject to the statute.  See Cal. Fin. Code § 1411 (formerly § 864)("Setoff Statute"). 
Agreeing with the lower court that the proposed class description would include whole categories of legal setoffs not within the scope of the Setoff Statute, the Appellate Court listed types of setoffs that would be pulled into the proposed class of claims, such as setoffs for deficiencies in commercial accounts, setoffs due to bank fees and overdrafts, and setoffs for debts not primarily incurred for personal expenses. 
The Appellate Court thus rejected Plaintiff's contention that the Setoff Statute did not limit Kruger's prohibition of setoffs from accounts holding Exempt funds, pointing out that the Setoff Statute "comprehensively" regulates the legality of bank setoffs but confines is applicability to consumer debt.   Noting that Plaintiff failed to show that any means existed to identify a class of bank customers who had been subject to unlawful setoffs, the Court concluded that the lower court properly denied class certification.
With regard to Plaintiff's argument that Bank was judicially estopped from opposing Plaintiff's two-account class, the Court determined that judicial estoppel did not apply in this case.  In so deciding, the Court noted that judicial estoppel is equitable in nature the application of which falls within the court's discretion.   Pointing out that Bank's prior statements in the prior appeal as to "whether or not two-account setoffs are forbidden in all circumstances was irrelevant to both courts' limited determinations as to the validity of one-account setoffs."
Finally, the Appellate Court also rejected Plaintiff's assertion that the lower court impermissibly ruled on the merits of his claims as part of deciding the class certification issues.  In so doing, the Court noted that issues going to the merits of a case may overlap with class action requirements, such as commonality, predominance, and typicality.
Describing as "nonsense" Plaintiff's argument that, due to unfair surprise at the lower court's interpretation of the Setoff Statute, he was entitled to remand in order to propose a new class definition and conduct even more discovery, the Appellate Court affirmed the denial of class certification. 

Ralph T. Wutscher
McGinnis Wutscher LLP
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