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Class Action Defense Cases-Fireside Bank v. Superior Court: California Court Reaffirms Importance Of One-Way Intervention Rule In Class Action Alleging Fair Debt Collection And Unfair Competition Violations

Trial Court Order on Motion for Judgment on the Pleadings in Fair Debt Collection/Unfair Competition Law Class Action Violated One-Way Intervention Rule but Remedy is Vacating of Order Rather than Barring Class Action to Proceed California Supreme Court Holds

Sandra Gonzalez filed a class action cross-complaint against Fireside Bank alleging inter alia violations of California’s Consumer Legal Remedies Act (CLRA) and Unfair Competition Law (UCL) for failing to comply with the statutory notice requirements for collection of a deficiency judgment on vehicle sales contracts. Fireside Bank v. Superior Court, 56 Cal.Rptr.3d 861, 2007 WL 1112020, *1 (Cal. April 16, 2007). Gonzalez moved for judgment on the pleadings, and for an order certifying her lawsuit as a class action. The bank objected to any ruling on the merits of the class action until after the court first ruled on the motion to certify a class action, arguing that the one-way intervention rule required that procedure be followed. The trial court promised to rule on the class action certification first, but instead it simultaneously granted both motions. The Supreme Court held that this was error, and vacated the order granting the motion for judgment on the pleadings.

Gonzalez purchased a vehicle for her father, obtaining dealer financing but intending that her father use and pay for the vehicle. Fireside, at *1. The sales contract was assigned to Fireside Bank, and the loan went into default so the bank repossessed the vehicle, id. The bank sent Gonzalez a notice advising her of her redemption rights but overstating the amount due by $2700. Id. The bank then filed a lawsuit against Gonzalez seeking a deficiency judgment; Gonzalez filed a cross-complaint alleging that the bank failed to comply with the Rees-Levering Motor Vehicle Sales and Finance Act (Rees-Levering) in that the bank’s notice of intent was defective, thereby precluding the bank from seeking a deficiency judgment. Id., at *2. In part, the cross-complaint alleged violations of Rees-Levering and of California’s unfair competition law (UCL), id. The bank conceded that the notice contained a mistake, attributing it to a “computer error” and admitting that 3,000 other borrowers also received inaccurate notices. Id. Gonzalez moved for judgment on the pleadings on the bank’s complaint; the bank opposed the motion arguing, in part, that “before obtaining a ruling on the motion Gonzalez must seek or forswear certification of a class . . . and the trial court should take the motion off calendar or deny it without prejudice until class issues, if any, were resolved.” Id. The trial court postponed ruling on the motion, id.

Gonzalez amended her cross-complaint to assert the Rees-Levering Act and UCL claims on behalf of “all persons who had received postrepossession [sic] notices from Fireside Bank on accounts started in California in which the listed redemption amount failed to subtract the credit for unearned finance charges,” and then moved the court to certify the action as a class action. Fireside, at *2. The bank opposed the motion, id. The trial court set the hearing on the motion to certify a class action for the same date as the hearing on the motion for judgment on the pleadings; in so doing, the court indicated that it would likely certify a class action. Id., at *3. The bank also objected to any ruling on the motion for judgment on the pleadings until after the class certification issue was resolved, id. The Supreme Court noted at page *3 that “The trial court assured counsel that it was ‘not going to rule’ on the motion for judgment on the pleadings ‘until I decide the issue of certification.’” Id. But the trial court issued orders not only granting the motion to certify a class action, but also granting the motion for judgment on the pleadings based on its finding that the bank had “failed to comply with the notice requirements under the Rees-Levering Act” and therefore the bank could not recover a deficiency judgment. Id.

The Court of Appeal denied the bank’s petition for writ relief, holding that “(1) any support for a rule against one-way intervention was tenuous at best, and the trial court retained broad discretion to issue merits rulings before deciding class issues; (2) even if such a rule existed, it did not apply to rulings on a class defendant’s claims against the class representative; and (3) in any event, Fireside Bank had not demonstrated it was prejudiced by the trial court’s rulings.” Fireside, at *3. The California Supreme Court granted review for the express purpose of “address[ing] the ongoing validity, scope, and application of the rule against one-way intervention.” Id.

The Supreme Court explained the “one-way intervention” rule at page *4 as follows:

As originally adopted, the class action device included no rules governing when to resolve merits and class issues…. One resulting potential injustice was the possibility for one-way intervention, a consequence of “actions for damages in which a decision for or against one member of the class did not inevitably entail the same result for all. One party could style the case a ‘class action,’ but the missing parties would not be bound. A victory by the plaintiff would be followed by an opportunity for other members of the class to intervene and claim the spoils; a loss by the plaintiff would not bind other members of the class…. So the defendant could win only against the named plaintiff and might face additional suits by other members of the class, but it could lose against all members of the class. This came to be known as ‘one-way intervention,’ which had few supporters.”… One-way intervention left a defendant open to “being pecked to death by ducks. One plaintiff could sue and lose; another could sue and lose; and another and another until one finally prevailed; then everyone else would ride on that single success. This sort of sequence, too, would waste resources; it also could make the minority (and therefore presumptively inaccurate) result the binding one.”… (Citations omitted.)

The California Supreme Court noted that the federal rules addressed this problem by statutory amendment, see Fireside, at *4, and then discussed at length the evolution of California decisional law, id., at *5-*8. The bottom line is that a defendant has “a due process right to avoid one-way intervention,” id., at *8 (citations omitted). “To prevent one-way intervention, courts must ensure that affected parties are bound before the merits are decided; to bind absent plaintiffs, courts must give them notice; and to give plaintiffs notice, courts must first resolve whether and on what scale a class is appropriate.” Id.

The Supreme Court next held that a motion for judgment on the pleadings falls within the scope of motions governed by the one-way intervention rule, Fireside, at *9-*10, and that the trial court abused its discretion in ruling on the motion when it did, id. Moreover, that error was prejudicial to the bank, id., at *11.

Turning to the question of remedy, the Supreme Court observed at page *11 that because class action lawsuits are equitable litigation devices “any remedy to cure procedural missteps in handling a class action must itself be equitable.” On the facts of this case, the Supreme Court held that it would be “inequitable” to preclude Gonzalez from prosecuting a class action due to the error of the trial court; accordingly, the Court set aside the trial court’s ruling on the motion for judgment of the pleadings, but allowed the class certification order to stand, id., at 11-12.

Turning to the trial court order certifying the matter as a class action, the Supreme Court noted that it reviews such orders for abuse of discretion, Fireside, at 12, and concluded that no such abuse existed in this case. Under California law, certification of a class action “requires proof (1) of a sufficiently numerous, ascertainable class, (2) of a well-defined community of interest, and (3) that certification will provide substantial benefits to litigants and the courts, i.e., that proceeding as a class is superior to other methods.” Id., at *13 (citations omitted). Defense attorneys challenged only Gonzalez’s proof of typicality and superiority, id.

With respect to typicality, Fireside argued that Gonzalez failed to present substantial evidence to support her motion: specifically, the defense argued that Gonzalez “cannot represent the class because (1) she has failed to present evidence establishing she has standing and has suffered injury typical of the class, and (2) she is subject to unique defenses not typical of the class.” Fireside, at *13. The Supreme Court disagreed. The Court noted that Gonzalez and the putative class members were “subjected to the same alleged wrong: deprivation of a fair opportunity to redeem the financed vehicle, followed by an unlawful demand for payment,” and that the bank repossessed the vehicle and sought a deficiency judgment against Gonzalez, id. Accordingly, Gonzalez had standing to prosecute the class action, id.

The Supreme Court also rejected defense claims that a class should not have been certified because “unique defenses” apply to Gonzalez’s claims, holding that unique defenses do not “automatically” preclude class certification. Fireside, at *13-*14. The concern in such circumstances is that “the class ‘representative might devote time and effort to the defense at the expense of issues that are common and controlling for the class.’” Id., at 13 (citations omitted). The Supreme Court’s analysis, see id., at *14-*15, led it to conclude that the unique defenses “are neither factually intensive nor legally complex and do not threaten to consume an inordinate amount of time and become a major focus of the litigation,” id., at *15. Accordingly, the trial court did not abuse its discretion in finding that the typicality requirement had been met, id.

With respect to the superiority claim, defense attorneys argued that the litigation “could proceed more efficiently as a non-class representative action under the UCL,” but the Supreme Court found its reliance on Proposition 64 to be unavailing in light of decisional law. Fireside, at *15.

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