In many class action cases, defendants succeed in convincing the court that the representative plaintiff who filed the class action would not be a suitable class representative. The reasons can include, among the things, conflicts of interest (i.e., where the class representative is also an attorney with the firm representing the class), satisfaction (where the defense settles or tenders an offer to make the plaintiff whole), unique defenses, an inability to understand or participate in the proceedings, death or incapacity, or a lack of standing by a plaintiff who once had standing.
When it is determined that a class representative lacks standing to represent the class or is otherwise unsuitable to represent the class, the representative must be granted leave to amend to redefine the class or add new individual plaintiffs, or both. La Sala v. American Sav. & Loan Assn. (1971) 5 Cal.3d 864, 872.) This rule is usually applied in situations where the class representative originally had standing, but has since lost it by intervening law or facts. La Sala [class action plaintiff challenged defendant’s loan acceleration clause; defendant waived enforcement of the clause against plaintiff]; Branick v. Downey Savings & Loan Assn. (2006) 39 Cal.4th 235, 243 [plaintiff in pending unfair competition case lost standing by intervening adoption of Proposition 64]; Kagan v. Gibraltar Sav. & Loan Assn. (1984) 35 Cal.3d 582, 588-589, 596 [class representative had standing when she sent the defendant a demand letter threatening suit, but lacked standing when the suit was filed because the defendant had granted plaintiff individual relief in response to her demand letter.]. But what if the plaintiff lacks standing because, as it turns out, he never was part of the alleged class in the first place? Must notice be given to the class, and an opportunity to amend be afforded the absent class members if the original plaintiff never had any standing whatsoever? The Second District Court of Appeal says no.
In First American Title Insurance Company v. Superior Court (Sjobring) 1/25/07, Second District Court of Appeal, B194004 (Los Angeles County Super. Ct. No. BC329482) the trial court found that, although the plaintiff was not – and never had been – a member of the class he purported to represent, he was entitled to conduct precertification discovery from the defendants for the purpose of identifying a member of the class who is willing to become a named plaintiff and pursue the action. On a writ petition, the Court of Appeal reversed.
As the current plaintiff is, in effect, a stranger to the action, we conclude the grant of such discovery would sanction an abuse of the class action procedure. We therefore conclude the trial court’s order granting the discovery was an abuse of discretion, and grant the defendants’ petition for writ relief.
The facts of the case will prove to be important, because it was a crucial factual distinction between this case and La Sala and its progeny that resulted in the finding for the defense. In February 2004, plaintiff Sjobring bought a house. Sjobring’s loan broker obtained a purchase money loan for Sjobring from Wilmington Finance. Though the choice of a title insurer should be of little concern to the seller, the seller’s real estate agent demanded that Sjobring used First American. Sjobring’s loan agent thought the cost of title insurance to be "suspiciously high." Later, Sjobring discovered that the Colorado Division of Insurance had settled a claim against First American for unlawful title insurance practices involving a reinsurance kickback scheme, under which that entity agreed to refund $24 million to consumers nationwide, and also agreed to end the practice. Four days later, Sjobring filed a class action against First American Title Company of Los Angeles, Wilmington Finance, and numerous Doe defendants for breach of fiduciary duty, constructive fraud, unjust enrichment, violation of the Consumer Legal Remedies Act (“CLRA”), unfair business practices, and declaratory relief.
Sjobring alleged that he was “directed in part through his lender [Wilmington Finance] to purchase a title insurance policy from defendant First American Title Company of Los Angeles.” Sjobring defined the class as all persons “[w]ho paid in whole or in part for a title insurance policy, from First American Title Company of Los Angeles and/or Does 1 through 249, which provided coverage for property located in the State of California . . . [f]or whom part of the premium paid for the title insurance policy was received by Wilmington Finance, Inc., and/or Does 250 through 500.”
In July 2005, the California Department of Insurance announced a $37.8 million settlement with nine different title insurance companies, including First American. A "full refund of the ceded premium,” was to be refunded on 38,000 affected customers. However, the affected customers represented less than one percent of First American's 5 million customers during the relevant time period. When the California Department of Insurance identified the list of builders, realtors and lenders who were implicated in the reinsurance scheme, Wilmington Finance was not mentioned. As it turned out, Wilmington Finance had not entered into any reinsurance agreements with any First American entities and Wilmington Finance had not been paid any compensation by First American entities for the referral of title insurance business.
In a case management statement, plaintiff wrote: “Plaintiff’s counsel is considering the substitution or addition of a class representative. It is possible that no improper kickbacks were directly connected to ... Sjobring’s purchase of title insurance. However, plaintiff may have suffered a direct injury if his title insurance premium was artificially inflated as a result of defendant’s practice of paying improper kickbacks on other title insurance policies. [¶] If it is determined that plaintiff Sjobring cannot represent the class, the court should allow plaintiff the opportunity to amend the complaint to ‘redefine the class, or to add new individual plaintiffs, or both, in order to establish a suitable representative.’ [Citation.]”
In April 2006, Sjobring served discovery requests on the First American defendants seeking the names and addresses of the 38,000 individuals who had received refunds pursuant to the California Department of Insurance for the purpose of assisting the plaintiffs to "identify a suitable class representative and also lead to potential witnesses to First American’s improper rebatings, kickback and/or payment practices." First American refused and moved for summary adjudication, based primarily on the fact that the defendants had not paid Wilmington Finance for the referral of Sjobring’s business. Sjobring responded with a motion for precertification discovery to seek class representatives, and an order compelling notice to the 38,000 California homeowners involved in the settlement with the California Department of Insurance.
At the hearing, Sjobring conceded that Wilmington Finance did not have a kickback agreement with any First American entity. He argued, however, that he still had two potential theories of liability against the First American entities: first, that perhaps another entity had channeled Sjobring into buying his title policy from First American in return for a kickback; and second, that Sjobring was indirectly harmed by the reinsurance scheme, in that the reinsurance scheme resulted in elevated premiums for all First American customers “to some extent.”
First American put it this way: “We have a fundamental jurisdictional issue. We don’t have a lawsuit here. There is nobody who is in front of the court as a plaintiff other than a bunch of lawyers looking for a client.” Defendants argued that while Sjobring might be entitled to such discovery if he was a member of the class who, due to a change in law, could no longer represent the class, Sjobring was never a member of the class alleged in his complaint, and therefore lacked standing to obtain discovery to locate a proper class representative. In his reply, Sjobring conceded that he is not a member of the class he proposed in his complaint, but argued that he still had standing to bring other causes of action against defendants. He argued, “Sjobring is seeking to determine whether another individual or individuals would be interested in stepping forward to represent the class that was proposed in his complaint. But Sjobring still has standing to bring other claims against First American and he could serve as a class representative for a class consisting of First American policyholders who have otherwise been harmed by wrongful practices. Sjobring is just not a good class representative for the ‘reinsurance’ class.”
The trial court granted the motion for precertification discovery, "apparently based on its determination of Sjobring’s good faith." The court approved a letter to be sent by the third-party administrator to the recipients of refunds pursuant to the Department of Insurance settlement. Defendants filed a petition for writ of mandate and request for immediate stay. The Court of Appeal framed the issue like this:
Can a plaintiff who purports to bring a cause of action on behalf of a class of which he was never a member obtain precertification discovery to find a new class representative? Framed as such, the answer must be “no.”
Issues of standing are generally determined by reference to the allegations made in the complaint. Sjobring conceded that the allegations in his original complant were false. Regardless of whether Sjobring may have another, unpleaded, claim against a First American entity, and regardless of whether Sjobring made his initial allegations in good faith, the fact remains that Sjobring is not, and never has been, a member of the class he sought to represent. La Sala and the cases which follow La Sala are "distinguishable on that ground." Sjobring relied on the post-Prop 64 case Branick v. Downey Savings & Loan Assn. for the proposition that a plaintiff who has never been a member of the class may amend the complaint to substitute in a plaintiff with standing to represent the class. Whether Sjobring should be granted leave to amend his complaint to name a new class representative, if he so moved, was not at issue in this proceeding, because Sjobring was apparently unaware of the identity of any member of the alleged class who seeks to become a representative plaintiff in this action. The defendants need not provide Sjobring with discovery to enable him to find a new plaintiff.
"We cannot permit attorneys to make an 'end-run' around Proposition 64 by filing class actions in the name of private individuals who are not members of the classes they seek to represent and then using precertification discovery to obtain more appropriate plaintiffs. Balanced against this potential abuse of the class action procedure are the rights of the parties under the circumstances. Sjobring’s interest in obtaining a proper plaintiff to represent the class is non-existent. Sjobring is not a member of the class and never has been; he has no cognizable interest in seeing this class action proceed. [Moreover,] Sjobring makes no argument that any future action they might pursue would be time-barred, or offer any other reason why the class members might be denied relief if this action is unable to proceed on their behalf. In short, the potential for abuse of the class action procedure is overwhelming, while the interests of the real parties in interest are minimal. Precertification discovery under these circumstances would be an abuse of discretion."
The holding appears to be somewhat in conflict with Budget Finance Plan v. Superior Court (1973) 34 Cal.App.3d 794, and thus might be suitable for Supreme Court review. However, even Budget Finance is distinguishable. The Budget Finance, the plaintiffs had been defrauded by the seller in a scheme in which the seller had used three additional defendants. The named plaintiffs were proper representatives of a subclass of victims of one finance company, and sought discovery to obtain similarly situated plaintiffs with respect to the other finance companies. Sjobring, however, was never a member of any class he sought to represent.
The case is of interest to wage and hour practitioners who prosecute or defend such cases as class actions. We have had similar issues arise in several of our cases, always being able to obtain the discovery and amendments necessary to advance the case. The defense has often asked the proverbial question, "at what point do you draw the line?" For now, at least, First American seems to draw that line quite clearly. You can download the full text of First American Title Insurance Company v. Superior Court here in pdf or word format.
Michael,
I blogged on this at CalBizLit. Actually, the decision more than appears to be in conflict with Budget Finance: the court states "... we question the current validity of Budget Finance's apparent blanket authorization of pre-certification discovery given the subsequent balancing test of Parris." But I agree with you, this doesn't look like one the Supremes would be likely to take.
Posted by: Bruce Nye | January 30, 2007 at 11:15 AM