Petition for Writ of Certiorari — Granberry v. Islay Investments
Supreme Court brief1995
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supreme Court, 0.8.
FILED
95 122 suL19 1%
In The
Supreme Court of the United States
October Term, 1995
’
LISA GRANBERRY, COSETTI JORDAN,
ALICE GLASSPOOL, CHRISTOPHER GLASSPOOL,
on behalf of themselves and
all others similarly situated,
Petitioners,
ISLAY INVESTMENTS, A California Partnership,
MARVIN TREVILLIAN,
Respondents.
*
On Petition For A Writ Of Certiorari To The
Supreme Court Of The State Of California
+
PETITION FOR A WRIT OF CERTIORARI
+
Davip H. ScHwartz
Counsel of Record
Of Counsel: Law OFFICES OF
ERNEST L. GRAVES Davip H. ScHwaRTz
130 West Victoria Street 240 Stockton Street
b CA 93101 San Francisco, CA 94108
Santa Barbara, (415) 362-2700
Counsel for Petitioners
COCKLE LAW BRIEF PRINTING CO., (800) 225-6964
OR CALL COLLECT (402) 342-2831
QUESTIONS PRESENTED
1. Do Mullane v. Central Hanover Bank & Trust Co. and its
progeny require that before a state court adjudicates a
defendant’s individualized offset claims against absent
members of a plaintiff class, reasonable and timely effort
be made to provide each class member with actual notice
of the specific offset claim, or, does it satisfy due process
if the notice of pendency of class action contains a general
statement that the defendant intends to assert offset
claims against some class members if the class claim is
successful?
2. Do Mullane v. Central Hanover Bank & Trust Co. and its
progeny prohibit a state court from adjudicating offset
claims against absent members of a plaintiff class based
on notice by publication and/or mailing 14 years after the
litigation commenced, when the party asserting those
claims has failed to take reasonable Steps available to it to
give the persons adversely affected actual notice of the
claims in a timely manner?
3. Does the highest court of a state violate the Due
Process Clause of the 14th Amendment and the Guaranty
Clause of Art. IV, Sec. 4 of the United States Constitution
by holding that a generalized statement in a notice of
class action that the defendant intends to assert
unspecified offset claims against some unspecified class
members can serve as a substitute for individualized,
specific, and prompt notice requirements enacted by the
state’s legislature?
ii
TABLE OF CONTENTS
Page
QUESTIONS PRESENTED... 2 .snccvicccccsiteencanses i
TABLE GP AUTHIORITIOS 2. cciccscessinvegeles eee iv
CTI CIWS obi vc cece cscancienn teeueo ns teus 1
JURISDICTION ..... .2<..- PPP re ee TT eee ere 1
STATUTORY PROVISION INVOLVED.............. 1
STATING S .¢ os 5 sanvtneceassdcaedscuhawesmataeenaie 2
Proceedings Below Pertaining To The Presentation Of
Thane Fecberel TOGO ac iscnckinacctaceunaicrewaes woes 5
REASONS FOR GRANTING THE WRIT ........... 13
I. THE WRIT SHOULD BE GRANTED TO PRE-
VENT THE CALIFORNIA COURTS FROM
ADJUDICATING RESPONDENTS’ OFFSET
CLAIMS WITHOUT FIRST PROVIDING EACH
AFFECTED CLASS MEMBER NOTICE REASON-
ABLY CALCULATED TO APPRISE THE CLASS
MEMBER OF THE SPECIFIC CLAIM BEING
MADE, AND TO DETERMINE WHETHER
AFTER A DELAY OF 14 YEARS FROM THE
START OF LITIGATION, ANY FORM OF
NOTICE CAN SATISFY THE REQUIREMENT
OF MULLANE V. CENTRAL HANOVER BANK &
TRUST CO. AND ITS PROGENY THAT THE
CLASS MEMBER BE GIVEN A MEANINGFUL
OPPORTUNITY TO PRESENT OBJECTIONS.... 13
A. Unless The Writ Is Granted The Trial Court
Will Proceed To Adjudicate Offset Claims
And Defenses To Them Without First
Affording Due Process Notice To Absent
Class Members, Most Of Whom Do Not
Even Know Their Rights Are Being Adjudi-
CHIOD 0 cancnsuesenek eens ee eene uae e 13
ili
TABLE OF CONTENTS - Continued
Page
B. The California Supreme Court Decision Is In
Conflict With The Principles Announced By
This Court In Mullane v. Central Hanover Bank
& Trust Co. And Its Progeny............... 16
C. Although Further Proceedings Will Take
Place In The State Trial Court, This Case
Meets The Finality Requirements For Grant
Of Certiorari Under The Standards Set Forth
In Cox Broadcasting Corp. v. Cohn, 420 USS.
eS ae cha cha hake ws £6e kd 6 21
II. CALIFORNIA CIVIL CODE SECTION 1950.5 IS
UNCONSTITUTIONAL AS CONSTRUED AND
APPLIED BY THE CALIFORNIA SUPREME
COURT: THE HOLDING THAT A GENER-
ALIZED STATEMENT OF THE DEFENDANT’S
INTENTION TO PURSUE OFFSET CLAIMS
AGAINST CLASS MEMBERS IN THE NOTICE
OF PENDENCY OF CLASS ACTIONS SATISFIES
THE STATUTORY REQUIREMENT FOR PRO-
VIDING INDIVIDUAL CLASS MEMBERS WITH
TIMELY NOTICE AND A REASONABLE
OPPORTUNITY TO DEFEND OFFENDS THE
DUE PROCESS CLAUSE OF THE 14TH
AMENDMENT, AND SO INVADES THE LEGIS-
LATIVE POWER AS TO VIOLATE THE SEPARA-
TION OF POWERS DOCTRINE,
INCORPORATED IN ART. III, SEC. 3 OF THE
CALIFORNIA CONSTITUTION, AND PRO-
TECTED BY THE GUARANTEE CLAUSE OF
ART. IV, SEC. 4 AS WELL AS THE DUE PRO-
CESS CLAUSE OF THE 14TH AMENDMENT... 24
TE Ube aes O55 56 cae ss see oak eb ee ou eR 30
iv
TABLE OF AUTHORITIES
Page
CASES
Ancient Egyptian Arabic Order of Nobles etc. v.
NECHENEE, 27S. Sc FOP Ch 806 6 eh Nec bscege ae nes 29
Barer 0. Caer, SOP Sia FG TI canes osc uwast ccees 29
California v. Superior Court of California, 449 U.S.
DOD COI 5 iP a a SER eh 15
Cox Broadcasting Corp. v. Cohn, 420 U.S. 469 (1975) 21, 22
Creswill v. Grand Lodge of Knights of Pythias, 225
aR Me Ee. . v2 Repent py ree rete eer tr Dany Coma 30
Eisen v. Carlisle & Jacqueline, 417 U.S. 156 (1974)
PPO roe Pree er ate ee ee ee pee 18, 19, 21, 23
Granberry v. Islay Investments, 9 Cal.4th 738, 889
P.2d 970, 38 Cal.Rptr.2d 650 (1995) Piccneree
LEE ess iced Wisin 5's pAb AA Aa ee 3, 40, 15
Granberry v. Islay Investments, 28 Cal.App.4th 1640,
23 Cal.Rptr.2d 420 (1993) (“Granberry II”) ........ 1, 8
Granberry v. Islay Investments, 161 Cal.App.3d 382,
207 Cal.Rptr. 652 (1984) (“Granberry I”) ....... Eo, 6
Greene v. Lindsey, 456 U.S. 444 (1982)................ 20
Martin v. Hunter’s Lessee, 1 Wheat. (14 U.S.) 304
CRBs 656.6 KRESS « Gad oo ae tee oe aa hin 29
McCullough v. Virginia, 172 U.S. 102 (1898) .......... 29
Memphis Light, Gas & Water Div. v. Craft, 436 U.S. 1
CLOFUD iors So hs cage a8 cae ead we 19
Mennonite Bd. of Missions v. Adams, 462 U.S. 791
CTS BEEN ia ii i i ae ce eke Oe een 17
Vv
TABLE OF AUTHORITIES - Continued
Page
Minor v. Happersett, 21 Wall. (88 U.S.) 162 (1875) .... 29
Mullane v. Central Hanover Bank & Trust Co., 339
i SE aan hea pet ee a, passim
Myers v. United States, 272 U.S. 52 (1926)............ 27
New York v. United States, 505 U.S. 144, 120 L.Ed.2d
Sails BE Ps MY MPO: ok Gia 6's dh oven ck 28, 29
Plaut v. Spendthrift Farms, ___ U.S. __, 131 L.Ed.2d
i Rae a OT Cac oa ok ka keds bk bokccan, 28, 29
Tulsa Collection Services v. Pope, 485 U.S. 478 (1988) 16, 27
Van Sickle v. Shanahan, 212 Kan. 426, 511 P.2d 223
CRUNE Gh Cea Sear ha en vied Ma ees ee 29
Ward v. Board of County Comm'rs, 253 U.S. 17
PEON kan ods wake uies's ph 2h ds aaa ahaa Deas ees; 29
Wayman v. Southward, 10 Wheat. (25 U.S.) 1 (1825) .... 27
CONSTITUTIONAL PROVISIONS
California Constitution Art. III, Sec.3......... 12, 28, 29
Due Process Clause of the 14th Amendment to the
United States Constitution.................... passim
Guaranty Clause of Art. IV, sec.4 of the United
ene © NR ho 12, 24, 25, 29
STATUTES AND RULES
Federal Rules of Civil Procedure, Rule 23........... 18
California Civil Code Section 1950.5............. passim
California Civil Code Section 1950.5, subdivision
ETRE Crate aston cerepey (SMa en ity erect ONE enya at passim
vi
TABLE OF AUTHORITIES - Continued
Page
California Code of Civil Procedure Section 384...10, 15
California Code of Civil Procedure Section 583.250 ..... 7
California Code of Civil Procedure Section 1501.5.... 15
California Code of Civil Procedure Section 1519.5.... 15
California Code of Civil Procedure Section 1540..... 15
Lisa Granberry, Cosetti Jordan, Alice Glasspool and
Christopher Glasspool, on behalf of themselves and ali
others similarly situated, respectfully petition for a writ
of certiorari to review the judgment of the Supreme Court
of the State of California in this case.
OPINIONS BELOW
The opinion of the Supreme Court of California in
Granberry v. Islay Investments is reported at 9 Cal.4th 738,
889 P.2d 970, 38 Cal.Rptr.2d 650 (1995) (App. 1). The
opinion of the California Court of Appeals for the Second
District, Division 6, in Granberry v. Islay Investments is
reported at 23 Cal.Rptr.2d 420 (1993) (App. 38).
JURISDICTION
The decision of the California Supreme Court was
entered on March 6, 1995. A timely request for rehearing
was filed on March 21, 1995 and was denied on April 20,
1995. The jurisdiction of this Court is invoked under 28
U.S.C. § 1257.
STATUTORY PROVISION INVOLVED
California Civil Code Section 1950.5 regulates the
manner in which a residential landlord in California may
demand, hold, and make claims against security deposits
paid by the tenant in addition to what the tenant Pays as
legitimate rent. During the time period relevant to the
proceedings in the state court, subsection (f) of California
Civil Code Section 1950.5 read as follows:
Within two weeks after the tenant has vacated
the premises, the landlord shall furnish the ten-
ant, by personal delivery or by first-class mail,
1
2
postage prepaid, a copy of an itemized state-
ment indicating the basis for, and the amount of,
any security received and the disposition of the
security and shall return any remaining portion
of the security to the tenant.
STATEMENT
Respondents own and/or operate a number of large
scale residential apartment complexes in Santa Barbara,
California. Petitioners are former tenants of respondents
who represent a certified class of some 10,000 former
tenants of respondents who vacated their apartment units
after April, 1978.
From 1973 through 1984, Respondents, pursuant to a
uniform practice employing standardized rental agree-
ments, charged each tenant an additional fixed amount of
“rent” for the first month of the month-to-month tenancy.
California Civil Code Section 1950.5 regulates the
taking and refunding of security deposits by residential
landlords. Under the statutory regulation, a landlord may
not take money in addition to the “legitimate” rent unless
the landlord treats it as a security deposit.}
Under the statute, money taken as security must be
refunded to the tenant at the termination of the tenancy
unless the landlord notifies the tenant of its specific
claims against the security promptly following the termi-
nation of the tenancy.
In April, 1981, Petitioners filed a class action suit in
the Superior Court of the State of California, for the
County of Santa Barbara. The suit sought a declaration
1 Granberry v. Islay, 161 Cal. App.3d 382, 388, 207 Cal.Rptr.
652 (1984), hereinafter (“Granberry I”).
3
that the additional fixed amount of “rent” charged for the
first month of each tenancy was a security deposit which
Respondents were required to refund to each tenant, an
accounting of the deposits taken, and refund of the
deposits to all class members. Following a trial in 1990,
the Superior Court entered a judgment in favor of Peti-
tioners holding that the extra “rent” charge was “secu-
rity” within the meaning of Civil Code Section 1950.5 and
refunds were due to all class members. That determina-
tion was never appealed and is now final.
In 1986 Respondents for the first time contended in
the litigation that if the extra “rent” charge was deter-
mined to be a security, they intended to pursue claims by
way of cross-complaints and offsets against any tenant
class member who sought to join the class and obtain a
refund of the alleged security deposit. Respondents indi-
cated the alleged claims would be for the types of occu-
pancy claims allowed under Section 1950.5: rent defaults,
cost of necessary cleaning of the apartment unit after the
class member vacated, and cost of repair of alleged dam-
age to the unit not the result of normal wear and tear.
In late 1987 the notice of pendency of class action
was mailed to the forwarding addresses for class mem-
bers contained in Respondents’ files and was published
in the local Santa Barbara newspaper. (App. 91-94) That
notice contained the following statement concerning
Respondents’ intention to pursue offset claims:
Defendants also contend that any refund you
might be entitled to must be reduced by the
amount of any unpaid rent, costs necessary to
clean and repair damage you caused to the
apartment, in excess of ordinary wear and tear,
and that such sums could exceed the amount of
any refund or damage you might receive.
4
This statement is the only attempt to directly provide
actual notice to any class member that Respondents were
asking the Superior Court to adjudicate occupancy claims
in order to defeat the class member’s right to a refund of
the security deposit.
Respondents had never acknowledged to any tenant
that Respondents held the extra “rent” charge as a secu-
rity deposit and they had never provided to their tenants
any itemization of claims they might have had against the
tenant as required by subdivision (f) of California Civil
Code Section 1950.5. At the same time, respondents made
no attempt to collect from their tenants for minor rent
defaults, cleaning the apartments on termination, or any
damage to the apartment unit, unless the Respondents
considered the tenant to have committed acts of vandal-
ism.?
Prior to trial the Superior Court granted Petitioners’
motion for summary judgment dismissing Respondents’
offset claims on the ground that Respondents had never
furnished the individual tenants with the personal notice
of those claims required by California Civil Code
§ 1950.5(f). Following a jury trial the trial court entered a
judgment declaring the extra “rent” charge was “secu-
rity” under Civil Code Section 1950.5 and ordering a
refund to each class member who came forward to make
a claim.
2 Several years after the institution of Petitioners’ class
action Respondents began taking a second charge which they
denominated as a “security” and treated in accordance with the
statute.
*
5
‘tespondents appealed the grant of summary judg-
ment dismissing their offset claims but not the determina-
tion that their charge had to be refunded. On appeal the
California Supreme Court ruled that Respondent had no
right to retain any of the security deposits under Califor-
nia Civil Code Section 1950.5. due to their failure to
comply with the subdivision (f) notice requirement. Nev-
ertheless, the California Supreme Court, with one justice
dissenting, authorized the trial court to proceed with the
adjudication of Respondents’ offset claims without fur-
ther notice to the absent class members affected. The
California court dismissed as “unavailing” Petitioners’
objection that the absent class members were entitled to
notice of the offset claims consistent with Mullane v.
Central Hanover Bank & Trust Co., 339 U.S. 306 (1950) and
its progeny.
No absent class member has ever received notice of
the specific offset claim being made against him or her by
Respondents, yet the California Supreme Court has
ordered the trial court to proceed to litigate these offset
claims without further notice to the class members. The
trial court will be adjudicating the offset claims of class
members who do not know that the class action is even
pending. Most of these class members will never appear
to defend these claims. Those who do appear will have to
prepare and present a defense a decade or more after
they vacated their apartment units.
Proceedings Below Pertaining To The Presentation Of
The Federal Issue
The history of Respondents’ various extra charges to
tenants is set forth in Granberry I, 161 Cal.App.3d 382, 207
6
Cal.Rptr. 652 (1984). In April of 1981 Petitioners com-
menced the subject class action in the Superior Court of
California for the County of Santa Barbara, seeking a
declaration that the extra “rent” charged for the first 31
days was a “security” under California Civil Code Sec-
tion 1950.5, along with an accounting and return of the
improperly taken security money. In October, 1982, the
Superior Court entered an order certifying a class of
approximately 10,000 persons, defined as then current
tenants and former tenants of Respondents who had
vacated their apartment within three years of the filing of
the action and had paid a higher amount of rent for the
first month of the tenancy than for the second and subse-
quent months.
Immediately following the certification of the class,
the Superior Court entered an order granting summary
judgment to the Respondents on the ground that the
charge was “rent” and not security as a matter of law. In
Granberry I, 161 Cal. App.3d 382, 207 Cal.Rptr. 652 (1984)
the California Court of Appeals reversed the summary
judgment ruling and held that the issue of whether the
extra charge for the first month was “legitimate rent” or a
“security deposit” under the statute was a question of
fact for the jury to determine.
After the remand Respondents for the first time
raised the issue of occupancy claims for unpaid rent,
cleaning and damage and were permitted to amend their
answer to allege an affirmative defense of equitable offset
against some tenants.
3 In early 1987 Respondents were also permitted to file a
cross-complaint alleging occupancy claims against some 6,200
class members as well as to amend their answer to allege, in
7
On December 28, 1987, notice of the pendency of the
class action against the Respondents was published in the
local paper and mailed to 5,438 absent tenants for whom
some forwarding address was available. Of the notices
mailed, 1756 were returned as undeliverable. The same
class notice was published in the general circulation
newspaper for the Santa Barbara area. The only reference
to Respondents’ offset claims in the notice was the fol-
lowing:
Defendants also contend that any refund you
might be entitled to must be reduced by the
amount of any unpaid rent, costs necessary to
clean and repair damage you caused to the
apartment, in excess of ordinary wear and tear,
and that such sums could exceed the amount of
any refund or damage you might receive.
(App. 92)
This notice was published and mailed in December,
1987, some 6'/2 years after the commencement of the
action and up to 9'/2 years after the earliest class mem-
bers had left their tenancies.
After the notice of class action, but before trial, the
trial court granted Petitioners’ motion for summary judg-
ment against Respondents’ offset claims on the ground
general terms, that Respondents had individual offset claims
against the class members which, in the aggregate, exceeded the
amount of security deposits which Petitioners sought to recover.
Respondents sought to serve the cross-complaint by delivery to
Petitioners’ counsel, which service was quashed by the Superior
Court. Respondents made no further attempt to serve the cross-
complaints on any individual class member, and the cross-com-
plaints were dismissed pursuant to California Code of Civil
Procedure § 583.250 requiring mandatory dismissal of any com-
plaint or cross-complaint not served within three years of filing.
8
that Respondents had failed to comply with the require-
ments of subdivision (f) of California Civil Code Section
1950.5, and that non-compliance prevented Respondents
from pursuing equitable offset claims against their former
tenants.
The Superior Court then conducted a jury trial on
two issues: (1) Was the extra charge a security? and if so,
(2) Was it taken in bad faith? The jury found the addi-
tional amount charged as “rent” was a security under the
statute; the jury further concluded that Respondents had
not taken the charge in “bad faith.”4
Following the jury verdict the trial court entered
judgment which, inter alia, required Respondents to
refund the security money, but only to those tenants who
could be found and who came forward to make a claim.
All security money held by Respondents for class mem-
bers who could not be found would remain with the
Respondents.
Both sides appealed from the judgment — Respon-
dents did not appeal from the determination that the
extra rent charge was security that they were required to
refund, but only from the summary judgment denying
them their offset claims. On appeal Petitioners chal-
lenged, inter alia, the order for class relief limiting the
refund order only to those class members who could be
found a decade after the litigation commenced. The deci-
sion of the California Court of Appeal in Granberry v. Islay
Investments, 23 Cal.Rptr.2d 420 (1993) (“Granberry II”) sus-
tained the judgment leaving all security money in the
4 Had the jury determined the Respondents had taken the
security in “bad faith,” Respondents would then have been
subject to additional statutory damages of up to $200 per tenant.
EE tens < inert ciipinoiony
9
hands of Respondents until and unless claimed by the
absent tenants and reversed the trial court’s dismissal of
the offset claims for failure to give the notice required by
subsection (f).
In a Petition for Rehearing, Petitioners contended
that to permit Respondents to pursue equitable offsets for
tort or contract claims when Respondents both had failed
to comply with the requirements for timely notice pro-
vided for in California Civil Code Section 1950.5, subdivi-
sion (f), and had never given any absent class member
notice of the specific claim being made against them,
violated the Due Process Clause of the 14th Amendment
to the U.S. Constitution. (App. 60-64)
On October 8, 1993, the Court of Appeals modified
its opinion to clarify that the equitable offsets remained
subject to equitable defenses and otherwise denied the
petition for rehearing and reaffirmed the judgment. (App.
38)
Petitioners then sought and were granted review in
the California Supreme Court on three issues, including:
(1) That it was an abuse of discretion to permit
Respondents to retain all the security money
belonging to absent class members except for
money belonging to tenants who could be found
and who presented claims; and
(3) That it was a violation of the Due Process
Clause of the 14th Amendment to the U.S. Con-
stitution to permit Respondents to assert equita-
ble offset claims in light of Respondents’ total
non-compliance with the provisions of subdivi-
sion (f) and the absence of any due process
notice to class members in the litigation afford-
ing the absent class members a reasonable
opportunity to defend against the deprivation of
their refund right. (App. 65-67)
10
Petitioners’ constitutional objections were repeated in
their opening brief in the California Supreme Court.
(App. 68-75)
The California Supreme Court issued its decision on
March 6, 1995, (Granberry v. Islay Investments, 9 Cal.4th
738, 889 P.2d 970, 38 Cal.Rptr.2d 650 (1995) (“Granberry
III”). The majority opinion reversed the Court of Appeals
decision affirming the trial court’s class action remedy
without reaching the abuse-of-discretion issue, and
instructed the Superior Court to follow the provisions of
California Code of Civil Procedure Section 384.°
All the justices agreed that Respondents had failed to
supply the notice to the tenants as required by subdivi-
sion (f), (App. 5-6 and 22) but sharply differed as to the
statutory consequences of that failure. The majority opin-
ion concluded that although a landlord who fails to com-
ply with the personal notice requirements of California
Civil Code Section 1950.5(f) loses his right to retain all or
part of the security deposit and must return the entire
deposit to the tenant, the landlord has not lost “all right”
to claim damages for occupancy claims against the secu-
rity because, as they construed and applied the statute,
> California Code of Civil Procedure Section 384 requires
the trial court to determine the total amount that will be payable
to all class members if all class members are paid the amount to
which they are entitled pursuant to the judgment. The trial
court is then to order a report from the parties setting forth the
amounts paid out to the class members and the amounts
remaining. The trial court is then to amend the judgment “to
direct the defendant to pay the sum of the unpaid residue, plus
interest ..., in any manner the court determines is consistent
with the objectives and purposes of the underlying cause of
action...”
ahaa net ee alte a et ee ne
rere Preheat Asner ths
11
“...a good-faith failure to comply with section
1950.5, subdivision (f), does not bar a landlord
from recovering damages for unpaid rent,
repairs and cleaning, and we agree with the
Court of Appeal to the extent it so held.”
(App. 2):
and applied this rule of good faith to Respondents:
“ ... [despite non-compliance] defendants may
set off amounts allegedly due for unpaid rent,
repairs, and cleaning against money due plain-
tiffs as a refund of their security deposits
(App. 6)
The decision held that since Respondents had raised
their claims through the equitable defense of offset, the
trial court must also determine whether those claims are
barred by any of the generally applicable equitable
defenses. (App. 16)
The majority decision disposed of Petitioner’s con-
tention that this construction and application of Section
1950.5 deprived tenants of timely notice and reasonable
opportunity to defend against the landlord’s occupancy
claims by referring to the original notice of pendency of
class action (App. 91-94) and concluded,
In light of this notice, plaintiffs’ contentions
regarding estoppel and lack of notice are
unavailing.
(App. 15) Under the majority decision, the Court of
Appeals was ordered to remand the cause to the trial
court to conduct further proceedings “ . . . consistent with
this opinion.” (App. 21)
In her dissent, Justice Kennard asserted that the leg-
islature had designed compliance with subdivision (f) of
12
the statute as the necessary prerequisite for a landlord to
have access to the security deposits for his occupancy
claims. Justice Kennard saw the majority opinion as
ignoring and overriding the carefully balanced remedies
selected by the state legislature. (App. 27 and 31-32)
In a Petition for Rehearing Petitioners urgently
argued that the court was unconstitutionally construing
and applying California Civil Code Section 1950.5(f) by
violating the “elementary and fundamental requirements
of due process” — timely notice and a reasonable oppor-
tunity to defend —- in that the notice of pendency of class
action given up to 9'/2 years after the termination of the
tenancies could not be substituted for specific notice of
the individual claim and its basis to each tenant person-
ally within two weeks of the termination of the tenancy
as required by the statute. (App. 76-85)
In the request for rehearing, Petitioners also argued
that the decision (1) so changed the requirements for
timely notice and a reasonable opportunity to defend
provided by subdivision (f) that it violated the “elemen-
tary and fundamental requirements of due process”, and
(2) constituted an unacceptable judicial invasion of the
legislative power repugnant to the Separation of Powers
doctrine as contained in Art. III, Sec.3 of the California
Constitution, and protected federally by the Guaranty
Clause of Art. IV, sec.4. (App. 86-90)
The petition for rehearing was denied on April 20,
1995; Justice Kennard voted in favor of granting a rehear-
ing.
a ARF a al EE aE eae NE id ek heh Noe AS
13
REASONS FOR GRANTING THE WRIT
I. THE WRIT SHOULD BE GRANTED TO PREVENT
THE CALIFORNIA COURTS FROM ADJUDICAT-
ING RESPONDENTS’ OFFSET CLAIMS WITHOUT
FIRST PROVIDING EACH AFFECTED CLASS
MEMBER NOTICE REASONABLY CALCULATED
TO APPRISE THE CLASS MEMBER OF THE SPEC-
IFIC CLAIM BEING MADE, AND TO DETERMINE
WHETHER AFTER A DELAY OF 14 YEARS FROM
THE START OF LITIGATION, ANY FORM OF
NOTICE CAN SATISFY THE REQUIREMENT OF
MULLANE V. CENTRAL HANOVER BANK & TRUST
CO. AND ITS PROGENY THAT THE CLASS MEM-
BER BE GIVEN A MEANINGFUL OPPORTUNITY
TO PRESENT OBJECTIONS.
A. Unless The Writ Is Granted The Trial Court
Will Proceed to Adjudicate Offset Claims And
Defenses To Them Without First Affording Due
Process Notice To Absent Class Members, Most
Of Whom Do Not Even Know Their Rights Are
Being Adjudicated.
The trial court has previously determined that
Respondents owe each of the 10,000 members of Peti-
tioners’ class a refund of security in an amount ranging
from $100 to $250 plus interest. This decision was never
appealed by Respondents and is now final. Respondents
seek to defeat this recovery by asserting that 6,200 or
more of the members of the class owe Respondents
money because each of these individual former tenants
didn’t make the last rent payment, did not clean the
apartment to Respondents’ satisfaction before the tenant
vacated, or caused damage to the unit which Respon-
dents seek to prove was not the result of normal wear
and tear.
14
These 6,200 claims arise out of tenancies which were
vacated anywhere from April of 1978 through 1987, i.e.,
from 8 to 17 years ago. Respondents admitted they never
informed any individual tenant of the existence of any
specific claim during or following the tenancy and the
California Courts found Respondents failed to provide
the statutory notice required under Civil Code Section
1950.5(f). (App. 5-6) Nor have Respondents during the
course of the litigation ever given any notice to any
specific class member of the claim Respondents are now
asserting against that class member.
The California Supreme Court has ordered the trial
court to proceed to adjudicate the claims, has found that
all due process requirements were satisfied by the notice
of pendency of class action, and has implicitly (“conduct
further proceedings consistent with this opinion” App.
21) told the trial court not to consider any due process
implications in the failure to provide notice of any speci-
fic claim to any class member during the fourteen years
of litigation.®
6 Petitioners have explicitly contended below that the trial
court could not adjudicate the offsets without first meeting
federal due process notice requirements as set forth in Mullane
v. Central Hanover Bank & Trust Co. and its progeny.
The California Supreme Court opinion never uses the term
“due process” with respect to the notice issue, but the opinion
does state that in view of certain language in the notice of
pendency of class action” . . . plaintiffs’ contentions regarding
estoppei and lack of notice are unavailing.” (App. 15)
In the discussion preceding this statement the Court in its
opinion discussed “notice” not as a separate contention of plain-
tiffs, but as a part of the detriment suffered by the change of
position in the estoppel contention.
Piss tien ‘
15
Thus the trial court will now adjudicate the offset
claims and the equitable defenses to them and must do so
whether or not the absent class member comes forward to
make a claim.” For each of the 6,200 claims where the trial
Since this discussion is the only discussion in the decision
that deals with the lack of “notice” issue, the California court
held either
(1) That the statement in the notice of class action against
the landlord could substitute for the landlord’s non-compliance
with the notice requirements of subdivision (f) and satisfied the
notice requirement of federal due process; or the California
court
(2) Denied Petitioners’ due process “notice” contentions
without any discussion or justification of them in the opinion, so
that the mixing of the “notice” issue with the state estoppel
issue was either inadvertent or a disingenuous attempt to
enclose a federal “notice” issue in a state equity issue to avoid
review by this Court.
Petitioners believe the first interpretation is a fairer reading
of the decision, i.e., that the California Supreme Court has
squarely rejected Petitioner’s federal due process objections on
federal grounds. However, if there is any doubt about the intent
of the California Supreme Court to deny the federal due process
claims, then this Court should grant certiorari and remand the
case back to the California Supreme Court with a request that it
clarify the basis for its ruling. California v. Superior Court of
California, 449 U.S. 945, (1980)
” Under the decision of the California Supreme Court, the
Respondent must refund whatever security deposit is due to
each class member. See Granberry III, App. 17-19; California
Code of Civil Procedure Section 384. Under California Code of
Civil Procedure Section 1519.5, court ordered refunds which are
not claimed by the persons to whom they are due within one
year must be paid to the California State Controller, who has the
permanent responsibility to locate the claimant as well as the
obligation to pay the funds to the claimant in perpetuity. Cali-
fornia Code of Civil Procedure §§ 1501.5, 1540. Thus, even
though some class members may learn of the offset claims when
16
court finds no affirmative defense availing and Respon-
dents’ evidence sufficient, the refund due to each affected
class member will be reduced if not entirely eliminated.
Based on the decision of the California Supreme
Court, the determination of all offset claims can take
place without any attempt at notice other than what was
given in the notice of pendency of class action. However,
even if the trial court were to order additional notice, the
vast majority of absent class members can no longer be
given actual notice through the mail, and hence could
now receive only constructive notice by publication. The
offset claims against these class members will be tried in
absentia.8 Those who do happen to receive actual notice
and come forward will be forced to defend a claim which
they first learned about 8 to 17 years after it allegedly
arose.
B. The California Supreme Court Decision Is in
Conflict with the Principles Announced by this
Court in Mullane v. Central Hanover Bank &
Trust Co. and Its Progeny.
In a line of cases beginning with Mullane v. Central
Hanover Bank & Trust Co. 339 U.S. 306 (1950) and extend-
ing through Tulsa Collection Services v. Pope, 485 U.S. 478
they come forward to claim their money, the California Supreme
Court has instructed the trial court to adjudicate in absentia
offset claims for those class members who do not learn of their
right to recover their security deposit within any claim period
and who never appear before the Court.
8 As previously noted, the mailing of pendency of class
action in 1987 reached only about a third of the class members.
Eight years later the number will certainly be less.
17
(1988) this Court has required that actual notice be pro-
vided to persons before they may be deprived of their
property through state auspices. Thus, in Mennonite Bd. of
Missions v. Adams, 462 U.S. 791, 795 (1983) the Court
stated:
‘
- + + prior to an action which will affect an
interest in life, liberty, or Property protected by
the Due Process Clause of the Fourteenth
Amendment, a State must provide ‘notice rea-
sonably calculated, under all the circumstances,
to apprise interested parties of the pendency of
the action and afford them an opportunity to
present their objections.’ ”
In Tulsa Collection Services v. Pope, supra, 485 U.S. at
488, the Court stated plainly that even an inchoate cause
of action constituted a “property interest” which had to
be afforded the due process protections under Mullane,
and that when the process of a state court is invoked to
deprive a person of such a cause of action, state action is
involved.
There is no doubt that the absent class members
represented by Petitioners in the California proceedings
have a property interest in the security deposits held by
Respondents. Moreover, the California Supreme Court
has affirmed that Respondents have no right to retain
those deposits any longer, except that they are subject to
having the state trial court adjudicate Respondents’
alleged occupancy claims. Thus the only way the class
members may be deprived of their property interest in
the refund of the unlawfully held security deposits is if
the state court proceeds to hear Respondents’ evidence
on these inchoate claims and makes determinations that
Respondents are entitled to retain the money due each
individual class member.
18
This Court has also held that absent class members
are entitled to notice of the pendency of the class litiga-
tion which seeks to determine their respective legal
rights, and that such notice must be given in a manner
consistent with the principles set forth in Mullane. In
Eisen v. Carlisle & Jacqueline, 417 U.S. 156 (1974) this Court
held that Rule 23 of the Federal Rules of Civil Procedure
required that the district courts were to give notice to
absent class members of the pendency of the class action
using
the best notice practicable under the circum-
stances, including individual notice to all members
who can be identified through reasonable effort. We
think the import of this language is unmistak-
able. Individual notice must be sent to all class
members whose names and addresses may be
ascertained through reasonable effort.
Eisen, supra, 417 U.S. at 173 (emphasis in original).
The Court noted that the Advisory Committee had
described subdivision (c)(2) as not merely discretionary,
but mandatory, since it was designed to fulfill the
requirements of due process set forth in Mullane to which
the class action procedure is subject. Eisen, supra, 417 U.S.
at 173-174.
In the California litigation, the class members have
received notice consistent with Mullane regarding the
pendency of the claim to recover their security deposits,
but they have never received notice consistent with Mul-
lane regarding the Respondents’ intention to prove claims
seeking to deprive the class members of those same
deposits now that their right to the deposit has been
finally established.
This Court should grant the writ to determine
whether federal due process considerations require state
19
courts to follow the dictates of Mullane and its progeny,
including Eisen, when the state court seeks to adjudicate
individual claims raised by the defendant in the plaintiff
class action to defeat recovery by absent class members
who are neither parties to the litigation nor have received
actual notice of the defendant's claims.
Petitioners submit that the notice of class action
which the California Supreme Court held made Peti-
tioners’ due process objections “unavailing” fails to sat-
isfy each of the notice requirements of Mullane:
1. The class notice is not timely since it was neither
published nor mailed until up to 91/2 years after the
termination of the tenancies. When considered in the
light of the dollar amount at issue, and the dilution of
human memory by time and the dissipation of evidence,
the untimeliness of the notice presumptively denies the
class member a reasonable opportunity to defend.
2. The class notice does not inform any particular
tenant of any particular claim, its basis or amount and
thus fails “reasonably to convey the required informa-
tion” within the terms of Mullane decision.
3. The class notice does not provide a reasonable
opportunity to make an appearance since it provides no
notice of when the class members should appear to pre-
sent their objections to the offset claims. Although Justice
Stevens, joined by Chief Justice Berger and Justice Rehn-
quist, dissented in Memphis Light, Gas & Water Div. v.
Craft, 436 U.S.1, 25-26 (1978) the dissent, nevertheless,
noted an instance when satisfying the two basic require-
ments of Mullane would be insufficient:
20
For example, if the notice describes a threatened
loss which can only follow a prescheduled hear-
ing, it must also inform the recipient of the time
and place of the hearing.
4. The class notice violates due process for all class
members who received constructive notice only through
publication. For all those tenants who never received a
mailing of the notice of class action against Respondents,
the publication manifestly fails to meet the requirements
of Mullane, particularly when, as in Mullane, “the notice
does not even name those whose attention it is supposed
to attract...” (Mullane, supra, 339 U.S. at 315)
5. The notice is not a reasonable choice since it is
not likely under all the circumstances to inform any given
tenant of any particular claim. (See Greene v. Lindsey, 456
U.S. 444 (1982): posting of notice on the tenant’s apart-
ment door in a forcible entry and detainer action found
wanting in Due Process.)
The petition should also be granted to resolve
whether a state court may carry out the adjudication of
claims based on notice by publication when the party
asserting those claims has delayed taking reasonable
steps available to it to give the persons adversely affected
by the claims actual notice of the claims until such time as
those persons can no longer be located with reasonable
effort. This Court has stated that
The means employed must be such as one
desirous of actually informing the absentee
might reasonably adopt to accomplish it.
Mullane v. Central Hanover Bank & Trust Co., supra, 339
U.S. at 315. Petitioners submit that the conduct of
Respondents in failing to give the statutory notice
required by subdivision (f) of Civil Code Section 1950.5
21
and their 14 year (to date) delay in giving any individu-
alized notice to the class members in the litigation dem-
onstrates that they have not employed means such as one
actually desirous of actually informing the class members
would reasonably have adopted. Their delay has resulted
in making the giving of actual notice no longer possible
through “reasonable effort.” (Eisen, supra, 417 U.S. at 173)
This Court should grant the writ to set forth the due
process limitations on state and federal courts in permit-
ting the adjudication of counterclaims against absent
class members in circumstances where there is little or no
likelihood that the absent class members will receive
actual notice of the counterclaim and/or have a timely
and reasonable opportunity to defend against it.
C. Although Further Proceedings Will Take Place
In The State Trial Court, This Case Meets the
Finality Requirements for Grant of Certiorari
Under The Standards Set Forth in Cox Broad-
casting Corp. v. Cohn, 420 U.S. 469 (1975)
Even though further proceedings are to be carried
out in the California courts, under the criteria set forth in
Cox Broadcasting Corp. v. Cohn, 420 U.S.469 (1975), there is
nevertheless justification for immediate review of the
federal question presented by the California Supreme
Court’s decision.
While it is possible that the trial court, when it pro-
ceeds to adjudicate the offset claims, may determine that
some or all of the offset claims are unmeritorious or
subject to equitable defenses which preclude granting
Respondents relief, absent class members will neverthe-
less be having their property rights adjudicated in a
proceeding without having been afforded due process
22
notice as required by the decisions of this Court interpret-
ing the Fourteenth Amendment to the United States Con-
stitution.
Review of the federal due process notice issue by this
Court is appropriate now under at least two of the four
categories set forth in Cox. Under the third Cox category
are cases “where the federal claim has been finally
decided, with further proceedings in the state courts to
come, but in which later review of the federal issue
cannot be had, whatever the outcome of the case.” Cox
Broadcasting Corp. v. Cohn, supra, 420 U.S. at 481. Were all
of Respondents’ claims to be decided against Respondent
on state law grounds, the issues raised by this Petition
would be mooted since Respondents would have no
standing to appeal the failure to provide notice to the
prevailing absent class members. On the other hand, were
Respondents to prevail on offset claims against various
absent class members who never receive notice of the
determination, Petitioners may be held by the state courts
to be bound by the existing state supreme court decision
and prevented from further litigating the issue. Unless
this Court reviews the due process question now, the
issue may be precluded from further review by this
Court.
The due process notice issue is also presently review-
able under the fourth category described in Cox, i.e.,
where the petitioner could yet prevail in the state court
on non-federal grounds but “where reversal of the state
court on the federal issue would be preclusive of any
further litigation on the relevant cause of action” and “a
refusal immediately to review the state court decision
might seriously erode federal policy . . . ” Cox Broadcast-
ing Corp. v. Cohn, supra, 420 U.S. at 482-483.
ae Ss Py ee
23
Reversal of the California Supreme Court's rejection
of any due process objection to adjudicating Respon-
dents’ occupancy claims without notice to absent class
members will be preclusive of Respondents’ equitable
offset causes of action because it is no longer possible to
give due process notice to any, or at the least, the vast
majority of class members at this late date.
In addition to the obvious stare decisis effect of the
unreviewed California Supreme Court decision, permit-
ting the state trial court to proceed to adjudicate the
substantive merits of some 6,200 claims against absent
class members’ property without affording the affected
parties due process notice will itself constitute a serious
erosion of the principles set forth in Mullane and Eisen.
The class members (or their statutory successor in inter-
est — the State Controller) will either be deprived of their
property permanently through unconstitutional proceed-
ings, or will have return of their property subject to
further significant delay while the trial court conducts
constitutionally meaningless hearings.
24
II. CALIFORNIA CIVIL CODE SECTION 1950.5 IS
UNCONSTITUTIONAL AS CONSTRUED AND
APPLIED BY THE CALIFORNIA SUPREME
COURT: THE HOLDING THAT A GENERALIZED
STATEMENT OF THE DEFENDANT’S INTEN-
TION TO PURSUE OFFSET CLAIMS AGAINST
CLASS MEMBERS IN THE NOTICE OF PEN-
DENCY OF CLASS ACTION SATISFIES THE
STATUTORY REQUIREMENT FOR PROVIDING
INDIVIDUAL CLASS MEMBERS WITH TIMELY
NOTICE AND A REASONABLE OPPORTUNITY
TO DEFEND OFFENDS THE DUE PROCESS
CLAUSE OF THE 14TH AMENDMENT, AND SO
INVADES THE LEGISLATIVE POWER AS TO
VIOLATE THE SEPARATION OF POWERS DOC-
TRINE, INCORPORATED IN ART. III, SEC. 3 OF
THE CALIFORNIA CONSTITUTION, AND PRO-
TECTED BY THE GUARANTEE CLAUSE OF ART.
IV, SEC.4 AS WELL AS THE DUE PROCESS
CLAUSE OF THE 14TH AMENDMENT.
The California Supreme Court holding that the notice
of pendency of class action was a sufficient substitute or
alternative to the personal notice to the individual tenant
required by California Civil Code Section 1950.5(f) con-
strues and applies subsection (f) so as to deprive the
citizens of California of protections which comport with
the notice requirements of Mullane v. Central Hanover Bank
& Trust Co., 339 U.S. 306, 314 (1950), and replaces those
subsection (f) notice protections with a notice which fun-
damentally fails to provide meaningful notice as defined
in Mullane.
Petitioners submit that even if the Due Process
Clause in the 14th Amendment to the United States Con-
stitution would not, on its own, require the California
courts to provide notice consistent with Mullane in the
———————————————————
25
absence of a state statute which offered such protections,
for the California Supreme Court to Strip the class mem-
bers of due process protections comporting with Mullane
which were afforded them by their state legislature con-
stitutes an independent violation of federal due process
and the Guarantee Clause protection of the separation of
powers required for a republican form of state govern-
ment.
Petitioners submit that the California Supreme Court
has construed all legislatively enacted due process
requirements out of California Civil Code Section 1950.5
in order to accommodate a large landlord’s tardy asser-
tion of occupancy claims and refusal to comply with the
strict notice provision created by the legislature:9
1. The California court has eliminated the state leg-
islative requirement for timely notice, since the statute
Provides that notice of any claim was to be furnished to
the individual tenant within two weeks of the termina-
tion of the tenancy, but the California court has construed
the statute so that the first notice of the claim may be
given 91/2 years after the termination of a tenancy.
? Both the California Supreme Court and Respondents in
their briefing to the California Court had emphasized that the
jury found Respondents’ conduct was not in “bad faith” within
the meaning of the California Civil Code provision. However, in
interpreting the application of federal due process requirements
to the states, this Court has never made the protections due to
persons about to be deprived of property through state action
contingent upon whether the party whose claim the state was
seeking to enforce was making that claim in good or bad faith.
Constitutional due process protections apply independently of
the state of mind of the party who stands to benefit from their
elimination.
26
2. The California court has eliminated the state leg-
islative requirement that the notice inform the tenant of
the specific nature of the claim. The statute required the
landlord to “furnish” the tenant with a copy of an
itemized statement showing the amount and basis of any
claims, but the California court has construed the statute
to permit the landlord to litigate the claim without telling
any individual class member what claim is being made
against him.
3. The California court has eliminated the state leg-
islative requirement that the notice provide a reasonable
opportunity to appear and object. The statutory require-
ment for notice within two weeks, while the tenant may
still be in the apartment or have an operative forwarding
address, provides a reasonable opportunity for the tenant
to object directly to the landlord or contend against the
claims by seeking relief in the small claims court, but the
California court has construed the statute to permit the
landlord to first give notice years after the tenancy has
ended, when it is unreasonable to make most tenants
defend a claim for a few hundred dollars.
4. The California court has eliminated the state leg-
islative requirement that the tenant receive actual notice
of the claim. Subdivision (f) requires the landlord to
“furnish” the notice to the tenant “by first class mail or
personal delivery” at a point in time when giving actual
notice will be practicable for virtually every tenant. The
California court has construed the statute to hold that the
landlord may wait years until the giving of actual notice
through reasonable effort will no longer be practicable for
most persons affected.
5. The California court has eliminated the state leg-
islative requirement for a notice which was a reasonable
res es
27
choice to actually inform the affected persons of the
claims and has construed the statute to permit a notice
which is not reasonably calculated to actually inform the
class members.
The challenged construction and application of Cali-
fornia Civil Code Section 1950.5 by the California
Supreme Court is state action for the purpose of the
review sought here. Tulsa Professional Collection Services
Inc. v. Pope, 485 U.S. 478, 487 (1988). If anything, it is the
challenged construction given the statute by the State
Supreme Court that takes it out of the set of self-execut-
ing statutes.
The three great departments of power in government,
set out in separate articles in the Constitution of the
United States and the Constitution of the State of Califor-
nia, have different functions. According to Chief Justice
Marshall, “[t]he difference between the departments is
that the legislature makes, the executive executes and the
judiciary construes the law.” Wayman v. Southward, 10
Wheat. (25 U.S.) 1, 46 (1825).
In Myers v. United States, 272 US. 52 (1926), this
Court noted that from our beginnings keeping the opera-
tion and function of these departments separate from
each other - the Separation of Powers principle —- is
possibly the single most important principle or doctrine
in our constitutional jurisprudence, and quoted Mad-
ison’s comments from The Annals of Congress, to the
following effect:
If there is a principle in our constitution, indeed
in any free constitution more sacred than
another, it is that which separates the legislative,
executive and judicial powers.
Myers v. United States, supra, 272 U.S. at 116.
28
For over two centuries this Court has tended the
beacon of this cardinal principle of our form of republi-
can government; to the extent of stating, in 1992, that an
“invasion” of the territory of one department by another
could not be cured of constitutional impropriety by the
consent of the department invaded, (New York v. United
States, 505 U.S.144, 120 L.Ed.2d 120, 112 S.Ct. 2404 at 2431
(1992)). (And see Plaut v. Spendthrift Farms, __ U.S. __
131 L.Ed.2d 328, 115 S.Ct. 1447 (1995) holding that Con-
gress lacks the power to set aside a final judgment of a
federal court.)
Since 1879, the Separation of Powers principle has
been an express protection of the republican form of
government set forth in the California Constitution, now
in Article III, Sec.3.:
The powers of state government are legislative,
executive and judicial. Persons charged with the
exercise of one power may not exercise either of
the other powers except as permitted by this
Constitution.
For the Supreme Court of California to hold that the
notice of pendency of class action may substitute for the
carefully delineated notice provision created by the state
legislature is blatantly beyond the state court’s judicial
function, as it, in effect, waives the detailed requirements
of a statute and replaces it with one of the court’s own
devise; one that holds the general may replace the partic-
ular, the late the timely, and the amorphous the detailed,
in informing tenants of the amount and basis of a land-
lord’s occupancy claims against their property (security
deposits). By this holding, the California Supreme Court
is essentially enacting its own private view of what con-
stitutes timely notice and a reasonable opportunity to
29
defend for landlords to replace that enacted by the Cali-
fornia Legislature.
This “invasion” of the legislative power by the Cali-
fornia Supreme Court is offensive to the Separation of
Powers principle in Art. III, Sec. 3 of the California Con-
stitution as well as repugnant to Art. IV, sec. 4 of the
United States Constitution. Minor v. Happersett, 88 U.S.
162 (1875); Baker v. Carr, 369 U.S. 186 (1962). If any
principle of “republican” government is binding upon the
states under the Guarantee Clause of the U.S. Constitu-
tion, than certainly it must be that most sacred principle:
the Separation of Powers doctrine. At least one state
court has so held. Van Sickle v. Shanahan, 212 Kan. 426,511
P.2d 223 (1973).
Although this Court in Plaut v. Spendthrift Farms, Inc.
supra, restricted its decision to the narrower grounds of
the Separation of Powers and chose not to rest the deci-
sion on the broader grounds of a violation of Due Pro-
cess, because of the possible application to state
legislation under the 14th Amendment, (Plaut v. Spend-
thrift Farms, __ US. ——. 131 L.Ed.2d 328, 115 S.Ct. 1447,
at 1452) Petitioners’ submit that when the state has
expressly placed its own version of the Separation of
Powers principle into a constitution then the Due Process
Clause of the Fourteenth Amendment picks up that prin-
ciple and secures it to the citizens of that State, because it
is then a part of law of that state secured by the Four-
teenth Amendment to The United States Constitution.
See: McCullough v. Virginia, 172 U.S.102 (1898); Martin v.
Hunter’s Lessee, 1 Wheat. (14 U.S.) 304 (1816); Ancient
Egyptian Arabic Order of Nobles etc. v. Michaux, 279 US.
737 (1929); Ward v. Board of County Comm'rs, 253 U.S. 17
30
(1930) and Creswill v. Grand Lodge of Knights of Pythias, 225
U.S. 246 (1912).1°
CONCLUSION
For the foregoing reasons the Petitioners respectfully
request the Court grant the writ of certiorari to review
the decision of the California Supreme Court in this liti-
gation.
Respectfully submitted,
Davip H. SCHWARTZ
Counsel of Record
Law OFFICES OF
Of Counsel: Davip H. SCHWARTZ
Ernest L. Graves 240 Stockton Street
cae haacyg ely seo San Francisco, CA 94108
anta barbara, (415) 362-2700
Counsel for Petitioners
10 This due process aspect of the separation issue was not
asserted below.
App. 1
Copr. (C) West 1995 No claim to orig. U.S. govt. works
38 Cal.Rptr.2d 650
(Cite as: 9 Cal.4th 738, 889 P2d 970, 38 Cal.Rptr.2d 650)
Lisa GRANBERRY et al., Plaintiffs and Appellants,
v.
ISLAY INVESTMENTS et al., Defendants and Appellants.
No. S035591.
Supreme Court of California,
In Bank.
March 6, 1995.
Rehearing Denied April 20, 1995.
Hill, Schwartz & Stenson, David H. Schwartz, Mic-
hael P. Guta and Ernest L. Graves, San Francisco, for
plaintiffs and appellants.
Daniel E. Lungren, Atty. Gen., Roderick E. Walston,
Chief Asst. Atty. Gen., and Yeoryios C. Apallas, Deputy
Atty. Gen., as amici curiae on behalf of plaintiffs and
appellants.
Diane M. Matsinger, Betty L. Jeppesen, Antonio R.
Romasanta, Santa Barbara, Crahan, Javelera, Ver Halen &
Aull and Marcus E. Crahan, Jr., Los Angeles, for defen-
dants and appellants.
MOSK, Justice.
An important provision of our Statutory landlord-
tenant law provides that within three weeks after the
termination of tenancy a landlord must return the secu-
rity deposit paid by a former tenant and provide a writ-
ten accounting of any portion retained as compensation
for unpaid rent, repairs, and cleaning. (Civ.Code,
App. 2
§ 1950.5, subd. (f).)! We granted review to determine
whether a landlord who in good faith fails to comply
with the requirements of this statute may nevertheless
recover damages for unpaid rent, repairs, and cleaning in
a subsequent judicial proceeding. We also consider
whether the trial court abused its discretion by not
requiring defendants to disgorge all security deposits
received from the members of the plaintiff class and to
pay this money into a fund. Finally, we consider whether
the court abused its discretion by limiting the award of
attorney fees and costs to 25 percent of the total class
recovery.
We conclude that a good faith failure to comply with
section 1950.5, subdivision (f), does not bar a landlord
from recovering damages for unpaid rent, repairs, and
cleaning, and we agree with the Court of Appeal to the
extent that it so held. We disagree with its view of the
remaining issues, however, and hence reverse its judg-
ment to permit the trial court to reconsider its choice of
remedy and limitation on attorney fees.
1 At the time of the events in this case the statute allowed
landlords only two weeks to act and the subdivision so provid-
ing was designated subdivision (e). The amendment changing
the statute into its present form took effect on January 1, 1994.
(Stats.1993, ch. 755, § 1.) The amendment is not material to the
issues presented by this case.
All further statutory references are to the Civil Code unless
otherwise specified.
App. 3
FACTS
Defendants own or operate between 1200 and 1500
residential rental units in the Santa Barbara area. During
the period relevant to this case, April 27, 1978, to April
27, 1981, it was defendants’ practice to charge tenants an
increased rental fee for the first 31 days of tenancy, but to
charge a reduced fee for all subsequent months.2 Defen-
dants never returned this fee in whole or in part; rather,
they simply retained it as part of the rental payment for
the first month. Approximately 10,000 tenants paid such
fees during the relevant period, and the aggregate
amount of such fees was approximately $1 million.
Plaintiffs, a class of former tenants, sued for a refund
of the amount by which the rent they had paid for the
first 31 days of their tenancy exceeded the amount they
paid in each of the following months. The court entered
summary judgment in favor of defendants on the ground
that the increased rent paid during the first month was in
fact rent and not a security deposit within the meaning of
section 1950.5, subdivision (b),3 and therefore plaintiffs
* The first month’s rent exceeded the rent paid in subse-
quent months by approximately $100. (Granberry v. Islay Invest-
ments (1984) 161 Cal.App.3d 382, 385, fn. 4 [207 Cal.Rptr. 652].)
+ Section 1950.5, subdivision (b) provides: “As used in this
section, ‘security’ means any payment, fee, deposit or charge,
including, but not limited to, an advance payment of rent, used
or to be used for any purpose, including, but not limited to, any
of the following:
“(1)_ The compensation of a landlord for a tenant’s default
in the payment of rent.
App. 4
were not entitled to a refund. In an earlier appeal the
Court of Appeal reversed, holding that the character of
the payment was a triable issue of fact. (Granberry v. Islay
Investments, supra, 161 Cal.App.3d 382.) On remand, the
court granted defendants leave to amend their answer to
allege they were entitled to set off amounts owed to them
for unpaid rent, repair, and cleaning if a jury were to find
the increased rental payment was a refundable security
deposit.
Plaintiffs subsequently moved for summary judg-
ment on the question whether defendants were entitled to
a setoff in view of the fact that they had failed to comply
with the requirements of section 1950.5, subdivision (f).
The court granted the motion. A jury thereafter found
that the excess rental payments were security deposits
within the meaning of section 1950.5, subdivision (b), but
that defendants had not retained them in bad faith. The
court ruled that the excess fees must be refunded to the
members of the class who made individual claims, but it
did not require defendants to disgorge the aggregate
‘amount of the security deposits they wrongfully retained
and to pay that money into a fund. The judgment also
“(2) The repair of damages to the premises, exclusive of
ordinary wear and tear, caused by the tenant or by a guest or
licensee of the tenant.
“(3) The cleaning of the premises upon termination of the
tenancy.
“(4) To remedy future defaults by the tenant in any obliga-
tion under the rental agreement to restore, replace or return
personal property or appurtenances, exclusive of ordinary wear
and tear, if the security deposit is authorized to be applied
thereto by the rental agreement.”
App. 5
awarded costs and attorney fees to plaintiffs, but pro-
vided that such items would be recovered from the agegre-
gate amount paid by defendants and would not exceed 25
percent of the total amount claimed by the individual
members of the class.
In a second appeal the Court of Appeal held (1) the
trial court erred in ruling that defendants were not enti-
tled to a setoff, (2) the court did not abuse its discretion in
granting refunds only to those class members who came
forward to claim them, and (3) it was not an abuse of
discretion to limit the award of attorney fees and costs to
25 percent of the total amount paid to the class. Although
the Court of Appeal purported to reverse the judgment in
its entirety, it in fact impliedly affirmed the judgment as
to the second and third of these issues.4
I.
During the three-year period relevant to this litiga-
tion, plaintiffs vacated apartments rented from defen-
dants but did not receive a written accounting of the
basis for, or the amount of, the security deposits retained
or the disposition of these security deposits. Nor did
plaintiffs receive a refund of any portion of their security
deposits. Accordingly, both the trial court and the Court
of Appeal correctly concluded that defendants failed to
* The Court of Appeal also held that the trial court erred in
failing to award prejudgment interest to plaintiffs and that the
jury instruction defining the words “bad faith” was not erro-
neous. Because these holdings were not addressed in the peti-
tion for review, we need not discuss them further. (Cal.Rules of
Court, rule 29.3(c).)
App. 6
comply with section 1950.5, subdivision (f). The issue
now before us is whether, notwithstanding their good
faith lack of compliance, defendants may set off amounts
allegedly due for unpaid rent, repairs, and cleaning
against money due plaintiffs as a refund of their security
deposits. We conclude that defendants may do so.
The English chancery courts allowed setoff to be
raised as a defense as early as the 17th century. (Pruden-
tial Reinsurance Co. v. Superior Court (1992) 3 Cal.4th 1118,
1124 [14 Cal.Rptr.2d 749, 842 P.2d 48]; 3 Story, Commen-
taries on Equity Jurisprudence (14th ed. 1918) § 1867, pp.
468-469; see also Tigar, Automatic Extinction of Cross-
Demands: Compensation from Rome to California (1965) 53
Cal.L.Rev. 224 [tracing the history of setoff to the Roman
law concept of compensation].) It was founded on the
equitable principle that “either party to a transaction
involving mutual debts and credits can strike a balance,
holding himself owing or entitled only to the net differ-
ence, ... ” (Kruger v. Wells Fargo Bank (1974) 11 Cal.3d
352, 362 [113 Cal.Rptr. 449, 521 P.2d 441, 65 A.L.R.3d
1266].) Setoff, as it applies to this case, is now codified as
section 431.70 of the Code of Civil Procedure, which
provides in pertinent part: “Where cross-demands for
money have existed between persons at any point in time
when neither demand was barred by the statute of limita-
tions, and an action is thereafter commenced by one such
person, the other person may assert in the answer the
defense of payment in that the two demands are compen-
sated for so far as they equal each other, . . . ” The quoted
statute, however, does not create a substantive right to
raise setoff as a defense to a claim for monetary relief, but
merely describes the procedures to be followed in raising
App. 7
this defense. (Kruger v. Wells Fargo Bank, supra, 11 Cal.3d 352,
362 [113 Cal.Rptr. 449, 521 P.2d 441, 65 A.L.R.3d 1266] Hauger
v. Gates (1954) 42 Cal.2d 752, 755 [269 P.2d 609].) To deter-
mine whether setoff is available in this case, we must turn to
section 1950.5.
We first consider whether to allow a landlord to raise
setoff even though he has failed to comply with the
requirements of section 1950.5, subdivision (f), is consis-
tent with the legislative intent underlying that statute.
(See Prudential Reinsurance Co. v. Superior Court, supra, 3
Cal.4th 1118, 1125.) “In determining intent, we look first
to the words themselves. [Citations.] When the language
is clear and unambiguous, there is no need for construc-
tion. [Citations.] When the language is susceptible of
more than one reasonable interpretation, however, we
look to a variety of extrinsic aids, including the ostensible
objects to be achieved, the evils to be remedied, the
legislative history, public policy, contemporaneous
administrative construction, and the statutory scheme of
which the statute is a part. [Citations.]” (People v. Wood-
head (1987) 43 Cal.3d 1002, 1007-1008 [239 Cal.Rptr. 656,
741 P.2d 154].)
Section 1950.5, subdivision (e), allows a landlord to
claim any portion of the security deposit reasonably nec-
essary to compensate for unpaid rent, repairs, and clean-
ing. Section 1950.5, subdivision (f), provides in pertinent
part: “Within three weeks after the tenant has vacated the
premises, the landlord shall furnish the tenant... a copy
of an itemized statement indicating the basis for, and the
amount of, any security received and the disposition of
the security and shall return any remaining portion of the
security to the tenant.” From the plain language of the
App. 8
statute we conclude that a landlord (1) must return a
tenant’s security deposit within the specified period after
the termination of the tenancy, (2) may retain all or part
of the security deposit as compensation for unpaid rent,
repairs, and cleaning, and (3) must provide a written
accounting of any amounts retained within the specified
period. If, within the specified period, the landlord has
not provided the tenant with a written accounting of the
portion of the security deposit he plans to retain, the
right to retain all or part of the security deposit under
section 1950.5, subdivision (f), has not been perfected,
and he must return the entire deposit to the tenant.
Nevertheless, the mere fact that the landlord has lost the
right to take advantage of the summary deduct-and-
retain procedure of section 1950.5, subdivision (f), does
not lead to the conclusion that he has lost all right to
claim damages for unpaid rent, repair, and cleaning,
whether through setoff or otherwise. The language of
section 1950.5, subdivision (f), offers no clear guidance on
this issue. Accordingly, we must look to the legislative
history of section 1950.5 to determine the intent of the
Legislature on this point. (People v. Woodhead, supra, 43
Cal.3d 1002, 1008 [239 Cal.Rptr. 656, 741 P.2d 154].)
In 1970, the Legislature enacted section 1951, the
predecessor of section 1950.5. Former section 1951, subdi-
vision (c), provided: “The landlord may claim of such
payment or deposit only such amounts as are reasonably
necessary to remedy tenant defaults in the payment of
rent, to repair damages to the premises caused by the
tenant, or to clean such premises upon [the] termination
of the tenancy, if the payment or deposit is made for any
or all of those specific purposes. Any remaining portion
App. 9
of such payment or deposit shall be returned to the
tenant no later than two weeks after termination of his
tenancy.” (Stats. 1970, ch. 1317, p. 2453.) Ostensibly, the
Legislature enacted section 1951, subdivision (c), to pre-
vent the misuse of security deposits, which one contem-
porary commentator described as follows: “Theoretically,
the security deposits are created to insure against the
contingencies of unpaid rents, tenant-inflicted damages,
and unclean premises at the termination of the lease. Any
claim as to the retention of these funds by the landlord
arises only at such time as there has been a breach of the
tenant's obligation and an assessment of damage. How-
ever, the security deposit in actuality has evolved into a
bonus to be kept by the landlord upon termination of the
lease agreement regardless of the damages actually sus-
tained by the landlord. Landlords will retain security
deposits after the departure of a tenant secure in the
knowledge that a former tenant is severely inhibited from
initiating legal action. This restraint is a product of a
combination of factors including problems of proof, the
relatively small sum of money at issue, the time factor,
and the distance now separating the tenant from his
former landlord. Where the reimbursement is forthcom-
ing, usually the payments are delayed, the application of
the retained amounts unitemized, and the interim reten-
tion and use of the funds having been without cost to the
landlord.” (Jory, The Residential Lease: Some Innovations for
Improving the Landlord-Tenant Relationship (1971) 3
U.C.Davis L.Rev. 31, 38-39, fns. omitted; see also Boss-
hardt, The Rental Security Deposit in California (1971) 22
Hastings L.J. 1373.) In 1972, the Legislature renumbered
section 1951 as section 1950.5, but did not change the
App. 10
wording of subdivision (c). Finally, in 1977, the Legisla-
ture enacted the version of section 1950.5 in effect during
the events of this case (now section 1950.5, subdivision
(f)).
From the foregoing history it is apparent that section
1950.5, subdivision (f), was enacted to ensure the speedy
return of security deposits on the termination of tenancy
and to prevent the improper retention of such deposits.
However, like the Court of Appeal, we find no conclusive
evidence in the legislative history of section 1950.5
regarding the specific issue we now address — namely,
whether a landlord may recover damages for unpaid rent,
repair, and cleaning even if he has failed in good faith to
avail himself of the summary deduct-and-retain pro-
cedure permitted under section 1950.5, subdivision (f).
Defendants note that the original draft of a bill pro-
posed in 1985 would have added language to section
1950.5 specifically denying offsets for landlords that fail
to comply with section 1950.5, subdivision (f), but this
language was deleted from the bill prior to enactment.
They contend that this proves that the Legislature, at
least in 1985, intended to allow offsets. In response, plain-
tiffs note that defendants urged the passage of two bills,
one in 1990 and another in 1991, but that these bills also
failed. Again like the Court of Appeal, we find these
arguments unpersuasive. As we have often observed,
“Unpassed bills, as evidences of legislative intent, have
little value.” (Dyna-Med, Inc. v. Fair Employment & Hous-
ing Com. (1987) 43 Cal.3d 1379, 1396 [241 Cal.Rptr. 67, 743
P.2d 1323]; accord, Grupe Development Co. v. Superior Court
(1993) 4 Cal.4th 911, 922-923 [16 Cal.Rptr.2d 226, 844 P.2d
545].)
App. 11
Defendants also remind us that we should construe
section 1950.5, subdivision (f), in a way that will give
effect to section 1950.5 as a whole, leaving no part useless
or deprived of meaning. (Gay Law Students Assn. v. Pacific
Tel. & Tel. Co. (1979) 24 Cal.3d 458, 478 [156 Cal.Rptr. 14,
595 P.2d 592].) They draw our attention to section 1950.5,
subdivision (k), which Provides in pertinent part: “The
bad faith claim or retention by a landlord
... Of the security or any portion thereof, in violation of
this section . . . , may subject the landlord . . . to statutory
damages of up to six hundred dollars ($600), in addition
to actual damages. . . . In any action under this section,
the landlord . . . shall have the burden of proof as to the
reasonableness of the amounts claimed... . "5 According
to defendants, this Provision is “critical” for two reasons.
First, they argue that if the Legislature had intended to
bar all claims for damages for unpaid rent, repair, and
cleaning other than those made in accordance with sec-
tion 1950.5, subdivision (f), it would not have been neces-
Sary to allocate the burden of Proof regarding
reasonableness, because the matter would never be liti-
gated. According to defendants, this Provision could only
have meaning in cases in which the landlord has failed to
comply with section 1950.5, subdivision (f), the tenant has
sued for a refund, and the landlord seeks setoff. The
argument misses the mark: the second sentence of section
1950.5, subdivision (k), would also apply in cases in
which the tenant contests the accounting required under
5 Prior to the 1993 amendments (see fn. 1, ante) this subdivi-
sion was designated subdivision (h), and the penalty for bad
faith was $200 rather than $600.
App. 12
section 1950.5, subdivision (f), and sues for a refund of all
or part of the amount deducted and retained under that
provision.
Second, defendants contend that because the Legisla-
ture provided a remedy only for bad faith retention of a
security deposit, we can infer it did not intend to impose
a penalty for good faith retention. They conclude that
landlords like themselves that have retained security
deposits in good faith should not be penalized by being
barred from raising setoff. This argument is persuasive.
“{I]t is well settled that ‘ “Courts will not impose penal-
ties for noncompliance with statutory provisions in addi-
tion to those that are provided expressly or by necessary
implication.’ ” [Citations.]” (People ex rel. Van de Kamp v.
American Art Enterprises, Inc. (1983) 33 Cal.3d 328, 334
[188 Cal.Rptr. 740, 656 P.2d 1170].) Because the Legisla-
ture has not expressly stated that landlords that fail to
comply with section 1950.5, subdivision (f), in good faith
are barred from recovering for unpaid rent, repairs, and
cleaning, we find that no such penalty was intended and
we will not imply such a penalty.
Plaintiffs vigorously contend this result is inconsis-
tent with principles of equity and with public policy. (See
Prudential Reinsurance Co. v. Superior Court, supra, 3
Cal.4th 1118, 1139, 14 Cal.Rptr.2d 749, 842 P.2d 48 [con-
sidering principles of equity and public policy in deter-
mining whether setoff was available].) They first urge
that to allow landlords to raise setoff as a defense would
be inconsistent with the equitable principle that an indi-
vidual should not profit from his own wrong, because
landlords may use this defense to keep all or part of the
security deposits they retained in violation of section
App. 13
1950.5, subdivision (f). While we recognize the impor-
tance of this equitable Principle (see § 3517), and while
we do not doubt that this principle may bar setoff on the
Particular facts of many individual cases, it does not jus-
tify an absolute bar to the right to a setoff in all cases.
When enacting, interpreting, or applying a rule of
law that regulates the interaction between individual citi-
zens, the lawmaking body should consider carefully
before creating absolute and invariable rules. Normally,
such laws should be as flexible as the regulated interac-
tions are varied, and they should leave the courts with
some discretion to apply them justly given the facts of the
case before them. (See Heriot, A Study in the Choice of
Form: Statutes of Limitations and the Doctrine of Laches, 1992
B.Y.U.L.Rev. 917, 920 [“In promulgating any kind of law,
one of the tasks a lawmaker must perform is to select the
best formulation of that law — the one that delegates to
the law administrator the level of discretion and author-
ity that is just right.”].) Without some degree of flexibility,
harsh and improper results may occur. (See id. at p. 937,
fn. omitted [Comparing strict rules, like Statutes of limita-
tions, to more flexible standards, like the doctrine of
laches, and asserting that as lawmakers move toward
more rigid rules, “there is an increasing potential for
incorrect judgments -— judgments that would not reflect
the lawmaker’s preferences had the lawmaker adjudi-
cated the case personally on an all-things-considered
basis. ... The rigidity of rules creates errors. [P]... [A]
rulelike statute of limitations will always be both under-
inclusive and overinclusive. . . . [and therefore] [i]t will
never be a perfect reflection of its underlying policies.” ].)
Such flexibility is particularly appropriate when applying
App. 14
equitable doctrines, such as setoff. (See, e.g., Holmberg v.
Armbrecht (1946) 327 U.S. 392, 396 [90 L.Ed. 743, 747, 66
S.Ct. 582, 162 A.L.R. 719] [“Equity eschews mechanical
rules; it depends on flexibility.”].)
In addition, a landlord that seeks setoff after good
faith noncompliance with the procedures described in
section 1950.5, subdivision (f), does not “profit from his
own wrong,” because he cannot set off any damages he
could not have recovered if he had complied with section
1950.5, subdivision (f). Indeed the landlord suffers a great
deal if he delays, because he loses the opportunity to take
advantage of the summary nonjudicial procedure allowed
under that statute, and must instead prove in court by a
preponderance of the evidence that he is entitled to dam-
ages and that the amount claimed is reasonable. (§ 1950.5,
subd. (k).) This burden of proof will become ever more
difficult to sustain the longer the landlord delays,
because the evidence supporting his claim may be lost
with the passage of time.
Second, plaintiffs contend that to allow defendants to
raise setoff would violate the equitable principle that an
individual may not change his position to the detriment
of another. (See § 3512.) They note defendants originally
claimed (1) the excess payments were rent, (2) they had
never demanded or received security deposits from plain-
tiffs, and (3) they, not plaintiffs, were to bear the cost of
unpaid rent, repairs, and cleaning. Only after the excess
payments were found to be security deposits did defen-
dants claim they were entitled to a setoff. Plaintiffs argue
this change of position worked to their detriment because
they did not receive adequate notice of defendants’
claims. However, the original class notice contained the
App. 15
following paragraph: “Defendants contend that any
refund you might be entitled to recover must be reduced
by the amount of any unpaid rent, costs reasonably nec-
essary to clean and repair damage you caused to the
apartment, in excess of ordinary wear and tear, and that
such sum could exceed the amount of any refund or
damages you might receive.” In light of this notice, plain-
tiffs’ contentions regarding estoppel and lack of notice
are unavailing.
Finally, plaintiffs contend that to allow setoff would
be inappropriate in class actions such as this because of
numerous practical difficulties. They stress that (1) the
class is comprised of approximately 10,000 individuals,
many of whom may have moved to other parts of the
state or country, (2) defendants have raised between 6,200
and 8,000 claims for setoff, which must be litigated indi-
vidually, (3) because the security deposits in question are
between $100 and $150, a relatively small amount of
money, many class members may not appear to oppose
defendants’ claims, and (4) if the class members do not
appear, defendants will prevail by default on their claims
for setoff, and may be unjustly enriched. Given these
difficulties, plaintiffs ask us not only to bar defendants
from raising setoff, but to reconsider our many earlier
decisions holding setoff may be raised when the claims
are not liquidated (see, e.g., Erlich v. Superior Court (1965)
63 Cal.2d 551, 555 [47 Cal.Rptr. 473, 407 P.2d 649]; Hauger
v. Gates, supra, 42 Cal.2d 752, 755), at least in the context
of class actions. We decline to do so for two reasons. First,
it may well be possible on remand to shape a remedy that
will avoid many of the problems plaintiffs have identi-
fied. Second, it is inappropriate to deprive defendants of
App. 16
their substantive rights merely because those rights are
inconvenient in light of the litigation posture plaintiffs
have chosen. (See City of San Jose v. Superior Court (1974)
12 Cal.3d 447, 462 [115 Cal.Rptr. 797, 525 P.2d 701, 76
A.L.R.3d 1223], fn. omitted [“Class actions are provided
only as a means to enforce substantive law. Altering the
substantive law to accommodate procedure would be to
confuse the means with the ends - to sacrifice the goal for
the going.” ].)
For the reasons stated, we conclude that a landlord
who has failed in good faith to take advantage of the
summary nonjudicial deduct-and-retain procedure
allowed under section 1950.5, subdivision (f), may
recover damages for unpaid rent, repairs and cleaning
(§ 1950.5, subd. (e)) in a subsequent judicial proceeding
provided that he proves by a preponderance of the evi-
dence that he has suffered such damages and that the
amount claimed is reasonable (§ 1950.5, subd. (k)).© The
trial court erred in ruling to the contrary, and that court
must now hold an evidentiary hearing to determine
whether defendants have sustained this burden. Because
defendants have raised their claims through the equitable
defense of setoff, the trial court must also determine
whether defendants’ claims are barred by any of the
generally applicable equitable affirmative defenses,
including laches, unclean hands, and estoppel.
6 Because the jury did not find that defendants here acted
in bad faith, we do not consider and therefore express no opin-
ion regarding the rights of landlords who have acted in bad
faith.
App. 17
Il.
Plaintiffs requested that judgment be entered on
behalf of the entire class for the aggregate amount of the
security deposits retained, and suggested that any
amounts not ultimately claimed by individual class mem-
bers should escheat to the state. The trial court rejected
the request and entered judgment in favor of only those
members of the class (excluding the named plaintiffs,
whose claims were dealt with separately) who might
actually come forward and file individual claims. In
doing so, the court issued a memorandum of intended
decision stating in pertinent part: “In certain consumer
class actions Fluid Recovery may be the best method of
compensating the class. The propriety of Fluid Recovery
in a particular case depends upon its usefulness in fulfill-
ing the purposes of the underlying cause of action. (See
State v. Levi Strauss & Company [1986] 41 Cal.3d 460 [224
Cal.Rptr. 605, 715 P.2d 564].) We do not find that the Fluid
Recovery method is necessary to fulfill the purposes of
this case.”” Plaintiffs now contend that the trial court
? The term “fluid recovery” refers to the application of the
equitable doctrine of cy pres in the context of a modern class
action. (State of California v. Levi Strauss & Co. (1986) 41 Cal.3d
460, 472 [224 Cal.Rptr. 605, 715 P.2d 564].) “The implementation
of fluid recovery involves three steps. [Citation.] First, the
defendant’s total damage liability is paid over to a class fund.
Second, individual class members are afforded an opportunity
to collect their individual shares by proving their particular
damages, usually according to a lowered standard of proof.
Third, any residue remaining after individual claims have been
paid is distributed by one of several practical procedures that
have been developed by the courts.” (Id. at pp. 472-473.)
App. 18
abused its discretion by denying the remedy they
requested.
“The class action is a product of the court of equity —
codified in section 382 of the Code of Civil Procedure. It
rests on considerations of necessity and convenience,
adopted to prew +t a failure of justice.” (City of San Jose v.
Superior Court, supra, 12 Cal.3d 447, 458.) In 1994 the
Legislature amended Code of Civil Procedure section 384,
providing guidelines for the courts to use in exercising
their equitable discretion to shape class remedies. Subdi-
vision (b) of this statute declares that unless the defen-
dant is a public entity or public employee, “prior to the
entry of judgment in a class action . . . the court shall
determine the total amount that will be payable to all
class members, if all class members are paid the amount
to which they are entitled pursuant to the judgment. The
court shall also set a date when the parties shall report to
the court the total amount that was actually paid to the
class members. After the report is received, the court
shall amend the judgment to direct the defendant to pay
the sum of the unpaid residue, plus interest on that sum
at the legal rate of interest from the date of the entry of
the initial judgment, in any manner the court determines
is consistent- with the objectives and purposes of the
underlying cause of action. ...” In subdivision (a) of
Code of Civil Procedure section 384, the Legislature
explains that its intent in enacting the foregoing statute
was “to ensure that the unpaid residuals in class action
litigation are distributed, to the extent possible, in a
manner designed either to further the purposes of the
underlying causes of action, or to promote justice for all
Californians.” However, the Legislature makes it clear
App. 19
that nothing in the statute “shall . . . be construed to
abrogate any equitable cy pres remedy which may be
available in any class action with regard to all or part of
the residue.” (Id., subd. (d).)
When the trial court chose the class remedy in this
case, it had already held that defendants were not enti-
tled to set off amounts owed for unpaid rent, repair, and
cleaning. There can be little doubt that this prior ruling
was among the more important factors that the trial court
considered in deciding what remedy would be most equi-
table given the circumstances as they then existed. How-
ever, we now hold in part I of this opinion that the trial
court's initial ruling was error, that defendants are not
barred as a matter of law from seeking setoff, and that
they are entitled to have the opportunity to prove their
right to setoff at an evidentiary hearing. It follows that
the equities in this case may well have changed, and the
trial court must reconsider its choice of remedy in light of
the result of the forthcoming evidentiary hearing on
defendants’ claim of setoff.
ITI.
The judgment provided in part that “Plaintiffs shall
recover legal costs in the amount of $___ [to be hereafter
determined by the court]. Plaintiffs’ counsel shall recover
reasonable attorneys’ fees in an amount to be hereafter
determined by the Court. Such court costs and attorneys’
fees shall be paid out of and deducted from any aggre-
gate amount of money paid by Islay under this judgment
as the refund of rent for the first 31 days of a tenancy
App. 20
(when compared with the rent for the second and subse-
quent months of the tenancy). Pursuant to the notice
given potential class members, such court costs together
with such attorneys’ fees shall not exceed 25% of said
aggregate amount.”
Plaintiffs contend the 25 percent limitation on attor-
ney fees was an abuse of discretion because the court
failed to obtain and consider evidence regarding the
number of hours class counsel devoted to the litigation,
counsel’s normal hourly rates, counsel’s experience, or
the quality of the legal services provided. This contention
is premature because it is impossible to determine
whether attorney fees in the amount of 25 percent of the
“aggregate class recovery” are adequate, given that (1)
the amount of defendants’ offsets, if any, have not yet
been calculated, and it is therefore impossible to deter-
mine what the total class recovery will be, if anything,
and (2) this case is far from over, and it is therefore
impossible to determine the total number of hours class
counsel will devote to it prior to completion.
We have held, and we remain convinced, that an
“ ‘experienced trial judge is the best judge of the value of
professional services rendered in his court... .’ ” (Serrano
v. Priest (1977) 20 Cal.3d 25, 49 [141 Cal.Rptr. 315, 569 P.2d
1303].) Accordingly, the trial court must reconsider the
question of attorney fees after the forthcoming evidenti-
ary hearing on defendants’ claim of setoff.
The judgment of the Court of Appeal is reversed
insofar as it impliedly affirms (1) that portion of the
judgment of the trial court which limits recovery to non-
named class members who have not opted out and who
App. 21
file claims, and (2) that portion of the judgment which
limits the amount of the award of costs and attorney fees.
The Court of Appeal shall remand the cause to the trial
court with directions to conduct further proceedings con-
sistent with this opinion. In all other respects the judg-
ment of the Court of Appeal is affirmed.
LUCAS, C_J., GEORGE, J., and WERDEGAR, J., con-
curred.
BAXTER, J. — I concur in the majority’s judgment and
in its holding that a landlord’s good faith failure to com-
ply with the requirement of Civil Code section 1950.5,
subdivision (f) for an accounting and return of a former
tenant’s security deposit does not bar the landlord from
raising setoff as a defense in an action by a former tenant
for the refund. (All further section references are to the
Civil Code.)
I respectfully disagree, though, with the majority’s
premise that section 1950.5 is ambiguous on the question
of whether setoff is allowed and that we therefore must
construe the statute based on its legislative history. “ ‘If
the language is clear and unambiguous there is no need
for construction, nor is it necessary to resort to indicia of
the intent of the Legislature... . ’” (Delaney v. Superior
Court (1990) 50 Cal.3d 785, 798 [268 Cal.Rptr. 753, 789 P.2d
934], quoting Lungren v. Deukmejian (1988) 45 Cal.3d 727,
735 [248 Cal.Rptr. 115, 755 P.2d 299].) I believe section
1950.5 is not ambiguous and that we need not construe it.
Section 1950.5, subdivision (k) provides the sole remedies
for a landlord’s retention of a security deposit: “The bad
faith claim or retention by a landlord or the landlord’s
successors in interest of the security or any portion
App. 22
thereof in violation of this section, or the bad faith
demand of replacement security in violation of subdivi-
sion (i), may subject the landlord or the landlord’s suc-
cessors in interest to statutory damages of up to six
hundred dollars ($600), in addition to actual damages.
The court may award damages for bad faith whenever
the facts warrant such an award, regardless of whether
the injured party has specifically requested relief. In any
action under this section, the landlord or the landlord’s
successors in interest shall have the burden of proof as to
the reasonableness of the amounts claimed or the author-
ity pursuant to this section to demand additional security
deposits.” Nothing in the statute states or even suggests
that the landlord who has acted in good faith loses his
right to assert a setoff. Because section 1950.5 provides
the remedies for a landlord’s wrongful retention but does
not even mention the loss of a landlord’s setoff, the
statute necessarily does not deprive the landlord of the
setoff. This is not ambiguous.
ARABIAN, J., concurred.
KENNARD, J., Dissenting. - The law requires that a
landlord “shall” assert any claims against the security
deposit of a tenant within a short period (formerly two,
now three weeks) after the tenancy ends and “shall”
within that period refund to the tenant any portion of the
security that the landlord did not claim. (Civil Code,
§ 1950.5, former subd. (e), now subd. (f), italics added.) In
breach of this statutory duty, the defendant landlord here
illegally withheld more than $1 million in security depos-
ited by over 10,000 residential tenants without asserting
any claim against the security. Nonetheless, in the name
of “equity” the majority holds that the landlord may now,
App. 23
14 to 17 years after the tenancies have ended, assert
claims against the tenants’ security for unpaid rent, clean-
ing expenses, and repair costs that the statute required
the landlord to assert within 2 weeks of the end of each
tenancy. -
In its haste to embark on its meanderings along the
byways of equity jurisprudence, the majority fails to rec-
ognize that the language and purpose of the statute pre-
clude the result it reaches. The purpose of Civil Code
section 1950.5’s carefully calibrated provisions is to com-
pel landlords to refund security due tenants promptly
without the necessity of legal action by the tenants. To
ensure that this occurs, the Legislature imposed the
requirement that landlords make their claims against the
security within the statutory period. The inescapable cor-
ollary of the landlord’s mandatory duty to assert any
claims within the Statutory period is that after that period
expires the landlord loses any further right to assert
claims as setoff against the security.
The majority, however, holds that landlords who vio-
late section 1950.5’s requirement to set off and refund
security within the statutory period may nonetheless
later raise their claims as setoff against the security. I
dissent because the majority’s holding ignores the statu-
tory language, disrupts the Statutory scheme, and dis-
serves the statute’s purpose. Section 1950.5 will now
become a toothless remedy.
Additionally, I would hold that the trial court abused
its discretion in fashioning the class remedy. I agree with
the majority, however, that the plaintiff class’s objections
to the attorney fee order are premature.
App. 24
I
Plaintiffs Lisa Granberry et al. are a class of approx-
imately 10,000 former tenants of defendants Islay Invest-
ments and its managing partner Marvin Trevillian
(hereafter collectively the landlord). The class members
were tenants of the landlord between 1978 and 1981. The
landlord charged the tenants on average approximately
$100 more for the first month of the tenancy than for each
succeeding month of the tenancy.
Granberry filed this class action contending that the
excess first month charge was a security payment within
the meaning of Civil Code section 1950.5; the jury agreed.
During the class period, class member tenants paid the
landlord over $1 million in security in the form of excess
first month charges, which the landlord never refunded
or accounted for upon the termination of the tenancies.
The landlord filed a cross-complaint against the class
member tenants for amounts allegedly due for unpaid
rent, cleaning, and repairs. The trial court dismissed the
landlord’s cross-complaint because it was not properly
served. The landlord also sought to assert these same
claims as setoff to the security the landlord had received
from the class member tenants. The trial court ruled that
because the landlord had not complied with Civil Code
section 1950.5, former subdivision (e)’s requirement of
accounting for and refunding security within two weeks
of the end of the tenancy, the landlord was not entitled to
set off any claims against the security.
After trial, the court entered judgment. The judgment
limited the landlord’s liability to the amount of security
PT Rr ayes mpeg
App. 25
owed to those class members who might thereafter sub-
mit a claim, rather than imposing liability for the full
amount of the security withheld from the class as a
whole.
Reversing the trial court, the Court of Appeal held
that the landlord was entitled to set off any claims against
the security owed to the class member tenants. It also
held that the trial court had not abused its discretion in
fashioning a class remedy limiting the landlord’s liability
to only the security due to those class members who
might thereafter submit a claim.
II
At the times relevant to this action, Civil Code sec-
tion 1950.5, former subdivision (e) provided: “The land-
lord may claim of the security only such amounts as are
reasonably necessary to remedy tenant defaults in the
payment of rent, to repair damages to the premises
caused by the tenant, exclusive of ordinary wear and tear,
or to clean such premises, if necessary, upon termination
of the tenancy. No later than two weeks after the tenant
has vacated the premises, the landlord shall furnish the
tenant with an itemized written statement of the basis for,
and the amount of, any security received and the disposi-
tion of such security and shall return any remaining
portion of such security to the tenant.” (Civ.Code,
§ 1950.5, former subd. (e), italics added.)! This version of
section 1950.5 subsection (e), applicable during the period
’ Unless otherwise noted, all further Statutory references
are to the Civil Code.
App. 26
from 1978 to 1981 relevant to this action, was enacted in
1977. (Stats. 1977, ch. 971, § 2, p. 2939.) Thereafter, the
Legislature amended section 1950.5 several times, extend-
ing the landlord’s compliance period from two to three
weeks and redesignating as subdivision (f) the second
sentence of subdivision (e) containing the setoff-and-
refund provision. Accordingly, I will hereafter refer to the
setoff-and-refund provision as section 1950.5(f).
Section 1950.5 limits both the nature of the claims
that a landlord may assert against the security and the
time within which a landlord may assert those claims.
Under the statute, within two weeks after a tenancy ends
the landlord must assert any claims against the security
and return any unclaimed amount.
The majority holds that, despite the landlord’s statu-
tory duty to assert any claim against the security and to
refund the balance within two weeks of the end of the
tenancy, a landlord who retains the entire security with-
out complying with this duty may assert claims for the
first time as setoff in a subsequent action by the tenant to
recover the security. In my view, this holding is inconsis-
tent with the language and purpose of section 1950.5(f).
In analyzing statutory language, this court looks to
“the object to be achieved and the evil to be prevented by
the legislation.” (Harris v. Capital Growth Investors XIV
(1991) 52 Cal.3d 1142, 1159 [278 Cal.Rptr. 614, 805 P.2d
873].) As the majority acknowledges, section 1950.5(f)
was designed to address the evil of landlords who fail to
promptly return security due the tenant at the end of the
tenancy. (Maj. opn., ante, at p. 746.) Recognizing the
obstacles facing a former tenant seeking to recover a
App. 27
security deposit from a recalcitrant landlord and the for-
mer tenant's lack of leverage over the landlord, the Legis-
lature sought to level the playing field by in effect telling
the landlord holding the security to “claim it or lose it.”
The plain language of section 1950.5(f) requires a
landlord within two weeks of the end of a tenancy to
notify the tenant of any claims against the security and to
return any portion of the security upon which the land-
lord has no claim. By strictly limiting the time within
which a landlord can assert a claim against the security,
the Legislature has necessarily provided that the landlord
forfeits any right to set off claims against the security if
the landlord does not do so within the Statutory period.
This reading of section 1950.5(f) accords with its pur-
pose. Section 1950.5(f) was designed to compel landlords
to routinely return security due the tenant without the
necessity of legal action. In the words of the majority,
section 1950.5(f) “was enacted to ensure the speedy
return of security deposits on the termination of tenancy
and to prevent the improper retention of such deposits.”
(Maj. opn., ante, at p. 746.) This purpose is furthered by
requiring landlords to assert their claims against the
security promptly after the end of the tenancy or else lose
the right to do so thereafter.
Although a landlord loses all recourse against the
security by failing to assert any claims within the statu-
tory two-week period, this does not mean that the land-
lord has lost all recourse against the tenant. Nothing in
section 1950.5(f) suggests that, by losing the right to set
off claims against the security, the landlord has also for-
feited any causes of action against the tenant. A landlord
App. 28
wishing to pursue those claims after allowing the statu-
tory period to elapse may do so in an independent suit
against the tenant. The landlord in this case did file a
cross-complaint against the class members asserting
claims for unpaid rent, cleaning costs, and repair costs;
the cross-complaint was dismissed, however, when the
landlord failed to properly serve it.
Ill
The majority hinges its conclusion that a landlord
does not lose the right of setoff after the statutory period
expires on the following reasoning. It first contends that
to deny a continuing right of setoff to the landlord who
fails to assert claims within the statutory period would
impose a “penalty” on the landlord. It then contends that,
because section 1950.5, subdivision (k) (hereafter section
1950.5(k)) authorizes $600 in statutory damages to be
awarded against a landlord who in bad faith unlawfully
retains security, the Legislature did not intend to “penal-
ize” landlords who without bad faith unlawfully retain
security by denying them the right of setoff.2 I disagree
both with the majority’s characterization of the limita-
tions period of the landlord’s setoff right as a “penalty”
and with its conclusion that the bad-faith-damages provi-
sion of section 1950.5(k) demonstrates an implicit inten-
tion by the Legislature not to terminate the landlord’s
right of setoff after the landlord has failed to assert any
claims within the statutory period.
2 The amount of statutory damages available under section
1950.5 during the period relevant to this lawsuit was $200.
(§ 1950.5, former subd. (h).)
App. 29
The majority is wrong in characterizing the expira-
tion of the section 1950.5(f) limitations period as a “pen-
alty.” We do not commonly say that someone who has
forfeited a claim by failing to bring it within the statute of
limitations period has suffered a penalty. Under the
majority’s reasoning, however, every statute of limita-
tions would be a penalty.
Nor is a limitations period for asserting claims (such
as the limitation period of section 1950.5(f)) a “penalty”
in the sense in which that word was used in the case on
which the majority relies, People ex rel. Van de Kamp v.
American Art Enterprises, Inc. (1983) 33 Cal.3d 328, 334
[188 Cal.Rptr. 740, 656 P2d 1170]. At issue there was a
monetary fine, not a claims limitation period as is the
case here. (See ibid.)
Furthermore, even if the complete loss of a claim
resulting from the running of a limitations period could
properly be characterized as a penalty, it would still be
incorrect to characterize the expiration of the landlord’s
setoff right under section 1950.5(f) as a penalty. As
explained above, the landlord whose setoff right under
section 1950.5(f) lapses does not forfeit any claims against
the tenant, which the landlord can still pursue in an
independent action against the tenant, but only loses the
right to satisfy the claims out of the security.
Even assuming that the expiration of the landlord’s
right to setoff could be characterized as a penalty, it is
one that arises “ ‘ “by necessary implication” ’” (People
ex rel. Van de Kamp v. American Art Enterprises, Inc., supra,
33 Cal.3d at p. 334 [188 Cal.Rptr. 740, 656 P.2d 1170]) from
the language of section 1950.5(f). As described above, the
App. 30
Legislature’s imposition on landlords of a mandatory
duty to assert any claims against the security within two
weeks of the end of the tenancy necessarily implies that if
landlords fail to do so within that period, they cannot do
so later. To hold otherwise would render meaningless the
mandatory term “shall” that the Legislature used in sec-
tion 1950.5(f).
The majority is also wrong in concluding that,
because section 1950.5(k) authorizes statutory damages
for landlords who retain security in bad faith, the Legisla-
ture must have intended that landlords who, without
acting in bad faith, unlawfully breach their mandatory
duty to account for any claims against the security and to
refund any remaining security should not lose the right
of setoff after the statutory period expires. Section
1950.5(k) provides: “The bad faith claim or retention by a
landlord . . . of the security or any portion thereof in
violation of this section, . . . may subject the land-
lord .. . to statutory damages of up to six hundred dollars
($600), in addition to actual damages.”
The Legislature’s decision to impose a special conse-
quence — statutory damages - for retention of security
that is accompanied by bad faith raises no logical infer-
ence that the Legislature intended to impose no conse-
quence whatever for retention of security in violation of
section 1950.5(f) not accompanied by bad faith. There is
nothing logically inconsistent about imposing separate
consequences for these different types of conduct. To the
contrary, in light of the legislative purpose — to secure the
prompt return of tenant funds to which the landlord has
no legitimate claim - it is perfectly rational and consistent
for the Legislature to have imposed, as it did, loss of
App. 31
setoff as the basic consequence for all retention of secu-
rity beyond the statutory period, and to have imposed
statutory damages as a second and additional conse-
quence for a particularly aggravated form of statutory
violation consisting of improper retention of security
accompanied by bad faith.
Nor, unlike People ex rel. Van de Kamp v. American Art
Enterprises, Inc., supra, 33 Cal.3d 328, 334, on which the
majority relies, is this a case in which, because the Legis-
lature has provided certain penalties or consequences for
a statutory violation, the issue is whether the Legislature
intended those remedies to exclude other penalties or
consequences. American Art was a nuisance action in
which the trial court had imposed upon the defendants a
$168,000 fine not expressly authorized by the nuisance
statute. (Id. at p. 334.) Because the Legislature had
expressly authorized injunctive relief and the sale of the
offending property as remedies for a nuisance, it was
unlikely that the Legislature had impliedly authorized
monetary fines as an additional punishment for the same
act. Here, however, in the majority’s view the Legislature
has provided no consequence for a violation of the man-
datory setoff-and-refund requirement not accompanied
by bad faith.
By permitting a landlord who has retained the entire
security without timely asserting any claims to the tenant
to nonetheless set off claims in an action by the tenant to
recover the security, the majority’s holding will render
section 1950.5(f) a flimsy barrier against the evil it is
designed to address - landlords who do not promptiy
account for any claims against the security and refund
App. 32
whatever security is due their tenants without the neces-
sity of legal action by the tenant. The statutory require-
ments that the landlord “shall” assert claims against the
security within two weeks by notifying the tenant and
“shall” refund any remaining portion within two weeks
are meaningless, and the purpose of the statute is frus-
trated, if the landlord who fails to do so can nonetheless
assert those claims as setoff years later in an action by the
tenant to recover the security. The carefully balanced
incentives of section 1950.5, designed to ensure that land-
lords refund security routinely and without the necessity
of court action, will accordingly be defeated.
IV
The trial court’s class action judgment required the
landlord to refund only the security withheld from those
class member tenants who might thereafter submit a
claim against the landlord. The majority reverses the
portion of the Court of Appeal’s judgment affirming the
trial court’s class action remedy without reaching the
issue of whether the trial court abused its discretion in
fashioning that remedy. In order to provide guidance to
the-trial court on remand, I would reach that issue and
hold that the trial court abused its discretion in ordering
a class remedy that permits the landlord to retain class
damages that are not claimed by individual class mem-
bers.
The trial court’s decision to limit the landlord’s lia-
bility to only the amounts owed to those class members
who may come forward and submit individual claims,
rather than imposing liability for the full amount of
App. 33
unlawfully withheld security owed to the class as a
whole, was an abuse of discretion, even assuming that the
landlord should be permitted the right of setoff. In my
view, allowing a wrongdoing defendant to retain all or
part of the amount for which it is liable to the plaintiff
class rarely is one of the options that a court should
choose in deciding how to distribute the class recovery or
dispose of the residual.
Initially, the trial court failed to distinguish between
the separate issues of the determination of the amount for
which a defendant is liable to the plaintiff class and the
method for distribution of that amount to the class. Code
of Civil Procedure section 384, cited by the majority,
makes clear the distinction between the amount of a
defendant's liability to the class and the method of distri-
bution of the class recovery (including the disposition of
any unpaid residual). It first requires that “prior to the
entry of any judgment in a class action . . . the court shall
determine the total amount that will be payable to all class
members. .. . ” (Code Civ.Proc., § 384, subd. (b), italics
added.) Thereafter, “the parties shall report to the court
the total amount that was actually paid to the class mem-
bers. After the report is received, the court shall amend
the judgment to direct the defendant to pay the sum of
the unpaid residue . . . in any manner the court deter-
mines is consistent with the objectives and purposes of
the underlying cause of action. . . . ” (Ibid.) Thus, the
proper measure of the class recovery is the injury caused
to the class members, not the amounts that individual
class members step forward to claim.
The trial court erased the distinction between these
two concepts by making the amount of the class recovery
App. 34
turn on the effectiveness of the distribution method it
selected. Using the trial court’s formula, by definition
there would never be any unpaid residuals in class
actions because defendants would never have any lia-
bility for any amounts not claimed by class members. By
making the landlord liable only for the security withheld
from those class members who step forward to claim a
refund and not for the security withheld from the class as
a whole, the trial court in effect narrowed the class with-
out notice after the trial had concluded and extinguished
the causes of action of the nonclaiming class members.
Instead, the trial court should have first determined the
landlord’s total liability to the class as a whole and then
developed a method for distributing that amount to the
class members to the extent feasible and for dealing with
any unclaimed residual. A trial court has several sources
of guidance in dealing with the unclaimed residual of a
class recovery. As the majority acknowledges, the class
action is a creature of equity, and it is a first principle of
equity that a wrongdoer should not be permitted to profit
from its wrongs. (See § 3517 [“No one can take advantage
of his own wrong.”]; see also Shepherd, Damage Distribu-
tion in Class Actions: The Cy Pres Remedy (1972) 39
U.Chi.L.Rev. 448 [retention of unclaimed residue by the
defendant results in “unjust enrichment of the defen-
dant”].) Consequently, this court has previously held that
the various methods of distributing the unpaid residual
of a class recovery that go under the name of “fluid
recovery” may be “essential to ensure that the policies of
disgorgement or deterrence are realized” and should be
utilized where appropriate to “fulfill[ ] the purposes of
the underlying cause of action.” (State of California v. Levi
App. 35
Strauss & Co. (1986) 41 Cal.3d 460, 472 [224 Cal.Rptr. 605,
715 P.2d 564].)
The Legislature, in Code of Civil Procedure section
384, has expressly addressed the factors a trial court must
consider in crafting a method for the disposition of the
unclaimed residual of a class recovery. It has decided that
“unpaid residuals in class action litigation [should be]
distributed, to the extent possible, in a manner designed
either to further the purposes of the underlying causes of
action, or to promote justice for all Californians,” includ-
ing distribution to child advocacy programs or to the
California Legal Corps. (Code Civ.Proc., § 384, subd. (a).)
Rarely will it further the purposes of the underlying
action or promote justice to permit a wrongdoing defen-
dant in a class action to simply retain for its own benefit
the unpaid residual of the class recovery, and nothing in
Code of Civil Procedure section 384 contemplates such a
result.
Accordingly, the trial court abused its discretion
when it permitted the landlord to retain the unclaimed
residual of the class recovery for the landlord’s own
benefit. The trial court in this case made no findings and
gave no reasons to support its conclusion that the land-
lord should be permitted to retain the unpaid residual or
that would explain why it was fair and just for the
landlord to do so. Instead, the trial court simply made the
conclusory assertion that “[w]e do not find that the Fluid
Recovery method is necessary to fulfill the purpose of
this case.” Given that it ordinarily does not further the
purposes of the underlying action or promote justice to
permit a defendant to retain the unpaid residual in a class
App. 36
action, the trial court’s unexplained decision to the con-
trary was an abuse of discretion. This is especially so
because the landlord here had previously attempted to
evade section 1950.5’s predecessor statute and to
unlawfully retain security due its tenants by denominat-
ing the security a “nonrefundable cleaning fee.” (See
Bauman v. Islay Investments (1973) 30 Cal.App.3d 752 [106
Cal.Rptr. 889].)
CONCLUSION
The Legislature enacted section 1950.5 to protect ten-
ants, not landlords. Section 1950.5(f) sets a clear limit on
the landlord’s right to set off claims against the security
by requiring a landlord to assert any claims against the
security within two weeks of the end of the tenancy and
then refund the balance. This furthers section 1950.5’s
purpose of ensuring that landlords routinely refund secu-
rity due their tenants without the necessity of legal action
by their tenants. Repeatedly invoking its notion of equity,
however, the majority ignores the language and purpose
of section 1950.5(f) to hold that landlords do not lose their
right of setoff after the expiration of the statutory period.
I cannot agree with this attempt to rewrite section
1950.5(f) and eviscerate its purpose. Moreover, the Legis-
lature intended that those tenants who are forced to bring
a lawsuit to recover their security have a simple, swift,
and certain legal remedy: section 1950.5 expressly autho-
rizes actions brought under that section to be maintained
in small claims court, limits the types of claims that can
be asserted against the security, and puts on the landlord
the burden of proof as to the reasonableness of any
amount claimed against the security. (§ 1950.5, subds. (e),
Te ee ee, ee
App. 37
(k), (m).) In turn, section 1950.5(f), by cutting off the
landlord’s right of setoff after the two-week statutory
period, assures the tenant weighing whether to bring an
action to recover security that he or she will not be met
by a surprise claim of setoff never before raised by the
landlord.
The majority’s holding upsets this statutory scheme,
for a tenant who brings an action to recover security now
may be faced with unanticipated claims of setoff the
landlord has never before asserted. The tenant’s action is
made not only unpredictable but more complicated.
Undoubtedly, in light of the majority’s creation of a land-
lord’s right to setoff in actions to recover security, many
tenants will now conclude that it is not worth the effort to
bring such an action, just as they did before section 1950.5
- hardly the result the Legislature intended in enacting
this consumer protection statute.
For the foregoing reasons, I would reverse the por-
tion of the judgment of the Court of Appeal holding that
the landlord may set off its claims against the illegally
withheld security and the portion of the judgment hold-
ing that the trial court did not abuse its discretion in
limiting the landlord’s liability to only the security due
those class members who hereafter submit a claim.
App. 38
Copr (C) West 1995 No claim to orig. U.S. govt. works
23 Cal.Rptr.2d 420
18 Cal.App.4th 885, 23 Cal.App.4th 648
(Cite as: 23 Cal.Rptr.2d 420)
Lisa GRANBERRY et al., Plaintiffs and Appellants,
v.
ISLAY INVESTMENTS et al., Defendants and Appellants.
No. B057796.
Court of Appeal, Second District,
Division 6.
Sept. 9, 1993.
As Modified on Denial of
Rehearing Oct. 8, 1993.
Review Granted Nov. 24, 1993.
Hill, Schwartz, Stenson and David H. Schwartz, Mi-
chael P. Guta and Ernest L. Graves, Law Offices of David
H. Schwartz, San Francisco, for plaintiffs and appellants.
Daniel E. Lungren, Atty. Gen., Roderick E. Walston,
Chief Asst. Atty. Gen., Yeoryios C. Apallas, Deputy Atty.
Gen. as amici curiae on behalf of plaintiffs and appel-
lants.
Crahan, Javelera, Ver Halen & Aull and Marcus
Crahan, Jr., Los Angeles, Antonio R. Romasanta, Betty L.
Jeppesen, Diane M. Matsinger, Santa Barbara, for defen-
dants and appellants.
ore Sa aa ear ee Tee Pay aE eee en Pee Te
“ae” Uae. eae ee ee = as
. Ste as ba Se ee a
ENTS CRS tn PET Re RE OS :
=" Ne eT er
4 SESE ILS REN UBT
yes Pao te eR ae
App. 39
WILLARD, Associate Justice (Assigned).*
These appeals concern security posted by approx-
imately 10,000 tenants (plaintiffs) who rented apartments
from defendants during a three-year period commencing
April 27, 1978. The basic issues relate to the meaning of
Civil Code! section 1950.5 as it read during that interval
of time.
Section 1950.5 was originally enacted in 1970 as sec-
tion 1951. It was amended in 1972 and again in 1977 to
read as it existed during the period involved in these
appeals. The relevant portions during the three-year
period are set forth in footnote 2.2
* Retired judge of the Superior Court sitting under assign-
ment by the Chairperson of the Judicial Council.
“1 All further Statutory references are to the Civil Code
unless otherwise specified.
2 “(a) The provisions of this section shall apply to security
for a rental agreement for residential property, that is, property
used as the dwelling of the tenant. “(b) As used in this section,
‘security’ means any payment, fee, deposit or charge, including,
but not limited to, an advance payment of rent, used or to be
used for any purpose, including, but not limited to, any of the
following: “(1) The compensation of a landlord for a tenant’s
default in the payment of rent. “(2) The repair of damages to the
premises caused by the tenant. “(3) The cleaning of the premises
upon termination of the tenancy.” . . . “(d) Any security shall be
held by the landlord for the tenant who is party to such lease or
agreement. The claim of a tenant to such security shall be prior
to the claim of any creditor of the landlord. “(e) The landlord
may claim of the security only such amounts as are reasonably
necessary to remedy tenant defaults in the payment of rent, to
repair damages to the premises caused by the tenant, exclusive
of ordinary wear and tear, or to clean such premises, if neces-
Sary, upon termination of the tenancy. No later than two weeks
App. 40
For several decades, defendants have managed a
number of apartment complexes in Santa Barbara County.
They have modified their rental agreement forms over
the years. At one time they required tenants to post
security deposits. Later, they required tenants to provide
nonrefundable cleaning fees. During the period here
involved, they established a rental rate for the first 31
days of occupancy. Thereafter, if the tenant continued on
a month-to-month basis, a lesser rent was charged. The
amount by which the first rental payment exceeded sub-
sequent payments was not refunded in whole or in part;
it was simply treated as part of the rent for the period
involved. The aggregate amount of such security is
approximately $1 million.
after the tenant has vacated the premises, the landlord shall
furnish the tenant with an itemized written statement of the
basis for, and the amount of, any security received and the
disposition of such security and shall return any remaining
portion of such security to the tenant. “. . . . “(h) The bad faith
claim or retention by a landlord or transferee of a security or
any portion thereof, in violation of this section, may subject the
landlord or his transferee to damages not to exceed two hun-
dred dollars ($200), in addition to any actual damages. In any
action under this section, the landlord shall have the burden of
proof as to the reasonableness of the amounts claimed. “(i) No
lease or rental agreement shall contain any provision charac-
terizing any security as ‘nonrefundable.’ “. . . . “Subdivision (e)
of this section shall be applicable to all tenancies, leases, or
rental agreements for residential property terminated on or
after January 1, 1978.”
3 Further factual background is set forth in a prior appeal in
this case, Granberry v. Islay Investments (1984) 161 Cal.App.3d
382, 207 Cal.Rptr. 652, and in Bauman v. Islay Investments
(1973) 30 Cal.App.3d 752, 106 Cal.Rptr. 889.
ee
App. 41
On April 27, 1981, plaintiffs brought a class action
against defendants seeking a refund of the amounts by
which the rate for rent curing the first 31 days exceeded
the subsequent rate.* A ‘ury found that the “excess” was
in fact a security within the meaning of section 1950.5,
subdivision (b). There has been no appeal from that
determination. By summary adjudication, the trial judge
ruled that such security deposits must be refunded to
members of the plaintiff class who individually made
claim therefor under a procedure to be established.
The court found that defendants were not entitled to
offsets for unpaid rent, repairs or cleaning, for which a
security might be required by section 1950.5, because the
defendants had not complied with a requirement of sub-
division (e): “No later than two weeks after the tenant has
vacated the premises, the landlord shall furnish the ten-
ant with an itemized written statement of the basis for,
and the amount of, any security received and the disposi-
tion of such security and shall return any remaining
portion of such security to the tenant.” The judgment did
not provide for requested prejudgment interest. It stated
that plaintiffs’ attorneys fees and costs should be deter-
mined later, should be paid out of the aggregate amount
paid by defendants as refund, and should not exceed 25
percent of such aggregate amount.
Defendants have appealed from the ruling that they
may not offset costs of cleaning, damages, unpaid rent, et
cetera, from the security to be refunded. We reverse.
* Approximately 260 members of the original class eventu-
ally “opted out” and are no longer members of the plaintiff
class. Reference in this opinion, infra, does not refer to them.
App. 42
Plaintiffs have appealed from the judgment claiming
error with regard to four matters: (1) the jury instruction
defining “bad faith,” (2) the limitation of refunds to those
members of the class who come forward individually to
claim them, (3) failure to award prejudgment interest,
and (4) limitation of attorneys fees to be awarded plain-
tiffs’ attorneys to 25 percent of the aggregate amount
defendant is ultimately required to pay. There is no error
with regard to the first, second and fourth claims, but we
reverse the judgment with respect to the third.
DEFENDANTS’ APPEAL
During the three-year period which the litigation
involves, plaintiffs vacated apartments rented from
defendants. During that period, and for more than nine
years thereafter, no plaintiff received a written statement
of the basis for, or the amount of, security posted or of
the disposition of that security. Likewise, none received a
return of any portion of that security. The trial court
found that defendants’ default barred claims for offsets
attributable to obligations for which the security was
posted. Defendants contend that to deny them the right
to offset, even after many years, is not mandated by the
statute and would constitute an impermissible forfeiture.
In construing the meaning of the statute, two sepa-
rate questions are presented. One is whether within two
weeks of tenancy termination the landlord is obligated to
account for and return unapplied security. We answer
this in the affirmative. Where there is a failure to account,
the entire deposit must be refunded, and because the
amount is liquidated, prejudgment interest accrues. The
App. 43
second question is whether failure of the landlord to
make the required refund cancels his causes of action, if
any, for which the deposit was security. In other words,
does loss of the security automatically result in loss of the
landlords’ right to setoff for property damage, unpaid
rent or other obligation secured by the deposit? We
answer this in the negative.
Obligation to Refund Security
“The fundamental rule is that a court should ascer-
tain the intent of the Legislature so as to effectuate the
law’s purpose, and in determining intent the court first
turns to the words used. [Citation.] [P ] When statutory
language is clear and unambiguous, there is no need for
construction and courts should not indulge in it. [Cita-
tions.]” (People v. Overstreet (1986) 42 Cal.3d 891, 895,
231 Cal.Rptr. 213, 726 P.2d 1288.) This rule of statutory
construction has been stated and followed many times by
the Supreme Court. (People v. Woodhead (1987) 43 Cal.3d
1002, 1007-1008, 239 Cal.Rptr. 656, 741 P.2d 154; Morse v.
Municipal Court (1974) 13 Cal.3d 149, 156, 118 Cal.Rptr.
14, 529 P.2d 46; Caminetti v. Pac. Mutual L. Ins. Co. (1943)
22 Cal.2d 344, 353-354, 139 P.2d 908; Solberg v. Superior
Court (1977) 19 Cal.3d 182, 198, 137 Cal.Rptr. 460, 561
P.2d 1148.)
Pursuant to that mandate, we first turn to the words
of the statute in order to ascertain whether there is ambi-
guity or whether the statute has an unambiguous plain
meaning. The statute provides: “No later than two weeks
after the tenant has vacated the premises, the landlord
App. 44
shall furnish the tenant with an itemized written state-
ment of the basis for, and the amount of, any security
received and the disposition of such security and shall
return any remaining portion of such security to the
tenant.” The amount of the tenant’s security deposit to be
refunded is the portion “remaining” as shown by the
required statement after subtracting the amount retained
from the original deposit. There is no other “remainder”
to which the statute could be interpreted to apply.®
Assuming, arguendo, that there were some ambi-
guity in the wording of the statute, we consider rules
developed by court decision as an aid to determination of
legislative intent. One is “that in attempting to ascertain
the legislative intention effect should be given, whenever
possible, to the statute as a whole and to every word and
clause thereof, leaving no part or provision useless or
deprived of meaning.” (Weber v. County of Santa Barbara
(1940) 15 Cal.2d 82, 86, 98 P.2d 492, quoted and approved
in Gay Law Students Assn. v. Pacific Tel. & Tel. Co. (1979)
24 Cal.3d 458, 478, 156 Cal.Rptr. 14, 595 P.2d 592.) If any
meaning is to be given to the statutory provision in
question, it must be that it obligates the landlord to
account for and refund the unused portion of the deposit
within the two-week period specified. Otherwise, the
5 “Any remaining portion of the payment or deposit must
be returned to the lessee no later than two weeks after termina-
tion of his tenancy.” (See Comment, California Liquidated Dam-
ages (1979) 16 San Diego L.Rev. 967, 974, fn. omitted.)
App. 45
requirement that the landlord “shall return any remain-
ing portion of such security” is meaningless. (Emphasis
added.) It might as well be written in “invisible ink.”6
Another construction aid, assuming ambiguity in
wording, is to look at the objectives to be achieved by the
statute. This involves consideration of the evils to be
remedited-{People v. Woodhead, supra, 43 Cal.3d at p.
1008, 239 Cal.Rptr. 656, 741 P.2d 154.) The situation prior
to the adoption in 1970 of section 1951, the predecessor of
section 1950.5, in the form governing this litigation has
been described as follows: “Theoretically, the security
deposits are created to insure against the contingencies of
unpaid rents, tenant-inflicted damages, and unclean
premises at the termination of the lease. [Fn. omitted.]
Any claim as to the retention of these funds by the
landlord arises only at such time as there has been a
breach of the tenant’s obligation and an assessment of
damage. [Fn. omitted.] However, the security deposit in
actuality has evolved into a bonus to be kept by the
landlord upon termination of the lease agreement regard-
less of the damages actually sustained by the landlord.
Landlords will retain security deposits after the depar-
ture of a tenant secure in the knowledge that a former
tenant is severely inhibited from initiating legal action.
This restraint is a product of a combination of factors
including problems of proof, [fn. omitted] the relatively
small sum of money at issue, the time factor, and the
6 (Cf. Huijers v. DeMarrais (1992) 11 Cal.App.4th 676,
678-679, 14 Cal.Rptr.2d 232.)
App. 46
distance now separating the tenant from his former land-
lord. [Fn. omitted.] Where the reimbursement is forth-
coming, usually the payments are delayed, the
application of the retained amounts unitemized, and the
interim retention and use of the funds having been with-
out cost to the landlord.” (Jory, The Residential Lease:
Some Innovations for Improving The Landlord-Tenant
Relationship (1971) 3 U.C. Davis L.Rev. 31, 38-39.)
Regardless of the accuracy of the law review descrip-
tion quoted, supra, it is clear that the 1970 legislation and
section 1950.5 as it read during the period here involved
was remedial legislation designed to furnish tenants
rights they had not previously had. It did away with
nonrefundable security deposits (which defendants’
leases had called for prior to 1970); it set upper limits on
the amount of security deposits; it required an accounting
for security deposits within two weeks of tenancy termi-
nation; it exempted ordinary “wear and tear” as a basis
for the retention of security deposits; and it provided for
a statutory penalty in cases of bad faith retention of
security deposits. This tends to show a legislative pur-
pose of ameliorating hardships previously suffered by
tenants — of leveling the playing field. We cannot recon-
cile this basic purpose with defendants’ argument that
the two-week period for accounting and refunding was a
simple request to landlords, unsupported by remedies or
sanctions except in cases of bad faith.
Defendants argue that to require an accounting and
refund of unapplied security within two weeks of the
time tenants have vacated premises would be unfair in
particular circumstances. As an example, they assume a
situation in which the tenant surreptitiously moves out
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and the landlord has no actual notice within two weeks
that the premises have been vacated. That situation is not
shown to have existed here, and we state no dictum with
respect to it. It is possible that in the future the statute
may be interpreted to contain exceptions.
Defendants also contend that an exception to the
two-week requirement should be recognized in this case
because they acted in good faith, as determined by the
jury. Their good faith foreclosed the assessment of a
penalty not exceeding $200 per tenancy pursuant to sub-
division (h) of section 1950.5. They submit that it also
excuses them from making the accountings and refunds
until adjudication that the money was “security.” Unlike
the hypothetical example of the surreptitious vacation of
premises, the tenants here are not shown to have caused
or contributed to the delay. They did nothing wrong. No
basis exists for denying them the benefits of the statute.
When this lawsuit was filed in 1981, defendants had
notice that their former tenants were seeking return of
deposits without offset. Regardless of their original eval-
uation of the merits of that claim, in 1984 they were
required to take it seriously. Our decision involving this
lawsuit, issued October 30, 1984 (161 Cal.App.3d 382, 207
Cal.Rptr. 652), held that the trial court should consider
and determine the close question as to whether the higher
amount of the first month’s rent was a security under
section 1950.5 or whether it was legitimate rent. Defen-
dants, however, did not change their position. They con-
tinued to treat it as rent until the jury found it to be
“security.” In this they assumed a risk. They lost and
raise no appellate issue with respect to that finding.
App. 48
Tenant’s Obligations
Security deposits posted by tenants may be claimed
by landlords only in “such amounts as are reasonably
necessary to remedy tenant defaults in the payment of
rent, to repair damages to the premises caused by the
tenant, exclusive of ordinary wear and tear, or to clean
such premises, if necessary, upon termination of the ten-
ancy.” (Civ.Code, s 1950.5, subd. (e).) If the security is lost
by the landlord, does it follow that he also loses the
substantive rights or causes of action for which the secu-
rity was posted? For example, would the landlord’s loss
of a $150 security deposit deprive him of the right to
collect $750 in unpaid rent or damages for negligent
destruction of the premises? The statute contains no
express provision for such a loss of formerly secured
rights. Nor does section 1950.5 specifically relate to rights
and duties of landlords and tenants except with respect to
security deposits.
Nothing has been called to our attention that indi-
cates a legislative intent to abolish the landlords’ right to
setoff for property damage, unpaid rent or other obliga-
tion secured by the deposit. Furthermore, “[t]he law tra-
ditionally disfavors forfeitures and statutes imposing
them are to be strictly construed.” (People v. United
Bonding Ins. Co. (1971) 5 Cal.3d 898, 906, 98 Cal.Rptr. 57,
489 P.2d 1385.)
Each side relies in part upon legislative history to
support its contention. Plaintiffs argue that defendants in
1990 and 1991 “pushed for a bill” to amend the section to
make it conform to defendants’ contention as to how it
should be interpreted, and that neither bill was passed.
App. 49
But, as said in Dyna-Med, Inc. v. Fair Employment &
Housing Com. (1987) 43 Cal.3d 1379, 1396, 241 Cal.Rptr.
67, 743 P.2d 1323: “Unpassed bills, as evidences of legisla-
tive intent, have little value. [Citations.]”
Defendants, likewise, rely on legislative history. In
1985, the Legislature failed to enact a bill that expressly
would have denied the right of offset to landlords who
failed to furnish the required statement and refund
within the two-week time limit. This has no appreciable
significance. The bill could have failed passage either
because the Legislature did not like the result, or because
it thought that was what the existing law provided and
that the amendment was unnecessary.
At that time, the Legislature did amend the section to
authorize a penalty of 2 percent per month to be charged
the landlord for “bad faith” retention of security, or any
portion thereof, in addition to the penalty of not to
exceed $200. This is in a distinct subdivision, subdivision
(k), of section 1950.5. It serves a different purpose. The
penalties may be applied even though a timely account-
ing is rendered. The interest and damage sanctions may
be applied only to that portion of the security retained in
bad faith. Because the 1985 amendment is applicable to
an entirely different situation than that here presented, it
is not of much help in determining what the 1977 Legisla-
ture meant by the provisions it enacted. The legislative
history has little significance and, in view of the explicit
language of the statute, is not controlling.
We conclude that although defendants are obligated
to former tenants to refund security deposits, they are not
deprived of causes of action against such tenants based
App. 50
either on contract or tort. Problems remain, however,
with regard to statutes of limitation, prejudgment interest
and offsets.
Section 431.70 of the Code of Civil Procedure fur-
nishes a partial answer. It provides in part: “Where cross-
demands for money have existed between persons at any
point in time when neither demand was barred by the
statute of limitations, and an action is thereafter com-
menced by one such person, the other person may assert
in the answer the defense of payment in that the two
demands are compensated so far as they equal each other,
notwithstanding that an independent action asserting the
person’s claim would at the time of filing the answer be
barred by the statute of limitations.” Civil Code section
1950.5 does not conflict with nor bar the application of
section 431.70 of the Code of Civil Procedure. Neither
expressly nor impliedly does it prohibit offsets which
otherwise are appropriate. The trial court shall determine
what offsets should be allowed.
As discussed, infra, prejudgment interest accrues on
the tenants’ liquidated claims for security deposit
refunds. While the issue had not been raised on appeal, it
would appear that such interest would also accrue on
liquidated claims of landlords (e.g., for unpaid rent), but
not for unliquidated claims (e.g., for negligent damage to
property).
PLAINTIFFS’ CROSS-APPEAL
I. Bad Faith
Subdivision (h) of section 1950.5 provided: “The bad
faith claim or retention by a landlord . . . of a security or
App. 51
any portion thereof, in violation of this section, may
subject the landlord . . . to damages not to exceed two
hundred dollars ($200), in addition to any actual dam-
ages.” Plaintiffs alleged in their pleadings and at the jury
trial that defendants acted in bad faith. In instructing the
jury, the trial court defined “bad faith” as follows:
“ “Bad faith’ is defined as the opposite of ‘good faith’
generally implying or involving actual or constructive
fraud, or a design to mislead or deceive another, or a
neglect or refusal to fulfill some duty or some contractual
obligation, not prompted by an honest mistake, but by
some interested or sinister motive, not simply bad judg-
ment or negligence, but rather the conscious doing of a
wrong because of dishonest purpose or moral obliquity; it
contemplates a state of mind affirmatively operating with
furtive design or ill will.” The jury returned a finding that
defendants did not act in bad faith.
Retentions of security deposits would seem to fall
within one of four categories: (1) Those authorized by the
statute; (2) Those not authorized by the statute, but kept
with the subjective, although erroneous, belief that keep-
ing these deposits was permitted by the statute; (3) Those
not authorized by the statute, but kept through negli-
gence; and (4) Those not authorized by the statute and
kept under the belief that they were not so authorized.
Throughout the trial, defendants had claimed that
the securities in question were rent; that the higher first
month’s rent was designed to motivate longer tenancies,
and that it had nothing to do with covering the repair of
damage or excessive cleaning requirements. The trial
court recognized that the jury might or might not adopt
App. 52
this contention, and instructed the jury that bad faith
involved a state of mind as indicated in the fourth alter-
native, supra. That was a correct instruction.
Faith is a mental concept involving belief, “often
used with the qualifiers good or bad to specify a state of
mind of one trying to be honest and faithful . . . or of one
trying to deceive, mislead, or defraud... . ” (Webster’s
Third New Internat. Dict. (1981) p. 816.) As used in
section 1950.5, subdivision (h), “bad faith,” which autho-
rized a penalty, required a finding that what was done
was done with the belief that it was not authorized by
statute. The statute should not be construed to penalize a
person whose actions were accomplished with the subjec-
tive belief that they were permissible under the statute.
The organization of section 1950.5 supports this
meaning. If every failure to furnish the required state-
ments and to refund the unapplied portions of the secu-
rity amount to bad faith, there would have been no
reason to complicate the statute by introducing the bad
faith concept. It would be inappropriate not to attribute
some meaning to the language. (Cf. Dyna-Med, Inc. v.
Fair Employment & Housing Com., supra, 43 Cal.3d at p.
1387, 241 Cal.Rptr. 67, 743 P.2d 1323.)
Reasoning by analogy may have its pitfalls, but in
this case of first impression it is helpful (if not control-
ling). Code of Civil Procedure section 128.5, subdivision
(a), provides sanctions for bad faith actions or tactics in
the course of litigation or arbitration. “To interpret sec-
tion 128.5 as authorizing the imposition of sanctions
solely upon a consideration of whether the action was
objectively frivolous would be to render the Legislature’s
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use of “bad-faith’ meaningless surplusage. That term is
given meaning only if we assume that the Legislature
intended that the court determine that an action or tactic
was being pursued in subjective bad faith before impos-
ing sanctions under this section.” (Summers v. City of
Cathedral City (1990) 225 Cal.App.3d 1047, 1071, 275
Cal.Rptr. 594, fn. omitted; see also Llamas v. Diaz (1990)
218 Cal.App.3d 1043, 1046-1049, 267 Cal.Rptr. 427; Javor
v. Dellinger (1992) 2 Cal.App.4th 1258, 3 Cal.Rptr.2d 662.)
The trial court’s instruction defining bad faith was
not in error.
Plaintiffs also appear to contend that there was no
substantial evidence of good faith to support the jury
finding. On the contrary, the record is replete with testi-
mony that representatives of defendants believed their
rental plan was designed merely to motivate longer ten-
ancies and was not to cover costs for which security was
authorized. There was substantial evidence to support
the jury’s finding.
Il. The Relief
The trial court’s judgment, in ordering defendants to
refund security, was in favor of only those remaining
members of plaintiffs’ class (excluding named plaintiffs
whose claims were dealt with specifically in the judg-
ment) who came forward and filed individual claims
under a procedure to be established at a later date. Plain-
tiffs had requested that judgment be for the total of
security improperly retained and had suggested the pos-
sibility of escheat of unclaimed funds to the State of
California. In denying this request, the trial judge issued
App. 54
a memorandum of intended decision stating in part: “In
certain consumer class actions Fluid Recovery may be the
best method of compensating the class. The propriety of
Fluid Recovery in a particular case depends upon its
usefulness in fulfilling the purposes of the underlying
cause of action. (See State v. Levi Strauss and Company
[1986] 41 Cal.3d 460 [224 Cal.Rptr. 605, 715 P.2d 564].) We
do not find that the Fluid Recovery method is necessary
to fulfill the purpose of this case.”
In that respect, this case differs from People ex rel.
Smith v. Parkmerced Co. (1988) 198 Cal.App.3d 683, 244
Cal.Rptr. 22, where the district attorney sued the landlord
for the return of fees charged tenants, the retention of
which constituted an unlawful business practice (Bus. &
Prof.Code, s 17206), and the unclaimed “refunds” were
required to be paid to a tenants’ organization. Unlawful
business practice was defined as “unlawful, unfair or
fraudulent” action. (Bus. & Prof.Code, s 17200.) The land-
lord was found to have acted in bad faith.
In framing a remedy the trial court limited recovery
to those plaintiffs who personally made claims for the
return of their deposits. It elected not to require all
deposits to be placed in a fund. Had it done so,
unclaimed deposits would have escheated to the State of
California at the end of the year (Unclaimed Property
Law, Code CivProc., s 1500 et seq.), and the basis upon
which plaintiffs’ attorneys’ fees will be calculated would
be larger than under the order made by the trial court.
The trial court understood that in designing a remedy
discretion was involved. The trial judge who framed the
remedy had lived with this case for many years. He was
App. 55
well acquainted with its history, the parties, their attor-
neys, and the issues involved. Our standard of review is
whether he abused his discretion. We hold that he did
not.
Fluid recovery is appropriate where useful in fulfill-
ing the purpose of the underlying cause of action, as in
those cases where proof of individual damages is not
feasible. (State of California v. Levi Strauss & Co. (1986)
41 Cal.3d 460, 224 Cal.Rptr. 605, 715 P.2d 564; see also
Bruno v. Superior Court (1981) 127 Cal.App.3d 120,
123-124, 179 Cal.Rptr. 342.) That is not the case here.
We conclude that the trial court did not abuse its
discretion in fashioning the remedy it adopted.
III. Prejudgment Interest
The judgment herein expressly rejected prejudgment
interest. Plaintiffs contend that they were entitled to such
interest under the provisions of section 3287, subdivision
(a), which provides: “Every person who is entitled to
recover damages certain, or capable of being made cer-
tain by calculation, and the right to recover which is
vested in him upon a particular day, is entitled also to
recover interest thereon from that day, except during such
time as the debtor is prevented by law, or by the act of
the creditor from paying the debt. This section is applica-
ble to recovery of damages and interest from any such
debtor, including the state or any county, city, city and
county, municipal corporation, public district, public
agency, or any political subdivision of the state.” Section
3281 defines damages broadly to include any monetary
recovery: “Every person who suffers detriment from the
App. 56
unlawful act or omission of another, may recover from
the person in fault a compensation therefor in money,
which is called damages.”
Although section 3287, subdivision(a) uses the term
“damages,” it has been consistently applied to require the
award of prejudgment interest where the judgment is for
money owed or to be refunded pursuant to a statutory
obligation. (Tripp v. Swoap (1976) 17 Cal.3d 671, 681, 131
Cal.Rptr. 789, 552 P.2d 749.)
Here the amount of security to be returned to each
class member was a fixed amount readily ascertainable
by defendants. It was the amount by which the rent for
the first 31 days exceeded the rent for subsequent months
of the tenancy. The “damages” were certain and they
were due two weeks after each class member vacated the
rented premises.
In support of the trial court’s order denying prejudg-
ment interest, defendants rely upon Korens v. R.W. Zukin
Corp. (1989) 212 Cal.App.3d 1054, 261 Cal.Rptr. 137. That
decision dealt with the question of whether interest
accrued on security deposits during the term of the ten-
ancy. There was no obligation that the deposits be
returned during the tenancy. Prejudgment interest was
held not to apply during a period prior to the time an
obligation to return the deposit came into being. The
decision was based on facts not comparable with those
here presented and is neither controlling nor persuasive.
It has been suggested that section 3287, subdivision
(a) is inapplicable because section 1950.5, subdivision (k)
was amended in 1986 to provide that a bad faith retention
of security may subject the landlord to interest at a rate of
App. 57
2 percent per month in addition to the penalty of not to
exceed $200. Assuming, arguendo, that this provision
applies to retentions that began long before the amend-
ment became effective, does this provide the exclusive
entitlement to interest? In bad faith situations, it might.
But where there was no bad faith, as here, the provisions
for penalty and interest at a penalizing rate are inapplica-
ble and do not override the prejudgment interest obliga-
tion established by section 3287, subdivision (a).
IV. Costs and Attorneys’ Fees
The remaining issue in these appeals relates to the
allowance of costs and the award of attorneys’ fees. The
judgment provided: “Plaintiffs shall recover legal costs in
the amount of $___ [to be hereafter determined by the
Court]. Plaintiffs’ counsel shall recover reasonable attor-
neys’ fees in an amount to be hereafter determined by the
Court. Such court costs and attorneys’ fees shall he paid
out of and deducted from any aggregate amount of
money paid by Islay under this judgment as the refund of
rent for the first 31 days of a tenancy (when compared
with the rent for the second and subsequent months of
the tenancy). Pursuant to the notice given potential class
members, such court costs together with such attorneys’
fees shall not exceed 25% of said aggregate amount.”7
” The class notice stated in part: “Plaintiffs’ attorneys esti-
mate that the reasonable attorneys fees and costs will total 25
percent or less of the total aggregate recovery, which fees and
costs will be deducted from any recovery.”
App. 58
At the time the judgment was under consideration,
neither side contended that an exact amount could prop-
erly be ascertained. Several issues remained open for
determination on appeal. The trial court merely declared
there should be a maximum consisting of 25 percent of
the aggregate amount of the judgment. That aggregate
amount will be different in the revised judgment. Upon
remand, the trial court will be in a position to determine
costs and attorneys’ fees based upon the net amount to be
paid by Islay. The actual figure awarded will be subject to
review on appeal.
Plaintiffs also ask us to consider whether they are
entitled to private attorney general fees pursuant to sec-
tion 1021.5 of the Code of Civil Procedure. In the trial
court, plaintiffs contended that such fees could not prop-
erly be determined until final judgment following appeal.
We agree, but add that such determination should be
made by the trial court. Fees may not be awarded on any
basis until there has been an evidentiary hearing with
respect to the basis for and the amount of the fees. The
trial court should determine, among other things, which
services were expended for successful claims (which are
compensable) and for unsuccessful claims (which are not
compensable). (Hensley v. Eckerhart (1983) 461 U.S. 424,
103 S.Ct. 1933, 76 L.Ed.2d 40.) It should also determine
the reasonable hourly rate (Merola v. Atlantic Richfield
Company (3d Cir.1975) 515 F.2d 165, 169; In re Capital
Underwriters, Inc. Securities Lit. (N.D.Cal.1981) 519
F.Supp. 92, 102-103), and the reasonable amount of hours
(Bernardi v. Yeutter (N.D.Cal.1990) 754 F.Supp. 743, 744).
“The ‘experienced trial judge is the best judge of the
value of professional services rendered in his court, and
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App. 59
while his judgment is of course subject to review, it will
not be disturbed unless the appellate court is convinced
that it is clearly wrong.’ (Harrison v. Bloomfield Building
Industries, Inc. (6th Cir.1970) 435 F.2d 1192, 1196.... y
(Serrano v. Priest (1977) 20 Cal.3d 25, 49, 141 Cal.Rptr.
315, 569 P.2d 1303.)
The judgment is reversed and remanded to the trial
court for further proceedings. Each side shall bear its
own costs on appeal.
GILBERT, Acting P.J., and YEGAN, J., concur.
App. 60
COURT OF APPEAL, STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT, DIVISION SIX
Filed September 28, 1993
ISLAY INVESTMENTS, A ) Santa Barbara Co.
California Partnership, ) Sup.Ct. No. 136 428
MARVIN TREVILLIAN, )
) Court Of Appeal No.
Appell
decatee=eeatg ) Civ B057796
Cross-Respondents,
VS.
LISA GRANBERRY, COSETTI
JORDAN, ALICE GLASSPOOL,
CHRISTOPHER GLASSPOOL,
on behalf of themselves and
all others similarly situated,
Respondents /
Cross-Appellants,
ed
CROSS-APPELLANTS’ PETITION FOR REHEARING
DAVID H. SCHWARTZ, State Bar No. 62693
~~ HILL, SCHWARTZ, STENSON
A Law Corporation
240 Stockton Street, Suite 300
San Francisco, CA 94108
Telephone: (415) 362-2700
ERNEST L. GRAVES, State Bar No. 25196
Attorneys for Respondents and
Cross-Appellants
+ * *
ARR
pat pep a aes Crean RANTS
TEE MATES A Ble SOMES cs eT 3
App. 61
IV. THE COURT’S DECISION MISCONCEIVES AND
MISAPPLIES C.C.P. § 431.70, RENDERING MEAN-
INGLESS THE NOTICE PROVISION OF CIVIL
CODE § 1950.5 AND VIOLATING THE CONSTI-
TUTIONAL RIGHTS OF THE PLAINTIFFS
D. To Apply C.C.P. § 431.70 In This Case Vitiates
The Protection Of Civil Code § 1950.5 Providing
Tenants Timely Notice And Opportunity To
Defend Against Claims Of The Landlord.
Civil Code Section 1950.5 protects a tenant’s money
held by a landlord as security by providing that the
tenant have timely notice and opportunity to defend
before being deprived of his money - security — to satisfy
the claims of the landlord upon termination of the ten-
ancy. This Court’s decision provides that while a land-
lord, who takes a security disguised as rent and has never
given notice of any claim to the tenant, may not privately
deduct from the security he holds, he nevertheless may
obtain such relief judicially.
In short, this result - charge a security as disguised
rent, treat the rent as income, never give notice, then
when it is determined that the disguised rent is a security,
setoff the hidden claims against the security-as-judgment
— gives a flat premium to a landlord to disguise the
security and never give notice to the tenants of anything.
By this decision the landlord has everything to gain and
nothing to lose by violating Civil Code § 1950.5 through
disguising a security and never giving notice, because
what he loses on the front side by not being able to setoff
App. 62
against the security — qua security — he gains on the back
side by offsetting against the security-as-judgment, while
all the time holding the tenant’s money, and still without
ever telling the tenant of his claims in any timely fashion.
In essence, it is meaningless to say a landlord may
not setoff a secur
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