Petition for Writ of Certiorari — Granberry v. Islay Investments
Supreme Court brief2000
Ask Donna
What actually matters in this document.
Text
(i) Supreme Co):
|
99 806 Nov9 1999
No. OFFICE O& IHE CLERK
In The
Supreme Court of the United States
¢
LISA GRANBERRY, COSETTI JORDAN, ALICE
GLASSPOOL, CHRISTOPHER GLASSPOOL,
Petitioners,
On behalf of themselves and all others
similarly situated,
V.
ISLAY INVESTMENTS, a California general
partnership, MARVIN TREVILLIAN,
Respondents.
¢
On Petition For A Writ Of Certiorari
To The Supreme Court Of California
¢
PETITION FOR A WRIT OF CERTIORARI
¢
Davip H. SCHWARTZ
Counsel of Record
Law Offices oF Davip H. SCHWARTZ
22 Battery Street, Tenth Floor
San Francisco, CA 94111-5524
Tel: (415) 362-2700
Counsel for Petitioners
COCKLE LAW BRIEF PRINTING CO., (800) 225-6964
OR CALL COLLECT (402) 342-2831
— oe
QUESTIONS PRESENTED
1. Does it violate the federal due process rights
granted by the Fifth and Fourteenth Amendments to the
United States Constitution for a state trial court to adjudi-
cate in a class action offset claims raised by the defendant
against individual absent class members where:
a. each offset claim is based on a unique indi-
vidualized set of facts unrelated to the common
facts of the defendant’s conduct on which the
representative plaintiffs’ certified class claims
were based;
b. the representative plaintiffs cannot ade-
quately represent the individual class members
in a defense of each claim because the facts
relevant to defending the claim are known only
to the individual class member against whom it
is being asserted;
c. the absent class members have been given
only a non-specific notice that offset claims may
be asserted against them; and
d. the method of notice to the absent class
members was by publication and/or mailing to
stale unverified addresses?
2. Is it a violation of due process under the Fifth
and Fourteenth Amendments to the United States Consti-
tution for a trial court to order that the unclaimed portion
of a class action judgment be returned unconditionally to
the defendant where the class judgment consists of an
aggregation of specific liquidated amounts found legally
QUESTIONS PRESENTED - Continued
due to each individual class member, where the defen-
dant has no legal claim on the class funds, and where the
individual absent class members have received no notice
that their rights will be extinguished?
TABLE OF CONTENTS
Page
QUESTIONS PRESENTED ......................... i
vt ak ne ec iii
a yey) iv
SN I es ee ee 1
JURISDICTIONAL STATEMENT.................... 1
STATEMENT OF THE CASE....................... 2
REASONS FOR GRANTING THE WRIT ........... 14
GE ae 24
APPENDIX
Granberry v. Islay Investments, 9 Cal.4th 738, 889
P.2d 970, 38 Cal.Rptr.2d 650 (1995) (“Granberry
RM et iss i App. 1
Granberry v. Islay Investments, Unpublished
Opinion of the California Court of Appeal, Sec-
ond Appellate District, Division Six (April 19,
it dp Se a i a App. 39
California Superior Court Statement of Decision
I 5 v's'e 666 Xo ie by osc odescccs..c... App. 58
California Superior Court Class Action Judg-
ment After Remand (May 14, 1997).......... App. 74
California Supreme Court Denial of Petition for
pweewe Crue, 31, 1099)...................... App. 78
March 27, 1996 Notice to Class.............. App. 79
California Civil Code § 1950.5............... App. 83
iv
TABLE OF AUTHORITIES
Page
CASES
BMW Of North America, Inc., v. Gore, 517 U.S. 559,
116 S.Ct. 1589, 134 L.Ed.2d 809 (1996) ............ 22
Boeing Co. v. Van Gemert, 444 U.S. 472, 100 S.Ct.
Fe Se Ae PE OED Oe vans wi cane nekeeawenes 22
Eisen v. Carlisle and Jacquelin, 417 U.S. 156, 94 S.Ct.
2100, GO LiGGOe 75e CPF 6s isin ceaaien 15, 17, 20
Granberry v. Islay Investments, 9 Cal.4th 738, 889
P.2d 970, 38 Cal.Rptr.2d 650 (1995) (“Grenberry
| eb errr Se Eri errr rr Tre ry Te rere ey passim
Granberry v. Islay Investments, 161 Cal. App. 3d 382,
207 Cal. Rptr. 652 (1984) (“Granberry I”) ............ 5
Granberry v. Islay Investments, 23 Cal.Rptr.2d 420
fo Bi eS gt ee Pere ee Pr rere rr rr 7
Hansberry v. Lee, 311 U.S. 32, 61 S.Ct. 115, 85 L.Ed.
Be CE tin scd tn dnn ie ede caueveeneniaswisaeened 16, 18
Martin v. Wilks, 490 U.S. 755, 109 S.Ct. 2180, 104
Si HONE CY siden ch een en es cehenubayeen 18, 19
Mennonite Bd of Missions v. Adams , 462 U.S. 791,
103 S.Ct. 2706, 77'%.Ed.2d 180 (1983) .......... 16, 17
Mullane v. Central Hanover Bank & Trust Co., 339 U.S.
306, 70 S.Ct. 652, 94 L.Ed. 865 (1950)........ 13, 15, 37
Ortiz v. Fibreboard Corporation, __ U.S. __, 119
Pe a eset cc cd dabhateiseacaehdaunas 18
Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 105
SAX. BOGS, BS ET GOS CAMP: ac es inesdesas 16
Richards v. Jefferson County, 517 U.S. 793, 116 S.Ct.
EPOL,. ESS Cee FU RPS 6 5. os 0s cui dendasaxaane 18
.
V
TABLE OF AUTHORITIES — Continued
Page
Six (6) Mexican Workers v. Arizona Citrus Growers,
904 F.2d 1301 Pet MUON ss hiccwri in bees a te ee 23
Van Gemert v. Boeing, 739 F.2d 730 (CA2 1984). ....., 23
CONSTITUTIONAL PROVISIONS
Fifth Amendment to United States Constitution... . Passim
Fourteenth Amendment to United States Constitu-
OO 95 a4) 58 ist sae sepa gyeee aee e passim
STATUTES
drei Bein OT Te 1
California Civil Code Section ag PERE EET OTE passim
California Code of Civil Procedure Section 384...... 12
California Code of Civil Procedure Section 583.250... _. 6
California Code of Civil Procedure Section 632...... 11
California Unclaimed Property Law, California
Code of Civil Procedure, Sections 1500 et ee 12
OPINIONS BELOW
The Class Action Judgment After Remand (App,
infra, 74) incorporating the Statement of Decision (App,
infra, 58) both issued by the Superior Court of the State of
California for the County of Santa Barbara, are unre-
ported. The decision of the California Court of Appeals,
Second Appellate District, Division Six (App, infra, 39) is
unreported, as is the denial of Petitioner’s Petition for
Review to the California Supreme Court (App, infra, 78).
The decision of the California Supreme Court in Gran-
berry III is reported at Granberry v. Islay Investments, 9
Cal.4th 738, 889 P.2d 970, 38 Cal.Rptr.2d 650 (1995) (App,
infra, 1).
¢
JURISDICTIONAL STATEMENT
The judgment of the Court of Appeal of California,
Second Appellate District, Division 6, was entered on
April 19, 1999. In response to a petition for rehearing, the
Court of Appeal amended its decision without changing
the judgment on May 18, 1999. The Supreme Court of
California denied a Petition for Review on August 11,
1999 (App, infra, 78)
The jurisdiction of this Court is invoked under 28
U.S.C. § 1257(a).
STATEMENT OF THE CASE
California Civil Code Section 1950.5 (hereinafter
“Section 1950.5”) governs the taking and return of secu-
rity deposits by landlords of residential apartments in
California. The statute defines “security” that a landlord
may demand of a residential tenant, limits and defines
the purposes for which the landlord may retain security
money after the tenant terminates, and provides a pro-
cedure obligating the landlord to return unclaimed secu-
rity following the termination of the tenancy.’ The statute
also provides for additional statutory damages in the
event a landlord claims or retains security in “bad faith.”
Starting in 1974 and continuing until 1984, Respon-
dents, (defendants in the state court below, and hereinaf-
ter referred to as “Islay”) commenced a practice of
charging a higher rent for the first month of their month-
1 Subsection (e) of Section 1950.5 read as follows at the time
the suit was brought:
(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 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
disposition of such security and shall return any
remaining portion of such security to the tenant.
In a subsequent amendment the California Legislature
indicated that “ordinary wear and tear” included the
cumulative effect of ordinary wear and tear.
what niahnsccaeaealnilldlal
to-month tenancies than for the second and subsequent
months. The California Supreme Court described the
practice of defendants as follows:
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 defen-
dants’ 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.
Defendants never returned this fee in whole or
in part; rather, they simply retained it as part of
the rental payment for the first month. Approxi-
mately 10,000 tenants paid such fees during the
relevant period, and the aggregate amount of
such fees was approximately $1 million.
Granberry vs. Islay Investments, 9 Cal.4th 738 at 742, 38
Cal.Rptr.2d 650 at 652 (1995).
Under Islay’s uniform practice, except in instances of
deliberate vandalism, Islay did not seek to collect any
money from their tenants for the cost of repairing routine
damage, cleaning, or minor rent defaults following the
termination of the tenancies, but instead Islay paid for
such items out of their general revenue stream (which
included the higher charge for the first month’s rent). At
no time during the pendency of the law suit did Islay
ever provide any tenant affected by the practice with the
notice required by Section 1950.5(e) indicating that Islay
was seeking to deduct money from the higher charge of
the first month’s rent for cleaning, damage, or rent
defaults allegedly owed by the tenant.
In 1981, Petitioners, all of whom are former tenants
of Islay during the relevant period, brought suit on behalf
of themselves and a similarly situated class of former and
existing tenants, contending that the higher amount
charged for the first month of each month-to-month ten-
ancy was a “security” within the meaning of the statute
and was therefore subject to refund by Islay under the
procedural provisions of Section 1950.5. Petitioners
sought a declaration that the extra first month’s rental
charge was a security, an accounting by Islay, and a
refund of all security taken less only those amounts
“properly” deductible under the statute.?
Islay answered the complaint but raised no issue that
they sought any relief against any absent class member.
Islay then moved for summary judgment and Petitioners
moved for class certification. The trial court granted class
certification and then granted Defendants’ Motion for
Summary Judgment on the ground that the definition of
security in Section 1950.5 did not encompass any charge
2 Plaintiffs’ Second Amended Complaint sought a
declaration that “Defendants have an obligation within two
weeks of the termination of the tenancy, to refund said
surcharges to Plaintiffs and other past and present tenants, less
only proper deductions atlowed by Civil Code § 1950.5(e).” JAI
740). In that same complaint plaintiffs’ request for an
accounting stated: “The amount of money due from Defendants
[to plaintiffs and the class members] cannot be ascertained
without an accounting of the amounts of security retained and
the amounts of deductions actually made (if any) against such
security within the time period provided by Civil Code
§ 1950.5(e).” (JA L, 747)
that the landlord had denominated as “rent” in its stan-
dard form rental agreement that each tenant was required
to sign.
On appeal by Petitioners the California Court of
Appeals reversed the grant of summary judgment and
remanded the case to the trial court for a trial, holding
that a security was any charge other than the “ordinary”
rent charged for the unit. The appellate court further held
that the determination of whether a charge was rent or
security was not determined by what the landlord chose
to call it, but was an issue of fact for the trial court to
decide under all the facts and circumstances of the prac-
tice. Granberry v. Islay Investments, 161 Cal.App.3d 382,
207 Cal.Rptr. 652 (1984) (“Granberry I”).
Following remand, in 1986, defendants for the first
time sought and obtained leave to amend their answer
and cross-complaint, in each document alleging over
6,000 individual occupancy claims against members of
the class, seeking damages for the failure to pay rent, for
cleaning the units, and for repair of damage allegedly
caused by the individual tenant class members. Peti-
tioners objected to these amendments on the grounds that
the claims raised individual fact issues for each class
member, that Petitioners had no contact with the individ-
ual class members, and that Petitioners could not ade-
quately defend the claims being raised against the
individual class members. Petitioners’ objections were
overruled.
Islay then attempted service of the cross-complaint
against some 6,000 individual class members by mere
delivery to counsel for Petitioners. This purported service
a ee ee
was quashed by the trial court. Islay made no further
attempt to serve any class member with their cross-com-
plaint.
Notice of the pendency of the class action, which
included a general statement that defendants were assert-
ing offset claims against class members, was mailed to
the last known addresses of the class members and pub-
lished in the local Santa Barbara newspaper. Prior to the
jury trial the trial court granted Petitioners’ motion for
summary adjudication dismissing the offset occupancy
claims alleged in the answer for failure to comply with
the notice provisions of Civil Code Section 1950.5. The
trial court held that if the higher charge were determined
to be a security under the statute, Islay’s failure to follow
the procedure for claiming a deduction from security as
set out in Section 1950.5(e) prevented them from raising
offset claims in the lawsuit brought to recover the
refunds.
The case was tried before a jury in 1990, resulting ina
jury verdict for Petitioners that the higher first month’s
rent was not ordinary rent but a security within the
meaning of Section 1950.5. The jury found for Islay on
petitioners’ contention that Islay had acted in bad faith.
After the trial, the trial court dismissed Islay’s cross-
complaint for occupancy claims against the individual
class members for failure to serve any of the cross-defen-
dants within three years of filing. California Code of Civil
Procedure § 583.250.
Following the jury verdict, the trial court issued a
class action judgment that included a “claims made rem-
edy,” i.e., one in which Islay would only refund the
* a
er eee EE
ee as
De ee
security to those class members who were found and
came forward to make a claim. Islay appealed from the
trial court’s grant of summary adjudication on their offset
claims. Petitioners appealed from the remainder of the
class action judgment.
The California Court of Appeal reversed the trial
court’s dismissal of Islay’s offset claims but affirmed the
trial court’s grant of a “claims made remedy.” The Court
of Appeal opinion appears at Granberry v. Islay Invest-
ments, 23 Cal.Rptr.2d 420 (1993) (hereinafter “Granberry
II”).
The California Supreme Court then granted Peti-
tioner’s Petition for Review to decide, inter alia, (1)
whether Islay could assert offset claims against tenants
when they had failed to follow the procedure for return
of the security deposits set forth in Section 1950.5, and (2)
whether the trial court’s “claims made remedy” was an
abuse of its discretion. On March 6, 1995 the California
Supreme Court issued its decision in Granberry v. Islay
Investments, 9 Cal.4th 738 (1995) (hereinafter “Granberry
lI”). The California Supreme Court found the failure to
comply with the notice and return provisions of Section
1950.5 did not bar a landlord from asserting offset claims
against a tenant when the tenant brought suit to recover
the security held by the landlord. The California Supreme
Court reversed the trial court’s order of a “claims made
remedy” and instructed the trial court on remand to
follow the procedures set out in the then recently enacted
California Code of Civil Procedure Section 384.
In the California Supreme Court, Petitioners had
raised the contention that the offset claims against absent
class members could not be adjudicated in the trial court
without giving actual notice to the individual class mem-
bers, and that to attempt to adjudicate these claims based
on the existing class action notice (by publication and
mailing) would violate both federal and state due process
requirements. In its opinion, without directly addressing
the due process contention, the California Supreme Court
stated that the original notice of pendency of class action,
which had stated that offset claims might be brought,
constituted sufficient notice to the absent class members.
The state high court then instructed the trial court to
attempt to fashion a method for determining the offset
claims against absent class members as well as to make
determinations on class-wide equitable defenses to the
offset claims that the representative plaintiffs had
asserted.
Petitioners filed a petition for certiorari with this
Court, contending that by instructing the trial court to
proceed with adjudication of the offset claims based on
the former class action notice, the California Supreme
Court was ignoring the due process problems inherent in
adjudicating offsets without actual notice to the affected
absent class members. Islay filed a response to the peti-
tion for certiorari arguing that the petition was premature
because the California Supreme Court had not reached
the question of what was sufficient due process notice for
adjudicating the offset claims. This Court denied the peti-
tion for certiorari.
3 Docket No. 95-122
a a psa
SSL TREE A as BC Efe 2 ih hea LN IED, Dac DADO
On remand, the trial court issued an order providing
for a second notice to the class, to be sent at Islay’s
expense by mail to last known forwarding addresses and
to be published in local papers in Santa Barbara, Ventura
and San Luis Obispo counties. (JA II 4526) Petitioners
objected to the content of the proposed notice because it
did not identify the persons against whom offset claims
were being made, and to the fact that it was creating a
second “claims made remedy.” (JA II 4531)
On February 3, 1996, Petitioners filed a “Motion to
Determine That Court is Without Jurisdiction To Adjudi-
cate Defendants’ Offset Claims,” challenging the ability
of the trial court to adjudicate the claims without giving
actual notice of the individual claim to the affected absent
class member and asserting that Petitioners could not be
adequate representatives of absent class members for the
defense of individual occupancy claims based on the
particular circumstances of each individual tenancy. Peti-
tioners contended that adjudication of the offset claims
against absent class members based on the notice being
given would violate both federal and state due process
requirements. (JA II 4608). The matter was heard on
March 15, 1996 and denied. (JA II 4773, RT 94-113).
Notice was mailed on March 29, 1996 to 5,386 class
members (JA II 5067) and was published in newspapers
in the three counties in mid-March, 1996. GA II 5075,
5078, 5082). Of the mailed notices, 3,337, or 62%, were
returned as undeliverable. (RT 514). In response to the
mailing and publication, 112 claims were made, 36 of
which were by persons who were not members of the
class as defined, leaving 76 valid claims. (RT 521).
10
In hearings held in October and November of 1996,
the trial court proceeded to adjudicate some 7,547 offset
claims against non-appearing absent class members. Islay
introduced records showing the cost of repairing damage,
cleaning, and rental amounts unpaid at termination of
each tenancy. Islay’s operations manager testified that
every apartment was rented in clean and “like new”
condition, and that therefore any cleaning or repairs that
had to be performed at termination were necessarily
caused by the tenant. Petitioners presented the testimony
of several class members against whom Islay had made
claims for cleaning and damage. The class members testi-
fied that they had left the units in clean and undamaged
condition, had given Islay their forwarding addresses,
but had never been told that they owed any money for
cleaning or repairs. This testimony was admitted for the
limited purposes of showing that the trial court could not
make the inference that because Islay had incurred costs
for painting, carpeting, or other types of repairs or clean-
ing that it was necessarily the responsibility of the tenant,
and to prove laches, waiver, and estoppel. Except for the
76 class members who made claims, the offsets were
adjudicated against 7,471 class members without their
appearing before the triai court and without any indica-
tion that they had actual notice of the suit, that they had
knowledge that they were due a refund of the security
they paid, or that they knew that Islay was asserting an
offset claim against them that the Court was proceeding
to adjudicate.
On November 21, 1996 the trial court issued a Mem-
orandum of Intended Decision finding that “defendants
Se DA Daan tnt arctan states
eID
11
have suffered damages for unpaid rent, repairs and clean-
ing and that the amounts of the claims are reasonable.”
The court indicated it found no evidence sufficient to
establish any equitable defense to Islay’s claims. The
Memorandum of Intended Decision did not set forth any
dollar amounts that had been found for Islay. (JA II 5095).
Petitioners then filed a “Request for Statement of
Decision” pursuant to California Code of Civil Procedure
Section 632. On January 24, 1997 the trial court issued a
Statement of Decision that contained two different figures
($2,483,000 and $1,800,000) for the aggregate amount of
the offset claims that the trial court awarded Islay against
individual absent members of the class.4 (JA II 6045)
4 The lower figure represented that aggregate amount of
“damages” actually shown by Islay’s expense records. The
higher figure came from testimony by an expert in the
economics of residential rental operations as to the aggregate
losses suffered by Respondent. The expert first added various
categories of expenses that he surmised Islay must have
incurred in addition to the amounts actually shown on their
expense receipts. After increasing the aggregate damage
amount, he then reduced it using mathematical formulas for
estimating the “ordinary wear and tear” on the units. Under
Section 1950.5, tenants are not required to pay for the cost of
repairing the effects of cumulative or individual ordinary wear
and tear on the premises. The expert’s testimony was not based
on the facts of any individual offset claim - he acknowledged
that he knew no facts about the condition of any individual unit
either before the tenancy or after it. Because the Respondents
were pursuing offset claims, they could not obtain relief on an
claim greater than the amount of security refund and interest
due the individual tenant. The trial court calculated the class
recovery using the lower figure, i.e., the figure that did not
make allowance for ordinary wear and tear.
12
Petitioners proposed to the Court that the residue of
unclaimed funds awarded to individual class members
after deduction in full of every offset claim raised by Islay
should be paid over the State Controller, who by statute
has the permanent responsibility to attempt to find and
pay the funds to the plaintiff class members who could
not be located.°
On May 15, 1997 the trial court issued its “Class
Action Judgment After Remand.” Pursuant to California
Code of Civil Procedure Section 384 it found that, after
deduction of all individual offset claims from the individ-
ual amounts of security and interest due each class mem-
ber, there remained a fund residue of $1,025,602,
assuming all class members had made claims. The trial
court then found that, after payment of $9,491 in claims
and payment of 25% of the fund in attorney’s fees, all
remaining unclaimed money should revert to Islay
unconditionally, thereby extinguishing all rights of absent
class members to recover the security money that had
been determined to be owed to them. The trial court’s
rationale for the reversion order was that Islay had acted
“in good faith” and that to force them to pay over to the
State Controller any of the unclaimed residue would only
serve to “punish” Islay unnecessarily.
Petitioners once again appealed to the California
Court of Appeal, raising the contentions, inter alia, that
the adjudication of the offset claims against absent class
° See the California Unclaimed Property Law, California
Code of Civil Procedure, Sections 1500 et seq. See especially,
California Code of Civil Procedure Sections 1519.5 and 1540.
%
-\
3
%
3
Fd
&
H
i
4
*
RS
ms
4
1
13
members violated federal and state due process protec-
tions,© and that the order of reversion constituted an
unlawful taking of property belonging to the individual
absent class members in violation of their federal due
process rights under the Fifth and Fourteenth Amend-
ments.”
The Court of Appeals issued its decision on April 19,
1999. (Granberry IV, App, infra, 39) In response to the
contention that the trial court lacked jurisdiction over
absent class members and that the adjudication of the
offset claims constituted a violation of the federal due
process rights of the absent class members, the Court of
Appeals referred to the California Supreme Court deci-
sion in Granberry III, holding that it was the law of the
case on those issues. (Granberry IV, App, infra, 45-46) The
Court of Appeals did not directly address Petitioners’
contention that the reversion order was an unlawful tak-
ing in violation of the Fifth and Fourteenth Amendments,
but simply ruled that it was within the equitable discre-
tion of the trial judge to return the unclaimed portion of
the judgment to Islay unconditionally and extinguish the
6 Petitioners argued in Headnote II of their Appellants’
Opening Brief that the trial court had failed to establish
jurisdiction over the absent class members for purposes of
adjudicating the offset claims against them; that the class
representatives could not adequately represent individual class
members in defense of their individualized and fact dependent
offset claims, and that both the manner of notice and the notice
contents failed to satisfy federal due process standards under
Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 70 S.Ct.
652, 94 L.Ed. 865 (1950), and its progeny.
7 Appellants’ Opening Brief, Footnote 4, p. 18.
14
absent class members’ rights in the fund, since the trial
court had found that paying the funds over to the State
Controller (to act as an agent with a permanent duty to
find and pay over the residue to the class members)
would result in “punishing” Islay. (App, infra, 49)
*
REASONS FOR GRANTING THE WRIT
Question 1.
In this litigation the California state courts adjudi-
cated over 7,000 claims against individual members of a
plaintiffs’ consumer class action with the affected class
members absent from the court and without the court
providing them actual notice, or published or construc-
tive notice, in accordance with the California statutory
procedures for obtaining jurisdiction.
The state courts were repeatedly advised by Peti-
tioners that although they were adequate representatives
for the absent class members for purposes of proving that
Islay had improperly taken and retained security deposits
in violation of Section 1950.5, they were not adequate
representatives to defend the thousands of individual off-
set claims arising out of alleged damage and cleaning
necessitated by the unreasonable use of the apartments
by the individual tenants.®
8 Section 1950.5 permits the landlord to retain security only
to cover damage to the unit “in excess of ordinary wear and
tear.” The term “ordinary wear and tear” includes the
cumulative effect of ordinary wear and tear over the course of
multiple tenancies. Thus the landlord cannot collect for the cost
15
The California courts have held that the notice of the
pendency of the class adjudication of the Petitioners’
claims relating to the uniform conduct of Islay was suffi-
cient to give the courts jurisdiction over the absent class
members for the unique and individualized claims raised
by Islay, by which Islay sought to reduce or eliminate the
amount due to each class member.
The California Courts have ignored Petitioners’
repeated protestations that the absent class members
lacked adequate representation for purposes of defending
individual offset claims and that, where adequate repre-
sentation was lacking, the state court could not adjudi-
cate such claims consistent with due process where the
affected parties had been given only the attenuated notice
usually provided to class action members following this
Court’s decision in Eisen v. Carlisle and Jacquelin, 417 U.S.
156, 94 S.Ct. 2140, 40 L.Ed.2d 732, (1974) ie., limited
publication and mailing to last known addresses.
In Mullane v. Central Hanover Bank & Trust Co. 339
U.S. 306, 70 S.Ct. 652, 94 L.Ed. 865 (1950), this Court first
set forth the due process requirements for notice to
absent but represented parties in a lawsuit affecting the
of all repairs and cleaning, but only repairs and cleaning
necessitated by use of the unit beyond ordinary wear and tear.
The landlord’s claim is thus predicated upon demonstrating the
specific state of the unit at the commencement of the tenancy
and at its conclusion, in order to demonstrate that the landlord
incurred costs for the repair of unreasonable use by the tenant.
The landlord may not collect for the cost of refurbishing carpets,
drapes, etc. merely because they are old and have not been
replaced in a long time. Each offset claim for repairs or damage
was thus an individualized, specific, fact-dependent claim.
16
absent parties’ interests. In Mennonite Bd. of Missions v.
Adams, 462 U.S. 791, 103 S.Ct. 2706, 77 L.Ed.2d 180 (1983)
this Court stated the duty of the state to implement the
requirements of Mullane before depriving citizens of their
property.
In Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 105
S.Ct. 2965, 86 L.Ed.2d 628 (1985) this Court discussed
extensively the difference between the burdens placed
upon a defendant brought into a distant court and the
burdens placed on an absent member of a plaintiff class.
Crucially, the Court noted:
absent plaintiff class members are not subject to
other burdens imposed upon defendants. They
need not hire counsel or appear. They are almost
never subject to counterclaims or cross-claims, or
liability for fees or costs. Absent plaintiff class
members are not subject to coercive or punitive
remedies. Nor will an adverse judgment typically
bind an absent plaintiff for any damages, although a
valid adverse judgment may extinguish any of
the plaintiff’s claims which were litigated.
(Ibid., at 810, emphasis supplied). The Shutts Court then
concluded:
[T]he Due Process Clause of course requires that
the named plaintiff at all times adequately rep-
resent the interests of the absent class members.
Hansberry v. Lee, 311 U.S. 32, 61 S.Ct. 115, 85
L.Ed. 22 (1940).
(Ibid., at 811-812)?
9 See also Sam Fox Publishing Co. v. United States, 366 U.S.
683, 81 S.Ct. 1309, 6 L.Ed.2d 604 (1961), affirming one part of the
judgment in the government anti-trust action because the
SO RP ee ee te
ia eT E Is BE LE RRR ee eR EE as
17
The patent inability of the representative plaintiffs to
adequately represent the absent class members on the
defense of the individual occupancy claims leaves the
adjudication of those occupancy claims by the trial court
as fatally lacking basic due process protections.!° The
provision of an Eisen type notice could not satisfy the due
process void resulting from the absence of adequate rep-
resentation. Without adequate representation by the class
representatives, the judgments rendered against the class
members in absentia are void.
By awarding Islay’ affirmative individualized tenant
claims against unrepresented absent class members, this
case raises the issue of whether a state may disregard the
Mullane/Mennonite mandates and attempt to shield their
action from review by an unreviewed, unpublished, inter-
mediate appellate court decision.
named party could adequately represent the absent members of
the class on external affairs of ASCAP, but reversing the other
part of the judgment on the consent decree because the named
party did not adequately represent absent members on the
internal affairs of ASCAP.
10 In the state courts Islay vigorously argued that
Petitioners had incorporated within the scope of their own class
claims the issue that Respondents were entitled to have their
offset claims adjudicated against individual tenants, and that
Petitioners should not be permitted to change their position in
mid-stream. Petitioners have denied and continue to deny that
they ever claimed they could adequately represent individual
class members on the individual offset claims. However, even
assuming, arguendo, that Petitioners had at one time included
the offset claims within the scope of class proceedings, their
statements could not eliminate the due process problem created
by Petitioners’ inability to provide adequate representation on
the offset claims.
18
By refusing to acknowledge that Petitioners could not
adequately represent their absent class members in
defending the individual claims, and adapting their class
action procedures accordingly, the state courts have bla-
tantly ignored this Court’s repeated warnings as to the
limitations placed upon state court class action proceed-
ings by the due process clause of the Fifth Amendment
and the Fourteenth Amendment to the United States Con-
stitution.
In this Court’s recent decision in Ortiz v. Fibreboard
Corporation, __ U.S. __, 119 S.Ct. 2295 (1999) the Court
reiterated the risk of due process violations arising from
the attempt by trial courts to resolve large numbers of
individualized claims through “class” procedures where
the absent class members lack adequate representation.
What the Court said in Ortiz regarding mandatory settle-
ment ciasses applies with equal force to the adjudication
of offset claims against absent individual class members
of a plaintiffs’ class, since such claims
implicate the due process “principle of general
application in Anglo-American jurisprudence
that one is not bound by a judgment in per-
sonam in a litigation in which he is not desig-
nated as a party or to which he has not been
made a party by service of process,” Hansberry v.
Lee, 311 US. 32, 40, 61 S.Ct. 115, 85 L.Ed. 22
(1940), it being “our ‘deep-rooted historic tradi-
tion that everyone should have his own day in
court,’ ” Martin v. Wilks, 490 U.S. 755, 762, 109
S.Ct. 2180, 104 L.Ed.2d 835 (1989) (quoting 18 C.
Wright, A. Miller, & E. Cooper, Federal Practice
and Procedure § 4449, p. 417 (1981)); see Rich-
ards v. Jefferson County, 517 U.S. 793, 798-799, 116
S.Ct. 1761, 135 L.Ed.2d 76 (1996). Although
19
“dé
[w]e have recognized an exception to the gen-
eral rule when, in certain limited circumstances,
a person, although not a party, has his interests
adequately represented by someone with the
same interests who is a party,’” or “where a
special remedial scheme exists icauiate fore-
closing successive litigation by nonlitigants, as
for example in bankruptcy or probate,” Martin,
supra, at 762, n. 2, 109 S.Ct. 2180 (citations omit-
ted), the burden of justification rests on the
exception.
In this litigation the California state courts have
failed to articulate why the desire to provide a “manage-
able” procedure for letting the landlord assert offset
claims justifies an exception to honoring the due process
rights of absent class members.!!
In Granberry III, the California Supreme Court
ignored Petitioners’ warnings that adjudicating offset
claims against the absent class members based on a mere
notice of pendency of plaintiffs’ class action would vio-
late the due process rights of the absent class members.
When Petitioners sought certiorari here to resolve that
issue, Islay argued in their brief that the issue was not
ripe because the California Supreme Court had not
addressed the issue and that the adequacy of the notice
11 In Granberry III, the California Supreme Court
characterized the due process problems arising from
adjudicating the offsets against the class members in absentia as
an “inconvenience”: “it is inappropriate to deprive defendants
of their substantive rights merely because those rights are
inconvenient in light of the litigation pane plaintiffs have
chosen.” Granberry III at 749.
20
could not be addressed until the trial court had fashioned
a procedure for adjudicating Islay’s offset claims.
The trial court’s response to Petitioners’ contention
that it could not obtain jurisdiction to adjudicate claims
against absent class members based on an Eisen form of
notice was to order a second Eisen form of notice that was
patently inadequate both in its method of delivery and in
its content.
In its unpublished opinion in Granberry IV, the Cali-
fornia Court of Appeals has now held that the California
Supreme Court did address the due process issue in Gran-
berry IV and ruled that a simple pendency of class action
notice delivered by publication and mailing to last known
addresses satisfied due process, even where the class
representatives could not adequately represent the absent
class members in defense of the individual claims. The
California Supreme Court denied review, thereby indicat-
ing that the Court of Appeal’s interpretation of its opin-
ion in Granberry IV is correct, to wit: that a trial court may
adjudicate affirmative claims against absent class mem-
bers based on a simple published notice of pendency of
class action without consideration as to whether the
named plaintiff representatives have the capacity to ade-
quately represent the absent class members on their affir-
mative claims.
It is now apparent that the California state courts
have a green light to entertain and adjudicate claims
raised by defendants against absent class members in
plaintiff class actions without affording the absent class
members the due process protections available to any
ee ee ee ee
e oc = =. ee
—- =; =< - =
21
normal party in a California state court against whom an
affirmative claim is raised.
This petition therefore implicates not only the due
process rights of the 7,000+ who have unknowingly lost
their right to a refund of their security deposits through
an adjudication held without providing them actual
notice or an opportunity to be heard, and with no one
present in the court with the ability to adequately repre-
sent their interests, but also the due process rights of all
potential class members in class action litigation in Cali-
fornia from hereon out. Affirmative claims, whether by
offset or cross-complaint, are an effective method for
defeating or defusing the monetary impact of a plaintiff
class action. If such claims can be raised and litigated by
default because the courts need not provide the absent
class members the basic protections afforded all other
parties to litigation, then it is obvious that similar pro-
ceedings will be occurring with regularity in the future.
Question 2.
The order of reversion constitutes an untrammeled
exercise of discretion by a trial court stripping individ-
uals absent from the court of their property interest in a
judgment at law - in effect giving class members’ prop-
erty to another party who has made no legal claim for the
money involved. The order of reversion gives back to
Islay the money that the trial court had determined Islay
owed to individual absent class members after the trial
court had awarded Islay 100% o’ their claim.
Neither the trial court nor the California Court of
Appeal could identify a legal basis for extinguishing the
22
rights of the absent class members in their judgment.
Instead, the Court of Appeal approved of the trial court’s
exercise of an unlimited “equitable” discretion to reverse
its own judgment so as not to “punish” Islay.
This Court has recognized that the absent class mem-
bers are “equitable owners” of their pro-rata share of the
common fund. Boeing Co. v. Van Gemert, 444 U.S. 472,
481-82, n. 7, 100 S.Ct. 745, 62 L.Ed.2d 676 (1980). The
residue which is the subject of the reversion order is not
the property of Islay but the property of the absent class
members. The effect of the reversion order was to transfer
the equitable ownership of the fund from the absent class
members to Islay.
The state court’s exercise of an “equitable” discretion
to strip the absent class members of their rights to the
residue in the fund represents an utterly lawless action —
a blind preference for the interests of Islay over the
established property interests of the absent class mem-
bers in the unclaimed residue. As noted by Justice Breyer
in his concurring opinion in BMW Of North America, Inc.,
v. Gore, 517 U.S. 559, 586-587, 116 S.Ct. 1589, 134 L.Ed.2d
809 (1996), an arbitrary deprivation of property arises
when a trial court acts without legal standards that pro-
vide “reasonable restraints” on the exercise of discretion.
Requiring the application of law, rather than a
decisionmaker’s caprice, does more than simply
provide citizens notice of what actions may sub-
ject them to punishment; it also helps to assure
the uniform general treatment of similarly situ-
ated persons that is the essence of law itself.
Id.
acacia
eae Tr ek ee
ee ee ee ee Pe > eee eee ey ee eer Le See
OI ENE AE SEN
STi erodes BEE ie an eh a sgn 2B aL orl
ls RB RO LS ETE
23
No legal standard informed the trial court’s decision
to give the money due to absent class members back to
Islay unconditionally, rather than to give it to a party
charged with a permanent duty to pay it to absent class
members who could be found.
To Petitioners’ knowledge, no published decision has
ever held that the equitable power of a court in a class
action proceeding could properly order the residue of a
class action judgment representing individual liquidated
amounts due to absent class members returned, uncondi-
tionally, to a defendant judgment debtor who had no
legal claim to the funds. See, e.g., Six (6) Mexican Workers
v. Arizona Citrus Growers, 904 F.2d 1301, 1307 (CA9 1990),
Van Gemert v. Boeing, 739 F.2d 730 (CA2 1984).
Where the basis for the judgment is equitable in
nature, as for instance in the case of a back-pay award to
a class of unidentified persons subjected to unlawful
employment discrimination, return of unclaimed funds
would be within the equitable discretion of the trial court.
However, where the basis for the judgment is a deter-
mination that money paid over by the absent class mem-
ber is due back to the class member as a matter of legal
right, and that the defendant has a lawful debt to the
4
class member, the trial court’s “equitable” decision to
extinguish the debt is nothing more than an unlawful
taking of property without due process of law or just
compensation. Since this taking took place in the absence
of any notice to absent class members, the taking is a
violation both of the substantive and the procedural due
process rights of absent class members.under the Fifth
24
and Fourteenth Amendments to the United States Consti-
tution.
CONCLUSION
Petitioners respectfully urge the Court to grant cer-
tiorari in this matter.
Respectfully submitted,
Davip H. ScHWARTZ
Counsel of Record
Law Orrices oF Davip H. SCHWARTZ
22 Battery Street, Tenth Floor
San Francisco, CA 94111-5524
Tel: (415) 362-2700
Counsel for Petitioners
1 Ae a NA eA IE Bia cone Sai Neh ree, en
3
3
2
App. 1
(Cite as: 9 Cal.4th 738, 889 P.2d 970, 38 Cal.Rptr.2d 650)
Lisa GRANBERRY et al., Plaintiffs and Appellants,
v.
ISLAY INVESTMENTS et al.,
Defendants and Appellants.
No. S$035591.
Supreme Court of California,
In Bank.
March 6, 1995.
Rehearing Denied April 20, 1995.
Hill, Schwartz & Stenson, David H. Schwartz,
Michael 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 providing 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.
sitar she 03
pukat iti
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.? 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
subsequent months by approximately $100. (Granberry v. Islay
Investments (1984) 161 Cal.App.3d 382, 385, fn. 4, 207 Cal.Rptr.
652.)
3 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:
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, 207 Cal.Rptr. 652.)
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 clean-
ing 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
“(1) The compensation of a landlord for a tenant’s
default in the payment of rent.
“(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
obligation 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.”
|
Bipisiocinet Ke Z
3
a
:
4
i
;
3
3
A
of
App. 5
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
awarded costs and attorney fees to plaintiffs, but pro-
vided that such items would be recovered from the aggre-
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
4 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
erroneous. Because these holdings were not addressed in the
petition for review, we need not discuss them further. (Cal.Rules
of Court, rule 29.3(c).)
App. 6
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
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: Compensatio from Rome to California (1965) 53
Cal.L.Rev. 224 [tracing the history of setoff to the Roman
law concept of compensatio].) 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.) 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 limitations, 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 compensated for so
far as they equal each other, .. . ” The quoted statute,
App. 7
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
this defense. (Kruger v. Wells Fargo Bank, supra, 11 Cal.3d
352, 362, 113 Cal.Rptr. 449, 521 P.2d 441; Hauger v. Gates
(1954) 42 Cal.2d 752, 755, 269 P.2d 609.) To determine
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, 14 Cal.Rptr.2d 749, 842 P.2d 48.) “In
determining intent, we look first to the words themselves.
[Citations.]} When the language is clear and unam-
biguous, there is no need for construction. (Citations. ]
When the language is susceptible of more than one rea-
sonable 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 construc-
tion, and the statutory scheme of which the statute is a
part. (Citations.]” (People v. Woodhead (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
App. 8
the security and shall return any remaining portion of the
security to the tenant.” From the plain language of the
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 termination of the
tenancy, if the payment or deposit is made for any or all
" he ‘ .
Se Ee See ae ee ee eee eee eg eee oe
PNG On TE Pe ee Pee ee a ae Se ee ee
App. 9
of those specific purposes. Any remaining portion 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 prevent the mis-
use of security deposits, which one contemporary com-
mentator described as follows: “Theoretically, the
security deposits are created to insure against the contin-
gencies 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 & Housing
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 sec-
tion . . . , 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
> Prior to the 1993 amendments (see fn. 1, ante) this
subdivision 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 w‘!] 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 Legislature
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
a ee ae ee ae ee oe Cee a ee
ee ee ape ee le Ee Oe Te vey hee Pees eae
00 Ee tee a eee en
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
justify 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. ("] ... [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, 66 S.Ct. 582, 584, 90
L.Ed. 743 [“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
PE ee PT ae ee eee ee Oe
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, 269 P.2d 609), 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 identified. Second, it is inappropriate to deprive
App. 16
defendants of 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, 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
opinion regarding the rights of landlords who have acted in bad
faith.
ee sr rea —
Ree re es
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 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 pur-
poses of this case.”7 Plaintiffs now contend that the trial
7 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, 224
Cal.Rptr. 605, 715 P.2d 564.)
App. 18
court 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 prevent a failure of justice.” (City of San Jose v.
Superior Court, supra, 12 Cal.3d 447, 458, 115 Cal.Rptr. 797,
525 P.2d 701.) 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. Subdivision (b) of this statute
declares that unless the defendant 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 judg-
ment, 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
i id eh he al od
Layee ae eae ee Ree
App. 19
action, or to promote justice for all Californians.” How-
ever, the Legislature makes it clear 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.
If.
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
App. 20
as the refund of rent for the first 31 days of a tenancy
(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
App. 21
judgment of the trial court which limits recovery to non-
named class members who have not opted out and who
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., and GEORGE and WERDEGAR, JjJ.,
concur.
BAXTER, Justice, concurring.
I concur in the majority’s judgment and in its holding
that a landlord’s good faith failure to comply 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
App. 22
faith claim or retention by a landlord or the landlord’s
successors in interest of the security or any portion
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., concurs.
KENNARD, Justice, 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
App. 23
$1 million in security deposited 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, 14 to 17 years after the
tenancies have ended, assert claims against the tenants’
security for unpaid rent, cleaning 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 laridlords 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.
App. 24
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.
Plaintiffs Lisa Granberry et al. are a class of approxi-
mately 10,00C 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.
—
App. 25
After trial, the court entered judgment. The judgment
limited the landlord’s liability to the amount of security
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.
I]
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
paymert 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,
App. 26
§ 1950.5, former subd. (e), italics added.)! This version of
section 1950.5 subsection (e), applicable during the period
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
1 Unless otherwise noted, all further statutory references
are to the Civil Code.
eee eee
App. 27
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 pp. 653-654, of 38 Cal.Rptr.2d,
at pp. 973-974 of 889 P.2d.) Recognizing the obstacles
facing a former tenant seeking to recover a security
deposit from a recalcitrant landlord and the former ten-
ant’s lack of leverage over the landlord, the Legislature
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
io 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. 654 of 38 Cal.Rptr.2d, at p. 974 of
889 P.2d.) This purpose is furthered by requiring land-
lords to assert their claims against the security promptly
after the end of the tenancy or else lose the right to do so
thereafter. ;
App. 28
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
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.? I disagree
2 The amount of statutory damages available under section
1950.5 during the period relevamt to this lawsuit was $200.
(§ 1950.5, former subd. (h).)
App. 29
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.
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 P.2d 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
App. 30
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
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
App. 31
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
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 secufity
accompanied by bad faith.
Nor, unlike People ex rel. Van de Kamp v. American Art
Enterprises, Inc., supra, 33 Cal.3d 328, 334, 188 Cal.Rptr.
740, 656 P.2d 1170, on which the majority relies, is this a
case in which, because the Legislature has provided cer-
tain 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, 188 Cal.Rptr. 740, 656 P.2d 1170.) Because the Legisla-
ture 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 autho-
rized monetary fines as an additional punishment for the
App. 32
same act. Here, however, in the majority’s view the Legis-
lature has provided no consequence for a violation of the
mandatory setoff-and-refund requirement not accom-
panied 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 promptly
account for any claims against the security and refund
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
App. 33
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
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
App. 34
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 . . . in any manner the court
determines 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
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 deal-
ing 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
;
App. 35
wrongs. (See § 3517 [“No one can take advantage of his
own wrong.”]; see also Shepherd, Damage Distribution 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 defendant”].) Conse-
quently, 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 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
App. 36
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
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 Bau-
man 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
App. 37
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 Legislature 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 authorizes 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 secu-
rity. (§ 1950.5, subds. (e), (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 weigh-
ing 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
App. 38
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. 39
NOT TO BE PUBLISHED
IN THE COURT OF APPEAL OF THE
STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SIX
LISA GRANBERRY et al., 2d Civil No. B113750
(Super. Ct. No. 136428)
Plaintiffs and Appellants, (Santa Barbara County)
Vv.
ISLAY INVESTMENTS et al.,
Defendants and Respondents.
(Filed April 19, 1999)
JOSEPH A. LANE, Clerk Deputy
A landlord charged more “rent” for the first 31 days
of occupancy than for succeeding months to entice ten-
ants to remain. The landlord did not refund security at
the end of tenancies, A class of tenants sued the landlord
arguing that the higher rent charged constituted a dis-
guised refundable security deposit. The issue was one of
fact. The landlord asserted an affirmative defense of set-
offs for unpaid rent, repairs and cleaning. A jury con-
cluded that the higher rent was security, but that the
landlord acted in good faith in creating its rent reduction
program.
Plaintiffs requested that judgment be entered on
behalf of the entire class for the aggregate amount of
security deposits retained, and that any amounts not
claimed by individual tenants escheat to the state. The
trial court rejected the request, entered judgment only for
those class members who would file individual claims
App. 40
and deemed fluid recovery as the appropriate remedy.
The landlord was not permitted to claim offsets to such
individual claims.
After further appeals, our Supreme Court concluded
that recovery for the security deposits was not limited to
individuals filing claims and that the landlord could seek
setoffs as damages against security for amounts of unpaid
rent, repairs and cleaning it proved by a preponderance
of the evidence, subject to equitable defenses. Fluid
recovery was found not to be necessary. It directed the
trial court to hold a further evidentiary hearing on the
setoff claims and to reconsider its choice of class remedy
in light of Code of Civil Procedure sections 382 and 384.!
Our Supreme Court deemed premature plaintiffs’
assertion that attorneys’ fees of 25 percent of the aggre-
gate class recovery are inadequate. The amount of defen-
sive offsets had not yet been determined so the total net
class recovery was unknown. It was impossible to state
the total number of hours counsel would devote before
completing the case. The Supreme Court ordered this
court to remand the matter to the trial court for further
proceedings consistent with its opinion. (Granberry v.
Islay Investments (1995) 9 Cal.App4th 738, 752.) We did so.
The trial court heard individual claims, held an evi-
dentiary hearing on setoffs against security to other mem-
bers of the class, made findings required under section
384 and determined attorneys’ fees. The court ruled that
the net common fund of $1,025,602, after individual
1 All statutory references are to this code unless otherwise
stated.
ine vecpemanenmnpmertciaiioch 3 Naat easiness rake rea naaas matmcini
App. 41
claims, would revert back to the landlord, and that plain-
tiffs are entitled to attorneys’ fees of 25 percent of the
common fund.
Lisa Granberry, et al. (Granberry) appeals from the
judgment entered which provides that the balance of the
fund remaining, roughly $750,000 after payment to plain-
tiffs of $256,400.50 as attorneys’ fees, reverts to respon-
dents, Islay Investments, et al. (Islay). Granberry asserts
the trial court’s determination of the offset claims is void
for lack of jurisdiction and violates due process, substan-
tial evidence does not support the offset claims, the court
abused its discretion in denying Granberry’s equitable
defenses and in determining attorneys’ fees. We affirm.
FACTS
Islay charged its tenants more “rent” for the first 31
days of tenancy than for subsequent months. Granberry, a
class of Islay’s former tenants, sued to obtain refunds of
the excess amount Islay denominated as “rent” for the
first month’s tenancy, alleging that the amount is a dis-
guised, refundable security deposit. In an earlier appeal,
we reversed the summary judgment granted defendants
and conciuded that the character of the excess amount is
a triable issue of fact.
Islay amended their answer to allege setoffs for
unpaid rent, repairs and cleaning should the jury decide
that the excess payments constitute refundable security
deposits. The jury found that the excess payments were
security deposits, but that Islay had not retained them in
bad Faith. The trial court determined that excess pay-
ments must be refunded only to members of the class
App. 42
making individual claims, and that Islay was not entitled
to setoffs. The trial court did not require Islay to disgorge
the aggregate amount of the security deposits it wrong-
fully retained and to pay that money into a fund.
In the second appeal, we held that the trial court
erred in ruling that defendants were not entitled to set-
offs, that the court did not abuse its discretion in granting
refunds only to those class members who would come
forward to claim them, and that the court did not abuse
its discretion in limiting attorneys’ fees and Costs to 25
percent of the total amount paid to the class.
Our Supreme Court concluded, inter alia, that Islay
may set off damages for unpaid rent, repairs and cleaning
it proves by a preponderance of the evidence in a subse-
quent judicial proceeding against the security deposits
Islay retained in good faith, even though Islay initially
failed to comply with the summary deduct-and-retain
provisions of Civil Code section 1950.5, subdivision (f).
The high court ordered the trial court to consider the
viability of plaintiffs’ equitable defenses. (Granberry Islay
Investments, supra, 9 Cal.4th at pp. 743-750.)
On remand, the trial court ordered that notice be
published in newspapers and that notice and claims
forms be mailed to class members before holding the
evidentiary hearing. The named plaintiffs failed to file
claims or to appear. The court heard and resolved indi-
vidual claims and offsets for the 111 claimants who
responded. Those claims resulted in payments with inter-
est of $9,490.87.
App. 43
The court conducted an evidentiary hearing as to the
remaining members of the class. The uncontroverted evi-
dence established that Islay collected security of
$1,418,559 as “rent differential” and “security deposits”
during the period at issue. Of the $442,000 in “security
deposits,” Islay had previously returned $347,000, leav-
ing a net excess revenue of $1,072,060. The court found
that Islay proved by a preponderance of the evidence that
it suffered setoff damages in reasonable amounts for
unpaid rent, repairs and cleaning and that Granberry did
not prove any equitable defenses they claimed. After
adjustment for ordinary wear and tear, Islay provided
evidence that it actually suffered $1,411,000 in damages
by the tenant class in excess of the total amount of
security collected.
The trial court held a hearing to make findings
required by section 364 and to determine attorneys’ fees
and costs. The court found that the total amount payable
to all class members is $1,025,602, less $9,491 in actual,
paid claims made, leaving a residue of $1,016,111.
Granberry presented no evidentiary support for
attorneys’ fees, much less an itemized accounting. Under
the common fund doctrine, the trial court found that a
fair and reasonable attorneys’ fee is 25 percent of the
theoretical fund of $1,025,602 which had been calculated
pursuant to section 384. The court found that an award of
private attorney general fees pursuant to section 1021.5
was inappropriate.
Granberry conceded that the trial court had the
power to dispose of the residue. The court found that the
individual claims had been paid and it ordered that the
App. 44
balance of the theoretical fund calculated pursuant to
section 384 remain with Islay because it acted in good
faith. The court expressly rejected Granberry’s claim that
the fund should escheat to the state, a remedy that would
unjustifiably punish defendants. The named plaintiffs
failed to make a claim or appear at any of the proceed-
ings. Accordingly, except for the attorneys’ fees of
$256,400.50, they did not recover anything,
This appeal ensued from the class action judgment of
the trial court entered after hearings were held pursuant
to remand.
DISCUSSION
Personal Jurisdiction
Granberry contends that the mailed and published
notice did not confer personal jurisdiction required over
the certified class. We disagree. (See generally Phillips
Petroleum Co. v. Shutts, (1985) 4 72 U.S. 797, 811-812 [86
L.Ed.2d 628, 641-642].) The instant, second notice, like
plaintiffs’ original notice of 1988, advises claimants of
their right to refund of security less offsets for unpaid
rent and/or costs reasonably necessary to clean and
repair damage in excess of ordinary wear and tear pur-
suant to a scheduled evidentiary hearing.
Granberry has repeatedly raised the issue of lack of
notice of Islay’s offset claims. (Granberry v. Islay Invest-
ments, supra, 9 Cal.4th at p. 749.) In its motion to quash
service of Islay’s cross-complaints, and at other times,
Granberry has acknowledged that the trial court has
jurisdiction to resolve the affirmative defense of offsets
pursuant to class notice provided. In its petition for
App. 45
rehearing from the last appeal, Granberry again raised
these notice and due process arguments. It specifically
requested us to consider and determine whether Islay
violated notice requirements as to the equitable setoffs.
We modified our opinion, rejecting the challenge.
Granberry raised the jurisdictional issue in its peti-
tion for review to our Supreme Court. Our high court
quoted the pertinent part of plaintiffs’ original class
notice and also held that “in light of this notice, plaintiffs’
contentions regarding . . . lack of notice are unavailing.”
(Granberry v. Islay Investments, supra, 9 Cal.4th at p. 749.)
Then Granberry reiterated its challenge in a petition for
rehearing to the Supreme Court. The high court denied
the petition. The decision of our Supreme Court on this
issue is law of the case. (People v. Stanley, (1995) 10
Cal.4th764, 766-787; see also In re Rebekah R. (1994) 27
Cal.App.4th 1638, 1649 [on the binding nature of coun-
sel’s prior positions].)
The offsets are in the nature of an affirmative defense
to plaintiffs’ certified class action and do not constitute a
defective default judgment. (Granberry v. Islay Invest-
ments, supra, 9 Cal.4th at pp. 743-744; and see generally
Safine v. Sinnott (1993) 15 Cal.App.4th 614, 618-619.)
Accordingly, section 580 does not apply here. The section
384 remedy, discussed infra, is comprised of the sum of
security deposits to the class less defensive offsets. Islay’s
substantive right to the affirmative defense of offsets is
not forfeited by the procedural difficulties created by
plaintiffs’ class action. (Granberry, supra, at p. 749; and see
generally In re Gypsum Antitrust Cases _ Cir. 1977) 565
F.2d 1123, 1127.)
App. 46
Our Supreme Court directed the trial court to hold
the evidentiary hearing. (Granberry v. Islay Investments,
supra, 9 Cal. 4th at pp. 749-750.) By using updated mail-
ing lists and published notice in the major newspapers in
San Luis Obispo, Santa Barbara and Ventura counties,
class members were apprised of the scheduled hearing,
their rights to make individual claims for the security
deposits and their right to appear at the scheduled hear-
ing for the class. These notices stated that Islay sought
offsets against security claims. Indeed, plaintiffs have the
responsibility to keep absent class members apprised of
their rights and responsibilities as needed throughout the
litigation. (See generally La Sala v. American Sav. & Loan
Assn. (1971) 5 Cal.3d 864, 871.)
Substantial Evidence Supporting Offsets
Granberry asserts there is no substantial evidence to
support the individual offset claims, and that the offsets
awarded improperly included all expenses for refurbish-
ing units without allowing for repairs and cleaning attrib-
utable to ordinary wear and tear. Granberry challenges
whether Islay met its burden of proof to show that the
expenses were caused by the tenant or his guests. We
presume the judgment is correct and all intendments and
presumptions are indulged in favor of it. We must uphold
the judgment if it is supported by any substantial evi-
dence. (Jordan v. City of Santa Barbara (1996) 46
Cal.App.4th 1245, 1254-1255.)
Islay provided evidence on a class-wide basis estab-
lishing reasonable damages on the affirmative defense of
offsets. (Granberry v. Islay Investments, supra, 9 Cal.4th at
App. 47
pp. 749-750.) Granberry did not rebut it. Donna Ogilvie,
the operations officer for Islay, testified that between 1978
and 1983 each unit was inspected by managers when
relinquished and was cleaned, repaired and renovated to
like-new condition before the next possession. Until 1983,
the move-out form Islay used noted only major damage.
In January 1983, when Islay denominated an amount paid
as the security deposit, it created an inventory and condi-
tion report that managers and tenants completed together
at move-in and move-out to replace the previous move-
out form. Upon possession, each new tenant agreed that
the unit was clean and in good repair and that he or she
would notify management within 48 hours of possession
if the unit did not meet these criteria.
At the 1990 trial, years of business records, including
work orders, bills, invoices, pay toll records and move-
out forms, compiled and denominated as exhibits
278-280, were introduced to establish an accounting,
without objection. At the instant evidentiary hearing,
these records were placed in evidence again over Granbe-
rry’s hearsay objection. The trial court did not abuse its
discretion in permitting this evidence. (Exclusive Florists,
Inc. v. Kahn (1971) 17 Cal.App. 3d 711, 716.) Foundational
testimony from Ogilvie established that these exhibits
were compiled as computerized secondary evidence of
the voluminous written records made at or about the time
of the events stated in the regular and ordinary course of
Islay’s business by sources and means establishing that
they are trustworthy. (Evid. Code, §§ 1272, 1521, subd.
(a), 1523, subd. (d), 1552, subd. (a); Aguimatang v. Califor-
nia State Lottery (1991) 234 Cal.App.3d 769, 797-798; People
v. Lugashi (1988) 205 Cal.App.3d 632, 640; Vanguard
App. 48
Recording Society, Inc. v. Fantasy Records, Inc. (1972) 24
Cal.App.3d 410, 418-419.)
Winston Elton, an expert on commercial real estate
forensics, examined, analyzed and compared exhibits 278
through 280 with typical security deposit charges, offsets
and refunds for similar properties. He determined that
Islay’s claimed 1980 tenant turnover costs of $225 to $300
per unit were lower than the $350 industry average. Elton
verified the accuracy of the files stated in the exhibits and
discovered that various actual costs were not included.
For example, the cost of paint and painting supplies did
not appear. He revised Islay’s claimed costs to reflect
actual costs and adjusted the figures to include ordinary
wear and tear.
Elton testified that the costs set forth in exhibits
278-280 were reasonable and, in fact, did not reflect all
costs. In Elton’s opinion, Islay suffered a net loss of about
$1.4 million, including ordinary wear and tear. Nonethe-
less, Islay acceded to Granberry’s calculation of a higher
net revenue figure. Granberry may not challenge the trial
court’s adoption of plaintiffs’ own figure. (Mesecher v.
County of San Diego (1992) 9 Cal.App.4th 1677, 1685-1686.)
The findings reflect substantial evidence of damages
caused by the class tenants supporting the defensive off-
sets provided in the judgment.
Class Remedy
After the hearing, Granberry conceded that the trial
court had discretion to provide a claims-made order with
reversion of the residual, unclaimed fund to Islay rather
than escheat to the state, pursuant to the directives of our
ee
App. 49
Supreme Court. Under section 384, the trial court is to
direct the defendant to pay the sum of the unpaid residue
with interest “in any manner the court determines is
consistent with the objectives and purposes of the under-
lying cause of action. .. . ” The trial court has broad
discretion in equity to fashion a remedy in class actions.
(8§ 384, 382; Granberry v. Islay Investments, supra, 9 Cal.4th
at p. 751; and see generally Richmond v. Dart Industries,
Inc. (1981) 29 Cal.3d 462; Green v. Obledo (1981) 29 Cal.3d
126; Vasquez v. Superior Court (1971) 4 Cal.3d 800; Daar v.
Yellow Cab Co. (1967) 57 Cal.2d 695.)
Under the unclaimed property law, escheat is not the
sole remedy. Rather, the court “may exercise the full
range of its inherent powers in order to accomplish com-
plete justice between the parties.” (People ex rel. Smith v.
Parkmerced Co. (1988) 198 Cal.App.3d 683, 692-693;
§ 1519.5.) Because the jury had previously found that
Islay acted in good faith, the court found that escheat
would not be the most equitable remedy. Escheat would
only result in punishing Islay, an unwarranted result.
After the evidentiary hearing showing Islay’s offsets and
other expenses, the court did not abuse its discretion in
ruling that the balance of the fund should remain with
Islay.
Equitable Defenses
Granberry argues that the trial court erred or abused
its discretion in denying the equitable defenses of waiver,
estoppel and laches as to Islay’s affirmative defense of
offsets. Waiver is the voluntary and intentional relin-
quishment of a known right after knowledge of the facts.
App. 50
(Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1,
31-32; DRG/Beverly Hills, Ltd. v. Chopstix Dim Sum Cafe &
Takeout III, Ltd. (1994) 30 Cal.App.4th 54, 60.) It is a
question of fact, and the party claiming waiver must
show it by clear and convincing evidence. (Engalla v.
Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 983;
Waller, supra, at pp. 31-32.)
Plaintiffs assert that Islay waived its right to offsets
by use of its rent differential program. Plaintiffs testified
at the previous trial that the rent differential program was
not misleading. The jury determined that Islay acted in
good faith. At the instant evidentiary hearing, plaintiffs
failed to appear. As Granberry’s counsel conceded, Islay
did not intend to waive its right to claim offsets when it
made the business decision to adopt the rent differential
program. Islay believed that the disputed amounts were
rent and treated it as such. Civil Code section 1950.5 was
nearly unintelligible; it would be inequitable to charge
Islay with notice that its rent discount program constitu-
ted taking security deposits.
Estoppel may exist only when a party has falsely,
intentionally and deliberately led another to do that
which he or she would not otherwise have done, causing
injury. (Evid. Code, § 623; Robinson v. Fair & Housing Com.
(1992) 2 Cal.4th 226, 244-245; State Compensation Ins. Fund
v. Workers’ Comp. Appeals Bd. (1985) 40 Cal.3d 5, 16.) This,
too, is a question of fact. (State Compensation Ins. Fund,
supra, at p. 16.)
Granberry argues that Islay’s change of position to
assert the affirmative defense of offset is subject to estop-
pel. As noted by the trial court, out Supreme Court has
Mere
App. 51
rejected Granberry’s position. (Granberry v. Islay Invest-
ments, supra, 9 Cal.4th at p. 749.) Our Supreme Court's
ruling on the issue is law of the case. (People v. Stanley,
supra, 10 Cal.4th at pp. 786-788.) There was no knowing
representation or concealment by Islay; the jury found
that Islay acted in good faith.
Laches requires unreasonable delay in bringing suit,
among other things. (Miller v. Eisenhower Medical Center
(1980) 27 Cal.3d 614, 624; Conti v. Board of Civil Service
Commissioners (1969) 1 Cal.3d 351, 359, 361.) Granberry
takes the position that Islay is guilty of laches by waiting
15 years before alerting tenants of its offset claims. The
trial court properly rejected Granberry’s contention. No
laches occurred here; Islay asserted its offset claims by
amending its answer as soon as it appeared necessary.
The “delay” in itemizing offsets from security resulted
from Islay’s good faith belief that its rent reduction pro-
gram did not involve security deposits.
Indeed, plaintiffs’ initial complaints acknowledged
Islay’s right to offsets. Both class notices stated that plain-
tiffs’ claim for refund of security was subject to the offsets
at issue and Islay has consistently and persistently sought
offsets after we concluded that the increased first month’s
rent constitutes security.
Altorneys’ Fees
Granberry challenges the 25 percent limitation on
attorneys’ fees set by the trial court. (Granberry v. Islay
Investments, supra, 9 Cal.4th at pp. 751-752.) An “ ‘experi-
enced trial judge is the best judge of the value of profes-
sional services rendered in his court... . ” ’ (Id., at p. 752,
App. 52
quoting from Serrano v. Priest (1977) 20 Cal.3d 2.5, 30.).
We may not disturb the ruling of the trial court on this
issue unless we are “convinced that it is clearly wrong.
(Serrano v. Priest, supra, 20 Cal.3d at p. 49.)
At the noticed hearing on attorneys’ fees, after deter-
mining the offsets, Granberry argued for fees from the
common fund and from Islay for private attorney general
fees. Granberry asserts that because the trial court took
no evidence an the time expended by counsel and the
value of its work and did not hold a hearing on private
attorney general fees, the trial court abused its discretion
in awarding 25 percent of the theoretical fund of
$1,025,602 for attorneys’ fees. We disagree.
Granberry had more than two months, with one con-
tinuance, to prepare an itemized claim for attorneys’ fees
after the court noticed the January 23, 1997 hearing.
Before the hearing, Granberry’s counsel filed only a gen-
eral declaration of spending more than 5,200 hours
($1,250,000) on the case. At the January hearing, Granbe-
rry’s counsel stated that total attorney time had not yet
been fully calculated and asked the court again to delay
hearing the matter. Granberry had filed no motion for
further continuance, and the trial court saw no reason to
delay ruling. The trial court noted that the amount of the
fund was established at the time and “we have all the
information we need to determine whether or not Section
1021.5 . . . and/or the Common Fund Theory apply.”
Granberry did not file an itemized claim for. fees until
April 7, 1997.
Whether or not to award private attorney general
fees is within the broad discretion of the trial court.
App. 53
(Church of Scientology v. Wollersheim (1996) 42 Cal.App.4th
628, 659.) To obtain such fees, one must establish that the
action resulted in the enforcement of an important right
affecting the public interest, conferring a significant bene-
fit on the general public or on a large class of people
under circumstances where the necessity and burden of
private enforcement transcends the litigants’ personal
interest. (City of Hawaiian Gardens v. City of Long Beach
(1998) 61 Cal.App.4th 1100, 1112.) The trial court has the
discretion to decide whether attorney fees should be paid
out of the recovery. (Rider v. County of San Diego (1992) 11
Cal.App.4th 1410, 1422.) The trial court should assess the
outcome of the litigation from a practical perspective to
determine whether private attorney general fees are war-
ranted. (City of Hawaiian Gardens, supra, at pp. 1112-1113;
also see generally Baggett v. Gates (1982) 32 Cal.3d 128,
142; Hull v. Rossi (1993) 13 Cal.App.4th 1763, 1767; Mandi-
cimo 0. Maggard (1989) 210 Cal.App.3d 1413, 1416.)
Although the court acknowledged that a case could
be made that the action resulted in the enforcement of an
important right affecting the public interest, it did not
believe an award should be made pursuant to section
1021.5, because there is a common fund available from
which fees can be paid. (See generally Jutkowitz v. Bourns,
Ime. (1981) 118 Cal.App.3d 102, 109-114; Bank of America v.
Cory (1985) 164 Cal.App.3d 66, 89-91; Rider v. County of
San Diego, supra, 11 Cal.App.4th at pp. 1422-1423 [private
attorney general fees inappropriate where common fund
exists|) Moreover, Granberry did not make specific, per-
Suasive arguments supporting the claim for private attor-
mey general fees. Realistically, Granberry achieved only
clarification of the definition of “security” under Civil
App. 54
Code section 1950.5 in the fairly unique situation where a
landlord sought in good faith to use a rent reduction
program in lieu of security. Section 1950.5 contains no
provision for attorney fees. The court did not abuse its
broad discretion in denying private attorney general fees.
(Planned Parenthood v. City of Santa Maria (1993) 16
Cal.App.4th 685, 692; Satrap v. Pacific Gas & Electric Co.
(1996) 42 Cal.App.4th 72, 79-81.)
The trial court believed that Granberry is entitled to a
reasonable fee payable out of the common fund, even
though Granberry failed to submit a timely, itemized
accounting of hours spent on the case. The trial court was
intimately familiar with the case, the parties and coun-
sel’s efforts, having been immersed in the matter for 15
years. The trial court needed no further input. It listed
and considered all the Wollersheim factors, reviewed the
complexity of the litigation, the strategic and tactical
decisions made by counsel, counsel’s success, the amount
of unnecessary adversarial skirmishing and whether or
not counsel pursued settlement. (Church of Scientology v.
Wollersheim, supra, 42 Cal.App.4th 628.) Granberry exer-
cised its right to try the case rather than accept substan-
tial settlement offers which could have ended the matter
many years ago. That the fruits of trial were less than
hoped for does not increase their attorneys’ fees.
The creation of an actual fund is not required for
application of the common fund fee doctrine, and the
exact percentage of a theoretical fund is within the broad
discretion of the trial court. (Williams v. MGM-Pathe Com-
munications Co. (9th Cir. 1997) 129 F.3d 1026; Glendale City
Employees’ Assn., Inc. v. City of Glendale (1975) 15 Cal.3d
328; Molendres v. City of Los Angeles (1975) 45 Cal.App.3d
iia
App. 55
267.) The 25 percent figure awarded here is the
benchmark. It should not be exceeded except in unusual
cases. (Paul, Johnson, Alston & Hunt v. Graulty (9th Cir.
1989) 886 F.2d 268, 272-273.) Under all the circumstances
of the case, the trial court concluded that the noticed
contingency fee of 25 percent of the theoretical fund,
calculated pursuant to section 384, subdivision (b), is
appropriate and that the lodestar approach is inappropri-
ate. (See generally Woodland Hills Residents Assn., Inc. v.
City Council (1979) 23 Cal.3d 917, 945; Glendale, supra, at
p. 341, fm. 19; Rider v. County of San Diego, supra, 11
Cal.App.4th 1410; Knoff v. San Francisco (1969) 1
Cal.App.3d 184, 203; Melendres, supra, at pp. 282-284.)
The trial court did not abuse its discretion by-awarding
25 percent of the theoretical fund of $1,025,602 for attor-
neys’ fees.
The judgment is affirmed. Costs are awarded to
respondents.
NOT TO BE PUBLISHED.
BURKE, J.*
We concur:
GILBERT, Acting P.J.
YEGAN, J.
“Assigned by the Chairperson of the Judicial Council.
App. 56
NOT TO BE PUBLISHED
[NO CHANGE IN JUDGMENT]
IN THE COURT OF APPEAL OF THE
STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SIX
LISA GRANBERRY et al., 2d Civil. No. B113750
(Super. Ct. No. 136428)
(Santa Barbara County)
v. ORDER MODIFYING
OPINION AND
S STMENTS
ISLAY INVESTMENTS et al, DENYING REHEARING
Defendants and Respondents. (Filed May 18, 1999)
JOSEPH A. LANE, Clerk
Deputy
Plaintiffs and Appellants,
It is ordered that the opinion filed herein on April 19,
1999, be modified in the following particulars:
1. On page 1, lines 6 and 7 of the second paragraph,
the words “as the appropriate remedy” are replaced with
the word “inappropriate” so tlhe sentence reads:
The trial court rejected the request, entered
judgment only for those class members who
would file individual claims and deemed fluid
recovery inappropriate.
2. On page 2, the third ful!l paragraph is deleted and
the following paragraph is inserted in its place: The trial
court held an evidentiary hearimg on setoffs against secu-
rity to members of the class, made findings required
under section 384 and determiined attorneys’ fees. Pur-
suant to class notice, the trial court appointed a referee to
App. 57
hear individual claims. Only one individual requested a
hearing which was mediated and settled. The court ruled
that the net common fund of $1,025,602 would revert
back to the landlord, and that plaintiffs are entitled to
attorneys’ fees of 25 percent of the common fund.
Appellants’ petition for rehearing is denied.
There is no change in judgment.
App. 58
MARCUS E. CRAHAN, JR., SBN 27717
380 Sheffield Drive
Santa Barbara, California 93108
(805) 565-0506
DIANE M. MATSINGER, SBN 96826
130 East Carrillo Street
Santa Barbara, California 93101
(850) 965-5711
BETTY L. JEPPESEN, SBN 100947
ANTONIO R. ROMASANTA, SBN 31535
800 Garden Street, Suite K
Santa Barbara, California 93101
(805) 963-8621
Attorneys for Defendants
SUPERIOR COURT OF THE STATE OF CALIFORNIA
FOR THE COUNTY OF SANTA BARBARA
LISA GRANBERRY, ) CASE NO. 136428
et al., . STATEMENT OF
Plaintiffs, ) DECISION
VS. ) (Filed Jan. 24, 1997)
ISLAY INVESTMENTS, ?
et al., |
Defendants. ) 2
) 1
The above-entitled cause came on regularly for evi-
dentiary hearing pursuant to order of the Supreme Court
on October 16, 1996, in Department One of the above-
entitled court, the Honorable Ronald C. Stevens, Judge,
presiding, without a jury, and was heard on that date and
on October 17, 21 and 22, 1996. David H. Schwartz
App. 59
appeared as counsel for plaintiffs, and Marcus E. Crahan,
Jr., Diane M. Matsinger, Antonio R. Romasanta and Betty
L. Jeppesen appeared as counsel for defendants. Ernest L.
Graves was also present at counsel table for plaintiffs.
Oral and documentary evidence was introduced on
behalf of the respective parties and the cause was argued
and submitted for decision. The Court, having considered
the evidence and heard the arguments of counsel and
being fully advised, issues the following statement of
decision with respect to the principal controverted issues
at the hearing:
Nature Of The Hearing
The California Supreme Court remanded this case to
this Court for an evidentiary hearing to consider two
issues:
(1) Whether defendants can prove by a prepon-
derance of the evidence (a) that they suffered damages
for unpaid rent, repairs and cleaning; and (b) that the
amount claimed is reasonable; and
(2) Whether plaintiffs can establish any equitable
defenses to those claims.
Granberry v. Islay Investments (1995) 9 Cal.4th 738
(“Granberry”) at pages 749-750.
In the California Supreme Court, plaintiffs claimed
that defendants’ offset claims must be litigated individu-
ally. The Supreme Court expressly rejected that claim,
and directed this Court to shape a remedy to avoid the
practical problems posed by the resolution of defendants’
App. 60
offset claims within the context of this class action. Gran-
berry at page 749.
Following the Supreme Court’s direction, this Court
shaped a two-part remedy, i.e., to resolve individual off-
set claims in an administrative procedure and to resolve
class-wide claims of damages and equitable defenses in
this hearing. Accordingly, and by virtue of prior orders of
this Court and the agreement of the parties, this hearing
has been held to determine defendants’ damage claims
and plaintiffs’ equitable defense claims on a class-wide
basis.
The administrative procedure established by this
Court pursuant to Order filed March 27, 1996, has been
completed. Some 109 claims were filed. Of those claims,
27 were outside of the definition of the class, and one was
prosecuted through an appeal to Judge Arnold Gowans.
(See Exhibit 297.) All proper claims have now been
resolved and are ready to be paid.
While individual claims were not litigated, and were
not required to be litigated, in this hearing, by virtue of
the evidence offered by defendants and received by the
Court, defendants’ offset claims as against each of the
individual class members have been established prima
facie.
Defendants’ Damages
The period for calculation of defendants’ damages in
this case began in April, 1978 (three years before the
filing of plaintiffs’ original complaint), and ended in June,
App. 61
1990, when the jury decided that the amount of the differ-
ential between the first and second months’ rent was a
security, but that defendants had acted in good faith in
claiming and contending that that amount was rent.
Defendants established that during the damage
period there were 9,240 move-outs or turnovers of tenan-
cies, and that, as a result thereof, defendants suffered
approximately $1,411,000 in damages (after adjustment
for ordinary wear and tear) in excess of the total amount
of jury-found and actual security which defendants had
taken during that period of time. See Exhibit 291.
More particularly, defendants established that they
received approximately $977,000 in jury-found security,
and approximately $442,000 in actual security due to a
security deposit program instituted in January, 1983, but
refunded approximately $347,000 of that security, leaving
a total of jury-found and actual security of approximately
$1,072,000. See Exhibit 291. Defendants also established
that they incurred damages as a result of the 9,240 tenant
turnovers in the amount of approximately $3,125,000
which, when reduced by approximately $642,000 in esti-
mated ordinary wear and tear, resulted in net damages of
approximately $2,483,000. Subtracting that amount from
the total security received results in the net adjusted loss
of $1,411,000. See Exhibits 287, 290 and 291.
Defendants also established, in Exhibits 278, 279 and
280, that they had offset claims against the class as a
whole in the amount of approximately $1,800,000 (before
adjustment for ordinary wear and tear), and against each
of the class members as stated therein.
App. 62
Winston Elton, defendants’ expert, testified at length
on direct and cross examination as to the nature, neces-
sity, amount and reasonableness of defendants’ damages.
Indeed, he prepared and explained in detail Exhibit 287, a
378 page summary, based upon Islay’s original business
records, of the damages Islay suffered on account of each
and every one of the 9,240 tenant turnovers which
occurred during the damage period.
Thus, as he explained, Exhibit 287 contained, with
respect to each of the 9,240 tenant turnovers, the follow-
ing specific information, where applicable:
The tenant’s name, Islay’s contract number, apart-
ment complex name and unit number, the dates of the
tenant’s move-in and move-out, the amounts of the first
and second months’ rent, the last rent paid, the date the
rent was paid to, the date the tenant gave notice of the
termination, and the rent due.
Exhibit 287 also contained specific information with
respect to whether any lock change or court judgment
was involved in any tenant turnover, and the following
information with respect to Islay’s damages resulting
from that tenancy:
The amount of the cost to clean the apartment, the
number of hours needed and the amount of the cost to
paint the apartment, the amount of the cost to replace
carpets and drapes, where applicable, and a summary of
all other costs (such as damage to furniture) Islay
incurred.
The foregoing damages and costs were based essen-
tially on Exhibits 278-280.
App. 63
Mr. Elton then adjusted those costs in Exhibit 287 to
add certain direct costs (i.e., paint) which were not
included in Exhibits 278-280, certain indirect costs (i.e.,
costs for administration and supervision), and also made
an adjustment (reduction) for ordinary wear and tear
with respect to costs incurred to paint the apartment or
replace carpet, or replace drapes.
Accordingly, defendants have established for the
class as whole, and for each class member, that defen-
dants have suffered damages and are entitled to assert
offsets for unpaid rent, cleaning, and repair (in excess of
ordinary wear and tear) against the class as a whole and
each class member who moved out of one of defendants’
apartment units during the period April, 1978, to June
1990, as stated in Exhibit 287.
There was no contrary evidence; and plaintiffs’
attempt to discredit Mr. Elton or to show the unreliability
of Exhibit 257 did not persuade the Court.
Defendants further established through Mr. Elton
that the cleaning and repair costs, as well as the unpaid
rent losses they suffered, were well within industry stan-
dards (see also Exhibits 285 and 286); and that the
amounts of their damages and offset claims based
thereon were and are reasonable. There was no contrary
evidence.
Plaintiffs’ request for statements of decision with
respect to a more detailed basis for the Court's findings
in this respect are denied as calling for statements of
evidentiary facts where only statements of ultimate facts
are required. People v. Casa Blanca’ Convalescent Homes
App. 64
(1984) 159 Cal.App.3d 509, 524-527; and Wolfe v. Lipsy
(1985) 163 Cal.App.3d 633, 643-644.
Defendants also established that the damages they
suffered as result of the 9,240 tenant turnovers which
occurred during the damage period were proximately
caused by the tenant-class members, and so their repair
was necessary. Plaintiffs offered no evidence to the con-
trary.
Paragraph 1 of Islay’s rental contract (Exhibits 279c,
292 and 306) provided:
“It is agreed that the tenant is taking possession of a
clean unit in good repair (i.e. tenantable per CC 1941.1)
and agrees to maintain it in good and clean condition (i.e.
tenantable per CC 1941.2). Notify the manager in writing,
within 48 hours of occupancy, if the unit is not clean, not
in good repair, or untenantable. Your written notice
assures corrective action by the owner and precludes
additional charges for damages. CC 1941.1 & CC 1941.2
are printed on the back of this page.”
Additionally, through the lengthy and detailed testi-
mony of Donna Ogilvie, Director of Islay’s Apartment
House Operations, defendants established that Islay had
a long-established practice of returning its apartment
unites to as like-new condition as possible after each
move-out, and that Islay made records contemporane-
ously with each tenancy turnover, which it kept and
maintains to this day, reflecting, among other things, the
amount of any unpaid rent owed, and the amount of any
cleaning, painting, carpet replacement, drape replace-
ment, or other costs, expenses or damage Islay incurred
as a result of each tenancy turnover.
SS a
App. 65
Under Evidence Code section 1105, that evidence of
Islay’s long-estabi'she2d custom and practice is admissible
to prove its coduct with respect to each tenancy turn-
over, and made out at least a prima facie case that the
tenant moving out was responsible for the unpaid rent,
cleaning and damages sought to be charged against him.
Romeo v. Jumbo Market (1967) 247 Cal.App.2d 817, 823-824.
Donna Ogilvie testified at length, on both direct and
cross examination, that all of Islay’s business records
supporting Islay’s offset claims were made contempora-
neously with each tenant move-out. For example, she
testified that the tenant move-out forms were filled out
on move-out date and reviewed by management within
days of the move-out; any unpaid rent was calculated at
the time of the move-out, or within days thereafter; that
whatever cleaning was done or damage repairs made
were ordered by the Islay apartment managers at the time
of the move-out; and that the work was done by Islay
employees or independent contractors, and was paid for,
within a matter of only a few weeks thereafter. Plaintiffs
offered no contrary evidence.
No Equitable Defenses
Plaintiffs’ Proof
The named plaintiffs failed to appear or testify at the
hearing. Moreover, the named plaintiffs failed to file
claims in the Administrative Claims Procedure. The evi-
dence establishes that the claims of the named plaintiffs
are exceeded by defendants’ damages and offset claims
against them.
App. 66
More particularly, there is a stipulated judgment filed
November 17, 1982, in defendants’ favor against plaintiff
Granberry for $136.00, which is an amount in excess of
her security claims of $100.00. As shown in Exhibit 278
(1980 move-outs, last two pages of Joyce, thirteenth ten-
ancy on sheet), defendants suffered damages in the
amount of $249.99 as a result of plaintiff Jordan’s tenancy,
which is an amount in excess of her security claims of
$100.00. As shown in Exhibit 279 (1982 move-outs, third
and fourth pages of Michelle, second tenancy on sheet),
defendants suffered damages in the amount of $243.00 as
a result of plaintiffs Glasspool’s tenancy, an amount
which exceeds their security claims of $100.00.
Accordingly, the named plaintiffs shall recover noth-
ing from defendants.
However, at the trial of this action in May and June
of 1990, the named plaintiffs testified, among other
things, that they were not even claiming that the rent
differential was a security (Request for Judicial Notice
(RJN) pp. 14-15); when they rented from Islay, they con-
sidered the rent differential to be rent, not security (RJN
pp. 17-18); consequently, they did not have any expecta-
tion of getting any money back from Islay when they
vacated their apartment units, so did not ask for any
money back when they did (RJN p. 18); and, the Islay
rental contract (Exhibit 279c) was not misleading, and
Islay did not mislead them (RJN pp. 19-21).
The class is bound by that testimony of the named
plaintiffs as their class representatives.
Since the named plaintiffs failed to appear or testify
at the hearing, they failed to establish any equitable
App. 67
defenses for the class as a whole. Nevertheless the attor-
ney for the class argued that defendants’ offset claims
were barred by various equitable defenses, and offered
the testimony of five former Islay tenant-claimants in
support of his claims.
Plaintiffs’ Claims
Waiver:
Waiver is the intentional relinquishment of a known
right after full knowledge of the facts. DRG/Beverly Hills,
Ltd. v. Chopstix Dim Sum Cafe & Takeout III, Ltd. (1994) 30
Cal.App.4th 54, 60.
The burden is on the party claiming a waiver to
prove it by clear and convincing evidence that does not
leave the matter to speculation. Doubtful cases will be
decided against a waiver. City of Ukiah v. Fones (1966) 64
Cal.2d 104, 107-108.
Plaintiffs failed to offer any convincing evidence that
defendants intended to waive their offset rights. When
these tenants vacated their apartments, defendants did
not believe they held any security for which they were
required to account, and the jury tound that defendants’
belief was in good faith. Therefore, defendants cannot be
held to have waived any right to offset. In fact, during the
course of closing argument, plaintiffs’ counsel conceded
that at the time defendants made the business decisions
which plaintiffs now claim constitute a waiver of their
offset rights, defendants did not intend by those business
decisions to waive such rights.
App. 68
Laches:
Laches is the unexcused failure to timely assert a
claim or defense in a lawsuit where the untimeliness of
the assertion of the claim or defense materially prejudices
the opponent. Miller v. Eisenhower Medical Center (1980) 27
Cal.3d 614, 624.
Plaintiffs’ laches claims are without merit. There is no
laches here as a matter of law because defendants
asserted their offset claims when it first appeared neces-
sary for them to do so. For the first six years of this
lawsuit (from 1981 to 1987), plaintiffs conceded defen-
dants right to assert offsets to their security claims in
each of their first three complaints (RJN pp. 7-11). In
1987, when plaintiffs sought to be relieved of that admis-
sion, defendants promptly asserted their offset rights by a
motion to amend their answer and to file a cross-com-
plaint. Additionally, the class as a whole was given
mailed and published notice of defendants’ offset claims
in 1987, as soon as plaintiffs asked the Court to give
notice to the class.
The argument of plaintiffs’ counsel that the class
members are prejudiced by the delay involved in the
prosecution of this litigation because the class members
allegedly would not be able to defend themselves against
Islay’s offset claims because they would have no docu-
ments or memories of their Islay tenancies was refuted by
the testimony of the named plaintiffs in 1990, and by the
testimony of the tenant-claimant witnesses called by
plaintiffs’ attorney to testify at this hearing. Each of the
named plaintiffs, and each of the tenant-claimant wit-
nesses, testified in some detail as to the condition of their
4
3
5
¥
a
{
£
4
3
%
:
t
2
App. 69
Islay apartment units when they left them, the terms of
their Islay tenancies, and what happened on both move-
in and move-out. Indeed, the tenant-claimant witnesses
who testified at the hearing produced original documents
relating to their tenancies such as rental contracts and
rent receipts. See Exhibits 292 and 306.
The fact that defendants failed to pursue their indi-
vidual cross-complaints is immaterial. Such failure does
not prevent defendants from pursuing their equitable
offset claims, as the California Supreme Court has
expressly held in rejecting that very argument which
plaintiffs made in that court. Granberry at page 749.
Estoppel:
For an estoppel to be established, it must be shown
that there was a representation or concealment of mate-
rial facts made with knowledge, actual or virtual, of the
facts, to a party ignorant, actually and permissibly, of the
truth, with the intention, actual or virtual, that the latter
act upon it; and the party must have been induced to act
upon it. There can be no estoppel where any one of these
elements is missing. Moreover the doctrine acts defen-
sively only. It operates to prevent one from taking unfair
advantage of another, but not to give an unfair advantage
to one seeking to invoke the doctrine., 11 Witkin, Sum-
mary of California Law, 9th edition, Equity, sec. 177, pages
858-860.
The jury has found that defendants, in good faith,
did not believe they held any security for which they
were required to account. Thus, there was no knowing
representation or concealment upon which a finding of
estoppel could be based. |
App. 70
In its discussion in this case, the California Supreme
Court dealt with plaintiffs’ equitable estoppel claims as
follows:
“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 sec. 3512.) They note defendants originally
claimed (1) the excess payments were rent, (2)
they had never demanded or received security
deposits from plaintiffs, and (3) they, not plain-
tiffs, were to bear the costs of unpaid rent,
repairs, and cleaning. Only after the excess pay-
ments were found to be security deposits did
defendants 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 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 necessary to ciean and repair dam-
age 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.” Granberry at 748-749.
Plaintiffs have offered no evidence of any equitable
estoppel other than that already decided against them by
the Supreme Court.
Plaintiffs’ repeated arguments that the class members
were never given notice of defendants’ offset claims
Sead
AAAS LCS AIO OR IR BI LN RIS IANS he catchy Mig Lon
PSS nee ath Sew
App. 71
simply refuse to acknowledge either the mailed and pub-
lished notice given in 1987 referred to by the Supreme
Court, or the duty of plaintiffs’ counsel, as class counsel,
to notify his class-member clients of all matters substan-
tially affecting their rights. Indeed, on this latter point,
the tenant-claimant witnesses who testified at the hearing
stated that when plaintiffs’ attorney contacted them, he
did not advise them of either their right to request docu-
ments supporting defendants’ offset claims or of their
right to have their claims heard by Judge Gowans on
appeal.
Plaintiffs’ counsel has consistently refused to repre-
sent the unnamed class members on their individual
claims and with reference to defendants’ offset claims.
Finally, plaintiffs’ arguments that defendants should
have somehow contacted their tenants during or after
their tenancies to advise them of defendants’ offset claims
runs afoul of the two prior Orders of this Court, the first
filed April 27, 1981 (the very date of the filing of plain-
tiffs’ original complaint), which prevented defendants or
their agents or employees from engaging in the very
communications which plaintiffs now claim they should
have engaged in.
Unjust Enrichment:
Unjust Enrichment is a variant of the equitable
maxim that “No one can take advantage of his own
wrong.” C.C. sec. 3517. It is also a variant of the “Clean
Hands” doctrine which will be discussed below.
Plaintiffs offered no evidence that defendants were
unjustly enriched. Indeed, the evidence is to the contrary.
App. 72
Defendants were not enriched at all as a result of their
rent differential program. They suffered a net loss of
approximately $1.4 million in excess of all security taken.
There is no evidence to the contrary.
Plaintiffs have argued that defendants retained the
class members’ security for 15 or more years without
paying them any interest on it, and so are thereby
unjustly enriched. However, until the verdict in June of
1990, defendants treated the entire amount of the r
This text is long and has been trimmed here. Open the source document for the complete record.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.