WASHINGTON MUTUAL BANK etc., Petitioner, v. The SUPERIOR COURT of Orange County, Respondent; Jayne A. Briseno, Real Party In Interest.
Jayne A. Briseno has obtained certification of a nationwide class in her action against American Savings Bank, now known as Washington Mutual Bank (ASB). She alleges ASB grossly overcharges home loan borrowers whose hazard insurance has lapsed for collateral protection insurance. ASB petitions for a writ of mandate directing the trial court to reverse its order certifying the nationwide class. It contends the trial court failed to engage in a conflict of law analysis which took into consideration and enforced the standard choice of law provisions contained in the underlying loan documents.
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Briseno's complaint challenges ASB's practice of “forced ordering” (or “forced placing”) collateral protection insurance. She alleges that a standard requirement of residential loan contracts is that the borrower must maintain hazard insurance in a form and from an insurer acceptable to ASB. If the borrower fails to maintain his or her insurance, ASB may pay the premium and continue the insurance policy in effect, charging the premium to the loan amount. Instead, ASB allows the original policy to lapse, places the property on a blanket policy, and charges the borrower for the coverage. The premium ASB charges the borrower is typically two to five times more than the premium on the lapsed policy would have been. In Briseno's case, when her homeowners' insurance was canceled, ASB charged her $1,980 annually for collateral protection insurance. The premium on her original policy was only $516.
Briseno alleges the vendors of the collateral protection insurance give “kickbacks” to ASB either in the form of cash commissions to it, or its subsidiary, or “in kind” services such as providing free tracking of insurance coverage for all borrowers, providing free gap coverage for 60 days for all borrowers, and providing free customer servicing with regards to the lender imposed insurance.
The 25,000-plus member class consists of all ASB mortgagors who have been required to pay for collateral protection insurance in the past four years. The complaint contains a breach of contract claim. It also contains several tort causes of action including breach of the implied covenant of good faith and fair dealing, unfair business practices under Business and Professions Code section 17200 et seq., unjust enrichment and imposition of a constructive trust, and conversion.
In opposing certification of the class, ASB explained that it originates home mortgage loans in California, Arizona, Colorado and Texas. It is also active in the “secondary market” for home loans, meaning that it purchases and services loans originating with other lenders throughout the entire United States. ASB's standard loan documents include a deed of trust which requires the borrower to maintain hazard insurance on the secured property. If the borrower fails to do so, “then Lender may do and pay for whatever is necessary to protect the value of the Property and Lender's rights in the property․” The deed of trust also contains a choice of law provision stating the deed of trust “shall be governed by federal law and the law of the jurisdiction in which the [secured property] is located.” The standard homeowner's insurance policy always contains a “lender's loss payable endorsement” which provides that in the event of the insured's (borrower's) failure to pay a premium, the insurer must give written notice to the lender and the lender may pay the premium in order to keep the policy in effect. As to the loans which do not originate with ASB, but are purchased by it on the secondary market, most contain similar provisions, although the precise language might vary.
ASB argued the choice of law clause contained in each class member's security instrument mandates the application of federal law or the law of the jurisdiction where the property is located. Therefore, the class should be limited to borrowers whose property is in California.
The trial court granted the motion for nationwide class certification stating, “Listening to the arguments and reading the papers I don't think that [ASB] has demonstrated that there are any conflicts. I don't think they specified a single unfair business practice statute involved in any transaction that is not wholly similar to a California statute or would legalize the kickback involved here.”
ASB petitioned this court for extraordinary relief. We summarily denied its petition. The Supreme Court granted review and transferred the matter to us.
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Code of Civil Procedure section 382 provides: “[W]hen the question is one of a common or general interest, of many persons, or when the parties are numerous, and it is impracticable to bring them all before the court, one or more may sue or defend for the benefit of all.” Two requirements must be met for class certification: there must be an ascertainable class and there must be “ ‘a well defined community of interest in the questions of law and fact involved affecting the parties to be represented [citations].’ ” (Dunk v. Ford Motor Co. (1996) 48 Cal.App.4th 1794, 1806, 56 Cal.Rptr.2d 483.)
“ ‘The community of interest requirement embodies three factors: (1) predominant common questions of law or fact; (2) class representatives with claims or defenses typical of the class; and (3) class representatives who can adequately represent the class. [Citation.]’ ” (Clothesrigger, Inc. v. GTE Corp. (1987) 191 Cal.App.3d 605, 612, 236 Cal.Rptr. 605; see also Dunk v. Ford Motor Co., supra, 48 Cal.App.4th at p. 1806, 56 Cal.Rptr.2d 483; Richmond v. Dart Industries, Inc. (1981) 29 Cal.3d 462, 470, 174 Cal.Rptr. 515, 629 P.2d 23.) It is the first of these factors which is implicated in this case: whether there were predominant common questions of law. At the heart of ASB's complaint is its contention that the trial court failed to undertake the legally required analysis for determining if there was a conflict of the laws of the states implicated in the nationwide class, which, in turn, prevented the court from adequately determining whether there were predominant common questions of law.
Class certification is generally within the discretion of the trial court. We will not disturb its decision absent an abuse of discretion, provided it applied the correct criteria in making its decision. (Osborne v. Subaru of America, Inc. (1988) 198 Cal.App.3d 646, 654, 243 Cal.Rptr. 815; Petherbridge v. Altadena Fed. Sav. & Loan Assn. (1974) 37 Cal.App.3d 193, 199-200, 112 Cal.Rptr. 144.) If the trial court's decision is based on erroneous legal assumptions or it applied improper criteria we reverse “even though there may be substantial evidence to support the court's order.” (Clothesrigger, Inc. v. GTE Corp. (1987) 191 Cal.App.3d 605, 612, 236 Cal.Rptr. 605; see also Caro v. Procter & Gamble Co. (1993) 18 Cal.App.4th 644, 655-656, 22 Cal.Rptr.2d 419; Osborne v. Subaru of America, Inc., supra, 198 Cal.App.3d at p. 654, 243 Cal.Rptr. 815; Richmond v. Dart Industries, Inc., supra, 29 Cal.3d at p. 470, 174 Cal.Rptr. 515, 629 P.2d 23.)
ASB's argument is premised on two cases. The first is Clothesrigger, Inc. v. GTE Corp., supra, 191 Cal.App.3d 605, 236 Cal.Rptr. 605. Clothesrigger reversed an order denying certification of a nationwide class because the trial court failed to undertake the analysis required under California choice of law rules. (Id. at p. 614, 236 Cal.Rptr. 605.) The trial court's only stated reason for denying nationwide class certification was that the class involved 49 other states, which might require application of those other states' laws, and would result in a totally unmanageable lawsuit. (Id. at pp. 613-614, 236 Cal.Rptr. 605.) But, the appellate court concluded that in deciding a choice of law question the trial court must proceed in three steps. First, it must determine whether the concerned states have different laws; second, it must consider whether each of the states has an interest in having its law applied to the case; and third, if there is a true conflict because laws are different and each has an interest in having its law applied, the trial court selects which law to apply by determining which state's interests would be more impaired if its policy were subordinated to the policy of the other state. (Id. at p. 614, 236 Cal.Rptr. 605.) Because the trial court failed to decide whether a “true conflict” existed, the order had to be reversed.
The second case is Nedlloyd Lines, B.V. v. Superior Court (1992) 3 Cal.4th 459, 11 Cal.Rptr.2d 330, 834 P.2d 1148. In Nedlloyd the Supreme Court held that if a contract, which has been negotiated at arm's length between two sophisticated commercial entities (id. at p. 468, 11 Cal.Rptr.2d 330, 834 P.2d 1148), contains a choice of law provision, that provision generally controls, even as to tort law claims related to the contract. (Id. at pp. 470-471, 11 Cal.Rptr.2d 330, 834 P.2d 1148.) 1
ASB's complaint is that the trial court failed to articulate the three part conflict of law test set forth in Clothesrigger, in such a way as to take into account in the holding of Nedlloyd, that choice of law clauses are generally enforceable. Furthermore, ASB appears to argue that because each potential class member's deed of trust contains an enforceable choice of law clause designating the law of the jurisdiction where the property is located, a nationwide class is inappropriate as a trial could potentially involve application of the law of other states.
We conclude there was no error. First, the deeds of trust contain choice of law clauses, not choice of forum clauses. The two are not synonymous. Nedlloyd specifically acknowledges the difference between the two. (Id. at p. 464, 11 Cal.Rptr.2d 330, 834 P.2d 1148.) Assuming the choice of law clause in a consumer adhesion contract is enforceable,2 that alone does not prohibit a California court from assuming jurisdiction. To so hold would create far too easy a device for lenders, insurers, and other businesses dealing with mass groups of consumers to avoid involvement in a nationwide class action. At most the choice of law clause raises the potential that another state's law might apply.
Second, and more importantly, there is no reason that the choice of law clauses would have any impact on the trial court's analysis if there is no conflict between California law and the law of other jurisdictions. The mere fact that two states are involved does not automatically raise a conflict of law or choice of law problem. As the Supreme Court stated in Hurtado v. Superior Court (1974) 11 Cal.3d 574, 114 Cal.Rptr. 106, 522 P.2d 666, “[t]here is obviously no problem where the laws of the two states are identical.” (Id. at p. 580, 114 Cal.Rptr. 106, 522 P.2d 666.)
ASB complains that the trial court failed to undertake the Clothesrigger analysis. But it obviously did. The first step in that analysis is to determine whether the concerned states have different laws. (Clothesrigger, Inc. v. GTE Corp., supra, 191 Cal.App.3d at p. 614, 236 Cal.Rptr. 605.) The trial court specifically found ASB had not “demonstrated that there are any conflicts. I don't think they specified a single unfair business practice statute involved in any transaction that is not wholly similar to a California statute or would legalize the kickback involved here.”
The party asserting a conflict of law must demonstrate the conflict.3 (Hurtado v. Superior Court, supra, 11 Cal.3d at p. 581, 114 Cal.Rptr. 106, 522 P.2d 666.) It must show the law of the foreign jurisdiction is different than California law and when applied would lead to a different result. (Stonewall Surplus Lines Ins. Co. v. Johnson Controls, Inc. (1993) 14 Cal.App.4th 637, 645, 17 Cal.Rptr.2d 713.) ASB did not show that any other jurisdiction's law would lead to different results.
ASB contends it did make the requisite showing. First, it argues many other states have statutes which expressly permit a lender to obtain collateral protection insurance. Therefore, this action could not proceed at all in those states.
The statutes it cites do allow lenders to obtain collateral protection insurance, but that is beside the point. The gravamen of the complaint is not the legality of obtaining the insurance; it is the legality of charging the borrower far in excess of what that insurance costs the lender. None of the statutes cited by ASB expressly allow a lender to charge whatever amount it wants for collateral protection insurance, to turn the practice of obtaining the insurance into a profit center for the lender, or to accept payments from the insurer for having placed the insurance with it. Indeed the statutes cited by ASB are all either silent on what the charges may be, or expressly state the lender may charge the borrower what the insurance costs the lender plus a reasonable service charge.4 There simply has been no showing by ASB that other state's statutes regarding collateral insurance would substantively affect this action.
ASB also argues that a multistate class action involving claims for violation of Business and Professions Code section 17200 et seq. is inappropriate. It argues that every state has some statutory scheme prohibiting unfair or deceptive acts or practices (UDAP), but each state's UDAP statute differs. Some exempt financial institutions from coverage and each has different substantive requirements for proving a violation of the act. They contain differing statutes of limitations and different procedural protocols. They differ as to whether a jury trial is required, and they provide different remedies. (See generally Sheldon & Carter, Unfair and Deceptive Acts and Practices (3d ed., 1996 supp.)) ASB claims these multitudinous differences in the statutes would require complex minitrials for class members from each state.
But absent from ASB's discussion, as the trial court noted, is any demonstration of how these alleged differences impact this action. ASB asserts each state has a different law and cites one federal district court opinion from Illinois denying certification of a multistate class because of significant differences in each state's UDAP act. (See Tylka v. Gerber Prods. Co., (N.D.Ill.1998) 178 F.R.D. 493.) But ASB does not cite any particular state's law, or explain how that particular law would substantively conflict with California law. ASB has not shown there is a conflict; we will not presume that to be the case.5
The writ petition is denied. The alternative writ is discharged.
1. Nedlloyd affirmed the approach under section 187 of the Restatement Second of Conflicts of Law for assessing whether to apply the law selected by the parties to the contract. “[T]he court [must first] determine either: (1) whether the chosen state has a substantial relationship to the parties or their transaction, or (2) whether there is any other reasonable basis for the parties' choice of law. If neither of these tests is met, that is the end of the inquiry, and the court need not enforce the parties' choice of law. If, however, either test is met, the court must next determine whether the chosen state's law is contrary to a fundamental policy of California. If there is no such conflict, the court shall enforce the parties' choice of law. If, however, there is a fundamental conflict with California law, the court must then determine whether California has a ‘materially greater interest than the chosen state in the determination of the particular issue․’ [Citation.] If California has a materially greater interest than the chosen state, the choice of law shall not be enforced, for the obvious reason that in such circumstance we will decline to enforce a law contrary to this state's fundamental policy.” (Nedlloyd Lines, B.V. v. Superior Court, supra, 3 Cal.4th at p. 466, 11 Cal.Rptr.2d 330, 834 P.2d 1148, fns. omitted.)
2. Nedlloyd considered only the enforceability of a choice of law clause negotiated at arm's length in a contract between sophisticated business entities. In Cal-State Business Products & Services, Inc. v. Ricoh (1993) 12 Cal.App.4th 1666, 16 Cal.Rptr.2d 417, the court concluded Nedlloyd compelled enforcement of a choice of forum clause in a contract of adhesion: “The fact the forum-selection clause is contained in a contract of adhesion and was not the subject of bargaining does not defeat enforcement as a matter of law, where there is no evidence of unfair use of superior power to impose the contract upon the other party and where the covenant is within the reasonable expectations of the party against whom it is being enforced.” (Id. at p. 1679, 16 Cal.Rptr.2d 417.)
3. ASB confuses its burden to establish a conflict of law with Briseno's burden, as the party seeking class certification to establish the “predominant common question of law” prong of the “community of interest” requirement for class certification. (Clothesrigger, Inc. v. GTE Corp., supra, 191 Cal.App.3d at p. 612, 236 Cal.Rptr. 605.) In short, ASB argues that whenever nationwide class certification is sought, in order to establish there are common questions of law, the party seeking class certification must demonstrate California law does not conflict with other states laws. But the common question of law prong simply means the plaintiff must show individual suits brought by each class member would involve the same basic legal issues (Vasquez v. Superior Court (Karp) (1971) 4 Cal.3d 800, 810, 94 Cal.Rptr. 796, 484 P.2d 964), not that all legal issues are identical or that the issues would be resolved in an identical manner.
4. Arizona Revised Statutes, section 20-452.02 allows a lender to furnish or renew insurance required by a trust deed or other loan agreement if the borrower has failed to furnish that insurance. It says nothing about what the lender may charge for that insurance.Idaho Statutes, section 41-1312 allows a lender to furnish or renew insurance required by a trust deed or other loan agreement if the borrower has failed to furnish that insurance. The lender may charge the borrower's account for the costs of the insurance, plus a “reasonable” service charge.Illinois' Collateral Protection Act allows the lender to obtain collateral protection insurance and impose on the borrower “the costs of the collateral protection insurance, including interest and any other charges imposed by the creditor in connection with the placement of the collateral protection insurance․” (Ill. Pub. Act. 90-581, § 180/51805.)Minnesota Statutes, section 65A.061 allows a mortgage lender or service to secure or renew an insurance policy if the borrower fails to furnish one. It is silent as to what the lender may charge the borrower for the policy.Nevada Revised Statutes, section 686A.200 allows a lender to obtain insurance if the borrower fails to provide it, and charge the borrower's account “with the costs thereof.”Oregon Revised Statutes, section 746.201 allows a lender to obtain collateral protection insurance and charge the borrower for “the cost of any insurance purchased by [the lender].” The lender may add the cost of the insurance onto the loan balance and it will be subject to the same interest rate as the underlying loan.Texas Insurance Code, article 21.48A allows a lender to secure or renew an insurance policy if the borrower fails to furnish one. It is silent as to what the lender may charge the borrower for the policy.Washington Statutes, section 48.30.260 allows a lender to secure or renew an insurance policy if the borrower fails to furnish one. It is silent as to what the lender may charge the borrower for the policy.
5. If the trial court later discovers the presence of insurmountable conflicts, it may decertify the nationwide class. But the mere presence of conflicts among states' laws does not automatically preclude the trial court from proceeding with a nationwide class. As one commentator relied upon by ASB in its petition notes, “[S]ubclasses may be used to manage differences in state law, particularly when the differences ․ are not great. The differences between the Uniform Commercial Code and the UDAP statutes of the various states may not be so great as to pose insuperable difficulties. Differences can be briefed, and class members grouped into subclasses according to the elements of their state law,․ Some courts have been hospitable to multistate class actions managed on this basis.” (Rosmarin & Edelman, Consumer Class Actions: A Practical Litigation Guide (2d ed.1990), § 3.4, p. 31.)
WALLIN, J.* FN* Retired Associate Justice of the Court of Appeal, assigned by the Chief Justice pursuant to California Constitution, article VI, section 6.
RYLAARSDAM, Acting P.J., and BEDSWORTH, J., concur.