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holding that statute of limitations defense did not result in individual inquiries about when class members had actual or inquiry notice of their claims and noting that defendant's "speculation that some class members' claims may be barred on the basis of actual knowledge is not sufficient to defeat certification"
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CIVIL MINUTES — GENERAL Case No. LA CV09-09442 JAK (FFMx).
October 19, 2011
Proceedings: (IN CHAMBERS) ORDER RE: PLAINTIFFS' MOTION FOR CLASS CERTIFICATION (Dkt. 83)
I. INTRODUCTION
In their First Amended Complaint ("FAC") in this putative class action, Barbara Schramm ("Schramm") and Steven Weinstein ("Weinstein") (collectively, "Plaintiffs") advance seven causes of action against defendants JPMorgan Chase Bank, N.A. and Chase Home Finance, LLC ("Defendants"). Plaintiffs' claims arise from certain disclosure forms and mortgage notes provided to them by Defendants in connection with two home loans made to them. Plaintiffs contend that these documents misrepresented the rates of interest that they would be charged during the respective terms of these variable rate loans. Thus, Plaintiffs assert that Defendants charged a higher interest rate than they had promised with respect to each loan.Plaintiffs now seek class certification for their fourth and sixth causes of action: (i) rescission based on fraud or mistake; and (ii) restitution and injunctive relief for alleged violations of Cal. Bus. Prof. Code § 17200. For the reasons set forth in this Order, the Court grants the motion and certifies the class, but only as to the sixth cause of action , i.e., the § 17200 claim.
The Court granted summary judgment for Defendants as to Plaintiffs' five other causes of action, each of which is a fraud-based claim subject to California's three-year statute of limitations. Accordingly, none of those claims is the subject of the present motion. Minutes (In Chambers) Order, Docket No. 93 (Aug. 9, 2011).
II. BACKGROUND
This action arises out of two adjustable rate mortgage ("ARM") agreements that Defendants entered with Plaintiffs in connection with the financing, and subsequent re-financing, of Plaintiffs' residence. The first ARM agreement was entered by the parties on October 12, 2001. The parties entered the second ARM agreement on May 13, 2003.
Plaintiffs contend that the Disclosure forms and Mortgage notes that Defendants provided to them in connection with each of the ARM agreements were deceptive. Thus, they contend that these documents informed them that the "Initial Interest Rate" — that to be charged before any adjustments were made in subsequent time periods — would be the sum of a specified "Index" plus a set "Margin," or possibly some rate less than this sum. In support of this claim, Plaintiffs rely on language in the disclosure forms and notes discussing how the interest rate is determined. Certain of the loan disclosures stated: "Your interest rate will be based on the weekly average yield on United States Treasury securities adjusted to a constant maturity of 1 year (the `Index') plus an amount called a `Margin.'" In a later section entitled "How Your Interest Rate Can Change," the disclosures stated that: "Your Initial Interest Rate may be discounted and will not be tied to the Index." Additional relevant language included a sentence in the Mortgage notes themselves, which stated that, "[b]eginning with the first Change Date, my adjustable interest rate will be based on an Index."
See Garbers Decl., Ex. C (2001 Disclosures); Ex. D (2003 Disclosures); Ex. K (2001 Note); Ex. N (2003 Note), Docket No. 55 (April 6, 2011).
Plaintiffs allege that, notwithstanding these statements, Defendants charged them an Initial Interest Rate that was higher than the sum of the governing index and margin. Plaintiffs also allege that, because any increase in interest during any later time period when either loan was in place was capped by, i.e., was not to exceed, a maximum percentage increase of the rate charged during the previous period, the higher initial rate also resulted in overcharges during subsequent loan periods.
Plaintiffs originally sought to certify a class of approximately 28,000 borrowers each of whom obtained an ARM loan from Defendants in California, was charged an interest rate in excess of the Index plus Margin, and was provided with disclosure forms that contained the same language described above. Plaintiffs filed their class certification motion before the Court issued its ruling on Defendants' Motion for Summary Judgment, in which the Court held that a Rate Change Notice Plaintiffs received in April 2006 constituted inquiry notice under the discovery rule for statute of limitations purposes. Thus, the claims of any potential class members who received a Rate Change Notice outside the statutory period are likewise barred. Accordingly, as Plaintiffs recognized in their Reply memorandum, the initial, proposed class of 28,000 must be redefined (and reduced in size) to exclude those who received Rate Change Notices prior to October 30, 2005.
A. Overview of Plaintiffs' Restitution Cause of Action Under § 17200 — California's Unfair Competition Law
California Business and Professions Code § 17200 prohibits any business practice that qualifies as "unfair competition," which it defines to include "any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising. . . ." Here, Plaintiffs contend that Defendants engaged in unfair and fraudulent business practices and deceptive advertising by distributing loan disclosures containing the allegedly misleading statements discussed above. Thus, Plaintiffs allege that Defendants told consumers that their initial interest rate would be the sum of the governing index and margin, but proceeded to charge borrowers more than that sum. Plaintiffs assert that, because this conduct violates § 17200, all putative class members are entitled to restitution of Defendants' alleged, ill-gotten gains, i.e., the difference between the interest each putative member actually paid and the amount he or she would have paid if the Initial interest rate had been the sum of the index and margin.
B. Overview of Plaintiffs' Rescission Cause of Action Based on Fraud or Mistake
California Civil Code § 1689(b)(1) states that a "party to a contract may rescind the contract . . . [i]f the consent of the party rescinding, or of any party jointly contracting with him, was given by mistake, or obtained through duress, menace, fraud, or undue influence, exercised by or with the connivance of the party as to whom he rescinds, or of any other party to the contract jointly interested with such party."
Plaintiffs contend that all putative class members are entitled to rescission of their respective loans on the basis of mistake or fraud. As to the claim of a mistake of fact, it may be premised on a "[b]elief in the present existence of a thing material to the contract, which does not exist. . . ." Cal. Civ. Code § 1577. Here, Plaintiffs allege that their "mistake" was as to how the initial interest rate would be calculated. Alternatively, Plaintiffs argue that each class member's loan should be rescinded because of Defendants' fraud. Under California law, the elements of a common law fraud claim are: (i) a false representation; (ii) knowledge of the falsity; (iii) intent to defraud; (iv) justifiable reliance; and (v) damages. Stansfield v. Starkey, 220 Cal. App. 3d 59, 72-73 (1990). Plaintiffs assert that the allegedly false representations contained in Defendants' loan disclosures resulted in a fraud on all class members.
III. ANALYSIS
A. Overview of Class Action Standards
"The class action is `an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only.'" Wal-Mart Stores, Inc. v. Dukes et al., ___ U.S. ___, 131 S. Ct. 2541, 2550 (2011) (quoting Califano v. Yamasaki, 442 U.S. 682, 700-01 (1979)). Under Federal Rule of Civil Procedure 23, a class "may only be certified if the trial court is satisfied, after a rigorous analysis, that the prerequisites of Rule 23(a) have been satisfied." Gen. Tel. Co. of Southwest v. Falcon, 457 U.S. 147, 161 (1982). That rigorous analysis will "frequently" include "some overlap with the merits of the plaintiff's underlying claim." Wal-Mart, 131 S. Ct. at 2551.
In seeking class certification, the plaintiff must make a prima facie showing that the proposed class meets each of the prerequisites of Rule 23(a). Hanon v. Dataproducts Corp., 976 F.2d 497, 508 (9th Cir. 1992). They are: (i) numerosity, (ii) commonality, (iii) typicality, and (iv) adequacy. Further, the plaintiff "must affirmatively demonstrate his compliance with the Rule — that is, he must be prepared to prove that there are in fact sufficiently numerous parties, common questions of law or fact, etc." Wal-Mart, 131 S. Ct. at 2551. Once these four prerequisites are satisfied, a court must consider whether the proposed class can be maintained under the standards of Rule 23(b). See, e.g., Valentino v. Carter-Wallace, Inc., 97 F.3d 1227, 1234 (9th Cir. 1996).
B. Application to Plaintiffs' Causes of Action
a) Numerosity
1. Rule 23(a) Prerequisites
Rule 23(a)(1) requires that, in order to be certified, a class must be "so numerous that joinder of all members is impracticable." Fed.R.Civ.P. 23(a)(1). "[I]mpracticability does not mean impossibility, but only the difficulty or inconvenience of joining all members of the class." Harris v. Palm Springs Alpine Estates, Inc., 329 F.2d 909, 913-914 (9th Cir. 1964) (internal quotations omitted). No specific number of members is needed to maintain a class action. Cypress v. Newport News Gen. Nonsectarian Hospital Ass'n, 375 F.2d 648, 653 (4th Cir. 1967).
Here, Plaintiffs' proposed class is sufficiently numerous. Defendants initially estimated that there would be approximately 28,000 potential class members; however, they made this calculation before the Court ruled on their motion for summary judgment. As a result of that ruling, the class size will be smaller. Although the parties have not submitted a revised estimate of the class size, Defendants do not dispute that the numerosity requirement is met. Accordingly, the Court is satisfied that, even in light of the class redefinition, the remaining members are sufficiently numerous that joinder would be impracticable. And, because Plaintiffs propose certifying the same class for each of their causes of action, the numerosity requirement is satisfied as to each.
b) Commonality
Rule 23(a)(2) requires that the case involve "questions of law or fact common to the class." Fed.R.Civ.P. 23(a)(2). "All questions of fact and law need not be common to satisfy the rule. The existence of shared legal issues with divergent factual predicates is sufficient, as is a common core of salient facts coupled with disparate legal remedies within the class." Hanlon v. Chrysler Corp., 150 F.3d 1011, 1019 (9th Cir. 1998). Recently, the Supreme Court explained that the commonality requirement is only satisfied by a common question "of such a nature that it is capable of classwide resolution — which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke." Wal-Mart, 131 S. Ct. at 2551.
The Ninth Circuit has found commonality when similar misrepresentations were allegedly made to all class members:
Confronted with a class of purchasers allegedly defrauded over a period of time by similar misrepresentations, courts have taken the common sense approach that the class is united by a common interest in determining whether a defendant's course of conduct is in its broad outlines actionable, which is not defeated by slight differences in class members' positions, and that the issue may profitably be tried in one suit.Blackie v. Barrack, 524 F.2d 891, 902 (9th Cir. 1975).
Here, the commonality prerequisite is satisfied for both of Plaintiffs' causes of action. All of the putative class members received the same allegedly misleading disclosures. As such, the proposed class members are united by a "common interest" in determining whether Defendants' course of conduct is generally actionable. Nonetheless, because the particular questions common to each cause of action differ, the Court next considers the issue in greater detail.
(1) The Commonality Requirement Is Met for Plaintiffs' Cause of Action for Restitution under § 17200
Plaintiffs assert that the instant case satisfies the commonality requirement because it revolves around common questions with respect to Defendants' conduct. Thus, they argue that, because the case will focus on Defendants' misrepresentations and not on the states of mind and reliance of individual borrowers, the individual issues are secondary to the questions relating to Defendants' conduct. In addition, Plaintiffs contend that, because the class is limited to borrowers who received loan disclosures with the same allegedly misleading language as those received by Plaintiffs, there are common questions of fact regarding whether those disclosures were "likely to deceive," making them actionable under § 17200. Defendants contend that the key questions instead turn on how each borrower interpreted the disclosures that he or she received, and whether each putative class member cared about the disputed language, i.e., whether it was material to a decision whether to borrow from Defendants.
This issue is resolved by the Ninth Circuit's decision in Stearns, which concluded that the California Supreme Court's decision in the Tobacco II Cases, 46 Cal. 4th 298 (2009), applies to § 17200 claims brought in federal courts. Stearns v. Ticketmaster Corp., ___ F.3d ___, 2011 WL 3659354 (9th Cir. 2011). Stearns described the elements of such an unfair competition law ("UCL") claim as follows:
To state a claim under either the UCL or false advertising law, . . . it is necessary only to show that members of the public are likely to be deceived. To achieve its goal of deterring unfair business practices in an expeditious manner, the Legislature limited the scope of the remedies available under the UCL. A UCL action is equitable in nature; damages cannot be recovered. [P]revailing plaintiffs are generally limited to injunctive relief and restitution.
The fraudulent business practice prong of the UCL has been understood to be distinct from common law fraud. A common law fraudulent deception must be actually false, known to be false by the perpetrator and reasonably relied upon by a victim who incurs damages. None of these elements are required to state a claim for injunctive relief under the UCL. This distinction reflects the UCL's focus on the defendant's conduct, rather than the plaintiff's damages, in service of the statute's larger purpose of protecting the general public against unscrupulous business practices.Stearns, 2011 WL 3659354 at *4 (quoting In re Tobacco II Cases, 46 Cal. 4th at 312).
Accordingly, even in a federal court proceeding, a plaintiff need only demonstrate that the defendant's practices were likely to deceive members of the public. Individual inquiries into potential class members' knowledge of, or reliance on, the defendant's actions are not required. Accordingly , Defendants' contentions as to the need for individual analyses as to each class member are unpersuasive. Instead, the inquiry at trial will be whether or not the representations made by Defendants were likely to deceive a reasonable borrower. This is the type of question identified by Wal-Mart as suitable for class treatment; "its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke." Wal-Mart, 131 S. Ct. at 2551. Thus, the commonality requirement is satisfied as to Plaintiffs' § 17200 claim for restitution.
(2) The Commonality Requirement is Met for Plaintiffs' Cause of Action for Rescission Based on Fraud or Mistake
The commonality requirement is also satisfied with respect to Plaintiffs' cause of action for rescission. Although Defendants assert that this claim does not satisfy the commonality element of Rule 23(a), their arguments actually focus on whether common questions predominate. Thus, they are more appropriately directed at the issue of certification under Rule 23(b)(3), which is discussed below. Rule 23(a) requires only that there be some common questions of fact or law that are potentially dispositive of the case. Here, given the factual similarity among the representations made to all class members, sufficient common questions exist, including: (i) whether a reasonable person would interpret Defendants' disclosures to mean that the initial interest rate would be the sum of an index and a margin; and (ii) whether the alleged misrepresentations would be material to a reasonable borrower. Both of these questions affect the dispositive issue whether Plaintiffs will be entitled to a class-wide presumption of reliance to support their claim for rescission based on fraud. For these reasons, the Court finds the commonality prerequisite satisfied.
c) Typicality
Rule 23(a)(3) requires that "the claims or defenses of the representative parties [be] typical of the claims or defenses of the class." Fed.R.Civ.P. 23(a)(3). "Typicality refers to the nature of the claim or defense of the class representative, and not to the specific facts from which it arose or the relief sought." Hanon v. Dataproducts Corp., 976 F.2d 497, 508 (9th Cir. 1992). A proposed class representative fails the typicality prong if her claims are subject to time-consuming specific defenses that would not apply to absent class members. State of Alaska v. Suburban Propane Gas Corp., 123 F.3d 1317, 1321 (9th Cir. 1997) ("A named plaintiff's motion for certification should not be granted if there is a danger that absent class members will suffer if their representative is preoccupied with defenses unique to it." (quoting Hanon, 976 F.2d at 508)). "[T]he typicality requirement is permissive and requires only that the representative's claims are reasonably co-extensive with those of absent class members; they need not be substantially identical." Rodriguez v. Hayes, 591 F.3d 1105, 1124 (9th Cir. 2010) (internal quotations omitted).
The named Plaintiffs' claims are based on the allegedly misleading disclosures made in connection with the ARM loans. The claims of unnamed class members are based on identical language in disclosures they received when obtaining ARM loans from Defendants. Thus, because Plaintiffs' claims are "reasonably co-extensive with those of absent class members," they satisfy the typicality requirement. Rodriguez, 591 F.3d at 1124.
Defendants argue that, because Schramm did not read the disclosures and Weinstein has a complicated and highly individualized method of shopping for ARM loans, their claims cannot be seen as typical. Although Schramm's failure to read the disclosures could be a defense to Plaintiffs' claim for rescission based on fraud, it is not a defense that will preoccupy her at the expense of the class. No more persuasive is the contention that Weinstein's method of loan evaluation — shopping for ARM loans based on the disclosed index and margin — is highly individualized. The core issue presented is whether the interest rates were as low as promised.
For the foregoing reasons, the Court finds that the typicality requirement is satisfied with respect to both of Plaintiffs' causes of action.
d) Adequacy
The Rule 23(a) requirement of adequacy ensures that "the representative parties will fairly and adequately protect the interests of the class." Fed.R.Civ.P. 23(a)(4). The adequacy requirement protects the due process rights of all of the class members, all of whom will be bound by the judgment of a class action. See Richards v. Jefferson County, 517 U.S. 793 (1996). A determination of adequacy hinges on whether the named plaintiffs and their counsel have any conflicts of interest with other class members and whether they will prosecute the action vigorously. Hanlon, 150 F.3d at 1020.
Here, Defendants have not identified a conflict that would make Plaintiffs inadequate as class representatives. Moreover, Plaintiffs have assured the Court that they and their counsel will vigorously pursue this action. Accordingly, the Court is satisfied that Plaintiffs are adequate representatives of the proposed class.
2. Rule 23(b)(3) Requirements
If the four Rule 23(a) prerequisites are satisfied, a court next considers whether the proposed class can be maintained under at least one of the subparts of Rule 23(b). See, e.g., Valentino, 97 F.3d at 1234. Here, Plaintiffs seek certification under Rule 23(b)(3), which contains two requirements: (i) that "questions of law or fact common to class members predominate over any questions affecting only individual members," and (ii) "that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy." Fed.R.Civ.P. 23(b)(3).
a) Predominance of Common Questions
The Rule 23(b)(3) predominance inquiry "tests whether proposed classes are sufficiently cohesive to warrant adjudication by representation." Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 623 (1997). Determining whether common questions predominate requires the weighing of the common questions in the case against the individualized questions, a more in-depth inquiry than is required in considering the Rule 23(a)(2) question whether common questions are at issue in the case. "It is clear that `considering whether questions of law or fact common to class members predominate begins, of course, with the elements of the underlying cause of action.'" Stearns, 2011 WL 3659354 at *4 (quoting Erica P. John Fund, Inc., v. Halliburton Co., ___ U.S. ___, 131 S. Ct. 2179, 2184 (2011)).
Because the two causes of action present different issues with respect to the predominance of common questions, the Court separately evaluates each.
(1) Common Questions Predominate in Plaintiffs' § 17200 Claim for Restitution
(a) Plaintiffs' Prima Facie § 17200 Case
The Ninth Circuit's decision in Stearns is instructive and controlling with respect to the determination of whether common questions will predominate in Plaintiffs' § 17200 claim. In Stearns, customers of Ticketmaster alleged that, after purchasing tickets on-line, when they clicked on a link promising them a $25 "cash back reward," entered their email addresses as prompted and clicked "yes," Ticketmaster automatically transferred their credit card information to an outside company. Stearns, 2011 WL 3659354 at *1. That company then enrolled the customers in a rewards program for which enrollees were charged a monthly fee, allegedly without the customers' knowledge or express approval. Id. Stearns held that, because all class members encountered the same website and the same links and prompts, common questions predominated over individual ones with respect to the customers' § 17200 claims. The primary inquiry would be whether Ticketmaster's conduct was likely to deceive the public. See id. at *5. The Ninth Circuit distinguished the factual setting from that in Wal-Mart, noting, "[w]e do not, of course, suggest that predominance would be shown in every California UCL [§ 17200] case. For example, it might well be that there was no cohesion among the members because they were exposed to quite disparate information from various representatives of the defendant." Id. at *4 (citing Wal-Mart, 131 S. Ct. at 2554-57).
In this matter, all putative class members received disclosures containing the same language. Thus, this is not a situation in which there is no "cohesion among the members because they were exposed to quite disparate information." Instead, with respect to the § 17200 claims of the members of the class, common questions will predominate. The fundamental inquiry will be whether Defendants' conduct was likely to deceive the public. As a result, and given the holding in Stearns approving the application of the Tobacco II Cases in a federal proceeding, individualized inquiries into each class member's knowledge and reliance are not necessary.
* * * *
Defendants contend that even if Plaintiffs' prima facie § 17200 claim presents common questions, there are individual issues regarding unnamed class members' standing and whether their claims are barred by the applicable statute of limitations. As a result, they argue that common questions do not, and will not, predominate and that the class should not be certified. In light of these contentions the Court next considers the individualized questions raised by each of these defenses and balances them against the common questions presented by Plaintiffs' prima facie case to determine whether the predominance requirement is satisfied with respect to each claim.
(b) Individual Questions Associated with Defendants' Defenses
(i) Standing
(a) General Article III Standing Requirements
To satisfy the standing requirement of Article III of the Constitution, federal plaintiffs must meet the "irreducible constitutional minimum of standing," which includes three elements: (i) an "injury in fact"; (ii) "a causal connection between the injury and the conduct complained of [that is] fairly traceable to the challenged action of the defendant"; and (iii) a likelihood that the "injury will be redressed by a favorable decision." Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992) (internal quotations and citations omitted). "[F]or purposes of satisfying Article III's causation requirement, we are concerned with something less than the concept of proximate cause." Canyon County v. Syngenta Seeds, Inc., 519 F.3d 969, 975 n. 7 (9th Cir. 2008) (quoting Barbour v. Haley, 471 F.3d 1222, 1226 (11th Cir. 2006)).
(b) Parties' Arguments Regarding Whether Unnamed Class Members' Standing Must Be Demonstrated
Defendants claim that individual inquiries into each class member's standing will overwhelm common questions. Thus, Defendants argue that many putative class members lack Article III standing because they suffered no injury as a result of their receipt of documents containing the disputed language. Defendants assert that putative class members may not have suffered injuries that are "fairly traceable" to Defendants' conduct because they could have: interpreted the relevant language differently than the class representatives; failed to read the disclosures at all; or chosen a loan from Defendants for reasons unrelated to the allegedly misleading language. Plaintiffs contend that demonstrating the standing of one named plaintiff is sufficient, and that class-wide reliance and causation are not relevant considerations for a § 17200 claim. Thus, they argue that, even in the context of a standing analysis, the Ninth Circuit's decision in Stearns establishes that individual issues will not predominate. Defendants respond that Article III standing is required for all plaintiffs, including unnamed class members, in any federal matter. In support of this contention, Defendants cite recent trial court decisions interpreting Stearns and the Tobacco II Cases as only disposing of causation as an element of a prima facie case under § 17200, independent of the requirements of Article III. See, e.g., O'Shea v. Epson Am., Inc., 2011 WL 4352458, at *7-12 (C.D. Cal. Sept. 19, 2011).
(c) Constitutional Standing in California § 17200 Class Actions in Light of Stearns
The language of Stearns is clear: it states that, in determining standing, Ninth Circuit case law "keys on the representative party, not all of the class members, and has done so for many years." Stearns, 2011 WL 2659354 at *5 (italics added). This reasoning is also present in Casey v. Lewis, where the Ninth Circuit stated:
At least one named plaintiff must satisfy the actual injury component of standing in order to seek relief on behalf of himself or the class. The inquiry is whether any named plaintiff has demonstrated that he has sustained or is imminently in danger of sustaining a direct injury as the result of the challenged conduct.4 F.3d 1516, 1519 (9th Cir. 1993) (internal citations omitted; italics added); accord Bates v. United Parcel Serv., Inc., 511 F.3d 974, 985 (9th Cir. 2007) ( en banc) ("In a class action, standing is satisfied if at least one named plaintiff meets the requirements. . . . Thus, we consider only whether at least one named plaintiff satisfies the standing requirements. . . .") (italics added). Although it is true that Bates does not directly address whether absent class members must have Article III standing, Stearns is clear that, in the context of a § 17200 class action, the representative parties are the focus of a court's standing analysis.
(d) Applying Stearns to Plaintiffs' § 17200 Claim
Defendants do not challenge the standing of the representative parties. As a result, Defendants' contention that individual questions pertaining to unnamed class members' standing will overtake common questions is without merit; those individual questions are not central to the standing analysis under Stearns. Accordingly, class certification can be determined without a more in-depth inquiry into the standing of individual unnamed class members. Moreover, even if constitutional standing must be demonstrated for each member of the putative class, the class members here satisfy the Article III requirements. In Stearns, despite focusing on the standing of the named parties, the Ninth Circuit reasoned that, with respect to the entire class, "a plaintiff's injury must be concrete and particularized. The injury here meets both of those requirements. Each alleged class member was relieved of money in the transactions. Furthermore, it can hardly be said that the loss is not fairly traceable to the action of [Ticketmaster] within the meaning of California substantive law." Stearns, 2011 WL 3659354 at *5.
This is not to say that individual class members do not need to have constitutional standing at all; rather, it is to state that the focus of a class standing analysis under § 17200 is to be on the named class representatives.
The same logic applies in this case. Thus, the alleged injury to each class member is similarly concrete and particularized. It is alleged that each member of the class was charged more in interest than Defendants promised they would charge in the loan disclosure documents that were distributed to each putative class member. Although a question of fact remains as to whether a reasonable person would interpret the allegedly misleading statements to mean that the initial interest rate would be the sum of an index and a margin, that is a question of fact capable of class-wide determination. Thus, if the fact-finder determines that Defendants' disclosures were misleading because they state that a borrower's initial interest rate will be equal to or less than the relevant sum, then each class member suffered a "concrete and particularized" injury in that each was charged more in interest than Defendants represented in the disclosure documents. Accordingly, each "alleged class member was relieved of money in the transactions," and "it can hardly be said that the loss is not fairly traceable" to Defendants' actions within the meaning of California substantive law. Thus, the entire class has standing, and in applying the controlling legal tests for potential liability, common questions will predominate.
(ii) Statute of Limitations
Defendants further contend that, because separate statute of limitations issues must be resolved for each member of the putative class, common questions do not predominate. Assuming arguendo that the discovery rule applies to the § 17200 claims, the determination of when the statute of limitations began to run is measured by either inquiry notice or actual notice. Inquiry notice refers to when a reasonable person should have discovered the factual basis for the claim, and actual notice is the time at which a particular person was actually aware of the factual basis for the claim. See Broberg v. Guardian Life Ins. Co. of Am., 171 Cal. App. 4th 912, 920 (2009).
The Court assumes, for the purpose of analyzing Defendants' contentions, that the delayed discovery rule applies to unfair competition claims based on deceptive disclosures, but notes that California courts appear to be in disagreement on this point. Compare Salenga v. Mitsubishi Motors Credit of Am., Inc., 183 Cal. App. 4th 986, 996 (2010) ("The `discovery rule,' which delays accrual of certain causes of action until the plaintiff has actual or constructive knowledge of facts giving rise to the claim, does not apply to unfair competition actions."), with Broberg v. Guardian Life Ins. Co. of Am., 171 Cal. App. 4th 912, 920-21 (2009) ("At least in the context of unfair competition claims based on a defendant's allegedly deceptive marketing materials . . . we believe the better view is that the time to file a section 17200 cause of action starts to run only when a reasonable person would have discovered the factual basis for a claim.").
(a) Inquiry Notice
Defendants have identified two sets of documents that may have alerted a reasonable person to the existence of a § 17200 claim: (i) the loan disclosure documents provided at the time of loan origination; and (ii) the Rate Change Notice received by Plaintiffs in April 2006. As to the first category, the Court already has ruled that there is a triable issue of fact as to whether those initial disclosures were sufficient to provide inquiry notice. Minutes (In Chambers) Order, Docket No. 93 (Aug. 9, 2011). That issue is common to all potential class members because each received loan disclosures containing the same language, albeit at different times. In general, inquiry notice is measured under a "reasonable person" standard. Once the fact question whether the initial disclosures put a borrower on inquiry notice is resolved, the determination can be applied to each member of the class. Similarly, with respect to the Rate Change Notice received by Plaintiffs in April 2006, the Court has held that it did provide inquiry notice under the reasonable person test. Accordingly, the claims of all class members who received Rate Change Notices more than four years before this case was filed are time barred. Defendants do not identify any other specific disclosure that might have put class members on inquiry notice. Thus, because any determinations of inquiry notice will be based on a reasonable person test, there are no significant individual issues related to when members should have known of the discrepancy between the represented interest rate and the rate actually charged.
Of course, if the disclosures are found to provide inquiry notice, whether the claims of a particular class member will be time barred will depend on the time period between when that member received the disclosures and the commencement of this action. However, such a calculation would be a mechanical one that would not make class treatment unsuitable.
(b) Actual Notice
Certain class members may have had actual notice of their claims more than four years before this action was commenced. Defendants contend that they are entitled to investigate when each class member actually had notice of his or her claim, and that the need for these investigations tips the balance away from the predominance of common questions.
"Courts have been nearly unanimous . . . in holding that possible differences in the application of a statute of limitations to individual class members, including the named plaintiffs, does not preclude certification of a class action so long as the necessary commonality and, in a 23(b)(3) class action, predominance, are otherwise present." In re Energy Sys. Equip. Leasing Sec. Litig., 642 F. Supp. 718, 752-53 (E.D.N.Y. 1986). The Ninth Circuit addressed this issue in a case where the discovery rule applied and held that the "presence of individual issues of compliance with the statute of limitations here does not defeat the predominance of the common questions." Cameron v. E.M. Adams Co., 547 F.2d 473 (9th Cir. 1976). Indeed, in the securities context, the Ninth Circuit held:
The existence of a statute of limitations issue does not compel a finding that individual issues predominate over common ones. Given a sufficient nucleus of common questions, the presence of the individual issue of compliance with the statute of limitations has not prevented certification of class actions in securities cases.Williams v. Sinclair, 529 F.2d 1383, 1388 (9th Cir. 1975).
Here, Plaintiffs have carried their burden of demonstrating that common questions predominate in their unfair competition law case-in-chief pursuant to § 17200, so there is a sufficient nucleus of common questions. Further, Defendants have presented no evidence that any potential class member had actual notice outside the statutory period. Thus, speculation that some class members' claims may be barred on the basis of actual knowledge is not sufficient to defeat certification.
For the foregoing reasons, the Court finds that common questions predominate over individual questions with respect to Plaintiffs' § 17200 claim. This cause of action satisfies the predominance requirement of Rule 23(b)(3).
(2) Common Questions Do Not Predominate in Plaintiffs' Cause of Action for Rescission Based on Fraud or Mistake
As explained above, Plaintiffs advance two grounds for rescission: (i) mistake and (ii) fraud. Plaintiffs contend that under either theory, common questions will predominate. Defendants disagree.
(a) Predominance of Common Questions for Rescission Based on Mistake
Plaintiffs argue that common questions will predominate when the fact-finder evaluates their cause of action for rescission based on mistake because it is based on two questions capable of class-wide resolution: (i) did Defendants tell class members that their interest rate would be equal to or less than the sum of the index and margin; and (ii) did Defendants actually charge class members rates that were higher than the sum of the index and margin? However, Plaintiffs cite no case in which such a determination of mistake was made on a class-wide basis. And, this Court has found none. A mistake of fact may consist of a "[b]elief in the present existence of a thing material to the contract, which does not exist. . . ." Cal. Civ. Code § 1577. California Civil Jury Instruction ("CACI") 330, which states the standard for a jury to apply the affirmative defense of unilateral mistake of fact, confirms that voiding a contract on this ground requires an actual, subjective mistake. Thus, the instruction requires that the party seeking to invalidate the contract prove that he or she "was mistaken about" the matter and that the "mistake was not caused by [his/her/its] excessive carelessness. . . ." CACI 330. Because evaluating whether a party to a contract entered the agreement based on a personally held mistaken belief requires an individual inquiry into that party's state of mind, the Court finds that a determination of mistake is not appropriate for class-wide evaluation. Common questions will not predominate over individual inquiries.
(b) Predominance of Common Questions for Rescission Based on Fraud
With respect to rescission for fraud, the issue whether common questions predominate depends on: (i) whether the remedy of rescission can be applied on a class-wide basis, and (ii) whether Plaintiffs will be given the benefit of a class-wide presumption of reliance. Generally speaking, "[c]lass certification of a fraud claim may be appropriate if the plaintiffs allege that an entire class of people has been defrauded by a common course of conduct." Plascencia v. Lending 1st Mortgage, 259 F.R.D. 437, 447 (N.D. Cal. 2009).
(i) Feasibility of Performing Rescission on a Class-wide Basis
(a) Rescission Generally
Defendants contend that the rescission remedy Plaintiffs seek cannot be provided on a class-wide basis because common questions will not predominate. Defendants cite numerous Truth in Lending Act ("TILA") cases holding that rescission is a personal remedy that is not amenable to class treatment. E.g., In re Community Bank of Northern Virginia, 622 F.3d 275, 308 (3d Cir. 2010) ("[C]ircuit courts that have addressed the issue are unanimous that a claim for rescission under TILA cannot be maintained on a classwide basis."); Andrews v. Chevy Chase, 545 F.3d 570, 574 (7th Cir. 2008) ("The variations in the transactional `unwinding' process that may arise from one rescission to the next make it an extremely poor fit for the class-action mechanism."); McKenna v. First Horizon Home Loan Corp., 475 F.3d 418, 421, 424-25 (1st Cir. 2007) ("The highly individualized character of [the rescission] process and the range of variations that may occur render rescission largely incompatible with a sensible deployment of the class-action mechanism."). Defendants also point to California cases that have followed this trend. See LaLiberte v. Pac. Merc. Bank, 147 Cal. App. 4th 1, 8-9 (2007) (upholding trial court's decision denying plaintiffs leave to amend "to seek either rescission or a declaration of entitlement to rescission on the class claims")). Plaintiffs have not provided any competing authority, i.e., a case in which a rescission claim was certified for class treatment under Cal. Civil Code § 1689(b)(1), which is the statutory provision at issue here.
Notwithstanding that the TILA cases arise in a specific statutory context, the Court finds them persuasive with respect to why a class-wide rescission remedy is not appropriate. Rescission is a remedy that restores the "status quo ante; the creditor terminates its security interest and returns any monies paid by the debtor in exchange for the latter's return of all disbursed funds or property interests." McKenna, 475 F.3d at 421. This process requires inquiries into each individual borrower's situation because it generally includes the return of all interest, fees, finance charges, and commissions paid in connection with the loan. See Pacific Shore Funding v. Lozo, 138 Cal. App. 4th 1342 (2006). Furthermore, additional individual questions would arise pertaining to each class member's circumstances because "the equitable nature of rescission generally entitles the affected creditor to judicial consideration of the individual circumstances of the particular transaction." McKenna, 475 F.3d at 427 n. 6. Accordingly, common questions would not predominate over individual ones in a class action — like this one — that seeks the rescission of thousands of individual loans. See, e.g., Andrews, 545 F.3d at 577 ("[P]roceeding as a class to `unwind' hundreds or thousands of individual credit transactions would not promote the primary purposes of the class-action mechanism: judicial economy and efficiency.").
(b) The Tender Rule and the Viability of a Rescission Subclass
There is another problem with a class approach to a rescission remedy: As Defendants point out, some class members may not be able to tender their loan proceeds to Chase as would be required as part of a rescission of their loans. Such a tender by each borrower would be a necessary part of a rescission. See, e.g., McKenna, 475 F.3d at 421. Plaintiffs ask the Court to address this issue through the creation of a "rescission subclass" limited to those members who have refinanced or paid off their Chase loans. Plaintiffs argue that this subclass alternative would eliminate the complications associated with tender and rescission generally because the rescission is already half-done. Thus, with the loans having been paid off, all that would remain is for Defendants to refund subclass members the difference between the amount of interest they actually paid and the amount they would have paid if their initial interest rate had been the sum of the governing index and margin.
Although the creation of this subclass may ensure that the tender rule is satisfied, it does not alleviate the fundamental difficulties associated with performing rescission on a class-wide basis. First, rescission is not, as Plaintiffs contend, a remedy that can be used solely to recover some portion of interest that was allegedly overpaid. Thus, when a borrower rescinds a refinanced loan, the calculation of the monies due would include individualized inquiries into the fees that were paid at origination, finance charges, commissions, the potential rescission of other associated agreements like in a short sale situation, and so on. See Pacific Shore, 138 Cal. App. 4th at 1354 (describing the rescission of a refinanced loan as involving a refund of all "interest, fees, penalties, and charges").
In contrast, Plaintiffs' remedy pursuant to § 17200 is restitution, which operates "to return to a person those measurable amounts which [were] wrongfully taken by means of an unfair business practice". Day v. AT T Corp., 63 Cal. App. 4th 325, 339 (1998) (italics in original). That remedy is readily amenable to class treatment because, if liability is established, each class member would be entitled to recover only the difference between the amount of interest Defendants actually collected from him or her and the amount Defendants would have collected had the initial interest rate been the sum of the governing index and margin. This calculation will be a mechanical one capable of ready determination from Defendants' records. Calculations such as this do not defeat certification because, although they are individualized in the sense that each class member may recover a different monetary amount, the process for calculating each class member's entitlement is uniform and mechanical. Yokoyama v. Midland Nat. Life Ins. Co., 594 F.3d 1087, 1094 (9th Cir. 2010) ("In this circuit, however, damage calculations alone cannot defeat certification.").
This conclusion is also consistent with the rule that refinanced loans cannot be rescinded because "there is nothing to rescind." King v. State of Cal., 784 F.2d 910, 913 (9th Cir. 1986) (holding that a borrower could not rescind a credit transaction under TILA for failure to disclose where the borrower had refinanced the subject loan, such that the deed of trust underlying it had been superseded).
Some courts have declined to follow King within the context of TILA, allowing rescission of individual refinanced loans because they found that this was what Congress intended in enacting TILA. Compare Hernandez v. Sutter West Capital, No. 9-3658, 2010 U.S. Dist. LEXIS 57365, at *8-9 (June 10, 2010), with Pacific Shore, 138 Cal. App. 4th at 1352-55. This Court finds King persuasive and controlling. The claims here are not brought under TILA, but under Cal. Civ. Code § 1689(b)(1). And, Plaintiffs have cited no authority in support of the proposition that a loan that had been refinanced or repaid could be revived and then rescinded under this statute. Accordingly, because this subclass would avoid only the tender rule and not the medley of other individualized inquiries related to rescission, and because, in light of King, permitting rescission of refinanced loans is inappropriate, the Court finds Plaintiffs' proposed solution of creating a rescission subclass to be inadequate.
Because of the individual questions that will arise in the course of performing class-wide rescission, regardless of whether the class is limited to a subclass of borrowers who have refinanced their loans, common questions do not predominate.
Because the Court finds that individualized questions pertaining to administering the remedy of rescission on a class-wide basis preclude a finding that common questions predominate, the Court need not reach the question of whether Plaintiffs will be entitled to a presumption of reliance. For the same reason, the Court does not reach the remaining Rule 23(b)(3) requirement of superiority for Plaintiffs' rescission cause of action.
b) Superiority of Class Action
In evaluating whether a class action is the superior litigation mechanism, a court must consider: (i) the interest of class members in individually controlling prosecution of separate actions; (ii) the extent and nature of any pending litigation concerning the controversy; (iii) the desirability of litigating the claims in the particular forum where the class action is filed; and (iv) difficulties likely to be encountered in managing the class action. Fed.R.Civ.P. 23(b)(3). A class action is superior "[w]here classwide litigation of common issues will reduce litigation costs and promote greater efficiency." Valentino, 97 F.3d at 1234.
(1) Plaintiffs' § 17200 Claim for Restitution and Injunctive Relief Satisfies the Superiority Requirement
The Court is persuaded that each of the four tests for measuring the superiority of a class proceeding is met in this action. And, it is noteworthy that Defendants have not expressly argued otherwise. First, the class is substantially composed of borrowers of average means who, absent class action resolution, will be left with no remedy because the individual claims of class members are so small in comparison to the prohibitive cost of complex litigation. Second, there has been no showing of other pending litigation concerning the controversy involved in this case. Third, the forum is desirable because Defendants allegedly have agents and transact their affairs in this district, and presumably a number of events or omissions giving rise to the claims for relief occurred here. Finally, there are minimal case management issues because the proposed class members can be easily identified, the potential liability of Defendants can be readily calculated from Defendants' own records, and the class claims are centered on Defendants' course of conduct.
Accordingly, the Court finds that class-wide litigation of the common issues regarding Defendants' conduct will reduce litigation costs and promote efficiency. Thus, the superiority requirement of Rule 23(b)(3) is met with respect to Plaintiffs' § 17200 claim.
IV. CONCLUSION
For the reasons stated above, the Court GRANTS Plaintiffs' motion for class certification with respect to Plaintiffs' Sixth Cause of Action under Cal. Bus. Prof. Code § 17200, and DENIES Plaintiffs' motion for class certification with respect to Plaintiffs' Fourth Cause of Action for Rescission.