We consider whether a group of consumers who have bought merchandise under installment contracts may maintain a class action seeking rescission of the contracts for fraudulent misrepresentation on behalf of themselves and others similarly situated, against both the seller of a product and the finance company to which the installment contracts were assigned. We conclude that such an action will lie against the seller under the principles set forth in Daar v. Yellow Cab Co. (1967) 67 Cal.2d 695 [63 Cal.Rptr. 724, 433 P.2d 732], and that the assignee of the contract is a proper party to such an action under the circumstances presented here.
The action was brought by 37 named plaintiffs on behalf of themselves as well as others who are residents of San Joaquin and Stanislaus Counties and who purchased frozen food and freezers from Bay Area Meat Company. They each executed two retail installment sales contracts to finance the purchases, one in payment of the food, and the other for the freezer, and a binder contract. These contracts were assigned by Bay Area to three finance companies, Avco Thrift, Sterling Finance Corporation, and Beneficial Finance Company of Turlock, which were also named as defendants.
In upholding the demurrers to the class action aspect of the fraud count, the trial court made it clear that it was not concerned with the sufficiency of the particular allegations to assert a class action but, rather, that in its view a class action for fraud may not be maintained by consumers.
Plaintiffs seek a writ of mandate to compel the trial court to vacate its order sustaining the demurrers to the first cause of action as a class action and to order the court to allow them to proceed to try the cause of action for fraud as a class action.
We are met at the threshold with a contention of defendants that mandate is an inappropriate remedy because plaintiffs have an adequate remedy by appeal. It seems clear, however, that plaintiffs may not appeal from the trial court's judgment dismissing their first cause of action as a class action
The complaint here seeks rescission of the contracts on the theory of fraud in the first cause of action and on the theory of a violation of the Unruh Act in the second cause of action.
We conclude, therefore, that since plaintiffs cannot appeal from the order which bars a substantial portion of their cause from being heard on the merits, their petition for a writ of mandate deserves consideration.
Thirty years ago commentators, in urging the utility of the class suit to vindicate the rights of stockholders, made this incisive observation: "Modern society seems increasingly to expose men to ... group injuries for which individually they are in a poor position to seek legal redress, either because they do not know enough or because such redress is disproportionately expensive. If each is left to assert his rights alone if and when he can, there will at best be a random and fragmentary enforcement, if there is any at all. This result is not only unfortunate in the particular case, but it will operate seriously to impair the deterrent effect of the sanctions which underlie much contemporary law. The problem of fashioning an effective and inclusive group remedy is thus a major one." (Kalven and Rosenfield, Function of Class Suit (1941) 8 U.Chi.L.Rev. 684, 686.)
What was noteworthy in the milieu three decades ago for stockholders is of far greater significance today for consumers. Not only have the means of communication improved and the sophistication of promotional and selling techniques sharpened in the intervening years, but consumers as a category are generally in a less favorable position than stockholders to secure legal redress for wrongs committed against them. For these reasons, the desirability of consumers suing as a class for fraud or other improper conduct of predatory sellers has been the topic of much thoughtful analysis in recent years. Numerous commentators have urged adaptation of class proceedings to consumer frauds. (See, e.g., Starrs, The Consumer Class Action (1969) 49 B.U.L.Rev. 211-250, 407-513; Eckhardt,
Protection of unwary consumers from being duped by unscrupulous sellers is an exigency of the utmost priority in contemporary society. According to the report of the Kerner Commission, many persons who reside in low income neighborhoods experience grievous exploitation by vendors using such devices as high pressure salesmanship, bait advertising, misrepresentation of prices, exorbitant prices and credit charges, and sale of shoddy merchandise. State laws governing relations between consumers and merchants are generally utilized only by informed, sophisticated parties, affording little practical protection to low income families. (Report of National Advisory Commission on Civil Disorders (Bantam ed. 1968) pp. 275-276; Hester, Deceptive Sales Practices and Form Contracts — Does the Consumer Have a Private Remedy? (1968) Duke L.J. 831.) The alternatives of multiple litigation (joinder, intervention, consolidation, the test case) do not sufficiently protect the consumer's rights because these devices "presuppose `a group of economically powerful parties who are obviously able and willing to take care of their own interests individually through individual suits or individual decisions about joinder or intervention.'" (Dolgow v. Anderson (E.D.N.Y. 1968) 43 F.R.D. 472, 484.)
Frequently numerous consumers are exposed to the same dubious practice by the same seller so that proof of the prevalence of the practice as to one consumer would provide proof for all. Individual actions by each of the defrauded consumers is often impracticable because the amount of individual recovery would be insufficient to justify bringing a separate action; thus an unscrupulous seller retains the benefits of its wrongful conduct. A class action by consumers produces several salutary byproducts, including a therapeutic effect upon those sellers who indulge in fraudulent practices, aid to legitimate business enterprises by curtailing illegitimate competition, and avoidance to the judicial process of the burden of multiple litigation involving identical claims. The benefit to the parties and the courts would, in many circumstances, be substantial.
In California, we do not lack authority on the subject of the amenability of consumer claims to class action litigation. Section 382 of the Code of Civil Procedure provides, "... when 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." In the leading case of Daar v. Yellow Cab Co., supra, 67 Cal.2d 695, we held that an individual plaintiff may under this section bring a class action on his
The class in Daar consisted of several thousand taxicab riders. Plaintiff sought to recover as damages the illegal overcharges received by defendant cab company from riders over the four years immediately preceding the commencement of the action. It was alleged that proof of a common or single state of facts and law would establish the right of each member of the class to recover, that the percentage of rate overcharge to each class member was identical, and that the amount of the overcharge could be calculated from defendant's books. In reversing the trial court's judgment based on sustaining a demurrer to the complaint, we concluded that two requirements must be met to sustain a class action.
The requirement of a community of interest does not depend upon an identical recovery, and the fact that each member of the class must prove his separate claim to a portion of any recovery by the class is only one factor to be considered in determining whether a class action is proper.
In applying these principles to the facts alleged in Daar, we concluded that the issues which were common among the class members would be the principal issues in any individual action, both in terms of time to be expended in their proof and of their importance, and that if a class suit were not permitted, a multiplicity of legal actions dealing with identical basic issues would be required in order to permit recovery by each of several thousand taxicab riders. The result would be manifold burdens on the parties and on the judicial process. Furthermore, efforts to seek recovery by an individual taxicab user would be unlikely as there was a relatively small loss to each class member and separate actions would not be economically feasible. Absent a class suit, a wrongdoing defendant would retain the benefits of its wrongs.
Sufficiency of the Allegations to State a Class Action
With these principles in mind, we turn to the allegations of the complaint which seeks to rescind the contracts on the ground that plaintiffs were induced to execute the instruments by the fraudulent representations of Bay Area. The complaint alleges that the same representations regarding the food and the freezers were made to each plaintiff, that Bay Area knew the representations were false, that they were made with intent to defraud, and that plaintiffs signed the agreements in reliance thereon. It is further alleged that plaintiffs are united in interest in that, inter alia, they have all signed contracts to purchase food and a freezer in reliance upon the misrepresentations, which in turn were based upon recitations by salesmen of a standard sales monologue contained in a training book and sales manual. Proof of a common state of facts, it is alleged, will establish the right of each class member to rescind his contract.
1. Ascertainability of the Class
2. Community of Interest
We next ascertain whether there are issues common to the class as a whole sufficient in importance so that their adjudication on a class basis will benefit both the litigants and the court. In this evaluation the mere fact that the transaction between Bay Area and each plaintiff was separately consummated is not determinative so long as each class member will not be required to litigate numerous and substantial issues to establish his individual right to recover.
a. The Representations
The representations conveniently fall into two categories: those concerning the contract for the purchase of the freezer and those relating to the frozen food contract. We examine them separately.
Plaintiffs allege that Bay Area's salesmen represented to each member of the class that the freezers were of high quality and guaranteed for a lifetime, and that they were sold at a reasonable retail price.
It is also alleged that the representations regarding the freezers were false, and that the prices charged for them were exorbitant, excessive and unconscionable, amounting to not less than twice the reasonable retail price. The falsity of these representations could be shown on a common basis since proof of the allegations regarding the quality and price of the freezers purchased by the named plaintiffs would provide proof as to all. Although it appears that not every member of the class purchased the same brand and model of freezer, it is likely that all the brands and models are represented among the 37 named plaintiffs and to the extent that this is not so evidence may be introduced to cure the omission.
We turn next to the alleged misrepresentations regarding the frozen food purchased by plaintiffs. It is averred that Bay Area salesmen represented to each class member that the food orders were sold at a wholesale rate, that each order would last a minimum of seven months, and that the total cost of a "seven-month" food order and a freezer would be less than the amount plaintiffs were spending each month for similar food at retail stores.
According to the allegations, a common sales recitation was also employed in the sale of the frozen food and, for the reasons discussed above regarding the freezer contracts, we assume for the present that these representations were in fact made to each plaintiff.
As to the falsity of the representations, we perceive no singular difficulty in proving on a common basis whether the food supplied by Bay Area was sold at wholesale rates. Defendants insist, however, that it would be impossible without the individual testimony of each plaintiff to demonstrate the falsity of the alleged representations that the supply of food would last for seven months. It is argued that each plaintiff must have given an estimate of his consumption to the salesman, that the accuracy of this estimate as well as the salesman's calculation of the amount of food required for a seven-month supply would vary in each case, and
This contention is unpersuasive at the pleading stage of the proceedings because we cannot assume that plaintiffs will be unable to establish their allegations without the separate testimony of each class member; at least they must be afforded the opportunity to show that they can prove their allegations on a common basis. An examination of the contracts attached to the complaint indicates that Bay Area sold varying quantities of food to the several plaintiffs, but that each order was of a standard type. Thus, for example, customers who purchased Pack F received 119 pounds of beef and 123 pounds of assorted variety meats, vegetables, and fruit juices. Each type of food pack had a standard price.
The existence of these standard orders raises at least a rebuttable implication that the salesmen utilized a defined formula to determine the amount of food a particular family would need for a specified period of time. Whether this formula related to the size of the family, the amount the family spent for food each month
The final allegation of misrepresentation with regard to the frozen food is that Bay Area salesmen told plaintiffs the total cost of a "seven-month" food order and a freezer would be less than the amount each plaintiff was spending every month on food at retail stores. The thrust of this allegation is that it was represented the price differential between the cost of the food purchased from Bay Area and its retail value elsewhere would be adequate to pay for the freezers purchased by plaintiffs. It appears from what has been said above that this allegation, too, may be amenable to proof on a common basis.
There may be other methods by which plaintiffs can establish the alleged falsity of the representations regarding the food orders for the class as a whole. For the purpose of determining if the demurrers should have been overruled, it is sufficient that there is a reasonable possibility plaintiffs can establish a prima facie community of interest among the class members on the false representation issue. Plaintiffs' inability to do so, if that be the ultimate result, can be determined at a later stage of the proceeding.
The next element which plaintiffs must prove in order to prevail is reliance upon the alleged misrepresentations. If they can establish without individual testimony that the representations were made to each plaintiff and that they were false, it should not be unduly complicated to sustain their burden of proving reliance thereon as a common element.
Williston speaks in terms of a presumption: "Where representations have been made in regard to a material matter and action has been taken, in the absence of evidence showing the contrary, it will be presumed that the representations were relied on." (12 Williston on Contracts (3d ed. 1970) 480.) This rule is in accord with the Restatement. (Rest., Contracts, § 479, illus. 1.) Whether an inference (as held in Hunter v. McKenzie, supra, 197 Cal. 176, 185) or a presumption (as described by Williston and the Restatement) of reliance arises upon proof of a material false representation we need not determine in this case.
Defendants insist that a class action is inappropriate under these circumstances. It is argued that the present case is distinguishable from Daar because there separate suits would have been impractical since the recovery of the individual class members would have been very small whereas in the present case each plaintiff's claim is sufficiently large to justify separate actions.
The complaint alleges that the total obligation of most class members on their contracts is less than $1,300.
Several other contentions raised by defendants are based upon policy considerations applicable to consumer class actions generally. It is asserted that a far more effective and efficient remedy for consumers than the class action is the intervention of a governmental body to protect the interests of
A two-prong response to the foregoing contentions is manifest.
While the present case was pending before this court the Legislature enacted the Consumers Legal Remedies Act. (Civ. Code, § 1750 et seq.) The act specifies certain unfair or deceptive practices (§ 1770) and provides that a class action to recover damages may be filed if such practices have caused damage to a number of consumers similarly situated (§ 1781, subd. (a)). The circumstances under which the court may allow the suit to proceed as a class action and the procedure to be followed are also set forth in the act (§ 1781, subds. (b),
Significantly, the act provides in section 1752 that its provisions are not exclusive, that the remedies provided therein shall be in addition to any other procedures or remedies provided for in any other law, and that nothing in the act shall limit any other statutory or any common law rights to bring class actions. However, class actions by consumers brought under section 1770 of the act (which lists certain unlawful deceptive practices) must be brought under the provisions of the act. The statute applies to suits filed on or after January 1, 1971. (§ 1756.)
Beneficial contends, however, that the act contains important protective procedures for defendants and that if we hold a consumer class action may be maintained under section 382 of the Code of Civil Procedure without regard to these protective provisions, no plaintiff will choose to sue under the act and submit to its safeguards. Thus, it is claimed, the act would be rendered nugatory.
There is no merit in this contention. As we have seen, the act itself clearly expresses a legislative intent not to affect class actions which may be maintained under other provisions of law. (§ 1752.) There are many types of actions consumers may bring as a class which are not covered by the deceptive practices specified in section 1770. The section is confined largely to deceptive representations; a case like Daar, involving overcharges by a taxicab company by means of inflated readings on a meter, would not readily fall within the statutory provisions.
The parties and amicus curiae cite numerous cases in support of their respective positions. These authorities are of limited usefulness because their facts are markedly dissimilar to those alleged here. Most of the decisions involved problems discussed in Daar, the principles of which we deem controlling.
Weaver v. Pasadena Tournament of Roses (1948) 32 Cal.2d 833 [198 P.2d 514], distinguished in Daar, held that a class action could not be maintained because each plaintiff would be required to prove too many factors relating to his own case. There was, said the court, no community of interest among the class members.
Slakey Brothers Sacramento, Inc. v. Parker (1968) 265 Cal.App.2d 204 [71 Cal.Rptr. 269], was a class action for fraud by some of the creditors of an insolvent subdivider suing on behalf of themselves and other creditors. It was alleged that defendants concealed the subdivider's financial peril, causing plaintiffs to refrain from attempts to collect their debts. The alleged misrepresentations were in form and mode of communication so varied as to "exhaust the legal possibilities"; some of them were made to the purported class as a group, others only to some, still others to public officers. It was held that proof that misrepresentations reached each creditor was required and that the reliance of each creditor upon the misrepresentations which reached him would have to be shown individually.
Decisions from other jurisdictions do not reveal a consistent pattern. A few cases permitted class actions in situations in which there were considerable variations in the facts relevant to each member of the class. (E.g., Contract Buyers League v. F & F Investment (N.D.Ill. 1969) 48 F.R.D. 7 [class action by numerous Negro purchasers of real property against sellers for alleged fraud and violations of civil rights in the sale of property].) On the other hand, defendants cite decisions in which class actions were barred even though there was substantial commonality in the facts applicable to each class member. (E.g., Hall v. Coburn Corporation of America (1970) 26 N.Y.2d 396 [311 N.Y.S.2d 281, 259 N.E.2d 720] [violations of
If the class action is to prove a useful tool to the litigants and the court, pragmatic procedural devices will be required to simplify the potentially complex litigation while at the same time protecting the rights of all the parties.
Section 1781, subdivision (c), of the Civil Code provides for a hearing, upon notice and motion, supported by affidavits, to determine if a class action is proper, whether published notice to the class members is necessary, and whether the action is without merit or whether there is a defense to the action. Subdivision (d) of that section provides that if the cause is to be permitted as a class action the court may direct either party to notify each class member and subdivision (e) sets forth the requirements of such notice, including a statement that the court will exclude the member notified from the class if he so requests by a specified date. Subdivision (f) prohibits settlement of a class action without approval of the court and notice to the class members, and subdivision (g) specifies the manner in which notice of the judgment must be given and provides that the judgment must state the names of the class members.
Although we have determined that the trial court acted improperly in sustaining the demurrers to the first cause of action as a class action because plaintiffs may be able to demonstrate a community of interest as to the elements of their claims of fraud, plaintiffs must nevertheless demonstrate that the questions which they will be required to litigate separately are not numerous or substantial and that the action meets the other requirements for a class action set forth in detail above. It would be appropriate
The technique described in the act may not adequately encompass all the procedural problems facing a court in the trial of a class action. In the event of a hiatus, rule 23 of the Federal Rules of Civil Procedure prescribes procedural devices which a trial court may find useful. (Cf. Daar v. Yellow Cab Co., supra, 67 Cal.2d 695, 709.)
The foregoing examples are intended to be illustrative and not exhaustive. As pointed out in the preface to California Retail Installment Sales (Cont. Ed.Bar 1969) page vii, "Much of the law in this field is in the formative stage...." Therefore we must rely upon the ability of trial courts to adopt innovative procedures which will be fair to the litigants and expedient in serving the judicial process.
Liability of Finance Company Defendants
The final question is whether the finance company defendants to which the sales contracts were assigned are proper parties defendant in the action.
The lenders contend, however, that even if plaintiffs prove that Bay Area was guilty of fraud they are nevertheless entitled as assignees to payment under the contracts because they enjoy the privileges of a holder in due course and take free of plaintiffs' defenses against Bay Area. Although it is not entirely clear from the record, this claim apparently rests on a clause in the contracts signed by plaintiffs waiving all defenses against assignees.
It seems clear under both statute and established legal principles that the finance company defendants would not be deemed holders in due course under the allegations of the complaint, even if they were holding an ordinary promissory note. The complaint alleges that Avco, Sterling and Beneficial had actual or constructive knowledge of Bay Area's fraudulent practices.
We must next inquire whether a "different rule" is set forth in section 1804.2 of the Civil Code, which is a provision of the Unruh Act. The section provides, "Except as provided in Section 1812.7,[
The finance companies contend that under this section plaintiffs may not bring an affirmative action against them for rescission but may only assert their defense of fraud in an action by the finance companies to collect on the contracts and then only to the extent of the amount still owing. Upon analysis, however, a number of considerations militate against such a restrictive interpretation of the section as to assignees who take with notice of defenses against an instrument or who bring themselves within the rationale of Commercial Credit.
It is suggested by amicus curiae that section 1804.2 was intended to eliminate the possibility that by depriving assignees of any right to take free of the buyer's defenses against the seller despite an agreement to the contrary, the section might subject assignees to products liability suits which might involve personal injuries and large damage claims.
It would be ironic indeed if a provision in an act intended to benefit consumers could be invoked to their detriment to such an extent that they would stand in a less advantageous position than others in the commercial arena. (See Consumer Viewpoints: Critique of the Uniform Consumer Credit Code, vols. 1, 2, p. 445.)
The finance companies advance numerous policy arguments in support of their claim that they should not be held liable for Bay Area's alleged fraud. It is asserted that a finance company is in no position to police the seller's activities, cannot know whether the goods which are the subject of the contract are reasonably priced, and should not be required to make such a determination. Moreover, if the finance company takes too active a part in the seller's business he becomes subject to liability under the Commercial Credit doctrine. Financial institutions are also victimized by fraudulent sellers and they have strong incentive to refrain from tacitly participating in a seller's fraud.
It must be emphasized that the complaint alleges the finance company defendants were aware of Bay Area's fraud and under the law one who accepts an instrument with notice of a defense against it is not a holder in due course. If, despite the allegations of the complaint — admittedly true on demurrer — we were to adopt the views of the finance companies, we would be according to financial institutions greater commercial advantage
As far back as 1953, the Florida Supreme Court warned that the burden on finance companies may "require some changes in business methods." But, said the court, "the finance company is better able to bear the risk of the dealer's insolvency than the buyer and in a far better position to protect his interests against unscrupulous and insolvent dealers." (Mutual Finance Co. v. Martin (Fla. 1953) 63 So.2d 649, 653 [44 A.L.R.2d 1].) Zeal is originally employed by the seller in investigating the credit of the buyer; only a modicum of additional zeal by the lender should be necessary to investigate the good faith of the seller. If any hardship results from the rule we adopt, it is only that hardship inherent in the insistence of the law that honesty and enterprise must remain compatible.
The writ is granted, and the trial court is directed to vacate its judgment dismissing the first cause of action as a class action, to vacate its order sustaining the demurrers without leave to amend, to overrule the demurrers, and to proceed in a manner consistent with the views expressed herein.
Wright, C.J., Peters, J., Tobriner, J., Burke, J., and Sullivan, J., concurred.
"(1) It is impracticable to bring all members of the class before the court.
"(2) The questions of law or fact common to the class are substantially similar and predominate over the questions affecting the individual members.
"(3) The claims of defenses of the representative plaintiffs are typical of the claims or defenses of the class.
"(4) The representative plaintiffs will fairly and adequately protect the interests of the class."