Appellant Robert E. Barwig (hereinafter appellant) is a member of the class of plaintiffs represented by William and Rita Trotsky (hereinafter the Trotskys) in a class action brought on behalf of themselves and all other persons similarly situated, against respondent Los Angeles Federal Savings and Loan Association (hereinafter respondent). In response to notice of hearing on a proposed settlement of the class action, appellant entered an appearance and objected to the proposed settlement. The trial court overruled all objections and entered judgment approving the settlement.
The settlement relates to three clauses (clauses 9, 10, and 12) of a certain trust deed used by respondent which were alleged to be invalid. Appellant appeals from the judgment approving the settlement "insofar as said settlement agreement and the judgment entered thereon purports to settle or waive the claims of those borrowers from LOS ANGELES FEDERAL SAVINGS AND LOAN ASSOCIATION, whose interest rates were raised by said defendant pursuant to the provisions of clause 10" of the trust deed. We have determined that under the particular circumstances of this case the trial court should not have approved the inclusion of clause 10 claims in the settlement, and therefore the judgment should be reversed.
In June 1969 the Trotskys filed the original complaint in Los Angeles Superior Court on behalf of themselves and all persons who had within four years prior to the filing borrowed money from respondent and executed a certain form of trust deed securing the loan. The complaint sought a declaration that three provisions of the trust deed were invalid, and it additionally sought damages for monies collected by respondent under those provisions. The three provisions were: (a) clause 9, authorizing respondent to increase the interest rate on the loan by 1 percent per annum in the event of the borrower's failure to pay 6 consecutive monthly payments within 15 days of the due dates; (b) clause 10, authorizing respondent to increase the interest rate on the loan by one-half of 1 percent per annum for each one-fourth of 1 percent per annum by which respondent increased the interest rate paid to its savings account holders; and (c) clause 12, authorizing respondent to impose a late charge of 4 percent on any installment paid more than 15 days after the due date.
In August 1969 the parties stipulated to the filing of a first amended complaint, which differed only insignificantly from the original complaint.
On January 8, 1970, also by stipulation of the parties, the Trotskys filed a second amended complaint which differed quite materially from the first amended complaint. Significantly, the second amended complaint omitted any reference to clause 10, the provision allowing an increased interest rate tied to an increase in savings account interest rates.
On October 20, 1971, apparently unaware of the Trotsky case, appellant filed a complaint against respondent in Barwig v. Los Angeles Federal Savings & Loan Assn., Los Angeles Superior Court case No. C 14608 (hereinafter the Barwig case), on behalf of himself and all persons or entities who had borrowed money from respondent and executed a promissory note and a certain trust deed (the same trust deed involved in the Trotsky case). Appellant alleged that pursuant to clause 10 of the trust deed, respondent had increased the interest rate on such loans by notice dated August 1, 1966. Appellant alleged that clause 10 was invalid and unenforceable. On behalf of his class he sought declaratory relief and the return of the monies collected pursuant to clause 10. The Barwig case did not involve any claims as to clause 9 or clause 12.
Respondent answered the complaint in the Barwig case in December 1971. Certain discovery was had, and appellant submitted a motion for an initial hearing to determine class action issues. (Vasquez v. Superior Court, supra, 4 Cal.3d 800, 820-821.) Respondent submitted a motion for summary judgment and a countermotion for a determination that the action was not a proper class action, and that appellant did not adequately represent the alleged class. The existence of the Trotsky case was not mentioned in the papers in support of these motions. The motion for summary judgment was denied on May 5, 1972, and the class action motion was continued. Under circumstances described infra, the hearing on this motion was taken off calendar, and there has not yet been
In June 1972 the Trotskys and respondent reached agreement upon settlement of the Trotsky class action. With court permission the class was redefined, for purposes of settlement, to be "all present mortgage loan borrowers" of respondent who in order to secure their respective loans executed the certain form of trust deed here involved. This removed from contention the claims of borrowers whose loans had been paid off, transferred or foreclosed.
The settlement agreement purported to include not only the clause 9 and clause 12 claims alleged in the second amended complaint, but also clause 10 claims. In general the settlement agreement provided that respondent would modify its practices with respect to the three provisions, but that respondent would not pay damages and would be released from further liability. (Respondent at all times maintained that the provisions were valid and enforceable and denied any liability for monies collected.)
With respect to clause 12 (late charges for installments not paid within 15 days of due date) respondent agreed that as to class members respondent would observe the notice requirements of Civil Code section 2954.5, even though the statute applies only to loans made after January 1, 1971.
With respect to clause 9 (increased interest in the event of six consecutive late payments) respondent agreed, among other modifications, to limit such increase to one-half percent per annum and to revoke such increase (prospectively only) upon written request of the borrower in the event that each installment during the two years following such increase is paid on time and there are no other defaults.
With respect to clause 10 (variable interest rates) respondent agreed to certain modifications affecting loans made prior to November 23, 1970, the effective date of Civil Code section 1916.5. (As to loans made after that date, § 1916.5 rendered clause 10 invalid.) Respondent agreed to give notice of such increase within six months of a passbook rate
In return for these agreements respondent was, with certain exceptions, released and discharged "from any and all liability for [respondent's] assessment and/or collection of any Late Charges and/or Sums of Increased Interest from any member of the Class." The Trotskys personally received $1,920 in settlement of their individual claim that even if the provisions were valid the Trotskys did not make six consecutive late payments and therefore respondent wrongfully exercised clause 9 as to them.
The Trotskys and respondent made joint application to the court for orders setting a hearing on the proposed settlement and prescribing the form, manner and time of giving notice of the action and the proposed settlement. There had been no previous notice to the class in the Trotsky case. In their joint application the parties did not inform the court of the existence of the Barwig case. The court set the matter for hearing and approved the form and manner of notice suggested in the joint application. The notice described the litigation and proposed settlement but did not mention the existence of the Barwig case. The notice was mailed to the Trotsky class as temporarily defined, i.e., all then present mortgage loan borrowers who had executed the certain form of trust deed. Appellant was a member of that class.
In response to the notice, appellant entered objection to the settlement and appeared at the hearing through counsel. As stated in his notice of appearance and objections, the basis of appellant's objection was that in the Barwig case he sought to obtain on behalf of the class a refund or credit for all amounts collected or charged under clause 10 as well as a declaration that such clause was invalid and unenforceable in the future. Appellant therefore objected to the proposed settlement "only to the extent that it is contended by LA FED that a judgment entered by this Court on the basis of such settlement is binding in any manner upon the members of the class who are also members of the class in the Barwig action with respect to any of the issues in the Barwig action."
The record on appeal does not contain a reporter's transcript of the hearing on objections to the proposed settlement. The court approved the validity of the suit as a class action, overruled all objections and
"The most common objection to the proposed settlement is that the class of plaintiffs does not obtain enough benefits from it. Particularly, the objection is directed to the fact that the class will receive no monetary rewards. The Court has carefully reviewed the pleadings herein and, in fact, the entire file. The Court concludes that the proposed settlement is a fair and reasonable one, having in mind the likely results of the litigation as compared with the consideration received for not going forward with it. [Citation.] While some members of the class of plaintiffs may be disappointed that the settlement does not provide them with more benefits, the Court notes the not insignificant possibility that they would receive no benefits whatsoever if the case proceeds to trial.
".... .... .... .... ...
"Finally, the objection is made that the settlement here may result in the principle of collateral estoppel being applied to the purported class action in Barwig v. Los Angeles Federal Savings & Loan Association, Civil Action No. C 14608, since there may be an overlap of the class of plaintiffs between these two cases and since the defendant in each case is the same. The Court first notes that the present case was filed prior to Barwig and should not be influenced by the mere filing of the latter case. In any event, this particular objection is insufficient to upset the settlement of this case. As for the merits, if any, of the collateral estoppel argument, they will have to be determined in the Barwig case. Barwig's objections to this settlement are a matter of record, and if such is sufficient to avoid collateral estoppel, then Barwig has protected himself. This Court regards the settlement of the instant case as fair and reasonable and will not deny the class of plaintiffs herein the benefits of this settlement merely because of the pendency of the Barwig case."
The court also approved the payment by respondent to the Trotskys' attorneys of $25,000 in attorneys' fees pursuant to the agreement. On November 9, 1972, the court entered judgment in accordance with the terms of the settlement, and it is that judgment from which appellant appeals.
The Trotsky judgment was brought to the attention of the trial court in the Barwig case. That court has deferred determination of the class
The purported clause 10 settlement was outside the scope of the second amended complaint. In that complaint the Trotskys contested only clauses 9 and 12, and made no allegations whatsoever concerning clause 10. They did not define the class to include clause 10 claimants, and did not purport to represent such class. In the absence of further amendments to the pleadings, the Trotskys could not settle the claims of a class of plaintiffs they did not represent. Furthermore, there is evidence that to the extent the Trotskys had a claim against respondent arising out of clause 10, it was not typical of the class claims purportedly settled in the agreement.
In addition, we disapprove of the manner in which the clause 10 claims were added to the settlement. At the time of the filing of the second amended complaint, which was by stipulation of the parties, respondent was apparently quite willing to have clause 10 excluded from the scope of the Trotsky case. Between the filing of the second amended complaint and the date of the settlement agreement, the Barwig case, challenging the validity of clause 10, was filed. We think it apparent that the intended effect, at least so far as respondent was concerned, of including clause 10 in the Trotsky settlement was to foreclose the Barwig case by binding the clause 10 class to the terms of the Trotsky agreement. Ordinarily the judgment in a class action is res judicata and binding on all members of the class who receive notice and who fail to request exclusion from the class action. (See Darr v. Yellow Cab Co., 67 Cal.2d 695, 704 [63 Cal.Rptr. 724, 433 P.2d 732]; Weaver v. Pasadena Tournament of Roses, 32 Cal.2d 833, 842 [198 P.2d 514].)
In the moving papers for court orders setting a hearing on the proposed settlement and providing for notice to the class, respondent, who was obviously aware of the Barwig case, failed to inform the trial judge of its existence and the significance of the Trotsky settlement to
Based upon the allegations of the second amended complaint, it is clear that the Trotskys were not, and did not claim to be, adequate representatives of those borrowers having claims against respondent arising out of clause 10. The class was defined in the second amended complaint as those persons who within the four years preceding the filing of the action executed agreements and trust deeds containing clauses 9 and 12 and from whom respondent had collected late charges and increased interest pursuant to those provisions. It was alleged that clauses 9 and 12 were invalid and unenforceable. That complaint did not define the class to include borrowers subject to clause 10, and made no allegations whatsoever with respect to the validity of clause 10. Thus the Trotskys had no "claims or defenses ... typical of ... the class" of
Aside from the Trotskys' failure to assert clause 10 claims in the second amended complaint, there is additional evidence that they may not have given adequate representation to the clause 10 claimants. It is conceded that although clause 10 was contained in the Trotskys' trust deed, that provision was never exercised as to their loan, and therefore the Trotskys had not personally suffered any monetary damage as a result of clause 10.
The fact remains, however, that here the complaint was not amended to encompass the terms of the settlement.
Furthermore, in the circumstances of this case the conflict between the second amended complaint and the settlement terms was far more serious than a pleading technicality. We have already referred to the substantial likelihood that the Trotskys' personal claim as to clause 10 was not typical of the class and that therefore they could not adequately represent such class. In addition, the failure to include reference to the existence of the Barwig case in the moving papers and the notice to the class impaired the ability of the court to consider whether it was desirable to approve this settlement of clause 10, assuming that the complaint could have been amended to allow it.
In order to exercise this power of careful scrutiny over the inclusion of additional claims in the settlement, the trial court has the right to expect the settling parties to disclose the effect of such terms at the time the proposed settlement is brought to the attention of the court. For instance,
There was no such candor and openness in the instant case. It seems obvious that the intended effect, at least so far as respondent was concerned, of including clause 10 in the Trotsky settlement was to foreclose the Barwig case. But when the parties requested the court to set a hearing on the proposed settlement, the court was not informed that the Barwig case was then pending in the superior court nor was it informed of the significance to that case of adding clause 10 to the Trotsky settlement. Furthermore, the notice mailed to the temporary class did not inform class members of the existence of the Barwig case and the significance of the Trotsky settlement in that respect. The existence of the Barwig case came to light in the trial court only because appellant, a member of the temporary class, received notice of the proposed settlement and entered his objections thereto.
The trial court did, eventually, learn about the Barwig case when appellant entered his appearance in objection to the settlement. The court took judicial notice of the Barwig file and the claims and defenses raised there
Even assuming that the record of the hearing would tend to support the trial court's findings, this case could have taken a completely different turn had the parties disclosed to the court the Barwig case and its significance prior to setting a hearing on approval of the proposed settlement, as should have been done.
First, assuming that the Trotskys thereafter desired to contest clause 10 in their case, the clause 10 issue then clearly overlapped the claims being made in the Barwig case, which was then pending in the same superior
Had the trial court been forewarned of the apparent overlap between the Trotsky and Barwig cases, it could have considered consolidating them. Had they been consolidated prior to setting a hearing on approval of the settlement, the outcome of the case might have been quite different. For instance, if the cases had been consolidated, appellant and his counsel would have had a greater role to play in negotiating the terms of the settlement and the language of the notice to the class.
Upon such investigation, class members might have presented additional evidence or objections at the hearing. Additional objections might have persuaded the trial court that the Trotskys did not adequately represent the clause 10 class or that clause 10 should be excluded from the Trotsky settlement or be modified.
We must now consider what disposition is required because of the erroneous inclusion of clause 10 claims in the judgment. Appellant has appealed from the judgment only "insofar as said settlement agreement and the judgment entered thereon purports to settle or waive the claims of those borrowers from LOS ANGELES FEDERAL SAVINGS AND LOAN ASSOCIATION, whose interest rates were raised by said defendant pursuant to the provisions of clause 10" of the trust deed. Appellant does not question any other portions of the settlement agreement. Respondent argues, however, that if the portion of the judgment relating to clause 10 is improper, the judgment in its entirety should be reversed.
We find no merit to the Trotskys' contention that the judgment can be affirmed on the ground that the release clause is ineffective against class members who were unaware of the Barwig case. The Trotskys' argument runs as follows: Under Civil Code section 1542, "[a] general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." It is argued that because class members were not made aware of the Barwig case they will not be bound by the release of clause 10 claims in the judgment.
This argument is erroneous because it confuses knowledge of the Barwig case with knowledge of a "claim." The notice mailed to the Trotsky class did state that clause 10 was contested in "[t]he various complaints on file"; the notice described the terms of respondent's agreement to modify its practices regarding clause 10; and the notice stated that "[i]n consideration of the foregoing described agreements of the Association, the Class has agreed to release the Association from all of the Claims, including, but not limited to, any liability which the Association might have in respect to its past assessment and/or collection of any Late Charges and/or Sums of Increased Interest from any member of the Class, ..."
Thus it cannot be said that class members were unaware of the existence of clause 10 claims within the meaning of Civil Code section 1542. They were merely unaware that an additional class plaintiff, appellant, was asserting similar claims in another case then pending in superior court.
Therefore we conclude that reversal of the judgment in its entirety is required by the circumstances of this case.
Kaus, P.J., and Hastings, J., concurred.
"Certain issues, although not always unique to class actions, frequently arise in them and are appropriate for a pretrial order after hearing.... Among these issues are:
"(a) CONSOLIDATION, SEVERANCE OR ABATEMENT. A motion to consolidate with, or sever from, one or more other pending actions, to abate the instant action until certain other pending actions have proceeded to judgment and similar motions based on the similarity of issues with those in other pending actions may be made. (Motions to coordinate with other pending actions pursuant to CCP Secs. 404 et seq. may be heard concerning all actions filed after January 1, 1974.)"