California Court Holds that if Class Representative Plaintiff is not and Never was Member of Class then Trial Court Abuses it Discretion if it Permits Precertification Discovery for the Purpose of Identifying Class Member Willing to Serve as Plaintiff
Plaintiff filed a putative class action against his title insurer (First American Title Insurance) and his lender (Wilmington Finance) alleging that “title insurers in the State of California are paying money for referral business from lenders,” that “[the] payments to lenders are rewards for channeling business to them,” and that “[t]hese kickbacks may be disguised as payments for bogus reinsurance which is purchased from captive insurers operated by the firms sending business to the title insurers.” First American Title Ins. Co. v. Superior Court, 146 Cal.App.4th 1564 (Cal.App. 2007) [Slip Opn., at 4]. Plaintiff brought the class action on behalf of those persons who “paid in whole or in part for a title insurance policy [from First American] which provided coverage for property located in the State of California . . . [f]or whom part of the premium paid for the title insurance policy was received by Wilmington Finance,” id., at 5. As it turned out, plaintiff was not a member of the class he proposed to represent, and no such scheme existed involving Wilmington Finance; accordingly, he propounded discovery on First American for the purpose of identifying someone willing to serve as class representative so the class action could proceed. Id., at 8. Defense attorneys objected on the ground that “[plaintiff] was never a member of the class alleged in his complaint, and therefore lacked standing to obtain discovery to locate a proper class representative.” Id., at 11. The trial court ultimately rejected the arguments of defense attorneys and granted plaintiff’s motion. The Court of Appeal granted First American’s petition for writ of mandate and directed the trial court to disallow the precertification discovery requested. Id., at 13.
Plaintiff purchased a home in February 2004. He claims the seller’s agent and the escrow company insisted that First American issue title insurance on the property, and he suspected that the escrow company or First American paid a kickback to the seller’s agent. Slip Opn., at 2. In November 2004, Colorado’s Division of Insurance “uncovered a reinsurance kickback scheme” under which “certain homebuilders, lenders and realtors formed their own reinsurance companies, known as ‘captive insurers'” and then referred business to title companies that agreed to “reinsure” the policies through the captive insurer. Id., at 3. In essence, “the reinsurance agreement was simply a way for the title insurer to transfer funds to the captive insurer as a payment for the referral of customers.” Id. California’s Department of Insurance initiated its own investigation in January 2005, one month before Colorado reached a settlement with First American. Id. A few days after the announcement that Colorado and First American had reached a settlement, plaintiff filed suit. Id.
Plaintiff’s original complaint advanced claims under California’s Consumer Legal Remedies Act (CLRA), and for breach of fiduciary duty, constructive fraud, unjust enrichment, unfair business practices and declaratory relief. Slip Opn., at 4. Plaintiff alleged First American had given part of his title insurance premium to Wilmington Finance as payment for referral business. Id., at 4-5. In point of fact, however, “Wilmington Finance had not entered into any reinsurance agreements with any First American entities . . . [and] had not been paid any compensation by First American entities for the referral of title insurance business.” Id., at 6. Accordingly, plaintiff dismissed Wilmington Finance without prejudice. Id. Within a week, however, plaintiff filed an amended complaint that once again named Wilmington Finance as a defendant. Id. He also filed case management conference statement in which plaintiff’s counsel disclosed that he was “considering the substitution or addition of a class representative” and admitted that possibly no kickbacks were paid in connection with plaintiff’s transaction. Id., at 6-7. Undeterred by this development, the statement advised the court that plaintiff may seek leave to redefine the class or to add new plaintiffs, and opined, apparently without explanation, that “plaintiff may have suffered a direct injury if his title insurance premium was artificially inflated as a result of defendant’s practice of paying improper kickbacks on other title insurance policies.” Id., at 7.
A fishing expedition followed. Plaintiff served on California’s Department of Insurance a Public Records Act request “seeking all documents relating to its investigation of the improper title insurance practices” including “[a]ll documents which . . . relate to . . . the identity of any individual . . . who was allegedly injured by First American’s improper title insurance rebating practices.” Slip Opn., at 7. The Department rejected plaintiff’s request. Id., at 7-8. Plaintiff thereafter “served extensive discovery requests” on First American seeking all information concerning the California’s Department of Insurance investigation as well as the names and contact information of all 38,000 people who received refunds under the settlement negotiated by California’s Department of Insurance. Id. The purpose of this discovery was to “identify a suitable class representative” as well as “potential witnesses,” and to determine how those individuals received their refunds and “whether they adequately compensated for damages.” Id., at 8-9. First American objected. Plaintiff’s ensuing motion to compel admitted that First American and Wilmington Finance were not involved in an illegal kickback scheme and that his precertification discovery was aimed at “seeking a new class representative.” Id., at 9-10.
Defense attorneys opposed the motion arguing that plaintiff “had no standing and could not seek defendants’ assistance in finding a plaintiff to sue them.” Id., at 11. First American stressed that this was not a case where plaintiff “was a member of the class who . . . could no longer represent the class”; rather, plaintiff “was never a member of the class alleged in his complaint, and therefore lacked standing to obtain discovery to locate a proper class representative.” Id. Plaintiff admitted in reply that he was not a member of the class; he argued, however, that he “had standing to bring other causes of action against defendants.” Id., at 12. The trial court expressed concern about the potential for abuse but ultimately concluded that plaintiff was entitled to the discovery he sought. Id., at 12-13. The appellate court disagreed.
The California appellate court framed the question as follows: “Can a plaintiff who purports to bring a cause of action on behalf of a class of which he was never a member obtain precertification discovery to find a new class representative?” Slip Opn., at 13. Preliminarily, the Court of Appeal easily concluded that plaintiff lacked standing to represent the class, particularly in light of the fact that California voters changed the law in November 2004 so that “an individual or entity may bring an unfair business practice class action only if that individual is a member of the class injured by the practice.” Id., at 14 (citation omitted). The appellate court found plaintiff’s speculation that he may have standing to assert other, unpleaded claims to be wholly irrelevant to its analysis: “The sole issue presented is whether the trial court abused its discretion by granting [plaintiff] precertification discovery to find a new class representative.” Slip Opn., at 13. Thus, irrespective of whether plaintiff “may have another, unpleaded, claim against a First American entity” it was undisputed that he “is not, and never has been, a member of the class he sought to represent.” Id., at 15.
The appellate court next recognized that there are circumstances under which a class representative who lacks standing to pursue a class action is permitted to “redefine the class or add new individual plaintiffs, or both,” but this usually occurs “where the class representative originally had standing, but has since lost it by intervening law or facts” or where the class representative “had standing when she sent the defendant a demand letter threatening suit” but the defendant gave the plaintiff the relief sought in the demand letter. Slip Opn., at 15-16 (citations omitted). None of those situations existed in this case. Rather, in engaging in the weighing process outlined in California decisional law, the appellate court held that it had “no trouble concluding that the potential abuse of the class action procedure greatly outweighs the rights of the parties under the circumstances.” Id., at 18. Plaintiff’s relentless discovery requests played a significant part in the court’s analysis, leading the appellate court to conclude that plaintiff “had apparently appointed himself enforcement officer for the California Department of Insurance settlement agreement” even though he was “an acknowledged stranger to that agreement did not restrain his efforts in any way.” Id., at 19.
The Court of Appeal also stressed that “this is not a case in which [plaintiff] has uncovered an apparent wrongdoing that will remain unaddressed without this class action.” Slip Opn., at 20. To the contrary, the lawsuit was not even filed until after the Colorado Division of Insurance announced a nationwide settlement with First American, and the California Department of Insurance also took steps to ensure that injured class members were made whole. Id. “In short, the potential for abuse of the class action procedure is overwhelming, while the interests of the real parties in interest are minimal.” Id. Accordingly, the appellate court held that the trial court abused its discretion in granting plaintiff’s motion to compel discovery. Id.
NOTE: To fill in some details, plaintiff filed suit only four days after the Colorado Division of Insurance announced a settlement with First American “by which that entity agreed to refund $24 million to on behalf of consumers nationwide,” Slip Opn., at 3. Later, the California Department of Insurance reached a $38 million settlement with nine different title insurance companies; First American agreed to pay $20 million of that settlement, but approximately $15 million of that sum “consisted of the share of the Colorado settlement payable to California consumers,” id., at 5. As part of the California settlement, First American agreed to provide a full refund of title insurance premiums to 38,000 customers; the balance of the $20 million settlement was a penalty paid to the California Department of Insurance. Id. The California Court of Appeal stressed that of the 5 million title insurance policies issued by First American in California “less than one percent of First American Title Insurance Company’s customers were victims of the reinsurance scheme and entitled to refunds under the settlement.” Id., at 5-6.