The Benefits and Burdens of Mega-Litigation

Petersen v. Bank of America, No. G048387 (D4d3 Dec. 11, 2014)

In a colorful majority opinion in 2-1 split decision reversing the trial court, the court of appeal holds that 818 individual plaintiffs can permissively join their mortgage-related claims under § 378 of the Code of Civil Procedure.  Taking some good-natured jabs at the “rococo” allegations of the voluminous Third Amended Complaint—in which “[r]hetorical flourishes abound”—Justice Bedsworth’s twenty-page majority opinion references William Jennings Bryan, Aristotle, Cicero, and Herman Melville. It’s a little over the top, perhaps on purpose. But it does read like the Justice had a good time writing it and the analysis doesn’t suffer for the style. Indeed, the opinion devotes the bulk of its discussion to analysis and forgoes the needless but all too typical recitation of the parties’ arguments and other procedural minutiae from the case below. That all said, this one seems like a pretty close call, or at least it seems so to me.

The case involves familiar allegations of allegedly deceptive mortgage origination practices by Countrywide in the mid-2000’s era. Plaintiffs claim that Countrywide engaged in shady appraisal practices to pump up home prices and then wrote loans to people who couldn’t afford them so that it could earn money by securitizing the loans. The plaintiffs’ lawyers managed to pull together 965 individual plaintiffs to join their complaint. A complaint, which by its third amendment raised four causes of action, for intentional and negligent misrepresentation, violations of the UCL, and (as to only 90 plaintiffs) wrongful foreclosure. 

The 3,142-page TAC included 208 pages of ordinary allegations, along with a 1,771 page appendix containing individualized plaintiff-specific allegations “that reads like a series of mini-complaints narrating the (rather similar) loan acquisition experiences of various plaintiffs.” It further appended more than a thousand pages of exhibits. The trial court sustained defendants’ demurrer on the ground of misjoinder of plaintiffs in violation of § 378. It dismissed all of the plaintiffs save the first one on the caption, with leave for them to re-file individual lawsuits. Of the dismissed plaintiffs, 818 appealed.

The court reverses. The majority opinion begins by noting that, in several respects, California procedural law favors economies of scale in litigation. This can be observed in liberal class action practice, related case rules, and the code provisions permitting coordination and consolidation of actions filed separately. It is also, according to the court, manifested in § 378, which permits plaintiffs to join with one another if they “assert any right to relief jointly, severally, or in the alternative, in respect of or arising out of the same transaction, occurrence, or series of transactions or occurrences and if any question of law or fact common to all these persons will arise in the action[.]”

The key text is “same series of transactions.”  After reviewing some venerable precedent standing for the proposition that § 378 should generally be interpreted broadly in favor of joinder, the court addresses several court of appeal cases that more specifically show that the facts here likely entail a “same series of transactions” with common issues of law and fact.  In particular, State Farm Fire & Casualty Co. v. Superior Court, 45 Cal. App. 4th 1093, 1113 (1996)—where 165 plaintiffs were permitted under § 378 to jointly complain about an insurer’s claims processing practices following the Northridge earthquake—seems pretty on point. Because those claims presented overlapping factual and legal issues regarding the insurer’s practices—albeit in fifteen different varieties—joinder was upheld. So if an insurance company’s processing 165 different, factually distinct insurance claims is a “series of transactions” satisfying the test, a single lender’s origination of 900 loans would too, provided there were similarly overlapping factual and legal issues involved. But key, says the court—in a point that the dissent contends with—is that the claims entail only one lender.(More on this below.)


The court then proceeds to offer some guidance for the trial court on remand. It notes that the the way the complaint is pleaded is unduly burdensome on both the trial court and the defendant. The trial court should—using tools such as the special demurrer for uncertainty, the motion to strike and its authority to manage complex cases—require the plaintiffs’ counsel to organize the plaintiffs’ claims into manageable subclaims and subclasses. And finally, the court specifically notes that its decision is without prejudice to whether the Class Action Fairness Act would authorize removal to federal court. 

Justice Fybel dissents. Somewhat more forcibly than is typical in state court. In particular, he does not agree that “over 1,000 separate and distinct loan and loan modification transactions” can be the same transaction or occurrence for the purposes of § 378. He also asserts that the majority was incorrect in its factual determination that the plaintiffs all shared the same lender. (The opinion lists eight third parties who were purportedly lenders to many of the plaintiffs.) Relying on a significant volume of factually analogous federal precedent, he would affirm the trial court’s ruling that joinder was inappropriate. Finally, Justice Fybel takes issue with what he sees as the majority’s “providing litigation strategy to appealing plaintiffs” when it comes to the redrafting of the complaint.

Reversed.

From a strict statutory interpretation perspective, it seems like the majority has the right side of this one. The dissent underplays § 378’s language permitting plaintiff joinder when there is a “series of transactions or occurrences.” If the statute were limited to the “same” transaction, there could never be joinder in contract cases unless all of the plaintiffs were parties to the same “series of” contracts, which just does not make sense. But the mass joinder permitted by the court creates a thicket of issues, and there are a few lingering issues that would be worth clearing up on rehearing. (Or, for that matter, by the Supreme Court on a review petition.)

First, how and why do the majority and dissent disagree about whether the plaintiffs all had the same lender? That seems like something that should be resolvable, and it’s probably a dispositive fact on the merits. It is feasible and within the available precedent to read a lender’s common deceptive practices arising from 965 similar loan transactions as a series of transactions or occurrences. But 965 complaints about a bunch of different lenders goes well past that. It is, essentially, putting an industry on trial. Section 378 does not go that far. This case is on an appeal of a demurrer, so I don’t understand how the issue can’t be resolved by looking at the pleadings. At minimum, it would be helpful for the majority to respond to the dissent and explain the basis for what reads like a factual dispute.

Second, neither the majority or the dissent explains what standard of review applies. There doesn’t appear to be any clear authority on the standard of review for an order granting a demurrer for misjoinder of plaintiffs under § 378. A demurrer for misjoinder of defendants under § 379 is generally reviewed for abuse of discretion, although courts have suggested that de novo review is more appropriate when the decision “requires no factfinding and is instead based largely on a conclusion of law.” See Van Zant v. Apple Inc., 229 Cal. App. 4th 965, 974 & n.5 (2014). The debate here largely entails the interpretation of § 378, which is clearly a legal question addressed through plenary review. But to the extent that the manageability concerns addressed in the majority opinion can make a difference on the permissibility of joinder under the statute—a point on which the opinion is not totally clear—those seem like discretionary concerns on which the trial court should be afforded substantial deference.  

Third, if the court is going to permit a joinder this big, it would be helpful if the court more clearly explained that plaintiffs need to plead their claims in a way that affords defendant an opportunity to demur on a claim-by-claim basis for failure to state a claim, no matter how burdensome that is. The allegations in this case involve fraud, which needs to be pleaded with particularity. In particular, the plaintiff needs to plead the who, what, when, where, why of each false statement, which in this case, potentially entails hundreds or thousands of statements in hundreds of different mortgage transactions. The fact that the case entails a “series of transactions” involving other common issues that merits a mega-joinder, does nothing to relieve each plaintiff of that burden. Plaintiffs should not be permitted to make a complaint un-demurrable through the sheer volume of their pleading. A defendant’s statutory right to demur to attack the sufficiency of the allegations of a complaint cannot be case aside because it is made inconvenient or burdensome because of the plaintiffs’ decision to join so many claims. The needs of efficiency in a complex case cannot and do not override the parties’ statutory procedural rights. See Rutherford v. Owens-Illinois, Inc., 16 Cal. 4th 953, 967 (1997).