Copyright 1996 Shelley Thomson; all rights reserved.
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Table of Contents for Biased Journalism.
Biased Journalism Volume 2, issue 15 August 7, 1996.
We present this story because it is enlightening with respect to class action suits. Anyone who has been involved in a foreclosure in California should pay close attention.
[One day last June we picked Ricketts up at the airport and went to court to see him in action. We wanted to learn something about class actions and see some lawyers who were not involved in scientology lawsuits. Ricketts, dapper and irrepressibly cheerful, had brought a large case filled with copies of his filings for the other parties. We followed him from the dismal catacombs of the clerk's office, jammed with banker's boxes and ancient chipped file cabinets, up to the courtroom. It resembled a large classroom (we understand it was a temporary courtroom) and contained some 45 lawyers. The large briefcase was quickly emptied. Ricketts chatted sociably with his adversaries.
"He has a ranch in Orange County. Raises olives and pomegranites," the lawyers gossipped. "He has nothing to do but work on this lawsuit," another said glumly. Ricketts, the interloper from the Valley, was twisting their tails in court. And when the judge appeared, he did it again.]
[Comments: The issues in this case are transparently clear to the author, a consummate expert who loves his work and is in the process of humbling at least 44 other lawyers. After talking with Ricketts we understood that the party bringing the suit must prove that the defendant acted uniformly toward the plaintiffs. This is what defines a "class." For instance, plaintiffs who are defrauded by a defendant might constitute a class. On the other hand, if the prospective defendant has conducted itself differently toward each plaintiff--defaming one, causing another to lose his job, trespassing on the property of a third--a class action suit might not be the right approach. Watch for our next legal article, which will address RICO. -ed]
THE CALIFORNIA CLASS ACTION 30 YEARS AFTER DAAR
A Case Study: The Unfair Foreclosure Practices Litigation
Donald W. Ricketts
!STATUS REPORT!Settlement discussions on Phase III of these cases are now in progress. There will be meetings between the parties involved before Hon. William Cahill, San Francisco Superior Court, Department 8, 633 Folsom St., San Francisco on 8/7/96 & 8/27/96 at 9:30 a.m. A hearing on approval of any settlements that may be reached will be held on 9/12/96 at 3:30 p.m. before Hon. Stuart Pollak, Dept. 15, San Francisco Superior Court. Anyone who was in foreclosure from 12/10/89 to present, AND GOT OUT AND PAID FEES, should inform himself or herself about these matters. The author, one of the attorneys for the plaintiffs, may be reached at firstname.lastname@example.org.
IntroductionOne aspect of the consumer movement that flowered in the 1960s was the adoption, in 1966, of amendments to the rules which govern the conduct of litigation in the federal courts (the Federal Rules of Civil Procedure) to permit the filing of what we now think of, commonly, as "class actions". One year later, in Daar v. Yellow Cab the California Supreme Court recognized that class actions could be maintained in California state courts.
The question of whether class actions should be allowed was hotly debated. Proponents argued that by allowing consumers to band together for the purpose of presenting claims too small to be presented by individual suits, corporations would be dissuaded from engaging in questionable economic activities that affected large numbers of people and the class action would be an effective device to compel disgorgement of illegally or unfairly secured profits. Opponents, mostly business, argued that these cases would clog the courts and, in the end, would benefit only the lawyers who mounted them. Thirty years later, the arguments of the proponents and opponents of the class action may be measured against class actions that have been filed and are pending.
Massive class actions have been pending against lenders, title insurers, and others involved in foreclosures for over 14 years in the San Francisco Superior Court. (Note 1; all notes at end.) They are the longest running class actions in the state and threaten to rival cases regarding Colorado River water for longevity. These cases--collectively called, here, "The Unfair Foreclosure Practices Cases"---have involved and continue to raise virtually every issue that can be presented in a class action. They present a comprehensive picture of how California handles class actions nearly 30 years after Daar v. Yellow Cab held that they would be allowed.
What Is a Class Action?A class action is a lawsuit brought by one or more individuals (the "class representatives") on behalf of a group of persons "similarly situated" ("the class") to recover money or to end (enjoin) some type of unfair or illegal practice or to enforce some common right. All three types of relief are often sought in a single action. With some limited exceptions, a class action for damages and, in particular, a class action for damages arising out of unfair consumer practices, could not be brought prior to the 1966 amendments to Rule 23 of the Federal Rules of Civil Procedure (and the subsequent adoption of similar rules by the states or opinions by courts recognizing the class action). The necessity for "enabling acts" was rooted in fundamental notions of the power of courts and due process.
The controversial concept of whether courts can/should make law vs. merely interpret existing law (created by the legislative and executive branches) is beyond the scope of this article. Whatever the "should," courts can be viewed as making law that is binding on the parties to a lawsuit, at least, whenever they resolve whatever controversy brought the parties to court. But unlike the legislature, a court cannot simply reach out and make law on its own or even exercise the power it has ("jurisdiction") to resolve disputes (civil cases) or judge and punish criminals. A case must be brought to it. For example, regardless of the heinousness of a crime and the knowledge of it by a court, a judge cannot reach out and levy punishment. The perpetrator, the defendant, must be arrested and brought before the court. The same concept applies to non-criminal (civil) matters. A court cannot resolve a dispute between persons until the dispute and the parties are brought before the court. The process commences with the filing of a lawsuit, and, by filing the suit, the person who does so (the "plaintiff") agrees to subject him/herself to the court's jurisdiction.
When a suit is filed, the court issues a summons. It advises the person sued (the "defendant") that a suit has been filed and orders the person to either come in and defend it or suffer a default. When the defendant answers the complaint, the defendant has subjected him/herself to the court's jurisdiction and the court can now exercise all of its powers.
The essential legal problem, which prevented widespread use of class actions before the Rule 23 amendments, was that all plaintiffs-- all of the persons who have complaints against the defendant or defendants---were not before the court and had not agreed to submit their claims or rights to the jurisdiction of the court. (Indeed, for the most part, persons who were damaged by reprehensible consume practices did not even know that they had been gouged.) For the court to decide claims or rights of persons not before it, without more, violates the Fourteenth Amendment's requirement of due process. The amendments to Rule 23 (and adoption of similar provisions by the states) provided the "more". Elaborate safeguards were set forth in the amended rule whereby the due process rights of the absent plaintiffs would be protected. Two of the most fundamental are that notice of the existence of the case must be given to those whose rights are involved and they must be afforded the right to opt out of the class action and proceed independently. These were and are the central issues in the Unfair Foreclosure Practices Cases and, as the cases illustrate, these issues are not as straightforward as they may seem.
Phase I: The Foreclosure Fees CasesA loan to buy or refinance real property is usually secured in California by a deed of trust (while not technically accurate, this is a "mortgage") on the property. It gives the lender the right to take and sell ("foreclose") the property when the borrower (the homeowner) fails to make the required loan payments (or otherwise violates the terms of the mortgage). The foreclosure process is regulated by l aw and includes provisions specifying the type and amount of the fees and costs of the foreclosure process which can be charged to the homeowner if he/she "catches up" the late payments and rescues the property from foreclosure.
In 1982, in California the fee which could be charged by the trustee (who does the work for the lender) was one-half of one-percent of the unpaid principal balance of the loan. On average, this fee, the "trustee's fee", runs around $350-400 for a foreclosure on a typical California home. In addition to the trustee's fee, the trustee may recover the costs he actually incurs. Typically, these add another $300-400 to the amount the homeowner has to pay to get out of foreclosure.
The "Foreclosure Fees Cases" was the name given by the Judicial Council of the State of California to a group of cases that were brought together ("coordinated") under a single judge in San Francisco. They were filed in 1982 by two groups of homeowners and by the District Attorney for Santa Cruz County. The central defendant in all was T.D. Service Company ("TDS"), the first (and still largest) company in the state that performs (primarily for banks, savings & loans, and finance companies) the work required to do a foreclosure on real property.
The key to TDS's success was its discovery that much of the paperwork required to foreclose could be processed by computer, rather than individually. Because of this, the regulated rates to do this work (adopted in the 1930s in response to gouging during the Great Depression and designed to cover costs but take the profit out of foreclosures) could now yield profit of from 60-70%. The computer had outdated the regulated rates and converted them from "cost-covering" to "profit making".
The rate set by the statute (=AB of 1% of the unpaid principal balance) was a "maximum" rate, not a "set" or "mandated" rate. The trustee could charge up to the statutory rate. It could charge less and, in fact, prior to the emergence of foreclosure specialists (like TDS) the trustee's fee that was charged was, more often than not, determined by the amount of time that the trustee expended. Thus, if the homeowner "caught up" the day after the notice of default ("NOD"- -the document that starts a foreclosure) was published, he or she paid less than someone who caught up (or cured or reinstated) three months after the NOD was published. What all the lawyers who filed the first cases had noticed was that in every foreclosure TDS was charging the maximum statutory rate--regardless of when the homeowner cured and got of foreclosure. Initially, all cases charged that this was an unreasonable and unfair practice; that the fee must bear a relationship to the work involved.
Within a short period of time after the suits were filed, it was learned that, starting in about 1978, TDS had entered into written contracts with its bank/savings & loan/finance company clients that provided that the maximum fee permitted by the statute would be charged in all cases and that TDS would pay half of this fee back to the lender that had sent it the foreclosure to perform. Stated bluntly, these written contracts provided for an illegal price-fix and an illegal kickback. If it would still take time before the cases were resolved by settlement, their outcome was never in doubt once this damning contract had been discovered. (Note 2)
The quasi-criminal action filed by the Santa Cruz District Attorney had, of course, priority in TDS's mind over the civil cases. While the latter posed the threat of large damages, the action by the People posed the threat of criminal charges and punishment. Accordingly, resolution of that case became the first order of business.
The Santa Cruz District Attorney sought, primarily, to end the price-fixing and kickback practices and secure a significant fine ($500,000). He was willing to leave the collection of damages to the civil actions that had been filed in Los Angeles and San Francisco. (The principal civil cases were Cook v. T.D. Service Co. (San Francisco) and Burry v. T.D. Service Co. (Los Angeles).) (Note 3.) However, rather than use the time-honored mechanism of a consent decree whereby TDS would agree to stop the practices, the highly unusual step of settling the case by legislation was taken.
The use of legislation in connection with class actions was not totally without precedent. A common immediate reaction by big-business defendants served with a new class action alleging that some business practice was illegal, was to immediately seek the enactment of legislation (or administrative regulations) that would declare the practice to be legal, thus wiping out the suit. In fact, TDS tried exactly that, but the legislation was beaten down by lobbying by the Santa Cruz District Attorney and the plaintiffs' attorneys in the Cook case. This effort by TDS, however, set the pattern for settlement of the People's case and, in fact, may have been a condition of settlement imposed by TDS (because it wanted a "safe harbor"). A side agreement was entered into that provided that although the parties would seek legislation, the Legislature would not be told of the settlement.
The legislation was adopted in 1984 and provided for a reduction in the maximum trustee's fee that could be charged from one-half to one-quarter of one percent of the unpaid principal balance of the homeowner's note. This was, of course, a highly beneficial result for homeowners. TDS had established, beyond question, that it could do foreclosures for the latter rate (by kicking back one-half the trustee's fee to the lender) and still make considerable profit. The reductions secured by the legislation restored, somewhat, the basic philosophy of the Great Depression foreclosure litigation: Foreclosures should not be a money-making enterprise. But the new, reduced rate still provided for significant profit. (Note 4.)
The settlement of the civil cases--Cook and Burry--was more difficult.
In 1978, at the inception of the price fix-kickback scheme, TDS processed 9,173 foreclosures. Between 1978 and 1981 it extensively advertised its new policy and in 1981 it processed 30,212 foreclosures. The total number of foreclosures it performed during the period covered by the suits (1978-1983) was, approximately, 170,000. Total overcharges paid by these approximately 170,000 class members were estimated at approximately $15.3 million. The clear liability in the case suggested that a fair settlement would not discount this figure by very much.
But TDS did not have insurance to cover the majority of its exposure, had few hard assets which could be levied on, and maintained that it could not pay an amount close to this in settlement. Moreover, it argued, it faced claims for indemnity by its customers (the lenders), a few of whom had been named in the cases and would not settle unless these claims, and all claims that could arise from its illegal practices, would be extinguished as part of the settlement. The Cook plaintiffs made a demand of $3 million to settle.
The Burry plaintiffs, however, proceeded to name, as defendants, the majority (approximately 350) of TDS's customers and brought them into the suit. By so doing, the Burry plaintiffs had provided the means by which the indemnity claims against TDS by its customers could be extinguished and, equally importantly, had provided 350 additional sources of settlement money. In the end, these new defendants provided approximately 40% of the $4.4 million for which the cases settled.
The right of the class members (the homeowners who had paid the illegal fees and were entitled to a share of the settlement fund) to individual, mailed notice of the existence and settlement of the cases, and their right to accept the settlement or opt out was not contested in Phase I. TDS had incomplete, hard-copy records of approximately 110,000 foreclosures which were used to create a database from which individual notice was given and which was used to administer the refund process. The mailed notice was supplemented by published notice throughout the state.
However, in what was to prove to be an impediment to fuller distribution of the settlement funds, all plaintiffs recommended that class members be required to make a claim and provide some proof that, in fact, they had been subjected to a foreclosure by TDS and had paid to get out.
Many class members failed to understand the notice and thought they were being sued. The problem was compounded by a dense notice printed in 8-point type that was full of legalese. When these notice problems began to manifest themselves, the Burry plaintiffs moved the court for a modification of the order approving the settlement to provide that, inasmuch as the TDS records had, in fact, identified the persons entitled to refunds, that checks simply be mailed directly. The Cook plaintiffs opposed the motion and prevailed. The final result was disappointing. Of a total of approximately 170,000 members of the class, only 9000 claims were presented.
Of the $4.4 million paid by the defendants in settlement, $1.6 million was paid for attorneys fees, the class members were paid $2.3 million, $200,000 was paid to non-profit organizations, $100,000 was paid over for costs in the Phase II cases, and the balance (difficult to determine but believed to be approximately $500,000) was used for the costs of notice and settlement administration.
By the time the Phase I cases closed, the Phase II cases were well underway and held the promise that a better job of distributing settlement funds to the class members to whom they belonged could be done. The result was quite the opposite.
Phase II: The TSG CasesAs the Foreclosure Fee Cases (Phase I) were progressing, the attorneys for the plaintiffs began to look at a "big-ticket" cost item that was paid in connection with every foreclosure: The Trustee's Sale Guarantee ("TSG") fee. It almost always equaled or exceeded the amount of the trustee's fee and was, on average, $350.00. The facts that were developed led to the filing of a second group of cases which were coordinated before a single judge by the Judicial Council under the title The TSG Cases.
Apart from conducting the sale should the homeowner not reinstate, the principal function of the trustee conducting the foreclosure (for the lender) is to give notice that the foreclosure has started. Besides the homeowner, California law requires that notice be given to others whose rights might be affected should sale take place. For example, a foreclosure sale would not only wipe out the debt represented by the first mortgage (or deed of trust) but also the second , third, etc., mortgage and other liens that may have been recorded against the property. Thus, in order to protect their rights, these people are entitled to notice that a foreclosure had been started. As with any real estate transaction , a foreclosing trustee determines the identities and addresses of persons entitled to notice of default by going to a title company for a title search.
Until 1978, a foreclosing trustee would get a limited title search (a Foreclosure Notice Report) that would give it the necessary information. The cost was approximately $35.00. Thereafter, as the time for sale approached and it became reasonable to assume that the homeowner was not going to rescue the property, the foreclosing trustee would prepare for sale by getting a full title search and a policy of title insurance that insured against defective sale-- the TSG.
In 1978, the legislature increased the number of persons who were entitled to notice of default. The title insurance companies, claiming that this made issuance of a Foreclosure Notice Report more difficult and chancy, abolished it, leaving, as the only device by which a foreclosing trustee could obtain the identity of persons entitle to notice, the TSG--at about 10 times the cost.
Thus, where homeowners who cured prior to 1978 would have to pay only $35 for the title search, they now had to pay $350.00. In 1995, for example, approximately 120,000 foreclosures were started in California. Roughly 65% of these, or 78,000 did not go to sale- -the property owners cured. Where the title insurance companies would have received, only, approximately $2.7 million for the Foreclosure Notice Report, in fact they received and homeowners paid, approximately $27 million for TSGs. (Note 5.)
These facts led the Burry plaintiffs to file an amended complaint in the Foreclosure Fee Cases alleging claims against the title companies for TSG overcharges. (Note 6.) They argued that the withdrawal of the Foreclosure Notice Report from the market had been the result of an anti-trust conspiracy among the title insurers. (At the time there were 16 such insurance companies in the state; the number is now down to 12; either number is small enough to allow for highly coordinated activity (i.e., a conspiracy) by the title insurers). They argued that in order to get title information (the names and addresses of persons entitled to notice of default), trustees were being forced to buy title insurance at the outset of a process that only resulted in sale a minority of the time. Thus, in a majority of the cases where the TSG was purchased, the risk which was insured against (defective sale) never materialized because there was no sale. From the standpoint of an insurance carrier, sales of insurance where there is no risk is very good business. The Burry plaintiffs argued, further, that because the trustees collected the TSG fee from, either, the homeowner if he reinstated or from the buyer if the property went to sale, they simply didn't care and willingly went along with the scheme.
The response of the Cook plaintiffs was immediate. They filed, outside the coordinated proceedings, an independent action ("Bell I") alleging, essentially, the same claims on behalf of the same class. Simultaneously, they entered into an agreement (undisclosed to the court or other plaintiffs' counsel until much later) with Chicago Title Insurance Company (who had used TDS to do some of its foreclosures and was a defendant in the Phase I cases) that the TSG claims would not be settled as part of the Foreclosure Fees Cases. When these facts were made known, the Burry plaintiffs complained to the court (Hon. Ira Brown) that the matters should be resolved in a single proceeding and would result in savings of millions of dollars in attorney's fees, court, and administrative costs. Judge Brown, preoccupied with the massive asbestosis cases, and seeing an opportunity to eliminate a significant, time-consuming group of cases, turned a deaf ear to the suggestion and approved the Foreclosure Fees Cases settlements, reserving the questions raised by the TSG complaints to separate resolution. Following dismissal of the Foreclosure Fees Cases pursuant to the settlements, the Burry plaintiffs, and others, filed independent lawsuits embodying the TSG claims and, ultimately, they became coordinated with Bell I as the TSG Cases.
It took approximately 3 years to arrive at settlements in the TSG Cases--and then, settlements were only reached in Bell I. Large and bitter disagreements developed between the two groups of plaintiffs over the handling of the cases and their settlement. The Bell plaintiffs determined that notice should be by publication only; that, again, claims would have to be presented; that opt outs would be precluded; and that an appropriate settlement amount would be $5 million. The other group, now headed by plaintiffs Robert G. and Wendy L. Brymer, (Note 7) opposed all of this.
After the court issued the no-opt orders, the attorney for the Brymers (the author) wrote to 7700 class members urging them to opt out anyhow. The court (now Judge John Ertola, who was described by Bell counsel as having a "special relationship" with his firm) found this to be an act of contempt; fined the attorney $154,000, suspending all but $7700 of the fine; and made detailed findings which accused the attorney of pursuing the position that he had taken in opposing the Bell settlements as an attempt to extort attorney's fees. Judge Ertola found that the attorney had a long history of such tactics. Additionally, Judge Ertola reported the matter to the State Bar after complaints by two of the attorneys in the case had been turned down by the State Bar. Judge Ertola's complaint received attention and disciplinary hearings were instituted. Counsel admitted to sending the letter, that it violated the intent of Judge Ertola's no opt out orders, and that the attorney failed to show respect for the court. The State Bar investigators and the State Bar trial judge could find no evidence to support the detailed findings which Judge Ertola had made.
The settlements which the Bell plaintiffs reached with the title insurance companies provided for cash payments of $4 million and another $1 million which would be paid pro rata when claims reached 16,000 and would be exhausted if 20,000 claims were paid at the contemplated rate. It also provided for prospective relief in the form of future reductions in the cost of a TSG of $100 or $50, depending upon the time in the foreclosure process when the homeowner cured and took the property out of foreclosure. The Bell plaintiffs that the future discounts would total approximately $34 million. Based upon this, they applied to the court for attorneys' fees and costs of $2.5 million.
The Brymer plaintiffs opposed the settlements. They argued that the cash payments were inadequate in the face of claims that had been valued at approximately $75 million; that the prospective relief was illusory; and that attorneys fees of 55% of the cash payments were obscene. The use of published notice, only; a claims procedure; and the denial of the right to opt out were central legal arguments which, eventually, formed the basis of an appeal.
Judge Ertola approved the settlements with their record-setting attorney's fees and the Court of Appeal affirmed, finding that the right to best notice and the right to opt out were not guaranteed by the right to due process.
Following affirmance on appeal, distribution of the remaining settlement funds began. The results were, not unexpectedly, more disappointing than the Phase I results. Only approximately 2000 claims were received from the 650,000 class members (.3%; the claims rate in Phase I had been 5%).
Finally, admitting they could generate no further claims, and unwilling to distribute the remaining settlement funds to those who had made claims, the Bell plaintiffs moved the court for an order that the remaining settlement funds be paid to non-profit organizations. The court appointed attorney Thomas Jenkins (one of the Bell counsel) to screen applications and make recommendations to the court. He made recommendations that various amounts be made to a variety of organizations. He recommended that $250,000, the largest proposed grant by far, be paid to the National Association of Consumer Advocates ("NACA"). Other groups who had applied for funds immediately came into court and advised Judge Pollak that NACA was an organization founded and controlled by Attorney Jenkins and other counsel representing the Bell plaintiffs. Judge Pollak, ignoring this gross impropriety, awarded NACA $50,000, an amount greater than many other non-related recipients received.
In the end, the $4 million settlements (and the interest they earned) were distributed by paying $3 million in attorney's fees and costs, $1.1 million to the class members, and $619,000 to non-profit organizations. A small balance remains.
The California Class Action At PresentPrior to the decision of the California Court of Appeal issued in connection with the Phase II cases, California stood squarely in the vanguard on recognizing the propriety of class actions and had not hobbled them with rules that the Federal Courts (and other states) had adopted to restrict their use. The California Supreme Court had urged trial courts to be creative in working out issues and remedies so that use of the class action would be promoted. Decision after decision had recognized the right of class members to the best practicable notice and the right to opt out of class actions for damages whose direction or resolution was not acceptable to them.
All of that changed with the decision of the Court of Appeal. California took a turn from pro-consumer to pro-attorney. The creativity which the Supreme Court had urged became a creativity for finding ways to restrict the opportunity for class members to share in large monetary settlements and to increase the opportunities for attorneys to do so.
Prior to the appellate opinion, the United States Supreme Court had flatly declared that "due process requires at a minimum that an absent plaintiff be provided with an opportunity to remove himself from the class by executing and returning an opt out' or request for exclusion' form to the court". Incredibly, the California Court of Appeal (First District) read this language not as establishing a constitutional due-process right to opt out, but merely holding that a federal court could adjudicate rights of distant class members. But a year after the decision of the California Court of Appeal, the U.S. Supreme Court granted a hearing in a case from the Ninth Circuit Court of Appeals plainly opposite to the opinion of the California Court of Appeal. Subsequently, however, it dismissed the case stating that it was not necessary to reach the constitutional question because the issue could be decided under the Federal Rules.
California has realized the predictions of the opponents of the 1966 amendments to Rule 23 that class actions would not prove to be of substantial benefit to consumers but would come to benefit only the lawyers who filed them. But all of that may change and California is likely to have the opportunity to return to the main stream. Phase III of the Unfair Foreclosure Practices Litigation is now in full swing and is fast coming to decisions that are likely to re-present all of the questions on new appeals and they are likely, this time, to go to the U.S. Supreme Court.
Phase III: The Enforcement Proceedings and the Oborn/Smith ActionsThe prospective relief portion of the Phase II settlements took two forms. One group of defendants agreed to provide discounts in the cost of the TSG when the homeowner saved the property and took it out of foreclosure. The amount of the discount was either $50 or $100, depending on when the cure took place. A second group agreed to offer a lesser-priced alternative product that would be sufficient to provide the trustees with the information they needed to start a foreclosure.
In late 1995 it was discovered that the prospective relief was, indeed, illusory. Virtually no discounts had been made and virtually no alternative products had been sold.
The Bell plaintiffs cried "Foul!" and instituted proceedings before Judge Pollak to enforce the settlements. The defendants claimed they had done nothing wrong.
The defendants pointed out that they had made the required rate filings with the Department of Insurance, thus making the discounts and alternative products available to the trustees. They also pointed out that the settlement agreements required the Bell plaintiffs to provide them with a list of trustees, lenders and others to whom they would give direct notice of the availability of the discounts and alternative products and, although defendants requested the list, the Bell plaintiffs failed to deliver it. They argued they had no obligation under the settlement agreements to do more and that the failure of the public to receive the discounts, or the benefit of the lower priced products, was because they were not widely known, as they would have been if the Bell plaintiffs had carried out their obligations. The Bell plaintiffs argued that the defendants had an independent duty to actively market the products and give discounts and could not sit back and wait for someone to ask for them.
Chicago Title Insurance Company pointed out that the alternative product which it had agreed to provide was in fact insufficient to allow a trustee to start a foreclosure, but was exactly what the Bell plaintiffs had specified they wanted. Its position was that it was not their fault that counsel for the Bell plaintiffs did not know what they were doing; they had given precisely what was asked for.
The enforcement proceedings started by the Bell plaintiffs failed against a major title insurer--Fidelity--because the Bell plaintiffs had specified the wrong Fidelity company as the settling defendant and, thus, the correct company had not agreed to do anything.
The enforcement proceedings against First American Title Insurance Company failed because the Bell plaintiffs simply failed to provide the court with evidence that, in fact, First American had not performed.
Enforcement proceedings against the balance of the defendants are pending but have been stayed.
While the enforcement proceedings were pending, new actions were filed on behalf of all persons who were supposed to receive the discounts and lesser-priced products, but did not. Rather than seek to enforce the illusory settlement agreements, these cases (Oborn and Smith) simply alleged that the title insurance carriers had violated their rate-filings, an indisputable fact, and were liable independently of what the settlement agreements provided or failed to provide. (Note 8.) These actions also alleged, on behalf of this new, post-Bell I class, the original anti-trust complaints that had been pled in the TSG Cases. Additionally, the actions named as defendants, in addition to the title insurance companies, the major trustees who perform the foreclosures, collect the fees and costs, and who failed to be aware of and request the discounts and alternative products. Finally, the new actions sued the attorneys for the Bell plaintiffs for malpractice alleging that the settlement agreements were negligently negotiated, that the attorneys failed to perform their obligations to provide the list under the settlement agreements, negligently failed to enforce the settlement agreements, and acted contrary to the interests of the class they represented when they sought settlement funds for their related organization (NACA) rather than their clients. (Note 9.)
The Bell plaintiffs are now seeking settlement agreements with the defendants. They seek, once again, to utilize published notice only, to institute a claims procedure, to preclude the right to opt out and to trade future relief to a future class for compensation to the class who was supposed to receive the discounts and benefit of lower priced products. All of this is opposed by the Oborn/Smith plaintiffs.
The Bell plaintiff have now appealed from the denial of their motion to enforce the settlement agreement against First American. Judge Pollak refused to grant a motion of the Oborn/Smith plaintiffs to disqualify Bell counsel and that ruling is now appealable. The Bell plaintiffs are likely to succeed in securing the settlements they seek and Judge Pollak is likely to approve them. And the First District Court of Appeal is almost certain to have the opportunity to re-examine the position it took in Phase II.
NOTES1. Phase III of these cases is about to become very active. One notice of appeal has already been filed by one group of plaintiffs who lost a motion to enforce the settlement of Phase II against First American Title Insurance Company. Phase III Settlements will come before the Honorable Stuart Pollak (the Coordination Trial Judge appointed by the Judicial Council of California to handle the cases) for approval shortly. They are likely to be hotly contested and appeals are likely to be taken. An appeal will be filed from Judge Pollak's denial of a motion to disqualify certain plaintiff's counsel in the cases on the grounds of gross impropriety.
2. This contract became the subject of one of many interesting side suits that were filed. TDS filed a malpractice suit (in a remote county) against the lawyers who had drawn this contract for them.
3. It is believed that TDS practices were discovered by Attorney Thomas A. Jenkins who brought what he found to the Santa Cruz District Attorney. In any event, the People's case was filed first followed, shortly, by Cook. TDS's practices had been independently discovered by Los Angeles attorney Joel Dwork and were under investigation by him at the time Cook and the People's case were filed. Although the People's case and Cook were coordinated immediately, the lawyers in those cases did not advise the court or Judicial Council of Burry, although they were fully aware of it.
4. Other features of the legislation were not beneficial to homeowners and the settlement of the People's case, and the legislation, was opposed by the Burry plaintiffs and sowed the seeds for discord that had a deleterious effect on the prosecution of the cases and contributed to their longevity. These matters are discussed below in connection with Phase II of the litigation.
5. A more egregious aspect of the process takes place when a title company is also the trustee. In those cases, it charges the homeowner for the TSG that it "buys" from itself to obtain information it already has and "insures" itself (an impossibility).
6. An immediate response by the title companies to this was that the law allowed collection of a TSG fee. This provision had been written into the statute as part of the legislation that was adopted pursuant to the settlement of the Foreclosure Fees Cases. Although that issue had been taken out of those cases (see below) the title insurance companies were able to get this provision inserted into the bill in an attempt to legalize the TSG. The process was aided by then Senator Barry Keene who chaired the committee that reported the bill out. Sen. Keene's brother, Scott Keene, was counsel for TDS in the actions and Sen. Keene was of counsel to Tobin & Tobin who represented Commonwealth Land Title Company, a defendant in all of the cases. The Santa Cruz District Attorney and counsel for the Cook plaintiffs went along with this deal. Counsel for the Burry plaintiffs opposed it.
7. As noted above, Linda Burry had been the secretary to Joel Dwork. As the disagreements raged, Mr. Dwork ultimately determined to separate Mr. & Mrs. Burry from their co-plaintiffs and to go along with the Bell plan, a position directly contrary to that which he had taken in connection with the settlement of the Foreclosure Fees Cases (Phase I).
8. An insurance carrier may not sell any line of insurance until it files a rate for it with the Department of Insurance. After it does so, there is a waiting period to allow for objections. If no objections are filed, the rate becomes effective. Once a rate is in force, the carrier may not charge more or less than its published rate.
9. The principal attorney-defendants are Daniel J. Furniss and Mark Jansen, and their firm, Townsend and Townsend and Crew; Thomas A. Jenkins and Daniel J. Mulligan, and their firm, Jenkins & Mulligan; and James C. Sturdevant and Patricia Sturdevant, and their firm, The Sturdevant Law Firm.
2. Netcom Assumes The Position
On August 1 it was announced that Netcom had settled with
RTC. The terms are secret. However, a quick visit to Netcom's
page told the story.
Netcom created an intellectual property protocol and made
it a part of its terms of service. The protocol covers:
<Fair Use Exerpt ON>
"These terms include a prohibition from using NETCOM services to unlawfully distribute the intellectual property of others, regardless of the format of the property."
"Intellectual Property is an idea represented in a form that can be sold, transferred, or otherwise disposed of. It's intangible property generally protected by patent, copyright, and trademark law. Some examples include: inventions, works of authorship like short stories or poetry, and a symbol representing a company or product like the NETCOM logo...Distributing here means making available to another Internet user whether via email, ftp, web publishing, netnews, Internet Relay Chat, or any other means.
"Owners of intellectual property who believe their intellectual property has been improperly posted or distributed via NETCOM servers should notify NETCOM so that appropriate action may be taken. Send notification challenging improper postings to NETCOM at email@example.com.
"Procedures for Postings Challenged as Improper
[Warning: the following impromptu remarks are not written by a
lawyer and are not represented as legal advice or legally
<Standard Disclaimer ON>
<Cynicism toggle ON>
This is a Big Win for the church. Netcom has agreed to remove any post (etc.) upon receipt of a complaint by an alleged copyright holder. The complaining party shall provide Netcom with various supporting information: the protocol does not specify how long the complainant can stall before providing the information, and it does not say how long Netcom can stall before making a decision. A challenged post can be mothballed indefinitely.
While the language invites the reader to believe that each challenged post will be reviewed by Netcom's lawyers using the same criteria the court would use in a copyright case, that is not necessarily what will happen. The criteria Netcom will use in making the judgment are not specified, and nothing is said about who will make the decision. Realistically, we think it is unlikely that Netcom will engage its expensive lawyers and rack up legal fees over ordinary Usenet posts (etc.). The posts will probably be sent to an employee who is charged with the task. ["Yo! Here's another one for the Clam Desk!"]
S/he will look at the material supplied by the complainant, compare it with the post to see if the texts agree in whole or in part, and write a report. We cannot imagine this clerk entrusted with the power to make a determination of the _lawfulness_ of the subscriber's use of copyrighted material. The clerk will simply report on use.
Censorship is the default. What Netcom will evaluate is not the lawfulness of the censored post, but the legal exposure involved in its restoration.
We imagine that the decision to _restore_ a challenged post will be scrutinized very carefully. If the complaining party is serious about filing suit, we surmise that Netcom might be sued for contributory infringement if Netcom releases the post. Should the isp risk incurring substantial legal fees merely for a Usenet post (or email, etc.)? Certainly not. So much for "fair use."
We had no difficulty guessing the fate of the famous six lines, Keith Henson's letter to Judge Whyte or the commentaries of Dennis Erlich.
In a difficult case, when a complainant threatens to sue and the post appears to be a legitimate use of copyrighted information, the decision can be postponed indefinitely. If the subscriber gets tired of waiting and sues, the isp can blame the complainant, in which case the subscriber may wind up having to sue both institutions. In worst case, Netcom can wait until the last minute and cough up the post to quell the subscriber's suit.
There is no doubt that the right of subscribers to speak freely has been severely compromised. Is this a Consitutional issue? The general opinion among attorneys is that it is not, because no government action is involved.
Mindful that the Cynicism toggle is still ON, it occurs to us that RTC/the church of scientology is not necessarily held to the published conditions. For all we know, the secret agreement establishes a church operative on the Clam Desk with a file of proprietary documents which Netcom has the theoretical right to review but in practice never sees. This gives the church a veto over critical posts. As another part of the agreement, we assume that Netcom agreed to hold the church harmless if any church vetoes were later overturned in court and damages were assessed.
Item 4, "to protect the rights of all concerned," annoyed us. How are a subscriber's rights protected by censoring his message? This is doublespeak of the purest Orwellian strain.
We wondered what other advantages this agreement gives the church. Will Netcom release to the church account information about a subscriber whose posts have been challenged, without the nuisance of a court order? We presume so. Netcom will have promised to assist the church in defending its intellectual property rights.
We considered how this might impact the remaining defendants, principally Tom Klemesrud, sysop of support.com. Support.com gets its Usenet connection through Netcom. On the other hand, netcom.com is not a part of its hostname or address. Klemesrud does not believe that support.com is directly affected by the new rules.
Extreme pressure may be brought now to force Klemesrud to settle.
On August 5 Klemesrud griped in a post to alt.religion. scientology, "Netcom counsels, Randalf Rice of the Genesis Group, amd Malissa Burke of Pillsbury, Madison, Sutro; still have not seen fit to inform co-defendants about their secret faustian deal. They apparently thought we'd catch it sooner or later in the newspapers, and that would be enough notice for us for the conference this Friday August 8th."
We messaged Klemesrud for his reactions to the deal, and he replied:
"The insurance company has the right to settle this out without my permission; however, it must be a clean settlement, with no strings attached. The Scientologists want a mutual release. I will not enter in to any contract with this criminal, terrorist group. However, I will not block a clean, no- string-attached settlement that the insurance company might want." [Earlier Klemesrud said, "I will not agree to any confidential settlement."]
"Judge Whyte's ruling precedents are going to be challenged by my defense. In my opinion Whyte doesn't have the empathy, requisite knowledge concerning this medium, and familiarity with civil, and constitutional, rights to sit in judgement of this case--made all too obvious by the unconstitutional raid on Erlich, without the benefit of the required United States Marshals."
"I cannot afford to defend this action in San Jose. Therfore, we are considering asking for a change of venue to Los Angeles."
"Here is an interesting quote from the _Santa Clara bench Book_ concerning Honorable Ronald Whyte:
"'10 Ex Parte Applications
'Generally Judge Whyte is not willing to hear ex parte applications with less that 24 hours' notice to the opposing party, but will do so for an extreme emergency, or if delay will cause irreparable injury to someone....' [This pertains to Klemesrud's annoyance at the secret settlement, which was concluded before Magistrate Judge Infante without the knowledge of any of the other defendants. Afterward the Netcom attorneys simply stopped returning telephone calls. Was this an ex parte hearing? Klemesrud wonders.]
We assume that Klemesrud will have more to say after the status conference on August 8.
<Cynicism toggle OFF>
3. The Ultimate NOTs Page
The NOTs Scholars Home Page (Scientology)
A mouse informed us that Dave Touretzky has created a web page for scholars. We paid a visit and were very impressed. The page is comprehensive and contains fascinating articles. Touretzky wrote some of the essays himself.
Concerning his motives, Touretzky said:
"This web site was created to promote the scholarly study of the NOTs documents as both religious literature and historical texts. In particular, I am interested in exploring the following issues:
"Contributions to this web site are eagerly requested. Information, commentary, and criticism of any aspect of NOTs may be submitted to Dave Touretzky. The appearance of any essay on this site is not an endorsement of the views expressed therein. It reflects only my editorial judgement that the material is relevant to fostering scholarly discussion.
"Anonymous contributions are welcome. However, materials that clearly violate US copyright law will not be accepted. Potential contributors should note that since I am not a lawyer, I cannot advise them on what they should or should not say here."
The site contains subtopics:
"Attention NOTs scholars: multiple commentaries on the same document are welcome. There are many ways to analyze these writings."
David S. Touretzky
Computer Science Department & Center for the Neural Basis of Cognition
Carnegie Mellon University
Pittsburgh, PA 15213-3891
We salute David Touretzky, who bypassed the flame wars to create a work of genuine intellectual value.