Chance v. Superior Court

three major divisions of land: (1) that portion, allegedly divided into house lots, which secures the instant 2,139 separate trust deeds; (2) areas set aside for roadways and other off-site improvements for the benefit and development of the 2,139 alleged lots; and (3) portions of land retained by County-Wide Improvement Company and the other defendant development companies (stated to be 200 acres) which may, for present purposes,' be considered as unencumbered, but which may have been purchased with funds supplied by investors in Exchange. AYhile the face amounts of the notes and trust deeds appear to have been, at the time of purchase by Exchange, considerably in excess of the actual value of the land securing the notes, land values apparently have risen so that the worth of that security now represents a major percentage of the face amounts of the notes and trust deeds.

The land securing the notes is yet “raw” land, as the off-site improvements appear not to have been undertaken by the defendant development companies. Also, the instant trust deeds provide for their subordination to construction loans, but since no construction was commenced on the New-hall tract, these remain “first” deeds of trust. While the petitioners and real parties herein appear to agree that the instant 2,139 parcels of land may be individually located and foreclosed by power of sale, it is nowhere alleged that the present subdivision plan for the Newhall tract, in a final form, has been approved by proper authorities. Concerning the separateness of these alleged lots, it is perhaps significant that the title insurance apparently is in the form of a blanket policy covering the entire land area containing the 2,139 “lots.” Attorneys for real parties have stated that the instant trust deeds “are secured by parcels of land usually no more than 25 x 56 feet which are only 1/8 or 1/16 of regular lots making up an old subdivision.”

The sale of this group of trust deeds by Exchange was commenced September 17, 1959, and continued until June 7, 1960. It would seem reasonable to assume that the ownership of every note and trust deed was obtained by the investors as a result of a separate transaction with Exchange. All of the 2,139 notes are in default.

Exchange was placed in receivership on June 7, 1960, by reason of numerous, continuous, and willful violations of federal securities acts in selling trust deed notes. On the latter date Exchange had in its “warehouse” account 17 unsold notes secured by trust deeds out of the instant issue

among other claims, a cause of action against some of the defendants named in said state court complaint for rescission of their trust deed note purchase, a cause of action against some of the said defendants under section 12 of the Securities Act of 1933, and a cause of action under the California Corporate Securities Law.” It is alleged by petitioners that approximately 600 investors are plaintiffs in the federal action. Attorneys for real parties state that “some persons have voluntarily joined both litigations in the hope that one or the other, or both would prove successful.”

In their complaint for class foreclosure, plaintiffs prayed that all of the land securing the instant trust deed notes be sold by a commissioner appointed by the court, “and the proceeds applied to the payment of the amount due on said Promissory Notes and Deeds of Trust. ...” The object of the latter prayer is to facilitate sale of all of the instant separate parcels of land as one overall unit, which method of sale would appear to offer the greatest recovery on these undeveloped or “raw” parcels of land, most of which appear to lack even physical access. In this connection it has been alleged by attorneys for real parties that one Austin Montgomery has “offered to purchase all of the trust deeds from the plaintiffs and the title to the land from the defendants at a substantial sum.” That such an offer was made was admitted in a verified declaration filed in this proceeding by G. Douglas Wikle, one of petitioners’ attorneys.

It is alleged in a return filed by real parties in interest and verified on their behalf by one of their counsel, Harvey G. Cooper, that “the offer of compromise and purchase in this action is one to purchase all of the outstanding 2,139 trust deeds in this [Newhall] tract for the sum of $1,520,000.00 cash or the equivalent of approximately 76% of the total face value of all said trust deeds and notes.” In the latter connection it is significant that petitioners have alleged that ‘ ‘ [t] he reasonable values of the parcels of land securing the said trust deed notes through the deeds of trust vary, ranging from 20% to 70% of the face value of the notes.” The latter allegation concerning differential values has been denied in a verified document filed in this proceeding on behalf of real parties in interest. The parties before this court have stipulated, “That it is probable that the land in the within tracts is more valuable as one integral unit than if the parcels are sold individually.”

In his memorandum opinion sustaining the representative

foreclosure action in the companion case of Hink v. Superior Court, this day decided, post, p. 921 [ 23 Cal.Rptr. 771 , 373 P.2d 859 ], concerning which case the parties have stipulated in effect that principles of law similar to those involved in the case at bar are applicable, Judge Patton concluded: “As a result, perhaps, of a pre-conditioned professional reflex, I was originally of the tentative view that no group action of any kind would constitutionally be permitted to bind a dissident interested party who appears in the case. I am now persuaded that no such ironclad prohibition exists, and that we are free to follow whichever procedure appears to offer the most practical approach to our problems. The essence of ‘due process’ is notice and an opportunity to be heard. This can be accorded every interested party, regardless of how we proceed. . . . The constitution does not guarantee any particular remedy. We can assume that what any victim of this fantastic ‘ten-percenter’ operation really wants most is to get as much of his money back as possible, and that, by his non-appearance, he manifests his indifference as to the particular methods we may follow to achieve that end. The doctrine of ‘virtual representation’ always involves a certain element of legal fiction. No man who has, or thinks he has, a claim against another, is really willing to be bound by an adverse judgment in any lawsuit brought by someone else as his ‘virtual’ representative. Factors of convenience and practicability are permitted to override the individual claimant’s reluctance whenever any ‘class’ action is allowed. These factors are as evident in the case before us as in any class action that I have seen approved in the books.”

Petitioners contend that there is no community of interest among the individual investors whom plaintiffs seek to represent that will support a class suit. The latter contention is based upon the statement in Weaver v. Pasadena Tournament of Roses Assn., supra, 32 Cal.2d 833 , 837, that in class suits in California “it has been uniformly held that there must be a well-defined ‘community of interest’ in the questions of law and fact involved as affecting the parties to be represented.” The latter holding was an interpretation of section 382 of the Code of Civil Procedure, which forms the statutory basis for class suits in California. Section 382 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.”

It is argued by petitioners that since these are separate notes secured by separate deeds of trust, each deed of trust covers a separate parcel of property, and every note and trust deed was sold to its owner in a separate transaction with Los Angeles Trust Deed and Mortgage Exchange, it must follow that every investor has an entirely separate and distinct cause of action so that the necessary community of interest to sustain a representative suit is not present herein. However, while petitioners appear to be correct as to the latter contentions concerning elements of “separateness” herein (although it is not entirely clear that every parcel is a separately saleable building lot), it is not apparent that the intended “class plaintiffs” possess the kind of separate and distinct claims that preclude the sustaining of a representative suit. It was indicated in Weaver v. Pasadena Tournament of Roses Assn., supra, 32 Cal.2d 833 , 838-840, 842-843, that for related causes of action to preclude representative litigation they must be separate and distinct in the sense that every member of the alleged class would have to litigate numerous and substantial questions determining his individual right to recover against the named defendant or defendants following the rendering of a “class judgment” which determined in plaintiffs’ favor whatever questions were common among the plaintiffs sought to be represented as a class. (Accord: Barber v. California Emp. Stab. Com., 130 Cal.App.2d 7 ,15 [ 278 P.2d 762 ]; see 6 Stan.L.Rev. 120 , 128; cf. Noroian v. Bennett, 179 Cal. 806 , 808-810 [ 179 P. 158 ].) As stated by another authority, the community of interest requirement is lacking and separate and distinct claims present, in those situations “where each member of the class must establish his right to recover on the basis of facts peculiar to his own case.” (1 Chadbourn, Grossman, Van Alstyne, California Pleading (1961) Class Actions, § 635, p. 543; see Price v. Communications Workers of America, 167 Cal.App.2d 524 , 532-533 [ 334 P.2d 632 ] ; Watson v. Santa Carmelita Mut. Water Co., 58 Cal.App.2d 709 , 718-719 [ 137 P.2d 757 ] ; Goodspeed v. Great Western Power Co., 19 Cal.App.2d 435 , 443-444 [ 65 P.2d 1342 ]; Ballin v. Los Angeles County Fair, 43 Cal.App.2d Supp. 884 , 887-888 [ 111 P.2d 753 ] ; 71 Harv.L.Rev. 874 , 938-939.)

While the notes and trust deeds involved herein are separate; are secured by allegedly separate parcels of property, and were acquired through Exchange in apparently separate transactions, there are also present a number of

owners who have fully paid for their notes and trust deeds are not subject to the claim by the trustees in bankruptcy of Exchange that unpaid portions of the “purchase price” under the alleged executory contracts for acquisition of notes and trust deeds are assets of the bankrupt, the approximately 700 individuals who are potentially subject to such a claim have a strong common interest in resisting debtor status in relation to Exchange.

It now appears that the trustees in bankruptcy of Exchange will be among the “class plaintiffs” in any representative suit and, as indicated above, the trustees probably will assert claims against the partially paid investor-plaintiffs adverse to the interests of the latter group of investors. However, such a contest would appear to be merely an intra-class conflict over division of the proceeds available from any liability of defendants, a question to be determined subsequent to adjudication concerning defendants’ liability or liabilities. It is not unusual for class actions to involve such subsidiary questions wherein individual creditors or groups thereof contest issues among themselves after common questions as to basic liability have been settled. (See Chaffee, Some Problems of Equity (1950) Representative Suits, pp. 209, 223; 71 Harv.L.Rev. 874 , 938, fn. 465; 6 Stan.L.Rev. 120 , 130.)

It is next argued that the case of Baumann v. Harrison, 46 Cal.App.2d 84 [ 115 P.2d 530 ], upon which plaintiffs and real parties in interest allegedly based the instant class foreclosure suit, is not in point and “bears only a superficial resemblance to the instant case.” In Baumawn, a class suit was sustained wherein a single plaintiff, holding four notes, sought to foreclose one deed of trust which secured 225 promissory notes. The suit was on behalf of the named plaintiff and all of the other holders of the 225 notes. (See 46 Cal.App.2d at pp. 88-89.) Petitioners urge that since only one deed of trust was involved in the Baumann case, so that all of the notes there involved were secured by the same parcel of real property, Baumann is inapplicable to the instant situation where all of the 2,139 notes are secured by separate deeds of trust on allegedly separate parcels of land.

However, while the situation present in the Baumann ease is distinguishable in some particulars, it is difficult to perceive an essential difference between owning an interest in a deed of trust secured by four (undivided) parts of land out of 229 parts in the total parcel, and owning a deed of trust secured by an allegedly separate parcel of land which in practical

effect cannot be considered as entirely separate from the other 2,138 “lots” in the Newhall tract. Thus the Baumann case may be considered authority for the instant class foreclosure suit (see also Blair v. Shelby County Agricultural & Joint Stock Assn., 28 Ind. 175 , 177-178; Bardstown & Louisville R.R. Co. v. Metcalfe, 61 Ky. ( 4 Metc. 199 ) 180, 184-185 [ 81 Am. Dec. 541 ]), although “a determination of whether a particular plaintiff can fairly protect the rights of the group he purports to represent is necessarily dependent upon the facts and circumstances of each case.” (Bowles v. Superior Court, 44 Cal.2d 574 , 587 [ 283 P.2d 704 ]; see 1 Chadbourn, Grossman, Van Alstyne, California Pleading (1961) Class Actions, § 632, p. 541; 67 Harv.L.Bev. 1059, 1068.)

Petitioners also contend that a “common fund” is necessary to sustain a class action in this jurisdiction, and that because of the separateness of the notes, the trust deeds, and the alleged separateness of the parcels of land, the instant ease does not involve a “common fund.” But it appears that the “common fund” requirement is merely another way of stating the requirement of a “community of interest” among the class sought to be represented (see Bowles v. Superior Court, supra, 44 Cal.2d 574 , 587 [20] ; City & County of San Francisco v. Market St. Ry. Co., 95 Cal.App.2d 648 , 653-654 [ 213 P.2d 780 ] ; 1 Chadbourn, Grossman, Van Alstyne, California Pleading, p. 545 ; 6 Stan.L.Rev. 120 , 126-127, 131), and the statement indicating the necessity of such actual fund or property in Price v. Communications Workers of America, supra, 167 Cal.App.2d 524 , 528 [3], is hereby disapproved, as is language of like import in Watson v. Santa Carmelita Mut. Water Co., supra, 58 Cal.App.2d 709 , 718-719 [13], As we have hereinbefore pointed out, the requisite “community of interest” is present among the individuals sought to be represented by the device of a class action.

It is next contended by petitioners that if the basic action is allowed to proceed to a judgment effecting a “class foreclosure,” they and other dissenters within the class will be deprived of property without due process of law. It is argued that since in California a judgment in a representative suit is res judicata as to claims of members of the class represented (see Weaver v. Pasadena Tournament of Roses Assn., supra, 32 Cal.2d 833 , 842-843; DeMonbrun v. Sheet Metal Workers Intl. Assn., 140 Cal.App.2d 546 , 555 [ 295 P.2d 881 ] ; King v. International Union etc. Engineers, 114 Cal.App.2d 159 , 164-165 [ 250 P.2d 11 ]; Fallon v. Superior Court, 33 Cal.App.2d

48 , 50 [ 90 P.2d 858 ]; 23 So.Cal.L.Rev. 285, 287), the judgment on behalf of the class would unconstitutionally deprive the dissenters of property because they will have been represented by individuals who had interests in conflict with their interests.

But while due process of law may not be accorded where individual plaintiffs are allowed to secure a judgment on behalf of a class which includes persons whose legal interests are directly opposed to those of the representing plaintiffs (Horton v. Citizens Nat. T. & S. Bank, 86 Cal.App.2d 680 , 684-686 [ 195 P.2d 494 ] ; see Hansberry v. Lee, 311 U.S. 32 , 44-45 [ 61 S.Ct. 115 , 85 L.Ed. 22 , 132 A.L.E. 741]; Price v. Communications Workers of America, supra, 167 Cal.App.2d 524 , 533), in the instant basic action the conflict within the class is merely a difference of opinion as to the most effective remedy to be pursued against the defendants and the property involved. Petitioners apparently wish to proceed with the action filed in the federal court, wherein a cause of action for rescission is stated as well as causes of action under federal and state securities acts, and they appear to be concerned that a successful class foreclosure herein would adversely affect recovery upon rights asserted in the federal action.

However, even if it were possible, notwithstanding the present undeveloped state of the respective records and rulings in the basic state action and in the action filed in the federal court, to determine the complex questions of the possible effects of the instant representative foreclosure suit upon the federal suit for rescission and damages, it does not appear that the instant petitioners or any other dissenters would be legally deprived of property without due process of law even if (as now appears unlikely) a class foreclosure suit or decree completely precluded the assertion of all causes of action or supplementary remedies potentially available in the federal court action (or in any supplementary state action). All of the owners of the instant 2,139 notes secured by trust deeds are, essentially, creditors of a savings or investment institution, and a creditor has “no property right, in the constitutional sense, in any form of remedy.” (See Carpenter v. Pacific Mut. Life Ins. Co., 10 Cal.2d 307 , 335 [ 74 P.2d 761 ] ; accord: Gibbes v. Zimmerman, 290 U.S. 326 , 332 [ 54 S.Ct. 140 , 78 L.Ed. 342 ]; 7 Lawson, Eights, Eemedies, and Practice (1890) § 3865, pp. 6084-6087.) The reason for such a doctrine is apparent in the light of bankruptcy and other such familiar proceedings wherein a creditor may not be

As indicated above, both of the latter elements are present herein.

In addition, the land involved herein appears to be the major asset to satisfy any judgments secured by the investors, and it has been stipulated by all parties in the instant proceeding “That it is probable that the land in the within tracts is more valuable as one integral unit than if the parcels are sold individually.” The instant class foreclosure action is the only procedure presently suggested to be readily available by which all of the parcels of land securing the present 2,139 trust deed notes may be sold as a unit. (See 18 Cal.Jur.2d, Equity, § 7, pp. 147-148; 71 Harv.L.Rev. 874 , 938.) The land would appear to be properly in the custody of respondent superior court (Tutt v. Davis, 13 Cal.App. 715 , 718-719 [ 110 P. 690 ]; Code Civ. Proc., § 726; see Heffernan v. Bennett & Armour, supra, 110 Cal.App.2d 564 , 590; De Funiak, Handbook of Modern Equity (2d ed. 1956) §7, p. 13; Walsh, A Treatise on Equity (1930) §12, pp. 51-52; Waples, Proceedings in Rem (1882) §83, pp. 117-118; 70 Harv. L.Rev. 1257 , 1260-1261), and thus subject to disposition by that court, as a court of equity, in a manner ensuring maximum possible protection to the rights of all concerned. (See Kirkpatrick v. Stelling, 36 Cal.App.2d 658 , 668 [ 98 P.2d 566 ]; 6 Stan.L.Rev. 120 , 136, 144.) As held in Weaver v. Pasadena Tournament of Roses Assn., supra, 32 Cal.2d 833 , 837, “the doctrine of virtual representation . . . ‘ rests upon considerations of necessity and paramount convenience, and was adopted to prevent a failure of justice. ’ ” (See Chafee, Some Problems of Equity (1950) p. 231.) It is also apparent that it is impracticable to bring all of the over 2,000 investors before the court other than by a class action. (See Code Civ. Proc., § 382; Goldman v. County of Santa Barbara, 203 Cal.App.2d 454 , 457 [ 21 Cal.Rptr. 532 ] ; Price v. Communications Workers of America, supra, 167 Cal.App.2d 524 , 528; Peterson v. Donelley, 33 Cal.App.2d 133 , 136-137 [ 91 P.2d 123 ]; cf. Gorman v. Russell, 14 Cal. 531 , 539.)

Numerous additional contentions and arguments need not be considered in view of our present holding that the instant representative suit is a valid class action pursuant to section 382 of the Code of Civil Procedure, so that any foreclosure action will not, because of its class nature, result in deprivation of property without due process of law as to any

members of this group of owners of the 2,139 notes secured by trust deeds on parcels of land in the Newhall tract.

For the foregoing reasons, the demurrer to the petition is sustained; the alternative writs of mandate and prohibition heretofore issued are discharged, and the petition for the peremptory writs of mandate and prohibition is denied.

Gibson, C. J., Traynor, J., Sehauer, J., McComb, J., and Peters, J., concurred.