LISA GRANBERRY et al., Plaintiffs and Appellants, v. ISLAY INVESTMENTS et al., Defendants and Appellants.
No. S035591
Supreme Court of California
Mar. 6, 1995.
9 Cal. 4th 738
Hill, Schwartz & Stenson, David H. Schwartz, Michael P. Guta and Ernest L. Graves for Plaintiffs and Appellants.
Daniel E. Lungren, Attorney General, Roderick E. Walston, Chief Assistant Attorney General, and Yeoryios C. Apallas, Deputy Attorney General, as Amici Curiae on behalf of Plaintiffs and Appellants.
Diane M. Matsinger, Betty L. Jeppesen, Antonio R. Romasanta, Crahan, Javelera, Ver Halen & Aull and Marcus E. Crahan, Jr., for Defendants and Appellants.
OPINION
MOSK, J.—An important provision of our statutory landlord-tenant law provides that within three weeks after the termination of tenancy a landlord must return the security deposit paid by a former tenant and provide a written accounting of any portion retained as compensation for unpaid rent, repairs, and cleaning. (
We conclude that a good faith failure to comply with
FACTS
Defendants own or operate between 1,200 and 1,500 residential rental units in the Santa Barbara area. During the period relevant to this case, April 27, 1978, to April 27, 1981, it was defendants’ practice to charge tenants an increased rental fee for the first 31 days of tenancy, but to charge a reduced fee for all subsequent months.2 Defendants never returned this fee in whole or in part; rather, they simply retained it as part of the rental payment for the first month. Approximately 10,000 tenants paid such fees during the relevant period, and the aggregate amount of such fees was approximately $1 million.
Plaintiffs, a class of former tenants, sued for a refund of the amount by which the rent they had paid for the first 31 days of their tenancy exceeded the amount they paid in each of the following months. The court entered summary judgment in favor of defendants on the ground that the increased rent paid during the first month was in fact rent and not a security deposit within the meaning of
Plaintiffs subsequently moved for summary judgment on the question whether defendants were entitled to a setoff in view of the fact that they had
In a second appeal the Court of Appeal held (1) the trial court erred in ruling that defendants were not entitled to a setoff, (2) the court did not abuse its discretion in granting refunds only to those class members who came forward to claim them, and (3) it was not an abuse of discretion to limit the award of attorney fees and costs to 25 percent of the total amount paid to the class. Although the Court of Appeal purported to reverse the judgment in its entirety, it in fact impliedly affirmed the judgment as to the second and third of these issues.4
I.
During the three-year period relevant to this litigation, plaintiffs vacated apartments rented from defendants but did not receive a written accounting of the basis for, or the amount of, the security deposits retained or the disposition of these security deposits. Nor did plaintiffs receive a refund of any portion of their security deposits. Accordingly, both the trial court and the Court of Appeal correctly concluded that defendants failed to comply with
The English chancery courts allowed setoff to be raised as a defense as early as the 17th century. (Prudential Reinsurance Co. v. Superior Court (1992) 3 Cal.4th 1118, 1124 [14 Cal.Rptr.2d 749, 842 P.2d 48]; 3 Story, Commentaries on Equity Jurisprudence (14th ed. 1918) § 1867, pp. 468-469;
We first consider whether to allow a landlord to raise setoff even though he has failed to comply with the requirements of
In 1970, the Legislature enacted section 1951, the predecessor of
From the foregoing history it is apparent that
Defendants note that the original draft of a bill proposed in 1985 would have added language to
Defendants also remind us that we should construe
Second, defendants contend that because the Legislature provided a remedy only for bad faith retention of a security deposit, we can infer it did not intend to impose a penalty for good faith retention. They conclude that landlords like themselves that have retained security deposits in good faith should not be penalized by being barred from raising setoff. This argument is persuasive. “[I]t is well settled that ‘Courts will not impose penalties for noncompliance with statutory provisions in addition to those that are provided expressly or by necessary implication.’ [Citations.]” (People ex rel. Van de Kamp v. American Art Enterprises, Inc. (1983) 33 Cal.3d 328, 334 [188 Cal.Rptr. 740, 656 P.2d 1170].) Because the Legislature has not expressly stated that landlords that fail to comply with
Plaintiffs vigorously contend this result is inconsistent with principles of equity and with public policy. (See Prudential Reinsurance Co. v. Superior Court, supra, 3 Cal.4th 1118, 1139 [considering principles of equity and public policy in determining whether setoff was available].) They first urge that to allow landlords to raise setoff as a defense would be inconsistent with the equitable principle that an individual should not profit from his own wrong, because landlords may use this defense to keep all or part of the security deposits they retained in violation of
In addition, a landlord that seeks setoff after good faith noncompliance with the procedures described in
Second, plaintiffs contend that to allow defendants to raise setoff would violate the equitable principle that an individual may not change his position to the detriment of another. (See
Finally, plaintiffs contend that to allow setoff would be inappropriate in class actions such as this because of numerous practical difficulties. They stress that (1) the class is comprised of approximately 10,000 individuals, many of whom may have moved to other parts of the state or country, (2) defendants have raised between 6,200 and 8,000 claims for setoff, which must be litigated individually, (3) because the security deposits in question are between $100 and $150, a relatively small amount of money, many class members may not appear to oppose defendants’ claims, and (4) if the class members do not appear, defendants will prevail by default on their claims for setoff, and may be unjustly enriched. Given these difficulties, plaintiffs ask us not only to bar defendants from raising setoff, but to reconsider our many earlier decisions holding setoff may be raised when the claims are not liquidated (see, e.g., Erlich v. Superior Court (1965) 63 Cal.2d 551, 555 [47 Cal.Rptr. 473, 407 P.2d 649]; Hauger v. Gates, supra, 42 Cal.2d 752, 755), at least in the context of class actions. We decline to do so for two reasons. First, it may well be possible on remand to shape a remedy that will avoid many of the problems plaintiffs have identified. Second, it is inappropriate to deprive defendants of their substantive rights merely because those rights are inconvenient in light of the litigation posture plaintiffs have chosen. (See City of San Jose v. Superior Court (1974) 12 Cal.3d 447, 462 [115 Cal.Rptr. 797, 525 P.2d 701, 76 A.L.R.3d 1223], fn. omitted [“Class actions are provided only as a means to enforce substantive law. Altering the substantive law to accommodate procedure would be to confuse the means with the ends—to sacrifice the goal for the going.“].)
For the reasons stated, we conclude that a landlord who has failed in good faith to take advantage of the summary nonjudicial deduct-and-retain procedure allowed under
II.
Plaintiffs requested that judgment be entered on behalf of the entire class for the aggregate amount of the security deposits retained, and suggested that any amounts not ultimately claimed by individual class members should escheat to the state. The trial court rejected the request and entered judgment in favor of only those members of the class (excluding the named plaintiffs, whose claims were dealt with separately) who might actually come forward and file individual claims. In doing so, the court issued a memorandum of intended decision stating in pertinent part: “In certain consumer class actions Fluid Recovery may be the best method of compensating the class. The propriety of Fluid Recovery in a particular case depends upon its usefulness in fulfilling the purposes of the underlying cause of action. (See State v. Levi Strauss & Co. [1986] 41 Cal.3d 460 [224 Cal.Rptr. 605, 715 P.2d 564].) We do not find that the Fluid Recovery method is necessary to fulfill the purposes of this case.”7 Plaintiffs now contend that the trial court abused its discretion by denying the remedy they requested.
“The class action is a product of the court of equity—codified in
When the trial court chose the class remedy in this case, it had already held that defendants were not entitled to set off amounts owed for unpaid rent, repair, and cleaning. There can be little doubt that this prior ruling was among the more important factors that the trial court considered in deciding what remedy would be most equitable given the circumstances as they then existed. However, we now hold in part I of this opinion that the trial court‘s initial ruling was error, that defendants are not barred as a matter of law from seeking setoff, and that they are entitled to have the opportunity to prove their right to setoff at an evidentiary hearing. It follows that the equities in this case may well have changed, and the trial court must reconsider its choice of remedy in light of the result of the forthcoming evidentiary hearing on defendants’ claim of setoff.
III.
The judgment provided in part that “Plaintiffs shall recover legal costs in the amount of $ [to be hereafter determined by the court]. Plaintiffs’ counsel shall recover reasonable attorneys’ fees in an amount to be hereafter determined by the Court. Such court costs and attorneys’ fees shall be paid out of and deducted from any aggregate amount of money paid by Islay under this judgment as the refund of rent for the first 31 days of a tenancy (when compared with the rent for the second and subsequent months of the tenancy). Pursuant to the notice given potential class members, such court costs together with such attorneys’ fees shall not exceed 25% of said aggregate amount.”
We have held, and we remain convinced, that an “‘experienced trial judge is the best judge of the value of professional services rendered in his court. . . .‘” (Serrano v. Priest (1977) 20 Cal.3d 25, 49 [141 Cal.Rptr. 315, 569 P.2d 1303].) Accordingly, the trial court must reconsider the question of attorney fees after the forthcoming evidentiary hearing on defendants’ claim of setoff.
The judgment of the Court of Appeal is reversed insofar as it impliedly affirms (1) that portion of the judgment of the trial court which limits recovery to nonnamed class members who have not opted out and who file claims, and (2) that portion of the judgment which limits the amount of the award of costs and attorney fees. The Court of Appeal shall remand the cause to the trial court with directions to conduct further proceedings consistent with this opinion. In all other respects the judgment of the Court of Appeal is affirmed.
Lucas, C. J., George, J., and Werdegar, J., concurred.
BAXTER, J.—I concur in the majority‘s judgment and in its holding that a landlord‘s good faith failure to comply with the requirement of
I respectfully disagree, though, with the majority‘s premise that
Arabian, J., concurred.
KENNARD, J., Dissenting.—The law requires that a landlord “shall” assert any claims against the security deposit of a tenant within a short period (formerly two, now three weeks) after the tenancy ends and “shall” within that period refund to the tenant any portion of the security that the landlord did not claim. (
In its haste to embark on its meanderings along the byways of equity jurisprudence, the majority fails to recognize that the language and purpose of the statute preclude the result it reaches. The purpose of
The majority, however, holds that landlords who violate
Additionally, I would hold that the trial court abused its discretion in fashioning the class remedy. I agree with the majority, however, that the plaintiff class‘s objections to the attorney fee order are premature.
I
Plaintiffs Lisa Granberry et al. are a class of approximately 10,000 former tenants of defendants Islay Investments and its managing partner Marvin Trevillian (hereafter collectively the landlord). The class members were tenants of the landlord between 1978 and 1981. The landlord charged the tenants on average approximately $100 more for the first month of the tenancy than for each succeeding month of the tenancy.
Granberry filed this class action contending that the excess first month charge was a security payment within the meaning of
The landlord filed a cross-complaint against the class member tenants for amounts allegedly due for unpaid rent, cleaning, and repairs. The trial court dismissed the landlord‘s cross-complaint because it was not properly served. The landlord also sought to assert these same claims as setoff to the security the landlord had received from the class member tenants. The trial court ruled that because the landlord had not complied with
After trial, the court entered judgment. The judgment limited the landlord‘s liability to the amount of security owed to those class members who might thereafter submit a claim, rather than imposing liability for the full amount of the security withheld from the class as a whole.
II
At the times relevant to this action,
The majority holds that, despite the landlord‘s statutory duty to assert any claim against the security and to refund the balance within two weeks of the end of the tenancy, a landlord who retains the entire security without complying with this duty may assert claims for the first time as setoff in a subsequent action by the tenant to recover the security. In my view, this holding is inconsistent with the language and purpose of section 1950.5(f).
In analyzing statutory language, this court looks to “the object to be achieved and the evil to be prevented by the legislation.” (Harris v. Capital Growth Investors XIV (1991) 52 Cal.3d 1142, 1159 [278 Cal.Rptr. 614, 805 P.2d 873].) As the majority acknowledges, section 1950.5(f) was designed to
The plain language of section 1950.5(f) requires a landlord within two weeks of the end of a tenancy to notify the tenant of any claims against the security and to return any portion of the security upon which the landlord has no claim. By strictly limiting the time within which a landlord can assert a claim against the security, the Legislature has necessarily provided that the landlord forfeits any right to set off claims against the security if the landlord does not do so within the statutory period.
This reading of section 1950.5(f) accords with its purpose. Section 1950.5(f) was designed to compel landlords to routinely return security due the tenant without the necessity of legal action. In the words of the majority, section 1950.5(f) “was enacted to ensure the speedy return of security deposits on the termination of tenancy and to prevent the improper retention of such deposits.” (Maj. opn., ante, at p. 746.) This purpose is furthered by requiring landlords to assert their claims against the security promptly after the end of the tenancy or else lose the right to do so thereafter.
Although a landlord loses all recourse against the security by failing to assert any claims within the statutory two-week period, this does not mean that the landlord has lost all recourse against the tenant. Nothing in section 1950.5(f) suggests that, by losing the right to set off claims against the security, the landlord has also forfeited any causes of action against the tenant. A landlord wishing to pursue those claims after allowing the statutory period to elapse may do so in an independent suit against the tenant. The landlord in this case did file a cross-complaint against the class members asserting claims for unpaid rent, cleaning costs, and repair costs; the cross-complaint was dismissed, however, when the landlord failed to properly serve it.
III
The majority hinges its conclusion that a landlord does not lose the right of setoff after the statutory period expires on the following reasoning. It first contends that to deny a continuing right of setoff to the landlord who fails to
The majority is wrong in characterizing the expiration of the section 1950.5(f) limitations period as a “penalty.” We do not commonly say that someone who has forfeited a claim by failing to bring it within the statute of limitations period has suffered a penalty. Under the majority‘s reasoning, however, every statute of limitations would be a penalty.
Nor is a limitations period for asserting claims (such as the limitation period of section 1950.5(f)) a “penalty” in the sense in which that word was used in the case on which the majority relies, People ex rel. Van de Kamp v. American Art Enterprises, Inc., supra, 33 Cal.3d 328, 334. At issue there was a monetary fine, not a claims limitation period as is the case here. (See ibid.)
Furthermore, even if the complete loss of a claim resulting from the running of a limitations period could properly be characterized as a penalty, it would still be incorrect to characterize the expiration of the landlord‘s setoff right under section 1950.5(f) as a penalty. As explained above, the landlord whose setoff right under section 1950.5(f) lapses does not forfeit any claims against the tenant, which the landlord can still pursue in an independent action against the tenant, but only loses the right to satisfy the claims out of the security.
Even assuming that the expiration of the landlord‘s right to setoff could be characterized as a penalty, it is one that arises “‘by necessary implication‘” (People ex rel. Van de Kamp v. American Art Enterprises, Inc., supra, 33 Cal.3d at p. 334) from the language of section 1950.5(f). As described above, the Legislature‘s imposition on landlords of a mandatory duty to assert any claims against the security within two weeks of the end of the tenancy necessarily implies that if landlords fail to do so within that
The majority is also wrong in concluding that, because section 1950.5(k) authorizes statutory damages for landlords who retain security in bad faith, the Legislature must have intended that landlords who, without acting in bad faith, unlawfully breach their mandatory duty to account for any claims against the security and to refund any remaining security should not lose the right of setoff after the statutory period expires. Section 1950.5(k) provides: “The bad faith claim or retention by a landlord . . . of the security or any portion thereof in violation of this section, . . . may subject the landlord . . . to statutory damages of up to six hundred dollars ($600), in addition to actual damages.”
The Legislature‘s decision to impose a special consequence—statutory damages—for retention of security that is accompanied by bad faith raises no logical inference that the Legislature intended to impose no consequence whatever for retention of security in violation of section 1950.5(f) not accompanied by bad faith. There is nothing logically inconsistent about imposing separate consequences for these different types of conduct. To the contrary, in light of the legislative purpose—to secure the prompt return of tenant funds to which the landlord has no legitimate claim—it is perfectly rational and consistent for the Legislature to have imposed, as it did, loss of setoff as the basic consequence for all retention of security beyond the statutory period, and to have imposed statutory damages as a second and additional consequence for a particularly aggravated form of statutory violation consisting of improper retention of security accompanied by bad faith.
Nor, unlike People ex rel. Van de Kamp v. American Art Enterprises, Inc., supra, 33 Cal.3d 328, 334, on which the majority relies, is this a case in which, because the Legislature has provided certain penalties or consequences for a statutory violation, the issue is whether the Legislature intended those remedies to exclude other penalties or consequences. American Art was a nuisance action in which the trial court had imposed upon the defendants a $168,000 fine not expressly authorized by the nuisance statute. (Id. at p. 334.) Because the Legislature had expressly authorized injunctive relief and the sale of the offending property as remedies for a nuisance, it was unlikely that the Legislature had impliedly authorized monetary fines as an additional punishment for the same act. Here, however, in the majority‘s view the Legislature has provided no consequence for a violation of the mandatory setoff-and-refund requirement not accompanied by bad faith.
By permitting a landlord who has retained the entire security without timely asserting any claims to the tenant to nonetheless set off claims in an
IV
The trial court‘s class action judgment required the landlord to refund only the security withheld from those class member tenants who might thereafter submit a claim against the landlord. The majority reverses the portion of the Court of Appeal‘s judgment affirming the trial court‘s class action remedy without reaching the issue of whether the trial court abused its discretion in fashioning that remedy. In order to provide guidance to the trial court on remand, I would reach that issue and hold that the trial court abused its discretion in ordering a class remedy that permits the landlord to retain class damages that are not claimed by individual class members.
The trial court‘s decision to limit the landlord‘s liability to only the amounts owed to those class members who may come forward and submit individual claims, rather than imposing liability for the full amount of unlawfully withheld security owed to the class as a whole, was an abuse of discretion, even assuming that the landlord should be permitted the right of setoff. In my view, allowing a wrongdoing defendant to retain all or part of the amount for which it is liable to the plaintiff class rarely is one of the options that a court should choose in deciding how to distribute the class recovery or dispose of the residual.
Initially, the trial court failed to distinguish between the separate issues of the determination of the amount for which a defendant is liable to the plaintiff class and the method for distribution of that amount to the class.
The trial court erased the distinction between these two concepts by making the amount of the class recovery turn on the effectiveness of the distribution method it selected. Using the trial court‘s formula, by definition there would never be any unpaid residuals in class actions because defendants would never have any liability for any amounts not claimed by class members. By making the landlord liable only for the security withheld from those class members who step forward to claim a refund and not for the security withheld from the class as a whole, the trial court in effect narrowed the class without notice after the trial had concluded and extinguished the causes of action of the nonclaiming class members. Instead, the trial court should have first determined the landlord‘s total liability to the class as a whole and then developed a method for distributing that amount to the class members to the extent feasible and for dealing with any unclaimed residual.
A trial court has several sources of guidance in dealing with the unclaimed residual of a class recovery. As the majority acknowledges, the class action is a creature of equity, and it is a first principle of equity that a wrongdoer should not be permitted to profit from its wrongs. (See
The Legislature, in
Accordingly, the trial court abused its discretion when it permitted the landlord to retain the unclaimed residual of the class recovery for the landlord‘s own benefit. The trial court in this case made no findings and gave no reasons to support its conclusion that the landlord should be permitted to retain the unpaid residual or that would explain why it was fair and just for the landlord to do so. Instead, the trial court simply made the conclusory assertion that “[w]e do not find that the Fluid Recovery method is necessary to fulfill the purpose of this case.” Given that it ordinarily does not further the purposes of the underlying action or promote justice to permit a defendant to retain the unpaid residual in a class action, the trial court‘s unexplained decision to the contrary was an abuse of discretion. This is especially so because the landlord here had previously attempted to evade section 1950.5‘s predecessor statute and to unlawfully retain security due its tenants by denominating the security a “nonrefundable cleaning fee.” (See Bauman v. Islay Investments (1973) 30 Cal.App.3d 752 [106 Cal.Rptr. 889].)
CONCLUSION
The Legislature enacted
Repeatedly invoking its notion of equity, however, the majority ignores the language and purpose of section 1950.5(f) to hold that landlords do not lose their right of setoff after the expiration of the statutory period. I cannot agree with this attempt to rewrite section 1950.5(f) and eviscerate its purpose.
Moreover, the Legislature intended that those tenants who are forced to bring a lawsuit to recover their security have a simple, swift, and certain legal remedy:
The majority‘s holding upsets this statutory scheme, for a tenant who brings an action to recover security now may be faced with unanticipated claims of setoff the landlord has never before asserted. The tenant‘s action is made not only unpredictable but more complicated. Undoubtedly, in light of the majority‘s creation of a landlord‘s right to setoff in actions to recover security, many tenants will now conclude that it is not worth the effort to bring such an action, just as they did before section 1950.5—hardly the result the Legislature intended in enacting this consumer protection statute.
For the foregoing reasons, I would reverse the portion of the judgment of the Court of Appeal holding that the landlord may set off its claims against the illegally withheld security and the portion of the judgment holding that the trial court did not abuse its discretion in limiting the landlord‘s liability to only the security due those class members who hereafter submit a claim.
The petition of plaintiffs and appellants for a rehearing was denied April 20, 1995. Kennard, J., was of the opinion that the petition should be granted.