Opinion
Amended 6/26/01
APPEAL from a judgment of the Superior Court of Los Angeles County Super. Ct. No. BC200288. Bruce E. Mitchell, Temporary Judge. (Pursuant to art. VI, section 6 of the California Constitution.)
Quisenberry & Kabateck, Brian S. Kabateck and Penny J. Manship; Esner & Chang and Stuart B. Esner; and Law Offices of Nate G. Kraut and Nate G. Kraut for Plaintiffs and Appellants.
Carlson, Messer & Turner, Jeffery J. Carlson, Charles R. Messer and Joseph R. Zamora for Defendant and Respondent.
CERTIFIED FOR PARTIAL PUBLICATION
Pursuant to California Rules of Court, rules 976(b) and 976.1, this opinion is certified for publication with the exception of parts III.C through III.H of the majority opinion and the entirety of the concurring and dissenting opinion.
TURNER, P.J.
I. INTRODUCTION
On August 5, 1998, before the present proposed class action was ever filed, the Los Angeles County District Attorney and the Attorney General, each acting on behalf of the People of the State of California, secured separate judgments against defendants in the present lawsuit, Trans World Airlines, Inc. (TWA) and National Collection Systems, Inc. doing business as National Credit Management (NCM). The separate August 5, 1998, judgments imposed injunctive and monetary relief and in part were based upon the provisions of Business and Professions Code sections 17200 through 17009, which are commonly called the unfair competition law. (See Stop Youth Addiction, Inc. v. Lucky Stores, Inc. (1998) 17 Cal.4th 553, 558, fn. 2; ABC Internat. Traders, Inc. v. Matsushita Electric Corp. (1997) 14 Cal.4th 1247, 1252.) As a result of the separate judgment secured by the Attorney General, 63 persons who were aggrieved by the alleged misconduct of defendants were ordered to receive restitution from NCM. None of the individuals who received restitution from NCM as a result of the August 5, 1998, separate judgment secured by the Attorney General are plaintiffs in the present class action.
In the present class action lawsuit, all 23 plaintiffs sought relief under the unfair competition law in the fourth cause of action of the second amended complaint. The trial court sustained the demurrer to the fourth cause of action of the second amended complaint for relief under Business and Professions Code section 17200 et seq. on res judicata grounds. Based on res judicata principles, the trial court reasoned plaintiffs were barred in the present class action from securing any relief because of the prior August 5, 1998, judgments imposed in the unfair competition law litigation pursued by the Attorney General and the Office of the Los Angeles County District Attorney on behalf of the People of the State of California. As will be discussed in the published portion of this opinion, based upon the provisions of sections 41 and 42 of the Restatement Second of Judgments, we conclude the trial court properly sustained the demurrer to the fourth cause of action. However, as will be noted, due to the unusual circumstances present in this case, we believe leave to amend should have been granted.
II. THE SECOND AMENDED COMPLAINT
A. Overview
Twenty-three plaintiffs in a class action, commenced November 5, 1998, appeal from the demurrer dismissal of their second amended complaint against defendants, TWA and NCM for: violation of Education Code sections 94831, 94832, and 94838; violation of Business and Professions Code section 17500; violation of the Consumers Legal Remedies Act (Civ. Code, § 1750); unfair competition within the meaning Business and Professions Code section 17200; conspiracy to defraud; and fiduciary duty breach. We affirm in part and reverse in part.
. TWA has secured the protection of the bankruptcy courts. Prior to filing its bankruptcy petition, TWA filed a brief in this case. Insofar as the analysis in the TWA brief is relevant to the demurrer of NCM, we have considered it. Further, the request to defer further resolution of the present appeal pending the outcome of the bankruptcy proceedings or the filing of a motion for relief of the automatic stay has been denied. The complaint in the present case was filed on November 5, 1998. The demurrer in the present case was sustained more than 18 months ago and further delay is not in order.
The second amended complaint alleged TWA and NCM entered into a conspiracy to defraud low income job applicants out of approximately $2,800 each for a sales training course. The training course was offered by TWA and defendants jointly profited from the scheme in the sum of $7.5 million. Further, on July 8, 1996, the Attorney General and the Los Angeles County District Attorney filed a complaint against TWA and NCM which sought injunctive relief and civil penalties. On August 5, 1998, stipulated separate final judgments in the lawsuit filed by the Attorney General and the Los Angeles County District Attorney were entered against TWA and NCM preventing them from engaging in unlawful and fraudulent practices such as were involved in the present case. Restitution was ordered paid to certain individuals. None of the persons ordered to receive restitution in the two August 5, 1998, judgments are plaintiffs in the present lawsuit. The second amended complaint in the present action alleges that TWA continued to deduct monies from plaintiffs' paychecks in order to pay for the improper courses despite the existence of the injunction.
B. Conspiracy Allegations
The second amended complaint contains substantial conspiracy allegations. As noted earlier, the second amended complaint alleged that the proposed class action lawsuit was brought by persons who were "victims of [TWA's] and [NCM's] conspiracy to defraud low income job applicants out of a fee of approximately $2,800 each for a sales reservation 'training' course offered by TWA." It is alleged TWA and NCM conspired as to each of the transactions identified in the second amended complaint. It is further alleged that TWA and NCM "formed a conspiracy to operate the TWA Course" between 1990 and 1998 by use of "unlawful advertisements, false representations, active concealment of statutorily mandated credit terms and threats of collection . . . ." The second amended complaint alleged that defendants "conspired to effect this scheme together." The second amended complaint also alleged, "NCM acted as TWA's collection agency and aggressively pursued payment for the TWA Course despite its knowledge of the concealment from Plaintiffs of the credit terms mandated by statute and other illegal activity . . . ." The second amended complaint alleged that: defendants directed their "scheme, in large part, at poor working mothers and women who were in need of stable employment with medical benefits"; they "intentionally conspired to take advantage of persons who [were] economically vulnerable"; and both TWA and NCM were located in St. Louis, Missouri. At another point, the second amended complaint alleged, "Defendants have engaged in a conspiracy, common enterprise, and common course of conduct the purpose of which was to commit the acts of unfair competition and defraud [plaintiffs], as alleged in this [second amended] complaint, for financial gain." It is also alleged that NCM was fully aware of the conduct of TWA.
C. Substantive Allegations
In terms of the substantive allegations, the second amended complaint alleged that beginning in 1990 and continuing through "some time in 1998, TWA operated purported 'vocational schools . . . .'" From 1990 through 1998, TWA placed "'help wanted' advertisements in various publications" which were untrue and misleading. This was because TWA was unable to offer any immediate employment. Rather, the advertisements were designed to induce principally economically disadvantaged single mothers and low income women to accept enrollment in the "TWA Course" in exchange for a potential job with medical benefits. TWA obtained authorization to provide the course from the California Department of Education, Private Postsecondary Division, and its successor the Council for Private Postsecondary and Vocational Education. TWA employees knew that Education Code section 94831 prevented them from advertising in the "'help wanted'" sections of newspapers or magazines. TWA concealed from state authorities the fact it was placing the advertisements in the "'help wanted'" sections of newspapers and magazines.
Those who responded to the advertisements were falsely told that if they completed the TWA Course, they would be guaranteed a job upon completion of the period of instruction. In fact, TWA had sole discretion as to which applicants completed the TWA Course. Before being hired, it was necessary that the student pay dues and join a union, facts which were not disclosed to plaintiffs prior to their enrollment in the TWA Course. TWA also falsely represented that its course would allow plaintiffs to secure employment "throughout the travel industry." In fact, the TWA reservation system was one that was not used by the majority of the travel industry and other airlines. The training provided by TWA was of limited value unless the student obtained employment with that airline.
The TWA Course was not taught in a professional manner. Classes were unruly and disorganized and educational materials were rarely used. Many of the "teachers" were not accredited in compliance with California law. Each plaintiff was required to pay $2,800 for the TWA Course. If a plaintiff could not afford the entire cost of the TWA Course, he or she was required to make a down payment. The second amended complaint alleged, "TWA represented that Plaintiffs could pay the remaining balance for the TWA Course fee through interest free payroll deductions if they were employed by TWA upon completion of the course."
TWA decided which students successfully completed its course. When the course was completed, the successful applicants were offered "'On The Job Training'" and were told that they could be terminated for any reason. Plaintiffs were paid $811 per month but there was a deduction by TWA for between $50 and 100 per month for the course. The location where plaintiffs worked was so unsafe that it was necessary that they park in the TWA parking facility which charged approximately $18 per month. After the deductions for the monies charged for the TWA Course and the parking as well as union dues, plaintiffs received less than the minimum wage. Further, plaintiffs were not advised that if they left their employment, they would be charged an annual interest rate of 18 percent or more on the outstanding balance owed for the TWA Course.
The second amended complaint alleged: "TWA intentionally structured the TWA Course in the manner described . . . in order to use the TWA Course as a profit center. TWA intentionally made the TWA Course more difficult than necessary so that there was a low passage rate and TWA could collect money from many students without having to hire all the applicants solicited through 'help wanted' ads." Further, the second amended complaint alleged: "Beginning at a time . . . at least since 1990, and continuing through 1998, TWA has contracted with, and/or assigned or sold Plaintiffs' contracts for the TWA Course to [] NCM for purpose of having NCM collect the amounts owed for the TWA Course from Plaintiffs. . . . [¶] NCM engaged in this conduct, and conspired with TWA, in order to gain unlawful financial profits at the expense of Plaintiffs." It is further alleged that NCM staff knew of the illegality of both its conduct and that of TWA.
The second amended complaint alleged in the first cause of action the foregoing conduct violated Education Code sections 94831 and 94832 in that "'help wanted'" columns were used to solicit students and false promises of employment were made by TWA. Specifically, the second amended complaint alleged defendants' deceptive conduct consisted of: falsely utilizing the "help wanted" sections of newspapers and the like in order to induce plaintiffs to enroll in the TWA Course; promising applicants employment if they passed the TWA Course when in fact it was solely in the airline's discretion as to whether a job would be offered; falsely representing the marketability of skills taught by the TWA Course; and making misleadingly incomplete statements concerning the terms of the credit extended to applicants including failing to disclose interest payments and an accelerated payment scheme. Further, plaintiffs alleged that the conspiracy to deprive them of monies violated Education Code section 94838, subdivision (c). This is because TWA unlawfully failed to provide requisite notice concerning the holder of the assignment of the contracts for the purchase of the TWA Course for collection which did not contain the notice required by Education Code section 94838, subdivision (c). Additionally, defendants' fraudulent conduct allegedly violated Business and Professions Code section 17500 et seq. and the Consumers Legal Remedies Act pursuant to Civil Code section 1750 et seq. Moreover, the conduct is alleged to violate the provisions of Business and Professions Code section 17200 et seq. and constitute a fraudulent conspiracy as well as a breach of fiduciary duties owed to plaintiffs. As noted previously, the present lawsuit was commenced on November 5, 1998.
III. DISCUSSION
A. Standard Of Review
Our Supreme Court has set forth the standard of review for ruling on a demurrer dismissal as follows: "On appeal from a judgment dismissing an action after sustaining a demurrer without leave to amend, the standard of review is well settled. The reviewing court gives the complaint a reasonable interpretation, and treats the demurrer as admitting all material facts properly pleaded. [Citations.] The court does not, however, assume the truth of contentions, deductions or conclusions of law. [Citation.] The judgment must be affirmed 'if any one of the several grounds of demurrer is well taken. [Citations.]' [Citation.] However, it is error for a trial court to sustain a demurrer when the plaintiff has stated a cause of action under any possible legal theory. [Citation.] And it is an abuse of discretion to sustain a demurrer without leave to amend if the plaintiff shows there is a reasonable possibility any defect identified by the defendant can be cured by amendment. [Citation.]" (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 966-967; accord, Moore v. Regents of University of California (1990) 51 Cal.3d 120, 125; Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)
B. The Res Judicata Issue and the Fourth Cause of Action for Violation of the Unfair Competition Law
On July 8, 1996, the Los Angeles County District Attorney and the Attorney General filed suit and later, on August 5, 1998, successfully secured injunctions against both TWA and NCM in separate judgments. Both TWA and NCM were enjoined pursuant to Business and Professions Code sections 17200 et seq. and 17500 et seq. as well as Education Code section 94952, subdivision (c)(1) from continuing with the course of conduct alleged in the second amended complaint. Further, NCM was ordered to pay $15,057.27 to the Attorney General to be placed in a "Restitution Account" which was to be paid to 63 persons specified on pages 11 and 12 of the August 5, 1998, judgment. No plaintiff in the present action is listed on pages 11 or 12 of the August 5, 1998, NCM judgment secured by the Attorney General. In other words, based on the documents available to us and to the trial court, no plaintiff in the present lawsuit received any money as a result of the litigation brought by the Attorney General and the Los Angeles County District Attorney which resulted in the separate August 5, 1998, judgments against TWA and NCM.
We confront the res judicata issue based on the two stipulated August 5, 1998, judgments against TWA and NCM which indicate that none of the plaintiffs in the present action received any restitution or other monetary relief. There can be circumstances where a represented party's claims may be barred by res judicata principles resulting from a judgment in a prior representative lawsuit. Those circumstances are discussed in section 41 of the Restatement Second of Judgments which states in pertinent part: "(1) A person who is not a party to an action but who is represented by a party is bound by and entitled to the benefits of a judgment as though he were a party. A person is represented by a party who is: [¶] . . . [¶] (d) An official or agency invested by law with authority to represent the person's interests; or [¶] (e) The representative of a class of persons similarly situated, designated as such with the approval of the court, of which the person is a member. [¶] (2) A person represented by a party to an action is bound by the judgment even though the person himself does not have notice of the action, is not served with process, or is not subject to service of process. [¶] Exceptions to this general rule are stated in [section] 42."
We agree with NCM that the prior lawsuit which resulted in the separate August 5, 1998, judgments was a representative action. An action under the unfair competition law can be a representative action. (See Cortez v. Purolator Air Filtration Products Co. (2000) 23 Cal.4th 163, 167; Weil, Cal. Practice Guide, Civil Procedure Before Trial (2000), § 14:6.1, p. 14-2.) A representative action can be brought by the Attorney General, a district attorney, or a private person. (Bus. & Prof. Code, § 17204; Stop Youth Addiction, Inc. v. Lucky Stores, Inc., supra, 17 Cal.4th at pp. 558, 567-578.) Section 41 of the Restatement Second of Judgments would appear to bar the present unfair competition law cause of action. A judgment secured on behalf of the People of the State of California falls within the ambit of section 41 of the Restatement Second of Judgments.
However, as noted in the last sentence of section 41 of the Restatement Second of Judgments, there are exceptions to the res judicata rule applicable to prior representative actions. The set of exceptions to the rule that a plaintiff may be barred by a prior judgment in a representative action from pursuing a new lawsuit are set forth in section 42 of the Restatement Second of Judgments which states in relevant part: "(1) A person is not bound by a judgment for or against a party who purports to represent him if: [¶] (a) Notice concerning the representation was required to be given to the represented person, or others who might act to protect his interest, and there was no substantial compliance with the requirement; or [¶] (b) The subject matter of the action was not within the interests of the represented person that the party is responsible for protecting; or [¶] (c) Before rendition of the judgment the party was divested of representative authority with respect to the matters as to which the judgment is subsequently invoked; or [¶] (d) With respect to the representative of a class, there was such a substantial divergence of interest between him and the members of the class, or a group within the class, that he could not fairly represent them with respect to the matters as to which the judgment is subsequently invoked; or [¶] (e) The representative failed to prosecute or defend the action with due diligence and reasonable prudence, and the opposing party was on notice of facts making that failure apparent." The exceptions in section 42 of the Restatement Second of Judgments include: the failure to give notice of the representation; before rendition of the judgment, the representative was divested of authority to act on behalf of the plaintiff; there was a conflict of interest between the plaintiff in the present action and those in the prior lawsuit; and the representative, in this case the Attorney General or the District Attorney, failed to prosecute the prior action with due diligence and reasonable prudence. (E.g., Phillips Petroleum Co. v. Shutts (1985) 472 U.S. 797, 812; St. Sava Mission Corp. v. Serbian Eastern Orthodox Diocese (1990) 223 Cal.App.3d 1354, 1376.)
This issue is before us at the demurrer stage. The question raised is whether an unlawful practice act complaint where there has been a previous judgment entered in a representative action brought by the Attorney General or a district attorney must allege the exceptions set forth in section 42 of the Restatement Second of Judgments. We conclude that when a prior judgment in an unlawful practices action has been secured by the Attorney General or a district attorney, such as occurred in this case, the plaintiff must allege the existence of one of the exceptions in section 42 of the Restatement Second of Judgments. It is presumed that an official duty has been regularly performed. (Evid. Code, § 664.) In order to withstand a demurrer, a plaintiff who is alleging that an official duty was not appropriately performed must allege facts to negate the presumption of regularity. (Lavine v. Jessup (1958) 161 Cal.App.2d 59, 67; Alexander v. Scattergood (1942) 51 Cal.App.2d 127, 131; Los Angeles Athletic Club v. Long Beach (1932) 128 Cal.App. 427, 431.) In this case, if one of the factors set forth in section 42 of the Restatement Second of Judgments is present, then plaintiffs must allege it. The factors set forth in section 42 of the Restatement Second of Judgments include issues related to conflicts of interest, a lack of diligence, and the absence of reasonable prudence by the lawyers filing the initial representative action.
The second amended complaint does not address any of the exceptions in section 42 of the Restatement Second of Judgments. Based on the limited evidentiary record available to us and to the trial court, we cannot determine as a matter of law that no res judicata effect can be accorded the two August 5, 1998, judgments because of the exceptions in section 42 of the Restatement Second of Judgments. (Bockrath v. Aldrich Chemical Co. (1999) 21 Cal.4th 71, 83-84 [judicially noticeable discovery responses insufficient to dispose of causation issue at demurrer stage].) This is in part because the res judicata issue was not raised until the reply to the opposition to TWA's demurrer to the second amended complaint. NCM never raised the issue. The issue had not been raised previously in the demurrers of TWA to the original and first amended complaints. The trial court sustained the demurrers to the fourth cause of action based on res judicata grounds. We agree with plaintiffs they are entitled to an opportunity to amend to allege facts showing that section 41 of the Restatement Second of Judgments is not a bar to their unlawful competition law cause of action. This is particularly true given the fact that the first time NCM was named as a defendant was in the second amended complaint. We conclude the trial court properly sustained the demurrer to the fourth cause of action of the second amended complaint but leave to amend should have been granted.
. We recognize that the res judicata effect of settlements of representative or class actions can implicate legitimate due process concerns. (Ortiz v. Fibreboard Corp. (1999) 527 U.S. 815, 846; Hansberry v. Lee (1940) 311 U.S. 32, 40.) The parties have not briefed any due process issues and we therefore do not address any constitutional issues. Further, there may be additional facts which warrant the conclusion that the application of res judicata principles would lead to an unjust result. (See Consumers Lobby Against Monopolies v. Public Utilities Com. (1979) 25 Cal.3d 891, 902, disapproved on another point in Kowis v. Howard (1992) 3 Cal.4th 888, 896, 899; Dunkin v. Boskey (2000) 82 Cal.App.4th 171, 180-181.)
[The portions that follow, parts III.C through III.H, are deleted from publication. See post, at page 20 where publication is to resume.]
C. The First Cause of Action
The first cause of action alleged violations of Education Code section 94831, subdivision (e) which states: "No institution, or representative of that institution shall do any of the following: [¶] . . . [¶] (e) Promise or guarantee employment." Further, it was alleged TWA violated Education Code section 9482, subdivisions (a) and (b) which state: "(a) No institution or representative of an institution shall make or cause to be made any statement that is in any manner untrue or misleading, either by actual statement, omission, or intimation. [¶] (b) No institution or representative of an institution shall engage in any false, deceptive, misleading, or unfair act in connection with any matter, including the institution's advertising and promotion, the recruitment of students for enrollment in the institution, the offer or sale of a program of instruction, course length, course credits, the withholding of equipment, educational materials, or loan or grant funds from a student, training and instruction, the collection of payments, or job placement." Moreover, the first cause of action alleged a violation of Education Code section 94838, subdivision (c) which provides: "Any school or institution governed by this chapter extending credit or lending money to any person for tuition, fees, or any charges whatever for educational services to be rendered or furnished shall cause any note, instrument, or other evidence of indebtedness taken in connection with that loan or extension of that credit to be conspicuously marked on the face thereof with the following notice:
NOTICE:
ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES THAT THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED PURSUANT HERETO OR WITH THE PROCEEDS HEREOF, RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER.'
In the event the school or institution fails to do so, it shall be liable for any damage or loss suffered or incurred by any subsequent assignee, transferee, or holder of that evidence of indebtedness on account of the absence of that notification." The trial court sustained the demurrer to the first cause of action on: statute of limitations grounds; res judicata grounds; and on the theory NCM owed no duty to plaintiffs.
An action for violations of Education Code sections 94831, 94832, and 94838 is subject to the three-year statute of limitations in Education Code section 94877, subdivision (e) which states. "An action brought under this section shall be commenced within three years of the discovery of the facts constituting grounds for commencing the action." Plaintiffs argue, as they did in the trial court, that they sufficiently alleged the existence of a conspiracy between TWA and NCM so that the statute of limitations did not commence to run more than three years prior to November 5, 1998, the date the original complaint was filed in this case. Plaintiffs do not argue that their cause of action did not accrue within three years of the discovery of the violations of the pertinent provisions of Education Code sections 94831, 94832, and 94838. (E.g., Hamilton v. Asbestos Corp. (2000) 22 Cal.4th 1127, 1146 [asbestos exposure]; Norgart v. Upjohn Co. (1999) 21 Cal.4th 383, 396-397 [prescription drugs].) We agree though with plaintiffs that they pled sufficient allegations of a conspiracy and an overt act in order to comply, at the pleading stage, with the Education Code section 94877, subdivision (e) three-year statute of limitations.
To begin with, there is no requirement of specific pleading of the existence of a conspiracy. In Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 47-48, the California Supreme Court, in an antitrust case, identified the pleading requirements for a conspiracy as follows: "State Farm Insurance Companies' particular concern is that the complaint fails to allege facts to support the claim that First American, Stewart Title, and Placer Title are 'conspiring' and 'have engaged in a general and concerted refusal to sell title insurance' or in a 'group boycott.' It argues that such general allegations should be deemed insufficient. Relying on Chicago Title Ins. Co. v. Great Western Financial Corp. (1968) 69 Cal.2d 305, 318 [], it suggests that specific factual allegations in addition to pleading the elements of the alleged unlawful act should be required. That is not the rule. A cause of action for a conspiracy in restraint of trade '"must allege (1) the formation and operation of the conspiracy, (2) the wrongful act or acts done pursuant thereto, and (3) the damage resulting from such act or acts. [Citations.]" [Citation.] General allegations of agreement have been held sufficient [citation], and the conspiracy averment has even been held unnecessary, providing the unlawful acts or civil wrongs are otherwise sufficiently alleged.' (Chicago Title Ins. Co. v. Great Western Financial Corp. [1968] 69 Cal.2d [305,] 316, quoting Wise v. Southern Pacific Co. (1963) 223 Cal.App.2d 50, 64-65 []; see also Unruh v. Truck Insurance Exchange (1972) 7 Cal.3d 616, 631 [].) [¶] '[T]he rule established by Chicago Title essentially is that a plaintiff cannot merely restate the elements of a Cartwright Act violation. Rather, in order to sufficiently state a cause of action, the plaintiff must allege in its complaint certain facts in addition to the elements of the alleged unlawful act so that the defendant can understand the nature of the alleged wrong and discovery is not merely a blind "fishing expedition" for some unknown wrongful acts.' (Cellular Plus, Inc. v. Superior Court (1993) 14 Cal.App.4th 1224, 1236 [].)"
Quelimane Co. and the authority cited therein is pertinent to the sufficiency of the conspiracy allegations in the first cause of action even though it does not involve an anti-trust violation. The first cause of action alleged: both defendants are headquartered in St. Louis Missouri; the employees of TWA and NCM conspired as to each transaction identified in the second amended complaint; TWA and NCM "engaged in a conspiracy, common enterprise, and common course of conduct the purpose of which was to commit" acts of unfair competition and defraud plaintiffs; "TWA and NCM formed a conspiracy to operate the TWA Course for unlawful financial gain" beginning in 1990 and continuing through 1998 and did so by means of "unlawful advertisements, false representations, active concealment of statutorily mandated credit terms and threats of collection . . ."; at least since 1990 TWA "contracted with, and/or assigned or sold Plaintiffs' contracts for the TWA Course to [] NCM . . ."; at least since 1990 and continuing through 1998 NCM collected the remaining balance from the TWA Course as part of a conspiracy with TWA in order to gain unlawful financial profits; and throughout the period of the conspiracy, "NCM knew of the illegality of both its and TWA's conduct." This constituted sufficient allegations at the pleading stage to support a conspiracy theory. (Quelimane Co. v. Stewart Title Guaranty Co., supra, 19 Cal.4th at p. 47; Rosenfeld, Meyer & Susman v. Cohen (1983) 146 Cal.App.3d 200, 224-225, disapproved on another point in Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 521, fn. 10; 5 Witkin, Cal. Procedure (4th ed. 1997) Pleading § 876, pp. 334-335.) The last alleged overt act of the conspiracy was the collection of the moneys owed under the purportedly unlawful agreements which occurred within three years prior to November 5, 1998, the filing date of the original complaint in this case. Hence, the November 5, 1998, filing of the original complaint was timely. (Wyatt v. Union Mortgage Co. (1979) 24 Cal.3d 773, 786 [final payment of a purportedly unlawful loan may be the final overt act of a conspiracy].)
NCM argues it is incapable as a matter of law of violating the aforementioned Education Code provisions. However, we agree with plaintiffs that even though NCM, acting alone as a collection agency, may not have violated the pertinent provisions of Education Code sections 94831, 94832, and 94838, by entering into a conspiracy, it can be liable for the statutory violations. The controlling authority is Doctors' Co. v. Superior Court (1989) 49 Cal.3d 39, 44, where the California Supreme Court held: "'The elements of an action for civil conspiracy are the formation and operation of the conspiracy and damage resulting to plaintiff from an act or acts done in furtherance of the common design. . . . In such an action the major significance of the conspiracy lies in the fact that it renders each participant in the wrongful act responsible as a joint tortfeasor for all damages ensuing from the wrong, irrespective of whether or not he was a direct actor and regardless of the degree of his activity. [Citations.]' (Mox Incorporated v. Woods (1927) 202 Cal. 675, 677-678 []; accord, Wyatt v. Union Mortgage Co. (1979) 24 Cal.3d 773, 784 [].)"
We agree with both plaintiffs and NCM that if it acted solely as an agent and not for its own personal gain, the situation might be different. In other words, if NCM merely acted as the agent of TWA then it may be there would be no viable conspiracy theory. In Doctors' Co. v. Superior Court, supra, 49 Cal.3d at page 45, the Supreme Court noted in reference to its prior opinion in Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 576: "We then invoked the rule that '[a]gents and employees of a corporation cannot conspire with their corporate principal or employer where they act in their official capacities on behalf of the corporation and not as individuals for their individual advantage. [Citations.]' (Wise v. Southern Pacific Co. (1963) 223 Cal.App.2d 50, 72 [].) 'This rule, as was explained in Wise (at pp. 72-73) "derives from the principle that ordinarily corporate agents and employees acting for and on behalf of the corporation cannot be held liable for inducing a breach of the corporation's contract since being in a confidential relationship to the corporation their action in this respect is privileged."' (Gruenberg, supra, 9 Cal.3d at p. 576.) [¶] In the present case, the only duty toward plaintiff claimed to have been breached as a result of the defendants' alleged conspiracy is the statutory duty to attempt 'in good faith to effectuate prompt, fair, and equitable settlement of claims in which liability has become reasonably clear' (§ 790.03(h)(5)). That duty is imposed by statute solely upon persons engaged in the business of insurance. (§ 790.01.) Because the noninsurer defendants are not subject to that duty and were acting merely as agents of the insurer 'and not as individuals for their individual advantage' (Wise, supra, 223 Cal.App.2d at p. 72), 'they cannot be held accountable on a theory of conspiracy.' (Gruenberg, supra, 9 Cal.3d at p. 576.)" (Italics omitted.)
We agree with plaintiffs the second amended complaint contains allegations different from the attorney and expert witness situation in Doctors' Co. and the non-insurer defendants in Gruenberg. As plaintiffs note, NCM is not alleged to be acting solely as the agent of TWA. Rather, paragraph 81 of the second amended complaint alleged NCM, with full knowledge of the illegality of its actions and those of TWA, engaged in the illegal conduct in order to "gain unlawful financial profits at the expense of Plaintiffs." Further, the second amended complaint alleged that this conduct had been going on since 1990 and the assignment or sale of the contracts was for the purpose of having NCM collect monies. These allegations fall within the scope of decisional authority allowing recovery in the conspiracy context against parties who ordinarily would not be potentially liable for statutory violations or other misconduct. (Black v. Sullivan (1975) 48 Cal.App.3d 557, 567; Rosenthal v. Gould (1969) 273 Cal.App.2d 239, 243-244; Anderson v. Thacher (1946) 76 Cal.App.2d 50, 72.)
D. Second Cause Of Action
The second cause of action was for a violation of Business and Professions Code section 17500 which provides in relevant part: "It is unlawful for any person, firm, corporation or association, or any employee thereof . . . to induce the public to enter into any obligation relating thereto, to make or disseminate or cause to be made or disseminated from this state before the public in any state, in any newspaper or other publication, or any advertising device . . . which is untrue or misleading, and which is known, or which by the exercise of reasonable care should be known, to be untrue or misleading . . . ." Business and Professions Code section 17500 extends to a wide range of deceptive practices. (Quelimane Co. v. Stewart Title Guaranty Co., supra, 19 Cal.4th at p. 52 ["Advertising that title insurance is necessary and will be issued on any property with good title, when in fact it will not be issued on tax-deeded property may be deemed both misleading and false"]; Committee on Children's Television Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 210-215 [false statements in television advertisements].) The trial court sustained the demurrer to the second cause of action because: the complaint was not filed within the three-year statute of limitations in part because there were insufficient allegations of a conspiracy; there were insufficient allegations of a conspiracy; and there were insufficient allegations concerning false representations. As to the statute of limitations question, our analysis in connection with the first cause of action is dispositive. The demurrer to the second cause of action should not have been sustained on that ground. The sole remaining question is whether there were sufficient allegations of misleading representations made to plaintiffs.
The trial court sustained TWA's demurrer on statute of limitations grounds. The trial court explicitly struck the reference to the statute of limitations in the order sustaining the NCM demurrer. So as to insure resolution of the demurrer on the merits, we will treat the trial court's order as recognizing the existence of the statute of limitations bar as to plaintiffs' claims against NCM.
We agree with plaintiffs the second amended complaint contains sufficient allegations of false or misleading statements so as to withstand a challenge at the demurrer stage. The second amended complaint alleged the following misrepresentations: immediate employment was available with TWA; if the TWA Course was completed the applicant would be guaranteed a job; it was never disclosed that upon being hired it was necessary that the student pay dues and join a union; TWA falsely represented that its course would allow plaintiffs to secure employment "throughout the travel industry"; the balance due on the TWA Course could be paid by means of an interest free payroll deduction; and requisite statutory notices were not provided concerning the terms of the credit agreement. These facts were sufficient to state a cause of action based upon Business and Professions Code section 17500 et seq. (Committee on Children's Television, Inc. v. General Foods Corp., supra, 35 Cal.3d at p. 211; Keimer v. Buena Vista Books, Inc. (1999) 75 Cal.App.4th 1220, 1226.)
E. Third Cause Of Action
The trial court sustained the demurrer to the third cause of action for a violation of the Consumer Legal Remedies Act because of insufficient conspiracy allegations on the part of NCM and the claims were hence time barred. For the reasons previously articulated in connection with the first cause of action, the demurrer should not have been sustained on these theories.
F. Fourth Cause Of Action
The trial court sustained the demurrer as to the fourth cause of action for a violation of Business and Professions Code section 17200 on res judicata grounds and because there were insufficient conspiracy allegations. We have discussed the res judicata issue in the published portion of this opinion. As to the statute of limitations issue, our discussion in connection with the first cause of action is dispositive.
G. Fifth Cause Of Action
In ruling on the NCM demurrer, the trial court noted that the fraud cause of action probably could not be certified as a class action due to individual reliance issues. The trial court was free to weed out legally meritless suits prior to certification in response to a demurrer. (Linder v. Thrifty Oil Co. (2000) 23 Cal.4th 429, 440; Employment Development Dept. v. Superior Court (1981) 30 Cal.3d 256, 263-265.) We review the decision that the fraud cause of action is not subject to class treatment for an abuse of discretion. (Occidental Land, Inc. v. Superior Court (1976) 18 Cal.3d 355, 361; Osborne v. Subaru of America, Inc. (1988) 198 Cal.App.3d 646, 654.) No abuse of discretion has occurred.
H. Fiduciary Duty Breach
The trial court sustained the demurrer as to the fiduciary duty breach cause of action based on insufficient facts. We agree with its analysis. No fiduciary relationship existed. (Union Bank v. Superior Court (1995) 31 Cal.App.4th 573, 579, fn. 2; Kim v. Sumitomo Bank (1993) 17 Cal.App.4th 974, 979; Peterson Development Co. v. Torrey Pines Bank (1991) 233 Cal.App.3d 103, 119; Nymark v. Heart Fed. Savings & Loan Assn. (1991) 231 Cal.App.3d 1089, 1093, fn. 1; Copesky v. Superior Court (1991) 229 Cal.App.3d 678, 690; Price v. Wells Fargo Bank (1989) 213 Cal.App.3d 465, 477; Mitsui Manufacturers Bank v. Superior Court (1989) 212 Cal.App.3d 726, 732-733; Lawrence v. Bank of America (1985) 163 Cal.App.3d 431, 437.)
[The balance of the opinion is to be published.]
IV. DISPOSITION
The order sustaining the demurrer of defendant National Collection Systems, Inc., doing business as National Credit Management, to the first, second, and third causes of action is reversed. The order sustaining the demurrer to the fifth and sixth causes of action without leave to amend is affirmed. The demurrer dismissal as to the first through fourth causes of action is reversed. The order sustaining the demurrer to the fourth cause of action for a violation of the Unfair Competition Act is affirmed. That part of the order sustaining the demurrer to the fourth cause of action without leave to amend, is reversed. Upon issuance of the remittitur, the trial court shall grant plaintiffs leave to amend within a period of time determined by it. Plaintiffs shall each recover their costs incurred on appeal from defendant, National Collection Systems, Inc., doing business as National Credit Management.
CERTIFIED FOR PARTIAL PUBLICATION
I concur: ARMSTRONG, J.
J. GRIGNON, Concurring and Dissenting
Plaintiffs appeal from a judgment of dismissal in favor of NCM following the sustaining of a demurrer to their second amended complaint without leave to amend. The majority opinion affirms in part and reverses in part. I would affirm the judgment in its entirety: (1) the conspiracy allegations of the complaint are a sham pleaded solely to overcome the expiration of the statutes of limitation; and (2) the conspiracy allegations fail to adequately state facts alleging a conspiracy between TWA and NCM.
Facts Alleged in the Complaint
TWA advertised for reservation sales agents in the "help wanted" section of various newspapers and magazines. Individuals responding to these advertisements learned they would be required to take and pass a TWA training course prior to employment. The training course cost $2800; prospective employees could finance the training course and have its cost deducted from their paychecks on an interest-free basis if employed by TWA. However, it was not disclosed to prospective employees that if an employee discontinued employment with TWA, the payments would be accelerated, TWA would withhold the employee's final paycheck, and TWA would begin charging 18 percent interest. NCM was TWA's agent for collection, or an assignee, of the credit agreements entered into by the students. As such, NCM was subject to all claims, equities, and defenses the students could assert against TWA. The credit agreements lacked the required disclosure of this fact, and other statutorily-required disclosures, but NCM nonetheless collected on the credit agreements.
The State Action
In July 1996, the State of California filed a complaint against TWA and NCM. The operative complaint was the first amended complaint, filed June 30, 1997. In that complaint, the State alleged TWA violated Business and Professions Code section 17500 (untrue or misleading advertising) and Business and Professions Code section 17200 (unfair competition). The State alleged NCM violated Business and Professions Code section 17200 by collecting on credit agreements lacking required disclosures. The State sought injunctive relief, civil penalties, and restoration of all monies acquired by the misconduct in violation of Business and Professions Code section 17200.
In August 1998, the State's action was resolved by two separate settlements. A final judgment was entered enjoining TWA from, among other things, improperly advertising its training course, failing to provide all necessary disclosures in its credit agreements, and demanding harsher terms of repayment from individuals no longer in its employ. A final judgment was also entered enjoining NCM from attempting to collect on any credit agreement which did not include the proper disclosures. Further, NCM was required to fund a restitution account in the amount of $15,057.27, from which refunds were to be made to 63 named individuals. The NCM judgment also provided that if any other California resident provided written documentation showing that, between July 1, 1993, and the date of the judgment, NCM "collected any money from that person on any contract for a Reservation Sales Agent course offered by TWA, [NCM] shall on its own, or within 30 days of written notice from the [Attorney General] or [District Attorney], refund to that person, the full amount of the compensation NCM received or was scheduled to receive from TWA for such collection."
Plaintiffs' Class Action Against TWA
Three months after the settlements, thirteen individual plaintiffs brought the instant class action against TWA. The complaint was based on the same underlying facts as the State's action, but sought monetary relief not obtained by the State. In addition to restitution of the tuition money paid, plaintiffs also sought treble damages, a reasonable hourly wage for their time spent in the training course, attorney's fees, and punitive damages. Plaintiffs filed a notice of related cases, in which they explained "the only notable difference between the State action and the [instant] action is the parties to whom the monetary damages should be paid." Another notable difference was that the complaint in the instant action did not seek relief against NCM, presumably because NCM had already consented to a judgment by which it repaid all monies it had received as a result of its collection efforts on the TWA course credit agreements.
TWA demurred to the complaint on statute of limitation grounds. Plaintiffs responded by filing a first amended complaint, in which they alleged the applicable statutes were tolled while the State's action was pending against TWA, and limiting most of their causes of action to those plaintiffs who took the TWA course in 1994 and 1995. TWA filed a second demurrer, again raising the bar of the statutes of limitation. In their opposition to the demurrer, plaintiffs relied on Wyatt v. Union Mortgage Co. (1979) 24 Cal.3d 773, for the proposition that statutes of limitation do not commence while the wrongdoing is continuing. They argued that TWA's continued use of payroll deductions prevented the statutes from commencing.
In reply, TWA distinguished Wyatt as involving a conspiracy claim and the "last overt act" doctrine. The trial court's tentative ruling agreed with TWA, stating, "The 'last overt act' doctrine applies only to conspiracy allegations, and thus does not apply here." At the hearing, the trial court again expressed its understanding that Wyatt applied only to conspiracies. Plaintiffs' counsel represented plaintiffs would amend the complaint to allege a conspiracy, and thereby bring their claims within the ambit of Wyatt. The demurrer was sustained with leave to amend.
The Addition of NCM as a Co-conspirator
Plaintiffs' second amended complaint contained conspiracy allegations. NCM was now named as a defendant in all of plaintiffs' causes of actions against TWA. For the most part, plaintiffs accomplished this amendment by simply scattering the phrase, "in furtherance of Defendants' conspiracy" throughout their allegations of TWA's wrongdoing. Plaintiffs alleged "principals, officers, directors, employees, agents and/or representatives" of TWA and NCM conspired with each other, their own corporation, and the other corporation; however, plaintiffs never identified any individual at either corporation believed to have been involved in the conspiracy, or set forth the nature of the conspiratorial agreement.
Plaintiffs also added 10 named plaintiffs, bringing the total to 23. Only one of the 23 named plaintiffs alleged collection efforts by NCM.
The only paragraphs of the complaint which attempted to set forth the facts or purpose of the conspiracy alleged that TWA and NCM conspired together to operate the training course for financial gain. According to plaintiffs, NCM's part in the scheme was to act as TWA's collection agent, and NCM aggressively pursued collection even though it was aware of TWA's wrongdoing and that the contracts lacked the statutorily required disclosures.
In other respects, the conspiracy allegations of the second amended complaint stand in contrast to the allegations of the first amended complaint. The first amended complaint alleged a scheme whereby TWA operated its reservation sales agent course to defraud applicants of $2,800 and retain its employees in unpleasant working conditions by the threat of onerous credit terms. In the second amended complaint, this alleged scheme had metamorphosed into a conspiracy whereby the possibility of collection by NCM was the threat that kept TWA's employees working, and NCM also shared, to an undisclosed degree, in the ill-gotten gains.
TWA and NCM demurred to the second amended complaint, again relying on the statutes of limitation, and arguing the conspiracy allegations were a sham. The trial court sustained NCM's demurrer without leave to amend. Dismissal was entered in favor of NCM.
Sham Pleading
A plaintiff cannot bypass defects in an earlier complaint by simply filing a new complaint with inconsistent allegations. (Owens v. Kings Supermarket (1988) 198 Cal.App.3d 379, 383-384.) In this case, plaintiffs initially pleaded that TWA ran its reservation course as a scam, with the purpose of defrauding applicants of $2,800 and forcing its employees to remain working in onerous conditions. When it subsequently became clear that plaintiffs could not avoid the bar of the statutes of limitation without alleging a conspiracy, plaintiffs' entire theory of the case transformed into one in which NCM was "a crucial part of the conspiracy." There is, however, no factual basis in the complaint that NCM conspired with TWA to defraud applicants of $2,800 and force TWA employees to remain working in onerous conditions. Indeed, NCM would derive no benefit from such a conspiracy. To the extent the threat of collection by NCM were successful, NCM would have no credit accounts to collect. The allegations against NCM are a sham, created to artificially prolong this time-barred lawsuit. I would not put this court's imprimatur on such a tactic by allowing this frivolous pleading to proceed. (Cf. Pearlson v. Does 1 to 646 (1999) 76 Cal.App.4th 1005, 1010.)
Obviously NCM was not "a crucial part of the conspiracy." Prior to filing their initial complaint, plaintiffs knew of the potential allegations against NCM because of the State's action, yet purposely chose not to sue NCM. The allegations against NCM were clearly added only to circumvent the statutes of limitation.
Conspiracy
Moreover, plaintiffs' general allegations are insufficient to plead a conspiracy. "As long as two or more persons agree to perform a wrongful act, the law places civil liability for the resulting damage on all of them, regardless of whether they actually commit the tort themselves." (Wyatt v. Union Mortgage Co. (1979) 24 Cal.3d 773, 784.) "To state a cause of action for conspiracy, a complaint must allege: (1) the formation and operation of the conspiracy; (2) the wrongful act or acts done pursuant thereto; and (3) the damage resulting from such act or acts. [Citation.] The sine qua non of a conspiratorial agreement is the knowledge on the part of the alleged conspirators of its unlawful objective and their intent to aid in achieving that objective." (Schick v. Lerner (1987) 193 Cal.App.3d 1321, 1327-1328.) Conspiring defendants must "have actual knowledge that a tort is planned and concur in the tortious scheme with knowledge of its unlawful purpose." (Kidron v. Movie Acquisition Corp. (1995) 40 Cal.App.4th 1571, 1582.) "However, actual knowledge of the planned tort, without more, is insufficient to serve as the basis for a conspiracy claim. Knowledge of the planned tort must be combined with intent to aid in its commission." (Ibid.) While general allegations of agreement are sufficient (Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 47), a conspiracy cannot be established by mere suspicions. (Kidron v. Movie Acquisition Corp., supra, 40 Cal.App.4th at p. 1582.) Nor can a conspiracy be established by fantastic or nonsensical allegations.
Plaintiffs failed to adequately plead the formation and operation of this conspiracy. Plaintiffs pled that NCM collected on the credit agreements with knowledge of TWA's wrongdoing, but with respect to the element of whether NCM acted with the intent to aid in the commission of the conspiracy, plaintiffs simply added the words that NCM acted in furtherance of the conspiracy. At the hearing on TWA's demurrer to the second amended complaint, plaintiffs were asked what they would add if given leave to amend to strengthen the allegations of conspiracy as to NCM. Plaintiffs' counsel replied that they would allege NCM was "accepting unlawful contracts as a result of this course . . . and the conspiracy as a whole." Plaintiffs argued they had alleged unlawful financial gain, in that it is unlawful to collect on a contract which was entered into illegally in the first place, with knowledge of its illegalities. Further, they argued NCM did not include the required disclosures. None of these allegations satisfy the element that NCM acted with the intent to aid TWA in the commission of the purported conspiracy.
Plaintiffs originally sued TWA, alleging it advertised its course illegally, and improperly profited from it. When faced with the argument that its complaint was time-barred, plaintiffs relied on the "last overt act" doctrine. When faced with the argument that the "last overt act" doctrine applies only to conspiracies, plaintiffs alleged TWA had acted pursuant to a conspiracy with NCM. TWA is now in bankruptcy, leaving NCM as the only defendant against whom plaintiffs can proceed. Plaintiffs purport to plead a conspiracy by simply alleging NCM acted "in furtherance of [the] conspiracy." No specific conspiracy is pleaded and the only conspiracy which might be inferred from the allegations of the second amended complaint makes no sense. These allegations are insufficient to plead a conspiracy. I would affirm.
NOT TO BE PUBLISHED.
GRIGNON, J.