Opinion
Previously published at 9 Cal.App.4th 1867
Rehearing Denied Oct. 30, 1992.
Review Granted Dec. 31, 1992.
Review Dimissed and Cause Remanded Aug. 19, 1993.
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COUNSEL
L.B. Elam and John F. Whisenhunt, County Counsel, for petitioner.
Jeff B. Marschner, Richard A. Elbrecht, John C. Lamb, Alberto Y. Balingit and Marla L. Scharf, Sacramento, as amicus curiae on behalf of petitioner.
Hansen, Boyd, Culhane & Watson, Kevin R. Culhane, James J. Banks, Sacramento, for real party in interest.
OPINION
BLEASE, Associate Justice.
The real party in interest (Porter), as the transferee and holder in due course of a third party check which was dishonored, filed a claim for relief against the drawer in the Small Claims Division of the Municipal Court of Sacramento County (Small Claims Court). The claim was dismissed as outside the jurisdiction of a small claims court under former Code of Civil Procedure section 117.5 [now § 116.420, subd. (a) ] which bars an action by the "assignee of the claim." The Superior Court of Sacramento County (Superior Court) disagreed and issued a writ of mandate commanding the Small Claims Court to vacate the dismissal.
At the time of the superior court judgment, the applicable statute was Code of Civil Procedure section 117.5. It provided that "No claim shall be filed by or prosecuted in such small claims court by the assignee of such claim." In 1990 the Legislature revamped the Small Claims Act; section 117.5 became section 116.420, subdivision (a) without substantive change. (See Stats.1990, ch. 1305, § 3 ["No claim shall be filed or maintained in small claims court by the assignee of the claim."].) We will refer to the applicable statute by its new designation, Code of Civil Procedure section 116.420, subdivision (a).
We will conclude that a holder after endorsement of a check, by virtue of the transfer of the right to payment upon dishonor by the drawer of the amount stated in the instrument, is "assignee of the claim" and barred from maintaining it in the Small Claims Court. We will issue a peremptory writ of
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mandate directing the Superior Court to set aside the judgment from which the writ issued.
The case arises from a purported appeal from a judgment granting issuance of a writ of mandate directing the Small Claims Court to vacate its dismissal of the claim. A judgment granting a petition for the issuance of a writ of mandamus directed to a municipal court is not appealable. (Code Civ.Proc., § 904.1, subd. (a)(4).) Nonetheless, we consider the appeal as a petition for extraordinary relief because the case " 'involves a question of public importance appropriate for resolution.' " (Heldt v. Municipal Court (1985) 163 Cal.App.3d 532, 534, fn. 1, 209 Cal.Rptr. 579.)
FACTS
Real Party in Interest, J.J. & J. Porter, Inc., dba Check-X-Change (Porter), is in the business of purchasing (cashing) checks. Upon the payee's endorsement and delivery to Porter of a negotiable check Porter becomes a holder of that check within the meaning of California Uniform Commercial Code section 3202. In this case Porter purchased a check in the sum of $50 from payee Dorothy Manhart that was dishonored by the drawee bank. Porter filed a claim in the Small Claims Court to recover on the check against its drawer, Carl Manhart. The court dismissed the case on the ground that Porter, as an assignee of the claim, cannot maintain the claim in that court.
All unspecified references to sections are to the California Uniform Commercial Code.
Porter petitioned the Superior Court for a writ of mandate directing the Small Claims Court to vacate its judgment of dismissal and to entertain the claim. It entered a judgment ordering the relief. It concluded that Porter, as a holder in due course of the dishonored check, is not an assignee of the claim and may maintain the claim in the Small Claims Court against the check's drawer.
There is no dispute that the check is a negotiable instrument within the meaning of section 3104 and that Porter is a holder in due course of the check within the meaning of section 3302.
The Small Claims Court seeks review of the judgment.
DISCUSSION
Code of Civil Procedure section 116.420, subdivision (a) forbids the filing or maintaining of a claim in small claims court "by the assignee of the claim." The drawing and acceptance of a check is a contract and the law supplies as a term of this contract a right to have the drawer pay
Subdivision (b) of section 116.420 provides two exceptions not pertinent here, a claim by "a trustee in bankruptcy in the exercise of the trustee's duties as trustee" and a claim by "the holder of a security agreement, retail installment contract, or lien contract subject to the Unruh Act ... or the Automobile Sales Finance Act ..., purchased by the holder for the holder's portfolio of investments, provided that the holder is not an assignee for the purpose of collection."
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the amount of the draft upon its dishonor by the bank. (See § 3413.) The transfer of a check, among other things, "vests in the transferee such rights as the transferor has therein...." (See § 3201.) Here Dorothy Manhart transferred the check to Porter. The question is whether Porter, a third party holder in due course, is an "assignee" under section 116.420, subdivision (a) of the claim for payment against its drawer when the check is dishonored.
A negotiable instrument is a simple contract. (C.I.T. Corporation v. Panac (1944) 25 Cal.2d 547, 551, .) In the case of a check, it represents the drawer's guarantee for the payment of money and the payee's or holder's corresponding right to receive the amount stated on the instrument should it be dishonored. (Roff v. Crenshaw (1945) 69 Cal.App.2d 536, 538-541, .) A guarantee for the payment of money is a transferable "thing in action" within the meaning of Civil Code section 954. (Fratessa v. Roffy (1919) 40 Cal.App. 179, 181, 180 P. 830.)
The arguments of the parties reflect the ambiguity of the statutory term "assignee." In some contexts the term has been defined as "one to whom an assignment is made: as ... b: one to whom a right or property is legally transferred." (Webster's Third New International Dictionary (1971) p. 132.) To "assign" is "to transfer to another in writing (one's title to or interest in property, esp. intangible property) <[assign] a bond by an endorsement>...." (Ibid.) Hence, "assignment" is sometimes used "in common parlance" broadly, to signify the transfer of all kinds of rights and property. (Compare Higgins v. Monckton (1938) 28 Cal.App.2d 723, 729, ; with 4A Words and Phrases (1969) pp. 139-142; Rest.2d Contracts, § 316, and comments.) Under this broad usage the transfer of the right to require the drawer to pay the amount of the check upon dishonor is an "assignment" and the "assignee" would be barred from proceeding in small claims court.
Porter, however, contends that a narrower usage of the word "assignee," derived from the law of commercial paper, should be applied. In this usage the "negotiation" of a negotiable instrument is distinguished from "assignment" to specify the legal consequences of negotiation that are different from the law of assignment, in particular the limitation of defenses against a holder in due course. (See § 3202.) Accordingly, this law is replete with statements distinguishing between ordinary assignment and negotiation. We imply no view on the meaning or effect of this distinction in the law of commercial paper by our discussion in this opinion; here we are faced with the question whether that law supplies the appropriate meaning for "assignee" for purposes of the jurisdiction of the small claims court.
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Porter's argument overlooks the statutory ambiguity, implicitly insisting that assignment could never be applied to negotiation. That is belied, inter alia, by Code of Civil Procedure section 368, which demonstrates that the use of assignment to include negotiation is semantically permissible. That statute excepts the holder of a "negotiable promissory note or bill of exchange" from the rule that the action by the "assignee" is without prejudice to defenses existing at the time of notice of assignment. The exemption makes sense only if the term "assignee" might otherwise be applied to such a holder of the instrument.
The issue is whether the term "assignee" in Code of Civil Procedure section 116.420, subdivision (a), should be taken in the broad sense or the narrower sense used in the law of commercial paper. In addressing this problem we do not write on an empty slate. In Merchants Service Company v. Small Claims Court (1950) 35 Cal.2d 109, , the Supreme Court broadly defined the term "assignee" for purposes of small claims court jurisdiction. "Section 117f of the Code of Civil Procedure [now § 116.420, subd. (a) ] ... does not confine its prohibition, in use of the small claims court, to assignees for collection or assignees for the purposes of suit. Rather it prohibits the filing of a claim by any and every 'assignee'; and as so used without limitation, the word suggests a broad meaning was intended to attach thereto and to include anyone who stands in the place of the original creditor." (Id. at p. 115, .)
A merchant had sold and delivered a ring to a purchaser, who signed a retail installment contract acknowledging its receipt and agreeing to make the payments on the ring to Merchants Service Company. When the purchaser defaulted on the payments Merchants Service Company sought and was denied the right to file a claim in the small claims court. The Supreme Court rejected Merchants Service Company's argument that the installment contract was made for its express benefit and that it, as the primary creditor, was entitled to enforce the contract against the purchaser in the small claims court. The Supreme Court responded as follows:
"A consideration of the two parts of the agreement together compels the conclusion that plaintiff's status is that of an assignee rather than that of the ordinary third party beneficiary, and that its claim is therefore not cognizable in the small claims court." (35 Cal.2d at p. 113, .) One part of the agreement was embodied in a writing which showed a debtor-creditor relationship existing between the purchaser and Merchants Service Company. (Id. at p. 114, .) However, another part of the contract, signed by the merchant, "relinquish[ed], disclaim[ed], and quitclaim[ed]" to Merchants Service Company
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the merchant's right to receive payment of the purchase price. The court concluded that consideration of the two parts of the contract together compelled the conclusion that Merchants Service Company was, in effect, an assignee.
The Supreme Court held that the merchant's "studious avoidance" of the word "assign" did not affect the classification of the transfer as an assignment; "any realistic appraisal of the substance of the three-party transaction (Civ.Code, § 3528) shows that [the merchant] by his 'relinquishment' thereby made to Merchants Service Company a present assignment of his claim against the purchaser arising out of his sale and delivery of the ring to her, a type of transaction coming within the express terms of section 117f [now § 116.420, subd. (a) ] of the Code of Civil Procedure; and the clerk of the small claims court was therefore justified in refusing to file plaintiff's claim." (35 Cal.2d at p. 115, .) Thus, "assignee", as used in Code of Civil Procedure section 116.420, subdivision (a), is not to be construed in a narrow, technical sense but broadly, with an eye towards the substance of the transaction.
This broad view of "assignment" was followed in Allianz Insurance Company v. Municipal Court (1981) 126 Cal.App.3d 1043, 179 Cal.Rptr. 334. A workers' compensation insurance carrier sought to recover in small claims court against a third party tortfeasor for the amount of benefits the carrier paid an injured worker. The carrier claimed rights as the holder of an independent, statutorily created cause of action (see Lab.Code, §§ 3850, 3852) and not as an assignee. The court rejected the argument, concluding that the Labor Code codified judicially created principles of equitable subrogation. Because subrogation operates as an equitable assignment and a subrogee's claim is derivative of the subrogor's rights, the subrogee was held to be an assignee within the meaning of former Code of Civil Procedure section 117.5. (126 Cal.App.3d at pp. 1045-1047, 179 Cal.Rptr. 334.) The substance and effect of a transaction giving rise to a claim controls and not its form or its label: " 'Whether the transfer be technically called assignment or subrogation or equitable assignment or assignment by operation of law its ultimate effect is the same, to pass the title to a cause of action from one person to another.' " (126 Cal.App.3d at p. 1046, 179 Cal.Rptr. 334, quoting Fifield Manor v. Finston (1960) 54 Cal.2d 632, 640, 7 Cal.Rptr. 377, .)
This suggests that the measure of an "assignee" for purposes of the jurisdiction of the small claims court is whether, in substance, the claim is derivative, i.e., whether the claimant "stands in the place of the original creditor" in asserting the claim. (Merchants Service Co. v. Small Claims Court,
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supra, 35 Cal.2d at p. 115, .) Thus, except for the two statutory exceptions, only original creditors are permitted to pursue a claim in small claims court.
This view is consistent with the view of commentators who assert that the reason assignees are forbidden from suing in small claims court under this and similar provisions is to prevent use of that forum by business entities for collections. (See Comment, Small Claims Courts and the Poor (1969) 42 So.Cal.L.Rev. 493, 497-498; Note, The Persecution and Intimidation of the Low-Income Litigant as Performed by the Small Claims Court in California (1969) 21 Stan.L.Rev. 1657, 1673; Comment, The California Small Claims Court (1964) 52 Cal.L.Rev. 876, 890; Comment, Small Claims Courts as Collection Agencies (1952) 4 Stan.L.Rev. 237, 239-240.) Some states' statutes are explicit about forbidding collection agencies and agents and those in the business of lending money at interest from suing in small claims court. (See, e.g., Ark.Stat.Ann. § 16-17-604; Ky.Rev.Stat.Ann. § 24A.240; Mich.Comp.Laws Ann. § 600.8408; Okla.Stat.Ann. tit. 12, § 1751; Tex.Gov't Code Ann. § 28.003.)
The legal distinctions between ordinary assignment and negotiation provide no rationale for allowing a holder after endorsement to pursue his claim in small claims court. The reason for barring assignees from prosecuting claims in small claims court is to prevent the use of that forum by commercial entities in collecting on derivative claims. That purpose would not be advanced by excepting holders in due course who have purchased the negotiable instrument. In most instances the holder in due course is a commercial entity in the business of purchasing commercial paper and is similar to a collecting assignee. Allowing this super plaintiff into small claims court is contrary to the purpose for which the court was originally established--to provide an informal judicial forum for persons of limited resources to resolve a small claim face to face (see Crouchman v. Superior Court (1988) 45 Cal.3d 1167, 1175-1176, 248 Cal.Rptr. 626, )--and to the related reason for barring an "assignee" from prosecuting claims in that court.)
Porter argues that it cannot be viewed as an "assignee" because, as a holder in due course, it has a claim superior to the original payee and hence does not "stand[ ] in [her] shoes." An assignee may take rights under a contract other than a negotiable instrument containing a "waiver of defense" clause, in which case he or she takes free of the obligor's personal defenses to the contract. (See § 9206.) That makes this assignee the functional equivalent of a holder in due course. (See 1 White & Summers, Uniform Commercial Code (3d ed. 1988) § 14-8.) Yet one could not suggest a semantic ground under which this assignee be allowed to file a claim in small claims court.
Porter notes that Merchants Service Company rejected the argument of the plaintiff in that case that it was a third party beneficiary rather than an assignee.
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(35 Cal.2d at p. 113, .) Porter suggests that its claim is "much closer" to a third party beneficiary claim than to an assignment because, under the Commercial Code (§ 3413), a holder after endorsement has the right to payment from the drawer upon dishonor of the check. However, in every assignment the assignee is entitled to some performance by the party against whom the assignment runs. Such a consequence does not distinguish "assignments" as transfers of original obligations from transactions involving "the ordinary third party beneficiary" to whom the obligation runs in favor of an existing third party from its inception. That section 3413 specifies that the drawer engages to pay the amount of the check to the holder upon its dishonor does not alter the reality that Porter became a holder only upon the transfer of the check from the original creditor, Dorothy Manhart.
Porter also argues that the transferee of the check cannot be taken as an "assignee of a claim" because the "claim" to payment by the drawer upon dishonor of the check does not exist until dishonor. This is mere nice word play. One also might have said plaintiff was not an "assignee of the claim" in Merchants Service Company because no "claim" for judicial relief existed until there was a breach of the payment obligation under the original contract. The term "assignment" is used with respect to the present transfer of contingencies. (See 6 Am.Jur.2d Assignments, § 8, pp. 192-194.) The substance of the transaction which closes the door to the small claims court is the transfer or substitution of one creditor for an earlier creditor. Here, the "claim" which was "assigned" was the judicially enforceable claim for payment in the amount of the check upon dishonor.
DISPOSITION
Treating the purported appeal as a petition for a writ of mandate pursuant to Code of Civil Procedure section 904.1, subdivision (a)(4), we direct the issuance of a peremptory writ of mandate commanding the Superior Court to set aside its judgment. The appeal is dismissed. The parties shall bear their own costs on appeal.
PUGLIA, P.J., and RAYE, J., concur.