Hakimullah Sarpas and Zulmai Nazarzai operated a scheme by which they promised customers they would obtain loan modifications from lenders and prevent foreclosure of the customers' homes. They operated this scheme through their jointly owned company, Statewide Financial Group, Inc. (SFGI), which did business as US Homeowners Assistance (USHA). Sharon Fasela
The Attorney General, on behalf of the People of the State of California,
In July 2012, following a lengthy bench trial, the trial court issued a judgment and a 19-page statement of decision finding against Defendants. The court permanently enjoined USHA, Nazarzai, Sarpas, and Fasela, and ordered restitution be made to every eligible consumer requesting it, up to a maximum amount of $2,047,041.86. The court found USHA, Sarpas, and Nazarzai to be jointly and severally liable for the full amount of restitution, and Fasela to be jointly and severally liable with them for up to $147,869 in restitution. The court imposed civil penalties against USHA, Sarpas, and Nazarzai, jointly and severally, in the amount of $2,047,041, and imposed additional civil penalties against Fasela, USHA, Sarpas, and Nazarzai, jointly and severally, in the amount of $360,540.
In this appeal, Sarpas and Fasela challenge the judgment on six discrete grounds of error, each discussed in order in the Discussion. (SFGI, USHA,
Based on these conclusions, we strike the civil penalties awarded against Fasela only and remand for the trial court to recalculate those penalties, but, in all other respects, affirm the judgment.
Sarpas was the 50 percent owner of SFGI, which did business as USHA. Nazarzai owned the other 50 percent. Sarpas and Nazarzai each received 50 percent of the company profits. From March 2008 to April 2009, Sarpas received $490,000 in profits from SFGI. Sarpas also served as operations manager of SFGI and oversaw the company's day-to-day operations.
Fasela worked as the office manager of SFGI for about one year, ending in July 2009. USHA paid Fasela $2,746 in 2007, $135,358 in 2008, and $11,611 in 2009.
SFGI, through USHA, purported to offer loan modification services. USHA ran a "boiler room" telemarketing operation in which sales representatives, working in a "pit area," cold-called potential customers to offer assistance with modifying the terms of home loans. In addition, sales representatives were available to receive calls from potential customers, usually people who were returning calls made by USHA sales representatives. SFGI purchased the contact information of potential customers from a "lead-generating company." Every USHA sales representative had a quota of calls to be made based on those leads.
Sales representatives were instructed to tell potential customers: "USHA is a full service loss mitigation and asset preservation company based out of California and we essentially help homeowners throughout the US who have fallen behind on their mortgage payment due to some unfortunate circumstance within their household or maybe a hardship situation, in which case our legal staff will negotiate with their current lender to reduce their overall
The cost of USHA's services varied. The service fee schedule of charges given to sales representatives set a fee of $1,800 for one out-of-state loan; $2,500 for two out-of-state loans; $2,500 for one California loan; and $3,500 for two California loans. Sales representatives were instructed to charge as little as $1,000 for lower income customers with low-balance loans, and up to $4,500 for higher income customers with high-balance/high-payment loans. Sales representatives also were instructed, "[i]f you see that an out of state lead has money please charge them California fees." Charges had to be paid in advance.
To induce potential customers to pay these fees, USHA made various promises, including (1) USHA would obtain a significant reduction in the principal balance of the loan, which would lower the amount of monthly payments; (2) USHA would obtain a reduction in the interest rate on the loan, which would lower the amount of monthly payments; (3) USHA would get the lender to forgive any arrearages; (4) USHA would save the customer from foreclosure; (5) the loan modification process would not take long, from 90 days to eight weeks; (6) USHA would refund the money paid by the customer if it were unable to obtain a loan modification; (7) if USHA obtained a loan modification, the fees paid to USHA would be repaid to the customer by the lender or the government; and (8) USHA was an "attorney backed company" with a "legal team" working with it to get loan modifications.
Most striking, USHA represented it had a 97 percent success rate, that it had a success rate of "over 95 percent," or that USHA never had a case in which a loan modification was not approved. Fasela came up with the 97 percent success rate figure "in the beginning." One customer testified the sales representative guaranteed USHA would obtain a loan modification.
In addition, customers were told to stop making their mortgage payments because doing so would make obtaining a loan modification easier. As a result, customers often suffered ruined credit, additional fees, foreclosure proceedings, and even loss of the home USHA had promised to save.
USHA made the representations orally in telephone calls from sales representatives and sometimes in letters purporting to set forth a loan modification proposal. A typical letter would propose (1) a reduction of the principal balance to the current property value, (2) conversion to a fixed rate loan, (3) a reduction of monthly payment, (4) forgiveness of arrearages, and
These representations were effective. During the 18 months prior to June 30, 2009, USHA took in over $2.22 million. One customer testified, "I was convinced by the — the word of [the USHA sales representative]." Another testified, "[t]he only reason I sent the money in is because he gave me a money back guarantee on that."
After paying USHA's fees, customers would have difficulty reaching anyone at USHA to find out the status of their loan modifications. Telephone calls and e-mails went unanswered; sometimes the customer could not even reach voicemail, and when the customer was able to reach voicemail, the call was not returned. When customers did get ahold of someone, they might be told USHA was "still negotiating" or the matter was "in the hands of a negotiator."
No credible evidence was presented at trial that USHA ever obtained a loan modification, or did anything of value, for any customer. USHA made no refunds to customers, despite its promises, and despite customer demands. Not only did USHA not have a legal team, it had no attorneys whatsoever working on loan modifications.
The case of Jerry Walton, a disabled man living in Mississippi, is a typical, and telling, example of how USHA operated its scam. Walton, who lives on a disability pension, was cold-called by John Kanpur of USHA. Kanpur told Walton that for a payment of $1,000, USHA would obtain a reduction in the interest rate on his home loan and that he would get his money back if USHA did not get the loan modification. Kanpur also told Walton, who was current on the loan, to stop making payments. As instructed, Walton sent USHA $1,000 and stopped making payments on his home loan. When the lender contacted Walton about missed payments, he directed it to USHA. Jean Lute, who worked as a collector for the lender bank, twice called USHA to inform it that foreclosure proceedings were about to commence and that it was important for USHA to return her call. No one from USHA called her back. Walton had to pay about $1,000 in extra costs to save his home from foreclosure, and never received a loan modification or a refund from USHA.
After receiving five complaints from Ohio residents, the consumer protection section of the Ohio Attorney General's Office launched an investigation of USHA. As part of the investigation, consumer protection investigator
Ian later e-mailed Laverty several documents, including a letter, similar to the one described above, purporting to set forth a loan modification proposal. Laverty understood the letter as reflecting what USHA was offering to do for its customers. Also, according to Laverty, USHA had not complied with Ohio law requiring telephone solicitors to register with the Ohio Attorney General's Office.
Sarpas and Fasela identify six arguments by which they challenge the judgment. We start by addressing an issue which, though not expressly identified as one of those six arguments, underlies their challenge to the order of restitution and civil penalties. Only a handful of USHA customers testified at trial, and the deposition testimony of only six customers was read into evidence. Sarpas and Fasela argue (in the context of other issues) that the amount of restitution and civil penalties must be limited to those witnesses and cannot be ordered for USHA customers whose live testimony was not presented at trial.
The defendant in Fremont Life, supra, 104 Cal.App.4th at page 531, argued that "across-the-board restitution may not be ordered without proof that all consumers were deprived of money or property as a result of an unfair business practice." The Court of Appeal rejected that argument as contradicting California Supreme Court authority and "the rule that restitution under the UCL may be ordered without individualized proof of harm." (Id. at pp. 531, 532.) The court in People v. Toomey, supra, 157 Cal.App.3d at pages 25-26, likewise rejected an argument that restitution under the UCL was limited to victims who testified at trial.
Because individualized proof of harm was unnecessary, the Attorney General was not required to present testimony from each and every USHA customer for whom restitution and civil penalties were being sought. Sarpas and Fasela faced no surprise when they walked into trial because the law was
Sarpas and Fasela argue the trial court erred by issuing a protective order limiting the Attorney General's obligation to respond to thousands of special interrogatories. The trial court did not err by issuing the protective order.
Eleven days after the complaint was filed, Sarpas and Fasela each served the Attorney General with a set of 83 special interrogatories (the first sets of special interrogatories). The first sets of special interrogatories asked generally whether the Attorney General made certain contentions and, if so, to state all facts supporting those contentions. The Attorney General served responses to the first sets of special interrogatories in September 2009. The responses in total were about 400 pages.
Sarpas and Fasela each brought a motion to compel further responses to every interrogatory of the first sets of special interrogatories (the first motions to compel). In April 2010, the trial court denied the first motions to compel, stating in a minute order: "Plaintiff ... was proper in its Responses. Plaintiff can only provide and only need[] provide the information that it has at the time it responds to particular discovery. Plaintiff apparently did this here with as much specificity to a particular Defendant as the information it had would allow. The objections that Plaintiff made were proper and were not tested by the Motions Defendants brought, in any event. As time goes on, supplemental discovery may well develop more particularized responses as to some of the defendants, victims, dates etc."
On the same day that the trial court denied the first motions to compel, Sarpas and Fasela propounded a request for supplemental responses to the
Sarpas and Fasela each brought a motion to compel further responses to the request for supplemental responses (the second motions to compel). They argued: "Time and again, Plaintiff provides an evasive and generalized response that totally fails to answer the question posed. After reading and reviewing each response, no individual Defendant has any inkling of what specifically it, he or she allegedly did, to whom, or when. The only information provided is a generalized and sweeping summary of the charges set forth in the Complaint. In this discovery, Defendants sought specific information as to what, where, when, and to whom they each, individually, allegedly did wrong. Absent proper responses, Defendants cannot possibly defend themselves against the generalized allegations brought."
In the responses to the first sets of special interrogatories, the Attorney General identified hundreds of USHA customers, including 585 customers identified by the court-appointed receiver. In June 2010, each Defendant served a second set of special interrogatories (the second sets of special interrogatories) propounding eight interrogatories for every one of about 550 of the USHA customers identified by the Attorney General.
In February 2011, each Defendant served a third set of special interrogatories, with each set containing 1,248 interrogatories. Each set propounded the
In March 2011, the Attorney General filed a motion for a protective order "that Plaintiff need not respond to Defendants' second and third sets of special interrogatories." In the motion, the Attorney General argued: "[T]hese interrogatories reflect a fundamental misunderstanding of what the People need to prove at trial to prevail on their claims, and what the People are obligated to provide in discovery. The People are not obligated to prove each and every specific individual harm suffered by every one of the hundreds of victims of Defendants' illegal acts. If that were the case, the People would be required to bring to Court the hundreds of victims as part of a multi-year trial. Rather, the People will establish that Defendants or those acting under their direction engaged in a pattern of illegal and deceitful behavior. While some victims will be called, the case will largely be based upon expert testimony, deposition testimony (including the Depositions of Defendants), employee testimony, and Defendants' own admissions and documents."
On April 1, 2011, following a hearing, the trial court issued a minute order denying the second motions to compel. The order stated: "Defendants have failed to show a reasonable and good faith attempt at meeting and conferring on the issues presented by these Motions. In addition, the motions failed to comply with applicable rules regarding Separate Statements."
The trial court granted the Attorney General's motion for a protective order. The order stated: "1. Plaintiff is only required to respon[d] to each Defendants' second and third set of special interrogatories as they pertain to those individuals Plaintiff anticipates will be called at trial; [¶] 2. As to the individuals Plaintiff does not anticipate calling at trial, Plaintiff is to (a) specifically state that it will not call those individuals, or (b) provide a specific date by which it will make the determination and then answer those interrogatories within 30 days of that date either stating that the particular individual will not be called or providing the requested information." The court ordered the Attorney General to provide to Defendants' counsel, by May 16, 2011, a list of those persons whom the Attorney General intended to call at trial, to provide additional names by June 16, and to serve interrogatory responses as to any additional names provided by July 16.
The standard of review for a discovery order is abuse of discretion. (Costco Wholesale Corp. v. Superior Court (2009) 47 Cal.4th 725, 733 [101 Cal.Rptr.3d 758, 219 P.3d 736].) We also review an order granting or denying a motion for a discovery-related protective order under the abuse of discretion standard. (Liberty Mutual Ins. Co. v. Superior Court (1992) 10 Cal.App.4th 1282, 1286-1287 [13 Cal.Rptr.2d 363].)
The abuse of discretion standard has been described generally in these terms: "The appropriate test for abuse of discretion is whether the trial court exceeded the bounds of reason." (Shamblin v. Brattain (1988) 44 Cal.3d 474, 478 [243 Cal.Rptr. 902, 749 P.2d 339].) Under the abuse of discretion standard, "[w]here there is a [legal] basis for the trial court's ruling and it is supported by the evidence, a reviewing court will not substitute its opinion for that of the trial court." (Lipton v. Superior Court (1996) 48 Cal.App.4th 1599, 1612 [56 Cal.Rptr.2d 341].)
The legal basis for the protective order issued by the trial court is Code of Civil Procedure section 2030.090: "When interrogatories have been propounded, the responding party, and any other party or affected natural person or organization may promptly move for a protective order...." (Code Civ. Proc., § 2030.090, subd. (a).) "The court, for good cause shown, may make any order that justice requires to protect any party or other natural person or organization from unwarranted annoyance, embarrassment, or oppression, or undue burden and expense." (Id., § 2030.090, subd. (b).) A protective order may include the direction that "the set of interrogatories, or particular interrogatories in the set, need not be answered," "the response be made only on specified terms and conditions," or "the method of discovery be an oral deposition instead of interrogatories to a party." (Id., § 2030.090, subd. (b)(1), (4) & (5).)
Substantial evidence supported findings the second sets of special interrogatories and third sets of special interrogatories were unwarrantedly oppressive or unduly burdensome or expensive. Each of the second sets of special
Much of the information sought by the interrogatories had already been provided or could be obtained by other means. Attached to the complaint were declarations from 19 USHA customers. The complaint and the declarations disclosed the Attorney General was asserting violations of sections 17200 and 17500, and described the conduct forming the basis for the alleged violations. In interrogatory responses the Attorney General provided Sarpas and Fasela with the names and addresses of 585 USHA customers. Sarpas and Fasela had the opportunity to interview, depose, or subpoena to testify at trial any or all of those USHA customers, if Sarpas and Fasela had wanted to do so. As the trial court explained, "if [the deputy attorney general]'s given you the names of everybody else, you can incur the costs and effort to find out if any of them have good things to say .... Because it appears to me it is an undue burden for them to go beyond giving you everybody's name and, if they've got statements from those people, copies of their statements."
In opposing the Attorney General's ex parte application for an order extending the time to answer interrogatories, counsel for Sarpas and Fasela stated, "we're really not interested in [the deputy attorney general] answering all these interrogatories unless he's intending to bring these people to trial." The trial court gave Sarpas and Fasela what they wanted by directing the Attorney General to answer the interrogatories related to those USHA customers whom the Attorney General intended to call as witnesses to testify at trial. The trial court did not abuse its discretion by issuing the protective order.
Finally, Sarpas and Fasela state in the heading under "Ground 1," on page 9 of their opening brief, that the trial court abused its discretion "in denying appellants' motion to compel." (Boldface & some capitalization omitted.) Although Sarpas and Fasela argue generally they were entitled to the information sought by the special interrogatories, they never specifically address the first motions to compel, the second motions to compel, or the grounds on which the trial court denied those motions. The trial court denied the first motions to compel because the Attorney General had provided all information known at the time the first sets of special interrogatories were
Sarpas and Fasela contend the trial court erred by receiving in evidence portions of the deposition transcripts of six USHA customers for whom the Attorney General did not provide interrogatory responses. The excerpts came from properly noticed depositions of witnesses who lived more than 150 miles from the courtroom. (Code Civ. Proc., § 2025.620, subd. (c)(1).) Sarpas and Fasela do not contend otherwise. They argue instead that receipt in evidence of portions of the deposition transcripts violated the terms of the protective order, which required the Attorney General to provide interrogatory responses to those USHA customers who "Plaintiff anticipates will be called at trial."
After the trial court issued the protective order, the Attorney General answered the second sets of special interrogatories and the third sets of special interrogatories as to 16 USHA customers. Of these 16, the Attorney General called five to testify at trial. In addition, the trial court received in evidence portions of the deposition transcripts of six USHA customers
Overruling the objection, the trial court stated: "There's no surprise when you set a person's depo[sition].... [I]n the court's mind that is the functional equivalent of the notice to the other side about what — who you're going to call. And because you're deposing them live, you're hearing the questions, and there's just no prejudice. [¶] ... [I]f the defendants then wanted to have interrogatories directed to those people whose deposition was taken on these
The trial court also received in evidence portions of the deposition transcripts of bank collector Lute and investigator Laverty. Defendants did not object to Laverty's deposition transcript.
Trial court rulings on the admissibility of evidence, whether made in limine or during trial, are usually reviewed under the abuse of discretion standard. (Pannu v. Land Rover North America, Inc. (2011) 191 Cal.App.4th 1298, 1317 [120 Cal.Rptr.3d 605].)
Whether the trial court erred by receiving in evidence the deposition transcripts of the six USHA customers depends on the meaning of the protective order. As relevant to this issue, it stated: "Plaintiff is only required to respon[d] to each Defendants' second and third set of special interrogatories as they pertain to those individuals Plaintiff anticipates will be called at trial ...." (Italics added.)
This meaning is consistent with the Code of Civil Procedure which, in describing the modes of taking witness testimony, distinguishes between a deposition ("a written declaration, under oath, made upon notice to the adverse party, for the purpose of enabling him to attend and cross-examine") and oral examination testimony ("an examination in presence of the jury or tribunal which is to decide the fact or act upon it, the testimony being heard by the jury or tribunal from the lips of the witness"). (Code Civ. Proc., §§ 2004, 2005.) A deponent is noticed or subpoenaed to testify outside the presence of the trier of fact. (Id., §§ 2025.010, 2025.210, 2025.250, 2025.280, 2025.320.) In describing how a subpoena may be obtained, the Code of Civil Procedure distinguishes between using a subpoena "[t]o require attendance before a court, or at the trial of an issue therein" and "[t]o require attendance out of court ... before a judge, justice, or other officer authorized to administer oaths or take testimony." (Id., § 1986, subds. (a) & (c).) The Code
The Attorney General points out that at the hearing on the protective order motion, the trial court, after hearing the Attorney General's proposal about identifying witnesses, stated, "[o]kay. So that would take care of live witnesses." Later at the same hearing, the trial court stated it wanted the Attorney General only "to turn over the answers to interrogatories as to the people he intends to call at trial." These comments by the trial court support the interpretation of the protective order as requiring the Attorney General to respond to interrogatories only for persons whom the Attorney General anticipated calling to provide live testimony at trial.
Even if the protective order could be construed as requiring the Attorney General to provide interrogatory responses for the six USHA customers whose deposition transcripts were used at trial, Sarpas and Fasela can show no prejudice. As the trial court commented, the depositions were properly noticed, and counsel for Defendants could have attended them and cross-examined the witnesses.
Sarpas and Fasela argue their counsel made a calculated decision not to attend the depositions because "each such deponent was outside of the protective order issued by the Court, rendering any such participation a waste of time." Sarpas and Fasela cite to nothing in the record to show their counsel tried to clarify the meaning of the protective order or confirm their interpretation of it was correct. The argument that participation in the depositions would have been a waste of time is unconvincing. Sarpas and Fasela argue some witnesses "did little to support [the Attorney General]'s case," and, by participating in the depositions, their counsel might have uncovered more unfavorable testimony to use in their defense. To lower costs, counsel could have attended the depositions by telephone. (Code Civ. Proc., § 2025.310, subd. (a).)
Sarpas and Fasela's reliance on Thoren v. Johnston & Washer (1972) 29 Cal.App.3d 270 [105 Cal.Rptr. 276] is misplaced, for in that case the plaintiff deliberately excluded the name of a potential witness from interrogatory responses. The appellate court held that the trial court did not abuse its
Sarpas and Fasela also argue the trial court erred by receiving in evidence portions of the deposition transcripts of Lute and Laverty. Lute was not a USHA customer, was not a subject of the special interrogatories, and, therefore, her testimony was not subject to the protective order. Sarpas and Fasela did not object to Laverty's deposition transcript and thereby forfeited any challenge to its admission. (Evid. Code, § 353, subd. (a).)
Sarpas and Fasela state there was "neither legal rhyme nor reason" why the trial court excluded one of their witnesses on the ground they did not identify the witness in interrogatory responses, yet allowed the Attorney General to use the six deposition transcripts "in violation of both the Discovery Act and the Protective Order." The only explanation for this result, Sarpas and Fasela assert, is judicial bias. Accusations of judicial bias are serious, and we treat them as such. Our review of the record leads us to categorically reject these accusations of bias. As we have explained, the trial court did not err by allowing the Attorney General to use the deposition transcripts, one of which was not covered by the protective order, and another of which was used without objection. There is not so much as a hint of judicial bias from the trial judge, who presided in a fair and exemplary manner over a difficult case.
Based on findings that Defendants violated sections 17200 and 17500, the trial court ordered USHA, Sarpas, and Nazarzai, jointly and severally, "to offer and make restitution to each and every customer, client or person who paid a fee for loan modification services to USHA ... during the period beginning January 1, 2008 through and including July 14, 2009 and who requests restitution in response to the offer." The court determined the maximum amount of restitution to be $2,047,041.86. Of that amount, Fasela was found to be jointly and severally liable for up to $147,869.
Relying on Bradstreet v. Wong (2008) 161 Cal.App.4th 1440 [75 Cal.Rptr.3d 253] (Bradstreet), Sarpas and Fasela argue they cannot be ordered to pay restitution absent evidence either one received money directly from USHA customers. Although the trial court found that USHA received over $2 million from customers, Sarpas and Fasela argue neither of them personally received money directly, and "[l]egally, under California law, a defendant who has violated the UCL, cannot be made to restore to a consumer that which he or she never directly received from the consumer." (Italics added.) This argument is legally incorrect.
In Bradstreet, the California Labor Commissioner filed a complaint against the shareholders, officers, and directors of several garment manufacturing corporations, seeking to hold them personally liable for the corporations' failure to pay employee wages. (Bradstreet, supra, 161 Cal.App.4th at p. 1444.) The complaint alleged the failure to pay wages constituted violations of the Labor Code and sought relief from the defendants personally on the ground they came within the relevant definition of employer. (Id. at p. 1446.) A private association and two former employees were permitted to file a complaint in intervention alleging violations of section 17200 and seeking restitution from the defendants personally. (Bradstreet, supra, at pp. 1444, 1446.)
The trial court found the common law definition of the word "employer" applied to the Labor Code violations alleged, the defendants were not employers under that definition, and, therefore, the defendants were not personally liable for the unpaid wages. (Bradstreet, supra, 161 Cal.App.4th at p. 1447.) The court found the plaintiff had failed to prove the defendants were the alter egos of the corporations. (Ibid.) On the section 17200 cause of action, the trial court found "an order requiring defendants to pay the wages owed by the ... Corporations, was not an available remedy in a private action under the UCL, because defendants had not personally obtained any money or property from the plaintiffs." (161 Cal.App.4th at p. 1448.)
The Court of Appeal affirmed. On the Labor Code violations, the court stated: "The issue is whether defendants, as the shareholders, officers, or managing agents of the ... Corporations, may be held personally liable for
On the section 17200 violations, the Court of Appeal stated, "[a]lthough it is well established that an owner or officer of a corporation may be individually liable under the UCL if he or she actively and directly participates in the unfair business practice, it does not necessarily follow that all of the remedies imposed with respect to the corporation are equally applicable to the individual." (Bradstreet, supra, 161 Cal.App.4th at p. 1458.) If the defendants had directly and actively participated in an unfair business practice, there would be no dispute that they would be subject to civil penalties in a public action and that unpaid wages could be recovered as restitution from the corporations. (Id. at p. 1459.) "The issue in the case before us," the court stated, "is whether these defendants, who were not the employers, and who were not found to have required any employee to work for them personally, or to have misappropriated corporate funds for their own use, may also be required to pay the earned but unpaid wages as restitution." (Ibid.)
The Court of Appeal concluded the defendants could not be held liable for restitution because the interveners did not perform labor for them personally: "In the absence of a finding that intervener performed labor for defendants personally, rather than for the benefit of [the] Corporations, or that defendants appropriated for themselves corporate funds that otherwise would have been used to pay the unpaid wages, we agree with the trial court's conclusion that an order requiring defendants to pay the unpaid wages would not be `restitutionary as it would not replace any money or property that defendants took directly from' intervener." (Bradstreet, supra, 161 Cal.App.4th at p. 1460.) The court distinguished cases cited by the interveners on the ground that "none addresses the question whether the corporate officer or owner could be directed to return money or property to the plaintiff that the corporation had obtained through an unfair practice, but that the individual defendant had not personally obtained or misappropriated." (Id. at p. 1461.)
Here, the parties argue at length over whether Bradstreet is an "employment" case or a UCL case, whether Bradstreet remains good law, whether it
Whether or not Bradstreet is a UCL case or remains good law on the issue of restitution under the UCL ultimately is beside the point. We are not bound by Bradstreet (Sarti v. Salt Creek Ltd. (2008) 167 Cal.App.4th 1187, 1193 [85 Cal.Rptr.3d 506] ["there is no horizontal stare decisis in the California Court of Appeal"]), and the case does not support Sarpas and Fasela's position that restitution under the UCL and FAL is available only from those who receive money directly from the victims of the fraudulent, unlawful, or unfair practice. Significant to the reasoning of the Court of Appeal in Bradstreet was the lack of evidence the defendants in that case had misappropriated corporate funds that otherwise would have been used to pay wages. (Bradstreet, supra, 161 Cal.App.4th at p. 1460.) Under this reasoning, the defendants might have been held liable for restitution if they had indirectly benefitted from the failure to pay wages.
In support of the argument they cannot be liable for restitution, Sarpas and Fasela also rely on the following passage from Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1149 [131 Cal.Rptr.2d 29, 63 P.3d 937] (Korea Supply): "Any award that plaintiff would recover from defendants would not be restitutionary as it would not replace any money or property that defendants took directly from plaintiff." (Italics added.) Several cases explain why Sarpas and Fasela's reliance on this passage is misplaced and illustrate how, in particular circumstances, restitution under the UCL and FAL is available from those who did not receive money directly from the victims of the fraudulent, unlawful, or unfair practice. We next analyze each of these cases. All of them support restitution to the victims in this case.
The trial court in Troyk v. Farmers Group, Inc. (2009) 171 Cal.App.4th 1305, 1314-1315, 1340 [90 Cal.Rptr.3d 589] (Troyk) ordered the defendants, an insurance company and its corporate attorney in fact, to pay restitution under the UCL for unlawful service charges paid by the class members to a billing company. On appeal, the defendants argued they could not be ordered to pay restitution because the service charges were paid directly to the billing
The Court of Appeal in Troyk rejected the defendants' interpretation of Korea Supply because "that language was parsed from the facts and analysis in that case, which involved money in which the plaintiff never had a vested interest and for which the plaintiff, in effect, sought disgorgement, rather than restitution, from the defendant." (Troyk, supra, 171 Cal.App.4th at p. 1338.) The Troyk court concluded Korea Supply was inapposite and "does not hold that a plaintiff who paid a third party money (i.e., money in which the plaintiff had a vested interest) may not seek UCL restitution from a defendant whose unlawful business practice caused the plaintiff to pay that money." (Troyk, supra, at p. 1338.) After reviewing California Supreme Court and Court of Appeal decisions, the Troyk court stated: "Accordingly, case law does not support [the defendant]s' argument that they cannot be liable for restitution under the UCL because [the billing company], rather than [the defendants], was the direct recipient of the service charges." (Id. at p. 1340.)
In Shersher v. Superior Court (2007) 154 Cal.App.4th 1491, 1494-1495 [65 Cal.Rptr.3d 634], the plaintiff sought restitution under the UCL from defendant Microsoft Corporation for a product he purchased from a retailer. Relying on Korea Supply, the trial court granted Microsoft Corporation's motion to strike the prayer for restitution on the ground restitution under the UCL was limited to direct purchasers and excluded those who purchased products from a retailer. (Shersher v. Superior Court, supra, at p. 1494.) The Court of Appeal issued a writ of mandate to overturn that ruling. The Court of Appeal concluded: "[The] respondent court's ruling went beyond the holding in Korea Supply, which was that an individual private plaintiff in a tort action may not invoke the court's equitable power under the UCL to seek the return of money or property in which the plaintiff never had an ownership interest. Nothing in Korea Supply conditions the recovery of restitution on the plaintiff having made direct payments to a defendant who is alleged to have engaged in false advertising or unlawful practices under the UCL." (Ibid.)
The plaintiffs in Hirsch v. Bank of America (2003) 107 Cal.App.4th 708, 712 [132 Cal.Rptr.2d 220] (Hirsch) were property owners who, in the course of completing real estate transactions, deposited money with escrow and title companies, which in turn deposited the plaintiffs' funds in demand deposit accounts with the defendant banks. Although federal law prohibited the banks from paying interest on demand deposit accounts, the banks could reward large depositors through other lawful means, including "earning credits" or the purchase of "monthly revolving credit facilities." (Id. at pp. 713-715.) The plaintiffs alleged those forms of reward were disguised interest payments
The Court of Appeal held the plaintiffs could not recover the "interest" payments as restitution because they would not have been entitled to interest in the first place. (Hirsch, supra, 107 Cal.App.4th at pp. 712, 717-718, 721.) But, the court held, the plaintiffs had "stated a valid cause of action for unjust enrichment based on [the] Banks' unjustified charging and retention of excessive fees which the title companies passed through to them. [The] Banks received a financial advantage — excessive fees charged to the title companies — which they unjustly retained at the expense of [the plaintiffs], who absorbed the overage. To confer a benefit, it is not essential that money be paid directly to the recipient by the party seeking restitution. [Citation.]" (Id. at p. 722.) The plaintiffs were entitled to relief under the traditional equitable principles of unjust enrichment, "upon a determination that under the circumstances and as between the two individuals, it is unjust for the person receiving the benefit to retain it. [Citations.]" (Ibid.)
Sarpas and Fasela argue the evidence at trial showed only that Sarpas was an owner and manager of SFGI and USHA and failed to show "any active involvement or participation on his part whatsoever." The trial court found otherwise: "The evidence at trial established that Sarpas and Nazarzai were each active participants in the day-to-day operations of USHA, managed the business, jointly owned USHA, and split the profits from USHA. They are thus directly liable for the actions of the company and liable for their failure to prevent the deceptive, illegal, and unfair acts of their agents, independent contractors, and employees. Substantial evidence also established that Sarpas and Nazarzai aided and abetted each other, [Fasela], and other employees, independent contractors, and agents of USHA in the violation of the UCL and the FAL."
Sarpas testified at his deposition, portions of which were read into the record at trial, he formed SFGI in 2005, was a 50 percent owner of SFGI,
This evidence supported the trial court's findings and is sufficient to impose liability against Sarpas under the UCL and FAL. An analogous case is People v. First Federal Credit Corp. (2002) 104 Cal.App.4th 721 [128 Cal.Rptr.2d 542] (First Federal). There, one of the defendants, Ida Lee Hansen, argued the finding she violated section 17500 was not supported by substantial evidence as her role was merely as a notary, office manager, and receptionist for the defendant company. (First Federal, supra, at pp. 734-735.) The Court of Appeal rejected that argument because the evidence showed that Hansen was one of the two principals of the company, in a position of control over daily operations, and aware of the company's unlawful practices. (Ibid.) "In view of Hansen's position as one of the two principals of First Federal, she was in a position of control, yet permitted the unlawful practices to continue despite her knowledge thereof." (Id. at p. 735.)
Sarpas, like Hansen in First Federal, tries to downplay his role in the unlawful practices. But Sarpas formed SFGI, was one of the two principals of SFGI, split its profits with Nazarzai, and, as operations manager, was in a position of control over its daily operations. Sarpas was in a position of control and permitted the known unlawful practices to continue.
Sarpas and Fasela argue that, with the exception of three potential violations, liability against Fasela was predicated entirely on vicarious liability. Sarpas and Fasela argue no evidence was presented to show Fasela participated in or aided and abetted UCL violations by others.
The trial court found: "The evidence at the trial established that [Fasela] was an active participant in the violations of the UCL and FAL. She was the office manager and sales manager and held a number of other roles at the company. She had been a key player in USHA's loan modification business from its inception, and in fact suggested that USHA cease working with the Firm and offer its own loan modification services. She also came up with the deceptive assertion that USHA had a `97% success rate' in its loan
Substantial evidence supported the trial court's findings, and they are sufficient to impose liability against Fasela under the UCL and FAL. Fasela testified at her deposition (portions of which were read into evidence at trial) she suggested USHA go into the loan modification business, was present when USHA was created, and, among other things, served as its office manager. As the sales floor manager, Fasela monitored the sales force and made sure the sales representatives "followed policy and procedure," called leads, and met their quotas; she also answered customers' questions and handled customers' complaints. Fasela also received leads and made sales calls herself. She communicated between the processing department and the sales force because she understood how both sides operated. Fasela oftentimes ran the company meetings held every Wednesday and distributed the scripts for sales representatives to use. Fasela was a compliance officer for USHA and in that capacity had to approve new customers. She closed completed files, maintained records of loans modified according to her definition of modification, and came up with the 97 percent success figure used in USHA marketing and promotion.
When asked to describe her role at USHA, Fasela testified at her deposition (read into evidence at trial): "I was administration. I was helping the processing team. I was ... helping with the sales floor, managing. I helped with the receptionist. I'd help with gathering payroll for agents. I was helping with complaints if they came in."
Sarpas and Fasela argue that Fasela, at most, can be held liable for restitution "to the 3 consumers who testified as to potential violations committed by her." This argument ignores Fasela's role in participating in, and aiding and abetting, Sarpas, Nazarzai, and USHA in their overall scheme, which harmed hundreds of people. As compensation for participating in, and aiding and abetting, the scheme constituting the UCL and FAL violations, Fasela received $147,869 from USHA. Although Fasela did not receive funds directly from USHA customers, she did receive compensation from USHA's income from victims of the scheme in which Fasela participated. Thus, Fasela received $147,869 from USHA customers, and is responsible, jointly and severally with USHA, Sarpas, and Nazarzai, for restitution up to that amount.
Pursuant to sections 17206 and 17536, the trial court imposed civil penalties against USHA, Sarpas, and Nazarzai, jointly and severally, in the amount of $2,047,041, and imposed additional civil penalties against Fasela, USHA, Sarpas, and Nazarzai, jointly and severally, in the amount of $360,540. In setting the amount of civil penalties, the court considered (1) the purpose of civil penalties to punish and deter; (2) Defendants' targeting of the elderly and the disabled; (3) the "enormous" number of UCL and FAL violations committed by Defendants; and (4) evidence establishing there were 1,259 "payors" checks deposited into USHA accounts.
Sarpas and Fasela challenge the imposition of civil penalties on the same grounds on which they challenge restitution: They contend the evidence showed they violated the UCL or FAL at most only three times and there was no evidence that either of them was an active participant in or aided and abetted any violations by others. We rejected those contentions when addressing restitution, and we reject them again now. As we have emphasized, individualized proof of each and every UCL and FAL violation is not required; from the evidence presented at trial, the trial court could draw the reasonable inference Sarpas and Fasela committed hundreds, if not thousands, of UCL and FAL violations. In this regard, the trial court found: "Defendants made false and misleading statements to each and every consumer who entered into a contract with Defendants. Further, Defendants used deceptive telemarketing scripts and other false and misleading marketing materials, and therefore civil penalties are appropriate for each consumer who spoke with a USHA representative and/or received USHA marketing materials, even if they never became a client of USHA."
Fasela alone argues there was no legal basis for imposition of $360,540 in civil penalties against her. Sarpas does not make this argument. The only explanation for that amount, she claims, is "[t]he Trial court found Fasela complicit in defendant Nazarzai's failure to turn over $360,540 to the Receiver." The Attorney General does not address this argument. The trial court offered no explanation or computation for coming up with $360,540, despite requests from Fasela to make factual findings. We agree the amount of civil penalties imposed against Fasela does not appear to be tethered to sections 17206 and 17536. She is, however, subject to civil penalties. We therefore will strike the civil penalties awarded against Fasela only and remand with directions to recalculate the amount of civil penalties under sections 17206 and 17536.
Sarpas and Fasela contend their due process rights were violated because they were ordered to pay restitution to and civil penalties for hundreds of USHA customers who did not testify at trial. The right to confront and cross-examine witnesses applies only to "`witnesses'" who "`bear testimony.'" (Crawford v. Washington, supra, 541 U.S. at p. 51; see Davis v. Washington (2006) 547 U.S. 813, 823 [165 L.Ed.2d 224, 126 S.Ct. 2266].) The USHA customers who did not testify were not witnesses bearing testimony. Restitution was not dependent on their testimony because, as we have emphasized, the UCL and FAL permit restitution without individualized proof of harm (e.g., People v. JTH Tax, Inc., supra, 212 Cal.App.4th at p. 1255; Fremont Life, supra, 104 Cal.App.4th at p. 532), and the testimony and evidence presented at trial was sufficient to draw an inference of classwide deception and injury.
Sarpas and Fasela rely on Goldberg v. Kelly (1970) 397 U.S. 254 [25 L.Ed.2d 287, 90 S.Ct. 1011] to support their claim of a due process violation. In that case, the United States Supreme Court addressed the narrow issue whether the due process clause required an evidentiary hearing before a state terminates a recipient's welfare benefits. (Id. at p. 260.) The court held that before welfare benefits can be terminated, "a recipient have timely and
Sarpas and Fasela were not denied those rights. Their claim they did not receive adequate notice of the charges against them borders on the absurd.
Sarpas and Fasela also contend the judgment violates their due process rights because it allows the Attorney General to pay claimants "at its own discretion" and "affords no requirement that the claimant present its evidence before a Constitutional tribunal and no opportunity for Appellants to confront and cross-examine that claimant in a judicial or judicially supervised manner." The judgment delegates to the Attorney General's Office the authority to administer and oversee the restitution process and provides: "[The Attorney General] is authorized to take any reasonable measure to insure the payment of restitution, including, without limitation: (1) hiring a third party administrator for the restitution process; (2) writing letters, e-mails, and telephone scripting to be used in contacting the Eligible Consumers; (3) sending
Sarpas and Fasela filed objections to the proposed statement of decision and the proposed judgment. Although they objected that the amount of restitution ordered in the judgment was improper and without factual support, they did not object to the portion of the judgment addressing the Attorney General's authority to administer the restitution process. Accordingly, the objection has been forfeited.
The trial court received in evidence the Attorney General's exhibit No. 1, which consisted of the front and back sides of over 1,900 checks deposited into a USHA account at Bank of America. The court received the exhibit in evidence for the limited purpose of establishing "Bank of America deposited into the account of the payee defendant in this action the amount of money that appears on the face amount of the check based on his testimony of their business practice with respect to how they handle the checks." The court stated it was not receiving exhibit No. 1 under the business records exception to the hearsay rule.
Elizabeth Mason, an associate governmental program analyst employed by the Attorney General's Office, testified she conducted a review of exhibit No. 1 and, from the information contained in it, created a spreadsheet showing a total of $2,224,113.86 was deposited into USHA's Bank of America account and USHA had 1,259 customers.
Sarpas and Fasela argue the trial court erred by receiving exhibit No. 1 in evidence because the checks were hearsay and did not fall within the business records exception to the hearsay rule, the ground on which they objected at trial.
The Attorney General does not contend the checks comprising exhibit No. 1 were Bank of America business records. Instead, the Attorney General argues the checks were authenticated for the purpose for which the court admitted exhibit No. 1. We agree.
The Attorney General authenticated the checks with testimony from a representative of Bank of America about how the checks were processed and the bank's custom and practice in accepting and negotiating the checks. The trial court accepted this testimony as sufficient to authenticate the checks for the purpose for which they were received in evidence. Sarpas and Fasela do not challenge this testimony.
Sarpas and Fasela argue exhibit No. 1 was used for a purpose other than the limited purpose for which it was received; that is, showing that Bank of America deposited into USHA's account the sums appearing on the faces of the checks. Sarpas and Fasela argue the trial court improperly used exhibit No. 1 in arriving at the total number of USHA customers, the total amount received from USHA customers, the amount of restitution, and the amount of civil penalties. They argue, "[a]ll the Trial Court knew was that Bank of America processed a number of checks: not the payor of the check, whether the payor was a customer; whether the payor was a victim, nor anything of relevance to the action."
The trial court could properly infer, from the totality of evidence presented at trial, the checks comprising exhibit No. 1 were payments from USHA customers, and the total amount received by USHA from those customers was $2,224,113.86. In considering Sarpas and Fasela's objection to exhibit No. 1, the trial court stated: "[I]f [the Attorney General] establish[es] through the[] evidence this business model of how your clients' company operated and allegedly defrauded 2 million plus dollars from people in a mortgage modification scam, if they establish that this was — how their business model worked, I, as the factfinder, can say I find it to be more likely to be true and
As the trial court suspected, the evidence at trial established that, during the relevant time frame, (1) USHA's business was primarily, if not exclusively, providing supposed loan modification services; (2) customers retained USHA to provide those services; (3) customers paid USHA by check for those services; and (4) $2,224,113.86 in checks was deposited in USHA's Bank of America account. Sarpas and Fasela presented no evidence to show that any of USHA's income — i.e., the deposits made into the Bank of America account — came from a source other than the loan modification business. From the evidence, the trial court could draw the reasonable inference, which it expressed in the statement of decision, that "[a]s a result of [Defendants'] deceptive and misleading practices, USHA procured over $2 million in up-front payments from consumers." It was equally reasonable for the trial court to set the maximum amount of restitution at $2,047,041.86. It could be true, as Sarpas and Fasela assert, that many of the payors on the checks were not victims, but those payors will not be able to obtain restitution, and Sarpas and Fasela's potential liability will be reduced correspondingly. (See Kraus v. Trinity Management Services, Inc. (2000) 23 Cal.4th 116, 137 [96 Cal.Rptr.2d 485, 999 P.2d 718] [fluid fund recovery not permitted in UCL actions].)
Mason testified USHA had 1,259 different customers. Sarpas and Fasela objected to Mason's worksheets (exhibit No. 558), but did not object to or move to strike Mason's testimony of the number of USHA customers. Responding to the objection to that exhibit, the trial court stated: "[T]his is the backup for the grand total numbers as described, which have been testified to. So that testimony's in evidence as to what the numbers are." Based on Mason's testimony of the number of USHA's customers, to which Sarpas and Fasela posed no objection, the trial court properly calculated the amount of civil penalties.
The civil penalties in the amount of $360,540 as to Fasela, and Fasela only, are stricken, and the matter is remanded to the trial court with directions to
Aronson, Acting P. J., and Thompson, J., concurred.
