Court of Appeal:
Couple Can’t Recoup Interest Paid to Unlicensed Lender
Majority Says Plaintiffs Lack Standing Under UCL Because They Can’t Show Actual Injury; Dissenter Maintains Decision Runs Afoul of 2011 California Supreme Court Decision
By a MetNews Staff Writer
A couple who took out a $550,000 loan on their home, not knowing that they were dealing with an outfit that was not a lender licensed by the State of California, as legally required, cannot maintain an action under the Unfair Competition law to gain a disgorgement of the interest payments they made, Div. One of the Fourth District Court of Appeal has held, in a 2-1 opinion, because the company never said it was licensed.
Justice Julia Kelety authored the majority opinion, joined in by Acting Presiding Justice Terry B. O’Rourke. Justice William Dato wrote a concurring and dissenting opinion—almost entirely a dissent.
The appellants are Loreto and Mercedes Lagrisola. They maintain that San Diego Superior Court Judge Joel R. Wohlfeil erred in sustaining a demurrer, without leave to amend, to their causes of action under the Unfair Competition Law (“UCL”) and under provisions of the Financial Code.
The Lagrisolas lack standing under the UCL, he ruled, because they do not meet the requirement, under Proposition 64, of having sufffered an an actual economic injury. The initiative, approved by voters in 2004, was intended to end shakedown lawsuits by amending Business & Professions Code §17204 to permit actions by private individuals only if they personally suffered an injury through loss of money or property stemming from unfair competition.
Supreme Court Opinion
Kelety found the holding by the California Supreme Court in its 2011 opinion in Kwikset Corp. v. Superior Court to be distinguishable; Dato maintained that it isn’t, and is dispositive of the issue.
Kwikset Corporation had falsely represented the locksets it sold to have been “Made in U.S.A.” when some components were imported. Suit was brought by a man who said he would not have made a purchase of a Kwikset lockset if he had known that it was partially made in a foreign country.
Reversing an opinion from Div. Three of the Fourth District Court of Appeal, the high court said, in the majority opinion by Justice Kathryn Werdegar:
“A consumer who relies on a product label and challenges a misrepresentation contained therein can satisfy the standing requirement of section 17204 by alleging, as plaintiffs have here, that he or she would not have bought the product but for the misrepresentation. That assertion is sufficient to allege causation—the purchase would not have been made but for the misrepresentation. It is also sufficient to allege economic injury.”
The Lagrisolas asserted that they would not have taken out a loan from defendant North American Financial Corporation (“NAFC”) if they had realized that, while it was a licensed broker here, the Nevada company was not a licensed lender in California.
There was a distinguishable fact situation in Kwikset, Kelety said, because the plaintiff in that case “allegedly ‘saw and relied on’ ” the labeling, while “the Lagrisolas do not point to any representation that NAFC made to them about its licensing status, nor do they allege that they relied on an actual belief or understanding that NAFC was licensed when obtaining their loan.”
“Put more simply, the Lagrisolas do not allege that they saw or relied on a statement that NAFC was ‘licensed as a lender in California.’ They allege, now, that they would not have obtained the loan from NAFC if they had known NAFC was not a licensed lender, but they do not allege that they did obtain the loan based upon a representation by NAFC that it was a licensed lender….
“The Kwikset decision did not change Proposition 64’s requirement that standing under the UCL requires both (1) an economic injury and (2) that the injury be caused by ‘the unfair business practice or false advertising that is the gravamen of the claim.’ ”
The jurist went on to say:
“We do not believe that the Kwikset court intended to expand Proposition 64 to include standing to plaintiffs like the Lagrisolas based on their intangible distaste for NAFC’s failure to complete the licensing process in California, a failure for which the state took appropriate action to remedy. The test for standing cannot turn on a consumer’s post hoc belief about the seller’s status, particularly in the absence of an affirmative misrepresentation about that status at the time the consumer entered the transaction.”
She added that the loan has been sold, presumably to a licensed lender, so the Lagrisolas have woumd up with what they allege they wanted: a loan from a licensed lender and therefore can allege no harm.
“The trial court’s reasoning is strikingly similar to an analysis rejected by the Supreme Court in Kwikset…Narrowly construing the reach of that decision, the majority finds Kwikset distinguishable on its facts. In my view, however, Kwikset stands for the general principle that where plaintiffs fairly allege they would not have entered into a consumer transaction had they known of an illegality, misrepresentation, or material omission by the defendant, they have adequately pleaded an economic injury for the purpose of establishing standing to sue under the UCL. Because North American’s lack of a license would be material to a reasonable homeowner’s decision where to obtain a home loan, I believe Kwikset controls and I respectfully dissent.”
“Recognizing that plaintiffs here entered into loan transactions with North American and make a nearly identical allegation—they would not have done so had they known it was an unlicensed lender—the majority opinion effectively dismisses the Kwikset analysis by pointing out that this case does not involve an affirmative misrepresentation…..But this is a distinction without a difference. It has been well-settled California law for decades that a UCL claim asserting a fraudulent business practice is not limited to affirmative misrepresentations. It can also be based on a defendant’s failure to disclose material information if it can be fairly alleged there was an obligation to disclose the omitted fact….That the Supreme Court’s Kwikset opinion makes statements about the affirmative misrepresentation involved in the case hardly means its reasoning only applies in that limited context.”
Financial Code Sections
The Lagrisolas’s pleading contained a cause of action based on two Financial Code sections requiring licensure of a lender, one of which provides for forfeiture of interest and charges on a loan “[i]f any provision of this division is violated in the making or collection of a loan.” Kelety declared that those sections do not authorize a private cause of action and Dato, in a footnote, indicated agreement.
(An action was brought by the state against NAFC which paid a $75,000 administrative penalty.)
However, the UCL authorizes an action based on conduct that is “unlawful” as well as that which is “unfair” or “fraudulent,” and Dato wrote:
“As the Supreme Court has repeatedly emphasized, an ‘unlawful’ business practice under section 17200 includes ‘anything that can properly be called a business practice and that at the same time is forbidden by law.’…Here, making unlicensed loans is an unlawful business practice under this broad definition.”
The case is Lagrisola v. North American Financial Corporation, 2023 S.O.S. 4016.
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