State Appeals Court Reinstates Antitrust Suit Against Development Firm Over Escrow Fees
A state appellate court in Santa Ana has revived an antitrust lawsuit against a development firm in a case involving alleged overcharges of as much as $192 each to more than 4,000 home buyers.
The case involves allegations that A. E. Realty Partners’ Ponderosa Homes forced buyers to use one of its subsidiaries for escrow services, at exorbitant rates, between 1979 and 1982. The 4th District Court of Appeal ruled last week that the plaintiffs were entitled to pursue their claim that the practice violates California’s 1907 antitrust statute.
The case drew the attention of state Atty. Gen. John Van de Kamp, who intervened in the private lawsuit to urge state justices to use their own “independent judgment” and reject recent federal court decisions and Reagan Administration policies that dilute antitrust enforcement.
The state appellate court declined to follow the reasoning of the U.S. Supreme Court in a 1985 case limiting the reach of federal antitrust law. In arguments, Van de Kamp’s office urged that the federal interpretation need not and should not be “imported” when it would undermine California’s “vital” state laws.
Turning to the State
Deputy Atty. Gen. Gary S. Garfinkle said the decision means that more Californians will be turning to state, rather than federal, courts with antitrust complaints.
“Litigants looked to federal law so, until recently, there was no great need for the Cartwright Act (state antitrust law),” Garfinkle said. “There’s a very clear impression that now, when somebody wants to invoke the antitrust laws, their first thought is towards the state.”
The ruling will be appealed, according to Mary Laura Davis, an attorney for the developer. She declined further comment.
The dispute began in 1979, when Frederick O. MacManus and Barbara-Helene Smith bought a home in the Westwind subdivision in San Diego County.
The sales agreement required their signatures on escrow instructions to be provided by the development firm. The forms provided bore the name of Realty Escrow Inc., a wholly owned subsidiary of that firm.
The fee for escrow services was $319. Charges for comparable services ranged from $127.50 to $269, according to papers filed in the case.
A year later, the couple sued, claiming use of the escrow firm was a condition of the home sale.
“An escrow company is supposed to be neutral,” said Cheri L. Hubka-Sparhawk, an attorney for MacManus. “How can a wholly owned subsidiary be neutral?”
Research showed that the subsidiary provided escrow services in 99.3% of the 4,327 single-family homes sales by the developer in 1978, 1979, and 1980, the plaintiffs claimed.
Documents Changed
Hubka-Sparhawk said the firm changed its documents in 1981, allowing buyers “to fill in the name of the escrow agent of their choice.”
The development firm persuaded a Superior Court judge to throw out the case, but it was reinstated in 1983 by the appellate court. Then in 1984, the U.S. Supreme Court ruled in another case that a parent firm and a wholly owned subsidiary are incapable of forming a conspiracy to illegally restrain trade.
Armed with that decision, which overturned 40 years of prior rulings, according to Garfinkle, lawyers for the development firm convinced another Superior Court judge to dismiss the case again, in 1985.
The history of state and federal antitrust legislation is parallel, and the legal principles often are identical, according to Van de Kamp’s office.
But, Van de Kamp argued, the state courts are not bound to follow the federal judges’ opinions.
“It is appropriate for California courts to exercise their independent judgment in considering whether this state’s antitrust laws are to suffer the same weakening process that is now being inflicted on the federal statute,” Van de Kamp’s office argued.
Lawyers for the development firm argued that four other states had followed the lead of the federal courts. They urged the court to bring California into line.
But the appellate court in Santa Ana, in an opinion written by Justice Sheila Prell Sonenshine, sidestepped that issue and revived the lawsuit on other grounds. Sonenshine’s opinion also reinstated the lawsuit as a class action, meaning one group of plaintiffs could represent the interests of as many as 4,000 home buyers.
The decision is significant, Garfinkle said. Both state and federal antitrust laws were enacted to protect consumers in the marketplace, he said.
“That’s why the principles are so important,” Garfinkle said. “You’re talking about a lot of consumers. What may seem like only a few hundred dollars for an individual, when multiplied across the spectrum, can be many millions.”
