125 Cal.App.4th 1219 Page 1 125 Cal.App.4th 1219, 23 Cal ...

Court of Appeal, First District, Division 4, Califor-nia.

The STATE of California ex rel. Kamala HARRIS,as District Attorney, etc., et al., Plaintiffs and Ap-

pellants,v.

PRICEWATERHOUSECOOPERS LLP, Defendantand Appellant.

The State of California ex rel. Kamala Harris, asDistrict Attorney, etc., et al., Plaintiffs and Appel-

lants,v.

Old Republic Title Company et al., Defendants andAppellants.

Nos. A095918, A097793.

Jan. 20, 2005.Review Granted May 11, 2005.

Background: City filed action on behalf of stateagainst title company and its auditor for violation ofFalse Claims Act (FCA) for failure of title companyto escheat dormant funds from escrows to the stateunder the unclaimed property law (UPL), and forauditor's allegedly submitting false audit reports toDepartment of Insurance (DOI) that masked this li-ability; city also filed action under Unfair Competi-tion Law (UCL) for failure of company to pay cus-tomers interest on escrow funds, which action wasjoined by consumer class. The San Francisco Su-perior Court, No. 993507,Stuart R. Pollak, J.,entered judgments against company, but in favor ofauditor in FCA action, and in favor of city and con-sumers in UCL action. Parties appealed.

Holdings: The Court of Appeal, Reardon, J., heldthat:(1) city had standing to pursue its FCA claims as aqui tam plaintiff;(2) damage to state from violation of UPL wasmeasured by loss of use of unescheated funds;(3) auditor's report violated the FCA;

(4) company violated UCL because it earned andunlawfully retained what amounted to interest re-ceived on escrow deposit funds, and(5) class could not be certified beyond limitationsperiod for UCL.

Affirmed in part and reversed in part.

*533 Kamala Harris, District Attorney, JuneCravett, David C. Moon, Assistant District Attor-neys, Dennis J. Herrera, City Attorney, Therese M.Stewart, Chief Deputy City Attorney, Joanne Hoep-er, Chief Trial Attorney, Ellen M. Forman, DonaldP. Margolis, David B. Newdorf, Deputy City Attor-neys, Counsel for appellants State of California,etc.

Gibson, Dunn & Crutcher, Joel S. Sanders, Mark A.Perry, Ethan D. Dettmer, San Francisco, CatherineH. Ahlin-Halverson, Counsel for appellant Pricewa-terhouseCoopers.

Kamala Harris, District Attorney, June Cravett,David C. Moon, Assistant District Attorneys, Den-nis J. Herrera, City Attorney, Joanne Hoeper, ChiefTrial Deputy, *534 Ellen M. Forman, Donald P.Margolis, Deputy City Attorneys, Cotchett, Pitre,Simon & McCarthy, Niall P. McCarthy, Burl-ingame, Richard A. Dana, Gross & Belsky, TerryGross, Adam C. Belsky, San Francisco, Moscone,Emblidge & Quadra, James A. Quadra, San Fran-cisco, Robert D. Sanford, Mogin Law Firm, DanielJ. Mogin, Counsel for appellants State of Califor-nia, etc.

Bill Lockyer, Attorney General, Christopher M.Ames, Senior Assistant Attorney General, LarryRaskin, Ronald A. Reiter, Supervising Deputy At-torneys General, Karen Z. Bovarnick, Deputy At-torney General, Counsel for amicus curiae on be-half of appellants State of California, etc.

Crosby, Heafey, Roach & May, Reed Smith CrosbyHeafey, Peter W. Davis, Kathy M. Banke, MichaelJ. George, Jayne E. Fleming, Oakland, Leland,

125 Cal.App.4th 1219 125 Cal.App.4th 1219, 23 Cal.Rptr.3d 529, 05 Cal. Daily Op. Serv. 603, 2005 Daily Journal D.A.R. 806Review Granted Previously published at: 125 Cal.App.4th 1219 (Cal.Const. art. 6, s 12; Cal. Rules of Court,Rules 28, 976, 977, 979)(Cite as: 23 Cal.Rptr.3d 529)

© 2009 Thomson Reuters/West. No Claim to Orig. US Gov. Works.

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Parachini, Steinberg, Matzger & Melnick, LosAngeles, Steven R. Walker, El Centro, Counsel forappellants Old Republic Title Company et al.

Greines, Martin, Stein & Richland, Robin Meadow,Cynthia Tobisman, Los Angeles, Counsel foramicus curiae on behalf of appellants Old RepublicTitle Company et al.

REARDON, J.

Under the rein of Donald Barr, who personally em-bezzled millions of dollars while serving as chieffinancial officer (CFO) of Old Republic Title Com-pany (ORTC) and related entities,FN1 the manage-ment of the company initiated a variety of illegalpractices. The continuation of these practices ulti-mately led to an action by the District Attorney andCity Attorney of the City and County of San Fran-cisco (City) against Old Republic, as well as con-sumer class actions. Along the way these actionswere consolidated and the governmental plaintiffsalso sued PricewaterhouseCoopers LLP (PwC), theaccounting firm that prepared the independent auditreports for ORTC that were submitted annually tothe California Department of Insurance (DOI).

FN1. ORTC and Old Republic Title In-formation Concepts (ORTICON) arewholly owned subsidiaries of Old RepublicTitle Holding Company, which in turn is awholly owned subsidiary of Old RepublicInternational (ORI). For purposes of theseconsolidated appeals, we refer to these en-tities collectively as “Old Republic.”

This consolidated litigation splits into twobranches: One follows the False Claims Act(FCA),FN2 the other follows the unfair competitionlaw (UCL).FN3

FN2. Government Code section 12650 etseq.

FN3. Business and Professions Code sec-tion 17200 et seq.

The FCA actions against Old Republic and PwC fo-cused on the systematic failure of ORTC to honorits obligation to escheat dormant funds to the stateunder the unclaimed property law (UPL).FN4 Thegovernment sued Old Republic for not disclosingits escheat liability in filings with the DOI and pur-sued PwC for allegedly submitting false audit re-ports that also masked this liability.

FN4. Code of Civil Procedure section 1500et seq.

As a threshold matter the trial court ruled that theCity, through its district attorney and city attorney,had standing to pursue its FCA claims as a qui tamplaintiff on behalf of the State of California. OldRepublic and PwC vigorously oppose this ruling onappeal. The ruling is correct. On the merits the gov-ernment prevailed against Old Republic but met de-feat at the hands of PwC, failing to convince the tri-al court that the allegedly false audit reports werematerial under the FCA. In *535 appeal No.A097793, the government and Old Republic bothfind fault with the trial court's measure of damagesagainst Old Republic. Again, we conclude the trialcourt got it right. In appeal No. A095918, the gov-ernment challenges the summary judgment inPwC's favor on its FCA claim. We conclude the tri-al court acted improvidently and therefore reverse.

In the UCL litigation, the trial court concluded thatcertain cost avoidance and arbitrage practices ofORTC generated millions of dollars in illegal in-terest that belonged to ORTC's escrow customers.The court entered orders for restitution as well aspenalties for violations related to these and otherpractices, and granted injunctive relief. Old Repub-lic challenges the arbitrage ruling as well as the tri-al court's decision awarding interest to classplaintiffs on certain lender funds. Class plaintiffsand the People challenge rulings related to the stat-ute of limitations and class certification, as well asthe disbursement float; class plaintiffs attack the or-der for injunctive relief as insufficient. All of theserulings were correct. Finally, the People contest thedismissal of its UCL claim following the sustaining







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of PwC's demurrer without leave to amend. Thisclaim should proceed and therefore we reverse thejudgment of dismissal.

I. FACTS

A. The Company

ORTC is an underwritten title company licensed bythe DOI to conduct business as a title and escrowagent in California. (See, e.g., Ins.Code, § 12389.)It provides title and escrow services for real estatetransactions in California. As a regulated entity,ORTC has disclosure and reporting obligations tothe DOI. (Id.,§ 12389, subd. (a)(4).)

Donald Barr was ORTC's CFO from approximately1979 until July 1996, when he was fired for embez-zlement in connection with the company's costavoidance program, discussed below. ORTC re-ferred these allegations to the San Francisco Dis-trict Attorney (SFDA). The SFDA opened a crimin-al investigation leading to Barr's arrest and sub-sequently charged him with multiple counts ofgrand theft, perjury, embezzlement and tax evasion.Barr negotiated a disposition in exchange for in-formation concerning certain alleged illegal busi-ness practices of ORTC (discussed below), andpleaded guilty to two counts of tax evasion.

B. Business Practices Subject to Litigation

1. Failure to Escheat Unclaimed Funds

As escrow agent, ORTC receives funds from pur-chasers, sellers, borrowers and lenders; preparesdocuments and closing account statements; and dis-burses escrow funds at the close of escrow. Thecompany routinely aggregates its customers' escrowfunds in demand deposit FN5 accounts with variousbanks throughout California. At times, customerswould fail to instruct ORTC to disburse all thefunds on deposit. On other occasions a party towhom ORTC disbursed funds from the escrow ac-

count at the close of escrow would fail to cash thecheck. In both cases these dormant funds accumu-lated and remained in the accounts after the close ofescrow. By the late 1980's, ORTC began sweepingsome of the dormant funds from escrow accountsinto its general fund and recognizing these funds asincome. Under the UPL, holders of unclaimedfunds such as ORTC are charged with submittingholder reports to the State Controller on an annualbasis *536 that disclose the nature, and last knownowner, of the unclaimed funds. (See Code Civ.Proc., § 1530.) At the same time, the reportingholders are to deliver all escheated property identi-fied in the reports to the State Controller. (Id., §1532, subd. (a).)

FN5. A “demand deposit” is a deposit pay-able on demand. (12 C.F.R. § 204.2(b)(1)(2004).)

At relevant times, PwC or its predecessor Coopers& Lybrand was the independent public accountantfor ORTC. PwC's scope of work included preparingthe annual audit report for the Commissioner of In-surance (Commissioner), as required by InsuranceCode section 12389, subdivision (a)(4).FN6

FN6. Pursuant to this statute, each year un-derwritten title companies such as ORTCmust submit to the Commissioner an auditcertified by independent auditors. The pur-pose of this and related requirements is “tomaintain the solvency of the companiessubject to this section and to protect thepublic by preventing fraud and requiringfair dealing.” (Ins.Code, § 12389, subd.(d).)

Gerard Fisher, PwC's audit manager on ORTC's ac-count during 1990, indicated he understood thatORTC had a policy of clearing dormant funds outof trust accounts. He suspected that the companyhad been violating the “laws related to escheat.”Fisher testified that the majority of dormant fundstaken from the accounts did not belong to ORTC. In1990, PwC recommended that ORTC evaluate the



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dormant escrow amounts which remained un-claimed and review its policies to ensure compli-ance with state law. ORTC indicated it would do so“ ‘insofar as practical.’ ” Between 1990 and 1994,PwC raised the issue of dormant funds with thecompany.

Karman Pejman, a former PwC auditor, testifiedthat there was always a concern about ORTC'spractice of purging funds from escrow accounts andrerouting them to the company's operating income.He noted that ORTC's liability for funds that shouldhave been escheated accumulated year after year.For example, for the period 1989 and 1990, nearly$1.7 million was purged from ORTC escrow ac-counts, with $1.3 million taken in as income. Ac-cording to Pejman, ORTC never, in recent history,complied with the UPL.

Richard Baker, PwC auditor partner on the Old Re-public account, was also aware of the company'sdormant funds practices and knew they were recur-rent.

Nonetheless, PwC issued an unqualified, “clean”audit opinion letter, which ORTC submitted to theCommissioner along with its financial statements.PwC understood that its opinion was so submitted.E. John Larsen, a certified public accountant andprofessor of accounting, gave his expert opinionthat once PwC learned of the escheat violations,minimum auditing standards required the firm totake steps to estimate ORTC's potential liability. Itdid not. Without an estimate, PwC should not haveissued unqualified opinion letters.

Alfred Bottalico, bureau chief of DOI's Field Ex-amination Division (FED), explained that his divi-sion conducts field audits at company offices,whereas the Financial Analysis Division of the DOIreceives and monitors the audit reports and finan-cial statements and determines when a field exam-ination is in order. One trigger point for a field ex-amination would be a qualified opinion letter froman independent auditor. One of the field examina-tion protocols is to determine if the company has its

own procedure “to set up an unclaimed property li-ability.” If fraud were detected as part of the exam,it would be a “major finding” and would spur fur-ther inquiry.

DOI undertook an examination of Old Republic andissued its confidential report *537 in February1999. The special examiner found that since 1980,the company had swept funds left dormant in es-crow accounts into its general fund. Further, insome years Old Republic actually budgeted for po-tentially escheatable income, thus demonstrating its“systematic approach to the movement of funds in-to their income accounts.”

ORTC did not escheat any unclaimed escrow fundsto the state until 1992. The company filed its firstholder report in the early 1990's. The holder reportsfor 1992-1994 and 1997 understated the fullamount of escheatable funds which ORTC held.After the City served Old Republic with the com-plaint in this lawsuit, the company escheated$9,551,527.89 in unclaimed funds and$7,710,118.18 in statutory interest on those funds tothe State Controller.

2. Cost Avoidance and Arbitrage Practices

a. Federal Regulatory Framework

The Federal Reserve Act FN7 prohibits memberbanks of the Federal Reserve System from directlyor indirectly paying any interest on any demand de-posit. (12 U.S.C. § 371a; see also 12 C.F.R. § 217.1et seq. (2004) (Regulation Q).) Regulation Qdefines interest as “any payment to or for the ac-count of any depositor as compensation for the useof funds constituting a deposit. A member bank'sabsorption of expenses incident to providing a nor-mal banking function or its forbearance from char-ging a fee in connection with such a service is notconsidered a payment of interest.” (12 C.F.R. §217.2(d) (2004).)

FN7. Act of December 23, 1913, 38 Stat-utes at Large 251, chapter 6; see also title



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12 United States Code section 226.

From time to time the Federal Reserve Board(Board) has issued rulings and opinion letters whichspell out various arrangements by which banks canprovide benefits to depositors without violating theFederal Reserve Act or Regulation Q. For example,a bank can withhold or impose a reduced charge forservices or benefits reasonably regarded as normalbanking functions or services, so long as the bankdoes not actually pay money to the demand depositcustomer. Thus, under this rationale, the Boarddoes not regard the provision of free checks, safetydeposit boxes, night depository service, messengerand armored car services and the like as constitut-ing the indirect payment of interest. (See 1957 Fed.Res. Interp. Ltr. (Jan. 23, 1957); 1974 Fed. ReserveBd. Interpretive Letter, Fed. Reserve Reg. Service2.540 (Jan. 3, 1974); 1964 Fed. Reserve Bd. Inter-pretive Letter, Fed. Reserve Reg. Service 2-439(July 17, 1964).) Similarly, the Board regards auto-mated escrow closing trust accounting and bank re-conciliation, and monthly general ledger and finan-cial statements pertaining to escrow accounting ser-vices as normal banking functions for which a bankmay absorb the expenses. (1994 Fed. Reserve Bd.Interpretive Letter, Fed. Reserve Reg. Service (Apr.26, 1994).)

Moreover, the Board has deemed that banks do notpay interest by offering loans at favorable rates forthe purchase of investment instruments pledged assecurity for the loans to customers who maintainlarge demand deposit balances. In this situation, theamount of credit a bank is willing to extend is tiedto the historical average demand deposit accountbalances. (1988 Fed. Reserve Bd. Interpretive Let-ter, Fed. Reserve Reg. Service 2-545.1 (June 28,1988).)

*538 b. Cost Avoidance Arrangements

ORTC provides direct escrow services in NorthernCalifornia; it serves as a subescrow in SouthernCalifornia. In both instances, ORTC deposits ag-

gregated escrow trust funds in demand deposit ac-counts in various banks.

Starting in the early 1980's, ORTC entered intovarious “cost avoidance” arrangements with ap-proximately 10 different banks which maintainedthe escrow accounts. Through these arrangements, aparticipating bank would make a certain dollaramount of “earnings” credits available to ORTC ona monthly basis. This is the way it worked: First,the bank would establish an “earnings credit rate”expressed as a percentage, and determined by refer-ence to a market index for the bank's cost of funds.Next, it would calculate the average daily balanceof funds held in ORTC non-interest-bearing de-mand deposit accounts for the previous month.From that balance the bank would deduct the“float” (checks deposited which were not yet “goodfunds”), as well as reserves and premiums imposedby federal regulators, resulting in an average netbalance. This net balance would be multiplied bythe earnings credit rate, to generate the actual earn-ings or vendor credit.

Fees for services provided directly by the bank suchas check processing, wire services and stop pay-ments were netted out, and the net credit was multi-plied by an agreed upon percentage rate, theproduct being the “available earnings credit.” Atthe end of the month, the bank would pay“vendors” on invoices submitted for “normal bank-ing services” in an amount up to the available earn-ings credit determined for the previous month.

Through the mid-1990's, Barr used the cost avoid-ance program to embezzle approximately $2 mil-lion. Barr would submit phony invoices to thebanks under a shell corporation he created and con-trolled, and skim some of the remitted funds beforetransferring the remainder to ORTC.

Since July 1994, most of the earnings credit pay-ments were paid against invoices from ORTICON.ORTC officers responsible for the ORTICON in-voices never consulted with ORTICON prior topreparing them. In fact, the operations manager for



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ORTICON was unaware that these invoices werebeing submitted to banks until he was deposed inconnection with this litigation. Through at least1997, checks paid on the ORTICON invoices weredeposited directly into ORTC's account.

ORTICON invoices reflected charges for computerequipment, software support and maintenance,training, escrow data accounting, and data pro-cessing. Invoices were prepared by determining theamount of available earning credits. The amountbilled and entered on any given invoice generallywas based on the earnings credit available at thetime, not the actual cost or value of servicesrendered by ORTICON to ORTC. These amountswere generally slightly less than the available earn-ings credit. Unused earnings credits were carriedforward to the next month and ORTC would billdown to zero at the end of the year.

For the period 1987-1994, ORTC collected over$19.2 million through the cost avoidance scheme.From July 1994 through February 2001, it collected$13,760,901.

c. Arbitrage Scheme

Beginning around 1997, ORTC and its bankingpartners largely replaced the cost avoidance ar-rangements with an “arbitrage” scheme. The arbit-rage relationship typically worked this way: ORTCwould receive a rock-bottom interest loan (.25 *539percent to 1 percent) from the bank for an amountequal to approximately 90 percent of the total aver-age daily balances maintained at that bank. Underagreement with the bank, ORTC was required touse the loan proceeds to purchase interest-bearinginstruments from the same bank. These instrumentssecured the loan. ORTC retained the “arbitrageyield” or “spread” constituting the excess interestearned by the instrument over the life of the loan.For the period July 1994 through February 2001,the arbitrage yield totaled $18,377,222.

William Sarsfield, a former bank president, national

bank examiner with the Office of the Comptrollerof the Currency, and adjunct faculty member atGolden Gate University, testified by declarationthat in his opinion “there was no business purposefor the ‘arbitrage’ loan other than pay net interest toOld Republic ... on the escrow demand deposits.”

3. Fees Charged for Services Not Rendered

ORTC also engaged in charging fees for services itdid not perform. In some Southern Californiacounties, it collected reconveyance fees from its es-crow customers-typically from $65 to $75-eventhough neither the beneficiary nor the trustee haddemanded the fee. ORTC transferred the fees to an“advance account” and paid out the fee if requestedby the trustee or beneficiary. However, in many in-stances neither demanded a reconveyance fee andperiodically ORTC would transfer the accumulatedfees into company income.

After the complaint in this case was unsealed, theState Controller's Office (SCO) audited ORTC.Both parties agreed that ORTC was not able to doc-ument adequately that it was entitled to take$5,621,657 in fees into income. ORTC tenderedthis amount together with $1,322,844.13 in interestto the SCO. Of these amounts, $2,009,623.70 infees and $154,727.51 in interest were attributable tofees charged on or after January 1, 1994. Thistranslates into unearned reconveyance fees collec-ted from approximately 80,309 customers.

In approximately 10 percent of its escrow transac-tions, ORTC also charged its customers $25 on av-erage for each outgoing wire transfer. In most casesOld Republic did not actually incur the expense ex-cept insofar as the bank absorbed the fee as part ofthe cost avoidance and arbitrage programs.

4. Customer Practices with Respect to Escrow Ac-counts

Old Republic's written escrow instructions did notinform customers that they could place funds in an



interest-bearing account. If a customer nonethelessmade such a request, Old Republic honored the in-struction.

Further, its form escrow instructions directed thatall disbursements from the escrow account be madeby check. Indeed, most disbursements were madeby check rather than by wire transfer. Whereas wiretransfer funds are withdrawn immediately from anaccount, disbursement checks take some time toclear, resulting in a disbursement float.

C. Procedural History

1. The City and Class Plaintiffs Sue Old Republic

The SFDA and San Francisco City Attorney filedthe complaint FN8 in this lawsuit *540 in March1998. They sued (1) on behalf of the City as a quitam plaintiff under the FCA on allegations of falsi-fying records to conceal escheat obligations; and(2) in the name of the People on other causes of ac-tion, including a civil enforcement action under theUCL for (a) collecting disguised interest under costavoidance and arbitrage schemes, but not payingthe benefits to consumers per Insurance Code sec-tion 12413.5; FN9 and (b) improper retention of re-conveyance fees. (Collectively, we sometimes referto these plaintiffs as the government or govern-mental plaintiffs.)

FN8. Pursuant to the FCA, San Franciscofiled the complaint under seal. (Gov.Code,§ 12652, subd. (c)(2).)

FN9. Insurance Code section 12413.5states in part: “Any interest received onfunds deposited in connection with any es-crow which are deposited in a bank ... shallbe paid over by the escrow to the deposit-ing party to the escrow....”

Barr filed his own FCA complaint in April 1998,but because the governmental plaintiffs filed first,Barr's suit has been preempted. (Gov.Code, §12652, subd. (c)(10).) As well, several class actions

were filed against Old Republic mirroring the gov-ernment's action,FN10 but not the FCA allegations.The trial court (1) certified a class consisting of“ALL PERSONS AND ENTITIES IN CALIFOR-NIA WHO, DURING THE PERIOD OF JULY 24,1994 THROUGH FEBRUARY 7, 2001, WEREPARTIES TO ESCROWS DIRECTLY WITH OLDREPUBLIC TITLE COMPANY, WHO DID NOTRECEIVE INTEREST EARNED ON FUNDS DE-POSITED IN ESCROW”; and (2) consolidated theclass and government actions for all purposes. Ex-cluded from the class were those consumers,primarily in Southern California, who were indir-ectly affected by Old Republic's conduct as asubescrow.

FN10. Class plaintiffs have alleged addi-tional causes of action not germane to thisappeal.

a. FCA Cause of Action

Old Republic demurred without success to the FCAcause of action on grounds the governmentalplaintiffs lacked standing to sue as qui tamplaintiffs, and also unsuccessfully renewed thischallenge on summary adjudication. As well, theCity moved for summary adjudication on thiscause. Based on Barr's submission of false holderreports to the State Controller which concealedORTC's failure to escheat dormant funds to thestate, ORTC conceded liability. Accordingly, thetrial court granted the City's motion, determiningthat the damages were the stipulated statutory in-terest amount of $7,568.079, trebled to $22,704,237and offset by interest already paid, for a net awardof $15,136,158. The trial court awarded the Cityone-third of the trebled damages, or $7,568,079.

b. UCL Cause of Action

i. Pretrial Phase

Pretrial, Old Republic sought to exclude from anyrestitution award to consumers the cost avoidance



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and arbitrage benefits forthcoming from lenderfunds held in escrow, arguing that consumers haveno right to them. The trial court disagreed, rulingthat when a borrower is charged interest prior toclose of escrow on funds deposited by the lender,the borrower is entitled to any interest earned onthose deposits.

ii. Trial: Liability Phase

The matter proceeded to a bench trial on the Busi-ness and Professions Code section 17200 allega-tions that ORTC committed unfair, unlawful orfraudulent business practices by failing to remit tothe depositing parties the benefits collected on es-crow deposits under the cost avoidance and arbit-rage*541 schemes. The trial court made three signi-ficant rulings.

First, it held that although the proper interpretationof “interest” within the meaning of Insurance Codesection 12413.5 is not governed by Regulation Q,there were sound reasons for construing “the Cali-fornia statute much like the federal provisions havebeen interpreted.” Accordingly, the court limitedthe term “interest” in Insurance Code section12413.5 to money paid for the use or deposit ofmoney, excluding from that definition other bene-fits that could be given in exchange for the depositof funds. On this point the court concluded that indetermining whether a particular transaction in-volved interest for purposes of section 12413.5,Regulation Q and federal interpretations thereofshould be looked to for guidance, but were not con-clusive.

Second, the court ruled that although cost avoid-ance benefits sanctioned by Regulation Q do notconstitute interest, the benefits paid by banks toORTC on ORTICON invoices did because the prac-tices in question did not comply with Regulation Q.Old Republic has not appealed this ruling.

Third, the court drew the line at equating “interest”under Insurance Code section 12413.5 with

“interest” as interpreted under Regulation Q when itcame to analyzing benefits conferred to Old Repub-lic under arbitrage arrangements. Specifically, itconcluded that while the Board sanctions the exten-sion of arbitrage benefits by banking institutions forpurposes of banking regulation, the extension ofthose benefits to ORTC are nothing but interest forpurposes of Insurance Code section 12413.5: “Thearbitrage benefits ... serve no function other than topermit the payment of an ascertainable sum ofmoney to ORTC.... The arbitrage arrangements are,purely and simply, means of circumventing the re-strictions that apply to the payment of interest ondemand deposits by doing in two steps what cannotbe done in one. While permitting this practice maynot undermine the objectives of the bank regula-tions, permitting ORTC to retain these monetarybenefits-i.e., interest-cannot be squared with the ex-plicit directive of section 12413.5.” (Fn.omitted.)

iii. Remedies Phase

The parties stipulated that ORTC received$13,760,901 and $18,377,222, respectively, duringthe class period from its cost avoidance and arbit-rage programs. In its decision on remedies, the trialcourt ordered restitution to class members of in-terest received by ORTC through its cost avoidanceand arbitrage programs during the classperiod,FN11 but only for amounts earned prior toclose of escrow. The court allowed interest on theconsumer float ($6,700,799) and most of the in-terest earned on the “lender float” ($4,853,113), butdisallowed interest on the disbursement float.“Consumer float” refers to funds deposited in es-crow by the buyer or refinancing party, while“lender float” refers to funds deposited in escrowby a financial institution that is lending funds to aparty to the escrow. The court also awarded classplaintiffs prejudgment interest in the stipulatedamount of $2,210,640. Additionally, the court im-posed civil penalties of (1) $3.57 for each of the207,324 stipulated transactions under the costavoidance scheme, for a total of $741,850; *542 (2)$2.55 for each of the stipulated 259,155 violations













under the arbitrage scheme, for a total of $660,824;and (3) $17.50 for each of 28,709 reconveyance feeviolations and $6.25 per each wire transfer fee viol-ation, totaling $778,640.

FN11. The court refused to add to the stip-ulated totals $1,165,000 in cost avoidancebenefits illegally obtained through C.E.B.,Inc. (CEB)-a shell corporation created andcontrolled by Barr for which Barr maderestitution to ORTC in 1998. The courtreasoned that although the payment wasmade in 1998, the funds were earned priorto the class period.

Finally, the court ordered ORTC to (1) develop aplan for court approval for crediting the account ofits escrow customers with interest earned on depos-its through cost avoidance and arbitrage programs;(2) draft statements disclosing the consumer's rightto have escrow funds deposited in an interest-bear-ing account; (3) draft disclosures concerning avail-ability and cost of wire transfers; and (4) refrainfrom charging escrow customers for bank services,the costs of which are not actually incurred byORTC. Thereafter Old Republic moved for approv-al of interim compliance plans, which the court ap-proved, along with the disclosures set forth in theplans.

Subsequently, the governmental plaintiffs movedfor civil penalties based on ORTC's dormant fundpractices. Finding 10,000 incidents had occurred,the trial court imposed a conditional penalty of$173.18 per violation FN12 under Business andProfessions Code section 17206, for a total penaltyof $1,731,800, to kick in only if we reversed thetreble damages award under the FCA. With an af-firmance, the penalty imposed is $1.

FN12. This amount represented the aver-age size of swept escrow accounts.

2. The City Names PwC as a Defendant

Meanwhile, with the fourth amended complaint

filed in August 2000, the City named PwC as a de-fendant, asserting violations under the FCA andUCL for failure to disclose ORTC's escheat liabilityin audit reports filed with the DOI. PwC demurredto both causes. Sustaining the demurrer withoutleave to amend as to the UCL claim, the court con-cluded that the DOI does not have responsibility forpolicing escheat laws. In any event, since the fundshad been returned, affected consumers could put ina claim and thus there was no additional remedy toimpose.

PwC also moved for judgment on the pleadings onthe FCA claim, contending that the City lackedstanding to pursue the action as a qui tam plaintiff.The trial court denied the motion, declining to re-visit its previous ruling. Thereafter, PwC obtainedsummary judgment on the FCA count. The trialcourt reasoned that even if PwC had disclosed theescheat irregularities, in the normal course ofevents and under normal procedures such informa-tion would not have been forwarded to the StateController for enforcement action and hence the al-leged misrepresentations were immaterial.

3. Judgment and Postjudgment Matters

The trial court entered judgment accordingly andthereafter denied motions for new trial brought byOld Republic and the class plaintiffs. Multiple ap-peals and cross-appeals followed. In No. A097793,Old Republic has appealed and the governmentalplaintiffs and class plaintiffs have separately cross-appealed. In No. A095918, the governmentalplaintiffs have appealed and PwC has cross-ap-pealed.FN13

FN13. The Attorney General has filed anamicus curiae brief in support of the gov-ernmental plaintiffs. California Land TitleAssociation has submitted its brief in sup-port of Old Republic.

In August 2002, Old Republic abandoned its chal-lenge to certain aspects of the judgment which it





satisfied by paying penalties, *543 restitution, pre-judgment interest, postjudgment interest and litiga-tion costs. In November 2002, Old Republic furtherpartially satisfied the conditional judgment award-ing penalties under Business and Professions Codesection 17206 for dormant fund practices.

II. FCA LITIGATION

A. Threshold Issues

In the FCA litigation, the City sued Old Republicand PwC FN14 as a qui tam plaintiff. The FCA au-thorizes lawsuits to recover misappropriated gov-ernment funds by three types of plaintiffs: (1) theAttorney General, with respect to claims involvingstate funds or both state and local funds (Gov.Code,§ 12652, subd. (a)(1), (2)); (2) the prosecuting au-thority of a “political subdivision” for claims in-volving local funds or both local and state fundsFN15(id., subd. (b)(2)); and (3) “a person” forclaims involving state or local funds (id., subd. (c)).The FCA refers to the “person” bringing such anaction “as the qui tam [FN16] plaintiff.” (Ibid.)These actions commonly are called“whistleblower” actions.

FN14. In this section entitled “FCA Litiga-tion,” we refer to Old Republic and PwCcollectively as defendants.

FN15. The City does not contend that localfunds are at stake.

FN16. “Qui tam” is short for qui tam prodomino rege quam pro se ipso in hac partesequitur, meaning “ ‘ “who pursues this ac-tion on our Lord the King's behalf as wellas his own.”’ ” (City of Pomona v. Superi-or Court (2001) 89 Cal.App.4th 793, 797,107 Cal.Rptr.2d 710, quoting VermontAgency of Natural Resources v. UnitedStates ex rel. Stevens (2000) 529 U.S. 765,768, fn. 1, 120 S.Ct. 1858, 146 L.Ed.2d836.)

Defendants insist that (1) the City is not a “person”within the FCA and therefore lacks standing tobring a qui tam action; and (2) the allegations uponwhich the FCA action is based were publicly dis-closed prior to commencement of this action, thustriggering a statutory bar to jurisdiction. We dis-agree with both points.

1. The City Has Standing to Bring a Qui Tam Ac-tion

According to defendants, the plain language, legis-lative history, structure and purpose of the FCA allconverge to support their position that the term“person” refers only to private actors.

a. Statutory Language

We start with the statutory language, which doesnot contain the word “private.” Rather, it states that“ ‘[p]erson’ includes any natural person, corpora-tion, firm, association, organization, partnership,limited liability company, business, or trust.”(Gov.Code, § 12650, subd. (b)(5).) The word“includes” ordinarily is a term of enlargement, notlimitation. (Ornelas v. Randolph (1993) 4 Cal.4th1095, 1101, 17 Cal.Rptr.2d 594, 847 P.2d 560.) In-deed, courts have long accepted that governmententities are statutory “persons.” For example, inCity of Pasadena v. Stimson (1891) 91 Cal. 238,248, 27 P. 604, our Supreme Court recognized acity's standing as a “person” under a provision ofthe Civil Code permitting “any person” to bring acondemnation action. The court reasoned that underthe general provisions of the Civil Code, a corpora-tion is a person and thus, any public or private cor-poration could exercise the statutory condemnationrights.

Later, in State of California v. Marin Mun. W. Dist.(1941) 17 Cal.2d 699, 111 P.2d 651, our state'shigh court construed *544section 680 of the Streetsand Highways Code, providing that any “person”maintaining a pipeline could be required to move itupon written demand when necessary for safety or







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public improvement purposes. The issue waswhether section 680 encompassed municipal waterdistricts. Another provision of the code defined“person” as “any person, firm, partnership, associ-ation, corporation, organization, or business trust.”(State of California v. Marin Mun. W. Dist., supra,at p. 704, 111 P.2d 651; see former Sts. &Hy.Code, § 19.) Explaining that the application ofsection 680 to municipal water districts would notlimit their otherwise valid power but would onlyoperate to prevent them from exercising their fran-chises in a manner contrary to law, the court con-cluded that the Legislature intended to embrace mu-nicipal water districts within the statute's applica-tion thereby affording a method of enforcement.(State of California v. Marin Mun. W. Dist., supra,at pp. 704-705, 111 P.2d 651.)

More recently, the court ruled that a statute pre-cluding prescription of property of public entitiesby “any person, firm or corporation” was not lim-ited to private parties, but rather included govern-mental agencies. (City of Los Angeles v. City of SanFernando (1975) 14 Cal.3d 199, 276-277, 123Cal.Rptr. 1, 537 P.2d 1250,disapproved on anotherpoint in City of Barstow v. Mojave Water Agency(2000) 23 Cal.4th 1224, 1248, 99 Cal.Rptr.2d 294,5 P.3d 853.)

Defendants' argument that in the absence of expresswords to the contrary, states and political subdivi-sions are not encompassed within the general wordsof a statute (citing Estate of Miller (1936) 5 Cal.2d588, 597, 55 P.2d 491) misses the mark. As ex-plained in City of Los Angeles v. City of SanFernando, supra, 14 Cal.3d 199, 123 Cal.Rptr. 1,537 P.2d 1250, the rule excluding governmentalagencies from the operation of general statutoryprovisions pertains “only if their inclusion wouldresult in an infringement upon sovereign govern-mental powers. ‘Where ... no impairment of sover-eign powers would result, the reason underlyingthis rule of construction ceases to exist and the Le-gislature may properly be held to have intended thatthe statute apply to governmental bodies even

though it used general statutory language only.’[Citations.]” (Id. at pp. 276-277, 123 Cal.Rptr. 1,537 P.2d 1250.)

Not surprisingly, defendants argue that if local gov-ernments were “persons” under the FCA, theywould also be subject to liability thereunder. FCAliability, in turn, would infringe on their sover-eignty by interfering with provision of public ser-vices.FN17 This argument was put to rest in LeVinev. Weis (1998) 68 Cal.App.4th 758, 80 Cal.Rptr.2d439. There, a school district contended it was not a“person” within the FCA and thus could not besued for wrongful termination under the employeewhistleblower provisions of the act. The reviewingcourt held that the definition of “person” must beread in light of the context and purpose of the stat-ute-namely, to protect the public fisc. Thus a broadinterpretation should be given to the person or en-tity allegedly raiding the public treasury and therewas no reason to deny protection when the raiderwas a governmental*545 entity. So construed, thedefinition of person was broad enough to encom-pass the school district within the terms“association” and “organization.” (Id. at pp.764-765, 80 Cal.Rptr.2d 439.) The court dispatchedthe sovereign powers argument with these words:“[N]o governmental agency has the power, sover-eign or otherwise, knowingly to present a falseclaim. The very notion is repugnant to how govern-ment should operate by and for the people. [Thedistrict] is subject to the False Claims Act.” (Id. atp. 765, 80 Cal.Rptr.2d 439.)

FN17. Apparently, the City has contendedin another case that imposition of liabilityunder the federal FCA would infringe onits governmental obligations. (See brief ofamici curiae City of New York, City ofLos Angeles, City and County of San Fran-cisco, and Cook County, Illinois at p. 23,in Vermont Agency of Natural Resources v.United States ex rel. Stevens, supra, 529U.S. 765, 120 S.Ct. 1858 [concerning fed-eral FCA].) The California FCA is pat-



















































terned on a similar federal act. (Laraway v.Sutro & Co. (2002) 96 Cal.App.4th 266,274, 116 Cal.Rptr.2d 823.)

Defendants are also adamant that including publicentities within the definition of “person” for pur-pose of qui tam standing is not sound public policy.For example, PwC casts the City's prosecution ofthis lawsuit as opportunistic, arguing that the quitam provisions are designed to provide financial in-centives for whistleblowers, and that the FCA re-flects an effort to “ ‘walk a fine line between en-couraging whistle-blowing and discouraging oppor-tunistic behavior.’ ” (Quoting U.S. ex rel. Spring-field Terminal Ry. v. Quinn (D.C.Cir.1994) 14 F.3d645, 651.) Surely the prosecution of this action bypublic officials poses substantially less risk of be-ing parasitic than actions by purely private actors.Moreover, depriving public entities standing woulddisserve the remedial purposes of the act. A liberalconstruction of the term “person” encourages com-petent prosecution of false claims by public qui tamplaintiffs for the public good.

Defendants attempt to modify “persons” with“private” by hearkening the doctrines that (1) wordsare known by the company they keep; FN18 and (2)the meaning of each item in a list should be determ-ined by reference to the others, with preference giv-en to an interpretation that uniformly treats itemssimilar in scope and nature.FN19 They argue thatthe entities identified as “persons” do not includeany governmental bodies and thus “person” shouldbe interpreted narrowly as embracing only privateactors. We disagree. The catalog of actors randomlycontains some specific terms associated withprivate parties-namely “natural person,”“partnership” and “business,” but other specificterms such as “trust” can be public (charitable) orprivate, as can a corporation. Finally, the terms“association” and “organization” are generalenough to embrace either. Thus, these doctrines donot aid defendants.

FN18. See Heller v. Norcal Mutual Ins.Co. (1994) 8 Cal.4th 30, 49-50, 32

Cal.Rptr.2d 200, 876 P.2d 999.

FN19. See Kelly v. Methodist Hospital ofSo. California (2000) 22 Cal.4th 1108,1121, 95 Cal.Rptr.2d 514, 997 P.2d 1169.

b. Structure of the FCA

Defendants also maintain that the structure of theFCA supports their interpretation, relying on therule that the statutory expression of some things ne-cessarily means other things not expressed are ex-cluded. (See Lake v. Reed (1997) 16 Cal.4th 448,466, 65 Cal.Rptr.2d 860, 940 P.2d 311.) They reas-on that since the FCA allows for actions by the At-torney General and qui tam plaintiffs and expresslyand separately allows for actions by political subdi-visions but only to recover local funds, the Legis-lature has implicitly accorded political subdivisionsa limited place in the statutory scheme that fore-closes standing in other instances, namely whenlocal funds are not involved. We are more per-suaded by the City's argument that rather than re-flecting an intent to exclude municipalities from su-ing as qui tam plaintiffs, in light of the FCA's broadremedial purpose, the Legislature meant *546 toenlarge the universe of remedies available to muni-cipalities. Suits prosecuted by the prosecuting au-thority of a political subdivision are available whenlocal funds are at stake, in addition to suits that mu-nicipalities and other public entities can bring as a“person,” whether or not local funds are involved.Nor does this interpretation render the separate pro-vision for political subdivision suits superfluous.That provision is necessary to make it clear thatwhen a political subdivision acts as prosecuting au-thority in cases involving its own funds, it need notfollow procedures required of qui tam plaintiffs,namely submitting the suit to the Attorney Generalfor review. (Gov.Code, § 12652, subd. (c)(3).) Ad-ditionally, a political subdivision can intervene inactions brought by the Attorney General involvinglocal funds. (Id.,§ 12652, subd. (a)(2), (3).)

Defendants attempt to bolster their position by al-








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luding to certain procedural requirements for quitam complaints “filed by a private person.”(Gov.Code, § 12652, subd. (c)(2).) FN20 But ofcourse the prior subdivision, which creates the quitam right of action, does not contain the “private”qualifier. (Id.,§ 12652, subd. (c)(1).) “Where theLegislature has employed a term or phrase in oneplace and excluded it in another, it should not beimplied where excluded.” ( Phillips v. San LuisObispo County Dept. etc. Regulation (1986) 183Cal.App.3d 372, 379, 228 Cal.Rptr. 101.) Nor mustwe infer an intent to restrict qui tam actions toprivate persons in order to “harmonize” the twosubdivisions. While the reference to “private” per-son in Government Code section 12652, subdivi-sion (c)(2) may detract from the statute's precision,it does not cancel out the broader meaning, nordoes it compel the conclusion that the Legislatureintended to single out political subdivisions for aless favored status than private individuals or entit-ies.

FN20. This provision reads: “A complaintfiled by a private person under this subdi-vision shall be filed in superior court incamera and may remain under seal for upto 60 days. No service shall be made on thedefendant until after the complaint is un-sealed.”

c. Legislative History

Defendants also champion the legislative history ofthe FCA as supporting a narrow reading of the term“person.” First, they point out that the original ver-sion of Assembly Bill No. 1441 (1987-1988 Reg.Sess.) as introduced on March 4, 1987, enumeratedvarious governmental entities in the definition of“person.” That version also provided only for civilactions brought by the Attorney General or by “anyperson” on behalf of the person and the people ofthe State of California. Thereafter, the specific enu-meration of governmental entities was removedfrom the definition of “person.” Concurrently, anew definition for “political subdivision” and a new

right of intervention and action by the prosecutingauthority of a political subdivision with respect tolocal funds was created.

Defendants point us to Wilson v. City of LagunaBeach (1992) 6 Cal.App.4th 543, 555, 7Cal.Rptr.2d 848, holding that an enactment shouldnot be interpreted to include a provision containedin the bill as originally introduced, but later rejec-ted. They draw an overly simplistic conclusionfrom this general proposition.

Here, the proposed amendment eliminating lan-guage from the definition of “person” simultan-eously created a definition and distinct action forpolitical subdivisions. The Legislative Counsel'sDigest for the original bill simply stated that the bill“would authorize the Attorney General and any oth-er person to bring a civil action for the people ofthe state.” (Assem. Bill *547 No. 1441, introducedMar. 4, 1987 (1987-1988 Reg. Sess.) p. 1.) The di-gest to the proposed amendment, and each digestthereafter including the digest to the chaptered bill,advised the legislators: “The bill would authorizethe Attorney General, the prosecuting authority of apolitical subdivision and any other person to bring acivil action for the people of the state or of thepolitical subdivision....” (Legis. Counsel's Dig., As-sem. Bill No. 1441 (1987-1988 Reg. Sess.) 4Stats.1987, Summary Dig., p. 523.) There is no ref-erence to “private” persons in any of the LegislativeCounsel's Digests for Assembly Bill No. 1441.

Courts frequently rely on the Legislative Counsel'sDigest to discern evidence of legislative intent. (SeeRockwell v. Superior Court (1976) 18 Cal.3d 420,443, 134 Cal.Rptr. 650, 556 P.2d 1101; People v.Tanner (1979) 24 Cal.3d 514, 520, 156 Cal.Rptr.450, 596 P.2d 328; Maben v. Superior Court (1967)255 Cal.App.2d 708, 713, 63 Cal.Rptr. 439.) In-deed, it is reasonable to presume the Legislature ad-opted an act with the intent and meaning expressedin the Legislative Counsel's Digest. (Maben v. Su-perior Court, supra, at p. 713, 63 Cal.Rptr. 439.)We conclude from this slice of legislative historythat rather than demonstrating an intent to deprive




























political subdivisions of standing as qui tamplaintiffs, this history suggests the Legislature con-templated a broad definition of “person” in the roleof qui tam plaintiff, one which gave all plaintiffsstanding to redress harm to either state or politicalsubdivisions. While the Legislature probably didnot anticipate that political subdivisions would betypical qui tam plaintiffs, neither does the historysuggest it intended to eliminate them as potentialqui tam plaintiffs. In light of the inclusive languageof the definition of person and the statute's remedialpurpose, we find defendants' reading of the legislat-ive history unduly narrow.

Defendants also call our attention to several refer-ences tying qui tam plaintiffs to “private” personsor parties scattered in a few legislative committeereports and an analysis of Assembly Bill No. 1441prepared by the public interest organization thatproposed the legislation. These references are notconvincing. We are persuaded that the definition of“person,” broadly interpreted in a manner that sup-ports the beneficial goals of the statute, in a mannerconsistent with prior Supreme Court interpretationsof the term “person” and with the Legislative Coun-sel Digests for Assembly Bill No. 1441, includesmunicipalities and other political subdivisions.

Finally, defendants refer us to comments in a com-mittee report to the effect that enactment of theFCA would not result in any increased governmentpersonnel costs or bureaucracy. They maintain thiscould only be true if “person” meant “private” act-or. But of course the FCA contemplates that the At-torney General and local prosecuting authoritieswill pursue false claims on their own behalf; whenthey do, without doubt public resources will be re-directed to those efforts.

2. There Was No Public Disclosure

Beyond requiring standing as a statutory person, theFCA further limits a court's jurisdiction over suchclaims, as follows: “No court shall have jurisdictionover an action under this article based upon the

public disclosure of allegations or transactions in acriminal, civil, or administrative hearing, in an in-vestigation, report, hearing, or audit conducted byor at the request of the Senate, Assembly, auditor,or governing body of a political subdivision, or bythe news media, unless the action is brought by theAttorney General or the prosecuting authority of apolitical *548 subdivision, or the person bringingthe action is an original source [FN21] of the in-formation.” (Gov.Code, § 12652, subd. (d)(3)(A).)The purpose of the public disclosure bar is to elim-inate parasitic suits by persons who merely echo al-legations already in the public domain and play norole in exposing the fraud in the first instance. (SeeU.S. ex rel. Findley v. FPC-Boron Employees' Club(D.C.Cir.1997) 105 F.3d 675, 678, 688 [discussingvirtually identical federal counterpart].)

FN21. The FCA defines “original source”as “an individual who has direct and inde-pendent knowledge of the information onwhich the allegations are based, who vol-untarily provided the information to thestate or political subdivision before filingan action based on that information, andwhose information provided the basis orcatalyst for the investigation, hearing,audit, or report that led to the public dis-closure as described in subparagraph (A).”(Gov.Code, § 12652, subd. (d)(3)(B).)

Here, Donald Barr disclosed information to the SF-DA about ORTC's escheat practices as part of thenegotiated disposition of the charges pendingagainst him. The disclosures were made during con-fidential interviews. Barr waived the right to a pre-liminary hearing and, as a condition of providingthe information, the SFDA guaranteed confidential-ity until the negotiated disposition was reached.The criminal information filed against Barr, as wellas his plea agreement (which was sealed) aredevoid of factual allegations which gave rise to thequi tam suit against Old Republic.

Defendants take the position that the disclosureswere “publicly” made during a “criminal hearing”








within the meaning of Government Code section12651, subdivision (d). We disagree.

Although the Third Circuit has held that “disclosureof discovery material to a party who is not underany court imposed limitation as to its use is a publicdisclosure under the [federal] FCA” (U.S. ex rel.Stinson v. Prudential Ins. (3d Cir.1991) 944 F.2d1149, 1158, fn. omitted), other courts have rejectedthat view, for good reason. “[T]he reasoning of theThird Circuit is unsound. The interpretation of‘public disclosure’ adopted there runs contrary tothe plain meaning of the words.... [¶] ... [T]he lan-guage of the statute itself is ‘public disclosure,’ not‘potentially accessible to the public.’ A plain andordinary meaning of ‘public’ is ‘open to general ob-servation, sight, or cognition, ... manifest, not con-cealed’ [citation].” (U.S. v. Bank of Farmington(7th Cir.1999) 166 F.3d 853, 860; see also U.S. exrel. Ramseyer v. Century Healthcare Corp. (10thCir.1996) 90 F.3d 1514, 1519 [“ ‘public disclosure’signifies more than the mere theoretical or potentialavailability of information.... [I]n order to be pub-licly disclosed, the allegations or transactions uponwhich a qui tam suit is based must have been madeknown to the public through some affirmative actof disclosure”]; U.S. ex rel. I.B.E.W. v. G.E. ChenConst., Inc. (N.D.Cal.1997) 954 F.Supp. 195, 198[“public disclosure require[s] actual rather thanmerely theoretical disclosure”].)

California adheres to the “plain meaning” rule. Weconcur that “public” disclosure requires an affirm-ative act of disclosure.

Defendants also contend that the relevant informa-tion was publicly disclosed because Barr divulgedOld Republic's secrets to a competent official au-thorized to act for the public. Defendants cite U.S.v. Bank of Farmington, supra, 166 F.3d 853, butfail to emphasize the key point. There, the courtheld: “Disclosure of information to a competentpublic official about an alleged false claim againstthe government we hold to be public disclosure ...[citation]*549 when the disclosure is made to onewho has managerial responsibility for the very

claims being made. ... [¶] ... [¶] Disclosure to offi-cials with less direct responsibility might still bepublic disclosure if the disclosure is public in thecommonsense meaning of the term as ‘open’ or‘manifest’ to all.” (U.S. v. Bank of Farmington,supra, 166 F.3d at p. 861, italics added.) The SFDAis not the public entity that has any direct manageri-al responsibility over the escheat provisions at issuehere. Rather, the State Controller is responsible foradministering and enforcing the UPL. (See CodeCiv. Proc., §§ 1540-1542, 1560-1567, 1571-1572,1580.) That the SFDA and city attorney are em-powered to seek penalties for unlawful acts underBusiness and Professions Code section 17200 etseq. does not give them “direct responsibility” forthe claims at hand.

Defendants further complain that availing publicprosecutors of the financial inducements affordedto qui tam plaintiffs generally creates a “dangerousconflict.” As they see it, a public prosecutor coulduse his or her criminal investigatory powers to ob-tain information and then “parasitically” file aclaim based on that information. Further, rewardinga district attorney with bounty for exposing falseclaims takes away incentives for whistleblowers tocome forward, and could implicate the due processrights of persons allegedly perpetrating fraud.

We fail to perceive the conflicts or other evils thatdefendants see. First, public prosecutors routinelycut deals with defendants for information implicat-ing a wider web of wrongdoers. Here, in the courseof the criminal investigation of Donald Barr, formerOld Republic insider, the SFDA obtained informa-tion concerning significant illegal practices en-gaged in by the company. Barr pleaded guilty totwo counts of tax fraud and thereafter the City filedsuit against Old Republic under the FCA. What isthe evil in permitting the City to reap the “bounty”as opposed to Barr, a convicted felon? In any event,Barr was not dissuaded from blowing the whistle.He filed his own qui tam complaint, three monthsafter the City filed its complaint. Being the sourceof the information, nothing prevented him from fil-





































ing it earlier, and beating the City to the court-house.

Second, there is no conflict as was the case inTumey v. Ohio (1927) 273 U.S. 510, 47 S.Ct. 437,71 L.Ed. 749, cited by PwC. There, a village courtwas set up to try persons accused of violating theProhibition Act. Fines received from convictionwere divided between the state and village and thusthe court made money for the village. The mayortried the cases, set the fines (within a minimum-maximum range) and received a fee, but only upona conviction. The high court did not hesitate to rulethat the defendant's due process rights had been vi-olated. Not only was the mayor personally and fin-ancially interested in the outcome of the case, but,as executive head of the village, he had an interestin and responsibility for its financial condition. (Id.at pp. 520, 523, 47 S.Ct. 437.) There are no suchconflicts here.

B. The Trial Court Correctly Determined the Meas-ure of Damages Against Old Republic

1. Trial Court Events

Once the FCA standing issues were resolved in thetrial court, Old Republic conceded liability basedon Donald Barr's submission of false holder reportsto the State Controller which concealed the com-pany's failure to deliver unclaimed funds to thestate. Under the FCA, a defendant who knowinglymakes or uses a false record “to conceal, avoid ordecrease an obligation to *550 pay or transmitmoney ... to the state” (Gov.Code, § 12651, subd.(a)(7)) is liable for “not more than three times theamount of damages which the state ... sustains be-cause of” that malfeasance (id.,§ 12651, subd. (b)).

Thereafter, the City moved for summary adjudica-tion, arguing that the measure of damages wastreble the understated escheat obligation plus themandatory 12 percent interest required under theUPL.FN22(Code Civ. Proc., § 1577.) Old Republicasserted that since the unclaimed funds do not be-

long to the state but are merely held for the rightfulowners, the state did not sustain any damages. Thetrial court took a different path, holding that thestate's damage was the loss of use of the under-escheated funds during the time they were wrong-fully withheld. Additionally, finding the UPL to be“ ‘complete within itself,’ ” the court ruled that the12 percent statutory interest prescribed by Code ofCivil Procedure section 1577 was the legislativelydetermined compensation for the loss of use of thefunds. In other words, actual loss of use damagesneed not be factually determined. Both sides criti-cize this ruling, but we conclude it is sound.

FN22. Specifically, Code of Civil Proced-ure section 1577 provides: “In addition toany damages, penalties, or fines for whicha person may be liable under other provi-sions of law, any person who fails to reportor pay or deliver unclaimed property with-in the time prescribed ... shall pay to theState Controller interest at the rate of 12percent per annum” on the property orvalue thereof from the date the propertyshould have been reported, paid or de-livered.

2. Legal Framework

The UPL has dual purposes: (1) to protect ownersof unclaimed property by locating them and restor-ing their property to them; and (2) to afford thestate, rather than the holder, the benefit of using theproperty. (Douglas Aircraft Co. v. Cranston (1962)58 Cal.2d 462, 463, 24 Cal.Rptr. 851, 374 P.2d819; see Cory v. Public Utilities Com. (1983) 33Cal.3d 522, 528, 189 Cal.Rptr. 386, 658 P.2d 749.)Property received by the state pursuant to the UPLdoes not permanently escheat to the state. (CodeCiv. Proc., § 1501.5, subd. (a).) Rather, the state as-sumes custody of the property (id.,§ 1560, subd.(a)); sells and otherwise disposes of it as appropri-ate (id., §§ 1563, 1565) and deposits all funds re-ceived under the UPL, including proceeds from thesale of property, into the “ ‘Abandoned Property’ ”























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account of the unclaimed property fund (id., §1564, subd. (a)).

All money in that account is “continuously appro-priated to the Controller, without regard to fiscalyears, for expenditure in accordance with law incarrying out and enforcing” the UPL, including thepayment of claims, appraisals, and the like. (CodeCiv. Proc., § 1564, subd. (b).) An appropriation “‘without regard to fiscal years' ” is “available forencumbrance from year to year until expended.”(Gov.Code § 16304.) Thus, the state has an obliga-tion, continuing in perpetuity, to pay owner claims,regardless of whether at any given time the un-claimed property fund is sufficiently funded. (CodeCiv. Proc., §§ 1540, 1501.5.) Notwithstanding thisobligation, on at least a monthly basis the StateController must transfer all money in excess of$50,000 to the state's general fund. (Id.,§ 1564,subd. (c).) At this point these are unrestricted statedfunds: “The General Fund consists of money re-ceived into the treasury and not required by law tobe credited to any other fund.” (Gov.Code, §16300.)

*551 3. The Damage to the State is Loss of Use,Not the Principal Amount

The City and the Attorney General (as amicus curi-ae) argue that the principal of the underreported un-claimed funds is the damages which should betrebled because once these funds find their way intothe general fund, the state can spend them like anyother revenue source. According to this view, theloss to the state is the unclaimed funds that shouldhave been reported and delivered to the state butwere not. In sum, they contend that damages underthe FCA is the amount of the false claim or, in thiscase, the “reverse” false claim.

This argument does not hold sway. Initially, we re-peat that Old Republic has already paid the under-escheated amount plus interest to the state. Moreimportantly, although from a tracing and account-ing point of view the bulk of unclaimed funds and

proceeds of unclaimed property are transferred tothe general fund, the state remains responsible forvalid owner claims in perpetuity. There is no per-manent escheat and thus the UPL can never be re-garded as a scheme whose purpose it is to augmentthe state's capital assets.

Further, rather than dictating the measure of dam-ages, the liability provision of the FCA simplyprovides that a person who commits a proscribedact is liable to the state for treble the amount ofdamage the state sustains because of the act.(Gov.Code, § 12651, subd. (a).) Given the State'scontinuing obligation to possible claimants and theabsence of permanent escheat, plus the statutorypurposes of the UPL, we conclude that the act of re-porting and transmitting less than is required there-under implicates the state's interest in the use offunds until reclaimed by their rightful owners, notthe remitted funds themselves. By design, asbetween the state and a holder such as Old Repub-lic, the UPL allocates the benefit of the use of un-claimed funds to the state. (Douglas Aircraft Co. v.Cranston, supra, 58 Cal.2d at p. 463, 24 Cal.Rptr.851, 374 P.2d 819; Bank of America v. Cory (1985)164 Cal.App.3d 66, 74, 210 Cal.Rptr. 351.) Thispurpose is reiterated in the legislative history of As-sembly Bill No. 3815, which added and amendedprovisions of the UPL. (See Sen. Com. on Judi-ciary, Rep. on Assem. Bill No. 3815 (1987-1988Reg. Sess.) as amended Mar. 24, 1988, p. 2.; Sen.Rules Com., Off. of Sen. Floor Analyses, 3d read-ing analysis of Assem. Bill No. 3815 (1987-1988Reg. Sess.) as amended Mar. 24, 1988, p. 2.) Fur-ther, as reflected in the analysis of the Senate RulesCommittee, by shortening the escheat period asproposed in the amendments, the likelihood of re-uniting owners with their property would increaseto between 35 and 40 percent, in contrast to approx-imately 25 percent under the then-current system.(Id. at pp. 534 - 535.)

4. Code of Civil Procedure Section 1577 Interest isthe Proper Measure of Damages for Loss of Use






















Old Republic, on the other hand, is adamant thatunder the FCA, loss of use damages should bemeasured by the actual market rates in effect at therelevant times. We disagree.

Code of Civil Procedure section 1577 sets interestat 12 percent for the failure to report, pay or deliverunclaimed property within the prescribed time,commencing from that prescribed time.FN23 In acase such as this, payment of the statutory interestis mandatory. Contrary to Old *552 Republic's con-tention, this is not a penalty; rather, it is in additionto any penalties, damages or fines for which a per-son may be liable. (Id.,§ 1577.) The 12 percent rateis the earnings the Legislature has determined thestate should earn on late-escheated property, calcu-lated on the amount of such property as of the datethe holder should have reported or transmitted thesame to the State Controller. In other words, this isthe rate the Legislature has deemed adequate tocompensate the state for loss of use of unclaimedproperty that holders fail to escheat under the UPL.(See Bank of America v. Cory, supra, 164Cal.App.3d at p. 81, 210 Cal.Rptr. 351[“[t]he Con-troller and owners of the funds escheatable ... canonly be adequately compensated for their loss ofuse by the award of [section 1577] prejudgment in-terest”].) Since the Legislature has declared a stat-utory rate of interest as compensation for loss ofuse, the decision is removed from the hands of thelitigants and the courts. Accordingly, the trial courtcorrectly ruled that damages under the FCA for lossof use is the Code of Civil Procedure section 1577interest, trebled, minus a set off for interest alreadypaid.

FN23. The 2003 amendment excuses in-terest where the failure to report, pay ordeliver is due to reasonable cause.(Stats.2003, ch. 304, § 5.)

C. The Trial Court Improvidently Granted Sum-mary Judgment in PwC's Favor on the FCA Causeof Action

1. The Trial Court Ruling

For purposes of this appeal, we assume that PwCsubmitted false reports to the government when itissued unqualified audit reports on Old Republic'sfinancial statements for annual submission to theDOI. Although disturbed about the gravity of thealleged false submissions, the trial court concludedthat full disclosure of Old Republic's escheat viola-tions to the DOI would not have had a tendency toinfluence the SCO, the public entity in charge ofenforcing California's escheat laws. Instead, thecourt found that any omissions from the audit re-ports were not material because the DOI would nothave forwarded the information to the SCO for en-forcement. The City is convinced this decision iswrong; so are we.

2. The Materiality Standard for FCA Action

Under the FCA, a person who knowingly submits afalse report to the state or a political subdivision inorder to conceal, avoid or decrease an obligation tothat entity is liable for treble the damages that theentity sustained “because of the act.” (Gov.Code, §12651, subd. (a)(7).) Thus, the false claim must bematerial in order to qualify for FCA action.

“Materiality, a mixed question of law and fact, de-pends on ‘ “whether the false statement has a natur-al tendency to influence agency action or is capableof influencing agency action.”’ ” (City of Pomonav. Superior Court, supra, 89 Cal.App.4th at p. 802,107 Cal.Rptr.2d 710, quoting U.S. ex rel. Berge v.Trustees of Univ. of Ala. (4th Cir.1997) 104 F.3d1453, 1459.) FN24 Reviewing precedent concern-ing the concept of materiality embodied in a varietyof federal statutes, the high court in Kungys v.United States (1988) 485 U.S. 759, 771, 108 S.Ct.1537, 99 L.Ed.2d 839 explained: “It has never beenthe test of materiality that the misrepresentation orconcealment would more likely than not have pro-duced an erroneous decision, or even that it wouldmore likely than not have triggered an investiga-tion.... [T]he *553 central object of the inquiry [is]

























whether the misrepresentation or concealment waspredictably capable of affecting, i.e., had a naturaltendency to affect, the official decision.”

FN24. Because California's FCA is verysimilar to the federal act, it is appropriateto consider federal precedents in interpret-ing our act. (City of Pomona v. SuperiorCourt, supra, 89 Cal.App.4th at pp.801-802, 107 Cal.Rptr.2d 710.)

Under this objective standard, the focus is on the“intrinsic capability” of the false claim or report toinfluence or affect the governmental entity. Assess-ing “intrinsic capability,” the court's job is to“consider whether a statement could, under someset of foreseeable circumstances, significantly af-fect an action by a [governmental] department oragency.” (U.S. v. Facchini (9th Cir.1989) 874 F.2d638, 643 [construing 18 U.S.C. § 1001].)

3. Factual Showing

a. DOI Operations and Practice

In part I.B.1, ante, we outlined evidence showingthe magnitude of Old Republic's escheat fraud,PwC's knowledge that Old Republic was violatingthe escheat laws and inflating its earnings, and theauditor's issuance of clean audit opinion letters forsubmission to the DOI despite this knowledge.Marshalling facts to defeat the issue of materiality,PwC proffered evidence that in the past DOI ana-lysts and field examiners did not communicate withthe SCO, and had not done so in years; FN25 therewas no documentary evidence that the DOI had co-operated with the State Controller in an investiga-tion or referred a UPL matter to the State Control-ler; nor was there documentary evidence that theDOI itself had initiated disciplinary action based onthe UPL or taken an enforcement interest in theUPL.

FN25. Charles DePalma, supervising in-surance examiner with the Field Examina-tion Division (FED), testified that the FED

used to have a working relationship withthe SCO, and he personally met with rep-resentatives from the SCO about an in-surer, but that was maybe 20 to 25 yearsago.

Additionally, David Lee, a supervisor in the DOI'sFinancial Analysis Division (FAD), testified thatindependent audit reports are reviewed for the pur-pose of assuring the company's financial solvency.If an analyst spotted a financial problem, he or shewould bring it to Lee's attention. Although no es-cheat violation had ever been brought to his atten-tion, if a FAD analyst “caught” one of a magnitudethat would affect the financial viability of a com-pany, the FAD analyst would notify him and his de-partment would follow up. For example, FADwould probably write a letter to the company to as-certain what it intended to do about the problem.Lee also explained that he would receive a copy ofthe final report prepared by the FED after conduct-ing a field examination. If the report confirmed apotential problem, FAD and FED would “probablyjointly work ... to find out what the company isgonna do about the problem that they have.”

Lee stated that he never conducted or requested anexamination of an underwritten title company suchas ORTC on the basis of failure to comply with theUPL. The discovery process in this litigation un-covered several independent auditor statementssubmitted since 1990 that noted the respective com-panies were not fulfilling their obligations underthe UCL. However, these matters had not beenbrought to Lee's attention and he was not aware ofany action taken by FAD with respect to the audit-ors' notes.

The FED has a set of field examination protocolswhich, among other things, direct the examiners topay attention to a company's handling of escheat-able funds, and call for reviewing and determiningprocedures for escheatable funds and stale datedchecks, as well as reviewing escheat *554 listingsand regulatory filings. FED supervisor DePalma ex-plained that when the field audit procedures reveal













a company is not in compliance with escheat laws,the examiner will disclose this fact in the examina-tion report. The examiner might also suggest to thecompany that it change its procedures. However,examiners do not have the authority to order a com-pany to change procedures, or to impose a penaltyor institute an enforcement action if it does not. De-Palma speculated that “[m]aybe we should have aprocedural report directly to the State Controller,but we don't.” FN26 FED does not routinely contactSCO, but “[w]e would hope that our legal depart-ment did when they followed up on the report.” Ifthe report shows “a lot of compliance issues,” De-Palma would direct that “Legal” get a copy of it.

FN26. Alfred Bottalico, a bureau chiefwith FED, stated he believed there was atime-probably in the late 1980's and early1990's-when field examination reportswere referred to the SCO as a follow-upmeasure when the report recommendedthat the company subject to examinationestablish an UPL procedure. He probablylearned about this practice at an FED man-agement meeting or discussions with man-agement.

Bottalico testified that a qualified audit opinion let-ter would “certainly” be a “trigger point[ ]” thatcould prompt a request for a field audit. Further,detection of fraud in the course of a field examina-tion would be a major finding that would prompt aninvestigation into whether management was in-volved, and at what level.

Bottalico supervised a 1993 periodic field examina-tion of a title insurance company (not an underwrit-ten title company),FN27 in which the report indic-ated that a review of the insurer's procedures relat-ing to uncashed checks showed that numerouschecks were outstanding for a considerable time. Itfurther noted the company in question had writtenprocedures to appropriately identify such checks toensure compliance with escheat laws. Bottalicostated that beyond a comment in a report, furtherprocedures or recommendations might be warranted

if, for example, the company were taking uncashedchecks back into income. If the outcome were ma-terial, FED would set up a liability on the com-pany's financial statements for those uncashedchecks.

FN27. FED typically examines title insur-ance companies every three years. Under-written title companies are examined whena specific issue arises that needs to be ad-dressed.

b. Action in the Old Republic Matter

In the fall of 1998, after the City's complaint in thiscase was unsealed, the SCO undertook a UPL auditof ORTC. In 1999, the DOI commenced action re-lating to UPL compliance in connection withORTC. Darrel Woo, custodian of records for theDOI, stated that the DOI action “was taken as partof a larger investigation and at the behest of anotheragency.”

Not only did the DOI investigate, it also took en-forcement action against Old Republic. The specialexaminer for DOI issued a report in February 1999which related, among other matters, that the SCOestimated the company's total escheat obligations,with interest and penalties, could reach $19 to $20million. The report, which treated the panoply ofORTC's suspect practices, also noted that the com-pany recently paid $10 million to the SCO. Re-sponding to the report, the Commissioner issued anotice of hearing regarding a cease and desist order,again addressing the panoply of Old Republic'spractices, including willful failure to escheat“several millions of dollars” to the state. The noticestated that the Commissioner “has reasonable causeto believe that [ORTC] is in a hazardous conditionand is conducting *555 its business and affairs in amanner which is hazardous to its policyholders,creditors and the public.” FN28 The notice identi-fied three areas of illegal conduct, including“willful failure to escheat several millions of dol-lars to the State of California in violation of Cali-



fornia Code of Civil Procedure Section 1511.” Thenotice warned that if the Commissioner foundagainst Old Republic, the Commissioner would or-der that the company “immediately cease and desistfrom engaging in any acts, practices or transac-tions” which endangered policyholders, creditors orthe public.

FN28. PwC has objected to the notice aswell as the examination report because thegovernment submitted this evidence theday before the summary judgment hearing.It further claims that the “facts” set forth inthese documents do not exist for purposesof appeal because they were not noted inthe separate statement, citing United Com-munity Church v. Garcin (1991) 231Cal.App.3d 327, 337, 282 Cal.Rptr.368.This absolute prohibition against con-sidering evidence not referenced in theseparate statement has been soundly rejec-ted because it ignores the discretion of thetrial court to deny a motion for summaryjudgment for failure to comply with Codeof Civil Procedure section 437(c), subdivi-sion (b). (San Diego Watercrafts, Inc. v.Wells Fargo Bank (2002) 102 Cal.App.4th308, 315, 125 Cal.Rptr.2d 499.) Moreover,what United Community Church also ex-plains, and PwC fails to acknowledge, isthat the purpose of the separate statementrequirement is to inform the court and theopposing party of all the facts upon whichthe moving party bases its motion. This isa due process protection for the opposingparty. Further, it is clear from the recordthat PwC did not object to the late submis-sion of these documents at the hearing, andthat the court considered all the paperssubmitted. (Code Civ. Proc., § 437c, subd.(c) [referring to all papers submitted andcalling on court to “consider all of theevidence set forth in the papers, except thatto which objections have been made andsustained by the court”].) We defer to the

trial court's implied exercise of its discre-tion to review late submitted papers. (SeeHobson v. Raychem Corp. (1999) 73Cal.App.4th 614, 625, 86 Cal.Rptr.2d497,disapproved on another point inColmenares v. Braemar Country Club, Inc.(2003) 29 Cal.4th 1019, 1031 & fn. 6, 130Cal.Rptr.2d 662, 63 P.3d 220.)Finally, thedocuments do not raise theories or any newcategory of facts that were not already be-fore the court as part of the government'sresponse to PwC's separate statement.

c. Impact of Escheat Violations on Old Republic'sSolvency

Opposing PwC's summary judgment motion, thegovernment submitted, among other things, anevidentiary stipulation entered in the City's actionagainst Old Republic. Pursuant thereto, the partiesagreed for purposes of trial that it was undisputedORTC had tendered $9,551,527.89 in dormantfunds and $7,710,118.18 in statutory interest in sat-isfaction of the SCO's unclaimed property audit ofthe company, with a credit. The company was cred-ited with $513,637.13 in previously escheatedamounts and $966,524.10 in interest on those pay-ments, and for a $10 million payment in December1998. Broken down, the figures show that byDecember 1989, Old Republic owed the statenearly $7 million in dormant escrow funds and mil-lions more dollars in interest. Through 1997, withcontinuing violation of the escheat laws, the debtmushroomed to almost $17 million, including in-terest. As noted above, by 1999 the SCO had estim-ated that total escheat liability could reach $19 to$20 million. In terms of PwC's work for ORTC, forthe fiscal year 1993 audit, PwC's strategy work pa-pers indicated that income statement materialitywas estimated at $750,000 and balance sheet mater-iality at $4.2 million. With respect to the incomefigure, the PwC partner on the ORTC audit engage-ment testified that if the aggregation of all adjust-ments was “close or greater than $750,000, then wewould ... consider whether that had a material im-















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pact on the financial statements.”

*556 PwC is adamant that the stipulation refer-enced above is not competent evidence, arguingthat a stipulation is not binding against someone nota party to the stipulation. The question is not one ofthe binding power of the stipulation. Certainly PwCcould offer opposing evidence. Rather, the questionis whether the court could consider the evidentiarystipulation on the question of the amount of OldRepublic's escheat indebtedness to the state. Cer-tainly the lower court, as well as this court, couldtake judicial notice of the evidentiary stipulation asa record of a court of this state relevant to the cur-rent dispute. (Evid.Code, § 452, subd. (d)(1).) PwCdid not object on this basis. Moreover, its assertionthat the evidentiary stipulation is not evidence isabsurd. Evidence includes “writings ... presented tothe senses that are offered to prove the existence ornonexistence of a fact.” (Id., § 140.) Here, the Cityoffered the stipulation to prove the extent of OldRepublic's escheat liability. The evidence is what itis-an agreement in related litigation between a partyto the instant litigation and the client of the otherparty to this litigation that the amounts disclosedwere undisputed for that particular lawsuit.

4. Analysis

In this reverse false claim scenario, our job is to de-termine whether auditor statements which disclosedmanagement's inflation of earnings by millions ofdollars based on systematic violation of the UPLwould have had a natural tendency to influence-orthe intrinsic capability to significantly affect-agency action. Without question the SCO is theprimary enforcer of our escheat laws, and withoutquestion such disclosures would not, in the naturalcourse of DOI business, be relayed to that office.Also without question, in the past no insurer or un-derwritten title company had ever been denied a li-cense or subjected to disciplinary or investigativeaction or examination for failure to comply with theUPL. However, notwithstanding PwC's argumentsto the contrary, although DOI is not the primary

UPL enforcer, it does have statutory authority andpractices and procedures for enforcing laws, includ-ing the escheat laws, that impact insurance compan-ies. Moreover, with the wheels of its internal pro-cedures and practices humming properly, disclosureof Old Republic's escheat violations would have anatural tendency to influence DOI action.

Underwritten title companies are required to furnishan annual audit prepared in accordance with gener-ally accepted auditing standards by an independentcertified public accountant or independent licensedpublic accountant. (Ins.Code, § 12389, subd.(a)(4)(B).) The purpose of this and other provisionsgoverning the conduct of underwritten title com-panies ... is “to maintain the solvency of[underwritten title] companies and to protect thepublic by preventing fraud and requiring fair deal-ing.” (Id.,§ 12389, subd. (d).) In carrying out thesepurposes, the DOI can enact reasonable rules andregulations to govern the conduct of these compan-ies. (Ibid.) Further, whenever it appears necessary,the Commissioner shall “examine the business andaffairs of [underwritten title companies].” (Id.,§12389, subd. (c).) The Commissioner also has stoporder and corrective and remedial powers which theCommissioner can exercise upon a reasonablecause to believe and a determination after publichearing, that a company subject to examination is“in a hazardous condition, or is conducting its busi-ness and affairs in a manner which is hazardous toits policyholders, creditors or the public....” (Id., §1065.1.) If a company violates or fails to complywith a stop order, the commissioner can exact mon-etary penalties and commence proceedings to re-voke*557 or suspend its license. (Id., § 1065.5,subds. (a), (b).)

The DOI's FAD reviews the audit reports of under-written title companies to evaluate their financialsolvency. If an audit report revealed escheat viola-tions that affected a company's financial viability,FAD would follow up. A qualified audit opinionletter would also be a trigger point that mightprompt referral to the FED for a field audit. Field



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audit procedures include protocols for reviewing acompany's escheat practices. In the past, examina-tion reports have identified UPL compliance issues.Follow-up recommendations might include settingup a liability on the company's books if the com-pany were realizing material income from stalechecks. If the examination report raised significantcompliance issues, the legal Department would re-ceive a copy of the report and if fraud were un-covered, further investigation would ensue.

Here, the People introduced evidence on the mag-nitude of Old Republic's escheat liability and thecorresponding inflation of the company's earnings,and PwC's knowledge of the same. By PwC's ownaudit guideposts, the debt exceeded the cutoff forincome statement materiality in 1993, many timesover. Moreover, when the true facts were madeknown, the DOI did take investigative and enforce-ment action against Old Republic, in part becauseof its sizable escheat obligation to the state. True, itwas not the catalyst, but the DOI did act. PwCurges that we ignore DOI's enforcement action, ar-guing that consideration of it would be“bootstrapping.” This is not bootstrapping. PwChas trumpeted the SCO's escheat enforcementpowers. This evidence shows that DOI also hassuch powers, although it is not the primary enfor-cer. The evidence also contributes to a reasonableinference that earlier discovery of the true factsconcerning the magnitude of the escheat violationswould have a natural tendency to influence, orwould be capable of influencing, DOI action.

The trial court and PwC focused almost exclusivelyon the actual historical practices, procedures andoutcomes within the DOI and the actions of indi-vidual government analysts and examiners. But thepurpose of the FCA is “to supplement government-al efforts to identify and prosecute fraudulentclaims made against state and local governmentalentities.” ( Rothschild v. Tyco Internat. (US), Inc.(2000) 83 Cal.App.4th 488, 494, 99 Cal.Rptr.2d721.) Thus, our focus is primarily on the intrinsicqualities of the statements themselves and the ex-

tant structures and authority that would support fer-reting out the financial wrongdoing and taking ac-tion to stop it. With this lens we conclude that thetotality of evidence submitted in opposition to thesummary judgment motion, from the audit require-ment and purpose, to DOI's statutory and regulatorypowers, to its internal procedures, to the magnitudeof the escheat violation and DOI's ultimate action,defeated summary judgment in PwC's favor. PwCdid not overcome the materiality element of theFCA cause of action and therefore was not entitledto judgment as a matter of law. (Code Civ. Proc., §437c, subd. (c).)

III. UCL LITIGATION

A. Old Republic's Issues on Appeal

1. Trial Court Correctly Ruled that Arbitrage Bene-fits Are Interest

The UCL authorizes civil penalties for acts of un-fair competition, defined as “any unlawful, unfairor fraudulent business act or practice....” (Bus. &Prof.Code, §§ 17200, 17206.) The trial court de-termined that ORTC committed “unlawful” actswithin the meaning of the UCL because the com-pany earned and unlawfully*558 retained interestthrough its cost avoidance and arbitrage arrange-ments, in violation of Insurance Code section12413.5. That law mandates that any interest re-ceived on escrow deposits shall be paid to the de-positing party to the escrow unless that party in-structs otherwise. Old Republic challenges this de-cision with respect to the arbitrage practices only.

a. Arbitrage Benefits Are Interest within the Mean-ing of Insurance Code Section 12413.5

Insurance Code section 12413.5 dictates that con-sumers have the superior right to any interest re-ceived on their escrow fund deposits. (Hirsch v.Bank of America (2003) 107 Cal.App.4th 708, 718,



















132 Cal.Rptr.2d 220.) Although the statute does notdefine “interest,” from the statutory context we dis-cern that interest is an amount “received on funds”and “paid over” “to the depositing party to the es-crow” rather than being transferred to the accountof the underwritten title company. (Ins.Code, §12413.5.)Our Civil Code defines interest as “thecompensation allowed by law or fixed by theparties for the use, or forbearance, or detention ofmoney.” (Civ.Code, § 1915.) As well, courts havedescribed interest as “a premium paid for the use ofmoney usually recognized as a percentage” FN29

and as “ ‘a consideration paid for the use of moneyor for the forbearance in demanding it when due.’”FN30 From these definitions, and consistent withcommon usage, we agree with the trial court that al-though other forms of compensation or benefitscould be extended in exchange for the use ofmoney, “interest” as used in Insurance Code section12413.5 refers to money paid for the use, forbear-ance or retention of money. As the trial court poin-ted out, if a bank gives a depositor a 10-pound tur-key to those maintaining balances of $10,000 and a20-pound turkey to those with $20,000 balances, aturkey may be the equivalent of interest but it is not“interest” as we know it.

FN29. Kenney v. Los Feliz Investment Co.,Ltd. (1932) 121 Cal.App. 378, 385, 9 P.2d225, italics added.

FN30. Sampson v. Century Indemnity Co.(1937) 8 Cal.2d 476, 480-481, 66 P.2d434, italics added.

In the final analysis, the spread that ORTC receivesunder the arbitrage arrangements is interest accru-ing on escrow deposits maintained with variousbanking institutions. It is the premium, compensa-tion fixed by the parties, or consideration paid toORTC by the banks for maintaining deposits withthe banks.

The “low” interest loans that banks extend are notloans in any usual sense of the term. First, the in-terest rate is nominal. Second, the amount of the

loan is tied to the historic escrow account balanceson deposit. Third, ORTC cannot use the proceedsfor its own business purposes. Rather, the sole pur-pose of the “loan” is to generate the interest differ-ential between the reduced interest on the “loan”and the interest received on the purchased instru-ments, which differential is credited to ORTC's ac-count. Thus, the company must purchase interest-bearing instruments from or through the bank, andpledge them as security for the “loan.” As the trialcourt explained, under this scheme a direct paymentof interest to ORTC is converted into a two-stepprocess with no purpose other than producing anascertainable amount of interest for ORTC on itsescrow account balances. Although there may be atheoretical risk to ORTC in terms of repaying theloans, in reality the transactions are risk-free. In-deed, as reflected in a verified annual report to the*559 Commissioner, ORTC did not consider theloans to be of substance.

Old Republic argues that the differential cannot beinterest within the meaning of Insurance Code sec-tion 12413.5 because the differential is paid by athird party, not the bank, on an investment, not ondeposited funds. Nor surprisingly, Old Republicsticks to a literal, highly technical argument as itmust. Stripped to its core substance, the interest dif-ferential is directly tied to the escrow account bal-ances because the rock-bottom “loan” is based onthat amount, and the bank is the engine that gener-ates and funnels interest to ORTC through the thirdparty device of investment instruments. When theinstrument matures, the banks shave off their .25 to1 percent and the arbitrage yield, being the balanceremaining, is credited to ORTC. Throughout thiswhole process, the escrow deposits are available tothe banks for their use. Thus, in essence the arbit-rage yield is compensation paid by the bank toORTC for the use of the escrow deposits. In theend, ORTC receives monetary interest from thebank on its escrow deposits.

b. Legislative History Does Not Aid Old Republic






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Old Republic also urges that the legislative historyof Insurance Code section 12413.5 and FinancialCode section 854.1 assists its cause. Not so.

A 1963 proposed amendment to the predecessor ofInsurance Code section 12413.5 provided that es-crow holders, with the consent of the depositingparty, could earn interest or income for the escrowholder's benefit for up to 60 days. (Stats.1963, ch.1895, § 1, p. 3887.) The enacted version, substant-ively identical to the relevant language of InsuranceCode section 12413.5, dropped any language per-taining to investment income and eliminated theright to retain any interest on deposits. This scanthistory provides no clue as to any intent of the Le-gislature with respect to the complex arbitrage pro-grams at issue here. Nothing in the record disclosesthat such programs were even a glimmer in the eyesof financial institutions at the time.

Old Republic also attempts to line up support fromFinancial Code section 854.1 and its legislative his-tory, which it asserts attests to the Legislature's en-dorsement that arbitrage programs are permissiblecompetitive benefits and not interest. That statutepermits real estate brokers functioning as mortgageloan servicers to keep for their own account any“benefits” accruing from placement of impoundfunds in non-interest-bearing accounts.FN31 Incontrast, Business and Professions Code section10145prohibits real estate brokers from keeping in-terest earned on funds deposited in trust in connec-tion with any real estate transaction. (Bus. &Prof.Code, § 10145, subds. (a)(1), (d)(5).)

FN31. Reporting on the proposed legisla-tion, the Assembly Committee on Financeand Insurance Report of June 1989 high-lighted the distinction between servicing areal estate loan, the subject of FinancialCode section 854.1, and holding fundspending a sale. As explained, funds re-ceived for loan servicing are assignable toprincipal and interest (belonging to thelender), taxes and insurance.

Section 854 of the Financial Code, California's ver-sion of Regulation Q, generally prohibits banksfrom paying interest on demand deposits, either dir-ectly or indirectly. With the enactment of FinancialCode section 854.1, the Legislature recognized adistinction between interest and benefits not in thenature of interest that may accrue from the depositof funds. As the report of the Assembly Committeeon Finance and Insurance explained, “as a class,non-interest-bearing accounts are attractive*560 tolenders, and lenders will often woo them from de-positors able to establish such large accounts, bythe provision of cut-rate banking services or favor-able terms on other borrowing by the depositor.”(Assem. Com. on Fin. and Ins., Rep. on Assem. BillNo. 1042 (1989-1990 Reg. Sess.) as amended May17, 1989, p. 3.)

Old Republic makes the leap that by enacting Fin-ancial Code section 854.1, the Legislature explicitlydetermined that benefits accruing from arbitrageprograms are competitive benefits which banks canextend to demand deposit customers, and thereforesuch benefits are not interest. Nothing in FinancialCode section 854.1 or its legislative history refer-ences arbitrage programs, let alone the particularschemes in place in this case. Offering loans on fa-vorable terms is quite different from an arrange-ment that dictates the purchase of commercial paperwith the loan proceeds-the amount of which is tiedto the escrow funds on deposit-in order to generateand credit the interest spread to an underwrittentitle company. With a conventional loan offered at areduced interest rate, the proceeds are available tothe borrower for business purposes and, as the trialcourt pointed out, the interest that is saved is “aninherently uncertain amount that is not ‘paid’ to therecipient.”

The uncodified portion of Financial Code section854.1 FN32 does not change our mind. Accordingto the report of the Senate Committee on Bankingand Commerce, the California Land Title Associ-ation had registered concern about “benefits” exten-ded “to title companies” for demand deposits. (Sen.




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Com. on Banking and Commerce, Analysis of As-sem. Bill No. 1042 (1989-1990 Reg. Sess.) asamended July 6, 1989, p. 2.) The senate amend-ments added the uncodified provision. In Hannon v.Western Title Ins. Co. (1989) 211 Cal.App.3d 1122,1128, 260 Cal.Rptr. 21 (Hannon), the court heldthat absent a contrary instruction, an escrow holderhas no duty to deposit funds in an interest-bearingaccount. Further, an escrow holder is not a trusteewithin the meaning of Probate Code section 16004,and does not have the powers or duties of a truetrustee. (Hannon, supra, at p. 1129, 260 Cal.Rptr.21.) In this regard, the plaintiff in Hannon had al-leged that the title insurance company breached itsfiduciary duty by receiving “ ‘interest, gratuitiesand other benefits' ” from the depository bank inexchange for the deposit of escrow funds in a non-interest-bearing account. (Ibid.) Hannon cannot beread as approving arbitrage programs or any otherparticular practices of title insurance, controlled es-crow or underwritten title companies; nor can Fin-ancial Code section 845.1.

FN32. “Nothing in this act shall affect thepermissibility of any deposit relationshipor practice that is not expressly covered bySection 854.1 of the Financial Code norabrogate or modify in any manner theholdings of Hannon v. Western Title Insur-ance Company, 89 D.A.R. 8451.”(Stats.1989, ch. 305, § 2, pp. 1388-1389.)

c. Regulation Q Does Not Govern Interpretation ofInsurance Code Section 12413.5

Old Republic further contends that we should con-strue “interest” as it is used in Insurance Code sec-tion 12413.5 in complete harmony with RegulationQ, as interpreted by federal regulators, and thatCalifornia regulators consistently have followed thefederal definition. We disagree, for several reasons.

As mentioned earlier, the Board has issued an inter-pretive letter determining that arbitrage arrange-ments essentially identical to those engaged in by

Old Republic and its banking partners do not *561violate Regulation Q. (1988 Fed. Reserve Bd. Inter-pretive Letter, Fed. Reserve Reg. Service 2-545-1(June 28, 1988) [LEXIS 150].) However, nothing inthe language of Insurance Code section 12413.5 orthe statutory scheme to which it belongs FN33 sug-gests that the Legislature intended to incorporateRegulation Q into section 12413.5.

FN33. Insurance Code section 12413.5comes within article 6 (Rebates and Com-missions) of chapter 1 (Title Insurance) ofpart 6 (Insurance Covering Land) of the In-surance Code.

Indeed, the general counsel of the Federal ReserveBank of San Francisco has acknowledged that Reg-ulation Q does not control the interpretation of In-surance Code section 12413.5. “I understand thatstate law requires that any interest paid on an es-crow account be paid over to the ultimate benefi-ciary, and not retained by the escrow company. TheFederal Reserve's positions on what is and is not apayment of interest are only for Regulation Q pur-poses, and should not be regarded as in any waydeterminative of whether an escrow company's re-tention of the benefits provided by a bank as com-pensation for an escrow deposit is appropriate un-der state law.” (June 16, 1995 letter from RobertMulford, Vice-President and General Counsel, Fed-eral Reserve Bank of San Francisco, to the LegalAnalyst of the Department of Insurance, p. 3, italicsadded.)

Old Republic cites to the deposition testimony of aHon Chan, an employee of the DOI, asserting thatstate regulators “turned first” to the Board on the is-sue of whether there was a violation of InsuranceCode section 12413.5. However, Chan was unequi-vocal that Regulation Q and Federal Reserve opin-ions were not determinative, but were looked to asguidance and “an additional source of information.”FN34

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consistently followed the lead of Regula-tion Q rulings in deciding whether statechartered banks pay interest on demand de-posits, a practice forbidden by FinancialCode section 854. The letter to which OldRepublic refers condemns a particularscheme as violative of Regulation Q.

Moreover, no regulations or guidelines have beenpromulgated by a California administrative agencyconcerning the receipt of earnings credits or costavoidance and arbitrage benefits, the applicabilityof Regulation Q to California law on the subject ofinterest, or the like. Although there is some refer-ence in the record to the understanding of a top of-ficial in California Land Title Association that theCommissioner had committed to adopting suchguidelines, no guidelines were ever drafted.

Old Republic also holds up a March 3, 1998 letterfrom the chief of the Enforcement Division of theDOI stating: “[T]he Department finds no per seprohibitions in the Insurance Code against[arbitrage] practice[s]. Nevertheless, the Depart-ment believes that it is the title company's obliga-tion to carefully analyze the facts and circum-stances of each particular arrangement to ensurethat the title company does not violate its fiduciaryduties as escrow holder and trustee of the escrowfunds, and does not violate any other applicablelaws.”

This letter, in the nature of an informal opinion,lacks analysis and is not persuasive. The persuasivepower of an agency's interpretation of a statute iscircumstantial and depends on the presence or ab-sence of factors supporting the merit of the inter-pretation. (Yamaha Corp. of America v. State Bd. ofEqualization (1998) 19 Cal.4th 1, 12, 78Cal.Rptr.2d 1, 960 P.2d 1031.) These include“indications *562 of careful consideration by senioragency officials” (id. at p. 13, 78 Cal.Rptr.2d 1, 960P.2d 1031), evidence that the agency has consist-ently maintained the particular interpretation, and“indications that the agency's interpretation wascontemporaneous with legislative enactment of the

statute being interpreted” (ibid.). The letter in ques-tion fails all these criterion. Moreover, we are moredeferential when faced with a quasi-legislative ad-ministrative decision. Informal, ministerial actionsdo not merit the same deference; nor does anagency's interpretation of a statute, as opposed to itsown regulation. (Id. at pp. 7, 12, 78 Cal.Rptr.2d 1,960 P.2d 1031.) Finally, while finding no blanketprohibition against arbitrage, the letter itself cau-tions scrutiny of the details of a particular arrange-ment, which the lower court undertook.

d. The Trial Court's Reasoning Was Sound

Old Republic also assails the trial court's statedreasons for its arbitrage ruling, complaining thatthey have nothing to do with the concept of interest.The company first attacks the court's finding thatthe low-interest loans are not real loans because thecompany must purchase treasury bills or other in-vestment instruments with the proceeds and pledgethem as security. Old Republic argues that restrict-ive loan terms and collateral requirements are nor-mal banking practices, not components of interest.Old Republic misses the court's point, namely thatthe “loans,” which were tied directly to the sum ofescrow deposits, were an artifice that allowed OldRepublic to receive a specified interest differentialfor its own account.

Further, Old Republic takes umbrage with thecourt's assessment that ORTC did not bear any realrisk that the return on its purchase of commercialpaper would be insufficient to repay the rock bot-tom “loans” extended by the banks. Old Republic'scontention is that risk is an unworkable standardand unrelated to any operative concept of interest.This argument goes nowhere. Old Republic insertedthe issue into the proceeding, arguing that it was“taking the risk and making the investment with itsown money,” not with the escrow deposits. Thecourt merely deflated Old Republic's risk analysisas a justification for its interpretation of “interest.”

Finally, Old Republic criticizes the court's conclu-





















sion that the arbitrage program has no “independentfunction” and serves no purpose other than facilitat-ing the payment to ORTC of a sum certain ofmoney. Relying on FRB interpretive letters, OldRepublic reasons that the foregoing of charges (thatis, market rate interest) is not interest. Again, theseinterpretations do not control. As important, the tri-al court made its arbitrage ruling in consideration ofthe whole package-not just the rock-bottom interest.

In any event, the trial court's fundamental interpret-ation of interest within the meaning of InsuranceCode section 12413.5 is sound. To exclude the ar-bitrage spread as a component of interest depleteseconomic substance from the term, exalts form overany notion of substance, and encourages imple-mentation of disguised, purposefully nontransparenttransactions, to the detriment of the consumer. In-deed, the purpose of section 12413.5 is to protectthe escrow customer. The statute makes it abund-antly clear that absent escrow instructions to thecontrary, any interest received on a customer's es-crow deposits belongs to them, and is not to betransferred to the account of the title company. Giv-en the expansive and protective nature of the provi-sion, we interpret it to mean any interest, whetherdirectly or indirectly earned on escrow funds.

*563 e. Old Republic's Federal Preemption Argu-ment Fails

Old Republic maintains that the trial court's arbit-rage ruling interferes with and frustrates federalbanking law, and thus federal law preempts Insur-ance Code section 12413.5, as interpreted. (SeeGrimes v. Hoschler (1974) 12 Cal.3d 305, 310, 115Cal.Rptr. 625, 525 P.2d 65 [state statute is preemp-ted if it “interferes with and frustrates a federal stat-ute” or “ ‘ “stands as an obstacle to the accomplish-ment and execution of the full purposes and object-ives” ’ ” of federal law].)

Old Republic did not raise this issue in the trialcourt, and thus it is waived. (Pool v. City of Oak-land (1986) 42 Cal.3d 1051, 1065-1066, 232

Cal.Rptr. 528, 728 P.2d 1163.)

On the substantive front, Old Republic has notmade a cogent statement of the federal banking lawpurpose it believes is thwarted by a rule that arbit-rage benefits must be passed through to Californiaescrow depositors as interest. Old Republic saysthat if the trial court's interpretation prevailed, titleand escrow companies would have no incentive toparticipate in arbitrage programs and thus, state lawin effect would “prohibit” a federally approvedbanking practice. But surely the purpose of Regula-tion Q, as interpreted to permit arbitrage programs,is not merely to maintain the existence of that prac-tice.

In any event, the trial court's interpretation does notthwart the practice. Insurance Code Section12413.5 provides that interest on escrow fundsmust be paid to the depositing party “unless the es-crow is otherwise instructed by the depositingparty....” Any title company is free to draft escrowinstructions that, with full disclosure to and agree-ment from the depositing party, direct that the arbit-rage interest differential be paid to the company. Itis a matter of disclosing the pertinent costs and be-nefits to the customer.

Old Republic also suggests that arbitrage practiceshave been approved to enable federal banks to com-pete for substantial demand deposit customers. Theinterpretive letters it cites are highly technical anddo not state such a purpose. Even if such a purposecould be inferred, Insurance Code section 12413.5as interpreted by the trial court does not thwart it.The statute applies across the board to interest re-ceived on escrow funds on deposits in any institu-tion, whether a federal or state bank, a savings andloan association, or an industrial loan company.Federal banks are not rendered noncompetitive bythis ruling because all financial institutions are im-pacted uniformly with respect to escrow deposits,as are all title insurance, underwritten title and con-trolled escrow companies in California. Nor wouldfederal banks gain a competitive edge from a con-trary ruling because again, any financial institution


















could compete for escrow deposits by offering ar-bitrage benefits for the account of such companies,without regard to Insurance Code section 12413.5.Further, notwithstanding the trial court's interpreta-tion, companies would still have an economic in-centive to seek out such benefits for their customersas a competitive tool vis-à-vis companies that donot negotiate arbitrage benefits for their customers,and because they could charge for the service. Theeffect postulated by Old Republic is attenuated atbest and too insignificant to implicate federal pree-mption. (Peatros v. Bank of America (2000) 22Cal.4th 147, 158, 91 Cal.Rptr.2d 659, 990 P.2d 539[stating that any conflict must be “ ‘of substanceand not merely trivial or insubstantial’ ”].)

Finally, the general counsel of the Federal ReserveBank of San Francisco has opined that RegulationQ has no preemptive*564 effect over state law con-cerning the payment of interest on escrow deposits.To reiterate, in his June 1995 opinion letter, thegeneral counsel indicated that the Federal Reserve'sdeterminations of what is interest for purposes ofRegulation Q “should not be regarded as in anyway determinitive [sic ] of whether an escrow com-pany's retention of the benefits provided by a bankas compensation for an escrow deposit is appropri-ate under state law.”

f. Later Stipulated Judgments Have No CollateralEstoppel Effect

Old Republic further urges that the People shouldbe “collaterally estopped” from relitigating the ar-bitrage issue on the basis of stipulated judgmentsagainst other companies entered after judgment wasrendered in this case. Each stipulated judgmentdefines “financial benefit” this way: “The term‘financial benefit’ means any consideration, otherthan consideration denominated as interest, that de-fendants obtain from a financial institution in con-nection with the defendants' deposit of escrowfunds with that financial institution. ‘Financial be-nefit’ includes a financial institution's absorption ofexpenses incident to providing normal banking

functions or its forbearance from charging a fee inconnection with providing normal banking func-tions or services, including those normal bankingfunctions and services that the Federal ReserveBoard determines may be provided without fullcharge consistent with 12 C.F.R. part 217. Ex-amples of ‘financial benefits' ... include, but are notlimited to, escrow accounting services and bank re-conciliation, wire transfers, and loans at preferen-tial interest rates.” Old Republic asserts that thesejudgments “are a powerful and persuasive statementby the California Attorney General that banking be-nefits that are not interest under federal law also arenot interest under § 12413.5.”

First, the stipulated judgments have no preclusiveeffect because they did not exist when judgmentwas entered in this case. The doctrine of collateralestoppel, while nuanced and complex in some re-spects, is straightforward with respect to sequen-cing: It bars subsequent relitigation of issues actu-ally litigated and determined in a prior action in-volving one or more of the same parties. (SeeTodhunter v. Smith (1934) 219 Cal. 690, 695, 28P.2d 916; see also Bernhard v. Bank of America(1942) 19 Cal.2d 807, 811-813, 122 P.2d 892; Es-tate of Gump (1991) 1 Cal.App.4th 582, 608, 2Cal.Rptr.2d 269.)

Second, the stipulated judgments never define in-terest, they define “financial benefits” which termexcludes “consideration denominated interest.”And, although they refer to low-cost loans, they donot refer to arbitrage programs. Third, the judg-ments direct that the full value of any “financial be-nefits” be allocated to the company's escrow divi-sion and used exclusively to underwrite the cost ofescrow services. In other words, the benefits inureto the customer, not the escrow holder!

g. Cases from Other Jurisdictions Are of No Help

Finally, Old Republic posits that “[e]very othercourt that has considered the question has ruled costavoidance and arbitrage benefits are not interest.”



















This is an overstatement, to say the least. While thecases discuss benefits under cost avoidance andearnings credits arrangements, they do not addressthe arbitrage schemes at issue here, let alone Insur-ance Code section 12413.5. The sine qua non of anarbitrage scheme is to consistently yield a sum cer-tain interest differential for the benefit of the titleinsurance, controlled escrow or underwritten com-pany based on, and in consideration of, the substan-tial escrow funds on deposit during the applicabletime. On the other hand, *565 the absorption ofcosts for specific bank-related functions and ser-vices yield benefits received in nonmonetary formand serves some independent function. Hence, thisout-of-state authority does not advance our deliber-ations.

For example, the court in Washington Legal Found.v. Legal Found. of WA (9th Cir.2001) 271 F.3d 835(en banc), affirmed sub nom. Brown v. LegalFoundation of Wash.(2003) 538 U.S. 216, 123 S.Ct.1406, 155 L.Ed.2d 376 generally discussed earn-ings credits used to offset bank fees for servicesand charges such as accounting services and wiretransfers, and distinguished such benefits from in-terest, but said nothing about arbitrage arrange-ments. Nor do the factual and legal landscapes ofthe other cases cited by Old Republic bear any re-semblance to the case at hand. (See Demitropoulosv. Bank One Milwaukee, N.A. (N.D.Ill.1997) 953F.Supp. 974, 985 [holding that automobile lessee'sclaim for interest on security deposit funds was un-founded: that secured lessor had use of funds toavoid borrowing or to increase lending on certaindays did not constitute money received from collat-eral under Wisconsin law requiring secured party toremit the same to debtor or apply it to offset thedebt]; Turner v. General Motors Acceptance Corp.(S.D.N.Y.1997) 980 F.Supp. 737, 740 [earningscredits awarded by bank to automobile financingcompany, which could only be used to offsetcharges to maintain the company's account, werenot equivalent of interest].)

2. The Trial Court Correctly Determined that the

Borrower Who Pays Interest on Lender Funds De-posited in Escrow Is Entitled to the Interest Earnedon Those Funds

a. Introduction

Old Republic obtained and retained illegal intereston lender funds through both its cost avoidance andarbitrage schemes. The trial court awarded 96 per-cent of the “lender float” to class members because“in 96% of the escrows where lender funds weredeposited the buyer paid interest on or before theclose of escrow.” In other words, lenders depositfunds in escrow for the use of buyer or refinancer,and the consumer pays for the use of that moneywhile it sits in escrow pending the close of escrow.Old Republic does not and cannot refute the sub-stantiality of the evidence underscoring the court'sfinding. Economist Paul Regan testified that lenderscharged the consumer interest in 96 percent of arepresentative sample of escrows.

Nonetheless, attacking the decision below, Old Re-public argues that the lender is the depositing partyentitled to interest under Insurance Code section12413.5, and that as a general proposition of lawinterest follows principal. Moreover, until escrowcloses it is the lender, not the consumer, who ownsthe funds and is entitled to interest thereon.

b. In This Situation the Borrower is the “DepositingParty to the Escrow”

Insurance Code section 12413.5 states that no in-terest earned on funds deposited in connection withan escrow shall be transferred to the account of atitle insurance, controlled escrow or underwrittentitle company. Thus, interest generated by lenderescrow deposits may not flow to ORTC.The statutealso provides that any interest received on funds de-posited into escrow “shall be paid ... to the deposit-ing party to the escrow....” (Ins.Code, §12413.5.)The trial court ruled that the language“depositing party to the escrow” should be con-strued to include both lenders and borrowers, de-























pending on the circumstances.*566 If a borrowerdoes not pay interest on lender funds prior to theclose of escrow, the borrower has no right to anyinterest earned on those funds and the lender shouldbe viewed as the depositing party entitled to the in-terest. But if lender has charged borrower intereston deposited lender funds prior to the close of es-crow, the “borrower has paid for the use of themoney and should be entitled to any interest earnedon the deposit. Even if title to the funds remainswith the lender until the close of escrow, the moneyshould be regarded as having been deposited by thelender on behalf of the borrower since the borrowerpaid interest on those funds.”

As the trial court correctly held, the term“depositing party to the escrow” as used in Insur-ance Code section 12413.5 is not constrained by anoverly technical notion of ownership or title to de-posited funds. Funds are placed in escrow by thelender on behalf of the borrower, who is a party tothe escrow. Nothing in section 12413.5 precludesthe correct and equitable result that when the bor-rower has paid the lender for the use of lenderfunds as they remain in escrow prior to closing, thatuse includes the right to any interest accrued onthose funds while in escrow and therefore the bor-rower, not the lender or ORTC, is entitled to it.

c. The Principle “Interest Follows Principal” is In-apposite

Old Republic cites case upon case standing for thegeneral rule that interest follows principal. Thisgeneral rule has no application to the unusual factsof this case. The trial court was faced with poten-tially competing claims for interest (lender vs. bor-rower) on funds obtained by an escrow holder withno valid claim to such interest.

d. The Restitution Order Was Sound

The trial court entered an order for restitution of 96percent of the lender float to class plaintiffs. Busi-ness and Professions Code section 17203 empowers

the trial court to “make such orders or judgments ...as may be necessary to restore to any person in in-terest any money or property, real or personal,which may have been acquired by means of suchunfair competition.” A UCL order for restitutioncompels the defendant to return money obtainedthrough unfair competition “to persons who had anownership interest in the property or those claimingthrough that person.” (Kraus v. Trinity ManagementServices, Inc. (2000) 23 Cal.4th 116, 127, 96Cal.Rptr.2d 485, 999 P.2d 718, fn. omitted.) OldRepublic asserts borrowers never owned the lenderfunds and thus, have no right to recoup interestthereon through restitution. We do not agree.

The issue here is whether the consumers who havepaid interest on lender funds are persons “in in-terest” with respect to those funds. They are. As ageneral rule, the consumer-borrower has a contin-gent contractual interest in such funds in that lenderhas made a commitment to fund the transactionsubject to the conditions necessary to close escrow.Otherwise, matters would not proceed to the pointof the lender depositing funds in escrow and char-ging the borrower interest thereon. At that point,the borrower has paid for the use of those funds.California recognizes future, contingent interests.(See Civ.Code, §§ 688, 690, 697; Estate of Zuber(1956) 146 Cal.App.2d 584, 590-591, 304 P.2d247.) Contrary to Old Republic's assertion, the bor-rower has more than an inchoate expectancy. Onthe other hand, the positions of an heir apparentdesignated in a will, and of a beneficiary named inan insurance policy subject to change by the in-sured, are mere expectancies. *567 (Thorp v.Randazzo (1953) 41 Cal.2d 770, 773, 264 P.2d 38.)Mere possibilities such as these are not deemed tobe an interest of any kind. (Civ.Code, § 700.) Incontrast, here the lender has a contractual commit-ment to fund, subject to borrower's performanceand other conditions of escrow. The lender cannotunilaterally withdraw funding for any reason,without facing contractual consequences.

For all these reasons, we conclude that borrowers

























and refinancers who paid interest on lender fundsare persons in interest within the meaning of Busi-ness and Professions Code section 17203 with re-spect to the lender float. Therefore, the restitutionorder awarding them interest earned thereon wassound.

B. Class Plaintiffs' and The People's Issues AgainstOld Republic

1. Class Plaintiffs' Certification Concerns

a. Standard of Review

Code of Civil Procedure section 382 authorizesclass actions when “the question is one of a com-mon or general interest, of many persons, or whenthe parties are numerous, and it is impracticable tobring them all before the court....” To obtain certi-fication, a party must establish “an ascertainableclass and a well-defined community of interestamong the class members.” (Linder v. Thrifty OilCo. (2000) 23 Cal.4th 429, 435, 97 Cal.Rptr.2d179, 2 P.3d 27.) The proponent of certification mustshow, among other matters, that “questions of lawor fact common to the class predominate over thequestions affecting the individual members....”(Washington Mutual Bank v. Superior Court (2001)24 Cal.4th 906, 913, 103 Cal.Rptr.2d 320, 15 P.3d1071.)

Trial courts are afforded great discretion in grantingor denying class certification. (Linder v. Thrifty OilCo., supra, 23 Cal.4th at p. 435, 97 Cal.Rptr.2d179, 2 P.3d 27.) We will reverse an order grantingor denying class certification if it is based on im-proper criteria or erroneous legal assumptions, eventhough substantial evidence may support the court'sorder. (Id. at pp. 435-436, 97 Cal.Rptr.2d 179, 2P.3d 27; Corbett v. Superior Court (2002) 101Cal.App.4th 649, 658, 125 Cal.Rptr.2d 46.) Anypertinent, valid reason is sufficient to uphold the or-der. (Linder v. Thrifty Oil Co., supra, 23 Cal.4th atp. 436, 97 Cal.Rptr.2d 179, 2 P.3d 27.) Moreover,our Supreme Court has admonished trial courts to

weigh the benefits and burdens of class actions andpermit them only where substantial benefits accrueto litigants and the courts. (Id. at p. 435, 97Cal.Rptr.2d 179, 2 P.3d 27.)

b. The Trial Court Correctly Excluded SubescrowsFrom the Class

Ruling on class plaintiffs' motion for class certifica-tion, the trial court determined that the class defini-tion should “be limited to customers who had es-crows directly with [ORTC].” During oral argu-ment on the motion, the court also indicated that ifORTC were “keeping secret interest in the SouthernCalifornia model, it is secret interest that belongs toa lending institution and not secret interest that isowed to the customer. It's not the customer's moneyyet. And that seems to me to be the reason forwhich the customer in [the] Los Angeles scenariowould not be a proper class member.” Classplaintiffs are adamant that we must overturn theclass definition ruling, asserting that the court pre-maturely excluded ORTC's subescrows in SouthernCalifornia at the certification stage of the proceed-ings. In effect they argue the court prejudged theirentitlement to interest on lender funds because thecourt ultimately arrived at an *568 opposite conclu-sion with respect to those borrowers who paid in-terest on lender funds.

An understanding of how ORTC operates in South-ern California is helpful. There, escrow transactionsare typically handled by independent escrow com-panies. Buyers, sellers and lenders alike contractdirectly with the escrow company for escrow ser-vices. The parties to a transaction address their es-crow instructions to the escrow company, which inturn performs the instructions without any involve-ment of companies such as ORTC. Buyers, sellersand borrowers have no direct contact with ORTC.However, lenders deposit their funds with ORTC.This latter arrangement is called a subescrow, al-though it is a depositary relationship and not an es-crow. A senior vice-president of Old Republic de-clared that lenders often are “unwilling to deliver




































loan funds to independent escrow companies be-cause those companies frequently lack the size orlongevity associated with solvency and liquidity.”Thus, they insist on depositing their funds with acompany such as ORTC.

Attacking the trial court's ruling excludingsubescrows from the class, class plaintiffs ignorethe main thrust of the certification proceedingwhich focused primarily on the contours of theclass pursuant to their own proposed definition. Intheir moving papers, class plaintiffs defined theclass as constituting “[a]ll persons and entities whowere parties to escrows conducted by or throughthe Defendants or their affiliates and who ... did notreceive interest earned on their deposits.” The trialcourt noted that in Southern California, buyers wereparties to escrows conducted through independentescrow companies, not ORTC. The situation inSouthern California was very different because thebuyers were not customers of ORTC and had notentered into any agreements with ORTC. Thus, asthe court asked, how could one say “that Old Re-public somehow is withholding anything from thecustomer when it's not their customer”?

Any pertinent valid reason stated will be sufficientto uphold an order denying class certification.(Linder v. Thrifty Oil Co., supra, 23 Cal.4th at p.436, 97 Cal.Rptr.2d 179, 2 P.3d 27.) Here,plaintiffs' complaints, and their proposed classdefinition, were grounded on a direct contractualescrow relationship. This significant commonNorthern California element was lacking in thelender subescrow situation. The Southern Califor-nia buyer would be seeking restitution from ORTC,but that buyer was not ORTC's customer and hadnever signed and delivered escrow instructions toORTC. Nor did ORTC have a depositary relation-ship with these individuals. The trial court did notabuse its discretion in limiting the class to ORTC'scustomers, particularly in light of class plaintiffs'own pleadings and proposed class definition, andthe obvious differences between Southern andNorthern California escrow practices.

c. Nor Did The Trial Court Err in Limiting theClass Period

i. Introduction

Actions under the UCL must be brought within fouryears of accrual of the cause of action. (Bus. &Prof.Code, § 17208.) Class plaintiffs argued belowthat the appropriate class period should encompassthe entire period of Old Republic's cost avoidanceactivities, from 1978 to the present. They contendedthat the class definition could not legally rest on adetermination of the merits of any potential statuteof limitations defense. Following a hearing, thecourt certified a plaintiff class for the period begin-ning four years prior to the filing of the first classaction, namely *569 July 24, 1994. Class plaintiffsassail this ruling.

ii. Analysis

(A) Proper Weighing

Here the trial court engaged in the necessary weigh-ing, determining that substantial benefits would notaccrue from extending the class period beyond theBusiness and Professions Code section 17208 limit-ation period where: (1) individual restitutionawards would be small; (2) the purpose of Businessand Professions Code section 17200 would be metwithout “go[ing] back to the beginning”; (3) an ex-tended class would be unmanageable; and (4) thestatute of limitations defenses would open the doorto thousands of individual factual determinations.

Class plaintiffs take issue with the court's observ-ance that individual recoveries would be small,pointing out that the very purpose of class actionlitigation is to provide a remedy where the loss toeach individual member is small. The trial court didnot ignore this principle. It merely recognized thatas part of the balancing process, opening the classperiod beyond the four years would not appreciablybenefit plaintiffs.












This concern is not new. Nearly 30 years ago ourSupreme Court advised: “[W]hen potential recov-ery to the individual is small and when substantialtime and expense would be consumed in distribu-tion, the purported class member is unlikely to re-ceive any appreciable benefit. The damage actionbeing unmanageable and without substantial benefitto class members, it must then be dismissed.” (BlueChip Stamps v. Superior Court (1976) 18 Cal.3d381, 386, 134 Cal.Rptr. 393, 556 P.2d 755; Caro v.Procter & Gamble Co. (1993) 18 Cal.App.4th 644,657-659, 22 Cal.Rptr.2d 419.)

On the other hand, by allowing a discrete class ac-tion to proceed for restitution of illegal interest,along with the government enforcement action forpenalties and other relief, the trial court vindicatedthe policies underlying Business and ProfessionsCode section 17200 while keeping its eye on thepoint of diminishing returns in terms of the benefitto the court. The court was well aware that a pro-posed class suit was not the sole means of deterringthe unfair business practices or preventing unjustadvantage to Old Republic. (See Washington Mutu-al Bank v. Superior Court, supra, 24 Cal.4th at p.926, 103 Cal.Rptr.2d 320, 15 P.3d 1071.) Under theUCL the court can, and did, order injunctive reliefand assess civil penalties. (Bus. & Prof.Code, §§17203, 17206.)

Finally, the court also properly weighed the burdenof proliferation from thousands of individual show-ings that potentially would have to be made to es-tablish delayed discovery or fraudulent conceal-ment of their cause of action. Under the commonlaw delayed discovery rule, the accrual of aplaintiff's cause of action is delayed to the time theplaintiff suspects or should have suspected wrong-doing which caused the injury. Where, as here, it isclear that the cause of action would be barredwithout the benefit of the delayed discovery rule,the plaintiff must show the inability to have madean earlier discovery despite reasonable diligence.(McKelvey v. Boeing North American, Inc. (1999)74 Cal.App.4th 151, 160, 86 Cal.Rptr.2d 645.) Sim-

ilarly, a defendant's fraud in concealing a cause ofaction will toll the applicable statute of limitations,but to take advantage of this doctrine the plaintiffmust show the substantive elements of fraud and anexcuse for late discovery of the facts. (Snapp & As-sociates Ins. Services, Inc. v. Robertson (2002) 96Cal.App.4th 884, 890, 117 Cal.Rptr.2d 331.)

*570 Class plaintiffs brush off the individualizedinquiry concern but we are not persuaded that thisconcern can be ignored. The discovery rule analysisentails inquiry into whether the plaintiff had actualknowledge of the wrongful conduct, not just wheth-er he or she “should have known” about it. As thetrial court recognized, the actual knowledge com-ponent is fact-specific depending on the plaintiff'sknowledge, experience, profession, etc. Thus, theinquiry proceeds on an individual basis. So, too, theinquiry for fraudulent concealment is also two-tiered: whether a reasonably diligent consumerwould have discovered Old Republic's wrongdoing,as well as whether a particular class member is oninquiry notice of the claim. (See Barber v. SuperiorCourt (1991) 234 Cal.App.3d 1076, 1083, 285Cal.Rptr. 668.) Again, this is an individual inquiry.

In the last analysis, the issue is whether the trialcourt abused its discretion in impliedly concludingthat certification beyond the limitation periodwould unduly impact the community of interest re-quirement for maintaining the class. As we have ex-plained, it did not.

(B) Massachusetts Mutual Does Not Aid ClassPlaintiffs

Class plaintiffs rely on Massachusetts Mutual LifeIns. Co. v. Superior Court (2002) 97 Cal.App.4th1282, 119 Cal.Rptr.2d 190 (Massachusetts Mutual)in their bid for this court to reject the trial court'sreasoning in this case. There, the reviewing courtupheld certification of a 33,000-member class com-prised of persons who had purchased a particularlife insurance product over a 15-year period. (Id. atp. 1286, 119 Cal.Rptr.2d 190.) In so doing, the












































court rejected Massachusetts Mutual's contentionthat its statute of limitations defenses under Busi-ness and Professions Code section 17208 and an-other statute would require individual factual de-terminations. The court noted that the applicablelimitations periods “probably [would] run from thetime a reasonable person would have discovered thebasis for a claim.” (Massachusetts Mutual, supra, atp. 1295, 119 Cal.Rptr.2d 190, italics added.) Fur-ther, “[g]iven the fact that plaintiffs' claim is basedon a nondisclosure, the objective determination ofwhen the nondisclosure should have been dis-covered seems readily amenable to class treatment.[¶] ...‘[C]ourts have been nearly unanimous ... inholding that possible differences in the applicationof a statute of limitations to individual class mem-bers ... does not preclude certification of a class ac-tion so long as the necessary commonality and ...predominance are otherwise present.’” (Ibid.)

First, it bears noting that the Massachusetts Mutualcourt declined to disturb an existing order, as op-posed to reversing a decision after the trial courtthoughtfully balanced competing concerns. Second,glossing over concerns about individualized inquir-ies, the court overlooked the possibility that discov-ery and fraudulent concealment inquiries can alsoextend to what the claimant actually knew.Moreover, at least one court has not been so quickto conclude that individual limitations issues do notoverwhelm common issues. (See Kapsimallis v. All-state Ins. Co. (2002) 104 Cal.App.4th 667,674-675, fn. 6, 128 Cal.Rptr.2d 358 [holding thatdeterminations concerning delayed discovery alleg-ations “must be made by individual fact-specific in-quiries” and that trial court would have to decide onremand “whether these required individual fact-specific inquiries preclude class certification”].)

In any event, we underscore that class certificationwas not denied outright. Rather, the court merelylimited the definition of the class period. The pos-sible *571 proliferation of individual inquiries wasbut one of several considerations the trial court as-sessed in weighing whether a broader certification

period would substantially benefit litigants and thecourt. The court was also concerned with the bur-den of managing a class with thousands upon thou-sands of more plaintiffs, to whom little benefitwould accrue. The practical reality of the impact onthe court system did not escape comment. “[T]o goback to the beginning ... you exceed the breakingpoint.” Moreover, constricting the certificationperiod did not contravene the Business and Profes-sions Code section 17200 policies and indeed otherremedies were and are available to vindicate thoseconcerns. We therefore conclude that the court didnot resort to improper criterion or legal assump-tions in restricting the class based on these practic-al, manageability issues.

(C) Other Doctrines Do Not Compel a DifferentResult

Nor, as class plaintiffs suggest, do the doctrines ofcontinuing violation or last overt act aid them. Thecontinuing violation doctrine comes into play whena plaintiff's claim is based on conduct occurring, inpart, outside the limitations period. It is routinelyinvoked in the employment discrimination context.(See Richards v. CH2M Hill, Inc. (2001) 26 Cal.4th798, 812-821, 111 Cal.Rptr.2d 87, 29 P.3d 175.) Asarticulated in Richards, when an employer engagesin a continuing course of illegal conduct that doesnot constitute constructive discharge, the statute oflimitations begins to run when the course of con-duct ends or the employee is on notice that furtherefforts to end the conduct will be in vain. (Id. at p.823, 111 Cal.Rptr.2d 87, 29 P.3d 175.) Moreover, achallenge to a systemic policy of discrimination isalways timely when launched by a present employ-ee even though events evidencing its inception oc-curred prior to the limitations period. The rationaleis that the very existence of the continuing systemof discrimination is what deters the employee fromseeking full employment rights or threatens to ad-versely affect him or her in the future. (Morgan v.Regents of University of California (2000) 88Cal.App.4th 52, 64, 105 Cal.Rptr.2d 652.) Applica-tion of the continuing violation theory only makes
































sense in the context of an individual's current ex-perience with respect to the policy or conduct. It isnot a tool to bring in new people who suffered theharm prior to the limitations period.

Similarly, when liability is premised on a civil con-spiracy the statute of limitations does not com-mence “until the ‘last overt act’ pursuant to theconspiracy has been completed.” (Wyatt v. UnionMortgage Co. (1979) 24 Cal.3d 773, 786, 157Cal.Rptr. 392, 598 P.2d 45; see Molko v. Holy Spir-it Assn. (1988) 46 Cal.3d 1092, 1127, 252 Cal.Rptr.122, 762 P.2d 46.) This doctrine will not assistplaintiffs against Old Republic. Conspiracy is “alegal doctrine that imposes liability on personswho, although not actually committing a tort them-selves, share with the immediate tortfeasors a com-mon plan or design in its perpetration. [Citation.]By participation in a civil conspiracy, a coconspir-ator effectively adopts as his or her own the torts ofother coconspirators within the ambit of the con-spiracy. [Citation.] In this way, a coconspirator in-curs tort liability co-equal with the immediate tort-feasors.” (Applied Equipment Corp. v. Litton SaudiArabia Ltd. (1994) 7 Cal.4th 503, 510-511, 28Cal.Rptr.2d 475, 869 P.2d 454.) Here the trial courtgranted Old Republic's motion for summary judg-ment on plaintiffs' conspiracy (RICO) claim andthey have not appealed that part of the judgment.Old Republic is the “immediate” wrongdoer under*572 the UCL, but there is no actionable conspir-acy.

(D) The Disgorgement Ruling Will Stand

Class plaintiffs further contend that the trial courtshould have ordered Old Republic to disgorge theapproximately $1,165,000 restitution paymentwhich Barr made to Old Republic in 1998, repres-enting a portion of cost avoidance benefits illegallyobtained through CEB. Although this payment wasmade to Old Republic during the class period asdefined by the court, the court nonetheless declinedto order disgorgement because the funds “wereearned on deposits in escrow accounts in existence

prior to the class period. Accordingly, any claim ontheses funds is barred by the four year statute oflimitations....”

Class plaintiffs argue that Old Republic's liabilitydid not arise under Insurance Code section 12413.5with respect to interest earned on escrows represen-ted by this payment until Old Republic actually re-ceived those funds and then failed to pay them overto its customers. Regardless of when liability arose,class plaintiffs had no claim for restoration of suchfunds because they were not harmed by chicanerywhich occurred before they were ever parties toORTC's escrow accounts. (See Bus. & Prof.Code, §17203 [providing for restoration of money or prop-erty acquired by means of unfair competition].) Aswe find the trial court did not err in restricting theclass period, so, too, it did not err in ruling thatBarr's restitutive payment was beyond classplaintiffs' reach.

2. The Trial Court Appropriately Restricted thePeople's Claim to the Four-year Limitation Period

The People urge that the trial court should have ap-plied the discovery rule and the fraudulent conceal-ment doctrine to expand the applicable statute oflimitations for the government's UCL claim. Addi-tionally, they claim the four-year limitation perioddoes not and should not curtail the court's ability toimpose penalties for conduct occurring prior to thatperiod.

a. The People Waived Reliance on Equitable Doc-trines

As we explain, the People have waived any claimthat regardless of the definition of class period, theequitable doctrines of delayed discovery and fraud-ulent concealment should have been applied to thegovernment enforcement action.

In the original complaint the People sought penal-ties, injunctive relief, restitution and disgorgementof ill-gotten gains with respect to the UCL claim.




















The People also alleged fraudulent concealment andlate discovery. However, after the class actionswere filed they abandoned any separate quest forrestitution, stating in their trial brief: “The Peoplewould support restitution through a class claim re-covery.”

Nor did the government participate in the debateabout whether to extend the class period beyond thefour-year statute of limitations. Lawyers for theCity appeared at the status conference where certi-fication issues were discussed and the schedule wasestablished, and received the schedule for numerousmatters including the briefing schedule for determ-ining the statute of limitations for the class period.They also appeared at the hearing. Nonetheless, thegovernment lawyers neither spoke, nor wrote, aword on the matter until the court below invited thegovernmental plaintiffs to review the penalty as-sessed against ORTC for unlawful reconveyancefees, as set forth in the court's tentative decision re-garding remedies. Responding by letter brief to thecourt, the government lawyers did not mention*573 equitable doctrines. Rather, they contendedthat the four-year statute of limitations applied onlyto the period within which a UCL claim could bebrought, but that penalties could be based on con-duct occurring years prior to that term. In sum, thePeople have waived any argument that they couldcircumvent the four-year limitation period by in-voking equitable doctrines.

b. Penalties Are Not Available for Conduct Occur-ring Outside the Limitations Period

Nor do we find merit in the People's argument thatthe trial court improperly transposed the class peri-od onto the government action for penalties. Theyreason that their action is not a class action, andsuffers none of the restrictions germane to the classprocedure. We agree that UCL actions brought by aprosecutor are fundamentally different from repres-entative or class actions brought by private parties.Nor do they require the same safeguards. (SeePeople v. Pacific Land Research Co. (1977) 20

Cal.3d 10, 17-19, 141 Cal.Rptr. 20, 569 P.2d 125.)“An action filed by the People seeking injunctiverelief and civil penalties is fundamentally a law en-forcement action designed to protect the public andnot to benefit private parties.... Civil penalties,which are paid to the government [citations] are de-signed to penalize a defendant for past illegal con-duct. The request for restitution ... is only ancillaryto the primary remedies sought for the benefit ofthe public.” (Id. at p. 17, 141 Cal.Rptr. 20, 569 P.2d125; accord, Payne v. National Collection Systems,Inc. (2001) 91 Cal.App.4th 1037, 1045, 111Cal.Rptr.2d 260.)

The structure of the UCL underscores this distinc-tion. Only government prosecutors acting “in thename of the people of the State of California” maypursue remedies under Business and ProfessionsCode section 17206. (Id., subd. (a).) And the“People of the State of California” are harmed bythe very existence of unlawful, unfair and fraudu-lent business acts and practices, whether or not in-dividual citizens rely on a defendant's falsehoods orare affected by its illegal practices. (See Prata v.Superior Court (2001) 91 Cal.App.4th 1128, 1146,111 Cal.Rptr.2d 296.)

However, does this distinction make any differencewhen it comes to recovering penalties for specificviolations subject to the UCL? No. The only courtconfronting a potentially similar issue declined torender a decision on this point. In Suh v. Yang(N.D.Cal.1997) 987 F.Supp. 783, 795, involving al-legations of multiple, continuous wrongful acts in-volving use and dilution of a service mark, thecourt concluded the plaintiff's claim for unfair com-petition was not barred by the Business and Profes-sions Code section 17208 limitation period becausesome of the acts transpired during that period.However, the court did not address the questionwhether the plaintiff could recover for allegedly in-fringing acts occurring outside the four-year statuteof limitation issue because the parties did not raisethat concern. (Suh v. Yang, supra, at p. 796, fn. 9.)

As in Suh v. Yang, supra, there is no question but




























that the government's UCL action was timely.However, here the trial court answered the questionleft open in Suh with a “no,” ruling that violationsoccurring outside the Business and ProfessionsCode section 17208 period may not be counted forpurposes of imposing a per-violation penalty. Suchtreatment “would be contrary to the well estab-lished purpose of a statute of limitation.”

We agree. Even though ORTC's pattern of conductwas systemic and the violations numerous, the gov-ernment is seeking penalties for discrete violationsdating *574 back to the early 1980's. Statutory pen-alties are mandatory in actions brought in the nameof the People, and they are imposed on a per-violation basis. (Bus. & Prof.Code, § 17206, subd.(a).) Had the government launched its UCL actionearlier, doubtless the offending behavior and sheermagnitude of illegal acts would have been curtailedalong with the accrual of penalties. There is a fair-ness issue here. The government will argue it couldnot have commenced its action earlier because itdid not reasonably discover the wrongful behavioruntil 1994. Again, the government has waiveddelayed discovery and fraudulent concealmentclaims with respect to the limitation period for itsown action.

More importantly, as a general matter governmentUCL actions will often be aimed at a pervasivepractice harmful to consumers that can be segmen-ted into independent violations. For the statute oflimitations to have any meaning or effect, it shouldoperate to cut off stale violations. Indeed, othercourts have calculated penalties in UCL actionsbased on the four-year statute. (See, e.g., South BayChevrolet v. General Motors Acceptance Corp.(1999) 72 Cal.App.4th 861, 874, fn. 8, 85Cal.Rptr.2d 301.)This does not mean, however, thatthe UCL's deterrent purpose is not served with re-spect to those violations. Under Business and Pro-fessions Code section 17206, subdivision (b), in as-sessing the amount of the penalty to be imposed foreach violation, among other matters the court mayconsider the number of violations, the persistence

of the defendant's conduct and the length of timeover which the misconduct occurred. Thus, viola-tions occurring outside the limitations period canbear on the gravity of the penalty imposed for viol-ations occurring within the limitations period.

3. The Disbursement Float Ruling Was Correct

For purposes of this lawsuit, the “disbursementfloat” “is comprised of funds remaining in the bankaccount after disbursement checks have been issuedupon the close of escrow prior to the checks havingbeen presented to the bank for payment.” Concern-ing the disbursement float, the trial court ruled that:(1) Insurance Code section 12413.5 does not entitlenondepositing sellers to interest earned on escrowfunds, and in any event sellers were not part of theclass entitled to restitution; (2) buyers' interest inescrow funds is extinguished at the close of escrow;and (3) as a limited agent, once ORTC issueschecks to pay escrow obligations, it has satisfied itsobligations to the escrow parties and is entitled toretain any benefit earned on funds while awaitingclearance of the payment.

Class plaintiffs dispute these rulings. They arguesellers are class members as well as depositingparties under Insurance Code section 12413.5, andin any event homeowners in refinancing transac-tions are depositing parties entitled to interestearned after the close of escrow. Further, they areadamant ORTC cannot be permitted to keep any in-terest and even if the trial court ruling was correctunder the “unlawful” prong of Business and Profes-sions Code section 17200, ORTC's conduct was im-proper under the “unfair and fraudulent” prong. ThePeople argue that the issue of who is or is not with-in the class has no bearing on their case under theUCL and at the very least, the disbursement floatshould be disgorged to a cy près fund.

We need not belabor each of these points becausewe conclude that Insurance Code section 12413.5ceases to govern the rights of the escrow partiesand the escrow obligations of ORTC before any




















disbursement*575 float begins to accrue. Specific-ally, ORTC's escrow duties are extinguished andthe parties to the escrow have received all to whichthey are entitled at that point of convergence intime when: (1) the conditions specified in the es-crow instructions have been satisfied; and (2)ORTC disburses the escrow funds in accordancewith those instructions.

a. The Escrow Process

A brief description of the escrow process is in or-der. Our Insurance Code defines an “escrow ac-count” as follows: “[A]ny depository account witha financial institution to which funds are depositedwith respect to any transaction wherein one person,for the purpose of effecting the sale, transfer, en-cumbering or leasing of real or personal property toanother person, delivers any written instrument,money, evidence of title to real or personal property... to a third person to be held by that third personuntil the happening of a specified event or the per-formance of a prescribed condition, when it is thento be delivered by that third person to a grantee,grantor, promisee, promisor, obligee, obligor....”(Ins.Code, § 12413.1, subd. (f).)

In practical, real estate parlance, an escrow“open[s]” with the deposit of initial instructions andis “closed” when the sale or refinancing is completeand the conditions satisfied. (3 Miller & Starr, Cal.Real Estate (3d ed.2000) § 6:1, p. 4.) When theconditions of escrow have been performed fully,title and purchase money pass to the grantee andgrantor respectively, as a matter of law, eventhough there has been no delivery. (Hagge v. Drew(1945) 27 Cal.2d 368, 375, 165 P.2d 461.) Thesame would be true in a refinancing situation.

The escrow holder is a limited agent whose dutiesextend to the strict and faithful performance of theprincipal's escrow instructions. (Hannon, supra,211 Cal.App.3d at pp. 1127-1128, 260 Cal.Rptr.21.) Once the escrow holder receives instructionsand the respective deposits of instruments and

money from each party, the agent holds the moneyand instruments as agent of both parties to the es-crow. (Shreeves v. Pearson (1924) 194 Cal. 699,707, 230 P. 448.) The agent has no authority to de-liver or dispose of the instruments and funds placedin escrow until the escrow conditions have tran-spired according to the terms of the instructions.(Love v. White (1961) 56 Cal.2d 192, 194, 14Cal.Rptr. 442, 363 P.2d 482; Todd v. Vestermark(1956) 145 Cal.App.2d 374, 377, 302 P.2d 347.)

Funds received by a company in connection with anescrow must be deposited in a separate accountwith a financial institution. (Ins.Code, § 12413.5)Any item received in connection with an escrowmust be deposited in, or submitted for collection to,a financial institution no later than the close of thenext business day following receipt. (Id., §12413.2.) Where the buyer, refinancer or buyer'slender deposits the requisite payment into escrowby check, the condition of payment is satisfiedwhen the check is honored by the drawee bank andfunds have thus become available for withdrawal asa matter of right. (See Greenzweight v. Title Guar.& Tr. Co. (1934) 1 Cal.2d 577, 581-582, 36 P.2d186; 3 Miller & Starr, Cal. Real Estate, supra, §6:18, pp. 41-42.)

Also pertinent to the escrow process is InsuranceCode section 12413.1, which establishes uniformholding periods governing when title insurance,controlled escrow and underwritten title companiescan disburse various types of funds from escrow ac-counts. For example, under the statute, funds de-posited by cash or electronic payment may be dis-bursed on the same day as *576 the deposit.(Ins.Code, § 12413.1, subd. (c).) Deposits otherthan cash or electronic payments which are accor-ded next-day availability pursuant to 12 Code ofFederal Regulations part 229 (2004) (RegulationCC) FN35 may be disbursed the business day afterthe business day of deposit. (Ins.Code, § 12413.1,subd. (a).) These items include cashier's, certifiedor teller's checks, postal money orders and the likewhere the aggregate amount of deposits is $5,000







































or less. (12 C.F.R. §§ 229.10(c)(1)(v), 229.13(b).)Other than drafts, deposits which are not accordednext day availability under Regulation CC, such aspersonal or business checks, may be disbursedwhen funds are made available for withdrawal ac-cording to that regulation. (Ins.Code, § 12413.1,subd. (b).) FN36 Funds cannot be disbursed withrespect to a draft, other than a share draft, until thedraft has been submitted for collection and paymentreceived. (Id.,§ 12413.1, subd. (e).)

FN35. Regulation CC governs availabilityof funds deposited in “insured banks” andother financial institutions. (12 C.F.R. §229.2(e).) An insured bank is any bank, in-cluding a state bank, whose deposits areinsured under the Federal Deposit Insur-ance Act. (12 C.F.R. § 229.2(e); 12 U.S.C.§ 1813, subds. (a)(1)(A), (h).)

FN36. Nonetheless, such funds can be dis-bursed on the business day after the busi-ness day of deposit if the depositary insti-tution advises the title insurance, con-trolled escrow or underwritten title com-pany in writing that final settlement hasoccurred. (Ins.Code, § 12413.1, subd. (d).)

When all the conditions pending escrow have beenperformed within the required time, the dual agencyof the escrow holder converts to an agency for eachof the parties to the transaction in respect to thoseitems deposited in escrow to which each has be-come “completely entitled.” (Shreeves v. Pearson,supra, 194 Cal. at p. 707, 230 P. 448; Todd v.Vestermark, supra, 145 Cal.App.2d at p. 377, 302P.2d 347.) At this point, consistent with InsuranceCode section 12413.1 and the escrow instructions,the title insurance, controlled escrow or underwrit-ten title company, acting, for example, as agent ofseller, would deliver funds to seller. And, at themoment of disbursement, all relevant deposits withrespect to a given escrow are either cash or thefunctional equivalent of cash; deposits accorded fi-nal settlement or, in the case of a draft, for whichpayment has been received; or funds defined by

Regulation CC as available for withdrawal. In otherwords, these funds are good funds in the hands ofthe escrow holder by virtue of the operation of In-surance Code section 12413.1.

b. Analysis

While buyers and refinancers have title to the de-posited funds until close of escrow, their interest insuch funds ceases upon disbursement by the com-pany in accordance with the escrow instructions. Atthat time the buyer has title to the property and therefinancer takes title as reflected in the refinancingtransaction. Thus after closing buyer and refinancerhave no funds that can float. Nor do they have anaccount to amass interest because the title insur-ance, controlled escrow or underwritten title com-pany-not any party to the escrow-owns the escrowdisbursement account. Finally, upon disbursementthe seller has what he or she is entitled to under es-crow instructions providing that all disbursementsshall be by check of ORTC and pursuant to whichbuyer and refinancer acknowledge that escrowfunds must be disbursed in accordance with theprovisions of Insurance Code section 12413.1.Should seller so choose, seller should be able topick up ORTC's check on *577 the date of dis-bursement and cash it that day at ORTC's deposit-ory bank. (See 12 C.F.R. § 229.2(d) [defining“available for withdrawal” with respect to funds de-posited in an account as including available “forpayment of checks drawn on the account”].)

Therefore, upon transfer of documents and issuanceof disbursement checks in strict accordance withthe escrow instructions, ORTC's escrow obligationsare extinguished and Insurance Code section12413.5 no longer applies.FN37 Nonetheless, classplaintiffs argue that Insurance Code section12413.5 continues to govern the transaction “untilgood funds are disbursed” and ORTC continues asa separate agent of buyer, seller and refinancer untilfunds are actually received by the seller. Again, asa general matter Insurance Code section 12413.1ensures that only good funds are disbursed.FN38
































After disbursement, the title insurance, controlledescrow or underwritten title company, as a corpor-ate entity, has an obligation to honor its ownchecks, but its escrow obligations have been ac-complished. “ ‘[T]he obligations of an escrow agentare limited to faithful compliance with the instruc-tions from the principals.’ ” (Hirsch v. Bank ofAmerica, supra, 107 Cal.App.4th at p. 719, 132Cal.Rptr.2d 220.) Moreover, the title company'srole as separate agent of seller upon satisfaction ofthe conditions of escrow is still circumscribed bythe instructions, and terminates upon completion ofperformance of the acts required thereby. (Claussenv. First American Title Guaranty Co. (1986) 186Cal.App.3d 429, 435, 230 Cal.Rptr. 749.) Again,the instructions require disbursement by check, inaccordance with Insurance Code section 12413.1.

FN37. For this same reason, our languagein Hirsch, that as between title companiesand their customers, Insurance Code sec-tion 12413.5“dictates that the customershave the superior right to any paymentsmade by Banks that constituted interest”does not affect entitlement to interest whenInsurance Code section 12413.5 no longerapplies. (Hirsch v. Bank of America, supra,107 Cal.App.4th at p. 718, 132 Cal.Rptr.2d220.)

FN38. Companies are not liable for any vi-olation of Insurance Code section 12413.1if the violation is unintentional or the res-ult of a bona fide error. (§ 12413.1, subd.(i).) Moreover, the parties can consent inwriting to recordation of documents priorto the time funds are available for dis-bursement with respect to a transaction.(Id., subd. (j).)

Nor are we persuaded by class plaintiffs' continuedintonement that the right to interest follows theprincipal and, thus, sellers or buyers, by permissionof sellers who accept disbursement by check, areentitled to the disbursement float. First, the casesthey rely on have nothing to do with the disburse-

ment float. (See, e.g., Phillips v. Washington LegalFoundation (1998) 524 U.S. 156, 118 S.Ct. 1925,141 L.Ed.2d 174. 165 [interest earned on clienttrust funds held in IOLTA accounts]; MetropolitanWater Dist. v. Adams (1948) 32 Cal.2d 620,628-629, 197 P.2d 543 [interest earned on waterdistrict funds deposited with court as security forcommencing eminent domain proceedings].)Second, we concur with the trial court that the au-thority pertaining to this issue supports ORTC's en-titlement to retain the disbursement float. In partic-ular, in Van de Kamp v. Bank of America (1988)204 Cal.App.3d 819, 852-853, 251 Cal.Rptr. 530the bank issued checks to pay trust obligations is-sued from a central disbursing account and immedi-ately charged the trust account. Pending clearance,the funds to cover the check were placed in a poolavailable to the bank for use. The reviewing courtupheld the trial court's finding that this practice “‘accords with generally accepted accounting prin-ciples and is an application of the rule permitting atrustee to keep cash on hand *578 to pay upcomingexpenses of the account. The obligation of the trust,for which the check is issued, is extinguished andbecomes [bank's] obligation. The trust check is vir-tually the same as a cashier's check ..., is almost aform of money and may be cashed immediately.Hence, [bank] must ensure that it has funds avail-able for payment of the check at the time it is is-sued.’ ” (Id. at p. 852, 251 Cal.Rptr. 530.) The re-cord supported the finding that the use of the dis-bursing float was reasonably necessary to the or-derly administration of the trust accounts, and thecourt concluded there was no obligation to returnthe value of its use to the trust beneficiaries. (Id. atp. 853, 251 Cal.Rptr. 530.) An escrow is similar.Upon disbursement of good funds, the title com-pany's escrow obligations are fulfilled but the com-pany now has a corporate obligation to maintain ap-propriate balances pending clearance of payment ondisbursement checks. It is of no legal consequencethat unlike the bank, the ORTC is not statutorilyempowered to self-deposit the applicable funds, oruse a separate disbursement account.











































Finally, we reject class plaintiffs' argument thateven if ORTC's retention of the disbursement floatwas “lawful” under Insurance Code section12413.5, it was “unfair” or “fraudulent” within themeaning of Business and Professions Code section17200. First, ORTC's escrow obligations andagency terminated upon disbursement of goodfunds. Second, class plaintiffs' related complaintthat ORTC failed to advise depositors they couldopen an individual interest-bearing account doesnot bear on the issue of Old Republic's retention ofinterest on the disbursement float. This failure toadvise, appropriately addressed in the court's in-junctive relief measures, is not a proper vehicle forrestitution under the facts of this case. Third, al-though ORTC's form escrow instructions dictatethat disbursements shall be made by check, we arenot convinced that this condition is detrimental toits customers. The trial court found, and classplaintiffs have not refuted, that there was no evid-ence suggesting that the reasonable cost of a wiretransfer ordinarily would not exceed the interest ac-cruing during the disbursement float. Thus, whereis the detriment?

4. The Trial Court Did Not Abuse Its Discretion inFashioning the Injunctive Relief Order

After the trial court rendered its decision on remed-ies, Old Republic submitted three alternative com-pliance plans and moved for approval. The trialcourt approved plans that would allow Old Repub-lic to retain arbitrage benefits in the future,provided its escrow instructions fully and fairly dis-closed this state of affairs and afforded the con-sumer the option of opening an individual interest-bearing account for which ORTC would charge areasonable fee. These instructions also providedguidance on how to calculate estimated interest sothe consumer could make an informed decisionabout whether to open an interest-bearing account.The court also found that the proposed fees foropening and maintaining an interest-bearing ac-count and for facilitating wire transfers were “goodfaith estimate[s] of the actual cost” incurred.

We review the trial court's exercise of its injunctivepowers pursuant to Business and Professions Codesection 17203 under an abuse of discretion stand-ard. (Brockey v. Moore (2003) 107 Cal.App.4th 86,102-103, 131 Cal.Rptr.2d 746.) Complaining thatthe relief ordered was insufficient because it al-lowed ORTC to retain arbitrage benefits on con-sumer escrow funds in the future, class plaintiffsfirst argue that the injunctive relief did not complywith *579Insurance Code section 12413.5. To reit-erate, that statute provides that any interest receivedon escrow deposits shall be paid to the depositingparty “unless the escrow is otherwise instructed bythe depositing party, and shall not be transferred tothe account of the title insurance company, con-trolled escrow company, or underwritten title com-pany.” (Ins.Code, § 12413.5.)Class plaintiffs high-light the “shall not be transferred” phrase, but ig-nore the language allowing an alternative disposi-tion upon instruction of the parties. That is what therevised escrow instructions accomplished.

Next, they disparage the basis of the court's order,namely that the cost of calculating and reportingeach individual escrow depositor's share of arbit-rage benefits on a pooled demand deposit accountwould be a logistical nightmare and cost-prohibitive. Although class plaintiffs submittedevidence that existing technology permitted track-ing of the investability of funds deposited in a com-mon general escrow account, the trial court alsoweighed Old Republic's argument that this proced-ure was untested, no one else was using it and OldRepublic did not know if it was “doable.” Plaintiffsare merely disagreeing with the court's assessmentof the evidence. (See Brockey v. Moore, supra, 107Cal.App.4th at p. 103, 131 Cal.Rptr.2d 746.) Butmore fundamentally, the court correctly saw its roleas fashioning injunctive relief to ensure that de-fendants were complying with existing law. Beyondthat, even if plaintiffs' approach were feasible, thecourt had no authority to prohibit Old Republicfrom carrying out a proposed plan that was lawful.

C. The People's Issues Against PwC

















1. Introduction

In the fourth amended complaint, the People al-leged that PwC was legally required to, but did not,comply with generally accepted auditing standards(GAAS) in preparing the audit reports for ORTC.The trial court was not convinced that the allegedviolations of auditing standards were actionable un-der the UCL, and therefore aborted the People'sUCL claim against PwC on demurrer. Further, thecourt ruled that the People lacked a remedy becauseOld Republic had already escheated the unclaimedescrow funds to the State. The People object tothese rulings.

The UCL broadly embraces anything properly iden-tified as a business practice that simultaneously isforbidden by law. (Cel-Tech Communications, Inc.v. Los Angeles Cellular Telephone Co. (1999) 20Cal.4th 163, 180, 83 Cal.Rptr.2d 548, 973 P.2d 527(Cel-Tech ).) With its proscription of “any unlaw-ful” business act or practice, the UCL transformsviolations of other laws into independently action-able unlawful practices under its statutory umbrella.(Ibid.) It matters not whether the law violated iscriminal, civil, federal, state, municipal, regulatory,statutory or court-made. (South Bay Chevrolet v.General Motors Acceptance Corp. (1999) 72Cal.App.4th 861, 880, 85 Cal.Rptr.2d 301.) Andeven if a practice is not specifically forbidden byanother law, it may be deemed unfair or fraudulentunder the UCL. (Cel-Tech, supra, 20 Cal.4th at p.180, 83 Cal.Rptr.2d 548, 973 P.2d 527.) To recoverunder this act, individualized proof of deception,injury or reliance is not necessary, nor is it neces-sary to prove that the defendant intended to injureanyone. (Prata v. Superior Court, supra, 91Cal.App.4th at p. 1137, 111 Cal.Rptr.2d 296.)

2. Analysis

The People's best argument is that PwC's allegedfailure to comply with GAAS violated Business andProfessions Code section 5062, which provides thataccountants “shall issue a report which *580 con-

forms to professional standards upon completion ofa compilation, review or audit of financial state-ments.” The California Board of Accountancy hasissued regulations requiring accountants to “complywith all applicable professional standards, includingbut not limited to generally accepted accountingprinciples and generally accepted auditing stand-ards.” (Cal.Code Regs., tit. 16, § 58, italics added.)The complaint alleged numerous violations ofGAAS in preparing and submitting “clean” auditreports for ORTC, based on PwC's alleged know-ledge that (1) the company's inflated earnings fromunescheated funds was material under GAAS; (2)the company's escheat practices were possible“illegal acts” by the client as defined by GAAS; (3)the company had never escheated money to thestate as it was required to do; and (4) throughoutthe course of the engagement the company's totalescheat obligation including penalties was growing.The complaint further alleged that the violationspermeated the engagement in that year after yearPwC issued unqualified opinion letters for ORTC.These allegations were sufficient to state a cause ofaction under the UCL.

Nonetheless, PwC is adamant that limitations onaccountants' liability articulated by our SupremeCourt in Bily v. Arthur Young & Co. (1992) 3Cal.4th 370, 11 Cal.Rptr.2d 51, 834 P.2d 745 (Bily) are dispositive in this case and protect the com-pany from suit under the UCL. We disagree.

The Bily court held that “an auditor's liability forgeneral negligence in the conduct of an audit of itsclient financial statements is confined to the client,i.e., the person who contracts for or engages theaudit services. Other persons may not recover on apure negligence theory.” (Bily, supra, 3 Cal.4th atp. 406, 11 Cal.Rptr.2d 51, 834 P.2d 745, fn. omit-ted.) Despite the reality that economic injury to in-vestors and others who might read and rely on auditreports is foreseeable (id. at pp. 398-401, 11Cal.Rptr.2d 51, 834 P.2d 745), the court deemed itnecessary to curtail the pool of potential plaintiffsin order to avert “the spectre of multibillion-dollar





























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professional liability that is distinctly out of propor-tion to” (1) the auditor's fault; and (2) the strengthof the correlation between the defective report anda third party's injury (id. at p. 402, 11 Cal.Rptr.2d51, 834 P.2d 745). Additionally, the court was con-vinced that “the generally more sophisticated classof plaintiffs in auditor liability cases ... permits theeffective use of contract rather than tort liability tocontrol and adjust the relevant risks through‘private ordering.’ ” (Id. at p. 398, 11 Cal.Rptr.2d51, 834 P.2d 745.) Furthermore, the court was notpersuaded that a pure foreseeability approachwould result in more accurate auditing and more ef-ficient spreading of loss. (Ibid.) However, the courtheld that persons who are “specifically intended be-neficiaries of the audit report who are known to theauditor and for whose benefit it renders the auditreport,” could recover on a theory of negligent mis-representation. (Id. at p. 407, 11 Cal.Rptr.2d 51,834 P.2d 745.) Finally, auditors enjoy no protectionagainst third party suits for intentional misrepres-entation. (Id. at p. 415, 11 Cal.Rptr.2d 51, 834 P.2d745.)

Bily does not pertain. First, this is not a professionalnegligence action for damages; it is an action underthe UCL for civil penalties, restitution and injunct-ive relief FN39 based on violations of GAAS. Con-trary*581 to PwC's assertions, allowing this lawsuitto proceed would not be “in flat contradiction of theBily Court's refusal to ‘endors[e] a broad andamorphous rule of potentially unlimited liability’for accountants.” (Citing Bily, supra, 3 Cal.4th at p.406, 11 Cal.Rptr.2d 51, 834 P.2d 745.) Without thefinancial incentive of damages (including punitivedamages) and attorney fees, and again contrary toPwC's assertions, it is unlikely that “anyone ”would “sue any accountant for alleged failure tocomply with GAAS in any audit.” Injunctive reliefand restitution are the only remedies available to in-dividuals. (Bus. & Prof.Code, §§ 17203, 17206.) Ifan auditor engages in ongoing misconduct, injunct-ive relief would be appropriate; Bily would be nobar. (Bus. & Prof.Code, § 17203.) Likewise if theconduct results in acquisition by the auditor of

“money or property, real or personal,” by means ofunfair competition, then restoration of the same tothe person harmed is appropriate and again Bilywould be no bar. (Bus. & Prof.Code, § 17203.)

FN39. We agree with PwC that thePeople's UCL recovery is limited to civilpenalties in the amount of $2,500 per viol-ation. (Bus. & Prof.Code, § 17206, subd.(a).) The People did not assert ongoingmisconduct, and thus injunctive relief isnot available. Nor did the People allegethat PwC benefited from ORTC's failure toescheat, and thus restitution is not avail-able. (See id.,§ 17203 [allowing for orders“as may be necessary to restore to any per-son in interest any money or property ...which may have been acquired by meansof such unfair competition”].)

PwC argues nonetheless that just as privateplaintiffs cannot “plead around” the bar to the judi-cially implied private action against insurers whocommit certain statutory unfair practices, as an-nounced in Moradi-Shalal v. Fireman's Fund Ins.Companies (1988) 46 Cal.3d 287, 292, 250Cal.Rptr. 116, 758 P.2d 58, so too the People can-not “plead around” Bily by casting their claim as aUCL cause of action based on violations of GAAS.(See Safeco Ins. Co. v. Superior Court (1990) 216Cal.App.3d 1491, 1493-1494, 265 Cal.Rptr. 585[holding that to permit plaintiff to prosecute UCLaction would render Moradi-Shalal v. Fireman'sFund Ins. Companies, supra, 46 Cal.3d 287, 250Cal.Rptr. 116, 758 P.2d 58 meaningless].) There isno analogy here. No private party can sue for dam-ages for the commission of unfair claims settlementpractices set forth in Insurance Code section790.03, subdivision (h). (Moradi-Shalal v. Fire-man's Fund Ins. Companies, supra, 46 Cal.3d at pp.292, 304, 250 Cal.Rptr. 116, 758 P.2d 58.)On theother hand, Bily does not obliterate any privateright of action, but instead creates rules restrictingwho has standing to sue auditors for professionalnegligence. At most Safeco stands for the proposi-























































tion that “the UCL cannot be used to state a causeof action the gist of which is absolutely barred un-der some other principle of law.” (Stop Youth Ad-diction, Inc. v. Lucky Stores, Inc. (1998) 17 Cal.4th553, 566, 71 Cal.Rptr.2d 731, 950 P.2d 1086.)There is no similar bar to the instant action.

Citing Samura v. Kaiser Foundation Health Plan,Inc. (1993) 17 Cal.App.4th 1284, 1299, 22Cal.Rptr.2d 20, PwC also complains that enlistingthe UCL to police compliance with GAAS is tan-tamount to invading the powers entrusted by theLegislature to the Board of Accountancy, the entitywith general power to regulate and discipline ac-countants in California. (Bus. & Prof.Code, § 5000et seq.) Samura does not help PwC. First, our Su-preme Court has held that despite the existence of adistinct statutory enforcement scheme, parallel ac-tion for unfair competition is appropriate under theUCL. (People v. McKale (1979) 25 Cal.3d 626,632-633, 159 Cal.Rptr. 811, 602 P.2d 731.) Second,the reviewing court in Samura held that the operat-ive statutory provisions upon which the trial courtrelied in authorizing a *582 UCL action did notdefine an unlawful act that could be enjoined as un-fair competition. Rather, they served to govern thepertinent regulatory agency in the exercise of itsregulatory powers. Thus, the lower court erro-neously “assumed [a] regulatory power” that be-longed exclusively FN40 to a state agency. (Samurav. Kaiser Foundation Health Plan, Inc., supra, 17Cal.App.4th at pp. 1301-1302, 22 Cal.Rptr.2d 20.)

FN40. At issue in Samura were provisionsof the Knox-Keene Act. The court notedthat the power to enforce that act “has beenentrusted exclusively to the Department ofCorporations, preempting even the com-mon law powers of the Attorney General.”(Samura, supra, 17 Cal.App.4th at p. 1299,22 Cal.Rptr.2d 20, italics added.)

Here, the statutory and regulatory provisions re-quiring accountants to comply with professionalstandards are not laws which serve to govern theBoard of Accountancy in its regulatory powers.

They are general mandates setting the baselinestandards for the conduct of the profession. Further,as suggested in People v. McKale, supra, 25 Cal.3d626, 159 Cal.Rptr. 811, 602 P.2d 731, the Board ofAccountancy does not have exclusive authority toenforce provisions of the Business and ProfessionsCode governing accountants: “The AccountancyAct (Bus. & Prof.Code, §§ 5000-5157) establishesthe Board of Accountancy with authority to seek in-junctive relief against violators of the act. (Bus. &Prof.Code, § 5122.) ...[T]he district attorney is notexpressly authorized to enforce the statute. Whilethe issue has not been directly faced, it appears aconcerned district attorney may prosecute an actionfor unfair competition predicated on violations ofthe Accountancy Act notwithstanding provisionsfor a special enforcement agency.” (People v.McKale, supra, 25 Cal.3d at p. 633, 159 Cal.Rptr.811, 602 P.2d 731.)

Finally, even if Bily applied, here the People al-leged that the DOI was the intended recipient of theauditor opinion letters. As a matter of law, when acompany retains an outside auditor to satisfy itsstatutory requirement to file an audit report with theCommissioner under the Insurance Code, the Com-missioner is within the universe of potentialplaintiffs defined by Bily.(See Arthur Andersen v.Superior Court (1998) 67 Cal.App.4th 1481, 1501,1507, 79 Cal.Rptr.2d 879 [concerning Ins.Code, §900.2, which requires insurers to file an annualaudit report with the Commissioner].)

The Commissioner, duly elected by the People, alsohas regulatory and enforcement powers vis-à-visunderwritten title companies such as ORTC.(Ins.Code, §§ 12389 et seq., 12900, subd. (a).) PwCargues that “ ‘The People is not the Department ofInsurance.’ ” This purported difference is meaning-less. This UCL action was brought by public pro-secutors authorized pursuant to Business and Pro-fessions Code section 17204 to sue “in the name ofthe People of the State of California.” A suit in thename of the People represents the “sovereignty” ofthe state. (Gov.Code, § 100, subd.(a).) The Com-






















































missioner receives audit reports from underwrittentitle companies such as ORTC in the course of itsenforcement and regulatory duties, which he or sheperforms for the benefit of the public, i.e., thePeople. Thus, for all practical purposes the People'ssuit is indistinguishable from a suit by the Commis-sioner, an intended recipient of the allegedly of-fending reports.

IV. DISPOSITION

We affirm the trial court's rulings that the City is aperson within the meaning of the FCA and the gov-ernment's claims did not come within the publicdisclosure bar *583 of that act. (Nos.A095918,A097793.) We also affirm the comprehensive judg-ment against Old Republic in its entirety. (No.A097793.) Parties to bear their own costs on thatappeal. We reverse the summary judgment in favorof PwC on the government's FCA cause of action,as well as the dismissal of the People's UCL claimfollowing the sustaining of PwC's demurer withoutleave to amend. (No. A095918.) PwC to pay costsof appeal.

KAY, P.J., and SEPULVEDA, J., concur.Cal.App. 1 Dist.,2005.State ex rel. Harris v. PricewaterhouseCoopers LLP125 Cal.App.4th 1219, 23 Cal.Rptr.3d 529, 05 Cal.Daily Op. Serv. 603, 2005 Daily Journal D.A.R.806

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