May 1997 Vol. 3 No. 5 ISSN 1087-6219
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In This Issue

• Ninth Circuit rules anti-affirmative action proposition constitutional
• Draw on letter of credit does not violate anti-deficiency laws
• Dillon v. Legg claim may be based on hearing the crash
• Discrimination claim based on work-related disability preempted by Workers Compensation remedy
• Insurer's claims manual is discoverable
• County may not include ban on gun sales in fairgrounds lease
• UPDATES

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Ninth Circuit rules anti-affirmative action proposition- constitutional

The Ninth Circuit has overturned a preliminary injunction against implementation of Proposition 209. The court ruled that the proposition's ban on "preferential treatment" does not violate a federal right.

The California electorate adopted the California Civil Rights Initiative on November 5, 1996. It provides that state and local government "shall not discriminate against, or grant preferential treatment to, any individual or group on the basis of race, sex, color, ethnicity, or national origin in the operation of public employment, public education, or public contracting." Cal. Const. art. I, § 31(a).

The NAACP and others filed suit, claiming that the ban on affirmative action programs denied women and minorities equal protection. They also argued that Title VII preempted the ban.

Proposition 209 does not violate the equal protection clause. Under what the court called "conventional" equal protection analysis, a ban on preferential treatment does not classify individuals by race or gender.

The United States Supreme Court has also used a "political structure" analysis in equal protection cases. Hunter v. Erickson, 393 U.S. 385 (1969) (striking down city charter amendment that withdrew city council authority to address racial discrimination in housing without voter approval); Washington v. Seattle Sch. Dist. No. 1, 458 U.S. 457 (1982) (striking down statewide initiative that barred school districts from bussing to desegregate).

That analysis did not invalidate Proposition 209, which prohibits all government units from affording preferential treatment to anyone based on race or gender. The proposition does not isolate antidiscrimination laws from a specific area delegated to local entities. It also does not treat antidiscrimination laws differently in one area than in another.

The preemption argument failed, because Title VII expressly only preempts state laws that "require or permit the doing of any act which would be an unlawful employment practice." Proposition 209 "does not remotely purport to require the doing of any [such] act."

Coalition for Economic Equity v. Wilson, 1997 WL 160667 (9th Cir. Apr. 8, 1997).

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Draw on letter of credit does not violate anti-deficiency laws

The California Supreme Court has ruled that recent legislation placing letters of credit outside the proscriptions of the anti-deficiency statutes did not change prior law. See Cal. Civ. Proc. Code § 580.5. Since the legislation was a mere clarification, a post-foreclosure draw on a letter of credit did not violate anti-deficiency law. The decision reverses a contrary ruling by the court of Appeal that was discussed in the November 1995 issue of Appellate Decisions Noted.

Beverly Hills Business Bank loaned Vista Place Associates $3,250,000, secured by a deed of trust on Vista's real property. As part of a loan modification, each of Vista's three partners provided a $125,000 letter of credit as additional security for the loan. Western Security Bank issued the letters of credit. Beverly Hills acquired the real property security through a nonjudicial foreclosure after Vista defaulted on the loan. Beverly Hills attempted to recover some of the $500,000 deficiency that remained after the foreclosure sale by foreclosing on the letters of credit. Western refused to honor the draws.

Code of Civil Procedure section 580d prohibits a lender from recovering a judgment for any deficiency remaining after a nonjudicial foreclosure. Two significant Court of Appeal decisions had said that section 580d should be interpreted broadly to bar any personal liability for the debtor following a nonjudicial foreclosure. Union Bank v. Gradsky, 265 Cal. App. 2d 40 (1968) (lender may not recover deficiency from a guarantor based on estoppel arising from destruction of guarantor's subrogation rights against the debtor); Commonwealth Mortgage Assurance Co. v. Superior Court, 211 Cal. App. 3d 508 (1989) (mortgage guaranty insurer could not get reimbursement from debtor for payments to lender following a nonjudicial foreclosure).

The Supreme court distinguished Gradsky and Commonwealth Mortgage as based on guaranty and suretyship relationships. Letters of credit are different, because the issuing bank's obligation to honor draws is independent of the underlying transaction between the lender and debtor. They are additional security for the loan. Draws on letters of credit do not offend section 580d, because it does not prohibit security in addition to the deed of trust.

The Supreme Court's holding will matter only to letters of credit issued before September 15, 1994, the effective date of the new legislation. The Supreme Court nonetheless went to the trouble of writing an opinion to explain the errors in the Court of Appeal decision. It also criticized some of the broader statements in Gradsky and Commonwealth Mortgage, and withheld any express endorsement of their holdings. Additional limits on liberal application of the antideficiency statutes may be on the way.

Western Security Bank v. Superior Court, 62 Cal. Rptr. 2d 243 (1997).

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Dillon v. Legg claim may be based on hearing the crash

The Second District Court of Appeal in Los Angeles has ruled that a bystander may recover in negligence for emotional distress based on hearing the injury-causing event.

Lucy Chen died after an unsecured kitchen island crushed her at the house that her parents were purchasing from Prudential. Her parents were in other rooms, and did not see the accident. They heard a crash in the kitchen. Knowing that Lucy had been in the vicinity, the parents immediately ran to the kitchen where they saw the island on top of her.

A bystander may recover emotional distress damages if he or she (1) is closely related to the injured person, (2) is present at the scene of the injury-producing event and is then aware that it is injuring the victim, and (3) suffers emotional distress beyond what would be expected in a disinterested witness. Thing v. La Chusa, 48 Cal. 3d 644 (1989).

The Court of Appeal held that "awareness" is not limited to visual observation. It was enough that Lucy's parents heard the crash and were aware of Lucy's proximity to it.

Chen v. Superior Court, 1997 WL 169278 (Cal. Ct. App. Apr. 10, 1997).

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Discrimination claim based on work-related disability preempted by Workers Compensation remedy

The First District Court of Appeal in San Francisco has ruled than the Workers Compensation Act preempts a claim under the Fair Employment and Housing Act (FEHA) for discrimination based on a work-related injury. The California Supreme Court has granted review in two cases that reached opposite conclusions on the issue. Cammack v. GTE Corp., 48 Cal. App. 4th 207 (1996) (workers compensation does preempt such claims), review granted, No. S056183 (Nov. 26, 1996); City of Moorpark v. Superior Court, 49 Cal. App. 4th 973 (1996) (workers compensation no longer preempts such claims), review granted, No. S057121 (Nov. 26, 1996). Those decisions were discussed in the September 1996 and October 1996 issues of Appellate Decisions Noted.

A long line of cases had held that the Workers Compensation Act remedy for disability discrimination preempts any remedy under FEHA. See Langridge v. Oakland Unified Sch. Dist., 25 Cal. App. 4th 664 (1994); Pickrel v. General Telephone Co., 205 Cal. App. 3d 1058 (1988)

However, a 1993 amendment to FEHA provided that FEHA did not repeal other anti-discrimination provisions "unless those provisions provide less protection to the enumerated classes of persons covered under this part." This Court of Appeal ruled that the Legislature did not intend to repeal "the well-established remedy under [Labor Code] section 132a for employment discrimination based on work-related injury."

Andreacchi v. Price Co., 53 Cal. App. 4th 646 (1997).

Practice Tip One should not rely too heavily on this decision. The Supreme Court may well grant review and then hold the case until it decides Cammack and City of Moorpark. Even if the Supreme Court does not grant review of this decision, its eventual ruling in those two cases will supersede the Court of Appeal's opinion in this case.

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Insurer's claims manual is discoverable

The Second District Court of Appeal in Los Angeles has ruled that an insurer must produce its claims manual in litigation with its insured after denying coverage.

Glenfed Development Corp. sued National Union after it denied coverage of various claims against Glenfed for defective construction caused by subcontractors. National Union resisted discovery of its policy manual on the grounds that (1) it was distributed after Glenfed's policy was issued, (2) the lawsuit did not involve claims handling procedures, (3) the claims manual did not refer to policy terms, and (4) extrinsic evidence of the policy's interpretation would be inadmissible at trial.

The Court of Appeal disagreed. (1) Since the policy language in question is still used, a claims manual distributed after the policy was issued may bear on interpretation. (2) The contention that National Union's legal position on interpretation did not affect claim handling was "silly." (3) The claims manual could not have been completely silent about policy terms. (4) Extrinsic evidence about the insured's reasonable expectations might be admissible. In any event, the claims manual might lead to other admissible evidence.

Glenfed Development Corp. v. Superior Court, 62 Cal. Rptr. 2d 195 (Ct. App. 1997).

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County may not include ban on gun sales in fairgrounds lease

The Ninth Circuit has dealt a blow to Santa Clara County's attempt to ban gun sales at the County fairgrounds. The lease clause containing the ban violated the First Amendment protection for commercial speech.

Santa Clara County added a provision to its lease with the fairgrounds operator that prohibited "any person from selling, offering for sale, supplying, delivering, or giving possession or control of firearms or ammunition to any other person at a gun show at the fairgrounds."

Merely exchanging a gun for money is not "speech protected by the First Amendment. However, offering to exchange a gun for money is commercial speech. Further, selling guns is lawful activity. Therefore, the County had to prove that (1) it had a substantial government interest, (2) the regulation advanced its interest, and (3) the regulation was not more extensive than necessary to serve its interest. Central Hudson Gas & Elec. Corp. v. Public Serv. Comm'n, 447 U.S. 557 (1980).

The lease provision did not directly advance an interest in curtailing illegal acquisition and use of guns, and was more extensive than necessary. The County apparently should have attempted to ban gun shows completely. (However, the court noted that the County might not have the power to enact such an ordinance.)

The County's interest in not appearing to promote gun usage might not qualify as a substantial interest. In any event, there was no evidence that anyone believed that the County was promoting gun usage.

Nordyke v. Santa Clara County, 1997 WL 155150 (9th Cir. 1997).

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UPDATES

Subsequent treatment of decisions reported on in earlier issues:

Folkerson v. Circus Circus Enter., Inc. (March 1997 issue), now reported at 107 F.3d 754 (9th Cir. 1997).

Gutowsky v. County of Placer (April 1997 issue), now reported at 108 F.3d 256 (9th Cir. 1997).

Papike v. Tambrands Inc. (March 1997 issue), now reported at 107 F.3d 737 (9th Cir. 1997).

Prilliman v. United Air Lines, Inc. (April 1997 issue), now reported at 62 Cal. Rptr. 2d 142 (Ct. App. 1997).

Somers v. Thurman (April 1997 issue), now reported at 109 F.3d 614 (9th Cir. 1997).

Warden v. State Bar of California (April 1997 issue), now reported at 53 Cal. App. 4th 510 (1997).

Western Security Bank, N.A. v. Beverly Hills Business Bank (November 1995 issue), superseded by 62 Cal. Rptr. 2d 243 (1997).

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