Case Name: Rocke Garcia, et al. v. Twin Valley Incorporated, et al.
Case No.: 17-CV-311119

This is a putative class action on behalf of customers of Twin Valley Incorporated (“TVI”), a public water utility. Before the Court is plaintiff’s motion for preliminary approval of a settlement.

I. Factual and Procedural Background

As alleged in the operative First Amended Complaint (“FAC”), TVI and its alter ego Steven Havens own and operate a public water utility serving approximately 96 residential customers in unincorporated Santa Clara County. (FAC, ¶ 1.) TVI is regulated by the California Public Utilities Commission and the State Water Resources Control Board, Division of Drinking Water (“DDW”). (Id. at ¶ 2.)

On January 11, 2018—after this action was filed—DDW applied for the appointment of a receiver to take control of the TVI water system (the “System”), stating that Havens “is unable or unwilling to address Twin Valley’s water quality and quantity and storage problems, which now pose an imminent threat to the health and safety of the system’s customers.” (FAC, ¶ 3.) DDW’s action followed TVI’s operation of the System in a deteriorating and dangerous condition for decades, including by failing to comply with multiple citations and compliance orders from regulators. (Id. at ¶¶ 4-15, 41-83.) In addition to serious risks to their health and safety, customers have experienced repeated water outages ranging from a day to a month, all without warning, and are routinely billed on the basis of false and fraudulent meter readings. (Id. at ¶¶ 13, 88.)

TVI is in terrible financial condition and is in default on fines, fees, loan payments, and other bills. (FAC, ¶ 16.) Neither TVI nor Havens have a bank account, which Havens recently bragged made it impossible for judgment creditors to levy his assets. (Ibid.) Plaintiffs allege that funds from rate increases that were set aside for water testing and maintenance have not been used for these purposes. (Id. at ¶¶ 84-87.) Moreover, Havens has gone door to door offering discounts to customers who agree to “prepay” their annual water bills, and has used these prepayments for his personal benefit rather than to cover TVI’s operating expenses. (Id. at ¶ 89.)

Based on these allegations, plaintiffs assert putative class claims under (1) Public Utilities Code section 2106, which authorizes a private cause of action for damages against a public utility for violations of California law; (2) breach of implied contract; (3) breach of the implied covenant of good faith and fair dealing; (4) private nuisance; and (5) injunctive relief under Health & Safety Code section 116670, addressing failures to comply with primary drinking water standards.

After this action was filed, TVI hired an operator for the system named Miles Farmer. Based in part on the discovery of new information by Mr. Farmer, DDW filed an ex parte application for the appointment of a receiver, which the Court granted on February 2, 2018 in the related action of California State Water Resources Control Board, Division of Drinking Water v. Twin Valley Inc., et al. (Super. Ct. Santa Clara County, No. 18-CV-321727). According to plaintiffs, the receiver soon undertook emergency fixes to the system; however, plaintiffs continued to prosecute this action in order to achieve a resolution ensuring that the system would be sold as soon as possible to a third party, without interference by Havens or TVI.

The parties have now reached a settlement. Plaintiffs move for an order preliminarily approving the settlement, provisionally certifying the settlement class, approving the form and method for providing notice to the class, and scheduling a final fairness hearing.

II. Legal Standards for Approving a Class Action Settlement

Generally, “questions whether a settlement was fair and reasonable, whether notice to the class was adequate, whether certification of the class was proper, and whether the attorney fee award was proper are matters addressed to the trial court’s broad discretion.” (Wershba v. Apple Computer, Inc. (2001) 91 Cal.App.4th 224, 234-235, citing Dunk v. Ford Motor Co. (1996) 48 Cal.App.4th 1794, disapproved of on other grounds by Hernandez v. Restoration Hardware, Inc. (2018) 4 Cal.5th 260.)

In determining whether a class settlement is fair, adequate and reasonable, the trial court should consider relevant factors, such as the strength of plaintiffs’ case, the risk, expense, complexity and likely duration of further litigation, the risk of maintaining class action status through trial, the amount offered in settlement, the extent of discovery completed and the stage of the proceedings, the experience and views of counsel, the presence of a governmental participant, and the reaction of the class members to the proposed settlement.

(Wershba v. Apple Computer, Inc., supra, 91 Cal.App.4th at pp. 244-245, internal citations and quotations omitted.)

In general, the most important factor is the strength of plaintiffs’ case on the merits, balanced against the amount offered in settlement. (See Kullar v. Foot Locker Retail, Inc. (2008) 168 Cal.App.4th 116, 130.) Still, the list of factors is not exclusive and the court is free to engage in a balancing and weighing of factors depending on the circumstances of each case. (Wershba v. Apple Computer, Inc., supra, 91 Cal.App.4th at p. 245.) The court must examine the “proposed settlement agreement to the extent necessary to reach a reasoned judgment that the agreement is not the product of fraud or overreaching by, or collusion between, the negotiating parties, and that the settlement, taken as a whole, is fair, reasonable and adequate to all concerned.” (Ibid., quoting Dunk v. Ford Motor Co., supra, 48 Cal.App.4th at p. 1801, internal quotation marks omitted.)

The burden is on the proponent of the settlement to show that it is fair and reasonable. However “a presumption of fairness exists where: (1) the settlement is reached through arm’s-length bargaining; (2) investigation and discovery are sufficient to allow counsel and the court to act intelligently; (3) counsel is experienced in similar litigation; and (4) the percentage of objectors is small.”

(Wershba v. Apple Computer, Inc., supra, 91 Cal.App.4th at p. 245, citing Dunk v. Ford Motor Co., supra, 48 Cal.App.4th at p. 1802.) The presumption does not permit the Court to “give rubber-stamp approval” to a settlement; in all cases, it must “independently and objectively analyze the evidence and circumstances before it in order to determine whether the settlement is in the best interests of those whose claims will be extinguished,” based on a sufficiently developed factual record. (Kullar v. Foot Locker Retail, Inc., supra, 168 Cal.App.4th at p. 130.)

III. Settlement Process

According to a declaration by their counsel, the lead plaintiffs agreed to serve as the class representatives on behalf of a larger group of TVI customers who funded and actively participated in the litigation, after concluding that DDW was not taking adequate measures to address the deteriorating condition of the System. The lead plaintiffs and many other customers knew from the outset that the possibility of collecting on a monetary judgment against Havens or TVI was questionable. They understood that the best way to achieve the provision of safe, clean, affordable, and reliable water to customers was to arrange for a sale of the system to a reputable purchaser, an approach that was explained to customers at a community meeting shortly after the action was filed.

Even before the customers filed suit, West San Martin Water Company (“WSM”) was contacted as a potential purchaser, and it provided a letter of intent soon after the action was filed. Havens was initially not opposed to the sale, and a meeting was arranged for August of 2017. However, Havens subsequently obtained counsel and began to actively litigate this action and resist the sale. He backed out of the August 2017 meeting and indicated that an individual named Donald Banning, who plaintiffs contend was a straw buyer, might purchase the system. The sale to WSM ultimately fell through due to its owner’s concerns about complications relating to the receivership, the present action, and Havens’s ability to interfere with a sale.

Plaintiffs continued to seek a settlement that would prohibit Havens from interfering with a sale, and the parties executed an initial settlement agreement in March of 2018. Havens agreed to waive any right to appeal a sale of the system, provided that DDW and the receiver agreed to allow at least $50,000 of any sale proceeds to pass through to him, conditioned on his cooperation with the receiver and his compliance with the Court’s orders. However, neither the receiver nor DDW would agree to this term, and Havens continued to disregard the receiver’s requests and the Court’s orders.

Meanwhile, WSM reached out to Great Oaks Water Company, a large, private utility, and the possibility that Great Oaks could purchase both the system and WSM was explored. A dispute over Havens’s refusal to produce financial documentation to the receiver threatened to derail these discussions as well, but after the Court issued an order to show cause regarding the imposition of monetary sanctions on Havens, a new settlement was achieved. That agreement was executed on December 19, 2018, and is now before the Court for preliminary approval. According to plaintiffs, the sale to Great Oaks is proceeding.

IV. Provisions of the Settlement

Pursuant to the settlement, defendants agree that the system shall be sold to a third party by the receiver, subject to approval by the Court. They agree not to file an objection to a sale in the trial court, and will not appeal a trial court order approving a sale. They will also pay $10 to the named plaintiffs, so that plaintiffs can seek their fees and costs as the prevailing party out of the sale proceeds. In exchange, plaintiffs will dismiss this action with prejudice and will, when they deem it appropriate, “continue to attempt to dissuade the Receiver from making unreasonable demands and requests from Defendants, including, without limitation, demands for financial records, reports and documents which do not exist or cannot reasonably be recreated.”

The named parties also agree to a mutual, general release, which specifically excludes “claims which are unique to certain members of the Plaintiff Class and which do not relate to the allegations in the Lawsuit or to claims or damages suffered by all members of the Plaintiff Class,” which “may include for example, claims for water credits or refunds, for personal injury or property damage, or for repayment of goods or services rendered.”

The settlement provides that no putative class members will be permitted to opt-out of the settlement or settlement class, while the proposed class notice states

Class members may choose to remain in the Class or to opt out of it. However, if you opt out of the Class, THE ENTIRE SETTLEMENT WILL BE NULL AND VOID. If this occurs, Defendants will be able to (a) assert a right to own and operate the System in the future, (b) object to a sale with the Court, and (c) appeal to the Court of Appeals an order granting a sale of the system.

The Court interprets the settlement to allow for opt-outs as described in more detail in the class notice.

V. Fairness of the Settlement

Having engaged with the parties at length in an effort to bring this action to a successful resolution, the Court is personally familiar with the difficult dynamics at play. The Court agrees with plaintiffs’ assessment that the best outcomes that can likely be achieved through this litigation are the repair of the system and its sale to a reputable buyer without interference by the defendants. Plaintiffs’ efforts throughout the case, culminating in the settlement before the Court, have brought the achievement of these objectives within reach. The Court is satisfied that the dismissal of this action in exchange for defendants’ agreement not to interfere with a sale of the system is in the best interests of the class.

VI. Proposed Settlement Class

Plaintiff requests that the following settlement class be provisionally certified:

All persons and entities who receive water from the Twin Valley water system.

A. Legal Standard for Certifying a Class for Settlement Purposes

Rule 3.769(d) of the California Rules of Court states that “[t]he court may make an order approving or denying certification of a provisional settlement class after [a] preliminary settlement hearing.” California Code of Civil Procedure Section 382 authorizes certification of a class “when the question is one of a common or general interest, of many persons, or when the parties are numerous, and it is impracticable to bring them all before the court ….” As interpreted by the California Supreme Court, Section 382 requires the plaintiff to demonstrate by a preponderance of the evidence (1) an ascertainable class and (2) a well-defined community of interest among the class members. (Sav-On Drug Stores, Inc. v. Superior Court (Rocher) (2004) 34 Cal.4th 319, 326, 332.)

The “community-of-interest” requirement encompasses three factors: (1) predominant questions of law or fact, (2) class representatives with claims or defenses typical of the class, and (3) class representatives who can adequately represent the class. (Ibid.) “Other relevant considerations include the probability that each class member will come forward ultimately to prove his or her separate claim to a portion of the total recovery and whether the class approach would actually serve to deter and redress alleged wrongdoing.” (Linder v. Thrifty Oil Co. (2000) 23 Cal.4th 429, 435.) The plaintiff has the burden of establishing that class treatment will yield “substantial benefits” to both “the litigants and to the court.” (Blue Chip Stamps v. Superior Court (Botney) (1976) 18 Cal.3d 381, 385.)

In the settlement context, “the court’s evaluation of the certification issues is somewhat different from its consideration of certification issues when the class action has not yet settled.” (Luckey v. Superior Court (Cotton On USA, Inc.) (2014) 228 Cal.App.4th 81, 93.) As no trial is anticipated in the settlement-only context, the case management issues inherent in the ascertainable class determination need not be confronted, and the court’s review is more lenient in this respect. (Id. at pp. 93-94.) However, considerations designed to protect absentees by blocking unwarranted or overbroad class definitions require heightened scrutiny in the settlement-only class context, since the court will lack the usual opportunity to adjust the class as proceedings unfold. (Id. at p. 94.)

B. Ascertainable Class

“The trial court must determine whether the class is ascertainable by examining (1) the class definition, (2) the size of the class and (3) the means of identifying class members.” (Miller v. Woods (1983) 148 Cal.App.3d 862, 873.) “Class members are ‘ascertainable’ where they may be readily identified without unreasonable expense or time by reference to official records.” (Rose v. City of Hayward (1981) 126 Cal.App.3d 926, 932.)

Here, the estimated 92 metered connections at issue (which serve approximately 200 customers) have already been identified, and the receiver has already created a list-serv email system to communicate with the class. The Court accordingly finds that the class is numerous, ascertainable, and appropriately defined.

C. Community of Interest

With respect to the first community of interest factor, “[i]n order to determine whether common questions of fact predominate the trial court must examine the issues framed by the pleadings and the law applicable to the causes of action alleged.” (Hicks v. Kaufman & Broad Home Corp. (2001) 89 Cal.App.4th 908, 916.) The court must also give due weight to any evidence of a conflict of interest among the proposed class members. (See J.P. Morgan & Co., Inc. v. Superior Court (Heliotrope General, Inc.) (2003) 113 Cal.App.4th 195, 215.) The ultimate question is whether the issues which may be jointly tried, when compared with those requiring separate adjudication, are so numerous or substantial that the maintenance of a class action would be advantageous to the judicial process and to the litigants. (Lockheed Martin Corp. v. Superior Court, supra, 29 Cal.4th at pp. 1104-1105.) “As a general rule if the defendant’s liability can be determined by facts common to all members of the class, a class will be certified even if the members must individually prove their damages.” (Hicks v. Kaufman & Broad Home Corp., supra, 89 Cal.App.4th at p. 916.)

Here, common legal and factual issues predominate. Plaintiffs’ claims all arise from defendants’ management of the System to the detriment of the similarly-situated class members.

As to the second factor,

The typicality requirement is meant to ensure that the class representative is able to adequately represent the class and focus on common issues. It is only when a defense unique to the class representative will be a major focus of the litigation, or when the class representative’s interests are antagonistic to or in conflict with the objectives of those she purports to represent that denial of class certification is appropriate. But even then, the court should determine if it would be feasible to divide the class into subclasses to eliminate the conflict and allow the class action to be maintained.

(Medrazo v. Honda of North Hollywood (2008) 166 Cal. App. 4th 89, 99, internal citations, brackets, and quotation marks omitted.)

Like other members of the class, plaintiffs are customers of the System and have been harmed by defendants’ actions. The anticipated defenses are not unique to plaintiffs, and there is no indication that plaintiffs’ interests are otherwise in conflict with those of the class.

Finally, adequacy of representation “depends on whether the plaintiff’s attorney is qualified to conduct the proposed litigation and the plaintiff’s interests are not antagonistic to the interests of the class.” (McGhee v. Bank of America (1976) 60 Cal.App.3d 442, 450.) The class representative does not necessarily have to incur all of the damages suffered by each different class member in order to provide adequate representation to the class. (Wershba v. Apple Computer, Inc. (2001) 91 Cal.App.4th 224, 238.) “Differences in individual class members’ proof of damages [are] not fatal to class certification. Only a conflict that goes to the very subject matter of the litigation will defeat a party’s claim of representative status.” (Ibid., internal citations and quotation marks omitted.)

Plaintiffs have the same interest in maintaining this action as any class member would have. Further, based on the Court’s own assessment of counsel’s work in this case, they have hired able and competent counsel. Plaintiffs have sufficiently demonstrated adequacy of representation. However, plaintiffs’ counsel shall file a declaration setting forth his relevant experience prior to final approval of the settlement.

D. Substantial Benefits of Class Certification

“[A] class action should not be certified unless substantial benefits accrue both to litigants and the courts. . . .” (Basurco v. 21st Century Ins. (2003) 108 Cal.App.4th 110, 120, internal quotation marks omitted.) The question is whether a class action would be superior to individual lawsuits. (Ibid.) “Thus, even if questions of law or fact predominate, the lack of superiority provides an alternative ground to deny class certification.” (Ibid.) Generally, “a class action is proper where it provides small claimants with a method of obtaining redress and when numerous parties suffer injury of insufficient size to warrant individual action.” (Id. at pp. 120-121, internal quotation marks omitted.)

Here, there are an estimated 200 members of the proposed class. It would be inefficient for the Court to hear and decide the same issues separately and repeatedly for each class member. Further, it would be cost prohibitive for each class member to file suit individually, as each member would have the potential for little to no monetary recovery. It is clear that a class action provides substantial benefits to both the litigants and the Court in this case.

VII. Notice

The content of a class notice is subject to court approval. (Cal. Rules of Court, rule 3.769(f).) “The notice must contain an explanation of the proposed settlement and procedures for class members to follow in filing written objections to it and in arranging to appear at the settlement hearing and state any objections to the proposed settlement.” (Ibid.) In determining the manner of the notice, the court must consider: “(1) The interests of the class; (2) The type of relief requested; (3) The stake of the individual class members; (4) The cost of notifying class members; (5) The resources of the parties; (6) The possible prejudice to class members who do not receive notice; and (7) The res judicata effect on class members.” (Cal. Rules of Court, rule 3.766(e).)

Here, the notice describes the lawsuit, explains the settlement, and instructs class members that they may object to the settlement. As stated above, the notice instructs class members that they may opt of out the class, but that doing so will void the entire settlement. Class members are informed that the representative plaintiffs and other customers have funded the lawsuit, and will seek to recover their fees and costs following final approval. After class counsel’s unpaid fees and costs are reimbursed, any excess fees will be returned to the representative plaintiffs, who will reimburse other customers who contributed pro rata.

The notice is generally adequate, but must be modified to provide a response deadline and a date for the final fairness hearing. The notice must also be modified to instruct class members that they may appear at the final fairness hearing and make an oral objection even if they do not submit a written objection. Finally, class members must be informed that the representative plaintiffs will seek to recover their fees out of the sale proceeds.

Turning to the notice procedure, the parties propose that the notice be e-mailed to class members using the same list-serv email system the receiver has used to communicate with them. Alternatively, plaintiff proposes that notice be mailed to each class member. The Court concludes that both forms of notice should be utilized. Plaintiffs shall submit a more detailed procedure for emailing and mailing notice to the class as soon as possible.

VIII. Conclusion and Order

Plaintiffs’ motion for preliminary approval is GRANTED. The following class will be provisionally certified for settlement purposes:

All persons and entities who receive water from the Twin Valley water system.

Prior to the hearing on this matter if possible, plaintiffs shall submit a detailed procedure for emailing and mailing notice to the class, along with an updated form of notice incorporating the modifications directed by the Court herein. Plaintiffs shall appear at the hearing on this matter to address the notice process with the Court, including the selection of dates for the final fairness hearing and for class members to opt out of the settlement or submit a written objection.

The Court will prepare the order.