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People v. Sarpas

California Court of Appeals, Fourth District, Third Division

April 24, 2014

THE PEOPLE, Plaintiff and Respondent,
v.
HAKIMULLAH SARPAS et al., Defendants and Appellants.

Appeal from a judgment of the Superior Court of Orange County, No. 30-2009-00125950 Andrew P. Banks, Judge.

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COUNSEL

Law Offices of Murphy & Eftekhari, Thomas Murphy and Afshin Eftekhari for Defendants and Appellants.

Kamala D. Harris, Attorney General, Frances T. Grunder, Assistant Attorney General, Michele Van Gelderen and Sheldon H. Jaffe, Deputy Attorneys General, for Plaintiff and Respondent.

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OPINION

FYBEL, J.

Introduction

Hakimullah Sarpas and Zulmai Nazarzai operated a scheme by which they promised customers they would obtain loan modifications from lenders and prevent foreclosure of the customers’ homes. They operated this scheme through their jointly owned company, Statewide Financial Group, Inc. (SFGI), which did business as U.S. Homeowners Assistance (USHA). Sharon Fasela[1] was, among other things, the office manager of USHA and came up with the key misrepresentation that USHA had a 97 percent success rate. Customers paid USHA over $2 million but received no services in return. There was no credible evidence that USHA obtained a single loan modification, or provided anything of value, for its customers.

The Attorney General, on behalf of the People of the State of California, [2] commenced this action in July 2009 by filing a complaint against SFGI, USHA, Sarpas, Nazarzai, and Fasela (collectively referred to as Defendants), seeking injunctive relief, restitution, and civil penalties under California's unfair competition law (UCL), Business and Professions Code section 17200 et seq., [3] and California False Advertising Law (FAL), section 17500 et seq. Accompanying the complaint were declarations from 19 purported victims. SFGI was placed in receivership on the same day that the complaint was filed.

In July 2012, following a lengthy bench trial, the trial court issued a judgment and a 19 page statement of decision finding against Defendants. The court permanently enjoined USHA, Nazarzai, Sarpas, and Fasela, and ordered restitution be made to every eligible consumer requesting it, up to a maximum amount of $2, 047, 041.86. The court found USHA, Sarpas, and Nazarzai to be jointly and severally liable for the full amount of restitution, and Fasela to be jointly and severally liable with them for up to $147, 869 in restitution. The court imposed civil penalties against USHA, Sarpas, and Nazarzai, jointly and severally, in the amount of $2, 047, 041, and imposed additional civil penalties against Fasela, USHA, Sarpas, and Nazarzai, jointly and severally, in the amount of $360, 540.

In this appeal, Sarpas and Fasela challenge the judgment on six discrete grounds of error, each discussed in order in the Discussion section. (SFGI, USHA,

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and Nazarzai are not parties to this appeal.) As to each ground, we conclude (1) the trial court did not err by issuing a protective order limiting the Attorney General’s obligation to respond to thousands of special interrogatories; (2) the trial court did not err by receiving in evidence portions of the deposition transcripts of six USHA customers; (3) the trial court did not err by ordering Sarpas and Fasela to pay restitution; (4) the award and amount of civil penalties against Sarpas are proper, the award of civil penalties against Fasela is proper, but the amount of penalties against her must be recalculated; (5) Sarpas and Fasela were not denied their due process rights to confront and cross examine witnesses; and (6) the trial court did not err by receiving in evidence checks deposited into USHA’s bank account.

Based on these conclusions, we strike the civil penalties awarded against Fasela only and remand for the trial court to recalculate those penalties, but, in all other respects, affirm the judgment.

Facts

Sarpas was the 50 percent owner of SFGI, which did business as USHA. Nazarzai owned the other 50 percent. Sarpas and Nazarzai each received 50 percent of the company profits. From March 2008 to April 2009, Sarpas received $490, 000 in profits from SFGI. Sarpas also served as operations manager of SFGI and oversaw the company’s day to day operations.

Fasela worked as the office manager of SFGI for about one year, ending in July 2009. USHA paid Fasela $2, 746 in 2007, $135, 358 in 2008, and $11, 611 in 2009.

SFGI, through USHA, purported to offer loan modification services. USHA ran a “boiler room” telemarketing operation in which sales representatives, working in a “pit area, ” cold called potential customers to offer assistance with modifying the terms of home loans. In addition, sales representatives were available to receive calls from potential customers, usually people who were returning calls made by USHA sales representatives. SFGI purchased the contact information of potential customers from a “lead generating company.” Every USHA sales representative had a quota of calls to be made based on those leads.

Sales representatives were instructed to tell potential customers: “USHA is a full service loss mitigation and asset preservation company based out of California and we essentially help homeowners throughout the U.S. who have fallen behind on their mortgage payment due to some unfortunate circumstance within their household or maybe a hardship situation, in which case our legal staff will negotiate with their current lender to reduce their overall

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payment and make it affordable to continue living in their home.” A sales representative might tell a potential customer that USHA “works with lenders to get the terms of their client’s current mortgage changed by forcing the lender to comply with the new federal program.”

The cost of USHA’s services varied. The service fee schedule of charges given to sales representatives set a fee of $1, 800 for one out of state loan; $2, 500 for two out of state loans; $2, 500 for one California loan; and $3, 500 for two California loans. Sales representatives were instructed to charge as low as $1, 000 for lower income customers with low balance loans, and up to $4, 500 for higher income customers with high balance/high payment loans. Sales representatives also were instructed, “[i]f you see that an out of state lead has money please charge them California fees.” Charges had to be paid in advance.

To induce potential customers to pay these fees, USHA made various promises, including (1) USHA would obtain a significant reduction in the principal balance of the loan, which would lower the amount of monthly payments; (2) USHA would obtain a reduction in the interest rate on the loan, which would lower the amount of monthly payments; (3) USHA would get the lender to forgive any arrearages; (4) USHA would save the customer from foreclosure; (5) the loan modification process would not take long, from 90 days to eight weeks; (6) USHA would refund the money paid by the customer if it were unable to obtain a loan modification; (7) if USHA obtained a loan modification, the fees paid to USHA would be repaid to the customer by the lender or the government; and (8) USHA was an “attorney backed company” with a “legal team” working with it to get loan modifications.

Most striking, USHA represented it had a 97 percent success rate, that it had a success rate of “over 95 percent, ” or that USHA never had a case in which a loan modification was not approved. Fasela came up with the 97 percent success rate figure “in the beginning.” One customer testified the sales representative guaranteed USHA would obtain a loan modification.

In addition, customers were told to stop making their mortgage payments because doing so would make obtaining a loan modification easier. As a result, customers often suffered ruined credit, additional fees, foreclosure proceedings, and even loss of the home USHA had promised to save.

USHA made the representations orally in telephone calls from sales representatives and sometimes in letters purporting to set forth a loan modification proposal. A typical letter would propose (1) a reduction of the principal balance to the current property value, (2) conversion to a fixed rate loan, (3) a reduction of monthly payment, (4) forgiveness of arrearages, and

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(5) reporting the loan status as current to credit agencies. The letters requested the customer to complete and return forms to “allow us to move aggressively in bringing these challenges to conclusion immediately.” USHA routinely sent these letters to customers. Several customers testified they believed the letters reflected what USHA would obtain for them.

These representations were effective. During the 18 months prior to June 30, 2009, USHA took in over $2.22 million. One customer testified, “I was convinced by the—the word of [the USHA sales representative].” Another testified, “[t]he only reason I sent the money in is because he gave me a money back guarantee on that.”

After paying USHA’s fees, customers would have difficulty reaching anyone at USHA to find out the status of their loan modifications. Telephone calls and e mails went unanswered; sometimes the customer could not even reach voice mail, and when the customer was able to reach voice mail, the call was not returned When customers did get hold of someone, they might be told USHA was “still negotiating” or the matter was “in the hands of a negotiator.”

No credible evidence was presented at trial that USHA ever obtained a loan modification, or did anything of value, for any customer. USHA made no refunds to customers, despite its promises, and despite customer demands. Not only did USHA not have a legal team, it had no attorneys whatsoever working on loan modifications.

The case of Jerry Walton, a disabled man living in Mississippi, is a typical, and telling, example of how USHA operated its scam. Walton, who lives on a disability pension, was cold called by John Kanpur of USHA. Kanpur told Walton that for a payment of $1, 000, USHA would obtain a reduction in the interest rate on his home loan and that he would get his money back if USHA did not get the loan modification. Kanpur also told Walton, who was current on the loan, to stop making payments. As instructed, Walton sent USHA $1, 000 and stopped making payments on his home loan. When the lender contacted Walton about missed payments, he directed it to USHA. Jean Lute, who worked as a collector for the lender bank, twice called USHA to inform it that foreclosure proceedings were about to commence and that it was important for USHA to return her call. No one from USHA called her back. Walton had to pay about $1, 000 in extra costs to save his home from foreclosure, and never received a loan modification or a refund from USHA.

After receiving five complaints from Ohio residents, the consumer protection section of the Ohio Attorney General’s Office launched an investigation of USHA. As part of the investigation, consumer protection investigator

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Sheila Laverty called USHA and posed as a potential customer. In the phone call, Laverty said she lived in Columbus, Ohio, was behind on her mortgage payments, and was interested in learning about USHA’s services. A sales representative named Ian told Laverty that due to the Home Affordable Mortgage Program, “banks are now forced to work out loan modifications with borrowers that have a hardship, ” and that if Laverty qualified, she would get a lowered interest rate and “could get rid of any late payments and second mortgages.” Ian told Laverty that USHA “works with lenders to get the terms of their client’s current mortgage changed by forcing the lender to comply with the new federal program, ” that USHA did “about 200 loan modifications a month, ” and that USHA worked with a legal team. The quoted fee for USHA’s services was $3, 500.

Ian later e mailed Laverty several documents, including a letter, similar to the one described above, purporting to set forth a loan modification proposal. Laverty understood the letter as reflecting what USHA was offering to do for its customers. Also, according to Laverty, USHA had not complied with Ohio law requiring telephone solicitors to register with the Ohio Attorney General’s Office.

Discussion: Preface

Sarpas and Fasela identify six arguments by which they challenge the judgment. We start by addressing an issue which, though not expressly identified as one of those six arguments, underlies their challenge to the order of restitution and civil penalties. Only a handful of USHA customers testified at trial, and the deposition testimony of only six customers was read into evidence. Sarpas and Fasela argue (in the context of other issues) that the amount of restitution and civil penalties must be limited to those witnesses and cannot be ordered for USHA customers whose live testimony was not presented at trial.[4]

Section 17203 authorizes an order of restitution as a remedy for violations of section 17200. In part, section 17203 reads: “The court may make such orders or judgments, ... as may be necessary to restore to any person in interest any money or property, real or personal, which may have been acquired by means of such unfair competition.” Section 17535 likewise authorizes an order of restitution for a violation of section 17500.

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“The restitutionary remedies of section 17203 and 17535... are identical and are construed in the same manner.” (Cortez v. Purolator Air Filtration Products Co. (2000) 23 Cal.4th 163, 177, fn. 10 [96 Cal.Rptr.2d 518, 999 P.2d 706].)

“In a suit for violation of the unfair competition law, ‘orders for restitution’ are those ‘compelling a UCL defendant to return money obtained through an unfair business practice to those persons in interest from whom the property was taken....’ [Citation.]” (People ex rel. Kennedy v. Beaumont Investment, Ltd. (2003) 111 Cal.App.4th 102, 134 [3 Cal.Rptr.3d 429] (Kennedy).) The trial court has broad discretion to order restitution. (Cortez v. Purolator Air Filtration Products Co., supra, 23 Cal.4th at p. 180.)

Restitution under the UCL and FAL may be ordered without individualized proof of harm. (In re Tobacco II Cases (2009) 46 Cal.4th 298, 326 [93 Cal.Rptr.3d 559, 207 P.3d 20] [" . . . 'California courts have repeatedly held that relief under the UCL [(including restitution)] is available without individualized proof of deception, reliance and injury’”]; People v. JTH Tax, Inc. (2013) 212 Cal.App.4th 1219, 1255 [151 Cal.Rptr.3d 728] [restitution under the FAL]; People ex rel. Bill Lockyer v. Fremont Life Ins. Co. (2002) 104 Cal.App.4th 508, 532 [128 Cal.Rptr.2d 463] (Fremont Life) [restitution under the UCL]; Massachusetts Mutual Life Ins. Co. v. Superior Court (2002) 97 Cal.App.4th 1282, 1288 [119 Cal.Rptr.2d 190]; Prata v. Superior Court (2001) 91 Cal.App.4th 1128, 1144 [111 Cal.Rptr.2d 296]; People v. Toomey (1984) 157 Cal.App.3d 1, 25-26 [203 Cal.Rptr. 642]); see Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1267 [10 Cal.Rptr.2d 538, 833 P.2d 545] [the Legislature considered UCL deterrence “so important that it authorized courts to order restitution without individualized proof of deception, reliance, and injury”].)

The defendant in Fremont Life, supra, 104 Cal.App.4th at page 531, argued that “across the board restitution may not be ordered without proof that all consumers were deprived of money or property as a result of an unfair business practice.” The Court of Appeal rejected that argument as contradicting California Supreme Court authority and “the rule that restitution under the UCL may be ordered without individualized proof of harm.” (Id. at pp. 531, 532.) The court in People v. Toomey, supra, 157 Cal.App.3d at pages 25-26, likewise rejected an argument that restitution under the UCL was limited to victims who testified at trial.

Because individualized proof of harm was unnecessary, the Attorney General was not required to present testimony from each and every USHA customer for whom restitution and civil penalties were being sought. Sarpas and Fasela faced no surprise when they walked into trial because the law was

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settled that restitution and civil penalties under the UCL and FAL could be ordered against them without individualized proof of harm. The Attorney General presented evidence sufficient to support a reasonable inference of deception and harm as to all USHA customers, and, therefore, the restitution and civil penalties as to all USHA customers were lawful.

Discussion

I.

The Trial Court Did Not Err by Issuing the Protective Order.

A. Background

Sarpas and Fasela argue the trial court erred by issuing a protective order limiting the Attorney General’s obligation to respond to thousands of special interrogatories. The trial court did not err by issuing the protective order.

1. First Motions to Compel

Eleven days after the complaint was filed, Sarpas and Fasela each served the Attorney General with a set of 83 special interrogatories (the first sets of special interrogatories). The first sets of special interrogatories asked generally whether the Attorney General made certain contentions and, if so, to state all facts supporting those contentions. The Attorney General served responses to the first sets of special interrogatories in September 2009. The responses in total were about 400 pages.

Sarpas and Fasela each brought a motion to compel further responses to every interrogatory of the first sets of special interrogatories (the first motions to compel). In April 2010, the trial court denied the first motions to compel, stating in a minute order: “Plaintiff... was proper in its Responses. Plaintiff can only provide and only need[] provide the information that it has at the time it responds to particular discovery. Plaintiff apparently did this here with as much specificity to a particular Defendant as the information it had would allow. The objections that Plaintiff made were proper and were not tested by the Motions Defendants brought, in any event. As time goes on, supplemental discovery may well develop more particularized responses as to some of the defendants, victims, dates etc.”

2. Second Motions to Compel

On the same day that the trial court denied the first motions to compel, Sarpas and Fasela propounded a request ...


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