In today's litigious society, parties are quick to sue others but, due to the demands of life, defendants will oftentimes overlook the lawsuit. Doing so typically results in the entry of a judgment by default - meaning the defendant did not appear in the lawsuit to defend against the complaint. The plaintiff - now the judgment creditor by virtue of his or her judgment - will then seek to use the judgment to seize the assets of the defendant, the judgment debtor.
Once aware of the judgment enforcement efforts against them, judgment debtors typically will seek legal counsel in an attempt to set aside or vacate the judgment entered. But there are procedural requirements to follow; the judgment debtor must, above all else, act quickly to ensure their rights are protected.
A. The process for obtaining a default judgment.
Obtaining a judgment by default is a two-step process. Before a default judgment can be entered, a plaintiff must first request and obtain an entry of default against a defendant. Once the court has entered default, the defendant can no longer appear in the proceedings other than to challenge the entry of default. Once the defendant is in default, the plaintiff then typically files a detailed "prove-up" motion seeking a default judgment from the court. If the court grants the prove-up motion, a judgment is issued against the defendant. The plaintiff can now seek to enforce that judgment.
B. If the failure to defend is a result of the neglect or mistake of the defendants, a defendant can seek discretionary relief from entry of default or entry of a default judgment within six months after default was initially entered. (Code Civ. Proc., § 473(b).)
If default has been entered but a judgment has not yet issued, a defendant has six months to seek relief from entry of that default on the grounds of "mistake, inadvertence, surprise, or excusable neglect" pursuant to section 473(b) of the California Code of Civil Procedure. In essence, the defendant must assert why he or she did not respond to the complaint by setting forth a showing of mistake, inadvertence, surprise, etc.
Often, however, the defendant is unaware of the entry of default at the time a default judgment is entered. Once default judgment has been entered, the defendant/judgment debtor again has six months to seek relief under Section 473(b) on the grounds noted above. But even if the judgment debtor moves for relief within six months of issuance of the default judgment, the court will refuse to vacate the default under Section 473(b) if the motion is brought more than six months after entry of default. Vacating the judgment would be an "idle act." This is because even if it were vacated, the defendant would remain in default, unable to oppose any subsequent "prove-up" motion. (See, e.g., Pulte Homes Corp. v. Williams Mechanical, Inc. (2016) 2 Cal.App.5th 267, 273.)
C. If the failure to defend is the fault of their attorney, the defendants can seek mandatory relief within six months of entry of the default judgment. (Code Civ. Proc., § 473(b).)
A judgment debtor may obtain relief from a default judgment if they seek said relief within six months of entry of the default judgment - even if default was entered more than six months prior - if their attorney attests that the failure to defend was a result of the attorney's mistake, inadvertence, surprise, or neglect. (Code Civ. Proc., § 473(b).) Should the attorney do so, relief from the default judgment is mandatory.
The court will relieve the party from both the default judgment and the entry of default. (See Cisneros v. Vueve (1995) 37 Cal.App.4th 906, 909.) This makes a motion to vacate based on attorney fault is a useful tool if the defendant blew the six-month deadline from the date of entry of default so long as it has not yet been six months from the date of entry of judgment. That window is often several months long.
Often, however, attorneys are either not at fault or are unwilling to fall on their sword, which means a judgment debtor must look to other provisions of Code for relief.
In a recent decision TVA obtained for the Chapter 7 bankruptcy trustee, the U.S. Bankruptcy Court held that a QPRT - generally irrevocable and commonly used in estate planning to hold personal residences - may nonetheless be revoked when the debtor retains an right to reacquire ownership of the residence.
A former savings-and-loan banker, Robert Ferrante, owned a beautiful 5,500 square foot home on an exclusive island in the harbor of Newport Beach, California, and which had fifty feet of bay frontage. In 1994, Robert transferred property into a QPRT - a qualified personal resident trust - with a 20-year term, to expire in 2014.
TVA successfully argued that, because Ferrante could terminate the QPRT by ceasing to use it as his own personal residence, the QPRT was thus de facto revocable (no matter what it said about being irrevocable), and thus it did not qualify as a QPRT for federal estate and gift tax purposes. The QRPT therefore failed, and the beautiful Newport Beach home reverted to Ferrante, and therefore to his bankruptcy estate.
In other words, Ferrante had the ability to effectively "toggle" into the off-position the QPRT at any time, simply by choosing to no longer live in the home, and this destroyed the QPRT's protections as to his creditors and made the home available for liquidation.
The upshot: ALL QPRTs are revocable for Chapter 7 bankruptcy purposes because whatever a debtor can do, his/her Chapter 7 trustee can do. Since a debtor can move out, thereby voiding the QPRT, a trustee can impliedly move out and thereby revoke the QPRT. The BAP did not reach this issue, although it was a hotly discussed topic at oral argument, because it did not need to reach it to affirm Judge Albert's ruling.
In addition, certain QPRTs will be revocable if the settlor retains an illegal right to redeem the property at any time before the end of the 20-year term. This will violate the 1997 regulations that specifically require an express statement that the settlor cannot redeem the property. Ferrante argued that his 1994 trust was grandfathered in, but the statute addressed that and gave such trusts 90 days to commence amendment of the trust agreement. Since Ferrante never did so, Judge Albert ruled that he waited too long.
TVA's victory was written up by Forbes.
Distressed homeowners subject to lender "dual-tracking" do not need to wait until the end of a lawsuit to recover attorneys' fees if they are successful in obtaining a preliminary injunction, ruled the Third District Court of Appeal today in Monterossa v. Superior Court (Cal. Ct. App. - June 12, 2014).
Under a 2012 law, banks are prohibited from dual-tracking, the tactic of processing a foreclosure while the homeowner is negotiating a loan modification. In one case, for example, a homeowner alleged she lost her home worth more than the remaining loan even while she was still negotiating with her bank. "If I had known they were going to do this," she told the LA Times, "I would have sold the damn house myself."
That is similar to what faced homeowners Michael Monterossa and Cheranne Nobis, according to the decision of the Third District. While negotiating a modification, PNC Bank recorded a notice of trustee's sale. When the owners learned of this, they immediately filed a lawsuit. The trial court granted a preliminary injunction to enjoin the foreclosure, noting the bank did not dispute it engaged in improper dual-tracking. But the court denied the owners' requests for attorneys' fees, ruling fees are only available at the end of the case.
The Court of Appeal reversed. The statute plainly awards fees to the "prevailing borrower" who obtains either "injunctive relief" or damages. Nothing in the statute, the court observed, required the injunctive relief to be "permanent." Moreover, the Legislature clearly intended to put an end to dual-tracking by giving teeth to the enforcement procedure, i.e., by awarding fees to "prevailing borrowers."
Artificially limiting the award to the end of trial, however, would pull the teeth out of the statute. Putting an end to the dual-tracking is a discrete harm in itself that will not exist by the time of trial, the court observed. Once the bank is in compliance, it could dissolve the injunction, and with it the basis for a later fee motion. That would defeat the purpose of the statute, which is to give homeowners a remedy against dual-tracking, which by its nature occurs only in the early phase of a lawsuit.
Ordinarily, of course, attorneys' fees are available only at the end of trial. But the rule is not absolute. Monterossa is a good application of an important exception.
h/t Shaun Martin
The one-year period to bring an action for malpractice typically begins after the lawyer last represented you, often easily identified as the date of formal withdrawal. But can it really be that easy?
A recent California Court of Appeal decided it's not, holding instead the relationship ended when the attorney served the client with a motion for withdrawal as counsel, and NOT when the motion was granted 44 days later.
In Flake v. Neumiller & Beardslee, a former client filed suit against his former attorneys for legal malpractice. The complaint was filed on what the former client believed was the last day before the statute of limitations on legal malpractice ran. In response to the complaint, the attorneys moved for summary judgment contending the claims were barred by the statute of limitations. In their motion, the attorney-defendants argued the statute of limitations began to run when they served the former client with the withdrawal motion on November 25th.
The former client opposed the motion for summary judgment contending: he did not have any recollection of receiving the withdrawal motion; the facts alleged in the withdrawal motion regarding an agreement that another attorney would take over representation were false; and that, in any event, the statute of limitation did not begin to run until after the withdrawal motion was granted on January 7th of the following year.
The trial court ultimately agreed with the attorney defendants, holding the complaint for legal malpractice was untimely and barred by the statute of limitations.
The former client appealed. In ruling on the appeal, the Court of Appeal first explained that in instances where the attorney unilaterally withdraws as counsel, the attorney-client relationship ends when "the client actually has or reasonably should have no expectation that the attorney will provide further legal services." Thus, the Court held that the client's subjective belief did not control.
It also held that a final court order was not required to sever the attorney-client relationship. Instead, the Court looked to when a reasonable person would conclude his or her attorney was not going to perform additional legal services on their behalf. In doing so, the Court found the trial court's determination that this occurred either when the attorney told the client after the verdict that the client would not be responsible for an attorneys' fees award, causing the client to believe his part in the litigation was over; or when the client received the withdrawal motion in which the attorney-defendants represented that another attorney was handling the post-judgment motions and appeal. As both occurred before the withdrawal motion was granted, the former client's complaint was time barred and he could not pursue his claims for legal malpractice.
As always, the law favors the vigilant, before those who sleep on their rights.
Last month's decision in Westside Estate Agency, Inc. v. Randall (Cal. Ct. App. - Dec. 1, 2016) began its opinion saying:
"We are all familiar with the phrase, "caveat emptor": Buyer beware. This case deals with its less renowned cousin, "caveat sectorem": Broker beware."
Section 1624 of the Civil Code says that a real estate broker can only be a broker for someone - e.g., get a commission - if there's an agreement in writing. The broker here didn't get a signed agreement authorizing his status as a broker, but instead relied upon an alleged oral agreement.
That's not good enough.
Which means he loses out on a $925,000 commission on a $45 million sale.
Follow the statute. Get the agreement in writing.
In the high-profile case City of San Jose v. Superior Court, the California high court recently held: "when a city employee uses a personal account to communicate about the conduct of public business, the writings may be subject to disclosure under the California Public Records Act."
The Court explains: "The whole purpose of CPRA is to ensure transparency in government activities. If public officials could evade the law simply by clicking into a different email account, or communicating through a personal device, sensitive information could routinely evade public scrutiny."
If you need information from a public agency, be sure your request appropriately includes relevant electronic information that might be stored on officials' or employees' private devices.
Leeman v. Adams Extract & Spice Co. (Cal. Ct. App. May 21, 2015) says no. As they routinely do, a Prop-65 toxic-chemicals-warning case settles for a trifling amount of penalties but a heaping portion of attorneys' fees - over $72,000, based on rates up to $895 per hour. Doesn't sit right with the trial judge, who cuts the fees substantially, without offering a reason. The First District Court of Appeal reverses, holding that the trial court has authority only to accept or reject a settlement, not change its terms.
Prof. Shaun Martin opines that, even having been reversed, the trial judge got "the last laugh":
I wonder if a part of him was thinking: "You bastards. You know full well this was a shakedown, and that the $72,500 fee award was excessive. You think I can't do anything about that. And you're largely right. I'm not going to keep a crappy case in my court (by disapproving the settlement) just to stop you from getting your fees. But you know what I can do? I can make it hard for you. I can slash you fee award. Once. Twice. Thrice. Make you file three motions. Make you prosecute an appeal. Make you wait a couple of years. And, yeah, you'll get your $72,500. But you'll at least have to work for it."
Maybe. Or maybe the Court of Appeal got it wrong. The parties didn't need the trial court to sign on to the settlement. But they wanted the trial court to maintain jurisdiction under CCP 664.6 to aid speedy enforcement of it: "If parties to pending litigation stipulate . . . orally before the court, for settlement of the case, or part thereof, the court, upon motion, may enter judgment pursuant to the terms of the settlement."
In other words, the trial court was free to deny. By granting with a lesser amount, the court effectively denied the motion, but indicated it would grant the motion if the settlement reflected a more reasonable attorneys' fees amount. What the court may do indirectly it may do directly. Perhaps this would constitute an inappropriate advisory opinion, though at the trial court level it's not terribly unusual. Besides, it makes no sense to give the court the authority to reject a bad deal, but no mechanism to communicate what it takes issue with.
But the trial court didn't change the terms of the settlement. It just said that, to the extent the parties want the court to enforce it under the expedited mechanism of CCP 664.6, this is all the court is willing to do. If the parties didn't want to live with the court's terms, it can forgo CCP 664.6. They can still dismiss their case and walk away with their deal intact, enforceable as any other contract.
If you've been involved in litigation, you likely are aware of the "CCP 998 offer." CCP § 998 is a statutory carrot-and-stick to entice parties to make reasonable offers, and to threaten penalties for rejecting reasonable offers.
A 998 offer may be made any time up to 10 days before trial or arbitration. The objective is to make, or accept, a reasonable offer, defined as an amount that is less than what the court ultimately awards.
If a party rejects a reasonable settlement - that is, fails to obtain a better award than the offer - that party must pay the other party's costs incurred after the offer was made.
A 998 offer can change the entire outcome of a case, as happened in Scott Co. v. Blount, Inc. (1999) 20 Cal.4th 1103. There, subcontractor Scott Co. alleged $2 million in cost overruns and delays concerning the San Jose Convention Center project. Blount made a 998 offer to pay Scott $900,000 to settle. Scott countered, demanding $1.5 million. Negotiations failed, and the parties went to trial.
So Scott's number to beat was $900,000 - if Scott failed to get a better outcome than that, it would have to pay up to Blount.
Scott did prevail, but only received a judgment of $442,000. Scott was still entitled to its pre-offer costs of $226,000, bringing its total award to a little over $668,000.
Less than $900,000.
This meant Blount was entitled to its post-offer costs - $633,000 in attorney fees and costs, plus $247,000 in expert fees, for a total of $881,000.
This flipped the outcome of the case: instead of writing a check to the judgment creditor, Blount, despite having a freshly-entered judgment against it, was entitled to receive $212,000 for its trouble.
The litigant who ignores the effects of a CCP 998 offer might win at checkers only to realize the game was chess, and he's been beaten.
In our February newsletter, we noted the California Supreme Court was reviewing whether the ambiguous spendthrift protections of Probate Code sections 15300-15309 meant to impose an absolute cap of 25% against creditors. The Court has answered: "no."
In its recent decision, styled Carmack v. Reynolds, the Court "hold[s] that the Probate Code does not impose such an absolute limit on a general creditor's access to the trust." Instead, "a general creditor may reach a sum up to the full amount of any distributions that are currently due and payable . . . . and separately may reach a sum up to 25 percent of any payments that are anticipated to be made to the beneficiary" in the future. The Court provides a helpful hypothetical near the end of its opinion to illustrate how its somewhat complicated holding might apply.
It's an interesting opinion that concludes the legislature probably made an oversight in drafting the statutes, which gave rise to the confusion.
The judicial admission is a simple concept: when you take a position in a pleading, discovery response, or open court, you're stuck with it. But whenever you see such a plain and sensible rule, expect to find enough exceptions to fill a volume.
For a while, things seemed to go all right. As recently as 2010, the Court of Appeal for the Sixth District of California held unequivocally that "a pleaded fact [i.e. in a complaint] is conclusively deemed true as against the pleader." (Dang v. Smith (2010) 190 Cal.App.4th 646, 657.) And in 2012, Thurman v. Bayshore Transit Management, Inc., 203 Cal.App.4th 1112 at page 1155, the Fourth District held "the trial court may not ignore a judicial admission in a pleading, but must conclusively deem it true as against the pleader." So far so good.
But in 2013, the Second District Court of Appeal held that "not every factual allegation in a complaint automatically constitutes a judicial admission." (Barsegian v. Kessler & Kessler (2013) 215 Cal.App.4th 446, 452.) Instead, a judicial admission "is ordinarily a factual allegation by one party that is admitted by the opposing party." That is, it is less one party's admission than it is a joint stipulation.
What to make of this apparent retelling of the doctrine?
The logic underlying the Second Appellate District's opinion appears flawed; it contends, for example, that if the Dang court's interpretation were true, "a plaintiff would conclusively establish the facts of the case by merely alleging them, and there would never be any disputed facts to be tried." (Id.) But as the Barsegian court itself noted, a judicial admission is a "conclusive concession[] of the truth...by the party whose pleadings are used against him or her." (Id. at 451 (citing Myers v. Trendwest Resorts, Inc. (2009) 178 Cal.App.4th 735, 746).) In other words, the doctrine may be used against the pleader, but not the responsive party. Simply pleading facts would not, as the Barsegian court incorrectly implies, "conclusively establish the facts of the case."
As retired Judge Michael Marcus helpfully points out, Barsegian "misses the point that judicial admissions also occur when language is inconsistent with and not in support of a proponent's position." In this way, Judge Marcus explains, a judicial admission is "like self-serving hearsay, which generally has no exception for its admissibility since it is inherently untruthful, an allegation favorable to the party asserting it is just that - a claim that will have to be proven at a contested hearing. In contrast, an inconsistent statement is admissible hearsay," as the Dang court explained.
One wonders how the Barsegian court so obviously misapplied the law. We would posit the Barsegian decision might have been driven by equitable more than legal concerns. Buried later in the opinion, for example, is a discussion about how the moving parties sought to bind the pleading party to its judicial admissions at one point in the case, while disclaiming the truth of said admissions later in the case. It appears the Barsegian court disliked this attempt to blow hot and cold with the doctrine. Unfortunately, its response throws a perfectly sensible and intelligible doctrine into confusion.
Hard cases not only make bad law, they ruin good law.
Is an employee leaving? Pay up. Pay in full. There is no 'A' for effort. Pay it all.
In last month's Court of Appeal opinion in Beck v. Stratton, employee leaves and employer asks his reputable payroll company, ADP, to cash him out. For reasons that "no one at trial court explain," ADP issued a check for $303.55 less than the total $1,075 the employee was entitled to. Employee filed with the Labor Commissioner, who awarded $6,060 against the employer.
The employer should have cut his losses there, but he decided to go for the gusto and appeal, and lost again. To the employer's surprise, however, the superior court case he believed to have been a limited civil action turned out to have been an unlimited civil action. That meant the prevailing employee was entitled to his fees, adding $31,365 to the penalty - over 100 times more than the original underpaid amount.
Retaining key personnel is vital to the success of any enterprise. However, the law's prohibition of trade restraints often makes it difficult for employers to protect their workforce and trade secrets. California law broadly states that "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." (Bus. & Prof. Code, § 16600. See also Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937.)
So what options do employers have?
Despite the seemingly vast scope of the prohibition, there are many common sense exceptions to protect confidential trade secrets, prevent "moonlighting," and allow unions and professional associations, such as physicians, to engage in exclusive bargaining agreements. Here is a summary of available protections notwithstanding California's seemingly broad prohibition of trade restraints:
Trade Secrets: Covenants prohibiting the misappropriation of trade secrets are valid and specifically excepted from the purview of Business and Professions Code section 16600, et seq. ("Section 16600"). (E.g., Muggill v. Reuben H. Donnelley Corp. (1965) 62 Cal.2d 239, 242; Morlife, Inc. v. Perry (1997) 56 Cal.App.4th 1514, 1519.)
Unfair Competition: Fairness is a two-way street. California courts have consistently refused to recognize a right to engage in unfair competition or "the gratuitous use of th[e] 'sweat‑of‑the‑brow' by others." (Morlife, supra, 56 Cal.App.4th at 1520; Cont'l Car-Na-Var Corp. v. Moseley (1944) 24 Cal.2d 104, 110.) Before invalidating non-interference or non-solicitation agreements, "[t]he potential impact on trade must be considered" in observance of the instructions of the California Supreme Court that "reasonably limited restrictions which tend more to promote than restrain trade and business do not violate the statute" (Loral Corp. v. Moyes (1985) 174 Cal.App.3d 268 at p. 276 (citing Muggill, supra, 62 Cal.2d at p. 242) and that "Section 16600 does not invalidate an employee's agreement not to disclose his former employer's confidential customer lists or other trade secrets or not to solicit those customers." (Loral, supra, 174 Cal.App. 3d at p. 276 (citing Gordon v. Landau (1958) 49 Cal.2d 690, 694).)
"In-Term" Restraints: While post‑engagement restraints are often invalid, "in‑term" covenants that prevent workers from "moonlighting" are not invalid. (E.g., Dayton Time Lock Serv., Inc. v. Silent Watchman Corp. (1975) 52 Cal.App.3d 1; IPA v. IPA Lock Co. (2002) 101 Cal.App.4th 1443; Thompson v. Impaxx, Inc. (2003) 113 Cal.App.4th 1425, 1427-29.)
Collective Bargaining Agreements: Exclusive bargaining covenants, according to the California Supreme Court, are designed "not for the purpose of restricting any trade or business, but for the purpose of promoting one." (Great W. Distillery Products v. John A. Wathen Distillery Co. (1937) 10 Cal.2d 442, 445-46.)
Exclusive Dealing Agreements: Exclusive dealing covenants are not per se invalid, as they often "provide an incentive for the marketing of new products and a guarantee of quality-control distribution." (Dayton Time Lock, supra, 52 Cal.App.3d 1, 6.)
Employees often cite the 2008 case of Edwards v. Arthur Andersen as a watershed that abolished the "rule of reasonableness," and with it many of these exceptions. However, the so-called "rule of reasonableness" concerned temporal and geographical restrictions on an employee's subsequent employment, not the exceptions described above. Moreover, that rule was rejected not in 2008 with Edwards but over 140 years ago in 1872 with the enactment of Civil Code section 1673, the predecessor to Section 16600. (Edwards, supra, 44 Cal.4th at p. 945; Bosley Medical Group v. Abramson (1984) 161 Cal.App.3d 284, 288 ("At least since 1872, a non-competition agreement has been void unless specifically authorized by sections 16601 or 16602.").
Thus, it is misguided to suggest that Edwards somehow reached back in time and struck down every later case upholding the validity of in-term restraints (Dayton Time Lock, supra, 52 Cal.App.3d 1), exclusive dealing agreements (id. at p. 6), exclusive bargaining agreements (Great W. Distillery Products, supra,10 Cal.2d at 445-46), restraints against unfair competition (Morlife, supra, 56 Cal.App.4th at 1520), and restraints against the disclosure of trade secrets. (Muggill, supra, 62 Cal.2d at p. 242.)
However, it is especially critical to draft employment contracts carefully, as courts often construe offending provisions against the employer. As always, a small error in the beginning is a great one at the end, and an ounce of prevention is worth a pound of cure.
*** The information presented here is general in nature and is not intended, nor should be construed, as legal advice for a particular case. This post does not create any attorney-client relationship with TVA. For specific advice about your particular situation, please contact TVA for a consultation or consult with your own attorney.