Opinion
F051193
8-8-2008
JAMES OLIVER et al., Cross-Complainants and Respondents, v. PACIFIC REAL ESTATE HOLDINGS, INC. et al., Cross-Defendants and Appellants.
Ericksen, Arbuthnot, Kilduff, Day & Lindstrom, Inc., Michael D. Ott and Steven M. Karcher, Gilmore, Wood, Vinnard & Magness, and David M. Gilmore, for Cross-Defendants and Appellants. G. Scott Benker, for Cross-Complainants and Respondents.
Not to be Published
Appellants, Rune Kraft and eight companies associated with Mr. Kraft, appeal from the denial of their motion to set aside default of a cross-complaint. They contend that the superior court lacked jurisdiction over them. They also contend that the entry of default judgment should be vacated because the cross-complaint did not specify an amount of compensatory damages. Finally, they contend that the superior court abused its discretion in failing to consider several declarations filed in support of their motion for default. For the following reasons, we vacate the default judgment.
PROCEDURAL AND FACTUAL BACKGROUND
A. ORIX Complaint
On April 8, 2005, ORIX Financial Services, Inc. (ORIX), filed a complaint against James Oliver, Alroy J. Oliver, Richard D. Oliver, and Larry P. Oliver (the Olivers or defendants or cross-complainants) in their individual capacities on written guarantees executed by the Olivers on April 29, 1992. Under the terms of these guarantees, the Olivers "agreed, among other things, to be jointly, severally, directly and unconditionally liable to ORIX for the due performance of all obligations, past, present and future of Artesia [Ready Mix Concrete, Inc.] to ORIX."
In the complaint, ORIX alleged that, on March 31, 2000, Artesia Ready Mix Concrete, Inc. purchased equipment and entered into a secured transaction with David Grimsley. David Grimsley, in turn, assigned the note and security agreement to ORIX.
According to the ORIX complaint, Artesia Ready Mix Concrete, Inc. failed to make a payment to ORIX on May 31, 2003. On April 1, 2004, ORIX retook possession of the collateral and then sold it, but the amount was not sufficient to cover the debt. ORIX then filed the complaint against the Olivers to recover $96,186.71, as well as interest, attorneys fees and costs. ORIX did not sue Artesia Ready Mix Concrete, Inc.
The Olivers demurred to the ORIX complaint for failure to give notice of sale of the collateral to the guarantors. The Olivers also asserted that they were not working for Artesia Ready Mix Concrete, Inc. when the collateral was sold. The Olivers demurrer was denied. On August 1, 2005, the Olivers filed a general denial to the ORIX complaint.
B. Oliver Cross-Complaint
At the same time as they filed their general denial to the ORIX complaint, the Olivers also filed a cross-complaint against Rune Kraft, an individual, and against several companies. These companies included: Artesia, Inc.; The Artesia Companies, Inc.; Cottonwood Construction & Development, Inc.; Florez Concrete Construction, Inc.; Independent Ready Mix Concrete Producers, Inc, formerly known as Artesia Ready Mix Concrete, Inc.; Pacific Real Estate Inc.; Christiana Homes, Inc.; and Realia, Inc. On August 23, 2005, Christiana Homes Pleasant Oak Sales, Artesia Holdings, Inc., Kraft Americas, L.P., and Kraft Americas Holdings, Inc., were subsequently added as cross-defendants (hereinafter, the cross-defendant companies will be referred to as the Kraft Companies).
The summons, cross-complaint, amendment to cross-complaint adding the four companies, and the notice of Case Management Conference (CMC) were served upon some of the Kraft Companies on September 3, 2005 and upon the remainder on September 12, 2005. Proofs of service for the Kraft Companies were filed with the superior court respectively on September 12 and September 27, 2005.
The service processor was unable to locate Rune Kraft by September 27, 2005. The Olivers, however, alleged that "Mr. Kraft is aware of this litigation and has purportedly made a verbal, conditional offer to defend and indemnify the defendants through a principal of one of his corporations. Therefore, a copy of the summons, cross-complaint and Notice of Continued Case Management Conference was served, with a notice of acknowledgement, to the corporation principal to forward to Rune Kraft on September 28, 2005."
On October 17, 2005, the Olivers filed a proof of service with the superior court in which they asserted that they attempted to serve the summons, cross-complaint, amendment to cross-complaint and notice of continued CMC upon Kraft on October 11, 2005, October 12, 2005, and sub-served these documents upon Mike Kalmink on October 13, 2005.
In their form cross-complaint, the Olivers sought indemnification from the ORIX complaint and declaratory relief that: "Cross-defendants are responsible for the defaults alleged in plaintiffs complaint;" and that "Cross-defendants are the alter ego of each of the other cross-defendants." The cross-complaint also asserted that the ORIX action was an unlimited civil case and that the action was not "reclassified as unlimited by this cross-complaint." The cross-complaint did not specify an amount of damages. Rather, it sought indemnification for any judgments rendered against them in the ORIX action and compensatory damages "according to proof."
The cross-defendants did not file a responsive pleading. Notice of entry of default was filed for all Kraft Companies on October 26, 2005, and for Rune Kraft on December 5, 2005.
On November 9, 2005, the Olivers filed their second amendment to the CMC statement. In this pleading, they stated that the mediation on the ORIX action was moved from December 6, 2005 to November 9, 2005, based upon the availability of the mediator and stipulation. "On November 7, 2005, Mike Kalmink, a corporate officer and agent for cross-defendants, called and confirmed no cross-defendant or representative of any cross-defendant would be appearing at the November 9 mediation." By stipulation, the November 9 mediation then was canceled.
On January 27, 2006, the Olivers filed an ex parte application for right to attach order to attach real property owned by Pacific Real Estate Holdings, Inc. In the ex parte application, the Olivers asserted that the "amount to be secured by the attachment is: $200,000.00," "which includes estimated allowable attorney fees of: $50,000.00."
In a declaration in support of the application, Al Oliver stated that he was a corporate officer of Artesia Ready Mix Concrete, Inc., before it was acquired by Rune Kraft on April 10, 2000. According to Oliver, Kraft later changed the name of this corporation to Independent Ready Mix Concrete Producers, Inc. Moreover, after Kraft acquired Artesia Ready Mix Concrete, Inc., he formed two new corporations: The Artesia Companies, Inc. and Artesia, Inc. Al Oliver asserted that he resigned from all companies in which he was an officer on June 26, 2003, because he refused Mr. Krafts demand to misrepresent facts in litigation filed against The Artesia Companies, Inc. Al Oliver asserted that, although he resigned, Kraft did not take his name off from corporate and retirement documents; thus, creditors have pursued him individually.
Al Oliver also made the following allegations: "Each of the corporations named in my cross-complaint was formed by Mr. Kraft. Mr. Kraft was the owner of the corporations."
On January 30, 2006, the trial court ordered a prejudgment writ of attachment to secure the Kraft Companies real properties, pending a judgment in this case. The cross-defendants admitted, through their attorney, that they were aware of the writ of attachment.
C. Motion to Set Aside Defaults.
On April 25, 2006, the last day possible, nine of the cross-defendants (Pacific Real Estate Inc., Florez Concrete Construction, Inc., Cottonwood Construction & Development, Inc., Christiana Homes, Inc., Rune Kraft, Kraft Americas Holdings, Inc., Kraft Americas, L.P., Realia, Inc., and Artesia Holdings, Inc.) (hereinafter appellants) filed a motion to set aside their defaults. In their motion to set aside default, appellants alleged, through a declaration by one of their counsel, that they entered into an agreement with a third party who agreed to indemnify them. Believing that the third party, The Artesia Companies, Inc., would provide a defense, they did not answer. However, without their knowledge, no defense was provided. As Exhibit "A" to the motion, the declaration attached the indemnification agreement. The motion to set aside default did not raise lack of jurisdiction as basis for setting aside the default.
On May 5, 2006, the Olivers filed their opposition to the appellants motion to set aside default. In their opposition, cross-complainants contended that the motion to set aside default was not supported by admissible evidence because the attorney who filed the declaration did not have personal knowledge about the agreement between appellants and The Artesia Companies, Inc. The Olivers filed a motion to strike the declaration in conjunction with this argument.
The Olivers also contended that, since there was no mistake of law because there was no attorney affidavit of fault, appellants would have to show excusable neglect. However, according to the Olivers, "[e]ntrusting the matter to a third-party who promises to take care of the matter is not, by itself, grounds for relief. (Davis v. Thayer (1980) 113 Cal.App.3d 892, 909-910 — as a matter of law, reliance on a third party is insufficient to give the trial court discretion to set a side default under CCP § 473.)" Moreover, the Artesia Companies, Inc. subsequently forfeited its corporate status rendering it unable to defend appellants. (Palm Valley Homeowners Assn., Inc. v. Design MTC (2000) 85 Cal.App.4th 553, 560-561.)
The Olivers filed two declarations to demonstrate that appellants were aware of the ORIX complaint and the cross-complaint since September of 2005.
On May 10, 2006, ORIX also filed an opposition to the appellants motion to set aside default.
A hearing was held on May 18, 2006. At the hearing, appellants attempted to introduce nine declarations filed by Kraft and by corporate representatives of the Kraft Companies, including Mike Kalmink, Terry Skvarek, and Dale Maloof. These declarations were faxed to the superior court and to the Olivers after the tentative decision was published. The originals were brought to the hearing. The superior court refused to consider the new declarations. The superior court then denied the motion and issued its decision denying the motion to set aside default.
D. Post-Default Hearing Proceedings
On September 8, 2006, appellants filed their notice of appeal.
On February 12, 2007, appellants filed a motion to augment the record with the declarations by Rune Kraft, and by corporate representatives of the Kraft Companies, including Mike Kalmink, Terry Skvarek, Dale Maloof, and the indemnification agreements. On October 9, 2007, this Court permitted the record on appeal to be augmented to include the declarations only.
On September 26, 2007, counsel for appellants filed a motion to withdraw because of "[s]ubstantial, irreconcilable differences." Counsel asserted that "Mr. Kraft has been aware that this motion would be filed for several weeks." Retained counsel noted that it does not have Rune Krafts current address, but does have an e-mail address to which the motion was sent. This Court was not provided with the e-mail address in the motion. On October 2, 2007, this Court provided Rune Kraft and the other defendants with an opportunity to file an opposition. None was received. On October 15, 2007, the motion to withdraw was granted.
On January 15, 2008, this Court received a written memo from appellants that they were in the process of retaining new counsel. To date, no counsel has made an appearance.
DISCUSSION
Appellants contend that the superior court erred in entering the default judgment against them for several reasons. First, they contend that the superior court lacked jurisdiction. Second, they contend that the superior court made several legal errors in imposing the default judgment. Finally, they contend that the trial court abused its discretion in denying their motion to set aside for default. We address each of these contentions in turn.
A. Lack of Jurisdiction
Appellants contend that the superior court did not acquire jurisdiction over them because the cross-complainants failed to serve the complaint and answer with the summons and cross-complaint, citing California Rules of Court, rule 3.222. Rule 3.222, formerly rule 202, provides that "[a] cross-complainant must serve a copy of the complaint ... and any answers thereto on cross-defendants who have not previously appeared." Appellants do not challenge the fact that they were properly served with the summons and cross-complaint.
Appellants cite Witkin as support for their argument that rule 3.222 is jurisdictional. However, the section from Witkin that they cite does not support their argument. According to appellants, Professor Witkin states that "[t]he state, by statute, may prescribe the manner in which notice shall be given, and compliance with the statutory procedure of notice (process) may be considered jurisdictional." (2 Witkin, Cal. Procedure (4th ed. 1996) Jurisdiction, § 122, italics added). The Drafters Notes for the former rule 202 states that: "These papers [complaint and answer] must be served in addition to the service of the summons and cross-complaint currently required by statute." Because the statutory procedure of notice does not require that cross-complainants serve the complaint and answer, the superior court acquired jurisdiction when appellants were properly served the summons and cross-complaint. (See Code Civ. Proc., § 410.50 ["[T]he court in which an action is pending has jurisdiction over a party from the time the summons is served on him .... A general appearance by a party is equivalent to personal service of summons on such party."])
While we agree that the better practice is to serve the complaint and answer with the summons and cross-complaint, we have been unable to locate any authority holding that rule 3.222 is jurisdictional. Our review of rule 3.222 indicates that appellants could have sought to dismiss the cross-complaint for failure to comply with rule 3.222. However, appellants did not seek to dismiss the complaint on this ground before the superior court. Thus, they have forfeited that issue on appeal. (See People v. Stowell (2003) 31 Cal.4th 1107, 1114 ["The forfeiture doctrine is a `well-established procedural principle that, with certain exceptions, an appellate court will not consider claims of error that could have been—but were not—raised in the trial court. [Citation.]"])
In any event, the superior court had jurisdiction over appellants because they made a general appearance when they filed their motion to set aside default and in that motion did not assert lack of jurisdiction. (See Severdia v. Alaimo (1974) 41 Cal.App.3d 881, 890 [Defendant consented to jurisdiction of court because "[h]is appearance was not a special appearance made for the sole purpose of objecting to lack of jurisdiction of the person without submitting to such jurisdiction."].)
B. Legal Errors in Entry of Default Judgment
Appellants also contend that the superior court erred in entering the default judgment because: 1) the cross-complaint failed to specify a certain amount of damage; 2) the cross-complaint was not well-pleaded; and 3) the Olivers failed to establish a prima facie case. We agree with appellants on the first issue, thus rendering the subsequent issues moot.
"[A] default judgment [may not] be entered against defendants without proper notice to them of the amount of damages sought." (Schwab v. Rondel Homes, Inc. (1991) 53 Cal.3d 428, 435 [addressing personal injury cases].) Under California Code of Civil Procedure, section 580, subdivision (a), "[t]he relief granted to the plaintiff, if there is no answer, cannot exceed that demanded in the complaint." According to the California Supreme Court, "[t]he notice requirement of [Code Civ. Proc.] section 580 was designed to insure fundamental fairness. Surely, this would be undermined if the door were opened to speculation, no matter how reasonable it might appear in a particular case, that a prayer for damages according to proof provided adequate notice of a defaulting defendants potential liability. If no specific amount of damages is demanded, the prayer cannot insure adequate notice of the demands made upon the defendant. [Citation.] Consequently, a prayer for damages according to proof passes muster under section 580 only if a specific amount of damages is alleged in the body of the complaint. [Citation, fn. omitted.]" (Becker v. S.P.V. Construction Co. (1980) 27 Cal.3d 489, 494.) A default judgment entered on a complaint that does not specify the amount of damages must be vacated. (Parish v. Peters (1991) 1 Cal.App.4th 202.)
Here, the cross-complaint asks for compensatory damages according to proof but did not specify a certain amount of damages. No such proof of damages was served on appellants prior to entry of default judgment. Although the ORIX complaint did seek specified damages, the complaint was not served upon appellants. Furthermore, no judgment had been issued in the ORIX action and thus the amount of indemnification could not be precisely calculated. Moreover, the notice of entry of default judgment did not indicate a specific amount of damages. Finally, the fact that appellants received notice about a specified amount of damages in the prejudgment writ of attachment does not assist cross-complainants because the prejudgment writ of attachment was not filed and served until after entry of default judgment. Thus, the entry of default judgment must be vacated.
Because we are vacating entry of default judgment, we do not reach the issues on appeal related to the motion to set aside default. We do note, however, that appellate counsel was also trial counsel, and that appellate counsel has withdrawn. In light of that withdrawal, we note that corporate appellants may not proceed in superior court without counsel. (CLD Construction, Inc. v. City of San Ramon (2004) 120 Cal.App.4th 1141.)
DISPOSITION
The default judgment entered herein is vacated. The case is remanded to the Superior Court for further proceeding consistent with this opinion. Costs to appellants.
We concur:
LEVY, J.
DAWSON, J. --------------- Notes: Further references to the rules are to the California Rules of Court.