Kurt Weldon Gets 419'ed

Luxury Asset Lending, LLC v. Phila. Tel. Network, Inc., No. G057766 (D4d3 Oct. 29, 2020)

This one is a doozy. Two connected Boomers from Philly—one of whom is my parents’ former congressman—get roped into an investment scam involving a purported former Libyan oil minister, a $350 million wealth fund, some Ghanian royalty and/or government officials, boxes of $100 million in $100 bills, and whole lot of other sketchy stuff that would raise red flags to most individuals of ordinary curiosity. When their adventure started to go south, an apparent White Knight stepped in to offer the Boomers high interest loans to throw good money after bad. It would later come to pass that White Knight’s principal was closer to the underlying scam than he let on. 

Boomer #2—not the congressman—was the apparent CEO and largest shareholder PTNI, a company that ran low-power TV station. He secured his loans from White Knight, not only with his own shares in PTNI, but also by pledging PTNI’s assets as collateral. (He was not actually allowed to do either—his stock was restricted and he didn’t own PTNI’s assets.) 

White Knight eventually got a $3.8 million default judgment in OC Superior against the Boomers and PTNI. (The service on PTNI was only on Boomer #2 in his capacity as CEO, which is not proper service.) Boomer #2 subsequently went BK, while Boomer #1 got sidetracked into an arbitration. White Knight then assigned the judgment to an affiliate, which then started to go after PNTI’s assets. It obtained an order under Code of Civil Procedure § 708.510 assigning both Boomer #2’s shares, as well as all ownership and control over PTNI and all of its assets. 

At this point, PTNI figured out what was going on and tried to fight back. It objected to the transfer of its broadcast license with the FCC. There were some receivership proceedings in the Court of Common Pleas in Philadelphia and some other inconclusive litigation in the OC. Eventually, PTNI moved to vacate the $3.8 million default judgment under § 473.5 and on non-statutory equitable grounds. The trial court denied relief, but the Court of Appeal—in a very funny and well-crafted opinion by Justice Bedsworth—reverses.

Section 473.5 permits a court to vacate a default or default judgment when the defendant never received actual notice of the claims in time to defend against them. The motion needs to be brought within 180 days of proper service or 2 years of entry and the lack of notice can’t be due to the defendant’s efforts to avoid service or inexcusable neglect. 

Here, there never was any proper service on PTNI, so we’re in the two year window. Nor did PTNI have actual notice. Although there was some evidence that other PTNI execs knew of Boomer #2’s issues with White Knight, there’s no basis to believe that anyone knew PTNI itself or its assets were on the line.

Nor was there any unreasonable delay. The fact that it took some time for PTNI to move to vacate the judgment is unsurprising. It was a small company facing a three front war. It would be unfair to expect it to act maximally and immediately in every forum as it tried to sort out its avenue for relief.

Finally, White Knight’s Assignee argues that because PTNI only moved to vacate the default judgment and not the underlying default, it’s not entitled to any meaningful relief. But that’s kind a trifle under the circumstances here. It is true that if a party moves for pre-judgment relief from a default, and doesn’t get it, relief from the default judgment is not of any substance, since the only thing that could happen is reentry for another judgment. But here, there is no real issue that PTNI wasn’t also entitled to relief from the entry of default, it just did not say so in its notice of motion. The Court of Appeal is not going to let that stand in the way of relief here.

So far as equitable relief goes, California permits non-statutory relief from a default judgment in exceptional circumstances. These are generally when some fraud or mistake extrinsic to the proceedings themselves prevents the defendant from putting on a defense. Fraud generally requires the plaintiff to do something deceptive, while mistake generally arises from an excusable neglect that results in an unjust judgment. Generally, to get relief on either grounds, the defendant moving to vacate needs to show: (1) that it had a meritorious case; (2) that is has a satisfactory excuse for failing to present a defense; and (3) that it diligently sought relief once the mistake or fraud was discovered. All three elements were satisfied here.

Reversed.

FWIW, this classic article from The Atlantic on scamming the scammers is well worth a read, even 13 years later.

 

Insurers Litigating the '70s Get a Break

Mechling v. Asbestos Defendants, No. A150132 (D1d5 Dec. 11, 2018)

Plaintiffs claim they were exposed to asbestos due to the actions of a long-dead company that stopped operating in 1974. Some of them sent demands to DeadCo’s potential Insurer. Others did not. Insurer was unable to locate any policy providing coverage to DeadCo. 

Plaintiffs sued DeadCo. They did not serve or join Insurer. Unsurprisingly DeadCo didn’t answer—it had long been suspended. So Plaintiffs’ get default judgments. Sometime thereafter, Insurer found some old policies showing that DeadCo was, in fact, their insured. So Insurer moved to intervene and vacate the defaults based on extrinsic mistake. The trial court granted the motion. Plaintiffs appeal.

As the Court of Appeal explains, courts have an inherent equitable power to relieve a party from a judgment that is entered based on extrinsic mistake. That’s a mistake—unrelated to conduct in the litigation itself—that somehow results in a party’s failure to get a fair disposition on the merits of the dispute.
To get relief, the defendant needs to show: “(1) a meritorious case; (2) a satisfactory excuse for not presenting a defense to the original action; and (3) diligence in seeking to set aside the default once the fraud [or mistake] had been discovered.” 

The first prong isn’t as big of a deal as it sounds. “Meritorious” doesn’t mean you need to prove you will win. Just that you have a case that’s worth deciding on the merits. And, affording the trial court the deference it gets on these kinds of discretionary decisions, Insurer made that showing. On these facts, the second and third factors aren’t too hard either. Insurer didn’t know it had policies until after the judgments were entered. We are, after all, talking about coverage for events that happened 44-plus years ago. For some of the litigation, they didn’t even have notice that cases were filed. And once Insurer figured out there was a potential for coverage, it promptly moved to intervene and vacate the defaults.

Affirmed.

Service on DeadCo's Authorized Agent Is Service Nonetheless

Pulte Homes Corp. v. Williams Mechanical, Inc., No. E064710 (D4d2 Aug. 9, 2016)
 
A defunct plumbing company whose charter had been suspended got sued for negligent performance of a contract. Plaintiff served its designated agent, who did nothing because the company was basically a dead letter. Plaintiff took a default.

The company, however, did have some insurance. After finding out about the default, the carrier retained counsel for the defunct company and moved for relief from default under Code of Civil Procedure § 473(b), which was granted by the trial court. But the Court of Appeal reverses.

Section 473(b) requires the motion to be filed within six months of the order to be vacated. The motion here was filed more than six months after the entry of default, although less than six months after a default judgment was entered. The court holds that the earlier date was the key one. Vacating a default judgment isn’t worth much unless you can also vacate the underlying default.

The court also rejects a challenge under § 473.5, which permits the setting aside of a default when the defendant never received actual notice. Here, there’s no question that the registered agent of the company was properly served. While service on an entity’s attorney might not be enough to give actual notice, when an attorney is also a designated agent, that service is sufficient to give the corporation actual notice as a matter of law. Even if the attorney neglects to inform the company’s principals because the company had gone out of business.

Finally, the court declines to award equitable relief from default on grounds of extrinsic mistake. That relief is available only under “rare circumstances” where the moving party is inequitably denied a hearing. To obtain the relief, the moving/defaulted party needs to show: (1) that its defense has merit; (2) a satisfactory excuse for not presenting the defense in the original action; and (3) that it acted diligently to set aside the default once discovered. There’s a threshold issue here that Defendant didn’t really raise extrinsic mistake until its reply brief, although two elements (excuse and timeliness) were discussed on the opening brief in connection with the 473.5 issue. The court finds that Defendant forfeited the argument on the meritorious-ness element. And in any event, Defendant didn’t meet the burden of showing either a satisfactory excuse or diligence.

Reversed.

Extrinsic Mistake Relieves Trustee of Default

Bae v. T.D. Service Co., No. B262921 (D2d4 Feb. 25, 2016)

Trustee to the deed of trust on a property gets sued in a real estate foreclosure dispute. Because trustees often get sued as relief-only defendants in cases where the title to property is at issue, Civil Code § 2924l sets forth a procedure permitting them to file a “declaration of non-monetary status” which absolves the trustee from participating in the litigation in any way unless some other party files an objection showing that some conduct by the trustee is really at issue. Trustee here served a § 2924l declaration, which was never opposed.

But Plaintiff put Trustee into default anyway, ultimately obtaining a $3 million default judgment more than two years later, Trustee, having become the subject of some collections efforts, moved for relief from default. The trial court granted the motion. Plaintiff appeals.

What makes this tricky are the time limits in the statutes that generally afford relief from default. Section 473(b) gives six months to move for relief on the grounds of mistake, inadvertence, or excusable neglect. Section 473.5 gives up to two years to obtain relief from a default that was entered without actual notice to the defendant.  

That all said, courts also have the inherent equitable power to vacate default judgments on grounds such as extrinsic fraud or extrinsic mistake. The court here focuses on the latter, which applies when some fact outside of the four corners of a default judgement led a court to mistakenly enter it. Courts generally apply a three-element test. The defaulted party seeking relief must: (1) show it has a meritorious case; (2) articulate a meritorious excuse for why it failed to defend the original case; and (3) that it acted diligently to set aside the default once discovered.

That test was met here. Trustee’s § 2924l declaration was timely and set out facts that showed a good faith belief that the trustee would was not liable for any act or omission of its own. No objection was ever filed, which should have absolved the trustee from answering and precluded any monetary liability. Trustee thus had a meritorious defense. 

Trustee also had a good excuse. It should have been able to rely on its filing of unchallenged § 2924l declaration in believing that it had no further obligation to participate in the case. In the absence of an objection, it was erroneous for the court to permit an entry of a default or default judgment against Trustee for failing to participate. 

Finally, Trustee acted diligently to set aside the default after learning about it. In addition to its reasonable reliance on its § 2494l declaration, Plaintiff made a bunch of service errors in prosecuting the default. In particular, Plaintiff failed to serve Trustee’s attorney with any of the default papers, including the default judgment, in violation of various statutes and rules governing the default procedure. In particular, Plaintiff violated Code of Civil Procedure §587 by failing to file an affidavit proving that a copy of the motion for entry of default had been mailed to the defaulting party’s attorney. It was thus not unreasonable that Trustee’s lawyer first learned of the default judgment when plaintiff tried to collect by levying its bank accounts. Which made Trustee’s lack of awareness pretty reasonable.

Affirmed.