Filed 9/20/19 Long v. Paul Financial, LLC CA4/3

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FOURTH APPELLATE DISTRICT

DIVISION THREE

MICHAEL LONG et al.,

Plaintiffs and Appellants,

v.

PAUL FINANCIAL, LLC et al.,

Defendants and Respondents.

G056108

(Super. Ct. No. 30-2014-00700351)

O P I N I O N

Appeal from a judgment of the Superior Court of Orange County, Derek W. Hunt, Judge. Reversed and remanded.

Law Office of Corey Evan Parker and Corey Evan Parker for Plaintiffs and Appellants.

Weintraub Tobin Chediak Coleman Grodin, Bredan J. Begley and Shauna N. Correia for Defendants and Respondents.

Michael and Kellie Long (the Longs) sued Paul Financial, LLC (PF) and William Walsh (Walsh) for breach of contract, fraud, and unlawful business practices. A little over a year later, the court clerk entered PF’s and Walsh’s default. The Longs filed a request for entry of a default judgment, requesting damages over $1 million. After the trial court denied this request, the Longs filed a second request for $196,786. The court denied this request and dismissed their case with prejudice. We agree with the Longs that the default prove up was sufficient to award $25,000, requiring reversal of the judgment of dismissal.

FACTS

In January 2014, the Longs filed their complaint alleging that in 2005 they purchased a home in the City of Costa Mesa (the residence). They named the following four defendants: (1) PF, who loaned them money to buy the residence; (2) Peter Paul, PF’s owner; (3) Walsh, PF’s vice president; and (4) Freedom Escrow, the escrow agent the parties used for the transaction. The court sustained Freedom Escrow’s demurrer without leave to amend, and the Longs dismissed Paul before requesting entry of the default judgment. Accordingly, Freedom Escrow and Paul are not parties to this appeal. We refer to PF and Walsh collectively as Respondents, unless the context requires otherwise.

In their original complaint, the Longs sought $500,000 in damages, plus interest. The Longs subsequently filed three amended complaints, and the February 2015 third amended complaint (TAC) is the operative complaint. The Longs alleged that at some point after escrow closed, Respondents forged the Longs’ signatures and changed the purchase price of the home on the California Impound Disclosure form (CID) and Waiver and Preliminary Change of Ownership Report (PCOR). Respondents raised the purchase price of the residence from $911,000 to $991,000, reducing the loan-to-value ratio below 90 percent. PF then sold the loan to IndyMac.

This reduction meant the Longs’ property taxes were not properly impounded and they received a tax bill of $18,000 for 2006. The Longs initially thought the Orange County (County) Treasurer-Tax Collector (TTC) made a mistake. During the three years it took the Longs to undergo the County’s appeal process, IndyMac paid the accumulating taxes. IndyMac amortized this additional debt over 12 months and added it to the mortgage payment. The Longs’ mortgage payment tripled from $2,800 to $9,352 per month. The Longs eventually lost their home to foreclosure and then discovered Respondents forged the documents “to avoid the condition of a separate escrow to collect and pay taxes so that the note could be immediately sold as a securitized loan.” The Longs alleged PF improperly sold the note before the close of escrow “to fund the loan.”

In May 2015, the court entered default against PF and Walsh. In July 2017, the Longs requested the court enter a default judgment awarding $1,323,835.61 in damages. To support the request, they submitted a declaration stating the basis for the damages. The Longs asserted the damages listed in the original complaint were based on their $92,000 cash down payment, $177,000 paid toward their mortgage, and $131,000 paid towards home improvements before the foreclosure. They spent $100,000 in legal fees trying to save their home and calculated $323,835 in interest. In addition, they requested $500,000 in punitive damages based on fraud allegation in the complaint.

The trial judge denied the Longs’ request for a $1 million default judgment. In its minute order, the court ruled as follows: “[The Longs’] instant application for entry of a default judgment against [Respondents] seeks $1 million in damages, plus interest, giving a requested aggregate award of $1,323,835. In its prayer, however, the [TAC] does not specify what damages [the Longs] are seeking against [PF and Walsh], nor can a concrete amount be divined from the body of the document. And although [the Longs] do claim to have served a statement of damages in the amount of $500K, the use of a statement of damages is only available in cases of personal injury and wrongful death. [Citations.] For this reason, plus the additional reason that the third cause of action is based on a statute that does not provide a private right of action and only provides for regulatory penalties, the court denies [the Longs’] application for a default judgment in any monetary amount.” Thereafter, the trial court denied the Longs’ motion for reconsideration. This court denied the Longs’ petition for a writ of mandate.

The trial court issued an order to show cause (OSC) regarding dismissal of the action and scheduled a hearing for January 22, 2018. Meanwhile, the Longs filed a second request for entry of a default judgment. This time, they reduced the amount of damages, requesting their down payment for the residence ($91,000) plus the jurisdictional limit of damages ($25,000), or alternatively, an award of only the jurisdictional limit ($25,000). They calculated interest as $80,786, and asked for a total sum of $196,786 in damages. The OSC and second request were heard on the same day.

On the date of the scheduled hearing, the trial court denied the Longs’ request for a default judgment. Our record does not contain a copy of the reporters’ transcript. In its minute order, the trial court noted the Longs previously sought a default judgment. The trial court incorporated its prior ruling, by cutting and pasting language contained in the August 2017 minute order. It added, “For the reasons heretofore expressed and [Code of Civil Procedure section] 425.10[, subdivision] (a)(2), the court hereby finds the prove-up insufficient and hereby orders the action dismissed with prejudice.”

DISCUSSION

I. Applicable Legal Principles

“When a defendant does not respond to a plaintiff’s properly served complaint, the plaintiff may seek the entry of default and, thereafter, a default judgment. (§ 585, subds. (a) & (b).) The ‘relief granted’ in the default judgment ‘cannot exceed’ what the plaintiff ‘demanded in the [operative] complaint.’ (§ 580, subd. (a).) Under these statutes, the operative complaint fixes ‘a ceiling on recovery,’ both in terms of the (1) type of relief and (2) the amount of relief. [Citations.]” (Sass v. Cohen (2019) 32 Cal.App.5th 1032, 1039-1040 (Sass).)

“These back-end limitations on the relief that may be awarded in a default judgment enforce the front-end statutory requirements for pleading. A complaint must set forth both (1) ‘[a] demand . . . for the relief’ sought and (2) ‘the amount’ of any ‘money or damages’ sought. (§ 425.10, subd. (a).) There are only three instances in which a plaintiff is statutorily prohibited from pleading the amount of relief in [his or] her complaint: (1) when the plaintiff is seeking damages for ‘personal injury or wrongful death’ (§ 425.10, subd. (b)); (2) when the plaintiff is seeking punitive damages (ibid.); and (3) when the plaintiff is required to use statutorily mandated forms in a marital dissolution action that do not permit a party to plead an amount of relief [citations]. In the first two instances, the amount of relief sought in a default judgment is capped at the amount the plaintiff sets forth in a supplemental pleading that [he or] she is statutorily authorized—and, before a default may be sought, statutorily required—to serve. (§§ 425.11, 425.115, 585.) In the third instance, the amount of relief sought in a default judgment has no cap . . . . [Citations.].” (Sass, supra, 32 Cal.App.5th at pp. 1040-1041.)

“Limiting the back-end relief on default to the relief that is pled at the front end is not only required by statute; it is also compelled by due process. [Citation.] Due process demands ‘“‘notice of [a pending case] and [an] opportunity to meet it.’”’ [Citation.] If and only if a defendant receives advance notice of the type and amount of relief sought can he make a ‘fair and informed’ decision whether to fight the pending case (and, in so doing, risk the possibility of a judgment exceeding that relief) or to forego that fight (and, in so doing, accept a judgment against him up to, but not exceeding, that relief in an amount fixed by the trial court). [Citations.]” (Sass, supra, 32 Cal.App.5th at p. 1041.)

“The notice required both by statute and by due process is formal notice. [Citations.] Neither actual notice nor constructive notice matters. [Citations.] The reason for this insistence on formal notice is simple: Formal notice ensures that the ‘maximum judgment’ can be ascertained from the four corners of the operative complaint or statutorily authorized supplemental pleadings, thereby eliminating the messier case by case inquiries into what a defendant actually knew or reasonably should have known that would be required if actual or constructive notice were the operative standard.” (Sass, supra, 32 Cal.App.5th at p. 1041.)

“A default judgment that awards relief beyond the type and amount sought in the operative pleadings is void. [Citation.] Because it is void, it may be collaterally attacked at any time. [Citation.] The remedy is to vacate and set aside the default judgment, not the precursor default. [Citation.] Once the default judgment is vacated, the trial court has the discretion to (1) reduce the default judgment to the types and amounts of relief properly pled in the operative pleadings or (2) give the plaintiff the option of amending [his or] her pleadings to include the previously omitted types or amounts of relief (but, in so doing, granting the defendant a further opportunity to avoid default by responding to the amended pleadings). [Citations.]” (Sass, supra, 32 Cal.App.5th at pp. 1041-1042.)

II. Was the Entry of Default Void?

Respondents assert the trial court properly refused to enter a default judgment awarding punitive damages because it would have been void. They correctly recite statutory authority mandating that parties seeking punitive damages, as part of a default judgment, must first serve a statement notifying the defendant of the amount of punitive damages before entry of default. (§ 425.115.) Respondents point out the Longs’ statement of damages (in their notice of default) did not list punitive or any other damages. Respondents reason the entry of default was void, and therefore, a default judgment awarding punitive damages would also have been void. This is an incorrect legal statement.

Section 425.115, subdivision (b), specifies, “The plaintiff preserves the right to seek punitive damages . . . on a default judgment by serving upon the defendant [a] statement, [with language contained in the statute,] or its substantial equivalent . . . .” (Italics added.) Subdivision (f) of section 425.115 clarifies: “The plaintiff shall serve the statement upon the defendant pursuant to this section before a default may be taken, if the motion for default judgment includes a request for punitive damages.” (Italics added.) There is nothing in the statute indicating the entry of default is void if the plaintiff’s complaint alleges punitive damages but he or she elects not to pursue such damages in the default proceedings. It simply requires due process for the defaulting party, providing adequate notice of the potential cap on damages before entry of default. (See Heidary v. Yadollahi (2002) 99 Cal.App.4th 857, 867.)

Moreover, we found no case authority supporting Respondents’ theory that the Longs’ failure to serve a section 425.115, subdivision (f), statement renders both the default judgment and the underlying default void. To the contrary, in Behm v. Clear View Technologies (2015) 241 Cal.App.4th 1, 16, the court considered what the appropriate remedy should be when the default judgment included punitive damages but plaintiff did not serve the statement of damages prior to taking the default. The Behm court determined a trial court could strike “the excess amount of damages” or permit

plaintiffs to amend their complaint. (Id. at p. 17.) It rejected the argument that the trial court must vacate the underlying default in addition to the default judgment. “‘Vacating the default judgment has no necessary effect on the underlying default and simply returns the defendant to the default status quo ante. [Citation.]’” (Ibid.)

III. Did the Longs Sufficiently Plead the Minimum Jurisdictional Limit?

The first cause of action for fraud states the Longs were harmed in “an amount subject to proof at the time of trial” and in paragraph 34, alleged the Longs suffered emotional harm “in an amount in excess of the jurisdictional threshold of this [c]ourt, the precise amount will be proven at trial.” The jurisdictional limit at the time was $25,000. The Longs argue the court could have entered a default judgment, at a minimum, for $25,000. We agree.

In Greenup v. Rodman (1986) 42 Cal.3d 822 (Greenup), our Supreme Court determined a complaint claiming general damages “‘in an amount that exceeds the jurisdictional requirements of this court’” provided adequate notice to the defendant that plaintiff was seeking general damages of at least $15,000 (the jurisdictional limit at that time). (Id. at p. 830.) In that case, the court entered default as a discovery sanction. (Id. at p. 824.) In her complaint, plaintiff alleged fraud and other causes of action caused damages “‘in a sum that exceeds the jurisdictional requirements of this court.’” (Id. at p. 825.) In her prayer, the only specific sum mentioned was $100,000 in punitive damages. (Ibid.) After the default prove-up, the court found defendants liable for $338,000 in compensatory damages and $338,000 in punitive damages. (Id. at p. 826.)

The Supreme Court amended the default judgment, concluding it exceeded “the limitations specified in section 580.” (Greenup, supra, 42 Cal.3d at p. 829.) In doing so, it rejected defendant’s argument plaintiff was not entitled to compensatory damages because an amount was not specified in her prayer. (Ibid.) It concluded “the

allegations of a complaint may cure a defective prayer for damages” and in this case, the complaint notified defendants compensatory damages would exceed the jurisdictional requirement. (Id. at p. 830.) “By her allegations, plaintiff thus gave sufficient notice to defendants that she claimed at least $15,000 in compensatory damages. While an award in excess of $15,000 would be improper, a judgment in that amount was within the jurisdiction of the court. [Citation.] The compensatory award should therefore be reduced to the extent that it exceeds $15,000.” (Id. at p. 830.)

The Supreme Court confirmed this holding several years later in Schwab v. Rondel Homes, Inc. (1991) 53 Cal.3d 428, 435 (Schwab).) It also reiterated the Greenup case’s conclusion “‘the allegations of a complaint may cure a defective prayer for damages.’ [Citation.]” (Schwab, supra, 53 Cal.3d at p. 435.) In Schwab, the Supreme court disapproved of cases interpreting “Greenup to hold that all defendants should be presumed to be on notice of the plaintiffs’ claim for general damages of at least the jurisdictional minimum regardless of the form of complaint.” (Id. at p. 434.) It reasoned section 425.11 “requires not only that the plaintiffs give notice of damages, but specifically of ‘the amount of special and general damages sought to be recovered.’” (Ibid.) The court stated, “Even if we were to presume that a layperson is aware of the jurisdictional minimum in superior court, no person could know the amount of general damages sought” in a case where there is no notice of damages in the complaint or a statement of damages. (Ibid.)

In the Schwab case, the court stated the plaintiff in the Greenup case provided sufficient notice to the defendants of the amount of damages claimed. “[E]ven though the plaintiff in Greenup did not follow the procedure required by sections 425.10 and 425.11, we held that the plaintiff’s prayer in the complaint for general damages ‘in an amount that exceeds the jurisdictional requirements’ of the superior court provided sufficient notice to that defendant of the amount of damages claimed. [Citation.]” (Schwab, supra, 53 Cal.3d at p. 435.)

The court determined the Greenup pleading was factually distinguishable from the plaintiffs’ pleadings in the Schwab case. (Schwab, supra, 53 Cal.3d at p. 435.) In the Schwab case it determined, “plaintiffs’ prayer for statutory damages in an amount according to proof but ‘no less than $250’ and punitive damages in the amount of $500,000 [was] not sufficient to meet the requirements of section 425.11.” (Ibid.) It reasoned, “Neither statutory nor punitive damages fulfills the mandate of section 425.11, which requires specific notice of ‘the amount of special and general damages sought to be recovered . . . .’ (Italics added.)” (Ibid.)

Respondents misread both Greenup and Schwab. They assert the distinction between the two cases was that the Greenup plaintiff introduced evidence of $676,000 in damages, which the Supreme Court reduced to the jurisdictional limit, whereas in Schwab the default judgment was vacated due to inadequate notice of damages. Not so. Both cases held a trial court lacks jurisdiction to enter a default judgment greater than the amount specifically demanded in the complaint. (Schwab, supra, 53 Cal.3d at p. 435; Greenup, supra, 42 Cal.3d at p. 826.) The outcomes were different simply because one complaint did a better job of notifying the defaulting defendants of damages than the other. We found no language supporting Respondents’ theory the different results were because the Schwab plaintiff failed to prove any damages. For this reason, we also reject Respondent’s assertion the Longs’ failure to prove damages supports the trial court’s ruling.

It is well settled that when Respondents failed to respond to the complaint, they are deemed to have admitted the material facts alleged in the complaint and nothing more is required if those allegations establish their liability. (Carlsen v. Koivumaki (2014) 227 Cal.App.4th 879, 898 (Carlsen) [failing to answer complaint “has the same effect as admitting the well-pleaded allegations of the complaint, and as to these admissions no further proof of liability is required”].) At the default prove-up, the Longs needed only to make a prima facia showing of their damages. (Id. at pp. 899-900; Johnson v. Stanhiser (1999) 72 Cal.App.4th 357, 361-362 [prima facie case, not preponderance of evidence, is applicable standard].)” Indeed, “The only evidentiary facts that have a place at a prove-up hearing are those concerning the damages alleged in the complaint. [Citations.] The damages, of course, may only be awarded for a well-pled cause of action, and to that end, the complaint must be examined. [Citations.]” (Carlsen, supra, 227 Cal.App.4th at pp. 899-900.)

Here, the first cause of action had well pleaded allegations of fraud. The TAC alleged the nature of the loan transaction and the tragic circumstances caused by Respondents forging documents. We appreciate the Longs repeatedly asserted the extent of their harm would be subject to proof at the time of trial and these allegations are insufficient to put Respondents on notice of potential liability for compensatory damages as required by the Schwab case.

However, paragraph 34 of the complaint contained specific notice of damages. The Longs alleged that due to the fraudulent conduct they suffered “extreme anguish, humiliation and emotional distress, the extent of which is not fully known at this time, but in an amount in excess of the jurisdictional threshold of this [c]ourt, the precise amount will be proven at trial.” As stated, Respondents are deemed to have admitted material facts of fraudulent conduct causing emotional distress liability. Applying Greenup and Schwab, we conclude this allegation was sufficient to put Respondents on notice that these damages alone reached at a minimum the jurisdictional limit of $25,000.

III. Was The Third Cause of Action for Regulatory Penalties Not Damages?

One of the reasons the trial court denied the request for a default judgment was its conclusion the third cause of action did not provide “a private right of action” and only permitted regulatory penalties. In the minute order, the court noted the third cause of action was for violation of Civil Code section 2954, subdivision (a)(1).

It appears the court misread the TAC’s third cause of action. It is titled, “Third cause of action for Unlawful Business Practices.” (Capitalization omitted.) Paragraph 41 incorporates by reference all prior fraud allegations. Paragraph 42 stated Respondents’ “unlawful conduct, acts, and omissions complained of above also constitute fraudulent and/or unlawful business practices in violation of California statutory and common law, including, but not limited to, violation of California Civil Code section 2954[, subdivision] (a)(1).” Paragraph 44 stated the Longs were “entitled to and hereby request all relief applicable under Business [and] Professions Code [section] 17200, et seq., including without limitation, injunctive relief, disgorgement of profits, restitution, costs, and any other relief the court deems appropriate and warranted.”

“The Unfair Business Practices Act defines ‘unfair competition’ as any ‘unlawful, unfair or fraudulent business practice and unfair, deceptive, untrue or misleading advertising . . . .’ (§ 17200.) The Legislature intended this ‘sweeping language’ to include ‘“anything that can properly be called a business practice and that at the same time is forbidden by law.”’ [Citation.]” (Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1266.) “‘A claim based upon the fraudulent business practice prong of the UCL is “distinct from common law fraud.”’” (Boschma v. Home Loan Center Inc. (2011) 198 Cal.App.4th 230, 252.)

Here, paragraph 41 incorporated all the allegations of fraudulent conduct relevant to the fraud claim into the third cause of action. This paragraph would have reasonably put Respondents on notice the Longs’ claim was predicated on the fraudulent prong of the Unfair Business Practice Act. We recognize the third cause of action also referred to a violation of Civil Code section 2954, a statute regarding the proper establishment of impound accounts. (See Kirk v. Source One Mortgage Services Corp. (1996) 46 Cal.App.4th 483, 488.) But the complaint clarified the claim “include[ed], but [was] not limited to, violation” of this statute. It appears the court mistakenly believed the third cause of action only referred to violation of Civil Code section 2954.

Nevertheless, we conclude that based on the allegations in the complaint the third cause of action does not support additional damages for a default judgment. “A UCL action is an equitable action by means of which a plaintiff may recover money or property obtained from the plaintiff or persons represented by the plaintiff through unfair or unlawful business practices. It is not an all-purpose substitute for a tort or contract action. ‘[D]amages are not available under section 17203. [Citations.]” (Cortez v. Purolator Air Filtration Products Co. (2000) 23 Cal.4th 163, 173.)

As the Longs point out in their brief, although compensatory damages are not available, a party prevailing on a UCL claim may recover monetary restitution. However, “‘Restitution under [the UCL] is confined to restoration of any interest in “money or property, real or personal, which may have been acquired by means of such unfair competition.” (Italics added.) A restitution order against a defendant thus requires both that money or property have been lost by a plaintiff, on the one hand, and that it have been acquired by a defendant, on the other.’ [Citation.]” (Zhang v. Superior Court (2013) 57 Cal.4th 364, 371.)

Here, the Longs alleged they lost their home to foreclosure, and restitution should include the sum paid on the down payment and other mortgage payments. While this may be true, the key allegation missing from the TAC is any connection between restitution damages and Respondents. The complaint does not allege Respondents (rather than the residence’s sellers) acquired the down payment. It does not appear that Respondents foreclosed upon nor ever owned the property. The complaint asserts the fraudulent conduct simply gave Respondents a quicker opening to resell the loan to IndyMac. Such allegations are insufficient to put Respondents on notice of liability for monetary restitution.

DISPOSITION

We reverse the judgment dismissing the action and order denying the request for default and remand the matter with instructions that the trial court enter a default judgment in the amount of $25,000 in addition to a newly calculated sum of interest due on this amount. Appellants shall recover their costs on appeal.

O’LEARY, P. J.

WE CONCUR:

MOORE, J.

ARONSON, J.