Articles Posted in Business Litigation

As an experienced San Diego litigation attorney, this writer knows just how devastating it is when someone learns that a court judgment has been entered against them without their knowledge. This usually occurs via what is called a default judgment. The plaintiff serves a summons and complaint on the defendant and, after the defendant fails to answer the complaint within the proscribed time limit, asks the court to enter judgment in its favor. The problem is that sometimes, default judgments are entered against people that had no idea that a legal case ever existed. This can be intentional where a plaintiff purposefully files a fraudulent proof of service claiming to have properly served the summons and complaint on the defendant, or unintentional where a plaintiff served the summons and complaint on an address they believed to be the Defendant’s correct address. There are also instances in which a defendant may have had knowledge of the case but for some excusable reason failed to participate in the case resulting in a judgment against them. Once a default judgment is entered against you, it is the same as any judgment. With a judgment, a plaintiff can attach bank accounts, garnish wages and put liens on real property, among other things.

paper-pile-860272-m-225x300Fortunately, California law provides defendants under these circumstances ways to set aside the default (essentially erasing it). However, timing is critical and it is important to act fast once you learn that a judgment has been entered against you. It’s advisable to contact an experienced litigation lawyer in San Diego as soon as possible to avoid missing important deadlines. Setting aside default judgments are governed by the following California law: California Code of Civil Procedure (“C.C.P.”) §§ 473, 473.1 and 473.5.

Mistake, Inadvertence, Surprise or Excusable Neglect (C.C.P. § 473(b))

Simply put, a default judgment is a judgment against a defendant who fails to answer a lawsuit. If a person or entity is sued and ignores the lawsuit entirely, the person or entity suing has the ability to get a judgment upon meeting certain criteria. The default judgment is a powerful tool in litigation allowing parties to obtain judgments for significant damages without a trial. Because of this, the requirements necessary for obtaining default are substantial. Judges insist on strict adherence to each requirement and routinely reject default packages submitted citing technical deficiencies. These strict requirements are designed to provide defendants due process. On one hand, California law provides wronged parties a mechanism to seek damages where the wrong doer ignores a lawsuit. On the other hand, California law ensures that basic procedures for fairness are in place. Unfortunately, the process is slow and cumbersome especially given how overwhelmed San Diego courts are today. For those who have been served with a lawsuit, the best advice from this lawyer is, “don’t ignore it”. See “Is Your Business Being Sued?” for a discussion of options. This article summarizes California’s default procedures and the options available for setting aside defaults.

Default procedures, like any aspect of lithe-lounge-1538128-300x200tigation, are complicated for lay persons. Whether seeking default or reacting to one entered against you, it is best to consult with and experienced San Diego litigator before taking any steps. This summary of procedures looks deceptively simple. It is not. In addition to strict adherence to procedural rules, the party requesting default may be required to “prove up” their case. This means presenting admissible evidence to the court establishing your legal claims and your damages. The following is a list of prerequisites to obtaining a default judgment:

  • Defendant must be served with the summons and complaint. In most cases, defendants must be personally served. However, where a defendant cannot be physically served, service may be accomplished by publication (by obtaining court approval to publish service in a newspaper).

One of the most misunderstood concepts in litigation is the concept of proof. San Diego business owners know when someone or some other business has committed a wrong. They know if a business partner has stolen from them, when a deal has been broken or when someone fraudulently induced them into a bad deal. Because of this confidence, business owners often walk into an attorney’s office expecting an unqualified validation of their claims. In some rare cases, it may be true that a party has a virtually guaranteed win. Unfortunately, in most cases, prospective litigants face numerous hurdles involving significant litigation fees and costs, legal hurdles (including defenses), damages and amassing admissible evidence (proof) all of which vary the risk of loss. This article provides a brief summary of issues of proof in California litigation.


It’s the attorney’s job to evaluate the case and give the client a frank assessment of what lies ahead. A good attorney will be careful to qualify her assessment pointing out various problems that may lie ahead including potential problems with proof. The client tells his story and while the attorney is listening, she is picturing how admissible evidence will be gathered and presented at trial. This often creates a disconnect between attorney and client leaving the client feeling flat. However the business owner might feel, it is important that he accept his attorney’s frank assessment especially when he has talked with several attorneys who are all providing similar evaluations. In fact, an attorney giving different advice might be blowing smoke to do whatever it takes to engage the client. It’s extremely important for prospective litigants to understand that what they personally know and what they can actually prove with admissible evidence are not always the same. Accepting these realities is often complicated because of the client’s personal and emotional connection to the dispute.

There are two key types of evidence presented at trial: witness testimony and documentary evidence. Both types of evidence come with a host of evidentiary and foundational requirements that in their entirety are beyond the scope of this article. However, there are some important evidentiary issues that assist the lay person in better understanding what their attorneys are trying to accomplish:

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It may seem obvious that damages are important to litigation but it’s surprising how misunderstood the concept is amongst business owners and the general public. The misconception is understandable of course given the natural inclination to focus on wrong doing. Nonetheless, without damages (significant damages in most cases) the cost of litigation can be prohibitive even where the most egregious conduct exists. There are two very important practical reasons damages are a critical consideration in deciding whether or not to sue: 1) the costs of winning may exceed the value of the case; and 2) even if you win an amount greater than your costs, the chances of collection may be minimal.

u-s--supreme-court-hallway-658254-m.jpgIf the damages are less than what it will cost to litigate the case, there is very little benefit in suing. Aside from the moral vindication, risking $50,000.00 to fight a court battle where the damages are $50,000.00 is effectively a useless exercise no matter how low the risk of losing is. Moreover, it’s difficult to place a value on the emotional cost that comes with litigation. The battle itself takes a toll. Determining whether the damages are outweighed by the costs requires careful evaluation of numerous factors including the risk of losing and whether or not attorney fees are recoverable. The risk of losing is not always clear. The first step in analyzing risk is analyzing the merits of the case, something that should be analyzed with the assistance of an experienced litigator

Attorney fees for litigating a case through trial can easily reach $100,000.00. In more complicated cases, the fees can be far higher. Even in the most simplest cases with extraordinarily efficient litigation counsel, attorney fees through trial can exceed $50,000.00. This all of course presumes that attorney fees are recoverable in the first place either pursuant to a contract or some statute. Moreover, it’s possible that if you are awarded $5,000.00 in damages where you originally sought damages of $50,000.00, the court may not consider you a prevailing party for the purposes of awarding attorney fees. In such cases, your attorney fees will not be recoverable (you will have spent $50,000.00 in attorney fees plus costs while only recovering $5,000.00). In addition to attorney fees, actual costs are incurred. Copying fees, court filing fees, service of process fees, court reporter and transcript fees for depositions and trial and expert fees are just some of the actual costs incurred during litigation. These fees can double the cost of litigation. While most of these actual costs are recoverable to the prevailing party, the determination of who is the prevailing party is often unpredictable. In the worst case, your opponent may be determined to be the prevailing party in which case you will have to pay their costs and attorney fees along with your own (while collecting nothing in damages).

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In general, shareholders are not permitted to sue corporations on their own behalf seeking damages for themselves. Instead, they are required to bring an action against wrongdoers (usually the officers and/or directors of the corporation) on behalf of the corporation in what is termed a “derivative” lawsuit. Where the corporation has a legal claim that the officers and/or directors refuse to prosecute on behalf of the corporation, the shareholders may do so derivatively. The damages recovered from a derivative lawsuit go to the corporation which in theory results in increasing share value. The idea of a derivative lawsuit may seem an oddity or even absurd to the average investor, especially shareholders in small closely held corporations where it’s officers or directors are stealing from the company.

944870_oak_tree.jpgThe public policy behind derivative actions is to protect corporations (especially publicly traded corporations) from the whims of fickle shareholders unhappy with share values. Even though it may be difficult for these fickle shareholders to win, the ability to bring actions without limitation can create significant waste. In essence, the goal is to reduce the number of frivolous suits and to encourage informal resolution, and there is a plethora of corporate law dictating the procedures necessary for bringing derivative actions. In general, derivative law requires shareholders to make a written demand on the corporate officers requesting that action be taken to investigate and if necessary file a lawsuit on the corporation’s behalf seeking to remedy the wrongs. This gives the corporation the opportunity to address the shareholders’ concerns in an effort to avoid costly litigation. The problem, especially for shareholders in smaller corporations, is that making written demands and allowing reasonable time for the corporation to act wastes important time especially if the officers and directors are all part of the problem. Nonetheless, where a derivative action is required, the demand is mandatory (except where the shareholders can show that due to the dominant control of the corporation by its officers, such demand would be futile). Pleading futility however requires more than simply naming all of the officers. The shareholders must be more specific. There are also potential bond requirements in derivative actions. If the corporation can show that there is no reasonable possibility that the lawsuit will benefit the corporation or its shareholders, the court may require the shareholders to post a bond up to $50,000. This can be prohibitory for many litigants. Moreover, because derivative actions are equitable actions, they are heard by judges and not juries. On the other hand, shareholders do benefit from derivative actions because they are able to recover attorney fees if they are ultimately found to be the prevailing party.

Derivative law for the most part isn’t necessarily ideal for small non-publicly traded or closely held corporations. This does not mean that shareholders in smaller corporations are without options. A shareholder may bring a direct action against an officer or director who committed fraud against the shareholder specifically – for instance, intentionally lying to the shareholder to induce him into purchasing shares knowing that the lies misled the purchaser regarding the true value of the company. Similarly, a shareholder may bring any other direct action against the corporation or its officers and directors where the injury is to the shareholder personally and not to the corporation. Stealing from the corporation, breaching fiduciary duties to the corporate shareholders and mismanaging corporate assets are all generally considered injuries to the corporation requiring a derivative action. As explained above, this matters because of the additional procedural hurdles required to pursue derivative actions.

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Being served with a lawsuit can be one of the worst things that can happen to any business.  The specter of long drawn out litigation causes immediate anxiety and young and inexperienced owners worry that their business may collapse.  In short, panic sets in and panic is the worst response.  There are two very good reasons not to overreact to being sued.  First, most businesses are insured to protect against the risk of litigation.  In such cases, the insurance company (with some exceptions) will step in and defend the action.  Second, overreacting leads to bad decision making especially for those that are not insured or perhaps under insured.  Whatever the scenario, there is little doubt that the most prudent step any business owner can take after being sued is an immediate consultation with an experienced business litigator.  The second most prudent step is to act fast.  It is important that business owners are aware of the deadline to respond to the complaint.  They have thirty days from service to do so and need to be acutely aware of the deadline.  Otherwise, on-the-ball attorneys on the other side will promptly move for default which at worst will result in a judgment and at best require significant additional attorney time to cure.  If more time is needed to gather insurance documentation and/or obtain counsel, it is best to at least contact the opposing party or attorney and ask for an extension to “respond” to the complaint and confirm so in writing.  Using the word “respond” instead of “answer” will allow you to respond to the complaint in any manner available under the law.  Most attorneys will agree to this at least once.

time-to-do-business-924991-m.jpgMost people would be surprised at the number of business owners (in San Diego alone) that choose to ignore lawsuits only to find out later that judgment has been entered against them for tens of thousands of dollars or even hundreds of thousands of dollars.  The existence of the judgment is often discovered only after bank accounts are attached or a Sheriff shows up one day to conduct a till tap (collecting money from the cash register at the end of the day to satisfy the judgment).  Others will rush to resolve the matter without the assistance of an experienced business litigator hoping that they can avoid the problem by agreeing to resolve the dispute informally.  While informal resolution is certainly preferable, signing agreements without legal representation is extremely risky.  The attorney representing the other side is armed with tools to maximize the benefit to their clients.  The harm to business owners under this scenario can be incalculable.  Usually, unrepresented business owners have no idea of the true extent of what they are agreeing to.  For instance, a business owner who agrees to pay off a debt in twenty-four monthly payments may unknowingly stipulate to forfeiting all of her shares in a corporation (a disastrous outcome) if she is late even one time on her payments.  An experienced business lawyer will build a cushion regarding late payments into any agreement settling the matter.

After “not panicking”, the first thing any business owner should do upon being served with a lawsuit is to retrieve all insurance policies (including personal umbrella policies) that might in any way cover the business.  In fact, any experienced lawyer would first ask about insurance policies.  It would be malpractice to do otherwise.  Moreover, attorneys aren’t interested in spending time on lengthy consultation and evaluation if a case is eventually going to be turned over to an insurance company who retain their own attorneys to handle litigation.  Businesses pay considerable premiums to protect themselves from risk.  When sued, they shouldn’t hesitate to tender their claims to insurers.
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Litigation can be divided into three relatively distinct phases: the pleading phase , the discovery phase and trial. While the distinction can sometimes be blurred, there is no doubt about these three significant areas of litigation. The average San Diegan has little understanding of the pleading phase. It involves the filing of a complaint followed by answers, cross-complaints and/or attacks on the pleadings (demurs, motions to strike and motions to quash) most of which require a response by the plaintiff and ultimately a hearing before the trial judge. This phase can be remarkably drawn out and complicated, and it is a topic for another article. Trial is, well, trial. It is of course the most well known phase in litigation. The discovery phase is no more or less important. A properly discovered case provides attorneys with the necessary tools to prove a litigant’s case at trial.

stone-judge-778488-m.jpgThere is a school of thought in both the legal and non-legal communities that discovery can also be used as an effective bulldozing tool (often referred to as “guerrilla discovery”), and the sad truth is that this is indeed true. The idea is to propound so much discovery (whether via written requests or deposition testimony) and to provide as much resistance to discovery propounded on you that the other side cowers in response to the onslaught. Between attorney fees, court reporter fees, transcript costs and expert fees, the total cost for the discovery phase alone can be astronomical. Even in a relatively simple case between two San Diego business owners, an attorney can propound hundreds and hundreds of interrogatories, requests for production of documents and requests for admissions (a discovery tool that allows parties to ask the other side to admit certain important facts in the litigation). If the propounding party feels that the discovery responses are inadequate for any reason a round of negotiation and motions to compel follow. By the time all of this is accomplished, the opposing party’s attorney may spend fifty to one hundred hours dealing with this written discovery alone. Even the most affordable litigator whose fees are in the low $200.00 per hour range, fifty to one hundred hours for a single battle over written discovery adds up fast. In addition, a guerrilla campaign will include taking the depositions of every possible witness resulting in significant additional cost. It is not uncommon for a party to notice the depositions of twenty or more witnesses. Some of these depositions are of business owners or managers and can last for days. The above scenario is an example of what can occur even with the simplest of cases. In more complex cases like patent litigation, attorney fees can be hundreds of thousands of dollars (for the discovery phase alone). As one might imagine, this type of onslaught can be daunting to the opposing party.

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When a large group of individuals are injured by the actions of a person or company, the class action lawsuit allows them to pursue their legal claims even where the damages personal to each individual may be small.  Because attorneys’ fees are recoverable in class action suits, litigation attorneys are generally willing to take such cases on a contingency basis.  Often, large corporations with potential exposure to class action claims incorporate arbitration clauses and class action waivers requiring any claimant to seek relief via arbitration and foreclosing the class action option.  Arbitration clauses are attractive to defendants, and sometimes plaintiffs, because it is faster, cheaper and more flexible than litigation.

u-s--supreme-court-2-1038828-m.jpgWhere individual damages are small, the class action waiver most often acts as a bar to relief.  From the corporate perspective, the class action waiver protects companies from frivolous suits brought by unscrupulous lawyers.  Currently, the enforceability of a class action waiver under California law is unclear.  One side is concerned with the protection of consumers who have little choice in most cases but to enter into whatever agreement they are presented (i.e. signing a contract with a cell phone provider).  The other side is concerned with protecting the strong policy goal of encourage arbitration and reducing the pressure on overwhelmed courts.  

Historically, California courts have been loathe to enforce arbitration agreements that limit or waive a plaintiff’s ability to pursue a class action. Following the U.S. Supreme Court’s recent decision in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), however, the California Supreme Court has had to reconsider its previous attitude towards such waivers, at least to some extent.  In Concepcion, the U.S. Supreme Court held that the Federal Arbitration Act (“FAA”) preempted state laws restricting the right of parties to agree to arbitration.  The Concepcion Court noted the efficiency and cost advantages of arbitration over class litigation and arbitration.  Significantly, the Court emphasized that contract law governs and that “the FAA requires courts to honor parties’ expectations”.   Thus, the enforceability of arbitration clauses and class action waivers falls squarely within the boundaries of contract law.
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In order to discourage unreasonable delay in bringing civil lawsuits, all states have established certain time limits within which a legal action must be brought, more commonly known as the “statute of limitations.” Some states, including California, have also adopted what are known as statutes of repose which act as an absolute bar to certain legal causes of action. Statutes of limitations and repose are intended to protect potential defendants from being subjected to stale legal claims where witnesses and/or evidence become unavailable thereby impeding the defendant’s ability to defend against the claims. If an action is not brought within the specified period, subject to certain exceptions, a court is barred from hearing the case.

1137812_old_time.jpgThe first step in determining when a statute of limitations begins to run is to ascertain when the cause of action “arose” or when it “accrued.” A cause of action arises when the conduct upon which the claim is based occurs. A cause of action accrues when the right to take legal action arises. Generally, the statute of limitations begins to run from the time a cause of action accrues.

For example, assume that John underwent surgery in 2000. During the procedure, unbeknownst to John, the surgeon negligently left an instrument inside him. Years later, in 2014, John began experiencing pain as a result of the instrument and later learned of the surgeon’s negligent mistake. John’s claim for medical malpractice arose in 2000, at the time the surgeon committed the negligent conduct. However, John’s cause of action didn’t accrue until 2014, when he discovered the surgeon’s negligence. Under the California Code of Civil Procedure, the statute of limitations for malpractice is the lesser of three years after the date of injury or one year after the plaintiff discovers, or through the use of reasonable diligence should have discovered, the injury.

A 2011 decision by a federal court highlighted the applicability of a legal theory known as the business judgment rule to corporate officers in California.  Codified at section 309 of the Corporations Code, the business judgment rule establishes a presumption that a corporate director, in the performance of his or her duties, acts on an informed basis, in good faith, and in the honest belief that his or her actions are in the best interest of the corporation.

man-on-a-bridge-3-1427249-m.jpgIn Federal Deposit Insurance Corp. v. Perry (C.D. CA December 13, 2011) (Case No. CV 11-5561 ODW), the U.S. District Court for the Central District of California held that the business judgment rule is inapplicable to decisions made by corporate officers (as opposed to “directors”) on behalf of the corporation.  In Perry, the Federal Deposit Insurance Commission (“FDIC”) sued the defendant, Matthew Perry, in his capacity as CEO of Indymac Bank, alleging that Perry breached his fiduciary duties by negligently allowing the bank to generate over $10 billion in risky residential loans.

Due to the volatility of the secondary market in which the loans were slated to be sold, Indymac was forced to absorb the loans into its own investment portfolio, resulting in losses of more than $600 million.  In July of 2008, Indymac Bank closed and the FDIC was appointed as receiver.  Perry moved to dismiss FDIC’s complaint, claiming it had failed to allege facts upon which it could state a claim for recovery.  Specifically, Perry contended that the business judgment rule protected him from liability stemming from decisions he made as a corporate officer of the bank.  FDIC countered that the business judgment rule does not apply to corporate officers in California.

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