Watcher v. Sanders CA4/3

Filed 6/29/23 Watcher v. Sanders 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NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication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
JOHN WATCHER et al.,
Plaintiffs and Appellants, G061304
v. (Super. Ct. No. 30-2018-00991458)
JOSEPH L. SANDERS, as Trustee, etc., OPINION
et al.,
Defendants and Respondents.
Appeal from an order of the Superior Court of Orange County, Gregory H.
Lewis, Judge. Reversed and remanded with instructions.
Buchalter, Robert M. Dato and Jason E. Goldstein; Gordon Stuart for
Plaintiffs and Appellants.
Cumming & Associates and William Cumming; Jeff Lewis Law, Jeffrey
Lewis and Sean Rotstan for Defendants and Respondents.
INTRODUCTION
Our Code of Civil Procedure1, despite being a set of procedural rules, rests
on a foundation of equity, and “its provisions and all proceedings under it are to be
liberally construed, with a view to effect its objects and to promote justice.” (§ 4, italics
added.) The series of provisions in the code giving a trial court discretion to vacate
defaults against defendants are so designed.2 If a defendant finds he has been defaulted
through mistake, surprise, inadvertence, or excusable neglect, he may seek to have that
action vacated so he may answer. (§ 473, subd. (b).) But the equitable objective runs
both ways; he must move for such relief within six months. (Ibid.) Said time limit
“protects the finality of judgments . . . provides repose to litigants and . . . ensures that a
motion for relief will be made promptly when memories are fresh[.]” (Arambula v.
Union Carbide Corp. (2005) 128 Cal.App.4th 333, 345.)
The statute here at issue, section 473.5, attempts a similar balancing of
equities by allowing relief for a defaulted defendant who, despite proper service of
process, never received actual notice of the lawsuit in time to defend. (Id., subd. (a).)
“To get such relief, the defaulted defendant must submit an affidavit showing the lack of
actual notice was not due to . . . avoidance of service or inexcusable neglect. (Id., subd.
(b).)” (Luxury Asset Lending, LLC v. Philadelphia Television Network, Inc. (2020) 56
Cal.App.5th 894, 908.) The defendant must in essence show the lack of actual notice was
not a problem of his own making.
In this case, perhaps inadvertently, the defendant seems to have done the
opposite. Taken at face value, his affidavits suggest he would have been lucky to receive
actual notice of the lawsuit, at least by any normal means. His numerous residences and
transient lifestyle made him difficult for anyone but a clairvoyant to pin down. But that
is the more generous view. What he characterizes as his “lifestyle” fluidity of residence
1
All further statutory references are to the Code of Civil Procedure.
2
These provisions are sections 473, subdivision (b) through (d), 473.1, and 473.5.
2
could just as easily be avoidance of service. Because the trial court did not determine
whether defendant was at fault for the lack of notice, we must reverse its order vacating
his default and remand so a proper analysis may be undertaken.
FACTS
Appellants John and Mabel Watcher are elderly plaintiffs who sued their
former investment advisor and friend, Rick Floyd, and his company, American Bankers,
LLC (American Bankers), for fraud.3 Floyd had approached John Watcher in 2014 about
investing the couple’s savings in private mortgage loans. He claimed he would find
potential borrowers, perform due diligence and arrange the loans, and then service them.
The Watchers would sit back and receive the monthly payments. Instead, the Watchers
claim, Floyd took the money and loaned it out under his or American Bankers’ name,
leaving the couple with no security interest or right to repayment. Floyd allegedly
managed to bilk almost $1 million from the Watchers in this manner between 2014 and
2017.
Two of the loans born from the scheme alleged were from American
Bankers to respondent Joseph L. Sanders, in his capacity as trustee for two trusts. One
for $110,000 was secured by the property at 30269 Callaway Circle in Riverside, and the
second for $283,000 was secured by Sanders’ residence at 1 Half Moon Bay in Corona
del Mar.
The Watchers received payments on both until February 2018, when the
money suddenly stopped flowing and Floyd went incommunicado. At that point, over
$100,000 of principal remained on the Callaway loan and all of the principal on the Half
Moon Bay loan. Sanders was added as a defendant to the Watchers’ first amended
complaint, on grounds that he conspired with Floyd to defraud the Watchers on the two
loans.
3
Neither Floyd nor American Bankers is a party to this appeal.
3
Service of Process and Sanders’ Notice of the Lawsuit
Naming Sanders turned out to be the easy part; finding and serving him was
quite another matter. Before filing their first amended complaint in October 2018, the
Watchers’ counsel, Gordon Stuart, had sent Sanders at least three letters demanding
repayment of the loans. Two of the letters were sent to the Half Moon Bay property, and
the third was sent to Sanders’ mailing address on Pacific Coast Highway in Huntington
Beach (the PCH address). Sanders did not respond to any of them.
Over a nearly three-week span in February 2019, process servers tried
almost a dozen times unsuccessfully to serve Sanders at one of his homes in Laguna
Beach (the Baja property). So on February 13, 2019, Stuart mailed the first amended
complaint, summons, and an acknowledgment of receipt form to the Baja property as
well as the PCH address. His assistant also e-mailed the documents to Sanders’ personal
e-mail address. The cover letter for the mailing advised Sanders the Watchers would
seek to serve him via publication if he did not respond.
In early March 2019, the Watchers were preparing to file a second amended
complaint when they learned the Half Moon Bay property was in foreclosure due to
Sanders’ default on a senior loan. They filed an ex parte application to impose an
equitable lien on the property for the remaining principal they were owed on their own
loan. This application was granted, and the equitable lien was recorded on March 7,
2019. Notice of the ex parte application was e-mailed to Sanders, and notice of the
court’s order was mailed to Half Moon Bay, the PCH address, the Baja property, and a
fourth address owned by Sanders in Long Beach. Sanders said nothing in response.
After filing the Watchers’ second amended complaint, Stuart asked the
Orange County Sheriff to try and serve Sanders at the Baja property. The sheriff was
unsuccessful after five attempts. Stuart tried to find other addresses for Sanders using a
LexisNexis person search, but no new addresses turned up except for the PCH address.
As he did with the first amended complaint, Stuart mailed the summons, second amended
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complaint, and acknowledgment of receipt form to Sanders at the Baja property. The
package was not returned as undeliverable. Still, Sanders did not respond.
In September and October 2019, Stuart wrote to the United States Postal
Service to request a forwarding address, if any, for Sanders, but did not receive a
response. He also did internet searches for Sanders, but these searches did not yield any
new information. With no other avenues to explore, Stuart applied to serve Sanders by
publication, and this request was granted in November 2019. When Sanders failed to file
a responsive pleading, his default was entered on February 14, 2020. Notice of entry of
default was mailed to Sanders at the Baja property and Half Moon Bay property on
February 28, 2020. The Watchers proved up the default and judgment was entered
against Sanders on April 8, 2021.
But the Watchers were not the only people suing Floyd. Stuart was
representing another plaintiff named Jeffrey Stoltz in a lawsuit against Floyd, and on
September 19, 2020, Sanders was served with a subpoena duces tecum to give a third
party postjudgment enforcement examination in the matter on October 2, 2020.
According to the proof of service, he was personally served at the Baja property. He had
an attorney friend, Cesar Vallarta, e-mail Stuart on the day the examination was to take
place, to say Sanders was ill and would not be able to make it.
Then, in late February 2021, Stuart’s firm mailed a settlement demand in
this case to Sanders, in care of Vallarta, at the Half Moon Bay property. Copies were
also mailed to Sanders at the PCH address and the Baja property. Vallarta did not discuss
the letter with Sanders, and Sanders claims he did not receive a copy until much later.
Sanders’ Motion to Vacate Default
In October 2021, Sanders, represented by new counsel, filed a motion to
vacate the default entered in February 2020. The motion was made pursuant to sections
473.5 and 473, subdivision (b), as well as equitable grounds. In his supporting
declaration, Sanders claimed he only learned about the Watchers’ default judgment in
5
August 2021. He was in foreclosure on a property in Palm Springs, and was obtaining a
loan to pay off the defaulted one. The lender pulled title and discovered the judgment.
In reaction to the judgment, Sanders filed for Chapter 11 bankruptcy on
August 17, 2021. He then reviewed the court’s file in this matter and discovered he had
been served via publication and subsequently defaulted.
On March 14, 2022, the trial court granted Sanders’ motion under the
auspices of section 473.5. The court recognized that service by publication is unlikely to
result in actual notice to the defendant, and the affidavits of due diligence filed by the
Watchers had indicated no one was present at the Baja property or Half Moon Bay
properties at the time the process servers approached. Additionally, the court observed
the Watchers had not sent a notice of entry of default to the PCH address, which was
Sanders’ mailing address. It determined Sanders had not received notice of entry of
default until August 2021, and therefore set aside the default and default judgment.
DISCUSSION
On appeal, the Watchers question the trial court’s refusal to consider certain
evidence which they tried to present in sur-reply to Sanders’ reply declaration. They feel
the reply declaration was inconsistent with Sanders’ bankruptcy-related testimony. We
will get to that in a moment because it is an issue for remand. But we reverse not because
of that, but because the trial court failed to apply the proper criteria in granting section
473.5 relief.
“We review a trial court’s decision to grant or deny relief under section
473.5 for abuse of discretion.”4 (Rios v. Singh (2021) 65 Cal.App.5th 871, 885.) “Under
this standard, ‘“a reviewing court should not disturb the exercise of a trial court’s
discretion unless it appears that there has been a miscarriage of justice.” [Citation.]’
(Cristler v. Express Messenger Systems, Inc. (2009) 171 Cal.App.4th 72, 80.) Still,
4
We reject the Watchers’ contention that a de novo standard is required simply because the trial
court refused to consider their evidence.
6
“‘“[a]ll exercises of discretion must be guided by applicable legal principles . . . .
[Citations.] If the court’s decision is influenced by an erroneous understanding of
applicable law or reflects an unawareness of the full scope of its discretion, the court has
not properly exercised its discretion under the law. [Citation.] Therefore, a discretionary
order based on an application of improper criteria or incorrect legal assumptions is not an
exercise of informed discretion and is subject to reversal.”’ (J.N. v. Superior Court
(2018) 23 Cal.App.5th 706, 714-715.)” (Kramer v. Traditional Escrow, Inc. (2020) 56
Cal.App.5th 13, 27 (Kramer).)
I. Findings Required Under Section 473.5
As we have already noted, a defendant seeking this relief must show his
lack of notice was not a problem of his own making. Additionally, though, the trial
court’s discretion to set aside the default under section 473.5 may only be exercised
“[u]pon a finding by the court that the motion was made within the period permitted by
subdivision (a) and that his or her lack of actual notice in time to defend the action was
not caused by his or her avoidance of service or inexcusable neglect[.]” (Id., subd. (c),
italics added.) This means two findings are needed – one as to timeliness and the other as
to lack of fault on the part of defendant. According to our record, these findings were
either non-existent or incomplete.
Much of the court’s ruling focuses on Sanders’ averred lack of actual
notice. Understandably, it was inclined to give Sanders latitude on this because it
recognized he was unlikely to have received actual notice if service was by publication.
But we find its analysis of Sanders’ motion lacking in some key respects.
For one thing, the court found Sanders “received notice of the entry of
default in August 2021” and his motion was therefore timely. Timeliness does not hinge
on when the defendant received the notice of entry of default. Rather, a motion is timely
if it is served and filed “within a reasonable time, but in no event exceeding the earlier of:
(i) two years after entry of a default judgment against him or her; or (ii) 180 days after
7
service on him or her of a written notice that the default or default judgment has been
entered.” (§ 473.5, subd. (a), italics added.) Undoubtedly, the motion was filed within
two years of entry of the default judgment – it was entered on April 8, 2021 and the
motion filed on October 27, 2021. And it was filed just under 180 days after service of
the default judgment on April 30, 2021. But it was not filed within 180 days after service
of the written notice of entry of default on February 28, 2020. Thus, the trial court only
had discretion under section 473.5 to set aside the default judgment; not the entry of
default.5 It exceeded its authority under section 473.5 by vacating both.6
The trial court also failed to make any findings as to whether Sanders’ own
inexcusable neglect or avoidance of service was to blame. The subject was never even
discussed in the ruling.7 This concerns us not just because it is an element necessary for
section 473.5 relief, but also because the factual scenario Sanders presented to the court
could be viewed as dubious, so confidence in the court’s ruling hinges on an indication he
considered the issue.
In his moving declaration, Sanders says he did not receive the notice of
entry of default in the mail at either the Baja or Half Moon Bay properties. He said the
Baja property had been under construction and he was not regularly going there. But he
gives no specifics around this assertion. How long was the construction going on? Why
were process servers unable to serve him in February and September 2019 at the same
address?
5
180 days after service of the notice of entry of default was earlier than 2 years after entry of
default, thus, pursuant to the statute, the former deadline was the applicable one.
6
This could implicate another problem. It would be an idle act to vacate the default judgment
without vacating the entry of default also, and yet this would be the only authority the trial court would have under
section 473.5. If the default remained, the trial court would have no option but to enter judgment again upon the
plaintiff’s request. (See Kramer, supra, 56 Cal.App.5th at p. 39; see also Howard Greer etc. Originals v. Capritti
(1950) 35 Cal.2d 886, 888–889.) On remand, the trial court will need to take this into consideration.
7
Sanders argues, despite the lack of a finding, that the trial court implicitly rejected the Watchers’
assertions about trying repeatedly to contact him or serve him with papers. Even if this assertion were true, the
court’s own words suggest it assumed Sanders had to actually hold in his hand and look at a document in order for
him to have any obligation to respond. It did not consider whether Sanders had needlessly created the conditions by
which he would be unlikely to see the documents.
8
Once confronted with the Watchers’ evidence regarding multiple attempts
to notify him of the lawsuit and serve him with process via multiple means at multiple
addresses, Sanders dissembled, coming up with excuse after excuse in his reply
declaration.
He stated he never looked at his personal e-mail account because it was
flooded with junk mail, and he corroborated this by submitting a screenshot of his inbox
showing over 194,000 unread e-mails.8 After receiving the Watchers’ opposition to the
motion, he said he searched and found the e-mail by which Stuart’s assistant had sent the
complaint to him on February 14, 2019. But Sanders’ failure to review and cull his e-
mail account is his own problem. He admits he received the e-mail; whether he chose to
read it or not is irrelevant.
Sanders then goes on state that he had five different residences in the year
2019 alone! Those are the Baja property, the PCH address, the Half Moon Bay property,
the Callaway Circle residence in Murrieta, and a property in Mexico. He would
“regularly move[] around to each for extended periods of time.” Though he
acknowledges he receives mail at both the Baja property and Half Moon Bay property, he
has been incredibly careless about attending to it. He says the Baja property’s mailbox
has not had a door for five years, making the mail visible and easy to steal. The mailbox
at Half Moon Bay requires a key to open, and he claims he has not had a key since 2009,
so he must reach a hand into the slot in order to retrieve mail. Apparently, he told the
mailman to deliver mail into a slot by the garage, but is not sure whether all mail carriers
abide by this request. And he admits he has received notices from the postal service
advising him both properties’ mailboxes are full and no mail will be delivered until they
are emptied. He does not say when he received these notices, but he clearly felt no
urgency around emptying the mail, supposedly because he felt he “rarely received any
8
You read that number right.
9
important mail at either location.” He concedes it is likely that long periods of time
passed with mail not being delivered to either address.
We are at a loss to understand how Sanders could so much as go about the
necessities of adult life in such a manner. Effectuating service of process or even getting
Sanders’ attention with his lifestyle and lax approach to his correspondence, such as it
was, would have daunted Sisyphus.9
Also significant was Sanders’ admission his personal mail was being
delivered to the PCH address and had been since 2008.10 If this was the case, he should
have received notice of the lawsuit. In April 2018, he had a tenant at the PCH address
who would “periodically” deliver to him large stacks of mail. The Watchers mailed a
copy of the summons and first amended complaint to the PCH address on February 13,
2019. They had previously mailed a demand letter to the PCH address. And a copy of the
notice regarding the equitable lien the Watchers had placed on the Half Moon Bay
property was also mailed there.11 If Sanders was receiving mail at the PCH address, he
should have received these documents.
II. Potential Inconsistencies in Sanders’ Testimony
On the whole, there is significant evidence to be weighed by the trial court
on remand to make a finding on whether Sanders lacked actual notice due to his own
non-relievable actions. And that brings us to the question of whether the Watchers’
additional evidence should be considered. We think it should.
Once Sanders filed his reply declaration, the Watchers sought leave to file a
sur-reply because they thought Sanders’ averments were inconsistent with testimony he
had given during the bankruptcy proceedings. For instance, Sanders’ reply declaration
9
Though, as we noted earlier, Stuart’s firm was finally able to serve him with the subpoena in the
Stoltz matter at the Baja property in October 2020. Lightning strikes occasionally.
10
Remember, the trial court cited the Watchers’ failure to send the notice of entry of default to the
PCH address as one reason for granting Sanders’ motion, because it may have indicated lack of actual notice.
11
Because the settlement demand letter was also sent to Sanders at multiple addresses, it is not
credible for Sanders to blame his attorney, Vallarta, for failing to share it with him.
10
stated he was not living at the Baja property in 2019, and would only occasionally visit
on weekends. But at a January 18, 2022 meeting of bankruptcy creditors, Sanders
testified he lived at both the Baja and Half Moon Bay properties. At the same meeting,
he testified he was mainly receiving his mail at the Half Moon Bay property, though in
the reply declaration, he said it was all going to the PCH address. There are several other
such examples of inconsistencies between the testimony offered by Sanders in the
bankruptcy about his addresses and residences, and what he said in this matter. Such
evidence should be explored and considered by the trial court on remand.
At oral argument on Sanders’ motion, the trial court refused to allow the
new evidence, stating: “Mr. Stuart, I don’t consider evidence that’s been presented on the
day of argument, it’s just not going to happen, it’s new evidence and it’s not proper.” We
cannot endorse this statement.
“The general rule of motion practice, which applies here, is that new
evidence is not permitted with reply papers. This principle is most prominent in the
context of summary judgment motions, which is not surprising, given that it is a common
evidentiary motion. ‘[T]he inclusion of additional evidentiary matter with the reply
should only be allowed in the exceptional case . . .’ and if permitted, the other party
should be given the opportunity to respond. (Plenger v. Alza Corp. (1992) 11
Cal.App.4th 349, 362, fn. 8; see Nazir v. United Airlines, Inc. (2009) 178 Cal.App.4th
243, 252; San Diego Watercrafts, Inc. v. Wells Fargo Bank (2002) 102 Cal.App.4th 308,
316.) The same rule has been noted in other contexts as well. (Alliant Ins. Services, Inc.
v. Gaddy (2008) 159 Cal.App.4th 1292, 1308 [in preliminary injunction proceeding, ‘the
trial court had discretion whether to accept new evidence with the reply papers’].) [¶]
This rule is based on the same solid logic applied in the appellate courts, specifically, that
‘[p]oints raised for the first time in a reply brief will ordinarily not be considered, because
such consideration would deprive the respondent of an opportunity to counter the
argument.’ (American Drug Stores, Inc. v. Stroh (1992) 10 Cal.App.4th 1446, 1453; see
11
Browne v. County of Tehama (2013) 213 Cal.App.4th 704, 720, fn.10.)” (Jay v.
Mahaffey (2013) 218 Cal.App.4th 1522, 1537-1538.)
The trial court’s response indicates it was enforcing a blanket rule against
allowing new evidence on the day of argument, which itself would be an abuse of its
discretion. (See In re Cortez (1971) 6 Cal.3d 78, 85-86, quoting People v. Surplice
(1962) 203 Cal.App.2d 784, 791 [“‘The term (judicial discretion) implies absence of
arbitrary determination, capricious disposition or whimsical thinking. It imports the
exercise of discriminating judgment within the bounds of reason. (Par.) To exercise the
power of judicial discretion all the material facts in evidence must be both known and
considered, together also with the legal principles essential to an informed, intelligent and
just decision.’”].)
But additionally, the Watchers were not the moving party on the subject
motion. Sanders was. And it was Sanders who raised new evidence on reply. If the
court was going to refuse to consider the Watchers’ new evidence, it should also have
refused to consider the new evidence in Sanders’ reply declaration. If it chose to consider
Sanders’ new evidence, it should have allowed the Watchers to respond. On remand, all
of this should be before the court.
DISPOSITION
The order granting respondent’s motion to vacate default and default
judgment pursuant to section 473.5 is reversed and remanded so the trial court may
conduct proceedings to make the findings required under section 473.5, and/or consider
12
any other grounds stated in respondent’s motion. Appellants to recover their costs on
appeal.
BEDSWORTH, ACTING P. J.
WE CONCUR:
GOETHALS, J.
SANCHEZ, J.
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