Scharf v. Scharf Investments CA6

Filed 6/30/23 Scharf v. Scharf Investments CA6
NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication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
SIXTH APPELLATE DISTRICT
JEFFREY SCHARF et al., H050150
(Santa Clara County
Plaintiffs and Appellants, Super. Ct. No. 22CV395005)
v.
SCHARF INVESTMENTS, LLC, et al.,
Defendants and Respondents.
Jeffrey Scharf and Sherril Smith-Scharf—subject to an arbitration award in favor
of respondents Scharf Investments, LLC and Brian Krawez—petitioned the trial court to
correct the award, and the trial court granted respondents’ motion to quash service of the
petition. The Scharfs’ appeal asks us to determine whether delivery of the summons and
petition through the mail slot of the LLC’s closed and vacant office substantially
complies with service requirements, where respondents received actual notice four days
after the deadline for service and six days before their answer to the petition would have
been due. Because even liberal construction of the operative statutes requires more
notice than the Scharfs afforded respondents here, we affirm.
I. BACKGROUND1
On November 10, 2021, a three-arbitrator panel awarded a total of $83,844,086.26
to Krawez and the LLC for claims relating to the Scharfs’ sale to Krawez of their
minority interest in the LLC.2 The panel further enjoined Jeffrey Scharf from
“misrepresenting his role” at the LLC and “making false disparaging statements” about
the LLC. The Scharfs were served with the award the same day.
A petition to correct an arbitration award “shall be served and filed not later than
100 days after the date of the service of a signed copy of the award on the petitioner.”
(Code Civ. Proc., § 1288;3 see also § 1286.8, subd. (a).) Accordingly, 99 days after
service of the final award, on February 17, 2022, the Scharfs filed a petition to correct the
arbitration award, challenging the $5 million punitive damages component of the total
award and the grant of injunctive relief. The Scharfs attempted service the same day, one
day before the deadline. The LLC office was generally open weekdays from 7:30 a.m. to
4:00 p.m. When the process server arrived at the office at 4:41 p.m., after the office had
already closed, a research analyst who had stayed late opened the door. The process
server asked for Krawez, was informed he was unavailable, and, when the research
analyst offered to pass on a message to Krawez, said to tell Krawez that “Tom was
looking for him,” without otherwise identifying his purpose or inquiring whether the
office would be open the following day, a Friday.
1
Respondents’ request for judicial notice of the trial court’s September 29, 2022,
order confirming the subject arbitration award in this case is denied, the order having no
relevance to the service issue before us. (Evid. Code, § 452, subd. (d); Mangini v. R. J.
Reynolds Tobacco Co. (1994) 7 Cal.4th 1057, 1063 [“Although a court may judicially
notice a variety of matters . . . , only relevant material may be noticed.”].)
2
Following the award, the Scharfs retained new counsel on December 14, 2021, to
represent them in litigation with Krawez and the LLC still pending in the Santa Cruz
County Superior Court and to review the arbitration award and arbitration record.
3
Undesignated statutory references are to the Code of Civil Procedure.
2
The LLC office was in fact closed from Friday, February 18 through Monday,
February 21, 2022, for the holiday weekend, although Friday itself was not a recognized
holiday. Accordingly, when the process server returned at 10:06 a.m. that Friday, the
office was locked and apparently vacant. The process server nonetheless returned at
3:34 p.m. to put the documents through the mail slot of the still closed and vacant office.
The process server indicated on the Judicial Council boilerplate form that service was
made by substituted service; in the space intended for identifying the “person . . .
apparently in charge at the office or usual place of business” with whom the documents
were left, the process server wrote, “PLACED DOCUMENTS INSIDE OFFICE SUITE
BY USING THE MAIL SLOT.”
The documents were found on Tuesday, February 22, 2022, when the office
reopened. Later that day, two additional copies addressed to Krawez arrived at the office
by mail. Krawez and respondents’ counsel received a copy at 4:30 p.m.
Krawez and the LLC moved to quash service of the petition, arguing that the
Scharfs failed to properly serve the petition before the deadline mandated by section 1288
and that, despite ongoing communications between the parties’ counsel, the Scharfs had
done nothing to alert respondents to the filing of the petition besides the service by mail
and delivery by mail slot. Over the Scharfs’ opposition, the trial court granted the motion
to quash service and concluded the petition to correct the arbitration award was moot.
The Scharfs timely appealed.
II. DISCUSSION
Service of a summons is typically “by personal delivery of a copy of the summons
and of the complaint to the person to be served.” (§ 415.10.) For an LLC, service of the
summons may be made by personal delivery to the LLC’s designated agent. (Corp.
Code, § 17701.16, subd. (b).) Where the person to be served is sued in an individual
capacity and personal delivery cannot be achieved despite reasonable diligence,
section 415.20 authorizes substituted service on “a competent member of the household
3
or a person apparently in charge of [the person’s] office” by leaving a copy in that
person’s presence and informing the person of the contents. (§ 415.20, subd. (b).) The
summons and complaint must thereafter be mailed to the person to be served. (Ibid.)
Substituted service on an LLC’s designated agent is similar except that it requires no
showing of reasonable diligence: the delivery of the papers must be to the designated
agent’s office, left “during usual office hours” with a person apparently in charge of the
office. (Id., subd. (a).) These statutory requirements “ ‘ “should be liberally construed to
effectuate service and uphold the jurisdiction of the court if actual notice has been
received by the defendant, and in the last analysis the question of service should be
resolved by considering each situation from a practical standpoint.” ’ ” (Pasadena Medi-
Center Associates v. Superior Court (1973) 9 Cal.3d 773, 778 (Pasadena Medi-Center)4;
Ellard v. Conway (2001) 94 Cal.App.4th 540, 544 [applying liberal construction to
substituted service].)
Once Krawez and the LLC challenged personal jurisdiction by filing their motion
to quash, it became the Scharfs’ burden “to prove the existence of jurisdiction by proving
. . . the facts requisite to an effective service.” (Dill v. Berquist Construction Co. (1994)
24 Cal.App.4th 1426, 1440 (Dill); see id. at p. 1439 [affirming dismissal where plaintiff’s
mailing of summons and complaint to corporation failed to identify an individual
specified in § 416.10].) The Scharfs contend that their good-faith service efforts and
respondents’ receipt of actual notice constitute substantial compliance with
section 415.20, which governs substituted service. Because the facts surrounding service
4
As courts have subsequently observed, the high court in Pasadena Medi-Center
“was misled as to the legislative history” of the Jurisdiction and Service of Process Act of
1969, but “its public policy analysis was clearly correct.” (Summers v. McClanahan
(2006) 140 Cal.App.4th 403, 408 (Summers); see also ibid. at fn. 8; Carol Gilbert, Inc. v.
Haller (2009) 179 Cal.App.4th 852, 863 (Gilbert).)
4
of the petition are not in dispute, we review de novo the question of jurisdiction. (Lebel
v. Mai (2012) 210 Cal.App.4th 1154, 1159.)
A. Reasonable Diligence as to Krawez
We first address whether the Scharfs were reasonably diligent in their attempts at
service on Krawez, as reasonable diligence is required before a party can resort to
substituted service on a natural person (as opposed to an LLC). (§ 415.20, subd. (b).)
“[E]ach case must be judged upon its own facts.” (Evartt v. Superior Court (1979) 89
Cal.App.3d 795, 801 [deeming insufficiently diligent the initiation of service efforts three
days before expiration of the applicable three-year limitations period].)
The Scharfs rely on their process server’s three visits to the LLC’s closed office as
justifying the resort to substituted service on Krawez. “Two or three attempts to
personally serve a defendant at a proper place ordinarily qualifies as ‘ “reasonable
diligence.” ’ ” (American Express Centurion Bank v. Zara (2011) 199 Cal.App.4th 383,
389 (American Express).) We read the looseness of this formulation—the “ordinarily”
qualifier and the abstention from a hard number—to be consonant with Pasadena Medi-
Center’s call to consider each situation from a practical standpoint. At bottom, what
constitutes reasonable diligence of efforts at personal service is determined based on the
totality of case-specific factors.
One of these case-specific factors is that the Scharfs left themselves only a narrow
margin within which to effect service as required by the Code of Civil Procedure, but
apparently failed to consider the long-standing business hours predictably in effect on
February 17. The Scharfs’ three attempts at personal service were accordingly squeezed
into a 24-hour period immediately preceding a holiday weekend. The first attempt was
after the LLC’s known business hours: the record reflects that 4:00 p.m. has been the
LLC’s normal closing time since at least 2007, and that as early as January 2001, Jeffrey
Scharf had noted the office’s 4:00 p.m. closing time in its publicly accessible Uniform
Application for Investment Adviser Registration he submitted as the LLC’s president.
5
The second attempt, by the same process server, was without his having inquired of the
research analyst encountered the day before about holiday hours. The same process
server made what the Scharfs count as their third attempt at personal service with full
awareness that the office had been closed and vacant during its customary hours that day;
this makes it difficult to endorse the notion that the office remained—at that time—“a
proper place” for personal service on Krawez (see American Express, supra, 199
Cal.App.4th at p. 389) or that the server’s return that afternoon could be deemed an
“attempt to personally serve” Krawez, as opposed to the abandonment of that endeavor in
favor of substituted service.
The Scharfs cite neither reason nor authority to justify why they or their process
server could not have confirmed the office’s hours before attempting service and served
the papers earlier in the day on February 17, before the office’s customary closing hour.
And the record discloses no effort to serve Krawez at his residence, his next likeliest
location after hours. Indeed, Krawez provided unrebutted evidence that he was home on
February 17 until approximately 8:00 p.m., and that another “competent member of [his]
household” was at the residence for much of February 18. A service attempt at his house
therefore would have had a high probability of success. On this record, accordingly, the
reasonable diligence of the Scharfs’ service efforts is doubtful.
B. Substantial Compliance
Even assuming reasonable diligence as to Krawez personally, however, “a finding
of substantial compliance requires three preconditions. First, there must have been some
degree of compliance with the offended statutory requirements. [Citations.] Second, the
objective nature and circumstances of the attempted service must have made it ‘ “ ‘highly
probable’ ” ’ that it would impart the same notice as full compliance. [Citation.] Finally,
it must in fact have imparted such notice, or at least sufficient notice to put the defendant
on his defense.” (Gilbert, supra, 179 Cal.App.4th at pp. 865-866.) The “offended
statutory requirements” at issue here are that a summons and complaint be left with or in
6
the presence of a “responsible person” at the defendant’s place of business, “who shall be
informed of the contents thereof.” (§ 415.20, subds. (a)-(b); see also 2 Witkin, Cal. Proc.
(6th ed. 2023) Jurisdiction, § 128 [defining substituted service as “delivery to a
responsible third person at the defendant’s home or place of business,” followed by
mailing].) The Scharfs established neither an adequate degree of compliance nor the
probable or actual efficacy of their efforts to comply.
1. Degree of Compliance
It is undisputed that the Scharfs’ process server informed no one of the summons
and petition left at defendants’ vacant office. Instead, the Scharfs allowed predecessor
counsel’s representations—touting their acceptance of the arbitration panel’s award as
“final”— to be the last word on the subject until four days after the deadline for service
had passed.
Proof of substituted service—unlike service under sections 415.10, 415.30, and
415.40—“does not require evidence that the defendant actually received the summons,”
nor does it mandate a particular timeline for mailing. (See Johnson & Johnson v.
Superior Court (1985) 38 Cal.3d 243, 251 (Johnson & Johnson).) But precisely because
it is deemed effective upon completion of “[t]he ‘required acts’ . . . specified in the
provision which sets forth the mechanics of substituted service” (id. at p. 251), we reject
the Scharfs’ suggestion at oral argument that the required act of personal delivery to a
duly informed responsible person was intended merely as a vestigial belt to the mailing’s
suspenders. Had the Legislature intended to permit service by mail without the
acknowledgment or proof of receipt that sections 415.30 and 415.40 require, it would
have so instructed us. Instead, it required personal delivery—before mailing—to an
actual person in the defendant’s stead, one associated with the defendant by their
presence in the defendant’s residence or place of business. And if this substitute were
merely intended to be a passive receptacle akin to a mail slot, there would have been no
need for the Legislature to specify that the person be responsible or to further require the
7
responsible person be informed of the contents of a summons package not addressed to
them. This required advisement presumes that the recipient of the summons is capable of
exercising some agency for the benefit of the defendant. (See Bein v. Brechtel-Jochim
Group, Inc. (1992) 6 Cal.App.4th 1387, 1393 (Bein); see id. at p. 1394 [deeming
compliance with § 415.20 substantial where service was made upon “a person whose
‘relationship with the person to be served makes it more likely than not that they will
deliver process to the named party’ ”].) The Scharfs’ assertion that their noncompliance
here was merely “minor” and “technical” would effectively excise from the statute the
requirement of personal delivery and affirmative advisement in favor of what on this
record is functionally indistinguishable from service by mail, albeit twice over.
The Scharfs rely heavily on the California Supreme Court’s direction in Pasadena
Medi-Center that the service of process statutes should be “liberally construed.” But
Pasadena Medi-Center did not purport to define substantial compliance for purposes of
substituted service or to address the timeliness of notice, actual or constructive. “As is
well established, a case is authority only for a proposition actually considered and
decided therein.” (In re Chavez (2003) 30 Cal.4th 643, 656.) It is not the case that “if
service of process, even if totally outside the statutory prescriptions, has somehow
resulted in actual notice to the defendant in time to defend the action, then any defects in
the manner of service should be overlooked.” (Summers, supra, 140 Cal.App.4th at
p. 415.)
For the proposition that the degree of compliance is immaterial so long as they
acted with good faith and eventually provided actual notice, the Scharfs rely on the
observation in Khourie, Crew & Jaeger v. Sabek, Inc. (1990) 220 Cal.App.3d 1009(Khourie) that “[t]he evident purpose of . . . section 415.20 is to permit service to be
completed upon a good faith attempt at physical service on a responsible person, plus
actual notification of the action . . . .” (Id. at p. 1013.) But the court in Khourie affirmed
a trial court’s discretionary denial of a motion to set aside appellants’ default under
8
section 473—where the burden in the trial court was on the defendants to establish a clear
abuse of discretion—not the reversal of a motion to quash service where the plaintiffs
bore the burden of defending the adequacy of service. (Compare id. at p. 1012; with Dill,
supra, 24 Cal.App.4th at pp. 1439-1440.) “The question of whether service was properly
made . . . [was] relevant only as it tends to support the argument that the trial court
abused its discretion in denying the motion to set aside the default.” (Khourie, supra, 220
Cal.App.3d at pp. 1012-1013.) Accordingly, we do not read the good-faith/actual notice
dictum from Khourie as a categorical rule that good faith and (eventual) actual notice will
always constitute substantial compliance. To read Khourie more broadly would disregard
Pasadena Medi-Center’s call for a practical, situation-specific inquiry.
2. Probability of Same Notice as Full Compliance
To the extent the Scharfs assert their service efforts had the same probable
efficacy as those deemed sufficient in Khourie, we are unable to agree. In Khourie, the
process server went to the defendant’s place of business and found the door locked.
(Khourie, supra, 220 Cal.App.3d at p. 1012.) A woman responded when the process
server rang the bell, and although she refused to identify herself or unlock the door, the
process server explained his purpose, told her he was leaving the summons and complaint
outside the locked door, and then left the documents just outside the door as she watched.
(Ibid.) The “actual notice” which the court in Khourie found dispositive was in fact what
the Scharfs urge us to treat as inconsequential here: “the process server provided actual
notice of the documents to the person apparently in charge of Sabek’s office and . . . left
them [at] the office door.” (Id. at p. 1014.) The good-faith attempt at physical service in
Khourie was thus, as prescribed in Gilbert, “ ‘ “ ‘highly probable’ ” ’ [to] impart the same
notice as full compliance” and “in fact . . . imparted such notice, . . . to put the defendant
on his defense.” (Gilbert, supra, 179 Cal.App.4th at p. 866.) In Pasadena Medi-Center
as well, it was undisputed that an apparently responsible person received timely notice;
rather, the asserted defect in service was that the plaintiff had not served “the official
9
secretary-treasurer” but “the ostensible secretary-treasurer: i.e., the officer held out to the
public as secretary-treasurer.” (Pasadena Medi-Center, supra, 9 Cal.3d at p. 779 (italics
added).)
No such effort at communication with a responsible person—or any person, on the
premises or off—occurred here. The Scharfs’ process server, unlike in Khourie, had no
reason to believe that any responsible persons were present at the office to be informed,
to inform themselves by reading the contents, or, crucially, to inform Krawez of their
contents—as one might reasonably expect a responsible person apparently in charge of
the office to do upon personal delivery of a summons package. On the one occasion that
the process server encountered someone at the office, the process server did not reveal his
purpose. The following day, when it was clear the acts required to meet the deadline for
substituted service were “physically impossible” as the Scharfs put it, no effort was made
to inform any responsible person, even off premises, even though Krawez and the LLC
were known to be represented by counsel in both the underlying arbitration and related
litigation locally. Under these circumstances, we are unable to say that depositing the
summons through the mail slot of a closed office before a holiday weekend was “more
likely than not” (Bein, supra, 6 Cal.App.4th at p. 1394) to afford the same notice as
personal delivery to a responsible person informed of its contents.
3. Sufficiency of Actual Notice
At bottom, the Scharfs’ reliance on the eventual fact of notice to Krawez—to the
exclusion of when it was received—exceeds liberal construction of the substituted service
statute to excise the first of its requirements. At oral argument on appeal, the Scharfs
relied on Johnson & Johnson, supra, 38 Cal.3d 243 for the proposition that their notice to
defendants was timely “as a matter of law” because substituted service is complete on the
date of mailing. Johnson & Johnson, however, involved code-compliant service, and a
more accurate statement of its rule is that “ ‘[s]ervice is complete’ ”—for purposes of
section 581a’s three-year deadline for service—“ ‘when all of the required acts are
10
done.’ ” (Johnson & Johnson, supra, at p. 249, italics added.) And mailing under
section 415.20 is not authorized until “[]after” the server has first left the summons and
complaint or petition with a responsible person informed of their contents. (§ 415.20,
subds. (a) & (b).) Johnson & Johnson thus does nothing to establish that the Scharfs’
nonconforming efforts at service under section 415.20 excuse the untimeliness of the
actual notice on which the Scharfs simultaneously rely to vitiate the nonconformity of
their efforts.
The high court’s observation in Johnson & Johnson that “the Legislature viewed
service by mail as [a] more reliable method” of providing actual notice than
section 415.20’s requirement of personal delivery to a person apparently in charge (see
Johnson & Johnson, supra, 38 Cal.3d at p. 251) does not excuse the failure under
section 415.20 of personal delivery to anyone at all. The court made this observation in
evaluating when service under section 415.40 would be effective—in light of its return
receipt requirement—not whether a party could accomplish substantial compliance with
section 415.20 even in the complete absence of one of its requirements. (Id. at pp. 245-
246, 251 [emphasizing that the statute at issue in the appeal was section 415.40 and
noting that the “required acts” for substituted service are those “specified in the provision
which sets forth the mechanics of substituted service”].) Timely delivery of process to “a
person apparently in charge” who is also “informed of the contents” is of sufficient
importance under section 415.20 that the Legislature has not only required personal
delivery to precede mailing but also dispensed with the requirement for
acknowledgement or proof of receipt otherwise required of service by mail. (See, e.g.,
Ginns v. Shumate (1977) 65 Cal.App.3d 802, 805-806; see also Khourie, supra, 220
Cal.App.3d at p. 1014 [“actual notice” is satisfied by informing the responsible person of
the nature of the documents left at her door]; cf. §§ 415.30 and 415.40.)
To find substantial compliance strikes us as particularly problematic here, where
section 1290.6 afforded respondents only 10 days to respond to the Scharfs’ petition, and
11
four were lost to the defect in service. We need not carve out a categorical deadline for
actual notice to find the delay in actual notice relevant to the practical, case-specific
inquiry Pasadena Medi-Center prescribes.
The Scharfs did not meet their burden of establishing effective service.
III. DISPOSITION
The trial court’s order is affirmed. Krawez and the LLC are entitled to their costs
on appeal.
12
____________________________
LIE, J.
WE CONCUR:
____________________________
GROVER, ACTING P.J.
_____________________________
WILSON, J.
Scharf et al. v. Scharf Investment, LLC et al.
H050150