California

Warning: The following opinion is provided for purposes of discussion only. We have not Shepardized™ this opinion, and do not know the subsequent disposition of this case nor whether the effect of the opinion has been overruled or superceded by other law.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT DIVISION TWO

B165199

2004.CA.0003864

April 29, 2004

BANKNORTH, PLAINTIFF AND RESPONDENT,
v.
EARL SERAP ET AL., DEFENDANTS AND APPELLANTS.

APPEAL from a judgment of the Superior Court of Los Angeles County. Lawrence W. Crispo, Judge. Affirmed in part and reversed in part. (Los Angeles County Super. Ct. No. BC258196)

Earl Serap and Deborah Serap, in pro. per., for Defendants and Appellants.

Clarkson, Gore & Marsella, George A. Juarez, Eve A. Marsella, and Scott C. Clarkson, for Plaintiff and Respondent.

The opinion of the court was delivered by: Ashmann-gerst, J.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.

Earl Serap (Earl) and Deborah Serap (Deborah) (sometimes collectively referred to as the Seraps), appeal the default judgment entered against them after the trial court issued a terminating sanction. We reverse the punitive damages award because the Seraps did not receive pre-default notice of the amount sought. In all other respects, we affirm the default judgment.

FACTS

First Massachusetts Bank, N.A., the predecessor-in-interest of respondent Banknorth, (collectively the Bank) sued National Seminar Services, Inc. (NSSI) and Earl Schuman (Schuman) for breach of contract and money had and received. As alleged: The Bank entered into a contract to provide merchant Master Card and Visa services to NSSI. Thereafter, NSSI -- which is Schuman's alter ego -- breached the contract by failing to pay the Bank in excess of $205,500 for chargebacks, chargeback fees, and gross merchant fees.

In the first amended complaint, the Bank added the Seraps, including them in the alter ego allegations.

The Seraps filed a general denial. *fn1

On July 12, 2002, the Bank filed a motion for leave to amend to allege the amount owing as $905,976.66, to add claims for fraud, conspiracy and declaratory relief, and to request punitive damages. *fn2

The motion was granted on August 1, 2002, and the Bank was ordered to file and serve the second amended complaint no later than August 9, 2002. Even though the Bank sought punitive damages, it did not notify NSSI or the Seraps of the amount.

On August 6, 2002, the trial court issued an evidentiary sanction against the Seraps precluding them from asserting any defense to the Bank's alter ego allegations.

Subsequently, the Seraps demurred to the fraud, conspiracy and declaratory relief causes of action. After their demurrer was overruled, the Seraps filed general denials to the second amended complaint. On October 23, 2002, their answers were stricken pursuant to a terminating sanction, and their defaults were entered.

The Bank submitted a request for default judgment, seeking $905,976.66 in compensatory damages and $100,000 in punitive damages. In support of its prove up, the Bank offered declarations from Eve A. Marsalla (Marsalla) and Kay Theberge (Theberge). Upon duly considering the prove up, the trial court entered judgment in accordance.

This timely appeal followed.

CONTENTIONS

The Seraps seek reversal of the default judgment on the following grounds: The Bank's prove up failed to establish that Earl committed fraud or conspiracy to commit fraud, or that NSSI was the Seraps' alter ego. Additionally, judgment should not have been entered against the Seraps for fraud and conspiracy because those allegations were in the second amended complaint and the terminating sanction pertained to discovery due and owing by the Seraps when the first amended complaint was the operative pleading. Finally, the punitive damages award was improper because there was no evidence of the Seraps' net worth, and the Bank never provided the Seraps with notice of the amount of punitive damages sought.

STANDARD OF REVIEW

"Where, as here, the defaulting party takes no steps in the trial court to set aside the default judgment, appeal from the default judgment presents for review only the questions of jurisdiction and the sufficiency of the pleadings. [Citations.]" (Corona v. Lundigan (1984) 158 Cal.App.3d 764, 766-767.) As a corollary, "sufficiency of the evidence is not reviewable within the purview of this rule." (Id. at p. 767; but see Barragan v. Banco BCH (1986) 188 Cal.App.3d 283, 302 [entertaining, without citation, a sufficiency of the evidence argument].) That said, an appellate court can amend a default judgment if the damages exceed those allowable pursuant to Code of Civil Procedure section 580. (Greenup v. Rodman (1986) 42 Cal.3d 822, 829 (Greenup) ["Because the default judgment in this case exceeded the ceiling on damages to which plaintiff is subject, we conclude that the award must be amended to conform to the limitations specified in section 580"].) *fn3

DISCUSSION

1. Sufficiency of the evidence.

The Seraps complain that Marsalla's and Theberge's declarations do not support a finding that Earl committed fraud and conspiracy to commit fraud, or that the Seraps were alter egos of NSSI. However, the Seraps fail to appreciate that entry of default established the truth of the Bank's allegations. (See Bristol Convalescent Hosp. v. Stone (1968) 258 Cal.App.2d 848, 859.) Moreover, as we previously indicated, the Seraps cannot challenge the sufficiency of the evidence. This not being a valid challenge, we must reject it.

2. New causes of action in the second amended complaint.

In essence, the Seraps contend that they can only be held liable for causes of action in existence at the time of the discovery noncompliance which ultimately led to a terminating sanction. To support their theory, the Seraps cite Ostling v. Loring (1994) 27 Cal.App.4th 1731, 1734, which states: " material amendment to the complaint opens a default because it permits the plaintiff to prove matters not in issue when the default was taken, which `would materially affect the defendant's decision not to contest the action.'" The problem, however, is that Ostling refers to a situation where the amendment occurs after the entry of default, not before. Here, the amendment occurred before the entry of default.

3. Punitive damages.

A plaintiff cannot obtain punitive damages by way of default unless the defendants are given notice of the amount sought before entry of default judgment and can chose to defend the case accordingly. (See Wiley v. Rhodes (1990) 223 Cal.App.3d 1470, 1472-1474.) If the defendants did not receive notice, due process concerns are implicated and the award must be reversed. (Id. at pp. 1473-1474.) Here, the Bank never gave the Seraps pre-default notice that it was seeking $100,000 in punitive damages. Therefore, that award was improper. *fn4

The Bank ignores this issue. Rather, it argues generally that the only proper issues for appellate consideration on appeal from a default judgment are jurisdiction and the sufficiency of the pleading. But the Bank's position is belied by case law and statutory authority. As was set forth in our discussion of the standard of review, Greenup, supra, 42 Cal.3d 822, permits an appellate court to amend a default judgment when the damages exceed the limits imposed by Code of Civil Procedure section 580. That section provides that the relief granted to the plaintiff on default "cannot exceed that which he or she shall have demanded in his or her complaint, in the statement required by Section 425.11, or in the statement provided for by Section 425.115." Code of Civil Procedure section 425.115, subdivision (b) establishes that a plaintiff "preserves the right to seek punitive damages . . . on a default judgment by serving upon the defendant" a statement of the amount of punitive damages sought. Subdivision (f) of that same statute provides that a "plaintiff shall serve a statement upon the defendant pursuant to this section before a default may be taken, where the motion for default judgment includes a request for punitive damages."

Next, the Bank points out that NSSI did not appeal the default judgment entered against it and the defaults establish that NSSI is the alter ego of the Seraps. The Bank then asserts that the Seraps "cannot be heard to challenge the judgment against NSSI, nor to litigate the propriety of the liability of NSSI being included in the judgment against them. . . . Thus, the imposition of the liability of NSSI, including the award of punitive damages against NSSI, is the obligation of the Seraps as a matter of law, whether or not punitive damages should have been awarded by the Superior Court against the Seraps personally."

This is a moot point. This opinion only deals with the punitive damages award against the Seraps personally, not whether the Seraps are obligated to satisfy the punitive damages award against NSSI.

To defend the award against the Seraps the Bank relies on Dow Jones Company, Inc. v. Avenel (1984) 151 Cal.App.3d 144, which states that a trial court can amend a judgment to add a judgment debtor pursuant to the alter ego doctrine. (Id. at p. 148.) However, this appeal does not involve an amended judgment to add a judgment debtor and Dow is irrelevant. Tacitly, it would seem, the Bank urges us to conclude that Dow permits us to ignore the due process violation perpetrated upon the Seraps. But Dow specifically says a trial court's authority is subject to due process considerations. (Ibid.) In affirming the trial court's decision to add the appellant to a judgment, the court noted that the appellant was not challenging the propriety of the judgment against the alter ego. Furthermore, the appellants controlled the alter ego and therefore had a chance to indirectly litigate the elements of the action. As a result, due process was satisfied. (Id. at pp. 149-150.) The facts of this case are markedly different. Not only did the Bank fail to give the Seraps the required notice, but it also failed to give NSSI the required notice. Therefore, under these facts, it cannot be said that due process was satisfied.

Having failed to comply with its statutory obligations, the Bank is in no position to defend the punitive damages award.

DISPOSITION

The portion of the judgment awarding the Bank $100,000 punitive damages against the Seraps is reversed. The remainder of the judgment is affirmed. The parties shall bear their costs on appeal.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS.

We concur:

NOTT, Acting P.J.

DOI TODD, J.

Opinion Footnotes

*fn1 Only Deborah's general denial appears in the clerk's transcript, but the parties do not dispute that Earl also filed a general denial.

*fn2 The motion was originally filed on June 7, 2002, but it was denied without prejudice.

*fn3 The Seraps failed to set forth a standard of review. Rather, they cite Johnson v. Stanhiser (1999) 72 Cal.App.4th 357 for the proposition that a plaintiff must establish a prima facie case to obtain a default judgment. In Johnson, the plaintiff obtained a default judgment, but the trial court refused to award damages. The plaintiff appealed. The court noted that, at the trial level, a plaintiff is required to establish a prima facie case. (Id. at p. 361.) After reviewing the evidence, and after concluding that the plaintiff had established a prima facie case, the court remanded the matter, instructing the trial court to reconsider damages. (Id. at pp. 364- 365.) Citing Uva v. Evans (1978) 83 Cal.App.3d 356, the court reasoned that "this case presents just the set of circumstances where the award, or lack thereof, is totally unconscionable and without justification, thus begging for our review." (Johnson, supra, 72 Cal.App.4th at p. 361) The Seraps accurately cited Johnson, but it does not aid their cause.

*fn4 We need not discuss whether the punitive damages award must be reversed due to a lack of net worth evidence.

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