In a case of first impression in California, in Airs Aromatics, LLC v. CBL Data Recovery Technologies, Inc., 50 Cal. App. 5th 1009 (2020), the California Court of Appeal held that where a contract contains a choice of law provision, the chosen state’s substantive law governs whether a plaintiff can recover interest on damages and at what rate. The case can be found here.
Facts and Procedural History
Plaintiff Airs Aromatics, LLC (“Airs”) sued defendant CBL Data Recovery Technologies, Inc. (“CBL”) for breach of a laptop repair service agreement. The complaint sought damages in an amount in excess of $25,000, with the amount to be proven at trial. CBL answered the complaint, but later stipulated to set aside the answer and for entry of default.
Airs then filed a request for entry of a default judgment in the amount of $3,016,802, which was granted by the court. CBL appealed this judgment on the ground that the complaint did not demand $3,016,802, but only damages of $25,000. The appellate court agreed with CBL, finding that because the complaint only set forth a minimum amount of damages of $25,000, no more could be awarded on a default judgment. See Airs Aromatics, LLC v. CBL Data Recovery Technologies, Inc., 23 Cal.App.5th 1013(2018).
On remand, the trial court entered a default judgment for $25,000 in damages, $33,849 in prejudgment interest, and $614 in costs. CBL filed a motion to set aside the judgment on the grounds that (i) it was not served with default prove-up papers or a substitution of counsel for Air; and (ii) it challenged the amounts awarded. The trial court denied the motion and CBL again appealed. This time, in a partially published opinion, the appellate court affirmed the award.
In portions of the opinion not certified for publication, the court rejected CBL’s arguments (i) that the default judgment was void as CBL was not served with notice of the default prove-up hearing, (ii) that the damages of $25,000 were not properly proven up, (iii) that the trial court failed to offset the damages as required under California Civil Code section 585, and (iv) that the award of prejudgment interest was unauthorized because the complaint only sought damages in the amount of $25,000.
In the only portion of the opinion certified for publication, the court rejected CBL’s argument that California Civil Code section 3287 did not allow for prejudgment interest because the award arose out of a judicial determination based on conflicting evidence. The court did not reach the merits of this claim because the court found that New York law applied and that no such requirement existed under New York law.
Citing an issue of first impression in California, the court determined that if a contract was subject to a valid choice of law clause, then the chosen state’s law also controlled whether prejudgment interest may be awarded upon a breach of that contract. In doing so, the court determined that California would follow section 207 of the Restatement Second of Conflict of Laws which provides that the state’s substantive law will govern whether to award prejudgment interest.
Here, the underlying contract stated that New York law would control. The court found that prejudgment interest was allowed under New York law. Therefore, the decision of the trial court to allow prejudgment interest at 9%, the rate provided for under New York law, was correct.
This decision reflects a staggering amount of litigation over a default judgment. The decision itself, however, can be summarized into two sections.
The first portion of the opinion, which is unpublished, generally reflects the reality that once a default is entered, the court is, without notice to the defendant, free to enter a default judgment on any amount squarely prayed for in the complaint so long as some evidence is provided by the plaintiff. Further, the court has nearly unlimited discretion to decide what that amount of evidence is. Finally, California law has always been clear that prejudgment interest, attorneys’ fees, and costs are a separate part of the prayer that need not be enumerated. Thus, the fact that the court found that those fees could be added despite the prayer for relief being limited to $25,000 was the easy conclusion.
The second portion of the opinion, which is published, sets new law in California that a choice of law clause controls as to whether prejudgment interest may be applied. This conclusion is not surprising. California law has long ruled that, at least in the commercial context, a valid choice of law clause also governs whether the prevailing party is entitled to attorneys’ fees and costs. See Applera Corp. v. MP Biomedicals, LLC, 173 Cal. App. 4th 769, (2009). There is nothing conceptually different regarding whether a prevailing party is also entitled to prejudgment interest.
Perhaps more interesting is a single sentence in the opinion “that ‘California usually follows the Restatement in every substantive field’ (1 Witkin, Summary of Cal. Law (11th ed. 2019) Contracts, § 62).” Accordingly, in the event that any dispute regarding choice of law arises, a party may simply cite to the Restatement and this opinion for the position that the Court should follow it.
These materials were prepared by Bernard J. Kornberg of Severson & Werson, P.C. [firstname.lastname@example.org], with editorial contributions from Kyra E. Andrassy of Smiley Wang-Ekvall, LLP [email@example.com].