Business Law

Sass v. Cohen (Cal.)

The following is a case update written by Uzzi O. Raanan, a partner at Danning, Gill, Israel & Krasnoff, LLP, analyzing a recent decision of interest:

SUMMARY

California Supreme Court rules unanimously that a default judgment in a case involving an accounting cause of action must comply with California Code of Civil Procedure (CCP) section 580(a), which precludes relief in excess of the amount specifically demanded in the operative complaint, whether the damages were known to plaintiff at the time the complaint was filed. Sass v. Cohen, 2020 WL 7653773 (December 24, 2020).

To read to full opinion, click here.

FACTS

Defendant Theodore Cohen was still married in 2006 when he got involved romantically with Plaintiff Deborah Sass. He convinced her to move to Los Angeles with him by promising to pay her living expenses for the “rest of her life” and to hold all property acquired during their relationship as joint property. During their time together, Defendant purchased real property and formed a company called Tag Strategic LLC (Tag). According to Plaintiff, she “helped out” at Tag and generated about $1,400,000 in revenues for the entity. Defendant failed to share Tag profits with Plaintiff, including $5,000 in promised monthly compensation.

In 2011, Plaintiff had enough and left Los Angeles. Defendant convinced her to return by promising to buy her a house. Plaintiff also understood that she would now own 50% of Tag, as well as all other income and property obtained during their relationship.

When Defendant failed to comply with the second agreement, Plaintiff sued alleging the following causes of action:

  1. Breach of the so-called Marvin agreement, seeking an amount to be determined at trial;[1]
  2. Failure to pay wages and waiting time penalties against Tag, seeking 30 days’ wages;
  3. Quantum meruit, seeking the reasonable value of services provided to Tag;
  4. Accounting of all property purchased and income earned during the relationship;
  5. Fraud, at an amount to be determined at trial, but more than $700,000, representing 50% of the revenues Plaintiff generated for Tag, along with an unknown sum representing 50% of profits earned by Tag, and the additional sum of $3,000,000, representing 50% of the values of various other properties;
  6. Fraudulent transfer of assets from Tag to Defendant in an unspecified amount.

Plaintiff further sought “special damages” in a sum to be proved at trial.

Defendant failed to respond to the complaint and default was entered. The trial court held a prove-up hearing, where Plaintiff presented the testimony of a forensic accountant to establish her damages. The court awarded Plaintiff damages on most of her causes of action, including $88,000 in punitive damages. It denied the $700,000 in damages sought for the revenues Plaintiff generated for Tag.

Defendant sought to vacate entry of the default and default judgment, arguing that the judgment amount exceeded the relief Plaintiff sought in her complaint. The trial court denied the motion, relying on Cassel v. Sullivan, Roche & Johnson, 76 Cal. App.4th 1157 (1999) for the proposition that when a plaintiff includes a cause of action for accounting and the defendant possesses information establishing the debt due, the plaintiff need not comply with CCP section 580(a)’s damages notice requirement.

Defendant appealed to the California Court of Appeal, which reversed. It rejected the holding in Cassel, concluding that cases where an accounting cause of action is pleaded are not excused from the prohibition that the default judgment amount not exceed the relief requested in the operative complaint. The appellate court remanded with instructions to either reinstate the default judgment in a reduced amount or allow Plaintiff to amend her complaint to include the relief amount she now seeks.

The Supreme Court granted review to reconcile the conflict between the appellate courts in this and the Cassel cases. It affirmed the appellate court’s ruling in this case, thereby overruling Cassel.

REASONING

The Court first focused on CCP section 580, which states in relevant part,

(a) The relief granted to the plaintiff, if there is no answer, cannot exceed that demanded in the complaint, in the statement required by Section 425.11, or in the statement provided for by Section 425.115; but in any other case, the court may grant the plaintiff any relief consistent with the case made by the complaint and embraced within the issue.  The court may impose liability, regardless of whether the theory upon which liability is sought to be imposed involves legal or equitable principles.

The Court noted that while Section 580(a) is silent about accounting claims, it does make two other specific exceptions, namely statements required by Sections 425.11 and 425.115. Moreover, a review of other CCP sections governing default judgments support the conclusion that Section 580(a) applies to accounting claims. For example, Section 425.10 states that, “[i]f the recovery of money or damages is demanded, the amount demanded shall be stated.” Code Civ. Proc. § 425.10(a)(2). Section 585(b), which governs procedures for obtaining a default judgment, contains similar language.

The Court next reviewed California case law, which it found to have “consistently demanded a ‘strict construction’ of section 580—a construction that is informed by the text of section 580, the language of surrounding pertinent provisions, and the animating purpose of the statute. [Citation.]”

Among the reasons courts have adhered to Section 580(a)’s pleading requirement: (1) fundamental fairness requires giving notice to defaulting defendants of the judgments that may be entered against them, (2) allowing judgment amounts higher than those pleaded in the complaint would undermine a defendant’s due process, (3) giving defendant adequate notice of the potential damages gives it the opportunity to make an informed choice as to whether to file a responsive pleading or allow a default judgment to be entered, and (4) there are no statutory exceptions to Section 580(a), other than the two specifically codified in that section, which do not address accounting claims.

Acknowledging the unique nature of an accounting action, namely it is generally pleaded when plaintiff has less information about assets than the defendant, the Court nevertheless concluded that plaintiffs can estimate their damages at the pleading stage or conduct discovery prior to a judgment prove-up hearing. After all, at some point a plaintiff must establish its damages, so why not require it provide an estimate in the complaint? A plaintiff thus can either provide an estimate of requested damages in its complaint or amend the complaint prior to the judgment prove-up hearing, which will usually allow the defendant another opportunity to respond to the complaint and address the requested damages.

The Supreme Court distinguished marital dissolution actions, where plaintiffs often fill out Judicial Council form complaints with limited space to provide detailed information about the damages sought. It further overruled the Cassel case, where the court found that Section 580(a) did not apply when the defendant had sufficient information to calculate the damages for which it could be held liable in the event of default, namely “actual knowledge.” In Such cases, the Cassel court concluded that the defendant could not be surprised by the default judgment amount, even if it ultimately exceeded the amount requested in the complaint. The Supreme Court noted that, “[a]dherence to this aspect of Cassel has been spotty in the decades since it was decided.” This is because notice to a defendant through the complaint is required by law and cannot be excused even if defendant possessed “actual knowledge” of the assets in question.

The Court was also asked to rule on the proper method for determining whether a default judgment exceeded the amount demanded in the complaint. Should courts compare each item in the default judgment with the corresponding amount demanded in the complaint, or aggregate all the amounts awarded for the respective causes of action and compare the total amount awarded to the total amount demanded in the complaint? The Court found that this issue was not implicated in its ruling and remanded it to the trial court for further consideration.

AUTHOR’S COMMENTS

It is hard to argue with conclusions reached by the Court of Appeal and Supreme Court that Section 580(a) prohibits default judgment money damages from exceeding the amounts requested in the complaints giving rise to the judgments. As the Court acknowledged, though, this decision may incentivize plaintiffs’ counsel in accounting action complaints to wildly overestimate the potential damages requested. The Court’s response to this concern is that plaintiffs who overestimate their potential damages could motivate defendants to file responsive pleadings to avoid grossly unfair default judgments. Thus, plaintiffs’ counsel will need to be strategic about their estimated damage amounts in accounting cases, where they likely have insufficient information to provide accurate damage amounts.

These materials were written by Uzzi O. Raanan, a partner at Danning, Gill, Israel & Krasnoff, LLP, located in Los Angeles, California, who is a member of the ad hoc group and the representative from the Business Law Section (BLS) to the CLA’s Board of Representatives. Editorial contributions were made by the Honorable Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.), also a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.


[1] Referring to Marvin v. Marvin, 18 Cal.3d 660, 665 (1976) (holding that express contracts between unmarried couples are enforceable).

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