Elite Computers v. Bahsoun

Filed 3/28/07 Elite Computers v. Bahsoun 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NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.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

The plaintiff in this civil action sued a corporation and its president, asserting breach of contract and fraud. The defendants responded with answers and a cross-complaint. Thereafter, at the plaintiffs behest, the trial court struck the answers of both defendants, and it entered their defaults. The court first struck the corporate defendants answer because the defense attorney withdrew, leaving the corporation unrepresented. A month later, the court struck the individual defendants answer after he failed to attend a case management conference. After refusing to set aside the defaults, the court eventually struck the cross-complaint and entered judgments against both defendants.

The individual defendant appeals, arguing that the trial court abused its discretion. For reasons explained below, we agree that the judgment against him must be reversed.

BACKGROUND

This action arose out of a sale of business assets by plaintiff Elite Computers & Software to defendant Executron Computers, Inc.

Litigation over the transaction began in November 2003, when plaintiff filed a verified complaint, naming as defendants both Executron and its president and principal shareholder, Khalil (Kelly) Bahsoun. Plaintiffs complaint asserts two causes of action for breach of contract, one related to an asset purchase agreement and the other arising out of a lease assignment. The complaint also asserts causes of action for unjust enrichment and for fraud.

In December 2003, both defendants answered the complaint. At the same time, defendant Executron filed a cross-complaint against plaintiff.

Defendants Representation

Initially, defendants were represented by attorney Nina Yablok. In March 2004, she moved to withdraw as counsel for the defendants, citing the transactional nature of her legal practice and a potential conflict of interest with another client. The court granted Yabloks motion to withdraw on April 22, 2004.

Defendants retained new counsel, Philip McCowan, who undertook work on the case in mid-April, officially becoming attorney of record on April 30, 2004. McCowan represented defendants until June 9, 2004, when his motion to withdraw as counsel was granted. During their representation by McCowan, defendants moved to set aside a writ of attachment and successfully opposed a motion by plaintiff to compel discovery.

In mid-August 2004, defendants retained new counsel, Daniel Herns. Herns became attorney of record on August 17, 2004, when the substitution of counsel was filed.

During the periods that they were unrepresented in this litigation, defendants sought replacement counsel, speaking with nine different attorneys in all, as well as posting a lawyer solicitation on the LegalMatch website.

July 2004 Case Management Conference

A case management conference was scheduled for July 13, 2004, as indicated in the June 9th order granting McCowans motion to withdraw as defense counsel. The body of the June 9th order correctly lists a Los Gatos residence address for Bahsoun, the individual defendant. Nevertheless, according to the proof of service, the order was mailed to Bahsouns residence using an incorrect zip code.

Thereafter, on June 29th, plaintiff filed a case management conference statement. As relevant here, it stated: Corporate defendant Executron, Inc. will have been unrepresented for five weeks by the date of the CMC. Plaintiff requests an order striking Executron Inc.s Answer and entering its default. As reflected in the proof of service, plaintiffs case management statement was served by mail on defendant Bahsoun at his residence in Los Gatos, but once again with the wrong zip code.

When the July 13th case management conference was called, neither defendant appeared.

Default Proceedings Against Executron

By formal order filed July 16, 2004, the court struck Executrons answer and also entered its default. The court made various findings, including these: (4) both of the motions to be relieved as counsel filed by both of Executrons former attorneys advised Executron and Bahsoun that a corporation cannot represent itself in a lawsuit; (5) notice of the July 13, 2004, Case Management Conference was served on both defendants as part of the motion to be relieved filed by their most recent counsel.

The record contains no evidence of immediate service of the order striking Executrons answer and entering its default. There is a later proof of service, however, which reflects personal service on defense attorney Herns on August 19, 2004.

Default Proceedings Against Bahsoun

On July 16, 2004, the same day as the order striking Executrons answer, plaintiffs counsel filed a notice of order to show cause, as directed by the court. It stated: At the Case Management Conference in this matter on July 13, 2004, the Court ordered defendant Khalil Kelly Bahsoun to appear on August 19, 2004, and show cause why his Answer should not be stricken and his default entered for failure to appear at the Case Management Conference on July 13, 2004.

As with plaintiffs case management statement, the proof of service of this notice indicates service by mail both on defendant Executron in Santa Rosa, and on defendant Bahsoun at his residence in Los Gatos, but with the same erroneous zip code for Bahsoun that was used before.

On August 17, 2004, Bahsoun filed a declaration stating that he did not receive notice of the July case management conference and that his first knowledge of the case management conference occurred after it had taken place. As to the first point, Bahsoun declared: I do not recall receiving the Notice of Entry of Order Granting Motion to Be Relieved As Counsel, perhaps because of the incorrect zip code. As to the second point, he stated: My first knowledge of the July 13, 2004 Case Management Conference occurred after the Conference, when I received the subject Notice of Hearing on Status of Case.

On August 19, 2004, Bahsoun appeared for the hearing on the order to show cause with his new attorney, Herns. The court stated that it was so close to striking Bahsouns answer and entering his default, explaining to defense counsel: This case has had a protracted history of this kind of behavior. Talk to me quick. Herns related his clients statement that he did not have notice of the July 13th CMC, and that is why he did not show up. Plaintiffs counsel retorted: Frankly, Your Honor, I dont think thats believable. We got a demonstrated pattern of false statements under oath in depositions and declarations. The court then stated: You know what I am going to do? I am going to do this in a way so that it puts the test. I am going to strike the answer. Mr. Herns, what you get to do now is you find the basis for a motion to set that aside. Thats the only way I can rationally do this so that Mr. Bahsoun knows that we are serious about what we are doing here. And if you have got a viable basis for that, then I can evaluate it by declaration and by evidence. Thats the only way I can figure out how to do this. If you convince me, then I will reinstate the answer. But at this point, I am going to strike the answer. The court then confirmed that a noticed motion would be required to seek relief from the default.

Defense Motion to Vacate Defaults

On September 23, 2004, defendants moved to vacate their defaults. As evidentiary support, defendants moving papers included declarations by defendant Bahsoun and defense counsel Herns, plus a request for judicial notice of 11 documents submitted in connection with a defense request to continue the prove-up hearing. Plaintiff opposed the motion.

The court conducted a brief hearing on the motion on October 14, 2004. The court stated that it was going to deny the request to set aside the defaults for several reasons. One is, as I understand this case, there is a history of things not happening until it has been forced to occur. Two, I have doubts, frankly, for several reasons that Mr. Bahsoun did not receive the mailing in spite of the wrong zip code on it.

Judgments

Thereafter, plaintiff filed a request for court judgment, which identified damages and costs exceeding $282,000.

On November 5, 2004, the court conducted a prove-up hearing. Defense counsel was present at the hearing, but he was not permitted to participate. Plaintiffs counsel proceeded by declaration and offer of proof regarding proof of the claims and damages and some elements of the fraud claim also. The court entertained that evidence. Plaintiffs counsel also stated his intent to offer testimony that responded to the cross-complaint for purposes of having a judgment, also include that the cross-complaint is denied. The court rejected that offer, however, saying: Were only here for the default itself. So the cross-complaint has no bearing on the default. In closing argument, plaintiffs counsel referred to Bahsoun as a convicted felon and a scoundrel. He asked for treble damages for fraud. At the conclusion of the hearing, the court took the matter under submission with a request that plaintiff (1) submit further briefing on the issue of the cross-complaint, (2) identify any statutory basis for the fraud damages sought, and (3) pinpoint that part of the contract that includes the attorneys fees.

On November 22, 2004, the court entered judgment against defendants for more than $396,000, including punitive damages in excess of $115,000.

Several months later, a revised judgment was entered against defendant Bahsoun, dated April 26, 2005, and filed May 2, 2005. An attachment to the judgment reflects subsequent events in a bankruptcy filed by Bahsoun.[1]

Dismissal of Cross-Complaint

By order to show cause, filed November 22, 2004, plaintiff sought dismissal of Executrons cross-complaint. A hearing was conducted in early January 2005, with the court taking the matter under submission. In a minute order the following month, the court ordered the cross-complaint dismissed. A formal order followed in March 2005. The record does not reflect the courts reasons for dismissing the cross-complaint.

Appeal

On February 14, 2005, defendant Executron filed a notice of appeal from the November 2004 default judgment entered against it and from the subsequent order striking its cross-complaint. That appeal (H028547) was dismissed on March 4, 2005, for failure to timely file the appellate record.

On June 24, 2005, defendant Bahsoun filed a notice of appeal, challenging the revised default judgment entered against him in May 2005. Bahsouns appeal is before us here. As stated in his opening brief, Bahsoun prosecutes this appeal for himself alone and not on behalf of Executron.

CONTENTIONS

Stressing the policy of trial on the merits, Bahsoun contends that the trial court should not have stricken his answer for missing a single appearance the July 2004 case management conference since his failure to appear was due to mistake, inadvertence, surprise, or excusable neglect. He also asserts that the judgment is excessive in amount. Plaintiff disputes those contentions, arguing that the trial court did not abuse its discretion in this case.

DISCUSSION

Before addressing the specific questions presented here, we first summarize the legal principles and review standards that govern our analysis.

I. Management of Civil Trial Proceedings

Trial courts are responsible for the monitoring of civil cases for the purpose of expediting them through the system. (Wantuch v. Davis (1995) 32 Cal.App.4th 786, 794.) As provided in the Trial Court Delay Reduction Act, judges shall have the responsibility to eliminate delay in the progress and ultimate resolution of litigation, to assume and maintain control over the pace of litigation, to actively manage the processing of litigation from commencement to disposition, and to compel attorneys and litigants to prepare and resolve all litigation without delay, from the filing of the first document invoking court jurisdiction to final disposition of the action. (Gov. Code, 68607.) The Trial Court Delay Reduction Act is codified at Government Code, sections 68600 et seq. (the Act). Taken together with other statutory provisions and court rules,[2] the Act represents a comprehensive statewide scheme of regulation of fast track matters, which attempts to balance the need for expeditious processing of civil matters with the rights of individual litigants. (Moyal v. Lanphear (1989) 208 Cal.App.3d 491, 500; accord, Garcia v. McCutchen (1997) 16 Cal.4th 469, 480.)

In administering the fast track system, the trial court must exercise its discretion at each stage of a lawsuit. (Moyal v. Lanphear, supra, 208 Cal.App.3d at p. 498.) A status conference is one of the tools used by trial courts to monitor the proceedings. At a status conference, discussions are held concerning arbitration, regulation of discovery, bifurcation, settlement and trial setting. Counsel and in propria persona litigants are required to be present. (Wantuch v. Davis, supra, 32 Cal.App.4th at p. 794.) In propria persona litigants are entitled to the same, but no greater, rights than represented litigants and are presumed to know the delay-reduction rules. (Id. at p. 795.)

In order to facilitate the expeditious processing of civil cases, parties may be sanctioned for failure to comply with delay-reduction rules or court orders. [Citations.] These sanctions may include terminating sanctions, such as the striking of pleadings. (Wantuch v. Davis, supra, 32 Cal.App.4th at pp. 794-795; see also, e.g., Tliche v. Van Quathem (1998) 66 Cal.App.4th 1054, 1061; see Gov. Code, 68608, subd. (b).) As the California Supreme Court recently recognized, the imposition of a terminating sanction for violation of fast-track rules is just one arrow in the courts quiver: Courts have numerous other methods for maintaining control of their calendars. (Garcia v. McCutchen, supra, 16 Cal.4th at p. 480.) Those other methods include civil and criminal contempt and monetary sanctions. (Id. at pp. 480-481; see also, e.g., Drum v. Superior Court (2006) 139 Cal.App.4th 845, 854.)

Although the Act authorizes terminating sanctions, the delay-reduction rules and the policy of expeditious processing of civil cases do not override, in all situations, the trial courts obligation to hear cases on the merits. (Wantuch v. Davis, supra, 32 Cal.App.4th at p. 795; accord, Garcia v. McCutchen, supra, 16 Cal.4th at p. 480.) To the contrary, the Act reflects a legislative policy favoring resolution of matters after full and careful consideration of the issues presented. (Moyal v. Lanphear, supra, 208 Cal.App.3d at p. 500, citing Gov. Code, former  68601, subd. (c).) When the two policies collide head-on, the strong public policy favoring disposition on the merits outweighs the competing policy favoring judicial efficiency. (Bahl v. Bank of America (2001) 89 Cal.App.4th 389, 398.)

II. Relief from Default

By statute, a court may, upon any terms as may be just, relieve a partyfrom a judgment, dismissal, order, or other proceeding taken against him or her through his or her mistake, inadvertence, surprise, or excusable neglect. (Code Civ. Proc., 473, subd. (b).) As the California Supreme Court recently reaffirmed, the provisions of section 473 of the Code of Civil Procedure are to be liberally construed and sound policy favors the determination of actions on their merits. (Zamora v. Clayborn Contracting Group, Inc. (2002) 28 Cal.4th 249, 256.)

The question as to whether or not a default was properly entered may be reviewed upon an appeal from the judgment. (Bristol Convalescent Hosp. v. Stone (1968) 258 Cal.App.2d 848, 859.) Unless the judgment is void, it may be set aside only under [subdivision (b) of] section 473, Code of Civil Procedure, or on appeal from the judgment, or by suit in equity. (Id. at p. 862; see also, Falahati v. Kondo (2005) 127 Cal.App.4th 823, 828.)

III. Review Standards

Since trial management is a discretionary area, the proper standard of review for a challenge to trial management orders is abuse of discretion. (Moyal v. Lanphear, supra, 208 Cal.App.3d at p. 498.) In exercising its discretion, the court does not have absolute and unlimited power; it must act with an impartial discretion guided and controlled in its exercise by fixed legal principles. (Ibid.) The courts discretion is also circumscribed by the factual record; a sanction order is an abuse of discretion when the courts basis for imposition of sanctions is not supported by the record. (Winikow v. Superior Court (2000) 82 Cal.App.4th 719, 727.)

As a general rule, the denial of a motion to set aside a default likewise is reviewed for an abuse of discretion. (See, e.g., Rappleyea v. Campbell (1994) 8 Cal.4th 975, 981.) Nevertheless, our review is informed by the overall policy favoring disposition on the merits. (See Zamora v. Clayborn Contracting Group, Inc., supra, 28 Cal.4th at pp. 255-256.) Appellate courts are much more disposed to affirm an order when the result is to compel a trial on the merits than when the default judgment is allowed to stand. (Shamblin v. Brattain (1988) 44 Cal.3d 474, 478.)

With respect to the trial courts factual findings concerning default, we ordinarily apply the substantial evidence standard of review, which requires us to affirm the courts order if it is supported by substantial evidence. (Falahati v. Kondo, supra, 127 Cal.App.4th at p. 828.) It is the province of the trial court to determine the credibility of the declarants and to weigh the evidence. (Ibid., fn. omitted; see also, Shamblin v. Brattain, supra, 44 Cal.3d at p. 479.) Nevertheless, when a party in default moves promptly to seek relief, very slight evidence is required to justify a trial courts order setting aside a default. (Shamblin v. Brattain, at p. 478.)

Errors of law are scrutinized de novo. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 860.) As relevant here, whether the default and default judgment complied with constitutional and statutory requirements are questions of law as to which we exercise independent review. (Falahati v. Kondo, supra, 127 Cal.App.4th at p. 828, fn. omitted.)

IV. Analysis

Applying the foregoing standards and principles to the present case, we conclude that the trial court erred, both in imposing a terminating sanction and in refusing to set aside the resulting default.

A. The trial court should not have imposed a terminating sanction.

The trial court imposed a terminating sanction in this case as a firstresort. That action does not comport with the requirements of the applicable statute, which provides: Judges shall have all the powers to impose sanctions authorized by law, including the power to dismiss actions or strike pleadings, if it appears that less severe sanctions would not be effective after taking into account the effect of previous sanctions or previous lack of compliance in the case. Judges are encouraged to impose sanctions to achieve the purposes of this article. (Gov. Code, 68608, subd. (b), italics added.) By using the pivotal word if, the statute limits the courts use of terminating sanctions to those situations where less severe sanctions would not be effective. (Ibid.)

Dismissal thus is statutorily authorized only where lesser sanctions (1) have failed or (2) would be futile, given a litigants history of noncompliance with court orders. (Tliche v. Van Quathem, supra, 66 Cal.App.4th at p. 1062.) Neither circumstance is present here.

1. There is no evidence that the court previously imposed lesser sanctions.

In this case, there is no evidence that the trial court first considered or employed a less drastic approach to secure defendants attendance, such as monetary sanctions. (See Moyal v. Lanphear, supra, 208 Cal.App.3d at p. 503 [loss of a cause of action is a greater hardship than monetary sanctions].) Where, as here, there is no evidence of prior sanctions , the order of dismissal must be reversed as premature and unauthorized and contrary to statutorily mandated principles. (Tliche v. Van Quathem, supra, 66 Cal.App.4th at p. 1062; cf., Marriage of Keener (1994) 26 Cal.App.4th 186, 194 [absent evidence of prior sanctions or noncompliance, dismissal was an abuse of discretion].)

2. The record does not reflect disregard of orders by defendant Bahsoun.

At the August 2004 hearing on the order to show cause, the court indicated its inclination to strike Bahsouns answer, saying: This case has had a protracted history of this kind of behavior. Two months later, in denying defendants motion to set aside the defaults, the court similarly expressed its understanding that there is a history of things not happening until it has been forced to occur. We find no evidence in the appellate record to support the trial courts observations. As explained in the margin, plaintiff offered argument that defendants collectively delayed the litigation by changing attorneys, but it presented no probative evidence on that point.[3]

More to the point, the record before us contains no evidence of disregard of court orders by Bahsoun, the individual defendant. In its response brief on appeal, plaintiff complains that Bahsoun failed to designate specified documents as part of the appellate record, which would help show the full picture below. Significantly, however, none of the cited omissions suggests evidence that Bahsoun disregarded any trial court orders. And at oral argument, plaintiffs counsel was unable to identify any specific violation, citing only the failure to comply with the courts general directive presumably addressed to the corporate defendant to secure counsel.

3. The court should not have stricken defendants answer.

Preventing parties from presenting their cases on the merits is a drastic measure; terminating sanctions should only be ordered when there has been previous noncompliance with a rule or order and it appears a less severe sanction would not be effective. (Wantuch v. Davis, supra, 32 Cal.App.4th at p. 795.) For that reason, in imposing the ultimate sanction of dismissal, judges are required to consider the history of the conduct of the case. (Tliche v. Van Quathem, supra, 66 Cal.App.4th at p. 1061.) As explained above, one factor in that consideration is evidence of prior sanctions. (Id. at p. 1062.) Another is previous lack of compliance with court orders or deadlines in the case. (Moyal v. Lanphear, supra, 208 Cal.App.3d at p. 502.)

In this case, there is no evidence that the trial court previously imposed lesser sanctions to compel compliance with delay reduction rules. Nor is there evidence that Bahsoun failed to comply with any court orders. The procedural history of the case thus does not support the trial courts decision to strike Bahsouns answer and enter his default. In taking that action, the trial court ignored statutory limitations on terminating sanctions, which may be used only where less severe sanctions would not be effective. (Gov. Code, 68608, subd. (b); see Tliche v. Van Quathem, supra, 66 Cal.App.4th at p. 1062; Wantuch v. Davis, supra, 32 Cal.App.4th at p. 795; Moyal v. Lanphear, supra, 208 Cal.App.3d at p. 500.)

For these reasons, the trial courts decision to strike Bahsouns answer and enter his default is contrary to statutory principles, and it cannot stand.

B. The trial court was required to set aside the default.

The trial court acted in derogation of the statute when it struck defendants answer and entered his default. Its order was unauthorized and contrary to statutorily mandated principles. (Tliche v. Van Quathem, supra, 66 Cal.App.4th at p. 1062.) For that reason alone, the court should have vacated the defaults. (See id. at p. 1063 [given appellate courts finding that the initial order of dismissal was invalid, the propriety of the trial courts rulings on [defendants] subsequent motions to vacate the order of dismissal is no longer pertinent]; cf., Falahati v. Kondo, supra, 127 Cal.App.4th at p. 828 [default judgment must be set aside where it was obtained in violation of statutory provisions and due process principles].)

CONCLUSION

The trial courts use of a terminating sanction in response to a single failure to appear violates the Trial Court Delay Reduction Act, given the lack of prior sanctions against defendant and the absence of any history of his noncompliance with court orders. The entry of default thus was improper and the ensuing default judgment cannot stand. Given our conclusion, we need not consider whether the court erred in determining the amount of the judgment.

Disposition

The judgment is reversed and the matter is remanded to the trial court with directions to reinstate the answer of defendant Bahsoun. Plaintiff shall bear the costs of appeal.

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McAdams, J.

WE CONCUR:

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Mihara, Acting P.J.

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Duffy, J.

Publication Courtesy of California attorney referral.

Analysis and review provided by Vista Property line attorney.

[1] The attachment states: Judgment is for Fraud/Deceit Individually Against Defendant Khalil Bahsoun aka Khalil Basoun a.k.a Kelly Bahsoun a.k.a. Kelly Basoun. It then describes the default prove-up hearing against defendants and the judgment entered against them. The attachment continues: Defendant Khalil Bahsoun declared Chapter 11 bankruptcy on November 17, 2004. [] On March 25, 2005, the United States Bankruptcy Court issued an order stating that the judgment entered November 22, 2004 against defendant Bahsoun was void. [] On April 2, 2005, the United States Bankruptcy Court issued an order stating: Elite Computers & Software, Inc. creditor of the estate, is hereby granted Relief From Automatic Stay to proceed to judgment in the State Court Case No. 1-03-CV-00837, filed in the Santa Clara County Superior Court of California. [] The judgment entered on November 22, 2004, against defendant Executron Computers, Inc. has remained in full force and effect since the date of entry. Code of Civil Procedure 578, 579.

[2] See, e.g., Code of Civil Procedure sections 575.1, 575.2 (relating to local court rules), and 177.5 (relating to monetary sanctions), and California Rules of Court, rule 2.30.

[3] The arguments and proffered evidence of delay came in as part of plaintiffs opposition to defendants motion to set aside their defaults. As relevant here, plaintiffs opposition papers addressed two points: (a) lapses in defendants representation and (b) discovery delays.

(a) Representation: In its points and authorities, plaintiff referred to defendants conduct and delays in connection with their string of attorneys, and asserted a history of noncontinuous representation of both defendants. After noting defendants failure to inquire about the status of the case while unrepresented in the summer of 2004, plaintiff argued: Defendants conduct of this case has substantially prejudiced Plaintiff, whose fees so far exceed $125,000.00. If ever there were a case that justified the use of the terminal sanctions provided in the statutes, this is it. Notably, however, defendant Bahsoun was not sanctioned for representing himself.

(b) Discovery: Plaintiffs memorandum of points and authorities also states that during defendants representation by Nina Yablock, discovery ground to a halt. As evidence in support of that claim, plaintiff proffered the declaration of its attorney describing his problems in securing discovery during March and April 2004. Despite those assertions, however, the only discovery order contained in the record before us is a June 2004 order denying plaintiffs motion to compel. Furthermore, there is no evidence that defendants themselves personally caused any discovery delay. (Cf., Garcia v. McCutchen, supra, 16 Cal.4th at p. 481 [court lacks power to dismiss an action where counsel alone is responsible for noncompliance].)