VW Credit v. Keuylian
Filed 7/26/12 VW Credit v. Keuylian CA4/3
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IN THE COURT OF
APPEAL OF THE STATE OF CALIFORNIA
FOURTH APPELLATE
DISTRICT
DIVISION THREE
VW CREDIT, INC.,
Plaintiff and
Respondent,
v.
VIKEN KEUYLIAN
et al.,
Defendants and Appellants.
G044632
(Consol. with G045182)
(Super. Ct. No. 30-2008-00115059)
O P I N I O
N
Appeal from judgments of
the Superior Court
of
County, Franz E. Miller, Judge. Affirmed as modified.
Ropers, Majeski, Kohn
& Bentley, Richard L. Charnley, Terry Anastassiou; Law Offices of William
J. Kopeny and William J. Kopeny for Defendants and Appellants.
Danner & Martyn,
Daniel E. Martyn, Jr., Michael D. Schulman, Diana S. Ponce-Gomez;Law Offices of
Michael D. Schulman and Michael D. Schulman for Plaintiff and Respondent.
Plaintiff
VW Credit, Inc. (VCI) sued certain individuals, business entities, and trusts
(collectively, defendants) for failure to repay loan obligations taken on by
two Lamborghini dealerships. After
defendants ignored discovery requests and refused to comply with ensuing court
orders, the trial court granted terminating sanctions (Code Civ. Proc.,
§ 2023.030, subd. (d)) against defendants.
Thereafter, two default judgments were entered awarding VCI sizable
compensatory (approximately $14 million) and punitive (approximately $44
million) damages against some of the defendants, including individuals Viken
Keuylian, Nora Keuylian, Asdghig Keuylian, and Sossi Keuylian (appellants).
damage awards. Because we agree with
their contentions, we modify the judgment by striking the awards of punitive
damages. There was insufficient notice
of the amount of punitive damages
demanded by VCI. (Code Civ. Proc.,
§§ 425.115, 580, subd. (a).) Moreover,
there was insufficient evidence of appellants’ financial condition presented at
the default judgment prove-up hearing.
FACTS
VCI
filed its operative complaint against defendants on January 30, 2009. The complaint alleged defendants breached several
promissory notes, failed to repay loans taken against lines of credit, and
breached a guaranty. The complaint also
alleged defendants committed the tort of conversion by selling inventory that
served as VCI’s collateral without notification or payment to VCI, instead
diverting the proceeds of these sales to themselves. In its prayer for relief, VCI requested a
total of $19,593,102 in compensatory damages (the total amount allegedly owed
on the various notes and lines of credit), plus interest, reasonable attorney
fees, and costs of suit. With regard to
its cause of action for conversion, VCI requested “exemplary and punitive
damages in a sum to be determined at the time of trial or entry of judgment.” Defendants answered the operative complaint.
VCI
served a plethora of written discovery requests on defendants in January
2009. As responses were not forthcoming
from defendants, VCI then filed and served a series of motions to compel in May
2009. There were no responses to the
discovery at the time of the hearing and no opposition to the motions
filed. The court granted each motion,
awarded monetary sanctions against defendants, and ordered defendants to
respond without objections within 20 days.
Despite this order, defendants failed to respond to VCI’s discovery
requests.
VCI
filed a motion for terminating sanctions on August 24, 2009, with the hearing
noticed for October 15, 2009. The
attached proof of service indicated appellants had been served with the moving
papers by mail on August 21, 2009.
Appellants did not file any opposition papers. On October 6, 2009, VCI served by mail a
notice of its intent to seek punitive damages in the amount of $51 million. The hearing on the motion for terminating
sanctions occurred as scheduled on October 15, 2009. Defendants did not appear at the
hearing. The court issued a minute order
the same day confirming its tentative ruling to grant terminating and
specifically ordered the answer stricken and default entered against all
applicable defendants, including appellants.
The court signed a more formal order on October 27, 2009, which simply
reiterated the relief provided on October 15.
In May 2010, defendants unsuccessfully moved to set aside the entry of
default.
In
its default judgment prove-up papers, VCI showed in detail how millions of
dollars were removed from the auto dealerships and transferred into the hands
of appellants and entities controlled by appellants, a process VCI described as
“an outrageous and unprecedented disappearance of [54] vehicles in a 13 day
period of time.” VCI also cited the
refusal of defendants to participate in the discovery process.
On
October 29, 2010, the court entered default judgment against five of the
defendants (all of the appellants except Sossi
Keuylian) as follows: (1) $14,104,594.40
in compensatory damages; (2) $713,897.40 in prejudgment interest; (3)
$143,595.94 in attorney fees; (4) $560 in costs; and (6) $44,455,475.40 in punitive
damages. Appellants (except Sossi
Keuylian) filed a timely notice of appeal from this judgment on December 28,
2010.
On March 22, 2011, the court entered default
judgment against Sossi Keuylian in amounts identical to those listed in the
prior judgment. Sossi Keuylian filed a
timely notice of appeal on May 2, 2011.
This court subsequently granted a stipulated motion to consolidate the
two appeals.
DISCUSSION
Appellants
do not challenge the court’s order granting terminating sanctions. Nor do appellants take issue with the court’s
denial of appellants’ motion to set aside default or most aspects of the
default judgments (i.e., compensatory damages, prejudgment interest, attorney
fees, and costs). Instead, this appeal
is limited to the question of whether the court erred by awarding punitive
damages.
Appellants
raise both procedural and substantive arguments pertaining to the punitive
damages awarded in the default judgments.
Procedurally, it is claimed VCI did not provide sufficient notice prior to
the entry of default of the amount of punitive damages sought. Substantively, it is posited there was
insufficient evidence of appellants’ financial condition presented by VCI at
the default judgment prove-up hearing.
Default
Principles
of due process require that defendants be provided with notice of the specific
relief sought by a plaintiff prior to entry of default. (See Van
Sickle v. Gilbert (2011) 196 Cal.App.4th 1495, 1520-1521.) “[A]ctual notice of the damages sought is not
sufficient; due process requires ‘formal notice.’” (Stein
v. York (2010) 181 Cal.App.4th 320, 326.) Thus, certain statutory provisions have been
enacted “to ensure that a defendant who declines to contest an action does not
thereby subject himself to open-ended liability.” (Greenup
v. Rodman (1986) 42 Cal.3d 822, 826 (Greenup).) Ordinarily, “[i]f
the recovery of money or damages is demanded [in a complaint], the amount
demanded shall be stated [in the complaint].”
(Code Civ. Proc., § 425.10.)
However,
a complaint may not “state an amount” of punitive damages sought. (Civ. Code, § 3295, subd. (e); see also
Code Civ. Proc., § 425.10, subd. (b).)
Instead, a plaintiff may serve a statement notifying defendant of the
specific amount plaintiff intends to seek in punitive damages, thereby
“preserv[ing] the right to seek punitive damages . . . on a default judgment .
. . .” (Code Civ. Proc., § 425.115,
subd. (b).) “The plaintiff
defendant pursuant to this section before
a default may be taken, if the motion for default judgment includes a
request for punitive damages.” (
A
failure to provide notice prior to default of the amount of punitive damages
sought precludes the recovery of punitive damages pursuant to a default
judgment. “The relief granted to the
plaintiff, if there is no answer, cannot exceed that demanded in the complaint,
in the statement required by [Code of Civil Procedure] Section 425.11, or in
the statement provided for by [Code of Civil Procedure] Section 425.115 . . .
.” (Code Civ. Proc., § 580; see
also Code Civ. Proc., § 585, subds. (a), (b).) “[A] default judgment greater than the amount
specifically demanded is void as beyond the court’s jurisdiction.” (Greenup,
supra, 42 Cal.3d at p. 826; see also
201 Cal.App.4th 267, 286.)
name="_ftnref4" title="">[4]
“This
rule applies to defaults entered as a terminating sanction for misuse of the
discovery process — the situation here — as well as to routine defaults, where
a defendant fails to file an answer.” (
v. Athans (2011) 195 Cal.App.4th 1275, 1286.) “[D]ue process requires notice to defendants,
whether they default by inaction or by wilful obstruction, of the potential
consequences of a refusal to pursue their defense. Such notice enables a defendant to exercise
his right to choose — at any point before trial, even after discovery has begun
— between (1) giving up his right to defend in exchange for the certainty that
he cannot be held liable for more than a known amount, and (2) exercising his
right to defend at the cost of exposing himself to greater liability.” (Greenup,
supra, 42 Cal.3d at p. 829.)
Although
a punitive damages statement was served by VCI prior to the entry of default in
this action, appellants contend the service of this statement was not timely
because service occurred shortly before the hearing date on which the court
granted VCI’s motion for terminating sanctions and entered default. Code of Civil Procedure “[s]ections 580,
425.11, and 425.115 do not specify the amount of time before a default is
entered that a statement of damages must be served on the defendant.” (Matera
v. McLeod (2006) 145 Cal.App.4th 44, 61 (Matera).) Pursuant to case
authority, notification of damages sought (including a Code of Civil Procedure
section 425.115 statement) must be served within “‘a reasonable period of time
before default may be entered.’” (
There
are two cases directly on point, as they both address the timeliness of service
of a damages statement in the context of a motion for terminating sanctions
leading to default judgment. In
service of a statement of damages on defendants’ attorney two days before the
court struck the defendants’ answer and entered default pursuant to a motion
for terminating sanctions was “not a reasonable period of time to apprise the
defendants of their substantial potential liability for purposes of due
process.” (Matera, supra, 145
Cal.App.4th at p. 62.) Conversely, in
(2005) 134 Cal.App.4th 1161, 1178 (Electronic
Funds), the court held that service of a “notice of punitive damages
concurrently with [a] motion for terminating sanctions” was sufficient to
accord defendant due process.
name="_ftnref5" title="">[5]
In
the instant case, on October 6, 2009, VCI served (by mail) a punitive damages
statement on appellants and various affiliated entities. This document, which was filed with the court
on October 7, 2009, indicated VCI “currently believes that its actual damages
will be approximately $17,000,000.00 (Seventeen Million Dollars) and as such,
it intends to seek an award of $51,000,000.00 (Fifty-One Million Dollars) in
punitive damages when [VCI] seeks a judgment . . . .” The document was served: (1) nine days before the hearing on
terminating sanctions (the same date default was entered pursuant to the court’s
minute order); (2) four days after
written opposition to the motion for terminating sanctions was due pursuant to
Code of Civil Procedure section 1005, subdivision (b); and (3) more than one
month after the notice of motion and motion for terminating sanctions and entry
of default was filed.
Remarkably,
by mailing its punitive damages statement to appellants nine days before the
terminating sanctions hearing, VCI managed to create a fact pattern perfectly
situated in between available guideposts in the case law pertaining to notice
of punitive damages in terminating sanctions cases. On one hand, two days of personal service is
too little. (Matera, supra, 145
Cal.App.4th at p. 62.) On the other
hand, notice provided concurrently with service of the motion for terminating
sanctions is enough (presumably “at least 16 court days before the hearing”
pursuant to Code of Civ. Proc. § 1005, subd. (b)). (See Electronic
Funds, supra, 134
Cal.App.4th at p. 1178.) What about
nine days (actual, not court) by mail
“The
striking of a defendant’s answer as a terminating sanction leads inexorably to
the entry of default.” (
hearing or filing a pro forma response to a meritorious motion for terminating
sanctions will not forestall the granting of an order striking the answer and
entering defendant’s default. To
meaningfully oppose a terminating sanctions motion, a defendant must file and
serve written opposition “at least nine court days . . . before the hearing.” (Code Civ. Proc., § 1005, subd.
(b).) In addition, to defeat a
meritorious motion for terminating sanctions, a defendant may need to take
swift remedial action regarding its prior litigation misconduct. By waiting to serve a statement of punitive
damages until after a defendant’s time to file written opposition to a motion
for terminating sanctions has expired, a plaintiff takes away a defendant’s
last chance to change course and convince the court it will take part in the
litigation process in an opposition to the motion for terminating sanctions. (See Matera,
at p. 62.)
Thus,
we hold that in the context of motions for terminating sanctions, a plaintiff
must serve its punitive damages notice, at the very latest, concurrently with
its properly noticed motion for terminating sanctions. (See Code Civ. Proc., § 1005, subd. (b)
[notice of motion and motion “shall be served and filed at least 16 court days
before the hearing”]; see also Electronic
Funds, supra, 134
Cal.App.4th at p. 1178.) Although
more notice was provided in this case than in Matera, supra, 145
Cal.App.4th at page 62, there is no principled basis for deeming the notice in
this case (nine days by mail) sufficient while the notice in
insufficient.
VCI
points out appellants did not appear at the terminating sanctions hearing and
did not fully comply with discovery obligations, even when attempting to set
aside the entry of default. The
implication of this argument is that there should be a “harmless error” analysis
afforded to VCI. In other words, the
fact that appellants did not bother to show up at the hearing to contest
terminating sanctions suggests they would not have filed a written opposition,
taken remedial action with regard to discovery misconduct, or appeared at the
hearing even if they had been provided with reasonable notice of the actual
amount of punitive damages demanded pursuant to Code of Civil Procedure section
425.115. Thus, the default judgment
entered by the court would have been identical.
There is some logic in this contention, particularly under the
circumstances of this case. From the
complaint, appellants were aware VCI was seeking nearly $20 million in actual
damages plus punitive damages. How much
more incentive did appellants need to participate in the action and oppose the
motion for terminating sanctions on the merits
Moreover, even if they had opposed the motion, was there anything
appellants realistically could have done to avoid terminating sanctions once
the case had reached the point it had in August 2009
But we are unaware of any authority for the
application of a “harmless error” analysis in the context of a plaintiff’s
failure to provide timely notice to a defendant of the amount of damages
sought. Our Supreme Court observed in
response to a related argument that “no matter how reasonable an assessment of
damages may appear in the specific case, we cannot open the door to speculation
on this subject without undermining due process — a protection to which every
defendant is entitled, even one as obstreperous and as guilty of reprehensible
conduct as this defendant.” (
We will stick to this clear rule.
The entire punitive damages award is void for lack of reasonable notice
of the amount demanded. A rule
potentially excusing VCI’s unreasonable notice of punitive damages based on
conjecture about a counterfactual world in which VCI’s notice was timely would
require this court to make speculative findings about: (1) whether appellants would have done
anything differently had they been provided with reasonable notice of the
punitive damage demand; and (2) whether appellants’ hypothetical conduct would
have affected the trial court’s exercise of discretion in granting terminating
sanctions.
Meaningful
Evidence of Financial Condition Required for Punitive Award
We
also address the contention that VCI failed to present sufficient evidence of
appellants’ financial condition at the time of the default prove-up hearing.
“In
an action for the breach of an obligation not arising from contract, where it
is proven by clear and convincing evidence that the defendant has been guilty
of oppression, fraud, or malice, the plaintiff, in addition to the actual
damages, may recover damages for the sake of example and by way of punishing the
defendant.” (Civ. Code, § 3294,
subd. (a).) “An award of punitive
damages hinges on three factors: the
reprehensibility of the defendant’s conduct; the reasonableness of the
relationship between the award and the plaintiff’s harm; and, in view of the defendant’s
financial condition, the amount necessary to punish him or her and discourage
future wrongful conduct.” (
Cal.App.4th 910, 914 (Kelly).) “[W]e review a trial court’s determination of
punitive damages under the substantial evidence standard.” (County
of San Bernardino v. Walsh (2007) 158 Cal.App.4th 533, 545 (
Typically,
“an award of punitive damages cannot be sustained on appeal unless the trial
record contains meaningful evidence of the defendant’s financial condition” at
the time of trial. (Adams v. Murakami (1991) 54 Cal.3d 105, 109 (
Cal.App.4th at p. 915.) Plaintiffs
have the burden of proof as to a defendant’s financial condition. (Adams,
at p. 109.) “The absence of this
evidence thwarts effective appellate review of a claim that punitive damages
are excessive.” (Ibid.) The
rigid standard for measuring a defendant’s ability to pay. . . . We cannot
conclude on the record before us that any particular measure of ability to pay
is superior to all others or that a single standard is appropriate in all
cases.” (Id. at p. 116, fn. 7.) Net
worth is often “the critical determinant of financial condition, but there is
no rigid formula and other factors may be dispositive especially when net worth
is manipulated and fails to reflect actual wealth.” (Walsh,
supra, 158 Cal.App.4th at p.
546.)
A
selective, cherry-picked presentation of financial condition evidence will not
survive scrutiny under Adams. Appellate courts have interpreted
balanced overview of defendant’s financial condition. (See Baxter
v. Peterson (2007) 150 Cal.App.4th 673, 676, 681 [record “silent with
respect to . . . liabilities” is insufficient]; Kelly, supra, 145
Cal.App.4th at pp. 916-917; Robert L. Cloud & Associates, Inc. v.
Mikesell (1999) 69
Cal.App.4th 1141, 1151-1153; Lara v. Cadag (1993) 13 Cal.App.4th 1061, 1063-1064.) Courts may not infer sufficient wealth to pay
a punitive award from a narrow set of data points (such as ownership of
valuable assets or a substantial annual income).
VCI,
while noting some very limited evidence of appellants’ assets in the record,
does not argue that there was sufficient evidence of appellants’ financial
condition in the record to sustain the award of punitive damages. Instead, VCI claims it should not have been
required to present evidence of appellants financial condition at the prove-up
hearing because appellants’ blocked discovery throughout the case.
One exception to the Adams rule is that a plaintiff’s burden may be excused if the
defendant violates an order compelling production of financial information at
trial. (Caira v. Offner (2005) 126 Cal.App.4th 12, 37-38, 41 [failure
to comply with court order to produce current financial statement at time of
bench trial]; Mike Davidov Co. v. Issod
(2000) 78 Cal.App.4th 597, 608-609 [by ignoring court order to produce
financial documents following finding of liability, “defendant improperly
deprived plaintiff of the opportunity to meet his burden of proof on the
issue”].) Relatedly, a lack of
clarity in the financial condition evidence can be forgiven if the evidence
supports an inference of financial and testimonial chicanery on the part of the
defendant. (Walsh, supra, 158
Cal.App.4th at p. 547 [defendants “intentionally concealed their assets,
testified falsely regarding many factual issues, and were, at best, evasive and
nonresponsive in answering questions as to their financial condition. This conduct gave the court wide latitude to
make inferences from the evidence unfavorable to” defendants]; see also
Cal.App.4th 441, 453-454.)
It is clear appellants’ litigation misconduct
in 2009 deprived VCI of the ability to develop its case during pretrial
discovery. Moreover, appellants violated
pre-default discovery orders and failed to fully comply with discovery requests
even when they moved to set aside default.
VCI points to information and documents it requested in written
discovery that could have borne on appellants’ financial condition (e.g.,
interrogatories requesting identification of assets owned by defendants;
requests to inspect defendants’ financial statements, tax returns, and bank
account documents). Certainly, had
appellants supplied this discovery, VCI would have had more evidence of
appellants’ financial condition. Of
course, compliance with these pre-default requests would not necessarily have
provided an updated, balanced view of each of appellants’ respective assets,
liabilities, and current income in 2010.
It
should be remembered that, absent a court order, financial condition evidence
for purposes of a punitive damages claim is not
the subject of proper pretrial discovery. (Civ. Code, § 3295, subds. (a)(2),
(c).) To establish evidence of financial
condition at trial, a plaintiff can either “subpoena documents or witnesses to
be available at the trial for the purpose of establishing the [defendant’s]
profits or financial condition” or request a court order requiring defendant to
produce evidence of his or her financial condition. (See Civ.Code, § 3295, subd. (c);
Inc. (2002) 103 Cal.App.4th 233, 243.)
“The record does not suggest [VCI] utilized these procedures.” (
at p. 919.)
We decline to extend the intransigent
litigant exception to Adams by
allowing a plaintiff to bootstrap terminating sanctions based on
pretrial discovery misconduct into a punitive damages award without regard to
the defendant’s ability to pay. The
purpose of punitive damages is not to destroy a defendant or express symbolic
contempt for the defendant’s actions.
Instead, a punitive damages award should properly punish and deter a
defendant by imposing a proportionate award based on a defendant’s ability to
pay. Before a court awards $45 million
in punitive damages against a defaulted defendant, there should at least be an
effort to force the defendant to testify or submit documentation as to
financial condition as of the time of the default judgment. Because there was an unexcused lack of
financial condition evidence in the record, the punitive damages award cannot
stand.
Remedy
The
parties disagree with regard to the proper remedy in this situation. Appellants urge the court to simply strike
the awards of punitive damages. VCI
states in its brief that if the punitive damages awards are reversed, we should
remand solely for a retrial on the question of punitive damages. But VCI’s proposed remedy would be meaningless
in light of our conclusion that untimely notice of the punitive damage amount
was provided to appellants. Any punitive
damages awarded in a retrial of the issue would be void for lack of due process
as described above. The only way VCI
could recover any punitive damages would be for this court to reverse the
default judgments, the entry of default, and the order granting terminating
sanctions. (See Matera, supra, 145
Cal.App.4th at pp. 62-63.) This
course of action would allow VCI to start over with a timely notice of punitive
damages. Neither party requested this
remedy and the narrow issues raised by appellants do not suggest such a remedy
would be appropriate. Moreover, VCI had
a fair opportunity to pursue and then (if defendants complied) present
financial condition evidence at the default judgment prove-up hearing. (Kelly,
supra, 145 Cal.App.4th at pp.
919-920.) We agree with appellants that
the judgments should be modified by striking the punitive damages awards and
the remainder of the judgments should be affirmed. (See Kim
v. Westmoore Partners, Inc., supra,
201 Cal.App.4th at p. 286 [default judgment may be modified to maximum
amount warranted].)
DISPOSITION
The default judgments
entered against appellants are modified by striking the punitive damages
awards. In all other aspects, the
judgments are affirmed. Appellants shall
recover costs incurred on appeal.
IKOLA,
J.
WE CONCUR:
O’LEARY, P.
J.
BEDSWORTH, J.
name="_ftn1" title="">[1] A
separate judgment was entered against Sossi Keuylian because the case against
her was delayed following her bankruptcy filing. Thus, Sossi Keuylian filed a separate appeal
from the judgment against her, which we consolidated with the other appellants’
appeal.
name="_ftn2" title="">[2] For purposes of this opinion, we will ignore (to the
extent possible) the manifold procedural quirks and technical morasses that
plague the factual record (e.g., attorney withdrawal/substitution issues,
identities of various non-appellant defendants, various bankruptcy filings). We will focus only on facts and procedural
history pertinent to the disposition of the legal issues raised in this appeal.
