New limit on entry of judgment by default

Default is a sensitive subject, not just for litigants but for the courts. Default aggravates defendants who have either failed to answer or had their defaults entered as a discovery sanction, and plaintiffs who must comply strictly with procedures intended to safeguard due process. And default strikes at the jurisdictional power that is the core of the court's authority. Proper service of summons is enough to support jurisdiction, but courts must be careful in awarding damages against a litigant who has not participated in the action. That is why CCP Section 580(a) provides "[t]he 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." A defaulting defendant that hasn't gotten formal notice of how much relief the plaintiff could recover, either from the complaint or from a statement of damages on a claim for personal injury (CCP Section 425.11) or punitive damages (CCP Section 425.11), has been denied a fair hearing, and entry of judgment would exceed the court's jurisdiction. The California Supreme Court's latest opinion on the subject further limits the entry of judgment by default. Sass v. Cohen, 2020 DJDAR 132589 (Dec. 24, 2020).

Courts have long construed Section 580(a) strictly. See, e.g., Becker v. S.P.V. Constr. Co., 27 Cal. 3d 489 (1980). Any default judgment for relief beyond what the complaint demands is void and can be set aside at any time. There were only three exceptions: (1) where the plaintiff was legally prohibited from alleging the amount of damages in the complaint, but timely served a statement of damages; (2) where the plaintiff in a marital dissolution action used a Judicial Council form petition; and (3) where the plaintiff sued for an accounting. On Christmas Eve, the California Supreme Court eliminated the third exception.

In truth, the exception was already narrowing. It arose from Cassel v. Sullivan, Roche & Johnson, 76 Cal. App. 4th 1157 (1999), a lawyer's suit against his former partners for an accounting of the value of his partnership interest, in which the 1st District Court of Appeal held the plaintiff partner needed only to specify the type of relief, not the dollar amount, because, like spouses facing property division, the defaulted defendants had the necessary information to calculate their exposure. But in more than 20 years since Cassel was published, no court appeared ever to have applied it in support of a published opinion, and three Courts of Appeal had flatly rejected it, instead following prior contrary authority. One of those three courts was the one the Supreme Court affirmed. Sass v. Cohen, 32 Cal. App. 5th 1032 (2019).

Deborah Sass and Ted Cohen were unmarried cohabitants. She sued him for breach of a Marvin agreement to share assets and income, as well as fraud, failure to pay wages and related claims, fraudulent transfer (Civ. Code Sections 3439, et seq.), and an accounting of the value of the shared assets and income. Although Cohen answered her first amended complaint, neither defendant answered the second amended complaint, even after the judge reminded Cohen during a discovery hearing. After filing and serving a notice of punitive damages on Cohen, Sass requested entry of both defendants' defaults. About seven months later, the trial court conducted a prove up hearing and entered default judgment against both defendants for $2,806,532, which was more than the complaint alleged.

Cohen moved to vacate the default judgment, arguing the judgment was void because it exceeded Sass's complaint. The judge denied Cohen's motion, reading Cassel to excuse Sass from the obligation to plead a specific amount of damages because her complaint included a cause of action for an accounting of the assets of Cohen and TAG, and they had greater knowledge of value than she did.

Cohen appealed. The Court of Appeal reversed. Noting Cassel had "been met with mixed reviews," the court gave two reasons to "join the growing majority of cases rejecting Cassel:" because it violates the plain language of Section 580 and because by substituting actual or constructive notice for formal notice Cassel "substantially dims section 580's 'bright-line' rule of formal notice" and would risk depriving defaulting defendants of due process. The court held: (1) A plaintiff alleging a claim for accounting or valuation of assets cannot obtain a default judgment for more than the amount alleged in the operative pleadings; and, (2) That amount must be based on the total compensatory relief demanded, rather than claim-by-claim. The Court of Appeal found the damages awarded exceeded the plaintiff's demand by $1,819,032, and remanded the case to the trial court with instructions to exercise its discretion to either reinstate the default judgment reduced by that amount or vacate the default and allow Sass to serve an amended complaint (which would, of course, restore defendants' ability to respond).

The Supreme Court granted Sass's petition for review. It affirmed the Court of Appeal's first holding and declined to rule on the second. The court disapproved Cassel and the two cases that cited it with approval, Warren v. Warren, 240 Cal. App. 4th 373 (2015), and Schwab v. Southern California Gas Co., 114 Cal. App. 4th 1308 (2004). The Supreme Court held "that a plaintiff alleging an accounting action must plead a specific dollar amount to support a default judgment awarding monetary relief."

For the most part, the Supreme Court's opinion reiterated existing law such as Becker and Greenup v. Rodman, 42 Cal. 3d 822 (1986), applying Section 580 to strictly limit a court's default judgment power, to protect the due process rights of defaulting defendants not to be subject to more damages than the complaint alleges. But this time the court was more explicit about its policy preferences.

The court started by analyzing statutory and case law on default judgments, including CCP Section 585, which describes default judgment procedure. In a footnote, the court noted Section 585(b) explicitly permits the court to take an account necessary to issue or effect a default judgment or to order a reference for that purpose. Because neither party relied on that language, the court did not further address it. The holding makes it hard to imagine a court engaging in such an accounting to calculate a default judgment exceeding pleaded damages. And a mention of the statute later in the opinion strongly suggests otherwise.

Applying default judgment law to an accounting claim, the Supreme Court started by addressing the Cassel exception's rationale: an accounting is not available to a party who alleges a right to recover a sum certain or one that can be calculated with certainty. The court characterized this as "an information asymmetry between the parties ... that generally favors the defendant but never the plaintiff."

Though claimants may be unable to state a sum certain, the court noted they are not precluded from providing an estimate of their maximum recovery. The court acknowledged the appearance of injustice in requiring plaintiffs to give defendants notice of exposure by pleading a specific amount of damages defendants already know but plaintiffs don't. Nevertheless, the court found no inherent conflict between strict compliance with Section 580 and the nature of an accounting action.

The court observed that some accounting plaintiffs have included estimates in their complaints, showing their relative lack of knowledge is not an insurmountable obstacle. Second, the court noted accounting plaintiffs still must prove up their damages to get a default judgment, so they could either allege an estimate to which they would be willing to be bound in case of default judgment, or they could amend the complaint to state damages more accurately after gathering the necessary information.

Of course, that second choice would re-open the default and give the defendant another opportunity to respond. But the court made clear that in its view, the possibility of reopening the default would be a feature not a bug, because the law favors a hearing on the merits whenever possible. The court made a second reference to Section 585 that reiterated the point, suggesting a plaintiff who truly had no idea of their damages could get a court to order an accounting under the statute. The court allowed, without deciding, that after a Section 585 accounting a plaintiff might need to amend the complaint to reopen the default.

The court rejected the plaintiff's argument that requiring accounting plaintiffs to plead specific damages could motivate them to allege exaggerated amounts, noting, "[t] he higher the figures an individual names in a complaint, the less likely it is that the defendant will 'giv[e] up his right to defend.'" This would be a "benefit of incentivizing a defendant to participate in the litigation," depriving plaintiffs of an easy win but "thus serving the law's preference to resolve litigation on the merits."

The court's latest default judgment opinion underlined the incompatibility of default judgments with the policy preference that claims be litigated on their merits to assure a fair result, and endorsed default judgment restrictions that enhance just resolution. 