Jackson v. Bank of America

Opinion

In an action by Paul O. Jackson (plaintiff) against the Bank of America (the Bank) for rescission, fraud, and negligent misrepresentation, the Bank has appealed from a default judgment awarding plaintiff $43,016.64 in compensatory damages and $2.5 million in punitive (exemplary) damages, notwithstanding that the complaint, upon which the “prove-up” of damages was purportedly based, alleged no facts which demonstrated a monetary loss to plaintiff chargeable to any conduct by the Bank. Accordingly, we shall reverse the judgment with directions.

Synopsis of the Facts

In March 1978, plaintiff loaned Robert R. Rallo (Rallo) five municipal bonds with a combined principal value of $25,000, and Rallo used the bonds as security to obtain a 90-day $23,000 loan from the Palm Desert branch of the Bank.^[1] On March 14, 1978, plaintiff signed a security “lent collateral” agreement with the Bank, which recited, among other things, that plaintiff authorized Rallo to use the bonds, without notice to plaintiff, for security for “any present or future indebtedness” of Rallo to the Bank; that the loan of the bonds to Rallo “shall not be construed to make [plaintiff] a guarantor or surety of the indebtedness of [Rallo],” and that plaintiff waived any right to contend that the loan operated to place him in the role of a guarantor or surety.

The following month, plaintiff loaned Rallo two additional municipal bonds with a combined principal value of $10,000, and Rallo used the bonds as security to obtain an additional $5,500 loan with the Bank. Plaintiff signed a second security agreement with the Bank as to the additional bonds. The second agreement included exculpatory provisions identical to

About two and one-half months later, the vice-president and manager of the Bank wrote plaintiff that the Bank intended to lend Rallo an additional $4,000; that the new loan required an additional $15,000 in bonds; that plaintiff should authorize the bank to remove three additional $5,000 bonds from plaintiffs file, and that plaintiff should sign a new security agreement with reference to the additional bonds.

Thereafter, plaintiff apparently did authorize the removal of the additional bonds from his file, and did sign the new security agreement. Again, this latest agreement included exculpatory provisions identical to those of the March 14 agreement noted above. The $23,000, $5,500 and $4,000 loans were then combined, and shortly afterwards, Rallo executed a promissory note in favor of the Bank for the total amount of $32,500. The note was due in 90 days (Oct. 10, 1978), and was secured by all 10 municipal bonds referred to above (hereinafter, the bonds).

On January 23, 1979, the Bank renewed Rallo’s $32,500 note, with the addition of $800 in accrued interest, making a total amount of $33,300. The new note was due on March 1, 1979, and was secured by the bonds.

On June 1, 1979, the Bank renewed Rallo’s $33,300 note with accrued interest of $1,580.09, and an additional loan of $5,103.85, making a total amount of $39,983.94. The new note was due on October 1, 1979, and was secured by the bonds.

Rallo did not pay any part of the $39,983.94 note on October 1, 1979. In order to avoid the Bank’s realizing on its collateral by a sale of the bonds, plaintiff on October 10, 1979, replaced Rallo’s $39,983.94 note (which was then assigned to plaintiff) with a 90-day note of his (plaintiffs) own for $41,984.52, representing the $39,983.94 due from Rallo, plus $2,000.58 in accrued interest. Also on October 10, 1979, plaintiff executed an “Agreement Regarding Collateral,” which recited that plaintiff “intends and agrees” that his own $41,984.52 note would be secured by the bonds as collateral.

Without more, on November 27, 1979, plaintiff filed a “complaint for money due” against Rallo and the Bank!^[2] In the complaint, notwithstanding his agreement with the Bank in which he had waived any rights to the role

As to the Bank, plaintiff alleged that he had become a “personal guarantor” of Rallo’s $23,000 loan on March 14, 1978, by “signing a guarantee and posting ten [bonds] as security for plaintiff’s performance of the guarantee”;^[3] that the Rallos and the Bank had “agreed between themselves . . . without informing plaintiff and without plaintiff’s knowledge or consent” to increase the loan from $23,000 to $39,983.94; that the Bank did not act reasonably to protect plaintiff’s interest as a guarantor of the $23,000 note, and did not intend to protect such interest; that the Bank had suppressed from plaintiff the fact that the Rallos were a bad credit risk and were not making payments on the note, and that the Bank had fraudulently and negligently induced plaintiff to guarantee Rallo’s $23,000 note and to execute his, plaintiffs, $41,984.52 note. Plaintiff sought: (1) to rescind his $41,984.52 note; (2) to prevent the Bank from selling the bonds; (3) to recover general damages of $43,016.64; (4) to recover exemplary damages of $5 million on each of the fraud and negligent misrepresentation causes of action, plus (5) attorney’s fees and costs. It is appropriate to observe here that nowhere in the First Amended Complaint did plaintiff allege that he was out of pocket in any amount.

At 3 p.m. on October 14, 1980, a hearing was held on plaintiffs request for a TRO. No one appeared on behalf of the Bank. The court granted plaintiffs request, and signed an order restraining the Bank from selling the bonds pending the hearing on plaintiffs request for a preliminary injunction, which was set for October 23, 1980. The order also recited that copies of the complaint and all the documents related to the TRO were to be served on the Bank that same day, October 14, 1980.

At about 9:30 the following morning (October 15), plaintiffs process server appeared at Bloom’s office to serve the foregoing document person

At the hearing on the Bank’s motion for equitable relief, the Bank argued that the Jackson court’s language as to the Bank’s inexcusable negligence, supra, was dicta, and, in any event, did not apply to the Bank’s new argument as to Bloom’s reliance on the conduct between professionals regarding notification. The trial court (Judge Younger) disagreed, stating that it would prefer to rule in favor of the Bank on the “continuous-course-of-conduct- and-communication-between-counsel issue,” that the previous trial judge had “obviously” done so on that basis, but that his, Judge Younger’s, hands were “tied” by the appellate court, which had ruled against the Bank “on all theories” (italics added) advanced for setting aside the default. The motion for equitable relief was accordingly denied. However, the resulting minute order recites no reasons for the denial.

About nine months later, plaintiff obtained a change of venue to the eastern district (Indio) of Riverside County. Yet another year later, plaintiff arranged for a “prove-up” hearing on shortened time before a court commissioner sitting as a judge pro tempore. The evidence at the hearing consisted of plaintiff’s testimony, and the entire contents of a 264-page “Bench Book.”^[4]

At that hearing, plaintiffs attorney began by calling the court’s attention to the first document in the bench book, which was the appellate court opinion in Jackson v. Bank of America, supra, 141 Cal.App.3d 55 . Although Jackson had been issued in March 1983, over two years after plaintiffs first amended complaint had been filed, although the factual recitation in Jackson was concerned almost entirely with events which had occurred after the complaint had been filed, such as the circumstances surrounding the Bank’s sale of plaintiffs bonds and the Bank’s failure to answer the complaint, and although the legal issue in Jackson was limited to whether the Bank’s default should have been set aside, plaintiffs attorney told the court that the opinion “deals with the underlying issues of this case.” The court responded that it would take judicial notice of the opinion.

The minute order entered following the default hearing recited that the court “grants judgment in the sum of $95,103.50, punitive damages in the sum of $2,500,000.00 . . . Counsel for Plaintiff to prepare formal judgment.” (Italics added.) The formal judgment, which was filed a week later, awarded plaintiff general damages of $43,016.64, “as alleged in the First Amended Complaint,” and exemplary damages of $2.5 million. There is no indication in the record as to why the $95,103.50 was changed to $43,016.64. This appeal followed.

Discussion

The Bank contends: (1) its latter motion for relief from default based on equitable, grounds should have been granted; (2) plaintiff’s argument and proof at the default hearing constituted a de facto amendment of his complaint, which “opened” the Bank’s default and entitled it to be served and to answer; (3) the damages are against the law.

The Bank’s Motion for Relief From Default on Equitable Grounds

The Bank contends, as it did in the trial court, that its default should have been set aside on equitable grounds, and, because the appellate

On appeal, the Bank has not squarely addressed the foregoing holding, and argues, because Jackson’s decision that relief should not have been granted was based on section 473, that the court did not purport to decide “any” issue with respect to extrinsic fraud or mistake.^[6] However, as noted, one of the grounds of Jackson’s decision on the section 473 issue was that the Bank’s negligence had been inexcusable, and as also noted, inexcusable negligence precludes equitable relief on the grounds of extrinsic fraud or mistake. Moreover, a court’s equitable power is narrower than its power under section 473 ( Weitz v. Yankosky (1966) 63 Cal.2d 849 , 857 [ 48 Cal.Rptr. 620 , 409 P.2d 700 ]). Accordingly, the Jackson holding that the Bank was inexcusably negligent under a section 473 standard would, a fortiori, decide the negligence issue with respect to extrinsic fraud or mistake, and thus preclude a later decision that the Bank was entitled to equitable relief.

In the trial court, the Bank argued that the Jackson holding as to the Bank’s negligence applied only to its counsel’s alleged failure to file an answer because she thought the complaint was moot, and not to her later excuse that she had relied on opposing counsel not to enter the default without informing her. However, it would seem that inexcusable negligence would not be transformed into excusable negligence, under a stricter standard, by a reliance on opposing counsel, particularly where, as here, the “reasonablé working relationship” Bloom claimed to have had with plaintiffs attorney was undoubtedly strained by the circumstances surrounding the Bank’s sale of plaintiffs bonds.

In light of all the above, it is our view that the trial court in Los Angeles correctly decided that it was precluded by Jackson from granting the Bank’s latter motion for relief from default on equitable grounds.

The Bank contends that plaintiff’s argument and proof at the default hearing constituted a de facto^[7] amendment of his complaint which relieved the Bank of its default and entitled it to be served anew and then to answer. We agree. Plaintiff does not argue with the proposition that the Bank would be entitled to be served and to answer an amended complaint, but contends: (1) no such amendment took place because the judgment after the default hearing did not go beyond the amount of damages alleged in the complaint, and (2) our scope of review is limited to whether the damages awarded at the default hearing were supported by the evidence. Amazing!

The answer to these deceptive contentions is: (1) the amendment here was not as to the amount of damages, but as to the facts alleging plaintiff’s entitlement thereto, and (2) “unless the facts essential to the support of the case be alleged upon the record, evidence upon such omitted facts cannot be heard or considered.” Hicks v. Murray (1872) 43 Cal. 515 , 522, italics added.) “To hold otherwise would mean that this court sanctions a procedure under which a defendant may be trapped by a default judgment.” (Burtnett v. King (1949) 33 Cal.2d 805 , 811 [ 205 P.2d 657 , 12 A.L.R.2d 333 ], italics in original.)

“The statutes are very specific in their requirements for a judgment following a default. ‘The relief granted to the plaintiff, if there be no answer, cannot exceed, that which he shall have demanded in his complaint . . . (Code Civ. Proc., § 580). In cases where no answer has been filed and a default has been entered, but the clerk may not enter a default judgment, the plaintiff may apply to the court ‘for the relief demanded in the complaint’. . . (Code Civ. Proc., § 585(2) [now § 582,. subd. (b)].) Manifestly ‘demanded’ means claimed, asserted a right to or prayed for.” (Burtnett v. King, supra, 33 Cal.2d 805 , 806-807, statutory emphasis in Burtnett, other italics added.) “As against a defaulting or disclaiming defendant, the relief must be consistent with the case made upon the complaint and embraced within the issues. (Code Civ. Proc., sec. 580.)” (Balfour-Guthrie Inv. Co. v. Sawday (1901) 133 Cal. 228 , 230 [ 65 P. 400 ], italics added.) “A default admits the material allegations of the complaint, and no more. ... the relief given to the plaintiff cannot exceed that which the law awards as the legal conclusion from the facts alleged

In the case here, although plaintiff alleged, in conclusory terms, that he had been damaged in the sum of at least $43,016.64 because he had guaranteed Rallo’s $23,000 note (which in reality was false) and had executed his own $41,984.52 note, these facts alone would not entitle him to any damages, without additional allegations as to a causal connection between the foregoing events and the monetary loss. In other words, plaintiff did not allege that the Bank had enforced the guarantee or collected on the $41,984.52 note, or that plaintiff had paid any money to the Bank because of the guarantee or the $41,984.52 note. (Although plaintiff had apparently paid $6,206.25 in interest on the note before the complaint was filed [see ante], there were no allegations in the complaint as to that payment.)^[8]

Accordingly, on the basis of the foregoing authorities, plaintiff’s failure to amend the complaint before the default hearing to allege any conduct of the Bank which had caused him to lose the alleged $43,916.64 precluded him from proving at the hearing that the Bank’s conduct in collecting interest on the $41,984.52 note before and after the complaint had been filed, and in selling the bonds after the complaint had been filed, had caused him to lose the $43,016.64 (much less $95,103.50). Nor was the erroneous admission of such evidence at the default hearing cured by reducing the $95,103.50 in compensatory damages which had been awarded at the hearing to the $43,016.64 award in the judgment following the hearing, and by reciting in the judgment that the foregoing damages had been incurred “as a result of’ plaintiffs executing the $41,984.52 note.

Plaintiffs contention as to our standard of review is based on Uva v. Evans (1978) 83 Cal.App.3d 356 [ 147 Cal.Rptr. 795 ], a dog-bite case, where the defaulting defendant contended on appeal that the $30,000 damage award was “grossly disproportionate to the injury suffered. ” (Id., at p. 362, italics added.) (There was no contention that the injury had not been alleged.) The reviewing court agreed with the defendant, and, in an opinion written by Justice Kaus, overturned the $30,000 award on the grounds that the evidence at the default hearing had showed actual and estimated expenses of less than $3,000, and that an appellate court could review a default award in a case where it was “totally unconscionable and without evidentiary justification.” (Id., at p. 364.)

A defendant in a default action “ ‘ha[s] the right to assume that the judgment which would follow a default on her part would embrace only the issues presented by the complaint and the relief therein prayed.’ ” (Burtnett v. King, supra, 33 Cal.2d 805 , 808, original italics.) Here, the Bank’s attorney, Bloom, assumed that plaintiff’s complaint was “moot,” because the only relief plaintiff would have been entitled to on the basis of the allegations of the complaint would have been the prevention of the sale of the bonds, and, in order to obtain any additional relief, such as monetary damages, plaintiff would have had to amend his complaint to include allegations as to his payment of interest on the $41,984.52 note or as to the sale of the bonds. In this sense, Bloom’s failure to file an answer was theoretically understandable, although, in view of what transpired, strategically ill-advised. It was theoretically understandable because there was no way plaintiff could prove his damages without amending his complaint, and Bloom undoubtedly assumed that plaintiff was aware of such predicament, and that he would amend the complaint without any further action on the part of the Bank.^[9]

Plaintiff also argues that there was no de facto amendment of his complaint because the record is devoid of any statutory request therefor, or any court authorization thereof. However, it is precisely the absence of such a formal procedure which renders the variance between plaintiff’s pleading and proof a de facto rather than a de jure amendment (see fn. 7, ante). Moreover, if we were to accept plaintiff’s argument, then any new evidence, based on any theory, could be introduced at a default hearing, as long as no formal amendment were requested, and the default judgment as to compensatory and exemplary damages were limited to the amount prayed for in the complaint. Under such a scenario, a plaintiff in a default proceeding would not be concerned with limiting his proof to his pleadings, but rather with

Disposition

The judgment is reversed, and the trial court is directed to enter its order setting aside the Bank’s default and to provide that the case shall not proceed unless and until plaintiff files a pleading which alleges the events it attempted to prove at the May 17, 1985, hearing.

Campbell, P. J., and Kaufman, J., concurred.

Respondent’s petition for review by the Supreme Court was denied March 26, 1987. Lucas, C. J., Panelli, J., and Kaufman, J., did not participate therein.