Barragan v. Banco Bch

• Decision Date: 23 December 1986
• Citation: 188 Cal.App.3d 283,232 Cal.Rptr. 758
• Court: California Court of Appeals Court of Appeals
• Parties: Roberto BARRAGAN, et al., Plaintiffs and Respondents, v. BANCO BCH, et al., Defendants and Appellants. D003520.

Page 758

232 Cal.Rptr. 758

188 Cal.App.3d 283

Roberto BARRAGAN, et al., Plaintiffs and Respondents, v. BANCO BCH, et al., Defendants and Appellants.

D003520.

Court of Appeal, Fourth District, Division 1, California.

Dec. 23, 1986.

As Modified on Denial of Rehearing Jan. 22, 1987.

Review Denied March 18, 1987.

David W. Steuber, Grace A. Carter and Paul, Hastings, Janofsky & Walker, Los Angeles, for defendants and appellants

John E. Ponder, J. Manuel Sanchez and Virginia R. Gilson, San Diego, for plaintiffs and respondents.

WIENER, Associate Justice.

Defendant Banco BCH appeals from a default judgment in favor of plaintiffs Roberto and Aida Barragan, two former depositors. Stated in this way there is little to distinguish Banco BCH's appeal from the routine appeals from default judgments frequently reviewed by this court. However, this case is unique in at least two ways. First, Banco BCH is a nationalized Mexican bank raising issues of foreign sovereign immunity and the act of state doctrine. Second, the default judgment totals $3,000,000--$1,000,000 compensatory damages and $2,000,000 punitive damages. The magnitude of the judgment, however, cannot be used as the basis for our decision. The amount is irrelevant. Every appeal from a default judgment touches upon the integrity of the judicial process and the due process right of the non-appearing defendant. Accordingly, careful appellate scrutiny is required in all cases regardless of the amount in controversy. After examining this case according to principles which govern all default judgments, we conclude the default was properly entered. We decide, however, the compensatory damages must be reduced to $500,000, the amount set forth in the prayer for relief. In reaching this conclusion we explain that because there were no motions pending to preclude entry of the default, court rules establish the period within which the bank was required to respond. We also discuss the reasons the bank failed to establish grounds for relief from entry of the default. As to the issue of punitive damages, we hold there is insufficient evidence to support the award and remand to allow the trial court to redetermine the proper amount of punitive damages in light of Banco BCH's net worth.

FACTS

The Barragans owned and operated a garment business in Tijuana, Mexico. Aida, a U.S. citizen, managed the corporation. Roberto, a Mexican citizen with legal residency in the U.S., was the president but worked primarily as a UPI correspondent. The Barragans owned a family residence in Chula Vista and rental property in San Ysidro.

In January 1978 the Barragans opened a commercial account for their garment business at the Tijuana branch of Banco BCH. Only Roberto and Aida were authorized to sign checks and make withdrawals from the account. In June 1978 the Barragans met Rafael Hernandez Moreno, the assistant manager of the Tijuana branch. On the bank's recommendation the Barragans hired Moreno as accountant for the corporation subject to his terminating employment with Banco BCH. Without the Barragans' knowledge Moreno continued to work for the bank.

During the nine months he was employed as the corporation's accountant, Moreno made unauthorized withdrawals of $176,244.24 from the Banco BCH account. It was later discovered other bank customers were given the same account number as the Barragans and their checks charged against the Barragans' account. Moreno disappeared when the Barragans' corporate checks started bouncing in March 1979. The bank refused to provide the Barragans with an accounting. Shortly thereafter Banco BCH reported Roberto Barragan to the Mexican police for fraudulent account shortages resulting from an alleged check kiting scheme. Roberto was arrested on May 23, 1979, convicted without trial and confined in a Mexican prison for almost two years. The bank's attorneys visited Roberto several times during his imprisonment and offered to dismiss the charges if he signed a form admitting the fraud. Roberto never accepted the offer. Banco BCH states it learned of Moreno's involvement only after Roberto's conviction.

A month after Roberto was imprisoned, the Mexican Labor Commission closed the corporation because the bank refused to honor payroll checks. By February 1981 the authorities had disposed of the corporation property and records. Because Roberto was in prison and Aida was unable to enter Mexico due to an outstanding arrest warrant, neither could protect the property.

PROCEDURAL BACKGROUND

The First Action: Banco BCH v. Barragan (Super.Ct. No. 437704)

In July 1979 Banco BCH sued the Barragans and Moreno in San Diego Superior Court for conversion, fraud, conspiracy and common counts (the "first action"). The bank attached an $18,397 promissory note and the two parcels of real property owned by the Barragans in California.

After Roberto was released from prison, the Barragans sought leave to file a cross-complaint in the first action alleging conversion, fraud and deceit, conspiracy, negligence, breach of contract, false imprisonment and requesting an accounting. The court denied the Barragans' motion without prejudice to their filing a separate lawsuit. The court ruled the cross-complaint was not compulsory.

After a jury trial in July 1982, the court directed a verdict in favor of the Barragans on the fraud, conversion and conspiracy counts. By special verdict the jury set damages on the common count at $30,000 and reduced the damages by 80 percent due to Banco BCH's negligence. The final judgment ordered the Barragans to pay the bank $9,000 together with costs and interest.

The Second Action: Barragan v. Banco BCH (Super.Ct. No. 482016)

After the court denied Barragans' motion for leave to file a cross-complaint and before the first action was tried, plaintiffs filed this action against Banco BCH for conversion, accounting, fraud and deceit, conspiracy, negligence, breach of contract and false imprisonment. The Barragans alleged Banco BCH and Moreno converted $176,244.24 in the Barragans' account and wrongfully complained to the Mexican authorities causing Roberto's arrest and imprisonment.

Because of its relevance to the sovereign immunity defense and motions for relief from default and default judgment, we detail the procedural chronology of the Barragans' lawsuit against Banco BCH in later sections of this opinion. To summarize briefly, Banco BCH moved for partial summary judgment on the false imprisonment count and demurrered on grounds the first action was pending. The parties agreed to take the motions off calendar pending resolution of the first action. After judgment in the first action and while the bank's motions were still unresolved, the bank unsuccessfully moved to dismiss the Barragans' lawsuit on grounds of res judicata. The court's order denying the motion was entered on July 6, 1984. After warning Banco BCH of the consequences of failure to answer within the time prescribed by law, the Barragans entered default against the bank on July 20, 1984.

On January 14, 1985, Banco BCH unsuccessfully moved to set aside the default on grounds of excusable neglect, mistake and inadvertence. The proposed answer set forth the single affirmative defense of res judicata.

At the May 31, 1985, "prove-up" hearing, the Barragans testified regarding damages incurred through the loss of their business, loss of funds in the Banco BCH account, and forced sale of real and personal property. Roberto testified about the emotional problems he suffered as a result of his incarceration in the Mexican prison. The court found the Barragans had proved damages of at least $1,000,000 and granted compensatory damages in that amount based on the allegations of the complaint. Because there was a question whether compensatory damages were limited by the amount stated in the prayer of the complaint, the court said it would award $500,000 in compensatory damages if it lacked the power to award the higher amount. The court also awarded punitive damages of $2,000,000 representing less than three percent of the bank's net worth. The court

denied Banco BCH's motion to vacate the default judgment. This appeal ensued.

DISCUSSION

I.

We first consider the question of the court's jurisdiction to enter judgment against Banco BCH. The bank argues it is immune from both personal and subject matter jurisdiction under the Foreign Sovereign Immunities Act of 1976 (FSIA), 28 United States Code sections 1330, 1332(a)(2, 4), 1391(f), 1441(d) and 1602-1611. Bancho BCH also claims the act of state doctrine bars any attempt to review and condemn acts of the sovereign state of Mexico through a ruling on the Barragans' false imprisonment claim.

A. The Foreign Sovereign Immunities Act

Congress enacted the FSIA to provide a comprehensive approach to questions of sovereign immunity of foreign states. 28 United States Code section 1603 defines the entities to which the FSIA applies and states:

"For purposes of this chapter--

"(a) A 'foreign state,' ... includes an agency or instrumentality of a foreign state as defined in subsection (b).

"(b) An 'agency or instrumentality of a foreign state' means any entity--

"(1) which is a separate legal person, corporate or otherwise, and

"(2) which is an organ of a foreign state or political subdivision thereof, or a majority of whose shares or other ownership interest is owned by a foreign state or political subdivision thereof, and

"(3) which is neither a citizen of a State of the United States as defined in section 1332(c) and (d) of this title, nor created under the laws of any third country." (28 U.S.C. § 1603(a) and (b).)

Mexican president Jose Lopez Portillo nationalized Banco BCH in September 1982, seven months after the Barragans filed this lawsuit. The president's decree provided for immediate expropriation of the assets of private Mexican banking institutions with compensation to be paid to shareholders over a period of ten years. ("Decree...