Grados v. Shiau

• Decision Date: 03 May 2021
• Docket Number: A160541
• Citation: 278 Cal.Rptr.3d 358,63 Cal.App.5th 1042
• Court: California Court of Appeals Court of Appeals
• Parties: Robert J. GRADOS, Plaintiff and Respondent, v. Paul SHIAU, Defendant and Appellant.

63 Cal.App.5th 1042

278 Cal.Rptr.3d 358

Robert J. GRADOS, Plaintiff and Respondent,

v.Paul SHIAU, Defendant and Appellant.

A160541

Court of Appeal, First District, Division 3, California.

Filed May 3, 2021

Keller Benvenutti Kim, Jane Kim and Dara L. Silveira, San Francisco; Leader-Picone & Young, Kaipolani K. Young, for Plaintiff and Respondent.

Wendel Rosen, Steven M. Morger and Patrick Tuck, Oakland, for Defendant and Appellant.

Petrou, Acting P.J. Defendant Paul Shiau appeals from an order denying his motion to set aside a default and default judgment in an action on a promissory note. Shiau argues that the trial court abused its discretion in denying the motion because the default judgment included "illegal" awards of a $100,000 earn-out payment and $16,163.05 in interest on the note, and these awards rendered the default judgment void. We conclude that both the award of the earn-out payment, as well as the award of interest on the earn-out payment, are contrary to law and render those portions of the default judgment void. Accordingly, we reverse the order on Shiau's motion as to these two awards, and modify the default judgment to exclude the $100,000 earn-out payment and reduce the award of interest to $8,081.53.

FACTUAL AND PROCEDURAL BACKGROUND

Plaintiff Robert J. Grados sued Shiau for breach of contract in October 2018. Grados filed a first amended complaint in March 2019 (Complaint), again asserting a single cause of action for breach of contract.

A. Complaint

The Complaint included the following allegations. In April 2017, Grados and Shiau entered into a Demand Note and Agreement (Note), by which Grados agreed to lend Shiau $100,000, together with interest as well as a $100,000 earn-out payment due on the maturity date of the Note (Earn-Out Amount). In July 2017, Grados exercised his right under the Note to demand immediate payment of the principal, interest, and Earn-Out Amount; Shiau failed to pay. In October 2018, Grados sent Shiau a letter notifying him that the failure to pay constituted a default, and thus the Note had matured. As of the filing of the Complaint, Shiau had not made the demanded payment or otherwise responded to the October 2018 letter. The Complaint sought $200,000 in general damages, interest according to proof at the time of trial, and "such other and further relief as the Court may deem just and proper."

B. Note

The Note was attached as an exhibit to the Complaint. It states that Shiau "hereby promises to pay" Grados "the principal amount of One Hundred Thousand Dollars ($100,000), together with all interest accruing on such amount from the Issuance Date and together with the Earn-Out Amount (as hereinafter defined), at the rates and times provided" in the Note.

Section 1 of the Note defines the interest and Earn-Out Amount as follows: "Subject to Sections 3 and 4, interest shall accrue on the unpaid principal balance of this Note at a rate of twenty percent (20.0%) per annum ... commencing on the Issuance Date. In addition to the payment of the principal amount of this Note, [Shiau] agrees that [Grados] shall be entitled to the payment on the maturity date of this Note of an earn-out in the aggregate amount of One Hundred Thousand Dollars ($100,000) ("Earn-Out Amount ")." (Emphasis in original.) It also states that any interest accruing on the Note "shall be credited" against the Earn-Out Amount.

Section 3 defines an "Event of Default " to occur if Shiau "fails to pay any portion of this Note in accordance with the terms of this Note[.]" (Emphasis in original.) Section 4 provides that, upon an Event of Default, "the entire outstanding principal balance of this Note, together with all accrued and unpaid interest and the Earn-Out Amount, shall accrue interest until such default is cured or waived in writing," at a rate of "the lesser of (a) ten percent (10.0%) per annum above the interest rate otherwise in effect for such day or (b) the maximum interest rate permitted under applicable law."

Section 7 states, in relevant part: "Nothing contained in this Note shall be construed or so operate as to require [Shiau] to pay interest at a greater rate than is lawful or in such case to contract for, or to make any payment, or to do any act contrary to applicable law." It also states that Shiau "hereby acknowledges and agrees that, the payment of the Earn-Out Amount shall not be deemed interest on this Note and, accordingly, [Shiau] hereby waives any and all laws applicable to the payment of interest in connection with its payment of the Earn-Out Amount."

C. Default and Default Judgment

On June 28, 2019, Grados obtained a default against Shiau. Grados then requested entry of a default judgment in the amount of $217,388.58: $200,000 as demanded in the Complaint (the $100,000 principal plus the $100,000 Earn-Out Amount); $16,163.05 in interest (calculated using the $200,000 total, 10 percent interest rate, and 295 days since alleged October 2018 default); and $1,225.53 for costs (filing fees and service attempts). On August 5, 2019, the clerk entered the default judgment against Shiau.

D. Motion to Set Aside Default and Default Judgment

On February 5, 2020, Shiau moved to set aside the default and default judgment pursuant to Code of Civil Procedure section 473 on two bases.¹

First, he argued that he was never personally served with "multiple necessary pleadings" in the matter, including the Complaint. Second, he argued that the default judgment must be side aside because the purported 20 percent interest rate of the Note was usurious and violated the 10 percent maximum interest rate prescribed by section 1 of Article XV of the California Constitution, and thus the default judgment awarded "illegal payout amounts" to Grados.

At the hearing, the trial court stated that the motion to set aside the default was untimely as section 473 includes a "jurisdictional limitation" that the motion be brought within six months of the default. Counsel for Shiau then turned to the default judgment. He argued that the judgment wrongly enforced a usurious contract because, despite Grados's request for only 10 percent interest, the Note stated a usurious 20 percent interest rate. He also argued that the enforcement of the $100,000 Earn-Out Amount, as part of the $200,000 total, rendered the default judgment void. The award of the Earn-Out Amount, equivalent to 100% interest on the principal, vastly exceeded the 10 percent maximum constitutional interest rate.

Counsel for Grados argued that the Note was not usurious, but "even if the Court found that it was, the proper remedy wouldn't be vacating the default judgment entirely." He identified the proper remedy in that circumstance as "reducing the judgment to the principal and statutory interest." Counsel for Shiau responded: "That was our feeling, as well, Your Honor. If the default must stand because of the statutory limitation, then a judgment reducing it to the principal and reasonable interest, legal interest, seems reasonable to us[.]" The trial court stated: "You didn't bring a notion [sic ] to that effect. You haven't cited any authority to that effect."

E. Trial Court's Order

The trial court denied the motion in its entirety. As to the default, the trial court found the motion untimely because it was brought more than six months after default was entered. As to the default judgment, the trial court identified two reasons to deny the motion. First, the trial court determined that setting aside the default judgment would be an " ‘idle act’ " because the default remained in effect. It explained that " ‘[i]f the judgment were vacated, it would be the duty of the court immediately to render another judgment of like effect, and the defendants, still being in default, could not be heard in opposition thereto.’ " ( Howard Greer Custom Originals v. Capritti (1950) 35 Cal.2d 886, 889, 221 P.2d 937 ( Howard Greer ).)

Second, the trial court determined that Shiau had not shown any basis for relief from the judgment that was independent of the default. It explained: " ‘A motion to vacate a judgment only lies where the judgment is void on its face ....’ " ( Ostling v. Loring (1994) 27 Cal.App.4th 1731, 1749, 33 Cal.Rptr.2d 391 ( Ostling ).) It stated that the "only argument that [Shiau] makes as to the validity of the judgment is service." The trial court then rejected the argument, finding that Shiau had not offered any declaration or evidence to support his assertion regarding lack of personal service, and had not offered any challenge to the propriety of the substituted service.

Shiau timely appealed the order.

DISCUSSION

The issue raised in this appeal is a narrow one. Shiau does not challenge the trial court's determination that his motion to set aside the default was untimely. Nor does he dispute the trial court's determination that the default judgment was not void for lack of service. Instead, Shiau argues that the illegal terms of the Note and awarded illegal rates of interest to Grados rendered the default judgment void. Specifically, Shiau challenges (1) the $100,000 Earn-Out Amount, awarded as part of the $200,000 demanded in the Complaint; and (2) the award of $16,163.05 in interest. Shiau contends that, by failing to find that the award of illegal interest rendered the default judgment void, the trial court abused its discretion in denying his motion.

I. STANDARD OF REVIEW

Section 473, subdivision (d) provides that a trial court " ‘may, ... on motion of either party after notice to the other party, set aside any void judgment or order.’ " A trial court's ruling on a motion for discretionary relief under section 473 will not be disturbed unless there is a clear showing that the trial court abused its discretion. ( Strathvale Holdings v. E.B.H. (2005) 126 Cal.App.4th 1241, 1249, 25 Cal.Rptr.3d 372.) "The appropriate test for abuse of discretion is whether the trial court exceeded the bounds of reason." ( Ibid. )

A trial court's determination that a judgment is...