Shapiro v. Clark

• Decision Date: 15 July 2008
• Docket Number: No. H030063.,H030063.
• Court: California Court of Appeals Court of Appeals
• Parties: MARK D. SHAPIRO et al., Plaintiffs and Respondents, v. PAMELA W. CLARK, Defendant and Appellant.

164 Cal.App.4th 1128

80 Cal. Rptr. 3d 398

MARK D. SHAPIRO et al., Plaintiffs and Respondents, v. PAMELA W. CLARK, Defendant and Appellant.

No. H030063.

Court of Appeals of California, Sixth District.

July 15, 2008.

Ellingson McLay & Scott, Mark G. Bonino, Phuong N. Fingerman, Maria S. Quintero, Hayes Davis Bonino; Clayton & McEvoy and Kevin C. Bedolla for Defendant and Appellant.

Richard A. Kutche for Plaintiffs and Respondents.

OPINION

RUSHING, P. J.

Pamela W. Clark appeals from a default judgment and an order denying relief from that judgment unless she posts bond in an amount to secure payment of some $300,000 in compensatory damages plus $1.5 million in punitive damages. She contends that the trial court should have granted relief without conditions. Respondents Mark D. Shapiro and GoGuys, Inc. (collectively, Shapiro), contend that the motion for relief should have been denied outright, and that the conditions are proper. We hold that given appellant's compelling showing of good cause for the minimal neglect reflected in her default, the court would have abused its discretion had it denied relief. We further hold that while the court acted permissibly in conditioning relief on appellant's furnishing an undertaking for compensatory damages, it abused its discretion by requiring security for punitive damages. Accordingly we will modify the order by reducing the amount of security and affirm the order as modified. We will also dismiss appellant's attempted appeal from the underlying default judgment, although that dismissal is inconsequential in the present circumstances.

BACKGROUND

Prior to the commencement of this action, Shapiro brought a suit against appellant's husband, Barry Clark, and Tax Advantage, Inc. (TAI), a business entity of which Clark was a principal, as well as one Andrew T. Cook, a business associate of Clark's. Although the complaint in that matter is not included in the present record, it appears that Clark and TAI suffered their defaults to be entered, leading to entry on April 25, 2005, of a default judgment against them after a prove-up hearing. The court issued a lengthy statement of decision prepared by respondents' counsel. Although this document is, on the present record, mere hearsay as to appellant, it is attached to the complaint against her, and "made a part [t]thereof,"and its contents may therefore be consulted as background for the present controversy, without in any sense accepting them as true.

According to the statement of decision, in February 2003 Shapiro gave $250,000 to Clark and TAI for investment in a hotel project in Stockton. The transaction was reflected in a written agreement containing various representations as to the income to be received from the investment and the security, including personal guarantees, to be provided for it. In May 2003, Shapiro lent another $50,000 to Clark and TAI, of which $40,000 remains unpaid. The court found that Clark and TAI procured these payments by fraud, inducing Shapiro to make them by means of false representations and the concealment of material facts, including that their venture was "vastly undercapitalized and unable to undertake the financial commitment touted to Plaintiffs," that the "loan proceeds were used for purposes other than what was represented to plaintiffs," and that the proposed ventures were, contrary to express representations, "inherently risky and speculative." The court also found that Clark and TAI "knowingly and willingly used plaintiffs' loan proceeds for purposes other than what was agreed upon and represented to plaintiffs and diverted plaintiffs' money to their own use." The court found that Clark's and TAI's conduct breached a fiduciary duty arising from their relationship to Shapiro as tax and financial advisers. The court also found that Clark and TAI had converted the sums in question to their own use, resulting in damages to respondents of $290,000 plus some $33,205 in interest and $36,500 in costs of recovery. The court awarded $1.5 million in punitive damages on a finding that Clark and TAI "acted intentionally, with fraud, malice, and oppression, and demonstrated a subjective motive to inflict injury or believed that injury was substantially certain to occur to plaintiffs as a result of their conduct ...."

After entry of this judgment against Clark and TAI, Shapiro exchanged various communications through counsel with Clark, who was unrepresented, concerning a possible resolution of their disputes. These exchanges proved inconclusive.

Shapiro commenced this action on August 3, 2005, by filing a complaint against appellant, Clark, and TAI, of which appellant is alleged to be "an agent and/or employee ...." Although the complaint is heavily burdened with evidentiary and other improper matter, the gist of Shapiro's grievance is that appellant was the beneficiary of transfers of the sums found in the first action to have been fraudulently procured from Shapiro. Thus it is alleged that over a 15-month period ending in May 2003, Shapiro loaned "substantial sums" to Barry Clark, TAI, and Cook. During the last four months of this period, some $298,000 was wired from the bank accounts of TAI to a Florida contractor who had been engaged to improve certain Florida real property then owned by appellant as a married woman, and ultimately held by her and Clark as husband and wife. The first cause of action asserts that these transfers were made in fraud of creditors in that, as relevant here, appellant knew that her husband and TAI "intended to hinder, delay, or defraud the collection of plaintiffs['] aforementioned claims ... by virtue of [the fact] that she was the spouse of [Barry Clark] and an agent and/or employee of [TAI]."

The complaint also makes some attempt to implicate appellant in the original fraud allegedly practiced upon Shapiro. Thus it is alleged in the second cause of action that appellant and Clark made certain representations to Shapiro while "defendants" suppressed the facts that Clark and TAI were undercapitalized and that the loan proceeds would be used for purposes diverging from their representations; appellant and Clark "also failed to reveal and suppressed the fact that the aforementioned transfers were to be and had been made all for their personal benefit"; these nondisclosures were likely to and did mislead Shapiro in light of other representations; and appellant and Clark made the affirmative representations and nondisclosures "with the intent to induce plaintiffs to extend loans ...." In the third cause of action Shapiro charges "constructive fraud" in that TAI and Clark "had a confidential and fiduciary relationship to Plaintiffs" which "Defendants" violated by certain misrepresentations and failures to disclose. The fourth through seventh causes of action assert claims for a constructive trust, conversion, conspiracy, and an accounting. In all but the last cause of action, Shapiro alleges that all defendants "acted with intent, fraud, malice, and oppression, and Plaintiffs are entitled to punitive damages in the sum of One Million Five Hundred Thousand Dollars ($1,500,000.00)."

On August 8, 2005, the complaint was served by personal delivery, apparently in Florida, on appellant, Clark, and TAI. Their time to answer or otherwise plead ran 30 days later, on September 7, 2005. (See Code Civ. Proc., §§ 412.20, subd. (a)(3), (4), 585, subd. (b).) Meanwhile counsel for Shapiro continued to exchange e-mail with Clark about settlement. On September 4, appellant's 39-year-old son suffered a "massive heart attack," of which he died on September 8, 2005. On that same date, counsel for Shapiro e-mailed Clark with a specific settlement proposal, stating, "in the event a resolution cannot be reached, a default will be entered on September 15, 2005 ...." This in effect extended appellant's time to plead through the close of business on September 14. Her son's funeral took place on September 12.

Early on the afternoon of September 14, 2005, Clark e-mailed counsel for Shapiro, expressing the belief that "we are within negotiation range" but warning that if respondents entered defaults the next day there would be no further communication between the parties. At the end of the message he wrote, "I would have responded to you a couple of days ago, but Pamela's son just died on September 8th, and the funeral and burial arrangements and services have taken all of our time over the past few days." Counsel replied that Shapiro was "very disappointed" with Clark's response to his offer, concluding, "Given that a resolution has not been reach[ed], please be advised that Mr. Shapiro has instructed me to move forward with the entry of default" in this matter.

On September 15, respondents requested, and the clerk duly made, entries of default as to all three defendants. On October 3, 2005, Shapiro applied to the court for entry of a default judgment. On October 17, 2005, the court entered judgment in Shapiro's favor and against all defendants, jointly and severally, for $298,558.37 in compensatory damages, $72,147.60 in interest, $477.50 in costs, and $1.5 million in punitive damages, for a total of $1,871,183.47. The judgment was accompanied by a 19-page statement of decision prepared by Shapiro's counsel.

On December 12, 2005, appellant filed a motion to set aside the default and default judgment together with a proposed answer. Clark and TAI did not join in the motion. The chief arguments in its support were that appellant's failure to file a timely response to the complaint was excusable, respondents suffered no prejudice as a result of it, and the delay in seeking relief was also excusable. Appellant also argued that Shapiro had identified no adequate basis for charging her with any liability that might have accrued in Shapiro's favor against Clark and TAI. In support of the motion, appellant submitted a declaration setting forth the facts of her son's death and other...