In Yu v. Liberty Surplus Ins. Corp. (No. G054522, filed 12/11/18), a California appeals court held that a developer’s failure to allege the amounts of damages sought in its cross-complaint rendered default judgments against a subcontractor void and, therefore, unenforceable against the subcontractor’s insurers in a direct action under Insurance Code section 11580(b)(2).
Yu, the owner, hired ATMI to develop a hotel. ATMI subcontracted with Fitch to perform stucco and paint work. Yu sued ATMI for construction defects and the developer cross-complained against its subcontractors, including Fitch, for breach of contract; warranty; indemnity, etc. Yu’s operative complaint prayed for damages “in an amount not less than $10,000,000, according to proof.” ATMI’s cross-complaint stated that it incorporated the allegations of Yu’s complaint “for identification and informational purposes only,” but “does not admit the truth of any allegations contained therein.” The cross-complaint also prayed for damages with respect to the various causes of action “in an amount according to proof.”
Fitch defaulted. ATMI then settled with Yu, including an assignment of rights against Fitch. Yu proceeded to prove up a default judgment against Fitch for $1.2 million, which was entered by the court.
Fitch’s insurers moved to vacate the judgment, arguing that ATMI had not stated an amount of damages in the cross-complaint sufficient to support a default judgment. That motion was denied on the ground that the insurers lacked standing to contest the validity of the default judgment. In an unpublished opinion the appeals court affirmed, while telling the insurers that they had an alternative remedy of denying any demand for payment and litigating the issue in a coverage action.
Yu then sued the insurers as a judgment creditor in a direct action under Insurance Code section 11580(b)(2). But the court in that action entered summary judgment for the insurers, ruling that the default judgment was void on its face because of the absence of a money demand in the cross-complaint.
The appeals court agreed. The court first pointed out that under Code of Civil Procedure section 425.10(a) in any complaint or cross-complaint “[i]f the recovery of money or damages is demanded, the amount demanded shall be stated.” The court cited exceptions to the general rule in cases involving personal injury or wrongful death, or when the plaintiff is seeking punitive damages. (Citing Code Civ. Proc., §§ 425.10(b); 425.11.) And in those cases, the plaintiff must still serve a separate written statement of damages (citing Code Civ. Proc., §§ 425.11 (compensatory damages), and 425.115 (punitive damages), before a default judgment may be taken. (Code Civ. Proc., §425.11(c).)
The Yu court explained that it is a matter of due process that the defendant must have notice of the specific relief sought, so that he or she can decide whether to appear and defend. Further, the Legislature has provided that a default judgment cannot exceed the amount demanded, or it is void. (Code Civ. Proc., §§ 580, 585; Greenup v. Rodman (1986) 42 Cal.3d 822, 826.)
There was no question that the developer’s cross-complaint failed to meet the requirements, but the Yu court also held that the allegation incorporating the underlying complaint by reference would not suffice either. The Yu court noted that neither statutes nor court rules establish any formal requirements for incorporation by reference, but common law contract principles require that: “(1) the reference to another document [be] clear and unequivocal; (2) the reference [be] called to the attention of the other party, who consented to that term; and (3) the terms of the incorporated documents [be] known or easily available to the contracting parties.” (Citing Kleveland v. Chicago Title Ins. Co. (2006) 141 Cal.App.4th 761, 765.)
After first pointing out that the alleged incorporation by reference was expressly “for identification and informational purposes only,” the Yu court then found the complaint’s allegation of damages “not less than $10 million” to be inconsistent with the cross-complaint’s allegation of damages “in an amount precisely unknown,” and “subject to proof.” Consequently, the incorporation by reference was not “clear and unequivocal,” nor was the precise amount “adequately called to the attention of the other party.” The Yu court ultimately faulted the developer for having failed to state any amounts in the cross-complaint:
“[W]e agree with the trial court’s assessment that ‘because the cross-complaint filed by ATMI specifically declined to state the amount of damages sought . . . , it seems contradictory to basic notions of due process and fairness to find that cross-defendants [the Fitch Entities] have been put on notice of their potential damages by virtue of an allegation in a complaint filed not against them, but against cross-complainant ATMI.’”
Finally, the Yu court rejected an argument that Fitch had entered a general appearance, saying this went to the issue of service or jurisdiction, but not the amount of damages required for a default judgment. Likewise, the Yu court rejected an argument that Fitch could have readily calculated the damages because it had performed the work, saying that was no substitute for adequate notice or due process.
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