By Limor Lehavi

Default judgments can be appealed for failure to state a cause of action and excessive damages.  That is the holding of a recent opinion written by Justice Bedsworth for the California Court of Appeal, Fourth Appellate District, in which the court overturned a default judgment, and entered judgment for the defendants instead.  (Kim v. Westmoore Partners, Inc. (2011) 201 Cal.App.4th 267.)

The complaint was filed by a creditor for payment on promissory notes.  The creditor attached seven promissory notes to the complaint.  The creditor also alleged that the debtors complied with the loan obligations until approximately one year before the complaint was filed.  Six of the notes had maturity dates that were much earlier, and the creditor did not allege any extensions had been given.  The seventh note required payment only when the business had cash available, and the complaint did not allege that cash was available.  Although the complaint failed to state a cause of action, the court entered a default judgment for $30 million.

But the default judgment would not stand.

The appellate court was critical of the trial court, holding that it should independently evaluate whether the complaint was properly pled.  Since the complaint failed to state a cause of action, then under Code of Civil Procedure section 580, judgment should not have been entered.  In reversing the judgment, the court stressed that a default is not a penalty.  A defendant can make a tactical decision not to answer a complaint.  And if well pleaded allegations of a complaint do not state a proper cause of action, the default judgment cannot stand.  

Further, under section 580, default judgment cannot be entered in an amount in excess of that demanded in the complaint.  And in cases where the damages require proof beyond the mere allegations of the complaint, a defaulting defendant may challenge the sufficiency of the evidence to support the damage award on appeal.  The Court of Appeal then rejected as woefully deficient plaintiff’s allegations of entitlement to millions in damages.

Much has been written about the Kim decision’s discussion of sanctions against counsel.  That may be more entertaining to read, but the default judgment aspects of the case are much more likely to recur.  And while the appellate court lamented a lack of published decisions on the issue of challenging damages after a default is entered, it took a big step toward filling that void.  More importantly, it also provided precedent for obtaining relief from improper and overreaching default judgments.