Luxury Asset Lending, LLC v. Phila. Tel. Network, Inc., No. G057766 (D4d3 Oct. 29, 2020)
This one is a doozy. Two connected Boomers from Philly—one of whom is my parents’ former congressman—get roped into an investment scam involving a purported former Libyan oil minister, a $350 million wealth fund, some Ghanian royalty and/or government officials, boxes of $100 million in $100 bills, and whole lot of other sketchy stuff that would raise red flags to most individuals of ordinary curiosity. When their adventure started to go south, an apparent White Knight stepped in to offer the Boomers high interest loans to throw good money after bad. It would later come to pass that White Knight’s principal was closer to the underlying scam than he let on.
Boomer #2—not the congressman—was the apparent CEO and largest shareholder PTNI, a company that ran low-power TV station. He secured his loans from White Knight, not only with his own shares in PTNI, but also by pledging PTNI’s assets as collateral. (He was not actually allowed to do either—his stock was restricted and he didn’t own PTNI’s assets.)
White Knight eventually got a $3.8 million default judgment in OC Superior against the Boomers and PTNI. (The service on PTNI was only on Boomer #2 in his capacity as CEO, which is not proper service.) Boomer #2 subsequently went BK, while Boomer #1 got sidetracked into an arbitration. White Knight then assigned the judgment to an affiliate, which then started to go after PNTI’s assets. It obtained an order under Code of Civil Procedure § 708.510 assigning both Boomer #2’s shares, as well as all ownership and control over PTNI and all of its assets.
At this point, PTNI figured out what was going on and tried to fight back. It objected to the transfer of its broadcast license with the FCC. There were some receivership proceedings in the Court of Common Pleas in Philadelphia and some other inconclusive litigation in the OC. Eventually, PTNI moved to vacate the $3.8 million default judgment under § 473.5 and on non-statutory equitable grounds. The trial court denied relief, but the Court of Appeal—in a very funny and well-crafted opinion by Justice Bedsworth—reverses.
Section 473.5 permits a court to vacate a default or default judgment when the defendant never received actual notice of the claims in time to defend against them. The motion needs to be brought within 180 days of proper service or 2 years of entry and the lack of notice can’t be due to the defendant’s efforts to avoid service or inexcusable neglect.
Here, there never was any proper service on PTNI, so we’re in the two year window. Nor did PTNI have actual notice. Although there was some evidence that other PTNI execs knew of Boomer #2’s issues with White Knight, there’s no basis to believe that anyone knew PTNI itself or its assets were on the line.
Nor was there any unreasonable delay. The fact that it took some time for PTNI to move to vacate the judgment is unsurprising. It was a small company facing a three front war. It would be unfair to expect it to act maximally and immediately in every forum as it tried to sort out its avenue for relief.
Finally, White Knight’s Assignee argues that because PTNI only moved to vacate the default judgment and not the underlying default, it’s not entitled to any meaningful relief. But that’s kind a trifle under the circumstances here. It is true that if a party moves for pre-judgment relief from a default, and doesn’t get it, relief from the default judgment is not of any substance, since the only thing that could happen is reentry for another judgment. But here, there is no real issue that PTNI wasn’t also entitled to relief from the entry of default, it just did not say so in its notice of motion. The Court of Appeal is not going to let that stand in the way of relief here.
So far as equitable relief goes, California permits non-statutory relief from a default judgment in exceptional circumstances. These are generally when some fraud or mistake extrinsic to the proceedings themselves prevents the defendant from putting on a defense. Fraud generally requires the plaintiff to do something deceptive, while mistake generally arises from an excusable neglect that results in an unjust judgment. Generally, to get relief on either grounds, the defendant moving to vacate needs to show: (1) that it had a meritorious case; (2) that is has a satisfactory excuse for failing to present a defense; and (3) that it diligently sought relief once the mistake or fraud was discovered. All three elements were satisfied here.
Reversed.
FWIW, this classic article from The Atlantic on scamming the scammers is well worth a read, even 13 years later.