Unpublished Case Counsels Care In What You Include In A Complaint, If Your Opponent Fails To Time Respond And Suffers A Default Judgment.
Cox, Castle & Nicholson, LLP v. Wan, Case No. B262017 (2d Dist., Div. 5 June 23, 2016) (unpublished) is an interesting 2-1 decision in a case involving a plaintiff law firm suing for unpaid fees, where the complaint among other causes of action pled a separate claim to compel arbitration pursuant to the arbitration agreement in the clients’ engagement letter with the firm (even designating a potential arbitrator in the pled claim).
What happened is that clients did not timely respond to the law firm’s complaint, resulting in the entry of defaults. The lower court denied a CCP § 473(b) motion from relief, and subsequently entered default judgments against clients and in favor of law firm to the tune of $274,525.28 plus interest of $85,184.53.
That all went POOF! on appeal in a divided panel decision.
Two reasons led to the reversal of the default judgments on appeal for the majority justices: (1) plaintiff’s claim seeking to compel arbitration deprived the trial court of jurisdiction over the merits of the fee dispute such that the trial court’s jurisdiction was limited to determine the gateway arbitrability issue; and (2) plaintiff was judicially estopped from seeking a default money judgment because plaintiff judicially admitted in its complaint that the fee dispute was subject to binding arbitration and the defendants relied to their detriment on that admission. However, in dissent, Presiding Justice Turner did not believe the arbitration claim divested the trial court of subject matter jurisdiction to enter the defaults, reasoning that the arbitration claim did not state a cause of action and that the cause of action had not yet accrued.
BLOG OBSERVATION—This decision, if correct, counsels that plaintiffs carefully think about whether they should include an arbitration claim in a complaint; otherwise, the trial court may not be able to proceed on the merits.
See also co-contributor Marc’s post on the case today in California Mediation and Arbitration.