In quite a scolding for defense counsel, the court in Shapell Socal Rental Properties, LLC v. Chico's FAS, Inc., found on appeal that attorneys have both an ethical and statutory duty to notify opposing counsel of an intent to seek a default. The fact that one party failed to pay rent and pushed the envelope due to COVID closures did not change the obligation of professionalism between legal teams.
Chic's FAS, Inc. (CFI) owns a chain of retail stores that sells women's clothing. Shapell Socal Rental Properties (Shapell) works in the area of owning and managing commercial real estate. CFI rented a commercial real estate space from Shapell pursuant to a lease agreement entered into between the parties. CFI failed to pay rent in April, May and June of 2020. The chief operating officer of CFI hosted a conference call for landlords of its various locations and expressed the hope that the landlords would accept reduced rental rates due to the pandemic and reduced to no customer traffic at the physical sites. July through December, 2020, CFI paid half of the rent due monthly to Shapell. In January, 2021, CFI resumed paying full rent, but never provided any of the delinquent rent funds from the previous year.
In a letter dated August 17, 2020, Shapell effectively gave CFI notice that it was in default of the lease for failing to pay rent. This letter was sent to CFI's corporate offices in Fort Meyers, Florida. CFI responded by letter on August 24, 2020 and denied that it had defaulted under the lease. In October 2020, Shapell served CFI with a formal ten day notice to pay rent or quit. The notice stated that CFI was in default for failing to pay rent, property taxes, insurance and common area maintenance obligations. Shapell claimed that the total amount owed was $51,335.42. This notice was served by overnight mail to CFI's corporate office in Fort Meyers.
CFI was represented by Foley & Mansfield. Their legal counsel responded to the ten day notice. In that letter, it states that CFI "had retained Foley and Mansfield for all real estate disputes and affirmative claims arising out of the effect of COVID-19 in the retail sector." The letter also requested Shapell to direct any communications to its legal counsel.
In November 2020, Shapell filed a summons and unlawful retainer complaint against CFI. Shapell's lawyers did not communicate directly with CFI's counsel as requested in the previous letter. The Complaint was instead served at CFI's store location in Laguna Niguel and was accepted by a store employee at that location. Copies of the Complaint were also sent to the Laguna Niguel store. Shapell neither served the Complaint or summons on CFI's registered agent for service of process in California nor sent copies of the same to CFI's counsel or the corporate offices.
On December 11, 2020, Shapell filed a request for entry of default and default judgment against CFI. This was also mailed to the Laguna Niguel store location. A judgment by default was entered by the court on December 22, 2020. Shapell's counsel never warned or notified CFI's counsel of any intent to request entry of a default judgment.
In February 2021, CFI gave notice of its intent to terminate the lease. It stated, "Such termination shall be effective 60 days following Landlord's receipt of Tenant's notice." CFI sent a second notice to terminate in April 2021 containing the same language.
CFI also filed a motion to set aside the default judgment in March, 2021. The trial court denied CFI's motion, which resulted in this appeal.
Should the Court Grant CFI's Motion to Set Aside the Default Judgment?
In its motion to set aside the default judgment, CFI argued that the Complaint did not result in actual notice because:
- Service did not comply with the agreed terms of the Lease, which required service on CFI at its corporate office in Florida, and
- Service was not made on CFI's registered agent for service of process in California.
CFI also argued that its failure to answer was due to "inadvertence, surprise, mistake, or excusable neglect" as the Complaint was served on a store employee who was not aware of what to do with the Complaint and did not forward it to the Corporate office or CFI's legal counsel. Neither CFI nor its counsel were aware of the intent to request a default judgment or the default judgment itself until after default was already entered by the court.
Shapell countered by arguing that CFI knew it had defaulted on the lease and that it provided service pursuant to the Code of Civil Procedure. It asserted that it was not required to notify CFI or its legal counsel of any intention to request a default judgment.
Counsel's Ethical and Statutory Duties to Provide the Opposing Side Notice of Intent to File for Default
The court here found that counsel has both a statutory and ethical duty to advise opposing legal counsel of an intent to file a request for a default judgment. This duty was memorialized in the LaSalle v. Vogel case which stated, "The obligation to advise opposing counsel of an impending default is part of an attorney's responsibility to the court and the legal profession and takes precedence over the obligation to represent the client effectively." (2019) 36 Cal.App.5th at 134,137. It went on to say that "the ethical obligation is rooted in decades of case authority, and is reinforced by a statutory obligation arising under Code of Civil Procedure section 583.130." The LaSalle court urged a return to the professionalism represented by section 583.130.
In addition, LaSalle emphasized the statutory nature of this duty in addition to the ethical implications, "So to the extent it was possible for a party seeking a default with unseemly haste to commit an ethical breach without creating a legal issue, that distinction was erased by section 583.130. The ethical obligation to warn opposing counsel of an intent to take a default is not reinforced by a statutory policy that all parties cooperate in bringing the action to trial or disposition. Quiet speed and unreasonable deadlines do not qualify as cooperation and cannot be accepted by the courts." Id. at 137.
In the case at hand, Shapell knew that CFI was represented by counsel at the time it served the Complaint and the Notice of Intent to Enter a Default on a store employee at a local store. Shapell's counsel did not communicate at all with CFI's legal representatives or CFI corporate regarding the case. Shapell does not deny these facts. Shapell simply asserts that it was under no obligation to inform CFI corporate or its counsel of its request to enter a default. Further, the Complaint itself was not served upon CFI's registered agent in California, CFI corporate, or CFI's legal counsel. The court noted that, "As members of a profession and officers of the court, counsel had the responsibility to treat opposing counsel with dignity, courtesy and integrity."
Shapell argues that this case is distinguishable from LaSalle, but the court returned fire by blasting Shapell's ethical breach as "markedly worse" than that committed in the LaSalle case. In LaSalle although notice to the opposing party was insufficient, an attempt at notice was at least made while here no attempt was undertaken. As a result, the court held that Shapell had a statutory and ethical duty to make CFI aware of its intent to seek an entry of default and default judgment. Shapell's attorneys failed to fulfill that duty under the law.
The Trial Court Abused its Discretion in Denying CFI's Motion to Set Aside the Default
The court also determined that the trial court abused its discretion in denying CFI's motion to set aside the default judgment. The court looked to several factors in making this determination.
First, Shapell's use of "deviousness and stealth" to obtain the default judgment. This conclusion was supported by evidence that Shapell not only served the Complaint and subsequent document on an "ordinary store employee", but also made service after 5 p.m. on the Friday before the Thanksgiving week holiday. It did not attempt to serve the registered agent, corporate offices, or the legal counsel representing CFI, which it knew about. Based on these facts, the court found that Shapell intentionally kept CFI "in the dark" about the proceedings surrounding the default judgment in order to give itself the upper hand.
In addition, Shapell does not present an argument regarding how the court's decision to set aside the default judgment would prejudice their case. Further, once CFI was aware of the default judgment it acted almost immediately in instructing its counsel to contact Shapell's attorneys to try to resolve the dispute. The court refused to penalize CFI for waiting to file the motion to set aside the default under after it learned of the default judgment and made reasonable attempts to settle the matter.
In sum, the court found that, "the evidence established beyond dispute that Shapell's counsel committed an ethical and statutory violation and engaged in underhanded litigation tactics calculated virtually to ensure CFI would default." The trial court's theory that CFI was trying to avoid paying rent and dragging its feet to see if the litigation would go away were not supported by the record. Based on this faulty theory entertained by the trial court along with overwhelming evidence of the unethical behavior of Shapell's attorney, along with their disregard for statutory requirements of the Code of Civil Procedure, CFI was entitled to notice of the impending default. Therefore, the trial court's denial of CFI's motion to set aside the default and default judgment is reversed and remanded.