Court Opinion

ID: 4662001
Source: CourtListenerOpinion
Date Created: 2021-02-22 21:02:38.608999+00
Date Added: 2024-06-11T08:02:17.969772
License: Public Domain

Filed 2/22/21 Gowdey v. Heseltine CA1/5
                NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not
certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been
certified for publication or ordered published for purposes of rule 8.1115.

        IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                                 FIRST APPELLATE DISTRICT

                                            DIVISION FIVE

 DAVID GOWDEY,
          Plaintiff and Respondent,
                                                               A159690
 v.
 JOHN HESELTINE, et al.,                                       (San Francisco County
                                                               Super. Ct. No. CGC-18-571227)
          Defendants and Appellants.

        Defendants John Heseltine, Bridget McNeill, and CB Trustees 2013
(CB Trustees) (collectively, Defendants), argue the trial court abused its
discretion in denying their motion to set aside the default judgments entered
in favor of plaintiff David Gowdey (Plaintiff). We agree, and reverse the
challenged order.
                                             BACKGROUND
        In November 2018, Plaintiff filed a complaint, in propria persona,
alleging breach of contract and other claims against Defendants, Daniel
Doulton, and Does 1 through 10. The complaint alleged as follows: Plaintiff
is a resident of Singapore, Heseltine and McNeill are New Zealand residents,
and CB Trustees is a New Zealand company. Plaintiff and Heseltine entered
into a loan agreement whereby Plaintiff loaned Heseltine $450,000 to buy

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shares in XYZ, Inc.,1 which Heseltine pledged as security for the loan in a
separate stock pledge agreement. With Plaintiff’s consent, Heseltine
subsequently transferred some of these shares to a trust (the Trust), and a
second stock pledge agreement pledging these shares as security for the loan
was executed by all three Defendants in their capacity as trustees of the
Trust.2 The loan agreement prohibited Heseltine from relinquishing the
shares before the loan was due in December 2019, and the stock pledge
agreements prohibited transfer of the shares without Plaintiff’s prior consent.
In March 2018, Heseltine breached the agreements by transferring shares
without Plaintiff’s consent. In July 2018, Heseltine further breached the loan
agreement by failing to immediately repay the loan upon Plaintiff’s notice of
the breach. In October and November 2018, XYZ, Inc. rescinded Heseltine’s
share purchase and subsequent transfer of shares to the Trust and cancelled
all shares involved in these transactions, resulting in a third breach because
Heseltine and the Trust “involuntarily relinquished” the pledged shares.
        Defendants failed to file an answer to the complaint and a default was
entered against them on December 21, 2018.3 On July 30, 2019, following a
prove-up hearing by declaration, the court entered a default judgment of
more than $550,000 against Defendants in their individual capacities.4

1Like the parties, we refer to the company as XYZ, Inc., despite name
changes during the events at issue here.
2The loan agreement and both stock pledge agreements are, by their terms,
governed by California law.
3Doulton timely filed an answer (the complaint alleged he conspired with
Heseltine to cover up the March 2018 share transfer). Plaintiff subsequently
dismissed the complaint as to Doulton and the Doe defendants.
4   Plaintiff retained counsel prior to the prove-up hearing.

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Notice of judgment was mailed to Defendants at New Zealand addresses on
July 31, 2019.
      On October 18, 2019, Defendants filed a motion seeking equitable relief
from the defaults and default judgments. Heseltine filed a declaration
averring that on December 10, 2018, acting on behalf of Defendants, he met
with Doulton’s attorney who “intimated” he would act on behalf of
Defendants as well as Doulton to ensure responses to the complaint were
filed.5 During December, Heseltine and the attorney exchanged numerous
emails about “payment of fees” and “specific facts and defenses to the
Complaint,” leading Heseltine to believe the attorney was representing
Defendants in this case. Only after the deadline to file an answer had passed
did the attorney inform Heseltine he was acting solely for Doulton.
      Heseltine further averred that on May 27, 2019, he attempted to file in
propria persona a case management statement on behalf of Defendants
seeking permission to appear telephonically at the case management
conference and request the defaults be set aside. The case management
statement was rejected by the court because McNeill had not signed it and
CB Trustees could not appear in propria persona. On June 12, Heseltine
attempted to appear telephonically at the case management conference, only
to learn that it had been cancelled. Heseltine learned of the default
judgments in August, spoke with a number of attorneys, and retained counsel
for Defendants on September 12.
      Defendants’ counsel also filed a declaration, averring that he contacted
Plaintiff’s counsel on September 19, 2019, in an attempt to negotiate a
stipulated set aside. That attempt proved unsuccessful by the first week of

5Although Heseltine and the attorney met in New Zealand, the attorney is a
member of the California State Bar.

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October, and counsel filed the instant motion shortly thereafter. Counsel also
submitted a proposed answer and averred, “Based on my knowledge of the
facts underlying this dispute, Defendants have valid defenses to the
allegations in the Complaint.” The proposed answer included a general
denial and 28 affirmative defenses.
      After briefing, the trial court denied the motion, finding Defendants
“have failed to demonstrate that they have a meritorious defense, have not
articulated a satisfactory excuse for not presenting a defense to the original
action and have not demonstrated diligence in seeking to set aside the
default; despite acknowledging that they had notice of the case on May
20 [sic], 2019.”
                                 DISCUSSION
      “A trial court has inherent power to vacate a default judgment on
equitable grounds. [Citations.] ‘One ground for equitable relief is extrinsic
mistake—a term broadly applied when circumstances extrinsic to the
litigation have unfairly cost a party a hearing on the merits.’ [Citations.]
‘[E]xtrinsic mistake exists when the ground of relief is not so much the fraud
or other misconduct of one of the parties as it is the excusable neglect of the
defaulting party to appear and present his claim or defense. If that neglect
results in an unjust judgment, without a fair adversary hearing, the basis for
equitable relief on the ground of extrinsic mistake is present.’ [Citations.] [¶]
To qualify for equitable relief based on extrinsic mistake, the defendant must
demonstrate: (1) ‘a meritorious case’; (2) ‘a satisfactory excuse for not
presenting a defense to the original action’; and (3) ‘diligence in seeking to set
aside the default once the fraud [or mistake] had been discovered.’
[Citations.] When ‘a default judgment has been obtained, equitable relief

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may be given only in exceptional circumstances.’ ” (Mechling v. Asbestos
Defendants (2018) 29 Cal.App.5th 1241, 1245–1246, fn. omitted (Mechling).)
      “Trial court rulings on motions for relief from default are subject to an
abuse of discretion standard. [Citation.] Even so, ‘[w]ith respect to setting
aside a default judgment, it is the policy of the law to favor, whenever
possible, a hearing on the merits, and appellate courts are much more
disposed to affirm an order where the result is to compel a trial on the merits
than they are when the judgment by default is allowed to stand and it
appears that a substantial defense could be made.’ ” (Luxury Asset Lending,
LLC v. Philadelphia Television Network, Inc. (2020) 56 Cal.App.5th 894, 907–
908 (Luxury Asset); accord, Mechling, supra, 29 Cal.App.5th at p. 1246.)
I.    Meritorious Case
      To establish “ ‘a meritorious case,’ . . . only a minimal showing is
necessary. [Citation.] The moving party does not have to guarantee success,
or ‘demonstrate with certainty that a different result would obtain . . . .
Rather, [it] must show facts indicating a sufficiently meritorious claim to
entitle [it] to a fair adversary hearing.’ ” (Mechling, supra, 29 Cal.App.5th at
p. 1246.)
      The low threshold for this showing is demonstrated by Rappleyea v.
Campbell (1994) 8 Cal.4th 975 (Rappleyea), where our Supreme Court
reasoned: “Ordinarily a verified answer to a complaint’s allegations suffices
to show merit. [Citation.] The answer here was not verified, but neither was
the complaint. Moreover, the answer did deny, admit, or otherwise respond
to the allegations. And the Arizona lawyer who informally aided defendants
declared under oath that he believed ‘these Defendants have a very good (and
certainly a justiciable) defense to the Plaintiff’s claim.’ On the combined
strength of these facts, we believe defendants have sufficiently shown merit.”

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(Rappleyea, at p. 983.) Mechling further demonstrates the minimal showing
required: “To be sure, a moving party may satisfy the meritorious defense
factor by submitting a proposed pleading or a declaration averring there is
such a defense. [Citation.] But we decline to impose such a requirement
here.” (Mechling, supra, 29 Cal.App.5th at p. 1247.)6
        Defendants submitted a proposed answer and their attorney averred
they have valid defenses. Under Rappleyea and Mechling, no more is
required. In addition, Defendants point to facts supporting specific defenses.
Defendants argue McNeill and CB Trustees signed the stock pledge
agreement in their capacities as trustees of the Trust, the stock pledge
agreement expressly limits their liability to the assets of the Trust, yet they
were sued in their individual capacities and the judgment issued against
them in their individual capacities. Defendants further argue Heseltine did
not transfer shares in breach of the loan agreement in March 2018, pointing
to a July 2018 email from Heseltine’s representative asserting that he
retained the shares and was therefore not in breach.
        Plaintiff’s arguments are unavailing. Defendants were not required to
submit a verified answer or other evidence in support of their defense.7
Defendants’ defaults are not conclusive admissions to the allegations of the
complaint for purposes of this motion; to find otherwise would doom every
motion to set aside a default. Plaintiff’s reliance on Heseltine’s purported
failure to repay the loan by the maturity date—a date occurring after the
appealed-from trial court order issued—contravenes the longstanding

6Plaintiff argues that in Mechling, the movant was not the defendant, but
rather the defendant’s insurer. We fail to see how this renders the case
distinguishable on this point.
7   As in Rappleyea, the complaint here was not verified.

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principle that “ ‘ “an appeal reviews the correctness of a judgment as of the
time of its rendition, upon a record of matters which were before the trial
court for its consideration.” ’ ” (California Farm Bureau Federation v. State
Water Resources Control Bd. (2011) 51 Cal.4th 421, 442.) Finally, it is not
appropriate for this court to resolve the parties’ arguments about the merits
of Defendants’ various defenses. (Ludka v. Memory Magnetics International
(1972) 25 Cal.App.3d 316, 323 [“it is improper in connection with a motion to
vacate the default, for the court to go into the merits of the main case”].)
Defendants have satisfied the minimal showing required to establish a
meritorious defense.
II.   Satisfactory Excuse
      “ ‘Where a default is entered because defendant has relied upon a
codefendant or other interested party to defend, the question is whether the
defendant was reasonably justified under the circumstances in his reliance or
whether his neglect to attend to the matter was inexcusable. [Citations.]’
[Citation.] . . . [¶] Reliance on a third party constitutes a satisfactory excuse
only if it is reasonable. [Citations.] ‘With regard to whether the
circumstances warranted reliance by the defendant on a third party, the
efforts made by the defendant to obtain a defense by the third party are, of
course, relevant.’ ” (Cruz v. Fagor America, Inc. (2007) 146 Cal.App.4th 488,
507, fn. omitted.)
      Plaintiff does not dispute that the facts asserted by Defendants, if
believed, constitute a satisfactory excuse. We agree with the implied
concession that a defendant reasonably relies on an attorney to file an answer
when the defendant and attorney have communicated multiple times about
fees and defenses.

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       Plaintiff instead argues the trial court could discredit Heseltine’s
account because it was contradicted. First, Plaintiff points to the fact that
Doulton filed his answer in propria persona. We fail to see how this
contradicts Heseltine’s averments regarding his communications with the
attorney and his understanding of the attorney’s representation of
Defendants and Doulton. Second, Plaintiff highlights that neither McNeill
nor CB Trustees averred that the attorney led them to believe he would
represent Defendants. This also does not contradict Heseltine’s declaration,
which averred that Heseltine communicated with the attorney on behalf of all
Defendants, suggesting the others had no direct contact with the attorney.
Finally, Plaintiff argues that “most telling” is Defendants’ failure to offer the
email exchanges between Heseltine and the attorney to corroborate
Heseltine’s declaration. But Defendants did offer the emails: their trial court
motion explained they considered the emails privileged but offered to submit
them to the trial court for in camera review.
       No record evidence contradicted Heseltine’s averments regarding his
communications with the attorney, and there was no basis for the trial court
to discredit them without first reviewing the corroborating evidence
Defendants offered to submit. Defendants established a satisfactory excuse.
III.   Diligence
       The final prong asks “whether defendants diligently tried to set aside
the default once discovered. [¶] ‘The greater the prejudice to the responding
party, the more likely it is that the court will determine that equitable
defenses such as laches or estoppel apply to the request to vacate a valid
judgment.’ [Citation.] Of the three items a defendant must show to win
equitable relief from default, diligence is the most inextricably intertwined
with prejudice. If heightened prejudice strengthens the burden of proving

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diligence, so must reduced prejudice weaken it.” (Rappleyea, supra, 8 Cal.4th
at pp. 983–984.)
      Plaintiff claims no prejudice. Defendants’ motion was filed less than
three months after Plaintiff’s prove-up hearing and less than a year after the
complaint was filed. The relevant evidence likely is primarily based on
documents and the parties’ testimony. We see no basis to find any prejudice
to Plaintiff from setting aside the default. (See Aldrich v. San Fernando
Valley Lumber Co. (1985) 170 Cal.App.3d 725, 740 [no showing “of missing
witnesses, evidence destroyed, and the like, to establish prejudice”].)
Defendants’ burden of proving diligence is correspondingly weakened.
(Rappleyea, supra, 8 Cal.4th at pp. 983–984.)
      The trial court order did not mention prejudice, and found Defendants
failed to act diligently despite notice as of May 2019.8 In May and June,
Defendants attempted to file a case management statement and appear at
the case management conference to request the default be set aside. After
learning of the default judgment sometime in August,9 Defendants contacted
attorneys and retained counsel by mid-September, and counsel promptly took
steps to set aside the default.
      Plaintiff complains that Defendants should have filed a motion to set
aside the defaults at the time they attempted to file a case management

8 Plaintiff suggests Defendants knew of the entry of default earlier, pointing
to Plaintiff’s declaration averring that he emailed Heseltine about the default
in January 2019. Although Plaintiff’s declaration attaches a copy of the
email, we note that it does not show the recipient’s email address and does
not establish any knowledge by McNeill or CB Trustees. In any event, the
trial court’s diligence finding focused on Defendants’ knowledge in May.
9The record is silent as to the date Defendants received notice, but the proof
of service shows notice was sent on July 31, 2019, by United States mail to
New Zealand addresses.

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statement. We decline to find the lack of diligence finding can be based on
the fact that Defendants—New Zealand residents without counsel—
attempted to seek guidance from the court on how to vacate the defaults
rather than filing the proper motion. Plaintiff also argues Defendants took
no action between May and mid-September, but in fact Defendants attempted
to make an appearance at the case management conference in June,
contacted attorneys in August, and retained counsel in September.
      In light of the absence of prejudice to Plaintiff, Defendants’ two
attempts to appear in the case in order to set aside the entries of default, and
Defendants’ prompt action upon learning of the default judgment, we
conclude Defendants demonstrated diligence. (Mechling, supra, 29
Cal.App.5th at p. 1248 [diligence shown where insurance company filed set
aside motion five months after retaining counsel to defend claims against
insured]; Rappleyea, supra, 8 Cal.4th at pp. 980, 984 [reviewing trial court
order denying set aside; finding defendants showed diligence where minimal
prejudice to plaintiff, defendants knew of the default several months before
filing set aside motion but may not have understood the legal consequences,
and defendants acted “quickly” after being told by the court they may face a
default judgment by filing the set aside motion approximately a month and a
half later]; Luxury Asset, supra, 56 Cal.App.5th at pp. 906, 913 [reviewing
trial court order denying set aside; finding sufficient diligence where
defendant knew of default judgment for almost a year before filing set aside
motion but acted reasonably in first pursuing related challenges in other
fora]; Orange Empire National Bank v. Kirk (1968) 259 Cal.App.2d 347, 355
[reviewing trial court order denying set aside; finding the defendant acted
diligently where “a period of 2-3 months elapsed between the date when [the

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defendant] obtained independent legal advice and the date the motion for
relief was filed”].)
                               DISPOSITION
      The order denying the motion to vacate the defaults and default
judgments is reversed. Defendants are awarded their costs on appeal.

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                                         SIMONS, Acting P.J.

We concur.

NEEDHAM, J.

SELIGMAN, J.*

(A159690)

*Judge of the Alameda County Superior Court, assigned by the Chief Justice
pursuant to article VI, section 6 of the California Constitution.

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