Default interest provision declared a penalty, successfully eliminating more than $10 million in interest from a commercial loan

Salvato Law Offices successfully objected to a default interest provision in a commercial loan that resulted in the Bankruptcy Court declaring that the provision was an unenforceable penalty under California Civil Code Section 1671(b). As a result, more than $10 million in default interest was eliminated from the commercial loan.

The following is an independent case analysis of the matter from Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, for his Commercial Finance Newsletter, published weekly on Westlaw. It has been reproduced in full.

Insolvency Law Committee E-Bulletin: In re Altadena Lincoln Crossing LLC - CA Bank. Ct finds default interest rate provision is an unenforceable penalty

November 16, 2018

Dear constituency list members of the Insolvency Law Committee:

The following is a case update prepared by Professor Dan Schechter, Loyola Law School, Los Angeles, analyzing a recent decision of interest:


A California bankruptcy court has held that a default interest rate provision was an unenforceable penalty because the loan agreements did not contain any estimate of the probable costs to the lender resulting from the borrower's default. [In re Altadena Lincoln Crossing LLC, 2018 Westlaw 3244502 (Bankr. C.D. Cal.).]

FACTS: A lender and a commercial borrower entered into two related real estate construction loan agreements, both of which contained clauses increasing the base interest rate by 5% in the event of default. The agreements also contained late fee provisions, which were intended to compensate the lender for any additional administrative costs arising from late payments. The principal amount of the obligation eventually rose to about $26 million.

Several years later, when the project ran into difficulty, the parties executed a series of forbearance agreements; several of those agreements contained "default interest forgiveness provisions," under which accrued default interest would be forgiven if the debtor paid the outstanding balance of the loan on the extended maturity date.

After the developer filed a Chapter 11 petition, the lender sought to recover interest at the default rate set out in the parties' governing documents. The debtor objected, claiming that the default rate of interest was an unenforceable penalty under California Civil Code §1671(b).

REASONING: The court sustained the objections and awarded the debtor attorney's fees for its successful objection to the claim. After reviewing the applicable case law, the court observed:

The standard is whether the default interest provisions were the result of a reasonable endeavor at the time the parties entered into the agreement to estimate a fair average compensation for any loss that might later be suffered and not whether the default interest figure eventually produced appears after the fact to be reasonable in relation to the principal amount of the loan.

The lender argued that because the borrower had waived its defenses to the default interest provision in the forbearance agreements, the borrower could not challenge that provision. The court disagreed:

[The lender] has cited no authority for the proposition that an unenforceable penalty will be rendered enforceable if the borrower signs an acknowledgment that it is obligated to pay the penalty or if the borrower agrees to waive any defenses it may have to the obligation to pay this amount. Moreover, in each Forbearance Agreement . . . , [the lender] agreed to forgive default interest provided the obligation was repaid at maturity, effectively creating a new liquidated damages provision that would need to be examined to ascertain whether it was an unenforceable penalty. As the amount of accrued default interest was larger each time [the parties] executed a new forbearance agreement, it would become harder and harder for the Court to find a reasonable relationship between the liquidated damages amount and any damages that the parties anticipated would flow from breach of the Forbearance Agreement. The Court finds no reason to conclude that the drafters of section 1671(b), who intended for the analysis to be performed at the inception of a loan, would have meant for the court to re-examine the result produced by a liquidated damage provision each time the parties extended the maturity date of a loan or any other due date for performance.

The lender next argued that because a 5% default interest provision is the admitted industry standard, the provision was reasonable. The court again disagreed:

[W]hile it might be relevant to the issue of reasonableness to know that other lenders typically charge 5 percent or more as default interest on construction loans, it is not dispositive. Industry standard or custom in the industry is different from reasonableness in this context. (The Court is not in a position to determine, and the parties have not litigated whether, lenders make a practice of imposing a default interest rate that is intended to function as a penalty to incentivize borrowers to pay in a timely fashion or whether they select default interest rates in an effort to provide compensation for anticipated losses.)

The court noted that there was no evidence the parties had negotiated the 5% provision or had attempted to quantify the probable loss to the lender resulting from a default:

[T]he selection of the 5 percent default interest rate was not the result of a reasonable endeavor by the parties to estimate a fair average compensation for any loss that might be suffered by [the lender] in the event of a default, in that the Debtor has established that there was no endeavor at all by either of the parties at the time they entered into the loans, let alone a reasonable endeavor, to estimate any losses that might be suffered by [the lender] in the event of a default. The default interest provision was selected arbitrarily pursuant to [the lender's] standard practice of utilizing a default interest rate in this amount.

The lender's expert testified that the probable loss in value resulting from a default justified the imposition of a 5% default rate, but the court reasoned that just because there is a correlation between the borrower's default and the lender's losses does not mean that the default caused the losses:

[T]here is no reason to believe, in this case or in any case, that a borrower’s default increases the risk that a lender will not receive payment of its principal. Such [an argument] is an invitation to the court to fall into the trap of confusing correlation with causation. The only conclusion that this court can legitimately draw from [the expert's] report is that, as a statistical matter, lenders recover less on loans that fall into default, but his report does not have any tendency whatsoever to establish that defaults cause a loss of principal or even a greater risk of loss of principal. In fact, as a logical matter, it is equally if not more likely that the causal relationship is the other way around, namely, that a borrower who lacks the ability to repay a loan in full or who owns collateral that will not produce enough to pay off the debt in full through sale, foreclosure or refinancing is more likely to default than a borrower who has sufficient resources to pay off the loan either from other sources of cash or by monetizing the value of the collateral. The factors that lead a borrower to fall into the former camp (borrowers who can pay) rather than the latter camp (borrowers who cannot pay) are likely to be present at the inception of the loan and are not themselves caused by the borrower’s default. Only when the loan agreement itself imposes adverse financial consequences after a borrower defaults, as, for example, by increasing the interest rate by 5 percent, does the default itself make the borrower’s financial condition more bleak than it already was.

AUTHOR'S COMMENT: This is a very well-written and well-researched opinion by a highly respected bankruptcy judge. Given the amount of money involved, I predict an appeal, and I predict affirmance. If so, this opinion will have a substantial impact on the real estate lending industry. As I will discuss below, I think that there are drafting techniques that lenders can use to increase the chances of collecting interest at the default rate, whether or not this decision is affirmed.

First, however, the inevitable quibbles: if an extra 5% default rate is the industry standard (as both the lender and the borrower argued), then isn't that a signal from the market that this is a reasonable provision? It is not outside the mainstream. It is not unprecedented. Shouldn't the concept of "reasonableness" take into account prevailing practices? That is certainly true, for example, in malpractice cases: the reasonableness of the defendant's behavior is assessed in light of customary norms. Why isn't that dispositive in this case?

Second, I am not sure that I agree with the court's analysis of correlation vs. causation. Isn't it true that the fact of default devalues the collateral? The project is immediately tainted; the lender is forced to foreclose, and foreclosures inevitably yield prices lower than fair market value.

Third, the court put the lender's expert into an impossible bind. He was tasked with showing the loss suffered by the lender as a result of the default. The court then used his own testimony to show that the lender could have estimated the probable losses from default at the outset of the transaction: "[T]he ease with which [the expert] was able to perform the calculations contained in his expert opinion demonstrates that a loss of this kind, if it can be characterized as a loss, would not be costly or difficult to estimate at the inception of a loan." The error in the court's logic is that although hindsight may be 20/20, foresight isn't.

Note that the documents contained the usual late payment provisions, which were designed to compensate the lender for its losses resulting from late payments. In the court’s view, the mere existence of those late payment provisions undermined, in part, the lender's argument that the default rate was designed to compensate the lender for the same losses. But I would argue that the losses covered by those two different sets of provisions are not the same: the late payment fees deal with the lender's administrative costs, while the default rate provision is more properly aimed at the devaluation of the collateral resulting from the default.

And that, of course, points the way toward a couple of different solutions. The first, which I have long (and unsuccessfully) recommended, is to support the default interest rate provision with carefully-worded factual recitals, right in the body of the agreement, demonstrating as a factual matter why the provision is needed and why it is the parties’ best approximation of the anticipated losses.

Could the borrower later repudiate those factual recitals? Maybe not. See Cal. Evid. Code § 622: “The facts recited in a written instrument are conclusively presumed to be true as between the parties thereto . . . . " For a discussion of a case in which that drafting technique was successful, see 2015-30 Comm. Fin. News. NL 60, Liquidated Damages Claim for Default Interest Is Enforceable Because Promissory Notes Recite Difficulty of Ascertaining Lender’s Actual Damages.

Note that this solution (to insert appropriate recitals in the agreement itself) is ex ante. But the court suggested an intriguing after-the-fact technique, one which I have never seen before:

[I]t would not be costly or inconvenient for [the lender] to have calculated its actual administrative costs in overseeing and servicing a defaulted loan. It would be difficult to predict with any degree of certainty at the inception of a loan how much these costs would prove to be later, but [the lender] could readily have kept track of such information by, for example, requiring its employees to keep timesheets to reflect how much time they spent overseeing or servicing which loans, and could have included provisions in the loan agreement passing these costs along to the Debtor as they accrued.

Assuming that the court's novel post hoc solution is viable, I would add a couple of additional "pass-through" cost items: the devaluation of the property resulting from the default itself, and the "time value of money" cost resulting from the illiquidity of a set of loan documents connected with a failing project. To describe that latter concept in a different way, a lender that had anticipated selling off a performing loan is now forced to hold a non-performing loan on its books, tying up the lender's capital. The inability to re-lend that money is a lost opportunity that damages the lender.

Given the bankruptcy courts' perennial antipathy to default interest rates, I am surprised that the finance industry still uses bland and generic "one-size-fits-all" default interest provisions, without including anticipatory verbiage to forestall the borrower's inevitable liquidated damages attack.

For discussions of other cases dealing with related issues, see:

  • 2016-45 Comm. Fin. News. NL 89, When Plan of Reorganization Cures Debtor’s Default, Creditor is Entitled to Interest at Default Rate Specified by Promissory Note.

  • 2006 Comm. Fin. News. 20, Postdefault Interest Rate of 36% Is Approved Because Congress Did Not Impose “Reasonableness” Requirement.

  • 2005 Comm. Fin. News. 22, Oversecured Lender's Claim for Default Interest Is Actually a “Charge” That Must Be Reasonable and Cannot Be Awarded in Addition to Late Fees.

  • 2004 Comm. Fin. News. 19, Contract Rate Governs Cramdown Interest, Unless Creditor Produces Evidence to Show That Default Rate Reflects Actual Damages.

These materials were written by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, for his Commercial Finance Newsletter, published weekly on Westlaw. Westlaw holds the copyright on these materials and has permitted the Insolvency Law Committee to reprint them. 

Thank you for your continued support of the Committee.

Best regards,
Insolvency Law Committee

Marcus O. Colabianchi
Duane Morris LLP

Rebecca Winthrop
Norton Rose Fulbright US LLP

Co-Vice Chair
Kyra Andrassy
Smiley Wang-Ekvall, LLP

Co-Vice Chair
Gary Rudolph
Sullivan Hill Rez & Engel, APLC

Federal Bar Association's 15th Annual Bankruptcy Ethics Symposium - November 16, 2018

November 16, 2018
Time: 9:00 a.m.
Roybal Federal Building, Conference Room 283
255 E. Temple St., Los Angeles, CA 90017

Click here to register online
Click here for flyer and additional event information

Coffee, Bagels, Pastries provided


Honorable Martin R. Barash, United States Bankruptcy Court
Honorable Robert N. Kwan, United States Bankruptcy Court
 Honorable Barry Russell, United States Bankruptcy Court
Ron Maroko, Office of the United States Trustee
Kristin Ritsema, Office of Chief Trial Counsel, State Bar of CA
Jolene Tanner, U.S. Attorney’s Office
Ellen A. Pansky, Pansky Markle Attorneys at Law
Elmer Dean Martin III, Elmer Dean Martin III, a Professional Corporation
Daniel M. Cislo, Cislo & Thomas LLP
J. Scott Bovitz, Bovitz & Spitzer

Program Chair: Joseph Boufadel, Salvato Law Offices

9:00 a.m. - 12:45 p.m. | Four Programs

  • How Not to be Befuddled by Bankruptcy Tax

  • Outsourcing, Delegating, and Abdicating: What Are Your Professional Responsibilities?

  • The Ethical Lawyer’s Dilemma: Information Technology in the Era of the iPhone, Software as a Service, and the Internet of Things

  • The New California Rules of Professional Conduct: How They Will Affect Your Bankruptcy Practice

MCLE: 3.5 Hours Legal Ethics. This activity has been approved for Minimum Continuing Legal Education Credit by the State Bar of California. The FBA certifies that this activity conforms to the standards of approved education activities prescribed by the rules and regulations of the State Bar of California governing minimum continuing legal education.

Cost: $25 (FBA members); $35 (CDCBAA and LABF members);
$40 (non-members). At Door $50
Judges and Clerks - No Charge

ABI Published Article: "There and Back Again: Perspectives on Practicing Law While Parenting"

American Bankruptcy Institute
December 2017 Journal
Chapter 8 Humor

By Joseph Boufadel

"At a recent outing of the Monday Night Lawyers Movie Club in Los Angeles, I bombarded the group with photographs of my daughter. As a proud new parent, I assumed that everyone would love to see pictures of my favorite (and only) “mini-me” daughter, Emma, with her big brown eyes and curly dark hair. What’s not to love? After enduring the onslaught of pictures and stories, J. Scott Bovitz1 of Bovitz & Spitzer retaliated.

Bovitz: Cute photos. You should write a Chapter 8 Humor article — you know, a personal-interest story about how becoming a parent has impacted your practice.

Boufadel: I’m not comfortable writing about myself.

Bovitz: Do it. Aren’t you a millennial? Talking about yourself should come easily. Plus, maybe at least a few readers of the ABI Journal will find it interesting and refreshing to hear a different perspective on being a parent today as a bankruptcy litigator.

I know what many of you are thinking: “Who wants to hear from only a millennial?”2 Good question. Luckily, I agree with you and recruited my mother-in-law, who kindly agreed to compare notes on her experiences parenting a bunch of millennials. Some of you probably know her as Lisa Hill Fenning, who has also been an ABI member since 1992. She was a bankruptcy judge in Los Angeles from 1985-2000, when she returned to practice to pay for college for my then-future wife, Danielle, and Danielle’s three siblings.3 Along the way, she found time to sit on the boards of ABI and NCBJ, handle a bunch of mega-cases, and do some other good bar stuff. And, from my personal perspective, her kids still managed to turn out OK (“OK” equals “terrific” if they are reading this).

What follows is a discussion about our experiences in practicing law and being a parent during the 1980s, 1990s and now, and how the tools available to attorneys have evolved since that time..."

Bankruptcy Appellate Panel affirms Court's Orders confirming Chapter 13 Plan and denying creditor's motion to dismiss on eligiblity grounds

Asset Management Holdings, LLC v. Aleli A. Hernandez, BAP No. CC-16-1228
(BAP 9th Cir. Apr. 11, 2017)

Salvato Law Offices successfully defended an appeal by a lienholder attacking the debtor's Chapter 13 plan confirmation for lack of good faith and seeking dismissal of the Chapter 13 case on eligibility grounds under Bankruptcy Code Section 109(e). The Bankruptcy Court denied the creditor's motion to dismiss and confirmed the Chapter 13 plan. The Bankruptcy Appellate Panel affirmed.


Debtor filed a chapter 7 case in 2010 and obtained a discharge, including a discharge of her personal liability on two debts secured by deeds of trust against her residence. More than four years later, Debtor filed a subsequent chapter 13 case. On her schedules, Debtor listed her residence and the two debts secured by that residence. Because the amount of the senior lien exceeded the value of the residence, Debtor indicated her intent to avoid the junior lien held by Appellant’s predecessor-in-interest pursuant to § 506(a). She listed the debt to the junior lienholder on Schedule D as a secured debt of $0, and again on Schedule F as an unsecured debt of $278,396.71.

Appellant Asset Management Holdings, LLC (“AMH”) objected to confirmation for lack of good faith and moved to dismiss the chapter 13 case on eligibility grounds. The bankruptcy court ruled that Debtor’s debts did not place her over the eligibility limits because the debt to AMH did not need to be included in the eligibility calculation. The court found that the debt should not be treated as secured because the lien was avoidable under § 506(a), nor should it be treated as unsecured because Debtor’s personal liability on the debt had been discharged in her prior chapter 7 case. The bankruptcy court also found that the plan was filed in good faith. Accordingly, the court denied the motion to dismiss and confirmed the plan, and AMH appealed.



Federal Bar Association-LA's 14th Annual Bankruptcy Ethics Symposium on November 17

November 17, 2017
Time: 9:00 a.m.
Roybal Federal Building, Conference Room 283
255 E. Temple St., Los Angeles, CA 90017

Click here to register online
Click here for flyer and additional event information

    Honorable Barry Russell, United States Bankruptcy Court
Honorable Meredith A. Jury, United States Bankruptcy Court
 Honorable Martin R. Barash, United States Bankruptcy Court
Ron Maroko, Office of the United States Trustee
J. Scott Bovitz, Bovitz & Spitzer
Michael T. O’Halloran, Law Office of Michael T. O’Halloran
Carey Caruso, Law Office of Carey Caruso
Kenneth D. Sulzer, Constangy, Brooks, Smith & Prophete, LLP
Jade Brewster, Constangy, Brooks, Smith & Prophete, LLP

Program Chair: Joseph Boufadel, Salvato Law Offices

9:00 a.m. - 12:45 p.m. | Morning Programs

  • An Ounce of Discipline

  • A mixed bag of ethical issues arising with client retention, client management, and termination of the attorney-client relationship

  • Benefits, Pitfalls, and Ethical Considerations of Corporate Chapter 7 Bankruptcy

1:00 p.m. - 3:00 p.m. | Afternoon Programs

  • Competence Issues/Substance Abuse:  Carey Caruso, Law Office of Carey Caruso

  • Elimination of Bias - Recognizing and Adjusting for Bias in the Legal Profession:  Kenneth D. Sulzer and Jade Brewster of Constangy, Brooks, Smith & Prophete, LLP

MCLE: 3.5 Hours Legal Ethics; 1 Hr. Substance Abuse; 1 Hr. Elimination of Bias. This activity has been approved for Minimum Continuing Legal Education Credit by the State Bar of California. The FBA certifies that this activity conforms to the standards of approved education activities prescribed by the rules and regulations of the State Bar of California governing minimum continuing legal education.

Cost: $25 (FBA members); $35 (CDCBAA and LABF members);
$40 (non-members). At Door $50
Afternoon Session Only $20; FBA Member (Afternoon Only) - No Charge
Judges and Clerks - No Charge

Ninth Circuit affirms nondischargeable judgment based upon issue preclusion

Hai Lecong v. Ashley Tran, No. 15-60039 (9th Cir. Feb. 13, 2017)

Salvato Law Offices successfully defended an appeal by the plaintiff attacking the nondischargeable judgment entered by the Bankruptcy Court. 

"Hai Lecong appeals the grant of summary judgment in favor of Ashley Tran, entered by the bankruptcy court and upheld by the Bankruptcy Appellate Panel (BAP), which held that the debt was nondischargeable under 11 U.S.C. § 523(a)(2)(A). We affirm.  ***
The doctrine of issue preclusion applies to dischargeability proceedings pursuant to § 523(a). Grogan v. Garner, 498 U.S. 279, 284 n.11 (1991). Issue preclusion, or collateral estoppel, bars relitigation of factual issues that have been adjudicated in a prior action. Under the principles of “full faith and credit,” 28 U.S.C. § 1738, federal courts give prior state-court judgments the same preclusive effect as the courts of the state from which the judgment derived. Cal-Micro, Inc. v. Cantrell (In re Cantrell), 329 F.3d 1119, 1123 (9th Cir. 2003). Therefore, we apply California’s collateral-estoppel principles.  ***
We disagree with Lecong’s argument that the first three requirements of issue preclusion are not met in this case. Section 523(a)(2)(A) of the Bankruptcy Code excepts from discharge any debt for money, property, services, or credit obtained by “false pretenses, a false representation, or actual fraud.” ***
The jury verdict also affirms that these questions were actually litigated and necessarily decided. An issue is “actually litigated” when both parties “presented evidence and witnesses in support of their positions, and . . . had the opportunity to present full cases.” Lucido, 795 P.2d at 1225. Here, both parties presented evidence and argued the merits of the fraud claim. To conclude that an issue was “necessarily decided,” California “courts have previously required only that the issue not have been ‘entirely unnecessary’” to the judgment in the initial proceeding. Id. at 1226. In reaching the verdict in this case, the question of fraud was not “entirely unnecessary” in the initial proceeding. No public policy factors weigh against application of the doctrine. Therefore, Tran has met the burden of establishing the threshold requirements of issue preclusion. The bankruptcy court and the BAP did not abuse their discretion in applying the doctrine. AFFIRMED."

NY Times quotes Gregory Salvato in art recovery case

Artists Fight to Get Works Back from Ace Gallery by Jori Finkel
April 20, 2016

LOS ANGELES — Lawsuits by artists and collectors, seeking the return of consigned works, demanding profits, or both, have never stopped Douglas Chrismas, the founder of Ace Gallery, from doing business. An early champion of trailblazers like Robert Irwin, Richard Serra and Michael Heizer, Mr. Chrismas has spent nearly 50 years helping to start or jump-start the careers of artists here, even as he was scrutinized for sometimes failing to pay when works sold.

But on April 6, Mr. Chrismas lost the keys to his gallery, after failing to make a $17.5 million court-ordered payment to settle his debts in a long-running Chapter 11 bankruptcy case. Sam Leslie, a bankruptcy trustee, took over as what he calls a “de facto C.E.O. of the reorganized business,” which includes a 30,000-square-foot mega-gallery in a historic Art Deco building in the mid-Wilshire district, and a space in Beverly Hills.

De Wain Valentine is one of a handful of artists who filed claims during the bankruptcy case, seeking back payments or return of artwork, bringing to light the sort of artist-dealer disputes that often remain behind closed doors...

He is seeking the return of eight early, experimental sculptures, made in resin or acrylic, consigned to Ace in 2010 to 2012. The group includes a study for his monumental “Gray Column” sculpture once featured at the Getty Museum. His claim placed their value at around $1.45 million.

“The artworks are not on display at the gallery,” said Mr. Valentine’s lawyer, Gregory Salvato, “so we don’t even know for sure whether they’ve been sold or if they’re in storage.”

Asked in an interview last week why he had not returned the eight artworks, Mr. Chrismas said, “It’s complex because we believe De Wain owes the gallery a large chunk of money.”

Mr. Salvato responded, “We have absolutely no idea what he is talking about.” Mr. Valentine said, “He’s never advanced me any money.”

Reversal of $3 million judgment affirmed on appeal in published opinion

Dhawan v. Biring, 241 Cal.App.4th 963 (Cal. App. 2d Dist., October 28, 2015)

Salvato Law Offices successfully reversed a $3,200,000 default judgment entered more than seven years earlier that was affirmed by the California Court of Appeal in a published decision.

A recent California Court of Appeal decision re-affirmed the longstanding rule that damages in a default judgment cannot exceed the amount of damages claimed in the complaint, and that a later-filed statement of damages specifically identifying the damages sought is no substitute for an amended complaint, at least in an action not involving personal injury or wrongful death. Dhawan v. Biring, 241 Cal.App.4th 963 (Cal. App. 2d Dist., October 28, 2015).

In Dhawan, The Second District Court of Appeal held that a default judgment is void on its face and subject to attack at any time where the default judgment awards damages that exceed the relief demanded in the complaint, citing Code of Civil Procedure Section 580(a). A complaint seeking monetary damages must state the amount of damages sought. Code of Civil Procedure Section 425.10(a)(2). Any amount awarded in excess of the amount stated in the complaint is beyond a court’s jurisdiction to grant, and the resulting judgment is void. Section 580(a). Furthermore, service of a statement of damages under Code of Civil Procedure Section 425.11 or 425.115 only satisfies the requirements of Code of Civil Procedure Section 580 when the law prevents a plaintiff from stating an amount of damages in the body of the complaint; i.e., in personal injury or wrongful death cases, or where the plaintiff is seeking punitive damages. In all other cases, a statement of damages does not substitute for an amended complaint, as it does not provide formal notice of the actual damages sought in compliance with the requirements of Section 580(a).

The plaintiff in Dhawan filed a complaint that did not specify the amount of damages, seeking merely an award of damages “according to proof.” Defendants failedto answer the complaint. At the default hearing -- likely at the instigation of the trial judge – the plaintiff moved to vacate the default so that he could personally serve a statement of damages on the defendants. Plaintiff subsequently filed and served a statement of damages, identifying each category of damages and the amount sought. Defendants again did not respond, and a default judgment was entered.

Nearly seven years later, defendant Biring moved to vacate the default judgment, contending that a default judgment in excess of the amounts demanded in the complaint is void, and merely voidable, because the award was in excess of the trial court’s jurisdiction. (Code Civ. Proc. § 580(a)). That is, the trial court did not have the power to enter a default judgment that exceeded the relief sought in the complaint, and such an excess damage judgment could be set aside at any time. (Code Civ. Proc. § 473(d)). The trial court agreed and vacated the default judgment. On appeal, plaintiff argued that defendants had actual notice of the lawsuit and the precise amount of damages sought, as they did not contest receipt of the statement of damages. At most, plaintiff argued, the judgment was merely voidable, and not void. And, as the time period to challenge a voidable judgment had long since passed, the default judgment should not have been overturned.

The Court of Appeal rejected each of the plaintiff’s arguments and affirmed the court’s order setting aside the default judgment. Even though it contained the same information, a statement of damages was not a substitute for a properly amended complaint. And, where the plaintiff had sought only “damages according to proof,” the original trial court had exceeded its jurisdiction in awarding any damages at all.

Article on Bankruptcy Removal & Remand

Article by Gregory Salvato and J. Scott Bovitz. Dated December 8, 2010.

Download written materials.

This paper summarizes the removal procedure under 28 U.S.C. § 1452 and Federal Rule ofBankruptcy Procedure ("FRBP") 9027. We will answer these questions.

  1. What claims can be removed under 28 U.S.C. § 1452?
  2. Who may remove claims under 28 U.S.C. § 1452?
  3. What are the limitations on removal jurisdiction?
  4. What should the notice of removal contain?
  5. Where does a party file a notice ofremoval?
  6. What are the deadlines for removing a claim?
  7. May a party remove fewer than all claims in the action?
  8. When does removal take effect?
  9. Where do removed cases "go"?
  10. If a matter is removed before an answer is filed, when is the responsive pleading due?
  11. When a state court action is removed, what is a party to do? a. Deadline for a motion to remand. b. Motion to remand under 28 U.S.C. § 1452(b). c. Motion to abstain.
  12. Can and order ofremand or abstention be reviewed on appeal?
  13. Can a court award sanctions for improper removal?
  14. Why bother to remove claims from state court to bankruptcy court?