In a matter that will have implications for construction defect claims in California, the California Court of Appeal, Fourth Appellate District, ruled in the matter Pulte Homes Corporation v. Williams Mechanical, Inc. (2016) WL4199093 ("Pulte Homes Corporation case") that the Trial Court erred in setting aside an entry of default and default judgment on a construction defect subrogation Complaint where the defendant entity, a dissolved California corporation, had been sued by a developer and served, via substituted service, through its agent for service of process and the entry of default was not set aside within six months of entry of default.
The Pulte Homes Corporation case is typical of many construction defect cases in California. In 2013, Pulte Homes Corporation ("Pulte") filed an action against Williams Mechanical, Inc. ("Williams") for defective performance of a plumbing subcontract. Even before suit was filed, however, Williams was defunct, first by being suspended by the California Secretary of State (apparently for failure to file a Statement of Information) and then dissolved. Williams was suspended on February 16, 2011 by the Secretary of State. On June 29, 2012, before suit was filed, it sole director filed a Certificate of Dissolution, which was accepted by the Secretary of State. On November 25, 2013, Pulte served a Summons and Complaint on Matt Morris, the agent for service of process for Williams. Morris admitted that he received the Summons and Complaint but did not take any action because of Williams being dissolved and because he claimed to have no information about Williams' liability insurer.
On January 7, 2014, the Trial Court entered Williams' default. However, a default judgment was not entered until March 10, 2015 against Williams. An insurer for Williams, First Specialty Insurance Corporation ("First") was contacted by Pulte's counsel in April 2015 and, after seeking information, First retained counsel on August 17, 2015 which immediately filed a Motion to Set Aside the Entry of Default and Default Judgment pursuant to Code of Civil Procedure §473 and Code of Civil Procedure §473.5. The Trial Court granted the
Motion to Set Aside Default, although it did not explicitly rule as to whether the set aside of default was based upon Code of Civil Procedure §473 or Code of Civil Procedure §473.5 (judgment relief statutes).
Pulte first contended that Williams was barred from defending the action because it had been a suspended corporation (prior to being dissolved). As to this issue, the Court of Appeal recognized that there was an issue of first impression as to whether a corporation that had first been suspended and then dissolved should be treated as a suspended corporation that could not defend itself. However, the Court of Appeal did not rule on this issue. Instead the Court of Appeal turned to whether the Trial Court erred by ruling that Williams was entitled to relief at all under Code of Civil Procedure §473 or Code of Civil Procedure §473.5.
In that regard, the Court of Appeal ruled that Williams was not entitled to relief from the entry of default and default judgment. The Court of Appeal acknowledged that the Motion to Set Aside was filed within six months of the entry of judgment. However, the Motion was not filed within six months of the entry of default. The Court of Appeal ruled, therefore, that the entry of judgment could not be set aside under Code of Civil Procedure §473 because the entry of default could not be set aside per that Statute. As for Code of Civil Procedure §473.5, the Court of Appeal noted that there was an issue as to whether service of the Summons had not resulted in an actual notice to a party. In that regard, the Court distinguished case law, and specifically Rosenthal v. Garner (1983) 142 Cal.App.3d 891, where an individual was determined not to have been served when the individual was served via substituted service on prior counsel. In that regard, the Court ruled that a corporation, as an artificial entity created by law, can only act through its agents and service on the agent for service of process, even though the corporation was dissolved (or suspended) was effective. The Court of Appeal also rejected the contention of Williams' counsel that a dissolved corporation's insurer was entitled to notice of service of process. The Court of Appeal acknowledged that insurance is an asset of a dissolved corporation, but ruled that no actual notice was required to the insurer. The Court of Appeal also rejected arguments based upon equitable relief, forfeiture and satisfactory excuse.
The Pulte Homes Corporation decision is important in that many California contractors, and particularly subcontractors, have been forced to dissolve. In cases of dissolution, it is important that the agents for service of process communicate the service of pleadings with the remaining director or shareholders that they are aware of as well as any insurer.
About the Authors: Edward F. Morrison, Jr. is the founding partner and Larry A. Schwartz is Of Counsel to The Morrison Law Group, a professional corporation. Their biographies can be viewed at www.morrisonlawgroup.com.
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