Judge: Daniel S. Murphy, Case: 20STCV04529, Date: 2023-11-06 Tentative Ruling

Case Number: 20STCV04529    Hearing Date: April 8, 2024    Dept: 32

BACKGROUND

            On March 27, 2020, Plaintiffs Craig Sallin, Croesus Investments, LLC, Linda Snyder-Kelbaugh, Sun Coast Distributing, Inc., Sun Pacific Group, Inc., and Jerry James filed this action for breach of contract against Defendants Joe Samuel Bailey and Renew Spinal Care, Inc. The operative First Amended Complaint was filed on March 27, 2020. The purported Second Amended Complaint on July 31, 2023 is not properly filed because a party may only amend a complaint once without leave of court. (See Code Civ. Proc., § 472(a).)  

            The FAC asserts a single cause of action for breach of written settlement agreement. The FAC alleges that Plaintiffs provided money to Defendants and that the parties reached a settlement resolving disputes over the amount owed. This action stems from Defendants’ alleged failure to pay the amounts required by the settlement agreement. 

            On March 8, 2024, Defendants filed the instant motion for leave to file a cross-complaint. Plaintiffs filed their opposition on March 25, 2024. Defendants filed their reply on March 28, 2024.

            On March 18, 2024, Plaintiffs filed a motion to reopen discovery. Defendants filed their opposition on March 27, 2024. The motion to reopen discovery is advanced and heard on this date (April 8, 2024).

DISCUSSION

I. Cross-Complaint

“Except as otherwise provided by statute, if a party against whom a complaint has been filed and served fails to allege in a cross-complaint any related cause of action which (at the time of serving his answer to the complaint) he has against the plaintiff, such party may not thereafter in any other action assert against the plaintiff the related cause of action not pleaded.” (Code Civ. Proc., § 426.30.) “A party who fails to plead a cause of action subject to the requirements of this article, whether through oversight, inadvertence, mistake, neglect, or other cause, may apply to the court for leave to amend his pleading, or to file a cross-complaint, to assert such cause at any time during the course of the action. The court, after notice to the adverse party, shall grant, upon such terms as may be just to the parties, leave to amend the pleading, or to file the cross-complaint, to assert such cause if the party who failed to plead the cause acted in good faith. This subdivision shall be liberally construed to avoid forfeiture of causes of action.” (Id., § 426.50.)

A compulsory cross-claim is one that “arises out of the same transaction, occurrence, or series of transactions or occurrences as the cause of action which the plaintiff alleges in his complaint.” (Align Technology, Inc. v. Tran (2009) 179 Cal.App.4th 949, 960.) Leave to file a compulsory cross-complaint “must be granted unless bad faith of the moving party is demonstrated where forfeiture would otherwise result. Factors such as oversight, inadvertence, neglect, mistake or other cause, are insufficient grounds to deny the motion unless accompanied by bad faith.” (Silver Orgs. v. Frank (1990) 217 Cal.App.3d 94, 99.) To justify denial of a motion to file a compulsory cross-complaint, the trial court must find “substantial evidence that bad faith existed in the circumstances . . . .” (Ibid.)  

Here, Defendants’ proposed cross-complaint seeks declaratory relief that the subject agreement is usurious and illegal. This arises from the same facts and transactions as the underlying complaint. Therefore, it is a compulsory cross-claim. Because the cross-claim is being made after the time for Defendants’ answer, the issue is whether Defendants acted in bad faith in asserting the cross-claim at this stage. Leave to file a compulsory cross-claim must be granted unless there is “substantial evidence” of bad faith. (Silver Orgs., supra, 217 Cal.App.3d at p. 99.) Bad faith is defined as “dishonest purpose, moral obliquity, sinister motive, furtive design or ill will.” (Id. at p. 100.) Mere delay and neglect are not sufficient to justify denial of the motion. (Id. at p. 99.) Without substantial evidence of bad faith, leave to file a compulsory cross-claim must be granted because the law favors resolution on the merits, and the statute expressly instructs courts to avoid forfeiture where possible. The merits of the cross-complaint are not at issue.

Plaintiffs argue that there is no explanation for the delay in seeking leave. However, as discussed above, mere delay does not constitute substantial evidence of bad faith. Plaintiffs cite Crocker Nat. Bank v. Emerald (1990) 221 Cal.App.3d 852 for the proposition that leave to file a cross-complaint may be denied based on unwarranted delay. However, the cross-complaint in Crocker was permissive, not compulsory. (Id. at p. 864.) Permissive cross-complaints are governed by a different statute and are subject to a different standard. (Ibid.) In Gherman v. Colburn (1977) 72 Cal.App.3d 544, 560, the trial court properly denied leave to file a cross-complaint after finding that “by attempting to file a cross-complaint on the first day of trial, defendants were not acting in ‘good faith’ but that the motion for leave to file a cross-complaint was merely a tactical, strategic maneuver to deprive plaintiffs of a right to a jury trial.” By contrast, Defendants here filed this motion five months before the trial date of August 20, 2024, and there is no indication that Plaintiffs will be deprived of a fair trial.

Plaintiffs also argue that Defendants have materially changed their position with the proposed cross-complaint. However, Defendants have consistently maintained throughout litigation that the settlement agreement is usurious and a culmination or extension of prior usurious loans. It does not constitute bad faith to now assert that position as a cross-claim.

Without substantial evidence of bad faith, Defendants must be granted leave to file their compulsory cross-complaint. Plaintiffs remain free to test the merits of the cross-claims through subsequent motions. However, for purposes of this motion, the merits of the cross-claims have no bearing on Defendants’ right to file the cross-complaint.

II. Reopen Discovery

A motion for leave to file a cross-complaint may be granted “upon such terms as may be just to the parties.” (Code Civ. Proc., § 426.50.) The court has discretion to impose “terms or conditions which will prevent injustice.” (Silver Orgs., supra, 217 Cal.App.3d at p. 101.) Here, the Court finds that Plaintiffs’ motion to reopen discovery should be granted in light of the new claims. Defendants cannot file a cross-complaint and then prevent Plaintiffs from conducting discovery on the new claims. However, Plaintiffs have not articulated good cause to reopen discovery on any other issue. Therefore, discovery is limited to the cross-complaint. The discovery cutoff will be based on the August 20, 2024 trial date.    

CONCLUSION

            Defendants’ motion for leave to file cross-complaint is GRANTED. Plaintiffs’ motion to reopen discovery is GRANTED in part. Discovery is limited to Defendants’ new cross-claims.