Judge: Margaret L. Oldendorf, Case: 21BBCV00679, Date: 2022-12-14 Tentative Ruling


Case Number: 21BBCV00679    Hearing Date: December 14, 2022    Dept: P

SUPERIOR COURT OF THE STATE OF CALIFORNIA

FOR THE COUNTY OF LOS ANGELES

NORTHEAST DISTRICT

 

DIRECT CAPITAL CORPORATION and CIT BANK, N.A.

 

                                            Plaintiffs,

vs.

 

CINEMILLS CORPORATION; CARLOS DIDIER DE MATTOS; MARCOS MICHAEL DE MATTOS; and DOES 1 through 10, inclusive,

 

                                            Defendants.

)

)

)

)

)

)

)

)

)

)

)

)

)
)

)

)

)

)

)

Case No.: 21BBCV00679

 

 

[TENTATIVE] ORDER GRANTING DEFENDANTS’ MOTION FOR LEAVE TO FILE CROSS-COMPLAINT

 

Date:   December 14, 2022

Time:  8:30 a.m.

Dept.:  P

 

           

            I.         INTRODUCTION

            This action stems from a loan agreement between Plaintiffs and Defendants. The loan was for the purpose of financing the purchase of equipment. The loan gives Plaintiffs a security interest in equipment purchased. Defendants defaulted. Plaintiffs repossessed the equipment, sold it for $1,000, and sued for the $105,865.13 deficiency.

           

            Defendants seek leave to file a cross-complaint alleging that the agent of Plaintiffs’ who picked up the equipment kept it for his own purposes rather than returning it to Plaintiffs. The proposed cross-complaint also alleges that Plaintiffs aided and abetted the agents, in that they failed to conduct a reasonable inspection of the property returned to them. Plaintiffs oppose the motion, arguing that Defendants have not acted in good faith, and that the cross-complaint is not compulsory.  The Court concludes that the proposed cross-complaint is compulsory, and it is not being sought in bad faith.  Therefore, the motion is granted.

 

II.        LEGAL STANDARD

            Compulsory cross-complaints are governed by Code Civ. Proc. §426.10, et seq.

            Code Civ. Proc. §426.10(c) defines “related cause of action” as a “cause of action which 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.”

            Failure to raise “related causes of action” by way of cross-complaint at the time of answering waives them. Code Civ. Proc. §426.30(a).

            A party who fails to plead a cause of action subject to this requirement may apply for leave to file a cross-complaint, which the court shall grant, upon such terms as may be just, if the party who failed to plead the cause acted in good faith. Code Civ. Proc. §426.50.

            The compulsory cross-complaint statute is designed to prevent piecemeal litigation and avoid a multiplicity of actions. The statute is to be liberally construed to advance this purpose. Heshejin v. Rostami (2020) 54 Cal.App.5th 984, 993. “Because of the liberal construction given to the statute to accomplish its purpose of avoiding a multiplicity of actions, ‘transaction’ is construed broadly; it is ‘not confined to a single, isolated act or occurrence ... but may embrace a series of acts or occurrences logically interrelated [citations].’ (Citation.)” Id. at 993-994.

A leading treatise has this to say:

[6:518] Relief granted: At any time during the course of the lawsuit, the court retains power to permit defendant to file or amend a cross-complaint to avoid forfeiture of defendant’s “related” claim. Indeed, the court “shall grant” leave as long as defendant is acting in good faith. [CCP § 426.50; see Silver Organizations Ltd. v. Frank (1990) 217 CA3d 94, 98-99, 265 CR 681, 683—even on “eve of trial,” leave to file compulsory cross-complaint mandatory absent bad faith]

1) [6:519] Discretion to refuse? There is a split of authority as to whether trial courts have any discretion to deny:

• One view is that the requirement of “good faith” gives courts a “modicum of discretion” but the law strongly favors granting leave. [See Sidney v. Sup.Ct. (Kinoshita) (1988) 198 CA3d 710, 718, 244 CR 31, 36]

• The other view is that courts have no discretion to deny absent findings of bad faith based on substantial evidence. [See Silver Organizations Ltd. v. Frank, supra, 217 CA3d at 98-99, 265 CR at 683]

Weil & Brown, Cal. Practice Guide: Civil Procedure Before Trial (The Rutter Group 2022) ¶¶ 6:518-6:519.

 

III.      ANALYSIS

            A. The Proposed Pleading Is A Compulsory Cross-Complaint

            Plaintiffs Direct Capital Corporation and CIT Bank, N.A. sue Defendant Cinemills Corporation for Breach of Equipment Financing Agreement and Open Book Account. They sue the individual defendants for Breach of Guaranty. They allege that in September 2014, Direct Capital entered into a Master EFA Agreement with Cinemills (Exhibit 1 to pleading) and that in August 2016, CIT Bank entered into an Accession Agreement pursuant to which it would become an additional party. (Exhibit 2.) It is alleged that in March 2019, Plaintiffs and Cinemills, pursuant to the terms of the Mater Equipment Finance Agreement, entered into a Supplemental Schedule wherein Plaintiffs financed the purchased of “(1) LED Bi-Color F Type 1; (1) 6 Wrap.” (Exhibit 4.)  At the same time, the parties entered into an Addendum to the Master EFA, which made changes to the payment amounts. (Exhibit 5.) Also at the same time, Plaintiffs perfected their security interest in the equipment by filing a UCC Financing Statement with the Secretary of State. (Exhibit 6.)

            Plaintiffs allege that in April 2020, Cinemills defaulted on the payments and refused to make payments despite demands upon them and that, pursuant to the terms of the Master EFA, Plaintiffs took possession of the property. In September 2020, Plaintiffs allege they provided notice of their intent to sell the property. (Exhibit 7.)  Plaintiffs allege that thereafter they sold the property in a commercially reasonable manner for $1,000.

            Defendants now seek leave to assert claims against Plaintiffs arising out of the repossession of the property. They allege that after the Covid-19 pandemic struck, Cinemills made arrangements with CIT and another lender that the equipment could be picked up by CIT’s agent, RTR Services, Incorporated. They allege that in July 2020, RTR employee Michael Gabris picked up equipment from Cinemills that was subject to financing with a different lender (not Direct Capital or CIT); and that as part of that transaction, Gabris signed a notice of return of equipment and release of all claims. With regard to the equipment at issue here, the proposed pleading alleges that in December 2020, arrangements were once again made for RTR to pick up the equipment and that when he did so, another notice of return of equipment and mutual release was signed, discharging the parties from any further obligation with respect to the equipment. The proposed cross-complaint alleges that after this, CIT informed Cinemills that most of the subject equipment had not been picked up and that Cinemills remained financially responsible for it. Finally, the proposed pleading alleges that Defendants just recently learned Gabris has multiple felony convictions and has served time in prison.

            This is not a claim that can be raised by way of a new lawsuit because the present lawsuit concerns and will dispose of Plaintiffs’ claim that they “took possession of” the equipment (Complaint, ¶18) and thereafter sold it in a commercially reasonable manner.

            Plaintiffs rely on Clark v. EZN, Inc. (1997) 57 Cal.App.4th 852 in support of their contention that the proposed cross-complaint is not compulsory. In Clark, denial of leave to file a cross-complaint on the day of trial was affirmed on appeal. Denial was not an abuse of discretion because, even if erroneous, the defendant was not prejudiced as he could file a separate action for fraud, conversion, and breach of contract, claims the creditor argued were not related to its action for foreclosure on a promissory note and security agreement. The lack of factual information about the proposed cross-complaint leaves something of a vacuum, but the Court of Appeal made a point of grounding the order on lack of prejudice rather than lack of error in the denial of leave to file the cross-complaint.

            This Court concludes that the proposed pleading in this case is a compulsory cross-complaint.

 

            B. Moving Parties Have Acted In Good Faith

            As the proposed pleading is compulsory, relief is mandatory so long as Defendants have acted in good faith. The record indicates they have. The circumstances here are quite similar to those in Silver Organizations Ltd. v. Frank (1990) 217 CA3d 94, 98-99, 265 CR 681, where the defendants obtained new counsel and sought leave to file a cross-complaint on the eve of trial. Here, Defendants obtained new counsel in October 2022, and new counsel sought leave to file the cross-complaint in November 2022. No bad faith is demonstrated by this conduct.

            Plaintiffs argue there is a lack of good faith here because, after substituting into the case new counsel indicated that unless the case was dismissed he would move for leave to file a cross-complaint naming Plaintiffs as part of a “criminal enterprise.” Declaration of Laurel Adams, ¶16 and Exhibit 3. While Mr. Gutman’s choice of words is questionable, the motion in fact did get filed. No legal argument is offered to support the contention that this demonstrates bad faith.

Plaintiffs further urge lack of good faith because the motion was personally served and set for hearing on the shortest possible time, forcing Plaintiffs’ counsel to have to respond to it during the Thanksgiving holiday. Opposition at 7:19-22. While the timing was certainly inconvenient, it appears that Defendants’ new attorney was attempting to act as expeditiously as possible after substituting into the case and after ascertaining that a cross-complaint would be necessary.

            Plaintiffs urge that the proposed cross-complaint “is insincere if not actually malicious.” Opposition at 7:15. It is not clear exactly what is meant by this, except that Plaintiffs obviously strongly object to the truth of the proposed allegations. Plaintiffs’ position is that the proposed allegations relate to how much is owed on the contract, such that an affirmative defense will suffice. Opposition at 8:12-14. This tends to undermine Plaintiffs’ position that the proposed claims are not compulsory; but further, it would take away Defendants’ right to decide how to respond to the underlying complaint.

            The Adams Declaration contains a detailed summary of the facts of the case. Defendants have filed extensive objections. As the facts of the case are not at issue, these facts were not used in the analysis and the objections are therefore not ruled upon.         

 

IV.      CONCLUSION

            Defendants’ motion for leave to file cross-complaint is granted. Defendants are granted five days to file the proposed pleading. Moving party is ordered to give notice.

 

           

Dated:                                                                        _______________________________

                                                                                          MARGARET OLDENDORF

                                                                                 JUDGE OF THE SUPERIOR COURT