When a defendant is sued in California state court by a plaintiff who resides outside of California or a plaintiff that is a foreign corporation, California law provides an underappreciated but highly effective tool for the defendant to potentially resolve the entire case at an early stage of the litigation when attorney’s fees are in play.
California Code of Civil Procedure Section 1030 requires that an out-of-state plaintiff or foreign corporation submit an undertaking to secure an award of costs and attorneys’ fees, typically in the form of a bond, if the defendant establishes that there is a “reasonable possibility” that the defendant will obtain a judgment at trial. See Cal. Code Civ. Pro. § 1030(b). For purposes of Section 1030, “‘attorney’s fees’ means reasonable attorney’s fees a party may be authorized to recover by a statute apart from [Section 1030] or by contract.” Id. § 1030(a). A motion pursuant to Section 1030 must be accompanied by an affidavit, which “set[s] forth the nature and amount of the costs and attorney’s fees the defendant has incurred and expects to incur by the conclusion of the action or special proceeding.” Id. § 1030(b). Once a court grants a defendant’s motion pursuant to Section 1030, the plaintiff “shall file the undertaking not later than 30 days after service of the court’s order requiring it or within a greater time allowed by the court.” Id. § 1030(d). If the plaintiff fails to meet the deadline set to file the undertaking, “the plaintiff’s action or special proceeding shall be dismissed as to the defendant in whose favor the order requiring the undertaking was made.” Id.
The purpose of Section 1030 is to provide a mechanism for a defendant who faces a meritless claim by a non-resident plaintiff to recover its costs and fees when that defendant prevails. Without Section 1030 and a secured undertaking, a successful defendant would be forced to bring an enforcement action to recover its costs from the non-resident plaintiff or foreign corporation, who may use their foreign status as a shield to prevent any recovery against them. In other words, Section 1030 is “intended to secure costs in light of the difficulty of enforcing a judgment for costs against a person who is not within the court’s jurisdiction.” Shannon v. Sims Service Center, Inc. (1985) 164 Cal.App.3d 907, 913.
Importantly, “reasonable possibility” does not require a showing that the plaintiff has no possibility of winning at trial, but merely that there is a reasonable possibility that defendant could win. See Baltayan v. Estate of Getemyan (2001) 90 Cal.App.4th 1427, 1430 (“Respondents were not required to show that there was no possibility that appellant could win at trial, but only that it was reasonably possible that respondents would win.”). This is a “relatively low bar.” See AF Holdings LLC v. Magsumbol (N.D. Cal. Mar. 18, 2013) Case No. 12-4221 SC, 2013 WL 1120771, at *1.
In a recent ruling, Kibler Fowler & Cave successfully obtained an order requiring foreign corporation plaintiffs to file an undertaking that would secure a potential award of costs and attorneys’ fees for our clients. See Shenghua Entertainment, et al. v. Cinelou Films, LLC, et al., LASC Case No. 22STCV34604. KF&C demonstrated to the Court that our clients had a reasonable possibility of defeating the plaintiffs’ claims, which included breach of contract, alter ego, and unjust enrichment. The Court required the plaintiffs to file an undertaking in the amount of $300,000 within 30 days. In the wake of this ruling, and facing the requirement of posting a substantial bond, the plaintiffs dismissed the litigation against KF&C’s clients in the entirety.
Practice Tips
When defending a client against a non-resident plaintiff in California state court, practitioners should consider seeking an order for an undertaking pursuant to Section 1030 in the event attorneys’ fees are at issue in the litigation (either contractually or statutorily). This is a powerful tool for California defendants facing out-of-state plaintiffs or foreign corporations given the “low bar” to proving reasonable possibility, and, if successful, it may pressure the plaintiff to dismiss their complaint at an early stage of the litigation.
For questions or comments on the content of this post, please email John Fowler at [email protected].
