Opinion
E065177
10-04-2017
VM RESIDENTIAL, LLC, Plaintiff and Respondent, v. EQUITY TRUST COMPANY, Defendant and Appellant.
Fullerton, Lemann, Schaefer & Dominick, Craig E. Wilson and Amar M. Hatti for Defendant and Appellant. Law Offices of Paul D. Bojic and Paul D. Bojic for Plaintiff and Respondent.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super.Ct.No. INC1303995) OPINION APPEAL from the Superior Court of Riverside County. James T. Latting, Judge. Reversed with directions. Fullerton, Lemann, Schaefer & Dominick, Craig E. Wilson and Amar M. Hatti for Defendant and Appellant. Law Offices of Paul D. Bojic and Paul D. Bojic for Plaintiff and Respondent.
I. INTRODUCTION
In this action over a disputed real estate transaction, plaintiff and respondent, VM Residential, LLC (VM Residential), obtained a default judgment against defendant and appellant, "Equity Trust Company Custodian FBO Scott McKhann Traditional IRA" (Equity). As the name might imply, Equity "serves as a passive, self-directed custodian" for an individual retirement account (IRA) owned by Scott McKhann. McKhann, as the owner of the IRA, is responsible for defending this lawsuit, even though Equity is the named defendant. Upon receiving the summons and operative complaint here, Equity mailed the documents to the address it had on file for McKhann. This was an outdated address, however, and McKhann did not receive notice of the operative complaint until too late. He did not have a chance to mount a defense before VM Residential sought entry of Equity's default and the default judgment. McKhann first learned of the operative complaint when he received notice of the default judgment against Equity. He immediately involved his attorneys and, a little over a month later, they filed a motion to set aside the default and default judgment against Equity. Equity appeals from the trial court's order denying that motion.
Code of Civil Procedure section 473, subdivision (b) allows relief from a judgment taken against a party through "his or her mistake, inadvertence, surprise, or excusable neglect." Courts must construe this remedial provision liberally. The law favors determination of cases on their merits, and courts must resolve any doubts in applying section 473 in favor of the party seeking relief from default. (Rappleyea v. Campbell (1994) 8 Cal.4th 975, 980.) Given these well-established principles, and Equity's showing that a mistake as to McKhann's address caused its default, we conclude the trial court abused its discretion in denying Equity's motion for relief. Equity should not suffer a judgment against it—here, over $145,000—without a hearing on the merits. We therefore reverse the default judgment with instructions to vacate the default.
All further statutory references are to the Code of Civil Procedure unless otherwise indicated.
II. FACTS AND PROCEDURE
A. The Allegations of the Fourth Amended Complaint
VM Residential's operative complaint, the fourth amended complaint, alleges as follows:
Equity is the custodian of McKhann's IRA. In August 2009, VM Residential and Equity entered into a purchase and sale agreement in which VM Residential agreed to purchase real property in Anza, California from Equity for $135,000 (the Anza property). VM Residential deposited $2,000 into escrow. In October 2009, the parties purportedly executed an amendment to the escrow instructions that provided for VM Residential to deposit another $5,000 into escrow. The amendment authorized the escrow company to release the $7,000 in escrow to Equity, regardless of whether escrow actually closed. Notwithstanding that VM Residential deposited the additional $5,000 into escrow, it never executed the amendment. Its signature was forged.
The same thing occurred with the second amendment to the escrow instructions in November 2009. The second amendment provided for VM Residential to deposit another $15,000 into escrow and authorized the escrow company to release the funds to Equity. Notwithstanding VM Residential's deposit of the additional funds, someone also forged VM Residential's signature on the second amendment.
In January 2010, the parties executed a third amendment to the escrow instructions providing for VM Residential to deposit another $10,000 into escrow. Unlike the other amendments, VM Residential actually executed this one. The third amendment authorized the escrow company to release $10,000 to Equity, regardless of whether escrow actually closed.
The escrow company eventually disbursed the $32,000 in escrow to Equity, even though VM Residential had authorized it to disburse only $10,000. The escrow company and Equity cancelled escrow in July 2010, pursuant to escrow cancellation instructions that VM Residential never executed. VM Residential lost the opportunity to purchase the subject property.
Equity and the escrow company forged VM Residential's signature on the first and second escrow amendments and cancellation instructions or "fail[ed] to receive fully executed" copies of these documents. Moreover, Equity had taken the funds in escrow with full knowledge that VM Residential had not actually executed the first and second amendments to the escrow instructions. VM Residential alleged causes of action against Equity and the escrow company for breach of contract, fraud and deceit, and negligent misrepresentation. B. VM Residential's Service on Equity
VM Residential effected personal service of the summons and complaint on McKhann in June 2013. McKhann's counsel promptly wrote a letter to VM Residential's counsel arguing that service on McKhann was improper, as McKhann was not the named defendant. Counsel requested that VM Residential withdraw service and properly serve Equity at its address in Ohio. VM Residential withdrew the proof of service on McKhann.
VM Residential mailed the summons and complaint to Equity in July 2013, along with a notice and acknowledgment of receipt, after speaking with an Equity representative who agreed to accept service. There is no indication in the record that Equity returned the acknowledgement of receipt.
For service by mail to be effective, a plaintiff serving the summons and complaint must also serve a notice and acknowledgment of receipt on the defendant. (§ 415.30, subd. (a).) Service is deemed complete on the date that the defendant executes the acknowledgment of receipt, if the defendant returns the acknowledgement. (Id., subd. (c).) If the defendant does not return the acknowledgment within 20 days, the defendant may be liable for expenses incurred in serving him or her by another method. (Id., subd. (d).)
Between October 2013 and April 2014, VM Residential filed first, second, and third amended complaints, to which the escrow company demurred. The escrow company ultimately secured a dismissal with prejudice of the causes of action against it (and it is not a party to this appeal). The record does not disclose service on Equity of the first, second, and third amended complaints.
On August 1, 2014, the California Franchise Tax Board suspended VM Residential's powers, rights, and privileges, pursuant to the Revenue and Taxation Code.
"[T]he corporate powers, rights and privileges" of a California corporation "may be suspended" if the corporation fails to pay its franchise taxes or fails to file a tax return. (Rev. & Tax. Code, §§ 23301, 23301.5.)
On November 11, 2014, VM Residential effected personal service of the summons and fourth amended complaint on Equity. Consistent with the terms of Equity's custodial agreement with McKhann, Equity mailed a copy of the summons and fourth amended complaint to McKhann's address of record in the Equity files. The address then on record was in Norco, California. McKhann had lived at the Norco address for nine years, but in June 2014, he had moved and set up a post office box in Capistrano Beach, California. He arranged to have his mail forwarded to that Capistrano Beach address.
On January 30, 2015, Equity received returned mail reflecting the updated mailing address for McKhann in Capistrano Beach. McKhann never received a copy of the summons and fourth amended complaint from Equity. C. The Default Judgment
On December 12, 2014, VM Residential filed a request for entry of default against Equity, having received no response to the fourth amended complaint. VM Residential mailed a copy of this request to Equity on the same date. The court also entered Equity's default on that date.
On December 18, 2014, VM Residential filed a request for default judgment in the amount of $145,325.78, consisting of $122,000 in damages and $23,325.78 in interest, costs, and attorney fees. VM Residential mailed a copy of this request to Equity on December 17.
On January 29, 2015, the court entered default judgment against Equity for $145,325.78. On March 3, 2015, VM Residential served notice of entry of the default judgment. Equity received that notice on March 10, 2015. It forwarded a copy of the default judgment to its address of record for McKhann, which had been updated to the Capistrano Beach address. McKhann received notice of the default judgment on or about March 26, 2015. This was when he first learned that VM Residential had served the summons and fourth amended complaint on Equity, and he immediately contacted his attorneys to deal with the matter. D. Equity's Motion to Set Aside the Default
On May 8, 2015, Equity filed a motion to set aside its default and default judgment. The declarations of an Equity employee and McKhann established that Equity is the passive, self-directed custodian of McKhann's IRA and characterized McKhann as de facto defendant or real party in interest in this matter. Pursuant to the custodial agreement between Equity and McKhann, McKhann, as the account owner, is responsible for the defense of lawsuits such as this.
Equity styled its motion as one to set aside the default only, but its memorandum of points and authorities and other papers adequately apprised the court and the opposing party that it was seeking complete relief from the effect of the default—that is, a setting aside of the default judgment as well. The thrust of its argument was that it should have an opportunity to litigate the merits of this case and defend itself, something that would not be possible if the court did not also vacate the judgment. "'"The nature of a motion is determined by the nature of the relief sought, not by the label attached to it. The law is not a mere game of words."'" (Austin v. Los Angeles Unified School Dist. (2016) 244 Cal.App.4th 918, 930 (Austin).) As such, we treat the motion as one to set aside the default and default judgment.
Equity's motion argued that the default was void because VM Residential was a suspended corporate entity and had no legal capacity to obtain the default and default judgment. It also argued that VM Residential did not notify McKhann's attorneys prior to taking the default, even though VM Residential knew he had legal representation. It further argued that service did not result in actual notice to McKhann, who was responsible for defending the lawsuit, and the default was the result of mistake, inadvertence, surprise, and/or excusable neglect under section 473, subdivision (b).
Finally, Equity argued it had a meritorious defense represented in McKhann's declaration. McKhann declared that he had entered into the sale of the Anza property with VM Residential, but the transaction did not close when VM Residential failed to deposit sufficient funds into escrow. McKhann and the person he believed to be VM Residential's principal executed a number of amendments to the escrow instructions providing for VM Residential to deposit additional funds into escrow. These amendments deemed the additional deposits nonrefundable and permitted the escrow company to release them immediately to Equity. At no time did McKhann forge anyone's signature on the escrow amendments or other documents. To his knowledge, VM Residential's principal executed the amendments himself, and because further deposits into escrow followed each amendment, McKhann believed VM Residential was acting pursuant to its understanding of its obligations under the amendments.
Equity also filed an ex parte application for an order shortening time to hear its motion. At the hearing on the ex parte application, counsel for VM Residential indicated it was in the process of "cleaning up" the issue with the Franchise Tax Board. The court granted the ex parte application and set the matter for a hearing in early June 2015. But the court ultimately continued the matter for 90 days to allow VM Residential more time to obtain a revivor of its corporate powers. Before the hearing on the motion, VM Residential filed evidence of a certificate of revivor issued by the Franchise Tax Board, effective August 4, 2015. E. The Trial Court's Ruling
"A suspended corporation can regain its corporate powers by filing all required tax returns, paying the necessary taxes, penalties or fees due, and applying to the Franchise Tax Board for a certificate of revivor. (Rev. & Tax Code, § 23305.)" (Center for Self-Improvement & Community Development v. Lennar Corp. (2009) 173 Cal.App.4th 1543, 1553.) "Our Supreme Court has held that the revival of corporate powers during the course of litigation validates earlier acts occurring prior to judgment, as well as matters occurring postjudgment." (Ibid.) --------
The court heard Equity's motion to set aside the default in September 2015 and issued a written ruling denying the motion in December 2015. The court found there was no dispute that VM Residential served Equity through Equity's attorneys. The court noted McKhann individually was not the movant, nor was he a party. Equity was claiming that VM Residential had to serve McKhann and that McKhann was improperly served at a previous address, and he consequently did not receive notice in time to defend the lawsuit. But Equity had not cited any authority for the proposition that service on McKhann was required. Further, VM Residential was currently in good corporate standing, having obtained a revivor. The revivor retroactively validated procedural steps taken on VM Residential's behalf during its period of suspension, including VM Residential's obtaining the default judgment.
III. DISCUSSION
Equity contends the trial court erred in denying the motion to set aside its default for two primary reasons. First, Equity asserts the default and default judgment were void because VM Residential's corporate revivor did not retroactively validate its acts in obtaining the default judgment. Second, Equity argues the default and default judgment were the result of mistake, inadvertence, or excusable neglect, justifying relief under section 473, subdivision (b). We need not reach the argument regarding corporate revivor. Regardless of whether VM Residential's prerevivor acts were invalid, the court erred in denying relief from the default and default judgment based on mistake.
Section 473, subdivision (b) consists of mandatory and discretionary provisions for relief from a judgment. We are concerned with the discretionary provision. It provides that a court may relieve a party from a judgment obtained through the party's "mistake, inadvertence, surprise, or excusable neglect." (§ 473, subd. (b).) The party must apply for relief within six months of entry of the default. (Ibid.; Rutan v. Summit Sports, Inc. (1985) 173 Cal.App.3d 965, 970.) Further, "a copy of the answer or other pleading proposed to be filed" must accompany the application for relief, "otherwise the application shall not be granted." (§ 473, subd. (b).)
We review the court's order denying relief from the judgment for abuse of discretion. (Fasuyi v. Permatex, Inc. (2008) 167 Cal.App.4th 681, 694 (Fasuyi).) While a request for relief from default is entrusted to the trial court's discretion, "[i]t is the policy of the law to favor, whenever possible, a hearing on the merits. Appellate courts are much more disposed to affirm an order when the result is to compel a trial on the merits than when the default judgment is allowed to stand." (Shamblin v. Brattain (1988) 44 Cal.3d 474, 478.) Section 473 is a remedial statute and should be liberally construed to dispose of cases on their merits and give "the party claiming in good faith to have a substantial defense to the action an opportunity to present it." (Wright v. Snyder (1934) 138 Cal.App. 495, 496.) Accordingly, when "'relief under section 473 is available, there is a strong public policy in favor of granting relief and allowing the requesting party his or her day in court.'" (Rappleyea v. Campbell, supra, 8 Cal.4th at pp. 981-982, 984 [holding the trial court abused its discretion in denying the defendants' motion to set aside the default].)
Moreover, "[w]hen the moving party promptly seeks relief and there is no prejudice to the opposing party, very slight evidence is required to justify relief." (Mink v. Superior Court (1992) 2 Cal.App.4th 1338, 1343-1344 [concluding the trial court abused its discretion in denying a motion for relief from a judgment]; accord, Shamblin v. Brattain, supra, 44 Cal.3d at p. 478.) This is because the movant may be deprived of a substantial right to defend the action, whereas the court may assume, "if nothing to the contrary is shown, that the plaintiff will be able at any time to establish his [or her] cause of action." (Wright v. Snyder, supra, 138 Cal.App. at p. 496.) If the plaintiff will suffer some prejudice from having the default set aside—beyond just delay or inconvenience—he or she should establish that fact. (Id. at pp. 496, 498.)
"Because the law favors disposing of cases on their merits, 'any doubts in applying section 473 must be resolved in favor of the party seeking relief from default [citations]. Therefore, a trial court order denying relief is scrutinized more carefully than an order permitting trial on the merits.'" (Rappleyea v. Campbell, supra, 8 Cal.4th at p. 980; Jade K. v. Viguri (1989) 210 Cal.App.3d 1459, 1473 ["Even when the showing under section 473 is not strong, when there is doubt about setting aside a default, such doubt should be resolved in favor of relief."].) The trial court should exercise its discretion consistent with the spirit of the law and in a manner that serves rather than defeats the ends of substantial justice. (Fasuyi, supra, 167 Cal.App.4th at p. 695.)
Turning to the statutory requirements, the parties do not dispute that Equity moved for relief within the requisite six-month period. We address the proposed pleading requirement first and then turn to whether Equity demonstrated mistake, inadvertence, surprise, or excusable neglect. A. Equity Substantially Complied with the Proposed Pleading Requirement
Equity did not accompany its motion with a proposed answer or other pleading, but VM Residential did not bring this to the court's attention, and the court never addressed the issue. The court denied the motion for other reasons, not because a proposed answer did not accompany the motion. We asked the parties to brief the effect on this appeal of Equity's failure to submit a proposed answer. (Gov. Code, § 68081.) Having reviewed those supplemental briefs, we conclude the failure is not critical. Equity substantially complied with the requirement.
The purpose of the proposed pleading requirement is to show the movant's "'good faith and readiness to at once file [an] answer,'" in the event the court grants relief. (Austin, supra, 244 Cal.App.4th at p. 933; Job v. Farrington (1989) 209 Cal.App.3d 338, 341.) It is essentially a screening device to determine that the movant is not seeking relief simply to delay the proceedings. (County of Stanislaus v. Johnson (1996) 43 Cal.App.4th 832, 838.) "Because that is the limited purpose for the attached-pleading requirement, 'courts have held substantial compliance to be sufficient,'" especially in light of the policies favoring (1) the determination of actions on their merits and (2) the resolution of doubts in favor of relief from default. (Austin, supra, at p. 933.) A rigid application of the proposed pleading requirement "fails to give full remedial effect to" section 473 and "is an 'unnecessarily strict' [citation] way to accomplish the statutory objectives." (County of Stanislaus v. Johnson, supra, at p. 837.) Accordingly, the movant's papers may substantially comply with the proposed pleading requirement by proffering essentially the same factual contentions or legal arguments that the movant would have proffered in a proposed pleading. (Ibid.) In such a case, the objective of the proposed pleading requirement—a determination that the movant is acting in good faith and not simply to delay the proceedings—is satisfied. (Austin, supra, at pp. 933-934.)
In Austin, the appellate court invoked the principle of substantial compliance. The plaintiff there had failed to file an opposition to the defendants' motion for summary judgment, and the trial court granted the motion and entered judgment for the defendants. (Austin, supra, 244 Cal.App.4th at pp. 924-925.) The plaintiff sought to vacate the judgment by filing several documents, including two sets of papers styled a motion for reconsideration. (Id. at pp. 925-927.) The trial court indicated it was treating both motions as based in part on section 473 and denied the motions for various reasons, which did not include the plaintiff's failure to submit a proposed opposition to the summary judgment motion. (Austin, supra, at pp. 925-927.) The defendants never raised the plaintiff's failure to submit a proposed opposition in the trial court. (Id. at pp. 932-933, fn. 11.) On appeal, the court held that although the plaintiff had not submitted a proposed opposition, her various filings requesting relief from the judgment had contained the factual contentions and legal arguments she would have made in a proposed opposition. (Id. at p. 933.) She had, therefore, substantially complied with the proposed pleading requirement of section 473, subdivision (b). (Austin, supra, at p. 933.)
Here, like in Austin, Equity substantially complied with the proposed pleading requirement by submitting McKhann's declaration with its motion. His declaration—made under penalty of perjury—contested the fundamental allegations of the operative complaint. Namely, he declared that, as the person who had entered into the sale of the Anza property with VM Residential, he had not forged any signatures on the escrow amendments, and as far as he knew, VM Residential's principal had signed the amendments. He believed VM Residential had agreed to the amendments because, after each amendment, VM Residential deposited additional funds into escrow, as the amendments required it to do. These denials of the lawsuit's fundamental allegations against Equity would have been at the heart of its proposed answer. The declaration thus achieves the objective of showing Equity's good faith and readiness to file an answer.
Moreover, because VM Residential did not raise this issue below, we are disinclined to resolve the issue in its favor. Had VM Residential raised the absence of a proposed answer, Equity could have corrected that mistake by submitting an answer before the trial court ruled. (See, e.g., Carmel, Ltd. v. Tavoussi (2009) 175 Cal.App.4th 393, 403 [concluding the defendants substantially complied with the proposed pleading requirement by proffering their proposed answer at the hearing on the motion to vacate the default judgment]; County of Stanislaus v. Johnson, supra, 43 Cal.App.4th at pp. 835, 838 [holding the defendant substantially complied with the proposed pleading requirement when the trial court granted a continuance at the initial hearing to allow the defendant to submit a proposed answer, and the defendant did so three weeks before the continued hearing].) In other words, VM Residential has forfeited the right to benefit from the lack of strict compliance on Equity's part. B. Mistake Justified Relief from the Default and Default Judgment
Equity contends its default was the result of mistake, inadvertence, or excusable neglect, and the court abused its discretion in denying relief on these grounds. We agree.
A mistake justifying relief under section 473, subdivision (b) may be one of fact or law. (H.D. Arnaiz, Ltd. v. County of San Joaquin (2002) 96 Cal.App.4th 1357, 1368.) "'A mistake of fact exists when a person understands the facts to be other than they are; . . .'" (Ibid.) "A mistake sufficient to vacate a [judgment] may be found where a party, under some erroneous conviction, does an act he would not do but for the erroneous conviction." (Id. at p. 1369.)
In this case, the essential facts are undisputed and establish a default based on mistake. VM Residential served McKhann with the summons and original complaint in June 2013 and mailed these documents to Equity in July 2013, although we have no sign that Equity acknowledged receipt, in which case service was not complete. (§ 415.30, subd. (c).) In any event, this is no longer the operative complaint. Approximately 16 months after attempting to serve the original complaint, VM Residential personally served Equity with the summons and fourth amended complaint. Equity then mailed these documents to McKhann's address of record in the Equity files. The problem was that, for the last five months or so, McKhann was no longer living at that address. According to the agreement between McKhann and Equity, McKhann is responsible for the defense of this suit against Equity, which was merely the passive custodian of his IRA. Because the fourth amended complaint went to the wrong address for McKhann, he did not receive actual notice of it until after the court entered the default judgment. When he received notice of the default judgment, he promptly involved his attorneys and caused Equity to move for relief within the six-month period. Simply stated, Equity's failure to respond to the fourth amended complaint was the result of its mistaken belief about McKhann's address.
The trial court erred in denying Equity relief for this mistake of fact, especially given the long-standing policy that favors disposing of cases on the merits, and our Supreme Court's direction to construe section 473 liberally and resolve any doubts in favor of the party seeking relief. (Zamora v. Clayborn Contracting Group, Inc. (2002) 28 Cal.4th 249, 256; Rappleyea v. Campbell, supra, 8 Cal.4th at p. 980.) What is more, Equity promptly sought relief, and VM Residential failed to demonstrate any prejudice to it from granting relief, beyond the garden-variety delay that follows any time a court sets aside a default judgment. (Fasuyi, supra, 167 Cal.App.4th at p. 702.) VM Residential merely asserted, in a conclusory fashion, that "[f]urther delays only prejudice [VM Residential] who has diligently prosecuted its claim . . . ." If this were sufficient prejudice, a court would never be justified in setting aside a default judgment under section 473. (See Rogalski v. Nabers Cadillac (1992) 11 Cal.App.4th 816, 822 ["The only true prejudice to [the plaintiff] is that he will now have to go back and try the case on the merits. But since the law strongly favors trial and disposition on the merits, there is no prejudice."].) As such, "very slight evidence" was required to justify relief, a standard Equity met. (Mink v. Superior Court, supra, 2 Cal.App.4th at p. 1343.) We may assume that VM Residential can establish its causes of action at any time, whereas if the trial court's ruling stands, Equity will be denied the substantial right to defend the action, even though Equity has demonstrated grounds for relief under section 473, subdivision (b).
The trial court understood Equity to be arguing that VM Residential was required to serve McKhann individually, and because Equity had not cited authority requiring service on McKhann, the court denied relief. But we understand Equity's argument—both below and on appeal—differently. Equity does not truly dispute that VM Residential properly served it with the summons and fourth amended complaint in November 2014, and it is not claiming that VM Residential had to serve McKhann individually. Indeed, when VM Residential served him with the original complaint, his attorney argued such service was improper because McKhann as an individual was not the named defendant. Instead, Equity is arguing that, notwithstanding service on it as the named defendant, McKhann is responsible for mounting the defense, but he did not receive actual notice of the fourth amended complaint until too late.
Courts have granted relief in similar situations, when a disconnect occurs between the properly served defendant and the party responsible for the defendant's defense. This arises, for instance, when an insurance company neglects to mount a defense on behalf of the insured, which occurred in Fasuyi. There, the appellate court reversed the trial court's denial of a motion to set aside a default. (Fasuyi, supra, 167 Cal.App.4th at p. 704.) The plaintiff had properly served the corporate defendant, Permatex. (Id. at pp. 686-687.) Permatex forwarded the summons and complaint to its insurance broker, which forwarded the documents to Permatex's insurer with instructions to defend the lawsuit on behalf of Permatex. (Id. at p. 687.) The insurer confirmed to the broker that the insurer had received the documents. (Ibid.) Nonetheless, the insurer never filed a responsive pleading on Permatex's behalf, and the plaintiff took Permatex's default. (Ibid.)
Permatex argued that it did not know of the default until the plaintiff served the default judgment. (Fasuyi, supra, 167 Cal.App.4th at p. 694.) Additionally, "'[s]omething went awry after transmittal of the complaint to the insurance carrier, but precisely what [was] not known.'" (Ibid.) The appellate court concluded that the default was the result of mistake, inadvertence, or excusable neglect. (Ibid.) Permatex's legal department "did what any good department would" do and forwarded the summons and complaint to its broker. (Id. at p. 700.) The broker likewise acted diligently in forwarding the complaint to the insurer, and it believed the insurer would handle the matter after the insurer confirmed receipt. (Id. at p. 701.) There was no evidence of deception or stonewalling, and no disregard of any warning. (Ibid.) Indeed, the plaintiff's counsel took Permatex's default without warning its legal department, despite the fact that counsel had an ethical obligation to provide a warning. (Ibid.) Even assuming Permatex's legal department "[p]erhaps . . . should have calendared the matter and pestered the insurer about the time to plead," "'some negligence on [the] defendant's part . . . might be excused if it in no way prejudiced the opposing party.'" (Id. at p. 702, quoting Weitz v. Yankosky (1966) 63 Cal.2d 849, 856.) And the plaintiff had shown no prejudice beyond delay. (Fasuyi, supra, at p. 702. )
The Fasuyi court acknowledged the tendency to uphold the trial court's determination, but when the trial court denied relief, that tendency conflicted with the tendency to dispose of cases on their merits. (Fasuyi, supra, 167 Cal.App.4th at p. 703.) The court held that "'[i]n borderline cases,'" the second principle carries the greater weight, and doubts should be resolved in favor of relief. (Ibid.) It therefore reversed the default judgment with instructions to vacate Permatex's default. (Id. at p. 704; see also Rogalski v. Nabers Cadillac, supra, 11 Cal.App.4th at pp. 820-822 [holding the trial court abused its discretion in denying relief to a defendant caught unaware by his insurer's failure to file a response to the complaint]; Jade K. v. Viguri, supra, 210 Cal.App.3d at pp. 1473-1474 [reversing the denial of a motion to vacate default where the insurer did not know of the lawsuit against the insured in time to respond to the complaint on the insured's behalf].)
The circumstances here are similar and merit relief perhaps even more. McKhann is responsible for Equity's defense, but unlike the insurer in Fasuyi, he did not actually receive the fourth amended complaint before the time to respond had lapsed. Instead, he was not aware of it until the court entered the default judgment. And, though VM Residential was not legally obligated to do so, it gave no warning to Equity before requesting entry of the default the very day after the period to respond had expired. In addition, there is no mystery about what went awry here—the documents went to the wrong address for McKhann. Even if McKhann failed to immediately update his address with Equity, or Equity should have followed up with McKhann through other means of communication, some negligence on their part is excusable, given that VM Residential has not demonstrated any prejudice caused by having to establish its causes of action now.
VM Residential asserts there can be no mistake because McKhann knew of the "pending complaint" as of June 2013, when it served him with the original complaint. This contention fails to persuade us that Equity and McKhann should lose their opportunity to defend this lawsuit. The original complaint was not the operative complaint at the time of the relevant events—it had not been for a long while—and, as such, Equity had no obligation to respond to it. (State Compensation Ins. Fund v. Superior Court (2010) 184 Cal.App.4th 1124, 1131 ["The amended complaint furnishes the sole basis for the cause of action, and the original complaint ceases to have any effect either as a pleading or as a basis for judgment."].) The default judgment was based on the fourth amended complaint, and VM Residential does not dispute that McKhann, the person responsible for directing a defense, did not actually know of the fourth amended complaint until too late.
On this record, we conclude the court abused its discretion in denying Equity relief from the default and default judgment. "[T]he policy of the law is to have every litigated case tried upon its merits, and it looks with disfavor upon a party, who, regardless of the merits of the case, attempts to take advantage of the mistake, surprise, inadvertence, or neglect of his adversary." (Weitz v. Yankosky, supra, 63 Cal.2d at p. 855.) In this case, Equity demonstrated its default was due to a mistake. It was entitled to relief and a chance to defend this lawsuit.
IV. DISPOSITION
The default judgment against Equity and the order denying its motion to set aside the default are reversed. The trial court is directed to vacate the default and permit Equity to file a responsive pleading. Each party shall bear its own costs on appeal.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
FIELDS
J. We concur: RAMIREZ
P. J. McKINSTER
J.