Opinion
B324082
09-19-2023
DELTA TECHNOLOGIES, LLC, Plaintiff and Appellant, v. SHIVAN KANAGARAJA et al., Defendants and Respondents
The Federici Law Firm and Michael L. Federici for Plaintiff and Appellant. No appearance for Defendants and Respondents.
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Los Angeles County No. 21STCV29200, William F. Fahey, Judge.
The Federici Law Firm and Michael L. Federici for Plaintiff and Appellant.
No appearance for Defendants and Respondents.
CHAVEZ, J.
Plaintiff and appellant Delta Technologies, LLC, (appellant) appeals from the dismissal of its action. Appellant contends the dismissal was in error, arguing a default judgment should have been entered on the breach of contract claim. Since we find the contract's existence was established as a matter of law by the default and included a fixed amount of damages, we find the trial court abused its discretion. Accordingly, we reverse and remand with directions to determine the amount of damages.
FACTUAL BACKGROUND
During the summer of 2020, Shivan Kanagaraja (Kanagaraja) was seeking manufacturers and distributors to supply cannabis products for sale on his website. Through an online hemp-related group, Kanagaraja met Alexander Jacobs, the managing member of appellant. The parties agreed appellant would design and manufacture two brands of hemp-based products for sale on Kanagaraja's website. Appellant agreed to pay Kanagaraja based on his reports of these sales.
Within a few months issues arose with Kanagaraja failing to deliver prompt sales reports and in addressing customer service concerns. As a result appellant demanded an accounting and timely sales reports from Kanagaraja. In addition appellant refused to continue selling its products on Kanagaraja's Web site unless a written agreement was signed defining expectations for both parties. This agreement also had to include a nondisparagement clause concerning appellant. The parties further agreed $25,000 was a reasonable estimate of damages should a breach occur due to the volatility of cannabis laws and regulations.
Kanagaraja signed the agreement on July 31, 2021, and then made a public statement on his Web site, "WE NO LONGER ENDORSE DELTA FARMS OR SPENSARY [sic], or can vouch for the efficacy or safety of their products, unfortunately, due to unknown sourcing." Appellant was informed of the statement through an e-mail from a customer, who expressed concern about potentially needing to find an alternative supplier based on Kanagaraja's statement. Appellant demanded Kanagaraja remove the statement from the Web site, but received no response.
PROCEDURAL BACKGROUND
Appellant filed its complaint on August 9, 2021, seeking an injunction to compel Kanagaraja to remove the post and damages of $2,500,000. Appellant alleged Kanagaraja was liable for the conduct of Best Industries, Inc., and Vape Whole Supply, LLC, because they were his alter egos.
Kanagaraja and the two entities filed answers to the complaint. After their counsel withdrew, the entities' answer was stricken. Kanagaraja's answer was also stricken because he failed to participate in discovery and to appear for hearings. Consequently, defaults were entered against all defendants.
The court set a hearing for appellant to prove up the default judgment. At the hearing, the court identified defects in the appellant's documents and continued the hearing, granting appellant leave to file additional evidence and supplemental briefing.
At the second hearing, appellant took the opportunity to provide further argument, evidence, and briefing. The court took the matter under submission and thereafter issued an order denying the request for default judgment and dismissing the case with prejudice. The order incorporated a three-page "Order Denying Second Request for Default Judgment," in which the court found the evidence of damages was inadmissible because it was not properly authenticated or included hearsay. Additionally, the court found appellant has not provided sufficient evidence to establish the existence of the contract.
Appellant filed a timely notice of appeal.
DISCUSSION
I. Applicable law and standard of review
"Substantively, '[t]he judgment by default is said to "confess" the material facts alleged by the plaintiff, i.e., the defendant's failure to answer has the same effect as an express admission of the matters well pleaded in the complaint." (Steven M. Garber & Associates v. Eskandarian (2007) 150 Cal.App.4th 813, 823.) It is the court's responsibility to act as a "gatekeeper," ensuring only appropriate claims get through and that the judgment is not inconsistent with or in excess of the complaint. (Heidary v. Yadollahi (2002) 99 Cal.App.4th 857, 868.)
Because a default confesses properly pleaded facts, a plaintiff has no additional responsibility to provide the court with evidence to prove them-they are treated as true for purposes of obtaining a default judgment. (Kim v. Westmoore Partners, Inc. (2011) 201 Cal.App.4th 267, 281.) The only evidentiary facts that have a place at a prove-up hearing are those concerning the damages alleged in the complaint. (Carlsen v Koivumaki (2014) 227 Cal.App.4th 879, 899-900.) As a result, damages, except when fixed by contract, must be proved. (Kass v. Young (1977) 67 Cal.App.3d 100, 106.)
Our review focuses on the trial court's use of these legal principles at the default prove-up hearings. We apply an abuse of discretion standard because this inquiry pertains to the application of principles of law to the facts. Court decisions that transgress the confines of the applicable principles of law are outside the scope of discretion and are considered an "abuse" of discretion. (City of Sacramento v. Drew (1989) 207 Cal.App.3d 1287, 1297-1298.)
II. Existence of contract and breach were confessed by default
The first cause of action is for breach of contract. The elements of the claim are the existence of the contract, performance by the plaintiff or excuse for nonperformance, breach by the defendant, and resulting damages. (Richman v. Hartley (2014) 224 Cal.App.4th 1182, 1186.)
The complaint here alleged the parties entered into a contract when respondent signed the document, and included a provision that Best Industries, Inc. "and all of its agents shall not at any time disparage in any manner or assist any other person in disparaging" appellant. Kanagaraja is alleged to be personally liable for any breach because he used Best Industries, Inc. as an alter ego. The complaint asserts appellant performed all required terms and conditions. It claims instead that Kanagaraja breached the agreement by posting statements on the VWS Website implying appellant's products were unsafe.
Kanagaraja is liable for the breach of contract under an alter ego theory as alleged. (See Gopal v. Kaiser Foundation Health Plan, Inc. (2016) 248 Cal.App.4th 425, 431 [when a corporation is used to perpetrate fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, the entity may be disregarded and its acts treated as if they were done by the persons actually controlling the corporation].)
The complaint included a claim for breach of contract because it alleged there was a contract between the parties, that appellant performed its obligations, and that Kanagaraja is liable for the breach of the nondisparagement clause based on the statements on the Web site. Due to the default on this claim, the elements were confessed by Kanagaraja and appellant had no further responsibility to prove these elements. The default, therefore, established Kanagaraja was liable for appellant's damages under the contract.
III. Damages of $25,000 were fixed by the contract
The complaint contained an allegation of a liquidated damages clause establishing that for any breach of the agreement damages were $25,000, in addition to all other damages to which appellant might be entitled. This was because the parties agreed that $25,000 was a reasonable estimate of damages due to the unpredictability of the cannabis and cannabis-related markets under the constantly changing laws and regulations in the various jurisdictions of the United States.
The objective of a liquidated damages clause is to identify "a pre-estimate of damages in order that the parties may know with reasonable certainty the extent of liability for a breach of their contract." (ABI, Inc. v. City of Los Angeles (1984) 153 Cal.App.3d 669, 685.) Under Civil Code section 1671, subdivision (b), "a provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made."
Here, the parties agreed that $25,000 was a reasonable estimate of damages. Since Kanagaraja is in default and has not shown this provision was unreasonable, it is valid.
During the September 19, 2022 hearing, the court concluded there was insufficient evidence to show the contract's existence because appellant had submitted two documents: a complete copy of the contract and a document containing the signatures. However, we find this conclusion was error because appellant was not required to prove the existence of the contract since it was well-pleaded in the complaint and confessed to by the default. Failure to apply the correct legal principles for default was an abuse of discretion.
Furthermore, the parties agreed that, in the event of a breach, damages would be $25,000 plus any other damages proven. Since the $25,000 amount was fixed by the contract, it was an abuse of discretion not to enter a default judgment of at least $25,000. (Civ. Code, § 1671, subd. (b).)
On remand the trial court can determine whether to hold a further hearing on the amount of damages or to enter the default judgment based on the amount fixed by the contract.
DISPOSITION
The dismissal of the action is hereby reversed, and we remand for the trial court to determine the amount of damages.
We concur: LUI, P. J. ASHMANN-GERST, J.