Separate Counsel, Increased Homestead Exemption, Are Bad Facts Bad Law? Quarterly Insights, Vol. I:
Updated: Dec 26, 2022
A colorful and seasoned partner practiced law in the labor department at my first job after law school. He represented industrial employers with large unionized work forces.
“Joe,” he once said to me, “every good labor lawyer talks like a Republican to the client and then votes like a Democrat.” His joke held a kernel of wisdom about the legal profession: our foes often create the need for our services.
In that spirit, I hereby complain about gonzo plaintiff lawyers in California who have a penchant for filing lawsuits with every conceivable party named as a defendant. Sometimes, even lesser corporate officers are named defendants.
Often all defendant parties appear in the litigation with the same counsel. In a subset of cases with meritless or small claims, the expense of engaging separate counsel would obviously be silly. But, I am surprised at how often multiple defendants appear in litigation and use the same counsel without discussion of the implications of that decision.
This concern of mine has recently been re-affirmed by a federal court. In the Northern District of California, in the case Carlson Produce, LLC v. Clapper, judgment was entered against a company defendant in a lawsuit, but the claims against the defendant owner failed. So, the owner of the business is in the clear, right? Wrong. After the case, the judgment creditor (i.e. the plaintiff), filed a motion to amend the judgment to add the owner of the company to the judgment in addition to the company defendant. The court conducted an alter ego analysis to determine whether the company defendant was merely the alter ego of the owner. And in part of its analysis, it used the fact that the company defendant and the owner had been represented by the same counsel at the beginning of the case. Ultimately, the court found the company defendant to be merely an alter ego and it amended the judgment to include the owner.
My concern about the finding of alter ego is not the only reason that multiple defendants ought to carefully consider their counsel selection. For example, a judgment stemming from a fraud claim, or other intentional wrongdoing, is usually not dischargeable in bankruptcy. That too seems simple enough, but defendants who are natural persons have more reason for concern regarding this than a company defendant. The interests of defendants can vary in a myriad of other ways and this is certainly not an exhaustive exploration of the topic.
Lastly, in this discussion about representation, consider whether utilizing multiple counsel is, in fact, an opportunity. In my experience, some plaintiffs name many defendants merely to harass and add burden to the litigation. The plaintiff merely hopes that the defendant will capitulate and settle. The plaintiff likely assumes that one law firm will represent all defendants when it files the lawsuit. However, when each defendant appears in the litigation with their own counsel, the tables are immediately turned. In such a scenario, the plaintiff fears burdensome discovery and expensive depositions by multiple defendants. As a result, the plaintiff may then be the party capitulating and settling at far lower amounts than originally planned.
California business owners, doctors and other individuals concerned about asset protection have something to cheer about. The legislature increased the amount of the homestead exemption. It was effective last year. The law now provides the amount of the homestead exemption is the greater of i) the countywide median sale price for a single-family home in the calendar year prior to the calendar year in which the judgment debtor claims the exemption, not to exceed six hundred thousand dollars ($600,000); or ii) three hundred thousand dollars ($300,000). Significantly, the amounts increase annually based on the change in the annual California Consumer Price Index. Numbers have never been my strong suit, but I think the $600,000 would have already increased to $625,200.
Considering that the amount of the homestead exemption was only $75,000 in years prior, this is a considerable increase. Most counties in Southern California surely meet the upper threshold amount.
From this I have a couple of musings. First, in theory, the variance on the exemption could be a significant difference between a small and affluent county like Orange County versus a large, less affluent county with varied communities like San Bernadino County. Second, if the only concern in life was asset protection, individuals in the highest risk industries would flock to the cheap areas of the wealthy counties. This would help them to more likely ensure that the totality of the equity in their home was afforded the protection of the homestead exemption. For Angelenos, Santa Ana would come to mind . . . And, finally, a musing more likely to lead to actionable advice: given the dizzying increase of home prices, certain individuals may find themselves with equity in their home in excess (or far in excess) of the homestead exemption. Those individuals – if they work in high-risk industries or own their own businesses – may wish to strip the home of the equity beyond the homestead exemption and deploy the capital elsewhere. In any event, none of the foregoing constitutes legal advice . . .
Do Bad Facts Create Bad Law?
There’s a saying in law school that bad facts make bad law. And the greatest danger in ignoring any legal proceeding is that potentially the facts are made without you at a default judgment stage. In default judgment proceedings, saintly defendants become mere mortals, sloppy defendants are painted as good-for-nothing rogues and scoundrels are deemed as crooks.
This is potentially illustrated in the recent Casey v. Hill (2022), where prospective adoptive parents in Missouri had reached out to a California adoption agency for assistance in 2015. An agreement was reached and, based on the amount of the judgment, it appears approximately $31,000 in fees were paid to the California agency, a portion of which were advanced to a possible birth mother. The agreement contained an arbitration provision, a California choice of law provision and a choice of forum provision that selected Riverside, California for the resolution of disputes. The adoption failed to happen. The prospective parents filed a Missouri lawsuit on Missouri statutory and common law claims. Various allegations were made about the conduct of the adoption agency in the lawsuit.
Now, please imagine a lawsuit. Imagine it in Missouri. Imagine this lawsuit is against a California company. Imagine the California company does not appear at said lawsuit. And, finally, keep in mind that the plaintiffs are exceptionally sympathetic plaintiffs because the subject matter of the lawsuit involves a failed adoption.
Not surprisingly, in October of 2019 after an evidentiary hearing where only testimony of the plaintiffs was recorded, a default judgment was entered in the amount of $547,960.
The Missouri parents applied in San Diego Superior Court for an entry of judgment on the Missouri judgment in December of 2020. The defendants made a motion to vacate the Missouri judgment, primarily on the grounds that Missouri courts lacked personal jurisdiction over the California company. The defendants, in essence, argued that this set of parents was its only contact with the state of Missouri. Although the San Diego Superior Court agreed with the defendants, the appellate court reversed it and found, essentially, that the agreement and stream of communications between the California adoption agency and the prospective parents was sufficient basis for the Missouri courts to establish personal jurisdiction in this case.
Without getting much further into the weeds, there are several lessons here for the earnest California business owner:
1. Always respond to lawsuits where you are a named defendant. This would seem to be an obvious lesson, but it is so important it merits stating. The adoption agency in question currently has only 2.7 out of 5 stars on its Facebook reviews. And yet, it has been in business for over twenty years, suggesting there may have been two sides to this story. Unfortunately, the evidentiary hearing at a default judgment informs the bedrock record of the case and will never go away. It’s essentially game over. A roughly $30,000 problem was permitted to metastasize into a half million-dollar problem.
2. Compel arbitration, or risk possibly waiving it. Here, the appellate court found that the defendants had waived their right to arbitration. This was a fatal error by the defendants because it is likely that the arbitration clause would have been enforced.
3. The barest amount of business in another state may subject your business to the jurisdiction of those courts. The adoption agency did not advertise in Missouri and had no other business in Missouri. Based on this one client, it now faces a half million-dollar judgment.
Finally, this does not constitute legal advice for your specific situation. If you would like to schedule a call to explore any of the above concepts or cases, please submit on the contact form or call.
 See also, (Quince & Co. v. Barrel Cellar (July 18, 2022, No. A160014) ___Cal.App.5th___ [2022 Cal. App. Unpub. LEXIS 4421]) where owner of the business using the same counsel was stated in a list of facts supporting an alter ego finding.  In the hearing to determine whether to order a primary home to be sold to satisfy a judgment, the court must consider whether the proceeds, after satisfying lienholders, would satisfy any part of the judgment. Code Civ. Proc., § 704.780(b). Thus, hypothetically, keeping equity in the home at or below the homestead exemption would seem to effectively prevent any judicially ordered sale of the home to satisfy a judgment. Of course, the full analysis of whether to proceed with this would also include a discussion about where the homeowner in question intends to deploy the capital.  Years ago a client of mine (obviously without consulting me) ignored a hearing of the California Department of Industrial Relations regarding a wage claim by an employee. The employee’s wage claim was absolutely bogus, but the facts from the first hearing could not be overturned.