Koch Real Estate, LLC v. Peter Hendrix, et al.

Extrinsic mistake is “a term broadly applied when circumstances extrinsic to the litigation have unfairly cost a party a hearing on the merits.” (Rappleyea, supra, 8 Cal.4th 975, 981.) To qualify for equitable relief based on extrinsic mistake, the defendant generally must demonstrate: (1) a meritorious case; (2) a satisfactory excuse for not presenting a defense to the original action; and (3) diligence in seeking to set aside the default once the mistake was discovered. 1 (Id. at p. 982.)

When default judgment has been obtained, equitable relief may be given only in exceptional circumstances as there is a strong public policy in favor of the finality of judgments. (Rappleyea, supra, 8 Cal.4th 975, 981.) Here, however, no default judgment has been obtained or entered and the public policy in favor of finality of judgments is not applicable. The law favors judgments based on the merits. (Lasalle v. Vogel (2019) 36 Cal.App.5th 127, 134; In re Marriage of Stevenot (1984) 154 Cal.App.3d 1051, 1070 [“there is a strong public policy in favor of allowing litigants their day in court”].)

II. DISCUSSION

Defendants moved for relief from default on the ground of extrinsic mistake. Defendants declare that Defendants vacated the leased premises on or about February 12, 2023, after failing to pay rent and community area operating expenses (CAM expenses) for February 2023. (Powell Dec., ¶ 4, Hendrix Dec., ¶ 4.)2 “Plaintiff claims a total amount of damages for loss of rent and CAM expenses of $235,134.08.” (Mem. P. & A., p. 6, ll. 23-24.) Defendants do not contest having been served with process. Defendants declare that they “made multiple attempts to electronically file forms” but were advised that they “could not electronically file without an attorney.” (Powell Dec., ¶ 6, Hendrix Dec., ¶ 6.) Defendants “made multiple trips to the courthouse to file a response but were unsuccessful.” (Powell Dec., ¶ 6, Hendrix Dec., ¶ 6.)

Defendants declare that in May 2023 they retained Chris Gautschi (Mr. Gautschi or bankruptcy counsel) to file for bankruptcy. (Powell Dec., ¶ 7, Hendrix Dec., ¶ 7.) Defendants were advised that filing for bankruptcy before the prove-up hearing would prevent Plaintiff from obtaining a judgment and placing a lien against Defendants’ home. (Powell Dec., ¶ 7, Hendrix Dec., ¶ 7.) They were further advised not to appear or respond in the civil action because “it would be taken care of in bankruptcy.” (Powell Dec., ¶ 7, Hendrix Dec., ¶ 7.) Default was entered against Defendants on May 24, 2023. (Powell Dec., ¶ 7, Hendrix Dec., ¶ 7.) Defendants filed bankruptcy on June 23, 2023. (Powell Dec., ¶ 7, Hendrix Dec., ¶ 7.)

After Defendant Powell obtained a job in Sacramento in March 2024, Defendants asked their bankruptcy counsel about the process to sell and purchase a home while in bankruptcy. (Powell

1 The California Supreme Court, in deciding Rappleyea, left open whether the same test applies where, as here, a default but no judgment has been entered. (Rappleyea, supra, 8 Cal.4th 975, 982.) 2 Although Defendant Hendrix’s declaration was filed with the Reply, the Court will nonetheless consider it because it is substantially identical to the declaration of Defendant Powell. (Jay v. Mahaffey (2013) 218 Cal.App.4th 1522, 1537-1538 [any declarations filed with the reply should only fill gaps in the evidence created by the other party’s opposition].)

Dec., ¶ 9, Hendrix Dec., ¶ 9.) Mr. Gautschi advised Defendants there was nothing he could do until they had a contract to sell and buy. (Powell Dec., ¶ 9, Hendrix Dec., ¶ 9.) After receiving and accepting an offer to sell their home, Defendants notified Mr. Gautschi at each stage, but counsel took no action. (Powell Dec., ¶ 10, Hendrix Dec., ¶ 10.)

Defendants declare that “[t]wo weeks into escrow, Chris Gautschi informed [them] the proper bankruptcy procedures were not followed for the sale of the house. [They] were given the choice to lose the sale of the home or dismiss the bankruptcy case. Chris Gautschi did not explain the consequences of either option. Chris Gautschi requested permission to dismiss the bankruptcy, and [they] understood that a dismissal is no different than a discharge. The bankruptcy was dismissed on September 9, 2025.” (Powell Dec., ¶ 11, Hendrix Dec., ¶ 11.) Defendants “became aware that this action was active again when [they] received a letter from the Court on December 26, 2025.” (Powell Dec., ¶ 12, Hendrix Dec., ¶ 12.)

Defendants contend that equitable relief from default is appropriate for two reasons. First, Defendants while unrepresented, made multiple but unsuccessful attempts to file a response. Second, Defendants argue that bankruptcy counsel owed his clients a duty to advise them that any alleged “immunity” dissipates upon dismissal of the bankruptcy case but failed to do so. Defendants’ failure to respond was not due to their own negligence, but their bankruptcy counsel’s neglect and faulty advice of an extreme degree. Defendants argue that similar to People v. One Parcel of Land (1991) 235 Cal.App.3d 579, their bankruptcy counsel’s conduct “suggests positive misconduct through a total failure to represent his clients.” (Mem. P. & A., p. 8, ll. 2-3.)

Plaintiff opposes vacating the defaults. Plaintiff cites Janetsky v. Avis (1986) 176 Cal.App.3d 799, 811 to show that Defendants’ motion based on extrinsic mistake fails as a matter of law. Specifically, “[w]here a party’s attorney knows the facts but mistakenly interprets their legal significance, that mistake is intrinsic, and will not warrant relief. An attorney’s mistake will not provide the basis for relief unless it is caused by the party’s adversary.” (Opp., p. 2, ll. 6-9, citing Janetsky v. Avis, at p. 811 [citations omitted].) Defendants attempt to distinguish this case from Janetsky, arguing in part that the mistake was extrinsic rather than intrinsic because it stemmed from their reliance on representations by bankruptcy counsel in a separate bankruptcy proceeding that the bankruptcy would eliminate the need to respond to the civil action.

Plaintiff next contends that an attorney’s mistake of law is imputed to his client. Defendants do not appear to address this argument in their reply, however, in the motion they assert that their bankruptcy counsel committed positive misconduct amounting to a failure to represent them in part because bankruptcy counsel did not “clarify that their alleged ‘immunity’ dissipates if the bankruptcy is dismissed.” (Mem. P. & A., p. 8, ll. 26-27.) Defendants cite People v. One Parcel of Land (1991) 235 Cal.App.3d 579 to support their argument.

However, People v. One Parcel of Land provides that extrinsic mistake for attorney misconduct may support equitable relief if there has been “ ‘neglect of an extreme degree amounting to positive misconduct’ by counsel, rather than mere inexcusable neglect, sufficient to obliterate the attorneyclient relationship and thereby preclude any imputation of counsel’s neglect to the client.

[Citation.] ‘Positive misconduct is found where there is a total failure on the part of counsel to represent his client.’ [Citation.]” (People v. One Parcel of Land, supra, 235 Cal.App.3d 579, 584.)

Defendants’ claim that bankruptcy counsel’s actions constitute a complete failure to represent them is unsupported by factual evidence. Defendants’ declarations provide that they relied on bankruptcy counsel’s advice not to respond to civil filings because these would be addressed through bankruptcy. (Powell Dec., ¶ 7, Hendrix Dec., ¶ 7.) Defendants declare that in March 2024, they sought advice from bankruptcy counsel about the process of selling and purchasing a home while in bankruptcy. (Powell Dec., ¶ 9, Hendrix Dec., ¶ 9.)

Bankruptcy counsel informed them that there was nothing he could do until they had a contract to sell and buy. (Powell Dec., ¶ 9, Hendrix Dec., ¶ 9.) Defendants declare that after receiving and accepting an offer to sell their home, Defendants notified bankruptcy counsel at each stage, but counsel took no action. (Powell Dec., ¶ 10, Hendrix Dec., ¶ 10.) According to Defendants, counsel did not advise them until two weeks into escrow that proper bankruptcy procedures were not followed for the sale of the house and that Defendants had two options: lose the sale of the home or dismiss the bankruptcy case. (Powell Dec., ¶ 11, Hendrix Dec., ¶ 11.)

Defendants assert that bankruptcy counsel did not explain the consequences of either option. (Powell Dec., ¶ 11, Hendrix Dec., ¶ 11.) Based on these circumstances, the Court does not find that bankruptcy counsel’s conduct rises to the level of a failure to represent Defendants.

Moreover, assuming arguendo that the alleged mistake is extrinsic rather than intrinsic, “relief on the ground of extrinsic ... mistake is not available to a party who has been given notice of the action yet fails to appear, unless the party was prevented from participating in the action. (Weil & Brown, Cal. Practice Guide: Civil Procedure Before Trial (The Rutter Group 2026) ¶ 5:435.) Here, Defendants were aware of this action and have not shown they were prevented from participating in the action. Furthermore, Defendants have not demonstrated diligence in seeking to set aside the default, despite having at least two opportunities to seek relief: initially prior to engaging bankruptcy counsel, and subsequently after the dismissal of their bankruptcy case.

While the law favors judgments on the merits, the Court nevertheless finds that Defendants have provided insufficient evidence to establish a satisfactory excuse for not presenting a defense to the original action and diligence in seeking to set aside the default. (Rappleyea, supra, 8 Cal.4th 975, 982.)

Defendants’ motion for relief from entry of default is denied.

The Court declines to rule on Plaintiff’s evidentiary objections nos. 1-11 as they were immaterial to the Court’s decision.

ORDER (PROPOSED)

The motion for relief from entry of default is denied.

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