Defendant Can Utilize Motion for an Undertaking to Enforce Award of Costs

The following scenario is all too common. An out-of-state plaintiff sues a defendant in a California state court proceeding. After incurring significant attorney fees and costs, the defendant defeats the plaintiff's claims, either through a pretrial motion or at trial.

The defendant then seeks to recover costs of suit as the prevailing party, which may include an award of attorney fees under a contractual "prevailing party" clause. Although the court awards attorney fees and costs, the defendant has difficulty enforcing the award because the plaintiff's assets are located outside of California.

One way to avoid this problem is to file a motion for an undertaking under Code of Civil Procedure Section 1030, which was enacted to "afford security for an award of costs which the defendant might otherwise have difficulty enforcing against a non-resident plaintiff." Law Revision Commission Comment to 1980 Amendment to Section 1030; see Shannon v. Sims Service Center Inc., 164 Cal.App.3d 907(1985).

Although Section 1030 (including its predecessor statutes) has been in place for more than a century, even the most seasoned litigators often overlook it.

There are two requirements for Section 1030 to apply. First, the plaintiff must reside out of state or be a foreign corporation. Second, the defendant must establish that there is a "reasonable possibility" that it eventually will obtain judgment. Section 1030(b). If both of these requirements are satisfied, the trial court "shall" require the plaintiff to post an undertaking in an amount sufficient to secure an award of costs and attorney fees that may be awarded in the action. Section 1030(a), (c).

The defendant may satisfy the first element of Section 1030 by establishing that the plaintiff either "resides out of state" or is a "foreign corporation." Section 1030(b). While Section 1030 does not define what constitutes a "foreign corporation," California law defines "foreign corporation" to include a company that is incorporated under the laws of another state. Corporations Code Section 171 (defining "foreign corporation" as "any corporation other than a domestic corporation"); Corporations Code Section 167 (defining "domestic corporation" as "a corporation formed under the laws of this state"). Thus, even where a corporation has its headquarters and assets located within California, it, nonetheless, may be considered a "foreign corporation" if organized under another state's laws (e.g., those of Delaware).

To establish the second element of Section 1030, the defendant must demonstrate that there is a "reasonable possibility" that it eventually will be entitled to judgment. Section 1030(b). Unlike a motion for summary judgment, the defendant need not show that no triable issue of material fact exists. Nor must it prove that there is "no possibility" that the plaintiff will win the case.

The defendant merely must satisfy the lower threshold that there is a "reasonable possibility" that it will prevail. Baltayan v. Estate of Getemyan, 90 Cal.App.4th 1427 (2001). Thus, even a defendant who may be unable to defeat a plaintiff's claims through summary judgment may, nonetheless, be entitled to an undertaking. If the defendant satisfies Section 1030's two elements, the court is required to award an undertaking. Section 1030(c). Despite the mandatory nature of the statute, the court has discretion to relieve an indigent plaintiff from posting an undertaking. Code of Civil Procedure Section 995.240.

For this exception to apply, the plaintiff must make "a prima facie showing that [it] has unsuccessfully attempted to obtain the required undertaking or that [it] is unable to furnish it." See Baltayan.

The amount of the undertaking consists of recoverable costs of suit as well as any attorney fees to which the defendant may be entitled pursuant to a statute or contractual provision. Section 1030(a). The defendant is required to submit a declaration that describes "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." Section 1030(b).

Awarding an undertaking is not a determination that the defendant is entitled to recover an award of attorney fees and costs when the case concludes. Rather, the court is simply requiring that the plaintiff post security for attorney fees and costs that eventually "may" be awarded if the defendant prevails. Section 1030(a).

The plaintiff must post the undertaking within 30 days after service of the court's order granting the motion. Section 1030(d). The court has discretion, however, to shorten or extend the 30-day period where good cause exists. In Shannon, the defendant filed a motion for an undertaking 34 days before the trial date. The trial court granted the motion and required that the plaintiff post the undertaking on the first day of trial - only 13 days later.

In affirming the trial court's order, the Court of Appeal held that good cause existed for the trial court to require the plaintiff to post an undertaking within 13 days. If the plaintiff had been granted a full 30 days, the trial would have started (and perhaps concluded) before the undertaking was to be posted by the plaintiff. This would have frustrated the statute's purpose.

If the plaintiff fails to post an undertaking pursuant to a court's order, the court shall dismiss the action. Section 1030(d). Because a dismissal based on the failure to post an undertaking is not based on the action's merits, however, this dismissal would be without prejudice. Rosenthal v. McMann, 93 Cal. 505 (1892).

A defendant may file a motion for an undertaking "at any time." Section 1030(a). It is advantageous, however, for the defendant to file the motion as early as possible. If the defendant files the motion within 30 days after the summons is served, the court has discretion to stay the litigation until either 10 days after the plaintiff posts an undertaking or 10 days after defendant's motion is denied. Section 1030(e).

This stay may facilitate settlement discussions before significant attorney fees and costs are incurred. In some instances, the prompt filing of the motion may cause an out-of-state plaintiff to rethink whether the litigation is worth pursuing due to the expense of posting an undertaking.

There is very little downside to filing an undertaking motion. Even if the motion is unsuccessful, the court's denial of the motion has "no effect on the determination of any issues on the merits" and is not admissible evidence at trial. Section 1030(f).

Given the difficulty often experienced in enforcing cost awards against out-of-state plaintiffs, an undertaking motion is a powerful device. It warrants serious consideration in all appropriate cases.

Brian T. Hafter is a senior associate with the litigation group of Steefel, Levitt & Weiss. He specializes in complex commercial litigation.