The Often-overlooked Weapon of Seeking a Cost Bond Against Foreign Plaintiffs

• Citation: Vol. 22 No. 1
• Publication year: 2016
• Author: By Henry S. David and Dana J. Emmer

The Often-Overlooked Weapon of Seeking a Cost Bond against Foreign Plaintiffs

By Henry S. David and Dana J. Emmer

Henry S. David is the proprietor of The David Firm®, which he founded after 33 years in Big Law. He is a commercial litigator, with a focus on creditors' rights.

Dana Emmer is Corporate General Counsel at ZestFinance, Inc., a company devoted to serving the unbanked and to creative underwriting. Before joining ZestFinance, Dana worked four years at The David Firm® handling commercial litigation. Dana can be reached at dje@zestfinance.com.

Your client is sued in California. As is common (if not the norm nowadays), the plaintiff is a Delaware corporation or limited liability company.¹ You think of the usual attacks on the pleadings (such as demurrers and motions to strike) and maybe even challenging venue and jurisdiction.² You think about removal to federal court (if your client is not a California citizen or a citizen of the same state as the plaintiff).³ You may even check with the Secretary of State to determine whether the plaintiff is qualified to do business in California and, if not, investigate whether it is obligated to so qualify.⁴ But many practitioners overlook a very powerful weapon: seeking an order under Code of Civil Procedure section 1030 ("Section 1030") that the plaintiff post a bond to secure your client's right to recover costs if your client prevails - and if the plaintiff does not post the bond, the action is dismissed.⁵

Section 1030(a) provides: "When the plaintiff in an action or special proceeding resides out of the state, or is a foreign corporation, the defendant may at any time apply to the court by noticed motion for an order requiring the plaintiff to file an undertaking to secure an award of costs and attorney's fees which may be awarded in the action or special proceeding. For the purposes of this section, 'attorney's fees' means reasonable attorney's fees a party may be authorized to recover by a statute apart from this section or by contract."

Why did the California Legislature⁶ require out-of-state plaintiffs to post a cost bond, but not in-state ones? Is that "discrimination" a violation of the Commerce Clause⁷ or the Equal Protection Clause⁸? No. The policy underlying Section 1030 is that a prevailing defendant should not be required to go to another jurisdiction to enforce and collect a cost award. ⁹ For a California plaintiff, at least theoretically, the prevailing defendant can levy on California assets to recover the costs of litigation. For an out-of-state plaintiff, or even worse, a non-United States entity, the prevailing defendant may have to go to a distant court (or country) to try to enforce and collect the cost award. As discussed below, the results under Section 1030 may not always be consistent with this policy. Nonetheless, the courts have upheld Section 1030 against constitutional attacks.¹⁰

There are four main issues that arise under Section 1030: (1) Is the plaintiff a "foreign" person; (2) does the defendant have a "reasonable possibility" of success; (3) how much of a bond should the Court require; and (4) is the plaintiff entitled to a waiver or a reduction of the bond due to its financial condition.

PLAINTIFF'S DESIGNATION AS A "FOREIGN" PERSON

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As quoted above, Section 1030(a) provides that a cost bond must be posted if "the plaintiff in an action or special proceeding resides out of the state, or is a foreign corporation." If the plaintiff is a natural person, there may be a dispute as to his or her residence, which is not necessarily the same as his or her "domicile," and will depend on where he or she lives, is registered to vote, has a driver's license, and the like.¹¹ But what is a "foreign corporation"? Is a Delaware corporation with substantial operations - and maybe its principal place of business - in California a "foreign corporation"? The Legislature did not define "foreign corporation"¹² in enacting Section 1030. However, the term "foreign corporation" is a well-defined and well-known term otherwise. Corporations Code section 171 defines the term "foreign corporation" as "any corporation other than a domestic corporation." Corporations Code section 167, in turn, defines a "domestic corporation" as "a corporation formed under the laws of this state." The Legislature has used this same definition of "foreign corporation" in other settings.¹³ Hence, a Delaware corporation most likely is a "foreign corporation" even if it has substantial operations and is qualified to do business in California.

The "bright line" test of the jurisdiction of formation means that the law and the underlying policy can diverge. For example, The Walt Disney Company ("Disney") is a Delaware corporation, but has major operations in California.¹⁴ To say the least, it has sufficient assets in California to cover almost all, if not all, cost awards.¹⁵ Does a defendant need the protection of a cost bond from Disney more than he needs one from most "California" corporations? Probably not. But the resolution of this divergence between the statute and the policy underlying it lies with the Legislature, not the courts.¹⁶

DEFENDANT'S "REASONABLE POSSIBILITY" OF SUCCESS

If the plaintiff is a foreign person, a defendant is entitled to a bond if the defendant has a "reasonable possibility" (not "reasonable probability") of prevailing in the lawsuit.¹⁷ The "reasonable possibility" burden of proof on a defendant is very low; the defendant need only show that he can defeat a motion by the plaintiff for summary judgment, not that defendant himself can obtain summary judgment.¹⁸ Nonetheless, it is here that trial courts, which often have not addressed Section 1030 previously and, in their guts, feel like something is fishy with it, often will deny a defendant a bond, in contravention of the language of Section 1030 and the case law. If the trial court denies your Section 1030 motion because it applies an improperly heightened standard, consider seeking a writ.¹⁹

AMOUNT OF THE BOND

If the court determines that your client is entitled to a cost bond, the court then reaches the...