1997 security for costs0001

8/14/2019 1997 Security for Costs0001

1/20


2/20

THOMAS J. MCDERMOTT, JR.RICHARD T. WILLIAMS

Chapter 14Security for Costs

I. INTRODUCTIONA. Rationale for Requir ing Security for Costs 14.1B. Constitutionality 14.2C. Chart: California Actions That May Require

Secur ity 14.3D. Principles and Forms Common to All Security for

Costs Statutes1. Effect of Plaintiff's Indigency 14.42. Effect of Order Requiring Security on Mer its of

Litigation 14.5E. Common Forms 14.6

1. Form: Notice of Motion for Order RequiringSecur ity 14.7

2. Form: Undertaking (CCP 1041) 14.8F. Statutory Offer Under CCP998 Compared 14.9II. NONRESIDENT OR FOREIGN CORPORATION PLAINTIFFSA. Scope of Requirement 14.10B. Effect of Demand 14.11C. Effect of Failure To Post Security 14.12D. Constitutionality of CCP 1030 14.13E. Procedure

1. Demand by Defendanta. Timing 14.14b. Contents and Service 14.15c. Form: Demand for Security for Costs 14.16

2. Procedures of Plaintiffa. Posting of Security

(1) Timing 14.17(2) Nature of Undertaking 14.18(3) Notice of Filing Undertaking

(a) Necessity for Notice 14.19(b) Form: Notice of Filing of Required

Undertaking 14.20b. Motion for Order That Action Proceed Without

UndertakingTHOMAS J. MCDERMOTT, JR., B.A., 1953, J.D., 1958, University of California (Los

Angeles).RICHARD T. \VILLlAMS, A.B., 1967, I"vI.B.A.,1972, j.n., 1972, Stanford University.Messrs. MeDermott and \ViIIiums practice in Los Angeles with the firm of Kadisou,Plaelzer, Woodard, Ou inn & Rossi. CEB attorney editor was CAROL S. BROSNAHAN.


3/20

::LCUIIIIY I Ull CU~)I;)

(1) Necessity and Grounds for Motion 14.21(2) Form: Notice of Motion for Order That ActionProceed Without Undertaking 14.223. Subsequent Procedures of Defendanta. Motion for Additional Security 14.23b. Motion To Dismiss for Failure To FileUndertaking 14.24

III. SHAREHOLDER DERIVATIVE ACTIONSA. Scope and Rationale for Requirement 14.25B. Constitutionality of Corp C 800 14.26C. Procedure

1. Motion To Require Securitya. Who May Move 14.27b. Aqainst Whom Motion May Be Made 14.28c. Elfeet of Motion 14.29d Grounds for MotioJ1 14.30o. lilllillD of Motinll 14.:31

2. Heal ill~1a. Bur den of Pi ool on Deleudant To Show

Grounds 14.32b. Defendant's "Business Judgment"Argument 14.33c. Plaintiff's Responses to "Business .Judqrnent"Arqurnant 14.34d. Presentation of Evidence on AppropriateAmount of Security

(1) Expenses To Be Considered 14.35(2) Expenses Arising From Liability UnderCorp C 317 14.363. Order

a. Decision Is Discretionary 14.37b. Effect of Noncompliance With Order 14.38c. Alternative to Compliance With Order 14.39d. Modification of Order 14.40e. Appealability of Order 14.41IV. ACTIONS AGAINST ARCHITECTS AND ENGINEERSA. Scope of Requirement 14.42B. Procedure

1. Motion for Order Requiring Security 14.432. Hearing 14.443. Ordera. Effect of Order 14.45

b. Effect of Noncompliance With Order 14.46c. Effect of Final Judgment on Order 14.47d. Appealability of Order 14.484. Procedure for Complying With Order 14.49

V. ACTIONS AGAINST DOCTORS AND OTHER MEDICALPROFESSIONALSA. Scope of Requirement 14.50B. Constitutionality of CCP 1029.6 14.51C. Procedure

1. Motion for Order Requiring Security

402 40] SECURITY FOR COSTS 14.2

a. Tactical Considerations 14.52b. Timing and Contents 14.532. Hearing 14.543. Order 14.554. Post judqrnent Procedures 14.56

VI. VEXATIOUS LITIGANTSA. Scope and Rationale for Requirement 14.57B. Constitutionality of CCP 391-391.6 14.58C. Procedure1. Motion for Order Requiring Security 14.592. Hearing 14.60

3. Order 14.61VII CALIFORNIA SECURITY FOR COSTS STATUTES NOW HELDUNCONSTITUTIONALA. Public Entities anci Employees 14.6213. D81(1IlI~ltiCJnActions H.63

VIII. /\F'F'LlCABILITY OF CALlFOI~NIA SECUlilTY FOR COSTSF~EQUlrmVlEI\JTS IN FEDERAL ACTIONS

A. Diversity Actions1. Substance-Procedu re Distinction 14.642. Local Rules and Inherent Court Powers 14.65B. Federal Question Actions 14.66

I. INTRODUCTION14.1 A. Rationale for Requiring Security for CostsBe/'ore proccl'dill,~ ill certain civil actions, pla intiff may be re-

(II' ired h~'statute to post a hond with tile court as security to assurepuvuie ut of costs incurred by defendant. The rationales for thisrequirement are that (1) the deposit ensures that nonresidentsusing the courts o r California to slle Californians are responsiblefor costs if their suits are unsuccessful, or (2) the deposit pre-vents frivolous or unrneritorious litigation.The effect of a demand for security is to stay all proceedingsuntil an adequate bond has been posted: an action may be dis-missed if the appropriate bond is not timely filed with the court.See 2 Witkin, C,\LlFOHNIA PROCEDURE, Actions 187 (2d ed19iO).14.2 B. ConstitutionalityS


4/20

)iavc'generaJly he(-!ll liclcl constitntioually invalid when the stat-utes bit to provide these safeguard requirements. Beaudreau vSunerior Court (1975) 14 C3d 448, 121 CR 585 (holding Govt C947, 951, and, by reasonable inference, Ed C 23175, whichrelates to government entities and their employees as defendantsand contains almost identical language, unconstitutional); Allen v[ordanosLnc. (1975) 52 CA3d 160, 125 CR 31 (holding CCP 830,relating to defamation cases, unconstitutional). See also Arnettv Kennedy (1974) 416 US 134; Mitchell v W. T. Grant Co. (1974)416 US 600; Skelly v State Personnel Bd. (1975) 15 C3d 194, 124CR 14. Code of Civil Procedure 1030, requiring security to beposted without the above-described safeguards, has not yet beenreviewed at the appellate level. See 14.13.

In Beaudreau, the California Supreme Court held that dueprocess requires notice and hearing before dismissal of an actionfor failure to file an undertaking. The hearing is deemed necessaryto determine whether the statutory purpose of deterring un-meritorious litigation is promoted by imposition of an undertakingrequirement in a particular case. Such a hearing must necessarilyinquire into the merits of plaintiff s action, as well as into thereasonableness of the amount of the undertaking in light ofdefendant's probable expenses. Beaudreau v Superior Court(1975) 14 C3d 448, 460, 121 CR 585, 592.14.3 C. Chart: California Actions That May Require Security

See chart on pp 466-467.

D. Principles and Forms Common to All Security forCosts Statutes

14.4 1. Effect of Plaintiff's IndigencyCode of Civil Procedure 1029.5(a) and 1029.6(a) specifically

provide that security will not be ordered unless defendants show"plaintiff would not suffer undue economic hardship in filing suchwritten undertaking." There is ample authority in cases decidedunder security for costs provisions that the court possesses inher-ent common law power to waive security for costs and that thispower should be exercised to protect indigents' access to thecourts. Buecliold v Ortiz (9th Cir 1968) 401 F2d 371; Bu n] : ofAmerica v SU1JCrior Court (1967) 255 CA2cl 575, 63 CR 366 (costs

'_"~._~-.JI;" I ......"ii "- --.. ....' - ~ ~.

denied in suit by indigent nonresident); Sutter v Superior Court(1966) 244 CA2d 770, .53CR 424 (costs denied in suit by indigentagainst governmental entity). Similarly, in proceedings under theFamily Law Act (CC 4000-5174), the trial court may relieve anonresident plaintiff of posting security under CC 4370. SeeBrandtscheit v Britton (ND Cal 1965) 239 F Supp 652.

The right of plaintiff to sue in forma pauperis has been held notinconsistent with CCP 391-391.6 (relating to vexatious liti-gants) because any showing of merit by plaintiff would precludethe statutes' application, but, if any conflict were possible, com-mon law right to proceed as a pauper would govern for constitu-tional reasons. Muller v Tanner (1969) 2 CA3d 445, 454, 82 CR738,743.

This same reasoning would probably apply to proceedings af-fected by Corp C 800(c), although the statute does not spe-cifically provide for relief for the indigent plaintiff.14.5 2. Effect of Order Requiring Security on Merits of Litigation

All security for costs statutes that provide fora hearing beforeposting of security will be ordered also provide that a court's de-termination whether security be furnished is not a determinationon the merits of any issue in the action. Corp C 800(d); Ensher vEnslier, Alexander & Barsoom (1960) 187 CA2d 407, 9 CR 732;Olson v Basin Oil Co. (1955) 136 CA2d 543, 288 P2d 952. See alsoCCP 391.2, 1029.5(a), 1029.6(a).

Code of Civil Procedure 1029.5(a) also provides that ordersunder it are not appealable.

14.6 E. Common FormsCertain forms may be used in all security for costs proceedings

presently in effect in California. These include the undertakingaud notice of motion for order requiring security.14.7 1. Form: Notice of Motion for Order Requiring SecurityCopies: Original (filed with court clerk with proof of service);

copies for service (one for each attorney of record and unrepre-sented party); office copies.

[Form continued on p 468]


5/20

.;-\('/ ian 1/ /(/1 /1/(/1/req II ire securiu]Plaintiff is a n o u-resident or a for-eign corporation.

/\JIJJ/in t/ I/( 'stat u u-

Chart: California Actions

I)1'1wed II rc'li II/(' . / 1 1 / dcnuuulIIr IllOliU/I

That May Require Security

Sh o u . iu i ; r c q u i r e t !/\I//(Jllllt (I Isecuritu permitted

Effect IIfIIonCU1np LieneeDiscretionarydismissal.CCP 1O.'30. Not specified.Laches may bar.Demand.

Barc allcgati ono r lion residency. Not exceeding $.300for "costs and charges,"unless court ordersadditional undertaking.

Shareholderderivative actiou. Mandatorydismissal.Corp C 800(c);Fin C 7616. Nuticedmotion and

heari ng.Within 30 daysafter service onddendalil.(jO-c1ay (".;t'(II.,il)J1Ilth'iltl,,

\\'ithill :30 daysafter xe rvico of

J)('\l'ndallt isarchitect' orellgillL'cr. OJ"related pro-fC'ssiolial.

CCI' L029..'5. 1'\oticcclIIIOti()1I uudlre.mnu. StIlIIIllOIiS.

Prohahi l ity illsupport of:I. No reasollahle

i1llssillilitl' o r11('1)('iit t() ('(lr-I)' )1;11 ir n : "1'"11:11',,1,, J i( I,'I','\ () jl;l l! i~ i!) : 1 1 i f )1 1ill l r


6/20

~.14.8, SECURITY FOR COSTS 468

[Caption. See 22.12-22.19, 22.22]

No. _NOTICE OF MOTION FOR ORDERREQUIRING SECURITY; POINTS ANDAUTHORITIES; DECLARATION

To each party and attorney of record:PLEASE TAKE NOTICE that on , 19__ at .rn., or as soon

thereafter as the matter can be heard, in __e.g., Department No. I the Lawand Motion Department 1 the courtroom of the Presiding Judge ]__ at__[address ] __, __[name of moving party ] __wil l move the Court under __ insertapplicable code section ]__ for an order requiring plaintiff to furnish security inthe amount of $ to ensure payment of costs that will be incurred in thedefense of the action.This motion is made on the ground(s) that

[State ground(s), e.q. ]there is no reasonable probabi li ty that the prosecution of the cause of act ionalleged in the complaint against this moving party will benefit the corporationor its security holders.

[And lOr]this moving party did not participate in the transaction complained of in anycapacity.

lA nd lOr]plaint if f would not suffer undue financial hardship in fi ling such written under-taking, and there is no reasonable possibility that plaintiff has a cause ofaction against this moving party.

[Continue 1This motion is based on the pleadings, records, and files in this action, the

attached memorandum of points and authorities and declaration of____[name L---, [and oral and documentary evidence to be presented at thehearing of the motion 1----.Dated: _

ISignature of attorney J[Typed name 1

Attorney for __name 1 __

14.8 2. Form: Undertaking (CCP 1041)

Copies: Original (filed with court clerk); copies for service (onefor each attorney of record and unrepresented party); officecopies.

46 9 SECURITY FOR COSTS 14.9No. _UNDERTAKING UNDERCCP1014

Whereas the desires to give an undertaking for __state what] __ asprovided by __state sections of code requiring undertaking]--; now, therefore,we the undersigned sureties, do hereby obligate ourselves, jointly and sever-ally, to __name who ]__ under said statutory obligations, in the sum of ----dollars.Dated: _

[Caption. See 22.12-22.19]

_[Signature of suret ies]_Comment: The above language is prescribed by CCP l041,which further states:

The sureties so signing such undertaking are bound to the full statu-tory obligations of the statute requiring the undertaking.Every provision of this code with reference to the qualification andjustification of sureties on undertakings authorized or required by anylaw of this state shall apply to this section.

14.9 F. Statutory Offer Under CCP 998 ComparedCode of Civil Procedure 998 (enacted in 1971) provides a

means by which costs in an action may be withheld or increased.One purpose of security for costs statutes is to discourage litiga-tion. The statutory offer procedure under CCP 998 does not meetthat purpose. Although it may discourage trial, it does not discour-age litigation. Another purpose of security for costs statutes, how-ever, is to aid the secured party in recovering its costs. The statu-tory offer provides a powerful tool to that end.

Code of Civil Procedure 998 applies to all but eminent domainlitigation cases. CCP 998(f). At any time up until ten days beforetrial, either party may serve a written offer on the other to allowentry of judgment in accordance with terms and conditions statedin the offer. If the offer is accepted, it is filed, along with proof ofacceptance, with the court, and judgment is entered in accordancewith the offer. CCP 998(b). If the offer is not accepted, it remainsopen for 30 days or until the outset of trial, whichever comes first,and is then considered withdrawn. It may not be used as evidenceat trial. CCP 998(h). Whether an offer of settlement, made underCCP 99i3, may be revoked before acceptance and within the


7/20

:;() (h,~ !,(,li(HI ~('I 1111111 ll I II


8/20

14.1.J SECURITY FOR COSTS 47 2

jurisdiction over the case. Estate of Balcer (1917) 176 C 4:30, 168 P881; Carter v Superior Court (1917) 176 C 752, 169 P 667. Neitherdoes dismissal for lailure to post bond bar a subsequent action onthe same cause if the period of limitations has not yet expired.Rosenthal v McMann (1892) 93 C 505,29 P 121.

14.13 D. Constitutionality of CCP 1030The constitutionality of CCP 1030 has not been determined bythe appellate courts. It has, however, been held unconstitutionalby at least one trial court. Under the standards set forth in Beau-dreau oSuperior Court (1975) 14 C3d 448, 121 CR 585 (requiringthat a hearing test merit of plaintiff s claim in light of legislativepurpose. of undertaking statute before undertaking may be re-quired), CCP lO30 might well be held unconstitutional as nowwritten. However, under the reasoning in Property Research Fin.Corp. v Superior Court (1972) 23 CA3d 41:3, 100 CR 233 (attach-ment of property of nonresident debtor constitutional on basis of a"situation requiring special protection to a state ... interest"),imposition of security for costs on out-of-state plaintiffs may beconsidered reasonable even without an inquiry into the claim'svalidity. It is arguably a reasonable fee for the privilege of using astate's court system to which plaintiff probably contributes nomonetary support.

E. Procedure1. Demand by Defendant

14.14 a. TimingCode of Civil Procedure 1030 does not establish a time limit

before which defendant's demand for security must he made. Thedemand is permissible either before or after all answer or demur-rer is filed. 'Val! D Hunter (1922) 57 CA 759,207 P 934. Beca\lsefiling a demand for security stays further proceedings until hond isposted, defendant may time the demand to extend the opportunityto frame a responsive pleading. However, a defendant who waitsuntil the eve of trial before presenting the demand for securitymay he held to have waived it, absent a showing of excuse for thedelay. Straus t; St raus (19.35)4 CA2d 461, 41 P2d 218. This is amatter for the d ixcretio n of the trial court. Hejfroll v Los A/lll.elcsTransit Lines (19.59)170 CA2cl709, 714, .339P2cl.567, 571 (dictumapproving Straus in general discussion of trial court's discretion).

47 3 SECURITY FOR COSTS 14.17

14.15 b. Contents and ServiceThe form of demand for security must include either a reference

to the code section on which it is premised or otherwise explainthe ground for the demand. Taylor v Powell (1962) 200 CA2d 780,19 CR 536. Citation of the code section alone has been heldsufficient. Cadette v Recorder's Court (1921) 53 CA72, 199 P 817.

No proof need accompany the demand to establish that plaintiffis a nonresident. A bald assertion will suffice. Cadette v Re-corder's Court, supra. See 14.21 if assertion of nonresidency ischallenged.

Under CCP lO15, service of the demand should be made onplaintiff s attorney, not plaintiff. If plaintiff has no attorney, or inthe absence of a known address for the attorney, service may bemade on the court clerk or judge if there is no clerk.14.16 c. Form: Demand for Security for CostsCopies: Original (filed with court clerk with proof of service);copies for service (one for each attorney of record and unrepre-

sented party); office copies.[Caption. See 22.12-22.19J

No. _DEMAND FOR SECURITY FOR COSTS

To each party and attorney of record:PLEASE TAKE NOTICE that defendant, __name 1--, requires from plaintiff,

__[name 1--, security for the costs and Charges that may be awarded againstplaintiff, __name 1--, in this action on the ground that plaintiff is a__[nonresident / foreign corporation 1 - ...This demand is made under Code of Civil Procedure section 1030.Dated: _

[Signature of attorney]rJyped name 1

Attorney for [name 1 _

14.17

2. Procedures of Plaintiffa. Posting of Security(1) Timing

After being served with a demand for security, a nonresidenthas :30days within which to post bond and serve and file a noticeof the filill .~ of security. CCP 1030. On motion showing goodcause the trial court may extend this time limit. CCP lO54. Ten

~,1/1.11l :, (I(IIIU)',I:, ,1 ,,1 sltl.LI


9/20

day~; all('1 rilill~ III(' IIl/lil'(' 111;11xccu ri l v lias 1)('('11 p(),>[(d, III(' sLtyis atlt()llIalically lined alld lile act iun proceeds,Plainti lf may move either ex parte or by noticed motion lor allextension of time in which to file an undertaking. See CCP 1054.Alternatively, this may he handled by stipulation hetween coun-sel, or by an agreement between counsel that a demand for secu-rity will not be posted at the outset of a suit but at some later time.

14.18 (2) Nature of UndertakingThe undertaking is a document executed under oath and musttherefore include either a declaration under penalty of perjury or auotnriz.ed affidavit. Set' CCP 1057, See form ill 14,R.TI,(' stuturorv rcqllirt'lIwllt that "sllrdics" will P


10/20

14:22 SECURITY FOR COSTS 476

, 0 Carter, supra, A corporation is "foreign" if incorporated outsideor California, regardless of whether it is qualified to do business inCalifornia or whether it is doing substantial business in Califor-nia. Corp C 171.14.22 (2) Form: Notice of Motion for Order That Action Proceed

Without UndertakingCopies: Original (filed with court clerk with proof of service);

copies for service (one for each attorney of record and unrepre-sented party); office copies.[Caption. See 22.12-22.19, 22.22 J

No. _NOTICE OF MOTION FOR ORDERTHAT ACTION PROCEED WITHOUTUNDERTAKING

To each party and attorney of record:PLEASE TAKE NOTICE that on _:... , 19__at .m., or as soon thereafter

as counsel may be heard, in __e.g., Department No. __ / the Law and MotionDepartment / the courtroom of the Presiding Judge J -- at __address J --, plaintiff,__[name ] __, will move the Court for an order that the above action proceedwithout the f il ing of an undertaking demanded by defendant, __name J-- , on______19__This motion will be made on the ground that plaintiff was at the time of the

commencement of the above action, and ever since has been, a resident ofthe State of California.This motion is based on this not ice, the pleadings, records, and fi les in this

action, the attached memorandum of points and authorities, and the attachedsupporting declaration of _

Ilf oral and documentary evidence to be presented Iand oral and documentary evidence to be presented at the hearing of themotion.

[Continue IDated: _

[Signature of attorney J__ -0_--[Typed name J

Attorney for lname J----

14.233. Subsequent Procedures of Defendanta. Motion for Additional Security

The sole method for challenging the quality of sureties Oil abond or the adequacy of the uutlertak ins; is for defendant to 111O\"efor a new or add itio nal undertuking, not by exception aud ju xt ificu-

477 SECURITY FOR COSTS 14.25tion. Estate of Baker (1917) 176 C 430,168 P 881. By means of anoticed motion, defendant may seek an order from the trial courtfor a new or additional undertaking in an amount reasonably re-quired to meet the costs of suit that may be charged against plain-tiff. CCP 1030.The statute provides no ceiling on such additional security. A

motion for such additional security should include a reference toCCP 1030, and should recite facts showing that the original un-dertaking has proved insufficient to meet anticipated court costs.In preparing such a motion, counsel should draft a notice of

motion, memorandum of points and authorities, declarations set-ting forth the necessary facts, and a proposed order.14.24 b. Motion To Dismiss for Failure To File UndertakingIf plaintiff fails to file an adequate undertaking within 30 days

after service of a demand for security or an order for additionalsecurity, the court may order dismissal of the action under CCP1030. See 14.12.In drafting the notice of motion and motion to dismiss the actionfor failure to post security, counsel may recite as ground for themotion:This notice is made on the ground that security for costs has not been filed

in this action within 30 days after service of a demand for such securi ty.The notice of motion should be accompanied by a memoran-

dum of points and authorities, a declaration containing as anexhibit a copy of the demand for security made on plaintiff andestablishing that 30 days have passed since service of the demand,and a proposed order.If the trial court denies defendant's motion for dismissal, de-fendant may seek a writ of prohibition to prevent further proceed-

ings. Garter v Superior Court (1917) 176 C 752, 169 P 667; seeShell Oil Co. [j Superior Court (1934) 2 CA2d 348, 37 P2d 1078.However, CCP 1030 no longer requires dismissal for failure topost bond as it did before 1933. See 14.12.

III. SHAREHOLDER DERIVATIVE ACTIONS14.25 A. Scope and Rationale for RequirementSince 1949, California has authorized security for expenses in-

l'lIITCd hv a defendant that is an unincorporated association, for-eigll or domestic corporation, or officer or director, in defense of


11/20

14.2f~ st.cuuu v I Oil CO!;I~; 'liB;UI .u.tio n 1Jr()lI,~ld IJY a sharchuldcr or uxsociutiou lllcllli>cr lorbenefit of tile corporation or association. See Corp C 800 (formerCorp C S.34). See Ballalltine, /shuses of Shareholders' DerivativeSuits: How Far l s California's New "Security for Expenses" ActSourid.Regulationi', .37 CALIF LHEV .399 (1949) for an analysis ofthisstatute in its original form. See also Fin C 7616 which makesderivative actions lry shareholders in savings and loans applicable tosecurity for costs provisions of former Corp C 834, which has beenreplaced by Corp C 800.Although shareholder derivative actions provide a rerne dv at

law against Faithless diredor.~ and Ill;lllag('IIIt'llt, these actiollsIra\'(' 1)('(:'11(l('('ctSiOIl;,tlh l)J"(lIlgIJt. not to r('dress real \\'J"OII,\,'>.m t lor('ali/.c Oil [Iwir 1IIIiS


12/20

14.~9 SECURITY FOR COSTS 480motion for security is appropriate on the derivative counts. 53 C2dat .50.3,2 CR at 29l.

Security may be sought not only from the original plaintiff, butfrom an intervening complainant. For example, when an officersues a corporation he controls for money allegedly due and owing,a shareholder may intervene and complain that the corporation isbeing defrauded by a collusive suit, but then the interveningplaintiff may be required to post security. See Shively v EurekaTellurium Gold Mining Co. (1900) 129 C 293, 61 P 939; Tlwnnanv Dome Producing &Developing Co. (1942) 50 CA2d 201,122 P2d927.

The number and amounts of plaintiff's shares is immaterial tothe security posting requirement. The New York statute providesthat security may be sought only if plaintiff holds less than fivepercent of any class of the corporation's shares and his shares havea market value of less than $50,000. NY Bus Corp Law 627(McKinney Supp 1975). Although defendants in California havesought to read into Corp C 800 (former Corp C 834) similarlimitations to excuse larger plaintiffs from this requirement, Cali-fornia courts have consistently rejected the argument that "sub-stantial interests" in the corporation should work some exemptionhorn this requirement. Suburb an. 'Water Sus. v Superior Court(1968) 264 CA2d 956, 71 CR 45; Wood v Gordon (1952) 112 CA2d374, 246 P2d 84.14.29 c. Effect of Motion

The proceedings in a derivative action are automatically stayedhy the filing of a motion requesting security from the time themotion is filed until ten days after disposition of the rnotiou. CorpC 800(t). The stay does not run until the required secu ritv itselfhas heen posted.

The stay is a complete bar to proceedings, and plaintiff is notentitled to conduct depositions in preparation for trial; it is a stepin the action's prosecution. Barber v Lewis & Kalljill(lll, Inc.(1954) 125 CA2d 95, 269 P2d 929.14.30 d. Grounds for Motion

Corporations Code 800(c) lists two alternative grounds for themotion for security, and a motion may he made on either or hothgrounds, with the ground set forth in the motion.

481 SECURITY FOR COSTS 14.32The first ground specified in the statute is that "there is no

reasonable possibility that the prosecution of the cause of actionalleged, ... against the moving party will benefit the corporationor its shareholders." (Emphasis added.) Corp C 800(c)(1). Thesecond ground is that the moving party "did not participate in thetransaction complained of in any capacity." Corp C 800(c)(2).14.31 e. Timing of Motion

Within 30 days after the service of summons on either the cor-poration or any defendant officer or director, the party served maymove the trial court on notice and hearing for an order requiringplaintiff to furnish security. Corp C 800(c). Compare New Yorkprocedure in which the motion may be made at any time beforefinal judgment. NY Bus Corp Law 627 (McKinney Supp 1975).On application of any defendant and showing of good cause, thetrial court may extend the 30-day period for seeking security up to90days. Corp C 800(c).Without a showing of excuse, a motion forsecurity is generally considered waived if not filed within theprescribed period. However, even absent a court-ordered exten-sion, when a series of stipulations between counsel extended de-fendant's time to move, answer, or otherwise plead to the com-plaint without explicitly mentioning an extension of the timewithin which to file a motion for security, it was held that a trialcourt could properly entertain a motion for security filed 83 daysafter service of summons. Consolidated Dock & Storage Co. vSuperior Court (1971) 18 CA3d 949, 96 CR 254.

2. Hearing14.32 a. Burden of Proof on Defendant To Show Grounds

The burden is on the moving defendant to establish a probabil-ity in support of one or more of the statutory grounds. Corp C800(d). Beuerbacli v Juno Oil Co. (1954) 42 C2d 11, 265 P2d 1;Burt v Irvine Co. (1965) 237 CA2d 828, 47 CR 392; Wood v Cor-dOll (1952) 112 CA2d 374, 246 P2d 84. See 14.30 for grounds.

Defendant need only make a sufficient showing as to one statu-tory gronnd as applied to only one cause of action within thecomplaint. Builey v FosC(l Oil Co. (1960) 180 CA2d 289, 4 CR474.IIIdetermining whether defendant has met his burden, the trialcourt must evul uate the possible defenses plaintiff would have to


13/20

"14.33 SECUHII Y FOil COSl S 482

()v('n'olll(' to prevail at trial. It is sulficir-ut that tilt, trial COllrtevaluate the dcf(~lIsCS ,1lId nile! tliom I()rnlidahlc; the trial courtneed not determiuc the merits of the complaint because therewould be insufficient evidence for it to do so. Marble v LatchfordGlass Co. (1962) 205 CA2d 171,22 CR 789.Appropriate sources of evidence for plaintiff or defendant in-

clude the corporation bylaws, minutes of the board meetings, oraltestimony of directors, management, and experts consulted by thedirectors in the making of a particular decision.

14.33 b. Defendant's "Business Judgment" ArgumentTill' al,l.';lIll1('lIt 1I1():-;11('t'st interest; security required).

483 SECURITY FOR COSTS 14.3614.34 c. Plaintiff's Responses to "Business Judgment" ArgumentPlaintiff may respond to the business judgment argument by

challenging the good faith of members of the board of directors,e.g., by presenting evidence that a majority of the board was not"disinterested" but was actively engaged in fraud or constructivefraud against the corporation. Or plaintiff may show that contraryexpert opinions were available to the board at the time of its deci-sion, but were not seriously considered by it.

14.35

d. Presentation of Evidence on AppropriateAmount of Security

(I) Expenses To Be Considered\t tll\' Ill'arill,!.';, till' pu rt iox IIIIISI pre scut c-viclence l iv which the(,()llrt (',III dcterillilll' ,lit uppropriu le .uuou nt of"security, including

('1)11l ('()sts and attorneys' fees for the corporation and movingdefendant. Security will not be allowed in an amount greaterthan the statutory ceiling of $50,000. Corp C 800(d).The largest element of corporate expense is attorneys' fees. It

has been held appropriate for defense counsel to offer testimonyhased on their own professional experience ahout the amount oftillle and dImt probably necessary for defense of the corporationill the pending litigation. Olson l) Ba sin Oil Co. (19.55) 136 CA2d5-U, 2 HH P2d 9.52.Th cnurt muv also consider the number of causes of actioninvol vod, the number of different defendants represented by clif:"lercut counsel, and the complexity of the issues to be resolved.See Koster t; Warren (9th Cir 1961) 297 F2d 418.14.36 (2) Expenses Arising From Liability Under Corp C 317If an agent of a corporation is successful on the merits in the

defense of a derivative action or in the defense of any claim, issue,or matter in the derivative action, the corporation must reimburseits agent for expenses actually and reasonably incurred by theagent in connection with his defense if he acted in good faith, in amanner he believed to be in the best interests of the corporation,and with the care of an ordinarily prudent person in similar cir-cumxtnnces. Corp C 317(c)-(cl). An agent of a corporation who isunsuccessful in defending against a derivative action or who set-tles muv, if the court determines he is fairly and reasonahly enti-tled to incle um itv , he reimbursed for expenses or amounts paid.Corp C ~:)17(c).


14/20

14.37 SECURITY FOR COSTS 48 4

For discussion of indemnification under former Corp C 8.30(now Corp C 317), see McIntyre, Directors and Officers LiabilityInsurance, 42 LA B BULL 57 (1966).

3. Order14.37 a. Decision Is Discretionary

After hearing, the court, exercising its discretion, may fix thenature and amount of security not to exceed $50,000 (Corp C800(d)), setting a reasonable time within which the security or-dered must be furnished, or may refuse to order security to befurnished. The decision by the court is a matter within its sounddiscretion, and its balancing of substantial and conflicting evi-dence will not be reversed except for an abuse of that discretion.Oser v Wilcox (9th Cir 1964) 338 F2d 886.14.38 b. Effect of Noncompliance With Order

Dismissal is mandatory for failure to comply with an order forsecurity, and an action must be dismissed against any defendantwho had moved for security on plaintiffs failure to post bond.Corp C 800(d). On noticed motion, however, the court, as itdeems appropriate, may extend plaintiff's time to post hondo CCP1054; Beuerhncli v Juno Oil Co. (1954) 42 C2d 11,26.5 P2d 1.

If unwilling to file a bond, plaintiff may voluntarily dismiss theaction; in this case, it is error for the court to make the dismissal"with prejudice." Enslier v Ensher, Alexander & Bar800111, Inc.(1960) 187 CA2d 407,9 CR 732.

If dismissal is ordered for failure to provide security, attorneys'fees may not he awarded against plaintiff. It was the intention ofthe legislature that defendant's attorneys' fees be reimbursed onlyfrom the security. Freeman v GoldlJcrg (1961) 5.5C2d 622, 12 Clt668.14.39 c. Alternative to Compliance With Order

Plaintiff may anticipate a motion for security by posting bond inthe amount of $.50,000 at the time of filing the complaint, or maypost that security at any time either before or after a motion ororder is made. Such all action is deemed in full compliance withCorp C 800, and no further bond or security may be required.Corp C 800(e).

48 5 SECURITY FOR COSTS 14.4314.40 d. Modification of Order

Corporations Code 800(d) declares the COUlt may thereafterorder the security increased or decreased on a showing that it isinadequate or excessive. Melancon v Superior Court (1954) 42C2d 698, 268 P2d 1050; Beuerbacli ojuno Oil Co. (1954) 42 C2d11, 265 P2d 1. Plaintiff may be required to furnish security forexpenses of defendant at trial court and on appeal. After a judg-ment for defendant, the trial court does not lose its jurisdiction toincrease (or decrease) security for costs pending appeal. No dis-tinction is made between expenses incident to trial and thoseincurred in defending the judgment on appeal. Kaiser v Easton(1957) 151 CA2d 307, 311 P2d 108.14.41 e. Appealability of Order

A court's order requiring plaintiff to furnish security is notap-pealable. However, a judgment of dismissal for failure to furnishsecurity is appealable. Woodman v Ackerman (1967) 249 CA2d644, 57 CR 687.

14.42IV. ACTIONS AGAINST ARCHITECTS AND ENGINEERSA. Scope of Requirement

Since 1968, any licensed architect, landscape architect, en-gineer, building designer, or land surveyor, who is a defendant inan action for damages for "error, omission or professional negli-gence in the creation and preparation of plans, specifications, de-signs, reports or surveys which are the basis for work performed oragreed to be performed on real property" may demand security forcosts from plaintiff CCP lO29..5(a). This provision is not applica-hIe to actions for wrongful death or bodily injury, nor to actionsbrought in small claims court. CCP 1029.5(b).

As of this writing, there have been no recorded decisions inter-preting this statute.

B. Procedure14.43 1. Motion for Order Requiring Security

Within .30days after service of summons, a defendant architector engineer may move the trial court for an order requiring plain-tiff to furnish security in the amount of $500. The motion must be


15/20

14.44 SECURITY FOR COSTS 48 6noticerl lor heuri llg uucl must be uccompauiecl by an aHidavit set-ting forth bets that would show that the claim against the demand-ing defendant is "frivolous." CCP 1029.5(a).14.44 2. HearingAt the hearing on the motion, the demanding defendant must

make a showing on two issues. First, defendant must show thatplaintitf will not suffer 1I11d\1ehardship in furrrishi ng the under-takillg .uu l ,~l,(,()lld, tktt tl\('rc is 110 ITaS()llahk posxil iil itv thatplailtlilf has a l':lIISl' ()r .ul io n a,L(:lillst tilt' d('III;tlldill


16/20

14.51 SECURITY FOR COSTS 48 8

, laboratory technol ogist, or veterinarian," and hospitals em-ploying those persons. CCP 1029.6(a).

The security for costs requirement is not applicable in smallclaims court actions. CCP 1029.6(h). It is available in wrongfuldeath and bodily injury actions, unlike the security provision forarchitects and engineers discussed in 14.42-14.49.

14.51 B. Constitutionality of CCP 1029.6Code of Civil Procedure 1029.6 contains two security for costs

provisions: One provision applies to actions seeking compensa-tory damages and provides for notice and hearing. CCP1029.6(a). The other, which provides for security in addition tothat provided for in CCP 1029:6(a), is intended to apply wher-ever exemplary damages are sought and permits an ex parte appli-cation. CCP 1029.6(e).

In Nork v Superior Court (1973) .33CA3d 997, 109 CR 428, theonly reported decision interpreting CCP 1029.6(e), the provisionproviding for an ex parte application was held unconstitutional forfailing to provide appropriate due process safeguards. Nork notedthe United States Supreme Court decision in Sniadacli v Famili;Fin. Corp. (1969) .395US 337, and the need for notice and hearing.See also Beaudreau v Superior Court (1975) 14 C3d 448, 121 CR585, in which the California Supreme Court expressly approvesthe holding in Nork. See 14;2.

The provisions providing for notice and hearing in CCP1029.6(a), together with the standard that the claim must beshown to he "frivolous," appear to satisfy the requirements of clueprocess dictated by Beaudreau. However, a constitutional chal-lenge might he made on the basis that the fact that so limited agroup as those engagecl ill health care is singlecl out for specialstatutory treatment violates the equal protection provisions of thefederal and state constitutions. The Nork court explicitly avoideddetermining this issue. Nor" v Su pcrior Court (1973) :33CA3cl997, 1000, 109 CH 428,4.30. To the extent that this statute may be\iUI1181'ableto constitutional challenge for impermissibly clis-criminating in iuvor of a selected class, CCP 1029.5, applicnble toarchitects and engineers and discussed ill 14.42-14.49, mayalso he vulnerable.

489 SECURITY FOR COSTS 14.55

C. Procedure1. Motion for Order Requiring Security

14.52 a. Tactical ConsiderationsThe attorney must weigh the advantages of amotion for sum-

mary judgment against the advantages of a motion for security forcosts. Code of Civil Procedure 1029.6(f)-(g) provides that a de-fendant who files or joins a motion for security for costs is pre-cluded from later filing a motion for summary judgment, and viceversa.14.53 b. Timing and Contents

Within six months after service of summons, a medical profes-sional defendant may move the court for an order requiring plain-tiff to post bond. CCP 1029.6(a). Counsel for other defendantswho have appeared have 30 days from notice of such a motion inwhich tojoin in that motion, or they will be precluded from bring-ing any separate security motion. CCP 1029.6(a); 14.43.

The motion for security must be accompanied by an affidavitsetting forth facts demonstrating that plaintiff's cause of actionagainst the medical professional defendant is "frivolous." CCP 1029.6(a).14.54 2. Hearing

At the hearing on a motion for security, the moving defendantmust demonstrate hoth that plaintiff will not suffer undueeconomic hardship in posting security and that there is no reason-able possibility that plaintiff has a cause of action against thatdefendant. Each defenclant seeking security must make his ownshowing concerning the cause of action. CCP 1029.6(a).

14.55 3. OrderIf the court determines that security is appropriate and estab-

lishes the amount required, it will also set a reasonable time inwhich bond must be filed, and the action must be dismissed


17/20

i4.56 SECURITY FOR COSTS 490

The amount of security is not defined but is limited to $500against a single defendant (CCP 1029.6(a)) and to a total of $1000if there are multiple defendants (CCP 1029.6(c)). Code of CivilProcedure 1029.6(a) requires plaintiff to furnish two sufficientsureties to support the bond. Presumably, CCP 1054a and 1056would permit one corporate surety, a cash deposit, bearer bonds,or notes as an acceptable substitute. See 14.18.

The court's determination on the motion is not a determinationOll the merits of any issue in the action. CCP 1029.6(a).14.56 4. Postjudgment Procedures

If ' the action i.~(\isJllissed or if de leudunt prevails, it is muncl.r-torv that the court re qu iro plaintiff to hear defendallt's "COli rtcosts." CCP 102Y.()(d). Compare CCP 1029.5(c1), whicl: lISe'S"costs of defense." No reported opinions have interpreted thesephrases in either section.

If plaintiff prevails, after having filed required security, defend-ant who moved for security must pay plaintiff's cost to obtain abond, and if defendant moved to dismiss the action for plaintiffsfailure to post adequate bond, and plaintiff later prevails, CCP1029.6(d) also requires defendant to pay plaintiff's costs in de-fending the motion to dismiss. This latter obligatioll is not ill-eluded in CCP 1029 ..5(cl),deal ing with architects and engineers.

VI. VEXATIOUS LITIGANTS14.57 A. Scope and Rationale for Requirement

In 1963, the legislature determined that a security for costs pro-vision similar to that used in connection with shareholder deriva-tive suits woul d curh the abuse of vexatious litigation. The bring-ing of repeated actions in propria persona by persons whoseclaims had heen fully litigated was the primary concern of thelegislature. Code or Civil Procedure 391(b) defines a "vexatiouslitigant" as a person who, in the seven years past, has maintainedin propria persona at least five actions outside small claims courtswhich have heen determined adversely to him or were pendingunjustifiably for at least 1\,\,0 years without heing brought to trial(CCP 391(h)(1)); or any person who repeatedly relitigates or at-tempts to rel itigate against the same defendant in propria persona,

491 SECURITY FOR COSTS 14.59any cause of action already finally determined against him (CCP39J.(b)(2)).

In any type of action, any defendant may move the court for anorder requiring a plaintiff to furnish security in an amountsufficient to cover defendant's reasonable expenses, including de-fendant's attorneys' fees (CCP 391(c), 391.3) on the ground thatplaintiff is a vexatious litigant and on the further ground that thereis no reasonable probability that plaintiff will prevail in the pend-ing liti gation against the moving defendant. CCP 391.1.

14.58 B. Constitutionality of CCP 391-39"1.6The JC,l!;i:;lati\(:' scheme in CCP 391-391.6 has been upheld

al!;aillsl a v. ui c -tx o r co nxtitutio nu] attacks made Oil due process andequal protection grounds. They have been held not unreasonably\;t.l!;1I(:',rhitrurv, or uureasonahly discriminatory against individ-uuls representing themselves, discriminatory against indigents, Ofunreasonably burdensome in stating terms on which a state maypermit access to its courts. Muller v Tonner (1969) 2 CA3d 445,82en 738; Taliaferro v Hoogs (1965) 236 CA2d 521, 46 CR 147.

C. Procedure14.59 1. Motion for Order Requiring Security

At anv time until final judgment is entered, defendant maymove [or an order requiring plaintiff to post security. Noticedmntio n and hearing are necessary to satisfy the constitutional rightto clue process. See Beaudreau v Superior Court (1975) 14 C3d.J4 8, 121 CR 585; Norlc v Superior Court (1973) 33 CA3d 997, 109en 428.

Affidavits must accompany the motion to show both that plain-tiff meets the statutory definition of a vexatious litigant and thatthere is not a reasonable probability that plaintiff will prevail inthe litigation against the moving defendant. CCP 391.1. Filing ofmotion for security before the trial under CCP 391.1 auto-matically stays proceedings and relieves moving defendants frompleading in response to the complaint until ten days after themotion has heen denied, or, if it is granted, until ten days afterpluiutifl' h . r served defendant with notice of Filing the requiredsccuritv. 'When a motion is made at any time thereafter, the litiga-

14.6Q SECUnlTY FOR COSTS 49 2 49 3 SECURITY FOR COSTS 14.64


18/20

tion is stayed lor whatever period the court decides after the mo-tion is denied or the security is furnished. CCP 391.6.

14.60 2. HearingAt the hearing, the trial court may consider oral and written tes-

timony by witnesses and affidavits. The burden of establishing thestatutory conditions rests on the moving party. Muller v Tanner(1969) 2 CA3d 445,82 CR 738.The importance of presenting a complete factual record of boththe statutory prerequisites that define a vexatious litigant is illus-tratedin Muller v Tanner, supra, in which the trial court deter-mined plaintiff to be a vexatious litigant and required him to postsecurity, and on his fail ure to do so, dismissed the action. Onappeal, the reviewing court overturned the dismissal, findingthere had been no evidence adduced in the trial court to sustainthe other statutory prerequisite on which the order for securitymust stand, i.e., that there is no reasonable probability plaintiffwill prevail in the case at bar. 2 CA3d at 464, 82 CR at 751.Some evidence must also be presented by the moving defend-ant relating to the time and effort probably necessary to defeatthe claim. A court's order will not be sustained as being reason-able and nonarbitrary when it appears from the record that theamount of security for attorney's fees specified by the trial courtwas picked out of "thin air." 2 CA3d at 465, 82 CR at 752.

14.61 3. OrderIf, on the evidence, the court determines plaintiff is a vexatious

litigant and there is no reasonable probability that he will prevail,it is mandatory for the court to order plaintiff to furnish security inan amount to be fixed by the court, and thereafter from time totime to he increased or decreased at the court's discretion. CCP39L3. As yet there have been no decisions dealing with chang-ing the amount of security.

TIle security may be in the form of cash, some other securityfixed by the court, or a bond, in an amount sufficient to coverdefendant's reasonable expenses, including defendant's attor-neys' fees. CCP 391(c), 391.3.

If the court orders plaintiff to provide security and he hils to doso, it is mandatory that the court dismiss the action against themoving defendant. Taliaferro v H cogs (1065) 2.37CA2d 73, 46 CR643.

VII. CALIFORNIA SECURITY FOR COSTS STATUTES NOWHELD UNCONSTITUTIONAL

14.62 A. Public Entities and EmployeesGovernment Code 947, 951, and Ed C 23175, required post-

ing of security in actions against public entities, publicemployees, and the University of California. The first two sectionshave been held unconstitutional. Beaudreau v Superior Court(197.5) 14 C3d 448, 121 CR 585. The latter section, identicallyworded, is presumably also violative of due process. See 14.2.14.63 B. Defamation Actions

Code of Civil Procedure 830 required a bond in defamationactions before summons would issue. That statute was struckdown as unconstitutional in Allen v [ordanos' Inc. (1975) 52 CA3d160, 125 CR 31. This decision rested on the decision in Beaudreauv Superior Court (1975) 14 C3d 448, 121 CR 585.

VIII. APPLICABILITY OF CALIFORNIA SECURITY FORCOSTS REQUIREMENTS IN FEDERAL ACTIONS

A. Diversity Actions14.64 1. Substance-Procedure Distinction

Whether state security for costs statutes are applicable in diver-sity actions in the federal courts depends on whether the amountof security to be furnished is considered so large that it creates asubstantive liability. Security requirements applicable toshareholder derivative actions have been treated as giving rise tosubstantive liability.

In Cohen v Beneficial Indus. Loan Corp. (1949) 337 US 541, 555(relating to the New Jersey derivative suit security for costs stat-ute), the Supreme Court held that "the security requirementcreates a new liability where none existed before, for it makes astockholder who institutes a derivative action liable for the ex-pense to which he puts the corporation and other defendants if hedoes not make good his claims" and, relying on Erie R.R. vTompkins (1938) 304 US 64, found that the security statute is partof the state law administered by the federal court.However, it has been held that when a claim is based on afederal statute, but plaintiff has nevertheless pleaded diversity ofcitizenship, such reference will be regarded as surplusage and the

14.65 SECURITY FOH COSTS 49 4


19/20

,

1997 security for costs0001

Documents