Chico’s Covid Rent Judgment Reversed Over Failure to Notify

A California appeals court reversed a default judgment in a rental dispute between Chico’s FAS Inc. and a property owner, citing a failure to notify Chico’s counsel of the lawsuit for failing to pay back rent during the Covid-19 shutdowns.

The California Court of Appeal for the Fourth District on Monday said lawyers for Shapell Socal Rental Properties LLC breached their ethical and statutory duties and “engaged in underhand litigation tactics calculated virtually to ensure CFI would default.”

The appeals panel, in reversing the decision, also ordered the presiding judge of the Orange County Superior Court to assign the case to a different judge than the one who handled the case “in the interest of justice.”

Shutdown, Default

The pandemic prompted Chico’s to make no rent payments in April, May, and June 2020 and reduced payments the rest of the year. The women’s clothing retailer resumed full payments in January 2021, the court noted. The landlord notified the retailer it was in default, which Chico’s disputed. Chico’s told the landlord that all communications would go through counsel at Foley & Mansfield.

Shapell’s counsel at Hamburg Karic Edwards & Martin never told Chico’s lawyers the retailer was being sued for being in default of its lease, the justices said. Instead, a process server served notice on an employee at the Laguna Niguel, Calif., store at 5 p.m. on the Friday before Thanksgiving, the court said.

No one at Chico’s knew about the default judgment until a Dec. 30, 2020, unsolicited email from Shapell stating the judgment was already entered against the retailer, the court noted.

The trial court “inexplicably denied” Chico’s motion to set aside the default and default judgment “and failed to address the breach of ethical and statutory duties by Shapell’s counsel,” the appeals court said.

“From the undisputed evidence presented in this case, only one reasonable finding can be made: Shapell intentionally served the Complaint, and sought entry of default and default judgment, in a manner precisely calculated to keep CFI in the dark about what was going on and to produce a substantial possibility of a default. The trial court had no discretion to find otherwise,” the court said.

“Shapell has gained nothing from its counsel’s breach of ethics and lack of courtesy. If counsel had complied with its obligation to advise CFI of the intent to request a default judgment, or had extended common courtesies, the unlawful detainer action in all probability would have by now been decided on the merits. And if Shapell would have prevailed, as it believes it should, then Shapell would be in rightful possession of the leased premises, " the court said.

Instead, “after much time and expenditure of attorney fees, the default judgment is being reversed, the parties are back to square one, and Shapell faces the prospect of CFI regaining possession and/or recovering monetary restitution,” the court said.

Foley & Mansfield represents Chico’s. Klapach & Klapach and Hamburg Karic Edwards & Martin represent Shapell.

The case is Shapell Socal Rental Properties LLC v. Chico’s FAS Inc., Cal. Ct. App., 4th Dist., No. G060411, opinion 10/17/22.