Thursday, April 17, 2014

Attorneys' Fees in Collections Cases, the Sequel: Cashier's Check Rochambeau

Gray1 CPB v. SCC Acquisitions, No. G047429 (D4d3, April 9, 2014)

As we just discussed, a judgment creditor is entitled to recover its attorneys’ fees incurred in collecting if (among other reasons) the underlying judgment contained a contractual fee award. But to obtain those fees, Code of Civil Procedure §§ 685.070(b) and 685.080(a) require the creditor must apply or move for them within two years of their being incurred, and in any event, before the judgment is satisfied. The issue here is: When precisely does satisfaction occur? In this case, getting the answer wrong cost the creditor $3 million dollars.

This is the kind of case that illustrates the minefield that is California civil procedure. California’s Enforcement of Judgments Act is an incredibly complicated block of more than a hundred different statutory seconds wedged into the middle of the Code of Civil Procedure between §§ 680.010 and 724.260. As is typical for California procedure, the Act manages to be both incredibly detailed and maddeningly vague. This case involves what one would think is a relatively simple question: When a debtor hands over a cashier’s check for the full value of the principal and accrued interest on a judgment, when is the judgment considered satisfied? When the check is handed over? When the funds clear? Both seem like reasonable answers. The creditor here seemed to have convinced itself that the latter was correct. But it was wrong. The answer is neither.

The court sets it up in the first paragraph:

You cross continents and spend years trying to collect a judgment for your client. Late one Friday afternoon, the debtor’s lawyer walks into your office and hands you a cashier’s check for almost $13 million, covering the entire judgment and all accumulated interest. Do you accept the check or say, “no thank you, I need to make a motion for attorney fees first?” Put another way, is a bird in the hand worth two in the bush?
The creditor in this case was trying to enforce an almost $13 million judgment, which included a fee award. When it was on the verge of succeeding in collections efforts that entailed unwinding a web of fraudulent transfers, the debtor sent the creditor a cashier’s check for the full balance due and demanded that the creditor file an acknowledgement of full satisfaction of judgment under Code of Civil Procedure § 724.050. Three days before it was required to file the acknowledgement—twelve days after it received the check—the creditor filed a costs memorandum, including more than $3 million in attorneys’ fees incurred in its collections effort to date. It then cashed the check and filed an acknowledgement of full satisfaction. So was the motion timely made before the judgment was satisfied? 


First, as a threshold issue the court holds that the judgment to be satisfied did not automatically include the attorneys’ fees incurred on collection. Code of Civil Procedure §§ 685.070(b) and 685.080(a) require a memorandum or motion of costs to add post-judgment collections costs to a judgment. (The memorandum is permissible for specific costs listed in the statue; a motion is required for any others.) So if the judgment is satisfied before either gets filed, the debtor is off the hook for the fees.

On to the main event. Although one would think that somewhere in the EJA lies a statute that actually explains when a judgment is satisfied, one would be wrong. Under longstanding California precedent, the issue of the finality of payment by a judgment creditor is governed by substantive commercial law. Thus, in this case—where payment was tendered by cashier’s check—the court thus looks to Article III of the UCC, which deals with negotiable instruments like cashier’s checks. Commercial Code § 3310(a) (California’s codification of UCC 3-310(a)) says that if a cashier’s check “is taken,” as payment it is treated as equivalent to cash at the time it was “taken.” It is, however, well-established that a creditor has the right not to “take” a cashier’s check—it can reject the cashier’s check and demand payment in cash. But if the check is cashed, the date of payment relates back to the date the check was delivered. 

Thus, in this case, because the creditor cashed the check, payment was made and the judgment was satisfied when the check was received—more than a week before the creditor filed its costs memo, even though the check didn’t clear till afterwards. It follows that the judgment was fully satisfied before the memo was filed, so the creditor loses out on $3 million in fees. The court notes that the creditor would have been free to reject the check, demand that the debtor pony up his $13 million in cash, and then quickly file a memo while the debtor was gathering the cash. Had that happened, it would have recovered another $3 million for its effort. But it would run the risk that the cash never arrived. As the court said, bird in hand v. two in bush.

The creditor tries to avoid this result by claiming that the right to reject the check was nugatory given other requirements of the EJA, and thus the UCC rule should not apply to judgment collections. First, it points to § 685.030, which stops the accrual of post-judgment interest on a “tender” of payment. But it makes sense to stop the accrual of interest when an instrument is delivered. The creditor shouldn’t be able to rack up more interest (which, at California’s 10 percent statutory rate, is a pretty good investment) just by declining to cash the check. So there’s no reason that the date on which the interest clock should stop needs to be the same as the date on which the judgment is deemed satisfied.

Similarly, the right to reject the check was not rendered futile by § 724.010, which says that when non-cash payment is made, the time to file an acknowledgement of satisfaction does not start until the check clears. There is no inconsistency there either. If the time to file an acknowledgment does not run until the check clears, the creditor is not going to be jammed into “taking” the check, even if it would prefer to demand cash. 

Finally, the court rejects the creditor’s argument that the time limits to file a cost memorandum or motion in §§ 685.070(b) and 685.080(a) should be equitably tolled. Although deadlines can be tolled due to fraud and concealment, the fraud and concealment that might arguably give rise to tolling in this case involved the only collections effort itself, not creditor’s effort to obtain its fees after the check was offered. It was the latter that was untimely. And in any event, the creditor waived the argument by not raising it before the superior court.*


Moral of the story:
If you are in the collections business, and have a judgment for which attorneys’ fees on collection are awardable under § 685.040, you should regularly file a memo or motion to add your fees to the judgment as soon as significant expenses rack up. By waiting until the end of the two-year window permitted under §§ 685.070(b) and 685.080(a) you run the risk that a quick payoff could leave you uncompensated for significant expenses. Or maybe worse, with the painful choice faced by the creditor here. 

*On a style point: This is the court’s recitation of the waiver standard:

“‘“‘“[I]t is fundamental that a reviewing court will ordinarily not consider claims made for the first time on appeal which could have been but were not presented to the trial court.” Thus, “we ignore arguments, authority and facts not presented and litigated in the trial court. Generally, issues raised for the first time on appeal which were not litigated in the trial court are [forfeited]. [Citations.]”’” [Citation.]’ [Citation.]” (In re Marriage of Zimmerman (2010) 183 Cal.App.4th 900, 912 [equitable tolling issue forfeited].)
Thats an ugly piece of text. Is it really necessary to have five sets of nested quotation marks, alternating between single and double? (Other than because it is the required California style? See California Style Manual § 4.22.) Or three separate bracketed notations that a [Citation] has been omitted? This just seems unsightly for no good reason. If the court wanted to keep the block quote, why isnt an “(citations and internal quotations omitted)” parenthetical sufficient, other than the fact that Bernard Witkin wouldn’t have approved?  It’s not like all of the additional clutter conveys any useful information. Tell me this does not look a hundred times better:
[I]t is fundamental that a reviewing court will ordinarily not consider claims made for the first time on appeal which could have been but were not presented to the trial court. Thus, we ignore arguments, authority and facts not presented and litigated in the trial court. Generally, issues raised for the first time on appeal which were not litigated in the trial court are [forfeited]. 
 In re Marriage of Zimmerman, 183 Cal. App. 4th 900, 912 (2010) (holding that an equitable tolling issue was forfeited) (citations and internal quotations omitted).
I’m not alone on this.

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