Getting Dirty in the Collections Game

Duke v. Superior Court, No. F073712 (D5 Dec. 13, 2017)

A CEO and two Investors were guarantors on their Company’s lease. After the Company breached the lease, the Company, the CEO, and the Investors were all held jointly and severally liable on a $385k judgment to the Landlord. 

Several years later Investors (who owned 51 percent of Company) ousted CEO (who owned the other 49 percent) and kick her off the board. Investors then settled with Landlord for $400k out of the judgment’s then-current balance of $444k. As part of that deal, Landlord released Investors assigned the judgment to them. Investors—claiming that they were entitled to $448k to satisfy the judgment—then levied though a writ of execution on CEO’s 49 percent stake, had the stock seized, and bought it at the sheriff’s sale. 

CEO sued on a host of different theories, but the theory at issue in this writ is conversion. She says that Investors wrongfully took her property by using the enforcement of judgment process, which permitted them to take CEO’s shares without so much as a hearing. The trial court sustained a demurrer on that claim without leave to amend, and CEO took a writ.

The Court of Appeal first addresses whether writ review is appropriate. Generally, California applies a rule that says if a plaintiff takes the court up on leave to amend, she forfeits the right to appeal the sufficiency of the complaint found deficient on a demurrer. Here, although the conversion claim was dismissed without leave, demurrers on other claims were sustained with leave. Plaintiff says the “you waive if you amend” rule would put her in the untenable choice between amending her other claims and waiving an appeal on conversion and declining to amend to save otherwise fixable claims. That makes her harm irreparable. 

But that isn’t right. The rule applies on a claim by claim basis. If the CEO amends her complaint to cure a pleading defect on, for instance, her employment discrimination claim, she waives any argument on appeal that that particular claim was correctly pleaded from the get-go. But the law is clear that amending on that claim will not waive the right to appeal some other claim, particularly one on which leave to amend was denied.

But that doesn’t matter, because the Court finds that writ review is merited because it would be inefficient to force plaintiff to go to trial on her other claims so as to get a final judgment from which to appeal the dismissal of her conversion claim. Particularly since CEO’s other claims in this case are somewhat factually distinct and have different remedies than conversion.

As to the merits, the court finds that the deal in which the investors bought the claims was an appropriate assignment. But wasn’t proper was seeking to execute on the full amount of a judgment that had been largely satisfied by that deal. While the Investors might have a right recover to more than the balance from the CEO as a matter of contribution, that issue can’t be resolved in a collections process. You need to file a lawsuit where the issue can be resolved like any other case. 

Thus, the deprivation of the CEO’s stock was a wrongful form of self-help that could sustain a conversion claim. The fact that the deprivation occurred through the use of a lawful court process does not bode otherwise. 

Writ granted.

Two issues here:

First, I’m a little surprised that this wasn’t raised in an anti-SLAPP motion. The case clearly arises from the use or abuse of the collections process, which is based on court filings. That would have required the CEO to not only show her claim should have survived a demurrer, but that she had evidence to sustain it.

And second, aren’t there some claim preclusion issues here? No doubt, the Investors did something they weren’t allowed to do. It was shady and somewhat inequitable. But CEO could have moved to quash the writ of execution or to vacate the levy on her shares. The Enforcement of Judgments Act also permits a judgment debtor to file an action to set aside a sheriff sale for irregularities when the purchaser was the creditor itself. Code Civ. Proc. § 701.680. But the debtor has only 90 days to do so. So it’s not clear to me that a conversion clam is really an appropriate remedy here.