Judgments and Jurisdiction

WV 23 Jumpstart v. Mynarcik, No. C095046 (D3 Nov. 21, 2022)

This is a weird opinion, in that it is deciding collections-related issues in a context where collections―at least collections in California―don’t appear to be a viable option.

Back in 2010, Creditor won a $1.4 million judgment against three individuals and a company. Shortly thereafter, it domesticated the judgment in California, where some of the defendants apparently had assets. Creditor ultimately settled with two of the individuals. And the company went Chapter 7. But there was still about a million bucks uncollected, with interest accruing, and the third Debtor to collect against. 

Unlike California judgments, which last ten years, Nevada judgments only last six. So when, slightly less than ten years after the California domestication, Creditor assigned the judgment to Plaintiff, the time to renew the underlying Nevada judgment in Nevada had already run.  

It appears, however, that Debtor doesn’t have any assets in California, only in Nevada. So to get around the expiration of the Nevada judgment, Plaintiff timely renewed the California judgment and then went back to Nevada to re-domesticate it. Debtor moved in Nevada to quash the judgment, claiming it was invalid. The Nevada court stayed the case pending a ruling from the California court on the judgment’s validity under California law. Debtor then argued to the California court that the renewed judgment was invalid because there was no personal jurisdiction over him in California to enter the original domesticated judgment. The trial court agreed. Plaintiff appealed.

The Court of Appeal reverses. In a basic sense, the idea that a court needs personal jurisdiction over a judgment debtor to domesticate a judgment doesn’t make sense. Collections is basically in rem. You domesticate a judgment because there are assets in the jurisdiction to be levied against. But if some separate minimum contacts style test is the rule, a judgment debtor could render itself collection proof just by moving its assets to a state with which it has no contacts.

The Court points out that nothing in the Sister State Money Judgments Act requires personal jurisdiction to domesticate a judgment. Indeed, the process is essentially ministerial. You attach the judgment to a form and the clerk stamps it as enforceable in California. While the Act permits challenges based on jurisdictional defects in the underlying merits judgment, it does not layer on any requirements beyond those.

Nor are any of the due process concerns from which personal jurisdiction requirements arise implicated. There is no dispute that the Nevada court that actually adjudicated the claim had personal jurisdiction over Debtor. He had notice and an opportunity to be heard in a court in a jurisdiction where he had contacts that bore a substantial relationship to the claims. There was thus no need for a separate jurisdictional analysis to justify out-of-state collections, which, after all are guaranteed under the Full Faith and Credit clause of the federal constitution.

There is, however, a different concern that is suggested, but not raised in the opinion. As I said, reading between the lines, there doesn’t appear to be any evidence that Debtor has assets in California to collect against. So can a creditor renew a domesticated Nevada money judgment in California, which can’t actually be enforced in California, in order revive an otherwise lapsed judgment in Nevada, to be enforced there? That seems a little squirrelly. But it's a Nevada problem, not a California one.

Reversed.

Time to Get a New Registered Agent

Bergstrom v. Zion Bancorporation, N.A., No. B309154 (D1d2 May 5, 2022)

A judgment Creditor served a writ of execution on the registered agent of a Bank that held some accounts of the judgment debtor. The agent misread the writ and, believing it to have been served on the wrong party, ignored it. Debtor proceeded to drain the accounts before Creditor could clear up the mistake. 

Under Code of Civil Procedure § 701.020(a) a third person’s “fail[ure] or refus[al]” to deliver property subject to a levy “without good cause” renders the third person “liable to the judgment creditor” for the amounts withdrawn and covered by the levy. The Court reads “without good cause” to mean “negligently.” And since the bank’s agent was clearly negligent, the Bank now owes the Creditor about $102k.

Reversed.

Husbands, Wives, and Reverse Outside Piercing

Blizzard Energy, Inc. v. Schaefers, No. B305774 (D2d6 Nov. 18, 2021)

Husband got hit with a $3.825 million fraud judgment in Kansas. The creditor domesticated the judgment in California. Then, while Husband was appealing the domestication, Creditor successfully moved under Code of Civil Procedure § 187 to add as a judgment creditor an LLC partially owned by Husband, which owns some commercial property in San Luis Obispo County. This is an appeal of that order. 

There's a threshold issue about whether the trial court had jurisdiction to amend the judgment because the appeal of the domestication was pending. (It was affirmed shortly thereafter.) Generally, the filing of a notice of appeal divests the trial court of jurisdiction and stays all proceedings, including enforcement of a judgment, under § 916. But § 916 is in Part 2 of the Code—“On Civil Actions.” Courts have held that the stay provisions in Part 2 only apply to ordinary civil actions, not to special proceedings of a civil nature—most of which are set out in Part 3.

The domestication of a sister state money judgment is governed by the Sister State Money Judgment Act, § 1710.10, which is in Part 3. That said, codification into Part 3 is not necessarily dispositive of whether something is an “action.” But because domestication of a judgment under the Act is a ministerial procedure that doesn’t bear any of the hallmarks of an ordinary civil action, the Court here finds that it is, in fact, a special proceeding. So the stay of trial court proceedings under § 916 did not apply.

On to the merits.

A thing about LLCs is that you generally can’t execute on LLC membership interests to collect on a judgment. (The theory is that doing so would make the creditor an involuntary partner of the other members.) The best you can get is something called a charging order, which creates a lien on any of the LLC’s distributions to the judgment debtor. Of course, if the judgment debtor controls the LLC, the debtor can just cause it not to make distributions. A lien on nothing isn’t worth much. Then the creditor can spend years trying to ensure that the debtor isn’t secretly leaking money out of the LLC, like by selling it stuff in non-arms length transactions. Little to wonder that hiding assets in LLCs is a popular collections avoidance strategy.

So creditor here tries a different move known as “outside reverse piercing,” which is a species of alter ego that, while not recognized in many jurisdictions, is recognized in California. In regular alter ego, you go up the chain and make the owner of an entity judgment debtor a co-debtor. In reverse outside piercing, you go down the chain to get at the assets of an entity owned by the debtor. But the test—requiring a unity of ownership and interest and fraud or injustice from upholding corporate separateness—is basically the same.

The Court here holds that both elements of the test were satisfied and the factual particulars aren’t that important.

But what gets tricky is that Husband isn’t the sole member of the LLC. He and Wife own it 50/50. In a slightly odd and not well explained twist, however, they came to own it about five years after they legally separated, which was itself more than 25 years ago. So although they are still married—Wife didn’t institute divorce proceedings till 2019—their membership interests are not community property. 

That means Wife could be completely innocent and have her legit interest in the LLC impaired if it were added as a judgment debtor. (Wife claims that she and Husband don’t really interact and that the cash thrown off by the LLC is retirement income.) The trial court, which thought everything was community property, did not consider any of that. So the case needed to be remanded to the trial court for a hearing on whether it would be inequitable to Wife’s interest to add the LLC as a debtor.

Reversed and remanded.

Post-Judgment Fees Don't Require a Number in the Judgment

Guo v. Moorpark Recovery Svc., LLC, No. A159195 (D1d5 Feb. 8, 2021)  

When a judgment includes an award of attorneys’ fees under a contractual fee provision, Code of Civil Procedure § 685.040 authorizes the creditor to also recover fees incurred in enforcing the judgment. Here, the creditor got a default judgment, which included a statement that it was entitled to a fee award. But the creditor never filed a cost bill to actually recover those fees so no ultimate judgment ever specified an amount. The Court of Appeal here holds that doesn’t matter. So long as the underlying judgment stated that the creditor was entitled to fees, that was adequate for the creditor to obtain fees for collection under § 685.040.

Reversed.

Fees, Form, and Substance

MSY Trading Inc. v. Seleen Automotive, Inc. No G057093 (D4d3 Jun 26, 2020)
 
Oversimplifying a little here, but the salient facts basically are: Plaintiffs won a breach of contract claim, which included an award of contractual attorneys’ fees. Original Defendant failed to pay. Plaintiffs then filed a separate collections suit against CEO, claiming that he was the alter ego of Original Defendant and thus liable on the judgment.

CEO prevailed on the alter ego issue. He then sought fees under the underlying contract and Civil Code § 1717. There’s no question he would have been entitled to those fees on an estoppel theory were he a prevailing defendant in the underlying contract action. Viz., if you sue a non-signatory enforce a contract, you are bound to the fee clause in that contract if you lose. But Plaintiffs argue that since this is a collections case, not an action on the contract, CEO can’t get fees, because Code of Civil Procedure § 685.040 makes fee recovery in a collections case a one-way right inuring only to the creditor. 

The Court of Appeal rejects that proposition. As the Court explains, there are three different ways to pop an alter ego with a judgment: Sue him in the original suit, add him to the judgement after the fact with a motion for leave to amend under Code of Civil Procedure § 187, or file a new lawsuit. These have procedural differences, but substantively, they are all the same. That being the case, the same logic that binds a plaintiff who tries to make an alter ego liable under a contract to the fee provision in it, applies when the other two procedures are used. So CEO was entitled to recover his fees in the alter ego case.

Affirmed.

Collections Default Is Not an Avenue for Collateral Attack

Cnty. of Sonoma v. Gustely, No. A153423 (D1d2 Jun. 24, 2019)

County agency assessed penalties against a Landowner for violations of land use ordinances. Landowner didn’t appeal or seek a writ of administrative mandamus. County brought a collection procedure to enforce the judgment. Landowner defaulted. On a motion for default judgment, the trial court reduced the penalty from $45 to $20 per day. That was error. By declining to appeal the enforcement case, Landowner forfeited the right to challenge the judgment. The trial court should not have engaged in what was essentially a collateral attack on it in a default proceeding.

Judgment modified.

Satisfied in Full

Wertheim, LLC v. Currency Corp., No. B277633 (D2d1 Jun. 6, 2019)

This case involves a 10 year saga to collect on a $40k judgment, since swollen to almost $300k in interest and enforcement costs. Between the underlying action and related collections actions, this is the fourth appeal of the matters. 

The Macaluso/Fox Johns Paradox: Five Years Later

Fin. Holding Co., LLC v. The Am. Inst. of Certified Tax Coaches, No. D072910 (D4d1 Nov. 29, 2018).

Creditor sought judgment collections discovery against Debtor’s Employer, asking for a broad swathe of business, tax, and bank records. When Employer balked, Creditor moved to compel and the trial court granted its motion. Employer appeals. 

Threshold question is whether the order is appealable as an order entered after an appealable judgment under Code of Civil Procedure § 904.1(a)(2). Cases are not consistent about whether post-judgment discovery orders against third parties are appealable under that statute. Indeed, as I pointed out way back in 2013, and again last year, this very court issued contradictory opinions on the issue within six days of each other. 

After reviewing the statutory text and extensive case law with its various splits of authority, the Court here sides in favor of appealability. The order against Employer was a final order as to the Employer—all that was left was for Employer to comply or refuse—which fits in within the Supreme Court’s general four-element test for appealability under § 904.1(a)(2).

On the merits, judgment collections discovery against third parties is addressed by § 708.120. It is conditioned on a showing that the third party has possession or control of property in which the debtor has an interest or owes a debt to the debtor worth more than $250. Discovery is limited to information about that property or debt. The statute does not permit “any and all documents” discovery like Creditor served on employer here. Moreover, contrary to Creditor’s arguments, various other statutes in the Code of Civil Procedure do not broaden third party collections discovery beyond what is permitted by § 708.120. 

Reversed.

Death Shall Not Quiet My Title

Cnty. Line Holdings, LLC v. McClanahan, No. B278790 (D2d6 May 2, 2018)

Debtor owns some real property in Ventura that is subject to two judgment liens. After Debtor dies, the junior lienholder executes against the property and Collector purchases it in the sheriff’s sale. But the senior lien is still out there. So Collector files a quiet title action to extinguish the senior lien. It argues that Code of Civil Procedure § 366.2(a)’s one-year statute of limitations on causes of action against dead people had run and thus that any enforcement of the senior lien was time-barred. 

But § 366.2(a) applies to “causes of action.” The right to execute on a judgment lien is a creditor’s remedy, not a cause of action. It survives so long as the judgment does. And since—for a bunch of complicated probate reasons that I don’t really care to wade into—the lien survives Debtor’s death, the property remains subject to the senior lien. 

Reversed.

It Will Never Be Satisfied...

Tikosky v. Yehuda, No. B278052 (D2d1 Jan. 30, 2018)

This collections opinion is only 14 pages long, but like any collections story worth its salt, it has so many twists and turns that it’s pretty hard to follow without drawing a diagram. The gist is that a judgment creditor tried to execute against some of the debtor’s real property. But that property already secured a large amount of other debt from different creditors. So the insurer for one of those other creditors decided that it was in its interest to just pay the judgment creditor off, in exchange for his agreement to forego pushing the property into a foreclosure sale. 

The question, then, is whether that payoff between the insurer and the judgment creditor should count as a satisfaction of the underlying judgment, to which the debtor is entitled to credit. It isn’t. The insurer wasn’t a joint tortfeasor. And it paid creditor to protect its insured’s security interest in the realty—thus avoiding paying a claim. It didn’t make the payment to pay off the judgment or otherwise benefit the debtor. Under those circumstances, the judgment debtor—who, FWIW, hasn’t paid a dime on the judgment—is not entitled to a partial satisfaction.

Affirmed.

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. 

Will the Judgment Ever Be Satisfied ...

Comercia Bank v. Runyon, No. G053691 (D4d3 Oct. 20, 2017)

Code of Civil Procedure §§ 881–883 provide procedures for joint judgment debtors other than joint tortfeasors—e.g., debtors jointly liable on a contract—to obtain contribution from one another. Section 883 requires an application for contribution to be filed within 30 days after “the judgment is satisfied in full.”

In this case, a joint judgement Debtor filed an application for contribution more than thirty days after the judgment been paid off to a zero balance, but while the creditor’s application to add costs to the judgment remained pending. The costs motion was ultimately partially granted to permit the addition of some costs, which had not been paid at the time Debtor filed his contribution application. But the trial court nonetheless denied the application as untimely.

That was error. A judgment can only be “satisfied in full” once—at the point where the creditor has been paid in full and the obligation fully extinguished. Once that happens, on written request of a debtor, the creditor is obliged to file and serve an acknowledgement of the full satisfaction. § 724.050(a)(1), (2). Te court here holds, as used in § 883, “satisfied in full” means the filing of that acknowledgement. A mere zero balance doesn’t cut it. And since the creditor hadn’t yet filed an acknowledgement when Debtor filed his contribution application, Debtor’s application was, in fact, timely under § 883. 

Reversed and remanded.

Reverse Veil Piercing for Alternative Entities

Curci Inv., LLC v. Baldwin, No. G052764 (D4d3 Aug. 10, 2017)

As we’ve discussed (on one occasion at very great length), under California law, a creditor can “pierce the corporate veil” of a corporate debtor to get at the assets of its “alter ego” owners. The creditor can do so when the company and the owners share a unity of ownership and interest and when the ends of justice require ignoring the separation between the company and the owners. 

But what about when the owners are the debtors? Can a creditor use veil piercing in a downward direction to get at the assets of a company owned by a debtor? This is generally called “reverse piercing” and one California court rejected it, at least for corporations. Postal Instant Press, Inc. v. Kaswa Corp., 162 Cal. App. 4th 1510 (2008). The court there reasoned that ordinary creditors’ remedies permit creditors to seize shares of corporate stock directly from the debtor. So the creditor does that, and then assumes whatever position the debtor had vis-a-vis the company. Viz., it gets dividends, votes at meetings, has the right to initiate derivative litigation, and can presumably sell the stock to someone else. Maintaining that separation protects other innocent stockholders from an attack on corporate assets due to the malfeasance of some other stockholder.

But here, the company is an LLC, and very closely held one at that. It’s 99 percent owned by debtor and 1 percent by his wife. That, in the court’s view, is a crucial difference, because creditors’ remedies don’t permit seizure of an LLC member’s equity in the entity. The best a creditor can get is a charging order redirecting any distributions out of the LLC to the creditor. But if the LLC is still owned and controlled by the debtor, the debtor can avoid the charging order by simply causing the LLC to stop making distributions. 

That’s what happened here. Debtors’ LLC paid out $178 million in the six years before the judgment. But since the $7.2 million judgment in this case issued, no distributions have been made. (Presumably the debtors aren’t having too hard of a time living off their $178 mil.)

The court here finds the corporate/LLC distinction significant in way that can make reverse piercing equitable for LLCs in a way it is not for corporations. The court isn’t saying that the veil should be reverse pierced in this case, just that it can be. So it reverses and remands for the trial court to conduct a full blown alter ego analysis.

Reversed.

Effects of Debtor’s Corporate Suspension Accrue to Claims Seized by Creditor

Bovet v. Chang, No. D070797 (D1d4 Jun. 7, 2017)

Plaintiff is a judgment creditor to a suspended corporation. In enforcement of judgment proceedings, Plaintiff was assigned certain of debtor’s assets, including certain funds held for potential escheat by the State Controller. Plaintiff filed claims for the property with the Controller, which the Controller denied based on the debtor’s being a suspended corporation. Plaintiff sued, but the court dismissed, on the grounds that the assignee of a suspended corporation can’t enforce that corporation’s rights in court because the corporation has no capacity to sue or defend on its own.

It’s not controversial that a suspended corporation can’t voluntarily assign rights to another, who then can sue to enforce the rights. That make it too easy avoid the consequences of the suspension, which include a disability to prosecute or defend actions in court. Plaintiff, however, claims that it stands in different stead because the assignment here was an involuntary judicial assignment obtained to collect on a debt. 

That has some intuitive sense to it, but the Court of Appeal doesn’t agree, resting on the formalism that the assignee takes subject to whatever defenses the assignor was subject to. According to the court, “It makes no difference if the assignment is voluntary or through a judicial assignment made in the enforcement of judgment process for a corporation refusing to pay a judgment or obligation. The result is the same and should not be permitted.”

Affirmed.

A Declaration Is a Declaration

Hearn Pac. Corp. v. Second Generation Roofing, Inc., No. A142203 (D1d2 May 2, 2016)

As the court tells it, this case “involves a civil procedure game of cat-and-mouse like none we have before encountered.”

Tax Return Privilege Overriden to Prevent Fraud

Li. v. Yan, No. A144994 (D1d2 May 2, 2016)

This is a collections case. Like most collections cases that progress to an appeal, the facts are convoluted and difficult to follow. But the court’s rulings aren’t. First, when the debtor is subject to a judgment debtor exam, the creditor doesn’t need to personally serve a subpoena demanding that he bring docs to the exam. Service in the same manner as applies to pre-judgment party discovery (e.g., mail service to counsel) will suffice.

Second, although California recognizes a privilege against the discovery of tax returns, it can be overridden in difficult collection cases by a “public policy greater than that of the confidentiality of tax returns.” To wit, the “policy is to prevent fraud against creditors. And against lenders. And perhaps against the court.” The record here showed that debtor had engaged in a bunch of pretty egregious conduct designed to frustrate the collections process. Under the circumstances, the court finds the privilege overridden.

(Re) Clearing the Decks

So I just moved, we are expecting a second daughter in May, and I have spent the last month pulling all-nighters in expedited preliminary injunction proceedings. Which is all a way to say that I’ve fallen really behind on posts here. 

Fraudulent Transfer Judgment Relates Back to Lis Pendens

Mira Overseas Consulting Ltd. v. Muse Family Enters., No. B254298 (D2d2, as modified Jun. 30, 2015)

A property claim relates back to the filing of a lis pendens such that the judgment creditor has superior title to anyone who subsequently obtains an interest. And a fraudulent transfer claim that seeks, among other remedies, reconveyance of real property is a property claim for which a lis pendens can be filed. So in this case, plaintiffs’ fraudulent transfer judgment related back to their filing of a lis pendens on the affected property.

Reversed.

Res Judicata Does Not Bar Collections Action

McCready v. Whorf, B253164 (D2d6 Mar 24, 2015)

Code of Civil Procedure § 683.050 expressly authorizes a separate action to enforce a judgment. Unsurprisingly such an action will not, by its very nature, be barred by res judiciata for failure to collect in the underlying case. 

Reversed.

And no, not that Whorf,

Anti-SLAPP Victor Can Collect Fees for Collecting

York v. Strong, No. G049778 (D4d3 Mar. 10, 2014)

Plaintiff who prevailed on an anti-SLAPP motion in a prior case won an attorneys' fee award. She then incurred more fees in collecting on it.  Under Code of Civil Procedure § 685.040, fees incurred in collection are awardable if the underlying judgment includes an award of fees when they are included as costs.  

The statute specifically references that that is the case when fees are awarded under § 1033.5(a)(10)(A), which permits an award of fees as costs when permitted by contract. But fees awarded in an anti-SLAPP victory are awarded as costs under § 1033.5(a)(10)(B) or (C)—as authorized by statute or law.  But the reference to § 1033.5(a)(10)(A) was not intended to limit an award of fees as costs on collection. It was specifically added to legislatively reverse an earlier case holding that a judgment that included an award of fees based on a contract—awardable under § 1033.5(a)(10)(A)—did not merit an award of fees incurred in collection. In any event, the Supreme Court essentially already decided this issue in Ketchum v. Moses, 24 Cal. 4th 1122, 1141 n.6 (2001) so there was no reason to go the other way.

Reversed.