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Crocker National Bank v. Jon R. Perroton,
208 Cal. App. 3d 1 (Cal.App. 02/27/1989)
COURT OF APPEAL OF CALIFORNIA, FIRST APPELLATE DISTRICT,
989.CA.41095; 255 Cal. Rptr. 794; 208 Cal. App. 3d 1
February 27, 1989
CROCKER NATIONAL BANK, CROSS-COMPLAINANT AND RESPONDENT,
JON R. PERROTON, CROSS-DEFENDANT AND APPELLANT *FN*
Superior Court of San Mateo County, No. 288028, Thomas McGinn Smith, Judge.
Jon R. Perroton, in pro. per., for Cross-defendant, Plaintiff, and Appellant.
Robert B. Kaplan, Joseph N. Demko and Frandzel & Share for Cross-complainant, Defendant and Respondent.
Opinion by Kline, P. J., with Smith and Benson, JJ., concurring.
Jon R. Perroton (Perroton) appeals the denial of his Code of Civil Procedure section 473 motion for an order voiding an order granting Crocker National Bank's motion for sale of Perroton's interest in a limited partnership known as Turn-Key Storage. He contends: (1) the trial court erred in ordering the sale of his partnership interest at an execution sale where the partnership was not the judgment debtor and (2) the order directing sale was precluded by the California Corporations Code and by the partnership agreement itself.
In December 1984, respondent Crocker National Bank (Crocker) obtained a judgment against Perroton for $1,431,688.29. Thereafter, on February 6, 1985, the bank obtained an order pursuant to Corporations Code
section 15673, charging Perroton's interest in the limited partnership known as California Self Storage with payment of the unsatisfied judgment plus interest. The charging order was subsequently corrected nunc pro tunc to change the name of the partnership to Turn-Key Storage doing business as California Self-Storage.
As of November 1985, Crocker had received no monies as a result of the charging order against Turn-Key Storage. Therefore, on November 26, 1985, Crocker moved for an order of sale of Perroton's interest in Turn-Key Storage. Notice was served on Perroton, the only limited partner, in care of the Federal Metropolitan Correctional Center in Tuscon, Arizona, where he was a prisoner. Notice was also served on counsel for Perroton's mother, Bette Perroton, the only general partner of Turn-Key Storage.
No opposition was filed to the motion for sale. Bette Perroton filed a statement of "conditional non-opposition" to the sale.*fn1
After hearing on January 7, 1986, the limited interest in Turn-Key Storage was ordered sold. Perroton, Bette Perroton as general partner, and counsel for the general partner received notice of the order for sale of Perroton's interest in the limited partnership on January 27, 1986.
Approximately 15 months later, on April 22, 1987, Perroton moved pursuant to Code of Civil Procedure section 473, to void the order of sale. This motion was filed after Perroton had filed for bankruptcy and after Crocker had obtained relief from the automatic stay in the bankruptcy to allow it to sell the limited partnership interest of Perroton in Turn-Key Storage.
Perroton's motion to void the order of sale was denied on June 1, 1987. Perroton filed a notice of appeal on June 23, 1987.
The Court Did Not Abuse Its Discretion in Denying Perroton's Motion to Void the Prior Order of Sale
"A motion for relief under section 473 is addressed to the sound discretion of the trial court and an appellate court will not interfere unless there is a clear showing of an abuse. [Citation.] . . . [The] moving party has the burden of showing good cause. [Citations.]" (Davis v. Thayer (1980) 113 Cal. App. 3d 892, 904 [170 Cal. Rptr. 328].) If the Corporations Code absolutely bars the sale of a partnership interest in satisfaction of a debt of an individual partner, abuse of discretion would be established.*fn2 However, under the facts presented, we conclude that the order of sale was not void. Hence, the court did not abuse its discretion in denying Perroton's motion.
"A creditor with a judgment against a partner but not against the partnership ordinarily cannot execute directly on partnership assets or on the partner's interest in the partnership." (Advising California Partnerships 2d (Cont.Ed.Bar 1988) - 6.88, p. 428, citing Code Civ. Proc., - 699.720; see also Corp. Code, - 15025, subd. (2) (c).)*fn3 The reasons for the rule were discussed at some length in Taylor v. S & M Lamp Co., supra, 190 Cal. App. 2d 700, 707-708: "Prior to California's adoption of the Uniform Partnership Act (Corp. Code, - 15001 et seq.) a judgment creditor of a partner whose personal debt, as distinguished from partnership debt, gave rise to the judgment, could cause a sale at execution of partnership assets,
including specific items of partnership property, to satisfy his judgment. [Citation.]
"Lord Justice Lindley gave the following reason for the English rule forbidding execution sale of a partner's interest in the partnership to satisfy his non-partnership debt:
"When a creditor obtained a judgment against one partner and he wanted to obtain the benefit of that judgment against the share of that partner in the firm, the first thing was to issue a fi. fa.,*fn4 and the sheriff went down to the partnership place of business, seized everything, stopped the business, drove the solvent partners wild, and caused the execution creditor to bring an action in Chancery in order to get an injunction to take an account and pay over that which was due the execution debtor. A more clumsy method of proceeding could hardly have grown up.(28 Wash.L.Rev. 1; see also 9 Cal.L.Rev. 117.)
"It was to prevent such 'hold up' of the partnership business and the consequent injustice done the other partners resulting from execution against partnership property that the quoted code sections and their counterparts in the Uniform Partnership Act and the English Partnership Act of 1890 were adopted. As we view those code sections they are not intended to protect a debtor partner against claims of his judgment creditors where no legitimate interest of the partnership, or of the remaining or former partners is to be served."
herefore, a judgment creditor must seek a charging order to reach the debtor partner's interest in the partnership. (See Corp. Code, -- 15028, 15522, 15673; Code Civ. Proc., -- 699.720, 708.310-708.320; Advising California Partnership, supra, - 6.88, pp. 428-429.) Through a charging order, the court may charge the debtor's interest in the partnership with payment of the unsatisfied judgment, plus interest. The court may also appoint a receiver of subsequent profits or other money due to the debtor partner. (Corp. Code, - 15028, subd. (1).)*fn5
Perroton concedes the validity of the charging order obtained by Crocker. He contends, however, that under the foregoing statutory scheme, the court may not order sale of his partnership interest at execution sale. We conclude that the authorities support the order for sale of a judgment debtor partner's partnership interest as distinct from the property of the limited partnership, where the creditor has shown that it was unable to obtain satisfaction of the debt under the charging order, and where the remaining partner, here the general partner Bette Perroton, has consented to the sale.
It is clear that "the limited partner is given no property interest in the specific partnership assets as such. Rather, he is entitled, among other things, 'to receive a share of the profits or other compensation by way of income, and to the return of his contribution . . . .' (- 15510, subd. (2).)" (Evans v. Galardi (1976) 16 Cal. 3d 300, 306-307 [128 Cal. Rptr. 25, 546 P.2d 313], fn. omitted.) "[The] limited partner has no interest in the partnership property by virtue of his status as a limited partner. Thus, such assets are not available to satisfy a judgment against the limited partner in his individual capacity. [Citation.]" (Id., at p. 307; Corp. Code, - 15671.) "[The] very nature of the limited partner's relationship with the business organization indicates that he has no property interest in the specific partnership assets which would render them available to his personal creditors." (Evans v. Galardi, supra, at p. 308.)
The question remains whether, nevertheless, the court may order sale of the debtor's partnership interest itself as distinct from the partnership assets in the circumstances presented here. We think the answer is yes.
Corporations Code section 15028 itself, which sets forth the creditor's charging order remedy, refers to the possible court ordered sale of a
partnership interest which is subject to a charging order. Subdivision (2) provides: "The interest charged may be redeemed at any time before foreclosure, or in case of a sale being directed by the court may be purchased without thereby causing dissolution: [ para. ] (a) With separate property, by any one or more of the partners, or [ para. ] (b) With partnership property, by any one or more of the partners with the consent of all the partners whose interests are not so charged or sold." (Italics added.) Referring to this provision, an authoritative treatise on California partnerships states as follows: "The judgment creditor does not own the partnership interest by virtue of the charging order but may become the owner by foreclosing the interest. Any of the other partners may, however, redeem the interest before foreclosure or court-ordered sale, using their individual property or partnership property if all the partners other than the debtor consent." (Advising California Partnerships, supra, at p. 429, italics added.)
Cases requiring creditors to obtain charging orders also indicate that sale of the partnership interest is permissible where the creditor has first obtained a charging order and has demonstrated that monies collected under the charging order are insufficient to satisfy the judgment.
n Evans v. Galardi, supra, 16 Cal. 3d 300, the court refused to allow a levy on partnership assets to satisfy a partner's debt. The court required the creditor to use the charging order instead. However, in so holding, the court stated: "Where, as in the instant case, the partnership is a viable business organization and plaintiff does not show that he will be unable to secure satisfaction of his judgment by use of a charging order or by levy of execution against the debtors' other personally owned property, there is no reason to permit deviation from the prescribed statutory process." (Id., at p. 311.) The clear implication is that such levy and sale may, in certain circumstances be permitted even in the absence of fraud.
In Taylor v. S & M Lamp Co., supra, 190 Cal. App. 2d 700, the creditor obtained a charging order and thereafter without obtaining any court order supplementing the charging order, obtained a writ of execution on his judgment against two partners and caused the sheriff to levy on all the beneficial interests of the two partners in the partnership. The trial court memorandum of opinion read: "'The charging order . . . impressed a lien on the interests of Ben and Eugene Stephens in the partnership, but the proceeding thereafter followed by plaintiff did not conform to the law. Another order could have been obtained directing the sale of said interests.'" (Id., at p. 710.) The Court of Appeal termed the trial court memo "a correct statement of the law as applied to the ordinary case," where the partnership continues and where no fraudulent transfer is made. (Ibid.)
Thus, both the Corporations Code and the cases seem to contemplate that a court may authorize sale of the debtor partner's partnership interest even in the absence of fraud, where three conditions are met: first, the creditor has previously obtained a charging order; second, the judgment nevertheless remains unsatisfied; and third, all partners other than the debtor have consented to the sale of the interest.
The concerns which form the basis for the exemption of partnership interests and property are satisfied by this procedure. Allowing sale in such instance is consistent with the purpose of these code sections to avoid disruption to the partnership business and with the observation of Taylor that the sections "are not intended to protect a debtor partner against claims of his judgment creditors where no legitimate interest of the partnership, or of the remaining or former partners is to be served." (190 Cal. App. 2d at p. 708.)
Because the Sale Is of the Limited Partner's Interest in the Partnership and the Remaining Partner Has Consented, the Order of Sale Does Not Violate the Partnership Agreement
Perroton contends that the order of sale was void as it was inconsistent with the terms of the limited partnership agreement.*fn6 Perroton points out that he is strictly a limited partner; his interest in the partnership is limited by the agreement to 50 percent of the capital and profits; and he has no cognizable or legal "interest" whatsoever in either the real or personal property of the partnership. Further, he argues that as a limited partner, he has no right to be active in the affairs of the partnership, and he may not sell, assign or encumber his interest in the partnership.
"The judgment creditor does not acquire any greater rights than the debtor is entitled to for his own benefit. [Citations.]" (6 West's U. Laws Ann. (1985) U. Limited Partnership Act, Off. Com. to - 28.) Just as a charging order cannot grant the creditor a greater interest in the partnership than that of the debtor partner at the time of the order (Corp. Code, -- 15028, 15673; Ribero v. Callaway (1948) 87 Cal. App. 2d 135, 138
[196 P.2d 109]; Advising California Partnerships, supra, at p. 429), a supplementary order for sale, does not allow the purchaser to acquire more rights in the partnership than the debtor partner possessed.
Nevertheless, as the Nevada Supreme Court pointed out in rejecting a debtor partner's claim that assignment of his partnership interest was inconsistent with the terms of the partnership agreement: "[The] partnership agreements could not divest the district court of its powers provided by statute to charge and sell an interest of a partner in a partnership." (Tupper v. Kroc (1972) 88 Nev. 146 [494 P.2d 1275, 1280].)
Crocker concedes that the "sale of Perroton's interest in Turn-Key Storage ordered by the superior court is not an order for the sale of any real or personal property owned by Turn-Key Storage. To the contrary, it is simply a sale of whatever interest, legal, equitable, or otherwise, which Perroton holds in Turn-Key Storage by virtue of his being a limited partner. The eventual purchaser . . . will acquire no greater rights . . . than Perroton would have if he had remained a limited partner."
Further, both the limited partnership agreement and the consent to the sale by Bette Perroton make clear that a purchaser of Perroton's limited partnership interest would have rights to profits and losses, but would not become a substituted limited partner in the partnership, absent consent by the general partner.
For these reasons, it is apparent that there is no inconsistency between the agreement and the court's order granting Crocker's motion for sale of Perroton's partnership interest.
As we see no statutory prohibition on the sale in these circumstances and sale does not violate the terms of the limited partnership agreement, the court did not abuse its discretion in denying Perroton's Code of Civil Procedure section 473 motion.
The judgment is affirmed.
The judgment is affirmed.
*fn* : This case was previously entitled "Centurion Corp. v. Crocker Nat. Bank."
*fn1 According to this declaration: "4. The Partnership does not object to the sale of Jon Perroton's partnership interest at Sheriff's Sale as sought by Crocker Bank provided that the rights of the purchaser at such sale are limited as set forth in the Stipulation and Order and amendment to Certificate of Limited Partnership as described above; to wit, the successor [ sic ] would have the rights to profits and losses but would not become a substituted limited partner in the Partnership."
*fn2 If the order of sale were void, abuse of discretion would be established, unless the court denied the section 473 motion for some procedural reason, such as lack of timeliness. Crocker does not contend that Perroton's motion was untimely. It appears the motion was made pursuant to the last sentence in the statute which provides: "The court . . . may, on motion of either party after notice to the other party, set aside any void judgment or order." (Code Civ. Proc., - 473.) Unlike that part of the statute allowing relief from a judgment or order taken by mistake, inadvertence, surprise or excusable neglect, no time limits are provided for applications for relief from a void order.
*fn3 Code of Civil Procedure section 699.720 lists among the types of property not subject to levy under a writ of execution, "(2) The interest of a partner in a partnership where the partnership is not a judgment debtor." Corporations Code section 15025, subdivision (2)(c) provides in relevant part: "A partner's right in specific partnership property is not subject to enforcement of a money judgment, except on a claim against the partnership."
Courts have allowed the creditor to execute directly on partnership assets in a few situations, such as where partnership assets have been transferred in fraud of creditors. (See Taylor v. S & M Lamp Co. (1961) 190 Cal. App. 2d 700, 708, 711 [12 Cal. Rptr. 323]; 8 Witkin, Cal. Procedure (3d ed. 1985), Enforcement of Judgment - 290, pp. 249-252; Advising California Partnerships, supra, - 6.88, p. 428.) No allegation of such attempt at fraudulent transfer has been made here.
*fn4 The abbreviation for fieri facias, literally "that you cause to be made," the term used to describe a writ of execution commanding the sheriff to levy and make the amount of a judgment from the goods and chattels of the judgment debtor. (Black's Law Dict. (4th ed. 1968 rev.) p. 754.)
*fn5 Corporations Code section 15028 provides in relevant part: "(1) On due application to a competent court by any judgment creditor of a partner, the court which entered the judgment, order, or decree, or any other court, may charge the interest of the debtor partner with payment of the unsatisfied amount of such judgment debt with interest thereon; and may then or later appoint a receiver of his share of the profits, and of any other money due or to fall due to him in respect of the partnership, and make all other orders, directions, accounts and inquiries which the debtor partner might have made, or which the circumstances of the case may require. [ para. ] 2. The interest charged may be redeemed at any time before foreclosure, or in case of a sale being directed by the court may be purchased without thereby causing a dissolution: [ para. ] (a) With separate property, by any one or more of the partners, or [ para. ] (b) With partnership property, by any one or more of the partners with the consent of all the partners whose interests are not so charged or sold. [ para. ] (3) Nothing in this act shall be held to deprive a partner of his right, if any, under the exemption laws, as regards his interest in the partnership."
Corporations Code section 15673 provides with respect to limited partnerships: "On application to a court of a competent jurisdiction by any judgment creditor of a partner, the court may charge the limited partnership interest of the partner with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the limited partnership interest. This chapter does not deprive any partner of the benefit of any exemption laws applicable to the partner's limited partnership interest."
*fn6 The order specifically provides: "It Is Hereby Ordered that John Perroton, aka J. Perroton, aka Jon Perroton, aka John R. Perroton, aka Jon R. Perroton's interest in Turn-Key Storage, a California Limited Partnership, doing business as California Self-Storage be sold at execution sale pursuant to Code of Civil Procedure Section 701.530 and Sections 701.545-701.830.
"It Is Further Ordered that the Santa Clara County Sheriff sell said interest at execution sale upon the written request of Crocker National Bank upon the receipt of a writ of execution directed against John Perroton, aka J. Perroton, aka Jon Perroton, aka John R. Perroton, aka Jon R. Perroton." (Italics added.)
A judgment creditor brought an action under California Uniform Commercial Code section 8112 to reach shares of stock owned by the judgment debtor and his wife to satisfy a money judgment.1 The debtor surrendered his stock certificate to the trial court. The debtor's wife argued that shares in her name were her separate property. The trial court found that the shares had no value, yet ordered the shares transferred directly to the creditor with no reduction in the outstanding judgment. If the debtor's wife failed to transfer her shares, her shares were to be canceled and reissued in the name of the creditor. We conclude that it was an abuse of discretion to order worthless shares of stock transferred to a judgment creditor in satisfaction of a money judgment without any reduction in the outstanding judgment. Therefore, we reverse.
1 All further statutory references are to the California Uniform Commercial Code, unless otherwise stated.
The Parties and the Judgment in the Underlying Action Dr. Jeng-Cheng Ho (Creditor) was raised in Taiwan. He came to the United States to attend dental school, married, and opened a dental practice in the Los Angeles area in 1986. Shih-Ming Hsieh (Debtor) met Creditor's sister Cheng-Fang Ho (Debtor's Wife) in Taiwan. They married in California in 1988, but live together in Taiwan.
In August 1991, the families purchased a 52-acre golf course property in Colton, California for $6.5 million, paying $2 million in cash and giving the seller a note for $4.5 million at 9 percent interest. Debtor and Debtor's Wife took title to the property as "husband and wife as Joint Tenants." H&H Investment Co., Inc., was incorporated on August 30, 1991. Debtor and his wife quitclaimed the Colton property to H&H. H&H issued 12,500 shares of stock each to Creditor, Creditor's wife, Debtor and Debtor's Wife.
Debtor served as the president and chief executive officer of H&H. Creditor acted as the general manager of the golf course. The golf course was not profitable because of the high interest rate on the seller's note. In 1994, Debtor told Creditor that if they provided substantial collateral, he could get a low interest loan from the French bank BNP to pay off the seller's note. Debtor obtained a $4.5 million loan from BNP with an interest rate of approximately 2 percent. The loan proceeds were paid to a Taiwanese corporation named Tonical Corporation that was controlled by Debtor. Tonical transferred the loan proceeds to Debtor's daughter-in-law Chiu-Ming Chung. Chung loaned $4.5 million to H&H at 9 percent interest. H&H continued not to show a profit because of the high interest rate on the loan. The difference between the interest rates on the BNP loan and the Chung loan was periodically credited against the H&H shareholders' loan balances.
On February 29, 2000, the father of Creditor and Debtor's Wife died. The relationship between Creditor and Debtor's Wife deteriorated and litigation was instituted in Taiwan over the disposition of their father's assets.
On July 12, 2002, Debtor filed the complaint in the underlying action against Creditor and H&H alleging multiple causes of action, including breach of fiduciary duty, declaratory relief, an accounting, and a shareholder derivative action for breach of fiduciary duty. The issues at trial included whether Creditor had used corporate funds for unauthorized purposes and whether certain accounting adjustments were appropriate. Creditor filed a cross-complaint against Debtor for declaratory relief, breach of fiduciary duty, conversion, fraud and deceit, breach of contract, money had and received, constructive trust, an accounting and injunctive relief.
Debtor paid off the BNP loan in March 2003. The trial court issued monetary sanctions against Debtor twice for refusing to produce documents and ultimately issued evidentiary sanctions against Debtor for his continued refusal to produce documents.
Debtor's Wife attended and testified at the trial in the underlying action. The court found Creditor's expenditures on behalf of H&H were reasonable and denied recovery on the complaint. However, on the cross-complaint, the court found Debtor committed fraud and breached his fiduciary duty when he burdened the corporation with a higher interest rate than the loan available from BNP, failed to openly identify and document the loan transactions, failed to render proper accountings for Creditor's payments toward the loan balance, and required H&H to pay off the loan from Chung. The court found Creditor had paid $1,512,322.50 toward his shareholder loan balance, and therefore, Debtor owed compensatory damages of $1,512,322.50 to Creditor. In addition, the court awarded punitive damages of $6 million based on Debtor's discovery abuses, malicious conduct, and wealth. The court entered a judgment in the underlying action on January 18, 2005, awarding $8,293,534.40 to Creditor for compensatory damages, prejudgment interest, punitive damages and attorney fees. Debtor appealed from the judgment.
On June 8, 2006, Creditor and H&H filed the instant action against Debtor and Debtor's Wife to transfer or cancel their H&H stock share certificates pursuant to section 8112. The complaint alleged that Debtor is a resident of Taiwan and Debtor's Wife's primary residence is in Taiwan. Creditor had attempted to execute on the judgment by applying for a judgment debtor's examination, obtaining an assignment order, notifying Debtor to return his share certificates to H&H, and requesting that H&H transfer or cancel Debtor's shares. However, Debtor had evaded Creditor's efforts to satisfy the judgment. Creditor and H&H sought an order canceling Debtor's H&H stock certificates and reissuing them to Creditor or transferring all right, title and interest in Debtor's H&H stock certificates to Creditor. They also sought an order enjoining any action with respect to the outstanding shares.
The judgment against Debtor in the underlying action was affirmed by Division Eight of this court and Debtor filed a petition for review by the California Supreme Court, which was denied. In the instant action, Debtor and Debtor's Wife filed a demurrer on the ground that the relief sought was not authorized by section 8112, subdivision (e). They argued that section 8112, subdivision (e) permits a court to order stock certificates delivered to a levying officer for execution in accordance with California's procedures for the enforcement of judgments. Creditor and H&H argued in opposition that section 8112, subdivision (e), provides the court with broad equitable authority to fashion remedies when a judgment debtor refuses to produce a corporation's share certificates and withholds them from a levying officer's reach in a foreign country. After a hearing on December 15, 2006, the trial court overruled the demurrer. The court concluded that section 8112, subdivision (e), is a statutory exception to the writ of execution procedures for enforcement of a money judgment. The court found that section 8112, subdivision (e), provides remedies to creditors with regard to a debtor's interest in otherwise unreachable securities when the debtor refuses to produce the certificate for levy and execution.
Debtor and Debtor's Wife filed a cross-complaint in the instant action against Creditor and H&H alleging several causes of action, including involuntary dissolution of the corporation. The trial court sustained Creditor's demurrer to the cross-complaint without leave to amend after finding that the issues raised by the cross-complaint were identical to the claims litigated in the prior proceeding and the relationship between Debtor and Debtor's Wife in the underlying litigation was sufficiently close to bar her from re-litigating the issues against Creditor. To reach this conclusion, the court reasoned that the shares of H&H stock owned by Debtor and Debtor's Wife were presumptively community property under California law because they were acquired during their marriage, and therefore, any recovery by Debtor in the underlying litigation would have been community property. In addition, the court noted that H&H is a close corporation, Debtor's derivative action was brought on behalf of H&H shareholders, the same attorney represented Debtor and Debtor's Wife, and Debtor's Wife attended and testified at the underlying trial.
Creditor and H&H filed a motion for summary adjudication seeking an order under section 8112 and the court's general equitable powers directing Debtor to turn over his H&H share certificates to be levied upon under the supervision of the trial court, or if Debtor refused to surrender the share certificates in violation of the court's order, to cancel and reissue the shares in Creditor's name and apply them to satisfy the judgment under the supervision of the court. Debtor filed a notice of non-opposition to the motion for summary adjudication and deposited the original certificate issued to him for 12,500 shares of H&H stock dated July 18, 1993. Debtor's attorney declared that he could not ascertain the proper procedure for an execution sale of the shares of stock of a close corporation. The trial court concluded that there were no procedures for valuing shares under section 8112, and therefore, the parties and the court could fashion a valuation method suited to the situation. The court granted the motion for summary adjudication to the extent it sought Debtor's shares of H&H to satisfy the judgment against Debtor. The trial court also allowed Creditor and H&H to file an amended complaint adding causes of action for fraudulent transfer and unjust enrichment.
On October 29, 2007, Creditor and H&H filed a motion for summary adjudication on the ground that the H&H shares in Debtor's Wife's name were community property. Debtor's Wife filed a motion for summary judgment on the ground that the shares of stock in her name were her separate property. After a hearing, the trial court granted Creditor's and H&H's motion for summary adjudication based entirely on the March 16, 2007 order sustaining the demurrer to the cross-complaint in which the court had reasoned that the Debtor's shares were community property. Although the characterization of the property was not at issue in the underlying trial between Debtor and Creditor and there was no opportunity to present evidence in connection with the demurrer proceeding in the instant action, the court stated that the characterization of the shares "was already litigated in this very Court and it was against [Debtor's Wife]. Res judicata and collateral estoppel prohibit the Court from revisiting the issue of community property." Therefore, the court concluded no triable issue of material fact existed and Creditor was entitled to reach the shares held by Debtor's Wife. A trial was held to determine the value of the shares. A real estate appraiser testified on behalf of Creditor and H&H that the fair market value of the golf course was $4.7 million and the liquidation value was approximately $3 million. A valuation expert opined that a 15 percent lack of marketability discount, an 18 percent minority interest discount and a 2 percent transaction cost discount should be applied as to each block of shares. H&H had been successful in a different action in voiding Chung's $7 million lien on the property, but the decision was not final. Therefore, the amount of Chung's lien must be taken into account in the valuation. Based on these factors, the valuation expert concluded that the shares had a value of zero. Alternatively, disregarding the outstanding lien and making assumptions favorable to Debtor and Debtor's Wife, the maximum value for each block of shares would be $1,056,529.
The trial court found that the value of the shares was the value of H&H's assets, less the outstanding liabilities and discounts for minority shares, lack of marketability, and transaction costs. Although the trial court found the real estate appraiser credible, the court chose to use $6.5 million as the value of the real property. The court included the Chung lien in the valuation, because the lien was still of record. The court concluded that the outstanding indebtedness to Chung eviscerated the value of H&H's assets, and therefore, the shares had no present value for purposes of an equitable judgment enforcement proceeding.
The trial court entered a judgment on August 8, 2008, authorizing Creditor and H&H to collect the shares of stock from the clerk of the court, or alternatively, to cancel and reissue the shares in Creditor's name. The judgment noted that with respect to the prior judgment in favor of Creditor in the amount of $8,293,534.40, there was no offset of any sums due and owing under that judgment as a result of the enforcement and cancellation procedures against the shares in the instant action. The H&H shares were adjudged to be of no value that would justify an offset. Debtor and Debtor's Wife filed a timely notice of appeal.
"The interpretation of a statute is a question of law, which we review de novo. [Citation.]" (Jhaveri v. Teitelbaum (2009) 176 Cal.App.4th 740, 749 (Jhaveri).) We review the trial court's exercise of its equitable powers under an abuse of discretion standard of review. (City of Barstow v. Mojave Water Agency (2000) 23 Cal.4th 1224, 1256.) Similarly, "[a] trial court's decision to apply a credit in partial satisfaction of the judgment is an exercise of the court's equitable discretion. [Citation.] An abuse of discretion occurs when, in light of applicable law and considering all relevant circumstances, the court's ruling exceeds the bounds of reason. [Citations.]" (Jhaveri, supra, 176 Cal.App.4th at p.749.)
Debtor and Debtor's Wife contend it was an abuse of discretion for the trial court to transfer shares of stock having no value to Creditor without any reduction in the outstanding money judgment against Debtor. We agree.v
The Enforcement of Judgment Law (EJL) (Code Civ. Proc., -- 680-724.260) is a comprehensive statutory scheme for enforcing civil judgments in California (Evans v. Paye (1995) 32 Cal.App.4th 265, 276), including procedures to enforce a money judgment (Code of Civ. Proc., - 695.010 et seq.). In general, all of the judgment debtor's property is subject to enforcement of a money judgment, except as otherwise provided by law. (Code Civ. Proc., - 695.010.) To levy on a security under a writ of execution to satisfy a money judgment, the ELJ directs the levying officer to comply with section 8112. (Code Civ. Proc., - 700.130.) Section 8112 provides a bridge between the ways in which a security interest is held under Article 8 of the Commercial Code and the means by which a creditor pursues legal process against the debtor's property as set forth in the ELJ. (See 7A Hawkland & Rogers, Uniform Commercial Code Series (2008 Supp.) - 8-112:01 [Rev. Art. 8][referring to similar section 8-112 of the Uniform Commercial Code, 1994 Revision of Article 8].)
Under section 8112, to reach a debtor's interest in a security represented by a certificate, the officer making the attachment or levy must actually seize the security certificate, although a security certificate in the possession of a secured party may be reached through legal process on the secured party and a security certificate that has been surrendered to the issuer may be reached through legal process upon the issuer. (- 8112, subd.s (a) and (d).)2 Subdivision (e) of section 8112 provides: "A creditor whose debtor is the owner of a certificated security, uncertified security, or security entitlement is entitled to aid from a court of competent jurisdiction, by injunction or otherwise, in reaching the certificated security, uncertified security, or security entitlement or in satisfying the claim by means allowed at law or in equity in regard to property that cannot readily be reached by other legal process." (Stats. 1996, c. 497, - 9.) In this case, "legal process" means "personal service by the levying officer of a copy of the writ of execution and notice of levy on the person who is to be served." (Code Civ. Proc., - 700.130.)
2 Section 8112, subdivision (a) provides: "The interest of a debtor in a certificated security may be reached by a creditor only by actual seizure of the security certificate by the officer making the attachment or levy, except as otherwise provided in subdivision (d) [concerning certificates in the possession of a secured party]. However, a certificated security for which the certificate has been surrendered to the issuer may be reached by a creditor by legal process upon the issuer." (Stats. 1996, c. 497, - 9.) The comment to section 8112 states, "In dealing with certificated securities the instrument itself is the vital thing, and therefore a valid levy cannot be made unless all possibility of the certificate's wrongfully finding its way into a transferee's hands has been removed. This can be accomplished only when the security is in the possession of a public officer, the issuer, or an independent third party. A debtor who has been enjoined can still transfer the security in contempt of court. [(]See Overlock v. Jerome-Portland Copper Mining Co., 29 Ariz. 560, 243 P. 400 (1926).[)] Therefore, although injunctive relief is provided in subsection (e) so that creditors may use this method to gain control of the certificated security, the security certificate itself must be reached to constitute a proper levy whenever the debtor has possession." (- 8112, com. 1 [incorporating the official comments to the Uniform Commercial Code].) As explained in Hawkland & Rogers's Uniform Commercial Code Series, "Subsection 8-112(a) provides that if the debtor is the direct holder of a certificated security, the appropriate means by which a creditor can reach the debtor's interest is by actual seizure of the certificate. The principal effect of this rule would be to direct one to whatever law governs legal process for reaching ordinary chattels, rather than whatever law governs legal process for reaching choses in action. Thus, this rule is merely a reflection, in the context of the rules of creditor process, of the principle that a security certificate is an embodiment of the underlying rights against the issuer." (7A Hawkland & Rogers, Uniform Commercial Code Series (1996) - 8-112:01 [Rev. Art. 8].)
Section 8112, subsection (e) authorizes the court to aid a creditor in reaching a certificated security or, in the case of property that cannot be reached by other legal process, in satisfying the creditor's claim by means allowed at law or in equity. "Subsection (e) simply makes clear that a creditor is entitled to appropriate aid from courts of competent jurisdiction, a proposition that would surely follow from other state law even in the subsection's absence. Subsection (e) provides for no relaxation of the requirements of the rest of section 8-112 (including subsection (a)'s actual seizure requirement) but merely welcomes supplemental means by which those requirements might be met." (7A Hawkland & Rogers, Uniform Commercial Code Series (2008 Supp.) - 8-112:01 [Rev. Art. 8], footnotes omitted.)
A court cannot compel a corporation to issue new stock certificates to a judgment creditor if the old certificates have not been surrendered and none of the statutory exceptions for issuing new certificates apply. (Reynolds v. Reynolds (1960) 54 Cal.2d 669, 679-681; see also Detox Industries, Inc. v. Gullett (Tex. App. 1989) 770 S.W.2d 954 [holding that Texas's statutory equivalent of Uniform Commercial Code section 8-317, the predecessor to section 8-112, did not authorize an order to cancel and reissue a stock certificate in the name of a court-appointed receiver for delivery to a levying officer to be sold at an execution sale to satisfy a money judgment]; cf. House v. Williams(1991) 573 So.2d 1012, 1013 [terse ruling on an emergency motion for stay of a sheriff's sale pending review that Florida's statutory equivalent of section 8112, subdivision (e), "authorizes a judge to order a closely held corporation controlled by the judgment debtors to reissue stock certificates in their names when they refuse to respond to discovery or to disclose the location of the original stock certificates."].)
In this case, once Debtor lodged his H&H stock certificate with the trial court, no further aid was required from the court under section 8112, subdivision (e), to reach Debtor's interest in the security. After a certificated security is reached as required under section 8112, the enforcement procedures of the ELJ apply. However, assuming the trial court could properly exercise its equity jurisdiction with regard to Debtor and Debtor's Wife's shares, we conclude that the trial court abused its discretion by ordering the property transferred directly to Creditor without any reduction in the outstanding money judgment. The purpose of Creditor's action was to reach the security interests to enforce the outstanding money judgment against Debtor. The securities at issue were found to have no value and cannot satisfy Creditor's judgment in any amount. It was an abuse of discretion to order property that cannot be applied to satisfy the outstanding money judgment in any measure transferred to Creditor in an action to enforce the judgment. (Cf. Associated Ready Mix, Inc. v. Douglas (1992) 843 S.W.2d 758, 761-763 [abuse of discretion to order judgment debtor to turn over derivative cause of action to judgment creditor who would not pursue claims, because the value of the claims could not be determined and applied to satisfy the judgment].) The judgment ordering the certificates transferred directly to Creditor must be reversed.
The judgment is reversed. Appellants Shih-Ming Hsieh and Cheng-Fang Ho are awarded their costs on appeal.