3H Corp. v. Integrated Technologies CA2/8

Filed 6/6/14 3H Corp. v. Integrated Technologies CA2/8
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION EIGHT
3H CORPORATION, B248626
Plaintiff and Respondent, (Los Angeles County
Super. Ct. No. LS021448)
v.
INTEGRATED TECHNOLOGIES
CONSULTING, INC.;
Defendant;
PAMELA REYES et al.,
Appellants.
APPEAL from an order of the Superior Court of Los Angeles County.
Frank J. Johnson, Judge. Affirmed.
Law Offices of Bennett A. Rheingold and Bennett A. Rheingold for Appellant
Philip Reyes.
Law Office of Michael P. Ribons and Michael P. Ribons for Plaintiff and
Respondent.
__________________________
Philip Reyes appeals from the trial court order that he turn over to judgment
creditor 3H Corporation money his corporation borrowed from the wife of judgment
debtor Allen Kurtz. We affirm the order.
FACTS AND PROCEDURAL HISTORY
In March 2011 an arbitrator determined that Integrated Technologies Consulting,
Inc. (ITC), and its alter ego, company president Allen Kurtz, breached their fiduciary
duty to 3H Corporation by diverting money owed to 3H in connection with their joint
project to design and build freeway call boxes for Los Angeles County. The arbitrator
awarded 3H more than $1.2 million in compensatory damages, costs, and interest, along
with punitive damages of $300,000 and $50,000 respectively against ITC and Kurtz.
Pamela Reyes, who owned an equity interest in, and was an officer of, ITC, was also a
party to the arbitration, but the arbitrator found she was not liable. The arbitrator also
enjoined Kurtz from selling, encumbering, or transferring his house or other assets that he
owned or controlled.
In May 2011, the trial court issued a temporary restraining order (TRO)
prohibiting Allen Kurtz and his wife Debra from selling, encumbering, or transferring
their house or other assets they owned or controlled.1 On November 9, 2011, the trial
court entered a default judgment confirming the arbitration award, including a permanent
injunction that ordered Allen Kurtz and “all those acting in concert with or under [his]
direction” from selling, encumbering, or transferring their homes or other assets within
their control.
3H later learned that Debra Kurtz had loaned $19,400 to Proguard Covers Inc. on
November 14, 2010, while the arbitration hearing was still underway. Proguard is a
telemarketer of abrasive wheels used for machining and other similar tasks. Its president
1 The appellate record does not include the TRO or any points and authorities that
might have been submitted in connection with it. Instead, the TRO is referenced in the
turnover order being appealed. The basis for the TRO does not appear in the record and
is not explained by the parties’ appellate briefs.
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and sole officer is Philip Reyes, the brother of ITC co-owner and officer Pam Reyes. The
loan, which was documented by a promissory note, was interest free and was to be repaid
within two years.
On March 14, 2011, Debra Kurtz paid $20,000 for 20 percent of Proguard’s shares
of stock. Those shares gave her no voting rights, paid no dividends, and could not be
sold without Proguard’s approval. On October 31, 2011, Debra Kurtz extended the term
of her loan to Proguard for an additional two years, without receiving anything in return.
This occurred while 3H’s motion to confirm the arbitration award as a default judgment
was pending.
In October 2012, 3H conducted judgment debtor’s examinations of Philip and
Pamela Reyes pursuant to Code of Civil Procedure section 708.120, which applies to
persons who possess or control property in which a judgment debtor has an interest, or
who owe money to a judgment debtor. Philip Reyes testified that he needed the loan
because Proguard was struggling and he wanted more capital, but he admitted that he was
still paying himself a regular monthly salary of $3,200 while also paying Pamela Reyes a
monthly salary in an unknown amount. He also had two employees who worked on
commission, and despite some monthly fluctuations in sales, kept an inventory of 10,000
abrasive wheels on hand.
As for the loan extension, Philip Reyes testified that Debra Kurtz offered it after
he told her that Proguard was struggling and that he did not want to default on the loan.
When asked why Debra Kurtz would extend her interest free loan another two years,
Reyes said, “I don’t know, I didn’t get into that. I don’t remember.”
Based in part on the results of those judgment debtor examinations, 3H filed a
motion asking the court to order Proguard to turn over the proceeds of the $19,400 loan
made by Debra Kurtz.2
At the March 2013 hearing on 3H’s turnover motion, the trial court found that the
loan extension violated its May 2011 TRO. It also found that the persons who “own and
2 It is unclear from the record whether other discovery or judgment debtor’s
examinations were conducted or, if so, whether their results were before the trial court.
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run” Proguard had been aware of that order, and that the “Reyes Family [was] drawing
significant funds from Proguard, Inc. each and every month.” It therefore ordered
Proguard, “through its president Philip Reyes,” to turn over the proceeds of the $19,400
loan from Debra Kurtz because the loan came due in December 2012.
Philip Reyes appeals from that order, contending that the trial court erred because:
(1) the loan term had been extended and repayment was not due until November 2014;
(2) Debra Kurtz did not violate the May 2011 TRO by extending the loan’s due date; and
(3) he could only be ordered to pay upon a showing the money was in his possession or
under his control, and the evidence showed that he had used the money to buy inventory
for Proguard, meaning there was no identifiable sum of money to turn over.3
DISCUSSION
1. Applicable Law and Standard of Review
Under prior law, a judgment creditor could enforce his judgment by executing on
property held by a third party as to which the judgment debtor had some interest, or on a
debt owed by a third party to the judgment debtor. (Former Code Civ. Proc., § 719.)4
However, if the third party asserted an interest in the property adverse to the judgment
creditor, or denied owing money to the debtor, the judgment creditor had to bring a
creditor’s suit against the third party to resolve any competing claims to the property or
3 3H contends that Philip Reyes lacks standing to appeal because the turnover order
was directed at Proguard, not him. We disagree. The turnover order was directed to
Philip Reyes in his capacity as president of Proguard. 3H later sought a contempt citation
against him for his failure to produce the funds. The notice of appeal states that Philip
was also appealing from a contempt order, so we presume such an order was granted.
Although Philip Reyes has not raised the contempt order in his appellate briefs, it is clear
that he is a party aggrieved by the turnover order and therefore has standing to appeal.
Pamela Reyes was also named in the notice of appeal, but Philip’s appellate briefs
raise no issues as to her, and we deem her appeal abandoned.
4 All further undesignated section references are to the Code of Civil Procedure.
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determine whether the third party in fact owed money to the judgment debtor. (Former
§ 719; Evans v. Paye (1995) 32 Cal.App.4th 265, 278 (Evans).)
Effective 1983, the Legislature eliminated former section 719 and adopted a
quicker way to resolve these issues. Now, if a judgment creditor makes a prima facie
showing that a third party holds property of, or owes a debt to, the judgment debtor, the
third party may be ordered to appear in court to answer questions about the property or
debt. The judgment creditor’s supporting declaration may be based on information and
belief. (§ 708.120, subd. (a); Evans, supra, 32 Cal.App.4th at pp. 279-280.)5
If the third party denies the debt, the creditor may ask the court to determine the
existence of the debt. The trial court may continue the matter for a reasonable time for
discovery proceedings, the production of evidence, or other hearing preparation.
(§ 708.180, subd. (a).) The court may not determine the debt’s existence if: the third
party’s denial of the debt is made in good faith; a creditor’s suit (§ 708.210) is pending;
or the trial court determines that the matter is best resolved in a separate creditor’s suit
(§ 708.180, subd. (b)(1)-(3)).
Once the judgment creditor make a prima facie showing that the third party owes
money to the judgment debtor, the burden shifts to the third party to show by a
preponderance of the evidence that he denies the debt in good faith. (Evans, supra,
32 Cal.App.4th at p. 282.) “Good faith” means an honest statement of mind, no intent to
defraud, and the absence of deceit and collusion. (Id. at pp. 282-283.) Good faith may be
“shown by evidence that the third person genuinely believed the debt never existed or, if
there was a debt, by evidence of the third person’s sincere belief that the obligation to the
judgment debtor was dependent on a condition yet unfulfilled; that payment on the debt
had been excused by the occurrence of some event subsequent to the obligation or by the
judgment debtor’s failure to perform; that the obligation was incurred through mistake or
fraud; that an honest dispute exists as to the amount of the debt; or that the debt had
already been satisfied, in whole or in part.” (Id. at p. 283.)
5 Even though sections 708.120 and 708.180 apply to both property and debts, for
ease of reference we will hereafter mention only debts.
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If the trial court finds that the third party’s claim of good faith is credible, the
debt’s existence is then determined by way of a creditor’s suit instead of through the
summary procedure supplied by sections 708.120 and 708.180. (Evans, supra,
32 Cal.App.4th at p. 283.) If the trial court rejects the third party’s claim of good faith, it
may then order that the third party’s debt to the judgment debtor be applied toward
satisfying the money judgment, thereby creating a lien on the debt. (§ 708.205,
subd. (a).)
We review the trial court’s ruling under the substantial evidence standard, and
therefore view the record and draw all reasonable inferences in the light most favorable to
the judgment. (Evans, supra, 32 Cal.App.4th at p. 285, fn. 18.)6
2. Substantial Evidence Supports a Finding the Loan Extension Was Not Made in
Good Faith
Philip Reyes’s appellate argument boils down to the following: (1) the loan to
Proguard was proper because it was made in mid-November 2010, before the May 2011
TRO that prohibited Allen and Debra Kurtz from selling, encumbering, or transferring
their house or other assets within their control; (2) the two-year loan extension made in
October 2011 did not violate the TRO because Debra Kurtz maintained all of her rights
arising from the original promissory note, meaning that no rights to an asset were
transferred by the extension; (3) as a result, the March 2013 turnover order was improper
because the loan was not due until November 2014.
In short, Philip Reyes does not dispute the existence of Proguard’s debt to Debra
Kurtz. Instead, he denies Proguard’s obligation to repay the debt at the time of the
turnover order by relying on the two-year extension from Debra Kurtz. If Reyes had
shown good faith in connection with these transactions, he would be correct. (Evans,
supra, 32 Cal.App.4th at p. 283 [good faith may be shown by evidence of the third
6 Both parties contend – incorrectly – that the abuse of discretion standard of review
governs here.
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person’s sincere belief that the obligation to the judgment debtor was dependent on a
condition yet unfulfilled].)
However, Philip Reyes does not acknowledge or discuss the good faith component
of sections 708.120 and 708.180 and has not analyzed the issue in light of the substantial
evidence standard of review.7 We therefore deem the issue waived. (Landry v.
Berryessa Union School Dist. (1995) 39 Cal.App.4th 691, 699-700.) We alternatively
conclude on the merits that the order was supported by substantial evidence that Philip
Reyes did not act in good faith when he denied Proguard’s immediate obligation to repay
the loan.
The trial court did not expressly find that Philip Reyes’s reliance on the loan
extension was in bad faith. Instead, it found that Kurtz violated the TRO by making the
extension, that the persons who owned and ran Proguard were aware of that order, and
that the Reyes Family was drawing significant sums of money from Proguard each
month. However Philip did not designate the reporter’s transcript of the hearing on the
turnover motion as part of the appellate record and, under well-settled rules of appellate
review, we therefore presume the absence of error from a silent record and assume that
the trial court made all necessary findings to support its order. (Sears, Roebuck & Co. v.
National Union Fire Ins. Co. of Pittsburgh (2005) 131 Cal.App.4th 1342, 1352, fn. 7.)
Our review of the record shows substantial evidence that the loan extension violated the
TRO and that Philip Reyes’s reliance on that extension in order to refuse payment was
not in good faith.
Whether a third party who borrowed money from a judgment debtor did so in
good faith turns on the circumstances of the transaction, including the relationships
7 3H’s appellate brief does not expressly refer to the notion of good faith. However,
it contends that the trial court’s order was proper based on all the circumstances and
evidence before the trial court, including the close ties between the parties, Proguard’s
knowledge of the TRO, and the fact that the loan was interest free and that Proguard paid
nothing for the extension. Combined, 3H contends, this showed that the loan was
intended to delay or thwart enforcement of the judgment. We construe this as a
contention that Philip Reyes’s reliance on the loan extension was not made in good faith.
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between the parties and the timing of the loans. (Evans, supra, 32 Cal.App.4th at p. 284
[finding of bad faith warranted by fact that land was transferred and loans made to family
members while litigation was pending and after judgment was entered].)
We begin with the relationships between the various players. Allen Kurtz was the
president and primary shareholder of ITC. Pam Reyes was an equity owner of ITC and
was a corporate officer. She also managed the books and performed other accounting
tasks for Proguard, which belonged to her brother, Philip Reyes. Philip Reyes invested
$100,000 in ITC. Although he claimed he lost that investment, he also admitted
receiving two checks from ITC totaling $140,000. Pam and Philip Reyes lived in the
same house. Philip Reyes was Proguard’s only officer, and Pam Reyes helped set up the
company. Proguard used ITC’s address when it was formed. This evidence shows that
the parties and their businesses have much in common. It also suggests that they act in
concert. Furthermore, Philip Reyes’s receipt of $40,000 more than his supposedly lost
investment in ITC suggests that ITC was parking funds with him.
We next examine the timing of the loan and the extension. The loan was made
while the arbitration was underway in November 2010. On March 14, 2011, Debra Kurtz
paid $20,000 for a very restricted class of 20 percent of Proguard’s shares of stock. This
occurred about two weeks before the arbitrator issued his decision. However, the
arbitrator’s decision refers to a February hearing on the issue of punitive damages and the
existence of an interlocutory award, leading to the inference that the stock purchase
occurred after ITC and the Kurtzes learned they had lost or likely were to lose the case.
On October 31, 2011, while 3H’s motion to confirm the arbitration award as a default
judgment was pending, Debra Kurtz extended the term of her loan to Proguard for an
additional two years. The timing of these transactions suggests they were motivated by
fear of losing, and then having lost, the arbitration proceeding.
Next we consider the terms of the loan – which was interest free – and the
extension – for which Proguard paid nothing. Philip Reyes contends that delaying the
limitations period to bring suit for breach of the promissory note supplied consideration
for the extension. We reject that contention. At the time the extension was made the
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loan was not yet due and there was no cause of action as to which an applicable
limitations period could have began to run.
Distilled, the evidence and its reasonable inferences showed that: Philip Reyes
had invested money in ITC, the company partly owned by his sister; Philip Reyes later
received checks from ITC in a combined amount greater than his investment; Proguard
and ITC shared the same address; Debra Kurtz, wife of ITC owner Allen Kurtz, made an
interest free loan to Proguard in the middle of the ITC-3H arbitration; Debra Kurtz then
bought a 20 percent share of Proguard after learning of the arbitrator’s decision, but had
no right to sell her shares without Proguard’s approval; Debra Kurtz extended the loan’s
term by another two years for no charge while the petition to confirm the arbitration
award as a judgment was pending.
Based on the intertwining relationships of these parties and the timing and
circumstances of the loan and the extension, the trial court was justified in finding that
the original loan, even if not in violation of any court order, was a sham and was made in
order to thwart enforcement of the judgment by 3H. The same holds true for the loan
extension.
We reject Philip Reyes’s contention that the loan extension did not violate the
May 2011 TRO because it did not involve the transfer or encumbrance of any assets.
Reyes contends that an encumbrance applies to only real property. We disagree. For
instance, in divorce proceedings a spouse is not allowed to “sell, convey, or encumber”
community personal property such as furniture and clothing. (Fam. Code, § 1100,
subd. (c), italics added.) Under the Commercial Code, personal property subject to an
execution lien remains subject to the lien even if it has been transferred or encumbered.
(Code of Civ. Proc., § 697.740.)
Under the analogous Uniform Fraudulent Transfer Act (Civ. Code, §§ 3439-
3439.12), the term “transfer” applies to “every mode, direct or indirect, absolute or
conditional, voluntary or involuntary, of disposing of or parting with an asset or an
interest in an asset, and includes payment of money, release, lease, and creation of a lien
or other encumbrance.” (Civ. Code, § 3439.01, subd. (i).) The term “transfer” in this
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section is derived from the federal Bankruptcy Code, which has similar language
(11 U.S.C. § 101(54)(D)), and which Congress intended to be all inclusive and which is
to be construed as broadly as possible, “including a transfer of possession, custody, or
control, even if there is no transfer of title.” (In re Lemley Estate Business Trust
(N.D. Texas 1986) 65 B.R. 185, 189.)
With these authorities in mind, we conclude that the loan extension qualified as
both an encumbrance and a transfer. The TRO was clearly intended to prevent Debra
Kurtz from transferring assets in order to thwart enforcement of 3H’s judgment. It would
undermine the trial court’s order to allow judgment debtors to whom money is owed by
third parties to gratuitously and in bad faith extend the loan term indefinitely solely to
prevent enforcement of a judgment. Under the circumstances here, we conclude that the
extension acted like a new transfer or encumbrance because it allowed Proguard to hold
on even longer to money that it accepted as part of a sham loan designed to keep those
funds out of 3H’s hands.
3. There Was Substantial Evidence That Proguard Had the Loan Funds
An application for a turnover order must describe the property in the possession or
control of a third party, or the third party’s debt to the judgment debtor, “in a manner
reasonably adequate to permit it to be identified.” (§ 708.120, subd. (c).) If the judgment
creditor prevails, the trial court may order the third party to turnover either the property in
his possession or control or the debt owed to the judgment debtor. (§ 708.205, subd. (a).)
Philip Reyes contends the turnover order must be reversed because the evidence showed
that he used all his capital to buy inventory and there was no showing that he possessed
adequate funds to pay the debt.
Philip Reyes did not testify that all of Proguard’s capital was tied up in inventory
or that the company was currently struggling to make ends meet. In fact, he produced no
evidence concerning Proguard’s current financial condition. The trial court’s order
focused on the fact that Philip and Pam Reyes were both drawing significant funds from
Proguard every month. This finding is supported by testimony that Philip paid himself
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$3,200 each month and paid his sister a monthly salary in an unknown amount. He also
testified that Proguard kept an inventory of 10,000 abrasive wheels on hand, suggesting
that the company was in fact thriving. Based on this evidence, the trial court was free to
conclude that Proguard had sufficient funds on hand to repay the loan from Debra Kurtz.
DISPOSITION
The turnover order is affirmed. Respondent 3H shall recover its costs on appeal.
RUBIN, ACTING P. J.
WE CONCUR:
FLIER, J.
GRIMES, J.
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