California

Warning: The following opinion is provided for purposes of discussion only. We have not Shepardized™ this opinion, and do not know the subsequent disposition of this case nor whether the effect of the opinion has been overruled or superceded by other law.

Beach Park Associates v. Heron,
2003.CA.0007995 (Cal.App. Dist.6 08/25/2003)

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SIXTH APPELLATE DISTRICT

H023320

2003.CA.0007995

August 25, 2003

BEACH PARK ASSOCIATES, PLAINTIFF, CROSS-DEFENDANT AND APPELLANT,
v.
SHERILL R. HERON ET AL., DEFENDANTS, CROSS-COMPLAINANTS AND APPELLANTS; WALTER HARRINGTON ET AL., CROSS-DEFENDANTS AND APPELLANTS.

(Santa Clara County Super.Ct.Nos. CV668886 & CV776920)

The opinion of the court was delivered by: Wunderlich, J.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

* * *

This case is related to and arises out of another case, Heron West Santa Clara Associates v. Kelley West Santa Clara Associates et al. (L'Omelette et al.) (Dec. 5, 1996, H014096 [nonpub. opn.] (hereafter "the related case"). In an unpublished opinion in the related case in 1996, we held that a 1990 trial court order, which had never been appealed from, could not be challenged for the first time in 1995. The 1990 order was issued against the L'Omelette Joint Venture and its two constituent partnerships (hereafter collectively "L'Omelette") and required L'Omelette to pay the plaintiff judgment creditors for money lent to its general partners in violation of a charging order.

After the prior appeal was decided in their favor, the judgment creditors served L'Omelette with a notice of levy and writ of execution, seeking to satisfy the unpaid judgment by selling L'Omelette's sole asset, commercial real property in Palo Alto. In response, a partnership that was not a party in the related case, Beach Park Associates, filed a third party claim of superior right to the real property, and it initiated foreclosure proceedings on the property. At that point, the court suggested that the matter could better be handled in a separate declaratory relief action.

Beach Park Associates ("Beach Park") filed a complaint for declaratory relief, initiating the instant action. Judgment creditors James R. Heron, Sherill R. Heron, and C. Norman Winningstad (hereafter "Heron Group") filed a cross-complaint. Following a nine-day court trial, the court found that Beach Park's security interest in the subject real property was senior to the Heron Group's interest. In its almost 60 page statement of decision, which incorporated its tentative decision and various revisions, the trial court made a number of other findings, some of which have been appealed by the Heron Group and others of which have been appealed by Beach Park. We shall affirm the judgment.

FACTS

A. The related case

The following facts are taken from our prior opinion: "On February 6, 1990, appellant Heron West Santa Clara Associates obtained a judgment against Ryland Kelley, William Kelley, and Kelley West Santa Clara Associates in the amount of $644,654.40. To enforce the judgment, appellant served the Kelleys, both individually and as general partners, with notice of a motion for charging orders against the Kelleys' partnership interests in some 40 partnerships. By operation of law, liens attached to each of the Kelleys' partnership interests on March 30, 1990, when the notice of motion was served. (Code Civ. Proc., § 708.320.)

"The charging orders required each partnership to pay to appellant `any and all income, revenues, distributions, compensation, fees, repayment of debt, or personal property, tangible or intangible, or [sic] whatever sort or nature, that have, at any time from the date of service of the notice of motion herein on the respective partnerships or thereafter, become due, payable, or distributable to any one or more of the judgment debtors, or as to which any one or more of the judgment debtors has become entitled . . . .

"At the time the charging orders were issued on May 21, 1990, the trial court (Hon. Ronald Whyte) specifically noted that the Kelleys and each of the 40 specified partnerships had been served with notice of motion `to the satisfaction of the Court.' It charged the Kelleys' partnership interests with payment of the unpaid balance of the underlying judgment and it ordered the partnerships to make their records available to appellant for inspection.

"Pursuant to this order, appellant's certified public accountant inspected the records of several Kelley partnerships. He discovered what he considered to be improprieties with respect to two of the partnerships and their joint venture, and he reported these discoveries to appellant's counsel. *fn1 Appellant's counsel immediately filed a motion to compel disgorgement of funds and/or other equitable relief.

"In the motion appellant recounted the following events: `Two of the partnerships named in the May 21 charging order were Roberts and L'Ommies. Both Bill Kelley and Ryland Kelley hold general and limited partnership interests in Roberts and in L'Ommies. In fact, the two Kelleys are the only general partners of L'Ommies and they comprise two of the three general partners of Roberts. *fn2 [] Roberts and L'Ommies each own 50% of a third partnership called `L'Omelette.' Thus, L'Omelette, a joint venture, is owned equally by the two limited partnerships, Roberts and L'Ommies. As the controlling general partners of both Roberts and L'Ommies, the Kelleys control L'Omelette. [] The partnership records indicate a planned series of transactions whereby L'Omelette would borrow $800,000 from a lender, secured by L'Omelette's valuable asset, a restaurant business, building and land in Palo Alto. L'Omelette in turn would 'lend' the loan proceeds to Bill and Rye Kelley individually, 'secured' by their respective partnership interests in Roberts and L'Ommies. Then the L'Omelette property would be sold and, in lieu of a distribution of sale proceeds to the Kelleys along with the other partners in Roberts and L'Ommies, their share would be offset by the amount due on the loan. The net effect would be that the Kelleys would be cashed out of the Roberts and L'Ommies partnerships by means of a `loan' in order to avoid the charging order. [] The $800,000 loan to L'Omelette in fact was made on or about April 9, 1990. (See, Deed of Trust with Assignment of Rents and Promissory Note, attached to the Declaration of Richard Nicol, `the Nicol Declaration', as Exhibit H.) Records of the L'Omelette partnership reflect that as of some date in May 1990 Bill and Rye Kelley became indebted to L'Omelette in the amount of approximately $800,000. (See L'Omelette monthly balance sheets as of 4/30 and 6/30/90 attached to the Nicol Declaration as Exhibit I.) [] Records reviewed by Mr. Nicol also include letters from Bill and Rye Kelley to the Roberts limited partners indicating that the sale of the restaurant and land was to be completed by September 1, 1990. (See, letters dated 4/20/90 and 5/31/90 attached to the Nicol Declaration as Exhibit L.) This closing date was apparently extended to October 1, 1990. (See Third Addendum to Loan Purchase Agreement attached to the Nicol Declaration as Exhibit K.) [] The scheme whereby the Kelleys would cash out their partnership interests by means of a `loan' was set forth in a memo dated April 12, 1990 from Bill Kelley to Pat Kelley. *fn3 [] The memo, which is attached to the Nicol Declaration as Exhibit G, states in relevant part: [] ` . . . In other words, Harrington's group loans to L'Omelette Joint Venture, L'Omelette Joint Venture then lends to the two Kelley boys as individuals or to Probion, and secures their loan with our partnership interests. Then at the time of the sale, they have to pay off Harrington in order to clear title, therefore we're in default and they seize our partnership interests . . . . (Emphasis added.)' [] The memo reflects a calculated plan to circumvent Heron's higher and prior claims to valuable partnership interests owned by `the Kelley boys' in Roberts and L'Ommies. If the Kelleys are allowed to keep the loan proceeds they will have succeeded in thwarting this Court's charging order.

"Appellant's motion was supported by the declaration of its accountant, who attached the memo from William Kelley. The motion asked the court to exercise its power to compel obedience to its judgments, orders and process (Code Civ. Proc., §§ 128, subd. (a)(4); 177, subd. (2)) by requiring that either the Kelleys disgorge the amount they "borrowed" or the respondent partnerships pay the amount they lent the Kelleys (up to the amount of the underlying judgment).

"The motion was served on the Kelleys both as individuals and as general partners of the partnerships that allegedly violated the charging order (Roberts and L'Ommies). At the hearing on the motion, the third party who lent the joint venture the $800,000 that was subsequently `lent' to the Kelleys made a special appearance. That party, Beach Park Associates, its general partner, Walt Harrington, and the third partner in the Roberts partnerships are now the general partners of the Roberts and L'Ommies partnerships. According to Ryland Kelley, `until the date of the hearing on September 19, 1990, I believed that no defenses existed . . . .' The Kelleys' attorney, therefore, did not oppose appellant's proposed order or contest its factual basis.

"The court, however, carefully went over appellant's proposed order. It made corrections on eight lines, substituted language, added conditions, and included an additional 19 handwritten lines at the end. After the court interlineated that `W. Patrick Kelley appeared for defendants' (emphasis added) *fn4 , the court decreed that `1. L'Ommies, a limited partnership, Roberts, a limited partnership and/or L'Omelette Joint Venture are hereby ordered to pay, and/or judgment debtors William Kelley and/or Ryland Kelley are ordered to disgorge, all moneys borrowed or otherwise obtained by defendants from L'Omelette Joint Venture at any time since March 30, 1990 in an amount sufficient to satisfy Heron's judgment. . . .' The order was signed on September 26, 1990.

"Subsequently, the Kelleys filed a motion for reconsideration and appellant filed a motion to enlarge the scope of the equitable relief. The motion for reconsideration was denied except as to one small point not relevant here. The motion for equitable relief was granted only to the extent it added seven additional partnerships. Appellant also sought a temporary restraining order against a real estate development corporation owned by the Kelleys and against the Beach Park Associates group that had lent L'Omelette the $800,000. As these groups were not defendants in the underlying action, and were not subject to the court's authority by virtue of the charging orders, the trial court denied appellant's application.

"On May 21, 1992, appellant presented the court's September 26, 1990, order to the clerk and represented it constituted a judgment against the Roberts and L'Ommies partnerships. Based on this representation, the clerk issued an abstract of judgment. The following day appellant filed a J-1 notice of lien naming the partnerships.

"The partnerships never appealed from the September 26, 1990 order requiring them to pay the amount due on the judgment. Nor did they ever pay any money to appellant. In 1992 Beach Park Associates, Walt Harrington, and Louie Borel purchased the interests of the more than 25 limited partners in the Roberts and L'Ommies partnerships. They did not pay anything, however, to acquire the interests of the two individuals who held the largest percentage interests in both partnerships, i.e., William and Ryland Kelley. The Kelleys had pledged their partnership interests as security for their $800,000 loan. These partnership interests were apparently foreclosed on, and Beach Park Associates, Walt Harrington, and Louie Borel became the general partners of the Roberts and L'Ommies partnerships.

"Over the years, appellant received certain periodic payments and credits on the Kelleys' account, although apparently none of it came from the respondent partnerships. As of April 6, 1995, only $366,374.50 remained due on the judgment.

"In early 1995, the partnerships entered into a long-term lease on its property on El Camino in Palo Alto with Walgreens Drugs. Walgreens intended to tear down the restaurant that was on the property and build one of its stores there. The lease was to commence on March 1, 1995, and was contingent upon L'Omelette providing Walgreens with a clear title insurance policy by March 14, 1995. The title policy, however, showed a lien on the property resulting from the abstract of judgment and J-1 filed by appellant.

"On February 23, 1995, the partnerships filed an ex parte application for an order shortening time to file a motion to set aside and vacate an abstract of judgment and judgment lien. After various papers were filed and a hearing held, the court denied the motion without prejudice and appointed a special master to `make recommendations to the Court as to what factually occurred. [] Special Master to review lease agreement also.'

"On April 7, 1995, the partnerships filed a motion for declaratory relief, to vacate order, and to vacate and remove abstract of judgment and J-1. In their moving papers, the respondent partnerships argued that they were not defendants in the underlying lawsuit, that the court had no jurisdiction over them when it made the September 26, 1990, order, that they were not judgment debtors of appellant, and that therefore the abstract of judgment and J-1 must be vacated.

"The motion was to be heard on April 28, 1995. Two days before the hearing on the motion, the special master issued his report. Its conclusion was `that Judge Whyte's Order of September 26, 1990 did not provide to Plaintiffs therein with a judgment against the MOVING PARTIES which determines, that the MOVING PARTIES are judgment debtors of Plaintiffs.' This conclusion was based in part on the special master's factual finding that `[t]he Order to Show Cause and the Temporary Restraining Order dated September 4, 1990, signed by Judge Stone, ordered that only the KELLEY'S [sic] come to court and that only they be served.' *fn5 The special master found that the court and prior counsel `[n]ever intended in the orders issued in 1990 that the MOVING PARTIES would be or had been adjudicated as judgment debtors of Plaintiffs. It is further concluded that the above Judges and counsel intended only that the partnership interests of Defendants, hereafter `the KELLEY'S' [sic][,] would be subject to collection, attachment, garnishment, in favor of the Plaintiff Judgment Creditor. . . . [T]he Court obtained jurisdiction over L'Omelette, a joint venture, Roberts, a Limited Partnership, and L'Ommies, a Limited Partnership, solely for the purpose of carrying out its orders for the foreclosure, sale or collection of partnership interest of the KELLEY'S [sic] in favor of the judgment creditors and to prohibit the KELLEY'S [sic] from shifting assets around and away from orders directing that their assets go to judgment creditors. Jurisdiction over the MOVING PARTIES to pay over Kelly [sic] moneys or interest is quite different from jurisdiction to determine indebtedness of the MOVING PARTIES.'

"The trial court, noting in its order that `[t]his is indeed a curious case,' ruled that the respondent partnerships `are not and never have been judgment debtors' of appellant and that the abstract of judgment and J-1 naming them as judgment debtors were null ab initio and should be vacated. Appellant timely appealed." (Heron West Santa Clara Associates v. Kelley West Santa Clara Associates et al. (L'Omelette et al.) (Dec. 5, 1996, H014096 [nonpub. opn.].)

After the appeal was decided, the Heron Group moved for an assignment of the rents being paid by Walgreens to L'Omelette. L'Omelette opposed the motion on the ground that the rents were being paid to Beach Park under its deed of trust. On April 23, 1998, the Heron Group served L'Omelette with a notice of levy and writ of execution, seeking to satisfy the disgorgement order by selling L'Omelette's real property. On May 1, 1998, Beach Park recorded a notice of default and election to sell under its deed of trust on the Palo Alto property. Six weeks later, on June 18, 1998, Beach Park filed a third party claim of superior right to possession of levied real property in the related case.

The Heron Group responded to Beach Park's claim by filing a motion to determine priority as between Heron Group's judgment lien and Beach Park's deed of trust, to stay Beach Park's foreclosure, for an assignment of rents, and to appoint a receiver. The trial court restrained Beach Park from foreclosing on the property but denied any other relief that the Heron Group sought. The court concurred with Beach Park's proposal that a determination of the parties' respective rights and obligations was more appropriately subject to a separate declaratory relief action.

B. The instant case

In the early 1990's, the Kelleys approached the general partner of Beach Park, one Walter Harrington, about securing a short-term loan from Beach Park, which would be repaid October 9, 1990, when L'Omelette's sole asset, the aforementioned real property in Palo Alto, was sold. The property was already in escrow under a contract of sale for $2.6 million. Harrington agreed to the short-term loan and took a second deed of trust on the property as security. He was unaware of the charging order and had never heard of the Herons. The deed of trust was recorded on April 10, 1990.

The disgorgement order that the Heron Group obtained was issued five months later, on September 26, 1990.

The sale of the property fell through, and the short-term loan was not repaid. As a consequence, in January 1992 Beach Park decided to buy out the limited partners in the Roberts and L'Ommies partnership and thus take control of L'Omelette. Beach Park purchased two-thirds interest in the partnerships and Roberts' general partner Louis Borel purchased the other one-third.

On September 25, 1998, Beach Park filed its complaint for declaratory relief, seeking, among other things, a judgment that Beach Park's security interest was prior to and senior to the Heron Group's judgment lien. On June 25, 1999, the Heron Group filed a cross-complaint against Beach Park, its general partner, Walter Harrington, and L'Omelette's general partners, Harrington and Louis Borel.

The case was tried before the trial court starting on September 28, 2000. After nine days of testimony and extensive post-trial proceedings, the trial court issued its Statement of Decision on June 29, 2001. The judgment was entered July 19, 2001, and the Heron Group timely appealed. Beach Park filed a cross-appeal.

DISCUSSION

A. The Heron Group's appeal

The Heron Group raises seven issues on appeal: (1) whether the trial court erred in finding for Harrington and Borel on Heron Group's cause of action for general partner liability; (2) whether the trial court erred in refusing to amend the judgment in the related action to add Harrington and Borel on alter ego grounds; (3) whether the trial court erred in finding that Beach Park's investment could be classified as a loan after 1992 when Beach Park became L'Omelette's majority owner and the L'Omelette partnership ceased to exist; (4) whether the trial court erred by finding that $500,000 received by the Heron Group from the sale of unrelated partnership interests should be credited against the underlying judgment; (5) whether the trial court erred by not giving effect to this court's prior opinion in the related case; (6) whether the trial court erred by refusing to make a finding on the amount due Beach Park; and (7) whether the trial court erred in awarding costs to Beach Park. We will address each issue separately.

1. Did the trial court err in finding for Harrington and Borel on Heron Group's cause of action for general partner liability?

Corporations Code section 16307, subdivision (d), provides, in pertinent part: "A judgment creditor of a partner may not levy execution against the assets of the partner to satisfy a judgment based on a claim against the partnership unless any of the following apply: [] (1) A judgment based on the same claim has been obtained against the partnership and a writ of execution on the judgment has been returned unsatisfied in whole or in part. [] . . . [] (4) A court grants permission to the judgment creditor to levy execution against the assets of a partner based on a finding that partnership assets subject to execution are clearly insufficient to satisfy the judgment, . . . " *fn6

In the instant case, the trial court found that the Heron Group's writ of execution had not been returned unsatisfied in whole or in part and that L'Omelette had sufficient assets to satisfy the judgment. Both of these determinations are supported by substantial evidence in the record below. The trial court also ruled that Harrington and Borel were not personally liable for the partnership debt of L'Omelette because neither had been personally served in the related case where the disgorgement order was entered. Heron Group challenges each of these findings.

With respect to whether the writ of execution was returned unsatisfied in whole or in part, the facts are as follows: On April 23, 1998, Heron Group served a notice of levy and writ of execution on L'Omelette, seeking to satisfy the disgorgement order by selling L'Omelette's real property. The notice of levy specified that the unsatisfied balance on the disgorgement order was $803,529.50.

Apparently in response to Heron Group's notice of levy, Beach Park took various actions to establish that it had an interest in the property that was superior to Heron Group's interest. First, it recorded a notice of default and election to sell under its deed of trust. Next, it filed a third party claim (because it was not a party) in the related case, claiming a "Superior Right to Possession of Levied Real Property," pursuant to Code of Civil Procedure section 720.110, and it filed an undertaking.

In response, Heron Group filed a motion in the related case to require Beach Park to increase its undertaking in connection with the third party claim, to allow a sheriff's sale, and to appoint a receiver to collect rents. The trial court ruled: 1. The objection to the undertaking is overruled and the Motion to Increase the Undertaking or Allow Sheriff's Sale is denied; 2. Third Party claimants Beach Park Associates and Judgment debtors L'Omelette, Roberts and L'Ommies are enjoined from selling, transferring or otherwise disposing of the property subject to this execution levy located at 4170 El Camino Real, Palo Alto, California, Assessor's Parcel No. 137-24-046 without further order of this court; 3. The Sheriff is enjoined from selling, transferring or releasing the property until further order of this court; and 4. The undertaking by Beach Park Associates is deemed filed in the correct amount.

In this appeal, Heron Group contends that the trial court "reasoned that Beach Park's filing of an undertaking deemed satisfactory by the court `caused the Writ of Execution to be withdrawn.' " An examination of that portion of the Statement of Decision, however, reveals that the trial court was setting forth "Beach Park's response to the Heron Group's objections" to its tentative decision. It was Beach Park who contended that the writ of execution was withdrawn, not the trial court. The trial court held that Harrington and Borel were not liable for the Heron Group's judgment against L'Omelette because they were never joined or served as defendants in the related case.

The facts in the instant case show that the sheriff was enjoined from selling, transferring or releasing the property by the court's November 18, 1998 order. As such, the writ of execution remains subject to the trial court's order, and the sheriff may not sell, transfer or release the property until further order of the court. Accordingly, there is no evidence that the writ of execution was returned "unsatisfied" in whole or in part. The court, therefore, did not err in finding Harrington and Borel not liable for L'Omelette's partnership debts on that basis.

With respect to whether L'Omelette had sufficient assets to satisfy the judgment, the following facts are relevant: At the present time, Walgreens pays L'Omelette $15,833.94 per month on its ground lease, which L'Omelette assigned to Beach Park. The Walgreens lease is for a period of 20 years, with options to renew for up to 50 years. The initial rent of $15,833.94 applies only for the first ten years (1995 to 2005), and will increase to $17,416 for years 11 through 20. The Beach Park loan for $800,000 carries interest of 14 percent per annum. *fn7 According to Beach Park, they are currently owed about $1,630,776. Heron Group complains that according to its calculations, it would take 20 years for Beach Park to be repaid, after adding interest and then deducting rent payments, and that throughout that period its judgment would continue to grow due to added interest. However, at the end of the 20 years (should it actually take that long to repay the Beach Park loan), the Heron Group can begin collecting on its judgment. The only evidence presented at trial as to the appraised value of the property showed its value at $2.675 million. That shows more than sufficient equity to satisfy both the Beach Park deed of trust and the Heron Group's judgment lien. Accordingly, the trial court did not err in finding Harrington and Borel not liable for the partnership debt on the ground that L'Omelette's assets were insufficient to satisfy the judgment.

With respect to the Heron Group's claim that the trial court erred in ruling that Harrington and Borel were not personally liable for the partnership debt of L'Omelette because neither had been personally served in the related case where the disgorgement order was entered, the following facts are relevant: The trial court quoted section 16307, subdivision (c) in its Statement of Decision, which provides: "A judgment against a partnership is not by itself a judgment against a partner. A judgment against a partnership may not be satisfied from a partner's assets unless there is also a judgment against the partner." It went on to state, "Neither HARRINGTON nor BOREL were joined or served as defendants or individual judgment debtors in [the related case] as required by Code of Civil Procedure [section] 369.5[, subdivision] (b). While a partnership may be sued in its partnership name, pursuant to Corporations Code [section] 16307[, subdivision] (a), a third party tort or contract creditor of the partnership, such as the HERON GROUP in this case, must join (i.e., name) and serve the individual general partner as a named individual party defendant in the action in order to obtain a personal judgment against that partner's personal assets. [See Code Civ. Proc., § 369.5, subd. (b).] A judgment may not be entered against a general partner in his individual capacity unless that general partner was named and served as a party to that action, and any judgment that does so is void to that extent. [Citations.] The undisputed evidence is that HARRINGTON and BOREL were never joined (i.e., named and served) in their individual capacities in the Underlying Action (No. CV 668 886)."

On appeal, the Heron Group claims that the court erred as a matter of law when it made this ruling. It points out that under section 16307, subdivision (b), "an action may be brought against the partnership and any or all of the partners in the same action or in separate actions." (Italics added.) It quotes Witkin for the proposition that "although a partner need not be named individually in an action against the partnership, the partner must be individually named and served in the action or in a later suit, and judgment entered against that partner, in order to reach the partner's personal assets." (9 Witkin, Summary of Cal. Law (2003 supp.) Partnership, § 60V, p. 235, italics added.) Heron Group contends that its fourth cause of action against Harrington and Borel for general partner liability in the instant action was a "later suit" seeking to impose liability on the general partners for a partnership obligation, as contemplated by section 16307, subdivisions (b) and (c).

We conclude that the trial court was correct in its ruling. Preliminarily, we note that Harrington did not become a partner of either L'Ommies or Roberts (the two joint venturers in L'Omelette) until 1992, a year and a half after the disgorgement order against L'Omelette was issued. Under section 16306, subdivision (b), "A person admitted as a partner into an existing partnership is not personally liable for any partnership obligation incurred before the person's admission as a partner." With respect to Borel, who was a general partner in the Roberts partnership in 1990, the Heron Group did not attempt to name him in a lawsuit until it filed its cross-complaint in the instant action, on June 25, 1999, almost nine years after the disgorgement order was issued. Throughout that period, the Heron Group was aware of Borel's position in the partnership, but it never sought to impose liability on him personally. If Heron Group wanted to hold Borel liable, it was incumbent upon Heron Group to file suit or sit on its rights. After this long period, memories have faded, evidence might have become lost, and some, or all, the principals may have died, as has appellant James R. Heron. For this reason, the law sets statutes of limitations and the equitable defenses of laches and waiver and estoppel. We do not dispute Heron Group's assertion that in order to reach a general partner's personal assets, that partner must be individually named and served in the action or in a later action. However, this does not mean that a judgment creditor may bring that later action almost a decade after the precipitating events. We conclude the trial court properly determined that under the facts of this case, the individual partners were not liable for partnership debts because they were never served or named in a lawsuit.

* * *

B. The Beach Park cross-appeal

In its cross-appeal, Beach Park makes two arguments. The first is that the court erred in refusing to apply payments that the Heron Group received in satisfaction of the underlying judgment to satisfaction of the disgorgement order as well. *fn13 The second is that L'Omelette's liability to the Heron Group should be reduced from $800,000 to $691,223.50 because the latter is the amount the Kelleys actually received after L'Omelette paid loan fees and prepaid interest to Beach Park. We will address each contention separately.

1. Did the trial court err in failing to apply payments against the disgorgement order?

Beach Park argues that (1) the disgorgement order should be governed by its language, (2) that the obligations of the Kelleys and L'Omelette under the disgorgement order are joint and several, and (3) that the Heron Group is estopped to change its position that prior payments do apply to the disgorgement order. The trial court carefully considered these arguments and set forth its reasoning in detail in its March 2, 2001 modification to its tentative decision.

The trial court wrote: "The issues presented in Boyle v. Hawkins (1969) 71 Cal.2d 229, and the facts of this case are similar to those that were before the California Supreme Court in Boyle. Prior to the filing of Boyle, plaintiff was prosecuting a separate action to recover from his former wife, Mary Hitchcock, money wrongfully converted by her. Plaintiff believed that the converted funds were held by defendant Mary Jo Hawkins. Mary Jo Hawkins and Ms. Hitchcock both worked for attorney Richard Hawkins, who represented Ms. Hitchcock in the lawsuit brought by her former husband. The marshal levied a writ of garnishment on defendant Hawkins and she replied that she was holding zero dollars belonging to Ms. Hitchcock. [] Plaintiff subsequently obtained a judgment against Ms. Hitchcock, which he was unable to collect. He therefore initiated a separate action against Mary Jo Hawkins to establish liability for her failure to deliver up funds upon garnishment. Plaintiff claimed that Ms. Hitchcock, Mr. Hawkins and Ms. Hawkins had conspired to deprive plaintiff of satisfaction of judgment.

The documentary evidence presented at trial was confusing and the testimony was conflicting. In the end, the jury found for plaintiff and awarded damages in the amount of $6,359. [] Defendant Hawkins claimed various errors on appeal. The California Supreme Court's discussion of the basis of defendant's liability is relevant to the instant case. `Defendant's liability rests upon section 544 for her failure to deliver Mary Hitchcock's funds to the marshal at the time of the levy . . . [ ] A garnishee's liability to the attaching creditor continues under section 544 until the judgment recovered by him against the judgment debtor is satisfied, or until the garnishment is released or discharged.' Accordingly, the judgment against L'Omelette is a separate and distinct judgment that arises from the violation of the charging order (which is akin to garnishment). It is of no consequence that the Heron Group moved for disgorgement of funds in Heron v. Kelley rather than initiate a separate action against L'Omelette. [] The Supreme Court's discussion of the propriety of the jury instructions further confirms that L'Omelette is liable for the lesser of (a) [the] amount of the improper distribution plus interest from the date of the disgorgement order and (b) the amount of the underlying judgment including costs, interest, and credits. [Regarding jury instructions, the Supreme Court held,] `Defendant correctly asserts that the limit of the garnishee's liability coincides with the amount of the judgment obtained by the plaintiff against the judgment debtor. (citation) . . .

[T]he plaintiff may recover not only the face amount of this judgment, but he may also recover interest on the judgment running from the date of its entry. Since the verdict [against the garnishee] falls short of [the underlying judgment] plus accrued interest, defendant cannot complain of an instruction which resulted in no prejudice to her case.' 71 Cal.2d at 240. L'Omelette likewise is indebted to the Heron Group for the lesser of $800,000 plus accrued interest or the amount of the judgment against the Kelleys as adjusted by credits, costs and interest.

[] The judgment against L'Omelette is not reduced due to collections from the Kelleys because the obligations are separate and distinct. The judgment against the Kelleys arises from their default on a promissory note. The judgment against L'Omelette (i.e., the Disgorgement Order) arises from its violation of the charging order. L'Omelette owes the amount wrongfully borrowed from the Kelleys, up to the amount of the underlying judgment. The theory proffered by Beach Park (i.e., both judgments are credited by all collections) is not correct. [] In the context of garnishment, it is settled that recoveries from the judgment debtor do not reduce the liability of the garnishee unless and until the amount of the underlying judgment dips below the amount improperly disbursed by the garnishee. `Garnishment is a subdivision-category of attachment where the asset to be attached is in the hands of a third party. [Citations.] It is a well-established rule that until a plaintiff collects on a garnishment, the plaintiff may still seek satisfaction of the judgment against the defendant; the judgment against the defendant is reduced only [sic] the amount actually received by the plaintiff. "The judgment against [the defendant] is separate from, and independent of that against the garnishees. It is true that both judgments are for the same demand, and if either is satisfied, the plaintiff would not be permitted to enforce the collection of the other. But until one is satisfied the plaintiff's remedy on each is as ample as though no other judgment had been rendered . . . ." [Citations.]' County of Shasta v. Smith 99 38 Cal.App.4th 329, 336." (Italics in original.)

Beach Park contends the court erred by allegedly disregarding the language of the disgorgement order. Any interpretation of the disgorgement order, Beach Park correctly asserts, must be governed by its language, as required by Civil Code sections 1638 and 1639. The disgorgement order provided, "IT IS ORDERED, ADJUDGED, AND DECREED AS FOLLOWS: (1) L'Ommies . . . Roberts . . . , and/or L'Omelette Joint Venture are hereby ordered to pay, and/or judgment debtors William Kelley and/or Ryland Kelley are ordered to disgorge all monies borrowed or otherwise obtained by defendants from L'Omelette Joint Venture at any time since March 30, 1990."

Beach Park contends that by its express terms, the disgorgement order imposed an independent subsidiary judgment on the Kelleys to disgorge all monies they borrowed or otherwise obtained from L'Omelette after March 30, 1990. We agree that this is what the disgorgement order says and requires. However, we do not agree that money the Heron Group collected from the enforcement of charging orders against the Kelleys' interest in other partnerships is money that the Kelleys personally are disgorging and that represents amounts they borrowed or otherwise obtained from L'Omelette.

Next Beach Park argues that the obligations of the Kelleys and L'Omelette under the disgorgement order are joint and several, not separate and distinct as found by the trial court. It claims that the Heron Group understood the obligations of the Kelleys and L'Omelette were joint and several in that in the prior appeal Heron Group wrote, "The order has a plain meaning: the Kelley partnerships were jointly and severally . . . liable to pay Heron for the entire amount `borrowed or otherwise obtained by defendants' in violation of the March 30, 1990 charging order lien." This quotation is inapposite, however. In the prior appeal in the related action, the Heron Group was referring to the Kelley partnerships (i.e., L'Ommies, Roberts, and L'Omelette) as being jointly and severally liable for the amount the Kelleys borrowed or otherwise obtained from Beach Park.

Beach Park notes that where a judgment is joint and several, one judgment debtor is entitled to a pro tanto credit for satisfaction of the judgment by the other judgment debtors. Therefore it argues that the disgorgement order should be reduced by the amount the Heron Group has collected from other, unrelated Kelley partnerships. Beach Park does not mention or attempt to distinguish the two cases relied on by the trial court, County of Shasta v. Smith, supra, 38 Cal.App.4th 329 and Boyle v. Hawkins, supra, 71 Cal.2d 229.

We agree with the trial court that County of Shasta v. Smith, supra, is dispositive. In County of Shasta, the appellate court affirmed a trial court's denial of a father's motion to declare that he was not liable for child support payments that had allegedly been withheld by his former employer. The employer filed for bankruptcy and then disappeared without having forwarded the payments to San Bernadino county for reimbursement of public assistance. The appellate court held that the father's former employer, the garnishee, was not an agent of either the father's ex-wife or the county. The garnishee's alleged malfeasance was therefore not imputed to either of the obligees, but rather was a matter for resolution between the father and his former employer. Therefore, the father's alleged payments to his former employer did not discharge his debt.

It was in this context that the appellate court held, as quoted by the trial court in the instant case, " `The judgment against [the defendant] is separate from, and independent of, that against the garnishees. It is true, both judgments are for the same demand, and if either is satisfied, the plaintiff would not be permitted to enforce the collection of the other. But until one is satisfied, the plaintiff's remedy on each is as ample as though no other judgment had been rendered . . . .' [Citations.]" (County of Shasta v. Smith, supra, 38 Cal.App.4th at p. 336.)

We agree with the trial court that the obligations in the instant case are separate and distinct. The judgment against the Kelleys arose from their default on a promissory note while the disgorgement order against L'Omelette arose from its violation of a charging order. Amounts recovered by the Heron Group from Kelley partnership interests other than L'Omelette should therefore be credited against the underlying judgment only. However, under no circumstances will the Heron Group be permitted to recover more than the amount of the underlying judgment. Until that judgment is extinguished, however, L'Omelette continues to owe the Heron Group the amount wrongfully borrowed by the Kelleys, up to the amount of the underlying judgment.

Beach Park also argues that the doctrine of judicial estoppel prevents the Heron Group from arguing that funds it received from other Kelley partnership interests are not credits against the disgorgement order. In declarations filed April 6, 1995, two of the Heron Group's former attorneys stated: "On or about September 26, 1990, judgment was entered in favor of Judgment Creditor against L'Omelette Joint Venture . . . in the amount of $668,089.99 with interest after August 22, 1990. [] . . . [] Since September 26, 1990, Judgment Creditor has received periodic payments and credits in the amount of $501,761.63, resulting in a reduction of the Judgment balance due, as of April 6, 1995, to $366,374.50."

"Judicial estoppel precludes a party from gaining an advantage by taking one position, and then seeking a second advantage by taking an incompatible position. [Citations.] The doctrine's dual goals are to maintain the integrity of the judicial system and to protect parties from opponents' unfair strategies. [Citation.] Application of the doctrine is discretionary. [Citation.] Courts apply the doctrine to prevent internal inconsistency, preclude litigants from playing `fast and loose' with the courts, and prohibit `parties from deliberately changing positions according to exigencies of the moment.' [Citations.] [] The party invoking judicial estoppel must show that (1) the party against whom the estoppel is asserted took an inconsistent position in a prior proceeding and (2) that the position was adopted by the first tribunal in some manner such as by rendering a favorable judgment. [Citation.]" (People ex rel. Sneddon v. Torch Energy Services, Inc. (2002) 102 Cal.App.4th 181, 189.)

In the instant case, Beach Park cannot establish the second prong (the position was adopted by the first tribunal in some manner such as by rendering a favorable judgment). Accordingly, the doctrine of judicial estoppel does not apply.

For all the reasons stated, we conclude that the trial court did not err in refusing to apply payments that the Heron Group received in satisfaction of the underlying judgment to satisfaction of the disgorgement order as well.

2. Did the trial court err by failing to base L'Omelette's liability on the amount of the violating disbursement?

At trial, Beach Park submitted the final escrow statement detailing its $800,000 loan to L'Omelette. It showed the following deductions before a check was issued: $9 for recording, $7 for reconveyance, $7 for statement of partnership, $40 for assignment, $1880 for title insurance, $300 for settlement or closing fee, $100,000 for prepaid interest, $5783.50 for legal fees, $750 for broker services, and $139.62 for interest earned on wire deposit. After these deductions, the check issued to L'Omelette was for $691,139.50, which was the amount turned over in full to the Kelleys. On cross-appeal, Beach Park argues that the amount of the violating disbursement was $691,139.50 and therefore the court erred in basing liability on the amount of the loan.

The trial court rejected Beach Park's argument below, noting in its January 19, 2001 modification to tentative decision, "The Kelleys who were in charge of L'Omelette borrowed $800,000 from Beach Park Associates which necessitated the payment of loan fees and pre-paid interest equal to the difference between the $800,000 and the $691,223.50. This double loan transaction perpetuated a fraud on the judgment creditor in the underlying case and constituted a violation of their fiduciary duties to the L'Omelette Joint Venture. The fact is that the double loan cost $800,000. The proceeds should have gone to the Heron Group, not to the Kelleys. The Kelleys should not be allowed to benefit from their fraud on their judgment creditor by contending that only the net proceeds and not the whole $800,000 is violative of the Disgorgement Order and general equitable principles. [] The Disgorgement Order required disgorgement of . . . `all moneys borrowed or otherwise obtained by defendants from L'Omelette. . . .' The loan fees and pre-paid interest were `moneys otherwise obtained.' Had these amounts not been paid by L'Omelette, which was controlled by the Kelleys at the time, the loan of $800,000 from Beach Park Associates would not have been consummated. The full amount of what the Kelleys wrongfully diverted for their benefit in contravention of this Court's charging order was $800,000 which includes the money necessary to perpetuate their fraud."

Beach Park does not cite any cases in support of its proposition that only the net proceeds to the Kelleys violated the charging order. We conclude that the trial court's well-reasoned analysis of this issue is persuasive and we adopt it as our own.

DISPOSITION

The judgment is affirmed. Each side to bear its own costs on appeal.

WE CONCUR:

Premo, Acting P.J.

Bamattre-Manoukian, J.

Opinion Footnotes

*fn1 The accountant also noted another alleged impropriety, but it is unrelated to this appeal and will not be recounted here.

*fn2 "The third general partner in Roberts in Louis Borel."

*fn3 "W. Patrick Kelley is Bill Kelley's son and is an attorney."

*fn4 The proposed order recited that "[n]o appearance was made by the judgment debtors . . . ." The court crossed this out and inserted the quoted language when W. Patrick Kelley appeared at the hearing.

*fn5 This factual finding is clearly erroneous. The order of September 4, 1990, stated, "IT IS ORDERED that defendants William K. Kelley, R. Ryland Kelley, (individually and as general partners on behalf of the partnerships listed on Exhibit A hereto) and Kelley W. Santa Clara Associates, a partnership, appear before this Court . . . ." Respondent partnerships were both listed on Exhibit A.

*fn6 All statutory references are to the Corporations Code unless otherwise specified. For the first time on appeal, Beach Park points out that section 16307 did not go into effect until 1996, as is set forth in section 16112 ["This chapter does not affect an action or proceeding commenced or right accrued before this chapter takes effect."]. This was eight years after the Heron Group obtained its disgorgement order. Because section 16307 did not apply at the time of the disgorgement order, Beach Park asks this court to refuse to impose general partner liability on that basis. We refuse to do so. Before the trial court, both parties assumed that section 16307 applied and each argued its applicability at length in the court trial and in various briefs and motions. The trial court made a specific finding on this point, as requested by the parties. Under these circumstances, any claim that section 16307 is inapplicable is waived.

*fn13 By enforcing charging orders against the Kelleys' interests in other partnerships, the Heron Group has collected $501,761.63 toward the judgment.

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