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In Haberbush v. Charles Dorothy Cummins Family Limited Partnership (2006) 139 Cal.App.4th 1630, 1633 [ 43 Cal.Rptr.3d 814] (Haberbush), the Second District Court of Appeal, citing to Judge Dorothy Nelson's dissent in Sherwood, held it did not.
Summary of this case from Credit Managers Assn. of California v. Countrywide Home Loans, Inc.Opinion
No. B175947.
May 31, 2006. [CERTIFIED FOR PARTIAL PUBLICATION]
Under California Rules of Court, rules 976(b) and 976.1, the following portions of this opinion are certified for publication: the first three sentences of the Summary section on page 1633, the first four paragraphs of the Factual and Procedural Background on pages 1634 (through the end of section I), part I. of the Discussion on pages 1635-1640, and the Disposition section on page 1641.
Appeal from the Superior Court of Los Angeles County, Nos. NC032874, NC032872 and NC032873, Judith A. Vander Lans and Joseph E. DiLoreto, Judges.
Moneymaker Moneymaker and Richard M. Moneymaker for Defendants and Appellants.
SulmeyerKupetz, Alan G. Tippie and Marcus A. Tompkins for Plaintiff and Appellant and for Plaintiff and Respondent.
OPINION
SUMMARY
These consolidated appeals involve an assignment for the benefit of creditors. The assignee brought three lawsuits, under Code of Civil Procedure section 1800, to avoid and recover preferential transfers. In the published portion of this opinion, we disagree with the majority opinion in Sherwood Partners, Inc. v. Lycos, Inc. (9th Cir.2005) 394 F.3d 1198 ( Sherwood Partners), and conclude that Code of Civil Procedure section 1800 is not preempted by the federal Bankruptcy Code.
See footnote, ante, page 1630.
FACTUAL AND PROCEDURAL BACKGROUND
On August 1, 2001, Carolyn's Country Pies, Inc. (Carolyn's) executed a voluntary general assignment for the benefit of creditors. (Code Civ. Proc, § 493.010.) Plaintiff David R. Haberbush (Haberbush) was the assignee. In his capacity as assignee for the benefit of Carolyn's creditors, Haberbush brought three lawsuits, under Code of Civil Procedure section 1800, to avoid and recover certain payments as preferential transfers. Haberbush obtained judgments in each of the three cases, subject to a setoff of $150,000 for sums advanced to Haberbush that were found to have accrued to the benefit of Carolyn's creditors. The defendants in each case — Charles and Dorothy Cummins Family Limited Partnership (Cummins FLP), Barry L. Vantiger (Vantiger) and Gemmel Pharmacy Group, Inc. (Gemmel) — appealed, and Haberbush cross-appealed on the setoff issue.We summarize first the applicable legal principles. Then, in the unpublished portion of the opinion, we describe the general substance of the lawsuits Haberbush filed and the proceedings in the trial court that resulted in the judgments for Haberbush.
I. The Legal Principles.
Under Code of Civil Procedure section 1800, the assignee of a general assignment for the benefit of creditors may recover any transfer of the property of the assignor — to whom we will refer as the debtor — under certain conditions. Transfers of the debtor's property may be recovered by the assignee if the transfer was made:
(1) to or for the benefit of a creditor;
(2) on account of an antecedent debt owed by the debtor before the transfer;
(3) while the debtor was insolvent;
(4) within 90 days before the assignment, or between 90 days and one year before the assignment if the creditor, at the time of the transfer,
(a) was an "insider," and
(b) had reasonable cause to believe the debtor was insolvent at the time of the transfer; and
(5) the transfer enables the creditor to receive more than another creditor of the same class. (Code Civ. Proc., § 1800, subd. (b).)
There are several exceptions to the assignee's power to recover transfers, such as contemporaneous exchanges for new value given to the debtor, payment of a debt incurred in the ordinary course of business or financial affairs of the debtor and the transferee, and so on. (Code Civ. Proc., § 1800, subd. (c).)
See footnote, ante, page 1630.
II. The Lawsuits.
Haberbush's three actions, which involved recovery of preferential transfers to "insiders," were these: A suit against Cummins FLP. Charles V. Cummins, a general partner of Cummins FLP, was a member of the board of directors of Carolyn's. Barry L. Vantiger, a limited partner in Cummins FLP and Cummins's son-in-law, was president and a member of the board of directors of Carolyn's. The alleged preferential transfer occurred in connection with an agreement for the purchase of real estate, under which Cummins FLP agreed to purchase property from Carolyn's with a cash down payment of $260,000 and financing for the balance. Haberbush asserted that Carolyn's owed Cummins FLP $215,517.69; when the real estate was transferred, this unpaid debt was credited to Cummins FLP as part of its down payment on the purchase of the property. A suit against Vantiger, who had advanced sums to Carolyn's totaling $76,904. The alleged preference occurred when Vantiger received an assignment from Carolyn's of its interest in an equipment lease to lessee Brooks Street Companies, and payments due under the lease were made to Vantiger rather than to Carolyn's. A suit against Gemmel. Charles V. Cummins was president and a member of the board of directors of Gemmel, and Vantiger was executive vice president of Gemmel. Gemmel had a factoring agreement with Carolyn's dated September 20, 1999. Under the factoring agreement, Carolyn's sold and Gemmel purchased, at a discount, certain invoices for Carolyn's receivables. When Carolyn's received checks from its customers for invoices Gemmel purchased, Carolyn's delivered the checks to Gemmel, which applied the proceeds in accordance with the factoring agreement. The preference allegedly occurred when Gemmel received $170,361 in payments from Carolyn's under the factoring agreement.
When the assignor (Carolyn's) is a corporation, the term "insider" includes a director; an officer; a person in control of the assignor; a partnership in which the assignor is a general partner; a general partner of the assignor; and a relative of a general partner, director, officer, or person in control of the assignor. (Code Civ. Proc., § 1800, subd. (a)(3)(B)(i)-(vi).) The term "insider" also includes "[a]n affiliate of the assignor or an insider of an affiliate as if the affiliate were the assignor" and a managing agent of the assignor. ( Id., § 1800, subd. (a)(3)(D) (E).)
The Cummins Family Trust, beneficially owned by Charles and Dorothy Cummins, was a shareholder in Gemmel, as were the Cummins's four daughters and three sons-in-law.
III. The Conduct of the Lawsuits.
On September 6, 2002, the actions against Vantiger and Gemmel were filed and assigned to Judge DiLoreto. The action against Cummins FLP was filed the same date and assigned to Judge Vander Lans. Trial in the Vantiger and Gemmel matters was scheduled for Monday, July 28, 2003. On Friday, July 25, counsel appeared before Judge DiLoreto for a final status conference. Defense counsel reported that the parties had agreed to file a joint stipulation of facts with the court, and then file cross-motions for summary judgment. Counsel asked the court "to give us the time to do that." The court replied, "Well, why don't we treat it as a court trial." Counsel replied, "But I think the court would prefer our written stipulation of facts from both sides agreeing as to what the facts are and we're negotiating the terms of that stipulation right now." The court inquired how long that would take, and both counsel agreed it could be done in 30 days, and "[t]hen we would both file cross-motions for summary judgments." The court, however, stated it would allow counsel to work on the stipulation of facts over the weekend and, "when you come in on Monday morning, you can put them on the record"; the court would then pose any questions it had and would set a briefing schedule for the legal issues. Defense counsel stated he was not sure the stipulation could be done within that time, but the court decided otherwise. On Monday, July 28, 2003, counsel appeared before Judge DiLoreto with a stipulation of facts signed by counsel. Haberbush's counsel had been unable to obtain Haberbush's authorization to sign, but defense counsel stated "we don't believe [there are] any disputed facts in this case, it's all disputed issues of law." The court asked: "Where is Mr. Haberbush? Today is the day for trial," and "I suggest you call him. I'll order him to come on down. Today's the trial date. ¶ . . . ¶ You don't want to come down, we'll dismiss the case, not ready." Counsel stated he would try to reach Haberbush. After a recess, counsel presented the court with stipulated facts for both cases, signed by counsel, which defense counsel stated "[represent] the facts on which we're willing to submit this case to the court." The court then set a briefing schedule, beginning with Haberbush submitting "its legal argument to the court" on or before August 29, 2003. Vantiger and Gemmel were to respond by September 26, and any reply was to be submitted by Haberbush on October 10, with the matter standing submitted as of November 7, 2003. The court stated its understanding that "the entire case is going to be submitted upon whatever legal arguments that you provide for us in the court's brief," which defense counsel confirmed. The court and the parties then confirmed there would be no hearing. When defense counsel expressed the hope that Judge Vander Lans would agree to handle the Cummins FLP case in the same way, the court indicated, "She probably will. I spoke to . . . her clerk."
Haberbush's counsel stated, "So there will be no hearing." The court responded, "It's my understanding there's no hearing." Haberbush's counsel said, "Just want to understand." Counsel for Vantiger and Gemmel said, "I don't believe a hearing is necessary." The court stated, "That's my understanding, correct."
A. The stipulated facts.In each action, the parties stipulated that Carolyn's was insolvent at all times during the one year period preceding the assignment. The other pertinent facts to which the parties stipulated were as follows.
The stipulated facts in all the cases included the general information about the assignment and the status of the parties.
1. The Vantiger case.
• Vantiger advanced sums to Carolyn's totaling $76,904 during the period April 1, 1999 through May 10, 2000.
• The transfer to Vantiger (an assignment of Carolyn's interest in the equipment lease to Brooks Street Companies) was to Vantiger as an unsecured creditor, on account of the $76,904 debt owed to him by Carolyn's before the transfer was made.
• The transfer enabled Vantiger to receive more than another creditor of the same class.
• Vantiger was president of Carolyn's and a member of its board of directors.
2. The Gemmel case.
• Gemmel and Carolyn's executed a factoring agreement on September 20, 1999, under which Gemmel purchased and Carolyn's sold certain invoices pertaining to receivables for the sale of Carolyn's products to its customers. The agreement "called for certain discounts and various charges made by [Gemmel] pursuant to the terms of the Factoring Agreement in consideration for the transfer of each invoice, including interest charges for late payments from each customer."
• Gemmel purchased a series of invoices from Carolyn's, from September 20, 1999, through the end of the year 2000. Upon receipt of checks from customers against each purchased invoice, Carolyn's delivered the uncashed checks to Gemmel. Gemmel endorsed and cashed the checks and applied the proceeds in accordance with the terms of the factoring agreement.
• The parties stipulated to the shareholdings in Gemmel and Carolyn's. The stipulation shows Vantiger owned 22.2 percent of the shares of Carolyn's, and Charles Cummins owned 28.7 percent. The Cummins family trust and the Cummins's daughters and sons-in-law, collectively, owned approximately 75 percent of Gemmel, with Barry Vantiger and his wife owning approximately 17 percent.
• Vantiger was president and a member of the board of directors of Carolyn's and executive vice president of Gemmel, and Charles Cummins was president of Gemmel and a member of Carolyn's board of directors.
• Gemmel at no time held voting control or exercised operating control of Carolyn's.
3. The Cummins FLP case.
• Cummins FLP and Carolyn's executed an agreement on October 1, 2000, for the purchase of certain real property owned by Carolyn's, for a purchase price of $970,000. The agreement called for a cash down payment of $260,000, with the balance to be financed through a new loan.
• Charles Cummins was a general partner of Cummins FLP and a member of Carolyn's board of directors, and Vantiger was a limited partner of Cummins FLP as well as president and a member of the board of directors of Carolyn's.
As is apparent, none of the three sets of stipulated facts established the prima facie elements of a preferential transfer. The Vantiger stipulation did not address whether Vantiger, in addition to being an "insider," also "had reasonable cause to believe the debtor was insolvent at the time of the transfer," and the other fact stipulations were deficient in this and other respects.
B. The papers filed by HaberbushApparently recognizing that the agreed facts did not amount to a prima facie case, on August 29, 2003, Haberbush did not merely file a "legal argument to the court. . . ." Instead, Haberbush submitted a "motion for judgment" in the style of a summary judgment motion, consisting of (1) a "statement of undisputed material facts in support of plaintiff's motion for judgment"; (2) declarations from Haberbush (and, in the Vantiger case, from counsel Janis G. Abrams), with accompanying exhibits, "in support of [Haberbush's] motion for judgment", and (3) a request for judicial notice of various documents, including the fact stipulations filed in the Vantiger and Gemmel cases, respectively. Specifically: 1. The Vantiger case. Haberbush's declaration included a copy of the proof of claim Vantiger filed, showing Carolyn's owed him $76,904 as of August 1, 2001, but did not address Vantiger's knowledge of Carolyn's insolvency during the year preceding the assignment. A declaration from Janis Abrams provided information on the value of Carolyn's interest in the lease transferred to Vantiger. 2. The Gemmel case. Haberbush's declaration included a copy of Gemmel's proof of claim asserting Carolyn's owed it $884,107.05 as of August 1, 2001. The proof of claim included an activity report Haberbush said showed Gemmel received $170,361 in payments during the year preceding the assignment, and Haberbush states that "[f]rom August 1, 2000 to December 6, 2000, the only record available to me, Carolyn's paid $170,361 to Gemmel as a result of the factoring agreement."
3. The Cummins FLP case.Haberbush filed his own declaration and one from Abrams. Haberbush attached the Cummins FLP proof of claim in the sum of $145,485.18, and stated the transfer of the real property and repayment of Carolyn's debt to Cummins FLP in the sum of $215,517.69 occurred in December 2000, when Vantiger, on behalf of Carolyn's and Cummins FLP, credited the unpaid debt as part of the down payment on Cummins FLP's purchase of the real property. Abrams's declaration attached a copy of the closing escrow statement stating that Cummins FLP paid $215,517.69 outside of escrow. Haberbush also requested judicial notice of the fact stipulations in the Gemmel and Vantiger cases.
The appellate record does not include the "motion for judgment" and otherwise contains no opening legal arguments to the trial court in the Vantiger and Gemmel cases. In the Cummins FLP case before Judge Vander Lans, Haberbush filed a motion for judgment with a memorandum of points and authorities on September 26, 2003. The motion states that a briefing schedule was set by "the Court's Order of July 28, 2003, requiring this Motion to be filed and served by September 26, 2003, [Cummins FLP's] Opposition to be filed and served by October 24, 2003 and [Haberbush's] Reply to be filed and served by November 4, 2003, deeming this matter submitted as of November 4, 2003." The court's order is not in the appellate record.
The documents actually attached to the request for judicial notice are not the stipulated facts in the other cases, but instead the "statement of undisputed material facts in support of plaintiff's motion for judgment" in the Vantiger and Gemmel cases.
Haberbush declared that Gemmel's claim "remains unsubstantiated and I am informed and believe . . . that at the time of the assignment, Carolyn's owed no monies to Gemmel. Moreover, I do not believe that Gemmel had any reasonable basis for filing a claim at all, let along [ sic] a claim in the amount stated."
C. The responses filed by Vantiger, Gemmel, and Cummins FLP.On September 26, 2003, Vantiger and Gemmel filed their responses, which they denominated post-trial briefs. Gemmel also filed a written objection to Haberbush's declaration, asserting Haberbush had neither sought nor received an order to reopen the case to present additional evidence, and offered no reason why the testimony in Haberbush's declaration was not made a part of the stipulation of facts. Both argued the court should refuse to admit the Haberbush declarations into evidence, since the court had accepted the fact stipulations in lieu of a trial, and Haberbush had not sought an order to reopen the trial. Vantiger argued Haberbush had not proved the elements of an avoidable preference, and particularly had not proved that Vantiger had reasonable cause to believe Carolyn's was insolvent when the equipment lease was assigned to Vantiger. Gemmel argued that it was not a creditor holding an antecedent debt, since the factoring agreement did not create a debtor/creditor relationship, Gemmel did not lend any money to Carolyn's, and Carolyn's was never indebted to Gemmel on either a current or antecedent basis. Gemmel also argued Haberbush did not prove Gemmel was an insider, and did not prove Gemmel had any knowledge of Carolyn's financial condition. Similarly, Cummins FLP, in the parallel proceedings before Judge Vander Lans, argued the court should refuse to consider the further declarations filed by Haberbush or, if it intended to permit introduction of the evidence, to give Cummins FLP an opportunity to file further declarations in response. On the merits, it argued there was no proof of a creditor/debtor relationship, as the Cummins FLP proof of claim was "simply a contingent claim for the money paid to purchase the real estate, in the event [Haberbush] sought to rescind the sale." Cummins FLP further argued Haberbush did not prove that, when the purchase agreement was executed on October 11, 2000, Cummins FLP had reasonable cause to believe Carolyn's was insolvent.
All three defendants argued they were entitled to a setoff from Haberbush's claim. In all three actions, the parties stipulated that Vantiger and Charles Cummins jointly transferred $250,000 to Haberbush, at the time of the general assignment, for use in accordance with the terms of an "Agreement Regarding Advances" and a related secured promissory note. Of that sum, $100,000 was used to pay a fee to Haberbush for his services in connection with the general assignment, and $150,000 was used for expenses and obligations incurred by Haberbush in connection with the operation of Carolyn's business for periods following the general assignment. In the Cummins FLP case, Judge Vander Lans found that the $250,000 transfer, "although ostensibly made by Cummins and Vantiger as individuals, was on behalf of [Cummins FLP]," and $150,000 accrued to the benefit of Carolyn's creditors. The court therefore concluded Cummins FLP was entitled to a setoff of $150,000.
Cummins FLP observed that Charles Cummins was an insider, and the parties stipulated that Carolyn's was insolvent, but that "that does not establish that [Cummins FLP] had reasonable cause to believe that Carolyn's was insolvent at the time of the sale." It pointed out that if the fact of insolvency was, ipso facto, proof of "reasonable cause to believe" the debtor was insolvent, there would be no purpose for the separate statutory requirement.
D. Haberbush's reply.
On October 10, 2003, Haberbush filed a reply memorandum, arguing Vantiger was equitably estopped from denying that Carolyn's was insolvent at the time of the transfer. This was because Vantiger was Carolyn's president (as well as a shareholder and member of the board) and had stipulated that "[Carolyn's] was insolvent at all times during the one-year period ending on the date of the General Assignment." In support of his reply memorandum, Haberbush filed two more declarations from his lawyers. A declaration from Janis Abrams purports to "explain why the only way to present this case to the Court for a decision on the merits was by way of motion and declaration." Abrams referred to defense counsel's "refusal to stipulate to the case-in-chief," and attached copies of her e-mails to defense counsel advising them, on August 15, 2003, that "because of the myriad of facts that still require proof," Haberbush would "be approaching the presentation as a summary judgment, with declarations as may be necessary as to those facts for which no stipulation exists." In the Gemmel case, Haberbush argued Gemmel was equitably estopped from denying that Carolyn's was its creditor because it filed a proof of claim, "asserting a claim against Carolyn's in the total amount of $884,107.56, arising out of the Factoring Agreement." Further, Haberbush argued Gemmel was equitably estopped from denying insider status, and from denying that Carolyn's was insolvent. In the parallel Cummins FLP case, Haberbush filed a reply brief with a declaration and evidentiary objections, similarly arguing that Cummins FLP was equitably estopped from denying various elements of Haberbush's case. In his objections, Haberbush argued that Cummins FLP's assertion that Haberbush filed further evidence without first seeking an order to reopen the trial was misleading, "as no trial ever took place," and the "trial date of October 7, 2003 was vacated by this Court's order on July 28, 2003." (No order appears in the appellate record.) A declaration from Haberbush counsel Marcus Tompkins stated that, at a telephonic status conference on July 28, 2003, the parties informed the court "that they believed there was no dispute as to the material facts of this case, and that the only matters remaining to be decided were legal conclusions." Tompkins stated the parties informed the court they wished to submit a written stipulation of facts in lieu of trial, and then file motions for judgment based on the stipulated facts, consistent with the procedure in the cases before Judge DiLoreto. E. The judgments. After the parties filed their papers, no hearings were held. Findings of fact and conclusions of law were filed and judgments were entered, as follows. 1. The Vantiger and Gemmel cases. On January 7, 2004, Judge DiLoreto issued a minute order overruling Vantiger's evidentiary objections, and filed findings of fact and conclusions of law in the Vantiger case. The introduction to the findings states that, upon representations by the parties that stipulations of fact had been reached, "the Court ordered a briefing schedule for submission of [Haberbush's] Motion for Judgment." The court found, in addition to facts showing the other elements of a preferential transfer, that:
Abrams recounts various events, including attempts at mediation, assertions that defense counsel disavowed an earlier agreement to stipulate to the case-in-chief and brief only the single defense of "new value," and "acrimony between counsel" — much of which apparently preceded the parties' appearance before Judge DiLoreto on July 28, 2003. Abrams also asserted in her declaration that all of the facts in the Haberbush declaration were known to Vantiger "either by way of discovery responses or voluntary disclosures of information made in the . . . sixteen (16) hours of mediation."
This is an exaggeration, at best. The proof of claim does not purport to show the claim for $884,107.56 arose "out of the Factoring Agreement." The claim lists loans for operations, loan payoffs, and loan fees as well.
On October 22, 2003, Vantiger filed objections to Haberbush's reply brief and to the declarations filed with the reply brief.
• "Vantiger admitted that he had knowledge of Carolyn's insolvency for the one-year period preceding August 1, 2001"; and
• Vantiger managed Carolyn's.
In the Gemmel case, the court similarly found that Vantiger admitted he had knowledge of Carolyn's insolvency for the one-year period preceding the assignment. In addition to findings on the other elements of a preferential transfer, the court found:
• Vantiger managed both Carolyn's and Gemmel.
• In a document attached to Gemmel's proof of claim," Gemmel demonstrates that it received $170,361 in payments within the year preceding the [general assignment]. . . ."
• From August 1, 2000, to December 6, 2000, "Carolyn's paid Gemmel $170,361 pursuant to the Factoring Agreement" and these transfers "were made on account of antecedent debt."
• Gemmel was an insider, and "[t]he knowledge of [Carolyn's] insolvency by Barry L. Vantiger is imputed to [Gemmel]."
• Gemmel had demonstrated "new value" in the sum of $109,445," so that the amount of the preferential transfer was $61,186.15.On February 2, 2004, judgments were entered in the Gemmel and Vantiger cases. Both judgments state they are judgments after a court trial, and the case was "[d]eemed submitted on motions November 7, 2003." In the Gemmel case, judgment was for Haberbush in the total sum of $70,429.50 ($61,186.15, plus $8,835.35 in prejudgment interest and $408 in costs). In the Vantiger case, judgment was for Haberbush in the sum of $107,755 ($93,825, plus $13,522 in prejudgment interest and $408 in costs).
No such admission appears in the record. The court presumably is referring to Vantiger's stipulation that "[Carolyn's] was insolvent at all times during the one year period ending on the date of the General Assignment."
In his reply brief to the trial court, Haberbush stated he sought judgment in the amount of $61,186.15 (rather than the original $170,361), and that he "accept[ed] the valuation of new value" that Gemmel had calculated in its brief (to show that, even under Haberbush's theory that Gemmel was making unsecured loans to Carolyn's, the most Haberbush could claim was $61,186.15).
2. The Cummins FLP case.On March 9, 2004, judgment was entered in the Cummins FLP case. The judgment states it is a judgment after court trial, and the case was "[d]eemed [s]ubmitted on [m]otions November 4, 2003." Judgment was for Haberbush in the total sum of $76, 049.51 ($65,517.69, plus $10,123.82 in prejudgment interest and $408 in costs). The court concluded Haberbush had established the elements of a preferential transfer, and its fact findings included these:
• Cummins FLP "had knowledge of Carolyn's insolvency for the one-year period preceding August 1, 2001. . . ."
• Carolyn's owed Cummins FLP $145,485.18 as of August 1, 2001.
• With respect to the purchase agreement for real property, which called for a cash down payment of $260,000, Cummins FLP made a cash down payment totaling only $44,340.18, and Carolyn's credited the balance of the down payment outside of escrow, in the sum of $215,517.69.
The court concluded that:
• Cummins FLP was equitably estopped from asserting it was not a creditor due to its filing of a proof of claim;
• Cummins FLP was equitably estopped from denying Carolyn's insolvency, "as the knowledge of Carolyn's insolvency known by Barry L. Vantiger [and by Charles Cummins] is imputed to [Cummins FLP]"; and
• Cummins FLP was entitled to a setoff of $150,000 (see footnote 8, ante) against the $215,517.69 sum, resulting in an avoidable transfer of $65,517.69, plus interest from July 31, 2002.
F. The post-judgment motions.On April 8, 2004, Vantiger and Gemmel filed motions to set aside the judgment, asserting Haberbush had failed to prove his case. Haberbush filed oppositions in both cases. On April 29, 2004, counsel appeared before Judge DiLoreto, who denied both motions. The court stated:
Vantiger asserted (1) there was no evidence Vantiger had knowledge of Carolyn's financial condition or insolvency for the year preceding the August 1, 2001 assignment, and (2) Haberbush failed to prove Vantiger had reasonable cause to believe Carolyn's was insolvent during that period. Gemmel's motion argued there was no evidence of antecedent debt; the factoring agreement was a sales transaction, not a debtor-creditor relationship; and Haberbush did not prove Gemmel had reasonable cause to believe Carolyn's was insolvent for the year before the assignment.
"Here's the problem, Mr. Moneymaker [defense counsel]. You filed a stipulated set of facts for the court to consider. The stipulated facts, set of facts, do not contain all the information upon which the court can make a decision. So the court asked for additional information, which it receives. ¶ I didn't ask for this procedure. I mean, it's a lot more work than going through court trial. So but that's what you wanted to do. So in so doing, the court has latitude to resolve the legal issues based upon the information it has and make reasonable assumptions and deductions based upon the information it's had. That's what I did."
Counsel for Vantiger and Gemmel observed:
"[B]ut when the court said you want further information, that was not a message conveyed to us. ¶ We thought the matter was on a stipulated set of facts based upon the court's rulings, and I filed objections to that, and only when the court ruled on the merits did it overrule our objection. ¶ So I was unaware the court requested further information."
The court replied, "Well, I have authority to do that. I mean, you can't give me information and leave something blank so the court can't decide upon." The court's orders denying the Gemmel and Vantiger motions to vacate the judgments were filed on May 11 and May 12, 2004, respectively. Meanwhile, Cummins FLP also filed a motion to set aside and vacate the judgment entered by Judge Vander Lans, on the grounds Haberbush failed to prove Cummins FLP had reasonable cause to believe Carolyn's was insolvent, and no evidence showed Cummins FLP was ever paid on any antecedent debt. Opposition was filed, and Judge Vander Lans took the matter under submission after a hearing on May 6, 2004. The transcript of the hearing does not appear in the record. The motion was denied on May 13, 2004.
IV. These Appeals.
After the motions to set aside the judgments were denied, Cummins FLP, Vantiger, and Gemmel filed notices of appeal. Haberbush filed a cross-appeal from the judgment in the Cummins FLP case, challenging the finding that Cummins FLP was entitled to a $150,000 setoff. Haberbush moved to consolidate the three appeals, and the court granted the motion, consolidating the three matters for all purposes.
DISCUSSION
I. Code of Civil Procedure Section 1800 Is Not Preempted by the Federal Bankruptcy Code.
After these appeals were filed, the United States Court of Appeals for the Ninth Circuit issued an opinion in Sherwood Partners, supra, 394 F.3d 1198. Over a dissent, the majority in Sherwood Partners concluded the federal Bankruptcy Code (title 11 of the United States Code) preempts the California statute giving the assignee the power to void preferential transfers. (Code Civ. Proc, § 1800.) Cummins FLP, Vantiger and Gemmel raised the issue of preemption in their brief on appeal. Because preemption is a question of subject matter jurisdiction (see De Tomaso v. Pan American World Airways, Inc. (1987) 43 Cal.3d 517, 520, fn. 1 [235 Cal.Rptr. 292, 733 P.2d 614]), and in this case presents a question of law not dependent upon any factual determinations, the issue is properly before this court.
Decisions of the lower federal courts on federal questions are persuasive but not binding on state courts. ( Walker v. Kiousis (2001) 93 Cal.App.4th 1432, 1441 [ 114 Cal.Rptr.2d 69].)
We begin with a review of the principles governing the question whether a state law has been preempted by federal law, as summarized in Sherwood Partners. Congress has the authority to preempt state laws. Whether it has done so in a particular case is a question of congressional intent. Congress may preempt state laws expressly, or its intent to do so may be inferred "where it is clear from the statute and surrounding circumstances that Congress intended to occupy the field, leaving no room for state regulation." ( Sherwood Partners, supra, 394 F.3d at p. 1200.) The United States Supreme Court has observed that, while various expressions of the governing principle have been employed, the court's primary function in deciding a preemption issue is to determine whether the state's law "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." ( Hines v. Davidowitz (1941) 312 U.S. 52, 67 [ 85 L.Ed. 581, 61 S.Ct. 399] ( Hines); see Sherwood Partners, supra, 394 F.3d at pp. 1200-1201.)
The Supreme Court quoted its decision in Savage v. Jones (1912) 225 U.S. 501, 533 [ 56 L.Ed. 1182, 32 S.Ct. 715]: "For when the question is whether a Federal act overrides a state law, the entire scheme of the statute must of course be considered and that which needs must be implied is of no less force than that which is expressed. If the purpose of the act cannot otherwise be accomplished — if its operation within its chosen field else must be frustrated and its provisions be refused their natural effect — the state law must yield to the regulation of Congress within the sphere of its delegated power."
According to the Sherwood Partners majority, the assignee's powers to avoid and recover preferential transfers cannot peaceably coexist with the federal bankruptcy scheme. The assignee's avoidance powers, the court concluded, are inconsistent with the operation of the bankruptcy system, and "trench too close" upon the exercise of the federal trustee's power to avoid preferential transfers. ( Sherwood Partners, supra, 394 F.3d at pp. 1202, 1204-1206.) Sherwood Partners explains that the Bankruptcy Code embodies two goals: a fresh start for the debtor and the equitable distribution of the debtor's assets among competing creditors. Because state statutes purporting to discharge debtors from their obligations (the first goal) are preempted (e.g., Pobreslo v. Joseph M. Boyd Co. (1933) 287 U.S. 518, 524-525 [ 77 L.Ed. 469, 52 S.Ct. 262, 53 S.Ct. 262] ( Pobreslo)), Sherwood Partners asserts that "state statutes that implicate the federal bankruptcy law's other major goal, namely equitable distribution," are likewise preempted. ( Sherwood Partners, at p. 1203.) The reasoning of the Sherwood Partners majority is this:
— The trustee's power to avoid preferential transfers and recover the funds for distribution to creditors is exercised under the supervision of the federal courts, and the trustee is appointed by the United States Trustee or elected by the creditors, not hand-picked by the debtor (as is the assignee under state law). Federal law protects creditors from the trustee's possible conflicts of interest and other possible sources of self-dealing.
— If a state assignee under Code of Civil Procedure section 1800 recovers a preferential transfer and distributes its proceeds to creditors, a federal trustee will be precluded from recovering the same sum if a federal bankruptcy proceeding is begun. "The distribution of the recovered sum will then have been made by a state assignee subject to state procedures and substantive standards, rather than by the federal trustee subject to bankruptcy law's substantive standards and procedural protections." ( Sherwood Partners, supra, 394 F.3d at p. 1204.)
— Once state proceedings are commenced, "they will affect the incentives of various parties as to whether they wish to avail themselves of federal bankruptcy law." ( Sherwood Partners, supra, 394 F.3d at p. 1205.) The creditor whose transfer the assignee avoids "may have a new incentive to begin an involuntary federal proceeding; other creditors . . . may have diminished incentives" because they may share in the funds recovered by the assignee "and might therefore have no interest in invoking the potentially more expensive and time-consuming federal processes." ( Ibid.) According to the Sherwood Partners majority, Congress did not contemplate "state laws that would sharpen or blunt the effect" of statutory incentives for the initiation of federal bankruptcy proceedings. ( Ibid.) Sherwood Partners thus concludes that "statutes that give state assignees . . . avoidance powers beyond those that may be exercised by individual creditors trench too close upon the exercise of the federal bankruptcy power." ( Sherwood Partners, supra, 394 F.3d at p. 1205.)
We are constrained to disagree with the analysis in Sherwood Partners, as we find it impossible to conclude that Code of Civil Procedure section 1800 is inconsistent with "the essential goals and purposes of federal bankruptcy law. . . ." ( Sherwood Partners, supra, 394 F.3d at p. 1202.)
First, it is undisputed that Congress intended, in general, to permit the coexistence of state laws governing voluntary assignments for the benefit of creditors. As Sherwood Partners necessarily concedes, voluntary assignments for the benefit of creditors have "a venerable common-law pedigree" ( Sherwood Partners, supra, 394 F.3d at p. 1205, fn. 8) and were expressly upheld in Pobreslo, supra, 287 U.S. at page 526: "And, quite in harmony with the purposes of the federal Act, the provisions of [Wisconsin law] that are regulatory of such voluntary assignments serve to protect creditors against each other and go to assure equality of distribution. . . ." (See also Stellwagen v. Clum (1918) 245 U.S. 605, 615 [ 62 L.Ed. 507, 38 S.Ct. 215] ( Stellwagen) [Ohio statute permitting appointment of a receiver to take charge of all assets of the debtor and administer them for the equal benefit of all creditors, in a suit by creditors seeking to void a transfer made in contemplation of insolvency and designed to prefer one or more creditors, "is not opposed to the policy of the bankruptcy law or in contravention of the rules and principles established by it with a view to the fair distribution of the assets of the insolvent"].) Indeed, the Bankruptcy Code expressly makes state law on voidable transfers available to the bankruptcy trustee. ( 11 U.S.C. § 544(b).)
Section 544(b) of the Bankruptcy Code provides, in pertinent part, that "the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim. . . ." ( 11 U.S.C. § 544(b)(1).)
Second, Sherwood Partners reaches too far in suggesting that any state statute that "implicate[s]" the federal bankruptcy law's second major goal of equitable distribution is preempted. ( Sherwood Partners, supra, 394 F.3d at p. 1203.) The statutes upheld against preemption challenges in Pobreslo and Stellwagen obviously implicate the federal bankruptcy law's goal of equitable distribution. Indeed, Pobreslo and Stellwagen expressly refer to that goal in upholding the state statutes. ( Pobreslo, supra, 287 U.S. at p. 526 [state law assures "equality of distribution"]; Stellwagen, supra, 245 U.S. at p. 615 [state law "is not opposed to the policy of the bankruptcy law . . . with a view to the fair distribution of the assets of the insolvent"].) In short, the mere fact that a state law "implicate[s]" the Bankruptcy Code's goal of equitable distribution is not sufficient to justify the conclusion that the state law "stands as an obstacle" to that goal. ( Hines, supra, 312 U.S. at p. 67.)
Sherwood Partners points to the settled principle that state laws purporting to give debtors a discharge from their obligations are preempted, because giving the debtor a fresh start by discharging most of his debts is one of the two "essential goals and purposes" of federal bankruptcy law. ( Sherwood Partners, supra, 394 F.3d at pp. 1202, 1203.) Sherwood Partners thereupon concludes that "[w]hat goes for state discharge provisions also holds true for state statutes that implicate the federal bankruptcy law's other major goal, namely equitable distribution." ( Id. at p. 1203.)
Third, the Sherwood Partners conclusion that Code of Civil Procedure section 1800 is preempted rests, in essence, on a two points: (1) the fact that section 1800 gives the assignee powers beyond those that may be exercised by individual unsecured creditors; and (2) the proposition that the assignee's powers to avoid preferential transfers will "affect the incentives of various parties as to whether they wish to avail themselves of federal bankruptcy law[,]" thereby interfering with the code's goal of equitable distribution of a debtor's assets. ( Sherwood Partners, supra, 394 F.3d at p. 1205.) However:
The Sherwood Partners majority observed that a creditor faced with a debtor's state assignment for the benefit of creditors "may not be able to run to federal court. . . ." ( Sherwood Partners, supra, 394 F.3d at p. 1205.) This is because in most cases three creditors are required to force the debtor into bankruptcy. Further: "[T]he action of the state assignee may diminish the likelihood that [the creditor] will be able to obtain the consent of other creditors. After all, if the state assignee succeeds in recovering the preferential transfer under state law, the other creditors may share in that bounty and might therefore have no interest in invoking the potentially more expensive and time-consuming federal processes." (Ibid.) Sherwood Partners thus rejected the argument that a creditor can prevent action by the state assignee by filing an involuntary federal bankruptcy petition, which would have the effect of preempting the state proceedings. However, the Supreme Court in Pobreslo, supra, 287 U.S. at page 526, specifically adopted that very argument, observing that, because proceedings under state voluntary assignment law "may be terminated upon petition of creditors filed . . . [as] prescribed by the federal Act," such voluntary assignments "should be regarded as not inconsistent with the purposes of the federal Act." ( Ibid.)
— As Judge Nelson points out in her dissent, "[s]tate voluntary assignments, by definition, give the assignee more power than may be exercised by an individual creditor." ( Sherwood Partners, supra, 394 F.3d at p. 1206 (dis. opn. of Nelson, J.).) The majority's reliance on this distinction thus would cast doubt on the validity of all voluntary assignment statutes, not merely those allowing the assignee to avoid preferential transfers. Yet Supreme Court precedents clearly reject the notion that voluntary assignments generally are incompatible with federal bankruptcy law. ( Pobreslo, supra, 287 U.S. at p. 526; Stellwagen, supra, 245 U.S. at p. 615.)
As Judge Nelson observes: "The state assignee, regardless of the powers granted by section 1800, distributes a debtor's assets among creditors and otherwise exercises powers on behalf of all creditors, thus exercising powers greater than any one creditor could exercise." ( Sherwood Partners, supra, 394 F.3d at p. 1206, fn. 1 (dis. opn. of Nelson, J.).)
— As for the alteration of incentives to use federal bankruptcy law, we do not doubt that incentives may be affected by the existence of an alternative to formal bankruptcy proceedings — particularly an alternative that may be less "expensive and time-consuming. . . ." ( Sherwood Partners, supra, 394 F.3d at p. 1205.) Again, however, incentives to use bankruptcy law may be affected by any voluntary assignment laws, whether or not the assignee has the power to avoid preferential transfers. The only pertinent question is whether the state statute's effect on those incentives somehow interferes with or is an obstacle to the Bankruptcy Code's objective of equitable distribution. In our view, the Sherwood Partners majority provides no cogent explanation of how the assignee's avoidance powers conflict with that objective. As Judge Nelson correctly observed, because the common law right to make an assignment of property for the benefit of creditors is well established, it is "illogical that state laws that provide a forum for the equitable distribution of that property should be preempted by federal bankruptcy law." ( Sherwood Partners, supra, 394 F.3d at p. 1207 (dis. opn. of Nelson, J.).)
Fourth, the Sherwood Partners majority correctly points out that if a preferential transfer is recovered by the assignee, the same sum could not be recovered if a federal bankruptcy proceeding were filed. However, as Judge Nelson observes: "But California's preference recovery provision is, by design, virtually identical to the bankruptcy code's preferential transfer statute. [Citations.] If the same transfer can be avoided in both the state and federal systems, how does the state system interfere with bankruptcy's goal of equitable distribution? Both the state and federal statutes serve to ensure equality of distribution and to deter the race to recover assets before insolvency. [Citations.] That California's voluntary assignment system has such a provision makes it more capable of effectuating the equality of distribution that is the aim of the bankruptcy law; it does not necessarily interfere with bankruptcy's goal of achieving equal distribution." ( Sherwood Partners, supra, 394 F.3d at pp. 1207-1208 (dis. opn. of Nelson, J.).)
According to the Sherwood Partners majority, "[t]his is not a matter for federal concern when the assignee has no special avoidance rights." [ Sherwood Partners, supra, 394 F.3d at p. 1204, fn. 6.) The majority observes that if individual unsecured creditors can sue to recover preferences under state law, the same powers are available to a bankruptcy trustee under 11 U.S.C. section 544(b), and "there is obviously no conflict then between federal law and state law giving those powers to an assignee." ( Sherwood Partners, at p. 1204, fn. 6.) That is plainly so, because section 544(b) of the Bankruptcy Code gives the trustee the power to avoid any transfer voidable under state law by an unsecured creditor. However, we fail to discern why a conflict between federal and state law arises simply because the assignee has powers that individual unsecured creditors do not have. After all, the bankruptcy trustee can avoid preferential transfers under section 547(b), as well as under section 544(b), so the assignee does not have powers not available to the trustee. We find unconvincing the distinction Sherwood Partners draws between a state assignment scheme where only the assignee has avoidance powers and an assignment scheme in which individual unsecured creditors also have those powers. In either case, if the assignee or the individual creditor recovers the transfer and distributes its proceeds under state law, the federal trustee will not be able to do so. In neither case does the state law stand as an obstacle to the federal goal of equitable distribution.
Finally, as Judge Nelson also pointed out, federal regulation should not be deemed preemptive of state regulatory power absent "`persuasive reasons — either that the nature of the regulated subject matter permits no other conclusion, or that the Congress has unmistakably so ordained.'" ( Sherwood Partners, supra, 394 F.3d at p. 1208 (dis. opn. of Nelson, J.), quoting Florida Lime Avocado Growers, Inc. v. Paul (1963) 373 U.S. 132, 142 [ 10 L.Ed.2d 248, 83 S.Ct. 1210].) This is not such a case. Voluntary assignments and the bankruptcy system have coexisted since the inception of bankruptcy law, and state laws regulating the rights and obligations of debtors or their assignees and creditors are often expressly incorporated in bankruptcy law. ( Sherwood Partners, at p. 1201 [citing examples].) Congress has not indicated that voluntary assignments generally or preferential transfer avoidance laws specifically are to be preempted. ( Id. at p. 1208 (dis. opn. of Nelson, J.).) Under these circumstances, we can discern no persuasive reason to conclude that California's "less stigmatic, and less costly, voluntary assignment scheme" ( ibid.) — which, like the federal bankruptcy system, serves to ensure equality of distribution of a debtor's assets — "stands as an obstacle to the accomplishment . . . of the full purposes and objectives" of the federal bankruptcy system. ( Hines, supra, 312 U.S. at p. 67.)
Accordingly, we conclude Code of Civil Procedure section 1800 is not preempted by the Bankruptcy Code.
II. The Judgments Must Be Reversed and the Causes Remanded for Further Proceedings Because Evidence Necessary for Haberbush's Prima Facie Case Was Presented in a Manner Unauthorized by Statute or Court Rules.
See foonote, ante, page 1630.
The consolidated appeals raise several other issues, but it is necessary to consider only one. As Haberbush phrases the issue, did the trial court err in overruling the defendants' objections to Haberbush's introduction of evidence "to establish facts not addressed by the Stipulations of Facts, but which were necessary for a determination of liability under Section 1800"? We are compelled to conclude that the trial court's judgments must be reversed, because the evidence necessary to prove Haberbush's case was presented in a manner unauthorized by statute or court rules. We are aware of no authority under which a litigant, without obtaining leave of court, may proceed to present additional evidence after agreeing to try a matter on stipulated facts. The record clearly shows that, on the date set for trial in the Gemmel and Vantiger cases, counsel presented the court with stipulated facts "which represen[t] the facts on which we're willing to submit this case to the court," and the court expressly stated and counsel confirmed that "the entire case is going to be submitted upon whatever legal arguments that you provide. . . ." We are referred to, and know of, no basis under which the plaintiff may thereafter, without seeking leave of court, present additional evidence. Nor do we know of any authority for filing, in effect, a motion for summary judgment after the date set for trial and without the benefit of a hearing on the motion. (See Code Civ. Proc., § 437c.) In short, we know of no legal basis for the kind of "motion for judgment" filed by Haberbush in these cases. Haberbush contends the trial court properly overruled the objections to his evidentiary submissions on several grounds. First, he contends the trial court, when it established the procedures, did not preclude the introduction of evidence by either party. Such a prohibition, he claims, is "contrary to common sense, given that the Stipulations of Facts did not address all facts needed for a determination of liability under Section 1800," and he "would never have participated in a procedure that would have precluded [him] from proving his case. . . ." The argument ignores the record and suggests that parties may introduce evidence at any time they see fit, so long as the trial court has not expressly stated otherwise. No authority supports Haberbush's position. We agree that Haberbush should not have agreed to submit the case on stipulated facts, when those facts did not amount to a prima facie case, but that is precisely what he did. Second, Haberbush protests that he could not have sought an order "to reopen the trial" (as the defendants argued he should have done), because no trials had taken place. No trial occurred, Haberbush says, because a trial does not commence under Code of Civil Procedure section 581, subdivision (a)(6) until an opening statement is made or a witness is sworn or evidence is introduced. Because "[t]he proceeding on July 28, 2003, did not comply with Section 581(a)(6), . . . therefore no trials had taken place." The argument is purely semantic and factually erroneous. It overlooks the fact that the parties presented the court with the stipulated facts for the Vantiger and Gemmel cases on July 28, 2003. In this context — assuming section 581 has any application to these circumstances — the presentation of stipulated facts to the court is "the introduction of . . . evidence." (Code Civ. Proc., § 581, subd. (a)(6).) And, however one denominates the order Haberbush should have sought, it is beyond peradventure that a motion was necessary to change the basis upon which the parties, with the trial court's approval, agreed to proceed. Haberbush's argument that the proceedings before the trial court "were more akin to motion for summary judgment proceedings, where the Superior Court may consider supplemental declarations" is misplaced. Summary judgment proceedings are subject to detailed procedural and substantive requirements, and proceedings "akin" to them are creatures unknown to the law, so far as we are aware. Third, Haberbush argues the trial court properly considered its evidence because the "evidence was necessary to establish the facts to which Defendants unjustifiably refused to acknowledge." According to Haberbush, the stipulations "did not address all necessary facts because Defendants disavowed their previous agreement to stipulate to the cases-in-chief, and to only brief the legal issue of their affirmative defense (setoff) in the form of cross motions for summary judgment." We do not condone one party's blindsiding of the other by disavowing a previous agreement, if that is what occurred. However, the only evidence of a "previous agreement" is included in the declaration from Haberbush's counsel, submitted with Haberbush's reply brief to the trial court — a declaration which does not explain why Haberbush agreed to the stipulated facts presented to the trial court on July 28, 2003. Obviously, counsel who intend to try a case on stipulated facts must beware the risks of waiting until the trial date to obtain the appropriate stipulations. The solution to the problem of reneging on a "previous agreement" is to try the dispute as scheduled, to seek a continuance, or to file a motion to reopen the proceedings for the submission of additional evidence. Instead, Haberbush stipulated to facts that did not prove his case; confirmed to the court, through defense counsel's express statement, that those stipulations "represent[ed] the facts on which we're willing to submit this case to the court"; and confirmed there would be no hearing. In sum, we discern no legal basis, absent a motion or an order of the court, upon which Haberbush could properly submit additional evidence to the trial court after agreeing to submit the cases on stipulated facts and legal argument. Certainly the trial court has the discretion to reopen a matter in order to take further evidence. Just as certainly, however, the consideration of additional evidence must be preceded by a motion from the party desiring to present it, or by an order of the court on its own motion, notifying both parties that further evidence will be received. In this case, the trial court should have either refused to consider Haberbush's additional evidence or, on its own motion, reopened the case for the submission of further evidence from both parties, utilizing appropriate trial or summary judgment procedures. Because the trial court erred in considering Haberbush's additional evidence without reopening the case, we must reverse the judgments and remand the causes to the trial court. On remand, the trial court is at liberty to decide in the first instance whether to hold the parties to the stipulated facts or to reopen the case for the submission of additional evidence by both parties.
Indeed, as Haberbush acknowledges in his brief, the court informed Haberbush's counsel that without the stipulations, the court was prepared to proceed with a trial that day or to dismiss the complaints.
The appellants' joint opening brief asserts that the exchange between Judge DiLoreto and defense counsel at the hearing on the motions to vacate the judgments (see page 17, ante) shows the court "had ex parte contacts with [Haberbush] requesting further information, and not informing the Defendants of its request or affording the Defendants an opportunity to file further declarations themselves." They assert this was a violation of the canons of judicial ethics, and "greatly prejudiced the Defendants by not affording them an opportunity to explain that the claims filed with [Haberbush] were contingent claims, to be considered only if the transfers and payments were avoided, and did not represent antecedent debts at the time of the alleged voidable transfers." In response, Haberbush states "[t]hese allegations are erroneous and outrageous."
Code of Civil Procedure section 581 governs dismissal of an action or complaint by the parties or the court.
DISPOSITION
The judgments are reversed, and the causes are remanded to the trial court with directions to vacate the judgments and conduct further proceedings consistent with the views expressed in this opinion. The appellants are to recover their costs on appeal.Rubin, Acting P. J., and Flier, J., concurred.
The petition of appellants Charles and Dorothy Cummins Family Limited Partnership and Gemmel Pharmacy Group, Inc., for review by the Supreme Court was denied August 30, 2006, S144977.