Herrera v. Lopez

Full title: FERNANDO HERRERA et al., Plaintiffs, v. ALFREDO LOPEZ et al., Defendants…

Court: California Court of Appeals, Fourth District, Second Division

Date published: Jun 23, 2010

No. E048462 (Cal. Ct. App. Jun. 23, 2010)

Opinion

NOT TO BE PUBLISHED

APPEAL from the Superior Court of Riverside County Nos. RIC479176 & RIC511626. Michael B. Donner, Judge.

Bewley, Lassleben & Miller, Leighton M. Anderson and David A. Brady for Defendant and Appellant.

Law Office of Pflaster & Berman, Martin R. Berman; and Edward J. Siegler for Plaintiff and Respondent.

OPINION

Richli, J.

I. Introduction

Fernando Herrera owns Blazing Industrial Steel, Inc. (Blazing). Alfredo Lopez is a former Blazing employee and shareholder. The parties have countersued one another in consolidated litigation stemming from Lopez’s employment and his interest as a shareholder. In their dispute involving a stock repurchase agreement, Herrera appeals from an order granting a right to attach and a writ of attachment to Lopez. (Code Civ. Proc., § 904.1, subd. (a)(5).)

Based on substantial evidence and our independent legal review, we uphold the trial court’s order.

II. Factual and Procedural Background

Herrera owns Blazing, a company engaged in steel fabrication. Lopez began working for Blazing in 1991. In 2000, Lopez purchased 97 shares of Blazing’s stock, subject to a Stockholders’ Agreement, which permitted Herrera or Blazing to purchase Lopez’s 97 shares if his employment terminated. Herrera owned 100 shares. In 2006, Lopez was paid $300,000 as a one-time employment signing bonus under a new employment agreement.

In November 2006, Herrera and Lopez disagreed about Herrera’s decision to hire Michael Calderon, to whom Herrera was related by marriage, as a manager subordinate to Lopez.

When Lopez ceased being employed by Blazing on June 29, 2007, he agreed to sell his stock to Herrera. The appraised value of the stock was $2,776,000.

In August 2007, Herrera and Blazing filed an action against Lopez and Wide Flange Steel, Inc. for breach of an employment agreement, breach of fiduciary duty, conversion, embezzlement, unfair competition, and declaratory relief. The primary focus of the complaint is the Stockholders’ Agreement.

On April 2, 2008, Herrera executed a five-year promissory note, in which he purportedly reserved the right to assert any pending credits or offsets against the sums due under the note based on the following language: “7.3 This Note shall not constitute a waiver by the Borrower or Holder of any credits, offsets, claims or disputed matters of any kind that now exist or may exist between them.”

Herrera contends that any stock repurchase was subject to an offset of $500,000 plus interest. The offset represented a claim for repayment of the $300,000 bonus paid to Lopez and a claim for overpayment of $200,000 in shareholder distributions.

In October 2008, Lopez filed a complaint for breach of the promissory note and common counts against Herrera. He alleged Herrera had defaulted by failing to make the first of 20 equal quarterly payments of $158,575.83.¹ Herrera admittedly did not make the first or second quarterly payments on the note, claiming the offset.

1 The last payment was scheduled to be $158,575.71.

In December 2008, Lopez filed an application for a right to attach order, seeking an attachment in the amount of $2,671,314.38. In April 2009, the court issued a right to attach order in the amount of $634,303.32, later adjusted to $475,727.49. The court ruled Lopez had shown there was “a debt arising out of a trade, business or profession in a readily ascertainable amount as well as the probable validity of the claim.

“The promissory note arose out of a business because it involved the sale of stock in the business previously owned jointly by the parties. The amount is readily ascertainable. In other words, the face amount of the promissory note. The claim has probable validity because it is undisputed that Mr. Herrera failed to make the quarterly payment....

“At the time Mr. Herrera agreed to make the quarterly payments on April 2, 2008, the complaint against Mr. Lopez had been pending for more than seven months alleging that Mr. Lopez’s resignation required that Mr. Lopez reimburse the corporation for a $300,000 bonus.

“The fact that Mr. Herrera agreed to a payment schedule with actual knowledge of his claims against Mr. Lopez, in this Court’s opinion, contradicts his assertion that the offset clause in the [promissory note]² can reasonably refer to the claims alleged in Herrera’s complaint against Lopez.

2 The court misspoke in referring to the “stock repurchase agreement.”

“There is no showing the application was brought for improper purpose.... In fact, it was brought for the specific purpose of obtaining payment of the debt, ...”

III. Analysis

The parties agree about the standard of review: “On appeal from an attachment order, we review the record for substantial evidence to support the trial court’s factual findings. [Citation.] We apply the same evidentiary standard to an attachment hearing decided on affidavits and declarations as to a case tried on oral testimony. (Lorber Industries v. Turbulence, Inc. (1985) 175 Cal.App.3d 532, 535; Loeb & Loeb v. Beverly Glen Music, Inc. [(1985) 166 Cal.App.3d 1110] at p. 1120.) We will not disturb a determination upon controverted facts unless no substantial evidence supports the court’s determination. (Bank of America v. Salinas Nissan, Inc. [(1989) 207 Cal.App.3d 260] at p. 273.)” (Goldstein v. Barak Const. (2008) 164 Cal.App.4th 845, 853.) If material facts are undisputed, we review legal issues independently. (Howard S. Wright Construction Co. v. Superior Court (2003) 106 Cal.App.4th 314, 320.)

A. Conduct of Trade, Business, or Profession

An attachment against an individual must arise out of the conduct of a trade, business or profession. (Code Civ. Proc., § 483.010, subd. (c); Nakasone v. Randall (1982) 129 Cal.App.3d 757, 762.) The trial court determined the note arose out of the conduct of a business because it involved the sale of stock in a business previously owned by Lopez and Herrera. Herrera argues there was no evidence that he was engaged in business when he purchased Lopez’s shares.

We agree with the trial court’s conclusions, both factually and legally. In the present case, the note from Herrera to Lopez constituted a commercial exchange in which Lopez agreed to extend credit to Herrera for the purchase of the shares of Blazing, a company owned and operated by Herrera for profit. As such, the note may be reasonably characterized as “a liquidated sum based upon money loaned” or a “commercial” transaction. (Foraker v. O'Brien (1975) 50 Cal.App.3d 856, 859.) Lopez’s action based on the note fits the requirement identified by Herrera that not only must “the individual against whom attachment is sought... be engaged in a trade or business, but that the obligation underlying the action must arise directly out of the conduct of the trade or business.” (Great American Ins. Co. v. National Health Services, Inc. (1976) 62 Cal.App.3d 785, 794, citing Shaw, Hooker & Co. v. Haisman (1976) 59 Cal.App.3d 262 and Advance Transformer Co. v. Superior Court (1974) 44 Cal.App.3d 127.)

B. Probable Validity of Lopez’s Claim

The applicant for a right to attach order must establish the probable validity of his claim. (Code Civ. Proc., § 481.190; Goldstein v. Barak Const., supra, 164 Cal.App.4th at p. 852.) Herrera relies on a statutory defense expressed in Code of Civil Procedure section 431.70 and argues the trial court did not properly analyze his right to claim an offset against the amounts owing on the note. Section 431.70 permits a defendant in a civil action to assert a claim for relief in its answer and allege, in effect, that the defense claim constituted prior payment for the plaintiff’s claim and therefore should be set off against any award in the plaintiff’s favor. (Construction Protective Services, Inc. v. TIG Specialty Ins. Co. (2002) 29 Cal.4th 189, 192.)

Statutory setoff is also an equitable doctrine (Wm. R. Clarke Corp. v. Safeco Ins. Co. of America (2000) 78 Cal.App.4th 355, 358-359) under which “‘either party to a transaction involving mutual debts and credits can strike a balance, holding himself owing or entitled only to the net difference, ...’ [Citation.]” (Granberry v. Islay Investments (1995) 9 Cal.4th 738, 744.) Whether a setoff is appropriate in equity is a question within the trial court’s discretion. We review the court’s decision under the abuse of discretion standard. (Wm. R. Clarke Corp. v. Safeco Ins. Co. of America, supra, at p. 359.) An abuse of discretion occurs if, in light of the applicable law and considering all of the relevant circumstances, the court’s decision exceeds the bounds of reason and results in a miscarriage of justice. (Shamblin v. Brattain (1988) 44 Cal.3d 474, 478-479.)

In the present case, Herrera has the right to assert a statutory and equitable setoff that may eventually be resolved in his favor. But Herrera could not use Code of Civil Procedure section 431.70, concerning denials and defenses when pleading a civil action, to oppose an attachment proceeding based on his default in initial payments on the promissory note. Instead, the better course of action would have been for Herrera to make payments until there was $500,000 remaining on the note, at which time he could have asserted his offset to avoid further payments. But section 431.70 does not afford him the unilateral right to delay his payments to Lopez. None of the cases cited by Herrera approve this procedure. Instead, they involve setoffs applied in the context of nonjudicial foreclosures and family law proceedings. (Nymark v. Heart Fed. Savings & Loan Assn. (1991) 231 Cal.App.3d 1089, 1095; Murchison v. Murchison (1963) 219 Cal.App.2d 600, 605, citing Hauger v. Gates (1954) 42 Cal.2d 752.)

Furthermore, we agree that, based on the non-waiver provision in the promissory note, Herrera could not refuse to make the first $500,000 in payments. (See Steinmeyer v. Warner Construction Corp. (1974) 42 Cal.App.3d 515, 518.) While the non-waiver provision may have preserved Herrera’s $500,000 claim against Lopez, it did not give him grounds to resist a right to attach order based on a default in the promissory note. Even if Herrera’s $500,000 claim is finally determined to be valid as a partial defense to the obligation under the note, Lopez is still likely to succeed in his claim that Herrera defaulted on the note, meaning the attachment order was properly granted.

In a related argument, Herrera contends the trial court should have applied an offset under Code of Civil Procedure section 483.015, subdivision (b), which permits the amount of potential damages being secured by the writ of attachment to be reduced by (1) the amount of debt that Herrera claims Lopez owes him, which has been claimed in a cross-complaint, and/or (2) the amount of any claim Herrera has asserted as an affirmative defense in his answer, if Herrera’s claim is one upon which an attachment could be issued. (Goldstein v. Barak Const., supra, 164 Cal.App.4th at p. 952.)

The difficulty with this argument is that it fails to acknowledge the amount sought to be attached, the potential damages, was $2,671,314.38 and the attachment order issued was in the amount of $634,303.32, later adjusted to $475,727.49. Even if Herrera can ultimately claim a credit for $500,000, that amount, combined with the amount of the attachment, is still much less than the total potential damages sought by Lopez. Herrera has already, in effect, received the benefit of an offset.

For that reason, we do not address the further issue about whether Herrera’s $500,000 claim is based on tort or contract.

IV. Disposition

We uphold the trial court’s order granting the writ of attachment. We order the parties to bear their own costs on appeal.

We concur: Ramirez, P.J., Miller, J.