Opinion
G053180
01-16-2018
THE ALMQUIST GROUP, LLC, Plaintiff and Appellant, v. DEBRA BOWEN, as Secretary of State, etc., Defendant and Appellant.
Iler Law Firm and Doug Iler for Plaintiff and Appellant. Kamala D. Harris and Xavier Becerra, Attorneys General, Douglas J. Woods, Assistant Attorney General, Marc A. LeForrestier and Peter H. Chang, Deputy Attorneys General, for Defendant and Appellant.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 30-2014-00741366) OPINION Appeal from a judgment of the Superior Court of Orange County, Franz E. Miller, Judge. Reversed and remanded with directions to dismiss. Iler Law Firm and Doug Iler for Plaintiff and Appellant. Kamala D. Harris and Xavier Becerra, Attorneys General, Douglas J. Woods, Assistant Attorney General, Marc A. LeForrestier and Peter H. Chang, Deputy Attorneys General, for Defendant and Appellant.
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INTRODUCTION
The Almquist Group, LLC (Almquist Group) sought recovery from the Victims of Corporate Fraud Compensation Fund (the Fund), Corporations Code section 2280 et seq. The California Secretary of State (the Secretary of State), who administers the Fund, denied Almquist Group's application for recovery. Almquist Group appealed the Secretary of State's decision by filing a verified petition in the superior court for an order directing payment out of the Fund. The superior court granted Almquist Group recovery in the amount of $50,000.
Both Almquist Group and Debra Bowen, as the Secretary of State, appealed from the judgment. Almquist Group contends it is entitled to nearly $750,000 in recovery from the Fund; the Secretary of State contends Almquist Group is entitled to no recovery whatsoever from the Fund.
We agree with the Secretary of State that Almquist Group is entitled to no recovery from the Fund because Almquist Group lacked standing to bring a claim. Almquist Group had assigned its rights and interest in the judgment for which recovery was sought to another entity, which did not file its own application for recovery, and Almquist Group did not inform the Secretary of State of the assignment. Standing is a threshold issue that must be resolved before a decision can be made on the merits (Dent v. Wolf (2017) 15 Cal.App.5th 230, 233-234); therefore, the proper disposition is to reverse the judgment and remand to the trial court with directions to dismiss Almquist Group's petition.
VICTIMS OF CORPORATE FRAUD
COMPENSATION FUND
In 2002, the Legislature established the Fund for "the sole purpose of providing restitution to the victims of a corporate fraud." (Corp. Code, § 2280; see Corp. Code, former § 1502.5, repealed by Stats. 2012, ch. 564, § 2.) The Fund is administered by the Secretary of State with funding appropriated by the Legislature. (Corp. Code, § 2280.)
An "aggrieved person" who has obtained a "final judgment" against a corporation "based upon the corporation's fraud, misrepresentation, or deceit, made with intent to defraud," may submit an application to the Secretary of State for payment from the Fund. (Corp. Code, § 2282, subd. (a).) The application may be filed only "upon the judgment becoming final and after diligent collection efforts are made" for the amount unpaid on the judgment that represents an "actual and direct loss" to the claimant in the transaction. (Ibid; see Cal. Code Regs., tit. 2, former § 22501, subd. (a), Register 2004, No. 12-Z (Mar. 9, 2004).)
In 2012, the Legislature codified various regulations then governing the Fund and, in effect, created a new code, effective on January 1, 2013, to govern the Fund. (Corp. Code, § 2281 et seq., added by Stats. 2012, ch. 564, § 4.) The code which became effective on January 1, 2013 and the corresponding implementing regulations apply to claims submitted after January 1, 2013. (Corp. Code, § 2296; Cal. Code Reg., tit. 2, § 22500, et seq.) Claims submitted before January 1, 2013 are subject to the regulations in effect before that date.
An application for recovery from the Fund must be verified and provide detailed information about the alleged fraud, the underlying judgment, and the claimant's efforts to collect on the judgment from the judgment debtor. (Corp. Code, § 2282, subd. (c); see Cal. Code Regs., tit. 2, former §§ 22501, subd. (c), 22502, subd. (a), Register 2004, No. 12-Z (Mar. 9, 2004).) The regulations in effect before January 1, 2013 also required the claimant to verify that the underlying judgment was prosecuted "conscientiously and in good faith," which was defined to mean, in relevant part, that "no party potentially liable to the claimant was intentionally and without good cause omitted from the complaint" and that the claimant "employed no other procedural means contrary to the diligent prosecution of the complaint or arbitration award for the purpose of seeking to qualify" for the Fund. (Cal. Code Regs., tit. 2, former § 22502, subd. (a)(6)(A), Register 2004, No. 12-Z (Mar. 9, 2004).) Although the regulations in effect after January 1, 2013 do not use the phrase "conscientiously and in good faith," they do require the claimant to identify all potentially liable parties and, if any such party was not a party to the underlying judgment, to state the reasons for failing to pursue the potentially liable party. (Cal. Code Reg., tit. 2, § 22502, subd. (d)(7).)
The regulations in effect before January 1, 2013 differ from the code sections in effect after January 1, 2013 in the limits placed on payment from the Fund. Under the regulations in effect before January 1, 2013, payment from the Fund could not exceed $20,000 for any one transaction. (Cal. Code Regs., tit. 2, former § 22515, Register 2004, No. 12-Z (Mar. 9, 2004).) Under current Corporations Code section 2289, subdivision (a), payment from the Fund may not exceed $50,000 "for any one claimant per single judgment."
A claimant may appeal the Secretary of State's decision on an application for recovery from the Fund by filing a verified petition in the superior court for an "Order Directing Payment Out of the Victims of Corporate Fraud Compensation Fund." (Corp. Code, § 2287, subd. (a).)
FACTS AND PROCEDURAL HISTORY
I.
Almquist Group's Application for Recovery
from the Fund
In November 2010, Almquist Group filed a complaint asserting fraud and other causes of action against Thomas Tarbutton and various corporations alleged to be his agents (the Tarbutton Defendants). Four days later, Almquist Group and the Tarbutton Defendants entered into a stipulated judgment (the First Stipulated Judgment) for the amount of $4,413,225.
The First Stipulated Judgment has this recital: "Plaintiff is an investor who entrusted investment monies with Defendants in the form of loans purportedly secured by deeds of trust recorded against specific parcels of real property ('Transactions'). Each of the Transactions was funded by Plaintiff. In total, Plaintiff funded sixty-four (64) individual and specifically identifiable Transactions, each with [its] own terms." The First Stipulated Judgment also recites, "Defendants fraudulently appropriated money entrusted to them by Plaintiff" and "presented to Plaintiff false or fraudulent documents and materially misrepresented to Plaintiff that said documents were validly recorded instruments or deeds of trust evidencing Defendants' interest in the real properties pertaining to the Transactions."
The First Stipulated Judgment was signed by the court on November 29, 2010 and was entered on January 14, 2011.
In December, 2010, before the First Stipulated Judgment was entered, Almquist Group filed a verified application with the Secretary of State for payment from the Fund. In January 2011, the Secretary of State sent Almquist Group a deficiency notice informing it that its application was premature, incomplete, and contained false statements. The Secretary of State explained the application was premature because "it appears the conscientious and good faith prosecution of the underlying actions has not been completed" and "Claimant could not have diligently pursued collection efforts prior to submitting the Application since no judgment has been entered." The Secretary of State also stated "it appears Claimant has made false statements in the Application." The Secretary of State sent additional deficiency notices in April and June 2011, March 2012, and August 2013.
In June 2011, Almquist Group and the Tarbutton Defendants entered into a stipulation to amend the First Stipulated Judgment by dividing it into two separate judgments. One judgment would be in the amount of $1,624,225 against defendant Primary Capital, Inc. (the PCI Judgment), and the other would be in the amount of $2,789,000 against all other Tarbutton Defendants (the Second Stipulated Judgment). Primary Capital, Inc. was a licensed California real estate broker, and, by creating a separate judgment against Primary Capital, Inc. alone, Almquist Group could seek recovery from the California Department of Real Estate (now the Bureau of Real Estate) Consumer Recovery Account. Recovery could not be obtained from both the Fund and the Consumer Recovery Account based on a single judgment.
That is because when the Real Estate Commissioner pays from the Consumer Recovery Account the commissioner receives an assignment of all right, title, and interest of the judgment creditor in the judgment. (Bus. & Prof. Code, § 10479.)
The PCI Judgment and the Second Stipulated Judgment were signed by the superior court and entered in March 2013. Almquist Group submitted the PCI Judgment to the Bureau of Real Estate and received $129,000 from the Consumer Recovery Account. In October 2013, Almquist Group notified the Secretary of State that it intended to proceed on its application based only on the Second Stipulated Judgment. The Secretary of State issued a notice of completion deeming Almquist Group's application to be complete as of October 30, 2013.
In June 2014, the Secretary of State issued a final decision stating: "On March 8, 2013, more than two years after submitting the Application, Claimant severed and amended its judgment for the sole purpose of recovering from both the [Fund] and the Bureau of Real Estate Recovery Account (BRERA). Subsequently, Claimant accepted payment from the BRERA and assigned its severed amended judgment to BRERA. [¶] The severing and amending the underlying judgment after the submission of the Application for the sole purpose of qualifying for payment from the [Fund] and conducting collection efforts more than two years after the submission of the Application fails to comply with the requirements of the Original Regulations." The Secretary of State concluded the First Stipulated Judgment could not be the qualifying judgment for recovery from the Fund because payment had been made from the BRERA, resulting in the full assignment of that judgment under Business and Profession Code section 10474. The qualifying judgment for recovery from the Fund therefore was the Second Stipulated Judgment. Because the Second Stipulated Judgment was entered in 2013, it was subject to the Corporations Code section in effect after January 1, 2013. Corporations Code section 2294 barred payment from the Fund to any claimant who had received payment from any other restitution fund.
Section 2294 states: "The Secretary of State shall not make any award to a claimant from the fund if the claimant has received payment from any other restitution funds or for the portions of the judgment that the claimant has collected from the corporation or its agent or any other defendant in the underlying judgment." --------
The version of the Secretary of State's final decision that was submitted to and considered by the trial court in this case had several portions redacted. Almquist Group included in the Appellant's Appendix the original decision, which has no redactions. The redacted portions refer to the Secretary of State's offer to compromise Almquist Group's claim for $50,000 in exchange for an assignment of the Second Stipulated Judgment. The Secretary of State moves to strike from the appellate record the version of the final decision with no redactions because it was not part of the trial court record. We agree and grant the motion to strike. (See Cal. Rules of Court, rule 8.124(g); Steroid Hormone Product Cases (2010) 181 Cal.App.4th 145, 151, fn. 6 ["Inclusion in a joint appendix of documents that were not filed with the trial court is improper"].)
II.
Creation of Restoration Holdings, LLC
In January 2011, soon after stipulating to the First Stipulated Judgment, Almquist Group and four others who also had been allegedly defrauded by the Tarbutton Defendants, and had entered into similar stipulated judgments, formed Restoration Holdings, LLC (Restoration Holdings). The purpose of Restoration Holdings was to facilitate collection of the judgments and distribute the proceeds to Restoration Holdings' respective owners.
Under the Operating Agreement for Restoration Holdings (the Operating Agreement), each of its members assigned his, her, or its stipulated judgment to Restoration Holdings as each member's capital contribution to the company. The fair market values of the stipulated judgments were identified in Exhibit B to the Operating Agreement. Exhibit B is a table entitled "Exhibit B - Capital Contribution" and "VCI Investors Judgment Table" which shows the name of each member, the case number of each member's judgment against the Tarbutton Defendants, the date each judgment was entered, the amount of the judgment, and the percentage of which each member's judgment constituted the total of all judgments. The first item listed in Exhibit B is the First Stipulated Judgment for $4.4 million.
The Operating Agreement provides that assets of Restoration Holdings were to be held in the name of Restoration Holdings and that that its members may not withdraw any part of their capital contribution or receive any distributions except as specifically provided in the Operating Agreement. The Operating Agreement makes it virtually impossible for members to withdraw their capital contributions. A member may withdraw from the company on six months' notice and only after divesting his or her entire membership interest. A member may divest his or her membership interest by transferring the interest to another only if all other members approve. Upon certain specific triggering events, such as the death or bankruptcy of a member, a member's withdrawal, or dissolution of a member, Restoration Holdings and its other members have the option to purchase that member's interest.
III.
Almquist Group's Appeal of the
Secretary of State's Decision
Almquist Group appealed the Secretary of State's decision by filing a verified petition for order directing payment. The matter was decided on briefs and exhibits submitted by the parties and oral argument presented at a hearing in September 2015. In a minute order, the superior court granted Almquist Group's petition in the amount of $50,000 only, payable after Almquist Group secured an assignment of the rights to the Second Stipulated Judgment from Restoration Holdings and reassigned those rights to the Secretary of State.
The superior court found that the qualifying judgment was the Second Stipulated Judgment, which was entered in 2013, and, therefore, recovery was capped at $50,000. The court found that, although the First Stipulated Judgment was entered in November 2010, Almquist Group chose to amend it by splitting it into two separate judgments so it could seek recovery from two different victim funds. The court held that the splitting of the original judgment effected a material change to the judgment.
The court also found that when Almquist Group submitted its application in December 2010 it could not have had exhausted its efforts to collect on the judgment, as the law requires, because the First Stipulated Judgment had been entered only one month earlier. The court found too that Almquist Group's application had been deemed incomplete by the Secretary of State due to a lack of evidence to show actual fraud. Almquist Group had amended its application in early 2013, and the application was not deemed complete until November 20, 2013.
The Secretary of State had contended that Almquist Group lacked standing because it had assigned its entire interest in the Second Stipulated Judgment to Restoration Holdings. In response, the superior court found that Almquist Group had assigned its interest in assets collected from the Tarbutton Defendants to Restoration Holdings. The court found, however, that it was unclear whether such assignment included Almquist Group's right to apply to the Fund. The court ultimately ruled that Almquist Group "has offered to secure back an assignment from Restoration Holdings to perfect standing which would obviate any concern [the Secretary of State] might have about Restoration Holdings making its own Application on the same claim."
The court did not make a ruling on the Secretary of State's contention that Almquist Group had not exhausted all collection efforts. Instead, the court stated, "[w]ere the amount in controversy higher, the contention might warrant further exploration." Judgment was entered in December 2015. Almquist Group and the Secretary of State each timely filed a notice of appeal from the judgment.
ALMQUIST GROUP LACKS STANDING TO SEEK
RECOVERY FROM THE FUND
I.
Almquist Group Assigned the Qualifying Judgment to
Restoration Holdings.
In her appeal, the Secretary of State raises the threshold and fundamental issue of Almquist Group's standing to seek recovery from the Fund. The Secretary of State argues that Almquist Group does not have standing because it had assigned its rights to recover under the First Stipulated Judgment to Restoration Holdings. We agree.
"A judgment creditor may assign the right represented by the judgment to a third person. [Citations.] In doing so, the judgment creditor assigns the debt upon which the judgment is based. [Citation.] Through such an assignment, the assignee ordinarily acquires all the rights and remedies possessed by the assignor for the enforcement of the debt, subject, however, to the defenses that the judgment debtor had against the assignor." (Great Western Bank v. Kong (2001) 90 Cal.App.4th 28, 31-32.) The assignee stands in the shoes of the assignor and takes the rights and remedies which the assignor had. (Johnson v. County of Fresno (2003) 111 Cal.App.4th 1087, 1096.) Once a right is assigned, the assignor is no longer the real party in interest and may not prosecute claims based on that right. (Searles Valley Minerals Operations Inc. v. Ralph M. Parson Service Co. (2011) 191 Cal.App.4th 1394, 1402; McCown v. Spencer (1970) 8 Cal.App.3d 216, 225 ["An assignor may not maintain an action upon a claim after making an absolute assignment of it to another; his right to demand performance is extinguished, the assignee acquiring such right"].)
Almquist Group made an absolute assignment of its interest in the First Stipulated Judgment to Restoration Holdings as Almquist Group's capital contribution. Article 3.1 of the Operating Agreement states: "Each member shall contribute to the capital of the Company as the Member's Capital Contribution the money and assets specific in Exhibit 'B' to this Agreement." The "assets specified in Exhibit 'B'" are judgments. The first judgment listed on exhibit B is the First Stipulated Judgment.
Thus, under the Operating Agreement, Almquist Group contributed to the capital of Restoration Holdings the First Stipulated Judgment in the full amount of $4,413,225. Article 5.5 of the Operating Agreement states: "All assets of the company, whether real or personal, shall be in the name of the Company."
Almquist Group's managing member (Martin Almquist) testified at his deposition that the Almquist Group assigned the First Stipulated Judgment and its claims against the Tarbutton Defendants to Restoration Holdings as Almquist Group's capital contribution. Upon assignment, the First Stipulated Judgment became an asset of Restoration Holdings and was held in its name. In exchange, Almquist Group received an allocation of the profits and losses of Restoration Holdings.
With its reply papers in support of the petition, Almquist Group submitted changes to Martin Almquist's deposition testimony which tried to substantially change his testimony on that point. In place of the testimony that Almquist Group assigned the First Stipulated Judgment, Martin Almquist stated, "[o]nly the right to share in the recovery of assets assigned by Villa Capital was contributed." In place of testimony that Restoration Holdings was attempting to collect against the Tarbutton Defendants on Almquist Group's behalf, he stated: "I did not assign my [Fund] claim to Restoration Holdings. I contributed my pro rata interest in the notes and deeds assigned by Villa Capital for marshaling and distribution."
Martin Almquist's corrected testimony is directly contrary to the Operating Agreement. Almquist Group's claim for recovery from the Fund is dependent on, not independent of, a claim under a judgment against the judgment debtors. For that reason, Almquist Group could not assign the First Stipulated Judgment to Restoration Holdings while keeping its own claim against the Fund.
After Almquist Group assigned the First Stipulated Judgment to Restoration Holdings, Almquist Group no longer was the real party in interest under that judgment and no longer had any rights and remedies for its enforcement. Instead, Restoration Holdings, as the assignee, acquired all the rights and remedies that Almquist Group had. Thus, only Restoration Holdings had the right to recover under the First Stipulated Judgment and the right to seek recovery under the Fund.
Restoration Holdings also would hold all rights and remedies under the Second Stipulated Judgment because it is an amended version of the First Stipulated Judgment. "[O]nce a valid assignment has been made, the assignor cannot cancel or modify the completed assignment by unilateral action without the assent of the assignee, nor may he defeat or impair the rights of the assignee in any other way [citations]." (In re Marriage of Shore (1977) 71 Cal.App.3d 290, 296.) Indeed, it is questionable whether the Second Stipulated Judgment is valid because Restoration Holdings was not a party to the stipulation to amend the First Stipulated Judgment.
II.
Almquist Group Failed to Inform the Secretary of State of
the Assignment.
The Secretary of State did not consider the matter of standing in denying Almquist Group's application for recovery from the Fund. The Secretary of State can be excused from this lapse because Almquist Group never informed her of the assignment to Restoration Holdings.
In March 2011, Almquist Group informed the Secretary of State that it was "the assignee of all claims for the underlying judgment." Almquist Group alluded to Restoration Holdings by informing the Secretary of State that abstracts of judgment had been filed and the proceeds from the abstracts would be "distributed among the other four VCI claimants in accordance with an agreement reached amongst the investors." But when the Secretary of State asked for a copy of the agreement, Almquist Group refused, asserting it was privileged under the attorney-client privilege and attorney work product doctrine. Almquist Group revealed only that it was to receive "42.52% of the net proceeds recovered through all collection efforts against judgment debtors."
The Secretary of State again asked for a copy of the agreement so that she might determine whether there has been an assignment of the judgment. The Secretary of State informed Almquist Group that "[a] copy of the distribution agreement and full disclosure about its negotiation is necessary to analyze whether assignment precludes a [Fund] award, whether procedural means contrary to diligent prosecution exist and whether diligent collection efforts have been pursued." The Secretary of State reminded Almquist Group that it had "verified under penalty of perjury that Claimant would notify the Secretary of State in writing of any assignment or transfer of all or any part of Claimant's interest in Claimant's judgment."
Almquist Group still did not disclose to the Secretary of State the assignment of the First Stipulated Judgment to Restoration Holdings and did not provide a copy of the assignment agreement. Instead, Almquist Group informed the Secretary of State that "[t]here has been no assignment of Claimant's claim." Almquist Group stated under penalty of perjury that "Claimant hereby affirms that he has not assigned his interest in [the Fund] to any third party." Only through discovery in this action was the Secretary of State able to obtain a copy of the Operating Agreement and determine that Almquist Group had assigned all rights to recover against the judgment debtors.
III.
The Trial Court's Findings
The trial court found, "[Almquist Group] has assigned its interest in assets collected from the underlying defendants, and so payments made by the Fund might be assignable to Restoration Holdings, but whether [Almquist Group] has assigned away its right to make application for the funds in the first instance is not clear." The court in effect found that Almquist Group did not have standing but that, by securing an assignment back from Restoration Holdings, could "perfect standing" and "obviate any concern . . . about Restoration Holdings making its own Application."
The court's finding, express or implied, that Almquist Group lacked standing is supported by substantial evidence. To the extent the trial court found that Almquist Group had not assigned its right to apply for recovery under the Fund, that finding is legally incorrect. Under the regulatory and statutory framework of the Fund, if the Secretary pays any sum from the Fund to a claimant, the Secretary "shall be subrogated to all of the rights of the claimant and the claimant shall assign all of his or her [the claimant's] rights, title, and interest in the judgment to the Secretary of State." (Corp. Code, § 2293; Cal. Code Regs., tit. 2, former § 22518, Register 2004, No. 12-Z (Mar. 9, 2004).) The judgment debtor is required to pay to the Fund the amount of the claim plus interest. (Corp. Code, § 2293.1; Cal. Code Regs., tit. 2, former § 22516, Register 2004, No. 12-Z (Mar. 9, 2004).) "[A]ny amount and interest so recovered by the Secretary of State on the judgment shall be deposited in the [F]und." (Corp. Code, § 2293; Cal. Code Regs., tit. 2, former § 22518, Register 2004, No. 12-Z (Mar. 9, 2004).) An applicant's claim against the Fund is thus based on its claim to recover from the judgment debtor under the judgment.
Requiring Almquist Group to obtain an assignment back from Restoration Holdings is not a cure for lack of standing. "'"Standing" is a party's right to make a legal claim and is a threshold issue to be resolved before reaching the merits of an action.'" (Dent v. Wolf, supra, 15 Cal.App.5th at pp. 233-234; San Francisco Apartment Assn. v. City and County of San Francisco (2016) 3 Cal.App.5th 463, 472 ["'A litigant's standing to sue is a threshold issue to be resolved before the matter can be reached on its merits"].) Because Almquist Group lacked standing to seek recovery from the Fund and to appeal the Secretary of State's decision, the trial court's only option was to dismiss the petition.
DISPOSITION
The judgment is reversed and the matter is remanded with directions to dismiss the Almquist Group's petition for and order directing payment out of the Fund. The Secretary of State shall recover costs on appeal.
FYBEL, ACTING P. J. WE CONCUR: IKOLA, J. THOMPSON, J.