Opinion
G057222
12-17-2020
JOSE EULOGIO BONILLA, Plaintiff and Appellant, v. SERGIO SALVADOR BONILLA et al., Defendants and Respondents; BELLANN RAILE et al., Third Party Claimants and Respondents.
Abir Cohen Treyzon Salo, Cynthia A. Goodman, David S. Bederman and Boris Treyzon for Plaintiff and Appellant. Morasse Collins & Clark, and Steven R. Morasse for Defendants and Respondents. Snell & Wilmer, Michael B. Reynolds, Todd E. Lundell and Jing Hua for Third Party Claimant and Respondent Bellann Raile. Xavier Becerra, Attorney General, Diane S. Shaw, Assistant Attorney General, Lisa W. Chao, Ronald N. Ito and Donny P. Le, Deputy Attorneys General for Third Party Claimant and Respondent Franchise Tax Board.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.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. 07CC04418) OPINION Appeal from an order of the Superior Court of Orange County, Gregory H. Lewis, Judge. Reversed and remanded. Abir Cohen Treyzon Salo, Cynthia A. Goodman, David S. Bederman and Boris Treyzon for Plaintiff and Appellant. Morasse Collins & Clark, and Steven R. Morasse for Defendants and Respondents. Snell & Wilmer, Michael B. Reynolds, Todd E. Lundell and Jing Hua for Third Party Claimant and Respondent Bellann Raile. Xavier Becerra, Attorney General, Diane S. Shaw, Assistant Attorney General, Lisa W. Chao, Ronald N. Ito and Donny P. Le, Deputy Attorneys General for Third Party Claimant and Respondent Franchise Tax Board.
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INTRODUCTION
In June 2011, Jose Eulogio Bonilla (Joe) obtained a $3.3 million judgment against Juan Bonilla (John), Sergio Salvador Bonilla (Sal), Jose Luis Bonilla (Louis), and Luis Alfred Bonilla (Alfred). The court appointed a receiver to manage the three businesses jointly owned by Joe, Sal, Louis, and Alfred. As of August 2018, Joe's judgment had not been satisfied, largely because the government and three law firms were in line ahead of Joe to collect the distributions from the businesses.
In August 2018, Joe moved for an order permitting him to foreclose on the partnership interests of Alfred, Sal, and Louis, arguing that he was being made to wait too long for his judgment to be paid off. The trial court denied the motion.
We reverse and remand for another hearing, this time to consider a crucial issue left unresolved - whether foreclosing on the partnership interests of Sal, Louis, and Alfred would unduly interfere with partnership operations. The receiver, who was in the best - and possibly the only - position to weigh in on this issue, did not address it. The trial court thus had no means by which to assess the potential of a foreclosure and sale of the partnership interests to disrupt the businesses.
FACTS
Joe sued his brothers - John, Sal, and Louis - in 2007, claiming, among other things, that he owned 25 percent of several family businesses from which he had been excluded. In 2008, the parties - along with Alfred - settled the lawsuit. As part of the settlement, Joe agreed to reduce his share to 20 percent; the defendants and Alfred agreed to pay Joe's attorney fee bill of $165,000.
The original complaint did not name Alfred as a defendant.
John, Sal, Louis, and Alfred breached the settlement agreement by not paying Joe his 20 percent share of the profits from the businesses or the promised attorney fees. Joe amended his complaint to include a breach of contract cause of action, which was tried in 2011.
Faced with the prospect of having to produce the documents relating to the businesses' profits between 2006 and 2010 for the trial, defendants hired a certified public accountant to prepare "amended" tax returns. As a result, the net profits reported for 2008 increased from $400,000 to over $1 million, and the profits for 2009 increased from $700,000 to over $2 million. There were other instances of cheating as well - for example, Louis' son received a W-2 form for working at one of the businesses. He never worked there.
The trial of the breach of the settlement agreement had several consequences. The court found that the agreement had created a partnership among Joe and the defendants. Breach of the agreement entitled Joe to $3.3 million in damages plus 20 percent of the net profits of the businesses. In addition, both the Internal Revenue Service (IRS) and the Franchise Tax Board (FTB) sent their compliments.
As of October 2016, the IRS had been paid $1.5 million, with $1.1 million still owing. The FTB was still owed $1.2 million.
In September 2011, the court appointed a receiver, who ultimately excluded all the Bonillas, including Joe, from the premises. Part of the receiver's assignment was to establish a payment priority list for distributions from the profits of each partner's percentage of ownership. Needless to say, the IRS was first, followed by several law firms. Joe's judgment was fourth or fifth in line.
One of the law firms was Bohm, Matsen, Kegel & Aguilera, LP, which filed an action against Joe to recover unpaid legal fees and then obtained a default judgment against him. We reversed the judgment in an unpublished opinion and sent it back to the trial court for recalculation in 2014. (Bohm, Matsen, Kegel & Aguilera v. Bonilla (Sept. 9, 2014, G048212) [nonpub. opn.].) Evidently the law firm obtained another judgment against Joe. --------
Since 2011, the receiver has been paying off the various lienholders in order of priority. Owing to his relatively distant place in line, however, Joe was not paid with the dispatch to which he believed himself entitled. With postjudgment interest at 10 percent, his judgment as of 2018 was over $7 million.
Accordingly Joe filed a motion pursuant to Corporations Code section 16504 to foreclose on the other Bonillas' interests in the businesses. The motion was opposed by one of the law firms, by the IRS, by the FTB, and by Sal, Louis, and Alfred. The receiver filed a "response," which also opposed the motion.
The trial court denied the motion, stating that the receiver had been paying the creditors, including Joe, and had kept the businesses profitable. The court also noted that the delay in paying Joe's judgment was due in large part to the partnership's failure to pay its taxes. Joe "failed to establish to the court that foreclosure of Defendants' partnership interests would not disrupt the Receivership and/or interfere with the priority of lien holders."
DISCUSSION
Corporations Code section 16504, subdivision (b), provides "A charging order constitutes a lien on the judgment debtor's transferable interest in the partnership. The court may order a foreclosure of the interest subject to the charging order at any time. The purchaser at the foreclosure sale has the rights of a transferee."
The leading published case on foreclosure of partnership interests appears to be Hellman v. Anderson (1991) 233 Cal.App.3d 840 (Hellman). There the court held that "a judgment debtor's interest in a partnership (meaning the right to share in the profits and surplus) may be foreclosed upon and sold, even though other partners do not consent to the sale, provided the foreclosure does not unduly interfere with the partnership business." (Id. at p. 842.) Hellman also held that whether foreclosure would unduly interfere with the partnership business had to be evaluated case-by-case. "In some cases, foreclosure might cause a partner with essential managerial skills to abandon the partnership. In other cases, foreclosure would appear to have no appreciable effect on the conduct of partnership business." (Hellman, supra, 233 Cal.App.3d at p. 852.) Since no record had been made on this issue, the reviewing court remanded the case to the trial court to make the appropriate findings. (Id. at pp. 852-853.) The court placed the burden of proof upon remand on the partner resisting foreclosure because he was in the best position to have knowledge and evidence relevant to the effect of foreclosure on the business.
Our case is indistinguishable. As far as we can tell from the record before us, foreclosure of the Bonillas' partnership interests might not affect the partnership business at all. None of the Bonillas, including Joe, is involved in managing any of the businesses. The receiver is in charge now, and nothing in the record suggests that this would change after foreclosure. The receiver would continue to run the businesses and to make the payments according to the priority list established in 2011. Indeed, the receiver's "response" to Joe's motion admitted as much: "It is therefore unclear how exactly Joe's Motion, if granted, would change the status quo. Joe's foreclosure on his brothers' partnership interest would not substitute Joe as a 100% partner, but could only provide Joe with his brothers' share of the profits and losses and the right to receive distributions. Since Joe already has a right to recover those distributions - subject to the rights of his brothers' various lien creditors . . . - the status quo cannot and should not be disturbed."
We recognize that the trial court's ruling is reviewed for abuse of discretion. (See Baum v. Baum (1959) 172 Cal.App.2d 658, 663-664.). Nevertheless, there must be some evidence to support the exercise of this discretion, and it seems to us on this record that crucial evidence was lacking. The oppositions did not address interference with partnership operations. The Bonillas who objected to foreclosure argued that Joe's 2011 judgment would be paid off in another 76 months (i.e., 6 years plus), so the delay was not unreasonable. The court added that it was partially Joe's fault it was taking so long because a large chunk of the money the receiver had been able to realize went to pay taxes that should have been paid years earlier.
All these arguments may be true and may figure into the trial court' decision. But the missing piece - the largest and most important piece in our view - is the evidence of business disruption. There was none. The court's observation that Joe had failed to show foreclosure would not disrupt the partnership did not take into account Joe's exclusion from managing the businesses. While the receiver is obliged to send him monthly reports of partnership assets, liabilities, revenues, and expenditures, these reports give no information about day-to-day operations and thus any effect that foreclosure would have on them. As Joe pointed out, the requested change would not affect the priority of the payments or the receiver's powers to run the businesses.
In light of the circumstances of this case, we think the parties opposing foreclosure have the burden to present evidence to show how foreclosure would disrupt the operation of the businesses. If they carry this burden, then it is up to Joe to explain how the status quo would be maintained despite the foreclosure. The trial court can take all the evidence into account when it makes its decision.
The receiver explained that the presence of liens against partnership revenues stymied her efforts to interest buyers or lenders in the businesses. Understandably so. Therefore the only potential bidders at any foreclosure sale are likely to be Joe or the other Bonillas. Whoever succeeded in any such sale would take only the sellers' interest, which is subject to the charging order. As far as we can tell, nothing about the business would change, and the creditors would be paid off per the priority list now in effect. The trial court must take interference with partnership business into account when it exercises its discretion to grant or deny Joe's motion. It may or may not change the outcome, but the record must reflect consideration of that factor.
DISPOSITION
The order denying the motion to foreclose on partnership interests is reversed, and the matter is remanded for further proceedings in accordance with this opinion. Appellant is to recover his costs on appeal.
BEDSWORTH, ACTING P. J. WE CONCUR: MOORE, J. ARONSON, J.