Opinion
G052420
05-01-2017
HOWARD GROBSTEIN, as Trustee, etc., Plaintiff and Respondent, v. 6TH & UPAS LLC, Defendant and Appellant.
Law Offices of Jeffrey S. Benice and Jeffrey S. Benice for Defendant Appellant. Landau Gottfried & Berger, John P. Reitman and Monica Rieder for Plaintiff and Respondent.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.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. 30-2011-00509238)
(Consol. with 30-2015-00767573) OPINION Appeal from three orders of the Superior Court of Orange County, Ronald L. Bauer, Judge. Appeal from two orders dismissed; third order affirmed. Law Offices of Jeffrey S. Benice and Jeffrey S. Benice for Defendant Appellant. Landau Gottfried & Berger, John P. Reitman and Monica Rieder for Plaintiff and Respondent.
The notice of appeal in this case is from a minute order dated June 6, 2015. The minute order did three things. It (1) granted the motion of Howard Grobstein (Grobstein or the Trustee), chapter 7 bankruptcy trustee for Point Center Financial, Inc. (PFC), to disqualify attorney Jeffrey Benice from representing an entity known as 6th & Upas (Upas), in this state court proceeding. It also (2) struck an answer and cross-complaint filed by Benice on behalf of Upas. And, finally, it (3) struck a Code of Civil Procedure section 170.6 declaration filed by Benice trying to remove Judge Bauer as trial judge from the case.
All statutory references are to the Code of Civil Procedure.
The last item - the striking of the affidavit filed against the trial judge - is clearly nonappealable. A statute, section 170.3, subdivision (d), directly says so: "The determination of the question of the disqualification of a judge is not an appealable order and may be reviewed only by a writ of mandate from the appropriate court of appeal sought only by the parties to the proceeding." Accordingly we dismiss this appeal to the degree it challenges the striking of the affidavit against Judge Bauer.
And in point of fact Benice, ostensibly on behalf of Upas, filed such a petition for writ of mandate in July 2015. The petition was denied by this court on July 30, 2015. (G052236)
This also disposes of Benice's argument that the trial court had no "jurisdiction" to make the rulings it did. That argument incorrectly assumes the validity of Benice's section 170.6 affidavit.
Likewise the middle item, the striking of the answer and cross-complaint, is also nonappealable as contrary to the one final judgment rule. In the context of this case, striking those pleadings was only interlocutory. The trial court's order did not, substantively, constitute a final judgment against Upas. (See Katzenstein v. Chabad of Poway (2015) 237 Cal.App.4th 759, 766 ["we begin with the understanding that, in a civil action not under the Probate Code, an order striking an answer and counterclaim is not an appealable order"].)
The first item - Benice's disqualification - is appealable, as a collateral matter. (Muller v. Fresno Community Hospital & Medical Center (2009) 172 Cal.App.4th 887, 901-902 (Muller).) We affirm it for two reasons: One, Benice cannot represent Upas because such representation is adverse to his former client PFC in a matter substantially related to the services he performed for PFC. Two, even if, for sake of argument, Benice's representation is not adverse to his former client, it is clear that the entity that controls Upas, which is PFC as administered by the bankruptcy Trustee, does not wish Benice to represent Upas.
The rule that disqualification orders are collateral matters, hence appealable, is traced back to Meehan v. Hopps (1955) 45 Cal.2d 213 (Meehan), which, as Muller points out, clearly stands for the appealability of disqualification orders even without the requirement of payment of money or performance of an act: "An order disqualifying or denying the disqualification of counsel, the latter being the order on appeal in Meehan, stands alone; it does not require the payment of money or the performance of an act." (Muller, supra, 172 Cal.App.4th at p. 902.)
FACTS
PFC was a conduit for investors who wanted a high return (around 10 percent before PFC took its cut) for participation in PFC's construction loans. (See Brewer Corp. v. Point Center Financial, Inc. (2014) 223 Cal.App.4th 831, 837-838.) In 2006, PFC served as a construction lender on various projects, including a condominium project near Balboa Park in San Diego by a developer named Mi Arbolito. (Ibid.; see National Financial Lending, LLC v. Superior Court (2013) 222 Cal.App.4th 262, 268 (National Financial).) At the time, PFC was wholly owned by its president Dan J. Harkey. (National Financial, supra, 222 Cal.App.4th at p. 268.)
The Mi Arbolito project failed, leaving contractors and materials suppliers - and of course investors - unpaid. In 2009, Upas was formed by Dan Harkey to take over the Mi Arbolito property and either develop it or liquidate it. Upas' articles of incorporation designate only one manager for it - PFC. Upas became the new owner of the Mi Arbolito project property and - in a last ditch effort to save the project - eventually (apparently around 2010 or 2011) assumed an obligation to repay a 2010 loan of about $6.2 million from a third party to Mi Arbolito. That effort failed and Upas gave up on the project in 2012.
The Mi Arbolito failure was but one flutter in the general collapse of Dan Harkey's house of cards in the Great Recession. This court described matters from the investors' point of view in Charton v. Harkey (2016) 247 Cal.App.4th 730, 735: "In November 2008, Plaintiffs filed this action to recover damages they suffered based on their investments. Plaintiffs named National Financial, Point Center, [Diane] Harkey, and her husband [Dan] as defendants. Plaintiffs alleged claims for breach of fiduciary duty, breach of operating agreement, breach of promissory note, negligent misrepresentation, intentional misrepresentation, rescission, failure to produce records, unfair business practices, securities law violations, elder abuse, and declaratory relief." Harkey's wife Diane was exonerated in that litigation. (See id. at pp. 735-736.)
The Mi Arbolito project failure prompted PFC to file this state court case (Orange County Super. Ct. Case No. 30-2011-00509238, "the 238 case," also sometimes referred to in the record and briefs as the "FATCO Action"). The 238 case sought damages arising out of the Mi Arbolito debacle from two title insurers: First American Title Insurance Company and First American Title Company (the title insurers). PFC's theory was that it would never have loaned money to Mi Arbolito if it had known that various contractors and material suppliers had already commenced work on the Mi Arbolito project, giving them priority over PFC's own first trust deed.
Benice was not counsel for PCF on the original complaint. Buchalter Nemer was.
In February 2013, while the 238 case was still pending in state court, PFC itself filed for chapter 11 bankruptcy. On the heels of that filing, Benice applied in the bankruptcy court to be "special litigation counsel" for PFC, based on his long experience in representing PFC in both litigation and regulatory matters.
In August of 2013 Howard Grobstein was appointed trustee of PFC's bankruptcy estate. By October the PFC chapter 11 case was converted to a chapter 7 bankruptcy case. Grobstein continued as bankruptcy trustee of the estate.
PFC's state court claims against the title insurers were settled in February and March 2014, as PFC's bankruptcy continued. The settlement called for the insurers to pay $199,975 and be dismissed with prejudice by PFC. This agreement was only between PFC and the insurers, with both Grobstein, as chapter 7 trustee for PFC, and Robert Wilson, as counsel for Grobstein qua Trustee, signing on behalf of PFC. Dan Harkey himself signed on behalf of Upas, but, as the line beneath his signature line attests, he was signing because PFC was the "Managing Member" of Upas.
But to whom was the settlement money ultimately supposed to go? The settlement agreement said it was to be paid to Upas "c/o" Benice. But the bankruptcy court later definitively explained that such language did not mean it was intended to go to Benice personally. The bankruptcy court held the "c/o Benice" language of the settlement agreement did not "constitute funds due to Benice as partial payment for fees and costs incurred in prosecuting the FATCO Action but were actually due to 6th & Upas." We note that it was the bankruptcy judge himself who emphasized that the money was not "due to" Benice. The court did say Benice might yet have a "righteous claim to fees," but that was to be determined later. For our purposes, we take it as a thing now finally judicially decided that it is Upas who was to be the ultimate recipient of the money generated by the 238 action.
Specifically: "Within five (5) court days after serving First American with a final order pursuant to Code of Civil Procedure section 708.440 approving this Agreement, including the payments herein, Plaintiffs, and each of them, hereby instruct First American to pay the sum of one hundred ninety-nine thousand, nine hundred seventy five dollars ($199,975.00) to 6th & Upas, c/o attorney Jeff Benice."
We grant the trustee's request to take judicial notice of court records from both the bankruptcy of PFC as well as certain related filings in the state superior court, including Benice's own breach of contract suit against Upas itself (Orange County Super Ct. Case No. 30-2015-00796177) in which Benice's long-time client Dan Harkey, purporting to act as manager of Upas, agreed to a stipulation for judgment giving Benice, as plaintiff, a $260,435 judgment against Upas. The judgment against Upas was soon vacated.
After the settlement, it appears that the "parties" (and given the truncated record we can't be more definite than that) tried to obtain the trial court's formal imprimatur. There was a hearing on April 7, 2014, on a motion to approve the settlement free of preexisting judgment liens. We have not been supplied with the papers bearing on the motion or a transcript of that hearing.
Parties is the word the trial judge himself used in his minute order on the motion. The motion was opposed by "judgment creditors" of PFC, which included the unpaid contractors and materials suppliers from the Mi Arbolito project.
However, it appears most of this appeal is centered on certain remarks at the April 7 hearing by Robert Wilson, Grobstein's counsel. Benice interprets those remarks as constituting some sort of judicial admission that the settlement proceeds from the 238 case would be paid to Benice and his firm to cover unpaid fees and costs. We reproduce those comments in the margin and address them in part III below. From what our record shows, the trial court itself had not been apprised that the proceeds were all destined for Benice and two associates. And, as would turn out later in the motion to disqualify Benice from representing Upas, neither had Wilson. In typically clear prose, Judge Bauer identified the miasma surrounding the settlement as it was presented to him: "The present suit was brought by PCF 'as Agent for Private Party Beneficiaries.' The court's best myopic reading of the First Amended Complaint has uncovered no further identification or definition of these 'Private Party Beneficiaries.' One might guess that these people are those investors who dropped their money down the Mi Arbolito hole, but that would be mere speculation. (Objection sustained [sic ].) This issue is of some importance because PCF professes that it wants no part of the settlement proceeds, but merely wishes that others be reimbursed for part of their losses and expenses. Yet the putative beneficiaries of this lawsuit ('Private Party Beneficiaries') remain a mystery and are nowhere mentioned in the parties' Settlement Agreement or in this motion. [¶] Another shroud of mystery surrounds Upas. The motion implies that the lenders will get none of these settlement monies, which will all go to Upas. Who/what is Upas? Who are its members? Who exactly is going to get this money? This entity was never mentioned in the First Amended Complaint. Is it perhaps comprised of principals in PCF? At several places in this motion and supporting papers, it is stated that Upas will be reimbursed for various expenses, including attorney fees in this suit. Is that a direct - or at least indirect - benefit to plaintiff PCF?" (Italics added.)
The following colloquy between the trial judge and Wilson in regard the proffered settlement appears in several places in the record and is the centerpiece of the opening brief's judicial admission and estoppel arguments:
"The Court: Mr. Wilson, one of the points that is made here is occasionally is maybe we are in the wrong court, and in fact Point Center Financial is a Bankrupt; that any asset relation in any fashion to Point Center Financial should first get the Approval of the Bankruptcy Court.
"Mr. Wilson: Well, first of all, Point Center was the Plaintiff in this case, so that Point Center did consent to the jurisdiction of this Court outside of the Bankruptcy. So the jurisdiction exists here, but with regard to the substance, I initially wasin my own mindquestioning whether or not some of those funds ought to come to Point Center because they are, in factthere is language in one of Point Center's bankruptcy schedules which we did not fileit was a debtorinpossession case; we dealt with the Trustee some months laterindicated that there might be equity that was owned by Point Center in this.
"But we did do the factual examination and ascertained that the funds that had been provided, quote, by Point Center were, in fact, investor funds and that the equity was not Point Center's to dispose of or spend.
"So, for that reason, we are in accord with the distribution of the proceeds to 6th & Upas, which is the entity that was formed to represent, in effect, the investors who provided the funds.
"And as I understand it, 6th & Upas has expenses that need to be paid. That is a rather small settlement based upon the total claims. And based upon my understanding, the expenses that were incurred.
"So from the trustee's standpoint, we are fine with the settlement, as it was presented to the court and we think it should be approved.
"The Court: What do you know, Mr. Wilson, about the expenditures of 6th & Upas, whether on this case or other actions? And whether [sic] that money will ultimately go if it's paid to 6th & Upas?
"Mr. Wilson: Well, first of all, my understanding is that the expenditures of 6th & Upas were only n this case, not in any other cases.
"The Court: It says otherwise in the papers.
"Mr. Wilson: Well, they may have spent money on the bankruptcy. I'm not sure. We have no recording of any of the books and records of 6th & Upas because it's not a debtor in the case, so we don't really have those books and records. What we have are the books and records of Point Center, and we have made a very careful examination to make sure that Point Center funds are not part of what's being resolved here today. And we found that that is not the case."
The trial judge was obviously paying attention to the problem of the uncertain facts before him and wryly noting he could only speculate. --------
Judge Bauer thus denied the motion: "The gaps and imprecision in this motion leave the court unable to conclude that there is not an entity closely connected with the judgment debtor that is getting an inequitable share (100%) of this settlement. The motion is therefore denied."
It was not until July 16, 2014, in a supplemental declaration filed in support of a second attempt to obtain the trial court's approval of the 238 action settlement, that Benice provided the trial court with the precise breakdown of the roughly $199,000 in proceeds: about $154,300 was for himself directly, $25,000 to another attorney named Cumming, and finally about $20,700 to an expert witness named Lanthrop. Judge Bauer was again unimpressed, and again denied the motion to approve the settlement.
Meanwhile, events in PCF's bankruptcy proceeding were also becoming problematic for Benice. The Trustee brought a fraudulent conveyance action against Dan Harkey and a group called the "Harkey Parties." That action, noted the bankruptcy court, implicated Benice. As the bankruptcy court characterized the Trustee's action: "[T]he Trustee also argues that Mr. Benice was right in the middle of the acts that are complained of now, i.e., back-dating of contracts and presumably in deciding to offload valuable rights, all of which are now characterized as an intentional fraudulent conveyance."
The upshot was that in November 2014, the bankruptcy court made an order disqualifying Benice from representing PCF, or "any parties adverse to the Trustee or to PCF's estate (including, but not limited to, Mr. Harkey, CalComm Capital Inc., or National Financial Lending, Inc.) in PCF's bankruptcy case . . . ."
There remained the problem of the proceeds from the 238 action settlement in state court. In January 2015, the two defendant title insurers in the 238 action filed their own separate state court complaint in interpleader. (Orange County Super. Ct. Case No. 30-2015-00767573 or the "573 interpleader action.") By this time there was absolutely no doubt Benice claimed all the money for himself and two associates. The title insurers, however, noted there were multiple claimants to the 238 action settlement fund, including unpaid contractors and materials suppliers from the aborted Mi Arbolito project, as well as Benice on behalf of Upas.
The present appeal appears to have been precipitated by Benice's filing of a an answer and cross-complaint on behalf of Upas in the newly filed 573 interpleader action. The 573 interpleader action was originally assigned to a judge other than Judge Bauer, but, on April 7, 2015, the interpleader action was consolidated with the original 238 case, with the 238 case the lead case. That meant Judge Bauer was the trial judge in charge of the consolidated cases. Benice filed a section 170.6 affidavit against Judge Bauer before seven days went by.
Benice's filings precipitated a response from the Trustee. In May 2015, the Trustee filed motions to disqualify Benice from representing Upas and to strike the various pleadings and papers Benice had filed on behalf of Upas. Those three motions were all granted in a single minute order in July. Benice - purporting to represent Upas - appealed from that order in August.
DISCUSSION
Benice's main argument is that the Trustee was judicially estopped by some judicial admission made in the hearing of April 7, 2014. These arguments are unpersuasive for these three reasons:
First, the judicial estoppel argument has been waived. Without a record giving us the full context of the section 708.440 motion, particularly including the reporters' transcript and the moving papers, this court has no ability to gauge whether Wilson's comments constituted any kind of judicial admission. (See Srithong v. Total Investment Co. (1994) 23 Cal.App.4th 721, 725, fn. 3.) Thus, even if Benice's argument that some statement of Wilson's at the April 7 hearing should estop the Trustee from later contesting his right to represent Upas is correct, this court does not have enough, by way of record, to rebut the fundamental presumption on appeal that trial court orders are presumed correct. (See Ketchum v. Moses (2001) 24 Cal.4th 1122, 1140-1141 [judgments are presumed correct, and an appellant has the burden on appeal of demonstrating the existence of error and presenting an adequate record by which a reviewing court can assess claims of error on appeal].)
Second, to the degree we have a record on the issue, Benice's judicial estoppel, as well his judicial admission argument, is shown to be based on a misreading of Wilson's comments. An examination of Wilson's comments shows nothing more than that Wilson recognized what the bankruptcy court would later conclude: Upas was the intended destination for the 238 action settlement funds. There is nothing in that text to indicate that Wilson was somehow admitting Benice was actually owed the settlement funds and therefore they should all go to him and two associates.
And third, the doctrines of judicial admission and estoppel are inapplicable in any event because any statement Wilson made at the April 7 hearing was the product of Benice's nondisclosure to the Trustee of the true destination of those proceeds. There is substantial evidence in the record, in the form of Wilson's declaration, that Benice did not tell Wilson the proceeds were destined for Benice. And statements that are premised on ignorance, fraud or mistake do not constitute judicial admissions. (See Wright v. Stang Manufacturing Co. (1997) 54 Cal.App.4th 1218, 1225, fn. 2 [obvious mistake in plaintiff's response to separate statement not treated as concession or judicial admission regarding issues of liability or causation]; see also Jackson v. County of Los Angeles (1997) 60 Cal.App.4th 171, 183 [judicial estoppel as doctrine does not apply when position taken was the "result of ignorance, fraud, or mistake."].)
Likewise, Benice cannot show the essence of judicial estoppel, which is a party's taking an inconsistent position in court that perverts the workings of the judicial system. As Jackson v. County of Los Angeles, supra, 60 Cal.App.4th 171 pointed out, "'The gravamen of judicial estoppel is not privity, reliance, or prejudice. Rather, it is the intentional assertion of an inconsistent position that perverts the judicial machinery.'" (Id. at p. 183, quoting Precluding Inconsistent Statements: The Doctrine of Judicial Estoppel (1986) 80 Nw. U. L.Rev. 1244, 1247-1248, fns. omitted.) Here, far from perverting justice, Wilson's comments helped bring to the attention of Judge Bauer how little he was being told about the settlement.
Benice makes a related argument that he is entitled to represent Upas because Dan Harkey, via yet another Harkey entity known as CalComm Capital LLC, had the right to select Benice as Upas' attorney. This again raises the issue of who actually has the right to control Upas.
That answer is easy. Under federal bankruptcy law, the Trustee controls the affairs of a bankrupt corporation, not its pre-bankruptcy president or managers. The United States Supreme Court put that point very plainly in Commodity Futures Trading Com'n v. Weintraub (1985) 471 U.S. 343, 352-353: "The powers and duties of a bankruptcy trustee are extensive. Upon the commencement of a case in bankruptcy, all corporate property passes to an estate represented by the trustee. . . . [¶] . . . [¶] . . . [T]he Bankruptcy Code gives the trustee wide-ranging management authority over the debtor . . . . In contrast, the powers of the debtor's directors are severely limited. Their role is to turn over the corporation's property to the trustee and to provide certain information to the trustee and to the creditors. . . . Congress contemplated that when a trustee is appointed, he assumes control of the business, and the debtor's directors are 'completely ousted.' [Citation.]" (Italics added.)
In fine, when PFC filed for bankruptcy and the Trustee was appointed, Harkey was out and Grobstein was in as the person in control of PFC. By the same token, Grobstein necessarily assumed control of Upas because he was in control of PFC. Under Upas' articles of incorporation, PFC is the manager of Upas. We note in this regard that when Dan Harkey signed for Upas in agreeing to the settlement from the title insurers, he signed as the manager of PFC. We must therefore reject all Benice's arguments which are, at root, predicated on the theory that Harkey, or CalComm, had the authority to appoint him as Upas' attorney. They had none.
Moreover, Benice makes no argument that Upas' articles of incorporation have been changed so as to allow Dan Harkey personally to remain in control. And whatever Dan Harkey's personal authority to sign for PFC back in March 2014, it is clear that by the time the disqualification motion was heard, in July 2015, Grobstein no longer wanted Benice to be Upas' attorney.
The order of July 7, 2015, disqualifying Benice from representing Upas is affirmed. The appeal is dismissed insofar as it challenges Benice's unauthorized filing of a section 170.6 motion on Upas' behalf. The appeal is also dismissed insofar as it challenges Benice's unauthorized filing of an answer and cross-complaint on Upas' behalf. Costs will be awarded the respondent Trustee. We are somewhat surprised the Trustee has not filed a motion for appellate sanctions in this court. (Cf. Trulis v. Barton (9th Cir. 1995) 107 F.3d 685, 693 ["The uncontroverted evidence establishes that Benice intentionally disregarded his clients' explicit instructions regarding dismissal and filed documents, including the notice for this appeal, which he was not authorized to file on their behalf."].)
BEDSWORTH, ACTING P. J. WE CONCUR: ARONSON, J. FYBEL, J.