Opinion
B185791
12-7-2006
GEORGE CHUANG et al., Plaintiffs and Respondents, v. MING TER CHEN et al., Defendants; BANK OF TAIWAN et al., Interveners and Appellants.
Wu & Cheung, Mark H. Cheung, Charles C.H. Wu and Carolyn N. Ko for Interveners and Appellants. George Chuang & Associates, George Chuang and David H. Bushnell for Plaintiffs and Respondents.
Appellants Bank of Taiwan, Thomas Kung and Sau Tuen Kung hold liens, and are judgment creditors, of Ming Ter Chen and Grace Tu Chen (the Chens). Appellants intervened in an action brought by respondents George and Shirley Chuang (hereafter sometimes the Chuangs) and Po-Jen and Sarah Cheng (hereafter sometimes the Chengs) against the Chens. Appellants, who stood in the shoes of the Chens, sought to defend the action brought by respondents against the Chens. The controversy between respondents and the Chens arose out of a limited liability company formed by respondents and the Chens to develop and construct a shopping center; the limited liability company brought into existence for this purpose is called G.C. Properties, LLC (GCP).
Where appropriate, we will refer to the Chuangs and Chengs collectively as the respondents.
Although the Chens initially defended the action brought by respondents, they did not appear at trial and were defaulted. The defense of the action therefore fell to appellants. They were unsuccessful in this effort. The trial court, sitting without a jury, found that the Chens improperly withdrew over $ 1.3 million from GCP and that the Chens owed respondents $891,333. We affirm the judgment.
Appellants claims against the Chens total almost $ 11 million.
FACTS
The operating agreement for GCP provided for contributions by respondents and the Chens. Respondents the Chuangs and the Chengs each contributed 25 percent and the Chens contributed 50 percent. As of 1998, before the center was completed but after the property was acquired, GCPs financial records showed that the Chens capital account was $428,981 and the capital accounts for respondents the Chuangs was $214,490, as it was for respondents the Chengs. After the property was purchased, the shopping center was built by K&P Facility Service, Inc. (K&P), a company owned and operated by Ming Ter Chen; the construction loan was for $2.46 million. The shopping center was completed in September 1999.
GCP proceeded to lease the premises to tenants. The leases with tenants required the tenants to accept the premises "as is" and provided that the tenant would be responsible for installing fixtures, equipment and other improvements. In certain cases, GCP agreed to pay the tenant an improvement allowance, but the allowance was payable from GCP directly to the tenant after the improvements were completed.
In February 2000, GCP obtained a take-out loan in the amount of $3.4 million, nearly $1 million more than the amount of the construction loan. It was respondents understanding the excess amount would be used to "take out" the members contributions into GCP. However, respondents did not receive any proceeds from the take-out loan.
Although the GCP operating agreement provided that all members would be managers (section 6.1), in fact and by admission the Chens were the exclusive managers of GCP from its formation to February 2002. Between 1997 and 2002, the Chens also had exclusive control of GCPs books and records at their office.
Respondent Chuang became increasingly concerned about the Chens management of GCP. In November 2001, he obtained a preliminary title report and learned there were mechanics liens recorded against the property. Respondent Chuang demanded that the Chens explain GCPs unpaid debts and further demanded GCPs bank records. The Chens failed to provide an accounting or any meaningful explanation of GCPs debts.
In January 2002, the Chens turned over GCPs bank records for 2000 and 2001 to respondent Chuang. The records they turned over did not include the bank statements, checkbooks or check registers for other years or other documents for GCP. In February 2002, respondent Chuang replaced Chen as comanager of GCP, with Grace Tu Chen remaining as comanager.
Upon receiving the partial financial statements, bank accounts and checks for GCP from the Chens, respondent Chuang discovered that, while the Chens had been writing checks to or on behalf of their other companies from GCPs account, GCPs bills for water, gas and electricity were not being paid. No property insurance was in place, and GCP technically was in default on the take-out loan. GCP needed funds immediately to pay its bills.
On February 25, 2002, respondent Chuang made a capital call for GCP in the amount of $50,000. Respondents met their shares of the capital call in the total amount of $25,000. Although the Chens initially indicated they would make the capital call, they ultimately failed to pay any part of their $25,000 share.
Respondents made written demands on the Chens to explain payments made by the Chens from GCPs account to themselves and their entities. Despite respondents demands, the Chens never provided an accounting for their use of GCP funds or an explanation of the improper payments made from GCPs account.
The partial records the Chens turned over to respondents indicated the Chens had made numerous payments to themselves, their relatives and businesses and to third parties for their own benefit. These payments were in the form of checks written by the Chens when they were in charge of the GCP construction and take-out loans and were paid under their authorization. At trial, respondent Chuang was able to compile a list of questionable payments made by the Chens from GCPs account. For instance, in 2000 and 2001, the Chens paid Chens business K&P a total of over $600,000, notwithstanding that K&Ps work on the shopping center had been completed months before and any tenant improvement work was the individual tenants, not GCPs, responsibility. From 1999 to 2001, the Chens made substantial payments to Universal Grant Investment Group, Inc. (UGI), a company of which Chen was the incorporator, a corporate officer and director. Chen admitted at deposition that UGI never provided any goods or services to GCP. In 2000, the Chens paid over $ 200,000 to Best Hospitality Services, Inc. (BHS), a company of which Chen was the president and whose shareholders were Chen and his brother. BHS was in the business of selling hospitality services and chinaware to hotels and casinos. BHSs business was unrelated to GCP, and it had provided no goods or services to GCP. From 2000 to 2001, the Chens wrote a total of $80,000 in checks to T.K. Tu, Grace Tu Chens father, and to Wen Chin Tu, Grace Tu Chens brother. From 2000 to 2002, the Chens also wrote other checks payable to Chen or to cash. The Chens made other similar withdrawals during the years they managed GCP.
PROCEDURAL HISTORY
Respondents, the Chuangs and the Chengs, filed a complaint against the Chens in May 2002 for breach of contract, breach of fiduciary duty, indemnity, fraud by concealment, constructive fraud, money had and received, conversion, and an accounting. Respondents alleged the Chens misappropriated GCP funds while acting as its manager-members.
In January 2003 and April 2004, appellants filed notices of liens in the action. The liens purportedly attached to the Chens "rights to money or property under any judgment . . . procured in this action." In April 2003 and May 2004, appellants filed a complaint and amended complaint in intervention raising the same issues as in respondents 11th cause of action.
The Chens initially defended the action but defaulted prior to trial.
Appellants and respondents served upon the Chens notices to appear at trial, but the Chens failed to comply. Thus, neither side had the benefit of the Chens explanations for disbursements and receipts by GCP at trial.
Following trial but before the statement of decision, the court granted respondents leave to amend their complaint to add GCP as a defendant and to add a claim for declaratory relief.
Appellants and respondents stipulated to allow the trial court to resolve the amended accounting and declaratory relief cause of action on the basis of the evidence and proceedings at the earlier trial.
In the 11th cause of action of the operative first amended complaint, respondents alleged that "some or all of the monies withdrawn by or for the benefit of the CHEN defendants constitute a withdrawal of some or all of their capital contributions to GCP, and thus, reduced their interest in GCP accordingly at the time of the withdrawal(s)." In addition to an accounting, respondents sought damages for money due under the accounting and adjudication of the members interests in GCP in light of the Chens capital withdrawals.
The court bifurcated the issues to try respondents 11th cause of action for accounting and declaratory relief first. The first phase trial also encompassed the issues raised by the complaint in intervention.
Appellants elected not to call any percipient witnesses or cross-examine respondents member witness on any significant issue.
Both sides submitted proposed statements of decision to the trial court. The court then issued a proposed statement of decision in favor of respondents and against appellants and the Chens. Appellants filed objections to the proposed statement of decision. The court overruled appellants objections and entered judgment in favor of respondents in the amount of $891,333.
The basis of the monetary award under the judgment is Exhibit 117. Respondents expert Richard Koo was called as a witness to explain how Exhibit 117 was prepared, and what it reflects. In substance, this exhibit chronicles the unauthorized withdrawals by the Chens from GCPs accounts. Exhibit 117 also reflects the Chens initial capital account of $428,981, and it credits the withdrawals against that account and, once the capital account was exhausted, it continues to chronicle the unauthorized withdrawals. Thus, Exhibit 117 reflects that in 1998, the Chens withdrew $22,200; in 1999, the Chens withdrew $1,084,224; in 2000 they withdrew $195,780; in 2001, $30,610; and in 2002 they were credited with $12,500 in the form of a capital contribution. This stream of figures results in the sum of $891,333. This represents the total withdrawals of $1,320,314, less the Chens capital account of $428,981.
The statement of decision reflects $1,101,739 in withdrawals. These figures are based on exhibits other than Exhibit 117, which do not include all of the withdrawals, particularly one for $165,940 in 1999. Since Exhibit 117 provides the bases for the judgment that was entered and is reliably explained by witness Koo, we disregard the withdrawal figures of the statement of decision as incorrect.
The court concluded that under the operating agreement the Chens capital account should be reduced by their improper withdrawals from GCP. The court found that by March 2000 the Chens had withdrawn the total amount of their initial capital contribution and had no interest in GCP and that their capital account amounted to a negative $891,333 by the end of 2003. Based on the accounting, the court found the Chens owed GCP and respondents damages of $891,333. The court ruled appellants as interveners had no greater rights than the Chens and appellants had failed to present sufficient evidence entitling them to claim credits offsetting the withdrawals made by the Chens.
Appellants timely appealed from the judgment. The Chens did not appeal.
DISCUSSION
1. The Court Conducted a Complete Accounting
Appellants contend that the trial court erred in not providing a "complete" accounting in that it chose to include only checks paid out of GCP to or for the benefit of the Chens and ignored all checks paid into GCP or on its behalf by the Chens or their entities. Had the court considered all credit as well as debit transactions, they assert, the net sum paid out of GCP should have amounted to approximately $ 575,000 and not the approximately $1.1 million sum arrived at by the court.
As noted, based on Exhibit 117, the actual sums withdrawn amounted to more than $1.3 million.
Respondents reply that the Chens failure to provide respondents with the accounting to which they were entitled, coupled with the substantial evidence respondents presented that the Chens breached their fiduciary duties, provides ample support for the accounting the court rendered. Respondents note the trial court did in fact admit and consider all the evidence, including checks paid into GCP, and gave the checks such weight as they deserved in arriving at its determinations. We agree with respondents.
Appellants intervened in the action as lienors and judgment creditors of defendants the Chens. (Code Civ. Proc., §§ 708.410, 708.430; see In re Marriage of Kerr (1986) 185 Cal.App.3d 130, 133-134; Firemans Fund Ins. Co. v. Gerlach (1976) 56 Cal.App.3d 299, 303-305.) The notices of lien state appellants liens attached to "the judgment debtors Chens rights to money or property under any judgment subsequently procured in this action." (Code Civ. Proc., § 708.410.) As lienors, appellants are entitled to the partial or full satisfaction of their liens, but only to the extent the Chens could prevail in the action. As interveners aligned with the defense, appellants had no greater rights and were limited to the same procedural rights and remedies as defendants in this action. (See 4 Witkin, Cal. Procedure (4th ed. 1997) Pleading, § 207, pp. 265-266 [intervener on the defendants side "has no more rights than any other defendant"].)
Managers of a limited liability company owe the same fiduciary duties of care and loyalty to the company and its members as partners owe to a partnership and its partners. (Corp. Code, §§ 16403, 16404, 17153; People v. Pacific Landmark, LLC (2005) 129 Cal.App.4th 1203, 1212.) Partners must act in the highest good faith to their copartners and may not obtain any advantage over copartners in partnership affairs "by the slightest misrepresentation, concealment, threat or adverse pressure of any kind." (Everest Investors 8 v. McNeil Partners (2003) 114 Cal.App.4th 411, 424; see also Prince v. Harting (1960) 177 Cal.App.2d 720, 727.) Indeed, partners are held to the standards and duties of trustees in their dealings with each other. (Everest Investors 8 v. McNeil Partners, supra, at p. 424.)
Trustees have the obligation "to keep full and accurate accounts of the trust funds coming into their hands, and to render an account thereof to their beneficiaries." (Purdy v. Johnson (1917) 174 Cal. 521, 527.) " `[W]here there has been a negligent failure to keep true accounts, or a refusal to account, all presumptions will be against the trustee upon a settlement. [Citations.] " (Ibid., italics added.)
In Purdy v. Johnson, the beneficiary of a trust brought suit against the trustees of the trust. (Purdy v. Johnson, supra, 174 Cal. 521.) The plaintiff sought an accounting of trust assets and alleged the trustees had mingled trust property with their own, negligently managed trust funds and so carelessly kept the accounts that the plaintiff was deprived of rents, income and assets. (Id. at p. 524.) The Supreme Court reversed a judgment that found plaintiff beneficiary was indebted to the trustees for money claimed to have been advanced from trust funds. The court noted fundamental error permeated the proceedings below because the trial court "assumed that the burden is upon the beneficiary to disprove the correctness of items in the account, whereas, in fact, the burden is upon the trustees to prove that charges made by them are proper." (Id. at p. 530.) The court stated, "it is the duty of the trustees to support every item of their account, and . . . wherever they fail to support the correctness of a charge or a credit by satisfactory evidence, the item must be disallowed. . . . Whatever doubts arise from their failure to keep proper records or their inability to establish the items of their accounts, must be resolved against them." (Id. at p. 531.)
Here, the evidence showed that the Chens assumed exclusive control and management of GCP from its inception to February 2002. As such, they were required to account to respondents for their use of GCP funds and assets during this period. Respondents demanded that the Chens provide an accounting for the proceeds of the construction and take-out loans. They also demanded that the Chens produce complete financial records and statements from GCPs inception until respondent Chuang became comanager. The Chens never did so.
As related above, respondents presented evidence at trial that the Chens wrote large checks on GCPs bank account payable to or on behalf of themselves, their relatives and their related entities that had admittedly furnished no goods or services to GCP. The Chens as fiduciaries were obliged to render a full accounting justifying such withdrawals. Appellants aligned themselves with defendants the Chens, and appellants had no rights in this action greater than the Chens. (Boskowitz v. Thompson (1904) 144 Cal. 724, 729.)
At trial, appellants proffered copies of checks written to or on behalf of GCP but produced no supporting documents explaining the payments or demonstrating they were repayments of any disbursements made by GCP. The trial court considered these checks but found them "insufficient" to establish the Chens were entitled to be credited with them in the accounting. The court concluded that "[t]he Chen Defendants failure to provide the accounting requested by [respondents], and [appellants] failure to provide the accounting required of the defendants on whose behalf they have intervened precludes them from contesting [respondents] claims of improper distributions."
The court did not err in so concluding in light of appellants failure to provide a proper accounting. Appellants concede that "money was flowing both into and out of [GCPs] operating account, with no clear explanation," and "neither [respondents] nor [appellants] know the specific reasons for the payments." (Italics added.) The trial court correctly determined that whatever doubts arose from the Chens failure to keep proper records or their inability or unwillingness to establish the items of their accounts must be resolved against appellants, not respondents. (Purdy v. Johnson, supra, 174 Cal. at p. 530; Rosenfeld, Meyer & Susman v. Cohen (1987) 191 Cal.App.3d 1035, 1051-1052.)
We find the award of $891,333 to be supported by substantial evidence.
2. The Trial Court Properly Charged the Chens with the Full Amount of Their Improper Withdrawals
We also reject appellants contention that the court was obliged to divide any adjustments to the Chens capital account by one half because of the Chens claimed 50 percent ownership interest in GCP. Appellants rely on their expert accountant Joseph Tsengs testimony to the effect that if the Chens did steal GCP operating account money, "they were stealing half of the money from themselves." Appellants cite no contractual or legal authority in their brief for this proposition.
We are unpersuaded for several reasons. Tseng testified he was not an attorney and he was testifying purely from an "accounting standpoint." He did not purport to render a legal opinion, which in any case was a matter properly for the court to render. Further, Tsengs testimony was inconsistent with the operating agreement. Section 3.4.1 of the operating agreement provides that "[n]o [m]ember shall have the right to withdraw, or receive any return of, [his or her] [c]apital [c]ontribution . . . ." Sections 1.30 and 8.1 of the operating agreement effectively provide that a member has no interest in specific property of GCP. Under the operating agreement, therefore, the Chens could have no direct ownership interest in the sums they diverted for their own benefit from GCP.
Section 1.30 defines "Property" to mean "all assets of the LLC, both tangible and intangible, or any portion thereof." Section 8.1 provides that "[e]ach [m]ember and each [e]conomic [i]nterest holder has no interest in the Property."
Moreover, the law is to the contrary. Under Corporations Code section 17300, "[a] member or assignee has no interest in specific limited liability company property." (See also PacLink Communications Internat., Inc. v. Superior Court (2001) 90 Cal.App.4th 958, 964 ["members of the LLC hold no direct ownership interest in the companys assets"].) The Chens legally could have no direct ownership in any specific property of the limited liability company.
Finally, appellants position makes no practical, ethical or equitable sense. Using appellants theory and figures, a member of a limited liability company holding a 50 percent membership interest could abscond with $1.1 million of the companys funds yet be obliged to repay only $550,000 leaving the company $550,000 poorer despite proscriptions against unilateral withdrawals of capital.
The court therefore did not err in charging the Chens with the entire sum taken by the Chens from GCP.
3. The Court Properly Adjusted the Chens Ownership Interest by Their Withdrawals
Appellants contend that it was improper for the trial court to make adjustments to the Chens 50 percent interest in GCP because of their withdrawals. Appellants argue that the only way a members ownership interest could be reduced was by the failure to meet a call for additional capital contributions when other members pay the required additional capital contribution. Such a capital call, they argue, could only have been made by approval of members holding 75 percent of the interests under section 8.3. Because respondents owned only 50 percent, appellants claim there was no evidence that approval was obtained for any capital call in compliance with the operating agreement. We disagree.
There was substantial evidence that the $50,000 capital call by respondent Chuang in February 2002 had the necessary approval. The respondents met the call, contributing a total of $25,000. Although the Chens ultimately did not meet the capital call for their 50 percent share, respondent Chuang testified the Chens initially assured him they would do so and did not object to the capital call. There was therefore sufficient evidence for the court to infer the capital call complied with the operating agreement. The court properly reduced the Chens proportionate membership interest due to their failure to meet the February 2002 capital call.
In any case, the court properly determined the members of GCP agreed their member interests would be in direct proportion to their capital contributions and would adjust with changes in contributions. That determination is supported by the operating agreement and the evidence. As the trial court noted, section 3.4.1 of the operating agreement provides that "[n]o [m]ember shall have the right to withdraw, or receive any return of, [his or her] [c]apital [c]ontribution." Section 3.5 provides for the adjustment of capital accounts and, in section 3.5.2(i), calls for a decrease in a members account for "cash distributed to such [m]ember." Section 5.1 provides for distributions to be allocated: first to outstanding loans (section 5.1.1) (of which there were none), second to capital contributions (section 5.1.2) and finally to the members in accordance with their percentage interests (section 5.1.3). Respondent Chuang testified it was his understanding the initial percentage interest of each member was not going to be fixed but was "going to be adjusted, if necessary, based upon the contributions of each member." Respondents expert Koo testified from an accounting standpoint that withdrawals or distributions to members under section 5.1.2 would affect the members percentage of interest.
Appellants argue that Koo conceded it was possible for members of a hypothetical limited liability company to "all simultaneously carry a negative capital account balance," in which case it would still be possible to determine respective ownership percentages among them. Regardless of a hypothetical possibility, the court properly disregarded this concession because it determined upon substantial evidence that all the members did not simultaneously carry a negative capital balance. Only the Chens, and no other members of the limited liability company, had a negative capital balance.
4. The Court Properly Awarded Damages Against the Chens
The trial court determined the Chens owe GCP and respondents a negative capital balance of $891,333. Appellants challenge this award asserting it results in a double recovery and is beyond the scope of the amended complaint. We disagree.
"As a general rule, where only one of several parties appeals from a judgment, the appeal includes only that portion of the judgment adverse to the appealing partys interest, and the judgment is considered final as to the nonappealing parties." (Estate of McDill (1975) 14 Cal.3d 831, 840.) The Chens did not appeal from the judgment, and, aside from the jurisdictional issue discussed below, appellants have no standing to appeal an award against the Chens.
Even if appellants had standing to complain of the monetary award, their contentions are not well founded. There is no double recovery since the court awarded only a single sum of $891,333 against the Chens. Further, appellants do not show how a judgment for monetary relief against the Chens in this action would prejudice appellants, who claim only the proceeds of any recovery by the Chens. Whether the sum is recovered by GCP or respondents individually against the Chens is not material to the issues raised in this appeal, since respondents are the sole members retaining any ownership interest in GCP and appellants are not aggrieved by a monetary award against the Chens.
Moreover, the sum the court awarded against the Chens was well within its jurisdiction. A trial court has no jurisdiction to enter judgment against a defaulting defendant that awards greater relief than that sought in complaint. (In re Marriage of Lippel (1990) 51 Cal.3d 1160, 1167.) With the exception of personal injury or wrongful death cases, a court "must look to the prayer of the complaint or to `allegations in the body of the complaint of the damages sought to determine whether a defendant has been informed of the `maximum liability he or she will face for choosing to default." (People ex rel. Lockyer v. Brar (2005) 134 Cal.App.4th 659, 667 [complaint seeking statutory penalties of $2,500 each for 1,500 separate violations gave "fair warning" at least $3.75 million was at stake]; see also Becker v. S.P.V. Construction Co. (1980) 27 Cal.3d 489, 494-495 [for adequate notice, specific amount of damages may be alleged in prayer or body of complaint].)
In this case, the complaint and first amended complaint alleged that the Chens "breached their fiduciary duty of full and complete disclosure" as a result of their "diversion of GCPs assets for the sole benefit of the CHEN defendants" and that respondents "have been damaged in an amount to be determined at trial, but not less than $1,000,000.00." Although these allegations are contained in the seventh cause of action for constructive fraud, they adequately informed the Chens of the "maximum liability" respondents sought against them in the action. The trial court awarded respondents a sum less than $900,000, well within the $ 1 million sum alleged. The award against the Chens therefore did not exceed the courts jurisdiction.
DISPOSITION
The judgment is affirmed. Respondents are to recover their costs on appeal.
We concur:
COOPER, P. J.
BOLAND, J.