Opinion
A148337
10-23-2017
TOWNSEND H. PORTER, JR., et al., Petitioners, v. THE SUPERIOR COURT OF NAPA COUNTY, Respondent; 1st SOURCE BANK, Real Party in Interest.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Napa County Super. Ct. No. 26-58119)
Defendants and judgment debtors Townsend H. Porter, Jr. (Porter) and the Townsend H. Porter, Jr. Revocable Trust (collectively, petitioners) challenge an order of the trial court granting plaintiff 1st Source Bank's "Motion to Expand Receiver's Authority." The bank sought this order at the request of the receiver after a review of financial records obtained in another case indicated there were $4.9 million in unaccounted transfers to Porter Family Vineyards, LLC, in which defendants have a significant ownership interest. We affirm.
Defendants initially appealed from the challenged order. We denied a motion to dismiss, deeming the appeal to be a writ petition. (See SCC Acquisitions, Inc. v. Superior Court (2015) 243 Cal.App.4th 741, 748-750.)
BACKGROUND
The underlying proceedings have their genesis in a personal guarantee of a commercial loan. In August 2007, 1st Source Bank (the bank) entered into a loan agreement with Sea Gate Enterprises X, LLC for the purchase of an aircraft. Porter, the former Chief Technology Officer and Executive Vice-President of Seagate Technology, guaranteed repayment of the loan.
As part of the loan application process, Porter and his wife provided the bank with a financial statement setting forth their net worth and assets. Among the assets listed, were a Florida residence (assessed in 2013 at $2.3 million) and a significant ownership interest in Porter Family Vineyards, LLC (the vineyard company), which owns a winery located in Napa County (valued in 2012 at $10 million). Porter and his wife are the managing members of the company. It is their only asset in California, as they have been Florida residents since 2003 and have never been domiciled in California.
After Sea Gate defaulted on the loan and Porter defaulted on the guarantee, the bank, in November 2011, obtained an Indiana judgment against petitioners for approximately $5 million.
The following year, in 2012, the bank obtained a sister-state judgment in the Napa County Superior Court pursuant to Code of Civil Procedure section 1710.25.
The bank thereafter conducted a debtor's examination of Porter in Napa and obtained a charging order against petitioners' interest in the vineyard company for the unsatisfied amount of its judgment. At the examination, Porter provided a financial statement dated June 2012, wherein he claimed to be insolvent and indicated he had no personal property, no vineyard, and no residence.
Several months later, the bank sought and the trial court entered an "Order Appointing Receiver for Distributions Subject to Charging Order and Injunction." This order appointed James H. Baron as receiver and authorized him "to take possession of any distributions subject to the charging order approved by this court." Under paragraph 4 of the order, the receiver was permitted to request copies of the following:
(a) The original operating agreement for the company and all modifications, amendments, and restatements;
(b) A list of membership interests as set forth in Corporations Code section 17701.13, subdivision (d) (formerly section 17058);
(c) Financial reports for 2010, 2011, and 2012 to date;
(d) Records of all distributions made by the company to its members; and
(e) Partnership returns for 2011 and 2012.
Upon receipt of these documents, the receiver was to "prepare and submit a report listing the documents received, identifying the interest subject to the charging order, and summarizing the financial condition of the business."
In addition, the order provided "[t]he receiver and the parties may at any time apply to this court for further instructions and orders and for additional powers necessary to enable the receiver to perform the receiver's duties properly." It also prohibited petitioners from gifting, selling, or transferring any portion of Porter's membership interest in the vineyard company without prior court approval. Finally, Porter, "in his capacity of Managing Member of [the company], [was] required to provide the receiver herein appointed with any documents and information requested by the receiver pursuant to this order."
The company thereafter produced an amended and restated operating agreement dated January 1, 2007, copies of its tax returns for 2011 and 2012, and profit and loss statements for 2010, 2011, and 2012. In 2013, the receiver estimated the value of the company at $14 to $16 million, with equity over $14 million.
The bank filed a motion to seal documents to protect Porter's personal financial information, which the court granted in part as to the tax returns, and financial account numbers (only last four digits could be used) but not as to the petitioners' ownership interest and capital account balances in the vineyard company.
The bank also proceeded on another front, and in 2013, sued Porter's wife, her trust, and the Porter Venture Limited Partnership in Florida. The bank alleged causes of action to pierce the corporate veil and to recover fraudulent conveyances. In its prayer for relief, the bank sought to " 'levy execution on [] assets' " located in Florida in the name of Porter's wife, her trust, and the Porter Venture Limited Partnership to satisfy its judgment against petitioners. The bank then commenced discovery related to " 'financial institutions with whom [Porter's wife] had a relationship,' " suspecting Porter had " 'transferred all or some of his wealth to his wife or entities controlled by her.' " The bank also sought, among other things, documents pertaining to payments and transfers of funds by Porter from 2007 to the present.
In the meantime, in the California case, petitioners filed a motion to stay the proceedings, claiming that, except for the vineyard company, the California enforcement action involved assets outside the state and which were subject to the Florida court's jurisdiction, given that the bank had chosen to file its fraudulent conveyance lawsuit in that forum.
The trial court agreed Florida was the more appropriate forum for the fraudulent conveyance action. Although petitioners, themselves, were not parties to the Florida action, third party discovery in the California case would involve them. Moreover, the California case involved and was intertwined "with the same theory [the bank was] advancing in Florida; that is, if Porter fraudulently transferred assets to [his wife] or other third parties, then [the bank] may execute on such assets in satisfaction of its judgment." Since "[t]here is no question that the Florida state court has asserted jurisdiction over these parties and this overarching issue regarding the fraudulently transferred assets," the trial court concluded the Florida court should decide this issue. The private and public interest factors, said the court, presented issues "that should be [tried] on the merits first in Florida" and "California [was] by no means the 'center of gravity' of this larger dispute." Therefore, " 'in the interest of substantial justice,' " the trial court ordered a stay of the California case, pending the outcome of the Florida action.
However, the court expressly excepted the vineyard company from the stay order, specifying that "[a]ll enforcement proceedings in Napa other than the proceeding related to Porter's interest in Porter Family Vineyards, LLC, are stayed pending the outcome of the Florida action including all outstanding motions and claims." (Italics added.).
During the course of discovery in the Florida action, the bank obtained records of Porter's transactions with the vineyard company. They indicated Porter had made transfers totaling $4,918,750 to the company between 2007 and 2013:
| Year | Townsend Porter CashTransfers to the Vineyards |
|---|---|
| 2007 | $2,100,000.00 |
| 2008 | $1,000,000.00 |
| 2009 | $436,000.00 |
| 2010 | $549,000.00 |
| 2011 | $485,500.00 |
| 2012 | $252,250.00 |
| 2013 | $96,000.00 |
| Total: | $4,918,750.00 |
While Porter apparently had contributed over $4.9 million to the company during this six-year period, the records also indicated his capital account decreased anywhere from $600,000 to $2 million, depending on what document was considered:
| Year | Townsend Porter Capital Balances & Source |
|---|---|
| 2007 | $4,042,378.00 ---- Vineyards Operating Agreement |
| 2011 | $2,032,887.00 ---- Vineyards Financial Statement |
| 2011 | $3,700,618.00 ---- Vineyards 2011 Tax Return |
| 2012 | $2,077,887.00 ---- Vineyards Financial Statement |
| 2012 | $3,472,508.00 ---- Vineyards 2012 Tax Return |
| 2013 | $2,643,000.00 ---- Porter Financial Statements |
The records further indicated that during this same period of time, from 2007 to June 2012, the company's total capital increased. However, by the time the company's 2012 tax return was prepared in October 2013, almost one and a half years after the charging order was entered, the company's total capital account reportedly decreased. And, while the charging order required that "any distribution that would otherwise be due and payable to [Porter] shall instead be paid to plaintiff [the bank] and applied to the unsatisfied amount of the judgment entered in this case," the company reported to the receiver it had made no distributions to any of its members.
After comparing the financial records it had obtained in the Florida case (the bank sent the Florida documents to the receiver), with the records the vineyard company had provided to the receiver, it appeared the former could not be reconciled with the latter.
At the receiver's request, the bank filed a motion to expand the receiver's authority. The motion was supported by a declaration by the receiver, who explained "there are inconsistent financial statements or missing information that call into question the value of Townsend Porter's capital account balance and/or economic interest which [the receiver] first determined based on the [vineyard company's] initial document production." He therefore, "needed to inspect additional records of the [vineyard company] especially in light of what appeared to be unaccounted for cash transfers by Townsend Porter . . . to the [vineyard company] from 2007 to 2013, and unexplained capital accounts that did not appear in the Operating Agreement nor any documents produced by the [vineyard company]." Given the inconsistences in the capital accounts, unsigned tax returns, accounting records showing millions of dollars paid in capital interests to unnamed members, and loan inconsistences, the receiver stated he was unable to determine if distributions were made in violation of the charging order. The receiver also explained he had asked the bank's attorney to "prepare [the] motion to expand [his] authorities as Receiver since it would be more economical than [the receiver] proceeding to seek retention of [his] own counsel and the Receiver Order did provide for a party to make such a motion."
Petitioners and the vineyard company opposed the motion to expand the receiver's authority, but did not provide any explanation for the apparent $4.9 million discrepancy in transfers shown by the documents produced in the Florida case. Instead, petitioners characterized the bank as attempting to circumvent the court's stay order, asserting the bank "has now come back to this Court to seek broad discovery to support its Florida lawsuit under the guise of a motion to expand the Receiver's authority." They maintained the bank offered "no legal or factual grounds for expanding the Receiver's authority beyond what is necessary for him to fulfill his duty of enforcing the charging order" and the requested additional discovery was "beyond even the discovery available to the company's members." Petitioners further claimed the receiver "made no attempt to obtain the information and documents sought by [the bank]'s Motion, despite years of a cooperative relationship between the Receiver and [the vineyard company]." Porter's lawyer submitted a declaration stating he was "agreeable to providing [the receiver] with further documents, upon his request, so long as the documents requested are within the scope of [his] duties as Receiver and are within the scope of the [receiver order]."
The court granted the bank's motion and authorized the receiver to:
(a) Obtain and inspect general ledgers for the calendar years 2007 through 2015;
(b) Obtain and inspect financial statements for the calendar years 2007 through 2015;
(c) Obtain (directly from the IRS) copies of the federal tax returns by use of a Form 4506 for the years 2007 through 2014;
(d) Obtain and inspect a complete record of the loan statements from the vineyard company or AgCredit;
(e) Obtain and inspect all the company's bank statements for the years 2007 through 2015;
(f) Interview and examine the company's CPA's records used in preparation of the tax returns and confirm the filings;
(g) Inspect the real property and improvements; and
(h) Interview the company's manager, bookkeeper and/or accountant to confirm the consistency and accuracy of the records and software, and to provide explanations for any inconsistences.
Porter and his wife, as managing members of the company, must "cooperate and produce to the Receiver the Records for inspection." The receiver is also empowered to interview Porter and anyone who prepared tax returns or financial statements for the company from 2007 to present.
Upon completion of his inspection of the additional records and applicable interviews, the receiver is to "prepare and submit to the Court under seal a second report identifying the interest(s) subject to [the charging order] and summarizing the Receiver's findings." Finally, the order permits the receiver to apply for additional authority, stating "[n]othing in this order limits the rights of the Receiver or the parties to apply to this Court for further instructions and orders and for additional powers necessary to enable the Receiver to perform his duties properly."
We deny the bank's request for judicial notice of the trial court's tentative ruling granting the motion to expand the authority of the receiver as being irrelevant and adding nothing of significance to the record, which already includes the court's written order and the transcript of the hearing. (Ct. App., First Dist., Local Rules of Ct., rule 9, Judicial Notice Requests ["motion seeking judicial notice pursuant to [Evid.] Code, [§] 452 must include a showing of the relevance of the information to be judicially noticed"]; see Cal. Rules of Court, rule 8.252.)
DISCUSSION
Charging Orders and Receivership
We first briefly summarize the law regarding charging orders and receivership.
Pursuant to Corporations Code section 17705.03, subdivision (a), "a court may enter a charging order against the transferable interest of the judgment debtor for the unsatisfied amount of the judgment. A charging order constitutes a lien on a judgment debtor's transferable interest and requires the limited liability company to pay over to the person to which the charging order was issued any distribution that would otherwise be paid to the judgment debtor." Corporations Code section 17705.03, subdivision (b) provides that "[t]o the extent necessary to effectuate the collection of distributions pursuant to a charging order in effect under subdivision (a), the court may do any of the following: (1) Appoint a receiver of the distributions subject to the charging order, with the power to make all inquiries the judgment debtor might have made. (2) Make all other orders necessary to give effect to the charging order."
Under the California Rules of Court, rule 3.1179, subdivision (a), "The receiver is the agent of the court and not of any party, and as such: (1) Is neutral; (2) Acts for the benefit of all who may have an interest in the receivership property; and (3) Holds assets for the court and not for the plaintiff or the defendant." The receiver acts as a fiduciary on behalf of both parties, as a representative of the court. (Security Pacific National Bank v. Geernaert (1988) 199 Cal.App.3d 1425, 1432; City of Chula Vista v. Gutierrez (2012) 207 Cal.App.4th 681, 685.) " '[The] power to appoint a receiver is a delicate one which is exercised sparingly and with caution, and only in an extreme case under such circumstances as demand or require summary relief, and never in a doubtful case or where there is no necessity or occasion for the appointment.' " (Morand v. Superior Court (1974) 38 Cal.App.3d 347, 350 (Morand).)
"A receiver occupies a position generally analogous to that held by an executor in the law of probate or by a trustee in the law of bankruptcy." (Shannon v. Superior Court (1990) 217 Cal.App.3d 986, 993 (Shannon).) "It has been a long standing judicial practice, in proper cases, to appoint receivers in proceedings variously called 'in aid of execution,' 'supplemental proceedings,' 'creditors' suits,' and 'creditors' bills.' The purpose of such proceedings is to reach property of a judgment debtor which may not be reached by the ordinary levy of execution. Unlike receivers generally whose true origin is in equity [citations], receivers in aid of execution are considered creatures of statute." (Morand, supra, 38 Cal.App.3d at p. 349.)
A receiver may be appointed by the court after judgment to carry the judgment into effect or to dispose of property according to the judgment. (Code Civ. Proc., § 564, subd. (b)(3), (4).) " 'After judgment, . . . in proceedings in aid of execution, when an execution has been returned unsatisfied, or when the judgment debtor refuses to apply his property in satisfaction of the judgment,' " Code of Civil Procedure section 568 provides for powers that a receiver may be granted. (Morand, supra, 38 Cal.App.3d at p. 350.) "The receiver has, under the control of the Court, power to bring and defend actions in his own name, as receiver; to take and keep possession of the property, to receive rents, collect debts, to compound for and compromise the same, to make transfers, and generally to do such acts respecting the property as the Court may authorize." (Code Civ. Proc., § 568.)
However, "[a] receiver is not immune from responsibility for his or her acts." (Shannon, supra, 217 Cal.App.3d at p. 993.) "[A]s any fiduciary, [a receiver] may be surcharged and his or her surety held liable for a failure to properly carry out the duties imposed by the order of appointment." (Ibid.)
Standard of Review
Petitioners and the bank agree, that the trial court's order augmenting the receiver's authority is reviewed on appeal for abuse of discretion. Thus, typically, "court rulings on receivership matters are afforded considerable deference on review." (City of Santa Monica v. Gonzalez (2008) 43 Cal.4th 905, 931 (City of Santa Monica).) "Judicial confirmation of a receiver's [action] rests upon the appointing court's sound discretion exercised in view of all the surrounding facts and circumstances and in the interest of fairness, justice and the rights of the respective parties. [Citation.] The proper exercise of discretion requires the court to consider all material facts and evidence and to apply legal principles essential to an informed, intelligent, and just decision. [Citation.] Our view of the facts must be in the light most favorable to the [receiver] order and we must refrain from exercising our judgment retrospectively. Reversal is warranted only after concluding the trial court abused its discretion by confirming a fraudulent, unfair, or oppressive [action by the receiver]." (Cal-American Income Property Fund VII v. Brown Development Corp. (1982) 138 Cal.App.3d 268, 274.)
The Trial Court Properly Exercised Its Discretion in Expanding the Receiver's Authority
The Receiver Made an Ample Showing for Expanding the Universe of Information He Can Obtain
Petitioners contend the trial court improperly expanded the receiver's authority beyond that necessary for him to perform his duties. They assert the receiver "has no right . . . to meddle in the affairs of the [vineyard company]" and the challenged order grants the receiver "nearly unlimited authority to investigate the past and present finances and business operations of the [vineyard company]." Because there supposedly is no "nexus" between the receiver's "limited duties and the broad discovery granted in the Expansion Order," petitioners conclude expansion of the receiver's authority was an abuse of discretion.
We conclude, as did the trial court, that petitioners' position is groundless. While the challenged order does, indeed, expand the universe of records and information the receiver may obtain, this expansion is entirely reasonable given what was revealed in the course of discovery in the Florida case. The receiver explained in his sworn declaration that, in comparing the discovery produced in the Florida case with what had been produced in the instant action, it was apparent "there [were] inconsistent financial statements or missing information that call[ed] into question the value of Townsend Porter's capital account balance and/or economic interest which [the receiver] first determined based on the [vineyard company's] initial document production." Accordingly, he "needed to inspect additional records of the [vineyard company] especially in light of what appeared to be unaccounted for cash transfers by Townsend Porter . . . to the [vineyard company] from 2007 to 2013, and unexplained capital accounts that did not appear in the Operating Agreement nor any documents produced by the [vineyard company]." Without doing so, he would be unable to determine if distributions were made in violation of the charging order. Thus, the receiver established a sufficient "nexus" between his duties and expansion of his authority to obtain financial information.
The order does not provide the receiver with "nearly unlimited authority" to interfere with the vineyard company by "meddl[ing] in [its] affairs." On the contrary, it empowers the receiver to obtain specific discovery from the company for a specific purpose.
In short, the trial court acted well within its discretion in authorizing the receiver to obtain and review additional financial information in order to identify "the interest subject to the charging order" and to "summarize[e] the financial condition of the business."
While petitioners claim the receiver acknowledged the order likely provided greater relief than is necessary for him to complete his court-appointed duties, the receiver did no such thing. What the receiver told the trial court was that "a quick review with [the vineyard company's] CPA" and a "review of the general ledger" may be enough. But, he certainly made no assurance in this regard, understandably so, given the apparent discrepancies that came to light only by virtue of the subsequent discovery in the Florida case. --------
The Challenged Order Does Not Give the Receiver the Power to Unilaterally Determine Petitioners' Membership Interest in the Vineyard Company
Petitioners also claim the expansion of the receiver's authority is unwarranted because the receiver "does not have the power to unilaterally determine Porter's membership interest." They claim the bank, the receiver, and the trial court all "appear to have the mistaken belief that a receiver can unilaterally declare the ownership interest of an LLC member," a determination, they say, can be made only by the company and its members.
To begin with, it is too late in the day for petitioners to be complaining about what the receiver has been ordered to determine. In its order appointing the receiver, the trial court directed the receiver to, inter alia, investigate and determine the extent of petitioners' economic interest in the vineyard company, and to "prepare and submit a report listing the documents received, identifying the interest subject to the charging order, and summarizing the financial condition of the business." Petitioners did not challenge this order on appeal, and it has long since become final. Accordingly, they cannot now take issue with the tasks which the receiver has been charged with performing. (See Carpenson v. Najarian (1967) 254 Cal.App.2d 856, 861 [where appellants did not appeal from appealable order appointing a receiver, the Court of Appeal was without jurisdiction to consider the appointment of receiver on appeal].)
Moreover, the order expanding the receiver's authority does not empower the receiver to unilaterally declare the ownership interest afforded a member of the vineyard company. Rather, it authorizes him to seek additional financial records and to make pertinent inquiry of those familiar with such records to resolve an apparent $4.9 million discrepancy revealed by documents produced in the Florida case.
In short, all the challenged order does is facilitate the receiver's accomplishment of the tasks with which he was charged in the initial order appointing him.
The Challenged Order Does Not Conflict With the Stay Order
Petitioners also complain the bank is seeking to subvert the stay order and "sought the Expansion Order to determine whether any fraudulent transfers had been made" and "needs the Receiver to conduct discovery to explore that suspicion." Petitioners assert "[a]s the basis for [the bank's] [m]otion is [its] speculation that Porter engaged in fraudulent transfers, [and] the Expansion Order effectively allows [the bank] to pursue its fraudulent transfer theory in California, in direct conflict with the Stay Order." The challenged order, claim petitioners, "makes Receiver Baron a discovery agent and investigator for [the bank]" and the receiver "should not be permitted to go on a fishing expedition looking for evidence of fraudulent transfer to aid [the bank] in [its] Florida Action."
This assertion comes close to being specious. To begin with, the trial court expressly excepted from its stay order "the proceeding related to Porter's interest in Porter Family Vineyards, LLC." Moreover, the trial court was well aware of the pendency and nature of the Florida litigation when it appointed the receiver, when it granted its partial stay order, and when it authorized the receiver to procure and review additional information. It was also fully aware that the reason why the receiver sought authorization to obtain and review additional information was because of documents that had been produced in the Florida case, which the receiver could not reconcile with the documents that had been produced in the instant case. There is simply no basis for petitioners' claim that the trial court did not understand the scope of and violated its own stay order.
Furthermore, whether the bank subjectively hoped for a bonanza of fraudulent conveyance evidence is beside the point. The trial court had before it the receiver's declaration under penalty of perjury explaining what he needed and why. The trial court plainly credited the receiver's declaration, and was entitled to do so.
There is No Evidence of Fraud , Unfairness , or Oppression
In the trial court, petitioners asserted the expansion motion was premature, overbroad, and for an improper purpose. On appeal, petitioners similarly claim that because the order is not necessary for the performance of the receiver's duties, and because it puts significant burdens upon the vineyard company as a non-judgment debtor, it is unfair and oppressive and should therefore be vacated.
For reasons we have already explained, the initial premise of petitioner's reasoning is unsound. The receiver adequately justified the authorization he was given to obtain and review additional information. For this reason, alone, this final claim by petitioners necessarily fails.
Furthermore, as we have set forth, "[w]here there is no evidence of fraud, unfairness, or oppression, the court has wide discretion in approving the receiver's proposed actions." (City of Santa Monica, supra, 43 Cal.4th at p. 931.) Plainly, the trial court perceived no evidence of fraud, unfairness, or oppression, and we certainly cannot say that its view of the record was unfounded.
DISPOSITION
The petition for writ of mandate is denied. Real party in interest to recover its costs. (Cal. Rules of Court, rule 8.278.)
/s/_________
Banke, J. We concur: /s/_________
Humes, P.J. /s/_________
Dondero, J.