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Sanchez v. Ayala

California Court of Appeals, Third District, Sacramento
Apr 29, 2009
No. C056915 (Cal. Ct. App. Apr. 29, 2009)

Opinion


SAMUEL SANCHEZ et al., Plaintiffs, Cross-defendants and Appellants, v. FRANCISCO AYALA et al., Defendants, Cross-complainants and Respondents. C056915 California Court of Appeal, Third District, Sacramento April 29, 2009

NOT TO BE PUBLISHED

Super. Ct. No. 04AS02966

SCOTLAND, P. J.

This appeal arises out of a failed restaurant venture between plaintiffs and cross-defendants, Samuel and Rubicelia Sanchez (plaintiffs), and defendants and cross-complainants, Francisco and Eloisa Ayala (defendants). For clarity, we will, with some exceptions, use the parties’ first names when referring to them as individuals.

The parties sued each other based on various alleged breaches of duty, but they were unable to prove any grounds for recovery. The trial court ordered the dissolution of the partnership and an accounting. Thereafter, the court confirmed the sale of the business to defendants; determined that defendants’ combined capital accounts were worth $170,802 and plaintiffs’ combined capital accounts were worth negative $102,764; and ordered plaintiffs to pay defendants $102,764, which was the excess of the charges over the credits in plaintiffs’ partnership accounts.

Plaintiffs appeal, contending that (1) the trial court erred in quashing a subpoena for the records of Francisco’s jewelry business, which plaintiffs believed would show defendants had been skimming money from the restaurant and funneling the money into the jewelry business; (2) the court erred in denying a motion for new trial; (3) the judgment is not supported by the evidence; and (4) the trial judge was biased against them. We shall affirm the judgment.

FACTS

Defendant Francisco is related to plaintiff Rubicelia. Defendant Eloisa is Francisco’s wife. The three of them decided to pursue a restaurant venture along with plaintiff Samuel, who is Rubicelia’s husband. Eloisa, who had 24 years of experience in the restaurant business, warned plaintiffs that it could take three years before the restaurant turned a profit.

In 2002, plaintiffs and defendants entered into an oral partnership agreement to open and operate a Mexican restaurant, and they signed a five-year lease of premises. Their written partnership agreement was signed in September 2003. It provided that the parties would each make an initial capital contribution of $65,000, that Eloisa and Rubicelia would work an equal amount of hours in the business without any salary, and that the partners would share equally in any profits. At the time she signed the agreement, Rubicelia intended to work in the restaurant. However, she later decided not to do so because it would result in the loss of her disability benefits. Defendants were stunned by her decision but continued with the restaurant plans.

The restaurant, Los Arcos, opened in January 2004. Despite not having any obligation to do so, Francisco and Samuel worked in the business on a regular basis. Francisco ran daily errands and purchased supplies, and Samuel worked as a busboy and kitchen helper on the weekends. Defendants’ daughter, Edaena, kept the financial records for the restaurant on a voluntary basis. The brunt of the work fell on Eloisa, who worked 15 to 17 hours a day, seven days a week, doing the cooking and handling the managerial duties.

About four months after the restaurant opened, Samuel asked Eloisa and Edaena for financial information regarding the business. According to Edaena, daily receipts and other financial information were kept in a file cabinet to which Samuel had a key and continuous access. Samuel’s wife, Rubicelia, was a signatory on the business bank account and could obtain financial records. Edaena refused to answer Samuel’s demands for financial information because she was angry about Rubicelia’s failure to work in the restaurant as agreed, which left Edaena’s mother overworked and exhausted.

Plaintiffs contacted an attorney and, in July 2004, they sued defendants for breach of the partnership agreement, conversion of partnership assets, violation of Corporations Code sections 16404 and 16601, fraud and misrepresentation, and sought an accounting. According to plaintiffs, defendants misappropriated at least $100,000 in partnership funds and wrongfully refused to provide them with any financial information.

Defendants cross-complained for breach of oral and written contract, promissory estoppel, deceit, conversion, and fraud. They asserted that Rubicelia failed to meet her obligation to work in the restaurant an equal amount of time. Defendants denied misappropriating any partnership funds. In fact, the restaurant was not profitable and, to keep it afloat, they were borrowing money from Ayala Jewelers, which was owned by Francisco and Edaena. The jewelry store loaned the money to defendants, who then made additional capital contributions in order to cover the restaurant’s bills.

Edaena testified concerning the spreadsheet she maintained to track the restaurant’s income and expenses on a monthly basis. She explained that the cash sales were in even dollar amounts each day because even dollar amounts were removed from the register for bank deposits or for purchases of food and supplies, with the remainder being left in the drawer for operating cash. The cash that was used for purchases was accounted for with receipts from vendors.

Sewell Keeter, a certified public accountant (CPA) who testified on behalf of plaintiffs, stated defendants’ method of handling the finances lacked any internal controls; for example, there was no log of money taken from the cash register till to pay expenses. Keeter noted discrepancies concerning the amount of cash reflected on the cash register tape. The total tape figure minus the charge card sales always resulted in an even amount of cash, which was incomprehensible and was a statistical anomaly that could not be accounted for by taking an even amount of cash out of the register drawer. If the register had a ten-key that could be programmed to enter even dollar amounts with no cents, the discrepancy could have been caused by a failure to understand the intricacies of the register. Keeter could not label as misappropriations any of the discrepancies he observed. Without the cash influx from Ayala Jewelers, the restaurant would not have had sufficient operating cash.

Richard Barnes, a CPA and forensic accountant who testified on behalf of defendants, stated that the lack of internal controls was not unusual for a small business of the size of Los Arcos. Barnes stated: “[A]t the end of the day I was not aware or did not see anything indicating where these lack of controls gave rise to anything that was inappropriate, any money being misappropriated, any money flowing to someone it shouldn’t have flowed to.” Although the practice of removing even amounts of cash from the register, and leaving different amounts of money in the register each day, was “not the best accounting policy out there,” Barnes saw “no evidence of anything inappropriate or fraudulent as a result of this.”

Plaintiffs sought to dissolve the partnership and distribute to partners any excess over the charges to their capital accounts. Asserting the method of recordkeeping used by defendants was unreliable, they requested a valuation by a special master to determine the true revenues and expenses “so that a dissolution sales [sic] could be had that is equitable for both partners.”

Defendants disputed that a dissolution and sale of the partnership was the appropriate remedy. They requested that the court disassociate plaintiffs from the business because Rubicelia had not met her partnership obligations, and they asserted that any buyout price for the business was offset by the damages caused by plaintiffs.

The trial court indicated that it needed to decide whether to dissolve the partnership, as plaintiffs requested, or to disassociate plaintiffs from the partnership, as defendants requested, and that, in either event, an accounting was necessary. Thus, the court directed the parties to meet and confer concerning the appointment of an accountant.

On November 2, 2006, the trial court issued its ruling on the submitted matter. It stated that plaintiff Rubicelia Sanchez failed to meet her contractual obligation to work in the restaurant; the partnership bookkeeping voluntarily performed by defendants’ daughter, Edaena Ayala, “was informal, at best;” Ayala Jewelers regularly transferred money to the restaurant to cover losses, but there was no evidence whether this was a gift, a loan, or a capital contribution by a partner; and, despite the “marked lack of formality permeat[ing] the manner in which all [the] restaurant accounting and business operations were handled,” there was no evidence of any wrongdoing. The court ruled that plaintiffs and defendants had breached their fiduciary duties to each other, but had failed to prove by a preponderance of the evidence any grounds for recovery of damages. The appropriate remedy for the parties’ breaches was to dissolve the partnership as of December 31, 2005. The court appointed Jeff Rogers as the special master to complete a partnership accounting for all profits, losses, and financial statements, and to advise the court of the dissolution value of the partnership. The court stated: “A final order and judgment will be prepared only after the Court receives Mr. Rogers’s financial reports and analysis of dissolution value.”

One month later the trial court issued an order to show cause concerning the accounting, as it appeared no progress was being made.

Defendants responded that because the trial court selected a dissolution date of December 31, 2005, rather than late January 2006 when plaintiff Samuel Sanchez ceased working at the restaurant, defendants no longer believed that it was necessary to appoint Mr. Rogers given that, at the trial, defendants had presented a complete accounting of the partnership profits and losses through the end of 2005. Moreover, a dissolution value was not necessary to wind up the business, and the business had to be wound up before the partnership accounts could be settled.

Defendants asserted that before settling the final accounting, the trial court needed to resolve the issue of whether the partners’ cash advances in excess of their agreed capital contributions of $65,000 were loans or additional capital contributions. Plaintiffs had advanced only $74,000, while defendants had advanced $342,015 to the partnership. Defendants had furnished plaintiffs with a detailed cash accounting of all receipts and disbursements during the relevant timeframe, which disclosed that the partnership business had not been profitable and that losses exceeded $300,000. Because the undisputed evidence disclosed the business had little or no value and its liquidation would not cover the debts, defendants proposed that one of the parties purchase the business based on the highest and best bid. If neither party made a purchase offer, the court could appoint a receiver to liquidate the assets.

Plaintiffs disputed that the money infused by Ayala Jewelers was a capital contribution. They noted there was no evidence that the partnership requested an additional capital contribution, and Edaena Ayala was not a partner in the restaurant. Nor should the cash infusions be considered loans because plaintiffs were not advised of the loans to the partnership’s business. They contended that the financial information submitted by defendants was unreliable because of their lack of internal controls with respect to the handling of cash. Accordingly, plaintiffs maintained that the cash infusions should be considered gifts or profits that were re-infused into the business.

The matter was continued until February 9, 2007. At the hearing, the court noted that no competent evidence was presented at trial concerning exactly how much money was transferred from Ayala Jewelers to the restaurant, or how the transfers were characterized, i.e., a further partnership contribution or a loan. Indeed, neither party “argued or even briefed the issue in detail because at the time of the trial these loans were not the focus of the parties nor the evidence submitted.” Plaintiffs had not explained why defendants should be faulted for transferring money into the business to keep it operational and had not addressed how to characterize the money. Accordingly, the court set a hearing on the accounting for March 16, 2007, at which time plaintiffs could submit their own accounting, proffer specific and detailed objections to the defendants’ accounting, and address how the cash infusions should be characterized.

Before the hearing, plaintiffs moved for a new trial based on newly discovered evidence. Plaintiffs relied primarily on a declaration from Maria Macias, in which she declared that Edaena told her (1) she had destroyed reports for the restaurant and made up new ones; (2) she deposited profits from the restaurant in the jewelry store’s bank account and then loaned the money back to the restaurant; (3) the jewelry store had two bank accounts, not one as she claimed, and she used the second bank account to hide money; and (4) she had made a false police report that the restaurant’s cash register had been “broken” by burglars, and she then hid the register at the jewelry store so plaintiffs and their counsel could not examine the restaurant’s register. According to plaintiffs, a new trial was necessary because this evidence went to the essence of all of plaintiffs’ claims and demonstrated wrongdoing by defendants.

On March 16, 2007, the date set for the hearing on the accounting, the court denied plaintiffs’ motion for new trial on the ground that it was premature because only an interlocutory order and not a final judgment had been entered. The court explained to plaintiffs’ counsel: “We’re in the middle of an interlocutory order dissolving the partnership, we have a final accounting. [¶] Your job is to demonstrate that somehow or another the accounting submitted is improper, fraudulent or unfair.” Macias’s testimony could be relevant to the validity of the accounting and whether defendants were entitled to be reimbursed for these cash transfers, but the witness needed to be present for the court to assess her credibility and to give defense counsel an opportunity to cross-examine her. The court directed plaintiffs’ counsel to produce Macias, and it continued the hearing until April 13, 2007.

Thereafter, plaintiffs sought another continuance because Macias had failed to return counsel’s phone calls, she had changed employers and, according to her new employer, she had gone to the Los Angeles area because a family member had been in an accident.

On April 11, 2007, the court continued the hearing until April 20, 2007. It directed plaintiff’s counsel to produce Macias and any and all witnesses on whose testimony they based any objections to the accounting submitted by defendants, and to serve subpoenas on the witnesses if necessary.

On the afternoon of April 19, 2007, plaintiffs moved to continue the evidentiary hearing again on the ground that Macias was still out of town due to a family emergency and counsel had been unable to contact her. Counsel “plan[ned] on subpoenaing the Custodian of Records for [Macias’s employer] to produce [her] address and telephone number....” The employer was refusing to divulge the information “claiming privacy issues.”

The court denied the request to continue the matter once again, finding that plaintiffs had ample time to provide the evidence and that, even if Macias’s declaration was credible, she did not implicate the partners in any of Edaena’s alleged wrongful conduct. Defense counsel had pointed out that if skimming had been occurring, there are auditing guidelines which would have detected it. In fact, the IRS has published guidelines on auditing restaurants and detecting fraud. Despite the availability of such methods to detect skimming and fraud, plaintiffs had not retained a single accountant to review the restaurant’s records and challenge the accounting submitted by defendants. Based on plaintiffs’ failure to present any evidence to refute defendants’ accounting, the court found it was unnecessary to conduct further evidentiary proceedings.

The court determined that the cash advances made by defendants were additional capital contributions and should be treated as such in any proposed final accounting settling the partners’ accounts. It directed the parties to obtain an appraisal of the business, which would be used as the basis for a sale of the partnership property. The business would be offered for purchase to the parties at the appraised price and they could submit credit bids to the court. The court gave the parties until June 22, 2007, to file their appraisal of the partnership business and their pro forma final accounting, and it set a hearing on the matter for June 29, 2007.

Plaintiffs refused to submit a final accounting because they believed defendants’ records were false and fraudulent, as confirmed by Macias’s declaration that the court refused to consider. Plaintiffs stated they did not want to incur the expense of performing an accounting based on numbers manufactured by defendants. “Further, [plaintiffs] prefer not reconcile [sic] the capital accounts, which have been altered by the court, despite a finding by the court that [defendants] breached their fiduciary duties.”

At the scheduled hearing, the court had reviewed the declarations of defendants’ experts and said it appeared that defendants’ accounting should be approved. Despite being given ample time, plaintiffs failed to undercut or challenge any of the numbers submitted by defendants, did not hire experts to review defendants’ records, and did not prove their allegations of fraud. Accordingly, the court entered judgment (1) confirming the sale of the restaurant and all of the partnership assets to defendants for $67,500, which was the highest bid and the appraised value of the restaurant; (2) settling the partners’ capital accounts in the amounts of $170,802 for defendants and negative $102,764 for plaintiffs; and (3) ordering plaintiffs to pay defendants $102,764 as the excess of charges over credits in plaintiffs’ capital account.

Plaintiffs filed the present appeal following the denial of their renewed motion for new trial based on the aforementioned declaration of Macias.

DISCUSSION

I

Plaintiffs state: “On August 17, 2007, the trial court denied [plaintiffs’] Motion for New Trial.... At the hearing the trial court ruled that the declaration was sufficient evidence for the purpose of the hearing and that he was accepting everything in Maria Macias[’s] declaration as true and was denying Plaintiffs’ motion for new trial. This was reversible error.”

Plaintiffs distort the nature of the trial court’s ruling and fail to understand why the motion was denied, let alone establish that the denial was erroneous.

As discussed previously, plaintiffs sought a new trial based on Macias’s declaration stating that Edaena had destroyed reports for the restaurant and made up new ones; had deposited profits from the restaurant in the jewelry store’s bank account and then loaned the money back to the restaurant; was hiding money in an undisclosed bank account; and made a false police report about the restaurant’s cash register being damaged in a burglary so that plaintiffs and their counsel could not examine the restaurant’s register.

The court denied plaintiffs’ initial motion for new trial because it was premature. At the time of the motion, the court had ruled that plaintiffs were entitled to dissolution of the partnership, which is what they sought to achieve, but this was only an interlocutory judgment. Before a final judgment could be entered, an accounting was necessary and plaintiffs could introduce Macias’s testimony at the hearing on the accounting to refute the defendants’ financial evidence. Indeed, the court directed them to produce Macias to testify so that the court could assess her credibility and defendants could cross-examine her. Plaintiffs failed to do so.

After the court entered judgment in favor of defendants, plaintiffs renewed their motion for new trial on the ground of newly discovered evidence relying again on Macias’s declaration.

In denying the new trial motion, the court explained: “It strikes me pretty simply that the testimony that’s in the declaration, had Ms. Macias shown up and testified in that fashion, would have gotten us to the same place we’re at anyway, which is that there was some question about the accounting records, that a full accounting was necessary, and that the partnership should be dissolved, all of which occurred. [¶] My recollection is... the court even went so far as to appoint a CPA under the Court’s authority to obtain a neutral accounting, and the plaintiffs failed to pursue the hiring of that expert.”

The court explained that plaintiffs had the burden to prove damages, if any, and they had the opportunity to prove that the accounting was false or inaccurate. But they failed to present any evidence despite being given the opportunity. Assuming Macias was truthful, the court could not speculate as to the significance or extent of the cash movements, or the amount of damages. The court stated: “You would have had to hire a[n] expert to go through the books as they exist and explain to the Court why they’re fraudulent, inadequate or demonstrated holes and gaps which support the plaintiffs’ position. [¶] You didn’t do any of that.” This was so despite the fact the “hearing [on the accounting] was continued for months to give the plaintiffs time to generate any kind of response.”

In other words, a new trial was not warranted because plaintiffs achieved their goal of dissolving the partnership, and then squandered their opportunity to use Macias’s testimony to attack defendants’ accounting with the assistance of an expert accountant.

A proceeding for a partnership dissolution and accounting is an equitable matter, and the partners’ claims for reimbursement of their capital advances and capital account balances are tested under equitable principles. (Kaljian v. Menezes (1995) 36 Cal.App.4th 573, 585 [until the affairs of the partnership are wound up and settled, the claims of the respective partners are equitable]; Oliker v. Gershunoff (1987) 195 Cal.App.3d 1288, 1306 [“judicial dissolution and supervised accounting of a partnership is an equitable action”].) Moreover, a partner’s duty of loyalty to the partnership and the other partners includes the duty “[t]o account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property or information, including the appropriation of a partnership opportunity.” (Corp. Code, § 16404, subd. (b)(1).)

Plaintiffs had the opportunity to show that they were not obligated to reimburse defendants for the cash infusions from Ayala Jewelers because the cash was fraudulently siphoned from the restaurant in breach of defendants’ duty to hold the restaurant profits as trustee for the partnership. Plaintiffs failed to take advantage of this opportunity by refusing to hire an accountant to audit defendants’ accounting and by neglecting to produce Macias.

As the court valiantly tried to explain to plaintiffs’ counsel: “Now, Mr. Garcia, what I did was said three times you could bring Mrs. Macias in as a witness. You could hire your own accountant, or you could go forward with the accountant the Court appointed and get all of these books and records reviewed and provide the Court with some evidence as to the amounts on which the accountings are in error... based on reasonable assumptions and professional work. [¶] Nothing was done at that point. That’s the point.”

The court never stated that it definitively believed Macias; it merely stated that even if it accepted her testimony as true for the purposes of the new trial motion, nevertheless the result would be the same. Plaintiffs were not entitled to a new trial because they were not relying on newly discovered evidence; they were relying on evidence they were aware of before the hearing on the accounting, and they failed to produce this evidence or any other evidence to refute defendants’ accounting at the appropriate time.

There was no error.

II

According to plaintiffs, the trial court erred in quashing their subpoena for the financial records of Ayala Jewelers, via which they sought to obtain all the jewelry store’s bank deposit slips and gross receipts from January 2004 to the present. Our review discloses no abuse of discretion.

Trial was set to begin on July 17, 2006. On June 28, 2006, plaintiffs moved to continue the trial and reopen discovery on the ground they learned for the first time in a belated deposition of defendants’ daughter, Edaena, that certain restaurant expenses were being paid with income from a jewelry business owned by defendant Francisco and Edaena. Plaintiffs posited that loans from Ayala Jewelers might actually be restaurant profits which had been siphoned from the restaurant into the jewelry store and then transferred back to the restaurant and mischaracterized as loans. It was necessary to reopen discovery in order for plaintiffs to fully explore the financial relationship between the jewelry store and the restaurant.

Defendants opposed the motion, arguing plaintiffs had not been diligent in deposing Edaena, whom plaintiffs’ counsel knew from the time he substituted into the case in September 2005 had been designated as the “person most knowledgeable.” Defendants asserted that Ayala Jewelers was not a party to the action, and presumably would object to, and move to quash, a subpoena for its records. Furthermore, plaintiffs’ “harebrained” theory of financial machinations involving the jewelry store did not make any sense.

The trial court denied the motion to continue and reopen discovery. It stated there had been ample time to pursue discovery and prepare for trial, and plaintiffs had not met the requirements for a continuance.

On the first day of trial, plaintiffs served a subpoena duces tecum on Edaena seeking the production of bank deposits and gross receipts for Ayala Jewelers.

The court indicated the matter had been discussed in chambers and it was unnecessary “to take that up” until plaintiffs established a foundation connecting the profits of the partnership to the jewelry store. In fact, defense counsel indicated in chambers that there were no profits from the restaurant at all, so no profits could have been diverted.

Plaintiff’s counsel, Mr. Garcia, agreed “to hold off on the subpoena issue until after [the court] heard this matter.”

On appeal, plaintiffs contend the court “never reconsidered the issue after the evidence was introduced at trial.” This is incorrect.

After plaintiffs had presented their evidence and rested their case, they renewed their request to subpoena the records of Ayala Jewelers. The court denied the request, stating: “I haven’t heard any evidence, even from your expert, that there’s any factual basis to conclude that funds were transferred from the restaurant to the jewelry store. [¶] In fact, the only evidence I’ve heard, even from your own expert, is that substantial amounts of money were transferred from the jewelry store to the restaurant. [¶] So I don’t think there’s any foundation laid to explore the records of the jewelry store.” The court observed that although plaintiffs had established the inadequacy of the restaurant’s recordkeeping, they had not established “in any way, shape or form” that there were transfers of funds from the restaurant to the jewelry store.

Plaintiffs do not refute the trial court’s reasoning by demonstrating they indeed had established a foundation connecting the restaurant profits to the jewelry store at the time the court ruled on the subpoena issue. They simply point to evidence about the lack of internal accounting controls at the restaurant, and conclude that if the court had allowed the subpoena then plaintiffs could have proved that Edaena or defendants were defrauding the partnership by embezzling money. But they fail to explain how deposit slips from the jewelry store would prove the deposited cash came from the restaurant, which the evidence disclosed was not profitable. Unless money was actually siphoned from the restaurant, any deposits into the jewelry store bank account are irrelevant as the fact deposits were made does not demonstrate where the money originated. Plaintiffs simply expected the court (1) to believe their fanciful theory of defendants removing profits from the restaurant, transferring them to the jewelry store, and then loaning them back to the restaurant, and (2) to permit plaintiffs to go on a fishing expedition in an attempt to prove their theory despite the absence of any foundational support.

Plaintiffs believe that the court should have revisited the subpoena issue after they filed the Macias declaration in connection with their motion for new trial.

However, plaintiffs do not refer to any portion of the record demonstrating they sought to subpoena the jewelry store financial records after they submitted Macias’s declaration. As appellants, plaintiffs have the burden to establish error with argument and analysis supported by legal authority and citations to the pertinent facts in the record. (City of Lincoln v. Barringer (2002) 102 Cal.App.4th 1211, 1239-1240; Badie v. Bank of America (1998) 67 Cal.App.4th 779, 784-785; Duarte v. Chino Community Hospital (1999) 72 Cal.App.4th 849, 856.) We are not obligated to do perform this function for them. (Estate of Hoffman (1963) 213 Cal.App.2d 635, 639; Metzenbaum v. Metzenbaum (1950) 96 Cal.App.2d 197, 199; see also Lewis v. County of Sacramento (2001) 93 Cal.App.4th 107, 113.)

Furthermore, the trial court cannot be faulted for failing to “revisit” the subpoena issue because the record discloses plaintiffs failed to establish any foundation for obtaining a subpoena.

Following the first phase of trial, plaintiffs moved for a new trial based on Macias’s declaration. Defendants responded that they should be given an opportunity to cross-examine Macias concerning her conclusory declaration. They also pointed out there were established IRS guidelines for auditing a restaurant that involved comparing the percentage of food costs to gross revenues and other matters, yet plaintiffs had presented no expert testimony that “for example, your food and labor percentage are way out of whack.”

The court questioned plaintiffs about their failure to submit an accountant’s declaration indicating the accountant had reviewed the restaurant’s records and it appeared money was being skimmed. Absent such evidence, Macias’s untested declaration was too speculative and conclusory. The court stated: “Why Francisco and his daughter would be taking money out of the restaurant, running it into a jewelry store account so they could run it back into the restaurant, it makes almost no sense unless the restaurant was making money hand over fist, which apparently it wasn’t. [¶] If it was making money hand over fist, there wouldn’t have been any need to transfer the money back to the restaurant, it would have just been a cash cow that was sending out money that they were taking -- skimming off the top.”

When plaintiffs’ counsel suggested that defendants had transferred the money to dilute the partner’s interest, the court responded, “you’re suggesting that [defendants] had a scheme from the outset now to lure their relatives into this business, and then transfer the entire time so they can dilute their interest, working twelve hours a day in the kitchen in order to carry on this grand scheme. [¶] Mr. Garcia, this is really a stretch. But that being said, here’s what we’re going to do. [¶] You’re going to come back with Mrs. Macias. They’re going to have a chance to cross-examine her. The court continued, “We’ll have a hearing on these allegations. [¶]... [¶] It needs to be locked down so the other side can address it and the Court can see what’s going on. The generalized declarations are insufficient.”

Plaintiffs failed to lock it down. They never produced Macias, which means there was no credible evidence of a money-transferring scheme that warranted the issuance of a subpoena for the financial records of Ayala Jewelers. Plaintiffs have failed to meet their burden of establishing reversible error.

III

The trial court entered judgment in favor of defendants in the amount of $102,764, which reflected the excess of charges over credits in plaintiffs’ capital account. Plaintiffs contend the court erred when it found that defendants breached their fiduciary duty to plaintiffs by borrowing money without their approval but then incongruously entered judgment in favor of defendants. Their argument is not a model of clarity. They appear to intermingle two different concepts: (1) their entitlement to reimbursement for skimmed profits, and (2) the absence of any obligation on their part to reimburse defendants for their excess capital contributions.

In support of their claim of error, they rely on comments the court made in its ruling following the first phase of trial. For example, the court found that the cash infusions were either debt or capital contributions, which were made without any communication with plaintiffs. Had plaintiffs been aware of the amounts of cash being transferred, they might have opted to terminate the partnership at that time. The effect of the transfers was to create an undisclosed debt obligation, which burdened plaintiffs and diluted their partnership interest without their consent, which was a breach of defendants’ duty to their partners.

Plaintiffs also refer to Prince v. Harting (1960) 177 Cal.App.2d 720 for the proposition that partners have a fiduciary duty to each other and “a faithless fiduciary must repay to the beneficiary of his fiduciary duties the entire profit that he has caused the beneficiary to lose. [Citations.]” (Id. at pp. 727, 731.) Plaintiffs believe that defendants obtained an advantage over them through misrepresentation and concealment, defendants falsified business records so it would appear that the business was losing money, and then defendants pretended to loan money to the restaurant “using Ayala Jewelers as a straw man.”

Plaintiffs contend their theory is supported by Macias’s declaration, and they continue to assert they should have been permitted to subpoena Ayala Jewelers’ financial records. According to plaintiffs, “[h]ad the judge not quashed the subpoena for the financial records of Ayala[] Jewelers, it is probable that those records would have revealed that Ayala[] Jewelers were [sic] bringing in revenues from Los Arcos through Adaena [sic] and moving those revenues back to Los Arcos in the form of loans and/or ‘capitol [sic] contributions’ credited by the court to [defendants].” They assert further that Richard Barnes’s testimony that there was no evidence of fraud, misappropriation, or wrongdoing was not credible. Under the circumstances, plaintiffs argue the cash infusions cannot be considered capital contributions for which they must reimburse defendants, and the evidence is insufficient to support the judgment.

Our review of plaintiffs’ contention discloses they misunderstand the import of the trial court’s ruling in the first phase of trial, mistaking it for a statement of decision. Furthermore, they do not fully appreciate the standard of review or their burden of proving reversible error on appeal. Nor do they comprehend that our review of the sufficiency of evidence is limited to evidence actually introduced at trial and does not include the evidence that plaintiffs wished had been admitted.

Ordinarily, the trial court’s judgment is presumed to be correct, and all intendments and presumptions are indulged in favor of its correctness. (In re Marriage of Arceneaux (1990) 51 Cal.3d 1130, 1133.) To avoid the application of these inferences in favor of the judgment, a party must comply with the two-step process set forth in Code of Civil Procedure sections 632 and 634. (Id. at pp. 1133-1134.) “[F]irst, a party must request a statement of decision as to specific issues to obtain an explanation of the trial court’s tentative decision (§ 632); second, if the court issues such a statement, a party claiming deficiencies therein must bring such defects to the trial court’s attention to avoid implied findings on appeal favorable to the judgment (§ 634).” (Id. at p. 1134.) If a litigant fails to comply with Code of Civil Procedure section 634 and to timely bring to the attention of the trial court the alleged deficiency in its statement of decision, the litigant forfeits the right to complain of the error on appeal, thereby allowing the appellate court to make implied findings in favor of the prevailing party. (Id. at p. 1132.)

“A memorandum opinion is not a decision. Although it may purport to decide issues in the case, it is merely an informal statement of the views of the trial judge. It does not constitute findings of fact.” (Taormino v. Denny (1970) 1 Cal.3d 679, 684.) Although a court’s comments may be valuable in illustrating the trial judge’s theory, they may never be used to impeach the order or judgment. (In re Marriage of Ditto (1988) 206 Cal.App.3d 643, 646.) This is appropriate because “a court is not bound by its statement of intended decision and may enter a wholly different judgment than that announced.” (Canal-Randolph Anaheim, Inc. v. Wilkoski (1978) 78 Cal.App.3d 477, 494.) A request for a statement of decision allows the trial court to review its memorandum of intended decision and “to make... corrections, additions, or deletions it deems necessary or appropriate.” (Miramar Hotel Corp. v. Frank B. Hall & Co. (1985) 163 Cal.App.3d 1126, 1129.)

Here, plaintiffs did not request a statement of decision. Thus, they may not impeach the judgment with statements made by the trial court in its ruling following the first phase of trial. This ruling was not a statement of decision.

In addition, plaintiffs fail to understand that where an appellant challenges the sufficiency of the evidence, we must start with the presumption that the record contains evidence sufficient to support the judgment; it is the appellant’s burden to demonstrate otherwise. (Foreman & Clark Corp. v. Fallon (1971) 3 Cal.3d 875, 881.) The appellant’s brief must set forth all of the material evidence bearing on the issue, not merely the evidence favorable to the appellant, and also must show how the evidence does not sustain the challenged finding else the claim of insufficiency of the evidence is forfeited. (Ibid.; Western Aggregates, Inc. v. County of Yuba (2002) 101 Cal.App.4th 278, 290.)

An appellant must also be mindful that the reviewing court does not have the power to reweigh the evidence, to consider the credibility of witnesses, or to resolve conflicts in the evidence or in the reasonable inferences that may be drawn therefrom. (Huang v. Board of Directors (1990) 220 Cal.App.3d 1286, 1294.) The test is “whether there is substantial evidence in favor of the respondent. If this ‘substantial’ evidence is present, no matter how slight it may appear in comparison with the contradictory evidence, the judgment will be affirmed.” (9 Witkin, Cal. Procedure(5th ed. 2008) Appeal, § 370, p. 427, italics omitted.)

Contrary to the aforementioned rules of appellate procedure, plaintiffs do not set forth all the evidence and show wherein it does not support the judgment. Although there were some accounting abnormalities, plaintiffs point to no evidence reasonably supporting a conclusion that defendants defrauded them, skimmed money, or made false loans from Ayala Jewelers to dilute plaintiffs’ partnership interest. Plaintiffs simply speculate that this occurred and want us to reweigh the evidence and make credibility determinations in their favor. We are not empowered to do so and, even if we were, there is no evidence supporting a rational inference that defendants were skimming money from Los Arcos. Both plaintiffs’ expert and defendants’ expert said there was no evidence of anything that they would label as the misappropriation of money from the restaurant by defendants.

Furthermore, although the court stated in its ruling that defendants breached their fiduciary duty by loaning money to the partnership without plaintiffs’ approval, plaintiffs proffer no legal authority that this means they are not liable to reimburse defendants for the excess capital charges. Nor do they refer to any evidence in the record that either one of them testified that they would have preferred to withdraw from the partnership (even with their continuing obligation on the five-year premises lease) rather than have defendants contribute additional capital amounts obtained from a loan from Ayala Jewelers.

As the trial court stated after its initial ruling, plaintiffs failed to explain why defendants should be faulted for transferring money into the business to keep it operational. And, as their expert Keeter explained, when one partner contributes more than the other, the under-contributing partner can be required to make the other partner whole by making additional contributions to make the capital accounts equal. Plaintiffs asked for a dissolution of the partnership and a distribution of the excess over the charges to the capital account. That is the effect of the court’s order. Plaintiffs got what they asked for; they just did not realize that they would be the ones owing money.

Plaintiffs had the opportunity to object to defendants’ accounting or present their own; but rather than doing so, they chose to stand on their misguided claim of fraud despite the court’s determination that no fraud or skimming had been proved. The court advised plaintiffs that they would have to present specific objections to defendants’ accounting or present their own, and gave them multiple opportunities to do so. Plaintiffs neglected to meet their burden of proof in the trial court and have failed to meet their burden on appeal.

IV

Lastly, plaintiffs’ counsel, Gaspar Garcia II, contends the trial judge was biased against his clients. The claim is baseless.

At the beginning of trial, Judge Cadei and defense counsel, James Curran, disclosed that more than eight years earlier they had worked together at Mr. Curran’s former law firm. Judge Cadei had been a partner, and Mr. Curran had been employed as an associate. The judge, who had not had any affiliation with Mr. Curran in over eight years, stated he had no reason under any of the guidelines to think he could not be fair and unbiased in the present matter, and had no reason to think that he should disqualify himself. Judge Cadei asked if his former association with Mr. Curran raised any issues for plaintiffs’ counsel, Mr. Garcia, or for his clients. Mr. Garcia stated that he believed the judge would be unbiased and asked to proceed.

On appeal, plaintiffs contend “judges should refrain from asking the views of counsel on the question of the desirability of remaining in a case involving actual, potential, probable, or possible conflicts of interest.” They rely on an inapposite federal case, which is based on federal rules applicable in a different factual situation. (Matter of Nat. Union Fire Ins. Co. of Pittsburgh (7th Cir. 1988) 839 F.2d 1226 [judge who learned his son represented bank that was the insured in an action involving the scope of insurance coverage asked counsel for their views on the matter and then declined a recusal motion made on the grounds of an appearance of impropriety].)

In California, Code of Judicial Ethics, canon 3E(2) states that “[i]n all trial court proceedings, a judge shall disclose on the record information that is reasonably relevant to the question of disqualification under Code of Civil Procedure section 170.1, even if there is no actual basis for disqualification.”

Thus, rather than err as plaintiffs claim, Judge Cadei did as he was required to do. In any event, even if a judge determines that he or she is disqualified, the judge may ask the parties and their counsel if they wish to waive the disqualification. (Code Civ. Proc., § 170.3, subd. (b)(1).)

Code of Civil Procedure section 170.3, subdivision (b) provides in pertinent part: “(1) A judge who determines himself or herself to be disqualified after disclosing the basis for his or her disqualification on the record may ask the parties and their attorneys whether they wish to waive the disqualification, except where the basis for disqualification is as provided in paragraph (2). A waiver of disqualification shall recite the basis for the disqualification, and is effective only when signed by all parties and their attorneys and filed in the record. [¶] (2) There shall be no waiver of disqualification if the basis therefor is either of the following: [¶] (A) The judge has a personal bias or prejudice concerning a party. [¶] (B) The judge served as an attorney in the matter in controversy, or the judge has been a material witness concerning that matter.”

Judge Cadei’s query whether Mr. Garcia was concerned about the judge’s former association with Mr. Curran--which was not a ground for disqualification--was completely proper under California law. If Mr. Garcia believed that Judge Cadei’s prior work affiliation suggested he harbored a bias in favor of defendants, counsel should have moved to recuse him under Code of Civil Procedure section 170.6 rather than asking to proceed with the case.

Relying on Catchpole v. Brannon (1995) 36 Cal.App.4th 237 (hereafter Catchpole), plaintiffs appear to believe that it was unnecessary to move for recusal or object in the trial court in order to preserve their claim of bias. Their reliance on Catchpole is misplaced.

Catchpole involved a judge whose gender bias against the plaintiff in a sexual harassment case was exposed by the totality of the judge’s comments throughout trial. (Catchpole, supra, 36 Cal.App.4th at p. 249.) The theory articulated in Catchpole was that a lawyer would be unwilling to confront a judge with an accusation of gender bias. (Id. at p. 244.) Catchpole said that an appellate court would consider points not raised at trial if they involved matters of public interest or the due administration of justice, and “[t]he issue of judicial gender bias obviously involves both a public interest and the due administration of justice.” (Ibid.)

This case does not involve judicial gender bias against a party, and plaintiffs fail to identify any matter of public interest or demonstrate that the due administration of justice is implicated.

In any event, Catchpole noted that a judge’s impartiality is evaluated by an objective standard. The question is whether a reasonable person aware of all the facts would entertain doubts concerning the judge’s integrity, impartiality, and competence. (Catchpole, supra, 36 Cal.App.4th at p. 246; Hall v. Harker (1999) 69 Cal.App.4th 836, 841, disapproved on another point in Casa Herrera, Inc. v. Beydoun (2004) 32 Cal.4th 336, 349.) As the appellants, plaintiffs have the burden of establishing facts supporting their claim of bias. (Betz v. Pankow (1993) 16 Cal.App.4th 919, 926.) They have not done so. The fact that Judge Cadei and defense counsel worked together eight years earlier, without more, would not lead a reasonable person to entertain doubts about the judge’s impartiality.

Plaintiffs assert that a person aware of all the allegedly erroneous and unfavorable rulings the court made would believe that Judge Cadei was biased against plaintiffs. But their argument is based on their own skewed view of the evidence, which ignores the evidence favorable to the judgment. Not only have plaintiffs failed to establish the existence of erroneous rulings, the fact that Judge Cadei ruled repeatedly against them does not support a charge of bias and prejudice. (Andrews v. Agricultural Labor Relations Bd. (1981) 28 Cal.3d 781, 795-796; People v. Superior Court (Dorsey) (1996) 50 Cal.App.4th 1216, 1231.) As we have explained, the rulings were proper.

Judge Cadei eventually expressed some exasperation at (1) Mr. Garcia’s circular and repetitive arguments that were not supported by the evidence, (2) Mr. Garcia’s failure to comprehend that the plaintiffs’ burden of proof required more than speculation, and (3) Mr. Garcia’s failure to present any expert testimony refuting defendants’ accounting or demonstrating that a comparison of the restaurant’s sales receipts with its food purchases and inventory demonstrated that money had been skimmed from the restaurant. However, “[m]ere expressions of opinion by a trial judge based on actual observation of the witnesses and evidence in the courtroom do not demonstrate a bias.” (People v. Guerra (2006) 37 Cal.4th 1067, 1111, disapproved on another point in People v. Rundle (2008) 43 Cal.4th 76, 151; Moulton Niguel Water Dist. v. Colombo (2003) 111 Cal.App.4th 1210, 1219-1220.)

Plaintiffs utterly fail to establish Judge Cadei harbored any bias against them. To the contrary, Judge Cadei demonstrated great patience and fairness in presiding over this matter.

DISPOSITION

The judgment is affirmed.

We concur: SIMS, J., RAYE, J.


Summaries of

Sanchez v. Ayala

California Court of Appeals, Third District, Sacramento
Apr 29, 2009
No. C056915 (Cal. Ct. App. Apr. 29, 2009)
Case details for

Sanchez v. Ayala

Case Details

Full title:SAMUEL SANCHEZ et al., Plaintiffs, Cross-defendants and Appellants, v…

Court:California Court of Appeals, Third District, Sacramento

Date published: Apr 29, 2009

Citations

No. C056915 (Cal. Ct. App. Apr. 29, 2009)