Hellman v. Anderson

• Citation: 284 Cal.Rptr. 830,233 Cal.App.3d 840
• Decision Date: 26 August 1991
• Docket Number: No. C008611,C008611
• Court: California Court of Appeals
• Parties: Fred N. HELLMAN et al., Plaintiffs and Respondents, v. John B. ANDERSON, Defendant and Appellant; Eureka Federal Savings & Loan Assn. et al., Intervenors and Appellants.

Page 830

284 Cal.Rptr. 830

233 Cal.App.3d 840

Fred N. HELLMAN et al., Plaintiffs and Respondents, v. John B. ANDERSON, Defendant and Appellant;

Eureka Federal Savings & Loan Assn. et al., Intervenors and Appellants.

No. C008611.

Court of Appeal, Third District, California.

Aug. 26, 1991.

Calfee & Young, Kent N. Calfee, and Christopher J. Konwinski, Woodland, for defendant and appellant.

Steefel, Levitt & Weiss, Michael J. Lawson, Leonard H. Watkins, San Francisco, Hansen, Boyd, Culhane & Watson, Kevin R. Culhane, and Betsy S. Kimball, Sacramento, for intervenors and appellants.

Reuben, Quint & Valkevich, Matthew F. Quint, and Jeffrey S. Rosen, San Francisco, Roni Keller, Los Angeles, for plaintiff and respondents.

SIMS, Associate Justice.

In this case, we hold that a judgment debtor's interest in a partnership (meaning the right to share in the profits and surplus) may be foreclosed upon and sold, even though other partners do not consent to the sale, provided the foreclosure does not unduly interfere with the partnership business.

Judgment debtor John B. Anderson (Anderson) appeals from the trial court's order authorizing the foreclosure and sale of Anderson's interest in a California general partnership known as Rancho Murieta Investors (RMI). The foreclosure and sale was requested to enforce a money judgment against Anderson in his individual capacity by judgment creditors Fred N. Hellman, Peter N. Hellman, Lesleigh A. Hellman, Judith S. Johnson, and D. James Fajack (hereafter collectively referred to as "Hellman"). Intervenors Eureka Federal Savings and Loan Association (Eureka) and Eric J. Tallstrom (Tallstrom) have also appealed the trial court's order. Eureka is Anderson's largest creditor. Tallstrom is Anderson's partner in RMI.

Appellants contend (1) the foreclosure sale is not authorized by law where the partnership is not the judgment debtor and (2) sale cannot be ordered where, as here, the "innocent" partner does not consent. Anderson additionally argues the trial court abused its discretion in ordering foreclosure in this case. We will conclude that such foreclosure is authorized by law and, while consent of nondebtor partners is not an inflexible requirement, the trial court should consider whether foreclosure of a charged partnership interest will unduly interfere with partnership business before the court exercises its equitable powers to order foreclosure. Because the parties in this case relied on authority requiring nondebtor partner consent, no evidentiary showing was made on the effect of foreclosure on partnership business. We therefore reverse the trial court's order directing foreclosure and remand for the trial court to make a finding whether foreclosure will unduly interfere with partnership business.

FACTUAL AND PROCEDURAL BACKGROUND

In 1985 and 1986, Hellman filed lawsuits against Anderson for accounting, breach of contract, breach of fiduciary duty, mandatory injunction, rescission, and fraud. In 1987, Anderson and Hellman settled the suits. Anderson failed to make any of the payments required by the settlement agreements, and in October 1987, stipulated judgments totaling more than $440,000 were entered against Anderson and in favor of Hellman.

In July 1988, after various unsuccessful attempts to enforce the judgments, Hellman obtained an "Order Charging Debtor John B. Anderson's Partnership Interest" in RMI pursuant to Corporations Code section 15028. ¹ Anderson owns 80 percent of RMI; Tallstrom owns the other 20 percent and is the managing partner of RMI. The charging order stated that Anderson's interest in RMI was charged with the unsatisfied judgment in the amount of $494,885 plus interest. Thus, all profits or other monies due Anderson by virtue of the charged partnership interest were thereafter to be conveyed to Hellman.

Despite the above orders, Hellman has not received any monies in satisfaction of the judgments. Anderson testified in an October 1988 debtor's examination that RMI had not generated profits and was not expected to do so in the near future.

In December 1988, Hellman filed a motion for an order authorizing and directing a foreclosure sale of Anderson's charged partnership interest in RMI, based on the unlikelihood that the charging order would result in satisfaction of the judgment within a reasonable time. On December 15, 1989, the trial court ordered that the interest of the judgment debtor in the profits and surplus of RMI would be sold at a public sale by the Sheriff of Yolo County. The trial court retained jurisdiction over all phases of the sale.

All appellants assign error to the trial court's order directing foreclosure and sale of the partnership interest. ²

DISCUSSION

I. California's Uniform Partnership Act (§ 15001 et seq.) Authorizes Foreclosure of a Partner's Charged Interest Without the Consent of the Other Partners

Appellants contend foreclosure of Anderson's charged interest in RMI is contrary to law. Anderson argues foreclosure was improper because a partnership interest is statutorily exempt from execution. All appellants argue that the trial court cannot order foreclosure unless the nondebtor partners consent.

A. The applicable statutes authorize the foreclosure of a charged partnership interest.

In Crocker Nat. Bank v. Perroton (1989) 208 Cal.App.3d 1, 255 Cal.Rptr. 794, ³ the First District recently addressed the question whether a charged partnership interest was subject to foreclosure and sale. Crocker's analysis begins with a summary of the background of the adoption of relevant provisions of the Uniform Partnership Act:

" 'A creditor with a judgment against a partner but not against the partnership ordinarily cannot execute directly on partnership assets or on the partner's interest in the partnership.' (Advising California Partnerships 2d (Cont.Ed.Bar 1988) § 6.88, p. 428, citing Code Civ.Proc., § 699.720; see also Corp.Code, § 15025, subd. (2)(c).) The reasons for the rule were discussed at some length in Taylor v. S & M Lamp Co. [ (1961) ] 190 Cal.App.2d 700, 707-708 : 'Prior to California's adoption of the Uniform Partnership Act (Corp.Code, § 15001 et seq.) a judgment creditor of a partner whose personal debt, as distinguished from partnership debt, gave rise to the judgment, could cause a sale at execution of partnership assets, including specific items of partnership property, to satisfy his judgment. [Citation.] ⁴

" '...

" 'Lord Justice Lindley gave the following reason for the English rule forbidding execution sale of a partner's interest in the partnership to satisfy his nonpartnership debt:

" ' "When a creditor obtained a judgment against one partner and he wanted to obtain the benefit of that judgment against the share of that partner in the firm, the first thing was to issue a fi. fa. ["fieri facias"--term used to describe writ of execution commanding the sheriff to levy on goods and chattels], and the sheriff went down to the partnership place of business, seized everything, stopped the business, drove the solvent partners wild, and caused the execution creditor to bring an action in Chancery in order to get an injunction to take an account and pay over that which was due the execution debtor. A more clumsy method of proceeding could hardly have grown up." (28 Wash.L.Rev. 1; see also 9 Cal.L.Rev. 117.)

" 'It was to prevent such "hold up" of the partnership business and the consequent injustice done the other partners resulting from execution against partnership property that the quoted code sections and their counterparts in the Uniform Partnership Act and the English Partnership Act of 1890 were adopted. As we view those code sections they are not intended to protect a debtor partner against claims of his judgment creditors where no legitimate interest of the partnership, or of the remaining or former partners is to be served.'

"Therefore, a judgment creditor must seek a charging order to reach the debtor partner's interest in the partnership. (See Corp.Code, §§ 15028, 15522, 15673; Code Civ.Proc., §§ 699.720, 708.310-708.320; Advising California Partnership, supra, § 6.88, pp. 428-429.) Through a charging order, the court may charge the debtor's interest in the partnership with payment of the unsatisfied judgment, plus interest. The court may also appoint a receiver of subsequent profits or other money due to the debtor partner. (Corp.Code, § 15028, subd. (1).)" (Crocker, supra, 208 Cal.App.3d at pp. 5-6, 255 Cal.Rptr. 794, fns. omitted.)

Crocker concluded the trial court could order the "sale of a judgment debtor partner's partnership interest as distinct from the property of the [ ] partnership, where the creditor has shown that it was unable to obtain satisfaction of the debt under the charging order, and where the remaining partner [ ] has consented to the sale." (Id. at p. 7, 255 Cal.Rptr. 794.)

Crocker's requirement of nondebtor partner consent will be discussed below. Before reaching that question, we must re-examine another question resolved in Crocker: whether foreclosure is authorized at all. Our re-examination is necessary because appellants tender some statutory arguments not considered by Crocker. We therefore begin with the basics, discuss the applicable statutes, and conclude Crocker correctly decided that court-ordered foreclosure and sale of a charged partnership interest is statutorily authorized.

First, we clarify the nature of the property interest at issue in this case, i.e., Anderson's interest in the partnership, not in the partnership property.

"A partner's right in specific partnership property is not subject to enforcement of a money judgment, except on a claim against the partnership...." (§ 15025, subd. (2)(c).)

However, a partner's right in specific partnership property is different from his interest in the partnership. "The property rights of a partner are (1) his rights in specific partnership property, (2) his interest in the partnership, and (3)...