Phoenix American Incorporated v. West, A115400 (Cal. App. 9/9/2008)

• Decision Date: 09 September 2008
• Docket Number: A115400
• Parties: PHOENIX AMERICAN INCORPORATED, Plaintiff, Cross-defendant and Respondent, LEASE MANAGEMENT ASSOCIATES, INC., et al., Cross-defendants and Respondents, v. W. COREY WEST, Defendant, Cross-complainant and Appellant.
• Court: California Court of Appeals Court of Appeals

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PHOENIX AMERICAN INCORPORATED, Plaintiff, Cross-defendant and Respondent LEASE MANAGEMENT ASSOCIATES, INC., et al., Cross-defendants and Respondents, v. W. COREY WEST, Defendant, Cross-complainant and Appellant.

A115400

Court of Appeal of California, First Appellate District, Division Two

September 9, 2008

Not to be Published

Appeal from the San Francisco County, Super. Ct. No. 318820.

Kline, P.J.

This appeal follows our remand after reversing a summary judgment in favor of Phoenix American Incorporated and other defendants on W. Corey West's claims of fraud and successor-in-interest liability. After trial, the court rejected the claim of successor-in-interest liability and found West's fraudulent transfer claim barred by the doctrine of collateral estoppel. West challenges both determinations. We affirm.

STATEMENT OF THE CASE AND FACTS

Phoenix American Incorporated (PAI) is a privately held corporation owned approximately 75 percent by the Gus and Mary Jane Constantin 1978 Living Trust (Trust), of which Gus Constantin is one of two beneficiaries, and 25 percent by Constantin's son.¹ Lease Management Associates (LMA) is a privately held corporation solely owned by the Trust. As described by Constantin, at times relevant here LMA was not an operating company but "just an investment company," with no employees. ResourcePhoenix.com (RPC) was a publicly-traded company in which the Trust owned about 60 percent of the shares and the general public owned the remaining 40 percent. RPC was the holding company for Resource/Phoenix, Inc. (RPI), the operating company and wholly owned subsidiary of RPC. Gus Constantin was the president, chairman of the board of directors and chief executive officer of PAI, LMA, RPC and RPI. West worked for RPI and RPC, initially in sales and marketing and, from April 2000 to November 21, 2000, as president and chief operating officer of RPC and RPI.

The focus of RPI's business was offering "back office services," including payroll, accounting, financial reporting and human resources, over the internet to dotcom and start up companies. RPI's main offering was its ReFOCOS product. RPI had originally been a division of another Constantin company, Phoenix Leasing, and was established as a separate entity in 1996 with all its stock owned by the Trust. Among the assets RPI acquired from Phoenix Leasing were the MARS (marketing and reporting system) and STAR (syndication tracking reporting) software systems. When RPC was formed and went public in 1999, RPC, rather than the Trust, owned RPI's stock.

In June 2000, LMA loaned RPI $3 million, secured by virtually all RPI's assets except the MARS software, with repayment guaranteed by RPC. The terms of the loan required RPI to make monthly payments of $90,000 on the first of the month. Constantin testified that LMA extended this loan because he believed RPI had "good products" and was a good business. The RPC board of directors—West, Roger Smith, Glenn McLaughlin and Jim Barrington—voted to accept the loan. To avoid a conflict of interest, Constantin did not participate in the vote and was not present when it was taken. West voted in favor of the loan, the proceeds of which were used for working capital.

During the summer of 2000, West and RPC entered into a retention agreement providing that West would be paid a year's salary if his employment was terminated. The agreement expressly stated that RPC would require any successor to all or substantially all of its assets to assume and agree to perform the agreement, and that if RPC failed to obtain such an assumption, the managers would be entitled to severance benefits as if they were terminated on the effective date of the succession. Constantin voted with the RPC board to enter the agreement with West and other senior management.

Around this time, according to Constantin, RPI was continuing to lose about $1.8 million a month. In August 2000, LMA made another loan to RPI, in the form of a line of credit with a maximum amount of $7 million. This second loan was secured by virtually all RPI's assets, including MARS, and was guaranteed by RPC. Again, the RPC board approved the loan with Constantin not participating in the vote and West voting in favor.

On November 21, 2000, West and about 10 to 15 other employees were laid off. Constantin did not believe West and other senior management were entitled to 12 months' salary under the retention agreements. West, like the approximately 95 other employees laid off in November, was paid two months' salary plus accrued vacation and sick time.

On November 28, 2000, RPC board members Constantin, Barrington and McLaughlin met and agreed to wind up the affairs of RPI and RPC.² Constantin proposed a plan under which PAI would acquire the assets of RPC and RPI and, in consideration, assume RPI's debt to LMA. Constantin excused himself and the remaining directors approved the transaction.

PAI, LMA, RPC and RPI then executed a letter agreement and Asset Purchase Agreement on November 28, 2000, documenting the transaction. Constantin referred to the transaction as a "consensual foreclosure" and testified that he viewed it as an assignment of assets rather than a sale. Constantin explained at trial that RPI's assets were transferred to PAI because LMA, as an investment company, did not need them and they could be put to use at PAI. The Asset Purchase Agreement specified that PAI would not assume RPI's liability other than for the LMA debt, including any employee claims.³ The Asset Purchase Agreement recited that "[t]he parties acknowledge that the fair market value of the Purchased Assets is less than the outstanding indebtedness owing by RPI to LMA."

On November 28 or the day after, LMA entered a loan agreement with RPC providing for a $3,000,000 line of credit; according to the testimony of Olsen and Constantin, $1.2 million was actually extended to RPC and was used to pay severance to the employees who had been laid off.⁴ The text of the loan agreement specifies that the loan proceeds "shall be used by Borrower for its working capital purposes." Disbursements were to be "always subject to the sole discretion, judgment and opinion of Lender, and Lender may refuse at any time or times and for any reason to make a particular Advance or Advances requested by Borrower." The loan was guaranteed by PAI.

In early 2001, West demanded arbitration with RPC and PAI pursuant to the arbitration provision of the retention agreements, claiming RPC and/or its successor had failed to pay the separation benefits required by the retention agreements.⁵ PAI filed a complaint for declaratory relief, seeking a determination that it was not obligated to submit to binding arbitration under the retention agreements because it was neither a signatory to the agreements nor a successor to RPC. West filed a cross-complaint against PAI, RPC, RPI, LMA and Constantin, alleging that each of the cross-defendants was the alter ego of the others, as well as a cause of action for fraudulent transfer, claiming the transfer of RPC and RPI's assets to PAI was intended to hinder, delay or defraud RPC's nonsecured creditors. The trial court resolved West's claims against him by summary adjudication and summary judgment. We reversed the summary judgment on West's fraudulent-transfer claim, finding West had raised a triable issue of fact as to the equivalence in value of the assets transferred to PAI and the debt assumed in exchange. Meanwhile, West had prevailed in his arbitration against RPC, obtaining an award for a total of $409,666.67.⁶ This award has not been paid.

After our remand, West's fraudulent-transfer claim was set for jury trial on November 7, 2005. PAI filed numerous motions, including a motion to sever, arguing that West's alter ego and successor-liability claims were equitable in nature and should be tried before the fraudulent-transfer claim because a finding in PAI's favor could be dispositive of the fraud claim. PAI urged that the fraudulent-transfer issue would be moot if the trial court decided the successor-liability issue in West's favor or if it found in PAI's favor and also found there was adequate consideration for the transfer of RPC's assets.

After a continuance, on March 21, 2006, PAI filed additional motions, including a motion to strike West's demand for a jury trial on his fraudulent-transfer claim on the ground that the relief West sought was primarily equitable. On March 23, the court denied both this motion and PAI's amended motion to sever. The discussion on the motion to sever focused on whether it would be more efficient to try the successor-liability issue first, before putting the fraudulent-transfer issue before a jury, or to present the issues in one trial, with the court deciding the equitable ones. The issues at stake included evidence to be presented on the various issues, accommodation of the court's vacation schedule and convenience of potential jurors. After lengthy discussion, the court noted it felt like a "Ping-Pong ball . . . going back and forth on what the most efficient way to do this is" and ultimately ordered a single trial of the issues.

On March 24, in an email to the court, PAI's attorney raised a number of questions about proceeding with a single trial. At the hearing on March 27, after further argument from the parties, the court changed its mind and ordered a court trial on all the issues in the declaratory relief action. Jury trial of the fraudulent-conveyance claim was set for June 5, 2006.

Presentation of evidence for the court trial began on April 3. Constantin testified that as RPI evolved, MARS and STAR played a minimal role in its business plan. In June of 2000, when the first LMA loan was made, RPI was doing "terribly" as a result of the market having "dried up" and throughout the summer, West and Gregory Thornton, RPC's vice president and chief financial officer, were unsuccessful in finding sources of...