A law firm obtained a $2.4 million judgment against one of its former partners, defendant Shahab E. Fotouhi, and, in an effort to collect the judgment, sought court orders (1) charging Fotouhi's interest in his new law firm, Fotouhi, Epps, Hillger & Gilroy, LLP (the Partnership) (Code Civ. Proc., § 708.310; Corp. Code, § 16504, subd. (a)); (2) extending the order charging his partnership interest to a corporation it contends is a "mere continuation" of the Partnership formed "to frustrate attempts to collect on the judgment . . .," Fotouhi, Epps, Hillger & Gilroy, P.C. (the Corporation); and (3) adding both the Partnership and the Corporation to the judgment against Fotouhi as his alter egos. The superior court issued a charging order against both the Partnership and the Corporation, directing each to pay 15 percent of its monthly net revenues toward the judgment until it is satisfied. The superior court declined to find the Partnership and the Corporation to be Fotouhi's alter egos.
In November 2000, Fotouhi entered into a partnership agreement with Phillips, Spallas & Fotouhi, LLP (the Phillips firm). In March 2004, Fotouhi announced he was leaving the firm, effective April 1, 2004, and taking two major insurance clients with him (insurance clients).
Fotouhi started a new law practice, with three of the Phillips firm's former associates, Darren Epps, Wendy Hillger, and Michael Gilroy. Fotouhi, Epps, Hillger & Gilroy, LLP, registered as a limited liability partnership on March 25, 2004. As the general partner, managing partner, and president of the Partnership, Fotouhi held a "dominant position in the firm," and controlled the firm's books and records. He generated between 75 and 90 percent of the work.
In May 2004, the Phillips firm's successor in interest, Phillips, Spallas, & Angstadt, LLP, and two of its named partners, Robert K. Phillips and Gregory L. Spallas (collectively, plaintiffs), asserted claims against Fotouhi for violating the partnership agreement and filed a petition in the superior court to compel arbitration. On May 17, 2005, an arbitration panel awarded plaintiffs liquidated damages of $2.4 million, finding Fotouhi had breached the partnership agreement by failing to give proper notice of his withdrawal, and continuing to perform work for and referring work from the insurance clients (arbitration award). Fotouhi vowed plaintiffs would "`never get a dime out of him.'"
A week later, Fotouhi met with a bankruptcy attorney and, on August 29, 2005, filed a petition for chapter 7 bankruptcy. In December 2007, the bankruptcy court entered a judgment denying him discharge, finding he had made false oaths in his bankruptcy schedules and statement of financial affairs. The bankruptcy court found he "was motivated by his expressed intention to deprive his former partners of any recovery on their massive judgment against him, and to mislead all parties as to the value of his interest in [the Partnership] as well as other assets" and that, by leaving virtually no paper trail, Fotouhi maximized "his ability to obfuscate the extent and nature of his property and business dealings."
Less than a month later, on December 12, 2008, "Fotouhi, Epps, Hillger & Gilroy, Inc.,"
The Partnership continued operating as a law practice.
The bankruptcy trustee pursued a claim for valuation of Fotouhi's interest in the Partnership as an asset of the bankruptcy estate. The bankruptcy court found Fotouhi had a 38.59 percent interest in the Partnership and valued this interest at more than $546,000 as of the filing of the bankruptcy petition. On May 10, 2009, the bankruptcy court entered judgment against the Partnership for $546,440.18.
Shortly after the May 2009 bankruptcy judgment was entered, the Partnership began doing business as "Fotouhi, Epps, Hillger & Gilroy, P.C." The Corporation took over the Partnership's office lease and continued to operate in the same location. The Corporation filed substitutions of counsel for the Partnership's clients in pending cases, and vendor accounts were changed to the Corporation's name. The Partnership's Web site became the Corporation's Web site, and the firm's name was changed on the letterhead and signage to reflect that it was now a professional corporation (P.C.) rather than a limited liability partnership (LLP). On June 1, 2009, the Corporation adopted bylaws, a shareholder agreement was executed, and the partners of the Partnership signed a bill of sale/asset purchase agreement transferring "certain real property" and personal property to the Corporation. The bill of sale does not identify the property or specify the consideration paid for these assets. Fotouhi states in a declaration that the "buy-sell agreement" provided for the Corporation's purchase of the Partnership's computers and equipment over a 12-month period at $3,000 per month. He maintains that no accounts receivable or work in progress carried over from the Partnership to the Corporation.
The superior court confirmed the arbitration award against Fotouhi and entered a $2.4 million judgment in plaintiffs' favor on June 17, 2009.
On November 24, 2009, plaintiffs filed three motions in the superior court proceeding seeking to enforce the judgment. First, they moved for an order (1) charging Fotouhi's interest in the Partnership; (2) declaring his interest in the Partnership at 38.59 percent; (3) directing the Partnership to pay to them amounts due to Fotouhi until the judgment is satisfied; and (4) appointing a receiver to distribute 15 percent of the Partnership's gross revenue to them until the judgment is satisfied. Second, plaintiffs moved for an order (1) extending the charging order to the Corporation, as a continuation of the Partnership; (2) appointing a receiver over the Corporation; and (3) requiring payment of 15 percent of the Corporation's gross revenue to them until the judgment was satisfied. Third, plaintiffs moved to add both the Partnership and the Corporation as judgment debtors, contending they were Fotouhi's alter egos.
After the motions were fully briefed (with over 1,670 pages of supporting papers), they were taken off calendar by the court,
On May 10, 2010, the superior court entered an order denying plaintiffs' motion to add alter egos as judgment debtors but granting the motions for a charging order against both the Partnership and the Corporation. The court found "[T]he law firm corporation is a continuation of the law firm partnership" and ordered each to pay 15 percent of its net income to plaintiffs, without any deduction from gross revenue for salary or other compensation to Fotouhi, including personal expenses, commencing with the first pay period after March 15, 2010.
Defendants filed a timely notice of appeal from the order.
We presume the superior court's order to be correct and indulge all intendments and presumptions to support it regarding matters as to which the record is silent. (Denham v. Superior Court (1970) 2 Cal.3d 557, 564 [86 Cal.Rptr. 65, 468 P.2d 193] (Denham); accord, Gee v. American Realty & Construction, Inc. (2002) 99 Cal.App.4th 1412, 1416 [122 Cal.Rptr.2d 167].) As the appealing parties, defendants have the burden to affirmatively show error. (Denham, at p. 564.)
"As to pure questions of law, such as procedural matters or interpretations of rules or statutes, we exercise our independent judgment. [Citations.]" (Gordon's Cabinet Shop v. State Comp. Ins. Fund (1999) 74 Cal.App.4th 33, 38 [87 Cal.Rptr.2d 541].) The application of a statute to undisputed facts also presents a question of law subject to de novo review. (International Engine Parts, Inc. v. Feddersen & Co. (1995) 9 Cal.4th 606, 611 [38 Cal.Rptr.2d 150, 888 P.2d 1279].) To the extent our review requires consideration of the superior court's determination of disputed factual issues, we affirm these
The superior court issued a charging order against the Partnership under Code of Civil Procedure section 708.310 (hereafter, section 708.310), and Corporations Code section 16504, subdivision (a) (hereafter, section 16504(a)). Section 708.310 provides: "If a money judgment is rendered against a partner or member but not against the partnership or limited liability company, the judgment debtor's interest in the partnership or limited liability company may be applied toward the satisfaction of the judgment by an order charging the judgment debtor's interest pursuant to [Corporations Code] Section 15673, 16504, or 17302 . . . ." Section 16504(a) provides: "On application by a judgment creditor of a partner or of a partner's transferee, a court having jurisdiction may charge the transferable interest of the judgment debtor to satisfy the judgment. The court may appoint a receiver of the share of the distributions due or to become due to the judgment debtor in respect of the partnership and make all other orders, directions, accounts, and inquiries the judgment debtor might have made or that the circumstances of the case may require." (See Corp. Code, § 16504, subd. (b) [charging order is "a lien on the judgment debtor's transferable interest in the partnership"]; Taylor v. S & M Lamp Co. (1961) 190 Cal.App.2d 700, 711 [12 Cal.Rptr. 323] (Taylor) ["the purpose of the lien of a charging order is to permit the judgment creditor to realize on his judgment . . . by appropriate supplementary proceedings or orders against [the debtor] partner's interest in the partnership"].)
Defendants challenge the superior court's order only to the extent it applies to the Corporation.
Substantial evidence in the record supports these findings. The record reflects that Fotouhi not only declared his intent not to pay the judgment, but that he filed for bankruptcy shortly after the arbitration award in an unsuccessful attempt to discharge the debt and maneuvered Partnership funds to conceal his assets, and that his partners assisted him in his efforts to avoid paying the judgment.
Defendants argue that the superior court abused its discretion in relying on its powers under section 187. (See Platypus Wear, Inc. v. Goldberg (2008) 166 Cal.App.4th 772, 782 [83 Cal.Rptr.3d 95] [a trial court abuses its discretion when it acts on "`a mistaken view about the scope of its discretion'"]; Horsford v. Board of Trustees of California State University (2005) 132 Cal.App.4th 359, 393 [33 Cal.Rptr.3d 644] ["`[a]ction that transgresses the confines of the applicable principles of law is outside the scope of discretion. . .'"].) They maintain that section 187 does not apply in this case because extending the charging order to the Corporation was not necessary to effect enforcement of the judgment since an appropriate statutory process— wage garnishment—is otherwise available.
We are not persuaded by defendants' premise that the superior court could properly rely on its powers under section 187 only if no other means for enforcing the judgment were available. They cite no authority supporting this construction of the proviso making section 187 applicable: "if the course of proceeding be not specifically pointed out by this Code or the statute . . . ." The authority on which they rely suggests that the pivotal distinction in evaluating the exercise of a trial court's power under section 187 is whether the court adopted a "suitable process or mode of proceeding" in finding a "workable means" to enforce an established substantive right or, rather,
Defendants contend: "The court's order[,] which requires the [C]orporation to pay 15% of its collected fees over to [plaintiffs] until the judgment against Mr. Fotouhi, individually, is satisfied amounts to a levy of execution against corporate assets, violates the due process rights of both the [P]artnership and the [C]orporation, and is therefore improper." (Boldface & italics omitted.) Defendants contend that corporate assets are not available to satisfy a judgment against a shareholder and that "a `charging order' which requires the firm to turn over a percentage of its profits clearly implicates the rights of non-judgment debtors, and in effect holds them responsible for paying the judgment [against Fotouhi]." (Boldface omitted.) We do not find these contentions persuasive.
First, the superior court's order is not a "levy" upon corporate assets to satisfy the judgment against Fotouhi.
Second, the court's order does not violate due process. Defendants argue that the superior court effectively added the Partnership and the Corporation to the judgment against Fotouhi even though they were not parties to that proceeding and are not his alter egos. We disagree. The superior court's order reaches only Fotouhi's share in the profits and surplus of the Partnership, not his partners' shares, so it does not hold the Partnership liable for the judgment against him. Furthermore, as discussed above, the superior court's order holds the Corporation liable for the Partnership's liabilities, not Fotouhi's.
The superior court's order is affirmed with costs to plaintiffs.
Jones, P. J., and Needham, J., concurred.