Herman v. Simard

Filed 10/9/07 Herman v. Simard CA3

NOT TO BE PUBLISHED

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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

THIRD APPELLATE DISTRICT

(Sacramento)

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Plaintiff Edward Herman supplied equipment and materials to George C. Foss Company (Foss), an electrical subcontractor, on three large construction projects. Although the general contractor reimbursed Foss for expenditures, Foss failed to fully reimburse Herman for the equipment and materials he supplied on the projects. Defendants Elwyn L. Simard, Tad Simard, Steve Simard, and Tony Velez (collectively defendants) were officers and shareholders of Foss.

After Foss ceased doing business, Herman filed suit against Foss for breach of contract, and against Foss and defendants for conversion and violation of the Unfair Practices Act. After the court entered a default judgment against Foss, defendants moved for summary judgment. The trial court granted the motion and denied Hermans motion to amend his complaint. Herman appeals, arguing undisputed facts reveal defendants converted Hermans property and violated the Unfair Practices Act. Herman also challenges the trial courts denial of his motion to amend his complaint. We shall affirm the judgment.

FACTUAL AND PROCEDURAL BACKGROUND

Foss specialized in commercial electrical work. Herman supplies electrical equipment for construction projects. Defendants were shareholders and officers of Foss.

Herman supplied materials to Foss for use in three construction projects: the Pacific Bell facility in French Camp (Pac Bell project), Electronic Data Systems Corporation facilities (EDS project), and the Mather Veterans Administration Hospital (VA project). Foss failed to pay Herman the total amount due for the equipment and materials Herman supplied.

Herman supplied Foss materials used in the Pac Bell project and issued an invoice for those materials. Foss paid part of the invoice but failed to pay the remaining balance of $72,769. In September 2004 the Pac Bell general contractor issued a joint check to Foss and Herman in the amount of $72,769. According to Herman, defendants refused to endorse the check to Herman unless Herman released his claims against them.

Herman also supplied equipment to Foss for the EDS project in the amount of $38,649. Foss paid Herman only $10,000, leaving a balance of $28,649.

Finally, Foss obtained equipment from Herman for the VA project in the amount of $1,132,153. Following partial payment, Foss still owed Herman $60,878.

The total balance due Herman for all three projects is $162,296. Herman did not file any liens against any of the projects to secure payment for materials supplied.

Foss maintained a line of credit and bank accounts with River City Bank (Bank). Fosss office building, assets, and accounts secured the line of credit. Foss deposited all progress payment checks, including those which included payments for materials provided by Herman, into its deposit accounts.

The Bank periodically took money from the Foss checking account and applied it to the balance owed on the line of credit. Foss periodically took down funds on its credit line to operate its business.

In deposition, defendant Tad Simard described the process: A: All [Foss account] monies were swept to the line [of credit] on a daily basis. [] Q: And then the money was taken back, wasnt it? [] A: Correct. [] Q: In other words, the bank would take money, sweep it from the account into the line of credit, correct? [] A: Correct. [] Q: And then Foss would turn around and take money back from the line of credit to run its business, correct? [] A: Correct.

During the period in which Foss received payments that included reimbursement for Hermans materials, Herman contends defendants used these funds for a variety of personal payments. They also used these funds, Herman argues, to pay themselves salaries, medical benefits, and athletic club dues, and for their cars.

Herman points out that defendant Velez admitted defendants used the funds received by Foss to finance Fosss operations. Velez also testified he, Steve Simard, and Tad Simard determined which expenses to pay.

Defendants made personal loans to Foss in December 2002 in the amount of $160,000. Foss repaid the loans with interest in January 2003. Foss also paid the Bank $300,000 on February 7, 2003. Defendants also note that Foss paid wages and benefits to them as employees during this period.

Foss owed the Bank $1,500,000, due and payable on March 1, 2003, prior to the completion of the projects. Unable to renew or pay the credit line, Foss closed down the business on March 21, 2003. Proceeds from the sale of Fosss office building and equipment were applied to payment of the credit line. The Bank also swept Fosss accounts and applied the proceeds to repayment of the credit line.

Herman filed a complaint against Foss and defendants on October 3, 2003. Herman alleged breach of contract against Foss, and conversion and violation of the Unfair Practices Act (Bus. & Prof. Code, 17000 et seq.)^[1]against Foss and defendants. Foss failed to respond to Hermans complaint, and default was entered. No action was taken to have the default set aside.

Herman filed a motion for summary judgment, which the trial court denied. On December 9, 2005, defendants filed a motion for summary judgment. On February 21, 2006, Herman filed a motion for leave to amend the complaint to allege a cause of action under the Uniform Fraudulent Transfer Act. (Civ. Code,  3439 et seq.)

In granting the summary judgment, the trial court found that Foss breached its contract with Herman. However, none of the individual defendants guaranteed this corporate debt, and none owed a contractual obligation to Herman. According to the court: Authorizing transfers to pay down the line of credit and paying other debts and expenses of keeping the business going, including payments to themselves, is not conversion by the officers. Hermans contractual right to payment from Foss did not constitute the ownership interest or right to immediate possession that is required for conversion. Once the funds were deposited they became the property of the Bank, and the Bank became the debtor of the depositor.

The court further found there was no discrete lump sum specifically owed to Herman. Instead, there was a stream of income into the company and funds outgoing to pay expenses. Defendants authorization of transfers to pay down the line of credit and the payment of other debts and business expenses did not constitute conversion. These were not affirmative acts to deprive Herman of his property. The court reasoned: Defendants were making the usual quotidian decisions as to whom to pay and what debts to discharge to keep the business going as long as possible. Herman disagrees with their decisions, but that does not mean that he has a cause of action for conversion.

Following entry of summary judgment, Herman filed a timely notice of appeal.

DISCUSSION

I. STANDARD OF REVIEW

A trial court properly grants summary judgment where no triable issue of material fact exists and the moving party is entitled to judgment as a matter of law. We review the trial courts decision de novo, considering all the evidence the parties offered in connection with the motion, except that which the court properly excluded, and the uncontradicted inferences the evidence reasonably supports. In the trial court, once a defendant has shown that one or more elements of the plaintiffs cause of action cannot be established, the burden shifts to the plaintiff to show the existence of a triable issue. To meet that burden, the plaintiff may not rely upon the mere allegations or denials in his pleadings but, instead, must set forth the specific facts showing that a triable issue of material fact exists as to that cause of action. (Merrill v. Navegar, Inc. (2001) 26 Cal.4th 465, 476-477.)

II. CONVERSION

Herman argues the evidence established that the individual defendants converted his property and are therefore liable for conversion. Defendants contend Herman neither owned nor had the right to immediate possession of a discrete sum of money. Therefore, no conversion took place.

A cause of action for conversion requires: (1) the plaintiffs ownership or right to possession of the property; (2) the defendants conversion by a wrongful act or disposition of property rights; and (3) damages. (Oakdale Village Group v. Fong (1996) 43 Cal.App.4th 539, 543-544.)The foundation of the action rests neither in the knowledge nor the intent of the defendant. Instead, the tort consists in the breach of an absolute duty; the act of conversion itself is tortious. (Burlesci v. Petersen (1998) 68 Cal.App.4th 1062, 1066.)

Herman contends he supplied equipment and materials that Foss used in the three projects, and Foss received payment for the equipment. According to Herman, he was entitled to immediate possession of the payments Foss received, but Foss, through the machinations of defendants, converted the money to its own use.

Defendants acknowledge that Foss received progress payment checks for work done on the projects that did include amounts paid for materials Herman supplied. However, defendants contend, the progress payment checks included both payment to Foss for some of the materials supplied by Herman and payment for Fosss own work and for other suppliers and subcontractors. Due to the mixed nature of the progress payments, [w]hile Herman had no claim against the progress payment check itself, he did have a contract claim against Foss for the value of the materials Herman supplied to the Projects.

Herman dismisses this metaphysical argument, arguing Foss held the progress payments in trust for each of the laborers and suppliers for whose benefit the payments were made. In support, Herman cites Chang v. Redding Bank of Commerce (1994) 29 Cal.App.4th 673, 685 (Chang). Defendants disagree, contending that once the checks were deposited into Fosss accounts, the bank owns that money and Foss had only a contractual claim against the bank for the check proceeds and a contract claim cannot suffice to establish a conversion claim.

In Chang, the plaintiff paid funds to a contractor for the construction of a hotel. The contractor deposited the money in a business checking account and issued checks to the subcontractors. The defendant bank recorded the checks tendered by the subcontractors as paid but then reversed the transactions. The bank seized the money to set off money owed the bank by the contractor, pursuant to a loan agreement that authorized an offset in the event of a default. The plaintiff settled the subcontractors mechanics lien claims and brought an action to recover the money from the bank. The plaintiff alleged causes of action for unjust enrichment and to impose a constructive trust. (Chang, supra, 29 Cal.App.4th at pp. 677-678, 679.)

The trial court granted the banks summary judgment motion. We reversed.

We concluded the progress payments received by a general contractor pursuant to a contract that requires they be paid to subcontractors are held by the contractor in trust for the benefit of the subcontractors. A bank with knowledge sufficient to require inquiry whether funds deposited by a general contractor to its account with the bank are trust funds cannot, as against the subcontractors, set off the funds to pay an indebtedness owed the bank by the general contractor. (Chang, supra, 29 Cal.App.4th at p. 678.)

Although Herman clings tenaciously to Chang, the case does not support his claim of conversion against defendants. The plaintiff in Chang did not allege conversion, but alleged unjust enrichment and sought to impose a constructive trust. Hermans complaint does not allege unjust enrichment or seek to impose a trust. Nor did we find the banks actions supported an action for conversion. Instead, we found that a bank, if it has notice that funds in an account are trust funds, cannot disregard the trust nature of the funds and apply them against a debt owed to the bank by the depositor.

In addition, the sums at issue in Chang were unequivocally owed to the subcontractors. There was no question of for whom those funds were earmarked. Here, the progress payments deposited by Foss were a mixture of repayment to Foss, Herman, and various other subcontractors for their work on the three projects.

Moreover, it was Foss, not defendants, who received and deposited the checks into its account. Under Chang, a bank, if it has notice of the trust nature of the funds, can be sued for unjust enrichment and imposition of a constructive trust. In the present case, Herman seeks to hold not the Bank but defendants liable for the Banks use of the funds to repay Fosss debt.

Plaintiff also cites another case decided by this court, Fischer v. Machado (1996) 50 Cal.App.4th 1069 (Fischer), for the general proposition that money can be the subject of an action for conversion and [t]here is no necessity that each coin or bill be earmarked. (Id. at p. 1072.) At oral argument, Hermans counsel elevated the importance of Fischer by insisting the holding directly supported his assertion of defendants liability.

Not so. The facts of Fischer bear no resemblance to the facts of the present case; its general propositions of law do not measurably advance Hermans cause.

In Fischer, Craig Machado was president of a company that entered into a contract to serve as sales agent for a small fruit packing company at a 6 percent commission. Machados company placed over $100,000 of sales proceeds into its operating account, where the funds were used to pay operating expenses and repay loans. (Fischer, supra, 50 Cal.App.4th at p. 1071.) In the Fischers suit for conversion, the Machados asserted the Fischers were not entitled to exercise dominion and control over any specific funds and thus conversion would not lie. (Id. at p. 1072.) This court concluded that, as an agent, the Machados company had an obligation to turn over the definite sum it received on the Fischers account. Our conclusion followed from the sound legal principle that an agent, with knowledge of anothers right to receive a specific amount of money, can be liable for conversion when he applies it for his own use. (Id. at p. 1073.) It was not necessary to earmark each coin or bill. In Fischer, the plaintiffs succeeded in piercing the corporate veil; the personal responsibility of Machado and his wife for the debts of their corporation, on an alter ego theory, was not disputed on appeal.

Here, defendants were not Hermans agents and their liability as alter egos is not asserted. The Fischer case is no assistance to Herman.

Herman also contends defendants owed a duty to him not to convert the money Foss received for materials supplied by Herman. Herman labels defendants claim that the only conduct in which the individual defendants engaged was to cause progress payments to be deposited into Fosss Bank account as false. According to Herman, defendants authorized the use of the progress payments, determining which expenses were paid and not paid.

The trial court found that although Foss owed Herman a contractual obligation, defendants did not because they never personally guaranteed or entered into the obligation owed to Herman. As to the disbursement of the progress payments, the court found there was no discrete lump sum held by Foss or the defendants that Herman owned. Instead, there was a stream of funds into and out of the company. Fosss use of income to pay business debts and expenses, repay loans made to Foss by defendants, and pay defendants their employment pay and benefits did not constitute affirmative acts to deprive Herman of his property. According to the trial court, these were the usual quotidian decisions as to whom to pay and what debts to discharge to keep the business going as long as possible.

We agree. Defendants, as officers or directors of Foss, authorized transfers to pay down the line of credit and to pay other debts and expenses. In addition, defendants authorized payments to themselves as part of ongoing business expenses. Conversion requires affirmative action to deprive another of property. A lack of action will not suffice. (Spates v. Dameron Hospital Assn. (2003) 114 Cal.App.4th 208, 222.) Defendants actions in keeping the business going by using funds to pay business expenses does not constitute an affirmative action sufficient to support a cause of action for conversion.^[2]

Herman briefly argues defendants are liable for conversion for failing to turn over to him a check from Pacific Bell issued in September 2004. Herman contends defendants admitted he was entitled to the check but refused to turn the funds over to him unless he released them from liability for theft.

However, Herman cites Tad Simards deposition testimony in which he stated a willingness to sign over the check if we get a release. No mention was made of theft or conversion, or a release from any tort connected with the case. Defendants were not holding the funds hostage to force Herman to give up his legal rights. Instead, defendants were attempting to negotiate a settlement of the monies owed to Herman as a subcontractor.

III. UNFAIR BUSINESS PRACTICES

Herman also alleges defendants and Foss violated the California Unfair Practices Act. Section 17203 provides, in pertinent part: The court may make such orders or judgments, including the appointment of a receiver, as may be necessary to prevent the use or employment by any person of any practice which constitutes unfair competition, as defined in this chapter, or as may be necessary to restore to any person in interest any money or property, real or personal, which may have been acquired by means of such unfair competition. Unfair competition includes any unlawful business act or practice. ( 17200.)

Herman theorizes that since parties have been permitted to borrow criminal statutes to establish a violation of Business and Professions Code section 17200, defendants violation of Penal Code section 484 constitutes an unfair business practice. Section 484 states that every person who feloniously takes the personal property of another is guilty of theft. Penal Code section 484b states that any person who receives money for the purpose of obtaining or paying for materials or equipment and willfully fails to pay for materials or equipment and wrongfully diverts the funds to a use other than that for which the funds were received is guilty of a public offense.

According to Herman, the evidence established that Foss received money to reimburse subcontractors, and defendants took the money and wrongfully diverted it to a use other than that for which the funds were received.

Herman also claims defendants conduct amounts to a violation of section 7120. Section 7120 states: Willful or deliberate failure by any licensee or agent or officer thereof to pay any moneys, when due for any materials or services rendered in connection with his operations as a contractor, when he has the capacity to pay or when he has received sufficient funds therefor as payment for the particular construction work, project, or operation for which the services or materials were rendered or purchased constitutes a cause for disciplinary action, as does the false denial of any such amount due or the validity of the claim thereof with intent to secure for himself . . . any discount upon such indebtedness or with intent to hinder, delay, or defraud the person to whom such indebtedness is due.

Herman argues that defendants violation of Penal Code sections 484 and 484b and their violation of Business and Professions Code section 7120 constitute a violation of the Unfair Practices Act. The trial court disagreed and found no violation of the Unfair Practices Act in Fosss use of progress payments to fund its business operations. Nor did the court find defendants decisions as to which expenses to pay constituted an unfair business practice.

The Penal Code statutes Herman accuses defendants of violating require a willful failure to pay the subcontractor and a wrongful diversion of the funds for another purpose. Here, defendants engaged in no such willful or wrongful conduct. Instead, defendants, as officers and directors of Foss, made business decisions as to how to disburse funds Foss deposited in the companys account. We agree with the trial courts assessment that these were quotidian decisions as to whom to pay and what debts to discharge made in the ordinary course of business. As such, these acts do not support Hermans Penal Code sections 484 and 484b claims.

Nor do these acts support Hermans argument that defendants violated section 7120. Section 7120 also requires a willful or deliberate failure to reimburse a party for materials and services rendered. Defendants actions in utilizing funds Foss received to keep the business running cannot be considered a willful or deliberate failure to reimburse Herman. There is no disputed issue of fact to support Hermans claim of unfair business practices.

IV. MOTION TO AMEND COMPLAINT

Herman argues the trial court erred in denying his motion to amend his complaint. Herman sought to add a cause of action against defendants under the Uniform Fraudulent Transfer Act. According to Herman, amendment was necessary based on his recent receipt of documents that defendants failed to produce earlier in response to a document request.

Herman filed a motion to amend his complaint on February 21, 2006. Herman claimed he only recently received new evidence, checks written to defendants totaling $160,000 and a $300,000 check written to the Bank. According to Herman, defendants attempts to keep evidence of their defalcations hidden . . . have delayed Hermans discovery of the grounds for the proposed amendment. Defendants opposed the motion to amend, arguing the evidence Herman claimed to be newly discovered had been available since November 2004.

In denying the motion to amend as against Foss, the trial court found Herman had not been diligent in seeking amendment. The checks upon which Herman based the motion, the court determined, had been produced in 2004 and accordingly were not new evidence. As to defendants, the trial court denied the motion to amend on the ground that the court had granted defendants motion for summary judgment and the case has been dismissed against them.

Ordinarily, courts should exercise liberality in permitting amendments at any stage of the proceeding. Nevertheless, whether such amendment shall be allowed rests in the sound discretion of the trial court, and courts are much more critical of proposed amendments offered after long delay, or where there is a lack of diligence or prejudice to the other party. (Hulsey v. Koehler (1990) 218 Cal.App.3d 1150, 1159.) As a general rule, a trial courts exercise of discretion with respect to amendment of pleadings should be upheld unless clearly abused. Furthermore, where inexcusable delay and probable prejudice to the opposing party is indicated, the trial courts exercise of discretion in denying a proposed amendment should not be disturbed. (Avedissian v. Manukian (1983) 141 Cal.App.3d 379, 384.)

Herman contends the evidence he relied upon, the checks, wasnt produced until February 4, 2006. Defendants argue the checks were produced in November 2004.

Herman claims the evidence defendants rely upon is solely the self-serving declaration of their attorney. Defendants attorney stated the checks were produced in November 2004 in a production consisting of one very large and three smaller, regular-sized boxes of documents. Herman dismisses this claim, stating [t]he checks were purportedly buried somewhere in those boxes.

The trial court did not abuse its discretion in denying Hermans motion to amend, given the evidence the checks were available in November 2004. The court could, quite properly, find that Hermans failure to properly inspect the document production reflected a lack of diligence insufficient to support amendment. A denial of leave to amend may rest upon the element of lack of diligence in offering the amendment after knowledge of the facts, or the effect of the delay on the adverse party [citations]. (Roemer v. Retail Credit Co. (1975) 44 Cal.App.3d 926, 939-940.)

DISPOSITION

The judgment is affirmed. Defendants shall recover costs on appeal. (Cal. Rules of Court, rule 8.276(a)(1).)

RAYE , J.

We concur:

SIMS , Acting P.J.

DAVIS , J.

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Analysis and review provided by Vista Property line attorney.

^[1] All further statutory references are to the Business and Professions Code unless otherwise indicated.

^[2] In response, Herman briefly argues: Assuming for the sake of argument that this were the only conduct in which defendants engaged and that upon the bank became [sic] the owner of the money which Foss received in trust for Herman, then defendants converted Hermans property by depositing it into a non-restricted account which allowed the bank to seize it. Not surprisingly, Herman fails to support this argument with any citation to authority or analysis.