Sherwood Partners v. EOP-MarinaBusinessCenter

Filed 3/6/07 Sherwood Partners v. EOP-Marina Business Center CA2/3

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.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

SECOND APPELLATE DISTRICT

DIVISION THREE

APPEAL from an order and judgment of the Superior Court of Los Angeles County, Rita Miller, Judge. Reversed and remanded with direction.

Snyder Miller & Orton and Luther Orton for Plaintiff and Appellant.

Allen Matkins Leck Gamble Mallory & Natsis, Charles N. Kenworthy, Michael S. Greger and Jeanne M. Jorgensen for Defendant and Respondent.

INTRODUCTION

Plaintiff and appellant, Sherwood Properties, Inc. (Sherwood), as an assignee for the benefit of the creditors of an insolvent entity called WhatsHotNow.com (tenant), filed suit against tenants landlord, defendant and respondent EOP-Marina Business Center, L.L.C. (EOP), for return of tenants security deposit in the amount of $324,000. The trial court entered judgment in favor of Sherwood. The Court of Appeal reversed and remanded the case, directing the trial court to enter judgment in favor of EOP, allowing it to retain the security deposit. (Sherwood Partners, Inc. v. EOP-MarinaBusinessCenter (July 8, 2005, B175899) [nonpub. opn.] (Sherwood I).)

On remand, the trial court granted EOPs motion for costs and attorney fees in the amount of $323,000 based upon an attorney fee provision in the written lease agreement between tenant and EOP. The trial court found that Sherwood and tenant were jointly and severally liable for the costs and attorney fees. Sherwood appeals the award of costs and fees against it personally. Sherwood does not appeal the award against tenant, WhatsHotNow.com.

We reverse. As an assignee for the benefit of creditors, Sherwood did not assume the underlying liabilities of tenant. (Credit Managers Assn. v. Brubaker (1991) 233 Cal.App.3d 1587, 1594-1595 (Brubaker).) Thus, Sherwood cannot be personally liable for the award of attorney fees pursuant to the written lease between EOP and tenant. The widely used procedure of an assignment for the benefit of creditors would be eviscerated if an assignee like Sherwood were required to assume the underlying liabilities of the assignors insolvent business. (Ibid.)

Moreover, we conclude that as an assignee for the benefit of tenants creditors, Sherwood was a trustee of an express trust. (Credit Managers Assn. v. National Independent Business Alliance (1984) 162 Cal.App.3d 1166, 1171.) Code of Civil Procedure section 1026, subdivision (b), quoted below in the Discussion, does not permit an award of costs and attorney fees against a trustee of an express trust absent mismanagement or bad faith by the trustee in the action. Because Sherwood did not engage in mismanagement or bad faith in the prosecution of this action, pursuant to section 1026, subdivision (b), Sherwood is not personally liable for EOPs costs and attorney fees.

We therefore remand the case to the trial court with direction to enter a new and different judgment stating that Sherwood, as assignee for the benefit of creditors, is not personally liable for the award of costs and attorney fees in favor of EOP.

FACTUAL AND PROCEDURAL BACKGROUND

1. The Lease

In March 1999, the tenant, WhatsHotNow.com, entered into a commercial real estate lease with EOP as the landlord. Tenant deposited $324,000 with EOP as a security deposit.

The lease contained an attorney fee provision: If Landlord places the enforcement of this Lease, or any part thereof, or the collection of any Rent due, or to become due hereunder, or recovery of possession of the Premises in the hands of an attorney, Tenant shall pay to Landlord, upon demand, Landlords reasonable attorneys fees and court costs, whether incurred without trial, at trial, appeal or review. In any action which Landlord or Tenant brings to enforce its respective rights hereunder, the unsuccessful party shall pay all costs incurred by the prevailing party including reasonable attorneys fees, to be fixed by the court, and said costs and attorneys fees shall be a part of the judgment in said action.

2. Tenant Defaults

Tenant defaulted under the lease by failing to pay rent and other charges. In June 2001, EOP served tenant with a three-day notice to pay rent or quit. Approximately one week later, tenant made a general assignment to Sherwood for the benefit of creditors.

The assignment agreement between tenant and Sherwood provided: [Tenant] . . . does hereby grant, bargain, sell, assign, convey and transfer to [Sherwood], its successors and assigns, in trust, for the benefit of [tenants] creditors generally, all of the property of [tenant] of every kind and nature[.]

In July 2001, Sherwood surrendered possession of the property to EOP. EOP withdrew approximately $323,000 in proceeds from tenants security deposit to pay rent and other charges.

3. Sherwood Files Suit for Return of Security Deposit

In September 2002, Sherwood filed suit for return of the security deposit. Sherwood alleged that EOP violated section Civil Code 1950.7, subdivision (c), (hereafter section 1950.7), by drawing upon the security deposit for reimbursement of unpaid rental obligations accruing after tenants breach of the lease. Sherwood claimed that section 1950.7 required EOP to return the security deposit to tenants estate.

4. Trial Court Enters Judgment in Favor of Sherwood

The trial court conducted a bench trial based upon stipulated facts. The court held that section 1950.7, subdivision (c), required EOP to refund a portion of the security deposit, minus an offset. The trial court entered judgment in favor of Sherwood, which EOP appealed.

5. The Court of Appeal Reverses Judgment in Favor of Sherwood

On appeal, in Sherwood I, supra, B175899, the Court of Appeal reversed the judgment in favor of Sherwood. The court concluded that in the lease agreement tenant waived protections set forth in section 1950.7, subdivision (c). This authorized EOP to retain the security deposit and apply it against unpaid rental obligations.

6. Trial Court Awards EOP Costs and Attorney Fees

Upon remand, the trial court found that pursuant to the contractual attorney fee provision, quoted above, tenant and Sherwood were jointly and severally liable to EOP for costs and attorney fees in the amount of $323,000. The trial court explained that in the opinion reversing the original judgment, the Court of Appeal concluded that Sherwood was the real party in interest. The court further explained that the case law suggested that Sherwood should be treated as a real party in interest with respect to the recovery of attorneys fees here.

The trial court also found that Sherwoods status was not analogous to the types of fiduciaries against which attorney fees may not be awarded pursuant to Code of Civil Procedure section 1026. Sherwood timely filed a notice of appeal.

ISSUE PRESENTED

The issue presented is whether Sherwood, as an assignee for the benefit of creditors, is personally liable for the costs and attorney fees the trial court awarded to EOP on the basis of the written attorney fee provision in the lease agreement between EOP and tenant.

STANDARD OF REVIEW

We apply a de novo standard of review. (California Wholesale Material Supply, Inc. v. Norm Wilson & Sons, Inc. (2002) 96 Cal.App.4th 598, 604 [On appeal, this court reviews a determination of the legal basis for an award of attorney fees de novo as a question of law.]. )

DISCUSSION

1. As an Assignee for the Benefit of Creditors, Sherwood Did Not Assume Tenants Liabilities Under the Written Lease with EOP

Sherwood asserts that it did not assume tenants liabilities under the written lease with EOP. We agree.

As summarized in Witkin, [a]n assignment for benefit of creditors is a widely used method by which an insolvent debtor transfers his or her assets in trust to an assignee, who liquidates them and distributes the proceeds to the creditors. (1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts, 710, p. 795.) In Credit Managers Assn. v. National Independent Business Alliance, supra, 162 Cal.App.3d 1166, the court explained: An assignment for [the] benefit of creditors is a business liquidation device available to an insolvent debtor as an alternative to formal bankruptcy proceedings. (Id. at p. 1169.) Under current California law, [t]he common law assignment by simple transfer in trust . . . is now the only method recognized by California decisions. (1 Witkin, supra, Contracts, 710, p. 796.)^[1]

In Brubaker, supra, 233 Cal.App.3d at page 1590, an insolvent partnership called NTS executed a general assignment for the benefit of creditors in favor of the Credit Managers Association of California (CMA). CMA sued the former chief executive officer of NTS, Brubaker, to recover amounts NTS paid to Brubaker in preference over other unsecured creditors. Brubaker filed a cross-complaint against CMA. Brubaker alleged that CMA was liable for breach of contract for compensation that Brubaker would have earned on the remaining two years of his contract. Brubaker also sought compensation for work performed for NTS after the assignment to CMA. (Ibid.) Following a court trial, the court awarded Brubaker $5,000 in quantum meruit, but denied his claim for contractual damages for the two years remaining on the employment contract with NTS.

On appeal, Brubaker asserted that he was entitled to damages for breach of his employment contract with NTS and that CMA was liable for those damages. The Court of Appeal rejected Brubakers assertion, stating: The trial court properly rejected this contention. The assignment to CMA did not include an assumption by CMA of the liabilities of NTSs contractual agreements. [] The assignment to CMA was not an assignment in connection with the purchase and sale of NTS as a going concern. It was an assignment for the benefit of creditors, pursuant to which CMA, as a disinterested third party, would liquidate and distribute the assets of NTS to creditors. The beneficial procedure of an assignment for [the] benefit of creditors would be impossible to use if the assignee had to assume the liabilities of the insolvent business. [Citations.] (Brubaker, supra, 233 Cal.App.3d at pp. 1594-1595.)

The rationale of the Brubaker case is persuasive and applies in this case. Like Brubaker, tenants assignment to Sherwood was not an assignment in connection with the purchase and sale of tenant as a going concern. It was an assignment for the benefit of creditors, pursuant to which Sherwood was required to liquidate tenants assets for the benefit of its creditors. We find that the assignment did not include an assumption by Sherwood of tenants underlying contractual liabilities, including the attorney fee provision in the written lease between EOP and tenant.

EOP argues that Sherwood should be personally liable because in Sherwood I, the Court of Appeal concluded that Sherwood was the real party in interest and because Sherwood initiated this lawsuit. We conclude that Sherwoods status as real party in interest and its status as plaintiff are irrelevant to the issue before us.

As an assignee for the benefit of creditors, Sherwood had a duty to marshal and protect the assets of tenant, which may include filing and defending lawsuits. (Credit Managers Assn. v. National Independent Business Alliance, supra, 162 Cal.App.3d at pp. 1170-1171.) To impose underlying contractual liabilities upon an assignee for the benefit of creditors because the assignee initiated litigation to protect an assignors assets, would create a disincentive for such assignees to seek to protect an assignors assets for the benefit of creditors.

Notably, in Brubaker, the assignee for the benefit of creditors, CMA, initiated the lawsuit against Brubaker for amounts paid to Brubaker. There, the court held, however, that plaintiff CMA, clearly the real party in interest, did not assume the contractual liabilities of the assignee, NTS. (Brubaker, supra, 233 Cal.App.3d. at p. 1594.) We therefore reject EOPs contention that because Sherwood was the real party in interest and initiated this lawsuit, it assumed tenants underlying lease obligations.

EOP asserts that pursuant to California Wholesale Material Supply, Inc. v. Norm Wilson & Sons, Inc., supra, 96 Cal.App.4th 598, Sherwood, as an assignee, assumed tenants contractual obligations, including the attorney fee provision. We reject this contention. California Wholesale Material Supply is inapposite to the issue presented in this case because it did not involve an assignment for the benefit of creditors. That case involved an assignment of a security interest in a construction subcontract and a right to account receivables. (Id. at pp. 601-602.) The court did not address whether an assignee for the benefit of creditors assumes the underlying lease obligations of the assignor.

EOP further asserts that Sherwood should be personally liable for attorney fees because Sherwood initially sought to recover attorney fees pursuant to the written attorney fee provision in the lease between EOP and tenant after prevailing on the merits in the trial court. We disagree. The record shows that Sherwood sought to recover attorney fees for the benefit of tenants creditors, not in its own right. Sherwood did not contend that it was entitled to an award of attorney fees as a party to the underlying lease between EOP and tenant. We cannot conclude that Sherwood is personally liable for attorney fees because it attempted to exercise rights which would have benefited the creditors of its assignor, tenant.

Pursuant to the foregoing, we conclude on this record that Sherwood, as an assignee for the benefit of creditors, did not assume the underlying contractual obligations in the written lease between tenant and EOP.

2. Sherwood Is Not Personally Liable for Costs and Attorney Fees

Pursuant to Code of Civil Procedure Section 1026, Subdivision (b)

Sherwood asserts that as an assignee for the benefit of creditors, it is a trustee of an express trust under section 1026, subdivision (b), and therefore is not personally liable for EOPs costs and attorney fees. We agree.

Section 1026 provides: (a) Except as provided in subdivision (b), in an action prosecuted or defended by a personal representative, trustee of an express trust, guardian, conservator, or a person expressly authorized by statute, costs may be recovered as in an action by or against a person prosecuting or defending in the persons own right. [] (b) Costs allowed under subdivision (a) shall, by the judgment, be made chargeable only upon the estate, fund, or party represented, unless the court directs the costs to be paid by the fiduciary personally for mismanagement or bad faith in the action or defense.

We conclude that as an assignee for the benefit of creditors, Sherwood qualifies as a trustee of an express trust. Thus, pursuant to subdivision (b) of section 1026, because Sherwood did not engage in mismanagement or bad faith, Sherwood is not personally liable for EOPs costs and attorney fees and the judgment must be modified accordingly.

California law recognizes numerous types of trusts. (13 Witkin, Summary of Cal. Law (10th ed. 2005) Trusts, 1-2, pp. 566-569.) As explained in Oldham v. California Capital Fund, Inc. (2003) 109 Cal.App.4th 421: The five essential elements of a noncharitable express trust are (1) a competent trustmaker, (2) trust intent, (3) trust property, (4) trust purpose, and (5) at least one beneficiary. (Id. at p. 433, fn. 12.)^[2]

The assignment for the benefit of creditors in this case satisfies these five elements. Tenant, WhatsHotNow.com, was a competent trustmaker. EOP makes no assertions to the contrary.

As for trust intent, the written general assignment between tenant and Sherwood establishes that tenant intended to create a trust for the benefit of all creditors. As to the trust property, the general assignment required tenant to convey all of tenants property to Sherwood.^[3] The general assignment establishes the trust purpose; that is for Sherwood to conduct tenants business and sell tenants property to pay to creditors of Assignor pro rata, the net proceeds arising from the conducting of said business and sale and disposal of said property. It is undisputed that there was at least one beneficiary of the trustEOP, tenants landlord.

We therefore conclude that Sherwood, as assignee for the benefit of creditors, was a trustee of an express trust.

In Bumb v. Bennett (1958) 51 Cal.2d 294, the Supreme Court recognized that an assignment for the benefit of creditors created a trust arrangement. There, a partnership called B.F. Wells & Son executed an assignment of all partnership property to plaintiff August Bumb as assignee for the benefit of the partnership creditors. Following execution of the assignment, a number of unsecured creditors of B.F. Wells & Son levied an attachment on real property assigned to August Bumb. The Supreme Court affirmed the quiet title judgment in favor of the assignee, Bumb. It held the assignment was valid and prior in time to the attachment. (Id. at p. 298.)

In Bumb, the unsecured creditors asserted that the assignment was void because it excluded certain beneficiaries. (Bumb v. Bennett, supra, 51 Cal.2d at p. 300.) Under the law at that time, creating a preference in favor of one creditor was not illegal.^[4] Rejecting the unsecured creditors argument, the Supreme Court recognized that an assignment for the benefit of creditors created a trust. The court explained: An insolvent debtor may lawfully pay one or more of his creditors to the exclusion of others by a direct transfer. [Citation.] We can see no reason why he may not do the same thing by way of a transfer in trust where there is no basis for contending that the transfer is in fraud of creditors. (Id. at p. 300, italics added.)

Later in the opinion, the Bumb court rejected the unsecured creditors assertion that the assignment was void because the assignee, Bumb, had materially altered the terms of the written assignment regarding his compensation. In rejecting this argument, the Bumb court again recognized the analogy between an assignee for the benefit of creditors and a trustee, stating: The assignee for the benefit of creditors, like a trustee, holds a bare legal title in trust for the beneficiaries. Accordingly, his alteration of the instrument . . . should not deprive the partnership creditors of their rights under the assignment. (Bumb v. Bennett, supra, 51 Cal.2d at p. 304, italics added.)

In Credit Managers Assn. v. National Independent Business Alliance, supra, 162 Cal.App.3d 1166, the plaintiff, Credit Managers Association, an assignee for the benefit of creditors, filed a lawsuit against one of the assignors creditors. The creditor filed a cross-complaint against Credit Managers Association and against the assignor. Without notice to the assignee, Credit Managers Association, the creditor obtained a default judgment against the assignor. (Id. at pp. 1168-1169.)

The court held that the assignee, Credit Managers Association, was empowered to seek to set aside the default judgment against the assignor. (Credit Managers Assn. v. National Independent Business Alliance, supra, 162 Cal.App.3d at p. 1173.) The court explained that as an assignee for the benefit of creditors, Credit Managers Association, was a trustee of the creditors and was charged with a duty to protect the assignors property. The court explained:   It is the duty of the assignee in the performance of this trust to defend this property against all unjust adverse claims. . . . In the present case, the right of the assignee to defend against a foreclosure of the mortgage is not based upon a transfer of the rights and equities of the creditors, but upon the fact that the title of the property had been vested in him in trust for the creditors, and that having accepted the trust, he is charged with the duty of protecting the property against all fraudulent claims. . . . [Citation.] (Id. at pp. 1170-1171, italics added and original italics omitted.) Later in the opinion, the court reiterated: Plaintiff-assignee was the legal representative of the assignor and as trustee for all the creditors, was charged with the duty to defend the property[.] (Id. at p. 1172, italics added.)

In Mechanics Bank v. Rosenberg (1962) 201 Cal.App.2d 419, the court found an assignment to an attorney for the benefit of creditors was valid. The court explained that the attorney acted as a trustee: Looking at the transaction as it was regarded by [the attorney], we find that he acted as a trustee. He deposited the money in the trustee account . . . and he testified that he held the funds awaiting either an agreement of the creditors or a decree of the court. These actions comport with the duties of a trustee for the benefit of creditors[.] (Id. at p. 424.)

In McKoin v. Rosefelt (1944) 66 Cal.App.2d 757, the court addressed whether an assignee for the benefit of creditors or a secured creditor had the right to title in certain real property. The court acknowledged that an assignee for the benefit of creditors was a trustee of an express trust. (Id. at pp. 768-769.)

In McKoin, two individuals, Byrd and Rosefelt, established a partnership to build and sell houses. With respect to one property and without the knowledge of Byrd, Rosefelt executed a second deed of trust in favor of defendant Dion to secure a promissory note in the amount of $6,500. (McKoin v. Rosefelt, supra, 66 Cal.App.2d at pp. 761-762.) At the time, the partnership was insolvent. The following year, Byrd made an assignment for the benefit of creditors, naming McKoin as the assignee. The court concluded that Rosefelt had no authority to encumber the property, which was therefore an asset of the partnership.

On appeal, defendant Dion asserted that the trial court erred by quieting title in favor of the assignee for the benefit of creditors. Defendant Dion asserted, among other grounds, that McKoin was not the proper party plaintiff because he claimed to be a trustee, but did not file suit in a capacity of a trustee. (McKoin v. Rosefelt, supra, 66 Cal.App.2d at p. 768.) The Court of Appeal rejected this contention, acknowledging that McKoin, as assignee for the benefit of creditors, was a trustee for the benefit of creditors, and therefore the real party in interest. (Id. at p. 768, italics added.)

We conclude that as an assignee for the benefit of creditors, Sherwood was a trustee of an express trust. Thus, pursuant to Code of Civil Procedure section 1026, subdivision (b), Sherwood cannot be personally liable for attorney fees and costs unless it engaged in bad faith or mismanagement.

The record shows that Sherwood did not engage in bad faith or mismanagement. To keep costs and fees down, Sherwood tried this case on stipulated facts. In addition, Sherwood originally prevailed in the trial court, which entered judgment in favor of Sherwood that it was entitled to a refund of tenants substantial security deposit. The reversal of that judgment in Sherwood I does not show that Sherwood engaged in bad faith or mismanagement.

DISPOSITION

The order and judgment awarding EOP attorney fees and costs personally against Sherwood is reversed. The case is remanded to the trial court with instructions to enter a new and different judgment showing that Sherwood is not personally liable for costs and attorney fees awarded to EOP.

Plaintiff Sherwood is awarded costs on appeal pursuant to rule 8.276 of the California Rules of Court. Sherwoods motion for attorney fees related to this appeal is otherwise denied.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

KITCHING, J.

We concur:

KLEIN, P. J.

ALDRICH, J.

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^[1] In Credit Managers Assn. v. National Independent Business Alliance, supra, 162 Cal.App.3d 1166, the court explained that in 1980, the Legislature repealed the statutory method of making an assignment for the benefit of creditors. (Id. at p. 1170.) The Legislature, however, did not repeal all of the code sections related to general assignments for the benefit of creditors. For example, enacted in 1977, Code of Civil Procedure section 493.010 defines a  general assignment for the benefit of creditors.  EOP does not dispute that the assignment to Sherwood qualified as an assignee for the benefit of creditors under section 493.010.

^[2] The Restatement Third of Trusts provides the following general definition: A trust . . . is a fiduciary relationship with respect to property, arising from a manifestation of intention to create that relationship and subjecting the person who holds title to the property to duties to deal with it for the benefit of charity or for one or more persons, at least one of whom is not the sole trustee. (Rest.3d Trusts, 2, p. 17.)

^[3] As to the transfer of all of tenants property to Sherwood, the general assignment additionally provided: [Tenant] agrees to execute such additional documents as shall be necessary to accomplish the purposes of this Assignment.

^[4] In 1977, the Legislature enacted Code of Civil Procedure section 493.010, subdivision (c), prohibiting assignments for the benefit of creditors which created a preference for one creditor over another.