Phoenix American v. Lease Management Associates

Filed 9/9/08 Phoenix American v. Lease Management Associates CA1/2

NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.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

FIRST APPELLATE DISTRICT

DIVISION TWO

This appeal follows our remand after reversing a summary judgment in favor of Phoenix American Incorporated and other defendants on W. Corey Wests claims of fraud and successor-in-interest liability. After trial, the court rejected the claim of successor-in-interest liability and found Wests 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 Constantins 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 RPIs business was offering back office services, including payroll, accounting, financial reporting and human resources, over the internet to dotcom and start up companies. RPIs 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 RPIs stock.

In June 2000, LMA loaned RPI $3 million, secured by virtually all RPIs 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 directorsWest, Roger Smith, Glenn McLaughlin and Jim Barringtonvoted 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 years 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 RPIs 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 RPIs 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 RPIs 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 RPIs 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 RPIs assets to PAI was intended to hinder, delay or defraud RPCs nonsecured creditors. The trial court resolved Wests claims against him by summary adjudication and summary judgment. We reversed the summary judgment on Wests 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, Wests fraudulent-transfer claim was set for jury trial on November 7, 2005. PAI filed numerous motions, including a motion to sever, arguing that Wests alter ego and successor-liability claims were equitable in nature and should be tried before the fraudulent-transfer claim because a finding in PAIs 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 Wests favor or if it found in PAIs favor and also found there was adequate consideration for the transfer of RPCs assets.

After a continuance, on March 21, 2006, PAI filed additional motions, including a motion to strike Wests 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 PAIs 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 courts 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, PAIs 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, RPCs vice president and chief financial officer, were unsuccessful in finding sources of financing. With respect to the retention agreements, Constantin explained that he felt if the management team was able to save the company, the money would be there to pay the severance, while if the company was not successful, the money wouldnt be there and you cant get blood out of a stone.

In September or October 2000, Constantin suggested to West the possibility that Constantin help the company by buying some of its assets. Constantin testified that he dropped this idea because West thought it would be inappropriate and might be viewed as self-dealing.

By November 2000, RPIs financial condition of the company was dire. NASDAQ had indicated the company was going to be delisted and its share price had fallen from $8 per share to below $1 per share.

Constantin testified that he thought of the concept of consensual foreclosure as an alternative to bankruptcy, which he believed would be bad for the company, the employees, and the customers. When he first thought of this plan, he had no idea RPI was in default on the LMA loan; he conceived of the idea, then discovered RPI was in fact behind in its payments. According to Constantin, on November 28, 2000, RPI had $800,000 in the bank and, so, could have made its November 1st loan payment. At this time, RPC and RPI owed about $5 million to other unsecured creditors, who did not receive anything.

Greg Thornton and Dave Brunton, who had been financial officers at RPC and RPI, testified that the monthly payments on the first LMA loan would have been regularly scheduled payments, probably handled electronically. Thornton, who was the chief financial officer at the relevant time, testified that some intervention in the normal process would have to have happened for the November payment on the LMA loan not to have been made. Prior to his termination on November 21, 2000, Thornton did not know of any nonpayment or default on the LMA loan. Thornton testified he would have been very sensitive to a default because that would have been a highly disclosable event.

Although the Asset Purchase Agreement recited that the value of the assets was less than the debt to LMA, the assets had not been appraised: Independent directors McLaughlin and Barrington testified that it would not have been prudent to have the assets appraised because the company was failing, West had been unable to find buyers for the assets, the proprietary software had limited resale value, and an appraisal would have delayed the process of winding down the company.^[7] In order to ensure fairness in the transaction, at the insistence of the independent directors, the purchase agreement also provided that if the transferred assets were sold within a two-year period for an amount exceeding the amount then owed to LMA, excess sale proceeds would be remitted to RPI.

The Form 8-K that RPC filed with the Securities and Exchange Commission on November 30, 2000, reported that RPC had announced it agreed to sell substantially all of its assets to Phoenix American Incorporated (PAI), an RPC affiliate, as part of an orderly winding down of the companys operations. The Form 8-K further stated that PAI would assume RPCs obligations to its secured creditors and no recovery to general unsecured creditors or shareholders was anticipated. Constantin testified that the transaction was reported as a sale of assets rather than a default and foreclosure because this was the way the attorneys drafted the document. The loan default was not reported in the Securities and Exchange Commission Form 10-Q either: Constantin felt the defaults were immaterial because the Form 10-Q indicated the company would likely go out of business and its stock had already been delisted from NASDAQ.

After the asset transfer, according to Constantin, PAI did not engage in the same type of business as RPI had. PAI was focused on a different market, the narrow niche of syndicators, and was not looking to deliver products over the internet. Two wholly owned subsidiaries of PAI, were formed: Phoenix American Financial Services, Inc. (Phoenix Financial) was formed to house the STAR system, and Phoenix American Sales Focus Solutions, Inc. (Phoenix Sales) was formed for the MARS system. The subsidiaries did not make money from the software but rather lost $2.8 million between November 2000 and November 2001, and about $3.35 million over the next year. Constantin acknowledged that a number of companies that had been clients of RPI/RPC remained clients of Phoenix Financial or Phoenix Sales, their contracts having been assigned after November 28, 2000.

Neal Divver, had worked for the Phoenix companies since 1988, had been chief operating officer of RPI and RPC from late November 2000 until March 2001, and then became the chief operating officer of Phoenix Financial, which took over the STAR system, and, for one year, the chief financial officer of Phoenix Sales, which took over MARS. Divver testified that Phoenix Financial did not make any money in 2001 or 2002, and Phoenix Sales did not make any money in 2001. David Brunton, who had been chief financial officer and head of operations at RPI and RPC, however, testified that in 2001, about a year after he had left the company, he spoke with Divver and learned that under the current organization . . . STAR was profitable. . . .

West testified that he understood his retention agreement to mean that in the event RPCs business or assets were sold or transferred, the successor company would be obligated to pay his severance benefits. When he discussed the agreement with Constantin, West was aware of Constantins position as controlling shareholder of RPC and his interest in LMA. He never asked Constantin to personally guarantee the retention agreement.

West testified that when he voted in favor of the LMA loan, he understood that in the event of a default LMA would look to RPCs assets to secure repayment. West agreed that the financial situation of RPC was challenging in the month or two before his termination. He testified that he and Greg Thornton discussed several options with Constantin, including bankruptcy, going private and cutting costs in various ways. When Constantin suggested transferring RPCs assets to one of his companies in exchange for forgiveness of the LMA debt, West said he did not think it was a good idea to have a public company transfer its assets to a private company in exchange for debt forgiveness, but said he would talk to legal counsel about it. After doing so, West told Constantin he thought the proposed transaction would amount to insider dealing and Constantin said he had talked to an attorney and gotten the same opinion. West testified that he did not believe the loan from LMA to RPI or granting LMA the security interest in RPCs assets constituted self-dealing. He believed the LMA loan in August 2000 was fair because it was an arms length negotiation . . . that we presented to the board to evaluate. In August, according to West, the value of the assets was quite a bit higher than the debt.

After his conversation with Constantin, in early November, West learned that Neil Divver had been calling people on Wests team, saying Constantin had directed him to collect information and put a plan together. West called Constantin to ask what was happening and Constantin did not return his calls.

From November 1 through his termination, including when he signed the November 14 Form 10-Q, West had no information that the LMA loans were in default. At the time of his termination, West understood there to be between one and two million dollars in RPCs bank account. According to West, in October and November, the companys net burn ratethe amount it was spending over its revenueswas slightly over one million dollars. West acknowledged on cross-examination that in a January 2002 deposition he stated that it was possible the amount owed to LMA was more than the value of the collateral that secured repayment of that amount. He also acknowledged having stated in his deposition that he understood employees did not have a superior right to assets over a secured creditor. West agreed that on the day he was laid off, he did not believe there had been a change in control of the company.

Daniel Monberg, managing partner of asset management firm GGP Global, with 20 years experience appraising high tech assets, testified for PAI as an expert on the value of the collateral transferred in the case. Monberg testified that in the last quarter of 2000, the dot-com burst and the subsequent failure of hundreds and hundreds of companies flooded the marketplace with high tech assets, to the extent that  new in the box thousand dollar computers were selling for $200. Because of the volatile conditions in 2000, Monbergs appraisal was based on the market value of the assets. He did not value soft costs such as maintenance agreements for hardware, freight, sales tax, and software, items which the American Society of Appraisers described as non-recoverable costs that should not be included in the value. Monberg explained that software manufacturers imposed very restrictive licensing that generally precluded reselling the software, so it would not be valued in the secondary market. Monberg concluded the fair market value of the transferred assets was $907,180. The orderly liquidation value (liquidation over a reasonable time period, usually six months) of the equipment was $597,325, and the forced liquidation value (a forced sale within 45 days) was $433,070.

Brian Napper, a senior managing director at F.T.I. Consulting, Inc., whose career had focused on valuation of intellectual property, testified for PAI as an expert on valuation of intangible assets. Napper concluded that, as of November 28, 2000, the fair market value of the MARS software had a range of $0 to $230,000, and the fair market value of the STAR software was $549,000. Napper considered several approaches to valuing these assets and concluded the most appropriate was the income approach, which looks at historical and future forecasts for revenue and costs, discounted to present value. Napper noted that he learned from questioning PAI personnel that the MARS product currently being offered was the result of a significant amount of investment and research and development as compared to what it was in 2000. In reviewing the historical performance of the systems, Napper reviewed RPIs Securities and Exchange Commission filings, which showed a smaller loss in 1997, growing to a loss of a little over $20 million in the third quarter of 2000. For the quarter ending September 30, 2000, STAR resulted in about a $3 million operating loss. Neither STAR nor MARS made any money from December 1998 through the end of September 2000, except for the quarter ending June 1999, when MARS revenue exceeded operating expenses. The Securities and Exchange Commission filings demonstrated that the company did not consider MARS a core offering and was not continuing to invest in it. RPI never made any money. STAR was a DOS-based system, not Windows based, and used a comparatively uncommon programming language; it was not as user-friendly as other software available in 2000 and it did not allow use of a mouse. Napper was aware that a company, PFPC Worldwide, had expressed interest in purchasing the MARS system but did not consider this as a good indicator of value because the transaction was not consummated, the company would have acquired assets in addition to the software rights, and the broker had contacted some 40 companies but found only one with any interest in MARS.

Wests expert on valuations, Marc Margulis, did not do a formal appraisal but reviewed Monbergs and Nappers work, performed a number of analyses, and concluded that the value of the RPI/RPC assets exceeded the amount of the forgiven LMA debt. Margulis criticized various aspects of Monbergs and Nappers analyses. Margulis viewed RPC and RPI as late development stage or early grow stage companies, a stage in the life cycle of companies in which costs are excessive relative to revenue; eventually, if a company succeeds, the revenue increases to make the company profitable.

The court trial concluded on April 17, and the court announced its tentative decision finding no successor liability.^[8]

The parties subsequently filed competing proposed statements of decision. PAIs included a section stating the trial courts determination that PAI was not the successor to RPC rendered Wests claim of fraudulent transfer moot, and the courts factual findings were binding on the parties, obviating the need for a trial on Wests claim. Wests opposition maintained that this argument was an improper and untimely motion to reconsider the courts prior ruling that West was entitled to a jury trial. At the May 25 hearing on the proposed statements of decision, after further argument on this issue, the court stated it was not ready to decide whether to proceed with the jury trial, was not going to continue the trial date, and would entertain additional input the parties chose to submit.

PAI filed an additional brief on the preclusive effect of the courts findings the next day, and West then filed a reply brief. The court, by email, advised the parties the trial would not proceed on June 5, requested briefing on additional issues, and set a hearing for June 5. After the hearing, the court requested further briefing, which the parties submitted.

On July 12, the court filed its statement of decision, finding that there was no successor liability and that collateral estoppel applied, thereby obviating the need for trial on the fraudulent-transfer claim. The court held that inadequate consideration was a prerequisite to both the merger and continuation exceptions to the rule of no successor liability, that the consideration did not necessarily have to be cash, and that RPC received adequate consideration because the value of the assets transferred did not exceed the amount of the loan being forgiven. With respect to fraud, the court found that the transfer of assets was driven by economic and market realities: RPC was in dire financial straits and was unsuccessful in seeking sources of funding, and the RPI assets were transferred to wind down the companys operations, avoid the cost of a bankruptcy proceeding, and allow PAI to continue the MARS and STAR business and enable LMA to recover its funds. The court noted it was common for a secured creditor to take control of collateral if the debtor could realize more value this way than through a foreclosure, and for a debtor to cooperate if the value of the collateral is less than the debt. Thus, despite its effect of leaving unsecured creditors unpaid, the court found the purpose of the transaction was not to avoid such payment.

In finding Wests cross-complaint for fraudulent transfer barred by collateral estoppel, the court explained that in the context of determining PAI was not the successor in interest to RPC, it had reached and resolved the question whether there was a fraudulent transfer of assets, concluding that the debt exceeded the value of the assets transferred, the transfer was not undertaken in order to defraud creditors or preclude West from recovering his claim against RPC, and the transfer was the exercise of a secured creditors rights, which could not be considered fraudulent. The court found this issue was identical to that raised in Wests fraud claim, the declaratory judgment was a final and binding judgment, West was a party to the declaratory relief action, and Constantin and LMA were in privity with PAI and had a proprietary interest in the court finding PAI was not the successor in interest to RPC. It further found West was represented by counsel and was not deprived of a full and fair opportunity to litigate the issues in the declaratory relief action. Finally, the court held application of collateral estoppel would decrease repetitive litigation; prevent the possibility of an inconsistent judgment; and promote public policy by affording PAI repose from vexatious litigation. Additionally, the court found the alter ego issues raised in Wests cross-complaint were moot.

Judgment was entered in favor of PAI on July 12, 2006. The trial court found that PAI was not the successor in interest to RPC, was not a party to the retention agreements and was not obligated to submit to binding arbitration under those agreements, and that West would recover nothing on his complaint.

West filed a timely notice of appeal on September 8, 2006.

DISCUSSION

I.

West has chosen not to challenge the trial courts factual findings but only its legal determinations. Accordingly, our review is de novo. (Ghirardo v. Antonioli (1994) 8 Cal.4th 791, 799 [where decisive facts undisputed, question of law subject to independent review]; Roos v. Red (2005) 130 Cal.App.4th 870, 878 [application of collateral estoppel reviewed de novo].) To the extent review of disputed factual issues comes into play, of course, we apply the substantial evidence test, affirming if there is   substantial evidence, contradicted or uncontradicted, which will support the determination.   (Piedra v. Dugan (2004) 123 Cal.App.4th 1483, 1489.)

II.

West challenges the trial courts determination that PAI was not liable to him as successor to RPC. As a general rule, a corporation purchasing the principal assets of another corporation does not assume the sellers liabilities unless (1) there is an express or implied agreement of assumption, (2) the transaction amounts to a consolidation or merger of the two corporations, (3) the purchasing corporation is a mere continuation of the seller, or (4) the transfer of assets to the purchaser is for the fraudulent purpose of escaping liability for the sellers debts. (See Ortiz v. South Bend Lathe (1975) 46 Cal.App.3d 842, 846; Schwartz v. McGraw-Edison Co. (1971) 14 Cal.App.3d 767, 780-781; Pierce v. Riverside Mtg. Securities Co. (1938) 25 Cal.App.2d 248, 255; Golden State Bottling Co. v. NLRB (1973) 414 U.S. 168, 182, fn. 5; Kloberdanz v. Joy Manufacturing Company (D.Colo. 1968) 288 F.Supp. 817, 820 (applying California law); 15 Fletcher, Cyclopedia Corporations,  7122.) (Ray v. Alad Corp. (1977) 19 Cal.3d 22, 28.)

The trial court found West failed to establish successor liability under any of these four alternative tests. On this appeal, West challenges only the courts finding under the third test that PAI was not a mere continuation of RPC. California decisions holding that a corporation acquiring the assets of another corporation is the latters mere continuation and therefore liable for its debts have imposed such liability only upon a showing of one or both of the following factual elements: (1) no adequate consideration was given for the predecessor corporations assets and made available for meeting the claims of its unsecured creditors; (2) one or more persons were officers, directors, or stockholders of both corporations. (See Stanford Hotel Co. v. M. Schwind Co. (1919) 180 Cal. 348, 354; Higgins v. Cal. Petroleum etc. Co. (1898) 122 Cal. 373; Economy Refining & Service Co. v. Royal Nat. Bank of New York (1971) 20 Cal.App.3d 434; Blank v. Olcovich Shoe Corp. (1937) 20 Cal.App.2d 456; cf. Malone v. Red Top Cab Co. [(1936)] 16 Cal.App.2d 268.) (Ray v. Alad Corp., supra, 19 Cal.3d at p. 29.)

In Franklin v. USX Corp. (2001) 87 Cal.App.4th 615, 625 (Franklin), the court viewed the mere continuation theory of successor liability as merely a subset of the consolidation or merger theory, stating: The crucial factor in determining whether a corporate acquisition constitutes either a de facto merger or a mere continuation is the same: whether adequate cash consideration was paid for the predecessor corporations assets. As described in Ray v. Alad Corp., supra, 19 Cal.3d at pages 28-29, the consolidation or merger theory has been invoked where one corporation takes all of anothers assets without providing any consideration that could be made available to meet claims of the others creditors (Malone v. Red Top Cab Co. (1936) 16 Cal.App.2d 268, 272-274) or where the consideration consists wholly of shares of the purchasers stock which are promptly distributed to the sellers shareholders in conjunction with the sellers liquidation (Shannon v. Samuel Langston Company (W.D.Mich. 1974) 379 F.Supp. 797, 801.)

West argues that the trial court ignored the requirement stated in Franklin that to avoid successor liability under the mere continuation theory, the acquiring corporation must make sufficient consideration available to the former corporations creditors to provide them a viable remedy. He points out that Franklinrepeatedly referred to cash consideration in finding no successor liability: No California case we have found has imposed successor liability for personal injuries on a corporation that paid adequate cash consideration for the predecessors assets. . . . We . . . perceive a very sound reason for the rule of nonliability in adequate cash sales: predictability. . . . [A] sale for adequate cash consideration ensures that at the time of sale there are adequate means to satisfy any claims made against the predecessor corporation. (Franklin, supra, 87 Cal.App.4th at p. 625.)

Despite his focus on the word cash, West agrees that the critical issue is not cash per se but consideration made available to creditors. Franklin itself involved a cash sale: The assets of the corporation alleged to be responsible for personal injuries sustained by the plaintiff sold its assets to Consolidated Steel Corporation of California (Con Cal) for over $6.2 million in cash; this corporation contracted to sell certain assets to Columbia Steel Company, a division of U.S. Steel, which later assigned its purchase rights to a newly formed subsidiary of U.S. Steel, Consolidated Western Corporation of Delaware (Con Del). Con Cal sold the assets to Con Del for over $17 million in consideration, almost $8.3 million of which was cash. Con Del later merged into U.S. Steel, which changed its name to USX Corporation, the defendant named in the suit; Con Cal changed its name, then dissolved several years after the sale of assets. (Franklin, supra, 87 Cal.App.4th at pp. 619-620.) Despite the fact that the president and chairman of the board of Con Cal at the time of the sale continued as president of Con Del and Columbia and chairman of Columbias board, Franklin found USX was not liable as successor to the original corporation because there was no claim the $17 million was inadequate consideration for the business assets transferred or that there were insufficient assets available at the time of the predecessors dissolution to meet the claims of its creditors. (Id. at p. 627, italics omitted.)

As the trial court recognized, the fact that Franklin(and other cases) referred to cash does not mean cash is invariably required to avoid successor liability. Franklin, supra, 87 Cal.App.4th at page 626, focused on the type and adequacy of the consideration: As our Supreme Court noted in Ray v. Alad, the de facto merger exception to the general rule of nonliability has been invoked where one corporation takes all of anothers assets without providing any consideration that could be made available to meet claims of the others creditors . . . . (Ray v. Alad [Corp.], supra, 19 Cal.3d at p. 28, italics added [in Franklin].) And, in Maloney v. American Pharmaceutical Co. (1988) 207 Cal.App.3d 282 (Maloney), the court held, in the context of the mere continuation exception to the rule of successor nonliability, that  [b]efore one corporation can be said to be a mere continuation or reincarnation of another, it is required that there be insufficient consideration running from the new company to the old.  (Id. at p. 287, quoting Ortiz v. South Bend Lathe, supra, 46 Cal.App.3d at p. 847.)

In the present case, the consideration for RPCs transfer of assets to PAI was forgiveness of LMAs loan to RPC. As of November 28, 2000, the loan amount was approximately $6,875,000. After hearing testimony from two experts presented by PAI and one expert presented by West, the trial court concluded the fair market value of RPCs assets at that time was approximately $1,686,000. Since the value of the assets was less than the consideration received by RPC, the court concluded successor liability had not been established. The trial court made an alternative finding that if cash consideration was required, the third LMA loan, which neither Constantin nor LMA expected to be repaid, constituted a transfer of cash to RPC.

West, on this appeal, expressly refrains from challenging the trial courts factual findings as to the value of the RPC assets, although he clearly disagrees with them. Rather, he challenges the legal conclusion that adequate consideration was given for the RPC assets, arguing that no consideration was given because forgiveness of RPCs debt did not provide assets from which West and other creditors could satisfy their claims. In his reply brief, West argues that the third LMA loan did not provide adequate consideration because loans made and controlled by LMA on behalf of PAI do not constitute adequate consideration made available for the benefit of creditors  as required by McClellan v. Northridge Park Townhome Owners Assn. (2001) 89 Cal.App.4th 746 (McClellan) and Franklin, supra, 87 Cal.App.4th 615. Wests fundamental argument is that neither forgiveness of the original loans nor payment of the third loan made cash or other consideration available to West or other RPC creditors.

As the trial court noted, none of the cases discussing adequacy of consideration involve a secured creditor extinguishing a debt as consideration for the transfer of the secured assets or hold that such loan forgiveness cannot satisfy the requirement of adequate consideration. Franklin, as just discussed, involved a transfer of assets for cash and found no successor liability. In McClellan, a contractor obtained an arbitration award against a homeowners association that had failed to pay him for work he performed under contract. The board of the homeowners association caused the filing of articles of incorporation for a new corporation, which became the homeowners association for the condominium complex. McClellan found the new corporation to be a mere continuation and hence liable for the acts of its predecessor, following the principle that  [c]orporations cannot escape liability by a mere change of name or a shift of assets when and where it is shown that the new corporation is, in reality, but a continuation of the old. Especially is this well settled when actual fraud or the rights of creditors are involved, under which circumstances the courts uniformly hold the new corporation liable for the debts of the former corporation. [Citations.]  (McClellan, supra, 89 Cal.App.4th at p. 754, quoting Blank v. Olcovich Shoe Corp., supra, 20 Cal.App.2d at p. 461, italics added by Blank court.)

Several of the other cases discussed by the parties involved transfers of assets for cash consideration. (E.g., Ray v. Alad Corp., supra, 19 Cal.3d 22, 28-30 [no successor liability under merger or continuation theories because adequate cash consideration^[9]]; Maloney, supra, 207 Cal.App.3d at pp. 285-286 [transfer of 10 percent of corporate assets, plus name, goodwill and trademarks to new corporation for cash; no claim of inadequate consideration; no successor liability]; Ortiz v. South Bend Lathe, supra, 46 Cal.App.3d 842, 846 [adequate cash consideration; no successor liability]; Katzirs Floors and Home Design v. M-MLS.COM (9th Cir 2004) 394 F.3d 1143, 1147 [assets sold by receiver to separate corporation for cash exceeding appraised value; no successor liability].)

Others were products liability cases decided under a test developed by the court in Ray v. Alad Corp. uniquely for successor liability in strict products liability cases, based on the purpose of the rule of strict liability  . . . to insure that the costs of injuries resulting from defective products are borne by the manufacturers that put such products on the market rather than by the injured persons who are powerless to protect themselves.  (Ray v. Alad Corp., supra, 19 Cal.3d at p. 30, quoting Greenman v. Yuba Power Products, Inc. (1963) 59 Cal.2d 57, 63.) Under this  product line successor rule (Fisher v. Allis-Chalmers Corp. Product Liability Trust (2002)95 Cal.App.4th 1182, 1188), [j]ustification for imposing strict liability upon a successor to a manufacturer . . . rests upon (1) the virtual destruction of the plaintiffs remedies against the original manufacturer caused by the successors acquisition of the business, (2) the successors ability to assume the original manufacturers risk-spreading role, and (3) the fairness of requiring the successor to assume a responsibility for defective products that was a burden necessarily attached to the original manufacturers good will being enjoyed by the successor in the continued operation of the business. (Ray v. Alad Corp., supra, 19 Cal.3d at p. 31.) As these justifications do not apply to Wests contractual claim, the relevance of these product liability cases to the present case is primarily as further illustration that inadequate consideration is a factor in finding successor liability. (E.g., Chaknova v. Wilbur-Ellis Co. (1999) 69 Cal.App.4th 962, 971 [assets purchased for cash; original corporation continued to exist for 15 months, then dissolved by sole shareholder with no connection to purchasing corporation; no successor liability]; Rosales v. Thermex-Thermatron, Inc. (1998) 67 Cal.App.4th 187, 192-193 [purchase price for assets of original corporation paid to creditor of that corporation, which itself had neither assets nor bank account; same business continued, successor liability found].^[10]

The only case of which we are aware involving a loan situation at all similar to that in the present case is Kaminski v. Western MacArthur Co. (1985) 175 Cal.App.3d 445 (Kaminski). Kaminski was a products liability action against Western MacArthur, which was held to be the corporate successor to Western Asbestos Company (Western), the supplier of the asbestos responsible for the plaintiffs injuries. In need of operating capital, Westerns shareholder/directors offered to sell the company to the MacArthur Company (MacArthur). MacArthur agreed to assume control of Western under a memorandum of agreement for a fee of 50 percent of Westerns net profits. MacArthur also agreed to loan Western $300,000 as operating capital, with loans to Western from its original directors subordinated to this loan. MacArthur received an option to purchase Westerns ownership stock, which was placed in escrow, for $300,000. When it was determined Western could not continue operations, MacArthur was relieved of its management contract in exchange for waiver of its rights to subordinate the loans of Westerns directors, and MacArthur formed a new corporation, Western MacArthur Company, to distribute asbestos. MacArthur was given the right to purchase at least $200,000 of products in Westerns inventory and at least $100,000 other noncash assets, and took over Westerns outstanding contracts. The new company, Western MacArthur, continued the same business as Westerns with most of the same employees. (Kaminski, at pp. 451-453.)

Kaminski found successor liability under Ray v. Alad Corp.s product line successor test. The loan from MacArthur to Western was relevant to the courts analysis of the first prong of this test, the  virtual destruction of the plaintiffs remedies against the original manufacturer caused by the successors acquisition of the business.  (Kaminski, supra, 175 Cal.App.3d at p. 454, quoting Ray v. Alad Corp., supra, 19 Cal.3d at p. 31.) Kaminski held that MacArthur caused Westerns dissolution, thereby destroying the plaintiffs remedies against Western, because MacArthur had financial and managerial control over Western. Since Western was indebted to MacArthur in the exact amount of Westerns escrowed stock, and MacArthur had the right to subordinate other loans, it could have forced Western into bankruptcy; MacArthur dictated Westerns decision making, including the decision to dissolve; and MacArthur was able to use its position to assume Westerns assets and continue its business.

PAI makes no mention of Kaminski in its briefs. As West asserts, the transaction by which MacArthur assumed Westerns assets and business could be viewed as a consensual foreclosure similar to the one with which we are faced. The policy considerations at issue in Kaminski, however, are very different than those involved here. Kaminski, as a products liability case, applied a test aimed at ensuring compensation for an injured third party. The present case, by contrast, involves no injury to a member of the public but only the contractual obligations between the parties.

Wests argument that forgiveness of the LMA loan could not constitute adequate consideration for the transfer of assets falters, as the trial court found, on the fact that LMA was a secured creditor. As the trial court noted, West voted in favor of obtaining the loans from LMA that resulted in LMA having a lien on RPIs assets. West acknowledged that he understood the loans and lien gave LMA a right to look to RPCs assets to secure repayment, and that he did not view the loans or lien as self-dealing. The trial court, citing Lyons v. Security Pacific Nat. Bank (1995) 40 Cal.App.4th 1001 (Lyons), held that the exercise by a secured creditor of its legal rights cannot be considered to be fraudulent.

In Lyons, Lyons fully paid a judgment obtained by the bank on a promissory note for which he and two business partners, the Yuroseks, were jointly and individually liable, then obtained a judgment for contribution from the Yuroseks. Meanwhile, the Yuroseks had negotiated a plan with the bank for payment on a series of loans upon which they had defaulted, as part of which the bank was given a security interest in various of the Yuroseks assets. When Lyons executed on the contribution judgment, seizing certain of the Yuroseks property, the bank obtained a judgment determining that its liens were superior to Lyonss. The Yuroseks sold their business, settled with the bank and satisfied Lyonss lien. Lyons then sued the Yuroseks and the bank, alleging a conspiracy to commit a fraudulent conveyance pursuant to which the bank sought to collect on the joint debt from Lyons alone and cooperated with the Yuroseks to hinder, delay and prevent Lyons from obtaining and collecting on a judgment of contribution.

Lyons found Lyonss argument that the bank had acted illegally had been raised and rejected in the arbitration resulting in the banks judgment on the promissory note, and the doctrine of res judicata precluded Lyons from relitigating either this issue or the subsequent judicial determination that the banks liens were superior to Lyonss. (Lyons, supra, 40 Cal.App.4th at pp. 1015-1017.) The court then applied the established rule that an insolvent or failing debtor can prefer one creditor over another. (Wyzard v. Goller [(1994)] 23 Cal.App.4th [1183] 1188, 1190 [(Wyzard)].) Civil Code section 3432, enacted in 1872, provides, A debtor may pay one creditor in preference to another, or may give to one creditor security for the payment of his demand in preference to another. This is because  . . . it is difficult to perceive how the payment of a debt which [is] justly owed, and which was past due, can be tortured into an act to hinder, delay, and defraud creditors[.] [Citation.] (Wyzard, supra, at p. 1188.) Therefore, a preferential transfer, made for proper consideration, although made with the recognition that the transfer will prevent another creditor from collecting on his debt, is not for that reason a transfer made to hinder, delay or defraud  that creditor. (Id. at p. 1191.) (Lyons, at pp. 1019-1020.)

West argues that Lyons has no applicability to this case because the lien that was enforced in Lyons had been judicially determined to be valid before it was exercised, stressing that the Lyons court recognized its conclusion applied only in the absence of fraud. We are not persuaded: While there had not been a previous determination of the validity of the lien, the trial court in the present case found it was valid. The court concluded that the transactions evidenced by the Letter Agreement and Asset Purchase Agreement were a function of the economic reality of the dotcom collapse in 2000 and the lack of sufficient funding to make the planned business of RPC a reality. In other words, the court found the transaction was not undertaken with the intent to defraud West, that is, with the purpose of escaping liability for RPCs debt to West. (Ray v. Alad Corp., supra, 19 Cal.3d at p. 28.)

West expressly states that he is not, for purposes of this appeal, challenging the trial courts conclusion that successor liability was not established under the fraud prong of the test or the trial courts factual findings underlying this conclusion. He takes this position because he believes fraudulent intent is a jury issue and did not need to be established in the successor liability case. We will consider below the propriety of the trial courts decision to give collateral estoppel effect to its determinations on the fraud issue. For present purposes, the effect of Wests decision not to challenge the trial courts factual findings is that we accept its conclusions that the transfer of assets was made for adequate consideration and without fraudulent intent.

As stated above, the trial court also found that the third LMA loan constituted a transfer of cash consideration to RPC. West challenges this finding on the basis that the loan was controlled by Constantin, PAI failed to offer documentary evidence to support the trial testimony that proceeds of this loan were used to pay employee severance, no explanation was offered as to why LMA would loan RPC money for severance payments when the asset purchase agreement excluded liability for RPC employee claims, and West was prevented from impeaching the testimony on this point by the trial courts deferral of ruling on Wests subpoenas.^[11] The trial court was well aware of Constantins role, as reflected in pretrial comments about the facts giving the appearance that all was not right with the transaction. (See infra, fn. 17, p. 34.) Nonetheless, the court concluded there was a sound business reason for the asset transfer. Having chosen not to challenge the trial courts factual findings, West cannot prevail on this point.

III.

West argues the trial court denied his due process rights by applying collateral estoppel to deny him a jury trial on his fraudulent transfer claim. He contends the fraud issue the court resolved in the context of determining the successor liability issue is not identical to that posed by the fraudulent transfer claim, he did not have a full and fair opportunity to litigate the fraud issue, and application of collateral estoppel is not fair in the circumstances of this case.

The doctrine of res judicata has two aspects. In its narrowest form, res judicata  precludes parties or their privies from relitigating a cause of action [finally resolved in a prior proceeding].  (Teitelbaum Furs, Inc. v. Dominion (1962) 58 Cal.2d 601, 604, quoting Bernhard v. Bank of America (1942) 19 Cal.2d 807, 810.) But res judicata also includes a broader principle, commonly termed collateral estoppel, under which an issue  necessarily decided in [prior] litigation  [may be] conclusively determined as [against] the parties [thereto] or their privies . . . in a subsequent lawsuit on a different cause of action.  (Teitelbaum Furs, supra, 58 Cal.2d at p. 604, italics added.) [] Thus, res judicata does not merely bar relitigation of identical claims or causes of action. Instead, in its collateral estoppel aspect, the doctrine may also preclude a party to prior litigation from redisputing issues therein decided against him, even when those issues bear on different claims raised in a later case. Moreover, because the estoppel need not be mutual, it is not necessary that the earlier and later proceedings involve the identical parties or their privies. Only the party against whom the doctrine is invoked must be bound by the prior proceeding. (Lucido v. Superior Court (1990) 51 Cal.3d 335, 341; Teitelbaum Furs, supra, 58 Cal.2d 601, 604; Bernhard, supra, 19 Cal.2d 807, 810-813.) (Vandenberg v. Superior Court (1999) 21 Cal.4th 815, 828.)

The requirements for application of collateral estoppel are as follows: First, the issue sought to be precluded from relitigation must be identical to that decided in a former proceeding. Second, this issue must have been actually litigated in the former proceeding. Third, it must have been necessarily decided in the former proceeding. Fourth, the decision in the former proceeding must be final and on the merits. Finally, the party against whom preclusion is sought must be the same as, or in privity with, the party to the former proceeding. ([People v.] Sims [(1982)] 32 Cal.3d 468, 484; People v. Taylor (1974) 12 Cal.3d 686, 691.) The party asserting collateral estoppel bears the burden of establishing these requirements. (See, e.g., Vella v. Hudgins (1977) 20 Cal.3d 251, 257.) (Lucido v. Superior Court, supra, 51 Cal.3d at p. 341.)

The trial court found that the issue raised by Wests fraudulent conveyance claim was identical to the issue it resolved in rejecting successor liability under the fraud exception: The court found there was no fraudulent transfer of assets because the debt forgiven exceeded the value of the transferred assets, the transfer was not undertaken for the purpose of defrauding creditors or precluding West from recovering on his claim against RPC, and the transfer was a valid exercise of a secured creditors rights.

As described above, the question the court resolved in the context of the successor liability issue was whether the transfer of assets to the purchaser [was] for the fraudulent purpose of escaping liability for the sellers debts. (Ray v. Alad Corp., supra, 19 Cal.3d at p. 28.) Wests cross-complaint for fraudulent conveyance alleged that the Asset Purchase Agreement was entered with intent to hinder, delay, or defraud the collection of Wests claims under the retention agreement. Civil Code section 3439.04, subdivision (a), provides that a transfer made or obligation incurred by a debtor is fraudulent as to a creditor . . . if the debtor made the transfer or incurred the obligation either [w]ith actual intent to hinder, delay, or defraud any creditor of the debtor or, under specified circumstances, [w]ithout receiving a reasonably equivalent value in exchange for the transfer or obligation.

West contends the trial courts determination that the transaction was not entered with intent to defraud him does not resolve the question whether it was entered with intent to hinder or delay his claim against RPC. As PAI points out, in his seventh affirmative defense to PAIs complaint for declaratory relief establishing it was not the successor to RPC, West alleged that PAI knowingly participated in the fraudulent transfer of assets from RPC and was aware that RPC intended this transfer to hinder, delay or defraud its nonsecured creditors, including West. Thus, the trial court necessarily resolved against West the claim that RPC and PAI intended to hinder, delay or defraud West. West offers no support for his contention that the definition of fraud in these two contexts differs. To the contrary, in discussing successor liability, the court in Strahm v. Fraser (1916) 32 Cal.App. 447, 448, noted: It is well settled that the identity of a corporation is not destroyed, nor are its legal obligations obliterated, by the mere fact of reincorporation under the same or a different name, and a transfer of the corporate assets from the old to the new corporation will, when warranted by the pleadings and proof, be considered as having been done to hinder, delay and defraud creditors of the old corporation.

As PAI points out, many cases hold that when a case includes both equitable and legal issues, the former properly may be tried first as they may obviate the need for trial of the legal issues. (Nwosu v. Uba (2004) 122 Cal.App.4th 1229; Golden West Baseball Co. v. City of Anaheim (1994) 25 Cal.App.4th 11, 50;Strauss v. Summerhays (1984) 157 Cal.App.3d 806, 813; Veale v. Piercy (1962) 206 Cal.App.2d 557, 562-563; Dills v. Delira Corp. (1956) 145 Cal.App.2d 124, 128-129.) As noted in Arntz Contracting Co. v. St. Paul Fire & Marine Ins. Co. (1996) 47 Cal.App.4th 464, 487, a case involving bifurcated trial of legal issues, [i]ssues adjudicated in earlier phases of a bifurcated trial are binding in later phases of that trial and need not be relitigated. (See Golden West Baseball Co. v. City of Anaheim, supra, 25 Cal.App.4th 11, 50 [bench resolution of bifurcated equitable issues eliminated need for a second phase jury trial on legal issues]; Estate of Kennedy (1982) 135 Cal.App.3d 676, 682-683] [bench resolution of bifurcated legal issues eliminated need for second phase jury trial on factual issues].) No other rule is possible, or bifurcation of trial issues would create duplication, thus subverting the procedures goal of efficiency. (Code Civ. Proc.,  598.)

West argues these cases are distinguishable because they involved plaintiffs raising both equitable and legal issues, whereas here, PAI raised equitable claims but West raised only legal ones. Wests view appears to be that binding effect can be given to findings on equitable issues in an early phase of trial only where the subsequent legal issues are raised by the same party. West offers no support for this distinction, nor any case in which equitable claims were tried before legal ones and factual findings from the first phase of trial were not given binding effect.