Filed 8/28/17 Airport Blvd. Realty v. HB&C Associates CA1/3
NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.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 THREE
| AIRPORT BOULEVARD REALTY, LLC, Plaintiff and Respondent, v. HB&C ASSOCIATES, LLC, Defendant and Appellant. |
A144963
(City & County of San Francisco Super. Ct. No. CPF14-513438)
|
A judgment debtor appeals from an order denying its motion to set aside a foreclosure sale of personal property to a judgment creditor. Notice of the sale was mailed late and to incorrect addresses, so that the sale occurred without the debtor’s knowledge. The judgment creditor contends the sale is absolute and may not be set aside despite the defects in notice. We conclude that a judgment debtor may set aside a sale to a judgment creditor “f the sale was improper because of irregularities in the proceedings” and that the irregularities in notice warrant relief here. (Code Civ. Proc., § 701.680, subd. (c)(1).) We shall reverse the order denying the motion to set aside the sale.
Statement of Facts and Procedural History
Airport Boulevard Realty LLC (ABR) is a limited liability company formed in 1995 to acquire and develop a parcel of land in Napa, California. A portion of the property was developed and, in the early 2000s, the original members of ABR sought new investors to help develop a hotel on the remaining portion of the property. One of the new investors was HB&C Associates, LLC (HBC), operated by John Challas. HBC agreed to make capital contributions of $750,000 toward the hotel project but, in 2007, refused to provide funding beyond $350,000. The shortfall was ultimately made up by other ABR members. Hotel construction began in 2008 and was completed in 2009.
In 2013, competing claims between ABR and HBC concerning the hotel project were submitted to arbitration. The arbitrator denied all claims brought by HBC and granted declaratory relief to ABR. The arbitrator concluded that HBC “owns only a 5.8275% economic interest in ABR” and has no membership right to vote or participate in management. The arbitrator found ABR to be the prevailing party and awarded it attorney fees and costs of $867,485,53. An order confirming the arbitration award and a final money judgment in the amount of the fees and cost award were entered in March 2014.
In enforcement proceedings, ABR propounded interrogatories to HBC asking it to identify its income and assets. HBC replied that it had no income and that its only assets were its membership interest in ABR and a lawsuit against ABR’s attorneys.
ABR applied for a charging order against HBC’s membership interest in ABR. (Code Civ. Proc., § 708.310; Corp. Code, § 17705.03.) “A charging order constitutes a lien on a judgment debtor’s transferable interest and requires the limited liability company to pay over to the person to which the charging order was issued any distribution that would otherwise be paid to the judgment debtor.” (Corp. Code, § 17705.03, subd. (a).) The order was granted in May 2014 and, soon after, ABR moved to foreclose on the charging order lien. ABR asserted that recovery under the lien would not satisfy the judgment within a reasonable time because there were no planned member distributions. ABR asked that HBC’s interest in the company be sold and the proceeds applied toward satisfaction of the judgment. In August 2014, the trial court foreclosed the charging order lien against HBC’s ownership interest in ABR and ordered the interest sold. HBC appealed from the foreclosure order but did not post an undertaking to stay the proceedings.[1] (Code Civ. Proc., § 917.2.)
ABR proceeded with a levy on HBC’s membership interest under a writ of execution. (Code Civ. Proc., § 699.510.) The clerk of the court issued a writ of execution on August 14, 2014, directing the sheriff of the County of Santa Clara to enforce the judgment against HBC and to provide notice of sale. On August 21, 2014, ABR’s attorney delivered instructions for the levy to the sheriff along with the writ of execution for the foreclosure sale of HBC’s ownership interest in ABR. The instructions correctly listed HBC’s agent for service of process and his address as then-registered with the California Secretary of State – 4920 El Camino Real in Los Altos. The instructions also correctly listed HBC’s attorney of record and address. However, the writ of execution enclosed with the instructions contained a typographical error listing the attorney’s Sacramento address as 700 University Avenue rather than 740 University Avenue.
On August 22, 2014, a registered process server attempted to serve the notice of levy on HBC’s registered agent but the notice came back as undeliverable. On August 25, ABR’s attorney checked the Secretary of State website and learned that HBC had recently changed its address for service of process and the change was registered after preparation of the levy instructions. The new address was 4546 El Camino Real, several blocks from the previous service address on the same street. Registered process servers successfully served the writ of execution and notice of levy on HBC’s agent at the new address on August 25, 2014. On August 28, 2014, the sheriff received both a “nonservice report” stating that the process server had been unable to locate HBC offices at the 4920 El Camino Real address and a completed proof of service for the writ of execution and notice of levy on HBC’s agent at the new address, 4546 El Camino Real. The sheriff also received proof of service by mail to HBC’s attorney at 740 University Avenue.
ABR’s attorney corresponded with the sheriff several times after service of the writ of execution and notice of levy. On September 19, 2014, ABR’s attorney sent the sheriff the order foreclosing the charging order lien and financial information about ABR. On October 2, counsel sent a check for the sheriff’s levy and sale costs. On October 16, ABR’s attorney sent a “further letter of instruction” explaining the interest to be sold and the property description that should be included in the notice of sale. None of this correspondence mentioned the service address for HBC or its counsel. ABR contends no mention was necessary because “updated proofs of service reflecting HBC’s new agent-for-service address” and “correctly listing HBC counsel’s address” previously had been delivered to the sheriff.
On October 17, 2014, Deputy Sheriff Tanaka prepared and publicly posted a notice setting the execution sale for October 29. He placed copies of the notice in envelopes addressed to HBC’s agent and attorney and placed the unstamped envelopes in the office’s mail collection area. It remained for clerical staff to apply postage and deposit the envelopes in the United States mail.
The deputy did not place the envelopes in the mail collection area until 4:45 p.m. on Friday, October 17, 2014. He later testified that the sheriff’s office is open to the public from 8:30 a.m. to 4:00 p.m. but “staff is still there till 5:00” p.m. Tanaka was asked, “In other words, staff should have been there available to take the mail, seal it up, put the postage on it and make sure it gets to the post office or in the post office box, correct?” He replied, “I don’t know what the hours are of who does the postage.” When asked if he “assumed” the notices “would go out” on the Friday afternoon he left the unstamped envelopes in the mail area, Tanaka said “It was late in the day, so I don’t know if it went out that day or Monday.” In fact, the envelopes were not stamped and mailed until Monday, October 20.
The notices were mailed to the wrong addresses—to HBC’s agent at 4920 El Camino Real (the outdated address) and to HBC’s attorney at 700 University Avenue (the erroneous address on the writ of execution). Tanaka testified that his office had received proofs of service of the writ of execution listing the correct addresses but he did not notice that the addresses were different from the ones in ABR’s instructions and writ of execution.
The execution sale took place on October 29 as scheduled. HBC’s ownership interest was sold to ABR for a credit bid of $25,000. HBC first learned of the sale later that day, after the sale had been completed. The notices of sale were later returned by the post office, marked “not deliverable as addressed.”
On December 30, 2014, HBC moved to set aside the foreclosure sale on three grounds (1) notice of the October 29 execution sale was not mailed until October 20, one day short of the statutorily required 10-day notice; (2) notice was mailed to incorrect addresses, so that the sale occurred without HBC’s knowledge; and (3) the foreclosure proceedings had been automatically stayed by HBC’s appeal of the foreclosure order. ABR opposed the motion. It argued there was no stay of execution because HBC never posted an undertaking on appeal and that the deficiencies in notice were insufficient “to overcome the general rule that an execution sale is final and may not be set aside.” ABR maintained that HBC’s only remedy is the recovery of actual damages, if any, caused by the sheriff’s failure to give notice.
The trial court denied the motion. At the hearing, the court remarked that the defects in notice were minor, or “nitpicks,” and questioned whether HBC established proof of a procedural irregularity sufficient to overturn the sale. The court noted that there was no evidence of an intentional deprivation of notice. In its written order, the court stated the motion is denied “because (i) HBC has not satisfied its burden of establishing cause to set aside the sale, (ii) to the extent that the question of setting aside the sale is discretionary, the court does not exercise its discretion to set aside the sale, and (iii) based on the other reasons set forth on the record during the hearing of the motion.”
HBC filed a timely notice of appeal from the order denying its motion to set aside the execution sale and from an earlier order awarding ABR $406,507.03 in post-arbitration attorney fees and costs.
Discussion
As a preliminary matter, HBC’s appeal of the foreclosure order did not stay proceedings because no undertaking was posted. (Code Civ. Proc., § 917.2.) ABR was therefore entitled to proceed with a properly conducted execution sale. The issue on appeal is whether the sale should be set aside because of the irregularities in noticing the sale.
As described above, the trial court enforced ABR’s money judgment against HBC by placing a lien on HBC’s membership interest in ABR (a limited liability company), foreclosing the lien, and ordering sale of HBC’s interest. (Code Civ. Proc., §§ 708.310, 708.320; Corp. Code, § 17705.03, subds. (a), (b)(3).) HBC’s interest was levied and sold pursuant to a writ of execution. (Code Civ. Proc., § 699.510 et seq.)
ABR, as the judgment creditor, was required to provide written instructions to the levying officer with “the correct name and address of the person” to be served with notice of the execution sale. (Code Civ. Proc., § 684.130, subd. (a).) “The judgment creditor shall use reasonable diligence to ascertain the correct name and address of the person” ([i]ibid.) and, “[u]nless the levying officer has actual knowledge that the name or address included in the instructions is incorrect, the levying officer shall rely on the instructions” in serving notice (Code Civ. Proc., § 684.130, subd. (b)).
The levying officer’s notice of sale of an interest in personal property “shall be in writing, shall state the date, time, and place of sale, and shall describe the interest to be sold.” (Code Civ. Proc., § 701.530, subd. (a).) “Not less than 10 days before a sale of personal property, notice of sale shall be posted and served on the judgment debtor by the levying officer. Service shall be made personally or by mail.” (Code Civ. Proc., § 701.530, subd. (b).)
It is undisputed that the notice of sale was defective. Notice was both late and sent to incorrect addresses. ABR contends that the levying officer, not itself, is to blame for service on the incorrect addresses, but for present purposes it makes no difference whether ABR or the sheriff was responsible for having misdirected the notice. Whoever was at fault, correctly addressed notice was not sent and the sale occurred without HBC’s knowledge.
The parties dispute whether the failure to give proper notice permits the sale to ABR to be set aside. Unquestionably a sheriff’s sale to a bona fide third party may not be vacated because of such an irregularity but the same is not true if the sale is made to a judgment creditor. “Failure to give notice of sale . . . does not invalidate the sale.” (Code Civ. Proc., § 701.560, subd. (a).) “A levying officer who sells property without giving the required notice is liable to the judgment creditor and the judgment debtor for actual damages caused by failure to give notice.” (Code Civ. Proc., § 701.560, subd. (b).) These principles are reinforced by a separate provision in the same statutory article, which states that the binding effect of a sale “is absolute and shall not be set aside for any reason,” except one. (Code Civ. Proc., § 701.680, subd. (a).) The exception applies to sales to judgment creditors, like the sale here. “If the sale was improper because of irregularities in the proceedings, because the property sold was not subject to execution, or for any other reason,” the “judgment debtor . . . may commence an action within 90 days after the date of the sale to set aside the sale if the purchaser at the sale is the judgment creditor.”[2] (Code Civ. Proc., § 701.680, subd. (c)(1).)
Code of Civil Procedure sections 701.560 and 701.680, read together, thus provide that a levying officer’s failure to give notice of a foreclosure sale does not invalidate the sale and the sale may be set aside only if the property was sold to the judgment creditor. Sales to bona fide third party purchasers are final and the judgment debtor’s only remedy in that instance is a damages action against the levying officer. In short, “[b]y statute, only the judgment debtor can set aside the sale for irregularity and only where the purchaser was the judgment creditor.” (Amalgamated Bank v. Superior Court (2007) 149 Cal.App.4th 1003, 1018; see First Federal Bank of California v. Fegen (2005) 131 Cal.App.4th 798, 801 [sale absolute where judgment debtor “did not file an action within 90 days after the sale” of property to the judgment creditor]; see also Lee v. Rich (2016) 6 Cal.App.5th 270, 278-279 [judgment debtor may not set aside sale for claimed irregularities where sale was not to judgment creditor]; accord Cal. Law Revision Com. com., Code Civ. Proc. § 701.680 (1985) [“the judgment debtor . . . is permitted to bring an action to set aside the sale . . . if the property was purchased by the judgment creditor, but not if it was purchased by a third person”].) This interpretation of the two statutes is well-understood. “[A]n execution sale is considered absolute, and may not be set aside for any reason except that if the purchaser at the execution sale was the judgment creditor.” (12 Miller & Starr, Cal. Real Estate (4th ed. 2016) § 42.79, p. 42-160.) “If the creditor was not the purchaser, the execution sale cannot be set aside, but the debtor can recover damages.” (Ibid.)
ABR urges a different construction of the two statutes. It says Code of Civil Procedure “section 701.560(a) provides that failure to give proper notice of an execution sale does not invalidate the sale, even on grounds specified in section 701.680(c)(1), i.e., if the sale was ‘improper’ due to ‘irregularities in the proceedings.’ Put another way, failure to provide notice of an execution sale does not, as a matter of law, create ‘irregularities in the proceedings’ sufficiently improper to invalidate a completed execution sale. This reading harmonizes the two provisions.”
Such an interpretation would provide dissonance rather than harmony. There is nothing in Code of Civil Procedure sections 701.560 or 701.680 to suggest that a sale to a judgment creditor may be set aside only for irregularities other than the failure to give proper notice. Indeed, however one defines an “irregularity”—which failure to give notice surely is[3]—Code of Civil Procedure section 701.680, subdivision (c) authorizes the judgment debtor to bring an action to set aside a sale to the judgment creditor “if the sale was improper because of irregularities in the proceedings . . . or for any other reason.” (Italics added.) Whether relief is available to a judgment debtor following a defective execution sale does not turn on the nature of the irregularity in the sale procedures but on the identity of the buyer. The law protects third party bona fide purchasers while allowing sales to judgment creditors to be set aside.
We do not suggest that any minor defect in the notice of sale entitles the judgment debtor to have a sale to a judgment creditor set aside. We assume that the irregularity must be such as to prejudice the rights of a party. But major defects in notice that deprive the judgment debtor of actual knowledge of the sale, as here, unquestionably preclude the judgment debtor from appearing and potentially bidding at the sale or taking other action to protect its interests. This irregularity clearly requires revocation of the sale to the judgment creditor.
Disposition
The order denying the motion to set aside the execution sale is reversed and the matter remanded to the trial court. The trial court is directed to set aside the sale and revive the judgment “to reflect the amount that was satisfied from the proceeds of the sale.” (Code Civ. Proc., § 701.680, subd. (c)(1).) ABR “is entitled to interest on the amount of the judgment as so revived as if the sale had not been made.” (Ibid.)
The order granting post-arbitration attorney fees and costs is reversed to the extent that it awarded sums attributable to the vacated sale. The trial court is directed to recalculate the award to exclude those sums. Any award of attorney fees incurred on this appeal and in further proceedings shall be in the trial court’s discretion. Appellant HBC shall recover costs incurred on this appeal upon timely application in the trial court. Any award of fees and/or costs against ABR may be offset against the judgment.
Pollak, Acting P.J.
We concur:
Siggins, J.
Jenkins, J.
[1] The appeal, docketed as No. A143304, was dismissed on February 18, 2015, after HBC failed to file an opening brief.
[2] The judgment debtor may bring a separate action or “ ‘apply by motion to the court which has decreed the sale.’ ” (Ford v. Cal. Pacific Inv. Co. (1919) 180 Cal. 616.)
[3] ABR correctly notes that the term “irregularities” is not statutorily defined. But the term is not a technical one and its meaning is readily ascertained. “Irregular” is commonly defined as “not being or acting in accord with laws, rules, or established custom” or “not following a usual or prescribed procedure.” (Merriam-Webster’s Collegiate Dict. (11th ed. 2003) p. 662, col. 2.) In the legal context, “irregular” means “[n]ot in accordance with law, method, or usage.” (Black’s Law Dict. (8th ed. 2004) p. 848, col. 1.)
