Judge Curtis A. Kin, Case BC506921 2022-10-11 Tentative Ruling

Judge: Curtis A. Kin, Case: BC506921, Date: 2022-10-11 Tentative Ruling

Case Number: BC506921 Hearing Date: October 11, 2022 Dept: 72

MOTION TO ENFORCE

JUDGMENT/CHARGING ORDER

MOTION FOR RETURN OF CASH DEPOSIT MADE TO STAY ENFORCEMENT OF COURT’S ORDER PENDING APPEAL

Date: 10/11/22 (8:30 AM)

Case: William E. Rice et al. v. Gary P. Downs et al. (BC506921)

TENTATIVE RULING:

I. DEFENDANT GARY DOWNS’ MOTION TO ENFORCE JUDGMENT/CHARGING ORDER

On May 1, 2020, defendant Gary P. Downs brought a Motion to Enforce Judgment/Charging Order, seeking, among other things, to disgorge $450,000 that Triton Community Development LLC (“Triton”) made to Glaser Weil Fink Howard Avchen & Shapiro LLP (“Glaser Weil”). (See Cypers Decl. ¶¶ 18-20.) On August 27, 2020, this Court (Hon. Rupert Byrdsong, presiding) issued an Order for such disgorgement. (Cypers Decl. ¶ 21.) On December 27, 2021, the Court of Appeal reversed the August 27, 2020 Order for disgorgement. (Cypers Decl. ¶ 24.) In so doing, the Court of Appeal remanded the matter and directed the Court to “determine the terms of Glaser Weil's security interest.” (Rice v. Downs (2021) 73 Cal.App.5th 213, 235.) The Court of Appeal explained: “Because the trial court resolved the lien priority question under its equitable authority, preferencing the charging order regardless of whatever security interest Glaser Weil may have, the court never made any factual findings as to the terms of the security interest, including, among other issues, whether it entitled Glaser Weil to the same property covered by the charging order.” (Id. at 218.)

As directed explicitly by the Court of Appeal, the Court here determines what property was covered by Glaser Weil’s security interest.

On June 27, 2019, through a Pledge and Security Agreement (“Security Agreement”), William E. Rice granted Glaser Weil a “continuing first priority lien on and security interest” in “all rights of [Rice] to receive moneys or distributions with respect to the Pledged Interests due and to become due under or pursuant to the Relevant Documents….” (Cypers Decl. ¶¶ 8, 11 & Ex. 2 at § 2.1(c).) “Pledged Interests” is defined as 100% of Rice’s interest in Triton. (Id. at § 2.1(a).) “Relevant Documents” is defined as Triton’s Operating Agreement and all other organizational documents. (Id. at § 1.)

On July 7, 2019, Glaser Weil filed a UCC-1 Financing Statement with the California Secretary of State. (Cypers Decl. ¶ 12 & Ex. 2.) The collateral set forth in the separate statement included “[a]ll of [Rice’s] right, title and interest in the property described in that certain Pledge and Security Agreement dated June 27, 2019, by [Rice], as pledgor, for the benefit of [Glaser Weil].” (Id. at Ex. A to Ex. 2.) Also set forth in the description of the collateral was Rice’s right to “receive moneys or distributions with respect to the Pledged Interests due and to become due under or pursuant to the Relevant Documents.” (Id.)

The Order Charging William E. Rice’s Interest in Limited Liability Companies (“Charging Order”) entered on October 30, 2019, after the filing of the UCC-1 Financing Statement, ordered Triton and its members to “pay any money or property due or to become due to Judgment Debtor WILLIAM E. RICE directly to Judgment Creditor GARY P. DOWNS until the amount remaining due on the judgment, plus all accrued interest and costs thereon, is paid in full.” (Cypers Decl. ¶ 19 & Ex. 3 at ¶ 3.)

Based on the foregoing, the Court finds that the Security Agreement entitled Glaser Weil to Rice’s distributions from Triton, notwithstanding the later Charging Order directing payment of such distributions to Downs. The $450,000 payment from Triton to Glaser Weil was a distribution to Rice. (Rice, 73 Cal.App.5th 228.) Further, Glaser Weil’s security interest covers Rice’s right to receive distributions from Triton, the same money owed by Triton to Rice under paragraph 3 of the Charging Order. Accordingly, because the UCC-1 Financing Statement was filed before Downs moved for the Charging Order on October 3, 2019 “Glaser Weil's security agreement, perfected by the filing of a financing statement, has priority over the later charging order.” (Rice, 73 Cal.App.5th at 218, 220.)

Sidestepping the issue of whether the Security Agreement covered the $450,000 payment from Triton and whether Glaser Weil’s claim to that money had priority over the charging order, Downs instead maintains the Security Agreement was never triggered because there was no Event of Default. (See Cypers Decl. ¶ 8 & Ex. 2 at § 2.2 [“Upon the occurrence and during the continuance of an Event of Default, the Firm shall have the right, at any time, in its sole and absolute discretion, to transfer to or to register in the name of the Firm any or all of the Collateral.”]; § 3.3(b) [“If any Event of Default shall have occurred, then so long as such

Event of Default shall continue … (i) all distributions on the Collateral shall be paid directly to the Firm for application to the Obligations pursuant to the terms hereof and the Amendment”].)

The definition of “Event of Default” includes Rice’s failure to make required payments of attorney fees within 10 calendar days after written notice from Glaser Weil. (Id. at § 3.4(A)(i).) Downs maintains that there was no written notice of default sent by Glaser Weil to Rice, and, in any event, Glaser Weil was paid less than 10 days after demand for payment. (Cypers Decl. ¶¶ 17-18.) However, “[i]f so agreed, and in any event after default, a secured party may require the debtor to assemble the collateral and make it available to the secured party at a place to be designated by the secured party which is reasonably convenient to both parties.” (Comm. Code § 9609(c).) “This language indicates that default is not necessarily required before a secured party may enforce a security interest if the parties have agreed otherwise.” (Rice, 73 Cal.App.5th at 235.)

Rice, as 100% owner of Triton, arranged for Triton to make a $450,000 payment to Glaser Weil. (Cypers Decl. ¶ 18 [“On or about February 28, 2020, Triton made a payment to Glaser Weil of $450,000 in partial payment of Glaser Weil’s fees for legal services previously rendered by the firm.”]; Rice, 73 Cal.App.5th at 228 [“The fact that as a technical matter it was Triton that made the payment pursuant to its own purported obligations was immaterial because Triton and Rice were effectively one and the same”].) Accordingly, it appears that Rice agreed to Glaser Weil’s enforcement of the Security Agreement regardless of whether Rice received written notice of default. Pursuant to Commercial Code § 9609(c), Glaser Weil was not required to serve any notice of default before receiving the $450,000 payment from Triton.

Moreover, even if written notice of default were required, the definition of “Event of Default” also includes the filing of a petition in bankruptcy by Rice. (Cypers Decl. ¶ 8 & Ex. 2 at § 3.4(A)(iii).) It is undisputed that Rice filed a Chapter 11 bankruptcy petition on January 27, 2020. (Cypers Decl. ¶ 15.) In response, Downs argues that Section 3.4(A)(iii) of the Security Agreement, which defines the filing of bankruptcy as an “Even of Default,” is unenforceable under 11 U.S.C. § 365(e)(1). However, 11 U.S.C. § 365(e)(1) does not apply here because the purpose of the Security Agreement was to extend financial accommodations to Rice. (11 U.S.C. § 365(e)(2)(B); Cypers Decl. ¶ 8 & Ex. 2 at § A [“To induce the Firm to defer the Deferred Fees…Pledgor has agreed to pledge and grant a first priority security interest in the Collateral…as security for the Obligations….”].) Accordingly, Rice’s filing of a bankruptcy petition also entitled Glaser Weil to enforce the Security Agreement and accept the $450,000 payment from Triton on February 28, 2020.

Any argument regarding Rice’s intent in entering into the Security Agreement with Glaser Weil or filing for bankruptcy with respect to the Charging Order is beyond the scope of the Court of Appeal’s directions on remand. “Where a reviewing court has remanded a matter to the trial court with directions ‘. . . the trial court . . . is bound to specifically carry out the instructions of the reviewing court. . .. (A)ny material variance from the explicit directions of the reviewing court is unauthorized and void.’” (Coffee-Rich, Inc. v. Fielder (1975) 48 Cal.App.3d 990, 998.) Accordingly, the Court does not consider the merit of Downs’ contention of a fraudulent conveyance.

For the foregoing reasons, in accordance with the directions of the Court of Appeal, this Court finds that the $450,000 transfer from Triton to Glaser Weil was subject to Glaser Weil’s secured interest pursuant to the Security Agreement, which had priority over Down’s interest pursuant to the Charging Order. Consequently, this Court DENIES that portion of Down’s May 1, 2020 Motion to Enforce Judgment/Charging Order seeking disgorgement or return of the $450,000 at issue.

II. MOTION FOR RETURN OF CASH DEPOSIT MADE TO THE COURT TO STAY ENFORCEMENT OF COURT’S ORDER PENDING APPEAL

Based on the Court of Appeal’s reversal of the August 27, 2020 disgorgement order, non-party Glaser Weil Fink Howard Avchen & Shapiro LLP’s Motion for Return of Cash Deposit Made to the Court to Stay Enforcement of Court’s Order Pending Appeal is GRANTED. The Court signs the proposed order lodged on September 13, 2022.