Judge: Mark H. Epstein, Case: 19SMCV00681, Date: 2023-04-25 Tentative Ruling

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Case Number: 19SMCV00681    Hearing Date: April 25, 2023    Dept: R

This is a request for a writ of attachment.  The request is GRANTED, but the court has some questions.

Underlying the case is a contract entered into between plaintiffs and Knibb Design.  (Also at issue here is Knibb Design’s owner, Mr. Knibb.  “Knibb” refers to them collectively.)  The contract was such that plaintiffs agreed to pay Knibb Design the sum of $245,000 plus the actual costs incurred by Knibb Design.  In other words, Knibb Design was to act as the contractor.  It would hire others to do specific aspects of the work and it was to bill plaintiffs at Knibb Design’s actual cost for subcontracted work.  Knibb Design might also have to go out-of-pocket for other reasons, and plaintiffs agreed to pay those actual costs as well.  According to plaintiffs, and this court agrees, Knibb Design’s profits (assuming all went well) should have been $245,000.  The rest was just money in/money out.

According to plaintiffs, though, Knibb Design engaged in significant fraud.  It allegedly falsified invoices, falsified payments made to others, and falsified costs incurred.  That meant that plaintiffs wound up paying Knibb Design (according to plaintiffs) a very large sum of money that did not represent actual costs but were portrayed as costs.  Doing so, plaintiffs assert, was not only fraud, but also a breach of contract.

Plaintiffs also assume that Mr. Knibb is liable as well under the alter ego doctrine.  Plaintiffs assert that there was a unity of interest as between Knibb Design and Mr. Knibb, which plaintiffs assert is demonstrated by the financial records showing that Mr. Knibb routinely used corporate money for private purposes and intermingled Knibb Design’s money with other uses and entities.  Therefore, plaintiffs claim, Mr. Knibb is also liable in contract and in tort.

And, to add insult to injury, plaintiffs assert that the job was a catastrophe from start to finish.  The project was not built correctly causing damage and forcing plaintiffs to expend large sums to get the job done right—something that is still going on.

Plaintiffs have submitted two declarations—one from Mr. Steinberg and one from counsel, Mr. Johnson.  (Johnson also submitted a reply declaration, which this court has not considered.  New evidence is generally not acceptable in reply.  That said, this tentative was written before the court even saw the reply.)  The Johnson declaration authenticates aspects of the deposition transcripts, but he also provides substantive testimony concerning his analysis of Knibb Design’s books and records, including various reports he generated from QuckBooks, which is the software in which Knibb Design’s financial records were kept by the defense.

Plaintiffs seek a writ of attachment as against both Knibb Design and Mr. Knibb—the latter on an alter ego theory.  Both defendants oppose.

Defendants’ opposition includes objections to both supporting declarations.  The court believes that the objections are in bad faith, and they are STRICKEN.  Objecting to declarations is not a law school exam.  One does not go through the declaration and submit boilerplate objections to virtually every sentence.  Yet that is what was done here.  The court can go through them, but the fact is that defendants would have been better objecting to the parts that matter and ensuring that the objections were well thought out as to those.  (See Reid v. Google (2010) 50 Cal.4th 512, 532-533.)

But that said, the court will address what is the most telling objection—the objection to the Johnson financial analysis.  As defendants correctly state, Johnson is not, and does not purport to be, a forensic accountant.  As such, he lacks the qualifications to be an expert witness in that area and he does not purport to be one.  Accordingly, his declaration must stand or fall in a lay sense.  However, the court disagrees with defendants that only an expert can make sense of financial records.  There are some things that require expert testimony, and some that do not.  A lay person can authenticate the underlying documents (which Johnson does) even if they are electronic.  And a lay person can use QuickBooks.  Indeed, that is the whole point of the software—to enable lay people to keep financial records and create financial reports without having a CPA or a degree in accounting.  If a report is run, a lay person can generally describe what it is.  That much is within the knowledge of the lay community.  The court therefore OVERRULES the objections to the Johnson declaration to the extent that defendants contend that only an expert can run or describe a QuickBooks report.

To obtain a writ of execution, the moving party must show the following: (1) an action in which an attachment is proper (here, an action in contract); (2) an amount sought that is liquidated or capable of calculation; (3) that the amount is more than zero; (4) that the attachment is not sought for an improper purpose; and (5) probable validity of the claim.  The application must also describe the property to be attached.

There is really no dispute that item 1 is met.  While plaintiffs also sue for fraud, that does not mean that an attachment cannot issue as it relates to the contract action.  Nor is there any debate that the amount sought is greater than zero.  What defendants do contest is that the amount is capable of being readily ascertained (or has been properly calculated), whether the writ is sought for an improper purpose, and probable validity.  Defendants also contend that the contract has a damages cap of $25,000 and no attachment can be issued for any greater amount.  And finally, defendants contend that even if an attachment is proper as against Knibb Design, it is not proper against Mr. Knibb, and even if it were, the property as to Mr. Knibb is not described with adequate particularity.

The court disposes with the proper purpose requirement first.  The court sees no evidence of an improper purpose here.  Plaintiffs have suggested that defendants are moving money off shore.  The court is not absolutely convinced that such is the case (although the showing is more than sufficient to demonstrate a “more likely than not” that such action is occurring), but such a showing is not necessary either.  It is enough that plaintiffs seek to secure any contract recovery and the court, as stated above, does not find defendants’ proper purpose argument convincing.

That leads to the amounts.  Plaintiffs start with the straightforward argument that Knibb Design seems to have booked a profit on this job of over $1 million and Mr. Knibb was totally at a loss to explain how that could be.  The court has looked at Exhibit 8 to the Johnson declaration.  It is an QuickBooks report for profit and losses.  It details each item of income (which appears to be, in QuickBook parlance, really revenue) and each items of expense.  There is a “Gross Profit” on the last page, which is total income less Cost of Goods Sold.  What follows are additional expenses and then a “Net Income” line, which appears to be the Gross Profit less the additional expenses.  The court interprets “Net Income” to be the same as “Net Profit” for purposes of the report.  To date, other than defendants’ argument that only an expert accountant can use QuickBooks, that would establish the profit as plaintiffs claim.  Of course, under the contract, Knibb Design was entitled to part of that profit, so there is no breach as to that sum.  But that leaves the difference of $1,212,764 of unexplained profits.  Defendants have provided no explanation as to how that could be.  Plaintiffs also provided a number of instances of false entries totaling $358,344.  Of that, defendants challenge only one item—a $50,000 payment to Hewitt.  However, Johnson declares that he subpoenaed Hewitt’s records and Hewitt had no supporting documents.  Johnson also subpoenaed bank records, and the bank had no supporting documentation even though the amount included an electronic funds transfer.  (In reply, plaintiffs demonstrate that even the $50,000 is indeed false; Knibb’s explanation is simply false.)

The bottom line here is that plaintiffs have proven a liquidated amount of $1,232,764 in amounts charged over what the contract provided.  It is calculable and ascertainable.  Alternatively, the $358,344 is demonstrated, although, at least for purposes of this motion, that is subsumed in the larger number. 

Not only has plaintiff demonstrated the amount, plaintiff has demonstrated a probability of success on the merits.  The information comes from Knibb Design’s own books and records.  Knibb Design, and Mr. Knibb, would normally have had every opportunity to explain it in deposition or even to submit a declaration in opposition to the application that might call this into question.  But there is not much.  That may be due to the evidentiary sanction imposed upon the defense for their really poor conduct during discovery—the sanction precludes defendants from submitting certain evidence in defense of the merits or any merits motion.  But the court does not believe that it would bar Mr. Knibb from pointing to parts of his deposition (or the deposition of others) to counter the claims plaintiffs are making.  Nor would it stop defendants from going through the QuickBooks report that plaintiffs introduced to explain what the report “really” means (if they differ from the Johnson explanation) or going through various entries therein to show that they do not establish what plaintiffs claim the entries establish.  Indeed, Mr. Knibb has put in some evidence reinforcing the $50,000 payment to Hewitt that plaintiffs attacked  But other than that, he is silent.  He does not attempt to defend the other aspects of the allegedly false statements, and he provides no explanation as to how Knibb Design could have a profit of over $1.4 million on this kind of contract.  His silence is deafening and the court draws the inference that he has not said anything about these topics in his deposition or (to the extent he was able to do so as described above) because there is nothing he can say that would be of aid to him.  The court notes that although Mr. Knibb refers to two employees (Crank and Leslie), they provide no declarations.  In other words, the opposition’s evidentiary showing is extraordinarily weak even given the sanction.  Put another way, the evidentiary sanction does bar Knibb from introducing new evidence to vindicate its position; it does not bar Knibb from commenting on the evidence that plaintiffs adduce.

That leaves two questions.  The first is whether the writ ought to be limited to the $25,000 cap set forth in the contract.  The second is whether the writ should apply not only to Knibb Design but also to Mr. Knibb personally. 

As to the former, the question is a close one.  A writ of attachment will not lie for fraud.  It will lie for contract, however.  The problem for plaintiffs is that the contractual cap limits the scope of their damages.  The problem for defendant is that while the cap may apply to damages, it does not apply to overcharges that can be recovered as restitution.  Plaintiff Steinberg claims that he paid the full amount invoiced, or at least that is how the court reads his declaration.  (The court will confirm as much, though.)  To the extent that the breach of contract includes overcharging, it is not really damages of the type the to which contractual limitation applies.  That is a limit to a suit for faulty construction (and this suit contains such allegations) or similar actions.  The court might well enforce that limitation were there any attempt to seek a writ in excess of $25,000 for such damage in contract.  But the court does not believe that as a matter of contract Knibb Design should be able to overcharge (even accidentally, but surely not deliberately) and then raise as a contractual defense that they get to keep the money over $25,000 according to the contract.  If this clause means that, it is unconscionable.  It is not nearly clearly enough stated to pass procedural muster, and the clause is so grossly inappropriate as to be substantively unconscionable as well.

Which leads, finally, to whether Mr. Knibb ought to be subject to attachment on an alter ego theory.  Oddly, his declaration makes no effort to rebut or explain any of the specific facts demonstrated in the moving papers from the accounting records, even to the extent he is able to do so.  Again, that silence is deafening.  And there do appear to be numerous personal uses of the funds from Knibb Design for Mr. Knibb’s own personal use.  The court finds, at least on this record, that plaintiffs have demonstrated a likelihood of success on the merits as to alter ego.  While that might mean that the evidentiary sanction drives the result, that is the point of the evidentiary sanction.  Next time, Knibb ought to take its discovery obligations a bit more seriously and with more good faith.

Turning, then, to the home.  It is identified with particularity.  If Mr. Knibb wanted to claim a homestead, he could have done so.  He did not.  Having not so claimed, the court need not address that issue.  He claims there is no equity in the home.  But there is no proof of that.  True, it appears to have significant debt, but the court has no idea what it is worth.  The court will not allow the home to be sold at this time, of course.  But it can be attached nonetheless.  As to the bank accounts, the court find this to be close.  However, the accounts are stated with sufficient particularity.  The banking institution is identified, and the court views the request as being limited to accounts in the name of Knibb Design or Mr. Knibb.  Surely Knibb can identify those accounts without too much difficulty and so can the bank.  No additional specificity is required.  If Mr. Knibb wanted to claim some exemption, he could have, and should have, done so.

Accordingly, the application for a writ of attachment is GRANTED AS PRAYED.  Plaintiffs to prepare the order.