Judge Theresa M. Traber, Case BC715362 2023-02-24 Tentative Ruling

This is a dispute among seven Tilakamonkul brothers in which Plaintiffs sought to quiet title, dissolve a partnership, and partition and sell the restaurants and real property alleged to be jointly owned by the brothers, among other causes of action. Plaintiffs alleged that the defendant siblings denied that Plaintiffs had any interest in the properties at issue. In a cross-complaint, T-Team investment also sought quiet title and declaratory relief with respect certain real properties.

The Court ordered briefing on the issue of whether Defendants are entitled to try their affirmative defense of offset.

The Court concludes that Defendants are not entitled to assert an affirmative defense of offset against any award to Plaintiff Vichit Tilakamonkul under Code of Civil Procedure section 431.70.

The Court also concludes that Defendants are not entitled to assert an affirmative defense of offset against the monetary recovery awarded to Plaintiff Somsak Tilakamonkul under Code of Civil Procedure section 431.70.

Defendants seek a trial on the affirmative defense of offset as to Plaintiffs’ recovery under the Court’s Amended Final Statement of Decision. Plaintiffs argue that the affirmative defense of offset is not available as a matter of law, and, further, that Defendants have waived their right to try this affirmative defense.

Plaintiffs request that the Court take judicial notice of (1) Defendants’ List of Disputed Issues for Resolution in Phase One of the Trial; (2) The Court’s February 4, 2021 Final Ruling on Defendants’ demurrer; (3) the Court’s October 11, 2022 Amended Final Statement of Decision; (4) the Second Amended Cross-Complaint; (5) Defendants’ Phase 1 Trial Brief; (6) Defendants’ Phase 1 Closing Trial Brief; (7) Defendants’ Reply Closing Brief for Phase I; and (8) Defendants’ Objections to the Court’s Proposed Statement of Decision at Phase I.

Plaintiffs’ Requests are GRANTED pursuant to Evidence Code section 452(d) (court records).

On July 25, 2018, Plaintiff Vichit Tilakamonkul (Vichit)[1] filed a verified complaint for damages and other relief against Defendants Vichai Tilakamonkul, Virut Tilakamonkul, Somsak Tilakamonkul, Marasri (Mary) Tilakamonkul, Narong Tilakamonkun, Sumeth Tilakamonkul,[2] and others claiming an interest in certain described real and personal property. In the initial complaint, Vichit asserted claims for breach of written contract, partnership accounting, dissolution of partnership and accounting, conversion, breach of fiduciary duty, constructive fraud, and partition and sale and accounting.

After several revised iterations of the complaint, the Second Amended Complaint was filed on August 21, 2019, which was the operative complaint at trial. In that pleading, Vichit Tilakamonkul joined with brother and former defendant, Somsak Tilakamonkul (jointly "Plaintiffs") to assert twelve causes of action against their brothers, Defendants Vichai, Virut, Narlong, Sumeth, and Pramorte, as well as Siriratn Tilakamonkul and several entities owned by some or all of the seven Tilakamonkul brothers. These entity defendants included Royal Thai Cuisine II, Inc. ("RT II"), Royal Thai Cuisine IV, Inc. ("RT IV"), and T-Team Investments, LLC. ("T-Team"). The Second Amended Complaint asserted claims for quiet title, breach of oral contract, negligence, partnership accounting, partnership dissolution and accounting, partition and sale of partnership property, breach of fiduciary duty, and breach of the covenant of good faith and fair dealing.

Various defendants filed Cross-complaints in the action. By the time of trial. there were three at issue. In its Second Amended Cross-Complaint, filed on March 25, 2021, Defendant T-Team sued Plaintiffs Vichit and Somsak, as well as Sudatip Tilakamonkul, who is also known as Dawn Tilakamonkul, alleging causes of action for declaratory relief, quiet title, breach of contract, account stated, and goods and services rendered. T-Team's cross-complaint focuses on the ownership of real property located at 4941 Mount Bigelow in San Diego ("Mt. Bigelow Property") and at 4199 and 4201 Ransom Street in Long Beach ("Ransom Properties"), and the related issue of whether funds paid to Vichit in 2007 constituted a buyout of his interest or a loan still owed by Vichit to T-Team. RT II intervened in the action on or about March 12, 2019 to bring a claim for declaratory relief against Plaintiffs, seeking a judgment regarding the ownership of the Royal Thai Cuisine restaurant in Newport Beach. Further, Defendants Vichai, Virut, Narlong and Sumeth cross-complained against Plaintiffs for declaratory relief on June 30, 2018, requesting a declaration that Plaintiffs own no part of the restaurant businesses or real property they claim to own jointly with the five defendant brothers.

On October 1, 2020, the Court bifurcated trial in this matter and ordered that the following equitable causes of action in the Second Amended Complaint would be tried first to the Court: (1) quiet title, (8) partnership accounting, (9) partnership dissolution and accounting, (10) partition and sale of partnership property, and (11) breach of fiduciary duty. (10/1/20 Order, p. 10.) In addition, the Court ordered that the following equitable causes of action in the Second Amended Cross-Complaint would be tried in the first-phase bench trial: the first, third and sixth causes of action for declaratory relief and the second cause of action for quiet title. The Court ordered that all other causes of action would be tried in a second phase, with the legal claims being tried to a jury along with an intertwined equitable cause of action that would be tried to the Court.

At the close of the first phase of trial, the Court issued its statement of decision, finding that Plaintiffs did not establish that RT II, RT IV, or RT V are partnerships, but rather that the evidence shows they are and have been properly functioning corporations, duly organized under the laws of the state. (Amended Statement of Decision.) The Court therefore declined to address Plaintiffs’ contentions that they suffered damages as a result of Defendants’ alleged breaches of fiduciary duty. (Id.)

The Court also concluded that Plaintiffs demonstrated by clear and convincing evidence that the Ransom and Mt. Bigelow properties were “jointly owned by all seven brothers until their transfer to T-Team, which has been jointly owned by all seven brothers,” but not that they possessed any ownership share in the Georgia Sue property, which has been continuously owned by Sumeth and Virut alone. (Original Final Statement of Decision.) The Court modified its statement of decision in this respect on October 11, 2022 to clarify that each of the seven brothers currently owns a beneficial interest in the Ransom and Mt. Bigelow properties and that they are each entitled to a one-seventh share of these properties. (Amended Statement of Decision; see RJN Exh. B.)

The Court denied Defendants’ request for declaratory relief to the effect that Vichit’s interest in the family business was bought out in 2007 and that Somsak’s ownership rights were terminated in 2014 because of his wife Pankee’s alleged misappropriation of corporate funds. (Amended Statement of Decision.) The Court also rejected Defendants’ affirmative defenses based on statute of limitations, laches, estoppel, and unclean hands, finding that the facts did not support the application of these defenses. (Id.)

Defendants now seek a trial on the affirmative defense of offset as to Plaintiffs’ recovery pursuant to the Court’s Amended Statement of Decision. Plaintiffs argue that the affirmative defense of offset is not available as a matter of law, and, further, that Defendants have waived their right to try this affirmative defense.

Plaintiffs assert that Defendants waived their right to assert an offset defense by requesting that it be tried in the first phase of trial but failing to argue its validity in their post-trial briefs setting forth their closing arguments.

Waiver is “the intentional relinquishment of a known right after knowledge of the facts.” (E.g. Roesch v. De Mota (1944) 24 Cal.2d 563, 572.) Waiver may also result from conduct “which, according to its natural import, is so inconsistent with the intent to enforce the right in question as to induce a reasonable belief that such right has been relinquished.” (Rubin v. Los Angeles Fed Sav. & Loan Ass’n (1984) 159 Cal.App.3d 292, 298 [internal citations omitted].) Once waived, a right is permanently lost. (City of Los Angeles School District v. Landler Inv. Co. (1960) 171 Cal.App.2d 744, 752.) A finding of waiver by a court requires clear and convincing evidence. (E.g. DuBeck v. California Physicians Service (2015) 234 Cal.pp.4th 1254, 1265.)

Plaintiffs contend Defendants asserted their affirmative defense of offset in their list of disputed issues for resolution in Phase I of the trial (Plaintiffs’ RJN Exh. 1), but then waived the defense by failing to mention the defense in their post-trial arguments. In opposition, Defendants argue that “nothing in any pleading or brief filed by Defendants intentionally relinquished Defendants’ affirmative defense of offset.” But neither side examines the full procedural history defining the equitable defenses that were set for resolution during the first phase of trial. While it is true that Defendants identified the offset defense and other equitable issues to be tried in a pre-trial submission on November 8, 2021, the Court directed the parties to meet and confer in an effort to develop a full list of the issues to be tried in the first phase of trial. (November 15, 2021 Minute Order.) At the final status conference on December 18, 2021, the Court confirmed that, in addition to the equitable claims identified in Judge Hammock’s October 20, 2020 order, the following issues would be tried during the first phase of trial: “issue of standing, including the statute of limitations issue and the following equitable defenses shall be tried in this matter: Latches, Estoppel Waiver and Uncleaned Hands Defense.” (December 13, 2021 Minute Order, p. 2.) Thus, the Court concludes that Defendants’ equitable defense of offset was not set for trial during the first phase and, thus, there is no basis for a finding that Defendants waived its right to a trial on that defense.

Defendants argue that they may properly assert a defense of offset against any award to Vichit based on the Court’s finding that Vichit was indebted to the other brothers for the loan he secured in 2007, pursuant to Code of Civil Procedure section 431.70. This code section provides:

Where cross-demands for money have existed between persons at any point in time when neither demand was barred by the statute of limitations, and an action is thereafter commenced by one such person, the other person may assert in the answer the defense of payment in that the two demands are compensated so far as they equal each other, notwithstanding that an independent action asserting the person's claim would at the time of filing the answer be barred by the statute of limitations. If the cross-demand would otherwise be barred by the statute of limitations, the relief accorded under this section shall not exceed the value of the relief granted to the other party. The defense provided by this section is not available if the cross-demand is barred for failure to assert it in a prior action under Section 426.30.

In its Statement of Decision, the Court rejected Defendants’ argument that the June 2007 payment to Vichit constituted a buyout of his property interests, instead ruling that this payment was an oral loan. (Amended Statement of Decision p. 26.) Defendants argue that this claim did not accrue until July 25, 2018, when Vichit filed the Complaint in this action. Plaintiffs argue, in opposition, that a “cross-demand” requires an affirmative assertion of a legal right, and that Defendants did not actually assert their rights under the 2007 loan until April 7, 2020. This dispute, however, is immaterial. The Court ruled that Plaintiff’s claims accrued on April 5, 2018, when Vichit became aware that Defendants intended to sell the businesses and properties without him. (See Amended Statement of Decision p. 28.) Under the plain language of section 431.70, a party may assert a crossclaim for money when cross-demands “have existed. . . at any point in time when neither demand was barred by the statute of limitations and an action is thereafter commenced.” (Code Civ. Proc. § 431.70.) Even if the Court were to adopt Defendants’ preferred interpretation of the facts and definition of “cross-demand,” Defendants concede that the cross-demand accrued when they learned that their right to sell the properties was being challenged—in other words, after the Complaint was filed. Section 431.70 therefore does not authorize the assertion of the affirmative defense of offset under the facts presented here.

Further, as Plaintiffs correctly state, this Court previously held that the statute of limitations for a claim on the June 2007 loan ran in June of 2009, pursuant to long-standing precedent that the statute of limitations for payable-on-demand contracts run on the date the agreement is made, not the date of the demand. (February 4, 2021 Ruling on Demurrer pp. 3-4; see also Miguel v. Miguel (1920) 184 Cal.311, 314.) As the Court also ruled that Plaintiffs’ claims did not accrue until April of 2018, there was no point in time when the claims overlapped, such that an affirmative defense of offset could be brought under section 431.70.

The Court therefore concludes that Code of Civil Procedure section 431.70 does not authorize an affirmative defense of offset with respect to any award to Plaintiff Vichit Tilakamonkul.

Defendants argue that they may properly assert an affirmative defense of offset against any award to Somsak because of an alleged obligation owed by Somsak’s wife, Pankee, for embezzlement of funds belonging to the Tilakamonkul brothers. As Plaintiffs point out, however, the evidence offered by Defendants at trial was that Pankee embezzled substantial funds from Royal Thai Cuisine IV, which the Court found to be a corporation, not a partnership functioning with some or all of the brothers as partners. (Amended Statement of Decision pp. 14, 27.) Thus, the claim that Defendants wish to assert as an offset is a claim held by Royal Thai Cuisine IV, not by any of the individual Defendant brothers.

In the context of this case, Defendants seek to assert this corporate debt to offset the amounts recoverable by Plaintiffs under the Court’s Amended Final Statement of Decision. The Court ruled in favor of Royal Thai Cuisine IV finding that it was functioned as a corporation at its formation and throughout its operation of various restaurants. (Id., p. 14.) As a result, the Court found against Plaintiffs and in favor of Defendants on the causes of action brought against the corporations and individual defendants for breach of fiduciary duty and other related claims grounded on Plaintiffs’ allegations of partnership. In fact, the only recovery secured by Plaintiffs was on their claimed entitlement to an equal share of the real estate owned by the parties. In its final decision, the Court found that each Plaintiff has a 1/7 beneficial interest in the Mt. Bigelow and Ransom properties. (Id., p. 17.)

The question the Court must answer is whether Defendants may offset a corporate debt against Plaintiffs’ recovery of their share of real estate interests owned by the seven brothers, including the four individual defendants who seek to assert the affirmative defense. The Court concludes that such an offset is not available under Code of Civil Procedure section 431.70. On its face, this provision addresses “cross-demands for money . . . between persons” where “one such person” commences an action for damages and “the other person” defends against payment by asserting a competing claim resulting in “the two demands [being] compensated so far as they equal each other.” “The language of section 431.70 and the cases discussing its interpretation and application make clear that the statute was intended to protect mutual claims existing between the same persons in the same capacities.” (Carnation Co. v. Olivet Egg Ranch (1986) 189 Cal. App. 3d 809, 821.) Applying this standard to section 431.70, the Court of Appeal in Carnation Co. v. Olivet Egg Ranch ruled that partners of one joint venture could not set off the claim of that joint venture against the plaintiff’s cause of action against the individual partners, either as individuals or as partners of a different joint venture. (Id., at p. 821.) This is consistent with the long-established mutuality requirement of the setoff doctrine. (Petersen v. Lyders (1934) 139 Cal.App. 303, 306 [“It is elementary that a set-off may not be invoked unless the parties and the debts are mutual and that the doctrine of mutuality requires that the debts be due to and from the same persons in the same capacity.”]; see also Advance Indus. Fin. Co. v. W. Equities, Inc. (1959) 173 Cal. App. 2d 420, 427; Eistrat v. Humiston (1958) 160 Cal. App. 2d 89, 91.)

Given the lack of mutuality between Pankee’s alleged embezzlement liability to Royal Thai Cuisine IV and the defendant brothers’ obligation to cede to Plaintiffs their shares of the real estate proceeds, the Court concludes that the setoff defense Defendants seek to advance against Somsak fails as a matter of law, because it may not be asserted under Code of Civil Procedure section 431.70. Given this conclusion, the Court does not address the other objections raised by Somsak to Defendants’ setoff defense.

Accordingly, the Court concludes that Defendants are not entitled to assert an affirmative defense of offset against any award to Plaintiff Vichit Tilakamonkul under Code of Civil Procedure section 431.70.

Any party may submit on the tentative ruling by contacting the courtroom via email at Smcdept47@lacourt.org by no later than 4:00 p.m. the day before the hearing. All interested parties must be copied on the email. It should be noted that if you submit on a tentative ruling the court will still conduct a hearing if any party appears. By submitting on the tentative you have, in essence, waived your right to be present at the hearing, and you should be aware that the court may not adopt the tentative, and may issue an order which modifies the tentative ruling in whole or in part.

[1] Most of the parties are brothers with the same or nearly identical last names. for clarity, the Court refers to each brother by his first name but means no disrespect to the parties in doing so.

[2] Where a party's name has been misspelled in an original pleading, the Court has simply corrected the spelling without restating the original misspelling to denote the name under which the party was erroneously sued.