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Tentative Ruling
Judge Colleen Sterne
Department 5 SB-Anacapa
1100 Anacapa Street P.O. Box 21107 Santa Barbara, CA 93121-1107

CIVIL LAW & MOTION

Nicole Nagel, et al. v. Tracy A. Westen, et al.

Case No: 15CV01178
Hearing Date: Mon Jan 08, 2018 9:30

Nature of Proceedings: Motion Prelimiinary Injunction; Objections to Proposed Findings of Discovery Referee; Case Management Conference

 

Nicole Nagel and ESY Investments, LLC, v. Tracy A. Westen, etc., et al., Case No. 15CV01178 (Judge Sterne)

 

Hearing Date:                      January 8, 2018

 

Motion:                                

(1)       Motion of Plaintiffs for Preliminary Injunction

(2)       Objections to Discovery Referee Report

 

Attorneys:                            

For Plaintiffs Nicole Nagel and ESY Investments, LLC: Paul J. Laurin, Matthew B. O’Hanlon, Jonathan J. Boustani, Barnes & Thornburg LLP; K. Andrew Kent, Rincon Venture Law Group

For Defendants Westen Family Group, LLC, Derek Westen, individually and as trustee, and Peter K. Westen, individually and as trustee: Scott B. Campbell, Rogers, Sheffield & Campbell, LLP

For Defendant Peter K. Westen, individually and as trustee: R. Chris Kroes, Law Offices of McCarthy & Kroes

For Defendants Tracy Westen and Linda Lawson: In pro. per.

For Third Party Slaughter, Reagan & Cole, LLP: William M. Slaughter, Gabriele M. Lashly, Slaughter, Reagan & Cole, LLP

 

Tentative Ruling:

 

(1)       The motion of plaintiffs for a preliminary injunction is denied.

 

(2)       As set forth below, the parties and third party objector Slaughter, Reagan & Cole, LLP, are to be prepared to discuss the discovery matter at the hearing.

 ____________________________________________________ 

 

(1)       Motion for Preliminary Injunction

 

Background:

 

Plaintiffs Nicole Nagel and ESY Investments, LLC, are judgment creditors of judgment debtors Tracy Westen and Linda Lawson based upon a $4.595 million judgment entered by the Los Angeles County Superior Court on February 21, 2014, in the underlying action, Nagel, et al., v. Westen et al., Los Angeles County Superior Court case number SS023693. (Nagel decl., ¶ 8 & exhibit A.)

 

On October 22, 2014, plaintiffs filed their original complaint in this action in Los Angeles County Superior Court alleging causes of action for fraudulent transfer against judgment debtors and also against defendants Derek Westen, Peter Westen and Westen Family Group, LLC (WFG).

 

On January 29, 2015, the court in the underlying action entered an order charging judgment debtors’ interests in WFG. (Laurin decl., exhibit X.) Judgment debtors own a 20.7416 membership interest in WFG. (D. Westen decl., ¶ 2.2.)

 

The order states:

 

“1.       The transferrable economic membership interest of Judgment Debtors in the limited liability company known as Westen Family Group, LLC, whose principal executive office in California is 1800 Jelinda Drive, Santa Barbara, California 93108 is hereby charged with the unpaid balance of the judgment entered in favor of Ms. Nagel and ESY Investments, LLC (together, ‘Judgment Creditors’) and against Judgment Debtors on February 21, 2014 in the sum of $4,595,939.53 plus post-judgment interest at the rate of 10% per annum on all uncollected amounts, reasonable attorneys’ fees and other costs expended by Judgment Creditors’ counsel in their efforts to enforce the judgment;

“2.       WFG shall promptly cause to be paid any money or property now due or to become due in the future to Tracy Weston and/or Linda Lawson from WFG directly to Judgment Creditors care of their counsel of record herein until the amount remaining due on the judgment, plus all accrued interest and cost thereon, is paid in full.” (Laurin decl., exhibit X.)

 

Plaintiffs filed their first amended complaint (FAC) on February 17, 2014.

 

On April 7, 2015, the Los Angeles court entered its order transferring this action to Santa Barbara.

 

On September 21, 2015, the court overruled demurrers of defendants and denied motions to strike portions of the FAC.

 

On October 13, 2015, defendants filed their respective answers to the FAC.

 

On January 13, 2017, judgment debtors filed a petition for chapter 7 bankruptcy, In re Westen and Lawson, United States Bankruptcy Court for the Eastern District of Texas, case number 17-40030 (the Bankruptcy proceedings). (Laurin decl., exhibit BB.)

 

On January 25, 2017, judgment debtors filed in the Bankruptcy Court a notice that plaintiffs are secured creditors in property described as “Westen Family Group, LLC” and that judgment debtors intended to surrender the property that secures the debt to plaintiffs. (Laurin decl., exhibit CC.)

 

On September 18, 2017, the Bankruptcy Court issued its order lifting the automatic stay to permit plaintiffs to proceed with this action and pursue all claims against the judgment debtors in this action. (Laurin decl., exhibit BB.) The order states: “The relief in this Order is limited to the final adjudication of the Lawsuit before the California Superior Court. Any enforcement of a final judgment against the Debtors or property of the estate must be brought before this Court.” (Ibid.)

 

On September 22, 2017, the Bankruptcy Court issued its order assigning to plaintiffs any and all interest the bankruptcy estate has in claims and causes of action asserted in this action. (Laurin decl., exhibit DD.)

 

On October 12, 2017, plaintiffs filed this motion for preliminary injunction. Specifically, plaintiffs seek orders prohibiting WFG from: (1) transferring by way of any conveyance or encumbrance, including by sale or other disposition any assets of WFG without either (a) plaintiffs’ consent to such sale after full disclosure of the proposed terms of any sale, or (b) court approval of the reasonableness and fairness of such sale; and (2) transferring in any way or disposing of the proceeds of any sale of WFG’s assets in violation of plaintiffs’ rights as the judgment creditor with a lien on judgment debtors’ interest in WFG. (Notice, p. 1.)

 

The motion is opposed by WFG, Derek Westen and Peter Westen as discussed below.

 

(Note: Plaintiffs’ declarations include hundreds of pages of exhibits, none of which are electronically bookmarked as required by Rules of Court, rule 3.1110(f)(4). The exhibits are also not indexed or paginated as required by Rules of Court, rule 3.1110(c), (f)(1). The absence of such bookmarks, indexing, and pagination has made the court’s review of plaintiffs’ evidence significantly more difficult than otherwise would have been necessary. WFG’s exhibits are bookmarked, but not indexed or paginated as required by Rules of Court, rule 3.1110(c), (f)(1). This, too, has hampered the court’s review of evidence.)

 

Analysis:

 

A preliminary injunction is available “[w]hen it appears by the complaint or affidavits that the commission or continuance of some act during the litigation would produce waste, or great or irreparable injury, to a party to the action.” (Code Civ. Proc., § 526, subd. (a)(2).) “The trial courts consider two interrelated questions in deciding whether to issue a preliminary injunction: 1) are the plaintiffs likely to suffer greater injury from a denial of the injunction than the defendants are likely to suffer from its grant; and 2) is there a reasonable probability that the plaintiffs will prevail on the merits. [Citations.] ‘[By] balancing the respective equities of the parties, [the court] concludes that, pending a trial on the merits, the defendant should or that he should not be restrained from exercising the right claimed by him.’ [Citations.]” (Robbins v. Superior Court (1985) 38 Cal.3d 199, 206.) The burden is on plaintiffs, as the parties seeking injunctive relief, to show all elements necessary to support issuance of a preliminary injunction. (O’Connell v. Superior Court (2006) 141 Cal.App.4th 1452, 1481.)

 

            (A)      Nature of Potential Injury to Plaintiffs

 

The order sought by plaintiffs is specifically limited to transfers by WFG of its assets. The motion arose out of a series of events involving WFG’s sale of one of its real estate assets.

 

In April 2017, plaintiffs served their requests for production of documents, set three, on WFG which included a request for all documents concerning any actual, planned, or potential transfers of WFG’s assets since May 2015. (O’Hanlon decl., ¶ 2 & exhibit A.) On July 3, plaintiffs filed a motion to compel further responses to this discovery, which consisted entirely of objections. (O’Hanlon decl., ¶ 3 & exhibit B.) On August 4, the discovery referee recommended granting the motion to compel further responses subject to a confidentiality protective order. (O’Hanlon decl., ¶ 4 & exhibit C.) On August 8, counsel for plaintiffs transmitted to counsel for WFG a proposed protective order. (O’Hanlon decl., ¶ 5.) The executed protective order was returned to counsel for plaintiffs by email on September 22. (O’Hanlon decl., ¶ 5 & exhibit E.) The evidence demonstrates that the delay in joint approval of the protective order was the result of several different factors, including the bicycle accident of WFG’s counsel and general delay on both sides. (See Campbell decl., ¶¶ 2-3.) The court does not find on the evidence presented that there was intentional or unreasonable delay by any party.

 

Nonetheless, at the same time that the protective order was under consideration by WFG’s counsel, and unknown to plaintiffs, WFG was in the process of selling real property in Santa Barbara known as 800 State Street through WFG’s wholly-owned subsidiary limited liability company, WFG 800 State, LLC. (Campbell decl., ¶ 5 & exhibit A.) On August 28, 2017, counsel for WFG sent an email to the judgment debtors’ chapter 7 trustee explaining the transaction, including a proposal to withhold proceeds from the sale for tax and a request for instructions as to whether the judgment debtors’ share of the proceeds should be paid directly to the trustee. (Ibid.)

 

In response to the August 28, 2017, email, on August 29, counsel for the trustee sent an email instructing WFG to transfer 100 percent of the judgment debtors’ share of the proceeds, without deduction for taxes, to the trustee. (Campbell decl., ¶ 6 & exhibit B.) After a lengthy series of emails regarding tax withholding issues, WFG distributed $771,587.52 to the chapter 7 trustee on September 8 as the phase 1 distribution. (Campbell decl., ¶¶ 7-8 & exhibit C.) Counsel for the trustee and for WFG agreed to keep these discussions confidential from third parties absent a legal requirement or court order. (Campbell decl., exhibit C.)

 

By letter dated September 25, 2017, Derek Westen stated that the phase 2 distribution would be made to the trustee later that week in the amount of $111,370.81, including $58,076.48 that was inadvertently withheld for taxes from the phase 1 distribution. (Campbell decl., exhibit D.) By email response on September 26 to the September 25 letter, the trustee requested that further distribution be delayed. (Campbell decl., exhibit E.) On October 6, the trustee requested that WFG not transfer the funds to the trustee at that time. (Campbell decl., exhibit F.)

 

Counsel for plaintiffs learned that counsel for WFG had contacted the trustee about the disposition of the sale proceeds of the State Street property on August 29, 2017. (Laurin decl., ¶ 28.)

 

The orders sought by this motion are to prohibit further transfers of assets of WFG without plaintiffs’ consent or court approval and to prohibit transfers of proceeds of sale in violation of plaintiffs’ rights as a judgment creditor with a lien on judgment debtors’ interest in WFG. Transfers of assets of WFG potentially causes harm to plaintiffs only where plaintiffs have a specific possessory interest in the property transferred or where transfer of the property effects a voidable transaction under the Uniform Voidable Transactions Act (Civ. Code, § 3439 et seq.) (UVTA). (See Civ. Code, § 3439.07, subd. (a).) Transfers of proceeds of sale contrary to plaintiffs’ secured interest causes harm by depriving plaintiffs of the present benefit of the security and so either requiring further proceedings against the WFG for damages for violation of its interest or requiring further proceedings against the recipient of such proceeds. Thus, the two requested orders are based upon different types of harm and are analytically different, but both orders depend upon the nature of plaintiffs’ interest.

 

The court notes that in the Bankruptcy proceedings, the judgment debtors filed a statement of intention to surrender their interest in WFG to plaintiffs. Plaintiffs argue alternatively that this statement effected or did not effect a surrender of the property from the bankruptcy estate, citing only to title 11 United States Code section 362(h) (relating to the automatic stay). The court finds that plaintiffs have not shown in this motion that the filing of the statement of intention effects a change in the property interests in the statement. There is insufficient discussion or legal citation in the parties’ papers for the court to conclude in this motion that the statement reflects any more than a future intention. The court’s analysis is therefore confined to the interests of the parties as they exist following the issuance of the charging order.

 

Plaintiffs’ interest in WFG was created by application of Corporations Code section 17705.03, which provides in part:

 

“(a) On application by a judgment creditor of a member or transferee, a court may enter a charging order against the transferable interest of the judgment debtor for the unsatisfied amount of the judgment. 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).)

 

“(b) To the extent necessary to effectuate the collection of distributions pursuant to a charging order in effect under subdivision (a), the court may do any of the following:

            “(1) Appoint a receiver of the distributions subject to the charging order, with the power to make all inquiries the judgment debtor might have made.

            “(2) Make all other orders necessary to give effect to the charging order.

            “(3) Upon a showing that distributions under a charging order will not pay the judgment debt within a reasonable time, foreclose the lien and order the sale of the transferable interest. The purchaser at the foreclosure sale obtains only the transferable interest, does not thereby become a member, and is subject to Section 17705.02.” (Corp. Code, § 17705.03, subd. (b).)

 

“(f) This section provides the exclusive remedy by which a person seeking to enforce a judgment against a member or transferee may, in the capacity of judgment creditor, satisfy the judgment from the judgment debtor’s transferable interest.” (Corp. Code, § 17705.03, subd. (f).)

 

The order in the underlying action provided for the charging order authorized by Corporations Code section 17705.03. There has been no foreclosure, so, as provided by section 17705.03, subdivision (a), plaintiffs’ interest in WFG is limited to a lien against the judgment debtors’ membership interest and a right to be paid proceeds that otherwise would have been distributed to the judgment debtors as members of WFG. A lien transfers no title to the property subject to the lien and provides no membership rights to participate in the management of the company. (Corp. Code, § 17705.02, subds. (a)(3)(A), (g); Civ. Code, § 2888.)

 

“The LLC’s members (i.e. owners) have no direct ownership interest in specific LLC property.” (In re KRSM Properties, LLC (B.A.P. 9th Cir. 2004) 318 B.R. 712, 718 [decided under prior law]; see also PacLink Communications International, Inc. v. Superior Court (2001) 90 Cal.App.4th 958, 964 [decided under prior law]; Corp. Code, § 17701.02, subd. (r) [defining “membership interest” as rights in the company rather than in its assets].) Consequently, judgment debtors, as members of WFG, have no rights to any specific assets of WFG unless and until there is a distribution and then judgment debtors only have rights as to the distribution. Plaintiffs’ lien does not give plaintiff any rights to specific WFG assets apart from such distributions. There is therefore no basis for an order prohibiting the transfer of WFG assets based upon plaintiffs’ rights in such assets. Any order relating to the transfer of WFG assets must be based upon the transfer as a voidable transfer.

 

            (B)      Request for Order Prohibiting Transfer of WFG Assets

 

As the above analysis demonstrates, the only legal basis for an order prohibiting transfer of WFG assets, except upon conditions, is that such a transfer would constitute a voidable transfer. Applying the first prong of the preliminary injunction analysis, the court considers which party would suffer the greater harm by the granting or denial of the injunction. If the injunction were granted, WFG would be hampered in its ability to operate. WFG now has four principal assets, all of which are real estate. (D. Westen decl., ¶ 8.) One of these assets is an undeveloped property in Goleta in which there is a substantial opportunity for profitable development. (Ibid.) WFG asserts that the opportunity will be hampered or possibly lost if the injunction is issued. (Ibid.) If the injunction were denied, plaintiffs would be injured by the denial only if WFG’s transactions diminished the value of WFG or its assets. As discussed below, there is no persuasive evidence presented that such transactions would diminish the value of WFG. The weight of the evidence, to the contrary, is that if the transactions go forward, the value to WFG, and hence to plaintiffs, is positive. To the extent that the transactions affect the liquidity of WFG so as to provide insufficient distributions relative to plaintiffs’ judgment creditor interest, plaintiffs have available the remedy of foreclosure of the interest. (See Corp. Code, § 17705.03, subd. (b)(3).) The court finds that the greater harm from the grant or denial of preliminary injunction would be to WFG by the grant of the injunction.

 

The court analyzes whether there is reasonable probability that the plaintiffs will prevail on the merits under the causes of action under the UVTA. The transfer at issue with respect to WFG is the conversion of WFG from a California limited liability company to a Nevada limited liability company (and back again). In addressing this issue in the context of discovery, the court concluded on the same evidence presented here that plaintiffs had made a prima facie showing that the initial conversion constituted a transfer under the UVTA. In opposition to this motion, WFG argues that the conversion cannot be considered a transfer under the WFG because “the conversion shall not be deemed a transfer of property.” (Corp. Code, § 17710.09, subd. (a).) It is not necessary for a conversion to be a “transfer of property” to be covered by the UVTA. Under the UVTA, “ ‘Transfer’ means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, license, and creation of a lien or other encumbrance.” (Civ. Code, § 3439.01, subd. (m).) The UVTA definition of “transfer” is intended to be as broad as possible. For example, the definition includes the creation of a lien. The creation of a lien is not a transfer of the property subject to the lien. (Civ. Code, § 2888.) The UVTA “transfer” here is not merely the conversion but is the diminution in creditor’s rights that is effected by the conversion. Keeping in mind the standard for preliminary injunctions, the court finds that plaintiffs have shown a reasonable possibility of prevailing in some fashion on the merits of this claim.

 

In balancing the equities, the court considers, among other things, the nature of the order sought in comparison to the relative potential harms. The court is not persuaded that an injunction is necessary to protect plaintiffs’ interests as presented in this motion. The evidence of the sale of the State Street property shows a certain hostility to plaintiffs’ collection efforts, but also reflects a reasonable—whether correct or not—concern about the effect of the bankruptcy proceedings on distributions. The order of the Bankruptcy Court for relief from the automatic stay retains jurisdiction within the Bankruptcy Court for enforcement of a final judgment against property of the estate. The Bankruptcy Court has exclusive jurisdiction to determine what is or is not within the bankruptcy estate. The evidence presented in the context of this motion does not establish that the Bankruptcy Court has made a final ruling that distributions on account of judgment debtors’ membership interest in WFG are outside of the bankruptcy estate. Consequently, the effect of transferring most of the distribution to the bankruptcy trustee was not to deprive plaintiffs of that money but was to leave the determination as to propriety of distribution to plaintiffs in the hands of the trustee and, by extension, the Bankruptcy Court. The interest being protected by this procedure was WFG’s interest in avoiding competing claims; the effect is not to deprive plaintiffs of rights. The weight of the evidence does not show a sufficient threat of action by WFG in derogation of plaintiffs’ interest to justify the injunction order sought in this regard.

 

Based on the totality of the evidence and arguments now presented, the court will deny the motion for a preliminary injunction as it relates to a requested order to prohibit transfer of WFG assets without plaintiffs’ consent or court approval.

 

            (C)      Request for Order Prohibiting Transfer of Proceeds of Assets

 

To the extent that the alternative requested order involves the transfer of WFG assets other than as a distribution on account of membership interests, the same analysis discussed above applies and the court will deny the motion in that regard on the same basis.

 

The alternative requested order, however, raises a different issue insofar as the order seeks to address distributions on account of membership interests over which plaintiffs have a lien through the charging order. WFG argues that this court has no jurisdiction on this issue because jurisdiction rests with the Los Angeles County Superior Court which issued the charging order. This argument has merit.

 

Enforcement of money judgments is governed by the Enforcement of Judgments Law (Code Civ. Proc., § 680.010, et seq.) (EJL). “Except as otherwise provided by statute: [¶] (a) A money judgment is enforceable as provided in Division 2 (commencing with Section 695.010).” (Code Civ. Proc., § 681.010, subd. (a).) “If a money judgment is rendered against a partner or member but not against the partnership or limited liability company, the judgment debtor’s interest in the partnership or limited liability company may be applied toward the satisfaction of the judgment by an order charging the judgment debtor’s interest pursuant to Section 15907.3, 16504, or 17705.03 of the Corporations Code.” (Code Civ. Proc., § 708.310.)

 

Corporations Code section 17705.03 is quoted above. An important textual qualification in section 17705.03 is that a charging order may be entered under subdivision (a) by “a court.” The use of “a court” demonstrates that the motion for a charging order may be made either in the court that entered the judgment or in any other court of competent jurisdiction. (See Ahart, Cal. Practice Guide: Enforcing Judgments and Debts (The Rutter Group 2017) ¶ 6:1465.) However, other orders “[t]o the extent necessary to effectuate the collection of distributions pursuant to a charging order” are to be made by “the court” rather than by “a court.” (Corp. Code, § 17705.03, subd. (b).) The use of the definite article in subdivision (b) in contrast to the indefinite article used in subdivision (a) indicates that the court making the charging order is the court authorized to make orders enforcing the charging orders as it relates to distributions.

 

There is an important distinction between this action under the UVTA and enforcement of the charging order. As plaintiffs correctly point out, this action is not brought to modify the charging order but the charging order is a predicate fact upon which the UVTA claims against WFG are brought. The charging order operates as an order to WFG directly. The Los Angeles court in the underlying action has issued that order upon plaintiffs’ application to that court. The underlying action has not been transferred to this court for enforcement or otherwise coordinated with this action. By authorizing statute, orders to enforce the charging order are properly sought and made in the Los Angeles court.

 

Based on the foregoing, the court will deny the motion for the alternative order sought.

 

Accordingly, the court will deny the motion for a preliminary injunction in its entirety.

 

The court has considered the objections to evidence by plaintiffs. The court relies only upon admissible evidence in reaching this disposition.

 

(2)       Objections to Discovery Referee Recommendations

 

On September 18, 2017, third party Slaughter, Reagan & Cole, LLP (SRC), filed its objections to the recommendations of Discovery Referee R.A. Carrington related to seven emails. Attached to the objections as exhibit 1 is an unsigned (and unfiled) set of recommendations dated September 8, 2017. The actual recommendations do not appear in the court’s file and no signed copies are presented to the court. A response to the objections was filed on September 28 by plaintiffs. On October 30, plaintiffs filed an objection and motion to strike a reply of SRC. The reply is also not in the court’s file. The specific emails which were reviewed in camera by the Discovery Referee are not now available to the court for further review.

 

The objections were set for hearing on November 6, 2017. On November 6, the court continued the hearing to January 8, 2018.

 

In light of the inadequacy of the court’s files, the court is unable to provide a tentative ruling on the objections. The parties are to be prepared to discuss further proceedings on this matter at the hearing of these objections.

 
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