California Court of Appeal, Fourth Appelate District, Wanke, Inc. v. AV Builder Corp., Docket No. D074392

Enforcement of Judgments Law

Writ of Execution and Notice of Levy

Third Party

Either Creditor's Suit, or Examination Proceedings

Setoff Claims; Right to Offset; Compensation

Two-year lien from issuance of writ of execution

One-year lien from examination order

No requirement for the judgment debtor to have present capacity to collect against the third person

Statute of limitations: four-year limitations period for an "action upon any contract, obligation, or liability founded upon an instrument in writing"

Wanke, Industrial, Commercial, Residential, Inc. (Wanke) obtained a judgment against Scott Keck and WP Solutions, Inc. (WP Solutions). To collect, Wanke filed a creditor's suit against third party AV Builder Corp. (AVB) to recover $109,327 that AVB owed WP Solutions in relation to five construction subcontracts. Following a bench trial, the court entered judgment in Wanke's favor for $83,418.94 after largely rejecting AVB's setoff claims.

The case proceeded to a two-day bench trial in June 2018. The parties stipulated as follows: Wanke obtained a judgment of $1,190,929 against WP Solutions and Keck; Keck discharged his debts in bankruptcy; and after serving a notice of levy on third-party AVB, Wanke learned that AVB owed $109,327 to WP Solutions. The sole issues presented to the court were AVB's setoff claims (§ 431.70) and Wanke's ability to collect given WP Solutions' incapacity.

Enforcement of Judgments Law

"Detailed statutory provisions govern the manner and extent to which civil judgments are enforceable. In 1982, following the recommendations of the California Law Revision Commission, the Enforcement of Judgments Law (EJL) was enacted. The EJL appears in sections 680.101 through 724.260 and is a comprehensive scheme governing the enforcement of all civil judgments in California." (Imperial Bank v. Pim Electric, Inc. (1995) 33 Cal.App.4th 540, 546 (Imperial Bank).)

After entry of a money judgment, the judgment creditor may obtain a writ of execution requiring the levying officer to enforce the judgment. (§ 699.510, subd. (a); Vinyard v. Sisson (1990) 223 Cal.App.3d 931, 939.) If property subject to levy is in a third party's possession, the levying officer serves a copy of the writ of execution and notice of levy on that person, who may not refuse to comply absent a showing of good cause. (§§ 700.040, subd. (a), 701.010.) A third party's failure to deliver property without good cause renders it directly liable to the judgment creditor for the lesser of the judgment debtor's interest in the property or debt, and the amount required to satisfy the money judgment. (§ 701.020, subd. (a).)

"A judgment creditor may enforce the 5 liability imposed by section 701.020 either pursuant to examination proceedings . . . or by way of a separate creditor's suit . . . ." (National Financial Lending, LLC v. Superior Court (2013) 222 Cal.App.4th 262, 271.)

Examination proceedings (§§ 708.110‒708.205) "permit the judgment creditor to examine the judgment debtor, or third persons who have property of or are indebted to the judgment debtor, in order to discover property and apply it toward the satisfaction of the money judgment." (Imperial Bank, supra, 33 Cal.App.4th at pp. 546‒547; see Evans v. Paye (1995) 32 Cal.App.4th 265, 280 (Evans).) Pursuant to section 708.120, a judgment creditor may "discover and specify property of the judgment debtor in the third person's possession, and obtain an order, on motion, determining any claim of exemption asserted by the judgment debtor." (Ilshin Investment Co., Ltd. v. Buena Vista Home Entertainment, Inc. (2011) 195 Cal.App.4th 612, 626 (Ilshin).) "When the third person claims no interest in the property or debt, such a motion procedure may be all that is required in order for the judgment creditor to obtain satisfaction of its judgment in whole or in part." (Ibid.)

However, "when the claims require a contested adjudication, the parties are entitled to have the issues determined in an independent creditor's action, rather than by the motion procedure under section 708.120, subdivision (d)." (Ilshin, supra, 195 Cal.App.4th at p. 626.) Pursuant to section 708.210, "if a third person has possession or control of property in which the judgment debtor has an interest or is indebted to the judgment debtor, the judgment creditor may bring an action against the third person to have the interest or debt applied to the satisfaction of the money judgment." "This action commonly is referred to as a creditor's suit." (Evans, supra, 32 Cal.App.4th at p. 276; see generally, §§ 708.210‒708.290.) A creditor's suit may be filed in the first instance without resorting to other procedures. (See Cal. Law Revision Com. com., 17 West's Ann. Code Civ. Proc. (2009 ed.) foll. § 708.210, p. 348.)

(…) (§§ 697.710 [two-year lien from issuance of writ of execution], 708.120, subd. (c) [one-year lien from examination order].)

(…) By its plain language, the creditor's suit statute considers solely whether the judgment debtor has an "interest" in property held by the third person or is owed a debt by the third person. There is no requirement for the judgment debtor to have present capacity to collect against the third person. And because no assignment is created, section 368 is not triggered and any incapacity by the judgment debtor does not present a bar to the judgment creditor's recovery.

(…) In short, Wanke could bring a creditor's suit against third party AVB under section 708.210 even though judgment debtor WP Solutions was a suspended corporation that lacked capacity to sue AVB.

Statute of Limitations
A creditor's suit must be commenced before the later of the following: "(1) The time when the judgment debtor may bring an action against the third person concerning the property or debt [and] (2) One year after creation of a lien on the property or debt pursuant to this title if the lien is created at the time when the judgment debtor may bring an action against the third person concerning the property or debt." (§ 708.230, subd. (a).) The levy and examination liens expired long before Wanke filed this creditor's suit. (§ 708.230, subd. (a)(2).) Accordingly, it is undisputed that Wanke's suit is timely only if it was filed within the time that WP Solutions "may bring an action" against AVB to recover the $109,327. (§ 708.230, subd. (a)(1).)

(WP Solutions could bring a collection action against AVB within four years of when AVB failed to meet its payment obligations under the waterproofing subcontracts. (§§ 337, subd. (a) [four-year limitations period for an "action upon any contract, obligation, or liability founded upon an instrument in writing"], 343 [four-year catchall period].) Thus, Wanke's suit is timely under section 708.230, subdivision (a)(1) if it was filed within four years of when WP Solutions' collection action accrued.)

"The right to offset is a long-established principle of equity." (Carmel Valley Fire Protection Dist. v. State of California (1987) 190 Cal.App.3d 521, 550; see Kruger v. Wells Fargo Bank (1974) 11 Cal.3d 352, 363.) As early as the 17th century, English chancery courts permitted a defense of setoff "founded on the equitable principle that 'either party to a transaction involving mutual debts and credits can strike a balance, holding himself owing or entitled only to the net difference.' " (Granberry v. Islay Inv. (1995) 9 Cal.4th 738, 743–744; Jess v. Herrmann (1979) 26 Cal.3d 131, 142 (Jess).) Codifying this principle, section 431.70 provides, in part:

"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."

Traditional setoff rules "operate as an accounting mechanism to avoid a payment and repayment from one party to another," "simply eliminating a superfluous exchange of money between the parties." (Jess, supra, 26 Cal.3d at pp. 134, 137.) Section 431.70 "permits a defendant in a civil action to assert a claim for relief in its answer and allege, in effect, that the defense claim constituted prior payment for the plaintiff's claim and therefore should be set off against any award in the plaintiff's favor." (Construction Protective Services, Inc. v. TIG Specialty Ins. Co. (2002) 29 Cal.4th 189, 192.) "Relief by way of a section 431.70 setoff is limited to defeating the plaintiff's claim." (Id. At p. 195.) "A defendant may not obtain an award of affirmative relief against a plaintiff by way of section 431.70" and may instead "only assert the setoff defensively to defeat the plaintiff's claim in whole or in part." (Id. at p. 198.)

Section 431.70 requires "cross-demands for money." Mutuality is key—the demands must exist "between the same parties in the same right." (Harrison v. Adams (1942) 20 Cal.2d 646, 649‒650.) Although the statute refers to demands "for money," such demands need not be liquidated. (See Legis. Com., com. 14C West's Ann. Code Civ. Proc. (2009 ed.) foll. § 431.70, p. 226 ["It is not necessary under Section 431.70, as it was not necessary under [former] Section 440, that the cross-demands be liquidated."], citing Hauger v. Gates (1954) 42 Cal.2d 752, 755 ["[Former] section 440 does not require that the cross-demands be liquidated."].) Likewise, the fact that a demand has not been reduced to judgment is not an obstacle to setoff. (Harrison, at p. 649.)

From these authorities we derive a general rule. A setoff may be applied pursuant to section 431.70 between parties who owed each other mutual debts or credits at a time when neither claim was time-barred. By reducing or eliminating a defendant's obligation, setoff serves as an "innocuous accounting mechanism" to eliminate a superfluous exchange between the parties. (Jess, supra, 26 Cal.3d at pp. 137−138.)

(California Court of Appeal, Fourth Appelate District, February 19, 2020, Wanke, Inc. v. AV Builder Corp., Docket No. D074392, Certified for Partial Publication)