California Court of Appeal, Yaffee v. Skeen, Docket No. C097746

Hospital Lien Act (HLA)

 

Lien Upon the Damages Recovered

 

Workers’ Compensation

 

California Law

 

 

 

 

With the HLA, “the Legislature established one mechanism through which hospitals that provide emergency services can recoup costs from an entity other than a patient’s health care service plan.” (Dameron Hospital Assn. v. AAA Northern California, Nevada & Utah Ins. Exchange (2022) 77 Cal.App.5th 971, 985.) Section 3045.1 states, every person or entity “maintaining a hospital licensed under the laws of this state which furnishes emergency and ongoing medical or other services to any person injured by reason of an accident or negligent or other wrongful act not covered by workers’ compensation shall, if the person has a claim against another for damages on account of his or her injuries, have a lien upon the damages recovered, or to be recovered, by the person... to the extent of the amount of the reasonable and necessary charges of the hospital and any hospital affiliated health facility, as defined in Section 1250 of the Health and Safety Code, in which services are provided for the treatment, care, and maintenance of the person in the hospital or health facility affiliated with the hospital resulting from that accident or negligent or other wrongful act.”

 

 

When a hospital receives payment from a patient and his health insurer at a reduced negotiated rate under a prior agreement in which the hospital agreed to accept that payment as “payment in full” for its services, the hospital cannot assert a lien under the HLA to “recover the difference between its usual and customary charges and the amount received from the patient and his insurer.” (Parnell, supra, 35 Cal.4th at p. 598.) (Parnell v. Adventist Health System/West (2005) 35 Cal.4th 595, 604.) However if, “hospitals wish to preserve their right to recover the difference between usual and customary charges and the negotiated rate through a lien under the HLA, they are free to contract for this right” when negotiating their contracts with insurers. (Dameron Hospital Assn. v. AAA Northern California, Nevada & Utah Ins. Exchange (2014) 229 Cal.App.4th 549, 554.)

 

 

We agree with defendants that the plain language of section 3045.1 requires a hospital to provide emergency services before the hospital can assert a lien under the HLA, and to the extent the trial court found otherwise, it erred.

 

 

(…) Thus, the Legislature contemplated the amendments would cover nonemergency services that flow from the provision of emergency services when patients remain in the hospital.

 

 

(…) The issue in Parnell was whether a hospital could assert a lien under the HLA to recover the difference between its usual and customary charges and the amount received from a patient and its insurer when the hospital had agreed to accept the amount the patient and insurer paid as “payment in full” for its services. (Id. at p.598.) Our Supreme Court concluded the hospital could not. (Ibid.)

 

 

 

 

 

(California Court of Appeal, Dec. 17, 2024, Yaffee v. Skeen, Docket No. C097746, Certified for Publication)

 

 

 

California Court of Appeal, Second Appellate District, Rice v. Downs, Docket No. B307780

 

Security Interest

 

Security Agreement, Perfected by the Filing of a UCC Financing Statement Filed with the Secretary of State (Perfected before D. Moved for His Charging Order)

 

Charging Order (Not to Confuse with Judgment Lien on Personal Property)

 

Lien (Obtained Through a Charging Order)

Assignment (Deemed to be a Security Interest, Hence, to be Perfected by a Filling with the Secretary of State)

Collateral

 

 

Priority Between Statutory Lien and Prior Security Agreement?

 

Disgorgement

 

Order Disgorging $X. Payment to Attorney Legal Fees

 

Alter Ego Theory

 

Ethics

 

California Law

 

 

When a “money judgment is rendered against” a member of an LLC, but not against the LLC itself, the member’s interest in the LLC “may be applied toward the satisfaction of the judgment by an order charging the judgment debtor’s interest pursuant to Section . . . 17705.03 of the Corporations Code.” (Code Civ. Proc., § 708.310.)

 

 

 

 

APPEAL from an order of the Superior Court of Los Angeles County, Rupert A. Byrdsong, Judge.  Reversed and remanded with directions.

 

 

Appellant Glaser Weil Fink Howard Avchen & Shapiro, LLC (Glaser Weil), former counsel of plaintiff William Rice, appeals from an order disgorging a $450,000 payment to Glaser Weil by Triton Community Development LLC (Triton), an entity owned and controlled by Rice. The trial court concluded the payment should instead have gone to defendant and respondent Gary Downs, who had obtained an order charging Rice’s interest in Triton to satisfy an earlier judgment entered in Downs’ favor.

 

In contesting disgorgement, Rice and Glaser Weil asserted that before Downs had moved for the charging order, Glaser Weil had entered into agreements with Triton and Rice to ensure payment of Glaser Weil’s legal fees, and those agreements took precedence over the charging order. Specifically, Triton had agreed to become co-obligor on Rice’s debt to Glaser Weil, and Rice had also pledged his interest in Triton to Glaser Weil as security on his debt. Although Rice and Glaser Weil did not provide these agreements to the trial court, Rice and a Glaser Weil partner submitted declarations attesting to the agreements, along with a Uniform Commercial Code (UCC) financing statement filed with the Secretary of State referencing, among other things, Glaser Weil’s security interest in Triton.

 

Glaser Weil argued that Triton made the $450,000 payment for its own obligations as co-obligor on Rice’s debt, and therefore the payment was not a “distribution” to Rice subject to the charging order. Alternatively, if the payment was a distribution to Rice, Glaser Weil contended its security interest, perfected before Downs moved for his charging order, had priority over that order.

 

The trial court found that Triton was Rice’s alter ego, and rejected the argument that the payment was for Triton’s obligation as opposed to Rice’s debt. The court agreed in theory with Glaser Weil’s lien priority argument, but relied on its equitable authority to place the charging order ahead of Glaser Weil’s security interest.

 

Like the trial court, we conclude that when Rice, as sole managing member of Triton, directed the company to disburse funds to pay his legal bills, it constituted a distribution to him subject to the charging order.

 

We disagree with the trial court on the lien priority question, however, and hold that Glaser Weil’s security agreement, perfected by the filing of a financing statement, has priority over the later charging order. In the unpublished portion of the opinion, we further conclude there was no equitable basis to override Glaser Weil’s lien priority here, assuming arguendo a trial court can override a statutory lien priority by exercising its equitable power.

 

(…) Rice filed for Chapter 11 bankruptcy on January 27, 2020. During that proceeding, he filed a monthly operating report disclosing that in February 2020, Triton had paid $450,000 to Glaser Weil, the firm representing Rice in his litigation against Downs.

 

(…) Attached to Cypers’ declaration, however, was a UCC financing statement filed by Glaser Weil with the Secretary of State on July 15, 2019. The statement identified Rice as debtor and Glaser Weil as the secured party. Exhibit A to the financing statement described the collateral securing Rice’s debt to Glaser Weil. The collateral included, inter alia, “All of Debtor’s right, title and interest in the property described in that certain Pledge and Security Agreement dated June 27, 2019,” and “100% of Debtor’s membership interests in Triton Community Development LLC, a California limited liability company, together with the certificates (if any) evidencing the same . . . .”

 

The full description of the collateral is as follows: “All of Debtor’s right, title and interest in the property described in that certain Pledge and Security Agreement dated June 27, 2019, by Debtor, as pledgor, for the benefit of the Secured Party (‘Pledge and Security Agreement’), whether now owned by Debtor or hereafter acquired and whether now existing or hereafter coming into existence; 100% of Debtor’s membership interests in Triton Community Development LLC, a California limited liability company, together with the certificates (if any) evidencing the same; All ownership interests, membership interests, shares, securities, moneys, instruments or property representing a dividend, a distribution or return of capital upon or in respect of the Pledged Interests, or otherwise received in exchange therefor, and any warrants, rights or options issued to the holders of, or otherwise in respect of, the Pledged Interests; All rights of Debtor under the Relevant Documents or any other agreement or instrument relating to the Pledged Interests, including, without limitation, (i) all rights of Debtor to receive moneys or distributions with respect to the Pledged Interests due and to become due under or pursuant to the Relevant Documents, (ii) all rights of Debtor to receive proceeds of any indemnity, warranty or guaranty with respect to the Pledged Interests, (iii) all claims of Debtor for damages arising out of or for breach of or default under a Relevant Document, and (iv) any right of Debtor to perform thereunder and to compel performance and otherwise exercise all rights and remedies thereunder; and all proceeds of and to any of the property of Debtor described herein and in that certain Pledge and Security Agreement and, to the extent documenting any property described in said clauses or such proceeds, all books, correspondence, credit files, records, invoices and other papers. All Current Fees plus interest, all Costs plus interest and all Deferred Fees plus interest as defined in that certain Engagement Letter dated April 18, 2014, December 10, 2014, June 4, 2015, May 2, 2017 and June 27, 2019, by and between Debtor and Secured Party, as amended and modified (collectively ‘Engagement Letter’). All terms made here but not defined shall have the meaning given to such terms in the Pledge and Security Agreement and the Engagement Letter.”

 

(…) Glaser Weil’s argument focused on MDQ, LLC v. Gilbert, Kelly, Crowley & Jennett LLP (2019) 32 Cal.App.5th 702 (MDQ), a case involving priority between a charging order and a security interest granted by a judgment debtor to his attorneys. (See id. at pp. 704–705.) After taking a recess to review the case, the trial court stated, “It does appear that Glaser Weil is on the right side of the law with regard to having the priority, even over my charging order.

 

A. The Payment Was a Distribution Subject to the Charging Order

For the reasons that follow, we reject Glaser Weil’s position that the $450,000 payment was not a distribution subject to the charging order.

When a “money judgment is rendered against” a member of an LLC, but not against the LLC itself, the member’s interest in the LLC “may be applied toward the satisfaction of the judgment by an order charging the judgment debtor’s interest pursuant to Section . . . 17705.03 of the Corporations Code.” (Code Civ. Proc., § 708.310.)

 

Corporations Code section 17705.03, subdivision (a), empowers a court to “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.”

 

As used in Corporations Code section 17705.03, a “transferable interest” is “the right, as originally associated with a person’s capacity as a member, to receive distributions from a limited liability company in accordance with the operating agreement, whether or not the person remains a member or continues to own any part of the right.” (Corp. Code, § 17701.02, subd. (aa).) A “distribution” is “a transfer of money or other property from a limited liability company to another person on account of a transferable interest.” (Id., subd. (f).)

 

By emphasizing the statutory language referring to the LLC’s operating agreement, Glaser Weil appears to be limiting the reach of a charging order to distributions formalized under that agreement, such as dividends or other entitlements granted to members. This narrow reading disregards the reality that many LLCs, like Triton, are completely controlled by a single person who may distribute funds at his or her discretion. (See Curci Investments, LLC v. Baldwin (2017) 14 Cal.App.5th 214, 224 [managing member with “near complete interest” in LLC “effectively has complete control over what the LLC does and does not do, including whether it makes any disbursements to its members”].) Under Glaser Weil’s interpretation, such entities easily could evade charging orders by eschewing formal distributions and instead taking funds out of the LLC as the need arose.

 

The language of the applicable statutes does not compel this result. Again, a charging order is against an LLC’s member’s “transferable interest,” defined as “the right, as originally associated with a person’s capacity as a member, to receive distributions from a limited liability company in accordance with the operating agreement . . . .” (Corp. Code, § 17701.02, subd. (aa).) When a managing member of an LLC directs the LLC to disburse funds for the managing member’s own purposes, the managing member does so based on the
“right . . . associated with his or her capacity as a member,” invoking powers “in accordance with the operating agreement.” (See ibid.) Put another way, the managing member has access to that money only by virtue of his or her status as managing member, just as members have the right to formal distributions by virtue of their status as members. We see no basis to treat the two types of disbursements differently, particularly when doing so would encourage evasion of charging orders.

 

We express no opinion as to how a charging order might affect disbursements made to a member for reasons other than membership, for example if the member were also an employee drawing a salary. Nor do we suggest that a charging order compels a managing member to disburse funds from an LLC, only that when the managing member does so for his or her own purposes, that disbursement is subject to a charging order (fn. 4).

 

(…) Given its unchallenged finding that Triton was Rice’s alter ego, the trial court could look past the corporate formalities and deem the transaction as Rice distributing money to himself from Triton to pay his legal bills. 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.

 

B. Glaser Weil’s Security Interest Has Priority Over the Charging Order, But Remand Is Necessary To Determine the Terms of That Security Interest

Turning to Glaser Weil’s second argument, we agree that Glaser Weil’s security interest, perfected by filing the financing statement with the Secretary of State, has priority over the charging order that Downs later requested and obtained. We further agree there was no equitable basis for the trial court to override that priority. We therefore reverse the disgorgement order. Remand is necessary, however, for the trial court to determine the terms of Glaser Weil’s security interest. The trial court has yet to make this determination, having instead relied on its equitable authority to place the charging order ahead of Glaser Weil’s security interest.

 

“Other things being equal, different liens upon the same property have priority according to the time of their creation . . . .” (Civ. Code, § 2897.) Numerous statutes apply this general first-in-time principle to specific types of liens or security interests. For example, Commercial Code section 9322 governs priorities between competing security interests, ranking them “according to priority in time of filing or perfection.” (Com. Code, § 9322, subd. (a)(1).) Similarly, Code of Civil Procedure
section 697.590 governs priorities between judgment liens on personal property and security interests in the same property, ranking those interests “according to priority in time of filing or perfection.” (§ 697.590, subd. (b).)

 

We have not found, nor have the parties identified, a statute specifically addressing the priority of charging orders in relation to other liens and security interests.

 

As Glaser Weil correctly notes elsewhere, however, a charging order is not equivalent to a judgment lien on personal property, the subject of section 697.590. Judgment liens on personal property are created pursuant to section 697.510 by filing a notice with the Secretary of State. (§ 697.510, subd. (a); § 697.590, subd. (a)(1)(A).) Charging order liens, in contrast, are created under section 708.320 “by service of a notice of motion for a charging order . . . .” (§ 708.320, subd. (a).) “If a charging order is issued, the lien . . . continues under the terms of the order. If issuance of the charging order is denied, the lien is extinguished.” (Id., subd. (b).)

 

In the absence of a statute specifically addressing the priority of charging orders, we rely on the general first-in-time rule stated in Civil Code section 2897. (See Bluxome Street Associates v. Fireman’s Fund Ins. Co. (1988) 206 Cal.App.3d 1149, 1158; cf. Ahart, Cal. Prac. Guide: Enforcement of Judgments and Debts (The Rutter Group 2015) ¶ 6:1472.1 [citing Civil Code section 2897 in support of proposition that “Where judgment creditors have obtained charging order liens on the same interests, priority should be given to the first creditor that obtained a lien”].)

 

Under this principle, it is evident that Glaser Weil’s security interest has priority over Downs’ charging order. As stated, the priority of a security interest is determined “according to priority in time of filing or perfection.” (Com. Code, § 9322, subd. (a)(1).) A security interest is perfected by filing a financing statement with the Secretary of State. (Id., § 9310, subd. (a); id., § 9501, subd. (a)(2); MDQ, supra, 32 Cal.App.5th at p. 711.) Glaser Weil filed a financing statement with the Secretary of State in July 2019.

 

Downs obtained his lien several months later, in October 2019, when he served notice of his second motion for a charging order, which motion—in contrast to his first motion— was granted. (§ 708.320, subd. (a).) Glaser Weil’s earlier perfected security interest therefore has priority.

 

Our conclusion that Glaser Weil’s security interest has priority over the charging order is supported by MDQ, which to some degree presents the converse of the factual pattern in the instant case. The underlying litigation in MDQ concerned plaintiff Cleopatra Records, Inc. (Cleopatra), and defendant Floyd Mutrux. (MDQ, supra, 32 Cal.App.5th at p. 705.) The trial court issued a proposed statement of decision awarding Cleopatra over a million dollars. (Ibid.) Shortly thereafter, Mutrux assigned to his attorneys, the law firm of Gilbert, Kelly, Crowley & Jennett LLP (Gilbert Kelly), a portion of his economic interests in four LLCs “ ‘in consideration for legal services provided . . . and to be provided hereafter . . . .’ ” (Ibid.) In the assignment, Mutrux directed the LLCs to make specified percentages of payments due to Mutrux to Gilbert Kelly instead. (Ibid.) Gilbert Kelly did not file a UCC financing statement. (Id. at p. 707.)

 

Months later, the trial court entered judgment of just under a million dollars in favor of Cleopatra. (MDQ, supra, 32 Cal.App.5th at p. 706.) Cleopatra recorded a judgment lien under section 697.590. (Id. at p. 707.) Cleopatra then moved for a charging order against Mutrux’s interests in the LLCs, which the trial court granted, directing the LLCs “ ‘to pay any and all profits, distributions, disbursements or other payments otherwise due to” Mutrux to Cleopatra. (Id. at 706.)

 

The LLCs filed an interpleader action to resolve the competing interests of Cleopatra and Gilbert Kelly. (MDQ, supra, 32 Cal.App.5th at p. 706.) The trial court found that because Gilbert Kelly had never filed a financing statement, Cleopatra’s judgment lien had priority over Gilbert Kelly’s assignment. (Id. at p. 707.)

 

Our colleagues in Division Eight affirmed the trial court’s ruling. (MDQ, supra, 32 Cal.App.5th at p. 704.) The appellate court rejected Gilbert Kelly’s argument that the assignment was not a security interest: “While Gilbert Kelly’s assignment may differ from some other secured transactions, in that the collateral securing Mutrux’s obligation to Gilbert Kelly is being paid as it accrues to satisfy that obligation, rather than securing payment from another source, Gilbert Kelly offers us no rationale under which we can conclude that it is not a security interest within the meaning of the California Uniform Commercial Code.” (Id. at p. 710.)

 

Downs argues that Glaser Weil did not notify him of the security interest, but he identifies no authority that Glaser Weil had an obligation to do so. As discussed, the law requires that a secured party perfect its interest by filing a financing statement with the Secretary of State, a rule “premised upon the assumption that the filing . . . will permit prospective purchasers and encumbrancers to ascertain the existence of security interest in the property by checking a centralized record system.” (T & O Mobile Homes, Inc. v. United California Bank (1985) 40 Cal.3d 441, 448.) Thus Downs, like any other creditor, could look to that “centralized record system” to determine if there were any competing claims to Rice’s interest in Triton.

 

Ethics

(…) Nor does Downs or anyone else suggest it is inappropriate for a law firm to obtain a security interest to ensure payment of its fees, assuming the firm complies with all ethical and other requirements concerning contracts with clients.

 

 

Secondary sources: Ahart, Cal. Prac. Guide: Enforcement of Judgments and Debts (The Rutter Group 2015).

 

 

 

(California Court of Appeal, Second Appellate District, Dec 27, 2021, Rice v. Downs, Docket No. B307780, Certified for Partial Publication)

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)

Montanile v. Board of Trustees of Nat. Elevator Industry Health Benefit Plan, Docket 14-723

ERISA: lien: equity: remedies: swollen assets doctrine: constructive trust: restitution: commingling: when a third party injures a participant in an employee benefits plan under the Employee Retirement Income Security Act of 1974 (ERISA), 88 Stat. 829, as amended, 29 U. S. C. §1001 et seq., the plan frequently pays covered medical expenses. The terms of these plans often include a subrogation clause requiring a participant to reimburse the plan if the participant later recovers money from the third party for his injuries. And under ERISA §502(a)(3), 29 U. S. C. §1132(a)(3), plan fiduciaries can file civil suits “to obtain . . . appropriate equitable relief . . . to enforce . . . the terms of the plan.”

In this case, we consider what happens when a participant obtains a settlement fund from a third party, but spends the whole settlement on nontraceable items (for instance, on services or consumable items like food). We evaluate in particular whether a plan fiduciary can sue under §502(a)(3) to recover from the participant’s remaining assets the medical expenses it paid on the participant’s behalf. We hold that, when a participant dissipates the whole settlement on nontraceable items, the fiduciary cannot bring a suit to attach the participant’s general assets under §502(a)(3) because the suit is not one for “appropriate equitable relief.”

We granted certiorari to resolve a conflict among the Courts of Appeals over whether an ERISA fiduciary can enforce an equitable lien against a defendant’s general assets under these circumstances.

As previously stated, §502(a)(3) of ERISA authorizes plan fiduciaries like the Board of Trustees to bring civil suits “to obtain other appropriate equitable relief . . . to enforce . . . the terms of the plan.” 29 U. S. C. §1132(a)(3). Our cases explain that the term “equitable relief ” in §502(a)(3) is limited to “those categories of relief that were typically available in equity” during the days of the divided bench (meaning, the period before 1938 when courts of law and equity were separate). Mertens v. Hewitt Associ­ates, 508 U. S. 248, 256 (1993). Under this Court’s prece­dents, whether the remedy a plaintiff seeks “is legal or equitable depends on [(1)] the basis for [the plaintiff ’s]claim and [(2)] the nature of the underlying remedies sought.” Sereboff v. Mid Atlantic Medical Services, Inc., 547 U. S. 356, 363 (2006). Our precedents also prescribe a framework for re­solving this inquiry. To determine how to characterize the basis of a plaintiff ’s claim and the nature of the remedies sought, we turn to standard treatises on equity, which establish the “basic contours” of what equitable relief was typically available in premerger equity courts. Great-West Life & Annuity Ins. Co. v. Knudson, 534 U. S. 204, 217 (2002).

(…) restitution in equity typically involved enforcement of “a constructive trust or an equitable lien, where money or property identified as belonging in good conscience to the plaintiff could clearly be traced to particular funds or property in the defendant’s possession.” But the restitution sought in Great-West was legal—not equitable—because the specific funds to which the fiduciaries “claimed an entitlement . . . were not in the defendants’ possession.” Id., at 214.

Under these principles, the basis for the Board’s claim here is equitable: The Board had an equitable lien by agreement that attached to M.’s settlement fund when he obtained title to that fund. And the nature of the Board’s underlying remedy would have been equitable had it immediately sued to enforce the lien against the settlement fund then in M.’s possession. That does not resolve this case, however. Our prior cases do not address whether a plan is still seeking an equitable remedy when the defendant, who once possessed the settlement fund, has dissipated it all, and the plan then seeks to recover out of the defendant’s general assets.

To resolve this issue, we turn to standard equity trea­tises. As we explain below, those treatises make clear that a plaintiff could ordinarily enforce an equitable lien only against specifically identified funds that remain in the defendant’s possession or against traceable items that the defendant purchased with the funds (e.g., identifiable property like a car). A defendant’s expenditure of the entire identifiable fund on nontraceable items (like food or travel) destroys an equitable lien. The plaintiff then may have a personal claim against the defendant’s general assets—but recovering out of those assets is a legal remedy, not an equitable one.

Equitable remedies “are, as a general rule, directed against some specific thing; they give or enforce a right to or over some particular thing . . . rather than a right to recover a sum of money generally out of the defendant’s assets.” S. Symons, Pomeroy’s Equity Jurisprudence §1234, p. 694 (5th ed. 1941) (Pomeroy). Equitable liens thus are ordinarily enforceable only against a specifically identified fund because an equitable lien “is simply a right of a special nature over the thing . . . so that the very thing itself may be proceeded against in an equitable action.” Id., §1233, at 692; see also Restatement of Restitution §215, Comment a, p. 866 (1936) (Restatement) (enforce­ment of equitable lien requires showing that the defendant “still holds the property or property which is in whole or in part its product”); 1 D. Dobbs, Law of Remedies §1.4, p. 19 (2d ed. 1993) (Dobbs) (similar). This general rule’s appli­cation to equitable liens includes equitable liens by agreement, which depend on “the notion . . . that the contract creates some right or interest in or over specific property,” and are enforceable only if “the decree of the court can lay hold of ” that specific property. 4 Pomeroy §1234, at 694–695.

If, instead of preserving the specific fund subject to the lien, the defendant dissipated the entire fund on nontrace­able items, that complete dissipation eliminated the lien. Even though the defendant’s conduct was wrongful, the plaintiff could not attach the defendant’s general assets instead. (…) The plaintiff had “merely a personal claim against the wrongdoer”—a quintessential action at law.

We have long rejected the argument that “equitable relief ” under §502(a)(3) means “whatever relief a court of equity is empowered to provide in the particular case at issue,” including ancillary legal remedies. Mertens, 508 U. S., at 256. In “many situations . . . an equity court could establish purely legal rights and grant legal reme­dies which would otherwise be beyond the scope of its authority.” Ibid. But these legal remedies were not relief “typically available in equity,” and interpreting them as such would eliminate any limit on the meaning of “equitable relief ” and would “render the modifier superfluous.” Id., at 256, 258; see also Great-West, supra, at 210. (…) While equity courts sometimes awarded money decrees as a substitute for the value of the equitable lien, they were still legal remedies, because they were “wholly pecuniary and personal.” 4 Pomeroy §1234, at 694. The same is true with respect to deficiency judgments. Equity courts could award both of these remedies as part of their ancillary jurisdiction to award complete relief. But the treatises make clear that when equity courts did so, “the rights of the parties are strictly legal, and the final remedy granted is of the kind which might be conferred by a court of law.” 1 id., §231, at 410; see also 1 Dobbs §2.7, at 180–181, and §4.3(3), at 602 (similar); New Federal Equity Rules 10 (rev. 5th ed. 1925) (authorizing equity courts to award such relief). But legal remedies—even legal reme­dies that a court of equity could sometimes award—are not “equitable relief ” under §502(a)(3). See Mertens, supra, at 256–258.

The Board contends that there is an exception if the defendant wrongfully dissipates the equi­table lien to thwart its enforcement. But none of the Board’s examples show that such relief was “typically available” in equity.

CIGNA Corp. v. Amara, 563 U. S. 421 (2011): CIGNA reaffirmed that “traditionally speaking, relief that sought a lien or a constructive trust was legal relief, not equitable relief, unless the funds in question were ‘particular funds or property in the defendant’s possession.’ ” 563 U. S, at 439 (quoting Great-West, supra, at 213.

The swollen assets doctrine also does not establish that the relief the Board seeks is equitable. Under the Board’s view of this doctrine, even if a defendant spends all of a specifically identified fund, the mere fact that the defend­ant wrongfully had assets that belonged to another in­creased the defendant’s available assets, and justifies recovery from his general assets. But most equity courts and treatises rejected that theory. See Taft, Note, A Defense of a Limited Use of the Swollen Assets Theory Where Money Has Wrongfully Been Mingled With Other Money, 39 Colum. L. Rev. 172, 175 (1939) (describing the swollen assets doctrine as “often . . . rejected by the courts”); see also Oesterle, Deficiencies of the Restitution­ary Right to Trace Misappropriated Property in Equity and in UCC §9–306, 68 Cornell L. Rev. 172, 189, and n. 33 (1983) (similar). To the extent that courts endorsed any version of the swollen assets theory, they adopted a more limited rule: that commingling a specifically identified fund—to which a lien attached—with a different fund of the defendant’s did not destroy the lien. Instead, that commingling allowed the plaintiff to recover the amount of the lien from the entire pot of money. See Restatement §209, at 844; Scott, The Right To Follow Money Wrongfully Mingled With Other Money, 27 Harv. L. Rev. 125, 125–126 (1913). Thus, even under the version of the swollen assets doctrine adopted by some courts, recovery out of M.’s general assets—in the absence of commin­gling—would not have been “typically available” relief.

Because the lower courts erroneously held that the plan could recover out of M.’s general assets, they did not determine whether M. kept his settlement fund separate from his general assets or dissipated the entire fund on nontraceable assets. A remand is necessary so that the District Court can make that determination.

(U.S.S.C., Jan. 20, 2016, Montanile v. Board of Trustees of Nat. Elevator Industry Health Benefit Plan, Docket 14-723, J. Thomas).

Books : S. Symons, Pomeroy’s Equity Jurisprudence §1234, p. 694 (5th ed. 1941); Restatement of Restitution §215, Comment a, p. 866 (1936); D. Dobbs, Law of Remedies §1.4, p. 19 (2d ed. 1993); New Federal Equity Rules 10 (rev. 5th ed. 1925); Taft, Note, A Defense of a Limited Use of the Swollen Assets Theory Where Money Has Wrongfully Been Mingled With Other Money, 39 Colum. L. Rev. 172, 175 (1939); Oesterle, Deficiencies of the Restitution­ary Right to Trace Misappropriated Property in Equity and in UCC §9–306, 68 Cornell L. Rev. 172, 189, and n. 33 (1983); Scott, The Right To Follow Money Wrongfully Mingled With Other Money, 27 Harv. L. Rev. 125, 125–126 (1913).

Intervention d’un fonds de pension (soumis à ERISA) en faveur de la victime d’un accident, impliquant responsabilité d’un tiers. Les actes du fonds contiennent une clause prévoyant que si la victime parvient à obtenir un dédommagement du responsable, ce dédommagement servira en priorité à rembourser le fonds. Quid si la victime a bien reçu une indemnité du tiers responsable, mais a déjà dépensé la somme reçue ? Le fonds peut-il agir en restitution contre la victime ? Si oui contre l’ensemble du patrimoine de la victime ou en visant seulement l’indemnité, ou les biens et valeurs acquis en remploi de l’indemnité ? Le fonds peut-il lier l’indemnité à une restriction du droit d’aliéner ?

La Cour Suprême juge en l’espèce que lorsque la victime a dépensé la somme reçue du tiers en acquérant des biens dépourvus de traçabilité (nourriture, services, etc.), le fonds de pension n’est pas en droit d’obtenir judiciairement la réalisation d’un gage grevant l’ensemble du patrimoine de la victime, parce qu’une telle action n’a pas nature de « remède approprié en équité » (cf. différence entre actions « at law » et « in equity »). Or la loi fédérale ERISA dans une affaire de ce type ne permet que le dépôt d’une action « appropriée en équité » pour tenter d’obtenir un tel droit de gage sur le patrimoine universel. Le droit de l’ « equity », historiquement, ne permet pas l’octroi judiciaire d’un tel droit de gage sur tout le patrimoine.

En effet, la jurisprudence de la Cour expose que la notion de « remède en équité » telle que prévue par ERISA à sa Section 502(a)(3) est limitée aux remèdes qui étaient typiquement disponibles en équité à l’époque où les cours statuant en droit et celles statuant en équité étaient séparées (soit avant 1938). Toujours selon la jurisprudence de la Cour, qualifier un remède de «légal » ou d’ «équitable » dépend (1) du fondement de la prétention du demandeur, et (2) de la nature de ses conclusions dans l’action. Pour procéder à cette qualification, il convient de se fonder sur la doctrine (les traités standard en matière d’ « equity »), qui établissent les contours de base des remèdes équitables typiquement disponibles devant les cours statuant en équité avant 1938.

A titre illustratif provenant d’une autre affaire, la Cour indique que le remède de « restitution », en équité, implique l’exécution d’un « constructive trust » (soit un trust qualifié de tel par la cour, sans formation préexistante) ou l’exécution d’un « gage équitable », situations dans lesquelles une somme d’argent ou une chose déterminée, identifiées comme appartenant de bonne foi au demandeur, peuvent clairement être tracées pour mener à des fonds ou des choses en possession du défendeur. Mais si une action en restitution vise des fonds qui ne sont pas en possession du défendeur, l’action sera légale et non équitable.

Selon ces principes, la base de l’action du fonds de pension est équitable : le fonds est titulaire d’un gage « en équité », conventionnel, qui porte sur les fonds reçus du tiers responsable par la victime. Et par ailleurs, le fonds aurait conclu à l’octroi par la cour d’un remède de nature équitable s’il avait immédiatement ouvert action en exécution du gage grevant l’indemnité reçue par la victime et en possession de celle-ci.

Ces considérations n’apportent pas encore la solution à la question que pose la présente affaire. La jurisprudence rendue à ce jour par la Cour ne tranche pas la question de savoir si le fonds conclut encore à l’octroi par le Tribunal d’un remède équitable dans la situation où la victime, qui a été en possession de la somme reçue en indemnisation, l’a depuis lors entièrement dépensée, de sorte que le fonds recherche à recouvrer la somme par lui versée en s’en prenant à l’ensemble du patrimoine de la victime.

Pour résoudre la question posée en l’espèce, la Cour se réfère à la doctrine établie en matière d’ « equity ». Les traités consacrés à cette matière indiquent clairement qu’un demandeur ne peut ordinairement procéder à l’exécution forcée de son droit de gage équitable que contre des fonds spécifiquement identifiés, restés en possession du défendeur, ou contre des biens, traçables, que le défendeur a acquis grâce à ces fonds spécifiques. Si le défendeur s’est défait desdits biens identifiables en faveur de biens impossible à tracer, le droit de gage équitable est détruit. Le demandeur aura peut-être à sa disposition un droit d’action personnel contre l’ensemble des biens du défendeur, mais ce droit est d’essence légale, et non équitable. La Cour se réfère à ce niveau au Traité Pomeroy (1941) et à la Section 215 du Restatement of Restitution (1936). Ces règles générales s’appliquent également aux droits de gage équitables créés contractuellement.

La Cour rejette donc ici à nouveau l’argument selon lequel un « remède équitable » au sens de la Section 502(a)(3) signifie n’importe quel remède à disposition d’une cour statuant en équité, y compris les remèdes d’essence légale. Cela même s’il est vrai que dans de nombreuses situations, une cour statuant en équité dispose de la compétence d’allouer des conclusions «légales ». Mais ces remèdes d’essence légale ne constituaient nullement des remèdes typiquement disponibles dans le régime équitable. De la sorte, admettre sans autre un remède légal dans le régime équitable éliminerait tout sens à la notion de « remède équitable ».

Même s’il est exact que les cours statuant en équité condamnaient parfois au versement d’une somme d’argent en lieu et place d’une exécution du gage équitable, ces condamnations pécuniaires s’analysaient en des remèdes de nature légale, parce qu’elles étaient intégralement pécuniaire et personnelle. Un raisonnement équivalent s’applique si la réalisation du gage équitable ne produit pas suffisamment pour désintéresser complètement le créancier. La somme qui reste alors due peut faire l’objet d’un jugement portant à la condamnation d’une somme d’argent (correspondante au montant non couvert par la réalisation du gage). Ce jugement était rendu par une cour statuant en équité, en vertu de leurs compétences accessoires leur permettant d’allouer au créancier l’intégralité du montant qui lui était dû. Mais les traités en matière d’équité indiquent clairement que lorsque une cour jugeant en équité disposait ainsi, les droits des parties s’agissant du faisceau accessoire de la procédure, étaient strictement de nature légale, relevant de la compétence originaire des cours « at law ». Il n’en demeure pas moins que ces remèdes d’essence légale, même octroyés par une cour statuant en équité, ne constituent nullement des remèdes équitables au sens de la section 502(a)(3).

Certes en toute logique le fonds soutient qu’une exception à ces principes existe si le défendeur dissipe le lien équitable de manière contraire au droit pour échapper à une exécution forcée. Mais aucun des exemples donnés par le fonds ne montre qu’un tel remède exceptionnel serait typiquement disponible en équité.

Ainsi une jurisprudence de la Cour de 2011 (CIGNA) a réaffirmé que des conclusions portant sur un gage (et non un gage équitable) ou portant sur un « constructive trust » (soit un trust établi par la cour elle-même à des fins de résolution du litige) s’analysaient en des remèdes légaux, et non équitables, à moins que les fonds recherchés ne constituaient des fonds ou une chose en possession du défendeur.

La théorie de l’accroissement du patrimoine, invoquée par le fonds, ne lui est d’aucun secours, car rejetée par la plupart des cours statuant en équité, ainsi que par les traités. Et dans la mesure où certaines cours adoptèrent cette théorie, elles n’en ont retenu qu’une définition allégée : selon la définition retenue, si le défendeur a mélangé une somme spécifique, objet du gage, avec d’autres biens en sa possession, alors le demandeur peut s’en prendre à ce pot commun. Le gage n’est en effet pas détruit par le mélange des biens. Ainsi, même en se référant à ce type de théorie, le fonds ne saurait en l’espèce récupérer ce qui lui est dû par la victime : aucun mélange de biens créant un pot commun disponible n’existe en l’occurrence.