California Court of Appeal, Crystal Bergstrom v. Zions Bancorporation, Docket No. B309154

 

Enforcement of Judgments

 

Judgment Creditor

 

Writ of Execution

 

Notice of Levy

 

Service of Process

 

Motion for a Court Order Imposing Third Party Liability

 

Garnishee’s Memorandum

 

When Account in the Name of Someone Other Than Judgment Debtor

 

Execution Lien

 

Oral Argument

 

California Law

 

 

 

 

A judgment creditor seeking to seize funds in bank accounts held by the judgment debtor’s spouse served a notice of levy on the bank’s agent for service of process.  Although the notice of levy form unambiguously listed the bank as the party to be served, the agent misread the form and rejected it.  By the time the agent informed the bank of its mistake and the bank then froze the funds, the spouse had all but drained the accounts. The Enforcement of Judgments Law (Code Civ. Proc., § 680.010 et seq.) provides that a third person’s “failure or refusal” to deliver property subject to a levy “without good cause” renders the third person “liable to the judgment creditor” for the amounts withdrawn and covered by the levy. (§ 701.020, subd. (a).) In deciding whether the bank is liable to the judgment creditor for the agent’s mistake in this case, we must answer two questions: (1) When does an agent’s mistake constitute “good cause” that therefore excuses its principal’s failure to deliver property subject to a levy, and (2) was the agent negligent in this case for misreading the form?  Because “good cause” exists if a third party does “not know or have reason to know of the levy” (§ 701.010, subd. (c)), because the “reason to know” standard looks to what “a reasonable person . . .  would have inferred” (Doe v. City of Los Angeles (2007) 42 Cal.4th 531, 547 (Doe)), and because an agent’s knowledge is imputed to its principal (Civ. Code, § 2332), we hold that “good cause” exists only when the agent’s mistake that causes the agent (and, hence, the principal) to not have reason to know of the levy is a mistake that a reasonable person would make—in other words, when the agent’s mistake does not amount to negligence. Further, because the agent in this case was negligent in misreading the standardized form it was served with, the agent for service of process—and hence its principal, the bank—had reason to know of the levy, such that the bank is liable to the judgment creditor for some (though not all) of the funds withdrawn. Accordingly, we reverse the trial court’s ruling in the bank’s favor and remand for further proceedings.

 

 

(…) Corporation Service Company (CSC) was acting as Zions’s agent for service of process for California-based matters. On March 29, plaintiff obtained a writ of execution in the amount of $4,944,759.25 from the Los Angeles Superior Court.

 

 

On April 2, plaintiff had a process server serve CSC with (1) the writ of execution, (2) a notice of levy on “all accounts standing in the name of” North american, Michaels, or Pitcock, (3) a spousal affidavit attesting that Pitcock was Michaels’s spouse, and (4) a blank memorandum of garnishee form listing “ZB, National Association” as the “garnishee.” The notice of levy is a one-page standardized form that in this case had the following information filled in:

 

•Among a series of boxes in the top third of the form, the notice of levy had a box that listed the “PLAINTIFF” as “Judicial Judgment Enforcement Services” (which is plaintiff’s company) and the “DEFENDANT” as “North american Sureties, Ltd., and Robert S. Michaels.”

 

•Immediately under the boxes, the notice of levy stated: “TO THE PERSON NOTIFIED (name):  ZB, NATIONAL ASSOCIATION.”

 

•Beneath that notification, the notice of levy stated that “the property to be levied upon is described . . . as . . . all accounts in the name of North american, and/or Michaels, and/or his spouse Pitcock . . ..”

 

 

(…) In January 2020, plaintiff filed a motion for a court order imposing third party liability on Zions for its noncompliance with the April 2 notice of levy. Plaintiff sought to hold Zions liable for the $117,815.97 Pitcock was able to withdraw on April 3 and April 10 due to Zions’s delay in freezing the funds in the accounts plaintiff controlled.

 

 

(…) When a creditor has a judgment in its favor against a debtor, the creditor seeking to enforce that judgment against the debtor’s property must (1) obtain a writ of execution from the trial court, which is directed to the sheriff or other levying officer and authorizes them to enforce the judgment (§§ 699.510, subd. (a), 699.520), and (2) complete and serve a notice of levy, which is directed to the judgment debtor or third person holding the debtor’s property and notifies them of their duties and rights (§ 699.540). (See Meyer v. Sheh (2022) 74 Cal.App.5th 830, 837-838.) When the debtor’s property is in the possession of a third person (such as a financial institution), the judgment creditor may serve the writ of execution and the notice of levy upon the third person.

 

 

(…) Within 10 days after service, the third person must also complete a garnishee’s memorandum. (§ 701.030.)

 

 

(…) When the third person is a “financial institution” and the property to be levied is a deposit account with that institution, the procedures to be followed turn on whose name is on the account. When the account is in the judgment debtor’s name, the judgment creditor must follow the procedures applicable to any levy served on a third person and must also serve the judgment debtor with notice of the levy. (§§ 700.140, subd. (a), 699.550.) When the account is in the name of someone other than the judgment debtor, the judgment creditor must not only follow the procedures applicable to any levy served on a third person and serve the judgment debtor with notice of the levy, but must also (1) obtain “a court order authorizing the levy” unless, as pertinent here, the account is in the name of the “judgment debtor’s spouse or registered domestic partner,” in which case an “affidavit” attesting to the relationship will suffice, and (2) serve the account holder with notice of the levy. (§ 700.160, subds. (a), (b)(2).)

 

 

(…) Once the financial institution is properly served as detailed above, an execution lien “arises” as to the “amounts in the deposit account at the time of service on the financial institution.” (§ 700.140, subds. (b) & (c).) While this lien is in effect, the financial institution is not to “honor a withdrawal request or a check or other order for the payment of money from the deposit account” unless there still will be “sufficient funds... available to cover the levy” (id., subd. (d)), and the institution cannot be held liable to the depositor for doing so (id., subd. (e)). This limitation on the financial institution’s discretion is an express statutory exception to the usual duty of a financial institution to honor its contractual relationship with its depositor even when third parties might make a claim against funds in a depositor’s account. (Grover v. Bay View Bank (2001) 87 Cal.App.4th 452, 456 [noting bank’s obligations to depositor except when the Law applies]; Chazen v. Centennial Bank (1998) 61 Cal.App.4th 532, 537, 539, 542; Fin. Code, § 1450, subd. (b) [obligating banks to honor depositor’s checks absent an “appropriate order against the bank from a court”].)

 

 

(…) If the financial institution (as a third person) “fails or refuses” to “deliver property to the levying officer” “without good cause to do so,” the financial institution “is liable to the judgment creditor for” the amount of the levy. (§ 701.020, subd. (a).)

 

 

(…) (E.g., Jespersen v. Zubiate-Beauchamp(2003) 114 Cal.App.4th 624, 633 [“a judge’s comments in oral argument may never be used to impeach the final order”].)

 

 

Section 701.020 entitles the judgment creditor to “the value of the judgment debtor’s interest in the property,” but only to the extent that the third person “fails or refuses without good cause” to deliver property to the levying officer. (§ 701.020, subd. (a).) Although the execution lien comes into being upon service of the notice of levy (§ 700.140, subd. (b)), the third person’s duty to deliver comes into being “at the time of the levy or promptly thereafter.” (§ 701.010, subd. (a).) Zions explained its internal policy of responding to notices of levy by freezing the affected funds by 4:00 p.m. on the business day after the notice of levy is served. Because CSC (and hence Zions) had “reason to know” of the levy on April 2, Zions is responsible for any withdrawals after 4:00 p.m. the next day—on April 3. Thus, Zions is not liable for the $15,000 withdrawn by Pitcock prior to 4:00 p.m. on April 3, but is liable for all of the withdrawals thereafter because Zions thereafter “failed or refused without good cause” to freeze the assets. This makes Zions liable for Pitcock’s two withdrawals on April 10, which total $102,610.97. Zions may also be liable for costs and reasonable attorney fees incurred by the judgment creditor in establishing the liability. (§ 701.020, subd. (c).)

 

 

DISPOSITION

 

The order is reversed with directions. The trial court is directed to enter an order awarding plaintiff $102,610.97, and to conduct a further hearing on whether to award costs and reasonable attorney fees. Each party is to bear its own costs on appeal.

 

 

 

 

(California Court of Appeal, Crystal Bergstrom v. Zions Bancorporation, May 5, 2022, Docket No. B309154, Certified for 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)