California Court of Appeal, Water for Citizens of Weed Cal. v. Churchwell White LLP, Docket No. C093421

 

Motion to Strike the Complaint

 

Anti-SLAPP Motion

 

SLAPP Back Action Against a Law Firm

 

Ethics

 

Civil Procedure

 

California Law

 

 

 

 

APPEAL from a judgment of the Superior Court of Sacramento County, David I. Brown, Judge. Affirmed.

 

 

This is an appeal from the grant of a special motion to strike a complaint for malicious prosecution. In the underlying action, defendants Churchwell White LLP, a law firm, and two of its attorneys, Barbara A. Brenner and Robin R. Baral (collectively Churchwell) represented a corporation in an action to quiet title to water rights. In the underlying quiet title action, Churchwell sued the City of Weed (City) and the plaintiffs here, Water for Citizens of Weed California, its members, and other citizens of the City (collectively Citizens). The trial court in that action granted Citizens’s special motion to strike the complaint, commonly called an anti-SLAPP motion (strategic lawsuit against public participation). Citizens then filed this action against Churchwell, alleging malicious prosecution for naming them in the quiet title action. The trial court granted Churchwell’s anti-SLAPP motion, concluding Citizens did not establish a probability of prevailing on their claim. They did not show that Churchwell lacked probable cause or acted out of malice in naming them in the quiet title action. We affirm the judgment.

 

 

Citizens filed an anti-SLAPP motion to strike the complaint. (Code Civ. Proc., §425.16.) (Statutory section citations that follow are found in the Code of Civil Procedure unless otherwise stated.) Each of the individual plaintiffs submitted a sworn declaration that he or she did not claim and had never claimed any right, title, estate, lien, or interest in the 2.0 cfs of Beaughan Springs water at issue in the case. The trial court granted the anti-SLAPP motion. It found that Citizens were named in the action solely because they exercised their constitutional rights. None of them claimed any private interest in the water. The court refused to address the second step of deciding an anti-SLAPP motion, which asked whether Roseburg could establish a prima facie case of success on the merits.

 

 

(…) Citizens filed the present action, a “SLAPP back” action, against Churchwell for malicious prosecution for suing them on behalf of Roseburg in the quiet title action. Citizens alleged Churchwell had no probable cause to name them in the underlying action, and that Churchwell named them only to silence and chill their exercise of First Amendment rights.

 

 

Churchwell filed an anti-SLAPP motion against the complaint. The trial court granted the motion. It found that although the complaint arose from Churchwell’s exercise of its constitutional rights, Citizens did not demonstrate a probability of prevailing on the merits. They did not establish a prima facie case of malicious prosecution: that Churchwell lacked probable cause to name them in the underlying action and that Churchwell acted out of malice. Citizens challenge those findings in this appeal.

 

 

We review the trial court’s grant of Churchwell’s anti-SLAPP motion de novo. (Park v. Board of Trustees of California State University (2017) 2 Cal.5th 1057, 1067.) Our review involves a two-step analysis. We first determine whether Churchwell, the moving party, established that the claim of malicious prosecution arose from its attorneys’s actions in furtherance of their “right of petition or free speech under the United States Constitution or the California Constitution in connection with a public issue.” (§425.16, subd. (b)(1).) If Churchwell has satisfied that burden, then Citizens bear the burden of establishing a probability of prevailing on their claim. (§425.16, subd. (b)(1).) Citizens must show that their malicious prosecution claim based on Churchwell’s protected activity “is legally sufficient and factually substantiated. The court, without resolving evidentiary conflicts, must determine whether the plaintiff’s showing, if accepted by the trier of fact, would be sufficient to sustain a favorable judgment. If not, the claim is stricken.” (Baral v. Schnitt (2016) 1 Cal.5th 376, 396.).

 

 

Citizens do not challenge the trial court’s determination on the first step of analysis, that their claim for malicious prosecution arose from Churchwell’s exercise of constitutional rights. We thus turn to the second step and determine whether Citizens have established a probability of prevailing on their claim.

 

 

To prevail on their malicious prosecution claim, Citizens must show that the quiet title action (1) was commenced by or at the direction of Churchwell and was pursued to a legal termination favorable to Citizens; (2) was initiated or maintained without probable cause; and (3) was initiated or maintained with malice. (Parrish v. Latham & Watkins (2017) 3 Cal.5th 767, 775 (Parrish).) No one disputes the first element, so we address the other two.

 

 

We need not address the element of malice. Because we have determined there was probable cause to bring the quiet title action, “the malicious prosecution action fails, whether or not there is evidence that the prior suit was maliciously motivated.” (Sheldon Appel Co. v. Albert & Oliker, supra, 47 Cal.3d at p. 875).

 

 

 

 

(California Court of Appeal, Feb. 9, 2023, Water for Citizens of Weed Cal. v. Churchwell White LLP, Docket No. C093421, Certified for Publication)

California Court of Appeal, Falcon Brands, Inc. v. Mousavi & Lee, LLP, Docket No. G059477

 

Legal Ethics

 

Professional Malpractice

 

Attorneys

 

Litigation Privilege

 

Anti-SLAPP Law

 

Illegal Attempts to Force into Settling

 

Extortion

 

“Flatley Rule.”

 

California Law

 

 

 

Lawyers argue for a living.  Some do more than argue.  They lace their settlement demands with threats.  When does such activity cross the line and become professional misconduct?  That is the fundamental question presented in this case.

 

 

Falcon Brands, Inc. and Coastal Harvest II, LLC (collectively Falcon) appeal here from an order granting respondent’s special motion to strike both causes of action in Falcon’s cross-complaint pursuant to Code of Civil Procedure section 425.16 (the anti-SLAPP law). The cross-complaint alleges extortion and intentional interference with a contract against attorney Amy Mousavi and her law firm, Mousavi & Lee, LLP (collectively Mousavi). Falcon argues Mousavi’s e-mail settlement demands, described in detail below, which are the focus of Falcon’s cross-complaint, were not entitled to protection under the anti-SLAPP law because they constituted illegal attempts to force Falcon into settling the underlying matter. The trial court rejected this argument and granted Mousavi’s anti-SLAPP motion.

 

We reverse as to the first cause of action for extortion because we conclude Mousavi’s e-mail settlement demands, when considered in context, were not protected speech in light of the Supreme Court’s ruling in Flatley v. Mauro (2006) 39 Cal.4th 299 (Flatley). Rather, Mousavi’s escalating series of threats ultimately transformed what had been legitimate demands into something else: extortion. We therefore conclude Falcon’s first cause of action is not protected by the anti-SLAPP law as a result of the well-established “Flatley rule.”

 

We affirm as to the second cause of action, intentional interference with a contract. That cause of action arises out of Mousavi’s actual revelation of damaging information about Falcon to Falcon’s merger partner. Falcon does not contend the revelations were illegal as a matter of law. The revelations were made in furtherance of Mousavi’s contemplated litigation. The trial court correctly concluded the revelations were protected by the litigation privilege. Consequently, they are also protected by the anti-SLAPP statute.

 

(…) The parties failed to reach a settlement; Mousavi thereafter sent Harvest copies of the various settlement demands she had made to Falcon. Harvest subsequently sued to rescind its merger agreement with Falcon, apparently based on the claims of illegal conduct it received from Mousavi.

 

(…) While Honard did allege in his complaint that Falcon engaged in specific illegal activities, he did not affirmatively link those acts to either his wrongful termination or the non-payment of his commissions, salary, or expenses.

 

(…) Mousavi moved to strike the cross-complaint pursuant to the anti-SLAPP law. In support of the motion, Mousavi declared that, after she learned Falcon was involved in a merger with Harvest, she had a good faith reason to inform Harvest about Honard’s claims against Falcon because the Corporations Code states the surviving corporation in a merger remains liable for any judgment entered against the disappearing corporation. (Corp. Code, § 1108.) She denied threatening to report Falcon to the Bureau of Cannabis Control, to other law enforcement agencies, or to the media.

 

The Anti-SLAPP Law

We begin our analysis with another quote from Flatley: “Our opinion should not be read to imply that rude, aggressive, or even belligerent prelitigation negotiations, whether verbal or written, that may include threats to file a lawsuit, report criminal behavior to authorities or publicize allegations of wrongdoing, necessarily constitute extortion.” (Flatley, supra, 39 Cal.4th at p. 332, fn. 16.) We concur in this observation. The presence or absence of extortion necessarily depends on the facts in a particular case. Having said that, we turn to the difficult issue presented here.

 

The anti-SLAPP law provides a summary mechanism to test the merit of any claim arising out of a defendant’s protected speech or petitioning activities. The law authorizes courts to strike any cause of action which falls within the statute’s purview, if the plaintiff cannot demonstrate a probability of prevailing on it. (Code Civ. Proc.,
§ 425.16.) “Attempting to protect against ‘lawsuits brought primarily to chill’ the exercise of speech and petition rights, the Legislature embedded context into the statutory preamble, ‘declaring that it is in the public interest to encourage continued participation in matters of public significance.’” (FilmOn.com Inc. v. DoubleVerify Inc. (2019) 7 Cal.5th 133, 143 (FilmOn.com).)

 

“Because our ‘primary goal is to determine and give effect to the underlying purpose of’ the anti-SLAPP statute,” we will “liberally extend the protection of the anti-SLAPP statute where doing so would ‘encourage continued participation in matters of public significance,’ but withhold that protection otherwise.” (FilmOn.com, supra, 7 Cal.5th at p. 154.)

 

When a party moves to strike a complaint on the basis of the anti-SLAPP law, the trial court must engage in a two-step process. “First, the court decides whether the defendant has made a threshold showing that the challenged cause of action is one arising from protected activity. The moving defendant’s burden is to demonstrate that the act or acts of which the plaintiff complains were taken ‘in furtherance of the defendant’s right of petition or free speech under the United States or California Constitution in connection with a public issue,’ as defined in the statute.” (Equilon Enterprises v. Consumer Cause, Inc. (2002) 29 Cal.4th 53, 67 (Equilon).)

 

If the court finds the defendant has made that required showing, the burden shifts to the plaintiff to demonstrate “there is a probability that the plaintiff will prevail on the claim.” (Code Civ. Proc., § 425.16, subd. (b)(1); DuPont Merck Pharmaceutical Co. v. Superior Court (2000) 78 Cal.App.4th 562, 567-568.)

 

“An order granting or denying a special motion to strike shall be
appealable . . . .” (Code Civ. Proc., § 425.16, subd. (i).) We review either ruling on a de novo basis. (ComputerXpress, Inc. v. Jackson (2001) 93 Cal.App.4th 993, 999 [“Whether section 425.16 applies and whether the plaintiff has shown a probability of prevailing are both reviewed independently on appeal”].) “While we are required to construe the statute broadly, we must also adhere to its express words and remain mindful of its purpose.” (Paul v. Friedman (2002) 95 Cal.App.4th 853, 864, fn. omitted.)

 

The Protected Activity Prong
A cross-defendant who files an anti-SLAPP motion to strike bears the initial burden of demonstrating that the challenged cause of action arises from protected activity. (Equilon, supra, 29 Cal.4th at p. 67.) “In deciding whether the ‘arising from’ requirement is met, a court considers ‘the pleadings, and supporting and opposing affidavits stating the facts upon which the liability or defense is based.’” (City of Cotati v. Cashman (2002) 29 Cal.4th 69, 79.)

 

In Flatley, the Supreme Court created an addendum to the standard anti-SLAPP analysis. We believe application of the so-called “Flatley rule” is dispositive here. Because the facts in Flatley bear such a remarkable similarity to those now before us, we quote liberally from the Supreme Court’s opinion:

“Plaintiff Michael Flatley, a well-known entertainer, sued defendant
D. Dean Mauro, an attorney, for civil extortion, intentional infliction of emotional distress and wrongful interference with economic advantage. Flatley’s action was based on a demand letter Mauro sent to Flatley on behalf of Tyna Marie Robertson, a woman who claimed that Flatley had raped her, and on subsequent telephone calls Mauro made to Flatley’s attorneys, demanding a seven-figure payment to settle Robertson’s claims. Mauro filed a motion to strike Flatley’s complaint under the anti-SLAPP statute.
[Fn. omitted.] . . . The Court of Appeal held that, because Mauro’s letter and subsequent telephone calls constituted criminal extortion as a matter of law, and extortionate speech is not constitutionally protected, the anti-SLAPP statute did not apply.” (Flatley, supra, 39 Cal.4th at p. 305.)

 

The Supreme Court affirmed the judgment of the Court of Appeal: “We conclude that, consistent with the legislative intent underlying the anti-SLAPP statute as revealed by the statutory language, and consistent with our existing anti-SLAPP jurisprudence, a defendant whose assertedly protected speech or petitioning activity was illegal as a matter of law, and therefore unprotected by constitutional guarantees of free speech and petition, cannot use the anti-SLAPP statute to strike the plaintiff’s complaint.” (Flatley, supra, 39 Cal.4th at p. 305.)

 

Mousavi argued in the trial court that Flatley is distinguishable despite the fact that, much like in Flatley, Falcon sued Mousavi for extortion and intentional interference with a contract based on the content of a series of increasingly strident demand letters it received from her. Mousavi echoes the argument made by counsel in Flatley that her demands “amounted to no more than the kind of permissible settlement negotiations that are attendant upon any legal dispute . . . .” (Flatley, supra, 39 Cal.4th at p. 328.) During oral argument before us, Mousavi’s appellate counsel vigorously agreed.

We are not persuaded.

 

Extortion
“Extortion is the obtaining of property . . . from another, with his or her consent . . . induced by a wrongful use of force or fear.” (Pen. Code, § 518, subd. (a).) Fear, for purposes of extortion “may be induced by a threat of any of the following:
1. To do an unlawful injury to the person or property of the individual threatened or of a third person. 2. To accuse the individual threatened . . . of a crime. 3. To expose, or to impute to him . . . a deformity, disgrace or crime. 4. To expose a secret affecting him, her, or them. 5. To report his, her, or their immigration status or suspected immigration status.” (Pen. Code, § 519, italics added; Flatley, supra, 39 Cal.4th at p. 326.)
Attempted extortion is also a crime. (Pen. Code, § 524; see People v. Umana (2006) 138 Cal.App.4th 625 (Umana) [affirming conviction for attempted extortion under Penal Code section 524].)

 

As the Supreme Court explained in Flatley, “extortion has been characterized as a paradoxical crime in that it criminalizes the making of threats that, in and of themselves, may not be illegal. ‘In many blackmail cases the threat is to do something in itself perfectly legal, but that threat nevertheless becomes illegal when coupled with a demand for money.’ [Citation.] The extortion statutes ‘all adopted at the same time and relating to the same subject matter, clearly indicate that the legislature in denouncing the wrongful use of fear as a means of obtaining property from another had in mind threats to do the acts specified in Penal Code section 519, the making of which for the purpose stated is declared to be a wrongful use of fear induced thereby.’” (Flatley, supra, 39 Cal.4th at p. 326, fn. omitted.). “Attorneys are not exempt from these principles in their professional conduct.” (Id. at p. 327.)

 

The Supreme Court addressed a pivotal argument tendered by Mousavi both in the trial court and before us—that her conduct did not constitute extortion since she threatened no direct disclosure of Falcon’s alleged criminal misconduct to either law enforcement or the media. We recognize at this point that this argument will strike a familiar chord with many lawyers who might ask, isn’t this type of posturing standard operating procedure for aggressive litigators? Don’t lawyers regularly link settlement demands to threatened consequences?

 

In response, we concur with the answers provided by the Supreme Court in Flatley: “threats to do the acts that constitute extortion under Penal Code section 519 are extortionate whether or not the victim committed the crime or indiscretion upon which the threat is based and whether or not the person making the threat could have reported the victim to the authorities or arrested the victim. [Citations.] Furthermore, the crime with which the extortionist threatens his or her victim need not be a specific crime.” (Flatley, supra, 39 Cal.4th at p. 327.)

 

In other words, it is the threat to reveal damaging information, not any subsequent revelation, that makes the conduct illegal when the threat is linked to a monetary demand. Many, perhaps most, extortionate threats may never actually be conveyed to either law enforcement or the media. The reason for this is obvious enough: the threat had its desired effect. “The accusations need only be such as to put the intended victim of the extortion in fear of being accused of some crime. The more vague and general the terms of the accusation the better it would subserve the purpose of the accuser in magnifying the fears of his victim, and the better also it would serve to protect him in the event of the failure to accomplish his extortion and of a prosecution for his attempted crime.” (People v. Sanders (1922) 188 Cal. 744, at pp. 749-750; cited with approval in Flatley, supra, 39 Cal.4th at p. 327.)

 

Again, it is the fact that the threat is directly linked to the monetary demand that is the critical factor. “‘It is the means employed to obtain the money which the law denounces, and though the purpose may be to collect a just indebtedness arising from and created by the criminal act for which the threat is to prosecute the wrongdoer, it is nevertheless within the statutory inhibition.’” (Flatley, supra, 39 Cal.4th at p. 326, italics added.)

 

Applying these rules to the current facts, we believe Mousavi’s initial communication with Falcon on September 6, 2019, as described above, was innocent. Her next e-mail sent on October 8, 2019, is a closer call when considered by itself. That e-mail contained at least an implicit threat, as Mousavi specified the crimes Falcon had allegedly committed, though she never directly linked her settlement demands to them. Instead, she explained how she had calculated her client’s damages without making any direct reference to the alleged criminal misconduct. A skeptical observer might reasonably wonder why Mousavi referenced the “BBC Violations” at all within that demand. Indeed, we share that curiosity. We nonetheless conclude the October 8 correspondence standing alone may not have crossed the line into misconduct.

 

But the October 8 e-mail must be considered in context along with the October 11, 2019 e-mail. In that e-mail Mousavi informed Falcon’s counsel she had already “put the attorneys for Harvest Health & Recreation Inc. (‘Harvest’) on notice about Mr. Honard’s claim for wages, without disclosing other issues mentioned in my letter of October 8, 2019.” There can be no doubt that bribing a deputy district attorney (as alleged in the October 8 e-email) involves criminal misconduct. Mousavi then added, “Harvest has requested that I forward the demand letters I have sent you. I am planning to e-mail those letters on Tuesday.” The implication is clear: settle the case now or Harvest will become aware of Falcon’s alleged criminal misconduct next week.

 

“It is not necessary that a threat should be apparent from the face of the letter, nor even necessary that it should be implied therefrom. The statute says if the language used is adapted to imply a threat, then the writing is sufficient. Parties guilty of the offense here alleged seldom possess the hardihood to speak out boldly and plainly, but deal in mysterious and ambiguous phrases . . . .” (People v. Choynski (1892) 95 Cal. 640, 641–642; Umana, supra, 138 Cal.App.4th at p. 640.)

 

Mousavi’s $490,000 settlement demand, as explained in her October 8 e-mail correspondence, was for unpaid wages, commissions, and related expenses. The demand was unrelated to any alleged criminal conduct. Thus, to paraphrase Flatley, Mousavi’s threat to disclose criminal activity entirely unrelated to her client’s damage claim “‘exceeded the limits of respondent’s representation of his client’ . . . . (State v. Harrington, supra, 260 A.2d at p. 699 [attorney’s veiled threat to have his client in a divorce action inform on her husband to the Internal Revenue Service and Bureau of Immigration and Naturalization supports attorney’s conviction of extortion].)” (Flatley, supra, 39 Cal.4th at pp. 330-331.)

 

Although statements made in connection with litigation are generally protected under the terms of the anti-SLAPP law, the Supreme Court made it clear in Flatley that settlement demands which contain threats may not be afforded protection: “not all speech or petition activity is protected by [Code of Civil Procedure] section 425.16.” (Flatley, supra, 39 Cal.4th at p. 313.) “The law does not contemplate the use of criminal process as a means of collecting a debt.” (People v. Beggs (1918) 178 Cal. 79, 84.)

 

 

(California Court of Appeal, Jan. 27, 2022, Falcon Brands, Inc. v. Mousavi & Lee, LLP, Docket No. G059477, 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)