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District Court of Appeal, Second District, Division 2, California.

J. F. OCHELTREE, Plaintiff and Respondent, v. Louis OZSGYANYI, Defendant and Appellant.

Civ. 24649.

Decided: June 07, 1961

Robert K. Grean, Beverly Hills, for appellant. Pray, Price & Williams, Long Beach, for respondent.

Action for dissolution of partnership, accounting and distribution. Defendant Louis Ozsgyanyi appeals from that portion of an order of February 2, 1960, which appoints a receiver and contains the following: ‘It Is Further Ordered that said receiver undertake with all due haste to sell said partnership assets as a going business if possible, and if not, then by piece-meal.’ The business of the partnership, conducted under the name Fleet Locker Club, was thus described in the order: ‘Fleet Locker Club * * * consisting of the real and personal property and businesses located at 601 through 609 West Ocean Boulevard, City of Long Beach, County of Los Angeles which said business[es] are further described as, but not limited to, Locker Club dormitory, merchandise store, Trade Winds Taheti cocktail lounge, Ye Bottle Shop package store, Ships Pantry restaurant, barber shop, cleaning, pressing and tailoring shop and any and all assets and/or activities related to said business * * *.’ These activities were conducted by the partnership as a single unit which was a profitable venture.

Respondent's first amended complaint prayed inter alia, ‘that a receiver be appointed to take possession of the property and assets of said partnership, and that said receiver be authorized to sell the property of said partnership and collect the debts due the same, and out of the money so realized that he pay the expenses of said receivership and the debts of said partnership, and that the residue if any be divided between plaintiff and defendant according to their respective interests under the agreement aforesaid.’ After an elaborate trial (reporter's transcript is 809 pages) the subject of receivership was brought up (at page 797) when Mr. Price (attorney for plaintiff) said: ‘I am moving to have a receiver appointed. I don't think that that man intends to cooperate any further.’ Mr. Tucker, one of defendant Louis Ozsgyanyi's attorneys, remarked: ‘I don't believe a receiver is necessary to take over the business. The first seven months of Mr. White's accounting of 1959 were examined and there was absolutely nothing shown to be wrong for the first seven months. There has nothing been shown to be wrong in the last five months. The Court: How can we carry on with the dissolution of the partnership without a receiver being appointed to accept the property and return the proceeds to these parties? Mr. Tucker: I would think a receiver could be appointed for the purpose of conducting the sale. I understand that Mr. Price's motion is to put the receiver in to run the business. Mr. Price: That is right.’ The court further said: ‘The Court can announce its judgment now and leave open only the matter of the final accounting, indicating that the Court has approved the accounting as of oast June, and that the final determination last June, and that the final determination of the property between the two partners can be left to further order of the Court when this is in.’ Again: ‘It is, in effect, an interlocutory judgment to be confirmed by final judgment after the sale, approving the sale.’ Thereupon Mr. White was appointed receiver, he being acceptable to both sides. Plaintiff's attorney was ordered to prepare findings and judgment but same had not been settled at the time of filing of briefs upon this appeal.

No complaint is made with respect to the appointment of receiver and appellant complains only of the direction to sell which is contained in the receivership order and above quoted.

Appellant's brief asserts that there is no evidence of any necessity for a sale of a profitable going business piecemeal. Of course, a receiver is the arm of the court charged with the duty of preserving the assets (this going business) for the benefit of all parties in interest and under direction of the court. ‘The appointment of a receiver before judgment is ancillary to and in aid of the action. Its purpose is to preserve the property pending the litigation so that the relief awarded by the judgment, if any, may be effective. (Murray v. Superior Court, 129 Cal. 628, 632 [62 P. 191]; 22 Cal.Jur. 433.)’ Steinberg v. Goldstein, 129 Cal.App.2d 682, 686, 278 P.2d 22, 25. The property may be sold only upon order of court (Code Civ.Proc. § 568.5). The direction for such sale, though lying within the discretion of the court, properly cna be made only when a reasonable discretion has been exercised; if that is lacking the order is erroneous.

Neither side claims that the Fleet Locker Club was not or could not be operated profitably. Appellant asserts there is no evidence that any circumstances existed which would require an immediate or a piece-meal sale of this business. Respondent does not dispute this statement. His counsel argues for the propriety of ordering a sale of partnership assets prior to final judgment as an aid to proper distribution and final adjudication of the rights of the partners. This is true, but that principle does not extend to justification of a piece-meal sale of a going profitable business unless some peculiar circumstances indicate that procedure as appropriate to preservation of the value of the business or assets. Steinberg v. Goldstein, 145 Cal.App.2d 692, 700, 303 P.2d 80, 85: ‘A court has authority to direct a receiver to sell the assets of a partnership, including a lease, if such action is necessary to preserve these assets for disposition under a judgment on the merits. Wulff v. Superior Court, 110 Cal. 215, 42 P. 638, [52 Am.St.Rep. 78]. In this case the evidence does not indicate such necessity. No value is placed upon the lease. Whether it is a partnership asset has not been decided. The need for liquidation in order to pay debts or expenses is not present. In his petition the receiver reported that he has partnership funds on hand. He does not report any unpaid debts.

‘If appears that the trial court was acting under the mistaken belief that all of the assets subjected to the receivership must be liquidated by the receiver preliminary to a trial of the case on the merits. It is true that, in an action seeking dessolution of a partnership and an accounting, as a general rule, partnership assets are liquidated prior to a final judgment. Hooper v. Barranti, 81 Cal.App.2d 570, 578, 184 P.2d 688. However, there are exceptions to this rule. Shuken v. Cohen, 179 Cal. 279, 283, 176 P. 447.’ See also, Wulff v. Superior Court, 110 Cal. 215, 216–218, 42 P. 638; Bradbury v. Barnes, 19 Cal. 120, 124; 42 Cal.Jur.2d § 98, page 390.

75 C.J.S. Receivers § 221, pages 856, 857: ‘Since the usual power and duty of a receiver are to collect and take possession of the assets of the estate and hold them for disposition as the court may direct, * * * a sale by him is ordinarily improper, but the property, unless it is perishable, should be preserved intact for the benefit of the party ultimately entitled. There are, however, instances in which a sale of real of personal property of the estate is expedient and proper, and, pursuant to the general rule justifying the appointment of a receiver when necessary to preserve property from loss or destruction, * * * where the character of the property or the surrounding circumstances are such as to render a sale necessary for the adequate protection of the rights of the parties, the court may direct and empower its receiver to sell such property, to the end that its value may be preserved, although the parties have not requested such sale, and even though the persons ultimately entitled have not yet been determined and conflicting claims to liens and priorities have not yet been adjudicated. Thus, where property or a business cannot be administered by a receiver except at a loss, it is clearly within the power of the court to stop the loss by ordering the sale of such property or the assets of such business; * * * A sale should not, however, be authorized or directed unless a necessity therefor appears, and, as a general principle, if the rights of the parties can reasonably be protected in any other way the power to sell should be denied to the receiver.

‘Ordinarily a sale should not be made until the various issues arising between the parties to the receivership suit have been adjudicated and determined. So it is not proper to order a sale and distribution at a preliminary stage of the suit when the cause is not ready for determination on the merits; and, in the absence of some emergency creating a condition of immediate necessity, the court has no authority before trial to order a sale of property where the propriety of such sale depends on the determination of an issue of fact, raised by the pleadings, which is properly the subject of the final judgment in the case, and thus put it out of its power to award the subject of the action to those who may be ultimately entitled to it.’ See also, 42 Cal.Jur.2d, Receivers, § 98, page 390; 38 Cal.Jur.2d, Partnership, § 152, page 114; Coker v. Norman et al., 162 Ga. 238, 133 S.E. 243, 244; Amason v. Harrigan, Tex.Civ.App., 288 S.W. 566, 569–570; Cf. State ex rel. Avenius v. Tidball, 35 Wyo. 496, 252 P. 499, 505, and United States v. Canadian American Co., D.C., 100 F.Supp. 721, 723.

Boothe v. Summit Coal Mining Co., 63 Wash. 630, 116 P. 269, 271: ‘Ordinarily a sale should not be made until the various issues arising between the parties have been finally adjudicated and determined. * * * ‘When it appears that affairs are rapidly growing worse under the receiver's management, and a majority of those interested believe a sale to be desirable, it may be ordered. On the other hand, when the condition of the property is such that an immediate sale will result in a great loss, and where the purposes of the receivership have no been accomplished, the order will be refused.’'

No exigency requiring an immediate sale is disclosed by the record at bar. Hence there is no room for exercise of discretion along that line. The pre-trial order makes no mention of a sale. There are no allegations in the complaint which show an emergency or the necessity for an immediate sale. Nor is there any evidence disclosing the usual situations requiring a sale before an accounting is completed.

The business is unusual in that it consists of a dormitory, lockers, cleaning, pressing and tailor shop, merchandise store, a cocktail lounge and restaurant, a bottle shop, and a barber shop, all operated as a unit under one roof with the intent of providing all service facilities to Navy personnel ashore. Presumably, it is presently being operated by the receiver as a unit. The record indicates no debts necessitating a sale. There is a partnership building loan in the original amount of $225,000 payable in monthly instalments which are current; thus immediate payment could not be forced upon the holder.

The evidence fully supports the court's conclusions stated at the end of the hearing, to the effect that ‘Mr. Louis Ozsgyanyi has started out on a course of conduct here which he intended to use to gradually freeze out Mr. Ocheltree altogether and secure Mr. Ocheltree's interest in the partnership by appropriation without any settlement with him or paying him anything at all. * * * In addition to that, Mr. Louis Ozsgyanyi has not been candid with the Court and has not been willing to answer all questions and account for some of these funds. * * * I am convinced by the evidence that has come in recently, as testified by Mr. White this morning, that a great part of the cash shortage can be traced into Mr. Louis Ozsgyanyi's account. He apparently treated the assets of the partnership as his own and shifted them back and forth from his own account without any regard to the interest his partner has in the assets.’ However, these circumstances warranting the dissolution of the partnership with an accounting and the appointment of a receiver, do not warrant a sale of the business upon the record now before us. Upon the showing made the appointment of the receiver will adequately preserve the partnership property.

Counsel for respondent devote their brief principally to a claim that the present appeal should be dismissed because it is taken from an interlocutory judgment. The point has been ruled against respondent. His motion to dismiss, made upon the same ground, was denied by this division and the Supreme Court denied a hearing. The appeal is taken only from that portion of the receivership order which directs a sale of the property, not from the portion appointing the receiver or any other part of it. The case of Miller v. Doyle, Cal.App., 5 Cal.Rptr. 254, upon which respondent heavily relies, is not authority. The Supreme Court granted a hearing in that case, thus vacating the district court decision, and the cause was thereafter dismissed by stipulation.

Counsel have advised us that the cause was reopened after the order of sale of February 2, 1960 was made, that additional evidence was taken and the court entered a judgment which includes an order of sale in the same language as that of February 2nd and that an appeal will be taken therefrom. But that judgment is not in the instant record, its inclusion would amount to the taking of additional evidence, and counsel were unable to agree upon a stipulation that we consider that judgment in determining this appeal; neither side made a motion to that effect. We mention these facts because our present ruling relates only to the propriety of the order of sale made on February 2, 1960. The order incorporated in the subsequent judgment will stand upon its own proofs, presumably different from the showing now before us, and hence the instand ruling probably will not operate as the law of the case with respect to the order of sale contained in said recent judgment.

The portion of the order of February 2, 1960 from which this appeal is taken is reversed.

ASHBURN, Justice.

FOX, P. J., and McMURRAY, J. pro tem., concur.