EVANS v. EL DORADO IMPROVEMENT CO

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

Lewis W. EVANS, Plaintiff and Appellant, v. EL DORADO IMPROVEMENT CO. (Third Party Claimant), Defendant and Respondent.

Civ. 43554.

Decided: March 14, 1975

Robert S. Sturges, San Jose, for plaintiff and appellant. Hodge, Hodges & Martin and Jerol R. Hodges, Los Angeles, for defendant and respondent.

Plaintiff appeals from an order sustaining a third party claim to monies levied upon by a sheriff's keeper installed in a business owned by a limited partnership which was itself ‘owned’ wholly by the two judgment debtors.

FACTS:

Plaintiff and appellant, Lewis W. Evans, recovered a judgment in the amount of $60,000 against defendants Galardi and Hodge. Plaintiff obtained a writ of execution. The two judgment debtors owned a limited partnership, El Dorado Improvement Co., which in turn held title to a motel, the Rodeway Inn, at Lake Tahoe. Plaintiff instructed the Sheriff of El Dorado County to place a keeper in that motel in order to collect the judgment. A third party claim was promptly filed by the on behalf of the limited partnership, El Dorado Improvement Co. Plaintiff then filed a bond with the sheriff, and defendants petitioned the court for hearing pursuant to Code of Civil Procedure section 689.

The ‘third party’ (El Dorado Improvement Co.) consisted of one general partner and two limited partners. The general partner was designated as the ‘El Dorado Improvement Corporation.’ All of its stock was owned by the two judgment debtors, Galardi and Hodge. The corporation did not own or hold title to any part of the partnership property.

All of the proprietary or equitable ownership of the limited partnership was owned equally by Galardi and Hodge, the two and only limited partners, the judgment debtors. After hearing of the third party claim, the court ruled that ‘[T]itle to the money and daily cash receipts taken into possession by the Sheriff of El Dorado County from the Rodeway Inn, was vested in the third party claimant, El Dorado Improvement Co.’

APPELLANT'S CONTENTIONS:

1. A creditor of one of two or more partners cannot levy directly upon partnership property, but there is not such restriction upon a creditor of all of the partners.

2. Code of Civil Procedure section 689 requires that the claimant be a true ‘third party’ or a separate owner of the property other than the judgment debtor himself. When all of the partnership equity is owned by the judgment debtors, there is no ‘third party interest’ which can be asserted under Code of Civil Procedure section 689 and there is therefore no reason in law to restrain a creditor from direct levy upon the assets held by two joint debtors in a partnership owned wholly by them.

DISCUSSION:

1. The levy upon the partnership.

Corporations Code section 15025(2)(c) provides: ‘A partner's right in specific partnership property is not subject to attachment, or execution, except on a claim against the partnership. . . .’

This provision is found only in Chapter 1, ‘The Uniform Partnership Act,’ relating solely to general partnerships. No such prohibition appears in any part of Chapter 2 of Title 2 of the Corporations Code relating to limited partnerships. However, appellant's argument seems to assume that such prohibition does apply to limited partnerships in the ordinary or usual case, but that under the particular facts of the case at bench the prohibition is inapplicable here. The defendants made no motion to quash the writ of execution as improperly used against a partnership. The defendants in their capacities of partners in the limited partnership simply asserted a third party claim on behalf of the limited partnership. Therefore, the matter of the propriety of the use of the writ of execution (or in other words the applicability of section 15025(2)(c)) is not truly an issue before us. However, for the reason that we reverse the ruling of the trial court and that the issue may arise in the future course of this matter, we deem it appropriate to discuss the applicability of section 15025(2)(c).

Although section 15025(2)(c) seemingly prohibits use of levy of attachment or execution, Corporations Code section 15522(1) provides: ‘On due application to a court of competent jurisdiction by any creditor of a limited partner, the court may charge the interest of the indebted limited partner with payment of the unsatisfied amount of such claim; and may appoint a receiver, and make all other orders, directions, and inquiries which the circumstances of the case may require.’

These rules were adopted under the Uniform Partnership Act to prevent the chaotic situation that resulted when a judgment creditor of a single partner levied upon the assets of a partnership so as to infringe upon the rights of the innocent non-debtor partner. (Taylor v. S & M Lamp Co., 190 Cal.App.2d 700, 12 Cal.Rptr. 323.) The language of Taylor of apposite:

“Charging orders on partnership interests have replaced levies of execution as the remedy for reaching such interests.'

‘This is a correct statement of the law as applied to the ordinary case, i.e., (1) where the partnership continues a bona fide existence and (2) where there is no transfer of partnership assets without a fair and adequate consideration or in fraud of creditors of either the partnership or of individual partners. But, if as alleged, (a) dissolution occurred . . . or (b) there was a transfer of partnership assets to one or more of the remaining partners, or to a third party, without a fair and adequate consideration or for the purpose of defrauding creditors of the partnership or of individual partners, then we do not have the ordinary and usual situation which Corporations Code, sections 15025 and 15028,1 are designed to protect. To apply the general rule as a shield to such a situation is contrary to reason and would violate public policy.’ (Taylor, supra, at pp. 710–711, 12 Cal.Rptr., at p. 329.)

‘It was to prevent such ‘hold up’ of the partnership business and the consequent injustice done the other partners resulting from execution against partnership property that the quoted code sections and their counterparts in the Uniform Partnership Act and the English Partnership Act of 1890 were adopted. As we view those code sections they are not intended to protect a debtor partner against claims of his judgment creditors where no legitimate interest of the partnership, or of the remaining or former partners is to be served.' (Taylor, supra, at p. 708, 12 Cal.Rptr., at p. 328.)

Taylor seems to recognize an implied exception to the statutory prohibition against execution. The prohibition against a levy upon partnership property for the debt of one (or less than all) of the partners is what is proscribed, not a resort to property owned wholly by the judgment debtor partners. In the case at bench, it was undisputed that the two judgment debtors together owned all of the beneficial interest in the limited partnership. The case at bench, like the case in Taylor, is not an ‘ordinary and usual situation.’ Here the two defendants Hodge and Galardi were the only real persons involved in the partnership. They were the two equitable and beneficial owners of all of the property. The use of the limited partnership with the corporation (of which they owned all of the corporate stock), as a general partner, and themselves, as limited partners, was merely a conduit for business. The conduit served only the two of them.

It is unquestioned that corporations, limited partnerships and other forms of businesses may be lawfully utilized even if the sole or principal purpose be to limit personal liability. However, even if lawfully created and lawfully used, the individual members or owners of a business entity or organization may possibly be subjected to personal liability in certain situations in order to avoid an unjust or inequitable result. Reference to the use of the ‘alter ego’ doctrine by way of an illustrative parallel seems appropriate here. As stated in 6 Witkin, Summary of Cal.Law (8th ed.), Corporations, §§ 5, 6, pp. 4317–4318:

‘When a corporation is used by an individual or individuals, or by another corporation, to perpetrate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, a court may disregard the corporate entity and treat the acts as if they were done by the individuals themselves or by the controlling corporation. It is often said that the court will disregard the ‘fiction’ of corporate entity, or will ‘pierce the corporate veil.’ . . . [Citations.]

‘It is not necessary that the domination be by a single individual; the same result may be reached where two or more persons own all the stock and control the corporation. (See Zenos v. Britten etc. Co. (1925) 75 C.A. 299, 306, 242 P. 914; Engineering etc. Corp. v. Longridge Inv. Co. (1957) 153 C.A.2d 404, 412, 415, 314 P.2d 563, infra, § 10; Riddle v. Leuschner (1959) 51 C.2d 574, 581, 335 P.2d 107; cf. 1956 A.S. 262.)

‘The problem of ‘alter ego’ only arises where some innocent party attacks the corporate form as an injury to his interests. And the issue is not whether the corporate entity should be disregarded for all purposes, nor whether its very purpose was to defraud the plaintiff. Rather, the issue is ‘whether in the particular case presented and for the purpose of such case justice and equity can best be accomplished and fraud and unfairness defeated by a disregard of the distinct entity of the corporate form.’ (Kohn v. Kohn (1950) 95 C.A.2d 708, 718, 214 P.2d 71, infra, § 8.)'

‘It must be shown that the corporation is dominated or controlled by the individual or other corporation, but it is not enough merely to show a ‘one-man’ or ‘two-man’ corporation, or ownership of a subsidiary by the parent. The general rule requires a further showing that failure to disregard the entity would sanction a fraud or promote injustice. These limitations are stated in Minifie v. Rowley (1921) 187 C. 481, 487, 202 P. 673, as follows: ‘Before the acts and obligations of a corporation can be legally recognized as those of a particular person, and vice versa, the following combination of circumstances must be made to appear: First, that the corporation is not only influenced and governed by that person, but that there is such a unity of interest and ownership that the individuality, or separateness, of the said person and corporation has ceased; second, that the facts are such that an adherence to the fiction of the separate existence of the corporation would, under the particular circumstances, sanction a fraud or promote injustice.’'

Although we are here dealing with a limited partnership, the application of the foregoing tests indicates that here, too, the entity should be disregarded for the purpose of permitting the levy upon the property of the individuals who truly incurred the debt and owe the plaintiff.

In the instant case, we recognize that the plaintiff himself was originally a partner with the two defendants. Plaintiff, too, had been a shareholder of the same corporation, El Dorado Improvement Corporation. The three-man partnership and the corporation had formed a previous limited partnership to develop and own the property. Plaintiff had sold his partnership and corporate interest to the two defendants as the remaining partners. Thus, it is clear that the form of business organization used by defendants was not devised or employed for the purpose of defrauding plaintiff. However, as indicated above, it is not necessary that the business structure be organized for such fraudulent purpose. It is sufficient that if recognition be given to the corporate or other entity, and injustice and inequity will result in the particular case.

Charging order provisions were intended to be used instead of levy of execution to protect innocent partners having nothing to do with the claim. There are no such partners here. There are no other partners, innocent or otherwise. There was no mistaken innocent third party whose property was being taken. The general partner, the corporation, had no proprietary interest in the property. Even if it had owned such interest, the corporation was entirely owned by the two defendants-debtors. The mere fact that the property or money is in the name of a partnership does not mean that a levy cannot be made. Where there is no objection in the trial court to a levy as an improper procedure, a levy has been held valid against partnership property for the debt of the individual partner. If the facts disclose that the partner in reality is the owner of the funds, the fact that the property is nominally held by the partnership may be disregarded. (Taylor v. S & M Lamp Co., supra, 190 Cal.App.2d 700, 12 Cal.Rptr. 323; Butler v. Nepple, 54 Cal.2d 589, 6 Cal.Rptr. 767, 354 P.2d 239.) To insist that only a charging order is permissible here is unreasonable. Moreover, under the statute itself the charging order provision is not to be deemed an exclusive remedy. (Corp.Code, § 15522(3).)

2. The existence of a valid third party.

As stated by this court before, the purpose of the third party claim statute, Code of Civil Procedure section 689, is to give a quick and effectual remedy to third parties whose property has been levied on by mistake and to protect the officer making such levy. (Rubin v. Barasch, 275 Cal.App.2d 835, 836, 80 Cal.Rptr. 337.) The idea behind the statute thus seems to be to afford relief to those who are not truly involved or responsible for the conditions which bring about the debt, the subsequent judgment and execution. The statute seeks to assure that the property which truly belongs to an innocent and noninvolved third party is not taken from him merely because the judgment debtor may have been using or in possession of such property. Thus, although the statute speaks of ‘determining title to the property,’ it is not merely legal title in its most formal sense that the court has recognized as a basis for doing what is just. An equitable right to property has also been recognized as sufficient to establish a third party's claim and thereby exempt the property from being wrongfully taken to satisfy the debt due the judgment creditor. (Gintel v. Green, 165 Cal.App.2d 723, 332 P.2d 298.) By the same reasoning, although the true owners here employ the device or conduit of a limited partnership to hold the nominal title to property, they in truth owned the beneficial and equitable interest. They were the real owners. They as debtors, therefore, could not honestly be third party claimants within the meaning and purposes of the statute, Code of Civil Procedure section 689. They could not thereby deprive the judgment creditor of the fruits of his judgment and the remedy by which he could satisfy the judgment. Under the facts here, respondents should not be allowed to employ an artificial person or entity as a ‘third party’ to thwart just recovery by their creditor.

In our view of the authority granted to the trial court by Code of Civil Procedure section 689, the court was authorized and should have determined the equitable and beneficial interest as well as the apparent ‘legal’ title in and to the Rodeway Inn. That scope of inquiry would have resulted in an adjudication and judgment that the two debtors and their wholly owned entity El Dorado Improvement Co. were not bona fide third party claimants but the same persons who owed the debt.

We do not rely upon any academic distinctions as to whether a limited partnership should be treated as an aggregate of individuals or as an entity. Our holding is simply based upon the proposition that there is no reason to restrain a creditor from direct levy on the assets held by two joint debtors in a partnership owned wholly by them. The reason for the rule preventing levying upon partnership property as explained above is not present in the matter at bench.

The judgment is reversed and the cause remanded to the trial court with directions to enter judgment in accordance with the views expressed herein.

FOOTNOTES

1.  Corporations Code sections 15025 and 15028 are general partnership sections. The counterpart of section 15028 applicable to limited partnerships is Corporations Code section 15522. As previously indicated, there is no similar statute or provision relative to limited partnerships similar to subsection (2)(c) of section 15025.

BEACH, Associate Justice.

ROTH, P. J., and FLEMING, J., concur.