What is the scope of discovery that a judgment creditor can obtain from a third party in a judgment debtor examination? Extensive, according to the court in Yolanda’s, Inc. v. Kahl & Goveia Commercial Real Estate, 11 Cal. App. 5th 509 (2017), a recent decision by the Second District Court of Appeal concerning post-judgment discovery efforts which reaffirms the State of California’s long-standing public policy to “leave no stone unturned in the search for assets which might be used to satisfy the judgment.”
Yolanda’s involves a dispute between a restaurant tenant in a shopping center and its landlord concerning a gym tenant’s monopolization of parking spaces in a common area lot. The restaurant tenant brought an action against the landlords of the shopping center for breach of a commercial lease and related claims. Also named in the lawsuit was the landlord’s associated shopping center management company who shared at least one principal member. Following trial, the trial court awarded approximately $1.9 million in damages to the tenant and against all of the defendants. On appeal, the judgment against the landlord defendants was affirmed, but the judgment against the management company was reversed since it was not a party to the lease agreement. Gietzen v. Goveia, No. 2D CIVIL B255925, 2016 WL 1254386 (Cal. Ct. App. Mar. 30, 2016).
After the case was remanded to the trial court, the tenant, as the judgment creditor, obtained an order which required the person most knowledgeable for the former defendant management company to appear as a third party witness at a debtor examination and issued a subpoena for the company to produce documents concerning the judgment debtor’s assets. In response to the subpoena, the management company produced a document showing a transfer of a vehicle to one of its principals and his wife for the forgiveness of an alleged debt. The management company also produced two bills of sale transferring four vehicles and other items including three leases and all goods, furniture, and equipment from the management company to the other principal of the company (the same individual who also served as the principal of the judgment debtor). But while the management company produced responsive documents, it refused to answer the tenant’s questions about the location of the assets because the examination was “beyond the scope of a third party judgment debtor’s examination.”
The trial court overruled the management company’s objection, and ordered it to respond to the tenant’s questions concerning: (1) the ultimate disposition of assets transferred by the management company to its principals; (2) the interrelationship between the management company and the judgment debtors and related parties for purposes of establishing possible alter ego liability; and (3) any other questions that may assist the tenant in determining the judgment debtor’s true financial condition and the nature and location of the judgment debtor’s assets and sources of income. The management company appealed.
The Court of Appeal’s Decision
The Court of Appeal rejected the management company’s arguments and reliance on the limited scope of Code of Civil Procedure section 708.120. While, under section 708.120, a third party may be ordered to appear for examination upon the judgment creditor’s application showing to the court’s satisfaction that the third party is in possession or control of property in which the judgment debtor has an interest or is indebted to the debtor, the court specifically noted that section 708.120 is not the only procedure available for examining a third party. While the purpose of section 708.120 is to provide a tool that allows a judgment creditor to find property or money that is owed to the judgment debtor, Code of Civil Procedure section 708.130 (a much broader statute) permits the examination of any person with information which may lead to the enforcement of a judgment in the same manner as if the third party was a trial witness. This would not limit the examination to questions concerning assets that are in the third party’s possession or questions determining whether the third party is indebted to the judgment debtor.
Broader Impact and Practical Implications of Yolanda’s Decision
The broader impact of the court’s decision may be in its upholding of the trial court’s inherent power under Code of Civil Procedure section 187 to adopt any suitable method of practice if the procedure is not specified by statute or the Rules of Court. Accordingly, since nothing in section 708.120 states that it is the only procedure available for examining a third party, the Court of Appeal found that the trial court had inherent power under section 187 to fashion an appropriate procedure for the tenant to examine the third party management company.
The immediate effect of Yolanda’s decision will be on prevailing plaintiffs who are faced with enforcing judgments against corporate defendants who create complex business structures and agency relationships in order to shelter their assets. In such cases, the door may be open for the examination of each of the judgment debtor’s affiliates and agents to determine if there was any attempt to conceal assets from the judgment creditor. In practice, the information the judgment creditor in Yolanda’s obtained concerning the transfer of assets from the management company to the judgment debtor’s principal once again shows the vital importance of leaving no stone unturned in the search for assets which might be used to satisfy a judgment.