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 Post subject: 2005 - Zboray v - UNPUBLISHED
PostPosted: Sat May 30, 2009 5:35 am 
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Zboray v., Inc., 2005 WL 2327803 (Unreported, Cal.App. 1 Dist., Sept. 22, 2005)

Not Officially Published; California Rules of Court, rule 8.1115, restricts citation of unpublished opinions in California courts.

Court of Appeal, First District, Division 4, California.

John ZBORAY, Plaintiff and Appellant,



Revere Data, LLC., Respondent.

No. A103946.

(San Francisco County Super. Ct. No. 02-5000468).

Sept. 22, 2005.

Stephanie Susan Rubinoff, Horowitz & Rubinoff, Oakland, CA, for Plaintiff-Appellant.

Dave Lennart Neville, Ojai, CA, for Defendant-Respondent.


FN* Judge of the San Francisco Superior Court assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.

*1 Code of Civil Procedure section 187 (section 187) permits a court, where appropriate, to modify a judgment by adding theretofore unnamed persons or entities as defendant/judgment debtors. Plaintiff John Zboray appeals from an order denying his motion to amend a judgment previously entered in his favor against defendant, Inc. (Sectorbase) by adding Revere Data, LLC (Revere Data) as a defendant/judgment debtor. The sole issue is whether the record contains substantial evidence to support the trial court's ruling. We conclude the trial court's order does have the support of substantial evidence, and therefore affirm.


The history of this dispute can be briefly summarized.

Plaintiff is a former employee of Sectorbase. A dispute arose as to whether he was owed unpaid vacation and overtime pay. After an administrative hearing, the California Labor Commissioner, in October of 2001, upheld plaintiff's claim, awarding him $167,451.04 in unpaid vacation wages, unpaid overtime wages, waiting time penalties, and interest. In February of 2002, at the Commissioner's request, the court below entered judgment on the administrative award, together with more than $15,000 interest. Thus, plaintiff obtained judgment against Sectorbase in the amount of $182,943.06.

In April of 2003, pursuant to section 187, plaintiff moved to amend the judgment to add Revere Data as a defendant/judgment debtor. The grounds advanced in support of the motion were that Revere Data is “a successor corporation” to Sectorbase and the alter ego of Sectorbase. The motion was supported by various declarations. In sharp summary, the declarations were offered in aid of the ultimate conclusions that Revere Data is the same entity as Sector Data, LLC, and that Sector Data is the successor in interest to Sectorbase.

Revere Data took the position “Plaintiff's Motion cannot succeed” because “[t]he actual facts demonstrate that Sector Data, LLC was a creditor of SECTORDATA.COM, INC. that exercised its rights as a secured creditor on a $5,000,000.00 secured not[e] and foreclosed on SECTORBASE.COM, INC. assets, and that Sector Data, LLC changed its name to Revere Data, LLC pursuant to the terms of a confidential settlement agreement with Sector, Inc., which had sued Sector Data, LLC for trademark infringement.” Revere Data supported its opposition to plaintiff's motion with several declarations.

The trial court denied the motion. Plaintiff then perfected this timely appeal from the order of denial.


Section 187 provides: “When jurisdiction is, by the constitution or this code, or by any other statute, conferred on a court or judicial officer, all the means necessary to carry it into effect are also given; and in the exercise of this jurisdiction, if the course of proceeding be not specifically pointed out by this code or the statute, any suitable process or mode of proceeding may be adopted which may appear most conformable to the spirit of this code .” Judgments are typically amended to add additional judgment debtors on two theories. One is called the “successor corporation” theory; the other is the alter ego theory. ( McClellan v. Northridge Park Townhome Owners Assn. (2001) 89 Cal.App.4th 746, 752-753.) As previously noted, plaintiff advances both theories. The trial court implicitly rejected the application of each to the facts before it.

*2 Before reaching the merits, plaintiff raises an issue concerning the standard of review. An order granting or denying a motion to amend a judgment is reviewed for substantial evidence to support the actual or implied findings underlying the trial court's decision. ( McClellan v. Northridge Park Townhome Owners Assn., supra, 89 Cal.App.4th at pp. 751-752; NEC Electronics Inc. v. Hurt (1989) 208 Cal.App.3d 772, 777; Alexander v. Abbey of the Chimes (1980) 104 Cal.App.3d 39, 46-47.) Plaintiff, however, submits this usual rule is “complicated” here because “virtually all of the facts are undisputed,” thus making the issue one to which we should apply a non-deferential independent review. While much of the evidence is undisputed, some is not. Moreover, even uncontradicted evidence is subject to the substantial evidence review if conflicting inferences may be drawn. (See 9 Witkin, Cal. Procedure (4th ed. 1997) Appeal, § 370, pp. 420-422.) That is the case here.

The “successor corporation” theory has been described as follows: “It has been generally stated that ‘where one corporation sells or transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the former unless (1) the purchaser expressly or impliedly agrees to such assumption, (2) the transaction amounts to a consolidation or merger of the two corporations, (3) the purchasing corporation is merely a continuation of the selling corporation, or (4) the transaction is entered into fraudulently to escape liability for debts.’ [Citations.]” ( Franklin v. USX Corp. (2001) 87 Cal.App.4th 615, 621; accord, McClellan v. Northridge Park Townhome Owners Assn., supra, 89 Cal.App.4th at p. 753.) Plaintiff advances only the third and fourth prongs of this test, that is, the continuation and fraud theories. Both sides acknowledge, and correctly so, that the key factor in determining successor liability, at least in the context of this case, is the adequacy of the consideration. ( E.g., Franklin v. USX Corp., supra, at pp. 621, 625.) As applied to the facts of this case, the adequacy of the consideration also is key to resolution of plaintiff's claim of alter ego, as shown below.

Against this legal background, we turn to the factual record. Because we review the record under a substantial evidence standard, we state as “facts” that for which there is substantial evidence even though there may be contrary evidence.

The pertinent facts date back to 1996. At that time a hedge fund and registered investment advisor was founded under the name DNB Capital Management, Inc. (DNB). In 1997 plaintiff was hired as an intern at DNB.

In 1998, DNB became Sieve, LLC (Sieve), which was formed to develop and commercialize a browser-based investment research application to create a superior classification system for organizing public companies. One of many analysts hired by Sieve to gather relationship and classification data on public companies was the plaintiff.

*3 By early summer of 2000, Sieve, whose name was to become Sectorbase, was having financial trouble and needed to borrow money. Thus, in June of 2000, one Michael Engmann (Engmann), through Kendu Partners Company, a California limited partnership managed by Engmann, and Engmann Options, Inc., an investment company managed by Engmann, made a secured loan of $1.5 million to Sectorbase. At the same time another lender made a secured loan of $165,000 to Sectorbase.

Despite having received funding, including the loans mentioned above, Sectorbase continued to find itself without sufficient funds to operate its business. Accordingly, in August of 2000, it terminated its analysts, including plaintiff.

Also in August of 2000, Engmann formed a business named, LLC (Entrust), there being evidence that its purpose was to generate a revenue source for Sectorbase by leveraging Engmann's name and business connections. Sectorbase contracted out its engineers to Entrust, and Entrust then subcontracted these engineers out to other companies and businesses.

Shortly thereafter, Sectorbase again in need of funds, Engmann Options and Kendu loaned an additional $3.5 million to Sectorbase. This loan, like the others, was a secured loan.

Between late 2000 and early 2001, Sectorbase liquidated most of its unsecured obligations. However, by February of 2001, Engmann and others had loaned Sectorbase a total of $5,272,724, including $5,165,000 secured against the assets of Sectorbase.

In early 2001, Sectorbase and Engmann were discussing the possibility of converting secured debt to equity. Around that time, plaintiff's claim became known to Engmann, thereby bringing matters between Sectorbase and Engmann to a head. Upon learning of plaintiff's amended claim, Engmann refused to convert debt to equity or to provide further funds. He also “made the decision to demand repayment on the secured notes ... as well as the loans ... that had been assigned to Kendu for collection.”

Against this background, in September of 2001, Sectorbase agreed to a consensual foreclosure on the assets of Sectorbase by Sector Data, LLC (Sector Data), the new name of Entrust. Pursuant to that foreclosure, Sector Data foreclosed on the secured notes and acquired all but approximately $165,000 of the assets of Sectorbase. In consideration, Sector Data entered into an agreement with Sectorbase and other lenders to release Sectorbase from its existing debt in the total aggregate amount of $5,272,724 in exchange for membership units in Sector Data.

Upon the closing of the foreclosure, all lenders except for a handful to whom Sectorbase owed an aggregate amount of approximately $750,000, agreed to release their loans. Excluding these non-participating lenders, the total amount of loans released by Sectorbase's lenders was $4,522,324. Sector Data did not assume all of Sectorbase's liabilities, only those “that consisted of customer deposits and the obligations of the Online Platform Business arising subsequent to the closing date of the foreclosure.”

*4 Before the foreclosure, stock ownership in Sectorbase was as follows: David Baker held 33.386 percent; a group known as Venture Partners collectively owned 28.426 percent; Engmann beneficially owned only 2.698 percent. After the foreclosure, David Baker and Venture Partners owned no shares of Sector Data; the founders of Sectorbase owned no shares, and Kendu/Engmann owned 96 percent of the membership units of Sector Data.

Prior to foreclosure, Sectorbase had five directors. Of those five, only Engmann remained as a managing member of Sector Data after foreclosure.

The management team formerly at Sectorbase eventually ended up at Sector Data. There was economic justification for that transition because it was in aid of efficient utilization of the intellectual property, computer equipment and software transferred by Sectorbase to Sector Data.

In March of 2003, as the result of unconnected litigation in a New York federal court, Sector Data changed its name to Revere Data. Hence it is Revere Data that plaintiff seeks to add as a judgment debtor.

At the heart of plaintiff's submission is his contention that the Sectorbase-Sector Data transfer was lacking in economic justification, sham, and fraudulent, its sole purpose being to deprive him of the means for receiving payment of his rightful claim. He views the formation of Entrust as suspicious in its timing, its effect nothing more than the creation of a shell, a conduit of Sectorbase assets to put them beyond the reach of the judgment Sector Data feared he would obtain.

Plaintiff supports his theory with much evidence not repeated here. Suffice it to observe for present purposes, the pertinent issue is not whether a trier of fact could reasonably agree with plaintiff's interpretation of events. Instead, it is whether the trial court could reasonably agree with Revere Data's interpretation.

With respect to plaintiff's claim of fraud, whether a conveyance is accompanied by an intent to defraud creditors has long been treated as an issue of fact. (E.g., Cook v. Cockins (1897) 117 Cal. 140, 147; Kirkpatrick v. Towers (1943) 60 Cal.App.2d 251, 256-257.) In general, “a voluntary conveyance is not, prima facie, fraudulent, and the fraudulent intent is not to be arrived at as a presumption of law” ( Cook v. Cockins, supra, at p. 147), particularly if the conveyance is to a secured creditor and is supported by consideration. (See Civ.Code, § 3440.5.) This is not to say, as this court has recognized, that a secured creditor can never be guilty of fraud ( Knox v. Phoenix Leasing, Inc. (1994) 29 Cal.App.4th 1357, 1361, fn. 5), but neither can the opposite be said.

In evaluating whether fair consideration was paid for the assets or whether a fraud was perpetrated upon the plaintiff, the trial court had before it these further facts. The appraised fair market value, that is, the going concern value, of the business operations that were transferred by Sectorbase to Sector Data was $4.9 million. That appraisal spoke as of May 30, 2001, which was shortly before the asset transfer here at issue. Evidence was presented to the court that the appraiser, Wilson & Associates, was an independent business appraiser selected by Sectorbase. Plaintiff criticizes this appraisal as “conveniently” valuing the business at “somewhat less” than the amount of Sectorbase's secured debt. However, whether the appraisal was “convenient” or accurate is a matter to be determined by the trier of fact, here the trial court, and not by this court.

*5 There is more. The book value of the transferred tangible assets was $1,059,983.60. Those assets had been purchased from 1998 to the date of foreclosure for $2,764,098. A permissible inference from this evidence, if not a required inference, is that the fair market value of the Sectorbase assets was somewhere between $1,059,983.60 and $4.9 million. Against that background, a fact finder could reasonably find that the release of debts exceeding $4.5 million was fair consideration for the transfer of assets, and that there was no fraud.

Moreover, the evidence was sufficient to support a finding that Sector Data reasonably viewed plaintiff's claim as the final straw demonstrating Sectorbase's inability to achieve short-term solvency or long-term viability. By foreclosing, Engmann capitalized on an opportunity to transfer the assets into a company he controlled as clear majority owner. This view of the evidence constitutes a permissible rejection of plaintiff's contention that the asset transfer was tortiously designed to defeat plaintiff's wage claim.

From the perspective of Sectorbase, the foreclosure of its assets could reasonably be seen as a legitimate hard-headed business decision to cut losses. Thus, the evidence supported findings to the effect that Engmann was the only party willing to financially assist Sectorbase, and that without his continued support, Sectorbase would be forced out of business. Therefore, Sectorbase had no realistic or reasonable alternative to succumbing to his demands.

It is elementary law, as applied in numerous and varied contexts, that forgiveness or release of debt constitutes a form of consideration. ( E.g., Pope v. National Aero Finance Co. (1965) 236 Cal.App.2d 722, 729; Parrish v. Greco (1953) 118 Cal.App.2d 556, 562-563; Commercial Nat. Bank v. McCandlish (D.C.Cir.1928) 23 F.2d 986, 988.) We are aware of no reason that, in the present context, release of a debt cannot be considered as a form of consideration to be evaluated for its adequacy.

Plaintiff, however, gives considerable emphasis to the fact that Sector Data paid no actual cash, but merely assumed the obligation to pay off Sectorbase's secured creditors. It is true that decisions cited by plaintiff speak of “cash consideration” ( Ray v. Alad Corp. (1977) 19 Cal.3d at p. 24; Franklin v. USX Corp., supra, 87 Cal.App.4th 615, 625), but this is not an invariable requirement. The cited decisions are distinguishable in that neither involved the acquisition of corporate assets by a secured creditor, as occurred here, and neither suggests that forgiveness or release of an antecedent debt cannot satisfy the requirement of adequate consideration.

Plaintiff further cites the Alad and Franklin cases for the proposition that a sale for adequate cash consideration ensures that at the time of sale there are adequate means to satisfy any claims made against the predecessor corporation. That observation is unavailing to plaintiff because “ ‘It is also a well-settled law of this state that in the absence of fraud a debtor may prefer one creditor in preference to another.’ “ ( Pope v. National Aero Finance Co., supra, 236 Cal.App.2d at p. 729.) Beyond that, it is noteworthy that plaintiff, as an unsecured creditor, did not stand on an equal footing with the secured creditors. Presumably, the latter would have enjoyed priority over the plaintiff with respect to any pursuit of Sectorbase's assets. (See Cal. U. Com.Code, § 9609.) Even if the secured creditors had paid cash for the assets, plaintiff would have stood behind their secured debt. Payment of, or foreclosure upon, that secured debt, under a permissible view of the evidence, would not have left assets from which plaintiff could have satisfied his judgment.

*6 “ ‘[T]he intent to defraud ... may be, and usually must be, inferred circumstantially.’ [Citation.]” ( Perry v. Superior Court (1962) 57 Cal.2d 276, 285.) Because there are conflicting inferences that may be drawn from the evidence presented to the trial court, the issue is not one where independent review is appropriate; rather, the substantial evidence test applies. (9 Witkin, Cal. Procedure, supra, Appeal, § 370, pp. 420-422.) There are also credibility issues at play-whether to accept the inferences or constructions favorable to plaintiff's evidence or to Revere Data's-and the determination of such issues is a defining feature of the substantial evidence test as applied on review. (E.g., Biren v. Equality Emergency Medical Group, Inc. (2002) 102 Cal.App.4th 125, 143.) As shown, the evidence and inferences favorable to the trial court's ruling are present and constitute substantial evidence that plaintiff failed to establish that Revere Data was the successor in interest to Sectorbase.

Much of the same reasoning also applies to plaintiff's alter ego theory. Whether to amend a judgment on the theory that the new judgment debtor is the alter ego of a defendant already named in the judgment, is deemed a matter “particularly within the province of the trial court” acting as the trier of fact. ( Alexander v. Abbey of the Chimes, supra, 104 Cal.App.3d at p. 46.) One of the requirements for application of the alter ego doctrine is that an inequitable result will follow from failure to pierce the corporate veil. ( E.g., NEC Electronics Inc. v. Hurt, supra, 208 Cal.App.3d at p. 777.) Where, as here, the evidence supports the conclusion that adequate consideration was paid for a transfer of assets, it cannot be said, or at least need not be said, that the transfer, unless disregarded, will produce an inequitable result. The trial court was within its rights, acting as the trier of fact, to conclude that the alter ego doctrine was inapplicable.

In connection with these conclusions, we note that plaintiff has not cited, nor has our own research discovered, any reported decision where a trial court's discretionary decision not to amend a judgment was reversed on appeal because the reviewing court determined that successor liability or alter ego liability was established as a matter of law. Neither can we do so here.

The trial court's order is affirmed.

We concur: REARDON, Acting P.J., and SEPULVEDA, J.

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