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 Post subject: FT - Go v. Smith (6/20/2002)
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Go v. Smith,
2002.CA.0005704 (Cal.App. Dist.4 06/20/2002)

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FOURTH APPELLATE DISTRICT DIVISION THREE

G029223

2002.CA.0005704

June 20, 2002

ALEX S. Y. GO, INDIVIDUALLY AND AS TRUSTEE, ETC., ET AL.,
PLAINTIFFS AND APPELLANTS,

v.

S. CLARKE SMITH ET AL., DEFENDANTS AND RESPONDENTS.

Appeal from a judgment of the Superior Court of Orange County, Ronald C. Kline, Judge. Reversed. (Super. Ct. No. 00CC00715)

Warren B. Wimer & Associates and Warren B. Wimer for Plaintiffs and Appellants.

Mark S. Rosen for Defendants and Respondents.

The opinion of the court was delivered by: Moore, Acting P. J.

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.

OPINION

This is the third in a series of superior court and bankruptcy court cases among three doctors who had a falling out over the operation of their medical corporation. This case arises out of the purported fraudulent conveyance of the medical corporation's assets to a new corporation, owned by two of the doctors, the day before they filed a petition for bankruptcy court protection on behalf of the transferor medical corporation, against whom the third doctor was obtaining an award in the first superior court lawsuit. The third doctor filed the second superior court lawsuit, which is the subject matter of this appeal, against the other two doctors and the transferee medical corporation, asserting various causes of action arising out of the asset transfer.

The trial court granted summary judgment against the third doctor because he had failed to dispute the valuation of the individual assets assigned to the transferee medical corporation and because in the first superior court lawsuit he had failed to dispute a post trial valuation of the transferor medical corporation. The third doctor appeals from the summary judgment. The trial court misapprehended the legal significance of the appellant's actions. We reverse.

I. FACTS

See the opinion in companion Case No. G024217. The appeal before us, Case No. G029223, arises out of the second lawsuit among the three doctors filed in superior court. This is the aftermath of the bankruptcy court filing.

One day before filing for bankruptcy court protection on behalf of GPMC, Smith and Tang transferred GPMC's leasehold interest and all of its equipment, machinery and other personal property, including fixtures and furnishings, to Garden Park Medical Center, Inc. (Center). Smith and Tang, who owned the Center, paid $6,000 for the assets.

Ultimately, GPMC was discharged in bankruptcy and the Gos received less than $30,000 from the bankruptcy estate. At the time of the hearing on the summary judgment motion, the Gos indicated they probably would not go back to the superior court to ask that judgment be entered in accordance with the statement of decision in Go v. Smith (Super. Ct. Orange County, 1998, No. 770383), because GPMC had been discharged in bankruptcy and had no assets to pursue.

Go individually, and Go and Mayo Go as trustees of the Go Family Trust, filed suit against Smith, Tang and the Center for fraudulent conveyance, conspiracy, constructive trust and breach of the director's standard of care. As the Gos characterized it, one day before the bankruptcy filing, Smith and Tang had transferred all of the business operations of GPMC to the Center. This included office space, a leasehold interest, patient lists, goodwill, telephone numbers, equipment, employees, receivables, and contract rights with HMO's and PPO's.

In their first amended complaint, the Gos asserted Go was the holder of a claim for unpaid wages against GPMC and Smith and Tang had intentionally defrauded GPMC's creditors. They also explained that on December 22, 1999, the bankruptcy court, pursuant to an order approving stipulation, transferred to Go and Mayo Go the bankruptcy estate's interest in the cause of action based on Smith and Tang's transfer of virtually all of the assets of GPMC to the Center. In addition, the Gos stated that they were 46 percent shareholders of GPMC and contended that Smith and Tang had breached their duties to GPMC's shareholders.

Smith, Tang and the Center filed a motion for summary judgment. As they saw it, there were only two issues to be adjudicated: (1) whether the allegedly fraudulent transfers were made for reasonable value and for a valid purpose; and (2) whether the Gos had any claim in their capacities as shareholders. Smith and Tang admitted transferring GPMC assets to the Center, but argued there was nothing improper about doing so. First, they hired an appraiser to appraise what they called the "hard" assets of GMPC. They contended the appraiser appraised those assets at $3,000 to $5,000 and that they paid GPMC $5,000 for them.

Smith and Tang also said they hired an appraiser to appraise the leasehold. Because the initial five year lease had converted to a month-to-month tenancy, the appraiser valued that property interest at zero. Nonetheless, Smith and Tang stated that they "cautiously chose to pay $1,000 for the leasehold interest." They also claimed they took no portion of the receivables or cash on hand, those being taken over by the bankruptcy trustee.

They argued that the Gos could not prevail on any of their first three causes of action because there was no fraudulent transfer, inasmuch as all transfers had been made for full value. As to any assertion they had failed to pay for the goodwill of GPMC, Smith and Tang replied that goodwill is not an asset within the meaning of the Uniform Fraudulent Transfer Act (Civ. Code, § 3439 et seq.). They also argued that when Go left GPMC in August 1996, and took his patients with him, he in effect divided the goodwill of the practice.

The moving parties also maintained that the Gos could not assert any claim as shareholders because they admitted in superior court Case No. 770383 that their stock had no value. They reasoned that if the stock had no value, the Gos could not suffer any damage as shareholders.

In their opposition to the motion for summary judgment, the Gos argued GPMC as a going business was worth in excess of $350,000 -far more than the $6,000 paid for it. In addition, the Gos said of Smith and Tang, "They also admitted that they made no attempt to obtain an appraisal for the goodwill value of the business that was doing in excess of $700,000.00 per year, even though they themselves continued doing business as usual the following day with the same employees, at the same location, with the same telephone number and the same patients and the same third party provider contracts under the name Garden Park Medical Center instead of Garden Park Medical Clinic."

The Gos made several legal arguments, including the following: (1) case law provides that when a business is sold to controlling shareholders, it should be valued as a going concern; (2) the appraiser improperly appraised the hard assets individually, as if they were being sold at auction, not as if they were being sold as an integral part of a going concern; (3) goodwill is recognized as valuable property under California law; and (4) Smith and Tang, as majority shareholders, were required to proceed in a manner that benefited all shareholders proportionately.

Moreover, the Gos emphasized that they brought the suit in three distinct capacities. The Gos acted in their capacities as assignees of the bankruptcy estate's fraudulent conveyance claims and as 46 percent shareholders in GPMC. Also, Go acted in his capacity as a defrauded creditor on his unpaid compensation claim. While the Gos may have been inarticulate about the significance of these distinctions, it is obvious that the defenses Smith and Tang might assert as to Go in one capacity might not necessarily apply to Go in every capacity.

The trial court granted the motion for summary judgment and entered judgment against the Gos. The Gos have appealed.

II. DISCUSSION

A. Standard of Review

On review of a summary judgment, we "examine the record de novo and independently determine whether [the] decision is correct. [Citation.]" (Colarossi v. Coty US Inc. (2002) 97 Cal.App.4th 1142, 1149.)

B. Written Agreements

A general understanding of two of the agreements between Go and GPMC is central to an understanding of the trial court's ruling in this case. The two agreements, an employment agreement and a stockholders agreement, dictated the amounts Go was entitled to receive upon termination of employment.

The employment agreement provided that in the event of termination, Go was entitled to receive a portion of GPMC's accounts receivable, as determined by a formula set forth therein. Based on this entitlement under the employment agreement, the trial court in Case No. 770383 provided in the statement of decision that Go was entitled to $92,460 in earned compensation, plus an additional $10,000 under Labor Code section 203 (penalty for willful failure to timely pay wages to departing employee). However, Go never received his full compensation, because of the GPMC bankruptcy filing and the setting aside of the judgment in his favor. He remains an unpaid creditor of GPMC, and GPMC was apparently discharged in bankruptcy.

In addition to the employment agreement, Go was a party to a GPMC stockholders agreement. Paragraph 1 of the stockholders agreement stated as follows: "If a stockholder . . . terminates his employment with the corporation, the corporation shall forthwith purchase and such stockholder . . . shall forthwith sell all of such stockholder's stock at the purchase price determined as provided in Paragraph 2." Paragraph 2 of the agreement, in turn, provided in relevant part: "The purchase price shall be such stockholder's proportionate share of the book value of the corporation's issued and outstanding stock as of the last day of the calendar month preceding the month in which any event requiring sale as provided in Paragraph 1 occurs, after provision for accounts payable and all taxes or reserves for taxes, but without provision for accounts receivable or goodwill . . . ."

C. Procedural History

In Case No. 770383, in the statement of decision, the trial court ordered the dissolution of GPMC. It also ordered an accounting firm to perform an evaluation of the 46 percent interest in GPMC owned by the Go Family Trust. The accounting firm performed the evaluation, based on the formula contained in the stockholders agreement, and excluding any amount for goodwill. Per the stockholders agreement, the valuation was made as of the last day of the month preceding the month in which employment terminated. In other words, the ownership interest of the Go Family Trust was determined as of July 31, 1996. In making its determination, the accounting firm subtracted from the July 31, 1996 book value of GPMC the $92,460 amount to be awarded to Go under the judgment which had not been entered as of July 31, 1996. Having adjusted book value in this manner, the accounting firm arrived at a total adjusted book value of negative $1,964.

The Gos had a pending motion for the appointment of a receiver to conduct the involuntary dissolution of GPMC. Once the corporate valuation had been prepared, however, the Gos withdrew their motion. In their reply to Smith and Tang's opposition to the motion for the appointment of a receiver, the Gos stated that their motion had been rendered moot by the zero valuation. As we shall see, Smith and Tang try to make much out of the withdrawal.

D. Order Granting Summary Judgment

The trial court granted the motion for summary judgment on several grounds. First, because the Gos had failed to dispute the accuracy of the appraisals for the hard assets and the leasehold interest, the court concluded those assets were transferred for full and adequate consideration and the Gos could not fashion a claim for anything other than goodwill. Second, the Gos could not prevail on any cause of action seeking compensation for goodwill, for several reasons. In the stockholders agreement, Go agreed that the valuation of his interest in GPMC would exclude any value for goodwill, so the Gos could make no claim for goodwill. Moreover, in Case No. 770383, an appraisal had been made showing the GPMC stock had no value. This meant the goodwill must have had no value, either. Furthermore, the Gos were bound by the zero valuation because they had accepted the appraisal and acted on it in Case No. 770383. Lastly, the court determined that because the Gos' stock had no value, they could not state a cause of action for damage to their interests as stockholders.

We disagree with the court's conclusion, for an equally large number of reasons.

(1) Transfer for full and adequate consideration

Smith and Tang say the Gos conceded at oral argument that they did not challenge the accuracy of the appraisals of the hard assets, so the only thing left to argue over is goodwill. But Smith and Tang misconstrue the Gos' comments at oral argument. The Gos admitted they were not debating the valuation of the individual hard assets, were it proper to value them piecemeal. However, the issue they were raising was whether the piecemeal valuation was indeed proper, or whether the appraiser should have valued the business in its entirety as a going concern. As they stated in their opposition to the motion, there was a triable issue of material fact as to the propriety of the appraisal at all, since there was no showing that the appraiser had been informed that the assets were going to be transferred as a going concern. Rather, they pointed out the appraisal stated it was based on a database of previous sales and auctions. Going concerns are not generally sold at auction.

The Gos did not admit that the valuation of individual assets was proper and that therefore their sole remaining claim was for goodwill. Moreover, Smith and Tang have cited no authority for the proposition that the value of a business as a going concern equals the total value of individual hard assets sold piecemeal, plus the value of goodwill. They do not take into consideration some of the components of the going concern that the Gos mentioned in their papers, such as the employees, who kept the business running and who one day worked for GPMC and the next day worked for the Center.

(2) Significance of stockholders agreement

Smith and Tang argue that, under the stockholders agreement, Go renounced any right to compensation for goodwill. The idea was that a doctor departing the practice took in tow his or her patients and the goodwill that doctor had developed over the years, and therefore was not entitled to any portion of the goodwill of the remaining medical practice. In other words, they say Go took his goodwill with him and was not entitled to another 46 percent of the value of the goodwill of the practice that he left behind.

But the amount of compensation owing to Go under the stockholders agreement with respect to his August 1996 departure is not at issue. Smith and Tang omit to explain what the buy-out provision under the stockholders agreement has to do with the claims for damages for the fraudulent conveyance of the assets of GPMC as it existed in August 1998, valued as a going concern, together with its goodwill, as of that date. The fact that Go agreed to have his stock valued without reference to goodwill for the purpose of establishing a buy-out price on termination in 1996 does not mean that he agreed goodwill would not be considered to be an asset of the corporation under any circumstance.

The same holds true with regard to Go in his capacity as assignee of the claim of the bankruptcy estate. To the extent the bankruptcy estate, as successor to GPMC, was bound by GPMC's agreement as to the method of valuation of the stock for the purpose of the buy-out on Go's termination, that does not mean either GPMC or the bankruptcy estate, as its successor, had agreed to that method of valuation of the stock in every possible circumstance. It did not mean that either GPMC or the bankruptcy estate was precluded from asserting, in a different context entirely, that one of GPMC's assets was goodwill. Consequently, no such preclusion applies to Go as assignee of the bankruptcy estate's claim.

(3) Valuation of GPMC stock in Case No. 770383

Smith and Tang try to make too much of the valuation of GPMC stock prepared pursuant to the statement of decision in Case No. 770383. First of all, the fact the appraisal set the value of the stock at zero for buy-out purposes did not mean either that there was no goodwill or that the goodwill was worth zero. The accounting firm specifically stated it excluded goodwill from the calculation. Therefore, the accounting firm expressed no opinion on the value of the goodwill.

Moreover, even assuming Go accepted the appraisal for the purpose of setting the amount he was owed under the stockholders agreement on buy-out does not mean he accepted it as a valuation of the corporate assets for all purposes, such as establishing the value of goodwill or the value of the corporation as a going concern. In addition, for the purposes of the fraudulent conveyance cause of action and related causes of action, the value of the corporation at the date of conveyance in August 1998 was at issue, not the value of the corporation as of July 1996, which is the value represented by the appraisal.

Finally, Smith and Tang omit to distinguish between the claims of Go, individually and as trustee of the Go Family Trust, on the one hand, and the claims of Go, as assignee of the bankruptcy estate's claim, on the other. They fail to address why the claims of the bankruptcy estate should be curtailed by any defense Smith and Tang may be able to assert against Go either individually or as trustee of the Go Family Trust. In other words, even assuming Go, in his capacities as an individual and as trustee of the Go Family Trust, agreed to the Case No. 770383 valuation (before he ever even received the assignment from the bankruptcy trustee), does not mean that Go, as assignee of the bankruptcy estate's claim, is barred from arguing the valuation does not accurately reflect the value of GPMC for the purposes of the fraudulent conveyance claim.

(4) Judicial estoppel

Smith and Tang argue the Gos, in Case No. 770383, admitted their stock was worthless. They further argue that because it was worthless, the Gos could not assert a cause of action for damages based on their ownership of stock in the corporation. They base their assertion on a faulty premise - that the doctrine of judicial estoppel bars the Gos from asserting their stock has value.

Smith and Tang argue the Gos conceded the stock had no value when they withdrew their motion for the appointment of a receiver in Case No. 770383 due to the zero valuation set forth in the appraisal. Smith and Tang argue the Gos should now be estopped to argue the valuation was inaccurate. Worse, they say Go "unconditionally stipulated to a zero value in the corporate stock and the de facto surrender of Go's interest in the stock." Hardly.

The doctrine of judicial estoppel provides that a party who successfully asserts one position in a judicial proceeding is estopped from asserting an inconsistent position in a subsequent proceeding. (Jackson v. County of Los Angeles (1997) 60 Cal.App.4th 171, 181-183.) The doctrine is designed to guard against litigants playing "fast and loose" with the courts. (International Engine Parts, Inc. v. Feddersen & Co. (1998) 64 Cal.App.4th 345, 350.) "[T]he primary purpose of the doctrine . . . is not to protect the litigants but to protect the integrity of the judiciary . . . . [Citation.]" (Id. at p. 351.) It is an equitable doctrine which a court may invoke in its discretion. (Ibid.)

In this case, the Gos were hardly the ones playing "fast and loose" with the court. Based on the statement of decision in Case No. 770383, they anticipated a judgment would be entered in their favor shortly, and withdrew a pending motion in good faith based on a valuation the court had ordered to be prepared. Just because they did not think it worthwhile to pursue a receivership under the circumstances does not mean they intended to waive their right to challenge the valuation in any conceivable context or that they made a binding admission as to value.

Moreover, the anticipated judgment in Case No. 770383, briefly entered, was set aside because of the legal maneuvering of Smith and Tang, seeking to avoid the entry of judgment after a full trial on the merits. The Gos, deprived of their judgment in one action, continued their pursuit, no doubt at great cost. Smith and Tang, having once already deprived the Gos of the fruit of a full trial on the merits, now seek to deprive the Gos of a trial on the merits a second time. They would have this court construe the simple withdrawal of a motion as a stipulation to zero value. They seek to deprive the Gos of their opportunity ever to argue the valuation was faulty.

"The determination of the existence of judicial estoppel is a factual finding which will be upheld if supported by substantial evidence. [Citation.]" (International Engine Parts, Inc. v. Feddersen & Co., supra, 64 Cal.App.4th at p. 354.) In this case, the only evidence is that the Gos withdrew their motion for the appointment of a receiver because of the valuation. By doing so they did not admit that the valuation was correct, so they cannot be said to have taken inconsistent positions in the two superior court case proceedings. (See Jackson v. County of Los Angeles, supra, 60 Cal.App.4th at p. 183 [judicial estoppel applies when a party has asserted two positions that are totally inconsistent].) Moreover, inasmuch as the judgment in Case No. 770383 has been set aside, it cannot be said that the original tribunal adopted the Gos' "position" on the valuation or accepted it as true. (See ibid. [judicial estoppel applies when "the party was successful in asserting the first position (i.e., the tribunal adopted the position or accepted it as true)"].) Substantial evidence does not support the trial court's implied finding the Gos are judicially estopped from attacking the zero valuation in the suit before us.

Moreover, the court should exercise the equitable power of judicial estoppel "with great circumspection." (International Engine Parts, Inc. v. Feddersen & Co., supra, 64 Cal.App.4th at p. 354.) If ever there were a case for caution in the application of judicial estoppel, this is the case.

We also observe that were the doctrine of judicial estoppel to be invoked in this matter, it might well be argued it should be invoked against Smith, Tang and GPMC. Smith and Tang, perhaps inadvertently, allude to the fact GPMC, about a week before filing for bankruptcy court protection, filed its own objections to the valuation in Case No. 770383. In that objection, GPMC stated, "[t]he correct adjusted book value of the corporation is $185,180.00." *fn1 So, GPMC itself argued against the zero valuation.

Additionally, as the Gos point out, in August 1998 Smith, on behalf of GPMC, filed schedules in the bankruptcy proceeding identifying the Gos as 46 percent stockholders. The Gos fairly argue that the doctrine of judicial estoppel could be applied to bar Smith from asserting the Gos have no interest in the corporation on which to base a shareholders claim. The trial court not having made a determination on this issue, it is a matter we need not decide.

E. Other Arguments

In addition to maintaining the trial court ruled correctly on the grounds stated in the order granting summary judgment, Smith and Tang argue the summary judgment was correct for other reasons as well. They state goodwill cannot be recovered in a cause of action for fraudulent conveyance. (See Civ. Code, § 3439.01, subd. (a)(2) [the term "asset," for the purposes of the Uniform Fraudulent Transfer Act, excludes property that is generally exempt under non-bankruptcy law]; Legis. Com. com., 12A West's Ann. Civ. Code (1997 ed.) foll. § 3439.01, p. 272 [per Code Civ. Proc., § 704.210, property that is not subject to enforcement of a money judgment is exempt].) We need not decide this issue, however, because the Gos are not arguing over goodwill exclusively. They have raised triable issues of material fact as to the propriety of the valuation of the assets on a piecemeal basis and at auction prices.

We also decline to review certain additional issues Smith and Tang address in their respondents' brief: (1) whether Corporations Code sections 309 (pertaining to a director's duty of care) and 1001 (regarding the transfer of substantially all the assets of a corporation), would be inapplicable even assuming the Gos held stock in GPMC as of the date of the alleged fraudulent transfer; (2) whether any Corporations Code section 1001 claim would be barred by the statute of limitations; (3) whether the Gos' fraudulent conveyance claims are barred by laches; and (4) whether the bulk transfer laws are inapplicable. With each of these points Smith and Tang raise factual issues not addressed in their motion for summary judgment, and not addressed in the order granting summary judgment.

F. Conclusion

"A party may move for summary judgment `if it is contended that the action has no merit or that there is no defense to the action or proceeding.' (Code Civ. Proc., § 437c, subd. (a).) `[T]he party moving for summary judgment bears the burden of persuasion that there is no triable issue of material fact and that he is entitled to judgment as a matter of law.' [Citation.]" (Colarossi v. Coty US Inc., supra, 97 Cal.App.4th at p. 1149.) Here, Smith, Tang and the Center did not meet their burden.

III. DISPOSITION

The judgment is reversed. The Gos shall recover their costs on appeal.

WE CONCUR:

ARONSON, J.

FYBEL, J.


Opinion Footnotes

*fn1 In their respondents' brief, Smith and Tang quote language from the Gos' reply to the opposition to the motion for the appointment of a receiver filed in Case No. 770383, in which the Gos pointed out that GPMC itself objected to the valuation. This court, on its own motion, takes notice of the objection to valuation GPMC filed in Case No. 770383 on August 5, 1998. (Evid. Code, § 452, subd. (d).)


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