Yolanda's, Inc. v. Kahl & Goveia Commercial Real Estate—expanding a Creditor's Post-judgment Examination of a Non-debtor Third Party

• Publication year: 2018
• Author: Gary B. Rudolph

Yolanda's, Inc. v. Kahl & Goveia Commercial Real Estate—Expanding a Creditor's Post-Judgment Examination of a Non-Debtor Third Party

Gary B. Rudolph

After obtaining graduate/ undergraduate degrees from American University, Washington D.C. I moved to San Diego, California graduating from California Western School of Law in 1981. I am a shareholder at Sullivan Hill Lewin Rez & Engel, APLC specializing in representing creditors, commercial debtors, trustees, receivers, and fiduciaries.

When a judgment creditor seeks to examine a non-debtor third party regarding the location and/ or transfer of assets of the judgment debtor, what are the parameters for the examination? The case of Yolanda's, Inc. v. Kahl & Goevia Commercial Real Estate¹ is factually straight forward; however, its holding implies a more complicated answer to the question, and sets boundaries for the examination of a non-debtor third party by a judgment creditor that arguably exceed those specified in the California Code of Civil Procedure.

The starting point for this analysis is California Code of Civil Procedure section 108.120, which provides that a judgment creditor may examine a third party who has possession or control of property in which the judgment debtor has an interest or is indebted to the judgment debtor in amount exceeding $250.²

In Yolanda's, a creditor obtained a judgment of approximately two million dollars against several individuals and the entities they controlled. The same individuals also controlled a third-party entity that was not a judgment debtor (or even a party to the litigation). The judgment creditor obtained (1) an order requiring the "person most knowledgeable" to appear as a third-party witness for a post-judgment debtor's examination, and (2) the issuance of a subpoena to produce documents. In response, the witness produced documents showing bills of sale transferring vehicles and other items of property from one of the defendants to one of its principals.

However, during the examination, counsel for the third-party witness instructed the witness not to answer questions about the location of those assets, because the examinee no longer had "possession or control over the property in question"³ as facially required by section 108.120.

After briefing and a hearing, the court concluded that authority for the issued subpoena was not limited to section 108.120;⁴ rather, the court had inherent authority to create a proper procedure for examination under the broad language of section 181.⁵ The court also granted the creditor permission to inquire as to the ultimate disposition of the assets transferred, as well as the relationship between the transferee and other judgment debtors and related parties for purposes of establishing alter-ego liability, and to ask any other questions that might assist the judgment creditors in determining the true financial condition of the judgment debtors and the nature and location of judgment debtor's assets and sources of income.⁶

The third party examinee appealed that order. The court of appeal treated the appeal as a petition for writ of mandate, and then denied it.⁷

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In reaching its decision, the court of appeal determined that "whatever the limitations of section 108.120, section 108.130 subdivision (a) has a broader reach."⁸ It provides: "Witnesses may be required to appear and testify before the court or referee in an examination proceeding under this article in the same manner as upon trial of an issue."⁹

Expanding on that analysis, the court of appeal explained, "[t]his subdivision allows any person with information leading to the enforcement of the judgment to be subpoenaed to testify in an examination proceeding in the same manner as a trial witness. (Ahart, Cal. Practice Guide: Enforcing Judgments and Debts (The Rutter Group 2016) ¶ 6:1280, pp. 6 G-2-6G3)."¹⁰

An interesting discussion ensued regarding application ofthe trial court's inherent power under section 181.¹¹ Section 181 afforded the trial court inherent power to adopt "any suitable method of practice if the procedure is not specified by the statute or the Rules of Court."¹²Counsel for the examinee asserted that section 181 did not apply, because section 108.120 in fact expressly limits the examinations of a third party to property of the judgment debtor held by a third party and debts owed by a third party to a judgment debtor.¹³ Clearly, neither of those qualifying conditions was present.

In dismissing that argument, the appellate court responded that nothing in section 104.120 stated that it would be the only procedure for examining a third party. "In fact, section 108.130 expressly provides otherwise. To the extent section 108.130 may not apply there is no reason why the court could not use its power under section 181 to fashion an appropriate procedure."¹⁴ The third-party examinee placed primary reliance on Fox Johns Lazar Peken & Wexler, APC v. Superior Court of California¹⁵ to support its position that section 108.120 did not allow for a more expansive examination.¹⁶ The court of appeal dismissed the argument by determining that section 108.130(a) had a broader reach,¹⁷ thereby expanding the scope of the examination to allow questions regarding the location of property even if the third party examinee no longer had possession or...