Opinion
SUPPLEMENTAL MEMORANDUM DECISION ON TRUSTEE'S CLAIM FOR COMMON COUNTS
ROBERT KWAN, Bankruptcy Judge.
After trial, the court issued a Memorandum Decision on April 5, 2013 ("Memorandum Decision") in which the court dismissed all but one claim in the adversary complaint with prejudice, finding that Plaintiff, the Chapter 11 Trustee for the Bankruptcy Estate of Debtor GSM Wireless, Inc. ("Trustee"), had failed to prove claims for relief by a preponderance of the evidence. However, with respect to the remaining claim for "Common Count - Claim for Money" against Defendant, Mohammad Honarkar ("Honarkar"), the court requested additional briefing from the parties. The Trustee filed on behalf of GSM Wireless, Inc, a Supplemental Brief on May 3, 2013 (Docket No. 186) ("Trustee's Brief"). Honarkar filed his Supplemental Brief on May 6, 2013 (Docket Nos. 187 and 188) ("Honarkar Brief"). The Trustee then filed a Brief in Response to Honarkar's Brief on May 20, 2013 (Docket No. 190) ("Trustee's Responsive Brief"). Honarkar filed a Supplemental Brief in Response to GSM's Brief on May 20, 2013 (Docket No. 1041 in Bankruptcy Case No. 2:12-bk-16456-RK) ("Honarkar Responsive Brief").
Having reviewed and considered the parties' supplemental briefing, the court concludes that the Trustee's claims for "Common Count - Claim for Money" should be denied and dismissed with prejudice.
The elements of a common count are: "(1) the statement of indebtedness in a certain sum, (2) the consideration, i.e., goods sold, work done, etc., and (3) nonpayment." Farmers Ins. Exchange v. Zerin, 53 Cal.App.4th 445, 460 (1997). A cause of action for money had and received is stated if it is alleged the defendant "is indebted to the plaintiff in a certain sum for money had and received by the defendant for the use of the plaintiff." Id. (internal citations omitted). "A common count is proper whenever the plaintiff claims a sum of money due... as an indebtedness in a sum certain." Utility Audit Co. v. City of Los Angeles, 112 Cal.App.4th 950, 958 (2003)(citation omitted).
I. Elements of a Common Count for Money Had and Received
A. Statement of Indebtedness in a Certain Sum
It is undisputed that Honarkar signed a promissory note obligating himself to pay GSM $3 million on March 1, 2003 (the "Promissory Note") in connection with the buyout of Joseph Fernandez de Castro (the "Transaction"), and that the funds were advanced by GSM. Memorandum Decision at 18:8-14, 77:12-13 (citing to page:line); Trial Exhibit 31, Promissory Note. The statement of indebtedness was in a sum certain, i.e., $3 million. Id. Therefore, the court finds that the first element of the common count claim is satisfied.
B. Consideration
It is also undisputed that the $3 million paid by GSM on behalf of Honarkar was consideration for the note payable to GSM. Memorandum Decision at 12:5-19:27, 77:13-14. Thus, the court finds that the second element of a common count is satisfied.
C. Non-Payment
The court finds that Trustee has not satisfied the third element of the common count claim of non-payment, i.e., this element has not been proven by a preponderance of the evidence. A claim for money had and received can be based on money paid pursuant to a void contract or performance by one party of an express contract. Utility Audit Co. v. City of Los Angeles, 112 Cal.App.4th 950, 958 (2003). The claimant must only claim the money due, and it makes no difference whether the original transaction was an express contract, a contract implied in fact, or a quasi-contract. Id. Under the terms of the Promissory Note, Honarkar was not obligated to pay the debt unless and until GSM issued dividends on his common stock. Memorandum Decision at 10:7-10, 18:8-14; Trial Exhibit 31, Promissory Note. Because GSM never paid a dividend, the debt was never payable by Honarkar. Since the condition was not met to trigger Honarkar's obligation to repay the Promissory Note, there is an argument that Honarkar is not legally obligated to pay the money at this time and there can be no non-payment.
In its Memorandum Decision, this court questioned whether that would be an appropriate result because Honarkar was on both sides of the transaction as the borrower and the 100-percent owner of the lender and he signed the note with a condition very favorable to him personally, which limited his obligation to repay the loan to any dividends from GSM. Memorandum Decision at 77:24-78:1. That is, only if GSM turned out to be profitable in the future would he have to repay the obligation. Id. The court specifically requested that the parties address the impact of the promissory note language limiting Honarkar's obligation to repay the loan in light of GSM's financial distress and the possibility of offset against Honarkar's post-petition loan to GSM. Id. at 78:24-79:4.
The Trustee argues that the Promissory Note is void because it is an illusory contract. Trustee's Brief at 3:1-7. The Trustee argues that the Promissory Note is an illusory contract because it contains a limiting condition that the loan principal and interest would be due and payable by Honarkar only to the extent that Honarkar received dividends from GSM. Id. According to the Trustee, since Honarkar (as the sole director of GSM) is the only corporate officer who could decide whether GSM would issue dividends, the Promissory Note was merely an illusory promise to pay. Id. at 4:3-4.
A contract is illusory under California law if one of the promises made by a party leaves that "party free to perform or withdraw from the agreement at his own unrestricted pleasure." Chodos v. West Publishing Co., Inc., 292 F.3d 992, 996 (9th Cir. 2002)(citation omitted). Where one party is invested with a discretionary power that affects the rights of the other, however, a court can read the implied covenant of good faith and fair dealing to impose an obligation on each party and the contract will not be illusory. Id. at 997. Therefore, this court can conclude that the Promissory Note is not illusory because Honarkar is bound by the implied covenant of good faith and fair dealing in exercising his power to cause GSM to issue dividends. Id.
Because the court concludes that the contract is not illusory, several of the cases cited by Trustee are inapplicable. Trustee's Brief at 4:3-20, citing, Alameda County v. Ross, 32 Cal.App.2d 135 (1939); Snow v. BE&K Construction Co., 126 F.Supp.2d 5 (D. Me. 2001); Badie v. Bank of America, 67 Cal.App.4th 779 (1999).
The court has already concluded that GSM's corporate directors owed no fiduciary duty to creditors. Memorandum Decision at 66:2-11. This is because GSM was not insolvent at the time of the Transaction, it was not rendered insolvent by the Transaction, and GSM's financial distress was caused by other post-Transaction supervening causes. Id. at 66:5-8. As such, Honarkar and Fernandez de Castro were entitled to do as they saw fit with the company and, under the business judgment rule, cannot be held liable for their alleged failures as directors or shareholders. Id. at 68:25-69:14
The Trustee relies on Hansen v. California Bank, 17 Cal.App.2d 80 (1936) in support of his position that Honarkar is liable on a common count claim. Trustee's Responsive Brief at 2:18-3:14. First, the court notes that Hansen did not involve a common count claim, and the Trustee does not argue that it does. Id. The Trustee cites Hansen for the statement in the opinion that "[i]t has been repeatedly held that a trustee in bankruptcy may maintain an action on behalf of any and all creditors to recover a trust fund belonging to the corporation which is created by an illegal purchase of its own stock without the consent of the corporation commissioner and contrary to law, for the reason the transaction is ultra vires and void." Trustee's Responsive Brief at 2:21-27, quoting, Hansen v. California Bank, 17 Cal.App.2d at 96 (emphasis added). In Hansen, as in this case, the parties challenging a stock purchase using the corporation's own money argued that they were not estopped from bringing suit based on the California Supreme Court's decision in Sargent v. Palace Cafe Co., 175 Cal. 737 (1917) "for the reason that the record fails to show that there were creditors of the corporation in existence at the time of the purchase, and that subsequent creditors are not in a position to complain of the transaction." Hansen v. California Bank, 17 Cal.App.2d at 95. The Hansen court distinguished Sargent v. Palace Cafe Co ., and held that the parties challenging the stock purchase could maintain suit against the parties which acquired the stock because under state law at the time, the sale and purchase of the stock was ultra vires and void for lack of approval by the state commissioner of corporations. Id. at 90-94. The Hansen court concluded that "the corporation in the present case was unauthorized to repurchase its own stock, regardless of whether it was then bankrupt, and the money which was paid to the bank therefor, with knowledge on its part of the inability of the corporation to purchase the stock, became a trust fund, subject to recovery by the trustee of the corporation in a proper suit." Id. at 94. Thus, the representative of the creditors, i.e. the bankruptcy trustee, was allowed to proceed with a "trust fund" doctrine claim against the parties acquiring the stock purchased with the corporation's money. Id.
In the case at bar, the court has already ruled upon such a "trust fund" doctrine claim in Honarkar's favor in its Memorandum Decision at 72:5-73:7, citing inter alia, Berg & Berg Enterprises, LLC v. Boyle, 178 Cal.App.4th 1020 (2009). As the court stated in the Memorandum Decision, "Honarkar as 100% shareholder of GSM had the right to dispose of its assets as long as it was not insolvent at the time of the Transaction and was not rendered insolvent by the Transaction, which did not appear to be the case at the time of the Transaction." Memorandum Decision at 75:2-6. As stated in the Memorandum Decision, the Trustee has not shown that Honarkar's acquisition of the remaining GSM stock was not an illegal purchase of GSM stock, and thus, Hanson is not applicable here.
Therefore, the court concludes that the case law relied upon by the Trustee here is misplaced. Because the Trustee has not established all of the elements required for a common count for money had and received because he has not established Honarkar's nonpayment of an amount due, this cause of action should be denied and dismissed with prejudice.
II. Neither Conversion nor Unjust Enrichment is Required as a Precedent to a Claim for Money Had and Received
While ultimately finding in favor of Honarkar on the common count claim, the court rejects Honarkar's argument that the common count for money had and received must be dismissed simply because the unjust enrichment and conversion counts were dismissed. Honarkar Brief at 5:4-7:11. Honarkar asserts that a claim for money had and received must fail if it merely incorporates the allegations in preceding claims, and argues that some courts have interpreted such a claim as a cumulative version of a conversion or unjust enrichment claim. Id. However, as set forth in the court's Memorandum Decision, unjust enrichment, conversion, and money had and received are somewhat similar but independent grounds for relief with different elements. Memorandum Decision at 74:4-19, 75:18-28, 77:3-11.
Each of the three cases Honarkar relies on are in the context of a demurrer, rather than a decision after trial, and are based on the specific facts (or lack thereof) alleged in the particular complaints. Farmers Insurance Exchange v. Zerin, 53 Cal.App.4th at 460; McBride v. Boughton, 123 Cal.App.4th 379, 394-395 (2004); Berryman v. Merit Property Management, Inc., 152 Cal.App.4th 1544, 1559-1560 (2007). None of these cases recite or stand for a per se rule that a common count for money had and received requires an affirmative finding on unjust enrichment or conversion. Id. These cases are also distinguishable because this court is making its determination after a full trial on the merits and need not rely solely on the facts alleged in the complaint for its determination of the common count claim.
Honarkar relies upon an unpublished judicial opinion that states a plaintiff must allege unjust enrichment in order to prevail on a claim for money had and received. Honarkar Brief at 6:4-14, citing Kaui Scuba Center, Inc. v. PADI Americas, Inc., 2011 WL 2711177 (C.D. Cal. 2011). However, that case concerned a plaintiff who had alleged unjust enrichment as the basis of the indebtedness so that the issue of whether a common count claim needs to be supported by an unjust enrichment allegation was not before the court. Kaui Scuba Center, Inc. v. PADI Americas, Inc. at *5. Further, the court in Kaui Scuba Center expressly dismissed the common count claim for relief because it relied "on an untenable allegation that Plaintiff bought unlicensed insurance from PADI rather than licensed insurance from Lexington" and did not base its decision on whether unjust enrichment was alleged. Id. The court's comment that unjust enrichment must be alleged to support a common count claim is therefore dicta. Finally, the Kaui Scuba Center decision is unpublished and as such, is not binding on this court, and the court does not find it otherwise persuasive for the proposition argued by Honarkar.
A claim for money had and received requires only a "statement of indebtedness in a certain sum." Farmers Ins. Exchange v. Zerin, 53 Cal.App.4th at 460. While unjust enrichment and conversion may be the basis for the indebtedness, a claim for money had and received can also result from an express contract that is void or unenforceable, a contract implied in fact, a quasi-contract, or where rescission is available. Schultz v. Harney, 27 Cal.App.4th 1611, 1623 (1994); Utility Audit Co. v. City of Los Angeles, 112 Cal.App.4th at 958; Crocker-Anglo Nat. Bank v. Kuchman, 224 Cal.App.2d 490, 492, 495-497 (1964); see also, Philpott v. Superior Court in and for Los Angeles County, 1 Cal.2d 512, 518-526 (1934)(discussing the history of the common count in the common law); 4 Witkin, California Procedure, Pleading, § 561 at 588 (Common Counts - Money Had and Received)(5th ed. 2008 and 2013 Supp.); Joseph L. King, The Use of the Common Counts in California, 14 S. Cal. L. Rev. 288 (1941). The court has already found that Honarkar owes a debt of $3 million to GSM under the Promissory Note. Memorandum Decision at 77:12-13. This is sufficient to state an indebtedness in a certain sum and the mere fact that the Trustee did not prevail on the claims for conversion and unjust enrichment does not dictate the same result on this common count for money had and received because it is a separate legal theory. The court rejects Honarkar's argument to the contrary.
III. Conclusion
For the reasons stated above, the court determines that the Trustee has failed to prove by a preponderance of the evidence his claim for relief under the common count claim against Honarkar.
A separate judgment consistent with this memorandum decision and the prior memorandum decision will be entered concurrently herewith.
IT IS SO ORDERED.