Opinion
D069196
03-07-2017
DAVID SMITH et al., Plaintiffs, Cross-defendants and Appellants, v. CASHUK, WISEMAN, GOLDBERG, BIRNBAUM & SALEM, LLP et al., Defendants, Cross-complainants and Respondents; INTERNAL REVENUE SERVICE et al., Cross-defendants and Respondents.
Law Offices of Matthew D. Rifat, Matthew D. Rifat and John M. Donnely for Plaintiffs, Cross-defendants and Appellants. Miller Law Associates, Randall A. Miller and Steven S. Wang for Defendants, Cross-complainants and Respondents Cashuk, Wiseman, Goldberg, Birnbaum & Salem, LLP, et al. Laura E. Duffy, United States Attorney, Brett Norris, Assistant United States Attorney, Caroline D. Ciraolo, Deputy Assistant Attorney General and Marion E. Erickson, Pro Hac Vice for Cross-defendant and Respondent Internal Revenue Service. Law Office of Gregory P. Olson and Gregory P. Olson; Law Office of Robert L. Kenny and Robert L. Kenny, for Cross-defendants and Respondents Texas 1845, LLC.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 27-2011-00096739-CU-PO-CTL) APPEAL from a judgment of the Superior Court of San Diego County, Joel M. Pressman, Judge. Affirmed. Law Offices of Matthew D. Rifat, Matthew D. Rifat and John M. Donnely for Plaintiffs, Cross-defendants and Appellants. Miller Law Associates, Randall A. Miller and Steven S. Wang for Defendants, Cross-complainants and Respondents Cashuk, Wiseman, Goldberg, Birnbaum & Salem, LLP, et al. Laura E. Duffy, United States Attorney, Brett Norris, Assistant United States Attorney, Caroline D. Ciraolo, Deputy Assistant Attorney General and Marion E. Erickson, Pro Hac Vice for Cross-defendant and Respondent Internal Revenue Service. Law Office of Gregory P. Olson and Gregory P. Olson; Law Office of Robert L. Kenny and Robert L. Kenny, for Cross-defendants and Respondents Texas 1845, LLC.
Plaintiffs and appellants David Smith (David) and Alicia Smith (Alicia), husband and wife (the Smiths), along with multiple corporate entities in which David "had an interest" (Smith entities) (the Smiths and Smith entities are sometimes collectively referred to as Smith parties), appeal a judgment following a bench trial. The trial court ruled settlement proceeds from an interpleader action brought by defendants, cross-complainants and respondents Cashuk, Wiseman, Goldberg, Birnbaum & Salem, LLP and Richard Goldberg (collectively, Cashuk), plaintiffs' former accountants, should be paid to lienholders, cross-defendants and respondents the Internal Revenue Service (IRS) and Texas 1845, LLC (Texas 1845), and not to one or more of the Smith parties and/or their counsel.
When relevant, certain of the Smith entities will be identified in this opinion.
In 2011, Smith parties filed a lawsuit against Cashuk for accounting malpractice. In May 2014, Smith parties filed an ex parte application for an order shortening time for hearing for approval of a "confidential settlement" they reached with Cashuk or alternatively, for an order granting approval of such settlement on an ex parte basis. The court set the matter for hearing.
At the court's invitation, Smith parties filed a motion for determination of good faith settlement pursuant to Code of Civil Procedure sections 708.440 and 877.6. In the motion, Smith parties stated they had reached a "confidential settlement" in the amount of $900,000 with Cashuk; that under the settlement, $646,248.83 would be paid to the IRS and the balance, $253,751.17, would be paid to plaintiff San Diego Comprehensive Pain Management Center, Inc. (SDCPMC)—a Smith entity, "for costs of this litigation"; and that as a result, none of the settlement proceeds would be paid to Texas 1845, despite the fact it had perfected in late 2013 a judgment lien in excess of $6 million against David and plaintiff Blue Pacific Aviation, Inc. (Blue Pacific)—another Smith entity. Texas 1845 opposed the good faith motion.
All further statutory references are to the Code of Civil Procedure unless otherwise noted.
The court denied the good faith motion of Smith parties and instructed Cashuk to interplead the $900,000 settlement payment so the court could determine the priority of competing claims/liens. Cashuk in response filed a cross-complaint in interpleader and named the IRS and Texas 1845 among other parties as cross-defendants. Smith parties objected to the interpleader action and asserted there had been no enforceable settlement because the parties could not agree on how the settlement proceeds would be disbursed.
In a bifurcated trial, the court found there had been a settlement between Smith parties and Cashuk; that Smith parties in any event were judicially estopped from denying the enforceability of that settlement; and that Cashuk properly filed the interpleader action and established all elements. The court next rejected the Smith parties' contention that the court should award pro rata the interpleaded settlement proceeds to the Smith entities (with the exception of Blue Pacific), after David, on behalf of himself and his entity, Blue Pacific, and Alicia attempted to disavow their interest in such proceeds. As a result of a stipulation between the IRS and Texas 1845 providing the IRS lien was senior to the Texas 1845 lien, the court ruled the IRS lien would be satisfied from the settlement proceeds first, with the balance of the proceeds paid to Texas 1845.
On appeal, Smith parties among others contend the court erred in finding they were judicially estopped to deny there had been an enforceable settlement agreement with Cashuk and in imposing an interpleader proceeding as a substitute for a motion to enforce settlement. As we explain, we disagree and affirm the judgment.
FACTUAL AND PROCEDURAL OVERVIEW
Smith parties in their operative complaint asserted nine causes of action against Cashuk including for professional negligence, gross negligence and breach of fiduciary duty for what Smith parties claimed was Cashuk's "grossly negligent preparation of tax returns and provision of tax advice over more than a decade." Smith parties further asserted the consequences of Cashuk's negligence became clear when the IRS and California Franchise Tax Board collectively sought to recover from the Smiths (but not the Smith entities) nearly $3 million in back taxes, penalties and interest. At the time of the commencement of the instant action, the Smiths had an active or pending installment agreement with the IRS to pay back taxes for the years 2006 to 2009, including penalties and interest, after the IRS in October 2010 recorded a notice of federal tax lien with the San Diego County Recorder's Office. In April 2012, the Smiths agreed to waive the Internal Revenue Code's restriction on levying taxpayer assets during the pendency of an installment agreement with the IRS with respect to any proceeds the Smiths received in their action against Cashuk.
The record shows that, as of June 2014, the Smiths (but again, not the Smith entities) owed the IRS about $646,000 in taxes, interest and penalties and were making monthly payments of $18,000.
Also at the time of commencement of the instant action, David and Blue Pacific were defending a separate and unrelated loan deficiency action filed by Texas 1845 in San Diego County Superior Court, case No. 37-2011-00096397-CU-BC-CTL (Texas 1845 action). In June 2013, the court in the Texas 1845 action entered judgment in favor of Texas 1845 and against David and Blue Pacific for more than $6 million. The judgment represented the deficiency balance David and Blue Pacific owed Texas 1845 under a promissory note and personal guaranty, after Texas 1845 repossessed a Cessna aircraft owned and operated in charter service by David and his company Blue Pacific. Texas 1845 learned of the instant action during David's judgment debtor's examination in the Texas 1845 action. As a result, Texas 1845 filed its notice of lien and abstract of judgment in the instant action and served all parties.
In September 2013, Smith parties and Cashuk engaged retired judge Steven R. Denton to mediate the malpractice claims. After months of negotiations, retired Judge Denton confirmed the parties had settled in a March 25, 2014 e-mail. In this e-mail, retired Judge Denton stated, "It gives me great pleasure to confirm to both of you the SETTLEMENT of this matter. . . . [¶] Mr. Miller [i.e., Cashuk's counsel] will expedite the preparation of the settlement agreement so that it can get paid as soon as possible, and if possible[,] by April 15, 2014. I want to personally thank both of you for your professional handling of this matter. We started this off with a mediation back on September 8, 2013. You all have worked hard. Congratulations to both of you. It is well resolved."
The next day, Cashuk (through counsel) e-mailed Smith parties (also through counsel) confirming the settlement of the malpractice action for $900,000 in return for a release of all claims. Significant to the instant appeal, in this e-mail Cashuk asked Smith parties to provide "either written consent from your judgment creditor(s) to enter into this agreement or proof that any lien(s) on this case have been released. Code of Civil Procedure §§ 708.420[]; 708.440[]." Later that same day, Smith parties in response stated Cashuk's e-mail requesting either the consent of the judgment creditor(s) or proof the lien(s) had been released "appears to attempt to undo the parties' agreement." Smith parties went on to note that there was no proof of any judgment lien filed in the instant case and that the $900,000 in settlement would be paid to SDCPMC. However, a few minutes later, Smith parties sent another e-mail noting that they had overlooked the lien and abstract of judgment "in the Texas matter" but that the abstract was "of no consequence," presumably because the settlement proceeds were to be paid to SDCPMC, as opposed to judgment debtors David and Blue Pacific.
As relevant here, section 708.420, subdivision (g) provides: "A statement that no compromise, dismissal, settlement, or satisfaction of the pending action or proceeding or any of the judgment debtor's [i.e., David and Blue Pacific] rights to money or property under any judgment procured therein may be entered into by or on behalf of the judgment debtor, and that the judgment debtor may not enforce the judgment debtor's rights to money or property under any judgment procured in the action or proceeding by a writ or otherwise, unless one of the following requirements is satisfied: [¶] (1) The prior approval by order of the court in which the action or proceeding is pending has been obtained. [¶] (2) The written consent of the judgment creditor [i.e., Texas 1845] has been obtained or the judgment creditor has released the lien. [¶] (3) The money judgment of the judgment creditor has been satisfied." (Italics added.)
Section 708.440 provides: "(a) . . . [U]nless the judgment creditor's money judgment is first satisfied or the lien is released, the judgment recovered in the action or special proceeding in favor of the judgment debtor may not be enforced by a writ or otherwise, and no compromise, dismissal, settlement, or satisfaction of the pending action or special proceeding or the judgment procured therein may be entered into by or on behalf of the judgment debtor, without the written consent of the judgment creditor or authorization by order of the court obtained under subdivision (b). [¶] (b) Upon application by the judgment debtor, the court in which the action or special proceeding is pending or the judgment procured therein is entered may, in its discretion, after a hearing, make an order described in subdivision (a) that may include such terms and conditions as the court deems necessary. The application for an order under this subdivision shall be made on noticed motion. The notice of motion shall be served on the judgment creditor. Service shall be made personally or by mail." (Italics added.)
In a follow up e-mail, Smith parties reiterated that the settlement payment would be made to SDCPMC; that the remaining plaintiffs would file dismissals; and that the dismissals would be "contingent upon the court's approval of the settlements with David Smith and Blue Pacific Aviation." In early May 2014, before Smith parties appeared ex parte requesting approval of the settlement or an order shorting time for hearing on such approval, Cashuk informed Smith parties that Cashuk's obligation to have " 'third parties['] claims to be part of the settlement process' arises by statute, not by [Cashuk's] imposition."
Cashuk in this same e-mail went on to note that the Texas 1845 lien was filed in October 2013, six months before the parties' settlement; that it was "unfortunate" Smith parties were unaware of the lien at the time they "confirmed settlement, and chose to try to structure a settlement—after it was confirmed by [retired] Judge Denton—to circumvent the lien" (emphasis in original deleted); that the statutory process for such a lien "attaches to a settlement even if the judgment debtors are not receiving the funds, but are instead dismissing their claims" (emphasis in original deleted); that as the settling payor, Cashuk could be liable to Texas 1845 for the settlement amount if the statutory lien procedure was not followed; that as a result, Cashuk advised Smith parties they needed either authorization from Texas 1845 or a court order; that Cashuk stood "ready, willing, and able to meet [its] obligations under the settlement as confirmed, and pay the settlement funds as dictated by statute (naming plaintiffs and the lien-holder/Texas . . .)"; that the "confirmed settlement" was "not intended as a means for [Smith parties] to 'test the waters' to see if the Court (or Texas 1845) would sanction [their] post-settlement suggested payment structure"; and that the obligations of Smith parties to their judgment creditors was of "no concern" to Cashuk, who entered into the settlement in return for a "release and dismissal, and an end to the litigation."
Cashuk recommended Smith parties file a motion pursuant to section 708.470, subdivision (a) and "agree to abide by the Court's [o]rder regarding the lien and disposition of the settlement funds. If [Smith parties] can prevail on the notion that the taxing authorities have first priority, that [Smith parties'] proposed structure is appropriate, and Texas 1845 has notice/opportunity to be heard, then settling defendants will abide with a final Court Order regarding disposition of the settlement funds. [Cashuk] is not interested in—nor did [it] agree to—a structure that allows plaintiffs to walk from the confirmed settlement, should they not obtain some desired outcome (presumably, to avoid paying funds to Texas 1845)."
In response, Smith parties initially proposed the following "solution": Smith parties would appear ex parte and ask the court to "approve payment of all the settlement proceeds to plaintiffs other than the judgment debtor[s] [i.e., David and Blue Pacific] for the purpose of satisfying the priority tax lien and paying the plaintiffs' costs [to counsel of Smith parties]."
As promised and as noted ante, Smith parties appeared ex parte in May 2014. Because of the lien and abstract of judgment recorded by Texas 1845, Smith parties informed the court it needed to approve the settlement with Cashuk pursuant to section 708.440. As noted, the court set the matter for hearing on "noticed motion for approval of good faith settlement."
In July 2014, Smith parties filed their notice of motion and motion for determination of good faith settlement and for approval of settlement. In connection with this motion, Smith parties contended that the "parties in this case have reached a confidential settlement"; that the consideration for the settlement was $900,000; that it was contemplated that about $254,000 would be paid to SDCPMC for the "hard costs," as opposed to attorney fees, of this litigation; and that the balance of the settlement proceeds would be paid to the IRS, as noted ante. As such, Texas 1845 would receive none of the settlement proceeds.
Smith parties in their motion noted they were unsure whether the "good faith determination" process "would be appropriate to achieve the ends sought by the Court." Smith parties went on to note, however, that "[w]hether the process is properly matched or not, it is evident that . . . at a minimum, the process will assure the parties and interested third parties of transparency." (Italics added.) Although Smith parties on appeal do not expressly contend the court erred when it invited them to file a motion for good faith determination, as opposed to some other "process" or motion, to the extent they imply it was error we deem that issue forfeited. (See Steven W. v. Matthew S. (1995) 33 Cal.App.4th 1108, 1117 [noting an "appellate court will not consider procedural defects or erroneous rulings where an objection could have been, but was not, raised in the court below"].)
In support of their motion, Smith parties argued as follows: "A frank evaluation of this case and its claims demonstrates that the case has been settled for fair value that is within the ballpark and consistent with good faith. . . . [¶] . . . [¶] While there are a variety of considerations, those alone militate in favor of the fairness of the settlement achieved by the parties. Indeed, these and other considerations were evaluated and discussed in an open and transparent manner before [retired] Judge Steven Denton who brokered the parties' settlement and appears to agree with its evaluation." (Italics added.)
After arguing the amount of the settlement was fair, Smith parties turned to its distribution. Smith parties contended the IRS tax lien should be paid before payments to any other judgment creditors because it had priority, including to the lien filed by Texas 1845. Smith parties also contended that the court should exercise its discretion under section 708.440 "because the proposed settlement achieves the goal of satisfying priority liens and facilitating access to credit to permit compromise of the Texas 1845 judgment." Thus, Smith parties argued the court "should permit settlement proceeds to be paid to David Smith notwithstanding the Texas 1845 judgment so that he can pay the priority IRS lien and should further permit the balance of settlement proceeds to be paid to [SDCPMC] for the purpose of paying the costs of suit."
David filed a declaration in support of Smith parties' motion. In that declaration, he testified under penalty of perjury that his business expanded beyond merely running a medical practice, and included such ventures as plaintiffs San Diego County Medical Buildings, "which owned and operated commercial office buildings," Surfun Enterprises, "which was [a] charter fishing business, and Blue Pacific . . . [,] which was [an] aircraft charter company." Because David claimed he then-owed the IRS about $646,000, he asked the court to "permit settlement proceeds in this case to be paid to [him] to pay the IRS and satisfy this priority lien and to allow the balance of the proceeds to be paid to [SDCPMC] for costs of suit which is owed by virtue of a pre-suit contractual lien."
Smith parties' counsel also filed a declaration in support of the motion of Smith parties. In that declaration, their counsel reiterated under penalty of perjury that the "case has been settled for fair value that is within the ballpark and consistent with good faith"; and that the "settlement achieved by the parties" in this case, "brokered" by retired Judge Denton, was fair and should be approved by the court.
At the hearing on the motion, Smith parties argued the "evidence is undisputed" and the "evidence is that there's been a $900,000 settlement, that there is a valid reported lien by the IRS"; and that the "IRS lien and costs incurred in this litigation, . . . some of which are still pending, absorbed all of the settlement in its entirety." Smith parties further argued that "[a]t the end of the day . . . all that is required today of the court is authorization for the conclusion of settlement."
The record shows during oral argument the Smith parties laid out three options for the court: first, if settlement was not authorized, the case should be set for trial "because the settlement [allegedly] can't be paid without this court's permission"; second, the "settlement is paid, $900,000, to the Plaintiffs collectively," in which case plaintiffs "would allocate a prorated share for Dr. Smith and turn that over to Texas 1845 to the extent that there isn't a priority lien from the IRS ahead of that"; or third—what Smith parties claimed was the most "pragmatic solution," to distribute the money to them and they would be responsible for paying the IRS and paying the costs of the suit, which was "all [they] can do."
In opposition, Texas 1845 argued that the court should not allow any of the settlement proceeds to be paid to David or the other Smith parties and that, to the extent there were competing judgment creditors, it was up to the court to determine priority and distribute the settlement money accordingly.
Cashuk argued it was ready, willing, and able, presuming a "fully executed and enforceable written settlement agreement, to pay the money as the court directs."
After additional argument, the court noted it preferred Cashuk "interplead the funds with the court." The court noted interpleader would be the most efficient way to resolve the issues, particularly when the parties had not even lodged a copy of the (confidential) settlement agreement with the court. The court further noted that once a hearing was set, it could dispose of claims to the money by the IRS and Texas 1845, and by counsel of Smith parties, who claimed to have a "pre-suit contractual lien[]" that "trump[ed] as a matter of right . . . any competing claims," including the lien by Texas 1845.
In denying Smith parties' good faith motion, the court in its August 1, 2014 minute order noted that Smith parties' "significant discussion in the motion regarding the merits of the claims against [Cashuk] is not relevant to the ultimate issue presented in this case: the settlement in light of various liens asserted." With respect to the release of lien request of Smith parties, the court further noted that there was no evidence proffered by them to show the settlement terms, including the allocation among the fourteen plaintiffs"; and that there was no showing to support the amount of costs SDCPMC allegedly incurred and whether SDCPMC had a lien to recover such costs and if so, whether it had priority over "other creditors (including Texas 184[5]'s judgment lien)."
In late September 2014, Smith parties filed an ex parte application to reset the matter for trial as a result of the alleged failure of the parties "to conclude the settlement of the matter." In support of their application, Smith parties contended that while they and Cashuk agreed "to the total consideration for the compromise of the case, settlement fell apart when the parties failed to agree on the structure of the payment of the settlement consideration." Thus, Smith parties further contended there was no settlement agreement to enforce, "the case remains at issue, and the matter ought to be set for trial immediately." The court in early October 2014 denied Smith parties' ex parte application to reset the trial date.
In December 2014, Cashuk filed a verified cross-complaint in interpleader naming as relevant here cross-defendants Smith parties, the IRS, Texas 1845 and counsel of Smith parties, who was allegedly holding what Cashuk referred to as a "charging lien" for approximately $254,000. In connection with its cross-complaint, Cashuk alleged that it had reached a "full and final settlement in this matter with David Smith, Alicia Smith and [the] remaining Plaintiffs in exchange for Cashuk's payment of $900,000 in settlement proceeds"; that Cashuk had "received conflicting notices from cross-defendants regarding the allocation of the [s]ettlement [p]roceeds"; that Cashuk had no interest in the settlement proceeds; and that as a result and per the court's instructions, Cashuk wanted the "Court to determine allocation of [s]ettlement [p]roceeds, and to leave cross-defendants to resolve any and all distribution issues," inasmuch as Cashuk "does not know and cannot determine how to disburse the [s]ettlement [p]roceeds and defers to [the] Court."
At a hearing in January 2015 for a scheduling order on Cashuk's interpleader cross-complaint, Smith parties informed the court they had filed papers to remove the interpleader action to federal court. Smith parties stated they intended to file a motion to dismiss the interpleader complaint because "bottom line," there "was never a finalized settlement." In late March 2015, the United States District Court for the Southern District of California entered an order granting Cashuk's motion, joined by the IRS and Texas 1845, to remand the interpleader action. In so doing, the district court found that because Smith parties disclaimed any interest in the interpleaded funds, which in turn defeated any right or interest to such funds, they "lacked an objectively reasonable basis for removing this case from state court," and as such, awarded Cashuk attorney fees of $1,980.
Once back in state court, Smith parties demurred to the cross-complaint in interpleader. In support of their demurrer, Smith parties again argued there was no final settlement because the parties allegedly "did not agree on an allocation of the proceeds of that settlement either among the Smith Cross-Defendants (there are fifteen) or third parties like the United States." Absent such a "critical term" of settlement, Smith parties again contended there allegedly [were] no "enforceable settlement agreement."
Smith parties further argued interpleader was inappropriate because Cashuk allegedly was not a "disinterested stakeholder," but rather sought "to have a judicial determination that the funds it seeks to interplead will operate as consideration for a general release and dismissal from the accountancy malpractice claims against it." As such, they contended the cross-complaint in interpleader was "merely a poorly conceived strategy to obtain court enforcement of the settlement structure [Cashuk] wants—a structure that was rejected by the Smith Cross-Defendants." The court overruled the demurrer, denied the Smith parties' request for a stay and ordered Cashuk to deposit in court the settlement proceeds, which were placed in an interest bearing account (where they remain).
Shortly before trial, Cashuk filed a motion in limine to exclude any evidence or argument that there was no settlement between it and Smith parties. Cashuk in its motion argued Smith parties were judicially estopped to assert there was not an enforceable settlement in light of the multiple instances when Smith parties, including their counsel, represented in both written and oral statements that they had in fact settled with Cashuk for $900,000.
In phase one of the trial and in connection with its motion in limine, Cashuk explained that the issue of allocation of the settlement proceeds was never part of the parties' settlement negotiation; and that allocation was a "complete red herring" because once the parties agreed on the amount of settlement, "the idea of splitting up those monies between competing parties was completely out of [Cashuk's] control." Cashuk further explained that if it had "risked" becoming involved in how the settlement proceeds would be paid, it potentially could have been liable to one or more of the judgment creditors if the settlement proceeds were somehow "purloined off, or through some agreement or some artifice [were] channeled to some entity that wasn't a judgment debtor, or that it was done so [as] to evade the lien or the judgment."
Following argument of counsel, including from Smith parties that there was no final and enforceable settlement agreement with Cashuk, and after a one-hour recess in which the court indicated it had reread Cashuk's motion in limine and reviewed case law including Blix Street Records, Inc. v. Cassidy (2010) 191 Cal.App.4th 39 (Blix), the court granted Cashuk's in limine motion and ruled Smith parties were estopped from offering evidence to show, or otherwise arguing, there was no enforceable settlement. In so doing, the court found it was "clear" that Smith parties had "consistently stated there is a settlement. This court has relied upon that fact in setting the procedures that we are in line to follow. . . . [Smith parties'] attorney made it very clear in the motion[] . . . for good faith settlement and in his declaration before the Court and Memorandum of Points and Authorities there was a settlement. It's clear that . . . retired Judge Denton believed there was a settlement. [¶] And [the court] then imposed a procedure by which the monies would be interplead. They have been, and we will proceed forward. However, plaintiffs will be estopped from arguing or presenting any evidence that there was no settlement."
As noted ante, in phase one the court found the elements of interpleader had been met. As such, the court dismissed Cashuk with prejudice from both the malpractice and interpleader actions. The matter next proceeded to phase two, determining the priority of the liens and claims to the $900,000 settlement proceeds.
In connection with phase two, the court noted that as of August 25, 2015, the IRS lien was $291,602.63 against David (and Alicia), which amount would continue to decrease as the Smiths made monthly payments as required under their installment agreement with the IRS. The court further noted the Texas 1845 lien was $6,281,159, plus interest, against plaintiffs David and Blue Pacific.
We include Alicia because the record shows the Smiths filed joint tax returns for the years in issue and therefore, their tax liabilities were joint and several (see Int. Rev. Code, § 6013, subd. (d)(3)), which David confirmed in his trial testimony.
The court found that Texas 1845 complied with section 708.410 when it filed the notice of lien in mid-October 2013; and that no other judgment liens had been filed. Relying on Civil Code section 2897, the court further found that the Texas 1845 lien had priority to the settlement proceeds "except for the senior IRS lien"; and that Texas 1845 and the IRS had, in any event, entered into a stipulation providing the IRS lien was senior to the Texas 1845 lien.
Civil Code section 2897 provides: "Other things being equal, different liens upon the same property have priority according to the time of their creation, except in cases of bottomry and respondentia."
The court in phase two rejected the contention that any of the Smith parties, including David and SDCPMC, were entitled to "any" portion of the settlement proceeds. The court in its statement of decision, which it issued at the conclusion of phase two, found David's declaration in support of Smith parties' motion for determination of good faith settlement "establishes that the damages alleged by [David] were personal to [David] and settlement proceeds must not be allocated to the Smith entities." In making this finding, the court relied on 11 separate statements from David's declaration to show that the Smith parties' suit against Cashuk ultimately concerned the personal tax obligations of David and Alicia and that the tax liability resulting from Cashuk's alleged accounting malpractice accordingly accrued to them, and not to any of the Smith entities.
In addition, the court cited to additional evidence to support this finding, including Exhibit A attached to David's declaration in support of the motion for good faith settlement, which showed IRS statements were sent to "David J. & Alicia D. Smith," which the court found corroborated David's testimony that "he and his wife filed joint tax returns"; David's verification to the verified answer to the cross-complaint in interpleader, which demonstrated he "was authorized to sign on behalf of each of the Smith entities"; and that none of the 11 Smith entities (other than SDCPMC) made "any claim to the settlement proceeds when the case settled or when [David] and his entities filed their motion for good faith settlement."
The court in its statement of decision thus concluded: "In summary, the evidence shows that [David] fully intended that the settlement proceeds would be distributed to him so that he could pay the debt he and [Alicia] owe to the IRS. All of the Smith Parties were in complete agreement with this request and the motion for good faith settlement was made jointly by [David], his wife and his entities. It would be improper for the Court to allow Smith or any of the Smith Parties to re-characterize the settlement proceeds now. The settlement proceeds were never intended for distribution to the Smith entities. All of the Smith Parties are bound by the multiple judicial admissions of [David]. Texas 1845's rights as a judgment creditor would be violated if the Court were to allow the Smith Parties to receive any of the settlement proceeds. For the same reasons, the Court finds that [David's], [Alicia's] and Blue Pacific's attempt on the last day of trial to disavow any claim to the settlement proceeds would be an improper attempt to circumvent Texas 1845's valid judgment lien rights."
Finally, the court found there was no attorney fee lien on the settlement proceeds, inasmuch as counsel of Smith parties declared under oath no such lien existed. The court also found there was no lien held by counsel of Smith parties and/or SDCPMC for "costs of the lawsuit," noting that no evidence was provided of such a lien; that in any event, under Civil Code section 2897 "any such lien would be subordinate to Texas 1845's judgment lien and the IRS lien because it was never recovered"; and that there was no evidence supporting the amount of the alleged costs, "what the costs were or whether such costs were reasonable" subject to such a lien. The court thus found the IRS lien should be paid first out of the $900,000 settlement proceeds, with the balance of the proceeds going to Texas 1845. Judgment was entered in accordance with the statement of decision.
DISCUSSION
I
Estoppel
Smith parties contend the trial court erred when it found that there was a settlement of the malpractice action against Cashuk in the amount of $900,000 and that they were judicially estopped to argue otherwise.
A. Judicial Estoppel
"Judicial estoppel is an equitable doctrine designed to maintain the integrity of the courts and to protect the parties from unfair strategies. [Citations.] The doctrine prohibits a party from asserting a position in a legal proceeding that is contrary to a position he or she successfully asserted in the same or some other earlier proceeding." (Owens v. County of Los Angeles (2013) 220 Cal.App.4th 107, 121 (Owens).) Judicial estoppel may be found when " '(1) the same party has taken two positions; (2) the positions were taken in judicial or quasi-judicial administrative proceedings; (3) the party was successful in asserting the first position (i.e., the tribunal adopted the position or accepted it as true); (4) the two positions are totally inconsistent; and (5) the first position was not taken as a result of ignorance, fraud, or mistake.' " (Ibid.)
On appeal, the "determination of whether judicial estoppel can apply to the facts is a question of law reviewed de novo, i.e., independently." (Blix, supra, 191 Cal.App.4th at p. 46.) However, the "findings of fact upon which the application of judicial estoppel is based are reviewed under the substantial evidence standard of review" (ibid), unless the facts are undisputed, in which case we "independently review whether the elements of judicial estoppel have been satisfied." (Owens, supra, 220 Cal.App.4th at p. 121; see Bell v. Wells Fargo Bank (1998) 62 Cal.App.4th 1382, 1388-1389 [noting judicial estoppel "is an issue of fact, to be decided according to the particular evidence and circumstances of each case" and further noting "[b]ecause the parties produced conflicting evidence showing that the various statements made by the plaintiff are not utterly irreconcilable, the issue of judicial estoppel could not be decided as a matter of law"].) Because judicial estoppel is an equitable doctrine, whether it should, as opposed to can, "be applied is a matter within the discretion of the trial court," which exercise we review "under an abuse of discretion standard." (Blix, at pp. 46-47.)
1. Representations of Settlement
The record shows Smith parties initially overlooked the judicial lien of Texas 1845 when they first agreed to a settlement with Cashuk. In fact, when Cashuk informed Smith parties in late March 2014 that to distribute the $900,000, they needed either the consent of the judgment creditor(s) or proof the lien(s) had been paid, Smith parties then responded it was Cashuk that was "attempt[ing] to undo the parties' agreement." Shortly thereafter, Smith parties conceded that had overlooked the judicial lien of Texas 1845, but suggested that lien was not an impediment either to the settlement or the distribution of the settlement proceeds.
In their May 2014 ex parte request for an order approving settlement, or for an order shortening time to approve such settlement, Smith parties represented they had in fact settled with Cashuk. The record further shows that Smith parties stated that this settlement was contingent not on how the proceeds would be distributed to one or more of its creditors and/or to one or more of plaintiffs, or on the negotiation of any additional terms by the settling parties, as they subsequently argued, but rather on the court approving the settlement under section 708.440 and dismissing the claims of David and Blue Pacific against Cashuk, as was necessary because David and Blue Pacific were judgment debtors as a result of the judicial lien filed by Texas 1845.
Smith parties in their written statements in support of ex parte relief were clear that once the court dismissed such claims, a "global settlement" of "[e]ach of the [p]laintiffs in this case" could be "concluded"; that David could use the settlement proceeds to "resolve [the] Smiths['] personal tax liabilities," which Smith parties contended was one of the "end goal[s] of this case"; and that judgment creditor Texas 1845 stood "in the way" of this goal.
As noted, the court set the issue of "approval of good faith settlement" for noticed motion. The record shows that, in the first sentence of their points and authorities in support of that motion, Smith parties unambiguously stated, "[t]he parties in this case have reached a confidential settlement." Smith parties explained that the "consideration for the settlement" was $900,000 and that the "settlement" would be "paid $253,751.17 to Plaintiff [SDCPMC] for costs of this litigation and that the balance [would] be paid to the [IRS]." Smith parties thus requested the court "make a determination of good faith and approve the settlement."
In support of their motion, David in his declaration unambiguously stated under penalty of perjury that the case had settled, when he asked the court to allow the "settlement proceeds in this case to be paid to [him] to pay to the IRS and satisfy this priority lien and to allow the balance of the proceeds to be paid to [SDCPMC] for costs of suit which is owed by virtue of a pre-suit contractual lien." Likewise, Smith parties' counsel in his declaration in support of the motion also stated the case had settled, when he too stated under penalty of perjury the "settlement achieved" by the parties, "brokered" by retired Judge Denton, was for "fair value" and was reached after considering a variety of factors including among others the defense's strategy of putting David's "lifestyle on trial," which could have resulted in "alienation of the jury," and the "open issue concerning the recoverability of tax" owed by the Smiths.
What's more, the record shows at the hearing on the good faith motion, Smith parties' counsel represented the evidence was "undisputed" that "there's been a $900,000 settlement" and the only issue then was how the settlement proceeds would be allocated. Smith parties stated the "most pragmatic approach" in allocating the money was to pay the settlement proceeds to them and they, in turn, would be responsible for paying the IRS lien, which had priority over the Texas 1845 lien, with the balance paid to SDCPMC.
During the hearing, the court noted it was then "uncomfortable" granting the motion, inasmuch as the parties had not lodged a copy of the confidential settlement agreement and the IRS had not appeared at the hearing. Because the court understood the case had settled and the issue before it was "lien priority, levy priority, tax priority, [and] cost priority," the court found Cashuk was merely the "estate holder" of the settlement proceeds and was "ready, willing, and able, presuming [there was] a fully executed and enforceable written settlement agreement," to pay the $900,000 in settlement. As such, the court instructed Cashuk to "interplead the funds with the court."
Notably, the record shows the parties—including Smith parties—then agreed with the court's decision to interplead the settlement proceeds, and that at no time during this hearing did any of the parties—again, including Smith parties—object to this decision. To the contrary, Smith parties' counsel insisted it would be "simple" to ensure all the participants in the interpleader action would be present at upcoming hearings by merely "copying a proof of service that's been filed with these [i.e., determination of good faith settlement] papers."
Toward the end of the hearing, counsel for Smith parties informed the court that the settlement agreement had not yet been signed by the settling parties because there had been an "ongoing dialogue/dispute between [the parties] about the impact of the Texas 1845 lien . . . ." Counsel for Cashuk noted his client would not interplead the money until there was a "fully executed" settlement agreement. In response to this additional information, the court set a hearing for January 2015 on the assumption there would be a signed settlement agreement, the funds would be interpleaded and all parties with an interest in the settlement proceeds, including the IRS, would be given notice of the hearing.
The record shows in September 2014, Smith parties moved ex parte to reset the trial. In support of their request, Smith parties argued for the first time (in a judicial proceeding) there was in fact no settlement with Cashuk because the settling parties could not agree on the "structure for payment of the settlement consideration." The court refused to grant Smith parties this relief.
Smith parties reiterated there was no settlement when they appeared at the January 2015 hearing. At that hearing, Smith parties informed the court they were removing the interpleader action to federal court and anticipated filing a motion to dismiss because "bottom line," no settlement had been reached. When ultimately that strategy failed and the parties found themselves back in state court, Smith parties demurred to the cross-complaint in interpleader, again arguing there was no settlement.
2. Analysis
From the foregoing, we conclude substantial evidence in the record supports the finding that Smith parties took "totally inconsistent" positions (see Owens, supra, 220 Cal.App.4th at p. 121) in judicial proceedings with respect to the issue of whether there was an enforceable settlement of their malpractice action against Cashuk. Indeed, the record shows that even before Smith parties went ex parte to seek approval of the settlement, they were accusing Cashuk of attempting to undo the settlement after Smith parties had overlooked the lien of Texas 1845.
What's more, as demonstrated by their ex parte application for approval of settlement and in their motion for determination of good faith settlement, Smith parties never contended there were additional terms that needed to be negotiated with Cashuk to enforce the settlement. Rather, Smith parties contended the only contingency that remained was the trial court's approval of the settlement in light of the fact there had been liens filed in the instant case by judgment creditors of the Smiths and Blue Pacific.
However, after it appeared the settlement proceeds might not be distributed in the manner sought by Smith parties, in which one of the Smith entities—SDCPMC—would receive about $254,000, Smith parties did an "about face" and contended on the same facts that there was no final settlement because the settling parties allegedly could not agree on how the proceeds would be distributed. We thus conclude Smith parties took "totally inconsistent" positions in separate judicial proceedings concerning the enforceability of their settlement agreement with Cashuk. (See Owens, supra, 220 Cal.App.4th at p. 121; Blix, supra, 191 Cal.App.4th at p. 51.)
We say "might" because the record shows Smith parties denied the existence of a settlement in a judicial proceeding in September 2014, before Cashuk filed its cross-complaint in interpleader that included as cross-defendants SDCPMC and counsel of Smith parties among many other parties.
That the settlement agreement between Smith parties and Cashuk had not been signed by the parties does not change our conclusion that Smith parties were judicially estopped from denying the enforceability of their settlement with Cashuk. Blix informs our decision on this issue.
There, after jury trial began and a jury was selected, the parties engaged in mediation and reached a settlement. (Blix, supra, 191 Cal.App.4th at p. 42.) The parties informed the court that they had reached a settlement, that there were just "a few things [left] to do" to finalize the agreement, and that the jury could be dismissed. (Id. at p. 43.) Based on that representation, the court dismissed the jury. (Id. at p. 44.) Thereafter, one of the parties, Blix Street, represented by new counsel, challenged the settlement agreement on several grounds, one of which was that the agreement constituted an unenforceable contract. (Id. at p. 45.) Noting that the trial court had dismissed the jury based on the parties' representation that they had reached an enforceable settlement agreement, the Blix court concluded that Blix Street was estopped from arguing that the settlement agreement was unenforceable. (Id. at p. 51.)
In reaching its decision, the Blix court rejected the argument of Blix Street—similar to the one raised by Smith parties in the instant case—that, because there allegedly were outstanding issues that still needed to be resolved, including in that case preparation of a "long-form agreement" between the parties and approval of the bankruptcy court, "the parties and the trial court were on notice that any settlement was conditional" and thus, presumably not enforceable. (Blix, supra, 191 Cal.App.4th at p. 48.) The Blix court noted that "[w]hen parties intend that an agreement be binding, the fact that a more formal agreement must be prepared and executed does not alter the validity of the agreement." (Ibid.)
The Blix court also rejected the argument of Blix Street that, "if it is estopped from denying the enforceability of the settlement agreement, it would be bound by an otherwise unenforceable contract and would not receive part of the bargained-for consideration: the general releases from [third parties] who had not signed the agreement." (Blix, supra, 191 Cal.App.4th at p. 49.) Instead, the court recognized that "[e]stoppel—whether judicial, equitable or promissory—can . . . be used to bind a party to what would otherwise be an unenforceable contract." (Id. at pp. 49-50.) As such, the court held that "even if the settlement agreement had not been binding, [Blix street and its principal] were judicially estopped from denying the enforceability of that agreement because they represented to the trial court that the case had settled and the trial court discharged the jury in reliance on that representation." (Id. at p. 41.)
Here, the record clearly shows the court and non-Smith parties relied on Smith parties' representations that there was in fact an enforceable settlement when the court instructed Cashuk to interplead the $900,000 in settlement proceeds and requested all parties making a claim to such proceeds receive proper notice of the court's intention to decide the only issue left in the case: distribution of the proceeds post-settlement. We thus conclude Smith parties were judicially estopped to deny the existence of an enforceable agreement between the settling parties even if that agreement had not yet been fully executed. (See Blix, supra, 191 Cal.App.4th at p. 50; see also International Billing Services, Inc. v. Emigh (2000) 84 Cal.App.4th 1175, 1189 [recognizing "[e]stoppel is not dependent on the potential merits of a claim but depends on the manner in which a claim is raised or not raised.]" (Italics added.)
B. Equitable Estoppel
The IRS argues in its brief that Smith parties were estopped from attempting to "re-characterize" the settlement proceeds during the bench trial. Specifically, the record shows at the conclusion of phase one, David and Blue Pacific attempted to disclaim any interest in the settlement proceeds, as did Alicia at the conclusion of phase two, arguing the remaining Smith parties should receive a pro-rata share of such proceeds. However, as already noted, Smith parties in their ex parte application to enforce settlement and in their motion for good faith determination of settlement, contended—and the court so found—that all Smith parties had agreed to a "global settlement" and that Smith parties sought an order "permitting the distribution of all of the settlement proceeds to [David] individually to be used to pay [the] Smiths['] personal obligation to the IRS . . . ." (Italics added.)
" 'The doctrine of equitable estoppel is founded on concepts of equity and fair dealing. It provides that a person may not deny the existence of a state of facts if he [or she] intentionally led another to believe a particular circumstance to be true and to rely upon such belief to his [or her] detriment. The elements of the doctrine are that (1) the party to be estopped must be apprised of the facts; (2) he [or she] must intend that his [or her] conduct shall be acted upon, or must so act that the party asserting the estoppel has a right to believe it was so intended; (3) the other party must be ignorant of the true state of facts; and (4) [the other party] must rely upon the conduct to his [or her] injury.' [Citation.]" (City of Goleta v. Superior Court (2006) 40 Cal.4th 270, 279.) "Although equitable estoppel is generally a question of fact, it is a question of law when the facts are undisputed and only one reasonable conclusion can be drawn from them." (Mt. Holyoke Homes, LP v. California Coastal Com. (2008) 167 Cal.App.4th 830, 840 (Mt. Holyoke).)
Here, we independently conclude based on the undisputed facts (see Mt. Holyoke, supra, 167 Cal.App.4th at p. 840) that all four elements of equitable estoppel are present. First, Smith parties and in particular, David, at all times relevant were "apprised of the facts" concerning the plaintiffs' interrelationship and to the nature and source of alleged damages suffered by one or more of plaintiffs in connection with the malpractice action they brought against Cashuk. Second, when David submitted his declaration in support of Smith parties' motion for good faith settlement, asking the court to distribute the settlement proceeds to him so that he could pay off the IRS tax lien that was personal to him and his wife, he intended the court, Cashuk, the IRS and Texas 1845 to rely on such statements.
Third, Cashuk, the IRS and Texas 1845 have no evidence beyond the statements of David and the evidence adduced at the trial to determine the true nature of the interrelationship of the Smith entities and/or their relationship to the Smiths and/or the respective tax consequences, if any, to each plaintiff.
Fourth, non-Smith parties relied to their detriment on David's representations that the tax consequences from the alleged malpractice of Cashuk were personal to him and his wife Alicia and that, in any event, such consequences in the end all accrued to the Smiths. As a result of such representations, non-Smith parties did not conduct any discovery to support a finding of alter ego between David, on the one hand, and the Smith entities, on the other hand and/or to understand the interrelationship between Smith entities and David.
We thus independently conclude the Smiths were estopped from disclaiming an interest in the settlement proceeds during the bench trial or otherwise attempting to "re-characterize" the proceeds as damages belonging to one or more of Smith entities (other than Blue Pacific).
II
Remaining Contentions
A. Interpleader
Smith parties contend the court erred as a matter of law in using interpleader to dispose of the competing claims of cross-defendants to the settlement proceeds.
" 'Interpleader is an equitable proceeding by which an obligor who is a mere stakeholder may compel conflicting claimants to money or property to interplead and litigate the claims among themselves instead of separately against the obligor. . . . After admitting liability and depositing the money or property with the court, the obligor is discharged from liability and freed from the necessity of participating in the litigation between the claimants.' [Citation.] Under [Code of Civil Procedure] section 386, subdivision (b), any person or entity 'against whom double or multiple claims are made, or may be made, by two or more persons which are such that they may give rise to double or multiple liability, may bring an action against the claimants to compel them to interplead and litigate their several claims.' 'The true test of suitability for interpleader is the stakeholder's disavowal of interest in the property sought to be interpleaded, coupled with the perceived ability of the court to resolve the entire controversy as to entitlement to that property without need for the stakeholder to be a party to the suit. " '[I]f the relations of the parties are such that the court's decision would determine the responsibility of the [interpleader plaintiff], he [or she] is for the purposes and within the scope of the code section authorizing interpleader a mere stake-holder.' " [Citations.]' [Citation.]
" ' "The purpose of interpleader is to prevent a multiplicity of suits and double vexation. [Citation.] 'The right to the remedy by interpleader is founded, however, not on the consideration that a [person] may be subjected to double liability, but on the fact that he [or she] is threatened with double vexation in respect to one liability.' [Citation.]" [Citation.] "In an interpleader action, the court initially determines the right of the plaintiff to interplead the funds; if that right is sustained, an interlocutory decree is entered which requires the defendants to interplead and litigate their claims to the funds." [Citation.] Then, in the second phase of an interpleader proceeding, the trial court also has "the power under section 386 to adjudicate the issues raised by the interpleader action including: the alleged existence of conflicting claims regarding the interpleaded funds; plaintiffs' alleged position as a disinterested mere stakeholder; and ultimately the disposition of the interpleaded funds after deducting plaintiffs' attorney fees." ' " (Southern California Gas Company v. Flannery (2014) 232 Cal.App.4th 477, 486-487 (Flannery).)
Smith parties contend the interpleader action was inappropriate because Cashuk was not a "disinterested stakeholder." In light of our conclusion ante that Smith parties were judicially estopped to deny the existence of an enforceable settlement agreement with Cashuk, we reject this contention. (See Flannery, supra, 232 Cal.App.4th at pp. 481-483 [noting the interpleader plaintiff was a disinterested stakeholder when it settled with the defendants and deposited the confidential settlement proceeds with the court].)
Smith parties also contend interpleader was inappropriate because Cashuk was not subject to double vexation. Section 708.470, subdivision (c) provides, "If the court determines that a party [i.e., Cashuk] (other than the judgment debtor[s] [i.e., David and Blue Pacific]) having notice of the lien [i.e., of Texas 1845] created under this article has transferred property that was subject to the lien or has paid an amount [i.e., the $900,000 in settlement proceeds] to the judgment debtor that was subject to the lien, the court shall render judgment against the party in an amount equal to the lesser of the following: [¶] (1) The value of the judgment debtor's interest in the property or the amount paid the judgment debtor. [¶] (2) The amount of the judgment creditor's lien created under this article."
Here, it is undisputed that Texas 1845 in the instant case had recorded a valid judgment lien in excess of $6 million against David and Blue Pacific six months prior to the settlement between Smith parties and Cashuk. It is further undisputed that the IRS also had a valid lien and that Smith parties' counsel also alleged he had a prefiling attorney fee lien that entitled him to a portion of the settlement proceeds. In light of these competing claims, if Cashuk had merely distributed the $900,000 in settlement proceeds to David, as he requested, Cashuk was potentially liable to Texas 1845 up to that amount and to the IRS and/or Smith parties' counsel for lesser amounts. (See § 708.470, subd. (c); see also Flannery, supra, 232 Cal.App.4th at p. 487 [noting the plaintiff interpleader "faced double vexation based on [the settling party's] and [the settling party's former attorney's] competing claims to the [s]ettlement [f]unds, and it risked being held liable to [former attorney] for interference with prospective economic advantage if it paid the [s]ettlement [f]unds to [the settling party] in accordance with the settlement agreement"].) We thus reject Smith parties' contention interpleader was inappropriate because Cashuk was not subject to double vexation.
In reaching our decision, additional comment is warranted. As recognized by the trial court and non-Smith parties, the record strongly suggests Smith parties sought to deprive Texas 1845 from receiving any of the settlement proceeds, despite its existence of a lien against David and Blue Pacific in excess of $6 million that was perfected before the settlement. In our view, the trial court's decision to use the equitable proceeding of interpleader ensured that both Smith and non-Smith parties alike had an opportunity to present in one forum their claims to the settlement proceeds in order to ensure such proceeds were fairly and properly distributed under the law. Thus, contrary to Smith parties' contention that interpleader was inappropriate, we commend the trial court for using such a procedure to ensure transparency and fairness in this case.
B. Distribution of Settlement Proceeds
Finally, in light of the stipulation between the IRS and Texas 1845 that the IRS lien had priority, we conclude the court properly found the settlement proceeds first would be used to pay the IRS lien (to the extent any portion of it currently remains unpaid), with the balance to be paid to Texas 1845.
We further conclude the court properly found there was neither an attorney fee lien on the settlement proceeds nor a lien for costs, findings, we note, Smith parties do not challenge on appeal.
DISPOSITION
The judgment providing the IRS's lien shall be paid first from the settlement proceeds, with the balance of those proceeds to be paid to Texas 1845, and not to one or more of Smith parties, is affirmed. The IRS, Texas 1845 and Cashuk are entitled to their costs of appeal.
In light of our decision, we deem Cashuk's January 13, 2017 motion to dismiss the appeal with respect to certain of the Smith entities, and the Smith parties' request for judicial notice in support of their response and opposition to the January 13 motion to dismiss, moot. --------
BENKE, Acting P. J. WE CONCUR: NARES, J. O'ROURKE, J.