The following is a case update prepared by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, analyzing a recent decision of interest:
A California appellate court has held that a judgment creditor conducting an examination of a judgment debtor may obtain a subpoena duces tecum directing the debtor’s bank to produce evidence, even though no examination of the bank itself had been ordered. [Shrewsbury Management, Inc. vs. Superior Court, 2019 Westlaw 1109754 (Cal. App.).]
Facts: A judgment creditor held a $1.4 million judgment against an individual. The creditor conducted a judgment debtor examination; in connection with that examination, the creditor sought an order compelling the judgment debtor’s bank to comply with a subpoena duces tecum concerning two entities over which the judgment debtor allegedly had signatory authority. The creditor claimed that the judgment debtor was using those entities to conceal his assets. The trial court denied the motion, holding that a subpoena can only be issued to a third party in connection with an examination of that third party, rather than in connection with an examination of the judgment debtor himself.
The creditor appealed; the appellate court treated the appeal as a petition for a writ of mandate and ruled in favor of the creditor.
Reasoning: The court noted that under the plain language of California Code of Civil Procedure §708.130(a), “[w]itnesses 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 the trial of an issue . . . .” An examination of a judgment debtor under §708.110 is an examination “under this article,” i.e., Article 2 of Chapter 6 of Division 2 of Title 9 of Part 2 of the Code of Civil Procedure.
By contrast, under §708.120, a judgment creditor may seek a separate examination of a third party if the judgment creditor shows “by affidavit or otherwise to the satisfaction of the proper court that [the] third person has possession or control of property” belonging to the judgment debtor.
The court reasoned that those two separate statutes contained two different avenues of discovery: §708.130(a) provides for the examination of a third party ancillary to a judgment debtor examination of the judgment debtor, while §708.120 empowers the judgment creditor to seek a separate judgment debtor examination of that third party.
The court distinguished the recent decision in Finance Holding Co., LLC v. The American Institute of Certified Tax Coaches, Inc., 29 Cal.App.5th 663, 240 Cal.Rptr.3d 604 (2018), on the ground that Finance Holding was solely concerned with proceedings under §708.120.
The court, perhaps in dicta, went on to disagree with some of the broader language in Finance Holding, perhaps also in dicta:
[T]o the extent that Finance Holding’s language suggests that the scope of inquiry with respect to a third party is always limited by that delineated in section 708.120, because section 708.120 is a purportedly more specific statute that controls over section 708.130, we respectfully disagree . . . .
The court later summarized its conclusion:
[W]hen a subpoena duces tecum is tethered to an examination under section 708.110, the scope of discoverable documents must be broadly construed to include matters relating to the “ ‘property and business affairs of the judgment debtor’ ”. . . and is not limited by section 708.120.
Author’s Comment: I think that the court’s conclusion is right, but I think that it could have done a better job in explaining the key differences between (1) an SDT issued to a third party in connection with the judgment debtor’s own examination and (2) an SDT issued to a third party in connection with that third party’s own separate examination. That latter alternative is available under §708.120, but it only applies when the trial court has already determined “that a third person has possession or control of property in which the judgment debtor has an interest or is indebted to the judgment debtor . . . .”
Thus, if (for example) the third party were allegedly the alter ego of the debtor, a judgment creditor would be justified in seeking an independent examination of that third party under §708.120. However, where the third party is independent of the judgment debtor and is simply in possession of relevant evidence, there would be no grounds for a separate examination. Instead, the third party would be compelled to provide evidence in aid of the judgment creditor’s examination of the judgment debtor himself under §708.130.
My only concern with this analysis, however, is that a broad reading of §708.130 would seem to subsume §708.120: why bother with a separate examination of the third party under §708.120, when §708.130 empowers the judgment creditor to conduct a judgment debtor examination and then to compel that very same third party “to appear and testify before the court or referee in an examination proceeding under this article in the same manner as upon the trial of an issue?”
Perhaps there is a practical difference between those two alternatives that would save the statutes from this overlap. An examination of the third party under §708.120 would presumably be broader in scope than an examination of the third party under §708.130, ancillary to the judgment debtor’s own examination. But the statutes do not expressly say so.
In light of the several conflicting cases in this area, perhaps the Legislature needs to revisit the statutes and enact clarifying amendments.
For a discussion of Finance Holding, see 2018-50 Comm. Fin. News. NL 99, Post-Judgment Examination of Non-Debtor Third Party is Restricted to Matters Involving Judgment Debtor’s Property Held by Third Party or Debts Owed to Judgment Debtor.
For a discussion of an earlier case dealing with related issues, see 2017-19 Comm. Fin. News NL 38, Post-Judgment Examination of Non-Debtor Third Party May Delve Into Alter Ego and Fraudulent Transfer Issues, Despite Narrow Wording of Statute.
These materials were written by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, for his Commercial Finance Newsletter, published weekly on Westlaw. Westlaw holds the copyright on these materials and has permitted the Insolvency Law Committee to reprint them.
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