Courts of Appeal are split on appeal of post-judgment order

The odds of a litigant ever appealing a post-judgment order are slim for a variety of reasons. An unpaid judgment usually means the debtor lacks the funds to appeal, while unpaid creditors are naturally averse to wasting money if the judgment is unenforceable.

As a result, there is a scarcity of interesting published authority concerning the Enforcement of Judgments Law. A recent decision, Yolanda's, Inc. v. Kahl & Goveia Commercial Real Estate, 2017 DJDAR 4166 (May 3, 2017), which concerns the permissible scope of third-party examination proceedings, is one such contribution to the sparse body of precedent in this area. Rarer still, it creates a split of authority.

A lesser-known cousin of the "judgment debtor exam," or "ORAP," Section 708.120 of the Code of Civil Procedure permits the examination of a third party if such party is in "possession or control of property in which the judgment debtor has an interest or is indebted to the judgment debtor in an amount exceeding two hundred fifty dollars." Relatedly, Section 708.130 provides that "[w]itnesses may be required to appear and testify before the court or referee in an examination proceeding ... in the same manner as upon the trial of an issue." The latter provision holds importance for creditors because serving subpoenas in connection with third-party examinations is one of the only means of obtaining documents from third parties post-judgment.

In Fox Johns Lazar Pekin & Wexler, APC v. Superior Court, 219 Cal. App. 4th 1210 (2013), the 4th District Court of Appeal put a tight rein on this subpoena power, limiting its informational reach to the stated purposes of Section 708.120. Inhibiting a stock move of any creditor's lawyer facing a shell game fact pattern, the panel found that "certainly," the third-party examination was "not the mechanism to allow a judgment creditor to discover ... information about entities that may be the alter ego of the judgment debtor." Though tough on creditors, the analysis of the Fox Johns opinion was rigorous and hard to fault.

In Yolanda's, the 2nd District Court of Appeal has adopted a far more flexible approach that permits the exploration of alter ego liability and other issues not specifically contemplated by Section 708.120. In reaching the opposite conclusion to Fox Johns, the Yolanda's panel found meaning in the neutral, process-focused language of Section 708.130, which it said has a "broader reach" than Section 708.120. That conclusion is questionable. The operation of Section 708.130 is dependent on the existence of an underlying examination proceeding, and its wording, which can be paraphrased as "subpoenas are allowed," is silent on the appropriate content of the subpoenas. Perhaps sensing that it was on shaky ground, the panel also held that, in the alternative, the trial court had inherent power under Section 187 to fashion appropriate orders so as to uphold the policy of the law.

The contrasting facts of the two cases help explain their divergent approaches. In Fox Johns, the third-party examinee was the judgment debtor's trial counsel, raising the specter of invasion of attorney-client privilege. The subpoena requested the identity of other firm clients, raising independent client confidentiality concerns. Additionally, the judgment was still subject to appeal and the examinee remained engaged as lead appellate counsel.

In Yolanda's, on the other hand, the debtor and insider third-party examinee were far less sympathetic. Playing an archetypal shell game, the debtor had shut down operations and incorporated a new entity with the same assets. The third-party examinee, who was the debtor's accountant and a brother of one of the principals, testified that he helped transfer assets out of the debtor to his brother and others, at which point he was instructed not to answer questions regarding assets that were no longer in his possession.

The instinct to throw the book at those who are abusing the corporate form is understandable. However, the Yolanda's panel could possibly have reached the same result in a manner more consistent with the careful approach of Fox Johns. Without involving Sections 708.130 or 187, the examination might have proceeded on the basis that all, or at least most, of the areas of inquiry were reasonably related to the purpose of a third-party examination. Alternatively, though the examinee may not have had physical possession of the property, a finding that he exercised some level of "control" over it, which is also within the scope of Section 708.120, might have been a permissible exercise of the trial court's discretion. In striving to do justice in this particular case with a loose interpretation of statute, the panel may have handed an unnecessarily blunt instrument to creditors in future cases.

Though otherwise irreconcilable, Fox Johns and Yolanda's did agree on one thing: The orders in both cases, being discovery orders, were not appealable. Each was treated as a petition for a writ of mandate. This rule makes sense in the pre-judgment context, but is logically weaker post-judgment. While parties can count on the opportunity to seek review of pre-trial discovery orders as an incident to appealing the final disposition of a case, there is no similar assurance post-judgment. Nonetheless, with the apparent consensus being that no appeal is available, this underdeveloped area of law will likely remain underdeveloped for the foreseeable future.