Judgment creditor not entitled to restitution on reversal

In PSM Holding Corp. v. National Farm Corporation, 2018 DJDAR 2161 (March 7, 2018), the 9th U.S. Circuit Court of Appeals said a judgment creditor who takes possession of a judgment debtor's company while the matter is on appeal cannot be awarded restitution for losses incurred while in possession of the company. Essentially, by assuming the risk of taking possession, the judgment creditor cannot then ask for damages, despite running the company as would an "ordinarily prudent man of business would conduct his own."

The opinion by Judge A. Wallace Tashima began by stating, "at the heart of this case lies a conceptually straightforward, but procedurally complex, question of first impression for our Circuit." The ruling rested on a California Supreme Court decision dating back over 100 years and the precise wording of the Restatements cited in the matter.

The case arose out of a dispute regarding the purchase of a company. National Farm Financial Corporation owned Business Alliance Insurance Company and entered into negotiations to sell BAIC to PSM. National Farm later walked away from the deal, and PSM sued.

After jury ruled in favor of PSM, the trial judge granted National Farm's motion to stay execution of the judgment pending appeal, conditioned upon the posting of a $40 million bond. When National Farm defaulted and entered bankruptcy, PSM executed on the judgment, taking possession of BAIC, which had over $30 million in assets. PSM then began integrating BAIC into PSM's existing businesses.

The judgment in favor of PSM was reversed on appeal, however, because "the plain terms of the agreement dictate that no contract was formed because the signature line ... [was] left blank." On remand, PSM was to pay restitution. National Farm wanted money restitution but the district court instead awarded a return of BAIC's shares. National Farm then sued for BAIC profits earned while under PSM control. But PSM argued that it suffered a loss while operating BAIC and sought restitution as well -- bringing the dispute to the present appeal.

In PSM Holding, the 9th Circuit decided that the district court was correct to grant National Farm, the judgment debtor, restitution, but was incorrect to allow PSM, the judgment creditor, to recover in restitution.

Neither party cited decisively controlling authority, instead referring more generally to restitution Restatements and less-than-directly-applicable caselaw. Under the Restatement (First) of Restitution Section 74, "the judgment debtor is entitled to specific restitution, together with the value of the property's use in the meantime, diminished by expenses necessarily incurred in the protection of the property and the payment of taxes and liens, but not including the expense of improvements." Restatement (Third) of Restitution and Unjust Enrichment Section 18 states a similar principle.

The 9th Circuit decided that the plain language of Section 74 refers only to restitution provided to the judgment debtor. Similarly, Section 18 uses the term "disadvantaged party," which the court interpreted to mean only the person who has property taken by court order, meaning the judgment debtor.

The parties also relied on California Code of Civil Procedure Section 908, which directs that "parties be returned so far as possible to the positions they occupied before the enforcement of or execution on the judgment or order. In doing so, the reviewing court may order restitution on reasonable terms and conditions of all property and rights lost by the erroneous judgment." But the 9th Circuit pointed out that Section 908 restitution awards should include, "all property and rights lost by the erroneous judgment." Here, the judgment itself was not the cause of PSM's loss. Rather, PSM's own actions -- taking over BAIC and integrating it with its own operations while the appeal was pending -- caused the loss.

Finally, the 9th Circuit turned to California caselaw. When federal courts interpret state law they are bound by "decisions of the state's highest court." Ariz. Elec. Power Co-Op., Inc. v Berkeley, 59 F.3d 988, 991 (9th Cir. 1995). Thus, the 9th Circuit cited a California Supreme Court decision from 1909, Ward v. Sherman (100 P.864), which contained similar facts. In Ward, a judgment debtor handed over a cattle range, including cattle and equipment, to a defendant, who then managed the range. The judgment was subsequently reversed. The California Supreme Court determined that the defendant must account for the property and management, but would not be liable for losses if they "acted in good faith and with common skill, prudence and diligence." Further, the defendant incurred losses despite running the ranch reasonably, for which the court declined restitution. (As a side noted: The 9th Circuit deemed some of the costs PSM incurred in managing BAIC to be improvements -- not repair or maintenance expenses. The court characterized the distinction as "the difference between 'keeping' and 'putting' [an] asset in good condition (quoting Moss v. Commissioner, 831 F.2d 833, 835 (9th Cir. 1987)).)

The 9th Circuit declined to rely on its own precedent to the contrary, stating that the federal courts should only rely on such court rulings when a state's highest court "has not spoken on the question" and where no convincing evidence exists that the highest court would decide differently from the 9th Circuit. The decision in Ward, it stated, "may, itself, well be such 'convincing evidence.'"

Ultimately, the court decided that a plain reading of the restitution Restatements and the California Supreme Court ruling in Ward say that only the judgment debtor was entitled to restitution. The lesson: When someone executes on a judgment still pending appeal, they bear the risks of doing so.