Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_05-cv-00075/USCOURTS-casd-3_05-cv-00075-8/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1332 Diversity-Insurance Contract

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

HOKOJITSUGYO COMPANY, LTD.,

Plaintiff,

CASE NO. 05CV75 WQH (CAB)

ORDER ON APPLICATIONS FOR

DISBURSEMENT OF JUDGMENT

PROCEEDS

vs.

FEDERAL INSURANCE COMPANY,

Defendant.

HAYES, Judge:

Pending before the Court are the applications for disbursement of judgment proceeds pursuant

to CAL.CODE CIV.P. §§ 708.410-708.480 filed by Otay Project, LLC (Doc. # 302) and Century Surety

Company (Doc. # 303). The Court finds these matters suitable for submission on the papers without

oral argument.

BACKGROUND

On December 13, 2004, Plaintiffs Hokojitsugyo Company, Ltd. (Hoko) and David Blackburn

(Blackburn) filed a Complaint against Defendant Federal Insurance Company (Federal) for breach of

contract and bad faith in the California State Superior Court in San Diego, California. See (Doc. # 1).

On January 14, 2005, Defendant Federal removed the case to this Court. (Doc. # 1). 

On December 12, 2005, the parties filed a stipulation whereby the parties agreed to allow

Plaintiffs to file a First Amended Complaint in which 350 W.A. was substituted as a Plaintiff “in place

and instead of Blackburn as the real party in interest for the claims erroneously asserted on behalf of

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Blackburn.” (Doc. # 33 at 1). Pursuant to the stipulation, Defendant Federal retained the right to

require Blackburn to respond to discovery requests even though Blackburn was made a “nonparty”

to the suit. (Doc. # 33 at 2). On December 12, 2005, Plaintiffs filed the First Amended Complaint

which was the subject of the stipulation, and thereby terminated Blackburn as a Plaintiff, and added

as a Plaintiff 350 West Ash, LLC (350 W.A.). (Doc. # 34). The First Amended Complaint asserted

claims for breach of contract, breach of the implied covenant of good faith and fair dealing, negligent

infliction to prospective economic advantage, and declaratory relief. (Doc. # 34). 

On January 26, 2006, Defendant Federal moved for summary judgment on each of the claims

asserted by Hoko and 350 W.A. (Doc. # 43). On May 1, 2006, the Court granted Defendant’s motion

for summary judgment with respect to all of the claims asserted by Plaintiff 350 W.A., as well as with

respect to Plaintiff Hoko’s claims for declaratory relief and negligent infliction to prospective

economic advantage. (Doc. # 101). As of May 1, 2006, only Plaintiff Hoko’s claims for breach of

contract and breach of the implied covenant of good faith and fair dealing remained pending in this

action. See (Doc. # 101).

On January 11, 2008, Plaintiff Hoko served an Offer of Compromise pursuant to CAL. CODE

CIV. P. § 998 upon Defendant Federal for $999,999.00. (Docs. # 298, 300). On January 25, 2008,

Defendant Federal accepted Plaintiff Hoko’s Offer of Compromise. (Doc. # 300).

On January 28, 2008, Century Surety Company (Century) filed a notice of judgment lien

against 350 W.A. and Blackburn. (Doc. # 273); see also CAL. CODE CIV. P. §§ 708.410(a-b). On

January 31, 2008, Duckor, Spradling, Metzger & Wynne law corporation (Duckor) filed a notice of

judgment lien against Blackburn. (Doc. # 288). On February 21, 2008, Duckor filed a notice of

contractual lien for attorneys’ fees against 350 W.A. and Blackburn. (Doc. # 291). On February 27,

2008, Otay Project, LLC (Otay) filed a notice of contractual lien against Blackburn and 350 W.A.

(Doc. # 293). Otay’s notice also claimed “a security interest in any funds paid to Blackburn, 350

W.A., or Hokojitsugyo Company, Ltd.” (Doc. # 293 at 1).

On April 15, 2008, the Court entered Judgment in favor of Hoko and against Federal in the

amount of $999,999.00. (Doc. # 300). The Court ordered enforcement of the judgment to be held in

abeyance pending adjudication of the rights of the lien holders. (Doc. # 300). On April 15, 2008, the

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 At the time that Otay entered into the Agreement with Blackburn and 350 W.A., Blackburn

was a Plaintiff in this case.

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Court set a briefing schedule for application to the court for judgment proceeds. (Doc. # 301).

On April 28, 2008, claimants Century, Otay, and Duckor filed applications for judgment

proceeds pursuant to CAL. CODE CIV. P. § 708.470(a). (Docs. # 302, 303, 304). On May 5, 2008,

Plaintiff Hoko filed a response to Duckor’s application for judgment proceeds (Doc. # 305), Otay filed

a response to the applications filed by Duckor and Century (Doc. # 308), and Century filed responses

to the applications of Duckor and Otay. (Docs. # 306, 307).

On June 5, 2008, the Court filed an Order requesting further briefing on (1) whether the Court

has the power to adjudicate judgment or contractual liens against non-parties, and (2) whether the

Court had the power to adjudicate contractual liens in this proceeding. (Doc. # 310). On June 13,

2008, claimants Century and Otay, as well as Plaintiff Hoko, filed responses. (Docs. # 311, 313, 314).

On June 13, 2008, claimant Duckor filed a notice withdrawing its liens and application for judgment

proceeds. (Doc. # 312).

FACTUAL BACKGROUND

On December 13, 2004, Plaintiffs Hoko and Blackburn filed the Complaint in this matter

seeking to recover money under an insurance policy and for bad faith. (Doc. # 1). Before filing suit,

Plaintiff Hoko assigned its rights to insurance proceeds under the policy at issue to 350 W.A. (Doc.

# 302-4 at Ex. 1).

On June 15, 2005, claimant Otay entered into a settlement agreement with Blackburn and 350

W.A. (Doc. # 302-4 at Ex. 1).1

 Pursuant to the settlement agreement, Blackburn and 350 W.A. agreed

to pay Otay $75,000 in four installments. (Doc. # 302-4 at Ex. 1). In addition, and in specific

reference to this litigation, Blackburn and 350 W.A. agreed to pay Otay, 

without deduction or offset of any type, twenty percent (20%) of all amounts paid by

Chubb [aka Defendant Federal] (i.e., 20% of each amount so paid as when paid) (i)

under any policy of insurance; (ii) to compromise any claim asserted or to be asserted

in the Insurance Litigation; (iii) to satisfy any judgment entered against Chubb in the

Insurance Litigation; or (iv) to otherwise satisfy or resolve any claim raised by

Defendants, directly or indirectly by virtue of the Assignment from Hoko, against

Chubb, until Otay has been paid a total of $305,000 pursuant to this paragraph.

(Doc. # 302-4 at Ex. 1). Blackburn and 350 W.A. further granted Otay a “security interest” in all of

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Blackburn and 350 W.A.’s interests,

in, and to and under (i) the Assignment from Hoko and all claims against Chubb in

respect thereof, (ii) all amounts due under all applicable policies of insurance, however

arising, (iii) the Insurance Litigation and all claims asserted therein, and (iv) all rights

to the payment of any amount pursuant to or in respect of any of the foregoing,

including without limitation pursuant to any judgment, settlement or other compromise

or otherwise paid or promised to be paid in full or partial satisfaction of any claim

raised by Defendants, directly or indirectly by virtue of the Assignment, against

Chubb. . . .

(Doc. # 302-4 at Ex. 1).

On September 15 and 23, 2005, and in accordance with the settlement agreement, Otay

recorded Uniform Commercial Code financing statements with the California Secretary of State

against Blackburn and 350 W.A., and notified Defendant Federal that Otay had an interest in this

litigation. 

On September 26, 2007, claimant Century obtained a judgment against Blackburn and 350

W.A. for $1,201,088.16. See Century Surety Company v. 350 W.A., LLC, United States District Court

for the Southern District of California, Case No. 05-CV-1548 L (September 26, 2007).

On January 11, 2008, Plaintiff Hoko served an Offer of Compromise upon counsel for

Defendant Federal, offering to accept the sum of $999,999.00 in exchange for dismissal of this action

and full satisfaction of all claims for damages, costs, attorney fees, and expenses. See (Doc. # 300).

On January 25, 2008, Defendant Federal accepted Plaintiff Hoko’s Offer of Compromise. See (Doc.

# 300).

On January 28, 2008, Century filed a notice of judgment lien against 350 W.A. and Blackburn

in the amount of $1,201,088.16. (Doc. # 273). On February 27, 2008, Otay filed a notice of

contractual lien and security interest against Blackburn and 350 W.A. in the amount of 20% of the

settlement proceeds, or $199,999.80. (Docs. # 293, 302-2).

On April 15, 2008, the Court entered judgment in favor of Hoko and against Federal in the

amount of $999,999.00. (Doc. # 300).

DISCUSSION

Claimants Otay and Century each contend that it is entitled to a portion of the judgment in

favor of Hoko as the bearer of a senior interest in judgment proceeds or for other equitable reasons.

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Otay contends that its security interest and/or contractual lien for 20% of 350 W.A.’s share of the

judgment proceeds, or $199,999.80, is entitled to priority over the lien filed by Century because Otay

has perfected a security interest in the judgment proceeds. Century contends that it is entitled to the

entire judgment for $999,999.00 because it was the first to file a judgment lien in this case.

I. California’s Judgment Lien Statutes (CAL. CIV. CODE §§ 708.410-708.480)

“Under [California’s] judgment lien statutes, ‘[a] judgment creditor who has a money judgment

against a judgment debtor who is a party to a pending action or special proceeding may obtain a lien

[on the rights of the judgment debtor to money or property under any judgment subsequently procured

in the action or proceeding] to the extent required to satisfy the judgment creditor’s money

judgment.’” Brown v. Superior Court, 116 Cal. App. 4th 320, 326 (2004) (citing CAL. CODE CIV. P.

§ 708.410(a)). “To obtain a judgment lien under these statutes, ‘the judgment creditor shall file a

notice of lien and an abstract or certified copy of the judgment creditor’s money judgment in the

pending action or special proceeding.’” Id. (citing CAL. CODE CIV. P. § 708.410(b)). After filing the

notice of lien, a judgment creditor may thereafter enforce the lien by application to the court pursuant

to CAL. CODE CIV. P. § 708.470. See Id. at 327. “For purposes of an application under [CAL. CODE

CIV. P. § 708.470], a judgment creditor is ‘deemed to be a party to the action or special proceeding’

even without intervening.” Id. (citing CAL. CODE CIV. P. § 708.470). 

California’s judgment lien statutes are “subject to strict construction,” and “do not apply” and

are “unrelated to liens created by contract.” Pangborn Plumbing Corp. v. Carruthers & Skiffington,

97 Cal. App. 4th 1039, 1056 (2002).

A. Century’s Judgment Lien

On January 28, 2008, Century filed a notice of judgment lien in this case, identifying 350 W.A.

and Blackburn as judgment debtors. (Doc. # 273). On April 15, 2008, this Court entered a money

judgment in the amount of $999,999.00 in favor of Plaintiff Hoko and against Defendant Federal.

California’s judgment lien statutes permit a judgment creditor to obtain a lien against a

judgment debtor in a “pending action or proceeding” if the judgment debtor “is a party” to the

“pending action or special proceeding.” CAL. CODE. CIV. P. § 708.410. Century is a “judgment

creditor” as of the date of its application to the Court. See (Doc. # 273). However, Century’s

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judgment lien does not identify a judgment debtor “who is a party” to this case. See CAL.CODE CIV.

P. § 708.410(a).

The judgment lien filed by Century identifies 350 W.A. and Blackburn as judgment debtors.

(Docs. # 273). In addition, the judgment submitted by Century to support its judgment lien indicates

on its face that it was entered against 350 W.A. and Blackburn. (Doc. # 273). Neither 350 W.A. nor

Blackburn, however, is a party to this case. Blackburn was voluntarily dismissed as a Plaintiff on or

about December 12, 2005, at which point 350 W.A. was substituted in as a Plaintiff in place of

Blackburn. See (Docs. # 1, 34). Thereafter, on May 1, 2006, the Court dismissed 350 W.A. from this

case when it granted summary judgment in favor of Defendant Federal on each of 350 W.A.’s claims.

(Doc. # 101). The Judgment entered in this case on April 15, 2008, is not against either 350 W.A. or

Blackburn. (Doc. # 300).

California’s judgment lien statutes are “subject to strict construction . . . .” Pangborn

Plumbing Corp., 97 Cal. App. 4th at 1056. The plain language of CAL. CODE CIV. P. § 708.410

permits a judgment creditor to obtain a lien on the money or property of a judgment debtor only where

the judgment debtor is “a party” to a pending action or proceeding, and Century has not submitted any

authority for the proposition that a person may seek enforcement of a judgment in a case in which the

judgment debtor is not a party. Neither 350 W.A. nor Blackburn is a party to this case, and therefore

the Court concludes that Century is not entitled to obtain a lien under CAL.CODE CIV. P. § 708.410(a)

on the judgment against Hoko. The Court further concludes that Century is not entitled to party status

pursuant to CAL. CODE CIV. P. § 708.430.

II. Contractual Liens on Proceeds

A contractual lien is created at the time of contracting, and may be placed on litigation

proceeds. Bluxome Street Assoc. v. Woods, 206 Cal. App. 3d 1149, 1152-54, 1158 (1988); see CAL.

CIV. CODE § 2881. Although litigation proceeds are often subject to an attorney’s contractual lien,

“the attorney-client scenario is not the only one in which a contractual lien on . . . litigation proceeds

may arise.” Id. at 1154 (noting that contractual liens to litigation proceeds may arise in favor of

doctors).

California courts have “consistently held” that a trial court in an underlying action has “no

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jurisdiction” to determine the existence or validity of an attorney or other person’s contractual lien on

the judgment. Carroll, 99 Cal. App. 4th at 1173. The rule is “founded on the fundamental principal

‘that one who is not a party to a proceeding may not make a motion therein.’” Brown, 116 Cal. App.

4th at 329 (citing Marshank v. Superior Court, 180 Cal. App. 2d 602, 605 (1960)). All holders of

contractual liens must bring “a separate, independent action . . . to establish the existence of the lien,

to determine the amount of the lien, and to enforce it.” Id. at 328. While “[a] judgment creditor

claiming a judgment lien under [CAL. CODE CIV. P. § 708.410 et seq.] is deemed a party to the

underlying action for purposes of an application under [CAL. CODE CIV. P. § 708.470],” there is no

“similar statute” which conveys party status on a person claiming a “contractual lien against the

proceeds of [a] judgment.” Id. at 330-31.

A. Otay’s Security Interest and/or Contractual Lien

Otay contends that it possesses a valid and enforceable security interest and/or contractual lien

against 350 W.A. and Blackburn. Otay seeks to enforce the security interest and/or contractual lien

against 350 W.A. and Blackburn in this case because 350 W.A. and Blackburn may be entitled to the

proceeds of the judgment in favor of Plaintiff Hoko pursuant to a contract between 350 W.A.,

Blackburn, and Hoko. 

The problem with Otay’s assertion of its security interest and/or contractual lien in this case

is two-fold. First, Otay does not assert its security interest and/or contractual lien against a party to

this case. Specifically, Otay’s alleged security interest and/or contractual lien are based on a contract

between Otay, Blackburn, and 350 W.A., and did not involve Plaintiff Hoko. The only money

Judgment to lien in this case, however, is in favor of Hoko. The Court concludes that there is no legal

basis for ordering portions of the money judgment in favor of Hoko to go to Otay in light of the fact

that Otay does not have a security interest and/or contractual lien against Hoko. Nor is Otay’s security

interest or contractual lien directly tied to the Judgment in this case, as Otay’s interest depends upon

the enforceability of ancillary agreements including (a) Otay’s security interest and/or contractual lien

against 350 W.A. and Blackburn, and (b) the assignment contract between Hoko, Blackburn, and 350

W.A. No separate proceeding has been brought to enforce and/or assure the validity of those

agreements. See Brown, 116 Cal. App. 4th at 328. The Court concludes that it would be improper

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2

 The Court takes no position as to whether Otay has perfected its claimed security interest.

However, the Court notes that where a security interest fails to be perfected, a valid contractual lien

may nevertheless arise. See Bluxome Street Assoc., 206 Cal. App. 3d 1149, 1156 (1988).

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to adjudicate the contractual rights of either 350 W.A. or Blackburn when neither 350 W.A. nor

Blackburn is a party to this case.

The second problem with Otay’s security interest and/or contractual liens in this case is that

Otay is attempting to enforce the security interest and/or contractual lien on a judgment obtained in

an action to which Otay is not a party. As noted above, the proper procedure for enforcing a

contractual lien is to bring “a separate, independent action . . . to establish the existence of the lien,

to determine the amount of the lien, and to enforce it,” since “one who is not a party to a proceeding

may not make a motion therein.” Brown, 116 Cal. App. 4th at 328-29 (internal citations omitted). It

is undisputed that Otay is not a party to this case, and Otay has not addressed “the fundamental

principle that one who is not a party to a proceeding may not make a motion therein.” Id. Otay

contends that the California Commercial Code authorizes the Court to order Defendant Federal to

satisfy Otay’s security interest, however, no provision of the California Commercial Code cited by

Otay addresses the fact that the judgment in this case is in favor of Hoko–not 350 W.A. or

Blackburn–and Otay has not cited any authority which would, in effect, require Hoko to satisfy the

alleged and yet-to-be adjudicated debts of 350 W.A. and Blackburn in this proceeding where neither

Otay, Blackburn, nor 350 W.A. is a party.

After reviewing Otay’s alleged security interest2

 and/or contractual lien, the Court concludes

that it would not be appropriate to adjudicate Otay’s rights vis-a-vis Blackburn and 350 W.A. when

neither Otay, Blackburn, nor 350 W.A. is a party to this suit, particularly where the judgment creditor

in this case objects. The application for judgment proceeds filed by claimant Otay is denied.

/

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/

/

/

/

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CONCLUSION

The applications for judgment proceeds pursuant to CAL.CODE CIV.P. §§ 708.410 et seq. filed

by claimants Otay, Century, and Duckor are DENIED. (Docs. # 302, 303, 304). The Court will enter

an amended judgment vacating the previous judgment which was held in abeyance. See (Doc. # 300).

The Clerk of the Court is ordered to close this case.

IT IS SO ORDERED.

DATED: June 19, 2008

WILLIAM Q. HAYES

United States District Judge

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