Court Opinion

ID: 4441046
Source: CourtListenerOpinion
Date Created: 2019-09-24 19:02:48.850557+00
Date Added: 2024-06-11T14:45:18.599708
License: Public Domain

Filed 9/24/19
                 CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                  SECOND APPELLATE DISTRICT

                            DIVISION SIX

ROD E. GIETZEN et al.,                     2d Civil No. B287339
                                         (Super. Ct. No. 56-2012-
     Plaintiffs and Appellants,          00413479-CU-CO-VTA)
                                             (Ventura County)
v.
                                        OPINION FOLLOWING
COVENANT RE                                 REHEARING
MANAGEMENT, INC.,

     Defendant and Respondent.

       The effect of an uncollected judgment may change through
circumstances occurring after judgment. The judgment holder
may suffer a loss or in this case gain a benefit.
       Once again, we visit the judgment arising from Yolanda’s
Inc.’s (Yolanda’s) action against its landlord. This time the issue
is whether a third party beneficiary of a contract has more rights
than the promissee. A shopping center lease contains a provision
limiting the lessor’s liability for breach of the lease to the lessor’s
interest in the shopping center. Yolanda’s, the lessee, obtained a
judgment against its lessor, a limited partnership. Yolanda’s
moved to amend the judgment to add the general partner of the
limited partner lessor as a judgment debtor. The trial court
denied the motion on the ground that the general partner is a
third party beneficiary of the provision limiting liability.
       We reverse. By virtue of a foreclosure, the lease was
assigned to the foreclosing lender. The assignment terminated
the lessor’s rights under the lease. The termination of the
lessor’s rights also terminated the rights of the third party
beneficiary general partner.
                               FACTS
       We continue to chronicle Yolanda’s odyssey to collect its
judgment. Yolanda’s owns and operates restaurants. It entered
into a lease with K&G/Seabridge II, LLC (K&G) and Rocklin
Covenant Group, LP (Rocklin) to operate a restaurant at the
Seabridge Shopping Center in Oxnard. Yolanda’s president Rod
Gietzen personally guaranteed the lease.
       During lease negotiations, K&G and Rocklin failed to
inform Yolanda’s that they were in negotiations to lease another
space in the shopping center to a gym. The gym’s customers
monopolized the parking spaces in the shopping center’s common
parking lot, resulting in a loss of business for Yolanda’s.
       In March 2012, Yolanda’s sued K&G, Rocklin, and their
agent, Kahl and Goveia Commercial Real Estate (KGCRE),
alleging, among other causes of action, fraud and breach of lease.
Yolanda’s obtained judgment for breach of the lease in the
amount of almost $2 million plus attorney fees and costs. On the
first appeal, we reversed the judgment against KGCRE because it
was not a party to the lease. We otherwise affirmed. (Gietzen v.
Goveia (March 30, 2016, B255925) [nonpub. opn.].) On remand,
the trial court awarded KGCRE almost $500,000 in attorney fees
as the prevailing party.

                                2
       Meanwhile, lessors lost their interest in the shopping
center through foreclosure. Thereafter, in June 2017, Yolanda’s
brought the instant motion to amend the judgment to add
KGCRE and Covenant Real Estate Management, Inc. (CREM) as
judgment debtors. Yolanda’s alleged that KGCRE is an alter ego
of K&G and that CREM is an alter ego of Rocklin. Yolanda’s also
alleged that CREM is the general partner of a limited
partnership of which Rocklin is a limited partner; thus, CREM is
liable for Rocklin’s obligations pursuant to Corporations Code
section 15904.04, subdivision (a).
       KGCRE and CREM denied they are alter egos and asserted
they have no liability per article 39 of the lease. Article 39
provides: “The liability of Landlord under this Lease shall be
limited to Landlord’s interest in the Shopping Center. Tenant
agrees to look solely to Landlord’s interest in the Shopping
Center for the satisfaction of any liability, duty or obligation of
Landlord with respect to this Lease, or the relationship of
Landlord and Tenant hereunder, and no other assets of Landlord
shall be subject to any liability therefor. In no event shall Tenant
seek, and Tenant does hereby waive, any recourse against
shareholders and/or constituent partners of Landlord and the
partners, directors, officers or shareholders thereof, or any of
their respective personal assets for such satisfaction.”
       Yolanda’s attached as an exhibit to its moving papers
portions of an earlier action it brought in the Orange County
Superior Court against K&G, Rocklin, KGCRE, CREM, and
others. That action alleged the fraudulent transfer of personal
property. The defendants moved for summary judgment because
they believed that article 39 limited satisfaction of the judgment

                                 3
to the shopping center assets, and that they no longer had an
interest in the shopping center due to their lender’s foreclosure.
      In response, Yolanda’s argued that article 39 is merged into
the judgment; that a determination of an Orange County
Superior Court on the applicability of article 39 is res judicata;
and that the benefit of article 39 was assigned with the lease to
Rocklin’s lender in foreclosure.
      The trial court in the Orange County action denied the
motion for summary judgment. The court ruled that the article
39 defense was not available because it had been merged into the
original judgment.
                 The Ventura Trial Court’s Ruling
           on Yolanda’s Motion to Amend the Judgment
      The trial court ruled that KGCRE is the alter ego of K&G.
The court declined, however, to add KGCRE as a judgment
debtor. Instead, in the exercise of the court’s equitable powers, it
struck the award of almost $500,000 in attorney fees awarded to
KGCRE against Yolanda’s. Not surprisingly, Yolanda’s does not
contest this portion of the trial court’s ruling.
      The trial court also ruled that CREM was not the alter ego
of Rocklin; that article 39 was not merged into the judgment; that
the court was not bound by the Orange County Superior Court’s
decision; and that CREM is a third party beneficiary of article 39;
thus, Corporations Code section 15904.04 does not apply.
Accordingly, the court denied Yolanda’s motion as to CREM.
                            DISCUSSION
                                   I.
      On appeal, Yolanda’s accepts the trial court’s finding that
CREM is not the alter ego of Rocklin. Instead, Yolanda’s argues
that CREM is liable as the general partner of a limited

                                 4
partnership of which Rocklin is a limited partner. Yolanda’s
relies on Corporations Code section 15904.04, subdivision (a).
That subdivision provides in part, “[A]ll general partners are
liable jointly and severally for all obligations of the limited
partnership unless otherwise agreed by the claimant or provided
by law.”
       CREM counters that article 39 of the lease constitutes an
agreement by the claimant not to hold it liable. But Yolanda’s
contends that article 39 does not apply because it was merged
into the judgment; the determination of the Orange County
Superior Court is res judicata; and the assignment of the lease
terminated CREM’s rights in the lease. We agree only that the
assignment terminated CREM’s rights in the lease.
       We did not decide the applicability of article 39 in the
appeal of the original underlying judgment. Instead, we
expressly reserved the matter for postjudgment proceedings.
                                  II.
       Yolanda’s argues that the entire lease was merged into the
judgment. Thus, Yolanda’s asserts article 39 does not limit
enforcement of the judgment to the lessor’s interest in the
shopping center.
       Merger is an aspect of the doctrine of res judicata.
(Passanisi v. Merit-McBride Realtors, Inc. (1987) 190 Cal.App.3d
1496, 1510.) “A valid final judgment in favor of the plaintiff
merges the claim in the judgment. The cause of action is
extinguished and the only remaining right of action is on the
judgment.” (7 Witkin Cal. Procedure (5th ed. 2008) Judgment
§ 401, p. 1034.)
       Yolanda’s relies on cases that state the contract is merged
into the judgment. (See Chelios v. Kaye (1990) 219 Cal.App.3d

                                5
75, 80 [“The contract, having merged into the judgment, has no
remaining vitality”].) But the rule would be better stated that
the particular cause or causes of action on the contract are
merged into the judgment, not the contract itself. Thus, a
judgment favorable to plaintiff does not bar a different cause of
action brought by plaintiff on the same contract. (See Title
Guarantee & Trust Co. v. Monson (1938) 11 Cal.2d 621, 631
[judgment for possession under trust deed not a bar to
subsequent action for rents under same trust deed].)
       Here, Yolanda’s obtained judgment on causes of action for
breach of contract and breach of the covenant of good faith and
fair dealing relating to the landlord’s duty to provide adequate
parking. Questions concerning whether article 39 limits the
enforceability of the judgment were not before the trial court or
this court. We expressly stated in our opinion affirming the
judgment that questions relating to article 39 are reserved for
postjudgment proceedings. (Gietzen v. Goveia, supra, B255925.)
                                  III.
       Yolanda’s contends the trial court erred in refusing to
follow the Orange County court’s order denying summary
judgment.
       Yolanda’s claims the order is res judicata and that CREM
is collaterally estopped from relitigating the issues decided
therein. “The doctrine of collateral estoppel precludes relitigation
of an issue previously adjudicated if: (1) the issue necessarily
decided in the previous suit is identical to the issue sought to be
relitigated; (2) there was a final judgment on the merits of the
previous suit; and (3) the party against whom the plea is asserted
was a party, or in privity with a party, to the previous suit.”
(Producers Dairy Delivery Co. v. Sentry Ins. Co. (1986) 41 Cal.3d

                                 6
903, 910.) But an order denying summary judgment is not a final
judgment. (See Salehi v. Surfside III Condominium Assn. (2011)
200 Cal.App.4th 1146, 1158.) It is a finding that there is a triable
issue which after being adjudicated may result in a final
judgment in a party’s favor.
       Yolanda’s argues that for the purposes of issue preclusion,
as distinguished from claims preclusion, a final judgment
includes any prior adjudication of an issue that is sufficiently
firm to be accorded preclusive effect. (Citing Rest.2d Judgments,
§ 13.) Yolanda’s cites a number of cases in which prior
adjudications not constituting final judgments were determined
to be sufficiently firm to be given preclusive effect.
       But none of the cases involved the denial of a motion for
summary judgment. (Citing Border Business Park, Inc. v. City of
San Diego (2006) 142 Cal.App.4th 1538, 1564 [order sustaining
demurrer]; Sabek, Inc. v. Engelhard Corp. (1998) 65 Cal.App.4th
992, 998 [order quashing service of summons for lack of personal
jurisdiction]; Sandoval v. Superior Court (1983) 140 Cal.App.3d
932, 936 [final judgment dismissed with prejudice pursuant to
settlement while case on appeal]; Security People, Inc. v. Medeco
Security Locks, Inc. (N.D.Cal. 1999) 59 F.Supp.2d 1040, 1045
[grant of motion for summary judgment].) An order denying
summary judgment does not end the case.
                                  IV.
       Yolanda’s contends the trial court erred in applying the
third party beneficiary doctrine to CREM because the lease was
assigned in foreclosure.
       It is undisputed that all of Rocklin’s interest in the
shopping center was acquired by Rocklin’s lender at a trust deed
foreclosure sale. It is also undisputed that under the terms of the

                                 7
trust deed, Rocklin assigned all of its interest in all leases of the
shopping center in the event of default. Thus, Yolanda’s lease
was assigned to Rocklin’s lender.
       Upon assignment, all rights in the lease belong to assignee
and the assignor’s rights are extinguished. (See McCown v.
Spencer (1970) 8 Cal.App.3d 216, 225.) Yolanda’s therefore
argues that Rocklin no longer has any rights in the lease.
Yolanda’s also points out that a third party beneficiary’s rights
are no greater than those of the promissee. (Citing Marina
Tenants Assn. v. Deauville Marina Development Co. (1986) 181
Cal.App.3d 122, 132.) Yolanda’s reasons neither Rocklin nor
CREM can assert article 39.
       CREM relies on Principal Mutual Life Ins. Co. v. Vars,
Pave, McCord & Freedman (1998) 65 Cal.App.4th 1469, 1485-
1486 (Principal). In Principal, a law firm leased space in a
building on which a lender held a trust deed senior to the lease.
The lease contained an attornment clause requiring the lessee
upon foreclosure to enter into a new lease with landlord’s
successor on the same terms as the existing lease. When the
lender foreclosed during the lease term, the law firm abandoned
the premises, claiming that the foreclosure of a senior lien
terminated the lease. The lender sued for breach of lease. The
trial court gave judgment in favor of the lender, and the Court of
Appeal affirmed.
       In affirming, the court stated, “To hold that Principal’s
foreclosure extinguished the firm’s duty to attorn would render
that clause meaningless . . . .” (Principal, supra, 65 Cal.App.4th
1469 at p. 1483.) The court cited Civil Code section 1559,
providing, “A contract, made expressly for the benefit of a third
person, may be enforced by him at any time before the parties

                                  8
thereto rescind it.” (Principal, at p. 1485.) The court stated that
if the contract is terminated for any reason other than rescission,
a third party beneficiary may still enforce the agreement. (Id. at
p. 1486.) We agree with Principal on its facts.
       But Syufy Enterprises v. City of Oakland (2002) 104
Cal.App.4th 869 (Syufy Enterprises) reached a different
conclusion on different facts. In Syufy Enterprises, the city leased
for a 50-year term a large parcel of land to the master lease for a
commercial development. The master lease was amended to
provide that the lessee can sublease a portion of the premises to
Syufy for the construction and operation of a movie theater.
Syufy built and operated the theater under the sublease. During
the term of the sublease, the master lessee filed for bankruptcy.
The bankruptcy court rejected the trustee’s motion to assume the
master lease, thus terminating the master lease. The city
brought an unlawful detainer action against Syufy on the ground
that the termination of the master lease terminated the sublease
on which it depended. Syufy responded by suing for declaratory
relief and damages on the ground that it was a third party
beneficiary of the master lease and the master lease was not
terminated by rescission. It argued that, under Principal, supra,
65 Cal.App.4th 1469, it was entitled to enforce the sublease. The
trial court rejected Syufy’s argument and granted the city
judgment of nonsuit.
       The Court of Appeal affirmed. The court distinguished
Principal on the ground that the attornment clause in question
there was designed to take effect on foreclosure, and would be
meaningless if the tenant’s obligation under the clause was
extinguished by foreclosure. (Syufy Enterprises, supra, 104
Cal.App.4th 869 at p. 888.) Whereas, in contrast, Syufy

                                 9
identified no clause, attornment or otherwise, designed to take
effect on termination of the master lease. (Ibid.) In addition, the
court identified the “main problem” with Syufy’s argument as the
rule that a third party beneficiary cannot assert greater rights
than those of the promissee under the contract. (Ibid.)
        Syufy Enterprises guides us here. Unlike the attornment
clause in Principal, supra, 65 Cal.App.4th 1469, article 39 here is
not rendered meaningless by the foreclosure. Instead, the benefit
of article 39 is now with the foreclosing lender, Rocklin’s
successor in interest. Nor do we read Civil Code section 1559 as
abrogating the rule that a third party beneficiary cannot assert
greater rights than those of the promissee. Rocklin lost its right
to assert article 39 when the lease was assigned in foreclosure.
Because CREM cannot have more rights than Rocklin, CREM
also loses its rights. CREM may not have anticipated the
foreclosure, but foreclosures do occur.
                                   V.
        In a petition for rehearing, CREM raises two issues for the
first time.
        CREM argues that the foreclosed trust deed is not part of
the record in this case. It was a part of the record in the Orange
County action. Yolanda’s requests that we take judicial notice of
the trust deed. We do so. (Evid. Code, § 452, subd. (d)(1).)
Moreover, in its letter brief in support of its petition for
rehearing, CREM concedes that the foreclosed trust deed
contains an assignment clause.
        CREM argues that the assignment clause is not alone
sufficient to perfect the assignment. CREM relies on Civil Code

                                10
section 2938, subdivision (c).1
      Civil Code section 2938, subdivision (c) applies to
provisions in trust deeds assigning rents as additional security in
the event of default. (See, e.g., Federal National Mortgage Assn.
v. Bugna (1997) 57 Cal.App.4th 529, 531.) The subdivision
provides for procedures that allow trust deed beneficiaries to
obtain rents prior to foreclosure that would otherwise be paid to
the defaulting borrower. Such procedures include appointment of
a receiver or written demand on the assignor and tenants. The
subdivision requires any such rents obtained by the trust deed
beneficiary to be applied to the secured debt.

      1  Civil Code section 2938, subdivision (c) provides in part:
“(c) Upon default of the assignor under the obligation secured by
the assignment of leases, rents, issues, and profits, the assignee
shall be entitled to enforce the assignment in accordance with
this section. On and after the date the assignee takes one or
more of the enforcement steps described in this subdivision, the
assignee shall be entitled to collect and receive all rents, issues,
and profits that have accrued but remain unpaid and uncollected
by the assignor or its agent or for the assignor’s benefit on that
date, and all rents, issues, and profits that accrue on or after the
date. The assignment shall be enforced by one or more of the
following . . . . ” The subdivision provides for enforcement by
appointment of a receiver; possession of rents, issues and profits;
or written demand on the assignor and tenants. The subdivision
further provides: “Moneys received by the assignee pursuant to
this subdivision . . . shall be applied by the assignee to the debt or
otherwise in accordance with the assignment or the promissory
note, deed of trust, or other instrument evidencing the obligation
. . . .”

                                 11
       The subdivision does not apply where, as here, the
landlord’s reversion is transferred in foreclosure along with the
lease. In such a case, the assignee becomes the new landlord. It
would be absurd to apply Civil Code section 2938, subdivision (c)
where the lease is assigned in foreclosure. A landlord is not
required to obtain the appointment of a receiver or to give a
demand to the foreclosed assignor before the landlord can collect
rent from its own tenants. In addition, the provision in
subdivision (c) requiring the rents to be applied to the secured
debt is meaningless as applied to the circumstances presented
here. CREM cites no authority requiring any particular
formalities to perfect the assignment of a lease.
       CREM argues that even after the lease is assigned,
contractual obligations continue between it and the assignee.
CREM relies on Vallely Investments v. BancAmerica Commercial
Corp. (2001) 88 Cal.App.4th 816, 822. There the court held that
where a tenant assigns its leasehold interest, it remains liable to
the lessor for the performance of the lease covenants based on
privity of contract.
       CREM’s reliance on Vallely is misplaced. CREM fails to
distinguish between liabilities and rights. Yolanda’s liabilities
are not at issue here. Instead, CREM is claiming through
Rocklin the right to protection under article 39 of the lease. But
Rocklin assigned its interest in the lease by virtue of the
foreclosure. Although the contractual liabilities of Rocklin, the
assignor, may remain after assignment, Rocklin’s rights are
extinguished. (See McCown v. Spencer, supra, 8 Cal.App.3d at p.
225.)
       Nevertheless, CREM also argues for the first time in its
petition for rehearing that article 39 continues to apply because

                                12
the judgment preceded the assignment. The judgment was final
before the foreclosure and assignment of the lease. But final does
not mean dead. The judgment is viable unless satisfied, barred
by limitations (Code Civ. Proc., § 683.020), or discharged in
bankruptcy. While the judgment remains viable, the judgment
creditor’s ability to enforce the judgment may be affected by
whatever happens, positive or negative, to the judgment debtor,
including the assignment of the lease.
       The general rule is that an assignment extinguishes the
rights of the assignor and its third party beneficiaries. CREM
presents no reason why that rule should not apply here. Article
39 and similar lease provisions are in the nature of an
exculpatory clause. Such a clause allows a landlord to establish
an under-capitalized entity as a nominal landlord. This insulates
an actual landlord from liability for harms to its tenants. CREM
cites no policy affording such clauses preferential treatment after
assignment. Nor can we think of any.
                            DISPOSITION
       The judgment (order) is reversed with instructions to
amend the judgment to include CREM as a judgment debtor.
Costs are awarded to appellants.
       CERTIFIED FOR PUBLICATION.

                                     GILBERT, P. J.

We concur:

      YEGAN, J.                      PERREN, J.

                                13
                   Kent M. Kellegrew, Judge

               Superior Court County of Ventura

                ______________________________

      Lurie & Seltzer, Barak Lurie, Michele A. Seltzer and Brent
A. Kramer for Plaintiffs and Appellants.
      Voss, Cook & Thel, Francis T. Donohue; Sheppard, Mullin,
Richter & Hampton, Aaron J. Malo and Karin Dougan Vogel for
Defendant and Respondent.