Court Opinion

ID: 9881731
Source: CourtListenerOpinion
Date Created: 2023-10-03 18:18:38.484303+00
Date Added: 2024-06-11T14:25:12.096625
License: Public Domain

Filed 10/2/23 Glaser Weil etc. v. Downs CA2/1
   NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions
not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion
has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                         SECOND APPELLATE DISTRICT

                                        DIVISION ONE

 GLASER WEIL FINK HOWARD                                              B324408
 AVCHEN & SHAPIRO LLP,
                                                                      (Los Angeles County
           Plaintiff and Respondent,                                  Super. Ct. No. BC506921,
                                                                      BC619678)
           v.

 GARY P. DOWNS,

           Defendant and Appellant.

     APPEAL from an order of the Superior Court of
Los Angeles County, Curtis A. Kin, Judge. Affirmed.
     Gary P. Downs, in pro. per., for Defendant and Appellant.
     Glaser Weil Fink Howard Jordan & Shapiro,
Michael Cypers and Elizabeth G. Chilton for Plaintiff and
Respondent.
                ____________________________
       In a prior appeal, we held that a security interest granted
by William E. Rice to his counsel, Glaser Weil Fink Howard
Avchen & Shapiro LLP (Glaser Weil),1 had first-in-time priority
over a charging order obtained by judgment creditor Gary P.
Downs. (Rice v. Downs (2021) 73 Cal.App.5th 213 (Rice III).) We
remanded for the trial court to make findings regarding the scope
of Glaser Weil’s security interest, including whether that interest
covered the same property subject to Downs’ charging order, and
under what conditions Glaser Weil could collect the collateral.
       On remand, the trial court found the security interest
applied to the same collateral as the charging order, and Glaser
Weil was entitled to collect that collateral because, inter alia,
Rice had filed a bankruptcy petition, a specified event of default
under the security agreement. Accordingly, the trial court denied
Downs’ motion to enforce the charging order against the
collateral to which Glaser Weil was entitled.
       Downs appeals from the trial court’s order, arguing the
security agreement is invalid, and the bankruptcy did not
constitute an event of default under the circumstances of this
case. We reject these arguments and affirm.

                        BACKGROUND

1.    Original judgment and charging order
      In a business dispute between Downs and Rice, an
arbitrator issued a decision that, inter alia, awarded Downs
hundreds of thousands of dollars in attorney fees. The trial court
confirmed the award and entered judgment in June 2015. On

      1Glaser Weil has since changed its name to Glaser Weil
Fink Howard Jordan & Shapiro LLP.

                                    2
appeal from that judgment, we affirmed the fees award but held
that certain of Rice’s cross-claims should not have been compelled
to arbitration, and therefore could proceed in court. (Rice v.
Downs (2016) 248 Cal.App.4th 175, 179–180 (Rice I).)
       Rice then filed a first amended complaint in the trial court
reasserting his claims and adding new claims based on business
transactions in Hawaii. The trial court denied Downs’ motion to
compel arbitration of the Hawaii-related claims and Downs
appealed—we will refer to that appeal as Rice II. Rice attempted
to proceed with his non-Hawaii-related claims despite the appeal,
but the trial court agreed with Downs the proper course was to
stay all proceedings pending a decision in Rice II.
       In April 2018, while Rice II was still pending, Downs moved
for a charging order directing various limited liability companies
(LLCs) of which Rice was a member to pay any distributions to
which Rice was entitled directly to Downs until the judgment
confirming the arbitration award was satisfied. One of the LLCs
included in the charging order motion was Triton Community
Development LLC (Triton), a company of which Rice was founder
and sole managing member.
       The trial court denied the charging order motion, ruling
that the order staying the proceedings while Rice II was pending
also applied to Downs’ attempt to enforce the judgment.
       We issued our opinion in Rice II in July 2019, and the
remittitur issued on September 23, 2019.2 (Rice v. Downs
(July 23, 2019, B286296) [nonpub. opn.].) On October 3, 2019,
Downs again moved for a charging order against Triton and other
LLCs affiliated with Rice. This time the trial court granted the

      2   The holding of Rice II is not relevant to this appeal.

                                      3
motion, issuing a charging order requiring the LLCs to “pay any
money or property due or to become due to [Rice] directly to
[Downs]” until the judgment was paid.

2.    Proceedings to enforce the charging order
       On January 27, 2020, Rice filed for chapter 11 bankruptcy.
In that proceeding, he disclosed that in February 2020, Triton
had paid $450,000 to Glaser Weil, the firm representing Rice in
his litigation against Downs. The bankruptcy court dismissed
Rice’s case in April 2020, finding that “in the interest of judicial
economy, the parties should continue to litigate in state court.”
       On May 1, 2020, Downs moved in the trial court to enforce
the charging order, contending Triton’s payment to Glaser Weil
violated the order.
       In opposition, Rice claimed that months before Downs
moved for the charging order in October 2019, Triton had entered
into an agreement with Glaser Weil to become a co-obligor on
Rice’s debt to the law firm. Simultaneous with that agreement,
Rice had granted Glaser Weil a security interest in his
membership in Triton, which Glaser Weil had perfected by filing
a UCC financing statement with the Secretary of State.
       As evidence of these transactions, Rice filed a declaration
summarizing the terms of Triton’s agreement with Glaser Weil to
become co-obligor on Rice’s debt, and Rice’s agreement with
Glaser Weil granting the security interest. A Glaser Weil partner
also filed a declaration summarizing the terms of the security
interest, and attached the UCC financing statement filed with
the Secretary of State. The agreements themselves were not
provided to the trial court.
       Rice argued that Triton’s payment to Glaser Weil was not a
distribution to Rice subject to the charging order, but rather “a

                                    4
payment made by Triton to satisfy its own debt” as co-obligor on
Rice’s debt. Alternatively, to the extent the payment was a
distribution to Rice, Rice argued Glaser Weil’s perfected security
interest in Triton had first-in-time priority over Downs’ charging
order.
       In reply, Downs argued that Triton’s payment to Glaser
Weil was for legal services provided to Rice, and therefore was a
distribution subject to the charging order. He further argued,
inter alia, that the security interest had no effect absent a
default, which had not occurred, and that it would be inequitable
to allow Rice to use Triton to evade the charging order because
Triton was Rice’s alter ego.
       After several hearings, the trial court ruled in Downs’
favor. The court found Triton was Rice’s alter ego, thus rejecting
the argument that Triton’s payment to Glaser Weil was for
Triton’s own obligations. The court agreed in theory that Glaser
Weil’s security interest in Triton had priority over the charging
order, but found Downs nonetheless had priority based on his
earlier, unsuccessful motion for a charging order. The court
further ruled under its equitable powers that the payment was
improper and in contravention of the charging order. The court
ordered Glaser Weil to pay Downs $450,000.

3.    Rice III
       Glaser Weil appealed, and we reversed the disgorgement
order in an opinion certified for partial publication. (Rice III,
supra, 73 Cal.App.5th at pp. 217–218.) We agreed with Downs
that Triton’s payment to Glaser Weil was effectively a
distribution to Rice, and therefore subject to the charging order.
(Id. at pp. 225–229.) We held, however, that Glaser Weil’s
security interest had priority over the charging order, because

                                    5
Glaser Weil had perfected that interest before Downs moved for
the charging order in October 2019. (Id. at p. 231.) Downs’ first,
unsuccessful motion for a charging order did not grant him
priority because the denial of that motion extinguished Downs’
lien. (Id. at p. 230, citing Code Civ. Proc. § 708.320, subd. (b).) In
the unpublished portion of the opinion, we held that, assuming
arguendo the trial court under its equitable authority could
override the statutory priority of a security interest, there was no
equitable basis to do so under the circumstances of the case.
       In reaching our holding, we noted that when the trial court
ruled in Downs’ favor under its equitable authority, it never
made any factual findings as to the scope of Glaser Weil’s
security interest. (Rice III, supra, 73 Cal.App.5th at p. 235.)
Specifically, the trial court never determined whether the
security interest covered the same property subject to the
charging order. (Ibid.) Nor had the trial court determined under
what conditions Glaser Weil could enforce the security interest,
including whether Rice first had to default on his debt, as Downs
argued. (Ibid.) We therefore remanded “for the trial court to
determine the terms of Glaser Weil’s security interest.” (Ibid.)
We “express[ed] no opinion as to the scope of that inquiry,
including whether the trial court may or should allow additional
evidence.” (Ibid.)

4.    Evidence presented on remand
       Following the remittitur in Rice III, Glaser Weil and Downs
filed memoranda and supporting declarations in the trial court
addressing the issues to be considered on remand. Glaser Weil
included a copy of the agreement granting the security interest.
       Under the agreement, Rice assigned to Glaser Weil “as
collateral security, all of [Rice’s] right, title and interest in the

                                     6
following property . . . .” The “following property” included one
hundred percent of Rice’s membership in Triton, which the
agreement referred to as the “Pledged Interests” (boldface &
italics omitted). The property further included, inter alia, “all
ownership interests, membership interests, shares, securities,
moneys, instruments or property representing a dividend, a
distribution or return of capital upon or in respect of the Pledged
Interests,” and “all rights of [Rice] to receive moneys or
distributions with respect to the Pledged Interests due and to
become due under or pursuant to the Relevant Documents. . . .”
“Relevant Documents” was defined as “the Operating Agreement
and all other organizational documents of [Triton].”
       The agreement provided that, “[s]o long as no Event of
Default shall have occurred and be continuing, [Rice] shall have
the right to exercise all of [Rice’s] rights under the Relevant
Documents . . . including the right to exercise any and all voting
rights, [and] the right to receive distributions on the Collateral to
cause all revenues generated by the Property to be applied in
accordance with the terms and provisions of” the amended
engagement letter. In the amended engagement letter, as
explained in the security interest agreement, Glaser Weil agreed
to defer payment of certain legal fees.
       Should an event of default occur, however, the agreement
provided that “so long as such Event of Default shall
continue, . . . all distributions on the Collateral shall be paid
directly to [Glaser Weil]” and be applied to Rice’s debt to the firm.
       The agreement listed a number of “Events of Default,”
including “Failure of [Rice] to make any payment required under
the Engagement Letters . . . within ten (10) calendar days after
written notice from [Glaser Weil].” Other events of default

                                     7
included, inter alia, “[a] petition in bankruptcy is filed by or
against [Rice].”
      A declaration from a Glaser Weil partner asserted that on
February 21, 2020, the firm’s managing partner e-mailed Rice
demanding Triton pay $500,000 towards Rice’s outstanding legal
fees by February 29, 2020. Triton paid the $450,000 at issue in
the instant case on or about February 28, 2020.

5.    The trial court’s ruling
       After a hearing, the trial court issued a written order
denying Downs’ motion to enforce the charging order. The court
found the security interest Rice granted to Glaser Weil
encompassed distributions from Triton, the same distributions
covered by the charging order. Because Rice III had held the
$450,000 constituted a distribution from Triton to Rice, and
further that the security interest had priority over the charging
order, Glaser Weil, not Downs, was entitled to that distribution.
       The trial court rejected Downs’ argument that Glaser
Weil’s security interest was never triggered because there had
been no event of default. Citing California Uniform Commercial
Code section 9609, subdivision (c), the court ruled that default
was not required if the parties had agreed otherwise, and Rice, by
arranging Triton’s payment to Glaser Weil, had “agreed to Glaser
Weil’s enforcement of the Security Agreement.” To the extent an
event of default was required under the security agreement, the
trial court found Rice’s filing for chapter 11 bankruptcy satisfied
this requirement.
       The trial court declined to address Downs’ arguments
concerning a fraudulent conveyance. The court found that “[a]ny
argument regarding Rice’s intent in entering into the Security
Agreement with Glaser Weil or filing for bankruptcy with respect

                                    8
to the Charging Order is beyond the scope of the Court of
Appeal’s directions on remand.”
      Downs timely appealed.

                         DISCUSSION
      As an initial matter, Glaser Weil disputes some of Downs’
arguments on appeal on the basis that those arguments exceed
the scope of our remand in Rice III, or that Downs lacks standing
to challenge provisions of the security agreement. We assume
without deciding that Downs’ arguments are both within the
proper scope of our remand and that he has standing to make
those arguments.
      The trial court’s ruling in this case involved contractual
and statutory interpretation on undisputed facts. Our review is
de novo. (See The Fifth Day, LLC v. Bolotin (2009)
172 Cal.App.4th 939, 946–947.) Under that standard, we agree
with the trial court’s ruling.
      Downs does not dispute, nor could he, that the collateral
defined under the security agreement includes Triton’s
distributions to Rice. Assuming arguendo Glaser Weil can only
enforce the security agreement following the occurrence of an
event of default, an issue we do not decide, Rice’s filing of a
bankruptcy petition qualified as an event of default under the
terms of the security agreement. Upon the filing of that
bankruptcy petition, therefore, Glaser Weil became entitled to all
distributions from Triton to Rice.
      Downs argues Glaser Weil’s security interest is invalid
because Glaser Weil never conferred any value on Triton, the
entity that paid the money. Downs cites California Uniform
Commercial Code section 9203, subdivision (b), which provides
that a security interest is enforceable only if, inter alia, the

                                   9
debtor has authenticated a security agreement that provides a
description of the collateral, the debtor has rights in that
collateral, and “value has been given.”
       As we held in Rice III, although Triton directly paid Glaser
Weil, that payment was in partial satisfaction of Rice’s debt to
Glaser Weil and therefore constituted a distribution to Rice.
(Rice III, supra, 73 Cal.App.5th at pp. 227–228.) Triton’s
distributions to Rice constituted collateral under the security
agreement executed by Rice, collateral to which Rice had rights.
Glaser Weil provided value to Rice in the form of legal services
and an agreement to defer unpaid legal bills. The security
interest therefore was valid under California Uniform
Commercial Code section 9203, subdivision (b), without need for
Glaser Weil to provide value to Triton.
       In a similar vein, Downs argues Triton “received no
consideration for entering into this . . . grant of a security
interest.” Triton was not party to the security agreement; rather,
Rice assigned his personal interest in Triton, including the right
to receive distributions, to Glaser Weil. It was Rice, as party to
the agreement, that received consideration, not Triton. To the
extent Downs argues that Triton received no consideration for the
separate agreement under which it became co-obligor on Rice’s
debt to Glaser Weil, that agreement is not at issue in this case,
and has no bearing on the validity of the security agreement.
       Downs disputes the bankruptcy constituted a valid event of
default, raising several arguments. He contends the parties
never “intended the 2020 Rice Bankruptcy filing to be an Event of
Default under the Security Agreement.” In support, he cites
filings by Rice in the bankruptcy court stating avoidance of the
charging order was “[o]ne of the principal reasons” for the

                                   10
bankruptcy petition.3 Further, Downs notes that Glaser Weil
continued to represent Rice in the state court during and after
the bankruptcy proceedings, and never asserted the bankruptcy
constituted an event of default. From this, Downs argues the
bankruptcy petition had nothing to do with Rice’s debt to Glaser
Weil, and therefore could not be an event of default under the
security agreement.
       The plain, unambiguous language of the security
agreement identifies as an event of default “[a] petition in
bankruptcy . . . filed by or against [Rice].” There are no
limitations or qualifications on this event of default based on
Rice’s intent in filing the petition, and nothing suggesting a
bankruptcy petition can only be an event of default if motivated
by Rice’s debt to Glaser Weil as opposed to another creditor.
       Downs’s interpretation also is not reasonable. A
bankruptcy petition is usually a sign one or more creditors are
moving in, which is precisely when a primary lienholder would
need to assert its rights to collateral. It is thus not logical to
conclude that the parties intended to limit events of default to
bankruptcies arising solely from Rice’s debt to Glaser Weil, as
opposed to other creditors like Downs seeking the same
collateral.
       Downs argues Glaser Weil has waived any right to assert
the bankruptcy as an event of default given that the firm

      3  Here and elsewhere in his appellate briefing, Downs
does not cite to supporting documents in the record, instead
citing to his own briefing in the trial court that in turn cites
purportedly supporting documents. Although we could deem his
arguments forfeited for failure to properly cite the record, we
decline to do so.

                                   11
continued to represent Rice after the bankruptcy filing. Downs
characterizes this as continued performance in the face of a
contractual breach, thus waiving claim of breach. The events of
default under the security agreement, however, are not limited to
breach of contract, and the filing of a bankruptcy petition is one
such event. Downs’ reliance on legal doctrine regarding
contractual breaches does not help him.
       Downs argues the bankruptcy court dismissed Rice’s
petition “as being filed in bad faith, thereby rendering it invalid
and disqualifying it as an Event of Default . . . .” Downs
mischaracterizes the record. The bankruptcy court’s order
dismissing the petition does not refer to, much less make a
finding of, bad faith. Rather, the bankruptcy court concluded
“that all the real action is in state court, not here,” and “in the
interest of judicial economy, the parties should continue to
litigate in state court.”
       We acknowledge, as Downs notes, that at one point, the
bankruptcy court stated that Rice “is not seeking a fresh start; he
simply wishes to extract from the state court litigation the one
piece he dislikes,” referring to an attempt by Downs and another
business associate to oust Rice from a company they all owned.
This does not amount to a finding of bad faith, nor does Downs
cite any authority compelling that conclusion.
       Downs further questions Glaser Weil’s reliance on the
bankruptcy as an event of default by arguing that “the
bankruptcy was filed February 27, 2020 and the payment to
Glaser was made on February 28, 2020.” Downs contends this
demonstrates Triton had the funds on hand with the intent to
pay them to Glaser Weil on Rice’s behalf even absent the
bankruptcy filing.

                                   12
       Again, Downs mischaracterizes the record. Rice filed for
bankruptcy on January 27, not February 27, 2020. Glaser Weil
demanded payment from Triton on February 21, almost a month
after the bankruptcy was filed. The timing of events therefore
supports, not undercuts, an inference that Glaser Weil made the
demand because of the bankruptcy petition. At the very least,
the timing of the payment does not indicate that Glaser Weil
demanded it before an event of default had occurred.
       Through all of the above-discussed (and rejected)
arguments, Downs implies that Glaser Weil’s reliance on the
bankruptcy filing as an event of default is an ex post facto
explanation for what otherwise was an inappropriate payment
from Triton to Glaser Weil or, alternatively, that Glaser Weil and
Rice deliberately orchestrated the bankruptcy filing to trigger the
security agreement to avoid the charging order. The evidence
cited by Downs—(1) Rice’s statements in the bankruptcy court
that he filed the petition to avoid the charging order, (2) Glaser
Weil’s continued representation of Rice after the filing of the
bankruptcy petition, (3) Glaser Weil’s failure to cite expressly the
bankruptcy petition as the basis for the firm’s demand for
payment from Triton, and (4) the timing of Triton’s payment
relative to the filing of the bankruptcy petition—is insufficient to
support either of Downs’ contentions, for the same reason that
evidence is insufficient to undercut our holding that the
bankruptcy petition constituted a valid event of default.
       Further, assuming arguendo Rice and Glaser Weil
deliberately triggered the default, or Glaser Weil relied on the
bankruptcy to justify the payment only after the fact, we do not
see why it matters. Glaser Weil had the right without
qualification to receive Rice’s distributions from Triton upon the

                                    13
occurrence of specified events, including a bankruptcy filing.
Downs cites no authority that a borrower cannot trigger a default
to allow a secured party to collect ahead of another creditor, or
that a secured party cannot claim a default after the fact to
justify its demand for collateral. Had the security agreement
required Glaser Weil to make certain declarations or provide
written notice before asserting its rights based on a bankruptcy
filing, Downs might have an argument, but Downs identifies no
such requirement in the security agreement. It is also
conceivable that in some cases, principles of waiver, estoppel, or
otherwise might preclude parties from asserting certain rights
under a security agreement, but as discussed above, Downs has
failed to persuade us any such principle applies.
       Downs argues that if parties can orchestrate defaults or
rely on them after the fact to trigger security interests, this would
“leave[ ] the door wide open for friendly borrowers and debtors to
collude to make up defaults in an effort to defraud unliked
creditors.” We note the only reason Glaser Weil could collect
Triton’s distributions to Rice ahead of Downs is that Glaser Weil
had first-in-time priority over Downs. If Downs had filed a
judgment lien or successfully moved for a charging order before
Glaser Weil obtained its security interest, then Glaser Weil
would be out of luck regardless of any efforts to trigger a default
or claim a default retroactively. Downs’ attempt to
recharacterize this case as about something other than lien
priority is not well taken.
       Downs argues the trial court erred in interpreting
California Uniform Commercial Code section 9609 to allow
Glaser Weil to trigger the security interest without a default if
Rice so agreed. Given our conclusion that Rice’s bankruptcy

                                    14
petition constituted an event of default, we need not reach this
argument. We similarly do not reach the parties’ arguments
relating to the existence of other events of default, such as
nonpayment by Rice following written notice from Glaser Weil.

                          DISPOSITION
     The order is affirmed. Respondent is awarded its costs on
appeal.
     NOT TO BE PUBLISHED.

                                          BENDIX, J.

We concur:

             ROTHSCHILD, P. J.

             CHANEY, J.

                                   15