Appendix — Rosenthal v. Conrad

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ae

Supreme Court, U.S.

od FILED

9 81479 Jan 1 2199

~~

No.

IN THE OFFICE OF THE CLERK

Supreme ya of lhe CCnuted Ss; Gales

October Term, 1998

JEROME B. ROSENTHAL

Petitioner [Defendant]

V.

ROBERT NOLAN CONRAD, and

ROBERT NOLAN CONRAD, A LAW

CORPORATION

Respondents [Plaintiffs

On Petition For A Writ of Certiorari

To The Court of Appeal of California

Second Appellate District

APPENDIX TO

PETITION FOR WRIT OF CERTIORARI

JEROME B. ROSENTHAL, Petitioner

125 South Crescent Drive #6

Beverly Hills, California 90212

[310] 276-9673

Petitioner, PRO SE

Second Appellate District, Division Seven, No. B096046

$073011

IN THE SUPREME COURT OF CALIFORNIA

ROBERT NOLAN CONRAD, Respondent

SUPREME COURT

V. FILE O

OCT. 14 1998

JEROME B. ROSENTHAL, Appellant Robert Wandruff Clerk

Deputy

Appellant’s petition for review DENIED.

The request for an order directing publication of the

opinion is denied.

Mosk, J., did not participate.

GEORGE

Chief Justic a

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION 7

ROBERT NOLAN CONRAD, BO096046

Plaintiff and Respondent, Super. Ct.No. C545108)

V. COURT OF APPEAL - SECOND DIST

re: £ ete

JEROME B. ROSENTHAL, JUL 21 1998

JOSEPH A. LANE Clerk

Defendant and Appeiianht. © an vances eave ee

Deputy Clerk

APPEAL from an order of the Superior Court of Los Angeles County

Ronald M. Sohigian, Judge. Affirmed.

jerome B. Rosenthal, in pro. Per., for Defendant and Appellant.

Freeman, Freeman and Smiley, Michael Blumenteld and Leslie E

Wallis for Plaintiff and Respondent.

Appellant is a judgment debtor who claimed his $12,500 quarterly annuity

payments were exempt from levy. This appeal is form an order denying the

exemption. We affirm.

BACKGROUND

In 1985, Robert Nolan Conrad, respondent, filed an action against appellant,

Conrad v. Rosenthal, C545108. The action sought a declaratory judgment as to

the ownership of a $2.2 million legal fee which had been paid into a bank trust

account by the client pending the outcome of the lawsuit. The action also sought

actual and punitive damages against Rosenthal for Rosenthal’s interference with

Conrad's right to collect the fee from the clients.

After a jury trial in February 1990, the jury determined that Conrad was the

owner of the fee and also awarded Conrad $112,360 in compensatory damages

and $150,000 in punitive damages. Judgment was entered on March 19, 1990.

At the conclusion of Rosenthal’s unsuccessful appeal, the $2.2 million was paid

to Conrad. Conrad then set about collecting the $262,000 damage award. As a

result of this judgment, a writ of execution was issued for a money judgment in

favor of Conrad in the amount of $278,415.94.

In an attempt to satisfy the judgment, Conrad attempted to conduct a judgment

debtor examination. In May 1991, and following extensive briefing and

argument, Superior Court Judge Stephen O'Neil held Rosenthal in contempt for

willfully disobeying a court order to answer questions during that judgment

debtor examination. Asa result of the contempt order, Rosenthal remained in jail

between April 1991 and November 1993. Rosenthal’s attempts to overturn the

contempt citation were unsuccessful. Thereafter, although the contempt order

remained in effect, Rosenthal was released from custody.

Respondent discovered appellant had an annuity with Traveler’s Insurance trom

which he received $12,500 every three months. Respondent levied upon the

annuity. Appellant claimed the annuity was exempt from levy. The trial court

denied the exemption. This appeal followed.

ISCUSSION

Appellant contends his annuity is exempt from levy for two reasons:

(1) it “is not assignable or transferable” (Code Civ. Proc., Proc., Sec. 695.030")

and

(2) it is an “unmatured” policy (Code Civ. Proc., Sec. 704.100?

-b-

I

The section reads:

“(a) Exeept as otherwise provided by statute, property of the judgment

debtor that is not assignable or transferable is not subject to enforcement of a

money judgment.

“(b) the following property is subject to enforcement of a money judgment:

“(1) An interest in a trust, to the extent provided by law.

“(2) A cause of action for money or property that is the subject of a

pending action or special proceeding.”

[he section reads:

(a) Unmatured life insurance policies (including endowment and annuity

policies), but not the loan value of such policies, are exempt without making

a claim.

“(b) The aggregate loan value of unmatured life insurance policies

(including endowment and annuity policies) is subject to the enforcement of

a money judgment but is exempt in the amount of eight thousand dollars

($8.000). Ifthe judgment debtor is married. each spouse is entitled to a

separate exemption under this subdivision, and the exemptions of the

spouses may be combined, regardless of whether the policies belong to either

or both spouses and regardless of whether the spouse of the judgment debtor

is also a judgment debtor under the judgment. The exemption provided by

this subdivision shall be first applied to policies other than the policy before

the court and then, if the exemption is not exhausted, to the policy before the

court.

“(c) Benefits from matured life insurance policies (including endowment

and annuity policies) are exempt to the extent reasonably necessary for the

support of the judgment debtor and the spouse and dependents of the

judgment debtor.”

As to assignability, respondent has not sought to levy on the annuity

policy, only its proceeds. Manifestly, those $12,500 proceeds are assignable.

As to maturity, the answer is the same. (/n re Moffat (Bankr. C.D. Cal.

1989) 107 B.R. 255, 261; In re Moffat (9th Cir. 1992) 959 F.2d 740.)

Having so concluded, we need not address repondent’s other reasons

why it should prevail and why appellant's appeal should be dismissed. (See

Stone v. Bach (1978) 80 Cal. App. 3d 442.)

DISPOSITION

The order is affirmed. Costs on appeal are awarded to rrespondent.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS.

WOODS, J.

We concur.

LILLIE, }.

NEAL, ].

In re Gordon H. MOFFAT, Debtor.

Bankruptcy No. LA 88-2019-KM.

United States Bankruptcy Court,

C.D. California.

Oct. 31, 1989

IN RE MOFFAT Cite as 107 B.R. 255 (Bkrtcy, C.D.Cal. 1989

Trustee objected to exemptions claimed by Chapter 7 debtor in principal residence

and in annuity purchased in preparation for bankruptcy filing. The Bankruptcy Court,

Kathleen P. March, J., held that: (1) under California law, debtor was entitled to

automatic homestead exemption in property which he no longer owned, but in which

he continued to reside, rent-free, as settlor and beneficiary of trust, but (2) quarterly

payments which debtor received from matured, single-premium annuity were not

“reasonably necessary” to support debtor and spouse, within the meaning of

California exemption.

Objection sustained in part and overruled in part.

1. Homestead 88

Under California law, debtor was ertitled to automatic homestead exemption in

property which he no longer owned, but in which he continued to reside. as settlor

and beneficiary of revocable trust. West’s Ann.Cal.C.c.P. Sec. 704.720

2. Homestead 62

Under California law, debtor was entitled only to basic $30,000 homestead

exemption in property which he had conveyed to revocable trust for benefit of

himself and his wife; debtor’s wife, who was only other person to reside on property,

had noncommunity property interest therein as beneficiary of trust, such as would

prevent debtor from claiming special $45,000 homestead exemption. West’s

Ann.Cal.C.C.P. Sections 704.720, 704.730 (a)(1,2

3. Homestead 49

_ ’ ;

$ ' + . ’ . . , r ‘ . - |} :

Chapter 7 debtor’s interest in single premium deferred annuity which he purchased

sd ." + | : > . a r | 1

prepetition was “matured witnin meanir 9 of ( alifornia exemp nm. wnen deptor tilec

r I P ‘ tir ’ r Jag ; + + + mt ‘ rie + +,+ “4 at

Dankruplicy, notwithstanding tna rSi DayMent Was Made positpe On; GeDULOFr §$

rignt to payments arose on date that maturity was purchased. West’s Ann.Cal.C.C.P.

sec. 704.100.

See publication Words and Phrases for other judicial constructions

and definitions.

4. Exemptions 49

Quarterly payments that orthodontist would be receiving from annuity were not

reasonably nec essary’ to support orthodontist and wife, within meaning of California

exemption, where ortnodontist nad PrOss montnly income of over > » OOO trom

reasonably be expected to sell his practice in order to finance his retirement. West’s

Ann.Cal.C.C.P. Sec. 704.100 (c).

practice, received another $800 per month in social security payments, and ™

See publication Words and Phrases for other judicia! constructions

and definitions. ;

5. Exemptions 49 4

Debtor cannot make proceeds of annuity policy “reasonably necessary” for his

support, within meaning of state law exemption, merely by increasing his debts in

preparation for bankruptcy filing. West’s Ann.Cal.C.C.P. Sec. 704.100(c). :

j

6. Exemptions 49

California exemption for unmatured annuities extends only to “ownership” interests

in such annuities, and not to beneficial interests. West’s Ann.Cal. C.C.P. Sec.

704.100(a)

Richard M. Moneymaker, Moneymaker & Kelley, Los Angeles, Cal. For debtor. 7%

David R. Haberbush, Roquemore, Pringle & Moore, Los Angeles, Cal., Chapter 7 :

trustee. ;

OPINION

KATHLEEN P. MARCH, Bankruptcy Judge.

I.

FACTS

In this contested matter, the Chapter 7 Trustee, David Haberbush, filed a motion

pursuant to Bankruptcy Rule 4003(b), objecting to debtor’s claimed exemptions under

11 U.S.C. Sec. 522(b)(1). Debtor filed opposition responding to the Trustee’s

objections both on legal and factual grounds. Pursuant to rules 121(2) and 111(1)(k)

of the Local Rules of the United States Bankruptcy Court for the Central District of

California, the Court ordered the parties to prepare a pre-trial order and scheduled this

matter for an evidentiary hearing. After the evidentiary hearing, the parties were

ordered to submit closing briefs.

The Debtor Gordon H. Moffat, an orthodontist, filed his Chapter 7 petition on

September 22, 1989. Along with his petition, debtor filed a list of property claimed |

exempt under 11 U.S.C. Sec. 522(b)(1), as required by Bankruptcy Rule 4003(a).

Among the property claimed exempt by debtor were (1) a $45,000.00 homestead in

his personal residence located at 4927 El Sereno Street, La Crescenta, California, and

(2) an unspecified interest in a $190,000.00 single premium deferred annuity.’

There are two types of property interests in an annuity. There is the ownership

interest, and there is the interest in the benefit payments to be received from the

4

Debtor claimed these exemptions pursuant to California Code of Civil Procedure

Sections 704.720 and 704.100 respectively.”

In preparation for filing his present petition,’ debtor engaged in various pre-

bankruptcy transactions. On February 5, 1988, debtor along with his spouse, created

“The Gordon H. Moffat and Barbara B. Moffat Living Trust” (herein after referred to

as the “Living Trust”), naming themselves along with their children as trust

beneficiaries.* On the same day, debtor transferred title to his personal residence to

the Living Trust. On February 28, 1988, debtor borrowed $300,000.00 against nis

home, utilizing $190,000.00 of the proceeds to purchase a single premium preferred

annuity called the beneficial interest. California Code of Civil Procedure Sec

704.100 (West 1987) exempts the ownership interest in certain kinds of

annuities. Debtor’s B-4 schedule fails to specify which interest debtor is

' claiming as exempt. Given debtor’s failure to distinguish between the

ownership interest and the beneficiary interest in the annuity, this court must

construe debtor’s schedule as claiming an exemption in both the ownership and

beneficiary interest in the subject annuity.

2

There are Pursuant to the B-1 schedules filed herein, debtor also claims an

exemption in various life insurance policies with “Executive Life and Url

under California Code of Civil Procedure Sec. 704.710 (West 1987). The

trustee’s initial moving papers raised an objection to debtor’s claim that these

policies were exempt. The trustee, however, abandoned this objection by

failing to include it in the pre-trial order submitted by the parties and ultimately

approved by the court. To the extent the pretrial order supersedes the trustee's

initial moving papers as a summation of the trustee’s objections to debtor claim

of exemption, there is no pending issue before the court regarding the propriety

of debtor’s claim to an exemption in the subject life insurance policies.

3

This is debtor’s second bankruptcy filing. Debtor filed his first petition

approximately ten years ago with the assistance of present bankruptcy counsel,

the firm of Moneymaker & Kelly. Debtor testified that he filed his present

petition primarily for the purpose of discharging a debt arising from a

$300,000.00 malpractice judgment entered against him.

4

Specifically, debtor holds a 12% interest, debtor’s wife holds a 48% interest, and

debtor’s four children hold a 205 interest as beneficiaries of the living trust

5

Trust. Debtor testified at the evidentiary hearing that he and his spouse created th

Living Trust® and purchased the $190,000.00 annuity on the advice of counsel ip:

order to keep his creditors from reaching these assets by maximizing allowablda

exemptions.

The Trustee objects to debtor’s claiming a homestead exemption on the ground thawi

pursuant to U.S.C. Sec. 522(b) debtor cannot claim an exemption in an asset whict 7

is not property of the estate. The trust document admitted into evidence confirms th

trustee’s allegation that title to the residence is held by the Living Trust. The trus

document, however, reveals that debtor and his spouse, and consequently ther

bankruptcy estate, hold various legal interests in the trust affecting title to the subjeche

residence, including (1) the right as trustor(s) to revoke the trust in whole or in partar

and (2) the right as beneficiaries under the trust to live on the property during their lifehne

time without obligation to pay rent. fr

The Trustee also objects to debtor’s claimed exemption in the ownership interestet

of the $190,000.00 single premium deferred annuity on the ground that, pursuant tow

California Code of Civil Procedure Sec. 704.100(a), debtor is not entitled to claim as3

exempt his ownership interest in a “matured” annuity. In addition, the trustee objects 0

‘to debtor’s claimed exemption in the beneficiary interest of the $190,000.00 annuity ¢

policy on the ground that pursuant to California Code of Civil Procedure Sec. €

704.100® debtor is not entitled to claim an exemption in annuity benefits which are t

not “reasonably necessary for the support of the judgment debtor and spouse and €

dependents of the judgment debtor.” t

The annuity policy admitted into evidence reveals that debtor purchased the subject f

annuity for a single premium of $190,000.00, naming himself both as owner and

annuitant under the policy. Debtor named his spouse as the contingent beneficiary. f

5

Throughout his testimony at the evidentiary hearing, debtor referred to the trust

created on February 5, 1988, in anticipation of filing his present bankruptcy

petition as the “family trust.” The trust document admitted into evidence,

however, is captioned “the Gordon H. Moffat and Barbara B. Moffat Living

Trust’ (emphasis added). The living trust consists of three trusts one of which is

entitled a “family trust.” However, it does not appear from the trust document

that the home in question was transferred into the family trust; rather the

property was transferred into the Living Trust. Article I of the trust document

provides that “This Trust and all trusts derived herefrom shall be known as the

GORDON H. MOFFAT AND BARBARA B MOFFAT LIVING TRUST.”

Accordingly, this court will refer to the trust in question as the “living trust”

rather than the “family trust.”

Re

suant to the terms of the policy, debtor as the annuitant, will receive forty quarterly

yments-certain” of $4,370.00 which commenced on October 1, 1988 (i.e., nine

/s after debtor filed for bankruptcy). The annuity provides that if the annuitant dies

‘ore receiving the forty “nayments-certain,” the contingent beneficiary, Mrs. Moffat,

‘| receive the remaining payments.

Jebtor is a practicing orthodontist. Not including any income from the annuity,

btor and his spouse receive a combined monthly gross income of $5,600.00

rned by debtor, and $600.00 earned by debtor’s wife, plus Social Security benefits.

ym these gross amounts debtor’s take home pay is $4,464.00 and his wife’s take

me pay is $432.00. (Debtor’s testimony, plus Schedule of Debtor’s Current Income

d Current Expenditures to his Bankruptcy Petition, received in evidence at the

aring.) Debtor testified that $5,000.00 of his monthly $5,600 gross income is salary

ym his orthodontics practice, paid through his wholly owned and operated

poration, Dr. Gordon H. Moffat, a Professional Corporation. Debtor testified his

holly owned corporation grosses approximately $400,000 a year. Debtor sees 200 -

10 patients a month in his practice. In addition to the income from his wholly

wned corporation, debtor testified that he receives $1,000 to $1,500 a month as

snsulting fees for consulting for an insurance company, the American Guild of

\thodontics. In addition to the earnings from his practice and consulting, debtor

stified that he also receives $800 a month of Social Security payments. No

vidence was submitted that debtor is unable to continue carrying on his practice for

1e foreseeable future. Moreover, debtor received an offer to purchase one part of his

ractice for $50,000.

Before mortgaging his home to purchase the subject annuity, debtor had a monthly

nortgage payment of only $1,600. After borrowing against the house to purchase the

190,000 annuity, debtor's monthly mortgage payment is $2,600. Debtor maintains

1e needs $4,370 quarterly annuity payment in order to service the debt on his home.

Lastly, in his closing brief, the trustee for the first time raises the argument that

Jebtor’s claim of exemption should be disallowed on the ground that debtor's

durchase of the annuity constitutes a fraudulent conveyance under California law.

II.

ISSUES PRESENTED

This contested proceeding presents the following issues:

A. Whether debtor is entitled to claim a $45,000 homestead exemption in his

0 California Code of Civil Procedure Section 704.720,

id in a living trust of which both debtor and his spouse

principal residence, pursuant t

when title to the dwelling is he

ate trustors and beneficiaries;

8 Whether debtor is entitled to claim an exemption in either the ownership or

beneficiary interest in a $190,000 single premium deferred annuity, pursuant to

7

California Code of Civil Procedure Sec.704.100, regardless of whether the annui

found to be “matured” or “unmatured;” and,

C. Whether debtor’s claim of exemption in the $190,000 single premium defer

annuity can be disallowed on the ground the purchase of the annuity constitut

fraudulent conveyance.

It.

ANALYSIS

The United States Bankruptcy Code permits states to opt out of the fed

exemption statutory schemes set forth in 11 U.S.C. Sec. 522(d). Bankruptcy C

Sec. 522(b)(1). In enacting California Code of Civil Procedure Sec. 703.1

California opted out of the federal exemption scheme relegating debtor to whate

exemptions are provided under state law. Consequently, substantive issues regarc

the allowance or disallowance of a claimed exemption are governed by state lav

California. However, the Bankruptcy Rules set forth the procedural framework

filing both a list of property claimed as exempt and objections to claimed exempti:

Bankruptcy Rule 4003(a) and (b). In a proceeding under Bankruptcy Rule 4003

the objecting party has the burden of providing that debtor is not entitled to

claimed exemption. Bankruptcy Rule 4003(c).

A. Debtor is Entitled to a $30,000 Homestead Exemption Pursuant to Califo:

Code of Civil Procedure Sec. 704.720

Debtor claims an “automatic”’ homestead exemption in his personal reside

pursuant to California Code of Civil Procedure Sec. 704.720 in the amoun

$45,000. In relation to the automatic homestead exemption, a “homesteac

defined as the “. . .the principal dwelling . . .in which the judgment debtor or

judgment debtor’s spouse resides... .” California Code of Civil Procedure |

704.710© (West 1987). (Emphasis added). For the purposes of the auton

homestead exemption, California Code of Civil Procedure Sec. 704.710 (a)(1) det

a “dwelling” as including “[a] house together with the outbuildings and the land uv:

which they are situated.”” The amount of a homestead is determined by Califc

6

For a discussion of the distinction between the “automatic” and the “declarec ”

homestead see /n re Knudsen, 80 B.R. 193 (Bankr.C.D.Cal. 1987).

7

The definition of dwelling under this automatic homestead article, Article 4, )

different from the definition of dwelling under C.C.P. Sec. 704.910 (West 19%

the declared homestead article, California Code of Civil Procedure Sec. 704.

(West 1987), gives a more restrictive definition of dwelling as follows: “‘(c)

8

j Code of Civil Procedure Sec. 704.730 (a)(1) which provides debtors with a $30,000

| homestead unless a debtor comes within subsection (a)(2) or (a)(3). Debtor herein

alleges he comes within subsection (a)(2) which provides a $45,000 homestead:

“[I]f the judgment debtor or spouse of the judgment debtor who resides in the

| homestead is at the time of the attempted sale of the homestead member of a family

»- unit and there is at least one member of the family unit who own nc interest in the

homestead or whose only interest in the homestead is a community property interest

with the judgment debtor.” California Code of Civil Procedure Section 704.730(a)(2)

(West 1989).

Debtor argues he is entitled to the 45,000 homestead exemption on the ground that

both he and his spouse utilize the subject dwelling as their principal residence and

both he and his spouse hold as an interest in the subject property as trustors, trustees

and beneficiaries under the subject trust. Debtor points out that California Code of

| Civil Procedure Sec. 704.720 does not limit the right to claim a homestead exemption

} « to individuals who have an “ownership” interest in the subject property.®

| 1. | The Bankruptcy Estate Holds Various Legal Interests

in the Subject Dwelling

[1] The Trustee objects to debtor’s claim to a $45,000 homestead on the ground that

debtor is not entitled to claim a homestead exemption in a dwelling which is not

property of the estate. 11 U.S.C. 522(b) provides that:

[nJotwithstanding section 541 of this title, an individual debtor may exempt from

the property of the estate the property listed in either paragraph (1) or, in the

alternative, paragraph (2) of this subsection.” 11 U.S.C. Sec. 522(b) (Emphasis added).

ME GS stats

‘Dwelling’ means any interest in real property . . .but does not include . . .the

interest of the beneficiary of a trust.” California Code of Civil Procedure Sec.

704.910 (West 1987).

Thus a debtor whose sole interest in a dwelling as a beneficiary of a trust could

not claim a declared homestead exemption regarding the dwelling, but could

claim an automatic homestead exemption regarding that dwelling, since

“dwelling” as defined in the automatic homestead article, California Code of

Civil Procedure Sec. 704.710 (West 1987) does not contain the restriction

regarding beneficiaries of trusts that the declared homestead exemption,

California Code of Civil Procedure Sec. 704.910 (West 1987) contains.

,

| As noted in footnote 7, Supra debtor is correct that the right to claim an

“automatic” homestead exemption is not limited to individuals who have an

ownership interest in the dwelling.

The trustee maintains that because debtor transferred title to the subject residence!

to the Living Trust before filing his bankruptcy petition, the residence is not property’

of the estate pursuant to 11 U.S.C. Sec.541(a) from which debtor can claim an!

exemption.’ The trustee’s contention that debtor cannot claim a homestead:

exemption in the subject dwelling because legal title to the property is not held by

the bankruptcy estate is without merit. While title to the dwelling is in the Livingé

Trust, as the trustee asserts, debtor holds various a interests” in the subjects

dwelling as a trustor and beneficiary of the living trust. ' f

11 U.S.C. 541 (a)(1) provides that, inter alia, “...a saab hh estate is comprisecl

of... all legal or equitable interests of the debtor ....” Debtor’s interest as a trustoré

and beneficiary under the Living Trust, among other things, all became property of

the bankruptcy estate pursuant to 11 U.S.C. Sec. 541 (a) upon the filing of debtot

petition. Debtor is entitled to claim an exemption in either of these legal interests. f

Pursuant to debtor’s interest as trustor in the “revocable” living trust, the bankruptcf

estate holds a “contingent reversionary interest” in the subject dwelling. Thef

bankruptcy trustee—standing in debtor’s place as trustor of the Living Trust —can, irk

his discretion, revoke the trust in whole or in part, reverting title in the residence baci

to the bankruptcy estate.'' Debtor claims a homestead in this “contingen4

reversionary interest” and the trustee has failed to produce any legal authority for the”

proposition that a homestead cannot be claimed in such an interest. The trustee ha@

¢

; .

Debtor argues Trustee’s contention is without merit because exempt property, b' j

its very nature, never becomes property of the estate. Debtor’s contention, ¢

however, is in error “[e]ven exempt property must initially be regarded as ;

property of the estate and then claimed and distributed as exempt.” (Citations

omitted) In re Poynor 68 B.R. 919, 921 (Bankr. N.D. Tex 1987).

10 a

Note, debtor also holds an “equitable interest” in the subject property as trustee #

of the Living Trust. h

1] a

If the trustee revoked the Living Trust (transferring title of the residence from

the living trust to the bankruptcy estate), the bankruptcy estate would hold lega! T

title to the dwelling subject to a first deed of trust in the sum of $300,000 and a:

abstract of judgement in the sum of $300,000. Consequently, if the bankruptcy

trustee reverted title in the dwelling back into the bankruptcy estate, there woul 4

be no equity from which debtor could claim a homestead exemption unless

debtor avoided the judgement lien pursuant to 11 U.S.C. Sec. 522 (f).

10

|

iled to meet his burden of proving a homestead exemption claim should be

sallowed. Consequently, this court must find that debtor is entitled to claim a

mestead exemption in his principal dwelling even if debtor’s sole interest in it was

“contingent reversionary interest.”

Furthermore, pursuant to debtor’s interest as a beneficiary under the Living Trust,

btor and his spouse are entitled to reside in the subject dwelling “without an

ligation to pay rent” during their life time, (i.e., debtor holds a “life estate”). Upon

fhe filing of debtor’s petition, however, debtor’s life estate transferred to the

Bankruptcy estate (i.e.,the bankruptcy estate holds an “estate pur altra vie”).'? Debtor

glaims a homestead exemption in this “life estate” and the trustee has failed to

oduce any legal authority for the proposition that a homestead exemption cannot

de claimed in such an interest. The trustee has failed to meet his burden of proving

hat debtor’s claim to a homestead exemption should be disallowed. Consequently,

is Court holds that debtor is entitled to claim a homestead exemption in his

jrincipal dwelling notwithstanding the fact debtor’s sole interest in the dwelling may

de a “life estate.”

4 Debtor Does Not qualify for a $45,000

. Homestead Exemption

[2] However, debtor is not entitled to claim a homestead exemption in the amount

f $45,000. Pursuant to California Code of Civil Procedure Sec. 704.730(a)(1) debtor

$s only entitled to a $30,000 homestead exemption, unless debtor comes with

ubsection (a)(2), i.e., that is “. . there is at least one member of the family unit who

wns no interest in the homestead or whose only interest in the homestead is a

ommunity property interest ....” (Emphasis added). The evidence presented at the

videntiary hearing, hance. sails that there is no member of a family unit who

olds either “no interest” or simply holds a “community property interest” in the

welling. Debtor and his spouse live in the subject property alone and both debtor

nd his spouse hold separate interest in the dwelling both in the form of “contingent

pversionary interests” and “life estates.” Consequently, debtor is only entitled to a

omestead exemption in the subject dwelling in n the amount of $30,000. The

—

12

heoretically, the bankruptcy trustee could sell debtor’s life estate in the subject

roperty, and debtor would be entitled to claim a homestead exemption from the

roceeds of the sale. As a practical matter, however, debtor’s life estate has little

‘any monetary value. As noted earlier, debtor’s residence is held subject to a

rst deed of trust in the sum of $300,000 and judicial lien in the sum of

300,000.

1]

trustee’s objection is overruled regarding debtor’s right to claim a homeste

exemption in the dwelling, but is partially sustained regarding the amount of t

exemption, since the proper amount of the exemption is $30,000, not the $45,0:

claimed.

B. Debtor May Not Validly Exempt Either an Ownership or a Beneficiary

Interest in the $190,000 Single Premium Deferred Annuity

Debtor claims an exemption in both the ownership and beneficiary interests und

the $190,000 annuity policy pursuant to California Code of Civil Procedure Se

704.100. California Code of Civil Procedure Sec. 704.100 provides:

[a] Unmatured life insurance policies (including endowment and annuity policie

but not the loan value of such policies, are exempt without making a clair

(Emphasis added).

[c] Benefits from matured life insurance policies (including endowment and annu|

policies) are exempt to the extent reasonably necessary for the support of th

judgment debtor and the spouse and dependents of the judgment debtor. Calor

Code of Civil Procedure Sec. 704.100 (Emphasis added).

Debtor argues that the quarterly payments to be made under the annuity policy he

in issue are exempt under California Code of Civil Procedure Sec. 704.100(a) on t!

theory that the annuity policy is unmatured. Debtor argues in the alternative (ay

inconsistently) that if the quarterly payments to be paid under the annuity are mature

rather than unmatured, the $4,370 quarterly payments should still be held exeny

because these $4,370 payments are “reasonably necessary” for the support of te

debtor Moffat and his spouse. 3

1. The Subject Annuity is “Matured” 3

[3] In order to determine whether debtor can claim an exemption in any interest§

the annuity (either the ownership or the beneficiary interest), this Court me

determine whether the subject annuity is “matured” or “unmatured.” The annuity§

question is payable in quarterly payments over a ten year period. The payout peri

commenced in October of 1988. Neither the parties nor the court were able to loch

any dispositive state or federal court authority on point addressing the question

whether an annuity whose payment is contingent solely on the passage of timeg

“matured” or “unmatured.” However, logic dictates holding that the annuity ff

question was mature when purchased, since no further act of any kind was necess¢

on the part of the debtor, or any other person, for debtor to be entitled to the re

payments. C

This is unlike the situation where a life insurance policy is the instrument

question. In the case of a life insurance policy, the insured life has to die before

insurance company is obligated to pay. Here the debtor does not have to die, or 4

]2

~

7

a

y other act, and there is no insured life. Rather, the annuity Company was

ntractually obligated to pay the 40 payments as soon as the annuity policy was

rchased and th: $190,000 purchase price paid, with the 40 payments to start on

date chosen by debtor at the time debtor purchased the annuity. The fact that a

btor may choose an annuity contract where the stream of 40 payments starts a

ek or two after , rather than a week or two before, he files his bankruptcy petition

nnot rationally be deemed to make the policy unmatured as of the date of filing.

er all, the right to receive the 40 payments arises the day the annuity is purchased,

ate which is prepetition. Black’s Law Dictionary defines “maturity” as “the date

which an obligation . . .becomes due.” Black’s Law Dictionary 883 (Sth ed. 1979).

ere, the annuity company’s duty to pay arose on the date the annuity policy was

rchased. Thus, the obligation was owed, i.e., “became due,” on the date the

nuity was purchased, despite the fact that the debtor delayed the time the payments

uld be made to a later date convenient to him. Accordingly, this court holds that

subject single premium deferred annuity was “matured,” when purchased, as the

m “matured” is used in California Code of Civil Procedure Sec. 704.100.

4 The Benefit Payments Are Not Reasonably Necessary to Support the

; Debtor and His Spouse

1[{4] In light of this Court’s holding that the subject annuity has “matured,” debtor

nnot validly claim an exemption in any interest under the annuity under California

de of Civil Procedure Sec.704.100 (a) (governing “unmatured” annuities).

wever, debtor is entitled to claim an exemption in the annuity to the extend for by

lifornia Code of Civil Procedure section 704.100[c] (governing “matured”

Anuities). Pursuant to subsection [c], debtor is entitled to claim an exemption in the

neficiary interest of a matured annuity to the extent the benefit payments from the

nuity are “reasonably necessary” for the support of the judgment debtor and the

ouse and dependents of the judgment debtor. (California Code of Civil Procedure

c. 704.100[c] is quoted supra).

Based on the evidence presented, this Court finds that none of the forty quarterly

nefit payments are “reasonably necessary” for the support of debtor, his spouse or

dependents. As set forth supra, debtor receives a gross monthly income of $5,600

month from his orthodontics practice and consulting. Should he wish at some

ure daie to stop practicing, debtor can reasonably be expected to sell his practice

finance his retirement. He testified he had already received an offer to sell a

rtain part of his practice. No evidence was presented that the debtor is unable to

ntinue working. At the time of trial he was practicing actively. Debtor also testified

at he receives social security payments of approximately $800 a month. In addition

debtor’s earnings, debtor’s spouse, who also resides in the residence, receives a

oss salary of $600 per month. (Debtor’s testimony and Schedule of Current Income

and Current Expenditures to his Bankruptcy Petition, received in evidence).

(5] The fact that debtor’s mortgage payments on his residence increased because!

refinanced his residence to purchase the annuity does not mean that the annu®

pavments are “reasonably necessary” to support the debtor because his mortga

payments had gone up. Annuity payments cannot be held to be reasonably necess!

to support a debtor merely because a debtor immediately before bankrup |

voluntarily takes on additional debts. A debtor cannot make proceeds of an anni s

policy “reasonably necessary” for his support, and therefore unavailable to be ul

to pay his creditors, merely because the debtor goes out and increases his debt!

preparation for filing bankruptcy. To do so would reward debtors who borrow

much as possible immediately before bankruptcy, while penalizing debtors whe

not do so. The measure of “reasonably necessary” is not how much debt the det

can run up, but the objective standard of how much a debtor reasonably need

live.'? Ifa debtor has excessively incumbered his residence with consensual liens

may lose the residence, or he may use the 47,900 gross monthly income he anc |

wife have from their work and other sources to continue paying the higher mon”

mortgage.

3. If the Subject Annuity is Deemed “Unmatured”, Debtor is Still Not

Entitled to Claim an Exemption in the Beneficiary Interest

(6] Given the lack of dispositive state or federal court authority on the questio

whether an annuity has “matured,” this court will now, in the alternative, address :

question of what exemption, if any, debtor would be entitled to claim if the pc

were assumed, arguendo (and contrary to this Court’s holding), to be “unmatur

lf the annuity is assumed, arguendo to be “unmatured,” debtor cannot clain |

exemption in any interest under the annuity under California Code of Civil Proce

Section 704.100 [c] (governing “matured” annuities). However, debtor woul

entitled to claim an exemption in any interest in the policy provided for by Califo

Code of Civil Procedure Sec. 704.100 [a] (governing “unmatured” annui®

Subsection (a) quoted supra states: “lujnmatured . . annuity policies . . .are exeng

Though there does not appear to be a case directly on point, see by analogy

California Code of Civil Procedure Sec. 704.200 (b) (West 1989), which det

when an item of personal property is “ordinary and reasonably necessary” fo :

the debtor as being the objective standard of: “(1) The extent to which the ©

particular type of item is customarily found in a household. (2) Whether the —

particular item has extraordinary value as compared to the value of items of '

same type found in other households.” See In re Lucas, 77 B.R. 242 (9th Ci |

B.A.P. 1987) |

14

——_

plifornia code of Civil Procedure sec. 704.100 [a] (West 1987). There is a question,

bwever, as to whether this language or subsection exempts the “ownership interest”

an annuity, or the “beneficiary interest” of an annuity, or both the ownership and

'e beneficiary interest.

‘The Court and tne parties found no state court Cases, and only one federal case,

onstruing California Code of Civil Procedure Sec. 704.100 [a].'* That case is the

linth Circuit case of Woodson v. Fireman’s Fund Insurance Company, (In_re

Voodson), 839 F.2d 610 (9th Cir.1988), where the Ninth Circuit stated:

“Both federal and California law fully exempt the ownership interest

‘1 the unmatured life insurance policy and exempt the loan value of

the policy up to $4000. See 11 U.S.C. Sec. 522(D)(7)-(8); Cal. Civ.

Proc. Code Sections 703.140(b)(7)(8); 704.100(a)-(b). Both only

partially exempt the proceeds of matured life insurance policies based

on the needs of the debtor. See 11 U.S.C. Sec. 522 (d) (11) © (1892)

(proceeds of life insurance contract insuring life of individual of

whom debtor was a dependent at insured’s death are exempt to the

extent reasonably necessary for the support of the debtor and any

dependents of the debtor.) Cal.Civ.Proc. Code Sec. 704.100(c).”

Voodson, 839 F.2d at 618, Footnote 12 (emphasis added).

The Ninth Circuit in Woodson recognized the difference between the

»wnership interest and the beneficiary interest in a life insurance policy, concluding

hat “[w]e must treat the two interests disparately because the Bankruptcy Code does

0.” 839 F.2d at 618; see In re Poynor, 68 B.R. 919, 923 (Bankr. N.D.Tex.1987)

“(t]his distinction between the ownership rights and beneficiary right appears to be

nore consistent with the intent of the Bankruptcy Code.”)

Debtor argues that under the Woodson case, the payments to be received pursuant

an unmatured life insurance policy are completely exempt. However, Woodson,

as just quoted, does not say this. Woodson says only that the ownership interest in

he unmatured life insurance annuity policy, and the loan value up to $4000 are

exempt. It does not say that the payments whic h will eventually be received from an

insurance or an annuity policy are exempt.

Though as noted in Woodson v. Fireman's Fund Insurance Company, 839 F.2d

610 (9th Cir. 1988), there are cases construing 11 U.S.C. Sec. 522 (d) (7) and

(8), the federal exemption statute governing life insurance contracts (not annuity

contracts). However, as noted supra as allowed by 11 U.S.C. Sec. 522 9b) (1),

California opted to use its own statutory exemptions instead of the federal

exemption stated in 11 U.S.C. Sec. 522 (d).

|

Ws

Consistent with Woodson, this Court holds that California code of Civil Proce

Section 704.100 (a) only exempts the ownership interest in an insurance or ann

policy and does not exempt the beneficiary interest in an insurance or annuity po

Consequently, if the annuity in issue were deemed, arguendo, to be “unmatur

debtor would be entitled to claim an exemption in his ownership interest in

annuity. However, debtor would not be entitled to claim an exemption in

portion of the beneficiary interest — the 40 quarterly payments — payable under,

annutty.

To interpret California Code of Civil Procedure Section 704.100 (a) as deta

advocates would be both (1) inconsistent with the statutory scheme of exemptipg

specified by California state law, and (2) contrary to public policy. It would allog

debtor to put substantially all of his assets beyond the reach of his creditors, raty

than only putting the finite dollar amount of assets specified by the exemption sche

beyond the reach of his creditors.

California’s statutory exemption system (California Code of Civil Procedure S¢

704.010 through Section 704.210 (West 1987) like that of most states, provides

series of exemptions of specified dollar amounts relating to specific types of assets

the debtor. These exemptions are not limitless, they are primarily (with exceptiqg

such as pain and suffering from personal injury) for quantifiable finite amounts.

etfect the California exemption statutory scheme sets up a “pot” of possig

exemptions having a finite dollar amount. One exemption is the Homeste

exemption, discussed supra. Others are exemptions of specified amounts for mow

vehicles, household furniture, appliances, provisions, personal effects, jewelry, hea

aids, tools used in the trade, deposit accounts, vacation credits, cemetery plots, e

California Code of Civil Procedure Sections 704.010 - 704.210 (West 1989). Oneg

the specified exemptions is an exemption of a specified amount for life insurang

policies, as provided for by California Code of Civil Procedure Sec. 704.100, hereg

issue. There is also a catch-all maximum of $7,900 exemption, provided #

California Code ot Civil Procedure Sec. 703.10(b)(1) and (5), sometimes referred @

as the “wild card” exemption, which exempts the: V

“(1) The debtor's aggregate interest, not to exceed seven thousand, five hundrg

dollars ($7,500) in value, in real or personal property that the debtor or a dependeg

of the debtor uses as a residence, in a cooperative that owns property that the debtg

or a dependent of the debtor uses as a residence, or in a burial plot for the debtor ¢

a dependant of the debtor.

(5) The debtor’s aggregate interest, not to exceed in value four hundred dolla

(S400) plus any unused amount of the exemption provided under paragraph (1),

any property.” California Code of Civil Procedure Sec. 730.140 (b) (1) (West 1987,

Thus, the California exemption scheme contemplates that a specified dolle

16

————

sount of assets may be placed by the debtor beyond the reach of creditors. lf the

btor were correct that all assets may be placed beyond the reach of creditors—

srely by converting them into a single premium deferred annuity—then there would

no need to have the rest of California statutory exemptions for specific items,

cause most assets could be sold and the cash raised to purchase an annuity or, In

e case of items such as paid earnings (California Code of Civil Procedure Sec.

14.070), or deposit accounts (California Code of Civil Procedure Sec. 704.080)

hich are already in liquid form, the cash could be withdrawn and used to purchase

annuity. It is hornbook law that a statutory scheme should never be interpreted

.as to make parts of that statute or statutory scheme meaningless or redundant. /n

Borba, 736 F.2d 1317, 1320 (9th Cir. 1984); See also Martinez v. Traubner 32 Cal

1755, 187 Cal.Rptr. 251, 653 P. Id 1046 (1982). To interpret the annuity section

‘debtor contends would require making exactly this error in statutory construction,

nce it would render many sections of the California Code of Civil Procedure

kemption scheme, particularly the maximum $7,900 “wild card” exemption,

jperfluous.

} From a public policy point of view, the position urged by debtor is also untenable.

he statutory aim of a Chapter 7 bankruptcy of an individual debtor such as Dr.

loffat is to liquidate debtor’s nonexempt assets in an orderly way for the benefit of

ebtor’s creditors and to allow debtor a fresh start by discharging debts to the extend

ot paid by the liquidation of debtor’s assets. E.G., In re Tarnow, 35 B.R. 1014

Sankr.N.d.Ind.1983), reversed on other grounds, 749 F.2d 464 (7th Cir. 1984).

Sebtor here seeks to obtain the discharge which constitutes this fresh start while

Reping literally hundreds of thousands of dollars of his assets in the form of the forty

ingle premium deferred annuity payments of $4,370 each, and while leaving

factically no assets to be liquidated for the benefit of creditors. To allow debtors to

paid single premium deferred annuities to protect all of a substantial portion of

sir assets from liquidation, while receiving a discharge, would completely gut the

hts of creditors in bankruptcy. This would be contrary to the bankruptcy statutory

plated by the California state exemption scheme,

heme, and clearly was not contem

ect matters of finite dollar

wich sought to provide exemptions for specified subj

mounts. See In re Krantz, 97 B.R. 514 (Bankr. N.D.lowa 1989) (refusing to sustain

Aclaim of exemption in a case where a debtor purchased a $500,000 plus annuity

Blicy as part of a conduct which the court found to be a fraud on creditors).

iC. This Court Does Not Reach the Issue of Whether the Annuity May be

Held Non-Exempt on the Ground that Its Purchase Constitutes an

Alleged Fraudulent Conveyance

The Trustee also argues that his objection to the claim of exemption regarding the

afnuity must be sustained because the purchase of the single premium annuity policy

2

17

constituted a fraudulent conveyance pursuant to California law, specifically Califors

Civil Code Section 3439.04." California Civil Code Sec. 3439.04(a) provides tha

transfer is fraudulent if the transfer is made:

a) With actual intent to hinder, delay or defraud creditor of the debtor.

California Civil Code Sec. 3439.04(b) provides that a transfer is fraudulent if

transfer was made:

ib) witnout receiving a reasonably equivalent value in exchange for the trang

or obligation and the debtor: . . .

(2) Intended to incur, or believed or reasonably should have believed that he or

would incur debts beyond his or her ability to pay as they became due.

Attempting to convert assets into exempt form obviously has the practical effec

hindering creditors from being paid in the bankruptcy. However, such convers

may not constitute “intent to hinder” creditors as that term is used in fraudul:

conveyance statutes, such as California Civil! Code Sec. 3439.04(a), since '

Congressional History regarding the part of the Code discussing exemptic

specifically states that converting property from non-exempt to exempt form is ©

fraudulent as to creditors.'® See Matter of Smiley, 864 F.2d 562, 566 (7th Cir. 198

The Trustee is not attempting to set aside debtor’s purchase of the annuity fre

Executive Life or Debtor’s transfer of the annuity to the Living Trust on the

ground that these “transfers” constitute fraudulent conveyance. Instead, the

Trustee is merely asking the court to disallow debtor’s claim to an exemption ©

the annuity on the ground that debtor’s acquisition of the annuity on the groun®

that debtor’s acquisition of the annuity would constitute a fraudulent

conveyance. However, there is some question whether the issue of fraudulent”

conveyance is in procedurally proper form to be decided as anelementofa

motion to disallow exemption. The Bankruptcy Rules require that a proceedir

to set aside a conveyance as fraudulent be raised by filing an adversary

proceeding, not by a motion. Bankruptcy Rules 7001; 11 U.S.C. Sec. 548. Th

Trustee might better raise a claim of fraudulent conveyance by bringing an

appropriate adversary proceeding, rather than claiming that the fact a

conveyance is fraudulent makes the property acquired by the conveyance non:

exempt.

16

However. as noted in Smiley, even if such a transfer is not a fraudulent

conveyance, such a conversion within one year of filing may constitute

“hindering creditors” as that term issued in Bankr. 11 U.S.C. Sec. 727(a)(2), 54

18

citing to House and Senate Reports regarding the Bankrupt

scheme, as follows:

‘As under current law, the debtor will be permitted to conve

into exempt property before filing a bankruptcy petition

fraudulent as to creditors, and permits the debtor to make fu

to which he is entitled under the law.” (Citations omitted) Mat

at 566.

However, the Congressional history just cited does not address

fraudulent conveyance statute here in issue, California Code of ¢

3439.04. Moreover, in addition to the question of whether the

as required by California Civil Code Sec. 3439.04(a), there is t

the purchase of the annuity was fraudulent under Californ

3439.04(b), which deals with purchases made for less than fair

Here, the purchase was not for fair consideration. (See Calif

343.03) defining fair consideration. Debtor paid $190,000 to +

payments totaling $174,000. Taking into account a discount

present value of the payments would be $112,441, or $77,559 less t

paid. This is not fair consideration. Debtor was so intent on ke:

from being paid that he decided he would rather lose $75,000 tt

creditors. The analysis of debtor’s schedules, of which the Court tak:

reflects that the purchase of the annuity in question rendered de!

the transaction would appear to be fraudulent under Calif

3439.04(b), which does not require actual intent to hinder or deft

However, even if the annuity purchase was held to be a fraudul:

it is unclear whether or not being a fraudulent conveyance would

nonexempt. Consistent with the legislative history of the code

Circuit cases hold that changing nonexempt to exempt ass¢

bankruptcy to place them beyond the reach of creditors (“pri

1

is allowable. E.g., Grover v. Jackson, In re Jackson, 472 |

5-,

Wudrick v. Clements, In re Wudrick, 451 F2d 988 (9th Cir. 197

97 B.r. 514, 531 (Bankr.N.D.lowa 1989) (sustained obiect

as to constitute grounds for denying a discharge under Bankr. 11 U.S

727(a)(2). See In re Oberst, 91 B.R. 97 (Bankr.C.D.Cal.1988)

not address the question of whether the conduct here in issue would |

for denying debtor a discharge under Bankr. 11 U.S.C.Sec.727 |

have done) since that issue would have to be raised by bringing

proceeding. E.g., Jn re Tveten, 70 B.R.529 (Bankr. D.Minn. 1987

19

debtor’s conduct in converting nonexempt to exempt property was done with inter

to hinder, delay or defraud creditors, and rose to the level of extrinsic fraud); an

Matter of Armstrong, 93 B.R. 197, 203 (Bankr.D. Neb.1988) (claim of exemptio

sustained unless activities of debtor exhibited “extrinsic fraud”). '” Because th

Court has held that neither the ownership interest nor the beneficial interest in th

annuity is exempt, for the reasons stated in part Ill C, supra, this Court does not nee

to reach, and does not reach, the questions of (1) whether the conveyance j

fraudulent under either California Civil Code Sec. 3439.04(a) or (b); or (2) Whether

if the annuity were held to have been purchased by a conveyance that wa

fraudulent, that fact, or debtor’s whole course of conduct, would constitute actua

fraud or extrinsic fraud so as to constitute a sufficient ground to deny the exemption

[his opinion constitutes the Findings of Fact and Conclusions of Law of the Court

In re Gordon H. MOFFAT, Debtor.

Gordon H. MOFFAT, Appellant,

v.

David R. HABBERBUSH, Appellee.

BAP No. CC-89-2062-POMe.

Bankruptcy No. LA 88-20019-KM.

United States Bankruptcy Appellate Panel

of the Ninth Circuit.

Argued and Submitted on June 25, 1990.

Decided Aug. 31, 1990.

Chapter 7 trustee objected to exemptions claimed by debtor in principal residence

and annuity purchased in preparation for bankruptcy filing. The Bankruptcy Court.

Kathleen March, J., 107 B.R. 255, sustained objection in part and overruled it in part,

and appeal was taken. The Bankruptcy Appellate Panel, Perris. J., held that: (1

Ninth Circuit cases decided after Wudrick discussing conversion of nonexempt

to exempt assets impliedly, though not expressly, seem to preserve this “actual

fraud” exception, because they state that conversion of assets from nonexempt to

exempt Status is not per se fraudulent. This leaves open the idea that the total

course of conduct in addition to the conversion itself, may rise to the level of

actual or extrinsic fraud. E.g.. Grover v. Jackson (In re Jackson) 472 F.2d 589,

590 (9th Cir. 1973); Wetzel v. Idaho State Bank, (In re Smith) 366 F.Supp. 1213,

1218 (D.Idaho 1973),

()

annuity had matured prior to date of debtor’s bankruptcy petition, and therefore,

payments under annuity were exempt under California law only to extent that they

were needed for support of debtor and his dependents, and (2) payments received by

debtor and his spouse, and thus, could not be claimed as exempt under California

law. Affirmed.

1. Exemptions 49

Se aul

Annuity had matured prior to date of debtor’s bankruptcy petition, and therefore,

payments under annuity were exempt pursuant to California law only to the extent

_ that they were needed for support of debtor and his dependents, where annuity was

designated on its face as immediate annuity, annuity took effect three days after issue

date, and initial quarterly payment was made at end of initial quarterly income

period. West’s Ann.Cal.C.C.P. Sec. 704.100.

2. Exemptions 49

Payments received by Chapter 7 debtor from annuity policy were not reasonably

necessary for support of debtor and his spouse, and thus, could not be claimed as

exempt under California law, where debtor’s monthly income of more than $5,000

was enough to meet expenses, including debt service on his residence, and even

though debtor’s age and medical condition suggested that monthly income would not

continue into distant future, there was no indication that income would not continue

for next few years. Bankr. Code, 11 U.S. C.A. Sec. 701 et seq.

Richard M. Moneymaker, Los Angeles, Cal. For appellant. David R. Haberbush,

Los Angeles, Cal., for appellee.

Before PERRIS, OLLASON and MEYERS, Bankruptcy Judges.

OPINION

PERRIS, Bankruptcy Judge:

This appeal concerns tne bankruptcy trustee’s objection to the debtor’s claimed

exemption in a $190,000 single premium immediate annuity. The bankruptcy court

determined that the subject annuity is a matured annuity and not reasonably

necessary to support the debtor and his spouse and therefore was not exempt. 107

B.R. 255. The debtor appeals from the order. We affirm.

FACTS

The debtor, Gordon H. Moffat (“the debtor”) is a practicing orthodontist who earns

a gross monthly salary of approximately $5,000 and monthly take-home pay of

approximately 44,000 from his wholly owned and operated professional corporation.

In addition, the debtor receives $1,000-$1,500 a month as a consultant for an

insurance a month as a consultant for an insurance company and 4800 a month in

social Security pavments. The debtor’s wife receives a gross monthly salary of $600.

21

—

Chapter 7 debtor from annuity policy were not “reasonably necessary” for support of:

—

aa aaa

Geptor testifiec

rnere

Dd ]

1D Ie CONTI!

‘ ) ‘

4 | rvao

» |

é re t

IS no medica

1 that he was developing glaucoma and had heal

|

| Opinion evidence that this, Or any oth

tors practice, nor any testimony that the debtor wou

|

ise cre ifed

‘The Gordon } 1. Moff

Nis spouse and the

title of his person:

‘onsideration of two sub-issues: (1) Whether the annuity had matured prior to the

late of the petition; and (2) Whether the payments received from the annuity are

easonably necessary for the support of the debtor and his spouse.

STANDARD OF REVIEW

Whether the annuity matured prior to the date of the petition is a legal question.

such a question is subject to de novo review. See In re Lewis, 79 B.R. 893, 895 (9th

-ir. BAP 1987). Whether the annuity is reasonably necessary for the support of the

mebtor and his spouse is a factual question that we review for clear error. See

i ankruptcy Rule 8013.

DISCUSSION

} California Code of Civil Procedure, section 704.100 provides, in relevant part

follows:

:

dS

(a) Unmatured life insurance policies (including endowment and annuity policies),

but not the loan value of such policies, are exempt without making a claim.

| eee Re

Ic] Benefits from matured life insurance policies (including endowment and ann

policies) are exempt to the extent reasonably necessary for the support of the

judgment debtor and the spouse and dependents of the judgment debtor.

| The bankruptcy court determined that the exemption was not available unde

section 704.100 because the annuity had matured and the payments were not

reasonably necessary for the support of debtor and his spouse. The court alternati\ ely

concluded that even if the annuity had not matured, the debtor could not claim an

exemption in any interest in the annuity because section 704.100(a) exempts only the

ownership interest in unmatured annuity policies and the payments which the debtor

sought to exempt were part of the beneficial interest.'? We do notconsider the

bankruptcy court’s analysis of the exemption of unmatured annuity policies under

section 704.100 (a) because the bankruptcy court did not commit reversible error in

determining that the annuity at issue matured prior to the date of the petition an

ine annuity is not reasonably necessary for the debtor’s support.

19

[he court also determined the debtor was entitled to a $30,000 homestead

-xemption in his residence and that it would not decide Bier the purchase of

‘he annuity was a fraudulent conveyance. Neither of these decisions a

ire raised

4S Issues On appeal. Similarly the parties do not raise any issue regarding

Whether exemption planning. if any, in this case would bar the exemption o1

reclude the debtor's discharge

|. | Whether the annuity had matured prior to the date of the petition.?°

[1] The debtor contends that the annuity had not matured as of the d

petition because maturity require that there be no further conditions to p

the debtor’s continued life was a condition to the payments.

that the annuity had

ate ou

aymen!

The Trustee conte

quisite to payments

arties nor the court cite relevant case™

an annuity. Our research similarly uncovered nog

law. Based upon the fundamental characteristics

Naracteristic Ss oft

matured because all contingencies prere

occurred prior to the petition. Neither the p

dealing with maturity date of

of annuities, the partiag

he annuity at issue and the plain meaning and application o#

term “mature,” we believe that the annuity at issue matured prior to the d

petition.

ate ov}

An annuity contract, in general, is one by which an annuitant makes an investres

which will assure his receipt of a specified annual or quarterly sum during his life ws

it he should die prematurely, his estate or those whon

ayments he has not yet received. See e.g., Garos v

. State Tax Commission, 99 } ‘

319, 321, 109 A.2d 844, 847 (1954). A fundamental characteristic of an “annul

iS a periodic payment made unconditionally without any contingency. In re Luci

Estate, 151 C.A.2d 481, 487, 312, P.2d 24, 29-31 (1957)

Annuities are classified upon various bases

1 he designates will receives

:

, including the structure of payma

See generally California Insurance Law and Practice sect

j

’

nade to the annuitants.

).20-20.21 (Matthew Bender 1990) (hereafter “California Insurance yf Bee

iccording to the structure of payments made to annuitants depends upon f

actors sq

(ne events which trigger the discontinuation of payments?! and, more importa®s

' Da) f

assifica

[he debtor’s exemption rights under state law: are determined as of the date o

the petition. / re Seyfert, 97 B.R. 590 (Bankr. S D.Cal. 1989): see In re

C

) a

igallunes, 96 B.R. 253, 255 (9th Cir. BAP 1988).

For example, annuities may be either Straight life annuities, the payments upo

Which will terminate upon the death of the annuitant regardless of how long hi

r she lives, annuities certain, the payments upon which will terminate at the &

of a specified number of years re

()

ee ee

gardless of how long the annuitant lives. or

period certain guaranteed minimum annuities. the payment upon which will

continue for the longer or a specified number of vears or the annuitant’s life.

See California Insurance Sec. 20. 21/[2]. The annuity at issue is a period certa:

2uaranteed minimum annuity because the insurance company will make

ee

‘ments to the debtor as long as he lives. but if the debtor dies prior to the en

F

3

;

’,

24

mm

.

aa ee

for purposes of determining maturity, the commencement of the benefits paid to an

annuitant. See California Insurance Sec. 29,21[2]-[3].

With regard to the commencement of benefits, there are two types of annuities: (1)

immediate annuities, in which the payment of benefits begins a short period of time

after the premium has been paid to the company, usually at the beginning or end of

the first income period; and (2) deferred annuities, in which the payment of benefits

begins on some future stated date. Id. At Sec. 20.21[3]. As stated in California

Insurance, Sec. 20.21[3][b], “[djeferred annuity contracts permit the annuitant to delay

the maturity date of the annuity [the date on which payments commence) . . .”

Although neither California Insurance nor other authorities discussed the definition

of maturity with respect to annuities, the quoted statement conveys the impression

that it is generally accepted that the maturity date of an annuity is the date upon

which the benefits under the annuity begin to accrue and that an immediate annuity

will be mature upon its effective date.

In this case, the annuity at issue is designated on its face as an immediate annuity.

This designation is consistent with the annuity’s terms because it took effect on July

1, 1988, three days after the issue date and the initial quarterly payment was to be

made on October 1, 1988, at the end of the initial quarterly income period. Thus,

although the initial payment was not to be made until October 1, 1988, the benefits,

as well as the right to payment commenced on July 1, 1988, the beginning of the

quarter for which the initial payment was made, and the annuity matured on that

date.

This conclusion is also consistent with the plain meaning of “maturity” and similar

terms. Black’s Law Dictionary defines “maturity” as “the date at which . . .an

obligation becomes due” and defines a “matured claim” as a “[c]laim which is

unconditionally due and owing.” Black’s Law Dictionary 883 (5th Ed. 1979). In this

case, the company’s duty to pay arose on the effective ate of the annuity, even though

the first payment was not to be made until three months later. Although it was not

certain that the payments would be made to the debtor, as opposed to his designated

beneficiary if he died within the 10 year period, on the July 1 effective date, there was

no pre-condition to the company’s obligation to make the payments under the

annuity. On that date, the debtor possessed an enforceable right to receive payments,

even though the debtor would not receive the first quarterly payment for the July-

September, 1988 quarter until October 1, 1988. Given the enforceable right and the

absence of conditions to the company’s obligation to pay, the annuity matured on

of the ten year period, the company will make payments to his wife, the

designated beneficiary, for the duration of the ten year period.

95

July 1, 1988.

The conclusion that the annuity matured on July 1, 1988 is not altered by the

debtor’s analogy of an annuity to life insurance. Although both annuity polices such

as this one and life insurance policies are similar in that they both involve an element

related to the annuitant’s or insured’s life, in life insurance contracts, the liability of

the company will arise upon the death of the insured. See California Insurance, Sec.

20.21[2]. This death is a pre-condition to the liability of the company and until the |

th occurs, the liability of the company will be, at the most, conditional and

By contrast, the death of the annuitant is not a pre- ¥

erkcansnta unmatured.

Rather, it is an event that will either !

condition to the company’s obligation to pay.

terminate the obligation to pay or, in this case, transfer that obligation to a different

1

party t

Nor do the debtor’s other arguments with respect to maturity alter the above €

conclusion. The debtor argues that under the definition of maturity adopted above, f

e

€

s and annuities would be mature on their date of purchase.

o immediate annuities, this is not the case as to life

| life insurance contract

Although this may be the case as t

nsurance policies or deferred annuities. As mentioned above, life insurance policies

will not mature until the pre-condition of the insured’s death has occurred. Deferred

ties will not mature until the future designated date comes to pass. The debtor %

a relies upon the trustee’s purported stipulation that the annuity was not mature on

the date of the petition. A review of the record, however, discloses that this

tipulation is far from clear.”

ic policy arguments are unpersuasive. In In re Woodson, 839

The debtor’s pub

F.2d 610, 618-19 (9th Cir. 1988), the Ninth Circuit explained the policy reasons ¥

O \

nderlying bankruptcy law’s distinction between an unmatured policy and a matured

solicv. While an unmatured policy may have value to the debtor and its loss could

+

jebtor to incur replacement costs, «

t n value, which is not exempt. On the other hand

+ + | ty yr

» the estate otner tan its | aN

nN unmatured policy will have no valu

AM bY om rine (

proceeds from a matured policy have value to the estate and can be used to pa)

The stream of payments arising from the annuity at Issue in this case would

to the estate. Any public policy arguments, therefore, support th |

L

creditors

have value

conclusion that the policy is matured. R

In summary, upon considering fundamental principles of annuity law, the plain

al

rhe record discloses that immediately after making the statement giving rise to

the purported stipulation, the trustee indicated that he disputed that the annuity

not matured on the date of the petition. See Excerpts of Record at

DOLCY Was I

26

aning of the term “matured” and the public policy concerns, the annuity at issue

tured on July 1, 1988, when the right to payment arose in the sense that the

efits began to accrue. Thus, the annuity matured prior to the September 21, 1988

ition.

Whether the payments received from the annuity are reasonably

necessary for the support of the debtor and his Spouse.

#2) Neither the parties nor the bankruptcy court cite any authority dealing with the

rpretation of the term “reasonably necessary for support” under section

100(c). Similarly, our research uncovered no authorities dealing with this

stion. In similar contexts, however, courts have set forth a number of factors to

in determining whether a given asset is reasonably necessary for the debtor’s

: port. See, e.g., In re McCabe, 74 B.R. 119, 122 (Bankr. N.D. lowa 1986). Tt

fors include the following: the debtor’s present and anticipated living expenses and

Bome; the age and health of the debtor and his or her dependents; tt

i

b

\

rese

ve debtor's

ity to work and earn a living; the debtor’s training, job skills and education: the

tor’s other assets and their liquidity; the debtor’s ability to save for retirement: and

speciai needs of the debtor and his or her dependents. /d. In addition, C.C.P.

703.115 requires that, in determining exemption based upon the need of the

tor and his spouse and dependents, the court should take into account the

erty of the judgment debtor’s spouse and dependents.

e do not believe that the bankruptcy court committed clear error in determining

I the annuity payments are not reasonably necessary for the support of his debtor

d his spouse. There is no contention that the debtor’s monthly income of more

a $5,000 is not enough to meet expenses,*’ including the debt service payments

the residence. Although the debtor’s age and medical condition suggest that this

Inthly income would not continue into the distant future, there is no indication that

fincome would not continue at this level

/

, or at least at a lever greater than the

Inthly social security payments, for the next few years. The debtor had a $30,000

j

i

:

oa

_

ough the bankruptcy court admitted into evidence a statement of the

or’s current income and expenses, that statement was not included in the

rd on appeal. That factor alone means that we cannot conclude that the

‘Tuptcy court’s determination was clearly erroneous. See In re Burkhart &4

658, 660 (9th Cir. BAP 1988).

aa a ia

interest in his home as another significant exempt asset.** In addition, the debtor’s

spouse had substantial interest in the home through her 485 interest in the Living

lrust. Given the debtor’s assets income and expenses, we affirm the bankruptcy

court's finding regarding the necessity of the annuity for the debtor’s support.

CONCLUSION

We determine (1) that the annuity at issue matured on its effective date, prior to the

bankruptcy petition and (2) that the bankruptcy court did not clearly err in finding that

the annuity is not necessary for the support of the debtor and his spouse. The

annuity, therefore, is not exempt under section 704.100 and we affirm the bankruptcy

{

urt s aetermination.

In re Gordon H. MOFFAT, Debtor.

Gordon H. MOFFAT, Appellant,

v.

David Richard HABERBUSH, Appellee.

No. 90-56134.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Oct. 8, 1991.

Memorandum Filed Dec. 12, 1991.

Order and Opinion Filed March 20, 1992.

Trustee objected to exemption claimed by Chapter 7 debtor in annuity purchased

in preparation for bankruptcy filing. The Bankruptcy Court, 107 B.R. 255, determined

that payments received from annuity were not reasonably necessary to support debtor:

and spouse within meaning of California exemption. Debtor appealed. Thi

Bankruptcy Appellate Panel, 119 B.R. 201, affirmed. The Court of Appeals, T.G

Nelson, Circuit Judge, subsequently filed opinion holding that annuity was matured

annuity and not reasonably necessary to support debtor and his spouse and, therefore

was not exempt from inclusion in bankruptcy estate under California law.

Affirmed.

1. Bankruptcy 2549

Annuity policy purchased by debtor in anticipation of bankruptcy was matured

annuity and was property of Chapter 7 estate pursuant to California law, where debtor

24

[he bankruptcy court also cited the debtor’s ability to sell his practice in the

future. It is doubtful, however, that this asset should be applied to the debtor’s

support because to the extent the stock in the debtor’s professional corporation

has any value, it apparently is property of the estate.

28

chose to have payout period commence on October 1, 1988, following the filing date

of his Chapter 7 petition on September 21, 1988; annuity matured on its effective

date prior to filing of petition. West’s Ann. Cal. C.C.P. Sec. 704.100.

2. Exemption 37

Immediate annuity purchased by Chapter 7 debtor in anticipation of bankruptcy

was not reasonably necessary for support of debtor and souse so as to be exempt from

bankruptcy estate under California law, given debtor’s assets, income and living

expenses. West’s Ann. Cal. C.C.P. Sections 704.100, 704.100(c).

Richard M. Moneymaker, Moneymaker & Kelley, Los Angeles, Cal., for appellant.

Peter C. Anderson, Roquemore, Pringle & Moore, Los Angeles, Cal., for appellant.

Appeal from Ninth Circuit Bankruptcy Appellate Panel.

Before BROWNING, ALARCON and T.G. NELSON, Circuit Judges.

ORDER

The memorandum disposition filed December 12,1991, is redesignated as an

authored opinion by Judge T.G. Nelson with minor modifications within the text.

OPINION

T.G.NELSON, Circuit Judge:

Debtor Dr. Gordon H. Moffat appeals from the Bankruptcy Appellate Panel’s

BAP’s) affirmance of the bankruptcy court’s determination” that the annuity at issue

is a matured annuity and not reasonably necessary to support the debtor and his

spouse, and therefore not exempt from the inclusion in the bankruptcy estate under

Califernia Code of Civil Procedure (C.C.P.) Sec. 704.100. We affirm.

On February 28, 1988, debtor borrowed $300,000 against his home and used

$190,000 of the proceeds to purchase a single premium immediate annuity, naming

himself as the annuitant and his wife as the contingent beneficiary. The issue date of

the annuity was June 28, 1988, and the effective date was July 1,1988. Debtor chose

to have the payout period for the 40 quarterly payments of $4,370 commence on

October 1, 1988, following the filing date of his Chapter 7 bankruptcy petition on

September 21,1988.

[1] After independent review, we agree with the BAP that the payout date chosen

by the debtor cannot rationally be deemed to make the policy unmatured as of the

date of filing the bankruptcy petition. The annuity policy provided tor immediate

payment following bankruptcy planning. Given the debtor’s enforceable right to

[he bankruptcy court decision is reported at /n re Moffat, 107 B.R. 255

(Bankr.C.D.Cal.1989). BAP’s opinion is found at Voffat v. Habberbush (sic),

119 B.R. 201 (9th Cir. BAP 1990).

29

t Lad rye ‘ ‘ r ? , Tiatat: + +} 9 ae | |

( i ) ( e company s obdiigation tO pay

tr a nuit mati and ’ ' eattect . into | . 1 1022 | ¢

latured ve date, July 1, 1988, prior to the September 21

] Tate motit ya T ‘Val: . 1 th . rer . , j

pe d lity and the California statute would have to be interpretec

ro th . | ‘ F

Lild Hera yT 1 the yiTy f mit hy th ’ t

If OF exemption Dy the debtor in tnis case

4 i

\ oO rT ) ea CONC ‘or ‘ Fr | Va r ‘no ‘1 : 4

1\ ray } re r iaded py deptor S argument tnat the trustes

. | lt tilda

t¢ } pir? f ' fr 4 mr + ol ij { f 4 oo ‘ on

it ( J i e | J Wa j atured ee MadhHverpus! 119 6 R if O5

i A } J J 4 ' . « « ‘

, \ \ f

ro S\A ? ‘ ’ ‘ ¥ ‘ , + + +} te + j

\ VV f iT¢ ) F ’ tin at ¢

: e istee WS ted } ne annuity wa

t ry 7 4 r +} ‘

1uUread ON f é f r f ‘ y ths taton nt + » i

, ate f ] ¢ iVe ri e To tne

i eaV 5 tt]

rted st DU.

wiit ’ 1

dition. unlit 4 + (9th Cir.1991). there is no conflic

|

f rye rt . r ) r + tr r

i ip al ang , if lage oft

v ¢ ( [ ne f wnetner ne exemt

' , fr j — , .

j ' | 4 > af ,

; ’ ' ‘ Cw if ) | f 17

. ’ rt —_ ‘ f ¢f

; Pr yr ‘ igment debtor ar

[ i

j ont loahtar ( ¢( Pp P t r 704 ()() (

r ' ‘ 9 . 9 ; ‘ i

} eX DE ( ) er evidenc

| y } VV

; ; ‘ ; . 4 + a ; A ‘ r

f ) ] ( " eP Dank pt

hers , ia arnt

t it e vy i

' ri\é r ? ; +

( f Y rth

. sif P

XVI. RES JUDICATA

. f A 1 ry :

ZOU Natur Joctrine

f r Hor

}

‘ rye } ‘ ) "401 2)

i (

t } A }

v\V v ‘

+ / ) |

f f ¢ { 4

)

) ) 1 ( 14 :

} } ) f J 1 19

[ i ) mtr |

} ( }

, ' ]

4 r

;

2) }

Rishell (1953) 40 ¢ .2d 477, 480, 254 P.2d 26; Estate of pinosa (1953) 117 C.A.2d

364, 367, 255 P.2d 843: Teitelbaum Furs v. Dominion Ins. Cc (1962) 58 C.2d 601,

25 C.R. 559, 375. P.2d 439, infra, Sec. 332: ¢ ommissioner v. Sunen (1948) 333 US

991, 68 S.Ct. 715, 719. 92 LEd. 894, 905; United States \ Vunsingwear (1950) 340

. 36, 71 S.Ct. 104, 95 L.Ed. 36; Busick v. Work Comp. App. Bd. (1972) 7 C.3d

167, 972,104 C.R. 42. 500 P.2d 1386, infra. Sec. 344, quoting the text: Vood vy.

Herson (1974) 39 C.A. 3d 737,745,114 CR. 365, citing the text: Shuffer \ Board of

Trustees (1977) 67 C.A. 3d 208, 216, 136 C.R. 527 quoting the tex; De Weese ,

nick (1980) 102 C.A. 3d 100, 105, 162 C.R. 259, citing the text: Nakash \ Superior

ourt (1987) 196 C.A. 3d 59, 67, 241 C.R. 578 infra. Sec. 349, quoting the text:

lifornia Coastal Com. \ »uperior Court (1989) 210 C.A. 3d 1488 1498, 1499 258

R 167; on the distinct doctrines of dw Of the Case and stare decisis. see 9 Cal Pree

Ltr 1ppea! SECTIONS 895 et oh ot @| 917 et se ] Cit Crnye ‘ t i

+t ff actior sectior 7A et eg

\ great deal of « ommentary WVallabDle f ¢ j e

tn, Cnap. 11; 47 Am.Jur.2d (Rev.ed Judgr ts Se 14 é > Harv. L.Re 18

¢ e disc ussion]; 56 Harv L.Rey 1; 103 Harv. | Re 1989 [clain Dreciusion

an latent disease Cases}: 40 ( al, | Rey, 412: 17 Si (a | R ey) $57

on of doctrine in multi-part tigatio 10 Hast

> the Effect of a Changs After

letinitive moderr treatmer

nent of ldggments., ( Napter

Sec. 281] Scope and Effect.

t te ome exception ang q

} al [Ss ¢ f er ~ ( )

pe f iT J ent f

? é

q

'

DIeCte D. 4

] ati f

r ) a ; r , ‘ 4 j ‘ j

} ( ction ¢ ? J t

' tigated | veen the |

) ( Dr ne eP Oetfern é

] r ¢ tT [ )¢ t t

} ict sections 10 | ntra, sec

> >

§. Restatement Second

‘ IND) id , |

[Sec. 282] Scope and Terminology.

] ‘ . + ¢} C . i pO +--+ ry rt ; icory mt woforr

f Cond Kestalt e | 4001 CONTAINS a

r r f é [ [ =) al qd effect ormne 1 citrine ire eit dld, and

oe) , ’ rat ; and té rinology i seq

‘ soe ike fate re t cac ine term : ry prec usion ror the

‘ +> nr > nmrea nn + r tor | scr nr 7

é | é j { ( Hate } eCStOopl el

ete tot n the opportunity u 1 second action t

t we tigated, or c 1} have Deen litigated, in a prior

; tt ‘el ‘dal nL ’ la ry) rey U (yr) and

; P ; nr ; Cre ; Ce,

[ erl aim arising ftror

¢ ly | f ited ICN a ain whnetne

i» } ‘ Th y ; > |

f ( eT Bal f ©’ PTeCciUSIOT

‘ ‘ . 7 ° »@ th, , +

e > i ] Nat a Da&i

; ; ‘ ; ‘ ta . ; rate } na previou

‘ tre +, ; , his ( ti r 2

} f ( f iT] D ¢ se ( On 34

} daement extend he { j Da yTtoti

[Dé f f ) | )

‘ ‘ ; f 5 mto ’

if

| ayat ‘ ryr

i

j ' ' , f

lf ‘ ‘ t)

' j ,

} { Tale

itt

‘ thy, { -" { i

t \ c 1 Wi

‘ f ’ \ A, tr » =

' | . | ed the ntra ira aw oft re

. . ‘ ; ’ +} ré vf t nao

)

} r QD t K ey ( | i | fer Sta

; ; ; , a cl re ogn ri

| , ‘ | 2 ? r ¢ F > ct

{ woyfoar

aden, Salhi

| [b] [Sec. 283] Other Rules of Estoppel.

‘“

The terms “res judicata” and “collateral estoppel” have some

fer to some other and distinct forms of estoppel.

6 tage BS ae aa,

(1) Where a party attempts to take inconsistent positions wit!

Fare

ntention arising in concurrent or successive actions, he is ofter

ntradict in one action a position taken in other litigation. “S

ee ae

ye imposed under the doctrine of election of remedies, or

andor toward the court that a party may not assume inconsistent

denominated as estoppel in pais. Estoppel imposed under su

on the fact that a court has determined the claim or content

estoppel is imposed on the basis of events occurring bef

, / ;

i< ine ul air ?

j f % /

ikes place. Rather, the basis of the estoppel

to a party from the possibility that the claim or «

ved in adiudi ations tnat are separate vy conducted

|

\ related torm of estoppel occurs when a Dal

idmission in prior litigation and in a subsequent action seek

j |

lecisions, the admission is treated as conclusive UT

| + | | , , + P

rebuttable presumption. “Here, too, the results may be

ne conduct of the party and not from a Gecisior

)

/ ict rd y ty ) 1Orvrye ryé f

no r ry r) font ; : } t t ry

P afl) (MCONSISTCENIL CilalmM Mis SitudtiO

}Or issue preclusion, for a.non-party ordinarily is. not Saund

' a

tigation to which he ts not a party. It is dealt wit!

rt ; yyy '

> IN applying a rule of estoppel ir

+ eal . + .

licata, particularly the term © privity

tinct ry, 1, ! larity | th, -¢}

InNctTIONS Involved may Clarify DOU f

[c] [Section 284] Res Judicata and Law of Procedure

Despite the creation of the tieid Code of 1848

deral Rules of Civil Procedure, the law of res judi

roduct of decisional law, which took only belated

, | D .

anges (ne of the cnief tasks of Kestatement ts to st

vem ior msith th | yicl + ‘ torr tre |

Ss coordinate wit ne jegisiative syste 5; of proced

) >

eral R yes ang State STEMS (

‘ rie r eanTra ré t ot ‘

.

another chance to do so. A related but narrower principle-that one who has actually

litigated an issue should not be allowed to relitigate it-underlies the rule of issue

presuppositions about the law of procedure. The ‘chance’ to litigate is not simply

Ses

—v

”

as either legally inconclusive—that is, Not a serious and genuine ‘chanc’ to litigate—or

fundamentally unfair. Indeed, a procedure for ventilating a legal dispute that lacks

certain minimal elements of form wil] be treated as inconclusive for the reason that

it is fundamentally unfair, Putting the point differently, it may be a denial of Due |

Process to treat an undefined procedural mechanism as yielding a conclusive result

in determination of legal rights.” (Chapter 1, p.6.)

(3) “The law of res judicata expresses the terms for assessing whether the procedural

system afforded the contending party an adequate Opportunity to litigate. In the now

accepted phrase, the question is whether that Opportunity was ° full and fair.’ Modern

civil procedure usually does provide full and fair freedom to present substantive

contentions and full and fair access to evidence. Accordingly, under that system of |

procedure there must be compeli ing reasons to sustain a plea for a second chance..

Such is the general tenor of this Restatement.” (Chapter 1, p.9.) Thus, “the policy of

the modern law of res judicata is summed up in Sec. 26(f) of this Restatement,

allowing relitigation of a claim (except on other specific grounds) only if it is * clearly

and convincingly shown that the policies favoring preclusion of a second action are

overcome for an extraordinary reason.’” (Chapter 1, p.10.) (See Gouvis Engineering

v. Superior Court (Cambridge Terrace Owners’ Assn) 1995) 37 C.A. 4th 642, 650,

43 c.r.2d 785, citing the text.)

(4) “[W]hen the rules of Original procedure constrain the first Opportunity to litigate,

the rules of res judicata are adjusted reciprocally. In some types of courts of limited

jurisdiction and some types of administrative agencies, for example, the scope of

substantive inquiry and the potential for development of evidence are much more

restricted than the corresponding opportunity afforded in a court of general

jurisdiction in a comparable case. The results of res judicata with respect to the

judgments of such tribunals are correspondingly less restrictive. See Sections 26(c)

28 [c] and 83, Comment f.” (Chapter 1,p.10,)

,

!

|

(5) “However formulated and applied, the basic principle of res judicata reflects a

fundamental paradox. The law of res judicata endows judgments of courts with a

peculiar finality: They are immune from examination by other authorities and may be

reexamined by the courts themselves only in unusual circumstances. Yet this finality

attaches not because the courts are infallible but because they are inevitably fallible.

Adjudication is a procedure by which a disinterested agency-the judge or jury—is

authorized to impose a binding resolution of a controversy or ver legal rights.

Arriving at such a resolution requires either a determination of the facts or a

particularization of the law as it applies to facts, or both. lf there were infallible

personages who could discern law and facts in a way that engendered universal

assent, the process of adjudication would be socially unnecessary. Legal disputes

could simply be remanded to the oracles. It is because such personages do not exist

that the offices of judge and jury and a system of procedure are created by law,

supplying by fiat a practical substitute for perfect intelligence.” (Chapter 1, p.10.)

(6) “Finality, then, is the service rendered by the courts through operation of the jaw

of res judicata. The finality in contemplation includes the immediate finality that is

imposed on the litigation itself. It includes also imposition of finality on the dispute

that gave rise to the litigation so far as it is within the means of legal process to do so.

In a still broader sense, the law of res judicata judicata cumulatively reinforces the

authoritativess of the law itself. It holds that at some point arguable questions of right

and wrong for practical purposes simply cannot be argued any more.” (Chapter 1,

p.17.)

(7) “The central problem in finality of judgments is how far the principle of finality

is to be qualified. The law of res judicata grapples with this central problem. Its

specifications endeavor to state the conditions under which the possibility of failure

of civil justice is so substantial as to justify remedial action in the form of relitigation.

One the one hand, judgments must in general be accorded finality despite flaws in

the processes leading to decision and the unavoidable possibility that the results in

some instances were wrong. On the other hand, a judgment in a particular case must

be subject to reexamination in the name of substantial justice if the initial engagement

of the merits was inadequate. Mediation between these opposed considerations

cannot be simply ad hoc; if it were, both the finality of judgments and the opportunity

for reexamination would be a function of in the institutions of judges. A measure of

intuition and discretion, to be sure, is required in administering the law of res

judicata, as the rules in this Restatement frankly acknowledge. However, a policy of

reasonable finality requires rules that take into account the complex substantive and

procedural considerations going into a civil judgment. The laws of res judicata is thus

a mirror of legal justice itself.” (Chapter 1, p.12.)

4. [sec. 285] distinction: Direct Estoppel.

Loe)

nn

“Issue preclusion” generally occurs where an issue previously litigated and

determined is raised in a subsequent action between the same parties on a different

claim. This effect is commonly calied collateral estoppel. (See supra, Sec. 281 and

infra, Sec. 354.)

In some situations, however, the issue previously litigated and determined is raised

again in a subsequent proper action between the same parties on the same claim.

The Restatement characterizes this effect as direct estoppel. (See Rest.2d Judgments,

Int.Note, p. 131; Sec. 17, Comment c; sec. 20, Comment b; MIB v. Superior Court

(1980) 106 C.A.3d 228, 232, 164 C.R. 828: Smith v. Smith (1981) 127 C.A. 3d 203,

207, 208, 179 C.R. 492 [quoting and discussing Second Restatement Tentative Draft].)

Thus, if the defendant successfully raises the objections of lack of jurisdiction,

improper venue, or nonjoinder of parties, a resulting judgment of dismissal is not on

the merits and is therefore neither a merger nor a bar. Hence, the plaintiff may bring

a second action on the same claim. (Rest.2d, Judgments Sec. 20(1).) But the issue

determined in the first action —lack of jurisdiction, improper venue, or nonjoinder of

parties—is conclusive on the Parties in that second action. (Rest.2d, Judgments, Sec.

17, Comment c; Sec. 20, Comment b.) King v. International Union of Operating

Engineers (1952) 114 C.A.2d 159, 164, 250 P.2d 11, illustrates the concept, although

it does not utilize the Restatement’s terminology. The first suit was by a number of

members of a local union on behalf of all to obtain a declaration of local freedom

from control by the international union. It was dismissed without prejudice for failure

to exhaust inter-union remedies. Held, the judgment of dismissal was res judicata in

this second suit by other union members seeking the same relief without exhaustion

of those remedies.

MIB v. Superior Court, supra, citing the first Restatement, California cases and

the text, applied the doctrine to a determination of nonjurisdiction. In three prior

actions against MIB, a foreign corporation, the trial court quashed summons on the

ground that plaintiff had failed to show sufficient contacts with this state to subject

MIB to the jurisdiction of California courts. Held, this prior determination of the

jurisdictional issue was res judicata: 1.e., a determination of jurisdictional facts is

binding, whether it establishes jurisdiction or lack of jurisdiction. (106 C.A.3d 232,

234) (For a full discussion of the res judicata effect of jurisdictional determinations,

see 2 Cal.Proc. (4th), Jurisdictional, sec. 335 et seq.)

In Smith v. Smith, supra, plaintiff wife sued defendant husband for divorce in 1967,

but did not plead his military retirement benefits as community property. They were

therefore not considered and the decree divided only the listed items. In 1968,

plaintiff moved to amend the divorce judgment on the ground of mistake, etc., of her

former attorney (L) and, on denial of the motion for untimeliness, brought an action

against defendant seeking either to set aside the decree or an award of one-half of the

36

Rl

etirement benefits. Defendant demurred on the grounds that (a) L’s mistake was

atrinsic and not a basis for equitable relief; and (b) the divorce decree was res

udicata on community property rights. The demurrer was sustained and the action

vas dismissed. Plaintiff then sued her former attorney for malpractice and obtained

, judgment for $100,000-the value of her lost claim of community property benefits

Smith v. Smith (1975) 13 C.3d 349, 118 C.R. 621, 530 P.2d 589, 1 Cal. Proc. (4th),

Attorneys, Sec.344). In 1978, Plaintiff brought the present action to recover the same

lost benefits. The trial judge concluded that the current complaint was identical to

one cause of action of the 1968 complaint and that the judgment on demurrer in the

1968 action was res judicata. Held, affirmed.

(a) If the 1968 judgment had been limited to the impropriety of the remedy of

equitable relief against a judgment, it would not be a.. .to a subsequent a tion

seeking an appropriate remedy. (127 C.A.3d 207, citing the text.) But the judgrnent

also resolved the issue of res judicata tendered by tne demurrer, i.e., it determined

‘hat failure to tender the issue of retirement benefits in the divorce action barred a

later claim for those benefits (127 C.A.3d 207.)

(b) Plaintiff's contention that the 1968 judgment was no res judicata because it did

not correctly decide the merits of her community property claim is unsound: a

judgment not passing directly on the substance of a claim may nevertheless operate

3s a bar to relitigation of the very issue that was litigated in the previous action. (127

C.A.3d 207, 208.) The 1968 judgment determined the issue of the res judicata effect

of the divorce decree on the claim of retirement benefits, and thus operated as a

direct estoppel. (127 C.A. 3d 209.)

5. [Sec. 286] Where Doctrine Is Inapplicable.

(a] Direct Attack on Judgment Not Final. By its very nature, the doctrine does not

prevent timely direct attack, e.g., by motion for new trial or appeal. It only applies

where the judgment is final and safe from direct attack, and is collaterally attacked

in a subsequent proceeding. (See Rest.2d, Judgments Sec. 13, Comment a; Sec.17,

Comment d; infra, Sec. 306 et seq.)

(b] Judgment Not on Merits. The doctrine only protects a final determination of the

controversy on the merits of the claims and defenses. if the judgment is on

procedural or other grounds unrelated to the merits, it is not res judicata. (See infra,

Sec. 313 et seq.)

(c] Judgment Void. Obviously a judgment, though final and on the merits, has no

binding force and is subject to collateral attack if it is wholly void for lack of

jurisdiction of the subject matter or person, an perhaps for excess of jurisdiction, or

where it is obtained by extrinsic fraud. (See Rest.2d, Judgments Sections 2 17:2

Cal. Proc. (4th), Jurisdiction, Sections 10, 108, 323; 8 Cal.Proc. (4th), Attack on

Judgment in Trial Court, Sections 6 et seq., 223 et seq.)

=

37

(d] Parties Not Adversaries. In Atherley vy. MacDonald, young & Nelson (1955) 135

C.A.2d 383, 287, P.2d 929, plaintiff sued M and F for personal injuries. Defendant

M cross-complained against defendant F on an agreement to hold M harmless from

liability. The trial judge struck out the cross-Complaint and M appealed. Pending the

appeal, the main action was tried with judgment for plaintiff against M and absolving

F. Held, M’s appeal was not rendered moot. “[I]n no event is a judgment in an action

in which the parties were not adversaries, but only joined as codefendats, res judicata

as between them in a later proceeding. . . .If respond ([F] had permitted appellants’

cross-complaint to go to trial then, of course, the parties would have Occupied the |

adversary position necessary to make the judgment res judicata between them.” (135 |

C.A.2d 385.) (See Truck Ins. Exchange v. Torres Installers (1972) 25 C.A.3d 491,

495, 101 C.R. 919: Schultz v. Harney (1994) 27 C.A.4th 1611, 1620, 33 C.r.2d 276

[citing Estate of Charters, infra. this section; res judicata did not bar action by |

guardians ad litem for minor to re. ver excessive attorneys’ fees awarded by probate

court in minor’s prior medical malpractice action; aftorney and guardians were not

adversaries jn medical.malpractice ac ton]; Rest.2d, Judgments Sec. 38, Comment b.)

[c] No Adversary Trial of Issue. In Estate of Charters (1956) 46 C.2d 227,293 P.2Gq_

778, S became guardian of the estate of a minor and also trustee of a testamentary

trust for her. S, in violation of the (rust terms, sold her residence, and had the account

approved. In this proceeding for instructions, the court ordered the trustee to

purchase a suitable home for her or provide her with rent. Held. affirmed; the order

settling the account was not res judicata. The trustee occupied a dual relationship,

the minor had no independent representation and no Opportunity to present her

Claims to the court, and there was therefore no adversary trial or decision of the issue. ae |

(46 C26 234.) 0 S0o crate ashen sean hath Nit

6. Discretionary Rejection of Doctrine.

(a) [Sec.287] Grenfield Case and Criticisms.

Greenfield v. Mather (1948) 32 C.2d 23, 194 P.2q interpleader suit, was the

culmination of a series of appellate proceedings over the division of a $12,549.60

fund between a divorced Nusband wife. On the fourth appeal in the action between

spouses, the Supreme Court finally decided the issue with reversal with directions to

enter judgment that the sum be paid: one-half to the husband and one-half to the

wife. (25 C.2d 5 ...) Trial judge entered the judgment, and it was accepted as res

judicata by the judge inthe interpleader suit in which the fund was divided. The wife

appealed, offering figures in support of herself to the whole of the fund. In this

appeal, the majority declare that the Supreme Court, in its previous decisions

Such a settlement and dismissa! of the lawsuit can fairly be construed as a judgment

favoring plaintiff on the merits.” (140 C.4.3d 939)

3) “Under no stretch of the iMagination can the Payment of $218,837 on the

et eS) “=~.

38

$262,600 judgment (83 percent of the judgment) be considered a judgment on the

merits for Deere; rather, it reflects a considered decision by Deere that pursuing the

~ appeal to its conclusion would result in Deere paying the full judgment plus interest.

Deere’s facade of continued nonliability by use of stereotyped language in the

settlement agreement does not alter the fact that the plaintiff prevailed in the lawsuit

because of the jury’s finding of a product defect.” It is the nature of the action and the

~ character of the judgment, not recitals in the judgment, that determine whether it is

| res judicata. (140 C.A. 3d, 940, citing Goddard v. Security Title Ins. & Guarantee Co.

| (1939) 14 C.2d 47, 52, 92 P.2d 804, infra, Sec. 318.) See Producers Dairy Delivery

Co. V. Sentry Ins. Co. (1986) 41C3d 903, 911, 226 C.R. 558, 718 P.2d 920 [following

Sandoval: settlement after affirmance on appeal and before expiration of time to

petition for review was final judgment for collateral estoppel purposes]; McClain v.

Rush (1989) 216 C.A.3d 18, 25, 264 C.R. 563 [following Sandoval; summary

judgment on issue]; Long Beach Unified School Dist. V. California (1990) 225 C.A.

3d 155, 169, 275 C.R. 449, supra, Sec. 307; Abelson v. National Union Fire Ins. Co.

(1994) 28 C.A.4th 776, 787, 35 C.R. 2d 13 [judgment in coordinated litigation not

final where ‘limited purpose” collateral estoppel was given for test case while test

case was on appeal].)

2. judgment on Merits.

(a) (Sec. 313] In General.

A final judgment is res judicata only if it was rendered on the merits. This

requirement is derived from the fundamental policy of the doctrine, which gives

stability to judgments after the parties have a fair opportunity to litigate their claims

_-and defenses. (See Goddard v. Security title ins.-& Guarantee -Co- (1939) 14-C:2d47,5 4"

31, 92, P.2d 804; Datta v. Staab (1959) 173 C.A.2d 613, 620, 343, P 2d 977, quoting

the text: Rest. 2d Judgments Sec. 605; 65 Harv. L. Rev. 835; supra, Sec. 280.) (On

conclusive effect of determination of an issue where the judgment is not on the merits

(direct estoppel), see supra, Sec. 285)

The judgment is on the merits if the substance of the claim is tried and determined,

no matter how wrongly it is decided. In other words, a judgment |s binding and

conclusive against collateral attack though it is harsh or unjust, contrary to the

evidence, or based on errors of law. (See Beverly Hills Nat. Bank v. Glynn (1971) 16

C.A. 3d 274, 286, 93 C.R. 907, quoting the text; Smith v. Smith (1981) 127 C.A.3d

203, 209, 179 C.R. 492, quoting the text [postdivorce ruling that decree was res

judicata on status of retirement benefits as community property barred further attempt

to recover benefits]; 46 am.Jur.2d (Rev.ed.), Judgment Sec. 606; 2 Cal.Proc. (4th),

Jurisdiction, Section 278; but see supra, Sec. 287.)

The rule, however, does not produce a fixed classification of judgments that are or

are not on the merits, it is often necessary to examine the record of the proceedings

to determine whether a particular adjudication is to be considered res judicata. (See

supra, Sec. 292 infra, Sec. 314 et seq.)

(b) What Judgments Are on Merits.

(1) [Sec. 314] Judgement After Trial on Facts.

The usual judgment that meets all the tests and carries out the policies of the

doctrine is one rendered after a trial of he issues of fact, by the jury or court. It is on

the merits though rendered on a directed verdict, or as a judgment notwithstanding

the verdict. (See Rest. 2d, Judgments Sec. 19, Comment h; 65 Har. L.rev. 836; 7

Cal.Proc. (4th), Trial, Sections 430,446.)

(2) [Sec.315] Judgement Without Trial on Facts.

(a) Summary Judgment. A judgment entered after granting a motion for summary

judgment is as final and conclusive a determination of the merits as a judgment after

trial. (See C.C.P. 437c; State Farm Mut. Auto. Ins. Co. V. Salazar (1957) 155 C.A.2d

Supp. 861, 864, 318 P.2d 210, citing the text; Martens v. Winder (1961) 191 C.A.2d

143, 151, 12 C.R. 413 [dictum]; Columbus Line v.Gray Line Sight-Seeing Cos.

Associated (1981) 120 C.A.3d 622, 629, 174 C.R. 527, citing the text; Castro v.

Higaki (1994) 31 C.A.4th 350, 357, 358, 37 C.R. 2d 84 [denial of petition under C.C.

1714.10 (leave to file civil conspiracy action against attorney is judgment on the

merits, analogous to granting of motion for summary judgment]; but cf. Koch v.

Rodlin Enterprises (1990) 223 C.A.3d 1591, 1595, 1597, 273 C.R. 438 [summary

judgment in previous action on ground that statute of limitations had run was not

judgment on merits]; 6 Cal. Proc. (4th), Proceedings Without Trial, Sec. 227.)

JAMES MARTIN, Petitioner v. THE SUPERIOR COURT

OF SACRAMENTO COUNTY et al., Respondents.

(Crim. No. 2683. In Bank.—June 28, 1924.]

In the Matter of the Application of FRED W. CHAPMAN

for a Writ of Habeas Corpus.

[S.F. No. 11139. In Bank.—June 28, 1924]

GEORGE ANASTASION, Petitioner, v. THE SUPERIOR COURT

OF SACRAMENTO COUNTY et al., Respondents.

[1] CONSTITUTIONAL LAW - CLASSIFICATION OF PERSONS OR

THINGS- BASIS OF DISTINCTION.—Where a classification of persons

or things is distinctive and such distinction is based upon some

“constitutional, or naturel, or intrinsic distinction,” laws may e made

applicable to such class alone, providing the act is uniform as to all

persons or things within such class.

[2] JURIES AND JURORS-SELECTION OF JURORS-SECTION 204,

40)

CODE OF CIVIL PROCEDURE, AS AMENDED IN 1923-

CONSTITUTIONAL LAW. That portion of section 204 of the Code

of civil Procedure as amended in 1923 (stats. 1923, c.195,p.436),

relating to the selection of jurors, which provides that, “In counties

and cities and counties having a population of ninethy thousand

‘nhabitants or over, such selection shall be made by a majority of the

judges of he superior court,” is nota special law; it is a general law

having a uniform operation upon a class of persons or things readily

and naturally differentiated form another class of persons or things by

reason of the necessities peculiar to the subject matter of the

legislation.

(3] CONSTITUTIONAL LAW-SPECIAL LAWS-CLASSIFICATION BY

LEGISLATURE.-A law Is not special legislation merely because it does

not apply to all persons, the legislature may classify for the purpose

of meeting different conditions, naturally requiring different

legislation, in order that legislation may by adapted to the needs of

the people. If the law is to bear equally upon all persons, the

legislature must classify whenever there exists a reason which may

rationally be held to justify a diversity of legislation; in other words,

different persons, different localities, and different governmental

organization and agencies may justly be found by the legislature to

stand in different relations to the law, and if the same law were, in

such a situation, to be applied to all alike, it would not bear equally

upon each of them.

[4] |.D-CHARACTER OF CLASSIFICATION.-The classification by the

legislature must not be arbitrarily made for the mere purpose of

classification, but must be based upon some distinction, natural,

intrinsic, OF constitutional, which suggests a reason for and justifies

the particular legislation; that is to say, not only must the ¢ lass itself

be germane to the purpose of the law but the individual components

of the class must be characterized by some substantial qualities or

attributes which suggest the need for and the propriety of the

legislation. Subject to these limitations a law is general despite the

fact that it operates only upon a class of individuals or things, if it

applies equally to all persons or things within the class to which It 1s

| addressed.

[5] ID.-FACTS JUSTIFYING CLASSIFICATION-LEGISLATL RE-

PRESUMPTIONS-COURTS.-The authority and the duty to ascertain

the facts which will justify « lassified legislation must of necessity rest

4]

sin iN cance

with the legislature, in the first instance, to whom has been given the

power to legislate and not to the courts and the decision of the

legislature in that behalf is ordinarily conclusive upon the courts.

Every presumption is in favor of the validity of the legislative act and

the legislative classification will not therefore be disturbed unless it is

palpably arbitrary in its nature and neither founded upon nor

supported by reason.

[6] ID-CLASSIFICATION-JUDICIAL NOTICE-COURTS.-In any given case

¢ the existence of a state of facts of which the court may take judicial

notice seems to have been made the basis of a particular piece of

legislation and if it may be reasonably said that such facts afford good

ground for the making of a particular classification, the legislative

enactment will be upheld although the reason therefor does not

appear prima facie in the law itself.

[7] JURIES AND JURORS-CLASSIFICATION MADE BY SECTION 204,

CODE OF CIVIL PROCEDURE-BASIS FOR-CONSTITUTIONAL

| AW.-It cannot be said that the classification made by the legislature

in providing by the 1923 amendment to section 204 of the Code of

Civil Procedure that in counties and cities and counties having a

population of ninety thousand inhabitants or over the selection of

jurors shall be made by a majority of the judges of the superior court,

is palpably arbitrary and was made merely for the purpose of a

classification which bears no relation to the inherent purpose of the

law, the amendment in question doubtless having been enacted in

order to facilitate and expedite the work of the superior courts in the

more populous counties of the state.

[8] ID.-CLASSIFIED LEGISLATION-JUDICIAL NOTICE.-In determining the

need and propriety of classified legistation, where the same does not

appear upon the face of the legislative enactment, the court may

resort to its judicial knowledge of the contemporaneous conditions

and situation of the people, the existing economic, sociologic, and

civic policy of the state and all other matters of common knowledge.

(9] ID.-SELECTION OF JURORS-JUDICIAL NOTICE.-It is a matter of

common knowledge, to be noticed judicially, that there are several

counties of the state each possessing a population many times greater

than the population of each of the remaining counties of the state; that

the counties with the greater populations have vastly more court

business and consequently require many more trial jurors than the

less populous counties; that the boards of supervisors of the counties

42

of the greater population have a larger, more continuous and

complicated volume of official business to deal with and dispose of

than do the boards of supervisors of the many less populous counties;

that the boards of supervisors of the more populous counties are

personally acquainted with only a comparatively small percentage of

their constituents and, therefore, less qualified to determine who,

among their constituents, possess the degree of moral and intellectual

fitness requisite for jurors, than are the boards of supervisors of the

less populous counties who are ordinarily in closer communication

with their constituents; that the judges of the superior courts, coming

as they do constantly in contact with the personnel of trial jurors, are,

by reason of their observation and experience, well qualified to

perform the duties of selecting and listing persons to serve as trial

jurors; and that in a situation where the persons to be selected as trial

jurors in the more populous counties are not personally known to the

boards of supervisors, the judges of the superior court, doubtless, are

better qualified to make the required selection than the boards of

supervisors who, because of their multitudinous duties incidental to

the government of such counties, cannot be expected to give the time

and though requisite to the selection of trial jurors.

[10] ID.-REDUCTION OF NUMERICAL BASIS OF CLASSIFICATION-

POWER OF LEGISLATURE.-The power of determining the numerical

basis of the classification of counties in the matter of selection of

jurors rested with the legislature and having the power to fix the limit

of population at one hurdred thousand to which, in the fist instance,

‘the legislation applied, the legislature had the power to reasonably

reduce the numerical limits of population where ever, in the exercise

of a wise discretion, the exigencies of a given situation so required;

in other words, “where the discretion so to classify is vested in the

legislature, the selection of a limit is a legislative power which will be

judicially reviewed only in the plain case of abuse.”

[11] ID.-J,\URY COMMISSIONER-PUBLIC OFFICERS-CONSTITUTIONAL

LAW.-the provision of section 204 of the Code of Civil Procedure

which provides for and permits the appointment of a jury

commissioner, in certain designated counties, to assist the judges of

the superior courts of those counties in making selections of trial and

grand jurors does not create a state or county office, and the jury

commissioner, when appointed, like uther attaches of the judicial

system of the state, is no more than en adjunct of that system acting

43

in the capacity of a mere employee to enable the court to transact its

judicial work in an orderly and expeditious manner and is an adjunct

“which the legislature . . .has the right to provide for when it deems

necessary.”

(1) 12 C.J., pp. 1129, 134, secs. 55, 858; 30 Cyc., pp. 992, 993. 92) 36 Cyc., p.

987. (3) 12 C.J., p. 1129, sec. 855; 36 Cyc., p. 986. (4) 12 C.J., p. 1130, sec. 855; 36

Cyc., p. 985. (5) 12 C.J., pp. 794, 891, 1129, 1130, secs. 222, 390, 855. (6) 12 C.J.,

pp. 787, 1129, secs. 219, 855 (1926 Anno.). (7) 12 C.J., p. 1134, sec. 858. (8) 12

C.|., p. 787, sec. 219 (1926 Anno.). (9) 23 C.J., pp. 59, 161, secs, 1810, 1987. (10)

12 CJ., p. 1130, sec. 855. (11) 35 CJ., pp. 258, 259, sec. 205 (1926 Anno.).

PROCEEDINGS in Prohibition to restrain the Superior Court of Sacramento County

from proceeding to a trial of certain actions; and proceeding in habeas corpus to

secure release from judgment of contempt of court. Writs of prohibition denied; writ

of habeas corpus denied.

The facts are stated in the opinion ot the court.

S. Luke Howe, R.B. Hibbitt. Markham Johnston, O.F. Meldon and T.A.Farrell for

Petitioner in S.F. No. 11128.

Edward T. Bishop, County Counsel, Roy W. Dowds, Deputy County Counsel, R.

Platnauer and Wm. H. Devlin, Amici Curiae.

Thomas B. Leeper for petitioner in Crim. No. 2683.

|.T. Henderson district Attorney, and Wm. V. Cowan, Assistant District Attorney, for

Respondents in Crim. No. 2683.

Wm. H. Devlin, Edward T. Bishop, County Counsel, and Roy W. Dowds, Deputy

County Counsel, amici Curiae in support of petition in Crim. No. 2683.

l.A. Farrell for petitioner in S.F. No. 11139.

Edward T. Bishop, County Counsel, Roy w. Dowds, Deputy County Counsel and

Wm. H. Devlin, amici Curiae in S.F. No. 11139

LENNON, J.-The three above-entitled cases, although differing in the facts which

form the basis of the respective petitions, present precisely the same legal questions

for decision. Each petition attacks the legality of the procedure provided for the

selection and listing of trial jurors in certain counties of the state of which the county

ot Sacramento is one.

In the matter of the application of Fred w. Chapman, the petitioner seeks his release

upon habeas corpus from a judgment adjudging him guilty of contempt of court in

refusing to answer a Summons to appear and serve as a trial juror and in refusing to

act as a trial juror in the superior court of the county of Sacramento. The petitioner,

Chapman, was summoned pursuant to the procedure provided by section 204 et seq.

of the Code ot Civil Procedure The petitioners in the Anastasion case and the

44

Martin case seek writs of prohibition to have the superior court in and for the county

of Sacramento restrained from proceeding to a trial of the causes, in which they are

respectively defendants, with a jury composed of persons selected to serve as trial

jurors in said court for the year 1924.

In the Anastasion case the petitioner was charged with unlawfully having in his

possession intoxicating liquor in violation of the Wright Act 9Stats. 1921, p. 79) with

two prior convictions. Thereafter he was arraigned and pleaded not guilty and his

Case was set for trial for the thirtieth day of April, 1924. The manner and method of

listing and selecting the persons to serve as trial jurors in the same superior court and

from whom the jurors were to be drawn for the trial of the two last-mentioned cases

followed the provisions of the code sections last above referred to.

A discussion and a decision of the facts and the law as applied to the martin case

will suffice as a basis for the decision in the other two cases.

The petition for a writ of prohibition in the Martin case is predicated upon the

following facts: the petitioner was on the twenty-seventh day of November, 1923,

indicted by the grand jury of the county of Sacramento for the crime of murder.

Thereafter, the petitioner was duly arraigned upon said charge and thereupon pleaded

not guilty. Subsequently the cause was set down for trial upon a designated day.

Thereafter, at a time some several weeks in advance of the date set for the trial of the

Cause a majority of the judges of said superior court made and entered a court order

directed to one Matt P. Barnes . as “Jury Commissioner of Sacramento County,” to

return to said court within a specified time a list of one hundred qualified persons to

act as trial jurors in civil and criminal causes during the ensuing year. Thereafter,

pursuant to saic der, the said Barnes, as jury commissioner, returned to said court

a list of persons qualified to act as jurors. \Whereupon, the said judges selected each

and all of said persons to serve as trial jurors in said court for the ensuing year of

1924. Subsequently the judge of department one of said court, wherein the charge

of murder was and is pending against the petitioner, made and entered an order

directing the clerk of said court to draw from the regular trial jury-box of said county,

in which were the names, and only the names, of persons returned and selected in

the first instance as aforesaid, the names of seventy-five persons from which would

be drawn the names of the persons to serve as trial jurors during the April session of

said superior court. Upon said drawing being made the court directed to be issued

and placed and there was issued and placed in the hands of the sheriff of the county

a venire for the summoning of said persons returnable April 14,1924. Thereafter, the

said sheriff returned said venire to said court, together with his return thereon,

specifying the names of said jurors so summoned.

Prior to the filing herein of the Martin petition, the said superior court, over the

objection of the petitioner, declared its intention and purpose to proceed with the trial

fue

‘A

of the case of the said petitioner, now pending in said court, with the persons so as

aforesaid selected to serve as trial jurors in said court.

In support of the petition for the writ of prohibition, it is contended that the portion

of section 204 of the Code of Civil Procedure as amended in 1923 (Stats. 1923, c.

195, p. 436) relating to the selection of jurors, which provides, that “In counties and

cities and counties having a population of ninety thousand inhabitants or over, such

selection shall be made by a majority of the judges of the superior court... ., “ is

unconstitutional and void in that it violates those provisions of the state constitution

which provide that, G

(1) “all laws of a general nature shall have a uniform operation.” (Art. |, sec. 11.)

(2) “No special privileges or immunities shall ever be granted which may not be

altered, revoked, or repealed by the legislature, nor shall any citizen, or class of

citizens, be granted privileges or immunities which, upon the same terms, shall not

be granted to all citizens.” (Art. |., Sec. 21.)

(3) “The legislature shall not pass local or special laws in any of the following

enumerated cases, that is to say; . . .Regulating the practice of courts of justice. . .

Summoning and impaneling grand and petit juries, and providing for their

compensation....” (Art. IV, sec. 25, subds. 3 and 8.)

While the petitioner refers to and relies upon all of the sections of the constitution

above quoted, nevertheless the sum and substance of the argument made in support

of the petition is condensed into the one proposition, that the law in question is

special legislation in that it does not uniformly apply to and operate upon all persons

and things throughout the state.

Section.204 of the Code of Civi! Procedure as it existed prior to.1923. provided in

substance and effect that the superior court of each county, in the month of January

of each year, should designate the estimated number of grand and trial jurors required

for the transaction of the business of the court and the trial of causes therein during

the ensuing year; that the court should select and list the grand jurors, and that

immediately after the making of the order designating the estimated number of trial

jurors, “the board of supervisors shall select . . .a list of men and women to serve as

trial jurors . . .during the ensuing year, .. . “ It will be noted that the selection in

question that, “In counties and cities and counties having a population of one

hundred thousand inhabitants or over, such selection shall be made by a majority of

the judges of the superior court.”

By the amendment in question, as enacted in 1923, the basis of classification for

the purpose of selecting and returning jurors for courts of record was changed from

counties and cities and counties having a population of one hundred thousand

inhabitants or over to counties and cities and counties having a population of ninety

thousand inhabitants or over.

46

[1] It is conceded, as indeed it must be, that where a classification of persons or

things is distinctive and such distinction is based upon some “constitutional, or

natural, or intrinsic distinction,” laws may be made applicable to such class alone

providing the act is uniform as to all persons or things within such class. But it is

argued in the instant case that there is no “constitutional, or natural or intrins

distinction” inherent in the procedure and practice requisite for the selection and

listing of trial jurors in counties having a population of ninety thousand or over and

the procedure and practice required for the same purpose in the remaining «

of the state having smaller populations.

[2] the amendment under consideration is not, in our Opinion, a special! law

a general law having a uniform operation upon a class of persons or things read

and naturally differentiated form another class of persons or things by reason

necessities peculiar to the subject matter of the legislation. [3] A law is not specia

legislation merely because it does not apply to all persons. It is a settled prin

constitutional law that the legislature may classify for the purpose of meeting different

conditions, naturally requiring different legislation, in order that legislation may be

adapted to the needs of the people. If the law is to bear equally upon al! persons, the

legislature must classify whenever there exists a reason which may rationally be held

to justify a diversity of legislation. In other words, different persons, different

localities, and different governmental organizations and agencies may justly be found

by legislature to stand in different relations to the law and if the same law v

such a situation, to be applied to all alike, it would not bear equally upon each

them. (Darcy v. Mayor etc. of San Jose, 104 Cal.642 [38 Pac. 500} imida

--177 Cal..388-[170 Pac. 823}.

[4] the classification, however, must not be aeinail made for the mer:

of classification, but must be based upon some distinction, natural. intri:

constitutional, which suggests a reason for and justifies the particular legislation. That

is to say, not only must the class itself be germane to the perpose of the law b

individual components of the class must be characterized by som:

qualities or attributes which suggest the need for and the propriety of t!

Subject to these limitations a law is general despite the fact that it operates

a class of individuals or things, if it applies equally to all persons or things \

class to which it is addressed. (Pasadena v. Stimson, 91 Cal. 238 (27

McDonald v. Conniff, 99 Cal. 386 [34 Pac. 71]; Darcy v. Mayor etc. of Sa

supra; People v. Central pac. R.R. Co., 105 Cal. 576 [38 Pac. 905]: Deyoe

Court 140 Cal. 476 [98 am. St. Rep. 73, 74 Pac. 28]; ruperich v. Baehr

[75 Pac. 782]; Title etc. Restoration Co. v. Kerrigan, 150 Cal. 289 [119 An

199, 8 L.R.A. 682, 88 Pac. 356]; Ex parte King, 157 Cal. 51[26 L.r.A. (N.S

Pac. 235]; Matter of Application of Miller, 162 Cal. 687 [124 Pac. 4

47

“ellows, 166 Cal. 765 [138 Pac. 355]; In re Sumida, supra; In re Morganstern, 61 Cam

App. 702 (215 Pac. 721].

cise thereof. [5] the authority and the duty to ascertain the facts which will justi

issitied legislation must of necessity rest with the legislature, in the first instance, |

vnom has been given the power to legislate and not to the courts and the decisio

reSL

5 NOt appear prima facie in the law itself (Stevenson v. Colgan, 91 Cal. 649 [23

>t. Rep. 230, 14 L.r.A. 459, 27 Pac. 1089]; Grumbach v. Lelande, 154 Cal. 67%

‘6 Pac. 1059]; People v. Sacramento Drainage Dist. 155 Cal. 373 [103 Pac. 207

‘er of Application of Martin, supra, Ex parte King, supra; Matter of Petition o

160 Cal. 300 [116 Pac. 755]; In re sumida, supra; Bacon v. Walker, 204 U.S

Ed. 499, 27 Sup. Ct. Rep. 289, see, also, Rose’s U.S. Notes].) ;

innot be said that the classification made by the legislature in the instant caseh

y arbitrary and was made merely for the purpose of a classification which

elation to the inherent purpose of the law. To the contrary, we are of the

" that good and sufficient reason existed for the classification. The amendment

juestion doubtless was enacted in order to facilitate and expedite the work of the}

r courts in the more populous counties of the state. Manifestly, the plan off

8 trial jurors in such counties selected by a majority of the judges of the superior

t r than by the board of supervisors of the county tends to promote the

y and expedition of the business of the courts.

) determining the need and propriety of classified legislation, where the same

' appear upon the face of the legislative enactment, the court may resort to its

‘| knowledge of the contemporaneous conditions and situation of the people,

existing economic, sociologic, and civic policy of the state and all other matters

mmon knowledge. [9] It is a matter of common knowledge, to be noticed

that there are several counties of the state each possessing a population

times greater than the population of each of the remaining counties of the state;

ities with the greater populations have vastly more court business and

48

onsequently require many more trial jurors than the less populous counties; that the

yoards of supervisors of the counties of the greater population have a larger, more

‘ontinuous and complicated volume of official business to deal with and dispose of

han do the boards of supervisors of the many less populous counties; that the boards

f supervisors of the more populous counties are personally acquainted with only a

-omparatively small percentage of their constituents and, therefore, less qualified to

Jetermine who, among their constituents, possess the degree of moral and intellectual

itness requisite for jurors, than are the boards of supervisors of the less populous

-ounties who are ordinarily in closer communication with their constituents; that the

udges of the superior courts, coming as they do constantly in contact with the

yersonnel of trial jurors, are, buy reason of their observation and experience, well

qualified to perform the duties of selecting and listing persons to serve as trial jurors;

and that in a situation where the persons to be selected as trial jurors in the more

populous counties are not personally known to the boards of supervisors, the judges

of the superior court, doubtless, are better qualified to make the required selection

than the boards of supervisors who, because of their multitudinous duties incidental

to the government of such counties cannot be expected to give the time and thought

requisite to the selection of trial jurors. From the foregoing facts the conclusion is

readily deducible and doubtless was deduced by the legislature when enacting the

legislation in question, that in counties having a small population the boards of

supervisors have both the requisite time and frequent opportunity for observation

requisite to the selection of the limited number of trial jurors required to serve the

needs of the courts in these counties, and that the boards of supervisor of the more

populous counties have not the requisite opportunity because of their other

multitudinous duties and lack of personal acquaintance to personally and properly

select the large number of trial jurors required in the more populous counties, and for

that reason it may be said that the distinction which the legislature drew between the

known situation existing in counties having a population of ninety thousand and over

and counties having a lesser population was a natural and intrinsic distinction which

amply justified the legislation complained of. In short, there is good reason for the

distinction made by the amendment and a most natural one. The classification being

permissible it is not, and cannot be, denied that the law purports to, and undoubtedly

does, in its operation and effect, apply equally and uniformly to all persons and things

falling within the designated class.

The case of In re Brady, 65 Cal. App. 345 [224 Pac. 252], cited and relied upon in

support of the contention that the legislature has no power to make the classification

complained of in the instant case, is not in conflict with anything decided here. There

the court had under consideration the question of whether or not an amendment to

the Code of Civil Procedure (secs. 73 and 142, Stas. 1923, c. 42, p. 78), which

49

provided that one session of the superior court should be held in each city contain

a population of not less than fifty thousand, located in counties of the first cla

whose city hall was not less than fifteen miles distant from the site of the cou

courthouse, was unconstitutional in that it was special legislation. The court the

speaking through Mr. Justice Houser, recognized and reaffirmed the settled rule t}

a statute even though it does not purport to apply to all of the people of the state

not special legislation and therefore unconstitutional if it applies to and affects

individuals and things embraced within a proper classification, and then held that}

classification made by the legislature in that case was not a proper classification |

the reason that, having in mind the purpose of the statute, no constitutional, natu

or intrinsic distinction existed between cities containing a population of not less th

fifty thousand, located in counties of the first class, and cities containing a populati

of not less than fifty thousand, located in counties not of the first class. We 4

satisfied that the conclusion reached in the case last cited is correct and we are

substantial accord with the reasoning upon which that conclusion is bas

Obviously, the situation presented in the instance case is distinctly different form!

situation presented in the Brady case in this, that in the instant case, a natural a

intrinsic difference as a basis for the classification is readily discernible, whereas

the Brady case no sufficient reason existed or could be conceived for the classificat

there held to be unconstitutional.

The point is suggested rather than argued that the legislation in question is sped

legislation in that the numerical basis of classification was reduced from one hund}

thousand to ninety thousand for the express purpose of admitting Sacramento Cou

into the group of larger counties.

[10] It will suffice to say that it does not appear upon the face of the legislation t

this was the purpose of the legislature and while it may, nevertheless, well be argu

that that was the legislative purpose and intent, still the fact remains that the poi

of determining the numerical basis of the classification rested with the legislature 2

having the power to fix the limit of population at one hundred thousand to which

the first instance, the legislation applied, there can be no doubt it seems to us that!

legislature had the power to reasonably reduce the numerical limits of populat

whenever, in the exercise of a wise discretion, the exigencies of a given situation

required. In other words, “where the discretion so to classify is vested in !

legislature, the selection of a limit is a legislative power which will be judicia

reviewed only in the plain case of abuse.” (Matter of the Petition of Burke, sup’

Incidental to the main point presented in support of the petition, it is argued "'

sections 204a to and including 204e of the Code of Civil Procedure are violative

Article |, section 21, of the constitution, in that the appointment of a |!

commissioner and the listing of juries by him is made optional with the judges o!'

50

uperior courts in the various counties wherein the provisions of these sections

urport to have eneration and effect. The constitutional provision last above referred

0 has to do and deals only with special privileges or immunities and we fail to

erceive , and counsel for the petitioner has not pointed out, how or in what manner

he appointment of a jury commissioner as a part of the judicial system of the state to

erve certain designated courts can be construed and counted a special privilege or

mmunity within the meaning of those constitutional provisions. The most that we

an make out of the contention of the petitioner in this particular is that the creation

f the office of jury commissioner is tantamount to the creation of a county office, and

eing optional with the judges of the courts wherein such appointment may be made

uns counter to he uniformity of the system of county government prevailing

nroughout the state. The case of Coulter v. Pool, 287 cal. 181 [201 Pac. 120], is cited

n support of the contention thus apparently made. That case is readily

listinguishable from and has no application to the situation here. There it was held

1 effect that a legislative enactment giving to boards of supervisors the power, at their

ption, to appoint a county engineer in the place and stead of the county surveyor

ermitted the creation of a county office contrary to the constitutional provisions (art.

‘1,sec. 4) which contemplate and command a uniform system of county government.

11] the provision of the statute under consideration in the instant case which

rovides for and permits the appointment of a jury commissioner, in certain

lesignated counties, to assist the judges of the superior courts of those counties in

laking selections of trial and grand jurors does not create a state or county office, and

ve jury commissioner, when appointed, like other attaches of the judicial system of

ve state, is‘no more than an adjunct of that system acting in the capacity of a mere

mployee to enact the court to transact its judicial work in an orderly and expeditious

vanner and is an adjunct “which the legislature we do not doubt has the right to

rovide for when it deems necessary.” (Noel v. Lewis, 35 Cal. App. 658, 662 [170

‘ac. 857, 859].)

The writ of habeas corpus heretofore issued in the Chapman case is dismissed and

le petitioner remanded to the custody from whence he came.

The order to show cause heretofore issued in the Anastasion case is dismissed and

le petition for a peremptory writ of prohibition is denied.

The order to show cause heretofore issued in the martin case is dismissed and the

etition for a peremptory writ of prohibition is denied.

Richards, J., Waste, J., Lawlor, J., Seawell, J., Shenk, J., and Myers, C.J., concurred.

[S.F. No. 11456. In Bank.—April 27, 1925.]

FRANCHISE MOTOR FREIGHT ASSOCIATION et al.,

Petitioners, v. CLYDE L. SEAVEY et al., as members of

WN

the Railroad Commission of the State of California,

Respondents.

(1] CONSTITUTIONAL LAW-CLASSIFIED LEGISLATION—POWER OF

LEGISLATURE—PRESUMPTIONS. — The authority and duty to

ascertain the facts which will justify classified legislation rests in the

first instance with the legislature, and every presumption is in favor of

the validity of the legislative determination, and its decision as to

what is a sufficient distinction to warrant the classification will not be

overthrown by the courts unless it is palpably arbitrary.

[2] ID.--UNLAWFUL DISCRIMINATION--PRIVILEGES--CLASS

ARBITRARILY SELECTED.-A statute makes an improper and unlawful

discrimination if it confers particular privileges upon a class arbitrarily

selected from a larger number of persons all of whom stand in the

same relation to the privilege granted and between whom and the

persons not so favored no reasonable distinction or substantial

difference can be found justifying the inclusion of the one and the

exclusion of the other.

[3] ID.-REGULATION OF MOTOR-TRUCKS ON HIGHWAY-PURPOSE

OF.—The primary purpose of the regulation of common carriers

engaged in the business of hauling various kinds of freight by motor-

truck upon the public highways is to insure the adequacy, regularity,

and reliability of service and the reasonableness of rates and charges

therefor, and such regulation is tor the benefit of the producing and

consuming public. .

(4] ID.-AUTO STAGE AND TRANSPORT ATION ACT- EXCLUSION OF

CERTAIN COMPANIES—UNLAWFUL DISCRIMINATION. —-The

provision of chapter 310 of the Statutes of 1923, purporting to amend

section 5 of the Auto Stage and Transportation Act of 1917, so as to

exempt from regulations under the act transportation companies

which are engaged exclusively in the movement of products or

implements of husbandry and other farm necessities from farm to

farm, or between farms and loading points, is an unwarranted

discrimination and unconstitutional, as the classification provided in

said act does not rest upon a constitutional distinction, nor is there

any natural or intrinsic distinction as a basis for it.

(1) 12 C.J., p. 887, n. 37, p. 891, n. 77, p. 894, n. 12, p. Big n. 25. (2) 12 C!

p. 1130, n. 31; 36 Cyc., p. 992,n. 91. (3) 12 Cj., p. 1117, n. 53. (4) 12 CJ., p. 111

n. 54; 36 Cyc., p. 994, n. 98.

52

APPLICATION for Writ of mandate to compel the Railroad Commission of

California to exercise jurisdiction over certain transportation Companies. Writ

granted.

The facts are stated in the opinion of the court.

H.J. Bischoff for petitioners.

Carl |. Wheat and Woodward M. Taylor for Respondents.

MYERS, C.J.-this is an application for a writ of mandate to compel the respondent

Commission to assume and exercise jurisdiction over certain persons engaged in the

business of transportation of property as common carriers for compensation over the

public highways in this state between fixed termini or over regular routes, and to

require such persons to cease operating until they shall have applied for and obtained

from the respondent Commission certificates of public convenience and necessity

therefor. The truck operators referred to are engaged exclusively in the movement

of products or implements of husbandry and other farm necessities from farm to farm

or between farms and loading points. There is no dispute as to the facts herein and

the matter is submitted upon a general demurrer to the petition. The refusal of the

respondent Commission to assume and exercise jurisdiction herein is predicated upon

chapter 310, Statutes of 1923, purporting to amend section 5 of the Auto Stage and

Truck Transportation Act of 1917 so as to exclude such persons from the regulations

of said act. Prior to 1917 the railroad Commission exercised no jurisdiction over

transportation Companies operating as common carriers of freight or passengers over

the public highways by motor-stage or motor-truck. In December 1916, this court

held that under section 22 of article XI! of the constitution, as amended in 1911, the

Railroad Commission was vested with the jurisdiction of the duty to regulate rates and

charges of such carriers of freight and passengers by motor-truck; that this provision

of the constitution could not be rendered nugatory by the omission of the legislature

to prescribe procedural provisions for the carrying out thereof; and a peremptory writ

of mandate was issued requiring the Railroad Commission to assume and exercise its

jurisdiction over such carriers (Western Association of Short Line Railroads v. Railroad

Com., 173 Cal. 802 [1 A.L.R. 1455, 162 Pac. 391)). Thereupon the Auto Stage and

Truck Transportation Act was enacted by the legislature to provide the procedural

rules for the exercise of such jurisdiction. (Stats. 191 7,p. 330.) The title of this act

and certain sections thereof were amended in 1919 (Stats. 1919, p. 457). The term

‘transportation company,” as used in the act, is defined in section 1 thereof to include

“Every corporation or person . . owning, controlling, operating or managing any

automobile, jitney, bus, auto truck, stage or auto stage used in the business of

ransportation of persons or property, or as a common carrier, for compensation, over

any public highway in this state between fixed termini or over a regular route, and not

operating exclusively within the limits of an incorporated city or town or of a city and

a)

J

county.” (With certain exceptions not pertinent herein.) The validity of this definiti

of the term “transportation company,” as used in the constitution, is not challeng

or questioned by either of the parties hereto. The truck operators who are referred |

in the petition herein are transportation companies within the meaning of purview

this definition and it is not questioned that under the provisions of this act as it exist

from 1917 to 1923 they were subject to all of the regulatory provisions thereof. |

1923 section 5 of the act, which provided for the issuance of certificates of publ

convenience and necessity and forbade the operation by transportation compani

upon the public highway without such certificates, was amended by adding there!

the following provisions: “Each application for a corticate of public convenience an

necessity, .. .must be accompanied by a fee of fifty dollars; provided, however, th

movement of products or implements of husbandry and other farm necessities fro

farm to farm or from and to farm and from loading point, warehouse or other initi

point shall not be subject to the regulations of this act.” (Stats. 1923, p. 644.) Sine

the passage of this amendment the railroad Commission in obedience thereto h

refrained from exercising jurisdiction over the transportation companies referred |

therein and has declined to issue certificates of public convenience and necessity |

such transportation companies or to require them to apply for and obtain su

certificates (In re Application c* Geyer, 23 Opinions and orders of Railro

Commission, p. 865). The interest of the petitioners in this proceeding consists int

fact that they are themselves engaged in the business of transportation of property

common carriers for Compensation operating over the same routes which a

followed by the truck operators referred to in the petition. Petitioners are operati

under certificates of public convenience and necessity obtained from the Railro

Commission, are subject to all of the regulations of the Commission, and by reas

of the failure of the Commission to act in the premises petitioners are subject to th

unrestricted and unregulated competition of those other truck operators. Petitione

contend that the amendment of 1923 is violative of sections 11 and 21 of article ||

the constitution of this state and of the fourteenth amendment to the feder

constitution, in that it makes an arbitrary classification and distinction not based upe

any natural, intrinsic, or constitutional ground of classification. In short, the

contention is that the amendment which purports to exempt from the regulations

the act those transportation companies which are engaged in hauling the produ

and implements of husbandry constitutes an unreasonable, unjust and unlawi

discrimination in favor of those transportation companies and against the:

petitioners. The respondents concede that the jurisdiction and power which

constitutionally vested in the Railroad Commission to regulate the rates of, to examin

the books, records and papers of, and to hear and determine complaints against suc

transportation Companies cannot be taken away or abridged by the legislature. The

54

uggest, however, that the additional powers commonly exercised by the

“ommission, such as the power to issue certificates of public convenience and

lecessity, to regulate the accounts, service and safety of operations of transportation

companies to fix their classifications, rules and regulations, to require them to file

eports, to regulate the issue by them of stocks, bonds, etc., and the sale or transfer

it certificates of convenience, etc., were conferred upon the Commission, not by the

‘onstitution, but by the legislature, and are therefore subject to withdrawal by the

egislature which conferred them.

The question, therefore, is whether or not the exemption created by the proviso of

923 constitutes a lawful classification. Concededly the classification here made does

lot rest upon a constitutional distinction, and some natural or intrinsic distinction

nust therefore by found as a basis for it. [1] It is well settled that the authority and

luty to ascertain the facts which will justify classified legislation rests in the first

nstance with the legislature. Every presumption is in favor of the validity of the

egislative determination, and its decision as to what is a sufficient distinction to

varrant the classification will not be overthrown by the courts unless it is palpably

rbitrary. (Anastasion v. Superior Court, 194 Cal. 93 [227 Pac. 762]; People v.

vlonterey Fish Products Co. 195 Cal. 548 [234 Pac. 398}). [2] It is equally well settled

Nat a statute makes an improper and unlawful discrimination if it confers particular

rivileges upon a class arbitrarily selected from a larger number of persons all of

vhom stand in the same relation to the privileges granted and between whom and

he persons not so favored no reasonable distinction or substantial difference can be

ound justifying the inclusion of the one and the exclusion of the other (5 Cal. Jur.

325, and cases cited). What reasonable ground of distinction is there between a

ommon Carrier engaged in the business of hauling various kinds of freight, including

oducts and implements of husbandry, by motor-truck over a regular route upon the

jublic highway and another common carrier engaged in the business of hauling

reight which consists solely of the products and implements of husbandry by motor-

ruck over the same route, which justifies the subjection of the one to the regulations

mposed by the Auto Stage and Truck Transportation Act, and the exemption of the

ther from the burden of those regulations? The only basis for such a distinction

vhich has been suggested to us is that a continuance of the development of the state

Jemands that the cultivation and marketing of farm products be encouraged and

issisted and that the intent of the legislature in making this provision was the

*ncouragement of the farmers to larger production and the assurance of accessibility

ot markets for that production, to the end that the products of the soil might be placed

within the ready reach of all and their production fostered and assisted. This

suggestion, as it seems to us, overlooks the main purpose of the regulation of rates

and charges provided for in the constitution, and of the regulation of service,

wa

wa

competition, safety provisions, issuance of securities, etc., provided for in the act h

in question. [3] It seems plain to us that the primary purpose of such regulation is

insure the adequacy, regularity and reliability of service and the reasonableness

rates and charges therefor. Such regulation is for the benefit of the producing a

consuming public. It follows that the exemption from regulation of th

transportation Companies engaged in hauling farm products and implements wo

be a detriment, rather than a benefit, to the farmers, as well as to the public genera!

and would be of benefit solely to the particular class of transportation companies

exempted. [4] Assuming, however, that thee provision here in question was design

for the benefit of the farmers and that it may conceivably so operate, the weight

authority is to the effect that it is an unwarranted discrimination. A closely simi

question came before the supreme court of the United States involving the invalid

of the Illinois Anti-Trust Law of 1893 [Ill]. Laws 1893, p. 182],which prohibite

combination of capital, skill, or acts of two or more persons, etc., to create or Ca

out restrictions in trade, to limit production or increase or reduce prices or prev

competition, and which contained a proviso that “The provisions of this act shall

apply to agricultural products or livestock while in the hands of the producer

raiser.” That court, after an exhaustive consideration of the case, held the stat

invalid solely upon the ground that the exception in favor of the farms was

unreasonable and unwarranted discrimination, violative of the fourtee

amendment. In the course of its opinion the court observed, “that if combinations

capital, skill or acts, in respect of the sale or purchase of goods, merchandise

commodities, whereby such combinations may for their benefit exclusively cont

or establish prices, are hurtful to the public interests and should be suppressed, ''

impossible to perceive why like combinations in respect of agricultural products 2

livestock are not also hurtful.” (Connolly v. Union Sewer Pipe Co., 184 U.S. 540

L. Ed. 679, 22 Sup. Ct. Rep. 431, see, also Rose’s U.S. Notes].) And so here it m

be observed that if the regulation of transportation Companies engaged in the busin

of hauling miscellaneous freight and commodities is helpful to the public welfare

is impossible to perceive why like regulation in respect of transportation Compan

engaged in hauling products and implements of husbandry is not also helpful. |

precise question here under consideration came before the federal courts under’

so-called Lever Food control Act which was enacted by Congress in 1917 (40 S:

276), “to provide further for the national security and defense by encouraging!

production, conserving the supply, and controlling the distribution of food produ

"That act, which was enacted as a war measure, made unlawful !

destruction, waste, or hoarding of necessaries for the purpose of restricting the sup?

and fuel.

or increasing the price thereof. By its terms it was made applicable to all persons, 0

subject to the following provisos: “Provided, that any storing or holding by ¢

56

rmer, gardener, or other person of the products of any farm, garden, or other land

iltivated by him, shall not be deemed to be storing or holding within the meaning

‘this act: provided, further, that farmers and fruit growers, co-operative and other

changes, or societies of a similar character, shall not be included within the

‘ovisions o1 this section.” In the district court for the district of Indiana, the

intention was made that the exemptions created by the provisos constituted an

bitrary and unlawful classification, violative of the due process clause of the fifth

nendment, and that if enacted by a state legislature it would be equally violative of

e like clause of the fourteenth amendment. In support of the act the contention was

ade there, as here, that the exemption of the farmers was justified upon the ground

at it would promote the general welfare by stimulating them to greater production.

hat contention applied with much greater force to the situation then obtaining, with

ie nation involved in a great war, than it possibly could to the present situation. It

as argued that Congress might well have determined that the safety of the nation

epended upon the increased production and conservation of food supplies and that

1e national welfare would be promoted by exempting the farmers from the drastic

rovisions of the act and thus stimulating them to increase their production. But the

ourt held that the exemption was unreasonable, unjust and wholly arbitrary and

ould not constitute a valid classification. Judge Anderson said: “the indulgence to

1e excepted class is in respect to the farm products produced or raised upon the land

wned, leased, or cultivated by the members of it. But this does not differentiate the

stant case from the Connolly case (184 U.S. 540 [46 L. Ed. 679, 22 Sup. Ct. Rep.

31, see, also, Rose’s U.S. Notes]), for there the exception was to apply to

agricultural products or live stock while in the hands of the producer or raiser.’ My

inclusion is that the classification in amended section 4 is arbitrary and not natural

r reasonable; that such section is repugnant to the * due process’ clause of the Fifth

mendment, and is therefore void.” He also held that the words “due process of law”

vust have the same meaning in the fifth and fourteenth amendments (Hurtado v.

alifornia, 110 U.S. 516 [28 L. Ed. 232, 4 Sup. Ct. Rep. 111, see, also, Rose’s U.S.

.otes}), from which it would follow that if the exception in the Lever Act is violative

f the fifth amendment, the exemption in the Auto Stage and Truck Transportation Act

‘ould be equally violative of the fifth amendment, the exemption in the Auto Stage

nd Truck Transportation Act would be equally violative of the fourteenth

mendment (United States v. Armstrong, 265 Fed. 683). The same question came

before the federal district court for the western district of Pennsylvania, and was

lecided in the same way, Judge Thomson saying: “Surely such classification is unjust

nd arbitrary in the extreme, violating both the letter and the spirit of the Fifth

mendment.” (United States v. Yount, 267 Fed. 861.) The circuit court of appeals

‘the second circuit held the Lever Act constitutional as a war measure. Judge

57

Manton in his opinion concluded that the exemption in favor of the farmers was no

under the circumstances then existing, so palpably arbitrary as to authorize a judicid

review of the legislative judgment. It is to be noted, however, that Judge Manton’

opinion cannot be regarded as the opinion of the court in that case. His associat

concurred specially in separate opinions. Judge Ward based his concurrence upo

the extraordinary powers vested in Congress for the maintenance of the nationd

security in time of war. Judge Hough emphasized this by saying, “If we were in

state of * official’ peace, this statute would . . .be constitutionally obnoxious becaus

it is a gross piece of class legislation; incapable of distinction from that condemn

in Connolly v. Union etc. Co., 184 U.S. 540 [46 L. Ed. 679, 22 Sup. Ct. Rep. 431

see, also, Rose’s U.S. Notes]. But the statute is begotten by war, and |

constitutionally excused (i.e., justified) by the war power, which is superior to, ang

not to be measured by, the police powers of the several states.” (C.a. Weed & Co. \

Lockwood, 266 Fed. 785.) It may be noted in passing this decision of the circuit cou

of appeals was in effect reversed by the supreme court, but upon other ground:

without passing upon the validity of the exemption in favor of the farmers (C.A. Wee

& Co. V. Lockwood, 255 U.S. 104 [65 L. Ed. 532, 41 sup. Ct. Rep. 305, see, als¢

Rose’s U.S. Notes]). We do not mean to infer that every classification based upo

distinction between the farmers on the one hand and all other persons on the oth

is unconstitutional, but we are impelled to conclude that no natural, intrinsic ¢

constitutional distinction is to be found on a basis for the exemption of th

transportation companies described in the 1923 amendment, supra, from th

regulations prescribed in the Auto Stage and Truck Transportation Act, and that suc

attempted exemption is violative of the fourteenth amendment to the federé

constitution and of like provisions in our state constitution. It is not claimed, and 4

view of the legislative history of the act could not be claimed, that the provisions ¢

this exception are so intimately and inherently related to and connected with thi

general provisions to which it relates as to invalidate the latter.

It is ordered that a peremptory writ of mandate issue as prayed herein. Waste,

Shenk, J., Seawel!, J., Lawlor, J., Lennon, J., and Richards,

J.,concurred.

[1]

(2]

[4]

(Civ. No. 13008. Second Dist., Div. One. Apr. 27, 1942.]

MOSIER M. MEYER, Appellant, v. BOARD OF PUBLIC

WORKS OF THE CITY OF LOS ANGELES et al.,

Respondents.

Municipal corporations—Officers and Employees-Removal—

Proceedings-Notice.-Under Los Angles City Charter, Sec. 112,

prohibiting the removal of any skilled employee except for a

Cause stated in writing and served on him, it is not necessary that

all causes that might be suggested for the removal of an employee

be, stated in the written notice served on him; the statement of a

single cause is sufficient. A written notice sent by the board of

public works to the superintendent of street maintenance, stating

that he was directly interested in public contracts contrary to the

best interests of the city, is in itself a sufficient charge upon which

to predicate his removal from office.

Id.—Officers and Employees—Removal—Proceedings—

Reinstatement.—Under a city charter provision that to reinstate a

discharged employee the civil service commission must find a

writing that the person removed “is a fit and suitable person to fill

the position from which he was removed,” the words “fit and

suitable” do not refer merely to information received by the

commission during its investigation of the original charges set

forth in writing, nor require that the employee must be found fit

and suitable mentally and physically to fit the position from which

he was removed.

Id.--Officers and Employees—Removal-Proceedings—

Reinstatement.—The action of a city civil service commission in

finding that a discharged employee as nota fit and suitable person

to be reinstated to his position does not constitute an abuse of

discretion where his testimony before the commission showed

that he gambled for high stakes under circumstances which

tended to impair public confidence in him.

Pleading—Conclusions-wrongfulness. — In a proceeding in

mandamus to reinstate a discharged city employee after the civil

service commission had refused to do so, an allegation that the

action of the commission was arbitrary and unlawful was a mere

conclusion of law, the truth of which was not admitted by a

general demurrer filed by respondents.

59

t¢

[5] ld.—Demurrer-Amendment After Demurrer Sustained.—The fact

that a demurrer to a petition for writ of mandate is sustained

without leave to amend does not constitute error in the absence

of a request for leave to amend.

APPEAL from a judgment of the Superior Court of Los Angeles county.

Emmet H. Wilson, Judge. Affirmed.

Proceeding in mandamus to compel petitioner’s reinstatement to a city

office. Judgment denying relief affirmed.

Loren A. Butts for Appellant.

Earl G. Read, as Amicus Curiae, on behalf of Appellant.

Ray L. Chesebro, City Attorney, Frederck von Schrader, Assistant City

Attorney and George William Adams, Deputy City Attorney, for Respondents.

DEMOND, J. Pro tem.—Appellant filed a petition for peremptory writ of

mandate to be directed to respondents, “ordering and commanding the

respondent Board of Public Works of the City of Los Angeles to reinstate the

petitioner to the position of Superintendent of Street Maintenance, Bureau of

Engineering, Department of Public Works of the City of Los Angeles, and to

permit him to perform the duties of said position and to restore to him all the

rights incident to said position and to cause demands and pay checks to be issued

to said petitioner for the amount of salary or wages due the petitioner from the 1st

day of August, 1940, until restored to duty, at the rate of Four Hundred Seventy-

tive Dollars ($475.00) per month, and

“Ordering and commanding the respondent Board of Civil Service

Commissioners to certify that petitioner has been duly and regularly appointed to

the position of Superintendent of Street Maintenance, Bureau of Engineering,

Department of Public Works of the City of Los Angeles, and approve the salary

or compensation due him from December 31, 1939, and

“Ordering and commanding the respondent Dan O. Hoye, Controller of

the City of Los Angeles, to approve the demand in the sum of Three Thousand

Three Hundred Twenty-five Dollars ($3,250.00), drawn in favor of petitioner and

delivered to the said Dan O. Hoye, all in accordance with the order and

instructions of the Council of the City of Los Angeles, as hereinabove set forth,

and to approve all other demands or pay checks when presented to him for

approval and

“Ordering and commanding the respondent Leon V. McCardle, Treasurer

of the City of Los Angeles, to pay said demands or pay checks when presented to

him for payment...”

A demurrer was filed to said petition, alleging that it did not “state facts

sufficient to constitute a cause of action or to support the issuance of a Writ of

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Mandate against the respondents or any of them or to entitle petitioner to any

relief at all.” The trial court sustained this demurrer, and petitioner having

declined to amend his petition, the court then entered judgment decreeing that

the petitioner take nothing by reason of his action against the respondents or

either or any of them. The appeal is from this judgment.

In December of 1939 the appellant, then holding the position of

superintendent of street maintenance,

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