On June 4, 2015, Smith LC shareholder John Clifford obtained judgment in favor of his client following a multi-day trial in Orange County Superior Court before the Honorable Andrew P. Banks. The judgment resulted in the immediate turnover of a long-established Orange County business.
Smith LC’s client had sold the business in question 12 years prior. The buyer made an initial down payment, and Smith LC’s client agreed to carry a large note for the balance of the purchase price. While the parties had agreed that the seller financing would be secured against the assets of the business, Smith LC’s client’s then attorneys failed repeatedly to record and/or file any security documents, setting the stage for what followed.
In 2011, knowing the seller had not perfected his security interest in the business, the business owner granted a security interest in the assets of the business to a close family member. In 2013 the business owner arranged for that family member to conduct a foreclosure sale on the assets of the business, filed personal bankruptcy, and informed Smith LC’s client (still represented at the time by other counsel) that he had no recourse or rights to further payments.
At this point, the seller of the business retained Smith LC who immediately filed a complaint against the purported new owner of the business alleging an equitable mortgage based on a claim that the foreclosing family member knew or should have known of the security pledge in favor of the seller regardless of his prior counsel’s failure to record the security instruments. Through discovery, Smith LC was able to show that the buyer still maintained control of the business in question after transferring the business to his family member, and that the foreclosure scheme was planned and executed with the specific intent to deprive the seller of his promised security interest in the assets of the business and to keep the business “in the family.”
At trial, Smith LC established that the foreclosing family member was not a bona fide encumbrancer for value as that family member had constructive notice of Smith LC’s client’s rights to the assets of the business and that the knowledge of the family member’s and former business owner’s shared attorney was imputed to the family member. Following the conclusion of evidence, Judge Banks entered judgment restoring Smith LC’s client to his first position in regards to the business, removing the buyer from the premises, and ordering that Smith LC’s client be granted immediate control of the business.
This favorable result at trial, despite challenging facts, represents another important victory for Smith LC’s clients, resulting in the protection of the client’s legal rights and financial security.