Loan Forgiveness May Not Satisfy A Judgment

Cunningham v. Magidow
(Cal. Ct. of App., 2d Dist.), filed August 30, 2013, published August 30, 2013

KEY FACTS

Kathleen Cunningham owned half the stock of Royal Airline Linen, Inc. Norman Magidow owned the other half and was also an officer and director. Royal was in a precarious financial position and both Cunningham and Magidow had loaned it large sums of money.

Cunningham filed a shareholder derivative action against Magidow and others, alleging claims for breach of fiduciary duty, usurpation of corporate opportunity, and conversion.

The trial court found Magidow liable for breach of fiduciary duty, awarded compensatory and punitive damages, and entered judgment against him.

Magidow responded to the judgment by forgiving $452,000 of a loan he had made to Royal. He then moved for an order compelling Cunningham to acknowledge that the judgment had been partially satisfied in the amount of $452,000. The trial court granted the motion. Cunningham appealed.

HOLDING & REASONING

The Court of appeal reversed.

The court first rejected Magidow’s argument that the appeal had become moot because Cunningham had acknowledged satisfaction of the judgment. It reasoned that Cunningham had merely complied with the trial court’s order. She was not required to disobey an order and risk being held in contempt in order to challenge it.

The court then found the trial court abused its discretion in permitting Magidow to satisfy the judgment against him by forgiving the loan. It reasoned that the effect was for Magidow to have repaid the loan he had made to Royal with the proceeds of the judgment. Because of Royal’s precarious financial condition, Magidow was getting preferential treatment with respect to Cunningham and other creditors. This was particularly inappropriate in as much as Magidow had been found liable for breaching his fiduciary duties to Royal.

ANALYSIS

The decision shows that not all financial instruments of equal value are perfectly fungible. It also provides a common sense answer to the issue of whether a litigant can both obey and appeal a trial court order the litigant believes to be erroneous.