2008-00021853-CU-CO

Michael A. Hackard vs. Hackard & Holt

Nature of Proceeding: Motion to Release Undertaking to Susan Smith, Trustee

Filed By: Yang, Minna C.

Plaintiff Michael A. Hackard’s Motion to Release Undertaking is granted.

Plaintiff’s Request for Judicial Notice is granted.

Defendant’s Request for Judicial Notice is granted.

Plaintiff seeks withdrawal of the $100,000 undertaking and an order releasing it to
Susan K. Smith, U.S. Trustee, of the bankruptcy estate of Hackard & Holt pursuant to
the terms of a settlement approved by the Bankruptcy Court. The parties dispute whether the Estate of Theodore H. Holt (“Holt Estate”), as successor to Theodore H.
Holt (“Holt”), is entitled to any portion of the Undertaking that was deposited with the
court in connection with Hackard’s 2008 Motion for Preliminary Injunction.
Defendants, the administrators of the Holt Estate, previously filed a motion to release
the $100,000 bond to them, but the motion was denied on the ground defendant had
not shown that the preliminary injunction was wrongfully issued. The action was
dismissed by the court pursuant to the parties’ request, with no finding on the merits of
the dispute due to the pending bankruptcy.

On October 7, 2008, the court (Judge McMaster) issued an order granting plaintiff’s
motion for preliminary injunction, prohibiting Theodore Holt from managing the law firm
or interfering with its management by Hackard. (Plaintiff’s RJN Exs. 2, 3) The
preliminary injunction bond was ordered pursuant to CCP 529, which provides in
pertinent part: “On granting an injunction, the court or judge must require an
undertaking on the part of the applicant to the effect that the applicant will pay to the
party enjoined any damages, not exceeding an amount to be specified, the party may
sustain by reason of the injunction, if the court finally decides that the applicant was
not entitled to the injunction. Within five days after the service of the injunction, the
person enjoined may object to the undertaking. If the court determines that the
applicant’s undertaking is insufficient and a sufficient undertaking is not filed within the
time required by statute, the order granting the injunction must be dissolved.” CCP 529
(a).

The $100,000 bond was funded by Hackard & Holt’s secured creditor, Law Finance
Group, Inc. (“LFG”). Holt died five weeks later on November 13, 2008. Neither Holt
nor the Holt estate ever appealed the issuance of or sought to dissolve the Preliminary
Injunction Order.

As of the date of Holt’s death, Hackard & Holt owed LFG $19,928,342.66. LFG
continued to loan funds to Hackard & Holt to fund resolution of pending settlements in
the remaining Diet Drug Litigation cases and to fund law firm costs. The settlements in
the Diet Drug cases did not come to fruition and LFG stopped funding loans. On
August 16, 2009, Hackard & Holt filed a voluntary petition for bankruptcy in the United
States Bankruptcy Court, Eastern District of California. LFG filed a secured creditor’s
claim in the amount of $7,491,514.79.

The Bankruptcy case settled with the assistance of Judge Richard Gilbert, Ret..
Neither defendant opposed the motion to approve the bankruptcy settlement. The
Bankruptcy Court issued an order on September 5, 2012 approving the terms of the
proposed settlement, which included the assignment of Hackard’s rights to the
$100,000 undertaking to the Bankruptcy Estate.

The defendants contend that the preliminary injunction was wrongfully issued because
Hackard did not admit that he owed the law firm $5,000,000 on a promissory note to
the firm. Defendants contend that Hackard’s actions contributed to the death of Holt.

Plaintiff contends that the Court has authority to release the bond to the bankruptcy
trustee because plaintiff never incurred liability to defendant and because defendants
cannot establish that the preliminary injunction was wrongfully issued. In addition,
plaintiff contends that the defendants can never establish any harm attributable to the
injunction so as to give rise to a claim enforceable against the undertaking. This is
because the partnership’s debts were so great that any portion of the $100,000 that
might have been payable, if they could establish that the preliminary injunction was
wrongfully issued, would be payable to the bankruptcy trustee.

Defendant contends it is entitled to recover on the bond under CCP 996.440. That
section provides for a summary enforcement proceeding where liability of the principal
has been determined giving rise to a presumption of enforceability against the bond or
undertaking. The right to recover damages caused by an improperly issued injunction
on the mere showing that such damages were incurred is a statutory procedure
provided in California as an action on the bond ( Code Civ. Proc., §§ 529. This
statutory procedure, which provides for a separate trial against the surety, may be
invoked after the decision on the injunction becomes final (Allen v. Pitchess (1973) 36
Cal.App.3d 321.) The right to recovery is then limited in amount to the value of the
bond ( Dickey v. Rosso (1972) 23 Cal.App.3d 493, 498; Board of Medical Examiners v
Terminal-Hudson Electronics, Inc. of California (1977) 73 Cal.App.3d 376. However,
no such decision occurred here, and Peter Holt is therefore not entitled to move under
Code of Civil Procedure section 996.440 to recover on the Undertaking. To recover on
an undertaking, a party must show that he sustained damages as result of an order
issued in prior action which resulted in final judgment. (Nuclear Electronic
Laboratories, Inc. v. William C. Cornell Co. (1965) 239 Cal.App.2d 8. Because there
has been no decision that Hackard was not entitled to the injunction, there can be no
liability on the bond pursuant to Code of Civil Procedure section 996.440.

The Court is well cognizant of its earlier ruling denying the defendant’s motion to
release the bond, citing to CCP 996.440 as the appropriate procedure to determine
liability on the bond. However, since the case was dismissed by the court with no
finding of liability to either side, the prerequisite of a finding of liability of the principal
has not and cannot ever be made. Therefore, the Court now finds that a trial pursuant
to CCP 996.440 is not required since there is no judgment finding liability of the
principal, Hackard. The unusual procedural history of this case is distinguishable from
the cases in which the plaintiff voluntarily dismissed the action, which was found to be
the equivalent of a judgment in defendant’s favor, giving rise to a motion to enforce the
surety’s liability. See Special Editions v Kellison (1982) 129 Cal.App.3d 803. Here the
motion to dismiss filed by the Holt Estate was unopposed and granted. (see Ruling
dated 11/02/2012) This is not a determination on the merits.

The sur-reply notes that the clerk previously issued the $100,000 to the BK trustee in
December 2012. Holt sought relief ex parte for a return the undertaking, and Judge
Cadei denied the request on August 21, 2013. The Court denies the request to order
the $100,000 bond be delivered to the court, as the bankruptcy trustee is the
beneficiary of the bond pursuant to the bankruptcy settlement.

The prevailing party shall prepare a formal order for the Court’s signature pursuant to
C.R.C. 3.1312.