2019 Lapides California Opinion Voidable Transactions And Fraudulent Transfers

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Hinds & Shankman, LLP v. Lapides, 2019 WL 4956148, 67 Bankr.Ct.Dec. 207 (C.D.Cal., Oct. 8, 2019).

 

United States District Court, C.D. California.

 

HINDS & SHANKMAN, LLP, Plaintiff,

 

v.

 

RICHARD LAPIDES, et al., Defendants.

 

Case No.: CV 18-10731-CJC(SKx)

 

Filed 10/08/2019

 

ORDER DISMISSING CASE

 

CORMAC J. CARNEY UNITED STATES DISTRICT JUDGE

 

I. INTRODUCTION

 

*1 Plaintiff Hinds & Shankman, LLP (“H&S”) brings this action against Defendants Richard A. Lapides, Janis Lapides, and Does 1 through 10. (Dkt. 33 [Second Amended Complaint, hereinafter “SAC”].) Before the Court are the parties’ responses to the Court’s Order to Show Cause as to why the case should not be dismissed because H&S’s requested relief is not available as a matter of law. (Dkt. 55.) For the following reasons, this case is DISMISSED because H&S’s requested relief is barred by the Texas Constitution’s homestead exception.1

 

1. Having read and considered the papers presented by the parties, the Court finds this matter appropriate for disposition without a hearing. See Fed. R. Civ. P. 78; Local Rule 7-15.

 

II. BACKGROUND

 

This lawsuit arises out of Defendants’ alleged obligation to pay H&S’s attorneys’ fees and costs incurred in connection with a Chapter 7 bankruptcy case. H&S is a California limited liability partnership with its principal place of business in Torrance, California. (SAC ¶ 1.) Richard A. Lapides (“Richard”) and Janis Lapides (“Janis”) are a married couple who are residents of Spicewood, Texas. (Id. ¶¶ 2–4.)

 

In 1987, nonparty Jay Johnson sold Richard a piece of real property in La Cañada Flintridge, California. (Id. ¶ 9.) Prior to the sale, Johnson had claimed that the raw land had water available to it for future development. (Id.) Later, Richard discovered Johnson had lied, sued him, and obtained a final judgment of over $1 million against Johnson. (Id.) Richard then attempted to collect on this judgment. (Id.) Unfortunately for Richard, on April 5, 2001, Jay and Debra Johnson filed a voluntary Chapter 7 case in the United States Bankruptcy Court for the Central District of California. (Id.) The Bankruptcy Court appointed Rosendo Gonzalez as the Trustee. (Id. ¶ 9.)

 

The Trustee employed H&S as the estate’s general counsel and special litigation counsel to represent the Trustee in various causes of action against the debtors, their business entities, and the debtors’ relatives. (Id. ¶ 11.) The estate, however, apparently lacked funds to pay for this legal representation. The Trustee approached Richard and asked him if he would be willing to help pay for the prosecution of two adversary proceedings. In September 2004, Richard agreed to pay H&S’s attorneys’ fees and costs associated with the adversary proceedings. (Id. ¶ 12; see also id. Ex. 1.)

 

In 2014, the Bankruptcy Court held a trial on the Trustee’s claims in the two consolidated adversary proceedings. (SAC ¶ 16.) The Bankruptcy Court found against the Trustee. (Id.) In June 2017, H&S filed an application for fees and expenses incurred in the adversary proceedings with the Bankruptcy Court. (Id. ¶ 18.) H&S also sought a money judgment against Richard for the amount of the fees and costs. (Id.) The matter proceeded to arbitration and, after a trial, the arbitrator ruled in H&S’s favor. (Id. ¶¶ 20– 21; see id. Ex. 3.) H&S then filed a petition before the Bankruptcy Court to confirm the award of fees and costs, and the Bankruptcy Court entered a judgment against Richard on December 21, 2018 for a total of $785,687.97 for damages, plus interest, and $70,491.91 for costs. (Id. ¶ 22; see id. Ex. 4.)

 

*2 The instant dispute concerns Richard’s sale of two properties in California and subsequent purchase of property in Texas, allegedly done to avoid H&S’s recovery on its fee award. The first property at issue is located at 5500 La Forest Drive in La Cañada, California. (Id. ¶ 23.) Around 1994, Richard transferred his entire ownership interest in the La Forest Drive property to his wife, Janis. (Id. ¶ 24.) On May 19, 2016, Janis sold her interest in the La Forest Drive property to Margarita Kazaryan for $850,000. (Id. ¶ 25.) The second property at issue is located at 5107 Castle Road in La Cañada, California. (Id. ¶ 26.) On July 17, 2017, Richard and Janis, who jointly owned the Castle Road property, sold it for $1,150,000 to Brandon and Cori Cipes. (Id. ¶ 27.) H&S alleges that Richard and Janis used the proceeds from these two sales to purchase real property located at 23704 Replica Road in Spicewood, Texas, for $1,210,096 on August 4, 2017. (Id. ¶¶ 25, 28.) Richard and Janis allegedly purchased the Texas real property to avoid paying Richard’s obligation to H&S. (Id. ¶ 29.) Purchasing real property in Texas allowed them to take advantage of Texas’s homestead exemption laws, which exempt the entire value of the Texas real property from collection. (Id.) The transfer allegedly rendered Richard and Janis insolvent and without nonexempt assets against which H&S could lawfully execute to recover its judgment. (Id.)

 

On December 28, 2018, H&S filed this action in federal court, claiming that Defendants fraudulently transferred their assets by selling their property in California and purchasing property in Texas. (Dkt. 1 [Complaint].) H&S seeks a relief in the form of “freezing the transferred equity from the liquidation of the [California properties] and then making this equity available to satisfy the Plaintiff’s judgment against [Defendants].” (Dkt. 48 [Opp. to Defs.’ Mot. to Dismiss] at 5.) Defendants contend that such relief is barred by the Texas Constitution’s homestead exception. See Tex. Const. Art. 16, § 50(a). The Court ordered the parties to show cause as to why the case should not be dismissed because H&S’s requested relief is not available as a matter of law. (Dkt. 55.)

 

III. DISCUSSION

 

At issue here is whether the Texas Constitution exempts a homestead from the claims of creditors when such homestead was acquired using non-exempt funds with the specific intent of hindering creditors. The Texas Constitution provides that:

 

(a) The homestead of a family, or of a single adult person, shall be, and is hereby protected from forced sale, for the payment of all debts except for:

 

(1) the purchase money thereof, or a part of such purchase money;

 

(2) the taxes due thereon;

 

(3) an owelty of partition imposed against the entirety of the property by a court order or by a written agreement of the parties to the partition, including a debt of one spouse in favor of the other spouse resulting from a division or an award of a family homestead in a divorce proceeding;

 

(4) the refinance of a lien against a homestead, including a federal tax lien resulting from the tax debt of both spouses, if the homestead is a family homestead, or from the tax debt of the owner;

 

(5) work and material used in constructing new improvements thereon, if contracted for in writing, or work and material used to repair or renovate existing improvements thereon ....

 

(6) an extension of credit that:

 

(A) is secured by a voluntary lien on the homestead created under a written agreement with the consent of each owner and each owner’s spouse; ....

 

(7) a reverse mortgage; or

 

(8) the conversion and refinance of a personal property lien secured by a manufactured home to a lien on real property, including the refinance of the purchase price of the manufactured home, the cost of installing the manufactured home on the real property, and the refinance of the purchase price of the real property.

 

See Tex. Const. Art. 16, § 50(a).

 

“The purpose of the homestead exemption is to provide a secure home for the family against creditors.” Salomon v. Lesay, 369 S.W.3d 540, 554 (Tex. App. 2012). Given this important purpose, Texas courts have been instructed to construe the exemption liberally, see Inwood N. Homeowners’ Ass’n, Inc. v. Harris, 736 S.W.2d 632, 635 (Tex. 1987), even though such liberal construction “sometimes directly assist[s] a dishonest debtor in wrongfully defeating his creditor,” Long Bell Lumber Co. v. Miller, 240 S.W.2d 405, 406 (Tex. App. 1951). The homestead exemption “shields a family or single adult person’s homestead from all but eight types of liens held by enumerated creditors.” Marincasiu v. Drilling, 441 S.W.3d 551, 558 (Tex. App. 2014). “Any liens against a homestead that are not specifically listed in the Texas Constitution are void.” Id. at 558–59.

 

*3 Defendants argue that because Texas’s homestead exemption does not contain an exception for a lien arising from the alleged fraudulent transfer of nonexempt funds into the homestead, the relief H&S seeks is unavailable as a matter of law. The Court agrees. The Texas Constitution “provides prophylactic protection from all but the few specifically enumerated types of constitutionally permitted liens against homesteads.” Kendall Builders, Inc. v. Chesson, 149 S.W.3d 796, 807 (Tex. App. 2004). When a party attempts to attach a type of lien to a homestead that is not among the enumerated exceptions, the lien is void. See Saloman, 369 S.W.3d at 556 (holding that the “lien on the [homeowner’s] residential property for child support arrearages does not fall under any of the constitutional categories of debt for which a lien may attach to homestead property” and is therefore void). Because the type of lien H&S seeks also does not appear in the specifically enumerated list, it cannot be attached to Defendant’s homestead.

 

Courts have been unwilling to expand the exceptions to Texas’s homestead exemption beyond its text even when, as here, the exemption is utilized as a tool to hinder creditors. In In re Reed, a debtor sold $34,500 worth of nonexempt personal property just before filing for bankruptcy and applied the proceeds from the sales towards the liquidation of liens on his homestead. See 12 B.R. 41, 42 (Bankr. N.D. Tex. 1981). The trustee sought to claw back these funds, claiming that the homestead exemption did not apply given the debtor’s fraudulent intent to frustrate his creditors. Id. The court disagreed and found that “Texas law has jealously protected the homestead from forced sale except under [the] very limited conditions” enumerated in the Texas Constitution. Id. at 43. Similarly, in In re Moody, the debtor made a series of property transfers in order to maximize the land he could claim as a homestead under Texas law in anticipation of filing for bankruptcy. See 77 B.R. 566, 575 (S.D. Tex. 1987). The Court held that, although these conveyances were clearly motivated by a desire to frustrate creditors, the homestead exemption barred the court from ordering foreclosure on the property at issue. See id. H&S’s claims are barred for the same reason.

 

In an attempt to bypass the text of homestead exemption, H&S relies on a line of Texas cases in which courts have imposed constructive trusts on real property being used as a homestead. Such reliance is misplaced. These cases stand for the proposition that “the homestead protection afforded by the Texas Constitution was never intended to protect stolen funds.” Bransom v. Standard Hardware, Inc., 874 S.W.2d 919, 928 (Tex. App. 1994) (imposing constructive trust on the proceeds of the sale of a homestead that was originally purchased with embezzled funds); see also Byrom v. Penn, 2016 WL 4447698, at *1 (Tex. App. Aug. 24, 2016) (affirming order compelling the sale of a homestead purchased with funds that an executor misappropriated from his mother’s estate). In these cases, the impingement on the defendant’s homestead right was justified by the fact that the property transferred to the homestead never belonged to the defendant in the first place. See Baucum v. Texam Oil Corp., 423 S.W.2d 434, 442 (Tex. Civ. App. 1967). This rationale is inapplicable to Defendants here, because there is no allegation that the funds they used to purchase the Texas property were stolen or misappropriated. Rather, the funds used to purchase the Texas homestead came from Defendants’ sales of the two California properties which they owned. (See SAC ¶¶ 25–28.)

 

Finally, although not binding authority, the Florida Supreme Court’s decision in Havoco of America, Ltd. v. Hill lends further support to Defendants’ position. See 790 So. 2d 1018 (Fla. 2001). There, the court was asked whether, under the Florida Constitution, a debtor’s homestead is exempt from the claims of creditors when such homestead was acquired using non-exempt funds with the specific intent of hindering creditors. See id. Like the Texas Constitution, Florida’s Constitution provides that—outside of specifically enumerated exceptions—a homestead is exempt from forced sale by any court. Fla. Const. art. X, § 4. In Havoco, a debtor from Tennessee purchased a property in Florida using nonexempt funds in an attempt to shield his assets from a judgment creditor. See 790 So. 2d at 1019. The Court first noted that Florida’s homestead exemption had long been construed liberally given its public policy implications. See id. at 1020. In light of this, the court declined to broaden the exceptions to the homestead exemption beyond those expressly enumerated. See id. at 1028. It held that the homestead exemption still applies where a debtor transfers nonexempt assets into an exempt homestead with the intent to hinder, delay, or defraud creditors. Id. Given the similarities between the Texas and Florida homestead exemptions, the Court finds the reasoning of the Florida Supreme Court to be relevant and persuasive to the issue presented here. Accordingly, the Court finds that Texas’s homestead exemption—like Florida’s—applies even when a debtor acquires the homestead using nonexempt funds with the intent of hindering its creditors.

 

IV. CONCLUSION

 

*4 For the foregoing reasons, the Court finds that Texas’s homestead exemption bars it from ordering H&S’s requested relief. Accordingly, this case is DISMISSED in its entirety.

 

 

 

 

 

 

 

2020.05.21 ... Utah Supreme Court Rejects Mixed Motive Test For Intentional Fraudulent Transfers In Jones Case

2020.01.06 ... Twyne’s Case And The Most Infamous Flock Of Sheep In Anglo-American Law

2019.12.07 ... New York Finally Modernizes Its Fraudulent Transfer Laws By Adopting The Uniform Voidable Transactions Act

2019.10.29 ... Repeal Of Kentucky’s Fraudulent Transfer Law In Favor Of UVTA Causes Headaches In Orchard

2019.10.19 ... Texas Homestead Gets Constitutional Protection From Fraudulent Transfer Claim In Lapides

 

 

Many more articles on voidable transactions law found here

 

 

Click here to go to the Voidable Transactions Decision Chart

 

Overview of UVTA -- The process and result

 

Learn The Vocabulary Of The Act (Main Page)

• Who are the parties? (Main Page)
• Creditor - Debtor - Insider & Affiliate - Relative - Organization & Person
• What is a Claim and Debt? - Establishes when the claim arose, and the amount of the claim
• What is an Asset and Property? - Not all property are assets because certain categories of property are excluded
• What is a Lien and a Valid Lien? - Liens also determine the value of assets
• What is a Transfer and when has it occurred? - Not all movement of property are transfers
• What is Value? - Value may have very different meanings to creditors and debtors
• What does Insolvency mean? - Sometimes very difficult to determine

 

Has A Voidable Transaction Occurred? (Main Page)

• Insolvency Test - The best test for creditors to use when available
• Insider Preference Test - Not really a voidable transaction test, but instead a preferential transfer test
• Overextending Insolvency Test - The debtor engaged in a transaction for which it did not have the necessary financial strength
• Sinking Insolvency Test - The debtor knew or should have known that insolvency was near
• Intent Test - The debtor intended to hinder, delay or defraud any creditor
• Badges of Fraud - One of the most misunderstood subjects and frequently misapplied

 

Does The Transferee Have A Defense? (Main Page)

• Extinguishment Periods a/k/a (incorrectly) Statute of Limitations - When UVTA actions cease to be viable
• Transferee's Good Faith - How a transferee can avoid liability

 

What Remedies Are Available? (Main Page)

• Non-Money Remedy (Avoidance, Injunction, Attachment, Levy, Receiver, Other) - The most common remedies which restore title to the asset in the debtor for purposes of the creditor's enforcement
• Money Judgment - When the remedy of avoidance is unattractive

 

Other Helpful Provisions (Main Page)

• Burdens of Proof - Who proves what and when
• Conflicts-Of-Laws - When multiple jurisdictions' laws may apply and they differ
• Applicability to Protected Series Organizations (Series LLCs) - Intra-series transfers may be voidable transactions
• Uniformity Between States - When the courts of one jurisdiction should look at UVTA rulings in another
• Supplementary Law - Resolving issues that are not covered by the UVTA
• Electronic Signatures - An utter waste of statutory drafting
• Title of the Act - Dumping fraudulent transfer for voidable transaction
• Conforming Amendments - Information for enacting legislatures

 

 

The Uniform Law Commission's complete copy of the UVTA with comments in PDF format is available here. The webpage for the UVTA, showing states that have enacted and much other information regarding the Act is found here.

 

1 - Definitions

(1) Affiliate -- (2) Asset -- (3) Claim -- (4) Creditor -- (5) Debt -- (6) Debtor -- (7) Electronic -- (8) Insider -- (9) Lien -- (10) Organization -- (11) Person -- (12) Property -- (13) Record -- (14) Relative -- (15) Sign -- (16) Transfer -- (17) Valid Lien

2 - Insolvency - How insolvency is calculated

3 - Value - Issues relating to calculating value

4 - Transfer Or Obligation Voidable As To Present Or Future Creditor

(a)(1) {Intent Test} - To hinder, delay or defraud any creditor

(a)(2)(i) {Overextending Insolvency Test} - The debtor engages in a transaction for which it does not have the financial strength

(a)(2)(ii) {Sinking Insolvency Test} - The debtor is not technically insolvent but headed for insolvency

(b) {Badges of Fraud} - Circumstances available to prove the debtor's intent

5 - Transfer or Obligation Voidable As To Present Creditor

(a) {Insolvency Test} - The test preferred by creditors

(b) {Insider Preference Test} - Not really a fraudulent transfer test at all

6 - When Transfer Is Made Or Obligation Is Incurred - Determines the time of the transfer

7 - Remedies Of Creditor

      {Non-Money Judgment Remedies} - Avoidance, attachment, etc.

8 - Defenses, Liability, And Protection Of Transferee Or Obligee

{Main Provisions} -The transferee's good faith for-value defense

(b) and (c) {Money Judgment Remedy} - Alternative remedy for creditors when avoidance is not good enough

9 - Extinguishment Of Claim For Relief - Similar to Statutes of Limitation

10 - Governing Law - Conflicts of Laws provisions

11 - Application To Series Organization - Applies to intra-series transfers

12 - Supplementary Provisions - Allows application of other law to issues unresolved by the UVTA

13 - Uniformity Of Application And Construction - Court opinions from other states may be looked to for guidance

14 - Relation To Electronic Signatures In Global And National Commerce - Waste of statutory space

15 - Short Title - From fraudulent transfers to voidable transactions

16 - Repeals; Conforming Amendment - Information for enacting legislatures

 

 

Fraudulent Transfers In Bankruptcy - Main Page

• Bankruptcy Code Section 544 - Trustee as lien creditor and as successor to certain creditors and purchasers
• Bankruptcy Code Section 548 -- Fraudulent Transfers And Obligations
• Bankruptcy Code Section 550 -- Liability of Transferee of Fraudulent Transfer

 

28 U.S.C. § 3301, et seq. - Where United States is the creditor

 

Common Law Fraudulent Transfer - Still exists in most states

 

Fraudulent Conveyances Act of 1571 a/k/a Statute of 13 Elizabeth - The medieval statute to which the modern American UVTA traces some of its roots.

 

Statutes Of The U.S. Jurisdictions -- State and Territorial Voidable Transaction and Fraudulent Transfer Laws

 

 

DEFINITIONS

     Creditor Definition - Court opinions on the definition of creditor

     Debtor Insider Affiliate Relative Organization Person Definitions   - Court opinions on the definitions of debtor, insider, etc.

     Claim And Debt Definitions  - Court opinions on the definitions of claim and debt

     Asset And Property Definitions  - Court opinions on the definitions of assets and property

     Lien And Valid Lien Definitions  - Court opinions on the definitions of lien and valid lien

     Transfer Definition  - Court opinions on the definition of transfer

     Value And Reasonably Equivalent Value (REV) Definition  - Court opinions on the definitions of value and reasonably equivalent value

     Insolvency Definition  - Court opinions on the definition of insolvency

TESTS

     Insolvency Test  - Court opinions relating to the Insolvency Test

     Insider Preference Test  - Court opinions relating to the Insider Preference Test

     Overextending Insolvency Test  - Court opinions relating to the Overextending Insolvency Test

     Sinking Insolvency Test  - Court opinions relating to the Sinking Insolvency Test

     Intent Test  - Court opinions relating to the Intent Test

           Badges Of Fraud  - Court opinions relating to the Badges of Fraud

DEFENSES

     Extinguishment Periods a/k/a (incorrectly) Statute Of Limitations  - Court opinions relating to the extinguishment periods

     Transferee Good Faith  - Court opinions relating to the transferee good faith for-value defense

REMEDIES

     Non-Money Remedies  - Court opinions relating to avoidance and other non-money remedies

     Money Judgment Remedies  - Court opinions relating to money judgments

OTHER

     Burdens of Proof  - Court opinions relating to the burdens of proof

     Conflict Of Laws  - Court opinions relating to conflict of laws

     Uniformity  - Court opinions relating to uniformity with the laws of other jurisdictions

     Supplementary Law  - Court opinions relating to the interplay of the UVTA with other law

     Jurisdictional Issues - Court opinions relating to jurisdiction of UVTA actions.

BANKRUPTCY

     Section 548  - Court opinions relating to 11 USC 548

 

 

• Decision Chart - How to resolve UVTA cases
• Topical Court Opinions - Collection of interesting court opinions
• Useful Articles and References - Other articles of interest
• Jay Adkisson's Available Services - Stuff I do

 

 

• Jay Adkisson - More about Jay D. Adkisson, background, books, articles, speaking appearances.

 

• Captive Insurance - Licensed insurance companies formed by the parent organization to handle the insurance and risk management needs of the business, by the author of the best-selling book on the topic: Adkisson's Captive Insurance Companies.

 

• Asset Protection - The all-time best-selling book on asset protection planning by Jay Adkisson and Chris Riser.

 

• Creditor-Debtor - An explanation of common creditor remedies, strategies and tactics to enforce a judgment, including a discussion of common debtor asset protection strategies.

 

• Private Retirement Plans - An exploration of a unique creditor exemption allowed under California law which can be very beneficial but is often misused.

 

• Charging Orders - The confusing remedy against a debtor's interest in an LLC or partnership is explained in reference to the Uniform Partnership Act, the Uniform Limited Partnership Act, and the Uniform Limited Liability Company Act.

 

• Protected Series - An examination of the single most complex statutory legal structure yet created, with particular reference to the Uniform Protected Series Act of 2017.

 

• California Enforcement of Judgments Law - Considers the topic of judgment enforcement in California, including the California Enforcement of Judgments Law and other laws related to California creditor-debtor issues.

 

• Anti-SLAPP Laws - A collection of and commentary about Anti-SLAPP laws and significant court decisions on the subject within the United States, and special section on California Anti-SLAPP.

 

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