Ninth Circuit Agrees That Damages Is Not An Element Of A Fraudulent Transfer Case In Medina

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Article 2021 California Money_Judgment Tests Art211030NinthCircuitAgreesDamagesElementFraudulentTransferCaseMedina




California has a community property regime that characterizes a married couple's property as either community property or separate property. His separate property is the property that he had before the marriage or inherited during it. Her separate property is the property that she brought into the marriage or inherited during it. All other property is community property, except that a couple may agree ("transmute") their community property to separate property.

For creditor-debtor purposes, his creditors can only go after his separate property, and her creditors can only go after her separate property, but creditors of either spouse can go after all the community property. Thus, it is very common in California (and other community property states) for couples as Step #1 in their asset protection planning to enter into transmutation agreements whereby they agree to divide their community property into separate property, and thereby immediately reduce that property's exposures to creditors by 50%.

But what if one spouse already has a creditor? In that case, California Family Code section 851 says that "A transmutation is subject to the laws governing fraudulent transfers." This doesn't mean that a transmutation is ipso facto a fraudulent transfer, only that such transmutations are potentially subject to a fraudulent transfer challenge, which in California usually means under its version of the Uniform Voidable Transactions Act (UVTA). If a transmutation is voided by the UVTA, the effect is that the property goes back to being community property and thus becomes available to the creditors of either spouse.

With that primer, we now turn to the case at hand.

Rudolph Medina filed for bankruptcy, and a Chapter 7 bankruptcy trustee was appointed for his estate. One of Medina's assets was a money judgment that he held against John Sarkisian, and so the bankruptcy trustee stepped into Medina's shoes and decided to enforce the money judgment on behalf of the estate.

Faced with the bankruptcy trustee's collection efforts, John Sarkisian and his wife Bernadette entered into a transmutation agreement whereby Bernadette apparently ended up with the most valuable assets as her separate property. This stopped the bankruptcy trustee cold in attempting to enforce the judgment against those assets, so the bankruptcy trustee filed an adversary action against the Sarkisians alleging that the transmutation agreement was void as a fraudulent transfer under California's UVTA.

After the usual litigation skirmishing, the Sarkisians filed a motion for summary judgment which was granted by the U.S. Bankruptcy Court for the Southern District of California. The court's grounds for granting the summary judgment motion was that the bankruptcy trustee had failed to prove any damages but instead was engaging in speculation that by setting aside the transmutation agreement there might be more assets to pursue. In other words, the bankruptcy court held that damages were a necessary element to a UVTA claim, and the bankruptcy trustee had failed to make proof of that element.

The bankruptcy trustee appealed the decision to the Bankruptcy Appellate Panel ("BAP") of the U.S. Court of Appeals for the Ninth Circuit, and the BAP reversed, holding that damages are not an element of a UVTA claim. Now it was time for the Sarkisians to appeal the BAP's decision, and they did so to the full Ninth Circuit directly. All this led to the Ninth Circuit's opinion which I shall next discuss.

In a short and very straightforward analysis, the Ninth Circuit agreed with the BAP that damages were simply not an element of a fraudulent transfer claim, that a creditor need not prove any damages, and that a creditor has been injured by the mere fact that the debtor has placed property out of the reach of creditors. Thus, the lower bankruptcy court was wrong to grant summary judgment in favor of the Sarkisians.

ANALYSIS

The instant opinion is not of particular interest because of the Ninth Circuit's ruling, which simply affirms well-established law that damages are not an element of a fraudulent transfer case. It is, however, of considerable interest because the lower bankruptcy court blew that same issue so badly, making its decision one of the worst to come down in the area of fraudulent transfer law in some considerable time.

Why did the bankruptcy court get this issue so wrong? The clear text of the UVTA does not list damages as an element of any of the tests for a fraudulent transfer found therein, and there are There are numerous California state court opinions to the effect that damages are not even awardable in fraudulent transfer cases (though money judgments are available as alternative relief in the UVTA). But, nonetheless, the lower bankruptcy court somehow made the first discovery in over 400 years of fraudulent transfer jurisprudence that damages were an element of a fraudulent transfer case.

It appears that one of the problems is that the bankruptcy court was mislead by the Sarkisians' authorities, which seemed to consist of truncating key passages from the authorities they cited and painting those authorities as holding something that they did not. At the end of the day, however, the very duty of the court is to check those quotes and citations to see if they really said what the Sarkisians' counsel said they did, and here the court's fulfilment of its duties was much less than desirable. Lazy court, horrendously bad ruling.

As mentioned, damages are not awardable in UVTA cases, but money judgments are specifically allowed by UVTA § 8(b) and (c), which, for reasons known only to the original drafters of the old Uniform Fraudulent Transfers Act from which it carried over, appears in the defenses section of that Act (§ 8), and not the remedies section (§ 7). So, you can't get damages, but you can get a money judgment: What is the difference?

The difference between damages and a money judgment goes to how they are calculated. There are often several ways to calculate damages, and damages may include things more than merely the hard economic loss to the creditor, such as the loss of ensuing investment income on the money that might otherwise have been collected. By contrast, a money judgment under the UVTA derives from a simple but hard calculation, being the value of the asset at the time it was transferred, adjusted by any equities (such as that the property significantly devalued thereafter).

That money judgments are awardable under the UVTA, but damages are not, is something that frequently throws courts for a loop when a creditor requests money from the transferee instead of simply avoidance of the transfer. Thus, in practice before the court, a basic but detailed explanation to the court of how this works and what goes on is usually a very good idea.

CITE AS

In re Medina, 2021 WL 3214757 (9th Cir., 2021).



AI Synopsis


♦ Summary: (1) Key Points: California Community Property: The article explains the concept of community property in California, where assets acquired during marriage are generally considered joint property unless they are classified as separate property. Transmutation Agreements: These agreements allow couples to convert community property into separate property, potentially reducing the exposure of those assets to creditors. Fraudulent Transfers: The article discusses how transmutation agreements can be challenged as fraudulent transfers under the Uniform Voidable Transactions Act (UVTA) if they are intended to hinder creditors. Damages Not Required: The Ninth Circuit Court of Appeals affirmed the established law that damages are not a necessary element to prove a fraudulent transfer claim. Money Judgments Available: While damages are not awarded, the UVTA allows for money judgments to be obtained against the transferee, calculated based on the value of the transferred asset. (1) Additional Insights: Importance of Clear Explanation: The article emphasizes the need for creditors to clearly explain to the court how money judgments work under the UVTA, as this concept can be confusing for some judges. Potential for Abuse: The case highlights the potential for abuse of transmutation agreements, particularly when one spouse is facing financial difficulties. Bankruptcy Trustee's Role: The bankruptcy trustee's role in this case demonstrates the importance of their responsibility to protect the interests of creditors in bankruptcy proceedings. ♦