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California Voidable Transaction Statutes

California State CaliforniaVoidableTransactionUVTAFraudulentTransferUFTA

JayNote:

• The differences between the California UVTA and the Uniform Laws Commission's UVTA are minor and may be summarized as the following:
  • California did not adopt the definitions of "affiliate", "insider" or "relative" for whatever misguided reasons, so those terms will be determined by decisional law.
  • California did not adopt the Insider Preference Test of § 5(b) for the ostensible reason that California already has its own insider preference laws, sort of.
  • California retained from its UFTA the seven-year "drop dead" extinguishment provision found in Cal.Civ.Code 3439.09(c), which arguably the ULC should have itself adopted.
  • California did not adopt § 11 relating to series organizations, which is fine because the UVTA's drafting committee wasn't particularly keen on that section either, but had it foisted into the UVTA by the Uniform Protected Series Act drafting committee, and at any rate California doesn't have its own series LLC enabling legislation.
• Otherwise, the California UVTA is pretty much the same as the uniform law.

California Uniform Voidable Transactions Act

California UVTA a/k/a CUVTA
California Civil Code §§ 3439 - 3439.14

{ Check Currency - Current Only As Of January 1, 2020 }

3439. [Title]

This chapter may be cited as the Uniform Voidable Transactions Act.

3439.01. [Definitions]

As used in this chapter the following definitions are applicable:

3439.02. [Insolvency]

3439.03. [Value]

Value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied, but value does not include an unperformed promise made otherwise than in the ordinary course of the promisor’s business to furnish support to the debtor or another person.

3439.04. [Transfers Voidable As to Present Or Future Creditors]

3439.05. [Transfers Voidable As To Present Creditors Only]

3439.06. [When Transfer Is Deemed Made]

For the purposes of this chapter:

3439.07. [Remedies]

3439.08. [Defenses]

3439.09. [Extinguishment (similar to Statute of Limitations)]

A cause of action with respect to a transfer or obligation under this chapter is extinguished unless action is brought pursuant to subdivision (a) of Section 3439.07 or levy made as provided in subdivision (b) or (c) of Section 3439.07:

3439.10. [Conflict Of Laws]

JayNote: California did not adopt the Protected Series provisions of UVTA § 11.

3439.12. [Supplementary Law]

Unless displaced by the provisions of this chapter, the principles of law and equity, including the law merchant and the law relating to principal and agent, estoppel, laches, fraud, misrepresentation, duress, coercion, mistake, insolvency, or other validating or invalidating cause, supplement its provisions.

3439.13. [Uniform Law]

This chapter shall be applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of this chapter among states enacting it.

3439.14. [Effective Date]

ARTICLES

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

♦ 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. ♦

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

♦ This case involved a dispute over a transmutation agreement, where John and Bernadette Sarkisian converted their community property into separate property. The bankruptcy trustee, Ronald Stadtmueller, argued that this transmutation was an actual fraudulent transfer under California law, intended to hinder his collection of a debt owed by John. (1) Key Points: The Bankruptcy Court: Initially granted summary judgment in favor of the Sarkisians, finding that the trustee failed to prove actual injury from the transmutation. The Bankruptcy Appellate Panel (BAP): Reversed the bankruptcy court's decision, holding that California law does not require a creditor to prove specific injury when alleging an actual fraudulent transfer. The Ninth Circuit: Affirmed the BAP's decision, agreeing that the plain language of the California Uniform Voidable Transactions Act (UVTA) and existing case law do not require proof of specific injury. (2) The Ninth Circuit's Reasoning: The court focused on the language of the UVTA, which states that a transfer is voidable if made with "actual intent to hinder, delay, or defraud any creditor of the debtor." The court found that the BAP correctly interpreted this language to mean that the creditor only needs to prove the transfer was made with the intent to hinder, delay, or defraud, not that the creditor suffered specific harm. The court rejected the Sarkisians' argument that the case of Mehrtash v. Mehrtash required proof of specific injury. The court found that Mehrtash actually supported the BAP's interpretation, as it stated that the necessary injury is the transfer of assets beyond the creditor's reach. (3) Conclusion: The Ninth Circuit affirmed the BAP's decision, holding that a creditor alleging an actual fraudulent transfer under California law does not need to prove specific injury. The only requirement is to prove that the debtor made the transfer with the intent to hinder, delay, or defraud the creditor. This decision clarifies the requirements for proving actual fraudulent transfers under California law. ♦

• Residence Underwater Due To Liens Not An Asset That Could Be Fraudulently Transferred In Tootian

♦ Key Takeaways: (1) UVTA and Asset Definition: The case highlights the importance of the timing of asset valuation under the Uniform Voidable Transactions Act (UVTA). The value of an asset is determined at the time of the transfer, not at a later date. This means that any appreciation in value after the transfer is irrelevant for purposes of determining whether a fraudulent transfer occurred. (2) Equity and Homestead Exemption: Creditors can only recover the debtor's equity in a property, less any homestead exemption. If the value of the property, plus the homestead exemption, is less than the amount of bona fide loans against the property, there is no equity for the creditor to recover. (3) Proof of Fraudulent Transfer: The trustee in this case failed to prove that the liens on the property were not bona fide. They also failed to provide an appraisal of the property at the time of the transfer to demonstrate that there was equity in the property at that time. (4) Importance of Evidence: The case emphasizes the importance of gathering and presenting strong evidence in fraudulent transfer cases. Simply showing that the debtors engaged in shady transactions is not enough. The trustee must prove that the transactions were fraudulent and that the debtor had equity in the property at the time of the transfer. (5) Asset Protection Planning: Asset protection planning should take into account the potential for appreciation in value. If a property is likely to appreciate, it may be necessary to take steps to protect the equity that will be created. (6) Debtor's Tactics: The debtors in this case engaged in a number of questionable transactions in an attempt to protect their property. This highlights the need for creditors to be vigilant in identifying and challenging such tactics. (7) Court's Approach: The court's decision was clear on the substantive issues but lacked clarity in its recitation of the facts. This raises questions about the court's approach to complex cases involving multiple transactions and parties. ♦

• In re Tootian (Goldman v. Dardashti), 2021 WL 4558290 (C.D.Cal., Oct. 5, 2021).

♦ This case involves a fraudulent transfer action brought by a Chapter 7 Trustee (Amy Goldman) against Shawn Dardashti, who purchased a property from debtors Shawn Melamed and Jenous Tootian through a short sale. The Trustee claims the short sale was a scheme to protect the debtors' equity from creditors, with Dardashti paying kickbacks and giving an option to repurchase the property. The Trustee seeks to set aside the transfer as fraudulent and recover the property for the benefit of creditors. The court granted summary judgment in favor of Dardashti, ruling that the property was not an "asset" under California law because it was heavily encumbered by liens exceeding its value at the time of the transfer. This finding negated the Trustee's fraudulent transfer claims based on 11 U.S.C. § 544 and California Civil Code § 3439.04. The court also rejected the Trustee's attempt to impose a resulting trust on the property. It found that: (1) Dardashti provided the purchase price with his own funds, not those of the debtors. (2) The existence of a repurchase option contradicted the intent of a resulting trust. (3) The Trustee lacked standing to pursue a resulting trust claim on behalf of creditors, as this type of action can only be brought by individual creditors, not a bankruptcy trustee. Furthermore, the court found that the Trustee's claims were likely barred by the in pari delicto doctrine, as the debtors' fraudulent actions would be imputed to the Trustee. In conclusion, the court determined that the Trustee lacked a legal basis for her claims and could not demonstrate any injury or harm suffered by creditors as a result of the transfer. ♦

• UVTA Held Not To Require A Third-Party Transferee In Nagel

♦ This case presents a fascinating legal battle over fraudulent transfers and asset protection strategies. Here's a breakdown of the key points and their implications: (1) The Case: Background: Westen and Lawson sold their mold-infested Brentwood home to Nagel without disclosing the damage. Nagel won an arbitration award but faced difficulties collecting due to Westen and Lawson's asset protection maneuvers. Asset Protection Plan: Westen and Lawson: Moved their LLC to Nevada. Placed sale proceeds in an annuity. Purchased a Texas home with the proceeds (Texas has unlimited homestead exemption). Nagel's Lawsuit: Nagel sued for fraudulent transfer, civil conspiracy, and aiding and abetting, targeting Westen, Lawson, their LLC, their attorneys, and family trusts. Trial Court Ruling: The trial court dismissed Nagel's case, finding no "transfer" under the Uniform Voidable Transactions Act (UVTA). Court of Appeals Decision: The Court of Appeals reversed the trial court, holding that the UVTA allows for a debtor to be the transferee of their own assets. This means that Westen and Lawson's actions, even if they didn't involve a third party, could be considered fraudulent transfers. (2) Key Legal Issues: UVTA and the Definition of "Transfer": The UVTA defines "transfer" broadly, encompassing any method of disposing of or parting with an asset. However, it doesn't explicitly define "transferee." Debtor as Transferee: The Court of Appeals reasoned that the UVTA's purpose is to protect creditors, and a debtor transferring assets to themselves (even if it's to a different legal form or location) can diminish their estate and harm creditors. Public Policy: The Court emphasized the UVTA's goal of preventing debtors from circumventing their obligations through creative asset protection schemes. (3) Implications: Broader Interpretation of UVTA: This case expands the scope of the UVTA, potentially making it easier for creditors to challenge asset protection strategies that involve self-transfers. Challenges to Homestead Exemptions: The case raises questions about the enforceability of homestead exemptions in the face of fraudulent transfer claims. Constructive Trusts: Nagel might attempt to establish a constructive trust over the Texas home proceeds, potentially bypassing the homestead exemption. (4) Future of the Case: Trial: The case will now proceed to trial, where Nagel will have to prove that Westen and Lawson's actions were fraudulent. Texas Law: If Nagel wins, the case may reach the Texas Supreme Court to determine whether a California UVTA judgment can override Texas's unlimited homestead exemption. (5) Overall: This case highlights the ongoing battle between creditors seeking to recover debts and debtors seeking to protect their assets. The Court of Appeals' decision broadens the reach of fraudulent transfer law, potentially impacting future asset protection strategies and raising complex legal questions about the interplay of state laws and homestead exemptions. ♦

• Nagel v. Westen, 2021 WL 58119 (Cal.App., Distr. 2, Jan. 7, 2021).

♦ This case involves a dispute over a house sold by Tracy Westen and Linda Lawson (Sellers) to Nicole Nagel (Buyer) in 2011. After discovering significant water damage, Buyer sued Sellers and won an arbitration award of over $4.5 million. Sellers then attempted to shield their assets from collection by transferring them out of California and into various exempt assets in Texas, Nevada, and Minnesota. Buyer sued again, this time alleging fraudulent transfer under the Uniform Voidable Transactions Act (UVTA). The trial court dismissed the case, reasoning that Buyer couldn't identify a "third-party transferee" who received the assets. The court believed that Sellers merely shifted their assets within their own control and didn't actually transfer them to someone else. The Court of Appeal reversed the lower court's decision in part. It held that the UVTA's definition of "transfer" is broad and includes "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset." Therefore, Sellers' actions in moving assets out of state and converting them into exempt assets could constitute a "transfer" under the UVTA. The court further argued that limiting the UVTA to only third-party transfers would allow debtors to easily evade creditors by simply shifting assets within their own control. This would contradict the law's purpose of preventing debtors from hiding assets from creditors. The court affirmed the dismissal of Buyer's common law fraudulent transfer claim as Buyer did not adequately argue its elements in their appeal brief. In summary, this case clarifies that the UVTA's definition of "transfer" is expansive and includes actions where debtors shift assets within their own control, not just to third parties. This decision helps creditors pursue their claims against debtors who attempt to evade their obligations by manipulating their assets. ♦

• Texas Homestead Gets Constitutional Protection From Fraudulent Transfer Claim In Lapides

♦ This summary discusses a legal case where a creditor, Hinds & Shankman, LLP, attempted to recover funds from a debtor, Richard Lapides, by claiming a fraudulent transfer. Lapides and his wife had sold their California properties and used the proceeds to buy a Texas homestead. The court sided with Lapides, ruling that the Texas homestead exemption, enshrined in the state constitution, prevented the creditor from recovering the funds. This exemption is considered superior to state fraudulent transfer laws, meaning the transfer could not be voided. The court referenced similar precedents in Florida, where a constitutional homestead exemption had been upheld despite the debtor's intent to hinder creditors. This decision establishes a similar "Havoco rule" in Texas, providing strong protection for Texas homesteads from creditors. The author highlights the significance of this decision, emphasizing that once funds are transferred into a Texas homestead, they are exceptionally secure, even if the intent behind the transfer was to avoid creditors. The only exceptions are for funds derived from criminal activity or other limited circumstances. ♦

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

♦ This case involves a dispute between Hinds & Shankman, LLP (H&S) and Richard Lapides and Janis Lapides (the Lapides) regarding payment of attorney fees and costs incurred in a bankruptcy case. H&S was the bankruptcy trustee's legal representation and was owed fees by Richard Lapides. When Richard Lapides failed to pay, H&S obtained a judgment against him. The Lapides then sold their California properties, used the proceeds to purchase a homestead in Texas, and claimed the Texas homestead exemption to avoid paying H&S. H&S sued, seeking to freeze the equity from the California properties and make it available to satisfy their judgment. However, the court dismissed the case, ruling that the Texas Constitution’s homestead exception bars the requested relief. The court's reasoning was based on the following: (1) Texas Homestead Exemption: The Texas Constitution protects homesteads from forced sale for debt payment, except for a limited number of exceptions. The court found that H&S's claim did not fall under any of the enumerated exceptions. (2) Liberal Construction of Homestead Exemption: Texas courts construe the homestead exemption liberally, even if it assists dishonest debtors in avoiding creditors. (3) Prior Case Law: Previous cases involving homestead exemption and fraudulent transfers supported the court's ruling. Texas courts have consistently refused to expand the exceptions to the homestead exemption beyond its text, even when used to hinder creditors. (4) Havoco of America, Ltd. v. Hill: The Florida Supreme Court's decision in Havoco was persuasive to the court, showing that homestead exemptions apply even when debtors acquire homesteads using non-exempt funds with intent to hinder creditors. Therefore, the court found that H&S's requested relief was not available because Texas’s homestead exemption shields the Lapides' property from H&S's claims. ♦

• Cortez Rule For California Uniform Voidable Transactions Act Reaffirmed In Potter

♦ This case delves into the California Uniform Voidable Transactions Act (CUVTA) and its unique interpretation of the statute of extinguishment, particularly in light of the "Cortez rule". (A) Key Points: (1) CUVTA's Statute of Extinguishment: Similar to a statute of limitations, it terminates a cause of action related to transfers or obligations. California's CUVTA has a standard 4-year period, with a 1-year discovery rule for the "Intent Test" (whether the debtor intended to defraud creditors). Additionally, there's a 7-year "drop-dead" period, regardless of other factors. (2) The Cortez Rule: California, unlike other states, interprets the "not later than four years after the transfer was made" clause differently. The "Cortez rule" states that the extinguishment period doesn't begin until the creditor obtains a judgment, potentially delaying the deadline by years. (3) The Case: Potter, injured by Tovar in a motorcycle accident, sued Tovar and his insurer, AUIC, for bad faith after AUIC settled with Tovar, potentially hindering Potter's claim. Potter argued the settlement was a voidable transaction under CUVTA. (4) The Court's Decision: Despite the 6-year gap between the settlement and Potter's suit, the court upheld Potter's claim, citing the Cortez rule. The court also ruled that Tovar's bad faith claim against AUIC was an "asset" for CUVTA purposes, making the settlement a transfer. (5) Analysis: The Cortez rule, although controversial, has been consistently upheld in California. While it makes sense in practice due to lengthy litigation, it creates uncertainty for debtors and asset protection planners who must consider a potential 7-year window for challenges. (B) Implications: (1) Creditor-Debtor Litigation: The Cortez rule significantly benefits creditors in California by extending the time for bringing voidable transaction claims. (2) Asset Protection Planning: Asset protection planning in California requires extra caution due to the 7-year "drop-dead" period and the potential for challenges under CUVTA. (3) Future of Cortez: Despite criticism, the Cortez rule remains a significant part of California law, emphasizing the need for careful consideration of CUVTA and the implications of voidable transactions in this state. ♦

• Potter v Alliance United Ins. Co., 2019 WL 3296949 (Cal.App., Distr. 2, July 23, 2019).

♦ This case involved a motorcycle accident where Christopher Potter was severely injured by Jesus Avalos-Tovar, who was insured by Alliance United Insurance Company (AUIC) with a $15,000 liability limit. (A) Key Events: Potter offered to settle for the policy limit but AUIC didn't respond. Potter sued Tovar, won a jury verdict for almost $1 million, but the verdict was later vacated. While Potter's appeal was pending, AUIC paid Tovar $75,000 to release any claims he had against AUIC, including bad faith claims. Potter won a second trial against Tovar for over $1 million but Tovar was insolvent. Potter sued AUIC, claiming the release was a fraudulent conveyance under the Uniform Voidable Transactions Act (UVTA) and common law. (B) Trial Court Ruling: The trial court sustained AUIC's demurrer, dismissing the fraudulent conveyance suit. The court ruled the UVTA claim was barred by the statute of limitations and failed to state a proper fraudulent conveyance claim. (C) Court of Appeal Decision: The Court of Appeal reversed the trial court's ruling on the UVTA claim. The court held that the statute of limitations did not begin until the judgment in the personal injury action became final, meaning Potter's claim was timely. The court found that Tovar's right to sue for bad faith was an asset under the UVTA because it was assignable. The court determined that Potter sufficiently alleged injury because the bad faith cause of action was an asset of Tovar's that was put out of reach by the Release. The court concluded that AUIC is a proper defendant because the release was made for its benefit. (D) Common Law Claim: The court did not address the common law fraudulent conveyance claim because Potter did not adequately argue it on appeal. (E) Result: The judgment of dismissal was reversed, and the case was remanded for further proceedings. (F) Key Takeaway: This case highlights the importance of understanding the Uniform Voidable Transactions Act and the concept of "assets" in fraudulent conveyance cases. It also shows how a contingent cause of action can be considered an asset, even if it has not yet matured. ♦

OTHER OPINIONS !!!OTHER OPINIONS

• Sturm v. Moyer, 2019 WL 642708 (Cal.App. Distr. 2, 2/15/2019).

♦ This case revolves around the application of the Uniform Voidable Transactions Act (UFTA) to a premarital agreement. The key question is whether the agreement, which designates all earnings and property acquired during marriage as separate property, constitutes a "transfer" under the UFTA, particularly in the context of a debtor spouse attempting to shield assets from creditors. (A) Background: Robert Sturm holds a judgment against Todd Moyer, who subsequently marries Jessica Schell. They enter a premarital agreement declaring all income and property acquired during marriage as separate property, effectively excluding any community property interest. Sturm alleges that the agreement was intentionally designed by Moyer to defraud creditors, including Sturm. (B) Legal Issues: Does a premarital agreement that designates all marital property as separate property constitute a "transfer" under the UFTA? Can the UFTA be applied to a premarital agreement even though the agreement doesn't take effect until marriage, at which point community property interests are established? (C) Court's Reasoning: The UFTA broadly defines "transfer" to include any method of disposing of an asset or interest in an asset. The premarital agreement, upon marriage, reorders existing property rights established by community property laws, effectively transferring interests in community property. The court examines the legislative history of the UFTA and Family Code, finding evidence supporting the applicability of the UFTA to premarital agreements. The court weighs policy considerations, recognizing the need to protect creditors from fraudulent transfers while acknowledging the policy favoring marriage and premarital agreements. The court concludes that the UFTA can apply to premarital agreements, particularly those that potentially shield assets from creditors. (D) Outcome: The court reverses the judgment dismissing Sturm's claim, finding that the UFTA may be applicable. The question of whether actual fraud occurred in this specific case remains for trial. (E) Significance: This case establishes a precedent for applying the UFTA to premarital agreements in California, particularly those aiming to alter community property laws and potentially hinder creditors. It highlights the complex interplay between family law and creditor protection laws, particularly in cases involving premarital agreements. ♦

• Hawk v. CIR, 2019 WL 2120170 (6th Cir., May 15, 2019).

♦ This case, Hawk v. CIR, involves a complex tax dispute surrounding the sale of a family bowling business, Holiday Bowl. (A) The Facts: Billy Hawk's wife, Nancy Sue, sold the bowling alleys to Bowl New England, generating a significant tax liability for Holiday Bowl. To avoid this tax liability, the Hawks, with the help of a broker, entered into a deal with MidCoast, a company that claimed to have "tremendous tax-loss carry-forwards." MidCoast agreed to pay more than Holiday Bowl's actual value, essentially exchanging a pile of cash for another, minus the tax debt. MidCoast used a purported loan from Sequoia Capital to finance the transaction, but the loan was found to be a sham, with MidCoast actually paying with Holiday Bowl's funds. MidCoast never paid Holiday Bowl's taxes, and the company dissolved. (B) The Legal Issues: (1) Transferee Liability: The court examined whether the Hawks were transferees of Holiday Bowl under 26 U.S.C. § 6901, which allows the government to pursue transferees of delinquent taxpayers. (2) Economic Substance Doctrine: The court analyzed whether the transaction with MidCoast had economic substance or was a sham designed to avoid taxes. (3) Tennessee Fraudulent Transfer Act: The court considered whether the transaction constituted a fraudulent transfer under Tennessee law, which allows creditors to recover assets transferred by insolvent debtors. (C) The Court's Decision: The court found that the Hawks were transferees of Holiday Bowl, as they received the company's assets (the horse farm and cash) through the transaction. The court concluded that the transaction lacked economic substance and was a sham, as the Sequoia loan was a fictitious arrangement used to transfer Holiday Bowl's funds to the Hawks. The court held that the Hawks were liable to the government under Tennessee's Uniform Fraudulent Transfer Act, as Holiday Bowl did not receive reasonably equivalent value in exchange for the transferred assets and became insolvent as a result of the transaction. (D) Key Takeaways: The case highlights the court's willingness to look beyond the form of transactions to their underlying economic reality, particularly when taxpayers attempt to use complex arrangements to avoid taxes. The court emphasizes that taxpayers cannot rely on sham transactions to shield themselves from tax liability. The case underscores the importance of carefully scrutinizing transactions involving net operating losses, as Congress and the courts have erected significant barriers to prevent abuse. The court distinguishes this case from Summa Holdings, where the government attempted to disregard the plain text of the statute. Here, the court upheld the government's enforcement of the Code's provisions regarding transferee liability and the fraudulent transfer act. ♦

• Chen v. Berenjian, 2019 WL 1397592 (Cal.App.Distr. 4, March 28, 2019).

♦ This case centers around Pang Yen Chen's attempt to recover money owed to him by Shazad Berenjian. Shazad, with the help of his brother Sharmad, allegedly engaged in a fraudulent transfer scheme to avoid paying Chen. (A) Key Allegations: Shazad owed Chen money for undelivered goods. Shazad and Sharmad colluded in a sham lawsuit where Sharmad filed a false claim against Shazad and they agreed to a default judgment for a large sum. This judgment, intended to shield Shazad's assets from creditors, was never enforced, and instead, Sharmad used it to levy on Shazad's property when Chen tried to collect his debts. Chen sued both brothers for fraudulent transfer under the Uniform Voidable Transactions Act (UVTA). (B) The Court's Ruling: The court ruled in favor of Chen, reversing the trial court's dismissal of his lawsuit. (C) Key Arguments and Findings: (1) Litigation Privilege: The court found that the litigation privilege of Civil Code Section 47(b) did not apply to Chen's fraudulent transfer claim. While the sham lawsuit and judgment were communicative acts, the gravamen of Chen's claim was the noncommunicative act of Sharmad levying on the speakers, which was intended to hinder Chen's recovery. (2) Uncertainty: The trial court's dismissal for uncertainty was also overturned. The court found that the complaint sufficiently alleged that the speakers belonged to Shazad, and any ambiguity could be clarified through discovery. (D) Conclusion: The court's decision allows Chen's fraudulent transfer claim to proceed. It affirms that the litigation privilege does not protect noncommunicative acts, like levying on property, even if they are connected to a legal proceeding. This ruling underscores the importance of the UVTA in protecting creditors from fraudulent schemes designed to shield assets. ♦

• Nautilus, Inc. v. Yang, 2017 WL 1422602 (Cal.App., 4th Distr., April 21, 2017).

♦ This case involves a fraudulent conveyance of property and the subsequent dispute over lien priorities. (A) The Facts: Nautilus obtained an $8 million judgment against Stanley Yang. Stanley and his brother Peter owned a property as joint tenants. Stanley fraudulently transferred his interest in the property to his father, Chao Chen. Chao Chen obtained a reverse mortgage loan from Security One, which was later sold to Urban Financial. The title insurance company missed Nautilus's abstract of judgment during the title search for the reverse mortgage. (B) The Legal Issues: (1) Good Faith Defense: Whether Security One and Urban Financial acted in good faith when they made and purchased the reverse mortgage loan, thus avoiding liability under the Uniform Fraudulent Transfer Act (UFTA). (2) Equitable Subrogation: Whether Urban Financial was entitled to equitable subrogation, which would make a portion of its mortgage senior to Nautilus's abstract of judgment even though it was recorded later. (3) Lien Priorities: Whether the trial court was correct in granting priority to Nautilus's lien over a portion of Urban Financial's lien on the reverse mortgage loan. (C) The Court's Decision: (1) Good Faith Defense: The trial court found that Security One and Urban Financial acted in good faith, despite the transfer being fraudulent. The court initially placed the burden of proof on Nautilus to disprove the good faith defense, which was incorrect. However, even with the correct burden on Urban Financial, the court found that the good faith defense was established because there was no evidence that Security One or Urban Financial had actual knowledge of Stanley's fraudulent intent. (2) Equitable Subrogation: The court granted equitable subrogation to Urban Financial, making a portion of its mortgage senior to Nautilus's abstract of judgment. The court reasoned that Security One and Urban Financial acted without culpable neglect, even though the title insurance company made an error. (3) Lien Priorities: The court granted priority to Nautilus's lien against Chao Chen, over a portion of Urban Financial's lien on the reverse mortgage loan. This was deemed proper as the court did not create a new lien through the judgment, but rather prioritized the existing lien based on equitable principles. (4) Stanley's Interest: The court ruled that Nautilus's $8 million lien applied to one-half of the property, rather than one-third, because Stanley's fraudulent conveyance was voided, meaning he retained a one-half interest when Nautilus recorded its abstract of judgment. (D) Key Takeaway: The case clarifies the standard for the good faith defense under the UFTA. The transferee must not only avoid collusion or active participation in the fraudulent scheme, but also must lack actual knowledge of the transferor's fraudulent intent. The court also emphasizes the importance of equitable principles in resolving lien priority disputes. ♦

California Voidable Transaction Opinions Listed