Snow Covered Capital, LLC v. Fonfa ( 2024 )

1 2 UNITED STATES DISTRICT COURT DISTRICT OF NEVADA 3 4 Snow Covered Capital, LLC, Case No. 2:22-cv-01181-CDS-BNW 5 Plaintiff Order Denying Defendants’ Motion to Dismiss 6 v. 7 Jodi Fonfa, et al., [ECF No. 159] 8 Defendants 9 10 Defendant Evan Fonfa, individually and as Trustee of the Evan Fonfa 2018 Trust, moves 11 to dismiss the sixth through tenth claims for relief from plaintiff Snow Covered Capital, LLC’s 12 (‘SCC”) second amended complaint (SAC, ECF No. 147). ECF No. 189. For the reasons herein, 13 Evan’s motion is denied. 14 I. Background1 15 Although a court’s review of a motion to dismiss is generally limited to the allegations in 16 the complaint, Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001), the incorporation by 17 reference doctrine allows me to take judicial notice of a document attached by a defendant to a 18 motion to dismiss when a “plaintiff’s claim depends on the contents of a document” and “the 19 parties do not dispute the authenticity of the document, even though the plaintiff does not 20 explicitly allege the contents of that document in the complaint.” Knievel v. ESPN, 393 F.3d 1068, 21 1076 (9th Cir. 2005). Thus, a court may take judicial notice of matters of public record without 22 converting a motion to dismiss into a motion for summary judgment. Lee, 250 F.3d at 689. But 23 courts may not take judicial notice of facts subject to reasonable dispute. Id. The Evan Trust is 24 incorporated by reference in the complaint, is central to SCC’s claims, and no party questions 25 the authenticity of the exhibit. Furthermore, under Federal Rule of Civil Procedure 902(8), the 26 1 Unless otherwise noted as undisputed, references to the complaint in this section are for background information only and do not serve as a finding of facts. 1 trust is self-authenticating as a notarized document. Evan Trust, Defs.’ Ex. 1, ECF No. 159-1 at 54 2 (notary public).2 I therefore grant Evan’s request, ECF No. 159 at 11, and take judicial notice of 3 the Evan Trust. 4 Andrew Fonfa, now deceased, established the Evan Fonfa Trust. Evan Trust, Defs.’ Ex. 1, 5 ECF No. 159-1 at 7.3 The trust appoints Evan Fonfa, Andrew’s son, as the sole trustee (id. at 23) 6 and beneficiary (id. at 7). It also contains spendthrift provisions. Id. at 15. The complaint alleges 7 that Evan, as the sole trustee, has control over the Evan Trust assets, including an unrestrained 8 ability to reach the property within the trust. SAC, ECF No. 147 at ¶ 79. The complaint further 9 alleges that since Evan can have the trust assets distributed to himself, the Evan Trust is not a 10 spendthrift trust and cannot enjoy any spendthrift protections. Id. 11 The complaint challenges multiple alleged transfers that Andrew made to the Evan 12 Trust. SAC, ECF No. 147 at ¶¶ 80–97. These transfers include: (1) one half of Andrew’s interest 13 in Indian Springs Holdings, LLC; and (2) Andrew’s rights to the income streams flowing from 14 that interest in those holdings in the Evan Trust. Id. at ¶ 80. The complaint alleges that Andrew, 15 his wife Jodi Fonfa, and Evan have acted to conceal the Evan transfers, and further, that since 16 Andrew’s death, Jodi and Evan have acted to conceal the Evan transfers and the details thereof. 17 Id. at ¶ 97. 18 II. Legal standard 19 The Federal Rules of Civil Procedure require a plaintiff to plead “a short and plain 20 statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). 21 Dismissal is appropriate under Rule 12(b)(6) when a pleader fails to state a claim upon which 22 2 I note that SCC avers that Evan intentionally redacted Schedule A from the Evan Trust before 23 submitting it as an exhibit. ECF No. 177 at 15 n.49. This argument does not challenge the authenticity of the trust, but rather challenges the alleged redaction as an attempt to make it “impossible” for me and 24 SCC to determine what other property Andrew fraudulently transferred to the Evan Trust. Id. This order does not determine whether Scheule A was redacted, or as Evan argues, ECF No. 224 at 1 n.4, 25 intentionally left blank. 3 These facts are drawn from the Evan Trust (Evan Trust, Defs.’ Ex. 1, ECF No. 159-1 at 7). Because, as set 26 forth herein, I determine that the Evan Trust is not a valid spendthrift trust, the court does not address the other exhibits or arguments set forth by the parties. 1 relief can be granted. Fed. R. Civ. P. 12(b)(6); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). A 2 pleading must give fair notice of a legally cognizable claim and the grounds on which it rests, 3 and although a court must take all factual allegations as true, legal conclusions couched as 4 factual allegations are insufficient. Twombly, 550 U.S. at 555. Accordingly, Rule 12(b)(6) requires 5 “more than labels and conclusions, and a formulaic recitation of the elements of a cause of action 6 will not do.” Id. To survive a motion to dismiss, “a complaint must contain sufficient factual 7 matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 8 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 570). “A claim has facial plausibility 9 when the plaintiff pleads factual content that allows the court to draw the reasonable inference 10 that the defendant is liable for the misconduct alleged.” Id. This standard “asks for more than a 11 sheer possibility that a defendant has acted unlawfully.” Id. 12 If the court grants a motion to dismiss for failure to state a claim, leave to amend should 13 be granted unless it is clear that the deficiencies of the complaint cannot be cured by 14 amendment. DeSoto v. Yellow Freight Sys., Inc., 957 F.2d 655, 658 (9th Cir. 1992). Under Rule 15(a), a 15 court should “freely” give leave to amend “when justice so requires,” and in the absence of a 16 reason such as “undue delay, bad faith or dilatory motive of the part of the movant, repeated 17 failure to cure deficiencies by amendment previously allowed, undue prejudice to the opposing 18 party by virtue of allowance of the amendment, futility of the amendment, etc.” Foman v. Davis, 19 371 U.S. 178 (1962). 20 III. Discussion 21 Defendant Evan Fonfa moves to dismiss the following claims under Rule 12(b)(6): (1) 22 Avoidance of Fraudulent Transfers Under NRS 112.180(1)(a) (sixth claim); (2) Avoidance of 23 Fraudulent Transfers Under NRS 112.180(1)(b)(1) (seventh claim); (3) Avoidance of Fraudulent 24 Transfers Under NRS 112.180(1)(b)(2) (eighth claim); (4) Avoidance of Fraudulent Transfers 25 Under NRS 112.190 (ninth claim); and (d) Avoidance of Transfers Under NRS 111.700 et seq (tenth 26 claim). The sixth, seventh, eighth, and ninth claims (the Fraudulent Conveyance Claims) allege 1 fraudulent conveyance claims against defendants under NRS 112.180 and NRS 112.190 related to 2 both the Indian Springs Sale and the other transfers. The tenth cause of action seeks to avoid any 3 nonprobate transfers made to either Evan or the Evan Trust at the time of Andrew’s death. 4 A. Preliminary matter—incorrectly filed exhibits 5 As a preliminary matter, I note that Evan violated Local Rule IC 2-2(3), which requires 6 exhibits and attachments be attached as separate files—not as one document. Given the age of 7 this case and the need for judicial efficiency, I do not strike the filings under Local Rule IA 10- 8 1(d). However, the parties are cautioned that future violations of the rules may result in the 9 court striking inappropriately filed documents or exhibits. The court advises the parties that 10 adherence to the local rules assists the court in resolving motions more expeditiously. 11 B. Fraudulent conveyance claims (sixth through ninth claims) 12 13 Evan moves to dismiss as time-barred SCC’s fraudulent transfer claims regarding the 14 transfers to the Evan Trust (counts six through nine). ECF No. 159 at 15–17. Evan argues that the 15 Evan Trust is a spendthrift trust, which is subject to a two-year statute of limitations. Id. In 16 opposition, SCC argues that the Evan Trust is not a valid spendthrift trust, so the four-year 17 statute of limitations applicable to fraudulent transfers generally applies. ECF No. 177 at 12. 18 Under Nevada law, fraudulent transfer claims raised under § 112.180(1)(a) are subject to 19 two statutes of limitation. NRS 112.230(1)(a) governs fraudulent-transfer claims generally, 20 requiring that claims be brought “within 4 years after the transfer was made or the obligation 21 was incurred or, if later, within 1 year after the transfer or obligation was or could reasonably 22 have been discovered by the claimant.” NRS 112.230(1)(a). But where there is a fraudulent 23 transfer of property to a spendthrift trust a much shorter statute of limitations under NRS 24 166.170 applies. It requires that claims be brought within “two years after the transfer is made” 25 or “six months after the person discovers or reasonably should have discovered the transfer.” 26 1 NRS 166.170 et seq. Accordingly, I must determine whether the Evan Trust is a valid spendthrift 2 trust. 3 “[A] spendthrift trust is defined to be a trust in which by the terms thereof a valid 4 restraint on the voluntary and involuntary transfer of the interest of the beneficiary is 5 imposed.” NRS 166.020. In other words, spendthrift trusts protect against a beneficiary’s 6 transfer of interests. See Klabacka v. Nelson, 394 P.3d 940, 950–51 (Nev. 2017) (discussing purpose 7 of and the legislative history of Nevada's statutory framework of protecting trust assets from 8 creditors). No specific language is necessary to create a spendthrift trust. NRS 166.050. Instead, 9 a spendthrift trust is created “if by the terms of the writing (construed in the light of [NRS 10 Chapter 166] if necessary) the creator manifests an intention to create such a trust.” Id. If the 11 spendthrift provisions are valid, neither the beneficiary nor the beneficiary’s creditors may reach 12 the property within the trust. NRS 166.120(1). 13 Evan argues that the Evan Trust is a Nevada spendthrift trust because Andrew included 14 a spendthrift provision in the trust instrument, Andrew subjected the trust to Nevada law, and 15 the trust contains at least three valid restraints on the voluntary and involuntary transfer of 16 trust assets to the beneficiary. ECF No. 159 at 13. Evan argues that “[t]he fact that he is both the 17 [t]rustee and beneficiary is of no consequence” because the trust imposes restraints on his 18 ability to make distributions. Id. at 13–14. But In re Frei Irrevocable Trust states otherwise. 390 P.3d 19 646 (Nev. 2017). In that case, the Supreme Court of Nevada held that a spendthrift trust 20 becomes invalid once a beneficiary is entitled to have the trust principal conveyed to them. 390 21 P.3d at 653–54 (citing Restatement (Second) of Trusts § 153(2) (1959)). “The beneficiary does 22 not need to actually exercise the right of distribution, only possess it.” Id. (citing See In re Estate of 23 Beren, 321 P.3d 615, 622 (Colo. App. 2013). Under the Restatement (Third) of Trusts, a 24 spendthrift trust is invalid if the beneficiary has the “equivalence of ownership,” and can demand 25 immediate distribution of the property. Restatement (Third) of Trusts § 58 (2003), Comment on 26 Subsection (1)b & b(1). “The rationale for these rules is that a valid spendthrift trust restrains 1 both voluntary and involuntary attachments or distributions of a trust. It not only prevents 2 creditors from attaching the beneficiaries’ assets, but restrains the beneficiary from distributing 3 assets as well.” In re Residuary Trust Established Under the Will of Rintz, 2007 Phila. Ct. Com. Pl. LEXIS 4 254, at *13 (June 19, 2007). 5 Courts are consistent on valid spendthrift trusts containing restraints on both voluntary 6 or involuntary attachments or distributions of the trust. For example, in In re Bottom, the Florida 7 Northern Bankruptcy Court found that if a beneficiary exercises absolute dominion and control 8 over the trust property, the trust can no longer be considered spendthrift. In re Zabelski, 81 B.R. 9 89, 90 (Bankr. N.D. Fla. 1988) (citing In re Lichstrahl, 750 F.2d 1488, 1490 (11th Cir. 1985)). And in 10 In re Schwen, the Minnesota Bankruptcy Court found that “[t]he purpose of a spendthrift trust is 11 to protect the beneficiary from himself and his creditors” and “fails where the beneficiary 12 exercises dominion or control over the property of the trust.” Schwen v. Ramette (In re Schwen), 240 13 B.R. 754, 757 (Bankr. D. Minn. 1999) (citing In re Cattafi, 237 B.R. 853 (Bankr. M.D. Fla. 1999)). 14 Evan argues that Frei does not stand for the proposition that the sole beneficiary of a 15 spendthrift trust cannot serve as its sole trustee, but rather that a trustee cannot be the sole 16 beneficiary without restraints on the trustee’s power of distribution. ECF No. 224 at 8. But 17 Evan’s own motion contradicts that argument. Using his argument and inserting Evan’s first 18 name in the place of “Evan’s trust” as the “trustee” and “beneficiary,” respectively, the trust reads 19 as follows: 20 “the Trust endows only [Evan] with the power to make distributions and explicitly precludes Evan, as beneficiary, from demanding that [Evan] make such 21 distributions to him[self].” 22 ECF No. 159 at 14 (emphasis added). 23 24 25 26 1 Turning to the trust’s language, and using Evan’s name rather than title, the Evan Trust 2 states that during Evan’s life: 3 1. [Evan] may, but shall not be required to distribute to any one or more of [Evan] and [Evan’s] descendants as much of the net income and principal of the 4 trust as [Evan] may at any time and from time to time determine, in such amounts or proportions as [Evan] may from time to time select for the recipient’s health, 5 education, maintenance or support in his or her accustomed manner of living. 6 . . . 3. Without limiting [Evan’s] discretion, [Evan] may consider the needs of 7 [Evan] as more important than the needs of [Evan’s] descendants or of any other beneficiary. 8 9 Evan Trust, Defs.’ Ex. 1, ECF No. 159-1 at 8 (emphasis added). So while it appears there are 10 restraints on the funds, the restraints are broadly defined and permit distribution for almost 11 any reason. Indeed, the plain language of the Evan Trust allows Evan to distribute funds to 12 himself for at “his discretion,” for “his needs,” and “without limitation.” 13 Further, I do not read Frei to hold that a spendthrift trust will maintain its spendthrift 14 protection, even when a trustee is a beneficiary, when the trust restrains the trustee’s 15 discretion to distribute funds. The Supreme Court of Nevada was clear: “[o]nce a beneficiary is 16 entitled to have the trust principal conveyed to him or her, however, any spendthrift 17 protection becomes invalid.” In re Frei Irrevocable Tr., 390 P.3d at 651. That is precisely the 18 situation with the Evan Trust. 19 Accordingly, while the Evan Trust contains a spendthrift provision, it is not a valid 20 spendthrift trust because it gives Evan, as trustee, the right to distribute trust funds to himself, 21 as a beneficiary. Accordingly, transfers to the Evan Trust are not subject to the special two- 22 year statute of limitations set forth in NRS 166.170(1).4 23 24 25 4 Because the statute of limitations outlined in Nev. Rev. Stat. § 166.170(1) does not apply, I decline to 26 address Evan’s related arguments. ECF No. 159 at 15–20. This determination also moots the court’s need to address SCC’s equitable estoppel and equitable tolling arguments. ECF No. 177 at 20 23. – 1 Because all the subject transfers occurred within the applicable four-year statute of 2 limitations, Evan’s argument that SCC’s fraudulent transfer claims (counts six through nine) are 3 time barred fails. 4 5 Evan argues that SCC failed to plead its fraudulent conveyance claims as to the “other 6 transfers” and “nonprobate transfers” to the Evan Trust, with sufficient particularity under 7 Federal Rule of Civil Procedure 9. ECF No. 159 at 20–21. SCC responds that Evan failed to 8 explain how or why SCC’s allegations regarding the “other transfers” and “nonprobate transfers” 9 fall within the definition of fraud or mistake. ECF No. 177 at 23. Still, SCC argues that it 10 adequately pled the fraudulent conduct of the Fonfa family and their efforts to conceal transfers. 11 Id. at n.81. 12 Rule 9 provides that, “[i]n alleging fraud or mistake, a party must state with particularity 13 the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). But it clarifies that 14 “[m]alice, intent, knowledge, and other conditions of a person’s and may be alleged generally.” 15 Id. Plaintiffs must also allege the who, what, when, where, and how of the misconduct, and set 16 forth what is false or misleading about a statement, and why it is false. Vess v. Ciba-Geigy Corp. 17 USA, 317 F.3d 1097, 1103 (9th Cir. 2003). 18 Here, the complaint adequately alleges who made the transfer, what transfer occurred, 19 when the transfer occurred, where the transfer originated, and how the transfer occurred, 20 sufficiently complying with Rule 9. SAC, ECF No. 147 at ¶¶ 46–97; 126–222. Therefore, Evan’s 21 motion fails on this ground. 22 C. Tenth claim for relief 23 Evan argues that SCC failed to set forth sufficient factual allegations within its tenth 24 cause of action to survive dismissal under Rule 12(b)(6) because the complaint fails to 25 adequately satisfy Rule 12(b)(6), Rule 8, and because it is allegedly barred by Nevada law. ECF 26 No. 159 at 21–23. 1 In the tenth claim, SCC alleges that Evan and the Fonfa Trust avoided transfers in 2 violation of NRS 111.700 et seq. SAC, ECF No. 147 at ¶¶ 314–24. NRS 111.779 provides that “a 3 transferee of a nonprobate transfer is liable to the probate estate of the decedent for all allowed 4 claims against that decedent’s probate estate to the extent the estate is insufficient to satisfy 5 those claims.” NRS 111.779(1). And the statute allows creditors to collect on such nonprobate 6 transfers. NRS 111.779(8). 7 The court addresses each of Evan’s arguments in turn. 8 9 Evan argues that the tenth claim fails because SCC did not allege facts sufficient to 10 demonstrate the plausibility of the claim to satisfy Rule 12(b)(6) and Rule 8. ECF No. 159 at 22. 11 Evan argues that “‘case law does not permit plaintiffs to rely on anticipated discovery to satisfy 12 Rules 8 and 12(b)(6); rather, pleadings must assert well-pleaded factual allegations to advance 13 to discovery.’” Id. (quoting Whitaker v. Tesla Motors, Inc., 985 F.3d 1173, 1176 (9th Cir. 2021)) 14 (internal quotations and citations omitted). 15 Rule 12(b)(6) is read in conjunction with Rule 8. Ileto v. Glock Inc., 349 F.3d 1191, 1199–1200 16 (9th Cir. 2003). Rule 12(b)(6) authorizes courts to dismiss a complaint that fails “to state a 17 claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). Rule 8(a) requires only “a short 18 and plain statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 19 8(a)(2). Rule 8 does not require detailed factual allegations but still “demands more than an 20 unadorned, the-defendant-unlawfully-harmed-me accusation.” Ashcroft, 556 U.S. at 678 21 (citing Twombly, 550 U.S. at 555). “A pleading that offers ‘labels and conclusions’ or ‘a formulaic 22 recitation of the elements of a cause of action will not do.’” Id. (quoting Twombly, 550 U.S. at 23 555). 24 Here, the tenth claim alleges that “some of the transfers from Andrew to Evan and the 25 Evan Trust were nonprobate transfers upon death as contemplated by NRS 111.700 and included 26 such devices as ‘pay on death designations’ or ‘POD designations.’” SAC, ECF No. 147 at ¶ 315. It 1 further alleges that “Evan and the Evan Trust, as the recipients of nonprobate transfers, are liable 2 to the Fonfa Estate because, as Jodi’s estate inventories show, the assets of the Fonfa estate are 3 insufficient to pay all of the claims asserted against the Estate.” Id. at ¶ 316. And it alleges that 4 SCC has a right to recover from Evan and the Evan Trust any monies transferred from Andrew, 5 at the time of Andrew’s death, to Evan or the Evan Trust, if the transfer falls within a transfer 6 prohibited by NRS 111.700. SAC, ECF No. 147 at ¶ 321–24. And paragraphs 71–97 of the SAC 7 outline the alleged transfers to Evan and the Evan Trust. Id. at ¶ 71–97. Those allegations include 8 that “Evan Fonfa also received $8,300 from account(s) owned by Andrew Fonfa (as payable 9 upon death) when such funds should have been retained by the Estate of Andrew Fonfa to pay 10 pre-existing debts that Andrew Fonfa (now his Estate) owed, including the debt owed to SCC 11 under the terms of the Guaranty.” Id. at ¶ 93. And that “Andrew may have transferred additional 12 assets to Evan, the Evan Trust and/or third parties for the benefit of Evan, the Evan Trust, or 13 such third parties” and “Evan and/or the Evan Trust were the recipients of one or more 14 nonprobate transfers upon death from Andrew.” Id. at ¶¶ 94–95. And finally, that “transfers to 15 Evan and/or the Evan Trust, including the nonprobate transfers upon death, are referred to as 16 the ‘Evan Transfers.’” Id. at ¶ 96. Accepting these factual allegations as true and viewing them in 17 the light most favorable to SCC, I find that SCC adequately pled its tenth claim for relief at this 18 stage. It is well settled that when a complaint pleads sufficient facts “to raise a right to relief 19 above the speculative level,” a court may not dismiss the complaint under 12(b)(6). See Twombly, 20 550 U.S. at 555. Therefore, Evan’s motion is denied on this ground. 21 22 Evan argues that NRS 111.779(12)(a)(6) and NRS 166.170 preclude SCC’s tenth claim and 23 argue that the claim and the Evan Trust should be dismissed as a result. ECF No. 159 at 19. 24 Specifically, Evan argues that NRS 111.779 bars the claim because SCC seeks to avoid nonprobate 25 transfers made to the trust, which Evan argues is a valid spendthrift trust. Id.; ECF No. 224 at 19. 26 NRS 111.779(12)(a)(6) precludes a creditor from making a claim against “[a]n irrevocable trust or amounts payable from a trust if the trust was properly created as a valid spendthrift trust under chapter 2|| 166 of NRS, except with respect to property transferred to the trust by the decedent to the extent permitted under subsections 1, 2 and 3 of NRS 166.170.” (emphasis added). Because the Evan Trust is not a valid spendthrift trust, NRS 111.779(12)(a)(6) does not apply here. Therefore, 5]| Evan’s motion is denied on this ground. Conclusion 7 THEREFORE, Evan's motion to dismiss [ECF No. 159] is DENIED in full. 8 Dated: August 28, 2024 /, / athic— Cristi . Silva 10 United States District Judge ll 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 ll