In re: RUDOLPH MEDINA A.K.A. Rudy Medina

FILED
AUG 14 2020
ORDERED PUBLISHED SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. SC-19-1299-FSG
RUDOLPH MEDINA a.k.a. Rudy Medina,
Debtor. Bk. No. 12-13764-LT7
RONALD E. STADTMUELLER, Chapter 7 Adv. No. 18-90039-LT
Trustee,
Appellant,
v. OPINION
JOHN SARKISIAN; BERNADETTE
SARKISIAN,
Appellees.
Appeal from the United States Bankruptcy Court
for the Southern District of California
Laura S. Taylor, Bankruptcy Judge, Presiding
APPEARANCES:
Melissa A. Blackburn Joniaux of Law Offices of William P. Fennell, APLC
argued for appellant; Melisa N. McKellar of Grant & Kessler APC argued
for appellees.
Before: FARIS, SPRAKER, and GAN, Bankruptcy Judges.
FARIS, Bankruptcy Judge:
INTRODUCTION
Chapter 71 trustee Ronald E. Stadtmueller (“Trustee”) holds a money
judgment. While he was attempting to enforce the judgment, the judgment
debtor and his wife entered into an agreement to split their community
property in equal shares and “transmute” their interests into separate
property. The judgment debtor and his wife then claimed that the Trustee
could not enforce the judgment against the wife’s “transmuted” separate
property. (Under California law, community property is subject to each
spouse’s debts, but separate property is not subject to the other spouse’s
separate debts.) If the agreement were effective, the assets available to
satisfy the Trustee’s judgment would have been cut in half.
The Trustee argued that the transmutation was voidable under the
California Uniform Voidable Transactions Act (“UVTA”). The bankruptcy
court held that the transmutation agreement between the judgment debtor
and his wife constituted a “transfer” under the UVTA. However, it held
that the Trustee had to prove actual damages and rejected the Trustee’s
argument that moving half of the judgment debtor’s property out of the
Trustee’s reach established injury under the UVTA. The court granted
summary judgment in favor of the judgment debtor and his wife, and the
1
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532, all “Rule” references are to the Federal Rules
of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal Rules of
Civil Procedure.
2
Trustee appealed.
The UVTA does not require a plaintiff to prove actual damages.
Accordingly, it was error to grant summary judgment in favor of the
judgment debtor and his wife. We REVERSE and REMAND.
FACTUAL BACKGROUND
A. Mr. Medina’s bankruptcy case and ongoing state court litigation
When debtor Rudolph Medina filed a chapter 11 petition, he was
litigating a state court lawsuit against John Sarkisian (the “State Court
Action”). The bankruptcy court authorized him to retain counsel and
continue the State Court Action.
Later, Mr. Medina obtained a partial judgment against Mr. Sarkisian
in an approximate net amount of $1.4 million. Mr. Sarkisian appealed.
A few months later, the bankruptcy court converted the case to one
under chapter 7 and appointed the Trustee to administer the estate. The
Trustee also received court approval to employ counsel and pursue the
State Court Action.
B. The Sarkisians’ Transmutation Agreement
While the appeal in the State Court Action was pending, the Trustee
conducted a judgment debtor examination of Mr. Sarkisian. He testified
that he did not have any pre- or post-marital agreement with his wife.
Less than a month after the judgment debtor examination, and
unbeknownst to Mr. Medina or the Trustee, Mr. Sarkisian and his wife
3
entered into an agreement (the “Transmutation Agreement”). The
Transmutation Agreement provided that each of the Sarkisians would
obtain a fifty percent interest in each item of their community property,2
and each spouse’s share would be converted to separate property.
According to the Transmutation Agreement, Mr. Sarkisian’s separate assets
totaled approximately $3.8 million plus a half-interest in a limited liability
corporation and a family trust of undisclosed value. The Transmutation
Agreement also listed the couple’s obligations in an approximate aggregate
amount of $4.1 million.
C. The Trustee’s adversary proceeding
After the appeal was decided, the state court entered a modified
judgment in favor of Mr. Medina for $1,718,271 and in favor of
Mr. Sarkisian for $200,000 (the “State Court Judgment”). That judgment is
final and no longer appealable.
The Trustee then conducted another judgment debtor examination of
Mr. Sarkisian. He learned for the first time that the Sarkisians had executed
the Transmutation Agreement.
The Trustee filed an adversary proceeding against the Sarkisians,
asserting that Mr. Sarkisian “made the property transfers alleged herein to
2
The division was not exactly equal: Mr. Sarkisian retained a bank account with
a $5,000 balance, while Mrs. Sarkisian’s separate account contained $30,000. This
discrepancy did not affect the bankruptcy court’s decision, nor will it affect ours.
4
Bernadette Sarkisian with the actual intent to hinder, delay, or defraud” the
bankruptcy estate with regard to the State Court Judgment. The Trustee
sought avoidance of those transfers under the UVTA, California Civil Code
(“CCC”) sections 3439 to 3439.14, and other remedies.
D. The first round of summary judgment motions
On cross-motions for summary judgment, the bankruptcy court held
that “the Transmutation Agreement was a transfer for the purposes of the
UVTA. . . . The UVTA only comes into play when a property owner acts to
remove property from the reach of creditors. It is very clear that the
Transmutation Agreement did just that with respect to [Mr. Sarkisian] and
his creditors.” The court denied summary judgment in all other respects.
E. The Sarkisians’ second motion for summary judgment
Shortly after discovery closed, the Sarkisians filed another motion for
summary judgment (the “Motion”), arguing that the Trustee could not
establish that the Transmutation Agreement caused actual injury.
Citing a California model jury instruction, the Sarkisians argued that
CCC section 3439.04(a)(1) requires a showing of “actual injury.” They
relied on Mehrtash v. Mehrtash, 93 Cal. App. 4th 75, 80 (2001), in which the
California Court of Appeal stated that “[m]ere intent to delay or defraud is
not sufficient; injury to the creditor must be shown affirmatively. In other
words, prejudice to the plaintiff is essential.” They asserted that the Trustee
must prove that Mr. Sarkisian was rendered insolvent by the transfer or
5
that the transfer put a specific asset beyond the reach of the Trustee that
would have been available to pay the State Court Judgment.
In response, the Trustee argued that he had demonstrated that the
estate had been harmed. He contended that the Sarkisians’ “litigation
shenanigans” and “proficiency in obstruction” had “made the collection of
this fully liquidated fraud judgment extremely difficult.” He argued that
Mehrtash was distinguishable and that the real property at issue there was
over-encumbered and had no value as an asset. In contrast, Mr. Sarkisian’s
assets listed in the Transmutation Agreement totaled at least $3.8 million.
The bankruptcy court issued a tentative ruling and stated that it was
inclined to grant the Motion because “[t]he Trustee has identified no
evidence that this bankruptcy estate suffered any injury by virtue of the
transmutation.” The court cited Mehrtash and its progeny for the
proposition that “injury to the creditor must be shown affirmatively.” It
was concerned with the Trustee’s failure to offer any evidence of injury,
such as the lack of enough funds to satisfy Mr. Sarkisian’s obligations post-
transfer.
At the hearing on the Motion, the court acknowledged that the
Transmutation Agreement put certain assets out of reach of the bankruptcy
estate but found that there was “cushion” to satisfy the State Court
Judgment. Thus, it concluded that there was no injury because the transfer
did not make collection more difficult or render Mr. Sarkisian unable to
6
pay his debts.
The bankruptcy court granted the Motion in its entirety as to all
claims. It incorporated its tentative ruling into its order and held that “one
of the elements of a UVTA claim is that Plaintiff must have suffered actual
damages as result of the alleged voidable transaction . . . . [B]ecause
Plaintiff failed to set forth any evidence of damages, the Court finds that
there is no genuine dispute as to the essential element of damages . . . .”
The Trustee timely appealed.3
JURISDICTION
The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334
and 157(b)(2)(H). We have jurisdiction under 28 U.S.C. § 158.
ISSUE
Whether the bankruptcy court erred in granting the Sarkisians
summary judgment.
STANDARD OF REVIEW
We review de novo the bankruptcy court’s decision to grant or deny
summary judgment. Boyajian v. New Falls Corp. (In re Boyajian), 564 F.3d
1088, 1090 (9th Cir. 2009). “De novo review requires that we consider a
matter anew, as if no decision had been made previously.” Francis v.
Wallace (In re Francis), 505 B.R. 914, 917 (9th Cir. BAP 2014) (citations
3
The Sarkisians did not cross-appeal from the order determining that the
Transmutation Agreement amounted to a “transfer” for purposes of the UVTA.
7
omitted).
DISCUSSION
A. Only “material” facts are properly considered in summary
judgment proceedings.
Summary judgment should be granted “if the movant shows that
there is no genuine issue as to any material fact and the movant is entitled
to judgment as a matter of law.” Wank v. Gordon (In re Wank), 505 B.R. 878,
886 (9th Cir. BAP 2014) (citing Civil Rule 56(a), made applicable in
adversary proceedings by Rule 7056). An issue is “material” if it might
legally affect the outcome of the case. Far Out Prods., Inc. v. Oskar, 247 F.3d
986, 992 (9th Cir. 2001) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
248-49 (1986)).
A nonmoving party who bears the burden of proof at trial must make
a “sufficient showing” that he can establish an element of his case at trial.
Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). But this only applies if
the fact is “material,” i.e., if it relates to an element of the nonmoving
party’s prima facie case.
Thus, to determine what facts were material, we must identify the
elements of the Trustee’s case under the UVTA.
B. The bankruptcy court erred in requiring the Trustee to prove
“actual harm” or “actual damages” under the UVTA.
Under the UVTA, “actual damages” or the insufficiency of the
debtor’s remaining assets is not an element of an actual intentional
8
fraudulent transfer claim. Requiring the Trustee to provide evidence of a
fact that is not material was error.
1. Actual damages or harm is not an element of an “actual”
fraudulent transfer claim under the UVTA.
To construe the UVTA,4 we begin (as we must) with the statute’s
language. See Poole v. Orange Cty. Fire Auth., 61 Cal. 4th 1378, 1384 (2015)
(When interpreting a statute, “[w]e begin with the plain language of the
statute, affording the words of the provision their ordinary and usual
meaning and viewing them in their statutory context, because the language
employed in the Legislature’s enactment generally is the most reliable
indicator of legislative intent.” (citation omitted)).
CCC section 3439.04(a)(1) provides that creditors may avoid what are
often called “actual” fraudulent transfers:
4
The UVTA is a relatively new statute with ancient roots. The UVTA, adopted in
California in 2015 and effective January 1, 2016, is a renamed and slightly revised
version of the Uniform Fraudulent Transfers Act (“UFTA”), which California enacted in
1986. The UFTA replaced the Uniform Fraudulent Conveyances Act (“UFCA”), which
was adopted in California in 1939. The provisions of UVTA, UFTA, and UFCA that are
relevant to this appeal are identical in substance. Further, the UFCA is not the
beginning of the story: it “was a codification of the ‘better’ decisions applying the
Statute of 13 Elizabeth.” Prefatory Note (1984), Unif. Voidable Transactions Act,
https://www.uniformlaws.org/HigherLogic/System/DownloadDocumentFile.ashx?Doc
umentFileKey=1a5715f1-679d-1a43-e82c-c2aaa2238f86&forceDialog=0. That statute was
adopted in England in 1571 and became the law of every American jurisdiction. In other
words, the law governing this case is at least 450 years old. See Twyne’s Case (Star
Chamber 1601) 76 Eng. Rep. 809, 3 Coke 80b.
9
(a) A transfer made or obligation incurred by a debtor is
voidable as to a creditor, whether the creditor’s claim arose
before or after the transfer was made or the obligation was
incurred, if the debtor made the transfer or incurred the
obligation as follows:
(1) With actual intent to hinder, delay, or defraud any
creditor of the debtor.
CCC section 3439.04(a)(1). The UVTA defines the key term “transfer” as
follows:
“Transfer” means 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, and includes
payment of money, release, lease, license, and creation of a lien
or other encumbrance.
CCC section 3439.01(m). The term “asset” is defined in a specific way that
differs from its common meaning:
“Asset” means property of a debtor, but the term does not
include the following:
(1) Property to the extent it is encumbered by a valid lien.
(2) Property to the extent it is generally exempt under
nonbankruptcy law.
(3) An interest in property held in tenancy by the
entireties to the extent it is not subject to process by a
creditor holding a claim against only one tenant.
CCC section 3439.01(a).
In short, under the plain language of the statute, the Trustee had to
10
prove only three things: that the Transmutation Agreement operated as a
(1) “transfer” of an (2) “asset” and was (3) “made . . . with actual intent to
hinder, delay, or defraud any creditor of the debtor.” No statutory
language supports a requirement that the plaintiff prove damages or actual
injury5 or that the debtor’s remaining assets after the transfer were
insufficient to satisfy the debt without undue burden.
It is significant that, when the legislature wanted to require a
showing that the debtor had insufficient assets, it did so unambiguously.
CCC section 3439.04(a)(2) permits the avoidance of “constructive”
fraudulent transfers (i.e., transfers that are voidable without proof of actual
intent to hinder, delay, or defraud):
A transfer made or obligation incurred by a debtor is voidable
as to a creditor, whether the creditor’s claim arose before or
after the transfer was made or the obligation was incurred, if
the debtor made the transfer or incurred the obligation as
follows:
5
The Sarkisians argue that the plain language of CCC section 3439.04(a)(1) only
provides that a transfer is “voidable” (as opposed to “void”) and that the use of the
discretionary term means that the Trustee must still establish actual damages before the
transfer can be set aside. We reject this argument. By referring to a “voidable” transfer
in the UFTA, “the legislature intended it to be a limited exception to the general rule
that, by nature, fraudulent transfers are void ab initio, in order to restrict the ability of a
creditor in an avoidance action to set aside a fraudulent transfer to a good faith
purchaser for reasonably equivalent value.” Daff v. Wallace (In re Cass), 476 B.R. 602, 617
(Bankr. C.D. Cal. 2012), aff’d, 2013 WL 1459272 (9th Cir. BAP Apr. 11, 2013), aff’d, 606 F.
App’x 318 (9th Cir. 2015). There is no reason to think that, when it used the term
“voidable,” the legislature intended to give courts discretion or impose an unwritten
“actual damages” element.
11
...
(2) Without receiving a reasonably equivalent value in
exchange for the transfer or obligation, and the debtor
either:
(A) Was engaged or was about to engage in a
business or a transaction for which the remaining
assets of the debtor were unreasonably small in
relation to the business or transaction.
(B) Intended to incur, or believed or reasonably
should have believed that the debtor would incur,
debts beyond the debtor’s ability to pay as they
became due.
(Emphases added.)
Similarly, CCC section 3439.05(a) permits the avoidance of another
kind of “constructive” fraudulent transfer. It expressly requires the creditor
to prove the debtor’s financial condition at the time of or after the
transaction:
A transfer made or obligation incurred by a debtor is voidable
as to a creditor whose claim arose before the transfer was made
or the obligation was incurred if the debtor made the transfer or
incurred the obligation without receiving a reasonably
equivalent value in exchange for the transfer or obligation and
the debtor was insolvent6 at that time or the debtor became
insolvent as a result of the transfer or obligation.
(Emphasis added.)
6
“A debtor is insolvent if, at a fair valuation, the sum of the debtor’s debts is
greater than the sum of the debtor’s assets. . . . A debtor that is generally not paying the
debtor’s debts as they become due other than as a result of a bona fide dispute is
presumed to be insolvent.” CCC section 3439.02(a), (b).
12
The legislature explicitly provided that “constructive” fraudulent
transfers are not avoidable unless the creditor proves that (put simply) the
debtor’s financial condition was bad at the time of the transfer or was made
worse by the transfer. The legislature made no such provision with respect
to actual fraudulent transfers. We must assume that this omission was
deliberate and meaningful. See Azusa Land Partners v. Dep’t of Indus.
Relations, 191 Cal. App. 4th 1, 20 (2010) (“[W]hen the Legislature has
carefully employed a term in one place and has excluded it in another, it
should not be implied where excluded.” (citation and internal quotation
marks omitted)).7
7
Section 3439.08(a) reinforces this conclusion by showing that the legislature
knew how to impose a financial condition requirement in a sophisticated way. It
provides that:
A transfer or obligation is not voidable under paragraph (1) of subdivision
(a) of Section 3439.04, against a person that took in good faith and for a
reasonably equivalent value given the debtor or against any subsequent
transferee or obligee.
In other words, if the debtor made an actual fraudulent transfer, but the
transferee acted in good faith and paid “reasonably equivalent value” for the
transferred asset, the transfer is not avoidable. At first blush, this appears to be an
“actual injury” requirement: if the debtor received “reasonably equivalent value” in
exchange for the transfer, the transfer did not harm the debtor’s financial condition. But
it is not only an “actual injury” requirement: even if the transferee paid full value for
the asset, such that the transfer had no net negative effect on the transferor’s financial
condition, the transferee still has to give up the transferred asset if the transferee did not
act in “good faith.” Further, section 3439.08(a) is an affirmative defense, not an element
of the creditor’s case: the transferee has the burden of proof under that section.
CCC section 3439.08(f). Imposing an extratextual blanket “actual damages” requirement
would disrupt the careful balance that the legislature struck in this section.
13
This is not to say, however, that the transferor’s insolvency is
completely irrelevant to an “actual” fraudulent transfer claim. The creditor
must establish that the transfer was made with “actual intent to hinder,
delay or defraud” creditors. Because transferors rarely admit that they
acted with bad intent, the UVTA and its ancestors permit the creditor to
prove intent using circumstantial evidence, and they provide a
nonexclusive list of circumstances relevant to the intent determination.
These include the value of the property transferred and “[w]hether the
debtor was insolvent or became insolvent shortly after the transfer was
made.” CCC section 3439.04(b)(5), (8), (9).8
In short, the statutory text does not make damages or “actual injury”
an element of an “actual” fraudulent transfer claim that a creditor such as
the Trustee must prove.
2. California case law does not support an extratextual “actual
damages” requirement in actual fraudulent transfer cases.
California courts have held, under the UVTA’s statutory ancestors,
8
Further, the creditor must prove that there was a “transfer.” This requires proof
that the transferred property was an “asset” within the statutory definition, meaning
that the property was not overencumbered or exempt. In this case, however, the
bankruptcy court has already determined that the Transmutation Agreement operated
as a “transfer” under the UVTA, and the Sarkisians did not cross-appeal.
Finally, if a court were convinced that the avoidance action was unnecessary and
was brought to harass the debtor or for another improper purpose, the court could
impose sanctions under Rule 9011 and similar provisions. See In re Brooks-Hamilton, 400
B.R. 238, 249 (9th Cir. BAP 2009).
14
that actual harm is not an element of an actual fraudulent transfer claim.
For example, in Fross v. Wotton, 3 Cal. 2d 384 (1935), the bankruptcy trustee
alleged “an actual intent on the part of [transferor] to hinder, delay, and
defraud his creditors by means of the conveyances attacked.” Id. at 386. The
California Supreme Court rejected the argument that the transfer was not
fraudulent because the debtor could satisfy the debt: “We do not regard the
failure of appellant to show that the security was insufficient to satisfy the
debt at the time of the conveyances as fatal to his case . . . .” Id. at 387.
Rather, it held that:
We understand the true rule to be that amply secured debts are
not to be taken into consideration for the purpose of
determining whether the financial condition of the grantor
renders the conveyance presumptively fraudulent as to existing
creditors, but that when actual fraud is charged the sufficiency
of the security at the time of the conveyance is important only
as evidencing the existence or nonexistence of a fraudulent
intent. This is in accordance with the long-established rule in
this state that where there is actual fraud it is immaterial that
the debtor does not entirely strip himself of his assets and
there is other property from which the creditor may be
satisfied.
Id. at 388 (emphases added); see, e.g., Johns v. Baender, 40 Cal. App. 790, 792
(1919) (“[I]f a conveyance be made with the intent to defraud creditors it is
void, notwithstanding that the debtor has other property ample in amount
15
to satisfy his creditor.”).9
Fross remains good law. See, e.g., Reddy v. Gonzalez, 8 Cal. App. 4th
118, 123 (1992) (“If there is actual fraud a creditor can maintain an action to
set aside the transfer without a showing that the defendant has no other
assets to satisfy his judgment.” (citation omitted)); Cooper v. Cooper, 168 Cal.
App. 2d 326, 335 (1959) (“The court found that [transferor] was solvent at
the time the property was purchased. The fact that [transferor] was not
rendered insolvent by the purchase is immaterial if the intent of the debtor
to hinder, delay, or defraud fraud a creditor is shown.”); Freeman v. La
Morte, 148 Cal. App. 2d 670, 675 (1957) (“Furthermore the transfer could be
set aside if there was an actual intent to defraud although [transferor] was
not rendered insolvent.”); Maguire v. Corbett, 119 Cal. App. 2d 244, 251
(1953) (“[I]t is settled that if the intent of the debtor to hinder or delay
creditors is shown, it is not necessary to prove that the debtor was
insolvent at the time.”).10
9
Fross and Johns predate California’s adoption of the UFCA in 1939. Prior to the
UFCA, CCC section 3439 (enacted 1872) provided that “[e]very transfer of property . . .
with intent to defray or defraud any creditor or other person of his demands, is void
against all creditors of the debtor . . . .” There is no substantive difference between this
language and the words of CCC section 3439.04(a)(1).
10
These cases were decided under the UFCA and UFTA, which were
substantially identical to CCC section 3439.04(a)(1) of the UVTA. Section 7 of the UFCA
provided that “[e]very conveyance made and every obligation incurred with actual
intent, as distinguished from intent presumed by law, to hinder, delay, or defraud
(continued...)
16
Federal courts applying California law have reached the same result.
See Palmdale 3D, LLC v. Calamos, No. CV-14-7523-MWF (PLAx), 2015 WL
71561, at *5 (C.D. Cal. Jan. 5, 2015) (“The debtor’s intent is the crucial aspect
of a fraudulent conveyance claim.” (citation omitted)); In re Liquimatic Sys.,
Inc., 194 F. Supp. 625, 628 (S.D. Cal. 1961) (“[A] transfer made with actual
intent to defraud creditors is fraudulent as to any creditor, regardless of
whether the debtor-transferor was insolvent at the time of the transfer.”
(citations omitted)); see also First Presbyterian Church of Santa Barbara v.
Rabbitt, 118 F.2d 732, 735 (9th Cir. 1940) (construing California law and
stating that, “if the deed was made with intent, on the part of both
[transferor] and appellant, to defraud [transferor’s] creditors, it was void
against them and against appellee, regardless of whether there was or was
not a valuable consideration, and regardless of [transferor’s] solvency or
insolvency”).11
10
(...continued)
either present or future creditors, is fraudulent as to both present and future creditors.”
Section 4 of the UFTA is nearly verbatim to the UVTA.
11
Courts construing the nearly identical language of § 548(a)(1) of the
Bankruptcy Code reach the same conclusion. See Brown v. Third Nat’l Bank (In re
Sherman), 67 F.3d 1348, 1355 n.6 (8th Cir. 1995) (“The [transferees] also argue that the
transfers cannot be avoided as fraudulent because no creditor was harmed. However,
the bankruptcy court correctly noted that under § 548(a)(1), actual harm is not required;
the trustee must show only that the debtor acted with the intent to hinder, delay or
defraud creditors.”).
17
3. The authorities cited by the Sarkisians are unpersuasive.
The authorities cited by the Sarkisians do not convince us that
damages or actual harm is an element of an actual fraudulent transfer
claim.
a. Mehrtash
The Sarkisians rely on Mehrtash, where a creditor sought to avoid as
fraudulent her former husband’s transfer of a house to his adult stepsons.
The former husband purchased the house for no more than $551,000 and
quitclaimed the house to the stepsons a few months later. At that time, the
property was subject to liens amounting to about $610,000 and a $125,000
homestead exemption. The Court of Appeal affirmed the superior court’s
holding that she had failed to allege any injury from the fraudulent
transfer, framing the rule as follows:
A transfer in fraud of creditors may be attacked only by one
who is injured thereby. Mere intent to delay or defraud is not
sufficient; injury to the creditor must be shown affirmatively. In
other words, prejudice to the plaintiff is essential. It cannot be
said that a creditor has been injured unless the transfer puts
beyond [her] reach property [she] otherwise would be able to
subject to the payment of [her] debt.
93 Cal. App. 4th at 80 (citations omitted) (emphasis added). The court held
that she was not injured by the transfer because she would not receive
anything even if it undid the fraudulent transfer: she failed to offer
“evidence that the value of the property could support any net recovery for
18
her in the event the conveyance were set aside. The trial court was
authorized to consider this a failure by plaintiff to prove an essential
element of her case (that the allegedly fraudulent conveyance injured
her) . . . .” Id. at 81.
Contrary to the Sarkisians’ argument, Mehrtash does not stand for the
proposition that the UVTA includes a free-floating “actual injury” element.
To make this argument, one has to read only the first three sentences of the
paragraph quoted above and ignore the fourth sentence. Under Mehrtash,
all that the plaintiff must prove is that the transfer put beyond the
creditor’s reach property that the creditor could otherwise have seized.12
This result is perfectly consistent with the plain language of the
UVTA. As we have explained, property is not treated as an “asset” for
purposes of the UVTA “to the extent it is encumbered by a valid lien [or]
generally exempt under nonbankruptcy law.” In Mehrtash, because the
amount of the liens on the house and the homestead exemption exceeded
the property’s value, the house was not an “asset” that could be the subject
12
The cases on which the Mehrtash court relied support this reading. In Bennett v.
Paulson, 7 Cal. App. 2d 120 (1935), a creditor challenged as fraudulent the debtor’s
transfer of a partnership interest. The trial court found that the liabilities of the
partnership exceeded its assets, so the partnership interest had no value. The court of
appeals held that, “[t]here being sufficient evidence to sustain the . . . findings, [the
creditor] was not entitled to have said transfer set aside.” Id. at 122. Haskins v. Certified
Escrow & Mortgage Co., 96 Cal. App. 2d 688, 692 (Cal. App. 1950), holds that the transfer
of a right of redemption cannot be a fraudulent transfer because the creditors could not
reach that right by legal means.
19
of a fraudulent transfer under the UVTA.
The holding of Mehrtash does not support the Sarkisians’ argument or
the bankruptcy court’s analysis in this case. The Mehrtash court was
concerned with whether the creditor could have made any recovery from
the asset that was transferred; in other words, whether the transferred asset
had any net value to the creditor. In contrast, the Sarkisians and the
bankruptcy court focused on whether the creditor could still recover,
without undue difficulty, from the assets that were not transferred.
Mehrtash does not support that broader requirement.
b. Schroeder
The Sarkisians similarly rely on Fidelity National Title Insurance Co. v.
Schroeder, 179 Cal. App. 4th 834 (2009), which also concerns an allegedly
fraudulent transfer involving an asset with no equity. The Court of Appeal
said that “Mehrtash rightly affirmed the longstanding principle that
injury-in-fact is an essential element of a claim under the UFTA, and we
follow that principle in the present case. A creditor has not been injured
unless the transfer puts beyond reach property the creditor could subject
to payment of his or her debt.” Id. at 845 (citations omitted). But the court
also noted that “the injury requirement is built into the express terms of the
UFTA,” based on the statutory definition of “asset” cited above. Id. at 845-
46.
20
In order for a fraudulent transfer to occur, among other
things, there must be a transfer of an asset as defined in the
UFTA. In the definitional section of the UFTA, a “transfer” is
defined as “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 . . . .” “Asset”
means “property of a debtor, but the term does not include, the
following: [¶] (1) Property to the extent it is encumbered by a
valid lien. [¶] (2) Property to the extent it is generally exempt
under nonbankruptcy law.”
The above definitions are relevant to the question of
whether any injury occurred to the creditor as a result of the
transfer, which is a necessary element for relief under the
UFTA.
Id. at 841 (citations omitted). Therefore, because the transferred property
was subject to both a prior encumbrance and a homestead exemption, there
was no equity available for the creditor, it was not injured by the transfer,
and the property was not an “asset” under the statute. Schroeder does not
support a broader requirement of “actual damages.”
c. The model jury instruction
The Sarkisians cite model civil jury instructions issued by the Judicial
Council of California that purport to lay out the elements of an actual
fraudulent transfer claim under CCC section 3439.04(a)(1). Once again, the
Sarkisians’ argument relies on a selective quotation of the model
instruction. In full, it reads:
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[Name of plaintiff] claims [he/she/it] was harmed because
[name of debtor] [transferred property/incurred an
obligation] to [name of defendant] in order to avoid paying a
debt to [name of plaintiff]. [This is called “actual fraud.”] To
establish this claim against [name of defendant], [name of
plaintiff] must prove all of the following:
1. That [name of plaintiff] has a right to payment from [name of
debtor] for [insert amount of claim];
2. That [name of debtor] [transferred property/incurred an
obligation] to [name of defendant];
3. That [name of debtor] [transferred the property/incurred the
obligation] with the intent to hinder, delay, or defraud one or
more of [his/her/its] creditors;
4. That [name of plaintiff] was harmed; and
5. That [name of debtor]’s conduct was a substantial factor in
causing [name of plaintiff]’s harm.
To prove intent to hinder, delay, or defraud creditors, it is not
necessary to show that [name of debtor] had a desire to harm
[his/her/its] creditors. [Name of plaintiff] need only show that
[name of debtor] intended to remove or conceal assets to
make it more difficult for [his/her/its] creditors to collect
payment.
Judicial Council of California Advisory Committee on Civil Jury
Instructions (“CACI”) 4200 (emphases added).
This jury instruction is not a model of clarity, but read in its entirety,
it is consistent with our analysis of Mehrtash. Under Mehrtash, injury or
harm is shown by a transfer that put beyond the creditor’s reach assets that
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were otherwise available to the creditor. The jury instruction says that
“harm” is an element of the claim, but the first and last sentence show that
the “harm” to which the instruction refers is simply removing or
concealing assets from creditors. That is all that is required under the
UVTA.
And, in any event, model jury instructions are not binding or
unassailable statements of the law. See Clem v. Lomeli, 566 F.3d 1177, 1181
n.2 (9th Cir. 2009) (“The use of a model jury instruction does not preclude a
finding of error.” (citation omitted)); Cal. R. of Court 2.1050(b) (“The
Judicial Council endorses these instructions for use and makes every effort
to ensure that they accurately state existing law. The articulation and
interpretation of California law, however, remains within the purview of
the Legislature and the courts of review.”). If one reads CACI 4200
carefully, it is consistent with the statutory elements of an actual fraudulent
transfer claim under the UVTA. If one reads it as the Sarkisians urge, it is
incorrect and invalid.
d. Berger
Berger v. Varum, 35 Cal. App. 5th 1013 (2019), has nothing to do with
the issues in this case. In Berger, the plaintiff obtained a $2.7 million
judgment and filed a complaint alleging that the defendants had made
fraudulent transfers. The defendants eventually paid the judgment. The
plaintiff amended his complaint to acknowledge satisfaction of the
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judgment and added claims for money damages caused by the defendants’
prior efforts to frustrate collection of the judgment. The trial court ruled
that a judgment creditor has no claim for consequential or punitive
damages resulting from the defendants’ delay in paying the judgment. Id.
at 1017-18.
The Court of Appeal reversed, holding that a creditor who is the
victim of a fraudulent transfer may recover a monetary award for
consequential damages caused by a fraudulent transfer, as well as punitive
damages. The court went on to hold that the creditor had adequately
alleged the types of damages which the creditor sought to recover.
Berger stands for the obvious proposition that a party who seeks an
award of money damages must plead and prove its damages. Berger does
not state or imply, however, that a creditor seeking to avoid an actual
fraudulent transfer must prove that it suffered actual injury (apart from the
fact that the debtor transferred an “asset” as defined).
e. Avila and Colby
The Sarkisians cite two federal district court cases that quote and rely
on Mehrtash’s actual injury requirement. In Avila v. Bank of America, Case
No. 17-CV-00222-HSG, 2017 WL 4168534 (N.D. Cal. Sept. 20, 2017), the
plaintiff brought claims for fraudulent transfer against mortgagees and
their servicers who allegedly transferred their interests in the subject
property in violation of the UVTA and refused to accept his loan payments.
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The district court granted the mortgagees’ motion to dismiss, holding that
the plaintiff failed to show that he had been injured by the fraudulent
conveyance because he did not “establish an essential element of his
claim—that the allegedly fraudulent conveyance injured him. . . .” Id. at *3.
Similarly, in Colby v. Newman, Case No. CV 11-07413, 2013 WL
12125529 (C.D. Cal. Aug. 29, 2013), the district court, relying on Mehrtash,
dismissed the plaintiffs’ actual fraudulent transfer claim because “Plaintiffs
fail to allege an injury” where they alleged that they “have suffered and
continue to suffer damages in an amount to be determined at trial.” Id. at
*7. It noted that the plaintiffs failed “to allege that they were in fact
prevented from collecting the property to enforce the [asset purchase
agreement] or any future judgment in this action.” Id.
These decisions are unpublished and not binding on us. We
respectfully believe that they rest on the same incomplete quote from
Mehrtash that the Sarkisians advocate and that they cannot be reconciled
with the complete text or holding of Mehrtash, the language of the statute,
or the overwhelming weight of California appellate authority.
4. The Trustee has standing.
The Sarkisians argue that the Trustee needed to articulate an actual
injury in order to have standing to sue under the UVTA. Standing requires
that the plaintiff allege some legally protected right that is or will be
injured by the defendant. “[W]hether one has standing in a particular case
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generally revolves around the question whether that person has rights that
may suffer some injury, actual or threatened.” Clifford S. v. Super. Ct., 38
Cal. App. 4th 747, 751 (1995).
The UVTA provides that a transfer “is voidable as to a creditor[,]”
CCC section 3439.04(a) (emphasis added), which is simply defined as “a
person that has a claim[,]” CCC section 3439.01(c). The Trustee was such a
person. To establish standing, he only needed to articulate that he had
rights that could suffer a cognizable injury, that is, that he was entitled to
collect on the State Court Judgment and that Mr. Sarkisian fraudulently
transferred property with the intent of hindering, delaying, or defrauding
the estate.
CONCLUSION
The bankruptcy court erred in granting the Sarkisians summary
judgment. We REVERSE the summary judgment and REMAND the matter
to the bankruptcy court for further litigation.
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