Opinion
NOT FOR PUBLICATION
Originally Argued and Submitted at Pasadena, California, October 23, 2003
On Remand from the United States Court of Appeals for the Ninth Circuit. Appeal from the United States Bankruptcy Court for the Central District of California. Honorable Arthur M. Greenwald, Bankruptcy Judge, Presiding. Bk. No. SV 01-11666-AG. Adv. No. SV 02-01022-AG.
Before: PERRIS, MARLAR and PAPPAS, [ Bankruptcy Judges.
Hon. Jim D. Pappas, Bankruptcy Judge for the District of Idaho, sitting by designation.
MEMORANDUM
Appellant Ash is the mother of Miguel Selwyn Thomas, a debtor in a chapter 7 bankruptcy case. She appeals the bankruptcy court's judgment for the chapter 7 trustee setting aside a prepetition transfer of real property from debtor to Ash, arguing that the bankruptcy court erred in finding that the trustee had proved a fraudulent transfer. This panel reversed the bankruptcy court's judgment in November 2003. The trustee appealed to the Ninth Circuit, which remanded the appeal to us to consider the bankruptcy court's findings of fact that it made after a hearing on Ash's motion to amend the judgment. After considering the bankruptcy court's findings in denying appellant's motion to amend the judgment, we again REVERSE.
Unless otherwise indicated, all chapter and section references are to the version of the Bankruptcy Code, 11 U.S.C. § § 101-1330, in effect before the 2005 amendments.
FACTS
In 1997, debtor bought a condominium from the Secretary of Housing and Urban Development. In 1998, debtor signed a note for $44,644, secured by a Deed of Trust on the property in favor of Norwest Mortgage, Inc. Although debtor and Ash assert that Ash, not debtor, actually owned the property, the deed was in debtor's name, and he was the sole obligor on the trust deed.
On May 30, 2000, debtor conveyed the condominium to Ash by quitclaim deed, which recited that there was no consideration given for the transfer. The quitclaim deed was recorded on June 7, 2000.
In early 2001, debtor filed a chapter 7 bankruptcy petition. The chapter 7 trustee filed a complaint in the bankruptcy court, seeking to set aside the condominium transfer as a fraudulent conveyance under Cal. Civ. Code § 3439, made applicable to this bankruptcy case by Bankruptcy Code § 544(b). After a trial, the bankruptcy court entered a judgment for the trustee.
After the bankruptcy court orally issued its ruling on January 7, 2003, but before it had entered the judgment, Ash filed a motion to amend the judgment. She attached to the motion additional evidence that was not introduced at trial. The court entered its written judgment on January 22, 2003, without disposing of this motion. Ash filed a notice of appeal from the judgment on January 27, 2003. When we realized that there was an outstanding tolling motion, we remanded the case to the bankruptcy court to resolve the motion. The bankruptcy court held an evidentiary hearing on the motion to amend, at which it considered the evidence Ash had submitted with her motion, as well as additional testimony and evidence. The court denied the motion to amend on August 14, 2003, and made additional findings based on the additional evidence presented on the motion to amend.
We issued our Memorandum decision on November 12, 2003, reversing the bankruptcy court's judgment. We did not consider the evidence presented at or the findings entered after the hearing on the motion to amend, because appellant had not filed an amended notice of appeal from the bankruptcy court's ruling on the motion to amend. Neither party filed revised briefs addressing any new evidence or findings, and we did not have the record from the hearing on remand.
The Ninth Circuit vacated our decision and remanded, holding that we had erred in failing to review the additional findings, which were based on the additional evidence presented at the hearing on the motion to amend. In re Thomas, 428 F.3d 1266 (9th Cir. 2005). We directed the parties to supplement the record on appeal with the evidence presented on the motion to amend, so we would have the same record before us that the bankruptcy court did.
We have reviewed the transcript of the August 12, 2003, hearing on the motion to amend. Nowhere in that transcript does it appear that the bankruptcy court admitted into evidence any of the additional materials submitted by either Ash or the trustee. However, it is apparent that the court considered the evidence, because it relied on that evidence in making its findings.
Having now considered the additional evidence and findings, we again conclude that the bankruptcy court erred in finding that the transfer of the property from debtor to Ash was a fraudulent transfer.
ISSUE
Whether the bankruptcy court erred in finding that the trustee established a fraudulent transfer under California law.
STANDARD OF REVIEW
On appeal, Ash challenges several factual findings. " The bankruptcy court's findings of fact are reviewed for clear error[.]" In re Park-Helena Corp., 63 F.3d 877, 880 (9th Cir. 1995). Clear error exists when, after examining the evidence, the reviewing court is left with a definite and firm conviction that a mistake has been committed. U.S. v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948), 68 S.Ct. 525, 92 L.Ed. 746. " This standard plainly does not entitle a reviewing court to reverse the finding of the trier of fact simply because it is convinced that it would have decided the case differently." Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985). " Where there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous." Id. at 574.
DISCUSSION
Section 544(b) of the Bankruptcy Code gives a trustee the power to avoid any transfer of property of the debtor that a creditor could avoid under " applicable law."
Section 544(b) allows the trustee to step into the shoes of a creditor who could, as of the date of the bankruptcy petition, avoid the transfer under state law. Ash does not dispute that there was at least one creditor in existence at the time of the transfer who still had a viable claim against debtor on the petition date. See In re Acequia, Inc., 34 F.3d 800, 807 (9th Cir. 1994)(trustee's § 544(b) power is dependent on whether a creditor existed at the time the transfers were made that still had a viable claim against the debtor at the time the debtor filed bankruptcy).
The trustee's complaint in this adversary proceeding alleged two state law claims: (1) that the quitclaim deed transfer was avoidable because debtor did not receive reasonably equivalent value for the transfer and, at the time of the transfer, debtor was insolvent; and (2) that debtor transferred the property with actual intent to hinder, delay, or defraud creditors.
The second claim, based on actual fraud, was clearly abandoned at trial.
The bankruptcy court questioned the trustee's counsel at trial about his theory, and the trustee said that he was pursuing a claim that debtor had made the transfer for no consideration when debtor was insolvent, so that the trustee did not need to show intent. Transcript of January 7, 2003 trial at p. 5:17-20.
The first claim, which is based on constructive fraud, arises under Cal. Civ. Code § 3439.05, which provides that a transfer is fraudulent as to a current creditor if the transfer was made without reasonably equivalent value and " the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer[.]" The bankruptcy court's findings after the trial focused on whether there was a creditor in existence on the date of the transfer, whether debtor was insolvent when the transfer was made, and whether there was consideration for the transfer. Transcript of January 7, 2003 trial at pp. 24:10-25:9; 33:15-34:13; 51:7-53:22. The court concluded that debtor was insolvent because he was unable to pay his debts as they came due. See Cal. Civ. Code § 3439.02(c) (" A debtor who is generally not paying his or her debts as they become due is presumed to be insolvent.").
On the motion to amend and on appeal, the trustee does not rely on Cal. Civ. Code § 3439.05, but instead relies on Cal. Civ. Code § 3439.04(b)(2), which provides that a transfer is fraudulent if it was made without reasonably equivalent value and the debtor " [i]ntended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due." See Memorandum Decision and Order Denying Defendant's Motion to Amend Judgment at p. 1; Appellee's Brief at pp. 2, 5, 6. At oral argument, the trustee again stated that he relies exclusively on § 3439.04(b)(2). The bankruptcy court expressly cited § 3439.04(b)(2) in its additional findings after the hearing on the motion to amend the judgment.
Cal. Civ. Code § 3439.04 has since been amended to, among other things, renumber § 3439.04(b) to § 3439.04(a)(2). Because this action was tried under the earlier version, we will continue to refer to the statute by the version in effect at the time the matter was tried.
Because there is some confusion about which theory the bankruptcy court applied, we will consider whether the bankruptcy court's judgment could be upheld under either § 3439.04(b)(2) or § 3439.05. Both of these statutes are constructive, not actual, fraud provisions. In re Cohen, 199 B.R. 709, 715-16 & n.7 (9th Cir. BAP 1996).
Cal. Civ. Code § 3439.04 provides, as pertinent:
A transfer made or obligation incurred by a debtor is fraudulent 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:
. . . .
(b) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:
. . . .
(2) Intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due.
Cal. Civ. Code § 3439.04. The elements of a cause of action under this provision, which is part of California's adoption of the Uniform Fraudulent Transfer Act (UFTA), are: (1) the debtor made a transfer or incurred an obligation; (2) without receiving a reasonably equivalent value in exchange; and (3) the debtor intended to become or, " believed or reasonably should have believed that he" would incur debts beyond his ability to pay as they came due. Cal. Civ. Code § 3439.04(b)(2). For purposes of California's fraudulent transfer provisions, a transfer of real property occurs when it is perfected as to good faith purchasers. Cal. Civ. Code § 3439.06(a)(1). Thus, the transfer in this case occurred when the deed was recorded on June 7, 2000.
The bankruptcy court considered the date of the transfer to be May 30, 2000, the date when the property was conveyed by quitclaim deed. Under the evidence presented, the one-week difference in the transfer date does not affect the outcome.
The party seeking avoidance bears the initial burden of proving all of the elements of the claim. See, e.g., In re Consol. Capital Equities Corp., 143 B.R. 80, 87 (Bankr. N.D. Tex. 1992)(applying California law).
A. Transfer of property
Ash asserts that the conveyance of the condominium did not constitute a transfer from debtor to her, because debtor did not in fact own the property. The trustee presented evidence that shows debtor was the owner of record of the property when the transfer was made: the original HUD Grant Deed, transferring the property to " Miguel S. Thomas - a single man, " and the Deed of Trust, signed by debtor. In addition, there was evidence from debtor's 1999 and 2000 tax returns that debtor had taken a deduction for payment of the mortgage interest.
Ash argued to the court that, although debtor's name was on the grant deed and trust deed, she was the actual owner of the condominium. According to Ash, debtor's name was on the property because, as a U.S. citizen, he was eligible for the HUD grant, and he had more consistency in employment. In connection with her motion to amend the judgment, Ash sought to prove that she was the actual owner of the property by providing evidence that she sometimes paid the monthly mortgage payments and covered utilities and other living expenses for her son.
The court did not clearly err in accepting the trustee's evidence and finding that debtor owned the property on the date of the transfer. The evidence submitted by the trustee provided support for a finding that debtor, not Ash, was the owner of the property at the time he transferred it to her.
B. Reasonably equivalent value
It is not clear whether Ash challenges this finding on appeal. Because the trustee had to prove a transfer for less than reasonably equivalent value, we will review the evidence on this element.
Ash asserts that she paid debtor $3,600 for the transfer of the property. Additionally, Ash seems to assert that consideration was paid over several years when she invested money in the property.
" Fraudulent conveyance analysis focuses upon what the debtor surrendered and what the debtor received." Consol. Capital Equities, 143 B.R. at 87. Reasonable equivalence is determined from the perspective of a creditor. In re Bay Plastics, Inc., 187 B.R. 315, 328 (Bankr. C.D. Cal. 1995)(applying Cal. Civ. Code § 3439.05). Under Cal. Civ. Code § 3439.03, " [v]alue is given for a transfer . . . if, in exchange for the transfer . .., property is transferred or an antecedent debt is secured or satisfied . . . ."
The trustee presented the quitclaim deed, executed by debtor on May 30, 2000, which recites that no consideration was given for the transfer. Ash presented no evidence that the recital in the quitclaim deed was wrong or that she paid money for the transfer. In fact, debtor testified in his deposition that he did not get anything for transferring the property. Transcript of Deposition of Mr. Thomas at 54:25 - 55:2. The bankruptcy court did not clearly err in finding that no consideration was exchanged for the transfer of property.
Ash argues that no consideration is necessary for a voluntary transfer to be valid. We have no reason to question the validity of the transfer. However, a valid transfer may be set aside if it meets the requirements of the fraudulent transfer statutes.
C. Debtor's belief that he would become insolvent
In order to establish a claim under § 3439.04(b)(2), the trustee had to prove that debtor either intended to incur, or " believed or reasonably should have believed that he . . . would incur, debts beyond his . . . ability to pay as they became due." Cal. Civ. Code § 3439.04(b)(2). This element requires that the court consider debtor's intent or belief. See, e.g., In re Van Vleck, 211 B.R. 689, 693-94 (Bankr. E.D. Mo. 1997)(court must consider debtor's intent).
There is nothing in the court's findings, either after the January trial or after the hearing on the motion to amend the judgment, to indicate that the court considered debtor's intent or belief. The court found that debtor was insolvent because he did not have the ability to pay his debts as they became due. Transcript of January 7, 2003 trial at p. 51; Memorandum Decision entered August 14, 2003. But the court did not consider whether or find that debtor intended to become or believed or reasonably should have believed that he would become unable to pay his debts as they matured, which is an element of the trustee's claim under § 3439.04(b)(2).
Further, the trustee does not point to any evidence in the trial record from which the court could have made such a finding. The trustee conceded at oral argument that he had not provided proof of debtor's intent. He argued instead that intent could be inferred from the fact that, according to debtor's bankruptcy petition and schedules, debtor had one debt that existed on the date of the transfer and that debtor had been unemployed for more than a year before the transfer.
The problem with the trustee's argument is that, at the hearing on the motion to amend the judgment, the parties presented evidence to show that the information contained in debtor's schedules on which the trustee relied was incorrect. For example, there was evidence, and the bankruptcy court found, that debtor was in fact employed when he executed the quitclaim deed on May 30, 2000, and had income of $30,138 in the year 2000. There was also evidence that debtor lost his job sometime in June 2000, although there is no evidence about whether the job was lost before or after June 7, the date of the transfer through the recording of the deed. Debtor also had other debts at the time of the transfer that totaled $90,215.97.
The evidence would not have supported a finding of intent, nor would it support an inference of that fact. Debtor was employed when he executed the quitclaim deed, and there was no evidence that he was unemployed when the deed was recorded (or that he knew he was going to lose his job before he lost it). The approximately $90,000 in debt included approximately $40,000 that was secured debt on the property that was transferred and is the subject of this adversary proceeding; $32,000 was a debt secured by a vehicle that debtor later surrendered to the lender. The trustee did not present any evidence about when these or the other debts were due. Debtor testified at his deposition that, until sometime in June 2000, he was employed and was paying his debts. Transcript of Deposition of Mr. Thomas at 59:13-20. The trustee does not explain how the bankruptcy court could infer from the evidence that debtor intended to incur debts beyond his ability to pay.
The bankruptcy court did not find and the trustee failed to present evidence from which the court could have found that debtor intended to incur or believed or reasonably should have believed that he would incur debts beyond his ability to pay. Therefore, if the bankruptcy court's judgment for the trustee was based on § 3439.04(b)(2), it was based on a clearly erroneous finding and must be reversed.
As we said above, the bankruptcy court's decision may have been based on Cal. Civ. Code § 3439.05, which does not require proof of debtor's intent. Instead, that statute, like § 3439.04(b)(2), requires proof of a transfer of property of the debtor for less than reasonably equivalent value, but also requires proof that debtor was insolvent at the time of the transfer or became insolvent as a result of the transfer.
Cal. Civ. Code § 3439.05 provides:
We have already explained that the bankruptcy court did not clearly err in finding that there was a transfer of property of the debtor for less than reasonably equivalent value. The issue with regard to § 3439.05 is whether there is evidence to support the court's finding that debtor was insolvent at the time of the transfer.
Under Cal. Civ. Code § 3439.02(a), a debtor is insolvent if his liabilities exceed his assets (the " balance sheet" definition of insolvency). In re Bay Plastics, Inc., 187 B.R. 315, 328 n.22 (Bankr. C.D. Cal. 1995). Under § 3439.02(c), a debtor is presumed insolvent if he is generally not paying his debts as they become due (the " equity" or " cash flow" test). Id.
Here, the bankruptcy court found after the hearing on the motion to amend the judgment that debtor was insolvent, " as his debts far exceeded his income, establishing his inability to pay his debts as they became due." Memorandum Decision at 4. This finding mixes the balance sheet test and the cash flow test.
If the court's finding was based on the balance sheet test, it was error, because the court did not consider debtor's assets, but only his debts and his income. A balance sheet analysis requires more than a comparison between income and debt; it requires a comparison between assets and debt. Cal. Civ. Code § 3439.02(a). The trustee never explored whether debtor had assets that were not listed in his schedules (there were numerous errors in the schedules that were explained at the hearing). Debtor testified in his deposition that he had a vehicle securing the $32,000 debt to Mitsubishi; there is no evidence of the value of the vehicle. Forty thousand dollars of the debt was secured by the condominium that was transferred. There is no evidence of whether that debt was oversecured or undersecured. It is also not clear whether the debt secured by a purchase money deed of trust should be included in the balance sheet when the asset is not included, because California law prohibits a deficiency judgment on such debts. See Cal. Code Civ. Pro. § 580b.
Nor does the evidence support a finding under the cash flow test. At the hearing on the motion to amend the judgment, the evidence showed that debtor had income of more than $30,000 in 2000. He also had debts totaling approximately $90,000 on the date of the transfer. The question is whether the bankruptcy court clearly erred when it held that the fact that debtor's income was substantially less than the total amount of his debts was enough to establish that he was unable to pay his debts as they became due.
California courts have not established what is sufficient evidence for a creditor to prove that a debtor was presumptively insolvent by generally not paying his debts as they became due. To determine what is sufficient evidence to establish this element, it is appropriate for a court to look to other states that have adopted the UFTA. Cal. Civ. Code § 3439.11 (" 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."). See Neumeyer v. Crown Funding Corp. of Am., 56 Cal.App.3d 178, 187, 128 Cal.Rptr. 366 (Cal.Ct.App. 1976), disapproved on other grounds by Liodas v. Sahadi, 19 Cal.3d 278, 287 n.3, 137 Cal.Rptr. 635, 562 P.2d 316 (1977)(holding that it was appropriate to look to decisions of courts of other states that had enacted the Uniform Fraudulent Conveyance Act for guidance in interpreting California's enactment of the Act); see also In re Image Worldwide, Ltd., 139 F.3d 574, 577 (7th Cir. 1998)(because the Illinois UFTA is a uniform act, the court may look to other cases interpreting other states' versions of the UFTA for assistance). No other state has outlined a test to determine if a debtor is insolvent under the cash flow test for insolvency under the UFTA.
The UFTA borrows this test from § 303(h)(1) of the Bankruptcy Code. First Fed. Sav. & Loan Ass'n of Galion, Ohio v. Napoleon, 428 Mass. 371, 701 N.E.2d 350, 354 n.4 (Mass. 1998). See also Cal. Civ. Code § 3439.02, Leg. Comm. Comment 3 (comparing subdivision (c) to § 303(h)(1)). The comment refers to case law under this section and implies that an inquiry under § 3439.02(c) would be analogous to an inquiry under § 303(h)(1):
In determining whether a debtor is paying its debts generally as they become due, the court should look at more than the amount and due dates of the indebtedness. The court should also take into account such factors as the number of the debtor's debts, the proportion of those debts not being paid, the duration of the nonpayment, and the existence of bona fide disputes or other special circumstances alleged to constitute an explanation for the stoppage of payments. The court's determination may be affected by a consideration of the debtor's payment practices prior to the period of alleged nonpayment and the payment practices of the trade or industry in which the debtor is engaged.
Cal. Civ. Code § 3439.02, Leg. Comm. Comment 3.
This inquiry comports with the case law that has developed under § 303(h)(1) of the Bankruptcy Code. See In re Vortex Fishing Sys., Inc., 277 F.3d 1057, 1072 (9th Cir. 2002)(the court adopts a " totality of the circumstances" test in deciding whether a debtor is generally paying his debts as they become due). " A finding that a debtor is generally not paying its debts 'requires a more general showing of the debtor's financial condition and debt structure than merely establishing the existence of a few unpaid debts.'" Id. (quoting In re Dill, 731 F.2d 629, 632 (9th Cir. 1984)).
Under this analysis, the bankruptcy court erred in finding that debtor was insolvent as of the date of the transfer. The trustee showed only that debtor had approximately $90,000 in debts, and that he had an income of $30,000 for the year in which the transfer occurred. The trustee did not provide evidence of debtor's payment history of the debts, how much payments were, when they were due, whether they were being paid and, if not, for how long.
Debtor testified in his deposition that, up until June 2000, he was paying his debts. Transcript of Deposition of Mr. Thomas at 59:13-20. At the time he executed the quitclaim deed, he was still working at the job he had held the year before, when his annual income had been approximately $47,000. Id. at 59:17-19; 1999 Tax Return. Debtor lost that job sometime in June 2000, but the evidence does not show whether it was before or after the deed was recorded. Deposition of Mr. Thomas at 7:3-9. At the time the deed was recorded, debtor had purchased the Mitsubishi vehicle, but payments were not yet due. Id. at 32:6 - 33:14.
Evidence that debtor has a moderate income and also has debts that exceed his annual income, at least some of which are payable monthly, is insufficient to establish that debtor was not paying his debts as they became due. Therefore, if the bankruptcy court's judgment for the trustee was based on § 3439.05, the bankruptcy court erred in finding that debtor was insolvent.
We note that a substantial portion of the debts were secured and nearly half were subject to anti-deficiency provisions. Thus, the amount for which debtor would be personally liable if the creditors were to pursue their remedies is significantly less than the entire amount of debt.
Because we conclude that the bankruptcy court erred in finding that the transfer was fraudulent under either § 3439.04(b)(2) or § 3439.05, we need not address Ash's remaining arguments. We also note that, even if we were inclined to address her other arguments, we would not address her new argument, raised for the first time after appellate briefing had closed, that the transfer could not be fraudulent because the property was exempt.
CONCLUSION
The bankruptcy court clearly erred in finding that the transfer of property from debtor to Ash was a fraudulent transfer. Therefore, we REVERSE.
A transfer made or obligation incurred by a debtor is fraudulent 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 insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.