Opinion
NOT FOR PUBLICATION
Argued by Telephone Conference and Submitted, March 23, 2007
Appeal from the United States Bankruptcy Court for the Northern District of California. Bk. No. 02-44874, Adv. No. 02-07273. Honorable Leslie Tchaikovsky, Bankruptcy Judge, Presiding.
Before: SMITH, DUNN and RADCLIFFE, [ Bankruptcy Judges.
Hon. Albert E. Radcliffe, U.S. Bankruptcy Judge for the District of Oregon, sitting by designation.
MEMORANDUM
Following a three-day trial, the bankruptcy court entered a judgment in favor of the trustee finding that the 2001 transfer of debtor's home to his wife was fraudulent under § 548(a) and thus avoidable. Debtor's wife sought reconsideration of the judgment, which the court granted in part. After reconsidering the evidence, the court amended the judgment so turnover of the home was based exclusively on an alter ego liability theory. We AFFIRM.
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036, as enacted and promulgated prior to the effective date (October 17, 2005) of The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, Apr. 20, 2005, 119 Stat. 23.
I. FACTS
A. Pre-Bankruptcy Actions
In November 1991, Stephen Brian Turner (" Debtor") and his wife Susana (collectively, the " Turners") acquired title to and began living in a residence located in Alameda County, California (the " Home"). The deed transferring title to the Home was recorded on November 25, 1991, and indicates that the Home was granted to " Stephen B. Turner and Susana C. Turner, husband and wife, as community property."
The Turners executed a written transmutation agreement in June 1992. Pursuant to the agreement, Debtor transferred his community property interest in the Home to Susana as her separate property, and in return, Susana transferred her community property interest in the couple's paramedical business to Debtor as his separate property. During this time, the Turners were allegedly having marital difficulties which they hoped to resolve through the transmutation agreement. The agreement was never recorded.
In 1994, Debtor attended a seminar on " asset protection" presented by Robert Matthews (" Matthews"). At Matthews' suggestion, Debtor consulted a tax attorney knowledgeable about the formation of foreign trusts. The attorney prepared a document entitled " Declaration of Trust" (" GG Trust Declaration"), which the Turners signed on June 30, 1995, but never recorded. The GG Trust Declaration established an irrevocable Bahamian trust (the " GG Trust") and declared that specific assets, including the Home, were to be held in trust for the Turners' three children. There is no evidence that title to the Home was ever transferred to the GG Trust.
In the spring of 1995, Debtor once again met with Matthews to discuss asset protection strategies. During this meeting, the two discussed the transmutation agreement and the GG Trust Declaration, as well as Matthews' preference for limited liability companies for holding real property rather than offshore trusts.
In 1997, Ah Beng Yeo and E.A. Martini (collectively, " Judgment Creditors") initiated an action against Debtor in state court based on tortious conduct allegedly committed in mid-1995. Shortly thereafter, at Debtor's direction, Matthews created Real Investment Capital Holdings LLC (" RICH"), a limited liability company, and Proset Enterprises, Inc. (" Proset"), a Nevada corporation. The GG Trust is the 99% owner of RICH and the sole shareholder of Proset. Proset owns the remaining 1% of RICH LLC. Alfred Cheung, Susana's brother who resides in Hong Kong, is Proset's president and secretary.
In early 1998, after the filing of the civil complaint but before the money judgment was entered against Debtor, the Turners executed a grant deed (the " 1998 Deed") transferring title to the Home to RICH in March 1998 (the " 1998 Transfer"). The 1998 Deed was recorded in April of that year.
The state court entered a million dollar judgment in favor of the Judgment Creditors in August 1998.
On March 16, 1999, approximately seven months after the state court judgment was entered, Debtor, acting on behalf of RICH, executed a deed of trust in favor of Proset (the " Proset Deed"), encumbering the Home to secure a line of credit. The Proset Deed was recorded on March 18, 1999, and identified Debtor as the managing partner of RICH.
Debtor testified at trial that there was never any draw on the line of credit. Thus, the Proset Deed did not secure any debt.
On September 22, 1999, the Judgment Creditors recorded an abstract of judgment in Alameda County. Thereafter, in October 1999, they filed a fraudulent conveyance action against the Turners in Contra Costa Superior Court. On May 31, 2001, the Judgment Creditors obtained a writ of execution which they attempted to execute against the Home.
In June 2001, Debtor prepared a marriage dissolution petition for Susana. In the petition, Debtor and Susana stipulated that the Home (which had previously been transferred to RICH) should be confirmed as Susana's separate property (the " Turner Marital Settlement Agreement"). A dissolution judgment was entered in September 2001 (the " Turner Dissolution Judgment"). Although divorced, Debtor and Susana both continued to reside in the Home and file joint tax returns identifying themselves as married.
On December 27, 2001, RICH executed a deed (the " 2001 Deed") transferring title to the Home to Susana (the " 2001 Transfer"). The 2001 Deed was signed by Nancy Lake, the trustee of the GG Trust, and recorded on that same day.
Debtor filed for chapter 7 relief on September 10, 2002. Subsequently, the fraudulent conveyance action was removed to the bankruptcy court and the chapter 7 trustee (" Trustee") substituted in as the real party in interest.
B. The Bankruptcy
On January 14, 2004, Trustee filed his first amended complaint (the " FAC") against Susana, Just In Case Holdings Inc., Proset, RICH, the GG Trust, and Nancy Lake as the trustee of the GG Trust (collectively, " Defendants"). The FAC asserted four claims for relief. The first and second claims prayed for avoidance of all the transfers related to 1) the 1992 transmutation agreement, 2) the GG Trust, 3) the 1998 Deed, 4) the Proset Deed, 5) the Turner Marital Settlement Agreement, 6) the Turner Dissolution Judgment, and 7) the 2001 Deed (collectively, the " Transfers") as actually and constructively fraudulent under § 548(a), § 544 and California Civil Code (" CC") § 3439 et seq. The third claim sought a determination that, despite the Transfers, Debtor retained an equitable interest in the Home when he filed for bankruptcy, and, that being the case, the Home should be declared property of the estate. Under the fourth claim, Trustee sought turnover of the Home under § 542(a).
Just In Case Holdings Inc. is a Nevada corporation that was formed on July 31, 2002 by Debtor.
The original complaint also named Debtor as a defendant.
1. The Trial Memorandum Decision
Following a three-day trial, the bankruptcy court took the matter under submission. The court issued its memorandum decision on December 5, 2005 (" Trial Decision") in which it determined that " all of the transfers in question were made with actual intent to hinder, delay, or defraud creditors." Trial Decision at 9, Dec. 5, 2005. In this regard, the court found that the evidence established that
Prior to the matter going to trial, the bankruptcy court heard two different summary judgment motions - one filed by Defendants on March 5, 2004, and a subsequent one filed by Trustee on December 23, 2004.
all of the transfers were to insiders; the Debtor retained possession and control of the Home after the all [sic] transfers; the Debtor had been sued before most of the transfers; no consideration was received for the transfers; and the Debtor was rendered insolvent by the transfers.
Id. at 9 n.7. It also found that Debtor received no consideration for any of the Transfers and that the Transfers rendered him insolvent.
In addition, the court concluded that RICH and Proset were Debtor's alter egos, noting Debtor's testimony that the entities were created, and their relationships structured, to maximize the protection of his assets, particularly the Home. While the court recognized that asset protection is permitted when done for a legitimate business purpose, it found that RICH and Proset were created solely for the improper purpose of shielding the Home from creditors. Relying on Fleet Credit Corp. v. TML Bus Sales, Inc., 65 F.3d 119 (9th Cir. 1995), the court determined that the transfer of the Home by RICH to Susana in 2001 should be treated as a fraudulent transfer by Debtor and that the " only relevant transfer to be avoided [was] the transfer reflected by the 2001 Deed." Trial Decision at 12, Dec. 5, 2005.
Notably, in its memorandum decision addressing Defendants' motion for partial summary judgment entered on July 27, 2004, the court indicated that the transfer of the 1998 Deed was the critical one for fraudulent transfer purposes. Because the 1998 Transfer occurred more than one year before the filing of the petition, the court assumed that Trustee's remedy was limited to avoidance of the asset transferred pursuant to the 1998 Deed under CC § 3439 et seq. (CUFTA). Under CC § 3439.01(a), an asset is defined to include only the unencumbered, nonexempt value of the property transferred. If the 1998 Transfer had been the operative transfer, Trustee would only be entitled to a judgment avoiding the transfer of the Home to the extent of its asset value. Based on the testimony of Trustee's appraiser, the court determined the asset value of the Home in 1998 was $7,700.
The 2001 Transfer occurred on December 27, 2001, within one year of the bankruptcy filing. Therefore, the court held that Trustee was entitled to avoid the 2001 Transfer of the Home to Susana under § 548(a)(1)(A) and (a)(1)(B).
The effect of avoiding the 2001 Transfer was to revert title to the Home back to RICH. Because Debtor and Susana were divorced prior to the bankruptcy filing, the court found that the entire interest in the Home ultimately reverted to Debtor as his separate property based on the court's determination that RICH is Debtor's alter ego. This finding entitled Trustee to the turnover of the Home's entire value under § 542.
On January 20, 2006, a judgment was entered in favor of Trustee (" Judgment").
2. The New Trial Memorandum Decision
Following the entry of the Judgment, the Turners filed a motion seeking: (1) amendment of the Judgment, (2) reconsideration, (3) a new trial, and (4) a stay of enforcement of the Judgment (the " New Trial Motion"). They asserted that the court erred in determining that there was an actual and constructive fraudulent conveyance of the Home, that the 2001 Deed was the operative deed for the purpose of the fraudulent conveyance claim, that Debtor held an equitable interest in the GG Trust, and that RICH was the alter ego of Debtor. In addition, they argued that the Judgment violated Susana's due process rights because the statutory scheme for finding a fraudulent conveyance under § 727, § 548, and CUFTA were internally inconsistent.
The court rejected most of the arguments in the New Trial Motion but did find persuasive the argument that Susana did not have an adequate opportunity to address the following issues:
(1) whether the court erred by treating RICH LLC as the Debtor's alter ego, and (2) whether the court's conclusion that the 2001 Transfer was avoidable as a fraudulent transfer pursuant to 11 U.S.C. § 548 was erroneous because the grant deed executed in 2001, purporting to transfer the House from RICH to Susana, was invalid.
New Trial Decision at 3, June 29, 2006. It therefore provided the parties with the opportunity to brief these issues.
This memorandum decision was not included as part of the record; nevertheless, we may take judicial notice of it. Harris v. U.S. Trustee (In re Harris), 279 B.R. 254, 261 n.4 (9th Cir. BAP 2002)(" A judicially noticed fact must be one not subject to reasonable dispute in that it is . . . capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned.").
On June 29, 2006, the court issued its ruling on the New Trial Motion (" New Trial Decision"). As to the alter ego issue, the court was not persuaded by the Turners' argument that Debtor could not be held as RICH's alter ego because he was not named as an owner or shareholder. Rather, it read California law as recognizing an alter ego relationship when two conditions are met: " (1) a unity of interest and ownership such that the person and the entity cannot fairly be considered separate and (2) adherence to the fiction of the separate existence of the entity and the individual would work an injustice." New Trial Decision at 5, June 29, 2006. The court found that the evidence presented during trial satisfied both prongs.
With respect to the validity of the 2001 Deed, the court agreed with the Turners that it was invalid. Consequently, the 2001 Transfer was ineffective and ownership of the Home was held by RICH, and not Susana, at the time of the bankruptcy filing. Based on its finding that RICH was Debtor's alter ego, the court concluded that the Home was property belonging to Debtor, and thus, property of the estate.
Given the Turners' concession regarding the invalidity of the 2001 Deed, the court determined that the Judgment required modification because the " prior ruling--that the 2001 Transfer should be avoided as a fraudulent transfer pursuant to 11 U.S.C. § 548--[was] clearly erroneous." Id . at 7. On July 14, 2006, the court entered an amended judgment nunc pro tunc in which it directed that the Home should be turned over to Trustee (" Amended Judgment").
Susana appealed on July 21, 2006. Following the filing of the appeal, the bankruptcy court approved Trustee's motion to sell the Home on August 14, 2006. At oral argument, Susana's counsel informed us that the Home sold for over $900,000.
Subsequent to the filing of the notice of appeal of the Amended Judgment, the bankruptcy court entered an order granting in part and denying in part the New Trial Motion in accordance with the reasons stated in its New Trial Decision. Susana filed a notice of appeal as to that order on September 20, 2006. That appeal has been consolidated with Susana's appeal of the Amended Judgment.
The order granting the sale was not included in the record, however, we may take judicial notice of it. See supra note 10.
II. JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. § 1334 and 28 U.S.C. § 157(b)(1) and (b)(2)(E), (H). We have jurisdiction under 28 U.S.C. § 158.
III. ISSUES
1) Whether the court erred in holding that the Home was solely property of the estate based upon its alter ego finding; 2) Whether Trustee holds a valid fraudulent transfer claim; 3) Whether Trustee is entitled to the increased equity in the Home that accumulated subsequent to the 1998 Transfer; 4) Whether the court abused its discretion in denying the New Trial Motion; and5) Whether the bankruptcy court abused its discretion in admitting evidence concerning Debtor's 1994 conviction.
IV. STANDARDS OF REVIEW
We review a bankruptcy court's conclusions of state and federal law and questions of statutory interpretation de novo. Movitz v. Baker (In re Triple Star Welding Inc.), 324 B.R. 778, 788 (9th Cir. BAP 2005); Smith v. Lachter (In re Smith), 352 B.R. 702, 705 (9th Cir. BAP 2006). Accordingly, a determination of a fraudulent transfer based on undisputed facts is reviewed de novo. Trujillo v. Grimmett (In re Trujillo), 215 B.R. 200, 203 (9th Cir. BAP 1997). A bankruptcy court's findings of facts are reviewed for clear error. Id.
A bankruptcy court's decision to deny a motion for reconsideration or a motion for a new trial is reviewed for an abuse of discretion. First Ave. W. Bldg., LLC v. James (In re OneCast Media, Inc.), 439 F.3d 558, 561 (9th Cir. 2006); see United States v. Bhagat, 436 F.3d 1140, 1145 (9th Cir. 2006). Rulings on admissibility of evidence are also reviewed for an abuse of discretion. United States v. Rice, 38 F.3d 1536, 1542 (9th Cir. 1994). An abuse of discretion will be found if the court " base[d] its ruling upon an erroneous view of the law or a clearly erroneous assessment of the evidence." Triple Star, 324 B.R. at 788. " The panel also finds an abuse of discretion if it has a definite and firm conviction that the bankruptcy court committed a clear error of judgment in the conclusion it reached." Id.
On appeal, we may affirm the bankruptcy court on any ground supported by the record, even if it differs from the bankruptcy court's stated rationale. Pollard v. White, 119 F.3d 1430, 1433 (9th Cir. 1997).
V. DISCUSSION
A. The Alter Ego Finding
Susana argues that the bankruptcy court erred in finding that RICH is the alter ego of Debtor because Debtor has no ownership interest in RICH and, under California law, alter ego liability cannot be imposed absent ownership. We agree.
The law of the forum state is used to determine whether an entity is an alter ego of an individual. SEC v. Hickey, 322 F.3d 1123, 1128 (9th Cir. 2003). In California, an alter ego relationship exists if " (1) [there is] such unity of interest and ownership that separate personalities of the corporation and the individual no longer exist and (2) that, if the acts are treated as those of the corporation alone, an inequitable result will follow." Mesler v. Bragg Mgmt. Co., 39 Cal.3d 290, 216 Cal.Rptr. 443, 702 P.2d 601, 606 (Cal. 1985)(emphasis added). While there is " no litmus test" for the existence of an alter ego relationship, there are two general requirements that must be present: ownership and the specter of fraud. Hickey, 322 F.3d at 1128-29 (interpreting California law). Accordingly, if the individual has no ownership in the entity, there can be no alter ego finding. Id . at 1128 (" Ownership is a pre-requisite to alter ego liability, and not a mere 'factor' or 'guideline.'"); Firstmark Capital Corp. v. Hempel Fin. Corp., 859 F.2d 92, 94 (9th Cir. 1988)(" Ownership of an interest in the corporation is an essential part of the element of unity of ownership and interest."); see also Riddle v. Leuschner, 51 Cal.2d 574, 335 P.2d 107 (Cal. 1959)(finding the wife was the alter ego of the subject corporation based on her ownership of a single share but the husband was not because he held no stock).
Members of limited liability companies are " subject to liability under the same circumstances and to the same extent as corporate shareholders under common law principles governing alter ego liability." People v. Pac. Landmark, LLC, 129 Cal.App.4th 1203, 29 Cal.Rptr.3d 193, 199 (Ct. App. 2005); Cal. Corp. Code § 17101(b).
While there is evidence to support a unity of interest finding, there is no evidence that Debtor was an owner or shareholder of either RICH or Proset - a pre-requisite for alter ego liability. Rather, the evidence establishes that the GG Trust owns a 99% membership interest in RICH and that Proset owns the remaining 1% membership interest. In addition, the record indicates that the GG Trust was the sole shareholder of Proset and that the GG Trust was controlled by two unrelated trustees, Nancy Lake and Janis Galanis. The beneficiaries of the GG Trust were the Turner's children.
Limited liability companies consist of members who own membership interests. Pac. Landmark, 29 Cal.Rptr.3d at 198. Each limited liability company must have at least two members who own membership interests to be valid. Id.
Proset was dissolved prior to the removal of the complaint.
The fact that Debtor may have served as the " managing partner" of RICH at some point does not resolve the ownership issue because a manager need not be a member of a limited liability company. Cal. Corp. Code § 17151(a). There is no evidence of Debtor's membership interest.
The Proset Deed, which evidenced the line of credit extended to Proset by RICH, was signed by Debtor as RICH's managing partner.
The bankruptcy court's determination that the Home is property of the estate is based entirely upon its erroneous alter ego finding. Accordingly, the court's ultimate ruling that the Home is property of the estate cannot be affirmed on an alter ego theory.
B. The Fraudulent Transfer Claim
The only relevant conveyances for fraudulent transfer purposes are those associated with the 1992 transmutation agreement and the 1998 Deed. See infra, p. 15 and note 17. Both these transfers were made more than one year before the bankruptcy filing. As such, Trustee's § 548(a)(1) claim is not applicable to these transfers because they were made outside of the one year reach back period. 11 U.S.C. § 548(a)(1)(" [t]he trustee may avoid any transfer of an interest of the debtor in property . . . that was made . . . on or within one year before the date of the filing of the petition"). Our analysis is therefore limited to the application of § 544(b) and CUFTA.
Section 544(b) permits a trustee to avoid any transfer voidable by unsecured creditors pursuant to state law. 11 U.S.C. § 544(b); Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198, 1201 (9th Cir. 2005). Under CUFTA, a creditor is able to avoid the transfer of a debtor's asset that is actually or constructively fraudulent and which is made within four years prior to the date the avoidance action is filed. CC § § 3439.07 & 3439.09.
For Trustee to be entitled to turnover of all or part of the Home's value, there must be a finding that one of the transfers represents a fraudulent conveyance. The FAC lists seven transfers upon which Trustee asserts an actual and/or constructive fraudulent transfer action can be based: 1) the 1992 transmutation agreement, 2) the GG Trust, 3) the 1998 Deed, 4) the Proset Deed, 5) the Turner Marital Settlement Agreement, 6) the Turner Dissolution Judgment, and 7) the 2001 Deed. Susana contends that the relevant transfer is the 1992 transmutation agreement. We disagree and find that the transfer of the 1998 Deed is the operative one for fraudulent conveyance purposes.
The transfers other than those related to the 1992 transmutation agreement and the 1998 Deed are irrelevant to our analysis. As to the GG Trust transfer, there is no evidence in the record that the Home was ever transferred to the GG Trust. Therefore, avoidance of that transfer would not have any effect on Debtor's interest in the Home. In regards to the Proset Deed and the 2001 Deed transfers, those deeds were entered into between RICH and third parties (i.e., Susana and Proset). RICH and Proset are not the alter egos of Debtor. As such, Debtor cannot be found to be liable for the Proset Deed and the 2001 Deed transfers. Moreover, the Turner Marital Settlement Agreement and the Turner Dissolution Judgment had no legal effect on Debtor's interest in the Home because both Susana and Debtor transferred whatever interest they held in the Home to RICH pursuant to the 1998 Deed. Thus, when the Turner Marital Settlement Agreement and Turner Dissolution Judgment were entered into, Debtor held no interest in the Home which he could transfer.
1. The 1992 transmutation agreement
Under California law, a married person may by agreement transmute an asset in which he has a community property interest into the separate property of his spouse. Cal. Fam. Code § 850(a). A transmutation is valid between spouses if it is made in writing by an express declaration approved by the adversely affected spouse, In re Marriage of Benson, 36 Cal.4th 1096, 32 Cal.Rptr.3d 471, 116 P.3d 1152, 1153 (Cal. 2005), but will remain ineffective against third parties until it is recorded or notice of it is provided, Cal. Fam. Code § 852(b). Transmutations are subject to the laws governing fraudulent transfers. Id . § 851.
Here, the 1992 transmutation agreement was made in writing by express declaration approved by Debtor and Susana. Pursuant to the agreement, Susana obtained the Home as her separate property and, in return, Debtor received the family business as his separate property. Although the agreement was valid between Debtor and Susana as of June 1992, it was never recorded. Consequently, it never took effect against third parties nor did it have any affect on the title or ownership status of the Home. Id . § 852(b); see also Finalco, Inc. v. Roosevelt (In re Roosevelt), 87 F.3d 311, 315 nn.4-5 (9th Cir. 1996), amended by, 98 F.3d 1169 (9th Cir. 1996), overruled on other grounds by, Murray v. Bammer (In re Bammer), 131 F.3d 788 (9th Cir. 1997).
Pursuant to the transmutation agreement, it could have been " recorded at any time . . . by either party in any place . . . authorized by law for the recording of documents affecting title to or ownership status of property[.]" Hence, Debtor or Susana could have caused the transmutation agreement to be effective against third parties at any time from the date of execution by recording it. There is no evidence that either tried to do so.
In light of the other " transfers" of the Home later made by Debtor, Susana, and their affiliates, the evidentiary record is clear that Debtor and Susana never treated the " transfer" of the Home supposedly effected by the 1992 transmutation agreement as effective.
In support of her argument that the relevant transfer date is the effective date of the 1992 transmutation agreement, Susana asserts that 1) the analysis for determining when a transfer is " made" should be the same for § 548 and CUFTA purposes as it is for § 727 purposes, and 2) the application of different definitions for when a transfer is made is unconstitutional.
a. The making of the transfer
Relying on the Ninth Circuit's decision In re Roosevelt, 87 F.3d 311 (9th Cir. 1996), Susana argues that, for CUFTA purposes, the transfer of the Home should be deemed " made" as of the date the 1992 transmutation agreement became effective between she and Debtor. Roosevelt does not support this proposition.
At issue in Roosevelt was whether, for purposes of § 727(a)(2) , a transfer is made when it is effective between the parties or when it is effective against third parties. 87 F.3d at 315. Importantly, the court there noted that, unlike § 548 (the Bankruptcy Code fraudulent transfer statute), § 727(a)(2) does not define when a transfer is made. Although both § 548(d) and § 727(a)(2) pertain to the fraudulent transfer of property belonging to the debtor, the Roosevelt court determined that the purposes underlying each differ in ways that impact the analysis of when a transfer is deemed made. Id . at 317. Section 727(a)(2) " centers on the debtor's wrongdoing in or in connection with the bankruptcy case." S. Rep. No. 598, 95th Cong., 2d Sess. 98 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5884. Because § 727(a)(2) " premises denial of discharge on certain conduct of the debtor in relation to his assets and creditors if done with 'intent to hinder, delay or defraud[, ]'" there is some suggestion that the transfer which is contemplated by § 727(a)(2) should be deemed made at " the time of the debtor's activity and not when the activity is somehow fully-insulated from the claims of other creditors." Roosevelt, 87 F.3d at 317 (citing First Nat'l Bank & Trust Co. of Fremont v. Shreves (In re Kock), 20 B.R. 453, 454 (Bankr. D. Neb. 1982)). In contrast, § 548 is more concerned with protecting creditors than punishing a debtor for his wrongdoing. See id. Under § 548, a trustee has " the power to avoid transactions and bring them back into the debtor's estate, a power that is not limited to situations where the debtor acted with the intent to defraud." Id . Based on the primary purposes of the two statutes, the Roosevelt court found that the transfer date for purposes of § 548 does not apply to fraudulent transfer claims made pursuant to § 727(a)(2).
Section 727(a)(2) states,
Under the Code's fraudulent transfer statute,
In contrast to the issue before the Roosevelt court, CUFTA expressly defines the date a transfer is presumed made. See CC § 3439.06(a)-(b). Because Susana offers no authority or persuasive argument as to why we should not apply CUFTA's definition or why Roosevelt would suggest otherwise, the CUFTA definition found in CC § 3439.06 governs our determination of when the 1992 transmutation agreement transfer was made.
Under CC § 3439.06,
A transfer is made with respect to . . . real property . . . when the transfer is so far perfected that a good faith purchaser of the asset from the debtor against whom applicable law permits the transfer to be perfected cannot acquire an interest in the asset that is superior to the interest of the transferee.
CC § 3439.06(a)(1). If the transfer has not been perfected in accordance with the applicable state law prior to the commencement of a fraudulent transfer action, then " the transfer is deemed made immediately before the commencement of the action." Id . § 3439.06(b).
As discussed above, because the 1992 transmutation agreement was never recorded, i.e., perfected, CC § 3439.06(b) governs the operative date of the transfer. Pursuant to this subsection, the transfer is deemed to have been made in October 1999, just prior to the filing of the action by the Judgment Creditors.
The problem, however, with using the transmutation agreement transfer as the critical conveyance, is that it was " made" in October 1999, over a year after the date if the 1998 Transfer. In light of the ineffectiveness of the transmutation of the Home to Susana as to third parties, and the fact that the 1998 Transfer was made prior to the transmutation agreement transfer, we view the 1998 Transfer as the first effective conveyance of Debtor's community property interest in the Home and the relevant transfer for Trustee's fraudulent transfer claim.
In March 1998, Debtor and Susana by grant deed transferred the Home to RICH. The deed was recorded that April. Based on the recordation date, the 1998 Deed transfer is deemed to have been made in April 1998. CC § 3439.06(a)(1).
b. Constitutionality of § 727, § 548, and CUFTA
Having determined that the transfer date for purposes of § 548 and CUFTA is different from that of § 727, we next turn to Susana's argument that the application of different definitions of when a transfer is " made" renders one or all of the statutes unconstitutional because they present " an internally inconsistent statutory scheme[] which violate[s] the substantive Due Process clauses of the 5th and 14th Amendments." Appellant's Opening Brief at 22-23, Jan. 26, 2007. Due to these inconsistencies, Susana contends that the statutes are void for vagueness due to their failure to provide notice of what the law prescribes.
In order for a statute to be deemed unconstitutional, it must be so vague as not to provide a " person of ordinary intelligence a reasonable opportunity to know what is prohibited." Grayned v. Rockford, 408 U.S. 104, 108, 92 S.Ct. 2294, 33 L.Ed.2d 222 (1972). As we have earlier noted, the purposes underlying fraudulent transfers governed by § 727(a)(2) on the one hand, and those governed by § 548 and CUFTA on the other hand, are fundamentally different. That being the case, as the Ninth Circuit determined in Roosevelt, the defined transfer date under § 548, and by implication CUFTA, need not be applied to actions under § 727(a)(2). See Roosevelt, 87 F.3d at 316. The fact that a court could find a particular transaction to be fraudulent under § 548 and CUFTA but not under § 727(a)(2), is of no consequence and raises no discernable constitutional issues. None of the constitutional arguments presented by Susana on this appeal persuade us otherwise.
2. The 1998 Deed
For the transfer of the 1998 Deed to be deemed fraudulent and avoidable, we must determine that 1) the 1998 Deed was executed with fraudulent intent or was a constructive fraudulent conveyance, and 2) the Home, at the time of the 1998 Transfer, held some asset value which Trustee can avoid.
a. Fraudulent intent
An actual fraudulent transfer is one made by the debtor with the " actual intent to hinder, delay, or defraud [a] creditor." CC § 3439.04(a). Because intent is difficult to prove, case law has evolved to allow actual intent to be established by reference to external circumstances (i.e., badges of fraud). See United States v. 5208 Los Franciscos Way, 385 F.3d 1187, 1191-92 (9th Cir. 2004); Kupetz v. Wolf, 845 F.2d 842, 846 (9th Cir. 1988). Under California law, the badges of fraud from which an inference of fraudulent intent may be drawn include:
(1) Whether the transfer or obligation was to an insider.
(2) Whether the debtor retained possession or control of the property transferred after the transfer.
(3) Whether the transfer or obligation was disclosed or concealed.
(4) Whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit.
(5) Whether the transfer was of substantially all the debtor's assets.
(6) Whether the debtor absconded.
(7) Whether the debtor removed or concealed assets.
(8) Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred.
(9) Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.
(10) Whether the transfer had occurred shortly before or shortly after a substantial debt was incurred.
(11) Whether the debtor transferred the essential assets of the business to a lienholder who transferred the assets to an insider of the debtor.
CC § 3439.04(b); 5208 Los Franciscos Way, 385 F.3d at 1191-92 (9th Cir. 2004).
Based upon the evidence presented at trial, the bankruptcy court found that Debtor made the 1998 Transfer with actual fraudulent intent. The presence of the following six " badges of fraud, " one or more of which provides evidence from which an inference of fraudulent intent may be drawn, sufficiently support the court's finding: (1) retention of control over property, (2) presence of a lawsuit, (3) transfer of substantially all assets, (4) insolvency, (5) incurrence of a substantial debt, and (6) an absence of reasonably equivalent value received for the transfer. CC § 3439.04(b).
First, it is undisputed that Debtor retained control over of the Home after the execution of the 1998 Deed. At all times, Debtor lived at the Home and paid the monthly mortgage. Second, by the time of the 1998 Transfer, the Judgment Creditors had filed a million dollar tort action against Debtor. Third, the 1998 Transfer caused Debtor to transfer away substantially all of his assets except those related to the paramedical business. Fourth, Debtor was rendered insolvent by the transfer. Fifth, the 1998 Transfer was made only four months before the Judgment Creditors' million dollar judgment was entered. And sixth, there is no evidence that Debtor received reasonably equivalent value for the Home from RICH in executing the 1998 Deed. In fact, the evidence indicates that no value was given at all.
Because these badges of fraud clearly support a fraudulent intent finding, we find that the bankruptcy court did not err in determining that Debtor had the actual intent to defraud his creditors when he transferred his interest in the Home to RICH.
b. Constructive fraud
A transfer will be considered constructively fraudulent if, when it was made, the debtor did not receive reasonably equivalent value in exchange for the transfer and the debtor was insolvent at that time or became insolvent as a result of the transfer. CC § 3439.05; Gill v. Stern (In re Stern), 345 F.3d 1036, 1042 n.6 (9th Cir. 2003).
Here, there is no evidence of Debtor receiving any monetary value for the 1998 Transfer when it was made. Moreover, because Debtor is neither a beneficiary of the GG Trust nor an owner of RICH, he could not have obtained any increase in the value of his interests in those entities in exchange for the 1998 Transfer. Debtor does not dispute this, but instead relies on the fact that he obtained value for the transfer of the Home when the 1992 transmutation agreement was entered into. As discussed above, this is not the relevant transfer for the fraudulent conveyance claim. Thus, whether he obtained any value for the execution of the 1992 transmutation agreement has no bearing on whether he received reasonably equivalent value for the 1998 Grant Deed.
In addition, it is undisputed that at the time of the 1998 Transfer, Debtor did not have $1 million in assets to cover the possible damages claim the Judgment Creditors held as alleged in the state court complaint. Although the 1998 Grant Deed was executed and recorded a few months prior to the issuance of the Judgment, at the time of its transfer, Debtor knew about the possibility of becoming liable for the Judgment. Nevertheless, he still chose to transfer the Home, which could have been used to pay off part of the Judgment. While Debtor may have been able to pay the Judgment prior to the Home's transfer, after the 1998 Transfer he clearly did not have the assets to do so. Thus, the 1998 Transfer also rendered Debtor insolvent for CUFTA purposes.
Based on the foregoing, we agree with the bankruptcy court's finding that the 1998 Transfer was constructively fraudulent.
c. Remedies under CUFTA
The record supports the bankruptcy court's finding that the 1998 Transfer of the Home was actually and constructively fraudulent and therefore voidable. Under CUFTA, a creditor's remedies for a fraudulent transfer include " avoidance of a transfer, attachment, and the equitable remedies of injunction and receivership as well as 'any other relief the circumstances may require.'" Filip v. Bucurenciu, 129 Cal.App.4th 825, 28 Cal.Rptr.3d 884, 887 (Ct. App. 2005)(citing CC § 3439.07(a)(3)(C)).
CC § 3439.07(a)(1) allows a creditor to obtain " [a]voidance of the transfer . . . to the extent necessary to satisfy the creditor's claim." To the extent a transfer is voidable by a creditor, " the creditor may recover judgment for the value of the asset transferred . . . or the amount necessary to satisfy the creditor's claim, whichever is less." CC § 3439.08(b). The asset value of a transfer " equal[s] the value of the asset at the time of the transfer, subject to adjustment as the equities may require." Id . § 3439.08(c). " Asset" is defined as the value of the property minus the amount encumbered by valid liens and exempt under nonbankruptcy law. Id . § 3439.01(a)(1)-(2).
Notwithstanding the fact that the bankruptcy court ultimately ruled that the 2001 Transfer was the relevant conveyance, during the pre-trial stage of the proceeding, the court identified the 1998 Transfer as the critical one. Thus, at the court's direction, Susana and Trustee each presented expert witness testimony as to the unencumbered, nonexempt value of the Home at the time of the 1998 Transfer. Susana's appraiser testified that the Home had no asset value at the time of the transfer, while Trustee's appraiser valued the unencumbered, nonexempt value of the Home at $7,700. Though the court found both appraisers credible, it ultimately found the methodology of Trustee's expert to be the more credible of the two, and therefore, accepted the latter's valuation.
On appeal, there appears to be no objection to the bankruptcy court's finding that the asset value of the Home in 1998 was $7,700. In fact, Susana states in both the opening and reply briefs that the available net equity as of April 1998 was $7,700. We, therefore, adopt the court's finding and hold that Trustee can avoid $7,700 of the 1998 Transfer pursuant to CC § 3439.07(a)(1).
C. The Equitable Remedy Available To Trustee
CUFTA " is not the exclusive remedy by which fraudulent conveyances may be attacked"; they " may also be attacked by . . . a common law action." Macedo v. Bosio, 86 Cal.App.4th 1044, 104 Cal.Rptr.2d 1, 6 (Ct. App. 2001); Fleet Nat'l Bank v. Valente (In re Valente), 360 F.3d 256, 261-62 (1st Cir. 2004). Trustee asserts that Debtor retained an equitable interest in the Home after the execution and recordation of the 1998 Grant Deed. Hence, when Debtor filed for bankruptcy, the increased equity in the Home was property of the estate based upon this interest. Trustee's claim has a strong basis in California law under the resulting trust doctrine.
Under California law, " '[a] resulting trust arises from a transfer of property under circumstances showing that the transferee was not intended to take the beneficial interest.'" Siegel v. Boston (In re Sale Guar. Corp.), 220 B.R. 660, 664 (9th Cir. BAP 1998)(citing Am. Motorists Ins. Co. v. Cowan, 127 Cal.App.3d 875, 179 Cal.Rptr. 747, 752 (Ct. App. 1982)). When a transfer is recognized to be fraudulent as to a debtor's creditors, the creditors can seek to impose a resulting trust upon the debtor's equitable interests in the transferred property for their benefit. See In re Torrez, 63 B.R. 751, 753-54 (9th Cir. BAP 1986)(applying California law).
Here, the record supports a finding that RICH was not intended to take a beneficial interest in the Home. After the 1998 Transfer, Debtor retained all important incidents of ownership in the Home: possession, the duty to pay expenses (i.e., mortgage, utility bills, property taxes), and the right to claim a tax deduction for mortgage payments. Moreover, there is no evidence that RICH paid any consideration for the Home, and the facts suggest no basis to infer a gift to RICH. In addition, neither RICH nor the GG Trust (the 99% owner of RICH) filed any response to Trustee's FAC arguing that Debtor did not hold an equitable interest in the Home at the time of his bankruptcy filing.
After the divorce, Susana testified that whenever she needed money for the mortgage payment, property taxes, or utility bills she would ask Debtor for the money, and he would write her a check for the requested amount. Susana would deposit the check into her account and then pay the bills out of that account.
The evidence compels a finding of a resulting trust, with RICH holding legal title to the Home in trust for Debtor, who retained an equitable interest in the Home at the time of the transfer. When Debtor filed for bankruptcy, this equitable interest became property of the estate. 11 U.S.C. § 541. Under § 542 Trustee is entitled to turnover of Debtor's equitable interest in the Home including the increased equity.
Prior to the bankruptcy, RICH transferred the Home to Susana in 2001. Both Trustee and Susana agree that when the 2001 Deed was recorded it was invalid due to it not being in compliance with CC § 1183, which requires that if a deed is made outside the United States and acknowledged by a notary public, there must be proof that the signature of the notary public was proved " (1) before a judge of a court of record of the country where the proof . . . is made, or (2) by an American diplomatic officer, consul, general counsel, vice consul, or consular agent, or (3) by an apostille affixed to the instrument[.]" CC § 1183. Nevertheless, Susana argues that even though the 2001 Deed was invalid at the time of recordation, CC § 1207 causes it to now be effective.
D. The New Trial Motion
On appeal, Susana argues that the bankruptcy court abused its discretion in denying the " post judgment motions for a new trial and to vacate, amend, modify, and/or reconsider the judgment." Appellant's Opening Brief at 29-30, Jan. 26, 2007. We disagree.
The post-trial motions were all filed in a single document - the New Trial Motion. The New Trial Motion was denied in part and granted in part. The bankruptcy court denied reconsideration of the following matters as lacking merit: 1) whether the court committed legal and/or factual error in determining that a) there was an actual and constructive fraudulent conveyance of the Home and b) Debtor held an equitable interest in the GG Trust, 2) whether Susana's due process rights were being violated, and 3) whether the Judgment was punitive (collectively, the " Denied Issues").
Rule 9023, which incorporates Federal Rule of Civil Procedure (" FRCP") 59, provides the legal standard for granting a new trial or amendment to a judgment. Fed.R.Bankr.P. 9023. Although there are no specific grounds listed for when a FRCP 59 motion should be granted, one " should not be granted, absent highly unusual circumstances, unless [the bankruptcy court] is presented with newly discovered evidence, committed clear error, or if there is an intervening change in the controlling law." McDowell v. Calderon, 197 F.3d 1253, 1255 (9th Cir. 1999) (emphasis in original).
Rule 9024, which incorporates FRCP 60(b), is similar to FRCP 59 and allows for reconsideration of an issue based upon:
(1) mistake, inadvertence, surprise, or excusable neglect; (2) newly discovered evidence which by due diligence could not have been discovered in time to move for a new trial under Rule 59(b); (3) fraud . . . misrepresentation, or other misconduct of an adverse party; (4) the judgment is void; (5) the judgment has been satisfied . . . or (6) any other reason justifying relief from the operation of the judgment.
For purposes of this appeal, Susana has not sufficiently articulated how the bankruptcy court abused its discretion in denying a new trial, amendment to the Judgment, or reconsideration of the Judgment as to the Denied Issues in the New Trial Motion. The opening brief and reply both fail to indicate how the New Trial Motion demonstrated the existence of newly discovered evidence, clear legal or factual error by the court, an intervening change in the controlling law, fraud or misrepresentation by Trustee, that the Judgment was void or had been satisfied, or any other reason justifying relief. Because the New Trial Motion did not provide sufficient grounds for a new trial, amendment to the Judgment, or reconsideration of the Judgment in regard to the Denied Issues, we find that the bankruptcy court did not abuse its discretion in declining to grant the relief requested therein.
E. Admissibility Of Debtor's 1994 Conviction
During trial, the bankruptcy court admitted into evidence a misdemeanor conviction related to a sexual assault claim that was entered against Debtor in 1994. Susana objected to its admission as irrelevant. The court found the conviction relevant to Debtor's state of mind in regards to whether he " had some awareness of a potential claim in 1992" which would have influenced him to enter into the 1992 transmutation agreement in order to avoid potential civil liability and future creditors. Hr'g Tr. 8:11, Mar. 10, 2005.
It should be noted that the conviction was later expunged pursuant to Cal. Penal Code § 1203.4.
Because we find the 1998 Transfer to be the operative transfer, the admission of the conviction in connection with the 1992 transmutation agreement is irrelevant. Nevertheless, as Susana raised the matter as a significant issue in her briefs on appeal, we have addressed and disposed of the issue.
Relevant evidence is defined in Federal Rule of Evidence (" FRE") 401 as " evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence." Evidence that is relevant may be excluded, however, under FRE 403 " if its probative value is substantially outweighed by the danger of unfair prejudice, confusion of the issues, misleading the jury, or by considerations of undue delay, waste of time, or needless presentation of cumulative evidence." Fed.R.Evid. 403. Bankruptcy courts " have wide latitude in ruling on the relevancy of evidence." United States v. Alvarez, 358 F.3d 1194, 1217 (9th Cir. 2004).
Here, the 1994 conviction tends to render the reason that Debtor entered into the 1992 transmutation agreement for fraudulent purposes more probable. If Debtor was engaging in unlawful activity, he may have had reason to believe that a civil action money judgment could result from his tortious conduct (i.e., assault). Susana has argued from the beginning that the relevant transfer for fraudulent conveyance purposes was the one associated with the 1992 transmutation agreement. Trustee appropriately should have the opportunity to present evidence to support his argument that the 1992 transmutation agreement was entered into fraudulently.
Furthermore, Susana's assertion that admission of the conviction is unduly prejudicial is without merit. The fact that this conviction was later expunged would not affect its relevancy. The bankruptcy court was not using the conviction as evidence of Debtor's character. The bankruptcy court did not abuse its discretion in allowing evidence of the conviction to be presented to determine Debtor's state of mind as to why he entered into the 1992 transmutation agreement.
We note parenthetically that the bankruptcy court conducted a bench trial and not a trial before a jury.
VI. CONCLUSION
Although we find that the bankruptcy court erred in basing the Amended Judgment on an alter ego theory, we may " affirm on any ground supported by the record, even if it differs from the rationale of the [bankruptcy court]." Pollard, 119 F.3d at 1433. Therefore, based on our resulting trust finding, we AFFIRM the Amended Judgment. We also AFFIRM the court's denial of the New Trial Motion and admission of Debtor's criminal conviction.
Defendants' summary judgment motion contended that, among other things, under California's Uniformed Fraudulent Transfer Act (" CUFTA"), the definition of " asset" includes only the unencumbered, nonexempt value of a debtor's property. At the time of the 1998 Transfer, the Home did not have any unencumbered, nonexempt value. Therefore, they were entitled to summary judgment in their favor on both fraudulent transfer claims. On July 27, 2004, the court denied the motion. Although it agreed with the Defendants' definition of " asset" under CUFTA, it held that there was a triable issue of fact with respect to whether the Home had any unencumbered, nonexempt value at the time of the 1998 Transfer.
Trustee's summary judgment motion asked the court to summarily adjudicate in his favor that 1) the 1998 Transfer was made with the actual intent to hinder, delay, or defraud the Judgment Creditors, 2) the 1998 Transfer was made for less than reasonably equivalent value at a time when Debtor was insolvent or that it rendered him insolvent, and 3) the transfer of the Proset Deed was avoidable under § 544(b). The court entered its memorandum decision granting the motion in part and denying it in part on February 17, 2005 (" February 17 memorandum decision"). Specifically, it granted Trustee's request to summarily adjudicate the issues of reasonably equivalent value and insolvency and denied summary judgment as to the fraudulent intent issue and any issues concerning the avoidance of the Proset Deed. An order evidencing the court's findings was entered on March 9, 2005.
(a) The court shall grant the debtor a discharge, unless (2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed-(A) property of the debtor, within one year before the date of the filing of the petition; or(B) property of the estate, after the date of the filing of the petition[.]
a transfer is made when such transfer is so perfected that a bona fide purchaser from the debtor against whom applicable law permits such transfer to be perfected cannot acquire an interest in the property transferred that is superior to the interest in such property of the transferee, but if such transfer is not so perfected before the commencement of the case, such transfer is made immediately before the date of the filing of the petition.
CC § 1207 states,
Any instrument affecting the title to real property, one year after the same has been copied into the proper book of record, kept in the office of any county recorder, imparts notice of its contents to subsequent purchasers and encumbrancers, notwithstanding any defect, omission, or informality in the execution of the instrument, or in the certificate of acknowledgment thereof, or the absence of any such certificate; but nothing herein affects the rights of purchasers or encumbrancers previous to the taking effect of this act.
The 2001 Deed was recorded on December 27, 2001. It would not have become valid under CC § 1207 until December 27, 2002. Debtor filed for bankruptcy on September 10, 2002. As such, Debtor's equitable interest in the Home became property of the estate prior to Susana having valid legal title to it.