Opinion
Bankruptcy No. 12-13764-LT7 Adversary No. 18-90039-LT
12-04-2018
In re: RUDOLPH MEDINA, Debtor. RONALD E. STADTMUELLER, Chapter 7 Trustee, Plaintiff, v. BERNADETTE SARKISIAN, an individual; JOHN SARKISIAN, an individual Defendants.
WRITTEN DECISION - NOT FOR PUBLICATION
MEMORANDUM DECISION
Defendant John Sarkisian is a judgment debtor of the bankruptcy estate of debtor Rudolph Medina. In his efforts to collect on the judgment, the Trustee seeks in this adversary proceeding to set aside a prepetition transmutation agreement through which Defendants transmuted their community property into equal separate property interests. Defendants have moved for voluntary abstention on several grounds, including that the legal issues involved are state law issues and unresolved. Defendants and the Trustee have also moved for summary judgment. For the reasons set forth below, the Court denies the motion to abstain at least to the extent of deciding the motions for summary judgment, denies Defendants' motion for summary judgment, and denies the Trustee's motion for summary judgment to the extent it sought a ruling on Defendants' state of mind and whether the estate suffered any damages.
This opinion is intended only to resolve the dispute between these parties and is not intended for publication.
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. §§101-1532, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. --------
Factual Background
On October 11, 2012, Rudolph Medina a.k.a. Rudy Medina ("Debtor") filed a Chapter 11 case. Prepetition, Debtor was the cross-complainant in a San Diego Superior Court case against John Sarkisian entitled Medina v. Sarkisian (the "Superior Court Case"). In his Chapter 11 proceeding, the Debtor sought and obtained approval to employ counsel to continue the Superior Court Case. On May 15, 2013, the Superior Court rendered a Partial Judgment on Jury Verdict (the "Judgment"); the Judgment was in favor of the Debtor and against Defendant John Sarkisian in the amount of $1,591,586 and in favor of John Sarkisian and against the Debtor in the amount of $200,000.
Debtor's case was converted to chapter 7 on September 4, 2013, and the Trustee was appointed. After conversion of the case, the Trustee also sought and obtained approval to employ counsel to continue the Superior Court Case.
The parties appealed certain rulings and on September 29, 2015, the Fourth District Court of Appeal decided the appeal in a manner favorable to the Debtor's estate. On March 2, 2016, a Modified Partial Judgment on Jury Verdict ("Modified Judgment") was entered in favor of the Debtor's estate and against John Sarkisian in the amount of $1,718,271.49, plus post-judgment interest, and in favor of John Sarkisian and against the Debtor in the amount of $200,000. The Modified Judgment is now final and not subject to further appeal.
The Sarkisian proof of claim
On January 27, 2014, John Sarkisian filed Proof of Claim No. 20 in the amount of $200,000 in the Debtor's case ("Sarkisian Proof of Claim").
The transmutation agreement
According to the Trustee, at a February 17, 2017 Judgment Debtor Examination of John Sarkisian, the Trustee's litigation counsel learned that on March 31, 2014, approximately eight months after the entry of the initial Judgment, the Defendants entered into a "Post Marital Transmutation Agreement" ("Transmutation Agreement"). At the time the Defendants entered into the Transmutation Agreement, they had been married for almost 30 years, and there was no separation or dissolution proceeding pending. The Trustee asserts that the purpose of the Transmutation Agreement was to evade payment of the Judgment by shielding half of the Defendants' community property from the reach of the Debtor's bankruptcy estate representative. Thus, in this adversary proceeding the Trustee asserts that the Transmutation Agreement was a fraudulent conveyance as it was entered into with the intent to hinder, delay, or defraud Defendants' creditors.
Abstention motion
Defendants requested that this Court abstain in favor of the Superior Court. The Motion was based on the typical grounds. However, at the hearing counsel added the argument that the case involved a legal issue of first impression which should be decided in the state court. The Court continued the matter to allow the parties to frame this legal issue through motions for summary judgment so that the Court could consider whether it was indeed best decided in state court.
Defendants' motion for summary judgment
Defendants argue that the transmutation accomplished under the Transmutation Agreement was not a "transfer" as required for the Trustee's claim under the Uniform Voidable Transactions Act ("UVTA") because Defendant John parted with no property. Defendants also argue that the same result could have been achieved through the Family Code had they divorced and allowed the court to divide the property, and therefore either the transmutation must be okay or, if the Court finds a fraudulent conveyance, the Court will be promoting divorce.
Trustee's motion for summary judgment
The Trustee also moved for summary judgment. He takes the opposite position on the Defendants' legal arguments. He also sought a summary judgment that (1) the Defendants had the intent required for an intentional fraudulent conveyance determination under § 3439; and (2) that Debtor's estate was damaged by Defendants' "transfer." At the hearing, the Trustee acknowledged that the factual determinations of intent and damages were not susceptible to summary judgment on this record. Thus, the only issues which will be resolved with respect to the motions for summary judgment are Defendants' legal arguments; thus, the Trustee's Motion amounts to an opposition to Defendants' Motion.
The Abstention Motion
Abstention standard
Abstention is governed by 28 U.S.C. § 1334(c) and can be either permissive or mandatory. Defendants do not argue for mandatory abstention; instead they request that this Court exercise permissive abstention under 28 U.S.C. § 1334(c)(1), which states in relevant part: "[N]othing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11."
The Ninth Circuit has provided guidelines for consideration by bankruptcy courts to determine if permissive abstention is appropriate. The factors a bankruptcy court should consider in deciding permissive abstention are: (1) the effect or lack thereof on the efficient administration of the estate if a Court recommends abstention, (2) the extent to which state law issues predominate over bankruptcy issues, (3) the difficulty or unsettled nature of the applicable law, (4) the presence of a related proceeding commenced in state court or other nonbankruptcy court, (5) the jurisdictional basis, if any, other than 28 U.S.C. § 1334, (6) the degree of relatedness or remoteness of the proceeding to the main bankruptcy case, (7) the substance rather than form of an asserted "core" proceeding, (8) the feasibility of severing state law claims from core bankruptcy matters to allow judgments to be entered in state court with enforcement left to the bankruptcy court, (9) the burden of [the bankruptcy court's] docket, (10) the likelihood that the commencement of the proceeding in bankruptcy court involves forum shopping by one of the parties, (11) the existence of a right to a jury trial, and (12) the presence in the proceeding of nondebtor parties. Christensen v. Tucson Estates (In re Tucson Estates), 912 F.2d 1162, 1167 (9th Cir. 1990).
Abstention Analysis
(1) The effect or lack thereof on the efficient administration of the estate if a Court recommends abstention.
The Trustee argues that the Modified Judgment is the last asset of the estate and needs to be administered promptly. The Court agrees. This case has been pending for approximately 6 years. Thus, the question is where can it be more promptly resolved? The Court is well aware of the current Superior Court caseload; it likely will get to decision more quickly in the bankruptcy court if it is simply a question of time to non-jury trial. But complications exist as to Ms. Sarkisian. First, at least with respect to her and absent her consent, the Court cannot enter a final order. See In re Bellingham Ins. Agency, Inc., 702 F.3d 553, 565 (9th Cir. 2012), aff d sub nom. Exec. Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165, 189 L. Ed. 2d 83 (2014) ("Taken together, Granfinanciera and Stern settle the question of whether bankruptcy courts have the general authority to enter final judgments on fraudulent conveyance claims asserted against noncreditors to the bankruptcy estate. They do not.") Further, Ms. Sarkisian has asserted a right to a jury trial. A jury trial cannot go forward here over opposition; and it would not be a good idea in any event. This issue, however, could be resolved by the withdrawal of reference to allow the matter to proceed to jury trial in the District Court. This factor cuts both ways and appears to be neutral.
(2) The extent to which state law issues predominate over bankruptcy issues.
Defendants' Family Code arguments are solely state law matters. However, the issue of what is and is not a transfer for the purposes of fraudulent conveyance actions has been addressed thoroughly in the bankruptcy arena and a ruling on the issue is likely to have ramifications in the federal bankruptcy arena. The Court finds this factor weighs only slightly in favor of abstention.
(3) The difficulty or unsettled nature of the applicable law.
It is undisputed that Defendants signed the Transmutation Agreement whereby they transmuted all of their community property to separate property - each receiving a 50% interest in the covered assets.
In their motion for summary judgment Defendants raise two arguments. First, Defendants argue that the transmutation accomplished under the Agreement was not a "transfer "as required for the Trustee's claim under the UVTA because Defendant John (against whom the Judgment was entered) parted with no property. Secondly, Defendants argue that the same result could have been achieved through the Family Code had they divorced and allowed the court to divide the property, and that this somehow requires the conclusion that it is not a fraudulent conveyance when done outside the family law arena. The creative "no transfer" argument has not been ruled on in a published opinion (perhaps because Defendants are the first to make the argument) but as discussed more fully below, the decision is not particularly difficult. Similarly, so too the argument that the transaction must be okay because it could be accomplished through a divorce is not a state law head scratcher.
No transfer theory
California Civil Code § 3439.01(m) defines "transfer" for the purposes of the UVTA 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."
Debtors argue that the Agreement wrought no change in Defendants' "respective ownership percentage in their assets" and therefore Defendants did not dispose of or part with an interest in any asset: "Prior to the Agreement, Defendants jointly owned all of their assets and liabilities, meaning John and Bernie each owned a 50% interest in each asset. After the Agreement, John and Bernie each owned a 50% interest in the same assets and liabilities. Nothing changed but the character of the assets and liabilities, from community to separate. The Agreement did not result in John transferring any asset to Bernie." Dkt. No. 25 at 2:19-23. The Trustee obviously disagrees, arguing in part that from the perspective of creditors a transfer did occur.
The parties cite to California case law and they appear to agree that no California court (or any other court that has been brought to this Court's attention) has addressed this specific argument. However, as discussed more fully below, the Court has determined that it is capable of resolving the legal issue by reference to the statutory language and relevant case law.
"We could have divorced" theory
Debtors argue that the changes accomplished by the Agreement could have been accomplished by divorcing and allowing the property and debts to be divided under the Family Code, and therefor that the "transfers" under the Agreement cannot be fraudulent transfers:
Spouses have the right to protect their assets to the extent allowed by law. Just as a debtor can do valid pre-bankruptcy planning—such as by converting non-exempt assets into exempt assets—spouses have the right to protect the assets of the non-debtor spouse.
Bernie is not liable on the Judgment. Yet, Bernie owns a one-half interest in all of the community assets. To protect her one-half interest, Bernie and John can divorce, Bernie would receive her one-half interest in all assets, and the Trustee would have no right or claim to reach Bernie's one-half
interest. If it can be done as part of a divorce, logic, common sense and the integrity of marriage demands it must be able to be done without divorce. It can be, through a transmutation agreement.
Defendants' Memorandum, Dkt. 25-1, pp. 9:22-10:5.
As with Defendants' other argument, the Court is competent to resolve the issues and able to do so quickly.
Though Defendants' legal arguments are based on state law, they are not particularly difficult and have import in the bankruptcy arena. This factor is neutral.
(4) The presence of a related proceeding commenced in state court or other nonbankruptcy court.
There may be an open related state court proceeding - the Superior Court Case in which the Modified Judgment was entered. But there is little certainty that the judge handling that matter will get the case. This adversary proceeding involves only one of the parties in the Superior Court Case, and the issues are entirely different. And there is less certainty that the Defendants would allow that judge (who decided the case against Defendant John) to retain the case after abstention given the tool that is C.C.P. § 170.6. This factor does not appear to weigh in favor of abstention.
(5) The jurisdictional basis, if any, other than 28 U.S.C. § 1334.
The Court's jurisdiction in this matter would be based solely on § 1334. This factor appears to weigh in favor of abstention.
(6) The degree of relatedness or remoteness of the proceeding to the main bankruptcy case.
This is a collection action to wrap up a long pending case. The alleged bad acts (the transfers) occurred while the bankruptcy was pending and impact payment to creditors. If the Trustee prevails, this Court likely must make determinations regard Defendant John's claim. This factor weighs in favor of retention.
(7) The substance rather than form of an asserted "core" proceeding.
This is a state law fraudulent conveyance action in connection with a collection action. It is core, but the Court has limitations on its ability to enter a final judgment. This factor appears neutral.
(8) The feasibility of severing state law claims from core bankruptcy matters to allow judgments to be entered in state court with enforcement left to the bankruptcy court.
There are no directly "bankruptcy matters" involved here. And this is part of the enforcement or collection piece of an action that was already decided in state court. This factor appears not applicable or neutral.
(9) The burden of [the bankruptcy court's] docket.
The Court and the state court currently bear a similar caseload burden. This factor is neutral.
(10) The likelihood that the commencement of the proceeding in bankruptcy court involves forum shopping by one of the parties.
The Trustee had no choice but to commence the action here. On the other hand, Defendants in the Court's view after hearing argument, are using this Motion to achieve some delay and to move the Trustee to a forum not of his choice. This factor does not favor abstention.
(11) The existence of a right to a jury trial.
As noted above, Ms. Sarkisian asserted a right to a jury trial. This factor favors abstention as her claims.
(12) The presence in the proceeding of nondebtor parties.
Ms. Sarkisian is not a creditor. Mr. Sarkisian, on the other hand, is a creditor and filed a proof of claim. This factor is neutral.
Conclusion re abstention
As is typically the case, some factors are neutral, some weigh in favor of abstention, and others favor retention. At the end of the day, the Court must do more than simply count the number of points for and against abstention. It must weigh the factors as well as decide their applicability. Having considered the motions for summary judgment, the Court is inclined to conclude that the factors that weigh most heavily are the need by the Trustee to get this matter resolved and this Court's ability to address the legal issues raised by the motions for summary judgment promptly and as competently as the state court. To the extent there are unique issues of importance in the state law fraudulent conveyance arena, they are also critically important in the bankruptcy arena. The Court denies the motion to abstain and will determine the motions for summary judgment.
Defendants' Motion for Summary Judgment
Defendants' Motion is based on two arguments. First, Defendants argue that the transmutation accomplished under the Agreement was not a "transfer" as required for the Trustee's claim under the UVTA because Defendant John parted with no property. Second, Defendants argue that the same result could have been achieved through the Family Code had they divorced and allowed the court to divide the property, and, therefore, it must be appropriate under California law: "Defendants have the same rights through a transmutation agreement that they would have through divorce. If not, the Courts would be promoting divorce, which is completely antithetical to California law (which is to promote marriage, not encourage divorce)." Dkt. No. 25 at 5.
No transfer theory
Under California law, married persons are free to transmute community property to separate property. Cal. Fam. Code § 850. However, such transmutation is expressly "subject to the laws governing fraudulent transfers." Cal. Fam. Code § 851.
California Civil Code § 3439.01(m) defines "transfer" for the purposes of the UVTA 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." The definition is nearly identical to the definition of "transfer" under bankruptcy law which has long been "used in its most comprehensive sense, and... intended to include every means and manner by which property can pass from the ownership and possession of another, and by which the result forbidden by the statute may be accomplished..."Pirie v. Chicago Title & Tr. Co., 182 U.S. 438, 444 (1901)(discussing preference law under the Bankruptcy Act).
The long-understood purpose of the fraudulent transfer statutes is to preclude debtors from removing property from the reach of creditors. Borgfeldt v. Curry, 25 Cal. App. 624, 626 (1914)("These sections, in common with the remainder of the Code, should be liberally construed with a view to effecting their purpose. That purpose undoubtedly is to prevent debtors from placing property which legitimately should be available for the satisfaction of demands of creditors beyond their reach...") Applying the Arizona Uniform Fraudulent Transfer Act, the Court of Appeals of Arizona explained: "[i]t is not the transaction itself, but rather[,] the purpose behind the transaction, that brings a transfer under the scrutiny of [the Act]."State ex rel. Indus. Comm'n v. Wright, 202 Ariz. 255, ¶ 20, 43 P.3d 203, 207 (Ct. App.2002); see also Kaufmann v. M & S Unlimited, L.L.C., 211 Ariz. 314, 318 (Ct. App. 2005)("the modification of a marital agreement to convert the husband's earnings from separate property into community property was held to be a transfer within the Act because the change had been made to protect those earnings from potential garnishment.")
Consistent with the purpose of fraudulent conveyance provisions, under California law, the key to whether a transfer occurs is whether an asset is put out of the reach of creditors. Opperman v. Path, Inc., 87 F. Supp. 3d 1018, 1065 (N.D. Cal. 2014)("A creditor cannot premise a UFTA claim on a transfer unless the 'the transfer puts beyond [the creditor's] reach property [the creditor] otherwise would be able to subject to the payment of [ ] debt.'"(citing Mehrtash v. Mehrtash, 93 Cal.App.4th 75, 80 (2001)).
This point is illustrated in Edward M. Wolkowitz v. Stephanie Beverly (In re Beverly), 374 B.R. 221, 227 (B.A.P. 9th Cir. 2007), aff'd in part, dismissed in part, 551 F.3d 1092 (9th Cir. 2008). In Beverly, husband, anticipating a large judgment on a community debt, used a marital settlement agreement ("MSA") in his pending divorce to exchange his interest in $1 million of nonexempt funds in exchange for wife's interest in his $1.1 million exempt retirement fund. This was held to be a fraudulent transfer, despite the fact that from the transferor's perspective he broke nearly even. It was only from the perspective of the judgment creditor that husband's portfolio had changed.
Defendants acknowledge that a transmutation agreement can be a fraudulent conveyance. See Reply, Dkt. No. 30 at 3:3-6. Rather, Defendants argue that their particular Transmutation Agreement was not a transfer because it wrought no change in Defendants' "respective ownership percentage in their assets" and Defendants did not dispose of or part with an interest in any asset:
Before signing the Agreement, John and Bernie each owned a 50% interest in their assets; after signing the Agreement, they each continued to own a 50% interest in their assets. Their respective ownership percentage in their assets has not changed. They did not dispose or part with any interest in any asset. The only change is the character of their ownership interests.Dkt. No. 25.
However, as noted above the "transfer" should be considered from the perspective of creditors, including the Trustee, and the question is whether property was removed from their reach. From the perspective of Defendant John's creditors, there was definitely a change: Before the transmutation they had access to all the community properly, after they had access only to the half that became Defendant John's separate property.
Further, Defendants overlook an important element of property ownership: it can be used to honor one's debts and thereby increase one's net worth. Prior to the Transmutation Agreement, Defendant John had access to all of the community property to satisfy his debts and to establish net worth. After the transmutation, he could use only half to pay his obligations or to support his balance sheet. It appears clear that; absent the assumption that his sole goal and desire was to avoid paying his legal obligations, Defendant John was worse off after the Agreement in that he had less property with which to reduce his debt load and to establish solvency. That right was one aspect of his ownership of community property; and Defendant John transferred it away. The flipside of this is that Defendant Bernie went into the agreement owning 50% of the community property all of which was subject to the claims of John's creditors. She emerged from the Agreement owning 50% of the property, now free and clear of the claims of John's creditors. Certainly, looking at it from the perspective of Defendant John's ability to pay his debt, he transferred away a valuable right under the Agreement.
The Court rules that the Transmutation Agreement was a transfer for the purposes of the UVTA. This interpretation accords with the purpose of the law, which is designed to protect the rights of creditors. Defendants argue that they are free to transmute or otherwise change the nature of their ownership of their property, which is generally true. If one has no debts or is not rendered insolvent or less capable to meet debt as a result of the transfer, the law cares little about what one does with one's property. 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 Defendant John and his creditors.
Defendants submit that there are no published cases in California that hold that a transmutation agreement such as theirs was a fraudulent transfer. This is not disputed by the Trustee, and the Court has found no such case. However, the fact that it has not been addressed by the courts yet, does not mean that the Trustee's theory is not viable; simply because there is no case holding that a particular division of property under the Family Code is a fraudulent transfer does not necessarily mean that one could never be subject to such a challenge.
Further, the flip side is that no court has published an opinion holding that such a transmutation was not a transfer. As set forth above, the issue can be resolved by reference to the statutory language and the long established and obvious purpose of the statute. The Transmutation Agreement was a transfer for the purposes of the UVTA.
"We could have divorced" theory
As explained above, Defendants argue that the changes accomplished by the Transmutation Agreement could also have been accomplished by divorcing and allowing the property and debts to be divided under the Family Code, and therefor that the transfers under the Agreement cannot be fraudulent transfers. See Defendant's Memorandum, Dkt. No. 25 at 8:6-10:5.
Their argument, however, is specious, and a careful consideration reveals several problems. In order for Defendants' argument to succeed, Defendants must establish at least three things: First, they must support their assertion that they could accomplish the same result as is accomplished through the Transmutation Agreement through a divorce proceeding; that is divide the assets into separate property with no consideration of John's separate liability on the Judgment. Second, they must establish that such a resolution would not be subject to a fraudulent conveyance action. Finally, Defendants must convince the Court that the law governing divorce should be applied to transmutation agreements. For the reasons set forth below, the Court holds that Defendants have failed to establish any of the forgoing.
The argument that "John and Bernie are entitled to divorce at any time and split their assets down the middle" is overbroad.
Defendants make this claim but provide no real support for the assertion. They make their case based on two statutes out of numerous others governing a dissolution proceeding: Family Code § 2550 which directs a court to divide community property equally, "[e]xcept upon the written agreement of the parties, or on oral stipulation of the parties in open court, or as otherwise provided in this division,"(emphasis added), and Family Code § 916, which provides that "after division of community and quasi-community property pursuant to Division 7 (commencing with Section 2500)... the property received by the person in the division is not liable for a debt incurred by the person's spouse before or during marriage, and the person is not personally liable for the debt, unless the debt was assigned for payment by the person in the division of the property." (Emphasis added.)
Code § 916 applies only after the divorce proceeding has completed and only "after division of community and quasi-community properly pursuant to Division 7 (commencing with Section 2500)." Contrary to Defendants' argument, a ruling that a property division in a divorce can amount to a fraudulent conveyance would not render this section "meaningless." Rather, the result of a post-divorce fraudulent conveyance ruling would be to set aside the property division that triggered § 916 in the first place: section 916 would no longer apply.
Code § 2550 only applies if the parties have not otherwise agreed or if another section of the Family Code does not otherwise provide. At the very least Defendants ignore Family Code § 2551 which directs the dissolution court to "assign" liabilities as either community or separate, in addition to dividing the assets; Family Code § 2552 which requires the court to make a valuation of the assets and liabilities as part of the division; Family Code § 2620 which directs the court to divide "the debts for which the community estate is liable; "and Family Code § 2622(b) which indicates the court must pay attention to whether "community debts exceed total community and quasi-community assets."
The Family Court is required to take the separate and community obligations into consideration in the property division . In re Beverly, 374 B.R. at 233 ("The state supreme court noted it is California legislative policy that, in allocating debts to divorcing parties, account be taken of the rights of creditors 'so there will be available sufficient property to satisfy the debt by the person to whom the debt is assigned.'")
In short, by their very selective and incomplete reference to the Family Code, Defendants fail to establish that they could have accomplished what they did under the Transmutation Agreement by going through a divorce. Ultimately, Defendants have provided no authority for their bald claim that they "are entitled to divorce at any time and split their assets down the middle" presumably with no consideration of the rights of third parties. Based on the statutes Defendants did not cite, it appears clear that the community and separate debt is a factor in the property division. It is quite possible that had Defendants divorced the Family Court would have awarded Defendant John a greater portion of the community property to ensure he could satisfy the Judgment. Defendants have failed to establish that they could have simply accomplished their specific asset division through divorce. And even if one assumes they can slip a deal intended to hinder a creditor by the State Court, the creditor retains rights to challenge the decision.
Argument that Divorce resolutions are not subject to a fraudulent conveyance action.
Case law establishes that a property division through a divorce proceeding is subject to attack as a fraudulent conveyance. This is true whether the matter is resolved through a marital settlement agreement ("MSA") (see Mejia v. Reed, 31 Cal. 4th 657 (2003)) or through a family court judgment (see In re Bledsoe, 569 F.3d 1106, 1112 (9th Cir. 2009)).
In Mejia, the California Supreme Court explored the intersection of the dissolution and fraudulent conveyance statutes: "[t]he UFTA permits defrauded creditors to reach property in the hands of a transferee. The Family Code, in section 916, protects property transferred to a spouse incident to divorce from the debts of the other spouse. Neither statute expressly refers to the other. Our task is to harmonize the two statutes." 31 Cal. 4th at 663. The court in Mejia ruled that a transfer of all of a husband's assets to wife in an MSA for the purpose of blocking a child support action by another woman was a voidable transfer. Husband had argued that the post-1984 enactments (culminating in Family Code § 916) meant a creditor could never challenge an MSA as a fraudulent transfer. The Court disagreed, reasoning "[t]he California Legislature has a general policy of protecting creditors from fraudulent transfers, including transfers between spouses." Id. at 668. What is clear throughout the Mejia opinion is that an MSA in a divorce proceeding is not immune from attack as a fraudulent conveyance.
A dissolution judgment is also subject to attack as a fraudulent conveyance, though only upon a finding of actual intent to hinder, delay, or defraud. In re Bledsoe, 569 F.3d 1106, 1112 (9th Cir. 2009). In Bledsoe, the Ninth Circuit held that a state court's dissolution judgment, following a regularly conducted contested proceeding, conclusively establishes "reasonably equivalent value" for the purpose of § 548, so it could not be challenged as a constructive fraud: it, however, would be subject to avoidance based upon allegations of the intent to hinder, delay, or defraud. Id.
Defendants argue that if a transmutation agreement such as theirs is deemed subject to challenge as a fraudulent conveyance, married couples will be encouraged to divorce. The Court is not convinced. Ignoring the speculative nature of the argument, the Court notes that simply holding that a transmutation such as accomplished by Defendants is a transfer for the purposes of fraudulent conveyance, does not mean that it is a fraudulent conveyance: it would only be actionable, if accomplished through a dissolution judgment, when it was done to hinder, delay, or defraud a creditor. There is no apparent inducement to divorce in order to hinder one's creditors where there are negative consequences for the transfer, and every policy reason to bar married persons from acting to the intentional disadvantage of legitimate creditors.
Transmutation in marriage and divorce are different
Ultimately, Defendants' argument is an invitation to compare apples to oranges: a transmutation in an ongoing marriage, on the one hand, to a property settlement or judgment in a marriage-ending proceeding, on the other. Defendants' argument ignores the unique policy considerations which arise in a divorce proceeding:
It is the policy of the State of California (1) to marshal, preserve, and protect community and quasi-community assets and liabilities that exist at the date of separation so as to avoid dissipation of the community estate before distribution, (2) to ensure fair and sufficient child and spousal support awards, and (3) to achieve a division of community and quasi-community assets and liabilities on the dissolution or nullity of marriage or legal separation of the parties as provided under California law.Cal. Fam. Code § 2100. The primary goal in a divorce is to divide the community debt and assets and allow the parties to go on their separate ways. This is quite different than allowing spouses who intend to remain a unit to transmute their property to the disadvantage of their creditors. The California legislature had every reason to afford flexibility in divorce cases. For example, property division in a divorce proceeding is often done in connection with or in lieu of ongoing support obligations. Also, the post-dissolution debt obligations are taken into consideration in the property division. See In re Beverly, supra. Thus, even if Defendants could transmute their community property to separate property through a divorce, and even if such a division would be immune from a fraudulent conveyance action (a determination the Court does not reach), the Court is not convinced that it means they can do the same outside of a divorce proceedings: they are two different things.
Conclusion
For the reasons set forth above, the Court denies the Motion to Abstain at this point and denies the Defendants' Motion for Summary Judgment and grants summary judgment on these legal issues to the Trustee. The Court also denies the Trustee's Motion for Summary Judgment on the intent and damages issues. DATED: December 4, 2018
/s/_________
LAURA S. TAYLOR, Chief Judge
United States Bankruptcy Court Ronald E. Stadtmueller v. Bernadette Sarkisian; John Sarkisian, Adv. 18-90039-LT
In re Rudolph Medina, Bk. No. 12-13764-LT7
CERTIFICATE OF MAILING
The undersigned, a regularly appointed and qualified employee in the office of the United States Bankruptcy Court for the Southern District of California, at San Diego, hereby certifies that a true copy of the attached document, to wit:
MEMORANDUM DECISION
was enclosed in a sealed envelope bearing the lawful frank of the bankruptcy judges and mailed via first class mail to the party at their respective address listed below: William P. Fennell, Esq.
Law Office of William P. Fennell, APLC
401 West A Street, Suite 1800
San Diego, CA 92101 Miles D. Grant, Esq.
Alexander J. Kessler, Esq.
GRANT & KESSLER, APC
1331 India Street
San Diego, CA 92101 United States Trustee
Office of the U.S. Trustee
880 Front Street, Suite 3230
San Diego, CA 92101 Ronald E. Stadtmueller, Chapter 7 Trustee
10755 Scripps Poway Pkwy., #370
San Diego, CA 92131
Said envelope(s) containing such document was deposited by me in the City of San Diego, in said District on December 4, 2018.
/s/_________
Regina A. Fabre, Judicial Assistant