Faulk v. Leaf

Filed 9/6/07 Faulk v. Leaf CA2/3

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION THREE

APPEAL from a judgment of the Superior Court of Los Angeles County, Joanne ODonnell, Judge. Reversed.

James L. Kellner for Helen Mary Leaf, Defendant and Respondent.

Irsfeld, Irsfeld & Younger and Kathryn E. Van Houten for Plaintiff and Appellant.

_________________________

INTRODUCTION

When a dispute arose between plaintiff, Audrey Candis Leaf Faulk, and her stepmother, defendant Helen Mary Wagner Leaf, the latter transferred all of her interest in realty and a dog kennel business to G.R.W., Inc., a Nevada corporation. After plaintiff obtained a $1.1 million judgment against defendant, she filed the instant action to set aside defendants transfers as fraudulent. (Civ. Code, 3439.04.) The trial court entered judgment in favor of defendant finding that plaintiff had failed to carry her burden to show that defendant made the transfers with intent to defraud plaintiff. Plaintiff appeals. We hold plaintiff has amply demonstrated actual intent to defraud. (Civ. Code,  3439.04, subd. (a)(1).) Accordingly, we reverse the judgment.

FACTUAL AND PROCEDURAL BACKGROUND

Reviewing the evidence according to the usual rules of appellate review (Crawford v. Southern Pacific Co. (1935) 3 Cal.2d 427, 429), there is no love lost between plaintiff and defendant; theirs is a bitter relationship. Defendant married plaintiffs father in July 1997. He died on March 29, 1999. Defendant owned residential property in Lakewood valued at $185,000, commercial property in Hawaiian Gardens, and a dog kennel business in Hawaiian Gardens. Defendant was a teacher, business owner, and formerly the Mayor of the City of Hawaiian Gardens.

A dispute between plaintiff and her father and stepmother arose in 1998. In November 1999, nine months after her father died, plaintiff filed an action on common count and alleging conversion and breach of trust (Faulk v. Leaf, Super. Ct. L.A. County, Case No. BC 220008) against defendant. Therein, plaintiff sought damages and specific recovery of personal property that was the corpus of certain trusts set up by plaintiffs parents. In February 2001, plaintiff obtained a final judgment against defendant in the amount of $1,136,099.

Plaintiff then brought the instant action to set aside defendants conveyances to G.R.W., Inc. as fraudulent transfers. The evidence adduced at trial shows that in April 1999, seven months before plaintiff filed her conversion action, defendant executed quitclaim deeds transferring her realty, amounting to 100 percent of her assets, to defendant G.R.W., Inc. G.R.W., Inc. is a Nevada corporation, whose purpose, defendant testified, was to protect [defendant] from [plaintiff]. The stated consideration for the transfer of defendants assets to the corporation was a promise to provide for [defendants] normal, day-to-day living expenses including but not limited to medical and hospital reimbursements for [defendant] until the date of her death. Defendant continues to reside rent-free at the residential property she transferred to G.R.W., Inc. At trial, defendant explained that the purpose of the asset transfer was to protect me against [plaintiff] [b]ecause of so much litigation . . . . Defendant testified further that the idea behind the transfers came from her late husband who felt it was a good idea for [defendant] to have some protection . . . . The deeds representing those transfers were recorded in 2001 and 2004.

The President of G.R.W., Inc. is Paul Baker, a friend of defendant and her deceased husband. Baker owns 99 percent of the corporations stock and Michael Degroat, another friend, owns 1 percent. Baker granted defendant power of attorney for the corporation, for the ease of getting things done.

Baker testified he did not understand that he was going to own 100 percent of the corporation. When the corporation sold the dog kennel business, Baker did not know about the terms of the sale and could not say what happened to the proceeds from that sale. He does not know what the corporations assets are. Defendant, who is secretary, along with the corporations accountant, knew this information. Baker defines himself as the messenger between defendant and the accountant.

At the close of trial, the court entered judgment in favor of defendant finding that plaintiff had failed to prove that defendant had the requisite intent to defraud plaintiff. Although G.R.W., Inc. was a sham, the court found, the property was transferred to the Nevada corporation prior to the death of defendants husband. Finally, the court found that plaintiff failed to prove that the property was transferred to avoid execution of any judgment.

DISCUSSION

Under the Fraudulent Transfer Act (Civ. Code, 3439-3439.12), a transfer of assets made by a debtor is fraudulent as to a creditor, whether the creditors claim arose before or after the transfer, if the debtor made the transfer (1) with an actual intent to hinder, delay or defraud any creditor, or (2) without receiving reasonably equivalent value in return, and either ([A]) was engaged in or about to engage in a business or transaction for which the debtors assets were unreasonably small, or ([B]) intended to, or reasonably believed, or reasonably should have believed, that he or she would incur debts beyond his or her ability to pay as they became due. [Citations.] (Monastra v. Konica Business Machines, U.S.A., Inc. (1996) 43 Cal.App.4th 1628, 1635, italics added.)[1]

Plaintiff contends that the trial court erred in entering judgment for defendant because she proved constructive fraud under Civil Code section 3439.04, subdivision (a)(2). However, we conclude that plaintiff has demonstrated actual fraud under subdivision (a)(1) of that section.

A creditor seeking to set aside a transfer as fraudulent under Civil Code section 3439.04 may satisfy either subdivision (a)(1) by showing actual intent, or subdivision (a)(2) by showing constructive fraud. (Monastra v. Konica Business Machines, U.S.A., Inc., supra, 43 Cal.App.4th at p. 1635; Annod Corp. v. Hamilton & Samuels (2002) 100 Cal.App.4th 1286, 1294; see Reddy v. Gonzalez (1992) 8 Cal.App.4th 118, 122-123.) Hence, subd[ivision] (a)[(1)] is independent of subd[ivision (a)(2)], and does not require proof of anything more than an actual intent to defraud. [Citation.] (2 Miller & Starr, Cal. Real Estate Digest, Fraudulent Conveyances and Transfers (3d ed. 2006)  5, p. 98.) It is sufficient to demonstrate that the transfer was made with the  actual intent to hinder, delay, or defraud any creditor of the debtor. ( 3439.04, subd. (a)(1).) (Filip v. Bucurenciu (2005) 129 Cal.App.4th 825, 834.)

Whether a conveyance was made with fraudulent intent is a question of fact, and proof often consists of inferences from the circumstances surrounding the transfer. [Citation.] (Filip v. Bucurenciu, supra, 129 Cal.App.4th at p. 834.) Fraud must be proved by a preponderance of the evidence. (Liodas v. Sahadi (1977) 19 Cal.3d 278, 292-293.)

Turning to the facts presented to the trial court, we conclude that plaintiff thoroughly demonstrated actual fraud under Civil Code section 3439.04, subdivision (a)(1). Defendant testified that her dispute with plaintiff arose in 1998. G.R.W., Inc. was established to protect defendant from plaintiff. Defendant testified that the purpose of transferring all of her assets to that corporation was to protect defendant against plaintiff because of so much litigation . . . .

This testimony is nearly identical to that adduced in Reddy v. Gonzalez, supra, 8 Cal.App.4th 118. There, the transferor testified that he conveyed his interest in real property to the defendant to protect the property from his creditors. (Id. at p. 123.) That testimony was sufficient to demonstrate by clear and convincing evidence the transferors intent to prevent his creditors from obtaining satisfaction of their claims from [his] interest in the . . . property. (Id. at pp. 123‑124.)

Likewise, here, defendants testimony that she transferred the real property to protect her from plaintiff because of litigation is ample evidence of defendants actual intent to prevent plaintiff from reaching the property. While fraud need be demonstrated by a mere preponderance of the evidence (Liodas v. Sahadi, supra, 19 Cal.3d at pp. 292-293), defendants testimony is clearly sufficient to meet the higher standard. (Reddy v. Gonzalez, supra, 8 Cal.App.4th at pp. 123-124.) Stated differently, therefore, there is no evidence to support the trial courts finding that plaintiff failed to prove the requisite intent to defraud.

Notwithstanding defendants own testimony is ample evidence of her actual intent to defraud plaintiff, the record also contains significant additional evidence substantiating that conclusion based on the factors of fraud codified in Civil Code section 3439.04, subdivision (b). (Filip v. Bucurenciu, supra, 129 Cal.App.4th at p. 834.) Of the non-exhaustive list of factors of actual intent under subdivision (a)(1) listed in subdivision (b),[2] at least six militate in favor of the existence of actual intent in this case.

First, the evidence supports the trial courts conclusion that G.R.W., Inc. is a sham. Baker, who owns 99 percent of the company, is unaware of its assets or its transactions, and testified he serves simply as a messenger between defendant and the corporations accountant. Defendant is the secretary, has Bakers power of attorney, and appears to run the day-to-day business. Hence, the record shows that defendants transfer was made to an insider. (Civ. Code,  3439.04, subd. (b)(1).) Second, defendant admittedly transferred all of her assets and yet continues to reside in the residence, rent-free, with the result that she clearly retains possession or control of the property she transferred. ( 3439.04, subds. (b)(2) & (b)(5).)

Moreover, defendant was fully aware of plaintiffs claim before she made the transfer and stated she made the transfer a matter of months before plaintiff filed her lawsuit. ( 3439.04, subds. (b)(4) & (b)(10).) The court incorrectly required plaintiff to prove that defendants transfer was made for the purpose of avoiding the execution of a judgment. Under the Fraudulent Transfer Act, a claim is sufficient. A claim is a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured. (Civ. Code,  3439.01, subd. (b), italics added.) Plaintiff had a claim, about which defendant was aware, in 1998 -- even if it was not reduced to a judgment until after the transfers had been made. In any event, fraud may be proven regardless of whether the creditors claim arose before or after the transfer . . . . (Monastra v. Konica Business Machines, U.S.A., Inc., supra, 43 Cal.App.4th at p. 1635, italics added;  3439.04, subd. (a).) Thus, apart from the fact that the evidence shows that the dispute giving rise to plaintiffs claim here arose in 1998, the fact that plaintiffs actual lawsuit was not filed until after defendant transferred the realty to the corporation is legally insignificant.[3]

Finally, the record shows that defendant did not receive consideration that was reasonably equivalent to the value of the assets she transferred to G.R.W., Inc. Defendant received as consideration for transferring her property to the

corporation, the promise to pay defendants normal, day-to-day living expenses including but not limited to medical and hospital reimbursements for [defendant] until the date of her death. However, value does not include an unperformed promise made otherwise than in the ordinary course of the promisors business to furnish support to the debtor or another person. (Civ. Code,  3439.03, italics added.) Defendant adduced no evidence that the ordinary course of G.R.W., Inc.s business included furnishing support to defendant; nor could there be, given the corporation is a sham. (Civ. Code, 3439.04 subd. (b)(8).)

We observe that the record shows that G.R.W., Inc. was not a bona fide purchaser for value. While a creditor may bring an action under Civil Code section 3439.04 to avoid a fraudulent transfer, [a] transfer that would otherwise be voidable as intentionally fraudulent under section 3439.04, subdivision (a), is not voidable against a transferee who took in good faith and for a reasonably equivalent value. [Citation.] (Monastra v. Konica Business Machines, U.S.A., Inc., supra, 43 Cal.App.4th at p. 1636; 3439.08, subd. (a).) The evidence shows that the corporation did not take the property in good faith for a reasonably equivalent value. As already noted, defendant did not receive valuable consideration for her conveyances, and G.R.W., Inc., the recipient of the transfer, is a sham. Where the transferee G.R.W., Inc. did not take defendants property in good faith for reasonable value, no impediment stands in the way of plaintiffs action to avoid the transfers. In short, the trial courts ruling is neither supported by the evidence nor legally accurate.

DISPOSITION

The judgment is reversed. Appellant shall recover costs of appeal.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

ALDRICH, J.

We concur:

KLEIN, P. J.

CROSKEY, J.

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[1] In 2004, after Monastra, the Legislature rewrote Civil Code section 3439.04. The amendment changed the numbering and lettering, but not the wording, of what is now subdivision (a)(1) and (a)(2). (Stats. 2004, ch. 50 (S.B. 1408),  1.)

[2] Civil Code section 3439.04, subdivision (b) reads in its entirety, In determining actual intent under paragraph (1) of subdivision (a), consideration may be given, among other factors, to any or all of the following:  []  (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 debtors 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 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.

[3] In any event, the trial courts finding that the property was transferred to the Nevada corporation prior to defendants husbands death is not supported by the evidence. The record shows that while her husband died on March 29, 1999, defendant did not execute the quitclaim deeds in favor of G.R.W., Inc. until April 1999, and did not record those deeds until 2001 and 2004.