Reminder Lessons: The Interaction between the California Uniform Voidable Fraudulent Transactions Act and Family Law

The following is a case summary written by Robert Harris and Kathleen A. Cashman-Kramer regarding the recent California Court of Appeal decision in Bijan Boutiques, LLC v. Isong, 104 Cal.App.5th 132 (Court of Appeal, Fourth District, August 13, 2024), holding that while a property division by a marital settlement agreement between divorcing spouses may be challenged as a fraudulent or voidable transfer, a property division entered by contested court order in a marital dissolution may not be.  The Court of Appeal ruled that if marital property is divided by contested order, California Family Code Section 916 applies, absolving each spouse of liabilities incurred by the other spouse before or during marriage. To view the published opinion, click here. 

Summary and Factual Background

Background: Richard Akubiro  was married to Rosamari Isong in 1997; they separated in 2017.  In 2012, Akubiro and Isong purchased a home in Chino, California, where Isong and the couple’s children lived. Akubiro never lived there and he maintained his residence overseas. 

Bijan Boutiques LLC (“Bijan”) filed a lawsuit against Akubiro (not Isong) in 2018 based on clothing he purchased in 2014 (during the marriage).  Shortly thereafter, Isong commenced dissolution proceedings and recorded a notice of pendency of action (also known as a lis pendens) against  the Chino property.  In January 2019, Bijan obtained a judgment by default against Akubiro. In July 2019, the Family Court entered judgment terminating the marriage and awarding the Chino property to Isong as her sole property, while Akubiro was awarded his overseas properties.  The Family Court also ordered that the debt owed to Bijan was the sole debt of Akubiro. 

Bijan then sued Isong in 2020 seeking to set aside the marital dissolution judgment under California Civil Code sections 3439 et seq., the California Uniform Voidable Transactions Act (“UVTA”).  Critically, Akubiro and Isong had no negotiated marital settlement agreement. Bijan acknowledged that it is the court’s own “Judgment and [its] subsequent order for appointment of an elisor to effect a conveyance of the Chino Property” that constitute the relevant “transfer” under the UVTA.  Bijan argued that the dissolution judgment “effectively makes enforcement of the Bijan Judgment impossible, without incurring the significant additional expense of attempting to enforce it against property and business interests outside the U.S.”  Id., 104 Cal.App.5th at 136, 141-42. 

Isong filed a motion for summary judgment.  The trial court granted summary judgment,  finding that Bijan’s complaint was barred by Family Code section 916(a)(2), which states that “the property received by the person in the [marital dissolution] 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.”   Bijan appealed.  Id. at 139. 

Result and Reasoning

The Court of Appeal (the “Court”) affirmed the trial court’s grant of summary judgment in favor of Isong and against Bijan.  In doing so, it first examined Bijan’s argument that a court judgment – such as Isong had obtained here from the Family Court – was avoidable under the UVTA to the same extent that any agreement between the parties would be.  The Court disagreed and examined numerous other cases supporting its position, particularly relying on Mejia v. Reed, 31 Cal.4th 657, 663 (2003) (since the court itself adjudicated the disposition of the marital property, it was not the product of a negotiated settlement).  Id. at 140-41.  It also noted that the Family Court judgment dividing the properties was final and not subject to collateral attack.  Id. at 142.  The Court additionally noted that the type of fraud Bijan claims Isong committed was intrinsic fraud (which it defined as “flaws in the proceeding or the substance of the judgment”), which was not a ground for setting the judgment aside.  In doing so, it cited to the California Supreme Court’s decision in Pico v. Cohn , 91 Cal. 129, 133 (1891), which it recognized was still good law.  The Court found that case, as well as others, confirmed that the well-established rule in California is that, under both federal and state law, a dissolution judgment may be set aside only on the ground that it was obtained by extrinsic fraud (where a party was deprived of an opportunity to participate in the litigation), and that extrinsic fraud is the only recognized exception under Family Code section 916.  Id. at 142.

While the Court stated it did not feel it needed to reach the substance of the fraud allegations Bijan made, it said that Bijan’s “assertions are so extreme they merit our attention.”  Id. at 144. 

Bijan contends Isong “lied” to the court in the marital dissolution action and acted “like a thief in the night,” when she claimed a quasi-community interest in the foreign properties awarded to Akubiro and that she lied about their value when she estimated that the total value was significantly greater than the value of the Chino property that was awarded to her. Bijan explains this alleged fraud was revealed when Isong later testified in a deposition that she believed being awarded an ownership interest in the marital properties located in Equatorial Guinea would have no value to her because she could never have sold them or tapped into their value.

Id. at 144.  The Court rejected these arguments, and noted that Bijan offered no evidence on specific points, including what properties and assets purportedly qualified as quasi-community property.  Id. at 145.

Then, the Court addressed Bijan’s position that the trial court erred by entering summary judgment against it and in favor of Isong on its cause of action for declaratory relief. According to Bijan, its claim for declaratory relief was warranted based on two equitable arguments:  (1) Isong would be “unjustly enriched if the Dissolution Judgment is allowed to stand [because it] excus[es] her from any liability for the community debt incurred by her husband;” and (2) that this is an appropriate case for application of the equitable doctrine of marshaling assets under Cal. Civ. Code § 3433.  The Court disposed of the first of these arguments by reminding Bijan that pursuant to the dissolution judgment, the Family Court, in addition to awarding Isong the Chino property free of any interest by Akubiro, also assigned the Bijan judgment to Akubiro as his separate liability, so that the relief sought by Bijan was “what Family Code section 916 is designed to prohibit.” Id. at 145.  The Court rejected Bijan’s second argument on similar grounds. 

Finally, the Court rejected Bijan’s argument that the award of the Chino property to Isong was erroneous because the property was previously held by Isong and Akubiro in joint tenancy, rather than as community property, and thus never should have been “subject to division at all under Family Code § 2550.”  Id. at 145-46.  In doing so, it noted that Family Code section 2581 expressly provides that property jointly acquired during marriage is presumed to be community property for purposes of property division upon dissolution of the marriage, regardless of how title was held.

Author’s Commentary

As bankruptcy practitioners, we have  many occasions to assert claims under the UVTA as to pre-bankruptcy transactions.  There are many commonalities between claims under the state law UVTA and fraudulent transfer claims under section 548 of the Bankruptcy Code.  Given that it is not uncommon for a spouse to file bankruptcy while a dissolution proceeding is pending, this case serves as a good reminder that the application of substantive state law governing marital dissolutions is very important, especially in a transfer context, . 

Practitioners should bear in mind that in Bijan Boutiques, LLC v. Isong, the plaintiff/appellant sought to overturn a court judgment. As the Court of Appeal noted, “A court’s judgment, the product of its own evaluation of the evidence and the law, is a different creature than a private agreement entered into between spouses. As Bijan acknowledges, when the court renders a judgment in a marital dissolution, it is required to divide the marital property in a manner that is fair and equal to both parties. We are required to presume it did so. (Wells Fargo & Co. v. City etc. of S.F. (1944) 25 Cal.2d 37, 40, 152 P.2d 625 [‘[e]very presumption is in favor of the validity of the judgment, and any condition of facts consistent with its validity (and not affirmatively contradicted by the judgment roll) will be presumed to have existed rather than one which will defeat it’].” Id. at 142 (internal quotes omitted).

A challenge in bankruptcy would yield the same result under federal law in the 9th Circuit: “a state court’s dissolution judgment, following a regularly conducted contested proceeding, conclusively establishes ’reasonably equivalent value’ for the purpose of §548, in the absence of actual fraud.” Batlan v. Bledsoe (In re Bledsoe), 569 F.3d 1106, 1112 (9th Cir. 2009). By contrast, it is well settled that a transfer accomplished through a martial settlement agreement may be avoided as a fraudulent transfer in a bankruptcy case under Bankruptcy Code section 548 and Cal. Civ. Code section 3439.04(a)(1) (applicable in a bankruptcy case under Bankruptcy Code section 544(b)). See, e.g., Wolkowitz v. Beverly (In re Beverly), 374 B.R. 221 (9th Cir. BAP 2007).

These materials were co-authored by ILC member Kathleen A. Cashman-Kramer, a director at Fennemore LLP and ILC advisor Robert G. Harris, a partner at Silicon Valley bankruptcy boutique Binder Malter Harris & Rome-Banks LLP, with editorial contributions by ILC member Gary M. Kaplan, a partner at Farella Braun + Martel LLP and the Hon. Meredith Jury (ret.).