The following is a case update written by Corey R. Weber, a partner at Brutzkus Gubner Rozansky Seror Weber LLP, analyzing a recent decision of interest:
The Ninth Circuit Bankruptcy Appellate Panel held in a published opinion that the claims for actual intent fraudulent transfers under the California Uniform Voidable Transactions Act do not require a plaintiff to prove harm or actual damages. Stadtmueller v. Sarkisian (In re Medina), 2020 WL 4742491 (9th Cir. BAP 8/14/20).
To view the full opinion, click here.
Rudolph Medina (“Medina”) filed a chapter 11 bankruptcy petition and, during the bankruptcy case, litigated an action against John Sarkisian (“Sarkisian”). Medina obtained a partial judgment against Sarkisian for $1.4 million; Sarkisian appealed the judgment. The bankruptcy case was converted to chapter 7 and the chapter 7 trustee (the “Trustee”) pursued the action as a judgment creditor. While the appeal was pending, Sarkisian and his wife entered into a transmutation agreement for each to obtain a 50% interest in their property as their separate property. Following the appeal, a judgment was entered against Sarkisian for approximately $1.7 million, and against Medina for $200,000.
The Trustee conducted two judgment debtor examinations. During the first examination, Sarkisian testified that he did not have a pre or post-marital agreement with his wife. One month later, Sarkisian and his wife entered into the transmutation agreement. During the second judgment debtor examination, the Trustee learned of the transmutation agreement. The Trustee then filed an adversary proceeding to avoid the transmutation agreement and recover the properties transferred by it as an actual intent fraudulent transfer pursuant to the California Uniform Voidable Transactions Act (“UVTA”), California Civil Code § 3439.04(a).
In deciding cross-motions for summary judgment, the bankruptcy court held that the transmutation agreement was a “transfer” under the UVTA but otherwise denied the motions. Following discovery, the Sarkisians filed another motion for summary judgment, contending that actual intent claims under the UVTA required a finding of “actual injury” and that the trustee could not establish actual injury. The Sarkisians relied on the California model jury instruction and Mehrtash v. Mehrtash, 93 Cal. App. 4th 75, 80 (2001) (“Mehrtash”) for the proposition that actual injury must be shown. The bankruptcy court concluded that the transmutation agreement put certain assets out of reach of the trustee, but that there was no actual injury given that there was a “cushion” to satisfy the judgment, and therefore it granted the Sarkisians’ motion.
On appeal, the Ninth Circuit Bankruptcy Appellate Panel (“BAP”) reversed and remanded, holding that “[t]he UVTA does not require a plaintiff to prove actual damages.”
The BAP held, based on the plain language of the statute that, in order to prove an actual intent fraudulent transfer claim, the trustee only needed to prove that a transfer of an asset was made with the actual intent to hinder, delay or defraud creditors.
The BAP reasoned that if the legislature wanted to include a requirement to show actual injury or that the debtor had insufficient assets, it could have done so, citing to specific requirements in the constructive fraudulent transfer statutes (California Civil Code §§ 3439.04(a)(2) and 3439.05) to prove insufficient assets or the debtor’s financial condition at the time of the transfer. The BAP stated that “[t]he legislature explicitly provided that ‘constructive’ fraudulent transfers are not avoidable unless the creditor proves that (put simply) the debtor’s financial condition was bad at the time of the transfer or was made worse by the transfer. The legislature made no such provision with respect to actual fraudulent transfers. We assume that this omission was deliberate and meaningful.” The BAP therefore found that “[i]n short, the statutory text does not make damages or ‘actual injury’ an element of an ‘actual’ fraudulent transfer claim that a creditor such as the Trustee must prove.”
In support of its determination that actual injury is not an element of actual intent fraudulent transfers, the BAP cited to Fross v. Wotton, 3 Cal. 2d 384 (1935) and more recent California cases such as Reddy v. Gonazlez, 8 Cal. App. 4th 118, 123 (1992). The BAP also cited to federal cases applying California law which came to the same result. The BAP discussed two of the cases relied on by the Sarkisians, Mehrtash and Fidelity National Title Insurance Co. v. Schroeder, 179 Cal. App. 4th 834 (2009), and determined that the cases were “unpersuasive” and did not support the idea of a “free floating ‘actual injury’ element.”
The BAP also discussed the Sarkisians’ reliance on the California model jury instruction for actual intent fraudulent transfer claims that are part of the Judicial Council of California Advisory Committee on Civil Jury Instructions (“CACI”) 4200. Rejecting the argument, the BAP stated that “[t]his jury instruction is not a model of clarity, but read in its entirety, it is consistent with our analysis of Mehrtash” and “[t]he jury instruction says that ‘harm’ is an element of the claim, but the first and last sentence show that the ‘harm’ to which the instruction refers is simply removing or concealing assets from creditors. That is all that is required under the UVTA.” Citing to Clem v. Lomeli, 566 F.3d 1177, 1181 n.2 (9th Cir. 2009), the BAP also noted that model jury instructions are not binding.
The BAP therefore held that “[u]nder the UVTA, ‘actual damages’ or the insufficiency of the debtor’s remaining assets is not an element of an actual intentional fraudulent transfer claim. Requiring the Trustee to provide evidence of a fact that is not material was error.” Based on that holding, the BAP reversed and remanded.
The BAP correctly concluded that “harm” or actual damages is not required to prove an actual intent fraudulent transfer claim under California Civil Code § 3439.04(a). Although harm is not an element of an actual intent fraudulent transfer claim, it made its way into the introductory paragraph in CACI 4200, and then also into two of five elements listed in CACI 4200 to prove an actual intent fraudulent transfer. The BAP harmonized its reading of CACI 4200 with applicable law, but the CACI instruction appears to incorrectly state what is required to prove an actual intent fraudulent transfer claim under California Civil Code § 3439.04(a).
The last two elements in CACI 4200 incorrectly state that the plaintiff is required to prove not only that the plaintiff was harmed, but also that the debtor’s conduct was a substantial factor in causing plaintiff’s harm. Beyond the lack of clarity noted by the BAP, portions of the CACI jury instructions for voidable transaction/fraudulent transfer claims do not accurately reflect the statutes and pertinent case law or at a minimum seem to simplify concepts in a way which does not give full meaning to the statutes. The CACI 4202 and 4203 instructions regarding constructively fraudulent transfers also list as necessary elements harm, and that the harm was a substantial factor in causing plaintiff’s injury (the harm listed is in addition to lack of reasonably equivalent value and the insolvency tests). Similar issues exist in CACI verdict forms VF-4200, VF-4201 and VF-4202. The affirmative defense of good faith in CACI 4207 (part of the good faith and for value defense) states that good faith means that the defendant “acted without actual fraudulent intent and that” the defendant “did not collude with” the debtor “or otherwise actively participate in any fraudulent scheme.” However, the definition of good faith in CACI 4207 does not comport with the objective standard for determining good faith in the Ninth Circuit. See, e.g., In re Cohen, 199 B.R. 709, 718-719 (9th Cir. BAP 1996) and In re Agricultural Research and Technology Group, Inc., 916 F.2d 528, 539 (9th Cir. 1990). Given the similarities between fraudulent transfer provisions under the Bankruptcy Code and state law, cases interpreting both are regularly applied by courts. See Donell v. Kowell, 533 F.3d 762, 769–770 (9th Cir. 2008). The CACI jury instructions and verdict forms are in need of revisions.
These materials were written by Corey R. Weber, a partner at Brutzkus Gubner Rozansky Seror Weber LLP, a member of the ad hoc group and the Chair of the CLA Business Law Section, with editorial contributions by the Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.), also a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.