Business Law

Weil v. Pyramid Center, Inc. (In re Momentum Dev. LLC), 649 B.R. 33 (B.A.P. 9th Cir. 2023)

Dear constituency list members of the Insolvency Law Committee, the following is a case update written by ILC member John W. Kim of Brower Law Group, APC, analyzing a recent case of interest.

SUMMARY

The United States Bankruptcy Appellate Panel of the Ninth Circuit recently affirmed the bankruptcy court finding that a chapter 7 trustee may assert a fraudulent conveyance action that occurred within seven years of the bankruptcy petition provided that (1) either the fraudulent transfer occurred within four years of the bankruptcy petition or (2) a judgment (creating a creditor) is entered against a debtor within four years of the bankruptcy petition.  Weil v. Pyramid Center, Inc. (In re Momentum Dev. LLC), 649 B.R. 33 (B.A.P. 9th Cir. 2023).

To read the full published decision, click here

FACTS

Momentum Development, LLC (“Momentum”) and Pyramid Center, Inc. (“Pyramid”) are affiliated companies.  Undisputed relevant facts are:

  1. In 2010, Momentum entered into a contract with DCA Drilling & Construction (“DCA”) to drill a well on Momentum’s San Bernardino California property.  This contract contained an attorney fees provision.
  2. On October 31, 2012, Momentum transferred the San Bernardino property to Pyramid for 55 cents.
  3. In 2014, Momentum sued DCA for breach of contract and lost.
  4. In 2018, a state court entered judgment awarding attorneys’ fees in DCA’s favor.  Soon after, on June 19, 2018, Momentum filed for bankruptcy relief under chapter 7.
  5. On October 25, 2019, the chapter 7 trustee (“Trustee”) filed a complaint against Pyramid alleging that the transfer of the San Bernardino property was fraudulent and seeking a recovery under § 544(b) and Cal. Civ. Code § 3439.09

The bankruptcy court found, among other things, that the Trustee’s claim was not barred because the “time” to start the 4-year clock commenced in 2018, when judgment was entered against the debtor.  The court rejected the argument that the 2012 transfer of the property was the only relevant time to determine timeliness.  The bankruptcy court also concluded that the Trustee’s complaint was not barred by the seven-year statute of repose in Cal. Civ. Code § 3439.09(c), because the claim arose less than seven years before Momentum’s bankruptcy filing and the Trustee filed suit within two years after the bankruptcy was filed. The Trustee also filed the suit within seven years of the transfer date.

On appeal, Pyramid only challenged the bankruptcy court’s conclusion of law that the Trustee’s claim was timely.  The BAP affirmed.  

REASONING

Applying California law, the California Uniform Voidable Transactions Act provides that “[a] transfer made or obligation incurred by a debtor is voidable as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred[.]”  Cal. Civ. Code § 3439.04(a).  Claims under this provision must be brought “not later than four years after the transfer was made or the obligation was incurred…”  Cal. Civ. Code § 3439.09(a).

The BAP agreed with the bankruptcy court’s reliance on Cortez v. Vogt, 52 Cal. App. 4th 917, 937 (1997) to conclude that in California, the statute of limitations may commence on the date a judgment is entered against a debtor.  In other words, the statute could commence on a date other than the date of the fraudulent transfer.  52 Cal. App. 4th at 937.  See also Potter v. Alliance United Insurance Co., 37 Cal. App. 5th 894, 906 (2019) (“Following Cortez, the UVTA filing deadlines did not begin to run until judgment was entered in the underlying action.”).  The court acknowledged that Cortez has been criticized by courts in other jurisdictions, Cortez, at 920, and is a minority position in fraudulent transfer law.  The majority position is that the phrase “obligation incurred” refers to a creditor’s ability to avoid a fraudulent obligation as set forth in § 3439.04 and not to the date the creditor obtains a judgment against the debtor. Thus, the BAP affirmed that even though a transfer occurred in 2012, the operative time was when the underlying liability to a creditor was fixed by final judgment in 2018. 

The BAP also found that Cortez was not limited to fraudulent transfers occurring during pending litigation and that the Trustee’s claim was not time barred by California’s statute of repose requiring a fraudulent transfer action to be brought within “seven years after the transfer was made or the obligation was incurred.”  Cal. Civ. Code § 3439.09(c). 

AUTHOR’S COMMENTS

Momentum is an important reminder that under California law, the statute of limitations for fraudulent transfer purposes may commence when the debtor incurs an obligation (i.e., a judgment), as opposed to the date of the alleged transfer of property, which is often the date on which most practitioners focus.  Thus, a Trustee may be able to attack transfers occurring more than four years prior to bankruptcy if a judgment was entered against Debtor within four years of the petition date. The Court dispensed with arguments that a creditor obtaining judgment in year 30 could attack a transfer that occurred decades earlier by holding that such an action would be barred by the 7-year statute of repose. Although not highlighted, it is also important to note that in Momentum, the bankruptcy court found that sufficient evidence of “actual intent to hinder or delay a creditor” was present under Cal. Civ. Code § 3439.04(a)(1).  Query whether the BAP may have reached a different result if “actual intent” did not exist. 

These materials were written by ILC member John W. Kim of Brower Law Group, APC, in Irvine, California (John@BrowerLawGroup.com).  Editorial contributions were provided by Ed Hays of Marshack Hays LLP (ehays@marshackhays.com) in Irvine, California.  


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