Ronald E. Stadtmueller, Chapter 7 Trustee v. Sarkisian (In re Medina)
B.R. (2020), 2020 WL 4742491 (B.A.P. 9th Cir. Aug. 14, 2020)
Article courtesy of David Simonds and Edward McNeilly (both of Hogan Lovells)
In In re Medina, the Bankruptcy Appellate Panel for the Ninth Circuit (the “BAP”) held that “actual damages” were not required in order for a court to set aside a prepetition transmutation between judgment debtor and his wife pursuant to California’s Uniform Voidable Transactions Act (“UVTA”).
Debtor, Rudolph Medina (“Medina”) filed a chapter 11 petition when litigating a state court lawsuit against John Sarkisian (the “State Court Action”). The bankruptcy court authorized Medina to retain counsel and continue the State Court Action. Medina obtained a partial judgment against Sarkisian in the amount of approximately $1.4 million. Sarkisian appealed. A few months later, the bankruptcy court converted the case to one under chapter 7 and appointed Ronald Stadtmueller (the “Trustee”) to administer the estate. The Trustee also obtained court approval to employ counsel and continue the State Court Action.
While the appeal in the State Court Action was pending, the Trustee conducted a judgment debtor exam of Sarkisian, who testified that he did not have any pre- or post-marital agreement with his wife. Less than a month after the judgment debtor exam, Sarkisian and his wife entered into an agreement (the “Transmutation Agreement”), which provided that each of the Sarkisians would obtain a fifty percent interest in each item of their community property and each spouse’s share would be converted to separate property. According to the Transmutation Agreement, Mr. Sarkisian’s separate assets totaled approximately $3.8 million plus a half interest in a limited liability corporation and a family trust. The Transmutation Agreement also listed the couple’s obligations in an approximate aggregate amount of $4.1 million. After the appeal in the State Court Action was decided, the state court entered a modified judgment for Medina in the amount of approximately $1.7 million (the “State Court Judgment”).
After learning of the Transmutation Agreement, the Trustee filed an adversary proceeding against the Sarkisians, asserting that Mr. Sarkisian made the property transfers with “actual intent to hinder, delay or defraud” the bankruptcy estate with respect to the State Court Judgment. The Trustee sought avoidance of those transfers under the UVTA, California Civil Code (“CCC”) sections 3439 to 3439.14, and other remedies. On cross-motions for summary judgment, the bankruptcy court granted the Sarkisians’ motion to dismiss, holding that a necessary element of a UVTA claim was “actual injury,” and that there was no actual injury to the estate because the transfer did not make collection more difficult or render Mr. Sarkisian unable to pay his debts. The Trustee timely appealed.
The BAP reversed the bankruptcy court’s decision to dismiss the adversary proceeding. The BAP held that actual damages or harm is not an element of an “actual” fraudulent transfer claim under the UVTA. Under the plain language of CCC section 3439, et seq., the Trustee needed only to prove that the Transmutation Agreement operated as a (1) “transfer of an (2) “asset” and was (3) “made …with actual intent to hinder, delay, or defraud any creditor of the debtor.” The BAP also found it significant that CCC section 3439.4(a)(2), which permits avoidance of “constructive” fraudulent transfers (i.e., transfers that are voidable without proof of actual intent to hinder, delay, or defraud), requires the plaintiff to prove insufficiency of assets. Had the legislature wanted to make “actual injury” as an element of an “actual” fraudulent transfer, it knew how to do so. The BAP further held that both California cases and federal cases applying California law supported the BAP’s holding.
The BAP reversed the summary judgment and remanded the matter to the bankruptcy court for further litigation.