fraudulent transfer

Published on: May 9, 2017

Fraudulent Transfers and the Good Faith Defense – Party Raising the Defense Only Needs to Prove It Did not Have Actual Knowledge of Wrongdoing

A fraudulent transfer is a transfer of property by a debtor to a third party with the intent to put that property out of reach of a creditor to satisfy their claim. If found to be a fraudulent transfer, the transfer is voidable as to the debtor. Voidable means that, if the third party took in good faith and gave reasonably equivalent value in exchange for the property, the transfer may not be reversed. If it had been void, the law assumes the transfer did not take place, and the creditor can attach the property. Parties facing a potential liability should consult with an attorney to determine the effect of transferring any assets to avoid a finding that the transfer was fraudulent relative to their creditors. In the decision I discuss today there was a judgment lien against real estate that was transferred and money borrowed, but the title insurer did not alert the lender. The lender in this case lucked out.

In Nautilus, Inc. v. Chao Chen Yang et al., Nautilus is a maker of exercise equipment. It obtained a Judgment for $8 million dollars against Stanley Yang for counterfeiting Nautilus products. Nautilus recorded the judgment in April 2012. Immediately prior to the recording, Stanley and his brother Peter, who were both on title to a house in Fountain Valley, conveyed the property to their father Chao. After the judgment was recorded Chao obtained a reverse mortgage against the property. In the loan process the title Insurer failed to note the Judgment as an exception.

The loan cash was used to pay off the existing liens on the property, and Chao kept the balance of the cash. Nautilus discovered the conveyance and loan, and filed suit to set aside the fraudulent transfer. The trial court found that the lender was a good faith lender for value, and thus Nautilus could not recover damages from the lender. This appeal followed.

Published on: March 9, 2016

California Fraudulent Conveyance Defendant Gets Deported Before He Could Be Served – How the Court Had Jurisdiction Over Him To Enter Judgment

by Law Office of James J. Falcone

When someone who owes a debt transfers property out of their name in order to prevent the creditor from collecting against that property, the transfer may be set aside under the Uniform Fraudulent Transfer Act. A classic move seen by business and real estate attorneys is the transfer of real estate to someone who disappears and cannot be served with a summons and complaint. This does not necessarily end the story, as the fraud is so obvious that the courts will not aid them in their fraud. In a recent decision involving an obviously fraudulent conveyance, the new owner of the property had been in prison and was subsequently deported to Mexico. That was not enough to keep the creditor from undoing the transaction.

In Diana Buchanan v. Ramon Soto, Maria Soto bought a business from Buchanan for over $300 thousand but did not pay for it. The plaintiff was in the process of obtaining a judgment against Maria, when Maria transferred her real estate in Vista, CA to her husband Ramon as his separate property. Plaintiff sued Maria & Ramon to undo the fraudulent conveyance. Of course, Ramon could not be found, because he was deported due to criminal activity, and was somewhere in Mexico. The plaintiff asked Maria where, but Maria did not know where other than rural Mexicali.

The court allowed plaintiff to serve Ramon by publication. A trial was held, and the plaintiff won. Ramon tried to set aside the judgment due to lack of service, but failed. They appealed, claiming that the California court lacked personal jurisdiction because Ramon had not been properly served.

Published on: September 1, 2015

California Statute of frauds and real property – how placing property in trust does not require a deed

by Law Office of James J. Falcone

The statute of frauds is legislation developed to prevent fraud by requiring a writing for several forms of agreement. The idea is that these transactions are too important to be left to claims of oral agreements. An important topic addressed by the statute of frauds is real estate. Covered are agreements for the sale, gift, financing, leasing for longer than one year, and contracts that cannot be performed within one year. (California Civil Code section 1624). The contract (called the ‘Memorandum”) must identify the subject matter of the contract and the parties; indicate that a contract has been made or offered by the person signing the memorandum; and state the essential terms of the agreement. If it is for the sale of real property, it must name the parties, identify the property, and set forth the price and terms of payment with a reasonable degree of certainty. Sacramento real estate attorneys rarely see real estate contracts that do not satisfy the statute of frauds except in old law books.

But there are different rules when it comes to trusts. Trusts are governed by the Probate Code, and in a recent decision a creditor was disappointed to learn how little it takes to satisfy the statute of frauds.

sacramento attorney Statute of frauds.jpg In Ukkestad v. RBS Asset Finance, Inc., Larry created a trust, and then died. His creditor wanted to go after some real estate in Vista and Indio that he owned, claiming that it had not been conveyed to the trust.

Published on: August 13, 2015

A California Lis Pendens (Notice of Pending Action) May Be Recorded In a Fraudulent Conveyance Lawsuit – When it Can Be Done

by Law Office of James J. Falcone

A lis pendens is a recorded notice of a lawsuit that concerns title or possession to real property. It is called a “Notice of Pending Action” in the statutes, but Judges and attorneys still like the old term. The purpose is to give notice of the lawsuit – anyone who acquires an interest in the property or a lien against it is later in time and subject to the results of the suit. A fraudulent conveyance is when a debtor transfers property out of their name in order to prevent their creditors from reaching it to satisfy their claim. Sacramento Business and real estate attorneys often see fraudulent conveyance actions to undo a transfer of a debtor’s assets that rendered the debtor insolvent. What happens when the two items coincide? In a recent case a judgment holder claimed that their lien was superior to that of someone who alleged a fraudulent conveyance and recorded a lis pendens, though they did not claim a direct interest in the property. The appellate court surprised them finding that the date of the fraudulent conveyance judgment related back to the recording of the lis pendens.

Sacramento lis pendens attorney.jpg In Mira Overseas Consulting Ltd. v. Muse Family Enterprises, Ltd., David Smith owned BTM Funding. Smith bought a house in Pacific Palisades for $10 million, but BTM held title so he could hide it from his wife during their divorce. Defendant Muse was an investor in BTM. Smith later deeded the property to himself, then to his new wife, but these were not recorded until BTM had financial problems. Once they were recorded, BTM’s primary asset was gone, and BTM was insolvent.

Muse sued BTM, Smith, and his wife, seeking to void the deeds as a fraudulent conveyance. Muse recorded a Lis Pendens in September 2010. A Judgment was entered and recorded nullifying all the deeds.

Published on: June 5, 2014

Deeding California Property to Someone To Avoid Creditors Not a Fraudulent Conveyance When There is No Equity; How the Homestead Exemption Helps Beat Intentional Fraud

by Law Office of James J. Falcone

When someone who owes a debt transfers property out of their name in order to prevent the creditor from collecting against that property, the transfer may be set aside under the Uniform Fraudulent Transfer Act (UFTA, California Civil Code section 3439.04 et seq.). AN important element of a fraudulent conveyance is that an injury must occur. Mere intent to delay or defraud is not enough. Thus, in the case of real property, a real estate attorney must determine whether, on seizing the real estate and selling it, would the creditor actually get anything after the liens are paid. In a recent decision, a creditor was surprised when the automatic homestead exemption (not a declared homestead) was applied to determine that there was no equity in the property.

sacramento fradulent conveyance attorney.jpg In Fidelity National Title Insurance Company v. Schroeder, Fidelity screwed up when it allowed a property to be refinanced without paying an existing judgment lien. Fidelity, as title insurer, thus had to pay off the creditor, and then stepped into their shoes, hoping to get a judgment and record their own lien against the property. However, the property was owned by two people, and the one whom the judgment was against conveyed his interest to the other, to avoid attachment of Fidelity’s lien. This lawsuit ensued, and the trial court dismissed the action by Fidelity, finding that, if the property were sold, after paying the existing liens, the remaining equity was protected by the debtor’s undeclared homestead exemption. Fidelity appealed, arguing that, in the case of an automatic homestead exemption, the judgment lien still attaches to the property.

The appellate court first addressed the difference between the two types of homestead exemption:

Published on: November 28, 2009

Intentional Fraud is Not Enough- A Real Estate Conveyance Is Not Undone as a Fraudulent Transfer Because the Total of the Liens plus the Homestead Exemption Wiped Out The Equity in the Property.

by Law Office of James J. Falcone

Under California law, the Uniform Fraudulent Transfer Act allows defrauded creditors to reach property in the hands of a third party, if a debtor transfers an asset with the intent to prevent a creditor from reaching that interest to satisfy its claim.”

In a recent California decision, Gordon owed his ex-wife over $70,000 in spousal support. She obtained a judgement and recorded it so it would be a lien against any real estate that he owned. Gordon and his girlfriend refinanced their house which was in both their names, at which time the debt should have been paid, but the title insurance company missed it, so they had to pay the ex-wife, and then recorded a new lien against Gordon. Gordon then fraudulently conveyed his half interest in the property to his girlfriend so the title company couldn’t get to it.

The court looked at how much money could be raised for the creditor if the house was auctioned. Gordon’s half of the equity in the property was only about $9,400. But, as it was his residence, he was also entitled to an automatic (undeclared) homestead exemption of $50,000. This exemption protects the debtor when the creditor seeks a court-ordered sale of the house. If the judge finds that the sale price will not be greater than all liens, plus the homestead exemption, there will be no sale. That was the case here, and the title company could not get the house sold.