DOES A JUDGMENT CREDITOR HAVE LIEN ON FRAUDULENTLY TRANSFERRED PROPERTY AFTER THE JUDGMENT DEBTOR FILES BANKRUPTCY?
As part of enforcing a judgment, many judgment creditors place liens on the judgment debtor’s real and personal property through abstracts of judgment recorded with county recorders offices, notices of judgment lien filed with the California Secretary of State and through personally serving orders to appear for examination upon the judgment debtor. Pressure from creditors, however, often drives judgment debtors to intentionally transfer (i.e., with actual fraud) property to insiders (or irrevocable trusts), all the while effectively maintaining control of the transferred property. What if the judgment creditor’s abstract is not recorded or the judgment debtor exam order is not served until after the judgment debtor transfers his property and the judgment debtor later files bankruptcy?
A bankruptcy trustee may seek to avoid the transfer(s) based on both California’s version of the Uniform Voidable Transactions Act (“UVTA”) and Section 548 of the Bankruptcy Code. If the bankruptcy trustee succeeds in bringing the transferred property back into the bankruptcy estate, she will immediately commence an action under Section 506 of the Bankruptcy Code seeking to determine the validity, extent or priority of your client’s judgment creditor’s lien. Who will prevail? The answer may depend on whether or not the bankruptcy court views the transfer, under state law, as void ab intio, a “sham” transfer, a nominee transfer, or recognizes the existence of a “resulting trust”.
A. State Law Determines the Validity and Effect of a Party’s Lien in Bankruptcy.
A bankruptcy court apples state law to determine whether a valid lien attached to the debtor’s property. In re Ahn, 804 Fed. Appx. 541, 544 (9 th Cir. 2020) (citing In re Watts, 298 F.3d 1077, 1080 (9 th Cir. 2002). State law determines the validity and effect of liens in the bankruptcy context. Cool Fuel v. Board of Equalization (In re Cool Fuel), 210 F.3d 999, 1007 2 (9 th Cir. 2000). Ordinarily, the nature, extent and validity of a creditor’s lien are matters to be determined by state, not federal, law. In Bering Trader, Inc., 944 F.2d 500, 502 (9 th Cir. 1991); In re Copper King Inn, Inc., 918 F.2d 1404, 1406 (9 th Cir. 1990) (“State law controls the validity, and effect of liens in the bankruptcy context.”). Similarly, “[w]hether a transfer is avoidable under California’s UFTA [now the Uniform Voidable Transactions Act] is a question purely of California law as to which the California Supreme Court is the final authority.” In re Beverly, 374 B.R. 221, 232 (9 th Cir. BAP). Thus, whether the judgment creditor has a perfected lien or liens on the fraudulently transferred property is determined under state law.
B. Over 150 Years’ of Case Law States The Transfer Is Void Ab Initio.
Five California Supreme Court decisions from 1863 to 2016 have held fraudulent transfers to be void ab initio, and not merely “voidable.” Most recently, in 2016, the California Supreme Court reaffirmed its well settled law by stating “[a]s we said of a fraudulent real property transfer, in First Nat. Bank of L.A., v. Maxwell (1899) 123 Cal. 360, 371, 55 P. 980 ‘a void thing is as no thing.’” Yvanova v. New Century Mortg. Corp., 62 Cal.4 th 919, 929 (2016).
Not surprisingly, California Court of Appeal decisions likewise hold fraudulent transfers are void ab initio, not merely voidable. Heffernan v. Bennett & Armour, 110 Cal.App.2d 564, 584 (1952) (trial court correctly concluded “transfer and payment were void as against plaintiff as a creditor of the transferor”); Alhambra Building & Loan Assn’ v DeCelle, 47 Cal.App.2d 409, 414 (1941) (fraudulent transfers of deeds deemed “void as against plaintiff in this action”); Malaquias v. Novo, 59 Cal.App.2d 225, 232 (1943) (when a vendee participates in a fraudulent conveyance, the sale will be declared void); Masami Sasaki v. Yana Kai, 56 Cal.App.2d 406, 410 (1942) (“a voluntary conveyance made with actual intent to defraud existing creditors was void for illegality”); Nicolos v. Grover, 231 Cal. Rptr. 79, 81 (Ct.App. 1986) (“title remains in the transferor as if no conveyance had been attempted”). Thus, for over 150 years law in California has been and remains that transfers made with fraudulent intent are void ab initio and not merely voidable.
Further, federal Courts and bankruptcy courts in the Ninth Circuit have also found fraudulent transfers to be void ab initio, and not merely voidable. See Hassen v. Jonas, 373 F.2d 880, 883 (9th Cir. 1967) (“The effect of [§ 3439.07] that transfers within the statute are fraudulent is that such transfers are deemed void as to creditors.”); In re Cass, 476 B.R. 602, 614 (C.D. CA 2012) (“a fraudulent transfer is inherently wrong, and is thus, void”).
California’s adoption of the Uniform Fraudulent Transfers Act and later the UVTA, codified at CC § 3439.04 et seq. made no change to common law that a fraudulent transfer is void with the exception of whether there was a good faith purchaser for reasonably equivalent value. The California Court of Appeal stated that “the remedies of the [Uniform Fraudulent Transfer Act] and its predecessor, the Uniform Fraudulent Conveyance Act, are cumulative to the remedies applicable to fraudulent conveyances that existed before the uniform laws went into effect.” Cortez v. Vogt, 52 Cal.App.4 th 917, 929 (1997). The Cortez court added “the objective of the act is to enhance and not to impair the remedies of the creditor.” Id. at 937. See also Fidelity National Title Insurance Co. v. Schroeder, 179 Cal.App.4 th 834, 849 (2009) (“California recognizes that common law causes of action are not pre-empted by the [C]UFTA and remain available remedies”). The Cass Court stated “there is no indication in CUFTA’s language or legislative history that the California legislature intended to change common law and establish fraudulent transfers in general as voidable instead of void.” In re Cass, at 617. Likewise, the UVTA “was intended to supplement, not replace, common law principals related to fraud.” Berger v. Varum, 35 Cal.App.5 th 1010, 1019 (2019). Further, the UVTA “does not supersede common law of fraudulent transfer” and “‘makes clear its remedies are cumulative to pre- existing remedies for fraudulent conveyances.’” Id. (citing Cortez v. Vogt at 930). Further yet, “[b]y referring to a ‘voidable’ transfer in the UFTA, “the legislature intended it to be a limited exception to the general rule that, by nature, fraudulent transfers are void ab initio, in order to restrict the ability of a creditor in an avoidance action to set aside a fraudulent transfer to a good faith purchaser for reasonably equivalent value.’” In re Medina, 619 B.R. 236, 241 fn.5 (9 th BAP 2020) (citing In re Cass). Thus, the CUFTA and the UVTA did not change California’s long 4 standing law that a fraudulent transfer is void. Thus, a judgment creditor could simply argue the transfers are “void ab initio” or void and thus its lien remains perfected.
C. Was the Transfer in fact a “Sham”?
A judgment creditor whose lien is attacked by a bankruptcy trustee might argue the subject transfer was void ab initio because it was actually a sham. “A sham contract is a pretense undertaken for the purpose of deceiving a third party.’” U.S. v. Booth, 2014 WL 130476, pg. 7. “In equity, these sham transfers are set aside as they were intended to be void in the first place.” See Saks v. Charity Mission Baptist Church, 90 Cal.App.4 th 1116, 1134 (2001) (“it was intended to be void, i.e., a sham not intended between the parties as a jural act”); See also Cal. Civ. Code § 1550 (to be valid, contracts must have “[a] lawful object”).
For example, if a debtor transfers assets to hinder creditors legitimate collection efforts, all the while maintaining control over the “transferred” assets, the trust is a sham from the outset and the transfers are void ab initio. Schwerin v. Khuns, 2014 WL 1435898 (CA Ct. of App. 2014) (citing See In re Gilleespie, 269 B.R. 383, 388-389 (E.D. Arkansas 2001); see also In re Brown, 953 F.3d 617, 624 (9 th Cir. 2020) (maintaining constructive control of property fraudulently transferred is a “sham transfer”). Thus, the bankruptcy court could find the transferred property a sham and thus void as if no transfer occurred. In this instance, the bankruptcy court would likely find the creditor’s lien perfected.
D. The Transferred Property Could be Void Ab Initio Because the Entity is Only the Debtor’s “Nominee.”
The Court must look to state law to determine whether the transferee is the debtor’s “nominee.” See Leeds LP v. United States of America, 807 F.Supp.2d 946, 966 (2011). A nominee is one who holds bare legal title to the property for the benefit of another. In re Brugnara Properties VI, 606 B.R. 371, 383 (2019). “The word ‘nominee’ in its commonly accepted meaning connotes the delegation of authority to the nominee in a representative or 5 nominal capacity only, and does not connote the transfer or assignment of the nominee of any property in ownership of the rights of the person nominating him.” Born v. Koop, 200 Cal.App.2d 519, 527-528 (1962). Thus, if the transferee is the debtor’s nominee it never had any ownership rights in the transferred property.
“[N]o California court has ever determined the factors involved in a nominee analysis.” Leeds at 966. In the Ninth Circuit, nominee status depends on the totality of circumstances based on the following factors:
(1) Whether inadequate or no consideration was paid by the nominees;
(2) Whether the properties were placed in the nominee’s names in anticipation of a lawsuit or other liability while the transferor remains in control of the property;
(3) Whether there is a close relationship between the nominees and the transferor;
(4) Failure to record conveyances;
(5) Whether the transferor retained possession; and
(6) Whether the transferor continues to enjoy the benefits of the transferred property.”
A creditor applying the facts in its particular case to the above could cause the bankruptcy court to find the transferee is Debtor’s nominee, and that such transfer was void ab initio and the creditor’s lien is perfected.
E. The Transfers Created a Resulting Trust to Which the Creditor’s Lien Attached.
“State law, here California, determines whether a valid trust exists ….” In re Chaleunrath, 2006 WL 6810921, * 5 (9 th Cir. BAP 2006). see also Fidelity National Title Ins. Co. v. Schroeder, 179 Cal.App.4 th 834, 849 (2009). “[U]nder established common law in this state a resulting trust may arise from a transfer of property under circumstances showing that the transferee was not intended to take the equitable or beneficial interest.” Fidelity Nat’l Title, Ins., at 849. A creditor’s claim can raise, “under a resulting trust theory. In re Sale Guar. Corp., 220 B.R. 660, 664 (9 th BAP 1998) (resulting trust arises when transferee was not intended to take the beneficial interest). The resulting trust carries out the inferred intent of the parties.” Fidelity 6 Nat’l Title Ins., at 848. See also Mckinnon v. McKinnon, 181 Cal.App.2d 97, 104 (1960) (if “property is acquired in the name of one person, for a consideration furnished by another, the grantee holds the title on a resulting trust for the one who furnished the consideration”). “The trustee has no duties to perform, no trust to administer and no purpose to carry out except the single task of holding or conveying the property to the beneficiary.” Fidelity Natl. Title Ins. at 864.
“[A] resulting trust merely gives effect to the original will of the parties, it is effective from the date of the original transfer ….” In re Sale Guar. Corp., 220 B.R. 660, 667 (9 th BAP 1998). “Allowing a judgment creditor to maintain a resulting trust cause of action in a case such as this one would merely apply a recognized legal and factual basis for concluding that the debtor actually retained an equitable interest [in the Irrevocable Trust] to which a judgment lien may attach.” Fidelity Nat. Title Ins., Co. at 849. Under a resulting trust, the creditor’s judgment lien would take effect on the date its lien was imposed, Fidelity Nat. Title Ins., at 850.
After a judgment debtor who transferred the property to thwart creditors files for bankruptcy, the bankruptcy trustee may argue the judgment creditor has no lien on the fraudulently transferred property. A judgment creditor, however, should consider making the above legal arguments in defense of any adversary action seeking to determine the validity, extent, or priority of the judgment creditor’s lien.
If you are facing a situation where a judgment creditor has placed a lien on your property after you have filed for bankruptcy, it is important to seek the help of a bankruptcy attorney. A bankruptcy law firm in Los Angeles can help you navigate the complexities of the law and determine the best course of action for your specific situation. Don’t wait, contact our bankruptcy attorney today to protect your rights and assets.