Opinion
No. 02-44874 TK, AT A.P. No. 02-7273
September 2, 2003
MEMORANDUM OF DECISION
Defendants move for summary judgment in the above-captioned fraudulent transfer action on the ground that the action is barred by the applicable statute of limitations. For the reasons stated below, the motion is denied.
DISCUSSION
The above-captioned action (the "Action") was filed in state court (the "State Court") in October 1999. The plaintiffs in the Action (the "Plaintiffs") are judgment creditors of the above-captioned debtor, Stephen B. Turner, M.D. ("Stephen"). On September 9, 2002, Stephen filed the above-captioned chapter 7 bankruptcy case. On December 4, 2002, Stephen filed a notice of removal of the Action to bankruptcy court. The chapter 7 trustee (the "Trustee") has intervened as the real party in interest in the Action and, with Court approval, has employed the Plaintiffs' state court counsel as special counsel. (As used hereinafter, the Plaintiffs shall be understood to mean the Trustee when referring to post-petition facts and contentions.)
Section 544(b) of the Bankruptcy Code gives a trustee standing to bring a fraudulent transfer action under state law as long as there is a creditor with an allowable unsecured claim against the estate that could do so. 11 U.S.C. § 544(b)(1).
The complaint in the Action (the "Complaint") alleges that, in 1995, Stephen engaged in certain malicious conduct directed against the Plaintiffs. Based upon this conduct, in August 1998, the Plaintiffs obtained a judgment against Stephen for approximately $1 million (the "Judgment"). The Complaint further alleges that, in 1998, Stephen fraudulently transferred his interest in certain real property (the "Residence") by executing a grant deed in favor of defendant Real Investment Capital Holdings LLC ("Real LLC"). The Complaint alleges that this transfer was actually and/or constructively fraudulent and seeks to avoid it.
On June 2, 2003, after the Action was removed to bankruptcy court, defendants Stephen and Susana C. Turner ("Susana"), Stephen's former wife, filed a motion for summary judgment. (Collectively, Stephen and Susana are referred to hereinafter as the "Turners.") In their motion, the Turners contend that the Plaintiffs' fraudulent transfer claims are time barred by Cal. Civ. Code § 3439.09. They note that, in 1992, Stephen and Susana executed a marital transmutation agreement (the "Transmutation Agreement"), converting their community property interests in the Residence into Susana's sole and separate property.
The Turners asserted that the fraudulent transfer claims were time barred in a previous summary judgment motion filed before the bankruptcy case was filed. In opposition to the motion, the Plaintiffs contended, as they do here, that the transfer was not "made" in 1992 because the Transmutation Agreement was not recorded. The State Court denied the motion on the ground that there were triable issues of fact with regard to whether the claims were time barred. It does not appear that the Plaintiffs cited Cal. Civ. Code § 3439.06(a) in their opposition. As discussed below, the Court concludes that the issue is governed by § 3439.06(a) and that the claims are not time barred as a matter of law.
The Turners note that the applicable state law statute of limitations is four years after the transfer occurs or one year after the transfer is discovered with a maximum of seven years after the transfer occurs. Cal. Civ. Code. § 3439.09(a)-(c). They contend that the transfer was "made" for purposes of the Action in 1992 when the Transmutation Agreement was executed. It is undisputed that, if they are correct, the Action is time barred.
More precisely, a cause of action for avoidance of a fraudulent transfer is extinguished either four years after the transfer is made or one year after the transfer is discovered only if the claim is based on actual fraud pursuant to Cal. Civ. Code. § 3439.04(a). Cal. Civ. Code § 3439.09(a). If the claim is based on constructive fraud pursuant to either Cal. Civ. Code § 3439.04(b) or § 3439.50, the cause of action is extinguished in all instances four years after the transfer is made. Cal. Civ. Code § 3439.09(b). A claim based on actual fraud is extinguished in any event seven years after the transfer is made. Cal. Civ. Code § 3439.09(c).
In support of their contention that a transfer of Stephen's interest in the Residence was "made" for purposes of Cal. Civ. Code 3439 et seq., the Turners rely primarily on In re Roosevelt, 87 F.3d 311 (9th Cir. 1996). Roosevelt involved an objection to the debtor's chapter 7 discharge on the ground that the debtor had "made" a fraudulent transfer within one year of filing for bankruptcy. See 11 U.S.C. § 727(a)(2).
In Roosevelt, the debtor had executed a marital agreement more than one year before he filed for bankruptcy, transmuting his interest in certain real property into his wife's separate property.Roosevelt, 87 F.3d at 313. Under state law, the transmutation was effective between the spouses when the agreement was executed even though it was never recorded. See Cal. Fam. Code § 852(a). However, under state law, because the agreement was not recorded, it was not effective against third parties. See Cal. Fam. Code § 852(b). The issue presented in Roosevelt was whether a transfer is "made" for purposes of 11 U.S.C. § 727(a)(2) when it is effective between the parties or only when it is effective against third parties.Roosevelt, 87 F.3d at 315.
The Ninth Circuit noted that, unlike 11 U.S.C. § 548 — the Bankruptcy Code fraudulent transfer statute — 11 U.S.C. § 727(a)(2) contains no definition of when a transfer is "made." Section 548(d) expressly provides that a transfer is deemed "made" only when it is effective against third parties. See 11 U.S.C. § 548(d)(1). TheRoosevelt plaintiff contended that, because both § 548(d) and 727(a)(2) pertain to fraudulent transfers, the definition of when a transfer was "made" in § 548(d)(1) should be imported into § 727(a)(2). The Ninth Circuit rejected this contention, concluding that, in this context, the transfer should be deemed "made" when effective between the parties. Roosevelt, 87 F.3d at 316-317.
The Ninth Circuit noted that the authorities were divided and the legislative history was unenlightening. In reaching its conclusion, it was persuaded by the argument that the purposes of 11 U.S.C. § 727(a)(2) and § 548 differ. Section 727(a)(2) focuses on the debtor's wrongdoing in connection with filing the bankruptcy case. Section 548 permits the trustee to avoid the transfer so as to bring the transferred property back into the estate for the benefit of creditors. The Ninth Circuit concluded that, because recording statutes are also focused on protecting third parties, it was reasonable to use the recordation date as the transfer point for § 548. However, it concluded that the same rationale did not apply to § 727(a)(2) and thus the same rule need not apply. Roosevelt, 87 F.3d at 317.
The Turners acknowledge that Roosevelt did not involve a fraudulent transfer action under the California Civil Code. However, they contend that the Court should extend the rationale of Roosevelt to such actions. They contend that federal law, as represented byRoosevelt, should preempt state law on this issue. They cite no authority for this proposition.
The Plaintiffs oppose the motion for summary judgment. They note that, unlike 11 U.S.C. § 727(a)(2), the California Civil Code does contain a definition of when a transfer is "made" for fraudulent transfer purposes. Section 3439.06(a) provides as follows:
(a) a transfer is made
(1) With respect to an asset that is real property . . . when the transfer is so far perfected that a good faith purchaser of the asset from the debtor against whom applicable law permits the transfer to be perfected cannot acquire an interest in the asset that is superior to the interest of the transferee. . . . "
Cal. Civ. Code § 3439.06(a). As recited above, Family Code § 852(b) states that "[a] transmutation of real property is not effective as to third parties without notice thereof unless recorded."
For purposes of the Action, the transfer was "made" immediately before the Action was filed. See Cal. Civ. Code § 3439.06(b): "If applicable law permits the transfer to be perfected as provided in subdivision (a) and the transfer is not so perfected before the commencement of an action for relief under this chapter, the transfer is deemed made immediately before the commencement of the action." At the hearing on the motion, the Turners argued that this issue should not be governed by an absurd legal fiction of this sort. The Turners' argument must be directed to the California legislature. The Court cannot disregard the plain language of § 3439.60(b) simply because the Turners characterize it as absurd. Moreover, clearly, if the date an unrecorded transfer is effective between the parties is not to constitute the date the transfer was made, a deemed date must be established. Otherwise, there would be no way to avoid it.
Cal. Fam. Code § 851 states that transmutations are subject to fraudulent transfer law.
The Court agrees with the Plaintiffs that, for purposes of the Action, Cal. Civ. Code § 3439.06(a) governs when the transfer of the Residence was "made." The Court finds the Turners' contentions frivolous. The fraudulent transfer claims asserted in the Action are based on California law. Thus, California law governs the elements of those claims, including when a transfer is "made." Where the relevant state law statute has a definition of when a transfer is "made" and the claim is governed by state law, the Court may not disregard that definition based on a generalized invocation of the doctrine of preemption.
In their motion for summary judgment, the Turners also contended that the Plaintiffs' claims for constructive fraud were untenable because Stephen was not insolvent in 1992, when he executed the Transmutation Agreement, nor was he rendered insolvent by executing it. At that point, they note, Stephen had not even engaged in the conduct that gave rise to the Judgment, and he had no other debts of any substance. The Plaintiffs did not address this issue in their opposition. However, the Court finds it without merit. The relevant date, for purposes of insolvency as well as for statute of limitations purposes, is the date the transfer was "made." As discussed above, the transfer is deemed to have been made in 1999, just prior to the filing of the Action. By that time, the Judgment had been entered. Turner does not contend that he was not insolvent at that point.
Moreover, even if the California fraudulent transfer statute did not contain a definition of when a transfer is "made," the Turners' claim would still fail. As noted above, the Roosevelt court based its conclusion on the different purposes served by 11 U.S.C. § 727(a)(2) and 11 U.S.C. § 548. However, Cal. Civ. Code § 3439 et seq. and 11 U.S.C. § 548 are both fraudulent transfer avoidance statutes and thus serve the same purpose: i.e., the protection of creditors. Thus, under the very rationale of Roosevelt, it would make sense to import the definition of when a transfer was "made" set forth in § 548 into Cal. Civ. Code § 3439 et seq.
CONCLUSION
The Turners' motion for summary judgment is denied. The Plaintiffs are directed to submit a proposed form of order in accordance with this decision.