Opinion
D069744
01-24-2018
KENT R. REUKEMA, Plaintiff and Appellant, v. PETER GILBOY, Defendant and Appellant.
Pachulski Stang Ziehl & Jones and Daryl G. Parker for Plaintiff and Appellant. Bernard M. Hansen for Defendant and Appellant.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 37-2011-00095643-CU-CO-CTL) APPEAL from a judgment of the Superior Court of San Diego County, Timothy B. Taylor, Judge. Affirmed in part; reversed in part with directions. Pachulski Stang Ziehl & Jones and Daryl G. Parker for Plaintiff and Appellant. Bernard M. Hansen for Defendant and Appellant.
In a litigation malpractice action, a plaintiff establishes causation by showing that "but for the alleged malpractice, it is more likely than not that the plaintiff would have obtained a more favorable result." (Viner v. Sweet (2003) 30 Cal.4th 1232, 1244 (Viner), italics omitted.)
Proving causation in such cases has been likened to a trial within a trial, or case within a case, in which the trier of fact determines how the underlying proceeding would have been resolved had the attorney met the standard of care. (Mattco Forge, Inc. v. Arthur Young & Co. (1997) 52 Cal.App.4th 820, 832-833 (Mattco Forge).) This method of proving causation applies not only in attorney malpractice cases, but also in analogous cases against nonlawyer "litigation support professionals." (Id. at pp. 834-835.)
This appeal does not arise from a legal malpractice case, but it involves analogous facts. The trial court characterized this as a "collection agent malpractice" case.
After obtaining a $416,345 federal court judgment against Charles F. Rebozo (the Rebozo judgment), Kent Reukema assigned the judgment to a nonlawyer professional judgment collector, Peter Gilboy. Gilboy agreed he would not settle with Rebozo, but instead would enforce the judgment to its fullest extent and pay Reukema 55 percent of monies recovered.
To enforce the Rebozo judgment, Gilboy filed a fraudulent conveyance action in Florida (the Florida action), seeking to set aside several transfers of real property Rebozo had made to himself and his wife. However, after that litigation dragged on for three years—and as Florida property values plummeted during the 2008 recession—Gilboy settled the Florida action for $195,000.
Reukema sued, asserting Gilboy breached his contractual and fiduciary duties by settling with Rebozo. At trial, Reukema asserted his damages were the difference between what Gilboy would have recovered if he had litigated the Florida action to judgment and the $195,000 settlement. Gilboy replied that to sustain that burden, Reukema was required to prove "the case within the case . . . [i.e., that the Florida action] would have been victorious."
After a bench trial the court entered judgment for Reukema. However, instead of requiring Reukema to establish the case within a case, the court determined the value of the Rebozo judgment by discounting it 20 percent to account for "risk factors," such as "uncertainty created by Florida law" and Florida's "well-deserved reputation for being a difficult place in which to enforce judgments."
After reducing the Rebozo judgment by 20 percent and crediting Gilboy for amounts he paid Reukema and for Gilboy's 45 percent fee, the court entered judgment in Reukema's favor for $136,023.25.
Reukema appeals, contending the court (1) should not have discounted the judgment; (2) erred by reducing his recovery by Gilboy's fee; and (3) should have applied higher Florida postjudgment interest rates instead of federal rates. He contends we should modify the judgment to $736,605.45.
Gilboy cross-appeals from the judgment. On appeal, Gilboy concedes he breached his contractual and fiduciary duties by settling with Rebozo. However, Gilboy contends that to establish his breach caused damages, Reukema was required to prove a trial within a trial—specifically, that the Florida action would have resulted in a collectible judgment against Rebozo. Gilboy asserts there is no substantial evidence that (1) the Florida action would have been successful, and (2) there was equity in Rebozo's properties to make the Rebozo judgment collectible.
We agree with Gilboy's contentions and, therefore, reverse with directions to enter judgment in his favor. (See Cardinal Health 301, Inc. v. Tyco Electronics Corp. (2008) 169 Cal.App.4th 116, 153-154 (Cardinal Health 301.)
FACTUAL AND PROCEDURAL BACKGROUND
A. The Rebozo Judgment
In 1998 Reukema purchased a sailboat from a company associated with Rebozo. That transaction resulted in litigation, the details of which are not relevant here. In March 2005 the district court entered an amended judgment in favor of Reukema against Rebozo for $416,345.39.
B. Assignment to Gilboy for Collection
Gilboy, a nonlawyer, is in the business of enforcing judgments. In June 2005 Reukema and Gilboy negotiated terms under which Reukema assigned the Rebozo judgment to Gilboy for collection. Gilboy told Reukema he would pursue collection "until all present assets are seized, past assets are put back into his name and taken, and future assets are assessed."
The initial draft agreement gave Gilboy the right to "collect, settle, prosecute, enforce, and compromise" the Rebozo judgment. However, Reukema was adamant that Gilboy not settle with Rebozo. Reukema insisted that Gilboy remove the "settle" and "compromise" language.
After further negotiations, in July 2005 Reukema and Gilboy entered into a written agreement (Agreement) under which Reukema assigned to Gilboy "all rights, interests and title" in the Rebozo judgment. The Agreement provides that Gilboy "will collect, prosecute, and enforce said judgment." The terms "settle" and "compromise" were omitted.
In exchange, Gilboy agreed to pay Reukema 55 percent "of the principle [sic] of the judgment and interest," with payment deferred until Gilboy "begins to receive judgment monies." Gilboy also agreed to pay all costs without reimbursement unless "the principal and interest of the judgment have been satisfied."
C. The Florida Action and Settlement
About five months before the Rebozo judgment was entered, Rebozo and his wife executed a quit claim deed to themselves, "husband and wife, in an estate by the entireties" to 9301 S.W. 148th Street, Miami, Florida (the 148th Street property). The deed recites consideration of $10 "and other good and valuable consideration . . . in hand paid," plus "love and affection." On the same date, Rebozo and his wife executed identically worded deeds to other Miami property located at 11910 S.W. 188th Street (the 188th Street property) and 23333 South Dixie Highway (the Dixie Highway property).
Without citation to the record, Reukema's brief states the transfers occurred "the week before the trial" in district court. That may be true; however, the record does not indicate when that trial began.
Under Florida law, there is nothing inherently wrong with a married couple holding title to their property in tenancy by the entirety. However, creditors cannot levy on entireties property to satisfy the debt of only one of the spouses. (Havoco of America, Ltd. v. Hill (11th Cir. 1999) 197 F.3d 1135, 1139.) As a result of these transfers, Gilboy could not enforce the Rebozo judgment against any of these properties.
Under Florida law, the court may set aside a transfer made with the intent to hinder, delay or defraud a creditor. (Wiand v. Wells Fargo Bank, N.A. (M.D.Fla. 2015) 86 F.Supp.3d 1316, 1325 (Wiand).) In approximately June 2006 Gilboy hired Florida attorneys to prosecute the Florida action, seeking to set aside the entireties deeds.
Gilboy litigated the Florida action for nearly three years. The docket contains 97 entries, including a judgment debtor examination, numerous deposition notices, a writ of garnishment, a motion to dismiss, discovery motions, trial notice, witness and exhibit lists, and various other proceedings.
In January 2009 Gilboy settled with Rebozo for property Gilboy later sold for $195,000. Gilboy testified he settled because his attorney "explained to me first of all the fraudulent lawsuit is not a slam dunk. We could lose that. [¶] Number two, if we won that and went to levy on Mr. Rebozo's property, his wife could file a third-party claim based on marital property." Gilboy was also concerned Rebozo could further delay collection by filing bankruptcy and/or appealing from a judgment in the Florida action.
Additionally, in 2009 Florida real estate values were plunging as a result of the recession. For example, the property on 188th Street lost about half its value between 2006 and December 2009. Gilboy testified, "The principal thing in my mind was the collapse of the economy. The Wall Street Journal said that the worst real estate fall was in Florida." In a cross-complaint Gilboy filed against Reukema (but dismissed the first day of trial), Gilboy stated that with the economy collapsing and his own home in default, he decided the "best course of action" was to settle.
After settling with Rebozo, Gilboy paid Reukema his 55 percent share. After paying $43,000 in costs, including fees for the Florida lawyers, Gilboy ended up with $250.
D. Reukema Sues Gilboy
In July 2010 Reukema sued Gilboy for breach of contract, breach of fiduciary duty, fraud, and an accounting. For reasons not relevant here, the case was not tried until late 2015.
In his trial brief, Reukema acknowledged there was a "question of whether Gilboy could levy against . . . real property held in 'tenancy by the entirety.'" He also stated that damages consisted of "the difference between (a) the amount which could have been recovered if Gilboy had performed as agreed and enforced the [Rebozo] [j]udgment fully and (b) what was actually recovered" plus interest.
E. Evidence at Trial
The parties waived jury. Reukema and Gilboy gave conflicting testimony on whether Gilboy had the right to settle the Rebozo judgment.
Reukema offered expert testimony from a real estate appraiser, James Kaysen. Kaysen testified that Rebozo still owned three pieces of real property in the Miami area: the 148th Street and 188th Street properties, and the Dixie Highway property. These were held by Rebozo and his wife under tenancy by entireties deeds dated February 25, 2004, which the court received in evidence without objection.
Kaysen appraised each of these properties for the period June 30, 2006 to December 31, 2010. The 148th Street property had appraised values ranging from $724,000 in June 2006 to $451,000 in December 2010. For the same period, the 188th Street property ranged from $278,000 to $112,000. The Dixie Highway property ranged from $1,030,000 to $993,000.
Reukema was unsuccessful in offering admissible evidence of Rebozo's equity in any of the properties. Reukema's attorney tried to establish the equity by offering certified copies of recorded mortgages. He told the court, "One of the contentions that [Gilboy] has made is that Mr. Rebozo . . . didn't have any property [in which] he had any equity. This goes to show that [Rebozo] did have property and [Rebozo] did have equity . . . ." [¶] . . . [¶] . . . And we're going to show with other testimony that his property was worth more than the mortgage." Reukema's lawyer stated the evidence was "relevant to determining whether or not the judgment was enforceable."
However, the court sustained Gilboy's objections to these exhibits on several different grounds, including that of unfair surprise. Reukema did not produce this mortgage evidence until about two weeks before trial, which was after expert witness depositions. When Gilboy's lawyer objected, the court stated, "I'm agreeing with the objections that [Gilboy's lawyer] has raised. He's raised several. All of them have merit. These documents were available to [Reukema] from the dates 1993 all throughout this six-year ordeal. And yet you have not controverted his assertion that this was not turned over in discovery and it was not proffered until after the expert witness testified."
Reukema contends the court erred in sustaining objections to this evidence because the certified copies he offered into evidence were self-authenticating. However, Reukema does not address the other grounds the court gave for excluding this evidence, including that of unfair surprise, and therefore the point is forfeited. (See People ex rel. Reisig v. Acuna (2017) 9 Cal.App.5th 1, 25.)
Consistent with these rulings, the court prohibited Reukema's expert from offering opinions based on "ownership and encumbrance reports" that were not produced at the expert's deposition.
Reukema's lawyer tried a second time to establish Rebozo's equity in the properties through another witness, Nicholas Smith, a private investigator. Smith testified he searched "online records available from the Miami Dade Recorder's Office" and found "several [mortgages]." One is a 1993 mortgage on the 188th Street property for $261,700.
After sustaining Gilboy's hearsay objections, the court took judicial notice of that $261,700 mortgage, stating, "I receive it on that basis, not for the truth of the matter but merely for the fact that it was a record, and that's what it's being proffered for." The court similarly took judicial notice of a mortgage and recorded satisfaction of mortgage on the Dixie Highway property.
On cross-examination, Smith conceded that at the time of his deposition, he did not know the amount of any liens against Rebozo's property. He also admitted that to determine "how much equity is in a piece of real property" one would "need to know the amount of the liens."
The statement of decision states that "the Smith testimony added very little to [Reukema's] presentation in this case, and the court placed little to no reliance on it in resolving the case."
F. Closing Arguments
In closing argument, Reukema's lawyer did not dispute that it was his burden to establish that the Florida action would have likely resulted in a judgment setting aside the tenancy by entireties deeds. Nor did he dispute it was his burden to show Rebozo had sufficient equity in those properties to satisfy the Rebozo judgment. Rather, counsel argued the evidence was sufficient to sustain findings in Reukema's favor on both issues, stating:
"[O]n the issue of collectability of the judgment, we put on evidence in the form of the appraisals . . . . The total value of all of those parcels is well over a million dollars, even when you take into account the mortgages which Mr. Smith had testified to.[]
" . . . So I think that we have shown that this judgment could have been collected if it had been diligently pursued.
" . . . We've cited cases in our trial brief as to . . . why there was a good case of fraudulent transfer. . . . [¶] . . .
" . . . [T]here simply was no impossibility here. It could have been done. It wouldn't have been easy, and it should have been done."
Smith did not testify about the amount of any mortgages. As noted ante, the court took judicial notice of the recorded mortgages, but not for the truth of the matter asserted.
In his closing, Gilboy's attorney emphasized that Reukema had not established causation under the case-within-a-case method, stating:
"And so as to the case within the case, Mr. Reukema has not presented evidence that the fraudulent transfer action would have been victorious."
G. Statement of Decision
1. Tentative decision
The next day, the court issued a tentative decision. The court resolved the contract interpretation issue in Reukema's favor, determining that Gilboy breached his contractual and fiduciary duties by settling with Rebozo. However, the court rejected Reukema's claims for fraud and punitive damages, stating:
The court relied on Harrison v. Adams (1942) 20 Cal.2d 646, Cross v. Bonded Adjustment Bureau (1996) 48 Cal.App.4th 266, and Elam v. Arzaga (1932) 122 Cal.App. 742, for the proposition that debt collectors "stand in a fiduciary relationship to an assignor of claims." Gilboy does not challenge this conclusion and, therefore, we express no opinion on whether Gilboy owed Reukema fiduciary duties arising out of the Agreement.
"The court finds Gilboy settled the Florida case because he was tired of dealing with a very difficult customer, because of his own financial problems, because of the risks of further litigation in Florida, and because of the effects of the real estate recession—not because of spite, ill will, oppression, fraud, or malice. After three and a half years of work and considerable expense, Gilboy ended up with only $250, so this was hardly a case of self-dealing."
The court determined that causation and damages were to be determined based on "[w]hat would Reukema have obtained had Gilboy proceeded to enforce and collect the judgment." On the issue of collectability, the court found there were "Rebozo assets with equity" and Gilboy "left money on the table . . . ."
Despite preparing an 11-page single-spaced tentative decision, the court did not specify to which of the three Rebozo properties it alluded, nor the amount of equity in any of them.
Next, the court found that the Florida action "was anything but a 'slam dunk'" because of "uncertainty created by Florida law, its 'tenancy by the entirety' rules, and its reputation for being a difficult place in which to enforce judgments." Moreover, the court found there was a "looming spectre of a Rebozo bankruptcy" and possible "delay associated with motions to dismiss, appellate proceedings, etc." Based on these "risk factors," the court determined a value of the Rebozo judgment by discounting it by 20 percent. Based on this discount and after adding postjudgment interest, the court calculated Reukema's "gross damages" were $446,249.54.
The court awarded Reukema 55 percent of $446,249.54 ($245,437.25), less the $109,414 Gilboy had already tendered to Reukema, for a net judgment of $136,023.25 plus costs.
2. Reukema's request for a statement of decision
Reukema requested a statement of decision. In part IIF of that request, he challenged the court's assessment of a 20 percent discount on the Rebozo judgment. Reukema asked the court to instead find that if the Florida action had been litigated to judgment, the tenancy by entireties deeds would have been set aside, stating:
California Rules of Court, rule 3.1590(d) provides: "Within 10 days after announcement or service of the tentative decision, whichever is later, any party that appeared at trial may request a statement of decision to address the principal controverted issues. The principal controverted issues must be specified in the request."
"Reukema respectfully submits that it is far more likely than not that these transfers would have been deemed fraudulent under Florida law and subject to execution and that, therefore, there is no need to discount his claim for uncertainty in this regard."
3. Gilboy's request for statement of decision
Gilboy also requested a statement of decision. He asked the court to address whether (1) "Reukema [is] required to prove there was equity in the three properties"; and (2) "Reukema [is] required to prove the 'case within the case' whereby he proves he would be better off, if Gilboy would not have settled."
4. Proposed statement of decision
In the proposed statement of decision, the court again determined causation and damages by discounting the Rebozo judgment by 20 percent. In so doing, the court stated it rejected Reukema's request for a finding that it was more likely than not the tenancy by entireties deeds would have been set aside in the Florida action:
"[T]he court finds that the gross judgment, plus accrued interest at the federal rate, must be discounted 20% for these risk factors. The court rejects the contrary argument contained in Part IIF of [Reukema's] RFSOD [request for statement of decision]." (Italics added.)
5. Objections to proposed statement of decision
Gilboy objected to the proposed statement of decision, stating there was no evidence of the amount of liens on Rebozo's properties and, therefore, no evidence that the Rebozo judgment was collectible. He also again objected to the court's causation analysis because the court did not determine whether "the fraudulent transfer case against Rebozo would have been won[.]"
6. Statement of decision and judgment
In its statement of decision, the court discounted the Rebozo judgment by 20 percent, essentially repeating the analysis in the tentative decision. Subsequently, the court entered judgment for Reukema on his causes of action for breach of contract and breach of fiduciary duty, and in favor of Gilboy on Reukema's causes of action for fraud and an accounting.
DISCUSSION
I. THE STANDARD OF REVIEW
"In reviewing a judgment based upon a statement of decision following a bench trial, we review questions of law de novo. [Citation.] We apply a substantial evidence standard of review to the trial court's findings of fact. [Citation.] Under this deferential standard of review, findings of fact are liberally construed to support the judgment and we consider the evidence in the light most favorable to the prevailing party, drawing all reasonable inferences in support of the findings." (Thompson v. Asimos (2016) 6 Cal.App.5th 970, 981.) "[I]f the statement of decision does not resolve a controverted issue . . . and the omission was . . . brought to the attention of the trial court, 'it shall not be inferred on appeal . . . that the trial court decided in favor of the prevailing party as to those facts or on that issue.'" (Ibid.)
II. THE JUDGMENT MUST BE REVERSED BECAUSE THERE IS NO SUBSTANTIAL
EVIDENCE OF CAUSATION
A. The Case Within a Case in Litigation Malpractice
"In a typical professional negligence case against a litigation attorney, a determination of the merits of the underlying lawsuit must be made in order to adjudicate the elements of causation and damages." (Gutierrez v. Girardi (2011) 194 Cal.App.4th 925, 934.) "The plaintiff is required to prove that but for the defendant's misconduct, '"the plaintiff would have obtained a more favorable judgment . . . in the action in which the malpractice allegedly occurred."'" (Ibid.) This method of establishing causation is commonly called a case within a case, or a trial within a trial. (Mattco Forge, supra, 52 Cal.App.4th at p. 832.)
The case-within-a-case approach "simply requires that to prove damages in certain types of legal malpractice lawsuits, the underlying case in which the malpractice allegedly occurred must be tried as part of the malpractice claim in order for the plaintiff to establish the amount of the damages caused by the malpractice." (Rice v. Crow (2000) 81 Cal.App.4th 725, 740.) This method is routinely employed in legal malpractice cases involving underlying litigation because it "'avoids the specter that the damages claimed by a plaintiff are a matter of pure speculation and conjecture.'" (Mattco Forge, supra, 52 Cal.App.4th at p. 835.) "Recreating the underlying action requires calling and examining those persons who would have been witnesses and presenting the demonstrative and documentary evidence that would have been presented but for the attorney's negligence." (4 Mallen, Legal Malpractice (2017 ed.) Litigation, § 37:87, p. 1694.)
B. Application to Litigation Consultants
In Mattco Forge, supra, 52 Cal.App.4th 820, a client brought suit against a third party and hired an accounting firm, Arthur Young & Co. (Arthur Young), to help prepare its case for trial in the federal court. The federal action settled after the judge issued a ruling adverse to the client. (Id. at p. 825.) The client later brought an action for professional negligence against Arthur Young. On appeal from a judgment in favor of the client, Arthur Young argued, among other things, that the trial court had erred in rejecting its theory that to prevail in the malpractice case, the client had to show that absent Arthur Young's negligence, the client would have prevailed in the underlying case. (Id. at pp. 829-830.) In short, the defendant in Mattco Forge argued the case-within-a-case method of proving causation applied not only in attorney malpractice cases, but also in analogous cases, such as those against nonattorney litigation support professionals. (Id. at p. 831.)
The court in Mattco Forge, supra, 52 Cal.App.4th 820 stated that the case-within-a-case burden "is the most effective safeguard yet devised against speculative and conjectural claims [and is] designed to limit damages to those actually caused by a professional's malfeasance." (Id. at p. 834.) The court held that consulting professionals retained to assist with litigation are, like attorneys, chargeable with damages for negligence in connection with their litigation-related services only if the plaintiff can show that but for the professional's negligence, a better result would have been achieved. The court held this requires the case-within-a-case method of proving causation:
"Like other defendants in negligence lawsuits, litigation support professionals are only responsible for the losses they cause. [Citations]. Thus, in situations where alleged negligent conduct is analogous to an attorney's mishandling litigation, a plaintiff should be held to the same burden." (Id. at pp. 834-835.)
C. Causation Here
Citing Mattco Forge, supra, 52 Cal.App.4th 820, Gilboy contends Reukema was required to establish causation using the case-within-a-case method. Gilboy asserts, "It is difficult to image anything more analogous to an attorney mishandling litigation than a judgment creditor mishandling collection of a judgment. Judgment collection is nothing more than the final step in successful litigation. In fact, the collection of a judgment is often, if not usually, handled by an attorney. This outcome is only reinforced by the [t]rial [c]ourt's finding that Gilboy owed a fiduciary duty to Reukema."
We agree with Gilboy. With respect to proof of causation here, this case is analogous to Mattco Forge, supra, 52 Cal.App.4th 820. Indeed, in the statement of decision, the trial court characterized this case as "collection agent malpractice."
Moreover, although Reukema did not sue Gilboy for professional negligence, the analysis in Mattco Forge, supra, 52 Cal.App.4th 820 does not turn on the theory of liability, but rather on the issue of causation and the defendant's role in preparing or presenting the underlying litigation. (Id. at pp. 834-835.) Causation is an essential element for breach of contract and breach of fiduciary duty. (Tribeca Companies, LLC v. First American Title Ins. Co. (2015) 239 Cal.App.4th 1088, 1102.) "Determining whether a defendant's misconduct was the cause in fact of a plaintiff's injury involves essentially the same inquiry in both contract and tort cases." (Id. at p. 1103.) Thus, the fact Reukema sued Gilboy for breach of contract and breach of fiduciary duty—rather than for negligence—is not a relevant distinction between this case and Mattco Forge.
To establish causation, Reukema was required to show it is more likely than not that Gilboy would have prevailed in the Florida action if it had been prosecuted to judgment. (See Viner, supra, 30 Cal.4th at p. 1241 ["In a litigation malpractice action, the plaintiff must establish that but for the alleged negligence of the defendant attorney, the plaintiff would have obtained a more favorable judgment or settlement in the action in which the malpractice allegedly occurred."].) Under Mattco Forge, supra, 52 Cal.App.4th 820, this must be done under the trial-within-a-trial method. (Id. at pp. 834-835.) The trial court was required to step into the shoes of the court in the Florida action, consider evidence regarding Rebozo's transfers into tenancy by the entireties, and determine whether it was more likely than not that any of those transfers would have been set aside.
Reukema contends Gilboy is trying to impose a heightened burden of proof, and that the legal malpractice cases do not impose any such requirement. However, in his reply brief, Gilboy concedes that Reukema bore the burden to prove causation and damages by a preponderance of the evidence and only to a legal certainty, not an absolute certainty. (See Viner, supra, 30 Cal.4th at pp. 1242-1243.)
On appeal, Reukema contends imposing the case-within-a-case standard is an unfair burden. However, it is not unfair, and it is a burden Reukema repeatedly placed upon himself in this case.
In his trial brief, Reukema stated his damages were the difference between the $195,000 settlement and "the amount which could have been recovered if Gilboy had performed as agreed and enforced the [j]udgment fully . . . ." That is simply another way of stating the case-within-a-case standard.
Moreover, Reukema's trial brief states, "Reukema will show at trial that Rebozo transferred several real properties into TBE [tenancy by entireties] shortly before judgment was entered against him. Reukema will also show that those properties were of sufficient value to pay the [j]udgment in full if Gilboy had done what he agreed to do and taken steps to set aside their conveyance." This also is another way of stating that causation must be established by showing Gilboy would have prevailed in the Florida action and collected on the Rebozo judgment once the entireties deeds were set aside.
Moreover, in closing argument Reukema's lawyer asserted, "We've cited cases in our trial brief as to why this was a—why there was a good case of fraudulent transfer." He argued, "This judgment could have been enforced. Mr. Rebozo had the assets."
The third time Reukema acknowledged he was required to establish causation using a case-within-a-case method was in his request for a statement of decision. There, he asserted the court erred in its tentative decision by discounting the Rebozo judgment by 20 percent. Stating, "the evidence of fraudulent transfer here was unequivocal," Reukema asserted, "[I]t is far more likely than not that these transfers would have been deemed fraudulent under Florida law and subject to execution and that, therefore, there is no need to discount his claim . . . ." (Italics added.)
D. The Court's Error
The court rejected Reukema's request for a finding that "it is far more likely than not that these transfers would have been deemed fraudulent under Florida law and subject to execution." Instead, the court determined the value of the Rebozo judgment by discounting it by 20 percent to account for certain "risk factors." This was error. The trial court in Mattco Forge, supra, 52 Cal.App.4th 820 made a similar mistake, instructing the jury that damages were to be determined based on the value of the underlying case that was settled. (Id. at p. 831 [jury erroneously instructed that damages include the "value of Mattco's case" against General Electric].) The appellate court reversed because establishing causation under the case-within-a-case standard requires evidence sufficient to sustain a finding that the plaintiff in the underlying action would have prevailed—not what the underlying case was worth as though the case was being evaluated for settlement purposes. (Id. at pp. 831-832.)
E. No Substantial Evidence of Fraudulent Transfer
On this record, there is no substantial evidence that Gilboy would have likely prevailed in the Florida action if he had pursued it to judgment. Under Florida law, the elements of a cause of action to set aside a fraudulent transfer are (1) a defrauded creditor, (2) a debtor who intended fraud, and (3) a conveyance of property that is applicable by law to the payment of the debt due. (Wiand, supra, 86 F.Supp.3d at p. 1325.) "Proof of fraud requires proof of intent." (Mejia v. Ruiz (Fla.App. 2008) 985 So.2d 1109, 1113.) Because of the difficulty in proving actual fraudulent intent, Florida law looks to "'"badges of fraud"'" to determine whether a transfer was made with the intent to defraud creditors. (Ibid.) "While a single badge of fraud may amount only to a suspicious circumstance, a combination of badges will justify a finding of fraud." (Ibid.) "Courts may take into account the circumstances surrounding the conveyance." (Ibid.)
Here, the only evidence offered to show Rebozo intended to defraud creditors are the tenancy by entireties deeds themselves. The timing of the deeds—occurring near the time of Reukema's trial against Rebozo—is suspicious. And the recited consideration—$10 plus love and affection—also seems suspicious. (See United States v. Major (Bankr. M.D.Fla. 2016) 551 B.R. 531, 541 [transfers of property to a family member in exchange for love and affection do not constitute reasonably equivalent value].)
However, there is nothing inherently fraudulent under Florida law about spouses holding or transferring property to themselves by the entireties. (See, e.g., In re Allen (Bankr. M.D.Fla. 1996) 203 B.R. 786, 792-793 [debtor did not fraudulently convert assets with spouse as tenants by the entireties where debtor and spouse had pattern of investing in stocks held by the entireties since they were married, and other factors showed no fraudulent intent].) The sole fact of a transfer into a tenancy by entireties shortly after a lawsuit is filed is not sufficient evidence of fraud. (See Ellis Sarasota Bank & Trust Co. v. Nevins (Fla.App. 1982) 409 So.2d 178, 180 [deposit into entireties account one month after complaint was filed may, but will not necessarily, constitute a fraudulent transfer].)
Reukema cites In re Blitstein (Bankr. S.D.Fla. 1989) 105 B.R. 133, for the rule that transferring property into the entireties for no consideration to a family member is sufficient evidence of fraudulent transfer. However, in Blitstein, there was also evidence the debtor continued to rely on his ownership of the ostensibly transferred property to support a loan application, and the debtor's funds were used to pay property taxes on the supposedly transferred property. (Id. at p. 136.) In re Mizrahi (Bankr. M.D.Fla. 1995) 179 B.R. 322, which Reukema also cites, is also distinguishable. There, in addition to a transfer without consideration, the court found four other factors indicating an intent to defraud creditors. (Id. at p. 328.) --------
"In considering all of the factors bearing on a debtor's actual intent to defraud creditors, it is appropriate to conduct 'a subjective evaluation of the debtor's motive,' in addition to the standard 'badges of fraud.' [Citation]. Even where traditional 'badges of fraud' may be present, actual intent may not necessarily be presumed where a debtor had legitimate or independent reasons or purposes for making the transfer." (In re Stewart (Bankr. M.D.Fla. 2001) 280 B.R. 268, 283.) "Under Florida law, whether a transfer is made to the end, purpose or intent to delay, hinder or defraud a creditor must be determined by the facts and circumstances of each particular case." (In re Gateway Investments Corp. (Bankr. S.D.Fla. 1993) 152 B.R. 354, 356-357.)
The problem here is there is no evidence of Rebozo's motive, purpose, reason, or intent—apart from inferences that might be drawn from the tenancy by entirety deeds themselves and their temporal relationship to the Rebozo judgment. The undisputed fact the Florida action was litigated for nearly three years seems to belie Reukema's assertion that the deeds alone are "unequivocal" evidence of fraudulent transfer.
Moreover, at one point even Reukema testified there was "a lot of doubt" about whether the Florida action was "going to be successful." Without objection, Gilboy testified his Florida attorney advised him the case was "not a slam dunk" and might well be lost. The court in the Florida action granted a motion to dismiss the case, albeit with leave to amend.
There must be an evaluation of the facts and circumstances surrounding the entireties deeds. The case-within-a-case standard "requires calling and examining those persons who would have been witnesses and presenting the demonstrative and documentary evidence that would have been presented" had the Florida action been litigated to judgment. (See 4 Mallen, Legal Malpractice, supra, § 37:87, p. 1694.) But here, there were no such witnesses or documents. Reukema testified that Rebozo's deposition was taken in the Florida action, but the record does not show that testimony was before the court. On this record, the tenancy by entirety deeds alone and their temporal relation to the Rebozo judgment are not enough to sustain a finding that it is more likely than not the Florida action would have resulted in a judgment setting aside the entireties deeds.
F. No Substantial Evidence of Collectability
Moreover, even if the deeds alone and their timing were enough to show the Florida court would have set the transfers aside, Reukema also had to show the Rebozo judgment would have been collectable. (Wise v. DLA Piper LLP (US) (2013) 220 Cal.App.4th 1180, 1190-1191 [collectability is part of the plaintiff's case and a component of the causation and damages]; Garretson v. Harold I. Miller (2002) 99 Cal.App.4th 563, 569 [plaintiff must prove that "careful management of the case-within-a-case would have resulted in a favorable judgment 'and collection of same'"].)
Before trial started, Reukema knew this was part of his burden. His trial brief states, "Reukema will also show that those [tenancy by entireties] properties were of sufficient value to pay the [j]udgment in full if Gilboy had done what he agreed to do and taken steps to set aside their conveyance."
In the statement of decision, the court found, "[T]he evidence slightly preponderates in favor of a finding that there were Rebozo assets with equity beyond the single piece of property which became the subject of the Florida settlement and ultimately the sale for $195,000.00. Said another way, Gilboy left collectible [sic] money on the table . . . ." Gilboy contends no substantial evidence supports this finding because "[a]ll evidence of . . . liens was properly excluded."
Gilboy is correct; there is no substantial evidence that the Rebozo judgment would have been collected because there was no admissible evidence of Rebozo's equity in any of the properties.
The trial court sustained Gilboy's objections when Reukema offered certified copies of the mortgages into evidence. Later, when Smith was testifying, the court took judicial notice of recorded mortgages. However, although a court may judicially notice recorded title documents, that "does not mean it may take judicial notice of factual matters stated therein." (Poseidon Development, Inc. v. Woodland Lane Estates, LLC (2007) 152 Cal.App.4th 1106, 1117.) The court could take judicial notice of the fact of the document's recordation, the date the document was recorded and executed, the parties to the transaction reflected in the document, and the document's legally operative language. However, the court could not take judicial notice of hearsay recitations of fact contained in the mortgages—including the purported amount of the debt being secured—for the truth of the matter asserted. (See Yvanova v. New Century Mortgage Corp. (2016) 62 Cal.4th 919, 924, fn. 1; Herrera v. Deutsche Bank National Trust Co. (2011) 196 Cal.App.4th 1366, 1375.) Recognizing these rules, the trial court here correctly stated it was taking judicial notice of the recorded mortgages "not for the truth of the matter but merely for the fact that it was a record . . . ." (Italics added.)
Disagreeing with this conclusion, Reukema contends "Rebozo owned properties there worth at least $1,556,000. That was enough to satisfy the [j]udgment in full more than twice over . . . ." However, $1,556,000 is simply the cumulative appraised value of the Rebozo properties as of December 31, 2010, and those appraisals were each based on an assumption of "unencumbered fee simple title of ownership." (Italics added.)
Appraised values are only part of the two-part collectability equation. The other essential element is the amount of secured debt on each property. Reukema's expert, Smith, conceded that he had not determined the amount of any liens. He also conceded that without that information, he could not determine the equity in any of Rebozo's properties.
Because there was no admissible evidence of the amount of the encumbrances on Rebozo's properties, no substantial evidence supports the court's finding that "there were Rebozo assets with equity" to satisfy the Rebozo judgment.
III. REVERSAL WITH DIRECTIONS
When the plaintiff has had full and fair opportunity to present the case, and the evidence is insufficient as a matter of law to support plaintiff's cause of action, a judgment for defendant is required and no new trial is ordinarily allowed, unless there is newly discovered evidence of the type that would have justified the grant of a motion for new trial. (Cardinal Health 301, supra, 169 Cal.App.4th at pp. 153-154.)
Gilboy contends the insufficiency of the evidence to support findings on causation requires that we reverse with directions to enter judgment in his favor. We agree. Reukema had a full and fair opportunity to litigate causation. The necessity of proving causation using the case-within-a-case method was no surprise. In a trial brief Reukema's attorney filed in March 2013—more than two years before trial—Reukema acknowledged that his damages were "the difference between the amount which could have been recovered if [Gilboy] had performed as agreed and enforced the [j]udgment fully and what was actually recovered" plus interest. He also stated, "In the course of drafting the Joint Trial Readiness Report . . . , Gilboy's counsel raised for the first time the question of whether Gilboy could levy against or otherwise sell real property held in 'tenancy by the entirety.'" Moreover, during trial, Reukema recognized that he was required to show the Florida action would have succeeded, and the Rebozo judgment was collectible. In closing argument, his lawyer asserted there was a "good case of fraudulent transfer" and "on the issue of the collectability of the judgment" there was "plenty of equity" in the subject properties. He urged the court to apply Florida law to decide whether the Florida action would have been successful.
""'[F]or our justice system to function, it is necessary that litigants assume responsibility for the complete litigation of their cause during the proceedings."'" (Cardinal Health 301, supra, 169 Cal.App.4th at p. 154.) Accordingly, a reversal with directions to enter judgment for the defendant is proper. (Frank v. County of Los Angeles (2007) 149 Cal.App.4th 805, 833-834 [reversal with directions to enter defense judgment where reversal for insufficient evidence].)
As a result, we do not reach the other issues raised in the appeal and in the cross-appeal.
IV. DISPOSITION
Paragraph 1 of the "Judgment Following Bench Trial" filed December 11, 2015 (the Judgment) is reversed with directions to enter judgment in favor of Peter Gilboy and against Kent R. Reukema on the first and second causes of action of the complaint. Paragraph 4 of the Judgment, which states Reukema is the prevailing party for purposes of costs incurred at trial, is reversed. The issue of entitlement to costs incurred at trial and amount thereof is remanded for further proceedings consistent with this opinion. In all other respects, the Judgment is affirmed.
Gilboy is entitled to costs incurred on appeal.
NARES, J. WE CONCUR: BENKE, Acting P. J. HALLER, J.