Elie v. Smith, 2011 WL 9349985 (Cal.Super.Napa, Oct. 13, 2011). _ http://goo.gl/UzNQaX
Superior Court of California.
Mehrdad ELIE, Plaintiff,
Kathleen A. SMITH, an individual; et al., Defendants,
And Related Actions;
Gregory Cutuli, Plaintiff,
Kathleen A. Smith, an individual, et al., Defendants;
Mehrdad Elie, Intervenor.
October 13, 2011.
Consolidated with 26-50182
Statement of Decision After Court Trial
Jeffrey E. Essner (State Bar No. 121438), Allonn E. Levy (State Bar No. 187251), Liam J. O'Connor (State Bar No. 246638), Hopkins & Carley, A Law Corporation, The Letitia Building, 70 S First Street, San Jose, CA 95113-2406, mailing address: P.O.Box 1469, San Jose. CA 95109-1469, Telephone: (408) 286-9800, Facsimile: (408) 998-4790, Attorneys for Plaintiff/Intervenor, Mehrdad Elie.
Hon. Philip A. Champlin, Judge.
[Code Civ. Proc. sec.632; Cal. Rule Ct 3.1591]
Trial Date: September 26, 2011
Time: 8:30 a.m.
This matter came on for trial and assignment before Napa County Superior Court Judge Francisca P. Tisher on September 8, 2011. The matter was assigned for trial on September 12, 2011 at which time defaulting party Kathleen Smith ("Smith") filed for bankruptcy in the Florida Bankruptcy Court and defendant Gregory Cutuli ("Cutuli") asserted the automatic stay in the instant case. On approximately September 15, 2011 the Federal Bankruptcy Court of Florida ruled that the claims of Cutuli were not covered by the automatic stay and expressly granted relief from stay to permit claims against both Smith and Cutuli to proceed through judgment. The Honorable Francisca P. Tisher assigned the matter to this court for trial commencing September 26. 2011, the Honorable Philip A. Champlin, presiding.
SUMMARY OF PLEADINGS AND PROCEEDINGS
Of the numerous complaints and cross-complaints originally filed by various parties to this consolidated action, the following claims remained active and were decided at the time of trial.
A. Cutuli's October 25, 2009 Complaint Against Smith, as Amended October 5, 2010, Case No. 26-50182
Cutuli initiated the instant action on October 25, 2009 by filing a complaint against Smith. Judgment Creditor Mehrdad Elie ("Elie") was not provided notice of the lawsuit but eventually uncovered it and filed a separate complaint in intervention (hereafter the "Cutuli-Smith Complaint"). Cutuli entered Default judgment against Smith on his amended complaint on November 17, 2010; At trial, Elie attacked the default judgment on the basis of fraud.
B. Elie's Original January 26, 2010 Complaint in Intervention
Based on the original October 25, 2009 Cutuli-Smith Complaint against which sought to quiet title in the 1070 Orchard property in favor of Cutuli, Elie filed a complaint in intervention seeking to (1) Set Aside any Fraudulent Transfer involving the 1070 Orchard Avenue property1, (2) Recover damages for Abuse of Process, (3) Establish a Conspiracy to defraud, (4) Quiet Title2 , and (5) Obtain Declaratory Relief (hereafter the "Complaint in Intervention").
C. Elie's July 30, 2010 Second Amended Complaint, October 13, 2010 and January 4, 2011 Amendments to the Same, Case No. 26-53342
Originally captioned as a separate case, on July 30, 2010 Elie filed a complaint (which was subsequently consolidated with the Smith-Cutuli Complaint action) for (1) Establishment of Alter Ego, (2) Setting Aside Fraudulent Transfers relating to various vehicles purchased by Smith, properties, and LLC interests, (3) Establishment of Conspiracy to Defraud, and (4) Constructive Trust, claims for trial remain against Cutuli, and the LLC defendants (hereafter the "Fraudulent Transfer Complaint").
D. Elie's December 7, 2010 Amendment to the Complaint in Intervention
On or about December 7, 2010, Elie field another separate action, however, at the request of Cutuli's counsel, Elie's separate December 7, 2010 complaint was treated as an amendment to the original Complaint in Intervention in case number 26-50182. This amendment sought to (1) Setting Aside Cutuli's Judgment against Smith as a Fraudulent Transfer, (2) Damages for Abuse of Process, (3) Establishment of a Conspiracy to Defraud, (4) Establishment of a Constructive Trust, and (5) Injunctive Relief (separately referred to as the "December 7, 2010 Amendment" but collectively referred to as part of the "Complaint in Intervention").
E. Elie's Amendments During Trial
During the course of trial, based upon newly discovered evidence and good cause appearing, the court granted an oral motion to amend to conform to proof and accepted Elie's Amendment to Consolidated Second Amended Complaint and Complaint in Intervention on October 3, 2011. The October 3, 2011 amendment amended Elie's claims with respect to Greg Cutuli to each of the fraudulent transfer, constructive trust, declaratory relief, injunctive relief, and conspiracy claims, including causes of action two, 17, and 18 of the Fraudulent Transfer Complaint (Case no. 26-53342), One, Three and Five of the Complaint in Intervention (Case No. 26-50182), and Four and Five of the December 07, 2010 Amendment.
SUMMARY OF PROCEEDINGS AND RELATED FINDINGS
Trial commenced on September 26, 2011 before this Court with the consideration of motions in limine. All papers and argument in support of and in opposition to said motions were considered. This Court finds that those motions for which express rulings were not made on the record are deemed moot.
On September 26, 2011, Plaintiff and Intervenor Elie presented his opening statement, defendant Cutuli reserved. As the first witness, Elie called defendant Cutuli to the stand pursuant to Evidence Code Section 776. Cutuli had been properly served with a notice to appear and produce documents at trial. On September 27, 2011, the court granted the unopposed request of Elie to interrupt Mr. Cutuli's testimony to take out-of area witness Shane Campbell out-of-order. Thereafter, Mr. Cutuli's testimony continued. At the conclusion of the day, all parties and counsel were ordered back for the continued trial on October 3, 2011.
A. Cutuli's Failure To Report For Continued Trial Testimony; Issuance of the Bench Warrant.
On the morning of October 3, 2011, Mr. Cutuli failed to report for trial. When questioned, Mr. Cutuli's counsel informed the court that it was his understanding that Mr. Cutuli was refusing to return. Mr. Cutuli was formally called to the stand for continued testimony and did not appear. Elie's counsel requested the immediate issuance of a bench warrant and the imposition of contempt sanctions. The court took the matter under submission. During the afternoon session, having considered the matter the court issued a bench warrant for Mr. Cutuli's arrest and reserved on the issue of contempt sanctions.
B. Smith's Counsel's Motion Relating to Newly Discovered Documents.
On the morning of October 3. 2011, counsel for Ms. Smith and for attorney Michael Rupprecht, Ms. Erin Pallas-Gray, appeared seeking to bring a motion to exclude certain evidence from trial. Attorney Michael Rupprecht represents Smith in other matters, but had not previously entered an appearance on behalf of Smith in this action. The third-party papers submitted to the court stated a general appearance for Ms. Smith and a special appearance for Mr. Rupprecht. Counsel for Elie offered to accept Smith's general appearance to argue the evidence issue, however, Ms. Pallas-Gray then withdrew the appearance on behalf of Ms. Smith and changed the moving papers to reflect solely a special appearance on behalf of attorney Michael Rupprecht.
Ms. Pallas-Gray sought to exclude evidence found in newly introduced Trial Exhibits 170-197 including Trial Exhibits 190 and 191 which Pallas-Gray contended had been inadvertently disclosed. Elie's counsel advised the court that it intended to submit Trial Exhibits 190 and 191 for the court's review based on Mr. Rupprecht's claim of " 'inadvertent disclosure," which had been made on Friday September 30, 2011. Elie's counsel's contention was that the documents were not privileged. The court received Elie's bench brief on the issue of inadvertent disclosure and privilege and heard argument from all parties and specially appearing counsel Pallas-Gray.
The court permitted Ms. Pallas-Gray to be heard on all issues. Following an extensive hearing and having considered the written submissions and oral arguments submitted by all parties the court overruled attorney Rupprecht's objection as to admissibility. With respect to the claim of privilege, the court found that documents within Trial Exhibit 190 and 191 had been redacted by Mr. Rupprecht prior to production, suggesting the documents were not inadvertently disclosed, and that many of the documents were generated by or provided to third-parties (including admitted non-client Greg Cutuli). The court further found that a sufficient showing had been made at trial that the services of Mr. Rupprecht had been "sought or obtained to enable or aid [one or more individuals] to commit or plan to commit a crime or fraud." (Cal. Evid. Code sec.956). Specifically, the court found that based upon Mr. Cutuli's testimony to date, documentary evidence of substantial transfers of funds to and from Mr. Rupprecht, evidence of Cutuli's ongoing discussions with Mr. Rupprecht (during a time that Rupprecht represented Smith and Cutuli had pending lawsuits against Smith), testimony by Mr. Cutuli that he had sent large amount of money to Mr. Rupperecht (during a time that Rupprecht represented Smith and Cutuli had pending lawsuits against Smith), testimony by Mr. Cutuli that he "may have" provided funds to Mr. Rupprecht to be "held" in the attorney's client-trust account, a review of Trial Exhibits 190 and 191 suggesting apparent documentation of trips and contacts in locations such as the Isle of Jersey, Isle of Man, and Cayman Islands, known to the court to be havens for off-shore banking, and Mr. Cutuli's repeated impeachment at trial on these issues, there was sufficient evidence to support a finding of fraud with respect to the services being provided by Mr. Rupprecht. As such, pursuant to Evidence Code section 956, no privilege could be claimed.
C. Continuation and Conclusion of Trial
In the afternoon of October 3, 2011, Elie called Stephen Morgan to the stand for testimony. On October 4, 2011, Elie called Kevin Sachs and Lori Jacobson to the stand for testimony and then rested. Closing arguments were heard from Elie and Cutuli's counsel. The court men issued a tentative ruling in favor of Elie on all counts and granted leave to re-open plaintiff's case to permit alternative evidence of damages as to the abuse of process claims.
On October 6, 2011, the court granted the stipulation of both parties permitting such evidence of damages to be submitted by declaration rather than live testimony. The court accepted the declaration of Allonn E. Levy in support of damages into evidence at which point the case was again submitted and this statement of decision and accompanying judgment ensued.
FINDINGS OF FACT AND LAW
Based on the evidence adduced at trial, the court makes the following findings:
A. General findings:
The court adopts its comments made at the conclusion of trial indicating that Mr. Cutuli appeared to be one of the greatest prevaricators the court had seen in over 30 years of experience. The court finds that Mr. Cutuli was evasive, contradicted himself, was impeached by his own prior testimony and by documentary evidence and appeared to the court to have committed perjury while testifying in trial. Mr. Cutuli repeatedly struggled to keep his stories straight and commonly paused for long periods of time and/or requested to have questions read back to him in what appeared to the court to be efforts to contrive information or plot responses that would be less damaging to his position. Cutuli had the opportunity to present evidence, to explain circumstantial evidence that appeared damaging, and to distance himself from Ms. Smith's activities. Instead, Cutuli appeared to adopt and attempt to further Ms. Smith's plan. Based upon the court's observations of Cutuli as a witness the court finds him to be not credible.
The court finds the testimony of third-party witnesses Shane Campbell, Steve Morgan, Kevin Sachs, and Lori Jacobson to be credible.
The court heard substantial evidence suggesting Cutuli and/or others engaged in the removal or destruction of evidence. Specifically, the court finds that Cutuli engaged in, conspired to, or directed, the removal or destruction of evidence including 10 bankers-boxes of documents relating to Smith, Cutuli, and the various entities they controlled from the 1070 Orchard Avenue home as well as 5-6 truckloads of information and personal property from the Napa Smith Brewery& Winery LLC ("NSBW"). Cutuli also directed individuals at Pelican Brands to attempt to hide the existence of key documents relating to the sale of Napa Smith Brewery and Winery LLC's assets. Based upon the foregoing, the court finds that with a culpable state of mind, Cutuli and his co-conspirators engaged in the destruction or suppression of evidence that was relevant to the proceeding and based on the same makes an adverse inference against Cutuli and in favor of Elie that such evidence would have been unfavorable to Cutuli and favorable to Elie. (Reeves v. MV Transp., Inc., (2010) 186 Cal. App. 4th 666). The court also finds adverse inferences are appropriate for Cutuli's failure to deny evidence presented against him and failure to provide better or different evidence pursuant to Evidence Code Sections 412 and 413.
The Court finds that Cutuli conspired with Smith and each of the defaulting entity defendants to delay and defraud creditors, to destroy or hide evidence, to engage in abuse of court processes, and to harm Elie. It appears to the court from the evidence adduced that Smith's counsel, Mr. Michael Rupprecht participated in activities to further said acts of fraud.
B. The Court Finds Elie Prevails on Each Cause of Action Seeking To Establish a Fraudulent Transfer
The Court finds that based on the evidence adduced at trial Elie has prevailed on each claim for Fraudulent Transfer. Specifically, Elie has proven an actual (intentional) fraudulent transfer between the debtor disposing of the property and the purchaser. The court finds sufficient evidence to support the following factors (set forth in Civil Code section 3439.04(a)(1)) suggesting an actual fraudulent transfer as to each alleged fraudulent transfer claims:
+++ The transfer or obligation was to an insider;
+++ The debtor retained possession or control of the property transferred after the transfer;
+++ The transfer or obligation was concealed;
+++ The transfer was made or obligation was incurred when the debtor had already been threatened with a lawsuit and had already been sued;
+++ The transfer were of substantially all of the debtor's assets that were readily reachable or discoverable because substantial assets had been hidden from creditors;
+++ The debtor absconded;
+++ The debtor removed or concealed assets;
+++ The value of the consideration received by the debtor was not reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
+++ The transfer occurred shortly before or shortly after a substantial debt was incurred; namely shortly after the demand for payment, initiation of the lawsuit, and in many instances actual judgment;
+++ Many of the transactions occurred after the judgment was entered;
+++ Both Cutuli and Smith were at all relevant times aware of the claim of debt, of the lawsuit, and of the eventual judgment.
Alternatively, the court finds sufficient evidence for a finding of constructive fraudulent transfer was shown at trial. (See Civ. Code sec. 3439.04(a)(2)).
With respect to each transfer or transmutation purported to have been accomplished by the April 25, 2008 Premarital Agreement (hereafter the "Pre-Nuptial") and the June 21, 2008 Addendum to the Premarital Agreement (hereafter the "Addendum"), the court finds each purported transfer or transmutation to be ineffective because the Pre-Nuptial and Addendum both contemplate a future transfer, and do not contain the requisite express declaration of a present transmutation. (See In re Marriage of Lund (2009) 174 Cal.App.4th 40, 50 (citing Cal. Fam. Code sec. 852)). The court further finds that the Pre-Nuptial Agreement required any amendment to be notarized and finds that the Addendum Agreement was not notarized and therefore was void and unenforceable as an amendment to the Pre-Nuptial Agreement. Alternatively, any transmutation or transfer that would have been completed through the June 21, 2008 Addendum to the April 25, 2008 Premarital Agreement was fraudulent and made for no consideration and with the intent to hinder, delay, and defraud her creditors, including Elie. As such, court finds that each such transfer was fraudulent under Civil Code Section 3439.04, The court finds that to the extent any transfer was accomplished, Cutuli received the benefit of the transfer with actual knowledge and intent to assist Smith in defrauding her creditors, including Elie. As such, Cutuli is not a good faith transferee under Civil Code Section 3439.08(a). Accordingly, each of Smith's attempted transfers contained within the Pre-Nuptial and Addendum Agreements are null and void pursuant to Civil Code Section 3439.07(a)(1)
The court finds that neither Elie nor any other creditor was a party to the Pre-Nuptial Agreement and that Cutuli and Smith's attempted assignment of debts as separate property in the Pre-Nuptial Agreement is unlawful and unenforceable pursuant to Family code Section 900, 910, et seq, and Civil Code Sections 1667, 1668, et seq. (See. Hogoboom & King, Cal. Practice Guide: Family Law (The Rutter Group 2010) Ch. 9, para. 9:78). Alternatively, the court finds that said attempted transmutation of debt was fraudulent for the same reasons as applicable to the remaining transfers within that document. (See Fam. Code sec. 851, State Board of Equalization v. Woo (2000) 82 Cal.App.4th 481, 484 ["Family Code Section 851 provides that '[a] transmutation is subject to the laws governing fraudulent transfers.' Civil Code Section 3439.04, subdivision (a) provides that a transfer is fraudulent as to a creditor if it is made '[w]ith actual intent to hinder, delay, or defraud any creditor of the debtor.' "]).
Here, Elie was able to prove either, or both, actual and constructive fraudulent transfers as to each of the transactions at issue. Further, in each applicable instance (except as specifically indicated), the court finds that the relevant defendant was not a good faith transferee under Civil Code Section 3439.08(a).
1. Elie Prevails on His Claims Seeking to Establish the Automobile Transfers As Fraudulent And To Recover Damages for That Fraud
The court finds that Smith's transfer of three high-value automobiles (a Porsche, a BMW, and Tesla) to Cutuli were made with actual intent to hinder, delay, and defraud Elie, and thus constitute actual fraudulent transfers. Specifically, Smith and Cutuli were both present in the courtroom when Elie's judgment was entered, and were plainly aware of the judgment when, just a few weeks later, Smith transferred the automobiles to Cutuli for zero consideration. Applying the "actual intent" factors found in Section 3439.04 the court finds strong evidence of fraud. Specifically:
+++ Smith's transferred the automobiles to her husband, an "insider";
+++ Smith and Cutuli retained possession and control of the automobiles after the transfer, until Cutuli sold the automobiles and kept the proceeds;
+++ The transfer was concealed from Elie;
+++ Before the transfers were made, Smith had been threatened with suit, had been sued and had already had judgment entered against her;
+++ Smith absconded following the transfer and a $100,000 Bench Warrant for her arrest remains outstanding;
+++ Smith concealed several assets;
+++ The value of the consideration received by Smith was $0 and was not reasonably equivalent to the value of the automobiles, which was at least $340,000;
+++ Finally, Smith made the transfer shortly after a substantial debt in the amount of nearly $6 Million was incurred to Elie.
In the alternative, the court finds Smith's transfers of automobiles constitute constructive fraudulent transfers because Smith received no consideration for the transfers and intended to incur, or believed or reasonably should have believed that she would incur debts beyond her | ability to pay as they became due. (See Civ. Code sec. 3439.07(a)(2)(B)).
Accordingly, whether Smith's transfer of automobiles to Cutuli constitutes actual or constructive fraudulent transfer, Elie is entitled to a judgment against Cutuli for the value of the automobiles pursuant to Civil Code Section 3439.08(b)(1).
2. Elie Prevails on His Claim Seeking to Establish the Bracknell Refinance of 1070 Orchard Avenue, As Well As Other Cash Transfers, as Fraudulent Transfers and for Injunctive Relief
The court finds that funds were diverted by Cutuli and Smith with the assistance and use of various accounts held in the names of entities controlled by Smith and Cutuli which had the effect of transferring monies from Smith to Cutuli in an apparent effort to remove those monies from the reach of creditors. Specifically, substantial evidence demonstrates several large transactions between Kathleen Smith, Greg Cutuli and in many cases, Kathleen Smith's counsel, Michael Rupprecht. When questioned about the transfers at trial Cutuli either denied their existence - only to be impeached by the documentary evidence, or feigned a lack of knowledge of the transactions. Cutuli admitted the transactions were genuine, but offered no legitimate, good-faith explanation for the transactions.
The court finds that Cutuli was earning approximately $60,000 per year and that Cutuli admitted that most of the couples' monies were generated by Kathleen Smith. Thus, the large transactions at issue were necessarily transactions involving the funds of Kathleen Smith. Cutuli was impeached on various transactions involving proceeds from property in Sayulita Mexico, which Cutuli eventually admitted was a commercial and residential rental property owned by Smith for which Cutuli was collecting rents owned by Smith. Mr. Cutuli eventually admitted to taking funds from Smith, admitted that he acted as a conduit for Smith, admitted that he had an "arrangement" with Smith to handle her business affairs while she avoided an outstanding bench warrant, and admitted that he paid moneys to and received monies from Smith's attorney - Michael Rupprecht. Cutuli also admitted he may have transferred money to Rupprecht in order to have the attorney hold those funds in the attorney's trust account. The Court finds that Cutuli and Smith engaged in a fraudulent conspiracy to transfer funds away from the reach of creditors, to delay and hinder creditors and collection efforts, to fraudulently transfer funds to Cutuli and other entities controlled by Smith and Cutuli, and to hide funds.
The court finds that in furtherance of the conspiracy between Smith and Cutuli, the couple, at minimum, used attorney Rupprecht's services in furtherance of the conspiracy to fraudulently transfer and hide funds. The court further finds that a sufficient showing was made at trial that the services of Mr. Rupprecht had been "sought or obtained to enable or aid [one or more individuals to commit or plan to commit a crime or fraud." (Cal. Evid. Code sec.956). Specifically, the court finds that based upon Mr, Cutuli's testimony at trial, documentary evidence of substantial transfers of funds to and from Mr. Rupprecht, evidence of Cutuli's ongoing discussions with Mr. Rupprecht (during a time that Rupprecht represented Smith and Cutuli had pending lawsuits against Smith), testimony by Mr. Cutuli that he had sent large amount of money to Mr. Rupperecht (during a time that Rupprecht represented Smith and Cutuli had pending lawsuits against Smith), testimony by Mr. Cutuli that he "may have" provided funds to Mr. Rupprecht to be "held" in the attorney's client-trust account, a review of Trial Exhibits 190 and 191 suggesting apparent documentation of trips and contacts in locations such as the Isle of Jersey, Isle of Man, and Cayman Islands, known to the court to be havens for off-shore banking, and Mr. Cutuli's repeated impeachment at trial on these issues, there is sufficient evidence to support a finding of fraud with respect to the services being provided by Mr. Rupprecht and therefore finds that any documents or evidence that would otherwise have been shielded by the attorney-client or attorney work product privilege are offered no such protection.
The Court finds Cutuli and Smith's refinance of their residence at 1070 Orchard Avenue, Napa, constitutes a fraudulent transfer. Specifically, Smith had been enjoined from transferring or encumbering any property by the San Mateo Court's September 25, 2009 Order. In direct violation of the Order, Cutuli and Smith further encumbered the 1070 Orchard property in the amount of $1,000,000. This decreased the equity value in the property, which would otherwise have been available for levy by Elie. Cutuli and Smith converted the equity value to cash, and both absconded with the funds, which have been concealed or removed forever beyond the reach of Elie's judgment. Cutuli initially claimed little or no knowledge of the transaction, but later contradicted himself and conceded that he had "facilitated" the transaction for the benefit of Smith, had directed brokers and Smith's lawyers in connection with the transaction, had as many as 20 contacts with the lender's agents, was the lender's primary contact, and received e-mails addressing the funds as Cutuli's.
The Court finds the following "actual intent" factors found in Section 3439.04 yield a strong inference of fraud:
+++ Smith effectively caused the transfer of the equity and cash to herself and her husband, both of whom are "insiders";
+++ Smith and Cutuli retained possession and control of the 1070 Orchard residence and the loan proceeds after the transfer and retained the use and enjoyment of the various funds transferred:
+++ The transfers was concealed from Elie and were initially concealed in court;
+++ Before the transfers were made. Smith had been threatened with suit, had been sued and had already had judgment entered against her;
+++ Smith absconded following the transfers and a $100,000 Bench Warrant for her arrest remains outstanding;
+++ Smith concealed several assets:
+++ Finally, Smith made the transfer shortly after a substantial debt in the amount of nearly $6 Million was incurred to Elie.
The lender, Bracknell Capital, has established that it was a "good faith transferee" and is not liable for fraudulent transfer under Civil Code Section 3439, et seq. Elie has reached a settlement with Bracknell, and there are no longer any claims at issue against Bracknell. However, Smith and Cutuli remain liable for the value of the asset transferred, $1.000,000, under Civil Code Section 3439.08(b)(1). The court finds that section establishes that Cutuli and Smith are liable as the parties "for whose benefit the transfer was made." (Id.).
3. Elie Prevails on His Claim Seeking to Establish the Napa Smith Brewery & Winery "Side-Deals" as Fraudulent Transfers, for Injunctive Relief, and Constructive Trust
Napa Smith Brewery & Winery LLC and Smith have both defaulted. As such, the allegations of alter-ego between the entity and judgment debtor Smith are established such that the liabilities and assets of the two are interchangeable. Moreover, the proceeds of any monies that could otherwise flow to Cutuli or Smith based upon their claimed interest in NSBW must instead be directed to the appointed receiver pursuant to the issued charging orders. Moreover, the court finds that as an alter-ego, any monies flowing to NSBW from the sale are payable to Elie based upon the alter-ego liability of NSBW for the liabilities of the couple.
Smith and Cutuli's diversion of sales proceeds into three "side-deals" in a failed effort to hide those assets from creditors - and specifically Elie - was fraudulent and the monies stemming from those deals must be turned over to Elie. The evidence shows that these "side-deals" were nothing more than a re-allocation of some of the value attributable to NSBW's assets into cash to be directed toward Smith and Cutuli. While Cutuli initially attempted to actively hide the existence of some of these transactions, they were all eventually uncovered.
The Court finds that Kathleen Smith was at all times the proper 100% owner of Napa Smith Brewery and Winery and that Pre-Nuptial Agreement and Addendum as well as the transaction and "side-deals" were an attempt to further hamper Elie's efforts to collect on the debt owed to him by changing one asset (the value of the NSBW LLC) into another (a stream of income created through contractual obligations). As with the other transactions, the court finds nearly all of the Section 3439.04 "actual intent" factors are satisfied with respect to the purported transfers of ownership within the Pre-Nuptial and Addendum agreements, the sale of the LLC's assets, and the creation of the associated side-deals. Specifically:
+++ Smith and Cutuli retained possession and control of the LLC after the alleged partial transfer to Cutuli and after the 'sale of the NSBW assets, with the right to receive payments under the Asset Purchase Agreement at an unknown point in the future, as well as the right to receive payments under the "side agreements;"
+++ The original Pre-Nuptial and Addendum as well as the sale of the LLC assets and "side agreements" diverting sales proceeds were concealed from Elie, the Receiver, and the Court; before the transaction occurred;
+++ Cutuli was aware that Smith had been threatened with suit, had been sued, and judgment had been rendered prior to the transaction and had been threatened with suit and actually sued prior to the execution of the Pre-Nuptial and Addendum;
+++ Smith absconded and a $100,000 Bench Warrant for her arrest remains outstanding and Cutuli absconded during this trial;
+++ Smith concealed several assets;
+++ Cutuli and Smith made the initial Pre-Nuptial and Addendum agreements shortly after the claim was made and after the lawsuit was filed. They made the sale transfer shortly after Smith's interest in the LLC was charged with a substantial debt in the amount of Elie's nearly $6 Million Judgment.
Accordingly, the court finds the Pre-Nuptial, Addendum, the sale of Napa Smith Brewery & Winery, LLC's assets and the associated side-deals all constitute actual fraudulent transfers. As such, Elie will be granted the provisional remedies set forth in Section 3439.07, including attachment of all proceeds due under the purchase and sale and the "side agreements"; injunctive relief directing all proceeds be transferred to Elie or his designee; and appointment of a receiver to take charge of the LLC and all sales proceeds for Elie's benefit, and imposition of a constructive trust over all proceeds flowing from the transaction (Civ. Code sec. 3439.07(a)(3)).
4. Elie Prevails on His Claims Seeking to Set Aside Cutuli's Judgment As a Fraudulent Transfer, for Injunctive Relief, and Constructive Trust
The court finds that part of Smith and Cutuli's conspiracy to avoid creditors, including Elie, involved using Cutuli's lawsuit against his wife and co-conspirator as an instrumentality through which the couple could transfer assets from Smith to her husband. The court finds that Smith, while working with Cutuli to sell the couple's business, while engaging in numerous cash transactions with Cutuli, and while large sums of money flowed to and from Smith's counsel Michael Rupprecht, allowed Cutuli to enter Judgment against her. Because Elie was not a party to the judgment, he lacked standing to object to the entry of judgment or to attack the judgment by motion. (See e.g. Cal. Code Civ. Proc. sec.473(b).). The result was effectively a $10,000,000 blank check to Cutuli that would allow the couple to transfer Smith's assets from Smith to Cutuli in furtherance of their scheme to hamper Elie's efforts to collect on his Judgment. The court finds that Cutuli's argument that the lawsuit, judgment, and amount of judgment were supportable were not credible. The court finds that extrinsic fraud exists with respect to the Cutuli-Smith Complaint, lis pendens, and judgment and that said complaint and judgment are being used as an instrumentality of fraud.
The court finds, nearly all of the Section 3439.04 "actual intent" factors are satisfied resulting in a finding of actual fraudulent intent. For example;
+++ Enforcement of Cutuli's Judgment would effectively transfer Smith's assets to an insider- Smith's husband. Gregory Cutuli;
+++ Details regarding the identity and location of the assets to be transferred have also been concealed, for example, Cutuli did not initially serve Elie with his complaint despite Cutuli's knowledge of Elie's lien on the relevant property;
+++ Smith has thwarted discovery efforts, failed to appear for her OEX, and has continued to evade the Napa Sheriff's service of the resulting bench warrant;
+++ The Cutuli-Smith Complaint that resulted in Cutuli's judgment, was initiated shortly after Elie had obtained the judgment against Smith and long after Smith and Cutuli were aware of the potential liability;
+++ Smith has absconded as demonstrated by Smith's failure to appear at her OEX and the inability of the Napa County Sheriff to locate Smith to serve the Bench Warrant, which remains outstanding. Cutuli absconded during this trial;
+++ Smith plainly did not receive reasonably equivalent value in exchange for allowing Cutuli's Judgment to be entered against her. In fact. Smith received no consideration.
Accordingly, Cutuli's Judgment against Smith constitutes an actual fraudulent transfer, and Elie is entitled to the relief set forth below.
In the alternative, Cutuli's Judgment constitutes a constructive fraudulent transfer because Smith did not receive any consideration in exchange for allowing Cutuli's judgment to be entered against her, and Smith intended to incur, or believed or reasonably should have believed that she would incur debts beyond her ability to pay as they became due. (See Civ. Code sec. 3439.07(a)(2)(B)). This is underscored by the fact that Smith has failed to satisfy the sizeable debt to Elie, and by the fact that Smith has since defaulted on mortgage obligations leading to foreclosures on multiple properties.
Whether Cutuli's judgment is considered an actual fraudulent transfer or a constructive fraudulent transfer, Elie is entitled to the provisional remedies set forth in Section 3439.07, including but not limited to avoidance of Cutuli's judgment, an injunction prohibiting Cutuli from enforcing his judgment, and appointment of a receiver. The court also has broad discretion to grant "[a]ny other relief the circumstances may require," including an order setting aside Cutuli's judgment, assigning the judgment to Elie, or the imposition of a constructive trust as set forth below. (Civ. Code sec. 3439.07(a)(3); 60 Cal.Jur.3d Trusts sec. 343 (Thomson Reuters 2011) [constructive trusts] (citing Bainbridge v. Stoner (1940) 16 Cal.2d 423)). The court finds sufficient evidence to set the judgment aside. Alternatively, the court finds sufficient evidence to impose a constructive trust on the proceeds from said judgment, to enjoin enforcement of said judgment until the judgment in this case and the underlying case have been satisfied, and directing Cutuli to turn over all funds collected pursuant to his judgment to Elie.
C. Elie Prevails on His Claim for Abuse of Process
The court finds that in filing the Smith-Cutuli Complaint, filing the related lis pendens, opposing the motion to expunge the lis pendens, and causing default Judgment to issue. Smith and Cutuli: "(1) contemplated an ulterior motive in using the process, and (2) committed a willful act in the use of the process not proper in the regular conduct of the proceedings." (Rusheen v. Cohen (2006) 37 Cal.4th 1048, 1057, citing Oren Royal Oaks Venture v. Greenberg, Bernhard, Weiss & Karma, Inc. (1986) 42 Cal.3d 1157, 1168.) The Restatement Second of Torts, section 682 provides: "One who uses a legal process,... against another primarily to accomplish a purpose for which it is not designed, is subject to liability to the other for harm caused by the abuse of process."
"The gist of the tort is the misuse of the power of the court: It is an act done under the authority of the court for the purpose of perpetrating an injustice, i.e., a perversion of the judicial process to the accomplishment of an improper purpose. Some definite act or threat not authorized by the process or aimed at an objective not legitimate in the use of the process is required. And, generally, an action lies only where the process is used to obtain an unjustifiable collateral advantage."
(Younger v. Solomon (1974) 38 Cal.App.3d 289, 297 [claim that litigation discovery process was used for collateral purpose of injuring party's reputation stated a cause of action for abuse of process.]).
Here, the court finds Cutuli and Smith have repeatedly used numerous court processes to accomplish an improper purpose unconnected with the legitimate stated objective of the litigation. Specifically, the court finds the testimony of Cutuli as to the timing of the complaint to be illustrative of such an ulterior motive, including Cutuli's admission that he filed the action shortly after the judgment and immediately prior to the time when Elie could have filed an abstract (thus establishing lien priority). Cutuli offered no alternate explanation for the timing of the complaints other than the theory offered by Elie. The court further finds the testimony of Lori Jacobson, the personal secretary and close confidant of the couple, to be persuasive. Jacobson's testimony that she was shocked to discover the lawsuit and that relations between Smith and Cutuli did not seem strained during the time the lawsuit was pending as well as testimony indicating that Cutuli was cooperatively interacting with both Smith and her attorney. Michael Rupperecht, while the actions were pending is persuasive. The court finds that the complaint Cutuli filed against his wife was never intended to resolve an actual dispute between the two. To the contrary, the October 26, 2009 complaint against Smith, the associated lis pendens, the associated amendment, and the associated judgment were all filed with the intent to first hamper Elie's ability to liquidate the 1070 Orchard Avenue property by improperly encumbering it, and subsequently the intent to obtain a default judgment against Smith in order to effectuate a de facto transfer of assets from Smith to Cutuli using the $10,000,000.00 default judgment obtained by Cutuli.
D. Elie Prevails on His Claims for Conspiracy
The court finds that a civil conspiracy has been shown in that evidence adduced at trial demonstrated: (1) the formation of the conspiracy between Cutuli, Smith, their entities and others; (2) operation of the conspiracy; and (3) damage resulting from operation of the conspiracy. (See 12 Cal.Jur.3d Civil Conspiracy sec. 2 (2011) (citing People v. Beaumont Inv., Ltd. (2003) 111 Cal.App.4th 102)). The court finds that Smith and Cutuli conspired together with respect to each of the transactions at issue including, the transfer of large sums of money between Smith, Cutuli and in some cases attorney Michael Rupprecht, the transfer of cars, the attempted transfer of properties and ownership rights through the Pre-Nuptial and Addendum agreements, the fraudulent lawsuits filed, the transaction for the sale of NSBW, the fraudulent entry of default judgment against Smith, the negotiation of "side-deals" (including efforts to transfer and hide monies through those side-deals) and the attempted use of the bankruptcy court to facilitate a transfer of the ownership of 1 Executive Way to Cutuli. The court further finds Cutuli's wrongful conduct during the trial, his tendency toward prevarication while testifying, and his failure to I provide evidence to explain the facts adduced to be further evidence of Cutuli's continual active involvement in the conspiracy with Smith and the entity defendants.
E. Elie Prevails on His Claim for Alter-Ego Against Smith and the LLCs
As an initial matter, Smith and the LLCs have all defaulted in this matter. These defaults act as admissions of liability as to those entities and parties with respect to the allegations in Elie's complaint, including the alter ego allegations against Smith and each of the entity defendants. The claims against 1 Executive Way, LLC are stayed at this time and were not at issue in this trial.
With respect to Smith, Cutuli and each of the remaining entity defendants (other than 1 Executive Way, LLC) the court finds that each was the alter-ego of the other. (Robbins v. Blecher (1997) 52 Cal.App.4th 886, 892; Communist Party v. 522 Valencia, Inc. (1995) 35 Cal.App.4th 980. 993-94). The court finds that there exists such a unity of interest and ownership between the entities and individuals that the separate personalities of each do not in reality exist, and there would be an inequitable result if the acts in question are treated as those of the entities or individuals alone. (Automotriz etc. De California v. Resnick (1957) 47 Cal.2d 792, 796; Hennessey's Tavern, Inc. v. American Air Filter Co. (1988) 204 Cal.App.3d 1351, 1358; Alberto v. Diversified Group, Inc. (1995) 55 F.3d 201, 205). Substantial evidence was adduced at trial indicating that monies were co-mingled between the individuals and entities and that there was no distinction between them. Moreover, substantial inequity will occur but for the alter ego finding. Specifically, absent such a finding, Smith and Cutuli will continue to be able to play their shell-game of transferring assets between themselves and the various entities they control.
FINDINGS REGARDING DAMAGES & RELIEF
Based on the foregoing, the court finds in favor of Elie on each of the claims that have not been dismissed or rendered moot. The court makes the following findings with respect to damages.
A. Compensatory Damages for Fraudulent Transfers
With respect to the fraudulent transfer claims, the court finds sufficient evidence to award the following damages to compensate the judgment creditor for losses incurred as a result of the transfers:
1070 Orchard/Bracknell Refinancing Scheme ~ ~ ~ $1,000,000.00
2008 Tesla Transfer ~ ~ ~ $ 100,000
2007 BMW M-6 Transfer ~ ~ ~ $143,000
2004 Porsche Transfer ~ ~ ~ $100,000
Napa Smith Brewery Side Agreements ~ ~ ~ $350,000
Cash Transferred to Cutuli Acct. #381 ~ ~ ~ $996,921
Cash Transferred to Cutuli Acct. #455 ~ ~ ~ $1,145,330
TOTAL ~ ~ ~ $3,835,781.00
Although Elie has proven a total of at least $3,835,781.00 in compensatory damages, the court has considered the evidence and finds the outstanding underlying judgment debt owed as of October 12, 2011 to be $2,772,496.92, with interest accruing at a rate of $736.58 per day. Therefore, the court limits compensatory damages for these claims to the amount of the debt owed and awards compensatory damages in the amount of $2,772,496.92 for the various fraudulent transfers.
B. Compensatory Damages for Abuse of Process.
With respect to the Abuse of Process Claim, the court finds that Elie was harmed by the abuse of process and that such damages to compensate for the harm take the form of the lost use of the funds available from the 1070 property together with the total out-of-pocket expenditures of Elie in this matter. The court finds this measure of damages to be more appropriate than awarding the actual value of the 1070 property itself, which would yield a higher recovery. The court finds the total amount of out-of-pocket expenses expended by Elie in this action amount to $1,814,578.60 in fees and costs. The court finds the fees and costs to be reasonable in light of the complexities of the case and the level of resistance employed by the parties and further finds that said fees and costs were actually incurred by Elie.
The total value of the 1070 orchard property that was the subject of the original Complaint in Intervention was approximately $3,766,666.66. The court reaches this figure by averaging the valuations of 1070 Orchard Avenue presented by Smith and Cutuli at various points as set forth in plaintiff's trial exhibits 10, 21, and 80. The court finds that Elie was harmed by the delay in obtaining said property as a result of defendants wrongful acts. Specifically, Elie was denied the right to the use of funds for at least 220 days between the October 26, 2009 tiling of the Smith-Cutuli Complaint and Us pendens and the withdrawal of the lis pendens on June 3, 2010. Applying the legal rate of interest of 10%, the court finds damages for the loss of use of the monies to be at least $227,031.96. The court finds the total damages for abuse of process needed to make Elie whole, and which are therefore awarded, are as follows:
Attorneys Fees as An Element of Damages ~ ~ ~ $1,814,578.60
Interest on Monies Not Collected ~ ~ ~ $227,031.96
TOTAL ~ ~ ~ $2,041,610.56
C. Punitive Damages
With respect to the intentional torts of Fraudulent Transfer, Conspiracy to Defraud, and Abuse of Process, the court finds clear and convincing evidence of malice oppression and fraud warranting the imposition of punitive damages. Specifically, the court finds that clear and convincing evidence of actual fraud has been proven with respect to the Abuse of Process, Fraudulent Transfer and Conspiracy claims. (Kemp v. Lynch (1937) 8 Cal.2d 457). The court finds that the Abuse of Process, Fraudulent Transfer, and Conspiracy claims were accompanied by actual malice on the part of the defendants. (Spellens v. Spellens (1957) 49 Cal.2d 210).
The court finds clear and convincing evidence that defendants acted with intent to cause injury, that their conduct was despicable and was done with willful and knowing disregard of the rights of Elie. The court finds the defendants' conduct was despicable and subjected Elie to cruel and unjust hardship in knowing disregard of his rights. The court finds the conduct of each defendant to be vile, base and contemptible such that it would normally be looked down upon and despised by reasonable people. The court further finds that defendants and each of them intentionally misrepresented or concealed a material fact and did so intending to harm plaintiff. The court finds the misconduct of defendants to have been part of a continuous pattern or practice and finds that each defendant acted with trickery and deceit.
Because of the defendants' misconduct, a precise picture of the defendants finances in unknown. However, the court finds that based upon the personal finance statements in evidence, the multiple accounts uncovered during trial demonstrating millions of dollars of transactions, the high-value properties controlled by Smith and Cutuli, and the anticipated income stream from the NSBW and 1 Executive Way liquidation, it is reasonable to infer that the defendants have access to resources in the range of several tens to upwards of 100 million dollars. In order to punish the defendants tor their wrongful conduct, the court finds an award [illegible text] compensatory damages to be appropriate. Therefore, the court awards punitive damages in the amount of $10,000,000.00
The court finds by clear and convincing evidence there to be a reasonable relationship between the amount of punitive damages awarded and Elie's harm and potential harm that defendants knew was likely to result. The court finds by clear and convincing evidence that defendants conduct was willful and malicious, and the harm was intentional or substantially certain to occur, acts were intentional, wrongful, and necessarily caused injury to Elie.
D. Declaratory Relief, Conspiracy & Alter Ego Findings.
The court finds sufficient evidence to grant each of the following declarations requested in the pleadings:
+++ All funds flowing from the transaction with Pelican Brands LLC and Napa Smith Holdings, LLC as well as all funds flowing from the sale of 1 Executive Way are available to satisfy Elie's judgment;
+++ The premarital agreement and addendum thereto did not effect any transfer of assets to Cutuli and/or that any such transfer has been set aside;
+++ The vehicle transfers were fraudulent;
+++ Cutuli facilitated and assisted Smith in completing the 1070 Orchard Avenue refinance, which effectuated a fraudulent transfer of assets away from the reach of creditors.
+++ Cutuli's claims asserted in the Cutuli-Smith Complaint were meritless, and the lis pendens and judgment asserted were fraudulent.
The court also finds sufficient evidence to support a finding of conspiracy as to all defendants and to support a finding of alter-ego as to all defendants. The court finds that Cutuli, Smith, and each of the entity defendants should be held jointly and severally liable for the damages suffered by Elie as a result of the conspiracy and based upon the findings of alter-ego.
E. Constructive Trust, Setting aside Cutuli's Judgment, and Injunctive Relief
The court finds sufficient evidence to grant each of the injunctions requested in the pleadings and to impose a constructive trust over all proceeds from the NSBW transaction and the proceeds of any distribution from the 1 Executive Way bankruptcy. (See, e.g., Civ. Code sec. 3439.07 (where fraudulent transfer established, court may grant injunctive relief and "any other relief the circumstances may require.")). The court finds extrinsic fraud and sufficient cause to set aside the judgment obtained by Cutuli in this action. The court finds there exists sufficient evidence and cause to grant the injunctive relief requested including the mandatory injunction directing payment of all proceeds from the NSBW transaction and the 1 Executive Way sale to Elie or his designee. The court finds that absent the issuance of equitable relief, including mandatory and prohibitory injunctions, great and irreparable injury would result.
As to each defense asserted in Cutuli's answer, the court finds the facts adduced at trial do not support each defense. Because Cutuli has failed to establish any defense pled, Elie prevails as set forth above.
With respect to Elie's claims in the Fraudulent Transfer Complaint, the court awards compensatory damages in the amount of $2,772,496.92 against Cutuli and Smith and in favor of Elie. With respect to Elie's claims in the Complaint in Intervention, the court awards compensatory damages in the amount of $2,041,610.56 against Cutuli and Smith and in favor of Elie. Accordingly, the total compensatory damages awarded to Elie and against Cutuli and Smith is $4,814,107.48.
Because the court finds by clear and convincing evidence that Cutuli and Smith undertook the actions described herein with malice, oppression, and fraud, the court awards punitive damages against Cutuli and Smith and in favor of Elie in the amount of $10,000,000.00 representing [illegible text] the compensatory damages described herein.
Accordingly, the court awards a total monetary judgment in the amount of $14,814,107.48 against Cutuli, Smith and each of the entity defendants and in favor of Elie. Elie is found to be the prevailing party in all respects based upon the court's findings that Elie has prevailed on all causes of action that have not been expressly dismissed or deemed moot. Elie may separately seek recovery of any costs not previously awarded as an element of damages.
IT IS SO ORDERED, ADJUDGED, AND DECREED.
Dated: Oct 13, 2011
Honorable Philip A. Champlin
Judge of the Superior Court
The parties having met and conferred with respect to the form of this statement of decision, it is APPROVED AS TO FORM:
Dated: 10/13, 2011
James R. Rose
THE LAW OFFICES OF JAMES R. ROSE Attorneys for Defendant GREGORY CUTULI
Elie sought to set aside Smith's purported obligation to Cutuli, which gave rise to Cutuli's claim and lis pendens.
The subject property, 1070 Orchard way was subsequently lost to a senior creditor by foreclosure. Therefore, this claim is likely moot.
= = = = = = = = J U D G M E N T E N F O R C E M E N T = = = = = = = =
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