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 Post subject: FT - Martino v. First Bank of Beverly Hills (3/7/2002)
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Martino v. First Bank of Beverly Hills,
2002.CA.0002109 (Cal.App. Dist.2 03/07/2002)


No. B150134


March 7, 2002




(Los Angeles County Super. Ct. No. SC061321) APPEAL from a judgment of the Superior Court of Los Angeles County. Patricia Collins, Judge. Affirmed.

Steven Karlton Kop and Louis J. Esbin for Plaintiff and Appellant. Epport & Richman, Steven N. Richman and Lawrence A. Abelson for Defendants and Respondents.

The opinion of the court was delivered by: Ashmann-gerst


California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.


Alfred Martino (Martino) timely appeals from entry of judgment of dismissal on behalf of First Bank of Beverly Hills, FSB (FBBH), and Girard Financial Corporation (Girard) after the trial court sustained their demurrers to Martino's first amended complaint (FAC) without leave to amend. In his opening and reply briefs, Martino addresses issues pertaining only to his first and second causes of action for remedies under the Uniform Fraudulent Transfer Act. We deem his appeal related to the seventh cause of action for enforcement of judgment lien, eighth cause of action for equitable subordination, ninth cause of action for breach of fiduciary duty as constructive or equitable trustee, and tenth cause of action for declaratory relief to have been abandoned. *fn1 We review the first and second causes of action de novo and conclude that Martino failed to allege sufficient facts to support his claims for fraudulent transfer remedies. In particular, the allegations fail to establish that FBBH or Girard are subsequent transferees who lacked good faith. As well, we review the trial court's decision for abuse of discretion. Although Martino contends that he can allege lack of bad faith based on FBBH and Girard's duty to conduct a due diligence investigation, this theory fails. Lewis v. Superior Court (1994) 30 Cal.App.4th 1850, 1858-1859 requires a showing of actual, subjective knowledge of the fraudulent nature of the transfer. Accordingly, we conclude that Martino cannot adequately amend the FAC and that the trial court did not abuse its discretion. We affirm.


A. The Proceedings in the Superior Court

Martino filed his complaint for fraudulent transfer remedies and other causes of action on April 18, 2000. At that time, Martino named FBBH as a defendant, but not Girard. Certain defendants demurred to various causes of action in the complaint (although FBBH did not). On October 12, 2000, the trial court sustained the demurrers to the first two causes of action with leave to amend, finding that they lacked sufficient specificity. On November 1, 2000, Martino filed his FAC, adding Girard as a defendant. FBBH and Girard demurred to the FAC, and on January 26, 2001, the trial court sustained their demurrers without leave to amend.

B. Summary of Martino's FAC *fn3

In 1993, Martino had an insurance business, and he maintained a professional relationship with George Elkins Company, Inc. (GECO). However, GECO terminated that relationship. On March 9, 1993, GECO commenced an action in superior court against Martino for breach of contract and fraud, among other things. GECO's intent, allegedly, was to prevent Martino from working as an insurance agent and competing against GECO's insurance division. Martino cross-complained. On August 19, 1993, because his insurance business had been destroyed, Martino was forced to file for Chapter 7 bankruptcy relief. GECO filed an adversary proceeding, seeking a determination that Martino's debt arising out of its superior court action was non-dischargeable. The bankruptcy court found in favor of Martino and discharged his debt. From July 7 to July 11, 1997, Martino's cross-complaint was tried in superior court, and he obtained an amended judgment against GECO for $3,156,547.95.

Due to a scheme by GECO insiders, the judgment has never been paid. During the pendency of the underlying lawsuit, GECO was controlled by Elkins Investment Company (EIC). Not only was GECO a wholly owned subsidiary of EIC, but the two companies had a combined board of directors (Combined Board). In January 1996, the Combined Board acknowledged that Martino's case needed to be considered a liability that would cost GECO money. In April 1996, the Combined Board voted to accept an offer from management to purchase GECO's three operating divisions -- mortgage banking, property management, and insurance -- for $1,235,500, plus the assumption of $190,000 in liabilities. The sale closed on April 19, 1996, and the proceeds were distributed to EIC and its shareholders. The Combined Board knew that the sale left GECO without sufficient assets to pay Martino's judgment.

GECO's mortgage banking division was sold to George Elkins Mortgage Banking (GEMB), a limited partnership. Hudson & Hinds, Inc. (H&H), a corporation owned by Jeffrey Hudson and Steven Hinds, was GEMB's general partner. Then, in 1998, FBBH and Girard acquired "interests" in GEMB.


On appeal from a judgment of dismissal after a demurrer is sustained without leave to amend, we review the pleading de novo to determine whether it alleges a cause of action under any legal theory. (Cantu v. Resolution Trust Corp. (1992) 4 Cal.App.4th 857, 879.) "[W]e assume that the complaint's properly pleaded material allegations are true and give the complaint a reasonable interpretation by reading it as a whole." (Moore v. Regents of University of California (1990) 51 Cal.3d 120, 125.) Also, we accept as true all facts that may be implied or inferred from the facts that have been expressly alleged. (Marshall v. Gibson, Dunn & Crutcher (1995) 37 Cal.App.4th 1397, 1403.) But we will not assume the truth of contentions, deductions, or conclusions of law. (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 966-967.)

Review of the trial court's failure to grant leave to amend is conducted under the abuse of discretion standard. (Aubry v. Tri-City Hospital Dist., supra, 2 Cal.4th at pp. 966-967.) We will reverse if we determine there is a reasonable possibility the pleading can be cured by amendment. (Hendy v. Losse (1991) 54 Cal.3d 723, 742.) "The burden is on the plaintiff, however, to demonstrate the manner in which the complaint might be amended." (Ibid.)


A. De Novo Review of the Factual Sufficiency of the Claims for Fraudulent Transfer Remedies

The Uniform Fraudulent Transfer Act (Civ. Code, § 3439 et. seq.) *fn4 provides a creditor with statutory remedies when a debtor intentionally renders itself unable to pay its obligations by transferring assets. Section 3439.08, subdivision (b)(2) permits a creditor plaintiff to obtain judgment against a "subsequent transferee other than a good faith transferee who took for value."

Based on oral argument, it is clear that Martino did not and cannot assert inadequate consideration. Rather, he contends that FBBH and Girard are not good faith transferees. Additionally, even though the FAC alleges that FBBH and Girard gained knowledge of the fraudulent nature of the original transfer through Jeffrey Hudson and Steven Hinds, Martino informed the appellate court at oral argument that this issue is a red herring. Instead, he premises his case on the following: FBBH and Girard had a duty to conduct a due diligence investigation, and whether they conducted it or not, they did not gain an interest in the asset in good faith. In other words, he goes on, the existence of a duty to conduct a due diligence investigation is enough to impute constructive knowledge of the fraudulent nature of the original transfer. We disagree.

It is clear from the foregoing that the FAC is factually deficient as to FBBH and Girard. Martino did not plead constructive knowledge arising out of FBBH and Girard's duty to conduct a due diligence investigation. Even if he had, it would not have saved his pleading. "The fraudulent conveyance statute requires actual, subjective knowledge by the alleged fraudulent transferee. The fiction of constructive knowledge is not enough. [] The requirements of the fraudulent conveyance statute are: `the term "good faith," as used in this subdivision and subdivision (d) [of Civ. Code § 3439.08] means that the transferee did not collude with the debtor or otherwise actively participate in the fraudulent scheme of the debtor.' [Citation.] `Fraudulent intent,' `collusion,' `active participation,' `fraudulent scheme' -- this is the language of deliberate wrongful conduct. It belies any notion that one can become a fraudulent transferee by accident, or even negligently. It certainly belies the notion that guilty knowledge can be created by the fiction of constructive notice. [Citation.]" (Lewis v. Superior Court, supra, 30 Cal.App.4th at pp. 1858-1859, original italics and original brackets.)

Martino never alleged that FBBH or Girard had actual, subjective knowledge from a due diligence investigation, and cannot allege lack of good faith based on a failure to conduct such an investigation.

B. The Other Causes of Action

Martino appealed from the entire judgment, but his briefs are limited to that part of the judgment dealing with the fraudulent transfer causes of action. Therefore, the court deems the appeal from the other parts abandoned. (Bonadiman-McCain, Inc. v. Snow (1960) 183 Cal.App.2d 58, 65.)

C. Abuse of Discretion

For the reasons discussed above, Martino's constructive knowledge theory is not viable. Also, Martino never suggested that he can plead actual knowledge. Therefore, we conclude that there is no reasonable possibility that Martino can cure his pleading and that the trial court did not abuse its discretion in sustaining FBBH and Girard's demurrers without leave to amend.


The judgment is affirmed. The respondents shall recover costs.

We concur:



Opinion Footnotes

*fn1 Although FBBH and Girard demurred to the sixth cause of action for breach of contract, the named defendants were: "GECO, EIC and the corporate insiders and H&H, GEPM, GEMB and E- J as Alter Ego Entities." The FAC does not include FBBH and Girard in the definition of "corporate insiders." Even though the judgment states that the respondents' demurrer to the sixth cause of action was sustained without leave to amend, this raises no issue for appeal.

*fn2 Because there are gaps in the record on appeal, we take judicial notice under Evidence Code section 452, subdivision (d) of the contents of the superior court file. All references to documents not contained in the clerk's transcript are references to the superior court file.

*fn3 This section is a summary of Martino's FAC. It is not to be construed as setting forth the actual facts of the case.

*fn4 Unless otherwise indicated, all statutory references are to the Civil Code.

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