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 Post subject: FT - Dary v. Gilbert (8/27/2002)
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Dary v. Gilbert,
2002.CA.0007798 (Cal.App. Dist.1 08/27/2002)




August 27, 2002




(San Mateo County Super. Ct. No. 406873)

The opinion of the court was delivered by: Ruvolo, J.


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 This opinion has not been certified for publication or ordered published for purposes of rule 977.


Dorothee Dary, Leonard Dary and Bradley Dary appeal from a summary judgment in favor of Lee Ann Gilbert, William Gilbert and The Gilbert Family Trust. The Darys contend there is a triable issue of material fact as to whether their debtor, Pioneer Saloon, Inc. (PSI), transferred its bar business to the Gilberts for less than its reasonable equivalent value, in violation of the Uniform Fraudulent Transfer Act (UFTA, Civ. Code, § 3439 et seq.). *fn1 The underlying question is whether there is a factual dispute regarding the alleged transfer to the Gilberts of the Pioneer Saloon's goodwill. We hold that there is, and accordingly reverse the judgment.


The Darys filed their original complaint against the Gilberts and PSI *fn2 in November 1998. After demurrers were twice sustained with leave to amend, the Darys filed a second amended complaint alleging fraudulent conveyance and violation of the Bulk Sales Act (Cal. U. Com. Code, § 6101 et seq.). The trial court sustained the Gilberts' demurrer to the latter cause of action without leave to amend, but overruled it as to the former.

The factual allegations supporting the Darys' fraudulent conveyance claim are these: In 1978, the Darys purchased the Pioneer Saloon, a popular Woodside bar located in a building owned by the Gilberts. The Darys ran the bar profitably until 1988, when they sold it to PSI for $50,000 cash and $225,000 in promissory notes. In December 1995, PSI stopped making monthly payments on the notes; it still owed the Darys $135,000. At about the same time, PSI, which was also in arrears on its rent, sold the Pioneer Saloon to the Gilberts for substantially less than its value. Nobody has paid off the Darys' notes.

The Gilberts moved for summary judgment asserting the Darys had failed to identify an asset, which could be fraudulently conveyed. The Gilberts proffered the following undisputed evidence: They had owned the premises in which the bar operated (the Pioneer Hotel) since 1986. In 1995 their lessee, PSI, defaulted in payment of rent for three months. They served a 20-day notice, filed an unlawful detainer action, and obtained a default judgment for possession of the premises, forfeiture of the lease, and $19,368 in damages, fees and costs. Thereafter, they entered into a compromise agreement by which PSI transferred the Pioneer Saloon's liquor license to them (in accordance with applicable law) in satisfaction of the unlawful detainer judgment. They recovered possession of the premises on January 1, 1996. They paid $1,500 for "physical assets" (tables, chairs, bar stools, glassware and utensils, art work, televisions, an adding machine, blenders, a microwave oven, a coffee machine and cash registers) in which the Darys had retained a security interest. The Darys introduced evidence that the Gilberts began operating an essentially identical bar business in the same location, with much the same customer base, in January 1996. *fn3

The trial court granted the Gilberts' summary judgment motion on the ground that the Darys had introduced "no evidence of a leviable asset, nor evidence of a voidable transfer." After denying the Darys' motion for reconsideration, the court entered judgment for the Gilberts, and the Darys filed a timely notice of appeal.


I. Standard of Review

"A motion for summary judgment is properly granted if the papers submitted show there is no triable issue as to any material fact and the moving party is entitled to a judgment as a matter of law. [Citation.] A defendant moving for summary judgment must show either one or more essential elements of the plaintiff's cause of action cannot be separately established or there is an affirmative defense which bars recovery. If the plaintiff fails to set forth specific facts showing a triable issue of material fact as to that cause of action or defense, summary judgment must be granted. [Citation.]" (Kline v. Turner (2001) 87 Cal.App.4th 1369, 1373.) "[T]he moving party's evidence must be strictly construed, while the opposing party's evidence must be liberally construed." (Binder v. Aetna Life Ins. Co. (1999) 75 Cal.App.4th 832, 838.) "On appeal, we review the trial court's decision to grant or deny the summary judgment motion de novo, on the basis of an examination of the evidence before the trial court and our independent determination of its effect as a matter of law. [Citations.]" (Sangster v. Paetkau (1998) 68 Cal.App.4th 151, 163.) "We also independently review the trial court's determination of questions of law. To that end, we are not bound by the trial court's stated reasons or rationale. In short, we review the summary judgment without deference to the trial court's determination. [Citations.]" (Eisenberg v. Alameda Newspapers, Inc. (1999) 74 Cal.App.4th 1359, 1376.)

II. Triable Issue of Material Fact

The Darys contend there is a triable issue of fact as to whether the Gilberts received and profited from the Pioneer Saloon's goodwill, for which they admittedly paid nothing, so that what they paid for the entire business-under $21,000-was less than its reasonable equivalent value, in violation of the UFTA.

A. The Uniform Fraudulent Transfer Act

Transfer of an asset by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the debtor made the transfer without receiving "a reasonably equivalent value in exchange," and the debtor was at the time, or became as a result of the transfer, insolvent. (§ 3439.05.) A "transfer' " is any mode of disposing of an asset (§ 3439.01, subd. (i)), an "asset' " is the property of a debtor (with certain exceptions), and "property' " is anything subject to ownership (§ 3439.01, subds. (a) & (h); see also § 654). Things subject to ownership include "the good-will of a business." (§ 655.)

The purpose of fraudulent conveyance actions is "to prevent valuable assets from being transferred away from debtors in exchange for less than fair value, leaving insufficient funds to compensate honest creditors. [Citations.]" (In re Pajaro Dunes Rental Agency, Inc. (Bankr. N.D.Cal. 1994) 174 B.R. 557, 571 (Pajaro Dunes).) *fn4 Fraudulent conveyance laws favor creditors through "a deliberate allocation of risk to the debtor's transferees." (Ibid.) Among the remedies available to a defrauded creditor are avoidance of the transfer to the extent necessary to satisfy his claim, and attachment or other provisional remedy against the transferred asset or its proceeds. (§ 3439.07, subds. (a) (1) & (2).) To the extent a transfer is voidable, a creditor may obtain a judgment against the transferee. (§ 3439.08, subd. (b)(1).)

B. Goodwill

"A `business' consists of nothing more than the tangible physical assets and the intangible assets of trade name and good will." (Ortiz v. South Bend Lathe (1975) 46 Cal.App.3d 842, 847, fn. 1 [Ortiz].) "Goodwill can be defined simply as the `expectation of continued public patronage.' [Citations.]" (Hill Medical Corp. v. Wycoff (2001) 86 Cal.App.4th 895, 902, fn. 6.) "Goodwill is property of an intangible nature and is a thing of value. [Citation.] When it is sold it is not the patronage of the general public which is sold, but that patronage which has become an asset of the business. [Citation.]" (In re Marriage of Foster (1974) 42 Cal.App.3d 577, 582, fn. omitted.) "[T]he good will of a business may not be owned by anyone other than the owner of the business. [Citations.]" (Golden State Linen Service, Inc. v. Vidalin (1977) 69 Cal.App.3d 1, 10.)

C. Application of Law to Facts

The Gilberts assert that, as a matter of law, there was no transfer of goodwill subject to the UFTA for several reasons, none of which withstands scrutiny.

1. Goodwill not separately transferable

The Gilberts first note that goodwill is not an asset subject to transfer separate and apart from other property comprising a business. From this undisputed fact, they conclude that any goodwill that passed to them "as part and parcel" of the legally acquired assets of the Pioneer Saloon (liquor license and "fixtures," i.e., furniture and equipment), rightfully belongs to them. But the fact that goodwill cannot be separately transferred does not mean it is without a separate and ascertainable value. Goodwill is routinely evaluated as one component of the total worth of a business enterprise. (See, e.g., DeBaun v. First Western Bank & Trust Co. (1975) 46 Cal.App.3d 686, 699.) If, therefore, goodwill was an asset of the Pioneer Saloon, which the Gilberts acquired without paying for it, then PSI did not receive a reasonable equivalent value for the business as a whole.

The Darys submitted the following evidence of the existence of goodwill during PSI's operation of the Pioneer Saloon, and the transfer of that goodwill to the Gilberts: Nancy Davis, the Pioneer Saloon's bartender from 1980 to 1997, declared that while PSI owned the bar it "had a lot of frequent customers, or `regulars,' and was generally full seven nights a week." (In deposition, she described the bar between 1992 and 1995 as "packed" every night.) When the Gilberts reopened it in January 1996, "dozens of former regular customers came back as customers." The Gilberts kept the "Pioneer Saloon" sign outside and did not post any notice that it was reopening under new management. Their liquor license identified the establishment as "Pioneer Saloon." *fn5

Neal Umphrey, a realtor with experience selling bars in the area, declared that when he listed the Pioneer Saloon for sale in the summer of 1995, the listing price was based on a number of factors including "the name recognition and reputation of the bar in the area" and "the fact that the bar had been a historic landmark at Woodside's Whiskey Hill area for over 100 years." The $175,000 listing price included $105,000 for goodwill, "meaning the reputation and customer base of the business." *fn6

The 1988 sales agreement between the Darys and PSI indicated that $100,000 of the purchase price was for the Pioneer Saloon's goodwill. PSI's tax returns showed annual gross receipts of over half a million dollars during the years 1990-1994, and almost $470,000 in 1995. Its 1992 tax return listed goodwill as an asset worth $100,000. The Gilberts' gross receipts from the Pioneer Saloon in their first quarter of operation were over $57,000. *fn7

This evidence is enough to raise a triable issue as to the existence of the Pioneer Saloon's goodwill, its transfer to the Gilberts, and its value at the time of transfer.

The Gilberts assert that the Darys' "suggestion" that "the bar `business' is somehow an asset that may be fraudulently transferred" is a new argument on appeal. In fact, this has been the Darys' consistent position throughout the litigation.

Nor do the Gilberts offer any authority for their "suggestion" that "[a] `business' is not an asset and cannot be the subject of a creditor's levy of execution." They agree that "a business is an economic enterprise that consists of a combination of assets," and that business assets are transferable. In fact, a business is nothing more than the sum of its assets. (Ortiz, supra, 46 Cal.App.3d at p. 847, fn. 1.)

2. No actual transfer of goodwill

Next the Gilberts contend that even if there was transferable goodwill, there was no evidence it was actually transferred to them. First, they make the assertion that, to the extent the Pioneer Saloon had any goodwill, PSI "still has it." This contention is startling in view of their acknowledgement-nay, insistence-that goodwill does not exist separate from the other business assets, which they have rightfully acquired, that it is inseparable from ownership of the business to which it attaches. Then, they appear to argue the contrary, but equally preposterous proposition that the Pioneer Saloon's goodwill has always belonged to them-even while PSI owned all the other business assets-because goodwill is entirely a function of location and they own the premises. Neither of these somewhat confusing contentions has any merit.

3. Statutory exception

Finally, the Gilberts assert that because any transfer of goodwill resulted from their termination of PSI's lease, this transfer falls within a UFTA exception providing that a transfer is not voidable if it "results from" the "[t]ermination of a lease upon default by the debtor when the termination is pursuant to the lease and applicable law." (§ 3439.08, subd. (e)(1).) But the transfer at issue here, the transfer of the entire Pioneer Saloon business including goodwill, did not "result from" the termination of PSI's lease within the meaning of the statute, even assuming that termination was "pursuant to the lease and applicable law." In this regard, the Gilberts misread the relevant legislative history.

According to a Legislative Committee comment, the provision on which the Gilberts rely, subdivision (e)(1) of section 3439.08, "rejects the rule adopted in Darby v. Atkinson (In re F[e]rris), 415 F.Supp. 33, 39-41 (W.D.Okla. 1976), that termination of a lease on default in accordance with its terms and applicable law may constitute a fraudulent transfer." (12A West's Ann. Civ. Code (1997 ed.) § 3439.08, p. 360.) *fn8 The facts of In re Ferris (Ferris) were these: The Ferrises leased a tract of land from Atkinson on which they built a theater and restaurant complex. (Ferris, supra, 415 F.Supp. at pp. 35-36.) The Ferrises subleased the restaurant to Kips and operated the theater themselves. (Id. at p. 36.) The complex operated successfully for a number of years, but eventually Atkinson terminated the lease for nonpayment of rent. (Ibid.) The Ferrises went bankrupt. (Id. at p. 37.) Atkinson soon re-leased the theater to a new tenant, and began collecting restaurant rents from Kips. (Ibid.) The Bankruptcy Court found that termination of the Ferrises' lease was a fraudulent transfer under the Bankruptcy Code (former 11 U.S.C. § 107(d), predecessor of the current fraudulent transfer provision [ante, fn. 4]). (Ferris, supra, 415 F.Supp. at p. 37.) The district court held that termination of a lease for breach of one of its terms is a covered "transfer" (id. at p. 39), and affirmed the bankruptcy court's finding that the Ferrises did not receive fair consideration for their surrender of the lease because "[w]hat Atkinson got by the termination far outweighs what he gave up." (Id. at p. 41.)

Reading the above-quoted comment to section 3439.08, subdivision (e)(1) (ante, p. 8) in conjunction with In re Ferris, whose rule it rejects, makes clear that the statutory exception on which the Gilberts rely applies only to the transfer of a leasehold. That is, under the UFTA, contrary to Ferris's holding, termination of a bankrupt's or debtor's lease for nonpayment of rent, which results in the transfer of the leased premises back to the landlord, is not fraudulent, regardless of whether the defaulting tenant receives a reasonably equivalent value in exchange for the lost lease. Thus, the statutory exception does not apply to the transfer at issue here. The Darys do not allege that the termination of PSI's lease was a fraudulent transfer. They argue that the Pioneer Saloon business as a whole was fraudulently transferred because the total amount the Gilberts paid for it did not include the value of its goodwill. Thus, the exception in this section does not apply.

To summarize, the Darys introduced sufficient evidence to raise a triable issue of material fact as to whether PSI's transfer of the Pioneer Saloon to the Gilberts violated the Uniform Fraudulent Transfer Act.

III. Evidentiary Rulings

In opposing the Gilberts' summary judgment motion, the Darys filed 12 exhibits attached to their attorney's declaration. Three days before the hearing date, the Gilberts filed written objections to seven of the Darys' exhibits on authentication grounds (Evid. Code, §§ 1400, 1401). Two days later, the Darys filed objections to the Gilberts' evidence and a response to the Gilberts' objections to theirs, resubmitting the challenged exhibits further authenticated by a declaration executed by Dorothee Dary. The trial court sustained the Gilberts' evidentiary objections and overruled the Darys' objections. On appeal, the Darys challenge the exclusion of their exhibits.

"Authentication of a writing is required before it may be received in evidence." (Evid. Code, § 1401, subd. (a).) "Authentication of a writing means (a) the introduction of evidence sufficient to sustain a finding that it is the writing that the proponent of the evidence claims it is or (b) the establishment of such facts by any other means provided by law." (Evid. Code, § 1400.) In submitting the challenged exhibits, the Darys' attorney declared of his own personal knowledge, under penalty of perjury, that each was the document it purported to be or a true and correct copy thereof. The Gilberts do not challenge the authenticity of any of the exhibits, but assert that the attorney's declaration is "obviously insufficient" because it "does not say that he `saw the writing[s] made or executed' (Evid. Code, § 1413)." Evidence Code section 1413 provides, "A writing may be authenticated by anyone who saw the writing made or executed, including a subscribing witness." Not only is "may" ordinarily construed as permissive, rather than mandatory (Common Cause v. Board of Supervisors (1989) 49 Cal.3d 432, 443), but Evidence Code section 1410 expressly provides, "Nothing is this article shall be construed to limit the means by which a writing may be authenticated or proved."

While maintaining that their attorney's declaration sufficiently authenticated the proffered exhibits, the Darys responded to the Gilberts' objections by resubmitting the exhibits attached to the declaration of Dorothee Dary. *fn9 The Gilberts do not claim the Dary declaration is insufficient to authenticate the exhibits, but instead challenge its timeliness. They cite no authority for the proposition that the Darys cannot rely on Dorothee's declaration because they "declined to avail themselves of any of the procedural mechanisms to cure a late filing." In fact, the trial court expressly ruled the filing timely, and the Gilberts have not cross-appealed to challenge that ruling. Nor do they explain how the alleged late filing might have denied them the opportunity to make further evidentiary objections, given that the documents at issue are the very same ones at which their original written objections were aimed.

Finally, the Gilberts argue that any error was harmless because the excluded evidence was immaterial and insufficient to create a triable issue of fact (Evid. Code, § 354, Pool v. City of Oakland (1986) 42 Cal.3d 1051, 1069). As demonstrated by our recitation of the evidence regarding goodwill (ante, pp. 5-6), the challenged documents, which include documentation of the Pioneer Saloon's historical place in the community, the terms of its sale to PSI, PSI's 1992 and 1993 tax returns, and a photograph of the Pioneer Saloon sign taken in the year 2000, were relevant to the creation of a triable issue of fact regarding the value of the business and its goodwill. The trial court therefore committed reversible error by excluding them.


The judgment is reversed, and the matter remanded to the trial court for further proceedings. The Darys are awarded costs on appeal. (Cal. Rules of Court, rule 26 (a).) Their request for judicial notice of the PSI defendants' answer to their complaint is denied.

We concur:

Haerle, Acting P. J.

Lambden, J.

Opinion Footnotes

*fn1 Unless otherwise indicated, all statutory references are to the Civil Code.

*fn2 Since PSI is not a party to this appeal, we recite only those facts pertinent to the Darys' action against the Gilberts.

*fn3 See post, Part III, for discussion of the trial court's ruling on admissibility of evidence.

*fn4 Both the UFTA and the federal Bankruptcy Code's fraudulent transfer provisions (11 U.S.C. § 548) derive from the common law. (Pajaro Dunes, supra, 174 B.R. at p. 572.) They are so "similar in form and substance" that they may be analyzed "contemporaneously." (In re United Energy Corp. (9th Cir. 1991) 944 F.2d 589, 594.)

*fn5 The Gilberts' assertion that the name "Pioneer Saloon" cannot itself be the subject of a fraudulent transfer because it is not independently saleable or subject to a creditor's levy, is undisputed. The significance of the name, as the Gilberts themselves recognize, is as an element of the business's goodwill, which, in turn, is a component of its total value.

*fn6 The Gilberts point out that a week later, Umphrey executed a second declaration stating that "[o]nce the Pioneer Saloon business lost possession of the premises it occupied in the Pioneer Hotel in my opinion, it had no goodwill to sell or transfer to any third party." Four days after that, Umphrey explained in his third declaration, "I was not saying and do not believe that [PSI]'s eviction meant that the Pioneer Saloon bar itself no longer had a reputation or that former customers would not come back to the bar. I. do not believe [PSI]'s eviction changed the fact that people knew about the Pioneer Saloon and intended to go there because of its past reputation." Umphrey's apparent confusion may undermine his credibility, but his statements at least create a triable issue of fact regarding the survival of the Pioneer Saloon's goodwill upon termination of PSI's lease.

*fn7 The Gilberts incorrectly believe that goodwill implies profitable patronage, and therefore that the Pioneer Saloon had no goodwill because "PSI ran the business into the ground," the bar was "not profitable" under PSI's ownership, "failed . . . miserably," and was ultimately "defunct." But goodwill consists of reputation and customer base which generate and are reflected by gross receipts, not net profit.

*fn8 The comments of the National Conference of Commissioners on Uniform State Laws, published by the California Assembly in connection with the adoption of the UFTA, "are part of the legislative history and may be considered when the meaning of a statute is uncertain. [Citation.]" (Cortez v. Vogt (1997) 52 Cal.App.4th 917, 930, fn. 13.)

*fn9 The Darys resubmitted all the challenged exhibits except for Exhibit J, which documented their attorney's unsuccessful attempts to obtain the records of real estate broker Frank Parker, who had written the Darys in March 1995 to inquire about the status of the Pioneer Saloon's lease. Since none of the documents relating to Mr. Parker was necessary to create a triable issue of fact, we need not resolve the issue of their admissibility authenticated only by the Darys' attorney's declaration.

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