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 Post subject: FT - G-Tech USA v. Alagem (1/24/2005)
PostPosted: Thu Feb 26, 2009 6:48 pm 

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G-Tech USA, Inc et a. v. Beny Alagem et al.,
No. B167716 (Cal.App. 01/24/2005)

Synopsis

The California Court of Appeal, Second Appellate District, Division Four, held that the trial court erred by granting summary judgment to debtor on grounds that certain alleged fraudulent transfers were made before creditor's claim arised.

Further, the appellate court found that where debtor claimed a $10 million transfer from debtor's corporation was an interest-free loan that he repaid, the corporation did not receive the resonable eqivalent of $10 million.

Thus, the court allowed the fraudulent transfer claim to continue against debtor.


Opinion

G-Tech USA, Inc., et a. v. Beny Alagem, et al., No. B167716 (Cal.App. 01/24/2005)

B167716

COURT OF APPEAL OF CALIFORNIA, SECOND APPELLATE DISTRICT,
DIVISION FOUR

January 24, 2005, Filed

NOTICE: [*1] NOT TO BE PUBLISHED IN OFFICIAL REPORTS. CALIFORNIA RULES OF COURT, RULE 977(a), PROHIBIT 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 THIS OPINION HAS NOT BEEN CERTIFIED FOR PUBLICATION OR ORDERED PUBLISHED FOR THE PURPOSES OF RULE 977.

PRIOR HISTORY: APPEALS from a judgment and order of the Superior Court of Los Angeles County, No. BC271277. Lawrence W. Crispo, Judge.

DISPOSITION: Reversed.

COUNSEL: Luce, Forward, Hamilton & Scripps, Michael H. Bierman and Jeffrey D. Wexler for Plaintiffs and Appellants.

Alschuler, Grossman, Stein & Kahan, Marshall B. Grossman and Daniel Alberstone; Greines, Martin, Stein & Richland and Robin Meadow for Defendants and Respondents.

JUDGES: GRIMES, J.; EPSTEIN, P. J., CURRY, J. concurred.

OPINIONBY: GRIMES

OPINION: This is an appeal from the grant of summary judgment in favor of respondents Beny Alagem (Alagem), Alagem Enterprises, Inc., (AEI) n1, and AST Computers, LLC (AST), who were defendants below. Alagem operated and controlled AST, and he was president and manager of AEI. Appellant G-Tech USA, Inc. (G-Tech) was a judgment creditor of AST for more than $ 4 million, and appellant GVC [*2] Corporation (GVC) was a judgment creditor of AST for more than $ 280,000. No part of the judgments was paid, and AST is no longer in business. G-Tech and GVC sued respondents for fraudulent transfers from AST and for breach of an agreement to make capital contributions to AST.

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n1 Apparently, the true name of this respondent is Alagem Enterprises, LLC.

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Respondents moved for summary judgment on the grounds that Alagem had repaid in full $ 10,374,231.61 that he borrowed from AST, and that Alagem had made all the capital contributions he was allegedly required to make, and thus appellants could not prove any damages. The court denied appellants' request to continue or deny the motion pursuant to Code of Civil Procedure n2 section 437c, subdivision (h) to permit appellants to obtain discovery to oppose the motion. After overruling appellants' objections to the adequacy of respondents' evidence of alleged loan repayments and capital contributions, the trial court granted summary judgment for respondents and awarded [*3] them attorney's fees.

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n2 All further statutory references are to the Code of Civil Procedure unless otherwise indicated.

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Appellants contend with respect to the first cause of action that there are triable issues as to whether Alagem's failure to pay interest on the alleged loans from AST and his waiver of $ 500,000 in salary proved repayment in full of the $ 10,374,231.61 to AST. With respect to the second cause of action, appellants contend that there are triable issues whether Alagem's waiver of an additional $ 750,000 in salary and payment of $ 2.4 million to a subsidiary of AST, including $ 150,000 paid by third parties, satisfied Alagem's obligation to make $ 7.5 million in cash capital contributions to AST. Appellants also contend that the trial court abused its discretion in overruling their objections to the Alagem declaration challenging his competency to prove the various transfers between him and AST or of his waiver of salary.

We agree with respondents that the best evidence rule does not exclude [*4] Alagem's testimony that he was entitled to this salary and waived its receipt, and that the absence of any documentation to substantiate Alagem's testimony goes to the weight and not the admissibility of the evidence. We find, however, that the trial court abused its discretion in denying appellants' request to continue or deny the motion in order that they might depose Alagem to attempt to demonstrate lack of foundation for the financial data in his declaration and to obtain evidence refuting his testimony regarding the transfers between him and AST.

Moreover, we find that respondents did not make a prima facie showing of the nonexistence of any genuine issue of material fact as to either cause of action. With respect to the first cause of action, respondents' evidence that Alagem waived $ 500,000 in salary and did not pay any interest for the alleged loans from AST does not demonstrate as a matter of law that AST received a reasonably equivalent value for the $ 10,374,231.61 in cash borrowed by Alagem. As to the second cause of action, respondents' evidence that Alagem's payment of $ 2.4 million to Vault Technologies, Inc. (Vault), a subsidiary of AST, does not establish as a matter [*5] of law that Alagem thereby made a capital contribution to AST, the parent corporation. Accordingly, we reverse the judgment and the award of attorney's fees.

BACKGROUND

For purposes of the summary judgment motion, respondents did not dispute that from July 1999, appellants were creditors of AST; and on August 20, 2001, judgment was entered in favor of G-Tech against AST for $ 4,143,249.58, and in favor of GVC against AST for $ 281,202.71, none of which has been paid. The following additional facts were undisputed: AEI and another entity entered into a written operating agreement for AST pursuant to which AEI contributed $ 5 million in cash to capitalize AST. The operating agreement provided that AEI would contribute an additional $ 7.5 million in cash to the extent required by AST. Alagem agreed to guarantee AEI's obligation to contribute up to an additional $ 7.5 million in cash capital contributions. It was also undisputed that Alagem received over $ 10 million from AST between January 11, 1999, and November 17, 2000, although appellants disputed that the payments were loans.

Respondents offered evidence that Alagem repaid the amounts he received from AST in full and, [*6] while not conceding that Alagem was obligated to make a $ 7.5 million capital contribution to AST, they offered evidence that Alagem had contributed $ 7,848,452.20 in cash as additional cash capital contributions between August 14, 2000, and November 13, 2001. Appellants disputed that AST's transfers to Alagem were loans, and that Alagem's payments to AST were repayments of loans. Appellants also disputed that Alagem's waiver of $ 500,000 in salary constituted repayment of AST's alleged loans and that Alagem's payment of $ 2,429,600 to Vault, including $ 150,000 paid by third parties to Vault, and his waiver of an additional $ 750,000 in salary constituted a cash contribution to AST.

In opposition to the motion, appellants asked the trial court to deny or continue the hearing pursuant to section 437c, subdivision (h) to discover additional grounds to support their opposition. Appellants sought to depose Alagem and to obtain bank documents to challenge respondents' evidence of loans, loan repayments, and capital contributions. Appellants had asked respondents to produce Alagem for deposition some time in the last week of January 2003 but Alagem was sick and unavailable until February 12, 2003. Appellants' [*7] opposition to the summary judgment motion was due February 5, 2003. Some months before, in November 2002, appellants had subpoenaed bank records from Bank of America, City National Bank, and Bear Stearns, seeking financial records of AST and Alagem, including cancelled checks and wire transfers. Respondents moved to quash the subpoenas, and the motion was referred to a discovery referee who had not been appointed by the court at the time of the hearing on the summary judgment motion. Respondents' motion for summary judgment rested in large part on copies, many of which were redacted, of account statements from Bank of America, City National Bank, and Bear Stearns.

Nonetheless, the trial court found appellants had not satisfied the requirements of section 437c, subdivision (h) and granted the motion for summary judgment. On appeal, respondents acknowledge that two grounds for granting summary judgment which they did not assert but which the court found warranted summary judgment were erroneous. In effect, the court found appellants lacked standing (1) because the alleged fraudulent transfers took place before they became judgment creditors and (2) because appellants were not parties [*8] to or third party beneficiaries of the operating agreement.

As to the first cause of action for fraudulent transfer, the court found plaintiff could not complain of injury arising from fraudulent transfers that were completed before AST's indebtedness to plaintiff had been reduced to judgment. The court found it was therefore irrelevant whether the transfers were loans, the manner in which they were repaid, and to what entity payments were made. Specifically, as to the matter of what entity to which payments were made, the court found it was irrelevant whether Alagem made payments to Vault rather than to AST since Vault is a subsidiary of AST "and as such is subject to receiving funding from its parent company." The court found plaintiff could not assert the second cause of action for breach of the operating agreement because it was not a party to nor a third party beneficiary of the agreement, and because the agreement was entered into before plaintiff became a judgment creditor of respondents.

The trial court specifically found there were factual disputes as to "whether the transfers were 'loans,' whether the method in which the money was replaced constituted 'repayment,' which [*9] entity the money was put back into, and whether a claimed salary deferment constituted a 'capital contribution,'" yet inexplicably, the court concluded these disputes were not material to the issue whether the money transferred was paid back "in one form or another."

Standard of Review

"On appeal after a motion for summary judgment has been granted, we review the record de novo, considering all the evidence set forth in the moving and opposition papers except that to which objections have been made and sustained. [Citation.] Under California's traditional rules, we determine with respect to each cause of action whether the defendant seeking summary judgment has conclusively negated a necessary element of the plaintiff's case, or has demonstrated that under no hypothesis is there a material issue of fact that requires the process of trial, such that the defendant is entitled to judgment as a matter of law. [Citations.]" (Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 334-335, fn. omitted.)

The moving party bears the initial burden "to make a prima facie showing of the nonexistence of any genuine issue of material fact." (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 845, 853.) [*10] "A prima facie showing is one that is sufficient to support the position of the party in question." (Id. at p. 851.) The burden of the moving party is to "persuade the court that there is no material fact for a reasonable trier of fact to find . . . ." (Id. at p. 850, fn. 11.)

"Once the defendant . . . has met that burden, the burden shifts to the plaintiff . . . to show that a triable issue of one or more material facts exists as to that cause of action or a defense thereto. The plaintiff . . . may not rely upon the mere allegations or denials of its pleadings to show that a triable issue of material fact exists but, instead, shall set forth the specific facts showing that a triable issue of material fact exists as to that cause of action or a defense thereto." ( § 437c, subd. (p)(2).)

"In performing our de novo review, we must view the evidence in a light favorable to plaintiff as the losing party [citations], liberally construing [his] evidentiary submission while strictly scrutinizing defendants' own showing, and resolving any evidentiary doubts or ambiguities in plaintiff's favor. [Citations.]" (Saelzler v. Advanced Group 400 (2001) 25 Cal.4th 763, 768-769.) [*11]

"All doubts as to whether any material, triable issues of fact exist are to be resolved in favor of the party opposing summary judgment. [Citation.]" (Barber v. Marina Sailing, Inc. (1995) 36 Cal.App.4th 558, 562.)

DISCUSSION

Initially, as appellants contend and respondents concede, the trial court erred in concluding as a matter of law that appellants may not assert causes of action for fraudulent transfers and breach of the operating agreement. The trial court incorrectly found that appellants could not sue for fraudulent transfers because the transfers had been completed before appellants became judgment debtors. First, Civil Code section 3439.04 provides that a transfer may be fraudulent whether made before or after the creditor's claim arose. n3 Second, it was not disputed that appellants had been creditors of AST since July 1999, and many transfers were made after that date. The trial court also incorrectly found that appellants could not sue for breach of the operating agreement because they were not parties to or third party beneficiaries of it. Code of Civil Procedure section 708.210 establishes [*12] in creditors (like appellants) the right to sue a debtor of the creditor's debtor (like respondents Alagem and AEI). n4

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n3 Civil Code section 3439.04, subdivision (a) provides that under certain circumstances, "[a] transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred. . . ."

n4 Section 708.210 provides: "If a third person has possession or control of property in which the judgment debtor has an interest or is indebted to the judgment debtor, the judgment creditor may bring an action against the third person to have the interest or debt applied to the satisfaction of the money judgment."

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In addition, the trial court abused its discretion in finding that appellants did not satisfy the requirements of section 437c, subdivision (h) to justify continuing or denying the motion to enable appellants to obtain evidence essential to justify opposition. The [*13] only witness on whose testimony respondents relied in seeking summary judgment was Beny Alagem, who testified that he "received several personal loans from AST totaling $ 10,374,231.61, all of which I repaid," and that he "contributed $ 7,848,452.20 in cash to AST," but the only documents he offered to prove the flow of these substantial sums were bank and other financial records, many of which were redacted. He testified that $ 500,000 in loan repayments and $ 750,000 in capital contributions were made by waiving his receipt of salary but he did not offer any documentary evidence to support his testimony that his annual salary was $ 500,000 or that he waived its receipt. He did not offer any evidence of loan agreements, promissory notes, board resolutions or minutes or any corporate authorization for AST to make the loans to him.

The financial records evidencing transfers of money as summarized in Alagem's declaration demonstrated that $ 2.4 million of the alleged $ 7.8 million capital contribution to AST was paid to Vault, not AST. Yet Alagem also testified that Vault was a subsidiary of AST, and he offered no testimony or other evidence demonstrating that Vault was the alter [*14] ego of AST or had any liability for AST's debts. Of this $ 2.4 million, $ 150,000 was evidenced by two checks paid by third parties to Vault which Alagem testified were "paid on my behalf by my agents, whom I repaid," but he offered no documentary evidence that he repaid these amounts.

Confronted with this evidence (admissible, but reasonably subject to challenge, if not suspicion), appellants were entitled to a continuance, if not denial of the summary judgment motion. The Alagem deposition was pending, and appellants' efforts to subpoena the financial documents on which the motion relied had been thwarted by respondents' motion to quash. We do not hesitate to conclude the trial court exceeded the bounds of reason in finding that appellants did not make the necessary showing under section 437c, subdivision (h). (See Shamblin v. Brattain (1988) 44 Cal.3d 474, 478, 243 Cal. Rptr. 902 ["The appropriate test for abuse of discretion is whether the trial court exceeded the bounds of reason"].)

Finally, even if appellants had not made an adequate showing under section 437c, subdivision (h), respondents were not entitled to summary judgment because they did not make a [*15] prima facie showing of the nonexistence of any genuine issue of material fact. Respondents' motion for summary judgment purported to negate damage, a necessary element of appellants' case. With respect to the first cause of action for fraudulent transfers, respondents contended that appellants could not prove AST did not receive a reasonably equivalent value for its transfers of over $ 10 million to Alagem because Alagem repaid everything in full, although he did not pay any interest. n5 To prove that Alagem repaid AST over $ 10 million, respondents relied in part on Alagem's testimony that he waived $ 500,000 salary. Waiver of this salary does not constitute proof as a matter of law that AST received the reasonable equivalent of a $ 500,000 cash capital contribution. (See Kirkland v. Risso (1979) 98 Cal. App. 3d 971, 977, 159 Cal. Rptr. 798 ["What constitutes a fair consideration is a question of fact [citation], and must be determined from the standpoint of the creditor]".)

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n5 In the court below, respondents argued: "First, assuming for the moment that plaintiffs' [sic] loans to Beny Alagem constituted a conveyance, plaintiffs must prove that AST did not receive fair consideration of a reasonably equivalent value in exchange for the conveyance."

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Also, it cannot be said as a matter of law that repayment of loans without interest is the reasonable equivalent to AST of having the use of its funds. It was undisputed that Alagem received over $ 10 million from AST over the course of 22 months. Respondents concede that if one used a 5 percent annual rate of interest, "the total accrued interest over Alagem's 22 months of borrowing would have been $ 215,541.22." n6 We simply cannot find as a matter of law that more than $ 10 million in interest-free loans by a corporation to its principal, which deprived the corporation of the interest it would have received if the loans had been made at market rates, were the reasonable equivalent of having $ 10 million cash on hand.

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n6 This calculation was not in the record before the trial court, but even without calculating the interest, we take judicial notice that interest would be a significant sum on loans with varying balances exceeding an aggregate of $ 10 million that were outstanding for varying periods of time over 22 months.

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Similarly, as to the second cause of action, respondents' evidence that Alagem paid $ 2.4 million to Vault is not the same, as a matter of law, as a capital contribution to AST, Vault's parent corporation. A subsidiary corporation is legally a separate and distinct entity from its parent corporation. (9 Witkin, Summary of Cal. Law (9th ed. 1989) Corporations, § 1, p. 511, and cases cited therein.) A corporate entity may be disregarded under certain circumstances, for example, if a parent and subsidiary are alter egos or if they are operated as a single enterprise. Under such circumstances, "it would be unjust to permit those who control companies to treat them as a single or unitary enterprise and then assert their corporate separateness in order to commit frauds and other misdeeds with impunity" (Las Palmas Associates v. Las Palmas Center Associates (1991) 235 Cal. App. 3d 1220, 1249), but respondents did not demonstrate any such circumstances here. To the contrary, the undisputed evidence is that Vault is a separate corporation with its own books and records and bank accounts.

Having concluded that respondents were not entitled to judgment, [*18] we also conclude there was no basis for the award of attorney's fees.

DISPOSITION

The judgment and the attorney's fees award are reversed. Appellants are to recover their costs on appeal.

GRIMES, J. *

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* Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.

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We concur:

EPSTEIN, P. J.

CURRY, J.


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