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 Post subject: FT - Christopher v. Gonzalez (5/25/2005)
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Erik Christopher v. Omar J. Gonzalez et al.,
No. G034348 (Cal.App. 05/25/2005)

The California Court of Appeals held proof of the existence of one or more factors used to test “actual intent to hinder, delay, or defraud” a creditor for the purposes of a claim pursuant to the Uniform Fraudulent Transfer Act do not create a presumption that the debtor has made a fraudulent transfer. The court affirmed the trial court’s decision to grant summary judgment in favor of the defendant debtor, even though the trial court erroneously concluded that actual intent is required to bring a cause of action for fraudulent transfer.

Erik Christopher sued Omar Gonzalez and his company, Omar’s Exotic Birds, Inc., pursuant to the Uniform Fraudulent Transfer Act. Christopher was a judgment creditor of one of Gonzalez’s other companies, Neon. Christopher alleged that Gonzalez fraudulently transferred Neon’s assets to himself and Omar’s. At trial, Gonzalez testified that the transfers were made in satisfaction of debts of Neon owed to Gonzalez and Omar’s. The trial court granted summary judgment in favor of Gonzalez and Omar’s, and Christopher appealed.

The appellate court affirmed the trial court’s decision, ruling that, even if the evidence shows factors such as insolvency of the debtor after the transfer or failure to receive reasonably equivalent value for the transfer, such factors are not presumptive of fraudulent intent. The court found that there was sufficient evidence that Gonzalez made the transfers in satisfaction of debts owed by Neon to Gonzalez and to Omar.



2005 Cal. App. Unpub. LEXIS 4569

May 25, 2005, Filed


PRIOR HISTORY: Appeal from a judgment of the Superior Court of Orange County, No. 03CC04879. Robert J. Moss, Judge.

COUNSEL: The Walker Law Firm, Joseph A. Walker and Mary G. Finlay for Plaintiff and Appellant.

No appearance for Defendants and Respondents.

JUDGES: O'LEARY, J.; SILLS, P. J., ARONSON, J. concurred.


OPINION: Erik Christopher sued Omar J. Gonzalez and his company, Omar's Exotic Birds, Inc., under the Uniform Fraudulent Transfer Act (UFTA) (Civ. Code, §§ 3439-3439.12). n1 Christopher claimed the assets of Neon Industries, Inc., another company owned by Gonzalez, against which Christopher had a judgment, had been fraudulently transferred to Gonzalez and Omar's. In a court trial, judgment was entered after the defendants' motion for judgment (Code Civ. Proc., § 631.8 [*2] ) was granted on the grounds that as to both the actual fraud cause of action ( § 3439.04) and the constructive fraud cause of action ( § 3439.05), proof of actual intent to defraud was lacking.

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n1 All further statutory references are to the Civil Code, unless otherwise indicated.

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Christopher appeals contending: (1) proof of actual intent to defraud is not required to establish constructive fraud under the UFTA; and (2) there is no substantial evidence to support any additional implied findings that would otherwise support a judgment for the defendants. We affirm. n2

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n2 Although no respondent's brief was filed, that does not require an automatic reversal; the appellant still has the affirmative burden to show error. We review the record and reverse only if prejudicial error is found. (Lee v. Wells Fargo Bank (2001) 88 Cal.App.4th 1187, 1192, fn. 7; In re Marriage of Davies (1983) 143 Cal. App. 3d 851, 854, 192 Cal. Rptr. 212; Cal. Rules of Court, rule 17(a)(2).)

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On January 27, 2000, Christopher sued Neon for breach of contract in Christopher v. Neon Industries, Inc. O.C.S.C. Case No. 00NL10774, alleging Neon owed him $ 20,000 on a promissory note that came due in August 1999. n3 Neon appeared in the action in February 2000, and trial took place in January 2001. Christopher prevailed and in June 2001, a $ 28,018.90 judgment (for damages and attorney fees) was entered against Neon.

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n3 The record contains vague references to Christopher having been, at one time, vice president and a director of Neon.

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In June 2003, Christopher filed this action against Gonzalez and Omar's Exotic Birds for violation of the UFTA. The complaint alleged two causes of action: the first was for violation of section 3439.04 [transfer made with intent to defraud creditor]; the second was for violation of section 3439.05 [transfer by insolvent debtor for less than reasonably equivalent value].

At trial, Christopher called Gonzalez as his only witness. Gonzalez was majority shareholder [*4] and president of Neon and controlled that company. Neon manufactured bird cages and bird supplies. Gonzalez was president and sole shareholder of Omar's. He was fully aware of Christopher's January 2000 breach of contract action against Neon.

Neon was a going concern throughout 1999 and into early 2000. In February 2000, Gonzalez began liquidating Neon and the company "closed its doors" on March 15, 2000. Neon's bird cage inventory was largely transferred to Omar's Exotic Birds. No cash was paid for the inventory. Gonzalez testified the transfer of inventory cancelled a debt Neon owed Omar's Exotic Birds for "prepayments" it had made to Neon.

On June 23, 2000, Gonzalez wrote out an invoice from Neon transferring all of Neon's inventory of a product called "Super Preen" to himself. He testified the current Neon board of directors approved the transfer. Gonzalez wrote on the invoice that the transfer was in exchange for cancellation of a $ 32,000 debt incurred by Gonzalez on his personal credit card to purchase the product two years earlier. No money was transferred to Neon.

Also on June 23, 2000, Gonzalez wrote out an invoice from Neon transferring all Neon's inventory of a product [*5] called "Enviro-Clean" to Omar's Exotic Birds. Gonzalez testified he valued the product at $ 18,000 for purposes of the transfer, but the number was arbitrary-"I just came up with a number of $ 18,000. There was no rhyme or reason for that." The invoice stated $ 18,000 would be deducted from "money owed to [Omar's] by [Neon] for prepayments paid on product never received." No money was transferred to Neon.

On July 30, 2000, Neon sold $ 7,500 of a product to a customer; Gonzalez directed the customer to make the check out to Gonzalez personally. The money was not deposited into Neon's bank account because Gonzalez had closed Neon's account. Gonzalez kept the money in satisfaction of debt owed him by Neon.

On cross-examination, Gonzalez testified to numerous payments either he made from his personal account on behalf of Neon or that Omar's Exotic Birds made to or for Neon. The trial court accepted into evidence Exhibit 114 which was a compilation Gonzalez prepared using his checkbook and Omar's Exotic Birds checkbook to document the payments made in 1999 and 2000. The document showed $ 79,556.88 in payments made by Omar's Exotic Birds to Neon in 1999, and another $ 15,790.78 in [*6] 2000, either as prepayment for inventory, for orders, or for other expenses of Neon's. The document listed payments made personally by Gonzalez on behalf of Neon totaling $ 6,504.43 in 1999, and $ 41,495.45 in 2000. The amounts personally paid by Gonzalez included $ 2,850 for accounting fees for Neon, numerous payments for back rent and equipment leases he had personally guaranteed, and other payments to Neon's creditors. He estimated he still owed about $ 114,000 to Neon creditors. The document indicated Gonzalez had credited Neon for the $ 7,500 check received from a customer.

At the close of Christopher's case, the defendants made a motion for judgment on the grounds there was no evidence Gonzalez made the transfers with "actual fraudulent intent." n4 Christopher opposed the motion arguing that while actual fraudulent intent might be required for the complaint's first cause of action, the second cause of action for violation of section 3439.05, transfer by insolvent debtor for less than reasonably equivalent value, did not require proof of actual intent to defraud. In granting the motion, the trial court stated, "I think you have to prove some intent on [Gonzalez's] part, and [*7] I see it's been [sic] proven. It sounds like a corporation that's in trouble. You had lots of trouble. He stuck his neck out. What I have really heard so far, he put a lot of money out of his own pocket to pay some of these debts." No statement of decision was requested. Judgment was entered for the defendants.

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n4 The defendants erroneously called the motion a motion for nonsuit (Code Civ. Proc., § 581c). Christopher concedes that because this was a bench trial, the motion was really a motion for judgment under Code of Civil Procedure section 631.8.

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"The standard of review of a judgment and its underlying findings entered pursuant to [Code of Civil Procedure] section 631.8 is the same as a judgment granted after a trial in which evidence was produced by both sides. In other words, the findings supporting such a judgment 'are entitled to the same respect on appeal as are any other findings of a trial court, [*8] and are not erroneous if supported by substantial evidence.' [Citations.] Consequently, where a trial court's factual finding is challenged on the ground there is no substantial evidence to sustain it, the power of the reviewing court begins and ends with the determination as to whether, on the whole record, there is substantial evidence, contradicted or uncontradicted, that will support the trial court's determination. [Citation.] [P] The appellate court views the evidence in the light most favorable to the respondents [citation], resolves all evidentiary conflicts in favor of the prevailing party and indulges all reasonable inferences possible to uphold the trial court's findings [citation]. However, when the decisive facts are undisputed, the reviewing court is confronted with a question of law and is not bound by the findings of the trial court. [Citation.] In other words, the appellate court is not bound by a trial court's interpretation of the law based on undisputed facts, but rather is free to draw its own conclusion of law. [Citation.]" (San Diego Metropolitan Transit Development Bd. v. Handlery Hotel, Inc. (1999) 73 Cal.App.4th 517, 528.)

III [*9]

Christopher contends the court erred in granting judgment on his UFTA causes of action due to lack of evidence of actual intent to defraud. He is correct on this point, but it will not carry the day for him.

"The UFTA permits defrauded creditors to reach property in the hands of a transferee." (Mejia v. Reed (2003) 31 Cal.4th 657, 663 (Mejia).) "Under the UFTA, a transfer is fraudulent, both as to present and future creditors, if it is made 'with actual intent to hinder, delay, or defraud any creditor of the debtor.' ([] § 3439.04, subd. (a).) Even without actual fraudulent intent, a transfer may be fraudulent as to present creditors if the debtor did not receive 'a reasonably equivalent value in exchange for the transfer' and 'the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.' ( § 3439.05.)" (Mejia, supra, 31 Cal.4th at p. 664, italics added.)

Although the trial court was wrong in its assertion that Christopher's cause of action for constructive fraud under section 3439.05 required proof of actual intent to defraud, "as a general principle, where the decision of a lower [*10] court is correct on any theory of law applicable to the case, the judgment or order must be affirmed regardless of the correctness of the grounds upon which the lower court reached its conclusion. [Citations.]" (Conservatorship of Davidson (2003) 113 Cal.App.4th 1035, 1056.) A statement of decision was not timely requested as required by Code of Civil Procedure sections 631.8 and 632. Accordingly, we must imply all findings necessary to sustain the judgment and we indulge all presumptions in favor of the judgment. (In re Marriage of Arceneaux (1990) 51 Cal.3d 1130, 1133, 275 Cal. Rptr. 797.) Thus, the only issue before us is whether substantial evidence supports the implied findings in the respondents' favor. We conclude it does.

Actual Fraud: section 3439.04

Christopher contends there is insufficient evidence to support the judgment in favor of the respondents on his first cause of action under section 3439.04.

Section 3439.04, subdivision (a)(1), provides that "a transfer made . . . by a debtor is fraudulent as to a creditor" if made "with actual intent to hinder, delay, or [*11] defraud any creditor of the debtor." Section 3439.04 subdivision (b), sets forth a list of factors that "may" be considered in determining actual intent. They include: "(1) Whether the transfer or obligation was to an insider. [P] (2) Whether the debtor retained possession or control of the property transferred after the transfer. [P] (3) Whether the transfer or obligation was disclosed or concealed. [P] (4) Whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit. [P] (5) Whether the transfer was of substantially all the debtor's assets. [P] (6) Whether the debtor absconded. [P] (7) Whether the debtor removed or concealed assets. ( Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred. [P] (9) Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred. [P] (10) Whether the transfer occurred shortly before or shortly after a substantial debt was incurred. [P] (11) Whether the debtor transferred the essential assets of the business to a [*12] lienholder who transferred the assets to an insider of the debtor."

Christopher argues that because almost all of the subdivision (b) factors are present, actual intent was established. But the legislature made clear that while proof of the existence of any one or more of those factors are relevant evidence of the debtor's actual intent, proof of the factors "does not create a presumption that the debtor has made a fraudulent transfer or incurred a fraudulent obligation." (See § 3439.04, Historical Notes, Legislative Committee Comment - Assembly, comments 5 & 6.) Gonzalez testified he transferred the Super Preen inventory to himself and the Enviro-Clean inventory to Omar's Exotic Birds to begin to reimburse each for expenditures on Neon's behalf. The court was not required to find Gonzalez had "actual intent to hinder, delay or defraud" other creditors.

Constructive Fraud: section 3439.05

Christopher contends there is no substantial evidence to support a judgment in the defendants' favor on his constructive fraud cause of action. We disagree.

The elements of Christopher's cause of action under section 3439.05 n5 are as follows: (1) A transfer is made by a debtor after [*13] a creditor's claim arose; (2) the debtor does not receive "a reasonably equivalent value in exchange for the transfer"; and (3) the debtor was insolvent when the transfer was made or became insolvent as a result of the transfer. As noted above, contrary to the trial court's erroneous belief, actual intent to defraud is not an element of the cause of action. Nonetheless, we must affirm if substantial evidence supports findings on the other elements.

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n5 Section 3439.05 provides, "A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation."

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Christopher proved the first and third elements of his cause of action: The transfers at issue were made after Christopher's [*14] promissory note came due and after he filed his breach of contract cause of action, and by Gonzalez's admission, Neon was insolvent at the time the transfers were made. But there is substantial evidence to support an implied finding there was "a reasonably equivalent value in exchange for the transfer" ( § 3439.05), namely, the satisfaction of Neon's debts. (See § 3439.03 ["Value is given for a transfer . . . if, in exchange for the transfer . . . an antecedent debt is secured or satisfied, . . . ."].)

Christopher acknowledges that satisfaction of preexisting debt is adequate consideration for the transfers. But he argues, when such a transfer is made to benefit a corporate insider like Gonzalez, the burden on the defendant is high to establish both the existence of the debt and that the transfer was for reasonably equivalent value. That burden was established here.

Gonzalez presented evidence of the numerous debts of Neon to himself personally, Omar's Exotic Birds, and to other creditors as well. "A debtor may pay one creditor in preference to another, or may give to one creditor security for the payment of his demand in preference to another." ( § 3432.)

As to the transfer [*15] of Neon's inventory of bird cages and Enviro-Clean to Omar's Exotic Birds, Christopher argues there was no evidence of the value of the inventory or the actual existence of any debt owed by Neon to Omar's Exotic Birds. Gonzalez deemed the inventory to be valued at $ 18,000, and his opinion as to the value is sufficient evidence of its value. (See Evid. Code, § 813, subd. (a)(3) [value of tangible personal property may be shown by opinion of officer of corporation that is owner].) Furthermore, Gonzalez provided evidence of almost $ 100,000 in prepayments for inventory by Omar's Exotic Birds to Neon in 1999 and 2000.

As to Gonzalez's transfer of the Super Preen inventory to himself, Christopher again argues there is no evidence supporting the value of the inventory or the existence of the debt it supposedly cancelled. As already noted, Gonzalez's opinion as to the value of the inventory ($ 32,000) is sufficient and the trial court could reasonably rely on Gonzalez's testimony the debt was owed.

But, Christopher argues, even assuming the debt existed, it was improper for Gonzalez, a corporate insider, to show preference to a debt owed to himself over other [*16] creditors of Neon. Christopher correctly points out that "one who dominates and controls an insolvent corporation may not, . . . assert the general immunity of creditor preferences from attack. He may not use his power to secure for himself an advantage over other creditors of the corporation." (Commons v. Schine (1973) 35 Cal. App. 3d 141, 144, 110 Cal. Rptr. 606.) Were the case as simple as Christopher asserts, i.e., Gonzalez simply closed the doors of Neon, took its assets for himself, and let creditors fend for themselves, we might agree. But as the trial court specifically noted in granting judgment for Gonzalez, that is not the case here. Even after Gonzalez transferred the Super Preen inventory to himself, and Neon closed its doors, he has continued to personally make huge outlays to satisfy Neon's debts such as Neon's landlord and equipment lessors. The trial court could have found Gonzalez was not so much giving himself a preference over other creditors, but passing the few remaining assets of Neon to himself so as to satisfy other creditors.

The case upon which Christopher primarily relies, Economy Refining & Service Co. v. Royal Nat. Bank of New York (1971) 20 Cal. App. 3d 434, 97 Cal. Rptr. 706, [*17] is distinguishable. In that case, the president of the debtor corporation held deeds of trust on real property owned by a debtor corporation securing loans he had made to the corporation. The debtor corporation became insolvent and the appellant had a judgment it was about to record. The president transferred the real estate to himself and then to a new corporation, still encumbered by the deeds of trust. The appellant's judgment was not transferred as a liability of the new corporation. The appellate court concluded there had been no consideration for the transfer. In view of the fact the debt had not been extinguished, the court rejected the argument the president had simply preferred one creditor (i.e., himself) over another. "If this were merely a preference among creditors, it would be sustainable. [Citation.] But where allowable preference is exercised, the debt of the preferred creditors is extinguished or diminished, depending upon the amount of payment and the agreement of the parties. Under the circumstances of this case, as related above, we conclude that actual intent to defraud consisted of the intent to do just what was done, that is, to remove the assets and to make [*18] impossible the collection of appellant's judgment while retaining intact the claims of the [old corporation's president]. The fact, therefore, that the trial judge evidently believed that [he] was not actuated by an evil motive is not sufficient to remove the fact that what he intended to do was objectively wrong and fraudulent." (Id. at pp. 441-442.) By contrast, here there is evidence supporting a finding that the transfers were supported by adequate consideration. Thus, the trial court's ruling must be upheld.

The judgment is affirmed. Because the defendants have not made an appearance in this appeal, we do not award any costs on appeal.





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