Nara Bank, N.A. v. Hana Financial, Inc., 2003 WL 1091035 (Unpublished, Cal.App. 2 Dist., March 13, 2003)
California Rules of Court, rule 8.1115, restricts citation of unpublished opinions in California courts.
Court of Appeal, Second District, Division 7, California.
NARA BANK, N.A., Plaintiff and Respondent,
HANA FINANCIAL, INC., Defendant and Appellant.
(Los Angeles County Super. Ct. No. BC218212).
March 13, 2003.
APPEAL from a judgment of the Superior Court of Los Angeles County. Ronald M. Sohigian, Judge. Reversed with directions.
Caldwell, Leslie, Newcombe & Pettit, David R. Pettit and Mary Newcombe for Defendant and Appellant.
Arter & Hadden, John L. Hosack; Greines, Martin, Stein & Richland, Martin Stein and Feris M. Greenberg, for Plaintiff and Respondent.
MU~NOZ (AURELIO), J.FN*
FN* Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California constitution.
*1 Hana Financial, Inc. (Hana) appeals a jury verdict awarding Nara Bank, N.A. (Nara Bank) $521,996.46 in damages on Nara Bank's claim for fraudulent transfer. (Civ.Code, § 3439.01 et seq. (UFTA).) On appeal, Hana contends: (1) no fraudulent transfer occurred because fair value was received in the transaction; (2) Nara Bank failed to prove that an “asset” was transferred within the meaning of the UFTA; (3) neither constructive nor actual fraud was proved because the goods were sold at arm's length for market value; (4) Nara Bank failed to prove damages on a transfer-by-transfer basis; (5) the trial court failed to instruct the jury on different damage theories; and (6) the trial court failed to instruct the jury that it could setoff any amounts paid to Nara Bank.
We conclude that Nara Bank failed to prove Hana “transferred” an “asset” within the meaning of the UFTA because the undisputed evidence establishes the assets purportedly transferred were subject to numerous valid, perfected security interests. Because Nara Bank failed to establish these threshold requirements for recovery under the UFTA, we reverse and remand for entry of judgment in Hana's favor.
FACTUAL BACKGROUND AND PROCEDURAL HISTORY
Commencing in 1993, Nara Bank loaned an entity known as “Castle Apparel Group, Inc.” (CAG) FN1 a total of $800,000 in several separate transactions. The debt was consolidated and memorialized by promissory notes and Business Loan Agreements, guaranteed by Lee, and was secured by a Commercial Security Agreement (Security Agreement) and a UCC-1 filing with the California Secretary of State. The debt was re-memorialized with nearly identical documents signed and filed in 1998.
FN1. CAG, incorporated in 1991, was 100 percent owned and run by defendant Hak Ro Lee (Lee), who was the chief executive officer. Lee, CAG, and two other defendants, Lee's wife Heung Lee and Hakro Corporation are not parties to this appeal.
Both the Security Agreement and the UCC-1 granted Nara Bank a security interest; the UCC-1 secured “all accounts, instruments, chattel paper, general intangibles, contract rights, inventory, equipment, furniture and fixtures, now or hereafter owned or acquired by debtor, and all proceeds, including proceeds of insurance thereof, all guarantees and other security therefor, all right, title and interest of debtor in the inventory which gave rise thereto, including all returned, rejected, rerouted or repossessed goods, the sale or lease of which shall have given rise to any account or chattel paper and proceeds including insurance proceeds thereof and all of debtor's books and records relating thereto.” FN2 Upon CAG's default, pursuant to the security agreement, Nara Bank could accelerate the indebtedness, assemble the collateral, sell the collateral, obtain the appointment of a receiver to collect revenues and apply accounts, and obtain a deficiency remaining after sale of the collateral.
FN2. The evidence at trial established that Nara Bank's security interest was in third position, behind that of another bank and a factor.
CAG used the funds to purchase apparel in Korea and sell the merchandise at a profit to retailers in the United States. After the Asian financial crisis of 1997-1998 and the loss of another major financer of CAG's operations, CAG was unable to obtain financing for its operations. Around this time, Nara Bank had determined for itself that CAG was insolvent and over-indebted. Nara Bank refused to lend CAG any more money after June 1998. A “tri-party agreement” was entered into with Heller Financial, a factor of CAG. Pursuant to such an agreement, CAG would assign some invoices to the factor, and the bank would make advances based on the invoices. Later, the factor collected the money and the Bank would repay the loan.
*2 On February 10, 1998, Lee incorporated a new company, Hakro Corporation. The only assets of Hakro were about $8,000 Lee put in. Lee filed a fictitious business name statement listing “Castle” as a dba of Hakro. Lee contended he used “Castle” as the fictitious business name of Hakro so that people would not think he was hiding anything. Hakro rented space from CAG, and shared its fax machine. Hakro had its own federal tax I.D. number. Hakro was formed for the purpose of purchasing closeouts and overproduced merchandise for sale to discount retailers in the United States.
In February 1998, as his relationship with Nara Bank deteriorated, Lee turned to Hana for financing. Working at Hana were several former employees of Nara Bank. Charles Kim and Sunnie Kim had worked at Nara Bank from 1993 to 1994. Charles Kim was a president, and Sunnie Kim was an executive vice president and chief credit officer. Daniel Ko and Justin (Yoon) Chae also worked at Nara Bank during this period. Chae was a vice president and the manager of the international department. Sunnie Kim and Chae worked with CAG on its initial loan from Nara Bank.
Hana engages in the business of what it describes as “purchase order financing,” a type of factoring. The transaction is started based upon the client's purchase order from the buyer. The bank will issue a letter of credit in favor of the supplier. Ultimately, four persons or entities are involved: the buyer, the supplier, the factor, and the client. The factor will send the money to the supplier, and the supplier will ship the merchandise to the factor. The factor is the actual buyer of the inventory. The factor then sells the merchandise to the client, and the client creates an invoice and assigns it to the factor. The buyer sends payment to the factor, who is the owner of the inventory. Repayment is thus received directly from the buyer, not the borrower.FN3
FN3. Yoon Suk (Justin) Chae, Senior Vice President described a typical transaction. Lee would approach Hana and tell Hana he had an opportunity to buy sweaters in Korea and sell them to a buyer in the United States at a profit. Chae would do some due diligence and recommend to the credit committee to finance the transaction. A bank would issue a letter of credit to the Korean supplier for the purchase price; the sweaters would be shipped to the U.S. and sent to the buyer, who would write a check for the purchase price (which had been assigned to Hana, the factor in this case). The buyer's obligation to pay for the sweaters was labeled an “account receivable” by Hana. Hana would pay the bank issuing the letter of credit. At that point, a loan would be created between the factor and the client so the factor could get its money back. This was accomplished by assignment of the invoice to the factor. After the factor got reimbursed for its costs and for the loan, the balance would go to Lee. Hana took a security interest in the sweaters of Hakro, as well as the account receivable. Hana took the position that in a purchase order financing transaction such as described above, the goods are owned by Hana.
With purchase order financing, in extending the loan to a prospective borrower, Hana performs less due diligence in evaluating the borrower because Hana owns the inventory. A finance company such as Hana is not governed by the regulations pertaining to banks. Banks will lend money based on the borrower's financial statements, while a finance company is more interested in the transaction. A finance company's client is usually is a “sub prime” client, and normally cannot borrow from a bank. Usually such clients do not have collateral to put up, and therefore a financing company takes a larger risk than a bank in financing a transaction.
Lee approached Hana and told them his financing had been cut off by his other lender and Nara Bank. He did not have any inventory to pledge so there were no accounts receivable to form the basis of financing. Thus, Lee needed to do purchase order financing. Lee had found a company that had some closeout inventory that he could purchase, and a buyer in the United States who was interested.
With respect to the Hakro transactions, Sunnie Kim at Hana sought legal advice on the transaction from an attorney. She asked whether Hana could enter into the transaction with a separate company and was told that Hana could. She did not ask for most recent financial statements because the borrower had just incorporated the entity. However, Kim obtained copies of Hakro's Articles of Incorporation, statement of domestic stock corporation, and federal tax I.D. number in order to ascertain that it in fact was a corporation.
*3 Hana also obtained a credit report from Experian, a credit agency. Such reports can only be run on individuals. Nothing in the credit report, which is Hak Ro Lee's, suggested that he owed any money to Nara Bank. Lee did not provide any documents showing he had paid off the loan to Nara Bank, nor did Kim check with Nara Bank to see if this was the case. The new client application indicated that Hakro had the same phone number, address and fax as CAG.
Further, Nara Bank was not contacted concerning a tri-party agreement with CAG, Hana, and Nara Bank. Sunnie Kim knew that CAG had been a customer of Nara Bank. Kim understood that security interest held by Nara Bank would extend not only to property owned by CAG at the time the security interest was granted, but also to property acquired afterwards. The financing statement also referred to “successors.”
Nonetheless, Sunnie Kim thought the proposed Hakro transaction was a good one, and discussed it with Charles Kim and Daniel Ko. The fact that Hakro and Lee might have been “sub prime” did not affect her decision to enter into the transaction. In purchase order financing, Hana could own the goods and the accounts receivable and monitor the transaction through every stage. The goods would be shipped to a public warehouse. The risks in such transaction are that the buyer will not accept the goods, so Hana would have to find another buyer.
Hana entered into a “Sale & Security Agreement” with Hakro. This Agreement provided that Hana obtained a security interest in “all of [Hakro's] interests in the types of property described below, whether now owned or hereafter acquired and wherever located.... [¶] all accounts, general intangibles, chattel paper, documents and instruments as such terms are defined in the California Uniform Commercial Code (“UCC”), including without limitation, all obligations for the payment of money arising out of [Hakro's] sale or lease of goods or rendition of services (collectively “Accounts”)....” Hana and Hakro also entered into a factoring agreement, pursuant to which Hakro assigned all accounts to Hana.
Hakro apparently arranged for several transactions with Hana. The record contains documentary evidence of a transaction with Shin Sung International for knit tops, for which Hana issued a letter of credit; a purchase of tents; and a purchase of sweaters, for which Hana issued a letter of credit. In these transactions, the invoices sent to the retailer bore the notation “This Account is Assigned, Owned by, and Payable only to: Hana Financial, Inc.” Hakro did not take title to the goods. The value of the transactions, as conceded by Nara Bank, was around $600,000.
Sunnie Kim went to the CAG warehouse in late March or early April 1998 and observed an empty warehouse. When the merchandise arrived, she inspected it. After a few days, she verified that the buyer had received the goods. Apparently, with respect to this and some other transactions, some goods ended up in Lee's warehouse instead of a public warehouse.
*4 CAG made payments to Nara Bank from the proceeds of its transactions arranged through Hana. As of November 2000, the amount owing had been paid down to $521,995.46. The parties stipulated to this fact at trial.
On October 1, 1998, Seung Kwak, Senior Vice President and manager of the International Department of Nara Bank, met with Lee. Lee told him about Hakro, and that Hakro's business was the same as CAG. Lee did not mention any relationship with Hana, but told Kwak he was unable to get financing for his business, which was why he started Hakro. The original Nara Bank note's maturity date was extended to November 20, 1998.
Prior to arranging purchase order financing with Hana, Lee took Hana a $20,000 check made out to “cash” with the notation “Sunny Kim (Hana).” The check was used to purchase a cashier's check, which was sent to Kyung Ja Shin-Oh in Canada. Lee claimed it was a currency exchange (dollars for Korean currency), and the funds for the check were borrowed from a friend.FN4
FN4. Nara Bank argued at trial this was an illegal money-laundering transaction.
Nara Bank's theory of liability was based upon a finding that Lee and the two corporations, CAG and Hakro, were all one and the same, or that Hakro was a successor of CAG. If either were the case, Hakro would become liable for any fraudulent transfer of assets belonging to CAG. Furthermore, Hana was responsible for Lee's conduct because Hana did not have an arm's length relationship with Lee, as evidenced by Sunnie Kim's long-term business relationship with Lee and her help in arranging the currency exchange.FN5
FN5. In its complaint, Nara Bank sought to recover the “funding” Hakro allegedly received from Hana, but prayed on that cause of action to recover the amount of the indebtedness, $521,995.46. Nara Bank obtained the default of the other defendants named in the complaint, i.e., CAG, Hakro, Lee, and Lee's wife Heung Lee, and has obtained default judgments against them in the sum of $521,995.46.
Nara Bank contended the conduct of Lee and Hana constituted a fraudulent transfer on two theories, actual and constructive fraud. First, Lee intended to hinder, defraud and delay Nara Bank in the collection of its debt. Second, Lee's companies were financially insolvent, and did not get reasonably equivalent value for the assets they transferred.
At the close of Nara Bank's case, Hana orally moved for non-suit on the basis there was no actual or constructive fraud (transfer for less than fair value). The motion was denied.
The jury was instructed that Nara Bank could prove a fraudulent transfer by showing either constructive fraud or actual fraud. Further, the jury was instructed that “[t]here is a dispute between the parties regarding whether Hakro Corporation and Castle Apparel Group, Inc. are truly separate companies or truly one company using different names.... The plaintiff has a burden of proving by a preponderance of the evidence that they are truly one company using different names. If you find that plaintiff has proven that they are truly one company using different names, then that company is the [debtor or transferor] referred to in these instructions.” The jury was also instructed on conspiracy.
With respect to remedies, the jury was instructed that if the jury found the transfer was held to be fraudulent, Nara Bank could recover “the lesser of, one, the amount necessary to satisfy Nara Bank's claim, or, two, the property's value when the fraudulent transfer was made.” Furthermore, Nara Bank could recover against Hana based on a showing that Hana engaged in fraudulent conduct, with the burden shifting to Hana to justify its conduct.
*5 The jury returned a general verdict in favor of Nara Bank, awarding it $521,995.46. After its motions for new trial and judgment notwithstanding the verdict were denied, Hana timely appealed the judgment.
Hana contends: (1) no fraudulent conveyance occurred because Hana paid for the goods sold and Hakro received fair value in the transaction as Hakro gave Hana an assignment in the accounts receivable; (2) Nara Bank failed to prove that an “asset” was transferred within the meaning of the UFTA because the goods at issue were owned by Hana, not Hakro, and were encumbered by valid liens; (3) neither constructive nor actual fraud was proved because the goods were sold at arm's length for market value; (4) Nara Bank failed to prove damages on a transfer-by-transfer basis, but instead wrongfully focused the jury on the amount owed to Nara Bank; (5) the trial court failed to instruct the jury on different damage theories for constructive and actual fraud; and (6) the trial court failed to instruct the jury that it could setoff any amounts paid to Nara Bank.
Nara Bank argues that the UFTA is to be liberally construed with a view to effecting its purpose, and that Hana's argument that Hakro and Lee never owned any of the assets in question is too formalistic. On the other hand, it contends that the evidence presented at trial established that the business arrangement between the two was based on a sale or assignment of accounts receivable; the transactions were structured precisely to hinder and delay Nara Bank in the collection of its debt, and the separate entity of Hakro was merely a fiction to implement this plan; and Hana has failed to account for the value received in exchange for the transfer of the assets, thus rebutting any conclusion that they were exchanged for reasonably equivalent value. The problem with these arguments is that they all ignore one basic fact, acknowledged by Hana and conceded by Nara Bank-Nara Bank had a security interest in all of CAG's assets.
I. STANDARD OF REVIEW.
Because a jury verdict is at issue, our standard of review is the “substantial evidence” test. (See, e.g., Bowers v. Bernards (1984) 150 Cal.App.3d 870, 872-873, 197 Cal.Rptr. 925 [we review the entire record in the light most favorable to the judgment to determine whether there are sufficient facts, whether contradicted or uncontradicted, to support the judgment].) However, where the issue is whether the plaintiff has presented sufficient evidence to state a claim to support the jury verdict in the first instance, our standard of review changes. We do not weigh the evidence or assess credibility, but consider whether the evidence, viewed in the light most favorable to the plaintiff and indulging all inferences in plaintiff's favor, nonetheless requires that judgment be entered for defendant as a matter of law because on the facts cannot sustain plaintiff's case. ( Alpert v. Villa Romano Homeowners Assn. (2000) 81 Cal.App.4th 1320, 1327, 96 Cal.Rptr.2d 364; see Gray v. Kircher (1987) 193 Cal.App.3d 1069, 1071, 236 Cal.Rptr. 891.) Indeed, where the decisive facts are undisputed, we are confronted with a question of law and are not bound by the findings of the jury. ( Ghirardo v. Antonioli (1994) 8 Cal.4th 791, 799, 35 Cal.Rptr.2d 418, 883 P.2d 960; Mole-Richardson Co. v. Franchise Tax Bd. (1990) 220 Cal.App.3d 889, 894, 269 Cal.Rptr. 662.)
II. NO FRAUDULENT TRANSFER OCCURRED BECAUSE NO “ASSET” WITHIN THE AMBIT OF FRAUDULENT TRANSFER LAW HAS BEEN “TRANSFERRED.”
*6 California adopted the Uniform Fraudulent Transfer Act (UFTA) in 1986. FN6 ( Wyzard v. Goller (1994) 23 Cal.App.4th 1183, 1189, 28 Cal.Rptr.2d 608; Civ.Code, § 3439 et seq.) The purpose of the UFTA is “ ‘to prevent debtors from placing property which legitimately should be available for the satisfaction of demands of creditors beyond their reach....’ “ ( Chichester v. Mason (1941) 43 Cal.App.2d 577, 584, 111 P.2d 362 [construing predecessor statute]; see also Fross v. Wotton (1935) 3 Cal.2d 384, 390, 44 P.2d 350; Yaesu Electronics Corp. v. Tamura (1994) 28 Cal.App.4th 8, 13, 33 Cal.Rptr.2d 283.) The UFTA has its roots in the English Statute of 13 Elizabeth. ( In re Pajaro Dunes Rental Agency, Inc. (N.D.Cal.1994) 174 B.R. 557, 571.)
FN6. When enacted, the UFTA replaced California's version of the Uniform Fraudulent Conveyance Act, though many provisions of that Act were carried forward. ( Reddy v. Gonzalez (1992) 8 Cal.App.4th 118, 122-123, 10 Cal.Rptr.2d 55; In re Pajaro Dunes Rental Agency, Inc. (Bankr.N.D.Cal.1994) 174 B.R. 557, 572.) The changes, in essence, tracked the changes that were made by Congress to various sections of the United States Bankruptcy Code in the Bankruptcy Reform Act of 1978, notably to section 548 concerning a trustee's avoidance powers. (11 U.S.C. § 548.) In many respects, California's fraudulent conveyance statutes are identical in form and substance to the provisions of section 548. Thus, where the provisions of California's UFTA and section 548 track each other, the legal analysis of the issue under each statute is identical. (See, In re United Energy Corp. (9th Cir.1991) 944 F.2d 589, 594.)
Under analogous federal bankruptcy law, the basic principle of fraudulent transfer law is that creditors are harmed or prejudiced only by a transfer of an interest in property that actually belonged to the debtor and that would have been available to creditors outside of bankruptcy. (See In re Superior Stamp & Coin Co., Inc. (9th Cir.2000) 223 F.3d 1004, 1007-1008; In re Victoria Alloys, Inc. (Bankr.N.D.Ohio 2001) 261 B.R. 424, 434.) The central inquiry is whether the transfer diminished the estate. If the debtor's estate is not diminished, the transfer normally is not avoidable. ( Matter of Maple Mortgage, Inc. (5th Cir.1996) 81 F.3d 592, 595; In re Rine & Rine Auctioneers, Inc. (8th Cir.1996) 74 F.3d 854, 861 [to be avoidable, a transfer must have placed something beyond the reach of creditors that could have been used to satisfy their claims].)
The California statutory provision relevant to the instant case is found at Civil Code section 3439.04, which provides for two methods of establishing a fraudulent transfer. “Actual fraud,” as defined in subdivision (a), is a transfer made with “actual intent to hinder, delay or defraud any debtor of the creditor.” FN7 “Constructive fraud,” as defined in subdivision (b), requires a showing that the debtor did not receive “reasonably equivalent value” for the transfer, and the transfer was made when the debtor (i) “was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction;” or (ii) the debtor “intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due.” FN8 A showing that the debtor did not receive reasonably equivalent value is a necessary element of a constructive fraud claim, but not a sufficient condition; the other two tests of subdivision (b) must be met. (See, e.g., In re Keener (Bankr.N.D.Tex.2001) 268 B.R. 912, 920-921.) Section 3439.04 is construed to mean a transfer is fraudulent if the provisions of either subdivision (a) or subdivision (b) are satisfied. ( Monastra v. Konica Business Machines U.S.A., Inc. (1996) 43 Cal.App.4th 1628, 1635, 51 Cal.Rptr.2d 528; Lyons v. Security Pacific Nat. Bank (1995) 40 Cal.App.4th 1001, 1020, 48 Cal.Rptr.2d 174 [proof of actual fraud alone is sufficient to establish a fraudulent transfer].) A creditor who is damaged by a transfer to a third party transferee can have the transfer set aside or seek other appropriate relief under Civil Code section 3439.07. ( Civ.Code, § 3439.08, subd .(a).)
FN7. In enacting section 3439.04, subdivision (a), the California legislature did not include in the statute a list of the “badges of fraud” found in the UFTA. Instead, the official comments to section 3439.04 list factors to be considered in determining whether actual fraud exists. The presence of one or more these factors does not give rise to a presumption of fraud, “but is merely evidence from which an inference of fraudulent intent may be drawn.” (Assem. Legis. Com. Comments (1986 Addition), 12A West's Ann. Civ.Code (1997 ed.), foll. § 3439.04, p. 288; In re Serrato (Bankr.N.D.Cal.1997) 214 B.R. 219, 229 [applying California UFTA].)
FN8. The full text of Civil Code section 3439.04 provides, “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, if the debtor made the transfer or incurred the obligation as follows: [¶] (a) With actual intent to hinder, delay, or defraud any creditor of the debtor. [¶] (b) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor: [¶] (1) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or [¶] (2) Intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due.”
*7 However, before the UFTA may even be applied to a transaction, the creditor must establish that an “asset” was “transferred” within the specific definitions of the UFTA. Under the UFTA, an “asset” is defined as “property of the debtor,” except (a) to the extent it is encumbered by a valid lien; (b) exempt under non-bankruptcy law, or (c) held by tenants in the entirety to the extent it is not subject to process by a creditor holding a claim against only one tenant. (Civ.Code, § 3439.01, subd. (a).) Property encumbered by a valid lien is not an asset for purposes of fraudulent transfer law to the extent of the encumbrance. (See In re Wintz Companies (8th Cir.BAP1999) 230 B.R. 848, 860 [applying Minnesota version of UFTA].) One reason for such a limitation is obvious: the lienor's remedy in the event of the debtor's default would be a foreclosure of the collateral, not an avoidance of the transfer. (See Cal. U. Com.Code, § 9601 et seq.) Furthermore, any assets of the debtor that were encumbered would not generally be available to pay the debts of its creditors, as those holding security interests would be first in line.
In Rich v. Rich (1991) 185 W.Va. 148 [405 S.E.2d 858], the plaintiff's former husband transferred property encumbered by an $18,700 lien to his second wife. ( Id. at p. 149, 405 S.E.2d 858.) Although there was evidence the property was worth in excess of the lien, the trial court had concluded there was no equity in the property and dismissed the wife's action. ( Id. at p. 150.) Rich concluded that only the portion of the property not encumbered by the lien constituted an asset for purposes of set aside under a theory of fraudulent transfer, and that the trial court erred in dismissing the action without taking evidence on potential equity in the property. ( Id. at p. 151, 405 S.E.2d 858.) Similarly, in Baker & Sons Equip. Co. v. GSO Equip. Leasing, Inc. (1993) 87 Ohio App.3d 644 [622 N.E.2d 1113], where the debtor's property had market value of less than the amount of the liens encumbering it, the property did not constitute an “asset” for purposes of fraudulent conveyance law. ( Id. at p. 652, 622 N.E.2d 1113; see also Kellstrom Bros. Painting v. Carriage Works, Inc. (1992) 117 Or.App. 275, 279 [844 P.2d 221, 222] [where valid security interest encumbered all of the assets of debtor, UFTA did not apply]; Eagle Pacific Ins. Co. v. Christensen Motor Yacht Corp. (1998) 135 Wash.2d 894, 911 [959 P.2d 1052, 1060].)
A “transfer” under the UFTA is defined as “every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, and creation of a lien or other encumbrance.” (Civ.Code, § 3439.01, subds.(a), (i).) Civil Code section 3439.06, subdivision (d) provides that “[a] transfer is not made until the debtor acquires rights in the asset transferred.” The essence of a transfer for purposes of fraudulent transfer law is that it depletes the estate of the debtor that would be available to pay creditors. ( In re Jarax Intern., Inc. (S.D.Fla.1993) 164 B.R. 180, 186.)
*8 In Essen v. Gilmore (2000) 259 Neb. 55 [607 N.W. 829], the debtor renounced his inheritance from his mother while an unexecuted judgment was pending against him. The debtor received no consideration for the renunciation. ( Id. at pp. 55-56, 607 N.W.2d 829.) Nonetheless, the renunciation did not constitute a fraudulent conveyance because the debtor did not “transfer” an “asset” within the meaning of Nebraska's UFTA. Because a timely filed renunciation related back to the time of death based upon the principle that a bequest was merely an offer which could be accepted or rejected, the beneficiary received no property, and therefore, the renunciation did not constitute a transfer because there was no asset to transfer. ( Id. at p. 60, 607 N.W.2d 829; see also Cal. Prob.Code, § 283 [disclaimer of interest in estate not a fraudulent transfer].) As summarized in Kellstrom, “[b]efore a creditor is entitled to relief under [the] UFTA, there must have been a ‘transfer’ by the debtor.” Because “transfer” under the UFTA is defined as “disposing of an asset,” and an asset does not include the debtor's property to the extent it is encumbered by a valid lien, and a lien includes a “security interest created by agreement,” the creditor's claim is not subject to the UFTA. ( Kellstrom Bros. Painting v. Carriage Works, Inc., supra, 117 Or.App. at p. 279, 844 P.2d 221.)
In the instant case, Nara Bank failed to establish in the first instance that its claim was within the ambit of the UFTA; on the contrary, the undisputed evidence establishes there was no “asset” that could be “transferred” pursuant to the UFTA. The facts do not, as a matter of law, supporting a finding that either Hana's funding of Hakro's purchase orders or Hakro's possession of merchandise in its warehouse constituted a fraudulent transfer of assets that should have been available to Nara Bank to satisfy CAG's debt. Essentially, Nara Bank has failed to state a claim.
Nara Bank repeatedly asserts that a valid UCC-1 financing statement and security agreement were in place; Hana does not dispute the existence of Nara Bank's security interest or the UCC-1. These would have given Nara Bank a security interest in any after-acquired assets of Hakro,FN9 based upon the successor corporation theory Nara Bank urged at trial.FN10 To the extent such assets were fully encumbered by liens, they do not constitute “assets” for purposes of the UFTA. It was therefore incumbent upon Nara Bank to establish the extent of any equity in the assets, if any, before it could proceed to go after a purported third party transferee, such as Hana.
FN9. This is the bone of contention for Nara Bank. By structuring the transaction so that it never took title to the goods, Hakro allegedly fraudulently “transferred” assets. Nara Bank alternatively attempts to categorize the “funding” as the asset that was transferred in an attempt to skirt the problem of liens without directly acknowledging that liens are the issue. Nara Bank's approach misses the target, as the relevant determination is whether or not the assets were free of liens and therefore could be subject to transfer. Nara Bank thus leap frogs over the threshold determination.
FN10. Hana does not contest the finding of successor corporation liability. Successor corporation liability is imposed upon a showing of (1) a lack of adequate consideration given for the assets of the predecessor corporation, or (2) one or more persons were officers, directors or stockholders of both corporations. ( Ray v. Alad Corp. (1977) 19 Cal.3d 22, 28, 136 Cal.Rptr. 574, 560 P.2d 3; see also Blank v. Olcovich Shoe Corp. (1937) 20 Cal.App.2d 456, 461, 67 P.2d 376.) The evidence established that Hakro shared the same officers and shareholders as CAG, used the same business premises, phone number and fax number, and held itself out as “Castle,” providing sufficient evidentiary basis for a finding of successor liability.
However, there was no evidence concerning potential equity in the inventory transferred. The record discloses that Nara Bank's security interest was in a third position. It was incumbent upon Nara Bank to show Hakro's assets were not fully encumbered in order to take advantage of the UFTA, as the UFTA simply does not apply to encumbered assets. ( Eagle Pacific Ins. Co. v. Christensen Motor Yacht Corp., supra, at p. 911, 959 P.2d 1052.)
*9 Because we decide the case on this basis, we need not address any arguments concerning whether or not the parties' conduct in this case constituted actual or constructive fraud, or whether a conspiracy existed. Nor do we need concern ourselves with the “legitimacy” of the basic structure of the transaction, i.e., whether it was factoring, purchase order financing, or some other financing device. In any event, it was secured financing. Both parties clearly understood the risks of dealing with clothing importers such as Mr. Lee, who was essentially a salesman who arranged transactions and received a “commission” off the proceeds. Thus, the battery of security Nara Bank required, including a personal guaranty from Mr. Lee.
In addition, turning to the policies behind the UFTA, which is to maintain the debtor's estate to pay creditors, there is no evidence the purchase order transactions in any way depleted whatever estate Hakro might have had. (Indeed, the evidence of Hakro's assets, other than the merchandise it apparently never owned, Lee's paltry capitalization, or the money it made off the transactions, is practically non-existent.) On the other hand, any proceeds from the transactions that actually came into Hakro through the purchase order transactions were in part used to pay Nara Bank's indebtedness. We thus find Nara Bank's attempt to categorize the transaction as some sort of fraud upon it disingenuous, particularly when it knew of Hakro's formation and took no action until Lee stopped paying its debt. This scenario does not constitute a violation of the policies behind fraudulent transfer law, and illustrates the difficulties of attempting to apply fraudulent transfer law to what is essentially a UCC Article 9 problem.
The judgment of the superior court is reversed, and the superior court is directed to enter judgment in favor of appellant. Appellant to recover costs on appeal.
We concur: PERLUSS, P.J., and JOHNSON, J.
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