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 Post subject: FT - Kaufman v. Reed (2/3/2004)
PostPosted: Thu Feb 26, 2009 3:39 pm 

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Kaufman v. Reed,
No. B163593 (Cal.App. Dist.2 02/03/2004)
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT DIVISION FOUR

February 3, 2004

MICHAEL KAUFMAN, PLAINTIFF AND APPELLANT,
v.
WILLIAM ORVIL REED ET AL., DEFENDANTS AND RESPONDENTS.

APPEAL from a judgment of the Superior Court of Los Angeles County, Andria K. Richey, Judge. Affirmed. (Los Angeles County Super. Ct. No. BC239997)

Telanoff & Telanoff and Adam J. Telanoff for Plaintiff and Appellant.

H. Clay Jacke, II for Defendants and Respondents.

The opinion of the court was delivered by: Epstein, Acting P.J.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

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 This opinion has not been certified for publication or ordered published for purposes of rule 977.

Michael Kaufman appeals from judgment against him in his action to enforce a judgment against William Reed and Rural Residential Redevelopment, Inc. Kaufman argues the trial court erred in refusing to set aside as fraudulent the transfer of a home which was an asset of William Reed. He also contends the trial court erred in ruling there was insufficient evidence to find that William's son, Reginald, was the alter ego of Rural Residential. We find no error and affirm.

FACTUAL AND PROCEDURAL SUMMARY

This case involves the tangled interests of William O. Reed; his sister, the late Bernice Boone; his ex-wife, Patricia Rogers Red; and William and Patricia's son and daughter in various assets, especially the ownership of 2259 Santa Rosa Avenue in Altadena (the Santa Rosa property). Patricia and judgment creditor Michael Kaufman both claimed a right to Santa Rosa. These interests were litigated in one probate action and two civil cases which we describe in more detail below. Because both Kaufman and Patricia Reed claimed that William fraudulently transferred the Santa Rosa property to Bernice Boone, their civil cases were eventually consolidated.

A. The Family

William Reed's first wife was Tommie Louise Sparks Reed, who died in 1965. William began living with Patricia at the Santa Rosa property in the mid 1960's. They were married in 1971 or 1973 and were divorced in Texas in May 1993. Despite the divorce, William and Patricia continued to live as husband and wife until 2000. They had two children, son Reginald and daughter Franchesca.

William Reed sometimes acknowledged James L. Reed as his illegitimate son, although he sometimes denied paternity. James Reed worked for William and Patricia as an employee of both Pacific Coast Mattress Company, and their corporation, The Bed Sleep Shops. Bernice Boone (also referred to as Bernice Reed) Celestine Smith and Alfreda Glasco were William's sisters. Anita Glasco is Alfreda's daughter. In April 1996, Bernice Boone died, and Celestine Smith and Reginald Reed were named administrators of her estate.

For a time, William and Reginald purchased land and developed houses in Texas under the Rural Residential Redevelopment name.

B. The Chain of Title

William Reed obtained title to the Santa Rosa property through the estate of his first wife Tommie, in 1974. After William and Patricia married, William transferred title to the Santa Rosa property to The Bed Sleep Shops, by grant deed in June 1974. On July 26, 1983, William, as president, and Patricia, as secretary of The Bed Sleep Shops signed a grant deed transferring title to James L. Reed. James did not pay for the transfer.

Eleven days later, in August 1983, title was transferred from James to William's sister, Bernice Boone. Bernice did not pay James for the transfer of the Santa Rosa property. Patricia testified that this was because William felt more comfortable having the property in Bernice's name. William testified that Bernice had loaned him money and the transfer was in payment for that debt, but he had no written documentation and could not recall the amount of the debt. Alternatively, William testified that he directed James to transfer the Santa Rosa property to Bernice so she could help him procure funds for business purposes. William believed the property was his throughout these transfers.

In 1983, Bernice obtained a mortgage on the Santa Rosa property, which was paid off from the proceeds of the sale of other property owned by William and Patricia. According to William, part of the mortgage proceeds went to Bernice and he got $50,000 of it. Bernice only lived in the house for one period, with William and Patricia, when she was recovering from a mugging. She had her own apartment. William and Patricia, not Bernice, paid the mortgage and taxes on the Santa Rosa property.

In 1983, Bernice wrote a memorandum stating that "to make possible certain business transactions" several properties belonging to William and Patricia and their children, Reginald and Franchesca, had been "temporarily transferred" into her name. The Santa Rosa property was among the properties listed on the memorandum. Bernice wrote: "These properties are the sole property of the above individuals [William (Orvil), Patricia, Reginald, and Franchesca] and I own no interest in them, financial or otherwise . . . ." Bernice died in 1996. This memorandum was not provided to the court during the probate of Bernice's estate.

In the probate of the estate of Bernice Boone (LASC No. PB040522), title to the Santa Rosa property was distributed one-third to Reginald Reed, one-third to Franchesca Reed, and one-third to the Estate of Alfreda Glasco. We are informed that ultimately the other heirs transferred their interests to Reginald Reed.

After a falling out with William in 2000, Patricia claimed an interest in the Santa Rosa property, and using a power of attorney previously granted to her by Reginald Reed on October 3, 1992, recorded a deed transferring Reginald's interest to herself. William claimed that this transfer took place in June 1999.

According to Patricia, she and William lived in the Santa Rosa property continuously from the 1960's until Patricia was removed in 2000. But she also testified that she and William purchased a home in Texas and lived there between 1989 and 2000. They paid the bills for the Texas and California properties from a joint bank account. William controlled their finances. After the divorce in Texas in 1993, Patricia returned to live at the Santa Rosa property. Patricia testified that at one time or another, she and William had most of their properties in Bernice's name.

C. The Kaufman Action

In 1988, Michael and Ava Kaufman purchased a building on Hyde Park Boulevard in Los Angeles from Rural Residential Redevelopment Corporation (Rural Residential). Rural Residential was incorporated in 1988, with William and Reginald as officers and shareholders. The Kaufmans sued because of problems with the building and, in May 1995, obtained a judgment for $176,426.43 against Rural Residential and William O. Reed as alter ego of the corporation.

Michael Kaufman learned that William and Patricia had transferred four parcels of real property and $25,000 in cash to William's sister, Bernice Boone. In November 2000, Kaufman sued to set aside these transfers as fraudulent (LASC No. BC239997). *fn1 His second cause of action alleged that Reginald Reed, son of William and Patricia, was liable for the judgment against Rural Residential on an alter ego theory. The named defendants were William O. Reed, Rural Residential, Reginald Reed, Franchesca Reed, and the Estate of Bernice Boone. The defendants answered the complaint.

D. Patricia's Action

Patricia sued William in Los Angeles Superior Court case No. BC241337, alleging causes of action for constructive trust, resulting trust, and to quiet title to the Santa Rosa property. Because her action also involved title to that property, it was consolidated with the Kaufman action.

E. Trial Court Decision

Following a court trial, the judge ruled that Patricia had prevailed on her claim, based on a finding that the Santa Rosa property always was community property belonging to William and Patricia. Finding there was extrinsic fraud because Patricia's interest was withheld from the probate court in Bernice's estate, the trial court awarded Patricia one-half interest in the property and Reginald and Franchesca the other one-half. The trial court found that Kaufman had not sustained his burden of proof, and entered judgment for respondents on his claim.

Kaufman filed a timely appeal, but Patricia did not; the judgment as to her is final.

DISCUSSION

I.

Kaufman first argues the trial court erred in finding sufficient evidence to set aside the transfer of the Santa Rosa property as to Patricia, yet finding against him on his complaint. This argument confuses extrinsic fraud, which was the basis for the trial court's ruling as to Patricia, with fraudulent transfer, which was the basis for Kaufman's claim.

As to Patricia's claim, the trial court found: "The theory basically is that no matter how this title was held on paper, it was always the community property of William and Patricia. It was treated as such in every way. It was understood by everybody to be such, and I think where the extrinsic fraud comes in is that even if you were to believe that she knew what was happening in the probate [of Bernice's estate], even that is consistent with the history of the way this property was titled but not the way it was handled. And I think William continued to lead her to believe that she always had an interest in that property until the day that he and his son threw her out in the street."

"`Extrinsic fraud occurs when a party is deprived of the opportunity to present his claim or defense to the court; where he was kept ignorant or, other than from his own negligence, fraudulently prevented from fully participating in the proceeding. [Citation.] Examples of extrinsic fraud are: concealment of the existence of a community property asset, failure to give notice of the action to the other party, and convincing the other party not to obtain counsel because the matter will not proceed (and then it does proceed). [Citation.] The essence of extrinsic fraud is one party's preventing the other from having his day in court.' (City and County of San Francisco v. Cartagena (1995) 35 Cal.App.4th 1061, 1067 [41 Cal.Rptr.2d 797]; accord, Estate of Sanders [(1985)] 40 Cal.3d [607] at p. 614.)" (Estate of McGuigan (2000) 83 Cal.App.4th 639, 649-650.)

Kaufman construes the finding of extrinsic fraud as a finding that the various transfers of the property were fraudulent. From this, he argues "[I]n order for William Reed to have been able to transfer a one-half interest in the Property to Patricia Rogers, all of the intervening transfers would have had to have been fraudulent. In particular, the last transfer of the property from the Estate of Bernice Boone to Reginald Reed, Franchesca Reed and Anita Glasco had to have been found to be fraudulent. As such, there was a fraudulent transfer after the existence of the Kaufman judgment in the underlying case." Kaufman argues: "This is a fraudulent transfer which must be set aside."

The first problem with this argument is that the distribution of the Santa Rosa property through the probate of Bernice's estate does not meet the definition of "transfer" under the Uniform Fraudulent Transfer Act. Civil Code *fn2 section 3439.01, subdivision (i) provides: "`Transfer' means 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." The probate court's order directing that title to the Santa Rosa property be divided between Reginald, Franchesca, and their cousin Anita does not come within this definition.

The more substantial problem with Kaufman's argument is that the trial court did not find the elements of fraud required by the Uniform Fraudulent Transfer Act. It found that Patricia had a community property interest in the property which William could not convey and which was not litigated in the probate of Bernice's estate. The trial court expressly found that the executors, Celestine Smith and Reginald, failed to apprise the probate court of Patricia's interest in the Santa Rosa property.

Kaufman's claim was under the Uniform Fraudulent Transfer Act section 3439 et seq. 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.'" Under section 3439.04, a transfer is fraudulent if the provisions of either subdivision (a) or subdivision (b) are satisfied. (Annod Corp. v. Hamilton & Samuels (2002) 100 Cal.App.4th 1286, 1294.)

The trial court did not make findings that address the elements of the fraudulent transfer cause of action. While it found that William breached a fiduciary duty to Patricia by participating in the distribution of the Santa Rosa property through Bernice's estate, which amounted to a concealment of community property, it did not find that William acted with the actual intent to commit fraud required by section 3439.04, subdivision (a). The court also found that Bernice held the property in trust for William and Patricia. But the trial court did not make findings that satisfy the constructive fraud provisions section 3439.04, subdivision (b).

The trial court made it clear that its findings as to Patricia were not to be construed as findings of a fraudulent transfer to warrant relief to Kaufman. It granted respondents judgment on Kaufman's complaint, and in its statement of decision said: "Plaintiff Kaufman did not meet its burden to prove that William O. Reed, as a debtor, transfer [sic] of the property was fraudulent as to a creditor." The evidence established that Patricia was aware of all of the transfers of the Santa Rosa property.

Kaufman disputes this conclusion, arguing that there were sufficient "badges of fraud" established to prove a fraudulent transfer. We limit our analysis to the transfer to Bernice in light of our conclusion that the probate court distribution did not qualify as a transfer under the Act. As to the transfer to Bernice, we agree with Kaufman that there was evidence that the Santa Rosa property was transferred to an insider, Bernice; that William retained possession and control over the property after the transfer; and that William did not receive reasonably equivalent consideration.

But this is not enough. There was no evidence that William transferred the property to Bernice with "actual intent to hinder, delay, or defraud any creditor of the debtor" as required for actual fraud under section 3439.04, subdivision (a). Nor was there evidence that when William transferred the property to Bernice, he either "(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." (ยง 3439.04, subd. (b).)

Kaufman attempts to satisfy these elements by citing evidence that William was insolvent after the 1983 transfer because he filed for bankruptcy in 1985. This evidence is too tenuous to establish the nexus required by the Act. Kaufman also asserts that William has been living on his Social Security for several years. He fails to provide a citation to the record to support this assertion, and we therefore decline to consider the argument. (See Lewis v. County of Sacramento (2001) 93 Cal.App.4th 107, 113.) Kaufman apparently would have us assume that living on Social Security benefits would in itself support a finding that William is insolvent within the meaning of section 3439.04, subdivision (b). This we decline to do.

In his reply brief, Kaufman argues the trial court erred in overlooking other transfers from William to Reginald. But in summarizing the evidence relating to the transfer of these cashier's checks, insurance proceeds, and other assets, Kaufman fails to demonstrate that each transfer met the requirements for a fraudulent transfer under section 3439 et seq. Evidence that some of these assets were transferred to Reginald is not enough to meet Kaufman's burden of proof.

II.

Kaufman argues the trial court erred in failing to find Reginald was the alter ego of the Rural Residential Redevelopment corporation. We conclude Kaufman failed to meet his burden of proof on this theory.

"Ordinarily, a corporation is regarded as a legal entity, separate and distinct from its stockholders, officers and directors, with separate and distinct liabilities and obligations. [Citations.] A corporate identity may be disregarded -- the `corporate veil' pierced --where an abuse of the corporate privilege justifies holding the equitable ownership of a corporation liable for the actions of the corporation. (Roman Catholic Archbishop v. Superior Court (1971) 15 Cal.App.3d 405, 411 [93 Cal.Rptr. 338].) Under the alter ego doctrine, then, when the corporate form is used to perpetrate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, the courts will ignore the corporate entity and deem the corporation's acts to be those of the persons or organizations actually controlling the corporation, in most instances the equitable owners. [Citations.] The alter ego doctrine prevents individuals or other corporations from misusing the corporate laws by the device of a sham corporate entity formed for the purpose of committing fraud or other misdeeds. (Associated Vendors, Inc. v. Oakland Meat Co. (1962) 210 Cal.App.2d 825, 842 [26 Cal.Rptr. 806].)" (Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 538-539.)

The Sonora Diamond court examined the showing required to establish alter ego liability. "In California, two conditions must be met before the alter ego doctrine will be invoked. First, there must be such a unity of interest and ownership between the corporation and its equitable owner that the separate personalities of the corporation and the shareholder do not in reality exist. Second, there must be an inequitable result if the acts in question are treated as those of the corporation alone. [Citations.] `Among the factors to be considered in applying the doctrine are commingling of funds and other assets of the two entities, the holding out by one entity that it is liable for the debts of the other, identical equitable ownership in the two entities, use of the same offices and employees, and use of one as a mere shell or conduit for the affairs of the other.' [Citations.] Other factors which have been described in the case law include inadequate capitalization, disregard of corporate formalities, lack of segregation of corporate records, and identical directors and officers. [Citations.] No one characteristic governs, but the courts must look at all the circumstances to determine whether the doctrine should be applied. (Talbot v. Fresno-Pacific Corp. (1960) 181 Cal.App.2d 425, 432 [5 Cal.Rptr. 361].) Alter ego is an extreme remedy, sparingly used. (Calvert [v. Huckins (E.D.Cal. 1995)] 875 F.Supp. [674] at p. 678.)" (Sonora Diamond, supra, 83 Cal.App.4th at pp. 538-539.)

"It is the plaintiff's burden to overcome the presumption of the separate existence of the corporate entity. (MacPherson v. Eccleston (1961) 190 Cal.App.2d 24, 27 [11 Cal.Rptr. 671].) The issue is one for the trier of fact and is reviewed on appeal according to the usual standards for sufficiency of the evidence to support the conclusion. (H.A.S. Loan Service, Inc. [v. McColgan (1943)] 21 Cal.2d [518] at p. 524.)" (Mid-Century Ins. Co. v. Gardner (1992) 9 Cal.App.4th 1205, 1212-1213.)

Assuming that a person can be the alter ego of a corporation (rather than the other way around) there was insufficient evidence to establish that Reginald was the alter ego of Rural Residential. William testified that while Reginald was an officer and shareholder of the corporation, he had no power or control and was not authorized to act on its behalf. Reginald testified that he acted as directed by William. Kaufman cites evidence that William ceased any connection with Rural Residential in 1990, and that Reginald revived it in 1993. He asserts: "Reginald Reed was the only person affiliated with the corporation at that time. It stands to reason, and no contrary evidence was presented, that Reginald Reed revived the corporation and controlled its actions from at least 1993 forward." Even if there were evidence to support this assumption, control of the corporation is not enough. Kaufman did not satisfy his burden of proof on the alter ego theory.

DISPOSITION

The judgment is affirmed. Respondents are to have their costs on appeal.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS.

We concur:

HASTINGS, J.

CURRY, J.


Opinion Footnotes

*fn1 The action was brought only in Michael Kaufman's name.

*fn2 All statutory references are to this code unless otherwise indicated.


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