Asset Protection v Fraudulent Transfer: Debtors’ Attempts To Avoid Paying Money Judgments
By Ronald R. Rossi
February 17, 2021
Someone recently asked me, “How many total years’ experience in litigating real estate cases does your firm have?” That total is 186 years, which blew my mind.
With several recent cases at our firm and a recent appellate decision in mind, I asked our team how many times we’ve recorded a judgment against someone and they have fraudulently tried to avoid payment of that judgment by transferring properties out of their name into other entities or to other states. We agreed we couldn’t be certain, but our best estimate was well over 100.
Lawyers have a saying: “getting a judgment is one thing; collecting on it is another.”
Just this month, the Second Appellate District Court out of Santa Barbara rendered its decision in Nagel v. Westen, et al., which gives you a good idea of what happens in these types of cases.
The facts in the Nagel case were pretty straightforward. The defendant sellers built a home, which was supposedly “architecturally significant,” in the Brentwood area of West Los Angeles in the early 1990s. The Nagels bought the home for $2.2 million in 2011. They soon discovered that the sellers misrepresented and did not disclose substantial water intrusion issues. They contended the sellers knew that the house was uninhabitable. The buyers tried to remedy the water intrusion and water damage but ultimately sued the sellers on a variety of theories, including fraud.
The case went to arbitration, which resulted in the buyers recovering $4.5 million in damages (including the loss of the home, their efforts to repair the damage, and attorneys’ fees and costs).
The court found that as the arbitration was winding down and it was becoming obvious that the sellers would lose, the sellers transferred most of their assets out of California. They took the proceeds of the sale and invested those monies in the purchase of a home in Texas. Texas has a homestead law that protects 100% of the owners’ equity against any judgment liens. In California, the homestead was recently increased to $600,000.
The sellers took the remainder of the funds and invested in various out-of-state annuities, and they also changed their limited liability company from a California company to a Nevada company.
The buyers did what we have done over the years – they filed an action under the Uniform Voidable Transactions Act (UVTA), which is contained in Civil Code § 3439, et. seq.
The lower court threw out the lawsuit, contending that there was not a third party transfer under the Act because all the sellers did was transfer ownership from one property to another in a different state.
The Appellate Court reversed the lower court’s decision. It explained the purpose of the UVTA, which is to “prevent debtors from placing, beyond the reach of creditors, property that should be made available to satisfy a debt.” The law does not require a fraudulent intent. The court opined that under the UVTA, there are a variety of remedies a creditor can utilize to reach assets that have been transferred. The sellers, however, contended it was not a transfer under the UVTA and, therefore, the creditor could not reach the equity in the Texas home. The Court disagreed and held that such was not the intent of the law. Under the UVTA, “physically relocating personal property and transmitting or transporting the sale proceeds out of the state, and then transmuting into a different legal form, may constitute a direct or indirect mode of parting with assets or of ones interests in those assets. As such, Nagel adequately alleged a transfer under the UVTA.”
This is a fairly standard example of a debtor attempting to avoid paying a California judgment. The court opined that there is a fine line between transferring assets away from a creditor to avoid a judgment and asset protection. A line once crossed creates liability and allows for a variety of remedies to ensure collection by the creditor.