Tuesday, April 2, 2002
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Marital Property Division Subject to Fraudulent-Transfers Law—C.A.
By KENNETH OFGANG, Staff Writer/Appellate Courts
A transfer of property between estranged spouses is subject to the Uniform Fraudulent Transfers Act, the Sixth District Court of Appeal has ruled.
Taking issue with a contrary Fourth District Court of Appeal ruling, Gagan v. Gouyd (1999) 73 Cal.App.4th 835, the panel Friday concluded that marital property transfers are not implicitly exempt from the act.
The justices reversed a summary judgment in favor of a former Bay Area physician who gave up his practice after his marriage broke up and it was determined that he was the father of a child born to a woman with whom he had an extramarital affair.
Rhina Mejia, the mother of Danilo Reed’s child, sued Reed and his ex-wife, Violeta Reed in 1997. She is seeking to set aside Danilo Reed’s transfer of interests in several real properties to his ex-wife as part of a 1995 marital settlement in which Violeta Reed gave up her interests in Danilo Reed’s later-abandoned medical practice.
Mejia claims the medical practice was fraudulently overvalued in order to justify the real property transfers and enable Danilo Reed to avoid paying her $1,153 monthly in child support.
Summary Judgment
A Santa Clara Superior Court judge granted summary judgment to the Reeds, finding that there was no intent to defraud and that Danilo Reed was not rendered insolvent by the transfers.
The court did not expressly rule on whether the UFTA applied to marital transfers. Gagan had not yet been decided at the time the issues were briefed and submitted.
The UFTA applies both to “fraudulent in fact” transfers—those intentionally designed to place property beyond the reach of creditors—and to transfers that are constructively fraudulent or “fraudulent in law”—meaning that the transferor failed to receive full value and was insolvent at the time or became insolvent as a result of the transfer.
Where a transfer is fraudulent in fact, any creditor may sue to set it aside. Where it is only fraudulent in law, however, only a pre-transfer creditor may sue.
No Exemption
Justice William Wunderlich, writing for the Court of Appeal, noted that the UFTA contains no express exemption for marital property transfers. He also noted that the State Bar, in its study of the UFTA prior to its adoption by the Legislature, questioned whether it should apply to certain types of transfers—including marital property agreements—but that none of the types of transfers mentioned were excluded when the statute was enacted.
He also noted that marital transfers may be set aside as fraudulent in bankruptcy proceedings, and concluded that the same rule should apply under the UFTA.
“We do not believe that the Legislature intended the Family Code’s provisions to operate as a shield for fraud,” he wrote. “…If the Legislature intends to shield property divisions in dissolution actions from liability under the UFTA, it should adopt an express provision to that effect.”
The evidence presented in support of the summary judgment motion, Wunderlich went on to say, did not establish that Danilo Reed’s real property transfers were not fraudulent.
The jurist noted that the MSA was executed less than a month after the child support order was entered. That evidence raised a reasonable inference of fraudulent intent, Wunderlich said, which the trial judge was “not permitted to ignore…or to weigh…against other inferences or other evidence.”
Even if there was no intent to defraud, the justice went on to say, the plaintiff presented sufficient evidence to raise a triable issue as to whether there was constructive fraud. There is clearly conflicting evidence as to the value of the medical practice at the time of transfer, he noted.
In determining that Reed was solvent at the time of the transfer, Wunderlich wrote, the trial judge erroneously ruled that the present value of the future child-support obligation did not count as a liability because it was contingent. “[UFTA] expressly recognizes that an unmatured, contingent claim as a debt,” the justice wrote.
The plaintiff’s evidence, he went on to say, suggests that the child support obligation exceeded the value of the medical practice, which would have rendered Reed insolvent and the transfers constructively fraudulent. The conflicting evidence must be sorted out at trial, he said.
The case is Mejia v. Reed, 02 S.O.S. 1612.
Copyright 2002, Metropolitan News Company