Stadtmueller v. Sarkisian (In re Medina)

619 B.R. 236

IN RE: Rudolph MEDINA a.k.a. Rudy Medina, Debtor.

Ronald E. Stadtmueller, Chapter 7 Trustee, Appellant,

v.John Sarkisian; Bernadette Sarkisian, Appellees.

BAP No. SC-19-1299-FSG

Bk. No. 12-13764-LT7

Adv. No. 18-90039-LT

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Filed August 14, 2020

Melissa A. Blackburn, Joniaux of Law Offices of William P. Fennell, APLC, argued for appellant;

Melisa N. McKellar of Grant & Kessler APC, argued for appellees.

Before: FARIS, SPRAKER, and GAN, Bankruptcy Judges.

FARIS, Bankruptcy Judge:

INTRODUCTION

Chapter 7¹ trustee Ronald E. Stadtmueller ("Trustee") holds a money judgment. While he was attempting to enforce the judgment, the judgment debtor and his wife entered into an agreement to split their community property in equal shares and "transmute" their interests into separate property. The judgment debtor and his wife then claimed that the Trustee could not enforce the judgment against the wife's "transmuted" separate property. (Under California law, community property is subject to each spouse's debts, but separate property is not subject to the other spouse's separate debts.) If the agreement were effective, the assets available to satisfy the Trustee's judgment would have been cut in half.

The Trustee argued that the transmutation was voidable under the California Uniform Voidable Transactions Act ("UVTA"). The bankruptcy court held that the transmutation agreement between the judgment debtor and his wife constituted a "transfer" under the UVTA. However, it held that the Trustee had to prove actual damages and rejected the Trustee's argument that moving half of the judgment debtor's property out of the Trustee's reach established injury under the UVTA. The court granted summary judgment in favor of the judgment debtor and his wife, and the Trustee appealed.

The UVTA does not require a plaintiff to prove actual damages. Accordingly, it was error to grant summary judgment in favor of the judgment debtor and his wife. We REVERSE and REMAND.

FACTUAL BACKGROUND

A. Mr. Medina's bankruptcy case and ongoing state court litigation

When debtor Rudolph Medina filed a chapter 11 petition, he was litigating a state court lawsuit against John Sarkisian (the "State Court Action"). The bankruptcy court authorized him to retain counsel and continue the State Court Action.

Later, Mr. Medina obtained a partial judgment against Mr. Sarkisian in an approximate net amount of $1.4 million. Mr. Sarkisian appealed.

A few months later, the bankruptcy court converted the case to one under chapter 7 and appointed the Trustee to administer the estate. The Trustee also received court approval to employ counsel and pursue the State Court Action.

B. The Sarkisians' Transmutation Agreement

While the appeal in the State Court Action was pending, the Trustee conducted a judgment debtor examination of Mr. Sarkisian. He testified that he did not have any pre- or post-marital agreement with his wife.

Less than a month after the judgment debtor examination, and unbeknownst to Mr. Medina or the Trustee, Mr. Sarkisian and his wife entered into an agreement (the "Transmutation Agreement"). The Transmutation Agreement provided that each of the Sarkisians would obtain a fifty percent interest in each item of their community property,² and each spouse's share would be converted to separate property. According to the Transmutation Agreement, Mr. Sarkisian's separate assets totaled approximately $3.8 million plus a half-interest in a limited liability corporation and a family trust of undisclosed value. The Transmutation Agreement also listed the couple's obligations in an approximate aggregate amount of $4.1 million.

C. The Trustee's adversary proceeding

After the appeal was decided, the state court entered a modified judgment in favor of Mr. Medina for $1,718,271 and in favor of Mr. Sarkisian for $200,000 (the "State Court Judgment"). That judgment is final and no longer appealable.

The Trustee then conducted another judgment debtor examination of Mr. Sarkisian. He learned for the first time that the Sarkisians had executed the Transmutation Agreement.

The Trustee filed an adversary proceeding against the Sarkisians, asserting that Mr. Sarkisian "made the property transfers alleged herein to Bernadette Sarkisian with the actual intent to hinder, delay, or defraud" the bankruptcy estate with regard to the State Court Judgment. The Trustee sought avoidance of those transfers under the UVTA, California Civil Code ("CCC") sections 3439 to 3439.14, and other remedies.

D. The first round of summary judgment motions

On cross-motions for summary judgment, the bankruptcy court held that "the Transmutation Agreement was a transfer for the purposes of the UVTA.... The UVTA only comes into play when a property owner acts to remove property from the reach of creditors. It is very clear that the Transmutation Agreement did just that with respect to [Mr. Sarkisian] and his creditors." The court denied summary judgment in all other respects.

E. The Sarkisians' second motion for summary judgment

Shortly after discovery closed, the Sarkisians filed another motion for summary judgment (the "Motion"), arguing that the Trustee could not establish that the Transmutation Agreement caused actual injury.

Citing a California model jury instruction, the Sarkisians argued that CCC section 3439.04(a)(1) requires a showing of "actual injury." They relied on Mehrtash v. Mehrtash , 93 Cal. App. 4th 75, 80, 112 Cal.Rptr.2d 802 (2001), in which the California Court of Appeal stated that "[m]ere intent to delay or defraud is not sufficient; injury to the creditor must be shown affirmatively. In other words, prejudice to the plaintiff is essential." They asserted that the Trustee must prove that Mr. Sarkisian was rendered insolvent by the transfer or that the transfer put a specific asset beyond the reach of the Trustee that would have been available to pay the State Court Judgment.

In response, the Trustee argued that he had demonstrated that the estate had been harmed. He contended that the Sarkisians' "litigation shenanigans" and "proficiency in obstruction" had "made the collection of this fully liquidated fraud judgment extremely difficult." He argued that Mehrtash was distinguishable and that the real property at issue there was over-encumbered and had no value as an asset. In contrast, Mr. Sarkisian's assets listed in the Transmutation Agreement totaled at least $3.8 million.

The bankruptcy court issued a tentative ruling and stated that it was inclined to grant the Motion because "[t]he Trustee has identified no evidence that this bankruptcy estate suffered any injury by virtue of the transmutation." The court cited Mehrtash and its progeny for the proposition that "injury to the creditor must be shown affirmatively." It was concerned with the Trustee's failure to offer any evidence of injury, such as the lack of enough funds to satisfy Mr. Sarkisian's obligations posttransfer.

At the hearing on the Motion, the court acknowledged that the Transmutation Agreement put certain assets out of reach of the bankruptcy estate but found that there was "cushion" to satisfy the State Court Judgment. Thus, it concluded that there was no injury because the transfer did not make collection more difficult or render Mr. Sarkisian unable to pay his debts.

The bankruptcy court granted the Motion in its entirety as to all claims. It incorporated its tentative ruling into its order and held that "one of the elements of a UVTA claim is that Plaintiff must have suffered actual damages as result of the alleged voidable transaction .... [B]ecause Plaintiff failed to set forth any evidence of damages, the Court finds that there is no genuine dispute as to the essential element of damages ...."

The Trustee timely appealed.³

JURISDICTION

The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(H). We have jurisdiction under 28 U.S.C. § 158.

ISSUE

Whether the bankruptcy court erred in granting the Sarkisians summary judgment.

STANDARD OF REVIEW

We review de novo the bankruptcy court's decision to grant or deny summary judgment. Boyajian v. New Falls Corp. (In re Boyajian) , 564 F.3d 1088, 1090 (9th Cir. 2009). "De novo review requires that we consider a matter anew, as if no decision had been made previously." Francis v. Wallace (In re Francis) , 505 B.R. 914, 917 (9th Cir. BAP 2014) (citations omitted).

DISCUSSION

A. Only "material" facts are properly considered in summary judgment proceedings.

Summary judgment should be granted "if the movant shows that there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law." Wank v. Gordon (In re Wank) , 505 B.R. 878, 886 (9th Cir. BAP 2014) (citing Civil Rule 56(a), made applicable in adversary proceedings by Rule 7056). An issue is "material" if it might legally affect the outcome of the case. Far Out Prods., Inc. v. Oskar , 247 F.3d 986, 992 (9th Cir. 2001) (citing Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248-49, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) ).

A nonmoving party who bears the burden of proof at trial must make a "sufficient showing" that he can establish an element of his case at trial. Celotex Corp. v. Catrett , 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). But this only applies if the fact is "material," i.e., if it relates to an element of the nonmoving party's prima facie case.

Thus, to determine what facts were material, we must identify the elements of the Trustee's case under the UVTA.

B. The bankruptcy court erred in requiring the Trustee to prove "actual harm" or "actual damages" under the UVTA.

Under the UVTA, "actual damages" or the insufficiency of the debtor's remaining assets is not an element of an actual intentional fraudulent transfer claim. Requiring the Trustee to provide evidence of a fact that is not material was error.

1. Actual damages or harm is not an element of an "actual" fraudulent transfer claim under...