Uniform Fraudulent Transfer Act
Since 1987, the Uniform Fraudulent Transfer Act has provided unsecured creditors remedies against debtors who make transfers of their properties or incur obligations against their property for the sole purpose of placing assets beyond the reach of the creditors. Factors considered in determining whether a transaction by an owner is "fraudulent" include:
- Whether the transfer was to an insider;
- If the debtor had retained possession or control of the property transferred;
- Whether the transfer or obligation was disclosed or concealed;
- Whether the debtor was sued or threatened with suit before the transfer was made or the obligation incurred;
- Whether the transfer was substantially all of the debtor's assets;
- If the debtor has absconded (i.e., run off with the money);
- If the debtor had removed or concealed assets;
- Whether the value of consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
- Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation incurred; and
- Whether the transfer occurred shortly before or shortly after a substantial debt was incurred.
A recent case involving this law was prosecuted by PGA West community in La Quinta, California. The facts of the case show that Dempsey Mork purchased a condominium in the community in 2003. In 2004, a deed of trust was recorded against the property naming a company named Hulven as the beneficiary. There was no entity registered to do business in California in the name of Hulven at the time the deed of trust was recorded and it was argued that Hulven was a completely fictitious entity created and assumed by Mork, and Mork and Hulven are one in the same. The trust deed was to secure a promissory note dated January 23, 2004, in which Mork agreed to pay Hulven $450,000 starting in January 2005. The market value of the property at that time was assumed to be $500,000 to $600,000. Nine months after Hulven was named the beneficiary on the deed of trust, Hulven was incorporated in Montana. Just over two years later, Hulven was involuntarily dissolved. At all times, Mork was Hulven's sole officer, director, and shareholder.
In 2011, seeking to collect judgments against Mork, the community filed an action to have the deed of trust to Hulven declared a fraudulent transfer under the Uniform Fraudulent Transfer Act. The trial court ruled for the community. Mork appealed. Surprisingly, on appeal, the ruling in favor of the community was overturned. The appellate court agreed with the community that the deed of trust was a sham and fell under the definition of a fraudulent transfer. Unfortunately for the community, the act requires that an action to invalidate a document as fraudulent be brought within 7 years. PGA West did not file its complaint until more than nine years after the deed of trust was recorded. Therefore, the appellate court overruled the trial court's decision and ordered the community to pay costs and attorney fees for the appeal to Hulven.
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Case of the Month
In late 1999, Alfonso Ayala found a five-unit residential property in Vacaville, CA that he wanted to purchase. However, he was unable to secure the funding. He requested assistance from his friend, Randy Dawson. Ayala was to put down the deposit, and Dawson was to purchase the property for $330,000.00. Ayala would pay Dawson a $200 monthly fee plus the monthly principal and interest on the mortgage. Ayala also agreed to maintain the property and contract a property management company to manage the rental units while he also lived in one of the units. Once Ayala paid off the entire principal and interest due on the mortgage, Dawson agreed to deed the property to Ayala.
The two parties entered into a written contract in December of 1999. Ayala claimed he relied on Dawson's superior real estate knowledge and had Dawson draft and execute the written contract, since Dawson was a real estate broker. Ayala claimed he thought he was signing an installment sale contract, but instead signed a residential lease with option to purchase. The option to purchase expired on December 31, 2004. Ayala lived in the property for 12 years. From January 2000 to 2008, he paid the same amount for rent. In 2009, the rent went up $200 more per month. In 2011, Dawson's finances started to become strained. He offered to sell the property to Ayala for the original amount, $330,000.00, with credit for the down payment he had paid. Ayala refused, stating that he already bought and owned the property.
In June 2012, Ayala filed suit against Dawson claiming fraud, breach of an oral contract, specific performance, preliminary and permanent injunctive relief, and declaratory relief. Ayala claimed he was never a tenant and he held equitable title to the property under an oral installment sale contract, and further that the written lease was fraudulent. In July 2012, Dawson filed an action of his own for an unlawful detainer in order to evict Ayala. Judge D. Scott Daniels spent one and a half days with an evidentiary hearing and ruled in favor of Dawson, noting the written contract was sufficient to satisfy that there was a landlord-tenant relationship, and that Ayala read and signed the lease because he had initialed every page and signed on multiple pages. Ayala also cited several sections of the contract, proving that he had fully read and had a complete understanding of the contract. In addition, Dawson was also awarded attorney fees in the amount of $27,000.00.
Ayala requested a writ of mandate by the superior court appellate division, asking them to review Judge Daniels's ruling, claiming that since the case went so quickly he was not provided due process. The appellate division denied the requested writ and affirmed Judge Daniels's ruling. Ayala did vacate the property.
Ayala continued to pursue the suit he filed against Dawson in June 2012, even though there was a ruling on Dawson's July 2012 suit for unlawful detainer. In February 2014, Dawson filed a motion for summary judgment, arguing, among other things, that Judge Daniels's ruling collaterally estops Ayala from pursuing further legal action.
The basic premise of res judicata is that one cannot be sued multiple times over the same issue. The main reasons for res judicata are to preserve the integrity of the judicial system, not to damage people economically with multiple law suits, and to protect people from vexatious litigation. There are two basic forms (or branches) of res judicata; claim preclusion and issue preclusion. In claim preclusion, the parties are not allowed to litigate the same "cause of action" in a subsequent suit. In issue preclusion, the parties are not allowed to litigate the same issues that were argued and decided in prior proceedings. Issue preclusion is more commonly referred to as collateral estoppel.
Collateral estoppel has five thresholds that need to be met before it can be applied: 1. The issue to be precluded from relitigation must be identical to the previous proceeding. 2. The issue had to have been litigated in the previous proceeding. 3. The issue had to have been decided in the previous proceeding. 4. The decision in the previous proceeding must be final and on the merits. 5. The party in the new litigation must be the same (or legally connected with the) party in the previous proceeding. Although not part of the legal doctrine of collateral estoppel, there is also an equitable financial aspect to this as well.
Collateral estoppel is not an easy rule to apply in legal proceedings. It's quite rare when collateral estoppel is used for a suit including an unlawful detainer because that type of suit is typically a summary proceeding that is limited to resolution only of the question of possession. In other words, an unlawful detainer action is typically so specific, it doesn't cover all the issues and when a later suit is litigated, more information is brought before the court. However, in Ayala's situation, he brought everything he had to fight Dawson's unlawful detainer action. Unfortunately for him, he lost that suit. In his own suit, he had nothing new to bring to the table. His arguments, documents, even list of witnesses and line of questioning were identical to the unlawful detainer action. Dawson was successful in arguing collateral estoppel to the appellate court. The appellate court affirmed the original judgement for Dawson, including attorney fees.
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Both California common law and California Civil Code section 1102 require a seller to disclose information to a potential buyer about the property that are material to their decision to acquire the property. California has a set form, called the Transfer Disclosure Statement, that is used for this purpose. However, if there is a material item not on the form, more information needs to be provided. Agents also have to disclose if they know of an issue with the property. There is a form for that as well called the Agent Visual Inspections disclosure.
Of the things a seller and listing agent must disclose, one is dangerous conditions on the property. In one situation, there was a prospective buyer checking out a property. The property contained an empty pool. The Multiple Listing Service listing contained a warning statement, "Please use CAUTION around the empty pool." While viewing the property, the prospective buyer decided to stand on the base of the diving board in order to see over the fence. Unfortunately, the diving board broke loose from the base and the prospective buyer fell into the empty pool, sustaining serious injuries. Neither the seller or the listing agent knew that the diving board was defective, and the listing agent had not found any breaks, cracks, or other damage to the diving board during their preliminary investigation of the property. In addition, a pool inspector had inspected the pool and did not report any concerns about the diving board.
The prospective buyer sued the listing agent for a failure to disclose the danger of the diving board and pool. On appeal, the Court determined that the listing agent was not liable for the injuries because of two main reasons, first there was no liability as the listing agent has had no notice that the diving board had any defects. Secondly, the Court found that, because the empty pool was a danger that was so obvious that any person would be reasonably expected to see it, the listing agent had no duty to remedy or warn of the danger.
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Upcoming Speaking Engagements
For October, 2017, Jennifer has the following speaking engagements:
October 4, 2017 - Escrow Training Institute Meet & Greet Educational Event
October 14, 2017 - California Escrow Association Annual Conference
For details about one or more of these events feel free to contact our office.
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