Opinion ID: 2625291
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Heading: The Uniform Fraudulent Transfer Act Applies to Transfers Under Marital Settlement Agreements

Text: The UFTA permits defrauded creditors to reach property in the hands of a transferee. The Family Code, in section 916, protects property transferred to a spouse incident to divorce from the debts of the other spouse. Neither statute expressly refers to the other. Our task is to harmonize the two statutes. ( DeVita v. County of Napa (1995) 9 Cal.4th 763, 778-779, 38 Cal.Rptr.2d 699, 889 P.2d 1019.) Under well-established rules of statutory construction, we must ascertain the intent of the drafters so as to effectuate the purpose of the law. [Citation.] Because the statutory language is generally the most reliable indicator of legislative intent, we first examine the words themselves, giving them their usual and ordinary meaning and construing them in context. ( Esberg v. Union Oil Co. (2002) 28 Cal.4th 262, 268, 121 Cal.Rptr.2d 203, 47 P.3d 1069.) [E]very statute should be construed with reference to the whole system of law of which it is a part, so that all may be harmonized and have effect. ( Moore v. Panish (1982) 32 Cal.3d 535, 541, 186 Cal.Rptr. 475, 652 P.2d 32.) Where as here two codes are to be construed, they `must be regarded as blending into each other and forming a single statute.' [Citation.] Accordingly, they `must be read together and so construed as to give effect, when possible, to all the provisions thereof.' [Citation.] ( Tripp v. Swoap (1976) 17 Cal.3d 671, 679, 131 Cal.Rptr. 789, 552 P.2d 749.) When the plain meaning of the statutory text is insufficient to resolve the question of its interpretation, the courts may turn to rules or maxims of construction which serve as aids in the sense that they express familiar insights about conventional language usage. (2A Singer, Statutes and Statutory Construction (6th ed.2000) p. 107.) Courts also look to the legislative history of the enactment. Both the legislative history of the statute and the wider historical circumstances of its enactment may be considered in ascertaining the legislative intent. ( Dyna-Med, Inc. v. Fair Employment & Housing Com. (1987) 43 Cal.3d 1379, 1387, 241 Cal. Rptr. 67, 743 P.2d 1323.) Finally, the court may consider the impact of an interpretation on public policy, for [w]here uncertainty exists consideration should be given to the consequences that will flow from a particular interpretation. ( Ibid. ) Following these principles of statutory construction, we turn first to the text of the UFTA and the Family Code.

The UFTA was enacted in 1986; it is the most recent in a line of statutes dating to the reign of Queen Elizabeth I. This Act, like its predecessor and the Statute of 13 Elizabeth, declares rights and provides remedies for unsecured creditors against transfers that impede them in the collection of their claims. (Legis. Com. com., 12A West's Ann. Civ.Code (1997 ed.) foll. § 3439.01, p. 272.) Under the UFTA, a transfer is fraudulent, both as to present and future creditors, if it is made [w]ith actual intent to hinder, delay, or defraud any creditor of the debtor. (Civ.Code, § 3439.04, subd. (a).) Even without actual fraudulent intent, a transfer may be fraudulent as to present creditors if the debtor did not receive a reasonably equivalent value in exchange for the transfer and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation. (Civ. Code, § 3439.05.) On its face, the UFTA applies to all transfers. Civil Code, section § 3439.01, subdivision (i) defines [t]ransfer as 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.... The UFTA excepts only certain transfers resulting from lease terminations or lien enforcement. (Civ.Code, § 3439.08, subd. (e).) Thus, the UFTA on its face encompasses transfers made under an MSA. Consequently, most decisions of other states construing parallel provisions of the UFTA hold that it does apply to marital property transfers, including those in connection with divorce. (See, e.g., Scholes v. Lehmann (7th Cir. 1995) 56 F.3d 750, 758-759 [applying 111. law]; Kardynalski v. Fisher (1985) 135 Ill.App.3d 643, 90 Ill.Dec. 410, 482 N.E.2d 117, 121-122; Dowell v. Dennis (Okla.Ct. App.2000) 998 P.2d 206, 209, 212-213; Greeninger v. Cromwell (1996) 140 Or. App. 241, 915 P.2d 479, 482; see also Federal Deposit Ins. Co. v. Malin (2d Cir. 1986) 802 F.2d 12, 18 [under New York law, UFTA applies but ex-wife was good faith purchaser for value]; but see Britt v. Damson (9th Cir.1964) 334 F.2d 896, 901 [Wash, law]; Witbart v. Witbart (1983) 204 Mont. 446, 666 P.2d 1217, 1219.) Civil Code section 3439.11 provides expressly that the UFTA shall be applied and construed to effectuate its general purpose to make uniform the law .. . among states enacting it. Husband here points to section 10 of the UFTA (Civ.Code, § 3439.10), which provides: Unless displaced by the provisions of this chapter, the principles of law and equity, including the law merchant and the law relating to principal and agent, estoppel, laches, fraud, misrepresentation, duress, coercion, mistake, insolvency, or other validating or invalidating cause, supplement its provisions. He argues that Family Code section 916 is a law that supplements] the provisions of the UFTA by, in effect, establishing an exception to its provisions. But to supplement the UFTA means to provide something additional to the law, not to narrow or nullify the law. This point is illustrated in Monastra v. Konica Business Machines, U.S.A., Inc. (1996) 43 Cal.App.4th 1628, 51 Cal.Rptr.2d 528. The defendants there argued that compliance with the Bulk Sales Act (Cal. U. Com.Code, § 6101 et seq.) immunized a transfer from attack under the UFTA. The Court of Appeal disagreed, concluding that the protections given creditors under the Bulk Sales Law supplemented, that is, added to the protections of the UFTA. ( Monastra v. Konica Business Machines, U.S.A., Inc., supra, at pp. 1639-1640, 51 Cal.Rptr.2d 528.)
Before 1984, a spouse who received community property after a dissolution of marriage was liable for the community debts incurred by the other spouse during the marriage. ( Dawes v. Rich (1997) 60 Cal. App.4th 24, 28, 70 Cal.Rptr.2d 72; see Packard v. Arellanes (1861) 17 Cal. 525; Frankel v. Boyd (1895) 106 Cal. 608, 612-615, 39 P. 939.) Thus, a creditor of one spouse could often reach any property transferred to the other without resorting to an action to set aside a fraudulent transfer. Nevertheless, that remedy was available when needed to invalidate a fraudulent transfer made under an MSA. (See, e.g., McKnight v. Superior Court (1985) 170 Cal.App.3d 291, 295-296, 299, 215 Cal. Rptr. 909.) In 1984, however, the Legislature substantially changed the postmarital liability of spouses. The Legislature determined that, under most circumstances, after a marriage has ended, it is unwise to continue the liability of spouses for community debts incurred by former spouses. ( Dawes v. Rich, supra, 60 Cal.App.4th at p. 30, 70 Cal.Rptr.2d 72.) It enacted former Civil Code section 5120.160, which provided in pertinent part that, upon the dissolution of the marriage, the property received by [a married] person in the division is not liable for a debt incurred by the person's spouse before or during marriage, and the person is not personally liable for the debt, unless the debt was assigned for payment by the person in the division of the property. (Stats.1984, ch. 1671, § 9, p. 6021.) When the Family Code was enacted in 1992, Civil Code section 5120.160 became Family Code section 916. When the Legislature enacted former Civil Code section 5120.160, it contemplated that `[i]n allocating the debts to the parties, the court in the dissolution proceeding should take into account the rights of creditors so there will be available sufficient property to satisfy the debt by the person to whom the debt is assigned, provided the net division is equal.' ( Lezine v. Security Pacific Fin. Services, Inc. (1996) 14 Cal.4th 56, 75, 58 Cal.Rptr.2d 76, 925 P.2d 1002, quoting Recommendation Relating to Liability of Marital Property for Debts (Jan.1983) 17 Cal. Law Revision Com. Rep. (1984) pp. 23-24, fn. omitted.) Family Code section 2550, however, provides: Except upon the written agreement of the parties, or on oral stipulation of the parties in open court, or as otherwise provided in this division, in a proceeding for dissolution of marriage or for legal separation of the parties, the court shall ... divide the community estate of the parties equally. (Italics added.) Whenever, as in this case, the parties agree upon the property division, no law requires them to divide the property equally, and the court does not scrutinize the M.S.A. § to ensure that it sets out an equal division. ( In re Marriage of Cream (1993) 13 Cal.App.4th 81, 91,16 Cal.Rptr.2d 575.) The only statutory exception to Family Code section 916's grant of immunity from liability is a provision that preserves the liability of property subject to a preexisting lien (Fam.Code, § 916, subd. (a)(2)); the statute does not mention fraudulent transfers. Thus, on its face, Family Code section 916 would appear to protect transfers of marital property incident to divorce from being set aside under the UFTA. We note, however, that section 916 states that it applies [n]otwithstanding any other provision of this chapter. (Similar language appeared in former Civil Code section 5120.160.) This language indicates that section 916 may be subordinate to other statutes, such as the UFTA, not included in the same chapter of the Family Code as section 916.
The parties call our attention to familiar canons of statutory interpretation, but these offer no assistance in resolving the apparent conflict between the statutes at issue here. Husband argues that the principle that specific provisions take precedence over general provisions (see Code Civ. Proa, § 1859; Collection Bureau of San Jose v. Rumsey (2000) 24 Cal.4th 301, 310, 99 Cal.Rptr.2d 792, 6 P.3d 713) is controlling. He asserts that Family Code section 916, because it discusses only transfers in an MSA, is more specific than the UFTA, which regulates all transactions, and should therefore prevail over the UFTA But one could as easily describe the UFTA as pertaining to only fraudulent transactions, and thus at least as specific as section 916, which concerns all marital settlement transactions. Neither statute appears to be significantly more specific than the other. Plaintiff bases her argument on the adage of expressio unis est exclusio alterius the expression of some things implies the exclusion of things not expressed. She argues that the Legislature, when it enacted the UFTA, knew how to make a specific exemption for transfers under an MSA since it made exceptions for some other transfersand she asks us to infer from the absence of an exception for marital settlements that the Legislature must have intended the UFTA to apply to marital settlement transactions. But one can equally argue that the Legislature, when it enacted former Civil Code section 5120.160 and later recodified that provision as Family Code section 916, knew how to make an exception for fraudulent transfers, but chose not to do so. Both the UFTA and the Family Code govern discrete subject areas, and the Legislature's failure to legislate expressly with respect to the rare instance in which they overlap does not suggest any legislative intent as to which should prevail.
Husband argues that the history of former Civil Code section 5120.160 (the predecessor to Family Code section 916) shows that the Legislature did not intend to allow creditors to challenge an MSA. In 1984, when the Legislature was considering former section 5120.160, Carol Bruch, a law professor at the University of California at Davis, proposed that the new law provide for notice to creditors and grant them a right to intervene in the dissolution proceedings. In connection with this proposal, she suggested amending the measure to provide that the section would not bar recovery by a creditor who was not notified, or did not approve the proposed marital settlement, and successfully challenges the property division as a fraudulent conveyance in a motion to set aside the property division filed within 3 years after entry of the judgment dividing the property. (Carol Bruch, U.C. Davis Law School, Suggested Amendments to Assem. Bill 1460 (1983-1984 Reg. Sess.) Mar. 14, 1984.) The Law Revision Commission rejected Professor Bruch's suggested amendments, saying: Carol proposes adoption of a `bankruptcy' or `probate' type scheme for imposing liability after dissolution of marriage, involving notice and an opportunity to appear for creditors, and fraudulent conveyance standards. While this scheme is theoretically interesting, the Commission rejected it because of the extensive procedures involved. It would transform simple divorce cases into elaborate proceedings involving many parties. We are unwilling to burden our bill with this; Carol can prepare and sponsor her own bill next session to adopt this sort of scheme if she is able to perfect it. (Nathaniel Sterling, Cal. Law Revision Com., letter to Assemblyman Alistair McAllister, Mar. 30, 1984, p. 2.) This historical account could support an inference that the Legislature did not intend to permit creditors to attack an MSA, as Husband contends, but it could also be viewed more narrowly as suggesting only a determination that creditors should not have standing to raise their claims in the dissolution proceeding itself. The legislative history of the UFTA equally offers a weak inference in support of plaintiffs position. In 1986, when the Legislature considered the UFTA, the Business Law Section of the California State Bar reported to the Legislature: Serious consideration needs to be given to the effect of this statute in areas such as leveraged buyouts of businesses, marital property agreements, foreclosures sales of real property, to name a few examples. (Margaret Sheneman, State Bar of Cal. (Business Law Section), mem., to Judith Harper, Legis. Rep. on Sen. Bill No. 2150 (1985-1986 Reg. Sess.) Apr. 30, 1986, p. 2, italics added.) The Legislature, however, added no provisions relating to marital property transfers. In sum, both when it enacted former Civil Code section 5120.160 and when it enacted the UFTA, the Legislature was advised that difficulties could arise from the intersection of family law and laws prohibiting fraudulent transfers. In both cases, it chose not to address the subject with specific legislation. In these circumstances, we cannot draw any conclusions as to what the Legislature intended based on the absence of legislative action.
The Court of Appeal here concluded that neither the language of the statutes nor their legislative history was dispositive, and that it would have to turn to an analysis of the relevant policy considerations as they bear on the question of legislative intent. The court that decided Gagan v. Gouyd, supra, 73 Cal.App.4th 835, 86 Cal.Rptr.2d 733, also found that neither the statutory text nor legislative history was sufficient to resolve the conflict, requiring it to base its decision on policy considerations. We arrive at the same juncture. The California Legislature has a general policy of protecting creditors from fraudulent transfers, including transfers between spouses. A transfer before dissolution can be set aside as a fraudulent conveyance. (See Fam.Code, § 851 [transmutation of marital property subject to UFTA]; Reddy v. Gonzalez (1992) 8 Cal.App.4th 118, 122-123, 10 Cal.Rptr.2d 55.) A transfer after dissolution can be set aside under the clear terms of the UFTA. When the court divides the marital property in the absence of an agreement by the parties, it must divide the property equally (Fam.Code, § 2550), which provides some protection for a creditor of one spouse only. In view of this overall policy of protecting creditors, it is unlikely that the Legislature intended to grant married couples a one-time-only opportunity to defraud creditors by including the fraudulent transfer in an MSA. Husband puts forward two countervailing policy considerations. First, he argues that allowing M.S.A. § transfers to be considered fraudulent to creditors will complicate marital settlement negotiations. This contention is supported by Gagan v. Gouyd, supra, 73 Cal.App.4th at pages 842-843, 86 Cal.Rptr.2d 733, which states: [A]s a matter of policy, we believe that to engraft the fraudulent transfer remedies onto a valid and approved marital settlement agreement would result in needlessly complicating the already emotionally laden dissolution process. It might result in the unraveling of a dissolution agreement painstakingly negotiated between the parties and their attorneys. We acknowledge Husband's contention, but we do not give it substantial weight. In our view, the parties' debts, and how to pay them, are matters that should be considered in marital settlement negotiations even if, like pension plans and income tax consequences, they make the process of reaching an agreement more complex. Second, Husband argues that the state and the parties need to rely on the finality of dissolution judgments. But California and federal law already permit such judgments to be set aside for fraud. Under state law, either spouse can attack the property division under a dissolution judgment on the ground that it was procured by extrinsic fraud. (Fam.Code, § 2122, subd. (a).) Under federal bankruptcy law, a bankruptcy trustee, acting in the interest of creditors, can set aside the property division of a dissolution judgment on the ground of fraud. (See Britt v. Damson (9th Cir. 1964) 334 F.2d 896, 902; In re Hope (Bankr.D.Colo.1999) 231 B.R. 403, 415 & fn. 19, and cases cited.) Thus, while the law respects the finality of a property settlement agreement that is not tainted by fraud or compulsion or is not in violation of the confidential relationship of the parties ( Adams v. Adams (1947) 29 Cal.2d 621, 624, 177 P.2d 265), we find no legislative policy to protect such agreements from attack as instruments of fraud. We therefore conclude, based on the policy considerations underlying the UFTA and the Family Code provisions governing dissolution judgments and settlements, that the UFTA applies to property transfers under MSA's. [2]