Court Opinion

ID: 8408288
Source: CourtListenerOpinion
Date Created: 2022-11-02 16:41:43.966234+00
Date Added: 2024-06-11T16:47:33.675311
License: Public Domain

ALARCÓN, Senior Circuit Judge,
Concurring in Part, Dissenting in Part.
I concur in the majority’s holding that the funds in the Plan were not excludable from Stern’s bankruptcy estate. I dissent from the majority’s conclusion that the funds in the Plan were exempt from distribution to Stern’s creditors under California law. I would hold that the Trustee presented sufficient facts to support an inference that Stern transferred funds into the Plan with the intent to hinder, delay, or defraud his creditors. A fraudulent transfer is not exempt from distribution to creditors under California law. Cal. Civ. Code §§ 3439.04 & 3439.05 (West 2002); Maddox v. Robertson (In re Prejean), 994 F.2d 706, 708 (9th Cir.1993). Accordingly, whether the Debtor acted with fraudulent intent is a question that should be determined after a trial on the merits and a determination of the credibility of the witnesses regarding Stern’s intent.
The Trustee presented evidence that on September 15, 1992, Dove Audio, Inc. (“Dove”) received an arbitration award of 4,585,000 dollars against Stern. Stern learned of the award on or about September 30, 1992. On October 22, 1992, the Los Angeles Superior Court issued a writ of mandate to secure the payment to Dove of the amount awarded by the arbitrator.
On October 14, 1992, Stern filed for a divorce. The next day, Stern received a Default Judgment of Dissolution of his marriage that included a stipulated property settlement agreement. Between October 19, 1992 and October 21, 1992, pursuant to the property settlement agreement, Stern transferred all his community property, consisting of over 2 million dollars in non-exempt assets, to Sharma Stern. Stern made these transfers without the benefit of property appraisals. Stern retained only supposedly exempt assets and assumed the 4.5 million dollar arbitration award, a community debt, owed to Dove. On October 23, 1992, Stern executed the documents that created the Plan. Later in the same month, Stern rolled 1.4 million dollars from his IRA into the Plan. On November 2, 1992, Stern filed for bankruptcy. Stern dismissed the Chapter 11 action on December 22, 1992, after the bankruptcy judge indicated that she would appoint a trustee for Stern’s estate.
*1046In July 1993, Dove filed an action in the Los Angeles Superior Court in which it alleged that Stern had fraudulently transferred the 1.4 million dollars into the Plan to shield his estate from his creditors. On August 11, 1995 while the fraudulent conveyance action was pending in state court, Stem filed a Chapter 7 bankruptcy petition (the “core proceeding”). In the fall of 1995, Dove transferred the fraudulent conveyance action (the “adversary proceeding”) to the bankruptcy court. On June 26, 1996, the Trustee was authorized to intervene in the adversary proceeding.
On or about March 27, 1998, Stern filed a motion for summary judgment in the core proceeding. He sought to prevent the money in the Plan from being included in the bankruptcy estate. He argued that: (1) the Plan is excludable from the bankruptcy estate as ERISA-qualified; (2) the Plan is exempt from creditor distribution under California law; and (3) even if there had been a fraudulent transfer, the Plan would still be exempt. The Trustee responded on April 27, 1998. The bankruptcy court agreed with Stern’s arguments. It held that the Plan was excluded from the estate as ERISA-qualified and that it was also exempt under California law.
On or about May 11, 1998, Stern moved for summary judgment on the fraudulent transfer claims in the adversary proceeding. Stern asserted that there was no transfer. He asserted in the alternative that even if there had been a transfer, the Trustee could not show that it was fraudulent. In response, the Trustee disputed Stern’s legal arguments and asserted that there was a question of fact regarding Stern’s credibility and his intent regarding the transfer. The bankruptcy court concluded that there was nothing improper about transferring assets into an exempt retirement fund on the eve of bankruptcy.
The Trustee timely appealed the bankruptcy court’s rulings on summary judgment to the district court. On August 9, 2000, the district court concluded that the funds in the Plan were not excludable as ERISA-qualified. It also concluded that the funds were exempt from distribution to creditors under California law because the Trustee failed to present evidence of fraud beyond the mere transfer of funds on the eve of bankruptcy.
Under California law, funds held in a “private retirement plan” are exempt from distribution to creditors. Cheng v. Gill (In re Cheng), 943 F.2d 1114, 1116 (9th Cir.1991); Cal.Civ.Proc.Code § 704.115(b)-(e) (West 2002). Corporate plans are entitled to complete exemption even where the corporation sponsoring the plan is closely held and its sole shareholder, director, and chief executive officer is the debtor. In re Cheng, 943 F.2d at 1115-17. The Plan in the instant case is a corporate plan, sponsored by Stern, Inc., and is therefore exempt. Stern argues that even if we assume that he transferred the funds into the Plan to defraud his creditors, the funds nevertheless remain exempt as part of the corporate plan. I disagree. I would hold that it was error for the district court to uphold summary judgment in favor of Stern where the Trustee presented evidence of fraud, beyond the mere transfer of property on the eve of bankruptcy.
A transfer may be avoided under California law if it was made with the “actual intent to hinder, delay, or defraud any creditor of the debtor,” or if it was made “[wjithout receiving a reasonably equivalent value in exchange for the transfer ....” Cal. Civ.Code §§ 3439.04 & 3439.05 (West 2002); Maddox v. Robertson (In re Prejean), 994 F.2d 706, 708-09 (9th Cir.1993). A transfer may also be avoided where there is actual fraud. Love v. Menick, 341 F.2d 680, 682-83 (9th Cir.1965); In re Moffat, 107 B.R. 255, 266 (Bankr.C.D.Cal.1989). Fraudulent intent may be *1047shown through circumstantial evidence of actual intent to defraud, or “badges of fraud.” Badges of fraud include:
(1) actual or threatened litigation against the debtor;
(2) a purported transfer of all or substantially all of the debtor’s property;
(3) insolvency or other unmanageable indebtedness on the part of the debtor;
(4) a special relationship between the debtor and the transferee; and, after the transfer, (5) retention by the debtor of the property involved in the putative transfer.
The presence of a single badge of fraud may spur mere suspicion; the confluence of several can constitute conclusive evidence of actual intent to defraud, absent “significantly clear” evidence of a legitimate supervening purpose.
Acequia Inc. v. Clinton (In re Acequia Inc.), 34 F.3d 800, 806 (9th Cir.1994) (emphasis and citations omitted); see also Cal. Civ.Code § 3439.04 (referring in comment (5)to the consideration courts give to the “badges of fraud”).
Citing to on this court’s opinion in Wudrick v. Clements, 451 F.2d 988 (9th Cir.1971), the majority writes; “Here, the principal evidentiary inference relied upon by Trustee is that non-exempt assets were converted to exempt assets immediately prior to bankruptcy. But, as Wudrick demonstrates, this inference is insufficient as a matter of law to establish a fraudulent transfer.” Majority opinion at p. 1044.
I respectfully disagree with my esteemed colleagues that Wudrick is determinative. It can readily be distinguished from the instant case. In Wudrick, Mr. and Mrs. Roon, after consulting experienced bankruptcy lawyers, refinanced their 1966 Chevrolet automobile. Id. at 989. The bank loaned them 2,325 dollars on the car. The Roons used these funds to pay off their previous car loan and their attorney’s fees. Id. They also deposited 800 dollars in a savings and loan association. Id. They then filed bankruptcy petitions. They claimed that the 800 dollar account was exempt from distribution under California law and the Bankruptcy Act. Id.
In a companion case, the record showed that Wudrick, on the advice of bankruptcy counsel, obtained a 2,197 dollar loan from a finance company on two vehicles about three weeks before filing his bankruptcy petition. Id. He put 1,300 dollars in a credit union. Such funds are exempt from distribution under California law. Id.
The Trustee argued in Wudrick that “conversion of non-exempt assets to exempt assets on the eve of bankruptcy by creation of a secured debt and deposit of the proceeds in an exempt account is fraudulent as a matter of law and therefore a claim of exemption based on such a transfer is invalid.” Id. at 990. In rejecting this argument, we held that “[i]t has long been the rule in this and other jurisdictions that the purposeful conversion of nonexempt assets to exempt assets on the eve of bankruptcy is not fraudulent per se.” Id. at 989 (citing In re Dudley, 72 F.Supp. 943, 945-947 (D.Cal.1947), aff'd per curiam, Goggin v. Dudley, 166 F.2d 1023 (9th Cir.1948); Love v. Menick, 341 F.2d 680, 682-683 (9th Cir.1965)).
The actual holding in Wudrick reads as follows:
Since no more is shown in either case than the intentional conversion of nonexempt property to exempt property, Love v. Menick, supra, controls.
A different case would be presented if on the eve of bankruptcy a debt were created with no intention of repaying the creditor, either by purchasing goods on credit or borrowing money without secu*1048rity. See Love v. Menick, supra, at 682-688 F.2d.
Wudrick, 451 F.2d at 990.
There is no showing in this matter that Stern consulted an experienced bankruptcy attorney before he transferred the funds from his IRA into the exempt Plan. He therefore cannot prevail on the argument that he acted in good faith reliance on the advice of his attorney when he transferred the funds and therefore lacked the intent required to deny him a discharge of his debts. See In re Adeeb, 787 F.2d 1839, 1343 (9th Cir.1986) (discussing the effect of a debtor’s good faith reliance on an attorney’s advice). Furthermore, the Trustee presented evidence that he did more than purposefully convert his assets on the eve of bankruptcy.
The Trustee presented evidence that Stern: (1) was sued and lost the arbitration before transferring the funds to the Plan; (2) testified inconsistently as to his motive for transferring the funds to the Plan; (3) may have, as a result of the 4.5 million dollar arbitration award levied against him, been insolvent when he made the transfer; (4) transferred the funds to the Plan to benefit him and his wife; (5) transferred all or substantially all of his property into the plan; and (6) retained control of the funds following the transfer. This evidence demonstrates the presence of several badges of fraud, including actual litigation against Stern, transfer of substantially all of Stern’s property, insolvency, and retention of control over the funds after the transfer. This evidence supports an inference of fraudulent intent.
In Wudrick, we cited Love v. Menick for the rule regarding the purposeful conversion of nonexempt assets to exempt assets. Wudrick, 451 F.2d at 989-90. In Love, we noted that in In re Martin, 217 F.Supp. 937 (D.Or. 1983), the district court cited the prevailing rule “that the purchase of exempt property by an insolvent debtor on the eve of bankruptcy will not, in itself, permit the trustee to disallow the claimed exemption.” Love, 341 F.2d at 683 (internal quotations omitted). The district court held in In re Martin, however, that substantial evidence in the record supported the referee’s finding of fraudulent intent and action. Love, 341 F.2d at 683. In reconciling the Martin decision with the “prevailing rule,” we commented in Love:
To harmonize the court’s decision with its recognition of the force of ... the “prevailing rule,” we must assume that the record in Martin contained some quality of “substantive evidence” of fraudulent intent which we cannot find in the record of the case at hand.
Love, 341 F.2d at 683; see also In re Dudley, 72 F.Supp. 943, 945-47 (S.D.Cal.1947) (discussing the “prevailing rule”).
Thus, the law of this circuit as reflected in Wudrick, and Love is as follows: “the purposeful conversion of nonexempt assets to exempt assets on the eve of bankruptcy is not fraudulent per se.” Wudrick, 451 F.2d at 989. The term “per se” is defined as: “[o]f, in, or by itself; standing alone, without reference to additional facts.” Black’s Law Dictionary 1162 (7th ed.1999). Therefore, where substantial evidence in the record supports a finding of the debt- or’s fraudulent intent, property transferred on the eve of bankruptcy is not exempt from distribution to creditors. See Tavenner v. Smoot, 257 F.3d 401, 406-09 (4th Cir.2001) (holding that “transfers of exemptible property are amenable to avoidance and recovery actions by bankruptcy trustees,” and that “such transfers surely can be characterized as fraudulent, so long as the debtor had the requisite fraudulent intent”); Ford v. Poston, 53 B.R. 444, 448, 449-50 (D.Va.1984) (stating the general rule that “in the eleventh hour a debtor may convert a part of his property which is not exempt into exempt items *1049for the purpose of placing the property out of reach of his creditors when he claims the exemption,” and stating that “[t]he courts have long recognized a limitation of this rule: If the evidence reveals fraud apart and distinct from the mere transfer of non-exempt property into exempt, the debtor has transferred the property with the intent to defraud, hinder, or delay his creditors.”); In re Krawtz, 97 B.R. 514, 522 (Bankr.N.D.Iowa 1989) (discussing the rule that “the act of converting non-exempt property to exempt property is not enough to deny the exemption,” but “[t]he actual intent to hinder, delay or defraud one’s creditors is sufficient to deny an exemption,” and that “[bjecause intent to hinder, delay or defraud is so difficult to prove directly, the Iowa Supreme Court relies on ‘badges or indices of fraud’ to determine the debtor’s intent.”). This court’s use of the term “per se,” in setting forth the rule in Wudrick that “the purposeful conversion of non-exempt assets to exempt assets on the eve of bankruptcy is not fraudulent per se,” is significant. We did not hold in Wudrick that a transfer on the eve of bankruptcy is inexorably exempt from distribution to creditors. The Majority has simply ignored the significance of the term “per se” in this court’s holding in Wudrick.1
Because the Trustee presented genuine issues of material fact regarding whether Stern acted with fraudulent intent when he transferred funds from his IRA into exempt funds under the Plan, I would reverse the judgment of the district court and remand for a trial on the merits and express findings on the question whether Stern intended to hinder, delay, or defraud his creditors.

. During oral argument, Stern's attorney quoted the holding in Wudrick, and attempted to convince this Court that the words "per se” were superfluous. He argued as follows:
"CT]he purposeful conversion of nonexempt assets to exempt assets on the eve of bankruptcy is not fraudulent per se.” And what he [Stem] seems to be saying if I understand him is those two words, "per se," at the end may open up some door, though I've already answered if you assume that opens up a door what could there be behind that door? And the answer is, nothing that changes it. But what’s interesting in terms of case analysis, if you take those two words off of there, I can't imagine he could even make the argument, and if Wudrick read, "It has long been the rule that the purposeful conversion of nonexempt assets to exempt assets on the eve of bankruptcy is not fraudulent,” period ... I can’t even imagine that this would be considered anything but a pure reversal of Wudrick, and to suggest that those two words there in that context really mean anything but that, alternatively, is not per se fraudulent. Well, would that open a door? The test has to be what could be behind that door....