Court Opinion

ID: 9377789
Source: CourtListenerOpinion
Date Created: 2023-03-08 19:00:56.560841+00
Date Added: 2024-06-11T17:17:16.611548
License: Public Domain

FILED
                                                                      MAR 2 2023
                       ORDERED PUBLISHED
                                                                 SUSAN M. SPRAUL, CLERK
                                                                    U.S. BKCY. APP. PANEL
                                                                    OF THE NINTH CIRCUIT

         UNITED STATES BANKRUPTCY APPELLATE PANEL
                   OF THE NINTH CIRCUIT

In re:                                       BAP No. CC-22-1084-CFL
MOMENTUM DEVELOPMENT, LLC,
          Debtor.                            Bk. No. 1:18-bk-11538-MT

THE PYRAMID CENTER, INC.,                    Adv. No. 1:19-ap-01129-MT
               Appellant,
v.                                           OPINION
DIANE C. WEIL, Chapter 7 Trustee,
               Appellee.

             Appeal from the United States Bankruptcy Court
                  for the Central District of California
             Maureen A. Tighe, Bankruptcy Judge, Presiding

                           APPEARANCES:
Simon J. Dunstan of Dunstan & Franke argued on behalf of appellant;
Ryan F. Coy of BG Law LLP argued on behalf of appellee.

Before: CORBIT, FARIS, and LAFFERTY, Bankruptcy Judges.

CORBIT, Bankruptcy Judge:

                             INTRODUCTION

     This case is about whether a bankruptcy trustee may, under

California law, claw back property that was fraudulently transferred more

than four years but less than seven years prior to the filing of a bankruptcy

petition. We agree with the bankruptcy court’s ultimate conclusion: the
                                      1
statute of limitations had not expired. Under Cortez v. Vogt, 52 Cal. App.

4th 917, 937 (1997), and its progeny, the statute of limitations on a

fraudulent transfer in California begins on the date of the transfer or on the

date a judgment is entered against a debtor. We also agree that the Cal.

Civ. Code § 3439.09(c) statute of repose does not bar the chapter 7 1 trustee’s

fraudulent transfer action because the transfer occurred less than seven

years before the filing of the bankruptcy petition. See Rund v. Bank of Am.

Corp. (In re EPD Inv. Co.), 523 B.R. 680, 691-92 (9th Cir. BAP 2015). As a

result, the action was timely. We AFFIRM.

                                       FACTS

      The material facts are undisputed. Josef Dolezal was the managing

member and an executive officer of two closely held corporations:

Momentum Development, LLC (“Momentum”) and Pyramid Center, Inc.

(“Pyramid”). In 2010, Momentum hired DCA Drilling & Construction

(“DCA”) to drill a well on Momentum’s 200-acre property in San

Bernardino County, California (the “Property”). The DCA contract

contained a prevailing party attorney fees provision.

      Two years later, on October 31, 2012, Momentum transferred the

Property to Pyramid for a purchase price of fifty-five cents. On

September 19, 2014, despite the title transfer to Pyramid, Momentum sued

DCA for breach of contract. Momentum lost at trial, and on May 15, 2018,

      Unless specified otherwise, all chapter and section references are to the
      1

Bankruptcy Code, 11 U.S.C. §§ 101-1532.
                                           2
the state court entered a judgment awarding DCA attorney fees incurred in

defending against Momentum’s lawsuit.

      On June 19, 2018, approximately one month after the judgment was

entered, and without satisfying the judgment, Momentum petitioned for

bankruptcy relief under chapter 7. On October 25, 2019, chapter 7 trustee

Diane C. Weil (“Trustee”) filed a complaint against Pyramid alleging the

Property transfer was fraudulent and seeking recovery of the Property for

the estate. The Trustee’s complaint was based on § 544(b) and the

California Uniform Voidable Transactions Act (“UVTA”),2 Cal. Civ. Code §

3439.09. 3

      Prior to trial, Pyramid argued that the Trustee’s claims were time-

barred. The bankruptcy court disagreed and explained:

          Under Cal. Civ. Code section 3439.09(a), the statute of
          limitations is four years after the “transfer was made or
          the obligation was incurred” (or if later, one year from
          the discovery of the transfer obligation is invoked but
          here, that analysis is unnecessary).
          ....
          If the four year statute started to run on the date of the
          Transfer, it expired on 10/31/16. However, the statute

      2
           In 2016, the California legislature changed the name from “Uniform Fraudulent
Transfer Act” (“UFTA”) to “Uniform Voidable Transactions Act.” Stats. 2015, c. 44
(S.B.161).
         3 The Trustee’s complaint alleged that the property transfer was avoidable on

four legal bases: (i) §§ 544(b) and 550 and Cal. Civ. Code §§ 3439.04(a)(1) and 3439.07;
(ii) §§ 544(b) and 550 and Cal. Civ. Code §§ 3439.04(a)(2)(A) and 3439.07; (iii) §§ 544(b)
and 550 and Cal. Civ. Code §§ 3439.04(a)(2)(B) and 3439.07; and (iv) §§ 544 and
550(a)(1)-(2) and Cal. Civ. Code § 3439.07.
                                            3
      allows for an alternative start date – four years after the
      obligation was incurred. That is a relevant date on the
      facts here. Momentum’s obligation to DCA was not
      incurred until the State court entered its judgment in
      favor of DCA – which was 5/15/18. Using that date as the
      start date for the four-year cause of action, the action is
      timely. Momentum and DCA were litigating that very
      obligation in state court up until 5/15/18. Filing the
      bankruptcy petition then tolled the statute.

Notice of Tentative Ruling re Pretrial Motions at 2-3 (March 30, 2022).

      As additional support, the bankruptcy court cited Cortez, 52 Cal.

App. 4th at 937, and Potter v. Alliance United Insurance Co., 37 Cal. App. 5th

894, 904 (2019).

      The bankruptcy court also concluded that the Trustee’s complaint

was not barred by the seven-year statute of repose in Cal. Civ. Code

§ 3439.09(c), because the claim arose less than seven years before

Momentum’s bankruptcy filing. As support, the court cited Ezra v. Seror (In

re Ezra), 537 B.R. 924, 932 (9th Cir. BAP 2015).

      The bankruptcy court ultimately found that the Trustee introduced

sufficient evidence of Momentum’s actual intent to hinder or delay a

creditor by transferring the Property, and thus established the elements of

Cal. Civ. Code § 3439.04(a)(1). The bankruptcy court also found that

sufficient evidence existed that Momentum transferred the Property

without receiving reasonably equivalent value, and Momentum reasonably

believed or should have believed that it would incur debts beyond its

                                       4
ability to pay, thus satisfying the elements of Cal. Civ. Code

§ 3439.04(a)(2)(B).

      The bankruptcy court’s factual findings were not challenged on

appeal. Pyramid challenges only the bankruptcy court’s conclusion of law

that the Trustee’s lawsuit was timely. 4

                                   JURISDICTION

      The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and

157(b)(2)(A) and (H). We have jurisdiction under 28 U.S.C. § 158.

                                         ISSUE

      Did the bankruptcy court err by concluding that the Trustee’s lawsuit

was timely?

                             STANDARD OF REVIEW

      We review a bankruptcy court’s conclusions of law, including its

interpretations of provisions of the Bankruptcy Code and state law, de

novo. Hopkins v. Cerchione (In re Cerchione), 414 B.R. 540, 545 (9th Cir. BAP

2009). On appeal, this Panel may affirm the bankruptcy court on any

ground supported by the record. Id.

                                    DISCUSSION

      “Whether a transfer is avoidable under [the California UVTA] is a

question of California law for which the California Supreme Court is the

final authority.” Kasolas v. Nicholson (In re Fox Ortega Enters., Inc.), 631 B.R.

      4
        The bankruptcy court’s legal conclusions related to the statute of limitations are
contained in “Notice of Tentative Ruling Re Pretrial Motions Related to Application of
                                            5
425, 441 (Bankr. N.D. Cal. 2021) (citing Wolkowitz v. Beverly (In re Beverly),

374 B.R. 221, 232 (9th Cir. BAP 2007) (whether a transfer is avoidable under

California’s UVTA “is a question purely of California law”), aff’d in part,

dismissed in part, 551 F.3d 1092 (9th Cir. 2008)).

      A.     Meaning of “obligation incurred” in the California UVTA.

      In this case, the Trustee sought to avoid Momentum’s 2012 property

transfer to Pyramid under Cal. Civ. Code § 3439.04. The California UVTA

provides that, under certain circumstances, “[a] transfer made or obligation

incurred by a debtor is voidable as to a creditor, whether the creditor’s

claim arose before or after the transfer was made or the obligation was

incurred[.]” Cal. Civ. Code § 3439.04(a). Claims under this provision must

be brought “not later than four years after the transfer was made or the

obligation was incurred . . . .” Cal. Civ. Code § 3439.09(a).

      Prior to trial, the bankruptcy court concluded that the 2018 entry of

the attorney fees judgment against Momentum constituted an “obligation

incurred” under Cal. Civ. Code § 3439.09(a) and therefore the statute of

limitations began to run in 2018.

      Pyramid alleges that the trial court misinterpreted the phrase

“obligation incurred” as referring to any obligation of a debtor to a

creditor, as opposed to only fraudulently incurred obligations. Pyramid

argues that because the 2018 judgment was not an “obligation incurred,”

within the meaning of the statute, and because no “triggering creditor”

Statute of Limitations and/or Repose,” adopted March 30, 2022.
                                           6
existed within four years of the Property transfer, the statute of limitations

under Cal. Civ. Code § 3439.09(a) expired.

       Although Pyramid’s definition of “obligation incurred” is supported

by statutory construction and cases from other jurisdictions, the

bankruptcy court was nonetheless correct in relying on Cortez to conclude

that in California, the statute of limitations may commence on the date a

judgment is entered against a debtor.5

       B.     For a creditor seeking to avoid a fraudulent transfer under
              California law, the limitations period may commence the date
              a judgment is entered against a debtor.

       Cal. Civ. Code §§ 3439.09(a) and (b) are statutes of limitation that

require a plaintiff to file a fraudulent transfer action within four years of

the transfer or, for an intentional fraud, within one year of discovery of the

       5
        Generally, the provisions of the Uniform Voidable Transactions Act are
intended to prevent debtors from intentionally making a fraudulent transfer or
incurring fraudulent obligations to defraud creditors. See, e.g., Leibowitz v. Parkway Bank
& Tr. Co. (In re Image Worldwide, Ltd.), 139 F.3d 574 (7th Cir. 1998) (obligation incurred
was loan guaranty by debtor to affiliated entity); McKloskey v. Galva Foundry Co. (In re
Art Unlimited, LLC), 356 B.R. 700 (Bankr. E.D. Wis. 2006) (obligation incurred was
payment for sham consulting services that were never performed), aff’d, 2007 WL
2670307 (E.D. Wis. Sept. 6, 2007); Gaughan v. Cavan (In re Strasser), 303 B.R. 841 (Bankr.
D. Ariz. 2004) (obligation incurred was debtor’s unenforceable promise to repay parents
for support); Off. Comm. Of Unsecured Creditors of Toy King Distribs., Inc. v. Liberty Savs.
Bank, FSB (In re Toy King Distribs., Inc.), 256 B.R. 1 (Bankr. M.D. Fla. 2000) (obligation
incurred was payment of guaranty fees when no guaranty existed). Cf. 5 COLLIER ON
BANKRUPTCY ¶ 548.03[4][a] (Richard Levin & Henry J. Sommer eds., 16th ed.)
(“Examples of [fraudulent obligations under § 548] could be guaranties extracted from
the debtor when it was insolvent or otherwise financially strapped, or false or sham
obligations taken on for inadequate consideration.”).
                                             7
alleged fraud. In 1997, the California Court of Appeal decided that the Cal.

Civ. Code § 3439.09(a) statute of limitations could commence on a date

other than the date of the fraudulent transfer. Cortez, 52 Cal. App. 4th at

937.6

        In Cortez, during a lengthy employment lawsuit, the defendant

employer sold its assets—without transferring its liabilities—to another

company, leaving no assets to satisfy the former employee’s eventual

judgment. In defending the employee’s subsequent fraudulent transfer

lawsuit, the employer argued that because the assets were sold more than

four years before the employee’s judgment was entered, the statute of

limitations in Cal. Civ. Code § 3439.09(a) had expired. The Cortez court

disagreed.

        Cortez reasoned that creditors challenging fraudulent transfers may

choose to pursue claims under either the UVTA or California Code of Civil

Procedure § 338. Id. at 931. A creditor who chooses to sue under the UVTA

may—but is not required to—establish the debt and annul a fraudulent

transfer in the same lawsuit. Id. Alternatively, a creditor may first establish

the debt in one lawsuit, and once established, initiate a second lawsuit

under the UVTA to avoid the fraudulent transfer. Id. 7 Because creditors

        6
         The California Supreme Court declined to review the Court of Appeal’s
decision on April 30, 1997.
       7 The Cortez court approved of a Minnesota court’s reasoning:

     Why should the creditor be compelled in every case to commence suit
                                          8
have this choice, the Cortez court concluded it would be “inappropriate” to

interpret the UVTA limitations period to begin on the date of the

fraudulent transfer before the debt is established. Id.

      The Cortez court noted that notwithstanding the UVTA, a creditor

may choose to challenge a fraudulent transfer under California Code of

Civil Procedure § 338. That statute provides creditors with a three-year

statute of limitations from the date a judgment on an underlying debt is

entered, or from the date a creditor knew or should have known about the

fraudulent transfer. Id. at 932.

      The Cortez court explained that the legislative “policy and purpose”

statements accompanying the UVTA demonstrate the statute serves “as a

cumulative and additional remedy” to the existing common law remedies

for recovering fraudulent transfers. Id. at 937. Cortez concluded that “‘[t]he

new act simply adds an efficient, optional, and additional remedy to a

creditor who has not reduced his claim to judgment,’ and that the objective

of the act ‘is to enhance and not to impair the remedies of the creditor.’” Id.

(quoting Lind, 282 N.W. 661, 666 (Minn. 1938)).

     against the grantee to set aside a transfer under penalty of having the
     statute of limitations run until he is certain of being one in fact? Often the
     asserted claim against the principal obligor might well be uncertain, and
     even speculative, or at least one in which the amount of recovery is very
     uncertain.
52 Cal. App. 4th at 936 (quoting Lind v. O.N. Johnson Co., 282 N.W. 661, 668 (Minn.
1938)).
                                             9
       As a result, the Cortez court sought to harmonize the limitation

periods provided by each of the two pathways for creditors and found that

Cal. Civ. Code § 3439.09(a) accommodates a tolling until a judgment on the

underlying debt is entered:

       [W]here an alleged fraudulent transfer occurs while an action
       seeking to establish the underlying liability is pending, and
       where a judgment establishing the liability later becomes final,
       we construe the four-year limitation period, i.e., the language,
       “four years after the transfer was made or the obligation was
       incurred,” to accommodate a tolling until the underlying
       liability becomes fixed by a final judgment.

Id. at 920. 8 Two decades later, the California courts continued to follow

Cortez. See Potter, 37 Cal. App. 5th at 906 (“Following Cortez, the UVTA

filing deadlines did not begin to run until judgment was entered in the

underlying action.”).

       Pyramid argues the statutory language of Cal. Civ. Code § 3439.09(a)

requires a conclusion contrary to Cortez, and other states would agree.9

       8
          Here, California law must be applied, even though the Cortez opinion has been
criticized by scholars and by courts in other jurisdictions. See, e.g., David Gray Carlson,
Fraudulent Transfers: Void and Voidable, 29 Am. Bankr. Inst. L. Rev. 1, 19 (2021); Moore v.
Browning, 50 P.3d 852, 860 (Ariz. Ct. App. 2002) (Cortez court “erred in ruling that the
statute of repose period in UFTA is tolled until the creditor obtains a judgment”); K–B
Bldg. Co. v. Sheesley Constr., Inc., 833 A.2d 1132, 1136 (Pa. Super. Ct. 2003) (“Cortez has
been roundly criticized and is against the weight of authority in this area.”).
        9 See, e.g., Moore, 50 P.3d 852, 858 (Arizona UFTA actions are not subject to

tolling); Levy v. Markal Sales Corp., 724 N.E. 2d 1008, 1014 (Ill. App. Ct. 2000) (four-year
Illinois UFTA limitation period commences on date transfer is made, not on the date
judgment is entered); First Sw. Fin. Servs. v. Pulliam, 912 P.2d 828, 830 (N.M. Ct. App.
1996) (New Mexico UFTA limitation commences on date of transfer); Supreme Bakery,
                                             10
However, as noted above, whether a transfer is avoidable under

California’s UVTA is a question of California law, and California courts are

the final authority on this issue. 10 See In re Fox Ortega Enters., Inc., 631 B.R.

at 441.

      In this case, Momentum transferred the Property in 2012 and two

years later initiated a lawsuit that established its underlying liability to

creditor DCA. Under Cortez, Cal. Civ. Code § 3439.09(a) accommodated a

“tolling” during Momentum’s lawsuit, until Momentum’s underlying

liability became fixed by final judgment in 2018.

      C.     Cortez is not limited to fraudulent transfers made and
             obligations incurred during a pending lawsuit.

      Pyramid also argues that Cortez is not applicable because the holding

of that case is limited to fraudulent transfers that occur during pending

litigation. The same argument was rejected by the California appellate

court in Macedo v. Bosio, 86 Cal. App. 4th 1044, 1051 n.6 (2001). The Macedo

court acknowledged that the language of the Cortez conclusion would

support the narrow interpretation, but the case as a whole indicates Cortez

applies more broadly:

      [A]ll of the analysis preceding that phraseology points to the
      conclusion that a completely cumulative remedy for a
      fraudulent transfer exists above and beyond that provided by

Inc. v. Bagley, 742 A.2d 1202, 1205 (R.I. 2000) (Rhode Island’s UFTA’s four-year
provision runs from date of transfer); SASCO 1997 NI, LLC v. Zudkewich, 767 A.2d 469,
474 (N.J. 2001) (New Jersey’s four-year UFTA provision runs from the date of transfer).
        10 As noted supra, the California Supreme Court denied review of Cortez.

                                           11
      the [UVTA], and that the statute of limitations governing such a
      remedy is [California Code of Civil Procedure] section 338(d).
      Nothing in that analysis provides a basis for limiting that
      cumulative remedy to those cases in which the fraudulent
      transfer occurs during the pendency of a lawsuit intended to
      determine a creditor-debtor relationship. 11

Id. Because the California courts have rejected the argument that Cortez

applies only to fraudulent transfers made during pending litigation with a

creditor, we must reject Pyramid’s argument. As a result, the holding in

Cortez applies to this case.

      D.      California’s UVTA statute of repose had not expired.

      Finally, Pyramid argues that starting the limitations period on the

entry of a judgment could lead to absurd results. Specifically, Pyramid

argues that “a fraudulent transfer could occur on year one and a creditor’s

claim could arise in year 30.” However, Pyramid ignores California’s

UVTA statute of repose: “Notwithstanding any other provision of law, a

cause of action with respect to a fraudulent transfer or obligation is

extinguished if no action is brought or levy made within seven years after

the transfer was made or the obligation was incurred.” Cal. Civ. Code §

3439.09(c).

      This seven-year limitation is “clearly meant to provide an

overarching, all-embracing maximum time period to attack a fraudulent

      11
        Macedo was decided in 2001, before the California Legislature changed the
short name in 2016 to “Uniform Voidable Transactions Act.” See supra, n.2.
                                          12
transfer . . . .” 12 PGA W. Residential Ass’n v. Hulven Int’l, Inc., 14 Cal. App.

5th 156, 183 (2017) (quoting Macedo, 86 Cal. App. 4th at 1051 n.4). Because a

statute of repose is not subject to tolling, any action brought more than

seven years after a fraudulent transfer is barred. Id. at 180-81; see also

Macedo, 86 Cal. App. 4th at 1051 n.4 (rejecting argument that fraudulent

transfer action could be filed “scores of years after the transfer” based on

Cal. Civ. Code § 3439.09(c)).

      Once a debtor files a petition for bankruptcy, the trustee has two

years from the petition date to file a fraudulent transfer action,

notwithstanding California’s UVTA statute of repose. In re EPD Inv. Co.,

523 B.R. at 691-92. In that case, we concluded that Cal. Civ. Code

§ 3439.09(c) “frustrates Congress’ intent in § 546 and collides with federal

bankruptcy law.” Id. Because no substantial countervailing state interest

outweighed Congress’ goal of maximizing the bankruptcy estate for the

benefit of creditors, we concluded “the state law must yield” under the

Supremacy Clause. Id. at 692. In sum:

      [S]o long as a state-law fraudulent transfer claim exists on the
      petition date . . . i.e., the state’s applicable repose period
      governing the action has not yet expired on the petition date . . . ,
      the trustee may bring the avoidance action under § 544(b),
      provided it is filed within the limitations period in § 546(a). The

      12
         Other states, including Arizona, do not have the “overarching” seven-year
limitation that exists in the California UVTA. Nevertheless, Arizona does not have the
“year 30” problem because its statute of limitations runs from the date of the fraudulent
transfer or obligation. California does not have a “year 30” problem because of the
“overarching” seven-year limitation in Cal. Civ. Code § 3439.09(c).
                                           13
      “reach back” period is established on the petition date . . . and
      encompasses all transfers within the relevant period provided by
      state law.

Id. In this case, Momentum fraudulently transferred the Property in 2012.

Subsequently, Momentum initiated a lawsuit, and a judgment was entered

against it in 2018. Momentum petitioned for bankruptcy in 2018, less than

seven years after the transfer. The Trustee filed the fraudulent transfer

lawsuit within two years, thus satisfying § 546.

                               CONCLUSION

      When Cortez, Macedo, and EPD Investment are read together with the

California UVTA and the Bankruptcy Code, a bankruptcy trustee has two

years from the commencement of the bankruptcy case to file an action to

avoid a fraudulent transfer pursuant California law provided that:

(1) either the fraudulent transfer occurred within four years of the

bankruptcy petition, or a judgment creating a creditor was entered within

four years of the bankruptcy petition; and (2) the fraudulent conveyance

occurred no more than seven years before the bankruptcy petition.

      In this case, a creditor had a viable claim for fraudulent transfer of the

Property on May 15, 2018, the date the judgment was entered against

Momentum for attorney fees. The Trustee’s action was filed on October 25,

2019, and thus was timely. Additionally, because less than seven years

elapsed between the fraudulent transfer and Momentum’s petition for

                                      14
bankruptcy, the statute of repose did not extinguish the Trustee’s claims.

Based on the foregoing, we AFFIRM.

                                     15