A California appeals court recently determined that debtors who attempt to avoid debt collection by moving their assets out of state and into a different legal form may be liable for fraudulent transfer under California law. On January 7, 2021, the California Court of Appeals issued a decision in Nagel v. Western (2021) 59 Cal.App.5th 740. In Nagel the court held that under California’s Uniform Voidable Transactions Act (the “UVTA”), “physically relocating personal property and transmitting or transporting sale proceeds out of state, then transmuting them into a different legal form, may constitute a direct or indirect mode of parting with assets or one’s interests in those assets.” This means that such transfers would fall under the fraudulent transfer prohibitions of the UVTA. In short, debtors can no longer feel safe trying to shield their assets from creditors by moving them out of state and changing their form. And Creditors have a new mechanism at their disposal to try to access those assets despite such maneuverings on the part of the debtors.
Nagel arose when Sellers sold an “architecturally significant home in the Brentwood area of West Los Angeles” to Buyers. Buyers later learned that the house had suffered extensive water damage causing the home to be uninhabitable. Buyers took the case to arbitration and won.
After the judgment was issued, Buyers tried to collect on their judgment. However, Sellers had already used the bulk of the proceeds from the sale to purchase a new home in Texas—a state which generally makes homes completely exempt from debt collection.
Buyers brought a fraudulent transfer lawsuit against Sellers, arguing that Sellers had violated the UVTA’s restriction on fraudulent transfers by moving their assets to the Texas home. Sellers disagreed, arguing that there could not have been fraudulent transfer under the UVTA because there was no transfer of assets from Sellers to any other third-party. Sellers argued that they had merely changed the location and form of their assets, but not the owners. Since there was not such a third-party recipient in the case to whom the assets were transferred, Sellers argued that it logically followed that there could not have been a fraudulent transfer.
Thus, the question presented to the court was as follows: is a third-party recipient of assets necessary to trigger the fraudulent transfer prohibitions of the UVTA? The court found that the answer to that question was no, a third-party recipient is not necessary.
This was an issue that had not been resolved before now. In resolving it, the court ruled that the UVTA was designed “to prevent debtors from placing, beyond the reach of creditors, property that should be made available to satisfy a debt.” As such, the court determined that when a debtor moves his or her assets to a different state and changes the legal form of the assets, the debtor may still be held liable for fraudulent transfer under the UVTA. This is the case even if there was never a third-party recipient of the assets. The out of state transfer to a different legal form of asset is sufficient to trigger a debtor’s liability for fraudulent transfer.
Take-Away for California Debtors and Creditors
The takeaway from this decision is that debtors can no longer feel that they have adequately shielded their assets from collection merely by moving the assets to a different state and changing the assets’ legal form. Conversely, creditors can feel emboldened that they now have the ability to collect despite any of such mechanizations from debtors.
The court went into uncharted waters in issuing this decision, and the decision may be subject to further challenge in other courts in the future. However, for the time being and into the foreseeable future, the decision is good law, and both debtors and creditors must take note.
If you have questions about creditor or debtor issues, including fraudulent transfers, please do not hesitate to contact the authors of this article or other attorneys at AALRR.
This AALRR post is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process.
© 2021 Atkinson, Andelson, Loya, Ruud & Romo
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