California Court Of Appeals Reverses Dismissal Of Fraudulent Transfer Action

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In Aghaian v. Minassian, the California Court of Appeal, Second District analyzed whether plaintiffs sufficiently alleged claims involving fraudulent transfer of assets under California law, and ultimately reversed the trial court’s judgment sustaining defendants’ demurrers.

The Facts of Aghaian v. Minassian

This is a dispute alleging causes of action stemming from alleged fraudulent transfers under California law brought by the  trustees and beneficiaries of The Galstian Trust II established by their late parents.

The Underlying Action

In 2013, Plaintiffs sued Shahen Minassian based on actions Shahen took beginning in 1996 pertaining to trust properties located in Iran (the underlying action). Plaintiffs sought $105 million in damages.

In 2016, Arthur, Shahen’s son, applied to be appointed as Shahen’s guardian ad litem in the underlying action.  According to Arthur’s application, Shahen was unable to comprehend the nature of the proceedings and could not adequately assist his counsel in defense of the underlying action.

The Dissolution Action

While the underlying action was pending, Arthur, Shahen, and Alice (Shahen’s wife) “concocted” a scheme . . . to hinder, delay or defraud Shahen’s creditors, particularly [p]laintiffs, by putting two houses owned by Shahen and Alice as “husband and wife as joint tenants” in Sherman Oaks into Alice’s name only, thereby making it more difficult for Plaintiffs to levy on the houses.

In furtherance of this scheme, Alice filed a petition for the dissolution of her marriage on September 26, 2016.  About three weeks after Alice filed the petition, the family court granted Arthur’s application to be appointed Shahen’s guardian ad litem in the dissolution proceeding.

Notwithstanding the dissolution proceeding and ostensible separation, Shahen and Alice continued to live together and hold themselves out as husband and wife. In January 2017, Shahen and Alice obtained a reverse mortgage on their residence in the amount of $938,250.

In June 2017, Arthur, as Shahen’s guardian, and Alice stipulated to a division of property in the dissolution action that allocated the Sherman Oaks properties to Alice. Shahen assumed the entire obligation to pay any judgment against him in the underlying action.  A family court judgment was entered approving the stipulation.

The Transfer Of Assets

In August of 2017, Arthur, as Shahen’s attorney-in-fact, executed quitclaim deeds to Alice of Shahen’s interest in their two Sherman Oaks properties.

Trial was held on the underlying action in September 2017.  Shahen testified during 12 days of the trial, without showing signs of diminished capacity.

In June 2018, after the trial in the underlying action but before the court issued its statement of decision, Alice sold the second Sherman Oaks property to a third party for $970,000, with net proceeds to Alice of at least $500,000.  Three days later, Alice used the proceeds from the sale to purchase, in her and Arthur’s name, a condominium in Sherman Oaks for $389,500 in an “all-cash transaction.” Arthur thereafter lived in the condominium. In August 2018, Arthur deeded his interest in the condominium to Alice.

In November 2018, the court issued its final statement of decision in the underlying action, awarding plaintiffs over $34 million, and entered a judgment for the amount.

The California Fraudulent Transfer Action

In July 2018 Plaintiffs filed the fraudulent transfer action, alleging causes of action for fraudulent transfer under California Civil Code § 3439.04(a)(1), constructive fraudulent transfer under California Civil Code § 3439.04(a)(2), aiding and abetting fraudulent transfer (against Arthur), and constructive trust (against Alice).

In sum, Plaintiffs alleged that:

  • The divorce between Shahen and Alice is a “complete sham”;
  • Plaintiffs are creditors within the meaning of California’s enactment of the Uniform Voidable Transactions Act (UVTA) (section 3439 et seq.);
  • Shahen, in making the alleged transfers, acted with “’an actual intent to hinder, delay, or defraud any creditor of the debtor” for purposes of the UVTA;
  • Arthur concocted the entire scheme to hinder, delay, or defraud Shahen’s creditors.

 

Shahen, Alice, and Arthur filed separate demurrers on the grounds that Plaintiffs failed to state a cause of action. The California appeals court summarized the decision of the trial court:

The court sustained the demurrers as to the first cause of action for fraudulent conveyance without leave to amend because Arthur made the challenged transfer as Shahen’s guardian ad litem “under the supervision of the family court.” Plaintiffs, therefore, “will not be able to demonstrate that transfer was made by Shahen with intent to defraud.”

The plaintiffs’ inability to establish Shahen’s fraudulent intent also defeated the third cause of action against Arthur for aiding and abetting fraudulent transfer. In addition, the court explained, “Arthur enjoys judicial immunity for his acts as guardian ad litem . . . [and,] [e]ven if . . . the applications for [guardian ad litem] and the filing of the dissolution actions were a sham, those acts are protected by the litigation privilege under [section] 47.”

The court overruled the demurrers to the second and fourth causes of action. Plaintiffs subsequently dismissed these causes of action without prejudice. The court thereafter entered a judgment of dismissal, and plaintiffs timely appealed.

What Are The Grounds For a Fraudulent Transfer Action In California?

A transfer made or obligation incurred by a debtor is voidable as to a creditor under California law, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation as follows:

(1) With actual intent to hinder, delay, or defraud any creditor of the debtor.

(2) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor either:

(A) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction.

(B) Intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due.

In their first cause of action, plaintiffs sought relief on the ground that Shahen’s transfers of the Sherman Oaks properties constitute voidable transfers under section 3439.04(a)(1) because they were made with actual intent to hinder, delay, or defraud any creditor of the debtor.

When Does a Debtor Have Actual Intent To Hinder, Delay, Or Defraud a Creditor?

Whether a debtor had the actual intent to hinder, delay, or defraud a creditor is a question of fact under California fraudulent transfer law.

Section 3439.04(b) enumerates a nonexclusive list of factors that may be considered in determining actual intent to hinder, delay, or defraud any creditor of the debtor, as follows:

  1. Whether the transfer or obligation was to an insider.
  2. Whether the debtor retained possession or control of the property transferred after the transfer.
  3. Whether the transfer or obligation was disclosed or concealed.
  4. Whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit.
  5. Whether the transfer was of substantially all the debtor’s assets.
  6. Whether the debtor absconded.
  7. Whether the debtor removed or concealed assets.
  8. Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred.
  9. Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.
  10. Whether the transfer occurred shortly before or shortly after a substantial debt was incurred.
  11. Whether the debtor transferred the essential assets of the business to a lienor that transferred the assets to an insider of the debtor.

 

The California court of appeals rejected the finding of the trial court that Plaintiffs could not maintain a fraudulent transfer action against Shahen because Arthur made the challenged transactions as guardian ad litem under the supervision of the family court.  Instead, the appellate court determined that plaintiffs pleaded facts sufficient to constitute a cause of action under section 3439.04, subdivision (a)(1):

They alleged that Shahen made the subject transfers with “ ‘an actual intent to hinder, delay or defraud any creditor of the debtor,’ ” within the meaning of the UVTA, and alleged with particularity the existence of several badges of fraud: Shahen made the transfers to an “insider,” namely, his wife Alice and his son Arthur; he “retained control of the two properties after the transfers”; the plaintiffs had sued Shahen before he made the transfers; and Shahen “did not receive reasonabl[y] equivalent value from Alice for his transfer of the two properties.”

Defendants also contended that plaintiffs failed to state a cause of action for fraudulent transfer because Shahen received from Alice reasonably equivalent value in exchange for the transferred properties.  However, to state a cause of action for fraudulent transfer under section 3439.04, subdivision (a)(1), Plaintiffs were not required to allege that Shahen failed to receive a reasonably equivalent value for the properties he transferred; it is sufficient to allege that the defendant made the transfer “with ‘actual intent to hinder, delay, or defraud any creditor of the debtor.’ ”

The Transfer Of Property Is The Gravamen Of a California Fraudulent Transfer Action

Defendants further argued that the litigation privilege barred the plaintiffs’ action because most of the actions occurred in the course of a judicial proceeding.  The appeals court disagreed, stating:

Shahen and Alice (with Arthur’s aid) used the dissolution judgment to authorize and justify Shahen’s transfer of the Sherman Oaks properties to Alice.… it is the transfer of the property, not the sham judicial proceedings used to provide legal cover for the transfer, that constitutes the gravamen of the action. Shahen’s transfer of the Sherman Oaks properties … is not protected by the litigation privilege.

Status As a Guardian Ad Litem Does Not Provide Blanket Quasi-Judicial Immunity

Plaintiffs’ third cause of action, asserted against Arthur, was based on allegations that he aided and abetted Shahen’s fraudulent transfer of the Sherman Oaks properties.

Defendants argued that the action against Arthur was barred because he has immunity for actions he took as Shahen’s guardian ad litem.  The court of appeals quickly disposed of this argument, stating:

Plaintiffs do not dispute that a guardian ad litem has immunity from liability for “acts within the scope of the guardian’s authority” (McClintock v. West (2013) 219 Cal.App.4th 540, 552), but argue that Arthur’s appointment in the marriage dissolution action as Shahen’s guardian ad litem “is not a get-out-of-jail-free card that provides blanket quasi-judicial immunity” for his conduct in this case. We agree.

Plaintiffs did not sue Arthur because of actions he took as Shahen’s guardian ad litem; they sued him because he “concocted the entire scheme (along with his parents Shahen and Alice),” including “the ‘divorce strategy,’ ” “to hinder, delay or defraud Shahen’s creditors, particularly [p]laintiffs, by putting the [Sherman Oaks properties] . . . into Alice’s name only.” He fulfilled the scheme by executing the challenged quitclaim deeds as Shahen’s attorney-in-fact. Arthur’s actions to become and act as Shahen’s guardian ad litem in the dissolution proceedings may have facilitated the scheme he concocted, but they are merely incidental to it. Stated differently, his involvement in “concoct[ing]” and “orchestrat[ing]” a “sham” divorce proceeding with the intent to “hinder, delay or defraud Shahen’s creditors” occurred outside the scope of the authority he had as Shahen’s guardian ad litem. He is not, therefore, entitled to immunity for that involvement.

The California court of appeals reversed the judgment of the trial court dismissing the fraudulent transfer action, ordering the court to vacate its order sustaining the defendants’ demurrers and enter a new order overruling the demurrers.

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