California Court Says Business Cannot Use Sham Lawsuit to Defeat Fraudulent Transfer Action
Under California law, a San Diego person or business cannot avoid paying its creditors by transferring property or items of value to someone else. Such transfers are voidable — that is, the creditor can file a lawsuit and ask a judge to void the transfer and return the assets to the original party so that the creditor can then seize the assets for payment of the amounts due. These types of cases are generally called fraudulent transfer cases. Fraudulent transfer cases are governed by the California Uniform Voidable Transactions Act (“UVTA”). See Cal. Civ. Code § 3439 et seq. As noted, the purpose of the UVTA is to prevent debtors from placing assets and property beyond the reach of creditors. The UVTA defines “creditors” in the standard way, such as lenders like banks and credit companies, but also includes others to whom money might be due under contracts, such as a seller of goods/services and/or a landlord to whom rent is due.
The UVTA applies to “all transfers.” According to a recent decision by a California Court of Appeals, this definition “… is broad enough to include transfers of assets by means of executing on a judgment obtained by fraud or collusion.” In other words, using a sham lawsuit to transfer property can be voided under the UVTA. See Chen v. Berenjian, Case No. G055496 (Cal. App. 4th Dist. March 28, 2019).
The facts of the case are these: Shazad Berenjian ran a business called Digital Ear, Inc., that sells various electronics including music listening devices like CD players, speakers, and more. Shazad Berenjian had a brother named Sharmad Berenjian.
In 2012, Shazad sold a large quantity of these electronics to Pang Yen Chen (“Chen”) who paid Shazad about $32,000. However, Shazad did not deliver the electronics to Chen and eventually, Chen sued and obtained a judgment against Shazad.
In the meantime, Shazad wanted to avoid having to pay Chen and to avoid having Chen obtain a levy against his inventory. Under California law, if a creditor such as Chen obtains a judgment, and if the judgment is not paid voluntarily, then the creditor can ask that the judge issue a levy against property such as existing inventory. Eventually, law enforcement officers will appear and allow the property to be seized and sold to pay the judgment. According to Chen, to avoid this result in his case, Shazad made an agreement with his brother Sharmad to transfer Shazad’s inventory to Sharmad through use of a sham lawsuit. According to Chen’s complaint, in June 2015, after Chen obtained his judgment, Shazad and Sharmad agreed that Sharmad would file a lawsuit against Shazad claiming that Shazad owed $199,900 to Sharmad. The brothers agreed that Shazad would allow a default judgment to be taken. According to Chen, the purpose of the agreement was “to create a shield against claims of creditors.” According to Chen, there was no truth or substance to the lawsuit between the two brothers. According to Chen, the Berenjian brothers executed their plan and Sharmad filed a lawsuit against Shazad. In October 2015, Sharmad and Shazad entered into a stipulated judgment against Shazad in the amount of $199,900.
When Chen attempted to execute his $32,000 judgment against Shazad, Shazad claimed that all of his assets had been transferred to Sharmad pursuant to the October 2015 stipulated judgment.
In response, Chen invoked the UVTA claiming that the $199,900 “stipulated judgment” was a voidable transfer and should be set aside. At the trial level, the judge refused to apply the UVTA. Essentially, the court said that the UVTA did not apply to transfers made via litigation and judgments. However, as noted, the Court of Appeals reversed holding that the UVTA can be used under the proper facts and circumstances to void a transfer made via a judgment. The case was before the Court of Appeals on various motions, so the case was sent back to the trial judge for further proceedings including a possible jury trial. Chen has not yet proven that the Berenjian brothers agreed to and committed the fraud via sham litigation, but the Court of Appeal has allowed Chen to proceed.
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For more information, please contact Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard’s law practice is focused on business, transactional, and corporate matters. Mr. Leonard can be reached via email or by calling (858) 483-9200. Like us on Facebook.