Judge: John C. Gastelum, Case: 22-01292967, Date: 2023-08-15 Tentative Ruling
(1) Demurrer to Complaint (2-3) Motions to Appear Pro Hac Vice (4) CMC
Tentative Ruling: (2-3) Off Calendar per MP
(1) Defendants, Michael Asmer (“Asmer”) and Diagnostx, LLC (“Diagnostx”) (together “Asmer/Diagnostx”) move for an order sustaining, without leave to amend, their demurrer to the First and Second Causes of Action for failure to state a claim for fraudulent transfer, and Third Cause of Action for failure to state a claim for aiding and abetting of the Complaint filed by Plaintiffs, Philips North America, LLC; Koninklijke Philips N.V; and Philips India, Ltd. (collectively “Philips”).
The Court SUSTAINS, with 10 days’ leave to amend, the demurrer as to the First and Second COAs. The Court OVERRULES the demurrer as to the Third COA.
First and Second COAs – Fraudulent Transfer and Constructive Fraudulent Transfer
Civil Code section 3439, et seq. is known as the Uniform Voidable Transactions Act (“UVTA”). (Civ. Code § 3439.)
Civil Code section 3439.04 states, in relevant part:
(a) 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, 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 reasonable 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 transaction for which the remaining assets of the debtor were unreasonably small in relation to the business 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.
(Civ. Code § 3439.04(a)(1)-(2).)
“ ‘Claim,’ except as used in ‘claim for relief,’ means a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured.” (Civ. Code § 3439.01(b).) “ ‘Debtor’ means a person that is liable on a claim.” (Civ. Code § 3439.01(e).) “ ‘Transfer’ means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, license, and creation of a lien or other encumbrance.” (Civ. Code § 3439.01(m).)
“ ‘A fraudulent conveyance [under the UVTA] is a transfer by the debtor of property to a third person undertaken with the intent to prevent a creditor from reaching that interest to satisfy its claim.’ ” (Yaesu Electronics Corp. v. Tamura (1994) 28 Cal.App.4th 8, 13, 33 Cal.Rptr.2d 283.) . . . . ‘A transfer of assets made by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer, if the debtor made the transfer (1) with an actual intent to hinder, delay, or defraud any creditor, or (2) without receiving reasonably equivalent value in return, and either (a) was engaged in or about to engage in a business or transaction for which the debtor’s assets were unreasonably small, or (b) intended to, or reasonably believed, or reasonably should have believed, that he or she would incur debts beyond his or her ability to pay as they became due. [Citations.]’ (Cortez v. Vogt (1997) 52 Cal.App.4th 917, 928, 60 Cal.Rtpr.2d 841, fns. Omitted; see also Civ. Code § 3439.04.)” (Kirkeby v. Superior Court (2004) 33 Cal.4th 642, 648.) “The purpose of the voidable transactions statute is ‘ “to prevent debtors from placing property which legitimately should be available for the satisfaction of demands of creditors beyond their reach . . . .” ’ [Citation.]” (Lo v. Lee (2018) 24 Cal.App.5th 1065, 1071.)
A transfer under the UVTA can be invalid either because of actual fraud or constructive fraud. (Potter v. Alliance United Ins. Co. (2019) 37 Cal.App.5th 894, 904.) “ ‘A creditor who is damaged by a transfer described in either section 3439.04 or section 3439.05 can set the transfer aside or seek other appropriate relief under Civil Code section 3439.07.’ [Citation.]” (Ibid.)
A creditor may recover and enter judgment against the following: “[t]he first transferee of the asset or the person for whose benefit the transfer was made.” (Civ. Code § 3439.08(b)(1)(A).)
To the extent that Philips might be arguing that Asmer or Diagnostx is a debtor, Philips does not provide sufficient support to establish this is the case. For Asmer/Diagnostx to be liable for alleged violations so the UVTA, it must either be the first transferee of the funds in the Escrow Account or must be the person for whose benefit the release and transfer of funds were made.
It appears that Philips is arguing that Asmer/Diagnostx is “the person for whose benefit the transfer was made,” under Civil Code section 3439.08(b)(1)(A) such that they are subject to liability. However, there are no allegations referenced or cited which support that liability may be had against Asmer/Diagnostx under the UVTA on the basis that either or both as being “the person for whose benefit the transfer was made.” Nor does Philips sufficiently address this point. They cite to federal case law and assert that it provides that a party who forces a debtor to make a transfer of money is generally subject to liability, but they do not cite to any allegations, and none have been found, which allege that Asmer/Diagnostx forced Minn to make a transfer of money. (See Opposition, 10:18-25.)
The phrase “the person for whose benefit the transfer was made,” was derived from 11 U.S.C.S. Section 550(a) of the Bankruptcy Code, and cases which have interpreted said section are persuasive authority. (Lo v. Lee (2018) 24 Cal.App.5th 1065, 1072. “Federal courts have observed that ‘[t]he paradigm example of a transfer beneficiary is a guarantor. When the guaranteed debt is paid, the guarantor has not received the money, but it did receive a benefit—release from its guarantee.’ [Citation.] Yet this model is not exclusive. [Citation.] The court’s obligation is to look behind the form of the transaction and which entity actually benefited from the transfer.” (Id at pp. 1072-1073.) The Court of Appeal in Lo, explained, “There are limits to the legal assessment of the type of ‘benefit’ that will subject a beneficiary to liability for the debtor’s alleged fraudulent transfer. The benefit received must be ‘direct, ascertainable and quantifiable’ and must bear a ‘ “necessary correspondence to the value of the property transferred.” ’ [Citation.]” (Id. at p. 1073.) “ ‘ “[T]ransfer beneficiary status depends on three aspects of the ‘benefit’: (1) it must actually have been received by the beneficiary; (2) it must be quantifiable; and (3) it must be accessible to the beneficiary.” ’ [Citation.]” (Ibid.) “This three-part test is used in federal courts to determine whether a party should be subjected to liability as the ultimate beneficiary of an alleged fraudulent transfer.[Citations.]” (Id. at pp. 1073-1074.) “The benefit that is actually received must flow from the initial transfer which is avoided, instead of being a secondary result of the alleged transfer. [Citation.]” (Id. at p. 1074.)
Here, the allegations indicate that the person for whose benefit the transfer was made was Minn and/or his wife. The Complaint alleges that “Minn is jointly and severally liable for more than $37 million judgment entered against him and his former company KPI Healthcare Inc. by the Honorable James V. Selna of the United States District Court for the Central District of California,” and that to make himself judgment proof, he “emptied his bank accounts, the bank accounts of KPI Healthcare, Inc. and fraudulently conveyed ownership of real property located in Aliso Viejo, California to his wife, Defendant Eun Jin Sue Minn and fraudulently transferred $731,573.51 to his wife, Defendant Eun Jin Sue Minn and to foreign bank accounts that are not subject to U.S. issued levies.” (Complaint, ¶ 2.) The allegations against Asmer/Diagnostx are that Asmer is the CEO of Diagnostx and Probo Medical, LLC, signed the asset purchase agreement, the Escrow Agreement and joint instructions that caused the release of $731,573.51 to KPI Healthcare Inc. in California, and that in so doing, Minn has conspired and received substantial assistance from them, and that Asmer/Diagnostx have intentionally and unlawfully aided, abetted, and conspired with Minn to hide money and assets from Philips. (Complaint, ¶¶ 3, 11.) The Complaint alleges that on September 16, 2019, Philips filed the federal lawsuit against KPI Healthcare, Inc. (“KPI”) and KPI Healthcare e-Commerce, Inc. aka O2 Lifecare Inc. for violations of the Lanham Act and violations of Philips’ intellectual property rights; that Minn misrepresented facts to the federal court and convinced said court to stay the litigation so that Minn could sell off all of KPI’s assets to Diagnostx, a transaction that closed on July 8, 2020, “put millions of dollars into his own pocket and flee to South Korea in an attempt to avoid judgment.” (Complaint, ¶¶ 15, 17.) Ultimately, the Complaint alleges that Asmer on behalf of Diagnostx, and Minn on behalf of KPI, jointly opened a bank account with Capstar Bank that initially contained $1,000,000; that on April 30, 2021, June 22, 2021, June 28, 2021, and September 16, 2022, Philips sent written notices to Asmer, Diagnostx, and Probo through their counsel stating that the funds int eh Escrow Account belong to Philips in satisfaction of its judgment against KPI and Minn; that on July 1, 2022, Philips served a levy on Capstar Bank for the funds in the Escrow Account; that on August 2, 2022, Capstar Bank released $731,573.51 to “KPI Healthcare, Inc.” which was identified as the “Beneficiary Name [] on the Account,” pursuant to joint instructions signed by Asmer as the CEO of Diagnostx and Minn as the representative of KPI; that on August 3, 2022, Capstar Bank wired $731,573.51 to KPI; that between August 3 and August 9, 2022, Minn transferred the entire amount from the KPI Bank of America account to his personal Bank of America account; that on August 9, 2022, Minn wired $664,000 to his wife’s personal bank account in two separate transactions; and that on August 23, 2022, Minn wired $44,000 to a bank account that “on information and belief is being used to hide assets.” (Complaint, ¶¶ 27-33.)
Based on the foregoing, it appears that neither Asmer nor Diagnostx was the first transferee of the funds in the Escrow Account or the person for whose benefit the release and transfer of funds were made such that Philips may not recover and enter judgment against either of them, and neither Asmer nor Diagnostx is a debtor.
Asmer/Diagnostx also argues that the transfer of funds from the Escrow Account does not constitute a “transfer” under the UVTA.
In order for a fraudulent transfer to occur, among other things, there must be a transfer of an asset as defined in the UVTA. (Fidelity National Title Ins. Co. v. Schroeder (2009) 179 Cal.App.4th 834, 841.)
“ ‘Transfer’ means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, license, and creation of a lien or other encumbrance.” (Civ. Code § 3439.01(m).) “ ‘Asset’ means property of a debtor,” but does not include “[p]roperty to the extent it is encumbered by a valid lien,” “[p]roperty to the extent it is generally exempt under nonbankruptcy law,” and [a]n interest in property held in tenancy by the entireties [sic] to the extent it is not subject to process by a creditor holding a claim against only one tenant.” (Civ. Code § 3439.01(a)(1)-(3).)
“ ‘A well-established principle of the law of fraudulent transfer is, “A transfer in fraud of creditors may be attached only by one who is injured thereby. Mere intent to delay or defraud is not sufficient; injury to the creditor must be shown affirmatively. In other words, prejudice to the plaintiff is essential. It cannot be said that a creditor has been injured unless the transfer puts beyond [her] reach property [she] otherwise would be able to subject to the payment of [her] debt.” [Citation.]’ [Citation.]” (Fidelity National Title Ins. Co. v. Schroeder (2009) 179 Cal.App.4th 834, 841.)
Asmer/Diagnostx’s argues that “[a] fraudulent transfer did not occur when Diagnostx instructed release of funds from the Escrow Account controlled by Capstar Bank, held in Diagnostx’s name, to an account in the name of KPI,” and that the transfer of funds by Capstar actually moved the funds closer to Plaintiff by releasing them to the KPI Bank of America account that Plaintiffs had previously levied. (Reply, 9:28-10:11.) However, the portions of the Complaint cited does not support this assertion. The Complaint alleges that, “Asmer on behalf of Diagnostx and Minn on behalf of KPI jointly opened a bank account with Capstar Bank that initially contained $1,000,000.” (Complaint, ¶ 27.) Taking this allegation as true, this Escrow Account was joint, and not held in Diagnostx’s name only.
Based on the foregoing, the Court SUSTAINS, the demurrer, with 10 days’ leave to amend.
Third COA – Aiding and Abetting
“California has adopted the common law rule for subjecting a defendant to liability for aiding and abetting a tort. ‘ “Liability may . . . be imposed on one who aids and abets the commission of an intentional tort of the person (a) knows the other’s conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other to so act or (b) gives substantial assistance to the other in accomplishing a tortious result and the person’s own conduct, separately considered, constitutes a breach of duty to the third person.” [Citations.]’ [Citation.]” (Casey v. U.S. Bank Nat. Assn. (2005) 127 Cal.App.4th 1138, 1144.) “Because transferring funds in order to evade creditors constitutes an intentional tort, it logically follows that California common law should recognize liability for aiding and abetting a fraudulent transfer.” (Berger v. Varum (2019) 35 Cal.App.5th 1013, 1025.)
Here, the Third COA alleges that based on the allegations set forth above which are incorporated into the Third COA, Asmer/Diagnostx “each provided substantial assistance to Minn in order to hinder, delay and defraud Philips,” that they caused the Property and escrowed funds to be fraudulently transferred , and that as a result of their substantial assistance and direct conduct which caused the fraudulent transfer of the escrowed funds, Philips has been hindered, obstructed, and delayed in its ability to collect on the judgment against Minn and KPI. (Complaint, ¶¶ 56, 58.) The Complaint alleges sufficient facts to support a fraudulent transfer by Minn and/or KPI by way of the execution of joint instruction to release funds in the Escrow Account, that Asmer/Diagnostx knew that the release of funds constitutes a breach of duty to Philips, that they gave substantial assistance to Minn to act in accomplishing a tortious result, and that their own conduct, separately considered, constitutes a breach of duty to Philips as they were on notice that the funds in the Escrow Account belonged to Philips, and were on notice of the Judgment entered against Minn and KPI prior to the release of funds, and yet, they signed joint instructions with Minn for the release of the funds in the Escrow Account. (Complaint, ¶¶ 3, 11, 15, 17, 27-34, 56, 58.) Thus, there are sufficient facts alleged to support a cause of action for aiding and abetting under either the first or second theory of liability. The Court OVERRULES the demurrer to the Third COA.
Asmer/Diagnostx argues that they were contractually obligated to provide joint escrow instructions for the disbursement of funds, citing to Section 4.10(iii) of the Escrow Agreement attached as Exhibit 2 to their RJN, but the cited section does not state any requirement by Asmer/Diagnostx to execute joint escrow instructions. (Ex. 2 to Asmer/Diagnostx RJN, Escrow Agreement, ROA 62.) It merely provides that the “Escrow Agreement shall terminate on the first” of three possible actions, which is known as the “Escrow Release Date,” with Section 4.10(iii), being “twenty-four (24) months following the Effective Date of this Escrow Agreement.” (Ex. 2 to Asmer/Diagnostx RJN, Escrow Agreement, § 4.10(iii), ROA 62.) It also states, “Upon the Escrow Release Date, the Escrow Agent [Capstar] is authorized and directed to disburse all of the remaining funds and property held hereinunder in accordance with the joint written instructions of the Parties.” (Id., § 4.10.) However, the Escrow Agreement does not expressly state that Asmer/Diagnostx was required to execute joint written instructions, it merely provides that upon the Escrow Release Date, Capstar is authorized and directed to disburse all remaining funds in accordance with joint written instruction of the Parties. Based on the foregoing, it does not appear that joint instructions were required, and Asmer/Diagnostx does not establish otherwise as a matter of law at this stage.
The Court declines to consider all new points, arguments, and evidence presented for the first time on reply, including that Asmer, as an individual defendant, cannot be held personally liable, and the Request for Judicial Notice and Supplemental Declaration of Michael K. Wegner. (See Balboa Ins. Co. v. Aguirre (1983) 149 Cal.App.3d 1002, 1010; Jay v. Mahaffey (2013) 218 Cal.App.4th 1522, 1537-1538.)
Asmer/Diagnostx’s request for judicial notice is GRANTED pursuant to Evidence Code sections 452(d) and (h).
Philips to file an amended complaint within 10 days of the notice of ruling.
Asmer/Diagnostx to give notice.