TENTATIVE RULING

Calendar:    6

Date:          8/26/22 

Case No: 22 GDCV00297 Trial Date: None Set 

Case Name: Cathay Bank v. Kim, et al.

DEMURRER

Moving Party:            Defendant Nexera Holding, LLC      

Responding Party: Plaintiff Cathay Bank     

RELIEF REQUESTED:

Sustain demurrer to tenth cause of action for fraudulent transfer    

CAUSES OF ACTION: from Complaint   

1) Judicial Foreclosure 

2) Actual Fraudulent Transfer 

3) Constructive Fraudulent Transfer 

4) Constructive Fraudulent Transfer 

5) Constructive Fraudulent Transfer 

6) Actual Fraudulent Transfer 

7) Constructive Fraudulent Transfer 

8) Constructive Fraudulent Transfer 

9) Constructive Fraudulent Transfer 

10) Actual Fraudulent Transfer 

SUMMARY OF FACTS:

Plaintiff Cathay Bank alleges that in June of 2021 it entered into a business loan agreement with Borrower Cherry Man Industries, along with a promissory note, and in August of 2016 entered into a term loan, also along with a promissory note.   Plaintiff alleges that in connection with the extensions of credit provided by plaintiff to the Borrower, defendant Edward Kim executed a commercial guaranty, pursuant to which guarantor agreed to repay all sums owed by the Borrower to the Bank. 

Plaintiff alleges that defendant Edward Kim is a 39% shareholder in Borrower and is also a co-trustee of defendant the Kim Living Trust, and that defendant Evelyn Kim is also a co-trustee of the Trust.   Plaintiff also alleges that defendant Kim’s Place, LLC claims in interest in the subject property that is part of this action. 

Plaintiff alleges that Borrower defaulted on its obligations to the Bank by failing to make monthly payments, maintain working capital current ratios and tangible net worth requirements, and granting junior liens on the collateral pledged, selling equipment and incurring other indebtedness.  The Bank accordingly accelerated the loans and made demand for repayment.   After some discussion, the Bank, Edward Kim and the Borrower agreed pursuant to a letter agreement of February 2022 that the Bank would forebear from exercising its rights as to the initial defaults, and in exchange defendants Edward Kim and Evelyn Kim, both individually and on behalf of the Kim Trust, would grant the Bank a deed of trust securing Edward Kim’s guaranty against an investment property that Edward Kim owned in Glendale.  

Plaintiff has recorded the Deed of Trust.  The Bank’s forebearance expired on February 23, 2022, and Borrower then further defaulted on its obligations to the Bank, and neither Borrower nor Edward Kim have paid all the sums due and owing.  Plaintiffs seeks to judicially foreclose on the subject property described in the Deed of Trust.  

Plaintiff also alleges that as the Borrower’s business began to fail and the defaults began occurring, defendant Edward Kim began transferring his personal residence in La Canada, first, to the Trust, and then to Evelyn Kim as her sole and separate property, and then to Edward Kim and Evelyn Kim as community property with right of survivorship.  Plaintiff alleges that the title transfers were for no consideration, and were made with actual intent to hinder, delay, or defraud creditors, including plaintiff. 

The complaint also alleges that defendants borrowed money secured by the residence, draining the residence of any equity above the homestead exemption, as reflected in a Deed of Trust recorded in March of 2022 in favor of defendant Nexera Holding, LLC and that the lien deed was a transfer of interest in the residence.  The complaint alleges that the funds from the transaction have been transferred to third parties, and that the fund transfers were for no consideration.  The complaint alleges that the lien transfer was also made with actual intent to hinder, delay or default creditors, including plaintiff. 

ANALYSIS:

Tenth Cause of Action— Actual Fraudulent Transfer  

Defendant Nexera demurs to the only cause of action brought against it, the tenth cause of action, in which plaintiff alleges that the lien transfer to Nexera was made with actual intent to hinder, delay, or defraud creditors, including the Bank, and seeks to have the court set aside or declare the lien transfer void to the extent necessary to satisfy the amounts due to the Bank.   

Defendant first argues that the cause of action fails to allege the traditional elements of a fraud cause of action, based either on misrepresentation or concealment.  As argued in the opposition, the cause of action is not one for fraud, but for fraudulent transfer, and plaintiff has no intention of asserting a traditional fraud claim against this defendant.  The cause of action is entitled in the caption “Actual Fraudulent Transfer,” and the cause of action is for “Fraudulent Transfer—Actual Intent to Hinder, Delay, or Defraud a Creditor.”   The cause of action is not for fraud and is not defective on this ground. 

The Uniform Voidable Transactions Act provides, in pertinent 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.”

 Civil Code section 3439.04 (a)(1).

The pleading here sufficiently alleges that plaintiff is a creditor of the Kim defendants, and alleges in some detail the lien transfer at paragraph 64.  The cause of action alleges that the lien transfer has hindered or delayed any potential recovery from Edward Kim by plaintiff, and that there was an intent to conceal the lien transfer, “to make it more difficult for the Bank to obtain payment.”  [Complaint, paras. 84, 85]. 

With respect to the remedies for fraudulent transfer, Civil Code section 3439.07 provides:

“(a) In an action for relief against a transfer or obligation under this chapter, a creditor, subject to the limitations in Section 3439.08, may obtain: 

 

 (1) Avoidance of the transfer or obligation to the extent necessary to satisfy the creditor's claim. 

 (2) An attachment or other provisional remedy against the asset transferred or its proceeds in accordance with the procedures described in Title 6.5 (commencing with Section 481.010) of Part 2 of the Code of Civil Procedure, or as may otherwise be available under applicable law.

 (3) Subject to applicable principles of equity and in accordance with applicable rules of civil procedure, the following:

 (A) An injunction against further disposition by the debtor or a transferee, or both, of the asset transferred or other property of the transferee.

 

(B) Appointment of a receiver to take charge of the asset transferred or other property of the transferee. 

 

 (C) Any other relief the circumstances may require.”

  The pleading requests that the lien transfer be set aside to the extent necessary to satisfy the amounts due to the Bank.  [Complaint, para. 86].  This request appears appropriate, and would require that defendant Nexera, the lien holder, be made a party to such an action, as judgment could ultimately impact its lien.   

Defendant argues that its lien is not subject to the UVTA because defendant’s lien is a valid lien.   

Under Civil Code § 3439.01(a), 

“As used in this chapter the following definitions are applicable:

  (a) "Asset" means property of a debtor, but the term does not include, the following:

    (1) Property to the extent it is encumbered by a valid lien….

  (g) "Lien" means a charge against or an interest in property to secure payment of a debt or performance of an obligation, and includes a security interest created by agreement, a judicial 

lien obtained by legal or equitable process or proceedings, a common-law lien, or a statutory lien….

(n) "Valid lien" means a lien that is effective against the holder of a judicial lien subsequently obtained by legal or equitable process or proceedings.”

As argued in the opposition, the complaint does not target a lien which existed at the time of the transfer of the asset, but one which was created by the transfer.  The critical definition here instead is the definition of “transfer,” as used in section 3439.04(a) quoted above.  Under Civil Code section 3439.01 (m), “‘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…creation of a lien or other encumbrance.”  

It is held that a fraudulent attempt to transfer equity in real property to insulate that asset from potential creditors constitutes a “transfer” as defined in section 3439.01 subdivision (m).   PGA West Residential Assn., Inc. v. Hulven Internat., Inc. (2017) 14 Cal.App.5th 156, 174. 

To the extent defendant argues that defendant took the interest in good faith, Civil Code section 3439.08 sets limitations on avoidance of transfers where an asset has been transferred to a party taking in good faith:

“(a) A transfer or obligation is not voidable under paragraph (1) of subdivision (a) of Section 3439.04, against a person that took in good faith and for a reasonably equivalent value given the debtor or against any subsequent transferee or obligee.”   

As pointed out in the opposition, the argument that defendant took in good faith constitutes an affirmative defense to the fraudulent transfer claim, which defendant can assert by way of answer.  Civil Code section 3439.08 subdivision (f)(1) expressly states:

(f)  The following rules determine the burden of proving matters referred to in this section:  

(1) A party that seeks to invoke subdivision (a)… has the burden of proving the applicability of that subdivision.” 

CACI No. 4207 refers to the good faith determination under Civil Code section 3439.08(a), (f)(1) as “Affirmative Defense—Good Faith.” 

It is not evident from the pleading either that under the facts the Bank took in good faith, or for a reasonably equivalent value, and defendant may assert this affirmative defense, if appropriate. The pleading is sufficient to state a fraudulent transfer claim against the lien held by the moving defendant, and the demurrer accordingly is overruled. 

RULING:

Demurrer to Complaint of Cathay Bank by Defendant Nexera Holding, LLC dba Newfi Lending aka Nexera Holding LLC is OVERRULED. 

Ten days to answer. 

UNOPPOSED Request for Judicial Notice in Support of Demurrer by Defendant Nexera dba Newfi Lending is GRANTED. 

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