Judge William A. Crowfoot, Case Number: 22AHCV00135, Date: 2024-09-10 Tentative Ruling

Judge: William A. Crowfoot, Case: 22AHCV00135, Date: 2024-09-10 Tentative Ruling

This action was filed on March 14, 2022, by plaintiffs Anthony K. Chu dba Law Offices of Anthony Chu (“Chu”) and Jian Qi (“Qi”) (collectively, Plaintiffs”). The operative complaint, the Third Amended Complaint (“TAC”) was filed on June 1, 2023. Plaintiffs assert causes of action for avoidance of fraudulent transfer and civil conspiracy. The Court notes that Plaintiffs filed several requests for dismissal on October 3, 2023, seeking to dismiss Ketian Yue, Chenchen Xu, Sunrise Logistic Group from the entire TAC and dismiss the First and Second Causes of Action against Yun Zheng, Jennifer Liu, and Shajoie Zhang, however, the dismissals were not entered because Plaintiffs did not use the correct form.

In short, the action arises from Plaintiffs’ attempt to collect on judgments from New Diamond and New Diamond’s owner, Qingyu Zhang, who allegedly made fraudulent transfers in order to avoid paying said judgments. Before the Court is a motion for summary judgment/summary adjudication filed by 2000 West, Yun Zheng (“Y. Zheng”), sued as Doe 5, and Shaojie Zhang (“S. Zhang”), sued as Doe 6. 2000 West, Y. Zheng, and S. Zhang (collectively, “Defendants”) seek summary judgment or, in the alternative, summary adjudication as to each cause of action in the TAC.

In reviewing a motion for summary judgment, courts must apply a three-step analysis: “(1) identify the issues framed by the pleadings; (2) determine whether the moving party has negated the opponent’s claims; and (3) determine whether the opposition has demonstrated the existence of a triable, material factual issue.” (Hinesley v. Oakshade Town Center (2005) 135 Cal.App.4th 289, 294.) A defendant moving for summary judgment or summary adjudication “has met his or her burden of showing that a cause of action has no merit if the party has shown that one or more elements of the cause of action . . . cannot be established, or that there is a complete defense to the cause of action.” (Code Civ. Proc., § 437c, subd. (p)(2).) To meet this burden of showing a cause of action cannot be established, a defendant must show not only “that the plaintiff does not possess needed evidence” but also that “the plaintiff cannot reasonably obtain needed evidence.” (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 854.) A moving defendant need not conclusively negate an element of plaintiff’s cause of action, but it is insufficient for the defendant to merely point out the absence of evidence. (Id. at p. 854; Gaggero v. Yura (2003) 108 Cal.App.4th 884, 891.) The supporting evidence can be in the form of affidavits, declarations, admissions, depositions, answers to interrogatories, and matters of which judicial notice may be taken. (Aguilar, supra, 25 Cal.4th at p. 855.) “Once the defendant . . . has met that burden, the burden shifts to the plaintiff . . . to show that a triable issue of one or more material facts exists as to the cause of action or a defense thereto.” (Code Civ. Proc., § 437c, subd. (p)(2).) The plaintiff may not merely rely on allegations or denials of its pleadings to show that a triable issue of material fact exists, but instead, “shall set forth the specific facts showing that a triable issue of material fact exists as to the cause of action.” (Ibid.) “If the plaintiff cannot do so, summary judgment should be granted.” (Avivi v. Centro Medico Urgente Medical Center (2008) 159 Cal.App.4th 463, 467.)

Request for Judicial Notice: Defendants’ request for judicial notice of an order issued by the Court of Common Pleas of Hamilton County, Ohio, is GRANTED. (Evid. Code, § 452, subd. (d).)

Objections to Declaration of Anthony Chu: Defendants’ Objection Nos. 2 and 3 relating to a deposition taken of Q. Zhang in a civil case filed in Ohio are SUSTAINED in part. (Wong v. Stillwater Ins. Co. (2023) 92 Cal.App.5th 1297, 1324 [out-of-state deposition of purported percipient witness from different case not admissible as evidence under California’s summary judgment statute].) Plaintiffs seek to introduce Q. Zhang’s deposition from a prior case filed by Q. Zhang and against 2000 West and Y. Zheng. While attorneys for both 2000 West and Y. Zheng were present at Q. Zhang’s deposition, and Frost, Brown, Todd, LLC (who is currently counsel of record for Defendants) was counsel of record for Y. Zheng in the prior action, S. Zhang was not a party to this lawsuit and therefore did not receive notice of the deposition or have an opportunity to cross-examine Q. Zhang.

Additionally, there is no evidence that Q. Zhang’s deposition was intended to serve as trial testimony or that the parties subsequently reached any agreement concerning use of his deposition at trial in that case, or in other cases. (Berroteran v. Superior Court (2022) 12 Cal.5th 867, 901-902.) In Berroteran, the California Supreme considered the difference between testimony given at a deposition compared to trial testimony and the tactical reasons why an examining party may elect not to conduct aggressive questioning at a deposition, which is primarily intended to pin down the testimony of an adverse witness and serve as impeachment evidence. The Berroteran court stated that the proponent of the prior deposition testimony had the burden of showing, when opposing a motion to exclude, that the examining party had the “same interest and motive for cross-examination that would exist at trial” and set forth specific factors, for any trial court considering whether to exclude a deposition taken in a different case. The fact that the parties were adverse is not, standing alone, sufficient to demonstrate an interest and motive to cross-examine.

Defendants’ Objection Nos. 6, 7, 8, 9, 10-12, 14, and 15 are SUSTAINED because there is no certificate of authentication from a custodian of record for bank statements and checks. In an impermissible sur-reply, Plaintiffs contend that the subpoenaed records were already “provided” to Defendants in prior discovery exchanges. (Sur-reply, Chu Decl., ¶¶ 9-11.) The issue is not whether Defendants have been given the records; the issue is that Plaintiffs have yet to demonstrate the admissibility of the purportedly subpoenaed records to the Court by providing the Court with a declaration from the custodian of records.

Defendants’ Objection Nos. 4, 5, 16-19, 23, 24 to court records from Ohio state court are OVERRULED. The Court takes judicial notice of the existence of these records, but not the truth of the matters stated within.

Objection Nos. 28-38 are SUSTAINED on the grounds that the statements objected to are improper legal conclusions.

Objection to the Declaration of Jennifer Liu: Defendant’s objection to the entirety of the Declaration of Jennifer Liu is SUSTAINED as untimely. Plaintiffs served this declaration on September 4, 2024, which is only 6 days before the hearing in violation of CCP section 437c(b)(2). Plaintiffs do not offer any explanation for the failure to timely serve the declaration. In their impermissible sur-reply, Plaintiffs claim that “for personal reasons”, the declaration could not be finalized until August 30, 2024. (Sur-reply, Chu Decl., ¶ 12.) However, this explanation, besides being inadequate, is belied by the act that the declaration is actually dated September 1, 2024.

Plaintiffs allege that 2000 West was formed in Ohio for the purpose of purchasing a parcel of real property in Hamilton County and that New Diamond fraudulently transferred money to 2000 West for this purchase in order to avoid paying a judgment in an employment case brought by Qi against New Diamond. This employment case was initiated in 2016 and Plaintiffs obtained their judgment against New Diamond in 2021. (TAC, ¶ 33.) Plaintiffs claim that the funds transferred by New Diamond, which amounted to a 50% ownership interest in 2000 West, were a fraudulent conveyance because New Diamond did not receive a reasonably equivalent value in exchange by being named as a shareholder of 2000 West. (TAC, ¶ 34) Instead, Q. Zhang (who owns New Diamond) was named as a shareholder. (TAC, ¶ 35.) The funds transferred from New Diamond to 2000 West form the basis for the First, Second, and Third Causes of Action. The First Cause of Action for Fraudulent Transfer is predicated on actual fraud whereas the Second Cause of Action for Fraudulent Transfer is predicated on constructive fraud. The Third Cause of Action is for Civil Conspiracy.

In July 2020, Plaintiffs filed a malicious prosecution case against Q. Zhang. Plaintiffs allege that after Q. Zhang was served with the summons and complaint in this case, he fraudulently transferred his 50% interest in 2000 West to Y. Zheng in order to avoid paying any potential judgment. (TAC, ¶¶ 63-64.) Plaintiffs eventually obtained a default judgment in this malicious prosecution case around April 30, 2021. (TAC, ¶ 65.) The transfer of Q. Zhang’s ownership interest in 2000 West to Y. Zheng form the basis for the Fourth, Fifth, and Sixth Causes of Action. The Fourth Cause of Action for Fraudulent Transfer is premised on actual fraud. The Fifth Cause of Action for Fraudulent Transfer is based on constructive fraud. The Sixth Cause of Action is for Civil Conspiracy.

A “fraudulent conveyance is a transfer by the debtor of property to a third person undertaken with the intent to prevent the creditor from reaching that interest to satisfy its claims.” (See Yaesu Electronic Corp. v. Tamura (1994) 28 Cal.App.4th 8, 13.) Under the Fraudulent Transfer Act (Civ. Code, §§ 3439–3439.12), 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 “with actual intent to hinder, delay or defraud any creditor.” (Civ. Code, § 3439.04, subd. (a)(1).) In determining actual intent, consideration may given to factors including whether:

(2) Whether the debtor retained possession or control of the property transferred after the transfer.

(4) Whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit.

(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.

(Code Civ. Proc., § 3439.04, subd.(b).) A transfer that would otherwise be voidable as intentionally fraudulent is not voidable against a transferee who took in good faith and for a reasonably equivalent value. (Civ.Code, § 3439.08, subd. (a).)

In the absence of actual intent, a transfer of assets is fraudulent if the debtor did not receive a reasonably equivalent value in exchange for the transfer or obligation and the debtor was: (a) engaged in or about to engage in a business or transaction for which the debtor's assets were unreasonably small, or (b) intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due. (Civ.Code, § 3439.04, subd. (a)(2).)

In their motion, Defendants argue that Plaintiffs cannot establish that the transactions between Y. Zheng, 2000 West, and Q. Zhang were made fraudulently because they were made in good faith and with valid consideration, and had nothing to do with Plaintiffs’ attempt to collect on judgments against New Diamond and Q. Zhang. Defendants argue that the money transferred from New Diamond to 2000 West consisted of: (1) reimbursement of funds that were originally provided by Y. Zheng, (2) Q. Zhang’s initial capital contributions to 2000 West, and (3) rental payments due under a sublease agreement by which New Diamond sub-leased a warehouse in Ohio (“the Subject Property”) from 2000 West’s landlord. Defendants claim that Q. Zhang transferred his 50% ownership interest in 2000 West to Y. Zheng, the sole manager of 2000 West, after he failed to reimburse Y. Zheng for expenditures made in connection with the formation of 2000 West and the purchase of the Subject Property.

Defendants explain that 2000 West was comprised of three members: Y. Zheng, Q. Zhang, and nonparty Jennifer Liu (“Liu”). Defendants claim that around 2017, Y. Zheng and New Diamond agreed that Y. Zheng would provide New Diamond with $362,500 so that New Diamond could secure a loan from the U.S. Small Business Administration (“SBA”); this SBA loan would then finance 2000 West’s acquisition of the Subject Property, which would be leased by New Diamond. (UMF No. 3.) Y. Zheng authenticates a copy of a check for $362,500 made payable to New Diamond dated April 3, 2017. (Y. Zheng Decl., Ex. 2.) Y. Zheng also states that this agreement was memorialized in a document entitled, “Funding Agreement”, but does not state when this memorialization occurred (Y. Zheng Decl., Ex. 3.) The purported memorialization states that the Fundng Agreement is an “agreement is entered into by and between [New Diamond] and [Y. Zheng] on and effective April 4, 2017.” In what appears to be a typographical error, the document also states that Y. Zheng “provided funding of $362,500 on April 4, 2020 to New Diamond in order to facilitate a SBA loan application to secure funding for the warehouse.” The timing of the purported fundng in 2020 is contradicted by the check written to New Diamond dated April 3, 2017, therefore, it appears that this document was created after the check was made and backdated because “4/4/17” and “04/04/17” are handwritten next to the signature blocks.

Y. Zheng claims that the $362,500 she gave for New Diamond’s SBA loan also acted as her capital contribution to 2000 West ($285,000) with the remaining $77,500 to serve as a personal loan to Q. Zhang. (Y. Zheng Decl., ¶¶ 10-11.) Another member of 2000 West, Liu, provided her capital contribution of $190,000 in cash. In contrast, Q. Zhang initially did not provide his capital contribution of $475,000 to 2000 West. Instead, he executed a promissory note dated October 1, 2017, agreeing that the full amount of his capital contribution would be “due upon lease termination and/or execution of purchase.” (Y. Zheng Decl., Ex. 5.)

Shortly after executing this promissory note, on or about October 5, 2017, New Diamond wired $160,000 to 2000 West as part of Y. Zheng’s capital contribution towards the purchase deposit for the Subject Property. (Id., ¶ 12.) The remaining $125,000 held by New Diamond became a short-term loan from 2000 West, due by April 30, 2018, with 6% annual interest. (Id., ¶ 15, Ex. 7.) New Diamond eventually repaid the principal amount by the due date and the interest was forgiven. (Y. Zheng Decl., ¶ 24.) As evidenced by checks dated October 23, 2017, through April 30, 2018, New Diamond paid $186,666.69 to 2000 West. (Y. Zheng Decl., Exs. 8-15.) After April 30, 2018, New Diamond continued to send checks to 2000 West in order to pay monthly rent due under the sublease agreement and as part of Q. Zhang’s capital contribution. (Y. Zheng Decl, Exs. 16-25.) The last check from New Diamond was dated March 1, 2019. (Y. Zheng Decl., ¶. 36.)

Apart from Y. Zheng and Q. Zhang’s involvement in 2000 West, Y. Zheng declares that from August through October 2018, she and Q. Zhang were considering investing in different warehouses. She made 2 checks payable to New Diamond as part of these investments for $253,173.25 and $169,326.25 which, along with the $77,500 loaned to Q. Zhang as agreed-upon in 2017, amounted to $500,000. (Y. Zheng Decl., ¶¶ 37-39.) This $500,000 loan was subsequently memorialized in an agreement dated January 1, 2019, which stated that Q. Zhang was supposed to pay Y. Zheng back by September 30, 2019, and Q. Zhang’s ownership interest in 2000 West would serve as collateral for this loan. (Y. Zheng Decl., Exs. 28-29.) Q. Zhang did not pay Y. Zheng the $500,000 by the due date, and on October 1, 2019, they executed an amendment which transferred Q. Zhang’s interest in 2000 West to Y. Zheng. (Y. Zheng Decl., ¶¶ 40, 41, Exs. 30-31.) Q. Zhang later filed a lawsuit in Ohio state court against Y. Zheng and 2000 West claiming that the transfer was fraudulently obtained. (Y. Zheng Decl., ¶ 43, Ex. 32.) The lawsuit was eventually resolved in Y. Zheng’s favor after the Ohio court granted Y. Zheng’s motion for summary judgment. (Id., ¶ 43.)

Y. Zheng and her husband, S. Zhang, also each declare that from 2017 through 2020, they were not aware of the judgments obtained against either New Diamond or Q. Zhang. (Y. Zheng Decl., ¶ 42; S. Zhang Decl., ¶ 3.) They both further declare that none of the transactions were undertaken with the intent to assist New Diamond or Q. Zhang in evading any obligations to their creditors. (Ibid.)

Based on the foregoing, Defendants have met their moving burden to show that Plaintiffs cannot establish their claims for fraudulent transfer or civil conspiracy. Defendants made a prima facie showing that they acted in good faith and the transfers from Q. Zhang and New Diamond were made for a “reasonably equivalent value” based on Q. Zhang’s obligations to Y. Zheng and 2000 West. (Civ. Code, § 3439.08, subd. (a).)

Plaintiffs argue in their opposition brief that triable issues of material fact exist regarding the intent of the transfers at issue, as well as Defendants’ involvement in those transfers. Plaintiffs claim that Y. Zheng and S. Zhang were both investors in New Diamond and therefore, the transfers from New Diamond to 2000 West, as well as those from Q. Zhang to Y. Zheng, were made to “insiders” intended to preserve their investments, which is a factor to take into consideration when determining whether there is an “actual intent to hinder, delay, or defraud any creditor of the debtor.” (Civ. Code, § 3439.04 subd. (b)(1).) As evidence, Plaintiffs rely on communications attached to Y. Zheng’s filings in the Ohio Lawsuit which refer to Y. Zheng and S. Zhang’s “investment” in New Diamond. (Chu Decl. p. 231.) However, the fact that Q. Zhang initiated the Ohio Lawsuit against Y. Zheng in 2021, before Plaintiffs initiated the instant action, shows that there was no collusion or conspiracy to transfer assets to avoid Plaintiffs’ attempts to collect on a judgment; rather, the Ohio lawsuit demonstrates that Q. Zhang actually attempted to invalidate the agreement to transfer his ownership interest in 2000 West to Y. Zheng. To conclude that the Ohio lawsuit was preemptively filed as a ruse between Q. Zhang, 2000 West and Y. Zheng in order to lend legitimacy to any transfers and shield Defendants’ “investment” in New Diamond from Plaintiffs’ collection efforts would require an incredible amount of speculation, especially since the Ohio lawsuit was filed before the instant one and did not even include S. Zhang.

Plaintiffs also attempt to cast doubt on Y. Zheng and 2000 West’s purported loans to Q. Zhang and New Diamond because the agreements appear to be backdated. However, on reply, Defendants persuasively argue that even if the agreements are backdated, there is no evidence that they do not accurately memorialize the purpose of those documents or the financial arrangements that were made.

Accordingly, Plaintiffs fail to raise a triable issue of fact showing that the transfers between Q. Zhang and New Diamond and Defendants were fraudulent. Without a fraudulent transfer, Plaintiffs necessarily fail to show that Defendants were engaged in a civil conspiracy.

William A. Crowfoot

Judge of the Superior Court

Parties who intend to submit on this tentative must send an email to the Court at ALHDEPT3@lacourt.org indicating intention to submit on the tentative as directed by the instructions provided on the court website at www.lacourt.org. Please be advised that if you submit on the tentative and elect not to appear at the hearing, the opposing party may nevertheless appear at the hearing and argue the matter. Unless you receive a submission from all other parties in the matter, you should assume that others might appear at the hearing to argue. If the Court does not receive emails from the parties indicating submission on this tentative ruling and there are no appearances at the hearing, the Court may, at its discretion, adopt the tentative as the final order or place the motion off calendar.