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CALIFORNIA CORPORATE & SECURITIES LAW

Transfer To Non-Existent Corporation Held To Be A Transfer Nonetheless

Sometimes, the law is just weird.  The case of PGA West Residential Ass’n, Inc. v. Hulven Int’l, Inc., Cal. Ct. App. Case No. E064270 (Aug. 9, 2017) is weirder than most.  The lawsuit alleged that the defendant had tried to insulate the equity in his condominium from creditor claims by executing a promissory note and deed of trust in favor of a corporation that did not exist at the time (it was later incorporated).  The defendant defaulted on the note and many years after the statute of limitations had expired on any claim that the corporation might have on the note, the trustee noticed a foreclosure sale.  The plaintiff, another creditor, sued to stop the foreclosure sale and for, among other things, declaratory relief.  The defendant demurred on the basis that the plaintiff’s lawsuit was barred by the seven year limitation period under the Uniform Fraudulent Transfer Act (Cal. Civ. Code § 3439.09(c)).  The plaintiff opposed on the basis that the deed of trust was not a “transfer” under the UFTA.  The Superior Court overruled the demurrer and after a bench trial entered a judgment declaring the deed of trust be void.

The Court of Appeal, reviewing the case de novo, disagreed holding that even though the defendant never incurred a real obligation to the corporation under the deed of trust and note, and the corporation apparently never really existed as a corporate entity, the defendant’s attempt to transfer the equity to the corporation constitutes a “transfer”.  One might expect that a creditor would be pleased if a court found that its debtor had made a “transfer” prohibited by the UFTA, but not in this case.  Here, the Court of Appeal found that the UFTA established a statute of repose rather than a statute of limitations (if you’re not familiar with the difference, the Court provides a good explanation).  As a statute of repose, the plaintiff’s action was “extinguished” because it was not filed within seven years after the transfer.  Technically, the Court of Appeal held only that Section 3439.09(c) is a statute of repose.  The Court did not decide whether Section 3439.09(a) and (b) were also statutes of repose.

I think many people would be surprised to learn that a “transfer” can occur even though the transferee doesn’t exist and that a creditor would be worse off under the UFTA because of that transfer.  But there is more weirdness to this case.  In a footnote, the Court of Appeal notes that during the pendency of the appeal the plaintiff had foreclosed on its own lien and was the owner of the condominium.  Neither party argued that this rendered the appeal moot and the Court exercised its discretion to retain jurisdiction to decide “important issues of public interest”.

Finally, the Court of Appeal recognizes that the UFTA has been amended and rechristened the Uniform Voidable Transactions Act.

 

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