Tri-Continental Leasing Corp. v. Zimmerman

• Decision Date: 04 March 1980
• Docket Number: No. C-79-2009.,C-79-2009.
• Citation: 485 F. Supp. 495
• Court: U.S. District Court — Northern District of California
• Parties: TRI-CONTINENTAL LEASING CORP., INC., a corporation, Plaintiff, v. J. Gene ZIMMERMAN, an Individual, Esther J. Zimmerman, an Individual, and Northern California Conference Association of Seventh Day Adventists, a corporation, Defendants.

485 F. Supp. 495

TRI-CONTINENTAL LEASING CORP., INC., a corporation, Plaintiff, v. J. Gene ZIMMERMAN, an Individual, Esther J. Zimmerman, an Individual, and Northern California Conference Association of Seventh Day Adventists, a corporation, Defendants.

No. C-79-2009.

United States District Court, N. D. California.

March 4, 1980.

COPYRIGHT MATERIAL OMITTED

Dinkelspiel & Dinkelspiel, San Francisco, Cal., for plaintiff.

Mandich, Clark & Barker, Sacramento, Cal., for defendants.

ORDER

WOLLENBERG, District Judge.

Plaintiff Tri-Continental Leasing Corp., Inc. brought this action in order to set aside as a fraudulent conveyance the transfer of certain real property by defendants Gene and Esther Zimmerman to defendant Northern California Conference Association of Seventh Day Adventists (the "Church"). The matter is presently before the Court for determination of the Zimmermans' motion to set aside the entry of default judgment and plaintiff's request that the Court enter final judgment.

Plaintiff filed the complaint herein on August 2, 1979. Upon the Zimmermans' failure to respond to the complaint, plaintiff requested on September 17, 1979, the entry of default against them. On the next day, the clerk entered the default. Approximately one month later, the Zimmermans filed a motion to set aside default and vacate judgment pursuant to Rule 60(b), Fed. R.Civ.P. They based their motion on the argument that their failure to file a timely answer resulted from the excusable neglect of their attorney who in August and September of 1979 had suffered from an incapacitating mental condition. Defendants submitted affidavits in support of this contention. On the date of the hearing, defendants attempted to submit additional materials in support of their motion. Despite the untimeliness of this offer and the fact that defendants had improperly brought their motion under Rule 60(b) as opposed to Rule 55(c), Fed.R.Civ.P., the Court accepted these materials and permitted both parties to file supplementary memoranda. Finally, it should be noted that defendant Church has stipulated to judgment in favor of plaintiff.

A motion to set aside an entry of default is addressed to the sound discretion of the trial judge. Madsen v. Bumb, 419 F.2d 4, 6 (9th Cir. 1969). Under Rule 55(c), "for good cause shown the court may set aside an entry of default." The showing of good cause contains two components. The movant must establish a good reason for setting aside the default analogous to the grounds for relief from judgment under Rule 60 and show the existence of a meritorious defense. See Gomes v. Williams, 420 F.2d 1364, 1366 (10th Cir. 1970); Madsen v. Bumb, 419 F.2d at 6; 6 Moore's Federal Practice ¶ 55.101 (2d ed. 1976). Defendants have met the first showing. The affidavits that they have submitted attesting to the illness of their previous attorney provide a sufficient basis for finding a good reason for setting aside the entry of default. Defendants have failed, however, to establish properly the existence of a meritorious defense.

Because the preferred disposition of any case is upon the merits, the showing of a meritorious defense does not involve a heavy burden of proof. Thus, a party seeking to set aside a default need not prove his defense by a preponderance of the evidence. Central Operating Co. v. Utility Workers Union of America, 491 F.2d 245, 252 n. 8 (4th Cir. 1974). Rather, that party only carries the burden of producing competent evidence that establishes a factual or legal basis for the tendered defense. See id.; Gomes v. Williams, 420 F.2d at 1366; Madsen v. Bumb, 419 F.2d at 6. Contrary authority indicating that the party in default need only allege a meritorious defense, see, e. g., Rasmussen v. W. E. Hutton & Co., 68 F.R.D. 231 (N.D.Ga.1975), must be disregarded in the face of the cited decisions of the higher courts. Such a rule would over emphasize the policy of disposing of cases on the merits at the expense of the counterbalancing considerations of judicial economy and efficiency.

The application of these standards to the case at hand finds that the meritoriousness of the Zimmermans' defense hinges upon a single issue. In this diversity case in which state law controls the substantive matter, plaintiff's claim for relief is based upon two different sections of the Uniform Fraudulent Conveyance Act ("the Act"), Cal.Civ.Code §§ 3439, et seq. (West 1970). The complaint alleges that the Zimmermans conveyed the property at issue to the Church with the actual intent to defraud their creditors and that the conveyance rendered the Zimmermans insolvent. The former allegation of actual fraud provides grounds for relief under section 3439.07 while the latter allegation of constructive fraud falls within the scope of section 3439.04. Because the question of actual intent brings into issue the Zimmermans' states of mind at the time of the conveyance, Mr. Zimmerman's sworn declaration in which he denies that their actions were tainted with any fraudulent intent constitutes, for purposes of their present motion, competent evidence necessary to support their defense that they lacked the intent required under section 3439.07.

Similar conclusory allegations, however, do not provide sufficient substantiation for their tendered defense to the claim for relief based upon constructive fraud. Under section 3439.04, every conveyance without fair consideration by a person who is or will be thereby rendered insolvent is fraudulent without regard to actual intent. The Zimmermans admit that the conveyance was without fair consideration but claim that they were solvent both before and after the conveyance. The question of their solvency — unlike the issue of actual intent — rests solely upon purely objective considerations. Under the Act, a person is insolvent when the present fair saleable value of his nonexempt assets is less than the amount that will be required to pay his probable liability on his existing debts as they become absolute and matured. Cal. Civ.Code § 3439.02; see, e. g., Miller v. Keegan, 92 Cal.App.2d 846, 852, 207 P.2d 1073, 1076 (2d Dist.1949). Thus, the determination of this motion depends upon the sufficiency of the evidence defendants have produced concerning this question.

Complicating the determination of this matter is the fact that defendants, despite having gained the reluctant permission of the Court to file untimely affidavits and memoranda, have wholly failed to address their arguments to the statutory scheme at issue. As noted above, the Act's definition of insolvency involves measuring at the time of the conveyance the fair saleable value of nonexempt assets against probable liability on existing debts as they become absolute and matured. Nowhere in their papers have defendants made an attempt to present any type of informal balance sheet computing these figures; nor have they presented the evidence from which such calculations could be made. Instead, defendants have offered the Court haphazardly presented allegations concerning their assets and liabilities at the time of the conveyance without any attempt to substantiate these claims or present estimates of the saleable value of these assets. Furthermore, defendants have either ignored or misconstrued the statutory definition of insolvency. They contend that after the conveyance, they had sufficient assets on hand to keep current with their "just debts." See Defendants' Memorandum of Points and Authorities in Support of Motion to Set Aside Default at 4; Further Affidavit of J. Gene Zimmerman at 2. This argument improperly focuses upon one of the traditional definitions of insolvency instead of utilizing the formula found in section 3439.02. Finally, defendants also fail to recognize that all debts, — not simply "just debts," — whether matured or unmatured, liquidated or unliquidated, absolute, fixed or contingent, are considered existing debts for purposes of determining insolvency. See Cal.Civ. Code §§ 3439.01 & 3439.02.

In light of the inappositeness of defendants' arguments but seeking to give due deference to the policy of disposing of cases upon the merits, the Court has carefully searched the record for competent evidence substantiating the Zimmermans' defense of solvency. The record indicates the following facts. At the time of the conveyance, the Zimmermans had extensive liabilities deriving from the leasing of four computers from four separate leasing companies. The computers ranged in price from $185,000 to $235,000. The Zimmermans allege that two of the leases were secured by real property valued well in excess of the terms of the leases and that the other two leases were secured by the computer that was the subject of the lease. Mr. Zimmerman alleges that in 1978 he had a before-tax income exceeding $150,000. The Zimmermans' only other assets consisted of an assignment of accounts receivable in the amount of $110,000 from a corporation owned by a sales representative of the vendor corporation of the computers. The Zimmermans had contributed their remaining assets to defendant Church. Sometime before the conveyance at issue, the Zimmermans had stopped making their monthly payments on, at least, the two leases secured by the computers. Plaintiff, whose status as a judgment creditor derives from a previous case in this Court based upon its purchase of and lease to the defendants of one of the unsecured computers, has also noted that testimony of Mr. Zimmerman at his post-judgment examination contradicts his present allegations regarding the amount of his 1978 income and the actual value of the real property securing the other two leases.

The Zimmermans' extensive liabilities at the time of the conveyance places a difficult burden upon them in proving their defense. The general rule in these cases creates a presumption of solvency. See Hansford v. Lassar, 53 Cal.App.3d 364, 375, 125 Cal.Rptr. 804, 810 (2d Dist.1976); T W M Homes, Inc....