U.S. Small Bus. Admin. v. Bensal

• Decision Date: 04 April 2017
• Docket Number: No. 14-17404,14-17404
• Citation: 853 F.3d 992
• Parties: UNITED STATES SMALL BUSINESS ADMINISTRATION, an agency of the government of the United States of America, Plaintiff–Appellee, v. Michael D. BENSAL, an individual, Defendant–Appellant, and Susan J. Bensal, as trustee of the Edward D. Bensal Trust; Michael Edward Bensal, an individual; Sophia Bensal, an individual, Defendants.
• Court: U.S. Court of Appeals — Ninth Circuit

853 F.3d 992

UNITED STATES SMALL BUSINESS ADMINISTRATION, an agency of the government of the United States of America, Plaintiff–Appellee,

v. Michael D. BENSAL, an individual, Defendant–Appellant,andSusan J. Bensal, as trustee of the Edward D. Bensal Trust; Michael Edward Bensal, an individual; Sophia Bensal, an individual, Defendants.

No. 14-17404

United States Court of Appeals, Ninth Circuit.

Argued and Submitted December 12, 2016 San Francisco, California

Filed April 4, 2017

Brian D. Seibel (argued), Seibel & Finta LLP, Concord, California, for Defendant–Appellant.

David M. Wiseblood (argued), San Francisco, California, for Plaintiff–Appellee.

Before: Michael Daly Hawkins, Marsha S. Berzon, and Mary H. Murguia, Circuit Judges.

OPINION

MURGUIA, Circuit Judge:

This case requires us to interpret two provisions of the Federal Debt Collection Procedures Act ("FDCPA"), which Congress enacted "to create a comprehensive statutory framework for the collection of debts owed to the United States government." United States v. Gianelli , 543 F.3d 1178, 1183 (9th Cir. 2008) (quoting H.R. Rep. No. 101–736, at 32 (1990)).

The United States Small Business Administration ("SBA") guaranteed a loan between a private bank and Appellant Michael Bensal's ("Bensal") company, Bensal & Coburn Investments LLC ("BCI"). After BCI defaulted on the loan, the private bank sued BCI as the borrower and Bensal as a personal guarantor. The private bank recovered a default judgment and assigned that judgment to the SBA.

Several years later, Bensal inherited a share in his deceased father's trust. Bensal did not accept his inheritance; instead, he signed a disclaimer, which legally passed his trust share to his two children and prevented creditors from accessing his trust share under California law. After Bensal executed his disclaimer, the SBA filed a lawsuit seeking to satisfy its default judgment. The district court held that: (1) the SBA is allowed to recover from Bensal's trust share under the FDCPA despite contrary California law, and (2) the default judgment was a debt within the meaning of the FDCPA. We affirm.

BACKGROUND

In 1999, BCI sought to establish TransWorld Burgers, a fast-food restaurant with an airline-inspired theme and decor. To finance this operation, BCI took out two loans from Millennium Bank ("Millennium"). In connection with the second loan, but not the first, BCI sought a guaranty from the SBA.

The SBA is a federal government agency that assists small businesses by, among other things, guaranteeing commercial loans from private banks. By providing its guaranty that a commercial loan will be repaid, the SBA eliminates some of the risk private lenders face and encourages private lenders to extend more loans to small businesses. 15 U.S.C. § 636(a) ("The [SBA] is empowered ... to make loans to any qualified small business ... either directly or in cooperation with banks or other financial institutions through agreements to participate on an immediate or deferred (guaranteed) basis."); see also United States v. Kimbell Foods, Inc. , 440 U.S. 715, 719 n.3, 99 S.Ct. 1448, 59 L.Ed.2d 711 (1979) (noting that "[t]he SBA prefers to guarantee private loans rather than to disburse funds directly").

A. The SBA Guaranty and BCI's Default

Over the course of several months, the parties signed several documents as part of the SBA's guaranty of the second loan between BCI and Millennium. First, Millennium submitted an application to the SBA for an SBA guaranty of 75% of a proposed $250,000 loan to BCI. In a signed document ("SBA Authorization"), the SBA reduced the loan amount to $175,000, but otherwise approved the bank's application, agreeing to guarantee up to 75% of the loan. Next, BCI and Millennium executed a standard loan contract ("Business Loan Agreement"), in which BCI borrowed $175,000 from Millennium. BCI signed a form ("SBA Note") acknowledging its second loan with Millennium, and Bensal signed a form ("SBA Guaranty") personally guaranteeing repayment of the second loan if BCI defaulted. Both the SBA Note and the SBA Guaranty appeared on SBA letterhead, referenced the same SBA loan-identifying information, and defined rights SBA held against Bensal and BCI.

In January 2000, BCI defaulted on its payment obligations under both loans; some time before the default, Millennium had assigned both loans to First Bank & Trust ("FBT"). FBT filed suit in California state court and alleged, among other claims, that BCI had breached the SBA Note and Bensal had breached the SBA Guaranty. The state court entered default judgment against BCI and Bensal in the following sums: (1) $95,576.66 in principal and interest owed on the first loan, (2) $140,905.63 in principal and interest owed on the second loan, (3) $50,257.92 in attorney fees, and (4) $902.50 in costs.

Because neither BCI nor Bensal satisfied the default judgment, FBT requested that the SBA honor its guaranty of the second loan. In 2005, the SBA negotiated a monetary adjustment with FBT and ultimately paid $54,027.39 to satisfy its obligations as a guarantor on the second loan. In 2011, FBT assigned to the SBA its right to collect the entire amount owing on the default judgment (over $300,000) from BCI and Bensal.

B. Bensal's Inheritance and Disclaimer

In July 2011, Bensal's father died, leaving behind the Edward D. Bensal Trust ("EDB Trust"), which consisted of cash and securities valued at $400,692.94. The trust document awarded Bensal 40% of the EDB Trust. In October 2011, Bensal executed a "Disclaimer of Interest in Trust," which means he renounced—refused to accept—his 40% share of the trust. The legal effect of the disclaimer under California law was that Bensal's trust share passed to his two children. CAL. PROB. CODE § 282.

After Bensal executed the disclaimer, the SBA filed suit in federal district court against the EDB Trust, Bensal, and Bensal's two children. The SBA sought to void Bensal's disclaimer under the FDCPA. In its complaint, the SBA claimed that Bensal had fraudulently transferred his trust share to his children by executing the disclaimer, thereby preventing the SBA from collecting the debt Bensal owed on the default judgment.

Bensal advanced two arguments in response. First, he asserted that his disclaimer was not a fraudulent transfer because the California Probate Code provides that "[a] disclaimer is not a voidable transfer." CAL. PROB. CODE § 283. Second, he maintained that the default judgment assigned to the SBA was not a "debt" within the meaning of the FDCPA.

The district court rejected both of Bensal's arguments, granted summary judgment in favor of the SBA, and ordered the defendants to "transfer all property representing Bensal's trust share to the SBA in satisfaction of the portion of the default judgment relating to the second loan." At the time of the district court's summary judgment order, the amount Bensal owed on the portion of the default judgment relating to the second loan was over $300,000,¹ while the value of Bensal's trust share totaled $153,944.03. Bensal timely appealed.

STANDARD OF REVIEW

This case involves only statutory interpretation, which we review de novo. See Millard v. United Student Aid Funds, Inc. , 66 F.3d 252, 253 (9th Cir. 1995). We review a district court's grant of summary judgment de novo. Entrepreneur Media v. Smith , 279 F.3d 1135, 1139–40 (9th Cir. 2002).

DISCUSSION

At the heart of this case lies the FDCPA's "fraudulent transfer" provision, which allows the federal government to void a fraudulent transfer by a debtor owing a debt to the United States.² 28 U.S.C. §§ 3301 –3308. Specifically, the FDCPA provides that

a transfer made or obligation incurred by a debtor is fraudulent as to a debt to the United States which arises before the transfer is made or the obligation is incurred if—

(1)(A) the debtor makes the transfer or incurs the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation; and

(B) the debtor is insolvent at that time or the debtor becomes insolvent as a result of the transfer or obligation[.]

28 U.S.C. § 3304(a).

Based on the statutory language, the SBA must prove: (1) the existence of a debt predating the transfer, (2) a transfer of assets, (3) lack of equivalent value in exchange for the transfer, and (4) the debtor's insolvency at the time of transfer. Neither party contests that the third and fourth requirements are satisfied. Instead, the dispute centers on: (1) whether Bensal's disclaimer qualifies as a transfer of property, and (2) whether the default judgment constitutes a debt.

I. Whether Bensal's Disclaimer is a Transfer of Property

Bensal contends that California law, which expressly states that "[a] disclaimer is not a voidable transfer," controls over the FDCPA and prevents the SBA from reaching the EDB Trust assets. CAL. PROB. CODE § 283. We disagree and hold that the FDCPA displaces California's disclaimer law.

A. Preemption

"The Supremacy Clause of the Constitution provides that any state law conflicting with federal law is preempted by the federal law and is without effect." Nathan Kimmel, Inc. v. DowElanco , 275 F.3d 1199, 1203 (9th Cir. 2002) (citing U.S. Const. art. VI, cl. 2 ). Where a statute contains an express preemption clause, we "focus on the plain wording of the clause, which necessarily contains the best evidence of Congress' preemptive intent." Chamber of Commerce of U.S. v. Whiting , 563 U.S. 582, 594, 131 S.Ct. 1968, 179 L.Ed.2d 1031 (2011) (quoting CSX Transp., Inc. v. Easterwood , 507 U.S. 658, 664, 113 S.Ct. 1732, 123 L.Ed.2d 387 (1993) ) (internal quotation marks omitted).

The FDCPA contains an express preemption clause, which "preempt[s] State law to the extent such law is inconsistent with a provision of [the statute]." 28 U.S.C § 3003(d). Echoing this preemption clause, federal regulations provide:

No person, corporation, or organization that applies for and receives any benefit or assistance from SBA, or that offers any assurance or security

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