Whitehouse v. Six Corp.

• Decision Date: 21 November 1995
• Docket Number: No. B079794,B079794
• Court: California Court of Appeals Court of Appeals
• Parties: , 95 Cal. Daily Op. Serv. 8894, 95 Daily Journal D.A.R. 15,384 Sheldon WHITEHOUSE, etc., Plaintiff and Respondent, v. SIX CORPORATION, et al., Defendants; Sammy Jo Reeder, et al., Third Party Claimants and Appellants.

Page 600

48 Cal.Rptr.2d 600

40 Cal.App.4th 527, 95 Cal. Daily Op. Serv. 8894,

95 Daily Journal D.A.R. 15,384

Sheldon WHITEHOUSE, etc., Plaintiff and Respondent, v. SIX CORPORATION, et al., Defendants Sammy Jo Reeder, et al., Third Party Claimants and Appellants.

No. B079794.

Court of Appeal, Second District, Division 6, California.

Nov. 21, 1995.

As Modified Nov. 29, 1995.

As Modified on Denial of Rehearing

Dec. 19, 1995.

Review Denied March 14, 1996.

Andre, Morris & Buttery, and James C. Buttery, San Luis Obispo, for Plaintiff and Respondent.

No appearance for Defendant.

David J. Gallo and Michael P. Fedynyshyn, San Diego, for Third Party Claimants and Appellants.

GILBERT, Associate Justice.

A creditor attaches real property. The party claiming ownership of the property asserts a third party claim pursuant to Code of Civil Procedure section 720.110 et seq. ¹ The third party has the burden of proving an interest in the subject property by a preponderance of the evidence. (§ 720.360.)

We hold that when a creditor resists the claim by asserting the property has been fraudulently transferred to the third party, the creditor must prove this allegation by a preponderance of the evidence.

FACTS

On December 18, 1991, respondent, American Universal Insurance Company (American) brought an action against Hill Top Developers Inc., Six Corporation, and One Hundred Thirteen Corporation, seeking the judicial foreclosure and sale of three parcels of secured realty, a mini-mart and two apartment houses. It also sought recovery of any deficiency. ²

At the time the action was filed, all of the stock in Hill Top was owned by Sammy Jo Reeder, appellant, and Wayne Reeder, her husband at the time. Appellant, Interstate Underground Warehouse & Industrial Park, Inc. (Interstate), is a wholly owned subsidiary of Hill Top. Each spouse possessed a one-half interest in Hill Top. The Reeders dissolved their marriage on May 4, 1992.

On December 2, 1992, American, acting through its receiver, moved for a prejudgment order of attachment for all property of Hill Top and RHI formerly One Hundred Thirteen Corporation). (§ 483.010.) In support of its application, American argued that the value of its secured interest in Hill Top's realty was declining, and it was probable the validity of its claims would be upheld.

On February 26, 1993, the trial court granted American a writ enabling it to attach "[a]ll property of Defendant Hill Top Developers, Inc." American recorded the writ of attachment against the three subject properties.

Meanwhile, through a series of transactions, which included a property settlement agreement, Hill Top transferred its interest in the three properties to appellants Sammy Jo Reeder and Interstate. Two of the deeds transferring these properties were dated June 1991, but were not recorded until March and April 1992. The other deed was dated in January 1992, but not recorded until December 1992.

On June 17, 1993, the parties in the underlying action entered into a stipulation allowing for entry of judgment in favor of American and against Hill Top and RHI in the sum of $78,154,937.68, and directing the foreclosure sale of a secured parcel of realty located in Riverside County. Judgment was duly entered by the trial court.

On July 14, 1993, appellants filed a third-party claim of ownership in the subject parcels. (§§ 720.110, 720.130.) In the claim, Ms. Reeder and Interstate alleged that they had lawfully acquired title to these parcels.

In response, American challenged the claim of appellants' ownership upon the grounds that the transfers of the properties from Hill Top to appellants were fraudulent. (Civ.Code, § 3439, et seq.) It petitioned for a hearing on the claim.

Appellants claimed American was attempting to prosecute a fraudulent transfer action by way of summary third-party proceedings. In addition, they requested a continuance so that they could conduct discovery. They also sought to withdraw their third party claim. The trial court denied these requests.

Appellants also protested that the summary third-party claim procedures unlawfully deprived them of their right to a trial by Ms. Reeder, appellants' lone witness at the hearing, testified that she had acquired the two apartment houses pursuant to a divorce settlement, and that she purchased an undivided one-half interest in the third parcel, the mini-mart, from Hill Top for $100,000. She had no explanation why the deed to the mini-mart was dated five months before she signed the check. Nor could she explain other peculiarities surrounding the transaction.

jury. The trial court, however, set the matter for hearing, which began on September 9, 1993.

John Booker, American's manager of administration, testified that, as of the date of the transfers, Hill Top owed American the sum of $65,250,504.84.

American requested that the trial court take judicial notice of the declarations of four appraisers, previously filed in the foreclosure action. Two of these declarants attested to the value of the secured property. Appellants objected upon the grounds that they were "totally surprised" by this evidence; that they were being denied the right to cross-examine the declarants; and that the declarations were hearsay.

The trial court found that the declarations were admissible for the limited purpose of showing the foundational basis for the writ of attachment, and overruled the objections. It also denied appellants' request that they be granted a three-month continuance so that they might obtain their own expert testimony in rebuttal.

On September 14, 1993, the trial court announced its decision to deny the third-party claim. It found that appellants had failed to sustain their burden of proof on the validity of their claims. Reeder and Interstate appealed this ruling.

DISCUSSION

I.

A writ of attachment allows a plaintiff, in certain prescribed instances, to obtain a pre-trial seizure of the property of a defendant-debtor. (Randone v. Appellate Department (1971) 5 Cal.3d 536, 543, 96 Cal.Rptr. 709, 488 P.2d 13.) A plaintiff who suspects that the defendant-debtor has fraudulently transferred assets in order to become judgment proof may also enforce its claim against the transferred property by way of a writ of attachment. (Civ.Code, § 3439.07, subds. (a)(2), (b); see also Schwartz and Ahart, Cal. Practice Guide--Enforcing Judgments and Debts 1 (The Rutter Group 1994) 3:342, p. 3-70.5, and p 4:96, p. 4-20.)

The transferee of the attached property may protect its interest by filing a third party claim. (§ 720.110 et seq.; Regency Outdoor Advertising, Inc. v. Carolina Lanes, Inc. (1995) 31 Cal.App.4th 1323, 37 Cal.Rptr.2d 552.) The property may be personal or real. (§ 720.110, subds. (a), (b).) Upon the filing of this claim, the attachment will be automatically released unless the creditor either: (1) posts a sufficient undertaking (§ 720.160); or (2) petitions the court for a hearing and applies for an ex parte restraining order (§§ 720.310, 720.380, subd. (b)).

II.

Appellants contend that the trial court improperly placed the burden of proof upon them to establish that the challenged transfers were bona fide. They argue that in an action to establish a fraudulent transfer, the plaintiff creditor must prove the transferor's intent by clear and convincing evidence. (See Reddy v. Gonzalez (1992) 8 Cal.App.4th 118, 123, 10 Cal.Rptr.2d 55; (Aggregates Associated, Inc. v. Packwood (1962) 58 Cal.2d 580, 587-588, 25 Cal.Rptr. 545, 375 P.2d 425.) ³

In Liodas v. Sahadi (1977) 19 Cal.3d 278, 292-293, 137 Cal.Rptr. 635, 562 P.2d 316, our Supreme Court disapproved the dictum in Aggregates that said fraud must be proved by clear and convincing evidence. The Liodas court stated the well-established rule that fraud must be proved by a preponderance of the evidence. (Ibid.) Appellants are correct, however, in stating that the creditor has the burden of proof to establish a fraudulent transfer. (Id. at pp. 291-292, 137 Cal.Rptr. 635, 562 P.2d 316.)

If the creditor shows that a conveyance made by a debtor is presumptively fraudulent because it has been made without fair consideration, the burden shifts to the party defending the transfer. (See Neumeyer v. Crown Funding Corp. (1976) 56 Cal.App.3d 178, 190, 128 Cal.Rptr. 366.)

American points out section 720.360 provides that in a third party claim proceeding "the third person has the burden of proof." (See Chrysler Credit Corp. v. Superior Court (1993) 17 Cal.App.4th 1303, 1312-1313, 22 Cal.Rptr.2d 37.) Therefore, it argues that appellants may not rely on the general rule governing the burden of proof in fraudulent transfer actions.

But a party filing a third party claim does not waive the legal requirements of a particular theory a creditor resisting the claim may wish to advance. Section 720.360 was never intended to abrogate the well established rule concerning the burden of proof required in fraudulent transfer actions. Without specifically saying so, the Legislature would not have repealed this long-standing rule merely because a fraud action is tried within the framework of a third party claim proceeding. (Ultramar, Inc. v. South Coast Air Quality Management Dist. (1993) 17 Cal.App.4th 689, 710, 21 Cal.Rptr.2d 608.)

In support of its theory, American contends that a trial court does not determine ultimate ownership of the property, but determines only whether third parties have established their claim.

This contention overlooks the plain meaning of the statute: the judgment of the trial court conclusively established which of the parties had the right to ultimately dispose of the properties. (Emphasis added.) Section 720.390 provides: "At the conclusion of the hearing, the court shall give judgment determining the validity of the third-party claim and may order the disposition of the property or its proceeds in accordance with the respective interests of the parties.... [T]he judgment is...