When a loan is secured by real property in California, a deed of trust is recorded, acting as a lien on the property. This reduces the equity in the property. If the owner defaults on the loan, the beneficiary (lender) may then conduct a trustee’s sale. But what if the beneficiary does not exist? A scam to hide equity from creditors would be to record a fictitious deed of trust so that a judgment would not attach to the property. If the creditor discovers the scam, they could take legal action to have the deed of trust determined to be void. However, in a recent decision, the owner of the property recorded a false deed of trust shortly after acquiring the property. The creditors did not discover the fraud until years later, after the statute of limitations for Fraudulent Transfer had expired. The scam worked.
In PGA West Residential Association Inc. v. Hulven International Inc., defendant Mork bought a condo in La Quinta for cash. It was valued between $5 & $6 hundred thousand dollars. He then recorded a deed of trust against the property naming Hulven Inc. as the beneficiary. There was no such corporation. The deed of trust purported to secure a Note for $450,000, but Mork never made any payments.
Nine months after it was named as the beneficiary on the deed of trust, Hulven was incorporated in Montana. Just over two years later, Hulven was involuntarily dissolved. At all times, Mork was Hulven’s sole officer, director, and shareholder.
In 2011 PGA and Mork’s neighbors obtained a Judgment against Mork for about $2 million dollars. Around then Mork abandoned the property and moved to Henderson, Nevada. In 2012 “Hulven” began foreclosure under its deed of trust. This lawsuit resulted because the plaintiffs’ wanted to reserve their priority. The court concluded that this was a sham transaction, and because Hulven and Mork were the same, the note and deed of trust were fake instruments for the scheme of protecting the equity in the property.
Under the Uniform Fraudulent Transfer Act (UFTA), a transfer is fraudulent, both as to present and future creditors, if it is made ‘[w]ith actual intent to hinder, delay, or defraud any creditor of the debtor.’ (Civ. Code, § 3439.04, subd. (a)[ (1) ].) Even without actual fraudulent intent, a transfer may be fraudulent as to present creditors if the debtor did not receive ‘a reasonably equivalent value in exchange for the transfer’ and ‘the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.’
A key in this case is that there must be a transfer of an asset as defined in the UFTA. Civil Code, section § 3439.01, subdivision [ (m) ] defines ‘[t]ransfer’ as ‘every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset ….’
Statute of Limitations
A claim under the UFTA must be filed within seven years of a fraudulent transfer. Section 3439.09(c) provides: “Notwithstanding any other provision of law, a cause of action under this chapter with respect to a transfer or obligation is extinguished if no action is brought or levy made within seven years after the transfer was made or the obligation was incurred.” Even if belated discovery can be pleaded and proven with respect to the statute of limitations applicable to common law remedies for fraudulent transfers, “in any event the maximum elapsed time for a suit under either the UFTA or otherwise is seven years after the transfer.
The Court concluded that “… the gravamen of those claims is that the 2004 deed of trust was a transfer or obligation executed and recorded “[w]ith actual intent to hinder, delay, or defraud” potential creditors such as PGA West and the Wyatts. (§ 3439.04, subd. (a)(1).)” Thus the UFTA applied.
It Was a Transfer
PGA argued that since the corporation did not exist when the deed of Trust was recorded, and that the defendants were one and the same, and thus no debt incurred,no ‘transfer’ ever occurred. But the court noted that in claims brought under the UFTA, plaintiffs often allege the transfer at issue was made by the debtor to a “sham” corporate entity to hide assets from creditors.
Therefore, although Mork never incurred a real obligation to Hulven under the deed of trust and note, and Hulven apparently never really existed as a corporate entity, Mork’s fraudulent attempt to transfer the equity in his condominium to Hulven to insulate that asset from potential creditors constitutes a “transfer” as defined in section 3439.01, subdivision (m).
The Statute of Limitations Had Passed – the Scam Worked
Civil Code section 3439(c) provides that an action must be brought on a fraudulent transfer within seven years of the transfer. The court found it to be a statute of repose, meaning it completely extinguishes a party’s right, not just the remedy of voiding the transfer. A statute of response can never be forfeited or tolled (the clock stopped). Here, the lawsuit was 7 years after the deed of trust was recorded – too much time had passed, and the scam worked.
The Legislature later revised the UFTA and renamed it the Uniform Voidable Transactions Act, effective January 2016.