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United States v. Chan

May 27, 2005

UNITED STATES OF AMERICA, PLAINTIFF,
v.
LISA CHAN, DEFENDANT.
CHRIS YIU, THIRD PARTY CLAIMANT, LAI HEUNG CHAN, THIRD PARTY PETITIONER.



The opinion of the court was delivered by: Claudia Wilken United States District Judge

ORDER ON PENDING MOTIONS REGARDING WRIT OF EXECUTION AND DISCOVERY

On December 9, 2002, a criminal restitution judgment was entered in this Court against Defendant Lisa Chan, also known as Kwai Fong Chan, in the amount of $4,500,100. In order to satisfy the restitution judgment, the government sought a writ of execution authorizing the sale of Defendant's family residence located at 44715 Aguilar Terrace, Fremont, California (the property) which is valued at $1,800,000. Defendant opposed the issuance of the writ of execution. On November 4, 2004, the Court issued its Order Granting Plaintiff's Application for Writ of Execution. On December 1, 2004, Petitioner Lai Heung Chan, Defendant's mother, filed a pro se motion to quash the writ of execution and remove the lien (Docket # 118), Claimant Chris Yiu, Defendant's husband, filed a request for a hearing on a claim of exemption (Docket # 119) and Defendant filed a request for a hearing on a claim of exemption (Docket # 120).*fn1 On December 3, 2004, Defendant filed a motion for reconsideration of the Court's November 4, 2004 Order (Docket # 122), and on February 4, 2005, Chris Yiu filed a request to set aside the writ of execution (Docket # 148).

On February 7, 2005, a hearing was held on all pending motions. Defendant was represented by counsel, Chris Yiu was present without counsel and Lai Heung Chan was not present in person or through counsel. Defendant and Chris Yiu asked the Court to stay ruling on the motions until each of the Objectors' counsel could submit briefing. The Court agreed to stay ruling until further briefing was filed and a further hearing was set for March 7, 2005.*fn2

All parties, through counsel, filed further briefing on the pending motions. On March 7, 2005, a hearing was held on all pending motions. Defendant and Chris Yiu were present with counsel and Lai Heung Chan appeared only through counsel. On March 25, 2005, Lai Heung Chan filed a motion to file a reply brief and for oral argument (Docket # 176). Chris Yiu joined in this motion.

On April 6, 2005, the government filed a motion to compel Defendant to respond to its discovery request and for discovery sanctions. (Docket # 178). Defendant has not responded to this motion.

Having considered oral argument on the motions and all the papers submitted, the Court DENIES Defendant's motion for reconsideration, DENIES Lai Heung Chan's motion to quash and her motion to file a reply and for oral argument, DENIES Defendant's claim of exemption, DENIES Chris Yiu's request to set aside the writ of execution, GRANTS Chris Yiu's claim of exemption and GRANTS the government's motion to compel discovery and for discovery sanctions.

RELEVANT EVIDENCE

On June 22, 2000, the government filed a complaint against Defendant, and a no-bail warrant was issued for her arrest. On June 23, 2000, Defendant appeared before the Magistrate Judge for a detention hearing. On June 27, 2000, she appeared before the Magistrate Judge for a further detention hearing and was released on a $650,000 property bond, secured by the property at issue. On July 13, 2000, a federal grand jury returned a sixteen-count indictment charging Defendant with conspiracy, copyright infringement, money laundering and trafficking in goods with a counterfeit mark in violation of 18 U.S.C. §§ 371, 2319, 1956 and 2320. The indictment alleged that Defendant conspired to infringe and did infringe the copyrights of Microsoft Corporation by selling illegally-reproduced Microsoft software and using counterfeit labeling in connection with these sales. Defendant was alleged to have laundered certain of the proceeds of her copyright infringement in order to conceal the nature, source, ownership and control of the proceeds.

On February 21, 2001, Defendant entered into a plea agreement in which she admitted that, prior to October, 1997 and continuing until June, 2000, she operated two businesses in Fremont, California which sold illegally replicated software programs without authorization from Microsoft, the copyright holder. On December 9, 2002, she was sentenced and was ordered to pay $4,500,100 in restitution to Microsoft. Defendant has paid or been credited with $1,975,114.57 toward the restitution judgment debt and there is a balance due of $2,524,985.43. The government's efforts to obtain a writ of execution against Defendant's property followed.

In regard to the pending motions, the following evidence has been submitted. The Objectors claim that, on August 31, 1998, in connection with the purchase of the property, Lai Heung Chan and Chris Yiu signed a document titled "Consent Agreement" that provides: (a) Lai Heung Chan will pay the deposit and down payment for the purchase of the property; (b) Chris Yiu will make the mortgage payments, pay the property taxes and pay for maintenance of the property; (c) Lai Heung Chan and Chris Yiu will equally own the residence; and (d) if the property is sold, the down payment and deposit will be returned to Lai Heung Chan along with fifty percent of the profit. A check dated July 26, 1998 made out to Old Republic Title in the amount of $10,000 had been signed by Lai Heung Chan. On August 31, 1998, a wire transfer in the amount of $578,278.49 was sent from an account in Lai Heung Chan's name at United Savings Bank to Old Republic Title, but the transfer was initiated by Defendant using her Chinese name, Kwai Fong Chan.

A title report of the property submitted by the government indicates that on September 1, 1998, when the property was purchased, title to the property was put in the names of Defendant and Chris Yiu, husband and wife, as community property. The title report also shows that on September 1, 1998, a deed of trust was signed by Defendant and Chris Yiu to secure their obligation under a Bank of America mortgage. The Deed of Trust remains on the property. A grant deed dated September 5, 1998 recites that Chris Yiu and Lai Heung Chan, as husband and wife,*fn3 deeded the property to Chris Yiu and Lai Heung Chan as trustees of the Chris Ngai K. Yiu (Husband) and Kwai F. Chan (Defendant) Living Trust (1998 Grant Deed). The signature on the deed reads "Lai Heung Chan," but the typewritten words say "Lai Heung Chan AKA/ Kwai F. Chan." As noted, Kwai F. Chan is Defendant's Chinese name. The title report shows that on November 6, 1998, a homestead declaration executed by Defendant and Chris Yiu was recorded against the property.

A grant deed dated June 26, 2000 (2000 Grant Deed) recites that Chris Yiu, as trustee of the Living Trust, granted the deed to the property to himself and Defendant, husband and wife, as community property. The next day, June 27, 2000, Defendant's further detention hearing took place and she was released on a $650,000 bond, secured by the property.

A statement from Chris Yiu's Bank of America checking account for the period October 13 through November 9, 2004 shows that he made a mortgage payment in the amount of $3,397.90 to Bank of America on November 1, 2004. There is no other evidence as to the source of the funds for the other mortgage payments.

DISCUSSION

The Objectors argue that the property cannot be used to satisfy the restitution judgment because Defendant does not own the property; rather, Chris Yiu and Lai Heung Chan own it. However, record title is in the name of Defendant and Chris Yiu, husband and wife, as community property. An "owner of legal title to property is presumed to be the owner of the full beneficial title. This presumption may be rebutted only by clear and convincing evidence." Tannehill v. Finch, 188 Cal. App. 3d 224, 227 (1986).*fn4 To overcome the presumption that Defendant owns the property with Chris Yiu as community property, the Objectors present several arguments, many of which overlap.

I. Lai Heung Chan's Ownership Interest

A. Ownership of Record Objectors Argue that the 1998

Grant Deed or "wild deed" means that Lai Heung Chan is the record owner. The government argues that the "wild deed" never deeded Defendant's ownership interest in the property to anyone, because her name is not on the "wild deed," and thus she never relinquished her original ownership rights.

The "wild deed" did not grant Lai Heung Chan an ownership interest in the residence. The "wild deed" did not purport to transfer title to Lai Heung Chan as an individual, but only as trustee of the Living Trust for Chris Yiu and Kwai F. Chan (Defendant). Therefore, there is no recorded evidence that title to the residence was transferred to Lai Heung Chan in her own right.

Because title to the residence was never recorded in the name of Lai Heung Chan, her contention that she owns the property turns on her argument that the circumstances of this case warrant the imposition of a constructive trust or a resulting trust.

B. Constructive Trust California

Civil Code § 2224, governing constructive trusts, provides:

One who gains a thing by fraud, accident, mistake, undue influence, the violation of a trust, or other wrongful act, is, unless he has some other and better right thereto, an involuntary trustee of the thing gained, for the benefit of the person who would otherwise have had it. "Constructive trusts are implied by law to prevent fraud in the absence of an agreement for a trust. Constructive trusts are 'fraud rectifying' trusts, and not 'intent-enforcing' trusts." Johnson v. Clark, 7 Cal. 2d 529, 533 (1936); Sampson v. Bruder, 47 Cal. App. 2d 431, 435 (1941) (constructive trust imposed not because of intent of parties, but because person "holding title to property would profit by a wrong or would be unjustly enriched if he were permitted to keep the property").

With her original opposition to the writ of execution, Defendant submitted a declaration in which she stated that, at the time of her indictment in July, 2000, the residence was owned by her husband and her mother, as trustees of the Chris Ngai K. Yiu and Kwai Fong Chan Living Trust. She stated that she believed she was the beneficiary of the Living Trust. Defendant continued that when she was required to post security for an appearance bond of $600,000, her family agreed to use the property as security for her bond. An attorney advised her family and herself that, to use the property as security for her bond, her husband and mother would have to transfer the property out of the trust and into the names of herself and her husband.*fn5

Defendant stated that she and her family followed the attorney's advice and that her husband and mother, as trustees of the Living Trust, transferred the residence to Defendant and her husband to be held as community property. Then they posted the residence as security for Defendant's appearance bond. Defendant stated that the transfer of the ownership of the residence was done only to accommodate her need to post security for her bond and the trustees of the Living Trust did not intend to make her a true co-owner.

These facts do not warrant the imposition of a constructive trust because Defendant did not obtain title to the property by defrauding her mother. As Defendant indicates, her family was convinced that title to the property should be transferred from the Living Trust to herself and her husband for the purpose of securing her release on bond in her criminal case. The June 26, 2000 Grant Deed was executed to do so.

In her pro se reply to her motion to quash, Lai Heung Chan did posit that Defendant gained title to the property by fraud. Lai Heung Chan indicated that, even though she and Chris Yiu had an agreement, the Consent Agreement, each to own one-half of the residence, legal title was originally recorded in Defendant and Chris Yiu's name when the residence was purchased. Lai Heung Chan continues:

Defendant orally agreed to transfer claimant's (Lai Heung Chan) 50 percent title back to claimant after the closing of escrow. In Nov, 1998, claimant requested defendant and her husband to transfer the 50 percent title back to her but they only put claimant as one of the trustees of their living trust, and in fact, no legal title has ever been recorded in claimant's name. They cheated claimant and told claimant that the trustee was the same as the title owner. In 2000, defendant breached the agreement when she used the property to secure her appearance bond and recorded a grant deed to put the property under the names of her and her husband without claimant's knowledge and consent.

January 18, 2004 Lai Heung Chan Reply to Motion to Quash at 4-5.

Because Lai Heung Chan presented this scenario in her pro se reply, after the government pointed out that imposition of a constructive trust required wrongdoing on the part of the title owner, the Court infers that she presented it in an attempt to alter the facts to fit the requirements of the law. This version of events is not repeated in the later brief filed by Lai Heung Chan's attorney who indicates that his brief "addresses, perhaps in a more concise way, both the facts and legal arguments previously presented to this Court as well as any additional matters deemed important and relevant . . ." March 15, 2005 Lai Heung Chan Supplemental Brief After Hearing at 2. Thus, the Court concludes that Lai Heung Chan has abandoned this version of events.

Lai Heung Chan cites New York cases which hold that imposition of a constructive trust does not require fraud or a wrongful act, it can be done to fulfill the true intent of the parties. However, these cases are contrary to California law, which must be followed by this Court.

Therefore, because no fraud or mistake was involved in the purported transfer of the property from the Living Trust to Defendant, the request for the imposition of a constructive trust is DENIED.

C. Resulting Trust

"Under California law, a resulting trust arises in favor of the party who pays the purchase price for a parcel of land and places the title to that land in the name of another person." In re San Diego Realty Exch., Inc., 132 B.R. 424, 428 (S.D. Cal. 1991) (citing Cal Civ. Code § 853 and California cases). "The resulting trust arises to enforce the inferred intent of the parties that the apparent purchaser should acquire and hold the property for the party with whose means the property was acquired." Id. However, when the transferee is a child or other natural object of the bounty of the payor, an inference is raised that a gift was intended, and the burden is on the payor seeking the creation of a resulting trust to prove that she did not intend to make a gift to the transferee. Altramano v. Swan, 20 Cal. 2d 622, 628 (1942); Lloyds Bank California v. Wells Fargo Bank, 187 Cal. App. 3d 1038, 1043 (1986).

Lai Heung Chan argues that she is the beneficiary of a resulting trust that arose when the property was purchased. She argues that the intent of the parties was expressed in the Consent Agreement and that, because she made the down payment on the property of approximately $588,000, she fulfilled the terms of the Consent Agreement and one-half of the property rightfully belongs to her. She reasons that because title to the property was taken in the name of Defendant, Defendant holds the residence in a resulting trust for Defendant's mother. Further, she argues that the intent of the September 5, 1998 Grant Deed, or "wild deed," "was to actually transfer the property from [Chris Yiu] and [Defendant], in whose names the property was at the close of escrow, to [Chris Yiu] and Lai Heung Chan in furtherance of the parties' agreement and the payment for the purchase of the property." Lai Heung Chan Supplemental Brief After Hearing at 9.

Even if Lai Heung Chan paid the down payment with her own funds, she must disprove the inference that this money was a gift to Defendant, as her daughter, the natural object of her bounty.

The facts relied upon by Lai Heung Chan do not indicate that the parties intended that she would own half the property. First, the Consent Agreement was never recorded. Therefore, this document could have been executed at any time, and the Court accords it little evidentiary weight. Second, Lai Heung Chan has never explained the source of the large sum of money that she indicates she provided as the down payment for the residence. She moved to quash the government's subpoena for her bank records and, although she withdrew her motion, there is no evidence before the Court that she has provided them. The document titled "Outgoing Funds Transfer Request" which evidences the transfer of $578,278.49 to Old Republic Title Company from a United Savings Bank account in the name of Lai Heung Chan indicates that the transfer was originated by Kwai Fong Chan, who is the Defendant. Thus, Defendant had control over this bank account and the funds could well have come from her illegal activities.

Third, the Deed of Trust recorded on September 1, 1998 to secure the Bank of America mortgage shows ...


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