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Nautilus, Inc. v. Yang

California Court of Appeals, Fourth District, Third Division

April 21, 2017

NAUTILUS, INC., Plaintiff, Cross-defendant and Appellant,
CHAO CHEN YANG et al., Defendants, Cross-defendants and Respondents URBAN FINANCIAL GROUP, INC., Defendant, Cross-complainant and Appellant.

         Appeals from a judgment of the Superior Court of Orange County No. 30-2012-00613352, Kirk H. Nakamura, Judge. Affirmed.

          Thompson Coburn and Samuel R. Watkins for Plaintiff, Cross-defendant, and Appellant.

          Anderson, McPharlin & Conners, Michael S. Robinson; Songstad Randall Coffee & Humphrey, L. Allan Songstad, Jr., and William D. Coffee for Defendant, Cross complainant and Appellant.

          No appearance for Defendants, Cross-defendants and Respondents.


          FYBEL, J.


         Nautilus, Inc. (Nautilus), obtained a judgment against Stanley Kuo Hua Yang, and recorded an abstract of judgment against real property on which Stanley and his brother, Peter Chun Hua Yang, held title.[1] Stanley and Peter transferred title on the property to their father, Chao Chen Yang, who obtained a reverse mortgage loan on the property from Security One Lending (Security One). In its title search, the title insurance company missed Nautilus's abstract of judgment when the reverse mortgage loan funded.

         Stanley's transfer of the property to Chao Chen was a fraudulent conveyance under the Uniform Fraudulent Transfer Act (UFTA) (Civ. Code, § 3439 et seq.).[2] (All further statutory references are to the Civil Code, unless otherwise specified.) Nautilus sued Stanley, Peter, and Chao Chen. Nautilus also sued Urban Financial Group, Inc. (Urban Financial), which bought the mortgage from Security One, for damages resulting from the fraudulent conveyance from Stanley to Chao Chen. Following a bench trial, the court found that Security One and Urban Financial had acted in good faith, and could not be liable to Nautilus.

         We affirm. As we will explain, the trial court misapplied the burden of proof in connection with the good faith defense. Nevertheless, given the facts of the case, even under the correct burden of proof and legal principles, the good faith defense was established.

         We publish our opinion because of our analysis of the requirements of the good faith defense. Some cases have held that a transferee cannot avail itself of the good faith defense if the transferee had fraudulent intent, colluded with a person who was engaged in a fraudulent conveyance, or actively participated in a fraudulent conveyance. A line of federal cases interpreting California law concludes the good faith defense may also fail if the transferee had actual knowledge of facts suggesting to a reasonable person that the transfer was fraudulent. Some of those cases may be read to improperly establish an inquiry notice standard, and others frame the test in a way that is inconsistent with the legislative comment to section 3439.08. After analyzing those state and federal cases, we hold a transferee cannot benefit from the good faith defense if that transferee had fraudulent intent, colluded with a person who was engaged in the fraudulent conveyance, actively participated in the fraudulent conveyance, or had actual knowledge of facts showing knowledge of the transferor's fraudulent intent.

         We also conclude that the trial court did not err in granting equitable subrogation to Urban Financial. This decision has the effect of making a portion of the Urban Financial mortgage senior to Nautilus's abstract of judgment even though the Urban Financial mortgage was recorded after the abstract of judgment.

         Finally, we conclude the trial court's equitable grant of priority to a money judgment to Nautilus as against Chao Chen, over a portion of Urban Financial's lien on the reverse mortgage loan taken out by Chao Chen, was proper.


         Nautilus is a manufacturer of exercise equipment under various trade names including Bowflex. In December 2011, Nautilus obtained an $8 million default judgment against Stanley (among others not involved in the present case) arising from counterfeiting Nautilus products. On April 4, 2012, Nautilus recorded an abstract of judgment in Orange County, California.

         As of the beginning of 2012, Stanley and Peter held title as joint tenants to a single family residence in Fountain Valley, California (the Property). In February and April 2012, through two separate transactions, Stanley and Peter conveyed their interests in the Property to Chao Chen. Chao Chen then obtained a reverse mortgage loan on the Property on April 17, 2012, in the amount of $386, 835 from Security One;[3] a deed of trust was recorded to secure the reverse mortgage loan.

         First American Title Company (First American) ran a title search in connection with the reverse mortgage loan, which revealed Nautilus's abstract of judgment. First American acknowledged its error in failing to realize the abstract of judgment affected the Property.

         The proceeds of the reverse mortgage loan were used to pay off the existing liens against the Property, all of which had been recorded before Nautilus's abstract of judgment, in the total amount of $308, 576.72. Those prior liens consisted of mortgage liens in favor of CitiMortgage, Inc., and Bank of the West, and a judgment lien in the amount of $20, 514.88 against Stanley in favor of Nautilus Design & Construction (Nautilus Design). (The judgment in favor of Nautilus Design is different from the judgment in favor of Nautilus.) The remaining funds were disbursed to Chao Chen. Security One sold the reverse mortgage loan to Urban Financial in May 2012 for $422, 302.21.

         Nautilus filed a complaint against Urban Financial, Stanley, Peter, and Chao Chen, to set aside fraudulent transfers, recover damages from Stanley, Peter, and Chao Chen for conspiracy, and for declaratory relief against Urban Financial.[4] Urban Financial filed a cross-complaint against Nautilus, Stanley, Peter, and Chao Chen, seeking to quiet title, to establish and foreclose an equitable lien, to recover damages from Stanley, Peter, and Chao Chen for fraud, and for declaratory relief.

         The case proceeded to a court trial. The trial court signed a statement of decision and a judgment, which provided, in relevant part:

1. Security One and Urban Financial were good faith lenders for value, and Nautilus therefore could not recover damages from Urban Financial.
2. Stanley and Chao Chen were each awarded a one-half, undivided interest in the Property, subject to the other parties' lien rights.
3. Urban Financial was granted a first priority equitable lien on the Property in the amount of $308, 576.72.
4. Nautilus was granted a second priority judgment lien on Stanley's one half interest in the Property, based on its abstract of judgment, in the amount of $8 million.
5. Nautilus was awarded a money judgment against Chao Chen in the amount of $153, 212, secured by a lien on Chao Chen's one-half interest in the Property.
6. Urban Financial's deed of trust securing the reverse mortgage loan was deemed to be junior to Urban Financial's equitable lien, Nautilus's judgment lien, and Nautilus's money judgment.

         Urban Financial's motion to vacate the judgment was denied. Nautilus filed a notice of appeal, and Urban Financial filed a notice of cross-appeal.



         The Trial Court Did Not Err in Finding That Security One and Urban Financial Acted in Good Faith.

         A. General Principles

         A fraudulent conveyance is “a transfer by the debtor of property to a third person undertaken with the intent to prevent a creditor from reaching that interest to satisfy its claim.” (Yaesu Electronics Corp. v. Tamura (1994) 28 Cal.App.4th 8, 13.) The UFTA makes fraudulent transfers voidable: “(a) A transfer made or obligation incurred by a debtor is voidable as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation as follows: [¶] (1) With actual intent to hinder, delay, or defraud any creditor of the debtor. [¶] (2) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor either: [¶] (A) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction. [¶] (B) Intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor's ability to pay as they became due.” (§ 3439.04, subd. (a).)

         If a transferee or obligee took in good faith and for a reasonably equivalent value, however, the transfer or obligation is not voidable. (§ 3439.08, subd. (a).)[5] Whether a transfer is made with fraudulent intent and whether a transferee acted in good faith and gave reasonably equivalent value within the meaning of section 3439.08, subdivision (a), are questions of fact. (Annod Corp. v. Hamilton & Samuels (2002) 100 Cal.App.4th 1286, 1294 (Annod).) “When the trial court has resolved a disputed factual issue, the appellate courts review the ruling according to the substantial evidence rule. If the trial court's resolution of the factual issue is supported by substantial evidence, it must be affirmed.” (Winograd v. American Broadcasting Co. (1998) 68 Cal.App.4th 624, 632.) As the party seeking to ...

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