Memorandum of Decision Re: Fraudulent Transfers

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re LEONARD ROWICKI,                                                 No. 1-86-01438      Debtor. ____________________/ WILLIAM B. GROVER,      Plaintiff,    v.                                                                                  A.P. No. 1-86-0221 STEPHANIA ROWICKI,
     Defendant. ____________________/
Memorandum of Decision
     On May 17, 1985, at the end of a three-day state court trial, the trial judge announced an intended decision against debtor Leonard Rowicki, the defendant in that action, in the amount of approximately $17,000.00. Within the next five days, Leonard and his wife transferred their two parcels of real property (with equity of approximately $18,000.00) and three notes secured by deeds of trust worth $41,000.00 to Leonard's mother, Stephania Rowicki, the defendant in this action. The Trustee here seeks to avoid these transfers as fraudulent.      Defendant asserts that the transfers to her were in payment of $57,000.00 in loans she made to Leonard from 1966 to 1980, none of which were memorialized by any sort of writing except a letter from Defendant to Leonard demanding payment. This letter was dated May 19, 1985, and notarized May 21, 1985.      At the time of the transfers, the applicable statutes were California Civil Code sections 3439.04 and 3439.07; California has since adopted the Uniform Fraudulent Conveyance Act, with new section 3439.04 embodying the terms of both old sections. Since the substance of the law was not changed, the court need not determine which statutes apply. Although defendant demanded a jury trial, no such right exists in a fraudulent conveyance action, notwithstanding reliance on state law. In re Wencl (Bkrtcy.D.Minn.1987) 71 B.R. 879.      Because of the difficulty proving fraud directly, proof of fraudulent intent in transfer avoidance actions usually consists of inferences from the circumstances surrounding the transfer and the parties' relationship. 16 Cal.Jur.3d (Rev.) Pt.2, Creditors' Rights and Remedies, sec. 330; Fross v. Wotton (1935) 3 Cal.2d 384, 393. Among other things, fraud can be inferred from the facts that the transferree was the debtor's mother (Johnson v. Drew (1963) 218 Cal.App.2d 614), the debtor was threatened with adverse judgment (Economy Refining & Service Co. v. Royal Nat. Bank of N.Y. (1971) 20 Cal.App.3d 434), and that the transfer was substantially all of the debtor's assets (Burrows v. Jorgensen (1958) 158 Cal.App.2d 644). Also important is the debtor's retention of possession of any of the assets transferred. See generally the Legislative Committee Comments to Cal.Civ.Code sec. 3439.04 (1986).      The evidence clearly showed that the purported loans from the defendant were made over a 14-year period, with the last such loan almost five years before the judgment, but no demand for payment was made until the debtor lost his lawsuit. Then, within less than a week, the debtor transferred all of his interests in real property to his mother, retaining possession of his residence, and assigned to her all of his interest in valuable notes. Under these circumstances, the inference of fraud is irresistible and inescapable. See Judson v. Lyford (1890) 84 Cal. 505; 16 Cal.Jur.3d, Creditors' Rights and Remedies, section 352. In view of this finding that the transfers were made with the intent to hinder and defraud the judgment creditor, the court may avoid them even if fair consideration was paid and the debtor remained solvent thereafter, both of which the court doubts. 16 Cal.Jur.3d, Creditors' Rights and Remedies, sec. 328.      Defendant did not personally appear at the trial. Through her counsel, she argues that there is no evidence of her knowledge of her son's fraudulent intent, but the evidence before the court clearly established otherwise. The court need not take as mere coincidence the sudden demand for payment at the conclusion of an adverse trial after some fourteen years of patience and the elapse of almost five years since the last "loan." Nor does the court believe that mothers usually notarize letters to their children unless they believe the letter may be used subsequently to justify their actions. Moreover, the text of the letter itself, with its reference to "your problems," shows that the defendant was aware of what was going on and was an active and knowing participant in the fraud.      For the foregoing reasons, the court finds that the Trustee has proved by clear and convincing evidence that the transfers were made with the actual intent to hinder, delay and defraud the debtor's creditors, and that the defendant was a willing and knowing participant. The Trustee is therefore entitled to a judgment avoiding the transfers. Pursuant to 11 U.S.C. section 550(a), the Trustee will have judgment in the amount of $49,800.00 on account of the transfers of the three notes and deeds of trust and the interest in the Hill Street property, together with interest at the legal rate from and after May 22, 1985. Since no testimony or stipulation was presented as to the value of the Double Eagle Ranch, this transfer will be avoided and preserved for the benefit of the estate pursuant to 11 .S.C. section 551, but no judgment for its value shall be rendered. The court notes the defendant's argument that the transfer of the ranch should not be avoided because it was exempt, but declines to so rule because no evidence of the ranch's exempt status was produced. The court is not inclined to assume such an exemption in light of laws which allow a debtor without a homestead to exempt several thousand dollars' worth of otherwise nonexemptible assets. See, e.g., California Code of Civil Procedure section 703.140(b)(5).      Counsel for the Trustee shall prepare and submit an appropriate form of judgment together with proof of its service on counsel for the defendant. This memorandum shall constitute findings and conclusions pursuant to FRCP 52(a) and Bankruptcy Rule 7052.
Dated: September 18, 1987                                                                                  ______________________                                                                                                                            ALAN JAROSLOVSKY                                                                                                                            U.S. BANKRUPTCY