Opinion
BANKRUPTCY NO: 21-03254-MM7 Adv. Proc. 21-90091-MM
2023-06-01
IN RE: Victoria VULAJ, Debtor, Eva Turney, Plaintiff, v. Victoria Vulaj, Defendant.
Miles D. Grant, The Grant Law Firm, San Diego, CA, Alexander Kessler, Phillip Zunshine, Grant & Kessler, APC, San Diego, CA, Melisa Nicole McKellar, Atkinson, Andelson, Loya, Ruud & Romo, La Jolla, CA, Jake Sesti, Seltzer Caplan McMahon & Vitek, San Diego, CA, for Plaintiffs. Cheryl L. Stengel, Law Office of Cheryl L. Stengel, San Diego, CA, for Defendant.
Miles D. Grant, The Grant Law Firm, San Diego, CA, Alexander Kessler, Phillip Zunshine, Grant & Kessler, APC, San Diego, CA, Melisa Nicole McKellar, Atkinson, Andelson, Loya, Ruud & Romo, La Jolla, CA, Jake Sesti, Seltzer Caplan McMahon & Vitek, San Diego, CA, for Plaintiffs. Cheryl L. Stengel, Law Office of Cheryl L. Stengel, San Diego, CA, for Defendant. MEMORANDUM DECISION DENYING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT MARGARET M. MANN, United States BANKRUTPCY JUDGE
The summary judgment motion before the court raises the novel issue of whether the recent Supreme Court decision, Bartenwerfer v. Buckley, — U.S. —, 143 S. Ct. 665, 214 L.Ed.2d 434 (2023), eliminates the need to establish culpable intent to render nondischargeable the liability of a transferee of an intentional fraudulent conveyance. This issue requires the court to reconcile two Supreme Court decisions which the parties here assert conflict in this context; Bartenwerfer, and Husky Int'l Elecs., Inc. v. Ritz, 578 U.S. 356, 136 S. Ct. 1581, 194 L.Ed.2d 655 (2016). Since the court concludes these cases can be reconciled in a manner that respects both the statutory language and longstanding Supreme Court precedent, the court denies summary judgment because triable issues of fact exist on whether culpable intent can be proven here. The court publishes this decision since no reported decision to date has yet grappled with the issue before the court.
No dispute was raised as to the facts recited here.
Plaintiff Eva Turney ("Eva") was previously married to Josh Turney ("Josh"). They divorced in 2011, causing Josh to owe child support to Eva under a Marital Settlement Agreement. Josh and Debtor/Defendant Victoria Vulaj ("Vulaj") began a romantic relationship the same year and later married. Doc. 58-1, p. 20. Before the marriage, Josh transferred a total of $400,000 to Vulaj. Id.
The references to Eva and Josh Turney by their first names are intended for ease of reference since they have the same last name. No disrespect is intended.
The court relies on undisputed facts subject to either preclusion or judicial notice of the Stipulated Facts at Trial, Doc. 58-1, p. 18. The parties stipulated to certain facts before trial in state court. Eva introduced the stipulated facts as part of her Motion for Summary Judgment in this adversary proceeding and Vulaj did not object to the court's consideration of those facts.
Eva filed a complaint in San Diego Superior Court ("Lawsuit") against Josh and Vulaj on September 13, 2017, to set aside $400,000 in alleged fraudulent transfers. Doc. 58-1, pp. 4-10. Eva alleged these transfers of cash from Josh to Vulaj were made with the actual intent to hinder, delay, or defraud her in violation of California Civil Code §§ 3439.04(a)(1) and 3439.05. Id. After a trial on May 20, 2021, the state court issued a Statement of Intended Decision ("Decision") that became final on June 11, 2021. Doc. 58-1, pp. 23-30. The state court found Vulaj was liable for damages as transferee, since she was unable to demonstrate good faith in her receipt of the funds. Absent from the Decision, however, were specific findings that Vulaj shared Josh's fraudulent intent regarding the transfers. The state court entered judgment against Vulaj in the amount of $178,861 a week later. Doc. 58-1, p. 32.
The intent findings specific to Vulaj are:
• Josh transferred $400,000 to Vulaj with the intent to hinder, delay, or defraud Eva even if he had no intention to harm her.Doc. 58-1, pp. 23-30.
• The transfers were not in exchange for reasonably equivalent value.
• Vulaj, as Josh's girlfriend with whom he was living, was an insider.
• Josh retained control of the $400,000.
• Vulaj and Josh did not carry their burden that Josh transferred the $400,000 to Vulaj in good faith.
• Eva was harmed in the amount of $178,861.
Vulaj then filed a Chapter 7 bankruptcy case on August 10, 2021. Eva filed a complaint against Vulaj to determine dischargeability of a debt under 11 U.S.C. § 523(a)(2)(A), based on the judgment. Vulaj initially moved for dismissal of the complaint under Federal Rules of Bankruptcy Procedures 7012(b) which the court denied. Although the court concluded the findings supporting the judgment were largely preclusive of the elements of Eva's § 523(a)(2)(A) cause of action, whether Vulaj received the transfers with actual fraudulent intent was a disputed issue. This dispute prevented dismissal of the complaint because the findings on intent were not sufficiently specific to be given preclusive effect.
All statutory references are to Title 11 of the United States Code unless otherwise stated.
Section 523(a)(2)(A) provides:
A discharge under section 727 . . . of this title does not discharge an individual debtor from any debt . . .
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition.
Eva then filed a motion for summary judgment after Bartenwerfer was decided. She contended Josh's fraudulent intent was sufficient to deem Vulaj's debt to be nondischargeable. Vulaj argued Husky more closely fit the facts here, and Husky required proof of actual fraudulent intent in fraudulent transfer situations. Which of the Husky and Bartenwerfer rulings controls the outcome of this motion is thus the question before the court.
II. ANALYSIS
A. Husky Requires Fraudulent Intent for Transfers of a Fraudulent Conveyance
Husky, 578 U.S. at 362, 136 S.Ct. 1581, held that fraudulent conveyance schemes conducted with culpable intent suffice "can be affected without a false representation." Husky, id. at 358, 136 S. Ct. 1581, involved a principal's intercompany fraudulent transfer scheme that was alleged to be nondischargeable in the principal's bankruptcy under § 523(a)(2)(A). Parsing the statute to evaluate whether a misrepresentation was an element of the claim, the Supreme Court explored all the relevant terms, including the term "actual fraud." Id. at 360-62, 136 S. Ct. 1581. Basing its analysis on long standing precedent, the Supreme Court explained:
"Actual fraud" has two parts: actual and fraud. The word "actual" has a simple meaning in the context of common-law fraud: It denotes any fraud that "involv[es] moral turpitude or intentional wrong." Neal v. Clark, 95 U.S. 704, 709, 24 L. Ed. 586 (187[7]). "Actual" fraud stands in contrast to "implied" fraud or fraud "in law," which describe acts of deception that "may exist without the imputation of bad faith or immorality." Ibid. Thus , anything that counts as "fraud" and is done with wrongful intent is "actual fraud."Id. at 360, 136 S.Ct. 1581 (emphasis added). To address an argument presented by the dissent in that case, Husky explained how the statutory language applies in a case like here where the debtor is the recipient of a fraudulent conveyance:
It is of course true that the transferor does not "obtai[n]" debts in a fraudulent conveyance. But the recipient of the transfer—who , with the requisite intent , also commits fraud—can "obtai[n]" assets "by" his or her participation in the fraud. If that recipient later files for bankruptcy, any debts "traceable to" the fraudulent conveyance . . . will be nondischargable [sic] under § 523(a)(2)(A). Thus, at least sometimes a debt "obtained by" a fraudulent conveyance scheme could be nondischargeable under § 523(a)(2)(A).Husky, 578 U.S. at 365, 136 S.Ct. 1581 (emphasis added) (citations omitted). Although Eva argues Husky's discussion of a transferee's ability to discharge a debt is dicta, the Supreme Court apparently thought otherwise given its extensive discussion of the issue. The aftermath of the Supreme Court's ruling Husky corroborates that the actual intent issue was not dicta. After the Supreme Court remanded the case to the Fifth Circuit, a further remand to the bankruptcy court was made "for additional fact finding as to whether [the Debtor's] conduct satisfies the actual fraud prong of TUFTA." Husky Int'l Elecs., Inc. v. Ritz (In re Ritz), 832 F.3d 560, 569 (5th Cir. 2016). The bankruptcy court then analyzed the Texas badges of fraud elements to find actual fraud. Husky Int'l Elecs., Inc. v. Ritz (In re Ritz), 567 B.R. 715, 755 (Bankr. S.D. Tex. 2017).
Cases following Husky have also focused on the intent of the fraudulent transferee debtor to determine whether the debt could be discharged. The Ninth Circuit in a persuasive but unpublished decision relied upon Husky, id., to hold that the recipient of a fraudulent conveyance such as Vulaj must individually possess the fraudulent intent. Bonnett v. Moirbia Scottsdale, LLC, 860 F. App'x 473, 475 (9th Cir. 2021); see also Klein v. Peirsol (In re Peirsol), Nos. 19-40782-JDP, 20-8060-JDP, 2021 WL 4782462, at *11, 2021 Bankr. LEXIS 2838, at *33 (Bankr. D. Idaho Oct. 13, 2021) (applying Bonnett but determining that actual intent of the recipient was not determined by default).
This court is persuaded by this authority that Husky imposes a fraudulent intent requirement for transferees of fraudulent conveyances.
B. Bartenwerfer is Compatible with Husky
Based on the plain language of the statute, Bartenwerfer held "§ 523(a)(2)(A) bars debtors from discharging a debt obtained by fraud of the debtor's agent or partner." 143 S. Ct. at 676 (Sotomayor, J., concurring). The debtor in that case was the partner, and wife, who did not share her eventual husband's fraudulent intent. Because the language of § 523(a)(2)(A) used the passive voice to "not discharge an individual debtor from any debt . . . to the extent obtained by . . . actual fraud," the Supreme Court held the identity of the actor did not determine whether a debt was incurred by "actual fraud" in the partnership or agency context. Id. at 671-72.
This interpretation of § 523(a)(2)(A) was also consistent with the Supreme Court's long-standing authority on the dischargeability of partnership liability for fraud. Strang v. Bradner, 114 U.S. 555, 561, 5 S. Ct. 1038, 29 L. Ed. 248 (1885) (citations omitted) held innocent partners could be vicariously liable for the actual fraud of their partners because of the nature of the partnership relationship:
The transaction between him and the plaintiffs is to be deemed a partnership transaction, because, in addition to his representation that the notes were for the benefit of his firm, he had, by virtue of his agency for the partnership, and as between the firm and those dealing with it in good faith, authority to negotiate for promissory notes and other securities for its use. Each partner was the agent and representative of the firm with reference to all business within the scope of the partnership. And if, in the conduct of partnership business, and with reference thereto, one partner makes false or fraudulent misrepresentations of fact to the injury of innocent persons who deal with him as representing the firm, and without notice of any limitations upon his general authority, his partners cannot escape pecuniary responsibility therefor upon the ground that such misrepresentations were made without their knowledge. This is especially so when, as in the case before us, the partners, who were not themselves guilty of wrong, received and appropriated the fruits of the fraudulent conduct of their associate in business.
The concurrence in Bartenwerfer joined the majority decision based on the understanding that the holding was limited to the agency or partnership context:
The Court here does not confront a situation involving fraud by a person bearing no agency or partnership relationship to the debtor. Instead, "[t]he relevant legal context" concerns fraud only by "agents" and "partners within the scope of the partnership."Bartenwerfer, 143 S. Ct. at 677 (citing Strang and stating: "This Court long ago confirmed that reading when it held that fraudulent debts obtained by partners are not dischargeable."). Because this case is not an agency or partnership case, and Vulaj's debt is not based on her vicarious liability, this limitation applies here. Commercial Bank v. Colquitt (In re Colquitt), Nos. 21-30235-JPS, 21-3010-JPS, 2023 WL 2361103, at *8, 2023 Bankr. LEXIS 551, at *21 (Bankr. M.D. Ga. Mar. 2, 2023) ("In the case at bar, Defendant's liability to Plaintiff does not arise from the fraud of another for which he is vicariously liable."). This court is not persuaded by Eva's argument that because only Justice Jackson expressly joined the concurrence written by Justice Sotomayor, the holding is not so limited. But the majority never disputed this limitation, and a broader application of the decision would be beyond the facts at issue in that case.
Limiting Bartenwerfer's holding to partnership or agency cases is also fully compatible with the statutory language. To wit, § 523(a)(2)(A) renders nondischargeable a "debt . . . to the extent obtained by . . . actual fraud." But Vulaj is not being held liable for Josh's debt, which was obtained by fraud, but for her own different role in the transfers. The state court did not impute Josh's fraud to Vulaj, but instead made separate findings on its assessment of whether she received the property transferred in good faith to find her liable as the fraudulent transferee of Josh's property. Vulaj's liability to Eva is different from that of Josh's liability, regarding both the critical intent element and their different roles in the transaction. Cal. Civ. Code § 3439.08(b). Because of these differences, Eva "obtained" a different "debt" from Vulaj than Josh's liability to Eva. Since Eva's different debt was not based on "actual fraud," it will be discharged if Eva fails to prove the necessary fraudulent intent at trial. Husky, 578 U.S. at 365, 136 S.Ct. 1581.
Although not expressly stated in the Bartenwerfer concurrence, the limitation on the scope of the holding is necessary to prevent conflict with not only Husky, but also Neal, 95 U.S. at 709, on which Husky, 578 U.S. at 360, 136 S.Ct. 1581, relied. For over a century, Neal, 95 U.S. at 709, was considered to state the general rule that culpable intent of the debtor was necessary to except debts from discharge, with partnership vicarious liability being the exception to the rule. In fact, Strang, 114 U.S. at 560, 5 S.Ct. 1038, was obligated to distinguish Neal in deciding the debts of partners are not dischargeable because of the nature of partnership liabilities. As noted in Bartenwerfer, 143 S. Ct. at 675, the Supreme Court generally assumes that "when Congress enacts statutes, it is aware of this Court's relevant precedents." (citation omitted). Both Neal and Strang are relevant precedents, and this court must accord proper respect to both.
III. CONCLUSION
The court will deny summary judgment and conduct a trial on whether Vulaj possessed the necessary intent for the debt she owes to Eva to be nondischargeable.
IT IS SO ORDERED.