Should California refer an auction sale for fraudulent-conveyance enforcement when the tax determinations came later and the seller received $63,000?

Plain-English summary

California legal staff recommended against referring an auction sale to the Attorney General for fraudulent-conveyance enforcement.

The property sold in November 1987, while the Board issued determinations in January and February 1988 and filed a lien in April 1988. Staff said it would be difficult to prove that California was an existing creditor when the sale occurred under former section 3439.04.

The taxpayer received more than $63,000 from the auction, which also weakened any claim that the transfer lacked fair consideration. The future-creditor provision required clear and convincing proof of actual fraud, and staff found too little evidence for referral.

Common questions

Was California already shown to be a creditor at the sale date?

No.

Did the seller receive proceeds?

Yes, more than $63,000.

What was the recommendation?

Do not refer the matter for a debtor examination based on fraudulent transfer.

Citations and references

• Former California Civil Code sections 3439.04 and 3439.07 — existing- and future-creditor theories discussed
• TWM Homes, Inc. v. Atherwood Realty & Investment Co. (1963) 214 Cal.App.2d 826 — fair consideration and fraud standards cited

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/170-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/170-0007-205.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Mr. Rick Slater
Supervisor, Collections Unit

From:

Gordon P. Adelman
Tax Counsel

Subject:

M---, Inc.
dba D--- T--- P--- and S--Account No. SR -- XX-XXXXXX

170.0007.205

Date:

May 4, 1989

You requested a review of the circumstances which gave rise to a request by San Bernardino Compliance to refer the above captioned account to the Attorney General for a Debtor’s Examination based on a fraudulent transfer. My opinion is that this account should not be referred to the Attorney General for the reasons stated below. The Uniform Fraudulent Conveyance Act in the California Civil Code, specifically section 3439.04 upon which San Bernardino hangs its hat, requires two critical factors, among others, to be present before a conveyance will be deemed fraudulent. The first factor is that we would need to establish that the Board was a creditor at the time of the conveyance. The second is that the conveyance was made without fair consideration. Section 3439.04 protects only existing creditors, and the person (Board) invoking the section must establish that he was a creditor at the time of the conveyance. Furthermore, in order to establish the conveyance as fraudulent under the section, it must appear that the transferor is insolvent at the thereby and the the conveyance was made without fair consideration….if the consideration is fair, the conveyance cannot be set aside under section 3439.04 (TWM Homes Inc. v. Atherwood Realty and Investment Co. Inc., 214 Cal.App.2d 826 (1983)). In the case of M---, the property sold at auction in November 1987. Notices of determination were issued in January 1988 and February 1988. Demands were made in March and April 1988 and a lien filed April 14, 1988. From a review of the file, it would be very difficult to establish the Board as an existing creditor as of November 1987.

Mr. Rick Slater

-2-

May 4, 1989
170.0007.205

Taxpayer received over $63,000 from the proceeds of the auction. This may or may not be a “fair consideration;” however, since the property sold at auction, I tend to believe there is little evidence to support a finding that that amount was not a fair consideration. Although another section of the Civil Code (3439.07) referes to “future creditors,” under that section actual fraud must be proven by clear and convincing evidence, and fraud will not be found if the circumstances of the conveyance comport with the theory of honesty and fair dealing. (Homes v. Atherwood Realty, supra.) For the reasons stated, I don’t think this case should be referred to the Attorney General for a Debtor’s Examination of M--- M---, President, M---, Inc.

GPA:sr
cc:

Mr. E. L. Sorensen, Jr.
Mr. Ronald L. Dick