Sturm v. Moyer

The question presented in this case is one of first impression: Assuming fraudulent intent, can the Uniform Voidable Transactions Act ( Civ. Code, § 3439 et seq., formerly known as the Uniform Fraudulent Transfer Act, or UFTA)^[2] apply to a premarital agreement in which the prospective spouses agree that upon marriage each spouse's earnings, income, and other property acquired during marriage will be that spouse's separate property? After examining the language of the relevant statutes, the legislative history, and public policy considerations, we conclude that it can.^[3]

BACKGROUND

Our discussion of the background facts is based upon the allegations of the

In July 2005, Robert Sturm, plaintiff in this action, obtained a $ 600,000 judgment in bankruptcy court against Todd Moyer. The judgment, which is not dischargeable in bankruptcy, was renewed in January 2015. Following the original entry of judgment and through July 2016, Sturm conducted several judgment debtor examinations of Moyer, during which Moyer claimed to have no assets, and claimed that he did not intend to work ever again so he would not have to pay any portion of the judgment.

During a judgment debtor examination in July 2016, Sturm discovered that Moyer had married Jessica Schell in or around 2014, and that they had entered into a premarital agreement. The premarital agreement provided that each party's earnings and income, and any property acquired during the marriage by each spouse, would be that spouse's separate property; each party acknowledged that these earnings, income, and property otherwise would be community property. The agreement attached as exhibits lists of each party's significant real and personal property and liabilities in which that party currently held an interest; Moyer's list (Exhibit A) included Sturm's judgment against him, as well as several liens and pending lawsuits. The agreement also included a kind of sunset provision (paragraph 5.15), which provided that in the event the judgments and liens against Moyer listed in Exhibit A, and any money judgment entered against him during marriage, lapse or otherwise become unenforceable for any reason, the parties' earnings and income, and any assets purchased with those earnings and income, from the date of the marriage will be treated as community property, with certain exceptions. Finally, the premarital agreement included a provision allowing the parties to open a jointly owned checking account to meet their reasonable present and future living expenses, but providing that any property acquired with funds from the account will be owned in the ratio of the respective contributions of each party's separate property into the account; it also expressly stated that the account will not create any community property interest.^[4]

Sturm filed the instant lawsuit against defendants Moyer and Schell, asserting a single cause of action under the UFTA to set aside the alleged transfer of Moyer's community property interest in Schell's earnings and income. The original complaint attached as an exhibit the Moyer-Schell premarital agreement. Following defendants' successful demurrer to the

Civil Code section 3439.06 contains provisions regarding when a transfer is made and deemed perfected for purposes of the UFTA.^[6] Subdivision (d) of that statute provides that "A transfer is not made until the debtor has acquired rights in the asset transferred." ( Civ. Code, § 3439.06, subd. (d).)

B. Relevant Family Code Provisions

Under California law, all property (with some statutory exceptions) acquired by a married person while domiciled in California is community property ( Fam. Code, § 760 ), and each spouse's respective interests in community property "are present, existing, and equal" during the marriage ( Fam. Code, § 751 ). However, the Family Code allows a couple by agreement entered into during or before the marriage to change the character of the property they acquire during marriage from community property to separate property.

statute imposing a criminal penalty" ( Fam. Code, § 1612, subd. (a)(7) ). The premarital agreement "becomes effective upon marriage." ( Fam. Code, § 1613.)

The characterization of property as separate or community is important when it comes to liability for debts incurred by either spouse, including debts incurred by a spouse before the marriage. Family Code section 910 states in relevant part: "Except as otherwise expressly provided by statute, the community estate is liable for a debt incurred by either spouse before or during marriage, regardless of which spouse has the management and control of the property and regardless of whether one or both spouses are parties to the debt or to a judgment for the debt." ( Fam. Code, § 910, subd. (a).) Notwithstanding this provision, the earnings of the non-debtor-spouse^[9] -- which are community property under Family Code section 760 -- "are not liable for a debt incurred by [the other] spouse before marriage." ( Fam. Code, § 911, subd. (a).) Those earnings remain not liable for the debtor-spouse's premarital debt, however, only "so long as they are held in a deposit account in which the person's spouse has no right of withdrawal and are uncommingled with other property in the community estate, except property insignificant in amount." ( Ibid. )

In short, although a married couple's community property is liable for the premarital debts of either spouse, a portion of that community property -- the non-debtor-spouse's earnings and income -- is shielded from liability for that premarital debt to the extent that those earnings and income are held in an account to

issue with which we are now faced was briefly addressed in a background study -- Reppy, Debt Collection from Married Californians: Problems Caused by Transmutations, Single-Spouse Management, and Invalid Marriage , 18 San Diego L. Rev. 143 (1981) (hereafter Reppy) -- prepared for the California Law Revision Commission for its study of whether the law relating to community property should be revised.^[11] ( Liability of Marital Property for Debts , 17 Cal. L. Revision Comm'n Reports 1, 3 (1984).) In the background study, Professor Reppy addresses myriad issues involving debt collection from married people under California law as it then existed, pointing out problems where he saw them, and recommending changes to the law.

married with the creditor having the same rights as existed before the change of status. Of course actual fraud might be proved to give the creditor relief under [the Uniform Fraudulent Conveyance Act]."^[14] (Reppy, supra , 18 San. Diego L. Rev. at p. 227.)

Although Professor Reppy identified the two competing constructions regarding the applicability of the UFTA to premarital agreements that the parties in this case present, and stated his preference for the construction asserted by defendants, we cannot say that this is dispositive. First, we observe that the Commission did not recommend -- and the Legislature did not enact -- any statutory provisions that implement this construction.

Second, several years after Professor Reppy wrote the background study in 1981, the Legislature enacted the UPAA, which included the provision that a premarital agreement does not become effective until marriage. (Stats. 1985, ch. 1315, § 3, p. 4583.) This addition tends to undermine the construction preferred by Professor Reppy, because (as Sturm argues) the agreement is not effective until marriage, at which time it effects a reordering of the parties' community property interests in each other's property acquired during marriage.

this situation, we turn to the policy considerations favoring and disfavoring each side's interpretation of the statutes. On the whole, those policy considerations favor the interpretation asserted by Sturm.

In Mejia v. Reed , the Supreme Court declared that "[t]he California Legislature has a general policy of protecting creditors from fraudulent transfers, including transfers between spouses" in a case that addressed whether the UFTA applied to a transfer of one spouse's interest in community property as part of dissolution of the marriage.^[15] ( Mejia v. Reed , supra , 31 Cal.4th at p. 668, 3 Cal.Rptr.3d 390 , 74 P.3d 166 .) In deciding that the transfer was subject to the UFTA, the Court found that, "[i]n view of this overall policy of protecting creditors, it is unlikely that the Legislature intended to grant married couples a one-time-only opportunity to defraud creditors by including the fraudulent transfer in an MSA." ( Mejia v. Reed , supra , 31 Cal.4th at p. 668, 3 Cal.Rptr.3d 390 , 74 P.3d 166 .)

Admittedly, there is a competing policy at play with regard to premarital agreements that was not present in Mejia . That is, there is a long-standing policy in favor of marriage in this state. (See In re Marriage of Dawley, supra , 17 Cal.3d at p. 350, 131 Cal.Rptr. 3 , 551 P.2d 323 ; In re Marriage of Pendleton & Fireman (2000) 24 Cal.4th 39 , 52, 99 Cal.Rptr.2d 278 , 5 P.3d 839 .) And premarital agreements facilitate marriage by allowing the parties to "reorder[ ] ... property rights to fit the needs and desires of the couple." ( In re Marriage of Dawley , supra , 17 Cal.3d at p. 358, 131 Cal.Rptr. 3 , 551 P.2d 323 ; see also In re Marriage of Pendleton & Fireman , supra , 24 Cal.4th at p. 53, 99 Cal.Rptr.2d 278 , 5 P.3d 839 [observing that the availability of an enforceable premarital agreement may encourage marriage].)

It might be argued that applying the UFTA to a premarital agreement in which the parties agree that each party's earnings, income, and assets acquired during marriage would be that party's separate property would discourage marriage in cases, such as the present one, in which one of the parties has significant debts while the other party has substantial income. But the Legislature already has provided protection for the couple in such a case, by enacting Family Code section 911. As noted, under that statute, the non-debtor-spouse's earnings are sheltered from liability for the debtor-spouse's premarital debts, so long as those earnings are kept by the non-debtor-spouse in a separate account (to which the debtor-spouse does not have a right of withdrawal) and are not commingled with other

intent to prevent the debtor-spouse from taking advantage of that protection at the expense of his or her creditors by being allowed access to the protected funds.

D. Conclusion

In light of the suggestions raised by the legislative language and history, and the strong policy -- advanced by both the UFTA and section 911 of the Family Code -- of protecting the rights of creditors from fraudulent transfers, we conclude that the Legislature must have intended that UFTA can apply to premarital agreements in which the prospective spouses agree that each spouse's earnings, income, and property acquired during marriage will be that spouse's separate property. The policy considerations in favor of applicability of the UFTA are especially strong in this case, where the agreement provides that all earnings and income, and property acquired with those earnings and income, dating back to the date of marriage will become community property when certain premarital debts no longer are enforceable, and where the agreement allows the debtor-spouse joint access to the non-debtor-spouse's earnings and income that are deposited in a joint account.

Our conclusion that the UFTA can apply to a premarital agreement does not mean that it necessarily will apply to invalidate the agreement here. Whether the UFTA applies in this (or any) case depends upon whether there was actual or constructive fraud under Civil Code section 3439.04. That issue is a factual one, and is not before us in this appeal from a judgment of dismissal following the sustaining of a demurrer.

DISPOSITION

The judgment is reversed. Sturm shall recover his costs on appeal.

We concur:

COLLINS, J.

DUNNING, J.^[1]

In sustaining the demurrer, the trial court found that "[u]nder In re Marriage of Dawley (1976) 17 Cal.3d 342 , 131 Cal.Rptr. 3 , 551 P.2d 323 and Family Code § 1500, defendants were entitled to alter the presumptions under Family Code § 760 and Family Code § 910(a) that property acquired during the marriage is community property and that the community estate would be liable to satisfy any judgments against defendant Todd Moyer. Even though the Premarital Agreement was not effective until Defendants married, pursuant to Family Code § 1613, Defendants still had the right to alter the presumptions of community property under Dawley ."

A judgment of dismissal was entered, from which Sturm timely filed a notice of appeal.

DISCUSSION

Sturm has alleged, in substance, that the Moyer-Schell premarital agreement effected a transfer of Moyer's interest in community property (i.e., Schell's earnings and income), and that the actual intent of this transfer was to hinder, delay, or defraud Moyer's creditors, including Sturm. To decide whether the agreement is one to which the UFTA applies, we must examine the relevant provisions of both the UFTA and the Family Code.

A. Relevant UFTA Provisions

At the time of the events at issue in this lawsuit, the UFTA provided, in relevant part, that "[a] transfer made or obligation incurred by a debtor is fraudulent as to a creditor ... if the debtor made the transfer or incurred the obligation ... [¶] (1) With actual intent to hinder, delay, or defraud any creditor of the debtor."^[5] (Civ. Code, former § 3439.04; the current version of this statute replaces "fraudulent" with "voidable.") A "transfer" was defined in the UFTA to mean "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, and creation of a lien or other encumbrance." (Civ. Code, former § 3439.01, subd. (i); the definition is found as subd. (m) of the current version, with one amendment that is irrelevant here and would not affect our analysis.)

Such an agreement may be made during the marriage under Family Code section 850, which provides that, subject to certain provisions, "married persons may by agreement or transfer, with or without consideration, do any of the following: [¶] (a) Transmute community property to separate property of either spouse. [¶] (b) Transmute separate property of either spouse to community property. [¶] (c) Transmute separate property of one spouse to separate property of the other spouse." One of the provisions referenced in that section is Family Code section 851, which states: "A transmutation is subject to the laws governing fraudulent transfers."

Before the marriage, couples may change the character of property acquired during marriage from community property to separate property by means of a premarital agreement under the Uniform Premarital Agreement Act ( Fam. Code, § 1600 et seq., hereafter the UPAA).^[7] The UPAA provides that the parties to a premarital agreement may contract with respect to various issues, including: "[t]he rights and obligations of each of the parties in any of the property [^[8] ] of either or both of them whenever and wherever acquired or located" ( Fam. Code, § 1612, subd. (a)(1) ), and "[a]ny other matter, including their personal rights and obligations, not in violation of public policy or a

whenever and wherever acquired" ( Fam. Code, § 1612, subd. (a)(1) ), and they simply agree to reorder those rights and obligations effective upon marriage. ( In re Marriage of Dawley , supra , 17 Cal.3d at p. 358, 131 Cal.Rptr. 3 , 551 P.2d 323 [describing premarital agreement in which parties agreed that earnings and property acquired by a spouse during marriage would be that spouse's separate property as a "reordering of property rights to fit the needs and desires of the couple"].)

Nonetheless, although the statutory language suggests that such a contract effects a transfer within the meaning of the UFTA, especially given the broad definition of "transfer," the statutory language does not conclusively resolve the issue. Therefore, we must look to the legislative history to see if it discloses the legislative intent.

2. Legislative History

The legislative history of the UFTA is enlightening, but not dispositive. Civil Code section 3439.06, enacted in 1986 as part of Senate Bill No. 2150 (Stats. 1986, ch. 383, § 2, pp. 1591-1592), addresses when a transfer is made and deemed perfected for purposes of the UFTA. The Report of Assembly Committee on Finance and Insurance on Senate Bill No. 2150 set forth the comments of the National Conference of Commissioners on Uniform State Laws as reflecting the intent of the Committee. (Report of Assembly Committee on Finance and Insurance on Sen. Bill No. 2150, found at Assembly Journal, vol. 5, pp. 8569-8587 (July 8, 1986) at p. 8570.) The comments explained the purpose of section 3439.06, and expressly referred to transfers as including "execution of a marital or premarital agreement for the disposition of property owned by the parties to the agreement." ( Id. at p. 8582.) This reference shows an intent that premarital agreements disposing of "property owned by the parties" at the time of execution would constitute a transfer under the UFTA. But the reference does not literally apply to the premarital agreement here, because when the agreement was executed neither spouse "owned" an interest in the prospective community property that, upon marriage would be "transferred," i.e., become separate property.

With regard to the legislative history related to premarital agreements as reflected in the Family Code and its predecessor statutes,^[10] we note that the

In a short section on premarital agreements, Professor Reppy noted that the placement of the then-existing statutes governing premarital agreements in the Family Law Act (the article was written before the enactment of the Family Code or the UPAA), "implies that such a contract is a means for varying the statutory rules that would otherwise attach to a marriage. A typical 'marriage settlement' [^[12] ] is an agreement to live separate in property. By permitting such a contract, [former Civil Code] section 5134 creates a situation whereby a community of property never exists between the spouses. Thus when after marriage W labors at her job and is paid wages, they are at all times hers. The alternative construction is that the community property statutes, such as [former Civil Code] section 5110, attach to W 's wages and then the antenuptial contract immediately converts the coownership between H and W to the sole ownership of W . The first interpretation is preferable. Under that interpretation, a creditor of insolvent H unable to reach W 's separate property could not object to characterization of the earnings as W 's separate property on grounds H was already or was thereby rendered insolvent. Under the alternative view, there is a transfer at the time W is paid which is constructively fraudulent under [the Uniform Fraudulent Conveyance Act^[13] ]." (Reppy, supra , 18 San. Diego L. Rev. at p. 226.)

In his conclusion of the premarital agreement section Professor Reppy stated, "With respect to creditors existing at the time of making of the [premarital] agreement, rather than at the time of an alleged subsequent 'transfer', the agreement to live separate in property should not be constructively fraudulent. The debtor spouse simply changes his status from single to