Friday, August 15, 2003
Supreme Court Rules:
Future Child Support Obligations Cannot Render Parent Insolvent
By DAVID WATSON, Staff Writer
Future child support obligations cannot be considered in determining whether a marital settlement agreement rendered the child’s father insolvent, potentially making it fraudulent, the state Supreme Court ruled yesterday.
The court unanimously reversed a decision by the Sixth District Court of Appeal, which held in March of 2002 that former Bay Area physician Danielo Reed’s transfer of his interests in several real properties to his ex-wife as part of a 1995 marital settlement in which she gave up her interest in his later-abandoned medical practice could be attacked under the Uniform Fraudulent Transfers Act.
Rhina Mejia, who had a child by Reed after an extramarital affair, sued the doctor and his ex-wife in 1997 seeking to set aside the property transfer. She claimed the medical practice was fraudulently overvalued in order to justify the real property transfers and enable Reed to avoid paying her $1,153 monthly in child support.
A Santa Clara Superior Court judge granted summary judgment to the Reeds.
Appeals Court’s Error
Writing for the high court, Justice Joyce Kennard said the Sixth District was correct in ruling that the UFTA could be used to attack a marital settlement agreement—a holding in conflict with the 1999 Fourth District Court of Appeal ruling in Gagan v. Gouyd, 73 Cal.App.4th 835. But the appeals court erred, she said, in ruling that Reed’s potential child support obligations could be considered in determining whether the settlement agreement was constructively fraudulent.
The UFTA applies both to “fraudulent in fact” transfers—those intentionally designed to place property beyond the reach of creditors—and to transfers that are constructively fraudulent or “fraudulent in law”—meaning that the transferor failed to receive full value and was insolvent at the time or became insolvent as a result of the transfer.
Where a transfer is fraudulent in fact, any creditor may sue to set it aside. Where it is only fraudulent in law, however, only a pre-transfer creditor may sue.
Child support, Kennard declared, is “generally paid from future income rather than current assets” and should not be considered in determining insolvency.
“We conclude...that future child support payments should not be viewed as a debt under the UFTA. In construing statutes, we avoid any interpretation that will lead to absurd consequences....To treat future child support payments as a debt, while not viewing the earning capacity from which they will probably be paid as an asset, would yield an absurd result. Relatively few parents of young children have current assets sufficient to pay the present discounted value of years and years of future support obligations. Thus, treating future child support as a current debt would label many persons with child support obligations as insolvent under the UFTA even though they were current on their child support obligations and will be able to pay future obligations as they became due.”
Such insolvency, Kennard said, “is of a wholly artificial character, for the debtor cannot be compelled to convert future child support obligations into a present cash payment, and in fact generally cannot even voluntarily terminate liability for future support by paying the custodial parent the present value of such future payments.”
“No legislative purpose is served by treating a parent as insolvent because of child support obligations when that parent has paid all payments currently due and can pay future payments from future earnings or earning capacity.”
Aside from the child support obligations, the justice said, Mejia had failed to raise a triable issue of fact as to her constructive fraud claim, thought remand was required in order for the trial court to consider evidence of actual fraud.
Kennard said the Sixth District had properly declined to follow Gagan.
The Court of Appeal panels rendering both decisions, the justice noted, had been unable to determine the applicability of the UFTA to marital settlements based on either statutory language or legislative history and had turned to policy considerations. The Supreme Court, Kennard said, found itself required to do the same.
“The California Legislature has a general policy of protecting creditors from fraudulent transfers, including transfers between spouses. A transfer before dissolution can be set aside as a fraudulent conveyance....A transfer after dissolution can be set aside under the clear terms of the UFTA. When the court divides the marital property in the absence of an agreement by the parties, it must divide the property equally..., which provides some protection for a creditor of one spouse only. In 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.”
The consideration found dispositive by the Gagan court—that the potential for attacks by creditors would complicate marital settlement negotiations—was not entitled to “substantial weight,” Kennard said.
“In our view,” the justice explained, “the parties’ debts, and how to pay them, are matters that should be considered in marital settlement negotiations even if, like pension plans and income tax consequences, they make the process of reaching an agreement more complex.”
The case is Mejia v. Reed, 03 S.O.S. 4403.
Copyright 2003, Metropolitan News Company