Nautilus, Inc. v. Chao Chen Yang
11 Cal. App. 5th 33
Cal. Ct. App.2017Background
- Nautilus obtained an $8 million judgment against Stanley Yang and recorded an abstract of judgment in Orange County on April 4, 2012.
- Stanley and his brother Peter (joint tenants) transferred title in two steps to their father, Chao Chen, shortly after the judgment; Chao Chen then obtained a HUD-insured reverse mortgage from Security One, secured by a deed of trust recorded April 17, 2012.
- First American (title company) performed the title search but failed to discover Nautilus’s abstract of judgment; Security One funded the loan and later sold it to Urban Financial.
- Nautilus sued to avoid the fraudulent conveyance under the UFTA, seeking damages and priority over the reverse mortgage; Urban Financial and Security One defended as good-faith purchasers for value and sought equitable relief.
- Trial court found Security One and Urban Financial acted in good faith, granted Urban Financial equitable subrogation for the portion of the loan used to pay senior liens, and entered a money judgment against Chao Chen secured by a lien on his 50% interest.
- On appeal the court affirmed, holding Urban Financial met its burden to prove good faith (despite trial court misallocating the burden), approved equitable subrogation, and upheld the lien priority scheme.
Issues
| Issue | Nautilus' Argument | Urban Financial's Argument | Held |
|---|---|---|---|
| Applicability of §3439.08 good-faith defense | Urban Financial had notice from badges of fraud (insider transfer, lack of consideration, timing) and should not be protected | Urban Financial lacked actual knowledge of transferor’s fraudulent intent and paid reasonably equivalent value in good faith | Transferee defense applies only if transferee lacked actual knowledge of transferor’s fraudulent intent; Urban Financial proved no such actual knowledge and prevailed |
| Standard to defeat good-faith defense | Transferee should be on inquiry/constructive notice based on suspicious facts | Good faith requires absence of actual fraudulent intent, collusion, active participation, or actual knowledge of transferor’s intent | Court rejects broad inquiry-notice test; requires actual knowledge of facts showing transferor’s fraudulent intent to defeat defense |
| Equitable subrogation to reverse-mortgage lender | Nautilus: lender should not be subrogated because title insurer’s negligence caused the problem | Urban Financial: paid to extinguish senior liens and HUD requires first lien; equitable subrogation proper absent culpable neglect | Equitable subrogation granted for loan proceeds used to pay preexisting senior liens; lender not chargeable with insurer’s neglect |
| Priority and lien scope (Nautilus $8M lien and $153k judgment) | Urban Financial: $8M judgment should attach only to Stanley’s one-third interest at recording | Nautilus: fraudulent transfer voided the interim transfer so abstract attached to Stanley’s one-half interest | Court held the transfer was voided as to Stanley; Nautilus’s $8M lien applies to Stanley’s one-half interest; judgment lien priorities as set by trial court affirmed |
Key Cases Cited
- Lewis v. Superior Court, 30 Cal.App.4th 1850 (Cal. Ct. App.) (rejecting constructive/inquiry notice for good-faith defense where transferee made reasonable title inquiry)
- Annod Corp. v. Hamilton & Samuels, 100 Cal.App.4th 1286 (Cal. Ct. App.) (good-faith defense where recipient received partnership draws; mere knowledge of overdue payments not participation in fraud)
- Cybermedia, Inc. v. Symantec Corp., 19 F. Supp. 2d 1070 (N.D. Cal.) (interpreting legislative comment to permit denial of good faith when transferee has actual knowledge of facts evidencing fraud but cautioning against broad inquiry-notice rule)
- JP Morgan Chase Bank, N.A. v. Banc of America Practice Solutions, Inc., 209 Cal.App.4th 855 (Cal. Ct. App.) (describing equitable subrogation as exception to first-in-time lien priority when lender pays senior encumbrances without culpable neglect)
- Branscomb v. JPMorgan Chase Bank, N.A., 223 Cal.App.4th 801 (Cal. Ct. App.) (title insurer’s error does not bar lender from equitable subrogation)