Case Number: EC061964 Hearing Date: May 16, 2014 Dept: A

American Contracotrs Indemnity Co. v Zhu

DEMURRER

Calendar: 10
Case No: EC061964
Date: 5/16/14

MP: Defendants, Benjamin Zhu and Phyllis Zhu
Joined by Defendant, Lie Chou
RP: Plaintiff, American Contractors Indemnity Co.

ALLEGATIONS IN COMPLAINT:
The Defendants agreed to indemnify Oakridge Homes LLC. The Plaintiff brought this action because the Defendants have refused to perform their obligations after Oakridge Homes, LLC, filed a bankruptcy petition. The Plaintiff seeks to recover the amounts owed through a judicial foreclosure on the following property:

1) 619 Indiana Terrace, South Pasadena, owned by Defendant, Benjamin Zhu;
2) 1017 Garfield Avenue, South Pasadena, owned by Defendant, Phyllis Zhu; and
3) 28 W. Grandview Avenue, Arcadia, owned by Defendant, David Shen;

Further, the Plaintiff seeks to aside the fraudulent transfer of property that was an attempt to avoid this debt.

CAUSES OF ACTION IN COMPLAINT:
1) Judicial Foreclosure on Trust Deed (619 Indiana Terrace property)
2) Judicial Foreclosure on Trust Deed (1017 Garfield Avenue property)
3) Set Aside Fraudulent Transfer (1017 Garfield Avenue property)
4) Judicial Foreclosure on Trust Deed (28 W. Grandview Avenue property)
5) Set Aside Fraudulent Transfer (28 W. Grandview Avenue property)
6) Declaratory Relief

RELIEF REQUESTED:
Demurrers to first, second, third, fourth, and sixth causes of action.

DISCUSSION:
This hearing concerns the demurrer of Defendants, Benjamin Zhu and Phyllis Zhu, to the first, second, third, fourth, and sixth causes of action in the Complaint.

1. Demurrer to First Cause of Action for Judicial Foreclosure
The Defendants argue that the Plaintiff has not stated a cause of action for judicial foreclosure because the Plaintiff does not allege that the parties intended to create a security interest, does not identify the specific clause at issue in the agreement, and does not identify the basis for a deficiency judgment. The Defendants do not cite to legal authority that identifies the essential elements of this cause of action.
This cause of action is similar to a breach of contract claim in which the remedy sought is the sale of the security for the contract and a deficiency judgment for any amount remaining after the sale of the security. See e.g., Talcott v. Meakin (1915) 26 Cal. App. 293 (analyzing an attempt to recover a debt secured by a mortgage as a breach of contract claim). The essential elements are the following:

1) the parties entered into an agreement secured by a deed of trust or mortgage, i.e., the contract (Talcott v. Meakin (1915) 26 Cal. App. 291, 292);
2) if the plaintiff is not the original payee, then the plaintiff’s ownership of the note and security, i.e., the assignment of rights and duties under the contract (Dunn v. Warden (1915) 28 Cal. App. 202, 203);
3) the defendant’s default, i.e., the breach of the contract (Luddy v. Pavkovich (1902) 137 Cal. 284, 285)
4) the amount due and unpaid, i.e., the damages (Blake v. Craig (1918) 37 Cal.App. 327-328).

The Plaintiff’s pleadings are not entirely clear and the Defendants and the Court must search through numerous prolix allegations to find the essential elements of the cause of action.
In paragraph 12, the Plaintiff alleges that in accordance with the terms of the “GIA”, a deed of trust and assignment of rents was recorded on the property. A search of the pleadings reveals an allegation in paragraph 5 that “GIA” refers to the general indemnity agreement that the Defendants entered into with the Plaintiff regarding the duties of Oakridge Homes, LLC. These allegations indicate that the parties entered into a contract and that a deed of trust was recorded on the property to secure the agreement.
In paragraph 19, the Plaintiff alleges that the Defendants breached the “GIA” by failing to indemnify the Plaintiff. In paragraph 20, the Plaintiff alleges that the damages are $1,897,300. These allegations indicate that the Defendants are in default and identify the damages.
This review of the first cause of action reveals that there are no grounds for a demurrer based on the failure to state sufficient facts because it pleads the essential elements.

The Defendants also argue that the cause of action is uncertain. A demurrer for uncertainty is strictly construed, even where a complaint is in some respects uncertain, because ambiguities can be clarified under modern discovery procedures. Khoury v. Maly’s of California Inc. (1993) 14 Cal.App.4th 612, 616. A demurrer for uncertainty will be sustained only when the complaint is so bad that the defendant cannot reasonably respond because the defendant cannot reasonably determine what issues must be admitted or denied, or what counts or claims are directed against the defendant. Id.
A review of the first cause of action reveals that the Defendants can reasonably respond to it. The Plaintiff has identified the cause of action, identified the Defendants, identified the agreement, identified the breach, and identified the damages. The Defendants can reasonably determine whether to admit or deny the issues, e.g., admit or deny that they breached the indemnity agreement. Accordingly, there are no grounds for a demurrer based on uncertainty.

Therefore, the Court will overrule the demurrer to the first cause of action.

2. Demurrer to Second Cause of Action for Judicial Foreclosure
The Defendants repeat their arguments that the cause of action lacks sufficient facts and is uncertain. Again, the Defendants do not identify legal authority regarding the required elements.

A review of the pleadings reveals that the Plaintiff pleads in paragraphs 5 and 29 that the parties entered the general indemnity agreement under which the Defendants agreed to indemnify the Plaintiff with regards to Oakridge, in paragraph 36 that the Defendants breached the agreement by failing to indemnify the Plaintiff, and in paragraph 37 that the damages are $1,897,300. This review of the second cause of action reveals that there are no grounds to sustain a demurrer based on the failure to state sufficient facts because it pleads the essential elements.

Further, the Defendants can reasonably respond to the second cause of action. The Plaintiff has identified the cause of action, identified the Defendants, identified the agreement, identified the breach, and identified the damages. The Defendants can reasonably determine whether to admit or deny the issues, e.g., admit or deny that they breached the indemnity agreement. Accordingly, there are no grounds for a demurrer based on uncertainty.

Therefore, the Court will overrule the demurrer to the second cause of action.

3. Demurrer to Third Cause of Action to Set Aside a Fraudulent Transfer
The Defendants argue that the Plaintiff did not plead that they were insolvent at the time of the transfer. This is not required.

The Plaintiff is seeking relief under Civil Code sections 3439 to 3439.12, which are the Uniform Fraudulent Transfer Act. Under section 3439.04(a), a transfer made by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation as follows:

1) With actual intent to hinder, delay, or defraud any creditor of the debtor.
2) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor either:
A) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction.
B) Intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due.

A review of the elements in the statute reveals that the intent to defraud the creditor and a transfer made without receiving a reasonably equivalent value in exchange are necessary elements of the statutory claim for fraudulent transfer. There is no requirement that the debtor be insolvent.

A review of the cause of action reveals that the Plaintiff alleges in paragraphs 43 that the Plaintiff had a claim against the Defendants. In paragraphs 45 to 51, the Plaintiffs alleges that the Defendants transferred the Garfield property into the name of Phyllis Zhu as her separate property and then encumbered the property with deeds of trust with the intent to hinder, delay, or defraud the Plaintiff. Further, the Plaintiff alleges in paragraphs 52 to 56 that adequate consideration was not provided for the transfer and the encumbrances. In paragraph 57, the Plaintiff alleges that the Defendants engaged in these transfers and created these encumbrances to shield the property from creditors.
These allegations are sufficient to plead the claim.

The Defendants also argue that there are no allegations that they attempted to avoid a “matured claim”. Again, this is unnecessary because, under California law, a transfer can be fraudulent before a claim is made. Under Civil Code section 3439.04(a), a transfer may be fraudulent as to a creditor, “whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred”. Further, the definition of “claim” is broad and indicates that the Legislature intended to provide a remedy for fraudulent transfers, whether they were mature or not mature. “Claim” is defined under section 3439.01(b) as “a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured” (italics added for emphasis).
Accordingly, there is no requirement that the Plaintiff’s claim be matured at the time of the alleged fraudulent transfer.

Therefore, the Court will overrule the demurrer to the third cause of action.

4. Demurrer to Fourth Cause of Action for Judicial Foreclosure
The Defendants repeat their arguments that the cause of action lacks sufficient facts and is uncertain. Again, the Defendants fail to identify legal authority regarding the required elements.

A review of the pleadings reveals that the Plaintiff pleads in paragraphs 5 and 59 that the parties entered the general indemnity agreement under which the Defendants agreed to indemnify the Plaintiff with regards to Oakridge, in paragraph 66 that the Defendants breached the agreement by failing to indemnify the Plaintiff, and in paragraph 67 that the damages are $1,897,300. This review of the fourth cause of action reveals that there are no grounds for a demurrer based on the failure to state sufficient facts because it pleads the essential elements.

Further, the Defendants can reasonably respond to the fourth cause of action. The Plaintiff has identified the cause of action, identified the Defendants, identified the agreement, identified the breach, and identified the damages. The Defendants can reasonably determine whether to admit or deny the issues, e.g., admit or deny that they breached the indemnity agreement. Accordingly, there are no grounds for a demurrer based on uncertainty.

Therefore, the Court will overrule the demurrer to the fourth cause of action.

5. Demurrer to Sixth Cause of Action for Declaratory Relief
The Defendants argue that this cause of action does not plead sufficient facts. It is general rule that in an action for declaratory relief the complaint is sufficient if it sets forth facts showing the existence of an actual controversy relating to the legal rights and duties of the respective parties under a contract or with regards to property and requests that the rights and duties be adjudged. City Of Tiburon v. Northwestern Pac. R.R. Co. (1970) 4 Cal. App. 3d 160, 170; see CCP section 1060 (identifying the remedy of declaratory relief). Declaratory relief is a broad remedy, and the rule that a complaint is to be liberally construed is particularly applicable to one for declaratory relief. Id.

The Plaintiff alleges in paragraph 91 that an actual controversy has arisen between the Plaintiff and the Defendants regarding their rights and duties under the general indemnity agreement and the deeds of trust recorded on the real property at issue. In paragraph 93, the Plaintiff requests a judicial determination of the rights and duties of the parties. These allegations are sufficient because they identify an actual controversy relating to the legal rights and duties of the parties under a contract and with regards to property and they request that the rights and duties be adjudged.

Therefore, the Court will overrule the demurrer to the sixth cause of action.

6. Joinder of Defendant, Lie Chou
The Defendant, Lie Chou, filed a notice of joinder to the demurrer. Since the above analysis reveals that there are no grounds to sustain the demurrers of Defendants, the Court will deny the joinder.

RULING:
OVERRULE demurrers to first, second, third, fourth, and sixth causes of action.
DENY joinder.