34-2013-00155513

Yuba County Water Agency vs. Western Water Co.

Nature of Proceeding: Motion to Conduct Discovery and Continue SLAPP Motion

Filed By: Tapp, Chad S.

Plaintiff Yuba County Water Agency’s (“YCWA”) motion to lift discovery stay pursuant
to CCP § 425.16(g) is granted.

In this action, YCWA alleges that Defendants Western Water Company (“Western”),
fraudulently transferred all of its assets to company insiders James Sherman and
Hubert Stiles in 2009, 2011, and 2012 in an attempt to defraud, hinder and delay YCMA from collecting on a $1,309,697.44 judgment for fees and costs obtained after it
prevailed in a lawsuit brought by Western. YCMA asserts causes of action for
fraudulent transfer, conspiracy to defraud and constructive trust. YCMA alleges that
the day after it filed its lawsuit against YCMA, Western entered a contract with
Sherman (Western’s President/CEO), Stiles (Western’s Treasurer), and others
pursuant to which Western transferred a security interest in all of its assets to Sherman
and Stiles in exchange for a loan to finance Western’s lawsuit. YCMA alleges that
they deliberately did not record the transfer to hide it from YCMA and other potential
creditors. YCMA alleges that less than two weeks after a decision was announced in
Western’s lawsuit, Western executed and recorded a deed of trust transferring and
assigning all its assets.

Defendants filed a motion to strike pursuant to CCP § 425.16 on the basis that the
instant action arises out of protected activity, specifically, the lawsuit Western filed and
a loan it took out to finance the lawsuit. They then argue that YCWA will not be able to
make a prima facie showing on any of its causes of action arguing, among other
things, that the loan, secured by Western’s assets was a valid loan and not a
fraudulent transfer. The motion to strike is set to be heard on February 10, 2014.

The filing of an anti-SLAPP motion automatically stays discovery until the Court rules
on the motion. (CCP § 425.16(g).) “The court, on noticed motion and for good cause
shown, may order that specified discovery be conducted notwithstanding this
subdivision.” The trial court “must liberally exercise its discretion by authorizing
reasonable and specified discovery…when evidence to establish a prima facie case is
reasonably shown to be held, or known, by defendant or its agents or employees.” (
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Lafayette Morehouse, Inc. v. Chronicle Publishing Co. (1995) 37 Cal.App.4 855, 868
[superseded by statute on other grounds in Damon v. Ocean Hills Journalism Club
th
(2000) 85 Cal.App.4 468].) In addition, whether discovery should be permitted also
depends on “whether the information the plaintiff seeks to obtain through formal
discovery proceedings is readily available from other sources or can be obtained
through informal discovery.” (Garment Workers Center v. Superior Court (2004) 117
th
Cal.App.4 1156, 1162.)

Here, YCMA seeks to obtain discovery with respect to the transactions by which
Western transferred its property interests in order to obtain evidence on the alleged
fraudulent transfers. It argues that it sought such documents prior to filing the lawsuit
but Defendants’ counsel provided some documents with almost all terms redacted.
YCMA summarizes the discovery it seeks as follows:

1. Unredacted and unaltered copies of all loan documents, including the
October 15, 2009, August 24, 2011, December 11, 2011, agreements.
2. Any transaction-related documents from First American Title Insurance
Company, T.Rowe Price Small-Cap Value Fund, Inc., and T. Rowe Price
New Era Fund, Inc.
3. Western Water’s documents regarding the loans including corporate
minutes of meetings about obtaining the loans.
4. Company documents valuing Western Water’s assets that were the
subject of the agreements.
5. Documents evidencing Western Water’s receipt of the loan proceeds and
whether the funds were spent.
6. Documents evidencing the financial impact the loans had on Western,
and whether they caused Western to become essentially insolvent. (Mot. 4:11-22.)

Defendants argue that the discovery stay cannot be lifted where the case is
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“resolvable as a matter of law.” (Garment Workers Center, supra, 117 Cal.App.4 at
1163.” “If…the defendant contends that the plaintiff cannot establish a probability of
success on the merits because its complaint is legally deficient, no amount of
discovery will cure that defect.” (Id. at 1162.) This proposition, however, has no
application to the instant matter. Indeed, Defendants anti-SLAPP motion argues, for
example, that YCMA will not be able to meet its burden on the second prong of the anti
-SLAPP analysis because the challenged transactions were made to secure a valid
loan and thus cannot be fraudulent transfers and in any event that they lacked the
requisite intent to hinder, delay or defraud when the loan was made. (Defs’ Memo.
ISO Anti-SLAPP 12:4-13:21.) These are not arguments that the complaint is legally
deficient, e.g., that under the facts as pled, YCMA could never prevail on a cause of
action, but rather an argument that YCMA will not be able to prove its allegations with
respect to the fraudulent transfer and related causes of action. These issues are
factual. Defendants argue that the anti-SLAPP motion can be resolved as a matter of
law because this case involves YCMA’s challenge to it giving a security interest in
exchange for a loan. Apparently it contends that a security interest can never be a
th
fraudulent transfer, citing to Wyzard v. Goller (1994) 23 Cal.App.4 1183. However, it
is enough for purposes of this motion to note that Wyzard held that the “an
encumbrance by a debtor to an attorney, made for value in the form of an antecedent
obligation for legal services, is not fraudulent as to another creditor, under applicable
provisions of the Uniform Fraudulent Transfer Act.” (Id. at 1184 [emphasis added].)
Importantly the holding was after a motion for summary judgment and thus evidence
had been presented with respect to the nature of the challenged security interest.
Wyzard does not stand for the proposition that a complaint alleging that a security
interest is a fraudulent transfer is legally deficient such that it can be resolved as a
matter of law on the pleadings in all cases without examining any evidence regarding
the nature of the challenged transaction. Thus, the argument that the motion should
be denied because the anti-SLAPP motion is premised on an assertion that the
complaint is legally deficient is denied.

The Court also rejects the argument that YCMA failed to show how the requested
discovery “will matter.” Indeed, YCMA seeks the requested discovery to obtain
information regarding the details of the subject transactions which it alleges were
fraudulently made, specifically to support a showing that the transactions were
structured to allow Western to avoid paying a judgment entered against it. Discovery
is sought to allow YCMA to “obtain the terms of the agreements. YCMA will also be
able to learn more about the timing of the agreements, the recording of the Deed of
Trust, the assets of Western and the financial impact the transaction had on
Western.” (Mot. 4:1-4.) “The requested discovery will allow Plaintiff to provide
evidence necessary to show that the transfers were in violation of the UFTA not only
because they were to insiders and because the timing was suspicious, but also
because the transactions were concealed, the value received was not ‘reasonably
equivalent’, as they caused Western to be insolvent.” (Id. 4:23-26.) Thus YCMA has
specifically addressed the basis for the discovery and how it will help it make a prima
facie showing, indeed, the stated reasons relate directly to the elements necessary to
prove a violation of the UFTA. (Civ. Code. § 3439.04.) As mentioned above, YCMA
sought to obtain such information informally, but Defendants would not produce the
information, other than redacted documents. Further, Defendants do not dispute that
they and their agents are the only ones who possess the information sought by YCMA.

(The Garment Workers Center, supra, 117 Cal.App.4 at 1162 [fact that evidence
necessary to establish prima facie case is in the defendant’s possession and cannot
be obtained through informal means supports finding of good cause for discovery].)

In sum, the Court finds that good cause exists to lift the discovery stay pursuant to
CCP § 425.16(g) so that YCMA can conduct the requested discovery identified in the
motion. Further, the Court will continue the February 10, 2014, hearing date on the
anti-SLAPP motion to allow YCMA to conduct the requested discovery. (Lafayette
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Morehouse, Inc., supra, 37 Cal.App.4 at 868.) The hearing will be continued to
Monday, May 12, 2014 at 2 p.m. in this department.

This minute order is effective immediately. No formal order pursuant to CRC Rule
3.1312 or other notice is required.