34-2013-00155513

Yuba County Water Agency vs. Western Water Co.

Nature of Proceeding: Motion to Strike (SLAPP)

Filed By: Bazel, Lawrence S.

Defendants Western Water Company, James E. Sherman and Hubert M. Stiles, Jr.’s
(collectively “Western Water”) Special Motion to Strike Plaintiff’s Complaint is DENIED.
C.C.P., sec. 425.16. The automatic stay is lifted.

Plaintiff’s Request for Judicial Notice is GRANTED.

Allegations of the Complaint

Plaintiff Yuba County Water Agency filed its Complaint for equitable relief and
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damages setting forth causes of action for three causes of action: the 1 for Fraudulent
Transfer under UFTA and common law; the 2nd for Conspiracy to Defraud Judgment

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Creditor; and the 3 for Constructive Trust, on October 15, 2013, in Yuba County
Superior Court. This action was thereafter transferred to this Court in Dec. 2013.

On October 15, 2013, the Agency filed this suit against Western Water, Sherman and
Stiles. The Agency’s complaint asserts three counts. Count 1 alleges that the Western
Water committed a fraudulent transfer when it borrowed money to pay for the lawsuit,
and encumbered its property and that the Loan and Deed of Trust should be declared
void. (Compl. paras. 20-35.) Count 2 alleges that the Defendants engaged in a
conspiracy when they decided to file a lawsuit against the Agency. (Compl. paras. 37-
38.) Count 3 asserts that Western Water holds the property as a constructive trustee
for the Agency’s benefit. (Compl. paras. 36-43.) The Agency prays for general
damages of more than $1.3 million, plus punitive damages.

Anti-SLAPP
The Court must follow a “two-step process for determining whether an action is a
SLAPP.” Navellier v. Sletten (2002) 29 Cal.4th 82, 88. First, whether the defendant
has made a threshold prima facie showing that the defendant’s acts, of which the
plaintiff complains, were ones taken in furtherance of the defendant’s constitutional
rights of petition or free speech in connection with a public issue. If the court finds that
such a showing has been made, then the plaintiff will be required to demonstrate that
“there is a probability that the plaintiff will prevail on the claim.” The defendant has the
burden on the first issue, the threshold issue; the plaintiff has the burden on the
second issue. Kajima Engineering & Construction, Inc. v. City of Los Angeles (2002)
95 Cal.App.4th 921, 928. “Only a cause of action that satisfies both prongs of the anti-
SLAPP statute–i.e., that arises from protected speech or petitioning and lacks even
minimal merit–is a SLAPP, subject to being stricken under the statute.” Navellier v.
Sletten (2002) 29 Cal.4th 82, 89.

Undisputed Facts

In 2009, Western Water filed suit against the Agency. Western Water alleged that the
Agency has been breaching a 1991 agreement by secretly taking water (63,000 acre-
feet per year) without paying for it. In that suit, Western Water’s expert opined that the
Agency owes Western Water $48 million for water the Agency took from 1991 through
2011. The Agency prevailed at trial, Western Water appealed, and the appeal is now
being briefed.

At the same time it filed the suit, Western Water entered into a set of loan agreements
in 2009, in which the company obtained cash to pay for the litigation against the
Agency. The loan was amended in 2011 to provide more cash as trial was
approaching. In return for more than $4 million in cash, Western Water has promised
to repay the loan in the future, and has secured that promise to repay with company
assets, as is typical for this type of commercial loan. The main lenders are two T.
Rowe Price entities. (Stiles Dec., para. 4) Additionally, the CEO and Treasurer,
Sherman and Stiles, were also lenders.

Moving defendants assert that the loan provisions are typical of commercial loans
made to companies. The lenders provided $4 million in cash to Western Water and in
return Western Water promised to repay the loan, together with commercially
reasonable interest and pledged its assets as security. If the assets had to be sold, the
lenders would take what they are owed and any excess over principal and interest
would be returned to Western Water. (Stiles Dec., para. 5) A Deed of Trust evidencing
the loan was required by the loan and was recorded. (Stiles Dec., paras. 8-10)

Suit Arose from Protected Activity

Moving party Western Water contends that Plaintiff Yuba County Water Agency
(“Agency”) filed this suit to attack Western Water’s suit against the Agency in 2009,
and the loan that Western Water took out to pay for the lawsuit. Western Water
asserts that this action was filed by the Agency to threaten and intimidate defendants
James E. Sherman (Western Water’s CEO) and Hubert M. Stiles, Jr. (its Treasurer) for
prosecuting that appeal.

Western Water contends that the filing, prosecution and funding of the lawsuit are all
activities protected by the anti-SLAPP statute, subject to a “special motion to strike”
under C.C.P., sec. 425.16.
Defendants assert that the causes of action all arise from the underlying lawsuit.
Litigation is a protected activity. C.C.P., sec. 425.16(e) (1).

The plain language of the “arising from” prong encompasses any cause of action
against a person arising from any statement or writing made in, or in connection with
an issue under consideration or review by, an official proceeding or body. (Navellier v.
Sletten (2002) 29 Cal.4th 82, 89-95; Jarrow Formulas, Inc. v. LaMarche (2003) 31 Cal.
4th 728, 734.)

In Wilcox v. Superior Court (1994) 27 Cal. App. 4th 809, 821-822, the allegedly
defamatory statements were made in the context of exhorting shorthand reporters to
contribute to the cost of pursuing that litigation, were found to be rationally connected
to the litigation itself.

Similarly here, defendants entering into a set of loan agreements, for which security
was provided, for the purpose of funding their litigation can be found to be rationally
connected to the litigation itself.

Therefore, Count 1 for fraudulent transfer in borrowing funds for the suit, and Count 2
for conspiracy, where Sherman as CEO and Stiles as Treasurer of Western Water,
recommended the pursuit of the lawsuit against the Agency and Count 3 for
constructive trust, which merely is a remedy, repeating the allegations of Count 1, are
all rationally connected to the litigation and therefore defendants’ protected activity.

The defendant having satisfied its burden on the first threshold issue, the burden shifts
to the plaintiff has the burden on the second issue.

Probability That the Plaintiff Will Prevail

A plaintiff establishes the requisite probability of success by “stat[ing] and substantiat
[ing] a legally sufficient claim.’” (Jarrow Formulas, Inc. v. LaMarche (2003) 31 Cal.4th
728, 741.) Plaintiff’s burden in showing a probability that it will prevail is not high.
Plaintiff needs to show only a case of “minimal merit.” Under section 425.16,
subdivision (b)(2), the trial court in making these determinations considers “the
pleadings, and supporting and opposing affidavits stating the facts upon which the
liability or defense is based.” (Equilon Enterprises v. Consumer Cause, Inc. (2002) 29
Cal.4th 53, 67.) The Court does not weigh credibility, nor does it evaluate the weight of
the evidence. Instead, the Court accepts as true all evidence favorable to the plaintiff
and assesses the defendant’s evidence only to determine if it defeats the plaintiff’s
submission as a matter of law. Grewal v. Jammu (2011) 191 Cal. App. 4th 977, 989.

Plaintiff contends that it has alleged, and the evidence before the Court supports, a
claim for fraudulent transfer, under Civil Code § 3439.04(a), as the debtor Western
Water made the transfer or incurred the obligation with actual intent to hinder, delay, or
defraud any creditor of the debtor.

A transfer made by a debtor is fraudulent under the UFTA if the debtor made the
transfer with the “actual intent to hinder, delay, or defraud any creditor of the
debtor.” (Civil Code, sec. 3439.04, subd. (a)(1).) Whether a conveyance was made
with fraudulent intent is a question of fact, and proof often consists of inferences from
the circumstances surrounding the transfer.
Filip v. Bucurenciu (2005) 129 Cal. App. 4th 825, 834.

The Fraudulent Transfer Act is codified in Civil Code §3439 et. seq. CCP section
3439.04 provides a framework for determining whether there was an actual intent to
delay, hinder or defraud a creditor. CCP section 3439.04(b), outlines the so-called
“badges of fraud” that can guide the Court in determining whether the transfer was
fraudulent. In determining actual intent, consideration may be given, among other
factors, to any or all of the following: (1) whether the transfer or obligation was to an
insider. (2) Whether the debtor retained possession or control of the property
transferred after the transfer. (3) Whether the transfer or obligation was disclosed or
concealed. (4) Whether before the transfer was made or obligation was incurred, the
debtor had been sued or threatened with suit. (5) Whether the transfer was of
substantially all the debtor’s assets. (6) Whether the debtor absconded. (7) Whether
the debtor removed or concealed assets. (8) Whether the value of the consideration
received by the debtor was reasonably equivalent to the value of the asset transferred
or the amount of the obligation incurred. (9) Whether the debtor was insolvent or
became insolvent shortly after the transfer was made or the obligation was incurred.
(10) Whether the transfer occurred shortly before or shortly after a substantial debt
was incurred. (11) Whether the debtor transferred the essential assets of the business
to a lienholder who transferred the assets to an insider of the debtor. Civil Code §
3439.04(b)

There is no minimum number of factors that must be present before the scales tip in
favor of finding of actual intent to defraud. This list of factors is meant to provide
guidance to the trial court, not compel a finding one way or the other. Filip v.
Bucurenciu, supra, 129 Cal. App. 4th 825, 834.

Here, opposing party points to the evidence that Sherman and Stiles, as CEO and
Treasurer, were insiders who entered into a loan with Western Water and retained a
security interest in Western Water’s assets. Civil Code § 3439.04(b) (1). (Exhs. C, E,
Sherman Dec. para. 1, Stiles Dec., para. 4)

Plaintiff asserts that debtor Western Water retained possession or control of the
property, as the encumbrance (DOT) was not recorded until 2012. Civil Code §
3439.04(b) (2). Sherman and Stiles do not appear to have actually provided the
amounts to finance the loans. Sherman offset the consulting fees he charged to
Western Water. Both obtained warrants providing them with equity ownership.

Plaintiff also relies upon the evidence that the transfer was concealed by all
defendants until almost three years after the original agreement. Civil Code § 3439.04
(b) (3). From the delay in the recordation of the encumbrance (DOT) until shortly after
the trial court’s decision that plaintiff had prevailed in the underlying suit, the inference
may be drawn that defendants intended to hinder, delay or defraud plaintiff from
recovering on its judgment, after Yuba County Water Agency had prevailed in the
underlying suit, but before it could recover on its judgment.

Western Water also transferred substantially all of its present and future assets. Civil
Code § 3439.04(b) (5). The value of the consideration was not reasonably equivalent
to the value of the assets transferred. Civil Code § 3439.04(b) (8).

Count 2 for conspiracy is not a malicious prosecution cause of action. Although
Sherman and Stiles were CEO and Treasurer of Western Water, they were not just acting for the company but were on both sides of the transactions (lender and
borrowers), and could be found to be acting for their own benefit.

Count 3 for constructive trust may be imposed in any case where there is a wrongful
acquisition or detention of property to which another is entitled. Civil Code, sec. 2223,
2224.

The Court finds that the plaintiff has met its burden of showing a probability of
prevailing on all three causes of action.

The anti-SLAPP motion is therefore denied.

The prevailing party shall prepare a formal order for the Court’s signature pursuant to
C.R.C. 3.1312.