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Date: 04-22-2017

Case Style: Nautilus, Inc. v. Chao Chen Yang

Case Number: G051956

Judge: J. Fybel

Court: California Court of Appeals Fourth Appellate District Division Three on appeal from the Superior Court, Orange County

Plaintiff's Attorney: Thompson Coburn and Samuel R. Watkins

Defendant's Attorney: Michael S. Robinson, L. Allan Songstad, Jr., and William D. Coffee

Description: INTRODUCTION
Nautilus, Inc. (Nautilus), obtained a judgment against Stanley Kuo Hua
Yang, and recorded an abstract of judgment against real property on which Stanley and
his brother, Peter Chun Hua Yang, held title.1
Stanley and Peter transferred title on the
property to their father, Chao Chen Yang, who obtained a reverse mortgage loan on the
property from Security One Lending (Security One). In its title search, the title insurance
company missed Nautilus’s abstract of judgment when the reverse mortgage loan funded.
Stanley’s transfer of the property to Chao Chen was a fraudulent
conveyance under the Uniform Fraudulent Transfer Act (UFTA) (Civ. Code, § 3439
et seq.).
2
(All further statutory references are to the Civil Code, unless otherwise
specified.) Nautilus sued Stanley, Peter, and Chao Chen. Nautilus also sued Urban
Financial Group, Inc. (Urban Financial), which bought the mortgage from Security One,
for damages resulting from the fraudulent conveyance from Stanley to Chao Chen.
Following a bench trial, the court found that Security One and Urban Financial had acted
in good faith, and could not be liable to Nautilus.
We affirm. As we will explain, the trial court misapplied the burden of
proof in connection with the good faith defense. Nevertheless, given the facts of the case,

1
We will refer to the members of the Yang family by their first names to
avoid confusion; we intend no disrespect.
2
Since the judgment was entered in this case, the UFTA has been renamed
the Uniform Voidable Transactions Act. (2015 Stats., ch. 44, § 2.) For purposes of
consistency and readability, in this opinion, we will continue to refer to the relevant
statutes as the UFTA.
3
even under the correct burden of proof and legal principles, the good faith defense was
established.
We publish our opinion because of our analysis of the requirements of the
good faith defense. Some cases have held that a transferee cannot avail itself of the good
faith defense if the transferee had fraudulent intent, colluded with a person who was
engaged in a fraudulent conveyance, or actively participated in a fraudulent conveyance.
A line of federal cases interpreting California law concludes the good faith defense may
also fail if the transferee had actual knowledge of facts suggesting to a reasonable person
that the transfer was fraudulent. Some of those cases may be read to improperly establish
an inquiry notice standard, and others frame the test in a way that is inconsistent with the
legislative comment to section 3439.08. After analyzing those state and federal cases, we
hold a transferee cannot benefit from the good faith defense if that transferee had
fraudulent intent, colluded with a person who was engaged in the fraudulent conveyance,
actively participated in the fraudulent conveyance, or had actual knowledge of facts
showing knowledge of the transferor’s fraudulent intent.
We also conclude that the trial court did not err in granting equitable
subrogation to Urban Financial. This decision has the effect of making a portion of the
Urban Financial mortgage senior to Nautilus’s abstract of judgment even though the
Urban Financial mortgage was recorded after the abstract of judgment.
Finally, we conclude the trial court’s equitable grant of priority to a money
judgment to Nautilus as against Chao Chen, over a portion of Urban Financial’s lien on
the reverse mortgage loan taken out by Chao Chen, was proper.
STATEMENT OF FACTS AND PROCEDURAL HISTORY
Nautilus is a manufacturer of exercise equipment under various trade names
including Bowflex. In December 2011, Nautilus obtained an $8 million default judgment
against Stanley (among others not involved in the present case) arising from
4
counterfeiting Nautilus products. On April 4, 2012, Nautilus recorded an abstract of
judgment in Orange County, California.
As of the beginning of 2012, Stanley and Peter held title as joint tenants to
a single-family residence in Fountain Valley, California (the Property). In February and
April 2012, through two separate transactions, Stanley and Peter conveyed their interests
in the Property to Chao Chen. Chao Chen then obtained a reverse mortgage loan on the
Property on April 17, 2012, in the amount of $386,835 from Security One;3
a deed of
trust was recorded to secure the reverse mortgage loan.
First American Title Company (First American) ran a title search in
connection with the reverse mortgage loan, which revealed Nautilus’s abstract of
judgment. First American acknowledged its error in failing to realize the abstract of
judgment affected the Property.
The proceeds of the reverse mortgage loan were used to pay off the existing
liens against the Property, all of which had been recorded before Nautilus’s abstract of
judgment, in the total amount of $308,576.72. Those prior liens consisted of mortgage
liens in favor of CitiMortgage, Inc., and Bank of the West, and a judgment lien in the
amount of $20,514.88 against Stanley in favor of Nautilus Design & Construction
(Nautilus Design). (The judgment in favor of Nautilus Design is different from the
judgment in favor of Nautilus.) The remaining funds were disbursed to Chao Chen.
Security One sold the reverse mortgage loan to Urban Financial in May 2012 for
$422,302.21.
Nautilus filed a complaint against Urban Financial, Stanley, Peter, and
Chao Chen, to set aside fraudulent transfers, recover damages from Stanley, Peter, and

3
Reverse mortgages are federally insured loans designed to assist senior
citizens in which the borrower remains on title, lives in the property, is free of monthly
payments, and may use the loan to pay off exiting debts against the property.
5
Chao Chen for conspiracy, and for declaratory relief against Urban Financial.
4 Urban
Financial filed a cross-complaint against Nautilus, Stanley, Peter, and Chao Chen,
seeking to quiet title, to establish and foreclose an equitable lien, to recover damages
from Stanley, Peter, and Chao Chen for fraud, and for declaratory relief.
The case proceeded to a court trial. The trial court signed a statement of
decision and a judgment, which provided, in relevant part:
1. Security One and Urban Financial were good faith lenders for value, and
Nautilus therefore could not recover damages from Urban Financial.
2. Stanley and Chao Chen were each awarded a one-half, undivided
interest in the Property, subject to the other parties’ lien rights.
3. Urban Financial was granted a first priority equitable lien on the
Property in the amount of $308,576.72.
4. Nautilus was granted a second priority judgment lien on Stanley’s
one-half interest in the Property, based on its abstract of judgment, in the amount of
$8 million.
5. Nautilus was awarded a money judgment against Chao Chen in the
amount of $153,212, secured by a lien on Chao Chen’s one-half interest in the Property.
6. Urban Financial’s deed of trust securing the reverse mortgage loan was
deemed to be junior to Urban Financial’s equitable lien, Nautilus’s judgment lien, and
Nautilus’s money judgment.
Urban Financial’s motion to vacate the judgment was denied. Nautilus
filed a notice of appeal, and Urban Financial filed a notice of cross-appeal.

4
Security One and the United States Department of Housing and Urban
Development (HUD) were initially named in Nautilus’s complaint, but were later
dismissed.
6
DISCUSSION
I.
THE TRIAL COURT DID NOT ERR IN FINDING THAT SECURITY ONE
AND URBAN FINANCIAL ACTED IN GOOD FAITH.
A. General Principles
A fraudulent conveyance is “a transfer by the debtor of property to a third
person undertaken with the intent to prevent a creditor from reaching that interest to
satisfy its claim.” (Yaesu Electronics Corp. v. Tamura (1994) 28 Cal.App.4th 8, 13.)
The UFTA makes fraudulent transfers voidable: “(a) A transfer made or obligation
incurred by a debtor is voidable 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 the debtor
would incur, debts beyond the debtor’s ability to pay as they became due.” (§ 3439.04,
subd. (a).)
If a transferee or obligee took in good faith and for a reasonably equivalent
value, however, the transfer or obligation is not voidable. (§ 3439.08, subd. (a).)5

Whether a transfer is made with fraudulent intent and whether a transferee acted in good
faith and gave reasonably equivalent value within the meaning of section 3439.08,
subdivision (a), are questions of fact. (Annod Corp. v. Hamilton & Samuels (2002) 100

5
“A transfer or obligation is not voidable under paragraph (1) of
subdivision (a) of Section 3439.04, against a person that took in good faith and for a
reasonably equivalent value given the debtor or against any subsequent transferee or
obligee.” (§ 3439.08, subd. (a).)
7
Cal.App.4th 1286, 1294 (Annod).) “When the trial court has resolved a disputed factual
issue, the appellate courts review the ruling according to the substantial evidence rule. If
the trial court’s resolution of the factual issue is supported by substantial evidence, it
must be affirmed.” (Winograd v. American Broadcasting Co. (1998) 68 Cal.App.4th
624, 632.) As the party seeking to invoke the protection of section 3439.08,
subdivision (a), Urban Financial had the burden of proving that subdivision’s
applicability by a preponderance of the evidence. (§ 3439.08, subds. (f)(1), (g).)6
B. The Trial Court’s Statement of Decision
In the statement of decision, the trial court made the following findings
regarding the issue of good faith on the part of Security One and Urban Financial: “The
Court finds both Security One Lending and Urban Financial acted in good faith in
making and purchasing the Subject Loan, respectively, such that Urban Financial has a
complete defense to Nautilus’s claim under the UFTA. . . . It is undisputed that Urban
Financial paid $422,302.21 for the Subject Loan and the Urban Deed of Trust. Pursuant
to the two controlling California cases of Lewis v. Superior Court (2nd Dist. 1994) 30
Cal.App.4th 1850, 1858-1859 . . . , and Annod Corp. v. Hamilton & Samuels (4th Dist.,
Div. 3 2002) 100 Cal.App.4th 1286, 1299-1300 . . . , in order to defeat a good faith
obligee defense under the UFTA, a party must show that the lender either (1) colluded
with the debtor, or (2) actively participated in the debtor’s fraudulent scheme. [Citation.]

6
Section 3439.08 provides: “(f) The following rules determine the burden
of proving matters referred to in this section: [¶] (1) A party that seeks to invoke
subdivision (a), (d), or (e) has the burden of proving the applicability of that subdivision.
[¶] (2) Except as otherwise provided in paragraph (3) or (4), the creditor has the burden
of proving each applicable element of subdivision (b) or (c). [¶] (3) The transferee has
the burden of proving the applicability to the transferee of subparagraph (B) of paragraph
(1) of subdivision (b). [¶] (4) A party that seeks adjustment under subdivision (c) has the
burden of proving the adjustment. [¶] (g) The standard of proof required to establish
matters referred to in this section is preponderance of the evidence.” (§ 3439.08,
subds. (f), (g).)
8
As the evidence presented at trial was that neither lender had actual knowledge of
Nautilus, Nautilus’s judgment against Stanley Yang, or Nautilus’s Abstract, Nautilus did
not meet its burden in establishing that either lender colluded with . . . Stanley Yang or
actively participated in the debtor’s fraudulent scheme. [¶] The Court rejects Nautilus’s
argument that Urban Financial should have discovered Stanley Yang’s fraud upon
Nautilus based on federal bankruptcy authorities. Even Nautilus’s cited case of
Cybermedia, Inc. v. Symantec Corp. (N.D. Cal. 1998) 19 F.Supp.2d 1070 . . . rejects the
argument that there is an inquiry notice standard [citation], and acknowledges that the
Lewis opinion sets forth California’s rule on good faith [citation]. In any event, even had
this standard been applied, Nautilus failed to carry its burden of proving indicia of fraud
on the transaction sufficient to put a reasonable lender on notice that a fraud was
occurring.” (Fn. omitted.)
C. Burden of Proof; Good Faith Defense
As conceded on appeal by Urban Financial, the trial court erred in placing
the burden of proof on Nautilus to prove the good faith defense did not apply.
(§ 3439.08, subd. (f).) In reviewing the evidence, post, we bear in mind that the burden
of proof was on Urban Financial to prove the good faith defense applied.
Urban Financial concedes on appeal that there was a fraudulent transfer.
Similarly, Nautilus concedes that Urban Financial took for a reasonably equivalent value.
Therefore, we will not discuss those issues further. Accordingly, we next analyze the
standard for deciding whether Security One or Urban Financial “took in good faith”
(§ 3439.08, subd. (a)) within the meaning of the statute.
Comment (1) of the Legislative Committee comments to section 3439.08,
subdivision (a), provides, in relevant part: “‘[G]ood faith’ means that the transferee acted
without actual fraudulent intent and that he or she did not collude with the debtor or
otherwise actively participate in the fraudulent scheme of the debtor. The transferee’s
9
knowledge of the transferor’s fraudulent intent may, in combination with other facts, be
relevant on the issue of the transferee’s good faith of the transferor [sic] or of the
transferor’s insolvency.” (Legis. Com. com.—Assembly (Revised) 1986 Addition,
12A pt. 2 West’s Ann. Civ. Code (2016 ed.) foll. § 3439.08, p. 377, italics added.)7
The parties agree there was no evidence that Security One or Urban
Financial had actual fraudulent intent, actually colluded with Stanley to defraud Nautilus,
or actively participated in the fraudulent scheme. As we will explain, based on the
Legislative Committee’s comment to section 3439.08 (Legis. Com. com.—Assembly
(Revised) 1986 Addition, 12A pt. 2 West’s Ann. Civ. Code, supra, foll. § 3439.08,
p. 377), the issue in this appeal is whether there is evidence showing Security One or
Urban Financial had actual knowledge that the transferor had fraudulent intent.
Urban Financial relies on two California appellate court opinions—Lewis v.
Superior Court (1994) 30 Cal.App.4th 1850 (Lewis) and Annod, supra, 100
Cal.App.4th 1286—to support its argument that the good faith defense protects it in this
case because there is no evidence of deliberate wrongful conduct on its part. These cases
do not fully set forth the appropriate standard for establishing the good faith defense, and
neither Lewis nor Annod addressed a record in which there was an issue whether the
transferee had actual knowledge of the fraudulent intent of the transferor.
In Lewis, supra, 30 Cal.App.4th at page 1855, Robert F. Lewis and
Josephine N. Lewis (the Lewises) acquired title to a property in Palos Verdes from
Randolph Shipley for a price close to the appraised value. The Lewises obtained two title
insurance policies, neither of which revealed any claims against title. (Id. at p. 1856.)

7
“The conflict in the cases should be resolved in favor of the legislative
committee comment and the policy articulated by the commission.” (Morris v. County of
Marin (1977) 18 Cal.3d 901, 927 (conc. opn. of Clark, J.).) Comments by legislative
committees are among the resources we use to ascertain legislative intent. (Schooler v.
State of California (2000) 85 Cal.App.4th 1004, 1012; Arroyo v. State of California
(1995) 34 Cal.App.4th 755, 761.)
10
The Lewises recorded a grant deed placing title to the property in their names on
February 28. (Ibid.) However, a lis pendens had been recorded against the property on
February 24, although it was not indexed until February 29. (Ibid.) The lis pendens
arose out of a federal lawsuit alleging Shipley purchased the property with
misappropriated funds. (Id. at p. 1857.)
One of Shipley’s creditors sued the Lewises for fraudulent conveyance.
(Lewis, supra, 30 Cal.App.4th at p. 1858.) The Lewises filed a motion for summary
judgment, arguing they had a complete defense to the claim based on section 3439.08,
subdivision (a). (Lewis, supra, at p. 1858.) Although the trial court concluded that the
Lewises had no actual knowledge of the lis pendens or of Shipley’s alleged misdeeds, the
existence of “the federal lis pendens deprived the Lewises of their status as good faith
purchasers through constructive notice.” (Ibid.)
The appellate court issued a writ of mandate, rejecting the “fiction of
constructive notice” within the context of the good faith defense. (Lewis, supra, 30
Cal.App.4th at p. 1859.) “‘Fraudulent intent,’ ‘collusion,’ ‘active participation,’
‘fraudulent scheme’—this is the language of deliberate wrongful conduct. It belies any
notion that one can become a fraudulent transferee by accident, or even negligently.”
(Ibid.) The appellate court noted that the Lewises had made a reasonable inquiry by
obtaining a title report and title insurance, and were not liable for the title report’s failure
to reveal the lis pendens. (Ibid.) “Since the Lewises had made precisely the inquiry that
the trial court thought they should have made and still knew nothing about the claims
against Shipley, the trial court erred in holding that they ‘colluded’ or ‘actively
participated’ in the claimed fraudulent conveyance. Instead, the court stripped the
Lewises of their good faith status by imputing to them knowledge supposedly (but not
actually) held by their title insurer concerning the federal lis pendens and the supposed
(but not shown by any evidence) negligence of their insurer in failing to find and disclose
the lis pendens.” (Ibid.)
11
In Annod, supra, 100 Cal.App.4th at page 1291, the plaintiff landlord sued
the partners of a defunct law firm for unpaid rent. The landlord claimed the partners had
received fraudulent conveyances from the law firm because the law firm paid them
partnership draws rather than paying rent. (Ibid.) The trial court granted the partners’
motions for summary judgment on the ground that the transfers were made in good faith
and for reasonably equivalent value. (Ibid.) The appellate court affirmed. (Ibid.)
“Annod [Corporation] cites no authority for the proposition that accepting partnership
compensation with the knowledge that lease payments are overdue is tantamount to the
participation in a fraudulent scheme. Similarly, Annod cites no authority to the effect
that a partner is prohibited from receiving a partnership draw authorized by the relevant
partnership documents if the partnership cannot make its rental payments.” (Id. at
pp. 1299-1300.) Annod does not directly address the issue whether the good faith defense
to an avoidance based on fraudulent conveyance may be based on the transferee’s actual
knowledge that the transferor had fraudulent intent.
Following the Lewis decision, federal courts interpreting California law
explored the requirements of the good faith defense.8
In Plotkin v. Pomona Valley
Imports (In re Cohen) (B.A.P. 9th Cir. 1996) 199 B.R. 709 (Cohen), the bankruptcy court
addressed the good faith defense. In that case, the debtor created a “Ponzi scheme,” in
which he accepted money from individuals to buy high-end cars wholesale. (Id. at
p. 712.) The debtor then purchased the cars at retail, and had the car dealers deliver them
to the purchasers. (Id. at pp. 712-713.) When the Ponzi scheme collapsed, a number of

8
While federal decisions are not controlling on matters of state law
(Howard Contracting, Inc. v. G. A. MacDonald Construction Co. (1998) 71 Cal.App.4th
38, 52), they are relevant to our analysis of a law whose purpose is to make uniform the
avoidance of fraudulent transfers among the different states: “This chapter shall be
applied and construed to effectuate its general purpose to make uniform the law with
respect to the subject of this chapter among states enacting it.” (§ 3439.13.)
12
the purchasers sought to recover the money they had paid to the debtor (without receiving
a high-end car) through the bankruptcy trustee. (Id. at p. 713.)
One of the issues on appeal in Cohen was whether the car dealers could be
forced to return the money they had received from the debtor, or whether they were
covered by the good faith defense. The bankruptcy court set forth this summary of the
good faith defense: “One lacks the good faith that is essential to the [section 3439.08]
defense to avoidability if possessed of enough knowledge of the actual facts to induce a
reasonable person to inquire further about the transaction. [Citation.] Such inquiry
notice suffices on the rationale that some facts suggest the presence of others to which a
transferee may not safely turn a blind eye. [Citations.]” (Cohen, supra, 199 B.R. at
p. 719.) Ultimately, the court determined that the car dealers were not on inquiry notice
of the Ponzi scheme, although the debtor had previously filed for bankruptcy, and the
purchases made by the debtor before bankruptcy were not avoidable. (Ibid.)
In Cybermedia, Inc. v. Symantec Corp. (N.D.Cal. 1998) 19 F.Supp.2d 1070,
1075 (Cybermedia), the court recognized, “[t]here is a surprising dearth of authority
regarding the standard applicable to the good faith requirement under California’s version
of the UFTA.” The Cybermedia court held that the proper standard was a combination of
the Lewis and Cohen standards. “The Legislative Committee Comment to California
Civil Code § 3439.08 states that a transferee acts without good faith if he or she
‘collude[s] with the debtor or otherwise actively participate[s] in the fraudulent scheme of
the debtor.’ [Citation.] Clearly, then, the Lewis court was correct in holding that a
transferee who colludes with the debtor or otherwise participates in the fraud lacks good
faith. However, the Legislative Committee Comment also states that ‘[k]nowledge of the
facts rendering the transfer voidable would be inconsistent with the good faith that is
required of a protected transferee.’ [Citation.] This portion of the Comment supports the
Cohen court’s conclusion that a transferee’s knowledge of facts evidencing fraud in the
transfer may be sufficient to strip the transferee of good faith even in the absence of
13
actual collusion or active participation. Accordingly, this Court holds that, for purposes
of the UFTA, a transferee lacks good faith if he or she (1) colludes with the debtor or
otherwise actively participates in the debtor’s fraudulent scheme, or (2) has actual
knowledge of facts which would suggest to a reasonable person that the transfer was
fraudulent.” (Cybermedia, supra, at p. 1075.)
Unfortunately, the quotation of the Legislative Committee comment in
Cybermedia stopped too soon. The comment continues: “Knowledge of the voidability
of a transfer would seem to involve a legal conclusion. Determination of the voidability
of the transfer ought not to require the court to inquire into the legal sophistication of the
transferee.” (Legis. Com. com.—Assembly (Revised) 1986 Addition, 12A pt. 2 West’s
Ann. Civ. Code, supra, foll. § 3439.08, p. 377.) Our formulation of the test seeks to
avoid framing the issue in terms of voidability. Instead, we frame the issue in terms of
“fraudulent intent”—a term used in the Legislative Committee comment to
section 3439.08.
The Cybermedia court correctly made clear that a transferee’s duty to probe
the transferor’s intent must be limited. “Defendants argue that Cohen establishes a much
broader ‘inquiry notice’ standard, essentially contending that a transferee must inquire
further into the transaction if he or she has knowledge that the transferor has been
accused of wrongful conduct in any of the transferor’s prior dealings. Cohen does not
support such an interpretation. The Cohen court’s statements regarding inquiry notice
were based upon the same excerpt from the Legislative Committee Comment cited
above, which refers to ‘knowledge of facts rendering the transfer voidable.’ [Citation.]
Additionally, the standard argued by Defendants simply is not feasible in a commercial
context. In our litigious society, commerce quickly would grind to a halt if every buyer
had an affirmative duty to conduct an independent inquiry prior to purchasing an asset
merely because the seller was involved in litigation or otherwise was accused of
wrongdoing.” (Cybermedia, supra, 19 F.Supp.2d at p. 1075, fn. 7.)
14
The reasoning of Cybermedia has been accepted by a few federal courts as
the correct interpretation of the good faith defense—although using different words. A
more recent federal court decision interpreting the UFTA explained: “Relying on the
first part of the legislative comment, two California intermediate appellate decisions have
held that a transferee acts in good faith unless the transferee colluded with the debtor or
otherwise participated in the debtor’s fraudulent scheme. [Citations.] However, the
United States Court of Appeals Bankruptcy Appellate Panel for the Ninth Circuit (‘Ninth
Circuit BAP’) and the United States District Court for the Northern District of California
looked to the entire legislative comment and determined that a transferee does not act in
good faith under CUFTA [(California’s Uniform Fraudulent Transfer Act)] if the
transferee ‘(1) colludes with the debtor or otherwise actively participates in the debtor’s
fraudulent scheme, or (2) has actual knowledge of facts which would suggest to a
reasonable person that the transfer was fraudulent.’ [Citations.] [¶] The Court concludes
that if the California Supreme Court addressed the issue, it would adopt the position of
the Ninth Circuit BAP and the Northern District of California. Viewing the legislative
comment in its entirety, a transferee is not entitled to the good faith defense if it colludes
with the debtor or participates in the fraudulent scheme. A transferee’s good faith
defense also may fail if the transferee had actual knowledge of facts which would suggest
to a reasonable person the transfer was fraudulent.” (Brincko v. Rio Props. (D.Nev.,
Jan. 14, 2013, No. 2:10-CV-00930-PMP-PAL) 2013 U.S.Dist. Lexis 5986, pp. *51-*52
(Brincko); see SEC v. Forte (E.D.Pa., May 16, 2012, Civil No. 09-63) 2012 U.S.Dist.
Lexis 68209, p. *19; Guzman v. Pinch (Bankr. N.D.Cal., Feb. 4, 2011, No. 05-51833 CN)
2011 Bankr. Lexis 357, p. *17.)
It appears to us that the federal courts started with a standard in Cohen that
could reasonably be read as “inquiry notice.” Then, in Cybermedia, the court recognized
that Cohen’s analysis needed to be limited to actual knowledge. Ultimately, in Brincko,
the court interpreted the knowledge element as “actual knowledge of facts which would
15
suggest to a reasonable person the transfer was fraudulent.” (Brincko, supra, 2013
U.S.Dist. Lexis 5986 at p. *52.) We read Brincko as requiring actual knowledge by the
transferee of a fraudulent intent on the part of the transferor—not merely constructive
knowledge or inquiry notice. To that extent, we agree with Brincko’s construction of the
proper test for application of the good faith defense. However, our formulation of the test
(1) does not use the words “suggest to a reasonable person” because that phrase might
imply inquiry notice—a concept rejected in Lewis and Brincko—and (2) avoids use of the
words “voidable” and “fraudulent transfer” because those concepts are inconsistent with
the Legislative Committee comment to section 3439.08. Accordingly, we hold that a
transferee does not take in good faith if the transferee had actual knowledge of facts
showing the transferor had fraudulent intent.
D. Application of Standard of Proof to This Case
We turn next to whether Security One or Urban Financial, based on the
facts known to them, had actual knowledge of the transferor’s fraudulent intent when
making the reverse mortgage loan. For the following reasons, we conclude that such
actual knowledge was not present.
We begin by reiterating that no one at Security One or Urban Financial was
aware of Nautilus’s abstract of judgment before the reverse mortgage loan was funded or
sold to Urban Financial. That was the fault of First American alone, and Security One
would not have gone forward with the reverse mortgage loan had it been aware of the
abstract of judgment.
Nautilus contends that several “badges of fraud” tainted the transfer of
Stanley’s interest in the Property to Chao Chen, and gave Security One and/or Urban
Financial notice that the reverse mortgage loan was in aid of a fraudulent conveyance.9

9
The so-called badges of fraud are described in section 3439.04,
subdivision (b): “In determining actual intent under paragraph (1) of subdivision (a),
16
Here, the transfer was to an insider (from Stanley to Chao Chen), was not
made in exchange for financial consideration, and occurred shortly after Nautilus
obtained its judgment against Stanley. As explained in evidence adduced by Security
One and Urban Financial, however, the first two of these facts are common in many
reverse mortgage loan situations, and would not necessarily alert a reasonable lender that
there was fraudulent intent in connection with the reverse mortgage loan.
Lisa Hatfield, Security One’s processing manager who supervised the
approval of Chao Chen’s loan application, testified the fact that a reverse mortgage loan
is being used to pay off someone else’s debt is not a concern “as long as the loan isn’t
delinquent.”
The underwriter on the loan expressed concern that Chao Chen was placed
on title immediately before he applied for the reverse mortgage loan, and asked that Chao
Chen provide proof of occupancy, by means of a Social Security Administration award
letter, a bank statement, and utility statements. Security One’s concern was whether
Chao Chen lived in the Property, as that is a HUD requirement.
In response, Chao Chen provided a letter explaining that he had purchased
the Property under his sons’ names because at the time he bought it, his income and

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 lienor that transferred the assets
to an insider of the debtor.”
17
credit score were insufficient to qualify for a loan. Chao Chen also provided copies of
his W-2’s from 2006, a 2012 statement from the Social Security Administration, and a
homeowners insurance premium notice for 2012, all of which show the Property address
as Chao Chen’s address.
Evidence at trial showed it was not unusual for a family member to transfer
his or her interest in a property to another family member to facilitate a reverse mortgage
loan. Before funding a reverse mortgage loan, the lender would review the file to
determine whether the property was distressed by looking to see if the existing mortgage
was past due or being foreclosed on, no matter in whose name the mortgage was held.
That information would be found in mortgage payoff statements. In this case, there was
nothing in the paperwork to indicate the Property was distressed.
Mortgage statements provided before the reverse mortgage loan was funded
in April 2012 showed that Stanley and Peter were several months behind on the mortgage
as of February 2012, and the payoff statement for the CitiMortgage loan showed a credit
of $150 for delinquency expenses. Stanley and Peter had therefore been delinquent on
their account. But Stanley and Peter had brought the existing mortgage current as of
March 2012, and were current at the time the reverse mortgage loan was funded.
The lack of reasonably equivalent consideration is a badge of fraud under
the UFTA. (§ 3439.04, subd. (b)(8).) Stanley and Peter transferred their ownership of
the Property to Chao Chen to facilitate the reverse mortgage loan with no exchange of
cash from Chao Chen. The lack of consideration in an intrafamily transfer of property to
obtain a reverse mortgage loan is not unusual, however. Within the reverse mortgage
industry, as long as the title is transferred into the name of the individual obtaining the
reverse mortgage loan, and HUD guidelines are met, there is no issue with the lack of
consideration as between family members.
Taking steps to conceal a debtor’s transfer of property is a badge of fraud.
(§ 3439.04, subd. (b)(3).) The transfer of title from Stanley and Peter to Chao Chen took
18
place in two steps because, if Stanley and Peter had transferred their interest to Chao
Chen before the reverse mortgage loan was funded, the current mortgage holders would
have required that they be paid off immediately, which would have prevented the reverse
mortgage loan transaction from progressing. In any event, as part of the funding of the
loan, the existing mortgages were paid in full.
Security One was aware that, in addition to the two existing mortgages on
the Property, the reverse mortgage loan funds would be used to pay off a preexisting
judgment lien against Stanley. The judgment against Stanley showed he had been sued
before the transfer was made. (§ 3439.04, subd. (b)(4).) Further, the timing of the
judgment showed that Stanley had incurred a legal and enforceable debt that he had not
paid off for more than a year. “A debtor that is generally not paying the debtor’s debts as
they become due other than as a result of a bona fide dispute is presumed to be insolvent.
The presumption imposes on the party against which the presumption is directed the
burden of proving that the nonexistence of insolvency is more probable than its
existence.” (§ 3439.02, subd. (b).) Security One and Urban Financial did not have a duty
to conduct further inquiry merely because of Stanley’s previous litigation. (Cybermedia,
supra, 19 F.Supp.2d at p. 1075, fn. 7 [“In our litigious society, commerce quickly would
grind to a halt if every buyer had an affirmative duty to conduct an independent inquiry
prior to purchasing an asset merely because the seller was involved in litigation or
otherwise was accused of wrongdoing.”].)
To sum up, Urban Financial and Security One established the existence of
the good faith defense by proving they did not have actual knowledge of the transferor’s
fraudulent intent. They established the arguable badges of fraud relied on by Nautilus
appeared normal, not fraudulent, for reverse mortgage lending. Having concluded the
good faith defense was established, we turn to the issue whether the trial court erred in
prioritizing the parties’ security interests in the Property.
19
II.
THE TRIAL COURT DID NOT ERR IN GRANTING EQUITABLE SUBROGATION.
In its statement of decision, the trial court found that a portion of Urban
Financial’s reverse mortgage lien was senior to Nautilus’s abstract of judgment, based on
the fact that the funds from the reverse mortgage loan were used to pay off the liens on
the Property that were senior to Nautilus’s abstract of judgment.
10
Whether the trial court
properly granted equitable subrogation to Urban Financial is reviewed for abuse of
discretion. (Valley Crest Landscape Development, Inc. v. Mission Pools of Escondido,
Inc. (2015) 238 Cal.App.4th 468, 482.)
In the absence of equitable subrogation, Nautilus’s abstract of judgment
would have priority over the entirety of Urban Financial’s reverse mortgage lien because
Nautilus’s abstract of judgment was recorded first. “‘California follows the “first in time,
first in right” system of lien priorities. [Citation.]’ [Citation.] . . . The doctrine of
equitable subrogation is an exception to the first in time, first in right rule and applies in
those situations where equity requires a different result. [Citation.] [¶] The Supreme
Court stated the general rule applicable to a lender’s entitlement to equitable subrogation
almost 84 years ago: ‘“One who advances money to pay off an encumbrance on realty at
the instance of either the owner of the property or the holder of the incumbrance, either
on the express understanding, or under circumstances from which an understanding will
be implied, that the advance made is to be secured by a first lien on the property, is not a
mere volunteer; and in the event the new security is for any reason not a first lien on the
property, the holder of such security, if not chargeable with culpable and inexcusable

10
The total amount spent by Urban Financial to buy the reverse mortgage
loan from Security One was $422,302.21. Of that, $308,576.72 was used to pay off
preexisting debts. That portion of the reverse mortgage lien was equitably determined to
be senior to Nautilus’s lien based on the abstract of judgment. The remaining portion of
the reverse mortgage lien, $113,725.49, is junior to the Nautilus judgment lien. There is
no argument on appeal about the priority of that portion of the reverse mortgage lien.
20
neglect, will be subrogated to the rights of the prior encumbrancer under the security held
by him, unless the superior or equal equities of others would be prejudiced thereby, and
to this end equity will set aside a cancellation of such security, and revive the same for
his benefit.” [Citations.]’ [Citations.] In doing so, equity gives effect to the intentions of
the parties. [Citation.]” (JP Morgan Chase Bank, N.A. v. Banc of America Practice
Solutions, Inc. (2012) 209 Cal.App.4th 855, 860 (JP Morgan).)
HUD regulations require that a reverse mortgage loan be secured by a first
deed of trust. The reverse mortgage loan to Chao Chen paid off two preexisting deeds of
trust and a judgment lien that had priority over Nautilus’s judgment lien. As we have
explained, neither Security One nor Urban Financial was “‘“chargeable with culpable and
inexcusable neglect”’” (JP Morgan, supra, 209 Cal.App.4th at p. 860). Therefore, the
trial court did not abuse its discretion by granting equitable subrogation to Urban
Financial.
Nautilus argues that equitable subrogation should not apply because First
American was chargeable with culpable and inexcusable neglect, and First American was
funding the litigation on behalf of Urban Financial pursuant to the title insurance policy.
First American accepted Urban Financial’s tender of defense and indemnity without a
reservation of rights. First American hired counsel for Urban Financial and controlled
the defense of the case on its behalf. First American exercised its right to prosecute any
action necessary to prevent or reduce loss or damage to its insured by filing a
cross-complaint in Urban Financial’s name, seeking, among other things, equitable
subrogation.
The ability of Urban Financial to recover from First American due to First
American’s error in failing to identify Nautilus’s abstract of judgment cannot defeat
Urban Financial’s claim for equitable subrogation. (Branscomb v. JPMorgan Chase
Bank, N.A. (2014) 223 Cal.App.4th 801, 809-810; JP Morgan, supra, 209 Cal.App.4th at
pp. 861-862; Katsivalis v. Serrano Reconveyance Co. (1977) 70 Cal.App.3d 200, 213.)
21
First American’s knowledge or neglect cannot be imputed to Urban Financial to bar
Urban Financial from equitable relief. (See Lewis, supra, 30 Cal.App.4th at pp. 1856,
1868-1870.)
III.
THE TRIAL COURT DID NOT ERR IN GIVING PRIORITY TO
NAUTILUS’S LIEN BASED ON THE CHAO CHEN JUDGMENT.
The judgment provides, in relevant part: “Nautilus is awarded a money
judgment against Chao Chen Yang in the amount of $153,212 at 10% interest from the
time of the transfer until paid, and declares such money judgment a lien upon Chao Chen
Yang’s 50% interest in the Subject Property, subordinate to Urban Financial’s equitable
lien rights as to such 50% interest, and senior to the lien of Urban Financial’s Deed of
Trust . . . upon such 50% interest.” (Italics added.) That money judgment was entered on
Nautilus’s claim against Chao Chen for conspiracy to fraudulently convey the Property.
Neither the propriety of the judgment against Chao Chen nor its amount is before us. On
appeal, Urban Financial challenges the trial court’s ability to create a lien through the
device of a written judgment.
“Except as otherwise provided by statute, a judgment lien on real property
is created under this section by recording an abstract of a money judgment with the
county recorder.” (Code Civ. Proc., § 697.310, subd. (a).) Nautilus does not identify any
other statute permitting the trial court to create a judgment lien on real property by stating
so in a judgment. Nautilus does, however, cite us to the UFTA provision regarding the
supremacy of California’s general principles of law and equity: “Unless displaced by the
provisions of this chapter, the principles of law and equity, including the law merchant
and the law relating to principal and agent, estoppel, laches, fraud, misrepresentation,
duress, coercion, mistake, insolvency, or other validating or invalidating cause,
supplement its provisions.” (§ 3439.12.)
22
Whether the trial court properly issued a lien requires us to interpret the
statutes governing judgment liens on real property. We independently determine the
proper interpretation of a statute. (People ex rel. Lockyer v. Shamrock Foods Co. (2000)
24 Cal.4th 415, 432; LaChance v. Valverde (2012) 207 Cal.App.4th 779, 784.)
In Behniwal v. Mix (2007) 147 Cal.App.4th 621, 623-624, this court held
that in a judgment granting specific performance to home buyers, the trial court may not
authorize the home buyers to reduce the purchase price by the amount of the attorney fees
awarded to them against the sellers. This court labelled the trial court’s act as an
“Ad Hoc Creation of ‘Super-Liens,’” without further definition or explanation. (Id. at
p. 635.)
Here, the trial court did not create an ad hoc super-lien. As explained ante,
the court could not create a lien through the judgment; the lien could only be created by
Nautilus’s recording of an abstract of judgment. What the trial court obviously intended
to do was to use its equitable powers to grant Nautilus’s judgment lien against Chao Chen
priority over Urban Financial’s lien on the reverse mortgage loan deed of trust (to which
the court added Urban Financial’s attorney fee award against Chao Chen).
Such an action was entirely within the trial court’s equitable authority.
That equitable protection only has effect if Nautilus timely records an abstract of its
judgment. If Nautilus never records an abstract of judgment, there is no lien to prioritize.
And if Nautilus delays unnecessarily in recording an abstract of judgment, the basic
principles of equity would prevent Nautilus from benefitting.11


11 The portion of the judgment adding Urban Financial’s award of attorney
fees to the lien of its reverse mortgage deed of trust is proper because the reverse
mortgage deed of trust had a provision for the award of attorney fees. (Wutzke v. Bill
Reid Painting Service, Inc. (1984) 151 Cal.App.3d 36, 46-47.)
23
Postjudgment, Stanley and Chao Chen had undivided one-half interests in
the Property, subject to the following liens, in order of priority:
1. Urban Financial’s equitable lien in the amount of $308,576.72, plus
interest, on 100 percent of the Property;
2. Nautilus’s judgment lien in the amount of $8 million, on Stanley’s onehalf
interest in the Property;
3. Nautilus’s judgment lien in the amount of $153,212, plus interest, on
Chao Chen’s one-half interest in the Property;
4. Urban Financial’s deed of trust, in the amount of $113,725.49, plus
attorney fees incurred in this case, on 100 percent of the Property; and
5. Urban Financial’s judgment in the amount of $153,212, plus interest,
against Stanley, on Stanley’s one-half of the Property.
IV.
THE TRIAL COURT DID NOT ERR BY DETERMINING THAT NAUTILUS’S
$8 MILLION LIEN APPLIES TO ONE-HALF OF THE PROPERTY.
Urban Financial argues that the trial court erred by ordering that the
$8 million Nautilus judgment lien applies to one-half of the Property, rather than
one-third. Urban Financial reasons that Stanley had only a one-third interest in the
Property at the time Nautilus’s abstract of judgment was recorded, meaning that is the
greatest portion of the Property to which the Nautilus abstract of judgment attaches.12
Because of Stanley’s fraudulent conveyance of the Property to Chao Chen,
the trial court voided the February 27, 2012 transfer of a portion of Stanley’s interest in
the Property to Chao Chen. Therefore, when Nautilus recorded its abstract of judgment,

12
Before February 27, 2012, Stanley had owned a one-half interest in the
Property; on that date, he and Peter each transferred a portion of their ownership to Chao
Chen. Nautilus recorded its abstract of judgment on April 4, 2012, at a time when
Stanley owned a one-third interest in the Property.
24
it was applicable to Stanley’s one-half interest in the Property. The trial court did not err
in so concluding.

Outcome: The judgment is affirmed. In the interests of justice, because both appellants prevailed in part, neither party shall recover costs on appeal.

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