M&E BROTHERS, LLC v. THE ESTATE OF BARBARA HORTMAN et al.

• Court: District Court, S.D. California
• Decided: July 18, 2024
• Docket: 3:20-cv-00234
• Status: Unknown

Opinion

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 M&E BROTHERS, LLC, Lead Case No.: 3:20-cv-00234-RBM- DEB 12 Plaintiff, Case No.: 3:22-cv-01892-RBM-DEB 13 v. ORDER (1) GRANTING M&E’S 14 THE ESTATE OF BARBARA MOTION FOR LEAVE TO AMEND HORTMAN et al., 15 AND (2) INSTRUCTING THE Defendants. PARTIES TO FILE ALL FUTURE 16 PLEADINGS AND DOCUMENTS IN 17 THE LEAD CASE

18 [Doc. 35] 19 20 21 22 On June 21, 2024, Plaintiff M&E Brothers, LLC (“M&E”) filed a Motion for Leave 23 to Amend (“Motion”), which seeks to add one claim for fraudulent conveyance against 24 Defendants Kim Buhler, as administrator and executor of the Estate of Barbara Hortman, 25 and Kim Buhler and Norman Alton Hortman, as trustees of The Norman Alton Hortman 26 and Barbara Hortman Revocable Trust No. 1 Dated July 2, 1985 (the “Hortman Parties”). 27 (Case No. 3:22-cv-01892-RBM-DEB, Doc. 35 at 1, 8.) In its Motion, M&E argues that it 28 seeks leave to amend without undue delay and in good faith because the proposed 1 amendment is based on new facts and information obtained during the deposition of Kim 2 Buhler only five months ago. (Id. at 12–14.1) M&E also argues that amendment is not 3 futile because a trustee has a duty to refrain from affirmative misconduct and because 4 California’s fraudulent conveyance statutes protect creditors. (Id. at 14–17.) Lastly, M&E 5 argues that the proposed amendment will not prejudice the Hortman Parties because it only 6 adds one cause of action and does not significantly alter the factual or legal landscape of 7 the case. (Id. at 17–18.) M&E also notes that the Hortman Parties recently amended their 8 own pleading, which contradicts any claim of prejudice. (Id. at 18.) 9 On July 8, 2024, the Hortman Parties filed an Opposition to M&E’s Motion 10 (“Opposition”). (Case No. 3:22-cv-01892-RBM-DEB, Doc. 40.) In their Opposition, the 11 Hortman Parties primarily (and repeatedly) argue that M&E is attempting to discover the 12 Hortman Parties’ personal financial information for use in negotiations with the Water 13 Board.2 (Id. at 3–10.) The Hortman Parties also argue that amendment is unnecessary to 14 the resolution of this action and that amendment is futile because the Hortman Trust is not 15 subject to creditor claims and M&E cannot allege a viable claim for fraudulent conveyance. 16 (Id. at 6–10.) 17 On July 15, 2024, M&E filed a Reply in Support of its Motion (“Reply”). (Case No. 18 3:22-cv-01892-RBM-DEB, Doc. 41.) In their Reply, M&E refutes the Hortman Parties’ 19 assertion that M&E is attempting to discover the Hortman Parties’ personal financial 20 information for use in negotiations with the Water Board.3 (Id. at 6–9, 11–13.) M&E then 21 argues that the Hortman Trust is subject to creditor claims, that the proposed fraudulent 22 conveyance claim is relevant to the resolution of this action, and that the proposed 23 fraudulent conveyance claim is not premature or futile. (Id. at 9–14.) 24

25 1 The Court cites to the CM/ECF pagination unless otherwise noted. 26 2 The Court will not address these arguments and will limit its analysis to the factors 27 governing leave to amend. Any future discovery disputes can be resolved by Magistrate Judge Butcher. 28 3 1 I. LEGAL STANDARD 2 Federal Rule of Civil Procedure 15 governs the Court’s determination of this 3 Motion. See Johnson v. Mammoth Recreations, Inc., 975 F.2d 604, 607 (9th Cir. 1992). 4 Rule 15 affords the Court broad leeway to grant plaintiffs leave to amend their pleadings 5 before, during, or after trial. See Fed. R. Civ. P. 15. 6 Before trial, the Court “should freely give leave [to amend] when justice so 7 requires.” Fed. R. Civ. P. 15(a)(2); see also Hurn v. Ret. Fund Tr. of Plumbing, Heating 8 & Piping Indus. of S. California, 648 F.2d 1252, 1254 (9th Cir. 1981) (“‘[T]he Supreme 9 Court has instructed the lower federal courts to heed carefully the command of Rule 15(a) 10 … by freely granting leave to amend when justice so requires.’”) (quoting Howey v. United 11 States, 481 F.2d 1187, 1190 (9th Cir. 1973)); AmerisourceBergen Corp. v. Dialysist W., 12 Inc., 465 F.3d 946, 951 (9th Cir. 2006) (“Rule 15(a) is very liberal and leave to amend shall 13 be freely given when justice so requires.”) (internal quotation marks and citations omitted). 14 “If the underlying facts or circumstances relied upon by a plaintiff may be a proper subject 15 of relief, he ought to be afforded an opportunity to test his claim on the merits.” Foman v. 16 Davis, 371 U.S. 178, 182 (1962) (internal quotation marks and citations omitted). 17 In the Ninth Circuit, “[t]he propriety of a motion for leave to amend is generally 18 determined by reference to several factors: (1) undue delay; (2) bad faith; (3) futility of 19 amendment; and (4) prejudice to the opposing party.” Hurn, 648 F.2d at 1254; see also 20 Foman v. Davis, 371 U.S. 178, 182 (1962) (finding that, absent undue delay, bad faith or 21 dilatory motive on the part of the movant, a repeated failure to cure deficiencies by 22 amendments previously allowed, undue prejudice to the opposing party by virtue of 23 allowance of the amendment, futility of amendment, etc., leave to amend should be freely 24 given). “[T]he consideration of prejudice to the opposing party [] carries the greatest 25 weight.” Eminence Cap., LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003). 26 “Absent prejudice, or a strong showing of any of the remaining Foman factors, there exists 27 a presumption under Rule 15(a) in favor of granting leave to amend.” Id. 28 1 “Defendants carry the burden of showing why leave to amend should not be 2 granted.” Stearns v. Select Comfort Retail Corp., 763 F. Supp. 2d 1128, 1154 (N.D. Cal. 3 2010) (citing Genentech, Inc. v. Abbott Lab’ys, 127 F.R.D. 529, 530–31 (N.D. Cal. 1989) 4 (“[S]ince Rule 15 favors a liberal policy towards amendment, the nonmoving party bears 5 the burden of demonstrating why leave to amend should not be granted.”)). Thus, the 6 arguments raised by the Hortman Parties in their Opposition guide the Court’s analysis. 7 II. DISCUSSION 8 As stated above, “[t]he propriety of a motion for leave to amend is generally 9 determined by reference to several factors: (1) undue delay; (2) bad faith; (3) futility of 10 amendment; and (4) prejudice to the opposing party.” Hurn, 648 F.2d at 1254; see also 11 Foman, 371 U.S. at 182. Here, Defendants do not squarely address each factor. The Court 12 construes the Hortman Parties’ arguments as primarily concerning the futility of 13 amendment factor. The Court addresses each of the Hortman Parties’ arguments as they 14 pertain to futility of amendment, as well as the remaining factors, below. 15 A. Futility of Amendment 16 “Futility of amendment is analyzed much like a Rule 12(b)(6) motion to dismiss— 17 an amended complaint is futile when it would be subject to dismissal.” Pappy’s Barber 18 Shops, Inc. v. Farmers Grp., Inc., 491 F. Supp. 3d 738, 739 (S.D. Cal. 2020) (quotation 19 omitted); see also Moore v. Kayport Package Exp., Inc., 885 F.2d 531, 538 (9th Cir. 1989) 20 (“Leave to amend need not be given if a complaint, as amended, is subject to dismissal.”); 21 ABM Indus., Inc. v. Zurich Am. Ins. Co., 237 F.R.D. 225, 227 (N.D. Cal. 2006) (“Futility 22 of proposed amendments is evaluated under the Federal Rule of Civil Procedure 12(b)(6) 23 standard.”). An amended complaint is also futile if it could be defeated by a motion for 24 summary judgment. See California v. Neville Chem. Co., 213 F. Supp. 2d 1142, 1144–45 25 (C.D. Cal. 2002) (“A proposed amendment is futile if the new claim could be defeated by 26 a motion to dismiss or a motion for summary judgment.”). 27 As stated above, the Hortman Parties’ argue (1) that proposed fraudulent conveyance 28 claim is unnecessary to the resolution of this action and (2) that amendment is futile 1 because (a) the Hortman Trust is not subject to creditor claims and because (b) M&E cannot 2 allege a viable claim for fraudulent conveyance. (Case No. 3:22-cv-01892-RBM-DEB, 3 Doc. 40 at 6–10.) However, whether the proposed fraudulent conveyance claim is 4 “necessary” for the resolution of this action is not the issue before the Court. The issue 5 before the Court is whether the addition of M&E’s fraudulent conveyance claim would be 6 futile. 7 1. The Revocability of the Hortman Trust 8 The Hortman Parties argue that “any assets held in the Hortman Trust are not 9 available to creditors … given that the Hortman Trust was irrevocable for more than a year 10 before [Barbara Hortman’s] death in April 2021[,]” when she became incapacitated, 11 meaning the Hortman Trust is not subject to creditor claims. (Case No. 3:22-cv-01892- 12 RBM-DEB, Doc. 40 at 6–7.) M&E responds that “[a]s evidenced by its title—‘The 13 Norman Alton Hortman and Barbara Hortman Revocable Trust No. 1, Dated July 2, 14 1985’—the trust at issue here was revocable until death, which means it is subject to 15 creditor’s claims.” (Case No. 3:22-cv-01892-RBM-DEB, Doc. 35 at 16–17.) Therefore, 16 the Court finds that there are factual disputes regarding when and why the Hortman Trust 17 became irrevocable, undermining the Hortman Parties’ assertion that amendment at the 18 pleading stage is futile. See Kandy Kiss of California Inc v. Tex-Ellent Inc, Case No. CV 19 10-9215 GAF (CWx), 2011 WL 13217764, at *3 (C.D. Cal. Aug. 22, 2011) (“This issue 20 thus presents a fact question that cannot be resolved at the pleading stage. Moreover, 21 Defendants do not—and cannot—contend that Plaintiff’s … claim fails as a matter of law 22 …. Plaintiff’s proposed amendment would not be futile.”) (citation omitted). 23 The Hortman Parties also argue that the trustees of the Hortman Trust owed M&E 24 “no duty whatsoever.” (Case No. 3:22-cv-01892-RBM-DEB, Doc. 40 at 11.) While the 25 Hortman Parties are correct that there is no “competing duty to withhold otherwise 26 authorized distribution to beneficiaries to preserve trust assets in favor of a third party with 27 a disputed claim[,]” Arluk Med. Ctr. Indus. Grp., Inc. v. Dobler, 116 Cal. App. 4th 1324, 28 1335 (2004), “nothing … precludes a creditor from seeking to hold a trustee personally 1 liable for improperly distributing assets to a trust beneficiary[,]” id. at 1340. “Such a 2 distribution may violate the common law or statutory provisions prohibiting fraudulent 3 conveyances ….” Id. (emphasis added). In other words, “[a]bsent affirmative wrongdoing 4 amounting to a violation of some other legally cognizable duty, … there is no legal 5 authority for subjecting the trustee to personal liability for distributing assets to the trust 6 beneficiaries to the potential detriment of a disputed claimant who later obtains a judgment 7 against the decedent’s estate.” Id. at 1341.4 As set forth below (see Section II.A.2), M&E 8 has a plausible claim for fraudulent conveyance. Thus, even though there was no duty for 9 the trustees of the Hortman Trust to withhold authorized distributions to beneficiaries, the 10 Court cannot say that amendment would be futile based on this absence of a duty alone. 11 2. Fraudulent Conveyance 12 California’s Uniform Voidable Transactions Act (“UVTA”) defines a transfer as 13 “every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of 14 disposing of or parting with an asset..., and includes payment of money, release, lease, and 15 creation of a lien or other encumbrance.” Cal. Civ. Code § 3439.01. A debtor is liable if 16 the debtor makes a transfer: “(1) With actual intent to hinder, delay, or defraud any creditor 17 of the debtor. (2) Without receiving a reasonably equivalent value in exchange for the 18 transfer or obligation, and the debtor either: (A) Was engaged or was about to engage in a 19 business or a transaction for which the remaining assets of the debtor were unreasonably 20 small in relation to the business or transaction. (B) Intended to incur, or believed or 21 reasonably should have believed that the debtor would incur, debts beyond the debtor’s 22 ability to pay as they became due.” Cal. Civ. Code § 3439.04(a) (emphasis added). 23 24 25 26 4 See also Arluk Med. Ctr. Indus. Grp., Inc., 116 Cal. App. 4th at 1340 (“A trustee may be 27 personally liable to a creditor under circumstances where the distribution constitutes a fraudulent conveyance or other common law tort against the creditor.”) (capitalization and 28 1 “Courts are to liberally construe California’s [UVTA] ‘with a view to effecting their 2 purpose.’ [Its] purpose ‘undoubtedly is to prevent debtors from placing property which 3 legitimately should be available for the satisfaction of demands of creditors beyond 4 [creditors’] reach.’” Tatung Co., Ltd. v. Shu Tze Hsu, 217 F. Supp. 3d 1138, 1186 (C.D. 5 Cal. 2016) (quoting Borgfeldt v. Curry, 25 Cal. App. 624 (1914)). 6 “In general, a voidable transaction is ‘a transfer by the debtor of property to a third 7 person undertaken with the intent to prevent a creditor from reaching that interest to satisfy 8 its claim.’” Tatung Co., Ltd., 217 F. Supp. 3d at 1186–87 (quoting Kirkeby v. Super. Ct. 9 of Orange County, 33 Cal. 4th 642 (2004)). “This is true regardless of whether the debtor 10 made the transfer before or after the creditor’s claim arose.” Id. at 1187 (quoting same). 11 In other words, future creditors as well as present creditors are protected by legislation 12 relating to fraudulent conveyances. See Kupetz v. Wolf, 845 F.2d 842, 847 n.7 (9th Cir. 13 1988); Mejia v. Reed, 31 Cal. 4th 657, 664 (2003); Severance v. Knight-Counihan Co., 29 14 Cal. 2d 561, 567 (1947). 15 Here, in its proposed amended complaint, M&E alleges that Kim Buhler and 16 Norman Alton Hortman III, as co-trustees of the Hortman Trust, had actual and/or 17 constructive knowledge of the contents of the Water’s Board notice; that they had actual 18 and/or constructive knowledge of the lawsuit filed by the Kims against Barbara Hortman; 19 and that they subsequently liquidated the Hortman Trust by conveying all Trust assets to 20 themselves. (Case No. 3:22-cv-01892-RBM-DEB, Doc. 35-1, Ex. D, ¶¶ 35–49.) Thus, 21 M&E concludes that Buhler and Hortman III conveyed assets, monies, and real property 22 from the Hortman Trust to themselves with the intent to defraud, hinder or delay its 23 creditors; that they conveyed the Hortman Trust assets without receiving reasonably 24 equivalent value; that, as a direct and proximate result of their actions, Plaintiff has incurred 25 damages, including costs and reasonable attorneys’ fees; and that the conveyances should 26 be returned to the Hortman Trust. (Id. ¶¶ 145–152.) Thus, the Court finds that M&E has 27 adequately stated a claim pursuant to California Civil Code section 3439.04(a). 28 1 Further, the law is clear that “‘[w]hether a conveyance was made with fraudulent 2 intent is a question of fact, and proof often consists of inferences from the circumstances 3 surrounding the transfer.’” Tatung Co., Ltd., 217 F. Supp. 3d at 1187 (quoting Filip v. 4 Bucurenciu, 129 Cal.App.4th 825, 834 (2005)). Additionally, a claim for fraudulent 5 conveyance may rely on the success of previously pled claims. See McNally v. Powers, 6 Case No. SACV 22-1569 JVS (ADSx), 2023 WL 6373407, at *6 (C.D. Cal. Aug. 2, 2023) 7 (“Defendants only argument is that because the breach of contract and quantum meruit 8 claim fail, so too do the fraudulent conveyance claims. … [T]he statute of limitations did 9 not expire as to the breach of contract claim. Thus, … the [fraudulent conveyance] claims 10 still stand.”) Thus, the law as applied in California district courts undermines the Hortman 11 Parties’ assertions that M&E’s proposed amendment is futile. 12 B. Undue Delay, Bad Faith, and Prejudice 13 As stated above, M&E argues that it sought leave to amend without undue delay and 14 in good faith because the proposed amendment is based on new facts and information 15 obtained during the deposition of Kim Buhler only five months ago. (Case No. 3:22-cv- 16 01892-RBM-DEB, Doc. 35 at 12–14.) M&E also argues that the proposed amendment 17 will not prejudice the Hortman Parties because it only adds one cause of action, does not 18 significantly alter the factual or legal landscape of the case, and comes shortly after the 19 Hortman Parties’ filing of an amended pleading. (Id. at 13, 17–18.) M&E notes that it 20 does not seek to add new parties, that the litigation is in the early stages, that a scheduling 21 order and trial date have not been set, and that the Hortman Parties will have ample 22 opportunity to conduct discovery on the added claim. (Id. at 18.) 23 The Hortman Parties do not refute any of these arguments, instead focusing on 24 M&E’s attempts to discover the Hortman Parties’ personal financial information for use in 25 negotiations with the Water Board. (Case No. 3:22-cv-01892-RBM-DEB, Doc. 40 at 3– 26 10.) However, as noted above (see Section I, n.2), any future discovery disputes can be 27 resolved by Magistrate Judge Butcher. Having adequately alleged a claim for fraudulent 28 conveyance, M&E is entitled to discovery on the claim to the extent permitted by law (see 1 || Section II.A.2). The Hortman Parties briefly assert that “M&E’s explanation that it did not 2 learn of the basis for the present motion until after the time of Ms. Buhler’s deposition on 3 || January 5, 2024 is flat wrong.” (Case No. 3:22-cv-01892-RBM-DEB, Doc. 40 at 4.) The 4 Hortman Parties contend that “[b]ased on public records obtained from the Water Board, 5 || M&E was aware as early as August [24,] 2023, and possibly earlier, that assets had been 6 || transferred from the Hortman Trust.” (/d.) However, this purported additional four months 7 || of the delay does not sway the Court’s conclusion that amendment is proper. 8 Il. CONCLUSION 9 Based on the foregoing, the Court GRANTS M&E’s Motion and INSTRUCTS 10 ||M&E to file its proposed amended complaint in the Lead Case (Case No. 3:20-cv-00234- 11 |}RBM-DEB). On June 13, 2023, the Lead Case and Case No. 3:22-cv-01892-RBM-DEB 12 || were deemed related and consolidated. (Case No. 3:22-cv-01892-RBM-DEB, Doc. 20.) 13 June 12, 2024, the Court reminded the parties that, while the Court dismissed Pacific 14 ||Resources Associates LLC’s claims against all parties in the Lead Case, other claims are 15 || still pending. (Case No. 3:22-cv-01892-RBM-DEB, Doc. 33 at 2, n.2.) Thus, the Court 16 || INSTRUCTS the parties to file all future pleadings and documents in the Lead Case as 17 || previously ordered. 18 IT IS SO ORDERED. 19 ||DATE: July 18, 2024 Et Esra Martians >. 7] HON-RUTH BERMUBEZ MONTENEGRO UNITED STATES DISTRICT JUDGE 22 23 24 25 26 27 28