Gonzales v. Potter et al

1The Trustee filed a reply in support of the Motion for Summary Judgment ("Reply")
(Docket # 96), and Martin Friedlander and Jeffery Potter each filed a surreply in response.
(Docket # 98 - "Friedlander Surreply"); and Docket # 99 - "Potter Surreply").
1
UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re: 	JEFFERY POTTER, 	No. 7-05-14071 MS
Debtor.
____________________________________________________________________________
YVETTE J. GONZALES,
Plaintiff,
v. 	Adversary No. 07-1062 M
JEFFERY W. POTTER;
SUMMIT INVESTMENT COMPANY, LLC;
SUMMIT VALDES BUSINESS PARK, LLC;
THE LEGAL DEFENSE AND MAINTENANCE
TRUST OF CALIFORNIA; MARIANA DANILOVIC,
as Trustee of the Legal Defense and Maintenance Trust
of California; and MARTIN FRIEDLANDER, Individually,
and as Trustee of the Legal Defense and Maintenance
Trust of California,
Defendants.
MEMORANDUM OPINION
THIS MATTER is before the Court on the Plaintiff’s Motion for Summary Judgment on
Counts I-VII, XIV, XV, and XVI of the Second Amended Complaint (“Motion for Summary
Judgment”) filed by Yvette J. Gonzales, the Chapter 7 Trustee (“Trustee”), by and through her
attorneys, Jacobvitz, Thuma, and Walker, P.C. (David T. Thuma). See Docket # 88. Defendants
Martin Friedlander, pro se, and Jeffery Potter, pro se, each filed a response in opposition to the
Motion for Summary Judgment.1 (See Docket # 93 and Docket # 97). The Motion for Summary
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2Default has already been entered against the Legal Defense and Maintenance Trust of
California, Mariana Danilovic, as original trustee of the Legal Defense and Maintenance Trust of
California, and Martin S. Friedlander, as successor trustee of the Legal Defense and Maintenance
Trust of California, pending judgment as to the non-defaulting defendants. (See Docket # 81).
The Trustee also filed a motion for default judgment against Defendants Summit Investment
Company, LLC (“Summit Investment”) and Summit Valdes Business Park, LLC (“Summit
Valdes”). See Docket # 89. The Court will address the motion for default against Summit
Investment and Summit Valdes by separate order.
The Trustee also asserted in her Reply that summary judgment should be granted as to
Counts XII and XIII of the Second Amended Complaint, based on the failure of Summit
Investment and Summit Valdes to file responses to the Motion for Summary Judgment. 	The
Court's disposition of the motion for default judgment makes it unnecessary to consider the
Trustee's request for summary judgment against the LLCs.
3Because the transfer occurred more than one year before the date of the filing of the
petition, outside the reach-back period for recovery of fraudulent transfers under 11 U.S.C. §
548, the Trustee filed her complaint under state law, which generally has a statute of limitations
applicable to fraudulent transfer actions of four years. See 11 U.S.C. § 544 (b) (granting the
Trustee the power to “avoid any transfer of an interest of the debtor in property . . . that is
voidable under applicable law . . . ”); N.M.S.A. 1978 § 56-10-23(A) (Repl. Pamp. 1996)(four
year statute of limitations under New Mexico Uniform Fraudulent Transfer Act); Cal.Civ.Code §
3439.09(a) and (b)(four year statute of limitations under California Uniform Fraudulent Transfer
Act).
2
Judgment requests the Court grant summary judgment against Jeffery Potter and Martin
Friedlander, in his individual capacity, as to Counts I, II, III, IV, V, VI, VII, XIV, XV, and XVI
of the Second Amended Complaint to Avoid Fraudulent Transfers, for Turnover, for Declaratory
Judgment, for Injunction, and for Other Relief (“Second Amended Complaint”).2
The object of the Second Amended Complaint is the Trustee’s effort to recover for the
benefit of the bankruptcy estate certain transfers of real and personal property made to the Legal
Defense and Maintenance Trust of California (“California Trust”). The trust was formed in
August of 2003, more than two years before the date of the filing of Defendant Jeffery Potter’s
bankruptcy petition. 3 The Trustee asserts that the transfers to the California Trust are
recoverable as fraudulent transfers based on actual fraud and constructive fraud under either
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4See Counts I, II, III, and IV of the Second Amended Complaint. The remaining counts
upon which the Trustee seeks summary judgment are: Count V - avoidance of the transfers
under 11 U.S.C. § 548(e) as transfers to a self-settled trust made with actual intent to hinder,
delay, or defraud present or future creditors; Count VI - declaratory judgment that the purported
settlement and dismissal of the fraudulent transfer action under Adversary No. 05-1151 was
void; Count VII - declaratory judgment that the spendtrhift trust provisions contained in the
California Trust are void; Count XIV - declaratory judgment that the Trustee has derivative
standing to avoid the transfers made by Summit Investment and Summit Valdes; Count XV - for
turnover of the transferred property or payment of the value of the transferred property under 11
U.S.C. § 550(a)(2) and/or 11 U.S.C. § 550(a); and Count XVI - for turnover of the property
transferred to the California Trust under 11 U.S.C. § 542.
3
California or New Mexico law. 4 The Trustee primarily bases her request for summary judgment
on previous statements Defendant Jeffery Potter has made in the Statements and Schedules filed
in his bankruptcy proceeding, statements made in the Complaint to Avoid Transfers Pursuant to
11 U.S.C. § 544 and for Turnover (“Original Complaint”) filed in Adversary Proceeding No. 05-
1151M, and in statements made in Jeffery W. Potter’s Approval of Proof of Claim filed by
Martin S. Friedlander, bearing Claim No. 15, filed on 1/30/06, as a Secured Prior Claim of the
Debtor in Possession in the Full Amount Stated and that Said Secured Claim Shall have Priority
over any Proof of Claim filed by LANB (“Claims Approval”- Docket # 155). The Trustee also
attaches certain communications between Mr. Potter and his former bankruptcy counsel which
were admitted as exhibits in connection with the hearing in Defendant Jeffery Potter’s
bankruptcy proceeding, held on April 10, 2007 on the applications for compensation filed by
Davis & Pierce. No affidavits or deposition testimony were offered in support of the Motion for
Summary Judgment.
Defendant Martin Friedlander opposes the Motion for Summary Judgment, asserting that
there is no evidence to support a finding of lack of reasonably equivalent value as of August 25,
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2003, the date the California Trust was formed; that the California Trust was not formed with the
intent to hinder, delay, or defraud creditors; that Defendant Potter’s prior bankruptcy counsel
failed to represent him properly and caused the filing of a “sham” bankruptcy; and that any
communications between Defendant Potter and his prior counsel are subject to the attorney-
client privilege and constitute improper hearsay evidence as against Defendant Martin
Friedlander.
Defendant Jeffery Potter’s objection to the Motion for Summary Judgment echos the
arguments asserted by Mr. Friedlander. He disputes that the statements contained in his
statements and schedules establish that the transfers to the California Trust were fraudulent and
maintains that he formed the California Trust for the purposes of funding litigation so that he
could ultimately repay his creditors.
After consideration of the Motion for Summary Judgment and the supporting
documentation, and objections thereto, the Court finds that, while the statements contained in
Jeffery Potter’s statements and schedules are insufficient to establish fraudulent intent, the
statements contained in the Original Complaint coupled with the Defendant’s other admissions
regarding the facts and circumstances surrounding the formation of the California Trust are
sufficient to establish actual intent to defraud under either California or New Mexico fraudulent
transfer law. The Court will, therefore, grant summary judgment in favor of the Trustee.
SUMMARY JUDGMENT STANDARDS
Summary judgment is governed by Rule 56, Fed.R.Civ.P., made applicable to bankruptcy
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5Rule 56, Fed.R.Civ.P. provides, in relevant part:
The judgment sought should be rendered if the pleadings, the discovery and
disclosure materials on file, and any affidavits show that there is no genuine issue
as to any material fact and that the moving party is entitled to judgment as a
matter of law.
Rule 56(c), Fed.R.Civ.P.
6Rule 56(a), Fed.R.Civ.P. provides:
A party claiming relief may move, with or without supporting affidavits, for
summary judgment on all or a part of the claim. The motion may be filed at any
time after:
(1) 20 days have passed from commencement of the action; or
(2) the opposing party serves a motion for summary judgment.
Rule 56(a), Fed.R.Civ.P.
5
proceedings by Rule 7056, Fed.R.Bankr.P. 5 It is appropriate to grant summary judgment when
there are no genuine issues of material fact and the moving party is entitled to judgment as a
matter of law. Id. 	“[A] party seeking summary judgment always bears the initial responsibility
of informing the . . . court of the basis for its motion, and . . . [must] demonstrate the absence of
a genuine issue of material fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548,
91 L.Ed.2d 265 (1986). 	Affidavits in support of a motion for summary judgment are not
required. Rule 56(a), Fed.R.Civ.P. (“A party claiming relief may move, with or without
supporting affidavits . . . ”)(emphasis added). Nor must a claimant wait until after a defendant
responds to the complaint before filing a motion for summary judgment. See Rule 56(a),
Fed.R.Civ.P. 6 It is appropriate to grant summary judgment if the undisputed facts, established
by “the pleadings, the discovery and disclosure materials on file,” are sufficient to show that
there is no genuine issue of material fact and that the moving party is entitled to judgment as a
matter of law. Rule 56(c), Fed.R.Civ.P.
In determining whether summary judgment should be granted, the Court must view the
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7Rule 56(e)(2) provides, in relevant part:
When a motion for summary judgment is properly made and supported, an
opposing party may not rely merely on allegations or denials in its own pleading;
rather, its response must – by affidavits or as otherwise provided in this rule – set
out specific facts showing a genuine issue for trial. If the opposing party does not
so respond, summary judgment should, if appropriate, be entered against that
party.
Rule 56(e), Fed.R.Civ.P.
6
facts in the light most favorable to the party opposing summary judgment. Henderson v. Inter-
Chem Coal Co., Inc., 41 F.3d 567, 569 (10 th Cir. 1994)(stating that the court must “view all facts
and any reasonable inferences that might be drawn from them in the light most favorable to the
nonmoving party . . .”)(citation omitted); Harris v. Beneficial Oklahoma, Inc., (In re Harris),
209 B.R. 990, 995 (10th Cir. BAP 1997)(same). To withstand a motion for summary judgment,
the opposing party may not simply rest upon its pleading or denial of the allegations, but must
demonstrate that genuine issues of material fact require a trial. Rule 56(e)(2), Fed.R.Civ.P. 7 A
fact is “material” when the fact is essential to the elements necessary under the substantive law
to dispose of the claim. Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 670 (10 th Cir. 1998)(citing
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)).
An issue is “genuine” when there is sufficient evidence on either side “so that a rational trier of
fact could resolve the issue either way.” Id. (citing Anderson v. Liberty Lobby, Inc., 477 U.S. at
248).
The “Declarations” of Martin Friedlander and Jeffery Potter are Insufficient to Satisfy the
Requirements of Rule 56(e), Fed.R.Civ.P.
The responses filed by Martin Friedlander and by Jeffery Potter each purport to contain a
declaration as to the facts each asserts are in dispute in this adversary proceeding. 	The
declarations state that the declarant has “personal knowledge of all of the facts alleged herein
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7
and if sworn as a witness herein I could competently testify to these facts.” See Defendant
Friedlander’s Opposition to Trustee’s Motion for Summary Judgment filed on 2/11/08
(“Friedlander’s Response”), p. 6; Defendant Jeffery W. Potter’s Opposition to Trustee’s Motion
for Summary Judgment Filed on 2/11/08 (“Potter’s Response”), p. 5. The declarations contained
in Potter’s Response and in Friedlander’s Response also recite that they were executed “under
the perjury laws of the United States.” See Friedlander’s Response, p. 15; Potter’s Response, p.
10. The declaration in Potter’s Response includes the following statements: “I have the
Declaration of Martin S. Friedlander. The same is true to the best of my knowledge.” There is
no other attestation as to the truth of the statements contained in Mr. Potter’s declaration, nor is
the declaration signed by Mr. Potter. The declaration portion of Friedlander’s Response contains
no averment that the statements are true and correct, though elsewhere in Friedlander’s
Response, Mr. Friedlander states that the declaration “will attest to the truth”. See, e.g.,
Friedlander’s Response, p. 24.
Mr. Friedlander asserts that the declarations under penalty of perjury have the same effect
as affidavits, citing 28 U.S.C.§ 1746. 	Unsworn declarations made under penalty of perjury may
satisfy a requirement for an affidavit pursuant to 28 U.S.C. § 1746, which provides, in relevant
part:
Wherever, under any law of the United States or under any rule . . . any matter is
required or permitted to be supported, evidenced, established, or proved by . . .
affidavit, . . . such matter may, with like force and effect, be supported,
evidenced, established, or proved by the unsworn declaration . . . in writing of
such person which is subscribed by him, as true under penalty of perjury, and
dated, in substantially the following form:
. . . .
(2) If executed within the United States,. . . “I declare (or certify, verify, or state)
under penalty of perjury that the foregoing is true and correct. Executed on
(date).
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(Signature)”.
28 U.S.C. § 1746(2).
Neither the declaration contained in Friedlander’s Response nor the declaration contained in
Pottter’s Response complies with the requirements of 28 U.S.C. § 1746: Mr. Potter failed to sign
his declaration and failed to certify that the statements made the declaration are true and correct,
and Mr. Friedlander failed to certify that the statements contained in his declaration are true;
consequently the declarations fail to satisfy the requirement for opposition to summary judgment
under Rule 56(c), Fed.R.Civ.P. See Smith v. Muscatell (In re Muscatell), 106 B.R. 307, 309
(Bankr.M.D.Fla. 1989)(concluding that unsworn declaration failed to meet the requirements of
28 U.S.C. § 1746 where the unsworn statement was signed under penalty of perjury, but not
declared true and correct).
Because the Court need not treat the declarations contained in Potter’s Response and
Friedlander’s Response as the equivalent of affidavits, summary judgment should be entered if
otherwise appropriate. See Rule 56(e)(2), Fed.R.Civ.P.
DISCUSSION
In support of her Motion for Summary Judgment, the Trustee relies on the California
Trust agreement, other statements made by Jeffery Potter in the Original Complaint and in the
Claims Approval, and statements made by Jeffery Potter in certain written and e-mail
correspondence to his former bankruptcy counsel. 	Both Mr. Potter and Mr. Friedlander object
to the Trustee’s use of the e-mail and other correspondence in support of her Motion for
Summary Judgment, arguing that it is subject to the attorney-client privilege, constitutes
impermissible hearsay evidence, and cannot be used in this unrelated proceeding.
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8 Mr. Friedlander objects to the e-mails on grounds that they are subject to the attorney-
client privilege because they consist of communications between Mr. Potter and his then
bankruptcy counsel. 	But by failing to object to the admission of such documents at the prior
hearing, any attorney-client privilege that might have applied was waived. Cf. U.S. v. Ary, 518
F.3d 775, 784 (10th Cir. 2008)(“The key is that the party seeking protection must treat the
document or communication as confidential. When a party delays in asserting protection,
however, the adverse party is free to continue to use the material, thereby negating its
confidential character.”)(citation omitted); United States v. Bernard, 877 F.2d 1463, 1465 (10 th
Cir. 1989) (“Any voluntary disclosure by the client is inconsistent with the attorney-client
relationship and waives the privilege.”)(citation omitted).
On the other hand, the Trustee’s reliance on In re Foster, 188 F.3d 1259 (10 th Cir. 1999)
for the proposition that a bankruptcy trustee for an individual’s bankruptcy estate holds the
attorney-client privilege and, therefore, has the power to waive it, is overly broad. In Foster, the
Tenth Circuit acknowledged that a bankruptcy trustee succeeds to a corporate debtor’s right to
9
The Correspondence and E-Mail Can be Used as Evidence in Support of the Trustee’s
Motion for Summary Judgment.
The correspondence and e-mail were introduced and admitted into evidence without
objection at a final hearing held April 10, 2007 in Defendant Jeffery Potter’s bankruptcy
proceeding. Defendant Jeffery Potter and Martin Friedlander were present at that final hearing.
The purpose of that hearing was to consider the reasonableness of Davis & Pierce’s fees and
was, therefore, not related to the Trustee’s complaint to recover the transfers to the California
Trust. 	Nevertheless, it is not inappropriate for a bankruptcy court to consider evidence that was
admitted in prior evidentiary hearings provided that the parties are permitted to challenge the
prior evidence. See In re Blumer, 95 B.R. 143, 146 (9th Cir. BAP 1988)(stating that bankruptcy
court “may, but need not, consider evidence from a prior hearing in the same case if the notice of
what will be considered is sufficient to permit the parties to challenge the prior
evidence.”)(citing In re Acequia, Inc., 782 F.2d 1352, 1359 (9th Cir. 1986)(finding that
bankruptcy court was not precluded from considering evidence admitted in prior evidentiary
hearings when ruling on confirmation). 8
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assert or waive attorney-client privilege, but required the bankruptcy court to balance the harm to
the debtor against the trustee’s need for information when determining whether the bankruptcy
trustee could control an individual debtor’s claim of attorney-client privilege. Foster, 188 F.3d
at 1268. 	But because the Court finds that the privilege was waived by its admission in the prior
proceeding, the Court need not consider whether it is appropriate for the Trustee to waive the
privilege under the Foster standards.
9See N.M.S.A. 1978 § 56-10-18(A) (Repl. Pamp. 1996)(“A transfer . . . is fraudulent . . .
if the debtor made the transfer . . . with actual intent to hinder, delay or defraud any creditor of
the debtor”)(emphasis added). Cf. In re M & L Business Mach. Co., Inc., 155 B.R. 531, 539-540
(Bankr.D.Colo. 1993), aff’d, 164 B.R. 657 (D.Colo. 1994), aff’d, 84 F.3d 1330 (10th Cir.
10
Hearsay Arguments.
Mr. Friedlander also argues that the e-mail and other correspondence attached to the
Motion for Summary Judgment constitute hearsay evidence as to him. Such out of court
statements may constitute hearsay as to Mr. Friedlander, but that fact fails to defeat the Motion
for Summary Judgment as to Jeffery Potter, who waived his attorney-client privilege. Other
evidence, including Mr. Friedlander’s admission that he drafted the California Trust, is sufficient
to establish that the Trustee can recover the transfers from Mr. Friedlander either as Trustee of
the California Trust, or as a beneficiary of the California Trust.
Although the Court can consider the previously admitted exhibits, the content of those
exhibits is insufficient on its own to establish fraudulent intent. In the e-mails and
correspondence the Trustee relies upon in support of the Motion for Summary Judgment,
Defendant Jeffery Potter exhorts his then counsel to “unwind the trust.” Such statements
constitute some evidence that Mr. Potter recognized that the assets in the California Trust needed
to be administered through his bankruptcy proceeding, but do not establish on their own that he
intended to hinder, delay, or defraud his creditors at the time that the California Trust was
formed.9
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1996)(stating that the trustee must prove actual fraudulent intent under § 548; that “[f]raudulent
intent may be established . . . by circumstantial evidence or by inferences drawn from a course of
conduct[;]” and that “[s]ubsequent conduct, itself, is often probative of a debtor’s intent on a
prior occasion.”)(citing In re Farmers Cooperative Ass’n of Talmage, KS v. Strunk, 671 F.2d 391
(10th cir. 1982)).
10 Judicial admissions are separate and distinct from the doctrine of judicial estoppel,
which requires a showing of the following factors: 1) that the party’s later position is clearly
inconsistent with the earlier position; 2) that the party succeeded or convinced the court to
accept its earlier position so that it would appear that the court was misled; and 3) that the party
would achieve an unfair advantage to the detriment of the opposing party if the party were not
estopped from taking the later position. In re Riazuddin, 363 B.R. 177, 185 (10th Cir. BAP
2007)(citing Johnson v. Lindon City Corp., 405 F.3d 1065, 1069 (10 th Cir. 2005)(approving of
the factors enunciated by the Supreme Court in New Hampshire v. Maine, 532 U.S. 742, 121
S.Ct. 1808, 149 L.Ed.2d 968 (2001)).
11Jenkins v. Tomlinson (In re Basin Resources Corp.), 182 B.R. 489, 492
(Bankr.N.D.Tex. 1995).
12Id.
13See In re Schraiber, 141 B.R. 1000, 1007 (Bankr.N.D.Ill. 1992) (explaining that “[a]n
admission made in one proceeding will not be regarded as conclusive and binding in a separate
proceeding[ ]” so that while a statement made in a motion filed in a separate adversary
proceeding might be admissible as an admission by a party opponent, it does not constitute a
judicial admission with conclusive effect)(citations omitted).
11
The Statements Contained in the Original Complaint and in Defendant’s Statements and
Schedules Constitute Admissions
Generally, factual statements made in pleadings or pre-trial orders constitute judicial
admissions 10 that are conclusively binding on the party who made them. 11 However,
“admissions made in another proceeding are not conclusive and binding judicial admissions.” 12
Rather, they are evidentiary admissions which the court may choose to admit in a separate
proceeding, but which will not have conclusive effect.13
The Original Complaint includes the following statements: 1) that Jeffery Potter did not
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14See N.M.S.A. 1978 § 56-10-18(A)(2) (Repl. Pamp. 1996) and Cal.Civ.Code. §
3439.05:
15 See Larson v. Groos Bank, N.A., 204 B.R. 500, 502 (W.D.Tex. 1996)(“[S]tatements in
bankruptcy schedules are executed under penalty of perjury and when offered against a debtor
are eligible for treatment as judicial admissions.”)(citing In the Matter of Gervich, 570 F.2d 247,
253 (8th Cir. 1978)(remaining citations omitted)).
16 Because the transfers to the California Trust occurred more than one year before the
date of the filing of Mr. Potter’s bankruptcy petition, the Trustee seeks to avoid the transfers
under state law, which generally has a four year statute of limitations. See 11 U.S.C. §
548(a)(1)( “The trustee may avoid any transfer of an interest of the debtor in property . . . that
was made . . . on or within one year before the date of the filing of the petition . . . ”); 11 U.S.C.
§544(b) (“. . . the trustee may avoid any transfer of an interest of the debtor in property . . . that is
voidable under applicable law . . .”); Cal.Civ.Code § 3439.09 (actions to avoid a fraudulent
transfers under Cal.Civ.Code § 3439.04(a)(1), § 3439.04(a)(2) or § 3439.05 are subject to a four-
12
receive reasonably equivalent value in exchange for the transfers to the California Trust; and 2)
that the transfers rendered Jeffery Potter insolvent. These statements constitute evidentiary
admissions made by Defendant Potter. But because these statements presume legal conclusions
necessary to a cause of action for constructive fraud14
, the Court will not treat them as judicial
admissions that conclusively establish all elements necessary to the Trustee’s cause of action.
Statements contained in a debtor’s statements and schedules can constitute judicial
admissions.15 The Trustee points to Mr. Potter’s statement in Schedule B(19) that the California
Trust “was subject to avoidance for fraudulent transfer (purports to hold all of the debtor’s real
and personal property)” as an admission that the transfers at issue constitute fraudulent transfers.
But just like the admissions contained in the Original Complaint, the Court will not treat it as a
judicial admission with conclusive effect because it presumes a legal conclusion. Nor is the
statement sufficient to establish fraudulent intent at the time of the transfers.
The Admissions Contained in the Original Complaint together with Other Undisputed
Circumstantial Evidence are Sufficient to Support an Inference of Fraudulent Intent
under Either California or New Mexico Law16
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year statute of limitations from the time of the transfer); N.M.S.A. 1978 § 56-10-23 (Repl. Pamp.
1996)(four year statute of limitations).
17Compare, Cal.Civ.Code § 3439.04 with N.M.S.A. 1978 § 56-10-18(A)(1) and (2)(Repl.
Pamp. 1996). Both statutes follow the Uniform Fraudulent Transfer Act. See N.M.S.A. 1978 §
56-10-14 (“This act may be cited as the ‘Uniform Fraudulent Transfer Act’”); Cal.Civ.Code §
3439 (“This chapter may be cited as the Uniform Fraudulent Transfer Act.”).
18See In re Stern, 345 F.3d 1036, 1043 (9th Cir. 2003)(adopting and applying
preponderance of the evidence standard of proof to fraudulent transfer action filed under
Cal.Civ. Code §§ 3439.04(a), 3439.04(b)1-2 and 3439.05); Mazer v. Jones (In re Jones), 184
B.R. 377, 386 (Bankr.D.N.M. 1995)(“Proof of fraud in New Mexico is by clear and convincing
evidence.”)(citing First Nat’l Bank in Albuquerque v. Abraham, 97 N.M. 288, 292, 639 P.2d
575, 579 (1982)); Ellen Equipment Corp. v. C.V. Consultants & Associates, Inc., 144 N.M. 55,
58, 183 P.2d 940, 943 (Ct.App. 2008)(creditor must prove actual fraud under UFTA by clear and
convincing evidence).
19 N.M.S.A. 1978 § 56-10-18(A)(1) (Repl.Pamp. 1996); Cal.Civ.Code § 3439.04(1).
13
The fraudulent transfer statutes in California and New Mexico are substantively
identical.17 However, the standards of proof are different: California applies a preponderance of
evidence standard to fraudulent transfer actions whereas New Mexico requires proof of fraud by
clear and convincing evidence.18 Under either the New Mexico or the California Uniform
Fraudulent Transfer Act (referred to collectively as the “UFTA”), a transfer made with actual
intent to hinder, delay, or defraud any creditor is fraudulent and, consequently, may be avoided.19
In determining actual intent, the following factors are relevant:
(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
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20See Jones, 184 B.R. at 386 (“The enumeration of these factors is non-inclusive)(citing
Dona Ana Savings and Loan Ass’n v. Dofflemeyer, 115 N.M. 590, 593, 855 P.2d 1054, 1057
(1993)).
21 See Prochasca v. Marcoux, 632 F.2d 848, 851 (10 th Cir. 1980)(noting that questions of
intent which depend upon intangible factors such as witness credibility are matters to be
determined at trial and not on summary judgment). Cf. In re Baines, 337 B.R. 392,
(Bankr.D.N.M. 2006)(“The issue of fraudulent intent, central to a claim for non-dischargeability
under 11 U.S.C. § 523(a)(2)(A) is a material issue which is not easily subject to adjudication by
summary judgment.”)(citation omitted).
22See Jones, 184 B.R. at 386 (“Although proof of one or more of these ‘badges of fraud’
[under the UFTA] does not create a presumption that the transfer was fraudulent . . . proof of
several badges of fraud may afford a basis to infer fraud.”)(citation omitted); In re Kopp, 383
B.R. 179, 185 (Bankr.D.Kan. 2008)(stating that because “actual intent may be proven by
circumstantial evidence or on inferences drawn from a course of conduct because a defendant is
unlikely to testify that his or her intent was fraudulent . . . . a court may look to all the
surrounding facts and circumstances and grant summary judgment if appropriate.”)(citation
omitted).
14
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
who transferred the assets to an insider of the debtor.
Cal.Civ.Code. § 3439.04; N.M.S.A. 1978 § 56-10-18(B) (Repl. Pamp.
1996)(substantively identical).
The enumerated factors contained in the UFTA are not exclusive.20
Because an action to recover a fraudulent transfer requires consideration of a person’s
intent, such actions generally cannot be resolved on summary judgment.21 But because a
defendant rarely admits to fraudulent intent, the Court can infer fraudulent intent based on the
surrounding facts and circumstances, including the presence of several of the factors enumerated
in the statute. 22 As discussed below, the terms of California Trust together with the admissions
of Jeffery Potter contained in the Original Complaint and in his response to the Motion for
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23Cf. In re Gertsch, 237 B.R. 160, 165 (9th Cir. BAP 1999)(upholding grant of summary
judgment on intent to defraud requirement under § 523(a)(2)(B), stating that “summary judgment
is appropriate if all reasonable inferences defeat the claims of one side, even when intent is at
issue.”)(quoting Newman v. Checkrite California Inc., 912 F.Supp. 1354,1380 (E.D.Cal.
1995)(citing White v. Roper, 901 F.2d 1501, 1505 (9th Cir. 1990)); Medina-Munoz v. R.J.
Reynolds Tobacco Co., 896 F.2d 5, 8 (1st Cir. 1990)(“Even in cases where elusive concepts such
as motive or intent are at issue, summary judgment may be appropriate if the nonmoving party
rests merely upon conclusory allegations, improbable inferences, and unsupported
speculation.”).
15
Summary Judgment, establish the presence of a number of the relevant badges of fraud from
which actual intent to defraud may be inferred under the UFTA. Such undisputed circumstances
surrounding the formation of the California Trust are sufficient to grant summary judgment in
favor of the Trustee.23
The California Trust expressly recites that its purpose is “not to defraud present or
existing creditors”, but that statement is belied by other terms and/or recitals contained in the
California Trust agreement. First, the California Trust agreement acknowledges that Jeffery
Potter was in the midst of significant litigation and that a “judgment against Potter Settlor has
also deprived the Potter Settlor from receiving funds to pay his living expenses . . . ” California
Trust, Recital No. 3. 	Mr. Potter’s Response admits to a $600,000.00 judgment against him at
the time the California Trust was formed. See Response, p. 5, ¶ 4. (“I personally suffered a
judgment in the approximate amount of over $600,000 at that time”). Thus it is clear that the
transfers occurred at a time when the debtor had been sued or threatened with suit, and that the
transfers occurred shortly after a substantial debt (the $600,000.00 judgment) was incurred.
Next, the California Trust provides for the transfer of “All of Jeffery W. Potter’s assets,
real or personal, wherever located.” California Trust, Schedule A. 	The clear intent of the
California Trust, according to its Schedule A, was to transfer all of the Mr. Potter’s assets.
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24 Lack of reasonably equivalent value is just one of the eleven enumerated badges of
fraud under the UFTA. See Cal.Civ.Code. § 3439.04; N.M.S.A. 1978 § 56-10-18(A)(1)
(Repl.Pamp. 1996).
25See In re Brun, 360 B.R. 669, 674 (Bankr.C.D.Cal. 2007)(“[P]roperty that is fully
encumbered and/or exempt is not voidable as a fraudulent transfer . . . . Plaintiff can avoid the
Transfer only to the extent Debtor transferred equity in the property, [and] . . . may recover the
‘value’ of that equity interest pursuant to § 550(a).”)(citation omitted). 	This is because the
fraudulent transfer statute, Cal.Civ.Code § 3439 et seq. allows creditors to avoid the transfer of
16
By transferring all of his assets, whether real or personal, and wherever located, to the California
Trust, Mr. Potter, as an individual, necessarily rendered himself insolvent. 	In addition, Mr.
Potter’s statement in the Original Complaint that the transfers to the California Trust rendered
him insolvent serves as additional evidence of the presence of one of the badges of fraud.
Mr. Potter further admits in his Response that he continued to live in the residential
property transferred to the California Trust. See Response, p. 8, ¶ 13. (stating that his stay at 53
La Vista was not for free, and that he did “like kind work in exchange for living there”). 	The
retention of possession of at least one of the transferred properties establishes another badge of
fraud under the UFTA.
Mr. Potter and Mr. Friedlander argue that the Trustee cannot prove her case because she
has presented no evidence of the value of the assets at the time of the transfers to the California
Trust. 	But given the presence of other undisputed circumstantial evidence that supports an
inference of actual fraud, a lack of evidence as to the value of the transferred assets is not fatal to
the Trustee’s request for summary judgment as to Counts I and III.24 Nor does the fact that
certain of the assets transferred to the California Trust were encumbered by liens at the time of
the transfer defeat the Trustee’s claim to bring such property back into the bankruptcy estate,
provided there was at least some equity in the transferred property.25
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an “asset” which is defined under Cal.Civ.Code § 3439.01(a) as “unencumbered, non-exempt
equity in property of a debtor.” Brun, 360 B.R. at 672. The New Mexico fraudulent transfer
statute similarly defines “asset” to exclude “property to the extent it is encumbered by a valid
lien.” N.M.S.A. 1978 § 56-10-15(B)(1) (Repl.Pamp. 1996).
26See Filip v. Bucurenciu, 129 Cal.App.4th 825, 834, 28 Cal.Rptr.3d 884, 890 (Ct. App.
2005)(stating that the factors enumerated in the California fraudulent transfer statute “do not
create a mathematical formula to establish actual intent. 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.”)(citation omitted); Royal Indem. Co. v. McClendon, 64 N.M. 46, 48, 323 P.2d 1090, 1091
(1958)(“A fraudulent conveyance may be established when circumstances attending the
transaction point to the existence of a sufficient number of these badges of fraud.”); Jones 184
B.R. at 386 (noting that the proof of one or more of the statutory badges of fraud does not create
a presumption of fraud, but may, nevertheless afford a basis to infer fraud.”)(citation omitted).
27See N.M.S.A. 1978 § 56-10-18(a)(1) (Repl. Pamp. 1996)(“with actual intent to hinder,
delay, or defraud . . .”)(emphasis added). In construing the fraudulent transfer statute under the
former Bankruptcy Act, the Tenth Circuit stated:
Not only is a conveyance illegal if made with an intent to defraud the creditors of the
grantor, but also equally illegal if made with an intent to hinder and delay them. Many
an embarrassed debtor holds the genuine belief that if suits can be staved off for a season,
he will weather a financial storm, and pay his debts in full. . . . The belief, even though
reasonably well founded, does not clothe such debtor with a privilege to build up
obstructions that will hold his creditors at bay. Fish v. East, 114 F.2d 177, 182 (10 th Cir.
1940)(citations omitted).
17
All factors need not be present in order to conclude that a fraudulent transfer has
occurred under New Mexico or California statutes.26 “The presence of a single badge of fraud
may spur mere suspicion; the confluence of several can constitute conclusive evidence of actual
intent to defraud, absent 'significantly clear' evidence of a legitimate supervening purpose.”
Acequia, Inc. v. Clinton (In re Acequia, Inc.), 34 F.3d 800, 806 (9th Cir. 1994)(quoting Max
Sugarman Funeral Home, Inc. v. A.D.B. Investors, 926 F.2d 1248, 1254-55 (1st Cir.
1991)(emphasis and citations omitted). In addition, because the relevant statutes require intent
to hinder, delay, or defraud, it is sufficient if the facts and circumstances show that the defendant
merely intended to hinder or delay his or her creditors.27 The stated purpose of the California
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28 See also, In re AFI Holding, Inc., 525 F.3d 700, 707 (9th Cir. 2008)(noting that when
proceeding under Cal.Civ.Code 3439.04(a)(1) based on actual fraud, the trustee does not have to
show that the debtor received less than reasonably equivalent value in exchange for the transfer)
29 That section provides:
A transfer made or obligation incurred 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:
(1) without receiving reasonably equivalent value in exchange for the
transfer or obligation, and the debtor:
(a) was engaged or was about to engage in a business or
18
Trust is to provide for the maintenance of Mr. Potter and fund his litigation, thus its intended
effect could only be to shield his assets from creditors in order to allow Mr. Potter additional
time to pursue and defend pending litigation. Such a goal is not a legitimate, supervening,
purpose sufficient to negate the fraudulent nature of the transfers, especially in light of the
presence of several other badges of fraud. The Court, therefore, concludes that the transfers to
the California Trust were fraudulent under the UFTA.
Because there is sufficient evidence of actual fraud under a clear and convincing
standard, summary judgment can be granted as to Counts I and III and it is not necessary to
determine whether the transfers are constructively fraudulent.28 Nevertheless, because the
Trustee also requests summary judgment on Counts II and IV based on New Mexico and
California constructive fraud statutes, the Court will consider these claims. California Civil
Code § 3439.05 provides:
A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose
claim arose before the transfer was made or the obligation was incurred if the debtor
made the transfer or incurred the obligation without receiving reasonably equivalent
value in exchange for the transfer or obligation and the debtor was insolvent at that time
or the debtor became insolvent as a result of the transfer.
The New Mexico statute is substantially identical. See N.M.S.A. 1978 § 56-10-18(A)(2). 29
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transaction for which the remaining assets of the debtor were
unreasonably small in relation to the business or transaction; or
(b) intended to incur, or believed, or reasonably should have
believed that he would incur, debts beyond his ability to
pay as they became due.
N.M.S.A. 1978 § 56-10-18(a)(2) (Repl. Pamp. 1996)
30See Allied Products Corp. v. Arrow Freightways, Inc., 104 N.M. 544, 547, 724 P.2d
752, 755 (1986)(interpreting former constructive fraud statute, N.M.S.A. § 56-10-4 which
provided that “[e]very conveyance made and every obligation incurred by a person who is or
will be thereby rendered insolvent is fraudulent as to creditors without regard to his actual intent
if the conveyance is made or the obligation is incurred without a fair consideration” to mean that
“proof of both insolvency and lack of consideration” is required)(citation omitted); Mejia v.
Reed, 31 Cal.4th 657, 664, 74 P.3d 166, 170 (2003)(transfers are fraudulent under Cal.Civ.Code
§ 3439.05 when debtor does not receive reasonably equivalent value in exchange for the transfer
and the debtor was insolvent at the time of the transfer or was rendered insolvent as a result of
the transfer).
19
Both New Mexico and California law require the presence of two elements: 1) lack of reasonably
equivalent value; and 2) insolvency. 30
Mr. Potter and Mr. Friedlander both stress that the Trustee has not presented evidence of
the value of the assets transferred to the California Trust as of the time the transfers were made,
thus there can be no determination of whether Mr. Potter received reasonably equivalent value in
exchange for the transfers to the California Trust. 	This Court agrees.
The Original Complaint avers that Potter did not receive reasonably equivalent value in
exchange for the transfers to the California Trust. 	But this statement presumes a legal
conclusion; it is not a factual admission of values from which a determination of reasonably
equivalent value can be drawn. 	As stated above, while the admissions in the Original Complaint
constitute some evidence, the Court will not give them conclusive effect, especially when there
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31See Guidry v. Sheet Metal Workers Int’l Ass’n Local No. 9,10 F.3d 700, 716 (10 th Cir.
1993)(doctrine of judicial admission not applicable to propositions of law).
32Cf. Wiswall v. Wallaert (In re Wallaert), 149 B.R. 665, 669 (Bankr.W.D.Wash.
1992)(denying summary judgment on claim for constructive fraud where neither party delineated
precisely the interest the debtors transferred nor the value of that interest); In re Carbaat, 357
B.R. 553, 560 (Bankr.N.D.Cal. 2006)(“To determine whether the transfers sought to be avoided
by the Trustee were constructively fraudulent, the Court must determine the value of what the
Debtor transferred and the value of what he received.”).
33 Subsection (e) of 11 U.S.C. § 548 was enacted as part of the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005 (“BAPCPA”), and became effective as of April
27, 2005, the date of enactment of BAPCPA. See Pub.L. 109-8, Title XIV,Section 1406(b),
making subsection (e) applicable only with respect to cases commenced under Tilte 11 on or
after April 20, 2005.
20
is no other evidence of value of the assets as of the time of the transfer. 31 Thus material issues of
fact as to whether Mr. Potter received reasonably equivalent value preclude summary judgment
on the Trustee’s claim to avoid the transfers based on constructive fraud.32
Count V - Avoidance of Transfer Under 11 U.S.C. § 548(e)33
The Trustee also requests summary judgment on Count V of the Second Amended
Complaint which seeks to avoid the transfers to the California Trust under 11 U.S.C. § 548(e).
That section provides:
In addition to any transfer that the trustee may otherwise avoid, the trustee may avoid any
transfer of an interest of the debtor in property that was made on or within 10 years
before the date of the filing of the petition if --
(A) such transfer was made to a self-settled trust or similar device;
(B) such transfer was by the debtor;
(C) the debtor is a beneficiary of such trust or similar device; and
(D) the debtor made the transfer with actual intent to hinder, delay, or defraud any
entity to which the debtor was or became, on or after the date that such transfer was
made, indebted.
11 U.S.C. § 548(e).
Jeffery Potter is the settlor identified in the California Trust. He is also one of its
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34Cf. In re Combes, 382 B.R. 186, 193 (Bankr.E.D.N.Y. 2008)(stating that the analysis of
a debtor’s intent to defraud under § 548(e) is the same as under the applicable New York
fraudulent transfer statute).
21
beneficiaries. He effectuated the transfer of the properties to the California Trust. As analyzed
above, the transfers to the California Trust were made with the intent to hinder or delay
creditors.34
Mr. Potter and Mr. Friedlander assert that the California Trust is not self-settled because
there are beneficiaries other than Mr. Potter and because some of the transfers were from
Summit Investment and Summit Valdes. 	Even if the Court were to accept these arguments, the
transfers to the California Trust are voidable under 11 U.S.C. § 548(e) at least as to Jeffery
Potter. Under 11 U.S.C. § 548, the debtor need only be “a” beneficiary, not the sole beneficiary;
the transfer must be to a self-settled trust “or other similar device”, and the transfers must be
made by the debtor. 11 U.S.C. § 548(e). The California Trust was funded in part with shares of
Summit Investment and Summit Valdes, two independent limited liability companies. 	But
Defendant Jeffery Potter is the sole member of Summit Investment, and Summit Investment, in
turn, owned all membership interests of Summit Valdes. Thus Jeffery Potter effectuated the
transfers of the membership interests of Summit Investment and Summit Valdes to the California
Trust. 	Consequently, the Court rejects the arguments of Mr. Potter and Mr. Friedlander and
finds that the Trustee has sufficiently established all elements required under 11 U.S.C. § 548(e).
Count VI - Mr. Potter's Voluntary Dismissal of the Original Complaint is not Binding on
the Trustee as a Matter of Law.
Before Mr. Potter’s bankruptcy proceeding converted from Chapter 11 to Chapter 7, Mr.
Potter filed the Original Complaint to avoid the transfers to the California Trust as Adversary
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35See also In re Shuman, 78 B.R. 254, 256 (9th Cir. BAP 1987)(finding that privity
between the debtor and the trustee requires a showing that interests of the debtor and the trustee
were so closely related that the debtor was the trustee’s "virtual representative" in the prior
action.)(citation omitted).
See also, In re MS55, Inc., 477 F.3d 1131, 1135 (10th Cir. 2007)("It is well established
that a Chapter 7 trustee succeeds to the rights of the debtor-in-possession and is bound by prior
actions of the debtor-in-possession to the extent approved by the court.")(citing Paul v. Monts,
906 F.2d 1468, 1473 (10th Cir. 1990)(emphasis added)). In MS55, Inc., the unambiguous
language of a prior court-approved order established that the debtor-in-possession waived its
right to assert an avoidance action; consequently, the Chapter 7 trustee was likewise barred from
brining such action post-conversion. Id. 	As previously determined by this Court in its Order
Denying MTD, p. 17 (Docket # 83), Mr. Potter dismissed Adversary Proceeding No. 05-1151 M
without the Court's permission. Thus the Chapter 7 Trustee is not automatically bound by Mr.
22
Proceeding No. No. 05-1141. Following the withdrawal of Mr. Potter’s bankruptcy counsel, Mr.
Potter, proceeding pro se, voluntarily filed a notice of dismissal of adversary proceeding No. 05-
1141. See Adversary Proceeding No. 05-1151 M, Docket # 28; Order Granting Motion to
Withdraw as Attorney of Record filed in Case No. 7-05-14071MS, Docket # 190. 	But as
previously determined by this Court in its Order Granting Motion to Convert Case to Chapter 7
(Docket # 228 in Case No. 7-05-14071 MS), Mr. Potter was required to give notice of his
intended dismissal of Adversary Proceeding No. 05-1141 M in accordance with Rule 9019,
Fed.R.Bankr.P. but failed to do so. 	Moreover, as determined by the Court in its Order Denying
Defendants' Motion to Dismiss ("Order Denying MTD" - Docket # 83), the Chapter 7 Trustee is
not in privity with Mr. Potter. See Order Denying MTD, pp. 16 - 17.
A chapter 7 trustee appointed following the conversion of a case from Chapter 11 to
Chapter 7 is considered to be in privity with the former debtor-in-possession only “to the extent
their interests coincide.” Matter of Silver Mill Frozen Foods, Inc., 32 B.R. 783, 786
(Bankr.W.D.Mich. 1983)(quoting Matter of Community Hospital of Rockland County, 15 B.R.
785, 787 (Bankr.S.D.N.Y. 1981)).35 By dismissing Adversary Proceeding No. 05-1141 M
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Potter's prior actions as debtor-in-possession.
36See California Trust, Article IV, Section G., “Spendthrift Provisions”, which provides,
in relevant part:
1. Except as otherwise provided in this Agreement, neither the principal of any trust
created under this Agreement nor the income from this Agreement while in the hands of
the Trustee shall be subject to assignment, alienation, pledge, attachment, execution or
claims of creditors or any Beneficiary or Beneficiaries whomsoever through legal
process, bankruptcy, operation of law or otherwise. Any attempted sale, assignment,
alienation, pledge or attachment of the principal or income held in any trust under this
Agreement shall be null and void and shall not be recognized under any circumstances by
the Trustee.
37See In re Brown, 303 F.3d 1261, 1265 (11 th Cir. 2002)(stating that “spendthrift and
support trusts are excluded from a debtor's bankruptcy estate to the extent they are protected
from creditors under applicable state law.”)(citation omitted).
23
which sought to recover for the estate the assets transferred to the California Trust, Mr. Potter
failed to act in the interests of creditors of the bankruptcy estate. His interests did not, therefore,
coincide with the interests of the Trustee, who represents the interests of all creditors of the
bankruptcy estate. 	Consequently, the dismissal of Adversary Proceeding No. 05-1141 is not
binding on Trustee as a matter of law.
Count VII - The Spendthrift Trust Provisions in the California Trust are Void as a Matter
of Law
The California Trust contains a spendthrift trust provision.36 In considering the validity
of a spendthrift trust provision, bankruptcy courts look to applicable state law.37 In Reardon v.
Brackett (In re Brackett), 54 B.R. 57, 58 (Bankr.D.N.M. 1985), this Court concluded that under
applicable New Mexico common law, the bankruptcy trustee was entitled to reach the debtor’s
interest in a self-settled spendthrift trust. Similarly, under applicable California law, “when the
settlor is a beneficiary of the trust, any spendthrift provisions are invalid.” In re Brooks-
Hamilton, 348 B.R. 512, 521 (Bankr.N.D.Cal. 2006)(citing Cal.Prob.Code §
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38Cf. Matter of Shurley, 115 F.3d 333, 338 (5th Cir. 1997)(construing Texas law on
spendthrift trusts and concluding that creditors were entitled to reach the self-settled portion of a
spend-thrift trust that was only partially self-funded); In re Bradley, 501 F.3d 421, 433 (5th Cir.
2007)(allowing trustee to recover assets the debtor transferred into a trust even though some
assets were co-mingled with assets transferred by third parties).
39See In re Barnes, 275 B.R. 889, 895 (Bankr.E.D.Cal. 2002)(finding that because the
debtors were both the settlors and the beneficiaries of the trusts, the spendthrift provisions of the
trust were invalid, and the beneficial interests of the debtors in the trust’s assets were included in
24
15404(a))(remaining citation omitted). 	In this instance, Mr. Potter is the primary settlor of the
California Trust and is also one of its beneficiaries. The California Trust contains all of his
assets and funds his living expenses, including health care and maintenance. 	Thus under either
California or New Mexico law, the spendthrift provision of the California Trust is unenforceable.
The Trustee can, therefore, reach the self-settled assets of the California Trust.
Mr. Friedlander and Mr. Potter assert that the California Trust cannot constitute a
voidable spendthrift trust because its settlors include Summit Investment and Summit Valdes
which are not named beneficiaries of the California Trust. They argue further that because the
California Trust has beneficiaries in addition to Mr. Potter, that the California Trust is not a self-
settled spendthrift trust. But neither the fact that Summit Investment and Summit Valdes are not
identified as beneficiaries nor the fact that the beneficiaries of the California Trust include
parties other than Mr. Potter negate the fact that Mr. Potter is both a settlor and a beneficiary of
the California Trust.38 In other words, the existence of additional settlors and additional
beneficiaries of the California Trust does not serve to validate the spendthrift provision as to Mr.
Potter, who is both settlor and beneficiary. Under either California or New Mexico law, the
California Trust includes a spendthrift provision that is void as a matter of law as to Mr. Potter’s
creditors.39 The Trustee is entitled to summary judgment on her claim to void the spendthrift
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the bankruptcy estate); In re Kuraishi, 237 B.R. 172, 175 (Bankr.C.D.Cal. 1999)(holding that
self-settled spendthrift trust is not enforceable under California law and assets held in such a
trust become assets of settlor’s bankruptcy estate); In re Brackett, 54 B.R. at 58.
40 Summit Valdes also transferred its interest in Summit FloorMart, LLC, Summit
Business Center, LLC, and Santa Fe Business Park, LLC to the California Trust.
25
provisions of the California Trust as to the assets transferred to the trust by Mr. Potter.
Count XIV - The Trustee has Standing To Avoid the Transfers Made by Summit
Investment Company, LLC and Summit Valdes, LLC
This Court previously determined in its Order Denying MTD (Docket # 83) that the
Trustee would have standing to undo the transfers of assets made by Summit Valdes and Summit
Investment where the effect of the transfers of the assets of Summit Valdes 40 and Summit
Investment to the California Trust was to devalue or remove property from the reach of Mr.
Potter’s creditors. See Order Denying MTD, pp. 7 and 8, citing In re Hill, 265 B.R. 296, 300
(Bankr.M.D.Fla. 2001). The Court further concluded that the Trustee had direct standing to
avoid the transfers by Summit Valdes and Summit Investment of their property to the California
Trust. 	See Order Denying MTD, p. 11. 	Thus the question of the Trustee’s standing to seek
recovery of the transfers made by Summit Investment and Summit Valdes has already been
established in this proceeding and summary judgment on this issue is appropriate.
Counts XV and XVI - The Trustee is Entitled to Turnover of the Property Transferred to
the California Trust In Accordance with 11 U.S.C. § 550
Once a transfer has been avoided under 11 U.S.C. § 548, the trustee may recover the
property for the benefit of the estate in accordance with 11 U.S.C. § 550. That section provides,
in relevant part:
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41See also Rupp v. Markgraf, 95 F.3d 936, 938 (10th Cir. 1996)(stating that "[n]o such
good faith defense is available to the initial transferee or the 'entity for whose benefit such
transfer was made' under § 550(a)(1); the trustee may always recover from the initial transferee
regardless of good faith, value, or lack of knowledge of the voidability of the transfer.").
42In re Potter, 386 B.R. 306, 308 (Bankr.D.Colo. 2008)(“The ‘initial transferee’ and the
‘entity for whose benefit such transfer was made’ are strictly liable, regardless of good faith,
value, or lack of knowledge of the voidability of the transfer.”)(quoting 11 U.S.C. § 550(b) and
26
Except as otherwise provided in this section, to the extent that a transfer is
avoided under section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title, the
trustee may recover, for the benefit of the estate, the property transferred, or, if
the court so orders, the value of such property, from --
(1) the initial transferee of such transfer or the entity for whose benefit
such transfer was made; or
(2) any immediate or mediate transferee of such initial transferee.
11 U.S.C. § 550(a).
The trustee’s right to recover transferred property is limited by subsection (b) which provides:
The trustee may not recover under section (a)(2) of this section from --
(1) a transferee that takes for value, including satisfaction or securing of a
present or antecedent debt, in good faith, and without knowledge of the
voidability of the transfer avoided; or
(2) any immediate or mediate good faith transferee of such transferee.
11 U.S.C. § 550(b).
However, "[t]he 'good faith' defense of section 550(b) does not apply to the 'initial transferee' of
the debtor or the 'entity for whose benefit such transfer was made,' and the trustee's power to
recover from these entities under section 550(a)(1) is absolute." Danning v. Miller (In re Bullion
Reserve of North America), 922 F.2d 544, 547 (9th Cir. 1991)(quoting 11 U.S.C. §
550(b)(emphasis in original).41 The California Trust, as the recipient of the transfers, is the
initial transferee. Having established that the transfers to the California Trust were fraudulent,
the California Trust is strictly liable.42
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citing Rupp v. Markgraf, 95 F.3d at 938).
43See Rupp v. Markgraf, 95 F.3d at 941 (test for whether a party is an initial transferee is
whether the party has dominion and control of the property to put the property to his or her own
purposes)(citing Bonded Fin. Services, Inc. v. European Am. Bank, 838 F.2d 890, 893 (7th Cir.
1988)).
44See Response, p. 10.
45See Response, p. 11; California Trust, Article I., Section B. “The Current Beneficiaries
shall be the Settlors’ present attorneys . . .”. ; Friedlander’s Surreply, p. 2
46 The California Trust gives the trustee the power to make payments to any beneficiary.
See California Trust, Article IV, Section A., “The trustee may make payments to any
beneficiary.” Thus, as trustee and beneficiary of the California Trust Mr. Friedlander has the
power to make payments from the assets of the California Trust to himself. 	The California
Trust itself appears to recognize this potential problem. 	See Article VI, Section B., ¶ 3 (“[T]he
reasonable adverse interests of the Trustee or any successor Trustee under this Agreement, which
may exist because a Trust or successor Trustee is also a Beneficiary under the Trusts created by
this Agreement, shall not disqualify the Trustee from retaining his or her position of trust or
27
Ms. Danilovic was the initial trustee of the California Trust, and Mr. Friedlander now
serves as the successor trustee of the California Trust. As the current trustee of the California
Trust and as one of its beneficiaries, Mr. Friedlander also falls within the parameters of “initial
transferee” or “entity for whose benefit the transfer was made.”43 Even if the Court were to
consider Mr. Friedlander an immediate, or mediate transferee based on his status as successor
trustee of the California Trust, or based on any liens he may claim against assets of the
California Trust, he does not qualify as a good faith transferee without knowledge of the
voidability of the transfer based on his role in the formation of the California Trust.
Mr. Friedlander readily admits that he drafted the California Trust.44 He has also
acknowledged that he is one of its intended beneficiaries.45 By assisting in the formation of a
trust whereby he benefits, Mr. Friedlander cannot qualify as a good faith mediate transferee and
has likely breached a duty to Mr. Potter.46 Despite (or perhaps because of) the language in the
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exercising his or her discretion in all matters in connection with any of the trusts.”).
47See 5 Collier on Bankruptcy ¶ 550.03[2] (Alan N. Resnick and Henry J. Sommer, eds.,
15th ed. rev. 2008)(the question of good faith under § 550(b) “'is solely whether the grantee knew
or should have known that he was not trading normally but that on the contrary, the purpose of
the trade, so far as the debtor was concerned, was the defrauding of his creditors.'")(quoting In re
Messenger, 32 F.Supp 490 (E.D.Pa. 1940)(quoting Glenn, Fraudulent Conveyances, § 295
(1931)). See also Jobin v. McKay (In re M & L Business Mach. Co., Inc.), 84 F.3d 1330, 1336
(10 th Cir. 1996)(discussing good faith defense under § 548(c), and noting that the majority of
bankruptcy courts hold that “a transferee who reasonably should have known of a debtor’s
insolvency or of the fraudulent intent underlying the transfer is not entitled to the § 548(c) good
faith defense.”)(citations omitted).
48 The Motion for Summary Judgment requests the Court to order immediate turnover of
the property under 11 U.S.C. § 542 because "[s]uch an order would eliminate the need for
ancillary state-court litigation over possession and control of the Property." But the Motion for
Summary Judgment does not establish sufficient undisputed material facts showing that the
property transferred to the California Trust is no longer held by the California Trust.
28
California Trust stating that its intended purpose is "not to defraud present or existing creditors"
it is apparent to the Court that Mr. Friedlander knew or should have known that the transfers to
the California Trust were likely voidable.47 By transferring all of Potter's assets to the California
Trust, the effect was to place assets out of creditor's immediate reach. 	Clearly Mr. Friedlander
does not qualify as a good faith transferee without knowledge that the transfers at issue are likely
voidable. See 11 U.S.C. § 550(b). The Trustee is entitled under 11 U.S.C. § 550 to recover from
the California Trust all property transferred by Mr. Potter to the California Trust. And because
the Trustee is entitled to recover the fraudulently transferred property under 11 U.S.C. § 550, it is
not necessary to order turnover under 11 U.S.C. § 542 at this time.48
Based on the foregoing, the Court concludes that the Trustee is entitled to summary
judgment as to Counts I, III, IV, V, VI, VII, XIV, and XV. Count XVI, requesting turnover
under 11 U.S.C. § 542, will be denied without prejudice. Fact issues preclude summary
judgment as to Counts II and IV. 	The Court will enter an order and a judgment against Mr.
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Potter and Mr. Friedlander consistent with this Memorandum Opinion.
________________________________________
MARK B. McFEELEY
United States Bankruptcy Judge
Date entered on docket: July 29, 2008
COPY TO:
David T Thuma
Attorney for Plaintiff
500 Marquette Ave NW Ste 650
Albuquerque, NM 87102-5309
Jeffery W. Potter
Defendant
PO Box 8280
Santa Fe, NM 87504-8280
Martin S. Friedlander
Defendant
10350 Wilshire Blvd Ste 603
Los Angeles, CA 90024-4717
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