Hoffman v. Retallick et al

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re
SANMILL PACIFIC, INC., 	No. 05-12757
Debtor(s).
______________________________________/
TIMOTHY W. HOFFMAN, Trustee,
Plaintiff(s),
v. 	A.P. No. 08-1092
KENDRA RETALLICK, et al.,
Defendant(s).
_______________________________________/
Memorandum After Trial
_________________
Plaintiff Timothy Hoffman is the Chapter 7 trustee of the bankruptcy estate of debtor Sanmill
Pacific, Inc., which filed a Chapter 11 petition in 2005 and converted to Chapter 7 in 2007. By this
adversary proceeding, he seeks a declaration that the bankruptcy estate is the owner of the single
family residence at 4519 Dry Creek Road in Napa, California. The property was deeded to Virginia
Sanborn, the sole shareholder, officer and director of the debtor, in 2003. Hoffman alleges that the
deed was defective and therefore the property belongs to the bankruptcy estate. Not only does he seek
a declaration that he owns the property, but he also seeks a declaration that the liens of two lenders,
Entered on Docket
July 06, 2010
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 08-01092 Doc# 186 Filed: 07/03/10 Entered: 07/06/10 10:13:26 Page 1 of
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1While it was not pleaded, the court notes that Hoffman cannot exercise the rights of a bona
fide purchaser for value given to him by § 544(a)(3) of the Code because Retallick lived on the
property when the bankruptcy was filed, thereby providing him with notice of her rights in it. In re
Probasco, 839 F.2d 1352, 1354 (9th Cir. 1988).
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defendants, Chase Bank and Washington Mutual Bank, securing loans made to Sanborn’s successors
in interest, are void.
Sanmill was in the business of real estate development. It purchased the real property in 2002
and build the residence on it. In order to obtain long-term financing to pay off the construction loan,
Sanborn decided to transfer title from the corporation to herself. The purchase price was
$1,060,000.00, consisting of cash from a new loan made by Sanborn of $864,000.00 and a her note to
the corporation for $162,000.00. The property was worth about $1.35 million at the time. Since the
transfer to Sanborn was without a commission, it was the equivalent of a sale for about $1.12 million.
There was absolutely no intent to “loot” the corporation. Quite the contrary, when Sanborn refinanced
the property some months later, she put $400,000.00 of the proceeds back into the corporation.
In 2006, Sanborn deeded the property to her living trust. She died later that year. In 2007, the
trustee of the trust, Sanborn’s daughter-in-law Kendra Retallick, deeded the property to herself. There
is no suggestion that these transfers were in any way improper.
It is important for the court to make two important points early in its analysis. First, the relief
Hoffman seeks is grossly inequitable. If he were to succeed, he would establish ownership of the
property, worth well over $1 million, free and clear of all liens, when the most Sanmill could have
recovered if the property was sold to a third party was around $200,000.00.
Second, and far more important, this is not a fraudulent conveyance action. None of the
trustee’s avoiding powers under the Bankruptcy Code have been pleaded or proved. The action is
based solely on the estate’s rights under § 541(a)(1) of the Code, with Hoffman stepping into the
shoes of the debtor. Hoffman can only prevail if, on the date of the bankruptcy filing, the corporation
had the right to recover the property under California law. It had no such right.1
Case: 08-01092 Doc# 186 Filed: 07/03/10 Entered: 07/06/10 10:13:26 Page 2 of
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Hoffman’s argument is based on a single undisputed fact: the deed from Sanmill to Sanborn is
defective. Sanborn had ceded all control over Sanmill to Retallick, who (through ignorance, not
deceit) was in the habit of signing Sanborn’s name willy-nilly without noting the fact that she was
acting under a power of attorney. Worse, the title officer handling the escrow evidently assumed that a
proper power of attorney authorizing Retallick to execute deeds for Sanmill had been recorded.
Special powers of attorney had been recorded in two other counties, limited to transactions in those
counties. However, no power of attorney authorizing Retallick to sign for Sanmill was recorded in
Napa County where the Dry Creek property was located. Thus, the deed from Sanmill to Sanborn
(again, its sole officer and shareholder) was defective.
The court notes that this point that there is absolutely no evidence, or even a hint of evidence,
that anything was happening without Sanborn’s full knowledge and agreement. Sanborn had retired to
Washington State, and knowingly left Retallick in full charge of all her affairs in California. They
were in frequent contact, and Sanborn was fully informed as to what was being done. In addition, the
new lender providing the purchase money financing insisted that Sanborn actually sign the loan
documents herself rather that allow Retallick to sign under a power of attorney, so the loan documents
were sent to Sanborn in Washington, actually signed by her, duly notarized, and returned.
Hoffman’s legal argument is based on California Civil Code § 1091, which requires that real
property can only be transferred by operation of law or by deed. The court does not find this argument
anywhere near persuasive, as the court has the power to make defective transfers right. Cal.C.C.P. §
1972.
It is true that the deed from Sanmill to Sanborn was defective, due to an honest mistake which
was seemingly harmless, since the transfer was from a corporation to its sole shareholder and therefore
intent is manifest. However, just because the deed was defective does not, as Hoffman argues, mean
that the corporation still owns the property (and free and clear, yet). 	Transfer can be made effective
by operation of law. 	“If a person who has agreed to transfer property has not subscribed his or her
name to a written instrument, the property may be transferred by the creation of a constructive or
Case: 08-01092 Doc# 186 Filed: 07/03/10 Entered: 07/06/10 10:13:26 Page 3 of
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2The court also notes that under California law even when a deed is void the purported grantor
may by his negligence or other misconduct be estopped to assert its invalidity against an innocent third
person who parts with value in reliance on the instrument. 26 Cal.Jur.3d, Deeds, § 144; Crittenden
v. McCloud, 106 Cal.App.2d 42, 50, 234 P.2d 642 (1951). The delay in assertion of the corporation’s
rights is therefore fatal to Hoffman’s claims against the banks. To the extent the court got it wrong on
the banks’ motion for summary judgment, the court corrects itself now.
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involuntary trust.” 3 California Real Estate L & P, Deeds and Recording, § 80.02. 	The equitable
result here is a declaration that after close of the escrow the corporation held legal title only, subject to
a constructive trust in favor of Sanborn, not the forfeiture and windfall Hoffman seeks. Where
evidence of intent to transfer is clear and convincing, and the transferor has allowed the transferee to
rely on the transfer, a court may give effect to a defective transfer and lend its assistance to perfection
of the transferee’s title. Kennedy v. Scally, 62 Cal.App. 367, 374, 217 P. 96 (1923).
Moreover, the equitable doctrines of laches and estoppel are applicable here. A transferor
cannot make a defective transfer, wait five years (all the while knowing that third parties are making
loans to the transferee) and then sue to get the property back. Yet that is exactly what Hoffman is
trying to do, and without even offering to return the consideration paid.2 Likewise, a transferor is
estopped from accepting all of the benefits of a bargain and then repudiating it on grounds that he did
not sign the transfer document. Blackmore Inv. Co. v. Johnson, 213 Cal. 148, 150 (1931); Keller v.
Richbart, 130 Cal.App. 296, 20 P.2d 55 (1933). Hoffman seems to forget that in this action he has no
greater rights than those of the debtor corporation on the date it filed its petition and is therefore
subject to all equitable arguments defendants could assert against the debtor. Bank of Marin v.
England, 385 U.S. 99, 101, 87 S.Ct. 274, 17 L.Ed.2d 197 (1966) (“The trustee succeeds only to such
rights as the bankrupt possessed; and the trustee is subject to all claims and defenses which might have
been asserted against the bankrupt but for the filing of the petition.”).
For the foregoing reasons, Hoffman will take nothing by his complaint. The court will decree
that since November 6, 2003, Sanmill Pacific, Inc., has held only bare legal title to the real property at
4519 Dry Creek Road, Napa, California, subject to a constructive trust in favor of Virginia Sanborn
Case: 08-01092 Doc# 186 Filed: 07/03/10 Entered: 07/06/10 10:13:26 Page 4 of
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and her successors in interest. Hoffman will be ordered to deliver a properly executed grant deed to
Kendra Retallick forthwith.
This memorandum constitutes the court’s findings and conclusions pursuant to FRCP 52(a) and
FRBP 7052. Counsel for Retallick shall submit an appropriate form of judgment forthwith.
Dated: July 3, 2010
SAlan Jaroslovsky
U.S. Bankruptcy Judge
Case: 08-01092 Doc# 186 Filed: 07/03/10 Entered: 07/06/10 10:13:26 Page 5 of
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