We now rejoin the litigation in Nagel v. Westin still in progress, and which was the subject of my article UVTA Held Not To Require A Third-Party Transferee In Nagel (Jan. 24, 2021). A quick disclaimer that after I wrote that article, I was hired as an expert witness by the Nagel parties, but prior to trial was disqualified due to a perceived conflict of interest (some years previously, one of the attorneys for the defendants called me about possibly serving as an expert but never followed up); however, the description that follows will come solely from the Order After Hearing (Sept. 7, 2023) issued in that case, and other public filings only, and nothing from my personal knowledge. Further, what shall be related below is about the rulings and basis therefore from the Superior Court of Santa Barbara County, and thus is subject to reversal on appeal, i.e., everything that I write about below is subject to being a clean scratch a couple of years hence. With all those necessary caveats, let’s now continue.
To recap, plaintiffs Nicole Nagel and ESY Investments, LLC, purchased a residence from Tracy and his wife Linda Westen in 2011, but there were defects in the residence that lead to an arbitration and ultimately a judgment against the Westens in 2014 for about $4.6 million. Instead of paying the judgment, the Westens bought a home in Texas (which has a homestead protection unlimited in amount), and engaged in other conduct meant to defeat Nagel’s collection of the judgment.
At this time, Tracy Westen owned an interest in a limited liability company called Westen Family Group, LLC (“WFG”) which owned valuable property in California, Arizona and Nevada. Tracey was a manager of WFG, as were his brothers, Derek Westen and Peter Westen, and all three were attorneys. Tracey, Derek and Peter coordinated with “asset protection” lawyers to take actions to help Tracey avoid the payment of the Nagel judgment. Included in these actions was the redomiciling of WFG from California to Nevada because they thought that Nevada had more debtor-friendly laws, since Nevada law prevents the foreclosure of a charging order on the debtor’s interest in an LLC, which California law allows. Also, according to Nagel’s later-filed fraudulent transfer complaint as summarized by the Court, “Defendants engaged in the fraudulent asset protection transfers by purchasing with the non-exempt proceeds of the Moss House an ostensibly exempt homestead residence in Texas and purchasing and transferring existing annuities intended to be held as entirely exempt under Texas law from execution, as opposed to California law which limits the exemption of annuities.”
As mentioned, Nagel later brought a lawsuit alleging voidable transactions (fraudulent transfers), a conspiracy by Tracy, Derek and Peter to fraudulently transfer assets, claims against Derek and Peter and others for aiding and abetting the fraudulent transfers, and for the imposition of a constructive trust over the proceeds of the Moss House in Texas. Derek were both sued individually and as trustees of the Westin Trust.
Now Tracey and Linda Westen attempted to wash out everything by filing a Chapter 7 bankruptcy petition in the U.S. Bankruptcy Court for the Eastern District of Texas. But Nagel obtained relief from the automatic stay to continue to pursue her lawsuit back in California. Meanwhile, back in California, Nagel sent Peter Westen an offer to compromise the case for $100,000 but he did not accept the offer.
Now if you think that a case ends when a judgment is entered, you’d be about as wrong as you could be, since the parties then start fighting over things like court costs, litigation expenses and attorney fees. That is exactly what happened here, and resulted in the Order After Hearing (Sept. 7, 2023) that is the subject of this article.
Nagel filed a motion that she be awarded attorney fees and costs as the prevailing party. Peter Westen filed a motion for attorney fees claiming to be the prevailing party since Nagel’s offer in compromise to him was $100,000 but the judgment against him was for only $50,000. Together WFG, Derek and Peter all opposed Nagel’s motion on a variety of grounds that will be discussed below.
The Court first took up the issue of Peter’s motion for attorney fees, and noted that while Nagel has not won more than $50,000 against Peter only, Nagel’s overall success at trial made her the prevailing party and thus Peter’s motion would be overruled.
Moving on, the Court next took up whether Nagel was entitled to her fees paid to a Texas law firm who represented her in the Tracy and Linda Westen bankruptcy proceedings. Here, Nagel argued that the Texas lawyers’ efforts in the Texas bankruptcy proceeding were necessary for her to obtain the result she did in California, and thus she should be able to claim those attorneys fees in California as well. The Court agreed, overruling the objections of WFG, Derke and Peter that only California attorneys could collect attorney fees.
The next issue was the amount of attorney fees to be awarded. Nagel sought about $7.4 million in total fees paid to a variety of law firms who had one time or another had participated in the litigation.
The Court first noted that California basically follows a lodestar calculation: The lodestar is the result of a number of attorney hours reasonably spent on the matter times a reasonable rate. This creates a base number that the Court can adjust up or down depending upon the peculiarities of each case. According to the Court: “Such an approach anchors the trial court’s analysis to an objective determination of the value of the attorney’s services, ensuring that the amount awarded is not arbitrary.” At least in theory.
WFG, Derek and Peter asked the Court for a 20% across-the-board reduction in fees, known as a haircut, but the Court was not willing to grant such relief. Instead, the Court reviewed the invoiced submitted by Nagel and made various adjustments, such as disallowing time entries that has been redacted to the point that nobody could tell what they related to. Another instance was an attorney who claimed to bill 22.5 hours of time in one day: Nobody would believe that, and the Court didn’t and denied the charge as excessive.
At the end of the day, the Court awarded a little over $4.5 million in attorney fees and another about $200,000 in costs and expenses. More importantly, the liability for these amounts were to be borne jointly and severally by WFG, Derek and Peter, i.e., even though Derek and Peter suffered judgments of only $50,000 each, they were now both on the hook for over $4.7 million in attorney fees and costs, along with WFG.
It is important to note that this was the ruling of the Superior Court of Santa Barbara County, California, and thus is not final in the ultimate sense but rather subject to appeal to the California Court of Appeal. Unless the litigation settles (and it should), in a couple of years and a few hundred thousand more dollars in attorney fees on both sides, in a couple of years from now the California Court of Appeals will kick out an opinion that looks at the jury verdicts, final judgment and this attorney fees and costs award.
Some folks might think that it seems pretty unfair for somebody to only be liable for $50,000 yet have to face liability for $4.5 million in attorney fees for conduct that was mostly done by somebody else. What you have to understand, however, is that civil conspiracy and civil aiding & abetting theories are largely grounded in their criminal counterparts and this traditionally assigns liability to each individual based on the actions of the group as a whole. To take an easy example, the getaway driver of a bank robbery does not just get the liability for illegal parking or speeding, but instead will likewise be charged with liability for the full bank robbery.
This is what makes helping judgment debtors so dangerous. In our society, debtors should be paying their judgments and not trying to avoid them. Taking action to avoid the payment of judgments is wrong (and has been an acknowledge wrong since at least from the time of the ancient Romans), and folks who assist a debtor in doing that are similarly engaging in a wrong. Additional liability over and above the amount of the underlying judgment will be assessed to the former and to the latter as well. That is what has happened here.
It is understandable from a family standpoint that Derek and Peter would want to assist their brother in time of need, but helping a family member to avoid the payment of a judgment is beyond the acceptable or permissible. The case law in this area is replete with thousands of examples of family members getting caught up in fraudulent transfers, so much so that the fraudulent transfers have long defined family members as statutory “insiders” for whose activity will inherently be viewed with greater suspicion. As much as it might have hurt to say it at the time, Derek and Peter should have pronounced, “Well, that totally sucks but it is not our problem,” and thereby avoided nearly a half-million in additional attorney fees in addition to probably about a similar amount that they themselves spent trying unsuccessfully to defend themselves. In the end, Tracey would have been better off too.
As I have pointed out about a zillion times now, the line of demarcation between permissible asset protection planning and impermissible fraud on creditors is found at the time when a claim arises. A claim is an event giving rise to liability, and has nothing to do with a demand letter, filing of a lawsuit, or even a judgment. Once a claim arises, the voidable transaction and other laws become operable and the potential for liability becomes very real for those who assist the debtor in dodging the claim. Here, the claim for liability arose when Tracy and Linda Westen sold their home with the construction defect and anything that happened later was not asset protection planning but simple fraud on creditors. When Derek and Peter stepped in to try to assist well after the claim had arisen, their liability for conspiracy and aiding & abetting creditor fraud materialized and metastasized into the judgment above.
This is where conspiracy and aiding & abetting theories are so dangerous for those who assist debtors. One of the most important things to understand is that it doesn’t matter whether the assistance was effective, but whether it occurred at all. Going back to our bank robbery example, let’s say that the getaway driver made a mistake and parked outside the wrong entrance to the bank so that when his compatriots came running out, he wasn’t there. In fact, he sat out the entire bankruptcy twiddling his thumbs and not accomplishing anything. Does that mean that he escapes liability? No! By agreeing to participate in the bank robbery scheme, the driver bought into liability for the entire scheme, even if he himself acted ineptly. That is what happened here, in that while the efforts of Derek and Peter were largely ineffective (the purchase of exempt annuities was unwound and the LLC was ultimately re-domiciled back to California) they were still part of the scheme.
Which is all to say that advising debtors who have an existing claim is very dangerous as it is, and getting increasingly dangerous as creditors explore new theories for holding third-parties co-liable for some or all of the underlying judgment. Indeed, here Derek and Peter were to an extent lucky that Nagel didn’t aggressively pursue a Civil RICO theory or some other theory such as unfair business practices that would have resulted in treble damages. The next folks who attempt to help a debtor might not be so lucky. It should also be noted that, as here, even if the damages that a jury awards against a coconspirator or aider & abettor, they may be still get clobbered by the joint and several liability that accompanies the attorney fees award.
As mentioned at the start of this article, the rulings discussed above are potentially subject to reversal on appeal and it is very likely that all of this will be appealed if for no other reason than that the dollars involved are pretty significant. In which case, the facts of this case may give us some good guidance from the California appellate courts about civil conspiracy and aiding & abetting theories applied to third-parties who assist a debtor in dodging the consequences of a judgment.
So stay tuned.