ANDREW H. WILSON, ESQ., SBN 063209
LINDA M. FONG, ESQ., SBN 124232
WILSON CAMPILONGO LLP
115 Sansome Street, Suite 400
San Francisco, California 94104
(415) 391-3900
(415) 954-0938 (fax)

KENDRICK MOXON, ESQ., SBN 128240
MOXON & BARTILSON
6255 Sunset Boulevard, Suite 2000
Hollywood, CA 90028
(213) 953-3360
(213) 953-3351 (fax)

Attorneys for Plaintiff/Judgment Creditor

SUPERIOR COURT OF THE STATE OF CALIFORNIA

FOR THE COUNTY OF MARIN

I.

INTRODUCTION

By this application, plaintiff Church of Scientology International ("CSI") seeks to attach the proceeds payable under a homeowner's policy for a fire which burned down a residence, originally owned by defendant Gerald Armstrong ("Armstrong"), and subsequently fraudulently transferred to defendant Michael Walton ("Walton"). Under the Uniform Fraudulent Transfer

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Act, a creditor may obtain an attachment against the asset transferred or its proceeds.

II.

PROCEDURAL BACKGROUND

On or about December 6, 1986, CSI and Armstrong entered into a written confidential Settlement Agreement (the "Agreement"). The Agreement settled outstanding litigation between CSI and Armstrong according to certain terms and conditions. As part of the settlement, Armstrong was paid $800,000.

In or about February, 1990, Armstrong began to take a series of actions which directly violated provisions of the Agreement. Fearing that plaintiff would seek to collect the liquidated damages owed by his breaches, Armstrong fraudulently conveyed all of his property, including a residence commonly known as 707 Fawn Drive, San Anselmo, California (the "Residence") to defendant Walton, receiving no consideration in return. On August 27, 1990, the grant deed to the Residence was recorded in Marin County Official Records as number 90 50497 in the Office of the County Recorder of Marin County, California.

Armstrong's breaches and resulting indebtedness arise in the context of a state court action for breach of contract filed in February 1992, in the action entitled Church of Scientology International v. Gerald Armstrong, Marin County Superior Court, Case No. 157 680 (the "State Court Action").

The present action was filed on July 23, 1993, alleging the fraudulent transfers referenced above.

On October 5, 1995, the Court granted plaintiff's motion for summary adjudication of the 13th, 16th, 17th and 19th causes of action asserted in the Second Amended Complaint and in connection therewith entered an order of permanent injunction against Armstrong. On January 27, 1995, the Court granted plaintiff's motion for summary adjudication of the th and 6th causes of action.

In April 1995, Armstrong filed a Chapter 7 petition in the U.S. Bankruptcy Court, Northern District of California,thus automatically staying both actions. CSI then sought relief from stay to proceed in the State Court Action. In May 1995, the Bankruptcy Court granted the

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request to pursue the State Court Action as to injunctive relief but denied relief from stay of the fraudulent conveyance claims, which the court stated belonged to the bankruptcy estate. The trustee decided not to pursue the claims asserted herein; CSI moved the Bankruptcy Court to require the Trustee to abandon the claims to plaintiff. That motion was granted in February 1996.

In June 1996, the Bankruptcy Court granted CSI's application to require the trustee to abandon the claims alleged in this action.

III.

FACTUAL BACKGROUND

In August 1990, Armstrong transferred all of his assets to third parties, including the conveyance of the Residence to Walton, his longtime friend and attorney. Deposition of Michael Walton (the "3/94 Walton Depo. ") at p. 78, attached as Exhibit A to the Declaration of Andrew H. Wilson (the "Wilson Decl."); Deposition of Solina Walton (the "Solina Depo.") at p. 60, attached as Exhibit B to the Wilson Decl.; Depositions of Gerald Armstrong (the "6/92 Armstrong Depo.") at p.164, (the "7/92 Armstrong Depo.") at pp. 267 and 269, and (the "3/94 Armstrong Depo.") at pp. 73 and 79, attached as Exhibit C to the Wilson Decl. In the past, Armstrong gave Walton gifts and Armstrong attended the wedding when Walton married his fiancee, Solina. Solina Depo. at pp. 13 and 50.

Armstrong received no consideration for this transfer of the Residence to Walton; it was a gift based upon Armstrong's vision from God. 2/93 Walton Depo. at p. 39; Solina Depo. at 28.

After the transfer, Armstrong continued to live in the Residence from August 1990 through August 1991. 3/94 Walton Depo. at pp. 42 and 79; Solina Depo. at pp. 19 and 23; 3/94 Armstrong Depo. at p. 95. In fact, when Armstrong moved out, he probably kept a key to the house and didn't actually move out until January 1992. Solina Depo. at pp. 80 and 82.

Subsequently, Walton transferred the Residence to his wife, Solina to assist in a refinance because Walton's credit was poor and she understood that she needed to roll over the profits from the sale of her home into the Residence in order to defer capital gains taxes. Solina Depo. at p. 91; 3/94 Walton Depo. at pp. 48-49. On or about April 16, 1997, the Residence burned down.

Wilson Decl. at ¶13.

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IV.

A CREDITOR IN A FRAUDULENT TRANSFER ACTION MAY OBTAIN A WRIT OF ATTACHMENT AGAINST THE ASSET TRANSFERRED OR ITS PROCEEDS

A writ of attachment allows a plaintiff, in certain prescribed instances to obtain a pretrial seizure of the property of a defendant-debtor. Whitehouse v. Six Corp. (1995) 40 Cal.App.4th 527, 533. A plaintiff who suspects that the defendant-debtor has fraudulently transferred assets in order to become judgment proof may also enforce its claim against the transferred property by way of a writ of attachment. Id. Civil Code § 3439.07(a)(2) provides that in an action for relief against a fraudulent transfer, the creditor may obtain an attachment against the asset transferred or its proceeds in accordance with the procedures described in the attachment statutes, Code of Civil Procedure¹ Sections 481.010, et seq.

Pursuant to the foregoing, CSI has a right to attach the fire insurance proceeds to the Residence fraudulently transferred to Walton by debtor Armstrong.

V.

CSI IS ENTITLED TO A JUDGMENT OF FRAUDULENT CONVEYANCE AGAINST TRANSFEREE MICHAEL WALTON

Section 484.030 requires that the application for right to attach order and writ of attachment be supported by an affidavit showing that the plaintiff on the facts presented would be entitled to a judgment on the claim upon which the attachment is based. Here there is ample evidence that CSI is entitled to a judgment arising out of the fraudulent transfer of the Residence from debtor defendant Gerald Armstrong to defendant Michael Walton.

Any 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 obligation was incurred, if the "debtor made the transfer or incurred the obligation ...with actual intent to hinder, delay or defraud any creditor of the debtor". Civil Code §3439.04. The creditor, in an action for relief

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¹ Unless otherwise stated, all section references are to the Code of Civil Procedure.

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against such a transfer or obligation, may obtain avoidance of the transfer or obligation to the extent necessary to satisfy the creditor's claim. §3439.07(a)(1). Further, to the extent a transfer is voidable under the foregoing statutory provisions, a creditor may recover judgment against the transferee for the lesser of the value of the asset transferred or the amount necessary to satisfy the creditor's claim. §3439.08(b).

In determining the existence or nonexistence of actual intent to hinder, delay or defraud creditors, courts have given consideration to the various "badges of fraud" - whether the transfer or obligation was to any insider; whether the debtor has retained possession or control of the transferred property; whether the debtor has absconded; whether the debtor had removed or concealed assets; whether the debtor was sued or threatened with suit before the transfer was made or obligation was incurred; whether the transfer was of substantially all of the debtor's assets; whether the debtor was insolvent or became insolvent shortly after the transfer was made or obligation was incurred. Legislative Committee Comment-Assembly (1986 Addition) to Civil Code §3439.04.

The fraudulent transfer statutes were designed for the protection of creditors and to protect a debtor's estate from being depleted to the prejudice of the debtor's unsecured creditors. See, Lewis v. Superior Court (1994) 30 Cal.App.4th 1850, 1873.

A. Armstrong Anticipated That He Would Be Sued by CSI.

By their own testimony, Armstrong and Walton have admitted that the transfer of the Residence was for the purpose of hindering, defrauding and delaying the execution of the judgment to be obtained in the underlying action.

Before Armstrong even signed the Agreement, he anticipated that he would breach it and a lawsuit would ensue because he knew that it was impossible to honor it. 6/92 Armstrong Depo. at pp. 83-87, 102-103, 123-124, 151 and 173-174, Walton and Armstrong discussed this very issue for "an hour or two" before Armstrong signed the Agreement. 2/93 Walton Depo. at p. 27; 6/92 Armstrong Depo. at pp. 163-164. At the time he executed the Agreement, Armstrong understood that in his legal counsel's opinion, the Agreement was unenforceable. Id.

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B. Walton Colluded with Armstrong In Fraudulently Transferring Armstrong's Assets.

Walton admits that, in the Summer of 1990, he knew that Armstrong intended to give away "most of his worldly possessions." 3/94 Walton Depo. at p. 28. Indeed, Walton and the other beneficiaries of Armstrong's "vision" met to discuss Armstrong's plan to give them all of his assets. Michael Douglas Depo. at pp. 21-22.

C. Armstrong Transferred All or Substantially All of His Assets in August 1990 to Insiders.

In August 1990, Armstrong transferred all of his assets to third parties, including the conveyance of the Residence to Walton, his longtime friend and attorney. 3/94 Walton Depo. at p. 78; Solina Depo. at p. 60; 6/92 Armstrong Depo. at p. 164; 7/92 Armstrong Depo. at pp. 267 and 269; and 3/94 Armstrong Depo. at pp. 73 and 79. In the past, Armstrong gave Walton gifts and Armstrong attended the wedding when Walton married his fiancee, Solina. Solina Depo. at pp. 13 and 50.

D. There Was No Valid Consideration Exchanged.

Armstrong received no consideration for this transfer of the Residence to Walton; it was a gift based upon Armstrong's vision from God. 2/93 Walton Depo. at p. 39; Solina Depo. at p. 28.

E. Armstrong Retained Possession and Control of the Residence After It was Transferred to Walton.

After the transfer, Armstrong continued to live in the Residence from August 1990 through at least August of 1991, (3/94 Walton Depo. at pp. 42 and 79; Solina Depo. at pp. 19 and 23; 3/94 Armstrong Depo. at p. 95), and probably continued to reside there until January 1992. Solina Depo. at pp. 80 and 82.

Substantial evidence exists to demonstrate that CSI would be entitled to a judgment on its claim for fraudulent transfer of the Residence. Accordingly CSI has a right to attach the proceeds paid under the fire insurance policy on the Residence.

VI.

CSI'S CLAIM IS IN A READILY ASCERTAINABLE AMOUNT

Section 483.010 provides in relevant part that an attachment may issue only in an action

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on a claim where the total amount of the claim or claims is "a fixed or readily ascertainable amount." In Brainard v. Rogers (1925) 74 Cal.App.247 the court allowed garnishment of the proceeds of a fire insurance policy by creditors of the insured before the insured had executed and delivered the formal proof of loss or the insurance company had made an adjustment or appraisal of the loss. The court held that in the case of fire insurance proceeds, where liability already exists and the policy furnished the required standard by which the amount of the liability can be ascertained and fixed, then such liability is a debt owing to the insured within the meaning of the attachment statutes. See, Brunskill v. Stutman (1960) 186 Cal.App.2d 97, 104-105 citing; see also, Department of Water & Power v. Inyo Chem. Co. (1940) 16 Cal.2d 744, 750.

Here, CSI is entitled to attach the proceeds of the fire insurance policy on the Residence regardless of whether the Waltons have filed a formal proof of loss.

VII.

CONCLUSION

Based on the foregoing, CSI respectfully submits that it is entitled to a right to attach order and writ of attachment attaching the proceeds of the fire insurance policy on the Residence.

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ANDREW H. WILSON, ESQ., SBN 063209
LINDA M. FONG, ESQ., SBN 124232
WILSON CAMPILONGO LLP
115 Sansome Street, Suite 400
San Francisco, California 94104
(415) 391-3900
(415) 954-0938 (fax)

KENDRICK MOXON, ESQ., SBN 128240
MOXON & BARTILSON
6255 Sunset Boulevard, Suite 2000
Hollywood, CA 90028
(213) 953-3360
(213) 953-3351 (fax)

Attorneys for Plaintiff/Judgment Creditor

SUPERIOR COURT OF THE STATE OF CALIFORNIA

FOR THE COUNTY OF MARIN

PROOF OF SERVICE

I declare that I am employed in the City and County of San Francisco, California.

I am over the age of eighteen years and not a party to the within entitled action. My business address is 115 Sansome Street, Suite 400, San Francisco, California.

I am readily familiar with Wilson Campilongo LLP's practice for collection and processing of correspondence by mailing with the United States Postal Service.

On May 13, 1997, I caused the attached copy of NOTICE OF APPLICATION AND HEARING FOR RIGHT TO ATTACH ORDER; ORDER FOR ISSUANCE OF WRIT OF ATTACHMENT; APPLICATION FOR RIGHT TO ATTACH ORDER; ORDER FOR ISSUANCE OF WRIT OF ATTACHMENT AFTER HEARING; MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF APPLICATION FOR RIGHT TO ATTACH AN ORDER FOR ISSUANCE OF WRIT OF ATTACHMENT AFTER HEARING; and DECLARATION OF ANDREW H. WILSON IN SUPPORT OF MOTION FOR RIGHT TO ATTACH AN ORDER FOR ISSUANCE OF WRIT OF ATTACHMENT AFTER HEARING on the following in said cause, by placing for deposit with the United States Postal Service on this day in the ordinary course of business, true copies thereof enclosed in sealed envelopes. The envelopes were addressed as follows:

Gerald Armstrong
715 Sir Francis Drake Blvd.
San Anselmo, California 94960

Michael Walton
700 Larkspur Landing Circle, #120
Larkspur, CA 94939

I declare under the penalty of perjury under the laws of the State of California that the foregoing is true and correct. Executed at San Francisco, California on May 13, 1997.