Wayne Hullett, individually and as Trustee of WEH Trust U/A v Mr. and Mrs. George Cousin, as Trustees for Cousin Corporation Pension Plan and Trustee, CPI of Florida Profit Sharing Plan et al.

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SUPREME COURT OF ARIZONA En Banc WAYNE HULLETT, individually and as TRUSTEE of WEH TRUST U/A 12/6/90, Plaintiff-Appellant, TFILED1 I FEB24 2083 NOELK~DESSA~NT CLERKSUPREMECO~ ) ) Arizona Supreme Court No. CV-01-0407-PR ) Court of Appeals Division One No. 1 CA CV 00 0550 v. MR. and MRS. GEORGE COUSIN, as ) Trustees for Cousin Corporation ) Pension Plan and Trust, CPI OF FLORIDA PROFIT SHARING PLAN, NUNO INVESTMENT COMPANY, ROBERT W. FREMONT, DR. JEROME THEIS, as ) Trustee for Tn-County Clinic, Inc., Profit Sharing Plan, ANTHONY BARBERA, as Trustee for BC and L Pension Plan, RICHARD N. GOLD, as Trustee for R.N. Gold and Company, Inc., Pension, PROFESSIONAL FINANCIAL MANAGEMENT, COMMERCIAL BANK-TEXAS, as Custodian for Eloise Payne IRA Account, DR. LEO HERBER, RAYMOND JAMES AND ASSOCIATES, as Custodian for Robert L. Thompson IRA Account, ROBERT J. AND MARTINE N. GREGORY, as Trustees for the Gregory Family Trust, RESOURCES TRUST COMPANY, as Trustees of Robert W. Fremont IRA, Maricopa County Superior Court No. CV 98-19294 0 P I N I 0 N Defendants Appellees. Appeal from the Superior Court in Manicopa County The Honorable Jeffrey A. Hotham, Judge REMANDED Opinion of the Court of Appeals, Division One Huilett v. Cousin, 201 Ariz. 119, 32 P.3d 44 (App. 2001) VACATED WARNICKE & LITTLER, P.L.C. By Ronald E. Warnicke Robert C. Warnicke Blake D. Gunn Attorneys for Plaintiff Appellant Phoenix BROENING OBERG WOODS WILSON & CASS, P.C. Phoenix By Loni B. Kirsch-Goodwin Donald Wilson, Jr. Cynthia Y. Kirkland Attorneys for Defendants-Appellees Cousin Corporation Pension Plan & Trust, Resources Trust Company, as Trustees for Robert W. Fremont IRA, CPI of Florida Profit Sharing Plan, Estate of Eloise Payne and Dr. Leo Herber R Y A N, ¶1. Justice Under Arizona s Uniform Fraudulent Transfer Act ( UFTA ), a transfer is fraudulent as to a creditor whose claim arose before the transfer if, as a result of the transfer, the debtor becomes insolvent and the transfer was not made in exchange for reasonably equivalent value. Aniz. Rev. Stat. ( A.R.S. ) § 44 1005 The central issue in this case is whether an unknown, (1994) unasserted, and presumably time barred claim rendered a partnership insolvent when the partnership transferred its assets. We hold that such a claim must be disregarded if found to be time-barred at the time of the transfer, Because the parties dispute whether the claim here was time-barred when the transfer occurred, we vacate the court of appeals opinion and remand to the trial court for further proceedings. I. ¶2 BACKGROUND Suncrest Villa Associates Limited Partnership was formed 2 in 1983, apparently for the purpose of investing in an apartment complex. Suncrest was funded with capital contributions from its general and limited partners. Clifton Investment Company and Rodger J. Clifton were Suncrest s general partners and Defendants Appellees were Suncrest s limited partnefs. ¶3 In apartment complex payment of secured by a deed and Plaintiff Appellant was and of a promissory trust. unable In April 1994, to a distress make Suncrest s buyer note Hullett to trustee s sale of the complex. 1994 Hullett purchased from Suncrest for $1.375 million, $250,000 difficulties complex. 1989, for with $l.125 encountered payments on an a cash million, financial the apartment trustee recorded a notice of Hullett sold the complex in October and Suncrest accepted a discounted payoff of Hullett s note. ¶4 Under the original limited partnership agreement, Suncrest was forced to dissolve upon accepting payoff of Hullett s note. The agreement all of the loans discosed of and stated that the partnership would funded by all other [Suncrest were] assets converted end when repaid or otherwise to cash. Suncrest distributed its assets to the general and limited partners and was deemed dissolved as of October 25, ¶5 partner, 1994. In December 1995, Hullett sued Suncrest and its general Clifton, for negligent misrepresentation arising out of the 1989 sale of the apartment complex 3 to Hullett. The alleged misrepresentation expenses and concerned income. the Hullett apartment did partners as defendants in the suit. filed an answer, complex s not~name operating Suncrest s limited Neither Suncrest nor Clifton and in November 1996 the trial court entered a $500,000 default judgment in favor of Hullett against Suncrest and Clifton, jointly and severally. Hullett was unable to collect the judgment because both Suncrest and Clifton were insolvent. ¶6 In October 1998, Hullett sued Suncrest s limited partners for fraudulent transfer. distribution of assets, it. Hullett alleged that at the time of the Suncrest knew of Hullett s claims against He also asserted that Suncrest was either insolvent at the time of the distribution or that the distribution rendered Suncrest insolvent. He therefore alleged that the transfer of Suncrest s assets was fraudulent. Hullett sought judgment against the limited partners in the amount each received in the distribution up to the default judgment amount. ¶7 The trial court Suncrest, reasoning that granted summary judgment in favor [t]he transferred distribution was of in exchange for the partnership s legal obligation to return capital and profit. had The court found no evidence that the limited partners any intent, actual or constructive, to defraud, hinder or delay any creditor, no evidence of bad faith, and no evidence that Suncrest was insolvent at the time of the distribution. The trial court also found that Suncrest had no outstanding liabilities and 4 no notice of any claims or debts at the time of distribution, and that Hullett did not raise his claim until fourteen months after the dissolution. ¶8 The court of appeals reversed, finding that a claim does not have to be asserted before a limited partnership dissblves to render it insolvent at dissolution. 119, 123, concluded assets, ¶ 11, that not 32 P.3d limited debts, and 44, Huilett v. 48 (App. partnership that their Cousin, 2001). capital The 201 Ariz. court also contributions distribution at are Suncrest s dissolution was fraudulent because it caused the liabilities of the partnership to exceed the value of its assets. 32 P.3d at 48. Additionally, the court Id. at 123, reasoned 91 15, that the distributions were undisputedly made without receiving a reasonably equivalent value Id. at 124, ¶ in exchange, which rendered Suncrest insolvent. 17, 32 P.3d at 49. The court remanded with directions that the trial court enter summary judgment in favor of Hullett. Id. at 124, ¶9 We granted ¶91 17-18, 32 P.3d at 49. review to examine whether an unknown and presumably time-barred claim must be considered in determining if a partnership was insolvent when it transferred its assets to its limited partners. II. ¶10 The dispute here DISCUSSION is essentially this. The limited partners contend that an unknown and presumably time barred claim 5 should not be considered in determining whether the partnership was insolvent on the date of contends that even its dissolution. unasserted and In contrast, wholly unknown Hullett claims are considered in determining whether a transfer rendered a partnership insolvent. Because this is largely interpretation, our review is de novo. 50 v. W.E.S. Const. Co., 177 Aniz. an issue of statutory See Cannon School List. No. 526, 529, 869 P.2d 500, 503 (1994). A. ¶11 1990. Arizona enacted the Uniform Fraudulent 1990 Aniz. Sess. Laws, ch. 17, §~1 2. Transfer Act in Arizona s version of the UFTA was based upon the uniform act promulgated by the National Conference of Commissioners on Uniform State Unif. Fraudulent replaced which Transfer Act, Arizona s Uniform had been on the books 7A U.L.A. Fraudulent since 267 Laws (1999) Conveyance 1919. in 1984. . Act See The UFTA ( UFCA ), See 1919 Aniz. Sess. The UFCA, in turn, replaced earlier legislation pertaining. to fraudulent conveyances. See Rev. Stat. Aniz. Civil Code §~ 3272 82 (1913); Rev. Stat. Aniz. §~ 2696 2708 (1901); Rev. Stat. Aniz. §~ 2030 38 (1887) ; Howell Code, ch. XXXVI, §~ 1 26 (1864) The origins of such legislation been traced as follows: [T]he Statute of 13 Elizabeth, invalidated covinous and fraudulent transfers designed to delay, hinder or defraud creditors and others. 13 Eliz., ch. 5 (1570) English courts soon developed the doctrine of badges of fraud : proof by a creditor of certain objective facts (for example, a transfer to a close relative, a secret transfer, a transfer of title without transfer of possession, or grossly inadequate consideration) would raise a rebuttable presumption of . . 6 . . Laws, ch. protect 131, §~ 1-14. creditors, Conveyance Act, Like the UFCA, See 7A U.L.A. Prefatory 2 (1999) . the UFTA s purpose is tc Note to Unif. The UFTA is Fraudulent set forth in A,R.S; sections 44 1001 to 1010. Under the UFTA, fraudulent transfers are subdivided into ¶12 two categories: 1004 (A) (1), actually fraudulent transfers, A.R.S. section 44 and constructively fraudulent sections 44 1004 (A) (2) and 44 1005. transfers, A.R.S. Only A.R.S. section 44 1005 is at issue here. Under A.R.S. ¶13 section 44 1005, constructive fraud occurs when an exchange lacks reasonably equivalent value and the debtor was insolvent result of at the that time on transfer. No the debtor became proof of intent insolvent is as required a to maintain a fraudulent transfer action under A.R.S. section 44-1005. Nor is a good faith defense available to a debtor in a fraudulent transfer action brought under this section. See A.R.S. § 44- actual fraudulent intent. See Twyne s Case, 3 Coke Rep. 80b, 76 Eng.Rep. 809 (K.B. 1601); 0. Bump, Fraudulent Conveyances: A Treatise upon Conveyances Made by Debtors to Defraud Creditors 31 60 (3d ed. 1882) BFP v. Resolution Trust Corp., 511 U.S. 531, 540 41 (1994). 2 The limited partners argue that Hullett s fraudulent transfer action was brought only under A.R.S. section 44 1004 (A) (1), which requires proof of an actual intent to defraud any creditor of the debtor. And because there is no evidence of actual intent to defraud, the trial court s ruling must be affirmed. However, we agree with the court of appeals implied finding that Hullett s complaint adequately alleged a fraudulent transfer under A.R.S. section 44-1005. . 7 . 1008(A); In re Viscount D. Aniz. Air Servs., Inc., 232 B.R. 416, 445 (Bankr. (finding good faith defense inapplicable to A.R.S. 1998) section 44 1005) ¶14 A indirect, absolute transfer is defined or conditional, as every voluntary or mode, direct or involuntary, of disposing of or parting with an asset or an interest in an asset. A.R.S. § 44 1001(9). The definition thus includes the distribution of assets at dissolution of a partnership. ¶15 that Insolvency is defined at A.R.S. section 44-1002. section, partnership s valuation, value of a partnership debts is greater of all of [its] each general is than The UFTA the if the sum the at aggregate, of a fair assets and the sum of the excess of the partner s partner s nonpartnership debts. ¶16 insolvent Under defines nonpartnership A.R.S. debt as assets over the § 44 1002(0), liability on a claim. A.R.S. § 44 1001(4). A claim is defined as a right to payment, whether right or not unliquidated, the fixed, is contingent, undisputed, legal, equitable, 1001 (2) . reduced to judgment, matured, liquidated, unmatured, secured or unsecured. disputed, A.R.S. § 44- By the plain language of its definition, a claim need not be reduced to a judgment, nor need it be asserted to qualify it as right to payment. ¶17 The limited partners first argue that the rule established by the court of appeals- that a claim does not have to 8 be asserted to be considered in a solvency determination -would mean find that limited partners bound to an inactive entity, would themselves indefinitely with no means to protect from the possibility of future suit. themselves Thus they contend that a distribution of assets when there is no notice of a claim is proper under the UFTA. Hullett, on the other hand, argues that contingent claims that are unasserted and even wholly unknown are considered partnerships under would the UFTA. become If preferred they were vehicles not, for even . limited defrauding creditors. ¶18 Both sides overstate the issue. The limited partners would not be indefinitely bound to an inactive entity. An action under A.R.S. section 44-1005 is barred if not brought within four years after the transfer was made. A.R.S. § 44 1009(2). claim that forms the basis of the fraudulent Also, a transfer allegation brought under A.R.S. section 44-1005 need not necessarily be known. Otherwise, there would be no need for that section, because transfers made when a claim is known or asserted would potentially The parties assert at various points that the negligent misrepresentation claim here was contingent. Contingent claims are considered in a solvency analysis only if there is a likelihood, as of the date solvency is being measured, that the contingency will occur. See, e.g., In re Martin, 145 B.R. 933, 949 (Bankr. N.D. Ill. 1992) However, the underlying negligent misrepresentation claim is not a contingent claim. A contingent claim is one that has not yet accrued and is dependent on some future event that may never happen. Black s Law Dictionary 241 (7th ed. 1999). Hullett s claim undisputedly had accrued. The parties dispute, however, when that claim accrued. . 9 be actual fraudulent transfers under A.R.S. section 44-1004 (A) (1) ¶19 Nevertheless, under the UFTA, the claim upon which the fraudulent transfer action is based must be a valid claim. Thus, the core question here is whether Hullett s misrepresentation claim constituted a right to payment or a claim for UFTA solvency purposes although the claim was unknown and presumably time-barred when the partnership dissolved. ¶20 Because this is a matter of first impression for Arizona, we look to cases from other jurisdictions having similar statutes. For example, the Bankruptcy Code uses the same constructive fraud language as that found in Arizona s version of the UFTA. 11 U.S.C. § 548(a) (1) (B) (ii) (I) Compare (Supp. 2002) with A.R.S. § 44-1005. The Bankruptcy Code and the Uniform Laws Annotated s version of the Uniform Fraudulent Conveyance Act also define insolvent, debt, and claim similarly. 101(32) (B) (1997) § 101 (5) (A) 1001 (2) . key terms Compare 11 U.S.C. § (defining insolvent), § 101(12) (defining debt), (defining claim) and Unif. Fraudulent Conveyance Act §~ 1 2, 7A U.L.A. 6, 22 23 - the Thus, (1999) with A.R.S. §~ 44 1002 (0), 1001(4), we consider relevant bankruptcy and UFCA cases that address the definitions relevant to this case. ¶21 Two principles inform our answer to the core question. First, to set aside a transfer as fraudulent, there must have been a valid claim at payment. A.R.S. the time of the § 44-1001(2); transfer, see Cohen v. 10 meaning a right to De la Cruz, 523 U.S. 213, 218 (1998) (defining right to payment as nothing more nor less than an enforceable obligation ) (citation omitted) Second, . whether a claim rendered the partnership insolvent is determined as of the date of the transfer, partnership dissolved. or in this case, the date the A.R.S. § 44 1005; see also First Nat. Bank v. Frescoln Farms, Ltd., 430 N.W.2d 432, 437 (Iowa 1988) ( Solvency must be determined as of the time the alleged fraudulent transfer took place. ) ¶22 (citation omitted) The UFTA s definition of claim is unquestionably broadly worded. See A.R.S. § 44-1001(2). unasserted claims. In re W.R. (Bankr. D. Del. 2002) As such, it includes unknown and Grace & Co., 281 B.R. 852, 862 ( This expansive language [defining a claim] must negate any residual inference that a right to payment must be known and asserted to be a claim. ) claim broadly, such a Jahner v. . But while the UFTA defines a claim must be Jacob, an enforceable See, e.g., noted by the court history. Id. The rationale is that the UFTA is remedial; it does in not create new claims. P.2d 903, 904 (App. 1982) 515 N.W.2d 183, Jahner, Clark v. this 185 obligation. (N.D. requirement Rossow, 134 Aniz. 1994). has 490, a 491, As long 657 ( The fraudulent conveyance act, A.R.S. § 44 1001, et seq., does not create a new claim. not exist there is no remedy. ) (citations omitted) If a claim does . Accordingly, a claim that is time barred is not a right to payment. Jahner, 515 N.W.2d at 185; see also State of Rio Be Janeiro v. E.H. Rollins 11 & Sons, Inc., 87 N.E.2d 299, 300 v. Emory University, 196 S.E. ¶23 The limited negligent misrepresentation (N.Y. 1949); Remington Rand, 58, 59 partners (Ga. contend claim was Inc. 1938). that based because upon Hullett s actions that occurred in 1989, it was time barred when the partnership dissolved in 1994. The misrepresentation statute claim is of limitations two years. for A.R.S. § a negligent 12 542 (1992) Consequently, on its face, Hullett s fraudulent transfer action is based on a time-barred claim, and thus Hullett did not have a valid right to payment when the partnership dissolved. ¶24 Hullett makes two arguments against the limited partners contention that his misrepresentation statute of limitations. action was barred by the First, he argues that the limited partners raised the issue for the first time in their petition for review. Second, he argues that the limited partners are collaterally attack his original default judgment, arguments. attempting to We reject both We reject the first argument because in the court of appeals the limited partners argued that Hullett had no right to payment because he did not have a valid claim. They argued in their answering brief that a right to payment under a claim may be lost if not timely asserted, and that had the [misrepresentation] claim been brought against them originally, they would have been entitled to Therefore, raise defenses such as the statute of limitations. the record reflects that the limited partners are not 12 raising a new issue in this court. ¶25 We reject the second argument determined at the time of the transfer, A.R.S~ § 44 1005; Ill. ~992) insolvent In re Martin, (holding that in because not at 145 B.R. determining at time of the conveyances, 933, solvency is some later time. 949 whether (Bankr. a N.D. debtor was liability for compensatory damages arose when debtor committed torts of fraud and conversion, so such liabilities would be considered, even though damages had not been awarded) ¶26 Nonetheless, operates as an adjudication upon the merits of all well pleaded facts. Hullett contends that the default judgment And because his original complaint against the partnership alleged that he did not discover the negligent misrepresentation until January 1994, the limited partners impermissible collateral attack on [his] ¶27 judgment, collateral are attempting an original judgment. Although couched by Hullett as a collateral attack on the we view Hullett s estoppel. argument Garcia v. as the General Motors 510, 514 n.2, ¶ 8, 990 P.2d 1069, 1073 n.2 (App. estoppel, or issue preclusion, litigated in a opportunity to previous litigate Corp., 1999) use of 195 Aniz. Collateral . applies when an issue was actually proceeding, the offensive issue, there was resolution a full of the and fair issue was essential to the decision, a valid and final decision on the merits was entered, and there is common identity of parties. 13 See Collins v. Miller & Miller, Ltd., 189 Ariz. 387, 397, 943 P.2d 747, 757 (App. 1996) ¶28 We find it estoppel applies here. unnecessary to decide whether collateral For even in cases in which the technical requirements for the application of collateral estoppel are met, courts do not preclude issues when special circumstances See Ferris v. 135 Aniz. 660 (App. 1983) Hawkins, 329, 331, P.2d exist. 1256, 1258 ( Principles of issue preclusion should not be applied, however, where there is some overriding consideration of fairness to a litigant, which the circumstances of the particular case would dictate. ) (quoting Di Orio v. 329, 332, 408 P.2d 849, 852 City of Scottsdale, (1965)) . 2 Aniz. App. The Restatement of the Law of Judgments lists exceptions to the general rule of issue preclusion even though an issue may have been actually litigated and determined by a valid and final judgment : There is a clear and convincing need for a new determination of the issue (a) because of the potential adverse impact of the determination on the public interest or the interests of persons not themselves parties in the initial action, (b) because it was not sufficiently foreseeable at the time of the initial action that the issue would arise in the context of a subsequent action, or (c) because the party sought to be precluded, as a result of the conduct of his adversary or other special circumstances, did not have an adequate opportunity or incentive to obtain a full and fair adjudication in the initial action. Restatement ¶29 (Second) Judgments § 28(5) (1982) We conclude that the special circumstances of this case did not provide the limited partners an adequate opportunity 14 . . to obtain a full and fair adjudication Id. The limited statute of partners never limitations misrepresentation claim. had defense in the initial action. an opportunity against to the raise a negligent And because the general partner and the partnership defaulted, it would be inequifable to bind the limited partners statute partners to of the default limitations are judgment, issue.4 not estopped at least Therefore, from challenging with we respect ~to the hold the limited the validity of the initial claim on the basis that it was time barred at the time of the transfer. ¶30 been Because of the procedural posture of this case, there has no discovery misrepresentation trial court Ring, on the issue claim accrued. of when Hullett s Accordingly, we remand to for further proceedings on this issue. 202 Aniz. 310, 318, 91 30, 44 P.3d 990, 998 negligent the See Walk v. (2002) (finding that determination of when cause of action accrues is ordinarily a question of fact) B. ¶31 The limited partners also argue that even if Hullett s claim was valid, thus it was Constructive the transfer at dissolution was not fraud fraudulent under under A.R.S. A.R.S. section for value, section 44 1005 44 1005. requires The limited partners do not otherwise challenge the default judgment s finding of liability or damages. 15 and both insolvency and a transfer not for value. The court of appeals concluded that Suncrest s distribution to the limited partners was not a transfer for Hullett, 201 Aniz. value at 123, under ¶ 14, A.R.S. section 32 P.3d at 48. 44 1003(A) As pointed out by the court of appeals, distribution of a limited partner s capital contribution is the return antecedent debt. of an asset, Id. at 123, ¶ 15, not satisfaction 323 & n.1 1991) not in partnership) . 44-1003(A), a distribution limited a partnership We agree with this reasoning. partners, for of assets example an 32 P.3d at 48; see also In re Riverside-Linden Investment Co., 925 F.2d 320, (finding interest of is a (9th Cm. debt of the Under A.R.S. section previously advanced by the capital contributions, may return of value previously advanced to the partnership, be a but it is not a transfer for value. ¶32 Accordingly, if Hullett is able to establish that his misrepresentation claim was not time barred at the time Suncrest transferred its assets to the limited partners, creditor of Suncrest for purposes of A.R.S. he would section 44-1005. Section 44 1003(A), A.R.S., defines value as follows: Value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied, but value does not include an unperformed promise to furnish support to the debtor or another person unless the promise is made in the ordinary course of the promisor s business. 16 be a III. ¶33 opinion, CONCLUSION For the above reasons, we vacate the court of appeals and remand this matter to the trial court proceedings consistent with this opinion. Michael D. Ryan, CONCURRING: Charles E. Jones, Chief Justice Ruth V. McGregor, Vice Chief Justice Stanley G. Feldman, Justice Rebecca White Bench, (Retired) Justice 17 Justice for further

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