Federal Refinance Co., Inc. v. Klock
| Decision Date | 05 December 2003 |
| Docket Number | No. 02-1753.,No. 02-1654.,No. 02-2547.,02-1654.,02-1753.,02-2547. |
| Citation | 352 F.3d 16 |
| Parties | FEDERAL REFINANCE CO., INC., Plaintiff, Appellant, v. Deborah KLOCK et al., Defendants, Appellees. Federal Refinance Co., Inc., Plaintiff, Appellee, v. Deborah Klock et al., Defendants, Appellees. Frank Romano, Jr., Defendant, Appellant. |
| Court | U.S. Court of Appeals — First Circuit |
Judd L. Peskin, with whom Weiner and Peskin, P.C. was on brief, for plaintiff.
Valerie S. Carter, with whom Carter & Doyle, LLP was on brief, for defendant Klock.
Gary C. Crossen, with whom Rubin & Rudman, LLP, Valerie S. Carter, and Carter & Doyle, LLP were on brief, for defendant Romano and intervenor-defendant Essex Group, Inc.
Before SELYA, Circuit Judge, COFFIN, Senior Circuit Judge, and LIPEZ, Circuit Judge.
Many people think that securing a favorable judgment from a court of competent jurisdiction marks the end of a plaintiff's journey. In some instances, however, that is only a step along the road to meaningful relief. This is a case in point.
In 1997, Federal Refinance Co., Inc. (Federal) obtained a deficiency judgment for over $331,000 against Frank Romano, Jr. It spent the next five years trying to satisfy the judgment by levying upon Romano's principal asset (his shares of stock in a closely held corporation). When the stock proved elusive, Federal asked the district court to set aside a series of allegedly fraudulent transfers. The court's ensuing rulings did not entirely please either Federal or Romano. Both appeal.
We affirm the district court's bench decision (i) setting aside Romano's 1988 transfer of the shares to a family trust and (ii) upholding the creation and funding of certain limited partnerships. We are less sanguine, however, about the court's subsequent invalidation of yet a third transfer. See Fed. Refin. Co. v. Klock, 229 F.Supp.2d 26 (D.Mass.2002). Finding a procedural error, we vacate that order and remand for further proceedings.
The background facts are largely undisputed. In 1980, Wickford Realty Trust obtained a mortgage loan from Second National Bank. Romano unconditionally guaranteed repayment of the loan, which eventually went into default. Federal acquired the defaulted loan and conducted a foreclosure proceeding. Left with a deficiency, Federal looked to the guaranty and brought a diversity action against Romano in the United States District Court for the District of Massachusetts. On March 3, 1997, the court awarded Federal a judgment for $331,608.78.
Romano was thought to be a principal of a closely held corporation, Essex Group, Inc. (Essex), a holding company whose six wholly-owned subsidiaries each operated a nursing home. Before any of the transfers here at issue, Essex's shares were held 43.75% by Romano, 47.25% by his mother Mary, and 9% by the Doyle Family Trust.
When Federal attempted to satisfy the judgment by garnishing Romano's stock, it learned that the stock had flown the coop. In 1988, Romano had transferred 17,500 shares (the whole of his 43.75% equity interest), without pecuniary consideration, to a newly formed trust (the B & T Trust) of which he was the trustee and his children were the beneficiaries.
Federal's frustration grew even more pronounced when it discovered that, between 1991 and 1994, Essex had created three limited partnerships. Each had an Essex subsidiary as its general partner (with a 20% share of the profits) and Romano's wife, Deborah Klock, as its sole limited partner (with an 80% share of the profits). Moreover, the general partners had divested themselves of their real estate, each having spun off title to its nursing home into its limited partnership. These transactions arguably diluted the value of Essex's shares.
Since Romano did not appear to have other significant assets, Federal sued to get the shares back into his hands1 and to collapse the limited partnerships.
All of these claims were tried to the court. The trial ended in a bench decision handed down on April 23, 2002. As we explain below, each side got half a loaf.
The first count of Federal's complaint asked the court to invalidate the stock transfer as a fraudulent conveyance under section 4 of the Uniform Fraudulent Conveyance Act (UFCA).2 The UFCA's constructive fraud provision, in force in 1988, read:
Every 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 fair consideration.
Mass. Gen. Laws ch. 109A, § 4 (repealed 1996). The district court determined that Romano's 1988 conveyance violated this section. It set aside the transfer to the trust and decreed that the 17,500 shares of stock were "deemed to be in the unencumbered possession of ... Romano."
Counts II through IV of Federal's complaint alleged that the purpose and effect of the creation and funding of the partnerships was to dilute the value of Romano's stock. On this basis, Federal sought to collapse the limited partnerships. In mounting this attack, it relied upon both UFCA § 4, quoted supra, and UFCA § 7. The latter provision is an actual fraud provision. Throughout the relevant time frame, it read:
Every conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay or defraud either present or future creditors, is fraudulent as to both present and future creditors.
Mass. Gen. Laws ch. 109A, § 7 (repealed 1996).
The district court ruled against Federal on these counts. It rejected Federal's constructive fraud claim, finding that the corporations were the actual transferors and that they were not insolvent at the times of the transfers. The court likewise rejected the claim of actual fraud, crediting evidence that there was a legitimate business purpose behind the creation and funding of the limited partnerships, namely, that the restructuring was a prerequisite to obtaining needed financing from the United States Department of Housing and Urban Development (HUD).
Having won a partial victory, Federal filed a motion in aid of judgment on May 2, 2002. See Fed.R.Civ.P. 69(a). In that motion, Federal asked the district court to reach and apply the 17,500 shares of Essex stock. Much to Federal's dismay, it learned that the shares had slipped away again. The tale follows.
At some point (the exact time is immaterial for present purposes), Essex had purchased from another of Romano's creditors a $15,000,000 debt. See FDIC v. Elder Care Servs., Inc., 82 F.3d 524, 525-26 (1st Cir.1996) (). In late April of 2002 (whether before or after the date of the district court's bench decision is not entirely clear), Romano transferred his 17,500 shares to Essex, ostensibly in exchange for an $85,000 credit and a ten-year forbearance agreement on that indebtedness.
Faced with a Tantalean predicament, Federal promptly moved to reconsider the denial of its motion for the appointment of a receiver, see supra note 1, and to annul this most recent conveyance. Federal averred that the 2002 transaction should be rescinded as preferential. Because this latest transfer took place after the effective date of the Uniform Fraudulent Transfer Act (UFTA), that updated version of chapter 109A governed the claim asserted. The UFTA provides in pertinent part:
A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent.
Mass. Gen. Laws ch. 109A, § 6(b).
The district court saw no need to take evidence, but, rather, summarily voided the transfer as preferential. Fed. Refin., 229 F.Supp.2d at 28. The court also ensured that the elusive shares would stay put, enjoining Romano from transferring or encumbering them in any way that might interfere with Federal's efforts to reach and apply. Finally, as a sanction for Romano's misconduct during discovery, the court granted Federal's renewed motion for the appointment of a receiver to hold the shares for the time being. See id. at 28-29 & n. 2.
The parties have cross-appealed. With respect to the district court's bench decision, Romano challenges the order voiding the transfer to the B & T Trust whereas Federal challenges the order upholding the creation and funding of the limited partnerships. With respect to the district court's subsequent written decision, Romano and Essex — which has intervened — challenge the order invalidating the stock-for-credit-and-forbearance arrangement. In the pages that follow, we address these disputes sequentially.
UFCA § 4 sets out two basic conditions for setting aside a transfer on the ground of constructive fraud: the transferor must have (i) been insolvent at the time of the conveyance (or rendered insolvent by it), and (ii) made the conveyance without fair consideration. Boston Trading Group v. Burnazos, 835 F.2d 1504, 1510 (1st Cir.1987). A person is insolvent for these purposes when the readily realizable market value of his assets is less than the amount required to pay his existing debts as they become due. First Fed. Sav. & Loan Ass'n v. Napoleon, 428 Mass. 371, 701 N.E.2d 350, 353-55 (1998). Fair consideration is given in exchange for transferred property when, "as a fair equivalent therefor, and in good faith, [other] property is conveyed or an antecedent debt is satisfied." Boston Trading Group, 835 F.2d at 1512 (quoting former Mass. Gen. Laws ch. 109A, § 3...
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