First Federal Sav. & Loan Ass'n of Galion, Ohio v. Napoleon

• Decision Date: 10 November 1998
• Parties: FIRST FEDERAL SAVINGS & LOAN ASSOCIATION OF GALION, OHIO v. Gilbert NAPOLEON & another. 1
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 350

701 N.E.2d 350

428 Mass. 371

FIRST FEDERAL SAVINGS & LOAN ASSOCIATION OF GALION, OHIO v. Gilbert NAPOLEON & another. ¹

Supreme Judicial Court of Massachusetts,

Middlesex.

Argued Oct. 8, 1998.

Decided Nov. 10, 1998.

Francis T. Talty, Lowell (Michael Talty, with him), for plaintiff.

Richard S. Milesky, Waltham, for defendants.

Before WILKINS, C.J., and ABRAMS, LYNCH, GREANEY, FRIED, MARSHALL and IRELAND, JJ.

FRIED, Justice.

A mortgage debt counts as a debt for purposes of the Uniform Fraudulent Conveyance Act (UFCA), G.L. c. 109A, § 2 (now repealed), and a conveyance by the debtor for less than a fair consideration should have been set aside under § 4 of the UFCA, even if the debtor may have been currently making payments required under the terms of an outstanding mortgage and even though the debtor was unable to continue to make such payments as they became due.

I

Debtor Gilbert Napoleon and his wife Arlene acquired a house and land as their principal residence (residence) in 1971. In 1982, with the assistance of a bank loan and mortgage, Napoleon purchased two condominiums for investment purposes. The condominium loan and mortgage were sold to the plaintiff, First Federal Savings & Loan Association of Galion, Ohio (bank). In April, 1991, Napoleon transferred his interest in the residence to a revocable trust, called "The Kids Trust" (trust). Napoleon made no further payments on the condominium loan to the bank after July, 1991. The bank foreclosed the mortgage on the condominium units in March of 1992, and in September of 1995, a deficiency judgment was entered in the amount of $123,663.01. The bank brought this action under § 4 of the UFCA to set aside the conveyance to the trust of Napoleon's interest in the residence. There was extensive discovery. At trial it was conceded that the conveyance of the residence, which has an equity of over $100,000, was made, in the words of the statute, "without a fair consideration," in this case for no consideration at all. It was further stipulated that the transfer of the residence "left Napoleon's total assets at $146,800 with liabilities of $235,000."

The judge ruled, however, that the bank had not proven that the requirements of § 4 had been met. That section provides:

"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 a fair consideration."

The definition of insolvency, contained in § 2 of the UFCA, provides that:

"a person is insolvent within the meaning of this chapter when the present fair salable value of his assets is less than the amount that will be required to pay his probable liability on his existing debts as they become absolute and mature."

The judge concluded that the bank had the burden of proving Napoleon's insolvency and that that burden could only be met by showing that "Napoleon was unable to meet his obligations as they came due." Indeed the bank, believing that no further showing was necessary, had rested on the stipulation as to Napoleon's assets and liabilities as sufficient to meet the definition of insolvency under the UFCA. The judge issued summary judgment, dismissing the bank's complaint. We granted the bank's petition for direct appellate review and now reverse.

II

We begin by noting that the UFCA had been repealed at the time of the hearing in the Superior Court in August, 1997, and replaced by the Uniform Fraudulent Transfer Act (UFTA). St.1996, c. 157 (effective Oct. 8, 1996). The UFTA carries the same chapter number as the UFCA. It is clear that the UFCA governs this case, as it was in force at the time of the conveyance in issue and we would not apply the new act retroactively. ² The rule regarding the retroactive application of statutes in Massachusetts is well settled:

"The general rule of interpretation is that all statutes are prospective in their operation, unless an intention that they shall be retrospective appears by necessary implication from their words, context or objects when considered in the light of the subject matter, the pre-existing state of law and the effect upon existing rights, remedies and obligations.... It is only statutes regulating practice, procedure and evidence, in short, those relating to remedies not affecting substantive rights, that commonly are treated as operating retroactively, and as applying to pending actions or causes of action."

Child Support Enforcement Div. of Alaska v. Brenckle, 424 Mass. 214, 219, 675 N.E.2d 390 (1997), quoting Hanscom v. Malden & Melrose Gaslight Co., 220 Mass. 1, 3, 107 N.E. 426 (1914). Though no Massachusetts court has addressed the question of the retroactivity of the UFTA, a United States Bankruptcy Court for the District of Massachusetts has held that, under Massachusetts law, the UFTA should not be applied retroactively. In re Granderson, 214 B.R. 671, 675 (Bankr.D.Mass.1997). The court there found the UFTA, even including the statute of limitations provision, to be substantive rather than merely remedial. The court found no evidence of a legislative intention that the UFTA apply retroactively. Id. The First Circuit has implicitly come to the same conclusion. In re Rauh, 119 F.3d 46, 48 n. 2 (1st Cir.1997) (applying the UFCA rather than the UFTA where all relevant events, including trial, occurred before effective date of UFTA explaining simply "[t]he Uniform Fraudulent Transfer Act ['UFTA'] did not take effect in Massachusetts until well after these transactions"). ³

A

The judge ruled that because the bank had offered no evidence that Napoleon was unable to make the regular payments required to service his mortgage debt, it had not been shown that he was insolvent at the time of the conveyance, nor that the conveyance rendered him so. Thus the judge's ruling required that a transferor be shown to be insolvent "in the equitable sense." See In re Vadnais Lumber Supply, Inc., 100 B.R. 127, 137 (Bankr.D.Mass.1989) ("The concept of equitable insolvency, inability to pay debts as they mature, is well known"), citing Revised Model Business Corp. Act, § 6.40 (1984). The bank, by contrast, takes the position that insolvency is established for purposes of § 4 of the UFCA if the conveyer's balance sheet is in, or is put by the conveyance into, a negative position. The stipulation of the parties clearly shows that without the full equity value of the property conveyed in April counting as an asset, Napoleon's balance sheet showed a significant excess of liabilities over assets.

The definition of insolvency in the UFCA speaks of "probable liability on [the conveyor's] existing debts as they become absolute and matured." The judge fastened on the word "probable" to support his interpretation: "The statute requires proving not merely that the existing debts exceeded the assets, but that the excess came from probable liability on those debts ..., i.e., payment that is immediately due, like this forthcoming month's mortgage payment, rather than the entire unpaid balance of the note" (emphasis in the original). The judge cites for his conclusion In re Goldstein, 194 B.R. 1 (Bankr.D.Mass.1996). But that case will not bear the weight which he put upon it. The debtor in In re Goldstein had made a $200,000 conveyance for no consideration. At the time of the conveyance he had assets of over $3 million, "contingent liabilities" of over $10 million and other liabilities of $862,000. The bankruptcy judge ruled that the plaintiff had not met his burden of proving the debtor's insolvency.

"To establish insolvency, [the plaintiff] must do more than establish that debts exceeded assets. The statute requires proof that assets were exceeded not by existing debts but by 'probable liability' on existing debts. G.L. c. 109A, § 2. Contingent liability is not per se probable. To establish that a contingent liability was probable, the [plaintiff] must show that its contingency was likely to occur, such that the liability was likely to become fixed. He has offered no evidence of probability. Therefore, the contingent liabilities cannot at this juncture be counted as probable, the Trustee has failed to establish insolvency, and his motion for summary judgment must be denied."

Goldstein, supra at 2. The judge below drew the conclusion that an undoubted debt, like a mortgage debt, not yet due and owing, is the kind of "contingent liability" discussed in Goldstein. The debtor urges examples of persons who have guaranteed loans, or who are under contractual obligations, as illustrating contingent liabilities which should not be counted against the assets of a debtor. See Matter of Xonics Photochemical, Inc., 841 F.2d 198, 199-200 (7th Cir.1988); In re Consolidated Capital Equities Corp., 175 B.R. 629, 632 (Bankr.N.D.Tex.1994). And perhaps they should not be, but they are contingent upon the happening of uncertain circumstances. Similarly, the example of monthly rent obligations under a lease cannot simply be added up and counted as a liability, at least not if the leasehold is not counted as a corresponding asset. But in the case of a fixed obligation like a mortgage or an instalment loan, even though payments are due periodically and the loan cannot be called in except on default of those payments, to call the outstanding principal amount of the debt contingent begs the very question before us. The principal amount of the mortgage debt is not contingent, in the sense that a loan guarantee or the liability that may occur if a person breaches a contract is contingent. The contingency here, if it is one, is the continued payment of the instalments provided for in the loan instrument, and the very question we must answer is whether the whole unpaid amount of the mortgage constitutes an "existing debt" or whether a debtor's "existing debts" include only the obligation to make the particular ...