Freitag v. McGhie

• Decision Date: 18 December 1997
• Docket Number: No. 64501-9,64501-9
• Citation: 133 Wn.2d 816,947 P.2d 1186
• Court: Washington Supreme Court
• Parties: Rommel FREITAG and Bernice Johnson Freitag, Petitioners, v. Frank W. McGHIE and Darlene T. McGhie, husband and wife, and Dorothy Lunn, as her separate estate, Respondents.

Page 816

133 Wn.2d 816

947 P.2d 1186

Rommel FREITAG and Bernice Johnson Freitag, Petitioners, v. Frank W. McGHIE and Darlene T. McGhie, husband and wife, and Dorothy Lunn, as her separate estate, Respondents.

No. 64501-9.

Supreme Court of Washington,

En Banc.

Argued May 21, 1997.

Decided Dec. 11, 1997.

As Amended Dec. 18, 1997.

Maier & Severance, P.C., by Laurence Severance, Seattle, for Petitioners

Sinsheimer & Meltzer, Inc. Lois Meltzer, Seattle, David Metcalf, Everett, for Respondents.

JOHNSON, Justice.

This case requires us to interpret the statute of limitations provision for the Uniform Fraudulent Transfer Act, RCW 19.40, and decide whether a claim

must be filed within one year after discovery of the transfer or one year after discovery of the fraudulent nature of the transfer. The trial court, after finding clear and satisfactory proof of fraudulent intent, dismissed Petitioners' action. The court ruled the claim was barred by the statute of limitations because it was not filed within one year after discovery of the transfer. The Court of Appeals granted a motion on the merits to affirm. We reverse the Court of Appeals and hold it is the fraudulent nature of the transfer which triggers the statute.

FACTS

Respondents Frank and Darlene McGhie operated a home loans business in which Petitioners Rommel and Bernice Freitag invested substantial sums of money between 1986 and 1989. These investments did not yield the expected results and the Freitags began to investigate the possibility of wrongdoing on the part of the McGhies. On March 20, 1990, the Freitags sued the McGhies for securities fraud and on September 8, 1993 won summary judgments.

As a result of the proceedings in the securities fraud suit, on August 28, 1991 the Freitags obtained, through their lawyer, a title report related to the McGhie family residence. The report revealed an assessed value of more than $126,000. The report also revealed, however, encumbrances in the following amounts: $3,753 in past due taxes and interest; $70,000 in a 1977 deed of trust; $51,200 in a 1989 second deed of trust; and $65,000, entered on October 26, 1989, in a third deed of trust, to Dorothy Lunn. No net equity remains in the home after subtracting the liens from the assessed value.

In early to mid July 1993, the Freitags received a personal financial statement from Frank McGhie, noting $65,000 owed on the residence to "E. Lunn." "E. Lunn" was Dorothy Lunn's deceased husband. On July 27, 1993, the Freitags received a copy of the $65,000 note to Dorothy Concerned the transfer might be fraudulent, the Freitags deposed Frank McGhie and Dorothy Lunn in early and late November 1993. During his deposition, Frank McGhie revealed the family relationship between himself and Lunn.

Lunn and on October 3, 1993, the Freitags traveled to Salt Lake City, Utah to meet with Ms. Lunn. Lunn repeatedly denied ever loaning any money to the McGhies. At that point, the Freitags believed "something was haywire."

On November 30, 1993, the Freitags filed the instant suit to set aside the transfer as fraudulent. The trial court found the following facts: (1) the third deed of trust was issued to an insider, Dorothy Lunn, who was Darlene McGhie's aunt, with whom she shared a close relationship; (2) at the time the deed of trust was issued, the McGhies were facing the possibility of substantial judgments against them; (3) this deed of trust eliminated the McGhie's equity in their last asset and rendered them insolvent; and (4) the $65,000 deed of trust transfer from the McGhies to Lunn was not received in exchange for adequate consideration and the facts established proof of actual fraudulent intent by the McGhies.

The trial court, however, dismissed the action, finding the Freitags had filed their claim too late, based on the extinguishment provisions of the Uniform Fraudulent Transfer Act (UFTA). RCW 19.40.091(a). The court found the last possible date from which the one-year discovery period in the statute should run was August 29, 1991, when the Freitags discovered the existence of the deed of trust. Because the instant claim was filed later than one year from this date, the court dismissed the action.

The Freitags appealed and the McGhies filed a motion on the merits to affirm. The Court of Appeals Commissioner granted the motion, ruling the extinguishment provisions of the UFTA barred the Freitags' claim. In so ruling, the Commissioner relied on the Court of Appeals

opinion in McMaster v. Farmer, 76 Wash.App. 464, 886 P.2d 240 (1994).

ANALYSIS

The statute of limitations for the UFTA states:

A cause of action with respect to a fraudulent transfer or obligation under this chapter is extinguished unless action is brought:

(a) Under RCW 19.40.041(a)(1), within four years after the transfer was made or the obligation was incurred or, if later, within one year after the transfer or obligation was or could reasonably have been discovered by the claimant....

RCW 19.40.091(a).

The first clause of RCW 19.40.091(a) requires the Freitags to have filed their claim four years after the transfer was made or the obligation was incurred. The transfer from the McGhies to Lunn was made on October 26, 1989. Therefore, the latest the Freitags could have filed their claim was on October 26, 1993. Their claim, however, was filed on November 30, 1993, thus, the first clause of the statute is inapplicable.

We, therefore, turn to the second clause of RCW 19.40.091(a) to determine the meaning of the phrase, "within one year after the transfer or obligation was or could reasonably have been discovered by the claimant." The Freitags argue they filed their claim in a timely fashion because this clause allows a claimant to file suit within one year of discovering the fraudulent nature of the transfer. The Freitags discovered the fraudulent nature of the transfer on November 2, 1993 and filed suit on November 30, 1993. The McGhies contend the statute should be read to require claimants to bring suit within one year of discovering or constructively discovering the transfer itself, and not the fraudulent nature of the transfer. Therefore, the McGhies assert, the Freitags should have filed suit by August 29, 1992, one year after the Freitags received the title report identifying the transfer to Lunn.

The sole issue in this case is whether RCW 19.40.091(a) begins to run when the plaintiff first discovers or could reasonably discover the transfer, or when the plaintiff first discovers or could reasonably discover the fraudulent nature of the transfer.

The Court of Appeals construed RCW 19.40.091(a) in McMaster v. Farmer, 76 Wash.App. 464, 886 P.2d 240 (1994), and held a fraudulent transfer claim must be commenced within one year of the discovery of the transfer and knowledge of the fraudulent nature of the transfer is not required to initiate the running of the statute. McMaster, 76 Wash.App. at 468, 886 P.2d 240. The Court of Appeals based its holding on the plain language of the statute.

Here, the McGhies rely on McMaster and assert because the term "transfer," as used in RCW 19.40.091(a), is plain and unambiguous, we need not apply rules of statutory construction to the statute. The McGhies further argue the term "transfer" is defined in the UFTA itself and means "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, and creation of a lien or other encumbrance." RCW 19.40.011(12). This definition of "transfer," the McGhies assert, must be read into the statute every time the term "transfer" appears, and precludes a finding that the statute of limitations begins to run when the fraudulent nature of the transfer is discovered or could reasonably have been discovered. The McGhies further contend that this literal, narrow reading of the term "transfer" does not lead to absurd results. We do not agree.

Common sense and the statutory purpose of the UFTA necessitate a finding that the statute begins to run with the discovery of the fraudulent nature of the conveyance. A fraudulent conveyance or transfer may be defined as a transaction by means of which the owner of property has sought to place the property beyond the reach of his or her creditors, or which operated to the prejudice of the creditor's legal rights or the legal rights of other persons, including subsequent purchasers. Rainier Nat'l Bank v. McCracken, 26 Wash.App. 498, 506, 615 P.2d 469 (1980); 37 Am.Jur.2d Fraudulent Conveyances § 1 (1968). In 1987, the Legislature enacted the UFTA to replace the Uniform Fraudulent Conveyance Act (UFCA). Laws of 1987, ch. 444, § 10. The former UFCA had been, in general, a declaration of the common law. Osawa v. Onishi, 33 Wash.2d 546, 554, 206 P.2d 498 (1949).

Both the former UFCA and current UFTA, obviously, discourage fraud. The former UFCA did not contain a codified statute of limitations within the act itself. Fraudulent conveyance claims were ruled by the three-year statute of limitations for fraud. RCW 4.16.080(4) limits a claim for fraud to a three-year statute of limitations, and "the cause of action in such case [is] not to be deemed to have accrued until the discovery by the aggrieved party of the facts constituting the fraud...."

The discovery rule contained in the statue of limitations for fraud was applied in actions under the former UFCA, and the statute of limitations began to run when there was discovery by the aggrieved party of the facts constituting the fraud. Strong v. Clark, 56 Wash.2d 230, 232, 352 P.2d 183 (1960). Further, actual knowledge of the fraud was inferred if the aggrieved party, through the exercise of due diligence, could have discovered it. Strong, 56 Wash.2d at 232, 352 P.2d 183. Thus, the statute of limitations codified in RCW 4.16.080(4), and containing a discovery rule for fraud actions, was incorporated...