Glimcher Supermall Venture v. Coleman

• Citation: 739 N.W.2d 815,2007 SD 98
• Decision Date: 19 September 2007
• Docket Number: No. 24163.,24163.
• Parties: GLIMCHER SUPERMALL VENTURE, LLC, a Delaware corporation, Plaintiff and Appellant, v. COLEMAN COMPANY and Dwight Sobczak, Sr., Defendants and Appellees, Dwight Sobczak, Jr., Dan Sobczak, and Duane Sobczak, Defendants.
• Court: Supreme Court of South Dakota

739 N.W.2d 815

2007 SD 98

GLIMCHER SUPERMALL VENTURE, LLC, a Delaware corporation, Plaintiff and Appellant, v. COLEMAN COMPANY and Dwight Sobczak, Sr., Defendants and Appellees, Dwight Sobczak, Jr., Dan Sobczak, and Duane Sobczak, Defendants.

No. 24163.

Supreme Court of South Dakota.

Argued January 9, 2007.

Decided September 19, 2007.

Haven L. Stuck and Jane Wipf Pfeifle of Lynn, Jackson, Shultz & Lebrun, Rapid City, South Dakota, Attorneys for plaintiff and appellant.

Ted L. McBride and Larry M. Von Wald of Beardsley, Jensen & Von Wald, LLC, Rapid City, South Dakota, Attorneys for defendants and appellees.

KEAN, Retired Circuit Judge.

[¶ 1.] Glimcher SuperMall Venture, LLC (Glimcher) brought this action in Pennington County, South Dakota under the Uniform Fraudulent Transfer Act (UFTA), claiming that the transfer of substantially all of the assets of Black Hills Gold Factory Outlet Store, Inc. (BHG) to Coleman Company (Coleman) and Dwight Sobczak (Sobczak) was a prohibited fraudulent transfer.

FACTS AND PROCEDURE

[¶ 2.] In 1994 Washington SuperMall Interests, L.P. (Washington SuperMall) began the process of developing a shopping mall in Auburn, Washington, a suburb of Seattle. Washington SuperMall contacted Coleman about the prospect of Coleman opening a retail store in the mall which would sell Black Hills Gold jewelry. Coleman is a closely-held South Dakota corporation which manufactures and distributes Black Hills Gold jewelry throughout the United States and also internationally. Its corporate offices are located in Rapid City, South Dakota. Defendants Dwight Sobczak, Sr., Dwight Sobczak, Jr., Dan Sobczak, and Duane Sobczak are family members, shareholders, officers and employees of Coleman.¹

[¶ 3.] Coleman was concerned about the liability exposure of such a venture in a new mall. Instead, BHG was formed as a new and distinct Washington corporation to operate the gift store within the mall. BHG would then sell Black Hills Gold jewelry manufactured and sold to it by Coleman. Coleman had significant control over BHG as the two corporations had nearly identical shareholders, directors and officers, along with the ownership interests. Coleman managed and supervised BHG's financial affairs through a common retail store manager and was paid a management fee. The corporate offices of both businesses were located at the same address in Rapid City.

[¶ 4.] In July 1994 BHG entered into a lease agreement with Washington SuperMall to begin July 15, 1995 and expiring August 31, 2002. Sobczak signed the lease as president of BHG. Because BHG was a newly formed corporation, Washington SuperMall sought and received from Coleman a one year rent guarantee. Sobczak signed the guarantee on behalf of Coleman as its president. Sometime later, Glimcher purchased all of Washington SuperMall's interests in the mall and became the owner of BHG's lease.

[¶ 5.] BHG operated the retail gift store until January 2001 when it closed the store and vacated the mall. At the time BHG vacated the premises, it had nineteen months remaining on the lease. BHG paid rent for January 2001, but failed to pay for the remaining months. In December 2000 BHG paid off $34,000 in shareholder loans to BHG. When BHG closed its store, all creditors, except for Glimcher and Coleman, were paid. In January 2001 BHG transferred $45,000 from its bank in Washington to Coleman's account in Rapid City and also transferred approximately $225,800 in inventory to Coleman. Later the store equipment was sold and the proceeds also paid to Coleman. The equipment, inventory and cash of BHG were not subject to any security interests. Coleman claims the transfers were made in return for cancellation of an account in excess of $600,000 owed by BHG to Coleman for unpaid inventory. These transfers reduced the assets of BHG to almost nothing. BHG was administratively dissolved by the State of Washington on April 23, 2001.

[¶ 6.] Glimcher sued BHG in Washington state court for the balance due under the lease. BHG and Glimcher reached a stipulation that judgment be entered against BHG in the amount of $90,000, plus 12 percent interest. The judgment was filed December 17, 2003 in the Superior Court of King County, Washington.

[¶ 7.] Glimcher entered its Washington judgment against BHG as a foreign judgment in Pennington County, South Dakota on March 3, 2004. After the judgment remained unsatisfied, Glimcher initiated this action under the UFTA in January 2005. After a trial to the court on January 10, 2006, the trial court issued a memorandum opinion dated April 25, 2006, followed by findings of fact and conclusions of law incorporating the memorandum opinion. The trial court concluded that there was neither actual fraud nor constructive fraud to hinder, delay or defraud creditors. It further concluded that reasonable equivalent value was given by Coleman in exchange for the transfer of inventory and cash. Therefore, it found that the transfer was not fraudulent under the UFTA. Glimcher appeals. Finding error, we reverse.

STANDARD OF REVIEW

[¶ 8.] "In reviewing a judge's findings in a court trial, we give no deference to conclusions of law; thus we review them under the de novo standard." Prairie Lakes Health Care Sys., Inc. v. Wookey, 1998 SD 99, ¶ 5, 583 N.W.2d 405, 410 (citing S.B. Partnership v. Gogue, 1997 SD 41, ¶ 8, 562 N.W.2d 754, 756 (citing Central Monitoring Serv., Inc. v. Zakinski, 1996 SD 116, ¶ 17, 553 N.W.2d 513, 517)). "Conversely, we examine findings of fact under the more deferential clearly erroneous standard." Prairie Lakes Health Care Sys., 1998 SD 99 at ¶ 5, 583 N.W.2d at 410 (citing Gogue, 1997 SD 41, ¶ 8, 562 N.W.2d at 756 (citing Shedd v. Lamb, 1996 SD 117, ¶ 17, 553 N.W.2d 241, 244)). This Court will not overturn fact findings "`unless we are definitely and firmly convinced a mistake has been made.'" Prairie Lakes Health Care Sys., 1998 SD 99 at ¶ 5, 583 N.W.2d at 410 (quoting Cordell v. Codington Cty., 526 N.W.2d 115, 116 (S.D. 1994)).

ANALYSIS AND DECISION

ISSUE ONE

The Uniform Fraudulent Transfer Act

[¶ 9.] The parties agree that this matter should be decided under Washington law. Butler Machinery Co. v. Morris Const. Co., 2004 SD 81, ¶¶ 6-7, 682 N.W.2d 773, 776-77. Both Washington and South Dakota adopted the UFTA in 1987. WashRevCodeAnn (RCWA) ch 19.40; SDCL ch 54-8A. The purpose of the UFTA is to protect a debtor's estate from being depleted to the prejudice of the debtor's unsecured creditors. UFTA § 3, cmt (2). "The Act invalidates `otherwise sanctioned transactions made with a fraudulent intent.'" Prairie Lakes Health Care Sys., 1998 SD 99 at ¶ 6, 583 N.W.2d at 410. Because RCWA 19.40.903 provides that "[t]his chapter shall be applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of this chapter among states enacting it[,]" case law from other jurisdictions can provide guidance in interpreting the UFTA. Sedwick v. Gwinn, 73 Wash.App. 879, 873 P.2d 528, 532 n8 (WashCtApp 1994).

A. Actual Fraudulent Intent

[¶ 10.] The UFTA analyzes transfers as actually fraudulent or constructively fraudulent. RCWA 19.40.041(a)(1) provides:

(a)A 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 the obligation was incurred, if the debtor made the transfer or incurred the obligation:

(1) With actual intent to hinder, delay, or defraud any creditor of the debtor[.]

[¶ 11.] RCWA 19.40.041(b) lists objective factors which may be considered in deciding whether a transfer was made with actual intent to hinder, delay or defraud a creditor:

(b)In determining actual intent under subsection (a)(1) of this section, consideration may be given, among other factors, to whether:

(1) The transfer or obligation was to an insider;

(2) The debtor retained possession or control of the property transferred after the transfer;

(3) The transfer or obligation was disclosed or concealed;

(4) Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;

(5)The transfer was of substantially all the debtor's assets;

(6) The debtor absconded;

(7) The debtor removed or concealed assets;

(8) The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;

(9) The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;

(10) The transfer occurred shortly before or shortly after a substantial debt was incurred; and,

(11) The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.

[¶ 12.] These factors have been referred to as "badges of fraud." See UFTA § 4, cmt (5). "Proof of the existence of any one or more of the factors enumerated in subsection (b) may be relevant evidence as to the debtor's actual intent but does not create a presumption that the debtor has made a fraudulent transfer or incurred a fraudulent obligation." Id. The debtor's state of mind becomes the point of inquiry when considering whether a transfer was actually fraudulent. Prairie Lakes Health Care Sys., 1998 SD 99 at ¶ 7, 583 N.W.2d at 411. The debtor² in this case was BHG, not Coleman. Glimcher and Coleman were creditors³ with claims.⁴ While the ownership interests and corporate officers and directors are the same for both Coleman and BHG, BHG, as a Washington corporation, was a separate entity, a distinction not fully appreciated by the trial court. The trial court focused on the actions of Coleman and determined that "Coleman acted without fraud or the intention to defraud anyone, and went beyond that which would have been otherwise expected of them." However, this transfer must be evaluated from the perspective of the debtor, BHG. The trial court's error was compounded...