Herup v. First Boston Financial

• Decision Date: 26 July 2007
• Docket Number: No. 45773.,45773.
• Citation: 162 P.3d 870
• Parties: Hans Joseph HERUP and Herup Holdings, LLC, Appellants/Cross-Respondents, v. FIRST BOSTON FINANCIAL, LLC, a Wyoming Limited Liability Company, Respondent/Cross-Appellant.
• Court: Nevada Supreme Court

162 P.3d 870

Hans Joseph HERUP and Herup Holdings, LLC, Appellants/Cross-Respondents, v. FIRST BOSTON FINANCIAL, LLC, a Wyoming Limited Liability Company, Respondent/Cross-Appellant.

No. 45773.

Supreme Court of Nevada.

July 26, 2007.

Robert C. Herman, Carson City, for Appellants/Cross-Respondents.

Brooke Shaw Zumpft and Michael L. Matuska, Minden, for Respondent/Cross-Appellant.

Before PARRAGUIRRE, HARDESTY and SAITTA, JJ.

OPINION

By the Court, HARDESTY, J.

In this case, we consider whether the Uniform Fraudulent Transfer Act (UFTA), NRS Chapter 112, was properly applied to a secured creditors' transfer of assets to a third party following the secured creditors' improper repossession of their business. We also take this opportunity to examine the standard to be used in determining whether a transferee has a good faith defense to a fraudulent transfer action under the UFTA. We adopt an objective, rather than a subjective, inquiry into whether the transferee knew or should have known of the debtor's fraudulent purpose in transferring the assets. But here, because we conclude that the district court failed to determine whether a fraudulent transfer under the UFTA occurred in the first instance, we reverse the district court's judgment as to the third party and remand this case for a new trial.

FACTS AND PROCEDURAL HISTORY

This appeal and cross-appeal arise out of a dispute over the sale, repossession, and subsequent resale of a small business by its original owners. Ralph and Penny Grant sold the assets, including the goodwill and customer base, of Nevada Small Engines for $250,000 to respondent/cross-appellant First Boston Financial, LLC. First Boston paid $70,000 at the close of escrow and executed a promissory note for $180,000 payable in monthly installments. First Boston made the first four payments, but was late making the fourth payment. Apparently, because of the late payment and without giving notice to First Boston, the Grants immediately repossessed the business and began operating it again themselves. First Boston filed a complaint against the Grants, alleging breach of contract and conversion.¹

While that action was pending, the Grants sold the business, through a private sale, to appellants/cross-respondents Hans Joseph Herup and Herup Holdings, LLC (Herup) for $199,060.88 in cash. Before the sale, the Grants and Herup executed an addendum to the purchase agreement, which referenced "pending litigation" as follows:

Buyer is aware of pending litigation between the Seller herein and the former Buyers of Nevada Small Engines, Gardnerville, Nevada, which has no legal effect on the current business assets or operation. Seller herein indemnifies Buyer herein from any liability of such litigation.

The escrow instructions included the same clause. After the Grants sold the business to Herup, First Boston amended its complaint to add a fraudulent transfer claim against Herup.² First Boston specifically sought to void the transfer between the Grants and Herup. First Boston also sought compensatory and punitive damages and injunctive relief as part of its fraudulent transfer claim. In the district court, Herup defended on the ground that he was a good faith purchaser for value, thereby precluding a judgment against him under the UFTA.

At some point during the course of litigation and before trial, the Grants disappeared. Given their failure to comply with requests for admissions, the district court granted partial summary judgment to First Boston on the liability portion of its breach of contract and conversion claims against the Grants and conducted a bench trial on the issues of the Grants' damages and Herup's liability and damages.³

Following the trial, the district court found that Herup was on inquiry notice of First Boston's claim because of the addendum to his contract with the Grants and, thus, could not establish a good faith defense under the UFTA. The district court then allocated damages between the Grants and Herup, finding that returning the business to First Boston would be unfair because of the passage of time and because First Boston never fully paid for the business. Herup was assessed damages of approximately $81,000, and the Grants were held liable for over $336,000.

Herup appeals, claiming that he should not have been subject to any damages because he acted in good faith in purchasing the business. First Boston cross-appeals, arguing that Herup should be liable in the amount of $199,060.88, the purchase price Herup paid to the Grants.

DISCUSSION

This case requires us to interpret and apply the UFTA, which Nevada has adopted and codified in NRS Chapter 112. While we will not disturb a district court's findings of fact if they are supported by substantial evidence,⁴ the construction of a statute is a question of law, which we review de novo.⁵

We conclude that the district court failed to determine, as required by the UFTA, whether a fraudulent transfer occurred under NRS 112.180(1)(a), which is a prerequisite to setting aside the transfer or imposing damages, and whether Herup acted in good faith. Consequently, we reverse the district court's judgment with respect to First Boston's claims against Herup and remand this matter for a new trial against Herup only.⁶ We also take this opportunity to clarify the standard to be used when evaluating a transferee's good faith defense to a fraudulent transfer claim under the UFTA and adopt an objective standard.

Prima facie case of fraudulent transfer

The UFTA is designed to prevent a debtor from defrauding creditors by placing the subject property beyond the creditors' reach. At the outset, we note that the district court never specifically determined that the Grants, who were initially secured creditors with respect to First Boston's promissory note, became "debtors" liable on a "claim" to First Boston within the meaning of the UFTA when they repossessed the business.⁷ However, the district court did state that the Grants "wrongfully foreclosed upon the business and repossessed its assets" and that they "did not have legal right to take possession, much less sell the property."

When reviewing a district court's judgment, we apply the rules of construction that pertain to interpreting other written instruments.⁸ We have previously explained that when unclear, a judgment's interpretation is a question of law for this court.⁹ Additionally, we have stated that a judgment's legal effect must be determined by construing the judgment as a whole, and that, in the case of an ambiguity, the interpretation that renders the judgment more reasonable and conclusive and brings the judgment into harmony with the facts and law of the case will be employed.¹⁰ Construing the order as a whole here, we conclude the district court found that a creditor-debtor relationship existed between First Boston and the Grants.

Three types of transfers may be set aside under the UFTA: (1) actual fraudulent transfers;¹¹ (2) constructive fraudulent transfers;¹² and (3) certain transfers by insolvent debtors.¹³ In its conclusions of law, the district court cited only the statutory provision concerning actual fraudulent transfers, NRS 112.180(1)(a), which provides that

[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:

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

NRS 112.180(2) sets forth several factors that the district court may consider in determining a debtor's actual intent, including whether:

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

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

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

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

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

(f) The debtor absconded;

(g) The debtor removed or concealed assets (h) 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;

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

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

(k) The debtor transferred the essential assets of the business . . . .

While several of these factors may be relevant here, the district court failed to document its findings, if any, with regard to the Grants' actual intent to defraud First Boston.

Indeed, the district court erroneously concluded that the Grants' intent was not at issue, stating that "[t]he parties stray from the fundamental issue in this case when they argue about the intent to defraud. [First Boston] does not have to prove that the Grants or Herup intended to defraud [First Boston] to recover the property." To the contrary, NRS 112.180(1)(a) plainly provides that, for the district court to enter judgment in favor of a creditor under that statute, it must first determine whether the debtor "actual[ly] inten[ded] to hinder, delay or defraud any creditor of the debtor." (Emphasis added.) Because the district court made no such determination here and failed to consider the factors set forth in NRS 112.180(2), we reverse the district court's judgment as to Herup and remand this matter to the district court for a new trial.

Good faith

Even if we were to assume that the district court properly found that the Grants actually intended to defraud First Boston under NRS 112.180(1)(a), the district court failed to properly consider Herup's good faith defense. NRS 112.220(1) provides a complete defense for an action for avoidance under NRS 112.180(1...