Hullett v. Cousin

• Citation: 204 Ariz. 292,63 P.3d 1029
• Decision Date: 24 February 2003
• Docket Number: No. CV-01-0407-PR.,CV-01-0407-PR.
• Parties: Wayne HULLETT, individually and as Trustee of WEH Trust U/A, Plaintiff-Appellant, v. Mr. and Mrs. George COUSIN, as Trustees for Cousin Corporation Pension Plan and Trust, CPI of Florida Profit Sharing Plan, Numo Investment Company, Robert W. Fremont, Dr. Jerome Theis, as Trustee for Tri-County Clinic, Inc., Profit Sharing Plan, Anthony Barbera, as Trustee for BC and L Pension Plan, Richard N. Gold, as Trustee for R.N. Gold and Company, Inc., Pension, Professional Financial Management, Commercial Bank Texas, as Custodian for Eloise Payne IRA Account, Dr. Leo Herber, Raymond James and Associates, as Custodian for Robert L. Thompson IRA Account, Robert J. and Martine M. Gregory, as Trustees for the Gregory Family Trust, Resources Trust Company, as Trustees of Robert W. Fremont IRA, Defendants-Appellees.
• Court: Supreme Court of Arizona

63 P.3d 1029

204 Ariz. 292

Wayne HULLETT, individually and as Trustee of WEH Trust U/A, Plaintiff-Appellant, v. Mr. and Mrs. George COUSIN, as Trustees for Cousin Corporation Pension Plan and Trust, CPI of Florida Profit Sharing Plan, Numo Investment Company, Robert W. Fremont, Dr. Jerome Theis, as Trustee for Tri-County Clinic, Inc., Profit Sharing Plan, Anthony Barbera, as Trustee for BC and L Pension Plan, Richard N. Gold, as Trustee for R.N. Gold and Company, Inc., Pension, Professional Financial Management, Commercial Bank Texas, as Custodian for Eloise Payne IRA Account, Dr. Leo Herber, Raymond James and Associates, as Custodian for Robert L. Thompson IRA Account, Robert J. and Martine M. Gregory, as Trustees for the Gregory Family Trust, Resources Trust Company, as Trustees of Robert W. Fremont IRA, Defendants-Appellees.

No. CV-01-0407-PR.

Supreme Court of Arizona, En Banc.

February 24, 2003.

Warnicke & Littler, P.L.C., by Ronald E. Warnicke, Robert C. Warnicke, Blake D. Gunn, Phoenix, Attorneys for Plaintiff-Appellant.

Broening Oberg Woods Wilson & Cass, P.C., by Lori B. Kirsch-Goodwin, Donald Wilson, Jr., Cynthia Y. Kirkland, Phoenix, Attorneys for Defendants-Appellees Cousin Corporation Pension Plan & Trust, Resources Trust Company, as Trustees for Robert W. Fremont IRA, CPI of Florida Profit Sharing Plan, Estate of Eloise Payne and Dr. Leo Herber.

OPINION

RYAN, Justice.

¶ 1 Under Arizona's Uniform Fraudulent Transfer Act ("UFTA"), a transfer "is fraudulent as to a creditor whose claim arose before the transfer" if, as a result of the transfer, the debtor becomes insolvent and the transfer was not made in exchange for "reasonably equivalent value." Ariz.Rev. Stat. ("A.R.S.") § 44-1005 (1994). The central issue in this case is whether an unknown, unasserted, and presumably time-barred claim rendered a partnership insolvent when the partnership transferred its assets. We hold that such a claim must be disregarded if found to be time-barred at the time of the transfer. Because the parties dispute whether the claim here was time-barred when the transfer occurred, we vacate the court of appeals' opinion and remand to the trial court for further proceedings.

I. BACKGROUND

¶ 2 Suncrest Villa Associates Limited Partnership was formed in 1983, apparently for the purpose of investing in an apartment complex. Suncrest was funded with capital contributions from its general and limited partners. Clifton Investment Company and Rodger J. Clifton were Suncrest's general partners and Defendant-Appellees were Suncrest's limited partners.

¶ 3 In 1989, Plaintiff-Appellant Hullett purchased an apartment complex from Suncrest for $1.375 million, with a cash payment of $250,000 and a promissory note for $1.125 million, secured by a deed of trust. Hullett encountered financial difficulties and was unable to make payments on the apartment complex. In April 1994, Suncrest's trustee recorded a notice of trustee's sale of the complex. Hullett sold the complex in October 1994 to a "distress buyer" and Suncrest accepted a discounted payoff of Hullett's note.

¶ 4 Under the original limited partnership agreement, Suncrest was forced to dissolve upon accepting payoff of Hullett's note. The agreement stated that the partnership would end when "all of the loans funded by [Suncrest were] repaid or otherwise disposed of and all other assets converted to cash." Suncrest distributed its assets to the general and limited partners and was deemed dissolved as of October 25, 1994.

¶ 5 In December 1995, Hullett sued Suncrest and its general partner, Clifton, for negligent misrepresentation arising out of the 1989 sale of the apartment complex to Hullett. The alleged misrepresentation concerned the apartment complex's operating expenses and income. Hullett did not name Suncrest's limited partners as defendants in the suit. Neither Suncrest nor Clifton filed an answer, and in November 1996 the trial court entered a $500,000 default judgment in favor of Hullett against Suncrest and Clifton, jointly and severally. Hullett was unable to collect the judgment because both Suncrest and Clifton were insolvent.

¶ 6 In October 1998, Hullett sued Suncrest's limited partners for fraudulent transfer. Hullett alleged that at the time of the distribution of assets, Suncrest knew of Hullett's claims against it. He also asserted that Suncrest was either insolvent at the time of the distribution or that the distribution rendered Suncrest insolvent. He therefore alleged that the transfer of Suncrest's assets was fraudulent. Hullett sought judgment against the limited partners in the amount each received in the distribution up to the default judgment amount.

¶ 7 The trial court granted summary judgment in favor of Suncrest, reasoning that "[t]he transferred distribution was in exchange for the partnership's legal obligation to return capital and profit." The court found no evidence that the limited partners "had any intent, actual or constructive, to defraud, hinder or delay any creditor," no evidence of bad faith, and no evidence that Suncrest was insolvent at the time of the distribution. The trial court also found that Suncrest "had no outstanding liabilities and no notice of any claims or debts at the time of distribution," and that Hullett did not raise his claim until fourteen months after the dissolution.

¶ 8 The court of appeals reversed, finding that a claim does not have to be asserted before a limited partnership dissolves to render it insolvent at dissolution. Hullett v. Cousin, 201 Ariz. 119, 123, ¶ 11, 32 P.3d 44, 48 (App.2001). The court also concluded that limited partnership capital contributions are assets, not debts, and that their distribution at Suncrest's dissolution was fraudulent because it caused the liabilities of the partnership to exceed the value of its assets. Id. at 123, ¶ 15, 32 P.3d at 48. Additionally, the court reasoned that the distributions were undisputedly made without receiving a reasonably equivalent value in exchange, which rendered Suncrest insolvent. Id. at 124, ¶ 17, 32 P.3d at 49. The court remanded with directions that the trial court enter summary judgment in favor of Hullett. Id. at 124, ¶¶ 17-18, 32 P.3d at 49.

¶ 9 We granted review to examine whether an unknown and presumably time-barred claim must be considered in determining if a partnership was insolvent when it transferred its assets to its limited partners.

II. DISCUSSION

¶ 10 The dispute here is essentially this. The limited partners contend that an unknown and presumably time-barred claim should not be considered in determining whether the partnership was insolvent on the date of its dissolution. In contrast, Hullett contends that even unasserted and wholly unknown claims are considered in determining whether a transfer rendered a partnership insolvent. Because this is largely an issue of statutory interpretation, our review is de novo. See Canon School Dist. No. 50 v. W.E.S. Const. Co., 177 Ariz. 526, 529, 869 P.2d 500, 503 (1994)

.

A.

¶ 11 Arizona enacted the Uniform Fraudulent Transfer Act in 1990. 1990 Ariz. Sess. Laws, ch. 17, §§ 1-2. Arizona's version of the UFTA was based upon the uniform act promulgated by the National Conference of Commissioners on Uniform State Laws in 1984. See Unif. Fraudulent Transfer Act, 7A U.L.A. 267 (1999). The UFTA replaced Arizona's Uniform Fraudulent Conveyance Act ("UFCA"), which had been on the books since 1919.¹ See 1919 Ariz. Sess. Laws, ch. 131, §§ 1-14. Like the UFCA, the UFTA's purpose is to protect creditors. See Prefatory Note to Unif. Fraudulent Conveyance Act, 7A U.L.A. 2 (1999). The UFTA is set forth in A.R.S. sections 44-1001 to -1010.

¶ 12 Under the UFTA, fraudulent transfers are subdivided into two categories: actually fraudulent transfers, A.R.S. section 44-1004(A)(1), and constructively fraudulent transfers, A.R.S. sections 44-1004(A)(2) and 44-1005. Only A.R.S. section 44-1005 is at issue here.²

¶ 13 Under A.R.S. section 44-1005, constructive fraud occurs when an exchange lacks reasonably equivalent value and "the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer." No proof of intent is required to maintain a fraudulent transfer action under A.R.S. section 44-1005. Nor is a good faith defense available to a debtor in a fraudulent transfer action brought under this section. See A.R.S. § 44-1008(A); In re Viscount Air Servs., Inc., 232 B.R. 416, 445 (Bankr.D.Ariz. 1998) (finding good faith defense inapplicable to A.R.S. section 44-1005).

¶ 14 A "transfer" is defined as "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." A.R.S. § 44-1001(9). The definition thus includes the distribution of assets at dissolution of a partnership.

¶ 15 "Insolvency" is defined at A.R.S. section 44-1002. Under that section, a partnership is insolvent "if the sum of the partnership's debts is greater than the aggregate, at a fair valuation, of all of [its] assets and the sum of the excess of the value of each general partner's nonpartnership assets over the partner's nonpartnership debts." A.R.S. § 44-1002(C).

¶ 16 The UFTA defines "debt" as "liability on a claim." A.R.S. § 44-1001(4). A "claim" is defined as "a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured." A.R.S. § 44-1001(2). By the plain language of its definition, a claim need not be reduced to a judgment, nor need it be asserted to qualify it as "right to payment."

¶ 17 The limited partners first argue that the rule established by the court of appeals—that a claim does not have to be asserted to be considered in a solvency determination—would mean that "limited partners would find themselves indefinitely bound to an inactive entity, with no means to...