In re Valente

• Citation: 360 F.3d 256
• Decision Date: 02 March 2004
• Docket Number: No. 03-1103.,03-1103.
• Parties: In re Paul VALENTE, Debtor Fleet National Bank, Appellant, v. Paul Valente, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

Page 256

360 F.3d 256

In re Paul VALENTE, Debtor

Fleet National Bank, Appellant, v. Paul Valente, Appellee.

No. 03-1103.

United States Court of Appeals, First Circuit.

Heard September 11, 2003.

Decided March 2, 2004.

COPYRIGHT MATERIAL OMITTED

Thomas S. Hemmendinger, with whom Brennan, Recupero, Cascione, Scungio & McAllister, LLP was on the brief, for Appellant.

Louis A. Geremia, with whom Lisa A. Geremia, and Geremia & DeMarco, Ltd. were on the brief, for Appellee.

Before TORRUELLA and LIPEZ, Circuit Judges, and SCHWARZER,^* Senior U.S. District Judge.

LIPEZ, Circuit Judge.

On motion by Fleet National Bank for the turnover of $18,000 held in escrow as security for an outstanding claim, the bankruptcy court ruled that the escrow funds should instead be turned over to the debtor because the debtor's transaction at issue was not a fraudulent conveyance within the meaning of the Uniform Fraudulent Transfer Act (UFTA). On appeal, the district court agreed. We now reverse the district court and direct the bankruptcy court to award judgment to Fleet.

I.

The material facts of this case are undisputed. In 1989, the Appellant, Fleet National Bank, lent the Debtor-Appellee, Paul Valente, $180,000 secured by property in Newport, Rhode Island. Valente defaulted on this loan. After the resulting foreclosure sale left a deficiency, Fleet obtained a judgment on July 26, 1993 for $10,648.50 from the Rhode Island Superior Court. The resulting execution order levied "the goods and chattels and real estate of [Valente] including any and all real estate located within the Town of Middletown, County of Newport, State of Rhode Island." Fleet filed a copy of that order in the land evidence records for the Town of Middletown on September 9, 1993.

On June 30, 1992, approximately one year prior to the deficiency judgment, Valente transferred title to the Middletown property to his son for no consideration. Valente claimed that he conveyed the property "for estate planning purposes;" however, he later testified that he and his son "had an understanding that I was going to be able to stay at the house and live at the house because I couldn't afford to keep the house any longer." The Middletown real estate was Valente's primary asset at the time and he was having trouble paying his bills. The property was encumbered by a mortgage loan from Citizens Bank, the IRS, and Rhode Island state tax liens. The mortgage alone was for $168,000 and the property was only worth about $150,000. When asked at deposition why his father transferred the property to him, Valente's son testified: "Because he was trying to scam somebody or scam something, I don't know, beat something. It wasn't out of the generosity of his heart."

Valente filed for Chapter 7 bankruptcy protection on January 28, 1994, claiming that he had no assets available for distribution to his creditors. The IRS and the State of Rhode Island released their tax liens on the Middletown property. Valente received his bankruptcy discharge on April 21, 1994.¹

During and after the bankruptcy proceedings, Valente continued to manage, maintain, and live in the home in Middletown as if he were the actual owner. He ran a business on the premises, the Valco Construction Corporation, and paid the utilities and other bills. In April 1996, Valente contracted with a realty firm to list and sell the property. In September 1997, after his attempt to sell the real estate failed, he leased the property. Valente signed all of the lease documents and collected the rent money during this period.

On April 14, 1999, Valente's son transferred title back to his father, without consideration, because Valente told him that "[h]e was going to sell it and get his money so he could move to Florida." Two months later, Valente entered into another listing agreement with the realty firm; on August 25, 1999, he sold the property for $200,500 cash. His son was not involved in this transaction.

In preparation for the closing on the property, a title attorney determined that Fleet's 1993 execution encumbered the property and would have to be removed before the sale could be completed. Valente contacted Fleet, and the bank agreed to release the execution if $18,000 of the sale proceeds were put into escrow as security for its claim plus interest. Valente placed $18,000 in escrow and the sale closed. Since the IRS and the State of Rhode Island had released their liens, Valente was able to pay off the Citizens' Bank mortgage and still receive approximately $24,850, in addition to the amount in escrow. His son did not receive any of those proceeds.

Valente reopened his bankruptcy case on February 15, 2000 and filed a motion to recover the escrow funds. He claimed that since he did not own any property in Middletown when Fleet executed its judgment, the bank's lien never attached to his property and, therefore, its claim remained unsecured when the bankruptcy court discharged his debts in 1994. Accordingly, he asked the bankruptcy court to hold Fleet in contempt for attempting to enforce a discharged debt and to order the escrow agent to turn over the remaining funds. Fleet responded with its own turnover motion on May 25, 2000. The parties prepared a joint statement of facts and law and waived a hearing.

In denying Fleet's turnover motion on June 26, 2001, the bankruptcy court began its explanation with a lament: "While it is unfortunate that a Debtor playing such a blatant shell game with his real estate might prevail, this one probably gets away with it, strictly by operation of law." The court then evaluated whether Rhode Island's version of the Uniform Fraudulent Transfer Act (UFTA) compelled Valente to turn the funds over to Fleet. Calling Valente's transfers a "blatant charade" laden with "plenty" of fraudulent intent, it nevertheless concluded that mere intent was not sufficient to establish Fleet's claim under the UFTA. Valente lacked equity in the Middletown property when he conveyed it to his son; therefore, the court held that the conveyance did not constitute a "transfer" of an "asset" as those terms are defined by the UFTA. It also held that even if the conveyance did constitute a transfer under the Act, Fleet could not recover because it filed the turnover motion after the UFTA's four year statute of limitations had expired. The court ordered the escrow agent to turn over the $18,000 to Valente; however, it stayed this order pending appeal.

Fleet appealed this decision to the district court, arguing that the UFTA did not apply because its action was not a suit to recover property that was fraudulently transferred. Instead, its turnover motion was aimed at enforcing a lien on the equitable interest retained by Valente when he transferred legal title to the property to his son for no consideration. The district court rejected that argument and upheld the bankruptcy court's order. This appeal followed.²

II.

Rhode Island's version of the Uniform Fraudulent Transfer Act (UFTA) provides creditors with remedies against debtors who transfer assets with "intent to hinder, delay, or defraud any creditor of the debtor." R.I. Gen. Laws. § 6-16-4(a)(1). As the bankruptcy court correctly observed, the Act limits its definition of "asset" to "property of a debtor ... [except]... to the extent it is encumbered by a valid lien." Id. § 6-16-1(2)(i). See also Ed Peters Jewelry Co., Inc. v. C & J Jewelry Co., Inc., 124 F.3d 252, 262 (1st Cir.1997). Since the Middletown property was only worth $150,000 but was encumbered by a $168,000 first mortgage, as well as a number of state and federal tax liens, it did not qualify as an "asset" under the UFTA at the time of the transfer. The bankruptcy court held, therefore, that Fleet could not recover under the UFTA. That conclusion was correct. However, the court failed to look beyond the UFTA to evaluate Fleet's claim to relief under Rhode Island common law.

Rhode Island courts have long granted common law remedies to defrauded creditors when statutory relief was otherwise barred. For example, in Monks v. Deslandes, 38 R.I. 2, 94 A. 854, 855 (1915), the Rhode Island Supreme Court considered whether a creditor could recover assets that the debtor was holding in his wife's name to protect them from attachment. The court held that the fraudulent conveyance statute that was in effect at that time, R.I. Gen. Laws § 253-1 (1909), did not provide such relief since the debtor did not actually transfer the property. However, the creditor did have "a right in equity to follow and reach the equitable assets of the debtor." Id. In taking this approach, the court implicitly concluded that the predecessor to the UFTA did not preempt the field of equitable recovery for fraudulent transfers.

The UFTA, by its own terms, is consistent with this background. The Act states that "[u]nless displaced by the provisions of this chapter, the principles of law and equity, including ... the law relating to ... fraud ... or other validating or invalidating cause, supplement[s] this chapter's provisions." R.I. Gen. Laws. § 6-16-10. At the very least, this clause demonstrates a desire by the drafters to preserve the common law as a supplement to the UFTA unless precluded by the terms of the Act. Moreover, to find broad preemption in the UFTA, in the absence of language of preemption, would be at odds with the presumption that statutes should not be construed to alter common law principles absent an explicit statement of legislative intent to do so. See, e.g., Shaw v. R.R. Co., 101 U.S. 557, 565, 25 L.Ed. 892 (1879) ("No statute is to be construed as altering the common law, farther than its words import."); Knowles v. Ponton, 96 R.I. 156, 190 A.2d 4, 6 (1963) ("It is a well settled rule in the construction of statutes that legislative enactments will be construed to alter the common law only to the extent that the legislature has made that purpose clear."); 3 Norman J. Singer, Sutherland Statutory...