Sedwick v. Gwinn

• Decision Date: 18 January 1994
• Docket Number: No. 31487-4-I,31487-4-I
• Citation: 73 Wn.App. 879,873 P.2d 528
• Court: Washington Court of Appeals
• Parties: Katharine SEDWICK, Respondent, v. Stephen M. GWINN; Stanley and Ruth Gwinn, husband and wife, and the marital community composed thereof, Appellants, Sandra A. Gwinn; S & S Investments, a Washington general partnership; GLG Partnership, a Washington general partnership; Thomas and Laurel Loss, husband and wife, and the marital community composed thereof; S & M Partners, a Washington general partnership; James and Alice Abbott, husband and wife, and the marital community composed thereof; and John and Joan Carter, husband and wife, and the marital community composed thereof, Defendants.

Page 879

73 Wn.App. 879

873 P.2d 528

Katharine SEDWICK, Respondent, v. Stephen M. GWINN; Stanley and Ruth Gwinn, husband and wife, and the marital community composed thereof, Appellants, Sandra A. Gwinn; S & S Investments, a Washington general

partnership; GLG Partnership, a Washington general

partnership; Thomas and Laurel Loss, husband and wife, and

the marital community composed thereof; S & M Partners, a

Washington general partnership; James and Alice Abbott,

husband and wife, and the marital community composed

thereof; and John and Joan Carter, husband and wife, and

the marital community composed thereof, Defendants.

No. 31487-4-I.

Court of Appeals of Washington,

Division 1.

Jan. 18, 1994.

Reconsideration Denied Feb. 25, 1994.

Kenneth B. Kaplan, Michael B. King, Lane Powell Spears Lubersky, Seattle, for appellants

C. Nelson Berry, Cynthia Whitaker, Seattle, for respondent.

PEKELIS, Acting Chief Judge.

Stephen, Stanley, and Ruth Gwinn (the Gwinns) appeal the trial court's order granting Katharine Sedwick's (Sedwick) motion for partial summary judgment. The Gwinns contend that genuine issues of material fact exist as to whether the challenged loan transactions involved either the actual intent to defraud or constructive fraud under the Uniform Fraudulent Transfer Act (UFTA). We agree and reverse.

I

In September 1991, trial commenced between Katharine Sedwick and Stephen Gwinn on Sedwick's petition for a post-dissolution modification to their parenting plan. At this time, Stephen experienced a cash flow shortage caused, in part, by litigation expenses, living expenses, unemployment due to psychiatric disability, and insufficient income from his property holdings. As a result, Stephen sought and obtained a loan from his parents, Stanley and Ruth Gwinn, in November 1991. In their affidavits, Stephen and Stanley Gwinn and James Abbott, counsel for a construction company owned by Stephen, each averred that Stephen sought the loan from his parents for litigation and living expenses. ¹

In a deposition taken prior to the submission of his affidavit, Stanley stated that he and Ruth had considered the loan amount "open-ended", that they had no particular limit in mind, and that he did not plan to demand repayment from Stephen.

Stanley and Ruth required Stephen to provide security for the loan. On November 5, 1991, Stephen executed two promissory notes in the amounts of $13,000 and $82,800 in exchange for two checks in those amounts. Both notes and "any renewals, modifications or extensions thereof and all such further sums as may be advanced or loaned" were secured as follows:

by an Assignment of Partnership Interest in S & M Partnership and an Assignment of Real Estate Contract between Borrower (as Seller) and John A. and Joan Carter (as Buyer), both Assignments of even date with this Note.

On November 5, 1991, Stephen executed an "Assignment of Real Estate Contract" of the Carter real estate contract as security for the promissory notes. Under that real estate contract, Stephen was to receive $75,000 from the Carters, in the form of a $15,000 down payment and $600 monthly interest payments until the $60,000 balance became due on April 1, 1992. In February 1992, the Carters made one On November 5, 1991, Stephen also executed an "Assignment of Partnership Interest" of the S & M Partnership as security for the promissory notes. Stephen owned a 50 percent interest in the S & M Partnership. At the time of the assignment, the S & M Partnership's sole asset was a $152,000 promissory note, secured by a second deed of trust, upon which monthly $1,294 interest payments were due until the entire balance became due on April 1, 1992. ³

                monthly interest payment to Ruth and Stanley. 2  On April 7, 1992, the Carters admitted that $57,592.05 was the balance due on the contract
                

On or about November 6, 1991, Stephen delivered copies of these assignments to his attorneys for immediate recording. However, due to a delay in delivering the original documents, they were not recorded until December 6, 1991.

In mid-November 1991, Stephen learned that Warren & Lewis had defaulted on the deed of trust securing the promissory note owned by the S & M Partnership, which in turn, caused Stephen to be in default to his parents pursuant to the following provision contained in both promissory notes:

Borrower agrees to protect and defend the Collateral from and against any impairment of its value. Failure to so protect the Collateral shall constitute a default hereunder.

To avoid default, Stephen and his parents agreed that he would provide additional security for the loans. On December 5, 1991, Stephen executed an amendment to each promissory note in which he acknowledged the default and re-secured the notes as follows:

In consideration of Lender's forbearance from accelerating the Note, Borrower hereby modifies the Note to provide that the Note will be further secured by an Assignment of Partnership Interest in the GLG Partnership....

Stephen then executed an "Assignment of Partnership Interest" for the GLG Partnership in which he, Stanley, and Ruth each owned a 33 1/3 percent interest. The GLG Partnership's sole asset was 9 acres of undeveloped and unappraised property. At the time of the assignment, the property's value was unascertained due to a partial wetlands classification in 1989. ⁴

On November 12, 1991, the trial court rendered its oral ruling in Sedwick's favor on her petition to modify the parenting plan. The trial court also scheduled a hearing for December 20, 1991, to determine whether Sedwick should be awarded her attorney's fees. In his declaration, Steven J. Fields, Stephen's domestic relations attorney, stated that the purpose of the attorney's fees hearing was to determine whether Sedwick should be granted her attorney's fees based on her financial circumstances. In Fields' opinion, it was "extremely unlikely" that Sedwick would be granted attorney's fees because her net worth was approximately $1 million and her cash flow had been approximately $221,000 the previous year. In his affidavit, Stephen also averred that, at the time of trial, he "was not at all concerned about an award of attorneys' fees" because Sedwick had substantial assets. On December 20, 1991, the court awarded Sedwick $142,181 in attorney's fees.

In February 1992, Warren & Lewis paid off the promissory note owned by S & M Partnership. Stanley and Ruth then received $79,133.56, which represented Stephen's interest in the S & M Partnership and several months of delinquent interest payments.

In February and March 1992, Stanley and Ruth made additional advances to Stephen totalling $60,152.77. ⁵ On In April 1992, Sedwick instituted this action in an attempt to collect her attorney's fees award, alleging, in part, that Stephen's assignments of interest in the S & M Partnership, the Carter real estate contract, and the GLG Partnership constituted fraudulent transfers under the Uniform Fraudulent Transfer Act. On July 2, 1992, Sedwick moved for partial summary judgment to avoid the transfers to Ruth and Stanley. ⁶ The trial court denied the motion. Sedwick moved for reconsideration. On August 14, 1992, the trial court reversed its previous ruling and granted Sedwick's partial summary judgment motion.

                March 25, 1992, Stephen executed a third promissory note to them for $13,101.66.   To secure the note, Stephen again assigned his interest in the GLG Partnership.   By the end of March 1992, Stanley and Ruth's loans to Stephen totalled $155,952.77
                

II

The Gwinns assign error to the trial court's ruling that there was no genuine issue of material fact as to whether Stephen's assignments: (1) were made with the actual intent to defraud Sedwick or (2) constituted constructive fraud under the UFTA.

An appellate court reviewing a summary judgment order must engage in the same inquiry as the trial court. Marincovich v. Tarabochia, 114 Wash.2d 271, 274, 787 P.2d 562 (1990). Summary judgment is appropriate "only when there is no genuine issue as to any material fact, and the moving party is entitled to judgment as a matter of law." Marincovich, at 274, 787 P.2d 562; CR 56(c). "A material fact is one upon which the outcome of the litigation depends in whole or in part." Atherton Condo Ass'n v. Blume Dev. Co., 115 Wash.2d 506, 516, 799 P.2d 250 (1990). On review,

[t]he court must consider the facts in the light most favorable to the nonmoving party, and the motion should be granted Marincovich, at 274, 787 P.2d 562; CR 56(c).

only if, from all of the evidence, reasonable persons could reach but one conclusion.

In addition, we "must view the evidence presented through the prism of the substantive evidentiary burden." Adams v. Allen, 56 Wash.App. 383, 393, 783 P.2d 635 (1989), citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 254, 106 S.Ct. 2505, 2513, 91 L.Ed.2d 202 (1986). Under Washington's UFTA, the actual intent to defraud must be demonstrated by "clear and satisfactory proof". Clearwater v. Skyline Const. Co. Inc., 67 Wash.App. 305, 321, 835 P.2d 257 (1992), review denied, 121 Wash.2d 1005, 848 P.2d 1263 (1993). In contrast, constructive fraud must be shown by "substantial evidence". Clearwater, at 321, 835 P.2d 257.

Under the former Uniform Fraudulent Conveyance Act (UFCA), the burden of proof rested upon the party alleging the fraudulent conveyance. See Columbia Intern. Corp. v. Perry, 54 Wash.2d 876, 880, 344 P.2d 509 (1959). Cases decided under the UFCA are relevant when interpreting the UFTA because the Acts' provisions are essentially the same. See Clearwater, 67 Wash.App. at 321, 835 P.2d 257. Because no reason exists to alter the burden of proof under the UFTA, we hold that the burden of proof rests on the party alleging the fraudulent transfer.

ACTUAL INTENT TO DEFRAUD

The Gwinns contend that Sedwick failed to prove an actual intent to defraud under RCW 19.40.041(a)(1). Under that section, a transfer is fraudulent if it is made...