Transamerica Ins. Co. v. Trout

• Decision Date: 31 January 1985
• Docket Number: CA-CIV,No. 1,1
• Citation: 701 P.2d 851,145 Ariz. 355
• Parties: TRANSAMERICA INSURANCE COMPANY, a California corporation, Plaintiff-Appellee, v. James G. TROUT and Jane Doe Trout, his wife, Garnishee, Defendants-Appellants. 7483.
• Court: Arizona Court of Appeals

Page 851

701 P.2d 851

145 Ariz. 355

TRANSAMERICA INSURANCE COMPANY, a California corporation, Plaintiff-Appellee, v. James G. TROUT and Jane Doe Trout, his wife, Garnishee, Defendants-Appellants.

No. 1 CA-CIV. 7483.

Court of Appeals of Arizona Division 1, Department A.

Jan. 31, 1985.

Jennings, Strouss & Salmon by James T. Skardon and Gammage & Burnham by Richard A. Burnham, Phoenix, for plaintiff-appellee.

Alston, Edwards & Novak, P.C. by Gerald W. Alston and David Brnilovich, Phoenix, for garnishee, defendants-appellants.

OPINION

HAIRE, Presiding Judge.

This appeal is taken from a judgment against James G. Trout in a garnishment action brought by Transamerica Insurance Company (Transamerica). The trial court ruled that Trout, as recipient of the fraudulent conveyance of property belonging to Transamerica's debtor, was liable to Transamerica for the $55,000 garnished together with interest thereon in conformance with Transamerica's prior judgment against its debtor.

Mr. and Mrs. Bert St. John (St. John) owned approximately 51 acres of farmland which included a dairy and a livestock barn. They operated a livestock auction in the barn and in connection with that business obtained a bond from Transamerica. Transamerica was ultimately obligated to pay $55,000 under the bond to various third parties and then sued St. John and obtained a judgment against him for the money paid pursuant to the bond.

Shortly before Transamerica's judgment against St. John became final, he quitclaimed the farm to Trout. The deed was recorded on September 17, 1974. Trout paid nothing for the farm and never assumed any of the outstanding obligations against it, but took title subject to encumbrances in the amount of $132,905.

Upon attempting to execute on its judgment against St. John in late December of 1974, Transamerica discovered that the farm had been conveyed by St. John to Trout. Transamerica was initially assured by counsel for St. John that Trout had accepted the conveyance of the farm as a favor to St. John and that the mortgages exceeded the value of the property. It was not until Transamerica conducted its debtor's examination of St. John on March 18, 1975 that it found that he thought the property was worth more than the amount of the encumbrances on the property. Transamerica obtained an appraisal of the farm in July of 1975 that confirmed St. John's belief.

Trout sold the farm to a bona fide purchaser in 1977, realizing a profit of approximately $75,000. Transamerica served a writ of garnishment on Trout on March 9, 1978, alleging that the conveyance to Trout had been fraudulent under A.R.S. § 44-1004, and attempting to recover $55,000 from Trout.

A trial to the court was held in October 1978, and resulted in a directed verdict for Trout. Transamerica appealed and this court reversed and remanded for a new trial. A second trial was held in March 1983, resulting in the entry of judgment for Transamerica on the writ of garnishment. The trial court ruled that the conveyance to Trout was fraudulent as to Transamerica, that the action was not barred by the statute of limitations, that St. John's intervening discharge in bankruptcy had no effect on Transamerica's claim against Trout and that Transamerica was entitled to judgment against Trout for $55,000 plus interest as provided in Transamerica's original judgment against St. John.

Trout challenges each of these rulings on appeal and also contends that the trial court erred in admitting certain evidence.

Trout argues first that Transamerica's action was barred by the statute of limitations. He contends that the three year period provided by A.R.S. § 12-543 began to run on September 17, 1974, the date the quitclaim deed from St. John to Trout was recorded. Transamerica responds that Trout waived this argument by not raising it until March 1983, shortly before the second trial. Alternatively Transamerica asserts that the statutory period did not begin to run until it discovered facts which could have led it to conclude that there had been a fraudulent conveyance. It argues that this did not occur until it obtained independent evidence of the value of the property.

Generally, it is held that the statute of limitations defense is waived only if it is not asserted prior to judgment. Romo v. Reyes, 26 Ariz.App. 374, 376, 548 P.2d 1186, 1188 (1976). An answer may be amended at any time before trial with the permission of the trial judge. Id. Transamerica contends that Trout waived the defense because he did not move to amend his answer until March 1, 1983, long after the first judgment and appeal. That judgment was reversed on appeal, however, and the matter remanded for a new trial. We hold that it was within the trial court's discretion to grant Trout's motion to amend his answer prior to the second trial, and therefore that he did not waive the statute of limitations defense.

A.R.S. § 12-543, which both parties acknowledge applies to claims based on fraudulent conveyances, provides that a cause of action in fraud accrues when the aggrieved party discovers facts constituting the fraud. The discovery dates from the time that he, by exercise of reasonable diligence, might have discovered the fraud. Condos v. Felder, 92 Ariz. 366, 377 P.2d 305 (1962).

Trout argues that this standard was met when the quit-claim deed to him from St. John was recorded. It is true that the recordation of a deed constitutes constructive notice of its contents. A.R.S. § 33-416. The statutory period may begin to run on the date of recording if the recorded deed sets forth facts from which the aggrieved party should have realized it had a cause of action. Thus, where a deed explicitly sets forth facts detailing the entire consideration given for the property, creditors are deemed to have discovered any inadequacy of consideration when the deed was recorded. Strong v. Clark, 56 Wash.2d 230, 352 P.2d 183 (1960). Similarly, when the deed, considered in the light of other facts known to the creditor, should have put him on notice of fraud, the statute begins to run when the deed is recorded. See, e.g., Babcock v. Tam, 156 F.2d 116 (9th Cir.1946) (applying Arizona law) (while personal injury action pending, defendant transferred his separate property to himself and wife as community property); Gibson v. Ransdell, 188 S.W.2d 35 (Mo.1945) (transfer by husband to himself and wife as tenants by the entirety, leaving him without any assets to satisfy his separate obligations); Causemaker v. DeRoo, 153 Kan. 648, 113 P.2d 85 (1941) (debtor deeded the very property upon which creditor relied in extending credit to his son.)

The deed from St. John to Trout did not purport to set out in detail the consideration agreed upon, reciting only that Trout paid "$10, and other valuable considerations." The language used in this recital accords with a common practice of stating a nominal, legal consideration and is not, in itself, suggestive of fraud. The transfer was to a third party who had no apparent relationship to St. John. Upon inquiry, St. John's attorney represented the property as worth less than the liens against it. Under these circumstances we hold that the recordation of the deed did not constitute notice of such facts as would, as a matter of law, alert Transamerica to the fraudulent nature of the conveyance. Rather, the trier of fact could consider such recordation and the attendant facts, together with all other evidence presented, in arriving at a factual determination of when Transamerica, by the exercise of reasonable diligence, should have discovered the fraudulent nature of the conveyance.

The trial court as the trier of fact found that Transamerica, having exercised reasonable diligence, first discovered information indicating that the conveyance might have been fraudulent when it received its appraisal report on July 26, 1975. It thus concluded that Transamerica's action, filed on March 9, 1978, was not barred by the statute of limitations. Even if Transamerica is deemed to have had the requisite notice of the possibility of fraud when it first questioned St. John about the value of the farm property on March 18, 1975, it filed its action within the three years permitted by the statute. We affirm the trial court's determination on this issue.

The trial court held that St. John's petition in bankruptcy and subsequent discharge did not affect Trout's liability to Transamerica. Trout, relying on a recent appellate opinion which held that the Uniform Fraudulent Conveyance Act does not create a new claim, Clark v. Rossow, 134 Ariz. 490, 657 P.2d 903 (App.1982), argues that the discharge in bankruptcy of St. John's underlying debt to Transamerica destroyed Transamerica's status as a creditor and thus, necessarily, its claim under the Uniform Fraudulent Conveyance Act against Trout.

Rather than proceeding directly against Trout in a separate action pursuant to the Uniform Fraudulent Conveyance Act, Transamerica filed suit against St. John and, after obtaining judgment, had a writ of garnishment served on Trout. Garnishment is an appropriate remedy for recovering the proceeds of a fraudulent conveyance. Sackin v. Kersting, 105 Ariz. 464, 466 P.2d 758 (1970). Service of a writ of garnishment creates an inchoate lien. Kuffel v. United States, 103 Ariz. 321, 441 P.2d 771 (1968).

Although the inchoate lien is not perfected until the creditor obtains judgment against the garnishee-defendant, the majority view is that if the lien attaches prior to the period within which the bankruptcy trustee can avoid it as a preference, it need not be perfected in order to survive a discharge in bankruptcy of the underlying indebtedness. See generally Liens by Garnishment, 4 Collier on Bankruptcy, para. 67.10 (14th Ed.1978). "[I]t is of no consequence [in bankruptcy] that the lien may be regarded as inchoate for certain purposes." Id. at p. 131. This view is consistent with Arizona law as interpreted by...