Hullett v. Cousin

SUPREME COURT OF ARIZONA
En Banc

WAYNE HULLETT, individually and ) Arizona Supreme Court
as TRUSTEE of WEH TRUST U/A ) No. CV-01-0407-PR
12/6/90, )
) Court of Appeals
Plaintiff-Appellant, ) Division One
) No. 1 CA-CV 00-0550
v. )
) Maricopa County
MR. and MRS. GEORGE COUSIN, as ) Superior Court
Trustees for Cousin Corporation ) No. CV 98-19294
Pension Plan and Trust, CPI OF )
FLORIDA PROFIT SHARING PLAN, )
NUMO INVESTMENT COMPANY, ROBERT )
W. FREMONT, DR. JEROME THEIS, as ) O P I N I O N
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. )
)

Appeal from the Superior Court in Maricopa County
The Honorable Jeffrey A. Hotham, Judge
REMANDED

Opinion of the Court of Appeals, Division One
Hullett v. Cousin, 201 Ariz. 119, 32 P.3d 44 (App. 2001)
VACATED
WARNICKE & LITTLER, P.L.C. Phoenix
By Ronald E. Warnicke
Robert C. Warnicke
Blake D. Gunn
Attorneys for Plaintiff-Appellant

BROENING OBERG WOODS WILSON & CASS, P.C. Phoenix
By Lori B. Kirsch-Goodwin
Donald Wilson, Jr.
Cynthia Y. Kirkland
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

R Y A N, 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

2
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 Defendants-

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

3
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

4
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

5
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 Cannon 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.

1
The UFCA, in turn, replaced earlier legislation pertaining
to fraudulent conveyances. See Rev. Stat. Ariz. Civil Code §§
3272-82 (1913); Rev. Stat. Ariz. §§ 2696-2708 (1901); Rev. Stat.
Ariz. §§ 2030-38 (1887); Howell Code, ch. XXXVI, §§ 1-26 (1864).
The origins of such legislation been traced as follows:

[T]he Statute of 13 Elizabeth, . . . invalidated
“covinous and fraudulent” transfers designed “to delay,
hinder or defraud creditors and others.” 13 Eliz., ch.
5 (1570). English courts soon developed the doctrine
of “badges of fraud”: proof by a creditor of certain
objective facts (for example, a transfer to a close
relative, a secret transfer, a transfer of title
without transfer of possession, or grossly inadequate
consideration) would raise a rebuttable presumption of

6
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-

actual fraudulent intent. See Twyne's Case, 3 Coke Rep.
80b, 76 Eng.Rep. 809 (K.B. 1601); O. Bump, Fraudulent
Conveyances: A Treatise upon Conveyances Made by
Debtors to Defraud Creditors 31-60 (3d ed. 1882).
BFP v. Resolution Trust Corp., 511 U.S. 531, 540-41 (1994).

2
The limited partners argue that Hullett’s fraudulent
transfer action was brought only under A.R.S. section 44-
1004(A)(1), which requires proof of an “actual intent to . . .
defraud any creditor of the debtor.” And because there is no
evidence of actual intent to defraud, the trial court’s ruling
must be affirmed. However, we agree with the court of appeals’
implied finding that Hullett’s complaint adequately alleged a
fraudulent transfer under A.R.S. section 44-1005.

7
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

8
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 protect themselves

from the possibility of future suit.” Thus they contend that a

distribution of assets when there is no notice of a claim is proper

under the UFTA. Hullett, on the other hand, argues that “even

contingent claims that are unasserted and even wholly unknown . . .

are considered under the UFTA.”3 If they were not, limited

partnerships would become “preferred vehicles for defrauding

creditors.”

¶18 Both sides overstate the issue. The limited partners

would not be indefinitely bound to an inactive entity. An action

under A.R.S. section 44-1005 is barred if not brought within “four

years after the transfer was made.” A.R.S. § 44-1009(2). Also, a

claim that forms the basis of the fraudulent transfer allegation

brought under A.R.S. section 44-1005 need not necessarily be known.

Otherwise, there would be no need for that section, because

transfers made when a claim is known or asserted would potentially

3
The parties assert at various points that the negligent
misrepresentation claim here was contingent. Contingent claims
are considered in a solvency analysis only if there is a
likelihood, as of the date solvency is being measured, that the
contingency will occur. See, e.g., In re Martin, 145 B.R. 933,
949 (Bankr. N.D. Ill. 1992). However, the underlying negligent
misrepresentation claim is not a contingent claim. A contingent
claim is one “that has not yet accrued and is dependent on some
future event that may never happen.” Black’s Law Dictionary 241
(7th ed. 1999). Hullett’s claim undisputedly had accrued. The
parties dispute, however, when that claim accrued.
9
be actual fraudulent transfers under A.R.S. section 44-1004(A)(1).

¶19 Nevertheless, under the UFTA, the claim upon which the

fraudulent transfer action is based must be a valid claim. Thus,

the core question here is whether Hullett’s misrepresentation claim

constituted a “right to payment” or a “claim” for UFTA solvency

purposes although the claim was unknown and presumably time-barred

when the partnership dissolved.

¶20 Because this is a matter of first impression for Arizona,

we look to cases from other jurisdictions having similar statutes.

For example, the Bankruptcy Code uses the same constructive fraud

language as that found in Arizona’s version of the UFTA. Compare

11 U.S.C. § 548(a)(1)(B)(ii)(I) (Supp. 2002) with A.R.S. § 44-1005.

The Bankruptcy Code and the Uniform Laws Annotated’s version of the

Uniform Fraudulent Conveyance Act also define the key terms

“insolvent,” “debt,” and “claim” similarly. Compare 11 U.S.C. §

101(32)(B) (1997) (defining insolvent), § 101(12) (defining debt),

§ 101(5)(A) (defining claim) and Unif. Fraudulent Conveyance Act §§

1-2, 7A U.L.A. 6, 22-23 (1999) with A.R.S. §§ 44-1002(C), -1001(4),

- 1001(2). Thus, we consider relevant bankruptcy and UFCA cases

that address the definitions relevant to this case.

¶21 Two principles inform our answer to the core question.

First, to set aside a transfer as fraudulent, there must have been

a valid claim at the time of the transfer, meaning a right to

payment. A.R.S. § 44-1001(2); see Cohen v. De la Cruz, 523 U.S.

10
213, 218 (1998) (defining “right to payment” as “nothing more nor

less than an enforceable obligation”) (citation omitted). Second,

whether a claim rendered the partnership insolvent is determined as

of the date of the transfer, or in this case, the date the

partnership dissolved. A.R.S. § 44-1005; see also First Nat. Bank

v. Frescoln Farms, Ltd., 430 N.W.2d 432, 437 (Iowa 1988) (“Solvency

must be determined as of the time the alleged fraudulent transfer

took place.”) (citation omitted).

¶22 The UFTA’s definition of claim is unquestionably broadly

worded. See A.R.S. § 44-1001(2). As such, it includes unknown and

unasserted claims. In re W.R. Grace & Co., 281 B.R. 852, 862

(Bankr. D. Del. 2002) (“This expansive language [defining a claim]

must negate any residual inference that a right to payment must be

known and asserted to be a claim.”). But while the UFTA defines a

claim broadly, such a claim must be an enforceable obligation.

See, e.g., Jahner v. Jacob, 515 N.W.2d 183, 185 (N.D. 1994). As

noted by the court in Jahner, this requirement “has a long

history.” Id. The rationale is that the UFTA is remedial; it does

not create new claims. Clark v. Rossow, 134 Ariz. 490, 491, 657

P.2d 903, 904 (App. 1982) (“The fraudulent conveyance act, A.R.S.

§ 44-1001, et seq., does not create a new claim. If a claim does

not exist there is no remedy.”) (citations omitted). Accordingly,

a claim that is time-barred is not a “right to payment.” Jahner,

515 N.W.2d at 185; see also State of Rio De Janeiro v. E.H. Rollins

11
& Sons, Inc., 87 N.E.2d 299, 300 (N.Y. 1949); Remington-Rand, Inc.

v. Emory University, 196 S.E. 58, 59 (Ga. 1938).

¶23 The limited partners contend that because Hullett’s

negligent misrepresentation claim was based upon actions that

occurred in 1989, it was time-barred when the partnership dissolved

in 1994. The statute of limitations for a negligent

misrepresentation claim is two years. A.R.S. § 12-542 (1992).

Consequently, on its face, Hullett’s fraudulent transfer action is

based on a time-barred claim, and thus Hullett did not have a valid

right to payment when the partnership dissolved.

¶24 Hullett makes two arguments against the limited partners’

contention that his misrepresentation action was barred by the

statute of limitations. First, he argues that the limited partners

raised the issue for the first time in their petition for review.

Second, he argues that the limited partners are attempting to

collaterally attack his original default judgment. We reject both

arguments. We reject the first argument because in the court of

appeals the limited partners argued that Hullett had no right to

payment because he did not have a valid claim. They argued in

their answering brief that “a right to payment under a claim may be

lost if not timely asserted,” and that “had the [misrepresentation]

claim been brought against them originally,” they would have been

entitled to raise defenses such as the statute of limitations.

Therefore, the record reflects that the limited partners are not

12
raising a new issue in this court.

¶25 We reject the second argument because solvency is

determined at the time of the transfer, not at some later time.

A.R.S. § 44-1005; In re Martin, 145 B.R. 933, 949 (Bankr. N.D.

Ill. 1992) (holding that in determining whether a debtor was

insolvent at time of the conveyances, liability for compensatory

damages arose when debtor committed torts of fraud and conversion,

so such liabilities would be considered, even though damages had

not been awarded).

¶26 Nonetheless, Hullett contends that the default judgment

“operates as an adjudication upon the merits of all well-pleaded

facts.” And because his original complaint against the partnership

alleged that he did not “discover” the negligent misrepresentation

until January 1994, the limited partners “are attempting an

impermissible collateral attack on [his] original judgment.”

¶27 Although couched by Hullett as a collateral attack on the

judgment, we view Hullett’s argument as the offensive use of

collateral estoppel. Garcia v. General Motors Corp., 195 Ariz.

510, 514 n.2, ¶ 8, 990 P.2d 1069, 1073 n.2 (App. 1999). Collateral

estoppel, or issue preclusion, applies when an issue was actually

litigated in a previous proceeding, there was a full and fair

opportunity to litigate the issue, resolution of the issue was

essential to the decision, a valid and final decision on the merits

was entered, and there is common identity of parties. See Collins

13
v. Miller & Miller, Ltd., 189 Ariz. 387, 397, 943 P.2d 747, 757

(App. 1996).

¶28 We find it unnecessary to decide whether collateral

estoppel applies here. For even in cases in which the technical

requirements for the application of collateral estoppel are met,

courts do not preclude issues when special circumstances exist.

See Ferris v. Hawkins, 135 Ariz. 329, 331, 660 P.2d 1256, 1258

(App. 1983) (“Principles of issue preclusion should not be applied,

however, where ‘there is some overriding consideration of fairness

to a litigant, which the circumstances of the particular case would

dictate.’”) (quoting Di Orio v. City of Scottsdale, 2 Ariz. App.

329, 332, 408 P.2d 849, 852 (1965)). The Restatement of the Law of

Judgments lists exceptions to the general rule of issue preclusion

even though an issue may have been “actually litigated and

determined by a valid and final judgment”:

There is a clear and convincing need for a new
determination of the issue (a) because of the potential
adverse impact of the determination on the public
interest or the interests of persons not themselves
parties in the initial action, (b) because it was not
sufficiently foreseeable at the time of the initial
action that the issue would arise in the context of a
subsequent action, or (c) because the party sought to be
precluded, as a result of the conduct of his adversary or
other special circumstances, did not have an adequate
opportunity or incentive to obtain a full and fair
adjudication in the initial action.

Restatement (Second) Judgments § 28(5) (1982).

¶29 We conclude that the special circumstances of this case

did not provide the limited partners “an adequate opportunity . . .

14
to obtain a full and fair adjudication in the initial action.”

Id. The limited partners never had an opportunity to raise a

statute of limitations defense against the negligent

misrepresentation claim. And because the general partner and the

partnership defaulted, it would be inequitable to bind the limited

partners to the default judgment, at least with respect to the

statute of limitations issue.4 Therefore, we hold the limited

partners are not estopped from challenging the validity of the

initial claim on the basis that it was time-barred at the time of

the transfer.

¶30 Because of the procedural posture of this case, there has

been no discovery on the issue of when Hullett’s negligent

misrepresentation claim accrued. Accordingly, we remand to the

trial court for further proceedings on this issue. See Walk v.

Ring, 202 Ariz. 310, 318, ¶ 30, 44 P.3d 990, 998 (2002) (finding

that determination of when cause of action accrues is ordinarily a

question of fact).

B.

¶31 The limited partners also argue that even if Hullett’s

claim was valid, the transfer at dissolution was for value, and

thus it was not fraudulent under A.R.S. section 44-1005.

Constructive fraud under A.R.S. section 44-1005 requires both

4
The limited partners do not otherwise challenge the
default judgment’s finding of liability or damages.

15
insolvency and a transfer not for value. The court of appeals

concluded that Suncrest’s distribution to the limited partners was

not a “transfer for value” under A.R.S. section 44-1003(A).5

Hullett, 201 Ariz. at 123, ¶ 14, 32 P.3d at 48. As pointed out by

the court of appeals, distribution of a limited partner’s capital

contribution is the return of an asset, not satisfaction of an

antecedent debt. Id. at 123, ¶ 15, 32 P.3d at 48; see also In re

Riverside-Linden Investment Co., 925 F.2d 320, 323 & n.1 (9th Cir.

1991) (finding interest in a partnership is not a debt of the

partnership). We agree with this reasoning. Under A.R.S. section

44-1003(A), a distribution of assets previously advanced by the

limited partners, for example capital contributions, may be a

return of value previously advanced to the partnership, but it is

not a transfer for value.

¶32 Accordingly, if Hullett is able to establish that his

misrepresentation claim was not time-barred at the time Suncrest

transferred its assets to the limited partners, he would be a

creditor of Suncrest for purposes of A.R.S. section 44-1005.

5
Section 44-1003(A), A.R.S., defines value as follows:

Value is given for a transfer or an obligation if, in
exchange for the transfer or obligation, property is
transferred or an antecedent debt is secured or
satisfied, but value does not include an unperformed
promise to furnish support to the debtor or another
person unless the promise is made in the ordinary
course of the promisor’s business.

16
 III. CONCLUSION

¶33 For the above reasons, we vacate the court of appeals’

opinion, and remand this matter to the trial court for further

proceedings consistent with this opinion.

Michael D. Ryan, Justice

CONCURRING:

Charles E. Jones, Chief Justice

Ruth V. McGregor, Vice Chief Justice

Stanley G. Feldman, Justice (Retired)

Rebecca White Berch, Justice

17