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
Hullett v. Cousin
Court: Arizona Supreme Court
Date filed: 2003-02-24
Citations: 63 P.3d 1029, 204 Ariz. 292
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