Kaufmann v. M & S Unlimited, L.L.C. ( 2005 )

FILED BY CLERK
IN THE COURT OF APPEALS SEP 30 2005
STATE OF ARIZONA
COURT OF APPEALS
DIVISION TWO DIVISION TWO
ELYSE KAUFMANN, a single woman, ) 2 CA-CV 2005-0037
) DEPARTMENT B
Plaintiff/Appellant, )
) OPINION
v. )
)
M & S UNLIMITED, L.L.C., an Arizona )
limited liability company, )
)
Defendant/Appellee. )
)
APPEAL FROM THE SUPERIOR COURT OF PIMA COUNTY
Cause No. C-20036104
Honorable Carmine Cornelio, Judge
REVERSED AND REMANDED
Law Office of Mark Rubin, P.L.C.
By Mark Rubin Tucson
Attorney for Plaintiff/Appellant
Brenda J. Lee & Associates
By Brenda J. Lee Tucson
Attorneys for Defendant/Appellee
E S P I N O S A, Judge.
¶1 Appellant Elyse Kaufmann appeals from the trial court’s grant of summary
judgment in favor of appellee M & S Unlimited, L.L.C. on its cross-motion for summary
judgment and the denial of Kaufmann’s motion for summary judgment in her cause of action
for fraudulent transfer of real property. Kaufmann contends the trial court erred by
determining that Blalak v. Mid Valley Transportation, Inc., 175 Ariz. 538, 858 P.2d 683
(App. 1993), was controlling authority and trumped the Arizona Fraudulent Transfer Act.
We agree and therefore reverse.
Factual Background
¶2 In reviewing a grant of summary judgment, we view the facts in the light most
favorable to the party opposing summary judgment. Hall v. World Sav. & Loan Ass’n, 189
Ariz. 495, 943 P.2d 855 (App. 1997). Between March and July of 2003, Kaufmann lent or
advanced a total of $195,000 to James Hessler and GWH Unlimited, L.L.C. Kaufmann
received two partially executed promissory notes, one in the amount of $25,000 signed by
James Hessler and one in the amount of $100,000 signed by Gerald Hessler on his own
behalf and purportedly under a power of attorney for Moshe Gedalia, the sole member of
M & S Unlimited. Kaufmann also received two partially executed deeds of trust covering
two residential lots in Pima County.1 At that time, GWH held legal title to three other lots
located in Pima County, and those lots are the subject of Kaufmann’s fraudulent transfer
claim.
¶3 In August 2003, Kaufmann demanded original promissory notes, recordable
deeds of trust, and a construction contract as the security agreed upon when she had
advanced the funds. On October 14, 2003, Kaufmann and Gedalia met to discuss the loan
1
Although it is not clear in the record, the parties agreed at oral argument that neither
of these residential lots was conveyed in the transfer at issue here.
2
transaction situation. The next day, Gerald Hessler signed deeds transferring the three lots
from GWH to M & S. The deeds were recorded on October 17. At the time it transferred
the lots, GWH apparently received nothing for them. Moreover, at that time, GWH had no
income and no assets other than the three lots in its name.
¶4 Kaufmann brought this action against M & S in June 2004, seeking to recover
her funds under Arizona’s Uniform Fraudulent Transfer Act, A.R.S. §§ 44-1001 through
44-1010, (the Act), alleging she was entitled to relief under § 44-1007.2 Both Kaufmann and
M & S filed motions for summary judgment. M & S, the transferee of the three lots that had
been GWH’s only assets, asserted that M & S had provided “all of the monies to purchase
the lots.” 3 It conceded that GWH had held legal title to the property until the transfer, but
argued that, under Blalak, Kaufmann could not recover because M & S had always been the
equitable owner of the property and the transfer of legal title did not fall under the Act. The
trial court “reluctantly” granted summary judgment in favor of M & S and denied
Kaufmann’s motion, citing Blalak and stating: “The Court feels its hands are tied.” This
appeal followed the trial court’s entry of judgment in favor of M & S pursuant to Rules 54(b)
and 56, Ariz. R. Civ. P., 16 A.R.S., Pt. 2.
2
Kaufmann previously had sued the Hesslers and GWH in November 2003. GWH
and Gerald Hessler stipulated to entry of judgment against them in February 2004 in the
amount of $170,000 plus interest.
3
Although M & S asserts in its brief that GWH “[a]t no time . . . ma[d]e any payments
toward purchase of the lots,” the record contains copies of multiple checks written by GWH
or the Hesslers to LandAmerica Account Servicing and Lawyers Title with corresponding
copies of payment coupons for the lots at issue. The record also contains copies of checks
to GWH from M & S, apparently written as reimbursement for those payments.
3
Discussion
¶5 We review a grant of summary judgment de novo and will reverse if the trial
court’s granting of M & S’s cross-motion was erroneous. See Hall. The denial of a motion
for summary judgment is generally not appealable, but once we have jurisdiction over an
order granting summary judgment, we may consider the merits of an order denying summary
judgment and direct entry of summary judgment if there are no issues of material fact and the
movant is entitled to judgment as a matter of law. Bothell v. Two Point Acres, Inc., 192 Ariz.
313, 965 P.2d 47 (App. 1998).
¶6 We initially note that this is a fraudulent transfer action under the Act, not an
action under Arizona’s conveyance statutes, A.R.S. §§ 33-401 through 33-513. In Blalak,
after a third party had purchased real property with Blalak’s funds, a judgment creditor of the
third party placed a lien on the property. Blalak sought to quiet title to the property in
himself and to have the lien declared invalid on the ground that he had always been the
equitable owner of the property notwithstanding § 33-412(A), which provides that
unrecorded conveyances of property are void as to creditors,4 and § 33-404, which requires
4
Section 33-412, A.R.S., specifically provides:
A. All bargains, sales and other conveyances whatever of lands,
tenements and hereditaments, whether made for passing an
estate of freehold or inheritance or an estate for a term of years,
and deeds of settlement upon marriage, whether of land, money
or other personal property, and deeds of trust and mortgages of
whatever kind, shall be void as to creditors and subsequent
purchasers for valuable consideration without notice, unless they
are acknowledged and recorded in the office of the county
recorder as required by law.
4
the disclosure of beneficiaries of property held in trust.5 Division One of this court granted
Blalak the relief he sought, holding that “A.R.S. § 33-412(A) does not, standing alone, affect
the validity of unrecorded equitable liens as against creditors . . . without notice of the liens.”
175 Ariz. at 541, 858 P.2d at 686. The Blalak court further found that the only relief
provided by § 33-404 is avoidance of the transaction by the grantor. We do not find Blalak
controlling here for two reasons.
¶7 First, we reject M & S’s argument that GWH never owned the lots and
therefore could not have transferred any interest in them because it had nothing to convey in
view of Blalak’s interpretation of § 33-404(F). To the extent Blalak suggests that legal title
is not an interest in property, we disagree. See Dunlap Investors Ltd. v. Hogan, 133 Ariz.
130, 132, 650 P.2d 432, 434 (1982) (owner of equitable title “not the legal owner of the
property because its interest was not of record” but the “hold[er of] all other rights”); Boone
B. Unrecorded instruments, as between the parties and their
heirs, and as to all subsequent purchasers with notice thereof, or
without valuable consideration, shall be valid and binding.
5
Section 33-404, A.R.S., generally provides that all deeds or conveyances shall
identify any beneficiaries for whom the grantee holds title, and that a failure to so identify
shall render the conveyance voidable by the other party within two years of recording.
Subsection F of the statute states:
If real property or any interest in real property, or any mortgage,
deed of trust or other lien on real property, is acquired for value,
the title, interest, mortgage, deed of trust or other lien is not
impaired or in any way adversely affected by reason of the
failure of any person to comply with the requirements of this
section.
5
v. Grier, 142 Ariz. 178, 182, 688 P.2d 1070, 1074 (App. 1984) (“There is a rebuttable
presumption that record title accurately reflects the ownership interest in real property.”); see
also Wayt v. Wayt, 123 Ariz. 444, 446, 600 P.2d 748, 750 (1979) (“A contract for the sale
of realty does not effect a transfer of legal title. The vendor remains the owner of the legal
estate, while the vendee holds an equitable interest in the property.”); Smith v. Tang, 100
Ariz. 196, 204, 412 P.2d 697, 703 (1966) (“The mutual interest the joint tenants retain after
a contract to sell is legal title . . . . Prior to entering the agreement to sell . . . , the joint
tenants own[] legal and equitable title to the land.”); Hoyle v. Dickinson, 155 Ariz. 277, 280,
746 P.2d 18, 21 (App. 1987) (pursuant to a land contract, legal title remains in vendor until
payment in full is made, but plaintiffs had “transferred legal title to the trustee and did not
retain any interest in the property”).
¶8 Second, Blalak involved only the conveyance and deed statutes in Title 33 and
did not address the law of fraudulent transfers. We reject M & S’s assertion that the
legislature intended the expansive reach of the Act to be circumscribed by an arguably
anomalous interpretation of Title 33. See Blalak (Garbarino, J., dissenting).6 Moreover,
adopting the Blalak majority’s reasoning in this fraudulent transfer action would preclude
Kaufmann from obtaining relief otherwise available under the Act.
6
Although the Blalak court’s conclusions may be questionable, see Blalak v. Mid
Valley Transportation, Inc., 175 Ariz. 538, 858 P.2d 683 (App. 1993) (Garbarino, J.,
dissenting), we need not, despite the parties’ repeated urging, address the soundness of
Blalak’s reasoning or result in view of our determination that the statutes in Title 33, most
notably § 33-404, are not controlling here.
6
¶9 Section 44-1005 provides that a transfer is “fraudulent as to a creditor whose
claim arose before the transfer was made . . . if the debtor made the transfer . . . without
receiving a reasonably equivalent value in exchange . . . and the debtor was insolvent at that
time or the debtor became insolvent as a result of the transfer.” “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.” § 44-1001(2). The same remedies are available to creditors whether the claim
has been reduced to a judgment or not. § 44-1007; Moore v. Browning, 203 Ariz. 102, 50
P.3d 852 (App. 2002). Kaufmann’s right to payment arose at the earliest when she received
partially executed notes and security interests in two lots in exchange for her funds, and at
the latest when she was notified that the loans would not be repaid as agreed.7 In any event,
Kaufmann had a claim for purposes of the Act before this transfer occurred.
¶10 M & S argues that the transfer at issue is not covered by the Act because it
merely consolidated the legal title of the property and its equitable ownership. We disagree
because it is clear the transfer of legal title to real property is a “transfer” within the Act’s
broad provisions. “It is not the transaction itself, but rather[,] the purpose behind the
transaction, that brings a transfer under the scrutiny of A.R.S. § 44-1004.” State ex rel.
Indus. Comm’n v. Wright, 202 Ariz. 255, ¶ 20, 43 P.3d 203, 207 (App. 2002); see also
Backman v. Backman, 127 Ariz. 414, 418, 621 P.2d 920, 924 (App. 1980) (“[I]t is the
7
Kaufmann alleged in her complaint that GWH had made this representation to her,
and M & S has not disputed it.
7
relationship of debtor-creditor and the debtor’s . . . intent to defraud creditors that makes the
act . . . operable.”).
¶11 Under the Act, a transfer is “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 and includes payment of money, release, lease and creation of a lien or other
encumbrance.” § 44-1001(9) (emphases added). “This broad statutory definition clearly
includes any transaction in which a property interest was relinquished.” Wright, 202 Ariz.
255, ¶ 8, 43 P.3d at 205. An asset is the property of a debtor to the extent it is not
encumbered by a valid lien. § 44-1001(1)(a). For purposes of the Act, “[l]ien” is defined as
“a charge against or an interest in property to secure payment of a debt or performance of an
obligation and includes a security interest created by agreement, a judicial lien . . . , a
common law lien or a statutory lien.” § 44-1001(6). And the Act specifically provides that
a transfer to an “insider” is a factor to be considered in determining fraudulent intent.
§ 44-1004(B)(1).
¶12 In Premier Financial Services v. Citibank, 185 Ariz. 80, 912 P.2d 1309 (App.
1995), Division One of this court found that a transfer of funds from the owners of a
certificate of deposit to their daughter was fraudulent despite the daughter’s testimony that
she previously had given the funds to her parents and they were merely returning the money.
The court concluded that the timing of that transfer during litigation against the parents and
other circumstances surrounding the transfer indicated the parties’ intent was to defraud
creditors. In a similar vein, the court noted in Wright that “[a]n agreement returning a
8
property right previously acquired is no less a transfer than the original agreement through
which that right was acquired.” 202 Ariz. 255, ¶ 12, 43 P.3d at 206. Thus, the modification
of a marital agreement to convert the husband’s earnings from separate property into
community property was held to be a transfer within the Act because the change had been
made to protect those earnings from potential garnishment. Similarly, in Gerow v. Covill,
192 Ariz. 9, 960 P.2d 55 (App. 1998), the transfer of goodwill accrued in a husband’s
separate business to a business owned by his sister-in-law was held to be a fraudulent
conveyance because the intent was to prevent the wife from claiming her share of the
community asset. See also Hullett v. Cousin, 204 Ariz. 292, ¶ 31, 63 P.3d 1029, 1036 (2003)
(“[A] distribution of assets previously advanced by . . . limited partners, for example capital
contributions, may be a return of value . . . , but it is not a transfer for value.”).
¶13 We note that, in an action pursuant to § 44-1005, proof of intent does not
appear to be required; instead, the plaintiff must merely prove the circumstances listed in the
statute. Id. ¶ 13 (“No proof of intent is required to maintain a fraudulent transfer action under
A.R.S. section 44-1005.”). Under § 44-1006(1)(a), real property is transferred when “a good
faith purchaser of the asset from the debtor . . . cannot acquire an interest in the asset that is
superior to the interest of the transferee.” In this case, that occurred on October 17, when the
transfer deeds between GWH and M & S were recorded. See § 33-412. However, under
§ 44-1003(C), that transfer was not “made for present value” because the exchange between
GWH and M & S was not “intended by them to be contemporaneous and [was not] in fact
substantially contemporaneous.”
9
¶14 The record reflects that legal title to the lots at issue was transferred to M & S
following Kaufmann’s meeting with Gedalia about her loans.8 Gerald Hessler, the principal
of GWH, admitted in his deposition that the company had no other assets at the time of the
transfer, which resulted in GWH becoming insolvent. See § 44-1002. Gerald Hessler also
admitted he had received no value from M & S in exchange for the transfer. Accordingly,
this transaction appears to include all of the elements of a fraudulent transfer under
§ 44-1005. Although M & S argues that GWH transferred the property only to consolidate
legal and equitable ownership, our supreme court has stated that “[no] . . . good faith defense
[is] available to a debtor in a fraudulent transfer action brought under [§ 44-1005].” Hullett,
204 Ariz. 292, ¶ 13, 63 P.3d at 1032.9
8
It is unclear from the record whether Gedalia may also be a debtor of Kaufmann. The
record contains a promissory note and deed of trust Gerald Hessler signed under a purported
power of attorney for Gedalia. In any event, we need not address that issue. Nor do we
address Kaufmann’s argument that the “clean hands doctrine” applies to defeat M & S’s
claim of equitable ownership.
9
In her briefs, Kaufmann asked us to both reverse the grant of summary judgment in
favor of M & S and remand to the trial court with instructions to enter summary judgment
in her favor. But at oral argument, both parties acknowledged there exist issues of fact,
precluding summary judgment. Therefore, we do not address the ultimate merit of the
fraudulent transfer claim. See Bothell v. Two Point Acres, Inc., 192 Ariz. 313, 965 P.2d 47
(App. 1998).
10
Disposition
¶15 For the foregoing reasons, we reverse the trial court’s grant of summary
judgment in favor of M & S and remand the case for further proceedings.
PHILIP G. ESPINOSA, Judge
CONCURRING:
JOHN PELANDER, Chief Judge
JAMES A. SOTO, Judge*
*A judge of the Santa Cruz County Superior Court authorized and assigned to sit as a judge
on the Court of Appeals, Division Two, pursuant to Arizona Supreme Court Order filed
July 8, 2005.
11