Schnidt v. HSC, Inc. ( 2014 )

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Electronically Filed
Supreme Court
SCWC-29454
15-JAN-2014
10:17 AM
IN THE SUPREME COURT OF THE STATE OF HAWAI#I
---o0o—
THOMAS FRANK SCHMIDT and LORINNA JHINCIL SCHMIDT,
Petitioners/Plaintiffs-Appellants, Cross-Appellees,
vs.
HSC, INC., a Hawai#i corporation,
RICHARD HENDERSON, SR., and ELEANOR R.J. HENDERSON,
Respondents/Defendants-Appellees, Cross Appellants.
SCWC-29454
CERTIORARI TO THE INTERMEDIATE COURT OF APPEALS
(ICA NOS. 29454 and 29589; CIV. NO. 06-1-0228)
January 15, 2014
NAKAYAMA, ACTING C.J., ACOBA, McKENNA, AND POLLACK, JJ., AND
CIRCUIT JUDGE GARIBALDI, IN PLACE OF RECKTENWALD, C.J., RECUSED
OPINION OF THE COURT BY ACOBA, J.
We hold that, in accordance with the text of Hawai#i
Revised Statutes (HRS) § 651C-9(1) (1993)1 pertaining to the
1
HRS § 651C-9 is set forth infra.
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Uniform Fraudulent Transfers Act (UFTA2), that the one year
limitations period that begins on the date a transfer “was or
could reasonably have been discovered by the claimant” commences
when a plaintiff discovers or could reasonably have discovered a
transfer’s fraudulent nature. The Intermediate Court of Appeals
(ICA), however, held that the limitations period begins when the
transfer, rather than its fraudulent nature, is discovered, and
resultingly affirmed the October 7, 2008 judgment of the Circuit
Court of the Third Circuit (the court)3 that dismissed the action
brought by Petitioners/Plaintiffs-Appellants Thomas Frank Schimdt
and Lorinna Jhincil Schmidt (collectively, Petitioners) on the
ground that the statute of limitations period had run on
Petitioners’ action.4 Based on this ruling, the ICA did not
reach Petitioners’ points of error on the merits of the case
2
HRS Chapter 651C represents Hawai#i’s adoption of the UFTA. The
UFTA is a uniform act that has been adopted by 45 jurisdictions. See 7A
Uniform Laws Annotated, Part II at 2-3 (2006).
3
This case involves proceedings before three different judges. As
explained in greater detail infra, Realty Finance Inc. (RFI) initially filed a
foreclosure action in the First Circuit Court under case number CIV. 97-1235-
03. The Honorable Kevin S. Chang presided over the initial proceedings.
Realty Finance, Inc. v. Schmidt (Realty II), No. 23441, 2004 WL 541878, at *1
n.3 (Haw. 2004) (mem.).
The judgment in that case was eventually remanded to the First
Circuit Court by this court in Realty II. The Honorable Karen N. Blondin
presided over the proceedings on remand.
Following the entry of final judgment in Civ. No. 97-1235-03,
Petitioners filed the action that is the subject of the instant appeal, Civ.
No. 06-1-228 in the Circuit Court of the Third Circuit. The Honorable Greg K.
Nakamura presided. In this opinion, the reference to “the court” is used to
describe the presiding court in each of the three trial proceedings. However,
the judge presiding over specific proceedings is noted.
4
The opinion was filed by the Honorable Alexia D.M. Fujise, the
Honorable Katherine G. Leonard, and the Honorable Lisa M. Ginoza.
2
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raised in Petitioners’ October 29, 2008 appeal from the court’s
October 7, 2008 final judgment in favor of Respondents/
Defendants-Appellees, HSC, Inc. (HSC), Richard Henderson Sr.
(Richard), and Eleanor Henderson (Eleanor), (collectively,
Respondents). Because the ICA erred in its ruling on the statute
of limitations issue and should have decided the merits of the
claim raised in Petitioners’ appeal, we vacate the October 9,
2013 judgment of the ICA filed pursuant to its August 30, 2013
Memorandum Opinion and remand the case to the ICA for disposition
consistent with this opinion.
I.
A.
This case can be traced back to a complaint for
foreclosure filed in the court5 on March 27, 1997, by RFI against
Petitioners, as well as Amerasian Land Co. (Amerasian)6 and
Turlington Corporation, filed in Civ. No. 97-1235-03.7
5
The Honorable Kevin S. Chang, in the First Circuit Court,
presided.
6
Neither RFI, Amerasian, nor Turlington Corporation are parties to
this present action.
7
As explained in greater detail infra, the proceedings that are the
issue of this appeal are distinct from, but related to the proceedings in the
First Circuit Court under case Civ. No. 97-1235-03 described supra. Hence,
the facts of that case are not a part of the record on appeal. For the
purposes of background, the facts of that case are taken from the ICA opinion
in Realty Finance, Inc. v. Schmidt, (Realty I), No. 23441 (Haw. App. June 27,
2002) (mem.), available at http://www.state.hi.us/jud/ica23441mop2.htm#, and
from the supreme court Opinion in Realty II.
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On June 10, 1991, Petitioners executed and delivered a
promissory note secured by a mortgage to Investors Finance, Inc.
(Investors) in the amount of $228,853.72. Realty II, 2004 WL
541878, at *1. On June 11, 1995, Petitioners executed and
delivered a second promissory note and mortgage to Investors in
the amount of $225,000 in a separate property transaction. Id.
at *1. Thereafter, Investors assigned and transferred both the
1991 and 1995 notes and mortgages to RFI. Id. Petitioners
subsequently defaulted on the notes and mortgages and RFI
initiated a foreclosure action against Petitioners and all
defendants on March 27, 1997. Id.
On February 24, 1998, the court granted a motion for
summary judgment and an interlocutory decree of foreclosure for
RFI, and determined the principal and interest amounts owed by
Petitioners to RFI. Id. at *2. In the aftermath of the court’s
February 24, 1998 judgment, RFI sold Petitioners’ notes and
mortgages to another investor, Waikiki Investments 418, Inc.
(Waikiki Investments), and allowed Waikiki Investments to collect
the monies owed on the notes and mortgages in order to discharge
the mortgages burdening the mortgaged properties. Id. at *3.
Waikiki Investments collected a total of $534,000 from Amerasian
and Lulani Properties, LLC (Lulani) before eventually defaulting
on its agreement with RFI. Id. at *4.
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RFI then filed notice reasserting its status as real-
party-in-interest and resumed foreclosure proceedings against
Petitioners. Id. After re-entering the case, RFI filed a motion
for an order approving confirmation of the private sale of the
subject properties on October 25, 1999. Realty I, slip op. at 9.
Subsequently, on December 21, 1999, Petitioners and Amerasian
filed a memorandum maintaining that the $534,000 paid to Waikiki
Investments should be credited to the debt owed by Petitioners to
RFI. Id. at 12. On January 6, 2000, RFI filed an opposition
memorandum arguing that it was not obligated to credit the
$534,000 payment. Id. In an Order filed on January 31, 2000,
the court apparently agreed with RFI’s position that it was not
required to give Petitioners credit for the $534,000 paid to
Waikiki Investments. Realty II, 2004 WL 541878, at *5.
Without informing Petitioners, in February 2000 RFI
transferred the proceeds of the foreclosure sale to four
creditors of RFI’s parent company, HSC. Schmidt v. HSC, Inc.,
No. 29454, 2013 WL 4711524, at *2 (Haw. App. Aug. 30, 2013). The
funds were transferred to Richard, Eleanor, the law firm of
Goodsill, Anderson, Quinn, and Stifel, (Goodsill), and Kamehameha
Schools, Bishop Estate (Kamehameha Schools). Richard was the
President of HSC. Eleanor was his wife and a director of HSC.
Goodsill and Kamehameha Schools were apparently creditors of HSC,
and not RFI.
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However, after RFI transferred the proceeds of the
foreclosure sale to the creditors of HSC, this court in Realty II
agreed that RFI should have credited Petitioners for the payments
made to Waikiki Investments. Realty II, 2004 WL 541878, at *8.
Therefore, this court reversed the court’s January 30, 2000 Order
and remanded to that court for further proceedings consistent
with this court’s order. Id.
B.
On remand, the court8 issued a December 21, 2004 final
judgment with regard to the surplus sale proceeds, requiring RFI
to repay approximately $537,000 to Petitioners. At this point,
Petitioners were still unaware that the proceeds of the
foreclosure sale had been transferred.
On March 18, 2005, the parties’ counsel met to discuss
RFI’s payment of the December 21, 2004 final judgment. At the
meeting, Petitioners’ counsel received RFI’s monthly bank
statement for February, 2000. The monthly bank statement
revealed that following the payment from the foreclosure
commissioner, RFI wrote four checks, one for $54,399.55, one for
$78,000.00, one for $119,393.42, and one for $165,058.42. The
monthly bank statement also indicated that the ending balance in
8
The Honorable Karen N. Blondin, in the First Circuit Court,
presided over the proceedings on remand.
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RFI’s bank account was $71,857.79. However, there was apparently
no indication of who received the checks.
On April 20, 2005, counsel for both parties attended a
“meet and confer” regarding the four checks listed in the monthly
bank statement. The results of the “meet and confer” are not a
part of the record. However, it is undisputed that at the
meeting, counsel for Petitioners received copies of the four
checks and discovered that the checks were made “to insiders.”
On July 26, 2005, counsel for Petitioners deposed
Michael Chagami (Chagami), the treasurer of HSC, Inc. Chagami
explained that RFI transferred the proceeds of the foreclosure
sale to HSC to “satisfy certain obligations of HSC.” Chagami
further stated that as of December of 2004, RFI was “insolvent.”
Subsequently, on September 1, 2005, Petitioners filed
an ex parte motion for issuance of execution and garnishment of
the December 21, 2004 judgment against the assets of both RFI and
HSC. In their memorandum in support of the motion, Petitioners
asserted that the transfers were fraudulent under HRS §§ 651C-
4(a)(1) (1993), 651C-4(a)(2) (1993), and HRS § 651C-5 (1993).9
Accordingly, Petitioners asserted that they were entitled to
execution and garnishment against the assets transferred under
HRS § 651C-7(b) (1993). The court denied Petitioners’ motion
9
HRS § 651C-5 establishes the circumstances under which a transfer
by a debtor is fraudulent as to a present creditor. Petitioners did not file
a cause of action under HRS § 651C-5 in their Complaint.
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“without prejudice to filing a separate action against the proper
parties.”
C.
On April 7, 2006, Petitioners filed a Complaint with
the court against Respondents in Civ. No. 06-1-0611-04 that is
the subject of the instant appeal. The Complaint alleged, inter
alia, that the transfers were fraudulent and Petitioners were
entitled to remedies under HRS § 651C-7.
The case proceeded to a bench trial on July 1 and 2,
2008. The parties submitted written closing arguments on July
31, 2008. In their closing argument, Petitioners asserted that
the transfers violated HRS § 651C-4(a)(1)10 because they were
10
HRS § 651C-4 provides in relevant part as follows:
§ 651C-4 Transfers fraudulent as to present and future creditors.
(a) A transfer made or obligation incurred by a debtor is
fraudulent as to a creditor, whether the creditor's claim
arose before or after the transfer was made or the
obligation was incurred, if the debtor made the transfer or
incurred the obligation:
(1) With actual intent to hinder, delay, or defraud any
creditor of the debtor; or
(2) Without receiving a reasonably equivalent value in
exchange for the transfer or obligation, and the debtor:
(A) Was engaged or was about to engage in a business or a
transaction for which the remaining assets of the debtor
were unreasonably small in relation to the business or
transaction; or
(B) Intended to incur, or believed or reasonably should have
believed that the debtor would incur, debts beyond the
debtor's ability to pay as they became due.
(b) In determining actual intent under subsection (a)(1),
consideration may be given, among other factors, to whether:
(1) The transfer or obligation was to an insider;
. . .
(3) The transfer or obligation was disclosed or concealed;
(4) Before the transfer was made or obligation was incurred,
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made with “[a]ctual intent to hinder, delay, or defraud
Petitioners.” Additionally, Petitioners asserted that their
claims fell within the statute of limitations established by HRS
§ 651C-9(1).11 In opposition, Respondents asserted that
Petitioners “failed to prove actual intent clearly and
convincingly,” see Kekona v. Abastillas, 113 Hawai#i 174, 181-82,
150 P.3d 823, 830-31 (2006) (holding that the clear and
convincing standard applies to UFTA fraudulent transfer claims),
and that Petitioners’ “claim was not timely filed.”
On October 7, 2008, the court entered the following
relevant findings of fact (findings), conclusions of law
(conclusions), and Order:
the debtor was sued or threatened with suit;
(5) The transfer was of substantially all the debtor's
assets;
. . .
(9) The debtor was insolvent or became insolvent shortly
after the transfer was made or the obligation was incurred;
. . . .
(Emphases added.)
11
HRS § 659C-9 provides in relevant part as follows:
§ 651C-9 Extinguishment of cause of action.
A cause of action with respect to a fraudulent transfer or
obligation under this chapter is extinguished unless action
is brought:
(1) Under section 651C-4(a)(1), within four years after the
transfer was made or the obligation was incurred or, if
later, within one year after the transfer or obligation was
or could reasonably have been discovered by the claimant;
. . . .
(Emphases added.)
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Findings of Fact
. . . .
5. This action relates to four allegedly fraudulent
transfers by RFI: (a) a check payable to Defendant [Eleanor]
dated February 11, 2000 in the amount of $78,000; (b) a
check payable to [Goodsill] dated February 15, 2000 in the
amount of $119,393.42; © a check payable to Defendant
[Richard] dated February 11, 2000 in the amount of
$54,399.55; and (d) a check payable to [Kamehameha Schools]
in the amount of $165,058.42 from Februrary 2000 . . . .
6. The Transfers were made from the proceeds of a
mortgage foreclosure sale which involved a transaction in
which [Petitioners] were the mortgagors, and RFI, a
subsidiary of HSC, was the mortgagee.
7. The foreclosure sale proceeds received by RFI were
used for the Transfers. The Transfers were payable to
creditors of HSC.
8. There were some suspicious circumstances regarding the
Transfers:
a. HSC was the parent company of RFI. The Transfers were
made to creditors of HSC in order to pay RFI’s obligations
to HSC;
b. they were made through a separate account apparently
created to effectuate them;
c. they were made immediately after receipt of the
proceeds of the foreclosure sale; and
d. [Petitioners] appealed the trial court’s judgment, so,
at the time of the Transfers, it was questionable whether
RFI would prevail on appeal. In order for RFI to prevail on
appeal, the appellate court would have to determine that it
was appropriate to require [Petitioners] to, in effect, pay
twice in order to obtain a release from the judgment
received by RFI in the foreclosure action: once to the
assignee of the judgment, and once to RFI itself.
9. These circumstances did not constitute clear and
convincing evidence of any actual intent on the part of
[Respondents] to hinder, delay, or defraud any creditors of
RFI:
a. When the Transfers were made, there was no actual debt
owed to the Plaintiffs by RFI.
b. There was no expert testimony demonstrating that the
Transfers were in violation of generally accepted accounting
practices.
c. At the time of the Transfers, there was no business
need to retain cash for the benefit of [Petitioners] should
[Petitioners] prevail upon appeal. The onus was on
[Petitioners] to obtain a stay in order to maintain the
status quo pending the appeal. This would have enabled them
to have a fund available to recover from if they prevailed
on appeal. [Petitioners] did not obtain such a stay.
d. At the time of the Transfers, RFI had bona fide debts
owed to HSC and there was a legitimate business purpose in
transferring RFI’s assets to reduce those debts.
. . . .
f. RFI did not conceal the Transfers by, for example, not
recording the Transfers in its accounting records or by
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entering into agreements with the transferees not to
disclose the existence of the Transfers.
g. The Transfers did not render RFI insolvent at the time
they were made.
h. RFI did not terminate its existence after the
Transfers.
Conclusions of Law
. . . .
5. Despite the facts reflecting in [findings] 8(a)-8(d),
[Petitioners] did not prove by clear and convincing evidence
that RFI actually intended to hinder, delay, or defraud any
creditors of RFI, as required by HRS § 651C-4(a)(1).
Order of Dismissal
Based on the foregoing [findings and conclusions] . . . this
action is to be dismissed and judgment is to be entered in
favor of [Respondents] and against [Petitioners].
(Emphases added.) The court did not discuss Respondents’
argument that Petitioners’ claim was untimely under HRS § 651C-
9(1).
Following the court’s ruling in favor of Respondents,
Respondents filed a Motion for Attorneys Fees and Costs on
October 10, 2008. Petitioners filed an opposition memorandum.
After Petitioners appealed to the ICA, on January 9, 2009, the
court issued an “Order on [Respondents’] Motion for Attorneys
Fees and Costs Filed on October 10, 2008, requesting that the
matter be remanded to the court for . . . an order [] setting
forth the . . . award of attorney's fees and costs.”12
12
Subsequently, Respondents filed two motions to temporarily remand
the case to the court to allow the court to rule on the attorney’s fees issue.
The ICA denied both motions without prejudice.
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II.
A.
Petitioners appealed to the ICA on November 5, 2008.
In their Opening Brief filed on March 19, 2009, Petitioners
challenged the court’s conclusion that Respondents did not intend
to hinder, defraud, or delay Petitioners by transferring funds
from RFI to HSC, and several findings supporting that conclusion.
Respondents filed a cross-appeal on January 9, 2009. In their
Opening Brief on cross-appeal, Respondents asserted that
Petitioners’ UFTA claim under HRS § 651C-4(a)(1) was time-barred.
Respondents also argued in their cross-appeal that the court
erroneously denied their request for attorneys’ fees. The ICA
did not discuss Petitioners’ arguments that the court’s findings
and conclusions were erroneous. See discussion infra. Rather,
the ICA ruled on the statute of limitations issue raised in the
cross-appeal instead, holding that Petitioners’ UFTA claim should
have been dismissed as untimely.
B.
In their cross-appeal, Respondents maintained that
pursuant to HRS § 651C-9(1), “claims based upon [HRS §651C-
4(a)(1) must] be filed ‘within four years after the transfer was
made [in this case, in February, 2000] . . . or, if later, within
one year after the transfer . . . was or could have been
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discovered by the claimant.[13]’” (Quoting HRS § 651C-9(1).)
Here, Petitioners’ claim was brought more than four years after
the transfers were made in Februrary, 2000. Therefore, according
to Respondents, “[Petitioners’] claim was timely . . . only if []
they had no knowledge of the disputed transfers prior to April 8,
2005 [one year before Petitioners filed their Complaint] and []
they could not have discovered them before that date with
reasonable diligence.”
As to Petitioners’ discovery of the disputed transfers,
Respondents contended that under the discovery rule, “the only
discovery necessary to trigger the running of the one-year
discovery extension is the discovery of the transfers
themselves.” (Emphasis in original.) According to Respondents,
Petitioners “became aware of the existence of the transfers . . .
on March 18, 2005.” (Emphasis in original.) Therefore,
Respondents maintain, “[Petitioners’] claim expired on March 18,
2006,” prior to the filing of Petitioners’ Complaint on April 7,
2006.
Additionally, Respondents argued that Petitioners
should have discovered evidence of the transfers “long before
April 8, 2005,” one year before Petitioners’ Complaint was filed.
13
The section of HRS § 659C-9(1) allowing a plaintiff to bring an
action under HRS § 651C-4(a)(1) within one year after the transfer could
reasonably have been discovered by the claimant is referred to herein as the
“discovery rule.”
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According to Respondents, “after [this court] ruled in
[Petitioners’] favor on March 18, 2004 . . . [Petitioners] had
tools they could, and should have used to discover the disputed
transfers[.]” However, Respondents maintain that Petitioners
“delayed meaningfully seeking discovery into [Respondents] assets
until March 2005[.]” Therefore Petitioners “have no one to blame
but themselves for the extended delay in discovering their []
claim[.]”
C.
In their Answering Brief on cross-appeal, Petitioners
argued that the one year period in the discovery rule does not
begin until the plaintiffs discover the “fraudulent nature” of
the transfer. (Citing Freitag v. McGhie, 947 P.2d 1186 (Wash.
1997).) Petitioners maintained that they “were not aware of the
fraudulent transfers until as early as April 20, 2005.” Hence,
according to Petitioners the one year period did not begin until
April 20, 2005 at the earliest, making their UFTA claim filed on
April 7, 2006 timely.
They also contended that they did not initiate
discovery earlier because “there was no judgment filed in the
foreclosure actions regarding the surplus of the sale proceeds
until December 21, 2004.” Petitioners declared that following
remand by this court, there was “extensive pleading” because
Respondents “opposed the accounting action and forced
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[Petitioners] to make numerous pleadings to finally result in
judgment in their favor.” Petitioners explained that “at no time
did RFI’s counsel tell [Petitioners] that RFI was unable to pay
any monetary judgment . . . over $1,500.”
Also, Petitioners advanced several alternative theories
as to why their claim was timely. They contended (1) that the ex
parte motion filed for execution/and or garnishment filed on
September 1, 2005, “could [also] be construed [] as a
commencement of an action under HRS § 651C-9(1),” (2) that their
claim was timely under HRS § 657-20 (1993),14 which “extends the
statute of limitations by fraudulent concealment,” and (3) that
“the statute of limitations of a UFTA claim starts when the
creditor has a final judgment against the debtor, not on the date
when the transfer was made[.]” (Citing Cortez v. Vogt, 52 Cal.
App. 4th 917 (1997).)
In their Reply Brief, Respondents again argued that
Petitioners’ UFTA claim was untimely under the one year period
set forth in HRS § 651A-9(1). Respondents asserted that they
“did not fraudulently conceal the transfers,” and that the
holding in Cortez that the statute of limitations starts when a
final judgment is entered “has now been rejected by virtually all
jurisdictions.”
14
See HRS § 657-20, quoted infra.
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III.
The ICA agreed with Respondents’ position that the one
year period in HRS § 651C-9(1) begins on the date that the
transfer was discovered, rather than on the date the plaintiff
discovers “the fraudulent nature of the transfer.” Schmidt, 2013
WL 4711524, at *4-5. The ICA recognized that among the other
jurisdictions adopting the UFTA, “there is no uniformity in the
interpretation” of provisions analogous to HRS § 651C-9(1).
Id. at *5. However, “the [discovery rule] plainly,
unambiguously, and explicitly extends the four year time limit to
no later than one year after the transfer has been discovered (or
reasonably should have been discovered).” Id. at *4 (emphasis in
original).
“The term ‘transfer’ is specifically defined in HRS §
659C-(9)(1) to mean ‘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 a payment
of money, a release, a lease, and the creation of a lien or
encumbrance.’” Id. The ICA noted that if “the Hawai#i
Legislature intended to require knowledge of the ‘fraudulent
nature’ [of the transfer] to trigger the UFTA statute of
limitations, it could have included such language in its statute,
as Arizona’s legislature has done, but it did not.” Id.
Therefore, the ICA reasoned that the “plain meaning” of HRS §
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651C-9(1) required the one year period to begin on March 18,
2005, the date Petitioners discovered the existence of the
transfers. Id. at *5.
Further, the ICA explained that “[i]t is uncontroverted
that, on March 18, 2005, [Petitioners] received a Realty Finance
bank account statement showing that the four checks . . . were
disbursed by Realty Finance[.]” Id. at *4. “Thus, on March 18,
2005, [Petitioners] discovered that the transfers occurred.” Id.
Consequently, the ICA concluded that “[Petitioners’] UFTA claim
was extinguished no later than one year after their discovery of
the transfers on March 18, 2005, and their April 7, 2006
complaint was untimely.” Id. at *5.
As a result, the ICA did not discuss several arguments
raised by the parties. First, the ICA held that because
Petitioner’s UFTA claim was extinguished by HRS § 651C-9(1), it
“need not reach the merits of [Petitioners’] points of error
contending that the [court] erred in [] rejecting their claims.”
Id. at *5. Second, the ICA held that it was “unnecessary to
address [the] contention” that “the transfers could have been
discovered” at an earlier date. Id. at *4 n. 7. Finally, the
ICA did not discuss any of the alternative theories that
Petitioners raised in support of their position that their claim
was timely.
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As to Respondents’ argument that the court erred in
denying their request for attorneys’ fees, the ICA related that
“Respondents’ subsequent motions to [the ICA] for temporary
remand to allow the [court] to rule on [Respondents’] Hawai#i
Rules of Civil Procedure Rule 60 motion were denied without
prejudice on February 10, 2009 and April 23, 2009.” Id. at *5.
Thus, “the [court] never entered an order determining the amount
of attorneys fees and/or costs or the basis for such an award.”
Id. The ICA “conclude[d] that th[e] case should be remanded for
the limited purpose of allowing the [court] to enter a ruling on
the substance of [Respondents’] request for attorneys’ fees and
costs.” Id. (citing Life of the Land v. Ariyoshi, 57 Haw. 249,
251, 553 P.2d 464, 466 (1976) (per curiam)). Ultimately, the ICA
“affirm[ed] the [c]ourt’s October 7, 2008 Final Judgment” and
“remand[ed] th[e] case for a ruling on [Respondents’] request for
attorneys’ fees and costs.” Id. at *6.
IV.
In their Application, Petitioners ask: (1) “Whether the
ICA . . . [erred in] deciding that Petitioners UFTA claim was
barred by the one-year statute of limitations and [in] failing to
decide that [the court’s] decision erroneously decided that
Petitioners’ UFTA claim was not proven, and therefore, . . .
[denied] Petitioner’s recovery[,]” and (2) “Whether the ICA . . .
[erred in] remanding the case for a decision on Respondents’
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request for attorneys’ fees under HRS § 607-14 and recovery of
costs, without deciding the merits of their attorney fee
request.” A Response was filed on October 31, 2013. A Reply was
filed on November 7, 2013.
V.
As to the initial part of the first question presented
in their Application, Petitioners again argue that their UFTA
claim was timely under four alternative theories. First,
Petitioners maintain that the one year statute of limitations set
forth in HRS § 651C-9(1) begins on the date the fraudulent nature
of the transfer is discovered, rather than on the date the
transfer itself is discovered. Second, Petitioners contend that
“the ex parte motion . . . for execution and/or garnishment . . .
could be construed as a commencement of an action under HRS §
651C-9.” Third, Petitioners argue that under HRS § 657-20,15
the statute of limitations is extended by six years due to
15
HRS § 657-20 provides in relevant part as follows:
§ 657-20 Extension by fraudulent concealment.
If any person who is liable to any of the actions mentioned
in this part or section 663-3, fraudulently conceals the
existence of the cause of action or the identity of any
person who is liable for the claim from the knowledge of the
person entitled to bring the action, the action may be
commenced at any time within six years after the person who
is entitled to bring the same discovers or should have
discovered, the existence of the cause of action or the
identity of the person who is liable for the claim, although
the action would otherwise be barred by the period of
limitations.
(Emphases added.)
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fraudulent concealment. Fourth, Petitioners assert that
limitations period set forth in HRS § 651C-9(1), which allows the
defendants to file an HRS § 651C-4(a)(1) action “within four
years after the transfer was made” actually begins “when the
judgment was final in the underlying action.” (Citing Cortez, 52
Cal. App. 4th at 917.)
VI.
A.
Petitioners’ first theory as to why their claim was
timely is that the “discovery rule” does not begin until a
plaintiff discovers the “fraudulent nature” of the transfer. To
reiterate, under HRS § 651C-9(1), “a cause of action with respect
to a fraudulent transfer[16] . . . is extinguished unless action
is brought,” inter alia, “within one year after the transfer
. . . was discovered . . . or could reasonably have been
discovered by the claimant.” (Emphasis added.)
Petitioners argue that “the effect of HRS § 651C-9 is
to extinguish a cause of action for a fraudulent transfer, not
just any transfer.” (Emphasis in original.) According to
Petitioners, the ICA’s plain language analysis “reads the word
fraudulent out of the first sentence of HRS § 651C-9.” (Emphasis
16
HRS § 651C-9 refers to “a fraudulent transfer or obligation.”
Pursuant to HRS § 651C-4, either a “transfer made” or an “obligation incurred
by a debtor” can be fraudulent. In this case, Petitioners are challenging the
transfer of funds from RFI to HSC, and not an “obligation incurred” by RFI.
Hence, the “obligation” language in HRS § 651C-9 is inapplicable to this case.
20
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in original.) Petitioners also point out that several cases,
including United States v. Green, 2007 WL 1748698 (S.D. Ohio June
15, 2007), and Freitag, “used the fraudulent nature of the
transfer as commencing the statute of limitations.”17 (Emphasis
in original.)
Petitioners maintain that their UFTA claim, filed on
April 7, 2006, was timely because they “were not aware of the
fraudulent transfers until as early as April 20, 2005,” when they
received copies of the checks used in the transfers and
discovered that the transfers were not made “to proper creditors
of RFI.” According to Petitioners, they did not discover “the
damage [they suffered] . . . until the Chagami deposition on July
26, 2005,” when “for the first time they were informed that RFI
was unable to pay the judgment.”
B.
On the other hand, in their Response, Respondents argue
that “the ICA’s reading of HRS § 651C-9(1) was correct” because
“the plain language [of HRS § 651C-9] directs” that claims are
extinguished “one year after a creditor discovers the disputed
transfers.” Further, Respondents contend that the Hawai#i
17
Apparently as a part of the same argument, Petitioners cite Hayes
v. City and County of Honolulu, 81 Hawai#i 391, 917 P.2d 718 (1996), Anderson
v. State, 88 Hawai#i 241, 965 P.2d 783 (App. 1998), Blair v. Ing, 95 Hawai#i
247, 21 P.3d 452 (2001), and Vidniha v. Miyaki, 112 Hawai#i 336, 145 P.3d 879
(2006), for the proposition that Petitioners’ “UFTA claim accrued when they
discovered or through reasonable diligence should have discovered the damage,
the fraudulent nature of the transfers, and the causal connection between the
duty and the damage[.]”
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legislature has not “chosen to modify [HRS § 651C-9(1)]” with
“language that says the repose period starts after the fraudulent
character of a transfer is first revealed[.]” Hence, Respondents
declare that this court should not add to HRS § 651C-9(1)
“unwritten requirements that the Hawai#i legislature omitted.”
Additionally, Respondents relate that under HRS
§ 1-24, “Hawai#i courts [must] promote uniformity in the
interpretation of uniform laws.” According to Respondents, “most
jurisdictions that have adopted Hawai#i’s version of the [UFTA]”
have held that the one year period in HRS § 651C-9(1) begins on
the date that plaintiffs discovered the transfer, and not its
fraudulent nature. Respondents attached, as an appendix to their
Response, a table of other states that adopted the same statute
of limitations under the UFTA. In the appendix, Respondents
relate that twenty-eight other states have concluded that the one
year discovery period begins when the transfer itself is
discovered. Respondents assert that, contrastingly, only two
jurisdictions have held that the one year period begins when the
plaintiff discovers the fraudulent nature of the transfer.
Finally, Respondents argue that even if this court
interprets the one year period as beginning when Petitioners’
knew or should have known of the fraudulent nature of the
transfers, Petitioners’ claim is still time-barred because
Petitioners were “dilatory in efforts to discover[] both the
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transfer and the alleged evidence of [Respondents’] actual
intent.” According to Respondents, therefore, Petitioners should
have known of the fraudulent nature of the transfers more than a
year before their Complaint was filed on April 8, 2006.
In their Reply, Petitioners counter that the cases
cited in the appendix are not persuasive, because many of the
cases are either federal or state trial court decisions, and not
state appellate court decisions. Petitioners also relate that
many of the cases cited by Respondents actually do not support
the position that the one year period begins to run when the
transfers themselves are discovered.
VII.
Initially, it must be observed that the court did not
discuss the statute of limitations in its findings and
conclusions and therefore did not issue any findings or
conclusions regarding when Petitioners discovered the “fraudulent
nature” of the transfers. Similarly, the ICA did not discuss the
date Petitioners’ discovered the “fraudulent nature” of the
transfers.
A.
As explained by the Hawai#i federal bankruptcy court,
“[s]ome courts read the [HRS § 651C-9(1)] statute literally and
hold that the period begins to run as soon as a creditor
discovered or reasonably could have discovered the transfer, even
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if no one knew the transfer was fraudulent.” In re Maui Indus.
Loan & Fin. Co., 454 B.R. 133, 137 (Bankr. D. Haw. 2011).
However, other jurisdictions “have held that the one year period
does not begin to run until the fraudulent nature of the transfer
is discovered or reasonably discoverable.” Id. The Hawai#i
bankruptcy court adopted the second view, predicting that “the
Hawai#i state courts [will] follow the [] rule which is more
protective of innocent creditors.” Id.
B.
Both the language of HRS § 651C-9(1) and the underlying
purpose of the UFTA suggest that the one year period begins when
a plaintiff discovers the fraudulent nature of a potential
transfer. Those courts holding that the one year period begins
once the plaintiff discovers the transfer itself claim to
generally rely on “the actual language used in the statute.” In
re Hill, 2004 WL 5694988, at *3 (M.D. Fla. Nov. 4, 2004)
(internal quotation marks omitted). In Hill, the federal
district court interpreting Florida’s UFTA statute noted the one
year period begins following the discovery of the “transfer,” and
not “the fraudulent nature of the transfer.” Id. According to
that court, “[i]f the Florida legislature meant for actions
brought within one year of when the ‘fraudulent nature of the
transfer’ was or could reasonably have been discovered by the
claimant to be timely, it could have so provided in the savings
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clause.” Id. The federal district court noted that the Arizona
legislature had amended its UFTA provision to read “within one
year after the fraudulent nature of the transfer was
[discovered.]” Id. Hill, therefore, interpreted the UFTA
limitations provision as barring all actions not “brought within
one year after the alleged transfers were or could reasonably
have been discovered[.]” Id. (internal quotation marks omitted).
On the other hand, it has been asserted that “[c]ommon
sense and the statutory purpose of the UFTA necessitate a finding
that the statute begins to run with the discovery of the
fraudulent nature of the conveyance.” Freitag, 947 P.2d at 1189.
In Freitag, the Washington Supreme Court explained that the
“UFTA, obviously, discourage[s] fraud.” Id. Therefore, to rule
that the one year period began at the date of the transfer “would
be to rule in complete derogation of the UFTA[.]” Id. at 1190.
Moreover, “[i]f the statute were to begin to run when
the transfer was made, without regard as to whether the claimant
discovered or could have discovered the fraudulent nature of the
transfer, those successful at concealing a fraudulent transfer
would be rewarded.” Id. “The statute should not reward a person
for successful concealment of fraud.” Id. Hence, the Washington
Supreme Court held that the UFTA limitation statute “provides a
one-year period from the date of discovery of the fraudulent
nature of the transfer within which to initiate a claim[.]” Id.
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The interpretation of the UFTA limitations provision
advanced in Freitag is consistent with our statute. First, HRS §
651C-9 begins by stating “[a] cause of action with respect to a
fraudulent transfer or obligation is extinguished unless action
is brought [within the relevant period].” (Emphasis added.)
Next, HRS § 651C-9(1) provides that, for actions brought under
HRS § 651C-4(a)(1), such as the action in this case, the
limitations period extends until “one year after the transfer
. . . was or could reasonably have been discovered[.]” The term
“transfer” in HRS § 651C-9(1) clearly refers to the “fraudulent
transfer” identified in the preceding sentence. “Laws in pari
materia, or upon the same subject matter, shall be construed with
reference to each other. What is clear in one statute may be
called upon in aid to explain what is doubtful in another.”
State v. Kamana#o, 118 Hawai#i 210, 218, 188 P.3d 724, 732 (2008)
(citations and internal quotations marks omitted). Hence, when
HRS § 651C-9(1) is construed in pari matera with the introductory
sentence in HRS § 651C-9, it is plain that the limitations period
extends until one year after the fraudulent transfer was
discovered. Thus, the limitations period begins when the
plaintiffs discover that a fraudulent transfer, and not simply a
transfer, occurred.
Additionally, it has been explained that in
interpreting statutes, this court “must read statutory language
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in the context of the entire statute and construe it in a manner
consistent with its purpose.” Blaisdell v. Dep’t of Pub. Safety,
113 Hawai#i 315, 318, 151 P.3d 796, 799 (2007) (internal
quotation marks omitted). As explained by the Washington Supreme
Court, the obvious purpose of the UFTA is to prevent fraud and to
provide a remedy to those who are victims of fraudulent
transfers. See Freitag, 947 P.2d at 1189. In the context of the
entire statute, the discovery rule allows plaintiffs to preserve
fraud claims when they could not have discovered the existence of
those claims prior to the expiration of the statute of
limitations. This purpose would be undermined if the one year
period began once plaintiffs discovered the existence of a
transfer, even if they were unaware of its fraudulent nature.
Under that interpretation, plaintiffs would lose the right to
pursue a remedy in court for fraudulently incurred injuries even
though they could not have become aware of the existence of their
claims.
Finally, “[t]he legislature is presumed not to intend
an absurd result, and legislation will be construed to avoid, if
possible, inconsistency, contradiction, and illogicality.” Kim
v. Contractors License Bd., 88 Hawai#i 264, 270, 965 P.2d 806,
812 (1998). Therefore, “[d]eparture from the literal
construction of a statute is justified” if “such a construction
yields an absurd and unjust result obviously inconsistent with
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the purposes and polices of the statute.” Leslie v. Bd. of
Appeals of Cnty. of Hawai#i, 109 Hawai#i 384, 393, 126 P.3d 1071,
1080 (2006) (internal quotation marks omitted). Here, it would
be legally absurd and unjust to interpret the discovery rule to
preclude claims under the UFTA if plaintiffs were never aware
they held a potential claim. Additionally, as explained in
Freitag, such an interpretation would produce the result of
rewarding those “successful at concealing a fraudulent transfer.”
947 P.2d at 1189.
In sum, interpreting the discovery rule as allowing
plaintiffs to file an action within one year of the discovery of
the “fraudulent nature” of a transfer, rather than of the
transfer itself, is consistent with the statutory language
referring to the transfer as a “fraudulent transfer.”
Additionally, this interpretation is consonant with the statutory
purpose of preventing fraud. Finally, such an interpretation
promotes the specific purpose of the discovery rule within the
statutory context, i.e., allowing plaintiffs to pursue otherwise
untimely claims after discovering their existence. Hence, under
HRS § 651C-9(1), Petitioners could bring their HRS § 651C-4(a)(1)
claim within a year after discovering the “fraudulent nature” of
the transfer from RFI to MSC.
C.
Respondents’ contention that this court must interpret
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the one year period in HRS § 651C-9(1) as beginning from the date
the plaintiffs discover the transfer itself to promote uniformity
with other jurisdictions interpretations of the UFTA is
incorrect. Respondents’ appendix purportedly demonstrating that
twenty-eight other jurisdictions have held that the one year
period begins when the transfer was discovered is inaccurate.
First, the cases from many of the jurisdictions cited
in the appendix do not discuss the one year “discovery rule” at
all. Many of the cases cited in Respondents’ appendix discuss
the four year period, not the one year “discovery rule.”18
Additionally, some of the cases cited in Respondents’ appendix do
not concern the UFTA extinguishment provision requiring that the
fraudulent transfer action must be brought either within four
years of the date the transfer was made or within one year of the
date the transfer was discovered, whichever was later.19 Thus,
18
See, e.g., In re S. Health Care of Arkansas,
Inc., 299 B.R. 918 (Bankr. E.D. Ark. 2003); Sands v. New Age Family P’ship,
Ltd., 897 P.2d 917 (Colo. Ct. App. 1995); Steinberg v. A Analyst Ltd., 2009 WL
806780 (S.D. Fla. 2009); Kent v. White, 631 S.E.2d 782 (Ga. Ct. App. 2006);
Marwil v. Cluff, 2007 WL 2608845 (S.D. Ind. 2007); In re Schaefer, 331 B.R.
401 (Bankr. N.D. Iowa 2005); In re Mi-Lor Corp., 233 B.R. 608, 616 (Bankr. D.
Mass. 1999); In re Nat’l Audit Defense Network, 367 B.R. 207 (Bankr. D. Nev.
2007); Sasco 1997 NI, LLC v. Zudkewich, 767 A.2d 469 (N.J. 2001); Anderson v.
Godley, 2009 WL 2881080 (W.D.N.C. Sept. 8, 2009); In re Sun Valley Products,
Inc., 328 B.R. 147, 156 (Bankr. D.N.D. 2005); In re C.F. Foods, L.P., 280 B.R.
103, 112 (Bankr. E.D. Pa. 2002); In re Supplement Spot, LLC, 409 B.R. 187, 201
(Bankr. S.D. Tex. 2009); Smith v. Am. Founders Fin., Corp., 365 B.R. 647, 677
(S.D. Tex. 2007); cf. Selvage v. J.J. Johnson & Associates, 910 P.2d 1252,
1258 (Utah Ct. App. 1996) (discussing a different type of UFTA action not
subject to the Utah equivalent of HRS § 651C-9(1)).
19
See, e.g., McWilliams v. McWilliams, 970 So. 2d 200, 203 (Miss.
Ct. App. 2007) (interpreting the general Mississippi statute of limitations,
rather than the UFTA statute of limitations); Gibson v. Trant, 58 S.W.3d 103,
117 (Tenn. 2001) (resolving a medical malpractice claim, not a UFTA claim,
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none of these cases examine the issue of when a transfer was
“discovered” under the UFTA limitations statute. These cases are
thus irrelevant to the question of when a transfer is
“discovered” under HRS § 651C-9(1).
In several of the cases cited by Respondents, the court
did hold that the one year period began when the plaintiffs
discovered the transfer itself. However, in those cases, the
plaintiffs did not raise the argument that the one year period
did not begin until they discovered the “fraudulent nature” of
the transfer.20 Hence, none of those courts analyzed the issue
of when the one year period begins.
Finally, some of the cases cited by Respondents
actually appear to interpret the one year discovery period as
beginning on the date the “fraudulent nature” of the transfer was
discovered. For example, in Norwood Grp., Inc. v. Phillips, 828
A.2d 300 (2003), the New Hampshire Supreme Court held that the
under the general Tennessee statute of limitations); Potts v. Celotex Corp.,
796 S.W.2d 678, 680 (Tenn. 1990) (discussing a products liability action,
rather than a UFTA claim); cf. In re Heaper, 214 B.R. 576, 583 (B.A.P. 8th
Cir. 1997) (holding that the Missouri UFTA did not apply because the transfer
occurred prior to the date Missouri enacted the UFTA).
20
See, e.g., Cendant Corp.v. Shelton, 473 F. Supp. 2d 307 (D. Conn.
2007); Joslin v. Grossman, 107 F. Supp. 2d 150 (D. Conn. 2000); Pereyron v.
Leon Constantin Consulting, Inc., 2004 WL 1043724 (Del. Ch. 2004); Gulf Ins.
Co. v. Clark, 20 P.3d 780, 783 (Mont. 2001); Intili v. DiGiorgio, 300 N.J.
Super. 652, 660, 693 A.2d 573, 577 (Ch. Div. 1997); In re Ewbank, 359 B.R.
807, 810 (Bankr. D.N.M. 2007); Duffy v. Dwyer, 847 A.2d 266 (R.I. 2004);
Supreme Bakery, Inc. v. Bagley, 742 A.2d 1202 (R.I. 2000); Duran v.
Henderson, 71 S.W.3d 833 (Tex. Ct. App. 2002); Blesh v. Johnson, 2006 WL
5838212 (Vt. 2006); Sandhill Oil Co., Inc. v. Ross, 2001 WL 34034445 (Neb.
Dist. Ct. 2001) (trial court decision).
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plaintiffs’ claims did not fall within the one year discovery
rule because the claims were brought “more than one year after
the plaintiffs discovered that the sale was allegedly
fraudulent.” Id. at 304 (emphasis added). Similarly, in
Salisbury v. Majesky, 817 N.E.2d 1219 (Ill. App. 2004), the
Appellate Court of Illinois, Third District, stated that the
discovery period began when the plaintiff “should have reasonably
known, at the very least, that a possible cause of action may
have existed for fraudulent transfer.” Id. at 1223. Moreover,
Respondents omit several cases that begin the one year discovery
period when the plaintiffs could have discovered the fraudulent
nature of the transfers.21
In total, the cases cited in Respondents’ appendix do
not support Respondents’ contention that “most jurisdictions”
have adopted the ICA’s interpretation of HRS § 651C-9(1).
Instead based on the foregoing, it is evident that as the ICA
concluded, “there is no uniformity in the interpretation of the
‘extinguishment’ provision.” Schmidt, 2013 WL 4711524, at *5.
21
See, e.g., Johnston v. Crook, 93 S.W.3d 263, 271-72 (Tex. App.
2002) (“Because the 272 warranty deed did not conclusively establish when
Receiver knew or should have known about the allegedly fraudulent transfer of
the house, Crook's summary judgment proof did not conclusively establish
limitations had run on Receiver’s challenge to that transfer.” (emphasis
added)); Gilbert Bros., Inc. v. Gilbert, 630 N.E.2d 189, 192 (Ill. App. 1994)
(“[T]he statute starts to run when a person knows or reasonably should know of
his injury and that it was wrongfully caused.” (emphasis added)); In re G-I
Holdings, Inc., 313 B.R. 612, 641 (Bankr. D.N.J. 2004); Fidelity Nat’l Title
Ins. Co. v. Howard Savings Bank, 436 F.3d 836 (7th Cir. 2006) (interpreting
Illinois law).
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As noted, of those courts that actually considered the issue,
some courts have concluded that, based on the plain language of
the statute, the limitations period begins at the date of the
transfer itself. In re Hill, 2004 WL 5694988, at *3; see also In
re Spitaleri, 2006 WL 4458357, at *2 (Bankr. N.D. Ohio May 9,
2006). Yet, other courts have concluded that based on the
statutory purpose, the limitations period begins on the date the
fraudulent nature of the transfer is discovered. Freitag, 947
P.2d at 1189; Hu v. Wang, 2009 WL 1919367, at *6 (Cal. Ct. App.
July 6, 2009) (unpublished). Also, as discussed supra, one or
the other position has been adopted by several jurisdictions
without analysis.
In Cnty. of Hawai#i v. Unidev, LLC, 129 Hawai#i 378, 301
P.3d 588 (2013), this court concluded that the mandate in HRS §
1-24 that uniform acts “shall be so interpreted and construed as
to effectuate their general purpose to make uniform the laws of
the states and territories which enact them,” HRS § 1-24, did not
apply in the face of “conflicting interpretations of the [uniform
acts] . . . in other states.” Unidev, 129 Hawai#i at 393, 301
P.3d at 603. As explained previously, the other states to
interpret the UFTA have not construed the extinguishment
provision in a uniform manner. Hence, HRS § 1-24 is not
controlling here.
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VIII.
Based on the foregoing, the one year statute of
limitations period begins on the date the fraudulent nature of
the transfer “was or could reasonably have been discovered by the
claimant.” HRS § 651C-9(1). The ICA incorrectly held that the
statute of limitations runs from the date of the transfer, rather
than the date that Petitioners discovered the fraudulent nature
of the transfer. Hence, the ICA’s October 9, 2013 judgment must
be vacated.
IX.
As to Petitioners’ second alternative theory,
Petitioners contend that the ex parte motion for execution and/or
garnishment filed on September 1, 2005 could be construed as the
“commencement of an action under HRS § 651C-9.” However,
Petitioners cite to no legal authority in support of this
conclusory statement. No argument is presented as to why filing
the ex parte motion in a different proceeding could be construed
as a commencement of the present action. Hence, it is not
necessary to discuss this argument further. See Norton v. Admin.
Dir. of the Court, 80 Hawai#i 197, 200, 908 P.2d 545, 548 (1995)
(stating that this court may “disregard [a] particular
contention,” if the Petitioner “makes no discernable argument in
support of that position”); see also Aames Funding Corp. v.
Mores, 107 Hawai#i 95, 104, 110 P.3d 1042, 1051 (2005) (“Because
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the Moreses do not provide any discernible legal argument as to
their contention . . . we do not address this contention
further.”).
X.
As to Petitioners’ third alternative theory,
Petitioners maintain that “under HRS § 651C-10, the law of fraud
discovery applies.” HRS § 651C-1022 states that “unless
displaced by the provisions of [the UFTA], the principles of law
. . . relating to . . . fraud . . . supplement its provisions.”
Petitioners apparently characterize HRS § 657-20, which extends
the statute of limitations by six years if a potential defendant
fraudulently conceals the existence of a cause of action, as a
principle of law “relating to fraud” and therefore contend that
“HRS § 657-20 applies to the UFTA claim per HRS § 651C-10.”
Petitioners rely on two federal district court cases, Rundgren v.
Bank of New York Mellon, 777 F. Supp. 2d 1224 (D. Haw. 2011)
(Seabright, J.) and Balog v. Center Art Gallery-Hawai#i, 745 F.
Supp. 1556, 1572-73 (D. Haw. 1990) (Ezra, J.), that applied the
22
HRS § 651C-10 provides as follows:
§ 651C-10 Supplement of provisions.
Unless displaced by the provisions of this chapter, the
principles of law and equity, including the law merchant and
the law relating to principal and agent, estoppel, laches,
fraud, misrepresentation, duress, coercion, mistake,
insolvency, or other validating or invalidating cause,
supplement its provisions.
(Emphases added.)
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doctrine of fraudulent concealment in non-UFTA cases. According
to Petitioners, HRS § 657-20 and the doctrine of fraudulent
concealment applies to UFTA claims generally. However,
Petitioners do not provide any definition of “fraudulent
concealment” and therefore do not explain why the facts of this
case constitute fraudulent concealment under any controlling
legal standard. Petitioners therefore do not make any
discernable argument as to why the doctrine of fraudulent
concealment should apply to the facts of this case. Thus, we
need not decide this issue.23
XI.
Fourth, Petitioners assert that under Cortez, “the
[four year] statute of limitations on an UFTA claim starts when
the creditor has a final judgment against the debtor, not on the
date the transfer was made.” To reiterate, HRS § 651C-9(1) sets
forth two alternate limitations periods for actions brought under
HRS § 651C-9(1), either “within four years after the transfer was
made,” or “if later, within one year after the transfer or
obligation was or could have reasonably been discovered by the
23
In their Application, Petitioners state that “on September 7,
2005, Schmidts’ counsel wrote a demand letter to the Defendant shown in
Exhibit 84 but there was no response.” Petitioners further contend that “the
undisputed facts are that RFI, by and through [Respondents], were concealing
RFI’s financial condition and the ‘upstream’ transfer of RFI’s assets to
[Respondents]. Such conduct tolls the statute of limitations.” However,
Petitioners do not cite any authority for this proposition, or cite any cases
that explain when the doctrine of fraudulent concealment applies in these
circumstances.
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claimant.” As explained supra, the second limitations period
allows plaintiffs to file suit even if they could not have
discovered the existence of their cause of action within the four
year period.
Petitioners’ first theory was that their UFTA claim was
timely under the second prong of the statute, i.e., the one year
“discovery rule.” Under their alternate theory, Petitioners take
the position that their claim was also timely under the first
prong of HRS § 651C-9(1) because, as in Cortez, their claim was
brought within four years of the final judgment in the underlying
action between Petitioners and RFI.
In Cortez, the California Court of Appeals observed
that the UFTA statute of limitations section stated that it began
at “the time the transfer was made.” 52 Cal. App. 4th. at 929.
Nevertheless, Cortez determined that, based on prior California
law, “where there is an alleged fraudulent transfer made during a
pending lawsuit that will establish where in fact, and the extent
to which, a debtor-creditor relationship exists . . . the [four
year] limitation period does not commence to run until the
judgment in the underlying action becomes final.” Id. at 937.
Numerous courts have explained that the decision in
Cortez is contrary to the plain language of the UFTA limitations
provision stating that the four year statute of limitations
begins “within four years after the transfer was made[.]”
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(Emphasis added.) That language “clearly indicates that an
action . . . must be brought within four years of the date the
transfer was made.” Levy v. Markal Sales Corp., 724 N.E.2d 1008,
1012 (Ill. App. 2000). Consequently, “the explicit language
provides that the four-year provision runs from the date of
transfer rather than the date of judgment.” SASCO, 767 A.2d at
473. Thus, Petitioners’ contention that the four year
limitations period began when the judgment was filed in the
underlying action is contradicted by the language of the
statute.24
Cortez explained that if a creditor asserts that a
transfer was fraudulently made by a debtor to escape potential
liability in another suit, the creditor may be required to file a
second action based on the fraudulent transfer before the initial
suit is concluded in order to meet the four year deadline.
Cortez, 52 Cal. App. 4th at 932. If the creditor subsequently
fails in the initial action, then both the underlying action and
24
See, e.g., Levy, 724 N.E.2d at 1012 (“We are not convinced by the
Cortez analysis.”); SASCO 767 A.2d at 473 (rejecting Cortez); Clark, 20 P.3d
at 786 (“[W]e join other jurisdictions which have criticized the ultimate
determination of the California court in Cortez.”); Moore v. Browning, 50 P.3d
852, 860 (Ariz. Ct. App. 2002) (“Unlike the court in Cortez, we are unable to
discern . . . any intent to toll the statute of repose until a judgment is
filed.”); K-B Bldg. Co. v. Sheesley Const., Inc., 833 A.2d 1132, 1136 (Pa.
Sup. Ct. 2003) (“Cortez has been roundly criticized and is against the weight
of authority in this area.”); cf. Supreme Bakery, Inc. v. Bagley, 742 A.2d
1202, 1205 (R.I. 2005) (holding that the four year limitations period begins
on the date of the transfer).
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the fraudulent transfer claim would be dismissed, and the actions
“will have resulted in needless effort and expense to both
parties and the court.” Id. The California Court of Appeals
further noted that the Minnesota Supreme Court had used similar
reasoning when interpreting the Uniform Fraudulent Conveyance Act
(UFCA), the predecessor to the UFTA. Lind v. O.N. Johnson, 282
N.W. 661, 667-68 (Minn. 1938).
However, Petitioners point to nothing indicating our
legislature intended to deviate from the plain language of the
statute providing that the limitations period begins on the date
of the transfer, rather than the underlying judgment, based on
such concerns.25 See Levy, 724 N.E.2d at 1013 (noting “the
concerns expressed by [Cortez] regarding the potential of
needless litigation,” but holding that “the [UFTA] plainly
contemplates that such provisional litigation may be necessary
under certain circumstances”). Hence, Petitioners’ argument that
the statute of limitations began to run when the judgment in the
underlying action was filed is incorrect.
25
Cortez maintains that the commentary to Section 7 of the UFTA
cites Lind with approval. However, Section 7 enumerates the potential
remedies available in UFTA actions. Section 7, therefore, has nothing to do
with the statute of limitations set forth in Section 9.
The commentary to Section 7 cites Lind for the proposition that
"the remedies specified in [Section 7] . . . are cumulative." 7A Uniform Laws
Annotated, Part II at 157. Thus, the citation to Lind in the Commentary does
not pertain to the date the statute of limitations begins to run.
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XII.
Based on the foregoing, the ICA incorrectly held that
the statute of limitations runs from the date of the transfer,
rather than from the date that Petitioners’ discovered the
fraudulent nature of the transfer. The ICA also did not decide
the merits of the case, as requested by Petitioners in their
Opening Brief on appeal.
In the second part of the first question in their
Application, Petitioners state that “the ICA’s authorities do not
support . . . the refusal to decide [Petitioners’] appeal
issues[.]” In their Response, Respondents asserted that “[t]he
Petition for Certiorari should be rejected” but did not discuss
the proper disposition of the case should this court overrule the
ICA on the statute of limitations issue. Finally, in their
Reply, Petitioners again maintained that they “ha[d] shown
conclusively that the trial court committed several significant
reversible errors,” but that “[t]he ICA did not even address
Petitioners’ points of error and arguments[.]”
Here, the ICA’s decision on the statute of limitations
provision in HRS § 651C-9(1) was wrong as a matter of law. We
therefore vacate its ruling on that issue and remand that issue
to the ICA. Additionally, we remand the case to the ICA for a
ruling on the merits of the case, as raised in Petitioners’
appeal herein from the October 7, 2008 judgment, irrespective of
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its decision on the statute of limitations issue on remand.
See Hamilton ex rel. Lethem v. Lethem, 119 Hawai#i 1, 12, 193
P.3d 839, 850 (2008)(holding that the ICA incorrectly ruled that
the case was moot and therefore “remand[ing] the case to the ICA
with instructions to address the merits of Father’s case”);
Bocalbos v. Kapiolani Med. Ctr. for Women & Children, 89 Hawai#i
436, 443, 974 P.2d 1026, 1033 (1999) (vacating the ICA’s opinion
dismissing an appeal for lack of jurisdiction and “remand[ing]
the appeal to the ICA for a decision on the merits”); Abadilla v.
Iwata, SCWC-29851, 2013 WL 4458874, at *11; see also HRS § 602-5
(allowing this court to “do such acts” that are “necessary to
carry into full effect the powers which are or shall be given to
it by law or for the promotion of justice in matters pending
before it”).
Finally, as to the second question presented in their
Application, the ICA’s judgment remanded the case to the court
for a determination of whether Respondents were entitled to
attorneys’ fees. A determination of whether Respondents are
entitled to attorneys’ fees cannot be made in light of our
disposition on the first question inasmuch as the prevailing
party must be determined on remand. Consequently, the ICA’s
judgment as to this issue is also vacated and remanded.
XIII.
Based on the foregoing, the October 9, 2013 judgment of
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the ICA is vacated and the case remanded to the ICA for
proceedings consistent with this opinion.
R. Steven Geshell, /s/ Paula A. Nakayama
for petitioner
/s/ Simeon R. Acoba, Jr.
Paul Alston,
for respondent /s/ Sabrina S. McKenna
/s/ Richard W. Pollack
/s/ Colette Y. Garibaldi
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