Munson Earth Moving v. Holmberg

Munson Earth Moving v. Holmberg, No. S0407-01 Cncv (Katz, J., Sept.
20, 2004)
[The text of this Vermont trial court opinion is unofficial. It has been
reformatted from the original. The accuracy of the text and the
accompanying data included in the Vermont trial court opinion database is
not guaranteed.]
STATE OF VERMONT
Chittenden County, ss.:
MUNSON EARTH MOVING
v.
HOLMBERG
ENTRY
Plaintiff, a construction company, seeks to void money transfers
made by defendant corporation to its owners, who are also defendants.
Plaintiff claims that these 1997 transfers were fraudulent and only meant to
deny plaintiff an opportunity to recover debts owed by the Holmberg
Company. Defendants assert that any action to void or recover these
transfers has expired because the statute of limitations for this action is one
year and does not allow for tolling. 9 V.S.A. § 2293(3). Both parties have
moved for summary judgment.
This dispute stems from the Meadow Ridge development project.
Defendant Holmberg, Inc. hired plaintiff for construction work on the site.
After partial performance and partial payment in 1996, plaintiff continued
to work and incurred more expenses. Around that time, Peter Holmberg,
the owner of Holmberg, Inc., sold off the company’s tangible assets and
used them to pay off a debt the company owed himself. The remainder of
the capital was then loaned to Peter, who used it to pay off personal debts
and other expenses. This was all accomplished in November 1997.
Plaintiff argues that it is entitled to reach out to Peter and his wife
Marilyn and avoid the November transfers because § 5 (b) of the Uniform
Fraudulent Transfers Act (as adopted by the Vermont legislature at 9
V.S.A. § 2289 (b)) allows a creditor whose claim pre-dates the transfer to
reach out to the transferred assets if:
$ the transfer was made to an insider [such as an officer of the
company like Peter Holmberg, see 9 V.S.A. § 2285 (6)]
$ for an “antecedent debt,” [a pre-existing debt to the insider]
$ the debtor [Holmberg, Inc.] was insolvent at that time, and
$ the insider had reasonable cause to believe that the debtor was
insolvent.
As the official comments to this provision note, this subsection labels a
preferential transfer to an insider fraudulent when the transfer is made while
the company is insolvent and the insider knew it. Unif. Fraud. Trans. Act §
5 cmt. 2, 7A pt.II U.L.A. 330–31 (1999). There is some disagreement
between the parties on whether or not Holmberg, Inc. was “insolvent” at the
time of the November transfers and whether Peter Holmberg knew at the
time that it was. The Act defines insolvency in two ways. A debtor is
insolvent if its total debts are greater than its total assets or if the debtor is
generally not paying its debts as they become due. 9 V.S.A. § 2286 (a),(b).
The uncontested evidence shows that Holmberg, Inc. existed on a hand-to-
mouth financing scheme that required Peter to loan money to the company
via his personal credit sources and then re-pay himself as the company sold
lots. Taking a snapshot of the company’s financial record at any given time
as suggested by the first definition of insolvency might not accurately
portray the financial situation of the company because of its precarious
accounting. Likewise, the second definition through the word “generally”
suggests far more widespread missed payments than Holmberg, Inc. was
guilty of in November 1997. This approach, however, has been questioned
by some commentators. M. Cook & R. Mendales, The Uniform Fraudulent
Transfer Act: an Introductory Critique, 62 Am. Bankr. L.J. 87, 91–92
(1988) (suggesting that the latter definition of insolvency is easier to prove
but is only a presumption of insolvency).
Setting aside the question of whether defendant’s status in
November 1997 qualified as insolvent as defined in 9 V.S.A. § 2286,
defendants note that this claim has a one year statute of limitations. 9
V.S.A. § 2293 (3). Plaintiff acknowledges this limitation but argues that it
was unaware of the transfer until after it had begun discovery. The
Fraudulent Transfer Act has three different statutes of limitation for each of
the different claims possible under the act. The first, for claims that debtor
made the transfer to intentionally hinder, delay, or defraud creditor, allows
for claims within four years of the transfer or within a year of when creditor
should have known about the transfer. 9 V.S.A. § 2293 (1) (citing § 2288
(a)(1)). The second statute limits claims to within four years of the transfer
when the claims arise from transfers where the debtor exchanges an asset
for something of less than reasonably equivalent value or incurs a debt
beyond its ability to pay. § 2293 (2) (citing § 2288 (a)(2)). Notably, this
provision does not require proof of intent to defraud or any element of bad
faith. See Unif. Fraud. Trans. Act § 4 cmt. 2, 7A pt.II U.L.A. 302 (1999);
see also Benson v. Richardson, 537 N.W.2d 748, 756–57 (Iowa 1995)
(noting fraudulent transfers do not require proof of actual dishonesty or
intent). It also does not have the tolling language of the previous section.
The third statute, relevant to plaintiff’s claim, limits actions to “within one
year after the transfer was made or the obligation incurred.” § 2293 (3). As
with the second statute, there is neither the underlying requirement to prove
bad faith or tolling language. This difference means more than mere
statutory interpretation or implied legislative intent.
This difference between the first statute and the second and third is
important because the statutes were designed as more than just statutes of
limitation. The statutes are actually statutes of extinguishment, and they
extinguish the rights as well as the remedy. Unif. Fraud. Trans. Act § 9
cmt. 1, 7A pt.II U.L.A. 359 (1999); see, e.g., United States v. Vellalos, 780
F.Supp. 705, 707 (D. Hawai’i 1992) appeal dismissed, 990 F.2d 1265 (9th
Cir. 1993) (“It is clear that the intent of the UFTA is to completely
extinguish the statutory cause of action following the expiration of the
delineated time period.”); see also Longe v. Boise Cascade Corp, 171 Vt.
214, 223 (2000) (“[T]he Legislature knows how to create an equitable
tolling provision when it wishes to do so.”); J. LaBine, Michigan’s
Adoption of the Uniform Fraudulent Transfer Act: an Examination of the
Changes Effected to the State of Fraudulent Conveyance Law, 45 Wayne L.
Rev. 1479, 1510–11 (noting the lack of tolling language in the Uniform Act
and its potential effect). In this case, plaintiff’s filed their complaint, at the
earliest, in December 2001. This was too late for a claim under § 2289 (b),
and its claim is barred by the statute of limitations.
Plaintiff’s secondary argument is that § 2288(a)(2), which allows
creditors to avoid transactions where the debtor has left an unreasonably
low amount of assets or incurred debts far larger than it will be able to pay.
As with plaintiff’s first claim, the statute of limitation, § 2293 (2) applies
and bars an action. While the window in § 2293 (2) is larger (4 years),
plaintiff’s December 2001 filing was too late. Its rights as well as remedy
were extinguished at the end of November 2001, 4 years after the
transaction.
Plaintiff’s final argument is that equitable estoppel should prevent
defendants from raising a statute of limitations defense. The evidence,
however, shows no evidence of bad faith or intent on the defendants’ part to
defraud plaintiff. While their business practices do not demonstrate a great
deal of stability, their actions were consistent with an on-going business
endeavor; their letters in January 1998 and July 1998 are honest about the
state of the business, its low assets and expectant business prospects.
Importantly, they do not demonstrate any kind of false picture or report that
the company was well funded or expected to pay the plaintiff in full
immediately. Instead, they ask for patience as the company expected to
develop future capital and offered incentives to plaintiff in return. Plaintiff
has not submitted any evidence that would show these promises to be
knowingly false or that they had a superior knowledge about the statute of
limitations and intended to lull plaintiff or into letting its rights expire. See
Beecher v. Stratton Corp., 170 Vt. 137, 139–40 (1999) (insurance
adjustor’s actions which delayed plaintiff’s filing did not demonstrate an
intent to deceive). Finally, this whole area of law—fraudulent transfers—
presumes that defendants are no angels. Yet, the enacted statute limits
actions to one year. Whether this be the result of compromise or some
other legislative intent, we are unwilling to remove it where plaintiff’s
evidence for equity is less than compelling.
Based on the foregoing, defendants’ motion for summary judgment
is granted. Plaintiff’s motion for summary judgment is denied. Count four
of plaintiff’s complaint is dismissed.
Dated at Burlington, Vermont________________, 2004.
________________________
Judge