John Haughney, (humcor, Inc) V Meridian Place Llc

Filed
Washington State
Court of Appeals
Division Two
June 28, 2016
IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
DIVISION II
MERIDIAN PLACE, LLC, a Washington No. 47292-9-II
limited liability company,
Respondent,
v.
JOHN and JANE DOE HAUGHNEY, UNPUBLISHED OPINION
Appellant,
HUMCOR, INC., a Washington corporation
d/b/a Callaway Fitness; PAWNEE LEASING
CORPORATION, a Colorado corporation;
KEY EQUIPMENT FINANCE, INC., a
Michigan corporation; CASCADE BANK, a
Washington corporation; SMART LENDING,
LLC; JAMES and KRISTI LOVEALL and
MICHAEL PETROVIC,
Defendants.
JOHANSON, P.J. — Damages were imposed against John Haughney under the Uniform
Fraudulent Transfer Act (UFTA), ch. 19.40 RCW, after his corporation, Humcor, Inc., fraudulently
sold a fitness center, Callaway I, to James Loveall. Haughney appeals the superior court’s damages
award to Humcor’s creditor, Meridian Place, LLC (Meridian). Haughney argues that the superior
No. 47292-9-II
court erred when, on remand from this court, it calculated Meridian’s damages award without
deducting Cascade Bank’s priority secured lien against Callaway I and Callaway II from Callaway
I’s value. We hold that the trial court did not abuse its discretion. Accordingly, we affirm the trial
court’s award of damages.
FACTS
I. BACKGROUND FACTS
Haughney was a shareholder and the treasurer of Humcor, the corporate owner of Callaway
Fitness. In June 2006, Humcor signed a lease with Meridian providing a location for its second
fitness center, Callaway II. Although Callaway I was financially successful, Callaway II was not
and Humcor fell behind on its lease payments to Meridian.
On or about January 25, 2008, Humcor borrowed $325,000 from Cascade Bank to
refinance and pay its leases and other debt. Cascade Bank had a security interest in first position
with respect to the assets of Callaway I and II.
As of March 31, the balance of Cascade Bank’s loan to Humcor was $321,706.04. On
April 1, Humcor sold all of the assets of Callaway I to Loveall for $750,000. The agreement stated
that Humcor would convey Callaway I’s assets to Loveall “free and clear of any and all liens.”
Clerk’s Papers (CP) at 478. Loveall agreed to pay Humcor $114,263.54 in cash and to assume
Humcor’s debts.1
1
The debt assumed by Loveall as stated in the purchase and sale agreement totaled $635,736.46.
However, Loveall never made any payments to reduce the debt and the parties do not dispute that
the transfer of this debt was illusory.
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Lovell gave Humcor a check for $114,263.54 on April 1, but Humcor did not deposit
Loveall’s check until April 22. Also on April 22, Humcor paid Cascade Bank $117,500. On April
24, Cascade Bank confirmed that it considered the $117,500 payment in full to release its security
interest in Callaway I’s assets, stating that “[t]his letter is also intended to provide comfort to the
purchasers of [Callaway I] in that they have acquired [Callaway I] free and clear of our perfected
security interest.” CP at 490. The sale of Callaway I rendered Humcor insolvent such that it could
not pay Meridian for Callaway II’s delinquent rent.
II. PROCEDURAL HISTORY
In July 2010, Meridian filed suit against Humcor under the UFTA. The trial court ruled
that the sale of Callaway I to Loveall was a fraudulent transfer under the UFTA and that Meridian
was entitled to judgment against Humcor. Notwithstanding that both parties agreed to Callaway’s
$750,000 market value, the trial court ruled that Callaway I was worth $75,000 and limited
Meridian’s damage award to this amount. Haughney paid Meridian $75,000.
Meridian appealed the $75,000 judgment amount. On appeal, we held that the trial court
abused its discretion when it limited Meridian’s damages to $75,000 because the record showed
that the parties agreed that the value of Callaway I was $750,000 and other evidence produced at
trial supported that value. We discussed RCW 19.40.011(2)(i) and .081(c) that govern how the
value of a fraudulently transferred, encumbered asset should be calculated for the purpose of
awarding a creditor. Specifically regarding Cascade Bank’s lien, we stated,
We recognize that the trial court had authority under RCW 19.40.011(2)(i)
and 19.40.081(c) to adjust the damages award downward in light of Cascade
Bank’s lien on Callaway I, which Cascade Bank released immediately after
Humcor’s sale of Callaway I to Loveall when Haughney paid off the underlying
loan with the sale proceeds. Thus, the trial court properly considered Cascade
Bank’s lien in adjusting the damages award downward because UFTA does not
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No. 47292-9-II
treat encumbered property as an “[a]sset” of the fraudulent transferor. . . . A
statutorily authorized downward adjustment of Meridian’s damages in the amount
of Cascade Bank’s lien, roughly $325,000, would still have left Meridian with
damages of roughly $450,000, $350,000 more than the $75,000 that the trial court
awarded.
CP at 164 (footnote omitted) (emphasis added). We vacated the trial court’s damages award to
Meridian and remanded to recalculate the damages award based on “RCW 19.40.081 and the
relevant evidence.” CP at 166.
On remand, the superior court held that Callaway I was worth $750,000 minus
$114,263.54, “representing payment of the Cascade Bank lien,” minus $75,000 already paid to
Meridian for a total of $560,000 in damages owed to Meridian. CP at 367. The court reasoned
that “the more ‘equitable approach’, as allowed by RCW 19.40, et al, is not to elevate ‘form over
substance’, and to look at the real numbers that were used in releasing the lien, not the amount that
existed at the time just before the transfer [of Callaway I].” CP at 367.
The superior court found that the value of Callaway I was $750,000 “[b]ased on the
uncontroverted testimony of the parties to the transfer in question and agreement by all parties in
the case.” CP at 397. The superior court also found that
2. [t]he lien of Cascade Bank that had attached to the equipment at the
Callaway I location prior to the transfer of that equipment to James Loveall was
released by Cascade Bank in consideration for the receipt of $117,500 from
Humcor on April 22, 2008. Humcor used the $114,263.54 down payment it
received from James Loveall on April 1, 2008 to pay Cascade Bank to release the
lien on Callaway I equipment. Cascade Bank stated in writing that it released its
lien on the Callaway I equipment so that James Loveall would receive the
equipment free and clear of the Bank’s lien and in fact the equipment was
transferred to James Loveall free and clear of Cascade Bank’s lien. Accordingly,
the Cascade Bank lien did not diminish the value of the asset transferred to Mr.
Loveall.
CP at 397 (emphasis added). The trial court also concluded that
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1. [j]udgment should be entered in favor of the plaintiff and against John
Haughney and his marital community in the amount of $560,736.46 which is
calculated by the value of the asset transferred at the time of transfer of $750,000
less $75,000 already paid by Mr. Haughney to the plaintiff and less $114,263.54 in
cash paid by Loveall to Humcor as part of the purchase price.
2. The Cascade Bank lien was released from Callaway I’s assets when they
were transferred to James Loveall, did not diminish the value of those assets to him
and, therefore should not be deducted from the value of the assets transferred to
him.
CP at 398. Haughney appeals.
ANALYSIS
Haughney argues that the trial court erred when it failed to deduct the entire amount of
Cascade Bank’s lien when calculating Meridian’s damages under the UFTA. We disagree.
I. STANDARD OF REVIEW
We review the interpretation of a statute de novo. Dimension Funding, LLC v. D.K.
Assocs., Inc., 146 Wn. App. 653, 657, 191 P.3d 923 (2008). We assume the legislature meant
exactly what the statute says—if the statute is unambiguous, meaning must be derived from the
wording of the statute itself. Berger v. Sonneland, 144 Wn.2d 91, 105, 26 P.3d 257 (2001).
We review findings of fact to determine whether substantial evidence supports them and
whether the findings support the conclusions of law. Hegwine v. Longview Fibre Co., 132 Wn.
App. 546, 555, 132 P.3d 789 (2006), aff’d, 162 Wn.2d 340, 172 P.3d 688 (2007). We review
conclusions of law de novo and legal conclusions to be drawn from the facts resulting in a mixed
question of law and fact are reviewed de novo. Rasmussen v. Bendotti, 107 Wn. App. 947, 954,
29 P.3d 56 (2001); Clayton v. Wilson, 168 Wn.2d 57, 62, 227 P.3d 278 (2010).
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We review a trial court’s award of damages for abuse of discretion. Krivanek v. Fibreboard
Corp., 72 Wn. App. 632, 636, 865 P.2d 527 (1993). We will find an abuse of discretion only on a
clear showing that the court’s exercise of discretion was manifestly unreasonable, or exercised on
untenable grounds, or for untenable reasons. T.S. v. Boy Scouts of Am., 157 Wn.2d 416, 423, 138
P.3d 1053 (2006). A trial court’s discretionary decision is based on untenable grounds or made
for untenable reasons if it rests on facts unsupported in the record or was reached by applying the
wrong legal standard. T.S., 157 Wn.2d at 423-24.
II. THE TRIAL COURT PROPERLY EXERCISED ITS DISCRETION IN AWARDING DAMAGES
Haughney assigns error to the trial court’s finding and conclusion that Cascade Bank’s lien
was not in effect at the time of Callaway I’s sale and that Cascade’s lien should not be deducted
from Meridian’s damages. Haughney contends that the entire $325,000 lien against Callaway I
and Callaway II must be excluded from the $750,000 value of Callaway I. Meridian argues that
the trial court properly excluded Cascade’s lien from Callaway I’s value to calculate the damages
award under RCW 19.40.081(c). We conclude that the trial court did not abuse its discretion by
finding that the value of the lien against Callaway I was $117,500.00 because that was the amount
paid to Cascade Bank to release the lien from Callaway I so that Loveall received Callaway I free
and clear of encumbrances.
The UFTA provides relief to creditors whose collection of debt is frustrated by a fraudulent
transfer of an asset by the debtor. Thompson v. Hanson, 168 Wn.2d 738, 746, 239 P.3d 537 (2009).
Its provisions govern the remedies a creditor can seek in the event of a fraudulent transfer. Ch.
19.40 RCW. Creditors can recover judgments for the value of the fraudulently transferred asset,
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but the creditor is entitled to judgment for only the value of that asset at the time of transfer. RCW
19.40.081(b), (c). Specifically,
(b) [e]xcept as otherwise provided in this section, to the extent a transfer is
voidable in an action by a creditor under RCW 19.40.071(a)(1), the creditor may
recover judgment for the value of the asset transferred, as adjusted under subsection
(c) of this section, or the amount necessary to satisfy the creditor’s claim, whichever
is less. . . .
....
(c) If the judgment under subsection (b) of this section is based upon the
value of the asset transferred, the judgment must be for an amount equal to the value
of the asset at the time of the transfer, subject to adjustment as the equities may
require.
RCW 19.40.081 (emphasis added).
The definition of “asset” excludes “[p]roperty to the extent it is encumbered by a valid
lien.” RCW 19.40.11(2)(i). “Valid lien” is defined as “a lien that is effective against the holder
of a judicial lien subsequently obtained by legal or equitable process or proceedings.” RCW
19.40.11(13). “Lien” 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.”
RCW 19.40.011(8). RCW 19.40.081(c) states, “If the judgment under subsection (b) of this
section is based upon the value of the asset transferred, the judgment must be for an amount equal
to the value of the asset at the time of transfer, subject to adjustment as the equities may require.”
(Emphasis added.)
Here, it is undisputed that the transfer of Callaway I to Loveall was fraudulent and that the
market value of Callaway I’s assets at transfer was $750,000. The parties agree that Cascade Bank
had a valid, first priority lien of $325,000 secured by the assets of Callaway I and II in existence
on April 1—the day the sale of Callaway I to Loveall closed. The trial court found that Cascade
Bank released its lien on Callaway I on receipt of $117,500. Cascade Bank released its lien so that
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Loveall received Callaway I free and clear of the Cascade lien. The trial court reasoned that
Cascade Bank’s lien did not diminish the value of the asset transferred to Loveall. The trial court
concluded that “the more ‘equitable approach’, as allowed by RCW 19.40, et al, is not to elevate
‘form over substance’, and to look at the real numbers that were used in releasing the lien, not the
amount that existed at the time just before the transfer [of Callaway I].” CP at 367.
We conclude that the trial court properly exercised its discretion to adjust the value of the
asset fraudulently transferred as equity required under RCW 19.40.081(c). We hold that the trial
court properly exercised its discretion in determining damages.
III. ATTORNEY FEES
Meridian argues that it is entitled to attorney fees because Haughney’s appeal is frivolous
pursuant to RAP 18.9(a), West v. Thurston County, 169 Wn. App. 862, 868, 282 P.3d 1150 (2012),
and Streater v. White, 26 Wn. App. 430, 435, 613 P.2d 187 (1980). We disagree.
RAP 18.9(a) authorizes compensatory damages when a party files a frivolous appeal for
the purpose of delay. An appeal is frivolous if it presents no debatable issues upon which
reasonable minds might differ and is so devoid of merit that there is no reasonable possibility of
success. West, 169 Wn. App. at 868. The issues presented here are debatable and reasonable
minds might differ, therefore this appeal is not frivolous. Thus, we deny Meridian’s request for
attorney fees.
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We affirm.
A majority of the panel having determined that this opinion will not be printed in the
Washington Appellate Reports, but will be filed for public record in accordance with RCW 2.06.040,
it is so ordered.
JOHANSON, P.J.
We concur:
MELNICK, J.
SUTTON, J.
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