358 P.3d 727
Haw. Ct. App.2015Background
- Realty Finance (a subsidiary of HSC) received foreclosure-sale proceeds in early 2000 and, days after receipt, issued checks totaling at least $416,851.45 to insiders/creditors of HSC (including HSC’s principals and counsel); evidence showed additional upstreaming in 2000–2002 leaving Realty Finance nearly asset‑less.
- The Schmidts were litigating entitlement to those proceeds; the Hawai‘i Supreme Court ultimately ruled in their favor and a final judgment in their favor was entered in December 2004 reducing Realty Finance’s claim.
- The Schmidts sued HSC, Richard Henderson, and Eleanor Henderson in April 2006 under Hawaii’s UFTA (HRS ch. 651C) for fraudulent transfers (actual intent) and for unfair/deceptive acts; only the UFTA (actual intent) claim remained at trial.
- The circuit court found suspicious circumstances but concluded the Schmidts failed to prove Realty Finance’s actual intent to hinder, delay, or defraud creditors by clear and convincing evidence and entered judgment for defendants; the ICA originally affirmed on statute‑of‑limitations grounds but the Hawai‘i Supreme Court remanded, instructing the ICA to reach the merits.
- On remand the ICA held the circuit court erred in several findings (notably treating HSC as a creditor and downplaying return of capital vs. debt), concluded the record supports clear and convincing evidence of Realty Finance’s fraudulent intent, vacated the final judgment, and remanded for (1) determination whether the UFTA claims are time‑barred and (2) entry of judgment and damages/fees if not time‑barred.
Issues
| Issue | Plaintiff's Argument (Schmidt) | Defendant's Argument (Hendersons/HSC) | Held |
|---|---|---|---|
| Whether transfers were fraudulent under HRS §651C‑4(a)(1) (actual intent) | Transfers were badges of fraud: to insiders, immediately after receipt of proceeds while litigation pending, upstreaming of assets left debtor judgment‑proof, no reasonably equivalent value (repayment of capital, not debt) | Transfers were legitimate returns/repayments: HSC invested capital and reasonably expected repayment; transfers satisfied bona fide obligations and served a legitimate business purpose | ICA: Circuit Court erred; record contains clear and convincing evidence of transferor’s actual intent to hinder/delay/defraud creditors (remand for relief) |
| Whether return of capital to HSC was "value"/antecedent debt under UFTA | Return of capital is not antecedent debt and does not provide reasonably equivalent value; therefore transfers lack protection of value/good faith defense | Good‑faith belief repayment was owed is dispositive; treated as repayment of obligations | ICA: Court misapplied law; repayment of capital is not the same as satisfaction of antecedent debt and cannot be treated as value as matter of law in UFTA analysis |
| Whether Schmidts were "creditors" when transfers were made | Schmidts had a claim (pending litigation) and thus qualified as UFTA creditors; transfers made while claim pending support fraudulent intent | Defendants argue no "actual" debt existed in 2000 and plaintiffs’ later judgment cannot be retroactively treated as a claim | ICA: Schmidts were creditors (UFTA defines claim broadly); circuit court erred in finding no debt and in relying on that to reject fraud showing |
| Whether claims are time‑barred under HRS §651C‑9(1) | One‑year toll runs from discovery of the fraudulent nature of the transfers (not merely discovery of transfers); plaintiffs found fraud no earlier than 2005 | Defendants argue plaintiffs could reasonably have discovered transfers/fraud earlier and suit is untimely | ICA remands to circuit court to decide when Schmidts reasonably discovered the fraudulent nature; statute‑of‑limitations question unresolved on record |
Key Cases Cited
- Bremer v. Weeks, [citation="104 Hawai'i 43"] (Haw. 2004) (standard of review: factual findings clearly erroneous; legal conclusions de novo)
- Kekona v. Abastillas, [citation="113 Hawai'i 174"] (Haw. 2006) (fraudulent transfers require clear and convincing evidence)
- In re Roco Corp., 701 F.2d 978 (1st Cir. 1983) (use of fraud "badges" to infer intent in corporate transfers)
- S.E.C. v. Res. Dev. Int’l, LLC, 487 F.3d 295 (5th Cir. 2007) (transferees’ knowledge irrelevant to establishing transferor’s fraudulent intent)
- United States v. Rocky Mountain Holdings, Inc., 782 F. Supp. 2d 106 (E.D. Pa. 2011) (capital contributions are equity, not antecedent debt; return of capital does not constitute "value" under UFTA)
- Hullett v. Cousin, 204 Ariz. 292 (Ariz. 2003) (en banc) (distribution of capital contribution is return of equity, not a transfer for value under UFTA)