THOMAS FRANK SCHMIDT and LORINNA JHINCIL SCHMIDT, Petitioners/Plaintiffs-Appellants, Cross-Appellees,
HSC, INC., a Hawai'i corporation, RICHARD HENDERSON, SR., and ELEANOR R.J. HENDERSON, Respondents/Defendants-Appellees, Cross Appellants.
CERTIORARI TO THE INTERMEDIATE COURT OF APPEALS (ICA NOS. 29454 and 29589; CIV. NO. 06-1-0228)
R. Steven Geshell, for petitioner
Paul Alston, for respondent
NAKAYAMA, ACTING C.J., ACOBA, McKENNA, AND POLLACK, JJ., AND CIRCUIT JUDGE GARIBALDI, IN PLACE OF RECKTENWALD, C.J., RECUSED
We hold that, in accordance with the text of Hawai'i Revised Statutes (HRS) § 651C-9(1) (1993) pertaining to the Uniform Fraudulent Transfers Act (UFTA), 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) 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. Based on this ruling, the ICA did not reach Petitioners' points of error on the merits of the case 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.
This case can be traced back to a complaint for foreclosure filed in the court on March 27, 1997, by RFI against Petitioners, as well as Amerasian Land Co. (Amerasian) and Turlington Corporation, filed in Civ. No. 97-1235-03.
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.
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.
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.
On remand, the court 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 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), 65104(a)(2) (1993), and HRS § 651C-5 (1993).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 "without prejudice to filing a separate action against the proper parties."
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) (l) because they were 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). 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:
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, ...