Washington

Warning: The following opinion is provided for purposes of discussion only. We have not Shepardized™ this opinion, and do not know the subsequent disposition of this case nor whether the effect of the opinion has been overruled or superceded by other law.

Worthington v. Low Cost Drugs Inc.,
1998.WA.390 (Wash.App.Div.3 03/19/1998)

Washington Court of Appeals

No. 16542-6-III

1998.WA.390

March 19, 1998

RICHARD A. WORTHINGTON AND KATHERINE L. WORTHINGTON, HUSBAND AND WIFE, APPELLANTS,

v.

LOW COST DRUGS, INC., A WASHINGTON CORPORATION, AND SHIRLEY R. BROWN, INDIVIDUALLY AND IN HER CAPACITY AS PRESIDENT, RESPONDENTS.

Appeal from Superior Court of Walla Walla County Docket No: 95-2-00710-5 Judgment or order under review Date filed: 03/04/97 judge signing: Hon. Donald Schacht

Counsel Of Record: Counsel for Appellant(s) Kristian E. Hedine Reese Baffney Schrag & Hedine P.s. Baker Bldg Fl 7 8 South 2nd Ave Walla Walla, WA 99362-1997 Counsel for Respondent(s) Richard F. Monahan Roach Monahan & Lowry P.o. Box 1815 Walla Walla, WA 99362-0034 Counsel for Other Parties Tina Driver (Appearing Pro Se) Official Court Reporter 315 West Main Walla Walla, WA 99362

The opinion of the court was delivered by: Dennis J. Sweeney

[Editor's note: originally released as an unpublished opinion]

Concurring

Frank L. Kurtz

Stephen M. Brown

SWEENEY, J.

The Uniform Fraudulent Transfer Act, RCW 19.40, imposes a one-year statute of limitation for transfers made to an insider for an antecedent debt where the debtor was insolvent and the insider had reason to believe the debtor was insolvent. RCW 19.40.091(c). A four-year statute of limitation applies to two other fraudulent transfers: (1) when the debtor is insolvent and does not receive "equivalent value" for the exchange of an asset (RCW 19.40.091(b)); (2) when the transferor actually intends to hinder, delay or defraud creditors (RCW 19.40.091(a)). The trial court here concluded that the one-year statute of limitation applied and, by implication, that the four-year statute of limitation did not. Richard Worthington has alleged causes of action that would fall within the four-year statute of limitations. We therefore reverse the summary dismissal and remand.

FACTS

Low Cost Drugs operated several stores in and around Walla Walla, until it folded under pressure from chain distributors. Shirley Brown was president of Low Cost and a member of the board. Richard Worthington was a 30-year Low Cost employee who resigned in 1991. Low Cost agreed to redeem his 490 shares of common stock at $338 per share. The total price, $165,620, was to be paid over 10 years, with annual principal payments and monthly interest payments at 9 percent. Low Cost paid only one principal payment. Mr. Worthington received his last monthly interest payment in July 1993. In February 1992, Low Cost signed a redemption agreement with Ms. Brown for her 1,470 shares at $66.38 each ($97,584) to be paid over 3 years at 5.25 percent interest.

In April 1992, Ms. Brown made an unsecured $100,000 loan to Low Cost. In June 1992, she made a second unsecured $100,000 loan. In April and September 1992, she made smaller unsecured loans. In May 1993, Low Cost gave Ms. Brown a security agreement and financing statement for company assets covering $260,000 in previously unsecured loans. In exchange, Ms. Brown agreed to forbear on default proceedings on her loans. Payments to Mr. Worthington stopped as of July 1993. Ms. Brown and Mr. Worthington disagree over whether payments to Ms. Brown continued. Mr. Worthington characterizes payments to Ms. Brown after August 1993 as repayments on the loan. Ms. Brown says they were payments on her stock redemption agreement.

Low Cost's pharmacy inventory and assets were subsequently sold to Safeway and Albertson's. Other assets were auctioned. Ms. Brown's security interest was junior to the bank's. Property not sold at auction was made available to general creditors, with the exception of a few things that would not sell, which Ms. Brown kept.

Mr. Worthington sued Low Cost and Ms. Brown under the Uniform Fraudulent Transfer Act (UFTA), RCW 19.40. His complaint alleged:

Conversion of loans from unsecured to secured status constitutes a lien under RCW 19.40.011(8) and is a transfer under RCW 19.40.011(12).

Low Cost was insolvent when the transfer occurred.

Ms. Brown believed or had reason to believe Low Cost was insolvent.

Ms. Brown gave no equivalent value in exchange for the lien.

The transfer was made with actual intent to hinder, delay or defraud creditors:

½ transfer was to a corporate insider;

½ transfer was undisclosed to outside creditors;

½ transfer consisted of substantially all the debtor's assets;

½ debtor was insolvent.

The transfer was made to an insider for an antecedent debt at a time when the company was insolvent and the insider knew that.

Low Cost moved for summary dismissal on three grounds:

The statute of limitation for actions based on transfer to an insider for antecedent debt was one year and had run.

Ms. Brown's forbearance constituted adequate value.

Ms. Brown received no payments after Mr. Worthington's payments ceased, so he has no remedy under RCW 19.40.

The court granted summary judgment on the ground the action was time barred. Mr. Worthington appeals.

Discussion

Standard of Review. In reviewing a summary judgment, the appellate court engages in the same inquiry as the trial court. Wilson v. Steinbach, 98 Wn.2d 434, 437, 656 P.2d 1030 (1982). We consider only the evidence that was before the trial court in the light most favorable to the nonmoving party, in this case, Mr. Worthington. Schaaf v. Highfield, 127 Wn.2d 17, 21, 896 P.2d 665 (1995). The inquiry is whether there is a genuine issue of material fact and whether the moving party is entitled to judgment as a matter of law. Marquis v. City of Spokane, 130 Wn.2d 97, 105, 922 P.2d 43 (1996).

Statutes of Limitation Generally. The goals of limitation statutes are to ensure litigation while the evidence is still available, and to provide repose from the threat of stale claims. Ruth v. Dight, 75 Wn.2d 660, 664, 453 P.2d 631 (1969). To prevent the common law from becoming an instrument of inJustice, the longer of two applicable statutes will apply whenever there is uncertainty as to which statute governs. Stenberg v. Pacific Power & Light Co., 104 Wn.2d 710, 714-15, 709 P.2d 793 (1985).

UFTA Generally. RCW 19.40 provides a remedy for corporate creditors when corporate assets are transferred in such a way as to place the property beyond the reach of creditors or to prejudice a creditor's legal rights. Freitag v. McGhie, 133 Wn.2d 816, 821-22, 947 P.2d 1186 (1997).

UFTA Limitations. The extinguishment clauses are triggered by the discovery of the fraudulent nature of the transfer, whether or not the statute language specifies discovery. Freitag, 133 Wn.2d at 821-22. The applicable statutes of limitation are as follows (from shortest to longest):

(1) RCW 19.40.091(c) provides: One year from the date of the transfer for violation of RCW 19.40.051(b) which requires a showing that:

Creditor status existed before the transfer.

The transfer was made to an insider.

For an antecedent debt and

The debtor was insolvent and

The insider had reason to believe the debtor was insolvent.

Mr. Worthington's complaint alleges all of the above.

(2) RCW 19.40.091(b) provides: Four years from the date of transfer for violation of RCW 19.40.051(a) which requires a showing that:

Creditor status was acquired before the transfer.

No reasonably equivalent value was given in exchange for the asset.

The debtor was insolvent at the time of the transfer or became insolvent as a result.

Mr. Worthington's complaint alleges all of these also.

(3) RCW 19.40.091(a) provides: Four years from the date of transfer or, if later, one year from the date the transfer was or reasonably should have been discovered for intentional fraud under RCW 19.40.041(a)(1):

Creditor status arose either before or after the transfer.

Transfer was made with actual intent to hinder, delay or defraud creditors.

Mr. Worthington alleges actual intent.*fn1

The court summarily dismissed Mr. Worthington's claim under the lower statutory limitation, RCW 19.40.091(c). However, the complaint and supporting documentation state a claim under RCW 19.40.041(a)(2), lack of equivalent value, and possibly under the intent provisions of RCW 19.40.041(a)(1). The dismissal of these claims requires the adjudication of disputed issues of fact. Was the security interest worth anything? Was Ms. Brown's forbearance equivalent value? Were the post-transfer payments to Ms. Brown proceeds from the security interest and recoverable by Mr. Worthington under the UFTA?

Low Cost's Alternative Grounds for Summary Judgment. Low Cost's motion for summary judgment contained two alternative grounds. Reasonably Equivalent Value. Low Cost asserts and Mr. Worthington refutes that Ms. Brown's forbearance to pursue legal process when Low Cost defaulted on the loans constituted adequate value in exchange for the transferred asset. This is a material factual dispute.

No Remedy. Low Cost claims Ms. Brown received no payments after Mr. Worthington's payments ceased and realized no value from the security agreement. Therefore, it contends Mr. Worthington has no remedy under RCW 19.40.

RCW 19.40.071 provides for avoidance of the transfer, attachment of the asset, prevention of Disposition of the asset, and execution on the asset in satisfaction of a judgment. Courts generally interpret the remedy provisions liberally to provide relief. Frank R. Kennedy, Reception of the Uniform Fraudulent Transfer Act, 43 S.C. L. Rev. 655, 672 (1992).

Mr. Worthington alleges that conversion of the loans from unsecured to secured status made possible $76,000 in payments to Ms. Brown which should have gone to him and which would not have been payable to Ms. Brown absent the security agreement. He therefore characterizes the $76,000 as proceeds of the transfer. This is also a dispute of material fact.

The summary dismissal of all claims, other than those specifically covered by RCW 19.40.091(c), are reversed. A majority of the panel has determined that this opinion will not be printed in the Washington Appellate Reports but it will be filed for public record pursuant to RCW 2.06.040.

Sweeney, J.

WE CONCUR:

Kurtz, A.C.J.

Brown, J.

Opinion Footnotes

*fn1 Mr. Worthington alleges the following statutory actual intent factors: (1) transfer was to a corporate insider, RCW 19.40.041(b)(1); (2) transfer was undisclosed to outside creditors, RCW 19.40.041(b)(3); (3) transfer consisted of substantially all the debtor's assets, RCW 19.40.041(b)(5); and (4) debtor was insolvent, RCW 19.40.041(b)(9).

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