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and do not know the subsequent disposition of this case nor whether the effect of the opinion has been overruled or superceded by other law.

Fleming v. French,
1998.WA.42100 (Wash.App.Div.2 11/20/1998)

Washington Court of Appeals

No. 22124-1-II

1998.WA.42100

November 20, 1998

CRYSTAL MARIE FLEMING, APPELLANT,

v.

PAUL BRUCE, JAMES FRENCH, AND FIRST INDEPENDENT BANK, DEFENDANTS, AND FRIEDGARD VAN ECK, INTERVENOR, AND ALEX FRENCH AND JULIA FRENCH, INTERVENORS/RESPONDENTS.

Counsel: Counsel for Petitioner(s) Ben Shafton Morse & Bratt 1111 Main St. 6th Fl P.o. Box 61566 Vancouver, WA 98666 Counsel for Respondent(s) Jeffrey A. Meehan Landerholm Memovich etal PO Box 1086 Vancouver, WA 98666 Timothy J. Dack Attorney At Law 105 W Evergreed Blvd #223 PO Box 1148 Vancouver, WA 98666-1645 Counsel for Other Parties William L. Miles Miles & Miles PS 1220 Main Suite 455 Vancouver, WA 98660

The opinion of the court was delivered by: Houghton, C.j.

Source of Appeal: Appeal from Superior Court of Clark County Docket No: 96-2-02154-1 Judgement or order under review Date filed: 06/13/97 Judge signing: Hon. Robert L. Harris

Judges: Authored by Elaine M. Houghton Concurring: J. Dean Morgan Carroll C. Bridgewater

[Editor's note: originally released as an unpublished opinion]

Crystal Marie Fleming appeals the trial court denial of. her motion for summary Judgement that certain transfers to trusts were fraudulent. We reverse and remand.

FACTS

The facts are undisputed. Crystal Marie Fleming is the daughter of Theresa French. Her mother married James French (French) in 1987 and lived with him until 1993. They are now divorced. During the 1980's and 1990's, French owned a number of bail bond companies in Washington and elsewhere.

On March 30, 1993, French created the French Family Irrevocable Trust for the benefit of his natural children, James A. French (Alex) and Julia E. French (Respondents). The trust authorized the trustee to make discretionary payments to the French children from the corpus of the trust. The trust also allowed French to add property to its corpus.

In late 1994, Fleming disclosed to her mother that French had sexually abused her from 1988 to 1993. Fleming's mother immediately reported the matter to the Vancouver Police Department. At approximately the same time, Fleming's mother told French she had reported the matter to the authorities.

The Police Department assigned Detective Marla Pea Schuman to the case. On December 22, 1994, Detective Schuman received a telephone call from an investigator who worked for French's attorney. The investigator asked to be present during Fleming's interview. On December 30, 1994, French's attorney telephoned Detective Schuman to discuss the investigation. Both the investigator and attorney told Detective Schuman that they represented French.

In January 1995, French discussed the issue of asset protection with his attorney, T. Randall Grove. French stated that he was very concerned about future lawsuits. He stated that "he didn't like the idea of people being able to get into his pocket" and that "{h}e wanted to hedge his risks however possible." French also expressed concern about a pending civil suit alleging sexual abuse against him and that he did not want any extra assets exposed to such claims.

After this conversation, Grove created the French Residence Trust, declaring French's residence a trust asset and naming French the trustee. The trust reserved to French the right to use the residence for the next 15 years. The trust allowed French to sell the residence and to apply the proceeds to the purchase of another residence. Alternatively, the trust allowed proceeds to be converted to an annuity for French's benefit.

On January 17, 1995, French signed the trust document, conveying his residence to the French Residence Trust. At the same time, French transferred the building that housed his bail bond business to the French Family Irrevocable Trust. There was no consideration for either transfer.

On May 18, 1995, criminal charges were filed against French alleging seven counts of various forms of child molestation to have occurred against Fleming between July 1, 1988 and March 12, 1993.

On June 8, 1995, French made his first appearance on the criminal matter. The court raised the issue of bail and discussed the possibility of a property bond. French made the following response to the court: mr. french: We would prefer to post a bail bond. The property I have is in a trust. I've had it in a trust for some time for my children. Because of my business, I'm subject to suits from defendants and so forth.

{the court}: So you've removed your property hopefully from the reach of creditors, is that what you're saying?

mr. french: Correct. I have my office building. But the bail bond is something we can go either way. But to require only a property bond would take quite a bit of time.

In the late summer of 1995, French decided to sell the property he had conveyed to the French Residence Trust and to buy a new home. French applied for a loan in order to purchase the new home. On his loan application, he listed the residence he was selling as a personal asset but did not indicate its prior conveyance to a trust.

On September 19, 1995, French acquired a new home in his own name. On October 12, 1995, French executed a deed conveying the premises to himself as trustee of the French Residence Trust. The deed indicated that the transfer was without consideration.

On November 13, 1995, a jury convicted French of all seven counts of child molestation. French was allowed to remain free, but absconded before sentencing. First Independent Bank thereafter took over management of both trusts.

In 1996, two actions were initiated on Fleming's behalf.*fn1 The first action was a tort claim for damages against French. Because he had absconded, the court entered a default Judgement against him in the principal amount of $4,644,444.25 together with costs. In the second action, Fleming sought to set aside as fraudulent the transfers of the office building to the French Family Irrevocable Trust and the residence to the French Family Trust.

On March 21, 1997, Fleming moved for summary Judgement in the fraudulent transfer action, seeking a determination that the transfers made to the trusts in January and October of 1995 were fraudulent. Following Fleming's motion for summary Judgement, the trial court found the following facts as a matter of law:

1. The tortious acts committed by French against Fleming occurred prior to the transfers at issue;

2. Each of the transfers was made without consideration and without receipt by French, in his personal capacity, of any reasonably equivalent exchange;

3. Both transfers were part of an effort to shield the transferred properties from the claims of others;

4. Fleming recovered a Judgement against French for $4,644,444.25 together with taxable costs and attorney fees in the amount of $1,451.62 with 12 percent interest.

5. A 1992 financial statement of French and a September 1995 loan application list French's assets as of those dates;

6. French's assets at any material time were less than $4.6 million.

The trial court then denied summary Judgement, reserving for trial questions regarding (1) whether French had the actual intent to hinder, delay, or defraud any creditor on the dates of the transfers, and (2) whether his liabilities on those dates exceeded his assets. On the second issue, the court ruled that Fleming's claim would be evaluated as of the dates of the transfers, and the trier of fact would be asked "to determine whether or not a Judgement rendered in excess of his assets would be one that could reasonably be anticipated."

Fleming requested discretionary review, which this court granted.

ANALYSIS

Standard of Review

An appellate court engages in the same inquiry as the trial court when reviewing an order for summary Judgement. Mountain Park Homeowners Ass'n v. Tydings, 125 Wn.2d 337, 341, 883 P.2d 1383 (1994). Summary Judgement is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a Judgement as a matter of law." CR 56(c); Hutchins v. 1001 Fourth Ave. Assocs., 116 Wn.2d 217, 220, 802 P.2d 1360 (1991).

In order to defeat a motion for summary Judgement, the non-movant may not "rest upon the mere allegations or denials" in its pleadings, but must demonstrate the existence of facts that could support a jury finding in its favor. CR 56(e). Summary Judgement should therefore be entered against a party that has failed to produce evidence concerning an element on which it will bear the burden at trial. Seven Gables Corp. v. MGM/UA Entertainment Co., 106 Wn.2d 1, 12-13, 721 P.2d 1 (1986). The court must make all inferences and resolve all ambiguities in favor of the nonmoving party. Lamon v. McDonnell Douglas Corp., 91 Wn.2d 345, 349, 588 P.2d 1346 (1979). The motion should be granted only if, from all of the evidence, a reasonable person could reach but one Conclusion. Lamon, 91 Wn.2d at 350.

Burden of Proof

Under the Uniform Fraudulent Transfer Act (UFTA), the burden of proof rests upon the party alleging fraudulent transfer. Sedwick v. Gwinn, 73 Wn. App. 879, 885, 873 P.2d 528 (1994). Proof of actual intent to hinder, delay, or defraud must be shown by clear and satisfactory proof. Clearwater v. Skyline Construction Co., Inc., 67 Wn. App. 305, 321, 835 P.2d 257 (1992), review denied, 121 Wn.2d 1005 (1993); Sedwick, 73 Wn. App. at 885. Although the burden of proof rests upon the party seeking to set aside an allegedly fraudulent transaction, the burden shifts to the defendant to prove good faith when the consideration for the transfer is shown to be grossly inadequate. Workman v. Bryce, 50 Wn.2d 185, 189, 310 P.2d 228 (1957) (citations omitted); Buckerfield's Ltd. v. B.C. Goose & Duck Farm Ltd., 9 Wn. App. 220, 225, 511 P.2d 1360 (1973).

Intent to Hinder, Delay, or Defraud Under the Uniform Fraudulent Transfer Act

Under the Uniform Fraudulent Transfer Act, a transfer is fraudulent if it is made by a debtor with "actual intent to hinder, delay, or defraud any creditor." RCW 19.40.041(a)(1). A fraudulent transfer may be defined as "a transaction by means of which the owner of {real or personal} property has sought to place the {land or goods} beyond the reach of his or her creditors . . . ." Freitag v. McGhie, 133 Wn.2d 816, 821-22, 947 P.2d 1186 (1997) (citing Rainier Nat'l Bank v. McCracken, 26 Wn. App. 498, 506, 615 P.2d 469 (1980), review denied, 95 Wn.2d 1005 (1981)). Any transfer made by a debtor with the intent to delay or defraud a creditor is subject to being set aside. Rainier, 26 Wn. App. at 506.

In determining whether a debtor acted with actual intent to delay or defraud, consideration may be given to the following nonexclusive factors or "badges of fraud" provided in the Act:

(1) The transfer or obligation was to an insider;

(2) The debtor retained possession or control of the property transferred after the transfer;

(3) The transfer or obligation was disclosed or concealed;

(4) Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit; (5) The transfer was of substantially all the debtor's assets;

(6) The debtor absconded;

(7) The debtor removed or concealed assets;

(8) The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;

(9) The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;

(10) The transfer occurred shortly before or shortly after a substantial debt was incurred; and

(11) The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.

RCW 19.40.041(b)

Fleming contends that the trial court erred in denying her motion for summary Judgement because there is no genuine issue of material fact regarding French's actual intent to hinder, delay, or defraud creditors. We agree.

The undisputed, direct evidence before the trial court was that French stated on three separate occasions that he established the French Irrevocable Trust and the French Residence Trust to keep his assets out of the hands of creditors. First, French told Regan, his accountant of three years, "that one of the purposes of {the French Irrevocable} Trust was to keep his assets out of the hands of creditors or others who might make claim against him." Second, French admitted in open court during his first appearance hearing that he made transfers to trust accounts in order to remove his property from the reach of creditors. And third, French acknowledged to Grove, his estate planning attorney, that he placed his residence into a personal residence trust and transferred his commercial building to the irrevocable trust for his children because he wanted to protect his assets from creditors. Specifically, French told Grove that he was concerned "that his former wife . . . might bring a civil lawsuit against him that alleged sexual abuse of two of her children while {they} were married."

Moreover, circumstantial evidence further reinforces French's intent to defraud.

1. French transferred the property to insiders, RCW 19.40.041(b)(1) As Fleming contends, each of the transfers at issue was made to an insider. Under the Act, an insider includes relatives of the debtor. RCW 19.40.011(7)(i)(A). Here, French's office building was transferred to the French Irrevocable Trust, the sole beneficiaries of which were French's children. In addition, French transferred his home to the French Residence Trust. As the sole trustor and trustee, French in essence transferred his residence to himself. Under the Act, both of these conveyances constituted a transfer to an insider.

2. French retained possession and control of the property after the transfer, RCW 19.40.041(b)(2)

Here, French retained control over his residence after its transfer to the trust in January. The trust reserved French the right to use the residence for the next 15 years and allowed French to sell the residence and apply the proceeds to the purchase of another residence. French's control also was demonstrated by the events surrounding the purchase of his new residence. On his loan application, French listed the residence he was selling as a personal asset but did not indicate that it had been conveyed to a trust. French also took title to the new residence under his own name, conveying it to himself in trust one month later.

French also retained possession and maintained control over the building in which his bail bond business was located until the time when he absconded.

3. French received no consideration for the transfers RCW 19.40.041 Both transfers made in January and October 1995 were made without consideration.*fn2

Respondents do not dispute these facts and fail to demonstrate the existence of any facts that could support a jury finding in their favor. In response to the direct evidence of French's intent to defraud, Respondents argue only that it is not unusual, and hence should be acceptable, for individuals who are subject to numerous lawsuits to use trusts to protect their property. This argument is contrary to the plain language of the RCW 19.40.041(a)(1), and ignores French's statement to his lawyer that he wanted to keep his assets from the precise creditor now seeking to reach them.

Citing Sedwick, Respondents also contend that "the {badges of fraud} are only circumstantial evidence of intent, and in cases where the debtor denies that his or her intent was to defraud, the issues cannot be conclusively determined by the trier of fact until it has heard the testimony and assessed the witnesses' credibility." Sedwick, 73 Wn. App. at 887. But the Sedwick court holding is specifically limited to situations where "the debtor denies that his or her intent was to defraud." Sedwick, 73 Wn. App. at 887. This case is thus distinguishable from the present case because French absconded after his conviction and has not denied these allegations.

Moreover, a jury need not assess the credibility of witnesses because there is direct evidence that French told his accountant, his attorney, and the court that one of the purposes of the trusts was to keep his assets out of the hands of creditors. And, specifically, French told his lawyer that he wanted to keep his assets from the precise creditor now seeking to reach them. Thus, the circumstantial evidence lends weight to the direct evidence of French's intent to defraud.

As the Respondents have failed to produce any evidence to controvert that the transfers were intended to hinder, delay, or defraud, reasonable minds could not differ. Thus, there is no issue of material fact for submission to a jury.

Reversed and remanded.

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 pursuant to RCW 2.06.040, it is so ordered.

Houghton, C.J.

We concur:

Morgan, J.

Bridgewater, J.

Opinion Footnotes

*fn1 Fleming reached her 18th birthday in March 1997. Therefore, Loren Etengoff acting as Fleming's guardian ad litem initiated the action. After she reached the age of majority, Fleming was substituted as a party in her own right.

*fn2 Fleming also contends that the following badges of fraud were also met: (1) suit was threatened before transfer RCW 19.40.041(b)(4); (2) French absconded RCW 19.40.041(b)(6); and (3) the transfers rendered French insolvent, RCW 19.40.041(b)(9). Under the Act, these badges have not been met. Further Discussion, however, is unnecessary to this analysis.

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