Jack E. Brown v. Melvin A. Heaper ( 1997 )

UNITED STATES BANKRUPTCY APPELLATE PANEL
FOR THE EIGHTH CIRCUIT
No. 97-6027WM
In re: *
*
MELVIN ALBERT HEAPER, *
RUBY EMMA LEE HEAPER, *
*
Debtors. *
*
*
MELVIN ALBERT HEAPER, *
RUBY EMMA LEE HEAPER, and * APPEAL FROM THE UNITED
MARY EGAN, * STATES BANKRUPTCY COURT
* FOR THE WESTERN DISTRICT
Appellants, * OF MISSOURI
*
v. *
*
JACK E. BROWN, Trustee, *
*
Appellee. *
Submitted: September 30, 1997
Filed: November 28, 1997
Before KRESSEL, SCHERMER and SCOTT, United States Bankruptcy Judges
SCHERMER, United States Bankruptcy Judge
Melvin Albert Heaper, his wife Ruby Emma Lee Heaper (the “Debtors”) together with their
adult daughter, Mary Egan, appeal an order from the bankruptcy court entering judgment in favor
of Jack E. Brown, the Chapter 7 trustee (the “Trustee”) on
the Trustee’s Complaint to avoid an allegedly fraudulent transfer of real property by the Debtors
to their daughter. The Trustee proceeded under § 544 of the Bankruptcy Code and § 428.020 of
Missouri’s Uniform Fraudulent Conveyance Act (Mo. Rev. Stat. §§ 428.010 - 428.090 (1986))
(“MUFCA”) which was in effect at the time of the transfer.
Prior to commencement of the Trustee’s action, however, the Missouri legislature
repealed MUFCA and adopted Missouri’s version of the Uniform Fraudulent Transfer Act (Mo.
Rev. Stat. §§ 428.005 - 428.059 (1994)) (“MUFTA”). MUFTA contains a four-year limitations
period while actions under MUFCA were subject to Missouri’s general five-year limitation statute.
Under MUFCA, the Trustee’s action was timely, but under MUFTA, the Trustee’s action would
have been barred by the statute of limitations.
The Debtors and their daughter (“Defendants”) contend that MUFTA controlled this
transfer because it was the statute in effect when the Trustee filed his lawsuit, and thus, they
assert that under MUFTA, the Trustee’s action was time barred. The Trustee responds that
MUFTA should not be applied retrospectively.
For the reasons below, we affirm the order of the bankruptcy court1 holding that MUFTA
should not apply retrospectively to transfers that occurred prior to its effective date. Accordingly,
the five-year statute of limitations governing actions for fraud under MUFCA controlled this
lawsuit and the Trustee’s Complaint was timely.
1
Chief Judge, Frank W. Koger, United States Bankruptcy Court for the Western
District of Missouri.
2
I. FACTUAL BACKGROUND
The facts relevant to this appeal are brief. The alleged fraudulent
transfer occurred on September 23, 1991. On May 23, 1996, the Debtors filed a
voluntary petition for relief under Chapter 7 of the Bankruptcy Code.2
On September 23, 1996, the Trustee filed an adversary Complaint against
the Debtors and their daughter seeking to set aside the transfer of real
property from the Debtors to their daughter as a fraudulent conveyance.
The Trustee filed his original Complaint under § 544 of the Bankruptcy
Code and Mo. Rev. Stat. § 428.024.1 (1994) which is the relevant provision under MUFTA
for avoidance of transfers made with the intent to hinder, delay or defraud creditors. The
Defendants filed a motion to dismiss the Trustee’s adversary Complaint, asserting that the action
was barred by the four-year statute of limitation of § 428.049 of MUFTA.
In reliance on its prior decision in In re Americana Services, Inc., 175 B.R. 1018, 1021
(Bankr. W.D. Mo. 1994), the court determined that the alleged fraudulent transfer, which
antedated the enactment of MUFTA, should be governed by Missouri’s predecessor MUFCA
statutes and by the general five-year statute of limitations applicable to fraud. Then, holding that
the Trustee’s action was timely-filed under MUFCA and the applicable five-year limitation, the
court denied the Defendants’ Motion to Dismiss and granted a request by the Trustee to amend
his Complaint to clarify that
2
The Bankruptcy Code is 11 U.S.C. §§ 101-1330. All future references are to
Title 11 unless otherwise indicated.
3
the Trustee was proceeding under MUFCA.3 After trial on the merits, the court held that the
transfer of real property from the Debtors to their daughter was a fraudulent conveyance under
MUFCA and the court set aside the transfer.
The sole issue on appeal is whether the court erred in its legal
conclusion that MUFCA rather than MUFTA applied to this transfer.
Defendants contend that MUFTA should have applied because it was the
statute in effect when the Trustee filed his action. Alternatively,
Defendants assert that the court should have given retroactive effect to
the procedural provisions of MUFTA even if the court applied the
substantive provisions of MUFCA. Defendants argue Missouri’s savings
statutes mandate that the procedural rules of MUFTA must control
fraudulent transfer actions commenced after MUFTA’s effective date. For
these reasons, Defendants contend that MUFTA’s statute of limitations
barred the Trustee’s action. The Trustee responds that the court
properly refused to apply MUFTA retrospectively.
III. STANDARD OF REVIEW
Both parties agree that the only question before this court is the propriety of the
bankruptcy court’s application of MUFCA rather than MUFTA. An appellate court
reviews the bankruptcy court’s findings of fact, whether based upon oral
or
3
The court’s order of December 31, 1996, which denies the Motion to Dismiss,
recites that at hearing on the motion, the Trustee conceded that if he were bringing the
Complaint under section 428.024.1 of MUFTA, the action would be time barred, but the
Trustee asserted at the hearing that he intended to proceed under MUFCA and its five
year limitations period. The record indicates that the Trustee moved to amend his
Complaint at hearing, and that in its December 31, 1996 order, the court granted leave
to amend.
4
documentary evidence, for clear error, and reviews legal conclusions de
novo. First Nat’l Bank of Olathe Kansas v. Pontow, 111 F.3d 604, 609
(8th Cir. 1997); Estate of Sholdan v. Dietz (In re Sholdan), 108 F.3d
886, 888 (8th Cir.1997). Whether the bankruptcy court applied the
correct legal standard is a question of law which we review de novo.
See In re Martin, 212 B.R. 316 (8th Cir. B.A.P. 1997).
IV. ANALYSIS
In 1992, Missouri adopted the Uniform Fraudulent Transfer Act, set
out in Missouri statutes at §§ 428.005 - 428.059. This act repealed and
replaced, in its entirety, the state’s prior fraudulent conveyance act,
MUFCA found at §§ 428.010 - 428.090. While MUFTA contains explicit
terms extinguishing a cause of action for avoidance of a fraudulent
transfer unless the action is brought within four years of the transfer,
(or if later, within one year after the transfer could reasonably have
been discovered), the predecessor act, MUFCA, did not contain a
limitations period. Instead, actions under MUFCA were subject to the
five-year statute of limitations in § 516.120 of Missouri’s general
limitations statutes.
Nothing in the new fraudulent transfer act states that MUFTA
should be applied prospectively or retrospectively. The act merely
states that its effective date is August 28, 1992. Because the Trustee
commenced his lawsuit to set aside the transfer after MUFTA became
effective as well as after expiration of MUFTA’s limitation period, the
retroactive applicability of MUFTA to that transfer is critical to the
success of Defendants’ assertion that the action was time barred.
5
As a general proposition, a presumption exists against giving
retroactive effect to a newly-enacted statute. State ex rel. Wabash Ry.
Co. v. Public Service Comm., 317 Mo. 172, 295 S.W. 86 (1927); State v.
Kummer, 741 S.W2d 285, 289 (Mo. Ct. App. 1987). Article I, Section 13 of
the Missouri Constitution prohibits enactment of statutes that are
retrospective in operation.4 There are, however, two recognized
exceptions to the rule that a statute shall not be applied
retrospectively: (1) where the legislature manifests a clear intent that it be applied
retrospectively; and (2) where the statute is procedural or remedial only and does not affect
any substantive right of the parties. State ex rel. St. Louis-San Francisco Ry.
Co. v. Buder, 515 S.W.2d 409, 410 (Mo. 1974) (en banc) (exceptions cited
in reverse order); Gershman Investment Corp. v. Duckett Creek Sewer
District, 851 S.W.2d 765, 767 (Mo. Ct. App. 1993).
Legislative Intent
In the instant matter, there is no evidence that the legislature
intended MUFTA to apply retrospectively. Indeed, almost every other
bankruptcy court faced with the issue of retroactive application of its
state’s uniform fraudulent transfer act has stated that legislative
4
Art. I, Section 13 provides “That no ex post facto law, nor law impairing the
obligations of contracts or retrospective in its operations, or making any irrevocable
grant of special privileges or immunities, can be enacted.”
6
intent for retroactive application was lacking. Almost unanimously,5
those
5
Two Illinois appellate courts have applied the Illinois UFTA to transfers
antedating enactment of the statute, but the cases involved a challenge to the court’s
power to enjoin further transfers, and although the courts acknowledged that the key to
retroactive application is legislative intent, they decided the cases on the basis of
whether justice, fairness and equity require retroactive application. Cannon v. Whitman
Corp., 569 N.E.2d 1114, 1118 (Ill. App. Ct.) appeal denied, 510 N.E. 2d (Ill.1991); Farm
Credit Bank v. Lynn, 561 N.E.2d 1355 (Ill. App.Ct. 1990).
7
courts have held that their respective state’s uniform fraudulent
transfer acts apply prospectively only. See BMG Music v. Martinez, 74 F.3d 87
(5th Cir. 1996) (holding that district court erred by relying on standards contained in uniform
fraudulent transfer act because its effective date occurred after the subject transfer and the
amended version of the statute was not applicable to the later transfer). Accord Fleet v. Rhode
(In re Fleet), 122 B.R. 910 (E.D. Penn. 1990) (applying New Jersey law and holding that
replacement of New Jersey’s version of UFCA by UFTA is to be accorded prospective effect
only); Smith v. McIntire (In re Smith),110 B.R. 597 (Bankr. M.D. Fla.
1990); Bay State Milling Co. v. Martin (In re Martin), 142 B.R. 260 (Bankr. N.D. Ill. 1992);
Campbell v. Carroll Indus. Inc. (In re Carroll Indus. Inc.), 153 B.R. 100 (Bankr. D. N.H. 1993);
Official Unsecured Creditors’ Comm. v. Rachles (In re Rachles), 131 B.R.
782 (Bankr. D. N.J. 1991); Whittaker v. Carmean (In re Carmean), 153
B.R. 985 (Bankr. S.D. Ohio 1993); Scott v. Fifth Third Bank (In re Carrousel Motels,
Inc.), 146 B.R. 733 (Bankr. S.D. Ohio 1992); In re Taubman, 160 B.R. 964 (Bankr.
S.D. Ohio 1993).
Missouri courts have also limited application of MUFTA to
prospective cases. Behr v. Bird Way, Inc. 923 S.W.2d 470,473 n.3 (Mo.
Ct. App. 1996) citing Aviation Supply Corp. v. R.S.B.O.I. Aerospace,
Inc., 868 S.W.2d 118, 121 (Mo. Ct. App. 1993) (stating without apparent
challenge from the litigants that because § 428.020 MUFCA was in effect at
the time of the transfer, MUFCA would apply to the transaction in
issue).
8
Thus, based upon the foregoing, we cannot say that the legislature
intended to have MUFTA apply retrospectively.
Moreover, one of the purposes of the uniform law is to promote
unanimity in application and construction of the uniform statutes
throughout the enacting states. Specifically § 11 of the Uniform Act
(7A Uniform Laws Annotated, Master Edition) as adopted in Missouri in §
428.059 states that the act “shall be applied and construed to
effectuate its general purpose to make uniform the law with respect to
the subject of [the act] among the states enacting it.” Mo. Rev. Stat.
§ 428.059. To give effect to the goal of uniformity, we agree with the
other enacting states in holding that the act shall apply prospectively
only.
Procedural vs. Substantive Law
Because the language of the amended statute does not reflect a clear intent that the
statute should be applied retrospectively, we turn to the remaining exception: whether the
statutory change is merely procedural or whether the change affects the substantive rights of the
parties. Brennecka v. Director of Revenue, 855 S.W.2d 509, 511 (Mo. Ct. App. 1993). If the
statute affects a substantive right, there is a constitutional bar to retrospective application. Id. If
the change is purely procedural or remedial however, then, the other exception to the prohibition
on retrospective application of statutes may authorize retrospective use of a newly-enacted
statute.
In Missouri, procedural law is understood to prescribe a method of enforcing rights or
obtaining redress for their invasion while substantive law creates, defines and
9
regulates rights. Id. The distinction between substantive law and procedural law is that
substantive law relates to the rights and duties giving rise to the cause of action, while procedural
law is the machinery used for carrying on the suit. Wilkes v. Missouri Hwy. and Transp. Comm.,
762 S.W.2d 27, 28 (Mo. 1988) (en banc) (holding that an act abrogating sovereign immunity was
procedural or remedial and therefore could be applied retrospectively). Other courts have
explained the distinction by observing that “[s]ubstantive statutes take away or impair vested
rights acquired under existing law, or create a new obligation or impose a new duty.” Fletcher v.
Second Injury Fund, 922 S.W.2d 402, 408 (Mo. Ct. App. 1996) citing Brennecka, 855 S.W.2d at
511 (holding that a statutory amendment imposing a 12.5% permanent partial disability threshold
on a claimant before the claimant could invoke Missouri’s Seond Injury Fund constituted a
substantive change in law which could not be applied retroactively). See also Gershman
Investment Corp. v. Duckett Creek Sewer Dist., 851 S.W.2d 765, 767 (Mo.
Ct. App. 1993) (holding that amended statutes governing priority of
public sewer district’s liens did not apply retrospectively to give the
district’s lien priority over prior recorded deeds of trust and liens
because lien priority is a substantive, vested right). But cf. Vaughan
v. Taft Broadcasting Co., 708 S.W.2d 656 (Mo. 1986) (en banc)
(resolving the issue that a change in the service letter statute which
barred punitive damages should apply retrospectively because punitive
damages were remedial and not substantive).
Missouri’s Supreme Court has already determined, in the context of
a change in time limits for filing a claim under Missouri’s Workmen’s
Compensation Act, that a
10
change of limitation can be substantive and not merely procedural.
Wentz v. Price Candy Co., 352 Mo. 1, 175 S.W.2d 852 (1943). Because the
language implementing a new time limitation in the workmen’s compensation statute in Wentz,
was similar to the limitation language in MUFTA, the Wentz case provides helpful instruction.
In Wentz, the appellant was employed by the Price Candy Company and suffered an injury
covered by Missouri’s Workmen’s Compensation Act. Under the compensation statute in effect at
the time of her injury, the employee had six months from the date of injury to file a workmen’s
compensation claim. Approximately two weeks before expiration of the six-month limitation
period, however, the legislature amended the statute extending the time to file claims from six
months to one year. The employee finally filed her claim two months after the six month limitation
expired, but well within the new limitation.
The court in Wentz addressed the issue of whether the new limitation statute was
retroactive by propounding the question: “Is Section 3727 [the newly-amended statute] a statute
of limitations which operates merely on the remedy? Or, is the time limit such an integral part of
the right of action itself that its lapse extinguishes the right altogether?” Id. at 853. Ordinary
statutes of limitations are held to affect the remedy only and therefore can be applied
retroactively, but other limitations operate on the right rather than on the remedy and cannot be
retroactive. Id. The court explained:
“A wide distinction exists between statutes providing for a limitation upon the
remedy, and special statutory limitations enacted in qualification of a given right. . .
. The second class of statutes are more [than mere limitations on the remedy], for
they create a right of action conditioned upon its enforcement within a prescribed
period, the theory being that the
11
lawmaking body which has the power to create the right may affix the conditions
under which it is to be enforced so that compliance with those conditions is
essential. In other words, where time is made the essence of the right created, the
limitation is an inherent part of the statute. . . . “
Id. quoting Schrabauer v. Schneider Engraving Product, 224 Mo. App. 304, 25 S.W.2d 529, 532
(Mo. Ct. App.1930) (emphasis added).
Applying this analysis to the workmen’s compensation statute, the court reversed its prior
holding in Higgins v. Heine Boiler Co., 328 Mo. 493, 41 S.W.2d 564 (1931), where it had stated
that the statute was not merely one of repose, but was instead “an inherent and inseparable part
of the statute out of which the particular right or remedy arises. . . .” Id. In reversing this position,
the Wentz court focused on whether or not the limitations period operated to extinguish the right
to file a claim. Analyzing this question, the court observed:
Nowhere does the [new limitations] statute say the right to recovery shall be
deemed extinguished if no claim is filed within the period. Nowhere does it
pronounce such right a nullity under such circumstances. Indeed, the statute does
not even mention the right. Only the procedure to enforce the right is referred to--
‘No proceedings for compensation . . . shall be maintained’ etc. The time limit is
made to operate expressly on the remedy . . . [and] a limitation upon a remedy is a
mere statute of limitation or repose.
Wentz, 352 Mo. at 7, 175 S.W.2d at 855.
Based upon the foregoing analysis, the Wentz court determined that the limitations period in the
new statute could apply retrospectively to permit the otherwise late claim for workmen’s
compensation.
Analyzing the language employed as the test in Wentz, we must conclude that MUFTA’s
limitation period is not merely a statute of repose which acts upon the
12
remedy. Instead, the limitation is an inherent part of the statutory right to set aside an alleged
fraudulent transfer, and unless a claim is filed within the time period, the right of recovery is
extinguished. Section 428.049 of MUFTA clearly states that “[a] claim for relief or cause of action
with respect to a fraudulent transfer or obligation under §§ 428.005 to 428.059 is extinguished
unless the action is brought . . . [within the specified time periods].” Mo. Rev. Stat. § 429.049
(1994). This language provides precisely the nexus between the right and the statute of
limitations that was lacking for the court in Wentz. We observe that the limitations period under
the workmen’s compensation statute in Wentz extended rather than shortened the limitations
period of the predecessor statute while MUFTA shortens the limitations period applicable under
its prior statute. This difference, however, does not detract from application of the reasoning in
Wentz to our question on appeal.
Our conclusion that MUFTA’s limitations period should not apply retrospectively is further
supported by the fact that the limitations period is only one section of a comprehensive act that
replaced the prior fraudulent conveyances act. Because many of the rights of debtors and
creditors differ under the two acts, giving retroactive effect to MUFTA would impermissibly
interfere with the vested rights of these parties. In re Smith, 110 B.R. 597, 599 (Bankr. M.D. Fla.
1990). For example, MUFCA required a creditor (or the trustee in bankruptcy) to prove the
transferor’s actual intent in making a fraudulent conveyance, while under MUFTA, such intent is
not necessary if the transfer is for less than reasonably equivalent value and the debtor has
insufficient assets or insufficient income to pay debts as they become due. See Mo. Rev. Stat. §
13
428.024(2)(a) and (b) (1994). Additionally, MUFTA permits a creditor to seek injunctive relief
while MUFCA is silent on the issue. Bay State Milling Co., v. Martin (In re Martin), 142 B.R. 260,
264 (Bankr. N.D. Ill. 1992). These statutory differences demonstrate that MUFTA, as an entire
act, affects the substantive rights of parties and as such, cannot be given retrospective effect.
Fletcher v. Second Injury Fund, 922 S.W.2d at 408.
Nor should the limitations portion of MUFTA be excerpted out of the statute and applied
retroactively. As discussed above, we hold that the limitations section of MUFTA itself creates or
defines a substantive right. Wilkes, 762 S.W.2d at 28. To apply a statute that affects
substantive rights retroactively violates constitutional principles.
Moreover, the plain language of MUFTA § 429.049 precludes such an argument.
Section 429.049 specifically states that its limitations extinguish only those actions brought under
§§ 429.005 to 429.059 of the new act. Thus, we reject the Defendants’ alternative contention
that the Trustee’s right to otherwise proceed under MUFCA is limited by the statute of limitations
period in MUFTA.
Missouri’s Savings Statutes
Lastly, we turn to Defendants’ argument that Missouri’s savings statutes mandate that the
“procedural” limitations of § 428.049 MUFTA control all avoidance actions brought after the
effective date of the statute. Our conclusion above, that MUFTA, including its limitations section,
is not a procedural statute but rather a substantive statute affecting vested rights, controls our
analysis on this last issue.
14
It is well settled that whenever the legislature repeals an
existing
statute, it is considered to have done so in contemplation of the
general saving clauses, and unless the legislature specifically makes
the repeal retroactive, it is presumed that those saving provisions are
to be incorporated by reference with the same effect as if the repealing
statute contained its own special saving clause. Protection Mutual
Insur. Co. v. Kansas City, 551 S.W.2d 909, 912 (Mo. Ct. App. 1977). In
this instance, Defendants contend that § 1.180 of Missouri’s savings
statutes makes retroactive MUFTA’s shortened limitations period.
Section 1.180 states:
No action or plea pending at the time any statutory
provisions are repealed shall be affected by the repeal; but
the same shall proceed, in all respects, as if the statutory
provisions had not been repealed, except that all proceedings
had after the repeal becomes effective are governed by
procedural rules and laws then in effect, insofar as they are
applicable.
Mo. Rev. Stat. § 1.180 (1994) (emphasis added).
Defendants read the italicized language of this section to require
the court to apply MUFTA’s four-year limitation to any action brought
after the effective date of the new statute. Because we hold that MUFTA
is not a procedural statute, the limitations on actions therein do not
constitute a “procedural rule or law then in effect” to which § 1.180
applies. In State ex rel. St. Louis-San Francisco Ry. Co. v. Buder, 515
S.W.2d 409 (Mo. 1974) (en banc), the Missouri Supreme Court rejected a
similar argument where the appellant attempted to apply a newly-enacted
statute retroactively by calling the provisions of the statute
“procedural.” The court remarked:
It is best to keep in mind that the underlying repugnance to
the retrospective application of laws is that an act or
transaction, to which certain legal effects were ascribed at
15
the time they transpired, should not, without cogent reasons,
thereafter be subject to a different set of effects
16
which alter the rights and liabilities of the parties
thereto. Merely to label certain consequences as substantive
and others as procedural does not give sufficient
consideration to this principle . . . .
State ex rel. St. Louis-San Francisco Ry. Co., 515 S.W.2d at 411 (holding that a change in the
dollar limitations of liability under the wrongful death statute was not a procedural change and
could not apply retrospectively).
Thus, referring to § 428.049 as a procedural statute, so the time
limitation of MUFTA may apply retrospectively, improperly neglects the
general prohibition on retrospective application of laws.
We also observe that the repeal of MUFCA did not repeal § 516.120
which provides a general five-year statute of limitations for actions in
fraud. That procedural statute remained in effect at the time of the
Trustee’s action. In fact, § 428.054 of MUFTA specifically provides that all
principles of law or equity, supplement the new fraudulent transfer act unless displaced by the
provisions of §§ 428.005 to 428.059. When MUFTA applies to an action, its
requirement that the action be brought within four years displaces or
supercedes the general statutes of limitation. However, because we
conclude that MUFTA does not apply to this transfer, which occurred
prior to MUFTA’s effective date, MUFTA’s limitation period does not
displace or supercede § 516.120. Accordingly, Defendants’ last point on
appeal is without persuasion.
V. Conclusion
For the foregoing reasons the decision of the bankruptcy court is
affirmed.
17
A true copy.
Attest:
CLERK, U.S. BANKRUPTCY APPELLATE PANEL
FOR THE EIGHTH CIRCUIT
18