Texas Custom Pools, Inc., Formerly Known as Riverbend Pools, Inc. v. Allan Clayton and Miriam Clayton

Citation: Not availableDocket: 08-07-00197-CV

Court: Court of Appeals of Texas; March 12, 2009; Texas; State Appellate Court

Original Court Document: View Document

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Texas Custom Pools, Inc. (TCP), formerly Riverbend Pools, Inc., filed a motion to review a trial court order that set aside its certificate of cash in lieu of supersedeas bond and granted post-judgment injunctive relief. The case arose from a lawsuit filed by Allan and Miriam Clayton against TCP in 2000, culminating in a judgment against TCP for $1,269,829. TCP appealed and filed a Certificate of Cash in Lieu of Supersedeas Bond, claiming a negative net worth of $165,182, as supported by an affidavit from its CFO, Alfred E. Mondoux.

The Claytons contested this claim, leading to a two-day hearing where the court found TCP was not insolvent and determined its net worth to be $8,681,659.87, correcting several improper deductions claimed by TCP. The court also deemed Mondoux's affidavit false and ordered that TCP's certificate be set aside, prohibiting the company from dissipating assets to evade the judgment. TCP subsequently filed a petition for writ of mandamus, which was treated as a motion under Texas Rule of Appellate Procedure 24.4. TCP argued that the trial court abused its discretion in its net worth assessment, while the Claytons contended the court's findings were supported by sufficient evidence, suggesting alternative net worth figures for TCP.

Under Rule 24.1 of the Rules of Appellate Procedure, a judgment debtor can supersede a judgment through various methods: (1) a written agreement with the judgment creditor, (2) filing a bond, (3) making a deposit, or (4) providing alternate security as ordered by the trial court. For judgments involving money, the required bond or security must cover the total compensatory damages, interest for the appeal duration, and any awarded costs, but cannot exceed the lesser of 50% of the debtor's current net worth or $25 million. To establish net worth, the debtor must submit an affidavit detailing assets and liabilities, which serves as prima facie evidence. Creditors can contest this affidavit, and at a hearing, the debtor carries the burden of proving their net worth, with the trial court required to detail its findings in an order. The court can also prevent the debtor from dissipating assets to satisfy the judgment. Appellate courts can review the adequacy of security, applying an abuse of discretion standard, which includes assessing whether the trial court had sufficient information and whether it applied its discretion appropriately. The traditional standards for evaluating evidence are relevant in this review, focusing on whether the trial court's decision was reasonable or arbitrary. Discrepancies between trial and appellate court decisions do not automatically indicate an abuse of discretion.

TCP contests both the legal and factual adequacy of evidence regarding its net worth, claimed to be $8,681,659.87. As the party bearing the burden of proof, TCP must demonstrate that the evidence incontrovertibly supports its position. The reviewing court will first search for supporting evidence while disregarding opposing evidence. If no supporting evidence exists, the court will then assess whether the opposing claim is established as a matter of law. The review process requires evaluating evidence in a manner that favors the challenged finding and supporting reasonable inferences. Furthermore, the credibility and weight of witness testimony are determined solely by the fact finder. For factual sufficiency, the court evaluates all evidence, and if the adverse finding is challenged by the party that had the burden of proof, it must show that the finding is against the great weight of the evidence. If there is any supporting evidence, the court will consider whether the absence of a finding is contrary to the overwhelming weight of the evidence.

In 1999, Riverbend Pools, owned by Charles Barnes, merged with Sandler Pools, owned by Travis Bain, forming Texas Custom Pools with a 60/40 stock ownership split. However, to maintain the income distribution ratio reflective of their prior contributions, they established a letter agreement which dictated their compensation. Under this agreement, both shareholders received annual salaries, and bonuses were contingent on net income exceeding $2,376,384, allocated based on their original income contributions of 66.53% for Riverbend and 33.47% for Sandler.

The merger was contingent upon a compensation agreement, wherein Mondoux estimated shareholders’ taxes at the fiscal year's end and issued partial bonuses in December to cover those taxes, with the remainder paid after fiscal year-end balancing. From 1999 to 2003, shareholders received their full compensation per the Letter Agreement, but from 2004 to 2007, TCP faced cash flow issues that prevented it from fully paying the amounts owed. Initially, TCP did not record these unpaid amounts as liabilities until advised by its tax accountant in 2006, leading to a recorded liability of $2,298,771.73, which included prior note agreements. TCP's net worth for the years 2002-2006 was calculated, revealing fluctuations, particularly negative figures in certain years. 

On June 25, 2007, TCP secured a $1.3 million loan from Compass Bank, guaranteed by the shareholders and backed by their certificates of deposit, which was crucial for loan approval. A balance sheet dated June 27, 2007, showed total assets of $8,399,471.03 and total liabilities of $8,564,653.02, resulting in a negative net worth of $165,181.99, prepared in accordance with GAAP. Mondoux asserted that the loan did not alter TCP’s net worth as the shareholder liabilities were already included on the balance sheet. During cross-examination, Mondoux clarified discrepancies regarding TCP's tangible net worth reported to the bank, which excluded shareholders' notes, treated as equity. CPA Jack Van Wunnik supported that the balance sheet was GAAP-compliant and affirmed that the loan's impact on net worth was negligible since the liability existed prior to the loan.

Jack Sprawls, a CPA, testified for the Claytons, initially affirming the validity of the 1999 Letter Agreement but later criticizing it for being based on future profits and lacking allocation of compensation relative to employee effort. He expressed concerns that the IRS might challenge the agreement due to its intent to circumvent income distribution based on stock ownership. Sprawls opined that TCP would not have a negative net worth without the agreement but did not provide calculations to substantiate this claim. He also argued that the agreement improperly prioritized shareholders over other creditors, including the Claytons.

The trial court’s net worth calculation was contested by the Claytons, who argued the 1999 Letter Agreement was invalid and sought to have payments made to Bain and Barnes from 1999 to 2007 added back into the net worth. Although the trial court did not clarify its reasoning, it found the payments from 1999 to 2006 to be improper and included them in the net worth calculation, along with certain liabilities from the 2007 balance sheet.

The Claytons contended that the trial court’s actions were justified as the 1999 Letter Agreement lacked consideration. They argued that payments to Barnes and Bain were not based on their efforts since they were already compensated with salaries, asserting that a promise of additional compensation for pre-existing duties does not form a valid contract. Consideration, defined as a "bargained-for" exchange, is essential for enforceability. The Claytons cited relevant case law to support their position.

James S. Ryan III, a partner at Jackson Walker L.L.P., who worked on the merger of Riverbend and Sandler Pools, provided testimony on the 1999 Letter Agreement, asserting it had two bases of consideration: Bain’s and Barnes’ agreement to merge the companies and their commitment to continue working for the surviving entity. The Claytons did not counter Ryan's testimony regarding the consideration. Ultimately, it was concluded that the 1999 Letter Agreement is supported by valid consideration and is not illusory.

The Claytons aim to invalidate the 1999 Letter Agreement, arguing that TCP did not intend to be bound by it, a claim not raised in the trial court. For an agreement to be valid, both parties must express intent to be bound, focusing on the intentions reflected in the written contract. The appellate court finds that the contract indicates both parties intended to be bound. Evidence presented by the Claytons regarding inconsistent payments to shareholders does not support their claim, as TCP acknowledged its obligations through accrued shareholder liabilities. Consequently, the court concludes the 1999 Letter Agreement is valid and finds that the trial court erred by implicitly invalidating it and improperly adjusting net worth calculations by adding back distributions to Bain and Barnes that were made under the Agreement. 

Even if the Letter Agreement were deemed invalid, the trial court incorrectly added back distributions from 1999 to 2006 into the net worth calculation, despite those amounts not being included in the 2007 balance sheet. The court assumed profits wouldn’t have been distributed to shareholders as dividends, ignoring the evidence suggesting that profits would have been distributed regardless of the agreement. Specific distribution amounts for each year from 1999 to 2006 are detailed, showing significant sums owed to Bain and Barnes, with a total balance due for 2005 and 2006 of $1,133,000.77. 

Additionally, the trial court included an item from the “Accrued Liabilities” section of the 2007 balance sheet, reflecting various liabilities that TCP accrued, such as salaries and taxes, based on generally accepted accounting principles.

On June 27, 2007, the Accrued Liabilities totaled $1,433,378.92, including various components such as Accrued Salaries and Wages ($526,357.02), Accrued Payroll Taxes Payable ($90,618.35), and others. The trial court added back $43,526.01 in other accrued liabilities to TCP’s net worth, which lacked justification since no testimony regarding this liability was presented. This decision was deemed an abuse of discretion. Additionally, the trial court included $1.3 million from a loan in the net worth calculation without specifying the rationale, although such inclusion could only be justified if the loan payment to shareholders was deemed a fraudulent conveyance under the Texas Uniform Fraudulent Transfer Act. 

The court likely intended to disallow the contractually required shareholder payment of $435,813.70 but mistakenly disallowed the other accrued liabilities. The validity of the 1999 Letter Agreement implied further abuse of discretion by adding the shareholder payment back into net worth. 

The provisions in Sections 24.005 and 24.006 outline criteria for fraudulent transfers, placing the burden on the judgment creditor to prove such claims by a preponderance of the evidence. A legal sufficiency challenge requires the record to show a lack of vital facts or that the evidence presented is insufficient. The court must view evidence favorably toward the judgment and afford reasonable inferences. The trial court found TCP was not insolvent, a finding unchallenged on appeal, which precludes Section 24.006 as a basis for the trial court’s ruling.

Section 24.005 establishes that a transfer by a debtor can be considered fraudulent to a creditor if it meets specific criteria, regardless of when the creditor's claim arose. A transfer is fraudulent if made with actual intent to hinder, delay, or defraud creditors or if the debtor failed to receive reasonably equivalent value in exchange while being in a precarious financial position. Specifically, two conditions must be met for the latter: the debtor must be engaged in or about to engage in a business with unreasonably small assets, or must have intended to incur debts beyond their ability to pay.

The Claytons' argument hinges on the assertion that TCP transferred loan proceeds to shareholders without adequate value in return, but they did not demonstrate the relevant conditions outlined in the statute. The evidence lacks any indication that TCP was in a financially precarious state or intended to incur unmanageable debts at the time of the transfer.

The only viable basis for fraudulent transfer consideration is under actual intent to defraud, which is often proven through circumstantial evidence since direct evidence is rare. Section 24.005(b) provides a non-exhaustive list of "badges" of fraud, including transfers to insiders, retention of control over transferred assets, concealment of the transfer, prior legal threats, substantial asset transfers, and signs of insolvency. While each badge alone is not definitive, a combination of multiple badges strengthens the case for fraud. The document indicates that an examination of these badges will follow.

The transfer of funds from TCP to its shareholders, identified as insiders, raises potential concerns of fraudulent transfer under TEX. BUS. & COM. CODE ANN. 24.002(7)(B). However, evidence alone of such a transfer does not conclusively indicate actual intent to defraud, as established in case law. Key points include: 

1. TCP did not retain the funds transferred to Bain and Barnes, nor was there evidence of concealment of the transfer.
2. A judgment favoring the Claytons was entered in March 2007, with TCP taking steps to pay the shareholders shortly after.
3. The transfer did not involve substantially all of TCP’s assets; its balance sheet indicated total assets of over $8.39 million.
4. TCP was not insolvent, and claims of asset concealment or removal were unfounded.
5. TCP borrowed $1.3 million to satisfy debts owed under previous agreements, and there was no evidence demonstrating the transfer lacked reasonable equivalent value.
6. Although TCP's liabilities were significant, the judgment amount was deemed substantial by a reasonable fact-finder.
7. The trial court identified only three badges of fraud, which are not particularly robust when viewed collectively.

The evidence was insufficient to support claims of intent to hinder or defraud the Claytons, leading to the conclusion that the trial court erred in considering the loan proceeds in TCP’s net worth calculation, which it determined to be $8,681,659.87. TCP's net worth, as established through its CFO’s testimony and compliant balance sheet, was actually negative $165,182. The trial court's injunction against TCP from transferring assets to evade the judgment was also evaluated in light of these findings.

Rule 24.2(d) allows a trial court to prohibit a judgment debtor from dissipating or transferring assets to evade judgment satisfaction during an appeal in civil cases. The appellate review of such injunctions is based on an abuse of discretion standard. The trial court must assess the likelihood of the judgment debtor dissipating or transferring assets. An abuse of discretion occurs if the evidence clearly indicates the debtor would not engage in such actions. In this case, evidence was found insufficient to classify TCP's payment of loan proceeds to shareholders as a fraudulent conveyance. Additionally, TCP was determined to be an ongoing enterprise with substantial assets, and there was no evidence suggesting that it would dissipate or transfer assets to avoid fulfilling the judgment. Consequently, the appellate court concluded that the trial court abused its discretion in issuing the post-judgment injunction, overturned the injunction, and established TCP's net worth as negative $165,182 based on submitted financial documents.