Court: District Court, S.D. Texas; March 31, 2014; Federal District Court
Randy Williams, the trustee in a Chapter 7 bankruptcy case involving Green Valley Growers, Inc. (GVG), sought summary judgment to avoid and recover transfers totaling approximately $12.3 million made by GVG to related entities, including Houston Plants and Garden World (HPGW) and O. Wayne Massey, prior to the bankruptcy. GVG's bankruptcy began as a Chapter 11 proceeding in March 2009, transitioning to Chapter 7 in April 2011. Williams argued that the transfers were recoverable under 11 U.S.C. § 548 and the Texas Uniform Fraudulent Transfer Act (TUFTA), while the defendants contended that the claims were legally untenable and unsupported by the evidence.
The court, guided by Federal Rule of Civil Procedure 56, emphasized that summary judgment is appropriate only when there is no genuine dispute regarding material facts. The moving party (Williams) must demonstrate the absence of such disputes, while the opposing party (defendants) is required to provide specific evidence to support their claims. The court noted that if the moving party fails to meet its initial burden, the motion must be denied, regardless of the opposing party's arguments. Ultimately, Williams's motion for summary judgment was denied, indicating that he did not sufficiently establish the necessary elements to warrant judgment in his favor.
Texas law allows for the avoidance of transfers made with the intent to hinder, delay, or defraud creditors under TUFTA (Tex. Bus. Com.Code § 24.005(a)(1)). A trustee can invoke the 'strong arm' provision of 11 U.S.C. § 544 to assert state law fraudulent conveyance claims. Although Williams alleges claims under TUFTA, he does not explicitly invoke § 544 in his complaint. However, he asserts his right to recovery under § 550, which allows the trustee to recover property transferred if it was avoided under various sections, including § 544.
The defendants contend that Williams failed to plead § 544 and argue they must rely on the trustee's pleadings. In contrast, Williams maintains he is entitled to relief under TUFTA through § 550, which is linked to avoidance under § 544. His pleadings are deemed sufficient based on established case law.
To determine actual intent to defraud, TUFTA outlines eleven nonexclusive factors, such as whether the transfer was to an insider, if the debtor retained control of the property, and signs of insolvency. Williams identifies four specific badges of fraud: concealed transfers, the removal of assets, transfers made to insiders, and the insolvency of GVG during the relevant time. The defendants argue Williams's claim under § 24.005(a)(1) is inadequately pleaded and unsupported by the evidence. Williams counters that the transfers were concealed as they were not disclosed in the financial statements submitted to the bankruptcy court. The defendants respond that the financial statement contains hearsay and is not binding on them as an admission of the debtor's transactions.
Courts have determined that a lack of concealment exists when a transfer is negotiated confidentially, as seen in In re Gen. Agents Ins. Co. of Am., but concealment may be found in real estate transactions where there is a significant delay in recording deeds alongside continued control by the grantor, as indicated in In re CRCGP LLC. Williams has not demonstrated, legally, that the transfers were concealed or that such concealment equates to asset removal. The analysis shows that neither badge of fraud is present. Williams claims the transfers were made to insiders, defined under Tex. Bus. Com.Code. 24.002(7)(B), which includes directors, officers, and close relations to the debtor. The determination of insider status typically hinges on the relationship closeness and whether transactions were conducted at arm's length, as per Matter of Holloway. Massey is identified as an insider due to his co-ownership of OTWM and HPGW, both recognized as insiders in the financial statement. The defendants argue that the financial statement is hearsay and not binding; however, the signed statement by Massey is not hearsay with regard to him. The defendants fail to contest the closeness of their relationship with GVG or the arm's length nature of the transactions. Therefore, Massey, OTWM, and HPGW qualify as insiders. Williams argues that GVG was insolvent when the transfers occurred, defined by the statute as having debts exceeding assets or not paying debts as they become due, with specific exclusions for transferred assets intended to hinder creditors.
Williams presents evidence from GVG’s financial statements, two proofs of claim from its bankruptcy, and a February 2008 collections report from KC Crushed, indicating GVG had unpaid invoices from January 2007 until the bankruptcy filing. One proof of claim from March 2009 reveals GVG executed a $199,112.36 promissory note in October 2008, with payments ceasing upon bankruptcy. Financial statements show GVG incurred significant overdraft fees in 2006 and 2007. The collections report indicates GVG had unpaid invoices ranging from 38 to 489 days overdue, suggesting it struggled to meet creditor obligations.
The defendants argue GVG was paying its debts until Capital One Bank ceased funding its line of credit before the bankruptcy. They claim some documents cited by Williams contain hearsay. However, even if the documents are deemed admissible, Williams fails to prove GVG’s insolvency at the time of the transfers, as critical factors for assessing insolvency—such as the volume and age of unpaid debts—are not addressed. Consequently, the court concludes that GVG was likely managing its debts adequately, lacking a significant badge of fraud.
While Williams identifies a single badge of fraud (transfers to insiders), this alone does not establish fraudulent intent. Thus, Williams’s motion for partial summary judgment under Tex. Bus. Com.Code. 24.005 and a related claim for attorney’s fees under Tex. Bus. Com.Code. 24.013 are denied. Additionally, under 11 U.S.C. 548(a)(1)(A), which allows recovery of transfers made with intent to defraud, several badges of fraud are considered, including the adequacy of consideration and the relationships between parties. The determination of actual intent requires a broader examination of these factors, which Williams has not sufficiently articulated.
A finding of actual fraud does not require the presence of all or even a majority of the 'badges of fraud'; the presence of several can support an inference of fraud. Williams asserts multiple badges of fraud, including a close relationship between the parties, irregular timing of transfers, suspicious check amounts, and alleged insolvency of GVG during the relevant period. Although Williams has identified GVG’s insiders, he has not substantiated GVG's insolvency. The timing and amounts of the checks—issued shortly apart and in high even-numbered amounts—are cited as indicators of fraud, but the defendants counter that Williams’ claims are based on duplicate checks and do not demonstrate fraud, arguing that the checks were for legitimate business purposes. Williams fails to provide specific evidence to support his claims. Ultimately, while the presence of a single badge (transfers to insiders) exists, it is insufficient to establish actual intent to defraud creditors. Consequently, Williams has not demonstrated, as a matter of law, that the transfers were made with fraudulent intent, leading to the denial of his motion for partial summary judgment under 11 U.S.C. § 548 and Tex. Bus. Com. Code § 24.005. A status conference is scheduled for April 16, 2014, and Enterprise Bank has settled and been removed from the case.
