Court: United States Bankruptcy Court, W.D. Texas; May 16, 2011; Us Bankruptcy; United States Bankruptcy Court
Ronnie Pace filed for Chapter 7 bankruptcy on August 15, 2007, following the dismissal of his wholly-owned company's Chapter 11 case in November 2006. A Default Judgment on December 13, 2007, placed Chaparral Resources, Inc.'s assets under the Chapter 7 trustee's administration for creditor benefit. On July 21, 2009, the Chapter 7 trustee, Randolph Osherow, initiated an adversary proceeding against Nelson Hensley and Consolidated Fund Management, LLC (CFM) to recover a condo transferred by Chaparral to CFM. Osherow alleges the transfer constitutes an actually and constructively fraudulent transfer under the Texas Uniform Fraudulent Transfer Act (TUFTA) and the Bankruptcy Code. Additionally, he claims Hensley breached fiduciary duty by violating Texas Disciplinary Rules of Professional Conduct. The trustee seeks recovery of the condo or its value, damages, attorneys' fees, and exemplary damages.
The Defendants deny the transfer's avoidability and Hensley's personal liability, asserting they provided fair consideration and that Pace and Chaparral consented to the transfer in writing. They argue that CFM made significant improvements and covered various costs related to the condo. If the transfer is avoided, they seek reimbursement for all expenditures incurred and attorneys' fees.
Pace, who founded Chaparral in 1977, has always been its sole shareholder and president. Chaparral previously owned 50% of DFIC, which was sold along with a buyout of its third owner in 2000. Following this, Pace and Chaparral faced legal challenges, culminating in a May 2007 judgment against them for nearly $1 million, which remains unpaid.
In April 2005, Brandon abandoned the DFIC property during litigation against Chaparral and Pace, leading to the appointment of a receiver. The receiver leased the property to DFIC Holdings, which subsequently leased it to Pace's new entity, DFIC, Inc. DFIC, Inc. ceased operations in Spring 2006 due to lack of work and Pace's lease default, rendering a $1.4 million note from DFIC Holdings to Chaparral uncollectible. Pace owned Durrins Ltd., which operated seven dry cleaning locations. In Fall 2006, Pace defaulted on a note to Durrins, prompting a lawsuit from Whatley, the property owner.
Pace and Hensley, a close friend and managing member of CFM, had a long-standing professional relationship. Hensley represented Pace in various capacities from 1983 to 2007 and also represented Chaparral starting in 2005. Facing financial challenges in 2005, Pace borrowed money from Hensley/CFM. Hensley claimed they discussed transferring the Austin condo from Chaparral to CFM in November 2005, contingent upon further loans to Pace. However, the actual transfer occurred on March 10, 2006, with no contemporaneous documentation of a sale, and only a special warranty deed prepared by Hensley’s office.
Hensley asserted that CFM paid around $122,500 for the condo through a series of loans starting in October 2005, although all evidence of this payment was retrospective. Hensley and Pace based the purchase price on an inflated Travis County tax appraisal that was not accurate at the time of their alleged agreement. No lump sum payment for the condo was made, and the purported purchase price was described as multiple transactions without interest or a maturity date. The court found the explanations regarding the condo transfer unconvincing, determining that the details did not support the claimed rationale for the transfer.
On November 22, 2005, Hensley/CFM issued a $10,000 check to Chaparral, recorded as a loan in a ledger entry. However, Pace testified that the check was given directly to the general manager of Durrins. Subsequent transactions included a $15,000 payment on February 15, 2006, from Hensley’s general cash management account to DFIC, Inc. for operating expenses, and a $20,000 transfer on March 6, 2006, and a $50,000 transfer on March 10, 2006, both to Durrins for rent obligations. An April 27, 2006, transfer of $12,500 from CFM to Ronnie Pace was recorded as a loan but was stated by Hensley to be the final payment on a condo and used for Durrins’ obligations. In total, these transactions amounted to $122,500, intended by Hensley and Pace to support Durrins and DFIC, despite being directed to entities other than them.
There was confusion regarding a July 19, 2008, payment of $42,800 from CFM to Managed Mortgage Investment Fund, with conflicting testimonies on its relation to the condo. No corroborating evidence tied the transactions to the condo purchase, and the price appeared to be set post-litigation threat. Hensley’s and Pace’s testimonies lacked supporting documentation, undermining their credibility. Hensley claimed Chaparral owed him legal fees by November 2005, suggesting part of the condo’s consideration was a credit for these fees, but no evidence supported this claim, and the court found no fees were owed at the time of the transfer. Additionally, in Chaparral’s bankruptcy case, the condo was reported as sold to Hensley for attorney fees, which Pace attributed to an error by their attorney, stating that he had signed blank schedules that were later filled in, although the attorney's records indicated Pace reviewed all filings.
Pace’s credibility is undermined by Ms. Rogers’ deposition, which details the timeline of events concerning Chaparral's Statement of Financial Affairs (SOFA). Ms. Rogers prepared the initial SOFA on January 2, 2007, and filed an amended version in February 2007, which Pace approved and signed, asserting its accuracy at the creditors' meeting. However, during Pace's Rule 2004 examination in March 2007, Ms. Rogers learned that the condo's transfer may not have been for attorneys’ fees, as previously stated, but rather to CFM as repayment for loans. Despite several checks from Hensley indicating payments for the condo, none were made to Chaparral. Ms. Rogers subsequently updated the disclosure statement to reflect that the condo transfer involved attorneys’ fees owed to Hensley, despite never seeing a bill for such fees.
The court finds Ms. Rogers’ testimony more credible than Pace’s, noting that her information was derived directly from him. Additionally, inconsistencies in the explanation of the condo's transfer in bankruptcy documents further diminish Pace's credibility. After the transfer to CFM in March 2006, Hensley failed to inform the property management of the change in ownership, while Pace continued to manage the property and receive rental payments. Chaparral continued to pay maintenance and utilities until 2007, despite CFM covering various costs associated with the condo totaling $13,846.91. CFM only notified the management company of its ownership on February 25, 2010, after the adversary proceeding commenced, while Hensley, acting as counsel for both Pace and Chaparral during the transfer, did not advise Pace to seek independent legal counsel. No written consent for the sale of the condo to Hensley was produced by either party. In November 2006, Chaparral filed for Chapter 11 bankruptcy, with Hensley retained as special counsel to pursue a fraudulent transfer action related to the DFIC litigation.
Hensley claimed no adverse interests of the debtor and did not disclose CFM's ownership of a condo. He waived any claims against Chaparral and did not file a fee application for his role as special counsel in the bankruptcy case. Conflicting testimonies regarding the financial status of Pace and Chaparral emerged, with financial schedules indicating significant liabilities at the time of the condo transfer. Specifically, Pace's November 2006 bankruptcy schedules showed assets of $163,904.91 against liabilities of $1,483,780.68, while Chaparral's February 2007 filings reflected assets of $1,694,303 and liabilities of $1,730,263.47. Accounts receivable from DFIC Holdings, Pace, and Durrins were deemed uncollectible, affecting the total asset calculation.
Despite Pace's initial assertion that his financial condition remained stable after the condo transfer, he later admitted that the value of his assets declined significantly, estimating a loss of approximately $3 million due to the deteriorating financial status of DFIC and Durrins. The Plaintiff argued that the accounts receivable were uncollectible at the time of the transfer, indicating that Pace's asset valuation was inflated. Additionally, evidence pointed to Chaparral's inability to sustain DFIC and Durrins financially, relying on borrowing to support their operations despite having a $300,000 money market account encumbered by a lien.
The court concluded that both Pace and Chaparral were insolvent at the time of the condo transfer, which is central to the Plaintiff's claim of fraudulent conveyance under the Texas Uniform Fraudulent Transfer Act (TUFTA). The Plaintiff contended that the transfer constituted both an actually fraudulent and a constructively fraudulent transfer, invoking the Bankruptcy Code's provisions that allow a trustee to assert fraudulent conveyance claims as if they were a creditor.
In Anderson v. Mega Sys. L.L.C., the court addressed the use of Section 544(b) of the Bankruptcy Code by trustees and debtors in possession to assert state law fraudulent transfer claims. Section 544(b) allows a bankruptcy trustee to exercise the avoiding powers of an unsecured creditor with an allowable claim under state or federal law. To succeed under this section, the trustee must demonstrate the existence of a creditor with an allowable unsecured claim at the time of the challenged transfer. In this case, it was undisputed that unsecured creditors, including Linda Lashley, existed at that time.
The applicable law is the Texas Uniform Fraudulent Transfer Act (TUFTA), which categorizes fraudulent transfers into actual and constructive types. Section 24.005(a)(1) outlines liability for actual fraudulent transfers, requiring proof of the debtor's intent to hinder, delay, or defraud creditors. A creditor's claim can arise either before or within a reasonable time after the transfer. The Trustee had standing under TUFTA because Lashley was a present creditor, allowing for claims under both sections of the TUFTA.
Proving actual intent to defraud is challenging, thus the TUFTA permits the use of "badges of fraud" as circumstantial evidence. Factors considered in determining actual intent under section 24.005(a)(1) include whether the transfer was made to an insider, if the debtor retained control of the property post-transfer, concealment of the transfer, prior lawsuits against the debtor, transfer of substantially all assets, insolvency of the debtor, and whether the transfer occurred shortly before or after significant debt was incurred.
The intent required under section 24.005(a)(1) for establishing fraudulent transfers is simply the intent to hinder, delay, or defraud a creditor, differing from the intent needed for fraud claims. The Trustee must prove by a preponderance of the evidence that the Debtor acted with this intent when making transfers. In the case at hand, the court found that a transfer of a condo from Chaparral to CFM on March 10, 2006, was made with the actual intent to hinder, delay, or defraud creditors. Although the transfer was not to a statutory insider, it was to a close friend and attorney of the Debtor, who retained substantial control over the property post-transfer, including collecting rent. The court noted that Chaparral continued to bear costs associated with the condo and that the Debtor was involved in significant litigation at the time of the transfer. The court also found that the Debtor received less than reasonably equivalent value for the property and had become insolvent shortly after the transfer. Additionally, a prior ruling indicated that the transfer constituted a sham transaction, although this ruling could not be used against Hensley and CFM due to their lack of involvement in that initial case, as required for collateral estoppel to apply.
Collateral estoppel prevents the re-litigation of an ultimate fact determined by a valid, final judgment against a party who had a full and fair opportunity to litigate. While mutuality of parties is not necessary, it only applies to parties or those in privity with them. In this case, the defendants were not involved in the previous suit regarding Pace's ownership of the condo, and thus could not be precluded.
The Fifth Circuit recognizes exceptions where non-parties may be bound by prior judgments, specifically: (1) a nonparty who inherits a party's property interest is bound, (2) a nonparty who controlled the original suit is bound, and (3) a nonparty whose interests were adequately represented by a party in the original suit is bound. None of these exceptions were applicable here. The transfer of interest from Pace to CFM occurred before the relevant judgment, the defendants did not control the prior litigation, and they were not adequately represented in that suit. The concept of virtual representation requires more than a parallel interest; it necessitates an express or implied relationship where the original parties are accountable to the non-parties. In this instance, no such relationship or obligation existed.
The court did not apply preclusive effects from the Whatley case regarding Pace’s ownership of the condo but determined that the transfer constituted an actual fraudulent transfer under section 24.005(a)(1) of the Texas Uniform Fraudulent Transfer Act (TUFTA). Evidence indicated that Pace orchestrated the transfer while facing significant financial difficulties and litigation risks, displaying multiple "badges of fraud." These included Pace retaining control and benefits from the condo, transferring it during ongoing litigation, using proceeds for unrelated third-party companies, and the significant indebtedness of both Pace and Chaparral, with no adequate consideration shown for the transfer. If Hensley is deemed an insider, this adds to the evidence of intent to defraud creditors.
Additionally, the transfer was argued to be constructively fraudulent under section 24.006(a) of TUFTA. For a claim under this section, the creditor’s claim must have arisen before the transfer, which was established. Although the condo's price of $122,500 was not disputed as reasonable, the court needed to assess whether Pace/Chaparral received equivalent value, given the numerous transfers to related entities. The court emphasized that "reasonably equivalent value" is determined from the creditor's perspective, focusing on the net effect of the transfer on the debtor's estate. The plaintiff had the burden to demonstrate that the transfer did not provide reasonably equivalent value and that the debtor was insolvent at the time or became insolvent due to the transfer. The trustee bears the burden of proving the debtor's insolvency related to the transfers.
To succeed on the TUFTA claims under sections 24.005(a)(2) and 24.006(a), the Trustee must prove that the Debtor did not receive 'reasonably equivalent value' for the transferred assets. The court has determined that there is no evidence linking the transfer of the condo to the loans and advances made to Pace and his businesses, justifying the conclusion that no reasonably equivalent value was exchanged for the condo transfer to either Chaparral or Pace. Even if a connection were established, the majority of the loans benefited entities other than the transferor, negating the presence of equivalent value.
The case SEC v. Resource Development International, LLC, illustrates the evaluation of 'reasonably equivalent value' in fraudulent transfer cases where the consideration benefits a third party. In that case, the court found that a transfer made by the target of an SEC investigation to cover legal fees for a third party did not constitute reasonably equivalent value, as it diminished the transferor's net worth without benefiting its creditors. The court affirmed that transfers made solely for the benefit of third parties fail to meet the statutory definition of reasonably equivalent value, underscoring that such payments do not furnish value to the debtor.
A transfer is generally considered to provide less than reasonably equivalent value when property is exchanged for consideration that benefits a third party rather than the transferor. In relevant case law, a debtor did not receive reasonably equivalent value for asset sales when proceeds were used to pay the principal’s debts instead of trade creditors. Additionally, if a debtor pays an affiliated company's debt, diminishing its net worth, such payment can be classified as a fraudulent transfer. Courts may recognize indirect benefits in transfers involving third parties, but these benefits must be substantial and concrete. When a transfer benefits a parent corporation of a debtor-subsidiary, the presumption is that the benefit to the debtor is nominal unless specific benefits are demonstrated. The key consideration is whether the transaction provides commercial value to the debtor equivalent to that of the transferred assets.
Three scenarios exist where a debtor may be deemed to receive reasonably equivalent value by discharging a third party's debt: (1) when the debtor's payment discharges its own debt to that third party; (2) when the debtor and third party share an identity of interests; and (3) when the debtor benefits from goods or services acquired for its principal. In the case discussed, only the second scenario was potentially applicable, but evidence showed the debtor, Pace, was not the 100% owner of the entities receiving transfers, thus failing to demonstrate that these transfers provided reasonably equivalent value. Specifically, a check made out to Chaparral that ultimately went to DFIC and a direct transfer to DFIC did not benefit Pace or Chaparral, particularly as evidence indicated Pace abandoned DFIC shortly after the transfer due to lack of work. While Pace owned Durrins, Ltd. at the time of one transfer, Durrins appeared to be insolvent, further negating any benefit to Pace or Chaparral from these transactions.
Durrins was unable to meet its operating expenses at the time of transferring assets and had been financially dependent on loans from Hensley since Fall 2005. Transfers made to a wholly-owned but insolvent subsidiary do not constitute "reasonably equivalent value." Unlike transfers to solvent subsidiaries, where the parent company’s stock value may increase, this is not applicable when the subsidiary is insolvent, as its share value remains zero. The transfer of a condo to pay Durrins and DFIC’s obligations failed to preserve Pace’s net worth or benefit the debtor, thus lacking "reasonably equivalent value."
For a constructive fraudulent transfer claim, the plaintiff must demonstrate the debtor’s insolvency at the time of transfer. Under the Bankruptcy Code, insolvency is defined as a situation where an entity’s debts exceed its assets, excluding certain transferred or concealed properties. Similarly, the Texas Uniform Fraudulent Transfer Act (TUFTA) defines a debtor as insolvent when their debts surpass their assets, and presumes insolvency for debtors not paying debts as they come due. The plaintiff established that Pace was insolvent during the condo transfer, as Pace could not pay business debts and had to borrow significant amounts from Hensley starting in October 2005. Hensley failed to provide evidence to counter this presumption. Additionally, some courts allow for retrojection of insolvency, showing that a debtor was insolvent shortly after a transfer without a significant change in financial condition in between.
Evidence from six months before and after a transaction can be accepted to demonstrate insolvency at the time of the transfer. Despite conflicting testimony from Pace about his financial situation, it was established that he was unable to pay his debts as they came due during the transfer. Both Pace and Chaparral were found to be balance sheet insolvent at that time or became insolvent due to the transfer. The criteria for constructive fraud under section 24.006(a) were satisfied. Under section 24.005(a)(2) of the Texas Uniform Fraudulent Transfer Act (TUFTA), a transfer by a debtor is fraudulent if made without receiving reasonably equivalent value and if the debtor was engaged in a business with unreasonably small assets or believed they would incur debts beyond their ability to pay. The court determined that Pace did not receive reasonably equivalent value for the condo transfer. Additionally, evidence indicated that at the time of the transfer, Pace believed he would incur debts he could not pay. He had been financially supporting his failing businesses since October 2005, and by March 2006, it was evident that at least one business was already failing. The presumption of Pace's insolvency was not rebutted, supporting the conclusion that he reasonably should have believed he could not meet his debt obligations. Relevant case law, such as In re Drywall and SEC v. Res. Dev. Int’l, reinforces that the absence of reasonably equivalent value and the debtor's insolvency at the time of transfer qualifies the transfer as fraudulent under section 24.005(a)(2).
The court has determined that the transfer of the condo is a voidable fraudulent transfer under Section 24.005(a)(1) of the Texas Uniform Fraudulent Transfer Act (TUFTA). A good faith defense, outlined in Section 24.009(a), is available to transferees, but the Defendants must prove both good faith and that they received reasonably equivalent value. The court has already established that the transferee, Pace/Chaparral, did not receive reasonably equivalent value.
The assessment of good faith is based on an objective standard, focusing on what the transferee knew or should have known rather than their actual knowledge. If a transferee possesses knowledge that would prompt a reasonable person to investigate further, they lack the good faith needed for the TUFTA defense. Notice of fraudulent intent can be actual or constructive; actual notice arises from personal knowledge, while constructive notice is legally imputed.
The Fifth Circuit suggests that knowing a debtor’s insolvency at the time of transfer may indicate bad faith. Hensley, Pace's close friend and attorney who prepared the deed, was aware that no actual consideration had been established and understood Pace's financial situation. The court concludes that Hensley knew or should have known about the fraudulent nature of the transfer.
The court must now decide if the Plaintiff can recover the property or its value from CFM, Hensley, or both under Section 550 of the Bankruptcy Code, following the finding that the condo transfer is voidable under Section 544.
Section 550 of the Bankruptcy Code establishes the rights and liabilities of transferees involved in avoided transfers and empowers the trustee to reclaim the transferred property or its value. This section serves as a recovery mechanism following a successful avoidance under various sections of the Code, including 544, 545, 547, 548, 549, 553(b), or 724(a). The trustee can recover from either the initial transferee or any subsequent transferees, but recovery from immediate or mediate transferees is restricted by section 550(b), which offers a good faith defense for those who took the transfer for value without knowledge of its voidability. However, this defense does not apply to the initial transferee or the entity benefiting from the transfer, allowing the trustee to recover from them regardless of good faith or value considerations.
In this case, the entity CFM is identified as an initial transferee, thus the trustee may recover the condo or its value from CFM under section 550(a). The court retains discretion on whether to award the property itself or its value, considering factors such as whether the property's value is contested, readily determinable, or diminished by conversion or depreciation. Additionally, a question arises regarding potential joint and several liability for Hensley, either as an initial transferee or as an entity benefiting from the transfer. A precedent from the Northern District of Illinois indicates that while a corporation is typically the initial transferee of payments made to it, arguments suggesting that an individual in control of the corporation could also be classified as an initial transferee lack substantial support.
To establish that the corporation was the president's alter ego and that the president was the "initial transferee" of payments, the plaintiff must present evidence supporting this claim. Several courts have recognized the alter ego theory, allowing for amendments to complaints to include such claims, but evidence of an alter ego relationship must demonstrate a complete unity of interest and ownership, alongside circumstances that would make preserving corporate separateness unjust. The record indicates no evidence that the corporation was, in fact, the president’s alter ego, as the mere fact that the president was both the president and majority shareholder is insufficient. A corporation is a distinct legal entity, and to disregard this status requires compelling evidence of intertwined interests and unjust circumstances.
In Texas, the corporate veil can be pierced under three conditions: if the corporation is the alter ego of its owners, if it is used for illegal purposes, or if it is a sham to perpetrate fraud. Although evidence showed that Hensley controlled CFM and commingled its funds, this was deemed insufficient to pierce the corporate veil under the alter-ego theory. Courts evaluate various factors when assessing an alter-ego claim, including adherence to corporate formalities, asset separation, and the individual’s control and use of the corporation. The evidence presented did not allow for a definitive alter-ego determination; however, it did show that Hensley used CFM in a fraudulent manner, which is a concern addressed in equitable considerations regarding corporate veil piercing.
The veil-piercing analysis focuses on preventing inequitable results for claimants due to abuses of the corporate form, extending beyond cases of intentional fraud. The broadest form of piercing is referred to as the "sham strand," which aims to avoid using corporate entities to facilitate fraud or injustice, regardless of specific liability theories. The Fifth Circuit, in Castleberry v. Branscum, emphasized that honoring corporate independence should not lead to inequity. Evidence indicated that Hensley acted in bad faith during a condo transfer, supporting the decision to pierce the corporate veil and hold both Hensley and CFM jointly and severally liable. Hensley and CFM cannot invoke protections under section 550(e) of the Bankruptcy Code, which safeguards good faith transferees; the court had already established Hensley’s bad faith. A bad faith recipient of a fraudulent transfer is treated equally to the fraudulent debtor regarding accountability and is not entitled to protections under the Code. Additionally, Hensley faced allegations of breach of fiduciary duty for violating Texas Disciplinary Rules by engaging in a business transaction without his client's independent counsel or written consent. Hensley contended that the breach of fiduciary duty claim was barred by the Texas statute of limitations, which allows four years for such claims from the time of the wrongful act causing legal injury.
Section 108 of the Bankruptcy Code pertains to the application of state statutes of limitation in actions initiated by a trustee on behalf of a debtor. It specifies that 108(a) applies only to causes of action owned by the debtor before filing for bankruptcy. The court identified that the breach of fiduciary duty claim accrued on March 10, 2006, when Pace transferred property to Hensley/CFM, and that Pace filed for bankruptcy on August 15, 2007, within the four-year statute of limitations. However, the Plaintiff's second amended complaint, which introduced the breach of fiduciary duty claim, was filed on August 27, 2010, after the state statute of limitations had expired and beyond two years post-order for relief, making it initially time-barred unless it relates back to the original, timely-filed complaint.
To establish relation back under Rule 15(c)(1)(A) and (B) of the Federal Rules of Civil Procedure, the Plaintiff must demonstrate that the amendment either falls within the statute of limitations or arises from the same conduct or transaction as the original complaint. The court noted that despite the change in legal theory, the factual basis of the second amended complaint remained the same as the original, allowing the breach of fiduciary duty claim to relate back to the original complaint and thus not be time-barred.
On the merits, the Plaintiff alleged that Hensley breached his fiduciary duty by engaging in a business transaction with Pace/Chaparral in violation of Texas Disciplinary Rules of Professional Conduct. Texas law recognizes a fiduciary relationship between attorney and client, and although violations of disciplinary rules do not create a private cause of action, they can serve as standards for evaluating malpractice and breach of fiduciary duty claims.
Texas Disciplinary Rules of Professional Conduct, particularly Rule 1.08, establish strict guidelines for attorneys engaging in business transactions with clients. The rule requires that any such transaction be fair, fully disclosed, provide the client an opportunity to seek independent counsel, and obtain written consent from the client. Courts apply a strict scrutiny standard to these dealings. In the case mentioned, attorney Hensley, who represented Pace, was implicated for violating Rule 1.08 despite the transaction being conducted through a third party (CFM). Disputed testimonies regarding the nature of the agreement—whether it involved the forgiveness of attorney fees or loaned funds—raised concerns about clarity in the transaction's terms.
While Pace had the opportunity to seek independent counsel during the months between discussions and the actual transfer, he did not provide written consent as required by the rule. Hensley and Pace argued that signing the transaction papers sufficed for consent, a position the court rejected, emphasizing that consent must be explicitly documented in a separate writing to maintain the integrity of Rule 1.08. Other case law supports this interpretation, asserting that mere signatures on transaction documents do not equate to informed written consent.
An attorney must obtain written consent before entering a business transaction with a client, as per Rule 1.08. The Plaintiff presented sufficient facts indicating that Hensley violated this rule, but such a violation must also demonstrate a breach of fiduciary duty to be actionable. Under Texas law, the elements necessary to prove a breach of fiduciary duty include establishing a fiduciary relationship, a breach of that duty, and resultant harm to the plaintiff. While the first two elements were satisfied, the Plaintiff, representing Pace, failed to prove any harm beyond the loss of a condominium. The court previously determined that the condo transfer could be reversed under the Bankruptcy Code, allowing its recovery, which negated the need for further damages for Hensley's breach. However, the loss of the condo itself can be considered damages for the breach of fiduciary duty, providing a basis for the Plaintiff's recovery.
Regarding exemplary damages, the Bankruptcy Code does not explicitly allow such damages for fraudulent transfers; however, state law can be applied if the Code is silent. Texas requires clear and convincing evidence of fraud or malice to award exemplary damages. In this case, while the Plaintiff established a fraudulent transfer by a preponderance of evidence, there was insufficient proof of Hensley acting with fraud, gross negligence, or malice to warrant exemplary damages. The court ultimately declined to award exemplary damages and indicated that the Plaintiff's request for attorneys’ fees would be addressed under the relevant statute.
Under the Texas Uniform Fraudulent Transfer Act (TUFTA), courts have the discretion to award reasonable attorney’s fees and costs if deemed equitable and just. This authority is supported by case law, including West v. Seiffert, where the court awarded fees due to defendants' egregious conduct in defrauding creditors. However, the current case lacks such extreme misconduct, as the transfer involved consideration, albeit not "reasonably equivalent," and there was no concealment from creditors. Despite this, courts typically grant attorney’s fees to the prevailing party in fraudulent transfer cases under TUFTA, regardless of the severity of the conduct.
The Receiver, as the prevailing party, is entitled to recover costs and reasonable attorney’s fees, with an application required within 14 days post-judgment. Additionally, regarding pre-judgment interest, Fifth Circuit courts allow such interest for claims arising from federal statutes, including those under the Bankruptcy Code. The analysis involves determining if the federal act prohibits pre-judgment interest and if an award aligns with congressional policies. The Bankruptcy Code, particularly section 548, is silent on pre-judgment interest, but awarding it supports the goal of making the estate whole by compensating for the time without access to the transferred funds. Consequently, the Plaintiff can recover pre-judgment interest on its claims under section 544 of the Bankruptcy Code. The appropriate rate for this interest remains to be determined.
Absent a federal statute, state law serves as guidance for determining the prejudgment interest rate, with Texas applying the prime rate as published by the Federal Reserve for both pre- and post-judgment interest. The court addresses the Plaintiff's allegations regarding the transfer of a condo as a sham within the context of fraudulent conveyance claims and finds the transfer avoidable under state law, negating the need to analyze section 548 of the Bankruptcy Code. Under section 544 of the Bankruptcy Code, a trustee can avoid transfers that are voidable under applicable law. The presence of multiple badges of fraud can substantiate a strong claim of fraud, with four to five badges being sufficient in past cases. The court extends its analysis to section 24.009(a) of the Texas Uniform Fraudulent Transfer Act (TUFTA), which is applicable despite the Plaintiff not explicitly addressing it, as the transfer is found voidable under section 544. The good faith defense under section 548(c) does not apply due to the nature of the transfer, while the defense under section 24.009(a) is limited to certain TUFTA claims. Additionally, Texas corporate veil piercing law applies to limited liability companies, and since the court determines that Hensley can be held liable as an initial transferee, the issue of his liability as the beneficiary of the transfer remains unnecessary to resolve. The court notes that personal liability under veil piercing could also be established in Hensley's case.
Shareholders or officers found liable under section 550(a)(1) for corporate transfers generally involve circumstances requiring veil-piercing. Notable cases include *Tavormina v. Weiss*, where a sole shareholder was deemed liable because the corporation was a mere shell with no assets or liabilities, and *Jacoway v. Anderson*, where corporate entities were treated as instruments of the defendants. The plaintiff contended that the action's accrual was delayed until a trustee was appointed, supported by the discovery rule allowing tolling of statutes of limitation in bankruptcy until that appointment, as seen in *Seitz v. Detweiler, Hershey. Assocs. P.C.* However, the court determined that the plaintiff’s second amended complaint was timely under Rule 15(c) of the Federal Rules of Civil Procedure, negating the need for the discovery rule. Additionally, under Texas law, section 41.003 mandates that a plaintiff must demonstrate that damages from breach of fiduciary duty arise from fraud, malice, or gross negligence to qualify for exemplary damages, as established in *Joe N. Pratt Ins. v. Doane*.
