Warren Waite, Jr. v. Lowell Cage , 458 F. App'x 385 ( 2012 )

Case: 11-20437 Document: 00511723547 Page: 1 Date Filed: 01/12/2012
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
January 12, 2012
No. 11-20437
Summary Calendar Lyle W. Cayce
Clerk
In the matter of: MARVIN E. MOYE, JMW AUTO SALES; JOAN M. MOYE,
Debtors
WARREN WAITE, JR.; WARREN WAITE, III,
Appellants,
v.
TRUSTEE LOWELL T. CAGE,
Appellee.
Appeal from the United States District Court
for the Southern District of Texas
USDC No. 4:11-cv-01067
Before HIGGINBOTHAM, DAVIS, and ELROD, Circuit Judges.
PER CURIAM:*
This appeal arises from a preference action commenced by Lowell T. Cage,
Chapter 7 Trustee, seeking to recover payments made by Marvin Moye, Joan
Moye, and JMW Auto Sales (collectively, the Debtors) to Warren Waite, Jr. and
*
Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be
published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
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Warren Waite, III within the 90 day period preceding the filing of JMW’s
involuntary bankruptcy petition.1 On November 18, 2010, the bankruptcy court
granted summary judgment in favor of Cage, entering a judgment in the amount
of $391,948.22 against Waite, Jr. and $16,555.71 against Waite, III. On May 27,
2011, the district court affirmed the bankruptcy court’s judgment and this
appeal followed. For the following reasons, we AFFIRM.
I.
Before the filing of their respective bankruptcies, the Debtors operated a
retail used car business. In addition to selling used cars, the Debtors also
provided financing to used car purchasers, regularly charging interest rates
ranging from 21% to 23%.
In order to obtain auto loans from the Debtors, purchasers would execute
a retail installment sales contract. The Debtors’ installment contracts obligated
purchasers to repay their auto loans by making regular monthly payments to
JMW over a pre-determined period. JMW retained liens on the vehicles that
Debtors financed in order to secure repayment of the auto loans.
The Debtors generated additional cash-flow by purportedly selling “pools”
of installment contracts to outside pool investors, including the Waites. These
purported sales were memorialized in one generic Master Purchase and Sale
Agreement (Master Agreement).
The Master Agreement did not reference or provide for the sale of any
distinct installment contracts held by JMW. Instead, it established the terms
for future installment contract transfers through the pooling arrangement.
Specifically, the Master Agreement stated that, at a future “Closing Date,” JMW
1
On October 31, 2007, an involuntary Chapter 7 bankruptcy petition was filed against
JMW Auto Sales (“JMW”) in the United States Bankruptcy Court for the Southern District
of Texas. On November 6, 2007, Marvin Moye and Joan Moye filed voluntary Chapter 7
bankruptcy petitions in the United States Bankruptcy Court for the Southern District of
Texas. The bankruptcy court has jointly administered JMW’s and the Moyes’ bankruptcy
cases.
2
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would “sell, transfer, assign, endorse, set over, convey, and deliver to Purchaser
all right, title, and interest of seller in, to, and under”: (i) a pool of yet-to-be-
determined2 installment contracts “accepted by Purchaser on such Closing Date”;
and (ii) the underlying “liens and security interests created by the [installment]
Contracts.” Upon the purported transfer of a pool, a pool investor would then
theoretically become entitled to receive all of the principal and interest paid on
each installment contract within the pool. Furthermore, as a condition to the
effectiveness of the Master Agreement, the Master Agreement required JMW
to deliver “an executed Servicing Agreement” to the pool investor “on or before
the Closing Date.”3
Upon the execution of a Master Agreement, the parties bound thereby
routinely proceeded to ignore some of the Master Agreement’s key terms. JMW
would assemble a pool with an aggregate current principal balance equal to the
amount a pool investor agreed to pay. Upon receipt of the agreed payment, JMW
would begin remitting monthly distributions to the pool investor equal to the full
amount of principal and interest due on the installment contracts within the
pool, irrespective of the amounts actually collected by JMW.4 JMW did not,
however, endorse any installment contracts to the pool investors. Likewise,
JMW did not execute any documents transferring or assigning rights in any
specific installment contract to the pool investors. JMW remained the registered
lienholder on the certificates of title and never notified vehicle purchasers of any
2
The Master Agreement provided that the installment contracts comprising a pool
would be set forth in a “Contract Schedule” that would be “attached as Addendum I to each
Bill of Sale delivered by [the Debtors] on each Closing Date.”
3
The Master Agreement’s “on or before” language demonstrates the parties’ expectation
that the “Closing Date” would likely occur after the date of the execution of the Master
Agreement.
4
When Debtors did not collect sufficient funds from vehicle purchasers to meet Debtors’
monthly pool payment obligations, Debtors would use their own cash to offset the collection
deficiency. Thus, pool investors were not directly exposed to losses caused by defaulting car
purchasers.
3
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changes in the ownership of their respective installment contracts.5 Moreover,
at least in the Waites’ cases, JMW never delivered any servicing agreements or
installment contract schedules as required by the Master Agreement.
Assuming the Debtors’ pooling business initially operated legitimately and
profitably, the Debtors grew the business well beyond the point of
sustainability.6 In 2007, due to the Debtors’ inability to continue making
payments to pool investors, the Debtors and some pool investors agreed to sell
installment contracts to a third party, Mid-Atlantic Finance Company, at a
discounted price. Mid-Atlantic purchased (the “Mid-Atlantic Transaction”)
certain installment contracts from the Debtors for $1.927 million. The Debtors
subsequently paid a portion of the proceeds from the Mid-Atlantic Transaction
to pool investors, including $391,948.22 to Waite, Jr. and $16,555.71 to Waite,
III.
Cage commenced this action to recover the Debtors’ $391,948.22 payment
to Waite, Jr. and $16,555.71 payment to Waite, III. On November 18, 2010, the
bankruptcy court granted summary judgment in favor of Cage, holding that the
Debtors’ pre-bankruptcy payments to the Waites constituted avoidable
preferential transfers under 11 U.S.C. § 547(b). The Waites unsuccessfully
argued that the transfers were outside the scope of § 547(b) because they
involved property belonging to the Waites, not property of the Debtors’ estate.
The bankruptcy court found that the Debtors never sold the installment
contracts to the Waites and, therefore, the proceeds of the sale to Mid-Atlantic
were property of the Debtors’ estate. The bankruptcy court also determined
5
Also, after an installment contract was allegedly transferred to a pool investor, JMW
continued to service the note, collect payments, and repossess vehicles in case of default.
6
According to the Certified Public Accountant employed as an expert witness by Cage,
the Debtors operated as an insolvent Ponzi scheme for at least three years before the initiation
of JMW’s involuntary bankruptcy proceeding. The Debtors relied upon funds from new pool
investors in order to meet the monthly obligations owed to existing pool investors. Similarly,
the bankruptcy court found that the Debtors defrauded numerous persons, including the pool
investors.
4
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that, even if the Master Agreement effectuated a transfer of assets, the transfer
to the Waites was illegal and void because the Waites were not licensed to hold
the installment contracts under § 348.501(a) of the Texas Finance Code.
Accordingly, under either theory, the Waites were creditors of the Debtors who
received avoidable transfers pursuant to § 547(b).
On December 3, 2010, the Waites filed a motion to reconsider based upon
Waite, Jr.’s receipt (on November 15, 2010) of a reinstated license to hold retail
installment contracts. The motion noted that Waite, Jr.’s license was
retroactive to September 15, 2002 and argued that the bankruptcy court should
reconsider its “illegality” holding. The bankruptcy court denied the motion and
the Waites appealed their case to the district court.
On May 27, 2011, the district court affirmed the bankruptcy court’s
summary judgment in favor of Cage, finding that any transfer of installment
contracts to the Waites was void under § 348.501(a) of the Texas Finance Code.
The district court also held that the bankruptcy court did not abuse its discretion
in denying the Waites’ motion to reconsider. This appeal followed.
II.
“We review a district court’s affirmance of a bankruptcy court decision by
applying the same standard of review to the bankruptcy court decision that the
district court applied.” Barner v. Saxon Mortg. Servs., Inc. (In re Barner), 597
F.3d 651, 653 (5th Cir. 2010) (citation omitted). We, therefore, review the
bankruptcy court’s findings of fact for clear error and its conclusions of law de
novo. Hickman v. Texas (In re Hickman), 260 F.3d 400, 401 (5th Cir. 2001). In
the summary judgment context, we review the record for genuine issues of
material fact and review whether the movant was legally entitled to summary
judgment. Campbell v. Countrywide Home Loans, Inc., 545 F.3d 348, 352 (5th
Cir. 2008). Furthermore, we review a bankruptcy court’s ruling on a motion to
reconsider for an abuse of discretion. Heller v. Texas Real Estate Comm’n (In re
Marinez), 589 F.3d 772, 775 (5th Cir. 2009).
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Section 547(b) of the Bankruptcy Code enables a bankruptcy trustee to
avoid any transfer: (1) of an interest of the debtor in property; (2) to a creditor;
(3) on account of an antecedent debt; (4) made while the debtor was insolvent;
(5) made within the 90 day period preceding the filing of the debtor’s bankruptcy
petition; and (6) that enabled the creditor to receive more than it would have
otherwise received in a Chapter 7 bankruptcy proceeding had the preferential
transfer not been made. 11 U.S.C. § 547(b).
The district court affirmed the bankruptcy court’s finding that the Debtors’
pre-bankruptcy payments to the Waites satisfied all the elements of § 547(b).
The Waites only raise the first two elements of § 547(b) on appeal, arguing that:
(1) the Debtors’ transfers were not of an interest of the debtor; and (2) the Waites
were not creditors of the Debtors. In this case, the two elements are interrelated
because they both hinge upon the Waites’ theory that the Debtors transferred
their ownership of various installment contracts to the Waites through the
pooling arrangement.
The Waites claim that, assuming they both lacked the required license, it
was nevertheless erroneous to declare void the Debtors’ alleged transfers of
installment contracts to the Waites. The Waites argue that they obtained full
title to their respective installment contracts when they purchased the pools
from the Debtors. Therefore, the Waites allegedly never established a debtor-
creditor relationship with the Debtors. Likewise, the Waites contend that the
proceeds of the Mid-Atlantic Transaction were never property of the Debtors
because the Waites (and not the Debtors) transferred the installment contracts
that they legally owned to Mid-Atlantic.
In determining whether transfers of installment contracts to unlicensed
holders are void, we must first review the relevant statutory text. McNeil v.
Time Ins. Co., 205 F.3d 179, 183 (5th Cir. 2000) (“Our analysis of this Texas law
begins with statutory construction, a process we approach as a Texas court
would.”). “The duty of the court is to construe a statute as written and ascertain
6
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the legislature’s intent from the language of the act.” Id. (citing Morrison v.
Chan, 699 S.W.3d 205, 208 (Tex. 1985)).
Section 348.501(a) of the Texas Finance Code provides that “[a] person
may not act as a holder [of an installment contract]. . . unless the person: (1) is
an authorized lender or a credit union; or (2) holds a license issued under this
chapter.” Tex. Fin. Code § 348.501(a) (emphasis added). The Texas Finance
Code defines “holder” as a person who is “a retail seller” or “the assignee or
transferee of a retail installment contract.” Tex. Fin. Code § 348.001(3). The
Waites concede that they do not qualify as authorized lenders or credit unions.
Thus, the relevant portions of § 348 simply provide that an unlicensed person
“may not” be the “assignee or transferee of a retail installment contract.” A plain
reading of this language leads to the conclusion that a transaction in
contravention of § 348.501(a) is void.7 To hold otherwise would eviscerate the
proscription embodied in the statutory text, enabling an unlicensed person to
attain that which only a licensed person is legally entitled to enjoy.8 See also
7
Appellants argue that the statute is ambiguous and direct us to consult additional
sources to divine the legislature’s intent. Assuming, arguendo, that the statute is ambiguous
and that it is proper to consult extrinsic sources, which we do not decide, a review of the
relevant extrinsic sources supports our analysis. See Ojo v. Farmers Group., Inc., --- S.W.2d
----, 2011 WL 2112778, at *15-16 (Tex. May 27, 2011) (explaining that courts may look beyond
the statutory text to extrinsic sources, including the Code Construction Act, in cases of
statutory ambiguity); Cox. v. Hilco Receivables, L.L.C., 726 F. Supp. 2d 659, 666 n.3 (N.D. Tex.
2010) (citing Rodriguez v. Serv. Lloyds Ins. Co., 997 S.W.2d 248, 254-55 (Tex. 1999)) (under
Texas law, “administrative rules have the same force as statutes”); Tex. Fin. Code § 1.002
(providing that the Texas Finance Code is subject to the Code Construction Act). The Code
Construction Act states, in pertinent part, that the phrase “may not” should be construed to
impose “a prohibition and is synonymous with ‘shall not.’” Tex. Gov’t Code § 311.016(5)
(emphasis added). In addition, “the Texas Finance Commission, which is the state agency
charged with enforcement of the statute, has issued the following rule based on § 348.501(a):
‘A person may not acquire a retail installment contract . . . unless the person holds a license
under Texas Finance Code, Chapter 348 . . . .’” Cox, 726 F. Supp. 2d at 666 n.3 (quoting 7 Tex.
Admin. Code § 84.401(a)) (emphasis added).
8
This conclusion is in accord with well-settled Texas law: “in situations where public
policy concerns have led to a governmentally supervised statutory licensing scheme, courts
have consistently held the unlawful and unlicensed participation in such regulated businesses
cannot form the basis for recovery.” Denson v. Dallas County Credit Union, 262 S.W.3d 846,
7
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Cox, 726 F. Supp. 2d at 666 n.3 (finding that an unlicensed, alleged transferee
of an installment contract “cannot be owed a debt it cannot legally acquire”
under § 348.501(a)); Denson v. Dallas County Credit Union, 262 S.W.3d 846, 853-
54 (Tex. App.–Dallas 2008, no pet.) (finding that unlicensed car dealer’s
contracts were void because “the transportation code specifically states that a
person may not engage in the business of dealing or selling cars without a
license”) (emphasis added). Accordingly, we conclude that the Debtors were the
owners of the installment contracts and that Debtors never transferred or
assigned any such ownership interests to the unlicensed Waites.
Our conclusion controls the outcome of this appeal with regard to § 547(b).
First, we hold that the Debtors had an interest in the proceeds from the Mid-
Atlantic Transaction that were transferred to the Waites. At all times prior to
consummation of the Mid-Atlantic Transaction, the Debtors owned–and,
therefore, had a legally cognizable interest in–the installment contracts. The
Debtors transferred their interests in the installment contracts to Mid-Atlantic
in exchange for cash. At that time, the Debtors acquired an interest in the
proceeds from the Mid-Atlantic Transaction, a portion of which was later
transferred to the Waites. Accordingly, the Debtors had an interest in the
proceeds transferred to the Waites.
Second, we hold that the Waites were “creditors” of the Debtors. A
“creditor” is an “entity that has a claim against the debtor . . .” 11 U.S.C.
§101(10). The term “claim” means a “right to payment . . . .” 11 U.S.C. §101(5).
854 (Tex. App.–Dallas 2008, no pet.) (citing Ahumada v. Dow Chem. Co., 992 S.W.2d 555,
558–59 (Tex. App.–Houston [14th Dist.] 1999, pet. denied); M.M.M., Inc. v. Mitchell, 153 Tex.
227, 265 S.W.2d 584 (Tex. 1954)); see also Rogers v. Traders & Gen. Ins. Co., 139 S.W.2d 784,
787 (Tex. Comm. App. 1940) (“It appears that all courts agree that where a statute was
enacted to protect the public against fraud or imposition or to safeguard the public health or
morals, an agreement in violation thereof is ordinarily void.”) (quoting 12 Am. Jur. Contracts
§ 163). Thus, the Waites–as unlawful participants in an industry subject to public policy
based regulations–should not be permitted to rely on their alleged illegal acts to protect
themselves from the Cage’s preference action.
8
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The Waites argue that they were not creditors of the Debtors but merely
previous purchasers of the Debtors’ interests in various installment contracts.
However, as discussed above, the Waites never purchased any installment
contracts from the Debtors. Instead, we determine that the Waites entered into
a debtor-creditor relationship with the Debtors when they transferred funds to
the Debtors in exchange for the right to receive a stream of monthly pool
payments. Shortly before the commencement of the Debtors’ bankruptcy cases,
the Debtors transferred a portion of the Mid-Atlantic Transaction’s proceeds to
the Waites in order to satisfy, at least in part, the Waites claims against them.
The Waites, therefore, were creditors of the Debtors who received pre-
bankruptcy transfers intended to reduce the debt owed by the Debtors to the
Waites.
The Waites do not appeal the bankruptcy court’s findings with regard to
any of the other elements of § 547(b). Accordingly, for the reasons set forth
above, we hold that the Debtors’ transfers to the Waites are avoidable pursuant
to § 547(b).9
III.
The Waites also appeal the denial of their motion to reconsider based upon
Waite, Jr.’s reinstated license. We determine that the bankruptcy court did not
abuse its discretion in denying the motion.
The parties agree that Waite, Jr. did not obtain a reinstated license until
after the Debtors’ bankruptcy petitions were filed. Section 502(b) of the
Bankruptcy Code provides, in part, that “the rights of holders of claims and
interests are fixed as of the Petition Date.” Carrieri v. Jobs.com Inc., 393 F.3d
508, 527 (5th Cir. 2004) (citing 11 U.S.C. § 502(b)). Thus, even if Waite, Jr.
9
The bankruptcy court also found that the Waites were not transferees of Installment
Contracts because the Master Agreements did not effectuate a transfer of assets. Since we
affirm the district court’s decision with regard to the effect of § 348 of the Texas Finance Code,
we need not consider whether the Master Agreements were calculated to transfer any assets.
9
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subsequently received a reinstated license (that applied retroactively to
September 15, 2002), his rights as a creditor were fixed as of the Debtors’
petition dates. Accordingly, the bankruptcy court did not abuse its discretion in
denying the motion to reconsider because the existence of the reinstated license
would not have altered the bankruptcy court’s decision.
IV.
For the reasons set forth above, the district court’s decision is AFFIRMED.
10