Kenneth Van Slyke and Patricia Van Slyke v. Teel Holding, LLC ( 2010 )

Opinion issued July 15, 2010

In The

Court of Appeals

For The

First District of Texas

NO. 01-08-00600-CV

KENNETH VAN SLYKE AND

PATRICIA VAN SLYKE, Appellants

V.

TEEL HOLDINGS, LLC, Appellee

On Appeal from the 80th District Court

Harris County, Texas

Trial Court Cause No. 2005-14060

MEMORANDUM OPINION

Appellants, Kenneth Van Slyke and Patricia Van Slyke, challenge the trial court’s judgment, entered after a jury trial, in favor of appellee, Teel Holdings, LLC (“Teel”), in Teel’s suit against appellants for violating the Texas Uniform Fraudulent Transfer Act (“TUFTA”).[1]  In five issues, the Van Slykes contend that the evidence is legally and factually insufficient to support the jury’s finding of a fraudulent transfer and its award of damages; the trial court, in its charge to the jury, erred in combining the theories of actual and constructive fraud into a single question; and the trial court erred in awarding Teel its attorney’s fees.

          We reverse and render judgment in favor of the Van Slykes and remand to the trial court to consider an award of costs to them.

Background

          The president of Teel, Leslie Ann Branscum, testified that on January 15, 2002, Teel, at an interest rate of “14% per annum” to be paid monthly and with principal due on demand or within one year, loaned $300,000 to Nationwide Box, Inc. (“Nationwide”) on an unsecured promissory note signed by Nationwide’s president, who was her husband, Tom Branscum. On August 7, 2002, Teel, “deeming itself insecure,” demanded payment in writing.  When Nationwide did not pay, Teel filed suit and obtained a $300,000 judgment against Nationwide on May 6, 2003. 

Kenneth Van Slyke, as part-owner and operator of Nationwide, testified that in 2002, Nationwide had borrowed the money from Teel because it was “growing very fast [and] had . . . [inherent] cash flow problems.”  That summer, Tom Branscum died unexpectedly, and Kenneth took over as president of Nationwide.  With cash flow a continuing problem in October 2002, Nationwide borrowed another $300,000 from Patricia Van Slyke, Kenneth’s mother, on a secured promissory note (the “October 2002 Loan”) after its largest customer, Budget Truck Rental, filed for bankruptcy, creating a need to “bridge[] the financing.”  Patricia advanced Nationwide $100,000 on September 24, 2002, and another $100,000 on October 9, 2002.  The security agreement, dated October 21, 2002, and perfected on December 11, 2002, granted Patricia a security interest in the accounts receivables due Nationwide from its customers Transpak, NPC (“Transpak”) and Budget Group, Inc.  After Budget Truck Rental made a payment to Nationwide in December 2002, Nationwide, in satisfaction of the October 2002 Loan, made a $205,000 payment to Patricia on December 27, 2002. 

On March 1, 2003, after Teel had filed suit against it, Nationwide entered into a second promissory note with Patricia for a $300,000 line of credit (the “March 2003 Loan”) secured by receivables from Corrugated Box, Public Storage–PS Orangeco, and Public Storage (collectively “Corrugated”).  Patricia perfected her security interest on February 27, 2003.  Kenneth explained that First Capital Credit (“First Capital”), which routinely bought Nationwide receivables, also had a priority security interest, previously perfected by a February 9, 2001 financing statement, which listed Nationwide’s “present and future accounts, . . . and the proceeds of all of the foregoing,” in the same receivables securing Patricia’s loans.

When Nationwide entered into the second note with Patricia, Kenneth had advised her about Teel’s note and its lawsuit.  Nationwide’s bank statements showed numerous advances against the line of credit from Patricia to Nationwide and payments by Nationwide to Patricia.  During late 2002 and through 2003, Nationwide made no effort to pay Teel.  Kenneth explained that “[he] had full discretion to pay what [he] deemed most appropriate for the company” and that was what “kept the company going,” including salaries, taxes, and “key” creditors.

On September 14, 2003, Patricia sent Nationwide a demand for payment of the outstanding balance on the March 2003 Loan.  Kenneth, acting as Nationwide’s president, on September 17, 2003, sent to Corrugated a letter, in which he stated that “all receivables due from you to [Nationwide] have been irrevocably assigned to Patricia Van Slyke.”  He directed Corrugated “to make all future payments on such receivables” directly to her.  No legal documents executing the assignment had been signed.  After sending this letter, Kenneth resigned from Nationwide, but he continued to assist Patricia in getting payment from Corrugated because he was “going to make sure” that she was repaid the amounts owed to her.

Corrugated initially refused to pay Patricia because of First Capital’s superior lien.  On October 22, 2003, Patricia’s legal counsel sent to Corrugated a letter that acknowledged its concern and requested that “all payments [be made] to [First Capital] in accordance with their lien position.”  After First Capital terminated its security interest on December 8, 2003, Corrugated, on April 4, 2004, paid Patricia $228,443.68 in satisfaction of the March 2003 Loan.  Kenneth explained that Corrugated, as well as others, owed Nationwide more than that amount, but, after he resigned, he did not know if Nationwide had collected on those accounts.

On cross-examination, Kenneth testified that the loans from Patricia were used for “general operating expenses,” each loan was “legitimate,” Patricia was not repaid more than she was owed, and he did not intend to defraud any creditor by making the payments to Patricia.  Nationwide had been paying the 14% interest rate on the Teel note until “2003 sometime.”  After Tom Branscum’s death, and before Kenneth resigned, Nationwide had continued to prepare financial statements showing its obligations to Teel and Patricia, and it distributed them to the shareholders, including Ms. Branscum.

Patricia Van Slyke testified that in 2002, Kenneth periodically advised her that Nationwide needed money “for operating expenses.”  She “loaned [Nationwide] money between March and September 2003.  And at the same time [Nationwide] was paying [her] back . . . from [the] operating expenses.”  Patricia could not recall being told about the Teel note or other lienholders, such as First Capital. 

On cross-examination, Patricia denied that she was paid more than she was owed or that she intended to defraud any creditors.  She explained that she entered into the notes to help Nationwide “pay[] bills and pay[] [its] people that worked [there]” and “to protect [Kenneth] to be able to pay his bills and fulfill his obligation to the company.”  Patricia “never felt like [she] was assuming a risk because [she] had the security note, [and she] knew [her] son would pay [her] back.”

Legal and Factual Sufficiency

          In their first issue, the Van Slykes argue that the evidence is legally and factually insufficient to support the jury’s finding of a fraudulent transfer because there was no transfer, no actual fraud, and no constructive fraud. 

          We will sustain a legal sufficiency or “no-evidence” challenge if the record shows one of the following: (1) a complete absence of evidence of a vital fact, (2) rules of law or evidence bar the court from giving weight to the only evidence offered to prove a vital fact, (3) the evidence offered to prove a vital fact is no more than a scintilla, or (4) the evidence establishes conclusively the opposite of the vital fact.  City of Keller v. Wilson, 168 S.W.3d 802, 810 (Tex. 2005).  In conducting a legal sufficiency review, a “court must consider evidence in the light most favorable to the verdict, and indulge every reasonable inference that would support it.”  Id. at 822.  If there is more than a scintilla of evidence to support the challenged finding, we must uphold it.  Formosa Plastics Corp. USA v. Presidio Eng’rs & Contractors, Inc., 960 S.W.2d 41, 48 (Tex. 1998). “‘[W]hen the evidence offered to prove a vital fact is so weak as to do no more than create a mere surmise or suspicion of its existence, the evidence is no more than a scintilla and, in legal effect, is no evidence.’”  Ford Motor Co. v. Ridgway, 135 S.W.3d 598, 601 (Tex. 2004) (quoting Kindred v. Con/Chem, Inc., 650 S.W.2d 61, 63 (Tex. 1983)).  However, if the evidence at trial would enable reasonable and fair-minded people to differ in their conclusions, then jurors must be allowed to do so. Keller, 168 S.W.3d at 822; see also King Ranch, Inc. v. Chapman, 118 S.W.3d 742, 751 (Tex. 2003).  “A reviewing court cannot substitute its judgment for that of the trier-of-fact, so long as the evidence falls within this zone of reasonable disagreement.”  Keller, 168 S.W.3d at 822.

In conducting a factual sufficiency review, we must consider, weigh, and examine all of the evidence that supports or contradicts the jury’s determination.  Plas-Tex, Inc. v. U.S. Steel Corp., 772 S.W.2d 442, 445 (Tex. 1989); London v. London, 192 S.W.3d 6, 14–15 (Tex. App.—Houston [14th Dist.] 2005, pet. denied).  We may set aside the verdict only if the evidence that supports the jury’s finding is so contrary to the overwhelming weight of the evidence as to be clearly wrong or unjust.  Cain v. Bain, 709 S.W.2d 175, 176 (Tex. 1986); Nip v. Checkpoint Sys., Inc., 154 S.W.3d 767, 769 (Tex. App.—Houston [14th Dist.] 2004, no pet.).

          In support of their legal and factual insufficiency challenges, the Van Slykes assert that the transactions between Nationwide and Patricia contained “standard provisions found in arms-length loans” and had an “undisputed non-fraudulent purpose”; no evidence showed that “other creditors were any worse off than before” the transactions; a preference, by itself, is not a fraudulent transfer; Patricia, as a secured creditor, had a legal right to favoritism; transfers must be of assets, which do not include property to the extent that it is encumbered by a valid lien; the “badges” of actual fraud are mostly absent; and Patricia provided reasonably equivalent value for the transfers.  Teel counters that “ample evidence” supports the jury’s finding of fraudulent transfers.

Section 24.005[2] of TUFTA provides

(a) A transfer made . . . by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or within a reasonable time after the transfer was made . . . , if the debtor made the transfer . . . :

(1) with actual intent to hinder, delay, or defraud any creditor of the debtor; or

(2) without receiving a reasonably equivalent value in exchange for the transfer . . . , and the debtor:

(A) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or

(B) intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due.

Tex. Bus. & Com. Code Ann. § 24.005(a) (Vernon 2009).  The purpose of TUFTA is to prevent debtors from defrauding creditors by placing assets beyond their reach.  Tel. Equip. Network, Inc. v. TA/Westchase Place, Ltd., 80 S.W.3d 601, 607 (Tex. App.—Houston [1st Dist.] 2002, no pet.).  A creditor has the burden to prove a debtor’s fraudulent intent, and such intent must be affirmatively shown and will not be presumed.  Sterquell v. Scott, 140 S.W.3d 453, 460 (Tex. App.—Amarillo 2004, no pet); Mladenka v. Mladenka, 130 S.W.3d 397, 405 (Tex. App.—Houston [14th Dist.] 2004, no pet.).  Direct proof of fraud is often unavailable; therefore, circumstantial evidence may be used to prove fraudulent intent.  Mladenka, 130 S.W.3d at 405.  In determining actual intent under section 24.005(a)(1), when several of the nonexclusive “badges of fraud” in section 24.005(b) are found, they can form a proper basis for an inference of fraud.  Id.

Teel complains that four transactions violated TUFTA: Nationwide’s grant to Patricia of security interests in the Transpak, Budget Group, and Corrugated receivables as security for the loans; Nationwide’s payment of $205,000 to Patricia in satisfaction of the October 2002 Loan; Nationwide’s assignment of the Corrugated accounts to Patricia; and Corrugated’s payment to Patricia of $228,443.68 in satisfaction of the March 2003 Loan. 

Security Interests

Teel bore the burden to prove, by a preponderance of the evidence, the “transfer” of an “asset” when Nationwide granted Patricia security interests in the specified accounts receivables.  See Tex. Bus. & Com. Code Ann. § 24.005; G.M. Houser, Inc. v. Rodgers, 204 S.W.3d 836, 842 (Tex. App.—Dallas 2006, no pet.).  A “transfer” is any means of “disposing of or parting with an asset or an interest in an asset, and includes payment of money . . . and creation of a lien or other encumbrance.”  Tex. Bus. & Com. Code. Ann. § 24.002(12) (Vernon 2009).  An “asset” is “property of a debtor,” but excludes “property to the extent it is encumbered by a valid lien.”  Id. § 24.002(2) (Vernon 2009).  Property is “anything that may be the subject of ownership.”  Id. § 24.002(10) (Vernon 2009).  Property encompasses “account[s],” which include the “right to payment of a monetary obligation.”  Id. § 9.102(2) (Vernon 2009).  A “lien” is “an interest in property to secure payment of a debt . . . and includes a security interest created by agreement.” Id. § 24.002(8) (Vernon Supp. 2009).  A “valid lien” is “a lien that is effective against the holder of a judicial lien subsequently obtained by legal or equitable process or proceedings.”  Id. § 24.002(13) (Vernon 2009). 

In this case, the parties agree that all of Nationwide’s accounts receivables, or accounts, were encumbered with First Capital’s priority, perfected security interest, which is a “valid lien” under TUFTA.  Therefore, Nationwide’s accounts receivables were not “assets” to the extent that they were encumbered by this valid lien at the time Nationwide, in consideration for her loans, granted Patricia a security interest in the Transpak, Budget Group, and Corrugated receivables.  The record contains no evidence showing the extent of Nationwide’s indebtedness to First Capital.  Therefore, Teel did not meet its burden to show that Nationwide’s granting of these security interests to Patricia was a “transfer.”  See Mladenka, 130 S.W.3d at 405.  Accordingly, we hold that the evidence is legally insufficient to establish that the security interests that Nationwide granted Patricia were fraudulent and Patricia had a “valid lien” that predated Teel’s judgment in the specified receivables.

Payments of Cash to Patricia

          The $205,000 payment of cash from Nationwide to Patricia in satisfaction of the October 2002 Loan, the periodic payments of cash from Nationwide to Patricia, and the $228,000 payment from Corrugated to Patricia in satisfaction of the March 2003 Loan were transfers because transfers include “payment[s] of money.”  See Tex. Bus. & Com. Code Ann. § 24.002(12).  Teel had the burden to affirmatively show that Nationwide undertook these transfers with actual or constructive fraudulent intent.  Mladenka, 130 S.W.3d at 405.

Actual Fraud

          To show “actual fraud,” Teel had to prove that Nationwide acted with “actual intent to hinder, delay, or defraud” Teel. Tex. Bus. & Com. Code Ann. § 24.005(a)(1).  Such intent may be established by the “badges” of fraud, which include whether:

(1) the transfer . . . was to an insider;

(2) the debtor retained possession or control of the property transferred after the transfer;

(3) the transfer . . . was concealed;

(4) before the transfer was made . . . , the debtor had been sued or threatened with suit;

(5) the transfer was of substantially all the debtor’s assets;

(6) the debtor absconded;

(7) the debtor removed or concealed assets;

(8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred . . . ;

(9) the debtor was insolvent or became insolvent shortly after the transfer was made . . . ; [and]

(10) the transfer occurred shortly before or shortly after a substantial debt was incurred.[3]

Id. § 24.005(b) (Vernon 2009).  Teel asserts that “ample evidence” established the badges of fraud, and it cites to a number of pages in the reporter’s record, but not to specific testimony. 

Here, viewing the evidence in the light most favorable to the verdict, only the first and fourth badges are present.  Nationwide did make payments to an insider, Patricia, and it did so after it had been threatened with suit by Teel.  However, Nationwide did not retain possession or control of the payments after they had been made to Patricia.  Nor did it abscond with, remove, or conceal assets.  Nationwide’s financial statements included the obligations to Teel and Patricia and the payments to Patricia.  The payments did not amount to substantially all of Nationwide’s assets because Nationwide continued to operate and had outstanding accounts receivables that were greater than the amounts owed to Patricia.  The amount of debt cancelled by Patricia was reasonably equivalent to the value of the payments she received from Nationwide.  The transfers to Patricia did not occur shortly before or after Nationwide entered into the note with Teel.  Finally, there is no evidence of Nationwide’s solvency status after the transfers.

The facts here stand in contrast to those in Telephone Equipment Network, in which an insider, Telephone Equipment Network (“TEN”), bought three of debtor-Southwest’s notes from Sterling Bank; TEN’s only business purpose was to hold the notes; the complaining creditor then sued Southwest; Southwest attempted to conceal the obligation to TEN from the creditor and immediately defaulted on the notes after TEN purchased them, enabling TEN to foreclose on the notes; and TEN provided short notice to the creditor of its intent to foreclose on all of Southwest’s assets, which were worth four times the amount of the security interest, and to bid on the assets at the sale to be conducted in the offices of TEN and Southwest’s “shared” counsel. 80 S.W.3d at 605, 609.  The court found these facts “significant” and “suggestive” of an actual intent by Southwest to defraud the creditor.  Id. at 609.

The situation here is more akin to those in Texas Custom Pools, Inc. v. Clayton, in which the debtor, after the complaining creditor began attempting to enforce a judgment, took a loan specifically to pay a pre-existing unsecured debt to shareholders.  293 S.W.3d 299, 313 (Tex. App.—El Paso 2009, no pet.).  The court found three badges of fraud—the debtor made a transfer to an insider (the shareholders), the debtor had been sued before the transfer, and the transfer occurred three months after the judgment was entered in favor of the creditor.  Id. at 313–14.  However, it held that they were not sufficient to show actual intent to defraud the creditor because even when considered together, they were not a “particularly strong” indicator of actual intent to hinder, delay, or defraud the Claytons.  Id. at 314. 

In this case, only two badges of fraud are present, and Nationwide made a choice, similar to the debtor in Clayton, to pay other creditors, including Patricia, instead of Teel. As in Clayton, the badges, even when considered together, are not a “particularly strong” indicator of the Van Slykes’ actual intent to hinder, delay, or defraud Teel.  Clayton stands for the proposition that a mere choice to pay one creditor over another, even when the second creditor has already sued the debtor, does not, by itself, establish fraudulent intent.  See id. 

Patricia, unlike the unsecured shareholders in Clayton, was a perfected, secured creditor with, as we have held, a valid lien that had priority over Teel’s judgment.  See Tex. Bus. & Com. Code Ann. § 9.317(a) (Vernon Supp. 2009) (security interest is superior to rights of person that becomes lien creditor after security interest is perfected).  She was entitled to payment out of her collateral.  See id. § 9.203(b) (Vernon Supp 2009) (security interest is enforceable against debtor and third parties with respect to collateral when value has been given, debtor has rights in collateral, and debtor authenticates security agreement that provides description of collateral). Hence, Nationwide’s $205,000 payment to Patricia in satisfaction of the October 2002 Loan and the payments made against the October 2003 Loan did not, by themselves, demonstrate fraudulent intent but were permissible to satisfy Patricia’s security interests. 

Additionally, Kenneth’s efforts to get Corrugated to pay Patricia were permissible because the Corrugated accounts were Patricia’s collateral through her security interest, regardless of whether Nationwide had also assigned them to her. See id. §§ 9.607(a)(1), (3) (Vernon 2002) (if so agreed, secured party may enforce obligations of account debtor as if secured party was debtor).  Thus, the $228,000 payment from Corrugated to Patricia was not, by itself, indicative of fraud but an enforcement of her right to payment from her collateral.  Moreover, no evidence showed that Patricia was paid more than she was owed such that reasonably equivalent value was not exchanged. Accordingly, we hold that the evidence is legally insufficient to establish that Nationwide acted with actual intent to hinder, delay or defraud Teel by paying Patricia.

Constructive Fraud

To show “constructive fraud,” Teel had to prove that Nationwide did not receive “reasonably equivalent value” in exchange for the payments it made to Patricia and Nationwide (1) “was engaged or was about to engage in a business or a transaction for which the remaining assets of [Nationwide] were unreasonably small in relation to the business or transaction” or (2) “intended to incur, or believed or reasonably should have believed that [it] would incur, debts beyond [its] ability to pay as they became due.”  See Tex. Bus. & Com. Code Ann. § 24.005(a)(2). “Reasonably equivalent value” means a transfer “that is within the range of values for which the transferor would have sold the assets in an arm’s length transaction.”  Id. § 24.004(d) (Vernon 2009). When Patricia loaned Nationwide $560,000 in cash in exchange for security interests in specific accounts receivables, she, as a matter of law, gave reasonably equivalent value for the security interests.  See First Nat’l Bank of Seminole v. Hooper, 104 S.W.3d 83, 84 (Tex. 2003) (holding “as a matter of law, the value of the interest in an asset transferred for security is reasonably equivalent to the amount of debt is secures”).  Likewise, when Nationwide and Corrugated paid cash to Patricia in satisfaction of her security interests, these were exchanges of reasonably equivalent value because Patricia was paid exactly the amount that she was owed in exchange for canceling Nationwide’s debts to her.  See Tex. Bus. & Com. Code Ann. § 24.004(a), (d).  Accordingly, we hold that the evidence is legally insufficient to establish that Nationwide engaged in constructive fraud against Teel by paying Patricia. 

We sustain the Van Slykes’ first issue. 

Having sustained their first issue, we do not reach the Van Slykes’ second, third, and fourth issues.

Attorney’s Fees

In their fifth issue, the Van Slykes argue that “the award of costs and attorney’s fees to Teel should be set aside and costs awarded” to them because if the trial court’s judgment is reversed, “the award [of attorneys fees to Teel] is no longer “equitable and just.” 

In their stipulations to the trial court, the parties provided that Teel would be awarded specified attorney’s fees if Teel “prevail[ed].”  A prevailing party must receive “at least some relief on the merits of his claim.”  Intercontinental Group P’ship v. KB Home Lone Star L.P., 295 S.W.3d 650, 654 (Tex. 2009) (quoting Hewitt v. Helms, 482 U.S. 755, 760, 107 S. Ct. 2672, 2679 (1987)).  Because we have sustained the Van Slykes’ first issue, Teel is no longer the prevailing party.  Accordingly, we reverse the trial court’s award of attorney’s fees and costs to Teel.

The Van Slykes prayed to recover “their costs of court.”  TUFTA provides that “the court may award costs and reasonable attorney’s fees as are equitable and just.”  Tex. Bus. & Com. Code Ann. § 24.013 (Vernon 2009).  Accordingly, a remand of this case to the trial court is appropriate to determine whether an award of costs to the Van Slykes is “equitable and just.”[4]

We sustain the Van Slykes’ fifth issue.

Conclusion

We reverse the judgment of the trial court and render judgment in favor of the Van Slykes.  We remand the case to the trial court to consider whether an award of costs to the Van Slykes is equitable and just.  See Tex. Bus. & Com. Code Ann. § 24.013.

                                                                             Terry Jennings

                                                                             Justice

Panel consists of Justices Jennings, Hanks, and Bland.

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[1]           See Tex. Bus. & Com. Code Ann. §§ 24.001–.013 (Vernon 2009).

[2]           Although Teel pleaded fraudulent transfer under sections 24.005 and 24.006, the trial court, in its instructions to the jury, discussed only section 24.005.

[3]           Badge number eleven, “the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor,” is not at issue here.  See Tex. Bus. & Com. Code Ann. § 24.005(b)(11).

[4]           In their briefing, the Van Slykes do not ask for attorney’s fees.  Thus, we do not remand for a consideration of whether the trial court should award attorney’s fees.