Eskelsen v. Theta Investment Company
437 P.3d 1274
Utah Ct. App.2019Background
- In 2007 JENCO and VC Holdings purchased real property; VC Holdings held a 31.8% interest. In 2008 JVC Leasing was formed and the property was vested in JVC Leasing; VC Holdings owned 31.8% of JVC Leasing.
- In May 2009 Chad and Lorna Eskelsen loaned $120,000 to Vaughn and Carolyn Hansen (the Hansens). The Hansens signed a promissory note and executed a pledge of 100% of VC Holdings’ membership interests as security; VC Holdings itself was not a party to the note.
- After the Hansens defaulted, the Eskelsens (through counsel) sent a December 2010 foreclosure letter asserting they were accepting the pledged VC Holdings membership interests and notifying related parties, but did not provide signed loan documents or the foreclosure letter to some recipients who requested proof.
- In March 2011 VC Holdings (through Mr. Hansen as manager) redeemed its interest in JVC Leasing for a direct 31.8% interest in the Property and sold that 31.8% interest to Theta Investment Company for value; Southern Utah Title verified Hansen’s authority on corporate filings before closing.
- The Eskelsens sued the Hansens, VC Holdings, and Theta asserting fraudulent transfer, lack of Hansen authority, and that the sale was outside ordinary course and required member approval. The trial court found no fraudulent transfer, concluded the Eskelsens failed to remove Hansen as manager and that Hansen had authority; judgment for Theta. The court denied most requested amendments to findings; the Eskelsens appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the March 29, 2011 transfer was a fraudulent transfer under Utah’s Uniform Fraudulent Transfer Act | Eskelsens: Transfer was fraudulent because it placed assets beyond creditors and proceeded despite their claim | Theta: VC Holdings (and Hansens individually) were not debtors of the Eskelsens under the Act, so Act does not apply | Court: No. VC Holdings was not a debtor (loan was to the Hansens individually) and the Hansens did not transfer a debtor’s assets; no fraudulent transfer remedy under the Act |
| Who bears burden on Theta’s good-faith-transferee defense | Eskelsens: Theta must prove it paid value and lacked notice to invoke §25-6-9(1) | Theta: Burden only arises if plaintiff establishes a voidable fraudulent transfer | Court: Plaintiff must first prove a fraudulent transfer; because none was found the burden never shifted to Theta |
| Whether Theta (via Jennings) had notice or inquiry notice of the Eskelsens’ claim such that Theta was not a good-faith transferee | Eskelsens: December 2010 letter and circumstances gave actual or inquiry notice and imposed duty to investigate further | Theta: Jennings made reasonable inquiry (asked for proof, consulted Hansen, checked Division of Commerce, title company also checked) and received no proof; thus no constructive notice of restrictions | Court: Held Theta (Jennings) conducted a reasonable inquiry and had no notice of the operating-agreement restriction; findings not clearly erroneous |
| Whether Hansen lacked authority to transfer VC Holdings’ assets because the operating agreement required majority member approval | Eskelsens: After foreclosure they were sole members and had removed Hansens as managers; transfers required member approval under article 5.4 | Theta: Manager-managed structure and public articles did not show any limitation; Jennings lacked notice of internal operating-agreement restriction | Court: Hansen remained manager (Eskelsens failed to effectuate removal or update filings); article 5.4 was not in the public articles; Jennings had no notice—Hansen’s actions bound VC Holdings |
Key Cases Cited
- 4447 Associates v. First Security Financial, 889 P.2d 467 (Utah Ct. App. 1995) (review of fact finding on notice is deferential)
- Norman v. Murray First Thrift & Loan Co., 596 P.2d 1028 (Utah 1979) (two-prong alter-ego test: unity of interest and unfairness)
- Colman v. Colman, 743 P.2d 782 (Utah Ct. App. 1987) (factors relevant to alter-ego inquiry)
- Meyer v. General American Corp., 569 P.2d 1094 (Utah 1977) (constructive and inquiry notice principles in property transactions)