Hometown 2006-1 1925 Valley View, L.L.C. v. Prime Income Asset Management, L.L.C.
2017 U.S. App. LEXIS 2048
| 5th Cir. | 2017Background
- Prime Income Management, LLC (Prime LLC) acted as contractual advisor to three public REITs (the Publics); Prime LLC had no employees or assets and Prime Inc. performed services and received payments under the Advisory Agreements.
- The Advisory Agreements required sixty days’ written notice before termination to avoid penalty and provided for base compensation payable mid-month (so at least once during any 60-day notice period) and payment for compensation accruing through the effective termination date.
- Hometown (judgment creditor) obtained a foreclosure-deficiency judgment against Prime LLC and alleges Prime’s affiliates formed Pillar and caused the Publics to terminate the Advisory Agreements without giving the required sixty-day notice, then immediately hired Pillar under substantially identical contracts.
- Hometown sued under the Texas Uniform Fraudulent Transfer Act (TUFTA), alleging the waiver of the sixty-day notice and appropriation of the income stream during that period constituted a fraudulent transfer of assets; district court dismissed the TUFTA claim holding the Advisory Agreements were not TUFTA “assets.”
- On appeal, the Fifth Circuit considered whether the right to payments during the sixty-day notice period (a future income stream) qualified as "property"/"assets" under TUFTA and reversed the dismissal, remanding for further proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether contractual payments during the required 60‑day notice period are TUFTA "assets" | The right to receive base payments during the notice period was an asset (a future income stream) and its waiver was a fraudulent transfer | Future compensation had not vested until services performed; termination pursuant to contract terms is not a transfer | The right to payments during the notice period was sufficiently vested and constituted an asset under TUFTA; dismissal reversed |
| Whether non‑assignment clause and lack of free market value defeat TUFTA asset status | Even if non‑assignable, the income stream and opportunity to perform during notice still had value | Non‑assignability and limited marketability render the contracts valueless for TUFTA purposes | Non‑assignability does not eliminate asset status; value may be diminished but still cognizable |
| Whether termination immediately negated compensation obligations on giving notice | Plaintiff: notice provision was intended to preserve duties/payments during the 60 days; waiver deprived Prime of that benefit | Defendants: compensation and duties ended upon giving notice, making the notice provision surplus | Court reads agreement as giving effect to 60‑day notice; immediate termination reading would render the clause meaningless, so plaintiff's reading prevails at pleading stage |
| Applicability of Seventh Circuit precedents holding contractual terminations under contract terms are not transfers | N/A | Cites In re Commodity Merchants and In re Wey to argue no transfer where termination follows contract terms | Distinguishes those cases because here the contracts were not freely terminable; waiver of a required notice period effected a constructive transfer of an existing right |
Key Cases Cited
- In re Commodity Merchants, Inc., 538 F.2d 1260 (7th Cir. 1976) (cancellation pursuant to contract terms held not a transfer)
- In re Wey, 854 F.2d 196 (7th Cir. 1988) (forfeiture under sales contract not a fraudulent transfer when termination followed contract terms)
- Americold Realty Trust v. Conagra Foods, Inc., 136 S. Ct. 1012 (2016) (trustee's citizenship controls for diversity when trustee sues in own name)
- In re Pirani, 824 F.3d 483 (5th Cir. 2016) (contracts should be interpreted to give effect to all provisions and avoid surplusage)