Husky International Electronics, Inc. v. Ritz (In re Ritz)Husky International Electronics, Inc. v. Ritz (In re Ritz)
MEMORANDUM. OPINION ON PLAINTIFF’S ORIGINAL COMPLAINT TO DENY DISCHARGEABILITY OF DEBT PURSUANT TO 11 U.S.C. § 523
[Adv. Doc. No. 1]
I. Introduction
Prosecution of complaints to determine dischargeability under 11 U.S.C.
II. Factual Background and Procedural History op this Adversary Proceeding
Husky International Electronics, Inc. (“Husky”) is a supplier of components used in electronic devices. Between 2003 and 2007, Husky sold its products to Chrysalis Manufacturing Corp. (“Chrysalis”), and Chrysalis accumulated a debt to Husky totaling $163,999,38. [Pi’s Ex. No. 3, p. 25 of 25
Between 2006 and 2007, the Debtor orchestrated transfers of cash out of Chrysalis’s accounts into the accounts of several other entities in which the Debtor had an interest. [Pi’s Ex. No. 5]. Meanwhile, Chrysalis did not pay the debt of $163,999.38 it owed to Husky (the “$163,999.38 Debt”). Indeed, Chrysalis filed a Chapter 7 petition in 2008. [Case No. 08-33793, Doc. No. 1]; [Defs Ex. No. 56
Specifically, this Court explained that the “actual fraud” element of § 21.223(b) requires that the defendant make a representation to the plaintiff; and since the Debtor made' no representation to Husky, no actual fraud could'be proven — which in turn meant that Chrysalis’s corporate veil could not be pierced to allow Husky to impose personal liability on the Debtor for the $163,999.38 Debt. Id. at 633, Additionally, this Court held that the test for proving “actual fraud” under § 21.223 was the same for proving “actual fraud” under § 523(a)(2)(A): namely, proof of a representation by the defendant to the plaintiff; and since the Debtor made no representation to Husky, there was no way that this Court could hold that the $163,999.38 Debt was a non-dischargeable personal obligation of the Debtor. Id.
Husky appealed to the District Court. [Adv. Doc. No. 97]. On July 14, 2014, the District Court issued a memorandum opinion affirming this Court’s ruling. Ritz,
Despite this holding, the District Court affirmed this Court’s ruling that Husky could not prevail because the District Court agreed with this Court that “actual fraud” under § 523(a)(2)(A) — unlike “actual fraud” under § 21.223 — does require a misrepresentation from the defendant (here, the Debtor) to the plaintiff (here, Husky); and the District Court emphasized that the Debtor never made any representation to Husky. Id.
Husky appealed to the Fifth Circuit. [Adv. Doc. No. 115], On May 22, 2015, the Fifth Circuit issued a memorandum opinion affirming the District Court’s ruling. Ritz,
For all of these reasons, we conclude that a representation is a necessary prerequisite for a showing of “actual fraud” under Section 523(a)(2)(A). Because the parties agree that the record contains no evidence of such a representation [by the Debtor to Husky], discharge of the debt at issue is not barred under this provision.
Id. at 321.
Husky thereafter filed a writ of certiora-ri with the Supreme Court. [Adv. Doc. No. 115]. Noting that there is a split among the circuit courts over whether “actual fraud” under § 523(a)(2)(A) requires a representation from the debtor “or whether it encompasses other traditional forms of fraud that can be accomplished without a false representation,. such as a fraudulent conveyance of property made to evade payment to creditors,” the Supreme Court granted certiorari to resolve the split. Ritz,
• Because we must give the phrase “actual fraud” in § 523(a)(2)(A) the meaning it has long held, we interpret “actual fraud” to encompass fraudulent conveyance schemes, even when those schemes do not involve a false representation. We therefore reverse the judgment of the Fifth Circuit and remand the case forfurther proceedings consistent with this opinion.
Id. at 1590.
In the wake of .the Supreme Court’s decision, on August 10, 2016, the Fifth Circuit issued a memorandum opinion explaining what further steps need to be taken that are consistent with the Supreme Court’s ruling. Matter of Ritz,
The Fifth Circuit began with this observation: “While the [Supreme] Court clarified the meaning of actual fraud in § 523(a)(2)(A), it did not specifically hold that actual fraud had occurred here or determine whether Husky could ultimately prevail in its attempt to deny [the Debtor] a discharge of the relevant debt. Rather, following its holding as to actual fraud, [the Supreme Court] ‘remand[ed] the case for further proceedings consistent with [its] opinion.’ ” Matter of Ritz,
The Supreme Court instructed this court to address specific issues with respect to § 523(a)(2)(A) on remand. Accordingly, we now specifically address' the issue pretermitted in our ill-fated opinion: whether Ritz is liable to Husky under Texas state law. Ritz’s liability to Husky under Texas law is a threshold question with respect to whether Ritz may be denied a discharge under § 523(a)(2)(A) because, if Ritz is not liable under Texas law, then he owes no debt to Husky. Because, as we explain below, we cannot resolve the state law issue without further fact finding by the bankruptcy court, we do not address the denial of a discharge under § 523(a)(2)(A) here and leave this determination to be made in the first instance by the bankruptcy court, after the necessary fact finding, in light of the standard articulated by the Supreme Court.
To succeed in denying Ritz a discharge under § 523(a)(2)(A), Husky must first show that Ritz is liable for the debt owed by Chrysalis to Husky. To show that Ritz is liable for the debt, Husky relies on Texas Business Organizations Code §. 21.223(b), which allows a plaintiff to pierce the corporate veil and hold a shareholder, such as Ritz, liable for the debts of a corporation. The district court held that Husky could pierce the corporate veil to hold Ritz liable. In our previous opinion, we did not address whether Ritz could be held liable for Chrysalis’s debt to Husky under Texas’s veil-piercing statute, but we do so here. We hold that the district court erred in concluding that Ritz was liable to Husky under the Texas veil-piercing statute because, in so concluding, it relied on a fact finding that the bankruptcy court did not actually make. However, we agree with the district court that Husky’s theory that Ritz is liable for the debt owed by Chrysalis to Husky under Texas law is legally viable and therefore remand for further factual findings on this theory.
Matter of Ritz,
[E]stablishing that a transfer is fraudulent under the actual fraud prong of TUFTA is sufficient to satisfy the actual fraud requirement of veil-piercing because a transfer that is made with the actual intent to hinder, delay, or defraud any creditor, necessarily involves dishonesty of purpose or intent to deceive. Given this holding, if Husky can show that Ritz’s transfers in this case satisfy the actual fraud prong of TUFTA, then it can also show that Ritz’s conduct constitutes actual fraud for the purposes of veil-piercing. As direct evidence of actual fraud is often scarce, TUFTA supplies a non-exclusive list of eleven factors, commonly known as badges of fraud, that courts may consider in determining whether a debtor actually intended to defraud creditors under TUFTA.
Id. at 567 (internal quotation marks and footnote omitted).
Having set forth that a “badge of fraud” analysis is appropriate for proving “actual fraud,” the Fifth Circuit stated that:
If the bankruptcy court concludes on remand that Ritz’s conduct satisfies the actual fraud prong of TUFTA and that the actual fraud was for Ritz’s “direct personal benefit,” Ritz is liable for Chrysalis’s debt to Husky under Texas’s veil-piercing statute and the bankruptcy court must then address whether Ritz should be denied a discharge under 11 U.S.C. § 523(a)(2)(A), consistent with the Supreme Court’s opinion in this case. If, however, the bankruptcy court concludes that Ritz’s conduct does not amount to actual fraud under Texas state law, then there is no debt to discharge, and the question of deniability under § 523(a)(2)(A) becomes moot.
Id. at 569.
Thus, it is now incumbent on this Court to undertake, at most, a three-step analysis. The first two steps are required by § 21.223 for determining whether Husky can pierce Chrysalis’s corporate veil to impose personal liability on the Debtor for the $163,999.38 Debt. These two steps are as follows: (1) Are there sufficient badges of fraud for this Court to find that the Debtor committed “actual fraud”?; and (2) If so, was the Debtor’s “actual fraud” for his direct personal benefit? If, after undertaking these steps, the Court concludes that the Debtor committed actual fraud for his direct personal benefit, then under § 21.223, the Debtor becomes personally liable to Husky for the $163,999.38 Debt. The third step then requires the Court to determine if the Debtor’s personal liability for the $163,999.38 Debt is a non-dis-chargeable obligation under § 523(a)(2)(A). Stated differently, just because Husky is able to pierce Chrysalis’s corporate veil to impose personal liability on the Debtor for the $163,999.38 Debt, it does not automatically follow that the $163,999.38 Debt is a non-dischargeable obligation. This Court must still inquire whether the Debtor’s personal obligation for the $163,999.38 Debt is — to use the language of § 523(a)(2)(A) — a “debt for money [or] property to the extent obtained by ... actual fraud.”
After receiving these instructions from the Fifth Circuit, this Court, on October 7, 2016, held a status conference with counsel for Husky and counsel for the Debtor. [Adv. Doc. Nos. 117, 119, & 124]. The Court inquired whether the parties wanted this Court to reopen the record so that they could introduce additional evidence. Both attorneys responded that they did not want to do so; rather, they wanted to make oral arguments based upon the existing record and submit additional briefing. [Tape Recording, Oct. 7, 2016 Hr’g at 1:34:56-1:36:40 P.M.; 1:40:39-1:41:22 P.M.]. Accordingly, the Court gave the parties approximately sixty days to prepare for oral arguments and to submit
The Court now makes the following Findings of Fact and Conclusions of Law pursuant to Rules 7052 and 9014. To the extent that any Finding of Fact is construed to be a Conclusion of Law, it is adopted as such; and to the extent that any Conclusion of Law is construed to be a Finding of Fact, it is adopted as such. Further, this Court reserves the right to make additional findings and conclusions as it deems necessary.
III. Findings of Fact
A. History of Chrysalis Manufacturing Corporation
1.In 2002, the Debtor formed Chrysalis. Chrysalis was in the business of manufacturing components of products for various companies that, once the products were fully assembled, distributed them in the marketplace. [Feb. 10, 2011 Tr. 58:12-14]; [Adv. Doc, No. 94, Feb. 11, 2011 Tr. 67:5-10, 67:23-68:2], The Debtor held and continues to hold a 30% interest in Chrysalis stock. [Adv. Doc. No. 94, Feb. 11, 2011 Tr. 68:13-69:2]; [Finding of Fact No. 4 in the 2011 Opinion]; [Adv. Doc. No. 1, pp. 2-3, ¶ 6]; [Adv. Doc. No. 8, p. 2, ¶6]. At all relevant times, the Debtor was in financial control of Chrysalis. [Adv. Doc. No. 94, Feb. 11, 2011 Tr. 101:18-19]; [Defs Ex. Nos. 63.1-64.18].
2. In 2003, through Chrysalis, the Debtor acquired a company called Link World, which was operated as Altatron EMC (“Altatron”). [Adv. Doc. No. 94, Feb. 11, 2011 Tr. 66:10-24], Chrysalis then became known as “Chrysalis Altatron.” [Id. at 15:16-18]. It is undisputed that references to “Altatron” refer to the entity known as “Chrysalis.” [Id.]-, [Feb. 2, 2011 Tr. 12:8-10].
3. The Debtor also testified that “Chrysalis needed capital the entire time that I [i.e., the Debtor] was involved with it.” [Adv. Doc. No. 94, Feb. 11, 2011 Tr. 70:22-23], Indeed, . at all relevant times, Chrysalis was unable to pay its debts as they became due. [Finding of Fact No. 5 in the 2011 Opinion]; [Feb. 3, 2011 Tr.12:13-13:13]; [Pi’s Ex. No. 171]. Moreover, at all relevant times, the sum of Chrysalis’s debts was greater than all of Chrysalis’s assets at a fair valuation. [Finding of Fact No. 6 in the 2011 Opinion]. Further evidence of Chrysalis’s constant woeful financial condition is as follows:
a. The Debtor testified that “the company’s [i.e., Chrysalis’s] assets were less than what was owed.” [Adv. Doc. No. 94, Feb. 11, 2011 Tr. 91:22-92:4]. He gave further testimony that he was not aware of any time when the assets were greater than the liabilities. [Id. at 92:11-16].
b. Chrysalis was unable to make payroll, so the Debtor would use his wholly-owned company, Institutional Insurance Management, to make cash infusions as necessary. [Defs Ex. Nos. 26.1 & 26.2]; [Adv. Doc. No. 94, Feb. 11, 2011 Tr. 39:1-7; 121:6-24]. In total, the Debtor estimates that, using this particular entity, he infused capital of approximately $2.4 million into Chrysalis in 2005 and 2006, with roughly $2.3 million of these funds being infused in 2005. [Pl’s Ex. No. 169]; [Feb. 3, 2011 Tr. 45:20-24].
c. As of March 31, 2006, Chrysalis had assets of approximately $2.4 million and liabilities of about $5.6 million. [Adv. Doc. No. 94, Feb. 11, 2011 Tr. 72:6-21]. Thus, at this time, Chrysalis had a net negative equity of $3.2 million. [Id],
d. As of April 21, 2006, Chrysalis had accounts payable of $640,031.54 that were more than 90 days past due. [Pi’s Ex. No. 171, p. 3 of 3]. Around April or May 2007, EmlinQ purchased Chrysalis’s assets for $600,000.00, [Feb. 10, 2011 Tr. 94:3-7] — a number lower than Chrysalis’s accounts payable. [Feb. 3, 2011 Tr. 89:20-90:1]; [Defs Ex. Nos. 45-48]; [Pi’s Ex. No. 171].
e. On July 7, 2006, Chrysalis executed a UCC Financing Statement with Virtra Manufacturing Corporation as the secured party. [Defs Ex. No. 1]. The Debtor testified that this was necessary so Chrysalis could receive some “intercom-pany advances” of half a million dollars. [Adv. Doc. No. 94, Feb. 11,2011 Tr. 82:11 — 13]. Stated differently, for Chrysalis to obtain financing from Virtra Manufacturing Corporation, the loan had to be secured with assets of Chrysalis. The UCC Financing Statement reflects that VirTra Manufacturing Corporation perfected its lien on virtually all of Chrysalis’s assets, including, but not limited to, accounts of Chrysalis. [Defs Ex. No. 1].10
f. As of March 2007, Chrysalis had assets valued at $2.1 million and liabilities of $7.68 million. [Adv. Doc. No. 94, Feb. 11, 2011 Tr. 72:22-73:13], Thus, at this time, Chrysalis had a negative net equity of $5.36 million. [Id.].
g. The Debtor personally guaranteed $177,000.00 of debt owed by Chrysalis to Arrow Electronics, Inc. [Defs Ex. No. 43]. The Debt- or never personally guaranteed any debt that Chrysalis owed to Husky.
h. The Debtor testified that Chrysalis was never able to pay its bills at any point in time. [Adv. Doc. No. 94, Feb. 11, 2011 Tr. 71:8-10].
4. On June 12, 2008, Chrysalis filed a voluntary Chapter 7 bankruptcy petition in the Southern District of Texas.11 [Case No. 08-33793, Doc. No. 1]; [Defs Ex. No. 56]. The Debtor signed Chrysalis’s petition as “Daniel L. Ritz, Jr., Director.” [Case No. 08-33793, Doc. No. 1, p. 7 of 7]. In the statement of financial affairs (“SOFA”), section 10, entitled “other transfers,” the Debtor, in his capacity as director of Chrysalis, represented that Chrysalis had not transferred any of its property outside the ordinary course of its business within two years preceding the filing of its bankruptcy petition. [Case No. 08-33793, Doc. No. 3, p. 47 of 54].12 This representation was false, as Chrysalis (through the Debtor’s actions), within two years of the filing of its bankruptcy petition, transferred a total amount of $1,161,279.90 out of Chrysalis’s account into the accounts of entities that the Debtor controlled. [See infra Findings of Fact Nos. 23-29]. Further, in Schedule B, which describes the non-real estate assets of a debtor, the Debtor, in his capacity as the director of Chrysalis, represented that Chrysalis had no claims of any kind when, in fact, Chrysalis had a claim against the Debtor for the $1,161,279.90 of funds that the Debtor transferred out of Chrysalis’s account into the accounts of entities which the Debtor controlled.
5. In Chrysalis’s Schedule F (entitled “Creditors Holding Unsecured Nonpriority Claims”), the Debtor, in his capacity as director of Chrysalis, represented that Chrysalis had the following non-insider unsecured debts as of the date of the filing of its Chapter 7 petition:
a. Ninety debts under $5,000.00, [Case No. 08-33793, Doc. No. 3, pp. 10-40 of 54];
b. Twelve debts more than $5,000.00 but less than $10,000.00, [id];
c. Twenty-four debts between $10,000.00 and $50,000.00, [id.];
d. Six debts more than $50,000.00 but less than $150,000, [id];
e. Two debts more than $150,000.00, specifically: (1) $162,487.65 to Husky, [id at p. 22 of 54] and (2)$228,000.00 to Arrow Electronics, [id. at p. 13 of 54]. In its Schedule F, Chrysalis, through the Debtor as its director, represented that Chrysalis did not dispute the debt that it owed to Husky.
B. History of the Relationship Between Husky and Chrysalis/the Debtor
6. On December 17, 2003, Altatron EMS (i.e., Chrysalis, [see Finding of Fact No, 2 supra]) entered into a Master Credit and Sales Agreement with Husky. [Pi’s Ex. No. 1], From 2003 to 2007, Husky sold and delivered electronic components to Chrysalis pursuant to this contract. [Finding of Fact No. 2 in the 2011 Opinion]; [Pi’s Ex. Nos. 1, 2, & 3]. Further, this agreement included language requiring Chrysalis to pay Husky’s attorneys’ fees under the following circumstances: “If Seller [i.e., Husky] engages legal counsel to enforce Seller’s rights under this Master Credit and Sales Agreement, Buyer [i.e., Chrysalis] shall pay Seller’s reasonable attorneys [sic] fees and costs incurred by Seller in connection with such efforts, whether or not litigation is commenced.” [Pi’s. Ex. No. 1, p. 2, ¶ 13].
7. Chrysalis failed to pay for goods sold and delivered to Chrysalis by Husky in the amount of $163,999.38. [Finding of Fact No. 3 in the 2011 Opinion]; [Pi’s Ex. No. 3, p. 25 of 25]; [Feb. 2, 2011 Tr. 35:1-7]. From October 2006 to January 2007, Husky accrued approximately ninety unpaid Chrysalis invoices. [Pi’s Ex. No. 7].
8. On or around January 9, 2007, Husky became aware that checks received from Chrysalis totaling approximately $90,000.00 had not cleared, [Pi’s Ex. No. 4]; [Feb. 2, 2011 Tr. 24:1-17].
9. On or around January 12, 2007, i.e., after certain cheeks from Chrysalis bounced, Nick Davis (“Davis”), the President and CEO of Husky, spoke with the Debtor by telephone. [Feb. 2, 2011 Tr. 26:17-28:10]. Davis credibly testified that he told the Debtor that if money was not immediately wired to pay for the products that Husky had delivered to Chrysalis, then Husky “would have to pursue litigation.” [Id. at 26:17-28:6]. Davis did not specify if Husky would pursue litigation against Chrysalis or the Debtor personally.
10. On June 1, 2007, Chrysalis prepared an A/P [Accounts Payable] Aging Summary indicating that it owed $162,487.65 to Husky among other creditors. [Pi’s Ex. No. 6, p. ¾.
11. At some point in 2007, Husky filed suit against Chrysalis in the 280th District Court of Harris County, Texas styled, Husky International Electronics, Inc. v. Chrysalis Manufacturing Corporation, Cause No. 2007-39059. [Case No. 09-39895, Doc. No. 1, p. 32 of 54]; [Pi’s Ex. No. 169, p. 3], Depositions were taken on March 27, 2008. [Pi’s Ex. No. 169],
12. On May 20, 2009, Husky filed suit against the Debtor, in its individual capacity, in the Southern District of Texas styled Husky International Electronics, Inc. v. Ritz. [Civ. Case No. 4:09-cv-01532, Doc. No. 1].
13. On December 31, 2009, the Debtor filed his Chapter 7 petition in this Court, [Main Case No. 09-39895, Doc. No. 1]. On June 4, 2010, the Debtor received a discharge under§ 727. [Main Case No. 09-39898, Doc. No. 32]. 13
14. In his Schedule F (entitled “Creditors Holding Unsecured Non-Priority Claims”), the Debtor did not schedule either Chrysalis or the trustee of Chrysalis’s Chapter 7 estate as a creditor holding a claim against the Debtor for the amount of the funds that the Debtor transferred out of Chrysalis’s account into the several entities that he controlled. [See infra Findings of Fact Nos. 15-23]; [Main Case No. 09-39895, Doc. No. 8-1].
C. History of the Debtor’s Transfers from Chrysalis to Other Companies that he Controlled
15. Between November 2006 and May 2007,14 the Debtor caused $677,622.00 of Chrysalis’s funds to be transferred to ComCon Manufacturing Services, Inc., a/k/a Vir-Tra Merger Corporation (“Com-Con”), without Chrysalis receiving reasonably equivalent value for the transfer.15 [Finding of Fact No. 7 in the 2011 Opinion]; [Pi’s Ex. No. 5]. Additionally, on September 19, 2006, the Debtor personally guaranteed a $1.0 million financing facility extended to ComCon by a financing company named Charter Capital. [Pi’s Ex. No. 168, p. 3 of 5]; [Feb. 3, 2011 Tr. 64:12-20]. At trial, under cross-examination, the Debt- or admitted that “it would be a good idea then to do anything [he] could to make sure the corporation pays that debt.” [Feb. 3, 2011 Tr. 65:19-21]. The Debtor further admitted that the transfers of $677,622.00 from Chrysalis’s account to ComCon’s account would be a personal benefit to him because it would enable ComCon to pay the loan that the Debtor had personally guaranteed. [Id. at 66:4-8].
16. Between November 2006 and May 2007, the Debtor caused $121,831.00 of Chrysalis’s funds to be transferred to CapNet Securities Corporation, without Chrysalis receiving reasonably equivalent value for the transfer. [Finding of Fact No. 8 in the 2011 Opinion]; [Pi’s Ex. No. 5]. Indeed, in the Joint Pretrial Statement, the Debt- or admits that he caused this transfer. [Adv. Doc. No. 61, p. 5 of 11].
17. Between November 2006 and May 2007, the Debtor caused $52,600.00 of Chrysalis’s funds to be transferred to CapNet Risk Management, Inc., without Chrysalis receiving reasonably equivalent value for the transfer. [Finding of FactNo. 9 in the 2011 Opinion]; [Pi’s Ex. No. 5].
18. Between November 2006 and May-2007, the Debtor caused $172,100.00 of Chrysalis’s funds to be transferred to Institutional Capital Management, Inc., and Institutional Insurance Management, Inc., without Chrysalis receiving reasonably equivalent value for the transfer. [Finding of Fact No, 10 in the 2011 Opinion]; [Pi’s Ex. No. 5]. Indeed, in the Joint Pretrial Statement, the Debtor admits that he caused this transfer. [Adv. Doc. No. 61, p. 5 of 11],
19. Between November 2006 and May 2007, the Debtor caused $99,386.90 of Chrysalis’s funds to be transferred to Dynalyst Manufacturing Corporation, without Chrysalis receiving reasonably equivalent value for the transfer. [Finding of Fact No. 11 in the 2011 Opinion]; [Pi’s Ex, No. 5].
20. Between November 2006 and May 2007, the Debtor caused $26,500.00 of Chrysalis’s funds to be transferred to Clean Fuel International Corp., a/k/a Gulf Coast Fuels, Inc., without Chrysalis receiving reasonably equivalent value for the transfer. [Finding of Fact No. 12 in the 2011 Opinion]; [Feb. 2, 2011 Tr. 136:19-21],
21. Between November 2006 and May 2007, the Debtor caused $11,240.00 of Chrysalis’s funds to be transferred to CapNet Advisors Incorporated, without Chrysalis receiving reasonably equivalent value for the transfer. [Finding of Fact No. 13 in the 2011 Opinion]; [Pi’s Ex. No. 5]. Indeed, in the Joint Pretrial Statement, the Debtor admits that he caused this transfer. [Adv. Doc. No. 61, p. 5 of 11].
22. During all of the transfers to the entities referred to above (the “Debtor-Controlled Entities”), Chrysalis was still operational. [Finding of Fact No. 13 in the 2011 Opinion].
23. In total, the Debtor made approximately 176 transfers to the Debt- or-Controlled Entities for an aggregate amount of $1,161,279.90. [Pi’s Ex. No. 5]. The Debtor “does not dispute that the transfers were made to insiders.” [Adv. Doc. No. 121, p. 1, ¶ 1]. Further, the Debtor admitted that “Chrysalis had been threatened with suit at the time [ ] some of the transfers were made.” [M], Before the threat of a lawsuit, the Debtor orchestrated transfers totaling approximately $414,322.00; and after the threat, the Debtor orchestrated transfers totaling approximately $720,458.00 — thereby resulting in a total amount of $1,134,780.00.16 [Pi’s Ex. No. 5].
24. During the trial, counsel for Husky asked the Debtor the following question: “It would have personally benefitted you for all of the entities that you owned an interest in to get $1.2 million, collectively,from Chrysalis; would it not?” [Feb. 3, 2011 Tr. 67:11-13]. In response, the Debtor admitted: “[I]t would have benefitted me, yes, sir.” [Id. at 67:14-15].
25. The Debtor testified that he believed the transfers- of $1,161,279.90 were made to cover the “operational cash flow needs of Chrysalis” and to cover repayment of Chrysalis’s loans. [Feb. 2, 2011 Tr. 101:14-16, 101:25-102:1]. However, the Debtor openly admitted, [Adv. Doc. No. 94, Feb. 11, 2011 Tr. 138:4-139:20], as did his former employee, Nancy K. Finney (“Finney”), [Feb. 3, 2011 Tr. 132:18-24], that there was absolutely no evidence to substantiate this testimony.
26. Finney, a comptroller for the Debt- or-Controlled Entities, credibly testified that the Debtor himself controlled all of these transfers and authorized every single one, [Id. at 127:12-17]. The Debtor also admitted that he was responsible for initiating and authorizing many of the transfers. [Id. at 27:1-7]. The Court finds that the Debtor in fact initiated and authorized all of the transfers.
27. At all relevant times, the Debtor owned:
a. 30% of Chrysalis, [Finding of Fact No. 14 in the 2011 Opinion], [Adv. Docket No. 8, p. 4„ ¶ 9(c) ];
b. 85% of CapNet Securities Corporation, [Finding of Fact No. 14 in the 2011 Opinion], [Adv. Doc. No. 8, p. 4;, ¶ 9(c) ], (to which he transferred $121,831.00);
c. 100% of CapNet Risk Management, Inc., [Finding of Fact No. 14 in the 2011 Opinion], [Adv. Doc. No. 8, p. 4„ ¶ 9(c) ], (to which he transferred $52,600.00);
d. 100% of Institutional Insurance Management, Inc., [Finding of Fact No. 14 in the 2011 Opinion], [Adv. Doc. No. 8, p. 4, ¶ 9(c) ], (to which he transferred $172,100.00, or a portion thereof, -with the other portion going .to Institutional Capital Management, Inc.);
e. 40% of Institutional Capital Management, Inc., [Finding of Fact No. 14 in the 2011 Opinion], [Adv. Doc. No. 8, p. 4, ¶ 9(c) ], (to which he transferred $172,100.00, or a portion thereof, with the other portion going to Institutional Insurance-Management, Inc.);
f. 25% of Dynalyst Manufacturing Corporation, [Finding of Fact No. 14 in the 2011 Opinion], [Adv. Doc. No.-8, p. 4, ¶9(0)], (to which he transferred $99,386.90);
g. 20% of Clean Fuel International Corp., a/k/a Gulf Coast Fuels, [Finding of Fact No. 14 in the 2011 Opinion], [Adv. Doc. No. 8, p. 4, ¶ 9(c) ], (to which he transferred $26,500.00);
h. 10% of ComCon, [Feb.'2, 2011 Tr. 129:16-131:2], (to which he transferred $677,622.00); and
i. No interest in CapNet Advisors Incorporated (to which he transferred $11,240.00), although he was a director, [id. at 79:11-15].
28.The Debtor’s positions with the above-listed entities are as follows:
a. He served as a director for Chrysalis, [id. at 79:17-19];
b. From 2001 until the trial held in 2011, he held the title of Chief Executive Officer for CapNet Securities Corporation, [Adv. Doc. No. 94, Feb. 11, 2011 Tr. 53:20-21];
c. He served as a director of CapNet Risk Management, Inc., [Feb. 2, 2011 Tr. 80:3-7];
d. From 1996 to the date trial of the Adversary Proceeding was held in 2011, he served as president of Institutional Insurance Management, Inc., [Adv. Doc. No. 94, Feb. 11, 2011 Tr. 47:16-17];
e. From 1996 to the date trial of the Adversary Proceeding was held in 2011, he served as president of Institutional Capital Management, Inc., [Id. at 45:9-10];
f. From approximately 2002 to 2009, he served as a director of Dynalyst Manufacturing Corporation, [Feb. 10, 2011 Tr. 109:21-110:2];
g. He did not serve as a director or officer of Clean Fuel International Corp., a/k/a Gulf Coast Fuels; .
h. From 2006 to the date trial of the Adversary Proceeding was held in 2011, he served as a director of CapNet Advisors, Incorporated, ' [Feb. 2, 2011 Tr. 79:11-15]; [Adv. Doc. No. 94, Feb. 11 Tr. 62:8-17]; and
i. At some point, he also served as an officer and director of ComCon, [Adv. Doc. No. 94, Feb. 11, 2011 Tr. 79:8-14].
29.The Debtor retained signatory authority over the accounts of the following entities: (1) Institutional Capital Management, Inc.; (2) Cap-Net Securities Corporation; (3) CapNet Risk Management, Inc.; (4) CapNet Advisors, Incorporated; (5) Chrysalis; (6) Institutional Insurance Management, Inc.; and (7) Clean Fuel International Corp., a/k/a Gulf Coast Fuels. [Pi’s Ex. No. 169].
D. The Adversary Proceeding
30. As a result of the Debtor’s orchestration of the transfers of funds out of Chrysalis’s account to the Debt- or-Controlled Entities, Husky suffered damages in the amount of $163,999.38 — which represents the amount owed to Husky by Chrysalis for the goods that Husky delivered to Chrysalis (already defined as the $163,999.38 Debt). [Finding of Fact No. 15 in the 2011 Opinion]; [Pi’s Ex. No. 2].
31. On March 31, 2010, Husky filed Plaintiffs Original Complaint to Deny Dischargeability of Debt Pursuant to 11 U.S.C, § 523 (the “Complaint”), which initiated the Adversary Proceeding. [Finding of Fact No. 1 in the 2011 Opinion]; [Adv. Doc. No. 1],
32. On January 13, 2011, the Debtor submitted answers to Husky's interrogatories. [Pi’s Ex. No. 172]. Interrogatory No. 8(i) reads as follows:
[i]dentify (by name, address, and telephone number) every Person who caused any transfer of money to be made in any amount between November 2006 and May 2007 from Chrysalis to: (i) ComCon Manufacturing Services, Inc. ... and state the exact Dates and amounts of each such transfer of money each such Person made to the forgoing.
[Id.]. In response, the Debtor asserted that Marlin Williford made these transfers in his capacity as CFO for ComCon and Chrysalis and that he (i.e., the Debtor) “did not initiate nor authorize any of these transfers.” [Id. at p. 4],
33. At trial, no exhibits were introduced and no testimony was adduced indicating that the Debtor made any oral or written representations to Husky inducing Husky to enter into the Master Credit and Sales Agreement. [Finding of Fact No. 16 in the 2011 Opinion]. The only communication that the Debt- or ever had with Husky was a telephone conversation between Husky’s founder and president, Davis, and the Debtor after the parties had entered into the Master Credit and Sales Agreement and Husky had already shipped components to Chrysalis. [/&]; [see supra Finding of Fact No. 9],
IV. Credibility
A. Husky’s Witnesses
1. Daniel Lee Ritz, Jr.
The Court finds that the Debtor is not a credible witness. During his testimony at trial, he gave answers which directly contradicted answers he had previously given in discovery. These contradictory statements relate to material issues. For example, his answer to Interrogatory No. 8(i) contradicts his testimony at trial on a very important issue. Interrogatory No. 8(i) reads as follows:
[i]dentify (by name, address, and telephone number) every Person who caused any transfer of money to be made in any amount between November 2006 and May 2007 from Chrysalis to: (i) ComCon Manufacturing Services, Inc.... and state the exact Dates and amounts of each such transfer of money each such Person made to the forgoing.
[Finding of Fact No. 32], The Debtor’s answer was as follows: “Marlin Williford was the primary person who managed these accounts. Defendant did not initiate nor authorize any of these transfers.” [Id,,]; [Pi’s Ex. No. 172].
The language immediately above reflects a Shermanesque statement by the Debtor that he never initiated or authorized any transfers. Yet, at trial, under examination by Husky’s counsel, the Debtor unequivocally admitted that he did authorize such transfers, [Feb. 2, 2011 Tr. 132:2-8]. Moreover, he could not offer any reasonable explanation as to why his answers were blatantly contradictory. [Feb. 3, 2011 Tr. 25:15-26:4]. On the witness stand, he claimed that he interpreted the interrogatory to mean that Husky wanted to know whether the Debtor personally transferred the funds — and the Debtor testified that he did not. [Feb. 2, 2011 Tr. 3-19]. This explanation is weak because the Debtor conceded that he authorized certain individuals to make transfers without the need for them to obtain his approval for each and every transfer. [Id. at 132:2-5]. Thus, his explanation is disingenuous, if not downright misleading.
. And there is plenty more. For example, at trial, the Debtor testified that he disputes that Chrysalis owes any debt to Husky. [Id. at 91:1-3]. The Debtor then conceded he signed an affidavit on October 24, 2007 representing that Chrysalis did in fact owe a debt to Husky. [Id. at 96:21-23]; [Pi’s Ex. No. 167] (“I entered into good faith negotiations, on behalf of Defendant Chrysalis, to settle all claims, avoid litigation and obtain a reduction from Plaintiff for any debts Defendant Chrysalis may
All in all, the record is replete with the Debtor’s contradictions on several very germane issues in this suit. Additionally, his frequent inability to recall certain information was not coincidental. His ability to recollect was selective. Finally, the Debtor frequently gave non-responsive answers to questions which were unambiguous. His evasiveness and obfuscation further undermines his credibility. For all of the reasons set forth above, this Court finds the Debtor not to be a credible witness. The Court gives very little weight to his testimony.
2.Nicolas C. Davis
Davis was the president of Husky. The Court finds that his testimony is very credible, and the Court gives substantial weight to this testimony.
3. Nancy K. Finney
Finney worked as a comptroller for several of the Debtor-Controlled Entities for approximately four years. The Court finds that her testimony is very credible, and the Court gives substantial weight to this testimony. Of particular significance, she testified that the Debtor made the decisions to transfer large sums of cash out of Chrysalis’s operating account and into the accounts of other companies controlled by the Debtor. [Feb. 3, 2011 Tr. 127:2-19]; [Finding of Fact No, 26].
4. James D. Rogers
James D. Rogers (“Rogers”) was Vice-President of Corporate Finance of CapNet Securities Corporation for approximately two and a half years. The Court finds that his testimony is very credible, and the Court gives substantial weight to this testimony. Of particular significance, he testified that the Debtor ran all of the operations of the various companies in which he had an interest. [Feb. 3, 2011 Tr. 158:1-13]. He also testified that he did not participate in, or have knowledge about, any transfers of funds from Chrysalis to the Debtor-Controlled Entities, [id. at 162:10-19] — which is contrary to the testimony given by the Debtor. The Court believes
5. Richard Hollan
Richard Hollan (“Hollan”), at one time, owned shares of Institutional Capital Management, Inc. — which is an entity owned 40% by the Debtor. The Court finds that his testimony is very credible, and the Court gives substantial weight to this testimony. Of particular significance, Hollan testified that he has known the Debtor for approximately twenty-five years and does not have a high opinion of him. [Id, at 187:5-18]. Indeed, he testified that the Debtor is not trustworthy. [Id. at 187:15-16]. Finally, he testified that he is familiar with the Debtor’s business practices, and that the Debtor controls all of the flow of money relating to corporations which he controls. [Id. at 185:1-186:2]
B. The Debtor’s Witnesses
1. Heather Cheaney
The Court finds Ms. Cheaney to be credible, but does not find her testimony to be significant on any important points. Therefore, the Court gives Ms. Cheaney’s testimony little weight.
2. Daniel Lee Ritz, Sr.
While the Court finds Daniel Lee Ritz, Sr. to be a credible witness, the Court gives less weight to his testimony because it recognizes that many of his statements were — not unsurprisingly — aimed at helping his son’s case.
3. Craig Takacs
The Court finds Mr. Takacs to be a bit evasive in his responses to the questions posed to him. Accordingly, the Court gives little weight to his testimony.
4. L. Andrew Wells
The Court does not find ML Wells to be a credible witness and, therefore, gives his testimony little weight.
5. Marlin R. Williford
The Court finds Mr. Williford to be direct and forthcoming in his testimony. Accordingly, the Court finds Mr. Williford to be a credible witness and gives his testimony significant weight. However, his testimony did not concern the transfers of cash that the Debtor orchestrated out of Chrysalis’s operating account into the accounts of the Debtor-Controlled Entities.
V. Conclusions op Law
A. Jurisdiction, Venue, and Constitutional Authority to Enter a Final Judgment
1. Jurisdiction
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b). Section 1334(b) provides that “the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11 [the Code], or arising in or related to cases under title 11.” District courts may, in turn, refer these proceedings to the bankruptcy judges for that district. 28 U.S.C. § 157(a). In the Southern District of Texas, General Order 2012-6 (entitled General Order of Reference) automatically refers all eligible cases and proceedings to the bankruptcy courts.
The matter at bar is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I) because the Court must determine whether the $163,999.38 Debt is a personal obligation that the Debtor owes to Husky that is non-dischargeable. Additionally, it is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(0) because a determination of whether the $163,999.38 Debt is a non-dischargeable personal obligation of the Debtor necessarily affects the debtor-cred
2. Venue
Venue is proper under 28 U.S.C. § 1409(a) because the Adversary Proceeding arises under title 11 in that Husky seeks a .judgment of non-dischargeability pursuant to an express provision of the Code: namely, § 523(a)(2)(A). Alternatively, venue is proper because the Adversary Proceeding is related to the Debtor’s main Chapter 7 case.
3. Constitutional Authority to Enter a Final Judgment
In the wake of the Supreme Court’s issuance of Stern v. Marshall,
Alternatively, even if Stem applies to all of the categories of core proceedings brought under 28 U.S.C. § 157(b)(2), see In re Renaissance Hosp. Grand Prairie Inc.,
Finally, in the alternative, this Court has the constitutional authority to enter a final judgment in the Adversary Proceeding because Husky and the Debtor have consented, impliedly if not explicitly, to adjudication of this dispute by this Court. Wellness Int'l Network, Ltd. v. Sharif, — U.S. —,
B. Pursuant to the Fifth Circuit’s Remand Opinion, This Court Must Undertake a Three-Step Analysis to Determine if the $163,999.38 Debt is a Personal Obligation That the Debtor Owes to Husky That is Non-. Dischargeable
. In this § 523(a)(2)(A) action, Husky “must show its entitlement to relief by a preponderance of the evidence.” In re Ryan,
To prevail in this lawsuit, Husky must first prove that the Debtor is personally hable for the $163,999.38 Debt under applicable state law.
C. Piercing Chrysalis’s Veil Under State Law to Impose Personal Liability on the Debtor for the
$163,999.38 Debt
1. Step No. 1: Did the Debtor Commit “Actual Fraud” Under § 21.223?
a. The Two Avenues for Proving “Actual Fraud"
In its remand opinion, the Fifth Circuit held that a plaintiff may satisfy the “actual fraud” prong of § 21.223 by showing that the Defendant effectuated fraudulent transfers under TUFTA. Matter of Ritz,
To prove that these transfers were fraudulent, Husky must show that the Debtor “made the transferís] ... with actual intent to hinder, delay, or defraud [Husky].” Tex. Bus. & Com. Code Ann. § 24.005(a)-(a)(l)' (WestlawNext 2015). How can Husky do so? There are two separate and distinct avenues available. One is to introduce direct evidence that the Debtor actually intended to hinder, delay, or defraud Husky when he made the transfers of $1,161,279.90 to the Debtor-Controlled Entities. For example, adducing testimony from the Debtor himself admitting that he intended to hinder, delay,
The second approach for meeting this element is to introduce circumstantial evidence showing the defendant’s intent to hinder, delay, or defraud. In re 1701 Commerce, LLC,
(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 was incurred, 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;
(10) the transfer occurred shortly before or shortly after a substantial debt was incurred; and
(11) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor
Tex. Bus. & Com. Code Ann. § 24.005(b); Matter of Ritz,
In order to find the requisite intent, “several of these ‘badges of fraud’” must be present. Mladenka v. Mladenka,
Because “several” is far from specific, this Court, at the hearing held on December 16, 2016, addressed the meaning of this word and stated that Merriam-Webster’s Dictionary defined “several” as “being more than two but fewer than many.” [Tape Recording, Dec. 16, 2016 Hr’g at 2:06:44-2:07:30 P.M.]. Having determined that the dictionary definition is “more than two,” this Court then stated on the record that three would be sufficient. [Id. at 2:07:30-2:07:33 P.MJ. Indeed, the District Court of the Southern District of Texas has held as follows: “But there is no bright-line rule that more than two badges of fraud must be found. See Williams v. Houston Plants & Garden World, Inc., No. Civ. A. H-11-2545,
It is unclear whether the Court may only consider badges affirmatively and specifically pled by Husky or if the Court may 'sua sponte consider other badges that are present based upon the evidence before the Court. Compare Ritchie Capital Mgmt., LLC v. Stoebner,
In assessing each badge of fraud, it is necessary to ask this question: To which “debtor” does the particular badge refer? Given the circumstances in the dispute at bar, when this Court assesses whether each specific badge is present, the Court, in some instances, will be undertaking the analysis as if the “debtor” referred to in the particular badge is Chrysalis — as opposed to the Debtor himself; and in other instances, the Court will be undertaking the analysis as if the “debtor” referred to in the particular badge is the Debtor himself.
Finally, case law is clear that “[t]he Bankruptcy Court maintains full discretion to determine whether actual fraud existed in this matter and to assign a particular weight to each badge of fraud as it sees fit.” In re Piceinini,
b. Husky has raised six of the eleven enumerated badges set forth in TUF-TA, and this Court finds that five of these badges are present
Husky argues that the following badges are present: (1) the transfers were to an insider, [Adv. Doc. No. 80, Feb. 11, 2011 Tr. 6:23-7:1]; (2) the Debtor retained possession or control of the property transferred after the transfers were made, [Adv. Doc. No. 1, pp. 3-5]; (3) before the transfers were made, the Debtor had been sued or threatened with suit, [Adv. Doc. No. 80, Feb. 11, 2011 Tr. 7:21-8:2]; (4) the transfers were of substantially all of Chrysalis’s assets, [id. at 8:22-9:3]; (5) the value of the consideration received by Chrysalis was not reasonably equivalent to the value of the funds transferred, [id. at 9:4-16]; and (6) Chrysalis was insolvent or
The Court addresses each of these badges in turn.
1) The Transfers were to an Insider
This first badge considers transfers to an insider. This badge “is so significant that in some cases an insolvent debtor’s transfer to an insider has caused the court to make a finding of actual fraud in the absence of any other badges of fraud.” In re Toy King Dists., Inc.,
First, TUFTA defines “transfer” as “every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, and creation of a hen or other encumbrance.” Tex. Bus. & Com. Code § 24.002(12) (WestlawNext 2015). Second, TUFTA defines “insider”— in pertinent part — as “a corporation of which the debtor is a director, officer, or person in control.” Tex. Bus. & Com. Code § 24.002(7)(A)(iv).
There is no doubt that the Debtor orchestrated transfers of assets (in the form of funds on deposit in Chrysalis’s account) from Chrysalis’s account to the accounts of the Debtor-Controlled Entities. [Findings of Fact Nos. 15-23]; Matter of Smiley,
Moreover, “ ‘[t]he cases which have considered whether insider status exists generally have focused on two factors in making that determination: (1) the closeness of the relationship between the transferee and the debtor; and (2) whether the transactions between the transferee and the debtor were conducted at arm’s length.’ ” Williams v. Houston Plants & Garden World, Inc.,
, Further, the transfers orchestrated by the Debtor were hardly transactions conducted at arm’s length. See Williams,
In sum, there is no denying that the transfers of $1,161;279.90 from Chrysalis to the Debtor-Controlled Entities were transfers to insiders. See Williams,
2). The Debtor Retained Possession or Control of the Property Transferred After the Transfer
There is no question that the Debtor orchestrated transfers totaling $1,161,279.90 from Chrysalis’s account to the accounts of the Debtor-Controlled Entities. [Finding of Fact No. 23]. There is also no question that the Debtor had substantial control of each of the Debtor-Controlled Entities: he was the majority shareholder in most of the entities, held various director and officer positions at each of the entities, maintained signatory authority over these various accounts, and even wholly owned some of the companies. [Findings of Fact Nos. 27-29]. Under these circumstances, this Court finds that the Debtor retained possession or control of the $1,161,279.90 even after these funds were transferred out of Chrysalis’s account. See Nwokedi,
3) Before the Transfers were Made, the Debtor had been Sued or Threatened with Suit
In 1701 Commerce, LLC, the court found this badge present when the creditors made demands on the debtor for payment before the debtor made transfers.
Here, Davis, the President and CEO of Husky, credibly testified that on or around January 12, 2007, i.e., after certain checks from Chrysalis bounced, he spoke with the Debtor. [Finding of Fact No. 9]. In that conversation, Davis not only demanded payment, but also actually threatened to sue: he informed the Debtor that if money was not wired immediately to pay for the products that Husky had delivered to Chrysalis, then Husky “would have to pursue litigation.” [Id.]. Davis did not specify
After the demand for payment and the threat of a lawsuit, the Debtor continued to make transfers out of Chrysalis’s accounts to the accounts of the Debtor-Controlled Entities. In total, the Debtor effectuated transfers of $720,458.00 to the Debtor-Controlled Entities after the threat. [Finding of Fact No. 23]. The Court finds that this is ample evidence to prove that transfers were' made after Husky threatened to file suit. 1701 Commerce, LLC,
4) The Transfer was of Substantially All the Debtor’s Assets
Numerous courts have found that for this badge to be present, a significant percentage of the debtor’s assets must have been transferred. For example, in 1701 Commerce, LLC, the court held that this badge was present because the property transferred was “six or seven times the combined value of [the debtor’s] remaining assets.”
Here, as of March 31, 2006, Chrysalis had assets of approximately $2.4 million. [Finding of Fact No. 3(c) ]. Further, from January to March 2007, Chrysalis had assets valued at $2.1 million. [Finding of Fact No. 3(f) ]. Meanwhile, between November of 2006 and May of 2007, the Debt- or caused $1,161,279.90 to be transferred from Chrysalis to the Debtor-Controlled Entities. [Finding of Fact No. 23]. $1.13 million is approximately one-half of Chrysalis’s assets, but is not — like the cases cited above — 85% or 95% of total assets. Stated differently, 50% of total assets is not substantially all of Chrysalis’s assets. See ASARCO,
Under these circumstances, the Court finds that this badge of fraud is not present in the suit at bar.
5) The Value of the Consideration Received was Reasonably Equivalent to the Value of the Asset Transferred
“The test for ‘reasonably equivalent value’ is whether the net economic effect of the transfer was a dissipation of the debtor’s estate.” In re WRT Energy Corp.,
There is no evidence whatsoever that Chrysalis received any consideration from the Debtor-Controlled Entities; the transfers of $1,161,279.90 simply dissipated Chrysalis’s estate. The Debtor testified that he believed these transfers occurred to cover the “operational cash flow needs of Chrysalis” and to cover repayment of various loans that the Debtor-Controlled Entities had extended to Chrysalis. [Finding of Fact No. 25]. Stated differently, the Debtor wants this Court to believe that Chrysalis owed debts (both loans and trade debt) to the Debtor-Controlled Entities and that therefore the transfers of $1,161,279.90 effectuated by the Debtor were done to pay off debts incurred by Chrysalis in the ordinary course of its business. However, there was no documentation introduced into evidence to substantiate that the Debtor-Controlled Entities extended any loans or provided any goods or services to Chrysalis, [id.] and given the Debtor’s very poor credibility, the Court gives no weight to this particular testimony. Thus, given that the record here is much like the record and the holdings in Williams and Porras, this Court holds that Chrysalis received no value in exchange for the $1,161,279.90 transfers that the Debtor made to the Debtor-Controlled Entities. See Williams v. Houston Plants & Garden World, Inc.,
6) The Debtor was Insolvent or Became Insolvent Shortly After the Transfers were Made
Under TUFTA, a debtor is insolvent if “the sum of the debtor’s debts is greater than all of the debtor’s assets at a fair' valuation,” and a debtor is presumed to be insolvent if the debtor does not pay its debts as they become due. Tex. Bus. & Com. Code. § 24.003(a)-(b) (WestlawNext 2015); see also ASARCO,
Indeed, there is sufficient evidence proving that Chrysalis was insolvent before the Debtor ever began making the numerous transfers to the Debtor-Controlled Entities in the fall of 2006. [See Findings of Fact Nos. 3(a)~(h) ]. First, Finney credibly testified that on or around October 2006, Chrysalis became unable to pay its hills and obligations as they became due. [Feb. 3, 2011 Tr. 130:10-17]. Second, she testified that Chrysalis was unable to pay its payroll taxes to the government. [Id. at 134:9-19], Third, Chrysalis had accounts payable of $640,031.54 that were more than 90 days past due as of April 21, 2006. [Finding of Fact 3(d) ]. Fourth, the Debtor conceded that “Chrysalis was having some pretty serious problems and was unable to pay its bills, at least some of them, as and when they became due as far back as April 21, 2006” and that the situation never improved. [Finding of Fact No.'3(h) ]; [Feb. 3, 2011 Tr. 22:20-23:23].
Fifth, the Debtor himself testified that “the company’s [i.e., Chrysalis’s] assets were less than what was owed.” [Adv. Doc. No. 94, Feb. 11, 2011 Tr. 91:22-92:4]. Sixth, as already noted, he testified that he was not aware of any time when the assets were greater than the liabilities. [Id. at 92:11-16]; [Finding of Fact No. 3(a) ]. Seventh, as elicited by his attorney, the Debt- or testified that Chrysalis “needed capital” the entire time he was involved with the company. [Adv. Doc. No. 94, Feb. 11, 2011 70:22-71:6].
Because the evidence overwhelmingly shows that Chrysalis’s debts always exceeded its assets, this Court finds that Chrysalis was insolvent before any of the transfers of $1,161,279.90 were made, was insolvent during the time when all of the transfers were made, and remained insolvent after all of the transfers were made. Further, there is a presumption of Chrysalis’s insolvency because the evidence demonstrates convincingly that it was unable to pay its debts as they came due; and the Debtor certainly has not overcome this presumption based upon the record made at trial. For all of these reasons, this badge of fraud is present and weighs heavily in favor of a finding of the Debtor’s actual intent to hinder, delay, or defraud Husky.
In sum, out of the eleven enumerated badges of fraud set forth in TUFTA, Husky has raised six of these badges, and this Court finds that five of them are present. As already noted previously, the presence of five badges of fraud is sufficient, see In re Soza,
c. With respect to the five enumerated badges of fraud under TUFTA that Husky did not raise, the Court, sua sponte, now considers these badges and finds that four of them are present
Husky did not raise the other five badges of fraud expressly set forth in § 24.005(b) of TUFTA, but the Court will address them sua sponte.
1) The Transfers Were Concealed
Black’s Law Dictionary defines “conceal” as “the act of refraining from disclosures; ... an act by which one prevents or hinders the discovery of something.” Black’s Law dictionary 282 (7th ed. 1999). In In re Adeeb, the court found that there was no concealment when a debtor attempted to undo all the transfers made before he filed his bankruptcy petition.
Here, when Chrysalis filed its Chapter 7 petition on June 12, 2008, the Debtor, in his capacity as Chrysalis’s director, signed the SOFA, thereby representing under oath that all representations made therein were accurate. [Finding of Fact No. 4]. Yet, they were not. This is so because section 10 of the SOFA, entitled “other transfers,” required Chrysalis (through its director, the Debtor) to do the following: “List all other property, other than property transferred in the ordinary course of the business or financial affairs of the debtor, transferred either absolutely or as security within two years immediately preceding the commencement of this case.” [Case No. 08-33793, Doc. No. 3, p. 47 of 54]. The sworn answer given by the Debt- or was that Chrysalis had not transferred any property within two years preceding the filing of its bankruptcy petition (i.e., within the two years prior to June 12, 2008). [Finding of Fact No. 4]. The Debtor thus completely failed to disclose that Chrysalis had transferred cash totaling $1,161,279.90 to the Debtor-Controlled Entities for the seven-month period between November 2006 and May 2007— which is within the two-year window of June 12, 2008. [Findings of Fact Nos. 15-23]. These transfers were definitely not within the ordinary course of Chrysalis’s business or financial affairs; there is absolutely no documentation evidencing that these transfers were payments made by Chrysalis in the ordinary course of its business to retire loans or trade debt extended by the Debtor-Controlled Entities. [Finding of Fact No. 25].
Thus, Chrysalis’s SOFA reflects that the Debtor was concealing from Chrysalis’s creditors (including Husky) the transfers of $1,161,279.90 that the Debtor had orchestrated from Chrysalis’s account into the accounts of the Debtor-Controlled Entities. The Court likens this to: (1) the debtors’ failure to disclose at the first meeting of creditors in Waddle the transfers that they had made there; and (2) the debtor’s failure in Smiley to reverse the transfers. Further, the Debtor made no attempt to reverse the transfers like in Adeeb; nor did the Debtor, in his capacity as director of Chrysalis, take it upon himself to file an amended SOFA disclosing the transfers totaling $1,161,279,90. Compare Williams,
Under all of these circumstances, this Court finds that that the Debtor concealed from Husky the transfers of $1,161,279.90 to the Debtor-Controlled Entities when he failed to disclose them on Chrysalis’s SOFA and when he failed to disclose on Chrysalis’s Schedule B that the company might have a cause of action against him, personally. Thus, this badge of fraud is present and weighs in favor of a finding of the Debtor’s actual intent to hinder, delay, or defraud Husky. The Court gives this badge significant weight in no small part because the Debtor made material misrepresentations under oath on Chrysalis’s SOFA and Schedule B. His failure to disclose the transfers of $1,161,279.90 and the cause of action against himself are not “Matters so trivial in nature as to have but little effect upon the estate and upon creditors .... ” Waddle,
2) The Debtor Absconded
There is no evidence that the Debtor absconded. This badge is not present.
3) The Debtor Removed or Concealed Assets
In Vaso Active Pharmaceuticals, Inc., the court found this badge present when the defendants received payments from the debtor that the debtor failed to disclose to creditors.
Here, the Debtor did not disclose to Husky or any other creditors the amounts of and reasons for the transfers of $1,161,279.90 to the Debtor-Controlled Entities. Husky was entitled to payment for providing products to Chrysalis, and like the creditor in Vaso, was kept in the dark by the Debtor about his transfers of $1,161,279.90 to the Debtor-Controlled Entities. This is sufficient evidence for this Court to find that the Debtor concealed Chrysalis’s assets. Indeed, the evidence presented at trial also leads this Court to find that the Debtor, by transferring the $1,161,279.90 out of Chrysalis’s account into the accounts of the Debtor-Controlled Entities, removed assets of Chrysalis— “which is sufficient proof of this badge of fraud even without a finding of concealment.” See Tow,
The last invoice Chrysalis received from Husky was on January 9, 2007. [See Findings of Fact Nos. 7 & 8]. And, there is no question that Chrysalis owed Husky the amount of $163,999.38 on or about this date. [Findings of Fact Nos. 7 & 30]. Under § 24.002(5), debt “means a liability on a claim” and under § 24.002(3), claim “means a right to payment or property, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.” Here, the $163,999.38 Debt is a right to payment that Husky holds against Chrysalis that is liquidated. Thus, there is no question that the $163,999.38 Debt is a “debt” under TUFTA. The question is whether the $163,999.38 Debt is a “substantial debt.”
The Court finds that this is a substantial debt. The Court makes this finding because a review of the schedules of non-insider unsecured creditors that Chrysalis filed in its Chapter 7 case reflects that Chrysalis represented that the debt owed to Husky was $162,487.65 — which is by far and away one the largest debts of the numerous unsecured debts set forth in Chrysalis’s schedules. [Finding of Fact No, 5(e) ]. Most of the unsecured debts scheduled by Chrysalis are under $5,000.00; there are some debts in the $10,000.00 to $50,000.00 range; one debt totals $141,070.68; and only one debt exceeds the amount owed to Husky, and that is the debt for $228,000.00 to Arrow Electronics. [Id.]. Thus, Husky is the holder of the second largest non-insider unsecured debt in Chrysalis’s case, and this debt (amounting to $163,999.38) represents approximately 10% of the total amount of non-insider unsecured debts. Under these circumstances, this Court finds that the debt owed by Chrysalis to Husky was a “substantial debt” as of January 9,2007.
So, the question is now whether the transfers orchestrated by the Debtor out of Chrysalis’s account into the accounts of the Debtor-Controlled Entities took place “shortly before” or “shortly after” January 9, 2007. The evidence reflects that many of these transfers occurred from November 10, 2006 up to January 9, 2007 — with the total amount of these transfers coming to $414,322.00. [Pi’s Ex. No. 5]; [Finding of Fact No. 23]. The evidence also reflects that many of these transfers occurred from January 9, 2007 to May 11, 2007— with the total amount of these transfers coming to approximately $720,458.00. [Pi’s Ex. No. 5]; [Finding of Fact No. 23]. The Court finds that the transfers that occurred for the two months prior to January 9, 2007 occurred sufficiently “shortly before” the substantial debt was incurred that this badge is satisfied. The Court further finds that the transfers that occurred for the four months immediately after January 9, 2007 occurred sufficiently “shortly after” the substantial debt was incurred; and that therefore, this badge is also satisfied in this respect.
For all of these reasons, the Court finds that this badge of fraud is present and weighs heavily in favor of a finding of the Debtor’s actual, intent to hinder, delay, or defraud Husky.
5) The Debtor Transferred the Essential Assets of the Business to a Lienor Who Transferred the Assets to an Insider of the Debtor
One of the Debtor-Controlled Entities— ComCon — was a lienor by virtue of the fact that it held a security interest on virtually all of Chrysalis’s assets. [Finding of Fact No. 3(e) ]. The Debtor oversaw the transfer of $677,622.00 from Chrysalis’s account to the account of ComCon, [id]; therefore, the Debtor transferred essential assets of Chrysalis to a lienholder (i.e., ComCon). The Debtor was both an officer and director, as well as a 10% shareholder, of ComCon, [Findings of Fact Nos. 27(h) & 28(i) ] — which means that the funds that the Debtor transferred from Chrysalis’s account to ComCon’s account was in fact a transfer of assets to an insider of the Debtor. See Tex. Bus. & Com. Code § 24.002(7)(A)(iv) (defining “insider” — in pertinent part — as “a corporation of which the debtor is a director, officer, or person in control.”); see also § 101(31)(A)(iv) (Code section defining “insider” as a “corporation of which the debtor is a director, officer, or person in control”). Thus, Chrysalis transferred essential assets out of its business to a lienholder (ComCon), a company on whose account the Debtor had signature authority and therefore could ensure that its funds could be used to pay down this corporation’s debt that the Debtor himself had personally guaranteed — circumstances that effectively constitute ComCon’s transferring the funds to the Debtor himself. Under these circumstances, the Court finds that this badge of fraud is present and favors a finding of the Debtor’s actual intent to hinder, delay, or defraud Husky.
d. There Are Two Additional Badges Not Expressly Enumerated in § 21.005(b) of TUFTA that Reveal the Debtor’s Intent to Hinder, Delay, or Defraud Husky
TUFTA states that when determining whether a transfer was fraudulent, “consideration may be given, among other factors, to” the eleven enumerated badges of fraud. Tex. Bus. & Com. Code § 24.005(b) (emphasis added). Further, the Fifth' Circuit has held that the eleven factors set out in TUFTA are “non-exclusive.” In re Soza,
1) The Debtor’s Lack of Credibility
•At the hearing held in this Court on December 16, 2016, counsel for Husky argued that because the list of badges is “non-exclusive,” an additional “badge of fraud” could be the Debtor’s lack of personal credibility. [Tape Recording, Dec. 16, 2016 Hr’g at 1:56:40-1:57:52 P.M.]; See e.g„ CRCGP,
The Fifth Circuit has found that “debtors with business acumen ... are to be held to a higher standard.” In re Jordan,
Thus, the Debtor, as an experienced businessman, should know that when there are approximately 176 intercompany transfers between entities in which he holds interests, [Finding of Fact No. 23], for such transfers to be considered “repayment of loans,” there must be supporting documentation. Bartley Tex. Builders Hardware, Inc. v. Swor, No. 07-03280,
2) The Debtor Lied on Chrysalis’s SOFA and Schedule B
Deceit committed in bankruptcy schedules and SOFAs comes with grave consequences. In one case, the Fifth Circuit vacated a confirmation order and an order authorizing conversion from Chapter 7 to Chapter 13 when the debtor committed fi-aud because he was fully aware of two judgments against him exceeding $500,-000.00 — but failed to list them on his schedules. In re Nikoloutsos,
Here, the Debtor lied on Chrysalis’s SOFA As stated previously, the Debtor had a duty to disclose the transfers Chrysalis made in the two years preceding its petition date of June 12, 2008. [Finding of Fact No. 4], The transfers of $1,161,279.90 made to the Debtor-Controlled Entities from November 2006 through May 2007 were within this two-year window. The Debtor admitted that these transfers occurred, [Findings of Fact Nos. 15-23], and therefore, knew they happened during that time, but he nevertheless failed to disclose them on Chrysalis’s SOFA. [Case No. OS-33793, Doe. No. 3, p. 47 of 54]. Moreover, on Chrysalis’s Schedule B, the Debtor, in his capacity as the director of Chrysalis completing and filing this schedule, failed to set forth that Chrysalis had a claim against him personally for his orchestration of the transfers of $1,161,279.90 out of Chrysalis’s account into the account of the Debtor-Controlled Entities. Therefore, the Court concludes that the omissions on Chrysalis’s SOFA and Scheduled are additional “suspicious facts” that weigh against the Debtor and evidences his actual intent to hinder, delay, or defraud Husky.
e. Summary of All Thirteen of the Badges of Fraud Analyzed Above
This Court has reviewed thirteen badges of fraud — the eleven enumerated badges set forth in TUFTA, plus two other badges that are particularly germane to the suit at bar. Of these thirteen badges of fraud, Husky raised seven of them, six of which are present. This Court, sua sponte, has reviewed six other badges, five of which are present. Thus, a total of eleven badges of fraud are present. The chart set forth below summarizes the badge of fraud analysis that this Court has undertaken:
[Editor’s Note The preceding image contains the references for footnote
Eleven badges are more than sufficient to find that the Debtor intended to hinder or delay Husky’s collection of the $163,999.38 Debt, or to defraud Husky out of recovering the $163,999.38 Debt. See Mladenka,
In its remand opinion, the Fifth Circuit stated that in this Court’s original opinion, this Court “never drew the inference from its factual findings that [the Debtor’s] transfers here were made ‘with actual intent to hinder, delay, or defraud any creditor.’ ” Matter of Ritz,
f The Debtor Has Failed to Rebut the Presumption of Fraud Raised by the Presence of the Eleven Badges Referenced Above
A finding of fraud raised by the presence of multiple badges “may be rebutted if a legitimate purpose exists for the transfers.” 1701 Commerce, LLC,
Courts have accepted a number of purposes as legitimate, including raising capital, restructuring financial obligations, releasing guaranties, seizing upon good investment opportunities, and encouraging management’s financial commitment to an enterprise. In comparison, other courts have rejected purported purposes as illegitimate when the transfers deviated from standard business practices, were poorly documented, were intended to convert non-exempt assets into exempt property, or were supported only by the testimony of a witness found not to be credible. Four factors identified by the Fifth Circuit to gauge whether a transfer’s alleged purpose was legitimate include whether the transfer was: (1) pursuant to a standard business practice; (2) an arm’s-length transaction; (3) voluntary or effectively forced upon the debtor; and (4) for proper consideration
1701 Commerce, LLC,
Set forth below is a discussion of various arguments articulated by the Debtor in an effort to rebut the presumption of fraud raised by the numerous badges that are present. The Court finds that none of the Debtor’s arguments fall within the “legitimate purpose” categories articulated by the Fifth Circuit and other courts.
1) Even if the Debtor Infused Funds into Chrysalis He Cannot Overcome this Court’s Conclusion that He Hindered, Delayed, or Defrauded Husky under TUFTA
The Debtor argues that he has rebutted Husky’s evidence on “actual fraud” by introducing evidence that the Debtor, although he orchestrated withdrawals of $1,161,279.90 out of Chrysalis’s account, also saw to it that cash was infused into Chrysalis. Indeed, at the post remand
The Court rejects this argument. It does so because there is no proof of any infusion of $2.4 million into Chrysalis during the first half of 2007 — i.e., when much of the $1,161,279.90 transfers orchestrated by the Debtor took place. Indeed, the Debtor himself testified that the $2.4 million infusion occurred in 2005 and 2006, with approximately $2.3 million of this total being infused in 2005. [Finding of Fact No. 3(b) ]. Thus, during the first half of 2007, the Debtor was draining Chrysalis of cash, and he has offered no acceptable explanation of why he orchestrated these transfers. The Debtor has failed to prove “by a preponderance of the evidence[ ] that [he] had a legitimate purpose in making the transfer.” SMTC,
Even assuming, however, that the Debt- or did infuse $2.4 million of cash into Chrysalis during the first half of 2007, he cites no case law that these circumstances overcome the presumption of fraudulent intent relating to his orchestration of the transfers of $1,161,279.90 to the Debtor-Controlled Entities. Nonetheless, this Court has found one case where a bankruptcy court addressed the issue in a somewhat similar fact pattern.
In In re Scarpello,
The Creditor’s strongest argument lies under § 523(a)(6) because unquestion-, ably the actions of the Debtor caused the Creditor an injury in her property interest in the proceeds. The Debtor’s actions were the effective conversion of the account proceeds for the Debtor’s benefit and use. It is clear that the Debtor’s wrongful conduct in converting the proceeds was an intentional act, but the evidence failed to demonstrate that the Debtor, at all times, intended to cause the Creditor the requisite injury. The Debtor’s replenishing of the account through subsequent deposits of proceeds from severance pay and retirement funds, after she had made some initialwithdraivals, is more probative of her intent not to cause the Debtor injury. Moreover, her subsequent offers to make installment payments and utilize the perceived equity from the sale of her home in satisfaction of the debt, negates the 'requisite showing of subjective intent to injure the Creditor. The Debtor’s loss of employment, dissolution of her marriage and the attendant loss of benefits from her former spouse, effectively precluded her from performing her stated intent to reimburse the Creditor. The Court finds the Debtor’s testimony that she always intended to and still intends to reimburse the Creditor for her .conversion of the account proceeds credible. Therefore, the Creditor failed to establish all of the requisite elements. Accordingly, the Court finds the debt owed by the Debtor to the Creditor dischargea-ble under § 523(a)(6).
Id. at 704-05 (emphasis added).
There is no question that the bankruptcy court in Scarpello found that the debt- or’s replenishing her account through subsequent deposits tended to prove that she did not intend to cause injury to the creditor. If the Scarpello court had stopped there, this Court would find this case fairly persuasive support for the argument lodged by the Debtor here. However, the Court in Scarpello went on to observe that the debtor offered to pay back the debt that was the subject of the lawsuit, not only by making installment payments but by selling her homestead and using the sale proceeds to pay the creditor. Id. It was this offer made by the debtor that seemed to convince the Scarpello court of the debtor’s lack of intent to defraud the creditor. In the suit at bar, there is no evidence whatsoever that the Debtor himself has ever offered to pay the $163,999.38 Debt or to sell any of his personal assets to help pay a portion of this debt. In this Court’s view, the distinction is material; and therefore, this Court does not find the Debtor’s argument persuasive.
There is a further point. The statute requires a plaintiff to prove that the defendant, through his actions, intended to “hinder, delay, or defraud” the plaintiff. Tex. Bus. & Com. Code § 24.005(a)(1) (emphasis added). The court in In re Brentwood Lexford Partners, LLC,
Under both the Bankruptcy Code and Texas law, the intent to hinder or delay or defraud are three separate elements. Each one on its own may make a transfer fraudulent. Thus, an intent merely to delay, but not ultimately prevent, a creditor from being repaid is generally sufficient to trigger the requisite culpability required by the statute.
Id. at 262-63; see also Matter of Perez,
The Bankruptcy Code does not define an intent to “hinder” or an intent to “delay.” According to the Oxford EnglishDictionary, the term “hinder” means to “keep back, delay; impede; obstruct; prevent.” It defines “delay” as “put off to a later time; postpone, defer/’ In keeping with this plain meaning, courts have held that a debtor acts with an intent to “hinder” if he or she acts with “... an intent to impede or obstruct” creditors and an intent to “delay” if he or she acts with “... an intent to slow or postpone creditors.” Others have stated more generally that in order to act with “intent to hinder or delay” is to “act improperly to make it more difficult for a creditor to collect a debt.” Whether a debtor acts with “actual intent to hinder, delay, or defraud” is a fact-specific inquiry.
Id. at *17 (internal citations omitted).
Here, Husky has argued that even if this Court does not find that the Debtor defrauded Husky by making the transfers of $1,161,279.90 to the Debtor-Controlled Entities, the Debtor’s actions certainly hindered or delayed Husky’s ability to collect the $163,999.38 Debt. [Adv. Doc. No. 129, pp. 6-8]. The Court agrees. It is without doubt that by orchestrating the transfers of the $1,161,279.90 from Chrysalis to the Debtor-Controlled Entities, -the Debtor hindered Husky because such actions “ke[pt] back, delay[ed], impede[d], obstructed], and prevent[ed]” Husky’s collection efforts. Wiggains,
Thus, even if this Court accepted the Debtor’s argument that his infusion of funds totaling $2.4 million into Chrysalis negates any intent to defraud Husky — and the Court most certainly does not accept this argument — the Court would still find that the infusion of the $2.4 million does not negate the hindering and delaying of Husky’s ability to collect the $163,999.38 Debt by the Debtor’s transferring of $1,161,279.90 out of Chrysalis’s account into the accounts of the Debtor-Controlled Entities.
2) The Debtor Failed to Prove that the Transfers to the DebttevControIIed Entities were Repayments of Loans
The Debtor also attempts to justify the transfers to the Debtor-Controlled Entities as “repayment of loans.” [Finding of Fact No. 25]. This argument woefully fails. To prove such a defense, the Debtor must have done so by a preponderance of the evidence and shown this Court that he “had a legitimate purpose in making the transferfe].” SMTC,
3) The Debtor’s Personally Guaranteeing One of Chrysalis’s Debts in 2007 Does Not Overcome this Court’s Conclusion that that He Hindered, Delayed, or Defrauded Husky under TUFTA
Another argument that the Debt- or raises to justify the transfers to the
The Court agrees with Husky. The Court is required to evaluate all the facts and circumstances surrounding the transfers, see Chastant,
Thus, the Debtor’s arguments do not overcome the presumption of fraud raised by the eleven badges of fraud already discussed herein. The presence of these eleven badges of fraud establishes the Debt- or’s intent to delay, hinder, or defraud Husky under TUFTA; and, because Husky has met its burden under TUFTA, Husky has therefore proven that the Debt- or committed “actual fraud” under § 21.223. Husky has therefore satisfied the first test of § 21.223.
2. Step No. 2: Was the Debtor’s “actual fraud” for his direct personal benefit?
The second part of the test to consider in order for the Court to find that Husky may pierce Chrysalis’s corporate veil under § 21.223(b) requires the Debtor to have derived a personal benefit from the transfers that he orchestrated to the Debt- or-Controlled Entities. Tex. Bus. & Org. Code § 21.223(b); Matter of Ritz,
In the first instance, this Court does not need to worry about the definition of “personal benefit.” This is so because the Debt- or himself specifically testified that the transfers he made to the Debtor-Controlled Entities were for his personal benefit. [Finding of Fact No. 24]. Specifically, counsel for Husky asked: “It would have personally benefitted you for all of the entities that you owned an interest in to get $1.2 million, collectively, from Chrysalis; would it not?” [Id.]. In response, the Debtor admitted that: “[I]t would have benefitted me, yes, sir.” [Id.].
Further, the Debtor testified that it would have been a personal benefit to him for Chrysalis’s funds to be paid to the company for which he had a personal guaranty. [Id]. And, indeed, the Debtor saw to it that of the $1,161,279.90 that Chrysalis
Even if the Debtor had not conceded that the transfers of $1,161,279.90 personally benefitted him, this Court would still hold that he did receive a personal benefit. Although the Fifth Circuit did not elaborate on what constitutes “personal benefit” in Ritz, it has issued rulings on this concept in other cases. Perhaps most analogous to the suit at bar is Thrift v. Estate of Hubbard. In that case, the veil was pierced to reach the shareholders when they used funds that should have been used to make payments to the corporation’s lender and instead were used to make payments to one of the shareholders. Thrift v. Estate of Hubbard,
In another case, In re Morrison, the majority stockholder and president of the company received a personal benefit when he knew of the “dire financial condition of his company,” made all the decisions regarding the company’s operations, and made a misrepresentation on financial statements in order to draw in business.
There are various circumstances when courts have found that an individual has not derived a personal benefit under § 21.223(b). For example, when the record fails to show whether the defendant deposited the funds in his own personal account or used them to purchase personal items or pay personal debts, there will be no finding of personal benefit. Solutioneers Consulting, Ltd. v. Gulf Greyhound Partners, Ltd.,
In the suit at bar, the Debtor’s behavior is more comparable to the cases in Hubbard, Spring Street, Morrison, JNS Aviation, and McCarthy. First, similar to Hubbard, the Debtor transferred funds from Chrysalis to ComCon, a corporation whose $1.0 million loan the Debtor had personally guaranteed, [Finding of Fact No. 15]; and by effectuating these transfers to ComCon, the Debtor put ComCon in a much better position to pay off the loan that the Debtor had personally guaranteed, [id]. Meanwhile, the transfers of these funds out of Chrysalis’s account resulted in Chrysalis not paying the debt it owed to Husky, a debt the Debtor had not personally guaranteed. [Finding of Fact No. 3(g)]. Second, similar to JNS Aviation, the Debtor used the funds to continue the businesses of his other companies instead of paying creditors of Chrysalis. [See Findings of Fact Nos. 15-25]. Third, all of the funds that were transferred out of Chrysalis’s account went into the accounts of the Debtor-Controlled Entities, and the Debt- or had a close connection to these entities, as he served as the only shareholder or the majority shareholder in most of these entities. [Finding of Fact No. 27]. This is remarkably similar to JNS Aviation and McCarthy, and the holdings there ring true here: if there were no other interested parties in these companies, how could any of these transfers not be for the Debt- or’s personal benefit? Finally, even if the transfers provided some benefit to the Debtor-Controlled Entities themselves, it must be remembered that § 21.223(b) requires only that Husky show that the transfers were “primarily for the' direct personal benefit” of the Debtor.” (emphasis added).
Under all of the circumstances described above, this Court finds that Husky has proven that the transfers from Chrysalis to the Debtor-Controlled Entities were made primarily for the Debtor’s personal benefit. Therefore, Husky has met its burden to prove both prongs of § 21.223 — i.e., actual fraud and personal benefit. In its remand opinion, the Fifth Circuit stated that “[i]f the bankruptcy court concludes on remand that [the Debtor’s] conduct satisfies the actual fraud prong of TUFTA and that the actual fraud was for [the Debtor’s] ‘direct personal benefit,’ ... then [the Debtor] is liable for Chrysalis’s debt, to Husky under Texas’s veil-piercing statute .... ” Matter of Ritz,
However, the analysis does not stop here. In its remand opinion, the Fifth Circuit made it clear that even if this Court finds that the Debtor personally owes the $163,999.38 Debt by virtue of Husky’s successful veil-piercing, this Court “must then address whether [the Debtor] should be denied a discharge under § 523(a)(2)(A), consistent with the Supreme Court’s opinion in this case.” Matter of Ritz,
3. Step'No. 3: Is the Debtor’s Personal Liability for the $163,999.38 Debt a Non-Disehargeable Obligation Under § 523(a)(2)(A)?
Section 523(a)(2)(A) states, in pertinent part for this suit, that a debtor will not receive a discharge “from any debt for money ... to the extent obtained by ... actual fraud.” The Supreme Court has declared that the phrase “to the extent obtained by” modifies “money,” not “any debt,” Cohen v. De La Cruz,
First, the record reflects that money was obtained. Specifically, the Debtor transferred $1,161,279.90 out of Chrysalis’s account into the accounts of the Debtor-Controlled Entities. [Finding of Fact No. 23]. Thus, the Debtor-Controlled Entities obtained money from Chrysalis. Indeed, as discussed in more detail below, the Debtor himself effectively obtained these monies from Chrysalis, as he made sure that a substantial portion of these funds were deposited into the account of ComCon, who had obtained a $1.0 million loan that the Debtor had personally guaranteed; and by moving funds from Chrysalis’s account into ComCon’s account, the Debtor put Com-Con into a much better position to pay off the large debt that the Debtor had personally guaranteed. Additionally, he ensured that a significant amount of the proceeds went into the account of IIM — which was one of the few companies in which he held a 100% interest. [Findings of Fact Nos. 18 & 27(d) ].
Second, the Debtor committed actual fraud when he transferred the $1,161,279.90 from Chrysalis’s account to the accounts of the Debtor-Controlled Entities. The badge of fraud analysis that this Court has already undertaken demonstrates that this is so. [See supra Part V.C.I.a.]. Indeed, the evidence reflects that the transfers of $1,161,279.90 from Chrysalis’s account to the accounts of the Debt- or-Controlled Entities all resulted from the Debtor’s actions. He — and he alone— was responsible for effectuating these transfers. [Finding of Fact No. 26],
Third, a personal debt of the Debtor arose due to the Debtor-Controlled Entities obtaining funds from the Debtor’s fraudulent conduct. This is so because of the veil-piercing statute of § 21.223(b). This statute imposes personal liability on the Debtor for the $163,999.38 -Debt. [See supra Part V.C.2]. There is no question that the creation of this personal obligation is directly traceable to — i.e., resulted from — the Debtor’s fraudulent actions in orchestrating the transfers of $1,161,279.90 out of Chrysalis’s account and into the accounts of the Debtor-Controlled Entities. Husky Inti. Elees., Inc.,
The fact that the creation of the $163,999.38 Debt itself — i.e., the obligation owed by Chrysalis to Husky — was not due to any fraud (but rather due to the fact that Chrysalis failed to pay the obligations that it owed to Husky under the Master Credit and Sales Agreement) does not change this conclusion. Moreover, the fact that Chrysalis — or, more precisely, the trustee of Chrysalis’s Chapter 7 estate— may have a non-dischargeable claim against the Debtor in the amount of $1,161,279.90 also does not change this conclusion.
There is one final point: for the Debt- or’s personal liability on the $163,999.38 Debt to be non-dischargeable under § 523(a)(2)(A), does the Debtor himself have to have personally received the cash of $1,161,279.90 that he transferred out of Chrysalis’s account — or is it sufficient to show that it was the Debtor himself who committed the fraud regardless of who actually received the money?
The Supreme Court has not expressly ruled on this issue. Several bankruptcy courts have, however, articulated three views as to whether a debtor must personally receive the money before allowing the exception to discharge under § 523(a)(2)(A). See, e.g., In re Wade,
The first view, which is that set forth hy the defendant, requires that the debtor personally receive the money that he obtained by fraud. The second approach, characterized as the “receipt of benefits theory,” requires only that the debtor derive a benefit from the money that the debtor obtained by fraud; whom the money was obtained for is irrelevant. Finally, the third approach holds that the exception applies whenever the debt- or fraudulently obtains money, irrespective of whether it is for himself and whether the debtor received any benefit.
In re Mones,
There- are no circuit courts that have adopted the first view. See, e.g., In re Brady,
This Court is bound by Fifth Circuit precedent, and therefore does not need to make a finding that the Debtor directly received the $1,161,279.90 that he transferred out of Chrysalis’s account; or, alternatively, make a finding that he indirectly benefitted from his transferring these monies out of Chrysalis’s account. Rather, this Court need only make a finding the $1,161,279.90 transferred from Chrysalis’s account to the accounts of the Debtor-Controlled Entities was done fraudulently by the Debtor — and this, the Court has already done.
Assuming, however, that this Court did have to make a finding that the Debtor benefitted from these transfers, the record demonstrates that he definitely did so.
In sum, the Debtor’s testimony that he received a personal benefit from the transfers of the $1,161,279.90 to the Debtor-Controlled Entities, combined with the stark fact that he had guaranteed a $1.0 million loan of ComCon and owned 100% of Institutional Insurance Management, is more than sufficient for this Court to hold that the Debtor was the recipient, either directly or indirectly, of the funds that he transferred out of Chrysalis’s account.
It is of course true that the transferor does not ‘obtai[n]’ debts in a fraudulent conveyance. But the recipient of the transfer — who, with the requisite intent, also commits fraud — can obtain assets by his or her participation in the fraud. If that recipient later files for bankruptcy, any debts ‘traceable to’ the fraudulent conveyance, will be nondischargeable under § 523(a)(2)(A). Thus, at least ‘’sometimes a debt ‘obtained by' a fraudulent conveyance scheme could be nondis-chargeable under § 523(a)(2)(A). Such circumstances may be rare because a person who receives fraudulent conveyed assets is not necessarily (or even likely to be) a debtor on the verge of bankruptcy, but they make clear that fraudulent conveyances are not wholly incompatible with the ‘obtained by' requirement.
Husky Int’l Elecs., Inc.,
Rare though these circumstances may be, they do exist here; and, therefore, this Court concludes that the Debtor’s personal obligation to Husky in the amount of $163,999.38 is a non-dischargeable debt under § 523(a)(2)(A).
The question now is whether the total amount of the non-dischargeable obligation that the Debtor owes to Husky is simply $163,999.38 — or an amount that is higher. The Court now addresses this issue.
4. Relief to be Awarded to Husky
a. Introduction
In the Complaint, Husky prayed for the following relief:
(i) Actual damages; (ii) Avoidance of all fraudulent transfers to the extent necessary to satisfy [Husky’s] claims; (iii) Exemplary damages; (iv) Prejudgment and post judgment interest at the maximum lawful rate; (v) Attorneys’ fees; (vi) Court costs; and (vii) All other relief to which [Husky] shall show itself to be justly entitled; together with a determination that the judgment entered may not be discharged by Defendant’s bankruptcy pursuant to 11 U.S.C. § 523(a).
[Adv. Doc. No. 1, p. 10, ¶ 26].
This Court will not grant the second category of relief sought by Husky because Husky did not plead for this relief in the Pre-Trial Statement; it did not reference § 550 in the Pre-Trial Statement; nor did it sue the Debtor-Controlled Entities (i.e., the recipients of the fraudulently transferred funds). See e.g., In re Hansen,
With respect to the remaining categories of specific relief requested by Husky, the Court grants this relief as discussed in greater detail below.
b, The Components of the Judgment to be Awarded to Husky
In In re Morrison,
1) Actual Damages Incurred by Husky
In its remand opinion, the Fifth Circuit issued the following holding: “If the bankruptcy court concludes on remand that Rita’s conduct satisfies the actual fraud prong of TUFTA and that the actual fraud was for Ritz’s ‘direct personal benefit,’ Tex. Bus. Orgs. Code Ann. 21.223(b), then Ritz is liable for Chrysalis’s debt to Husky under Texas’s veil-piercing statute .... ” Matter of Ritz,
In its remand opinion, the Fifth Circuit also stated that if this Court concluded that the Debtor is personally liable for the $163,999.38 Debt under § 21.223(b), then this Court must address whether the Debtor’s obligation is non-dischargeable under § 523(a)(2)(A). Matter of Ritz,
Thus, this Court grants Husky’s request for actual damages, with the specific amount being $163,999.38; and, moreover, this Court grants Husky’s request that the Debtor’s obligation for this amount be declared as non-dischargeable.
2) Pre- and Post-Judgment Interest
i. Pre-Judgment Interest
This Court has discretion to impose pre-judgment interest. See Williams
The determination for whether prejudgment interest should be awarded requires a two-step analysis: does the federal act creating the cause of action preclude an award of prejudgment interest, and if not, does an award of prejudgment interest further the congressional policies of the federal act. If prejudgment interest can be awarded under the two-prong test, whether such interest is awarded in any given case is within the court’s discretion.
Carpenters Dist. Council of New Orleans & Vicinity v. Dillard Dept. Stores, Inc.,
In the suit at bar, there is no provision of the Bankruptcy Code in general, or § 523 in particular, precluding an award of pre-judgment interest. Moreover, the Fifth Circuit has held that pre-judgment interest may be awarded in cases involving fraudulent transfers because it “furthers the congressional policies of the Bankruptcy Code” and “compensates the estate for the time it was without use of the transferred funds.” In re Tex. Gen. Petroleum Corp.,
Awarding pre-judgment interest also furthers the congressional purpose that the Code provide a discharge to only honest debtors. Grogan,
Therefore, for all the reasons set forth above, this Court, exercising its discretion,
Because no federal statute' sets the pre-judgment interest rate, the Court must look to state law. ASARCO LLC v. Americas Mining Corp.,
An award of pre-judgment interest will accrue from the “time demand is made or an adversary proceeding is instituted.” Floyd v. Dunson (In re Rodriguez),
ii. Post-Judgment Interest
28 U.S.C. § 1961(a) sets forth that interests “shall be. allowed on any money judgment in a civil case recovered in a district court.” This statute also “applies to judgments entered by a bankruptcy court.” Ocasek v. Manville Corp. Asbestos Disease Comp. Fund,
This Court’s award of post-judgment interest will accrue during the period from the date the judgment is rendered until the date the judgment is satisfied. La. Power & Light Co. v. Kellstrom,
3) Reasonable Attorneys’ Fees
With respect to Husky’s request for attorneys’ fees, the holding in Cohen is that a non-dischargeable debt in a § 523(a)(2)(A) encompasses not only the debt created by the fraud, but also an award of attorneys’ fees, among other damages. Stated differently, the word “debt” in § 523(a)(2)(A) encompasses any form of damage that can be causally linked to the conduct that gives rise to the non-dischargeable debt. Cohen,
Of course, under the so-called “American Rule,” each party pays its own attorneys’ fees arising out of litigation except when specific authority granted by statute or contract states otherwise “Since the Bankruptcy Code does not address whether creditors can recover attorney’s fees in non-dischargeability cases, they can do so if allowed by another statute or by contract.” In re Kirk,
The Court finds that there is a contractual basis for awarding attorneys’ fees to Husky. Paragraph 13 of the Master Credit and Sales Agreement reads as follows: “If Seller [i.e., Husky] engages legal counsel to enforce Seller’s rights under this Master Credit and Sales Agreement, Buyer [i.e., Chrysalis] shall pay Seller’s reasonable attorneys [sic] fees and costs incurred by Seller in connection with such efforts, whether or not litigation is commenced.” [Finding of Fact No. 6]. While the Master Credit and Sales Agreement is between Husky and Chrysalis, this Court nevertheless concludes that because Husky has pierced the corporate veil to impose the $163,999.38 Debt on the Debtor personally, the Debtor is also liable for the attorneys’ fees incurred by Husky in prosecuting the Adversary Proceeding. See Wachovia Secs., LLC v. Jahelka,
A key question is just exactly how much does prosecuting the Adversary Proceeding encompass? Does it mean that Husky should just recover its attorneys’ fees for trying the Adversary Proceeding in this Court in 2011? Or, does it mean that Husky should recover its attorneys’ fees for not only prosecuting the complaint at the trial in 2011, but also for prosecuting its appeals up to the Supreme Court and, additionally, for making post-remand arguments in this Court?
The term “adversary proceeding” is equivalent to the term “action”: both refer to a lawsuit. The term “action” is ambiguous, as it does not articulate whether the “action” is the first lawsuit or if it includes appeals. In Nigh v. Koons Buick Pontiac GMC, Inc.,
[Defining action in this way means it is possible for a ... plaintiff to obtain attorney’s fees for a state of litigation atwhich she does not prevail. If a plaintiff does not prevail before the district court, but later is determined to have successfully demonstrated a defendant’s liability, her actions are successful, and she may recover fees for work done at trial level.
Id. While the Nigh court made this analysis using TILA (Truth in Lending Act), this Court sees no reason why this same logic would not equally apply to the suit at bar.
Here, the Court finds that Husky has prevailed in proving that the Debtor committed actual fraud primarily for his personal benefit. Proving this was no simple task — Husky fervently argued its case all the way up to the Supreme Court and then continued making post-remand arguments in this Court. Similar to the plaintiff in Nigh, Husky should be compensated for this work. See, e.g., Coston v. Plitt Theaters, Inc.,
Further, this Court has the authority to determine what amount of fees are reasonable. Rule 7054(b)(2); Perkins v. Standard Oil Co.,
Additionally, the Court will also order the Debtor to pay Husky post-judgment interest on the total amount of attorneys’ fees ultimately awarded. The Fifth Circuit has held that interest on attorneys’ fees begins to accrue on the date of the judgment allowing recovery of attorneys’ fees and runs until the date the fees are paid in full. See Copper Liquor, Inc. v. Adolph
VI. Conclusion
During trial, the Debtor once stated that “you begin your entrepreneurial career with your dreams in full bloom and your integrity intact. Be sure that you finish you career with your dreams realized and your integrity still intact.” [Feb. 2, 2011 Tr. 73:22-74:4]. The Debtor further testified that he still lived his professional business life by this motto. [Id. at 74:7-8]. The Debtor’s actions here are wholly inconsistent with his highly cherished “integrity” — indeed, he will be finishing this part of his life with little integrity'at all.
The Debtor lost his integrity when he utilized Chrysalis as an entity to funnel money away from its creditors, such as Husky. He will now bear the consequences of his actions. Because the Debtor committed actual fraud for his personal benefit when he made the transfers of $1,161,279.90 from Chrysalis to the Debt- or-Controlled Entities, the Debtor became personally liable to Husky by virtue of the Texas veil-piercing statute, i.e., § 21.223(b). And, because the Debtor’s personál obligation to Husky is non-dis-chargeable under § 523(a)(2)(A), he is now liable for the following non-dischargeable amounts: (1) $163,999.38; (2) pre-judgment interest on the $163,999.38 Debt, which totals $57,766,62; (3) post-judgment interest of 1.05% per annum on the amount of $221,766.00 (representing the sum of $163,999.38 plus the pre-judgment interest amount of $57,766.62); (4) reasonable attorneys’ fees incurred by Husky (with the specific amount to be subsequently determined); and (5) post-judgment interest of 1.05% per annum on the amount of the reasonable attorneys’ fees incurred by Husky.
A judgment consistent with this Memorandum Opinion will be entered on the docket as soon as this Court makes a determination regarding the amount of reasonable attorneys’ fees to be awarded to Husky.
Notes
. Hereinafter, any reference to any section (i.e., §), unless otherwise noted, refers to a section in 11 U.S.C., which is the United States Bankruptcy Code, and any reference to "the Code” refers to the United States Bankruptcy Code. Further, any reference to a "Rule” is a reference to the Federal Rules of Bankruptcy Procedure.
. Husky's exhibits (i.e., "Pi’s Ex.”) were admitted throughout the trial. Specifically, Husky’s exhibit numbers 1 through 4, 6, 7, and 167 through 169 were admitted on February 2, 2011. Husky’s exhibit numbers 171, 172, 174, and 175 were admitted on February 3, 2011. Finally, Husky's exhibit number 5 was admitted on February 10, 2011.
.The Debtor’s exhibits (i.e., "Def’s Ex.”) were admitted throughout the trial. Specifically, the Debtor’s exhibits 38, 39, 42, 43, 55a, and 69 were admitted on February 10, 2011. The Debtor’s exhibits 1 through 11, 25.1 through 32.4, 45 through 49, 56, 57, 59.1, 59.2, 60, 61.1 through 61.3, 62.1 through 64,18, 65, 66, 67, and 68 through 68.18 were admitted on February 11, 2011.
. The Complaint also sought, in the alternative, a judgment of non-dischargeability based upon 11 U.S.C. § 523(a)(4) and § 523(a)(6). This Court disposed of these claims in the Debtor's favor; these rulings were upheld upon appeal; and the only claim now still at issue is Husky’s § 523(a)(2)(A) claim.
. Hereinafter, any reference to § 21.223(b) refers to this specific section of the TBOC.
. In finding that the “actual fraud” element of § 21.223(b) does not require a representation by the defendant, the District Court also cited a Texas appellate court opinion issued in 2012; Tryco Enters., Inc. v. Robinson,
.This section of the Texas Business and Commerce Code is often referred to as “TUFTA,” i,e„ the Texas Uniform Fraudulent Transfer Act, and will frequently be referred to as such herein. Hereinafter, any reference to “§ 24.005” refers to this specific section of TUFTA.
. The language from the remand opinion is as follows: "Accordingly, we must remand this case to the district court (and thence to the bankruptcy court) for additional fact finding as to whether Ritz’s conduct satisfies the actual fraud prong of TUFTA. This is so because, under Texas law, " ‘[i]ntent is a fact question uniquely within the realm of, the trier of fact.’ ” Matter of Ritz,
. In this Court’s memorandum opinion of August 4, 2011, this Court made a total of sixteen findings of fact. Ritz,
. While the UCC Financing Agreement was introduced into evidence, there was no security agreement put into the record evidencing that Chrysalis expressly gave a security interest in its assets to Virtra Manufacturing Corporation. Nevertheless, based upon the testimony adduced at the trial, it is clear to this Court that the Debtor believes that Chrysalis gave a lien to Virtra Manufacturing Corporation when it received “intercompany advances” from this entity.
. Despite the parties’ failure to introduce Chrysalis's schedules and statement of financial affairs into evidence, the Debtor did introduce into evidence the docket sheet for the Chrysalis case, and this Court has the right to take judicial notice of pleadings filed in the Southern District of Texas. SEC v. First Fin. Grp. of Tex.,
. Item 10 of the statement of financial affairs reads as follows: “List all other property, other than property transferred in the ordinary course of the business or financial affairs of the debtor, transferred either absolutely or as security within two years immediately preceding the commencement of this case.” [Case No. 08-33793, Doc. No. 3, p. 47 of 54],
. The order discharging the Debtor expressly set forth that certain debts are not discharged, including the following: "Debts that the bankruptcy court specifically has decided or will decide in this bankruptcy case are not discharged” as well as "Some debts which were not properly listed by the debtor.” [Main Case No. 09-39895, Doc. No. 32, p. 2 of 2],
. The Court focuses on this seven-month period because this is the relevant period when Chrysalis’s checks to Husky that bounced were being written. [Feb. 2, 2011 Tr. 11:8— 12].
,Previously, the Debtor had given sworn answers to interrogatories that he did not initiate the transfers, but that the transfers were initiated by Marlin Williford, who was chief financial officer for ComCon and Chrysalis. [Finding of Fact No. 32]. However, at trial, the Debtor testified that his answers to these interrogatories were incorrect and that it was in fact he who made the transfers, not Mr. Williford. [Feb. 3, 2011 Tr. 33:16-21],
. There is a difference of $26,500.00 between the figure of $1,161,279.90 (which represents the total amount of the transfers) and the figure of $1,134,780,00 (which represents the sum of $414,322.00 and $720,458.00). There is no question that the Debtor made transfers of $26,500.00 to Clean Fuel International Corp., a/k/a Gulf Coast Fuels, Inc. However, the record is unclear as to whether these transfers were made before Husky's threat of a lawsuit or after Husky’s threat of a lawsuit. Therefore, the Court has not included the figure of $26,500,00 in the “before and after the threat of a lawsuit” badge of fraud analysis. [See infra Part V.C.l.b.3].
. After the Fifth Circuit remanded the matter to this Court in August 2016, a status hearing was held, at which time the Court inquired of counsel for the parties as to whether they wanted to adduce additional testimony or introduce additional exhibits. They both declined. Accordingly, this Court has no reason to change its credibility findings from the findings made in the 2011 memorandum opinion. Hence, the credibility findings set forth herein are the same findings — with some additional citations to sources and footnotes.
. Since the Court made its credibility findings in its memorandum opinion of August 4, 2011, the Court has reviewed the schedules that Chrysalis filed in its Chapter 7 case. The Debtor, in his capacity as a director of Chrysalis, submitted these schedules under oath. In schedule F, the Debtor, on behalf of Chrysalis, represented that Chrysalis owed Husky a debt of $162,487.65 and this Schedule F further represented that Chrysalis did not dispute this amount. [Finding of Fact No. 5(e) ]. Thus, as of June 12, 2008, the date that the Schedule F was filed, the Debtor did not dispute that Chrysalis owed Husky a debt, a representation that directly contradicts his answer at trial that he disputes that Chrysalis owes any debt to Husky. This is additional evidence reflecting the Debtor's poor credibility.
. In making its findings of fact, this Court, even though it finds the Debtor not to be a credible witness, nevertheless cites his testimony, in some instances, as a basis for certain findings. The Court does so because the Debtor has been challenged on cross-examination and has owned up to the truth or, alternatively, the Debtor's testimony concerns a non-controversial point (at least in the Debt- or’s mind) about which he has no reason to obfuscate; or, alternatively, it is an admission against interest.
. The Master Credit and Sales Agreement between Husky and Chrysalis includes a choice of law provision stating that it is governed by Colorado law. [Pi's Ex. No. 1], However, in all of the hearings since 2011, neither party has ever asserted that Colorado law governs the Adversary Proceeding. Moreover, the Joint Pretrial Statement references solely Texas law and leaves no doubt that Husky seeks to pierce Chrysalis’s corporate veil to
. This Court notes that Chrysalis filed a Chapter 7 petition and that the Debtor, who signed Chrysalis’s SOFA in his capacity as its director, failed to disclose the transfers of $1,161,'279.90 that he withdrew from Chrysalis’s account and transferred to the accounts of the Debtor-Controlled Entities. [Finding of Fact No. 4], Additionally, in Chrysalis’s Schedule B, no disclosure was made in item 21 of any claim that Chrysalis has against the Debtor for his transferring the amount of $1,161,279.90 out of Chrysalis’s account into the accounts of the Debtor-Controlled Entities. [Id,]. Thus, the Chapter 7 trustee of Chrysalis's estate could have a cause of action on behalf of this estate against the Debtor for ' the amount of $1,161,279.90. In re Moore,
Regardless of whatever cause of action the Chrysalis Chapter 7 trustee might have and might bring against the Debtor, Husky is in no way deprived from standing to sue the Debtor on a veil-piercing theory under § 21.223(b) to recover the $163,999.38 Debt that Chrysalis owes to Husky. The Fifth Circuit made this clear in its remand opinion. Matter of Ritz,
. For a concise look of which badges of fraud are present in the suit at bar, see the chart included in the section entitled: “Sum-maty of All Thirteen of the Badges of Fraud Analyzed Above." See infra Part V.C.l.e.
. The undersigned judge has held that a bankruptcy court is bound by rulings issued by the district court in the district where the bankruptcy judge sits. In re DePugh, 409 B,R. 125, 131, 131 n.5 (Bankr. S.D. Tex. 2009). In ASARCO, the District Court for the Southern District of Texas issued an opinion containing one sentence that could be construed to mean that a plaintiff must actually plead a specific badge of fraud for the Court to consider it: "Lastly, there is not even a suggestion of the eleventh badge .... ” ASARCO v. Americas Mining Corp.,
. See supra note 23.
. Chrysalis, through the Debtor as its director, also scheduled debts owed to insiders, including a debt of $866,511.65 to ComCon and a debt of $1,620,912.53 to Institutional Capital Management, Inc. [Case No. OS-33793, Doc, No. 3, pp. 15 & 23 of 54], However, as already discussed herein, there is no documentary evidence that these entities extended loans to Chrysalis, and this Court gives no weight to the Debtor's testimony that such loans existed. The Court therefore does not take into account these alleged loans when making its determination that the bona fide debt of $163,999,38 that Chrysalis owes to Husky constitutes a "substantial debt” for purposes of evaluating this particular badge of fraud.
. For reference, the first eleven badges of fraud are enumerated in § 24.005(b) of TUF-TA. The twelfth and thirteenth badges (in italics) are additional badges not expressly enumerated in TUFTA that this Court finds appropriate to analyze because the TUFTA list is not exhaustive and these badges further suggest the transfers were made with fraudulent intent. 1701 Commerce, LLC,
. The Debtor orchestrated transfers of $1,161,279.90 out of Chrysalis's account, and . Chrysalis received no consideration in exchange for these transfers. [Findings of Fact Nos. 15-21]. And, when the Debtor signed Chrysalis's SOFA, there was no disclosure made of these transfers, which were clearly not in the ordinary course of Chrysalis’s business. [Finding of Fact No. 4], Further, when the Debtor signed Chrysalis's schedules, there was no disclosure in item 21 of any claim that Chrysalis might have against the Debtor for
. A cursory review of the Fourth Circuit’s decision in In re Rountree,
. Even if no Fifth Circuit precedent existed, leaving this Court to decide whether to adopt the first view or the second view, this Court would reject the first view and adopt the second view.
. The calculation is done for the period of March 31, 2010 through April 18, 2017 (i.e., up to the date that this Memorandum Opinion is entered on the docket). The calculation is done using 5% simple interest. Arete Partners, L.P. v. Gunnerman,
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. In addressing this issue, the Fifth Circuit has found that it is inappropriate to uphold an award of attorneys' fees when the corporate veil is not pierced or when the alter ego