John and Vassie Kelly owned a company called Jay & VMK, Corp. ("VMK"), of which Vassie was the President and John was the Vice-President. VMK owned an assisted living facility, which Christina Lopez and her company was interesting in purchasing.
In March of 2015, the Kellys and VMK agreed to sell the assisted living facility for $1.35 million to Lopez and her company, with the latter making an earnest money deposit of $410,000 which was to be available to Vassie Kelly to pay off all the debt on the property.
The sale was put together by a company called Regulatory Licensing & Compliance, LLC ("RLC"), which charged Lopez the sum of $300,000 apparently to locate an assisted living facility that was available for purchase and to consummate the purchase for Lopez's benefit.
Long story short, the sale of the property was never closed, and Lopez demanded that RLC either force the sale to close or reimburse for the $300,000 she paid RLC to arrange the sale. Mayhem ensued. RLC sued Lopez seeking a declaration that it was not required to refund the $300,000 to Lopez, Lopez countersued RLC and its owner, and also sued the Kellys and VMK.
As the litigation proceeded, Vassie Kelly refused to appear at her deposition, sending instead her doctor's letter that she has been diagnosed with bipolar disorder and the deposition could "cause her severe psychological pressure". In advising the Court, and this becomes important later, Lopez argued that:
"if [Vassie] is not mentally healthy enough to attend a deposition ..., and you add in the stress of finding new counsel, she cannot be trusted to run the only asset of value the Defendants own."
On July 27, 2017, the Texas District Court entered a preliminary order which appointed a receiver for the assisted care facility and enjoined Vassey Kelly from operating or having anything to do with the facility in any capacity. Shortly thereafter, Vassey Kelly resigned as President and as a director of VMK, leaving John Kelly as the sole director and officer.
After Vassey Kelly's resignation, VMK asked the court to set aside its order, arguing that there was no grounds for a receiver and that the danger of Vassey mismanaging the facility had dissipated because of her resignation.
In response ─ and we are now to the factual crux of the case ─ Lopez argued among other things that Vassey Kelly's resignation from VMK was a fraudulent transfer that justified the receiver. The District Court agreed with Lopez, and VMK and John Kelly appealed.
The appeal was heard by the Texas Court of Appeals, which first commented on Lopez's argument that a transfer is fraudulent if made with the intent to "hinder the progress in this case". Of course, that's not what the Texas Uniform Fraudulent Transfer Act actually says, which is that a fraudulent transfer is a transfer made with the intent to hinder, delay or defraud "any creditor of the debtor" ─ and there was no evidence that Kelly Vassey's resignation was either meant to or accomplished the latter.
The Court of Appeals also thought it odd that Lopez would complain about the very thing that Lopez originally demanded, which was that Kelly Vassey resign as President of VMK:
Further, the Lopez Parties did not explain how Vassie's resignation as VMK's co-director could possibly hinder the progress of this case, much less "hinder, delay, or defraud" any creditor. Certainly the Lopez Parties do not claim that, as creditors or as plaintiffs, they have some right or interest in Vassie's continuing directorship of the company. Indeed, they advocated the opposite position by asking the trial court to enjoin Vassie "from making any decisions in regard to the Property." By resigning as co-director, Vassie did no more than voluntarily grant the Lopez Parties a portion of the relief they requested.
Moving on, and more importantly, the Court of Appeals also noted that the TUFTA defines the term transfer as:
'Transfer" means 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 lien or other encumbrance.
Whatever else it was or accomplished, Kelly Vassey's resignation as President of VMK did not have the effect of her parting with an asset, which is further defined by the TUFTA as basically an interest in property. Although Lopez attempted to argue that this somehow caused Kelly Vassey to give up her equity in VMK, the Court of Appeals noted that before and after the resignation Kelly Vassey held exactly the same percentages of stock.
The bottom line is that this was a fraudulent transfer case without a transfer, which is to say that it was no fraudulent transfer case at all, and the Court of Appeals reversed the order of the District Court in appointing a receiver.
ANALYSIS
The Texas Court of Appeals got this result exactly right, and it is a curiosity how the District Court made such a technically poor ruling. One gets the impression that the District Court didn't spend much time if any in researching the issue, but instead just made a shoot-from-the-hip ruling based on an understanding of fraudulent transfer law that in retrospect was perhaps little better than a layman's.
Which is to say that the fraudulent transfer laws do not apply to any ol' thing that a debtor does which seems bad, but instead are tightly constricted to a debtor's transfers (defined as a parting by the debtor) of an asset, which is itself defined as an interest in property, made to a transferee, and which satisfies at least one of the intent test, the insolvency test, or one of the other minor tests for fraudulent transfers.
But, first and foremost, there has to be a transfer of an asset. If there is no transfer of an asset, then whatever else the debtor's conduct might be, it simply cannot be a fraudulent transfer.
The term transfer also means that the ownership of the asset went from the debtor to a transferee. If, for example, the debtor transfers money from the debtor's account in Colorado to the debtor's account in the Cayman Islands with the stated intent of cheating creditors, that is not a fraudulent transfer because the ownership of the money never passed to a transferee.
Similarly, a fraudulent transfer case quite fundamentally requires that an asset be involved, being some valuable interest in some kind of property that the debtor used to own but got rid of it like a hot potato so that it would not be available to her creditors. The whole point of fraudulent transfer law is to restore (by avoiding the transfer) the property to the ownership of the debtor so that the creditor can then execute the judgment against the property as if the debtor had never transferred the property away.
But even here, the asset had to be something that the creditor could execute against in the first place, which is why things like property secured by another creditor and exempt property is not considered an "asset" for purposes of the fraudulent transfer laws to the extent that a creditor could never execute the judgment against them. Thus, if the creditor could not execute against the property in the first place -- such as here, a corporate office held by the debtor -- then it is probably not going to be an "asset" as defined in the fraudulent transfer laws.
These are simple concepts, yet we see creditor's counsel making these sorts of arguments with some frequency ─ they should know better.
CITE AS:
Jay & VMK, Corp. v. Lopez, 2019 WL 302545 (Tex.App., Distr. 14, Jan. 24, 2019).
This article at https://goo.gl/J2meV4
