Geneva Corp Fin Inc v. Waddell ( 2001 )

UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 00-10253
Geneva Corporate Finance, Inc. F/K/A
Geneva Business Services, Inc.,
Plaintiff-Appellee,
VERSUS
Clyde C. Waddell, Jr. Hester’s Office Center, Inc.,
and Crone Oil Company, Inc.,
Defendants-Appellants.
Appeal from the United States District Court
For the Northern District of Texas, Lubbock Division
(5:98-CV-185-C)
March 7, 2001
Before POLITZ, SMITH, and PARKER, Circuit Judges.
PER CURIAM:*
This case involves a creditor’s attempts to collect a judgment
from corporate shareholders under article 2.21 of the Texas
Business Corporations Act. Appellants Clyde Waddell and his two
corporations, Hester’s Officenter and Crone Oil Company, argue that
*
Pursuant to 5TH CIR. R. 47.5, the Court has determined that this
opinion should not be published and is not precedent except under
the limited circumstances set forth in 5TH CIR. R. 47.5.4.
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there is insufficient evidence in the record to support the jury’s
verdict holding the appellants liable for the debt that Officenter
owed to Geneva Corporate Finance.
I.
Clyde Waddell was the sole shareholder of Hester’s Officenter
and Crone Oil Company. Hester’s Office Center was in turn the sole
shareholder of Officenter, Inc., which sold office furniture and
supplies. In order to supplement cash flow deficiencies, Plains
National Bank loaned approximately $2.3 million to Hester’s, which
in turn loaned the full amount to Officenter. Plains National Bank
filed security interests against Officenter’s accounts receivable.
Waddell and Crone Oil Company also executed loans to Officenter.
On March 22, 1994, Officenter sent an engagement letter to
Geneva Corporate Finance, requesting that Geneva find a purchaser
of Officenter’s assets for a “success fee” based on the total sales
price. After Geneva failed to locate a purchaser in the following
two years, Officenter, with the help of a third party, contacted
Sewco, Inc. On March 20, 1996, Sewco agreed to purchase all of
Officenter’s assets.
The day after the sale, Officenter transferred its employees,
floor-planned inventory and trade receivables to its parent company
Hester’s.1 The proceeds of the sale were paid through Hester’s to
1
“Floor-planned” inventory is owned by a finance company. The
retailer may earn a profit if the merchandise is sold, but the
retailer never receives title to the goods.
2
Plains National Bank and several vendors. For reasons not
articulated in the record, Plains National Bank required Hester’s
to sign the notes as the parent company. Hester’s also repaid
Waddell $30,000, which he loaned to Officenter for a down payment
to Geneva.
As Hester’s continued to pay Officenter’s debts, a dispute
arose between Officenter and Geneva concerning Geneva’s portion of
the sale proceeds. Officenter claimed that it did not owe the
entire fee to Geneva because Geneva failed to locate a purchaser.
Officenter submitted a settlement offer, which Geneva rejected.
The parties submitted their case to arbitration, and the arbitrator
awarded Geneva $170,848.35 on November 9, 1996. By this time, all
of the sale proceeds had been paid to Officenter’s creditors.
Geneva reduced the arbitration award to a judgment against
Officenter. Hester’s continued to pay its debts to Plains National
Bank, Waddell, and Crone Oil, but did not pay any part of Geneva’s
judgment against Officenter. In October of 1997, Waddell sold
Hester’s for $500,000.
Geneva filed suit in the United States District Court for the
Northern District of Texas, Lubbock Division, seeking a judgment
against Waddell, personally, as well as his two companies, Hester’s
and Crone Oil. Geneva asserted claims that Waddell, Hester’s and
Crone Oil were alter-egos of Officenter, that Waddell denuded
assets from Officenter, and that the payments from Officenter to
its creditors were fraudulent transfers. At the close of the
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plaintiff’s evidence, Waddell, Hester’s and Crone Oil moved for
judgment as a matter of law, which the district judge denied. The
district judge instructed the jury on Geneva’s alter-ego claim
under article 2.21 of the Texas Business Corporations Act, but
refused Geneva’s proposed instruction concerning a common law cause
of action for denuding corporate funds.
The jury rendered a verdict in favor of Geneva. Waddell,
Hester’s and Crone Oil renewed their motion for judgment as a
matter of law, claiming that there was insufficient evidence to
support a finding of liability based on the alter-ego theory under
article 2.21. They also argued that the fraudulent transfer claim
under § 24.006 of the Texas Business and Commerce Code was barred.
In its response, Geneva stated that its sole theory of recovery was
the article 2.21 alter-ego claim. The district judge denied the
motion and entered its judgment against Waddell, Crone Oil and
Hester’s.
II.
We assess the district court’s denial of a motion for judgment
as a matter of law de novo. Ford v. Cimarron Ins. Co., Inc., 230
F.3d 828, 830 (5th Cir. 2000). “Judgment as a matter of law is
proper after a party has been fully heard by the jury on a given
issue, and ‘there is no legally sufficient evidentiary basis for a
reasonable jury to have found for that party with respect to that
issue.’” Foreman v. Babcock & Wilcox Co., 117 F.3d 800, 804 (5th
4
Cir. 1997) (quoting FED. R. CIV. P. 50(a)). Geneva continues to
deny that their case is governed by the Texas Uniform Fraudulent
Transfer Act. See TEX. BUS. & COM. CODE ANN. § 24.006 (Vernon 1987 &
Supp. 2000). Our review is therefore confined to Geneva’s alter-
ego claim under article 2.21 of the Texas Business Corporations
Act.
A plaintiff seeking to pierce the corporate veil and hold a
shareholder liable for a corporation’s contractual obligations must
demonstrate that the shareholder “caused the corporation to be used
for the purpose of perpetuating and did perpetuate an actual fraud
on the obligee primarily for the direct personal benefit of the
[shareholder].” TEX. BUS. CORP. ACT ANN. art. 2.21 (Vernon Supp.
2000). There are several types of fraud, including fraudulent
inducement, fraudulent concealment, and misrepresentation. See
Kajima Int’l, Inc. v. Formosa Plastics Corp., 15 S.W.3d 289, 292
(Tex. App.–-Corpus Christi 2000). Although most courts have
applied the elements of fraudulent misrepresentation to article
2.21 claims, the district court defined actual fraud in its
instructions to the jury as “involving dishonesty of purpose or
intent to deceive.”2 Absent timely objection or suggested
alternative language, the jury is to be guided by the instruction
as given. See Thrift v. Hubbard, 44 F.3d 348, 354 (5th Cir. 1995).
2
See Menetti v. Chavers, 974 S.W.2d 168, 175 (Tex. App.–-San
Antonio 1998, no writ); Harco Energy, Inc. v. The Re-Entry People,
Inc., 23 S.W.3d 389, 397 (Tex. App.–-Amarillo, 2000 n.w.h.).
5
Geneva claims that Waddell, Hester’s, and Crone Oil intended
to prevent Geneva from collecting its judgment by transferring
Officenter’s assets to Hester’s, which in turn relinquished the
remaining funds to creditors other than Geneva.3 A debtor in Texas
has the right to prefer an obligation to one creditor over an
obligation to another creditor, as long as the debtor’s preference
is devoid of fraudulent intent. See, e.g., Englert v. Englert, 881
S.W.2d 517, 518 (Tex. App.–-Amarillo 1994, no writ) (holding that
intent to deceive creditors will not be inferred in fraudulent
transfer cases). “[F]raudulent intent must be affirmatively shown
and will not be presumed.” See id.
We do not think the evidence supports a finding that Waddell,
Crone Oil and Hester’s intended to deceive or dishonestly deprived
Geneva of its claim to the sale proceeds. There is no evidence in
the record to suggest that Officenter raised its dispute over the
amount of money owed to Geneva in bad faith. Officenter had no
reason to postpone payments to its other creditors until the
resolution of the contractual dispute with Geneva. By the time the
arbitrator issued the award in favor of Geneva, the sales proceeds
were depleted. The record shows that the remaining items
Officenter transferred to Hester’s were accounts receivable,
3
We note that the judgment against Office Center directly related
to Office Center’s contract with Geneva for purposes of asserting
an alter-ego claim under article 2.21. See TEX. BUS. CORP. ACT art.
2.21(A)(2).
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secured by Plains National Bank, and floor-planned inventory, which
Office Center did not own. All of the payments Officenter and
Hester’s tendered to Plains National Bank, Hester’s, Waddell, and
Crone Oil were payments for legitimate debts.
The record does not support a conclusion that Waddell used
Officenter to perpetrate an actual fraud on Geneva. See TEX. BUS.
CORP. ACT art. 2.21(A)(2). To the contrary, Officenter was simply
going out of business. Because there is insufficient evidence to
support a finding of actual fraud as defined by the district court,
we reverse and render judgment in favor of Waddell, Hester’s and
Crone Oil.4
REVERSED and RENDERED
4
We note that § 24.006 of the Texas Uniform Fraudulent Transfer
Act allows a creditor to avoid transfers made to insiders for an
antecedent debt if the debtor was insolvent at the time of the
transfer and the insider had reason to believe the debtor was
insolvent. See TEX. BUS. & COM. CODE ANN. §§ 24.006, 24.008 (Vernon
1987 & Supp. 2000). Because the district court did not instruct
the jury as to a fraudulent transfer claim and Geneva consistently
rejects this theory of recovery, we have no reason to review the
evidence under the Uniform Fraudulent Transfer Act.
7