Tareco Properties, Inc. v. Morriss , 196 F. App'x 358 ( 2006 )

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 06a0623n.06
Filed: August 23, 2006
Nos. 04-6334, 04-6335
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
TARECO PROPERTIES, INC., )
)
Plaintiff-Appellee, )
)
v. ) ON APPEAL FROM THE UNITED
) STATES DISTRICT COURT FOR THE
KAREN MORRISS, ) MIDDLE DISTRICT OF TENNESSEE
)
Defendant-Appellant, (04-6334) )
)
AMY MORRISS LOWRY; ROBERT DAVID )
LOWRY, )
)
Defendants-Appellants. (04-6335) )
Before: SUHRHEINRICH, GILMAN, and ROGERS, Circuit Judges.
ROGERS, Circuit Judge. Defendants Amy Morriss Lowry, David Lowry, and Karen Morriss
appeal the district court’s judgment, after a bench trial, in favor of Tareco Properties, Inc. on
Tareco’s claims of fraudulent conveyance and conspiracy under Tennessee law. The defendants
received hundreds of thousands of dollars from Steve Morriss, a relative, while Morriss was subject
to a large judgment. On appeal, the defendants argue that: (1) Amy Morriss Lowry should not be
liable because the district court found that she lacked the intent to commit fraud; (2) the defendants
should not be liable for the portion of the fraudulent conveyance that was transferred back into Steve
Morriss’s companies; (3) Karen Morriss’s liability should be reduced by the amount she spent on
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living expenses; (4) Karen Morriss’s liability should be limited to the amount she actually spent; and
(5) the equitable doctrines of estoppel and laches bar recovery because Tareco, through its
representatives, knew of Steve Morriss’s use of the Amy Morriss account as early as 1994. We
affirm.
I. Background
In 1993, the FDIC obtained a judgment in a federal district court against Steve Morriss and
others for almost two million dollars. The FDIC never received any money from Morriss, and it
ultimately assigned the judgment to Tareco.
Around the same time, Steve Morriss set up a bank account in the name of his daughter, Amy
Morriss Lowry. Steve Morriss generally used the account as if it were his own—for example, by
depositing checks and later obtaining funds for his business activities—but he did not retain the
authority to sign checks. Instead, the signatories on the account were Amy Morriss Lowry; David
Lowry, Amy Morriss Lowry’s husband; and Karen Morriss, Steve Morriss’s wife.
According to the district court in this case, Morriss deposited a total of $816,285.97 into the
Amy Morriss account since May 5, 1996. Much of the money appears to have been spent by the
defendants. Karen Morriss spent approximately $111,237.83 on personal, credit card, and
entertainment expenses. Amy Morriss Lowry, while having “no clue” why her father was depositing
checks into her account, also appears to have used the money. In addition, as Steve Morriss’s
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employee, David Lowry wrote checks for Steve Morris’s business expenses. As much as $273,700
was transferred from the Amy Morriss Account to entities owned by Steve Morriss.
In September 1999, Tareco purchased the FDIC judgment. Tareco had been incorporated
earlier in the year, and it learned of the judgment through Steve Morriss’s former business partners.
One such partner, Robert Geringer, had used the Amy Morriss account as early as 1994. Geringer
received a check for $6,310 drawn from the account. His law firm also made several deposits into
the account through wire transfers. Although Geringer was Tareco’s representative at trial in the
present proceeding, Geringer was not an officer or director of Tareco, never owned stock in Tareco,
and did not have any otherwise formal relationship with Tareco.
Tareco immediately began trying to collect the FDIC judgment from Morriss. Years of
litigation followed, involving claims, counterclaims, sanctions, and multiple state and federal
jurisdictions. Nevertheless, in July 2000, Morriss agreed to transfer ownership of eight of his
companies to Tareco in partial satisfaction of the judgment. Although Morriss later tried to
challenge the agreed order, this court affirmed the district court’s decision upholding the order. See
Tareco Props., Inc. v. Morriss, 321 F.3d 545, 548-49 (6th Cir. 2003).
In May 2000, Tareco brought suit against the defendants in the United States District Court
for the Middle District of Tennessee. In its complaint, Tareco asserted two causes of action. First,
Tareco claimed that the defendants were liable under Tennessee’s Uniform Fraudulent Transfer Act
(Uniform Act), Tenn. Code Ann. §§ 66-3-301 to -313, because “Steve Morriss transferred cash, real
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estate, stock in various companies owned by him and other property owned by him . . . to the
defendants for the express purpose of delaying, hindering, defrauding, and preventing the plaintiff
from collecting” the FDIC judgment.1 Second, Tareco claimed that the defendants had engaged in
a conspiracy with Steve Morriss to engage in fraudulent transfers of the assets. Karen Morriss filed
a counterclaim and third party complaint that was later dismissed.
The case went to trial in March 2004 before a United States Magistrate Judge. The court
ruled that the Tennessee statute of limitations precluded Tareco from challenging any conveyances
made prior to May 5, 1997. The court then found the defendants liable on Tareco’s two claims.
First, the court ruled that the deposits by Steve Morriss into the Amy Morriss account after May 5,
1997, were fraudulent conveyances. The court reached this conclusion after finding that the
following “badges of fraud” showed an intent to delay, hinder or defraud creditors: Steve Morriss
made the deposits while “in a precarious financial condition” and knowing that a large judgment had
been rendered against him; inadequate consideration was given for the transfers; and a family
relationship existed between Steve Morriss and the transferees.
Second, the court ruled that Karen Morriss and David Lowry were liable as co-conspirators
in the fraudulent conveyances. Amy Morris Lowry was not a co-conspirator because “the testimony
1
Both Tareco and the district court use the Tennessee fraudulent statute based on the English
Statute of 13 Elizabeth, Tenn. Code Ann. § 66-3-101 to -104, and the Uniform Act interchangeably.
It makes no difference because the statutes’ definitions of a fraudulent transfer are identical for
relevant purposes. The Uniform Act did not repeal but merely enlarged the scope of the earlier
statute. Scarborough v. Pickens, 170 S.W.2d 585, 587 (Tenn. 1942). For easier reference, we refer
only to the Uniform Act.
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at trial showed that she lacked the requisite intent.” The court thus entered judgment, jointly and
severally, against all three defendants for $681,149.79, “the amount [Steve] Morriss deposited into
the ‘Amy Morriss’ account since May 5, 1997.”
The defendants now appeal. Although they do not challenge the district court’s finding that
the deposits were fraudulent conveyances, the defendants argue that: (1) Amy Morriss Lowry
should not be liable because the court found that she lacked the intent to commit fraud; (2) the
defendants should not be liable for the portion of the fraudulent conveyance that was transferred
back into Steve Morriss’s companies; (3) Karen Morriss’s liability should be reduced by the amount
she spent on living expenses; (4) Karen Morriss’s liability should be limited to the amount she
actually spent; and (5) the equitable doctrines of estoppel and laches bar recovery because Tareco,
through its representatives, knew of Steve Morriss’s use of the Amy Morriss account as early as
1994.
II. Analysis
We review conclusions of law de novo, Golden v. Kelsey-Hayes Co., 73 F.3d 648, 653 (6th
Cir. 1996), and factual findings for clear error, Fed. R. Civ. P. 52(a).
A. Amy Morriss Lowry’s Liability
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Amy Morriss Lowry is liable for the fraudulent conveyances as a transferee under the
Uniform Act even if she did not intend to commit fraud.2 The Tennessee Code provides that a
creditor, in an action to recover a fraudulent transfer, may obtain “[a]voidance of the transfer or
obligation to the extent necessary to satisfy the creditor’s claim.” Tenn. Code. Ann. § 66-3-
308(a)(1). To the extent such a transfer is voidable, the creditor may obtain a judgment against
“[t]he first transferee of the asset or the person for whose benefit the transfer was made.” § 66-3-
309(b)(1) (emphasis added). Because Steve Morriss fraudulently conveyed money into the Amy
Morriss account, and because Amy Morriss Lowry, as owner of the account, was the “first
transferee,” Amy Morriss Lowry is liable for the transferred money.
The defendants’ argument—that Amy Morriss Lowry should not have been held liable
because the district court found that she “lacked the requisite intent to be a co-conspirator”—is
without merit. There is nothing in the Uniform Act requiring fraudulent intent; the statute is silent
as to scienter. Cf. Bowlin v. Comm’r, 273 F.2d 610, 611 (6th Cir. 1960) (holding, without discussing
intent, that a wife who received cash from her insolvent husband was a transferee and thus liable
under a previous Tennessee fraudulent conveyance statute). Moreover, courts interpreting identical
statutes from other jurisdictions have held that there is no intent requirement for transferee liability.
See, e.g., Warfield v. Byron, 436 F.3d 551, 557-58 (5th Cir. 2006) (holding that Washington’s
2
At oral argument, counsel for the defendants indicated for the first time that Amy Morriss
Lowry’s liability had been discharged through bankruptcy. Without any evidence that her debt to
Tareco has been properly discharged, we decline to decide whether the appeal as to Amy Morriss
Lowry has been rendered moot.
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Uniform Fraudulent Transfer Act “permits entry of judgment even without proof that the transferee
knowingly accepted property and intended to assist the debtor in evading the creditor”). The district
court therefore properly found Amy Morriss Lowry liable as a transferee despite its finding that she
did not intend to participate in a fraudulent conveyance.
B. Funds Returned to Steve Morriss’s Companies
The district court did not err by holding the defendants liable for the money that was later
transferred back into various companies owned by Steve Morriss because the defendants failed to
satisfy their burden of proving that any of the money benefitted Tareco. The district court found the
defendants liable for the total amount fraudulently conveyed to the Amy Morriss account because
the defendants were transferees of the fraudulently conveyed money and Karen Morriss and David
Lowry were conspirators with Steve Morriss. The defendants, however, argue that the “evidence
is insufficient” to support the judgment for the $273,700 that they later transferred to Steve
Morriss’s companies because that money “was not placed in [the Amy Morriss] account for the
personal benefit of the Defendants.” This argument fails as a matter of law. The district court was
not required to find that the money was transferred for the personal benefit of the defendants.
Instead, it was sufficient for the court to find that the defendants were transferees, see § 66-3-
309(b)(1), and with respect to Karen Morriss and David Lowry, in the alternative, that they were
conspirators with Steve Morriss, see Dale v. Thomas H. Temple Co., 208 S.W.2d 344, 353 (Tenn.
1948). The defendants were therefore liable for the full amount that Steve Morriss fraudulently
conveyed to the Amy Morriss account.
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Although the district court had the discretion to reduce the defendants’ liability as it found
equitable, the defendants failed to meet their burden of proving that a reduction was warranted. The
Uniform Act provides that judgments based upon the value of the asset transferred “must be for an
amount equal to the value of the asset at the time of the transfer, subject to adjustment as equities
may require.” § 66-3-309(c) (emphasis added). Thus, if the defendants proved that they transferred
the $273,700 back into the companies, and that Tareco received that money when it later obtained
those companies pursuant to the July 2000 order, the court could have reduced their liability
accordingly to avoid conferring a windfall upon Tareco.
A similar result was reached in Dahar v. Jackson (In re Jackson), 318 B.R. 5, 27 (Bankr.
D.N.H. 2004). In Dahar, a transferee used some of the proceeds from her sale of fraudulently
conveyed property to pay the transferor’s business and family expenses. Id. at 28. The court found
that, under the damages provision of the New Hampshire fraudulent conveyance statute, which was
identical to § 66-3-309(c), the transferee was entitled to an equitable reduction of her liability for
her payments of the transferor’s expenses. Id. at 26-28. Without a reduction, the plaintiff would
have received a windfall because he essentially would have recovered twice for some of the money
fraudulently conveyed: the money the plaintiff paid pursuant to the judgment for the fraudulent
conveyance and the additional money in the transferor’s estate that resulted from the transferee
paying the transferor’s expenses. Id. at 27-28.
But even assuming that Tennessee courts would equitably reduce a transferee’s liability
under circumstances similar to those in Dahar, the defendants are not entitled to such a reduction
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because they failed to prove that Tareco actually received the $273,700. The defendants conceded
at oral argument that they had the burden of proving that a reduction in damages was warranted.
See also Tennessee ex rel. Chapdelaine v. Torrence, 532 S.W.2d 542, 550 (Tenn. 1975) (stating that
defendants have the burden to prove the mitigation of damages). They did not meet this burden.
The defendants provided evidence that they paid $273,700 to several of Steve Morriss’s companies,
J.A. at 293, and that those companies and others were later transferred to Tareco, J.A. at 199-202.
They never proved, however, that Tareco actually received the $273,700 that they transferred to the
companies. For example, there was no evidence that the money stayed within the companies until
the companies were transferred to Tareco. On the contrary, the evidence shows that Tareco did not
receive a substantial portion of the money because the combined value of all the companies,
including those that were paid the $273,700, was only $100,000 at the time they were transferred
to Tareco. J.A. at 197. The defendants thus failed to fulfill their burden of proving the extent to
which their transfer benefitted Tareco, and the district court properly declined to reduce their
liability.
C. Reduction for Living Expenses
Karen Morriss’s argument—that she was entitled to a reduction in liability for the amounts
she spent on living expenses—fails for the same reason as the defendants’ argument that their
liability should have been reduced for amounts transferred to Steve Morriss’s companies. Nothing
in the Uniform Act suggests that, once a person is found to be a transferee or to have participated
in a conspiracy to engage in a fraudulent transfer of assets, that person’s liability is governed by
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what she spends the proceeds on. Although the district court could have equitably reduced Karen
Morriss’s liability, as the court did in Dahar, 318 B.R. at 27-28, if it had found that she paid for
family or living expenses that Steve Morriss would have otherwise paid if the fraudulent transfers
had not occurred, Karen Morriss did not meet her burden of proving that she was entitled to a
reduction. She did not show what family and living expenses she paid that would otherwise have
been paid by Steve Morriss.
The cases on which Karen Morriss relies provide no support for her argument. In Hamilton
v. Zimmerman, for example, the court stated that a debtor cannot be held liable to creditors for the
expenses incurred in supporting his family. 37 Tenn. (5 Sneed) 39, 1857 WL 2547, at *3 (Tenn.
1857). The court went on to hold, however, that the debtor could not use his family expenses as a
pretext for fraud. Id. Hamilton is thus consistent with the district court’s ruling in this case. Once
the district court ruled that all of the conveyances were made “to hinder, delay, or defraud” creditors,
§ 66-3-305, the defendants became liable regardless of what they later decided to spend the money
on. The district court thus properly found that Karen Morriss was not entitled to a reduction in
liability for the portion of the fraudulently conveyed money that she spent on family and living
expenses.
D. Joint and Several Liability for Karen Morriss
Karen Morriss also argues, without providing any support, that “[e]ven if [the amount she
spent] was held to be a fraudulent transfer, her liability should not exceed that amount which
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represents checks she received, or checks which she wrote to others, drawn on the Amy Morriss
account.” This argument is frivolous. It is well settled in Tennessee that conspirators are jointly and
severally liable, and it makes no difference how the “booty” is distributed. Brumley v. Chattanooga
Speedway & Motordrome Co., 198 S.W. 775, 776-77 (Tenn. 1917); see also Trau-Med of Am., Inc.
v. Allstate Ins. Co., 71 S.W.3d 691, 703 (Tenn. 2002) (“Upon a finding of conspiracy, each
conspirator is liable for the damages resulting from the wrongful acts of all co-conspirators in
carrying out the common scheme.”). Because the district court found Karen Morriss to have
conspired in the fraudulent transfers, she is jointly and severally liable for the entire judgment.
E. Equitable Defenses
The equitable doctrine of laches does not bar Tareco’s recovery because the evidence
demonstrates that Tareco could not have known of Steve Morriss’s and the defendants’ use of the
Amy Morriss account until after the fraudulent conveyances took place.3, 4 Although laches has been
used under Tennessee law to bar the recovery of creditors that knew of fraud but delayed in suing,
see Carrier v. Dixon, 218 S.W. 395, 396 (Tenn. 1919); see also Tenn. Code Ann. § 66-3-311
3
The defendants also raise the defense of equitable estoppel, but they do not allege that
Tareco engaged in any wrongdoing. See Osborne v. Mountain Life Ins. Co., 130 S.W.3d 769, 774
(Tenn. 2004) (stating that estoppel requires proof of, among other things, “false representation or
concealment of material facts”). Their estoppel theory therefore fails as a matter of law.
4
Additionally, the defendants likely waived any equitable defense. The defendants did not
raise laches or estoppel in their answer, J.A. at 69-71, nor do the defenses show up in Karen
Morriss’s counterclaim and third-party complaint, J.A. at 16-45. An affirmative defense must be
pled under Federal Rule of Civil Procedure 8(c); if raised for the first time on appeal the defense is
waived. Brunet v. City of Columbus, 1 F.3d 390, 402-03 (6th Cir. 1993).
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(providing that “the principles of law and equity, including . . . laches . . . supplement [the Uniform
Act’s] provisions”), the defendants’ defense fails because Tareco was not incorporated until 1999,
years after almost all of the fraudulent conveyances and subsequent spending by the defendants.
Tareco could not have known of the conveyances because it did not exist at the time.
The defendants’ attempt to impute the knowledge of Tareco’s agents to Tareco is not
supported by evidence or case law. The only person connected with Tareco who could have known
of the conveyances prior to Tareco’s incorporation was Robert Geringer. Geringer received a check
from the Amy Morriss account in 1995, and his law firm made several wire transfers into the
account in 1994 and 1995. But, while Geringer was Tareco’s Rule 30(b)(6) representative at trial,
there is no evidence that Geringer had ownership or managerial control over Tareco, such that he
could perhaps be argued to have been an alter ego of Tareco. Instead, it appears that Geringer was
simply Tareco’s agent. The defendants offer no support for the proposition that an agent’s
knowledge, acquired before the agent began working for the principal, can be imputed to the
principal for purposes of a laches defense. Therefore, the defendants’ laches defense fails.
III. Conclusion
For the foregoing reasons, we affirm the judgment of the district court.
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