Texas

Warning: The following opinion is provided for purposes of discussion only. We have not Shepardized™ this opinion, and do not know the subsequent disposition of this case nor whether the effect of the opinion has been overruled or superceded by other law.

Donald M. White and Kathleen White v. Melvin D. Babcock
1995.TX.947 (Tex.App. 08/28/1995)

Synopsis

Appellants sued Gates Rental, Inc., a company controlled by appellees, Melvin Babcock and Babcock Management, Inc. for breach of contract. When appellants went to collect from Gates, they discovered that Mar-Jean Management, Inc. had purchased all the assets of Gates. The court finds that the essential elements of a civil conspiracy are: (1) two or more persons; (2) an object to be accomplished; (3) a meeting of the minds on the object or course of action; (4) one or more unlawful, overt acts; and (5) damages as the proximate result. The summary judgement evidence in this case, even when viewed in the light most favorable to appellants, does not show any unlawful, overt acts. The sale of the assets to Mar-Jean to pay the loan to BankSouth was legal. Because there were no improper or illegal acts in paying the valid loan due to BankSouth, appellees did not engage in a conspiracy.

Opinion

08/28/1995 DONALD M. WHITE and KATHLEEN WHITE v. MELVIN D. BABCOCK

BLUE BOOK CITATION FORM: 1995.TX.947

Affirmed and Opinion filed August 24, 1995.

In The Fourteenth Court of Appeals

NO. 14-94-00468-CV

DONALD M. WHITE AND KATHLEEN WHITE, Individually and d/b/a PINE FOREST ASSOCIATES,

Appellants

V.

MELVIN D. BABCOCK, BABCOCK MANAGEMENT CORPORATION AND TRANSAMERICA

RENTAL FINANCE CORPORATION ,

Appellees

On Appeal from the 151st District Court Harris County, Texas Trial Court Cause No. 88-58626

OPINION

This is an appeal from a summary judgement in a case involving an alleged fraudulent transfer of assets. In two points of error, appellants contend that the trial court erred in granting summary judgment for appellees because there were material issues of fact concerning whether the underlying transaction violated the Bulk Transfers Act or Uniform Fraudulent Transfer Act. We affirm the judgment of the trial court.

The following facts are undisputed. Appellants sued Gates Rental, Inc. d/b/a Love TV Rental ("Gates"), a company controlled by appellees, Melvin Babcock and Babcock Management, Inc. ("Babcock") for breach of contract. On November 23, 1987, appellants were scheduled to have a summary judgement hearing on their suit against Gates. Gates moved to delay this hearing because it alleged that it did not have adequate time to complete discovery. The trial court delayed the hearing on the motion for summary judgement until December 21, 1987. On that day, the trial court entered a judgement against Gates for $58,130.40, together with prejudgment and post-judgment interest, court costs, and attorney's fees. When appellants went to collect from Gates in May 1988, they discovered that Mar-Jean Management, Inc. ("Mar-Jean") had purchased all the assets of Gates on December 1, 1987. Appellee, Transamerica Rental Finance Corporation ("Transamerica"), had financed Mar-Jean's purchase of Gates's assets. On June 28, 1988, appellants filed a turnover suit against Gates. Appellants failed to recover on the turnover suit because Gates had no remaining assets after the sale to Mar-Jean on December 1, 1987. The following facts concerning Gates's sale of its assets to Mar-Jean are also undisputed. Gates sold the assets to Mar-Jean on December 1, 1987. On December 2, 1987, Mar-Jean executed a promissory note and loan agreement with Transamerica whereby Transamerica loaned Mar-Jean the principal amount of $425,000. Transamerica disbursed these loan proceeds by a joint check to Gates and BankSouth and the proceeds were actually received by BankSouth. On December 3, 1987, Transamerica filed a UCC statement with the Texas Secretary of State perfecting its security interest in Gates's assets. Additionally, prior to November 23, 1987, BankSouth held a lien on Gates' property because of an unpaid loan. The loan had been designated a "problem loan" and BankSouth could foreclose at any time. BankSouth released this lien because of the payment received from Transamerica. BankSouth's release of Gates' loan is dated November 30, 1987.

On November 10, 1988, appellants filed suit against Mar-Jean, Transamerica, Babcock, and Gates for violations of the Bulk Transfers Act and the Uniform Fraudulent Transfer Act claiming the sale of assets on December 1, 1987, was done to prevent payment to appellants. Appellants allege that Gates intentionally delayed the hearing and then sold the assets to deny appellants their right to recover. Appellees respond that the sale was not done with an improper motive, but solely to pay off the overdue loan to BankSouth. Appellants contend that the fraudulent nature of the transfer is shown by the fact that the loan was released prior to the sale and the assets were transferred prior to the security interest being perfected. BankSouth's release of the loan is dated November 30, 1987, while Gates did not sell the assets to Mar-Jean until December 1, 1987. Additionally, Transamerica disbursed the proceeds to Gates and BankSouth on December 2, 1987, prior to Transamerica filing a UCC statement perfecting security interest in Gates's assets on December 3, 1987. Appellants contend this transfer violated the Bulk Transfers Act and the Uniform Fraudulent Transfer Act because Gates was not under any obligation when the funds were paid since the BankSouth lien was already released and the Transamerica lien was not yet perfected. Appellees respond that the entire sale transaction was designed to pay off a loan to BankSouth and therefore was not fraudulent. Prior to the sale of the assets, BankSouth had designated Gates' loan as a "problem loan" and had the right to foreclose. Mar-Jean alleges it agreed to purchase the assets to assist Gates in paying off the loan to BankSouth. Mar-Jean raised the capital to finance the purchase of Gates's assets by granting Transamerica a security interest in the assets. Transamerica paid Mar-Jean's loan proceeds in a check payable to Gates and BankSouth. BankSouth received the entire amount of the loan proceeds. Appellees contend that this was a transfer in settlement of a lien and was not the subject of the Uniform Fraudulent Transfer Act or the Bulk Transfers Act.

The trial court granted summary judgement for Gates, Babcock, and Transamerica. Appellants went to trial against Mar-Jean and appellants recovered $180,000. In this appeal, appellants contend the trial court erred in granting summary judgement on their claims against Babcock and Transamerica. The summary judgement against Gates is final and appellants have not appealed that ruling.

In his two points of error, appellant contends the trial court erred in granting summary judgement for appellants because there were genuine issues of material fact concerning whether appellees violated the Bulk Transfers Act,*fn1 or the Uniform Fraudulent Transfer Act,*fn2 whether appellees engaged in a conspiracy to defraud appellants and whether Babcock was liable as Gates' alter-ego.*fn3 The standard to be followed in reviewing a summary judgement is well established. The movant for summary judgement must show that there is no genuine issue of material fact and that he is entitled to judgement as a matter of law. Nixon v. Mr. Property Management Co., 690 S.W.2d 549-49 (Tex. 1985). Evidence favorable to the non-movant will be taken as true and every reasonable inference must be indulged in favor of the nonmovant. Id. When a summary judgement does not specify the grounds upon which the trial court granted it, the reviewing court will affirm the judgement if any one of the theories advanced in the motion is meritorious. State Farm Fire & Casualty Co. v. S.S., 858 S.W.2d 374, 380 (Tex. 1993).

While many potential fact questions remain concerning appellees' motives for the sale of the assets to Mar-Jean, we find that those motives are not determinative of the issues on this appeal. Put simply, the sale of the assets served to pay off a valid and outstanding lien to BankSouth, and therefore cannot be a fraudulent transfer as a matter of law. A transfer in settlement or realization of a lien or other security interest is not subject to the Bulk Transfers Act. TEX. BUS. & COM. CODE ANN. Section(s) 6.103(3) (Vernon 1968). The summary evidence shows as a matter of law that the transfer of Gates' assets to Mar-Jean was done to settle the lien owed to BankSouth. BankSouth received the entire proceeds of the loan to MarJean and released the loan. Although there was a one-day window in which Gates may have claimed the proceeds of Transamerica's loan because BankSouth released the loan prior to the new security interest being perfected, this does not raise a fact issue as to whether this sale was made in realization of a lien or other security interest. Whatever opportunity Gates may have had to claim the loan proceeds for himself is not dispositive. The proceeds were received solely by BankSouth and were used solely to satisfy the lien. Gates did not receive any of the funds. . See e.g., Hixson v. Pride of Texas Distributing Co., Inc., 683 S.W.2d 173, 178 (Tex. App. -- Fort Worth 1985, no writ); River City Products, Inc. v. A.E.J. Inc., 774 S.W.2d 452, 453 (Ky. App. 1989); Peerless Packing Co., Inc. v. Malone & Hyde, Inc., 376 S.E.2d 161, 165 (W.Va. 1988); Ouachita Electric CoOperative Corp. v. Evans-St. Clair, 672 S.W.2d 660, 663 (Ark. App. 1984); Techsonic Industries, Inc. v. Barney's Basin Shop, 621 S.W.2d 332, 333-34 (Mo. App. 1981); American Metal Finishers, Inc. v. Palleschi, 391 N.Y.S. 170, 172 (1977). Because the funds were used solely to pay BankSouth, the trial court correctly determined that appellants did not have a valid cause of action for a violation of the Bulk Transfers Act.

The Uniform Fraudulent Transfer Act does not cover property to the extent it is encumbered by a valid lien. TEX. BUS. & COM. CODE ANN. 24.002 (2) (A). The assets appellants claim were fraudulently transferred were encumbered by BankSouth's valid lien. Even if appellants were to have received Gates' assets, the assets still would have been encumbered by the BankSouth lien; therefore, Gates had no "assets" to fraudulently transfer. See e.g., Baker & Sons Equipment Co. v. GSO Equipment Leasing, Inc., 662 N.E.2d 1113, 1118-19 (Ohio App. 1993); Kellstrom Bros. Painting v. The Carriage Works, Inc., 844 P.2d 221, 222 (Or. App. 1992). Furthermore, there was no fraud in this transfer because the sale was done to pay off Gates' legitimate creditor. No cash proceeds were available to Gates and he did not defraud his creditors by absconding with the funds. The funds were received solely by BankSouth. A debtor does not commit fraud by choosing to pay one creditor ahead of another. A sale by a debtor for the purpose of applying the proceeds of the sale to payment of its debts is not fraudulent as to the creditors not sharing in the proceeds of such sale. Rogers v. Driscoll, 125 S.W. 599, 601 (Tex. Civ. App. -- San Antonio 1910, writ ref.). Because appellants did not have a valid cause of action for a violation of the Uniform Fraudulent Transfer Act, the trial court correctly granted summary judgement for appellees on the Uniform Fraudulent Transfer claims.

The trial court also properly granted summary judgement on appellants' claims that appellees engaged in a conspiracy because appellees did not commit a fraudulent transfer. The essential elements of a civil conspiracy are: (1) two or more persons; (2) an object to be accomplished; (3) a meeting of the minds on the object or course of action; (4) one or more unlawful, overt acts; and (5) damages as the proximate result. Massey v. Armco Steel Company, 652 S.W.2d 932, 934 (Tex. 1983). The summary judgement evidence in this case, even when viewed in the light most favorable to appellants, does not show any unlawful, overt acts. The sale of the assets to Mar-Jean to pay the loan to BankSouth was legal. Because there were no improper or illegal acts in paying the valid loan due to BankSouth, appellees did not engage in a conspiracy.

Finally, appellants may not recover under their alter-ego theory against appellee, Babcock. Appellants allege that because Babcock controlled Gates, Babcock should be liable for any damages Gates caused. Without reaching whether Gates is Babcock's alter-ego, we hold that appellant may not recover under this claim because the trial court granted summary judgement that Gates committed no wrong doing and the suit against Gates was severed from this appeal and the judgement is final. If the underlying corporation cannot be liable, the corporation's alleged alter-ego cannot be liable under an alter-ego theory because the alter-ego doctrine creates liability based on the wrong doing of the corporation. Kern v. Gleason, 840 S.W.2d 730, 736 (Tex. App. -- Amarillo 1992, no writ); Equinox Enterprises, Inc. v. Associated Media, Inc., 730 S.W.2d 872, 877 (Tex. App. -- Dallas 1987, no writ). Because the judgement against Gates is final and clears it of any wrongdoing, appellants do not have a valid cause of action against Babcock under an alter-ego theory.

Because appellees presented the trial court with valid grounds upon which to properly grant summary judgement on all of appellants' causes of actions, the trial court properly granted summary judgement for appellants. We affirm the judgement of the trial court.

/s/ Joe L. Draughn Justice

Judgement rendered and Opinion filed August 24, 1995. Panel consists of Justices Yates, Fowler and Draughn.*fn4* Publish - TEX. R. APP. P. 90.

***** BEGIN FOOTNOTE(S) HERE *****

*fn1 TEX. BUS. & COM. CODE ANN. Section(s) 6.101, et seq., (Vernon 1968) (repealed by Acts 1993, 73rd Leg., ch. 570, Section(s) 16, eff. Sept. 1, 1993).

*fn2 TEX. BUS. & COM. CODE ANN. Section(s) 24.001, et. seq., (Vernon 1987).

*fn3 Appellants address separate points of error to the Babcock defendants and Transamerica. However, because our disposition for all appellees turns on the same issue, we discuss both appellees' points of error together.

*fn4 *The Honorable Joe L. Draughn sitting by assignment.

***** END FOOTNOTE(S) HERE *****

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