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L.L.C. v. Prime Income Asset Management, L.L.C.

United States Court of Appeals, Fifth Circuit

February 3, 2017

HOMETOWN 2006-11925 VALLEY VIEW, L.L.C., Plaintiff - Appellant

         Appeal from the United States District Court for the Northern District of Texas

          Before HIGGINBOTHAM, DENNIS, and CLEMENT, Circuit Judges.


         The question posed is whether contractual payments due during a required sixty-day notice period prior to termination of contractual rights here constitute "assets" under the Texas Uniform Fraudulent Transfer Act's broad definition. We are persuaded that they do and reverse dismissal of the TUFTA claims and remand for further proceedings.


         Prior to April 2011, Prime Income Management, LLC ("Prime LLC") served as a contractual advisor[1] to three publicly traded real estate companies (collectively "the Publics").[2] Prime LLC had no employees or assets. Its parent company, Prime Income Management, Inc. ("Prime Inc."), provided services on behalf of Prime LLC, and received payments due under the Advisory Agreements Those Agreements provided that they were only assignable by mutual consent and that the Publics were required to give sixty days' written notice to Prime LLC before terminating the Agreements in order to avoid penalty.

         Prime LLC also guaranteed a commercial real-estate loan held by Plaintiff Hometown's predecessor-in-interest.[3] In late 2010, Hometown's predecessor learned that the borrower had missed monthly payments and demolished a portion of the property securing the loan in violation of the note's terms. Hometown then posted the property for a non-judicial foreclosure sale. Shortly before the scheduled sale, Prime LLC transferred the property to another affiliated entity, EQK Bridgeview Plaza, Inc., which promptly filed for Chapter 11 bankruptcy protection, halting the proceedings.

         In March 2011, a bankruptcy court lifted the automatic stay, allowing the foreclosure to proceed. Hometown then sued Prime LLC as guarantor on the loan, obtaining a judgment for the foreclosure deficiency in the amount of $2, 087, 464.78.[4] In April 2011, Defendants created Pillar Income Asset Management, Inc. ("Pillar"), an entity owned, controlled, and operated by the same individuals and entities that owned, controlled, and operated Prime LLC. The Publics then terminated their contracts with Prime LLC[5] without giving the required sixty-day written notice, and Prime LLC did not object.[6] According to testimony from Defendant Gene Bertcher, although the Publics "initiated" the termination of their Agreements with Prime LLC, the decision "was by mutual consent" of Prime Inc. and the Publics. Upon termination of the Agreements, the Publics immediately entered into substantially identical contracts with Pillar.

         On January 9, 2013, the Publics and Pillar filed a declaratory judgment action in Nevada state court against Prime LLC, Prime Inc., and Hometown, seeking a declaration that the Publics and Pillar were not the alter egos of Prime LLC and Prime Inc. Hometown removed the Nevada action to the United States District Court for the District of Nevada on February 20, 2013.

         Asserting that it was unable to collect on its judgment, Hometown filed the instant action against Prime LLC as well as: (1) Prime Inc.; (2) the Publics; (3) Pillar;[7] and (4) individual defendants who served as officers or directors of Prime LLC-and held the same or substantially similar positions in Prime Inc. and the Publics[8]-asserting claims for fraudulent transfer under the Texas Uniform Fraudulent Transfer Act ("TUFTA"), [9] tortious interference with existing contract, alter ego, and assisting and participating in a conspiracy. Under the first-filed doctrine, the Northern District of Texas transferred this case to the District of Nevada. However, the District of Nevada returned this case-as well as the first-filed suit by the Publics and Pillar-to the Northern District of Texas for two reasons. First, the court found that Defendants' initial Nevada filing was "an anticipatory-strike suit and thus the first-to-file rule does not apply." Second, the court found that "considerations of convenience" favored transfer to Texas.[10]

         Plaintiff filed its First Amended Complaint in the Northern District of Texas.[11] The district court dismissed the TUFTA claim, finding that "the Advisory Agreements were not 'assets' [covered by TUFTA] and thus no transfer occurred." Plaintiff timely appealed.


         We turn first to the question of our jurisdiction.[12] Defendants challenge Hometown's assertion as to citizenship. Hometown is a Texas limited liability company with one member, U.S. Bank National Association ("U.S. Bank").[13]According to the "'oft-repeated rule' that diversity jurisdiction in a suit by or against [artificial entities other than corporations] depends on the citizenship of 'all [its] members, '"[14] we must look to the citizenship of U.S. Bank to determine Hometown's citizenship. There is no dispute that U.S. Bank is a national bank with citizenship in Ohio.[15]

         Defendants argue that our inquiry does not stop there; citing to Americold Realty Trust v. Conagra Foods, Inc., [16] Defendants reason that since U.S. Bank in its capacity as a trustee is the sole member of Hometown, the citizenship of the "members"[17] of that trust ought be accounted for. We disagree. Americold involved a Maryland Real Estate Investment Trust, nominally a trust but in reality an unincorporated business entity recognized by statute.[18] For traditional trusts, the Americold court held that "when a trustee files a lawsuit or is sued in her own name, her citizenship is all that matters for diversity purposes."[19] We need look no further than U.S. Bank's citizenship to conclude that Hometown is a citizen of Ohio.

         The parties agree that Defendants are citizens of Nevada and Texas. On appeal, Defendants also assert that Mr. Moos is a citizen of Louisiana because his principal residence is there.[20] Regardless, the parties are diverse if all defendants are citizens of states other than Ohio. This Court has subject matter jurisdiction.


         Hometown next argues that the district court should not have dismissed its TUFTA claims under Rule 12(b)(6); that the finding that Prime LLC's Advisory Agreements were not assets under TUFTA was in error. Reviewing de novo, [21] we must affirm if, assuming the factual allegations in the complaint true, [22] Hometown has "fail[ed] to state a claim upon which relief can be granted."[23] In our review, we may consider the content of the Advisory Agreements, [24] as well as the Publics' SEC filings, [25] in addition to the pleadings.

         Hometown alleges that Defendants fraudulently transferred the Advisory Agreements to Pillar in violation of TUFTA. TUFTA defines "transfer" broadly to include "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."[26] "Asset" is defined under TUFTA as "property of a debtor;"[27] "property" in turn is defined as "anything that may be the subject of ownership."[28] The district court determined that "the Advisory Agreements were not 'assets' and thus no transfer occurred."

         In dismissing the TUFTA claims, the district court relied heavily on two bankruptcy cases from the Seventh Circuit. In In re Commodity Merchants, Inc., the Seventh Circuit considered whether a cancelled commodity contract constituted a fraudulent transfer.[29] The court noted that the cancellation was pursuant to a common provision, triggered when "[the bankrupt's] financial position became unsatisfactory."[30] The Seventh Circuit agreed with the conclusion of the bankruptcy court that the contracts had been terminated in good faith and pursuant to their legally enforceable terms.[31] Observing that "[t]he essence of a transfer is the relinquishment of a valuable property right, "[32] and as the bankrupt had no right to the commodities at issue when the contracts were terminated, the court concluded there was no transfer of a property right.[33] The court also found that, cancellation aside, the contracts were not freely assignable and had no market value in light of the termination provisions, [34] so that their cancellation could not sustain a claim of fraudulent transfer.[35]

         Similarly, in In re Wey, the Seventh Circuit dealt with the forfeiture of the bankrupt's down payment as part of a contract for the sale of real property.[36] After a sizeable down payment for the purchase of a hotel in the U.S. Virgin Islands, the bankrupt purchaser could not pay the balance at closing.[37] Per the terms of the sale contract, the bankrupt forfeited his deposit.[38] The trustee in bankruptcy attempted to have the contract forfeiture set aside as a fraudulent transfer.[39] Citing Commodity Merchants, the Seventh Circuit held that "[w]hen a termination is pursuant to the terms of a contract, there is no transfer."[40]

         We agree. The rub is that the contracts here were not freely terminable. Rather, the Advisory Agreements provided for termination without cause upon sixty days' written notice. Plaintiff asserts that Prime's termination of the Agreements in disregard of the sixty-day notice term effected a transfer; that income under the Advisory Agreements would have otherwise been paid to Prime LLC during the sixty-day notice period, a future income stream asset under TUFTA's broad definition. Defendants reply that, because "[t]he right to income under the Advisory Agreements did not vest until the services were performed, " future compensation under the contracts had not yet vested and could not constitute a TUFTA asset.

         Defendants' reading misstates the contracts' compensatory scheme, reading the sixty-day notice provision as a superfluity. While other forms of compensation due under the contracts were tied to performance metrics or specific services, [41] the base pay was triggered on the fifteenth day of each month. That amount would have been due and payable at least once during the sixty-day notice period, subject only to Prime's continued good-faith performance of its contractual duties. Waiver of the sixty-day notice period effected a transfer of the right to continue performance under the Agreements and receive the payments due thereunder, payments which had ...

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