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In re Galaz

United States Court of Appeals, Fifth Circuit

March 10, 2017

In the Matter of: LISA ANN GALAZ Debtor
v.
LISA ANN GALAZ and JULIAN JACKSON Appellees RAUL GALAZ and SEGUNDO SUENOS, L.L.C., Appellants

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

          Before SMITH, CLEMENT, and SOUTHWICK, Circuit Judges.

          EDITH BROWN CLEMENT, Circuit Judge:

         Appellants Raul Galaz ("Raul") and Segundo Suenos, LLC[1] appeal the district court's judgment awarding actual and exemplary damages to debtor Lisa Ann Katona, formerly known as Lisa Galaz ("Lisa"). We AFFIRM the judgment of the district court.

         I

         This case is on appeal before this court for the second time. See Galaz v. Galaz (In re Galaz I), 765 F.3d 426 (5th Cir. 2014). It is just the latest episode in a series of lawsuits dating back ten years.

         Raul founded Artist Rights Foundation, LLC ("ARF") with Julian Jackson ("Jackson") in 1998, and each originally held a 50 percent membership interest in ARF. When Lisa divorced Raul in 2002, she obtained a 25 percent economic interest in ARF-half of his 50 percent interest. ARF's assets consisted of the rights to the royalties from the music of the Ohio Players, a former funk band.

         In June 2005, without the knowledge of Jackson or Lisa, Raul transferred ARF's royalty rights to "Segundo Suenos"-which at the time, "was not organized as a business entity under the laws of any state." In re Galaz I, 765 F.3d at 428. In September 2005, Raul assisted his father, Alfredo Galaz ("Alfredo") in establishing Segundo Suenos, LLC ("Segundo") in Texas. Raul asserts that Alfredo is the "sole owner" of Segundo. Soon after the transfer, the royalties began to generate a substantial amount of revenue. Segundo received nearly a million dollars from the transfer until trial in February 2010. Lisa did not receive any share of the revenue, despite her 25 percent interest in ARF. Raul unilaterally dissolved ARF in December 2006.

         Lisa filed for Chapter 13 bankruptcy in December 2007. In April 2008, Lisa brought this adversary proceeding against Raul, Alfredo, and Segundo, alleging that they fraudulently transferred the assets of ARF to Segundo and defrauded Lisa of her interest. Raul, Alfredo, and Segundo filed a third-party complaint against Jackson, and Jackson asserted seven counterclaims against them. Id. at 429.

         "After a five-day bench trial, the bankruptcy court found that the transfer of assets from ARF to Segundo Suenos was invalid, that it constituted a fraudulent transfer under TUFTA, that Raul owed fiduciary duties to [Jackson] and had breached those duties, and that Raul owed no fiduciary duties to Lisa." Id. The bankruptcy court held Raul and Segundo liable, but held Alfredo not liable. Id. at 429 & n.4. The bankruptcy court awarded actual and exemplary damages to Lisa and Jackson. Id. at 429.

         Raul and Segundo appealed to the district court, which affirmed the bankruptcy court's judgment as to liability but vacated and remanded for redetermination of actual and exemplary damages. Id. On remand, the bankruptcy court awarded actual and exemplary damages consistent with the district court's instructions. Id. Appellants again appealed to the district court, which affirmed. Id. Appellants then appealed to this court. Id.

         This court vacated and remanded the bankruptcy court's judgment on jurisdictional grounds, with instructions to dismiss Jackson's third-party counterclaims for lack of subject-matter jurisdiction. Id. at 431, 434. This court also determined that Lisa's claims were non-core bankruptcy claims, and remanded for the district court to enter final judgment after further consideration. Id.

         On remand, the district court referred this adversary proceeding to the bankruptcy court. The bankruptcy court submitted proposed findings of fact and conclusions of law pursuant to 28 U.S.C. § 157(c)(1). After de novo review, the district court adopted those findings of fact and conclusions of law, invalidating the transfer of assets ...


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