Case No. 03-60190, Adversary No. 04-6085.
June 4, 2007
FINDINGS OF FACT AND CONCLUSIONS OF LAW
Now before the Court for consideration is the "Complaint for the Return of Fraudulently Transferred Assets and Injunction Against Disposition of Transferred Assets" filed in the above-referenced adversary proceeding. By his complaint, Bob Anderson (the "Trustee"), the Trustee for the Chapter 7 Bankruptcy Estate of Mega Systems, L.L.C., seeks to avoid the Debtor's transfer of essentially all of its operating assets to Mega Lift Systems, L.L.C. ("Mega Lift") under various theories arising under both the Bankruptcy Code and Texas state law. Additionally, the Trustee seeks an award of punitive damages against Mega Lift and its co-defendant, James Lee Bartley ("Bartley"), who owned and controlled both the Debtor-transferor and the transferee, Mega Lift. Finally, the Trustee seeks the imposition of an injunction to prevent Bartley and Mega Lift from again transferring the assets in question. A trial was held on February 20, 2007, after which the Court solicited the filing of post-trial briefs on designated topics. Upon receipt of the post-trial briefs, the Court took the matter under advisement. These findings of fact and conclusions of law dispose of all issues pending before the Court.
The theories asserted by the Trustee as grounds for setting aside the transfers are: fraudulent transfer under both § 548(a)(1)(A) and (a)(1)(B) of the Bankruptcy Code; fraudulent transfer under Chapter 24 of the Tex. Business and Commerce Code, incorporating 11 U.S.C. §§ 542 and 544; breach of fiduciary duty; and fraud.
Findings of Fact
For ease of reference in distinguishing it from the transferee-defendant, Mega Lift Systems, L.L.C., the transferor-debtor, Mega Systems, L.L.C., will be referenced throughout these findings and conclusions as "the Debtor," regardless of whether any particular reference to Mega Systems, L.L.C. in any finding or conclusion occurred before or after the actual filing date of its bankruptcy case.
With the exception of certain grammatical changes, findings of fact ## 1-6 herein are taken from Agreed Issues of Fact ## 1-6 as stipulated by the parties in the Pre-Trial Order approved in this adversary proceeding on February 7, 2007 (dkt #59).
Agreed Issue of Fact #32.
Agreed Issue of Fact #33.
Agreed Issue of Fact #34.
With the exception of certain grammatical changes, findings of fact ## 11-34 herein are taken from Agreed Issues of Fact ## 7-30 as stipulated by the parties in the Pre-Trial Order.
Agreed Issue of Fact #31.
Plaintiff's Ex. 1-4.
See Plaintiff's Ex. 3 and Defendants' Ex. 4.
The Court notes that, in addition to the lack of sufficient evidence on the issue of damages, there is no evidence that Ferguson Beauregard or any other entity reasonably relied on Bartley's silence. Reasonable reliance is a necessary element of a cause of action for fraud. Great Plains Trust Co. v. Morgan Stanley Dean Witter Co., 313 F.3d 302, 322 (5th Cir. 2002).
While the Court acknowledges the Trustee's arguments regarding fiduciary duties which arise in favor of creditors when a debtor approaches a "zone of insolvency," the Court also notes the cogent analysis and rejection of this theory of recovery under Texas law set forth by the Hon. Melinda Harmon in Floyd v. Hefner, 2006 WL 2844245, at *10 (S.D. Tex. Sept. 29, 2006). Furthermore, even if the Court were to accept the proposition that a director of a corporation approaching insolvency owes fiduciary duties to the corporation's creditors, it is difficult to see how a defendant in on-going litigation would owe fiduciary duties to the plaintiffs in such litigation such that he would be obligated to disclose all asset movement at the defendant corporation when the parties are situated in such an adversarial posture.
See ¶ E of the prayer of the Plaintiff's Complaint at p. 22.