Court Opinion

ID: 23192
Source: CourtListenerOpinion
Date Created: 2010-04-25 08:07:21+00
Date Added: 2024-06-11T15:04:46.866096
License: Public Domain

UNITED STATES COURT OF APPEALS

                        FOR THE FIFTH CIRCUIT

                             No. 00-10253

                Geneva Corporate Finance, Inc. F/K/A
                   Geneva Business Services, Inc.,

                                                     Plaintiff-Appellee,

                                  VERSUS

         Clyde C. Waddell, Jr. Hester’s Office Center, Inc.,
                     and Crone Oil Company, Inc.,

                                                 Defendants-Appellants.

            Appeal from the United States District Court
        For the Northern District of Texas, Lubbock Division
                           (5:98-CV-185-C)
                            March 7, 2001
Before POLITZ, SMITH, and PARKER, Circuit Judges.

PER CURIAM:*

       This case involves a creditor’s attempts to collect a judgment

from   corporate   shareholders   under    article   2.21   of   the   Texas

Business Corporations Act.     Appellants Clyde Waddell and his two

corporations, Hester’s Officenter and Crone Oil Company, argue that

  *
   Pursuant to 5TH CIR. R. 47.5, the Court has determined that this
opinion should not be published and is not precedent except under
the limited circumstances set forth in 5TH CIR. R. 47.5.4.

                                    1
there is insufficient evidence in the record to support the jury’s

verdict holding the appellants liable for the debt that Officenter

owed to Geneva Corporate Finance.

                                  I.

      Clyde Waddell was the sole shareholder of Hester’s Officenter

and Crone Oil Company.   Hester’s Office Center was in turn the sole

shareholder of Officenter, Inc., which sold office furniture and

supplies.     In order to supplement cash flow deficiencies, Plains

National Bank loaned approximately $2.3 million to Hester’s, which

in turn loaned the full amount to Officenter. Plains National Bank

filed security interests against Officenter’s accounts receivable.

Waddell and Crone Oil Company also executed loans to Officenter.

      On March 22, 1994, Officenter sent an engagement letter to

Geneva Corporate Finance, requesting that Geneva find a purchaser

of Officenter’s assets for a “success fee” based on the total sales

price.   After Geneva failed to locate a purchaser in the following

two years, Officenter, with the help of a third party, contacted

Sewco, Inc.     On March 20, 1996, Sewco agreed to purchase all of

Officenter’s assets.

      The day after the sale, Officenter transferred its employees,

floor-planned inventory and trade receivables to its parent company

Hester’s.1    The proceeds of the sale were paid through Hester’s to

  1
   “Floor-planned” inventory is owned by a finance company. The
retailer may earn a profit if the merchandise is sold, but the
retailer never receives title to the goods.

                                  2
Plains   National    Bank   and   several   vendors.   For   reasons   not

articulated in the record, Plains National Bank required Hester’s

to sign the notes as the parent company.           Hester’s also repaid

Waddell $30,000, which he loaned to Officenter for a down payment

to Geneva.

     As Hester’s continued to pay Officenter’s debts, a dispute

arose between Officenter and Geneva concerning Geneva’s portion of

the sale proceeds.       Officenter claimed that it did not owe the

entire fee to Geneva because Geneva failed to locate a purchaser.

Officenter submitted a settlement offer, which Geneva rejected.

The parties submitted their case to arbitration, and the arbitrator

awarded Geneva $170,848.35 on November 9, 1996.        By this time, all

of the sale proceeds had been paid to Officenter’s creditors.

     Geneva reduced the arbitration award to a judgment against

Officenter. Hester’s continued to pay its debts to Plains National

Bank, Waddell, and Crone Oil, but did not pay any part of Geneva’s

judgment against Officenter.         In October of 1997, Waddell sold

Hester’s for $500,000.

     Geneva filed suit in the United States District Court for the

Northern District of Texas, Lubbock Division, seeking a judgment

against Waddell, personally, as well as his two companies, Hester’s

and Crone Oil.      Geneva asserted claims that Waddell, Hester’s and

Crone Oil were alter-egos of Officenter, that Waddell denuded

assets from Officenter, and that the payments from Officenter to

its creditors were fraudulent transfers.           At the close of the

                                     3
plaintiff’s evidence, Waddell, Hester’s and Crone Oil moved for

judgment as a matter of law, which the district judge denied.    The

district judge instructed the jury on Geneva’s alter-ego claim

under article 2.21 of the Texas Business Corporations Act, but

refused Geneva’s proposed instruction concerning a common law cause

of action for denuding corporate funds.

     The jury rendered a verdict in favor of Geneva.        Waddell,

Hester’s and Crone Oil renewed their motion for judgment as a

matter of law, claiming that there was insufficient evidence to

support a finding of liability based on the alter-ego theory under

article 2.21.   They also argued that the fraudulent transfer claim

under § 24.006 of the Texas Business and Commerce Code was barred.

In its response, Geneva stated that its sole theory of recovery was

the article 2.21 alter-ego claim.      The district judge denied the

motion and entered its judgment against Waddell, Crone Oil and

Hester’s.

                                II.

     We assess the district court’s denial of a motion for judgment

as a matter of law de novo.   Ford v. Cimarron Ins. Co., Inc., 230
F.3d 828, 830 (5th Cir. 2000).       “Judgment as a matter of law is

proper after a party has been fully heard by the jury on a given

issue, and ‘there is no legally sufficient evidentiary basis for a

reasonable jury to have found for that party with respect to that

issue.’” Foreman v. Babcock & Wilcox Co., 117 F.3d 800, 804 (5th

                                 4
Cir. 1997) (quoting FED. R. CIV. P. 50(a)).             Geneva continues to

deny that their case is governed by the Texas Uniform Fraudulent

Transfer Act.     See TEX. BUS. & COM. CODE ANN. § 24.006 (Vernon 1987 &

Supp. 2000).     Our review is therefore confined to Geneva’s alter-

ego claim under article 2.21 of the Texas Business Corporations

Act.

       A plaintiff seeking to pierce the corporate veil and hold a

shareholder liable for a corporation’s contractual obligations must

demonstrate that the shareholder “caused the corporation to be used

for the purpose of perpetuating and did perpetuate an actual fraud

on the obligee primarily for the direct personal benefit of the

[shareholder].”        TEX. BUS. CORP. ACT ANN. art. 2.21 (Vernon Supp.

2000).    There are several types of fraud, including fraudulent

inducement, fraudulent concealment, and misrepresentation.                   See

Kajima Int’l, Inc. v. Formosa Plastics Corp., 15 S.W.3d 289, 292

(Tex. App.–-Corpus Christi 2000).              Although most courts have

applied the elements of fraudulent misrepresentation to article

2.21 claims,     the    district   court     defined   actual   fraud   in   its

instructions to the jury as “involving dishonesty of purpose or

intent   to    deceive.”2     Absent       timely   objection   or   suggested

alternative language, the jury is to be guided by the instruction

as given.     See Thrift v. Hubbard, 44 F.3d 348, 354 (5th Cir. 1995).

  2
   See Menetti v. Chavers, 974 S.W.2d 168, 175 (Tex. App.–-San
Antonio 1998, no writ); Harco Energy, Inc. v. The Re-Entry People,
Inc., 23 S.W.3d 389, 397 (Tex. App.–-Amarillo, 2000 n.w.h.).

                                       5
       Geneva claims that Waddell, Hester’s, and Crone Oil intended

to prevent Geneva from collecting its judgment by transferring

Officenter’s assets to Hester’s, which in turn relinquished the

remaining funds to creditors other than Geneva.3         A debtor in Texas

has the right to prefer an obligation to one creditor over an

obligation to another creditor, as long as the debtor’s preference

is devoid of fraudulent intent. See, e.g., Englert v. Englert, 881
S.W.2d 517, 518 (Tex. App.–-Amarillo 1994, no writ) (holding that

intent to deceive creditors will not be inferred in fraudulent

transfer cases).   “[F]raudulent intent must be affirmatively shown

and will not be presumed.”       See id.

       We do not think the evidence supports a finding that Waddell,

Crone Oil and Hester’s intended to deceive or dishonestly deprived

Geneva of its claim to the sale proceeds.      There is no evidence in

the record to suggest that Officenter raised its dispute over the

amount of money owed to Geneva in bad faith.             Officenter had no

reason to postpone payments to its other creditors until the

resolution of the contractual dispute with Geneva.         By the time the

arbitrator issued the award in favor of Geneva, the sales proceeds

were   depleted.    The    record   shows   that   the    remaining   items

Officenter   transferred    to   Hester’s   were   accounts    receivable,

  3
   We note that the judgment against Office Center directly related
to Office Center’s contract with Geneva for purposes of asserting
an alter-ego claim under article 2.21. See TEX. BUS. CORP. ACT art.
2.21(A)(2).

                                    6
secured by Plains National Bank, and floor-planned inventory, which

Office Center did not own.     All of the payments Officenter and

Hester’s tendered to Plains National Bank, Hester’s, Waddell, and

Crone Oil were payments for legitimate debts.

      The record does not support a conclusion that Waddell used

Officenter to perpetrate an actual fraud on Geneva.    See TEX. BUS.

CORP. ACT art. 2.21(A)(2).   To the contrary, Officenter was simply

going out of business.   Because there is insufficient evidence to

support a finding of actual fraud as defined by the district court,

we reverse and render judgment in favor of Waddell, Hester’s and

Crone Oil.4

REVERSED and RENDERED

  4
   We note that § 24.006 of the Texas Uniform Fraudulent Transfer
Act allows a creditor to avoid transfers made to insiders for an
antecedent debt if the debtor was insolvent at the time of the
transfer and the insider had reason to believe the debtor was
insolvent. See TEX. BUS. & COM. CODE ANN. §§ 24.006, 24.008 (Vernon
1987 & Supp. 2000). Because the district court did not instruct
the jury as to a fraudulent transfer claim and Geneva consistently
rejects this theory of recovery, we have no reason to review the
evidence under the Uniform Fraudulent Transfer Act.

                                  7