Lawsuit Regarding Alleged Fraudulent Money Transfers and Corporate Entities, Study notes of Business

Download Lawsuit Regarding Alleged Fraudulent Money Transfers and Corporate Entities and more Study notes Business in PDF only on Docsity! UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TEXAS SAN ANTONIO DIVISION FRANK BRAMANTE and § SALVATORE BRAMANTE, § § Plaintiffs, § v. § § CIVIL ACTION NO. DOUGLAS A. MCCLAIN, SR., § DOUGLAS A. MCCLAIN, JR., § SA-06-CA-0010 OG (NN) SW ARGYLL INVESTMENTS, LLC, § YELLOW JACKET MANAGEMENT § COMPANY, § F.I.T. MANAGEMENT, LLC a/k/a § F.I.T. MANAGEMENT GROUP, LLC, § F.I.T. HOLDINGS, LTD., § B.V.I. OFFSHORE FUND, § THE FIT GROUP, INC., § THE ARGYLL GROUP, LLC, § F.I.T. EQUITIES, LLC, § F.I.T. INVESTMENTS, LLC, § F.I.T. CAPITAL, LLC, § ARGYLL MANAGEMENT, LLC, § ARGYLL CAPITAL, LLC, § ARGYLL ENERGY, LLC, § ARGYLL INVESTMENT, LLC, § THE F.I.T. GROUP, a Texas Limited § Liability Company, § ARGYLL BIOTECHNOLOGIES, LLC, § ARGYLL EQUITIES, LLC, § PADMORE HOLDINGS, LTD., § and DEBRA A. MCCLAIN, § § Defendants, § § and § § FIRST SOUTHWEST COMPANY, § § Trustee. § Case 5:08-cv-00444-OLG Document 400 Filed 12/18/07 Page 1 of 19 Docket entry # 160.1 These defendants are The Argyll Group, LLC; Argyll Management, LLC; Argyll Capital, LLC;2 Argyll Investment, LLC; Argyll Biotechnologies, LLC; and Argyll Equities, LLC. 2 MEMORANDUM AND RECOMMENDATION ON THE ARGYLL DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT This memorandum and recommendation addresses the motion for summary judgment filed by the Argyll defendants. The memorandum and recommendation is the second of other1 memorandums and recommendations to follow to resolve pending motions prior to trial. Because the District Court is already familiar with this case—having conducted a hearing at a previous time—this memorandum and recommendation includes only the background the District Court needs to resolve the motion for summary judgment. Background and Nature of the Case This lawsuit stems from the plaintiffs’ attempt to collect on a $4,500,000.00 default judgment against defendant Douglas A. McClain, Sr. (McClain Sr.) The judgment was entered in the United States District Court for the District of Massachusetts on June 1, 2005. The plaintiffs here allege that McClain Sr. has engaged in fraudulent money transfers to avoid payment of the judgment. The plaintiffs allege that McClain Sr. has transferred assets to his son—defendant Douglas McClain Jr.—and other family members to avoid payment. The plaintiffs have also sued McClain Sr.’s wife—Debra McClain—and various business entities of which the plaintiffs allege that McClain Sr. is a member, partner, owner, shareholder or authorized agent. The parties refer to some of these entities as the Argyll defendants. The2 Argyll defendants filed the motion for summary judgment addressed by this memorandum and recommendation. Summary judgment is appropriate “if the pleadings, the discovery and Case 5:08-cv-00444-OLG Document 400 Filed 12/18/07 Page 2 of 19 Id. at 245.12 These defendants are: F.I.T. Management, LLC a/k/a F.I.T. Management Group, LLC; F.I.T.13 Holdings, Ltd.; The FIT Group, Inc; F.I.T. Equities, LLC; F.I.T. Investments, LLC; F.I.T. Capital, LLC; and The F.I.T. Group, a Texas Limited Liability Company. See appx. to docket entry #s 189 & 190, exh. A, tab to Nov. 6, 2007 deposition.14 See appx. to docket entry #s 189 & 190, exh. B, p. 122 of Oct. 19, 2006 deposition.15 See appx. to docket entry #s 189 & 190, exh. B, p. 26 of Jan. 5, 2007 deposition.16 See appx. to docket entry #s 189 & 190, exh. B, p. 40 of Oct. 19, 2006 deposition.17 5 of the corporation’s outstanding stock.”12 The Argyll defendants maintain that no evidence exists of unity because the plaintiffs cannot show that McClain Sr. has an ownership interest in, or control over, the Argyll defendants. The plaintiffs, however, presented summary judgment evidence raising a fact question about these issues. That evidence is discussed in the following paragraphs. The plaintiffs presented evidence suggesting that McClain Sr. created a group of corporate entities with similar names, one being F.I.T. Management Group. This memorandum refers to these entities collectively as the F.I.T. defendants. The plaintiffs’ summary-judgment13 evidence suggests that the F.I.T. entities ultimately became the Argyll entities that are defendants in this case. The plaintiffs presented a partnership agreement showing that McClain Sr., McClain Jr. and James T. Miceli were partners in F.I.T. Although the partnership agreement14 indicates that the three were equal partners in companies resulting from the partnership, McClain Sr. testified that he was “F.I.T. Management.” McClain Sr. stated that he was the only15 shareholder and owner of F.I.T. McClain Sr. explained that he was a principal of F.I.T. Group16 and F.I.T. Holdings in 2003, but worked as a consultant for Argyll. Even though McClain Sr.17 Case 5:08-cv-00444-OLG Document 400 Filed 12/18/07 Page 5 of 19 See appx. to docket entry #s 189 & 190, exh. A, pp. 32-3 of Nov. 6, 2006 deposition.18 See appx. to docket entry #s 189 & 190, exh. B, p. 36 of Jan. 5, 2007 deposition.19 See appx. to docket entry #s 189 & 190, exh. A, p. 42 of deposition of Nov. 6, 2006.20 See appx. to docket entry #s 189 & 190, exh. A, p. 84 of deposition of Nov. 6, 2006.21 See id. at p. 214.22 See appx. to docket entry #s 189 & 190, exh. C, pp. 60-1 of deposition of Oct. 9, 2006.23 See docket entry # 370, exh. B.24 See appx. to docket entry #s 189 & 190, exh. C, pp. 148-9 of deposition of Oct. 9, 2006.25 See docket entry # 370, exh. A.26 6 represented that he was the sole owner of F.I.T., Miceli testified that McClain Sr. had a one-third equity stake in the F.I.T. companies.18 The summary-judgment evidence indicates that prior to October 2002, McClain Jr. and James T. Miceli either worked for F.I.T. or were partners in F.I.T. McClain Jr. and Miceli claim they left F.I.T. to form the Argyll defendants, yet they continued to receive money from F.I.T.19 Around the time Argyll was created, F.I.T. ceased to exist. Argyll kept the F.I.T. lease space,20 21 signed a lease reflecting F.I.T. instead of Argyll, and used the same phone number as F.I.T. 22 23 The amount of $39,000.00 was transferred from a F.I.T. bank account to Argyll in November 2002. Miceli testified that he transferred money from Argyll to F.I.T. A letter of introduction24 25 for Argyll Equities purports to introduce the addressee to the principles and appropriate parties that make up the F.I.T. Family and reflects the F.I.T. Group’s website. 26 Miceli described McClain Sr.’s role in Argyll as a consultant, receiving a monthly Case 5:08-cv-00444-OLG Document 400 Filed 12/18/07 Page 6 of 19 See appx. to docket entry #s 189 & 190, exh. A, p. 27-8 of Nov. 6, 2007 deposition.27 See appx. to docket entry #s 189 & 190, exh. A, p. 127 of Nov. 6, 2007 deposition.28 See id. at pp. 71-2, 126.29 See id. at pp. 142-5.30 See id. at pp. 178-81; see appx. to docket entry #s 189 & 190, exh. C, pp. 46-7 & 60 of31 deposition of Oct. 18, 2006. See appx. to docket entry # 189 & 190, exh. F.32 See id.33 See appx. to docket entry #s 189 & 190, exh H.34 See id.35 7 salary. Miceli testified that McClain Sr. had no ownership interest in Argyll, but he stated that27 McClain Sr. was a director of Argyll. Argyll paid for McClain Sr.’s health insurance, cell28 phone and car, and transferred money to McClain Sr.’s wife—defendant Debra McClain—and29 McClain Sr.’s mother, Muriel McClain. Even though they left F.I.T., Miceli and McClain Jr.30 signed checks from F.I.T.’s account in 2003.31 Craig Zabala testified that McClain Sr. told him that he was changing F.I.T.’s name to Argyll–that the name change was a conversion. Zabala stated that McClain Sr. told him that32 McClain Jr. was going to work for him, along with McClain Sr.’s partner, Miceli. Steve Martin33 attested that McClain Sr. told him that McClain Jr. and Miceli started Argyll with assets and capital from F.I.T. Management Group, leaving F.I.T.’s debts left with McClain Sr. Martin34 further attested that McClain Jr. confided in him that Argyll really belonged to McClain Sr., but that they had to keep Argyll clean from all of F.I.T.’s liabilities.35 Although the plaintiffs presented additional summary-judgment evidence, the evidence Case 5:08-cv-00444-OLG Document 400 Filed 12/18/07 Page 7 of 19 See docket entry # 232, ¶ 2.1.43 See docket entry # 160, ¶ 7.3.44 See appx. to docket entry #s 189 & 190, exh. A, attach. 1, ¶ 1.45 See id. at ¶ 2.46 See id. at ¶ 6.47 10 McClain Sr. is partner in Argyll, and the agreement hasn’t been in effect for years. The43 44 plaintiffs, however, have presented sufficient summary-judgment evidence to raise a fact question about these issues. Although the partnership agreement doesn’t specifically name the Argyll defendants, the language of the agreement is broad enough to encompass the Argyll defendants. The agreement purports to create a partnership for the purpose of “devising, creating, designing, pursuing, formulating, enacting and engaging in all companies, corporations, partnerships, or legal entities which are or have been or will be used by [McClain Sr, McClain Jr, and Miceli] for the purpose of creating any income or tangible item recognized as having value foreign or domestic.” The agreement names the entities created by and for the benefit of the45 partnership as including a group of entities operating under the name “The F.I.T. Group,” but “not limited to” that group. Although the Argyll defendants maintain that the agreement has46 not been in effect for several years, the agreement states its term as “fifteen years, unless the partners mutually agree in writing to a shorter period.” The summary-judgment evidence does47 not include a writing terminating the agreement by mutual agreement. In addition, the summary-judgment includes evidence of the statutory factors listed above for showing partnership: (1) Receipt or right to receive a share of profits of the business: The partnership Case 5:08-cv-00444-OLG Document 400 Filed 12/18/07 Page 10 of 19 See id. at ¶ 5.48 See id. at ¶ 1.49 See id. at ¶ 3.50 See appx. to docket entry #s 189 & 190, exh. B, p. 122 of Oct. 19, 2006 deposition.51 See appx. to docket entry # 189 & 190, exh. F.52 See id.53 See appx. to docket entry #s 189 & 190, exh. A, p. 127 of Nov. 6, 2007 deposition.54 11 agreement states that, “[t]he profits and losses of the partnership shall be divided amongst the partners . . . .”48 (2) Expression of an intent to be partners in the business: The agreement states that McClain Sr., McClain Jr. and Miceli “agree that they shall be exclusive partners. . . .”49 (3) Participation or right to participate in control of the business: The partnership agreement states that “[e]ach partner shall have equal rights to manage and control the partnerships and it’s [sic] businesses.” McClain Sr. testified that he was F.I.T. Craig testified50 51 that McClain Sr. told him that he was changing F.I.T.’s name to Argyll. Martin attested that52 McClain Jr. confided in him that Argyll really belonged to McClain Sr. If McClain Sr. was the53 sole shareholder of the F.I.T. entities and those entities became the Argyll defendants, McClain Sr. would have the right to participate in and control the Argyll defendants. Miceli testified that McClain Sr. was a director of Argyll. As a director, McClain Sr. would have a right to54 participate in and control the Argyll defendants. Evidence indicating that $39,000.00 from an F.I.T. account was used to open Argyll’s bank account at the same bank suggests that McClain Case 5:08-cv-00444-OLG Document 400 Filed 12/18/07 Page 11 of 19 See docket entry # 370, exh. B.55 See appx. to docket entry #s 189 & 190, exh. A, attach. 1, ¶ 5.56 See id. at ¶ 4.57 See docket entry # 297, ¶¶ 101-6.58 Id. at ¶¶ 103-4.59 12 Sr. used his assets in F.I.T. to start the Argyll defendants. This evidence indicates that McClain55 Sr. has participated in and has exercised control over the Argyll defendants. (4) Sharing or agreeing to share the losses of the business or liability for claims by third parties against the business: The partnership agreement states that the “losses of the partnership shall be divided amongst the partners . . . .”56 (5) Contributing or agreeing to contribute money or property to the business: The partnership agreement states that the “capital contribution of each partner shall consist of the property, services, or cash that each partner has contributed.”57 The summary-judgment evidence discussed above is sufficient to raise a fact question about the existence of a partnership between the Argyll defendants and McClain Sr. such that the Argyll defendants are not entitled to summary judgment. The Plaintiffs’ Claims Based on Joint Enterprise The plaintiffs also seek to hold the Argyll defendants liable based on a joint enterprise. 58 The plaintiffs allege that McClain Sr. worked together with the Argyll defendant in a joint enterprise to engage in actual and constructive fraud, allowing the court to pierce the business entities and hold the entities liable for the judgment and fraudulent transfers. The Argyll59 defendants move for summary judgment on this claim, arguing that no evidence exists that they Case 5:08-cv-00444-OLG Document 400 Filed 12/18/07 Page 12 of 19 See appx. to docket entry #s 189 & 190, exh. B, p. 122 of Oct. 19, 2006 deposition; appx. to72 docket entry #s 189 & 190, exh. B, p. 26 of Jan. 5, 2007 deposition; appx. to docket entry # 189 & 190, exh. F; appx. to docket entry #s 189 & 190, exh H. See appx. to docket entry #s 189 & 190, exh. A, p. 127 of Nov. 6, 2007 deposition.73 See docket entry # 297, ¶¶ 92-100.74 See id.75 See id.76 15 suggest, but the time that McClain Sr. made the alleged transfers to avoid payment of the judgment. Relevant to that time period, the plaintiffs presented summary-judgment evidence indicating that McClain Sr. owned the F.I.T. entities and converted those entities to the Argyll defendants. They also presented evidence indicating that McClain Sr. was a director for72 Argyll. McClain Sr. would have an authoritative voice or some voice and right to be heard if he73 owned the Argyll defendants or was a director for the Argyll defendants. The plaintiffs have presented summary-judgment evidence raising a fact question about the right to control. Having presented summary-judgment evidence raising a fact question about the third and fourth elements of their joint-enterprise claim, the plaintiffs survive summary judgment. Plaintiffs’ Claims under the Texas Uniform Fraudulent Transfer Act The plaintiffs allege that the individuals and entities named as defendants violated the Texas Uniform Fraudulent Transfer Act (TUFTA). The plaintiffs maintain that actionable74 transfers include the creation of the Argyll defendants following the dissolution of the F.I.T. companies. The plaintiffs maintain that the value of real and intangible aspects of the F.I.T.75 companies was transferred to the Argyll defendants. The Argyll defendants move for summary76 judgment on this claim, arguing that no evidence exists to show that McClain Sr. transferred any Case 5:08-cv-00444-OLG Document 400 Filed 12/18/07 Page 15 of 19 See docket entry # 160, ¶¶ 9.1-9.8.77 See TEX. BUS. & COMM. CODE ANN. §§ 24.001-24.013 (Vernon 2002 & Supp. 2006).78 Telephone Equipment Network v. TA/Westchase Place, 80 S.W.3d 601, 607 (Tex.79 App.—Houston [1st Dist.] 2002, no pet.). TEX. BUS. & COMM. CODE ANN. § 24.002(12) (Vernon 2002).80 See docket entry # 370, exh. B.81 See appx. to docket entry #’s 189 & 190, exh. D, p. 27.82 See appx. to docket entry #s 189 & 190, exh. B, p. 122 of Oct. 19, 2006 deposition.83 16 assets to the Argyll defendants. They argue that the plaintiffs are not entitled to any of the remedies available to creditors under the TUFTA because no evidence exists that McClain Sr. fraudulently transferred assets to an Argyll defendant.77 The TUFTA provides remedies for creditors defrauded by a judgment debtor’s improper transfer of property. “The purpose of [T]UFTA is to prevent fraudulent transfers of property by78 a debtor who intends to defraud creditors by placing assets beyond their reach.” “‘Transfer’79 means 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, and includes payment of money, release, lease, and creation of a lien or other encumbrance.”80 Although the Argyll defendants maintain no evidence exists that McClain Sr. transferred assets to them, the plaintiffs presented summary-judgment evidence that raises a fact question about that issue. Specifically, summary-judgement evidence shows that F.I.T. transferred $39,000.00 to Argyll on November 5, 2002 and $5,000.00 to Argyll on March 17, 2003. If81 82 McClain Sr. owned F.I.T. as he testified, then the plaintiffs’ summary-judgment evidence83 indicates that McClain Sr. used F.I.T. to transfer assets to the Argyll defendants. Consequently, Case 5:08-cv-00444-OLG Document 400 Filed 12/18/07 Page 16 of 19 See docket entry # 297, ¶¶ 107-10.84 See docket entry # 160, ¶¶ 10.1-10.6.85 See id.86 Yokogawa Corp. of America v. Skye Intern. Holdings, 159 S.W.3d 266, 272 (Tex. App.—Dallas87 2005, no pet.). See Yokogawa Corp. of Am., 159 S.W.3d at 272 (affirming summary judgment on conspiracy88 claim because summary judgment was proper on the underlying claim of fraudulent transfer); Chu v. Hong, 185 S.W.3d 507, 513 (Tex. App.—Fort Worth 2005, pet. granted) (determining that the TUFTA created personal liability for defendant-lawyer who conspired with defendant husband to fraudulently transfer asset to prevent plaintiff-wife from obtaining her share); Lentino v. Cullen Ctr. Bank & Trust, 14-00-00692-CV, 2002 WL 220421, at *11 (Tex. App.—Houston [14 Dist.] Feb. 14, 2002, no pet.) (overruling appellant’s issue challenging the sufficiency of the evidence supporting a cause of action for conspiracy to fraudulently transfer property); Intervest Capital Group, 17 the Argyll defendants are not entitled to summary judgment. The Plaintiffs’ Claims Based on Conspiracy The plaintiffs allege that the defendants, including the Argyll defendants, conspired by agreeing to commit fraudulent transfers to avoid collection on the judgment. The Argyll84 defendants ask for summary judgment on this claim, arguing that the plaintiffs’ claim does not state a claim under Texas law. In the alternative, the Argyll defendants argue that Texas law85 does not impose liability on a transferee beyond any amount actually fraudulently transferred.86 “[T]he Texas Supreme Court [has] held that civil conspiracy is a derivative tort and a defendant’s liability for conspiracy depends on participation in some underlying tort for which the plaintiff seeks to hold at least one of the named defendants liable.” In this case, the87 underlying tort is the alleged violation of the TUFTA. Although few Texas cases consider claims involving a conspiracy to make fraudulent transfers, sufficient case law exists to support the plaintiffs’ conspiracy claim. I did not find any authority, however, supporting liability beyond88 Case 5:08-cv-00444-OLG Document 400 Filed 12/18/07 Page 17 of 19