Rimade Ltd. v. Hubbard Enterprises Inc.

The district court correctly applied the law of fraudulent transfer of assets: Once the court (implicitly) found that Hubbard lacked the intent to defraud with respect to the sales to TDW � a finding that is not clearly erroneous � it could not as a matter of law have found that he used HEI as a sham to perpetrate fraud.

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Click here for the full text of this decision FACTS:Rimade and Giait, two Swiss tire manufacturers, sold tires to and Italian distributor, Pneus Acqui. In turn, Pneus sold tires to Bob Hubbard and his business, HEI, incorporated in Tennessee, but with a principal place of business in Fort Worth. Pneus sold tires to HEI on credit for three years. Hubbard negotiated the terms of the agreement, which included use of two standard invoices. Pneus, Rimade and Giait all required Hubbard to maintain a standard letter of credit for a fixed amount with a bank that could be drawn on in the event of a failure to pay. The first letter was for $350,000, though it was later reduced to $150,000 per year. In June 2000, after HEI had paid $4.3 million in invoices, Hubbard directed an HEI employee to ask Rimade if it could cancel its letter of credit. Rimade refused. HEI soon began to fall behind in its payments, though Hubbard persuaded the others to keep sending him tires. In January 2001, Pneus asked Hubbard to increase the HEI letter to $400,000. Unknown to Pneus at the time was that its bank and already told Hubbard’s bank that the letter was no longer required. Hubbard’s bank thus canceled the letter, but Hubbard only told Pneus that he couldn’t increase the letter. Meanwhile, tires still were being sent to Hubbard. When HEI’s debt to Pneus reached $700,000 the company again asked Hubbard to increase the letter. Soon thereafter, Pneus, Rimade and Giait finally learned that the letter had been canceled. A Pneus representative met with Hubbard and Hubbard signed a statement agreeing that at that moment, he owed $227,922 to Rimade and $224,647 to Giait. He gave the Pneus representative six post-dated checks for $105,000. Only two of the checks cleared; Hubbard stopped payment on the other four. At the time these dealings, Hubbard was also involved in other business ventures. One venture was with a tire resale business, Tire Dealers Warehouse, run by Hubbard’s son. HEI transferred over $1.4 million inventory to TDW, some, but not all of which was paid back. Hubbard never sent TDW a demand letter for the rest of the balance and made no other efforts to collect on the sales. Rimade, Giait and Pneus sued Hubbard and HEI. The plaintiffs charged that HEI breached its contract and that HEI was the alter ego of Hubbard, who used HEI to defraud the plaintiffs. At the time the matter was filed, Hubbard owed all plaintiffs $359,052. In total, of the $6 million in tires sent to HEI over the course of the parties’ relationship, HEI either paid for or returned all but $359,000 worth of tires. At trial, the plaintiffs’ expert testified that HEI was always insolvent during its short life, and that it owed Hubbard over $400,000. The district court said it was ruling for Hubbard, though it did not say specifically why. In a brief order, the district court said that the plaintiffs had failed in their burden of proof. The plaintiffs appeal. HOLDING:Affirmed. The court says that as the present case is based on a breach of contract, it will focus only on Hubbard’s alleged use of HEI to perpetrate fraud. The court says it will first determine whether Hubbard, using HEI as a sham, perpetrated an actual fraud on the plaintiffs when he failed to disclose to them that their bank had canceled the letter. The court rules that Hubbard had no duty to notify the plaintiffs that their own bank had caused the letter’s cancellation. The court also points out that Hubbard said he had no intent to deceive the plaintiffs. Though calling Hubbard’s statement “self-serving,” the court points out that it was up to the trial court to evaluate the evidence and judge the witnesses’ credibility. The court adds that Hubbard actually paid over four times the amount of the letter after the letter was canceled. Indeed, if the plaintiffs had immediately learned of the letter’s cancellation and at that point ceased doing business with Hubbard, as they testified they would have, they would have been worse off financially. “In sum, the district court correctly applied the law of partial disclosure: While Hubbard did nothing to correct the Plaintiffs’ mistaken impression about the Letter, he also made no partial disclosures to cause or perpetuate that misunderstanding. His simple refusal to increase the amount of the Letter did not disclose a fact that would impose a legal duty to disclose his knowledge of the Letter’s cancellation. It was, after all, the Plaintiffs’ own bank that had canceled the Letter and had failed to communicate that fact to the Plaintiffs. Thus the district court’s implicit finding that Hubbard lacked the intent to use HEI as a sham to defraud with respect to his personal letter of credit was not clear error.” After finding that HEI’s veil should not be pierced because of the letter’s cancellation, the court then finds that it should not be pierced based on Hubbard’s and HEI’s dealings with TDW. Hubbard did not have a personal interest in TDW, and merely selling on credit to TDW cannot be a fraudulent business tactic, especially when TDW paid over $500,000 to HEI during the first three quarters of 2001. OPINION:E. Grady Jolly, J.; Jolly, Wiener and Pickering, JJ. DISSENT:Jacques L. Wiener, Circuit Judge. “To me, the factual findings of the district court, albeit they are terse, reflect that Hubbard knowingly and intentionally misused and disregarded his one-man corporation’s form to disadvantage these plaintiffs, with whom he had done business for years. His corporation’s veil should be pierced to expose it as Hubbard’s alter ego and make him personally liable for his corporation’s debts to Plaintiffs[.]“ The dissent says Hubbard “fraudulently stood mute,” and faults the majority for reviewing the facts in a vacuum, rather than as a series of links in a continuous and evolving chain of ongoing business transactions. “If nothing else, we today re-affirm the age-old adage that ‘debtors either die or move to Texas.’”

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