Opinion
Civil Action No. 3:00-CV-2770-N
October 28, 2002
ORDER
Before the Court are Defendants' Tyrrell, Turtle Creek Resources, Inc., ASM Exploration, Inc. and Castlerock Oil. Co.'s Motions for Summary Judgment. For the reasons stated below, Defendants' Motions for Summary Judgment are GRANTED.
I. FACTUAL BACKGROUND
This action arises out of an attempt by Plaintiff Western Oil and Gas J.V., Inc. ("Western") to collect from third parties on a judgment it obtained against Defendant John Griffiths, Jr. ("Griffiths") in an earlier lawsuit. Western invested in several oil and gas wells through entities owned or controlled by Griffiths, an oil and gas promoter. The wells, which needed repair, were never repaired and Griffiths refused to refund Western's investment. Western filed suit against Griffiths and obtained judgment against him for breach of contract and fraud. In addition, Western filed suit and obtained judgment against Griffiths' wife for fraudulent transfer and conspiracy. Western also obtained a Turnover Order in the initial litigation against Griffiths purportedly requiring certain third parties, including Defendants Tyrrell, Turtle Creek Resources, Inc. and ASM Exploration, Inc. ("Tyrrell Defendants") and Castlerock and Castlerock Oil Co. ("Castlerock Defendants"), to turn over to the U.S. Marshals any property or money belonging to Griffiths or any of his companies to collect on Western's judgment. However, the Tyrrell Defendants and the Castlerock Defendants were not partners with Griffiths, and the trial court made no factual finding regarding either set of Defendants in conjunction with the Turnover Order.
On December 21, 2000, Western filed the current lawsuit against the Tyrrell Defendants and the Castlerock Defendants, among others. Western's Complaint claims the Tyrrell and Castlerock Defendants: (1) made fraudulent transfers; (2) violated the Turnover Order; (3) acted as alter egos of Griffiths; (4) were a single business enterprise with Griffiths and liable as such; (5) were unjustly enriched; and (6) conspired with Griffiths to defraud Western.
II. SUMMARY JUDGMENT STANDARD
According to Federal Rule of Civil Procedure 56(c), summary judgment is proper "if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986). Substantive law will determine which facts are material and only disputes about those fact will preclude summary judgment. Becker v. Nat'l Educ. Training Group, Inc., 2002 WL 31255021 (N.D. Tex. 2002) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). The party seeking summary judgment bears the burden of proving no genuine issue of material fact exists. Latimer v. Smithkline French Lab., 919 F.2d 301, 202 (5th Cir. 1990). If the moving party meets this initial burden, the burden shifts to the nonmovant to produce evidence establishing a genuine issue of material fact for trial. Celotex, 477 U.S. at 321-322.
The court must consider the record in the light most favorable to the party opposing summary judgment. Anderson, 477 U.S. at 248. Allegations in briefs and pleadings, without more, are insufficient to avoid summary judgment. Alizadeh v. Safety Stores, Inc., 802 F.2d 111. 113 (5th Cir. 1986). Summary judgment in favor of the defendants is proper if, after adequate time for discovery, the plaintiffs fail to establish the existence of an element essential to their case and as to which they will bear the burden of proof at trial. Celotex, 477 U.S. at 322-23.
III. FRAUDULENT TRANSFER
In this case, Western claims that Griffiths transferred interests in various oil wells to the Tyrrell Defendants and the Castlerock Defendants without receiving equivalent value in exchange and with the intent to hinder, delay or defraud Western. Both Defendants argue that Griffiths did not own the interests he purportedly transferred to Defendants, and therefore, Western's claims should fail. According to the Texas Business and Commerce Code, a transfer made or obligation incurred by a debtor is fraudulent if the debtor made the transfer or incurred the obligation:
(1) with actual intent to hinder, delay, or defraud any creditor of the debtor; or (2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor: (A) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or (B) intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor's ability to pay as they become due.
TEX. Bus. COM. CODE § 24.005 (West 2002). In addition, a transfer made by a debtor is fraudulent pertaining to a creditor whose claim arose before the transfer if "the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent." TEX. Bus. COM. CODE § 24.006(b) (West 2002). Although Western claims Griffiths made fraudulent transfers to Defendants, this claim fails because Griffiths did not own the interests he purportedly transferred.
A. Tyrrell Defendants
Western contends that two transactions between Griffiths and the Tyrrell Defendants were fraudulent transfers intended to prevent Western from collecting on its judgment against Griffiths. First, Western claims Griffiths transferred an interest in the Shinn well to the Tyrrell Defendant Turtle Creek Resources, Inc. ("Creek") in March of 1994, to avoid paying Western's judgment. However, some years earlier the leases on the Shinn well terminated, so Griffiths had no interest to transfer to Defendant Creek. If Griffiths had no interest in the Shinn well, then no transfer occurred. Because Section 24.005 of the Texas Business and Commerce Code requires a transfer for a fraudulent transfer to occur and Western failed to provide any specific evidence of a transfer involving the Tyrrell Defendants, Western's fraudulent transfer claim regarding the alleged transfer of Shinn well fails.
Griffiths owned interests in the Shinn well at some point in time and was also promoting investment in the well.
Griffiths Depo. p. 80, Lines 5-7. The Shinn well stopped producing for more than 90 days in the early nineties, and the leases lapsed at that time by their terms. Western offers no summary judgment evidence raising a fact on whether the Shinn lease was still in force when the transfer was made and that Griffiths had an interest to transfer to Defendant Creek.
Along with the Shinn transfer, Western contends that the renunciation of an oral agreement between the Tyrrell Defendants and Griffiths constituted a fraudulent transfer. Western argues that the Tyrrell Defendants agreed with Griffiths that if Griffiths brought investors into the Shinn well transaction to help fund reworking of that well, the Tyrrell Defendants would convey a "back end" interest in that well to Griffiths. Western contends that the Tyrrell Defendants conveyed that prospective back end interest to ASM instead of Griffiths, and the change of recipients was a fraudulent conveyance. The Tyrrell Defendants, on the other hand, claim Griffiths never performed his end of the deal and the oral agreement was rescinded; alternatively, they argue the oral agreement was unenforceable under the Statute of Frauds. The Court need not attempt to untangle that dispute, however, because all parties agree that Griffiths never received any back end interest in the well. Never having received such an interest, Griffiths could not fraudulently convey it to the Tyrrell Defendants, and the Tyrrell Defendants are entitled to summary judgment on this claim.
A "back end" interest is a mineral interest which provides that the interest holder will be paid some portion of the profits from the well in the future, after initial investors are paid.
B. Castlerock Defendants
Western claims Griffiths fraudulently transferred four oil wells to the Castlerock Defendants. Western argues that when Griffiths advised the Castlerock Defendants that several wells on the orphan oil well list in Louisiana might be a good investments, he was actually perpetrating a fraudulent transfer by bypassing the opportunity himself. Western claims that the four wells Castlerock acquired for about $44,000 were actually worth $200,000 and that because Griffiths knew he might be sued by Western and did not want to acquire assets that could be used to satisfy a judgment, he advised Castlerock about the orphan wells opportunity and then took consulting fees from Castlerock as a form of compensation for the wells.
Castlerock Defendants acquired SL 10090 No., SL 10090 No. 4, and Gulf States Land Ind. No. 1 oil wells.
In response to Western's arguments, the Castlerock Defendants claim Griffiths did not possess an interest in any of the four wells, at the time of the transfer, that Western alleges were fraudulently transferred. In fact, Griffiths never owned any interest in three of the four wells at issue. Griffiths' knowledge that three wells were on the orphan well list is not the same as owning an interest in them. In addition, although Griffiths owned the fourth well, Holloway Planting Co. No. 6, in the early 1990s, the lease expired before Castlerock acquired the new leases from Rock Energy, Inc. Western failed to raise a fact issue on Castlerock's position that at the time of the alleged fraudulent transfer, Griffiths did not own an interest in any of the wells acquired by Castlerock. Awareness of a potentially valuable business opportunity dos not constitute property subject to the Texas Fraudulent Transfer Statute. Because one must have an interest in property to transfer it and transfer is an essential element of a fraudulent transfer, Western's fraudulent transfer claim must fail. Western failed to raise a genuine issue of material fact regarding its fraudulent transfer claim; therefore, Defendants are entitled to judgment as a matter of law.
Griffiths Depo. P. 11-12 89-90.
IV. TURNOVER ORDER VIOLATION
Western obtained a Turnover Order in its previous lawsuit against Griffiths requiring "all parties with notice of the order to turnover all property and money owed to Defendant Griffiths . . . and/or that later come into possession of such property and money." Western claims that the Tyrrell and Castlerock Defendants violated the Turnover Order and retained assets belonging to Griffiths. The Texas Turnover Statute cannot be used to litigate third parties' property rights. Resolution Trust Corp. v. Smith, 53 F.3d 72, 79 (5th Cir. 1995). It supports a turnover proceeding against a third party only if the judgment-creditor either succeeds in piercing the corporate veil, or the trial court makes a factual finding that the property the judgment-creditor wants to seize is under the possession or control of the judgment-debtor even though its retained by a third party. Plaza Court, Ltd. v. West, 879 S.W.2d 271, 276-277 (Tex.App.-Houston [14th Dist.] 1994, no writ). If the judgment creditor meets this burden, only non-exempt property can be seized from the third party. Burns v. Miller, Hiersche, Martens Hayward, P.C., 948 S.W.2d 317, 324 (Tex.App.-Dallas, 1997, writ denied). Western's argument that Defendants retained Griffiths' property in violation of the Turnover Order fails because the trial court made no factual findings regarding Defendants and failed to pierce the Castlerock or Tyrrell Defendants' corporate veils.
A. Tyrrell Defendants
Western claims that the Tyrrell Defendants retained Griffiths' interest in the Shinn well in violation of the Turnover Order issued by the trial court. The Tyrrell Defendants respond that the Turnover Order does not apply to them because Western failed to pierce the corporate veil or receive a factual finding from the trial court in the previous lawsuit with Griffiths, one of which is required for the Turnover Order to apply to them because they are a third party not involved in the original lawsuit between Western and Griffiths. Western did not provide evidence that the trial court made a factual finding or that it pierced the corporate veil. Therefore, the Turnover Order does not apply against the Tyrrell Defendants, and they did not violate it.
B. Castlerock Defendants
Western claims the Castlerock Defendants violated the Turnover Order when they failed to turn over consulting fees owed to Griffiths, which are not exempt under the turnover statute. Like the Tyrrell Defendants, the Castlerock Defendants argue that because the trial court made no factual finding and Western did not pierce the corporate veil, the Turnover Order does not apply to them. In addition, the Castlerock Defendants say that money paid to Griffiths after the Turnover Order went into effect was not consulting fees as Western claims, but rather exempt wages. Western fails to provide a factual finding by the trial court or grounds for piercing the corporate veil against the Castlerock Defendants, so the Turnover Order does not apply to them. Western failed to raise a genuine issue of material fact regarding either Defendant's alleged violation of the Turnover Order; therefore, Defendants are entitled to judgment as a matter of law.
See TEX. PROP. CODE § 42.001(b)(1) (West 2000); TEX. Civ. PRAC. REM. CODE § 31.002(f) (West 1997).
V. ALTER EGO
Western contends that the Tyrrell and Castlerock Defendants are alter egos of Griffiths and, therefore, both Defendants are liable for Griffith's judgment debt owed to Western. Alter ego is a vehicle for courts to disregard corporate formalities and hold shareholders liable for the acts of the corporation they own. It is an equitable doctrine for disregarding corporate formalities to avoid injustice. Sid Richardson Carbon Gasoline Co. v. Interenergy Res., Ltd., 99 F.3d 746 (5th Cir. 1996). The underlying purpose of piercing the corporate veil is to prevent the use of a corporation as a cloak for illegality or fraud or to work an injustice. Fidelity Deposit Co. of Maryland v. Commercial Cas. Consultants, Inc., 972 F.2d 272 (5th Cir. 1992). Western's contention that Defendants are alter egos of Griffiths fails because the relationships involved do not fit within the purview of alter ego theory.
Western claims that the Tyrrell and Castlerock Defendants are alter egos of Griffiths, and therefore should be liable for his judgment debt. Western provides evidence that Griffiths shares office space and employees with Defendant and has close business relationships with both Defendants. However, Western's alter ego claims cannot succeed because the relationships between Griffiths and the Tyrrell and Castlerock Defendants, no matter how close, do not fall within the definition of an alter ego relationship. The party initially held liable must be a corporate entity for alter ego theory to apply. Then, if certain circumstances exist, the court may hold the owners, shareholders, affiliates or subsidiaries of the corporate entity liable for its debts. In this case, Griffiths, an individual, is the liable party, and Western asserts Defendants are alter egos of him. Such a situation does not fall within alter ego theory because the liable party is an individual, not a corporation. Alter ego necessarily involves piercing the corporate veil of the liable party, and an individual like Griffiths has no corporate veil to pierce. Griffiths has no shareholders or owners to hold liable for his actions, unlike corporations. Without a liable corporation, Western's alter ego claim fails. Because Western failed to meet an essential element of alter ego, Defendants are entitled to judgment as a matter of law.
VI. SINGLE BUSINESS ENTERPRISE
Western asserts that the Tyrrell Defendants and Griffiths and the Castlerock Defendants and Griffiths are single business enterprises so Defendants' assets should be used to pay for Griffiths' judgment debt. The single business enterprise doctrine applies when two or more business entities act as one. Nichols v. Pabtex, Inc., 151 F. Supp.2d 772, 782 (E.D. Tex. 2001). When corporations integrate their resources to achieve a common business purpose and are not operated as separate entities, each corporation may be held liable for debts incurred during the pursuit of the common business purpose. Old Republic Ins. Co. v. Ex-Im Serv. Corp., 920 S.W.2d 393, 395-396 (Tex.App.-Houston [1st Dist.] 1996, no writ). Being part of a single business enterprise does not make all members general guarantors of each other's debts; rather it imposes partnership-style liability for obligations arising out of the specific enterprise. Aluminum Chems. (Boliva), Inc. v. Bechtel Corp., 28 S.W.3d 64 (Tex.App.-Texarkana 2000, no pet.). Like the alter ego doctrine, the single business enterprise doctrine is an equitable remedy that applies when the corporate form is used as an unfair device to achieve inequitable results. Old Republic, 920 S.W.2d at 395. Although Western argues Griffiths' and Defendants' relationships constitute a single business enterprise, this argument fails because Defendants and Griffiths were not a single business enterprise during the transactions that were the basis of Western's judgment against Griffiths.
A. Tyrrell Defendants
Western contends Griffiths and the Tyrrell Defendants have been engaged in a single business enterprise since May of 1994. It claims that Griffiths and the Tyrrell Defendants worked together on the Shinn well project and shared office space, equipment, phones, fax machines, employees, business expenses and profits. Even assuming Western raises a genuine fact issue about the Tyrrell Defendants and Griffiths constituting a single business enterprise at some point, Western fails to provide evidence that they were a single business enterprise working toward a common business purpose during the transactions from 1992-1995 that gave rise to Western's judgment. Under single business enterprise theory, corporations are only liable for the other corporation's debts incurred during the pursuit of the common business purpose, not debts incurred before the common purpose. See Old Republic, 920 S.W.2d at 395. Even if Griffiths and the Tyrrell Defendants eventually operated as a single business enterprise, without evidence that they did so during the specific transactions with Western leading to the judgment against Griffiths, Western's single business enterprise claim against the Tyrrell Defendants fails.
B. Castlerock Defendants
Western claims that the Castlerock Defendants have been engaged in a single business enterprise with Griffiths since September 1998. Western points to the connection between Griffiths and Canaan Resources, a partner of the Castlerock Defendants. Griffiths used Canaan's car and credit card and Griffiths shared several employees with the Castlerock Defendants. Despite these factors indicating a single business enterprise existed between Griffiths and Castlerock since 1998, Western's single business enterprise claim seeking reimbursement from Castlerock for Griffiths judgment debt fails. Castlerock could not have been a single business enterprise with a common purpose with Griffiths from 1992 to 1995 when the transactions leading to Western's judgment occurred because Castlerock Company was not formed until September 1998, years after the transactions took place. Western provides no evidence that Castlerock Company existed during the early 1990s. As mentioned previously, single business enterprise theory liability requires that the corporations be engaged in the common business purpose at the time the transaction took place. In this case, Castlerock did not exist when Griffiths transactions with Western occurred, therefore Western's single business enterprise claim necessarily fails. Defendants are entitled to judgment as a matter of law because Plaintiff failed to raise a genuine issue of material fact regarding Western's single business enterprise claim.
VII. UNJUST ENRICHMENT
Western claims the Tyrrell and Castlerock Defendants were unjustly enriched by retaining fraudulent transfers from Griffiths. A party may recover under unjust enrichment when one person obtained a benefit from another by duress, fraud or by the taking of undue advantage of the other. Matagorda County v. Texas Assn'n of Counties County Gov't Risk Mgmt. Pool, 975 S.W.2d 782, 785 (Tex.App.-Corpus Christi 1998), aff'd, 52 S.W.3d 128 (Tex. 2000). The party must "show that the person sought to be charged wrongfully secured a benefit or passively received one which is unconscionable to retain." Nationscredit Corp. v. CSSI, Support Group, Inc. 2001 WL 200147, *6 (Tex.App.-Dallas 2001, no pet.). The claimant seeking restitution must be the source of the benefit to the unjustly enriched party. Id. at *7 (citing Corpus Christi v. S.S. Smith Sons Masonry, Inc., 736 S.W.2d 247, 250 (Tex.App. — Corpus Christi 1987, writ denied). Because Western, the claimant, is not the source of the benefit to Defendants, the alleged unjustly enriched party, Western's unjust enrichment claim cannot succeed as a matter of law.
In this case, Western argues it is entitled to restitution from Defendants because they retained fraudulently transferred property actually belonging to Griffiths. Western alleges that Griffiths fraudulently transferred several oil wells to Defendants, as discussed previously. Even if this assertion is true, Western's unjust enrichment claim fails as a matter of law because Western was not the source of the benefit, the oil wells, it alleges Defendants received; rather Griffiths transferred the wells to Defendants. Because the party seeking restitution (Western) must be the source of the benefit for a successful unjust enrichment claim, and because Griffiths (rather than Western) was the source of the benefit, Western's claim fails. Western failed to raise a genuine issue of material fact regarding its unjust enrichment claim. Accordingly, Defendants are entitled to judgment as a matter of law.
VIII. CONSPIRACY TO DEFRAUD
Western claims that the Tyrrell and Castlerock Defendants conspired with Griffiths to defraud Western. It contends that Defendants accepted fraudulent transfers from Griffiths so Griffiths could avoid paying Western's judgment. A civil conspiracy is two or more persons acting to accomplish an unlawful purpose through unlawful means. First Interstate Bank of Texas, N.A. v. S.B.F.I., Inc., 830 S.W.2d 239, 249 (Tex.App. — Dallas 1992, no writ). The following are elements of conspiracy: "(1) the involvement of two or more persons; (2) an object to be accomplished; (3) a meeting of the minds on the object or the course of action; (4) one ore more unlawful, overt acts; and (5) damages as the proximate result." Id. (citing Massey v. Armco Steel Co., 652 S.W.2d 932, 934 (Tex. 1983)). In this case, the unlawful act Western claims Defendants performed was accepting alleged fraudulent transfers. Since the essence of a conspiracy claim requires an unlawful act and this Court rejected the fraudulent transfer claims previously and Western failed to address or provide evidence of any other illegal activity by Defendants, Western is unable to raise a genuine issue of fact regarding one element of its conspiracy claim. Defendants, therefore, are entitled to judgment as a matter of law.