Ge Capital Commercial, Inc. v. Worthington Nat'l Bank

• Citation: 754 F.3d 297
• Decision Date: 10 June 2014
• Docket Number: No. 13–10171.,13–10171.
• Parties: GE CAPITAL COMMERCIAL, INCORPORATED; General Electric Capital Corporation; GE Capital Financial, Incorporated, Plaintiffs–Appellees v. WORTHINGTON NATIONAL BANK, Defendant–Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

754 F.3d 297

GE CAPITAL COMMERCIAL, INCORPORATED; General Electric Capital Corporation; GE Capital Financial, Incorporated, Plaintiffs–Appellees

v.WORTHINGTON NATIONAL BANK, Defendant–Appellant.

No. 13–10171.

United States Court of Appeals, Fifth Circuit.

June 10, 2014.

John Thomas Cox, III, David Steven Coale, Esq., Christopher John Schwegmann, Attorney, Lynn Tillotson Pinker & Cox, L.L.P., Jeffrey M. Goldfarb, Attorney, Goldfarb, L.L.P., Dallas, TX, for Plaintiffs–Appellees.

David E. Keltner, Esq., Preston Randolph Mundt, Marshall M. Searcy, Jr., Matt David Stayton, Kelly, Hart & Hallman, L.L.P., Fort Worth, TX, for Defendant–Appellant.

Appeal from the United States District Court for the Northern District of Texas.

Before JOLLY, GARZA, and HIGGINSON, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

GE Capital Commercial, Inc., General Electric Capital Corporation, and GE Capital Financial, Inc. (collectively “GE Plaintiffs”), sued Worthington National Bank (“Worthington”) under the Texas Uniform Fraudulent Transfer Act (“TUFTA”). The GE Plaintiffs sought to void transfers that Worthington received from the GE Plaintiffs' predecessor-in-interest, allegedly with notice of the transfers' fraudulent nature. The jury found in favor of the GE Plaintiffs, and the district court entered judgment for the amount of the transfers. On appeal, Worthington contends that either TUFTA or the common-law one-satisfaction rule entitles it to a settlement credit for the GE Plaintiffs' prior settlement with a non-defendant, and that the district court erred in construing TUFTA's “good faith” defense as an objective, rather than subjective, standard in its jury instructions and evidentiary rulings. We affirm.

I

In 2006, David Ashley Wright (“Wright”) and Justin Prather (“Prather”) applied for a line of credit from Worthington, on behalf of Wright's company Wright & Wright, Inc. (“Wright & Wright”). When applying, Wright and Prather represented to Worthington that the company brokered heavy equipment on a nationwide scale and enjoyed extraordinary revenue growth. Worthington failed to verify Wright & Wright's representations.¹ Nonetheless, the following year, the bank extended a line of credit to Wright & Wright in the amount of $2.5 million.

Months later, Worthington employees noticed suspicious activity involving Wright & Wright's accounts, including numerous wire transfers into Prather's personal account and cash withdrawals by Wright. After initially flagging Wright & Wright's accounts for risks of money laundering, Worthington employees later concluded that nothing was amiss after Wright explained that the company's investors preferred to be compensated in cash. Although the frequency of transfers subsequently increased. Worthington took minimal action.

By three wire transfers in July 2008, CitiCapital Commercial Corporation (“CitiCapital”), then a subsidiary of Citibank, N.A. (“Citibank”), wired a total of $2,471,330 to Wright & Wright's checking account at Worthington to pay off the balance of the loan. A month after receiving those transfers, Worthington closed Wright & Wright's accounts.

CitiCapital was then acquired from Citibank by various GE entities under a Purchase and Sale Agreement. The GE entities subsequently investigated the three wire transfers and concluded that Prather, then an employee of CitiCapital, had fraudulently appropriated funds from CitiCapital to repay Wright & Wright's loan. In total, Prather ultimately induced his employers CitiCapital and, later, GE Capital to transfer $12.5 million to various bank accounts, including the $2.5 million transferred to Worthington.

In April 2009, the GE Plaintiffs sent a Notice of Claim and Demand to Citibank. The Notice sought three remedies under the Purchase and Sale Agreement—a purchase price adjustment, indemnification for breaches of the Purchase and Sale Agreement, and indemnification from later claims by other parties. In explaining the purchase price adjustment, the Notice contended that “[b]ased on GE's review to date, the damage and lost value caused by the Fraud Scheme to the Business and Portfolio Assets was no less than $12,500,000.” In summarizing the amount of the claim, the Notice explained: “GE currently estimates that it has suffered and incurred losses in the amount of at least $12,500,000 in respect of the Employee Fraud Scheme and the Fraudulent Documents, as well as substantial costs and fees to investigate the Employee Fraud Scheme, assess and modify business processes and systems, mitigate damages and recover losses.”

In June 2009, the GE Plaintiffs named Worthington as a defendant in a lawsuit that they had initiated in the district court as successors-in-interest to CitiCapital. The GE Plaintiffs alleged that the bank had accepted the wire transfers “in bad faith or with willful ignorance as to the fraudulent nature of the fraudulent conduct,” in violation of TUFTA, and sought to void the transfers and recover the funds. Second Amended Complaint at ¶ 43. In response, Worthington pleaded numerous affirmative defenses, including that it had accepted the transfers in good faith under TUFTA. Tex. Bus. & Comm.Code § 24.009(a); Answer at ¶ 129.

Months later, the GE Plaintiffs and Citibank settled their dispute. Under the terms of the Settlement Agreement, the GE Plaintiffs and Citibank aimed “to settle, compromise, resolve amicably and discontinue... their dispute under [the Purchase and Sale Agreement] arising out of, relating to or in connection with” the allegedly fraudulent transfers and ongoing lawsuit involving Worthington. Settlement Agreement at ¶ G (“Recitals”). They further agreed to a mutual release from all liability under the Purchase and Sale Agreement or relating to the fraudulent transfers at issue in the lawsuit. Id. at ¶¶ 2, 3. Under the Settlement Agreement, Citi paid the GE Plaintiffs an amount that exceeded $2.5 million, the total amount of the transfers to Worthington.

Meanwhile, the GE Plaintiffs' suit against Worthington proceeded toward trial. During a pretrial conference, the GE Plaintiffs and Worthington agreed to stipulate to the dates and amounts of every settlement related to the dispute. They further agreed that settlement-related issues would not go to the jury and would be addressed post-verdict to determine the availability of a settlement credit. Accordingly, in a pretrial order, the district court denied as moot the GE Plaintiffs' request to exclude all evidence, statements, or arguments regarding the GE Plaintiffs' settlements with third parties. In the same order, the district court reiterated its prior determination that an objective standard of the “good faith” defense applies and, over Worthington's objection, allowed the GE Plaintiffs to introduce evidence that Worthington “should have known” of the fraudulent nature of the transfers.²

At trial, the parties disputed whether Worthington accepted the transfers from Wright & Wright in “good faith” under TUFTA. The GE Plaintiffs' expert testified that Worthington's loan review process deviated from industry standards and that the bank knew of facts that put it on notice that the transfers were likely fraudulent. The district court instructed the jury as follows:

To establish that it acted in good faith, Worthington must prove by a preponderance of the evidence that it lacked actual and constructive knowledge of the debtor's fraud. Actual knowledge is what one actually knows, and constructive knowledge means facts or circumstances that excite the suspicions of a person of ordinary prudence under the same or similar circumstances and put him on inquiry of the fraudulent transfer. Stated another way, you may not find that Worthington acted in good faith if the evidence shows that it had actual or constructive knowledge of a fraudulent transfer.

The jury ultimately found that the GE Plaintiffs had proven by a preponderance of the evidence that Wright & Wright transferred the $2.5 million to Worthington with the intent to hinder, delay, or defraud GE Capital, and that Worthington failed to prove that it accepted the transfers in good faith. ³

Following the verdict, the district court ordered the GE Plaintiffs to provide Worthington with copies of all relevant settlement agreements. Subsequently, the GE Plaintiffs disclosed the Settlement Agreement. Worthington then moved for a mistrialand requested a settlement credit on the grounds that the settlement proceeds received from Citibank exceeded the amount of the judgment. The district court denied Worthington's requests and voided the three transfers.⁴ This appeal followed.

II

We review a district court's conclusions of law concerning the calculation of a settlement credit de novo. See Davis v. Odeco, Inc., 18 F.3d 1237, 1245 (5th Cir.1994). Likewise, when “a jury instruction hinges on a question of statutory construction, this court's review is de novo.” United States v. Garcia–Gonzalez, 714 F.3d 306, 312 (5th Cir.2013) (citation omitted). We review a district court's evidentiary rulings for abuse of discretion. United States v. Miller, 520 F.3d 504, 510 (5th Cir.2008). However, “[a] trial court abuses its discretion when its ruling is based on an erroneous view of the law,” Bocanegra v. Vicmar Servs., Inc., 320 F.3d 581, 584 (5th Cir.2003), and our review of legal conclusions is plenary, Johnston & Johnston v. Conseco Life Ins. Co., 732 F.3d 555, 562 (5th Cir.2013).

III

Worthington's first claim is that the district court erred as a matter of law in entering its post-verdict judgment by failing to apply a settlement credit for the GE Plaintiffs' settlement proceeds received from Citibank. Worthington contends that it is entitled to such credit for two reasons: First, TUFTA limits recovery to “the amount necessary to satisfy the creditor's claim,” and second, Texas's common-law one-satisfaction rule permits only one recovery for a single injury. Below, we consider each in turn.

A

Worthington...