Spring St. Partners-IV, L.P. v. Lam

• Decision Date: 13 September 2013
• Docket Number: No. 12–20517.,12–20517.
• Citation: 730 F.3d 427
• Parties: SPRING STREET PARTNERS–IV, L.P., Plaintiff–Appellee, v. Long K. LAM; En Kha Lam; Ten Lam; Vinh Ngo, Defendants–Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

730 F.3d 427

SPRING STREET PARTNERS–IV, L.P., Plaintiff–Appellee,

v.Long K. LAM; En Kha Lam; Ten Lam; Vinh Ngo, Defendants–Appellants.

No. 12–20517.

United States Court of Appeals,Fifth Circuit.

Sept. 13, 2013.

John Eugene Mitchell (argued), Baker & McKenzie, L.L.P., Thomas S. Leatherbury, Esq., Daniel L. Tobey, Esq., Vinson & Elkins, L.L.P., Dallas, TX, for Plaintiff–Appellee.

Allan Richard Brain, Esq. (argued), Attorney, Houston, TX, for Defendants–Appellants Long K. Lam and En Kha Lam.

Hung Michael Nguyen (argued), Houston, TX, for Defendant–Appellants Ten Lam and Vinh Ngo.

Appeals from the United States District Court for the Southern District of Texas.

Before STEWART, Chief Judge, and HIGGINBOTHAM and JONES, Circuit Judges.

CARL E. STEWART, Chief Judge:

Defendants–Appellants Long K. Lam, En Kha Lam, Ten Lam, and Vinh Ngo appeal from the district court's summary judgment in favor of Plaintiff–Appellee Spring Street Partners–IV, L.P. on its claims for fraudulent transfer and piercing the corporate veil of a limited liability company. We AFFIRM IN PART and VACATE AND REMAND IN PART.

I. FACTS AND PROCEDURAL HISTORY

A. The Financial Obligations

Between 2001 and 2005, Bayou City Fish Company, also known as Bayou City Fish, Inc. (“Bayou”), incurred debt to SouthTrust Bank, N.A. (“SouthTrust Bank”). The most significant of these obligations was a promissory note for a revolving line of credit that eventually grew to the amount of $8.5 million. The revolving credit note had a maturity date of May 31, 2006. The remainder of the Notes had a collective principal amount of approximately $1.2 million with various maturity dates. Douglas Lam, who was the sole owner of Bayou, personally guaranteed the promissory notes (“Notes”) for all of this debt.

In May 2006, the $8.5 million in Notes matured and became due and payable. However, Bayou and Douglas Lam failed to make any payments. Thus, on November 10, 2006, Wachovia sent Bayou and Douglas Lam a “Notice of Default and Intent to Accelerate” the Notes (“Default Notice”).

On December 11, 2006, Wachovia sold the Notes to Spring Street at a private auction. In January and February of 2007, Spring Street sent at least three (3) demand letters to Bayou and/or Douglas Lam.

B. The Lam Entities1. Bayou

In 1994, Bayou began operating as a retail and wholesale seafood distributor. From the beginning and through at least 2004, Douglas Lam's sister, Ten Lam, worked for Douglas at Bayou as a sales representative, and Ten Lam's husband, Vinh Ngo, worked in the warehouse.

Bayou operated its business out of two locations on the same street in Houston, Texas: 213 East Hamilton Street (wholesale operations), and 415 East Hamilton Street (retail operations).

According to Ten Lam and Ngo, Brian Shernak (“Shernak”), a Bayou employee who was responsible for bringing in a significant amount of sales from supermarket chains, constantly advised Douglas Lam that he should fire Ten Lam and Ngo. Shernak also repeatedly advised Douglas Lam to sell the retail operation located at 415 East Hamilton because it was too much work and not profitable, and selling the retail business likely would cause Bayou's wholesale business to increase. Douglas Lam found Shernak's advice persuasive because of his record of increasing Bayou's sales. Ten Lam and Ngo also periodically requested that Douglas Lam sell them Bayou's retail operation. Finally, in late 2004 or early 2005, Douglas Lam agreed to sell the retail business, which was spun off into what would become LT Seafood, L.P. (“LT Seafood”).

2. LT Seafood

In February 2005, Ten Lam and Douglas Lam formed LT Seafood. At the time of LT Seafood's formation, Douglas Lam owned 49%, Ten Lam owned 50%, and an entity that Ten Lam owned—LT Seafood Management, L.L.C.—owned 1%.

After the Lams formed LT Seafood, the restaurant began operating out of 415 East Hamilton Street, although Bayou continued to use that location as its address as late as August 2007.

According to Ten Lam and Ngo, a staffer from Bayou was in charge of moving out Bayou's property from 415 East Hamilton, and this staffer indicated that everything was removed other than “some furniture and computers that were so old that they were abandoned, an ice machine that was fixed to the structure, and some old trucks that Bayou had replaced in service.” Employees of Bayou who still worked at 415 East Hamilton moved to Bayou's other location at 213 East Hamilton.

At some point, Wachovia declined to lend Bayou any more money unless it increased its assets. Thus, for a period of time after the Lams created LT Seafood, Bayou submitted borrowing base certificates to Wachovia which combined the assets, finances, receivables, and inventory of LT Seafood and Bayou in order to guarantee that the bank would continue to extend credit to Bayou. Douglas Lam has asserted that Wachovia suggested that the entities combine their assets in this manner.

3. DKL & DTL

On November 20, 2006–ten days after Wachovia sent the Default Notice to Bayou and Douglas Lam—Douglas Lam formed the LLC, DKL & DTL, with his wife, Diane Lam, and two of his siblings, Long K. Lam (“Long Lam”) and En Kha Lam (“En Lam”).

4. Other Relevant Lam Entities

In 2001, Douglas Lam formed Wells Star Group, Inc. (“Wells Star”). This entity is involved in some of the transactions that Ten Lam and Ngo allege relate to their purchase of Douglas Lam's 49% interest in LT Seafood, discussed infra.

In May 2007, Ten Lam formed JNT Group, LLC, and served as its sole member, manager, and president. JNT also was involved in the sale of 415 East Hamilton, discussed infra.

C. The Transfers of Assets

As relevant to the issues on appeal, Spring Street charges that three particular transfers were fraudulent: (1) Bayou's transfer of “hard assets” to LT Seafood when LT Seafood took over Bayou's retail operations at the 415 East Hamilton location; (2) Douglas Lam's transfer of his 49% interest in LT Seafood to DKL & DTL; and (3) DKL & DTL's subsequent transfer of this 49% interest to Ngo. Douglas Lam testified in deposition that, as a result of these transfers, he has had no source of income and has paid his daily expenses by relying on his wife and using credit cards.

1. Bayou's Transfer of “Hard Assets” to LT Seafood

Ten Lam and Ngo assert that LT Seafood agreed to pay $12,000 per month to lease the 415 East Hamilton location, and LT Seafood eventually paid a total of $363,000 under this arrangement. They assert that the property that Bayou “abandoned” when it left the 415 East Hamilton location was included in the lease, and was worth, at most, $50,000. They also maintain that LT Seafood paid for the inventory Bayou left at the location, and for various other items, such as insurance, maintenance, and repairs. Accordingly, Ten Lam and Ngo assert that, between 2005 and early 2007, LT Seafood overpaid Bayou by $73,729.78 for these various items.

Meanwhile, Spring Street asserts that Bayou transferred property in the form of “hard assets,” with an estimated value of $150,000, to LT Seafood when LT Seafood was formed. These hard assets included trucks and computers, among other things.

2. Douglas Lam's Transfers to DKL & DTL

In December 2006, Douglas Lam transferred his interests in the following entities to DKL & DTL ¹:

a. 49% interest in LT Seafood

b. Port Arthur Camellia Estate, L.P.

c. Camellia Plaza, L.P.

d. DHL Development, L.P.

e. DHL International, L.P.

f. Sea Farm Enterprise, L.P.

g. VLC Kuykendahl Venture, L.P. (“VLC Kuykendahl Venture”)

Douglas Lam received no consideration from DKL & DTL for any of these transfers. Rather, he testified in deposition that he set up DKL & DTL to protect the interests of his mother and children, and that he effectuated the foregoing transfers as a “gift” to them.

Douglas Lam has stated that out of the 28 or more companies he owned, only four have been profitable since 2005, including LT Seafood, Bayou, VLC Kuykendahl Venture, and Wells Star.

3. DKL & DTL's Transfer of the 49% Interest in LT Seafood to Ngo

In November 2007, DKL & DTL subsequently transferred the 49% interest in LT Seafood to Ngo.

Ten Lam and Ngo assert that Ngo paid Douglas Lam for this 49%. They maintain that, in November 2007, they purchased the 415 East Hamilton location and the 49% interest in LT Seafood in a single transaction. Ten Lam and Ngo maintain that they obtained $1 million in financing from Golden Bank, and borrowed approximately $250,000 from friends and family to finance this single transaction. Ten Lam and Ngo further assert that the 415 East Hamilton property was only worth about $600,000. Additionally, according to Randall Joe Mayer, the accountant who reviewed LT Seafood's financial statements to determine its value, this 49% interest was worth approximately $382,000. Therefore, by subtracting $600,000 from $1.25 million, Ten Lam and Ngo assert that Ngo paid Douglas Lam $625,000 for the 49% interest in LT Seafood, while the true value of this interest was much less ($382,000).

Spring Street asserts that there is no competent evidence demonstrating that Ngo paid for this interest. It maintains that all of the evidence Tem Lam and Ngo rely on demonstrate a real estate purchase between an entity that Douglas Lam controlled, Wells Star, and an entity that Ten Lam controlled, JNT, and that neither DKL & DTL nor Ngo were involved in this transaction.

D. Procedural History1. Relevant District Court Proceedings

On January 8, 2008, Spring Street instituted this suit against Bayou and Douglas Lam to recover on the defaulted Notes. On April 23, 2009, Spring Street filed an amended complaint naming as additional defendants DKL & DTL, LT Seafood, Ten Lam, and Ngo. In this amended complaint, Spring Street brought additional claims for: 1) single business enterprise / joint venture / joint enterprise / partnership against LT Seafood and Bayou; and 2) fraudulent transfers under the Texas Uniform Fraudulent Transfer Act (“TUFTA”), Tex. Bus. & Comm.Code §§ 24.005(a)...