U.S.A v. Loftis

• Decision Date: 17 May 2010
• Docket Number: No. 09-10482.,09-10482.
• Citation: 607 F.3d 173
• Parties: UNITED STATES of America, Plaintiff-Appellee,v.Todd LOFTIS, Defendant,Lisa Loftis, Movant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

607 F.3d 173

UNITED STATES of America, Plaintiff-Appellee,v. Todd LOFTIS, Defendant,Lisa Loftis, Movant-Appellant.

No. 09-10482.

United States Court of Appeals Fifth Circuit.

May 17, 2010.

Megan J. Fahey, Asst. U.S. Atty., Amber Michelle Rogers, Asst. U.S. Atty. (argued), Fort Worth, TX, for U.S.

Daivd Harlan Harper, Jason Patrick Bloom, Layne Steven Keele (argued), Benjamin Lee Mesches, Donald Edward Tiller, Haynes & Boone, L.L.P., Dallas, TX, for Lisa Loftis.

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

Before GARWOOD, SMITH and CLEMENT, Circuit Judges.

EDITH BROWN CLEMENT, Circuit Judge:

Lisa Loftis (“Lisa”) appeals the district court's Final Order of Garnishment, which set aside a community property partition agreement entered into between Lisa and her husband, Todd Loftis (“Todd”). She contends that the district court erroneously found the partition agreement to be a fraudulent transfer, and she challenges the scope of the garnishment ordered. We reject her arguments and affirm.

FACTS AND PROCEEDINGS

This garnishment proceeding arose out of Todd's conviction for conspiracy to defraud the United States with false and fraudulent claims. From 1998 to 2004, Todd, as the president of Tools and Metals, Inc. (“TMI”), directed TMI employees to inflate the cost of tools that were purchased by Lockheed Martin, a Department of Defense (“DOD”) contractor. The inflated costs were then passed on to the government. Todd also directed TMI employees to conceal the conspiracy by destroying invoices and removing evidence from TMI computers.

DOD began investigating Todd and TMI in 2002. Its investigator contacted Lockheed employees and counsel, former employees of TMI, as well as other companies doing business with TMI. Sometime around September 1, 2004, an investigator visited TMI's offices. A TMI employee told Todd about the investigator's visit and gave him the investigator's business card.

Shortly before the investigator's visit, the Loftises' attorney, James Wyss, recommended that the couple execute a community property partition agreement as part of their estate planning. Wyss considered Todd to be a “high risk professional” because of Todd's high net worth and his position as the president of a large company that had recently been sold. Wyss typically advises high risk professionals “to move assets from one spouse to another to preserve the acquired assets,” and to protect assets from possible judgment creditors. The Loftises entered into a partition agreement, the subject of this lawsuit, in early September 2004, though the exact date is unclear. Under the agreement, Lisa received assets valued at $2,337,777.16. The partition agreement values the property received by Todd at $2,000,000, though the government disputes this valuation. The agreement did not allocate the Loftises' $1,000,000 home in Colleyville, Texas (referred to by the parties as the “Hawthorne House”). A later conversion of the Hawthorne House to Lisa's separate property has been set aside as fraudulent in a related proceeding. ¹

Todd was officially notified of the criminal investigation by the United States Attorney's office in Fort Worth, Texas on October 1, 2004, no more than a month after entering into the agreement. He was charged by information and pleaded guilty after signing a factual basis admitting the allegations of fraud detailed above. The district judge sentenced Todd to eighty-seven months' imprisonment and ordered him to make restitution in the amount of $20,000,000.

The government filed two applications for writs of garnishment to recover the restitution and sought to garnish property transferred to Lisa under the partition agreement. The two proceedings were consolidated in the district court. Though Todd did not make an appearance in the garnishment proceeding, Lisa appeared as a party-in-interest and filed motions to quash the writs, arguing that the partitioned property was exempt from garnishment because it was her separate property. She further sought to limit the government's ability to garnish the couple's jointly managed community property to Todd's one-half interest.

The district court denied in part and granted in part Lisa's motions, finding it likely that the government would be able to show that the partition agreement was fraudulent. Though the district court initially granted Lisa's motion to quash to the extent the government sought to garnish Lisa's interest in the couple's jointly managed community property, the court later reversed this holding on the government's motion to reconsider, finding instead that the entirety of the couple's jointly managed community property was subject to garnishment. The court further held that Todd's interest in Lisa's retirement savings account could be garnished, even though this asset was Lisa's solely managed community property.

The government then moved for summary judgment to set aside the partition agreement under the Federal Debt Collection Procedures Act (“FDCPA”), 28 U.S.C. §§ 3304(b)(1)(A), 3304(b)(1)(B), 3304(a)(1), as well as under Tex. Fam.Code § 4.106(a). The district court held that the agreement was voidable under each provision. This timely appeal followed.

DISCUSSION

A. Fraudulent Transfer

The district court did an extensive analysis of the various FDCPA provisions and held that the partition agreement was voidable under each provision argued by the government.² The partition agreement is clearly voidable under 28 U.S.C. § 3304(b)(1)(B)(ii), and we affirm on that basis. Because this court may affirm on any legally sufficient ground raised below BMG Music v. Martinez, 74 F.3d 87, 89 (5th Cir.1996), we decline to address all of the provisions analyzed by the district court.

Section 3304(b)(1)(B)(ii) states:

Except as provided in section 3307, a transfer made or obligation incurred by a debtor is fraudulent as to a debt to the United States, whether such debt arises before or after the transfer is made or the obligation is incurred, if the debtor makes the transfer or incurs the obligation-

....

(B) without receiving a reasonably equivalent value in exchange for the transfer or obligation if the debtor-

....

(ii) intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.

The terms of § 3304(b)(1)(B)(ii) are satisfied and a transfer is voidable if the debtor (i) transferred assets without receiving reasonably equivalent value (ii) when he reasonably should have believed he would incur a debt beyond his ability to pay.³

The district court determined that the value of the assets received by Todd, though estimated at $2,000,000 in the agreement, was not reasonably equivalent to the $2,337,777.16 in assets transferred to Lisa. Reasonably equivalent value means that “the debtor has received value that is substantially comparable to the worth of the transferred property.” BFP v. Resolution Trust Corp., 511 U.S. 531, 548, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994) (interpreting the same term in the Bankruptcy Code). Under the partition agreement, Todd received his nontransferable 401(k) account, a ten-percent membership interest in an LLC, and his future income. The parties mainly dispute the value of Todd's future income, since it is clear that most of the $2,000,000 valuation was attributed to this asset.

The value of an asset is determined from the creditor's point of view. In re Hinsley, 201 F.3d at 644. “The proper focus is on the net effect of the transfers on the debtor's estate, the funds available to the unsecured creditors.” Id. (quotation omitted). As the district court correctly concluded, Todd's future income was of questionable worth from a creditor's perspective when the partition agreement was executed see id. (“Value is determined as of the date of transfer.”). At the time the partition was completed, the government was investigating Todd's extensive fraudulent conduct; he potentially faced a lengthy prison term and a sizable criminal restitution. That is not to say that Todd's future income was worthless cf. Calmes v. United States, 926 F.Supp. 582, 590 (N.D.Tex.1996), but the asset cannot bear the substantial value attributed to it by the agreement. Though we cannot determine with any precision on the current record the properly discounted value of Todd's future income at the time of the agreement, we agree with the district court that there is a great disparity between the value, from a creditor's perspective, of the minor assets Todd received in the agreement, including his speculative future income, and the $2,337,777.16 in assets transferred to Lisa.

This disparity is even greater when the Hawthorne House transfer is considered. Todd transferred his interest in the Hawthorne House to Lisa through a separate instrument two months after the partition.⁴ Through this transfer, Todd divested himself of his interest in the couple's $1,000,000 home, his last remaining major asset. There is no doubt that the net effect of these two agreements was to move nearly all of Todd's tangible assets into his wife's hands. See In re Hinsley, 201 F.3d at 644 (finding no reasonably equivalent value when “the net effect of the partition and assignments was to remove the valuable assets from [the debtor's] ownership, making them unavailable to the judgment creditors.”). Viewing these two agreements together, it is clear that Todd did not receive reasonably equivalent value.

Moreover, Todd should have reasonably believed that he was incurring debts beyond his ability to pay when he defrauded Lockheed and the government of millions of dollars. See United States v. Resnick, 594 F.3d 562, 567 (7th Cir.2010) (“The second element [of § 3304(b)(1)(B)(ii)] was also satisfied because Resnick certainly should have believed that he was incurring debts beyond his ability to pay when he defrauded Universal of millions of dollars ....”); see also 28 U.S.C. § 3002(3)(B) (de...