Prospect Capital Corporation v. Michael Enmon et al
Filing
157
MEMORANDUM OPINION AND ORDER. Prospect shall prepare and file an appropriate judgment w/i 10 days. (Signed by Judge Kenneth M. Hoyt) Parties notified.(dpalacios, )
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
PROSPECT CAPITAL CORPORATION,
Plaintiff,
VS.
MICHAEL P. ENMON, et al,
Defendants.
§
§
§
§
§
§
§
§
CIVIL ACTION NO. H-11-601
MEMORANDUM OPINION AND ORDER
I.
INTRODUCTION
On August 23, 2008, the plaintiff, Prospect Capital Corporation (“Prospect”), obtained a
$2,287,687.32 arbitration award against Michael Enmon1 and, on October 14, 2008, the United
States District Court for the Southern District of New York issued a final judgment in the case.
Enmon has not satisfied the judgment, claiming that he has no assets. According to Prospect,
post-judgment discovery has revealed that Enmon has acted fraudulently, transferring and
concealing his assets. This is a summary of the genesis of the case before the Court.
II.
FACTUAL BACKGROUND
On October 3, 2007, after the arbitration started, Enmon transferred his royalty interests
in 364.379 acres of minerals to his mother, Grace Enmon, for $80,000. Because Grace did not
have the money to pay, Enmon accepted an unsecured, interest-free $80,000 note. On September
24, 2008, in anticipation of Grace selling a portion of those royalty interests, the Enmon
Irrevocable Family Trust (“Trust”) was created with Grace listed as the grantor and Enmon and
his wife, Kari Enmon, as the beneficiaries.
1
Michael Enmon will be referred to as “Enmon” but the other defendants who share the same last
name as him will be referred to by their first names.
1 / 11
Prospect claims that although a trustee was appointed, the Trust is actually controlled by
Enmon and Kari. Hence, on December 2, 2008, when Grace sold a portion of the royalty
interests for $700,000, it is argued that Enmon was the person orchestrating the sale. The record
shows that Grace placed $400,000 into the Trust and used the remaining $300,000 to pay Enmon
the $80,000 owed on the note. She also paid credit card and student loan debts for Enmon and
Kari among other debts. Enmon then caused the Trust to purchase a tract of land for a pet hotel,
the Kickapoo Kennels LLC. Also, the Trust and Kickapoo secured a $2.2 million loan to fund
the business upon Enmon’s application. The record also reflects that he and Kari each owns 5%
of Kickapoo and the Trust owns the remaining 90%. In essence, Prospect claims and the record
reflects that Enmon and Kari transferred the bulk of their assets to Grace, the Trust, and
Kickapoo in the aftermath of the arbitration award.
On March 1, 2011, the Court granted Prospect’s request for a temporary restraining order
against the Trust and Kickapoo, enjoining them from, inter alia, transferring, selling, or
distributing assets of the Trust and Kickapoo. On April 11, 2012, the Court granted Prospect’s
motion for contempt against the Trust, Kickapoo, and Kari for violating the temporary
restraining order. The Court subsequently denied summary judgment motions filed by Prospect
and some of the defendants, and the case was presented to the Court on November 5 and 6, 2012.
III.
CONTENTIONS OF THE PARTIES
A.
The Plaintiff’s Contentions
Prospect claims that it should prevail on its fraudulent transfer claims because it has
satisfied all the elements under the Texas Fraudulent and Transfer Act (“TFTA”), namely that:
(1) a creditor-debtor relationship exists between the parties in that Prospect has an unpaid
judgment against Enmon: (2) Enmon made a transfer of assets in his royalty interests to Grace,
2 / 11
diverted his salary and bonuses into Kickapoo bank accounts, and caused Grace, Kari, the Trust
and Kickapoo to acquire land and a bank loan for the Kickapoo kennel using those funds; and (3)
Enmon transferred assets either (i) without receiving reasonably equivalent value in exchange; or
(ii) he transferred assets with the intent to hinder, delay, or defraud Prospect. Prospect also
argues that it should prevail on its civil conspiracy cause of action because it has satisfied all the
elements of that claim. Lastly, Prospect alleges that it has proven common law fraud against
Kari and Kickapoo.
B.
The Defendants’ Contentions
Kari Enmon and Kickapoo argue that Prospect’s common law fraud claim should fail
against them because they made no representation to Prospect. They had no discussion, never
communicated with, and had no relationship with Prospect. Kari, Kickapoo, and the Trustee
contend that the statutory claim of fraudulent transfer against them should fail because there is
no evidence that Enmon transferred any property to them. In other words, they argue that neither
Kari, Kickapoo nor the Trustee is a transferee. The defendants together argue that, even if a
transfer from Enmon could be established, Prospect cannot show that it was made with the actual
intent to hinder, delay or defraud it. Lastly, the defendants claim that Prospect has failed to
satisfy the elements of a civil conspiracy.
IV.
FINDINGS OF FACT
Based on the parties’ pleadings, the testimony and documents received in evidence and
the inferences that may be drawn, the Court adopts and makes the following findings of facts as
modified.
In April of 2006, Enmon contacted Prospect and requested a $10 million loan for the
purchase of Caprock Pipe & Supply, LP. When that loan was not consummated, Enmon sued
3 / 11
Prospect. Specifically, on or about December 4, 2006, Enmon sued Prospect in a Texas state
court, claiming that Prospect was liable for $50 million because Prospect had declined to provide
financing to his company. Prospect successfully moved to compel arbitration and initiated
arbitration proceedings against Enmon in New York, seeking a declaration that it was not liable
to Enmon and that Enmon must pay all of Prospect’s attorneys’ fees. The arbitration hearing
began in New York on July 23, 2007, continued on July 24-27, September 27-29, 2007, and
concluded on November 14-15, 2007.
On October 3, 2007, within a few days of giving his testimony, Enmon transferred his
royalty interests in 364.379 acres of land that he had inherited from his father to his mother,
Grace, in return for an unsecured $80,000 interest-free note. At the time of the transfer, Grace
was a widow with almost no assets of her own, and depended on Enmon and his wife, Kari, for
support. Hence, Grace had no ability to pay the $80,000 note apart from the Royalty Interests.
The Court is of the opinion, based on expert testimony, that the Royalty Interests were worth
$440,000 to $840,000 at the time of the transfer.
The evidence shows that Enmon set the “price” of the transfer of the Royalty Interests to
Grace without negotiation and knew, or with the exercise of diligence, would have known, that
the value of the Royalty Interests was rapidly increasing when he made the transfer. He also
knew or reasonably should have known at the time of transfer that he would incur debts beyond
his ability to pay, i.e., attorney’s fees. When Enmon transferred his Royalty Interests to his
mother, he was fully aware that Prospect sought a monetary recovery from him that exposed him
to millions of dollars in fees.
On April 14, 2008, the arbitrator dismissed Enmon’s claims, awarded him nothing, and
found for Prospect on all of its claims. The arbitrator directed Prospect to submit supporting
4 / 11
papers to calculate the final award against Enmon. In the summer of 2008, and in spite of the fact
that he no longer owned the mineral interest, Enmon entered into negotiations with MAP
Royalty, Inc. (“MAP”), to sell a portion of Grace’s Royalty Interests for $700,000. On August
23, 2008 -- while Enmon was finalizing negotiations with MAP -- the arbitrator awarded
Prospect $2,287,687.32 against Enmon. Within days, Enmon directed a lawyer to set up the
Enmon Irrevocable Family Trust. The Trust was labeled as an irrevocable gift from Grace to
Enmon and his wife, Kari, as the sole beneficiaries. Grace retained no benefit for herself. This
arrangement meant that Grace, who depended upon Enmon to pay her monthly expenses,
surrendered funds that could have been used to cover her expenses. The record shows that she,
although over 82 years of age, has since resumed employment.
The $700,000 paid by MAP for half of the Royalty Interests, was distributed by Grace as
follows: (i) 400,000 into the Trust; (ii) $80,000 to Enmon as “repayment” of the note; and, (iii)
approximately $320,000 to pay off Grace’s home mortgage, Enmon and Kari’s credit card debts
and student loans and unspecified personal debts and purchases. None of the expended funds
were used to reduce the debt owed to Prospect by Enmon.
Finally, the facts show that Enmon, Kari and Grace have contributed to Kickapoo
enterprise despite the fact that each had no legitimate reason to do so. For example, the Trust is
a co-borrower with Enmon on the bank loan. The Trust “leases” its land to Kickapoo at below
market rates. And, Grace and Kari are each personal guarantors on the loans to Kickapoo. Yet,
to date, Kickapoo is an unprofitable business. Nevertheless, from at least March 1, 2011 through
April 11, 2012, Enmon directed his annual salary of $180,000, plus bonuses, into a Kickapoo
bank account rather than his own personal account. After directing his salary to Kickapoo,
5 / 11
Kickapoo, in turn, paid at least $47,572.00 of Enmon and Kari’s personal expenses, as well as
other unspecified personal expenses in an amount of at least $21,073.89.2
V.
ANALYSIS AND DISCUSSION
Fraudulent Transfer Claim.
Prospect claims that the evidence establishes Enmon’s intent to defraud under Tex. Bus.
& Com. Code §§ 24.005(a)(1).3 Prospect’s argument is persuasive. Intent may be inferred from
the following “badges of fraud:” (1) the transfer was made to an insider, including a relative; (2)
the debtor retained possession or control of the transferred property after the transfer: (3) the
transfer or obligation was concealed; (4) the debtor was sued or threatened with suit before the
transfer was made or the obligation incurred; (5) the value of the consideration received by the
debtor was not reasonably equivalent to the value of the asset transferred; (6) the debtor was
insolvent or became insolvent shortly after the transfer was made or obligation incurred; and (7)
the transfer occurred shortly before or after a substantial debt was incurred. See Tex. Bus. &
Com. Code §§ 24.005(b); Essex Crane Rental Corp. v. Carter, 371 S.W.3d 366, 377 (Tex. App.-
2
When called to testify in this case, Enmon refused to testify, relying on his Fifth Amendment right to remain silent.
Prospect proffered a list of questions for the record and requested that the Court grant an adverse inference with
regard to the questions. See United States v. Roundtree, 420 F.2d 845, 852 (5th Cir. 1970). The defendant crossdesignated his own testimony as well. The Court is of the opinion that the testimony provided and the records
admitted conclusively establish Enmon’s intent to defraud by transfer, his assets to others. Therefore, whether by
inference or acquiescence, the facts are undisputed.
3
The statute provides that a “transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether
the creditor’s claim arose within a reasonable time before or after the transfer was made or the obligation was
incurred, if the debtor made 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 became due. Tex. Bus. & Com. Code §§ 24.005(a)(1), (2)(B).
6 / 11
Houston [1st Dist] 2012, pet. denied); BMG Music v. Martinez, 74 F.3d 87, 89-90 (5th Cir.
1996).
The Court is of the opinion that each of the “badges of fraud” is present in Enmon’s
transactions. While an individual badge of fraud is not conclusive, “a concurrence of many
badges in the same case will always make out a strong case of fraud.” Walker v. Anderson, 232
S.W. 3d 899, 914 (Tex.App.-Dallas 2007, no pet.); see also Wohlstein v. Alilezer, 321 S.W.3d
765, 777 (Tex.App.-Houston [14th Dist] 2010, no pet.) (“although there is “no magic number” of
factors that must exist, the presence of several “badges” may support an inference of fraud). In
the case at bar, the testimony and evidence presented by Prospect establish multiple of the abovementioned badges of fraud, giving rise to the Court’s conclusion that Enmon‘s transfer was, in
fact, fraudulent pursuant to § 24.005(a)(1).4
The Court also concludes that the transfers were fraudulent under Tex. Bus. & Com.
Code § 24.005(a)(2).5 The evidence establishes that Enmon transferred assets to Grace for less
than reasonably equivalent value and that, at the time he made the transfer, he knew or should
have known that he would incur debts beyond his ability to pay as they came due. Specifically,
Enmon who appeared to have suspected that he would sustain a large arbitration judgment,
4
To the extent that Kari Enmon and some of the other defendants argue that they had no intent to defraud, courts
have held that the “transferees’ knowing participation is irrelevant . . . for purposes of establishing the premise (as
opposed to liability for) a fraudulent transfer . . . . The statute requires only a finding of fraudulent transfer on the
part of the ‘debtor.’” S.E.C. v. Resource Dev. Int’l, LLC, 487 F.3d 295, 301 (5th Cir. 2007); see also Flores v.
Robinson Roofing & Const. Co., Inc., 161 S.W.3d 750, 756 (Tex.App.-Fort Worth 2005, pet. denied) (noting that a
transferee’s awareness of the fraudulent nature of a transfer “is not an essential element of a fraudulent transfer
claim”). Section 24.000(a) provides that a transfer is not voidable under § 24.005(a) if the transferee “took in good
faith and for a reasonably equivalent value.” Here, however, none of the defendants took in “good faith” and for
“reasonably equivalent value.” Moreover, good faith is an affirmative defense, with the burden on the transferees
(Flores, 161 S.W.3d at 756), a burden that the transferees have not met in this case.
5
Although the Court is of the opinion that the transfers were fraudulent under Tex. Bus. & Com. Code §§
24.005(a)(1) and (2), it should be noted that the statute requires only that the plaintiff satisfy either one, not both, of
the bases for fraud. See Tex. Bus. & Com. Code §§ 24.005(a)(1) or subsection (2); S.E.C. v. Resource Dev. Int’l,
LLC, 487 F.3d 295, 301 (5th Cir. 2007).
7 / 11
transferred mineral interest to Grace for an $80,000 unsecured note. Grace had no money to pay
the sale price and Enmon secured the sale with a promissory note that was paid only after he
negotiated a sale of a portion of the mineral interests for $700,000. Based on those facts, the
Court finds a violation of section 24.005(a)(2). See S.E.C. v. Resource Dev. Int’l, LLC, 487 F.3d
295, 301 (5th Cir. 2007) (finding a fraudulent transfer under section 24.005(a)(2), where, inter
alia, the transferee did not give “reasonably equivalent value in return”).
Kari, the Trustee, James Van Meter, and Kickapoo argue that they were not “transferees”
because there is no evidence that Enmon transferred property to them. That argument is
unpersuasive because the law defines “transferee” broadly to include not only the first transferee
of an asset but “any subsequent transferee[s]” if they are found to have participated in the
fraudulent transfer. Trigeant Holdings, Ltd. v. Jones, 183 S.W.3d 717, 726 (Tex. App.- Houston
[1st Dist.] 2005, pet. denied); United States v. Chapman, 756 F.2d 1237, 1241-1243 (5th Cir.
1985) (the defendants transferred property to their son; the son subsequently conveyed the
property to his sister, who then exchanged the property and cash for another property; the Court
found a fraudulent transfer and allowed the IRS to enforce a lien against the last piece of
property acquired); see also Roland v. U.S. 838 F.2d 1400, 1401-1403 (5th Cir. 1988). Without
doubt, Kari, the Trustee and Kickapoo are transferees.
The Court is of the view that, based on the facts and circumstances of this case, Grace,
Kari, the Trustee and Kickapoo were aware of and facilitated Enmon’s fraudulent scheme. The
transfer “trail” reveals that Enmon transferred property to Grace, who in turn sold a portion of it
to fund the Trust that used part of the proceeds to purchase property and secured a bank loan for
Kickapoo. In this circumstance, Kari, the Trustee (and Trust), and Kickapoo became transferees.
8 / 11
The documentary evidence supports this conclusion as Enmon is seen on all sides of these
transactions.
The Court also concludes that Grace, Kari, the Trust and Kickapoo were not bona fide
purchasers because, under the facts and circumstances of this case, they took “property with
knowledge of such facts as would excite the suspicions of a person of ordinary prudence and put
him on inquiry of the fraudulent nature of [the] alleged transfer.” Phillips v. B.R. Brick And
Masonry, Inc., No. 01-09-00311-CV, 2010 WL 3564820, at *4 (Tex.App.-Houston [1st Dist]
Sept. 10, 2010, no pet.)].
VI.
CONCLUSION
The Court is of the opinion that it need not address the plaintiff’s common law fraud or
conspiracy claims. This is so because a finding that Enmon committed statutory fraud that the
remaining defendants participated in is sufficient to effect an appropriate remedy. As noted,
each of the defendants participated in Enmon’s scheme. Hence, Kickapoo, Grace, and Kari
could not, and did not, become bona fide purchasers because they received property with full
knowledge that the transactions were without adequate consideration and designed to avoid
Enmon’s impending debt. Id. Therefore, they are not able to shield the transfers and/or
purchases.
VII.
REMEDIES
Prospect is entitled to levy execution on the assets transferred and on any proceeds in
possession of the Trust or owed to the Trust.
Accordingly, the Court shall enter a Final
Judgment and Orders as follows:
A judgment voiding:
● the transfer of the Mineral Rights by Enmon to Grace;
9 / 11
● Grace's transfer of the proceeds from the sale of the Mineral Rights to the Trust;
● Grace's transfer of $80,000 from the sale of the Mineral Rights to Michael
Enmon;
● all transfers of personal property of Michael Enmon into Kickapoo Kennels; and
● the transfer of Michael Enmon's half of his community estate or funds to
Kickapoo Kennels.
● all transfers of money and/or property into The Enmon Irrevocable Family Trust,
by any defendant, at any time, are voided.
● all transfers of money and/or property into Kickapoo Kennels, LLC, by any
defendant, at any time, are voided.
A writ of attachment or turnover order in Prospect’s favor may issue against all of the
following:
● the remaining Mineral Rights and/or real interest in Enmon’s 364.379 acre
inheritance;
● the receivables of Kickapoo;
● the Kickapoo land;
● the personal property of Kickapoo; and
● all assets of the Trust.
The Court awards costs and attorneys fees to Prospect and against Enmon and Kari
jointly and severally in the amount of $200,000;
The Court awards post-judgment interests to Prospect and against Enmon and Kari,
jointly and severally;
Prospect shall receive the $79,645.89 held in the Registry of the Court;
10 / 11
Prospect is relieved of its obligation under the $5,000 bond posted for the issuance of the
Temporary Restraining Order. Prospect shall prepare and file an appropriate judgment within 10
days of the entry of this Memorandum.
It is so Ordered.
SIGNED on this 27th day of November, 2012.
___________________________________
Kenneth M. Hoyt
United States District Judge
11 / 11
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?