Sycamore Family v. Sycamore et al
Filing
82
MEMORANDUM DECISION AND ORDER denying 61 Motion for Partial Summary Judgment; granting in part and denying in part 62 Motion for Partial Summary Judgment. EarthGrains shall prepare the form of a declaratory judgment re: Relinquishment Document. On or before 1/9/15, the parties shall file a joint statement as to the claims remaining and a proposed schedule for resolution of any remaining disputes. Signed by Judge David Nuffer on 12/18/14 (alt)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH
SYCAMORE FAMILY LLC AND LELAND
SYCAMORE,
Plaintiffs,
v.
EARTHGRAINS BAKING COMPANIES,
INC.,,
Defendant.
MEMORANDUM DECISION AND
ORDER DENYING [61] SYCAMORE
FAMILY, LLC’S MOTION FOR
PARTIAL SUMMARY JUDGMENT, AND
GRANTING IN PART AND DENYING IN
PART [62] EARTHGRAINS BAKING
COMPANIES, INC.’S MOTION FOR
PARTIAL SUMMARY JUDGMENT
Case No. 2:13-CV-00639-DN
District Judge David Nuffer
EARTHGRAINS BAKING COMPANIES,
INC.,
Counterclaimant,
v.
SYCAMORE FAMILY LLC, LELAND
SYCAMORE, and JERI SYCAMORE,
Counterclaim Defendants.
CASE OVERVIEW
In March, 2011, EarthGrains Baking Companies, Inc. 1 (“EarthGrains”) obtained a
judgment against Sycamore Family Bakery, Inc., and Leland Sycamore (“Leland”). 2 In June,
2013, the Sycamore Family LLC (“LLC”) filed the present case, requesting declaratory judgment
1
Suit was initially filed by Sara Lee Corporation. EarthGrains, however, acquired Sara Lee Corporation during the
lawsuit, and therefore was substituted as the real party in interest.
2
EarthGrains is a judgment creditor of Leland. In June, 2009, EarthGrains filed a lawsuit against Leland for breach
of contract, trademark infringement, and unfair competition. On April 4, 2011, the court found Leland liable on
EarthGrains’s claims. Ultimately, EarthGrains obtained a judgment against Leland in excess of $5.7 million.
that Leland has relinquished most of his membership interest in the LLC, thus precluding
EarthGrains from collecting on its judgment from Leland’s membership interest in the LLC.
EarthGrains, opposing the LLC’s declaratory judgment request, argues that Leland still retains
his membership interest.
CURRENT MOTIONS
On June 13, 2014, the parties filed two partial summary judgment motions. The LLC
moved for partial summary judgment 3 on its second cause of action, which seeks a declaratory
judgment that a line of credit Leland received was a distribution from the LLC. EarthGrains
moved for partial summary judgment 4 on its fraudulent transfer, alter ego, and nominee liability
counterclaims. 5 EarthGrains’s motion also seeks summary judgment 6 on both of the LLC’s
declaratory judgment claims. 7 For the reasons set for below, after reviewing the parties’
memoranda, the undisputed facts and the relevant legal authorities, EarthGrains’s motion for
partial summary judgment is hereby GRANTED in part and DENIED in part, and the LLC’s
motion for partial summary judgment is DENIED. Oral argument is unnecessary. 8
3
Motion for Partial Summary Judgment and Supporting Memorandum [LLC’s Partial Summary Judgment], docket
no. 61, filed June 13, 2014.
4
EarthGrains’s Motion for Partial Summary Judgment and Memorandum of Law in Support Thereof [EarthGrains’s
Partial Summary Judgment], docket no. 62, filed June 13, 2014. Two oppositions were filed in response to
EarthGrains’s Partial Summary Judgment. The first was Leland Sycamore’s Combined Opposition to EarthGrains’s
Motion for Summary Judgment; Motion to Strike EarthGrains’ Motion for Summary Judgment and Joinder in
Sycamore’s Opposition to EarthGrains’s Summary Judgment Motion [Leland’s Opposition], docket no. 68, filed
July 30, 2014. And the second was Sycamore Family, LLC’s and Jeri Sycamore’s Memorandum in Opposition
[LLC’s Opposition] to EarthGrains’s Motion for Partial Summary Judgment, docket no. 71, filed Jury 30, 2014.
Leland, in his opposition, expressly joins the LLC’s Opposition, and therefore, the LLC’s Opposition is more often
referenced. Where appropriate, however, Leland’s Opposition is also referenced.
5
EarthGrains Baking Companies, Inc.’s Second Amended Answer and Counterclaims [EarthGrains’s
Counterclaims], docket no. 50, filed February 24, 2014.
6
LLC’s Partial Summary Judgment at 28.
7
Complaint, docket no. 2-2, filed July 8, 2013.
8
See DUCivR 7–1(f).
2
BACKGROUND ............................................................................................................................ 3
STANDARD OF REVIEW ............................................................................................................ 4
EARTHGRAINS’S MOTION FOR PARTIAL SUMMARY JUDGMENT ................................. 5
I.
Undisputed Facts ..................................................................................................... 5
II.
EarthGrains’s Fraudulent Transfer Claims Fail ...................................................... 6
a.
Utah Code Ann. § 25-6-6(1) (transfer without value, insolvent debtor) .... 7
b.
Utah Code Ann. §25-6-6(2) (transfer for antecedent debt)....................... 14
c.
Utah Code Ann. § 25-6-5 (transfer with intent to defraud) ...................... 15
III.
EarthGrains’s Alter Ego Claim Fails .................................................................... 17
IV.
EarthGrains’s Nominee Liability Claim Fails ...................................................... 19
V.
EarthGrains is Entitled to Summary Judgment on the LLC’s First Claim for
Declaratory Relief (invalidity of Leland’s relinquishment)................................. 20
VI.
EarthGrains is Entitled to Summary Judgment on the LLC’s Second Claim for
Declaratory Relief (alleged distribution to Leland) .............................................. 21
LLC’S MOTION FOR PARTIAL SUMMARY JUDGMENT.................................................... 22
CONCLUSION ............................................................................................................................. 23
BACKGROUND
On December 29, 1998, husband and wife, Jeri (“Jeri”) and Leland Sycamore formed the
LLC as a Nevada limited liability company. At the time of formation, each received a 48%
membership interest in the LLC, with the remaining 4% interest divided among their four
children.
In 2008, Leland decided to purchase a bakery business. The LLC executed a deed of trust
on the Sycamore Family home to Wells Fargo Bank to secure a loan for Leland. In return,
Leland gave the LLC a promissory note (“Promissory Note”) for $2,112,500.00. 9 The note is
dated September 15, 2008. Ultimately, Leland obtained a line of credit from Wells Fargo Bank in
the amount of $2,112,500. 10 The LLC asserts that as additional consideration 11 for the pledge of
the Sycamore Family home, Leland signed a document (“Relinquishment Document”)
9
Promissory Note, docket no. 2-2, filed July 8, 2013.
10
LLC’s Partial Summary Judgment at exhibit F.
11
Complaint ¶ 15.
3
relinquishing “46% of [his 48%] interest in the Sycamore Family LLC, including [his] position
as managing member, if so required, to [his] wife Jeri Lyn Sycamore.” 12
The LLC seeks a declaratory judgment upholding the validity of Leland’s relinquishment
of 46% of his 48% membership interest in the LLC. 13 Alternatively, in the event that the
relinquishment is determined to be invalid, the LLC requests a declaratory judgment that the line
of credit extended to Leland was a distribution and asks the court to grant a “catch-up”
distribution to the other members of the LLC. 14
The LLC originally filed this action for declaratory relief in state court on June 7, 2013,
naming both EarthGrains and Leland as defendants. This Court, on November 1, 2013, realigned
Leland as a co-plaintiff alongside the LLC. 15
EarthGrains responded to the LLC’s complaint and filed a counterclaim 16 against the
LLC, Leland and Jeri, alleging, among other things, counterclaims of fraudulent transfer, alter
ego, and nominee liability. With this factual backdrop, both pending motions are discussed
below.
STANDARD OF REVIEW
“The court shall grant summary judgment if the movant shows that there is no genuine
dispute as to any material fact and the movant is entitled to judgment as a matter of law.” 17
When analyzing a motion for summary judgment, the court must “view the evidence and draw
all reasonable inferences therefrom in the light most favorable to the party opposing summary
12
Relinquishment Document, docket no. 2-2, filed July 8, 2013.
13
Complaint at 5.
14
Complaint at 6.
15
Memorandum Decision and Order Denying Motion for Remand and Realigning Defendant Leland Sycamore as a
Plaintiff, docket no. 43, filed November 1, 2013.
16
See EarthGrains’s Counterclaims at 15–17.
17
Fed. R. Civ. P. 56(a).
4
judgment.” 18 However, “the nonmoving party must present more than a scintilla of evidence in
favor of his position.” 19 A dispute is genuine only “if the evidence is such that a reasonable jury
could return a verdict for the nonmoving party.” 20
EARTHGRAINS’S MOTION FOR PARTIAL SUMMARY JUDGMENT
EarthGrains argues that it is entitled to judgment as a matter of law on its fraudulent
transfer, alter ego, and nominee liability counterclaims. 21 EarthGrains also moves for summary
judgment on the LLC’s declaratory relief claims. Each of EarthGrains’s arguments is discussed
in turn below.
I.
Undisputed Facts 22
The following relevant factual statements from EarthGrains’s motion for summary
judgment are undisputed:
1.
The LLC Operating Agreement provides that no member may transfer any
interest in the LLC without the “prior written consent of the managers which consent may
be withheld in the manager’s sole and absolute discretion.” Any attempted transfer with
[sic] such prior written consent is “invalid, null, and void, and of no force or effect.” 23
18
Mathews v. Denver Newspaper Agency LLP, 649 F.3d 1199, 1204 (10th Cir. 2011) (citation and internal
quotations omitted).
19
Ford v. Pryor, 552 F.3d 1174, 1178 (10th Cir. 2008) (citations omitted).
20
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); see also Kerber v. Qwest Group Life Ins. Plan, 647
F.3d 950, 959 (10th Cir. 2011).
21
See EarthGrains’s Counterclaims at 15–17.
22
Where facts offered by EarthGrains were properly disputed in the LLC’s response, those disputes have been
removed by editing and the undisputed portions remain. Some minor edits and consolidations have been made to
improve readability without changing meaning.
23
LLC’s Opposition at 17 (quoting the Operating Agreement of Sycamore Family, L.L.C., a Nevada limited liability
company [Operating Agreement] § 7.1, docket no. 2-2, filed July 8, 2013).
5
2.
The LLC Operating Agreement provides that the transfer documentation
must be duly executed in an acknowledged written instrument. 24
3.
No member of the LLC gave written consent to the Relinquishment. 25
4.
There was never any notary or formal acknowledgement of Leland
Sycamore’s signature on the Relinquishment Document. 26
5.
The LLC Operating Agreement provides that the transferor and the
transferee must agree in writing to indemnify and hold the other managers and members
harmless from any loss, liability, claim, or expense arising out of the transfer. 27
6.
Neither Leland nor Jeri Sycamore ever agreed in writing to indemnify or
hold the other managers and members harmless from losses or liabilities arising out of the
transfer in the Relinquishment. 28
7.
The LLC and Jeri were unaware of the Relinquishment Document until
late 2012. 29
II.
EarthGrains’s Fraudulent Transfer Claims Fail
EarthGrains argues that Leland’s relinquishment of his 46% membership interest in the
LLC is a fraudulent transfer pursuant to the Utah Uniform Fraudulent Transfer Act (“UFTA”). 30
24
Id. (citing Operating Agreement § 7.5.1) (The LLC does not dispute this requirement, it only argues that the
definition of transfer as defined in § 7.1 is ambiguous and does not apply to transfers among members).
25
Id. (quoting Operating Agreement § 7.1).
26
Id. (referencing Operating Agreement § 7.5.1) (The LLC does not dispute the fact that there was no notary or
formal acknowledge of the signature, it only argues that the definition of transfer as defined in § 7.1 is ambiguous
and does not apply to transfers among members).
27
Id. at 18 (citing Operating Agreement § 7.5.4) (The LLC does not dispute the requirements of § 7.5.4, it only
argues that the definition of transfer as defined in § 7.1 is ambiguous and does not apply to transfers among
members).
28
Id. (The LLC does not dispute that Leland and Jeri did not follow the requirements of § 7.5.4 of the Operating
Agreement, it only argues that the definition of transfer as defined in § 7.1 is ambiguous and does not apply to
transfers among members).
29
See Complaint at 4, docket no. 2-2, filed July 8, 2013; LLC’s Opposition at 8.
6
The UFTA provides several avenues under which a claim for fraudulent transfer may be
alleged. 31 EarthGrains claims that the relinquishment of Leland’s membership interest is
fraudulent under Utah Code Ann. §§ 25-6-5(1)(a), 25-6-6(1), and 25-6-6(2). Under § 25-6-5, the
debtor may be liable whether the creditor’s claim arose before or after the transfer. Section 25-66, however, only applies if the creditor’s claim arose before the transfer. For the reasons stated
below, summary judgment on EarthGrains’s fraudulent transfer claim is denied as there was
never a transfer of Leland’s membership interest.
a. Utah Code Ann. § 25-6-6(1) (transfer without value, insolvent debtor)
Utah Code Ann. § 25-6-6(1) provides:
A transfer made or obligation incurred by a debtor is fraudulent as to a
creditor whose claim arose before the transfer was made or the obligation
was incurred if: (a) the debtor made the transfer or incurred the obligation
without receiving a reasonably equivalent value in exchange for the
transfer or obligation; and the debtor was insolvent at the time or became
insolvent as a result of the transfer or obligation. 32
i.
Transfer
EarthGrains contends that its claim as a creditor arose before Leland relinquished his
membership interest in the LLC. EarthGrains provides two bases for this assertion. First,
EarthGrains claims that the evidence shows that the Relinquishment Document was executed
sometime in July 2011, and was simply backdated by Leland to read “September 15, 2008.” 33
And second, even assuming that the Relinquishment Document was signed in 2008, the
relinquishment was not effective in 2008 because it did not comply with the LLC Operating
30
See Utah Code Ann. § 25-6-1 to -13.
31
See id. §§ 25-6-5 and 25-6-6.
32
Id. § 25-6-6(1) (emphasis added).
33
EarthGrains’s Partial Summary Judgment at 33.
7
Agreement. 34 EarthGrains contends that “[t]he Relinquishment . . . did not comply with the LLC
Operating Agreement, if at all, until 2012 when it was adopted and ratified by both Jeri
Sycamore and the LLC—long after EarthGrains’ claims arose.” 35 The LLC and Jeri argue that
the Relinquishment Document became effective the day it was signed—September 15, 2008. 36
Even when taking the facts in the light most favorable to the non-moving party and assuming
that the Relinquishment Document was signed in 2008, there still remains the issue of whether
the transfer was effective in 2008 or anytime thereafter.
The LLC Operating Agreement requirements must be met before a member of the LLC
may transfer any portion of his or her membership interest. 37 These requirements include, among
others:
§ 7.1 – Transfers. Except as otherwise provided in this Section VII, no
Member may Transfer all, or any portion of, or any interest or rights in,
the Membership Rights owned by the Member, and no Interest Holder
may Transfer all, or any portion of, or any interest or rights in, any Interest
without the prior written consent of the Managers which consent may be
withheld in the Managers’ sole and absolute discretion. . . . The Transfer
of any Membership Rights or Interest in violation of the prohibition
contained in this Section VII shall be deemed invalid, null, and void, and
of no force or effect. 38
§ 7.5 Conditions Precedent. After satisfying the other restrictions
contained in Section IV, a Person may Transfer all or any portion of or
any interest or rights in the Person’s Interest only if the following
conditions (“Conditions of Transfer”) are satisfied:
34
Id. at 39. EarthGrains also argues, in the alternative, that if by chance the relinquishment is characterized as a
secured transaction, then the relinquishment was not effective until October 5, 2012, when it was perfected by the
filing of a UCC-1 Financing Statement. See EarthGrains’s Memorandum of Law in Reply to Sycamore Family LLC
and Jeri Sycamore’s Opposition to EarthGrains’s Motion for Partial Summary Judgment at 24 [EarthGrains’s Reply
to LLC], docket no. 74, filed August 22, 2014. As Plaintiffs make clear, however, the relinquishment is not a
secured transaction, but simply “a transfer of property for value.” LLC’s Opposition at 42.
35
EarthGrains’s Partial Summary Judgment at 39.
36
See LLC’s Opposition at 13.
37
See Operating Agreement § 7.
38
Id. § 7.1 (emphasis added).
8
§ 7.5.1. A duly executed and acknowledged written instrument of
assignment is filed with the Company.
...
§ 7.5.4. The transferor and transferee agree in writing to indemnify
and hold the Managers, Members, and the Company harmless for,
from, and against any loss, liability, claim, or expense arising out of
the Transfer. 39
The LLC and Jeri do not dispute that these requirements were not met. Rather, they argue
that § 7.1 is ambiguous and appears on its face to apply only to transfers to non-member entities
or individuals.
The LLC’s and Jeri’s interpretation of § 7.1 is without merit. The plain terms of § 7.1
require prior written consent of the managers before any transfer. There is no limiting language
indicating that the prior written consent only applies to transfers to non-members. Although the
last sentence of § 7.1 specifically addresses the implication of transferring membership rights to
a non-member, 40 this sentence does not create an ambiguity as to the remaining requirements
within the section. 41 Hence, before Leland could relinquish his membership interest, he needed,
among other things, the prior written consent of both managers—Jeri and himself.
The LLC and Jeri further contend that § 12 of the Operating Agreement overrides “§ 7.1
as it provides that Leland could take actions without Jeri’s consent and vice versa and that each
acted with power of attorney for the other.” 42 Section 12 states:
39
Id. § 7.5.
40
Id. § 7.1:
Any Person to whom Membership Rights or an Interest are attempted to be transferred in violation of this Section
VII shall not be entitled to vote on matters coming before the Members, participate in the management of the
Company, act as an agent of the Company, receive allocations or distributions from the Company, or have any other
rights in or with respect to the Membership Rights or Interests.
41
See e.g., ELM, Inc. v. M.T. Enterprises, Inc., 968 P.2d 861, 863 (Utah Ct. App. 1998) (“Utilizing ordinary rules of
contract construction, if a contract’s terms are clear and unambiguous, the court must construe the writing according
to its plain and ordinary meaning.”).
42
LLC’s Opposition at 17, 42.
9
By executing this Agreement, the spouse of each Interest Holder acknowledges
and consents to the terms and conditions of this Agreement and agrees, for
himself or herself and for the community of himself and herself and the Interest
Holder, to be bound hereby. Each spouse of a Interest Holder, for himself or
herself and the community of which he or she is a member, hereby irrevocably
appoints the Interest Holder as attorney-in-fact with an irrevocable proxy coupled
with an Interest to vote on any matter to come before the Members or to agree to
and execute any amendments of this Agreement without further consent or
acknowledgment of the spouse and to execute proxies, instruments, or documents
in the spouse’s name as may be required to effect the same. This power of
attorney is intended to be durable and shall not be affected by disability of the
spouse. 43
Jeri and the LLC argue that “the plain and clear language of . . . [§ 12] itself permits
Leland to act in [sic] behalf of Jeri in relation to her LLC responsibilities, and accept the transfer
of Leland’s membership interest.” 44 EarthGrains disputes the interpretation that § 12 confers any
rights on Leland to act on behalf of Jeri as a Manager of the LLC. EarthGrains contends that “the
provision in Section 12 of the Operating Agreement only applies to members, not managers, and
gives no party any authority to act for another in the capacity of a manager.” 45
Section 12’s plain language makes clear that it “appoints the Interest Holder as attorneyin-fact” to (1) “vote on any matter to come before the Members”; (2) “agree to and execute any
amendments of this Agreement without further consent or acknowledgment of the spouse”; and
(3) “to execute proxies, instruments, or documents in the spouse’s name as may be required to
effect the same.” 46 Leland’s relinquishment of his membership interest does not fall into any of
these three categories of actions. No vote by members was required for the relinquishment—
simply the written consent of the managers. The relinquishment did not require an amendment to
the Operating Agreement. Finally, Leland never executed any documents, related to the
43
Operating Agreement § 12 (emphasis added).
44
LLC’s Opposition at 42 (citing §12 of the Operating Agreement).
45
EarthGrains’s Reply to LLC at 24.
46
Operating Agreement § 12 (emphasis added).
10
relinquishment, in Jeri’s name, nor does the Relinquishment Document mention that it is
approved by Jeri in her managerial capacity.
Accordingly, the Relinquishment Document—whether or not signed on September 15,
2008—was ineffective to transfer Leland’s membership interest to Jeri because the
relinquishment did not comply with the strictures of the Operating Agreement. Because it fails to
comply with the Operating Agreement, the transfer is “deemed invalid, null, and void, and of no
force or effect.” 47 The Relinquishment Document, void ab initio, cannot later be made valid by
ratification. 48 In effect, Leland currently retains his 48% membership interest in the LLC.
Because EarthGrains has failed to establish that a transfer was ever made, inquiry on this
claim could end. However, in the interest of completeness, the remaining elements of §§ 25-66(1), 25-6-6(2), and 25-6-5(1)(a) are addressed below.
ii.
Reasonably Equivalent Value
Earthgrains argues that Jeri, the transferee, did not give Leland anything of value in
return for Leland’s relinquishment of his 46% membership interest. Jeri and the LLC contend
that “Jeri did exchange value for the Relinquishment [by allowing] . . . the LLC to take on the
risk that the LLC’s Real Property could be foreclosed, and she forego [sic] any of the Wells
Fargo line of credit.” 49
Jeri’s and the LLC’s argument is unavailing. Jeri, as a member of the LLC, has no
ownership interest in the LLC’s real property, and has no authority to consent in her individual
capacity to encumber the LLC property. 50 Jeri’s consent to allow the LLC’s real property to be
47
Id. § 7.1.
48
See Ockey v. Lehmer, 2008 UT 37, ¶ 18, 189 P.3d 51 (That which is “void cannot be ratified or accepted[.]”).
49
LLC’s Opposition at 9–10.
50
Nev. Rev. Stat. Ann. § 86.311 (“Real and personal property owned or purchased by a company must be held and
owned, and conveyance made, in the name of the company.”).
11
pledged as collateral was, therefore, in her official managerial capacity on behalf of the LLC. 51
Neither Jeri nor the LLC have put forth any evidence to suggest that Jeri has given anything of
reasonable value in her individual capacity in exchange for receiving Leland’s 46% membership
interest.
The argument that Jeri “forego [sic] any of the Wells Fargo line of credit,” assumes that
Jeri had an interest in the line of credit. But the undisputed facts show that there was an exchange
of value between Leland and the LLC. Leland executed a promissory note to the LLC for
$2,112,500.00 in exchange for the LLC’s pledge of collateral for the Wells Fargo line of credit.
Jeri and the LLC have failed to provide any factual or legal support for their bare assertion that
Jeri had an interest in the line of credit.
iii.
Insolvent
UFTA provides that “[a] debtor is insolvent if the sum of the debtor’s debts is greater
than all of the debtor’s assets at a fair valuation.” 52 Also, a debtor is presumed insolvent when
the debtor “is generally not paying his debts as they become due.” 53
EarthGrains contends that “[e]vidence showing that a debtor was not able to pay its debts
as they become due supports a presumption of insolvency.” 54 EarthGrains points out that Leland
has not been paying his debts as they have become due; Leland “has repaid neither his loan from
51
See Operating Agreement § 5.3.8 (“[T]he Managers shall have power and authority on behalf of the Company: . . .
To enter into any and all other agreements on behalf of the Company, with any other Person for any purpose, in such
forms as the Managers may approve, including, but not limited to agreements between the Company and a
Manager[.]”).
52
Utah Code Ann. § 25-6-3(1).
53
Id. § 25-6-3(2).
54
EarthGrains’s Combined Memorandum of Law (1) in Opposition to Leland Sycamore’s Motion to Strike, and (2)
in Reply to Leland Sycamore’s Opposition to EarthGrains’s Motion for Partial Summary Judgment at 11
[EarthGrains’s Reply to Leland], docket no. 72, filed August 22, 2014.
12
Wells Fargo nor the promissory note to the LLC,” 55 nor “paid nary a cent of the Judgment owed
to EartghGrains. . . .” 56 Jeri and the LLC argue that Leland was not insolvent back in 2008.
However, as determined above, there was no effective transfer in 2008, and therefore, the
insolvency analysis must be made post-2008. Jeri and the LLC claim that the 10th Circuit has
recently shed light on the question of Leland’s solvency. “Specifically, the 10th Circuit has
determined that Leland has held, and continues to hold, the trademark rights for Grandma
Sycamore’s Bread in the states of Arizona and Nevada.” 57 They contend that Leland “presently
has a viable claim against EarthGrains for their violation of that trademark right over the past
several years.” 58 They conclude that “[t]hese two assets together are worth several million
dollars.” 59
“Under the UFTA, the level of insolvency necessary to meet the statute requirement is
not insolvency in the bankruptcy sense but merely a showing that the party’s assets are not
sufficient to meet liabilities as they become due.” 60 “In order to prove insolvency, a balancing of
assets and liabilities must be accomplished and only a showing that the debtor’s entire
nonexempt property and assets are insufficient to pay his debts rises to the level of insolvency.” 61
Here, there is a dispute between the parties as to what possible assets Leland owned post2008. 62 Had there been a valid transfer, there would have been an issue of material fact
55
Id.
56
Id.
57
LLC’s Opposition at 47.
58
Id.
59
Id.
60
Tolle v. Fenley, 2006 UT App 78, ¶ 24, 132 P.3d 63 (quoting Meyer v. General Am. Corp., 569 P.2d 1094, 1096
(Utah 1977)) (internal quotation marks omitted) (emphasis added).
61
Id. (quoting Furniture Mfrs. Sales, Inc. v. Deamer, 680 P.2d 398, 400 (Utah 1984)) (internal quotation marks
omitted).
62
See LLC’s Opposition at 11.
13
concerning Leland’s solvency based on the foregoing and the lack of sufficient evidence
showing that Leland’s assets are insufficient to meet his debt requirements.
b. Utah Code Ann. §25-6-6(2) (transfer for antecedent debt)
EarthGrains argues, in the alternative, that a fraudulent transfer occurred pursuant to Utah
Code. Ann. § 25-6-6(2). If “[t]he LLC[’s] claims in the Complaint that the Relinquishment was
made as purported consideration for the LLC’s pledge of the Sycamore family home as collateral
for a $2.1 million line of credit” are taken as true, then the Relinquishment was a transfer made
for an antecedent debt. 63 The section reads:
A transfer made by a debtor is fraudulent as to a creditor whose claim
arose before the transfer was made if the transfer was made to an insider
for an antecedent debt, the debtor was insolvent at the time, and the insider
has reasonable cause to believe that the debtor was insolvent. 64
EarthGrains contends that both Jeri and the LLC are “insiders” of Leland as defined in
the UFTA statute, 65 and that, “[t]he debt was incurred in 2008, and the transfer (i.e., the
Relinquishment) was made thereafter in or around July 2011, or else become [sic] effective in
2012.” 66
Although this section need not be addressed, because there has been no transfer, a brief
analysis is provided for the sake of completeness. Section 25-6-6(2) does not apply under the
facts. The Promissory Note between Leland and the LLC was executed in 2008. There is a
dispute regarding the date that Leland’s Relinquishment Document was executed in favor of Jeri.
The parties’ date dispute, however, is immaterial. To satisfy the “antecedent debt” requirement,
Leland must have owed a “debt” to Jeri and the debt must have been incurred before the transfer
63
EarthGrains’s Partial Summary Judgment at 42.
64
Utah Code Ann. § 25-6-6(2)
65
See id. § 25-6-2(7).
66
EarthGrains’s Partial Summary Judgment at 42.
14
was made. The documents are signed by different parties. Leland’s debt was with the LLC. His
relinquishment was to Jeri—to whom he had no debt obligations. Utah Code. Ann. § 25-6-6(2)
does not apply.
c. Utah Code Ann. § 25-6-5 (transfer with intent to defraud)
Although this section need not be addressed, because there has been no transfer, a brief
analysis is provided for the sake of completeness. Section 25-6-5 allows relief from a fraudulent
transfer even if EarthGrains’s claim arose after Leland’s relinquishment of his membership
interest. This section states:
A transfer made or obligation incurred by a debtor is fraudulent as to a
creditor, whether the creditor’s claim arose before or after the transfer was
made or the obligation was incurred, if the debtor made the transfer or
incurred the obligation: (a) with actual intent to hinder, delay, or defraud
any creditor of the debtor[.] 67
“A creditor who claims a debtor transferred property with actual intent to defraud . . . must
establish that claim by clear and convincing evidence.” 68 Section 25-6-5 enumerates factors
which may be considered, among others, to determine if “actual intent” existed. These include
whether:
(a) the transfer or obligation was to an insider; (b) the debtor retained possession
or control of the property transferred after the transfer; (c) the transfer or
obligation was disclosed or concealed; (d) before the transfer was made or
obligation was incurred, the debtor had been sued or threatened with suit; (e) the
transfer was of substantially all the debtor’s assets; (f) the debtor absconded; (g)
the debtor removed or concealed assets; (h) the value of the consideration
received by the debtor was reasonably equivalent to the value of the asset
transferred or the amount of the obligation incurred; (i) the debtor was insolvent
or became insolvent shortly after the transfer was made or the obligation was
incurred; and (k) the debtor transferred the essential assets of the business to a
lienor who transferred the assets to an insider of the debtor.” 69
67
Utah Code Ann. § 25-6-5(1).
68
Bradford v. Bradford, 1999 UT App 373, ¶ 18, 993 P.2d 887.
69
Utah Code Ann. § 25-6-5(2).
15
These factors are termed “badges of fraud.” 70 “The badges’ value as evidence however, is
relative not absolute, and they are considered facts which throw suspicion on a transaction and
which call for an explanation.” 71 “In other words, ‘[t]hey are not usually conclusive proof; they
are open to explanation.’” 72
EarthGrains argues that there are numerous badges of fraud associated with Leland’s
relinquishment of his membership interest to Jeri:
1. Leland Sycamore’s purported transfer of his 46% interest in the LLC
was made to an insider, his wife Jeri Sycamore.
2. Leland Sycamore continued to serve in a managerial capacity for the
LLC despite the Relinquishment. . . .
3. Leland Sycamore lived in the Sycamore home, an LLC asset, for
several years after he purportedly signed the Relinquishment.
4. Leland Sycamore is planning to move into a luxury condominium
owned by the LLC which has a market rent of $1,200 per month even
though he claims to have no assets and no income.
5. Leland Sycamore concealed the Relinquishment which he claims to
have signed in 2008, and he did not disclose that purported transfer to
anyone else. In particular, he did not disclose the purported transfer to
its recipient, his wife, and he did not disclose it to his and the LLC’s
accountant.
6. In March, 2011, the court issued a summary judgment against Leland
Sycamore finding Sycamore liable for trademark infringement and
related claims in a trademark infringement action pending in this
Court.
7. Sycamore’s first disclosure of the Relinquishment took place shortly
after the Summary Judgment Order was issued in the ongoing
trademark infringement action against him.
70
Tolle v. Fenley, 2006 UT App 78, ¶ 27, 132 P.3d 63 (quoting Dahnken, Inc. v. Wilmarth, 726 P.2d 420, 423 (Utah
1986)).
71
Wasatch Oil & Gas, L.L.C. v. Reott, 2007 UT App 223, ¶ 33, 163 P.3d 713 (internal quotation marks and citation
omitted).
72
Id. (quoting Territorial Sav. & Loan Ass'n v. Baird, 781 P.2d 452, 462 (Utah Ct. App. 1989)).
16
8. His LLC interest is Leland Sycamore’s primary asset and without his
asset he is destitute and without any financial means. . . . 73
The LLC claims that, with the exception of Jeri’s status as an insider, there are material
issues of fact regarding each of EarthGrains’s alleged badges of fraud. The LLC contends that
Leland was not insolvent at the time of transfer; 74 there was a non-fraudulent reason for the
transfer (i.e., Leland cashed out his interest in the LLC to be able to start a new bakery); 75 there
was no litigation pending at the time of transfer; 76 from the time of relinquishment, Jeri has
solely been responsible for managing the LLC; 77 and there was reasonable equivalent value
exchanged for Leland’s relinquishment of his membership interest. 78
Although some facts support the various badges of fraud, the LLC has presented evidence
that creates a genuine issue of material fact as to Leland’s actual intent to defraud. At summary
judgment, where credibility may not be judges and facts and inferences must be construed in
favor of the non-movant, EarthGrains cannot establish undisputed facts which are clear and
convincing evidence of Leland’s actual intent to defraud.
III.
EarthGrains’s Alter Ego Claim Fails
“Under the equitable ‘alter ego’ doctrine as it originally evolved, courts would, upon a
proper showing, disregard the integrity of the corporation and view a controlling shareholder as
indistinguishable from the corporation, thereby permitting creditors of the corporation to reach
the assets of a controlling shareholder.” 79 In the present case, EarthGrains seeks relief under a
73
EarthGrains’s Partial Summary Judgment at 25 (internal citations omitted).
74
LLC’s Opposition at 45–47.
75
Id. at 47–48.
76
Id. at 48.
77
Id. at 48–49.
78
Id. at 49–50.
79
Transamerica Cash reserve, Inc. v. Dixie Power and Water, Inc., 789 P.2d 24, 26 (Utah 1990).
17
variant of the traditional alter ego doctrine—the reverse piercing theory. This variant theory
allows a third party outsider to reach corporate assets to satisfy claims against an individual
shareholder. 80
EarthGrains argues that it may reverse pierce the corporate veil and recover directly from
the LLC because Leland, Jeri and the LLC “have discarded the separate legal existence of the
LLC and have wholly disregarded necessary corporate formalities.” 81 EarthGrains cites to
several cases that recognize a reverse piercing theory—none of which are drawn from Utah’s
body of jurisprudence. The Tenth Circuit, however, has previously considered a reverse piercing
theory in a case applying Utah law. In Cascade Energy and Metals Corp., the 10th Circuit held
that a Utah court would not reverse pierce the entity veils of the companies. 82 The 10th Circuit
noted, among other things:
[T]this case largely involves “reverse” piercing, and it is far from clear that Utah
has adopted the doctrine of “reverse” piercing, much less this particular variant of
“reverse piercing.” Messick v. PHD Trucking Service, 678 P.2d 791, 793 (Utah
1984) does discuss the “reverse pierce” concept, calling it “little-recognized
theory,” but the Utah court ultimately declined to pierce the corporate veil there
because of the failure to prove the traditional piercing the corporate veil elements
....
The reverse-pierce theory presents many problems. It bypasses normal judgmentcollection procedures, whereby judgment creditors attach the judgment debtor's
shares in the corporation and not the corporation’s assets. Moreover, to the extent
that the corporation has other non-culpable shareholders, they obviously will be
prejudiced if the corporation’s assets can be attached directly. In contrast, in
ordinary piercing cases, only the assets of the particular shareholder who is
determined to be the corporation’s alter ego are subject to attachment.
Absent a clear statement by the Supreme Court of Utah that it has adopted the
variant reverse piercing theory urged upon us here, we are inclined to conclude
that more traditional theories of conversion, fraudulent conveyance of assets,
respondeat superior and agency law are adequate to deal with situations where
80
See Cascade Energy and Metals Corp. v. Banks, 896 F.2d 1557, 1576, n. 17 (10th Cir. 1990).
81
EarthGrains’s Partial Summary Judgment at 50.
82
See Cascade Energy and Metals Corp., 896 F.2d at 1576–79.
18
one seeks to recover from a corporation for the wrongful conduct committed by a
controlling stockholder without the necessity to invent a new theory of liability. 83
The Tenth Circuit, in a later opinion dealing with a similar issue under Kansas law,
reaffirmed its previous reluctance to apply a doctrine the state had not adopted:
[W]e stress that in reciting the litany of problems associated with the
[reverse piercing] doctrine, we should not be understood as seeking to
dictate or influence the law of corporations in Kansas. Rather, we seek
only to lend additional weight to Cascade’s federal law conclusion that, in
the absence of a clear statement of Kansas law by the Kansas courts, we
will not assume that such a potentially problematic doctrine already has
application in that state. 84
Similarly, this opinion will follow controlling circuit precedent and decline to apply a
reverse piercing theory. EarthGrains has offered no other precedent. Accordingly, EarthGrains’s
alter ego claim is not viable and summary judgment is denied.
IV.
EarthGrains’s Nominee Liability Claim Fails
EarthGrains contends, in the alternative, in the event the transfer to Leland is found to be
effective, that Jeri holds Leland’s transferred assets as a nominee. 85 In response, the LLC argues
that nominee liability theory is not applicable to the facts of this case because it “is a legal
doctrine which applies to taxpayers who are attempting to avoid a tax lien or levy.” 86
EarthGrains’s reply does not provide any authority to controvert the LLC’s argument that
nominee liability is a legal doctrine limited to the tax liability arena. Accordingly EarthGrains
has effectively abandoned this claim. Summary judgment on this theory is denied.
83
Id.
84
Floyd v. I.R.S. U.S., 151 F.3d 1295, 1300 (10th Cir. 1998).
85
See EarthGrains’s Counterclaim at 17–18; see also EarthGrains’s Partial Summary Judgment at 28.
86
LLC’s Opposition at 57.
19
V.
EarthGrains is Entitled to Summary Judgment on the LLC’s First Claim for
Declaratory Relief (invalidity of Leland’s relinquishment)
EarthGrains seeks summary judgment against the LLC on its first claim for declaratory
relief (the validity of Leland’s relinquishment of his membership interest). 87 EarthGrains
contends that summary judgment on this claim is appropriate “on grounds that the
Relinquishment is not valid or enforceable because it constitutes a fraudulent transfer under
applicable state laws.” 88 This reason for relief is not appropriate because there is no fraudulent
transfer. Leland’s attempted relinquishment of his membership interest is void ab initio, and thus
there is no transfer to analyze under the UFTA. 89 But the Complaint’s claim that “the
relinquishment substantially complies with the requirements of the operating agreement[,]” 90 and
is “valid” 91 cannot succeed. The Complaint correctly alleges:
28. A determination of the validity or invalidity of the relinquishment . . .
will terminate the controversy between the parties regarding the amount of
Leland's interest in the Sycamore Family LLC.
29. Declaratory relief is necessary and appropriate at this time so that the
parties can determine their rights under the circumstances. 92
As this opinion finds, the Relinquishment Document did not comply with the Operating
Agreement; the Operating Agreement makes the Relinquishment Document “invalid, null, and
void, and of no force or effect”; 93 and the LLC cannot obtain a declaration of validity.
EarthGrains is therefore entitled to summary judgment against the LLC on this claim for a
87
EarthGrains’s Partial Summary Judgment at 28.
88
Id.
89
See supra section II(a)(i).
90
Complaint ¶ 26.
91
Complaint ¶ 27.
92
Complaint ¶¶ 28, 29.
93
Id. § 7.1.
20
declaration of validity. Having submitted the matter for declaration, the LLC receives a
declaration that the Relinquishment Document is not valid. 94
VI.
EarthGrains is Entitled to Summary Judgment on the LLC’s Second Claim for
Declaratory Relief (alleged distribution to Leland)
EarthGrains seeks summary judgment on the LLC’s second, and alternative, claim for
declaratory relief. 95 In its second claim, the LLC requests—in the event the relinquishment is
determined to be invalid—a declaratory judgment that the funds received by Leland from Wells
Fargo Bank be considered a distribution to Leland and not a loan. EarthGrains argues that the
relief sought by the LLC is flawed for at least three reasons: (1) “if Leland Sycamore has not
properly paid the interest and principal outstanding on the Promissory Note, then the LLC’s right
to relief rests in a claim for breach of contract against Mr. Sycamore[;]” (2) “all of the members
of the LLC are not joined in this action. . . . Thus, any relief accorded under the alternative claim
of the LLC’s Complaint would be inappropriate since necessary parties are not joined[;]” and (3)
“the ‘catch-up’ distribution that the LLC seeks to effect is inconsistent with the Utah LLC
Act.” 96
For the reasons explained more fully below in the following analysis of the LLC’s
Motion for Partial Summary Judgment, EarthGrains’s motion on this claim is GRANTED
because the plain and clear language of the Promissory Note—and the absence of any argument
challenging its sufficiency—demonstrates that the funds received by Leland through the line of
credit and the encumbrance of the LLC’s real property were a loan, and not a distribution.
94
See 28 U.S.C.A. § 2201 (A court “may declare the rights and other relations of any interested party seeking such
declaration, whether or not further relief is or could be sought.”).
95
EarthGrains’s Partial Summary Judgment at 28.
96
Id. at 55–60.
21
LLC’S MOTION FOR PARTIAL SUMMARY JUDGMENT
The LLC seeks partial summary judgment on its alternative declaratory relief claim that
the funds paid to Leland by Wells Fargo were a distribution “if the relinquishment and
accompanying promissory [note] are invalid.” 97 If the funds were a distribution, the LLC alleges
that Nevada law and the LLC’s Operating Agreement require the LLC to “make a
catchup/priority distribution to its [other] members prior to any additional distributions to Leland
or his creditors—including EarthGrains.” 98
EarthGrains contends “[t]here is no evidence that Leland actually received a distribution,
because the pledge of LLC property was done in exchange for a $2.1 million promissory note
given as consideration.” 99 The LLC’s pledge of collateral, EarthGrains claims, was a loan from
“which it expected repayment with interest from Leland as a return on its investment, rather than
a distribution of capital or income to Leland.” 100 As further support, EarthGrains points out that
the 2008 transaction is not reported as a distribution on Leland’s 2008 tax return as would be
required if it were a distribution. 101 In reply, the LLC argues that:
If, as EarthGrains desires, the 2008 Promissory Note is deemed a validly executed
document in 2008, then the Relinquishment Document must necessarily also be
deemed a validly executed document in 2008. If the Relinquishment is deemed
valid, then Jeri is a 94% owner of the LLC; Leland is a 2% owner of the LLC and
the matter is resolved. Otherwise, both documents must be deemed invalid and
there is no question that a distribution was previously made to Leland for which
Jeri and the other LLC members are entitled to a catch-up distribution. 102
97
Complaint at 6–7.
98
LLC’s Partial Summary Judgment at 25.
99
EarthGrains’s Memorandum of Law in Opposition to Sycamore Family LLC’s Motion for Summary Judgment at
2 [EarthGrains’s Opposition], docket no. 69, filed July 30, 2014.
100
Id. at 8.
101
Id. at 4, 8.
102
Reply to EarthGrains’s Memorandum of Law in Opposition to Scyamore [sic] Family LLC’s Motion for
Summary Judgment at 29 [LLC’s Reply], docket no. 73, filed August 22, 2014.
22
The LLC’s argument is infirm. The Promissory Note and the Relinquishment Document
are not dependent on one another. The Relinquishment Document is invalid due to its failure to
meet the transfer requirements of the Operating Agreement. 103 Neither party has argued any
deficiencies to render the Promissory Note ineffective. Accordingly, the Promissory Note is valid
and enforceable. The Promissory Note plainly demonstrates Leland’s intent to repay the amount
owing to the LLC, which is sufficient, if not conclusive, evidence that the transaction was a loan,
and not a distribution.
Accordingly, the LLC’s motion for partial summary judgment on its alternative
declaratory relief claim is DENIED.
CONCLUSION
For the foregoing reasons, IT IS HEREBY ORDERED:
1.
EarthGrains’s Motion 104 for Partial Summary Judgment is DENIED on its
fraudulent transfer, alter ego, and nominee liability claims. Also, EarthGrains’s
motion for partial summary judgment is GRANTED against the LLC on its First
Claim for Declaratory Relief, and GRANTED against the LLC on its Second
Claim for Declaratory Relief.
2.
Leland’s Motion to Strike, 105 incorporated into his Opposition to EarthGrains’s
Partial Summary Judgment Motion is DENIED. Leland moved to strike arguing
that EarthGrains’s Partial Summary Judgment violates Utah Local Rule 561(b)(2)(C) because there is no concise statement of facts in the entire brief.
103
See supra section II(a)(i).
104
EarthGrains’ Motion for Partial Summary Judgment and Memorandum of Law in Support Thereof, docket no.
62, filed June 13, 2014.
105
Leland Sycamore’s Combined Opposition to EarthGrains’s Motion for Summary Judgment; Motion to Strike
EarthGrains’ Motion for Summary Judgment and Joinder in Sycamore’s Opposition to EarthGrains’s Summary
Judgment Motion, docket no. 68, filed July 30, 2014.
23
Leland’s argument lacks substance, as EarthGrains has provided a concise
statement of the material facts necessary to meet each element for which
EarthGrains’s contends no genuine issue exists. 106
3.
LLC’s Motion 107 for Partial Summary Judgment is DENIED.
IT IS FURTHER ORDERED that EarthGrains shall prepare the form of a declaratory
judgment that the Relinquishment Document is not valid.
IT IS FURTHER ORDERED that, on or before January 9, 2015, the parties shall file a
joint statement as to the claims remaining and a proposed schedule for resolution of any
remaining disputes between these parties. The parties shall file an attorneys’ planning meeting
report and submit a proposed scheduling order as outlined at
http://www.utd.uscourts.gov/documents/ipt.html.
Dated December 18, 2014.
BY THE COURT:
____________________________
David Nuffer
United States District Judge
106
See EarthGrains’s Partial Summary Judgment at 20–29.
107
Motion for Partial Summary Judgment and Supporting Memorandum, docket no. 61, filed June 13, 2014.
24
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