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Deltagypsum, LLC v. Felgemacher

Court of Appeals of Tennessee, Knoxville

April 26, 2017

DELTAGYPSUM, LLC
v.
MICHAEL FELGEMACHER

          Session March 24, 2017

         Appeal from the Chancery Court for Sullivan County No. K0038411C E.G. Moody, Chancellor

         A supplier of drywall was a creditor of a company that installed drywall. The owner of the indebted company signed a promissory note in the amount of $370, 615 payable to the supplier and paid a small portion of the note before selling the business to his son for $12, 000. The supplier filed suit to obtain a judgment for the balance owed on the promissory note after the transfer of the business to the son. The supplier obtained a judgment against the former owner, but not against the company, for the amount owed on the note. The supplier then filed this action against the son in an effort to have the sale set aside on the basis that it was a fraudulent conveyance. The trial court found the supplier was unable to satisfy the elements of either the actual fraud statute, Tenn. Code Ann. § 66-3-305(a)(1), or the constructive fraud statute, Tenn. Code Ann. § 66-3-306(a). We agree and affirm the trial court's judgment.

         Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed

          Frederick Larue Conrad, Jr., Knoxville, Tennessee, for the appellant, Delta Gypsum, LLC.

          Mary Foil Russell, Bristol, Virginia, for the appellee, Michael Felgemacher.

          Andy D. Bennett, J., delivered the opinion of the Court, in which D. Michael Swiney, C.J., and Thomas R. Frierson, II, J., joined.

          OPINION

          ANDY D. BENNETT, JUDGE

         I. Factual and Procedural Background

         Delta Gypsum, LLC d/b/a Appalachian Gypsum ("DG") is a drywall supplier that supplied drywall materials and related services to W.F. Interiors, LLC ("WFI") when WFI was owned by Wilhelm Felgemacher ("Wilhelm"). In March 2009, Wilhelm agreed to sell WFI to his son, Michael Felgemacher ("Michael"), the defendant. On March 10, 2009, Michael signed a promissory note in the amount of $12, 000, payable to his father, and Wilhelm transferred ownership of WFI to Michael. Michael paid Wilhelm the $12, 000 purchase price on June 9, 2009.

         When Wilhelm sold the business to his son, WFI owed a substantial amount of money to DG. In October 2007, Wilhelm signed a promissory note payable to DG in the amount of $370, 615.13. Wilhelm owed DG $346, 890.70 when he transferred the business to his son. On May 20, 2009, after Wilhelm transferred WFI to Michael, but before Michael paid the note, DG filed a complaint against Wilhelm and WFI in an effort to obtain a judgment for the outstanding amount then due on the note. In January 2012, the trial court in that case issued a ruling that Wilhelm signed the note in his individual capacity rather than in his representative capacity and entered a judgment against Wilhelm alone for the outstanding balance.

         DG has been unsuccessful in collecting its judgment against Wilhelm. DG filed this lawsuit against Michael in July 2012, asserting that Wilhelm's transfer of WFI to Michael constituted a fraudulent conveyance and should be set aside. DG alleged causes of action for actual fraud, pursuant to Tenn. Code Ann. § 66-3-305(a)(1), and for constructive fraud, pursuant to Tenn. Code Ann. § 66-3-306(a). The parties tried their case in February 2016. DG and Michael each proffered an expert to give an opinion on the value of WFI when Wilhelm transferred it to Michael in 2009. Testimony was also provided by Michael and his wife, Rachel. Wilhelm did not testify, and DG did not present a representative to testify at the trial.

         The trial court filed its Order on June 15, 2016, finding DG failed to prove either its constructive fraud or actual fraud claim. The court concluded that DG failed to show that Wilhelm was "insolvent" when he sold the business to Michael, which it found was a prerequisite for finding Michael liable for constructive fraud pursuant to Tenn. Code Ann. § 66-3-306(a). As to DG's claim of actual fraud, the court concluded Michael rebutted the presumption of fraud that DG established by satisfying two of the statutory factors set forth in Tenn. Code Ann. § 66-3-305(b), demonstrating actual intent. The trial court did not assign a value to WFI as of the time when Wilhelm transferred it to Michael.

         DG appealed the trial court's judgment. It contends, inter alia, that the trial court erred in failing to conclude Wilhelm's transfer of WFI to Michael constituted a fraudulent conveyance under either Tenn. Code Ann. § 66-3-305 or Tenn. Code Ann. § 66-3-306. It also argues the trial court erred by allowing Michael to testify regarding the value of WFI based on the advice of two individuals who were not present to testify at the trial.

         II. Analysis

         A. Standard of Review

         We review a trial court's findings of fact de novo upon the record, affording them a presumption of correctness unless the evidence preponderates otherwise. Tenn. R. App. P. 13(d); Cross v. City of Memphis, 20 S.W.3d 642, 644-45 (Tenn. 2000). We conduct a de novo review of legal issues, with no presumption of correctness afforded to the trial court's conclusions of law. Blair v. Brownson, 197 S.W.3d 681, 683 (Tenn. 2006). This case involves the interpretation of statutes, which involves questions of law that we review de novo. Mansell v. Bridgestone Firestone N. Am. Tire, LLC, 417 S.W.3d 393, 399 (Tenn. 2013); State v. Pope, 427 S.W.3d 363, 367 (Tenn. 2013).

         B. Actual Fraud

         In Tennessee, the Uniform Fraudulent Transfer Act ("the Act") is codified at Tenn. Code Ann. §§ 66-3-301 to -313. The Act recognizes two different types of fraudulent transfers: actual fraud, codified at Tenn. Code Ann. § 66-3-305(a)(1), and constructive fraud, codified at Tenn. Code Ann. § 66-3-306. The statute describes actual fraud thusly:

(a) 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:
(1) With actual intent to hinder, delay, or defraud any creditor of the debtor; . . . .
(b) In determining actual intent under subdivision (a)(1), consideration may be given, among other factors, to whether:
(1) The transfer or obligation was to an insider;
(2) The debtor retained possession or control of the property transferred after the transfer;
(3) The transfer or obligation was disclosed or concealed;
(4) Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
(5) The transfer was of substantially all the debtor's assets;
(6) The debtor absconded;
(7) The debtor removed or concealed assets;
(8) 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;
(9) The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
(10) The transfer occurred shortly before or shortly after a substantial debt was incurred; and
(11) The debtor transferred the essential assets of the business to a lienor who transferred the assets to an ...

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