Galaz v. Galaz (In re Galaz)

Case Type:
Case Status:
15-51194 (5th Circuit, Mar 10,2017) Published
The district court did not err by (1) referring "non-core" fraudulent transfer claims to the bankruptcy court for proposed findings of fact and conclusions of law, and (2) adopting such findings and conclusions. The record demonstrated sufficient "badges of fraud" to find actual fraud under TUFTA. The awards of actual damages ($241,309.10), plus exemplary damages ($250,000) were also affirmed because plaintiff demonstrated fraud by clear and convincing evidence. Appellants waived certain exemplary damages defenses by inadequate briefing.
Procedural context:
The debtor (Lisa Ann Katona f/k/a Lisa Ann Galaz) filed a chapter 13 bankruptcy petition in 2007. In April 2008, she brought a fraudulent transfer action against her ex-husband (Raul Galaz), her ex-father-in-law (Alfredo Galaz) and the entity formed by Raul (Segundo Sueno) but owned by Alfredo. At issue was the validity of transfers from a pre-existing entity (ARF), in which Lisa and Raul each held a 25% interest, to Segundo Sueno, which was 100% owned by Raul's father Alfredo. The Galaz defendants (Raul, Alfredo and Segundo Sueno) filed a third-party complaint against Raul's former business partner (Julian Jackson) and 50% owner of ARF, and Julian responded with seven counterclaims. In a 2014 decision, the Fifth Circuit concluded that the bankruptcy court lacked subject matter jurisdiction over the claims between Raul and Jackson, so the bankruptcy court's rulings on those claims were reversed and the claims were dismissed. The Fifth Circuit's 2014 decision also concluded that the debtor's fraudulent transfer claims were "non-core bankruptcy claims," and remanded for the district court to enter final judgment after further consideration. On remand, the district court referred the adversary proceeding to the bankruptcy court, which had previously held a five-day bench trial. The bankruptcy court submitted proposed findings of fact and conclusions of law, invalidating the transfers to Segundo Sueno as actual fraud under TUFTA and imposing actual and exemplary damages against Raul and Segundo Sueno. The district court adopted the bankruptcy court's proposed findings and conclusions of law, and this appeal followed.
In 1998, the debtor's husband Raul founded Artist Rights Foundation, LLC (ARF) with business partner Julian Jackson. Initially, each partner held an equal 50% interest in ARF. However, when Raul and debtor Lisa divorced in 2002, Lisa received a 25% interest in ARF. ARF's primary asset was the right to royalties from the music of the Ohio Players, a former funk band. In 2005, Raul transferred ARF's rights in such royalties to a to-be-formed entity known as Segundo Sueno, and he assisted his father Alfredo in forming the entity. Between 2005 and 2010, Segundo Sueno realized nearly $1 million in revenue from the Ohio Players royalties. After a five-day bench trial, the bankruptcy court concluded that Lisa was actually damaged in the amount of $241,309.10, which was 25% of the net revenues received by Segundo Sueno from 2005 forward. The district court also adopted the bankruptcy court's recommendations on damages. In addition to the actual damage award, the district court awarded $250,000 in exemplary damages, concluding that Lisa had demonstrated the Galaz defendants' fraud by clear and convincing evidence. This appeal followed.
Clement, Smith, Southwick (opinion by Clement)

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