Morash v. Valley Ridge Roofing and Construction, L.L.C. (In re Silver State Holdings, Assignee 7901 Boulevard 26, L.L.C.)

Case Type:
Case Status:
21-10212 (5th Circuit, Aug 30,2022) Not Published
In a 2-1 opinion, the Court holds that the Texas Uniform Fraudulent Transfer Act (TUFTA) allows a junior lienholder to avoid a pre-petition foreclosure sale as a fraudulent transfer where (1) the foreclosing creditor and the debtor-owner are owned and controlled by the same person, and (2) the market value of the property--but not the high bid at the trustee's foreclosure sale--exceeds the value of liens on the property. The dissent (Judge Edith Jones) argues against setting a foreclosed property's value (for fraudulent transfer purposes) at anything other than the foreclosure sale price.
Procedural context:
Direct appeal to the Fifth Circuit from an adversary proceeding resolving a junior lienholder's challenge and a chapter 7 trustee's challenge to a pre-petition foreclosure sale.
A former Home Depot outside Fort Worth was owned by 7901, subject to a first lien for $100,000 in property taxes, a second lien securing a $3.4 million bank loan, a third lien securing a $180,000 loan from the City of North Richland Hills, and a fourth lien for a $500,000+ judgment owed to an unpaid roofing contractor, Valley Ridge. Valley Ridge filed a petition to foreclose. 7901's owner, Morash, formed a new company, Silver State, which acquired the City's third-ranking lien. Silver State appointed a trustee who posted the property for foreclosure and ultimately accepted a credit bid from Silver State in the amount of $200,000. The foreclosure sale extinguished the third and fourth-tier liens; Valley Ridge amended its petition to add TUFTA claims against Silver State. Upon finding a buyer, Silver State filed a petition for relief under Chapter 11 to facilitate a sale of the property to a third party "free and clear" of all liens, claims, and interests. Silver State removed Valley Ridge's state court lawsuit to bankruptcy court. Separately, Valley Ridge initiated an involuntary Chapter 7 case against 7901. The Chapter 7 Trustee filed an adversary complaint against Morash and Silver State alleging fraudulent transfer, preferential transfer, breach of fiduciary duty, and other claims. The disparate proceedings were consolidated. The Bankruptcy Court allowed the property to be sold under 11 USC 363, and allowed Silver State to pay the first and second liens, with the remaining proceeds held in the court's registry. The Chapter 7 Trustee assigned her claims to Valley Ridge for cash. The Bankruptcy Court ruled for Valley Ridge on multiple grounds, and awarded it all funds remaining in the court's registry ($587,750.96), plus attorneys' fees.
Costa, Haynes, Jones

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