Cadle Co. v. Brunswick Homes, LLC (In Re Moore)
379 B.R. 284, 2007 Bankr. LEXIS 3885, 49 Bankr. Ct. Dec. (CRR) 43 (2007)
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Rule of Law:
Under Texas law, the remedy of reverse corporate veil piercing may be applied to hold a corporation's assets accountable for an individual's debt even when the individual is not a record equity owner, provided there is evidence of a 'de facto' ownership interest and the remedy would not prejudice non-culpable shareholders or stakeholders.
Facts:
- In the late 1980s, James H. Moore, III incurred millions of dollars in personal debt from real estate ventures.
- Between 1988 and 1990, Mr. Moore transferred community assets to his wife, Elizabeth Moore, via a post-marital partition agreement.
- In 1991, Mrs. Moore created JHM Properties, Inc., allegedly with her separate property. Shortly after, Mr. Moore's own company ceased operations and he began working for JHM Properties, Inc.
- In May 1997, Brunswick Homes, LLC was formed by Rod Miller and Mr. Moore. Its ownership was split between Miller's affiliates (50%) and JHM Properties, Inc. (50%), and Mr. Moore was appointed President without investing personal capital.
- Plaintiffs allege that Mr. Moore controlled JHM Properties, Inc., using its funds to pay for his personal American Express bills, country club dues, and legal fees.
- Plaintiffs further allege that Mr. Moore manipulated Brunswick for his personal benefit by embezzling over $1,000,000, using company funds for home improvements and personal trips, and transferring his personal assets into the company.
- In 2002, Rod Miller became aware of Mr. Moore's alleged self-dealing with Brunswick, leading to Mr. Moore's termination as president in December 2005.
Procedural Posture:
- The FDIC obtained a judgment against Mr. Moore in 1992, which was eventually assigned to The Cadle Company ('Cadle').
- In 2003, Cadle obtained a second, separate default judgment against Mr. Moore.
- On April 5, 2005, Cadle filed suit in Texas state court against Mr. Moore, JHM Properties, Inc., and Brunswick Homes, LLC, alleging fraudulent transfer and seeking to reverse pierce the corporate veil.
- On May 2, 2006, Mr. Moore filed for Chapter 7 bankruptcy protection.
- Following the bankruptcy filing, Cadle's state court action was removed to the U.S. Bankruptcy Court, where it became an adversary proceeding, with the bankruptcy Trustee, Jeffrey H. Mims, joining as a plaintiff.
- Defendant Brunswick Homes, LLC filed a motion for summary judgment, asking the Bankruptcy Court to dismiss all claims against it as a matter of law.
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Issue:
Under Texas law, may a creditor utilize the remedy of reverse corporate veil piercing to reach the assets of a company to satisfy an individual's debt, where that individual is not a record equity owner of the company?
Opinions:
Majority - Jernigan
Yes, a creditor may potentially utilize the remedy of reverse corporate veil piercing even when the individual debtor is not a record equity owner. The court denied summary judgment, reasoning that while the doctrine has 'thin roots' in Texas jurisprudence, the Fifth Circuit in cases like Zahra Spiritual Trust v. United States has recognized it as a viable theory. The key is whether the individual exercised 'de facto' ownership and control over the entity. Because genuine issues of material fact exist as to whether Mr. Moore was the de facto owner of JHM Properties, Inc., and by extension held a de facto interest in Brunswick, the plaintiffs' claim cannot be dismissed as a matter of law. The court expressed grave concern about this 'draconian remedy' and its potential impact on innocent third parties, indicating that prejudice to non-culpable stakeholders will be a key consideration at trial.
Analysis:
This opinion solidifies the viability of the reverse corporate veil piercing doctrine in Texas, as interpreted by federal courts, and extends its potential application to complex, indirect ownership structures. By denying summary judgment, the court affirms that a lack of record ownership is not a fatal flaw to a reverse piercing claim if 'de facto' control can be established. Critically, the court imports a limiting principle from other circuits, suggesting that a key factor in future Texas cases will be whether the remedy prejudices the rights of innocent shareholders or corporate creditors. This signals a cautious approach, balancing the need to prevent fraud with the protection of legitimate business expectations and third-party rights.
