Is the waiver of a right to 60 days’ notice of termination an “asset” that can be the subject of a fraudulent transfer suit?
Distinguishing Seventh Circuit authority, the Fifth Circuit held that waiving a right to 60 days’ notice of termination of a contract, without compensation, is the transfer of an “asset” that can be the subject of a fraudulent transfer suit under the Texas Uniform Fraudulent Transfer Act.
A third party and a judgment debtor were parties to a contract that could be terminated on 60 days’ notice. Rather than give notice, the third party and the judgment debtor agreed to terminate the contract immediately.
The judgment creditor sued the judgment debtor, claiming that voluntary termination of the contract without consideration was a fraudulent transfer.
The district court dismissed the plaintiff’s fraudulent transfer suit, ruling that terminating a contract is not the transfer of an “asset” under TUFTA and therefore could not underlie a fraudulent transfer suit.
On appeal, Circuit Judge Patrick E. Higginbotham recounted in his Feb. 3 opinion how “transfer” in TUFTA is “broadly” defined as any means of “disposing of or parting with an asset.” In turn, “asset” is “anything that may be the subject of ownership.”
Construing the language of the contract, Judge Higginbotham interpreted the agreement to mean that compensation would be due after notice was given until the effective date of termination 60 days later. Waiving the 60-day notice period amounted to the transfer of an asset, Judge Higginbotham said, because “ascertainable value” was lost by voluntary termination.
In two cases, the Seventh Circuit held that cancelling a contract was not a transfer and thus could not support a fraudulent transfer claim. Agreeing with that principle, Judge Higginbotham distinguished two Seventh Circuit cases because they involved contracts that were freely terminable at any time.
Judge Higginbotham is on a roll. In the space of four days, he authored two opinions on the cutting edge of insolvency law. On Jan. 31, he wrote a concurring opinion in Janvey v. Alguire, where he urged federal courts to stop enforcing arbitration agreements in cases permeated with fraud. To read ABI’s discussion of Janvey, click here.