Inquiry Notice and Good Faith – You Cannot Hide Your Head in the Sand Anymore

The United States Court of Appeals for the Fifth Circuit recently asked for guidance from the Supreme Court of Texas on whether a transferee on inquiry notice of fraudulent intent can achieve good faith without investigating its suspicions. Without providing an exhaustive review of the Texas Uniform Fraudulent Transfer Act’s good faith affirmative defense, the Supreme Court of Texas answered the question no. Janvey v. GMAG, L.L.C. et al, Case No. 19-0452, ___ S.W.3d ____ (Tex. December 20, 2019).

The Supreme Court restated that the purpose of the Texas Uniform Fraudulent Transfer Act (“TUFTA”) is to “protect creditors from being defrauded or left without recourse due to the actions of unscrupulous debtors.” Janvey v. GMAG, L.L.C. et al, Case No. 19-0452, ___ S.W.3d ____ (Tex. December 20, 2019), citing, KCM Fin. LLC v. Bradshaw, 457 S.W.3d 70, 89 (Tex. 2015).  Creditors are allowed to invoke TUFTA to “claw back” fraudulent transfers from their debtors to third-party transferees. The ability to claw back can be defeated if the transferee can show that it acted in good faith and the transfer involved reasonably equivalent value.

In responding to the certified question, the Supreme Court held that when a transferee is on inquiry notice and attempts to invoke TUTFA’s affirmative defense of good faith, it must show that it investigated its suspicions diligently. Janvey v. GMAG, L.L.C. et al, Case No. 19-0452, ___ S.W.3d ____ (Tex. December 20, 2019). Recognizing that the investigation may not uncover additional evidence to impute to the transferee, it is still required once the transferee is on inquiry notice. Further, the investigation is a chance to demonstrate good faith and requiring proof of an investigation negates the incentive to remain willfully ignorant of fraud. Janvey v. GMAG, L.L.C. et al, Case No. 19-0452, ___ S.W.3d ____ (Tex. December 20, 2019).

This opinion by Justice Busby and the Supreme Court of Texas helps clarify the duties of transferees. Parties to a transaction have closed their eyes to examples of possible fraudulent intent to defraud a creditor for much too long. This opinion significantly strengthens the TUFTA which already provides its own eleven, nonexclusive indicia of fraudulent intent. See Tex. Bus. & Com. Code ch. 24. Also, this opinion along with the Supreme Court of Texas’ previous opinion on what constitutes “reasonably equivalent value” in Janvey v. Golf Channel, Inc., 487 S.W.3d 560, 566 (Tex. 2016) provides a comprehensive look at what is needed to raise or defeat the affirmative defense to TUFTA.

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Finality of Judgments in Texas

In one of her first opinions as a new Justice on the Supreme Court of Texas, Justice Bland wrote an opinion for the court on finality of judgments. See In the Interest of R.R.K., a child, Case No. 18-0273, ____ S.W.3d ___ (Tex. December 13, 2019). In R.R.K., the issue was whether a memorandum order modifying possession and child support was final and appealable, rending the trial court’s later order void and the mother’s appeal untimely. Because the memorandum order lacked clear and unequivocal indicia of finality, the Supreme Court was required to examine the entire record to determine the trial court’s intent. Lehmann v. Har-Con Corp., 39 S.W.3d 191, 205-206 (Tex. 2001); In re Elizondo, 544 S.W.3d 824, 827 (Tex. 2018) (per curiam). In reversing the Court of Appeals decision and finding that the memorandum order was not intended to be a final order, it is important to review what should be done to ensure you have a final and appealable judgment in Texas.

The Supreme Court of Texas in Lehmann v. Har-Con Corp., 39 S.W.3d 191 (Tex. 2001) came out with what appeared to be a bright line rule that allowed the use of magic words to ensure that the judgment was a final judgment. The Supreme Court of Texas followed up Lehmann with In re Elizondo, 544 S.W.3d 824 (Texas 2018) and held that no matter what else the order says, if it says that “This Judgment is final, disposes of all the claims and all the parties and is appealable,” it is a final judgment for appellate purposes. According to the Supreme Court in Elizondo, those words were so “clear and unequivocal” that the Court’s review must stop there without reviewing the rest of the order in the interest of finality. Otherwise, finality phrases would serve no purpose. The Supreme Court further acknowledged that while this rule is inflexible, it is its inflexibility that makes the rule useful because it warns litigants that prompt action is required to challenge the final judgment.

There are a number of great articles on finality of judgments, but I want to reference one right off the bat should this issue arise in your case. Chris Dove wrote an article entitled Article: Crafting the Final Judgment, 30 App. Advoc. 423 (Winter 2018) that is excellent. When drafting a final judgment, my recommendation is to include a mother hubbard clause  that states “all relief not expressly granted is denied” along with the Lehmann/Elizondo magic words that “This Judgment is final, disposes of all claims and parties and is appealable.”

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Amendments to Residual Exception to Hearsay Rule

Federal Rule of Evidence 807 provides a method for admitting hearsay statements that would not normally be admissible under Federal Rule of Evidence 803 and 804. Many commentators would argue that the residual exception has swallowed up the hearsay rule. See Sonenshein, David A, Fabens-Lassen, Ben. “Has the Residual Exception Swallowed the Hearsay Rule?”. Kansas Law Review, Kansas Law Review Inc. October, 2015: vol. 64(3). Rule 807 has been amended effective December 1, 2019 and the amendments make that proposition more true than ever. Previously, the  residual exception was considered something that would only be used in rare or exceptional circumstances. United States v. Reed, 908 F.3d 102 (5th Cir. 2018).

Under the new Rule 807, a hearsay statement is not excluded by the hearsay rule even if the statement is not admissible under a hearsay exception under Federal Rules of Evidence 803 or 804 if: (1) the statement is supported by sufficient guarantees of trustworthiness – after considering the totality of circumstances under which it is made and evidence, if any, collaborating the statement; and (2) it is more probative on the point for which it is offered than any other evidence that the proponent can obtain through reasonable efforts. See Proposed Amendment to Federal Rule of Evidence dated April 25, 2019. The residual exception still requires the proponent to give an adverse party reasonable notice of the intent to offer the statement – including its substance and the declarant’s name (but no address) – so that the party has a fair opportunity to meet it. The notice must be provided in writing before the hearing or trial, but upon a showing of good cause, the court can excuse the lack of notice.

The amendment moves away from the reliability standard of FRE 803 or 804 and requires the court to look at trustworthiness under the totality of the circumstances. It also removes the requirement that the statement be of a material fact as required in the old version of Rule 807 and eliminates the interest of justice and purpose of the rules standard for admission.

The amendment to Rule 807 is just another step in the continuing trend of courts admitting more and more hearsay. I suspect this trend will continue. The opinions in this blog are solely the author’s and any replies, comments, or suggestions can be sent to Happy Veteran’s Day and thank you to all the men and women who have served!


Account Debtor Has No Duty To Look for Hypothetical Assignments of Debt

There is more and more litigation over the priority rules under the Texas Business and Commerce Code lately. Claims involve who and when they had notice and the rights of parties, including rights to offset a debt. In litigation that has apparently spanned decades between the parties, the United States Court of Appeals for the Fifth Circuit has decided what “actual notice” means and clarified that an account debtor has no duty to look (and continuously look) for assignments of the debt. See Finserv Casualty Corporation v. Symetra Life Insurance Company, No. 18-20762, 2019 U.S. App. LEXIS 32365 (5th Cir. October 29, 2019) (“Fifth Circuit”).

While all the facts of this case are truthfully mind numbing, the basic facts are that  Symetra owed structured settlement payments to two individuals who were tort victims. Payments were subject to security interests held by Finserv and A.M.Y., both insurance companies. RSL-3B acquired the rights to the payments from the two tort victims and Finserv and A.M.Y. filed UCC-1 financing statements with the Texas Secretary of State in 2004 and 2008 disclosing their rights in RSL-3B’s property. Symetra obtained judgments against RSL-3B including the right to offset the payments with an attorney fee award in 2010. In 2012, Finserv notified Symetra that they claimed a security interest in the payments and such interest was superior to the right of offset. More litigation ensued and a jury found that Symetra had notice of the assignment in 2005 and Symetra appealed. On appeal, the parties agreed that Symetra did not have “actual knowledge” of the assignment to RSL-3B by the individuals until 2012.

The issue for the Fifth Circuit was whether under Texas UCC Section 9.404 did Symetra’s right of offset, as an account debtor, take priority over a security interest in the debt based on UCC-1 financing statements filed before the right of offset accrued. Under Section 9.404(a)(2) of the Texas UCC, the rights of an assignee are subject to claims or defenses of the account debtor that accrues before the account debtor, Symetra, received notice of the assignment that accrued before receiving notification of the assignment. Symetra argued that it did not receive actual notification until 2012 and Finserv responded that Symetra had inquiry notice or “reason to know” that the payments were assigned based on the all the facts and circumstances and therefore, Finserv’s security interest had priority.

The Fifth Circuit held that the Texas UCC does not place the burden on the account debtor to search for and discover assignments of the debt. Further, Section 9.404(a) of the Texas UCC still requires “actual notice” of the assignment and the account debtor’s right to assert claims against the assignee should not be disturbed until it has actual notice of the assignment. The court made it clear that actual notice is not the same as actual knowledge, but the notice requirement must be strict enough to protect the rights of account debtors, like Symetra. An account debtor is not required to continually search for a financing statement or an assignment and the statute does not require it to do so. The burden is on the assignor or assignee (or secured creditor) to provide notice of assignment to the account debtor. Constructive knowledge is not actual notice and other courts have reached the same conclusion. See In re Alliance Health of Fort Worth, 240 B.R. 699, 704 (N.D. Tex. 1999); see also In re Davidson Lumber Sales, Inc., 66 F.3d 1560, 1566 (10th Cir. 1995).

This case is important to make it clear that more notice is always better and when in doubt, give notice of the assignment as quickly as possible. Also, send notice in such a way to be able to prove that actual notice was given and received. Sitting on your rights or a hypothetical right based on constructive notice may cost you and allow a third party to obtain a greater right.

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Hughes Tolling Rule Update

The Texas Supreme Court heard oral arguments (Case No. 18-0486) on September 26, 2019 to consider whether the Hughes tolling rule for litigation malpractice claims should be extended beyond litigation claims to transactional lawyers. See Renda v. Erikson, 547 S.W.3d 901 (Tex. App. – Amarillo 2018, petition granted). Simply put, the Hughes tolling rule holds that claims against an attorney are tolled for limitations purposes when an attorney commits malpractice in the prosecution or defense of a claim that results in litigation until all appeals on the underlying claim are exhausted. See Hughes v. Mahaney & Higgins, 821 S.W.2d 154, 157 (Tex. 1991). This special tolling rule has been very strictly and narrowly construed over in the past twenty plus years.

The underlying facts are that Renda received advice from his lawyers about transferring assets from Renda’s company to corporate creditors even though the United States government had won a judgment against Renda’s company. Under federal law, Renda’s company was required to give the federal government priority in paying the judgment and because it did not, a judgment against Renda in his individual capacity for $12 million was obtained. Renda sued Erikson and the firm, but the issue is whether the statute of limitations had run because the advice came 11 years before the government won the $12 million judgment against Renda.

Erikson’s attorneys did not argue that malpractice did not occur or that bad advice was not given. Erikson argued that because the transactional advice did not relate to prosecuting or defending a claim in litigation that the Hughes tolling rule does not apply. The whole case really centers around what is meant by “in prosecution or defense of a claim” but will have broader implications if the Supreme Court of Texas extends the Hughes tolling rule to transaction advice.

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Texas Citizens Participation Act (Texas Anti-SLAPP Statute) Changes on September 1, 2019

The Texas Citizens Participation Act (the “TCPA” and also known as the Texas Anti-SLAPP Statute) underwent a lot of changes this legislative session. See Tex. Civ. Prac. & Rem. Code 27.001 et seq. These changes were signed into law in June 2019 and are effective September 1, 2019. The purpose of the TCPA is to protect constitutional rights to free speech, right to petition and right of association. So essentially, think about First Amendment type rights. Before briefly listing some of the changes, let’s get the good news out of the way first.

In Wayne M. Klocke v. Nicholas Matthew Watson, ___ F.3d ____ (5th Cir. August 29, 2019), the United States Court of Appeals for the Fifth Circuit held that the TCPA does not apply to diversity suits in federal court. As a word of caution, this decision was based on the older TCPA, not the revised TCPA.

The Texas Legislature attempted to limit the TCPA this session and did in fact do that to some degree. Because TCPA litigation was truly getting out-of-control, the TCPA was changed to more narrowly define what constitutes a “legal action” to take out procedural actions, dispute resolution proceedings and post-judgment enforcement. Also, the exercise of the right of association section of the TCPA was limited to governmental proceedings or public concerns. Matters of public concern was also limited from a non-exclusive list to a more generalized approach of activities or statements about public officials or essentially famous people or celebrities. The new TCPA also changes the exemptions to the TCPA and specifically includes trade secret issues, family law cases and protective orders, claims under the Deceptive Trade Practices Act, grievance cases, and common law fraud cases. The TCPA also expressly states now that governmental actors, agencies, officials or employees acting in an official capacity do not qualify as someone who can invoke the TCPA.

The Anti-SLAPP motion procedure under the TCPA is now more akin to the procedures used for a motion for a summary judgment and sets out very specific deadlines for notice (21 days) and response (7 days before the hearing). It also allows parties to agree to file the Anti-SLAPP motion beyond the sixty-day limit. Also, the burden of proof is no longer by a preponderance of evidence. The new TCPA simply requires a movant to demonstrate that the legal action is covered by the TCPA.

If you have not taken a course on the TCPA, I recommend that you do so because whether you represent a plaintiff or a defendant, the TCPA is something that should be talked about upfront before the first demand is sent or pleading filed. To make things worse, and at least for the next couple of years, courts are going to have to apply the old TCPA and the revised TCPA depending on when the actions occurred.

Today’s blog does not even begin to scratch the surface. There are a number of good courses out there and most of the larger law firms have papers on their websites that discuss the TCPA. I also recommend a blog written by Sean Lemoine at Wick Phillips entitled the Texas ANTI-SLAPP Blog. It is very helpful. The opinions in this blog are solely the author’s and any comments, suggestions or replies can be sent to




Federal and Class Action Claims Can Stay in State Court

One of the many tort reform remedies passed through the years was the Class Action Fairness Act of 2005 (“CAFA”). CAFA provides that a class action filed in state court may be removed to federal court by any “defendant” without the consent of all defendants. See 28 U.S.C. 1453(b). So is a defendant in a class action counterclaim a “defendant” under CAFA so that the claims can be removed to federal court? In Home Depot U.S.A., Inc. v. Jackson, 139 S.Ct. 1743, 204 L.Ed. 2d 34 (U.S. 2019), the United States Supreme Court answered that question with a resounding no!

In Home Depot, Citibank brought a collection action in state court against a consumer based on a Home Depot credit card which was used to purchase a water treatment system. The consumer counterclaimed and brought in Home Depot and Caroline Water Systems as third party defendants. Home Depot removed the case to federal court and the consumer filed a motion to remand that was granted. The case was sent back to state court. Home Depot appealed the remand.

The real issues in Home Depot are the wording of two removal statutes, CAFA and the general federal removal statute at 28 U.S.C. 1441(a). Both use the term defendant or the the defendants in defining the types of parties eligible to use the removal statutes but is that only to the original defendant sued by the plaintiff or does it include third party defendants? The Supreme Court ruled that Home Depot was not a “defendant” under CAFA or a “defendant or the defendants” under the general removal statute because it was a third party defendant based on the counterclaim. The general removal statute only allows removal if there is federal jurisdiction for the plaintiff’s original complaint so that the defendants who can take advantage of the general removal statute (and CAFA removal) are limited to the original defendants sued by plaintiffs.

The Home Depot opinion opens the door for many consumer counterclaims to be used as a tool to remain in state court even when raising claims that would normally go to federal court based on a federal question, such as Fair Debt Collection Act claims. Home Depot also allows consumer to bring class action counterclaims to be able to remain in state court and avoid removal. The implications of Home Depot‘s holding is very broad.

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