Jenco LC v. SJI LLC

541 P.3d 321

JENCO LC, Dean Gardner Investment LC, and F.M. Snow Properties LLC, Appellants,

v.SJI LLC, Appellee.

No. 20220892-CA

Court of Appeals of Utah.

Filed December 14, 2023

Bryan J. Pattison, St. George, Attorney for Appellants

Erik A. Olson and Christopher D. Ballard, Salt Lake City, Attorneys for Appellee

Judge Ryan M. Harris authored this Opinion, in which Judges Ryan D. Tenney and Amy J. Oliver concurred.

Opinion

HARRIS, Judge:

¶1 This case involves a dispute about the rightful ownership of an option (the Option) to purchase certain property. SJI LLC (SJI) contends that it owns the Option pursuant to a 2010 assignment from the Option's previous owner, Ledges Partners LLC (Ledges Partners). SJI's litigation opponents—JENCO LC, Dean Gardner Investment LC, and F.M. Snow Properties LLC (collectively, JENCO)—contend that the 2010 assignment was an invalid fraudulent transfer and that they own the Option after purchasing Ledges Partners’ interest in it in a 2017 execution sale. After a one-day bench trial, the court concluded that the 2010 assignment was not a fraudulent transfer and that SJI therefore owned the Option. JENCO appeals, asserting that the trial court's fraudulent transfer analysis contained legal errors. We agree with JENCO and therefore vacate the trial court's decision and remand the case for additional proceedings.

BACKGROUND

¶2 In the early 2000s, JENCO owned land in the area now known as "The Ledges," north of St. George, Utah. Beginning in 2004, JENCO entered into a series of agreements with Ledges Partners by which Ledges Partners purchased successive parcels of JENCO's land for purposes of development; the purchases were often at least partially seller-financed by JENCO. After each purchase of property from JENCO, Ledges Partners would typically transfer title to the property into separate single-asset affiliate entities in which Ledges Partners’ managers were also named as managers. Ledges Partners did this to guard against "cross-liability"—to prevent any problems with any one portion of the development from affecting other portions—and always notified JENCO of any transfers.

¶3 For a few years, the parties operated successfully under this arrangement, but the economic recession of 2007–2008 changed matters; at that point, sales of developed lots ceased "virtually overnight," throwing the project into "dire straits" and causing the parties to reassess their arrangement. In 2010, after lengthy negotiations, JENCO and Ledges Partners entered into a series of "settlement" agreements that redefined their arrangement and placed certain additional financial obligations on Ledges Partners. In particular, one of the new agreements specified that Ledges Partners owed JENCO more than $210,000 from a prior transaction.

¶4 Another of the new agreements entered into in 2010 was captioned "New Real Property Option Agreement" (the Option Agreement). Under this agreement, JENCO granted Ledges Partners an option—the Option—to purchase 67.5 acres of land located next to the Ledges Golf Course. Due to the location of the property at issue, the Option is apparently quite valuable; at one point, one of Ledges Partners’ managers estimated that the Option was worth $29.7 million.

¶5 One of the terms of the Option Agreement discussed the extent to which Ledges Partners could assign its rights thereunder to another entity. On this point, the parties agreed that, as a general matter, Ledges Partners could not assign its rights under the Option Agreement without JENCO's consent, but this provision had a noteworthy exception: Ledges Partners was allowed to "assign its rights hereunder ... to one or more of [its] Affiliates, as long as such Affiliate ... assumes all of [Ledges Partners’] obligations with respect to the property so transferred." The term "Affiliate" was defined in the Option Agreement to include any company in which any member of Ledges Partners has an ownership interest. The Option Agreement contained no provision requiring Ledges Partners to notify JENCO of any assignment to an "Affiliate."

¶6 In December 2010, just a few months after entering into the Option Agreement, Ledges Partners assigned—in a document we refer to as "the Assignment"—its rights under the Option Agreement, including the Option, to SJI, an entity controlled by one of Ledges Partners’ managers (Manager). At the time, Ledges Partners was financially indebted to JENCO and, in the words of Manager, was "out of business." Manager was the only one of Ledges Partners’ managers who was affiliated with or had any interest in SJI. And Manager was the only person to execute the Assignment, doing so on behalf of both Ledges Partners and SJI. Ledges Partners received no monetary consideration in return for the Assignment; the only consideration involved was SJI's promise "to perform and be bound by all the terms, conditions, obligations and liabilities required to be paid or performed by [Ledges Partners] under the" Option Agreement. At the time, Ledges Partners did not notify JENCO that it had assigned its rights under the Option Agreement to SJI.

¶7 In 2012, JENCO filed a lawsuit against Ledges Partners and eventually obtained a judgment in the amount of $382,787.08. In an effort to satisfy this judgment, JENCO sought to locate and execute upon Ledges Partners’ assets; in particular, it applied for and obtained a writ of execution allowing it to execute upon Ledges Partners’ interest in the Option Agreement, including the Option. A constable's sale was set for June 13, 2017. The day before the sale, SJI—through a letter from its counsel—notified JENCO of the Assignment and asserted that it was the rightful owner of the Option. SJI also recorded a "Notice of Interest" against the property subject to the Option Agreement. JENCO learned of SJI's claimed interest in the Option for the first time upon receipt of counsel's letter. But despite SJI's notice, the constable's sale proceeded as scheduled, and JENCO—through a $100 credit bid—purchased Ledges Partners’ interest in the Option Agreement.

¶8 A few weeks after the sale, Manager sent a letter—written on Ledges Partners letterhead—to JENCO. In that letter, Manager implored JENCO to cease its efforts to execute on or possess the Option, stating as follows: "What you are now attempting to do with the [Option], the only remaining asset Ledges [Partners ] has , goes far beyond the boundaries of appropriate and fair business practices and is just morally and ethically wrong." (Emphasis added.) Manager asked JENCO to undertake "constructive reflection" about "the inequities that exist between" JENCO and Ledges Partners, and he expressed his "hope" that such reflection "would lead to [JENCO's] withdrawal from any further pursuits" regarding the Option.

¶9 Soon after acquiring Ledges Partners’ interest in the Option Agreement and learning of SJI's asserted interest, JENCO made two post-judgment litigation maneuvers. First, it sought and obtained leave to conduct additional "post-judgment discovery" regarding "Ledges Partners’ assets and claimed transfer of assets." Second, it sought and obtained leave to join SJI as a "defendant in interpleader" in the case so that the district court could make a decision—with all interested parties present—regarding the validity of the Assignment. JENCO did not, however, file a complaint or other pleading against SJI setting forth any particular causes of action.

¶10 Once SJI was present in the case, JENCO filed a motion asking the trial court to confirm the validity of the 2017 constable's sale and to extinguish any adverse claims to the Option, including SJI's. The court granted JENCO's motion, determining "that any interest SJI claimed in the [Option] was extinguished because it did not reply to the writ of execution" before the constable's sale occurred. See JENCO LC v. Ledges Partners LLC , 2020 UT App 42, ¶ 7, 463 P.3d 64. SJI appealed that ruling and—in this case's first visit to the appellate courts—we determined that, because the writ of execution only authorized the sale of Ledges Partners’ interest in the Option Agreement, "any interest SJI may have had ... could not have been conveyed to JENCO" at the constable's sale. Id. ¶ 14. Accordingly, we remanded the case to the trial court "for a determination of whether [the Assignment] conveyed" Ledges Partners’ interest in the Option Agreement to SJI. Id.

¶11 On remand, the parties engaged in additional discovery, and then the court set the matter for a bench trial. In briefs filed before the start of the trial, JENCO asserted that the Assignment was "a fraudulent transfer" under Utah law, citing section 25-6-5 of the pre-2017 Utah Code.¹ JENCO did not invoke section 25-6-6 of the Utah Code.

¶12 At the bench trial, the court heard from only two witnesses: JENCO's manager and Manager. Both witnesses testified about the events outlined above. In addition, Manager was asked about a 2016 email exchange between Manager and one of Ledges Partners’ investors. The investor initiated the email chain, inquiring whether Ledges Partners still owned any property at the Ledges. Manager responded by stating that "[a]n affiliate of [Ledges Partners] has the rights to roughly 64 acres of property."² After the investor asked about the affiliate and, in particular, whether Ledges Partners’ investors still had "the rights to this 64 acres," Manager replied that the affiliate was merely holding the property "to limit cross-liability," that Ledges Partners’ rights in the Option Agreement still existed, and that the Option was the company's "only remaining asset."

¶13 In closing arguments, JENCO argued that the Assignment was a fraudulent transfer, and it asserted that several "badges of fraud" were present indicating that the Assignment had been made to "hinder, delay, or defraud" Ledges Partners’ creditors, including JENCO. In response, SJI argued that the Assignment had not been made to defraud creditors but, instead, was a perfectly...