July 14, 2025|Franchise Frontlines
July 14, 2025 | United States Bankruptcy Court, Northern District of Texas | Published Opinion
Executive Summary
In a published opinion, Bankruptcy Judge Stacey G. C. Jernigan granted summary judgment in favor of hotel franchisor GrandStay Hospitality, LLC in an adversary proceeding brought by a Chapter 7 trustee seeking to avoid and recover a $1,000,000 earnest money deposit as a fraudulent transfer under 11 U.S.C. § 548 and the Texas Uniform Fraudulent Transfer Act (“TUFTA”). The trustee alleged that the deposit, paid in connection with a failed asset purchase agreement for a portfolio of hotel franchise assets, was transferred from a “family” bank account jointly held by the debtor, his adult son, and the debtor’s ex-wife, and that the debtor was insolvent or trending toward insolvency at the time. The court held that the debtor did not have a property interest in the transferred funds under Texas law and, alternatively, that the trustee failed to produce evidence that the debtor was insolvent or near insolvency at the time of the transfer. The motion for summary judgment was granted.
Relevant Background
The adversary proceeding arose out of a broader bankruptcy case involving allegations that the debtor’s adult son had engaged in a large-scale fraud in connection with a real estate financing transaction. As part of that scheme, funds from a $149.7 million loan were transferred through a series of accounts, including a “family” bank account held in the names of the debtor, his son, and the debtor’s ex-wife.
On June 30, 2022, $1,000,000 was wired from that family account to GrandStay Hospitality, LLC as an earnest money deposit in connection with an asset purchase agreement under which an affiliate of the debtor’s son agreed to purchase certain hotel franchise-related assets. The transaction ultimately did not close, and GrandStay retained the deposit pursuant to the agreement.
After the debtor filed for Chapter 7 relief, the trustee brought an adversary proceeding seeking to avoid and recover the $1,000,000 transfer as actually or constructively fraudulent under § 548 of the Bankruptcy Code and TUFTA. The trustee’s theory depended on establishing that the transfer was “of an interest of the debtor in property” and that the debtor was insolvent or near insolvency at the time of the transfer.
Decision
The court began by emphasizing a foundational requirement under both § 548 and TUFTA: a transfer is avoidable only to the extent it involves “an interest of the debtor in property.” Whether a debtor has such an interest is determined under applicable state law—in this case, Texas law.
The trustee argued that because the debtor’s name appeared on the family account and he had signatory authority, he had a sufficient property interest in the funds transferred to GrandStay. The court rejected that argument.
Relying on Texas law governing joint accounts, the court explained that mere presence on a signature card or signatory authority does not establish ownership of funds in a joint account. Under Texas Estates Code § 113.102, a joint account belongs to the parties in proportion to their net contributions, absent clear and convincing evidence of a different intent.
The summary judgment record reflected that the only significant contribution to the family account was a $21.9 million transfer originating from the son’s entity. The debtor testified that he had not deposited funds into the account, had not made withdrawals, and believed his name was added for convenience. There was no evidence that the debtor exercised unfettered control over the funds or used the account to pay his own creditors.
The court cited Texas authority holding that signatory authority alone does not confer ownership and that title to stolen property remains with the original owner. Even assuming the funds were fraudulently obtained by the son, that fact would not vest ownership in the debtor.
Accordingly, the court concluded that the trustee failed to create a genuine issue of material fact that the debtor had a property interest in the funds used to make the $1,000,000 transfer to GrandStay.
The court also addressed insolvency. Under § 548(a)(1)(B) and TUFTA, a trustee must demonstrate that the debtor was insolvent or trending toward insolvency at the time of a constructively fraudulent transfer. The trustee argued that although the debtor signed a guaranty shortly after the transfer, creating substantial liability, he was effectively insolvent or near insolvency at the time of the transfer.
The court rejected this theory. The guaranty giving rise to the debtor’s liability was executed approximately two weeks after the earnest money transfer. The record contained no evidence that the debtor had an enforceable obligation to the lender at the time of the transfer or that he was otherwise insolvent under the balance-sheet or “generally not paying debts” tests.
Because the trustee failed to establish both the property-interest element and the insolvency element, summary judgment was granted in favor of the franchisor.
Looking Forward
Although this case arises in the bankruptcy context, it carries practical implications for franchisors and brand owners engaged in asset sales, franchise transfers, and earnest money transactions.
First, the decision underscores the importance of tracing and property-interest analysis in fraudulent transfer litigation. The mere fact that a debtor’s name appears on a joint account does not automatically make funds in that account property of the debtor’s estate. Courts will examine contributions, control, and actual ownership under applicable state law.
Second, the opinion highlights that franchisors receiving earnest money deposits in connection with contemplated asset or franchise sales are not automatically exposed to clawback risk simply because the funds later turn out to be connected to wrongdoing by an affiliate of the buyer. A trustee must establish that the transfer involved property of the debtor and satisfy statutory insolvency requirements.
Third, the court’s insolvency analysis reinforces that timing matters. Liability arising from a later-executed guaranty or judgment does not retroactively render a debtor insolvent at the time of an earlier transfer absent evidence that such obligations existed or were reasonably anticipated at that time.
This decision does not eliminate fraudulent transfer exposure for franchisors. Transfers made directly by debtors, or from accounts clearly controlled by debtors, may still be subject to avoidance actions. However, In re Bhai confirms that trustees bear the burden of proving both ownership and insolvency elements with competent evidence, and that formal account relationships alone are insufficient.
For franchisors engaged in significant asset transactions, particularly in distressed or rapidly evolving circumstances, careful documentation of counterparties, payment sources, and contractual rights remains critical in mitigating downstream bankruptcy risk.
This article is based solely on the opinion of the Court in this matter. The author has not conducted any independent investigation into the facts. For the avoidance of doubt, each statement related to the law and facts in this article is drawn from the Court’s opinion in this case.
Thomas O’Connell is a Shareholder at Buchalter LLP and Chair of the firm’s Franchise Practice Group. For questions about this article or media inquiries, you can contact Tom at toconnell@buchalter.com.
This communication is not intended to create, and does not create, an attorney-client relationship or any other legal relationship. No statement herein constitutes legal advice, nor should it be relied upon or interpreted as such. This communication is for general informational purposes only and is not a substitute for legal counsel. Readers should not act or refrain from acting based on any information provided without seeking appropriate legal advice specific to their situation. For more information, visit www.buchalter.com.
