THURMAN, Chief Judge.
In this appeal, both the debtor, Expert South Tulsa, LLC ("EST"), and the E.H. Hawes Revocable Trust (the "Trust")
The basic facts are simple. EST sold real property (the "Commons") to Cornerstone in January 2010 for $3 million. Approximately ten days later, Cornerstone sold the Commons to South Memorial Development Group, LLC ("South Memorial") for approximately $4.42 million. An involuntary Chapter 7 petition was filed against EST on March 30, 2010, which EST later had converted to a Chapter 11. On September 1, 2011, EST
The first prong of the adversary claim, insolvency, is uncontested on appeal. However, the parties disagree on the second prong, i.e., regarding the value that was given and received for the Commons. Nonetheless, the bankruptcy court found that the uncontroverted facts established that EST could not prevail on its § 548 Claim because it had received reasonably equivalent value for the sale. The bankruptcy court also ruled, as a matter of law, that EST could not prevail on its UFTA
The details of the challenged sale transaction are quite complex, and EST relies heavily on that complexity in an effort to establish contested issues of fact.
EST was formed to purchase and develop real property located in South Tulsa, Oklahoma (the "Tulsa Property"), and it obtained a loan to purchase and develop the Tulsa Property from M & I Marshall & IIsley Bank ("M & I") in early 2007. That loan (the "Tulsa Loan") was secured by the Tulsa Property, a $12,329,500 promissory note (the "Note"), and the personal guaranties of McLellan and Hawes. The Note was renewed, modified, and/or transferred many times. EST purchased the Tulsa Property for $10.3 million, and then divided it into three separate parcels: 1) an 11-acre parcel that was sold, pre-petition, to Life Time Fitness; 2) a 2.5-acre parcel, also sold pre-petition to an individual buyer for construction of a hotel; and 3) the Commons, a 21.5-acre parcel that is the subject of the present dispute.
In 2008, EST sold the first two of the three Tulsa Property parcels, using the proceeds of those sales to pay M & I approximately $2.5 million on the Tulsa Loan. EST and M & I were in the process of negotiating a restructure of the Tulsa Loan, which was in default. Ultimately, the parties were unable to reach an agreement, and M & I elected to sell the Tulsa Loan at auction. The Tulsa Loan (along with some loans M & I had made to the other Expert LLCs) was purchased at auction by OKL 18, LLC ("OKL") in March 2009. At all times relevant to this appeal, the principals of OKL were Steve Perry ("Perry") and Scott Asner ("Asner").
Shortly after OKL purchased the Expert LLC loans, including the Tulsa Loan, the Expert LLCs (including EST) entered into a forbearance agreement (the "Forbearance Agreement") with OKL. In the Forbearance Agreement, OKL agreed to cease collection efforts on the purchased loans until July 22, 2009, upon its receipt of a $500,000 forbearance fee. In addition,
The $500,000 forbearance fee was paid by the Expert LLCs with funding provided by the Trust. On July 23, 2009, as no additional payments had been made by the Expert LLCs, OKL declared the Forbearance Agreement to be terminated, and requested full payment of all Expert loans. On the same day, Owasso and Rockwell executed a new forbearance agreement with OKL, which related only to loans of those LLCs, for which they paid $100,000. The new forbearance agreement allowed Owasso and Rockwell to eliminate their loans by paying $4.25 million to OKL by August 5, 2009. Although this forbearance agreement was extended twice, it also terminated pursuant to its terms due to Owasso and Rockwell's failure to pay the agreed satisfaction amount.
In August 2009, OKL filed a state court action against EST, seeking both to recover on the Note and to foreclose its lien on the Commons. At that time, a state court mechanic's lien action was already pending against EST, and the new foreclosure action was consolidated with that case. While the Tulsa Loan was in default, McLellan and Hawes discussed with OKL (via Perry) the potential for the Trust to purchase the Tulsa Loan.
Throughout the negotiations with OKL, EST was attempting to sell the Commons. On December 11, 2009, EST and Sitton Properties, LLC ("Sitton LLC") entered into a purchase contract, under which Sitton LLC agreed to buy the Commons for $3.2 million (the "Sitton Contract"). The principal of Sitton LLC was Mike Sitton ("Sitton"). As part of the Sitton Contract, EST agreed to take ownership of certain Tulsa real property that was owned by Sitton LLC (the "Riverside Property"). The sale to Sitton was originally set to close by February 11, 2010, but the Sitton Contract was modified to shorten the closing period to December 30, 2009.
Eighteen days later, on the day before the closing deadline for the Sitton Contract, EST was informed that Sitton LLC had assigned its interest in the Sitton Contract to South Memorial, and that South Memorial would not be bound by the December 30 closing date. Moreover, if EST insisted on closing the sale by December 30, South Memorial would terminate the Sitton Contract. The next day, December 30, South Memorial terminated the Sitton Contract. EST continued trying to secure a sale of the Commons throughout that day and the next. On December 31, OKL assigned its interest in the Tulsa Loan to GTMI, LLC ("GTMI"), apparently for tax reasons. Despite the assignment, EST continued to discuss the Tulsa Loan and the Trust Option with Perry, who acted as the lender representative. The assignment of the Tulsa Loan mortgage to GTMI was not recorded, nor did GTMI substitute for OKL in the pending foreclosure action.
Also on December 31, Hawes notified Perry by email that a new sale had been negotiated with Sitton and his partner, Rob Phillips ("Phillips"). On that basis, Hawes requested that the Trust Option be extended to January 8, 2010. Perry responded by email, "I will let you know as soon as I can get an answer." No further contact was had until Perry notified Hawes on January 5 that he was "still waiting for final sign off," and proffered an amended payoff amount "if funds are received prior to 2 p.m. this Friday [1/8]. I need to see a draft settlement statement from the title company [re Sitton/Phillips purchase]
Cornerstone and EST executed a new contract for the purchase and sale of the Commons (the "Cornerstone Contract"), specifying a purchase price of $3 million, to be paid on January 8, and including a representation by EST that there would be no pending or threatened claims against the property, except as may be provided in the title commitment. Thus, EST was required to deliver clean title to Cornerstone, and was required to obtain dismissal of the pending foreclosure action as a condition to issuance of a title policy.
At the closing on January 8, 2010, Cornerstone paid $3 million to the title company, from which it made the following payments:
The $415,000 paid to the Trust was credited by it to EST's outstanding debt. The remainder of the $3 million purchase price, a total of $261,477, was paid directly to EST, which subsequently paid it to Sitton LLC for the Riverside Property.
On January 27, 2010, only nineteen days after the EST/Cornerstone sale closing, Cornerstone closed its own sale of the Commons to South Memorial.
Team Viva, LLC, an EST creditor, filed an involuntary Chapter 7 petition against EST on March 30, 2010, which case was later converted to Chapter 11 at EST's request. EST filed the adversary proceeding from which this appeal arose in September 2011, seeking to recover approximately $1.42 million from Cornerstone pursuant to either Oklahoma law (through § 544(b)) or § 548(a)(1)(B). Cornerstone
This Court has jurisdiction to hear timely filed appeals from "final judgments, orders, and decrees" of bankruptcy courts within the Tenth Circuit, unless one of the parties elects to have the district court hear the appeal.
At the same time, appellants also filed a Rule 9023 motion to alter or amend the bankruptcy court's judgment, purportedly to resolve any problems with the judgment that might be caused by the United States Supreme Court's June 9, 2014 Executive Benefits decision.
Neither the appellants nor the appellee elected to have this appeal heard by the district court, and the parties have therefore consented to appellate review by this Court.
Both of these issues arise from a decision on summary judgment. Such judgments are reviewed by this Court de novo, applying the same legal standard as was used by the bankruptcy court.
The appealed order was decided as a matter of summary judgment. Summary judgment is appropriate only if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any," when viewed in the light most favorable to the non-moving party, "show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law."
Section 544(b)(1) of the Bankruptcy Code (the "strong-arm statute") allows a trustee (or a debtor-in-possession)
Significantly, the UFTA avoidance power is only available when the property "transfer" was of a debtor's "asset." The Act defines those terms, as follows:
The UFTA also provides that it "shall be applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of this act among states enacting it."
EST's position is that the bankruptcy court erroneously determined that the Commons was not an "asset" at the time of its sale to Cornerstone because it was fully secured and, therefore, not subject to the UFTA. EST does not contest that real properties subject to liens equal to or in excess of their value are not "assets" subject to the UFTA.
In World Properties an unsecured creditor filed an action to avoid its debtor's transfer of real property to a related entity, claiming the transfer to be fraudulent under the UFTA. One of the defendants, Antonio Reale, was a contractor/developer who controlled several business entities primarily owned by his wife and children. Three Reale businesses were World Properties, World, and LAN. World had no assets and did not conduct business, as it was used primarily to funnel funds between other Reale companies and Reale's wife, who had neither income nor creditors. However, LAN and Reale owned real property in New Jersey that was subject to a mortgage held by the FDIC. The FDIC foreclosed the mortgage on the New Jersey property in 1994, but that property was of insufficient value to satisfy the mortgage, resulting in an award to the FDIC of a $7 million deficiency judgment against LAN and Reale. The FDIC later transferred the deficiency judgment to National.
LAN also borrowed money from Chase Bank in order to develop real property in
Once the lease was in place, Reale reached an agreement with WLL, Chase's successor-in-interest to the foreclosure judgment, under which WLL accepted payment of $5.2 million "in full satisfaction of the debt." LAN and Reale obtained a mortgage loan from People's Bank in order to fund the payment to WLL. People's Bank was directed to pay the loan proceeds to World Properties, an entity that Reale had recently formed, which then paid the $5.2 million settlement amount to WLL. In return, according to the defendants, World Properties received the $17 million Chase judgment, which it proceeded to foreclose. In response, LAN transferred both the property and the lease to World Properties, which left it without any assets and, thus, no ability to pay the FDIC/National deficiency judgment from the year before.
Predictably, National filed suit against LAN, World Properties, World, and Reale, alleging that LAN's transfer to World Properties was fraudulent under the UFTA. The trial court agreed, and entered judgment avoiding the World Properties transfer. Defendants appealed, asserting that the property was not an "asset" subject to a transfer avoidance under the UFTA because it was secured by the Chase/National/World Properties $17 million judgment lien, which exceeded the property's value, when it was transferred. All parties and the court agreed that a transfer of property subject to liens that equaled or exceeded its value would not be subject to avoidance under the UFTA. The defendants' claim was rejected by the trial court, which was affirmed by the Connecticut Court of Appeals, based on a finding that the property had not been subject to a $17 million lien when it was transferred because the defendants' settlement with WLL had discharged that lien and substituted the $5.2 million lien in its stead, and "[t]hat settlement occurred prior to the transfer between LAN and World."
The property transferor in World Properties unsuccessfully argued that its transfer of property to a related company could not be avoided as a fraudulent transfer because the transferee held a lien on the property that exceeded the property's value. In the present case, relying on World Properties, EST seeks to avoid its own transfer of property to an unrelated company, claiming that a lien exceeding the property's value was compromised prior to the transfer, leaving the property with some equity and, therefore, an "asset" subject to the UFTA.
The essence of the World Properties decision is that a security interest that is compromised prior to transfer of the secured property will be included in a determination of the property's security status at the compromised value. However, the undisputed facts in the present appeal establish that no such compromise took place prior to the Cornerstone sale closing. The present transaction was, effectively, a "short sale." Such sales are common and involve an agreement by a property lien holder to accept less than full repayment of its loan in exchange for its full release of a property lien in order to facilitate a sale of the secured property. Short sales typically involve mortgage obligations that are in default, and lenders enter into such agreements based on the economic reality that the certainty of partial repayment from sale proceeds is usually preferable to an uncertain recovery from foreclosure and resale.
Short sales are often preceded by lenders' attempts to either sell the loan to another lender at a discount or to rewrite the mortgage terms with the borrower. If such an agreement is reached without involving the property's sale, the parties' conduct will thereafter be dictated by the terms of the new agreement. In World Properties, the trial court found that just such a compromise agreement had been made prior to any transfer of the property by the debtor. Thus, when the debtor did transfer the property, it was subject only to the compromised mortgage and had value beyond the security. As such, the property was an "asset" that debtor could only transfer in exchange for "reasonably equivalent value" under the UFTA. Debtor's receipt of less than equivalent value for the property led the Connecticut court to avoid the sale.
In the present case, however, although OKL had indicated its willingness to accept less than full value for the Tulsa Loan, either from the debtor or from a third party, no compromise deal was ever consummated prior to the sale of the Commons to Cornerstone. In fact, the Trust did not make any payment to either OKL or GTMI after it paid to obtain the Trust Option. The only payments that were made to those entities came directly from EST's sale proceeds. Thus, the Trust undeniably did not exercise the Trust Option prior to the Cornerstone sale closing, whether or not its time to do so had been extended.
Appellants respond that the parties' communications leading up to the sale at least create a disputed issue of fact as to whether the Trust Option had been extended prior to the sale, and thus requiring a denial of the motion for summary judgment and a reversal by this Court. Indeed, whether or not OKL and/or GTMI extended the Trust Option's payment deadline was and is a hotly contested matter between these parties. However, only "material" fact disputes preclude entry of summary judgment, and resolving that dispute in appellants' favor does not change the result since, whether or not the Trust was granted additional time to exercise the option, it did not do so. Moreover, even if
EST asserted avoidance claims under both the UFTA and § 548(a)(1)(B). These two fraudulent transfer provisions are essentially identical, except that § 548 does not require transfer of an "asset," as does the UFTA. Instead, § 548 covers transfers of "an interest of the debtor in property" or the incurrence by the debtor of "an obligation" that are not in exchange for "reasonably equivalent value."
The relevant portions of § 548 provide:
This provision allows a property transfer that was made within the two-year period immediately preceding the petition filing to be avoided, but only if the plaintiff establishes both that the transfer was not supported by debtor's receipt of "reasonably equivalent value" and that the transfer took place when the debtor was insolvent (or the debtor became insolvent due to the transfer). Such transfers are considered "constructively fraudulent,"
In seeking to avoid the Cornerstone sale, EST claims, in essence, that Cornerstone (and, by implication, OKL) took advantage of its foundering financial situation to profit from a back-to-back purchase and resale of the Commons. Considering only the following basic facts of the sale and the resale, EST's assertion may appear to be well-taken:
However, the issue before the bankruptcy court and this Court is not the validity of
Although "reasonably equivalent value" is not defined in the Bankruptcy Code, it is not a simple calculation of purchase price versus the property's appraised value
Determination of reasonably equivalent value is ordinarily a finding of fact.
A determination of whether a transfer involved the exchange of reasonably equivalent value requires consideration of whether or not the transferor's unsecured creditors were better off before or after the transfer. In other words, courts must calculate the net value received from a transaction, and include any benefit received by the transferor, regardless of its source.
Appellants, however, contend that the only value EST received in exchange from the sale was the $3 million purchase price, based on its claim that the Tulsa Loan was not discharged in that transaction but was instead transferred to the Trust. Under appellants' version of the transaction, then, EST remains obligated on the Tulsa Loan.
We disagree. First, it is undisputed that the Trust never paid the option
Significantly, whatever any of the parties may have believed to be the effect of the sale transaction on the Tulsa Loan was rendered moot by OKL's filing of a dismissal with prejudice of the foreclosure action. OKL had asserted two causes of action in that lawsuit—one for recovery of the debt evidenced by the promissory note, and the other for foreclosure of the mortgage. Dismissal with prejudice of the claim on the note rendered that note unenforceable by anyone.
The undisputed facts lead inevitably to the legal conclusion that the Cornerstone
