WILLIAM T. THURMAN, Chief Judge.
Over the course of hearings on March 9, March 28, April 1, and April 25, 2011, the Court has heard the Defendant's Motions for Summary Judgment on Counts I-V of the Second Amended Complaint ("Complaint") and the Plaintiffs' Motions for Summary Judgment or Partial Summary Judgment on Counts I-III. The Court has provided oral bench rulings on each of those motions in open court and submits now this Memorandum Decision ("Memorandum") to provide additional clarification and consistency to the issues addressed. This Memorandum, although the Court believes is entirely consistent with its prior bench rulings, shall supersede any contradicting bench rulings made on the Court's record and shall constitute the Court's findings and conclusions.
The Court has jurisdiction over the subject matter pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(L). Venue is appropriate under 28 U.S.C. § 1408. Notice of the hearing on these motions is found to be appropriate and adequate in all respects.
Because all of the motions seek summary judgment, the only facts the Court can consider are those not in genuine dispute. Although if disputed facts exist and the Court considers those in the light most favorable to the non-movant, the Court can still determine if the movant is entitled to the relief sought in its motion. The relevant facts provided to the Court are as follows.
1. The Debtors filed for chapter 11
2. An examiner, Ray Strong, was appointed in February 2003. The Examiner was granted expanded powers.
3. The Debtors were in the business of owning and operating gas stations and convenience stores. The business entities in bankruptcy are Tri-Valley, Cook Oil and Snobird Oil. Seven C Enterprises, Inc. ("Seven C") is a separate entity formerly owned by principals of the Debtors, but has not filed for bankruptcy protection.
4. Seven C held title to most of the real property of the gas stations and convenience stores, including a gas station and convenience store in Rock Springs, Wyoming, ("Rock Springs Property"), and Tri-Valley paid rent or lease payments to Seven C.
5. Seven C purchased the Rock Springs Property from Christmann Oil Co. ("Christmann") in October 1993. The deed transferring title to the property from Christmann to Seven C was recorded on October 25, 1993 ("Christmann Deed").
6. The purchase was seller-financed and Christmann took back a mortgage to secure the balance due from Seven C. The
7. In October 1994, Seven C entered into a 132-month lease of the Rock Springs Property with Tri-Valley. The lease was signed by Paul Cook on behalf of Seven C, as president, and by Noel Cook on behalf of Tri-Valley, as a 51% owner.
8. Prior to the petition date, Tri-Valley attempted to obtain a loan from Star-Mac, an affiliate of Texaco. Collateral for the proposed Star-Mac loan included the Rock Springs Property and other properties which were then titled in Seven C.
9. As a condition for making the loan, Star-Mac insisted that all property being pledged to secure the loan, including the Rock Springs Property, be titled in Tri-Valley.
10. On August 23, 2001, in anticipation of the closing, Paul Cook, as president of Seven C, signed a deed transferring title to the Rock Springs Property from Seven C to Tri-Valley.
11. Wyoming Land Title Company recorded the deed transferring the Rock Springs Property from Seven C to Tri-Valley. Although there was consideration flowing between Seven C and Tri-Valley on lease arrangements, there was no specific consideration given for the transfer of this property to the Debtor—at least there was no evidence presented of such.
12. Star-Mac "backed out" of making the loan and the loan did not close on August 23, 2001, or at any other time.
13. Paul Cook expected the Rock Springs Property to be transferred back to Seven C if the Star-Mac loan "fell though."
14. Seven C also owned property in Ivins, Utah, which it also leased to Tri-Valley. On August 26, 2001, Seven C transferred its Ivins property to Tri-Valley for the purpose of obtaining a financial accommodation from Wells Fargo Bank. The Ivins property was transferred back to Seven C on October 22, 2001, when the financing accommodation was not effected.
15. Tri-Valley continued to pay monthly lease payments, including the payment for the Rock Springs Property to Seven C after August 23, 2001.
16. Unlike the Ivins property, the Rock Springs Property was not transferred back to Seven C before Tri-Valley filed its bankruptcy petition on November 6, 2001.
17. The Rock Springs Property was, however, transferred back from Tri-Valley to Seven C by a deed dated November 30, 2001 (the "November 30 Deed").
18. The November 30 Deed was recorded on December 10, 2001.
19. The November 30 Deed was signed by Noel Cook above the printed word "President."
20. Tri-Valley's schedules filed December 7, 2001 list Noel Cook as chief executive officer ("CEO") and 51 % shareholder and Paul Cook as president of Tri-Valley.
21. Filings by Tri-Valley with the State of Utah show Noel Cook as president in all of 2001, however, and not being replaced by Paul Cook as president until February 2002.
22. Subsequent to the November 30 Deed, Noel Cook signed documents as CEO of Tri-Valley including documents where the Court approved the sale of certain Tri-Valley property.
23. Paul Cook had no involvement in preparing or executing the November 30 Deed. However, the need to transfer the Rock Springs Property back to Seven C was discussed by Paul Cook and other members of the Cook family and Paul
24. The postpetition transfer effected by the November 30 Deed was not disclosed on any of the bankruptcy schedules, amendments or other pleadings or submissions filed by Tri-Valley.
25. In fact, the schedules showed that Tri-Valley was leasing the Rock Springs Property from Seven C.
26. The Debtor and other parties involved in the case treated the arrangement between the Debtor and Seven C as a lease arrangement. That lease between Seven C and Tri-Valley was assumed as part of the plan of reorganization which was confirmed on December 22, 2003.
27. In October 2002, the Cook family entered into a transaction to sell their stock in both Seven C and Tri-Valley to Speedy Turtle Petroleum, Inc. ("Speedy Turtle").
28. Seven C and Speedy Turtle, as borrowers, entered into loan arrangements with the Metropolitan Mortgage & Securities Inc. ("Metro Mortgage"). The loan was to be secured by various properties, including the Rock Springs Property.
29. Speedy Turtle funded these purchases by borrowing $6,500,000 from Metro Mortgage (the "Metro Loan"). Seven C was a co-borrower.
30. The Metro Loan was secured by, among other things, fifteen parcels owned by Seven C, including the Rock Springs Property. Most of these properties were similar facilities and were leased to Tri-Valley.
31. In December 2002, the Metro Loan was paid off when Speedy Turtle borrowed $13,779,500 million from the Defendant (the "WULA Loan").
32. Seven C was one of several guarantors of the WULA Loan and its guarantee included the Rock Springs Property.
33. The current adversary proceeding was filed on March 19, 2004, challenging the transfer of a security interest in the Rock Springs Property to the Defendant.
34. The Defendant rejected some of the proposed properties as collateral for its loan because the titles were in Tri-Valley and the Defendant knew Tri-Valley was in bankruptcy.
35. The Rock Springs Property was included in the loan package.
36. Old Standard, an affiliate of the Defendant, performed investigation and underwriting with respect to this loan and the Metro Loan.
37. Old Standard did not request a chain of title report for any of the properties securing either loan.
38. A 2002 appraisal ordered by the Defendant during the underwriting of its loan stated that the Rock Springs Property had not been otherwise sold or been transferred within the past three years, despite the transfer to and from Tri-Valley which was later discovered by the Plaintiffs.
39. The only deeds found by the appraisal were the Christmann Deed and a name correction deed transferring the title from Seven "C" to Seven C.
40. According to the Plaintiffs' analysis, the Debtor at the time of the WULA Loan had the following liabilities:
41. According to Plaintiffs' revisions and analysis based on a revised 2004 appraisal of Hopkins, the assets of Seven C were no more than $10,558,000. According to a 2002 appraisal by Hopkins, the value of Seven C's assets were $17,135,000.
42. The Plaintiffs argue the 2002 Hopkins Appraisal relied on bad information supplied by Ted Hanson, an owner of Speedy Turtle, and that the 2004 revised appraisal should be used.
43. Most of the Seven C properties were sold for a total of $6,985,000 after Speedy Turtle's default.
44. Finally, the Plaintiff argues that Mr. Hansen's admission of cash flow shortages at Speedy Turtle shows insolvency was imminent for the Debtor.
45. From the WULA Loan, $6,458,083.36 of the proceeds paid off the Metro Loan.
46. The WULA Loan was also used to satisfy existing tax and mortgage liens against Seven C in the amount of $2,957,613.
47. In 2003, Speedy Turtle defaulted on the WULA Loan and the Defendant foreclosed on the Seven C assets that collateralized the loan including the Rock Springs Property. The Defendant sold all but three of the Seven C properties including the Rock Springs Property. The Rock Springs Property sold for $1,702,546 net of sales commissions. The Defendant has escrowed all of the foreclosure sales proceeds.
48. The Plaintiffs and Defendant stipulated that the bankruptcy court would have sole jurisdiction of the escrowed funds relating to the Rock Springs sale and these proceedings.
49. It is entitlement to these funds that the current adversary proceeding addresses.
50. In December 2003, the Examiner along with the Committee filed an adversary proceeding
51. The standstill agreement was not part of the written Seven C stock purchase agreement between Speedy Turtle and the Cook family as owners of the Debtors.
52. In December 2005, the Court entered a judgment in favor of the Examiner against Seven C for approximately $8.7 million for breach of the standstill agreement and conversion of assets.
53. Plaintiffs in this present adversary proceeding assert standing to sue the Defendant, in part, because of the judgment against Seven C.
Summary judgment is appropriate only if "the movant shows that there is no
The first count of the Complaint alleges a fraudulent conveyance, in the form of a grant of a security interest in the Rock Springs Property, from Seven C to the Defendant under Utah Code §§ 25-6-5 and 25-6-6. To establish a fraudulent conveyance under these sections, a plaintiff must show (1) that the transferor did not receive reasonably equivalent value and (2) that the transferor fit one of several defined financially troubled states (each of which the Court will articulate and discuss more below). Because both sections require a finding of a lack of reasonably equivalent value, the Court will merge the analysis of these sections.
Reasonably equivalent value under the Utah statute has been described as "a price [that] a capable and diligent businessman could presently obtain for the property after conferring with those accustomed to buy such property."
Having found that the Plaintiffs cannot meet the first prong of the fraudulent transfer analysis, no further discussion is necessary as the elements are conjunctive. For the sake of completeness and because the parties raised other arguments, however, the Court will discuss the second prong—that of the transferor's financial troubles. Under Utah Code §§ 25-6-5 and -6, those troubles may be shown by insignificant assets, an unsatisfiable debt, a skewed balance sheet, or a failure to pay debts.
The first method of showing the transfer was part of a constructively fraudulent transfer is to show that the transferor "was engaged or was about to engage in a business or a transaction for which the remaining assets of the [transferor] were unreasonably small in relation to the business or transaction...."
A second way to show a transfer was constructively fraudulent is to establish that the transferor "intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due."
A third method of establishing the constructive fraudulence of a transfer is to prove that the transferor was insolvent as established when "the sum of the [transferor's] debts is greater than all of the [transferor's] assets at a fair valuation."
Liabilities Amount Tri-Valley Converted Assets $1,270,000 Standstill Agreement Violation Liability $5,284,482 Pledge of Assets to Chevron $2,100,000 WULA Loan Liability (50%-100% contingency) $6,889,500-$13,779,000Total $15,273,982-$22,163,482
The Plaintiffs' analysis further assumes an asset value of $10,558,000 based on a modification of the 2002 Hopkins appraisals.
While the Court must accept the facts as true for purposes of this analysis, it is not required to accept the analysis or conclusion at face value. The Court believes that several of the listed liabilities are improperly included in this analysis. In particular, the liabilities for the conversion of assets and violation of the standstill agreement were not established until a judgment was entered in 2005 in the adversary proceeding that was commenced in 2003. Because this liability had not been established at the time of the transfer in 2002, it should not be included in the analysis of Seven C's insolvency.
In addition, because Seven C was only a guarantor on the WULA Loan, its liability must be analyzed as a contingent liability. Contingent liabilities may be included in an insolvency analysis only in the proportion to the likelihood that the guarantor will be required to satisfy the obligation.
In addition, the Court is persuaded by the Defendant that the adversary proceeding judgment issued in 2005 for conversion of assets and for violation of the standstill agreement could be collaterally attacked by the Defendant if it were to be used by the Plaintiffs against the Defendant.
A final method of demonstrating insolvency is to establish that a transferor "is generally not paying [its] debts as they become due...."
Regardless of the above analysis, the Court believes that the Defendant is protected by the good faith defense provided in these sections. Because a good faith defense will be addressed more fully later in this memorandum, the Court will postpone the current discussion until that time.
Count II of the Complaint alleged a fraudulent transfer from Tri-Valley to Seven C under the Utah Code sections analyzed above. Due to a mutual misunderstanding of the parties, however, they did not brief those issues in their memoranda and the Court will not address that Count at this time.
The third count of the Complaint alleges an unauthorized postpetition transfer under § 549 of the Bankruptcy Code. Section 549 permits a trustee to avoid a transfer of estate property that was made postpetition and was unauthorized by the Bankruptcy Code. The parties agree that such a transfer occurred in this case when Noel Cook signed the November 30 Deed on behalf of Tri-Valley transferring the Rock Springs Property to Seven C.
The issue in controversy arises from the good faith defenses available to the Defendant under §§ 549(c) and 550(b). The good faith defense under §§ 549 or 550 eliminates the liability of the transferee for the unauthorized postpetition transfer under § 549.
Under § 550, good faith is a "question [of] solely whether the grantee knew or should have known that he was not trading normally but that on the contrary, the purpose of the trade, so far as the [transferor] was concerned, was the defrauding of his creditors."
The second prong of the good faith analysis varies depending on whether the defense is claimed under § 549 or § 550. Section 549 and its analytical case law present a quandary of statutory interpretation. Of the various elements a defendant must establish to claim the good faith defense are a showing of being a good faith purchaser and giving present fair equivalent value.
The less exacting standard of "value" is satisfied by an amount sufficient to support a contract,
On the facts of this case, the Court finds that the value given by the Defendant in exchange for the property interests it received
Even assuming, however, that the value given by the Defendant should be reduced by the amount of the Metro Loan (as would occur if the two loans were treated as one), the additional value provided by the WULA Loan was admittedly negotiated for and bargained for and would thus constitute sufficient value to support a contract claim, which would be sufficient to satisfy this element of the good faith defense under § 550.
The third element the Defendant must establish in its good faith defense is that it did not have knowledge of the case or knowledge of the voidability of the transfer.
In this case, as analyzed above, the Defendant did not have knowledge of the avoidability of the transfer and it did not have enough facts that it should have known about the avoidability. Thus, the Court finds that it fulfills the element under § 550. Further, the Court notes that "knowledge of the case" would logically refer to knowledge of a bankruptcy of Seven C—which does not exist—and thus it would be impossible for the Plaintiffs to establish that the Defendant had knowledge of the case.
As the Defendant has provided satisfactory, uncontroverted evidence of all 3 elements
A good faith transferee can enforce an obligation occurred to the extent of value given to the transferor for the transfer.
The UCC defines good faith as "honesty in fact in the conduct or transaction concerned."
The case law found by the Court comes from a recently decided case from the Utah District Court in Wing v. Williams and explains that good faith is "measured objectively and that `if the circumstances would place a reasonable person on inquiry of a debtor's fraudulent purpose, and a diligent inquiry would have discovered the fraudulent purpose, then the transfer is fraudulent.'"
Under either definition, then, the Court determines that the Defendant did not have knowledge or adequate or sufficient notice about the fraudulent or constructively fraudulent transfer that rises to the level required in this statute. Therefore, even if the Plaintiffs could establish a viable claim under Counts I or III, because the Defendant qualifies for the good faith defense under Utah law and under the Bankruptcy Code, the Defendant's property interest is not subject to the Plaintiffs' avoidance powers; summary judgment
The fourth cause of action alleged in the Complaint is under § 363. Section 363 provides the mechanism for a trustee (or debtor in possession) to utilize assets of a debtor. If the use of those assets is outside the normal course of business, the trustee must obtain court approval.
The Court concludes that this claim should be dismissed because § 363 does not create a right of action for a trustee (or here by the examiner with expanded powers) to avoid an unauthorized postpetition transfer. The better place to look for a remedy is in § 549 or possibly other code sections or state law. No authority has been cited for the use of § 363 to remedy an unauthorized transfer and the Court can find none. Further, the Court is not prompted to create one in this case— where a Bankruptcy Code section already provides (through § 549) the relief sought by the Plaintiffs under § 105(a), the Court would be unnecessarily overstepping by creating another right of action through § 105(a). Thus, summary judgment should be granted for the Defendant on this Count.
The final count of the Complaint alleges a violation of the automatic stay based on the transfer of the Rock Springs Property postpetition. The automatic stay, however, is designed to protect the estate's assets against involuntary transfers by creditors. "In contrast, § 549 provides a remedy to creditors when the debtor ... initiates an unauthorized [postpetition] transfer of estate property."
In summary, the Court concludes that the Defendant did provide reasonably equivalent value, fair value, and value for the transfer of the security interest in the Rock Springs Property from the Seven C to the Defendant. Further, the Plaintiff has not provided sufficient evidence of the insolvent status of the Debtor to rebut the Defendant's argument for summary judgment. Finally, the Court concludes that the Defendant qualifies as a good faith transferee, which eliminates its liability for the unauthorized postpetition transfer from the Debtor to Seven C. With all of these findings and conclusions, the Court must grant summary judgment on Counts I and III through V for the Defendant and deny summary judgment on Count III and
The Utah Supreme Court in National Loan Investors, L.P. v. Givens, 952 P.2d 1067, 1069 & n. 2 (Utah 1998), explains that Utah's Uniform Fraudulent Conveyance Act was a codification of the common law. The Court thus believes that case law predating the passage of the Uniform Act continues to be helpful in defining the terms used in the Uniform Act and the application of those principles.
In a Utah Supreme Court case, a party tried to argue it was a bona fide purchaser under Utah Code § 25-1-13 to defeat a fraudulent conveyance claim. Without specifically addressing whether being a bona fide purchaser was the applicable standard, the court stated, "It is notice, not knowledge, that the purchaser must have, and it need not be actual notice—constructive notice is sufficient to defeat the purchaser's claim." Meyer v. Gen. Am. Corp., 569 P.2d 1094, 1097 (Utah 1977).
