Thomas D. Stalnaker v. DLC, LTD.

United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT
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No. 03-6010NE
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In re: *
*
DLC, Ltd., a Nebraska Corporation *
*
Debtor *
*
Thomas D. Stalnaker, Trustee *
*
Plaintiff-Appellee * Appeal from the United States
* Bankruptcy Court for the
v. * District of Nebraska
*
DLC, Ltd., a Nebraska Corporation; *
DLC Family Trust, Ltd., *
a Nebraska Corporation *
*
Defendants-Appellants *
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Submitted: May 21, 2003
Filed: June 18, 2003 (Corrected July 11, 2003)
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Before KRESSEL, Chief Judge, SCHERMER and DREHER, Bankruptcy Judges.
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KRESSEL, Chief Judge.
DLC, Ltd. and DLC Family Trust, Ltd. appeal from the order of the bankruptcy
1
court allowing the trustee to avoid certain fraudulent transfers and recover a portion
of the transferred property. They also appeal from the bankruptcy court’s order
allowing fees and expenses to the trustee and his attorneys. We affirm.
BACKGROUND
For a number of years, the debtor, DLC, Ltd., operated a farming operation in
Tilden, Nebraska. DLC purchased various crop inputs from Central Farmers
Cooperative, Nonstock one of which was herbicide for its crops. In August of 1991,
Cooperative filed a fertilizer lien with the county clerk of Antelope County. Several
fertilizer liens were also filed in Madison and Pierce Counties. In 1991, DLC
discovered that Cooperative had over-applied herbicide on its crops during at least
the years of 1989, 1990, and 1991. In 1991, DLC experienced a hail storm on one
farm, for which Blakely Crop Hail, Inc. provided insurance coverage.
Negotiations were undertaken between DLC and Cooperative for damages. On
April 20, 1992, Cooperative filed a lawsuit in the Antelope County District Court of
Nebraska against DLC seeking to foreclose certain fertilizer liens in order to recover
amounts due to it for goods and services provided to DLC. Cooperative named Fort
Calhoun State Bank as a defendant because the bank might assert an interest in the
crops covered by Cooperative’s liens. DLC filed an answer in which it generally
denied the allegations of the complaint and asserted that the bank had lien rights prior
to those of Cooperative. It also asserted defenses under the Uniform Commercial
Code.
On June 24, 1993, Cooperative filed a motion for partial summary judgment.
In an order dated August 26, 1993, the district court granted partial summary
1
The Honorable Timothy J. Mahoney, United States Bankruptcy Judge for the
District of Nebraska.
2
judgment to Cooperative, finding that DLC was indebted to Cooperative on its open
account in the sum of $15,841.59 as of March 12, 1992, together with interest. The
court also found that the affirmative defenses raised by DLC were conclusions of law
and that no facts were alleged in support of the conclusions. On September 2, 1993,
DLC filed a motion for a new trial, which was denied on October 12, 1993. This
decision was appealed to the Nebraska Court of Appeals. In 1995 the Court of
Appeals found there were genuine issues of material fact for trial, reversed the
District Court’s decision, and remanded the case to the district court for further
proceedings.
In July of 1992, DLC filed a lawsuit against Cooperative in the U.S. District
Court for the District of Nebraska, alleging that Cooperative violated the Racketeer
Influenced and Corrupt Organizations Act by fraudulently inducing DLC to purchase
and apply excessive herbicide. The district court dismissed the RICO action, holding
that DLC could not prove its case. This decision was affirmed by the Eighth Circuit
Court of Appeals in Demerath Land Co. v. Sparr, 48 F.3d 353 (8th Cir. 1995).
After its RICO action was dismissed, DLC moved to amend its answer in
Cooperative’s lawsuit in Antelope County District Court and to file a counterclaim
against Cooperative for negligence in over-applying the herbicide. The request was
denied. On March 4, 1997, the District Court of Antelope County found for
Cooperative based on a Confession of Judgment and Stipulation, and found that
Cooperative was entitled to a judgment for $27, 127.22 together with interest thereon
at 16% per annum on the unpaid balance from February 28, 1997.2 Nothing in the
judgment addressed the other issues contained in Cooperative’s petition concerning
its lien rights and priorities. On April 1, 1997 DLC appealed the decision to the
2
DLC maintains that at no time did Cooperative ever attempt to join Family
Trust in the lawsuit, and that with the full knowledge that Family Trust owned the
assets of DLC, Cooperative ultimately took and received a judgment against DLC
only for its alleged debt.
3
Nebraska Supreme Court. The appeal was summarily dismissed by the Nebraska
Supreme Court on April 14, 1999.
In May of 1993, the shareholders of DLC created DLC Family Trust, Ltd., and
DLC transferred, among other things, several parcels of real estate to Family Trust.
As partial consideration for the transaction, Family Trust executed and delivered to
DLC a promissory note in the amount of $84,213. Although, thereafter, DLC and
Family Trust filed tax returns reflecting that such transactions took place, and
although one or the other of the entities notified various county recording offices as
well as an office of the U.S. Department of Agriculture that the transactions took
place, no deeds were prepared, delivered, or recorded representing conveyance of the
real estate until March 24, 1994.
On November 23, 1994, following the recording of the deeds conveying the
real estate, three lawsuits were filed by Fort Calhoun State Bank against DLC, Family
Trust and others. Those suits alleged that the real estate conveyances were fraudulent
transfers under the Nebraska Uniform Fraudulent Transfer Act. Each of the Fort
Calhoun State Bank suits were resolved by settlement. The court entered an Order of
Dismissal in each case. No trial was held and no judgments were entered.
On July 5, 1995, DLC, assigned to Family Trust all claims and demands which
it had concerning the herbicide damage claim for the years of 1989, 1990, and 1991;
the hail insurance claim for the year 1991, and a wrongful replevin or taking of
personal property claim. DLC also forgave the $84,213 promissory note. As
consideration for the transfer of the claims and the cancellation of the indebtedness,
Family Trust agreed to prosecute the three claims. The assignment was also subject
to the contingency that “if Trust collects from all claims an accumulated total sum
greater than the amount of the note...any accumulated interest on said note...and the
total amount of any fees and expenses expended and paid by the Trust in collection
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efforts, then DLC shall receive from Trust a payment equal to twenty five percent
(25%) of such excess proceeds.”
In 1995, two tax foreclosure suits were commenced by the County of Madison,
Nebraska against Cooperative 3 and Family Trust in Madison County district court.
In its answer, Cooperative claimed that the transfer of the property amounted to a
voidable transfer under the Uniform Fraudulent Transfer Act, §§ 36-701-36-712. In
September of 1995, the taxes were paid and the foreclosure actions dismissed. An
order of dismissal with prejudice was entered on September 14, 1995.
In June of 1995, DLC filed suit against Blakely for the hail damage caused to
its crops in 1991. DLC filed bankruptcy on September 2, 19974, which stayed the
proceedings in the Blakely case. In January of 1999, Blakely, joined by DLC and
Family Trust, moved for relief from the automatic stay. The bankruptcy court granted
this motion and the matter was ultimately resolved between Blakely and Family Trust
on May 4, 2000, with Blakely paying Family Trust a net settlement of $26,750.
In December of 1998, the trustee filed a complaint against DLC5 and Family
Trust under 11 U.S.C. § 544(b) to avoid the transfers, the assignments and the
promissory note forgiveness as fraudulent under the Nebraska Uniform Fraudulent
Transfer Act, §§ 36-701-36-712 and asked that the transfers be recovered under 11
U.S.C. § 550. The trustee also requested that the bankruptcy court declare Family
Trust a mere continuation of DLC, that Family Trust be held liable for the debts and
3
Cooperative was named because it had filed a lien against the real estate.
4
Originally, DLC filed a chapter 7 case, but converted the case to a chapter 11
on December 23, 1997. The bankruptcy court converted the case back to chapter 7 on
September 10, 1998, and the appellee was appointed trustee.
5
Although the trustee named the debtor as a defendant, he sought no relief
against the debtor nor was any granted.
5
obligations of DLC, and that the assets of Family Trust be deemed property of the
bankruptcy estate. Finally, the trustee requested $84,213 principal, plus interest on
the promissory note. In their answer, DLC and Family Trust raised, among other
things, the defense of res judicata. They filed two motions for summary judgment
based on this defense.
Their first motion for summary judgment dealt with the effects of res judicata
upon Cooperative’s debt in the tax foreclosure suit where Cooperative first raised the
issue of fraudulent transfers. The bankruptcy court denied the appellants’ motion for
summary judgment, holding that an order that dismisses a case with prejudice but
does not pronounce judgment nor grant or deny relief is not a judgment and therefore
cannot be final. The appellants filed a motion for a new trial or rehearing, but the
bankruptcy court denied the motion and reiterated its holding that res judicata does
not apply to settlements that do not deny or grant any relief.
The appellants filed a second motion for summary judgment. This time, they
argued the effects of res judicata on Cooperative’s claim because of Cooperative’s
failure to join Family Trust as a necessary party in their suit to foreclose on the
fertilizer liens. The bankruptcy court also denied this motion.
On October 3, 2001, Cooperative, DLC, and Family Trust entered into a
settlement agreement that ended their ongoing lawsuits. The debtor then signed and
filed a “satisfaction of claim” indicating payment of the claim by the appellants and
their subrogation to Cooperative’s rights under the claim.
After settlement of the Cooperative claim, the trustee’s attorneys filed an
application for attorneys fees. The bankruptcy court ruled that the adversary
proceeding should move forward before the issue of attorneys fees was addressed.
The appellants filed a motion to dismiss, the plaintiff and defendants entered into a
Joint Preliminary Pretrial Statement, and a trial was held on February 26, 2002. The
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bankruptcy court concluded that because of the significant legal question before the
court and the unique posture of the fraudulent conveyance action, the parties should
attempt mediation, which proved unsuccessful.
On December 9, 2002, the bankruptcy court rendered its decision and held that
the evidence offered in the case was clear and convincing that the assets were
transferred with actual intent to hinder, delay, or defraud creditors, and that the
transfers were fraudulent under the Nebraska Uniform Fraudulent Transfer Act,
Neb.Rev.Stat. §§ 36-701 et. seq. It withheld entering judgment while the trustee and
his attorneys resubmitted their applications for fees. Over the objection of the
appellants, the bankruptcy court, on February 26, 2003, issued its order approving the
requested trustee and attorneys fees and expenses in the total amount of $58,280.25.
On the same date it entered judgment in the adversary proceeding allowing the trustee
to avoid the fraudulent transfers and recover a portion of the transferred property. On
March 6, 2003, the appellants timely filed a Notice of Appeal
Six claims have been filed: (1) Central Farmers Cooperative’s claim in the
amount of $29,327.05; (2) Central Farmers Cooperative’s claim in the amount of
$29,327.05; (3) Blakely Crop Hail, Inc.’s claim in the amount of $3,231; (4) U.S.
Trustee’s claim in the amount of $750; (5) Blakely Crop Hail, Inc.’s claim in the
amount of $3,231; and (6) Larry R. Demerath’s claim in the amount of $90,670.
Claims number two and five are clearly duplicative and the U.S. Trustee is not a
creditor.6
JURISDICTION
As we discussed in Moix-McNutt v. Coop (In re Moix-McNutt), 215 B.R. 405,
407 (B.A.P. 8th Cir. 1997), 28 U.S.C. § 158(a)(1) confers jurisdiction on a
6
To be a creditor, with certain exceptions not applicable here, an entity must
hold a pre-petition claim. See 11 U.S.C. § 101(10)(A).
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bankruptcy appellate panel to hear appeals from “final judgments, orders, and
decrees,” a small list of interlocutory orders and, in its discretion, other interlocutory
orders. Id. at 408 (citing 28 U.S.C. §§ 158(a)(2) and (3)). Like all courts we have a
duty to review our own jurisdiction. Nieters v. Sevcik (In re Rodriquez), 258 F.3d
757, 759 (8th Cir. 2001) (citing Olin Water Servs. v. Midland Research Labs., Inc.,
774 F.2d 303, 306 (8th Cir. 1985)).
We note that the trustee’s original complaint contained three counts. The
bankruptcy court, in the beginning of its opinion acknowledges the three counts, but
explicitly discussed and dealt only with the first count. Nevertheless, we believe that
the bankruptcy court’s judgment was final because it was after a trial on the merits
of the entire complaint, and although the bankruptcy court did not explicitly rule on
the other two counts, it is clear to us that both of those counts were implicitly denied
by the court, abandoned by the parties, or are now moot.
STANDARD OF REVIEW
We review the bankruptcy court’s factual findings for clear error and its
conclusions of law de novo. Blackwell v. Lurie (In re Popkin & Stern), 223 F.3d 764,
765 (8th Cir. 2000); Wendover Fin. Servs. v. Hervey (In re Hervey), 252 B.R. 763,
765 (B.A.P. 8th Cir. 2000).
11 U.S.C. § 544(b)
11 U.S.C. § 544(b) provides:
The trustee may avoid any transfer of an interest of the
debtor in property or any obligation incurred by the debtor
that is voidable under applicable law by a creditor holding
an unsecured claim that is allowable under section 502 of
this title or that is not allowable only under section 502(e)
of this title.
8
Bankruptcy trustees use section 544(b) as a conduit to assert state law-based
fraudulent conveyance actions in bankruptcy. Williams v. Marlar (In re Marlar), 267
F.3d 749, 753 (8th Cir. 2001) (citing Young v. Paramount Communications, Inc. (In
re Wingspread Corp.), 178 B.R. 938, 945 (Bankr.S.D.N.Y. 1995). Section 544(b) of
the Bankruptcy Code gives the bankruptcy trustee whatever avoiding powers an
unsecured creditor with an allowable claim might have under applicable state or
federal law. Id. at 754; In re Marlar, 252 B.R. 743, 753 (B.A.P. 8th Cir. 2000)
(quoting Blackwell v. Lurie (In re Popkin & Stern), 223 F.3d 764, 769 n. 11 (8th Cir.
2000)). Here, the applicable state law is the Nebraska enactment of the Uniform
Fraudulent Transfer Act.
In order to avail himself of the avoidance powers contained in section 544(b),
the trustee must show the existence of an actual unsecured creditor holding an
allowable unsecured claim who could avoid the transfer in question under the
provisions of the Nebraska Uniform Fraudulent Transfer Act. See Ries v. Wintz
Properties, Inc. (In re Wintz Co.), 230 B.R. 848, 859 (B.A.P. 8th Cir. 1999). The
trustee bears the burden of proving the existence of a qualified unsecured creditor,
and if the creditor is estopped or barred from recovery for some reason, so is the
trustee. In re Marlar, 252 B.R. at 754 (citing Brent Explorations, Inc. v. Karst Enter.,
Inc. (Brent Explorations, Inc.), 31 B.R. 745, 748 (Bankr.Colo. 1983)). The trustee is
subject to any defenses that could be asserted against the unsecured creditor. Id.(citing Belfance v. Bushey (In re Bushey), 210 B.R. 95, 100 (B.A.P. 6th Cir. 1997)).
Simply put, it is the trustee’s responsibility to: (1) identify an existing creditor;
(2) with an allowable claim; (3) who under non-bankruptcy law could avoid the
transfer, at least in part. Once the trustee has proven his case, the trustee, pursuant to
Moore v. Bay, 284 U.S. 4 (1931), as interpreted, may: (4) avoid the entire transfer
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(even if the creditor upon whom the trustee relies could avoid it only in part); and (5)
if necessary7, recover the property transferred or its value under 11 U.S.C. § 550(a).
RES JUDICATA
The appellants state that trustee is barred from bringing the section 544(b)
action because he is barred by res judicata due to the previous litigation involving the
appellants. Res judicata does not apply to the trustee. As we stated in In re Marlar:
“[T]he trustee in bankruptcy...represents all creditors.”...As
such, the trustee is not simply the successor in interest to
the debtor: he represents the interest of all creditors of the
debtor’s bankruptcy estate....
Because the trustee is invested with “extraordinary
rights...as a general representative of...creditors,” he is “not
bound, either on res judicata or judicial collateral estoppel
[grounds] by the prior state proceedings.”
In re Marlar, 252 B.R. at 757 (quoting Corzin v. Fordu (In re Fordu), 201 F.3d 693,
705 (6th Cir. 1999)). Moreover we held that, “[A] person cannot be barred from
litigating a claim unless he was a formal party or ‘in privity’ with a formal party to
the first action...[T]he trustee, who was neither a formal party...nor represented by a
party...[is not barred] from litigating this claim.” In re Marlar, 252 B.R. at 757(quoting Boyajian v. DeFusco (In re Giorgio), 62 B.R. 853, 862-863 (Bankr.D.R.I.
1986)). Thus, we are persuaded by the forgoing principles that the trustee in this case
is not barred by res judicata from pursuing the section 544(b) fraudulent transfer
action. The trustee was neither a party nor in privity with any pre-petition party. It
may be that the creditor’s claim is barred by res judicata in which case an element of
7
We say “if necessary” because sometimes, as in the case of the avoidance of
the grant of a security interest, avoidance is sufficient.
10
the trustee’s case is missing. This is really the point the appellants are trying to make
and we address it later.
CREDITOR ELIGIBILITY
In order to avail himself of the avoidance powers under 11 U.S.C. § 544(b), the
trustee must show the existence of at least one actual unsecured creditor with an
allowable unsecured claim who could avoid the transfer in question under the
provisions of the Nebraska Uniform Fraudulent Transfer Act. At the time the
bankruptcy case was filed, there were three creditors with allowable unsecured
claims: Cooperative, Blakely and Demerath. The appellants argue that the trustee
failed to prove the existence of a current unsecured creditor for purposes of 11 U.S.C.
§ 544(b). The appellants concede that two creditors initially qualified as unsecured
creditors: Blakely and Cooperative. However, the appellants argue that by the time
the case was filed, Cooperative was barred by principles of res judicata from bringing
a fraudulent transfer claim. They also argue that the time to determine the existence
of a qualifying creditor is at the time of trial, and by that time Cooperative and
Blakely were paid and Demerath had withdrawn his claim.
COOPERATIVE’S CLAIM
(RES JUDICATA REVISITED)
The appellants argue that the settlement of Cooperative’s claim in the lien
foreclosure action is equivalent to a final judgment on the merits for purposes of res
judicata and thus, under section 544(b), Cooperative could not avoid the fraudulent
transfers at issue and thus the trustee cannot use it as an eligible unsecured creditor.
The appellants also argue that before concluding its fertilizer lien foreclosure lawsuit
on March 4, 1997, Cooperative, who knew Family Trust owned the real estate of
DLC, had an obligation to join Family Trust as a necessary party or waive any cause
of action against Family Trust. Since Cooperative did not join Family Trust, the
appellants reason that Cooperative’s claim is barred by res judicata.
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Under the traditional rule of res judicata, or claim preclusion, any rights, facts,
or matters in issue directly adjudicated or necessarily involved in the determination
of an action before a competent court in which a judgment or decree is rendered upon
the merits, is conclusively settled by the judgment therein and cannot again be
litigated by the parties and privies. Gruber v. Gruber, 261 Neb. 914, 918, 626 N.W.2d
582, 585 (2001) (citing Schuelke v. Wilson, 255 Neb. 726, 587 N.W.2d 369 (1998)).
The doctrine of res judicata rests on the necessity to terminate litigation and on the
belief that a person should not be vexed twice for the same cause of action. Cole v.
Clarke, 10 Neb.App.981, 983, 641 N.W.2d 412, 415 (2002). The doctrine bars
relitigation not only of those matters actually litigated, but also of those matters which
might have been litigated in an earlier proceeding if (1) the former judgment was
rendered by a court of competent jurisdiction; (2) the former judgment was a final
judgment; (3) the former judgment was on the merits; and (4) the same parties or their
privies were involved in both actions. Hangman v. Bruening, 247 Neb. 769, 771-772,
530 N.W.2d 247, 249 (1995) (citing Wicker v. Vogel, 246 Neb. 601, 521 N.W.2d 907(1994); Smith v. Smith, 246 Neb. 193, 517 N.W.2d 394 (1994); Dakota Tile v. World-
Wide Steel Sys., 238 Neb. 519, 471 N.W.2d 430 (1991). Moreover, res judicata
operates to generally bar every question which was or might have been presented and
determined in the first action. In re Marcus, 11 Neb. App. 313, 323, 649 N.W.2d 899,
909 (2002).
The appellants argue that Simpson v. City of North Platte, 215 Neb. 351, 354,
338 N.W.2d 450, 452 (1983), and Kuskie v. Adams Bank & Trust of Madrid, 248 Neb.
18, 531 N.W.2d 921 (1995), mandate application of res judicata to Cooperative’s
claim of fraudulent transfer avoidance, while the trustee cites J.K. v. Kolbeck, 257
Neb. 107, 595 N.W.2d 875 (1999), in arguing that it does not.
While the parties argue over whether a dismissal order can have res judicata
effect, we do not think that is really the issue. Dismissals sometimes are on the merits
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and sometimes are not. However, as the Nebraska Supreme Court has consistently
held:
The doctrine of res judicata is based on the principle that a
final judgment on the merits by a court of competent
jurisdiction is conclusive upon the parties in any later
litigation involving the same cause of action.
Simpson, 215 Neb. at 354; Kuskie, 248 Neb. at 23. The judgment against the debtor
on a contractual debt is in no way the same cause of action as a fraudulent transfer
avoidance action against Family Trust.
As to the tax foreclosure actions by Madison County, appellants claim that
Cooperative “characterized” the transfers as fraudulent. That is a far cry from
asserting a fraudulent transfer avoidance action. In any case, the dismissal of the
foreclosure action because it was rendered moot is not the type of judgment “on the
merits” entitled to res judicata effect.
The fact that Cooperative did not join Family Trust in its state lawsuit against
DLC does not bar future litigation against Family Trust due to res judicata. It is the
duty of the plaintiff in a lawsuit to join all persons who have or claim an interest
which could be affected by the judgment. Battle Creek State Bank v. Preusker, 253
Neb. 502, 511-512, 571 N.W.2d 294, 301 (1997) (citing Robertson v. School Dist.
No. 17, 252 Neb. 103, 560 N.W.2d 469 (1997)). An indispensable or necessary party
to a suit is one who has an interest in the controversy to an extent that such party’s
absence from the proceeding prevents a court from making a final determination
concerning the controversy without affecting such party’s interest. Id.The fact that in May of 1993 Family Trust received substantially all of the real
estate once owned by DLC, although such transfers were not recorded until March
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of 1994, did not qualify Family Trust as an indispensable or necessary party in the
April 1992 state lawsuit between Cooperative and DLC. The failure of Cooperative
to join Family Trust in the state lawsuit did not affect Family Trusts’ rights or
interests because a money judgment was entered in favor of Cooperative against DLC
personally on March 4, 1997. No determination of lien priority involving land owned
by Family Trust was made or discussed in the March 4, 1997 judgment.
In the previous actions involving Cooperative and the debtor, the court did not
grant nor deny relief and did not pronounce a judgment. When one applies applicable
precedent, it is evident the bankruptcy court did not err when it held that res judicata
did not apply to Cooperative. The trustee took over the rights of this creditor upon the
filing of the bankruptcy petition to avoid the fraudulent transfers, and those rights do
not change based on the post-petition actions of the transferee.
BLAKELY’S AND DEMERATH’S CLAIMS
In any case, Blakely and Demerath qualified as eligible unsecured creditors.
The appellants do not argue that Blakely or Demerath were barred by principles of
res judicata from bringing an avoidance action. Thus, the trustee also took over the
rights of these creditors upon the filing of the bankruptcy petition.
TIMING UNDER SECTIONS 544(b)
Next we address what we think is the appellants’ principal argument. They
argue that by the time of trial, the claims of Cooperative and Blakely had been
satisfied and Demerath’s claim had been withdrawn and therefore, there were no
eligible creditors and the trustee’s case fails. We disagree.
Section 544(b)(1) allows the trustee to avoid transfers of the debtor in property
that is voidable under applicable law by a creditor holding an unsecured claim that
is allowable under section 502. See 11 U.S.C. § 544(b)(1). Section 502(a) allows a
claim or interest unless a party in interest objects. Section 502(b) states: “If such an
14
objection to a claim is made, the court...shall determine the amount of such claim in
lawful currency of the United States as of the date of the filing of the petition...” 11
U.S.C. § 502(b) (emphasis added). The date of the filing of the petition is important
because it generally fixes the rights of the estate and other parties in interest.
Congress and courts commonly refer to the date of the bankruptcy petition as the
“date of cleavage.” See Mickelson v. Detlefsen (In re Detlefsen), 610 F.2d 512, 519
(8th Cir. 1979). While there are exceptions, the rights of the debtor and other parties
in interest are generally fixed as of that date.
As of the date of the filing of the petition, there were creditors holding
unsecured claims that were allowable under section 502, and the transfers were
avoidable by those creditors. The existence of such creditors as of the date of the
filing of the petition is undisputed. On the date of the filing of the petition in this
case, the trustee could have brought an avoidance action under section 544, the
recovery from that avoidance would have been property of the estate, and would have
been distributed to all of the estate’s creditors. It is inconsistent with the Bankruptcy
Code to allow a transferee of a fraudulent transfer to defeat the bankruptcy trustee by
paying a couple of creditors. The potential for abuse is obvious.
Thus, we hold, as have other courts analyzing this issue, that the trustee must
identify a creditor with an allowable unsecured claim who had an allowable claim
against the debtor on the date the bankruptcy petition was filed. Acequia, Inc. v.
Clinton (In re Acequia, Inc.), 34 F.3d 800, 907 (9th Cir. 1994); see also Karnes v.
McDowell (In re McDowell), 87 B.R. 554, 558 (Bankr.S.D.Ill. 1988) (stating that the
trustee’s action against the defendant depends on whether there was a creditor
existing at the time the transfers were made that still had a viable claim against the
debtor at the time the bankruptcy petition was filed). If the trustee can find such a
creditor at the time the petition is filed, the trustee takes over those rights.
15
We note in passing that we are not satisfied that the appellants’ factual
assumptions are correct. While the parties assume the Demerath claim has been
withdrawn, we find nothing in the record to support that assumption. The so-called
“satisfaction of claim” of Cooperative was not signed or filed by Cooperative but by
the debtor. It also indicated that the appellants were subrogated to Cooperative’s
rights. Notably, the claim was not withdrawn. Likewise, the settlement with Blakely
does not explicitly satisfy Blakely’s claim or withdraw it.
Since the trustee has proven the existence of an actual unsecured creditor
holding an allowable unsecured claim at the time the bankruptcy petition was filed,
and has proven that the transfers are voidable under the Nebraska Uniform Fraudulent
Transfer Act, the trustee has met his burden under section 544(b). The appellants do
not challenge the bankruptcy court’s findings that the transfers were fraudulent.
RECOVERY
Once the requirements of section 544(b) have been met, 11 U.S.C. 550(a)
states: “To the extent that a transfer is avoided under section...544...of this title, the
trustee may recover, for the benefit of the estate, the property transferred, or, if the
court so orders, the value of such property.” Once the trustee identifies a transfer
avoidable by an eligible creditor, is the entire transfer avoidable or may the trustee
recover only the amount necessary to satisfy the creditor’s claim? The case of Moore
v. Bay, 284 U.S. 4, 52 S.Ct. 3, 76 L.Ed. 133 (1931) and subsequent cases interpreting
Moore address this issue.
11 U.S.C. §§ 544(b) and 550(a) of the Code are codifications of the Supreme
Court’s decision in Moore v. Bay, 284 U.S. 4 (1931). In enacting section 544(b),
Congress expressly rejected limiting the estate’s recovery to the amount of a
particular creditor’s claims. Committee. of Unsec. Creditors of Interstate Cigar Co.,
Inc. v. Interstate Distrib., Inc. (In re Interstate Cigar Corp., Inc.), 278 B.R. 8, 18
(Bankr.E.D. N.Y. 2002). As the court in C.F. Foods, L.P. stated:
16
When enacting the Bankruptcy Code of 1978, the
Committee Report for section 544(b) stated Congress’
intent was to retain the controversial rule of a 1931 U.S.
Supreme Court case, Moore v. Bay... which held that a
trustee could avoid an entire transfer without regard to the
size of the claim of the unsecured creditor whose rights and
power the trustee was asserting. “In other words, an entire
transfer can be set aside even though the creditor’s claim is
nominal and, moreover, the recovery of the trustee is for
the benefit of all creditors including those who had no right
to avoid the transfer.”
Liebersohn v. Internal Revenue Serv. (In re C.F. Foods, L.P.), 265 B.R. 71, 86
(Bankr.E.D.Pa. 2001) (citing 5 Collier on Bankruptcy ¶ 544.09 [5] (1998)). Similarly,
the court in In re Pearson Indus., Inc. stated that “the language of 550(a) which
specifies that a trustee may recover ‘for the benefit of the estate’ [the property
transferred or its value], codifies the rule in Moore v. Bay, that a recovery made by
the trustee is for the benefit of all unsecured creditors in accordance with the
distributive provisions of bankruptcy law and not merely for the benefit of those
outside bankruptcy.” Indus. and Mun. Eng’g, Inc. v. McCord Auto Supply, Inc. (In re
Pearson Indus., Inc.), 178 B.R. 753, 756, n. 4 (Bankr.C.D.Ill. 1995) (citing 4 Collier
on Bankruptcy, ¶ 550.02. p. 550-6-550-7, n. 3 (15th ed. 1994)).
“The Moore case contains two holdings: (1) that any property recovered by the
trustee comes back into the estate for the benefit of all the unsecured creditors, not
just those named as plaintiffs; and (2) improper transfers may be avoided in their
entirety, regardless of the relationship between the size of the transfer and the amount
of the unsecured claims.” Pajaro Dunes Rental Agency, Inc. v. Spitters (In re Pajaro
Dunes Rental Agency, Inc.), 174 B.R. 557, 595-596 (Bankr.N.D.Cal 1994) (citing
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Vadnais Lumber Supply, Inc. v. Byrne (In re Vadnais Lumber Supply, Inc.), 100 B.R.
127, 134 (Bankr.D.Mass 1989); Collier ¶ 548.03 at 548-54).
Moreover, the court in In re Serrato stated that although state law limits a
creditor’s recovery in a fraudulent transfer action to the amount necessary to satisfy
the creditor’s claim, this is not controlling in bankruptcy. Decker v. Voisenat (In re
Serrato), 214 B.R. 219, 231 (Bankr.N.D.Cal 1997). The Bankruptcy Code separates
the concepts of avoiding a transfer and recovering it from the transferee. Id. (citing
In re Acequia, Inc., 34 F.3d at 808 (citing H.R. Rep.No. 595, 95th Cong. 1st Sess. 375
(1977)). The Serrato court stated that “Although the trustee has demonstrated her
right to recover under state law, she must still establish the amount of recovery
pursuant to section 550(a) of the Code. Id. The court went on to state that the purpose
and thrust of section 550 is to restore the debtor’s financial condition to the state it
would have been had the transfer not occurred. Id. (citing Reiber v. Baker (In re
Baker), 17 B.R. 392, 395 (Bankr.W.D.N.Y. 1982); Aero-Fastener, Inc. v. Sierracin
Corp. (In re Aero-Fastener, Inc.), 177 B.R. 120, 139 (Bankr.D.Mass. 1994) (and
cases cited therein). The Acequia court recognized that “[a] transaction that is
voidable by a single, actual unsecured creditor [under 544(b)] may be avoided in its
entirety, regardless of the size of the creditor’s claim. In re Acequia, 34 F.3d at 809.
Thus, we are persuaded by the forgoing principles that the trustee may recover
the entire fraudulent transfer under section 550(a). In this case, the bankruptcy court
allowed the trustee to recover only part of the transfer sufficient to pay administrative
expenses. The trustee has not appealed the judgment nor made an issue of the limited
recovery.
BENEFIT OF THE ESTATE
The appellants argue, however, that the avoided transfers may not be recovered
at all because the transfers may only be recovered for the benefit of the estate.
Whether the estate is benefitted depends on a case by case, fact specific analysis.
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Wellman v. Wellman, 933 F.2d 215, 218 (4th Cir. 1991). The appellants argue that
because there may be no unsecured creditors of the estate, the estate cannot be
benefitted.
The appellants seem to treat the estate and its unsecured creditors as
synonymous. Such a characterization is incorrect. “Estate” is a statutory term that
Congress uses to denote the asset side of the bankruptcy balance sheet. 11 U.S.C. §
541 defines what constitutes property of the estate and what can be credited to the
asset account. In virtually every case, recovery of any property benefits the estate. In
fact, section 541(a)(3) specifically includes in the estate property recovered under
section 550. Creditors are on the opposite side of the balance sheet.
The appellants refer us to Harstad v. First Am. Bank (In re Harstad), 39 F.3d
898 (8th Cir. 1994) for the proposition that benefit to the estate and benefit to
creditors are synonymous. However, they misinterpret Harstad. In Harstad, the
Eighth Circuit was addressing the situation in a chapter 11 case after a plan was
confirmed, revesting property in the debtors, thereby eliminating the estate. The
questions confronting the court was this: “What does it mean to benefit the estate in
a situation where there was no estate?” The Eighth Circuit held: “there is no post-
confirmation bankruptcy estate here to be benefitted–directly or indirectly. Therefore
we agree with the courts below that we must look to see whether the Harstads’ action
would result in any benefit to creditors.” Harstad, 39 F.3d at 904.
Since this is a chapter 7 case, the analysis is simple and straightforward. There
is an estate, the recovery of the property is added to the estate, and recovery is for the
benefit of the estate.
11 U.S.C. § 704The appellants argue that sections 544(b) and 550(a), whose collective purpose
is to benefit the estate, must be read in conjunction with section 704(1), which
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requires the trustee to collect and reduce to money the property of the estate for which
such trustee serves, and close such estate as expeditiously as is compatible with the
best interest of the parties in interest. While we do not disagree with this premise, we
find nothing in section 704 that would override the provisions of sections 544 or 550.
FEES
The appellants complain that the order allowing attorney fees and trustee’s fees
violates the so called “American Rule.” They argue that the trustee brings his
adversary proceeding under Nebraska Uniform Fraudulent Transfer Act in which
there is no provision for attorney fees. The appellants further argue that Nebraska
follows the American Rule, which states that attorney fees and expenses may be
recovered in a civil action only where provided for by statute or when a recognized
and accepted uniform course of procedure has been to allow recovery of such fees.
The American Rule is not really an issue in this case. The bankruptcy court did
not award the trustee and his attorneys fees in the adversary proceeding for
prevailing. It awarded them their fees and expenses under 11 U.S.C. § 330 which
allows the trustee and his attorneys to recover fees and expenses from the estate.
The appellants also challenge the reasonableness of the fees awarded. 11
U.S.C. § 330(a) allows a court to award a trustee or a professional person:
(1) reasonable compensation for actual, necessary services
rendered...based on the nature, extent, and value of such
services, the time spent on such services, and the cost of
comparable services other than in a case under this title;
and
(2) reimbursement for actual, necessary expenses.
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11 U.S.C. § 330(a). In calculating the appropriate compensation, the lodestar
approach, including the possibility of adjustments in rare and exceptional
circumstances, is an appropriate method to use in calculating reasonable
compensation under § 330. Chamberlain v. Kula (In re Kula), 213 B.R. 729, 736
(B.A.P. 8th Cir. 1997). The lodestar method is calculated as the number of hours
reasonably expended multiplied by a reasonable hourly rate. Id. Determinations as to
necessity, reasonableness, etc., involve questions of fact. The bankruptcy court’s
decision to award fees are reviewed for an abuse of discretion. Grunewaldt v. Mut.
Life Ins. Co. (In re Coones Ranch, Inc.), 7 F.3d 740, 744 (8th Cir. 1993). Moreover,
judges are justified in relying on their own knowledge of customary rates and
experience concerning reasonable and proper fees, without the need for independent
evidence. Bachman v. Pelofsky (In re Peterson), 251 B.R. 359, 365 (B.A.P. 8th Cir.
2000). The appellants do not question the number of hours spent by either the trustee
or his attorneys, nor the reasonableness of their rates. Rather, they argue that their
efforts did not benefit the estate, in part, based on their earlier argument that there is
no estate.
The appellants’ argument that the trustee’s attorneys services must benefit the
estate is an incorrect characterization of the standard. Section 330 contains no
requirement that the attorneys’ services benefit the estate. Section 330(a)(3)(A) states:
In determining the amount of reasonable compensation to
be awarded, the court shall consider the nature, the extent,
and the value of such services, taking into account all
relevant factors, including–
(A) the time spent on such services;
(B) the rates charged for such services;
(C) whether the services were necessary to the
administration of, or beneficial at the time at which the
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service was rendered toward the completion of, a case
under this title;
(D) whether the services were performed within a
reasonable amount of time commensurate with the
complexity, importance, and nature of the problem, issue,
or task addressed; and
(E) whether the compensation is reasonable based on the
customary compensation charged by comparably skilled
practitioners in cases other than cases under this title.
11 U.S.C. § 330(a)(3)(A). 11 U.S.C. § 326(a) also contains a monetary limit on the
trustee’s compensation. Based on these standards and limitations, the bankruptcy
court awarded the trustee $64.23 for expenses and $3,461.35 for fees, and the
attorneys for the trustee $2,028.67 for expenses and $52,726 for fees.
The bankruptcy court found that the trustee was challenged by the appellants
at every turn, causing litigation expenses to explode. The court also found that the
trustee and his counsel cannot be blamed for pursuing the litigation even in the face
of vociferous opposition from the appellants, because the trustee had a good case, and
until late 2001, there were claims to be paid. Although the fee may be somewhat high,
the bankruptcy court found that, under the unique circumstances of this case, the legal
services were necessary and reasonable, and that the estate was benefitted even if in
the end it appears the only persons who will receive compensation is the trustee and
counsel. Had the trustee not pursued the litigation, it was unlikely the debtor would
have had an incentive to settle with the creditor. Such findings by the bankruptcy
court are not clearly erroneous, and the awarding of trustee’s fees and attorney fees
was not as an abuse of discretion.
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CONCLUSION
Because the bankruptcy court did not err in allowing the trustee to avoid and
recover the fraudulent transfers, and did not err in allowing attorney fees for the
trustee and his attorneys, we affirm.
A true copy.
Attest:
CLERK, U.S. BANKRUPTCY APPELLATE
PANEL, EIGHTH CIRCUIT.
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