[1] |
UNITED STATES COURT
OF APPEALS FOR THE FIFTH CIRCUIT
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[2] |
No. 01-30454,, No.
01-30455
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[3] |
Keywords: fraudulent
transfer, 548(c), good faith, reasonably equivalent value, 548(a)(1)(B)(i)
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[4] |
October 29, 2002
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[5] |
IN THE MATTER
OF: HANNOVER CORPORATION; REDWOOD RAEVINE CORP.; RUBICON XXI CORP.; PLACE
VENDOME, INC.; PLACE VENDOME CORPORATION OF AMERICA; PENZANCE, INC.; AND
ATG, INC., DEBTORS
JIMMY SWAGGART MINISTRIES, APPELLANT,
v.
WILLIAM G. HAYES, JR., APPELLEE.
WILLIAM G. HAYES, JR., APPELLEE,
v.
JIMMY SWAGGART MINISTRIES, APPELLANT.
IN THE MATTER OF: HANNOVER CORPORATION; REDWOOD RAEVINE CORP.; RUBICON
XXI CORP.; PLACE VENDOME, INC.; PLACE VENDOME CORPORATION OF AMERICA;
PENZANCE, INC.; AND ATG, INC., DEBTORS
WILLIAM G. HAYES, JR., APPELLEE,
v.
GEORGE RUSSELL; JIMMY SWAGGART MINISTRIES, APPELLANTS.
JIMMY SWAGGART MINISTRIES, APPELLANT,
v.
WILLIAM G. HAYES, JR., APPELLEE.
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[6] |
Appeals from the
United States District Court for the Middle District of Louisiana
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[7] |
Before Davis, Jones
and Smith, Circuit Judges.
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[8] |
The opinion of the
court was delivered by: Edith H. Jones, Circuit Judge
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[9] |
This is an adversary
proceeding brought by William G. Hays, Jr. ("Hays"), trustee
of the debtors' bankruptcy estate, to recover $2,472,500 paid by the debtors
to Jimmy Swaggart Ministries ("JSM") from July 1990 to July
1992. Hays argues -- and JSM contests -- that these transfers can be avoided
as actual and/or constructive fraudulent conveyances under 11 U.S.C. §
548(a). JSM additionally claims the "good faith" defense of
11 U.S.C. § 548(c). For the reasons that follow, this court finds that
JSM met the requirements of § 548(c) and the criteria for a comparable
defense under Louisiana law. Accordingly, we need not reach the other
issues raised on appeal. The district court's 1999 reversal of the bankruptcy
court's 1995 judgment must be reversed, and judgment must be entered in
favor of JSM.
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[10] |
FACTS
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[11] |
The debtors in this
case are a number of corporations created and controlled by Sam J. Recile
("Recile") for the purpose of developing a shopping mall in
Baton Rouge, Louisiana. Critical to the success of this project was Recile's
acquisition of a tract of land owned by JSM. In July 1990, one of Recile's
corporations entered into an option agreement for purchase of a 68-acre
tract of JSM's land in Baton Rouge, Louisiana. The stipulated purchase
price was $11,250,000. For the next two years Recile made payments totaling
$2,435,000 on this and subsequently renegotiated agreements as he sought
to obtain financing for the project. No purchase ever occurred.
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[12] |
Although call option
contracts on real estate are common enough, Recile's behavior was not.
He offered to prospective investors short-term double-your-money-back
promissory notes to finance his project. The nominal party on Recile's
side of the option arrangement changed frequently. Payments to JSM were,
in later stages of the relationship, made on a weekly or daily basis --
sometimes in cash, sometimes with counter-signed third-party checks. Most
notably, Recile came under SEC investigation, a complaint being filed
in April 1991 in the United States District Court for the Eastern District
of Louisiana. JSM was not a party to this action.
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[13] |
Over the next fifteen
months the supervising district judge issued a variety of orders, each
of which allowed the debtor corporations to continue making payments on
this and other options. Eventually, in July 1992, the court entered an
order granting the SEC broad injunctive relief that, among other things,
appointed Hays as receiver for the debtors. See SEC v. Recile, 10 F.3d
1093 (5th Cir. 1993) (affirming district court's grant of SEC's motion
for summary judgment). In September 1992, Hays filed voluntary Chapter
11 bankruptcy petitions on behalf of the debtors.
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[14] |
In February 1994,
Hays filed this action in bankruptcy court, seeking to avoid a total of
$2,472,500 in pre-petition payments made by the debtors to JSM. Following
an extensive bench trial with multiple witnesses, Judge Jerry A. Brown,
the bankruptcy judge, ruled in favor of JSM on all of Hays's claims in
this action. The court concluded that, although there was ample evidence
that Recile had engaged in illegal activities, there was "no substantial
evidence that JSM was a party to, knew of, or was put on notice of sufficient
facts, that it should have known of such illegal activities when it accepted
the numerous transfers of money and agreed to allow the debtors to tie
up valuable real estate for the lengthy amount of time here involved."
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[15] |
Hays appealed to
the district court. Three and a half years later, that court reversed
and remanded the bankruptcy court's decision. On remand, the bankruptcy
court granted Hays's motion for judgment in his favor, but declined to
award pre-judgment interest. On appeal, the district court reversed the
bankruptcy court's denial of pre-judgment interest. JSM filed notices
of appeal to this court, the district court entered an amended judgment,
and JSM filed a third notice of appeal. The appeals have been consolidated.
*fn1
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[16] |
DISCUSSION
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[17] |
I. The district court
erred in reversing the bankruptcy court's conclusion that JSM had satisfied
the elements of the good faith defense under 11 U.S.C. § 548(c).
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[18] |
With 11 U.S.C. §
548(c), Congress provided to transferees a defense against a trustee's
(or debtor's) successful demonstration of an actual or constructive fraudulent
transfer under, respectively, § 548(a)(1)(A) and § 548(a)(1)(B) of the
Bankruptcy Code. 11 U.S.C. § 548(c) states in pertinent part:
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[19] |
[A] transferee or
obligee of such a transfer or obligation that takes for value and in good
faith has a lien on or may retain any interest transferred . . . to the
extent that such transferee or obligee gave value to the debtor in exchange
for such transfer or obligation. The burden of proof is on the defendant
transferee. See In re M. & L. Bus. Mach. Co., Inc., 84 F.3d 1330 (10th
Cir. 1996); In re Agric. Research & Tech. Group, 916 F.2d 528 (9th
Cir. 1990). To avail himself of this defense, the transferee must demonstrate
that he "[took] value in good faith." To keep what he received,
he must subsequently demonstrate that he "gave value."
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[20] |
Hays argues that
Recile's corporations made actual and/or constructive fraudulent transfers
to JSM under § 548(a). JSM argues that these payments were not fraudulent.
It also argues, in the alternative, that it is protected by the defense
provision found in § 548(c). Because this court holds that JSM satisfied
the terms of § 548(c), we need not undertake an evaluation of Hays's assertion
that the transfers were actually and/or constructively fraudulent under
§ 548(a).
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[21] |
A. Good Faith
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[22] |
In an appeal from
a district court reversal of a bankruptcy court judgment, this court should
"perform the same appellate review as did the district court: [the
appellate court] examine[s] the bankruptcy court's findings of fact under
the clearly erroneous standard, and [the appellate court] examine[s] that
court's legal determinations under the de novo standard." In re Sewell,
180 F.3d 707, 710 (5th Cir. 1999).
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[23] |
The dispute regarding
JSM's "good faith" under § 548(c) comes to this court as a question
of first impression. In the absence of clear factual error or controlling
legal precedent, we decline the invitation to overturn the trial court's
finding that JSM received Recile's payments in "good faith."
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[24] |
As courts and commentators
frequently note, the bankruptcy code does not define "good faith"
and the statute's legislative history is quite thin. 5 COLLIER ON BANKRUPTCY
¶548.07[2][a] (2002). Moreover, there is little agreement among courts
as to what conditions ought to allow a transferee this defense. Id. This
is not surprising, as the variables are manifold.
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[25] |
The most important
set of questions concerns the transferee's state of mind. First, what
level of knowledge -- knowledge itself or some form of notice -- vitiates
a claim of "good faith"? Second, need the knowledge be actual
or merely constructive? Third, what duty of inquiry does notice impose?
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[26] |
The first set of
questions begs the second: Knowledge of what? Of the transferor's insolvency,
fraudulence, or both? If insolvency, then of what degree -- actual, imminent,
or potential? If fraudulence, then regarding what transactions -- the
enterprise involving the transferee or any of the transferor's dealings?
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[27] |
Regarding the second
set of questions -- the debtor corporations' insolvency and fraudulence
-- there is no reason to disagree with the bankruptcy court. The debtor
corporations were insolvent ab initio. They also made fraudulent representations
to investors, though not necessarily at the outset. Moreover, Recile's
fraudulence pertained to the JSM land deal itself, not to some unrelated
transaction. Without an option on JSM's land, Recile could not have perpetrated
his fraud upon his investors. The transferor was engaged in a crooked
scheme.
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[28] |
The heart of the
bankruptcy court's conclusion lies, then, in the first set of questions
-- the transferee's state of mind. Once again, bankruptcy court's findings
are comprehensive, cogent, and entitled to the respect due them under
the clear error standard. We point here only to the most telling out of
a voluminous list of findings. With regard to JSM's knowledge of the debtor
corporations' insolvency, the bankruptcy court found that
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[29] |
"[a]t the time
the transfers occurred, JSM had no way of knowing that the debtors were
insolvent." With regard to JSM's knowledge of the debtor corporations'
fraudulent activities, Judge Brown found that JSM had read newspaper accounts
of the SEC's suit against Recile. Finally, with regard to JSM's duty of
inquiry, Judge Brown found that JSM, upon reading -- and being duly alarmed
by -- these newspaper stories, undertook its own investigation, contacting
the SEC and the federal district court, eventually receiving assurances
from the district court that JSM could continue to receive option payments
from Recile's corporations.
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[30] |
Based on its findings,
the bankruptcy court's resultant legal conclusion is unproblematic. As
noted above, there is little agreement among courts regarding the appropriate
legal standard for this defense, because "[t]he unpredictable circumstances
in which the courts may find its presence or absence render any definition
of "good faith" inadequate, if not unwise." 5 COLLIER ON
BANKRUPTCY ¶548.07[2][a] (2002). Compare In re: Little Creek Dev. Co.,
779 F.2d 1068 (5th Cir. 1986) (interpreting good faith in context of Chapter
11's availability).
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[31] |
This court has lacked
either occasion or disposition to attempt to formulate such a definition
for purposes of § 548(c). Moreover, the atypical posture of the fraudulent
conveyance claim here, i.e. the debtor's payments to an unaffiliated third
party in an arms-length transaction, counsels caution in attempting to
propound a broad rule concerning "good faith" for § 548(c).
It is enough for present purposes to rely on the bankruptcy court's conscientious
findings and conclusion.
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[32] |
B. For Value
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[33] |
This court has not
yet had occasion to articulate the standard for appellate review of trial
court determinations of "value" under § 548(c). As the parties
to this case do not dispute this point, we adopt for present purposes
this court's approach to the review of trial court determinations of "reasonably
equivalent value" under § 548(a)(2). See In re Wes Dor, Inc., 996
F.2d 237, 242 (10th Cir. 1993). The question of valuation under § 548(a)
is "largely a question of fact, as to which considerable latitude
must be allowed to the trier of the facts." In re Dunham, 110 F.3d
286, 290 (5th Cir. 1997) (internal quotations omitted). That being said,
"we review de novo the methodology employed by the bankruptcy court
in assigning values to the property transferred and the consideration
received." Id. at 290 n.11.
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[34] |
Section 548(c) allows
a transferee who "takes for value" to retain this transfer to
the extent that he "gave value to the debtor in exchange." It
is undisputed that JSM "[took] for value"; Hays contends, however,
that JSM "gave" no "value" in return. The bankruptcy
court disagreed with Hays but the district court did not. Because the
bankruptcy court's findings of fact are supported by the record and its
conclusions of law are consistent with the text of the Bankruptcy Code,
the Code's interpretation by this and other courts, and sound commercial
practice, we reverse the district court's reversal.
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[35] |
This court is presented
with two questions, one of law, the other of fact. Of Law: Did the bankruptcy
court correctly conclude that the transferee's sale of short-term call
options to a party unable to exercise them have "value" under
§ 548(c)? Of Fact: Did the bankruptcy court correctly conclude that this
was an equitable exchange? We answer both in the affirmative.
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[36] |
The arc of § 548
easily encompasses as "value" the present exchange of cash for
a right to buy or sell property at a future point in time. Courts are
understandably chary of interpreting § 548 to regard promises of future
support as "valuable." Without consideration, courts suspect
gratuitous transfer rather than contractual exchange. See 5 COLLIER ON
BANKRUPTCY ¶548.05[1][b]. This court is not, however, willing to regard
as without "value" all transactions in which present cash is
exchanged for a right of future exercise. See In re Fairchild Aircraft
Corp., 6 F.3d 1119 (5th Cir. 1993). To do otherwise would require rejection
of our caselaw as well as the economic realities of options markets.
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[37] |
Hays, nonetheless,
requests something of the sort. Hays has argued that these options had
no "value" because there was no possibility that Recile would
ever exercise them. To determine whether the debtor received "value,"
the district court held that courts
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[38] |
must consider the
circumstances that existed at the time and determine if "there was
any chance that the investment would generate a positive return."
If there was no such chance at the time of the transfers that the payments
would generate a positive return, then no value was conferred. District
Court Opinion at 12 (quoting In re R.M.L., Inc., 92 F.3d 139, 152 (3d
Cir. 1996)).
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[39] |
Hays asserts that,
because of the fraudulent character of Recile's project, there was no
chance that he would ever exercise this option. This option, therefore,
had no "value."
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[40] |
Hays's legal argument
is flawed for three reasons.
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[41] |
First, it contradicts
the bankruptcy court's finding that Recile's development project began
as a legitimate real estate venture, turning into a Ponzi scheme only
in its subsequent stages.
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[42] |
Second, its adoption
would, by permitting the exercise of judgment in hindsight, conflict with
basic economics and with Fifth Circuit caselaw. Like all speculative financial
instruments, the value of an option can change over time, depending upon
the value of the underlying property. This is their nature; options are
bought and sold precisely to speculate on or hedge against market fluctuation.
Without more, the fact that an opinion has become worthless in no way
proves that it was worthless at an earlier date. Thus, consistent with
economic reality, this and other circuits unequivocally hold that for
purposes of § 548 the value of an investment, even a risky one, such as
we have before us now, is to be determined at the time of purchase. See
Fairchild, 6 F.3d 1126-27; In re Chomakos, 69 F.3d 769, 770 (6th Cir.
1995); see also 5 COLLIER ON BANKRUPTCY ¶548.02[2] (2002).
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[43] |
Third, and critically,
Hays's position would subvert the defensive character of § 548(c), a clause
specifically designed to protect transferees, not transferors. 5 COLLIER
ON BANKRUPTCY ¶548.07. We fully appreciate the problem that appears to
trouble the district court: Under the guise of a negotiated contract,
a debtor anticipating bankruptcy can transfer valuable properties for
consideration of lesser worth. The problem is even more acute in the case
at bar, where the consideration is alleged to be wholly without value.
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[44] |
Although we share
this concern, § 548(c) is not the test that Congress has established to
extirpate this form of fraud. The Bankruptcy Code looks, rather, to the
"reasonable equivalency" test found at § 548(a)(1)(B)(i). In
order to establish a prima facie case for avoiding a transfer as constructively
fraudulent, the trustee must demonstrate that the debtor "received
less than a reasonably equivalent value in exchange for such transfer
or obligation." Id. This provision ensures that there is no great
disparity between the value of the goods exchanged. But it does so, most
importantly, from the perspective of the transferor: Did the transferor
"receive[]" enough? See Fairchild, 6 F.3d at 1127 ("the
recognized test is whether the investment conferred an economic benefit
on the debtor").
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[45] |
Compare this with
the provision at § 548(c). Instead of inquiring into the possibility and
extent of the debtor's loss, it provides a means by which the unwitting
trading partner can protect himself. Received property can be retained
"to the extent" that the "transferee . . . gave value to
the debtor." The provision looks at value from the perspective of
the transferee: How much did the transferee "give"? The concern
here, quite properly, is for the transferee's side of the exchange, not
the transferor's gain.
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[46] |
Read in combination,
§§ 548(a) and (c) are perfectly complementary. The first section affords
creditors a remedy for the debtor's fraudulence or, as the case might
be, mere improvidence; the second protects the transferee from his unfortunate
selection of business partners. See Fairchild, 6 F.3d at 1126-27 (rejecting
the proposition that "anyone who provides, deals with, or invests
in an entity in financial straits would be doing so at his or her peril
under § 548"). Each party can make a claim for cure, but only to
the extent it was harmed. On account of the allegedly thoroughgoing fraudulent
character of Recile's development project, Hays asks this court to reject
JSM's § 548(c) defense. We decline to do so, however, because (1) call
options do indeed have value, (2) their values are to be determined at
the time of origination, and (3) a transferor's practical inability to
exercise his option is irrelevant to its valuation under § 548(c). *fn2
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[47] |
The crucial fact
question for our analysis is thus whether the bankruptcy court clearly
erred in finding that JSM "gave value" under § 548(c). After
a careful review of the evidence presented to the bankruptcy court, this
court concludes that it did not so err.
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[48] |
On the basis of testimony
offered by JSM's expert witness, Dr. Rodolfo Aguilar, the bankruptcy court
found that JSM was "reasonabl[y] compensat[ed]" for the option
it sold to Recile:
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[49] |
The transfers to
JSM were made for good and valuable consideration -- in exchange for the
transfers, the debtors received the option to buy the property, a very
valuable asset. JSM owned valuable commercial property and wished to sell
it to the debtors. The debtors were attempting to construct a shopping
mall complex and desired to purchase the property. The debtors paid JSM
reasonable compensation for the options and rights to property which resulted
in the property being "tied up" for over two years. Bankruptcy
Court Opinion at 46-47; see also id. at 50 & 59.
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[50] |
Hays argues that
the court erred in accepting conclusions based upon a flawed methodology,
to wit, taking the sales price as recorded in the option contracts and
the moneys received by JSM, determining the rate of return, and comparing
this rate with those yielded by financial instruments of similar qualities.
On the basis of the contract price of $11,250,000 and totaled receipts
of $2,435,000, Dr. Aguilar concluded that JSM's rate of return was 8.64%,
a rate which, he testified, was below that which could have been garnered
by other similar investments. If anybody was disadvantaged in its deal,
it was JSM, not Recile.
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[51] |
If this were the
sum total of Dr. Aguilar's testimony, this court would be inclined to
agree with Hays, for, as he correctly notes, the validity of Dr. Aguilar's
conclusion rests upon the fairness of the underlying contract price. Absent
a finding of the fairness of its value, it is impossible to determine
the fairness of the option payments. The record demonstrates, however,
that the bankruptcy court fully understood the methodological problem
that Hays presents and that it obtained satisfactory evidence to assuage
any concerns.
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[52] |
After hearing Dr.
Aguilar's opinion that the rate of return was indeed inferior to similar
investment vehicles, Judge Brown pointedly articulated the missing element
of Dr. Aguilar's calculation, and encouraged the attorneys to produce
evidence regarding the fairness of the contract price. Dr. Aguilar thereupon
testified that he believed that the contract prices set forth in the purchase
agreements were reasonable, and presented extensive details upon which
he based his conclusion, including, but not limited to, JSM's subsequent
sale of an option to another developer.
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[53] |
Hays produced no
expert testimony, either to prove that Recile "received less than
a reasonably equivalent value" under § 548(a) or rebut JSM's claim
that it "gave value" under § 548(c).
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[54] |
Absent contrary evidence
regarding the valuation of JSM's property, the bankruptcy court was justified
in finding that JSM did not part with a right worth less than what Recile
had paid for it.
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[55] |
II. JSM satisfied
the "regular course of . . . business" defense under LA. CIV.
CODE art. 2040 (West 2001) to a revocatory action under art. 2036.
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[56] |
In a manner similar,
but not identical, to § 548 of the federal Bankruptcy Code, the Louisiana
Civil Code provides trustees with a tool for avoiding fraudulent conveyances
from debtors. To avoid such a transfer, the trustee must demonstrate (1)
that the transfer was "made or effected after the right of the obligee
[trustee] arose" and (2) that the transfer "causes or increases
the obligor's [debtor's] insolvency." LA. CIV. CODE art. 2036 (West
2001). The Code also provides trading partners with an absolute defense:
"An obligee [trustee] may not annul a contract made by the obligor
[debtor] in the regular course of his business." Id., art. 2040 (West
2001).
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[57] |
The bankruptcy court
concluded that Hays had satisfied the second prong of art. 2036 but said
nothing regarding the first. It also concluded that JSM satisfied the
"ordinary course of business" defense under art. 2040 and, accordingly,
rejected Hays's claim. The district court affirmed the bankruptcy court's
holding regarding the second prong of art. 2036 and concluded, further,
that Hayes had satisfied the first prong. Additionally, the district court
held, on the basis of its own findings regarding Recile's fraudulence
and JSM's bad faith, that it could not find that "Recile and the
debtors were acting in the ordinary course of business."
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[58] |
Because this court
upholds the bankruptcy court's finding that Recile's transfers to JSM
were made "in the regular course of his business," we need not
undertake an evaluation of Hays's art. 2036 claim. Furthermore, because
this court rejects the district court's de novo finding of bad faith on
the part of JSM, the only remaining question is whether Recile's fraudulence
vis-a-vis his investors deprives JSM of his art. 2040 defense.
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[59] |
This court reads
art. 2040 to encompass within the terms "regular course of his business"
Recile's corporations' payments to JSM. The Louisiana Supreme Court has
consistently let stand transactions between debtors and their trading
partners, provided that the partners are not also creditors. In the most
proximate case -- factually and chronologically -- the Louisiana Supreme
Court held that "'[a] sale made to one not a creditor must be considered
as one made in the ordinary course of business, if made for an adequate
consideration in cash.'" Hirsch v. Fudickar, 9 So. 742, 744, 43 La.
Ann. 886, 891, 1891 LEXIS 424, 6 (1891), rehearing denied and holding
clarified to encompass credit transactions, 9 So. 742, 744, 43 La. Ann.
886, 893, 1891 LEXIS 425, 4 (1891) (emphasis in original) (quoting Pochelu
v. Catonnet, 4 So. 74, 76, 40 La. Ann. 327, 330 (1888)). Because Recile
formed this contract in the role of real estate developer, because Recile
received adequate consideration for his payments, and, finally, because
JSM was not a creditor to any of Recile's many corporations, this court
declines to find this transaction outside of the scope of art. 2040.
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[60] |
CONCLUSION
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[61] |
For the foregoing
reasons, this court reverses the district court's 1999 reversal of the
bankruptcy court's 1985 judgment and orders the entry of judgment in favor
of JSM.
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[62] |
Judgment REVERSED.
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Opinion Footnotes |
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[63] |
*fn1
The judgments of the district court are final for purpose of appeal.
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[64] |
*fn2
Hays also argues that these options -- at least those of a day's or week's
term -- had no value on account of their exceedingly short duration. We
find this argument without merit, both theoretically and practically.
Although an option of a day's duration seems unusually short in light
of the relatively greater time required to execute a real estate sale,
a short life does not ipso facto negate the value of a financial instrument.
More convincing to this court is the practical context from which this
unusual practice emerged. The bankruptcy court found that daily payments
emerged not from JSM's desire to create day-to-day option contracts but,
rather, from Recile's lack of adequate financing. Instead of turning away
this prospective purchaser, JSM indulged Recile's request for daily payments.
This court respectfully rejects Hays's insistence that no good deed go
unpunished.
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