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Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 

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United States Bankruptcy Appellate Panel

FOR THE EIGHTH CIRCUIT

No. 06-6048MN

In re: *

*

Alex and Chanhsamone *

Phongsisattanak, *

*

Debtors. *

*

* Appeal from the United States

Alex and Chanhsamone * Bankruptcy Court for the 

Phongsisattanak, * District of Minnesota

*

Plaintiffs -Appellants, *

*

v. *

*

Blue Heron, Inc., *

Mark Erjavec, *

John Doe, *

*

Defendants-Appellees. *

*

Submitted: September 13, 2006

Filed: October 13, 2006

Before FEDERMAN, MAHONEY, and McDONALD, Bankruptcy Judges.

MAHONEY, Bankruptcy Judge.

Appellate Case: 06-6048 Page: 1 Date Filed: 10/13/2006 Entry ID: 2098837
1

The Honorable Dennis D. O’Brien, United States Bankruptcy Judge for the

District of Minnesota.

2

This is an appeal from a decision of the bankruptcy court1

 which determined

that a real estate transaction entered into between the debtors and Blue Heron, Inc.,

was not a fraudulent conveyance under Minnesota law because the debtors were not

insolvent at the time of the transaction and were not made insolvent as a result of the

transaction. The debtors, operating as debtors in possession in a Chapter 11 case,

brought this action, in part, to avoid the real estate transaction by the exercise of the

avoidance powers provided to debtors in possession by 11 U.S.C. § 544. In the

bankruptcy court, the debtors also argued that there had been a violation of the

Minnesota Consumer Fraud Act (Minn. Stat. § 325F.69), and that there had been a

breach of contract. Those arguments were abandoned on appeal.

We affirm the decision of the bankruptcy court. 

STANDARD OF REVIEW

The bankruptcy court’s factual findings are reviewed for clear error and its

conclusions of law are reviewed de novo. Moon v. Anderson (In re Hixon), 387 F.3d

695, 700 (8th Cir. 2004). A bankruptcy court’s finding regarding solvency is reviewed

for clear error. Northwest Vill. Ltd. P’ship v. Franke (In re Westpointe, L.P.), 241

F.3d 1005, 1007 (8th Cir. 2001). 

DISCUSSION

To aid in understanding the complexity of this case, the transaction needs to be

described in detail. The bankruptcy court explained the history of the relationship

between the debtors (referred to during the trial and hereafter as “the Phongs”) and

Blue Heron and the substance of the transaction, as follows:

In June of 2003, the plaintiffs owned four parcels of real estate.

They are referenced here as:

Appellate Case: 06-6048 Page: 2 Date Filed: 10/13/2006 Entry ID: 2098837
3

 Market Value Liabilities Net Equity

2205 Chicago Ave. $ 285,000 $ 76,000 c/d $ 209,000

1625 Fremont Ave. $ 325,000 $ 370,000 mtg $ (45,000)

 mech lien

6821 18 Avenue So. $ 200,000 $ 119,200 $ 80,800

16188 Hominy Path $ 500,000 $ 270,000 $ 230,000

$1,310,000 $ 835,200 $ 474,800

Three of the four properties were real estate investments. The Hominy

Path property was the Phongs’ newly acquired homestead. The Fremont

Ave. property liability included a mechanic’s lien in the amount of

$250,000, owing Castle Roofing for repairs caused by a fire. The work

was completed in the spring of 2003 and the amount was due in June.

In the months shortly before the mechanic’s lien was due, the Phongs

purchased both the Hominy and Chicago Ave. properties, using

$400,000 in cash. They sought financing to pay the mechanic’s lien.

Mr. Phong had discussions with at least one, and possibly two,

traditional lenders, but did not obtain traditional financing to cover the

lien. Instead, he was introduced to the defendant Mark Erjavec, who was

the owner of Blue Heron, which was in the business of purchasing

mortgages in foreclosure. According to Mr. Phong, Mr. Erjavec offered

to purchase all four properties from the Phongs and sell them back on a

contract for deed. Additionally, according to Mr. Phong, Mr. Erjavec

agreed to participate with Mr. Phong in partnership to enable Mr. Phong

to acquire deteriorated properties that he could fix up and sell profitably,

enabling him to make the increased payments that would be required to

service the increased debt load. Mr. Phong testified that he was

guaranteed ten to twelve properties per year. Finally, Mr. Phong testified

that Mr. Erjavec assured him that an equity cushion of between $85,000

and $100,000 was available as a source to fund the increased payments

in the meantime.

Mr. Erjavec disputes that there was an agreement, partnership or

otherwise, but, acknowledges that the parties discussed generally a

cooperative effort in obtaining and dealing with deteriorated properties.

There was no discussion or agreement regarding how the acquisition of

such properties would be financed, who would hold title, or how any

Appellate Case: 06-6048 Page: 3 Date Filed: 10/13/2006 Entry ID: 2098837
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profits would be applied between the parties. And, there was no written

memorialization of any arrangement. Mr. Erjavec disclaimed any

knowledge regarding an equity cushion to fund increased payments and

denied making any such representation.

Sometime in early June 2003, Mr. Erjavec delivered to the Phongs

a draft of a proposed agreement and contract for deed. He testified that

he went over the documents with the Phongs, reading and explaining the

major portions. Included in the draft agreement, and also included in the

agreement eventually signed, was this provision:

The Phongsisattanaks acknowledge and promise that this

Agreement and the Contract for Deed reflect the entire

agreement between them and Blue Heron and that there

were (or are) no oral representations which are being relied

upon by them as a basis for their decision to enter into this

transaction with Blue Heron, Inc. Further, the

Phongsisattanks [sic] acknowledge that any statements

made prior to execution of the transaction documents by

Blue Heron, Inc., its agents or employees, or yourself,

outside this Agreement and the Contract for Deed have

been disregarded by them as statements made during

negotiations leading up to this transaction.

(Par. 8, p.4., Def. Ex. K).

On June 30, 2003, the parties signed an agreement substantially

the same as the earlier draft, and the defendants signed a contract for

deed to the Phongs for the total purchase price of $950,000 for the four

properties. The price was arrived at by adding up all liabilities against

the properties, plus a $50,000 cash payment by the defendants to the

Phongs, closing costs in the approximate amount of $18,000, and a fee

assessed by the defendants for their participation. The agreement

provided that the defendants were to assume the existing mortgages and

pay the contract for deed on the Chicago property. The contract for deed

recited that it was given by Blue Heron, subject to existing financing, but

obligated the vendor to convey a marketable title to the Phongs upon

payment of the contract in full. The Phongs delivered their warranty

deed, subject to existing encumbrances, to Blue Heron on July 9, 2003.

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The contract for deed required monthly payments from the Phongs

of $7,304.68. No payments were made. No payments were made by the

defendants on the mortgages and Chicago contract for deed either.

Sometime late in the summer of 2003, the Phongs were contacted by at

least one of the mortgagees and told that a delinquency existed. When

informed of the transaction with the defendants, the mortgagee told the

Phongs that the mortgage was not assumable, but, had a “due on sale”

clause. 

Mr. Phong contacted Mr. Erjavec, who acknowledged that he had

made no payments on the mortgages and the Chicago contract for deed

because the Phongs had made no payments to Blue Heron. At that point,

Mr. Phong indicated that he wished to make the mortgage payments

directly. Mr. Erjavec agreed and prepared a new amortization schedule

for the payments due Blue Heron from the Phongs in the monthly

amount of $2,500. The Phongs made a total of $4,000 to the defendants

under the revised schedule by February 2004.

In February, Blue Heron assigned its rights under the Phong

contract for deed to a company called Caberallo. The defendants had

borrowed $240,000 from the principal of Caerallo [sic] to fund the

Phong agreement and contract for deed. In return for the assignment,

Caberallo cancelled all indebtedness owing the principal from the

defendants.

In March 2003, Caberallo served the Phongs a notice of

cancellation of the Phong contract for deed. The Phongs retained an

attorney, who advised Caberallo that the contract for deed was an

equitable mortgage and could not be cancelled, but, must be foreclosed

upon as a traditional mortgage. Apparently, the assertion was

persuasive. The parties entered into a written agreement substantially

altering their rights and obligations under the contract for deed.

It was agreed that the non-homestead properties would be sold, all

mortgages encumbering them paid out of the proceeds, and that the

Phongs would receive marketable title to their Hominy homestead

property. The Phongs were to pay $10,000 toward the balance of the

contract for deed on the Chicago property, Caberallo would pay $65,000.

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The marketable title to the Hominy property was to be delivered upon

the release of certain tax liens on the Chicago property resulting from the

vendor’s liability for taxes owing the IRS. The agreement between the

Phongs and Caberallo was fully consummated, except that the Phongs

were given a limited warranty deed to their Hominy property. Caberallo

did not satisfy the Phongs’ purchase money mortgage on that property.

Order for Judgment at 2-6, Appellant’s Supplemental App., Tab 1 (footnotes omitted).

The court then found that, at the time of the transaction, the debtors were not

insolvent, nor did the transaction render the debtors insolvent. On page 7 of the

order, the court clearly laid out the status of the equity of the debtors after the

transaction:

After the transaction, the plaintiffs’ equity was reduced only by

the closing costs and transaction fee assessed against them, leaving them

with an equity position of $410,200. This was their position following

delivery of the deed:

 Market Value Liabilities Net Equity

2205 Chicago Ave. $ 285,000 $ 76,000 c/d $ 209,000

1625 Fremont Ave. $ 325,000 $ 370,000 mtg $ (45,000)

mech lien

6821 18 Avenue So. $ 200,000 $ 119,200 $ 80,800

16188 Hominy Path $ 500,000 $ 270,000 $ 230,000

June 29, 2003 $1,310,000 $ 835,200 $ 474,800

Contract for Deed B/H $950,000

Cash received $ 50,000

Contract right to pay-

 ment of liens $ 835,200 

July 10, 2003 $2,195,200 $1,785,000 $ 410,200

Net change in equity ($ 64,600)

Id. at 7.

Appellate Case: 06-6048 Page: 6 Date Filed: 10/13/2006 Entry ID: 2098837
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513.45. Transfers fraudulent as to present creditors

(a) A transfer made or obligation incurred by a debtor is fraudulent as to

a creditor whose claim arose before the transfer was made or the

obligation was incurred if the debtor made the transfer or incurred the

obligation without receiving a reasonably equivalent value in exchange

for the transfer or obligation and the debtor was insolvent at that time or

the debtor became insolvent as a result of the transfer or obligation.

(b) A transfer made by a debtor is fraudulent as to a creditor whose claim

arose before the transfer was made if the transfer was made to an insider

for an antecedent debt, the debtor was insolvent at that time, and the

insider had reasonable cause to believe that the debtor was insolvent.

3

Debtors appealed the finding that the transaction with Blue Heron was not

actually a sale but was an equitable mortgage. The characterization of the transaction

does not change the numbers, and does not affect the solvency/insolvency

determination.

7

A transfer is fraudulent as to pre-transfer creditors under Minnesota law if it is

made by a debtor for less than reasonably equivalent value received when the debtor

is either insolvent at the time of the transfer or is rendered insolvent by it. Minn. Stat.

§ 513.45(a).2

 The bankruptcy court correctly found, based upon an analysis of the

testimony of the expert witness for the defendants, that because the debtors were

solvent at all times, they had failed to meet their burden with regard to insolvency and

therefore could not prevail on the fraudulent conveyance action.

On appeal, the debtors/appellants suggest that the bankruptcy court erred

because it chose to believe the numbers presented by that expert, rather than the

numbers presented by their own expert.3

 A factual finding is “clearly erroneous”

when although there is evidence to support it, the reviewing court on the entire

evidence is left with the definite and firm conviction that a mistake has been

committed. Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573 (1985)

Appellate Case: 06-6048 Page: 7 Date Filed: 10/13/2006 Entry ID: 2098837
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(quoting United States v. United States Gypsum Co., 333 U.S. 364, 395 (1948)).

When two permissible views of the evidence exist, the factfinder’s choice between

them cannot be clearly erroneous. Anderson, 470 U.S. at 574 (citing United States v.

Yellow Cab Co., 338 U.S. 338, 342 (1949)).

We find that the trial judge’s determination that the debtors/appellants were not

insolvent at any time with regard to this transaction is not clearly erroneous. Since

there cannot be a fraudulent conveyance under Minnesota law unless the transferor is

insolvent at the time of the transaction or is made insolvent by the transaction, we

affirm.

Appellate Case: 06-6048 Page: 8 Date Filed: 10/13/2006 Entry ID: 2098837