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IN THE UNITED STATES DISTRICT COURT 

FOR THE MIDDLE DISTRICT OF ALABAMA 

N.D. HORTON, Jr., JAMES ) 

M. REYNOLDS, III, ) 

 ) 

 Appellants. ) 

 ) NO. 06-00746-WHA 

J. LESTER ALEXANDER, III, ) 

 ) 

 Appellee. ) 

_____________________________________________________________ 

ON APPEAL FROM THE UNITED STATES BANKRUPTCY COURT 

FOR MIDDLE DISTRICT OF ALABAMA 

ADVERSARY PROCEEDING NO.: 05-03042 

REPLY BRIEF OF APPELLANTS N.D. HORTON AND 

JAMES M. REYNOLDS, III 

_____________________________________________________________ 

 C. Ellis Brazeal III 

 Attorney for N.D. Horton & 

 James M. Reynolds, III 

OF COUNSEL: 

Walston, Wells & Birchall, LLP 

1819 5th Avenue North 

Suite 1100 

Birmingham, AL 35203 

Telephone: (205) 244-5237 

Telecopier: (205) 244-5437 

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TABLE OF CONTENTS

TABLE OF CONTENTS................................................................................ 2 

TABLE OF CITATIONS ............................................................................... 3 

SUMMARY OF THE ARGUMENT ............................................................. 4 

ARGUMENT AND CITATIONS TO AUTHORITY ................................... 7 

I. The “plan language” of Section 8-9A-8(d) provides a complete 

defense to the Trustee’s claims .................................................. 7 

II. At the Trustee’s urging, the trial court incorrectly interpreted 

the “indirect benefit” rule......................................................... 11 

III. The application of the “indirect benefit” rule demonstrates that 

Terry Manufacturing received more than “reasonably 

equivalent value.”..................................................................... 13 

IV. “Alter ego” and “identity of interest” arguments were timely. 18 

CONCLUSION............................................................................................. 19 

CERTIFICATE OF COMPLIANCE............................................................ 20 

CERTIFICATE OF SERVICE ..................................................................... 20

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TABLE OF CITATIONS

Cases

Rodriguez, 895 F.2d 725 (11th Cir. 1990)................................................. 6, 12 

Rubin v. Hanover & Trust Co., 661 F.2d 979, 991 (2d Cir. 1981)......... 13, 19 

Statutes

Ala. Code § 8-9A-8(d).......................................... 5, 6, 8, 9, 10, 11, 14, 15, 20 

Ala. Code § 8-9A-8(b)(1) ......................................................................... 9, 10 

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SUMMARY OF THE ARGUMENT

Just like the trial court’s Memorandum Decision, the reply brief 

of the Appellee (the “Trustee”) does not address the necessary legal analysis. 

Instead, the Trustee attempts, with pejorative language, to obscure the 

efficacy of the Appellants’/Horton & Reynold’s defenses to this action. 

First, like the trial court, the Trustee refuses to analyze the 

admittedly unique language contained in Alabama Code Section 8-9A-8(d). 

While admitting that the language is unique, the Trustee refuses to analyze 

the language. Instead, the Trustee contends that fraudulent transfer law is 

“well settled” and that this Court should not adopt the Appellants’ novel 

theory. Appellants are not asking the Court to adopt a new novel theory, but 

rather to interpret the plain language of the statute. If fraudulent transfer 

law is “well settled”, then the deviation of the Alabama Legislature from the 

language of the Uniform Fraudulent Transfer Act would seem to be an 

attempt to change such “well settled” law. 

Additionally, the language in § 8-9-A-8(d) constitutes a defense 

and is designed to protect the transferee, not the transferor or the transferor’s 

creditors. Finally, Appellants’ reading of § 8-9A-8(d) does not leave the 

creditors of the transferor without recourse, as urged by the Trustee. Instead, 

the creditors always can sue the ultimate beneficiary to recover the benefit 

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received from the transferor. Appellants’ plain reading of § 8-9A-8(d) 

merely protects the transferee from having to pay twice. 

 Second, the Trustee seems to have a fundamental 

misunderstanding of the “indirect benefit” rule. The Trustee stresses that the 

benefit received must have been “in exchange for” the allegedly fraudulent 

transfers. Instead of relying upon the “in exchange for” language, the 

“indirect benefit” rule looks at whether the allegedly fraudulent transfers 

resulted in a diminution of the transferor’s estate. If there is a “direct 

benefit” to the transferor, then there is certainly a direct exchange. 

However, if there is an “indirect benefit”, then there is not a direct exchange. 

So, the “in exchange for” language is inapposite to an “indirect benefit” 

analysis. 

Third, there is indisputable evidence that, when the “indirect 

benefit” rule is applied, Terry Manufacturing received more than 

“reasonably equivalent value” for the allegedly fraudulent transfers. When 

one applies the Eleventh Circuit “indirect benefit” test set forth in 

Rodriguez, 895 F.2d 725 (11th Cir. 1990), it is clear that, by making the 

allegedly fraudulent transfers totaling $596,738.60 on its guaranteed 

obligation, Terry Manufacturing received several loans totaling millions of 

dollars. (Even if the court were to find that the benefit had to flow directly 

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from Horton & Reynolds (and not from American Real Estate), Horton and 

Reynolds are due on offset in the amount of $263,000.00). Both the Trustee 

and the trial court went to great lengths in an attempt to discredit this 

argument by referring to it as a “post hoc” attempt to defeat the Trustee’s 

claims. However, an unclouded review of the facts reveals that “reasonably 

equivalent value” was received by Terry Manufacturing. 

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ARGUMENT AND CITATIONS TO AUTHORITY

I. The “plain language” of Section 8-9A-8(d) provides a complete 

defense to the Trustee’s claims. 

A. The unique language in Section 8-9A-8(d) is meant to change 

“well settled” law. 

 In the Trustee’s Reply Brief, the Trustee claims that the 

Appellants’ construction of this Code Section is “novel” and would change 

“well settled” law. However, the Trustee does acknowledge that the 

language contained in this Code Section is unique. Indeed, it differs from 

the Uniform Fraudulent Transfer Act which codifies such “well settled” law. 

So, if one is to give any effect to the different language, one must determine 

that the Alabama Legislature decided to change “well settled” law. Had the 

legislature not decided to change “well settled” law, it would not have 

changed the language of the Uniform Fraudulent Transfer Act when it was 

adopted by the legislature. 

B. Section 8-9A-8(d) is meant to protect the transferee. 

 As set forth in the comments to this Code Section, the intent of 

the Alabama Legislature could not be more plain - - it desired to protect the 

transferee that gives value, even if it is to someone besides the 

debtor/transferor. The comments to § 8-9A-8(d) of the Alabama Fraudulent 

Transfer Act, at Comment 3, indicate that the language “or to another person 

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as a consequence of the debtor’s making such transfer to” was added to the 

Uniform Act to clarify the fact that a “good faith transferee is protected to 

the extent of value given by the transferee to one other than the Debtor.” 

The Alabama legislature added this language to make it clear that, if a good 

faith transferee gives value (regardless of whether it is to the debtor or to 

another), the transferee will not have to reimburse the debtor to the extent of 

the value given. In other words, the transferee will not have to pay twice. 

A review of the following hypothetical situation illustrates the 

reason behind the different language. 

 Parent decides to purchase a car for Son as a graduation present. 

While the loan from Bank is to Son, the car is in Son’s name, and Parent 

guarantees the loan. Parent makes all of the payments on the loan to Bank. 

Under the Trustee’s interpretation of § 8-9A-8(d), if Parent’s creditors sued 

Bank for fraudulent transfers based upon the loan payments, Bank would 

have to refund the payments since Parent received no benefit (that is if 

Parent’s guaranty was also a fraudulent transfer). Under Appellants’ version 

of § 8-9A-8(d), Bank would be protected and creditors of Parent would have 

recourse against Son and not the Bank. See Ala. Code § 8-9A-8(b)(1) and 

(b)(2). In this example, just as in the case before this Court, Bank, i.e., 

Horton & Reynolds, provided “reasonably equivalent value” to another 

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person (Son or the Terry Family) in the form of a reduction of the debt. 

“Value” under the Alabama Fraudulent Transfer Act includes reduction of 

an indebtedness. 

 The Trustee argues that the Appellants’ interpretation of § 8-

9A-8(d) would result in a diminution of the transferor’s estate. Indeed, the 

Trustee states at p.21 of his Reply Brief: 

Under the Defendants’ reading of the statutes, 

creditors will have no remedy when insiders cause 

the debtor to make transfers which solely benefit 

them. Indeed, if the Defendants are correct, an 

insider may cause the corporate debtor to employ 

all of its assets in transactions for which it received 

absolutely no benefit, and those transfers will be 

effectively immune from attacks so long as the 

insiders receive some benefit. 

This is simply untrue. Either the Trustee is intentionally misstating the law, 

or the Trustee should further acquaint himself with the provisions of 

Alabama fraudulent transfer law. Even though the initial transferee for 

value is protected under § 8-9A-8(d), the subsequent transferee who gives no 

value is not. See Ala. Code § 8-9A-8(b). So, the allegations that creditors 

will have “no remedy” is simply wrong. 

Under Ala. Code § 8-9A-8(b), a claim for a fraudulent transfer 

is recoverable not only from the first transferee, but also from “the person 

for whose benefit the transfer was made” [Son (in the example) or the Terry 

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Family (in this case)] and from any “subsequent transferee.” So, interpreting 

Alabama Code Section 8-9A-8(d) in the manner warranted by the plain 

language of the statute does not diminish the transferor’s estate, but merely 

provides protection to a transferee who provides value, such as Bank (in the 

example) or Horton & Reynolds. 

C. Section 8-9A-8(d) is not meant to codify the “indirect benefit” 

rule. 

 Rather than analyzing the plain language of the statute, the 

Trustee instead argues that this language was meant to codify the “indirect 

benefit” rule. However, just a cursory review of the plain language reveals 

that this is not the case. The language of the statute provides that the 

transferee has an offset to the extent of value given to the debtor “or to 

another person as a consequence of the debtor’s making such transfer”. It 

is the “or to another person” language that the Trustee refuses to deal with. 

The “indirect benefit” rule requires benefit to go to the debtor, not “to 

another person”. Under the “indirect benefit” rule, the benefit must go first 

to another, but then ultimately has to reside with the debtor. If the Alabama 

Legislature had intended to codify the indirect benefit rule, it would have 

used language such as: “value initially transferred to another person which 

ultimately is received by the debtor” or “value given to another person 

which benefits the debtor.” Instead, the Alabama Legislature clearly 

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provided that benefit “to another person” constitutes an offset for the 

transferee. As set forth in the previous section, this is designed to protect the 

transferee from double payments or liability. 

II. At the Trustee’s urging, the trial court incorrectly interpreted the 

“indirect benefit” rule. 

 It cannot be disputed that, but for the allegedly fraudulent 

transfers of $596,738.60, Terry Manufacturing would not have received 

several loans. If one looks at the “net benefit” to Terry Manufacturing, there 

is no fraudulent transfer. Since the Trustee cannot withstand this analysis, 

the Trustee stresses that the benefit must have been received “in exchange” 

for the transfers. Such would be the case if it were a direct benefit. Instead, 

the “indirect benefit” rule looks at the “net effect” on the debtor’s estate, not 

whether there was a direct “exchange” encompassing the allegedly 

fraudulent transfers and the benefit received. 

 The Trustee correctly explains the “indirect benefit” rule at p.14 

of his Reply Brief: 

As the Eleventh Circuit explained in In re 

Rodriguez, the purpose of avoiding transfers 

unsupported by reasonably equivalent value is to 

protect creditors against depletion of the debtor’s 

estate. Therefore, “this provision [11 U.S.C. § 

548] does not authorize voiding a transfer which 

confers an economic benefit upon the debtor either 

directly or indirectly. In such a situation, a 

debtor’s net worth has been preserved and the 

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interests of the creditors will not have been injured 

by the transfer.” 895 F.2d 725, 727 (11th Cir. 

1990) (citing with approval Rubin v. Hanover & 

Trust Co., 661 F.2d 979, 991 (2d Cir. 1981)). 

The Trustee further states: 

 The ultimate question is whether the transfer has 

materially affected the debtor’s ability to satisfy 

his creditors’ claims. 

Reply Brief, p.13. 

Then, because this explanation of the rule is availing to 

Appellants and not to the Trustee, the Trustee states: 

The fundamental and fatal law in Defendants’ 

argument is that the supposed value provided by 

them or their affiliates was not “in exchange” for 

the challenged transfers, and there was a net 

diminution of the Terry Manufacturing estate. 

The Trustee must attempt to rely upon the “in exchange” language. 

Otherwise, from the Trustee’s standpoint, all is lost. 

For it cannot be disputed that, if Terry Manufacturing had not 

made the $596,736.80 in payments, Terry Manufacturing would not have 

received the following: 

 a) $5.5 million in loan proceeds from the American Real 

Estate loan to the Terrys which were deposited by the Terrys into Terry 

Manufacturing; 

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 b) $1.5 million in loan proceeds from Peoples Bank to 

Perky Cap but deposited into Terry Manufacturing as a result of the 

purchase of the Perky Cap stock for $596,738.60; 

 c) $500,000 loan from American Real Estate; and 

 d) $263,000 in loans from N.D. Horton, Jr. 

 Terry Manufacturing also received a direct benefit in the 

amount of $596,738.60 due to the reduction of Terry Manufacturing’s 

guaranteed obligation to Horton & Reynolds for the Stock Purchase Notes. 

 Any single one of these transactions, save the last, resulted in a 

net increase, not a net diminution, of the Terry Manufacturing estate. Even 

if one only considers the last transaction (where Horton individually was the 

transferor of value), an offset in the amount of $263,000.00 is owed. 

III. The application of the “indirect benefit” rule demonstrates that 

Terry Manufacturing received more than “reasonably equivalent 

value.” 

 Just as the Trustee refused to analyze the plain language of § 8-

9A-8(d), the Trustee similarly refused to analyze the testimony of Mr. 

Horton. Once again, not unsurprisingly, the Trustee used rhetoric and 

pejorative language in an attempt to cloud or darken this Court’s review. 

The Trustee states in his reply brief at p. 11: 

His counsel’s [Horton’s counsel] repeated and 

finally successful effort to coax him into claiming 

Case 2:06-cv-00746-WHA Document 10 Filed 10/06/2006 Page 13 of 21
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that American Real Estate would not have granted 

a line of credit to the Terrys if the stock sale did 

not close, was, the Bankruptcy Court properly 

found, “not credible and that his claims of a tie 

have been fabricated to provide a defense to the 

Trustee’s avoidance action.” 

Just as this Court should review the plain language of § 8-9A-8(d), this 

Court should review the examination of Mr. Horton that the Trustee called a 

“repeated and finally successful effort to coax. . .” A review of the 

examination of Mr. Horton reveals the complete consistency between 

Horton’s testimony when examined by Trustee’s counsel and when 

examined by his own counsel. A review of the questions by both Mr. 

Barriere and Mr. Brazeal, and Mr. Horton’s answers, further reveals that 

there was no “coaxing” involved, but rather direct questioning and answers 

thereto. 

Mr. Barriere: 

 Okay. And just so I am clear, if Allie Robinson and Cotina Terry 

hadn’t bought your stock, American Real Estate was going to make this 

loan; was it not? 

Mr. Horton: 

 Well, I asked to tell you how this developed and you asked me to 

answer your question. 

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The Court: Okay. Well, you can do it now. 

Mr. Barriere: 

 Now you can do it. 

Mr. Horton: 

 The Terrys came to me with a plan to make Perky a minority firm. 

They already owned a third of it, and they wanted to buy an additional 

twenty percent so Perky could bid on government contracts, contracts with 

Coca-Cola and Delta that required minority-owned companies to do it. And 

they talked to me about doing that, and that made a little sense to me. 

 And then they asked me about starting Terry Promotional Products, 

and I said what would that do, and they said, well, they wanted to go on the 

Internet and that they thought they could really generate some big numbers, 

and they had some numbers that they called, something like an optimistic 

forecast, as realistic forecast and a very conservative forecast. 

 And I said, well, you know that is going to be you, Roy, and you, 

Rudolph, and Terry Manufacturing Company guaranteeing it and 

guaranteeing cross-default on all the notes that we have with you or that we 

do with you in the future, and they said that they would. 

 Had they come in to close and wanted to change their plan, it would 

have raised some skepticism on my part as to whether they knew what their 

plan was, but that’s the way they laid it out and they said they had no 

problem . . . 

 And then our lawyer put in the cross-default and the legalese that is 

required to tie - we thought that we tied them as tight as you could tie a 

borrower, and I had never loaned anybody five and a half million dollars 

before. 

Transcript, pp. 167-169. 

Case 2:06-cv-00746-WHA Document 10 Filed 10/06/2006 Page 15 of 21
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Mr. Brazeal: 

 Mr. Horton, Mr. Barriere went to some lengths to get you to say that 

the loaning of the five point five million dollars was not conditioned upon 

the purchase of the stock by the two Terry women. That went on for a 

while; did it not? 

Mr. Horton: 

 Yes. 

Mr. Brazeal: 

 At one point during his examination you indicated that had the Terrys 

not gone forward with the stock purchase, that you would have had some 

qualms about their overall business plan; is that correct? 

Mr. Horton: 

 Well, I would have questioned what their business plan was in that 

their purpose in buying the twenty percent of the stock was so Perky could 

go to a minority-owned firm and it would increase the sales. 

Mr. Brazeal: 

 All right, sir. Well, my question for you, Mr. Horton, is both of these 

transactions closed on the same date, the stock purchases and the five point 

five million dollar loan. Suppose the Terrys had showed up or apprised you 

prior to November 10 of 2000 that they still wanted the five point five 

million dollars which you had been discussing but that they told you that 

they no longer wanted to purchase the stock in Perky Cap? 

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Mr. Horton: 

 I would have decided that they didn’t have a plan, that they were just 

there to get my five and a half million dollars and wouldn’t have gone 

forward. 

Transcript, pp. 185-187. 

 This testimony demonstrates the nexus between the stock 

purchase deal and the $5.5 million loan. Not only were the deals crossdefaulted, but it seems logical that, if the Terrys had determined to renege on 

their business plan of purchasing the Perky Cap stock, Mr. Horton would not 

have loaned the $5.5 million. Even if one discounts this testimony of Mr. 

Horton, it seems logical, and the testimony was undisputed that, if Terry 

Manufacturing had ceased making payments on the Stock Purchase Notes: 

a) neither Horton nor American Real Estate would have made any further 

loans to the Terrys or Terry Manufacturing; and b) American Real Estate 

would have called upon Terry Manufacturing’s guaranty of the $5.5 million 

dollar loan. 

The Trustee relies upon the testimony of Mr. Horton that the 

stock purchase deal and the other deals were “separate deals.” However, 

this does not mean that the transfers did not result in the debtor receiving 

“indirect benefit”. A hypothetical situation here may be helpful as well. 

Company A, a real estate developer, obtains two loans from Bank B. The 

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loans are for “separate” subdivision developments. Nevertheless, the Bank 

cross-defaults the loans, just as the loans given by Mr. Horton and American 

Real Estate were cross-defaulted. Then, if Company A defaults on either of 

the loans, it is virtually inconceivable that Bank B will fund any further loan 

proceeds on the other loan or on any new loans. Furthermore, Bank B 

would call both loans. Such is the situation here - - the payments on the 

Stock Purchase Notes resulted in “indirect benefit” to Terry Manufacturing. 

IV. “Alter ego” and “identity of interest” arguments were timely. 

 Finally, the Trustee argues that this Court should not consider 

Appellants’ “alter ego” theory. The Appellants’ “alter ego” theory was 

raised with the trial court (conducting a bench trial), prior to the entry of 

judgment through the draft memorandum decision prepared by Appellants in 

lieu of a post-trial brief. Accordingly, the Trustee’s argument about 

timeliness is baseless. Furthermore, even if the evidence adduced at trial did 

not rise to the level necessary for a finding of “alter ego,” there was clearly 

sufficient evidence of “identity of interest” to find that what benefited the 

Terrys also benefited Terry Manufacturing. See Rubin, supra. The case law 

concerning the “identity of interest” test was raised at trial and is just another 

nuance of the “indirect benefit” rule. 

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CONCLUSION

 The Trustee successfully directed the trial court’s attention 

away from an analysis of § 8-9A-8(d) which provides a complete defense to 

the Trustee’s claim. Similarly, the Trustee effectively led the trial court 

down the wrong road in interpreting the “indirect benefit” rule and in 

analyzing the evidence. While acknowledging on the one hand that the 

“indirect benefit” rule looks at “net diminution” to the debtor’s estate, the 

Trustee with his other hand completely eviscerated this rule by focusing on 

the “exchange” language. The Trustee then utilized the complex nature of 

the transactions to convince the trial court that there was no “exchange.” 

Had the trial court instead looked at the “net effect” on the estate of Terry 

Manufacturing, one hopes that the trial court would have found “reasonably 

equivalent value.” In any event, Appellants respectfully request this Court 

to do so. 

 Respectfully submitted, 

 \s\ C. Ellis Brazeal III 

 C. Ellis Brazeal III 

 Attorney for Appellants 

N.D. Horton & James M. 

Reynolds, III 

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OF COUNSEL:

WALSTON, WELLS & BIRCHALL, LLP 

1819 5th Avenue North, Suite 1100 

Birmingham, Alabama 35203 

Telephone: (205) 244-5237 

Telecopier: (205) 244-5437 

CERTIFICATE OF COMPLIANCE

 This brief complies with the type-volume limitation of Fed. R. App. P. 

32(a)(7)(B) because, according to the word-processing system used to 

generate this brief, this brief contains 3,705 words, excluding the parts of the 

brief exempted by Fed R. App. P. 32(a)(7)(B)(iii). 

 \s\ C. Ellis Brazeal III

 OF COUNSEL 

CERTIFICATE OF SERVICE

I hereby certify that a copy of the above and foregoing Reply 

Brief of Appellant N. D. Horton and James M. Reynolds, III has been served 

upon counsel of record by electronic filing purposes, as follows: 

Catherine E. Laskey 

Phelps Dunbar LLP 

City Plaza 

445 North Boulevard 

Suite 701 

Baton Rouge, LA 70802-5707 

Case 2:06-cv-00746-WHA Document 10 Filed 10/06/2006 Page 20 of 21
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This the \6th\ day of October, 2006. 

 \s\ C. Ellis Brazeal III

 OF COUNSEL 

 

 

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