NO. 06-00746-WHA 

IN THE UNITED STATES DISTRICT COURT 

FOR THE MIDDLE DISTRICT OF ALABAMA 

N.D. HORTON, Jr., JAMES ) 

M. REYNOLDS, III, ) 

 ) 

 Appellants. ) 

 ) Adversary Proceeding No. 

J. LESTER ALEXANDER, III, ) 05-3042 

 ) 

 Appellee. ) 

_____________________________________________________________ 

ON APPEAL FROM THE BANKRUPTCY COURT FOR MIDDLE 

DISTRICT OF ALABAMA 

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 

Case 2:06-cv-00746-WHA Document 6 Filed 09/14/2006 Page 1 of 52
C-1 of 1 

NO. 06-00746-WHA 

N.D. HORTON, JAMES M. REYNOLDS, III V. J. LESTER 

ALEXANDER, III 

CERTIFICATE OF INTERESTED PERSONS AND CORPORATE 

DISCLOSURE STATEMENT

 Pursuant to FRAP 26.1 and 11th Cir. R. 26-1, counsel for 

Appellants, N.D. Horton, Jr., and James M. Reynolds, III, hereby discloses 

any publicly held corporate affiliation of Appellants and certifies that the 

following judges, attorneys, persons, associations of persons, firms, 

partnerships, and corporations have an interest in the outcome of the abovestyled cause: 

 A. Corporate Disclosure Statement 

 None. 

 B. Certificate of Interested Persons 

 N.D. Horton, Jr., Appellant 

 James M. Reynolds, III, Appellant 

 C. Ellis Brazeal III, Attorney for Appellants 

 Walston, Wells & Birchall, LLP, Attorneys for Appellants 

 William R. Sawyer, U.S. Bankruptcy Court Judge 

 J. Lester Alexander, Plaintiff, Appellee 

 Brent Barrier, Jr., Attorney for Appellee 

 Phelps Dunbar, LLP, Attorneys for Appellee 

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STATEMENT REGARDING ORAL ARGUMENT

 Appellants submit that this case involves a legal question of 

first impression - - the interpretation of Ala. Code § 8-9A-8(d). Appellants 

respectfully request oral argument. 

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TABLE OF CONTENTS

CERTIFICATE OF INTERESTED PERSONS AND CORPORATE 

DISCLOSURE STATEMENT....................................................................... 1 

STATEMENT REGARDING ORAL ARGUMENT ..................................... i 

TABLE OF CONTENTS................................................................................ ii 

TABLE OF CITATIONS .............................................................................. iv 

STATEMENT OF JURISDICTION ............................................................. vi 

STATEMENT OF ISSUES ............................................................................ 1 

STATEMENT OF THE CASE ...................................................................... 4 

 I. Course of Proceedings Below .................................................... 4 

 II. Statement of the Facts ................................................................ 4 

 III. Standard of Review .................................................................. 14 

SUMMARY OF THE ARGUMENT ........................................................... 15 

ARGUMENT AND CITATIONS TO AUTHORITY ................................. 22 

I. The Trial Court Erred in Failing to Determine that Ala. 

Code § 8-9A-8(d) Applies and Provides a Complete 

Defense to, or Offset Against, the Trustee’s Claims ............... 22 

II. The Trial Court Erred in Determining that the $5.5 

 million in loan proceeds did not constitute “Reasonably 

 Equivalent Value” for the Debtor’s Payments......................... 25 

III. The Trial Court Erred in Determining that the 

 Forbeance in Calling the Loans Did Not Constitute 

 “Reasonably Equivalent Value.”.............................................. 31 

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IV. The Trial Court Erred in Determining that the Forbearance 

 Calling the Loans Did Not Constitute “Reasonably 

 Equivalent Value.” ................................................................... 35 

V. The Trial Court Erred in Determining that the $1.5 million 

 Loan from Peoples Bank did not constitute “Reasonably 

 Equivalent Value.” ................................................................... 36 

VI. The Trial Court Erred in Failing to Determine that Other 

 Loans by Horton Directly to Terry Manufacturing 

 Provided “Value.” .................................................................... 37 

VII. The Trial Court Erred in Failing to Determine that Terry 

 Manufacturing and the Terrys were Alter Egos or held an 

 “identify of interest” such that any benefit to one 

 constituted benefit to the other................................................. 38 

CONCLUSION............................................................................................. 42 

CERTIFICATE OF COMPLIANCE............................................................ 43 

CERTIFICATE OF SERVICE ..................................................................... 44

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TABLE OF CITATIONS

Cases

International Administrative Services, Inc., 408 F.3d 689, 698 (11th Cir. 

2005) ............................................................................................................. 13 

Grisson, 955 F.2d 1440, 1444 (11th Cir. 1999.............................................. 18 

Fairchild Aircraft Corp., 6 F.3d 1119, 1125-26 (5th Cir. 1993)................... 18 

Rubin v. Manufacturers Hanover Trust Co., 661 F.2d 979 (2nd Cir. 1981) . 18 

Cavalier Homes of Ga., Inc., at 886 ............................................................. 23 

Day Telecommunications, Inc., 70 B.R. 904, 909........................................ 23 

Kallen v. Litas, 47 B.R. 977, 982-83 (N.D. Ill. 1985) .................................. 23 

Sunset Enterprise, Inc., v. B & B Coal Co., 38 B.R. 712, 717 (Bankr. W.D. 

Va. 1984)) ..................................................................................................... 23 

Uniroyal Tire Company, 779 So.2d 227, 236 (Ala. 2000)........................... 24 

Volkswagen of America, Inc., v. Dillard, 579 So.2d 1301, 1305 

(Ala. 1991) .................................................................................................... 24 

Bockman v. WCH L.L.C, 2006 WL 1361126 (Ala. 2006)............................ 25 

Supertrail Manufacturing Co., Inc. 276 B.R. So.2d 610 (Ala. 1964).......... 25 

Worthington v. USA, 21 F.3d 399 (11th Cir. 1994)....................................... 30 

Rodriguez, 895 F.2d 725 (11th Cir. 1990)..................................................... 31 

Martin, 205 B.R. 646 (Bankr. M.D. Ala. 1993) ........................................... 31 

Cavalier Homes of Georgia, Inc., 102 B.R. at 878 (Bankr. M.D. 

Ga. 1989)....................................................................................................... 31 

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Pembroke Development Corporation v. Commonwealth Savings & Loan 

Association, 124 B.R. 398 (Bkrtcy. S.D. Ala. 1991).............................. 35, 39 

BBL Group, Inc., 205 B.R. 625 (Bankr. N.D. Ala. 1996) ............................ 41 

Statutes

Ala. Code § 8-9A-8(d).................................... 2, 14, 17, 18, 20, 21, 22, 23, 26 

Ala. Code § 6-5-253(a)(4) ............................................................................ 24 

Ala. Code 1975 § 40-27-1............................................................................. 26 

11 U.S.C. § 548............................................................................................. 33 

11 U.S.C. § 548(d)(2)(A).............................................................................. 34 

Ala. Code § 8-3-2.......................................................................................... 36 

Ala. Code § 8-3-11........................................................................................ 36 

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STATEMENT OF JURISDICTION

 This Court has appellate jurisdiction over this matter pursuant 

to 28 U.S.C. § 158(a). 

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STATEMENT OF THE ISSUES

1. Whether the Court erred (or misinterpreted the law) in 

finding that the $5.5 million in loan proceeds received by the Debtor from 

the loan made by Mr. Horton’s company, American Real Estate Investment 

Company, Ltd., L.P. (“American Real Estate”), did not constitute 

“reasonably equivalent value” for the guaranties and payments from Terry 

Manufacturing Company, Inc. (“Terry Manufacturing” or “Debtor”)? 

 2. Whether the Court erred (or misinterpreted the law) in 

finding that the $1.5 million in loan proceeds received by the Debtor from 

Peoples Bank did not constitute “reasonably equivalent value” to the Debtor 

in exchange for the Debtor’s payments? 

 3. Whether the Court erred (or misinterpreted the law) in 

failing to find that the following loans constituted “reasonably equivalent 

value:” 

 (1) one for $500,000 from American Real Estate dated February 

25, 2003; (2) one for $175,000 from N.D. Horton, Jr. dated January 10, 

2003; and (3) one for $88,000 from N. D. Horton, Jr. dated February 10, 

2003. 

 4. Whether the Court erred (or misinterpreted the law) in 

failing to find that the Terrys and the Debtor were “alter egos” or had a 

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substantial “identity of interest” such that the reduction of the Terrys’ 

obligations by payments from the Debtor constituted “reasonably equivalent 

value?” 

 5. Whether the Court erred (or misinterpreted the law) in 

failing to find that the Terrys and the Debtor were “alter egos” or had a 

substantial “identity of interest” such that the guaranties provided by the 

Debtor were supported by “reasonably equivalent value?” 

 6. Whether the Court erred (or misinterpreted the law) in 

failing to find that the payments by the Debtor to Horton resulted in 

“reasonably equivalent value” by having Horton and/or American Real 

Estate defer from calling their various loans? 

 7. Whether the Court erred (or misinterpreted the law) in 

failing to hold that the defendants were entitled to relief pursuant to Ala. 

Code § 8-9A-8(d)? 

 8. Whether the Court erred (or misinterpreted the law) in 

not finding that the payments by the Debtor (and the commensurate 

reduction in its contingent liability) constituted “reasonably equivalent 

value?” 

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 9. Whether the Court applied the correct legal standard in 

assessing whether “reasonably equivalence value” had been received by the 

Debtor for its guaranties and payments? 

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STATEMENT OF THE CASE

I. Course of Proceedings Below 

 

 Alexander, the Trustee in the bankruptcy case of Terry 

Manufacturing Company, Inc., pending in the U.S. Bankruptcy Court for the 

Middle District of Alabama bearing Case No. 03-32063-WRS, commenced 

this Adversary Proceeding No. 05-3042 seeking to set aside purportedly 

fraudulent pre-petition transfers by the debtor to Horton and Reynolds. 

After a trial, the bankruptcy court rendered a judgment in favor of the 

Trustee and against the Defendants in the amount of $596,738.60. The 

Defendants filed a timely post-trial motion, which was denied, and then 

timely commenced this appeal.

II. Statement of the Facts 

 The Trustee and the Appellants stipulated to the following facts 

at trial: 

 1. Messrs. Horton and Reynolds were owners of common 

stock of Perky Cap Company, Inc. (“Perky Cap”), a manufacturer 

headquartered in Eaton, Georgia. 

 2. On November 10, 2000, Cotina Terry, daughter of Roy 

Terry, executed a Purchase Money Promissory Note (the “Cotina Terry 

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Note”) in the principal sum of TWO HUNDRED THOUSAND NO/100 

($200,000.00) DOLLARS, bearing interest at the rate of 9.5% per annum. 

 3. The Cotina Terry Note was made payable to Mr. Horton 

and Mr. Reynolds, and was purportedly given in consideration of 9,000 

shares of Perky Cap common stock sold to Cotina Terry by Messrs. Horton 

and Reynolds. These shares represented ten (10%) percent of the 

outstanding common stock of the Company. 

 4. Terry Manufacturing was not a signatory to the Cotina 

Terry Note. 

 5. All payments on the Cotina Terry Note were made by 

Terry Manufacturing to Messrs. Horton and Reynolds. The Note was paid 

in full with payments totaling TWO HUNDRED THIRTY-FOUR 

THOUSAND, THREE HUNDRED SEVENTY-FIVE DOLLARS AND 

81/100 ($234,375.81). 

 6. On November 10, 2000, Allie Robinson, wife of Rudolph 

Terry, executed a promissory note in a form identical to that executed by 

Cotina Terry. The note was designated a Purchase Money Promissory Note 

(the “Allie Robinson Note”), and, like the note executed by Cotina Terry, 

was in the principal sum of TWO HUNDRED THOUSAND ($200,000.00) 

DOLLARS, and provided for 9.5% interest. Also, like the Cotina Terry 

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Note, the promissory note executed by Allie Robinson was given for and in 

consideration of 9,000 shares of Perky Cap Stock sold to Ms. Robinson by 

Messrs. Horton and Reynolds. These shares represent ten (10%) percent of 

the outstanding common stock of Perky Cap 

 7. Terry Manufacturing was not a signatory to the note 

executed by Ms. Robinson. 

 8. Terry Manufacturing executed written guarantees of the 

promissory notes executed by Ms. Terry and Ms. Robinson. 

 9. The Perky Cap common stock purchase by Cotina Terry 

and Allie Robinson was registered in their names, and they received all 

benefits flowing to holders of Perky Cap Stock, which would have included 

recognizing for federal tax purposes their respective share of losses recorded 

by Perky Cap, a sub-s corporation. 

 10. Terry Manufacturing was never a shareholder of Perky 

Cap. None of the stock purchased by Ms. Robinson or Ms. Terry was 

registered in its name. 

 11. On May 30, 2002, Roy and Rudolph Terry jointly 

executed a promissory note, in favor of Messrs. Horton and Reynolds, in the 

principal amount of SIX HUNDRED TWENTY-FOUR THOUSAND 

NO/100 ($624,000.00) DOLLARS, and bearing interest at the rate of 9.5% 

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per annum. In consideration thereof, Messrs. Horton and Reynolds 

purportedly transferred to Roy and Rudolph Terry, jointly, 27,900 shares of 

Perky Cap common stock, representing thirty-one (31%) percent of the 

outstanding common stock of that company. The parties do not stipulate as 

to whether the shares were actually transferred. If, in fact, the shares were 

transferred, they were registered in the name of Roy and Rudolph Terry, 

individually, and Terry Manufacturing had no interest in the shares 

whatsoever. 

 12. Terry Manufacturing made all payments on the note 

executed by Roy and Rudolph Terry. Payments continued until May, 2003, 

and totaled ONE HUNDRED TWENTY-SEVEN THOUSAND, NINE 

HUNDRED EIGHTY-SIX DOLLARS AND 98/100 ($127,986.98). No 

payments were made after the Chapter 11 filing by Terry Manufacturing. 

 13. Terry Manufacturing made total payments of FIVE 

HUNDRED NINETY-SIX THOUSAND, SEVEN HUNDRED THIRTYEIGHT DOLLARS AND 60/100 ($596,738.60) to Messrs. Horton and 

Reynolds in connection with the promissory notes executed by Cotina Terry, 

Allie Robinson and Roy and Rudolph Terry (collectively the “Stock 

Purchase Notes”). 

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 14. A number of entities were unsecured creditors of Terry 

Manufacturing prior to November 10, 2000 (the date on which Cotina Terry 

and Allie Robinson delivered their respective promissory notes to Messrs. 

Horton and Reynolds), and remained unsecured creditors of Terry 

Manufacturing as of the date Terry Manufacturing filed for relief under 

Chapter 11 of the Bankruptcy Code. These unsecured creditors include 

American Express, Southern Mills, Arkansas State Highway Employees 

Retirement System, Arkansas Department of Economic Development, CIT 

Financial Services, Milliken & Company, Darwood Manufacturing, L.L.C. 

Industries, Inc., Atlantic Thread and Supply Company, Inc., and Bonifay 

Manufacturing Company. 

 In addition to the stipulated facts, Appellants submit the 

following facts: 

 15. On November 10, 2000, pursuant to a Line of Credit 

Promissory Note, Roy and Rudolph Terry borrowed $5.5 million from 

American Real Estate Investment Company, Ltd., L.P. (“American Real 

Estate”). Transcript, pp. 168-170. Horton Ex. 1. (all references to 

Appellants’ exhibits will be as "Horton Ex.") Mr. Horton testified that the 

general partner of American Real Estate is RJ & J Enterprises, Inc., and that 

Mr. Horton is president of RJ & J Enterprises, Inc. Transcript, pp. 156, 162. 

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 16. On the same date November 10, 2000, the Cotina Terry 

Note and Allie Robinson Note were executed and they purchased 20% of the 

stock of Perky Cap. (Stipulated) 

 17. A loan agreement was executed in connection with the 

$5.5 million loan. Transcript, p. 168. Horton Ex. 3. This was crossdefaulted with the Cotina Terry Note and the Allie Robinson Note. Id. The 

$5.5 million loan was guaranteed by Terry Manufacturing. Horton Ex. 10. 

 18. N.D. Horton testified that he would not have made the 

$5.5 million loan (the largest loan that American Real Estate had ever made) 

had Mrs. Terry and Ms. Robinson not purchased the stock pursuant to Mr. 

Terry’s oral commitment in that regard. Transcript, pp. 186, 187-188. Mr. 

Alexander testified that, had Terry Manufacturing ever ceased making 

payments on either of these notes, American Real Estate could have called 

the $5.5 million loan. Id., pp. 126-128. 

 19. Although the $5.5 million loan was to the Terrys 

individually, the Terrys transferred all of these funds into Terry 

Manufacturing. Transcript pp. 223-232. Horton Ex. 62. Terry Depo. Pp. 

26-27. 

 20. On May 30, 2002, Perky Cap borrowed $1.5 million 

from Peoples Bank of Eatonton and transferred this money into Terry 

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Manufacturing. Id. at 223, 224, 228. Horton Ex. 57, 62. Terry Depo. Pp. 

33-34. 

 21. On the same date as the Perky Cap loan, Roy and 

Rudolph Terry purchased 31% of the stock of Perky Cap from Mr. Horton 

and Mr. Reynolds, which constituted all of Horton and Reynolds’ remaining 

interest in Terry Manufacturing. Id. at pp, 68, 186-187. Horton Ex. 54. 

Horton Ex. 43.

 22. At that time, Mr. Horton and Mr. Reynolds resigned as 

officers of Perky Cap and resigned from the Board of Directors of Perky Cap 

(the “Board”). Id. at pg. 192. Horton Ex. 47. 

 23. After Mr. Horton and Mr. Reynolds resigned from the 

Board, Roy Terry, Rudolph Terry, and Jack Perkinson consented to 

obtaining the $1.5 million loan from Peoples Bank. Horton Ex. 48. 

 24. Mr. Horton testified that, had he not been bought out of 

Perky Cap, he would not have facilitated the loan from Peoples Bank. Id. 

p.194. 

 25. Mr. Horton facilitated the loan with Peoples Bank. Id., p. 

189.. Accordingly, but for Mr. Horton’s intervention, Terry Manufacturing 

would not have received the $1.5 million. Id. p. 189 . 

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 26. As testified to by Jesse Slaton, the Appellant’s 

accounting expert, all of the proceeds from the $5.5 million loan to the 

Terrys was deposited into bank accounts of Terry Manufacturing. Mr. 

Slaton further testified that all of these loan proceeds appear to have been 

used for ordinary business expenses of Terry Manufacturing. Id. at p. 228, 

231-232, 241. Horton Ex. 62 

 27. As to the Peoples Bank loan, Mr. Slaton testified that all 

of these proceeds were deposited into bank accounts of Terry 

Manufacturing. Transcript, pp. 228, 231-232, 241. Horton Ex. 62. He 

further testified that all of these proceeds appear to have been used for 

ordinary business expenses of Terry Manufacturing. Id. 

 28. The payments by the Debtor on the Cotina Terry Note 

and the Allie Robinson Note totaled $468,751.62 and resulted in a 

commensurate reduction of indebtedness under those notes. (Stipulated) 

 29. The payments by Terry Manufacturing on the Roy and 

Rudolph Stock Purchase Notes totaled $127,986.98 and resulted in a 

commensurate reduction of the indebtedness under that note. (Stipulated) 

 30. The Terry’s desired, and communicated to Horton their 

desire, to have control of Perky Cap, a company which manufactured the 

products which their company did not manufacture. Transcript, p. 186; 

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Terry depo. p. 9-12. This was done so that Terry Manufacturing could 

supply the entire uniforms to customers such as McDonald’s Corporation 

 31. The Terrys told Horton, and Roy Terry testified that, one 

of their biggest customers, McDonald’s Corporation, would not buy 

uniforms piecemill. Terry Depo. p. 12. Instead, McDonald’s purchased the 

cap, shirt and pants from one supplier. Id 

 32. Each purchases of the Perky Cap stock was for a price of 

$200,000 per 10% of stock purchased. Id. At 13-14. This was true from 

1994 through 2002. Id. 

33. The Trustee acknowledged that, due to the Peoples Bank 

loan to Perky Cap, Terry Manufacturing’s net relationship with Perky Cap 

was a positive $500,000.00. Transcript p. 137-138. 

 34. The promissory notes from Allie Robinson and Cotina 

Terry were guaranteed by Terry Manufacturing. (Stipulated) Cotina Terry is 

Roy Terry’s daughter. Terry Depo. p. 16. Allie Robinson is Rudolph Terry’s 

wife. Id at 16. Horton was unwilling to extend credit to Mrs. Terry and 

Mrs. Robinson individually. Transcript, pp. 168-169. As a condition to the 

stock purchase, he required Terry Manufacturing to guarantee those 

promissory notes. Id. at 169. 

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35. Terry testified that Terry Manufacturing had a least three 

other loans with Horton or American Real Estate: (1) one for $500,000 dated 

February 25, 2003; (2) one for $175,000 dated January 10, 2003; and (3) one 

for $88,000 dated February 10, 2003. Terry Depo., pp. 98-99. Ex. 11, 12, 

and 13. Terry further testified that, had Terry Manufacturing not made 

payments on the $624,000 note, Terry Manufacturing would not have 

received these funds, Id. pp. 99-100. 

 36. The Trustee has acknowledged the following conduct 

which would warrant finding that the Debtor and the Terrys were "alter 

egos" or had a substantial "identity of interest": 

 a) certain financial records of Terry Manufacturing were 

either erroneous, highly misleading, or outright fraudulent; Id. at 145. 

 b) Terry Manufacturing prepared two sets of tax returns; Id 

at 42. 

 c) Terry Manufacturing’s financial statements were grossly 

misleading; Id. at 98. 

d) Terry Manufacturing engaged in check kiting, off 

balance sheet loans, trade debt, and ponzi schemes to sustain its operations; 

Id. at 141, 143, 145. 

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 e) Roy and Rudolph Terry used funds of Terry 

Manufacturing for personal obligations. Id. at 142-143, and 

f) Roy and Rudolph Terry were the two primary 

shareholders of Terry Manufacturing, and there is no evidence that any of 

the other shareholders exerted any control over Terry Manufacturing. Id. pp. 

142-143. 

37. David Giddens, accountant for Mr. Horton acknowledged 

that he did not review Mr. Horton’s 2002 tax return with him before it was 

filed. Giddens Depo. p. 38 

III. Standard of Review 

 The district court’s review of factual findings of the bankruptcy 

court is for “clear error.” In re: International Administrative Services, Inc., 

408 F.3d 689, 698 (11th Cir. 2005). The district court’s review of the 

determinations of law by the bankruptcy court is “de novo.” Id. 

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SUMMARY OF THE ARGUMENT

In almost any fraudulent transfer action, one question which 

arises is whether the transferor received “reasonably equivalent value” for 

the transfers. The trial court found that Terry Manufacturing (the 

transferor/Debtor) did not. However, the trial court’s findings in this regard 

were clearly erroneous - - the trial court’s statement of the factual basis for 

these findings are directly contradicted by the record. The millions of 

dollars in loans initially received by third parties, namely the Terry Family 

and Perky Cap, but then transferred to Terry Manufacturing, constituted 

"reasonably equivalent value" for the guaranty by Terry Manufacturing of 

the Stock Purchase Notes and the payments on said notes. Moreover, even if 

these millions of dollars in loans are disregarded, under Alabama law, the 

reduction in the debts of the Terry Family through the payment of the Stock 

Purchase Notes entitles Horton and Reynolds to an offset in like amount 

under Ala. Code § 8-9A-8(d). Despite being raised at trial, and in a motion 

to alter or amend, the trial court did not specifically address this “offset” 

argument. It’s failure to embrace this argument clearly presents an 

erroneous legal conclusion on the part of the trial court. 

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In order to understand the factual and legal arguments presented 

by this complex case, a thorough understanding of the players and 

transactions is imperative. 

 This case involves three companies and their principals: 

a) Terry Manufacturing (a manufacturer of uniform shirts and 

pants) and its principals, brothers Roy and Rudolph Terry, and Cotina Terry 

(Roy’s daughter) and Allie Robinson (Rudolph’s wife) (collectively the 

“Terry Family”); 

b) American Real Estate (an investment partnership owned 

ostensibly by Horton and Reynolds); and 

c) Perky Cap (a manufacturer of caps). 

There are several transactions at issue but they fall into two 

categories: 

 a) the sale of stock in Perky Cap from Horton and Reynolds 

to the Terry Family; and 

 b) loans to the Terry Family or Perky Cap from which all 

loan proceeds - - more than $7 million - - were transferred to Terry 

Manufacturing and utilized to pay its ordinary bills and expenses. 

 The undisputed evidence reveals that the Terry Family 

purchased stock in Perky Cap from Horton and Reynolds so that the Terry 

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Family could gain control over a cap manufacturer to augment the 

manufacture of shirts and pants by Terry Manufacturing. (Roy Terry 

testified that a customer, McDonalds Corporation, required Terry 

Manufacturing to produce all parts of a uniform - - caps, shirts, and pants). 

This also rendered Perky Cap a Minority Owned Business, another desired 

result of the Terry Family. The Terry Family did not pay cash for the Perky 

Cap stock but instead executed the Stock Purchase Notes to pay for the 

stock. Terry Manufacturing guaranteed the Stock Purchase Notes from 

Cotina Terry and Allie Robinson since the stock purchase was part of the 

company’s business plan to obtain control of Perky Cap and since Horton 

made it a requisite. 

 On the same dates that the stock purchases occurred, millions of 

dollars were loaned to the Terry Family and/or Perky Cap and then 

immediately transferred into Terry Manufacturing. On November 10, 2000, 

the first stock purchased occurred and American Real Estate loaned $5.5 

million to the Terry Family for infusion into Terry Manufacturing. On May 

30, 2002, additional stock in Perky Cap was purchased by the Terry Family, 

and Roy and Rudolph Terry replaced Horton and Reynolds on the Board of 

Directors of Perky Cap. Having gained control over Perky Cap (through the 

stock purchases), the Terrys caused Perky Cap to borrow $1.5 million from 

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Peoples Bank of Eatonton (with the assistance of Horton). This $1.5 million 

was transferred immediately into Terry Manufacturing. 

 The payments found to be fraudulent transfers were the 

payments that Terry Manufacturing made on the Stock Purchase Notes. The 

trial court found that these payments were not supported by “reasonably 

equivalent value.” However, the trial court’s factual and legal 

determinations are flawed. First, Terry Manufacturing did receive 

“reasonably equivalent value” - - millions of dollars. Second, as a separate 

and equally efficacious defense, Ala. Code § 8-9A-8(d) provides a complete 

defense or offset against the Trustee’s fraudulent transfer claims. 

 In finding that the loaned funds did not constitute “reasonably 

equivalent value,” the trial court made factual determinations that directly

contradicted the testimony and documents at issue, thereby making clearly 

erroneous findings. As to Ala. Code § 8-9A-8(d), the trial court failed to 

address this Code provision in its Memorandum Decision and even upon 

consideration of the defendants’ motion to alter or to amend. The reason 

appears clear - - a plain reading of § 8-9A-8(d) provides a complete defense 

to the defendants. 

This case is clearly not as straightforward as many fraudulent 

transfer cases, but a careful review of the facts and law reveals that the trial 

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court’s judgment of $596,738.60 against Horton and Reynolds is flawed. 

The trial court indicated that the defendants’ arguments in this case left him 

“grasping madly for a bottle of aspirin.” See Memorandum Decision, p. 8. 

Furthermore, the trial court stated that: 

“You know, if I had my choice of a root canal and looking at 

your tracing analysis, I think it is an easy call.” Transcript, p. 209. (The 

tracing analysis demonstrated that the loan proceeds of several million 

dollars went to Terry Manufacturing.) 

Perhaps the trial court was antipathetic towards this case, but, 

for whatever reason, the trial court: 

 a) perhaps inadvertently, misstated testimony and 

mischaracterized documentary evidence; and 

 b) failed to specifically consider Ala. Code § 8-9A-8(d). 

In addressing fraudulent transfers, the Eleventh Circuit Court of 

Appeals recognizes that such cases are not always as straightforward as one 

might desire and, therefore, follows the “totality of the circumstances” 

approach to determine “reasonably equivalent value” and rejects the use of a 

mechanical mathematical formula.1

 In re Grissom, 955 F.2d 1440, 1444 

 

1

 The Eleventh Circuit has also acknowledged that “[c]aselaw applying the concept of ‘fair consideration’ 

under the old Bankruptcy Act of 1898 has been adopted as applicable to the concept of ‘reasonably 

equivalent value’ under the current Bankruptcy Code of 1978.” In re Chase & Sanborn Corp., 904 F.2d 

588, fn 11 (11th Cir. 1990). 

Case 2:06-cv-00746-WHA Document 6 Filed 09/14/2006 Page 27 of 52
20 

(11th Cir. 1999); In the Matter of Fairchild Aircraft Corp., 6 F.3d 1119, 

1125-26 (5th Cir. 1993). In reviewing the “totality of circumstances,” this 

Court may consider benefit initially conferred upon a third party. The 

seminal case involving benefit initially conferred upon a third party is Rubin 

v. Manufacturers Hanover Trust Co., 661 F.2d 979 (2nd Cir. 1981). There, 

the Second Circuit made clear that “the cases recognize . . . that a debtor 

may sometimes receive ‘fair’ consideration even though the consideration 

given for his property or obligation goes initially to a third person.” Id. at 

991. The Court further clarified that: 

Although transfers solely for the benefit of third 

parties do not furnish fair consideration under § 

67(d)(1)(e), the transaction’s benefit to the debtor 

need not be direct; it may come indirectly through 

benefit to a third person. If the consideration given 

to the third person has ultimately landed in the 

debtor’s hands, or if the giving of the consideration 

to the third person otherwise confers an economic 

benefit upon the debtor, then the debtor’s net 

worth has been preserved, and § 67(d) has been 

satisfied-provided, of course, that the value of the 

benefit received by the debtor approximates the 

value of the property or obligation he has given up. 

Id. 

A review of the “totality of circumstances” of the players and transactions in 

this case warrants a reversal of the bankruptcy court and a judgment in favor 

of Appellants. 

Case 2:06-cv-00746-WHA Document 6 Filed 09/14/2006 Page 28 of 52
21 

 In this case, the parties have stipulated that Terry 

Manufacturing made payments to Horton and Reynolds on the Stock 

Purchase Notes in the amount of $596,738.60, which notes were given in 

consideration for the purchase of the stock by the Terry Family. The 

question presented is whether the acquisition of the Perky Cap stock by the 

Terry Family and/or the payments by Terry Manufacturing on the Stock 

Purchase Notes resulted in transactions which conveyed “reasonably 

equivalent value” to Terry Manufacturing. By purchasing the stock, 

guaranteeing the Stock Purchase Notes, and/or making payments thereon, 

Terry Manufacturing received several million dollars, an amount greatly in 

excess of the $596,738.60 in payments which the trial court found to be 

fraudulent transfers. Clearly, these millions of dollars in transfers provided 

Terry Manufacturing with “reasonably equivalent value” such that no 

fraudulent transfers occurred. Additionally, Terry Manufacturing and the 

Terry Family held such an “identity of interest” that “what benefited one 

benefited the other” and, therefore, “reasonably equivalent value” was 

received. Finally, even if these millions of dollars in loans are not 

considered, under Ala. Code § 8-9A-9(d), the Appellants have a complete 

offset or defense to the amount claimed. 

Case 2:06-cv-00746-WHA Document 6 Filed 09/14/2006 Page 29 of 52
22 

ARGUMENT AND CITATIONS TO AUTHORITY

I. The Trial Court Erred in Failing to Determine that Ala. 

Code § 8-9A-8(d) Applies and Provides a Complete Defense 

to, or Offset Against, the Trustee’s Claims.

Under Ala. Code § 8-9A-8(d), a good faith transferee is entitled 

to an offset to the extent of value given the debtor for the transfer “or to

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

Accordingly, under the plain language of the statute, Horton and Reynolds 

are entitled to an offset in the amount of the value given to Ms. Robinson, 

Ms. Terry and Roy and Rudolph Terry (the “Terry Family”). The comments 

to the Ala. Fraudulent Transfer Act, at Comment 3, indicate that the 

language “or to another person 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. 

 Ala. Code § 8-9A-3(a) states that “value is given for a transfer 

if, in exchange for the transfer, property is transferred or an antecedent debt 

is secured or satisfied. . .” “An antecedent debt arises once the debtor 

Case 2:06-cv-00746-WHA Document 6 Filed 09/14/2006 Page 30 of 52
23 

borrows the money or signs the agreement even though repayment may be 

postponed or contingent.” In re Cavalier Homes of Ga., Inc., at 886 (citing 

In re Day Telecommunications, Inc., 70 B.R. 904, 909 (Bankr. E.D.N.C. 

1987); Kallen v. Litas, 47 B.R. 977, 982-83 (N.D. Ill. 1985); Sunset 

Enterprise, Inc., v. B & B Coal Co., 38 B.R. 712, 717 (Bankr. W.D. Va. 

1984)). Accordingly, the Stock Purchase Notes constituted “antecedent 

debts” of the Terry Family. So, each payment on the Stock Purchase Notes 

by Terry Manufacturing provided a reduction in the amount of an antecedent 

debt of the Terry Family. Under Ala. Code § 8-9A-3(a), such reductions 

constitute value to the Terry Family. This “value” received by the Terry 

Family constitutes “value. . . received by another person as a consequence of 

the debtor’s [Terry Manufacturing’s] making such transfer” under Ala. Code 

§ 8-9A-8(d). This results in an offset in the amount of such reduction in the 

debt under § 8-9A-8(d). 

 For some reason, the trail court failed to address this argument 

in its original memorandum decision and again failed to address it in 

response to the appellant’s motion to alter or to amend. A review of 

Alabama law on statutory construction suggests why the trial court failed to 

address it - - there is simply no way to address this statute and not find for 

the Appellants. 

Case 2:06-cv-00746-WHA Document 6 Filed 09/14/2006 Page 31 of 52
24 

The issue in the instant case is how to interpret § 8-9A-8(d) of 

the Alabama Fraudulent Transfers Act, specifically the phrase “or to another 

person,” the only four words that separate the Alabama act from the uniform 

version. The Alabama legislature could have easily adopted the uniform act 

whole cloth, but chose to add “or to another person,” to the original text of § 

8-9A-8(d). By changing the act, the legislature manifested its clear intent for 

the Alabama Fraudulent Transfers Act to differ from the uniform act. In Ex 

parte Uniroyal Tire Company, 779 So.2d 227, 236 (Ala. 2000), the 

Alabama Supreme Court held that: “There is a presumption that every word, 

sentence or provision was intended for some useful purpose, has some force 

and effect, and that some effect is to be given to each...”. Id. (emphasis 

added). Ignoring these four words in the Alabama Fraudulent Transfers Act 

as if the legislature never wrote or codified it is to act at cross-purposes with 

Alabama case law of statutory construction. 

With that as a foundation, the question remains as to how to 

interpret the statute. The fundamental rule in interpreting acts of the 

legislature is to “ascertain and give effect to the intent of the legislature in 

enacting the statute.” Volkswagen of America, Inc. v. Dillard, 579 So.2d 

1301, 1305 (Ala. 1991). In doing so, the court must look to the “plain 

Case 2:06-cv-00746-WHA Document 6 Filed 09/14/2006 Page 32 of 52
25 

meaning of the words as determined by the legislature.”2 Bockman v. WCH, 

L.L.C. 2006 WL 1361126 (Ala. 2006). 

The law is well-settled that, under the plain reading of the 

statute, a reduction in, or satisfaction of, the debt of the debtor/transferor 

constitutes “reasonably equivalent value.” See Boyett’s, Inc. v. Gross, 163 

So.2d 610 (Ala. 1964); In re: Supertrail Manufacturing Co., Inc., 276 B.R. 

136 (Bankr. N.D. Miss. 2000). By adding “or to another,” the Alabama 

legislature clearly evidenced its intent that the reduction in the debt of 

“another” based upon the transferor’s payments would constitute 

“reasonably equivalent value.” Therefore, the trial court erred in not 

construing “or to another” in Ala. Code § 8-9A-8(d) to apply to the value 

received by the Terry Family for the reduction in their antecedent debts 

under the Stock Purchase Notes. 

II. The Trial Court Erred in Determining that the $5.5 million 

in loan proceeds did not constitute “Reasonably Equivalent 

Value” for the Debtor’s Payments.

 It is undisputed that, on November 10, 2000, two transactions 

took place: 1) Cotina Terry (daughter of Roy Terry) and Allie Robinson 

(wife of Rudolph Terry) each purchased 10% of the outstanding shares of 

 

2

 “Words used in a statute must be given their natural, plain, ordinary commonly understood meaning, and 

where plain language is used a court is bound to interpret that language to mean exactly what it says.” 

Chapman v. Smith, 893 So.2d 293, 297 (Ala. 2004) quoting Ex parte Alabama Dep’t of Mental Health & 

Mental Retardation, 840 So.2d 863, 867 (Ala. 2002) (internal citations omitted). 

Case 2:06-cv-00746-WHA Document 6 Filed 09/14/2006 Page 33 of 52
26 

Perky Cap and executed two stock purchase notes in connection therewith 

which were guaranteed by Terry Manufacturing; and 2) American Real 

Estate agreed to loan $5.5 million to the Terry Brothers pursuant to a $5.5 

million Line of Credit Promissory Note guaranteed by Terry Manufacturing. 

It is further undisputed that $5.5 million was loaned to the Terry Family, 

then transferred to Terry Manufacturing, and then utilized by Terry 

Manufacturing to pay its customary bills and expenses. 

 Mr. Horton and Mr. Terry both testified, and there was no 

testimony to the contrary, that the stock purchases in Perky Cap by the Terry 

Family were designed to benefit Terry Manufacturing, not the Terrys 

individually. Both Horton and Terry testified that part of Terry 

Manufacturing’s business plan was for the Terry Family to have a 

controlling interest in Perky Cap, a manufacturer of caps, so that Terry 

Manufacturing could manufacture, or control the manufacture of, entire 

uniforms including caps. Mr. Terry testified that this was important to 

existing customers such as McDonalds and potential customers such as 

Coca-Cola. Additionally, Terry testified that it was important for Perky Cap 

to be a minority-owned business (“MOB”), which was accomplished by the 

Case 2:06-cv-00746-WHA Document 6 Filed 09/14/2006 Page 34 of 52
27 

Cotina Terry and Allie Robinson stock purchase.3 The question is whether 

the stock purchases (and the payments therefore by Terry Manufacturing 

pursuant to its guaranties) resulted in the receipt of “reasonably equivalent 

value” by Terry Manufacturing. 

 As to the nexity between the stock purchases (and the payments 

therefore) and the $5.5 million loan, under examination by Trustee’s 

counsel, Mr. Horton explained that, while the stock purchase and the loan 

were separate business deals, they were related as follows: 1) the two 

transactions were cross-defaulted; and 2) the $5.5 million loan was made 

based, in part, upon Mr. Terry’s business plan for Terry Manufacturing 

which involved the purchase of the Perky Cap stock by the Terry Family. 

 Mr. Horton testified, and there was no testimony to contradict 

it, that if the Terry Family had not purchased the Perky Cap stock, American 

Real Estate (which Mr. Horton controlled), would not have loaned the $5.5 

million to the Terry Family. Mr. Horton explained that, if Terry 

Manufacturing had departed from its business plan by not purchasing the 

Perky Cap stock, Mr. Horton would have had grave concerns about Terry 

Manufacturing’s business plan and would not have loaned the $5.5 million - 

- the largest loan that American Real Estate had ever made. Importantly, 

 

3

 After these two purchases, Perky Cap was owned: Cotina Terry (10%); Allie Robinson (10%); Roy Terry 

Case 2:06-cv-00746-WHA Document 6 Filed 09/14/2006 Page 35 of 52
28 

Mr. Terry and Mr. Slaton both testified that all of the proceeds from the $5.5 

million loan were deposited into Terry Manufacturing accounts. Mr. Horton 

testified that the purpose of the loan was to fund the $5.5 million to Terry 

Manufacturing. So, as the result of purchasing the Perky Cap stock for 

Cotina Terry and Allie Robinson, Terry Manufacturing received $5.5 

million, clearly more than “reasonably equivalent value.” 

 In reaching its conclusion that the $5.5 million in loan proceeds 

did not constitute “reasonably equivalent value,” the trial court ignored the 

above-recited evidence and made the following factual findings: 

 a) “Horton testified at trial that he would not have made the 

loans to Cotina Terry and Allie Robinson for the purchase of the Perky Cap 

stock, but for the repayment of the loan by Terry Manufacturing. Horton’s 

claim is wholly lacking in logic. The repayment of the Cotina and Allie 

loans by Terry Manufacturing was not done until a later point in time.” 

Memorandum Decision, p. 8. 

 b) “None of this documentary evidence suggests any 

relationship to the Cotina and Allie loans.” Id. at p.8-9. 

 (10%); Rudolph Terry (10%); and Roy and Rudolph Terry (12%) for a total of 52%. 

Case 2:06-cv-00746-WHA Document 6 Filed 09/14/2006 Page 36 of 52
29 

 c) “None of the documents created on November 10, 2000, 

suggest such a connection and no credible evidence supports such a 

finding.” Id. at p. 9. 

 Horton did not testify that the loans to Cotina Terry and Allie 

Robinson would not have been made “but for the repayment of the loan by 

Terry Manufacturing.” Had Mr. Horton so testified, his testimony would 

have lacked credibility since, as the Court pointed out, the repayment of the 

loans were “not done until a later point in time.” Instead, Horton testified 

that he would not have sold the stock to Ms. Robinson and Ms. Terry unless 

Terry Manufacturing agreed to guarantee the Stock Purchase Notes which 

were given in exchange for the stock. Horton testified that he did not know 

Ms. Robinson and Ms. Terry and therefore required the guaranty from Terry 

Manufacturing. Accordingly, this factual determination by the trial court is 

clearly erroneous. 

 Moreover, the trial court’s factual determination that” [n]one of 

the documents created on November 10, 2000, suggest such a connection” is 

clearly erroneous as well. The very loan documents at issue (the Stock 

Purchase Notes and the $5.5 million loan documents) demonstrate that the 

loans were inextricably linked - - they were cross-defaulted. In other words, 

if Terry Manufacturing did not pay on the Stock Purchase Notes, Terry 

Case 2:06-cv-00746-WHA Document 6 Filed 09/14/2006 Page 37 of 52
30 

Manufacturing would have been in default on the $5.5 million obligation 

and American Real Estate could have called both loans. How much more 

closely could the two loans have been linked? 

 The Eleventh Circuit was faced with a similar situation where 

the trial court’s factual findings were directly at odds with the testimony 

adduced at trial. See Worthington v. USA, 21 F.3d 399 (11th Cir. 1994). 

The Worthington case involved a wrongful death action resulting from a 

plane crash. There the trial court found: “[u]nder the evidence presented, the 

Court does not credit testimony that [the decedent] suffered spatial 

disorientation as claimed by plaintiff.” The trial court’s determination was 

based upon the credibility of the witnesses. However, every expert witness 

who testified at trail acknowledged that the decedent suffered from spatial 

disorientation. Therefore, the Eleventh Circuit found the trial court’s factual 

determination to be clearly erroneous. 

 Here, the bankruptcy court’s factual determinations are 

similarly flawed. The two witnesses who spoke to the issue of the nexus 

between the Stock Purchase Notes and the $5.5 million loan both testified 

that, had the Stock Purchase Note transaction not gone forward, the $5.5 

million loan would not have occurred. Additionally, the very loan 

documents link these two loan transactions. Accordingly, these factual 

Case 2:06-cv-00746-WHA Document 6 Filed 09/14/2006 Page 38 of 52
31 

findings of the bankruptcy court are due to be overturned. Once overturned, 

this Court should find based upon the only evidence adduced that the two 

transactions were tied to one another and that they resulted in Terry 

Manufacturing receiving $5.5 million, a much greater amount than the 

payments at issue - - $596,738.60. 

III. The Terry Manufacturing payments generated “reasonably 

equivalent value” through the reduction of Terry 

Manufacturing’s guaranteed obligation. 

An alternate and equally compelling analysis reveals that the 

Terry Manufacturing payments on the Cotina Terry and Allie Robinson 

Stock Purchase Notes were exchanged for the “reasonably equivalent value” 

of the reduction in Terry Manufacturing’s guaranteed obligation for these 

notes. Each Court that has considered whether transfers made pursuant to a 

guaranty constitute “reasonably equivalent value” has determined that they 

do. See In re: Rodriguez, 895 F.2d 725 (11th Cir. 1990); In re: Martin, 205 

B.R. 646 (Bankr. M.D. Ala. 1993); and In re: Cavalier Homes of Georgia, 

Inc., 102 B.R. at 878 (Bankr. M.D. Ga. 1989). The Courts have uniformly 

held that, since the debtor received a dollar for dollar reduction in its 

guaranteed obligation, the debtor did receive “reasonably equivalent value.” 

Id. Importantly, both the Eleventh Circuit and the U.S. Bankruptcy Court 

for the Middle District of Alabama have embraced this argument. 

Case 2:06-cv-00746-WHA Document 6 Filed 09/14/2006 Page 39 of 52
32 

 In Rodriguez, the Eleventh Circuit not only recognized that a 

debtor may receive reasonably equivalent value from indirect benefits, but 

also acknowledged that repayment of a guaranteed obligation would 

constitute a “direct benefit” and, therefore, “reasonably equivalent value.” 

Importantly, in considering the law applicable to the facts, the Eleventh 

Circuit stated: 

Since Domino was not liable for repayment of 

International’s indebtedness, Domino could not be 

found to have benefited directly from repaying the 

loan absent a piercing of International’s corporate 

veil. 

Id. at 727. Accordingly, under the Eleventh Circuit’s analysis, if the debtor 

had been “liable for payment of the . . . indebtedness,” it would have 

received a “direct benefit.” Id. Therefore, the “direct benefit” which Terry 

Manufacturing received from the reduction of its guaranty obligation 

constitutes “reasonably equivalent value.” The Trustee acknowledges the 

precedential value of Rodriguez in his Memorandum of Law. 

 Notably, the Martin opinion was decided by the Bankruptcy 

Court for this District. In In re: Martin, C&C Land Corporation (“C&C”) 

purchased certain real property from Alfa Mutual Fire Insurance Company. 

C&C signed a purchase money promissory note and a mortgage regarding 

the purchase of this real estate. The individual debtor, Don Martin, 

Case 2:06-cv-00746-WHA Document 6 Filed 09/14/2006 Page 40 of 52
33 

guaranteed both the mortgage and the promissory note. Prior to his filing 

bankruptcy, Martin submitted a check in the amount of $105,062.49 as the 

final payment on the promissory note. When Martin later filed bankruptcy, 

the trustee filed suit to recover this payment under 11 U.S.C. § 548 as a 

fraudulent conveyance. The trustee argued that Martin did not receive 

“reasonably equivalent value” since C&C received value through the 

satisfaction of its debt and the release of its mortgage. However, Judge 

Steele found that, since the debtor was a guarantor of the debt, the debtor 

received “reasonably equivalent value” in the satisfaction of its antecedent 

debt. Id. at 648. In rendering this opinion, Judge Steele noted the opinion in 

In re: Cavalier Homes, supra. 

In Cavalier Homes, defendant AmSouth Bank issued an 

industrial revenue bond in favor of the individual defendants, who were 

principals of the company which leased real property to Cavalier Homes. As 

part of the transaction, the defendants executed a promissory note for 

$800,000 payable to the Development Authority of Jones County. This note 

was assigned by that authority to AmSouth Bank. Also as part of the 

transaction, the debtor executed a guaranty agreement in favor of AmSouth 

Bank guaranteeing payments under the bond. Pre-bankruptcy, the debtor 

made payments under its guaranty. The trustee filed suit to set aside these 

Case 2:06-cv-00746-WHA Document 6 Filed 09/14/2006 Page 41 of 52
34 

payments as fraudulent transfers, arguing that no value flowed to the debtor. 

The defendants argued that the debtor received “reasonably equivalent 

value,” because its contingent obligation under its guaranty was reduced by 

the transfers. The Court noted that, under 11 U.S.C. § 548(d)(2)(A), “value” 

means: “property or satisfaction or securing of a present or antecedent debt 

of the Debtor...” The Court found that the transfer reduced the debtor’s 

contingent liability under its guaranty and, therefore, received “reasonably 

equivalent value.” Id. at 880. 

The trial court found that it did not need to address this legal 

issue since it found the Terry Manufacturing guaranty to be a fraudulent 

transfer itself. However, the guaranties of the Stock Purchase Notes were 

exchanged for “reasonably equivalent value” - - the receipt by Terry 

Manufacturing of $5.5 million. Horton testified that he required these 

guaranties from Terry Manufacturing for the stock purchase to go forward 

and that the stock purchase allowed Terry Manufacturing to receive $5.5 

million. Since the guaranties were valid, the $596,738.60 in payments 

thereon were valid. Alternatively, as set forth in Section VII. below, and 

more specifically the Pembroke and BBL Group opinions, the guaranty from 

Terry Manufacturing was supported by “reasonably equivalent value.” 

Case 2:06-cv-00746-WHA Document 6 Filed 09/14/2006 Page 42 of 52
35 

IV. The Trial Court Erred in Determining that the Forbearance 

in Calling the Loans Did Not Constitute “Reasonably 

Equivalent Value.”

At trial, the Trustee acknowledged that, had Terry 

Manufacturing ceased making payments on the Stock Purchase Notes, the 

$5.5 million loan could have been called as to Terry Manufacturing pursuant 

to its guaranty of that loan. So, the payments at issue allowed Terry 

Manufacturing to continue its operations. This also represents “reasonably 

equivalent value.” See Pembroke Development Corporation v. 

Commonwealth Savings & Loan Association, 124 B.R. 398 (Bkrtcy. S.D. 

Ala. 1991). In Pembroke, the Court found that forbearance on collecting a 

debt constituted "reasonably equivalent value," without the necessity of 

proving the amount of the value. Similarly, while the value cannot be 

calculated with certainty, the forbearance in calling the $5.5 million loan 

was brought about by the payments on the Stock Purchase Notes and had to 

create substantial value to Terry Manufacturing. Had Terry Manufacturing 

been sued for the $5.5 million, it appears that Terry Manufacturing would 

have ceased operations much earlier. 

 

Case 2:06-cv-00746-WHA Document 6 Filed 09/14/2006 Page 43 of 52
36 

V. The Trial Court Erred in Determining that the $1.5 million 

loan from Peoples Bank did not constitute “Reasonably 

Equivalent Value.”

 The nexity between the stock purchases by the Terry Family 

and the loan from Peoples Bank is without dispute. Although the Trustee 

contends that they are unrelated, this admittedly unusual loan transaction 

which put $1.5 million into Terry Manufacturing’s coffers would not have 

occurred unless the Terry Family owned substantially all of the stock of 

Perky Cap. Had Terry Manufacturing not made the payments on the Stock 

Purchase Notes, Horton and Reynolds would have been entitled to recall the 

stock pursuant to their security interest therein; and Horton and Reynolds 

would not have resigned from the Perky Cap board of directors. 

 On May 30, 2002, Roy and Rudolph Terry purchased 31% of 

Perky Cap stock, purportedly giving them 84% of the stock of Perky Cap. 

The Trustee contends that this stock purchase never occurred since it was 

not reflected on Mr. Horton’s K-1s and due to certain transaction involving 

Wholesale Distribution and American Testing Laboratories.4

 Even if the 

stock was never transferred, the stock purchase transaction enabled the 

Terrys to obtain control of Perky Cap by replacing Horton and Reynolds as 

 

4

 The evidence weighs in favor that the stock purchase occurred; 1) a $624,000 note was executed as 

payment for the stock and payments in the amount of $127,986.98 were made; 2) Horton’s accountant 

admitted that he did not recall discussing the K-1 with Mr. Horton or reviewing his 2002 tax return with 

him; 3) Horton and Reynolds resigned as officers of Perky Cap (and the Terrys became officers); 4) Horton 

Case 2:06-cv-00746-WHA Document 6 Filed 09/14/2006 Page 44 of 52
37 

officers of the corporation and members of the Perky Cap Board of 

Directors. Once Mr. Horton and Mr. Reynolds were removed, Perky Cap 

borrowed $1.5 million from Peoples Bank on that same day (May 30, 2002), 

which $1.5 million was funneled into Terry Manufacturing. Furthermore, 

Mr. Horton arranged the loan with Peoples Bank. He testified that he would 

not have arranged the loan had he remained an owner of Perky Cap. 

Accordingly, due to Terry Manufacturing making the payments on the Stock 

Purchase Notes, and thereby maintaining ownership of the Perky Cap stock 

by the Terry Family, the Terry Family (acting as members of the Board of 

Perky Cap) utilized Perky Cap to borrow $1.5 million which was funneled 

immediately into Terry Manufacturing. Had the Terry Family not been in 

control of Perky Cap, it is inconceivable that Perky Cap would have 

borrowed the $1.5 million only to funnel it into Terry Manufacturing. 

VI. The Trial Court Erred in Failing to Determine That Other 

Loans by Horton Directly to Terry Manufacturing Provided 

“Value”

 Horton and/or American Real Estate made three other loans 

directly to Terry Manufacturing: 

 (1) one for $500,000 from American Real Estate dated February 

25, 2003; (2) one for $175,000 from N.D. Horton, Jr. dated January 10, 

 and Reynolds resigned from the Board of Perky Cap (and the Terrys joined the Board); and 5) Perky Cap 

Case 2:06-cv-00746-WHA Document 6 Filed 09/14/2006 Page 45 of 52
38 

2003; and (3) one for $88,000 from N. D. Horton, Jr. dated February 10, 

2003. 

Both Horton and Terry testified that, had the Stock Purchase Notes not been 

paid, Horton would not have loaned these other funds to Terry 

Manufacturing. Accordingly, even if the Court rejects all of the other 

arguments, Horton and Reynolds are due an offset reduction in the amount 

of the judgment by the amount of these loans: $736,000.00, which 

completely eviscerates the judgment. 

VII. The Trial Court Erred in Failing to Determine that Terry 

Manufacturing and the Terrys were Alter Egos or held an 

"identity of interest" such that any benefit to one 

constituted benefit to the other. 

 In Rodriguez, supra, the Eleventh Circuit considered whether it 

should pierce the corporate veil and find that the debtor benefited from the 

consideration given to a subsidiary corporation on the grounds that the 

subsidiary corporation was an “instrumentality of the debtor.” The Court 

noted that, for the “instrumentality” doctrine to apply, there must have been 

undue control over the other party and the use of that control must have 

harmed the transferee. Id. at 728. In finding that there was no evidence of 

undue control, the Eleventh Circuit noted that there was no evidence of 

“shared officers or intermingling of funds to support a claim” of undue 

 pledged its assets to borrow $1.5 million which was injected directly into TERRY MANUFACTURING. 

Case 2:06-cv-00746-WHA Document 6 Filed 09/14/2006 Page 46 of 52
39 

control. Id. In this case, there were shared officers (the Terry Brothers were 

the officers of Terry Manufacturing) and the Trustee has determined that 

there was intermingling of funds and that the Terrys, in their business 

dealings, made no distinction between themselves and their company. 

Furthermore, this has worked an inequity on Horton and Reynolds, because 

they indicated that they would not have sold the stock to the Terry Family, 

but for the guaranty of Terry Manufacturing. 

 Another opinion from a court in the Eleventh Circuit which 

speaks to this issue is In re: Pembroke Development Corporation, 124 B.R. 

398 (Bankr. S.D. Fla. 1991). In Pembroke, the debtor executed a loan 

modification agreement, which the trustee claimed to constitute a fraudulent 

transfer. The Court found that this loan modification was not a fraudulent 

transfer since the corporate debtor had guaranteed the loan. Furthermore, 

the Court recognized that an indirect benefit to the transferor may be 

sufficient to establish “reasonably equivalent value” where the debtor and 

third party “are so related or situated that they share an identity of interest 

because what benefits one will, in such case, benefit the other in some 

degree.” Id. at 400. In Pembroke, the bankruptcy guarantor and the party to 

the loan agreement were both controlled by the same person. Here, the 

Case 2:06-cv-00746-WHA Document 6 Filed 09/14/2006 Page 47 of 52
40 

relationship is even closer - - the debtor/transferor was controlled by the 

Terry Family, the obligors to Horton and Reynolds. 

The Trustee has acknowledged that Roy and Rudolph Terry 

were the two primary shareholders of Terry Manufacturing, and there is no 

evidence that any of the other shareholders exerted any control over Terry 

Manufacturing. Id. pp. 142-143. The Terry Brothers utilized their control 

over Terry Manufacturing to engage in fraudulent conduct which resulted in 

an investigation of Terry Manufacturing by the U.S. Attorney’s office and in 

a “plea agreement” by Roy Terry. 

Some of this conduct included: 

 a) the creation of financial records of Terry Manufacturing 

which were either erroneous, highly misleading, or outright fraudulent; Id. at 

145. 

 b) maintaining two sets of tax returns for Terry 

Manufacturing; Id at 42. 

 c) preparing grossly misleading financial statements for 

Terry Manufacturing, Id. at 98. 

 d) engaging in check kiting, off balance sheet loans, trade 

debt, and ponzi schemes to sustain its operations; Id. at 141, 143, 145; 

Case 2:06-cv-00746-WHA Document 6 Filed 09/14/2006 Page 48 of 52
41 

 e) using funds of Terry Manufacturing for personal 

obligations of the Terry Brother’s. Id. at 142-143, and 

 f) defrauding many investors and lenders including Mr. 

Horton and Mr. Reynolds. See Memorandum Decision, pp. 3-4. (In fact, 

both Roy and Rudolph Terry pled guilty in connection with defrauding Mr. 

Horton insofar as the $5.5 million loan). 

An Alabama bankruptcy court relied upon the Pembroke

opinion in determining that the "identity of interest" between the debtor and 

its principals supported the guaranty which the debtor gave for its principals' 

obligation. In re: BBL Group, Inc., 205 B.R. 625 (Bankr. N.D. Ala. 1996). 

In upholding the guaranty, Judge Sledge opined: 

This Court recognizes that an indirect benefit to 

the transferor may be sufficient to establish reasonably 

equivalent value where the debtor and third party "are so related 

or situated that they share an identity of interests because what 

benefits one will, in such case, benefit the other to some degree. 

Id. p. 636. 

In this case, it is undisputed that what benefited the Terry Family benefited 

Terry Manufacturing - - the Terry Family borrowed millions of dollars and 

funneled it to Terry Manufacturing. In this case, the bankruptcy court did 

not make any factual findings as to this issue. Accordingly, this Court 

should consider the undisputed facts and find that the “identity of interest” 

Case 2:06-cv-00746-WHA Document 6 Filed 09/14/2006 Page 49 of 52
42 

between the Terry Family and Terry Manufacturing warrants the reversal of 

the judgment. 

CONCLUSION

 This bankruptcy appeal involves the woeful end of Terry 

Manufacturing, which was once considered one of the most successful 

MOB’s in America. Like many others, Horton and Reynolds were 

defrauded by the Terry Family through a complex series of transactions. 

This resulted in the loss of millions of dollars to Horton and Reynolds. 

Now, the bankruptcy court has added insult to injury by requiring Horton 

and Reynolds to repay $596,738.60 to the bankruptcy estate even though 

these very payments from Terry Manufacturing enabled it to receive over $7 

million in loan proceeds. The bankruptcy court’s judgment is due to be 

overturned and rendered in favor of Horton and Reynolds on factual and 

legal grounds. The millions of dollars in loan proceeds constituted 

“reasonably equivalent value.” Even if this Court discounts or ignores the 

$7 million in loans, the judgment is still due to be reversed under Ala. Code 

§ 8-9A-8(d), an absolute legal defense. Finally, there were loans directly to 

Terry Manufacturing in the amount of $736,000.00, which would not have 

been made but for the repayment of the Stock Purchase Notes. These loans 

completely eviscerate the judgment. 

Case 2:06-cv-00746-WHA Document 6 Filed 09/14/2006 Page 50 of 52
43 

 Respectfully submitted, 

 \s\ C. Ellis Brazeal III 

 C. Ellis Brazeal III 

 Attorney for Appellants 

N.D. Horton & James M. 

Reynolds, III 

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 9410 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 

Case 2:06-cv-00746-WHA Document 6 Filed 09/14/2006 Page 51 of 52
44 

CERTIFICATE OF SERVICE

I hereby certify that a copy of the above and foregoing 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 

This the \14th\ day of September, 2006. 

 \s\ C. Ellis Brazeal III

 OF COUNSEL 

 

 

Case 2:06-cv-00746-WHA Document 6 Filed 09/14/2006 Page 52 of 52