FILED

U.S. Bankruptcy Appellate Panel

of the Tenth Circuit

July 20, 2015

Blaine F. Bates

Clerk

PUBLISH

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE TENTH CIRCUIT

IN RE EXPERT SOUTH TULSA, LLC,

Debtor.

BAP No. KS-14-027

EXPERT SOUTH TULSA, LLC,

Plaintiff – Appellant,

and

E.H. HAWES REVOCABLE TRUST

Intervenor-Plaintiff –

Appellant,

Bankr. No. 10-20982

Adv. No. 11-06208

Chapter 11

v. OPINION

CORNERSTONE CREEK PARTNERS,

LLC,

Defendant – Appellee.

Appeal from the United States Bankruptcy Court

for the District of Kansas

Eric L. Johnson of Spencer Fane Britt & Browne LLP (Andrea M. Chase of

Spencer Fane Britt & Browne LLP and Jonathan A. Margolies of McDowell,

Rice, Smith & Buchanan PC, with him on the briefs), Kansas City, Missouri, for

Plaintiff – Appellant Expert South Tulsa, LLC and Intervenor-Plaintiff-Appellant

E.H. Hawes Revocable Trust.

John Henry Rule of GableGotwals (Sidney K. Swinson and Brandon C. Bickle of

GableGotwals and John W. McClelland of Armstrong Teasdale, LLP, Kansas

City, Missouri with him on the brief), Tulsa, Oklahoma, for Defendant – Appellee

Cornerstone Creek Partners, LLC.
Before THURMAN, Chief Judge, MICHAEL, and ROMERO, Bankruptcy Judges.

THURMAN, Chief Judge.

In this appeal, both the debtor, Expert South Tulsa, LLC (“EST”), and the

E.H. Hawes Revocable Trust (the “Trust”) challenge the bankruptcy court’s order

1

granting Cornerstone Creek Partners, LLC (“Cornerstone”)’s motion for summary

judgment in the appellants’ fraudulent transfer claim against it. We affirm.

I. BACKGROUND

The basic facts are simple. EST sold real property (the “Commons”) to

Cornerstone in January 2010 for $3 million. Approximately ten days later,

Cornerstone sold the Commons to South Memorial Development Group, LLC

(“South Memorial”) for approximately $4.42 million. An involuntary Chapter 7

petition was filed against EST on March 30, 2010, which EST later had converted

to a Chapter 11. On September 1, 2011, EST filed an adversary action against

2

Cornerstone, pursuant to 11 U.S.C. § 548(a)(1)(B) (the “§ 548 Claim”) and

§ 544(b), asserting a claim under Oklahoma’s Uniform Fraudulent Transfer Act

(the “UFTA Claim”). The complaint sought to avoid EST’s sale of the Commons

3

to Cornerstone on the grounds that EST was insolvent at the time of the sale and

Cornerstone had not provided “reasonably equivalent value” for the property.

The first prong of the adversary claim, insolvency, is uncontested on

appeal. However, the parties disagree on the second prong, i.e., regarding the

value that was given and received for the Commons. Nonetheless, the bankruptcy

The Trust is technically a creditor of EST, but it is a revocable trust settled

1

by the father of one of EST’s two principals.

The adversary was initially brought by EST, but the Trust, which is a

2

creditor of EST, later intervened.

Oklahoma’s Uniform Fraudulent Transfer Act, Okla. Stat. Ann. tit. 24,

3

§§ 112-123, will hereafter in this opinion be called the “UFTA” or the “Act.”

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court found that the uncontroverted facts established that EST could not prevail

on its § 548 Claim because it had received reasonably equivalent value for the

sale. The bankruptcy court also ruled, as a matter of law, that EST could not

prevail on its UFTA Claim because the Commons was not an “asset” subject to

that Act, as it was fully encumbered at the time of the sale.

4

The details of the challenged sale transaction are quite complex, and EST

relies heavily on that complexity in an effort to establish contested issues of fact.

5

The principals of EST are Lawrence McLellan (“McLellan”) and Trey Hawes

(“Hawes”). The Trust is an inter-vivos revocable inheritance device settled by

Hawes’ father, and is a creditor of EST. The Trust periodically advanced money

to EST and other entities owned by McLellan and Hawes, but the total amount of

those advancements is a contested issue. McLellan and Hawes were also the

principals of three other limited liability companies, Expert Owasso, LLC

(“Owasso”), which owned approximately 2.57 acres of property in Owasso,

Oklahoma, Expert SWC Rockwell Memorial, LLC (“Rockwell”), which owned

approximately 41 acres of property in Oklahoma City, Oklahoma, and Expert

Development, LLC (“Development”), which was the manager of EST, Owasso,

and Rockwell.

6

“Asset” is a statutorily defined term in this context. Clearly, the Commons

4

was an asset for balance statement purposes. However, the UFTA excludes a

debtor’s property from its definition of an “asset,” to which fraudulent transfer

restrictions are applicable, “to the extent it is encumbered by a valid lien.” Okla.

Stat. Ann. tit. 24, § 113(2)(a) (1986).

For example, EST contests many extraneous facts, and has also apparently

5

included every document filed in the bankruptcy court in the appellate record. As

a result, both the relevant facts and documents are more difficult to find than they

probably should be. Especially since it is only “material” fact disputes that

preclude summary judgment rulings. Fed. R. Civ. P. 56(a).

EST, Owasso, Rockwell, and Development will at times be referred to in

6

this opinion as the “Expert LLCs.”

-3-
EST was formed to purchase and develop real property located in South

Tulsa, Oklahoma (the “Tulsa Property”), and it obtained a loan to purchase and

develop the Tulsa Property from M&I Marshall & IIsley Bank (“M&I”) in early

2007. That loan (the “Tulsa Loan”) was secured by the Tulsa Property, a

$12,329,500 promissory note (the “Note”), and the personal guaranties of

McLellan and Hawes. The Note was renewed, modified, and/or transferred many

times. EST purchased the Tulsa Property for $10.3 million, and then divided it

into three separate parcels: 1) an 11-acre parcel that was sold, pre-petition, to Life

Time Fitness; 2) a 2.5-acre parcel, also sold pre-petition to an individual buyer

for construction of a hotel; and 3) the Commons, a 21.5-acre parcel that is the

subject of the present dispute.

In 2008, EST sold the first two of the three Tulsa Property parcels, using

the proceeds of those sales to pay M&I approximately $2.5 million on the Tulsa

Loan. EST and M&I were in the process of negotiating a restructure of the Tulsa

Loan, which was in default. Ultimately, the parties were unable to reach an

agreement, and M&I elected to sell the Tulsa Loan at auction. The Tulsa Loan

(along with some loans M&I had made to the other Expert LLCs) was purchased

at auction by OKL 18, LLC (“OKL”) in March 2009. At all times relevant to this

appeal, the principals of OKL were Steve Perry (“Perry”) and Scott Asner

(“Asner”).

Shortly after OKL purchased the Expert LLC loans, including the Tulsa

Loan, the Expert LLCs (including EST) entered into a forbearance agreement (the

“Forbearance Agreement”) with OKL. In the Forbearance Agreement, OKL

agreed to cease collection efforts on the purchased loans until July 22, 2009, upon

its receipt of a $500,000 forbearance fee. In addition, the Forbearance Agreement

provided that a payment of $5.5 million (plus accrued interest) to OKL by July

22, 2009 would fully satisfy the obligations of the debtors and the guarantors on

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the Expert LLC loans. Payment to OKL of $1 million would extend the

forbearance period to September 20, 2009.

The $500,000 forbearance fee was paid by the Expert LLCs with funding

provided by the Trust. On July 23, 2009, as no additional payments had been

made by the Expert LLCs, OKL declared the Forbearance Agreement to be

terminated, and requested full payment of all Expert loans. On the same day,

Owasso and Rockwell executed a new forbearance agreement with OKL, which

related only to loans of those LLCs, for which they paid $100,000. The new

forbearance agreement allowed Owasso and Rockwell to eliminate their loans by

paying $4.25 million to OKL by August 5, 2009. Although this forbearance

agreement was extended twice, it also terminated pursuant to its terms due to

Owasso and Rockwell’s failure to pay the agreed satisfaction amount.

In August 2009, OKL filed a state court action against EST, seeking both to

recover on the Note and to foreclose its lien on the Commons. At that time, a

state court mechanic’s lien action was already pending against EST, and the new

foreclosure action was consolidated with that case. While the Tulsa Loan was in

default, McLellan and Hawes discussed with OKL (via Perry) the potential for the

Trust to purchase the Tulsa Loan. As a result, OKL and the Trust reached an

7

agreement, executed on November 9, 2009, that gave the Trust an option to

purchase the Tulsa Loan (the “Trust Option”). Under the Trust Option, the Tulsa

8

Loan could be purchased by the Trust for approximately $1.65 million, plus

interest and costs, but only if that amount was paid to OKL on or before

December 31, 2009. The Trust Option included the following provisions:

Apparently, although the Trust was technically a creditor of EST, Hawes

7

acted on the Trust’s behalf, at least in this transaction.

Because EST was not a party to the Option, the Trust intervened as a

8

plaintiff in the adversary proceeding against OKL.

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1. Grant of Option. Lender [OKL] does hereby grant to Purchaser

[the Trust] the option (the “Option”) to purchase the Tulsa Loan at a

purchase price of $1,645,108 as of the date of this Agreement plus:

(a) if the Option is exercised after the date hereof but on or before

November 30, 2009, an additional amount equal to $1,519.45 per

diem, and (b) if the Option is exercised on or after December 1, 2009

but on or before December 31, 2009, an additional amount equal to

$2,019.45 per diem in addition to the amount payable pursuant to the

preceding subparagraph (a), and (c) an additional amount equal to all

legal fees, costs and expenses incurred by Lender with respect to the

Tulsa Loan through the date of the exercise of the Option

(collectively, the “Option Price”).

2. Exercise of Option. Purchaser may exercise the Option by paying

the Option Price in full to Lender on or before December 31, 2009, 2

p.m. Kansas City, Missouri time.

3. Closing Documents. Upon payment of the Option Price, Lender

(contemporaneous with such funding) shall provide (I) an

Assignment of Loan Documents, (ii) an Assignment of Mortgage (in

recordable form), (iii) an allonge to the original promissory note(s)

for the Tulsa Loan and (iv) any and all other reasonable documents

customary for a loan conveyance. Purchaser acknowledges and

agrees that Lender is making no representations or warranties of any

kind in connection with the sale and assignment of the Tulsa Loan,

including but not limited to the outstanding principal balance thereof

or interest accrued and payable thereon, and that such sale and

assignment shall be without recourse to Lender.

8. Amendment. The provisions of this Agreement may be amended or

waived only by an instrument in writing signed by the parties hereto.

11. No Oral Agreements. The Parties each acknowledge that the

other Party has no obligation except as set forth herein and that it is

not relying on any agreement, representation or warranty of the other

Party in entering into this Agreement, other than the agreements of

such Party expressly and specifically set forth in this Agreement.

12. Time is of Essence. Time is of the essence of each and every

covenant, condition and provision of this Agreement to be performed

by the parties hereto.

9

Throughout the negotiations with OKL, EST was attempting to sell the

Commons. On December 11, 2009, EST and Sitton Properties, LLC (“Sitton

LLC”) entered into a purchase contract, under which Sitton LLC agreed to buy

Option to Purchase Promissory Note and Related Loan Documents in Joint

9

Appendix of Appellants Expert South Tulsa, LLC and E.H. Hawes Revocable

Trust, vol. 10 (“Appx 10”) at 2589-591.

-6-
the Commons for $3.2 million (the “Sitton Contract”). The principal of Sitton

LLC was Mike Sitton (“Sitton”). As part of the Sitton Contract, EST agreed to

take ownership of certain Tulsa real property that was owned by Sitton LLC (the

“Riverside Property”). The sale to Sitton was originally set to close by February

11, 2010, but the Sitton Contract was modified to shorten the closing period to

December 30, 2009.

10

Eighteen days later, on the day before the closing deadline for the Sitton

Contract, EST was informed that Sitton LLC had assigned its interest in the Sitton

Contract to South Memorial, and that South Memorial would not be bound by the

December 30 closing date. Moreover, if EST insisted on closing the sale by

December 30, South Memorial would terminate the Sitton Contract. The next

day, December 30, South Memorial terminated the Sitton Contract. EST

continued trying to secure a sale of the Commons throughout that day and the

next. On December 31, OKL assigned its interest in the Tulsa Loan to GTMI,

LLC (“GTMI”), apparently for tax reasons. Despite the assignment, EST

continued to discuss the Tulsa Loan and the Trust Option with Perry, who acted

as the lender representative. The assignment of the Tulsa Loan mortgage to

GTMI was not recorded, nor did GTMI substitute for OKL in the pending

foreclosure action.

Also on December 31, Hawes notified Perry by email that a new sale had

been negotiated with Sitton and his partner, Rob Phillips (“Phillips”). On that

basis, Hawes requested that the Trust Option be extended to January 8, 2010.

Perry responded by email, “I will let you know as soon as I can get an answer.”

No further contact was had until Perry notified Hawes on January 5 that he was

This change was apparently intended to allow use of the sale proceeds to

10

pay OKL the $1.65 million purchase price for the Tulsa Loan by December 31.

However, although sale of the Commons was between EST and Sitton LLC, the

Trust Option was between OKL and the Trust.

-7-
“still waiting for final sign off,” and proffered an amended payoff amount “if

funds are received prior to 2 p.m. this Friday [1/8]. I need to see a draft

settlement statement from the title company [re Sitton/Phillips purchase] ASAP so

I can get final sign off on my end. After Friday, no deal.” Also on January 5,

EST’s counsel was notified that the Sitton Contract would be assigned to

Cornerstone and would be amended to both reflect a purchase price of $3

11

million and exclude the Riverside Property. The next day, January 6, Perry

12

notified Hawes by email that Cornerstone would be ready to close on January 8.

Cornerstone and EST executed a new contract for the purchase and sale of

the Commons (the “Cornerstone Contract”), specifying a purchase price of $3

million, to be paid on January 8, and including a representation by EST that there

would be no pending or threatened claims against the property, except as may be

provided in the title commitment. Thus, EST was required to deliver clean title to

Cornerstone, and was required to obtain dismissal of the pending foreclosure

action as a condition to issuance of a title policy.

13

At the closing on January 8, 2010, Cornerstone paid $3 million to the title

company, from which it made the following payments:

• $1,742,170.16 to GTMI (as holder of the Tulsa Loan);

• $17,002.42 to OKL for its legal fees;

• $114,999.77 to mechanic’s lien holders for lien releases;

Cornerstone was formed as a limited liability company by counsel for OKL

11

and GTMI for the purpose of acquiring and developing the Commons. Phillips

signed the sale agreement on behalf of Cornerstone.

The Sitton Contract had already been terminated by South Memorial on

12

December 30. However, Sitton and Phillips continued to push EST to take

ownership of the Riverside Property, which was apparently transferred to EST

sometime after the January 8 sale to Cornerstone.

It should be noted that the Trust never held any secured interest in the

13

Tulsa Property.

-8-
• $15,000 to Paisley Properties, LLLP (“Paisley”);

14

• $686,000 to EST’s unsecured creditors (including EST’s attorney’s

fees of $42,500, and $415,000 to the Trust); and

• $137,330 in miscellaneous closing costs.

The $415,000 paid to the Trust was credited by it to EST’s outstanding debt. The

remainder of the $3 million purchase price, a total of $261,477, was paid directly

to EST, which subsequently paid it to Sitton LLC for the Riverside Property.

On January 27, 2010, only nineteen days after the EST/Cornerstone sale

closing, Cornerstone closed its own sale of the Commons to South Memorial.

15

The purchase price under the Cornerstone/South Memorial sale contract was

$4,421,230.

16

Team Viva, LLC, an EST creditor, filed an involuntary Chapter 7 petition

against EST on March 30, 2010, which case was later converted to Chapter 11 at

EST’s request. EST filed the adversary proceeding from which this appeal arose

in September 2011, seeking to recover approximately $1.42 million from

Cornerstone pursuant to either Oklahoma law (through § 544(b)) or

§ 548(a)(1)(B). Cornerstone moved for summary judgment on EST’s complaint,

which was ultimately granted by the bankruptcy court. For purposes of summary

judgment, the parties agreed that the value of the Commons at the time of its sale

to Cornerstone was $4.99 million.

Paisley held an undivided 5% interest in the Commons as a tenant-in14

common.

South Memorial had previously purchased the Sitton Contract and then

15

revoked it when EST would not agree to extend the closing date past December

31, 2009.

This Court has no information regarding the reason why South Memorial,

16

which had been unwilling to purchase the subject property for $3.2 million if the

sale had to close by December 30, was willing to buy the same property at a 44%

higher price less than one month later.

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II. APPELLATE JURISDICTION

This Court has jurisdiction to hear timely filed appeals from “final

judgments, orders, and decrees” of bankruptcy courts within the Tenth Circuit,

unless one of the parties elects to have the district court hear the appeal. A

17

decision is considered final “if it ‘ends the litigation on the merits and

leaves nothing for the court to do but execute the judgment.’” An order granting

18

summary judgment disposing of the plaintiff’s claims against the defendant is a

final order for purposes of appeal. The bankruptcy court order granting

19

summary judgment to Cornerstone was entered on June 9, 2014, and EST and the

Trust filed a notice of appeal from that order on June 23, 2014. The notice of

appeal was therefore timely.

20

At the same time, appellants also filed a Rule 9023 motion to alter or

amend the bankruptcy court’s judgment, purportedly to resolve any problems with

the judgment that might be caused by the United States Supreme Court’s June 9,

2014 Executive Benefits decision. The parties and the bankruptcy court agreed

21

to an order granting appellants’ motion and to entry of an amended memorandum

28 U.S.C. § 158(a)(1), (b)(1), and (c)(1); Fed. R. Bankr. P. 8001(e) (now

17

also at Fed. R. Bankr. P. 8005, effective December 1, 2014); 10th Cir. BAP L.R.

8001-3 (now at 10th Cir. BAP L.R. 8005-1, effective December 1, 2014).

Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 712 (1996) (quoting Catlin

18

v. United States, 324 U.S. 229, 233 (1945)).

Tanner v. Barber (In re Barber), 326 B.R. 463, 466 (10th Cir. BAP 2005)

19

(order granting summary judgment disposed of adversary proceeding and was

final and appealable).

Fed. R. Bankr. P. 8002(a)(1) (notice of appeal must be filed within fourteen

20

days of entry of final order).

Executive Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165 (2014) (setting

21

parameters of bankruptcy courts’ non-core jurisdiction). Rule 9023 of the federal

bankruptcy rules makes Rule 59 of the Federal Rules of Civil Procedure

applicable to bankruptcy cases. We see no different result under the Supreme

Court’s more recent case on this issue, Wellness Int’l Network, Ltd. v. Sharif, 135

S. Ct. 1932 (2015).

-10-
decision, nunc pro tunc, specifically finding that the parties had consented to the

bankruptcy court hearing and determination of the adversary proceeding, pursuant

to 28 U.S.C. § 157(c)(2).

22

Neither the appellants nor the appellee elected to have this appeal heard by

the district court, and the parties have therefore consented to appellate review by

this Court.

23

III. ISSUES AND STANDARDS OF REVIEW

1. Did the bankruptcy court properly determine, as a matter of law,

that the Commons was not an “asset” and, therefore, not subject

to avoidance under the UFTA?

2. Did the bankruptcy court properly determine, as a matter of law,

that EST received “reasonably equivalent value” for the

Commons from Cornerstone, such that the sale was not subject

to avoidance under 11 U.S.C. § 548(a)(1)(B)?

24

Both of these issues arise from a decision on summary judgment. Such

judgments are reviewed by this Court de novo, applying the same legal standard

as was used by the bankruptcy court. De novo review requires an independent

25

determination of the issues, giving no special weight to the bankruptcy court’s

decision.

26

Whether the appeal time runs from entry of the order granting appellants’

22

Rule 9023 motion or from either order granting summary judgment, the notice of

appeal filed on June 23, 2014 was timely. See Fed. R. Bankr. P. 8002(b)(2) and

9023.

28 U.S.C. § 158(c)(1); Fed. R. Bankr. P. 8001(e) (now also at Fed. R.

23

Bankr. P. 8005, effective December 1, 2014).

Unless otherwise indicated, all further statutory references in this decision

24

will be to the Bankruptcy Code, which is Title 11 of the United States Code.

Rushton v. Bank of Utah (In re C.W. Min. Co.), 477 B.R. 176, 180 (10th

25

Cir. BAP 2012), aff'd, 749 F.3d 895 (10th Cir. 2014).

Salve Regina Coll. v. Russell, 499 U.S. 225, 238 (1991).

26

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IV. DISCUSSION

A. Summary Judgment Standard

The appealed order was decided as a matter of summary judgment.

Summary judgment is appropriate only if “the pleadings, depositions, answers to

interrogatories, and admissions on file, together with the affidavits, if any,” when

viewed in the light most favorable to the non-moving party, “show that there is no

genuine issue as to any material fact and that the moving party is entitled to

judgment as a matter of law.” A dispute about a material fact is “genuine” if the

27

evidence is such that a reasonable jury could return a verdict for the non-moving

party. In making its determination, the court must draw all justifiable inferences

28

in favor of the non-moving party. “Statutory interpretation is a matter of law

29

appropriate for resolution on summary judgment.”

30

B. Applicability of the UFTA

Section 544(b)(1) of the Bankruptcy Code (the “strong-arm statute”) allows

a trustee (or a debtor-in-possession) to avoid transfers of the debtor’s property

31

that would be voidable by an unsecured creditor pursuant to applicable state law.

This provision makes state fraudulent transfer laws applicable in bankruptcy.

Oklahoma law applies to the EST/Cornerstone sale, and Oklahoma has adopted

the UFTA. That Act describes a “fraudulent transfer” as follows:

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986) (internal

27

quotations omitted); Fed. R. Civ. P. 56(a) (made applicable to bankruptcy

adversary proceedings by Fed. R. Bankr. P. 7056)).

Anderson, 477 U.S. at 248.

28

Id. at 255.

29

Thomas v. Metro. Life Ins. Co., 631 F.3d 1153, 1160 (10th Cir. 2011).

30

Although §§ 544 and 548 grant avoidance power only to the bankruptcy

31

trustee, a debtor-in-possession is given the trustee’s power to avoid transfers by

§ 1107(a). Se. Waffles, LLC v. United States Dep’t of Treasury (In re Se. Waffles,

LLC), 702 F.3d 850, 856 n.3 (6th Cir. 2012) (debtor-in-possession has trustee’s

avoidance powers).

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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.

32

Significantly, the UFTA avoidance power is only available when the property

“transfer” was of a debtor’s “asset.” The Act defines those terms, as follows:

“Transfer” means every mode, direct or indirect, absolute or

conditional, voluntary or involuntary, of disposing of or parting with

an asset or an interest in an asset, and includes payment of money,

release, lease, and creation of a lien or other encumbrance.

“Asset” means property of a debtor, but the term does not include . . .

property to the extent it is encumbered by a valid lien.

33

The UFTA also provides that it “shall be applied and construed to effectuate its

general purpose to make uniform the law with respect to the subject of this act

among states enacting it.”

34

EST’s position is that the bankruptcy court erroneously determined that the

Commons was not an “asset” at the time of its sale to Cornerstone because it was

fully secured and, therefore, not subject to the UFTA. EST does not contest that

real properties subject to liens equal to or in excess of their value are not “assets”

subject to the UFTA. Rather, relying almost entirely on a Connecticut UFTA

35

Okla. Stat. Ann. tit. 24, § 117 (1986).

32

Okla. Stat. Ann. tit. 24, § 113(2)(a) and (12) (1986) (emphasis added).

33

Okla. Stat. Ann. tit. 24, § 123 (1986). Thus, courts in states that have

34

adopted the UFTA typically consider other states’ interpretations of the Act’s

language when construing the Act’s provisions. See, e.g., Brown v. ARP &

Hammond Hardware Co., 141 P.3d 673, 680 (Wyo. 2006) (decisions of other

courts are persuasive with respect to uniform or model acts).

See, e.g., Noranda Aluminum, Inc. v. Golden Aluminum Extrusion, LLC,

35

No. M2013-02274-COA-R3-CV, 2014 WL 4803149, at *6 (Tenn. Ct. App. Sept.

26, 2014) (“property encumbered by a lien is excluded from the UFTA's

definition of an asset to the extent of the encumbrance”); Jecker v. Hidden Valley,

Inc., 27 A.3d 964, 971 (N.J. Super. Ct. App. Div. 2011) (transfer of fully

encumbered property is not subject to the UFTA); In re Valente, 360 F.3d 256,

(continued...)

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decision, World Properties, EST contends that the value of the Commons

36

actually exceeded the liens on it at the time of the Cornerstone sale. Accordingly,

a careful review of the World Properties decision is in order.

In World Properties an unsecured creditor filed an action to avoid its

debtor’s transfer of real property to a related entity, claiming the transfer to be

fraudulent under the UFTA. One of the defendants, Antonio Reale, was a

contractor/developer who controlled several business entities primarily owned by

his wife and children. Three Reale businesses were World Properties, World, and

LAN. World had no assets and did not conduct business, as it was used primarily

to funnel funds between other Reale companies and Reale’s wife, who had neither

income nor creditors. However, LAN and Reale owned real property in New

Jersey that was subject to a mortgage held by the FDIC. The FDIC foreclosed the

mortgage on the New Jersey property in 1994, but that property was of

insufficient value to satisfy the mortgage, resulting in an award to the FDIC of a

$7 million deficiency judgment against LAN and Reale. The FDIC later

transferred the deficiency judgment to National.

LAN also borrowed money from Chase Bank in order to develop real

property in Enfield, Connecticut (the “Property”), giving Chase a mortgage on the

Property as security for the loan. LAN defaulted on that mortgage, which led to

foreclosure of Chase’s mortgage in 1995, from which Chase obtained a $17

million judgment against LAN and Reale. Around the same time, LAN managed

to lease the Enfield property, on which a 113,000 square foot building had been

constructed, to a supermarket chain. The lease terms favored the lessor such that,

with the lease, the property value increased to $14.5 million.

(...continued)

35

260 (1st Cir. 2004) (over-encumbered real property is not “asset” under UFTA).

Nat’l Loan Investors, L.P. v. World Props., LLC, 830 A.2d 1178 (Conn.

36

App. Ct. 2003).

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Once the lease was in place, Reale reached an agreement with WLL,

Chase’s successor-in-interest to the foreclosure judgment, under which WLL

accepted payment of $5.2 million “in full satisfaction of the debt.” LAN and

Reale obtained a mortgage loan from People’s Bank in order to fund the payment

to WLL. People’s Bank was directed to pay the loan proceeds to World

Properties, an entity that Reale had recently formed, which then paid the $5.2

million settlement amount to WLL. In return, according to the defendants, World

Properties received the $17 million Chase judgment, which it proceeded to

foreclose. In response, LAN transferred both the property and the lease to World

Properties, which left it without any assets and, thus, no ability to pay the

FDIC/National deficiency judgment from the year before.

Predictably, National filed suit against LAN, World Properties, World, and

Reale, alleging that LAN’s transfer to World Properties was fraudulent under the

UFTA. The trial court agreed, and entered judgment avoiding the World

Properties transfer. Defendants appealed, asserting that the property was not an

“asset” subject to a transfer avoidance under the UFTA because it was secured by

the Chase/National/World Properties $17 million judgment lien, which exceeded

the property’s value, when it was transferred. All parties and the court agreed

that a transfer of property subject to liens that equaled or exceeded its value

would not be subject to avoidance under the UFTA. The defendants’ claim was

rejected by the trial court, which was affirmed by the Connecticut Court of

Appeals, based on a finding that the property had not been subject to a $17

million lien when it was transferred because the defendants’ settlement with WLL

had discharged that lien and substituted the $5.2 million lien in its stead, and

“[t]hat settlement occurred prior to the transfer between LAN and World.”

37

Id. at 733 (emphasis added). Although the appellate court mistakenly

37

stated that the Property was transferred to World rather than to the actual

(continued...)

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The property transferor in World Properties unsuccessfully argued that its

transfer of property to a related company could not be avoided as a fraudulent

transfer because the transferee held a lien on the property that exceeded the

property’s value. In the present case, relying on World Properties, EST seeks to

avoid its own transfer of property to an unrelated company, claiming that a lien

exceeding the property’s value was compromised prior to the transfer, leaving the

property with some equity and, therefore, an “asset” subject to the UFTA.

38

However, EST misconstrues the applicability of World Properties to this appeal.

Here, as in World Properties, the property transferor attempts to manipulate

applicability of the UFTA to its advantage, using a “friendly” separate entity as

the means to either avoid or ratify a property transfer. Such a result is most

certainly not supported by the World Properties decision, in which the court

determined that such conduct would not be sanctioned.

The essence of the World Properties decision is that a security interest that

is compromised prior to transfer of the secured property will be included in a

determination of the property’s security status at the compromised value.

However, the undisputed facts in the present appeal establish that no such

compromise took place prior to the Cornerstone sale closing. The present

transaction was, effectively, a “short sale.” Such sales are common and involve

an agreement by a property lien holder to accept less than full repayment of its

loan in exchange for its full release of a property lien in order to facilitate a sale

of the secured property. Short sales typically involve mortgage obligations that

are in default, and lenders enter into such agreements based on the economic

(...continued)

37

transferee, World Properties, that misstatement did not affect its analysis.

This position is somewhat contrary to EST’s second appellate argument,

38

which is that the lien was transferred to the Trust, and thus it was error to include

a lien reduction in the value obtained by EST for the transfer.

-16-
reality that the certainty of partial repayment from sale proceeds is usually

preferable to an uncertain recovery from foreclosure and resale.

39

Short sales are often preceded by lenders’ attempts to either sell the loan to

another lender at a discount or to rewrite the mortgage terms with the borrower.

If such an agreement is reached without involving the property’s sale, the parties’

conduct will thereafter be dictated by the terms of the new agreement. In World

Properties, the trial court found that just such a compromise agreement had been

made prior to any transfer of the property by the debtor. Thus, when the debtor

did transfer the property, it was subject only to the compromised mortgage and

had value beyond the security. As such, the property was an “asset” that debtor

could only transfer in exchange for “reasonably equivalent value” under the

UFTA. Debtor’s receipt of less than equivalent value for the property led the

Connecticut court to avoid the sale.

In the present case, however, although OKL had indicated its willingness to

accept less than full value for the Tulsa Loan, either from the debtor or from a

third party, no compromise deal was ever consummated prior to the sale of the

Commons to Cornerstone. In fact, the Trust did not make any payment to either

OKL or GTMI after it paid to obtain the Trust Option. The only payments that

were made to those entities came directly from EST’s sale proceeds. Thus, the

Trust undeniably did not exercise the Trust Option prior to the Cornerstone sale

closing, whether or not its time to do so had been extended.

Appellants respond that the parties’ communications leading up to the sale

at least create a disputed issue of fact as to whether the Trust Option had been

extended prior to the sale, and thus requiring a denial of the motion for summary

judgment and a reversal by this Court. Indeed, whether or not OKL and/or GTMI

Significantly, such debt reductions then become part of the “value” the

39

seller receives from the sale, which is an issue that will be discussed in the

section of this opinion dealing with “reasonably equivalent value.”

-17-
extended the Trust Option’s payment deadline was and is a hotly contested matter

between these parties. However, only “material” fact disputes preclude entry of

summary judgment, and resolving that dispute in appellants’ favor does not

change the result since, whether or not the Trust was granted additional time to

exercise the option, it did not do so. Moreover, even if the Trust did somehow

exercise the option, it did not do so prior to the Cornerstone sale. Therefore, “at

the time of the sale,” the Commons was subject to a $7.75 million mortgage that

exceeded its value, which means it was not an “asset” under the UFTA and its

transfer to Cornerstone was not subject to avoidance under that Act.

C. Reasonably Equivalent Value

EST asserted avoidance claims under both the UFTA and § 548(a)(1)(B).

These two fraudulent transfer provisions are essentially identical, except that

§ 548 does not require transfer of an “asset,” as does the UFTA. Instead, § 548

covers transfers of “an interest of the debtor in property” or the incurrence by the

debtor of “an obligation” that are not in exchange for “reasonably equivalent

value.”

The relevant portions of § 548 provide:

(a)(1) The trustee [or the debtor in possession] may avoid any

transfer . . . of an interest of the debtor in property . . . that was made

or incurred on or within 2 years before the date of the filing of the

petition, if the debtor voluntarily or involuntarily--

(B)(I) received less than a reasonably equivalent value in exchange

for such transfer or obligation; and

(ii)(I) was insolvent on the date that such transfer was made or such

obligation was incurred, or became insolvent as a result of such

transfer or obligation.

This provision allows a property transfer that was made within the two-year

period immediately preceding the petition filing to be avoided, but only if the

plaintiff establishes both that the transfer was not supported by debtor’s receipt of

“reasonably equivalent value” and that the transfer took place when the debtor

was insolvent (or the debtor became insolvent due to the transfer). Such transfers

-18-
are considered “constructively fraudulent,” and are avoidable on behalf of the

40

estate’s unsecured creditors.

In seeking to avoid the Cornerstone sale, EST claims, in essence, that

Cornerstone (and, by implication, OKL) took advantage of its foundering

financial situation to profit from a back-to-back purchase and resale of the

Commons. Considering only the following basic facts of the sale and the resale,

EST’s assertion may appear to be well-taken:

EST agreed to sell the Commons to Sitton LLC for a purchase price

of $3.2 million. Prior to closing, Sitton LLC inexplicably transferred

its interest in the sale agreement to South Memorial. South

Memorial then canceled the sale, purportedly over the closing date.

EST returned to negotiations with the Sitton LLC principals and

worked out a “new” deal on the same terms, but with a slightly later

closing date. EST was then told that its deal with the Sitton LLC

principals would be executed by Cornerstone rather than Sitton, and

that the purchase price would be $3 million, rather than the

previously agreed-upon $3.2 million. The deal closed, on time and

for a price of $3 million. Almost immediately thereafter,

Cornerstone (which was apparently set up by the Sitton LLC

principals for the sole purpose of buying and selling the Commons)

resold the property to South Memorial (EST’s original buyer) for

$4.4 million.

However, the issue before the bankruptcy court and this Court is not the validity

of the resale transaction. It is simply whether EST received “reasonably

equivalent value” in exchange for its transfer of the Commons to Cornerstone.

Although “reasonably equivalent value” is not defined in the Bankruptcy

Code, it is not a simple calculation of purchase price versus the property’s

appraised value. If it were, then payment of $3 million for a property worth

41

Sender v. Buchanan (In re Hedged-Invs. Assocs., Inc.), 84 F.3d 1286, 1287

40

(10th Cir. 1996) (§ 548(a)(2) claim defined as “constructive fraudulent” transfer);

Weinman v. Walker (In re Adam Aircraft Indus., Inc.), 510 B.R. 342, 352 (10th

Cir. BAP 2014) (same).

LTF Real Estate Co. v. Expert S. Tulsa, LLC (In re Expert S. Tulsa, LLC),

41

522 B.R. 634, 652 (10th Cir. BAP 2014) (reasonably equivalent value

determination involves three questions: “(1) whether value was given; (2) if value

was given, whether it was given in exchange for the transfer; and (3) whether

what was transferred was reasonably equivalent to what was received”). See also

(continued...)

-19-
$4.99 million would certainly fail to meet the standard. Rather, reasonably

equivalent value is measured by all benefits received by the seller, direct and

indirect:

The authorities are in agreement that Congress did not

provide a definition reasonably equivalent value

(“REV”) in the federal bankruptcy statutes. Thus, the

courts have been left with the responsibility of defining

the term. A review of the case law reveals four precepts

in construing REV. First, the fair market value of the

property in question cannot usually be used as the sole

determinant, especially in foreclosure actions. Second,

although not wholly determinative, the market value of

the property at issue is an important query and will often

serve as a starting point for deciding whether REV was

received by the debtor. Third, the property at issue must

be disposed of in a manner consistent with the law of the

forum state. Finally, a bankruptcy court should consider

all of the facts of each case, one of which may be the

market value of the property.

42

Determination of reasonably equivalent value is ordinarily a finding of fact.

43

However, where the facts of the transaction are undisputed, the issue presented is

whether or not those facts fit within the statutory parameters, which is an issue of

law. Finally, the party seeking to avoid the transfer bears the burden of proving

44

(...continued)

41

11 U.S.C. § 548(d)(2) (defining “value” to include satisfaction of present or

antecedent debt of the debtor); Jobin v. McKay (In re M & L Bus. Mach. Co.), 84

F.3d 1330, 1341 (10th Cir. 1996) (since “value” includes satisfaction of existing

debt, the amount of debt that is satisfied must be included in determining

reasonably equivalent value); Parks v. Persels & Assocs., LLC (In re

Kinderknecht), 470 B.R. 149, 170 (Bankr. D. Kan. 2012) (reasonably equivalent

value is determined at the time of the transfer and is viewed from the standpoint

of the debtor’s creditors).

McCanna v. Burke, 197 B.R. 333, 338-39 (D. N.M. 1996) (citations

42

omitted).

See, e.g., Weinman v. Walker (In re Adam Aircraft Indus., Inc.), 510 B.R.

43

342, 354 (10th Cir. BAP 2014) (the determination of reasonably equivalent value

is largely a question of fact).

United States v. Telluride Co., 146 F.3d 1241, 1244 (10th Cir.1998)

44

(construction and applicability of federal statutes reviewed de novo).

-20-
that reasonably equivalent value was not received.

45

A determination of whether a transfer involved the exchange of reasonably

equivalent value requires consideration of whether or not the transferor’s

unsecured creditors were better off before or after the transfer. In other words,

courts must calculate the net value received from a transaction, and include any

benefit received by the transferor, regardless of its source. The bankruptcy

46

court’s determination of value received by EST in exchange for the Commons

included the following amounts: 1) the $3 million purchase price paid by

Cornerstone; 2) satisfaction of the Tulsa Loan promissory note and release of the

mortgage, totaling $7,754,151; and 3) releases of mechanic’s liens that totaled

47

$499,740.

48

In re Kinderknecht, 470 B.R. at 169.

45

See, e.g., Sharp v. Chase Manhattan Bank, USA, N.A. (In re Commercial

46

Fin. Servs., Inc.), 350 B.R. 559, 577-78 (Bankr. N.D. Okla. 2005) (citing Harman

v. First American Bank (In re Jeffrey Bigelow Design Group, Inc.), 956 F.2d 479,

484 (4th Cir.1992) and Jack F. Williams, “Revisiting the Proper Limits of

Fraudulent Transfer Law,” 8 Bankr. Dev. J. 55, 80 (1991)).

Since the purchase price was used to pay GTMI (the owner of the Tulsa

47

Loan at the time of the Cornerstone closing) $1.74 million and OKL $17,000 (for

its attorney’s fees), the value received by EST from satisfaction of its Tulsa Loan

obligation would necessarily be reduced by those amounts. Even so, since the

loan reduction provided a net benefit of nearly $6 million, adding that amount to

the $3 million purchase price results in a net gain of approximately $9 million.

The net benefit from the mechanic’s lien releases may have been

48

overstated. Approximately $500,000 in mechanic’s liens were removed from the

property for payment of approximately $115,000 out of the purchase price, for a

net return of $385,000. However, since EST no longer owned the property after

the transfer, lien releases arguably only benefitted it to the extent that the sale

was dependent upon them. Although the Cornerstone sale clearly did depend on

providing a clean title, it would be difficult to quantify the benefit to EST. On

the other hand, to the extent that the lien releases were also full satisfactions of

the underlying claims, EST would benefit, but only to the extent that the claim

released exceeded the payment made to the lien holder. It appears that many of

the lien releases were also satisfactions of the lien holders’ claims. However, the

largest lien claim was made by the general contractor, and that release does not

appear to resolve the underlying claim. In light of these issues, this Court does

not include a value for the mechanic’s lien releases in its consideration of

reasonably equivalent value.

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Appellants, however, contend that the only value EST received in exchange

from the sale was the $3 million purchase price, based on its claim that the Tulsa

Loan was not discharged in that transaction but was instead transferred to the

Trust. Under appellants’ version of the transaction, then, EST remains obligated

on the Tulsa Loan. At the very least, appellants argue, there are disputed issues

49

of material fact regarding the value received, which should have precluded

summary judgment.

We disagree. First, it is undisputed that the Trust never paid the option

amount, and thus never obtained the loan. A lender may grant an option to

50

purchase a loan, but the loan remains owed to the lender unless and until the

option is exercised. In this case, the option was not exercised by the Trust,

whether or not it was granted an extension of the time it had to do so. At closing,

as part of a global transaction, OKL/GTMI accepted payment of $1.74 million in

full satisfaction of the loan. The transaction documents made it clear that the

We note that such a transaction would ordinarily require the Trust to pay

49

the amount requested by the lender, for which it would receive an assignment of

the full $7.75 million promissory note obligation. However, in this case, it was

actually EST that paid that amount, and it would be entitled to a credit on the note

in the amount of that payment, leaving the Trust with a $6 million unsecured

claim against it. However, appellants also claim, with respect to the property’s

status as an “asset, that the Tulsa Loan was compromised prior to the Cornerstone

sale. If, as Cornerstone, OKL, and GTMI all claim, the payment at closing was in

“full satisfaction” of the Tulsa Loan, then there was nothing left to transfer to the

Trust. Likewise, if the loan was reduced from $7.75 million to $1.74 million by

agreement with the lender, the Trust would still have no claim on the note

because EST had already paid that amount. In response to these issues, appellants

contend that only the loan security was compromised prior to the sale, leaving an

unsecured obligation for the full amount of the note. This allows appellants to

argue: 1) the property had value that exceeded the liens to which it was subject

when it was transferred, so the UFTA is applicable, and 2) since compromise of

the security without also compromising the underlying obligation doesn’t benefit

the property seller and, therefore, should not be considered in the “reasonably

equivalent value” determination. This argument requires EST to put the Trust’s

interests ahead of the interests of all of its other unsecured creditors; which

certainly does not appear to be a legitimate use of the § 548 avoidance power.

Not only did the Trust not pay the money it now claims entitles it to

50

recover the loan amount from EST’s bankruptcy estate, it actually was paid

$415,000 from the sale proceeds.

-22-
loan was being extinguished rather than transferred, and appellants were privy to

all of the sale documentation. There is simply no other way to interpret the

phrase “in full satisfaction” than as a full extinguishment of the debt,

notwithstanding appellants’ assertion that they did not interpret the transaction

that way. Ironically, it is the lender that claims the debt was extinguished in the

transaction, while the debtor contends that it was not.

Significantly, whatever any of the parties may have believed to be the

effect of the sale transaction on the Tulsa Loan was rendered moot by OKL’s

filing of a dismissal with prejudice of the foreclosure action. OKL had asserted

two causes of action in that lawsuit – one for recovery of the debt evidenced by

the promissory note, and the other for foreclosure of the mortgage. Dismissal

with prejudice of the claim on the note rendered that note unenforceable by

anyone. Moreover, Oklahoma law allows a plaintiff to dismiss its action

51

without a court order prior to a pretrial hearing, and such dismissal may be

expressly “with prejudice.” Finally, Oklahoma law also allowed OKL to

52

continue as the plaintiff in the foreclosure action, despite its transfer of the Tulsa

See, e.g., Perfect Invs., Inc. v. Underwriters at Lloyd’s, 782 P.2d 932, 933

51

(Okla. 1989) (dismissal with prejudice operates as a bar to future action on the

claim). Appellants contend that the fact that the promissory note was never

marked as cancelled and is now in possession of the Trust renders it still

enforceable. However, § 3-601 of the Uniform Commercial Code (Okla. Stat. tit.

12A, § 3-601) allows negotiable instruments to be discharged “by an act or

agreement” with the obligor, and that discharge is effective unless the instrument

is acquired by a “holder in due course.” The Trust cannot be a holder in due

course because it had notice that the note was compromised in connection with

the Cornerstone sale. See Okla. Stat. tit. 12A, § 3-302, defining “holder in due

course.”

Okla. Stat. tit. 12, § 684(A) provides: “An action may be dismissed by the

52

plaintiff without an order of court by filing a notice of dismissal at any time

before pretrial. After the pretrial hearing, an action may only be dismissed by

agreement of the parties or by the court. Unless otherwise stated in the notice of

dismissal or stipulation, the dismissal is without prejudice.” In this case, in

addition to being prior to the pretrial, the parties (OKL and EST) did in fact agree

to the dismissal, as part of the Cornerstone sale.

-23-
Loan to GTMI. Thus, the dismissal with prejudice of the foreclosure action was

53

a bar to any further action on either the promissory note or the mortgage,

effectively and permanently eliminating any claim of liability against EST based

on the Tulsa Loan.

V. CONCLUSION

The undisputed facts lead inevitably to the legal conclusion that the

Cornerstone sale may not be avoided as constructively fraudulent under either the

UFTA or § 548. Accordingly, in the absence of disputes regarding material fact

issues, this Court affirms the bankruptcy court’s summary judgment.

Okla. Stat. tit. 12, § 2025(C): “In case of any transfer of interest, the action

53

may be continued by or against the original party, unless the court upon motion

directs the person to whom the interest is transferred to be substituted in the

action or joined with the original party.”

-24-