United States Bankruptcy Appellate Panel

FOR THE EIGHTH CIRCUIT

______

No. 07-6034NE

No. 07-6035NE

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In re: *

 *

Prime Realty, Inc., *

 *

 *

Debtor. *

 *

James Killips, Chapter 11 Trustee, *

 *

Plaintiff-Appellants, * Appeal from the United States

 * Bankruptcy Court for the 

v. * District of Nebraska

 *

Robert C. Schropp, *

RCS Sons, Inc., and Leo Dahlke *

 *

 *

Defendants–Appellees. *

______

Submitted: October 24, 2007

Filed: December 27, 2007

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Before KRESSEL, Chief Judge, SCHERMER and McDONALD, Bankruptcy Judges.

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McDONALD, Bankruptcy Judge
1

 The Honorable Timothy J. Mahoney, Chief Judge, United States

Bankruptcy Court for the District of Nebraska.

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James Killips, the Chapter 11 Trustee of Debtor Prime Realty, appeals from the

judgment of the bankruptcy court1

 in favor of Defendants on Trustee’s preference and

fraudulent conveyance claims. We affirm. 

I.

Debtor, Prime Realty, Inc. (“Prime”), was involved in several joint ventures

with Leo Dahlke and RCS & Sons, Inc. (“RCS”). The primary purpose of these joint

ventures was to purchase and develop real property (the “Real Property”). Robert C.

Schropp was the sole shareholder of RCS.

The joint ventures were primarily in the form of limited partnership, with Prime

as the general partner (collectively the “Partnerships”). The Partnerships began

experiencing cash flow problems in 2000. James McCart, Prime’s President and

CEO, created a plan to address the Partnerships’ liquidity issues (the “Plan”). Under

the Plan, RCS and Dahlke agreed to obtain loans from Nebraska State Bank totaling

approximately $2,072,000.00 (collectively the “Loans”). Nebraska State Bank would

provide the proceeds of the Loans directly to Prime. Prime in return would repay the

Loans directly to Nebraska State Bank over a twelve month period and indemnify

RCS and Dahlke from any liability on the Loans. 

Finally, as part of the Plan, Prime agree to purchase the interest of both RCS

and Dahlke in the Partnerships. This portion of the Plan required Prime to remit
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$232,000.00 to both RCS and Dahlke upon receipt of the proceeds of the Loans.

Prime was then to make monthly payments of $20,000.00 to RCS and $15,000.00 to

Dahlke for a term of one year (the “Monthly Payments”). Under the terms of the Plan,

RCS and Dahlke would transfer their interests in the Partnerships to Prime upon

Prime’s completion of its obligation to remit the Monthly Payments. 

Both RCS and Dahlke entered into “Purchase Contracts” with Prime dated

March 6, 2001 that memorialized the above outlined terms of the Plan. RCS and

Dahlke then executed the promissory notes in favor of the Nebraska State Bank on

April 12, 2001 pursuant to the Plan. The documents prepared by Nebraska State Bank

confirm that it remitted approximately $2,100,000.00 in proceeds from the Loans

directly to Prime. It is unclear from the evidentiary record how Prime disposed of

these proceeds.

Pursuant to the terms of the Plan, Prime immediately paid the initial

$232,000.00 to both RCS and Dahlke as required by the Purchase Contracts. Prime

additionally made the Monthly Payments to both RCS and Dahlke for April, May and

June. Prime transferred a total of $313,682.45 to RCS and $293,682.45 to Dahlke in

April, May, June and July 2001 (collectively the “Transfers”). 

Prime, however, failed to make any payments on the Promissory Notes to

Nebraska State Bank as required by the Plan. Prime also failed to remit any additional

Monthly Payments on the Purchase Contracts to either RCS or Dahlke after July 1,

2001. Therefore neither RCS nor Dahlke transferred their interest in the Partnerships

to Prime as contemplated by the Purchase Contracts.
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The relationship between McCart and Schropp and Dahlke quickly deteriorated

after Prime stopped making the Monthly Payments. The FBI also began to investigate

McCart sometime in the summer of 2001 for his part in a check kiting scheme. When

Schropp and Dehlke learned of the FBI investigation, they refused to contribute any

additional capital to the Partnerships or guaranty any additional loans for the benefit

of the Partnerships. Without the ability to obtain additional liquidity, the Partnerships

defaulted on several existing loans that were secured by the Real Property.

Prime and McCart then filed a tortuous interference with a business expectancy

action against Schropp and Dahlke in Nebraska state court (the “State Court Action”).

The basis for Prime’s State Court Action was that Schropp and Dahlke intentionally

and wrongfully caused the Partnerships to default on several loans with Nebraska

State Bank by refusing to guaranty the Partnerships’ obligations on additional loans.

Schropp and Dahlke filed an answer to the State Court Action arguing, inter alia, that

McCart had deceived them about the financial condition of the Partnerships as early

as March 2001, and they had no obligation to provide further liquidity to the

Partnerships. It is unclear from the record as to the disposition of the State Court

Action, but the State Court did not enter a judgment entered in the case. 

Prime’s financial condition continued to deteriorate through the rest of 2001

and into 2002. Accordingly, Prime filed a petition for relief under Chapter 11 of the

Bankruptcy Code on March 15, 2002. The United States Trustee appointed James

Killips as the Chapter 11 trustee (the “Trustee”) on August 15, 2003. Apparently,

James McCart passed away sometime after Prime filed its petition for relief, but

before the United States Trustee appointed Killips.
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Trustee filed two separate adversary complaints against RCS, Schropp and

Dahlke (collectively the “Defendants”) to avoid the Transfers as either preferential

under §547(b) or constructively fraudulent under §548(a)(1)(B). Trustee also sought

to recover the value of the Transfers, $313,682.45 from RCS and Schropp, and

$293,682.45 from Dahlke, under §550(a)(1). 

The bankruptcy court consolidated the two adversary complaints for trial.

Concerning the preference actions, the bankruptcy court found that the Defendants

were insiders of Prime so that the one-year look back period contained in

§547(b)(4)(B) applied. Also, because Prime did not make the Transfers within the 90

days prior to the petition date, the Trustee was not entitled to the statutory

presumption of insolvency under §547(f).

A primary focus at trial was whether Prime was either insolvent at the time it

made the Transfers or whether it had an unreasonably small amount of capital after

it made the Transfers. Trustee produced Prime’s balance sheet dated April 1, 2001 to

demonstrate that Prime was insolvent at the time it made the Transfers (the “Balance

Sheet”). Trustee testified that although he was not certain, he suspected that McCart

prepared the Balance Sheet. 

The Balance Sheet indicated that as of April 1, 2001, the value of Prime’s assets

exceeded its liabilities by approximately $165,000.00. Trustee testified, however, that

when he reviewed the condition of Prime’s assets in early 2003, the true market value

of those assets were almost $2,000,000.00 less than the values reflected on Balance

Sheet. Trustee also claimed on the liability side of the ledger that the Balance Sheet
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failed to reflect that Prime was liable for a significant amount of special assessments

on the Real Property. Trustee maintained that when he compared the true market

value of Prime’s assets with its liabilities, Prime was insolvent by at least

$2,500,000.00. 

With respect to the unreasonably small capital issue, Trustee produced a group

of documents that he claimed evidenced that Prime was having difficulty meeting its

financial obligations at the time of the Transfers. These documents include several

default notices sent to Prime, RCS and Dahlke on loans executed by the Partnerships

and several non-sufficient funds notices sent from Nebraska State Bank to Prime

(collectively the “Default Notices”). The date of the Default Notices range from April

2001 through August 2001. 

The bankruptcy court held that the Balance Sheet, on its face, indicated that

Prime was solvent as of April 1, 2001. The bankruptcy court further noted that

Trustee failed to introduce evidence that as of April 2001, the true market value of

Prime’s assets differed from the book value of those assets as listed on the Balance

Sheet. Thus, the bankruptcy court held that Trustee failed to demonstrate that Prime

was insolvent at the time it remitted the Transfers. 

Concerning the question of whether Prime was left with an unreasonably small

amount of capital after it made the Transfers, the bankruptcy court held that the

Default Notices were not probative of Prime’s capital structure at the time it made the

Transfers. In fact, the bankruptcy court observed that the net effect of the various

transactions that constituted the Plan resulted in a $1,600,000.00 cash infusion to
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Prime. The bankruptcy court concluded, therefore, that Trustee failed to prove that

Prime operated with an unreasonably small amount of capital after it made the

Transfers. 

The bankruptcy court held that because Trustee failed to demonstrate that Prime

was insolvent at the time it made the Transfers, Trustee failed to meet its burden of

proof on the preference actions under §547(b)(3). The bankruptcy court also held that

because Trustee did not establish insolvency or that the Transfers left Prime with an

unreasonably small amount of capital, Trustee did not meet his burden of proof on the

fraudulent conveyance claims under §§548(a)(1)(B)(ii)(I) or (II). 

 

The bankruptcy court, accordingly, entered judgement in favor of Defendants

on both adversary complaints. Trustee filed a timely notice of appeal and this appeal

follows.

II.

The bankruptcy court’s determination that Trustee failed to establish that Prime

was insolvent or was operating with an unreasonably small amount of capital when

it made the Transfers are questions of fact that we review for clear error. Onix Credit

Alliance v. Harvey (In re Haddox Contractor, Inc.), 40 F.3d 118, 120 (5th Cir. 1994)

(insolvency); F.P.P Enter. v. United States, 830 F.2d 114, 117 (8th Cir. 1987) (small

amount of capital). A finding is clearly erroneous when “although there is evidence

to support it ... the reviewing court is left with the definite and firm conviction that a

mistake has been committed.” In re Kaelin, 308 F.3d 885, 889 (8th Cir. 2002). 
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III.

A. The bankruptcy court did not error in finding that Trustee failed to establish his

preference claims.

Because the statutory presumption of insolvency does not apply, Trustee is

required to prove by a preponderance of the evidence that Prime was insolvent at the

time it remitted the Transfers to Defendants in order to prevail on the preference

claims. 11 US.C. §547(g). Section 101(32)(A) of the Code defines insolvency as a

state when an entity’s debts are greater than the fair value of the entity’s property.

Thus, in determining whether the debtor was insolvent, the court should examine the

debtor’s balance sheet to determine whether the value of its assets were greater than

its liabilities at the time of the transfer in question. Silverman Consulting, Inc. v.

Hitachi Power Tools, U.S.A., Ltd. (In re Payless Cashways, Inc.), 209 B.R. 689, 699

(W.D. Mo. 2003). 

Here, Trustee argues that the Balance Sheet and the Default Notices

conclusively demonstrate that Prime was insolvent at all times relevant to the dispute

in question. We disagree. 

As the bankruptcy court properly observed, the Default Notices simply have no

bearing on the value of Prime’s assets or liabilities as of the date of the Transfers. The

Default Notices, therefore, are irrelevant to the question of whether Prime was

insolvent at the time it made the Transfers.
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The Balance Sheet reflects that the book value of Prime’s assets exceeded its

liabilities by $164,000.00 as of April 1, 2001. The Balance Sheet, therefore, reflects

that Prime was solvent as of April 1, 2001. 

Trustee argues, however, that his testimony at trial established that Prime was

insolvent at the time it remitted the Transfers. The bankruptcy court correctly rejected

this argument for two reasons. First, Trustee undertook his analysis of the condition

of Prime’s assets and liabilities in early 2003, approximately two years after Prime

remitted the Transfers in question. Thus, the bankruptcy court correctly concluded

that Trustee’s testimony was simply not probative to the question of whether Prime

was insolvent in early 2001, the relevant time frame at issue here. 

The second reason why Trustee’s testimony fails to establish that Prime was

insolvent is that Trustee is not a financial expert. The plaintiff, in order to establish

insolvency, must generally produce expert testimony of an accountant or other

financial expert that the “book” value of the property listed on the balance sheet is not

the property’s fair value. Harvey v. Orix Credit Alliance, Inc. (In re Lamar Haddix

Contractor), 40 F.3d 118, 121 (5th Cir. 1994). 

Trustee is not an accountant, real estate appraiser or otherwise qualified to

proffer an opinion as to the true value of Prime’s assets in early 2001. In fact, as the

bankruptcy court noted, Trustee did not proffer any testimony as to what valuation

method Prime utilized in calculating the value of its assets reflected in the Balance

Sheet. Given this record, the bankruptcy court correctly concluded that Trustee was
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not competent to offer testimony as to the true market value of Prime’s assets as of

early 2001.

Trustee additionally maintains on appeal that because he offered evidence that

Prime was insolvent at some point in time after it remitted the Transfers, the

bankruptcy court should have found that Prime was also insolvent at the time that it

made the Transfers. Some courts have allowed a plaintiff to establish that a debtor

was insolvent by a method called retrojection. Under this method, a plaintiff may

establish that the debtor was insolvent when it made the transfers in question if the

plaintiff can establish both that the debtor was insolvent shortly after making the

transfers and that the debtor’s financial condition did not substantially changed in the

interim. See e.g. Parlon v. Clairborne (In re Kaylor Equip. & Rental, Inc.), 56 B.R.

58, 62 (Bankr. E.D. Tenn. 1985). 

Here, Trustee failed to offer evidence as to exactly when, or even if, Prime

became insolvent. Also, Trustee did not establish that Prime’s financial condition had

not substantially changed between the time of the Transfers and when it may have

become insolvent. Thus, the bankruptcy court correctly refused to apply the doctrine

of retrojection here. 

Trustee additionally argues on appeal that the Defendants judicially admitted

that Prime was insolvent in their answer to the State Court Action. This argument

fails for two reasons. First, the specific portion of the answer that Trustee relies on

alleges that as early as March 2001, McCart and Prime deceived Schropp and Dahlke

about the ability of the Partnerships to service its debts secured by the Real Property.
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Although this contention does relate to the ability of the Partnerships to meet its

financial obligations as they came due, it is not evidence of whether Prime’s assets

exceeded its liabilities in March 2001. Thus, Schropp and Dahkle’s statement in their

answer cannot be construed as a judicial admission that Prime was statutorily

insolvent at the time it remitted the Transfers. 

Second, and more fundamentally, a party’s statement made in a pleading in a

prior case does not rise to the level of a judicial admission. Bank One v. Prudential

Ins. Co., 939 F.Supp. 533, 541 (N.D. Tex.1996). Rather, such a statement can only

be used by the declarant’s opponent as a statement against interest in the subsequent

proceeding, which the trial court should weigh as any other admission. First Bank of

Marietta v. Hogge, 161 F.3d 506, 510 (8th Cir. 1998). 

Here, the bankruptcy court properly admitted Schropp and Dahlke’s answer to

the State Court Action into evidence. Also, as described above, the specific statement

that Trustee relied on in the answer to the State Court Action did not relate to the

value of Prime’s assets or liabilities at the time it made the Transfers. Thus, that

statement had little, if any, probative value to the insolvency analysis in the instant

case. 

After reviewing this evidentiary record, we are not left with a definite and firm

conviction that the bankruptcy court erred in finding that Trustee failed to establish

that Prime’s liabilities exceed the value of its assets at the time it made the Transfers.

The bankruptcy court’s finding on insolvency, therefore, is not clearly erroneous.
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Accordingly, the bankruptcy court did not err in finding that Trustee failed to meet his

burden of proof on the preference actions under 11 U.S.C. §547(b)(3). 

B. The bankruptcy court did not err in finding that Trustee failed to establish his

fraudulent conveyance claims. 

The bankruptcy court also found that Trustee failed to meet his burden of proof

in his fraudulent conveyance claims. In order to prevail in a fraudulent conveyance

action, a plaintiff must establish by a preponderance of the evidence either one of the

following: (1) that the debtor made the transfer in question while it was insolvent, or

become insolvent because of the transfer; or (2) that the debtor was operating its

business after the transfer with an unreasonably small amount of capital. 11 U.S.C.

§548(a)(1)(B)(ii)(I) and (II). Here, the evidentiary record supports the bankruptcy

court’s conclusion that Trustee failed to prove either requirement by a preponderance

of the evidence. 

As discussed above, the bankruptcy court’s factual determination that Prime

was not insolvent at the time it remitted the Transfers is not clearly erroneous for

purposes of §547(b)(3). The fraudulent conveyance statute, however, is slightly

different than the preference statute in that the former allows the plaintiff to avoid not

only a transfer made when the debtor was insolvent, but also a transfer that makes the

debtor insolvent.

Here, the Balance Sheet reflects that Prime was solvent by $165,000.00 as of

April 1, 2001. As noted above, after the Transfers, the net effect of the Plan provided
2

 The Court also notes that Prime’s long term obligation to RCS and Dahlke

pursuant to the Purchase Contracts are not considered liabilities on Prime’s balance

sheet in the insolvency analysis. See Official Comm. of Former Partners v.

Brennan (In re Labrum & Doak, LL.P.), 227 B.R. 383, 389-90 (Bankr. E.D. Pa.

1998) 

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approximately $1,600,000.00 of cash to Prime. Thus, the only evidence in the record

as to a change in Prime’s balance sheet after April 1, 2001 was the $1,600,000.00 in

cash provided by the net effect of the Plan.2

 The evidence, therefore, supports the

bankruptcy court’s conclusion that Prime did not become insolvent because of the

Transfers. 

The record also supports the bankruptcy court’s conclusion that Prime was not

operating with an unreasonably small amount of capital after it made the Transfers as

provided in §548(a)(1)(B)(ii)(II). The determination of whether the debtor was

operating with an unreasonable small amount of capital should focus on the debtor’s

ability to generate enough cash from operations or the sale of assets to pay its debts

as they become due and remain a financially viable going concern. Dahar v. Jackson

(In re Jackson), 459 F.3d 117, 123-24 (1st Cir. 2006). 

Here, Trustee relied exclusively on the Default Notices to establish that Prime

was operating with an unreasonably small amount of capital after it remitted the

Transfers. It is true that when a debtor has insufficient cash in its checking account

to pay the checks it remits to its creditors, a court may conclude that it is operating

with an unreasonably small amount of capital for purposes of §548(a)(1)(B)(ii)(II).

W.E. Tucker Oil Co. v. First State Bank of Crossett (In re W.E. Tucker Oil Co.), 55

B.R. 78, 82 (Bankr. W.D. Ark. 1985). The Default Notices reflect that Prime did not
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have sufficient cash in its checking account to cover several checks it had presented

to its creditors for payment from April through July of 2001. Thus, there is evidence

in the record that supports Trustee’s position on this issue. 

 

But there is also evidence that supports the bankruptcy court’s finding. Prime

continued to operate as a going concern for almost a year after it remitted the

Transfers. Additionally, and more importantly, Trustee failed to introduce any

evidence as to Prime’s actual capital structure after it remitted the Transfers. There

is no evidence in the record concerning Prime’s cash flow or statement of cash during

the relevant time frame. In fact, as the bankruptcy court noted, the only evidence in

the record as to Prime’s capital structure after it made the Transfers is that it netted

nearly $1,600,000.00 in cash from the Plan. 

Given this record, although there is some evidence to support Trustee’s

position, we are not left with a definite and firm conviction that Trustee established

that Prime was operating with an unreasonably small amount of capital after it made

the Transfers. We, therefore, conclude that the bankruptcy court’s finding that Trustee

failed to establish that Prime was operating with an unreasonably small amount of

capital was not clearly erroneous. 

C. The bankruptcy court’s prior order does not collaterally estop Defendants from

denying that Prime was either insolvent or operating with an unreasonably small

amount of capital. 
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Trustee finally argues that a prior order of the bankruptcy court entered in an

another adversary proceeding involving Schropp and Dahlke collaterally estops them

from denying that Prime was either insolvent or operating with an unreasonably small

amount of capital (the “Prior Order”). Trustee specifically argues that the bankruptcy

court’s following finding of fact in the Prior Order collaterally estops Schropp and

Dahlke: “[d]uring 2001 and 2002, there were many forecloses and substantial sums

of money were lost by the partners and their lenders.” 

The elements of collateral estoppel under federal law are: 1) the party sought

to be precluded in the second suit must have been a party, or in privity with a party,

to the original lawsuit; 2) the issue sought to be precluded must be the same as that

involved in the prior action; 3) the issue must have been litigated in the prior action;

4) the issue must have been determined by a valid and final judgment; and 5) the

determination must have been essential to the prior judgment. Sells v. Porter (In re

Porter), 375 B.R. 822, 826 -827 (B.A.P. 8th Cir.2007). We find that the Prior Order

did not adjudicate the issue of Prime’s insolvency or whether it was operating with an

unreasonably small amount of capital. 

Here, the factual determination made by the bankruptcy court in its Prior Order

relates directly to the Partnerships’ ability to service the debt secured by the Real

Property. The only comment in the Prior Order concerning Prime’s financial

condition is that “substantial sums of money were lost by the partners.” This finding

simply does not conclusively determine whether Prime was insolvent or operating

with an unreasonably small amount when it made the Transfers,. Thus, the Prior
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Order does not collaterally estop Schropp or Dahlke from denying that Prime was

either insolvent or operating with an unreasonably small amount of capital. 

IV.

After reviewing the evidentiary record before us, we are not left with a definite

and firm conviction that Trustee met his burden of proof in establishing that Prime

was insolvent at the time it remitted the Transfers. We also find that the record does

not leave us with a definite and firm conviction that Trustee established either that the

Transfers made Prime insolvent or that Prime operated its business after the Transfers

with an unreasonably small amount of capital. Accordingly, the bankruptcy court’s

conclusion that Trustee failed to meet his burden of proof on both his preference and

fraudulent conveyance causes of action is not clearly erroneous. 

 The bankruptcy court also did not err in finding that Defendants’ answer in the

State Court Action was not a binding judicial admission that Prime was either

insolvent or operating its business with an unreasonably small amount of capital after

it made the Transfers. Additionally, the bankruptcy court correctly concluded that its

Prior Order did not collaterally estop Schropp or Dahlke from denying that Prime was

either insolvent or operating with an unreasonably small amount of capital in the

instant cases. 

Accordingly, we affirm the two judgments of the bankruptcy court in favor of

Defendants.