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FILED

SEP 04 2015

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT

NOTFOR PUBLICATION

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. SC-14-1287-JuKlPa

) BAP No. SC-14-1320-JuKlPa 

UC LOFTS ON 4TH, LLC; UC LOFTS) (related appeals)

ON 5TH, LLC; )

) Bk. No. 05-15409-CL7

Debtors. )

______________________________) Adv. No. 07-90139-CL

LESLIE T. GLADSTONE, Chapter 7)

Trustee, )

)

Appellant, )

)

v. ) M E M O R A N D U M*

)

FRANK SCHAEFER; FRANK SCHAEFER)

CONSTRUCTION CO.; FRANK )

SCHAEFER CONSTRUCTION, INC. )

PENSION PLAN; SHEILA LEMIRE, )

)

Appellees. )

______________________________)

HALIFAX INVESTMENTS, LLC; )

JOHN SCAFANI, )

)

Appellants, )

)

v. )

)

LESLIE T. GLADSTONE, Chapter 7)

Trustee, )

)

Appellee.** )

______________________________)

Argued and Submitted on July 23, 2015

at Pasadena, California 

* This disposition is not appropriate for publication.

Although it may be cited for whatever persuasive value it may

have (see Fed. R. App. P. 32.1), it has no precedential value. 

See 9th Cir. BAP Rule 8024-1.

** NOTE TO CLERK: please change the caption to reflect the

above.

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Filed - September 4, 2015

Appeal from the United States Bankruptcy Court

for the Southern District of California

Honorable Christopher B. Latham, Bankruptcy Judge, Presiding

_________________________

Appearances: Jeffry A. Davis of Mintz Levin Cohn Ferris

Glovsky & Popeo argued for appellant/appellee

Leslie T. Gladstone, Chapter 7 Trustee; Gregg A.

Johnson argued for appellant Halifax Investments,

LLC and appellant John Scafani; James Jay Stoffel

of Beberman Stoffel & Beberman argued for

appellees Frank Schaefer, Frank Schaefer

Construction Co., and Frank Schaefer

Construction, Inc. Pension Plan.*** 

______________________________

Before: JURY, Klein,  and PAPPAS, Bankruptcy Judges.

Chapter 71 trustee, Leslie A. Gladstone (Trustee), filed an

adversary proceeding against Frank Schaefer, Frank Schaefer

Construction, Inc., Frank Schaefer Construction, Inc. Pension

Plan (collectively, the Schaefer Entities), John Scafani, Sheila

Lemire, Halifax Investments, LLC, and others,2 seeking to avoid

** * Appellee Sheila Lemire has not participated in this

appeal.

**** Hon. Christopher M. Klein, Chief United States

Bankruptcy Judge for the Eastern District of California, sitting

by designation.

1 Unless otherwise indicated, all chapter and section

references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532. 

“Rule” references are to the Federal Rules of Bankruptcy

Procedure and “Civil Rule” references are to the Federal Rules of

Civil Procedure.

2 Trustee named others as defendants in the adversary

proceeding including Charles McHaffie who is mentioned below. On

March 23, 2011, the bankruptcy court approved Trustee’s

settlement with James Warner and the Law Offices of James Warner,

and with Broadsmore Capital, LLC, Centaur Construction, Matthew

(continued...)

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several transfers arising out of a series of loan transactions

to finance the acquisition and initial development of real

property held by debtors, UC Lofts on 4th, LLC and UC Lofts on

5th, LLC (Debtors or UC Lofts). Trustee also asserted claims

against the Schaefer Entities seeking to avoid preferential

transfers and equitable subordination of the proof of claim

filed by Frank Schaefer Construction, Inc. (Schaefer

Construction). 

The bankruptcy court bifurcated the issues for trial into

(1) insolvency; and (2) all others. The court held a trial in

February 2012 on insolvency and issued a memorandum decision

finding that Trustee failed to prove debtors were insolvent on

February 12, 2004.3 The bankruptcy court later conducted an

eight day bench trial in which it considered the issue of

Debtors’ insolvency at the time of the various transfers and all

remaining issues. 

After trial, the court issued its findings of fact and

conclusions of law in a single judgment. The bankruptcy court

granted judgment in favor of the Schaefer Entities, Scafani, and

Lemire on the ground that Trustee had failed to meet her burden

of proof on all claims against them. As to Halifax, the

bankruptcy court awarded judgment in Trustee’s favor on the

2(...continued)

Gordon and Peter Kostopoulous. On October 24, 2011, the

bankruptcy court approved Trustee’s settlement with McHaffie

which included a stipulated judgment in the sum of $375,000. 

Other defendants were dismissed.

3 This decision was issued by Judge Meyers who has since

retired from the bench.

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fraudulent transfer claim in the amount of $1,100,000 plus

$537,734.25 in prejudgment interest. 

Trustee appeals from the bankruptcy court’s ruling in favor

of the Schaefer Entities, Scafani, and Lemire, contending that

the court erred in numerous ways relating to her various claims

(BAP No. 14-1287). Halifax appeals from the judgment against it

on the fraudulent transfer claim (BAP No. 14-1320). For the

reasons set forth below, we AFFIRM the judgment in all respects. 

I. FACTS4

A. Charles McHaffie’s Purchase of Urban Coast

Urban Coast, LLC (“Urban Coast”) was the sole owner and

managing member of Debtors. The sole asset of each debtor was

contiguous real property near downtown San Diego, California 

(Lofts Property), which was to be developed for mixed use and

known as the Atmosphere Project. McHaffie acquired 100% of the

membership interests of Urban Coast in two contemporaneous

transactions.

He purchased forty-nine percent of Urban Coast from Halifax

for $1,600,000 which was evidenced by a sale agreement (Halifax

Sale Agreement) and a promissory note secured by a deed of trust

on the Lofts Property. The Halifax Sale Agreement listed

McHaffie as the “Buyer,” Scafani as the “Broker,” Urban Coast as

the “Company” and Halifax as the “Seller.” The terms of the

sale agreement required McHaffie and Urban Coast to execute the

promissory note. McHaffie executed the promissory note on

4 We borrow heavily from the facts set forth in the

bankruptcy court’s memorandum decision entered March 27, 2014.

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behalf of Urban Coast but did not sign in his individual

capacity. Although McHaffie pledged the Lofts Property as

collateral for the note, the UC Lofts entities were not parties

to the Halifax Sale Agreement. Halifax and Scafani promised to

refrain from recording the deed of trust until Urban Coast

obtained construction financing. McHaffie signed the deed of

trust against the Lofts Property but never delivered it to

Halifax, so it remained unrecorded. 

Scafani, a licensed real estate broker, wholly owned and

managed Halifax. Under the terms of the sale agreement, Scafani

was to receive real estate brokerage representation rights in

connection with offering the finished condominium units for sale

and preferential rights in purchasing condominium units in the

Atmosphere Project.

A consortium known as the Broadsmore Group owned the

majority fifty-one percent interest in Urban Coast. McHaffie

paid $2,452,803 for the Broadsmore Group’s interests: 

$1,899,625 in cash and $552,803 in a promissory note secured by

a deed of trust on real property held by La Bella Vida, L.P. 

To fund the purchase of Urban Coast, McHaffie caused

Debtors to obtain a $4,000,000 loan from the Barth Family (Barth

Loan) which was evidenced by a promissory note and secured by a

first priority trust deed on the Lofts Property. Debtors also

obtained a loan from the Frank Schaefer Construction Inc.

Pension Plan (Schaefer Pension) in the amount of $1,750,000

which was evidenced by a promissory note and secured by a junior

trust deed on the Lofts Property (Schaefer Initial Loan). 

McHaffie applied $4,527,600 from the Barth and Schaefer

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Loans to purchase Urban Coast and pay various loan fees,

appraisal fees, commission, taxes and other expenses. He

deposited $1,222,400 into a fund control account (First Fund

Control) controlled by the Schaefer Pension. Around the same

time, the parties entered into an agreement to govern

disbursements out of the fund control account (Fund Control

Agreement). Under the agreement, funds would be disbursed to

McHaffie upon written order for payment of items relating to the

development of the Lofts Property. The $1,222,400 amount was

based on a proposed budget for the project which consisted of

various line item costs related to, among other things, shoring

and concrete, excavation, equipment rental, and the like. 

When McHaffie acquired Urban Coast there were two deeds of

trust against the Lofts Property which were unrecorded. One

deed of trust allegedly secured a $3,400,000 obligation to Urban

Coast (UC DOT) and the other allegedly secured a $100,000

obligation to SD Lofts, LLC (SD Lofts DOT).5 Those debts were

not paid off with the Barth and Schaefer Loans. 

McHaffie’s transactions for the purchase of Urban Coast

closed on February 12, 2004. At that time, Debtors’ total

assets were the Lofts Property and $1,224,900 held in the First

Fund Control account. 

Between February 12, 2004 and April 2, 2004, Debtors made

numerous transfers from the First Fund Control: $20,000 on

February 23, 2004 to the Schaefer Pension Plan for

5 As further discussed below, whether or not these deeds of

trust secured valid and enforceable obligations of Debtors was a

contested issue at trial relating to the issue of insolvency.

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“Reimbursement–Management;” $5,000 on March 5, 2004 to James

Warner, Esq. for “Legal;” $20,000 on March 5, 2004 to

Charlemagne McHaffie6 for “Funds to Borrower;” $50,000 on

March 8, 2004 to Ron Bedell for “Commission;” and $20,000 on

April 1, 2004 to Charlemagne McHaffie with no stated purpose. 

B. The Schaefer Construction April 2, 2004 loan for $1,200,000

On April 2, 2004, Debtors borrowed $1,200,000 from Schaefer

Construction (April 2, 2004 Loan) which was evidenced by a

straight note and secured by a third position deed of trust on

the Lofts Property. The UC and SD Lofts DOTs were subordinated

to the April 2, 2004 Loan. 

McHaffie used the April 2, 2004 Loan proceeds to exercise

an option to purchase a Nevada limited liability company,

Tropicana Partners, LLC (Tropicana). Tropicana’s primary asset

was commercial real property in Las Vegas, Nevada. Debtors made

the following additional payments to acquire Tropicana: 

$100,000 on May 20, 2004 to Santoro, Driggs for legal fees;

$1,000 on May 24, 2004 to Lawyer’s Title for title fees; $50,000

on May 26, 2004 to Fred Young for “Deposit, per borrower;”

$5,010 on June 17, 2004 to Santoro, Driggs for legal fees;

$10,000 on July 21, 2004 to Santoro, Driggs for legal fees;

$300,000 on July 21, 2004 to Joy Turner for “Deposit, per

borrower;” and $60,000 on July 21, 2004 to Santoro, Driggs for

legal fees.

During this time period, Debtors also made the following

transfers from the First Fund Control that were unrelated to the

6 Charlemagne was evidently Charles’ son.

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Tropicana acquisition or the Atmosphere Project: $10,000 on

May 14, 2004 to James Warner for legal fees; $46,666.67 on

July 8, 2004 to Pacific Horizon Financial for “Interest payment,

1st TD;” and $20,416.67 on July 8, 2004 to Action Loan Servicing

for “Interest payment; 2nd TD.” The last two transfers went to

pay down interest on McHaffie’s personal residence. 

On August 17, 2004, Debtors made a $36,000 interest payment

toward the April 2, 2004 Loan.

On August 20, 2004, Schaefer Construction initiated a

nonjudicial foreclosure on the Lofts Property by recording a

notice of default and sale. The notice of sale was subsequently

rescinded in January 2005. 

C. The Schaefer Entities September 24, 2004 loan for

$2,500,000

On September 24, 2004, the Schaefer Entities loaned Debtors

another $2,500,000 (Second Loan). The Second Loan was secured

by an assignment of the $3,400,000 UC DOT which was property of

Urban Coast, not Debtors. Frank Schaefer later testified that

there was no note in connection with the UC DOT: “[i]t was a

bogus deal. That note actually didn’t exist. The deed of trust

did, but there was no note. So there was nothing owing on it. 

So I took something of no value.” 

The Schaefer Entities initially funded the Second Loan 

with $500,000 and charged $35,312 as a loan origination fee. 

Debtors directed $100,000 of the Second Loan proceeds to pay

Hawkins & Hawkins Architects, Inc. to maintain the necessary

building permits on the Lofts Property and deposited the

remaining $365,688 into a second fund control account (Second

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Fund Control). 

After receiving the Second Loan proceeds, Debtors made the

following transfers from the First Fund Control: $37,000 on

October 8, 2004 to Charlemagne Ed. Trust for “Funds to

Borrower;” $35,000 on October 8, 2004 to WH-TH for “Funds to

Borrower;” $10,000 on October 8, 2004 to Charlemagne McHaffie

Trust for “Funds to Borrower;” and $4,097.83 on October 15, 2004

to the City of San Diego to fund a bond. After these transfers,

the First Fund Control was overdrawn by $2,179.50.

D. The Schaefer Entities November 19, 2004 loan for $4,000,000

and Halifax Settlement for $1,100,000

Scafani discovered that the Schaefer Entities trust deed in

relation to the April 2, 2004 Loan had been recorded on

April 10, 2004, making it senior to Halifax’s yet-to-be

delivered and recorded deed of trust. Because this was contrary

to the terms of the parties’ agreement, on June 25, 2004,

Halifax and Scafani filed a lawsuit against McHaffie and Urban

Coast for breach of contract and fraud seeking rescission of the

Halifax Sale Agreement. Halifax did not name Debtors as

defendants. Halifax and Scafani also recorded a lis pendens

against the Lofts Property in connection with the state court

lawsuit.

On November 18, 2004, McHaffie, Halifax, Scafani, Urban

Coast, the Schaefer Entities, and others entered into a

settlement agreement and mutual release (Halifax Settlement

Agreement). According to the settlement, Halifax and Scafani

agreed to dismiss the lawsuit against McHaffie and Urban Coast

and withdraw the lis pendens against Debtors. In exchange, they

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would receive payment of $1,100,000 million which reflected a

$500,000 discount on the promissory note executed by McHaffie on

behalf of Urban Coast.

By mid-November 2004, the First Fund Control displayed a

negative balance, the Schaefer Entities had filed a notice of

default related to the April 2, 2004 Loan, and Debtors had no

other sources of capital. At the time, Schaefer and McHaffie

were negotiating the transfer of the Tropicana property to

satisfy the April 2, 2004 Loan and they also discussed a

possible new loan. Eventually, McHaffie agreed to assign the

interest in the Tropicana property to Schaefer Construction in

full payment and cancellation of the April 2, 2004 note executed

in the sum of $1,200,000. 

These events converged to precipitate an immediate need for

capital. On November 19, 2004, Schaefer Construction loaned

Debtors an additional $4,000,000 (Third Loan), which was

evidenced by a promissory note and secured by the Lofts

Property. This loan was arranged by a licensed real estate

broker, Edward Spooner of Lending Associates, and funded in the

initial amount of $1,165,000. The escrow instructions routed

$1,100,000 of the loan proceeds directly to Halifax, charged a

$210,500 loan origination fee and charged $52,500 as an

extension fee for the Schaefer Initial Loan. Scafani testified

at trial that Halifax disbursed the $1,100,000 to its creditors. 

The withdrawal of the lis pendens was also part of the escrow

agreement. When the funds were distributed by escrow, the

Notice of Withdrawal of the Notice of Pendency Of Action was

recorded.

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The Third Loan also extinguished the Second Loan. Debtors

transferred $206,552.65 from the Second Fund Control and

$299,447.35 from the Third Loan proceeds to pay off the $500,000

funded under the Second Loan. This transfer left the Second

Fund Control with a zero balance. Schaefer Construction 

advanced another $111,600 under the Third Loan on November 22,

2004 to replenish the deficiency. This left a $6,413.69 balance

in the Second Fund Control. After the Third Loan, the Schaefer

Entities made no new loans to Debtors. 

On December 30, 2004, at McHaffie’s request, Schaefer

Construction assigned the April 2004 note and deed of trust to 

Lemire.7 On April 18, 2005, Lemire executed and recorded a

Substitution of Trustee and Full Reconveyance of the April 2,

2004 deed of trust. 

E. The April 2005 global settlement

In April 2005, Debtors and Schaefer Construction entered

into a workout agreement whereby Schaefer Construction agreed to

provide $1,130,000 in additional funding under the terms of the

Third Loan. The agreement reinstated and extended the Third

Loan’s maturity date and paid delinquent real property taxes. 

Under the agreement, Debtors were also required to reconvey all

deeds of trust junior to the Third Loan, which included the

deeds of trust securing the $3,400,000 debt owed to Urban Coast,

the $100,000 debt owed to SD Lofts, and the April 2, 2004 Loan

deed of trust that Schaefer had assigned to Lemire. The only

7 Trustee argues that this assignment of the deed of trust

made Lemire a subsequent transferee liable for $1,200,000 arising

out of the April 2, 2004 Loan.

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advances that the Schaefer Entities made after April 15, 2004

under the Third Loan went to pay off the $1,750,000 Schaefer

Initial Loan.

F. The sale of Tropicana by Lemire

In September of 2005, Lemire paid Schaefer Construction

$70,000 for a lease option to purchase the Tropicana property. 

In April 2006, after substantial work in repairing and releasing

the individual units, Lemire was able to generate approximately

$200,000 to $500,000 in net income on the sale of the Tropicana

property.

G. Involuntary Chapter 11

On October 25, 2005, three unsecured creditors of Debtors

filed involuntary chapter 11 petitions against them. Debtors

initially contested the petition. In January 2006, they 

withdrew their answers to the involuntary petitions and an order

for relief was entered. 

On April 17, 2006, Gladstone was appointed the chapter 11

trustee for both debtors. The bankruptcy court later entered an

order directing the joint administration of the related

chapter 11 cases. 

In early September 2006, the bankruptcy court entered an

order terminating the automatic stay in favor of Schaefer

Construction. Schaefer Construction foreclosed on the Lofts

Property and became the owner. Schaefer then sold the Lofts

Property through an LLC to Alpha and Omega Development, LLC for

$6,000,000 and paid $5,312,330.37 out of escrow to First

National Bank, the successor beneficiary to the Barth note. The

Schaefer Pension Plan also made an additional $1,250,000 hard

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money loan to Alpha and Omega Development, LLC secured behind a

purchase money loan from Dunham & Associates of $3,700,000

secured by a first deed of trust. Ultimately, the holder of the

first trust deed foreclosed out the Schaefer Entities’ interest

in the Lofts Property.

Schaefer Construction filed a secured proof of claim in

Debtors’ case alleging that the amount it was owed on account of

the Third Loan was $5,678,351.50.

On October 20, 2006, Debtors’ cases were converted to

chapter 7 and Gladstone was appointed the chapter 7 trustee.

H. The Adversary Proceeding

On April 2, 2007, Trustee filed the adversary complaint

which is the subject of this appeal. Trustee asserted claims

against the Schaefer Entities for: (1) avoidance and recovery of

fraudulent transfers; (2) avoidance and recovery of preferential

transfers; (3) aiding and abetting breach of fiduciary duty;

(4) declaratory relief that Frank Schaefer was a partner of

Debtors; (5) equitable subordination of Schaefer Construction's

claims; (6) breach of fiduciary duty to Debtors; and

(7) conversion.8 Trustee also sought to avoid allegedly

fraudulent transfers to, or for the benefit of, defendants

8 The Schaefer Entities filed a motion for summary judgment

which was granted in part and denied in part. The bankruptcy

court granted summary judgment in their favor as to Trustee’s

eleventh and thirteenth claims for relief on usury relating to

the first loan, first loan extensions and the third November 2004

loan of $4,000,000. Trustee withdrew the twelfth claim for usury

in connection with the September 24, 2004 loan for $2,500,000 

which was funded in the amount of $500,000. Trustee also

withdrew her tenth claim for relief for alter ego prior to the

hearing on the motion for summary judgment.

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Lemire, Scafani and Halifax. 

The adversary proceeding was assigned to Judge James M.

Meyers. Judge Meyers bifurcated the trial, with the initial

session on whether Debtors were insolvent as of February 12,

2004 (the date McHaffie acquired 100% membership interest in

Urban Coast). At the trial on insolvency, Judge Meyers

concluded that the value of Debtors’ assets on that date was “in

the range of $8 million to $9.5 million,” and the liabilities

were $6,154,531. The bankruptcy court did not explain how it

reached its decision. In an April 17, 2012 status report,

Trustee requested the court to issue a supplemental decision

with specific findings regarding the value. No supplemental

decision was issued. Judge Meyers retired and the case was

reassigned to Judge Christopher Latham.

Following an eight day trial, the bankruptcy court issued

its memorandum decision on March 27, 2014. The court found that

the value of the Lofts Property was $7,366,306 as of April 2004,

and $8,225,954 as of November 24, 2004. The court also found

that the Schaefer Entities were not insiders of the Debtors. In

ruling on the fraudulent transfer claims, the court found that: 

(1) after the April 2, 2004 Loan, Debtors’ liabilities were

$7,118,385.52 and, therefore, Debtors’ assets9 exceeded their

debts by $1,205,920.48; (2) the Third Loan and the $1,100,000 

payment to Halifax ultimately rendered Debtors insolvent because

by November 22, 2004, Debtors’ liabilities greatly exceeded

9 Debtors’ assets also included monies in the First Control

Fund.

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their assets and they were balance sheet insolvent by at least

$964,797.33; (3) the Third Loan and the $1,100,000 payment to

Halifax left Debtors with unreasonably small assets;

(4) transfers related to Tropicana and the April 2, 2004 Loan

were not fraudulent as to the Schaefer Entities; (5) transfers

related to the Second and Third Loans and Halifax payment were

not fraudulent as to the Schaefer Entities; (6) Trustee failed

to meet her burden that Lemire was a subsequent transferee of

the Tropicana property or that she did not provide reasonably

equivalent value; (7) the payment to Halifax was constructively

fraudulent and should be avoided; and (8) neither Scafani nor

Halifax provided reasonably equivalent value for the $1,100,000

transfer.

Trustee had also sought to avoid as preferential transfers

two payments totaling $506,000 made by Debtors to the Schaefer

Entities. The bankruptcy court found the Schaefer Entities were

not insiders and thus the extended preference period did not

apply. Therefore, the transfers were not recoverable as

preferences.

Finally, on the equitable subordination claim, the

bankruptcy court found Trustee had not met her burden to

equitably subordinate Schaefer Construction’s proof of claim. 

Since the court found that none of the Schaefer Entities were

insiders or partners of Debtors, the burden remained with

Trustee to prove circumstances justifying subordination. In the

end, the court found that the evidence did not establish

inequitable conduct. 

The bankruptcy court entered judgment on the adversary

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complaint on the same date it issued its memorandum decision,

awarding judgment as to all claims in favor of the Schaefer

Entities, Scafani, and Lemire and awarding judgment against

Halifax in the amount of $1,100,000, plus interest.

Trustee filed a motion to amend the judgment on April 10,

2014. The Schaefer defendants filed a response. 

On June 6, 2014, the bankruptcy court issued an order on

Trustee’s motion resulting in a two page revision of the

memorandum decision with no change in the judgment. On the same

day, Trustee filed her notice of appeal.10 On June 20, 2014,

Halifax filed its related appeal. 

II. JURISDICTION

The bankruptcy court had jurisdiction pursuant to 28 U.S.C.

§§ 1334 and 157(b)(2)(A) and (H). We have jurisdiction under

28 U.S.C. § 158.

III. ISSUES 

FRAUDULENT TRANSFER CLAIMS: SCHAEFER ENTITIES AND LEMIRE

1. Did the bankruptcy court err by considering parol

evidence to explain or construe the payment provision in the

November 2004 Halifax Settlement Agreement which stated that

Frank Schaefer Construction “shall pay” to Halifax the sum of

$1,100,000? 

2. Did the bankruptcy court err by not including the

$3,400,000 Urban Coast obligation and $100,000 SD Lofts

obligation in its insolvency analysis as of April 2, 2004 when

10 Trustee subsequently filed two amended notices of appeal

with no substantive changes.

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those obligations were “stipulated facts” in the pretrial order?

3. Did the bankruptcy court err by determining that

Schaefer Construction gave reasonably equivalent consideration

for the April 2, 2004 Loan?

4. Did the bankruptcy court err by failing to place the

burden of proof on Sheila Lemire to establish her good faith

defense as a subsequent transferee?

FRAUDULENT TRANSFER CLAIM: HALIFAX

1. Did the bankruptcy court err by determining that the

$1,100,000 payment from Debtors to Halifax was a fraudulent

transfer because Halifax was not a secured creditor based on the

filing of the lis pendens?

2. Did the bankruptcy court err in determining that

Halifax did not give reasonably equivalent value for the

$1,100,000 payment by releasing its $1,600,000 note, dismissing

its lawsuit, and withdrawing the lis pendens against the Lofts

Property?

3. Did the bankruptcy court err in determining that 

Scafani was not liable for receiving a fraudulent transfer

because the entire $1,100,000 transfer went to Halifax’s

creditors and Scafani did not receive any of the funds?

AIDING AND ABETTING BREACH OF FIDUCIARY DUTY: SCHAEFER ENTITIES

Did the bankruptcy court err by finding that the Schaefer

Entities did not have actual knowledge of McHaffie’s

defalcations as they occurred for purposes of aiding and

abetting McHaffie’s breach of fiduciary duty under California

law?

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PREFERENTIAL TRANSFER CLAIM: SCHAEFER CONSTRUCTION

Did the bankruptcy court err by determining that the

Schaefer Entities were not “insiders” within the meaning of

§§ 101(1) and 547?

EQUITABLE SUBORDINATION: SCHAEFER CONSTRUCTION

Did the bankruptcy court err by determining that the

Schaefer Entities had not engaged in inequitable conduct?

IV. STANDARDS OF REVIEW

We review findings of fact for clear error and conclusions

of law and mixed questions of law and fact de novo. Banks v.

Gill Distrib. Ctrs., Inc., 263 F.3d 862, 867 (9th Cir. 2001). 

 A bankruptcy court’s factual determination is clearly

erroneous if it is illogical, implausible, or without support in

the record. United States v. Hinkson, 585 F.3d 1247, 1261-62 &

n.21 (9th Cir. 2009) (en banc) (quoting Anderson v. City of

Bessemer City, N.A., 470 U.S. 564, 577 (1985)) (explaining that

the clearly erroneous standard of review is an element of the

clarified abuse of discretion standard). Where there is

admitted evidence in the record to support the bankruptcy

court’s fact findings, an appellate court cannot substitute its

views of the facts for those of the bankruptcy court. Anderson,

470 U.S. at 573. “Where there are two permissible views of the

evidence, the factfinder’s choice between them cannot be clearly

erroneous.” Id. at 574.

The determination of insider status is a question of fact

to be reviewed under the clearly erroneous standard. Friedman

v. Sheila Plotsky Brokers, Inc. (In re Friedman), 126 B.R. 63,

67 (9th Cir. BAP 1991). 

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The bankruptcy court’s decision regarding equitable

subordination is reviewed for abuse of discretion. Paulman v.

Gateway Venture Partners III (In re Filtercorp, Inc.), 163 F.3d

570, 587 (9th Cir. 1998). A court abuses its discretion when it

fails to identify and apply “the correct legal rule to the

relief requested,” or if its application of the correct legal

standard was “(1) ‘illogical,’ (2) ‘implausible,’ or (3) without

‘support in inferences that may be drawn from the facts in the

record.’” Hinkson, 585 F.3d at 1262-63. 

We may affirm the bankruptcy court’s decision on any ground

supported by the record. Olsen v. Zerbetz (In re Olsen),

36 F.3d 71, 73 (9th Cir. 1994).

V. DISCUSSION

A. Fraudulent Transfers: Schaefer Entities and Lemire

Section 544(b)(1) provides that a trustee “may avoid any

transfer of an interest of the debtor in property or any

obligation incurred by the debtor that is voidable under

applicable law by a creditor holding an unsecured claim . . . .” 

Trustee, acting in her capacity as an unsecured creditor, seeks

to avoid certain transfers to the Schaefer Entities and Lemire

under California’s Uniform Fraudulent Transfer Act (UFTA). See

Cal. Civ. Code § 3439 et. seq.; see also Gen. Elec. Capital Auto

Lease, Inc. v. Broach (In re Lucas Dallas, Inc.), 185 B.R. 801

(9th Cir. BAP 1995) (noting that the California UFTA “only

confers standing upon a ‘creditor’ of the debtor” citing Cal.

Civ. Code § 3439.07(a)). 

Under California’s UFTA, a transfer is constructively

fraudulent if the debtor made the transfer without receiving

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reasonably equivalent value in exchange and the debtor either:

(1) was engaged or was about to engage in a business or a

transaction for which the remaining assets of the debtor were

unreasonably small in relation to the business or transaction;

or (2) intended to incur, or believed or reasonably should have

believed that he or she would incur, debts beyond his or her

ability to pay as they became due; or (3) was insolvent at the

time, or was rendered insolvent by the transfer or obligation. 

Cal. Civ. Code §§ 3439.04(a), 3439.05. 

1. The bankruptcy court did not err by considering parol

evidence to construe the payment provision contained

in the November 2004 Halifax Settlement Agreement.

The Halifax Settlement Agreement provides in relevant part: 

SETTLEMENT TERMS: CASH. In full and final settlement

of all claims, whether or not said claims have been

set forth in the LITIGATION, SCHAFFER [sic]

[Construction] shall pay to HALIFAX, in cash, the sum

of One Million One Hundred Thousand Dollars

($1,100,000).

“Schaefer” is defined in the settlement as “Frank Schaefer

Construction, Inc.” and the agreement contained an integration

clause. 

Trustee contends on appeal, as she did at trial, that

Schaefer Construction did not pay the $1,100,000 as required

under the settlement agreement, instead requiring Debtors to use

proceeds from the Third Loan to pay Schaefer Construction’s

obligation. According to Trustee, because Debtors were

insolvent on the date of the transfer, the payment of $1,100,000

by Debtors to Halifax to satisfy the debt of Schaefer

Construction was fraudulent. In addressing these arguments, the

bankruptcy court found:

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The Trustee contends that this provision shifts the

obligations owed by Urban Coast and McHaffie under the

Halifax Sale Agreement onto Schaefer. The court

disagrees. None of the Schaefer Entities was a party

to either the Halifax Sale Agreement or the lawsuit

filed by Scafani and Halifax. Rather than imposing a

legal obligation on the Schaefer Entities, the court

interprets this provision—which, like the rest of the

document, was quite loosely drafted—as merely

recognizing the source of payment.

Trustee contends that the court’s ruling was erroneous because

an unambiguous contract is interpreted as a matter of law

without the use of parol evidence. Trustee argues that the

payment provision here was unambiguous and susceptible to only

one interpretation — Schaefer Construction was the party

obligated to pay the $1,100,000 — “pay means pay.” In finding

otherwise, the court had inappropriately relied on evidence not

on the face of the agreement. 

The parol evidence rule has no applicability in this case

for two reasons. First, Trustee stepped into the shoes of an

unsecured creditor of the estate by invoking § 544(b). The

parol evidence rule does not apply to disputes with third

parties. 

In an action between a party to a contract and a third

party the rule that parol evidence cannot be received

to contradict or vary a written contract does not

apply, as the estoppel on which the rule rests must be

mutual, and, since the third person is not bound by

the contract as written, neither is his adversary in

the action.

Penberthy v. Vahl, 101 Cal.App.2d 1, 4 (1950); see also Alberts

v. HCA Inc. (In re Greater Se. Cmty. Hosp. Corp. I), 365 B.R.

315, 318–19 (Bankr. D.D.C. 2007) (noting that a creditor would

be “a third person, not a party to, nor representing a party to,

the act.”). Second, regardless of whether this rule applies in

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this case, “the ‘very essence’ of a fraudulent transfer suit is

to identify the ‘true nature’ of a transaction, and ‘the parol

evidence rule can[not] function as a false prophet to preclude

consideration of evidence of the true nature of the transaction

in question.” In re Greater Se. Cmty. Hosp. Corp. I, 365 B.R.

at 318 (citing Gaudet v. Babin (In re Zedda), 103 F.3d 1195,

1206 (5th Cir. 1997) (holding that trustee could not use parol

evidence to exclude evidence in fraudulent conveyance suit

brought under § 548)). Accordingly, this assignment of error is

not grounds for reversal.

2. The bankruptcy court did not err by determining that

Debtors’ assets exceeded their liabilities as of

April 2, 2004.

Under Cal. Civ. Code § 3439.02(a), “[a] debtor is insolvent

if, at fair valuations, the sum of the debtor’s debts is greater

than all of the debtor’s assets.” For purposes of the

fraudulent transfer claims, the bankruptcy court examined

Debtors’ financial condition from February 13, 2004 to

November 24, 2004 (Relevant Period).11 Regarding Debtors’

liabilities, the bankruptcy court found:

Defendant Scafani testified credibly that no

accompanying note existed to support the UC DOT. Nor

did Plaintiff provide any evidence of a signed note.

Further, McHaffie signed for SD Lofts, LLC in all

relevant transactions. Ultimately, both the SD Lofts

DOT and the UC DOT were reconveyed. Neither SD Lofts,

LLC nor Urban Coast ever demanded payment on these

purported obligations during the relevant period

between February 13, 2004 and November 24, 2004. The

court therefore finds that the UC DOT and SD Lofts DOT

were not liabilities owed by Debtors. Nevertheless,

11 This period starts the day after McHaffie’s purchase of

100% of Urban Coast closed and ends on the date the Schaefer

Entities made their last loan to Debtors.

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to facilitate the First Loan transaction, Urban Coast

and SD Lofts, LLC agreed to subordinate their

respective trust deeds.

Accordingly, the bankruptcy court did not include the UC or SD

Lofts debts when calculating Debtors’ liabilities at the time of

the April 2, 2004 Loan and found Debtors were solvent.

Trustee argues on appeal that the bankruptcy court’s

decision to exclude these debts from its solvency calculation

was based on her not producing any signed notes. Trustee

asserts that she did not need to produce the notes because the

pretrial order contained stipulated facts which conclusively

established the existence of both a loan and note in favor of

Urban Coast in the amount of $3,400,000 and a loan and note in

favor of SD Lofts in the amount of $100,000. Therefore,

according to Trustee, the bankruptcy court was required as a

matter of law to consider these obligations in its insolvency

analysis. Finally, Trustee maintains there was a “mountain of

evidence” establishing these debts.

The undisputed facts in the pretrial order relied upon by

Trustee are: 

(10) On February 11, 2004, SD Lofts, LLC executed a

Subordination Agreement, subordinating a note in its

favor in the sum of $100,000 dated October 16, 2003,

in favor of Urban Coast and secured by the UC Lofts

Real Property to the Barth Note.

(11) On February 11, 2004, Urban Coast executed a

subordination agreement, subordinating a note held by

it and secured by the UC Lofts Real Property in the

amount of $3,400,000 dated August 1, 2003 to a

$4,000,000 [sic] by the Barths.

(12) On April 2, 2004, Schaefer Construction extended

UC Lofts a loan in the amount of $1,200,000, secured

by a junior deed of trust on the UC Lofts Real

Property . . . . 

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. . . .

(14) On April 13, 2004, Urban Coast executed a

Subordination Agreement, subordinating a loan in the

amount of $3,400,000 dated August 1, 2003, in favor of

Urban Coast and secured by UC Lofts Real Property, to

the April 2, 2004 Note in favor of Schaefer

Construction.

(15) On April 13, 2004, SD Lofts executed a

Subordination Agreement, subordinating a loan in the

sum of $100,000 dated as of October 16, 2003, in favor

of Urban Coast and secured by UC Lofts Real Property

to the April 2, 2004 Note in favor of Schaefer

Construction.

Generally, “parties are bound by stipulated facts in a

pretrial order.” E.H. Boly & Son, Inc. v. Schneider, 525 F.2d

20, 23 n.5 (9th Cir. 1975) (citing Civil Rule 16). But here 

the language used in the stipulated facts does not clearly show

that the parties agreed that there were underlying and

enforceable debts owed by Debtors to Urban Coast and SD Lofts. 

Rather, under a plain language interpretation these stipulated

facts at most show that the parties acknowledged the four

recorded subordination agreements. Indeed, the pretrial order

preserved the issue of Debtors’ insolvency, and facts and

evidence supporting the parties’ positions were before the

bankruptcy court. Trustee had an opportunity to rebut the

evidence which refuted the existence of the UC and SD Lofts

obligations. Moreover, she did not refer us to any portion of

the record where she objected to the court’s consideration of

this evidence, asserting it was not relevant because the debt

was “admitted” in the pretrial order. Accordingly, nothing in

the record shows Trustee was relying on the pretrial order to

establish the existence of these obligations.

The record shows that Scafani testified that the

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transaction that would have resulted in the $3,400,000

obligation was never consummated and the bankruptcy court found

his testimony credible. “When factual findings are based on

determinations regarding the credibility of witnesses, we give

great deference to the bankruptcy court’s findings, because the

bankruptcy court, as the trier of fact, had the opportunity to

note ‘variations in demeanor and tone of voice that bear so

heavily on the listener’s understanding of and belief in what is

said.’” Anderson, 470 U.S. at 575. We thus defer to the

bankruptcy court’s reasonable assessment of Scafani’s

credibility. In addition, although the Schaefer Entities

acknowledged the existence of the Urban Coast and SD Lofts debts

each time they made a loan to Debtor, this acknowledgment does

not show that such debts were valid. Frank Schaefer also

testified that there was no note in connection with the

$3,400,000 million Urban Coast obligation. In short, other than

the subordination agreements regarding the UC DOT, there is no

evidence in the record that refutes Scafani’s or Schaefer’s

testimony. 

Trustee also points to no evidence in the record - other

than the subordination agreements - that establishes the

SD Lofts debt. The bankruptcy court noted that McHaffie had

signed the deed of trust on behalf of SD Lofts but there was no

demand for payment on the underlying note between February 12,

2004 and November 24, 2004. 

Simply put, Trustee’s “mountain of evidence” is not in the

record. Accordingly, the bankruptcy court committed no clear

error by excluding the Urban Coast or SD Lofts debts when

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calculating Debtors’ liabilities during the Relevant Period. 

3. The transfer of the deed of trust in connection with

the April 2, 2004 Loan was not fraudulent.

Under Cal. Civ. Code § 3439.04(a)(2)(A), “[a] transfer made

or obligation incurred by a debtor is fraudulent as to a

creditor . . . if the debtor made the transfer or incurred the

obligation [w]ithout receiving a reasonably equivalent value in

exchange for the transfer or obligation, and the debtor . . .

[w]as engaged or was about to engage in a business or a

transaction for which the remaining assets of the debtor were

unreasonably small in relation to the business or transaction.”

Trustee seeks to avoid as fraudulent transfers the deed of

trust Debtors gave to Schaefer Construction in connection with

the April 2, 2004 Loan and the later transfers of Tropicana to

Schaefer and Lemire. Trustee contends that because the loan

funds went to purchase Tropicana, the deed of trust given to

Schaefer Construction was a “transfer” of Debtors’ property for

no consideration and thus was fraudulent. Trustee further

asserts that “since proper recognition of the stipulated Urban

Coast and SD Lofts debts establishes that Debtors were insolvent

as of April 2, 2004, the granting of a deed of trust on the

Lofts Property was without question a fraudulent transfer that

should be avoided.”

As previously discussed, the bankruptcy court did not err

by omitting the Urban Coast and SD Lofts debts when determining

Debtors’ assets and liabilities at the time of the April 2, 2004

Loan. Therefore, as the bankruptcy court found, Debtors were

balance sheet solvent on and after the April 2, 2004 Loan and

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were not left with unreasonably small assets as a result. 

Because Trustee failed to prove an essential element of her

fraudulent transfer claim related to the April 2, 2004 Loan, the

claim fails and we need not resolve the other related elements,

including whether reasonably equivalent value existed. 

Accordingly, there is no basis to reverse the bankruptcy court’s

judgment in favor of Schaefer Construction on this fraudulent

transfer claim.

4. The bankruptcy court did not err by misapplying the

burden of proof with respect to the fraudulent

transfer liability of Lemire. 

Cal. Civ. Code § 3439.08(a) states that “[a] transfer or an

obligation is not voidable under subdivision (a) of [Cal. Civ.

Code section] 3439.04, against a person who took in good faith

and for a reasonably equivalent value. . . .” Thus, a showing

of good faith and reasonably equivalent value is all that is

required to defeat a creditor’s action based on Cal. Civ. Code

§ 3439.04(a). Obviously, if a transfer is made both in good

faith and for a reasonably equivalent value, then the transfer

is not a fraudulent transfer under Cal. Civ. Code § 3439.04(b)

either, since subdivision (b) applies only to transfers made

without receipt of reasonably equivalent value. Cal. Civ. Code

§ 3439.08(b)(2) authorizes the creditor to obtain judgment

against a subsequent transferee.

In its memorandum decision, the bankruptcy court found: 

The Trustee's remaining fraudulent transfer claim

against Lemire derives from her claim against the

Schaefer Entities arising out of the Tropicana

transaction. Specifically, the Trustee seeks to

recover whatever profit Lemire gained from her sale of

the Tropicana property.

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As noted above, the Tropicana LLC interests or the

underlying real property never belonged to the

Debtors. Further, Lemire contributed value for the

property. She paid $70,000 for an option to purchase

it from Schaefer. She then borrowed funds to improve

the property and reduced the vacancy rate through her

own labors. Lemire sold the Tropicana real property

for $5,750,000. But she could not state with

certainty the amount she received from the transaction

after accounting for payments to Schaefer and the

liens against property. And the Trustee did not offer

any evidence on the amount Lemire may have personally

profited from the sale.

The court therefore finds that the Trustee has failed

to meet her burden of showing that Lemire was a

subsequent transferee of property of the Debtors or

that she did not provide reasonably equivalent value.

The court will enter judgment in Lemire's favor.

As discussed above, Trustee asserted Debtors’ transfer of

the deed of trust to Schaefer Construction was fraudulent. 

Schaefer Construction later assigned the April 2, 2004 note and

deed of trust to Lemire on December 30, 2004. Therefore,

Trustee contends that Lemire is a subsequent transferee who is

liable, the same as Schaefer Construction, for the fraudulent

transfer of the $1,200,000 trust deed. Trustee further argues

that Lemire had the defense, if she could establish it, that she

took the transfer for value and in good faith. Cal. Civ. Code

§ 3439.08(b)(2). Trustee asserts that the bankruptcy court

improperly placed the burden on her, rather than Lemire, to

prove value and good faith.

The bankruptcy court found that the deed of trust recorded

on April 14, 2004, in connection with the April 2, 2004 Loan by

Schaefer Construction, could not be avoided as a fraudulent

transfer since Debtors were balance sheet solvent on and after

the April 2, 2004 Loan and were not left with unreasonably small

assets as a result. Thus, Trustee failed to prove an essential

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element of her fraudulent transfer claim against Schaefer

Construction. If Trustee could not avoid the transfer of the

deed of trust as to Schaefer Construction on this ground,

Trustee could not recover from Lemire as a subsequent

transferee. It follows that there was no need for Lemire to

prove that she took the transfer for value and in good faith

when there was no fraudulent transfer in the first place.

Accordingly, to the extent the bankruptcy court misapplied the

burden of proof, it is harmless error.

B. Fraudulent Transfer - Halifax

Trustee successfully avoided the fraudulent transfer of

$1,100,000 from Debtors to Halifax as constructively fraudulent

under Cal. Civ. Code § 3439.04(a)(2), which Halifax challenges

on appeal. Under this section, there must be a transfer of

property of the debtor; constructive fraud is defined simply as

transactions in which the debtor receives less than reasonably

equivalent value for this transfer at a time when the debtor is

insolvent. Trustee bears the burden of proving all these

elements.

In its memorandum decision, the bankruptcy court found that

the $1,100,000 payment from Debtors to Halifax was

constructively fraudulent and should be avoided: “The Halifax

payment left the Debtors with [unreasonably small assets] and

rendered them insolvent. Moreover, neither Halifax nor Scafani

provided reasonably equivalent value for this transfer.”

1. The lis pendens did not make Halifax a fully secured

creditor.

Halifax argues on appeal, as it did at trial, that it was

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fully secured by virtue of recording the lis pendens. Thus,

because it received payment from Debtors as a fully secured

creditor, the transfer was not fraudulent under the holding in

Henry v. First All. Mortg. Co. (In re First All. Mortg. Co.),

471 F.3d 977, 1008 (9th Cir. 2006)(“‘[r]epayments of fully

secured obligations—where a transfer results in a dollar for

dollar reduction in the debtor’s liability—do not hinder, delay,

or defraud creditors because the transfers do not put assets

otherwise available in a bankruptcy distribution out of their

reach.’”).

Halifax offers no persuasive authority to support its

argument that its notice of lis pendens operated as an

“encumbrance” which made it a fully secured creditor. This is

not surprising since, under California law, a notice of lis

pendens does not make the person who recorded it a secured

creditor. Cal–Western Reconveyance Corp. v. Reed,

152 Cal.App.4th 1308, 1318-19 (2007) (citing Campbell v. Super.

Ct., 132 Cal.App.4th 904, 914 (2005) (“true purpose of the lis

pendens statute is to provide notice of pending litigation and

not to make plaintiffs secured creditors of defendants nor to

provide plaintiffs with additional leverage for negotiating

purposes.”)); see also Cal. Code Civ. Proc. § 405.20 (lis

pendens serves as notice that litigation regarding the property

is being pursued).

 Halifax’s reliance on Hurst Concrete Products, Inc. v. Lane

(In re Lane), 980 F.2d 601 (9th Cir. 1992) is misplaced. The

facts in Lane are distinguishable. The issue in Lane was

whether the filing of a lis pendens was a transfer within the

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definition of transfer set forth in § 547(e)(1)(A). The

question of whether the filing of a lis pendens creates a lien

is missing from the court’s analysis. 

In sum, the filing of the lis pendens did not make Halifax

fully secured. Therefore, the rule espoused in In re First All.

Mortg. Co. has no applicability to this case. Accordingly, the

bankruptcy court did not err on this basis. 

2. The bankruptcy court did not err in determining that

Halifax did not give reasonably equivalent value for

payment of $1,100,000 by releasing its $1.6 million

note, dismissing its lawsuit, and withdrawing the lis

pendens against the Lofts Property.

Under Cal. Civ. Code § 3439.04(a), a transfer is avoidable

if the debtor made the transfer without receiving a reasonably

equivalent value in exchange for the transfer and the debtor

intended to incur, or believed or reasonably should have

believed that it would incur debts beyond its ability to pay as

they became due. See also Cal. Civ. Code § 3439.05.

With respect to the reasonably equivalent value

requirement, the bankruptcy court found:

In this case, McHaffie, Urban Coast, Halifax and

Scafani executed the Halifax Sale Agreement. One

component of this agreement required Urban Coast or

McHaffie to pay $1,600,000 to Halifax. This secured

McHaffie's acquisition of Urban Coast and through it,

the UC Lofts Real Property. McHaffie and Urban Coast

also owed brokerage rights and purchase options to

John Scafani. The Debtors were not signatories to the

Halifax Sale Agreement. That the UC Lofts Real

Property secured those obligations did not transform

them into the Debtors' liabilities. Nor is it

apparent that the change in leadership from Scafani to

McHaffie provided any value to the Debtors to support

granting a security interest in their property. Thus,

under the indirect benefit rule stated in Northern

Merchandise and Pajaro Dunes, Defendants must

demonstrate that Debtor's received a direct, tangible

benefit from paying Urban Coast and McHaffie's

obligation.

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Defendants offered substantial testimony emphasizing

that Scafani agreed to relinquish his purchase options

and brokerage rights and that Halifax agreed to a

$500,000 reduction on its note. But the testimony

from Warner and Schaefer established that they

believed the lis pendens was improperly recorded and

could have been expunged for a fraction of the

settlement price. The court accepts this

characterization. Thus, the Debtors can hardly be

said to have received reasonably equivalent value by

paying $1,100,000 for its removal. Moreover, the

upstream benefit Urban Coast and McHaffie received by

being relieved from obligations under the Halifax Sale

Agreement did not provide a sufficiently tangible

benefit to the Debtors to allow the court to conclude

they received reasonably equivalent value.

Halifax challenges these findings on appeal and argues that

we should review these findings under a de novo standard of

review rather than a clearly erroneous standard. In support of

this contention, Halifax relies on Maddox v. Robertson

(In re Prejean), 994 F.2d 706, 708 (9th Cir. 1993).

In Prejean, the Ninth Circuit considered whether California

case law which held that the release of time-barred debt was

consideration to avoid a fraudulent transfer was abrogated in

light of California’s recent adoption of the California

Fraudulent Transfer Act (CFTA). The CFTA substituted the term

“reasonably equivalent value” for “fair consideration.” As

noted by the Ninth Circuit, the facts in Prejean were

undisputed. Id. at 707. Ursula Maddox lent her brother, Joseph

Prejean, $40,000 between 1968 and 1971 to assist him in

attending medical school. The two did not memorialize the loan

in writing. Between 1974 and 1984, Maddox also cared for

Prejean’s child. Nothing was set down in writing during that

period either to value those services or to establish terms of

payment. Maddox and Prejean agreed in 1985 upon a figure of

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$200,000 as representing the aggregate value of the child care

services and the loan. They did not record that figure in

writing. In September 1987, Prejean gave Maddox a $100,000 note

that he secured with a deed of trust upon his home. The deed

was recorded in January 1988.

Seventeen months later Prejean filed a chapter 7 bankruptcy

petition. The trustee brought an action in the bankruptcy court

to set aside the transfer of the interest in Prejean's home

under § 544. The trustee alleged that the transfer of the home

violated the CFTA. The primary issue was whether the

satisfaction of a time-barred debt was “reasonably equivalent

value” for a transfer, thus precluding the transfer from being

avoidable under Cal. Civ. Code § 3439.04.

The bankruptcy court refused to set aside the transfer. It

found that the note and transfer had been made in good faith,

and that finding was not challenged on appeal. Citing United

States Fid. & Guar. Co. v. Postel, 64 Cal.App.2d 567 (Cal. Ct.

App. 1944), the bankruptcy court reasoned that the discharge of

a moral obligation is “reasonable consideration” for a new

promise to repay a time-barred debt. In United States Fidelity,

the California Court of Appeal determined that the payment of an

antecedent debt that is partially time-barred is “fair

consideration.” United States Fidelity had been decided under

the California Fraudulent Conveyance Act, the predecessor of the

CFTA.

The BAP reversed the judgment of the bankruptcy court. It

held, among other things, that United States Fidelity was no

longer good law. Analogizing Cal. Civ. Code § 3439.04 to § 548,

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the federal “strong-arm” statute that contains “reasonably

equivalent value” language, the BAP said:

The switch from ‘fair consideration’ to ‘reasonably

equivalent value’ directs attention away from what is

fair as between the parties and instead measures

consideration in terms of its objective worth to all

the transferor’s creditors.

Maddox appealed. On appeal the Ninth Circuit couched the

issues as legal ones requiring de novo review. The court first

considered the question whether California’s recent adoption of

the UFTA, which substituted “reasonably equivalent value” for

“fair consideration,” implied a rejection of the rule set forth

in United States Fidelity. The Ninth Circuit held that the

Panel had read United States Fidelity too narrowly:

We discern nothing in the language or history of the

CFTA that would lead us to conclude that a time-barred

debt that was a ‘fair equivalent’ from the viewpoint

of the creditors under the prior law is not also

‘reasonably equivalent value’ under the CFTA. There

has been no showing that the California legislature

intended to abrogate the rule of United States

Fidelity in enacting the current statute.

The Ninth Circuit noted that under both prior law and the CFTA

reasonably equivalent value must be determined from the

creditors’ standpoint, not the debtor’s. 

The court observed that Prejean gave Maddox a security

interest in satisfaction of an antecedent obligation, arising

from cash loans and valuable services, that, but for the statute

of limitations, was enforceable. Therefore, since United States

Fidelity remained good law, the court concluded that the

transfer satisfied the requirement of “reasonably equivalent

value” contained in the CFTA and reversed the Panel’s decision.

As this recitation shows, the issue before the Ninth

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Circuit in Prejean was not a factual one where consideration for

a transfer was to be weighed, but rather was a determination of

whether a type of consideration — release of time-barred debt —

was still to be considered of value after a change in California

law. The Ninth Circuit appropriately applied de novo review to

its determination of this legal issue. However, we are not

persuaded that the Ninth Circuit held that a factual

determination of reasonably equivalent value requires de novo

review. See Ehrenberg v. Tenzer (In re Heartbeat of the City,

N.W., Inc.), 2006 WL 6810939, at *5 (9th Cir. BAP April 6, 2006)

(stating that there was no clear statement in the Ninth Circuit

case law concerning whether determining if reasonably equivalent

value has been given for a transfer for purposes of § 548 is a

question of law). 

Indeed, the Ninth Circuit later applied the clearly

erroneous standard of review to the bankruptcy court’s

determination of reasonably equivalent value in Decker v.

Tramiel (In re JTS Corp.), 617 F.3d 1102, 1109 (9th Cir. 2010). 

In JTS, after the district court reversed the bankruptcy court’s

determination that the defendant had paid reasonably equivalent

value when purchasing real property, the Ninth Circuit found

error in the District Court’s ruling. It determined that the

bankruptcy court’s finding of reasonably equivalent value “was

not clearly erroneous” since the evidence supported that

conclusion, clearly applying this deferential standard of review

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to the trial court’s factual finding. Id. at 1109-10.12 

Accordingly, because we are not convinced otherwise, we

follow the clearly erroneous standard adopted in JTS and the

weight of authority in other circuits and consider the issue a

question of fact. In re Heartbeat of the City, 2006 WL 6810939,

at *5 n.8 (noting that eight other circuits and a leading

treatise consider the issue a question of fact).13

We now reach the merits of Halifax’s various arguments.

Halifax contends that the $1,100,000 payment it received matched

more than a dollar for dollar benefit to Debtors. Halifax

asserts that in addition to having the $1,600,00 lien against

the Lofts Property extinguished, “they” obtained a discount of

12 California case law is in accord. See Patterson v.

Missler, 238 Cal.App.2d 759, 766-67 (Cal. Ct. App. 1966).

13 Tex. Truck Ins. Agency v. Cure (In re Dunham), 110 F.3d

286, 288–89 (5th Cir. 1997) offered the following survey of

circuit cases determining whether reasonable equivalency is a

question of law, subject to de novo review, or a question of

fact: Consove v. Cohen (In re Roco Corp.), 701 F.2d 978, 982

(1st Cir. 1983) (factual issue to be reviewed for clear error);

Klein v. Tabatchnick & Emmer, 610 F.2d 1043, 1047 (2nd Cir. 1979)

(fairness of consideration is generally a question of fact);

Morrison v. Champion Credit Corp. (In re Dewey Barefoot),

952 F.2d 795, 800 (4th Cir. 1991)(factual determination that can

only be set aside if clearly erroneous); Bundles v. Baker

(In re Bundles), 856 F.2d 815, 825 (7th Cir. 1988)(great

deference to the district court); Jacoway v. Anderson

(In re Ozark Rest. Equip. Co., Inc.), 850 F.2d 342, 344 (8th Cir.

1988) (question of fact reversible only if clearly erroneous);

Clark v. Sec. Pac. Bus. Credit, Inc. (In re Wes Dor, Inc.),

996 F.2d 237 (10th Cir. 1993)(suggesting fact question); and

Nordberg v. Arab Banking Corp. (In re Chase & Sandborn Corp.),

904 F.2d 588, 593 (11th Cir. 1990)(fair consideration is largely

a question of fact). The Dunham court noted that in the Ninth

Circuit, according to Prejean, reasonable equivalency is subject

to de novo review.

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$500,000 on the lien, and the withdrawal of the lis pendens

which allowed Debtors to resume development of the Lofts

Property.

Halifax also maintains that the only defect in the lis

pendens was that it was recorded against the property of a

non-party. However, James Warner testified unequivocally that

this minor defect could be corrected by amending the complaint

to add Debtors as named defendants, an amendment which the trial

judge would “never, never” deny. Halifax points out that Warner

was the attorney of record for Debtors at the time of the

Halifax Settlement Agreement and thus he was in a position to

value the settlement and agreed that withdrawing the lis pendens

and discounting the note constituted valuable consideration to

Debtors.

Contrary to Halifax’s assertion, we discern no error with

the bankruptcy court’s analysis. The reasonably equivalent

value analysis “is directed at what the debtor surrendered and

what the debtor received irrespective of what any third party

may have gained or lost.” Wyle v. C.H. Rider & Family

(In re United Energy Corp.), 944 F.2d 589, 597 (9th Cir. 1991);

see also Frontier Bank v. Brown (In re N. Merch., Inc.),

371 F.3d 1056, 1059 (9th Cir. 2004)(the “primary focus . . . is

on the net effect of the transaction on the debtor’s estate and

the funds available to the unsecured creditors.”); Roosevelt v.

Ray (In re Roosevelt), 176 B.R. 200, 206 and 208 (9th Cir. BAP

1994) (same).

“Beyond looking at what is exchanged in a quid pro quo

transaction, it is important to examine the value of all

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benefits inuring to a debtor by virtue of the transaction in

question, directly or indirectly.” In re Fox Bean Co., Inc.,

287 B.R. 270 (Bankr. D. Idaho 2002)(citing Pummill v.

Greensfelder, Hemker & Gale (In re Richards & Conover Steel,

Co.), 267 B.R. 602, 612–13 (8th Cir. BAP 2001); see also

In re N. Merch., Inc., 371 F.3d at 1058 (“It is well settled

that reasonably equivalent value can come from one other than

the recipient of the payments, a rule which has become known as

the indirect benefit rule.”). “Under [the indirect benefit

rule], some clear and tangible benefit to the debtor must still

consequently result from the payment by the transferee.” Pajaro

Dunes Rental Agency, Inc. v. Spitters (In re Pajaro Dunes Rental

Agency, Inc.), 174 B.R. 557, 579 (Bankr. N.D. Cal. 1994).

There is a two step process required to determine whether a

debtor received a reasonably equivalent value. Greenspan v.

Orrick (In re Brobeck, Phleger, & Harrison, LLP, 408 B.R. 318,

341 (Bankr. N.D. Cal. 2009). First, it must be determined that

the debtor received value. Id. Value is defined under Cal.

Civ. Code § 3439.03 as follows:

Value is given for a transfer or an obligation if, in

exchange for the transfer or obligation, property is

transferred or an antecedent debt is secured or

satisfied, but value does not include an unperformed

promise made otherwise than in the ordinary course of

the promisor’s business to furnish support to the

debtor or another person.

Value is similarly defined for purposes of § 548. Id. (citing

In re United Energy Corp., 944 F.2d at 595). Second, the court

must determine whether that value was reasonably equivalent to

what the debtor gave up. Id. Reasonable equivalence can

include the elimination of claims or litigation. In re United

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Energy, 944 F.2d at 595-96. Finally, the determination of

reasonable equivalence must be made as of the time of the

transfer. BFP v. Resolution Trust Corp., 511 U.S. 531, 546

(1994). Trustee had the burden of showing that Debtors did not

receive reasonably equivalent value in exchange. In re Pajaro

Dunes Rental Agency, Inc., 174 B.R. at 578.

Here, the bankruptcy court considered what Debtors received

and what they gave up when determining whether there was

reasonably equivalent value. As noted by the bankruptcy court,

Debtors were not obligated on the underlying note. Therefore,

reducing the amount owed on the note by $500,000 cannot be said

to have benefitted Debtors directly or indirectly. Generally

speaking, a debtor’s payment of the debt of another does not

constitute a reasonably equivalent value when the debtor is not

obligated on the debt. Wood v. Delury, Pomares & Co.

(In re Fair Oaks, Ltd.), 168 B.R. 397, 402 (9th Cir. BAP 1994).

Further, while the $1,100,000 payment to Halifax satisfied

the lien against the Lofts Property, the bankruptcy court found

that Debtors had received no value in connection with the

transfer of the deed of trust in the first place; i.e., they

were not obligated on the loan. Additionally, the court found

no indirect benefit to Debtors since the transfer in leadership

from Scafani to McHaffie did not provide any value for the

security obligation. Halifax does not point to any evidence in

the record that would contradict the bankruptcy court’s finding

of no value. 

Further, although Debtors transferred $1,100,000 to Halifax

in settlement of the litigation, Debtors were not named as

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defendants in the litigation. It follows that none of the

claims were asserted against them. Nor is it apparent from the

record that Debtors’ future was dependent upon the resolution of

the lawsuit rather than on the withdrawal of the lis pendens. 

Although the withdrawal of the lis pendens was beneficial to

Debtors so they could resume development, the bankruptcy court

quantified that benefit as being worth at most $10,000. Thus,

Debtors payment of $1,100,000 to Halifax for that benefit cannot

be reasonably equivalent. See BFP, 511 U.S. at 540 n.4 (“. . .

the phrase ‘reasonably equivalent’ means ‘approximately

equivalent,’ or ‘roughly equivalent.’”). Accordingly, the

bankruptcy court properly found that Debtors did not receive

reasonably equivalent value for the $1,100,000 payment and that

finding was not clearly erroneous.

3. The bankruptcy court did not err in determining that

John Scafani was not liable for receiving a fraudulent

transfer because the entire $1,100,000 transfer went

to Halifax’s creditors and Scafani did not receive any

of the funds.

Scafani’s unrebutted testimony was that the $1,100,000

payment from Debtors to Halifax went to Halifax’s creditors. 

Trustee did not trace the funds nor has she pointed out any

evidence in the record showing otherwise. See In re Pajaro

Dunes Rental Agency, Inc., 174 B.R. at 583 (“Tracing of funds

has often been a part of fraudulent transfer litigation.”). 

Accordingly, the bankruptcy court’s finding that Scafani did not

receive any of the $1,100,000 from Debtors was supported by

inferences drawn from the facts in the record. We thus discern

no error.

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C. Aiding and abetting breach of fiduciary duty: Schaefer

Entities

In connection with Trustee’s claim against the Schaefer

Entities for aiding and abetting McHaffie’s breach of fiduciary

duty, the bankruptcy court found:

Under California law, “[l]iability may ... be imposed

on one who aids and abets the commission of an

intentional tort if the person ... knows the other's

conduct constitutes a breach of a duty and gives

substantial assistance or encouragement to the other

to so act.'” In re First All. Mortg Co., 471 F.3d at

993 (quoting Casey v. U.S. Bank Nat'l Assn.,

127 Cal.App. 4th 1138, 1144 (2005)); see also Fiol v.

Doellstedt, 50 Cal.App. 4th 1318, 1325–26 (1996).

“[A]iding and abetting liability ... requires a

finding of actual knowledge, not specific intent.” 

In re First All. Mortg. Co., 471 F.3d at 993.

In First Alliance Mortgage, a jury found Lehman

Brothers, Inc. and its subsidiary (“Lehman”) liable

for aiding and abetting the debtor's fraudulent

lending practices. Id. at 983. The finding relied on

Lehman’s eventual relationship as the debtor's only

lender, its intimate knowledge of the debtor's lending

practices and its substantial assistance in furthering

the scheme by continuing to lend. Id. at 986–87,

994–95. In fact, Lehman warned the debtor that if it

did “not change its business practices, it [would] not

survive scrutiny.” Id. at 994.

Here, the Schaefer Entitles, like Lehman, at some

point became the Debtors' only source of financing

such that they provided substantial assistance.

Further, it is apparent that Schaefer at least had the

opportunity to scrutinize each disbursement from the

fund controls. But distinct from the situation in

First Alliance, Schaefer credibly testified that his

primary, if not sole, focus was the equity in the

property—not the Debtors’ progress on the Atmosphere

Project. Moreover, the Fund Control Agreement gave

him the contractual right to presume that each

disbursement request was actually what the borrower

requested and related to the project. Finally, the

proposed budget negotiated between the Schaefer

Entities and McHaffie contemplated management and

contingency line items, for which they allotted over

$400,000.

Thus, the court cannot conclude that the Schaefer

Entities had actual knowledge of McHaffie's

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defalcations as they occurred. The Trustee has

therefore failed to meet her burden on this claim, and

judgment for the Schaefer Entities is appropriate.

Trustee argues that the bankruptcy court’s finding that the

Schaefer Entities did not have actual knowledge of McHaffie’s

defalcations as they occurred was clear error. According to

Trustee, the court’s conclusion ignores “substantial amounts of

uncontroverted evidence and the court’s own findings.” 

Specifically, the court found that “the Schaefer Entities

possessed a significant degree of control over the Debtors” and

“Schaefer had the opportunity to scrutinize each disbursement

from the fund controls.” These findings, Trustee argues, show

that Schaefer could not have been unaware that $570,000 or more

taken out of the First Fund Control account was misdirected

towards Tropicana. Trustee also asserts that the Fund Control

Agreement does not allow the Schaefer Entities to avoid

liability. The agreement provides:

Control shall conclusively presume that any written

order of an authorized person is (1) given for the

purposes stated in the order; and (2) authorized by

the owner and contractor.

Because Schaefer failed to produce any written order for the

misdirected payments, Trustee argues that he may not rely upon

any presumption that these payments were intended for completion

of the Atmosphere Project.

We disagree that this constitutes error. The bankruptcy

court’s finding that the Schaefer Entities had no actual

knowledge of McHaffie’s breach of fiduciary duty is plausible in

light of the evidence presented. Although the court found that

the Schaefer Entities exercised a significant degree of control

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over Debtors and that they had the opportunity to scrutinize

each disbursement from the fund control accounts, the bankruptcy

court also relied on Schaefer’s testimony in making its ruling. 

Schaefer testified that his primary focus was on the equity in

the Lofts Property and not Debtors’ progress on the completion

of the Atmosphere Project. Thus, even if Schaefer was aware

that McHaffie was not using the April 2, 2004 loan proceeds for

the development of the Lofts Property, a reasonable inference

from his testimony is that he did not make a conscious choice to

make loans to Debtors knowing that McHaffie was engaging in

improper conduct. See Lomita Land & Water Co. v. Robinson,

154 Cal. 36, 47 (1908) (The defendant must have acted to aid the

primary tortfeasor “with knowledge of the object to be

attained.”). Moreover, “[m]ere knowledge that a tort is being

committed and the failure to prevent it does not constitute

aiding and abetting.” Fiol v. Doellstedt, 50 Cal.App.4th 1318,

1326 (1996).

In short, the bankruptcy court was free to accept

Schaefer’s testimony and draw any reasonable inferences

therefrom to support its ruling. It is not the province of the

appellate court to reweigh the evidence and choose between

competing inferences. See Anderson, 470 U.S. at 573–74 (“[i]f

the [trial] court’s account of the evidence is plausible in

light of the record viewed in its entirety, the court of appeals

may not reverse it even though convinced that had it been

sitting as the trier of fact, it would have weighed the evidence

differently”). Despite Trustee’s argument to the contrary, we

see nothing that requires a difference result. 

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D. Preferential Transfer Claim: Schaefer’s Insider Status

Section 547(b) authorizes a trustee to avoid preferential

transfers made by a debtor within certain periods of time before

the bankruptcy filing. Miller v. Schuman (In re Schuman),

81 B.R. 583, 585 (9th Cir. BAP 1987). Where a creditor is an

insider, the preference period is one year. Id. 

Trustee seeks to recover a $506,000 payment on the Second

Loan to Schaefer Construction within one year of the

commencement of the bankruptcy case. The trustee bears the

burden of proof to establish each and every element under

§ 547(b) in order to avoid a transfer as a preference. Batlan

v. TransAmerica Commercial Fin. Corp. (In re Smith’s Home

Furnishings, Inc.), 265 F.3d 959, 963 (9th Cir. 2001). 

The bankruptcy court found:

The court accepts Schaefer's testimony as credible in

all respects and finds that neither he nor Frank

Schaefer Construction, Inc. nor Frank Schaefer

Construction, Inc. Pension Plan was an insider of the

Debtors. The Schaefer Entities exerted considerable

control over Debtors and McHaffie. But this control

never extended beyond that of a secured

lender-to-borrower relationship.

Significantly, the court notes that Schaefer

faithfully acted according to the terms of the various

promissory notes and deeds of trust. He also never

refused a disbursement request from McHaffie. And

with the exception of the Halifax payment, Schaefer

did not advocate that the Debtors pay certain

creditors or forego payments to others. Ultimately,

the evidence did not establish that Schaefer was ever

able to pressure Debtors in such a way as to

substitute his own decision making power for

McHaffie’s.

Trustee challenges these findings, contending that the

bankruptcy court applied the wrong legal test for determining

non-statutory insider status. According to Trustee, there are

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different legal standards applied when considering statutory

insiders under § 101(31) and non-statutory insiders. While the

“person in control” test may apply to statutory insiders,

Trustee argues that with non-statutory insiders actual control

is not required: “it is not necessary that a non-statutory

insider have actual control; rather the question is whether

there is a close relationship [between debtor and creditor] and

. . . anything other than closeness to suggest that any

transactions were not conducted at arm’s length.” See Shubert

v. Lucent Techs. Inc. (In re Winstar Comm’ns, Inc.), 554 F.3d

382, 396-97 (3d Cir. 2009). 

First of all, we are not bound by Third Circuit case law,

but by Ninth Circuit case law and our own prior decisions. See

State v. Rowley (In re Rowley), 208 B.R. 942, 944 (9th Cir. BAP

1997) (stating that we are bound by prior Panel decisions).

Second, our reading of the relevant legal authorities indicates

that the bankruptcy court did not apply the wrong legal test as

demonstrated below.

The Bankruptcy Code provides a definition of insider that

varies based on the type of debtor and includes different

individuals who are insiders depending on whether the debtor is

a person, corporation, partnership, or municipality. 

§ 101(31).14 However, “the respective insider definitions do not

14 Section (31) provides in relevant part:

 The term “insider” includes-- 

(A) if the debtor is an individual-- 

(i) relative of the debtor or of a general partner of

the debtor; 

(continued...)

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attempt or purport to be all inclusive.” In re Friedman,

126 B.R. at 69. An insider can either fall into one of these

per se classifications listed in the statute, or be a

non-statutory insider who has a “professional or business

relationship with the debtor . . . where such relationship

compels the conclusion that the individual or entity has a

relationship with the debtor, close enough to gain an advantage

attributable simply to affinity rather than to the course of

business dealings between the parties.” Id. at 70. A

non-statutory insider is one “who has a sufficiently close

relationship with the debtor that his conduct is made subject to

closer scrutiny than those dealing at arms [sic] length with the

14(...continued)

(ii) partnership in which the debtor is a general

partner; 

(iii) general partner of the debtor; or 

(iv) corporation of which the debtor is a director,

officer, or person in control; 

(B) if the debtor is a corporation-- 

(i) director of the debtor; 

(ii) officer of the debtor; 

(iii) person in control of the debtor; 

(iv) partnership in which the debtor is a general

partner; 

(v) general partner of the debtor; or 

(vi) relative of a general partner, director, officer,

or person in control of the debtor; 

(C) if the debtor is a partnership-- 

(i) general partner in the debtor; 

(ii) relative of a general partner in, general partner

of, or person in control of the debtor; 

(iii) partnership in which the debtor is a general

partner; 

(iv) general partner of the debtor; or 

(v) person in control of the debtor; 

. . . .

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debtor.” Vill. at Lakeridge, LLC v. United States Bank N.A.

(In re Vill. at Lakeridge, LLC), 2013 WL 1397447, at *5 (9th

Cir. BAP Apr. 5, 2013) (citing In re Friedman, 126 B.R. at 70);

see also Miller Ave. Prof’l & Promotional Servs. v. Brady

(In re Enter. Acquisition Partners, Inc.), 319 B.R. 626, 631

(9th Cir. BAP 2004) (citing Wilson v. Huffman, 712 F.2d 206, 210

(5th Cir. 1983)).

In determining whether a creditor qualifies as a

non-statutory insider, courts look at “the closeness of the

parties and the degree to which the transferee is able to exert

control or influence over the debtor.” In re Vill. at

Lakeridge, LLC, 2013 WL 1397447, at *5 (citing In re Enter.

Acquisition Partners, Inc., 319 B.R. at 626 and Miller v.

Schuman (In re Schuman), 81 B.R. 583, 586 (9th Cir. BAP 1987)). 

The primary test of a non-statutory insider is whether the

creditor “exercises such control or influence over the debtor as

to render their transaction not arms-length.” Id.

Here, the bankruptcy court implicitly applied the legal

test for determining whether the Schaefer Entities were nonstatutory insiders espoused in our precedent. The court

determined that there was “closeness” because the Schaefer

Entities exerted considerable control over Debtors. However,

the bankruptcy court quantified that control by stating that it

never extended beyond a secured lender to borrower relationship. 

In addition, the court implicitly found no other evidence to

suggest the transactions were not conducted at arm’s length: 

(1) Schaefer faithfully acted according to the terms of the

various promissory notes and deeds of trust; (2) Schaefer never

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refused a disbursement request from McHaffie; and (3) with the

exception of the Halifax payment, Schaefer did not advocate that

the Debtors pay certain creditors or forego payments to others. 

Again, the bankruptcy court’s findings came down to Schaefer’s

credibility: “[w]hen factual findings are based on

determinations regarding the credibility of witnesses, we give

great deference to the bankruptcy court’s findings . . . .” 

Anderson, 470 U.S. at 575. Accordingly, we discern no error in

the bankruptcy court’s decision that the Schaefer Entities were

not insiders for purposes of § 547. 

E. Equitable subordination of Schaefer Construction’s proof of

claim

“The subordination of claims based on equitable

considerations generally requires three findings: ‘(1) that the

claimant engaged in some type of inequitable conduct, (2) that

the misconduct injured creditors or conferred unfair advantage

on the claimant, and (3) that subordination would not be

inconsistent with the Bankruptcy Code.’” In re First All.

Mortg. Co., 471 F.3d at 1006. “Where non-insider, non-fiduciary

claims are involved, as is the case here, the level of pleading

and proof is elevated: gross and egregious conduct will be

required before a court will equitably subordinate a claim.” 

Id. “Although equitable subordination can apply to an ordinary

creditor, the circumstances are ‘few and far between.’” Id. 

Here, the bankruptcy court found no inequitable conduct.

The Schaefer Entities were not insiders and the relationship

between Debtors and the Schaefer Entities never extended beyond

those of a borrower-lender relationship. Furthermore, because

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the Halifax payment was not an obligation of the Schaefer

Entities, Trustee did not show how their conduct depleted or

otherwise adversely impacted Debtors’ assets. Trustee points to

no evidence in the record which the bankruptcy court allegedly

overlooked which would demonstrate an abuse of discretion. 

Accordingly, there is no basis for reversal on this assignment

of error.

VI. CONCLUSION

For the reasons stated above, we AFFIRM the judgment in all

respects.

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