67 F.3d 1348 (8th Cir. 1995), 94-3613, In re Sherman

Docket Nº:94-3613 and 94-3615.
Citation:67 F.3d 1348
Party Name:In re Larry Wayne SHERMAN; Karen Lucille Sherman, Debtors. Jack E. BROWN, Trustee, Appellee, v. THIRD NATIONAL BANK, Appellant, J.D. Sherman; Doris Sherman; Junior D. Sherman; Junior D. Sherman and Doris M. Sherman Revocable Trust, Defendants. In re Larry Wayne SHERMAN; In re Karen Lucille SHERMAN, Debtors. Jack E. BROWN, Trustee, Appellee, v. THIR
Case Date:October 06, 1995
Court:United States Courts of Appeals, Court of Appeals for the Eighth Circuit

Page 1348

67 F.3d 1348 (8th Cir. 1995)

In re Larry Wayne SHERMAN; Karen Lucille Sherman, Debtors.

Jack E. BROWN, Trustee, Appellee,

v.

THIRD NATIONAL BANK, Appellant,

J.D. Sherman; Doris Sherman; Junior D. Sherman; Junior D.

Sherman and Doris M. Sherman Revocable Trust, Defendants.

In re Larry Wayne SHERMAN;

In re Karen Lucille SHERMAN, Debtors.

Jack E. BROWN, Trustee, Appellee,

v.

THIRD NATIONAL BANK, Defendant,

J.D. Sherman; Doris Sherman; Junior D. Sherman; Junior D.

Sherman and Doris M. Sherman Revocable Trust, Appellants.

Nos. 94-3613 and 94-3615.

United States Court of Appeals, Eighth Circuit

October 6, 1995

Submitted April 10, 1995.

Rehearing and Suggestion for

Rehearing En Banc Denied

Nov. 21, 1995.

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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Thomas Vetter, Jefferson City, MO, argued (Ronald Medin on the brief), for appellant Third National Bank.

Jerry Venter, Jefferson City, MO, argued for Trust.

Frank Wendt, Kansas City, MO, argued (Donald Koehler, II, on the brief), for appellee.

Before MAGILL and HANSEN, Circuit Judges, and GOLDBERG, [*] Judge.

MAGILL, Circuit Judge.

Third National Bank, J.D. Sherman, Doris M. Sherman, and the Junior D. Sherman and Doris M. Sherman Family Revocable Grantor Trust appeal from the district court's 1 decision affirming the bankruptcy court's 2 decision. The bankruptcy court's decision avoided as fraudulent the transfer, within one year of filing a bankruptcy petition, of twelve properties from Larry and Karen Sherman to J.D. and Doris Sherman and eliminated Third National Bank's liens on the properties. We affirm.

I. BACKGROUND

The following facts are undisputed. In approximately 1978, Larry and Karen Sherman (the debtors) began purchasing residential rental property. By 1988, the debtors had acquired eleven properties. Third National Bank (the Bank) provided financing on each of these properties, which was secured by a separate mortgage on each property. The debtors' primary loan officer at the Bank was Donald Broaddus, Senior Vice-President in charge of the real estate department. He had been the debtors' banker for fifteen years.

The debtors fell behind on their payments to the Bank in late 1989. In December 1989 and August 1990, the debtors executed two additional notes secured by a second and third mortgage on some of the eleven properties to secure their unsecured debts to the Bank.

In July 1990, the Pettis County Collector published a list of properties for sale due to delinquent real estate taxes. This list included several of the debtors' properties. The Bank paid one year of the debtors' delinquent real estate taxes and added that amount to the mortgage debts, thereby obviating the possibility of a tax sale.

After publication of the tax sale list, J.D. Sherman (Larry Sherman's father) contacted

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Broaddus, who was an old grade school acquaintance, to determine whether Larry was having financial difficulties. Broaddus informed J.D. that the debtors were in the midst of financial troubles. J.D. also contacted Harry Eilert, Jr. of Benson Lumber Company (Benson), and Eilert informed J.D. that Larry was behind in his payments to Benson.

In September 1990, Benson filed suit against Larry Sherman in Missouri state court for failure to pay approximately $37,000 for materials Benson supplied to Larry. Prior to this suit, the debtors gave Benson a fraudulent financial statement showing real estate with equity of $210,000 in an attempt to stave off collection of prior debts and receive additional credit. 3

Meanwhile, the Bank planned to start foreclosure proceedings against the debtors' eleven properties on January 4, 1991. However, prior to initiation of foreclosure proceedings, J.D. contacted Broaddus and offered to purchase the eleven properties if the Bank provided financing. J.D.'s motivation for purchasing the eleven properties was to prevent the Bank from foreclosing on his son. The Bank agreed to finance the Shermans' purchase of the eleven properties.

On January 22, 1991, J.D. and Doris Sherman (the Shermans) borrowed $246,000 from the Bank to finance the purchase of the eleven properties. Broaddus testified that the Bank typically would only make loans for 70-75% of the value of rental property. J.A. at 207. At this time, the only information available to the parties concerning the value of the eleven properties indicated they were worth approximately $310,750; subsequently, the parties stipulated that the fair market value was only $247,150 at the time of the transfer. Of the proceeds of the Bank's loan to the Shermans, $243,527.90 applied to the purchase of the eleven properties, with $237,602.15 paying off the debtors' thirteen notes held by the Bank and $5,925.75 paying off delinquent real estate taxes; $207 for recording fees; $737 for title insurance; and $822.36 to the Shermans. The debtors deeded the eleven properties to the Shermans; the Shermans executed a promissory note in the amount of $246,000 payable to the Bank secured by a deed of trust encumbering the eleven properties; and the Bank released the debtors' thirteen deeds of trust encumbering the eleven properties. All of the relevant deeds were prepared by the Bank. On January 23, 1991, the warranty deed, the deed of trust and the deed of release were recorded at the county recorder's office. On February 15, 1991, the Shermans transferred the properties to the Junior D. Sherman and Doris M. Sherman Family Revocable Trust (Sherman Trust).

In April 1991, J.D. paid a $5000 debt that the debtors owed to Union Savings Bank which was secured by a deed of trust on another property (the Sedalia property). J.D. then applied to the Bank for a $6500 loan and offered the Sedalia property as security; however, the debtors still held title to the Sedalia property. Broaddus prepared a warranty deed transferring the Sedalia property from the debtors to the Shermans. The Bank closed the $6500 loan to J.D. on May 3, 1991, and J.D. gave the Bank a first mortgage on the Sedalia property as security. This property had a stipulated value of $10,500 as of May 3, 1991.

The debtors first began to consider filing for bankruptcy in the summer of 1990. On June 27, 1991, the debtors filed a Joint Petition for Relief under Chapter 7 of the Bankruptcy Code. The debtors omitted the Benson litigation and the May 3, 1991 transfer of the Sedalia property to J.D. from their bankruptcy schedules, and misstated the nature of the transfer of the eleven properties on January 22, 1991 as "purchased by JD Sherman from Third National Bank prior to foreclosure sale 12/90."

The bankruptcy trustee brought an adversary proceeding before the bankruptcy court, seeking to avoid the transfer of the twelve properties to the Shermans and the Bank's two liens securing the Shermans' mortgages on the twelve properties (the Bank's liens). The bankruptcy court found that the transfers of the properties were avoidable under 11 U.S.C. Sec. 548(a)(1) 4 and that the Shermans

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did not retain liens on the properties under Sec. 548(c). 5 The court held that the trustee could recover the security interest in the properties from the Bank and the properties from the Sherman Trust under Sec. 550(a)(2). The court also held that neither the Bank nor the Sherman Trust were protected from recovery under Sec. 550(b). Finally, the court held that the May 3, 1991 transfer was an avoidable preference under 11 U.S.C. Sec. 547.

The Shermans and the Bank appealed to the district court, which affirmed the decision of the bankruptcy court. This appeal followed.

II. DISCUSSION

The Shermans and the Bank each raise three issues on appeal. The Shermans allege the bankruptcy court and district court erred in: (1) determining the debtors violated Sec. 548(a)(1) by transferring the twelve properties with the actual intent to hinder, delay or defraud creditors; (2) denying the Shermans any liens or interest in the transferred properties under Sec. 548(c) because the Shermans did not act in good faith; and (3) determining that the transfer of property in May 1991 was an avoidable preference. The Bank alleges the bankruptcy court and district court erred in: (1) determining that the Bank's liens could be avoided pursuant to Sec. 550(a)(2); (2) denying the Bank an equitable lien under 11 U.S.C. Sec. 550(b); and (3) determining that recovery of the twelve properties combined with avoidance of the Bank's liens without granting the Bank a replacement lien was not a double recovery prohibited by Sec. 550(c).

We use the same standard of review as did the district court. We review the bankruptcy court's legal conclusions de novo and its factual findings for clear error. In re Howell Enters., Inc., 934 F.2d 969, 971 (8th Cir.1991). A finding is clearly erroneous only if we are left with a definite conviction that a mistake has been committed.

  1. The Shermans' Claims

    1. Avoidance of Fraudulent Transfers Under Sec. 548(a)

      The bankruptcy court determined that the debtors' transfer of eleven properties to the Shermans in January 1991 and the transfer of the Sedalia property in May 1991 were avoidable under Sec. 548(a)(1) because the debtors acted with the actual intent to hinder, delay or defraud creditors. This finding of actual fraudulent intent by the bankruptcy court is a factual finding that we will reverse only upon a showing of clear error. In re Acequia, Inc., 34 F.3d 800, 805 (9th Cir.1994); McCormick v. Security State Bank, 822 F.2d 806, 808 (8th Cir.1987).

      Section 548(a)(1) allows the trustee to avoid any transfer of property made by the debtor within one year of filing a bankruptcy petition, if the debtor "made such...

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