Holloway, Matter of

• Citation: 955 F.2d 1008
• Decision Date: 23 March 1992
• Docket Number: No. 91-1991,91-1991
• Parties: , 22 Bankr.Ct.Dec. 1246, Bankr. L. Rep. P 74,522 In the Matter of Pat S. HOLLOWAY, Debtor. BROWNING INTERESTS, Appellants, v. Linda W. ALLISON, Appellee. Summary Calendar.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1008

955 F.2d 1008

60 USLW 2667, 22 Bankr.Ct.Dec. 1246,

Bankr. L. Rep. P 74,522

In the Matter of Pat S. HOLLOWAY, Debtor BROWNING INTERESTS, Appellants, v. Linda W. ALLISON, Appellee.

No. 91-1991

Summary Calendar.

United States Court of Appeals Fifth Circuit.

March 23, 1992.

Rehearing Denied May 29, 1992.

J. Michael Sutherland, Steve Malin, Vinson & Elkins, Dallas, Tex., for Browning Interests.

Kenneth Warren Nordeman, Lynch, Choppell & Alsup, Dallas, Tex., for appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before JOLLY, DAVIS, and SMITH, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

The Browning Interests ¹ appeal from the district court's judgment affirming the judgment of the bankruptcy court which refused to set aside as a fraudulent conveyance the transfer of a security interest from the Debtor, Pat S. Holloway ("Holloway") to one of his ex-wives, Linda W. Allison ("Allison"). Under a correct application of the law, the evidence can only support the conclusion that Allison is an insider; therefore, the transfer of the security interest is voidable as a fraudulent conveyance. Accordingly, we reverse the judgment of the district court, vacate the judgment of the bankruptcy court, and remand the case for entry of judgment in favor of the Browning Interests in accordance with this opinion.

I

Allison and Holloway were married to each other for twenty years, from 1949 to 1969, and have three children in common. On November 11, 1979, Holloway filed a Chapter 11 reorganization case, which was converted to a Chapter 7 liquidation case in 1982. Beginning January 5, 1984, and continuing through February 7, 1989, Allison loaned him $326,337.05, initially without any collateral. According to Allison, the loans were made "to provide for his sustenance and living expenses incurred due to the financial hardship brought upon Holloway by his lengthy bankruptcy proceedings."

In 1986, Holloway obtained a judgment for approximately $1,400,000 ("the HECI Judgment") against the HECI Exploration Company Employees' Profit Sharing Plan ("the Plan"). On February 5, 1987, Holloway executed a Collateral Assignment and Security Agreement in favor of Allison granting a security interest in the HECI Judgment.

Because there were numerous claims to the proceeds of the HECI Judgment, the Plan filed an adversary proceeding interpleading the funds into the registry of the bankruptcy court. The claimants initially included Holloway's second wife, Robbie Holloway, and the Internal Revenue Service. The Browning Interests, who hold a $72,000,000 judgment against Holloway, also actively participated in the proceedings before the bankruptcy court.

In addition, Holloway made several unsuccessful attempts to obtain the funds. First, he attempted to have the bankruptcy court disburse the funds to him in satisfaction of his alleged pro se attorney's fees. He then attempted to have the funds declared his exempt property under Texas law. Next, he tried to have the funds declared the community property of his marriage to his third and current wife, Brenda Holloway, and to obtain enforcement of an alleged partition agreement. Holloway later voluntarily dismissed his claim based on the alleged partition agreement.

On February 27, 1989, the Government filed a motion for relief from the automatic stay so that it could file tax liens and levy on the funds in the registry of the bankruptcy court. On March 21 and 22, 1989, Allison caused financing statements to be filed, perfecting her security interest in the HECI Judgment. Although Allison was aware of the claims of the Browning Interests and the Government, as well as Holloway's efforts to obtain the funds, she made no effort to assert her claim to a portion of the funds until she filed her Motion to Determine Status of Claim on March 31, 1989. Shortly thereafter, Holloway, in his role as Trustee of his children's trusts, asserted a claim to $284,892.46 of the funds, plus interest and attorney's fees, pursuant to an alleged security agreement dated February 5, 1987, recorded on April 19, 1989, securing loans allegedly made by the trusts to Holloway.

On May 8, 1989, the United States filed four Notices of Federal Tax Liens against Holloway totaling $4,433,176.48.

II

The case was tried in bankruptcy court to determine the validity and priority of Allison's claim to the proceeds of the HECI Judgment. The bankruptcy court entered judgment in favor of Allison in the amount of $364,346.47, plus additional interest and attorney's fees, to be paid out of the funds on deposit in the registry of the court. The bankruptcy court's judgment was affirmed by the district court. Disbursement of the funds was stayed pending appeal. The Browning Interests and the Government appealed from the district court's judgment, but the Government settled with Holloway and dismissed its appeal.

III

The Browning Interests contend that the collateral assignment to Allison is avoidable as a fraudulent conveyance under Tex.Bus.Com.Code Ann. § 24.006(b), and that the bankruptcy and district courts erred in holding that Allison was not an "insider."

The bankruptcy court's findings of fact "will not be set aside unless clearly erroneous." Matter of Delta Towers, Ltd., 924 F.2d 74, 76 (5th Cir.1991). However, "when a finding of fact is premised on an improper legal standard, that finding loses the insulation of the clearly erroneous rule." Matter of Fabricators, Inc., 926 F.2d 1458, 1464 (5th Cir.1991). "Conclusions of law, on the other hand, are subject to plenary review on appeal." Id.

Transfers made after September 1, 1987 are governed by the Uniform Fraudulent Transfer Act, Tex.Bus. & Com.Code Ann. §§ 24.001, et seq. (West 1987). The transfer at issue is Holloway's granting of the security interest to Allison, which is deemed to have been made when it was filed of record so as to be perfected. Tex.Bus. & Com.Code Ann. § 24.007(1)(B). Section 24.006(b) provides:

A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent.

The record establishes, and the bankruptcy court found, that: (1) the Browning Interests' claims arose prior to the transfer, ² (2) the transfer was for an antecedent debt, (3) Holloway was insolvent at the time of the transfer, and (4) Allison knew that Holloway was insolvent. Therefore, the only disputed issue is whether Allison is an "insider". Section 24.002(7) defines an "insider" as follows:

(7) "Insider" includes:

(A) if the debtor is an individual:

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

(ii) a partnership in which the debtor is a general partner;

(iii) a general partner in a partnership described in Subparagraph (ii) of this paragraph; or

(iv) a corporation of which the debtor is a director, officer, or person in control.

Tex.Bus.Com.Code Ann. § 24.002(7) (emphasis added).

The bankruptcy court held that Allison was not an insider, apparently because she did not fit within one of the four categories listed in the statute:

Allison was an ex-wife of twenty years whose only substantial contact with Debtor was to provide him with funds to help defray living and legal expenses. "Insider" is narrowly defined in § 24.002(7). Allison is not a "relative" under the definition of § 24.002(11) or under Texas law because divorce terminates the marital relation. Allison is not an insider; thus, Uniform Fraudulent Transfer Act § 24.006(b) does not apply.

Memorandum Opinion at 5 (citation omitted; emphasis added). The bankruptcy court's finding was based upon an erroneous interpretation of the law. As the Texas Court of Appeals in Dallas recently made clear, the UFTA's definition of "insider" is not intended to limit an insider to the four listed subjects. Instead, "the drafters provided the list for purposes of exemplification." J. Michael Putman, M.D.P.A. Money Purchase Pension Plan v. Stephenson, 805 S.W.2d 16, 18 (Tex.App.--Dallas 1991, no writ).

The UFTA's definition of "insider" is very similar to the definition in the Bankruptcy Code, 11 U.S.C.A. § 101(31) (West Supp.1991), and both parties agree that cases interpreting § 101(31) are instructive. Collier on Bankruptcy states that "[a]n 'insider' generally is an entity whose close relationship with the debtor subjects any transactions made between the debtor and such entity to heavy scrutiny." 2 Collier on Bankruptcy p 101.31 at 101-87 (15th ed. 1991). The legislative history of § 101(31) defines an insider as a person or entity with "a sufficiently close relationship with the debtor that his conduct is made subject to closer scrutiny than those dealing at arm's length with the debtor." S.Rep. No. 95-989, 95th Cong. 2d Sess., reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5810.

The cases which have considered whether insider status exists generally have focused on two factors in making that determination: (1) the closeness of the relationship between the transferee and the debtor; and (2) whether the transactions between the transferee and the debtor were conducted at arm's length. E.g., In re Friedman, 126 B.R. 63, 70 (9th Cir.B.A.P.1991) ("insider status may be based on a professional or business relationship with the debtor, in addition to the Code's per se classifications, where such relationship compels the conclusion that the individual or entity has a relationship with the debtor, close enough to gain advantage attributable simply to affinity rather than to the course of business dealings between the parties"); In re Schuman, 81 B.R. 583, 586 (9th Cir.B.A.P.1987) ("The tests developed by the courts in determining who is an insider focus on the closeness of the parties and the degree to which the transferee is able to exert...