In re Hannover Corp.

• Decision Date: 29 October 2002
• Docket Number: No. 01-30454.,No. 01-30455.,01-30454.,01-30455.
• Citation: 310 F.3d 796
• Parties: In the Matter of: HANNOVER CORPORATION; Redwood Raevine Corp.; Rubicon XXI Corp.; Place Vendome, Inc.; Place Vendome Corporation of America; Penzance, Inc.; and ATG, Inc., Debtors. Jimmy Swaggart Ministries, Appellant, v. William G. Hayes, Jr., Appellee. William G. Hayes, Jr., Appellee, v. Jimmy Swaggart Ministries, Appellant. In the Matter of: Hannover Corporation; Redwood Raevine Corp.; Rubicon XXI Corp.; Place Vendome, Inc.; Place Vendome Corporation of America; Penzance, Inc.; and ATG, Inc., Debtors. William G. Hayes, Jr., Appellee, v. George Russell; Jimmy Swaggart Ministries, Appellants. Jimmy Swaggart Ministries, Appellant, v. William G. Hayes, Jr., Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

310 F.3d 796

In the Matter of: HANNOVER CORPORATION; Redwood Raevine Corp.; Rubicon XXI Corp.; Place Vendome, Inc.; Place Vendome Corporation of America; Penzance, Inc.; and ATG, Inc., Debtors.

Jimmy Swaggart Ministries, Appellant, v. William G. Hayes, Jr., Appellee.

William G. Hayes, Jr., Appellee, v. Jimmy Swaggart Ministries, Appellant.

In the Matter of: Hannover Corporation; Redwood Raevine Corp.; Rubicon XXI Corp.; Place Vendome, Inc.; Place Vendome Corporation of America; Penzance, Inc.; and ATG, Inc., Debtors.

William G. Hayes, Jr., Appellee, v. George Russell; Jimmy Swaggart Ministries, Appellants.

Jimmy Swaggart Ministries, Appellant, v. William G. Hayes, Jr., Appellee.

No. 01-30454.

No. 01-30455.

United States Court of Appeals, Fifth Circuit.

October 29, 2002.

COPYRIGHT MATERIAL OMITTED

Barry W. Miller (argued), Suzanne Kay Sasser, Baton Rouge, LA, for Appellant.

Fredrick R. Tulley (argued), Andree Matherne Cullens, Taylor, Porter, Brooks & Phillips, Baton Rouge, LA, for Appellee.

Appeals from the United States District Court for the Middle District of Louisiana.

Before DAVIS, JONES and SMITH, Circuit Judges.

EDITH H. JONES, Circuit Judge:

This is an adversary proceeding brought by William G. Hays, Jr. ("Hays"), trustee of the debtors' bankruptcy estate, to recover $2,472,500 paid by the debtors to Jimmy Swaggart Ministries ("JSM") from July 1990 to July 1992. Hays argues — and JSM contests — that these transfers can be avoided as actual and/or constructive fraudulent conveyances under 11 U.S.C. § 548(a). JSM additionally claims the "good faith" defense of 11 U.S.C. § 548(c). For the reasons that follow, this court finds that JSM met the requirements of § 548(c) and the criteria for a comparable defense under Louisiana law. Accordingly, we need not reach the other issues raised on appeal. The district court's 1999 reversal of the bankruptcy court's 1995 judgment must be reversed, and judgment must be entered in favor of JSM.

FACTS

The debtors in this case are a number of corporations created and controlled by Sam J. Recile ("Recile") for the purpose of developing a shopping mall in Baton Rouge, Louisiana. Critical to the success of this project was Recile's acquisition of a tract of land owned by JSM. In July 1990, one of Recile's corporations entered into an option agreement for purchase of a 68-acre tract of JSM's land in Baton Rouge, Louisiana. The stipulated purchase price was $11,250,000. For the next two years Recile made payments totaling $2,435,000 on this and subsequently renegotiated agreements as he sought to obtain financing for the project. No purchase ever occurred.

Although call option contracts on real estate are common enough, Recile's behavior was not. He offered to prospective investors short-term double-your-money-back promissory notes to finance his project. The nominal party on Recile's side of the option arrangement changed frequently. Payments to JSM were, in later stages of the relationship, made on a weekly or daily basis — sometimes in cash, sometimes with counter-signed third-party checks. Most notably, Recile came under SEC investigation, a complaint being filed in April 1991 in the United States District Court for the Eastern District of Louisiana. JSM was not a party to this action.

Over the next fifteen months the supervising district judge issued a variety of orders, each of which allowed the debtor corporations to continue making payments on this and other options. Eventually, in July 1992, the court entered an order granting the SEC broad injunctive relief that, among other things, appointed Hays as receiver for the debtors. See SEC v. Recile, 10 F.3d 1093 (5th Cir.1993) (affirming district court's grant of SEC's motion for summary judgment). In September 1992, Hays filed voluntary Chapter 11 bankruptcy petitions on behalf of the debtors.

In February 1994, Hays filed this action in bankruptcy court, seeking to avoid a total of $2,472,500 in pre-petition payments made by the debtors to JSM. Following an extensive bench trial with multiple witnesses, Judge Jerry A. Brown, the bankruptcy judge, ruled in favor of JSM on all of Hays's claims in this action. The court concluded that, although there was ample evidence that Recile had engaged in illegal activities, there was "no substantial evidence that JSM was a party to, knew of, or was put on notice of sufficient facts, that it should have known of such illegal activities when it accepted the numerous transfers of money and agreed to allow the debtors to tie up valuable real estate for the lengthy amount of time here involved."

Hays appealed to the district court. Three and a half years later, that court reversed and remanded the bankruptcy court's decision. On remand, the bankruptcy court granted Hays's motion for judgment in his favor, but declined to award pre-judgment interest. On appeal, the district court reversed the bankruptcy court's denial of pre-judgment interest. JSM filed notices of appeal to this court, the district court entered an amended judgment, and JSM filed a third notice of appeal. The appeals have been consolidated.¹

DISCUSSION

I. The district court erred in reversing the bankruptcy court's conclusion that JSM had satisfied the elements of the good faith defense under 11 U.S.C. § 548(c).

With 11 U.S.C. § 548(c), Congress provided to transferees a defense against a trustee's (or debtor's) successful demonstration of an actual or constructive fraudulent transfer under, respectively, § 548(a)(1)(A) and § 548(a)(1)(B) of the Bankruptcy Code. 11 U.S.C. § 548(c) states in pertinent part:

[A] transferee or obligee of such a transfer or obligation that takes for value and in good faith has a lien on or may retain any interest transferred ... to the extent that such transferee or obligee gave value to the debtor in exchange for such transfer or obligation.

The burden of proof is on the defendant transferee. See In re M. & L. Bus. Mach. Co., Inc., 84 F.3d 1330 (10th Cir.1996); In re Agric. Research & Tech. Group, 916 F.2d 528 (9th Cir.1990). To avail himself of this defense, the transferee must demonstrate that he "[took] value in good faith." To keep what he received, he must subsequently demonstrate that he "gave value."

Hays argues that Recile's corporations made actual and/or constructive fraudulent transfers to JSM under § 548(a). JSM argues that these payments were not fraudulent. It also argues, in the alternative, that it is protected by the defense provision found in § 548(c). Because this court holds that JSM satisfied the terms of § 548(c), we need not undertake an evaluation of Hays's assertion that the transfers were actually and/or constructively fraudulent under § 548(a).

A. Good Faith

In an appeal from a district court reversal of a bankruptcy court judgment, this court should "perform the same appellate review as did the district court: [the appellate court] examine[s] the bankruptcy court's findings of fact under the clearly erroneous standard, and [the appellate court] examine[s] that court's legal determinations under the de novo standard." In re Sewell, 180 F.3d 707, 710 (5th Cir. 1999).

The dispute regarding JSM's "good faith" under § 548(c) comes to this court as a question of first impression. In the absence of clear factual error or controlling legal precedent, we decline the invitation to overturn the trial court's finding that JSM received Recile's payments in "good faith."

As courts and commentators frequently note, the bankruptcy code does not define "good faith" and the statute's legislative history is quite thin. 5 COLLIER ON BANKRUPTCY ¶ 548.07[2][a] (2002). Moreover, there is little agreement among courts as to what conditions ought to allow a transferee this defense. Id. This is not surprising, as the variables are manifold.

The most important set of questions concerns the transferee's state of mind. First, what level of knowledge — knowledge itself or some form of notice — vitiates a claim of "good faith"? Second, need the knowledge be actual or merely constructive? Third, what duty of inquiry does notice impose?

The first set of questions begs the second: Knowledge of what? Of the transferor's insolvency, fraudulence, or both? If insolvency, then of what degree — actual, imminent, or potential? If fraudulence, then regarding what transactions — the enterprise involving the transferee or any of the transferor's dealings?

Regarding the second set of questions — the debtor corporations' insolvency and fraudulence — there is no reason to disagree with the bankruptcy court. The debtor corporations were insolvent ab initio. They also made fraudulent representations to investors, though not necessarily at the outset. Moreover, Recile's fraudulence pertained to the JSM land deal itself, not to some unrelated transaction. Without an option on JSM's land, Recile could not have perpetrated his fraud upon his investors. The transferor was engaged in a crooked scheme.

The heart of the bankruptcy court's conclusion lies, then, in the first set of questions — the transferee's state of mind. Once again, the bankruptcy court's findings are comprehensive, cogent, and entitled to the respect due them under the clear error standard. We point here only to the most telling out of a voluminous list of findings. With regard to JSM's knowledge of the debtor corporations' insolvency, the bankruptcy court found that "[a]t the time the transfers occurred, JSM had no way of knowing that the debtors were insolvent." With regard to JSM's knowledge of the debtor corporations' fraudulent activities, Judge Brown found that JSM had read newspaper accounts of the SEC's suit against Recile. Finally, with regard to JSM's duty of inquiry, Judge Brown found that JSM, upon reading — and being duly alarmed by — these newspaper stories, undertook its own investigation, contacting the SEC and the federal district court, eventually receiving assurances from the district court that...