noting, in construing § 548 of the Bankruptcy Code, that “the question of ‘[w]hether fair consideration [now “reasonably equivalent value”] has been given for a transfer is “largely a question of fact, as to which considerable latitude must be allowed to the trier of the facts.’ ” ’ ”
How later courts described this case
- noting, in construing § 548 of the Bankruptcy Code, that “the question of ‘[w]hether fair consideration [now “reasonably equivalent value”] has been given for a transfer is “largely a question of fact, as to which considerable latitude must be allowed to the trier of the facts.’ ” ’ ”
- holding that issue of “reasonably equivalent value” is generally a question of fact
- “[An] argument must be raised to such a degree that the trial court may rule on it.”
- abrogating Butler Aviation Int’l, Inc. v. Whyte (Matter of Fairchild Aircraft Corp.), 6 F.3d 1119, 1125 (5th Cir.1993)
Written by the judges who cited it.
The opinion
United States Court of Appeals,
Fifth Circuit.
No. 96-10565
(Summary Calendar).
In the Matter of Vance DUNHAM, Debtor.
TEXAS TRUCK INSURANCE AGENCY, INC., Appellant,
v.
Harry CURE, Chapter 7 Trustee for Vance G. Dunham, Debtor,
Appellee.
April 17, 1997.
Appeal from the United States District Court for the Northern
District of Texas.
Before HIGGINBOTHAM, WIENER and BENAVIDES, Circuit Judges.
WIENER, Circuit Judge:
In this core bankruptcy proceeding, Appellant Texas Truck
Insurance Agency, Inc. (Texas Truck) appeals the decision of the
district court affirming the bankruptcy court's order that granted
the trustee's avoidance of a transfer to Texas Truck as fraudulent,
pursuant to 11 U.S.C. § 548(a)(2), and ordered Texas Truck to
return $160,000 to the bankrupt estate. Finding no clear error in
the bankruptcy court's determination that the debtor's transfer was
made for less than a reasonably equivalent value, we affirm.
I
FACTS AND PROCEEDINGS
Debtor Vance Dunham (Dunham) and his wife, now Linda
Halyburton (Linda), founded the Dunham Insurance Agency (DIA), a
sole proprietorship, in 1986. By 1992, however, the Dunhams were
1
contemplating a divorce. Dunham met with Frank Brown of Texas
Truck, also an insurance agency, to discuss a possible merger of
DIA with Texas Truck. At Brown's recommendation and in accordance
with an agreement drafted by Brown, Linda transferred to Dunham her
one-half community interest in DIA for the stated consideration of
$15,000. The agreement acknowledged that Dunham was contemplating
the sale of DIA's assets to Texas Truck and, in a non-competition
provision, prohibited Linda from soliciting the customers or
accounts of DIA.
The next month, Dunham entered two agreements with Texas
Truck: (1) the Servicing Agreement and (2) the Employment
Agreement. The Servicing Agreement provided that Texas Truck would
act as the servicing agent for the insurance "book of business"1 of
DIA. Specifically, Texas Truck agreed to (1) collect the sums due
on DIA insurance policies written before the effective date of the
Servicing Agreement, (2) service the accounts, and (3) allocate and
pay to DIA's creditors the commissions earned on the existing book
of business.
The Employment Agreement hired Dunham to solicit and sell
insurance for Texas Truck and prohibited him from engaging in any
1
The "book of business," also known as "expirations" or
"renewals," has a definite and well recognized meaning in the
insurance industry. "[I]t embodies the records of an insurance
agency.... This information enables the agent to contact the
insured before the existing contract expires and arms him with the
information essential to secure another policy and to present to
the insured a solution for his insurance requirements." John
Bezdek Insurance Associates, Inc. v. American Indemnity Co., 834
S.W.2d 401, 404 (Tex.Ct.App.-San Antonio 1992)(quoting In re
Corning, 108 A.D.2d 96, 488 N.Y.S.2d 477 (N.Y.App.Div.1985)).
2
other business or occupation without its written permission.
Dunham acknowledged that all renewals, expirations, books, records,
notes, files, customer lists, and similar data and information were
the property of Texas Truck and would remain its property even if
Dunham's employment were terminated for any reason. Dunham also
transferred to Texas Truck his exclusive right to contact his
former customers for the three years following the termination of
his employment.
Eight months later, Dunham filed a voluntary Chapter 7
bankruptcy petition. Harry Cure (Trustee), trustee of Dunham's
bankrupt estate, filed this action against Texas Truck seeking to
recover certain property that he alleged had been fraudulently
transferred by Dunham, d/b/a DIA, to Texas Truck. The property in
question included (1) all furniture, fixtures, and equipment;2 (2)
the telephone number; (3) the customer files and customer lists;
(4) the insurance policies; (5) all rights to renew the insurance
policies; and (6) all commission income generated from the
insurance policies.
At trial, the bankruptcy judge heard testimony from two
appraisers concerning the value of the property transferred. The
Trustee's expert, Roy L. Phillips, boasted impressive credentials,
extensive involvement in the insurance industry, and substantial
experience in valuing insurance agency businesses. He is presently
2
Linda testified at trial that Dunham transferred DIA's
furniture and office equipment to Texas Truck. As no written
agreement evidenced the transfer, the bankruptcy court speculated
that the conveyance was merely oral and noted that the record
contained no evidence of the property's value.
3
the owner of an insurance agency (formed in 1981) and has worked in
the industry for thirty-four years. He serves on the boards of
several insurance organizations and has taught in the insurance
department at the University of Houston for twelve years. More
significantly, he has written numerous articles on insurance agency
valuation, appraised thirty-two insurance agencies, and developed
his own method for valuing insurance companies.
Phillips opined that the value of the book of business ----
the books, records, expirations or renewals, and other documents --
-- was approximately $200,000. Phillips based his opinion on
actual documentation from the books and records of DIA, including
its tax returns and its financial statement for the year preceding
the transfer to Texas Truck, as well as the testimony of DIA
employees with first-hand knowledge of DIA's financial condition.
He also considered the Service Agreement, the Employment Agreement,
the non-competition clauses, and the benefits of the economies of
scale enjoyed by Texas Truck by virtue of acquiring DIA.
By contrast, the expert hired by Texas Truck, Robert Dohmeyer,
was largely inexperienced in both the insurance industry and the
valuation of insurance agency businesses. He is not licensed and
has never worked in the insurance industry. He has no formal
education regarding insurance agency valuation, has not written any
articles on valuing insurance agency businesses, and has appraised
only two insurance agencies.
Dohmeyer testified that the value of the book of business was
$26,000. Dohmeyer assumed a 60% renewal rate and applied a 50%
4
discount based on the erroneous assumption that no non-competition
agreements had been executed. Phillips, on the other hand, assumed
a 90-95% renewal rate, based largely on Dunham's future exclusive
employment with Texas Truck, and recognized the existence of the
two non-competition agreements.
The bankruptcy court determined first that the property
transferred to Texas Truck consisted of the property rights and
policies of DIA on the effective date of the Service Agreement and
the Employment Agreement. Specifically, it stated, "these policies
afforded an entree for Dunham or Texas Truck to meet and to sell
renewals or other insurance to customers, and there is a bundle of
property rights there that was transferred." The court concluded
next that Phillips' appraisal was more credible than Dohmeyer's and
assigned a $200,000 value to the property transferred. The court
then determined that Texas Truck expended $40,000 to acquire the
property transferred, arriving at this figure by netting the
commissions that Texas Truck earned on DIA policies ($56,000)
against the expenses that it paid on behalf of DIA ($76,000) and
adding the servicing expenses that Texas Truck incurred ($20,000).
After comparing the value of the property transferred
($200,000) with the value of the consideration given in exchange
($40,000), the court concluded that the transfer was made for less
than a reasonably equivalent value and therefore was avoidable by
the Trustee. Alternatively, the court found that the transfer was
avoidable as one made with actual fraud. The bankruptcy court
ordered Texas Truck to return $160,000 to the bankrupt estate, that
5
being the difference between the values of the assets exchanged.
The district court, reviewing for clear error, affirmed the
decision of the bankruptcy court and added pre-judgment interest of
4% from April 15, 1994 to the date of judgment and post-judgment
interest at the fixed federal rate.
Texas Truck timely appealed, asserting, inter alia, that the
district court erred in (1) failing to review the issue of
reasonable equivalency de novo, (2) including renewals in the value
of the property transferred, (3) determining that the transfer was
made for less than a reasonably equivalent value, and (4)
determining that the transfer was made with actual fraud.
II
ANALYSIS
A. STANDARD OF REVIEW
There exists some disagreement, both within this circuit and
among the circuits, as to whether the ultimate determination of
reasonable equivalency is a question of law, subject to our de novo
review, or a question of fact, subject to the clearly erroneous
standard.3 Recently in In re Fairchild Aircraft Corporation,4 we
3
Most of the other circuits have concluded that the issue is
one of fact. See In re Roco Corp., 701 F.2d 978, 982 (1st
Cir.1983)(factual issue to be reviewed for clear error); Klein v.
Tabatchnick, 610 F.2d 1043, 1047 (2d Cir.1979)(fairness of
consideration is generally a question of fact); In re Barefoot,
952 F.2d 795, 800 (4th Cir.1991)(factual determination which can be
set aside only if clearly erroneous); In re Bundles, 856 F.2d 815,
825 (7th Cir.1988)(great deference to the district court); In re
Ozark Restaurant Equip. Co., Inc., 850 F.2d 342, 344 (8th
Cir.1988)(question of fact reversible only if clearly erroneous);
In re Wes Dor, Inc., 996 F.2d 237 (10th Cir.1993)(suggesting fact
question); and In re Chase & Sanborn Corp., 904 F.2d 588, 593
(11th Cir.1990)(fair consideration is largely a question of fact).
6
applied a de novo standard of review, following our previous
decision in Durrett v. Washington National Insurance Company.5 In
both cases, however, we noted that the result would have been the
same regardless of whether we applied the de novo or the clear
error standard. Later in In re Besing,6 even though we declined to
resolve the issue,7 we recognized that the reasonable equivalency
inquiry is ordinarily fact-intensive, as the court bases its
determination upon subsidiary fact findings regarding the value of
the property transferred and the value received in the exchange.8
Long before we decided any of these cases, however, we
verbalized the proper standard of review. In Mayo v. Pioneer Bank
But see In re Prejean, 994 F.2d 706, 708 (9th Cir.1993)(de novo
review).
4
6 F.3d 1119 (5th Cir.1993).
5
621 F.2d 201, 203 (5th Cir.1980)(reviewing the question of
reasonable equivalency de novo). Our decision in In re Coston, 991
F.2d 257 (5th Cir.1993)(en banc), calls into doubt the continued
soundness of Durrett. In Coston, we held that the question of the
reasonableness of a creditor's reliance is one of fact, which is
reviewable only for clear error. Deferring to the bankruptcy judge,
who is most familiar with the circumstances surrounding the inquiry
and who has had the opportunity to evaluate the credibility of the
witnesses, we concluded that the bankruptcy judge should have the
benefit of the clearly erroneous rule when he determines a question
of reasonableness. The considerations in Coston apply with equal
force to the instant inquiry and implicitly weaken Durrett 's
application of the de novo standard to the question of
reasonableness.
6
981 F.2d 1488 (5th Cir.), cert. denied, 510 U.S. 821, 114
S.Ct. 79, 126 L.Ed.2d 47 (1993).
7
Id. at 1495 n. 12.
8
Id. at 1495 (citing In re McConnell, 934 F.2d 662 (5th
Cir.1991); In re Emerald Oil Co., 807 F.2d 1234 (5th Cir.1987)).
7
& Trust Company,9 we stated that the question of "[w]hether fair
consideration [now "reasonably equivalent value'] has been given
for a transfer is "largely a question of fact, as to which
considerable latitude must be allowed to the trier of the facts.'
"10
When these opinions are carefully analyzed against this
backdrop, we are led to the conclusion that the clearly erroneous
standard is proper.11 Thus we join the majority of the circuits in
embracing that standard.
B. REASONABLY EQUIVALENT VALUE
As such, the issue in the instant case is whether the
bankruptcy court clearly erred in accepting the appraisal of the
more credible expert and determining on the basis of that appraisal
that the transfer was made for less than a reasonably equivalent
9
270 F.2d 823 (5th Cir.1959), cert. denied, 362 U.S. 962, 80
S.Ct. 878, 4 L.Ed.2d 877 (1960).
10
Id. at 829-30 (quoting Collier's Bankruptcy Manual (Oglebay,
Kelliher and Newkirk)(1948), p. 845). Mayo 's conclusion on this
point was not discussed by Durrett or any other Fifth Circuit case.
11
We recognize, however, that the clearly erroneous standard
is subject to modification if the bankruptcy court invokes improper
methodology in reaching its conclusion on the issue of reasonable
equivalency. Consequently, we review de novo the methodology
employed by the bankruptcy court in assigning values to the
property transferred and the consideration received.
In the instant case, the methodology employed by the
bankruptcy court was appropriate. The bankruptcy court heard
testimony, on direct and cross-examination, from each party's
expert appraiser as to his credentials, opinion of the proper
valuation, considerations, assumptions, and sources of
information. Texas Truck does not challenge the methodology
of the bankruptcy court.
8
value. We conclude that the bankruptcy court did not err.
The bankruptcy court accorded great weight and probative value
to the testimony of the highly qualified and credible appraiser,
Phillips, and attributed little or no probative value to the
appraisal of the largely inexperienced appraiser, Dohmeyer. We
find no clear error in this call by the bankruptcy court.
Texas Truck does not challenge this decision; instead, it
insists that the bankruptcy court erred in including the value of
renewals in the value of the property transferred, as they were
either the non-transferrable personal goodwill of Dunham or mere
expectancies, which are not property. We disagree. Renewals are
clearly property, and they are a transferrable asset of an
insurance agency.12 Texas Truck introduced no evidence that
renewals could not be considered in appraising the value of the
book of business. Indeed, Texas Truck's own expert included
renewals in his valuation ---- albeit at a discount rate
significantly greater than that assumed by Phillips ---- and he
admitted that the renewal rate was the single most important factor
in a comparison of his analysis and Phillips'. Thus the bankruptcy
12
See John Bezdek Insurance Associates, Inc. v. American
Indemnity Co., 834 S.W.2d 401, 404 (Tex.App.-San Antonio 1992, no
writ)("It has been determined that [the book of business] is of
vital assistance to the insurer ... in carrying on the insurance
business and it is recognized in the insurance field as a valuable
asset in the nature of goodwill.") (citations omitted); Alexander
v. Edwards-Northcutt-Locke, 329 S.W.2d 304, 306
(Tex.Civ.App.-Dallas 1959, no writ)("This Court has held that an
asset of an insurance agency which may be sold and conveyed by a
seller to a purchaser is the right in and to expirations of all
policies written by the seller, and also an asset is the right to
control and solicit renewals of all policies written by the
seller.") (citations omitted).
9
court did not clearly err in accepting Phillips' appraisal which
included the value of renewals.13
Texas Truck also argues that the bankruptcy court, in
determining the value of the consideration given, ignored the
$56,000 in commissions earned on DIA policies and paid to DIA's
creditors. As the bankruptcy court clearly accounted for this
income in calculating Texas Truck's cost to acquire DIA, Texas
Truck cannot now be heard to complain on this point.
As we have concluded that the values assigned by the
bankruptcy court to the property transferred and the consideration
received are not clearly erroneous and that the court did not
clearly err in determining that the transfer was made for less than
a reasonably equivalent value, all that remains to be done is a
simple arithmetic calculation to determine the amount, if any, that
Texas Truck owes to the bankrupt estate. Our calculation is
identical to the one performed by the bankruptcy court and affirmed
by the district court. Consequently, Texas Truck must return to
the bankrupt estate $160,000 plus pre-judgment interest at the rate
of 4% per annum from April 15, 1994 to the date of this judgment
and post-judgment interest at the fixed federal rate.
Concluding that the transfer is avoidable as one made for less
than a reasonably equivalent value, we need not address whether the
transfer is avoidable on the alternative ground that it was actual
fraud.
13
Whether the value of renewals is subject to a discount is a
separate question and one which Texas Truck did not raise.
10
III
CONCLUSION
For the foregoing reasons, we affirm the decision of the
district court ordering Texas Truck to return $160,000 plus
interest to the bankrupt estate.
AFFIRMED.
11