REVISED NOVEMBER 13, 2002
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_______________________
No. 01-30454
_______________________
In the matter of: Hannover Corporation; Redwood Raevine Corp.;
Rubicon XI Corp.; Place Vendome, Inc.; Place Vendome Corporation
of America; Penzance, Inc.; and ATG, Inc., Debtors
JIMMY SWAGGART MINISTRIES,
Appellant,
versus
WILLIAM G. HAYS, JR.,
Appellee.
WILLIAM G. HAYS, JR.,
Appellee,
versus
JIMMY SWAGGART MINISTRIES,
Appellant.
_________________________________________________________________
Appeals from the United States District Court
for the Middle District of Louisiana
_________________________________________________________________
_______________________
No. 01-30455
_______________________
In the matter of: Hannover Corporation; Redwood Raevine Corp.;
Rubicon XI Corp.; Place Vendome, Inc.; Place Vendome Corporation
of America; Penzance, Inc.; and ATG, Inc., Debtors
WILLIAM G. HAYS, JR.,
Appellee,
versus
GEORGE M. RUSSELL; JIMMY SWAGGART MINISTRIES,
Appellants.
JIMMY SWAGGART MINISTRIES,
Appellant,
versus
WILLIAM G. HAYS, JR.,
Appellee.
_________________________________________________________________
Appeals from the United States District Court
for the Middle District of Louisiana
_________________________________________________________________
October 29, 2002
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
2
(“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 agree-
ments 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
3
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
4
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
1
The judgments of the district court are final for purpose of
appeal.
5
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
6
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?
7
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
8
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 JSM
could continue to receive option payments from Recile’s
corporations.
Based on its findings, the bankruptcy court’s resultant
legal conclusion is unproblematic. As noted above, there is little
agreement among courts regarding the appropriate legal standard for
this defense, because “[t]he unpredictable circumstances in which
the courts may find its presence or absence render any definition
of “good faith” inadequate, if not unwise.” 5 COLLIER ON BANKRUPTCY
¶548.07[2][a]. Compare In re Little Creek Dev. Co., 779 F.2d 1068
(5th Cir. 1986) (interpreting good faith in context of Chapter 11's
availability). This court has lacked either occasion or
disposition to attempt to formulate such a definition for purposes
of § 548(c). Moreover, the atypical posture of the fraudulent
conveyance claim here, i.e., the debtor’s payments to an
unaffiliated third party in an arms-length transaction, counsels
caution in attempting to propound a broad rule concerning “good
faith” for § 548(c). It is enough for present purposes to rely on
the bankruptcy court’s conscientious findings and conclusion.
B. Value
This court has not yet had occasion to articulate the
standard for appellate review of trial court determinations of
9
“value” under § 548(c). As the parties to this case do not dispute
this point, we adopt for present purposes this court’s approach to
the review of trial court determinations of “reasonably equivalent
value” under § 548(a)(2). See In re Wes Dor, Inc., 996 F.2d 237,
242 (10th Cir. 1993). The question of valuation under § 548(a) is
“largely a question of fact, as to which considerable latitude must
be allowed to the trier of the facts.” In re Dunham, 110 F.3d 286,
290 (5th Cir. 1997) (internal quotations omitted). That being
said, “we review de novo the methodology employed by the bankruptcy
court in assigning values to the property transferred and the
consideration received.” Id. at 290 n.11.
Section 548(c) allows a transferee who “takes for value”
to retain this transfer to the extent that he “gave value to the
debtor in exchange.” It is undisputed that JSM “[took] for value”;
Hays contends, however, that JSM “gave” no “value” in return. The
bankruptcy court disagreed with Hays but the district court did
not. Because the bankruptcy court’s findings of fact are supported
by the record and its conclusions of law are consistent with the
text of the Bankruptcy Code, the Code’s interpretation by this and
other courts, and sound commercial practice, we reverse the
district court’s reversal.
This court is presented with two questions, one of law,
the other of fact. Of Law: Did the bankruptcy court correctly
conclude that the transferee’s sale of short-term call options to
10
a party unable to exercise them have “value” under § 548(c)? Of
Fact: Did the bankruptcy court correctly conclude that this was an
equitable exchange? We answer both in the affirmative.
The arc of § 548 easily encompasses as “value” the
present exchange of cash for a right to buy or sell property at a
future point in time. Courts are understandably chary of
interpreting § 548 to regard promises of future support as
“valuable.” Without consideration, courts suspect gratuitous
transfer rather than contractual exchange. See 5 COLLIER ON BANKRUPTCY
¶548.05[1][b]. This court is not, however, willing to regard as
without “value” all transactions in which present cash is exchanged
for a right of future exercise. See In re Fairchild Aircraft
Corp., 6 F.3d 1119 (5th Cir. 1993). To do otherwise would require
rejection of our caselaw as well as the economic realities of
options markets.
Hays, nonetheless, requests something of the sort. Hays
has argued that these options had no “value” because there was no
possibility that Recile would ever exercise them. To determine
whether the debtor received “value,” the district court held that
courts
must consider the circumstances that existed at the time
and determine if “there was any chance that the
investment would generate a positive return.” If there
was no such chance at the time of the transfers that the
payments would generate a positive return, then no value
was conferred.
11
District Court Opinion at 12 (quoting In re R.M.L., Inc., 92 F.3d
139, 152 (3d Cir. 1996)). Hays asserts that, because of the
fraudulent character of Recile’s project, there was no chance that
he would ever exercise this option. This option, therefore, had no
“value.”
Hays’s legal argument is flawed for three reasons.
First, it contradicts the bankruptcy court’s finding that
Recile’s development project began as a legitimate real estate
venture, turning into a Ponzi scheme only in its subsequent stages.
Second, its adoption would, by permitting the exercise of
judgment in hindsight, conflict with basic economics and with Fifth
Circuit caselaw. Like all speculative financial instruments, the
value of an option can change over time, depending upon the value
of the underlying property. This is their nature; options are
bought and sold precisely to speculate on or hedge against market
fluctuation. Without more, the fact that an option has become
worthless in no way proves that it was worthless at an earlier
date. Thus, consistent with economic reality, this and other
circuits unequivocally hold that for purposes of § 548 the value of
an investment, even a risky one, such as we have before us now, is
to be determined at the time of purchase. See Fairchild, 6 F.3d
1126-27; In re Chomakos, 69 F.3d 769, 770 (6th Cir. 1995); see also
5 COLLIER ON BANKRUPTCY ¶548.02[2].
12
Third, and critically, Hays’s position would subvert the
defensive character of § 548(c), a clause specifically designed to
protect transferees, not transferors. 5 COLLIER ON BANKRUPTCY ¶548.07.
We fully appreciate the problem that appears to trouble the
district court: Under the guise of a negotiated contract, a debtor
anticipating bankruptcy can transfer valuable properties for
consideration of lesser worth. The problem is even more acute in
the case at bar, where the consideration is alleged to be wholly
without value.
Although we share this concern, § 548(c) is not the test
that Congress has established to extirpate this form of fraud. The
Bankruptcy Code looks, rather, to the “reasonable equivalency” test
found at § 548(a)(1)(B)(i). In order to establish a prima facie
case for avoiding a transfer as constructively fraudulent, the
trustee must demonstrate that the debtor “received less than a
reasonably equivalent value in exchange for such transfer or
obligation.” Id. This provision ensures that there is no great
disparity between the value of the goods exchanged. But it does
so, most importantly, from the perspective of the transferor: Did
the transferor “receive[]” enough? See Fairchild, 6 F.3d at 1127
(“the recognized test is whether the investment conferred an
economic benefit on the debtor”).
Compare this with the provision at § 548(c). Instead of
inquiring into the possibility and extent of the debtor’s loss, it
13
provides a means by which the unwitting trading partner can protect
himself. Received property can be retained “to the extent” that
the “transferee . . . gave value to the debtor.” The provision
looks at value from the perspective of the transferee: How much did
the transferee “give”? The concern here, quite properly, is for
the transferee’s side of the exchange, not the transferor’s gain.
Read in combination, §§ 548(a) and (c) are perfectly
complementary. The first section affords creditors a remedy for
the debtor’s fraudulence or, as the case might be, mere
improvidence; the second protects the transferee from his
unfortunate selection of business partners. See Fairchild, 6 F.3d
at 1126-27 (rejecting the proposition that “anyone who provides,
deals with, or invests in an entity in financial straits would be
doing so at his or her peril under § 548”). Each party can make a
claim for cure, but only to the extent it was harmed. On account
of the allegedly thoroughgoing fraudulent character of Recile’s
development project, Hays asks this court to reject JSM’s § 548(c)
defense. We decline to do so, however, because (1) call options do
indeed have value, (2) their values are to be determined at the
time of origination, and (3) a transferor’s practical inability to
exercise his option is irrelevant to its valuation under § 548(c).2
2
Hays also argues that these options — at least those of
a days or weeks term — had no value on account of their exceedingly
short duration. We find this argument without merit, both
theoretically and practically. Although an option of a day's
14
The crucial fact question for our analysis is thus
whether the bankruptcy court clearly erred in finding that JSM
“gave value” under § 548(c). After a careful review of the
evidence presented to the bankruptcy court, this court concludes
that it did not so err.
On the basis of testimony offered by JSM’s expert
witness, Dr. Rodolfo Aguilar, the bankruptcy court found that JSM
was “reasonabl[y] compensat[ed]” for the option it sold to Recile:
The transfers to JSM were made for good and valuable
consideration — in exchange for the transfers, the
debtors received the option to buy the property, a very
valuable asset. JSM owned valuable commercial property
and wished to sell it to the debtors. The debtors were
attempting to construct a shopping mall complex and
desired to purchase the property. The debtors paid JSM
reasonable compensation for the options and rights to
property which resulted in the property being “tied up”
for over two years.
Bankruptcy Court Opinion at 46-47; see also id. at 50 & 59.
Hays argues that the court erred in accepting conclusions
based upon a flawed methodology, to wit, taking the sales price as
recorded in the option contracts and the moneys received by JSM,
duration seems unusually short in light of the relatively greater
time required to execute a real estate sale, a short life does not
ipso facto negate the value of a financial instrument. More
convincing to this court is the practical context from which this
unusual practice emerged. The bankruptcy court found that daily
payments emerged not from JSMs desire to create day-to-day option
contracts but, rather, from Reciles lack of adequate financing.
Instead of turning away this prospective purchaser, JSMs indulged
Reciles request for daily payments. This court respectfully
rejects Hays insistence that no good deed go unpunished.
15
determining the rate of return, and comparing this rate with those
yielded by financial instruments of similar qualities. On the
basis of the contract price of $11,250,000 and totaled receipts of
$2,435,000, Dr. Aguilar concluded that JSM’s rate of return was
8.64%, a rate which, he testified, was below that which could have
been garnered by other similar investments. If anybody was
disadvantaged in its deal, it was JSM, not Recile.
If this were the sum total of Dr. Aguilar’s testimony,
this court would be inclined to agree with Hays, for, as he
correctly notes, the validity of Dr. Aguilar’s conclusion rests
upon the fairness of the underlying contract price. Absent a
finding of the fairness of its value, it is impossible to determine
the fairness of the option payments. The record demonstrates,
however, that the bankruptcy court fully understood the method-
ological problem that Hays presents and that it obtained
satisfactory evidence to assuage any concerns.
After hearing Dr. Aguilar’s opinion that the rate of
return was indeed inferior to similar investment vehicles, Judge
Brown pointedly articulated the missing element of Dr. Aguilar’s
calculation, and encouraged the attorneys to produce evidence
regarding the fairness of the contract price. Dr. Aguilar
thereupon testified that he believed that the contract prices set
forth in the purchase agreements were reasonable, and presented
extensive details upon which he based his conclusion, including,
16
but not limited to, JSM’s subsequent sale of an option to another
developer.
Hays produced no expert testimony, either to prove that
Recile “received less than a reasonably equivalent value” under §
548(a) or rebut JSM’s claim that it “gave value” under § 548(c).
Absent contrary evidence regarding the valuation of JSM’s
property, the bankruptcy court was justified in finding that JSM
did not part with a right worth less than what Recile had paid for
it.
II. JSM satisfied the “regular course of . . . business” defense
under LA. CIV. CODE art. 2040 (West 2001) to a revocatory
action under art. 2036.
In a manner similar, but not identical, to § 548 of the
federal Bankruptcy Code, the Louisiana Civil Code provides trustees
with a tool for avoiding fraudulent conveyances from debtors. To
avoid such a transfer, the trustee must demonstrate (1) that the
transfer was “made or effected after the right of the obligee
[trustee] arose” and (2) that the transfer “causes or increases the
obligor’s [debtor’s] insolvency.” LA. CIV. CODE art. 2036 (West
2001). The Code also provides trading partners with an absolute
defense: “An obligee [trustee] may not annul a contract made by the
obligor [debtor] in the regular course of his business.” Id., art.
2040 (West 2001).
The bankruptcy court concluded that Hays had satisfied
the second prong of art. 2036 but said nothing regarding the first.
17
It also concluded that JSM satisfied the “ordinary course of
business” defense under art. 2040 and, accordingly, rejected Hays’s
claim. The district court affirmed the bankruptcy court’s holding
regarding the second prong of art. 2036 and concluded, further,
that Hays had satisfied the first prong. Additionally, the
district court held, on the basis of its own findings regarding
Recile’s fraudulence and JSM’s bad faith, that it could not find
that “Recile and the debtors were acting in the ordinary course of
business.”
Because this court upholds the bankruptcy court’s finding
that Recile’s transfers to JSM were made “in the regular course of
his business,” we need not undertake an evaluation of Hays’s art.
2036 claim. Furthermore, because this court rejects the district
court’s de novo finding of bad faith on the part of JSM, the only
remaining question is whether Recile’s fraudulence vis-a-vis his
investors deprives JSM of his art. 2040 defense.
This court reads art. 2040 to encompass within the terms
“regular course of his business” Recile’s corporations’ payments to
JSM. The Louisiana Supreme Court has consistently let stand
transactions between debtors and their trading partners, provided
that the partners are not also creditors. In the most proximate
case — factually and chronologically — the Louisiana Supreme Court
held that “‘[a] sale made to one not a creditor must be considered
as one made in the ordinary course of business, if made for an
18
adequate consideration in cash.’” Hirsch v. Fudickar, 9 So. 742,
744, 43 La. Ann. 886, 891, 1891 LEXIS 424, 6 (1891), reh’g denied
and holding clarified to encompass credit transactions, 9 So. 742,
744, 43 La. Ann. 886, 893, 1891 LEXIS 425, 4 (1891) (emphasis in
original) (quoting Pochelu v. Catonnet, 4 So. 74, 76, 40 La. Ann.
327, 330 (1888)). Because Recile formed this contract in the role
of real estate developer, because Recile received adequate
consideration for his payments, and, finally, because JSM was not
a creditor to any of Recile’s many corporations, this court
declines to find this transaction outside of the scope of art.
2040.
CONCLUSION
For the foregoing reasons, this court reverses the
district court’s 1999 reversal of the bankruptcy court’s 1995
judgment and orders the entry of judgment in favor of JSM.
Judgment REVERSED.
19