Ingalls v. Erlewine (In Re Erlewine)

United States Court of Appeals
Fifth Circuit
F I L E D
October 23, 2003
IN THE UNITED STATES COURT OF APPEALS
Charles R. Fulbruge III
FOR THE FIFTH CIRCUIT Clerk

_____________________

No. 02-51324
_____________________

In The Matter Of: MARGARET ANNE ERLEWINE

Debtor

-----------------

RONALD E INGALLS, Trustee

Appellant

v.

MARK ERLEWINE

Appellee

_________________________________________________________________

Appeal from the United States District Court
for the Western District of Texas
_________________________________________________________________

Before KING, Chief Judge, and HIGGINBOTHAM and BARKSDALE, Circuit
Judges.

KING, Chief Judge:

A trustee in bankruptcy brought an adversary action under 11

U.S.C. § 548 to recover assets from the bankrupt debtor’s former

husband, to whom the debtor had transferred property pursuant to

a divorce decree. The bankruptcy court granted summary judgment

in the former husband’s favor, the district court affirmed, and
the trustee now appeals to this court. For the following

reasons, we AFFIRM.

I. FACTUAL AND PROCEDURAL BACKGROUND

This case arises out of the bankruptcy of Margaret Anne

Erlewine (“the Debtor”). The Debtor married Mark Erlewine

(“Erlewine”) in 1986, and in the course of the marriage the

couple acquired certain commercial real property. In November

1998, Erlewine filed a petition for divorce in Texas state court.

The proceeding was contested, and the court held several days of

trial. On June 4, 1999, the divorce court entered a final decree

of divorce, which granted Erlewine custody of the couple’s minor

child as well as ownership of more than fifty percent of the

couple’s community assets. The court justified the

disproportionate division of property on several grounds, most

prominently that: (1) the Debtor caused a significant amount of

community funds to be spent on drug treatment, (2) the Debtor

used community funds to purchase large and unnecessary quantities

of prescription drugs, and (3) the Debtor’s unreasonable position

in the divorce litigation caused Erlewine to incur unusually high

attorneys’ fees. The court awarded the couple’s commercial real

property to Erlewine, and in this action he claims that it is his

business homestead and is necessary for the support of the minor

child.

2
 Less than a year after the divorce decree, the Debtor filed

for Chapter 7 bankruptcy. The trustee of her bankruptcy estate

(“the Trustee”) then filed an adversary proceeding against

Erlewine to recover community property transferred to Erlewine

under the divorce decree. The Trustee sought to avoid the

transfer under § 548 of the Bankruptcy Code, which provides, in

relevant part:

(a)(1) The trustee may avoid any transfer of an interest
of the debtor in property, or any obligation incurred by
the debtor, that was made or incurred on or within one
year before the date of the filing of the petition, if
the debtor voluntarily or involuntarily--
. . .
(B)(I) received less than a reasonably equivalent
value in exchange for such transfer . . . .

11 U.S.C. § 548 (2000).

The Trustee filed two motions for partial summary judgment

in the bankruptcy court. The first motion sought a ruling on

whether the divorce decree effected a “transfer” of an interest

in property within the meaning of § 548, and the second motion

asked for summary judgment on the question of whether the Debtor

received, in the statute’s language, “less than a reasonably

equivalent value in exchange for such transfer.” The bankruptcy

court granted the first motion but denied the second. The

Trustee then filed a motion to reconsider the denial of his

second motion for partial summary judgment, and Erlewine filed

his own motion for summary judgment on the issue of reasonably

equivalent value.

3
 After a consolidated hearing on both pending motions, the

bankruptcy court denied the Trustee’s motion to reconsider and

granted Erlewine’s motion for summary judgment on the issue of

reasonably equivalent value. The bankruptcy court ruled that the

Debtor received reasonably equivalent value as a matter of law,

despite the fact that the divorce court had divided the couple’s

property on a basis explicitly described as “disproportionate.”

In reaching its conclusion, the bankruptcy judge relied on our

decision in Besing v. Hawthorne (In re Besing), 981 F.2d 1488

(5th Cir. 1993), which he read broadly as prohibiting bankruptcy

courts from “looking behind” state adjudications in § 548

avoidance actions.

The Trustee appealed the bankruptcy court’s ruling on

Erlewine’s motion for summary judgment to the district court,

which affirmed without opinion. The Trustee now appeals to this

court.1

1
There is an extra procedural wrinkle in this case. The
parties treated the bankruptcy court’s grant of Erlewine’s motion
for summary judgment as an interlocutory order, which they then
appealed to the district court under an agreed motion. They
apparently believed that they could not appeal the district
court’s affirmance of the order, so the parties then returned to
the bankruptcy court to file an agreed motion for final judgment.
The bankruptcy court entered judgment, the district court
affirmed, and the case is now before this court. It is not clear
whether these extra maneuvers were necessary, as the grant of
Erlewine’s motion for summary judgment may have amounted to a
final determination of the parties’ rights. See County Mgmt.,
Inc. v. Kriegel (In re County Mgmt., Inc.), 788 F.2d 311, 313
(5th Cir. 1986). In any event, there is now a final judgment
before this court.

4
 II. STANDARD OF REVIEW

We review de novo the bankruptcy court’s grant of summary

judgment. See Williams v. Int’l Bhd. of Elec. Workers, Local 520

(In re Williams), 298 F.3d 458, 461 (5th Cir. 2002). Summary

judgment is proper when there is no genuine issue of material

fact and the moving party is entitled to judgment as a matter of

law. FED. R. CIV. P. 56(c); BANKR. R. 7056 (applying FED. R. CIV. P.

56 to adversary bankruptcy proceedings).

As to the particular issue of whether a debtor has received

reasonably equivalent value under § 548, we have recognized that

the question of reasonable equivalence is usually a question of

fact, or is at least fact-intensive. See Tex. Truck Ins. Agency

v. Cure (In re Dunham), 110 F.3d 286, 288-89 (5th Cir. 1997);

Besing, 981 F.2d at 1494-95. Certain transactions, however, can

give the debtor reasonably equivalent value as a matter of law.

See Besing, 981 F.2d at 1496. In the case before us, the

bankruptcy court found that the Debtor received reasonably

equivalent value as a matter of law. Like other legal

conclusions of the bankruptcy courts, this conclusion is reviewed

de novo. See Bradley v. Pac. Southwest Bank, FSB (In re

Bradley), 960 F.2d 502, 507 (5th Cir. 1992).

III. DISCUSSION

The bankruptcy court held that the state court’s division of

the Erlewines’ marital property could not be set aside under 11

5
U.S.C. § 548(a)(1)(B) as a transfer for less than reasonably

equivalent value. While this decision was based largely on an

interpretation of our decision in Besing, Erlewine also offers

two other grounds on which he might prevail: (1) the Trustee’s

action is barred by the Rooker-Feldman doctrine, and (2) res

judicata and collateral estoppel preclude the Trustee from

relitigating the property division.

A. Rooker-Feldman and Preclusion

Although we believe that the Trustee’s claim fails for other

reasons, we begin by briefly assessing Erlewine’s Rooker-Feldman

argument, since it implicates our jurisdiction. The doctrine,

named after two Supreme Court cases,2 holds that the inferior

federal courts lack jurisdiction to exercise appellate review

over state court decisions. See Reitnauer v. Tex. Exotic Feline

Found., Inc. (In re Reitnauer), 152 F.3d 341, 343 (5th Cir. 1998)

(describing the doctrine). Plainly, the Trustee’s avoidance

action does not seek appellate review of the state divorce

proceeding in a literal sense. Nonetheless, the doctrine is

potentially applicable whenever the state and federal proceedings

would be “inextricably intertwined.” See Davis v. Bayless, 70

F.3d 367, 375-76 (5th Cir. 1995).

While courts have often had difficulty deciding whether a

state adjudication and a later federal action are so intertwined

2
See D.C. Ct. App. v. Feldman, 460 U.S. 462 (1983);
Rooker v. Fidelity Trust Co., 263 U.S. 413 (1923).

6
that the latter would amount to a review of the former,3 the

answer in this case is relatively clear. Even if it could be

said that the Trustee’s avoidance action seeks “review” of the

state divorce decree–-which seems doubtful, given that the two

proceedings address rather different issues--our cases have

indicated that the Rooker-Feldman bar generally should not extend

to state decisions that would not be given preclusive effect

under doctrines of res judicata and collateral estoppel. See Am.

Airlines, Inc. v. Dep’t of Transp., 202 F.3d 788, 801 & n.9 (5th

Cir. 2000). In this particular case, as explained below, the

divorce decree is not entitled to preclusive effect because the

Trustee was not a party to the state court divorce proceedings,

nor was he in privity with any party. For the same reason, the

Rooker-Feldman doctrine is inapplicable. See Johnson v. De

Grandy, 512 U.S. 997, 1006 (1994) (refusing to apply the Rooker-

Feldman doctrine against a litigant who was not a party to the

prior state action).4

3
See, e.g., Ritter v. Ross, 992 F.2d 750, 754 (7th Cir.
1993) (noting that “[t]here is, unfortunately, no bright line
that separates a federal claim that is ‘inextricably intertwined’
with a state court judgment from a claim that is not so
intertwined”) (citation omitted).
4
Our analysis here should not be taken to imply that the
Rooker-Feldman doctrine is simply coextensive with traditional
preclusion doctrine. See generally 18B CHARLES ALAN WRIGHT, ARTHUR
R. MILLER & EDWARD H. COOPER, FEDERAL PRACTICE AND PROCEDURE § 4469.1 (2d
ed. 2002) (describing the subtle differences between the two
bodies of law). Rather, we conclude only that in this case both
doctrines are inapplicable for the same reason.

7
 The Trustee’s challenge to the divorce decree is not barred

by the traditional preclusion doctrines of res judicata or

collateral estoppel. The federal full faith and credit statute

requires us to give state court judgments the same preclusive

effect that they would enjoy in the courts of the rendering

state. See 28 U.S.C. § 1738 (2000); Marrese v. Am. Acad. of

Orthopaedic Surgeons, 470 U.S. 373, 380 (1985). Under Texas law,

the preclusion doctrines of res judicata and collateral estoppel

apply only against a litigant who was a party to, or who is in

privity with a party to, the original suit. See Amstadt v. U.S.

Brass Corp., 919 S.W.2d 644, 652 (Tex. 1996); Bonniwell v. Beech

Aircraft Corp., 663 S.W.2d 816, 819 (Tex. 1984).5 The Trustee

was not a party to the divorce action. Nor can the Trustee be

considered the Debtor’s privy, for two parties are said to be in

privity when they share an “identity of interests in the basic

legal right that is the subject of litigation.” Amstadt, 919

S.W.2d at 653. The interests of the Debtor in the divorce

proceeding and of the Trustee in the instant case are, however,

quite distinct. As we observed in Coleman v. Alcock, another

5
In the Texas courts, the doctrine of res judicata (also
known as claim preclusion) “bars litigation of all issues
connected with a cause of action or defense which, with the use
of diligence, might have been tried in the prior suit.”
Bonniwell, 663 S.W.2d at 818. Collateral estoppel (or issue
preclusion), in contrast, “bars relitigation of any ultimate
issue of fact actually litigated and essential to the judgment in
a prior suit, regardless of whether the second suit is based upon
the same cause of action.” Id.

8
case involving a bankruptcy trustee’s attempt to avoid a

transfer,

[W]e are of the view that the Trustee is not bound, either
on res judicata or judicial collateral estoppel, by the
prior state court proceedings. The Trustee is, of course, a
successor of the Bankrupt for many purposes. But he is much
more both in the extraordinary rights with which the
Bankruptcy Act invests him, and as a general representative
of the creditors.

272 F.2d 618, 621-22 (5th Cir. 1959) (emphasis added).6 As the

interests of the Debtor’s creditors were not represented in the

divorce action, preclusion doctrines do not bar the Trustee from

vindicating the creditors’ interests in this subsequent avoidance

action.

B. Reasonably Equivalent Value

While the Trustee’s claim is not barred as a matter of

jurisdiction or res judicata, it nonetheless fails on the merits.

In reaching this conclusion, we find significant guidance in this

court’s Besing decision. Although Besing noted that its result

was “consonant with” the duty to give full faith and credit to

state judgments, 981 F.2d at 1496, the decision in fact rested on

6
It should be noted that the prior state judgment in
Coleman came from the courts of Florida, not Texas. The
sentiment expressed in Coleman is nonetheless equally applicable
in this case. Other courts agree with Coleman that a bankruptcy
trustee is not in privity with the debtor for purposes of an
avoidance action. See Corzin v. Fordu (In re Fordu), 201 F.3d
693, 705-06 (6th Cir. 1999) (citing cases). We note as well that
there may be other reasons why preclusion doctrines are
inapplicable in this case, but we need not address those
additional factors in light of the absence of privity.

9
an interpretation of the phrase “reasonably equivalent value” in

§ 548. That is likewise the basis of today’s decision.

In Besing, the debtors sought to use § 548 to avoid a state

court’s adverse judgment in a contract and tort suit brought

against Hawthorne, the former fiancée and business partner of one

of the debtors. Id. at 1490. As a sanction for discovery abuse,

the state court had stricken the debtors’ pleadings, dismissed

their claims with prejudice, and entered a default judgment

against them on Hawthorne’s counterclaim. Id. The question

before us was whether the state court proceedings had effected a

transfer of the debtors’ interest in property for less than

reasonably equivalent value. Id. at 1491, 1494.

The Besing court first determined that the state proceedings

“transferr[ed]” the debtors’ interest in property, namely their

causes of action against Hawthorne. Id. at 1492-94.7 We then

held that the debtors had received reasonably equivalent value as

a matter of law. Id. at 1495-96. We noted that state law

regarded the dismissal as an adjudication on the merits, and so

7
While we recognize that referring to the court’s
judgment as effecting a “transfer” is perhaps counterintuitive,
the Bankruptcy Code expansively defines “transfer” as embracing
“every mode, direct or indirect, absolute or conditional,
voluntary or involuntary, of disposing of or parting with
property or with an interest in property, including retention of
title as a security interest and foreclosure of the debtor’s
equity of redemption.” 11 U.S.C. § 101(54) (2000). As Besing
pointed out, Congress intended the definition to be as broad as
possible. 981 F.2d at 1492. In this appeal, the parties agree
that the divorce decree effected a transfer.

10
the state courts had effectively appraised the debtors’ claims on

Hawthorne’s property as valueless. Id. at 1495-96. Therefore,

the debtors’ involuntary separation from their interest in those

claims could not have given the debtors less than reasonably

equivalent value. Id.

In the instant case, the Debtor entered the divorce

proceedings with a claim on the couple’s community property. The

parties to this case agree that the divorce court’s judgment

effected a “transfer” of that claim for purposes of § 548, so the

only question is whether the Debtor received less than reasonably

equivalent value when the divorce court took the Debtor’s claim

on the community property and exchanged it for a concrete share

of individual property. The judicial division of the couple’s

assets admittedly favored the Debtor’s ex-husband, but this was

because the state court made findings that the Debtor had

previously spent a disproportionate share of community assets and

had taken an unreasonable position in the divorce litigation. We

cannot agree with the Trustee that the Debtor necessarily

received less than reasonably equivalent value for her claims

solely by virtue of the fact that the Debtor received less than

half of the community property.

Citing Hinsley v. Boudloche (In re Hinsley), 201 F.3d 638

(5th Cir. 2000), the Trustee insists that the inquiry into

reasonable equivalence is purely an economic test, a narrower

metric than those used in the decisions of divorce courts.

11
Hinsley arose from a rather different situation, however, for

there a married couple agreed to a partition of their community

property in contemplation of divorce. Soon after, the husband

filed for bankruptcy, and the trustee of his bankruptcy estate

brought an adversary proceeding against the wife. In deciding

whether the spouses’ agreement constituted a fraudulent transfer,

we noted that “[i]ntangible, non-economic benefits, such as

preservation of marriage, do not constitute reasonably equivalent

value.” Id. at 643 (citing Dietz v. St. Edward’s Catholic Church

(In re Bargfrede), 117 F.3d 1078, 1080 (8th Cir. 1997) (per

curiam)). That is a sound principle, but it is meant to guard

against a type of mischief not present in this case. Here it is

not asserted that the Debtor volunteered to take fewer assets in

exchange for non-pecuniary benefits. The property division in

this case was above all an economic transaction, albeit an

involuntary one. The Trustee’s argument, if adopted, would

apparently subject every divorce decree to scrutiny in the

bankruptcy court, so long as the divorce court divided the

community property unequally.

Section 548’s reasonable equivalence test is naturally

somewhat more difficult to apply in the context of a judicial

“transfer” than it is with respect to more paradigmatic

transfers, such as voluntary sales. Our understanding of how the

text operates in this context draws modest support, however, from

the Supreme Court’s decision in BFP v. Resolution Trust Corp.,

12
511 U.S. 531 (1994), in which the Court held that the price

received at a mortgage foreclosure sale conclusively satisfies

the reasonable equivalence test as long as the sale was

noncollusive and conducted in conformity with state law. The

Court limited its holding to mortgage foreclosures, id. at 537

n.3, but the decision’s reasoning is helpful here. In explaining

the meaning of reasonable equivalence in the context of a

foreclosure sale, the Court remarked that “[f]ederal statutes

impinging upon important state interests ‘cannot . . . be

construed without regard to the implications of our dual system

of government.’” Id. at 544 (ellipsis in original) (quoting Felix

Frankfurter, Some Reflections on the Reading of Statutes, 47

COLUM. L. REV. 527, 539-40 (1947)). In interpreting § 548, the

Court therefore took account of the states’ interest in the

security of titles to real property, an interest that would be

threatened if every foreclosure could be undone in the federal

bankruptcy court. Some of the same concerns are present in this

case, and they suggest that we should hesitate before we impute

to Congress an intent to upset the finality of judgments in an

area as central to state law as divorce decrees.

We are not sure that Besing sweeps so broadly as always to

prevent a Trustee from challenging a divorce decree under

§ 548(a)(1)(B).8 But in this case the only thing that the

8
Bankruptcy courts have in some cases set aside property
settlements under § 548. See, e.g., Citibank, N.A. v. Williams

13
Trustee can say by way of challenge to the property settlement

provided by the divorce decree is that the state court divided

the community assets unevenly. Whatever concerns might arise in

other cases, the divorce before us–-which was fully litigated,

without any suggestion of collusion, sandbagging, or indeed any

irregularity–-should not be unwound by the federal courts merely

because of its unequal division of marital property.

Accordingly, we conclude that the bankruptcy court did not err in

finding that the Debtor received reasonably equivalent value as a

matter of law.9

IV. CONCLUSION

For the foregoing reasons, the district court’s judgment

affirming the bankruptcy court’s judgment is AFFIRMED.

(In re Williams), 159 B.R. 648 (Bankr. D.R.I. 1993); Germain v.
Kaczorowski (In re Kaczorowski), 87 B.R. 1 (Bankr. D. Conn.
1988).
9
Given our disposition of the case, we need not consider
Erlewine’s argument that the commercial real property he was
awarded in the divorce is an exempt business homestead not
susceptible to an avoidance action. See Tavenner v. Smoot, 257
F.3d 401, 406 (4th Cir. 2001) (noting a split of authority on the
issue).

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