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).
14