Nordberg v. Cntntl IL Natl Bnk

• Court: Court of Appeals for the Fifth Circuit
• Decided: October 29, 2002
• Docket: 02-10322
• Status: Unpublished

Opinion

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

____________________

No. 02-10322

Summary Calendar ____________________

In The Matter Of: TOPCOR INC.

Debtor

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

PAUL C NORDBERG, Trustee of the Estate of Topcor Inc

Appellant

v.

CONTINENTAL ILLINOIS NATIONAL BANK & TRUST COMPANY OF CHICAGO

Appellee

_________________________________________________________________

Appeal from the United States District Court for the Northern District of Texas No. Civ.A. 3:01-CV-510-M _________________________________________________________________ October 28, 2002 Before KING, Chief Judge, and SMITH and DENNIS, Circuit Judges.

PER CURIAM:*

This case is an appeal from the district court’s Memorandum

Order and Opinion affirming both the Order Denying Plaintiff’s

* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4. Motion to Amend Complaint and the Final Judgment entered by the

bankruptcy court on November 8, 2000. For the reasons stated

below, we affirm the district court’s Memorandum Opinion and

Order.

I. FACTUAL AND PROCEDURAL BACKGROUND

Before setting out the facts, the complicated nature of the

dealings in this case suggests a roadmap of the involved parties

would be in order. At the time of the loans in question, Clint

Murchison owned several companies, in whole or in part,

including: Topcor, Inc. (“Topcor”), Topcor Financial

(“Financial”), Calfeed, Inc., (“Calfeed”), and NOE Corporation

(“NOE”). Topcor was the sole shareholder of Financial; it also

owned 90% of NOE and, through Corland (an additional subsidiary),

80% of Calfeed. NOE, in turn, owned 90% of New Orleans East,

Inc., a real estate holding company whose principal asset was a

large tract of undeveloped land within the City of New Orleans

(the “NOE Parcel”).

In 1981, Continental Bank, N.A., of Chicago (“Continental”)2

agreed to lend Financial $50 million, an obligation that Topcor

and Murchison both partially guaranteed. By 1983 Murchison was

having financial difficulties; on June 15, Murchison agreed to

have Topcor pledge 468 shares of NOE (out of a total of 900

shares of NOE’s common stock outstanding) to Continental to

2 The Appellee in this case, Bank of America, N.A., is the successor-in-interest to Continental.

2 secure payments of $4 million in interest on various loans,

including the 1981 loan from Continental to Financial and a

separate $7.5 million note owed by Calfeed to Continental.

Unlike the Financial loan, Topcor was not a guarantor on the

Calfeed note.

On October 4, 1983, Topcor borrowed $10 million from Arab

Banking Corporation (“ABC”); the loan agreement specifically

stated that up to $6.5 million of the loan could be used to meet

the “working capital” requirements of other Murchison-controlled

entities. As collateral, Topcor gave ABC 900 shares of NOE,

including the 468 shares it had already given to Continental as

collateral on the interest payments. Continental released the

NOE shares to Topcor on the same date that ABC transferred the

loan proceeds to Topcor; an officer for Continental personally

delivered the certificates evidencing the shares to an officer

for ABC in New York. When Topcor received the proceeds, it sent

$4 million to Continental to satisfy its debt. Continental

applied $1,093,037.66 to pay past due interest owed on the

Calfeed note; it applied the balance of the $4 million to

interest (both overdue and prepaid) on the Financial loan.

On February 26, 1986, Topcor filed a Chapter 11 petition for

bankruptcy. No portion of the $10 million loan from ABC had been

repaid. On March 27, 1990, Topcor’s trustee3 in bankruptcy

3 In 1990, Topcor’s trustee in bankruptcy was A.M. Mancuso. Nordberg was appointed successor trustee on December 7,

3 initiated a proceeding against Continental alleging that the

$1,093,037.66 transferred to Continental was a fraudulent

transfer under state law.4 As such, the trustee sought to avoid

the transfer under 11 U.S.C. § 544(b).5

The state law at issue is § 24.005(a) of the Texas version

of the Uniform Fraudulent Transfer Act. Section 24.005(a)

provides:

(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or within a reasonable time after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation: (1) with actual intent to hinder, delay, or defraud any creditor of the debtor; or (2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor: (A) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relations to the business or transaction; or (B) intended to incur, or believed or reasonably should have believed that the debtor would

1998. 4 The trustee did not make any § 544(b) claim as to the remaining $2,906,962.34 transferred to Continental. As Topcor had guaranteed Financial’s debt to Continental, Topcor received adequate consideration in the form of decreased liability as guarantor. 5 Section 544(b) states in relevant part that “the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable” under applicable state law. 11 U.S.C. § 544(b) (2000).

4 incur, debts beyond the debtor’s ability to pay as they became due.

TEX. BUS. & COM. CODE ANN. § 24.005(a) (Vernon 2002).6

Section 24.005(a) provides two theories for a debtor seeking

to avoid a transfer: actual fraud (subsection 1) or constructive

fraud (subsection 2). While the original complaint alleged both

actual and constructive fraud as potential causes of action, in

the Pre-Trial Order Nordberg made only a constructive fraud claim

based on a lack of reasonably equivalent value. However, on May

12, 2000 - shortly before the trial - Nordberg filed a Motion for

Leave to Filed Amended Pretrial Brief and Amended Proposed

Findings of Fact and Conclusions of Law in order to reinstate his

actual fraud claim. The bankruptcy court denied the motion. On

July 28, 2000, Nordberg (having preserved the issue during the

four-day trial) filed a Motion to Amend Complaint to Conform to

the Evidence Admitted at Trial, once again seeking to reinstate

his actual fraud claim. The bankruptcy court denied that Motion

as well and, on November 2, 2000, the court found that Nordberg

had failed to prove a fraudulent transfer had occurred.

Nordberg appealed to the District Court for the Northern

District of Texas. In his appeal, Nordberg raised three issues:

(1) whether the bankruptcy court erred in holding that Nordberg

failed to prove that ABC received less than reasonably equivalent

6 While the trustee who filed the complaint was not the original debtor in the case, the trustee was, in effect, stepping into ABC’s shoes by seeking to avoid the transfer to Continental.

5 value; (2) whether the bankruptcy court erred in finding that, in

effect, ABC had consented to the transfer of funds by Topcor to

Continental; and (3) whether the bankruptcy court had erred in

refusing to grant either of the trustee’s motions to reinstate

the actual fraud claim against Continental.7 The district court

found for Continental on each of Nordberg’s three issues.8 In re

Topcor, Inc., No. Civ.A 3:01-CV-510-M, 2002 WL 226346 (N.D. Tex.

Feb. 13, 2002). Nordberg timely appealed to this court,

asserting the same three issues. Continental also reasserts its

limitations cross-appeal.

II. ANALYSIS

A. Constructive Fraud

The bankruptcy court found that Nordberg failed to prove

constructive fraud under § 24.005(a)(2). Findings of fact by the

bankruptcy court will not be overturned unless they are clearly

erroneous. In re Jack/Wade Drilling, Inc., 258 F.3d 385, 387

(5th Cir. 2001).9 The bankruptcy court’s finding that there was

7 Continental also cross-appealed, arguing that Nordberg’s claims should be barred by the limitations period set forth in 11 U.S.C. § 546(a). 8 As a result, Judge Lynn did not reach Continental’s § 546(a) cross-appeal. 9 Nordberg argues that a de novo standard, rather than the clearly erroneous standard, is appropriate because, in its findings of fact, the Bankruptcy court stated that Nordberg had presented “no evidence” as to the value of the NOE stock at the time of the transfer. This court disagrees; regardless of what the Bankruptcy court stated, the totality of its Memorandum Opinion and Order demonstrates that it reached its conclusion

6 no fraudulent transfer was based on its conclusion that Nordberg

failed to prove that the value of the NOE stock was not

“reasonably equivalent” to the $1,093,037.66 that Continental

received in exchange for the stock.

Section 24.005(a)(2) permits a creditor to avoid a transfer

where it appears that the debtor “made the transfer or incurred

the obligation without receiving a reasonably equivalent value in

exchange for the transfer or obligation.” TEX. BUS. & COM. CODE

ANN. § 24.005(a)(2) (Vernon 2002). A transfer has been made for

a reasonably equivalent value so long as the value is “within the

range of values for which the transferor would have sold the

assets in an arm’s length transaction.” TEX. BUS. & COM. CODE ANN.

§ 24.004(d) (Vernon 2002). The determination of what constitutes

a “reasonably equivalent value” must be made as of the time of

the transfer, without the benefit of hindsight as to what

actually transpired after the transfer that might have affected

the value. In re Fairchild Aircraft Corp., 6 F.3d 1119, 1125-26

(5th Cir. 1993).

At the time of the transfer, NOE’s main asset was the nearly

30,000 acre tract of land comprising the NOE Parcel. At trial,

Nordberg argued that the NOE Parcel was worthless because certain

regulatory decisions concerning flood insurance and drainage for

the parcel had left it largely as unusable wetlands. As a

based upon a careful weighing of the evidence presented. The clearly erroneous standard of review therefore applies.

7 result, the stock ABC received in exchange for the loan - which

represented about 90% of the ownership of NOE - was worthless.

Nordberg presented as a witness Ronda Collum, a CPA, who

confirmed that the value of the stock as of October 4, 1983 (the

date of the transfer) must have been zero. Her reasoning for

this finding was that Topcor itself valued the stock at zero in a

February 1984 financial statement; because nothing had happened

to the land or to NOE between October 4, 1983 and February 1984

that would have affected its value, she concluded that the value

of the stock on October 4, 1983 must have been zero.

Continental countered this argument by presenting three

separate appraisals of the NOE Parcel, each done close in time to

October 4, 1983. Two of these appraisals had been conducted at

the behest of ABC when it was deciding whether or not to take the

NOE stock as collateral for its loan to Topcor. Each of the

three appraisals put the approximate value of the NOE Parcel at

more than $100 million (though the appraisals do assume that the

flood insurance and drainage permits, which were ultimately

denied, would be approved).

The bankruptcy court, while noting that the parties had

presented conflicting evidence on the value of the NOE stock at

the time of the transfer, ultimately found for Continental.

Nordberg, as plaintiff, had the burden of proof on this issue.

While Nordberg does present some evidence that the NOE stock was

of little value at the time of the transfer, he does little to

8 explain away the three appraisals which tend to show otherwise.

The argument that the appraisals are invalid because they assume

the drainage and flood insurance permits will be granted is

insufficient; at the time the transfer was made, there was no

evidence that the permits would not (as expected) be granted.

In fact, the two appraisers hired specifically by ABC to

value the land in connection with the Topcor loan placed the

value of the NOE Parcel at approximately $100 million; if it had

been expected at that time that the necessary permits would not

be forthcoming, the appraised value of the NOE Parcel would have

been far less. Because the three appraisals presented at trial

tend to show that, as of October 4, 1983, the value of the NOE

stock was approximately $100 million, the bankruptcy court found

that Nordberg failed to meet his burden of proving that

reasonably equivalent value did not pass in exchange for the NOE

stock. That decision was not clearly erroneous.

B. Consent to the Transfer

Nordberg also argues that the bankruptcy court erred in

finding that the transfer was not fraudulent because ABC

consented to the use of the money to pay interest owed to

Continental. This is also a question we review under a clearly

erroneous standard.

We agree with the reasoning employed by the district court

in disposing of this issue on appeal. The bankruptcy court, in

ruling in favor of Continental, rested its judgment on two

9 separate and distinct bases: Nordberg failed to prove

constructive fraud, and ABC consented to the use of the money by

expressly stating in the loan agreement that up to $6.5 million

of the loan could be used as “working capital” for any of the

Murchison-owned enterprises. Because either ground would be

sufficient to uphold the final judgment in favor of Continental,

a holding that the bankruptcy court was clearly erroneous in

finding that ABC consented to transfer of funds to Continental

would be no more than a harmless error.

Nevertheless, we agree that, on the record, it was not

clearly erroneous for the bankruptcy court to find that ABC

consented to use of the funds to satisfy interest payments owed

to Continental on the Financial loan. At trial, Continental

presented testimony that one valid use of working capital is the

payment of past-due interest (so long as the interest is not more

than one year overdue). Nordberg countered that definition of

“working capital” with one of his own, but the bankruptcy court

found that the weight of the evidence supported a finding that

ABC consented to the transfer when it permitted Topcor to use the

10 funds as “working capital.”10 The bankruptcy court’s ruling was

not clearly erroneous.

C. Motions to Amend

Nordberg’s final argument is that the bankruptcy court erred

in refusing to permit him to amend the pre-trial order to include

both the actual fraud claim and an additional claim that the

balance of the $4 million loan should also be treated as a

fraudulent transfer.11 This court reviews denials of such

motions under an abuse of discretion standard. In re Matter of

Southmark Corp., 88 F.3d 311, 314 (5th Cir. 1996).

The trial court has “broad discretion” in deciding whether

to permit a party to amend the pre-trial order. Thomas v. Tex.

Dept. of Criminal Justice, 220 F.3d 389, 394 (5th Cir. 2000).

“The order following a final pretrial conference shall be

10 Judge Abramson discounted much of Nordberg’s testimony for two grounds: (1) Nordberg called himself as a fact witness even though he had not personally taken part in any of the transactions at issue; and (2) Nordberg stood to receive 50% of any damage award as a contingency fee. The contingency in particular, while not improper as Nordberg was both the trustee in bankruptcy (who deserves some compensation for his services) and a fact witness rather than an expert witness, does tend to color Nordberg’s testimony with questions of bias. Even if he were an objectively neutral witness, though, the contents of the trial record would not be sufficient to warrant reversal of the bankruptcy court under a clearly erroneous standard of review. 11 Unlike the claim for actual fraud, the claim that the approximately $2.9 million that went to the Financial loan was a fraudulent transfer was not a part of the original complaint.

11 modified only to prevent manifest injustice.” FED. R. CIV. P.

16(e). Factors to be weighed when deciding whether to permit

amendment of a pre-trial order include: “(1) the prejudice or

surprise in fact to the opposing party; (2) the ability of the

party to cure the prejudice; (3) the extent of disruption of the

orderly and efficient trial of the case; and (4) the bad faith or

willfulness of the non-compliant party.” Rapco, Inc. v. C.I.R.,

85 F.3d 950, 953 (2d Cir. 1996) (citation omitted).

Nordberg’s first argument - that the Pre-Trial Order in this

case was invalid because it was not docketed until after the

beginning of the trial - is without merit. Nordberg’s counsel

signed the order (as did counsel for Continental); the bankruptcy

judge also signed it before the trial began on May 23, 2000.

This court agrees with the District court, which said that

Nordberg’s “attempt to invalidate what he himself took part in

creating is not only illogical, but duplicitous.” In re Topcor,

Inc., at *5.

While the original complaint in this case included an actual

fraud claim, Nordberg omitted that claim from the final Pre-Trial

Order. The bankruptcy court found that this omission constituted

a waiver of the actual fraud claim, a decision that this court

does not find to be an abuse of discretion. In addition,

permitting Nordberg to amend the pre-trial order to include a new

(though related) cause of action less than ten days before the

12 trial was to begin would have unduly prejudiced Continental.

Similarly, the bankruptcy court did not abuse its discretion by

denying Nordberg’s Motion to Amend Complaint to Conform to the

Evidence Submitted at Trial. Permitting amendment after trial

would have been even more prejudicial than permitting amendment

before trial, since Continental would then have lost its

opportunity to rebut the actual fraud argument at trial.

Even more prejudicial would be leave to amend the Pre-Trial

Order to include a claim against the $2.9 million that went

toward interest on the Financial loan. This claim, unlike the

actual fraud claim, was not even a part of the original

complaint. If Continental would be prejudiced by permitting

Nordberg to add a claim about which he had at least provided some

prior notice, the prejudice would be much more severe where no

notice at all had been previously served on Continental.

Therefore, the bankruptcy court did not abuse its discretion in

denying Nordberg’s motions.

III. CONCLUSION

For the foregoing reasons, we AFFIRM the district court’s

Memorandum Order and Opinion.