United States Court of Appeals Fifth Circuit F I L E D UNITED STATES COURT OF APPEALS June 23, 2003 FOR THE FIFTH CIRCUIT _______________________ Charles R. Fulbruge III Clerk No. 02-10940 _______________________
IN RE: ERSTMARK CAPITAL CORPORATION
Debtor,
------------------------------
WILLIAM H. RANDALL; T.A. TORO,
Appellants,
versus
ERSTMARK CAPITAL CORPORATION,
Appellee. ________________________________________________________________
Appeal from the United States District Court for the Northern District of Texas Civil Docket 3:01-CV-2524-M _________________________________________________________________
Before JONES and CLEMENT, Circuit Judges and FELDMAN, District Judge.*
PER CURIAM:**
This appeal arises out of an adversary proceeding brought
by Erstmark Capital Corporation (“Erstmark”) against William H.
Randall, Theodore A. Toro, Erstmark Merchant Bankers (“EMB”), and
* District Judge of the Eastern District of Louisiana, sitting by designation. ** 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 R. 47.5, the Court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR.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. Erstmark Mortgage Corporation (“Mortgage”). Erstmark brought
several claims against Randall and Toro, including claims for
avoidance of fraudulent transfers, avoidance of preferential
transfers, and breach of fiduciary duty. The bankruptcy court
entered judgment in favor of Erstmark on its claims. The court
awarded Erstmark $1,449,494,83 in damages (including $50,000 in
exemplary damages) against Randall. The court also awarded
Erstmark $242,000 in damages (including $50,000 in exemplary
damages) against Toro. On appeal, the district court affirmed.
Randall and Toro incorporated Erstmark. Toro was the
Chairman of the Board, Secretary, and Treasurer of Erstmark.
Randall was President, Chief Executive Officer, and a director of
Erstmark. The bankruptcy court found that Randall and Toro
transferred money from Erstmark to themselves or otherwise used
Erstmark funds to pay their personal obligations. The bankruptcy
court rejected Randall’s and Toro’s contention that these transfers
were repayments of loans made by Randall and Toro to Erstmark.
Specifically, the bankruptcy court found that in the four
years prior to the filing of the bankruptcy petition, Randall had
withdrawn $126,321.97 from Erstmark’s accounts via checks made
payable to cash and another $650,273.32 by counter withdrawals.
Also, the bankruptcy court identified $622,899.54 of Erstmark’s
funds that were used to pay Randall’s personal obligations. The
2 bankruptcy court also identified $192,000 paid by Erstmark to Toro
that was not supported by any business purpose.
“Bankruptcy court rulings and decisions are reviewed by
a court of appeals under the same standards employed by the
district court hearing the appeal from bankruptcy court;
conclusions of law are reviewed de novo, findings of fact are
reviewed for clear error, and mixed questions of fact and law are
reviewed de novo.” Century Indem. Co. v. NGC Settlement Trust (In
re National Gypsum Co.), 208 F.3d 498, 504 (5th Cir. 2000). Under
a clear error standard, this court will reverse “only if, on the
entire evidence, we are left with the definite and firm conviction
that a mistake has been made.” Walker v. Cadle Co. (In re Walker),
51 F.3d 562, 565 (5th Cir. 1995) (quoting Allison v. Roberts (In re
Allison), 960 F.2d 481, 483 (5th Cir.1992)). This court must give
"due regard . . . to the opportunity of the [bankruptcy] court to
judge the credibility of the witnesses." Hibernia Nat’l Bank v.
Perez (In re Perez), 954 F.2d 1026, 1027 (5th Cir. 1992) (quoting
Fed. R. Civ. P. 52(a)).
The bankruptcy court found that the transfers to Randall
and Toro were avoidable transfers under Tex. Bus. & Com. Code Ann.
§§ 24.005(a)(1), 24.006(a), 24.006(b), and 11 U.S.C. §§ 547-548.
Randall and Toro appeal the bankruptcy court’s findings and
conclusions as to each of these bases for recovery.
3 Randall and Toro challenge the bankruptcy court’s
conclusion that the conveyances to them were fraudulent under
section 24.006(a) which provides that
[a] transfer made . . . by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made . . . if the debtor made the transfer . . . without receiving a reasonably equivalent value in exchange for the transfer . . . and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer. . .
Tex. Bus. & Com. Code Ann. § 24.006(a) (Vernon 2002). Randall and
Toro argue that the bankruptcy court erred in finding that Erstmark
was insolvent at the time of the transfers and that Erstmark did
not receive reasonably equivalent value for the transfers.
Under the Texas Uniform Fraudulent Transfer Act “[a]
debtor is insolvent if the sum of the debtor's debts is greater
than all of the debtor's assets at a fair valuation.” Tex. Bus. &
Com. Code Ann. § 24.003(a) (Vernon 2002). The fair value is
determined by “estimating what the debtor’s assets would realize if
sold in a prudent manner in current market conditions.” Orix
Credit Alliance, Inc. v. Harvey (In re Lamar Haddox Contractor,
Inc.), 40 F.3d 118, 121 (5th Cir. 1994) (quoting Pembroke Dev.
Corp. v. Commonwealth Sav. & Loan Ass’n, 124 B.R. 398, 402 (Bankr.
S.D. Fla. 1991)). An asset’s fair value may not be equivalent to
its book value on an entity’s balance sheets. Id.; see also Lawson
v. Ford Motor Co. (In re Roblin Indus., Inc.), 78 F.3d 30, 36 (2d
4 Cir. 1996). Insolvency is a finding of fact reviewed for clear
error. Orix Credit Alliance, Inc., 40 F.3d at 120.
We hold that the bankruptcy court did not clearly err in
finding that Erstmark was insolvent at the time of the transfers.
Randall and Toro argue the bankruptcy court erred because the only
evidence proffered by Erstmark as to its insolvency was Erstmark’s
balance sheets contained in its federal tax returns filed from 1994
forward showing that its liabilities were greater than its assets.
While the balance sheets alone may not be sufficient evidence to
support an insolvency finding, they can provide, “in some
circumstances, competent evidence from which inferences about a
debtor’s insolvency may be drawn.” Lawson, 78 F.3d at 36.
In this case, the balance sheets indicate that Erstmark’s
liabilities consistently exceeded its assets. Additionally, Steve
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United States Court of Appeals Fifth Circuit F I L E D UNITED STATES COURT OF APPEALS June 23, 2003 FOR THE FIFTH CIRCUIT _______________________ Charles R. Fulbruge III Clerk No. 02-10940 _______________________
IN RE: ERSTMARK CAPITAL CORPORATION
Debtor,
------------------------------
WILLIAM H. RANDALL; T.A. TORO,
Appellants,
versus
ERSTMARK CAPITAL CORPORATION,
Appellee. ________________________________________________________________
Appeal from the United States District Court for the Northern District of Texas Civil Docket 3:01-CV-2524-M _________________________________________________________________
Before JONES and CLEMENT, Circuit Judges and FELDMAN, District Judge.*
PER CURIAM:**
This appeal arises out of an adversary proceeding brought
by Erstmark Capital Corporation (“Erstmark”) against William H.
Randall, Theodore A. Toro, Erstmark Merchant Bankers (“EMB”), and
* District Judge of the Eastern District of Louisiana, sitting by designation. ** 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. Erstmark Mortgage Corporation (“Mortgage”). Erstmark brought
several claims against Randall and Toro, including claims for
avoidance of fraudulent transfers, avoidance of preferential
transfers, and breach of fiduciary duty. The bankruptcy court
entered judgment in favor of Erstmark on its claims. The court
awarded Erstmark $1,449,494,83 in damages (including $50,000 in
exemplary damages) against Randall. The court also awarded
Erstmark $242,000 in damages (including $50,000 in exemplary
damages) against Toro. On appeal, the district court affirmed.
Randall and Toro incorporated Erstmark. Toro was the
Chairman of the Board, Secretary, and Treasurer of Erstmark.
Randall was President, Chief Executive Officer, and a director of
Erstmark. The bankruptcy court found that Randall and Toro
transferred money from Erstmark to themselves or otherwise used
Erstmark funds to pay their personal obligations. The bankruptcy
court rejected Randall’s and Toro’s contention that these transfers
were repayments of loans made by Randall and Toro to Erstmark.
Specifically, the bankruptcy court found that in the four
years prior to the filing of the bankruptcy petition, Randall had
withdrawn $126,321.97 from Erstmark’s accounts via checks made
payable to cash and another $650,273.32 by counter withdrawals.
Also, the bankruptcy court identified $622,899.54 of Erstmark’s
funds that were used to pay Randall’s personal obligations. The
2 bankruptcy court also identified $192,000 paid by Erstmark to Toro
that was not supported by any business purpose.
“Bankruptcy court rulings and decisions are reviewed by
a court of appeals under the same standards employed by the
district court hearing the appeal from bankruptcy court;
conclusions of law are reviewed de novo, findings of fact are
reviewed for clear error, and mixed questions of fact and law are
reviewed de novo.” Century Indem. Co. v. NGC Settlement Trust (In
re National Gypsum Co.), 208 F.3d 498, 504 (5th Cir. 2000). Under
a clear error standard, this court will reverse “only if, on the
entire evidence, we are left with the definite and firm conviction
that a mistake has been made.” Walker v. Cadle Co. (In re Walker),
51 F.3d 562, 565 (5th Cir. 1995) (quoting Allison v. Roberts (In re
Allison), 960 F.2d 481, 483 (5th Cir.1992)). This court must give
"due regard . . . to the opportunity of the [bankruptcy] court to
judge the credibility of the witnesses." Hibernia Nat’l Bank v.
Perez (In re Perez), 954 F.2d 1026, 1027 (5th Cir. 1992) (quoting
Fed. R. Civ. P. 52(a)).
The bankruptcy court found that the transfers to Randall
and Toro were avoidable transfers under Tex. Bus. & Com. Code Ann.
§§ 24.005(a)(1), 24.006(a), 24.006(b), and 11 U.S.C. §§ 547-548.
Randall and Toro appeal the bankruptcy court’s findings and
conclusions as to each of these bases for recovery.
3 Randall and Toro challenge the bankruptcy court’s
conclusion that the conveyances to them were fraudulent under
section 24.006(a) which provides that
[a] transfer made . . . by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made . . . if the debtor made the transfer . . . without receiving a reasonably equivalent value in exchange for the transfer . . . and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer. . .
Tex. Bus. & Com. Code Ann. § 24.006(a) (Vernon 2002). Randall and
Toro argue that the bankruptcy court erred in finding that Erstmark
was insolvent at the time of the transfers and that Erstmark did
not receive reasonably equivalent value for the transfers.
Under the Texas Uniform Fraudulent Transfer Act “[a]
debtor is insolvent if the sum of the debtor's debts is greater
than all of the debtor's assets at a fair valuation.” Tex. Bus. &
Com. Code Ann. § 24.003(a) (Vernon 2002). The fair value is
determined by “estimating what the debtor’s assets would realize if
sold in a prudent manner in current market conditions.” Orix
Credit Alliance, Inc. v. Harvey (In re Lamar Haddox Contractor,
Inc.), 40 F.3d 118, 121 (5th Cir. 1994) (quoting Pembroke Dev.
Corp. v. Commonwealth Sav. & Loan Ass’n, 124 B.R. 398, 402 (Bankr.
S.D. Fla. 1991)). An asset’s fair value may not be equivalent to
its book value on an entity’s balance sheets. Id.; see also Lawson
v. Ford Motor Co. (In re Roblin Indus., Inc.), 78 F.3d 30, 36 (2d
4 Cir. 1996). Insolvency is a finding of fact reviewed for clear
error. Orix Credit Alliance, Inc., 40 F.3d at 120.
We hold that the bankruptcy court did not clearly err in
finding that Erstmark was insolvent at the time of the transfers.
Randall and Toro argue the bankruptcy court erred because the only
evidence proffered by Erstmark as to its insolvency was Erstmark’s
balance sheets contained in its federal tax returns filed from 1994
forward showing that its liabilities were greater than its assets.
While the balance sheets alone may not be sufficient evidence to
support an insolvency finding, they can provide, “in some
circumstances, competent evidence from which inferences about a
debtor’s insolvency may be drawn.” Lawson, 78 F.3d at 36.
In this case, the balance sheets indicate that Erstmark’s
liabilities consistently exceeded its assets. Additionally, Steve
Gummer, Erstmark’s Chief Financial Officer, testified that Erstmark
had been insolvent from 1993 forward. Gummer also testified that
starting in 1993 Erstmark’s expenses exceeded its revenue and
prevented Erstmark from purchasing new notes which it could then
resell. Thus, Erstmark’s financial situation became more and more
precarious. Erstmark also notes that when it filed its Amended
Summary of Schedules with the bankruptcy court, it listed
liabilities of $8.2 million and assets of $1.8 million on the
petition date. Id. at 24-25. The schedules require that assets be
listed at market value, not book value. Sleepy Valley, Inc., 93
5 B.R. at 928 n.5. Based on this evidence, we cannot say that the
bankruptcy court clearly erred in finding that Erstmark was
insolvent at the time of the transfers.
Randall and Toro also argue that the bankruptcy court
erred in refusing to find that the payments made by Erstmark were
repayments of loans they made, and the loans constituted reasonably
equivalent value for the transfers. Specifically, Randall and Toro
argue that they in fact loaned $3.3 million to Erstmark over the
years. A finding regarding reasonably equivalent value is reviewed
for clear error. Texas Truck Ins. Agency v. Cure (In re Dunham),
110 F.3d 286, 289 (5th Cir. 1997).
The bankruptcy court did not clearly err on this point.
First, there is no documentation to support the existence of loans
by Randall and Toro to Erstmark. The written promissory notes to
which appellants point were executed about 1990 with a three-year
maturity date. At trial, Gummer testified that the transfers to
Randall and Toro were booked in Erstmark’s records to accounts for
loans made by Randall and Toro. Gummer testified, however, that
while Randall and Toro did provide some funds to Erstmark, the
transfers from Erstmark to them exceeded any amounts they put into
Erstmark. Finally, Erstmark’s tax returns for 1992-1994 and 1996
indicate there were no outstanding loans from Randall and Toro to
Erstmark. The bankruptcy court was entitled to credit this
evidence over that furnished by appellants.
6 Since the bankruptcy court did not clearly err in its
factual findings, its judgment in favor of Erstmark comports with
section 24.006(a). Thus, we need not address appellants’ arguments
regarding the alternative bases upon which the bankruptcy court
entered judgment except for Erstmark’s breach of fiduciary duty
claim, which is the sole basis to support the award of exemplary
damages in favor of Erstmark.
Randall and Toro argue that the judgment cannot be
sustained based upon Erstmark’s breach of fiduciary duty theory.
They make two arguments. First, they argue that the transfers of
money to them from Erstmark were repayment for loans they had
previously made to Erstmark. This argument fails for the reasons
already noted.
Randall and Toro also argue that many of the challenged
transfers occurred outside the then-applicable two-year statute of
limitations for breach of fiduciary duty. See Kansas Reinsurance
Co. v. Congressional Mortgage Corp., 20 F.3d 1362, 1374 (5th Cir.
1994) (Texas statute of limitations for breach of fiduciary duty is
two years). This argument is incorrect. In 1999, Texas enacted a
statute stating that the statute of limitations for breach of
fiduciary duty is four years. Tex. Civ. Prac. & Rem. Code
§ 16.004(a)(5) (Vernon 2002). Under Texas law section 16.004(a)(5)
is retroactive. Rice v. Louis A. Williams & Assocs., 86 S.W.3d
329, 335-36 (Tex. App. – Texarkana 2002, pet. denied). Therefore,
7 the statute of limitations did not bar recovery for breach of
fiduciary duty based upon the transfers, and it did not err in
awarding exemplary damages.
For the foregoing reasons, we affirm the judgment in
favor of Erstmark.
AFFIRMED.