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In re Keeley & Grabanski Land Partnership

United States Court of Appeals, Eighth Circuit

August 10, 2016

In re: Keeley and Grabanski Land Partnership Debtor
v.
Louie Slominski Appellant Kip M. Kaler, in his capacity as Chapter 11 Bankruptcy Trustee of the Debtor Keeley and Grabanski Land Partnership Appellee In re: Keeley and Grabanski Land Partnership Debtor Kip M. Kaler, in his capacity as Chapter 11 Bankruptcy Trustee of the Debtor Keeley and Grabanski Land Partnership Appellant
v.
Louie Slominski Appellee

          Submitted: February 11, 2016.

         Appeal from the United States Bankruptcy Appellate Panel for the Eighth Circuit

          Before SMITH and COLLOTON, Circuit Judges, and GRITZNER, [1] District Judge.

          SMITH, Circuit Judge.

         Kip Kaler, as trustee of the debtor's bankruptcy estate, brought suit against Louie Slominski to avoid a land lease that Slominski and the debtor had entered. The bankruptcy court avoided and terminated the lease, ordered Slominski to pay rent for the period that he occupied the land, awarded Slominski an offset based on improvements that he made to the land, and denied the trustee's motion for a new trial based on newly discovered evidence. Both parties appealed the bankruptcy court's judgment to the Bankruptcy Appellate Panel (BAP). The BAP held that the bankruptcy court incorrectly calculated the setoff but affirmed its judgment in all other respects. Slominski appeals the judgment of the BAP, arguing that the estate received an impermissible double recovery under 11 U.S.C. § 550. The trustee cross-appeals, arguing that the bankruptcy court erred when it denied its motion for a new trial based on newly discovered evidence. We affirm.

         I. Background

         Before entering Chapter 11 bankruptcy, Keeley and Grabanski Land Partnership ("debtor") entered into a lease with Slominski. The three-year lease granted Slominski use of 3, 600 acres of Texas farm land. After the bankruptcy court granted the order for bankruptcy relief on January 7, 2011, Kip Kaler was appointed as the Chapter 11 trustee on April 5, 2011.

         According to Slominski and the debtor, the debtor orally leased the land to Slominski in November 2010, and later reduced it to writing on December 1, 2010. But the trustee argues that the lease was executed no earlier than April 2011, and backdated to reflect the December 1, 2010 prepetition date.

         Under the written lease, the debtor leased the land to Slominski from December 1, 2010, until November 1, 2013. In exchange, the lease required Slominski to annually pay the debtor 20 percent of the gross proceeds derived from the land or $300, 000, whichever was greater. Lease payments were due in arrears on November 1 of each year. In 2011, Slominski farmed the land and deposited $314, 464.55 as rent into his attorney's trust account on November 10, 2011. While under the lease, Slominski also paid $14, 879.95 in property taxes. Slominski planted a wheat crop for a 2012 harvest while under the lease. Before the crop was harvested, however, the bankruptcy court terminated the lease, and the bankruptcy estate harvested the crop. Slominski expended $563, 968 in seed and planting costs for that year. After the estate harvested the 2012 wheat crop, the estate netted $442, 218.09.

         On August 26, 2011, the trustee sued Slominski to avoid the lease. The trustee planned to sell the land for the benefit of the estate but believed that the Slominski lease hampered sales efforts. The trustee therefore sought to invalidate the lease and remove its encumbrance on the land. The trustee claimed that the lease could be avoided because it was entered postpetition without authorization under 11 U.S.C. § 549 or, alternatively, it was a fraudulent transfer under 11 U.S.C. § 548(a)(1) because the rent under the lease was less than fair market value (FMV). While that proceeding was pending, the case was converted to Chapter 7 on October 11, 2011. Kaler continued as trustee in the Chapter 7 case.

         In the bankruptcy proceedings, the bankruptcy court found that the lease was executed prepetition, but it also determined that the rent due under the lease was below FMV, which it found to be $490, 000 per year. As such, the bankruptcy court avoided and terminated the lease as a fraudulent transfer under § 548(a)(1). The bankruptcy court calculated the FMV rent for 2011 and the portion of 2012 that Slominski occupied the land to be $745, 200.[2] After crediting Slominski $314, 000 that he paid the trustee against the 2011 rent, the bankruptcy court concluded that Slominski owed the trustee $431, 200.

         In response, Slominski claimed good-faith-purchaser (GFP) status under § 550(e). He asserted entitlement to the value of improvements that he made to the land. Specifically, Slominski sought an offset against the $431, 200 based on the $563, 968 that he expended in seed and planting costs and the $14, 879.95 that he paid in property taxes. Although the bankruptcy court found that Slominski had failed to prove the value of his improvements under § 550(e)(1)(B), it permitted Slominski to recover his seed and planting costs and the amount that he paid in property taxes, totaling $578, 577.95, under § 550(e)(1)(A). The bankruptcy court applied the offset and ordered the estate to pay Slominski $147, 377.95.[3]

         After the bankruptcy court entered judgment, both parties moved the court to amend its judgment by recalculating the offset to Slominski under § 550. The trustee also moved for a new trial or relief under Federal Rule of Civil Procedure 60(b)(2). The trustee argued that newly discovered evidence demonstrated that the lease had been backdated and thus undermined Slominski's GFP status. The bankruptcy court denied all of the postjudgment motions, and both parties appealed to the BAP.

         On appeal, Slominski argued for the first time that the estate received a double recovery when the bankruptcy court both awarded the estate FMV rent and avoided the lease. According to Slominski, § 550 permitted the estate to recover the fraudulently transferred leasehold or the value of the leasehold, but not both. The BAP noted that "[a]rguably, Slominski failed to raise this double-recovery argument before the Bankruptcy Court." Nevertheless, it considered and rejected it. The BAP corrected the bankruptcy court's calculation of the setoff under § 550(3) ...


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