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Korth v. Luther

Supreme Court of Nebraska

November 15, 2019

Gerald C. Korth, Appellee and cross-Appellant.
v.
Laura Luther and Michael Luther, Appellees and Cross-Appellees, Atelier Partners, intervenor-Appellee and Cross-Appellant, David G. Goukol, Appellant, and Kathryn J. Derr, Appellee and Cross-appellant Gerald C. Korth and Atelier Partners, Appellee and Cross-Appellants,
v.
Laura Luther and Michael Luther, Appellees and Cross-Appellees, David J. Koukol, Appellant, and Kathryn J. Derr, Appellee and Cross-Appellant

         1. Conveyances: Fraud: Equity: Appeal and Error. An action under the Uniform Fraudulent Transfer Act is equitable in nature, and an appeal of a district court's determination that transfers of assets were in violation of the act is equitable in nature.

         2. Equity: Appeal and Error. In an appeal of an equity action, an appellate court tries factual questions de novo on the record, reaching a conclusion independent of the findings of the trial court, provided, however, that where credible evidence is in conflict on a material issue of fact, the appellate court considers and may give weight to the fact that the trial judge heard and observed the witnesses and accepted one version of the facts rather than another.

         3. Judgments: Appeal and Error. When reviewing questions of law, an appellate court resolves the questions independently of the lower court's conclusions.

         [304 Neb. 451] 4. Judgments: Pleadings. A motion for judgment on the pleadings is properly granted when it appears from the pleadings that only questions of law are presented.

         5. Attorney Fees: Appeal and Error. On appeal, an appellate court will uphold a lower court's decision allowing or disallowing attorney fees for frivolous or bad faith litigation in the absence of an abuse of discretion.

         6. Conveyances: Fraud: Debtors and Creditors: Proof. In an action to set aside an actually fraudulent transfer or obligation under Neb. Rev. Stat. § 36-705(a)(1) (Reissue 2016) of the Uniform Fraudulent Transfer Act, it is the plaintiff's burden to prove by clear and convincing evidence that (1) the debtor made a transfer or incurred an obligation, (2) the plaintiff was a creditor of the debtor, and (3) the debtor made the transfer or incurred the obligation with actual intent to hinder, delay, or defraud any creditor of the debtor.

         7. Conveyances: Fraud: Words and Phrases. It is fundamental that before there can be a "fraudulent transfer" under the Uniform Fraudulent Transfer Act, there must be a "transfer."

         8. Actions: Parties: Appeal and Error. An appellate court reviews a case on the theories pursued by the parties, not on a theory that the parties might have raised.

         9. Conveyances: Fraud: Property: Words and Phrases. There are limits to how abstract an interest may be and still constitute "property" under the Uniform Fraudulent Transfer Act.

         10.___: ___: ___: ___. Whether under the Uniform Fraudulent Transfer Act there is a "subject of ownership" constituting "property" that can be an "asset" depends on a legitimate and identifiable claim of entitlement.

         11. Conveyances: Fraud: Debtors and Creditors. A security agreement by the debtor in favor of an alleged transferee is the vehicle for disposing of or parting with an asset or an interest in an asset; for purposes of the Uniform Fraudulent Transfer Act, it is not the asset itself.

         12. Conveyances: Fraud: Property: Debtors and Creditors: Estates: Liens: Words and Phrases. Only equity in property in excess of the amount of encumbering liens thereon is an "asset" reachable by creditors as a fraudulent transfer; encumbered property is not considered part of the debtor's estate.

         13. Conveyances: Fraud: Debtors and Creditors. A blanket security agreement does not convey an asset under the Uniform Fraudulent Transfer Act if everything subject to ownership that is described as [304 Neb. 452] collateral therein is fully encumbered by other creditors with superior claims at the time of the alleged transfer.

         14. Judges: Words and Phrases. A judicial abuse of discretion exists when the reasons or rulings of a trial judge are clearly untenable, unfairly depriving a litigant of a substantial right and denying just results in matters submitted for disposition.

         15. Actions: Attorney Fees: Words and Phrases. Frivolous for the purposes of Neb. Rev. Stat. § 25-824 (Reissue 2016) is defined as being a legal position wholly without merit, that is, without rational argument based on law and evidence to support a litigant's position in the lawsuit.

         16. ___:___:___. Frivolous for purposes of Neb. Rev. Stat. § 25-824 (Reissue 2016) connotes an improper motive or legal position so wholly without merit as to be ridiculous.

         17. Actions. Any doubt whether a legal position is frivolous or taken in bad faith should be resolved in favor of the one whose legal position is in question.

          Appeals from the District Court for Douglas County: W. Mark Ashford, Judge.

          Mark C. Laughlin and Jacqueline M. DeLuca, of Fraser Stryker, PC, L.L.O., for appellant. Lisa M. Meyer, of Pansing, Hogan, Ernst & Bachman, L.L.P., for appellee Gerald C. Korth. Kathryn J. Derr, of Berkshire & Burmeister, for intervenor-appellee.

          Richard L. Anderson and David J. Skalka, of Croker, Huck, Kasher, DeWitt, Anderson & Gonderinger, L.L.C., for appellee Laura Luther.

          Maynard H. Weinberg, of Weinberg & Weinberg, PC, for appellee Michael Luther. Julie Jorgensen, of Morrow, Willnauer & Church, L.L.C., for appellee Kathryn J. Derr.

          Heavican, C.J., Miller-Lerman, Cassel, Stacy, Funke, Papik, and Freudenberg, JJ.

          [304 Neb. 453] FREUDENBERG, J.

         I. NATURE OF CASE

         This consolidated appeal involves two actions brought under Nebraska's Uniform Fraudulent Transfer Act (UFTA)[1] by two creditors. The creditors alleged in both actions that a blanket security agreement guaranteeing repayment of a loan by a wife to her husband was a fraudulent transfer under the UFTA. The amount loaned to the husband was paid directly to the Internal Revenue Service (IRS) to satisfy a settlement agreement between the husband and the IRS relating to the husband's unpaid taxes. When the husband signed the blanket security agreement, the IRS liens were still outstanding and the husband made ownership claims to little other than contingent expectancy interests in past and future business ventures. After receipt of the funds, the IRS extinguished the liens and dismissed the lawsuit, which sought to foreclose against the marital home that was titled solely in the wife's name. Following a trial in one of the actions, the district court determined that there was no actual intent to hinder, delay, or defraud any creditor under the UFTA and, in any event, that the wife had proved good faith. The court ultimately granted the wife attorney fees as sanctions against the creditors and their attorneys on the grounds that both actions were frivolous. We affirm in part and in part reverse.

         II. BACKGROUND

         1. Prior Judgments in Favor of Creditors In July 2001, Gerald C. Korth was awarded a judgment against Michael Luther and a company then owned by Michael, Aden Enterprises, Inc., in the amount of $1, 392, 328.50. The judgment was entered as a sanction for discovery violations. Korth subsequently sought orders in aid of execution, but was unsuccessful in securing any assets. On October 4, 2016, the [304 Neb. 454] district court released Terra Nova Carbon Energy Company. LLC (Terra Nova); Terra Nova's chief executive officer; and other entities on the grounds that they had proved they possessed no money, property, or credits of Michael at the time garnishee interrogatories were served and should accordingly be discharged of any garnishee liability.

         In an unrelated action in June 2007, Atelier Partners (Atelier) obtained a money judgment against Michael in the amount of $152, 898. Atelier was unable to execute on its judgment to any degree until May 2013, when Michael's stock interests in several business entities, including Luther Capital Management, L.L.C. (Luther Capital), and Luther Corporation, were auctioned off at a sheriff's sale following public notice. Atelier purchased the interests for $1, 000.

         2. Other Lawsuits by Atelier or Korth

         A prior action by Atelier (the 2012 Atelier action) against Laura Luther and Michael, her husband, had sought to set aside a $2 million cash conveyance to Laura from Michael and the acquisition of the marital home in Laura's name. The action was dismissed with prejudice as barred by the statute of limitations.

         3. IRS Action to Enforce Tax Liens

         Between 2007 and 2009, the IRS filed with the Nebraska Secretary of State notices of a federal tax lien against Michael in a total amount of approximately $1 million. On February 12, 2012, the IRS sued Laura and Michael for the collection of unpaid taxes owed by Michael (the IRS action). The IRS sought a judgment against Michael in the total amount of $1, 266, 227.20 for federal personal income taxes and penalties for the years 2004 through 2007 and trust fund recovery penalties for 2001 and 2002.

         The IRS named Laura in the suit because it sought to foreclose its tax liens against the home that Laura and Michael lived in, which was titled only in Laura's name. The IRS alleged that Michael provided money to Laura to purchase [304 Neb. 455] the home and that Michael had retained beneficial use and equitable ownership of the home. The IRS joined, as persons that may claim an interest in the property, Atelier, Korth, and several other creditors of Michael.

         Michael reached a settlement agreement with the IRS in which he agreed to pay the IRS $450, 000 to satisfy the tax debts owed by him as of March 24, 2014. In exchange, the IRS agreed to dismiss the case with prejudice as against Laura and Michael and not take further collection action against the home or certain transfers of property between Laura and Michael. The IRS also agreed to terminate the tax liens after receipt of the $450, 000.

         4. $450, 000 Loan and Corresponding Security Agreement

         Laura agreed to loan Michael $450, 000 in order to pay the settlement, because Michael lacked the funds to do so. On March 20, 2014, Michael signed a security agreement to secure payment of the loan, which was reflected by a demand note also dated March 20, 2014, in the original face amount of $450, 000.

         The security agreement described that it was to secure payment of the "Obligations," which were defined as the March 20, 2014, demand note in the original face amount of $450, 000. The security agreement then described the collateral for such obligations as follows:

"Collateral" means the following personal property, assets, and rights, wherever located, whether now owned or hereafter acquired or arising, in which [Michael] now has or hereafter acquires an interest and all proceeds and products thereof: all personal and fixture property of every kind and nature including without limitation all goods (including inventory, equipment and any accessions thereto), instruments (including promissory notes), documents, accounts (including health-care-insurance receivables), chattel paper (whether tangible or electronic), deposit accounts, letter-of-credit rights (whether or not [304 Neb. 456] the letter of credit is evidenced by a writing), commercial tort claims, securities and all other investment property, supporting obligations, any other contract rights or rights to the payment of money, insurance claims and proceeds, and all general intangibles (including all payment intangibles). [Laura] acknowledges that the attachment of [her] security interest in any additional commercial tort claim as original collateral is subject to [Michael's] compliance with this agreement with respect to commercial tort claims.
The Collateral shall also include, as applicable, all (i) products of the Collateral; (ii) substitutions and replacements for the Collateral; (iii) proceeds from the sale or disposition of the Collateral, including insurance proceeds and any rights of subrogation resulting from the damage or destruction of the Collateral; and (iv) for Collateral that is tangible, all additions, increases, improvements, accessories, attachments, parts, equipment and repairs now or in the future attached to or used in connection with such Collateral, and any warehouse receipts, bills of lading or other documents of title now or in the future evidencing [Michael's] ownership of the Collateral.

         5. First UCC Filing

         On March 20, 2014, a Uniform Commercial Code (UCC) financing statement was filed with the Secretary of State, describing Michael, at his mailing address, as the debtor and Laura as the secured party. It described the collateral in the same terms as those set forth in the security agreement.

         6. Payment of IRS and Dismissal of Claims The $450, 000 was transferred from Laura's brokerage account to her attorney's trust account, from where it was transferred directly to the IRS on March 24, 2014. Subsequently, the IRS terminated the tax liens and the court dismissed with prejudice the IRS action as against Laura and Michael. The court thereafter dismissed any and all claims against the United [304 Neb. 457] States with prejudice and any and all pending claims asserted by any defendant against any coparty without prejudice.

         7. Collateral Control Agreement On March 19, 2014, a collateral control agreement was signed by Michael, Laura, and Koch as chief executive officer of the "account debtor," Terra Nova. The agreement described that Terra Nova "may now or in the future hold accounts, general intangibles, or other elements of the Collateral for [Michael], and acknowledges [Laura's] security interest in the Collateral." Terra Nova further "acknowledges, without immediate verification, that it is not aware of and has not been given notice of any other security interest existing on the Collateral." Terra Nova subordinated in favor of Laura "any security interest or lien [Terra Nova] may have, now or in the future, against the Collateral, except that [Terra Nova] will retain its right of setoff in the account."

         8. Korth Filed Complaint Alleging Security Agreement Was Fraudulent Transfer

         On January 14, 2015, Korth, represented by attorney David Koukol, filed a complaint against Laura and Michael alleging that the security agreement and the financing statement that recorded that agreement reflected a fraudulent transfer. The complaint did not seek to void the collateral control agreement. Korth's complaint was filed under case No. CI 15-299 (CI 15-299).

         9. Laura's and Michael's Answers to Complaint in CI 15-299

         Laura and Michael, in their answers to the complaint, denied that Korth had a lien on Michael's personal property at the time of the collateral agreement, elaborating that he had not successfully seized in execution any of Michael's property pursuant to Neb. Rev. Stat. § 25-1504 (Reissue 2016). Further, they denied any intent to hinder, delay, or defraud. They alleged that a lien in favor of Laura in the sum of $450, 000 replaced liens filed by the IRS against Michael's assets in the amount [304 Neb. 458] of $1, 266, 227.20 plus interest and penalties and that the IRS liens were superior to Korth's interest in Michael's assets and would have had to have been satisfied before Korth could have executed upon Michael's assets. Thus, Laura and Michael argued, the loan and corresponding security agreement being challenged by Korth had placed Korth in a better position to collect against Michael's assets than Korth had been in before the loan transaction. Laura and Michael asserted that even without the security agreement and UCC financing statement that allegedly represented the fraudulent transfer, under the doctrine of equitable subrogation, Laura's interest in Michael's assets in the amount owed under the loan would still be superior to Korth's creditor interest.

         Laura and Michael asserted that Korth's claims against them were frivolous and asked that sanctions be awarded pursuant to Neb. Rev. Stat. § 25-824 (Reissue 2016). Michael's attorney filed an affidavit stating that he had notified Koukol of his intent to enforce sanctions under § 25-824 against both Korth and his attorneys.

         10. Cross-Motions for Summary Judgment or Partial Summary Judgment in CI 15-299

         Laura and Michael both moved for summary judgment in CI 15-299, asking that Korth's complaint be dismissed with prejudice. They asserted that no fraudulent transfer had been pled or could be proved. Korth filed a motion for partial summary judgment asking the court to declare that the UCC financing statement was ineffective as a matter of law, because the description in the agreement of the collateral was too broad and the filing failed to reflect Michael's middle initial, which is present on his driver's license.

         At the hearing on the motions, the court received Laura's and Michael's deposition testimony.

         (a) Michael's Deposition

         Michael described that his work involves providing corporate finance services either individually or through Luther [304 Neb. 459] Capital. Michael indicated that he was generally paid for his services by a percentage of project revenues, if they materialized, on a kind of contingency or equity ownership basis. He described that his equity and stock interests in several companies he had worked with had been subjected to execution.

         Michael explained that at the time of the loan, he had anticipated receiving a payment from Terra Nova. Michael elaborated that he had a loose oral agreement with Terra Nova to receive approximately $100, 000 for past services performed on a particular project, if and when Terra Nova realized sufficient profits. He had intended to give that payment to Laura as partial repayment of the loan. Michael testified that both at the time of the security agreement and as of the time of the deposition, he owned no real property and possessed personal property of only nominal value.

         Michael admitted, over his counsel's objection, that he had given Laura $2 million in 1999 or 2000. This transfer was the subject of the 2012 Atelier action which was dismissed as barred by the statute of limitations. Michael did not know what Laura had done with the money or whether, approximately 14 years later, she used that money to effectuate the loan that enabled him to pay the IRS settlement.

         Michael could not recall if he had made any interest payments to Laura on the loan. The evidence was undisputed that at the time of the summary judgment hearing, Michael had made no payments toward the principal. Michael described that Laura orally demanded payment on the note "every day.'' Michael testified that he owed Laura the money lent to him as reflected in the security agreement and that he intended to repay her.

         (b) Laura's Deposition In her deposition, Laura testified that she was the sole titled owner of the residence where she and Michael lived, which had been paid for in cash by Michael in 2000. Most of Laura's testimony concerned whether Michael had any assets. There were none that she could identify.

         [304 Neb. 460] (c) Other Evidence

         Korth submitted evidence that Michael had numerous unsatisfied judgments in favor of various entities against either Michael personally or Luther Capital in a total amount of approximately $9 million.

         Other evidence demonstrated that on May 5, 2015, a second UCC financing statement was filed reflecting the collateral pledged to Laura under the security agreement-this time with Michael's middle initial. Evidence was submitted, and it was later stipulated, that the standard search logic used by the Secretary of State's office to search filings under the UCC changed on May 4, 2015. Before May 4, a search for "'Michael S. Luther, '" the name on Michael's driver's license, would not retrieve the financing statement reflecting the security agreement that was with '"Michael Luther.'" After May 4, it would.

         11. Order Denying Motions for Summary Judgment in CI 15-299

         On July 6, 2015, the court denied Korth's motion for partial summary judgment on the ground that he was making a premature claim for declaratory relief. The court explained that Korth was seeking through his motion a declaration of lien priority when there were no assets or funds that the parties were identifying as being subject to a lien priority contest. Further, the court reasoned that it would not rule on a motion for summary judgment dealing with lien priority and perfection issues when those issues were not presented in Korth's complaint.

         Despite this conclusion that there were no assets that the parties were fighting over, the court also denied Laura's and Michael's motions for summary judgment. Citing Matter of Hollow ay, [2] the court first explained that it was rejecting any argument that the UFTA does not apply to the grant of security interests. The court did not otherwise address whether it mattered that the only identified interests transferred by the [304 Neb. 461] security agreement were future contingent expectancy interests. Nor did the court address whether there could be a "transfer" under the act if the debtor's assets at the time the security agreement was executed were subject to a lien superior to the creditor's rights.

         Instead, the court focused on Laura and Michael's argument that because there was no genuine issue that the grant of the security interest was for a reasonably equivalent value and that Laura took the security interest in good faith, she had a complete defense as a matter of law under § 36-709(a). The court found there was no genuine issue that a reasonably equivalent value was exchanged for the assets transferred through the security agreement. However, the court found a genuine issue of material fact as to whether the transfer was made in good faith. For that reason, the court denied Laura's and Michael's motions for summary judgment.

         12. Intervention in CI 15-299

         Atelier filed a complaint in intervention in April 2015 as another creditor seeking to set aside the alleged transfer effectuated by the security agreement and UCC filing. Atelier was represented by Kathryn Derr. Michael opposed intervention on the ground that Atelier's claim was already litigated and decided in the 2012 Atelier action. The court allowed the intervention after it ruled on the motions for summary judgment. In his answer to the complaint in intervention, Michael pled that the Atelier action operated as claim preclusion.

         13. Denial of Leave to Amend in CI 15-299

         On May 2, 2016, the court denied Korth's motion for leave to file an amended complaint. The court explained that the motion was substantively identical to a prior motion for leave to file an amended complaint in May 2015, which had been denied because it was made in response to Laura's and Michael's motions for summary judgment. In addition to repeating the allegations of fraudulent transfer, the proposed amended complaint asked the court to declare that the UCC [304 Neb. 462] financing statement reflecting the ...


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