Gerald C. Korth, Appellee and cross-Appellant.
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,
Laura Luther and Michael Luther, Appellees and Cross-Appellees, David J. Koukol, Appellant, and Kathryn J. Derr, Appellee and Cross-Appellant
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.
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.
Judgments: Appeal and Error. When reviewing
questions of law, an appellate court resolves the questions
independently of the lower court's conclusions.
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.
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.
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.
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."
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.
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.
___: ___: ___. 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.
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.
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.
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.
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.
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
___:___:___. 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.
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
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
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.
Neb. 453] FREUDENBERG, J.
NATURE OF CASE
consolidated appeal involves two actions brought under
Nebraska's Uniform Fraudulent Transfer Act
(UFTA) 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.
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.
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.
Other Lawsuits by Atelier or Korth
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
Action to Enforce Tax Liens
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.
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.
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.
$450, 000 Loan and Corresponding Security Agreement
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
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
First UCC Filing
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.
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
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
Korth Filed Complaint Alleging Security Agreement Was
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).
Laura's and Michael's Answers to Complaint in CI
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
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.
Cross-Motions for Summary Judgment or Partial Summary
Judgment in CI 15-299
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.
hearing on the motions, the court received Laura's and
Michael's deposition testimony.
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
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.
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.
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.
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
Neb. 460] (c) Other Evidence
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.
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,
Order Denying Motions for Summary Judgment in CI 15-299
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
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,  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.
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.
Intervention in CI 15-299
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
Denial of Leave to Amend in CI 15-299
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