               United States Bankruptcy Appellate Panel
                            FOR THE EIGHTH CIRCUIT


                                    No. 06-6048MN


In re:                                     *
                                           *
Alex and Chanhsamone                       *
Phongsisattanak,                           *
                                           *
         Debtors.                          *
                                           *
                                           *        Appeal from the United States
Alex and Chanhsamone                       *        Bankruptcy Court for the
Phongsisattanak,                           *        District of Minnesota
                                           *
         Plaintiffs -Appellants,           *
                                           *
               v.                          *
                                           *
Blue Heron, Inc.,                          *
Mark Erjavec,                              *
John Doe,                                  *
                                           *
         Defendants-Appellees.             *
                                           *


                             Submitted: September 13, 2006
                                Filed: October 13, 2006


Before FEDERMAN, MAHONEY, and McDONALD, Bankruptcy Judges.


MAHONEY, Bankruptcy Judge.
       This is an appeal from a decision of the bankruptcy court1 which determined
that a real estate transaction entered into between the debtors and Blue Heron, Inc.,
was not a fraudulent conveyance under Minnesota law because the debtors were not
insolvent at the time of the transaction and were not made insolvent as a result of the
transaction. The debtors, operating as debtors in possession in a Chapter 11 case,
brought this action, in part, to avoid the real estate transaction by the exercise of the
avoidance powers provided to debtors in possession by 11 U.S.C. § 544. In the
bankruptcy court, the debtors also argued that there had been a violation of the
Minnesota Consumer Fraud Act (Minn. Stat. § 325F.69), and that there had been a
breach of contract. Those arguments were abandoned on appeal.

      We affirm the decision of the bankruptcy court.

                             STANDARD OF REVIEW
       The bankruptcy court’s factual findings are reviewed for clear error and its
conclusions of law are reviewed de novo. Moon v. Anderson (In re Hixon), 387 F.3d
695, 700 (8th Cir. 2004). A bankruptcy court’s finding regarding solvency is reviewed
for clear error. Northwest Vill. Ltd. P’ship v. Franke (In re Westpointe, L.P.), 241
F.3d 1005, 1007 (8th Cir. 2001).

                                  DISCUSSION
      To aid in understanding the complexity of this case, the transaction needs to be
described in detail. The bankruptcy court explained the history of the relationship
between the debtors (referred to during the trial and hereafter as “the Phongs”) and
Blue Heron and the substance of the transaction, as follows:

            In June of 2003, the plaintiffs owned four parcels of real estate.
      They are referenced here as:

      1
        The Honorable Dennis D. O’Brien, United States Bankruptcy Judge for the
District of Minnesota.

                                           2
                          Market Value      Liabilities     Net Equity
2205 Chicago Ave.         $ 285,000          $ 76,000 c/d $ 209,000
1625 Fremont Ave.         $ 325,000          $ 370,000 mtg $ (45,000)
                                                   mech lien
6821 18 Avenue So.         $ 200,000         $ 119,200      $ 80,800
16188 Hominy Path          $ 500,000         $ 270,000      $ 230,000
                           $1,310,000        $ 835,200      $ 474,800

Three of the four properties were real estate investments. The Hominy
Path property was the Phongs’ newly acquired homestead. The Fremont
Ave. property liability included a mechanic’s lien in the amount of
$250,000, owing Castle Roofing for repairs caused by a fire. The work
was completed in the spring of 2003 and the amount was due in June.
In the months shortly before the mechanic’s lien was due, the Phongs
purchased both the Hominy and Chicago Ave. properties, using
$400,000 in cash. They sought financing to pay the mechanic’s lien.

       Mr. Phong had discussions with at least one, and possibly two,
traditional lenders, but did not obtain traditional financing to cover the
lien. Instead, he was introduced to the defendant Mark Erjavec, who was
the owner of Blue Heron, which was in the business of purchasing
mortgages in foreclosure. According to Mr. Phong, Mr. Erjavec offered
to purchase all four properties from the Phongs and sell them back on a
contract for deed. Additionally, according to Mr. Phong, Mr. Erjavec
agreed to participate with Mr. Phong in partnership to enable Mr. Phong
to acquire deteriorated properties that he could fix up and sell profitably,
enabling him to make the increased payments that would be required to
service the increased debt load. Mr. Phong testified that he was
guaranteed ten to twelve properties per year. Finally, Mr. Phong testified
that Mr. Erjavec assured him that an equity cushion of between $85,000
and $100,000 was available as a source to fund the increased payments
in the meantime.

      Mr. Erjavec disputes that there was an agreement, partnership or
otherwise, but, acknowledges that the parties discussed generally a
cooperative effort in obtaining and dealing with deteriorated properties.
There was no discussion or agreement regarding how the acquisition of
such properties would be financed, who would hold title, or how any

                                     3
profits would be applied between the parties. And, there was no written
memorialization of any arrangement. Mr. Erjavec disclaimed any
knowledge regarding an equity cushion to fund increased payments and
denied making any such representation.

       Sometime in early June 2003, Mr. Erjavec delivered to the Phongs
a draft of a proposed agreement and contract for deed. He testified that
he went over the documents with the Phongs, reading and explaining the
major portions. Included in the draft agreement, and also included in the
agreement eventually signed, was this provision:

       The Phongsisattanaks acknowledge and promise that this
       Agreement and the Contract for Deed reflect the entire
       agreement between them and Blue Heron and that there
       were (or are) no oral representations which are being relied
       upon by them as a basis for their decision to enter into this
       transaction with Blue Heron, Inc.             Further, the
       Phongsisattanks [sic] acknowledge that any statements
       made prior to execution of the transaction documents by
       Blue Heron, Inc., its agents or employees, or yourself,
       outside this Agreement and the Contract for Deed have
       been disregarded by them as statements made during
       negotiations leading up to this transaction.
(Par. 8, p.4., Def. Ex. K).

       On June 30, 2003, the parties signed an agreement substantially
the same as the earlier draft, and the defendants signed a contract for
deed to the Phongs for the total purchase price of $950,000 for the four
properties. The price was arrived at by adding up all liabilities against
the properties, plus a $50,000 cash payment by the defendants to the
Phongs, closing costs in the approximate amount of $18,000, and a fee
assessed by the defendants for their participation. The agreement
provided that the defendants were to assume the existing mortgages and
pay the contract for deed on the Chicago property. The contract for deed
recited that it was given by Blue Heron, subject to existing financing, but
obligated the vendor to convey a marketable title to the Phongs upon
payment of the contract in full. The Phongs delivered their warranty
deed, subject to existing encumbrances, to Blue Heron on July 9, 2003.

                                    4
       The contract for deed required monthly payments from the Phongs
of $7,304.68. No payments were made. No payments were made by the
defendants on the mortgages and Chicago contract for deed either.
Sometime late in the summer of 2003, the Phongs were contacted by at
least one of the mortgagees and told that a delinquency existed. When
informed of the transaction with the defendants, the mortgagee told the
Phongs that the mortgage was not assumable, but, had a “due on sale”
clause.

       Mr. Phong contacted Mr. Erjavec, who acknowledged that he had
made no payments on the mortgages and the Chicago contract for deed
because the Phongs had made no payments to Blue Heron. At that point,
Mr. Phong indicated that he wished to make the mortgage payments
directly. Mr. Erjavec agreed and prepared a new amortization schedule
for the payments due Blue Heron from the Phongs in the monthly
amount of $2,500. The Phongs made a total of $4,000 to the defendants
under the revised schedule by February 2004.

      In February, Blue Heron assigned its rights under the Phong
contract for deed to a company called Caberallo. The defendants had
borrowed $240,000 from the principal of Caerallo [sic] to fund the
Phong agreement and contract for deed. In return for the assignment,
Caberallo cancelled all indebtedness owing the principal from the
defendants.

       In March 2003, Caberallo served the Phongs a notice of
cancellation of the Phong contract for deed. The Phongs retained an
attorney, who advised Caberallo that the contract for deed was an
equitable mortgage and could not be cancelled, but, must be foreclosed
upon as a traditional mortgage. Apparently, the assertion was
persuasive. The parties entered into a written agreement substantially
altering their rights and obligations under the contract for deed.

      It was agreed that the non-homestead properties would be sold, all
mortgages encumbering them paid out of the proceeds, and that the
Phongs would receive marketable title to their Hominy homestead
property. The Phongs were to pay $10,000 toward the balance of the
contract for deed on the Chicago property, Caberallo would pay $65,000.

                                   5
      The marketable title to the Hominy property was to be delivered upon
      the release of certain tax liens on the Chicago property resulting from the
      vendor’s liability for taxes owing the IRS. The agreement between the
      Phongs and Caberallo was fully consummated, except that the Phongs
      were given a limited warranty deed to their Hominy property. Caberallo
      did not satisfy the Phongs’ purchase money mortgage on that property.

Order for Judgment at 2-6, Appellant’s Supplemental App., Tab 1 (footnotes omitted).

       The court then found that, at the time of the transaction, the debtors were not
insolvent, nor did the transaction render the debtors insolvent. On page 7 of the
order, the court clearly laid out the status of the equity of the debtors after the
transaction:

             After the transaction, the plaintiffs’ equity was reduced only by
      the closing costs and transaction fee assessed against them, leaving them
      with an equity position of $410,200. This was their position following
      delivery of the deed:
                                Market Value Liabilities           Net Equity
      2205 Chicago Ave.          $ 285,000          $ 76,000 c/d $ 209,000
      1625 Fremont Ave.          $ 325,000          $ 370,000 mtg $ (45,000)
                                                         mech lien
      6821 18 Avenue So.         $ 200,000          $ 119,200      $ 80,800
      16188 Hominy Path          $ 500,000          $ 270,000      $ 230,000
      June 29, 2003              $1,310,000         $ 835,200      $ 474,800

      Contract for Deed B/H                        $950,000
      Cash received              $   50,000
      Contract right to pay-
       ment of liens             $ 835,200
      July 10, 2003              $2,195,200        $1,785,000      $ 410,200

        Net change in equity                                      ($ 64,600)
Id. at 7.



                                          6
       A transfer is fraudulent as to pre-transfer creditors under Minnesota law if it is
made by a debtor for less than reasonably equivalent value received when the debtor
is either insolvent at the time of the transfer or is rendered insolvent by it. Minn. Stat.
§ 513.45(a).2 The bankruptcy court correctly found, based upon an analysis of the
testimony of the expert witness for the defendants, that because the debtors were
solvent at all times, they had failed to meet their burden with regard to insolvency and
therefore could not prevail on the fraudulent conveyance action.

      On appeal, the debtors/appellants suggest that the bankruptcy court erred
because it chose to believe the numbers presented by that expert, rather than the
numbers presented by their own expert.3 A factual finding is “clearly erroneous”
when although there is evidence to support it, the reviewing court on the entire
evidence is left with the definite and firm conviction that a mistake has been
committed. Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573 (1985)


      2
       513.45. Transfers fraudulent as to present creditors

             (a) A transfer made or obligation incurred by a debtor is fraudulent as to
             a creditor whose claim arose before the transfer was made or the
             obligation was incurred if the debtor made the transfer or incurred the
             obligation without receiving a reasonably equivalent value in exchange
             for the transfer or obligation and the debtor was insolvent at that time or
             the debtor became insolvent as a result of the transfer or obligation.

             (b) A transfer made by a debtor is fraudulent as to a creditor whose claim
             arose before the transfer was made if the transfer was made to an insider
             for an antecedent debt, the debtor was insolvent at that time, and the
             insider had reasonable cause to believe that the debtor was insolvent.

      3
       Debtors appealed the finding that the transaction with Blue Heron was not
actually a sale but was an equitable mortgage. The characterization of the transaction
does not change the numbers, and does not affect the solvency/insolvency
determination.

                                            7
(quoting United States v. United States Gypsum Co., 333 U.S. 364, 395 (1948)).
When two permissible views of the evidence exist, the factfinder’s choice between
them cannot be clearly erroneous. Anderson, 470 U.S. at 574 (citing United States v.
Yellow Cab Co., 338 U.S. 338, 342 (1949)).

       We find that the trial judge’s determination that the debtors/appellants were not
insolvent at any time with regard to this transaction is not clearly erroneous. Since
there cannot be a fraudulent conveyance under Minnesota law unless the transferor is
insolvent at the time of the transaction or is made insolvent by the transaction, we
affirm.




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