Korth v. Luther

304 Neb. 450

935 N.W.2d 220

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 J. Koukol, 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,andKathryn J. Derr, appellee and cross-appellant.

Nos. S-18-670

S-18-671.

Supreme Court of Nebraska.

Filed November 15, 2019

Mark C. Laughlin and Jacqueline M. DeLuca, of Fraser Stryker, P.C., L.L.O., Omaha, for appellant.

Lisa M. Meyer, of Pansing, Hogan, Ernst & Bachman, L.L.P., Omaha, 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., Omaha, for appellee Laura Luther.

Maynard H. Weinberg, of Weinberg & Weinberg, P.C., Omaha, 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.

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 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 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 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 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...