Kaler v. Slominski (In re Keeley)

Kaler v. Slominski (Case No. 15-2405)
The Eighth Circuit Court of appeals affirmed the decision of the BAP that the bankruptcy court had incorrectly calculated the setoff awarded to the debtor's land lease tenant for improvements he had made to the land but affirmed the court's avoidance and termination of the lease and the court's denial of the trustee's motion for a new trial based on newly discovered evidence.
Procedural context:
The appellant appealed the judgment of the BAP, arguing that the debtor's estate received an impermissible double recovery under Section 550. The chapter 7 trustee cross-appealed, arguing that the bankruptcy court erred when it denied its motion for a new trial based on newly discovered evidence.
Before filing chapter 11 bankruptcy, the debtor (a land partnership) entered into a 3 year lease with Slominski for the use of 3,600 acres of farm land. The debtor orally leased the land to Slominski in November 2010 and later reduced it to writing on 12/1/10, which was a pre-petition date. Under the lease, Slominski was to pay rent of 20% of the gross proceeds derived from the land or $300,000, whichever was greater. 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 estate harvested the crop. Slominski had expended $563,968 in seed and planting costs for that year. The trustee sued Slominski to avoid the lease. The trustee lanned to sell the land but believed that the lease hampered sales efforts. The trustee argued that the lease could be avoided because it was entered prepetition without authorization under Sec. 549, or, alternatively, it was a fraudulent transfer under Sec. 548(a)(a) because the rent was less than fair market value ("FMV"). While that proceeding was pending, the case was converted to chapter 7. The bankruptcy court found that the lease was executed prepetition, but also determined that the rent was below FMV. The court thus avoided and terminated the lease as a fraudulent transfer under Sec. 548(a)(1). After crediting Slominksi for the rent he had paid, the court concluded that he owed the trustee $431,200. Slominski responded claiming good faith purchaser ("GFP") status under Sec. 550(e) and asserted entitlement to the value of the improvements he had made to the land. He sought an offset against the $431,200 based on the amounts he expended in seed and planting costs and on property taxes. Although the bankruptcy court found that Slominski had failed to prove the value of his improvements under Sec. 550(e)(1)(B), it permitted him to recover his seed and planting costs and the amount he had paid for property taxes under Sec. 550(e)(1)(A). After applying the offset, the bankruptcy court ordered the estate to pay Slominski $147,377.95. After judgment was entered, both parties moved the court to amend its judgment by recalculating the offset. The trustee also moved for a new trial or relief under F.R.Civ.P. 60(b)(2), arguing that newly discovered evidence showed that the lease had been backdated and thus undermined Slominski's BFP status. The bankruptcy court denied all of the post-judgment motions. Both parties appealed to the BAP. On appeal, Slominski argued for the first time that the estate had received a double recovery when the court both awarded the estate FMV and avoided the lease. He argued that Sec. 550 permitted the estate to recover the fraudulently transferred leasehold or the value of the leasehold, but not both. The BAP rejected the argument. The BAP corrected the bankruptcy court's calculation of the setoff under Sec. 550(3), but affirmed the court's ruling that the newly discovered evidence would not likely have produced a different result. The Eighth Circuit concluded that Slominski did not raise his double recovery argument before the bankruptcy court and that generally they do not consider arguments raised for the first time on appeal. The court noted that it has discretion to consider a new argument in exceptional circumstances, but it was not convinced to do so on this record. The trustee contended that the newly discovered evidence was that the lease was not executed until after the filing of the chapter 11 case and, therefore, Slominski could not be a GFP entitled to a setoff under Sec. 550(e). The Eighth Circuit noted that grant of a new trial is an "extraordinary" remedy and may be based on newly discovered evidence, but only after the movant proves the following four elements: (1) the evidence was discovered after trial; (2) due diligence was exercised to discover the evidence; (3) the evidence is material and not merely cumulative or impeaching; and (4) the evidence is such that a new trial would probably produce a different result. The movant bears a heavy burden under Rule 60(b)(2). The bankruptcy court held that the trustee satisfied the first three elements but not the fourth, explaining that the newly discovered evidence would not change its finding that Slominski was a GFP. The trustee argued that the court erred by evaluating Slominski's GFP status subjectively rather than objectively. The Eighth Circuit noted that the trustee was correct that the GFP determination of a transferee is an objective one. The trustee was incorrect, however, that the bankruptcy court evaluated Slominski's GFP status subjectively. The court credited Slominski's testimony as more probative of his status than the newly discovered evidence offered by the trustee. A court may do so objectively, and, in this case, the Eighth Circuit concluded the court did. The Eighth Circuit observed that the Bankruptcy Code does not define "good faith". Where findings as to witness credibility inform the bankruptcy court's factual determinations, the appellate court accords the trier of fact great deference. The bankruptcy court did not commit clear error in crediting Slominski's evidene and testimony as more persuasive than the trustee's claimed newly discovered evidence. In the bankruptcy court's estimation, the newly discovered evidence -- consisting primarily of unexecuted lease documents found on a computer not belonging to Slominski -- did not undermine its conclusion that Slominski acted in good faith. This finding was not clearly erroneous.
Smith, Colloton, and Gritzner

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