KSB

Judge Somers

09-06099 Terra Bentley II, LLC v. Village of Overland Pointe et al (Doc. # 51) - Document Text

SO ORDERED.
SIGNED this 30 day of November, 2010.


Dale L. Somers
UNITED STATES BANKRUPTCY JUDGE

Opinion Designated for Electronic Use, But Not for Print Publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In Re:

TERRA BENTLEY II, LLC,
DEBTOR.

TERRA BENTLEY II, LLC,
PLAINTIFF,

v.
VILLAGE OF OVERLAND POINTE,
LLC,
DEFENDANT.

CASE NO. 09-23107-11
CHAPTER 11

ADV. NO. 09-6099

OPINION DENYING DEFENDANT’S MOTION FOR SUMMARY JUDGMENT

This proceeding is before the Court on the Defendant’s motion for summary

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judgment. The Defendant appears by counsel Ronald S. Weiss of Berman DeLeve
Kuchan & Chapman, L.C., and Steven R. Smith of Gates, Shields & Ferguson, P.A. The
Plaintiff appears by counsel James F.B. Daniels of McDowell Rice Smith & Buchanan.
The Court has reviewed the relevant materials and is now ready to rule.

Before it filed for bankruptcy, Debtor Terra-Bentley II, LLC, sued Village of
Overland Pointe, LLC (“Village”) in a Kansas state court, and Village asserted
counterclaims; both parties’ claims concerned a real estate development they were
involved in. After that court ruled on the parties’ dispute, the Debtor appealed. Later, the
Debtor filed a Chapter 11 bankruptcy petition. In this adversary proceeding, it seeks to
avoid certain transfers and other actions that affected its rights in the development.
Village seeks summary judgment on the ground the state court’s judgment bars the claims
the Debtor is asserting in this proceeding. After considering the materials presented, the
Court concludes: (1) it has subject-matter jurisdiction because the Debtor’s present
claims do not amount to an appeal of the state court’s judgment; (2) the state court
judgment does not preclude the Debtor’s avoidance claims because the Debtor could not
have asserted the claims before that court; and (3) the state court judgment precludes the
Debtor from contesting certain factual determinations, detailed below, that were made by
the state court.
Facts

Terra-Bentley II, LLC, is the Debtor in the Chapter 11 bankruptcy case to which
this adversary proceeding is related. Defendant Village of Overland Pointe, LLC
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(“Village”) is owned or controlled by two men, L. Gray Turner and John Sweeney, who
were involved in organizing the Debtor and were its original managers.

Except where indicated, the following relevant facts are not disputed.1 In their
summary judgment pleadings, the parties have raised some factual disputes, but none of
the disputes concern the content of the state court judgment. This opinion addresses the
effect of the state court judgment on the claims made in this proceeding, and no factual
disputes prevent this Court from deciding that question.

In 2005, Bentley Investments of Nevada IV, LLC (“Bentley IV”), and Terra
Venture Investments, LLC (“Terra Venture”), formed the Debtor, dividing its ownership
equally between them. At the time, Terra Venture had a contract to buy approximately 20
acres of land at the southeast corner of 135th Street and Mission Road in Leawood,
Kansas, for almost $5 million. Under the Debtor’s Operating Agreement, Terra Venture
assigned that contract to the Debtor. Bentley IV supplied enough cash to enable the
Debtor to obtain a loan to buy the 20 acres. The Debtor took out a loan, bought the
property, and named the property “Mission Corner,” mortgaging it as security for the
loan.

The parties have skirmished a bit about the make-up of Bentley IV. Gary L. Hall
signed the Debtor’s Operating Agreement as “managing member” of Bentley IV, but the

1The Debtor originally objected to Village’s summary judgment motion because supporting
exhibits were not attached to it. Village responded that the exhibits had been omitted inadvertently and
that the Debtor had agreed Village could supplement its motion by filing the exhibits separately, which it
did.

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Debtor says the Gary Hall Revocable Trust was Bentley IV’s sole member. Village
responds that so long as Hall is alive, he and the Trust are effectively one and the same.
No one has said whether Hall or someone else is the trustee of the Trust. However, so far
as the Court can see, none of the issues raised in Village’s summary judgment motion
hinge on the identity of the owners or managers of Bentley IV. Clearly, Hall had
something to do with Bentley IV, but the precise nature of his connection with that
company is not relevant to this decision.

As indicated, Turner and Sweeney were the Debtor’s initial managers. They had a
plat prepared for Mission Corner. In January 2006, the Debtor submitted an application
for rezoning and approval of a preliminary site plan and preliminary plat for Mission
Corner, and the City of Leawood (“the City”) approved the application by an ordinance
passed in May 2006. The ordinance required the Debtor to make specified road and
utility improvements before any building in the Mission Corner development could be
finally occupied.

In June 2006, the Debtor sold land designated as “Lot 4” in the preliminary plat to
Village for a bit over $600,000. Sweeney was the only person who signed the sale
contract, and he was identified as “Trustee, Member” for both the Debtor and Village.2
Another company Turner and Sweeney owned or controlled was paid a commission of

2In the Debtor’s Operating Agreement, Sweeney is identified, along with Turner, as an initial
manager of the Debtor, not as a member, nor is he identified as a trustee of any sort. But the parties have
ignored these discrepancies, and the Debtor concedes the sale complied with the Operating Agreement.
Consequently, the discrepancies have played no part in the Court’s decision.

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about $36,000 from the proceeds of the sale, and about $567,000 was paid on the
Debtor’s mortgage loan. The Debtor has conceded this transaction was approved by
Bentley IV and Terra Venture, as required by the Debtor’s Operating Agreement. Lot 4
is surrounded by the Debtor’s property, and utility easements and internal roadways to
serve it would lay on or across property the Debtor owns. In prior litigation between the
Debtor and Village, a Kansas state court ruled the parties intended for the Lot 4 sale
agreement to require the Debtor to proceed with construction of infrastructure for the
Mission Corner development, and to complete and file the final plat for the development.
The state court explicitly rejected the Debtor’s argument that the sale agreement should
be construed to mean the parties intended that the Mission Corner property might never
be developed.

In August 2006, the Debtor applied for final approval of its plat and site
development plan for Mission Corner, and the City approved it in December 2006. Like
the ordinance approving the preliminary application, the resolution approving the final
plat and site plan required the Debtor to make specified road and utility improvements
before any building there could be finally occupied.

Earlier in 2006, the Debtor had obtained an estimate of the cost, based on
preliminary plans, to build the infrastructure for the Mission Corner development. The
estimate was almost $2.5 million, but that was later reduced to just under $2 million
because fill dirt was available from another site, and a retaining wall and water feature
were eliminated. The Debtor hired a construction company to do some grading and other

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infrastructure work, and that company obtained a grading permit late in December 2006.
In May 2007, a significant change in the Debtor’s operations occurred. Paragraph

9.7 of the Debtor’s Operating Agreement established a reciprocal buy-sell option for
Bentley IV and Terra Venture. Under it, Bentley IV could force Terra Venture to choose
either to buy Bentley IV’s half of the Debtor or sell its own half to Bentley IV, and Terra
Venture could do the same to Bentley IV. On May 29, 2007, Bentley IV served Terra
Venture with a letter exercising this option. Terra Venture had sixty days to choose
whether to buy or to sell.
On June 6, 2007, acting as the Debtor’s manager, Sweeney executed five contracts
purporting to sell other Mission Corner lots to Village. In later litigation, the state court
ruled these contracts were invalid because they were not approved by Bentley IV, as
required under the Debtor’s Operating Agreement.

On July 23, 2007, shortly before Terra Venture’s decision about the buy-or-sell
demand was due, the Debtor and Village signed a document called the “Mission Corner
Declaration of Covenants, Restrictions, Easements, Reservations and Assessments,”
which was filed two days later with the Johnson County Register of Deeds. Turner
signed this document as a manager of the Debtor, and Sweeney signed it as a member of
Village. This Declaration says when the “Developer” (who is the Debtor) sells a lot to a
third party, the Developer will begin and diligently proceed with all infrastructure
improvements required for a certificate of occupancy to be issued for the building to be
built on the lot. The lot’s buyer is to reimburse the Developer for a pro rata share of the

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costs of all public and private infrastructure and other common improvements incurred in
developing Mission Corner.

On July 27, 2007, Terra Venture chose to sell its interest in the Debtor to Bentley

IV. The Operating Agreement called for the closing on this transaction to occur within 30
days, and on August 14, Bentley IV became the sole owner of the Debtor.
In the summer of 2007, representatives of Bentley IV told the construction
company they had taken over as managers of Mission Corner, and the company would no
longer be dealing with Turner or Sweeney. Later, they told the company to stop the
infrastructure work on the development. At that time, the rough grading and erosion
control had been completed and some temporary fencing had been installed. After that,
the Debtor refused to take any further action to get the final plat filed or to install any
infrastructure.

At the end of August 2007, the Debtor sued Village and other parties in a Kansas
state court. It alleged breach of fiduciary duties, fraud, and tortious breach of contract,
and sought rescission or cancellation of the five contracts to sell lots to Village that
Bentley IV had not approved. One of the Debtor’s main legal theories was that managers
Turner and Sweeney had violated their fiduciary obligations to the Debtor and its
members by failing to comply with: (1) provisions in its Operating Agreement that called
for any infrastructure at Mission Corner to be funded solely from the proceeds of sales of
lots in the development, and (2) a later decision Bentley IV and Terra Venture had made
not to engage in physical development of Mission Corner until either they sold all of

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Mission Corner to an experienced developer or found another owner to replace Bentley

IV. The Debtor did not seek to rescind the Lot 4 sale contract. Village asserted a
counterclaim asking that the Debtor be required to finish platting Mission Corner, and
finish the grading, roads, and utilities for the development. In July 2008, the state court
issued its decision voiding the five sale contracts. Then on January 7, 2009, following a
bench trial, it issued the decision that Village now relies on in its summary judgment
motion.
Early in the decision, the state court noted it had previously ruled that the
agreement for the sale of Lot 4 showed, as a matter of law, that the Debtor and Village
intended for the final plat to be completed and filed, and for infrastructure to be built, and
that the agreement obligated the Debtor to pursue those activities. The court said it had
also determined the Debtor would have a reasonable time to complete the platting and
build the infrastructure, but evidence would have to be presented for the court to be able
to determine what a reasonable time for performance under the agreement was. If the
court found the Debtor had failed to do the platting and build the infrastructure within a
reasonable time, the court would have to determine the appropriate remedy.

Parts of the Mission Corner development plan included plans to build several
underground parking garages, which would have cost between $6 and $9 million. In the
state court litigation, the Debtor claimed these garages were part of the infrastructure the
Lot 4 sale agreement required it to build, and relied on their substantial cost as evidence
showing Turner and Sweeney had exceeded their limited authority to oblige the Debtor to

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build Mission Corner infrastructure. Based on the evidence presented, however, the state
court found the parking garages were not part of the infrastructure required for Mission
Corner to be developed, or for Village to get a building permit for Lot 4.

The state court decided that a reasonable time for the Debtor to file the final plat
for Mission Corner was no later than October 31, 2007, and that Village probably would
have obtained a building permit for Lot 4 by that date but for the Debtor’s actions. The
court concluded that a reasonable time to complete the infrastructure was no later than
December 31, 2007, and that Village would have completed its building on Lot 4 by
approximately July 30, 2008 if the Debtor had built the necessary infrastructure.

The state court found the Debtor was obliged by the Lot 4 sale agreement to file
the final plat of Mission Corner and build the infrastructure for the development. The
court granted Village’s request for specific performance under the agreement, and ordered
the Debtor: (1) to sign and file the final plat of Mission Corner; (2) to comply with the
City’s ordinance approving the Debtor’s preliminary plan and plat, including getting off-
site road and utility improvements completed; (3) to comply with the City’s ordinance
approving the final plan and plat, including getting off-site road and utility improvements
completed; (4) to complete all on-site infrastructure, including internal streets and all
utilities; (5) to do everything specified in a letter from the City to be necessary for Village
to obtain a building permit; and (6) to pay all governmental or other fees and costs
required of the developer for Village to obtain a building permit. The court awarded
Village $1.362 million as damages for the Debtor’s delay in completing the infrastructure.

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Finally, the court declared that the Debtor’s managers had the authority to execute the
Mission Corner Declaration of Covenants, Restrictions, Easements, Reservations and
Assessments, so it was binding on both the Debtor and Village.

The Debtor appealed the state court’s decision. The parties have presented no
information about the status of this appeal.

The Debtor filed a Chapter 11 bankruptcy petition on September 18, 2009. A few
days later, it filed this adversary proceeding against Village. It filed an amended
complaint on October 30, 2009. In Count I of the amended complaint, the Debtor claims
that under § 544(a)(3) of the Bankruptcy Code, it can avoid the final site development
plan and final plat for Mission Corner because a hypothetical bona fide purchaser who
bought that real property on the day the Debtor filed for bankruptcy would not be subject
to either the plan or the plat because they had not been recorded with the county register
of deeds, as required by K.S.A. 58-2221 and 58-2223. In Count II, the Debtor claims that
under § 544(a)(1) and (a)(2),3 it can avoid the Lot 4 sale agreement and the Mission
Corner Declaration of Covenants, Restrictions, Easements, Reservations and Assessments
because a judicial lien creditor or creditor who obtained an execution that was returned

3The Debtor cited § 544(a)(3) of the Bankruptcy Code in labeling Count II of its amended
complaint, but in the body of the count, cited § 544 without specifying any subsection it was relying on.
In its memorandum opposing Village’s summary judgment motion, the Debtor alleged the Lot 4 sale
agreement and the Declaration of Covenants were avoidable under § 544(a)(1) and (a)(2), not (a)(3).
Docket no. 38 at 19-20. In its reply to the Debtor’s response to its motion, Village stated the Debtor was
claiming that the rights of a hypothetical bona fide purchaser or an unsecured creditor were not addressed
in the state court litigation, Docket no. 42 at 23, but Village did not complain that it was not aware the
Debtor was relying on § 544(a)(1) and (a)(2) for one of its claims. The Court concludes Village has
waived any right it may have had to object to Count II on the ground it did not inform Village the claim
was based on § 544(a)(1) and (a)(2).

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unsatisfied on the day the Debtor filed for bankruptcy could avoid them as fraudulent
transfers under K.S.A. 33-204(a)(1) and (a)(2) and K.S.A. 33-205(a). In its summary
judgment motion, Village argues the state court’s rulings bar both counts of the
complaint.

Discussion

1. Summary judgment rules
Under the applicable rules of procedure, the Court is to grant summary judgment if
the moving party demonstrates that there is “no genuine issue of material fact” and that
the party “is entitled to a judgment as a matter of law.”4 The substantive law identifies
which facts are material.5 A dispute over a material fact is genuine when the evidence is
such that a reasonable factfinder could resolve the dispute in favor of the party opposing
the motion.6 In adjudicating disputes, bankruptcy courts usually both determine the law
and find the facts. In deciding a summary judgment motion, though, the Court is limited
to its role of deciding legal questions, not weighing the evidence and resolving factual
disputes, but merely determining whether the evidence favorable to the non-moving party
about a material fact is sufficient to require a trial7 at which the Court would act in its
factfinding role. Summary judgment is inappropriate if an inference can be drawn from

4Fed. R. Civil P. 56(c), made applicable by Fed. R. Bankr. P. 7056.

5Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

6Id.

7Id. at 249-50.

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the materials properly submitted either to support or oppose the motion that would allow
the non-moving party to prevail at trial.8

The substantive law’s allocation of the burden of proof also affects the Court’s
analysis of a summary judgment motion. The party asking for summary judgment has the
initial burden of showing that no genuine issue of material fact exists.9 But if the moving
party does not have the burden of proof on a question, this showing requires only pointing
out to the Court that the other party does not have sufficient evidence to support a finding
in that party’s favor on that question.10 When such a showing is made, the party with the
burden of proof must respond with affidavits, depositions, answers to interrogatories, or
admissions sufficient to establish that a finding on the question could properly be made in
the party’s favor at trial.11

2. The Debtor’s claims
As indicated, the Debtor makes two claims for relief in its amended complaint.
First, it claims that under Kansas law, a bona fide purchaser of the Mission Corner
property would take the property free of the final site development plan and the final plat
because they are documents affecting real estate that were not recorded with the county
register of deeds pursuant to K.S.A. 58-2221. K.S.A. 58-2221 provides in part: “Every

8See id. at 248.
9Shapolia v. Los Alamos Nat'l Lab., 992 F.2d 1033, 1036 (10th Cir. 1993).
10Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986).
11Celotex, 477 U.S. at 324; Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574,


586 (1986).
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instrument in writing that conveys: . . . or (d) whereby any real estate may be affected . . .

may be recorded in the office of the register of deeds of the county in which such real

estate is situated.” K.S.A. 58-2222 and 58-2223 then specify the effects of filing or

failing to file an instrument affecting real estate. K.S.A. 58-2222 provides: “Every such

instrument in writing . . . shall, from the time of filing . . . impart notice to all persons of

the contents thereof; and all subsequent purchasers and mortgagees shall be deemed to

purchase with notice.” K.S.A. 58-2223 provides: “No such instrument in writing shall be

valid, except between the parties thereto, and such as have actual notice thereof, until the

same shall be deposited with the register of deeds for record.” If these statutes apply to

the final plan and final plat, a subsequent purchaser from the Debtor would not be bound

by them unless the purchaser had actual notice of them.12

Section 544(a)(3) of the Bankruptcy Code provides:

(a)
The trustee shall have, as of the comencement of the case, and
without regard to any knowledge of the trustee or of any creditor, the
rights and powers of, or may avoid any transfer of property of the
debtor or any obligation incurred by the debtor that is voidable by —
. . .
(3)
a bona fide purchaser of real property, other than
fixtures, from the debtor, against whom applicable law
permits such transfer to be perfected, that obtains the
status of a bona fide purchaser and has perfected such
transfer at the time of the commencement of the case,
whether or not such a purchaser exists.
12See, e.g., Jeremiah 29:11, Inc., v. Seifert, 284 Kan. 468, 472-75 (2007) (under K.S.A. 58-2223,
restrictive covenant in recorded deed not signed by grantees was not binding on subsequent purchasers;
signatures required to give notice grantees accepted covenant); Shlup v. Bourden, 33 Kan. App. 2d 564,
567-71 (2005) (under K.S.A. 58-2223, covenant to provide free natural gas not binding on subsequent
purchaser because deed with covenant not recorded until after purchase).

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So if the final development plan and final plat had to be filed under K.S.A. 58-2221, 58


2222, and 58-2223, the Debtor could, under § 544(a)(3), avoid the obligations they

imposed on it.

Second, the Debtor claims that under the Kansas Uniform Fraudulent Transfer Act,

K.S.A. 33-201 to -212, certain types of its creditors (whether creditors of those types
actually existed or not) could avoid both the Lot 4 sale agreement and the Declaration of

Covenants, Restrictions, Easements, Reservations and Assessments as fraudulent

transfers under K.S.A. 33-204(a)(1) and (a)(2) and 33-205(a). K.S.A. 33-204(a) provides:

(a)
A transfer made or obligation incurred by a debtor is fraudulent as to
a creditor, whether the creditor’s claim arose before or after the
transfer was made or the obligation was incurred, if the debtor made
the transfer or incurred the obligation:
(1)
With actual intent to hinder, delay or defraud any creditor of
the debtor; or
(2)
without receiving a reasonably equivalent value in exchange
for the transfer or obligation, and the debtor:
(A)
Was engaged or was about to engage in a business or a
transaction for which the remaining assets of the debtor
were unreasonably small in relation to the business or
transaction; or
(B)
intended to incur, or believed or reasonably should
have believed that such debtor would incur, debts
beyond such debtor’s ability to pay as they became
due.
K.S.A. 33-205(a) provides:
(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
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or obligation.

K.S.A. 33-207(a) provides that a creditor attacking a transfer or obligation may obtain
avoidance of the transfer or obligation to the extent necessary to satisfy its claim, and

K.S.A. 33-207(b) provides that if the creditor has a judgment against the debtor, the court
may allow the creditor to levy execution on the transferred asset or its proceeds.

Section 544(a)(1) and (a)(2) authorize a debtor-in-possession like the Debtor to

avoid transfers and obligations that certain creditors would be able to avoid under

applicable state law. They read:

(a)
The trustee shall have, as of the commencement of the case, and
without regard to any knowledge of the trustee or of any creditor, the
rights and powers of, or may avoid any transfer of property of the
debtor or any obligation incurred by the debtor that is voidable by —
(1)
a creditor that extends credit to the debtor at the time of the
commencement of the case, and that obtains, at such time and
with respect to such credit, a judicial lien on all property on
which a creditor on a simple contract could have obtained
such a judicial lien, whether or not such a creditor exists; [or]
(2)
a creditor that extends credit to the debtor at the time of the
commencement of the case, and obtains, at such time and with
respect to such credit, an execution against the debtor that is
returned unsatisfied at such time, whether or not such a
creditor exists.
So if the Debtor can show the Lot 4 sale agreement or the Declaration of Covenants

satisfied the criteria of K.S.A. 33-204(a)(1) or (a)(2), or K.S.A. 33-205(a), it can avoid

those transfers under § 544(a)(1) or (a)(2).

3. Rooker-Feldman doctrine
Village argues the claims the Debtor is making in this proceeding are barred by the

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Rooker-Feldman doctrine, citing a single case, one which was decided before 2005.13 In
2005, however, in Exxon Mobil Corporation v. Saudi Basic Industries Corporation,14 the
Supreme Court said that lower courts had sometimes extended the doctrine far beyond the
contours of the Rooker and Feldman cases for which it was named. Both Rooker and
Feldman, the Court explained, were based on the premise that Congress had given
subject-matter jurisdiction over appeals of state court judgments exclusively to the
Supreme Court, and empowered district courts to exercise only original, not appellate,
jurisdiction.15 By applying Rooker-Feldman to other situations, the Court went on, the
lower courts had improperly overridden Congress’ conferral of federal-court jurisdiction
concurrent with jurisdiction exercised by state courts, and superseded the ordinary
application of preclusion law pursuant to 28 U.S.C. § 1738 (the Full Faith and Credit
Statute). The Court ruled the doctrine was much more limited, saying:

The Rooker-Feldman doctrine, we hold today, is confined to cases of
the kind from which the doctrine acquired its name: cases brought by
state-court losers complaining of injuries caused by state-court judgments
rendered before the [federal] district court proceedings commenced and
inviting [federal] district court review and rejection of those judgments.
Rooker-Feldman does not otherwise override or supplant preclusion
doctrine or augment the circumscribed doctrines that allow federal courts to
stay or dismiss proceedings in deference to state-court actions.16

13See In re Beardslee v. Beardslee (In re Beardslee), 209 B.R. 1004, 1010-13 (Bankr. D. Kan.
1997).
14544 U.S. 280 (2005).
15Id. at 283-84.
16Id. at 284.
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The Tenth Circuit has explained Exxon Mobil means that so long as a plaintiff’s federal
action is filed before a state court lawsuit has been finally determined, Rooker-Feldman
cannot prevent the federal court from having subject-matter jurisdiction over the federal
action.17

In this case, Village has not suggested the ruling in the state court lawsuit became
final before the Debtor filed the complaint that commenced this adversary proceeding; the
Debtor’s appeal prevented the ruling from being final. Instead, Village asserted in its
brief that the Debtor appealed the state trial court’s judgment to the Kansas Court of
Appeals without posting a supersedeas bond, and after Village sought to enforce the
judgment, filed its Chapter 11 bankruptcy petition in an effort to delay complying with
the trial court’s orders.18 Under such circumstances, the state court judgment is not final,
and the Rooker-Feldman doctrine cannot apply to bar the Debtor’s claims in this
proceeding.

4. Claim preclusion
The federal Full Faith and Credit Statute19 requires the Court to apply the
preclusion law of Kansas, the state in whose courts the judgment was rendered, to
determine the judgment’s effect in this case.20 But if Kansas law says that the judgment

17Guttman v. Khalsa, 446 F.3d 1027, 1031-32 (10th Cir. 2006).
18Docket no. 30 at 16.
1928 U.S.C.A. § 1738.
20Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 379-86 (1985);


Matsushita Electric Industrial Co., Ltd., v. Epstein, 516 U.S. 367, 373-75 (1996).
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would have a preclusive effect here, the Court must then determine whether something
else in federal law makes an exception to the Full Faith and Credit Statute for purposes of
the Plaintiff’s claim.21

The first question that arises about claim preclusion here is whether the state court
judgment can be binding even though it has been appealed. Although doing so can cause
some problems, the general rule federal courts follow is to give a federal judgment
preclusive effect even though an appeal of the judgment is pending.22 The Tenth Circuit
has stated that Kansas also follows this general rule.23 So despite the fact the Debtor’s
appeal of the judgment is pending, the state court judgment can have a preclusive effect in
this case.

The next question is whether, through claim preclusion, the state court judgment
prevents the Debtor from making the claims it is pursuing in this case. Under Kansas
law, “[c]laim preclusion prevents parties from relitigating a cause of action that has been
finally adjudicated. It is founded on the principle that the party, or some other party in
privity, has litigated or had an opportunity to litigate the same matter in a former action in

21Marresse, 470 U.S. at 379-86; see also National Union Fire Ins. Co. v. Boyovich (In re
Boyovich), 126 B.R. 348, 350 (Bankr. W.D. Wash. 1991) (Marresse approach applies in bankruptcy
proceedings).

22See 18A Wright, Miller & Cooper, Federal Prac. & Pro.: Jurisdiction 2d, § 4433 (2002)
(stating general rule and discussing difficulties it causes); see also 18 Wright, Miller & Cooper, Federal
Prac. & Pro.: Jurisdiction 2d, § 4402 (discussing terminology of res judicata and indicating treatise uses
“res judicata” to refer to both claim preclusion and issue preclusion).

23Phelps v. Hamilton, 122 F.3d 1309, 1318 (10th Cir. 1997) (citing Willard v. Ostrander, 51 Kan.
481, 486-90 (1893); Munn v. Gordon, 87 Kan. 519, 521-22 (1912)).

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a court of competent jurisdiction.”24 In a 1985 decision, the Kansas Supreme Court

described claim preclusion in these terms:

The salutary rule of res judicata forbids a suitor from twice litigating a
claim for relief against the same party. The rule is binding, not only as to
every question actually presented, considered and decided, but also to every
question which might have been presented and decided. The doctrine of res
judicata prevents the splitting of a single cause of action or claim into two
or more suits; it requires that all the grounds or theories upon which a cause
of action or claim is founded be asserted in one action or they will be barred
in any subsequent action.25

More recently, the court described the doctrine in these terms:

“The doctrine of res judicata (or claim preclusion) prohibits a party from
asserting in a second lawsuit any matter that might have been asserted in the
first lawsuit.” Stanfield, 263 Kan. at 397, 949 P.2d 602. Res judicata
prevents relitigation where the following requirements are met:
“‘(1) identity in the thing sued for, (2) identity of the cause of action,

(3) identity of persons and parties to the action, and (4) identity in the
quality of persons for or against whom claim is made.’” Waterview
Resolution Corp. v. Allen, 274 Kan. 1016, 1023, 58 P.3d 1284 (2002)
(quoting Regency Park v. City of Topeka, 267 Kan. 465, 478, 981 P.2d 256
[1999]).26
Village concedes the Debtor did not try to avoid the Lot 4 sale agreement as a

fraudulent transfer in the state court lawsuit, but contends the Debtor could have done so.

However, K.S.A. 33-204(a)(1) and (a)(2), and K.S.A. 33-205(a) all concern actual or

constructive fraud on a debtor’s creditors, and K.S.A. 33-207 allows a creditor to recover

or avoid a transfer or obligation that violated one of those provisions. Village has not

24Jackson Track Group, Inc., v. Mid States Port Authority, 242 Kan. 683, 690 (1988).

25In re Estate of Reed, 236 Kan. 514, 519 (1985) (citations omitted).

26Winkel v. Miller, 288 Kan. 455, 468 (2009).

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pointed to anything in the Kansas Uniform Fraudulent Transfer Act that authorizes a
debtor itself to avoid a transfer it made or obligation it incurred. The UFTA authorizes
only a creditor of the Debtor to do so. The same thing is true of the Debtor’s present
effort to avoid the Declaration of Covenants under § 544(a)(1) and (a)(2). Village has not
identified any claim the Debtor could have asserted under the UFTA that would have
enabled it to avoid the obligations it incurred in that document.

But when the Debtor filed its bankruptcy petition, the Bankruptcy Code authorized
it to pursue some claims it previously had no right to make. Section 1107(a) authorized
the Debtor as the debtor-in-possession in its bankruptcy case to exercise certain powers of
a Chapter 11 trustee, such as to try to avoid transfers under § 544(a). Claims like that
were not available to the Debtor before it filed for bankruptcy. Furthermore, in its
capacity as the debtor-in-possession, the Debtor is not the same “quality of person” it was
when it was acting only on its own behalf in the state court litigation.

Essentially the same analysis applies to the Debtor’s claims to avoid the final
development plan and the final plat for Mission Corner under § 544(a)(3). K.S.A. 582223
specifically provides that an unrecorded document affecting real estate is still valid
with respect to the parties to the document. In the state court lawsuit, the Debtor had no
claim to invalidate the plan and plat on the ground they had not been recorded. It can
make that claim now only because the Bankruptcy Code authorizes it to assert the rights a
hypothetical bona fide purchaser of the Mission Corner real property would have to
defeat the plan and plat because they were not recorded. The Debtor had no right to

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assert such claims before it filed for bankruptcy. In addition, the Bankruptcy Code made
the Debtor a debtor-in-possession, a capacity it did not have before filing for bankruptcy.

In short, under Kansas claim preclusion law, the state court judgment does not
preclude the Debtor from asserting the claims it is making in this proceeding. Since the
judgment has no claim-preclusive effect, the Court need not consider whether anything
else in federal law makes an exception to the Full Faith and Credit Statute for the
Debtor’s claims.

5. Issue preclusion
As was true for claim preclusion, the federal Full Faith and Credit Statute27
requires the Court to apply the issue preclusion law of Kansas, the state in whose courts
the judgment was rendered, to determine the judgment’s effect in this case.28 But if
Kansas law says that the judgment would have a preclusive effect here, the Court must
then determine whether something else in federal law makes an exception to the Full
Faith and Credit Statute for purposes of the Plaintiff’s claim.29 Also, as indicated in
discussing claim preclusion, the fact the Debtor’s appeal of the state court judgment is
still pending does not, under Kansas law, prevent the judgment from precluding
relitigation of specific issues decided by the state court.

2728 U.S.C.A. § 1738.

28Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 379-86 (1985);
Matsushita Electric Industrial Co., Ltd., v. Epstein, 516 U.S. 367, 373-75 (1996).

29Marresse, 470 U.S. at 379-86; see also National Union Fire Ins. Co. v. Boyovich (In re
Boyovich), 126 B.R. 348, 350 (Bankr. W.D. Wash. 1991) (Marresse approach applies in bankruptcy
proceedings).

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Under Kansas law,
The requirements of collateral estoppel [also known as issue preclusion] are: (1) a
prior judgment on the merits which determined the rights and liabilities of the
parties on the issue based upon the ultimate facts as disclosed by the pleadings and
judgment; (2) the parties must be the same or in privity; and (3) the issue litigated
must have been determined and necessary to support the judgment. [Citation

omitted.]30
The claims the Debtor is pursuing now concern the rights and powers a judicial lien or
judgment creditor would have had against it on the day it filed for bankruptcy, and the
rights and powers a hypothetical bona fide purchaser of real property from it would have
had on that same day. For the most part, none of those rights and powers were litigated in
the state court suit between the Debtor and Village.

To the extent, however, that the Debtor’s own obligations to Village under the
various transactions involved in the state court suit were determined in that suit, creditors
of or purchasers from the Debtor would be bound by the state court’s rulings. Most of the
rights such creditors or purchasers could assert against Village would derive directly from
the Debtor, and the Bankruptcy Code does not give them any additional right to assert
claims the Debtor could properly assert in the state court suit. For example, the state
court’s determination that the Lot 4 sale agreement obliged the Debtor to build the
infrastructure required for Village to be able to build on Lot 4 precludes the Debtor from
arguing now on behalf of its creditors and purchasers, as it did in state court on its own
behalf, that the agreement did not impose such an obligation on the Debtor. Similarly, the

30Regency Park v. City of Topeka, 267 Kan. 465, 478 (1999).
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Debtor cannot properly argue in this proceeding that the infrastructure for the Mission
Corner development included the underground parking garages that were included in
some of the development plans.31 In other words, with respect to the obligations the state
court determined the Debtor had to develop Mission Corner, the Debtor’s creditors or
purchasers are in privity with the Debtor so that the state court’s rulings preclude them
from disputing the obligations that court found the Debtor’s transactions with Village
imposed on it. The Debtor has not suggested anything in federal law would except these
findings from the Full Faith and Credit Statute, and the Court is not aware of any
applicable exception.

On the other hand, while Village argues appraisals and other evidence of the value
of Mission Corner and Lot 4 were presented to the state court, Village does not identify
any findings the court made about those values, or any claim for relief the Debtor asserted
or could have asserted in the state court case that raised the question whether it received
reasonably equivalent value in return for Lot 4. Under Kansas law, the sufficiency of the
consideration required for a contract to be enforceable between the parties who make it is
largely up to them. Some years ago, in In re Estate of Shirk, the Kansas Supreme Court
determined the consideration a daughter gave was sufficient to make an enforceable
contract for her mother to give her one-third of the mother’s estate upon death, saying:

Generally speaking, consideration is not insufficient merely because it is

31In paragraph 29 of its first amended complaint in this proceeding, the Debtor alleged the
inclusion of the underground parking garages showed the Final Site Development Plan, the Final Plat, and
the Declaration of Covenants and Restrictions were infeasible and uneconomic. Dkt. no. 9, at 6.

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inadequate. To be sufficient, the consideration agreed upon must be a legal benefit
or detriment, and need not be a thing of pecuniary value or reducible to such value
. . . . Nor does the legal sufficiency of a consideration for a promise depend upon
the comparative economic value of the consideration and of what is promised in
return, for the parties are deemed to be the best judges of the bargains entered into.
The value of all things contracted for is measured by the appetite of the contractor
. . . . Where a party contracts for the performance of an act which will afford him
pleasure, gratify his ambition, please his fancy, or express his appreciation of a
service another has rendered him, his estimate of value must be left undisturbed,
unless there is evidence of fraud . . . . In the class of cases mentioned, if there is
any legal consideration for a promise, it is sufficient. If this were not the case, the
result would be that the courts would be substituting their own judgment for the
promisor’s, and in so doing, make a new contract for the parties.32

So long as contracting parties each gave some consideration, the relative equivalence of

the value of the exchanges they bargained for is not relevant to the enforceability of the

contract in a lawsuit between them. The $600,000 Village gave the Debtor for Lot 4 was

certainly sufficient to make the sale contract enforceable against the Debtor. The degree

of equivalence of the consideration becomes relevant only when creditors of one of the

parties (or their representative, such as the debtor-in-possession in a bankruptcy case)

claim the contract amounted to a fraudulent transfer that the creditors can avoid under

state law, the Bankruptcy Code, or a combination of the two. Village has not shown that

the state court’s judgment precludes the Debtor from claiming it received less than

reasonably equivalent value in its transactions with Village.

32In re Shirk’s Estate, 186 Kan. 311, 321-22 (1960) (citations omitted); see also Barfield v.

Commerce Bank, 484 F.3d 1276, 1278-79 (10th Cir. 2007) (Tenth Circuit relied on and quoted from Shirk

in deciding that person’s proposal to exchange large-denomination bill for smaller-denomination bills at

bank constituted contract offer under Kansas law that was covered by federal statute barring racial

discrimination that impairs right to make contracts).

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Conclusion

For these reasons, the Court concludes Village’s motion for summary judgment
must be denied.
# # #

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