David Anderson, et al., Plaintiffs,

This opinion will be unpublished and
may not be cited except as provided by
Minn. Stat. § 480A.08, subd. 3 (2018).

STATE OF MINNESOTA
IN COURT OF APPEALS
A18-0685

David Anderson, et al.,
Plaintiffs,

vs.

David H. Koch, et al.,
Defendants,

New State Funding, LLC d/b/a Partners Funding,
Appellant,

Mark Sheffert, in his capacity as the court-appointed receiver
for Koch Group MPLS, LLC,
Respondent.

Filed March 18, 2019
Affirmed
Bjorkman, Judge

Hennepin County District Court
File No. 27-CV-16-15134

Paul L. Ratelle, Fabyanske, Westra, Hart & Thomson, P.A., Minneapolis, Minnesota; and

Charles C.J. Schoenwetter, Bowman and Brooke LLP, Minneapolis, Minnesota (for
appellant)

Steven H. Silton, Joel D. Nesset, Cozen O’Connor, Minneapolis, Minnesota (for
respondent)

Considered and decided by Connolly, Presiding Judge; Bjorkman, Judge; and
Florey, Judge.

2
U N P U B L I S H E D O P I N I O N
BJORKMAN, Judge
Appellant-finance-company challenges the district court’s disallowance of its
secured-creditor claim against a restaurant receivership , arguing that the district court
mischaracterized its agreement with the restaurant as a loan rather than a future-receivables
factoring agreement and erred by voiding the agreement under the Minnesota Uniform
Voidable Transfers Act. We affirm.
FACTS
On June 21, 2016, appellant New State Funding, LLC d/b/a Partners Funding (New
State) entered into a “revenue based factoring agreement” with Koch Group MPLS, LLC
d/b/a Seven Steakhouse (Koch Group).1 In exchange for New State’s immediate payment
of $500,000, Koch Group agreed to make daily payments representing 16% of daily
receipts to New State until it reached $670,000. The agreement sets Koch Group’s daily
payment at $4,528, but contains a “true -up” clause under which this amount could be
adjusted. The agreement requires Koch Group to warrant its solvency , prohibits Koch
Group from obtaining additional financing after the agreement became effective , and
expressly states that it is not a loan. Upon default, which includes violation of any term of
the agreement, Koch Group must immediately pay to New State the “full uncollected
Receipts Purchased Amount plus all fees due under this Agreement.”

1 In addition to the entities referenced above, t he contract includes other similarly named
entities.

3
Within four months, a number of individual Koch Group investo rs sued Koch
Group, David H. Koch, and Alexus Koch for breach of fiduciary duty, theft, and unjust
enrichment. The complaint alleges that David and Alexus Koch acted fraudulently and
“grossly mismanaged Seven,” and that they obtained “large loans secured by Seven,” took
money from Seven without accounting for it, and formed a new company in order to divert
Seven’s funds.
The district court appointed respondent Mark Sheffert as an emergency limited
receiver over the assets of Koch Group and Seven , and ame nded th at order to appoint
Sheffert as general receiver in November 2016. A week after the general receiver
appointment, the district court approved the sale of Seven’s operating assets to another
investment group for $1,700,000, free of all liens and interests. The sale closed on January
20, 2017.
In April 2017, t he district court granted the receiver’s motion to establish claim
procedures for creditors. New State timely submitted a claim for $347,728.
In July 2017, the receiver submitted a report recommending that one secured
creditor receive a full allowance , three receive reduced allowances, and seven claims be
disallowed, for a total distribution of $340,632.34 from the receivership’s assets . He
recommended that New State ’s claim be discounted by $ 129,732.96, or roughly 39 %,
explaining:
Pursuant to that certain Revenue Based Factoring
(RBF/ACH) Agreement dated on or about June 16, 2016, New
State Funding, LLC (“New State” ) advanced Koch Group the
sum of $500,000.00. Pursuant to the parties’ agr eement, New
State was to receive daily payments over a one hundred and

4
forty-eight (148) day period, in a total amount of $670,000.00.
The effective interest rate under the New State agreement,
therefore, was 83.9% per annum. As of the Appointment Date,
Koch Group had paid New State the sum of $330,072.00.

. . . .

The Receiver has determined that the interest rate and
the fees sought by New State are not commercially reasonable,
and that Koch Group did not receive reasonably equivalent
value in exchange for any agreement that it may have made to
pay such charges. It is the Receiver’s determination that a
commercially reasonable interest rate for a transaction of this
type would be 15% per annum, and that the New State claim
should therefore be allowed in the amount of $200,133.48 . . . .

New State is the only secured creditor that objected to the receiver’s report.
The district court conducted an ev identiary hearing during which the parties’
respective experts, both of whom the district court found qualified, submitted written
reports and testified. Michael Doyle, the receiver ’s expert, testified that the exorbitant
interest rate on the transaction made it an unreaso nable debt for Koch Group to assume.
Doyle testified that Koch Group had made 73 payments of $4,528 per business day at the
time of the receiver’s appointment —reflecting an annualized interest rate of nearly 84%.
According to Doyle, the return on this tr ansaction to New State was “far in excess of” the
return rate for similar transactions.
Doyle further testified that Koch Group’s balance sheet showed the company was
clearly insolvent and “unfinanceable” when it entered the agreement in June 2016, and that
the extent of its insolvency was even more apparent if intangible assets were considered. 2

2 Doyle’s report states that “New State did not conduct a reasonable level of underwriting
prior to advancing $500,000 to Koch Group in June 2016.”

5
Koch Group immediately spent $293,000 of the funds it received from New State to pay
off existing creditors, and the funds received effectively wrapped the exi sting loans into
the new $4,500 daily payment, extending the terms of the prior loans. According to Doyle,
the new payment obligations to New State effectively increased the prior loan payments
from $2,000 to $2,700. Under these circumstances, Doyle opined that the $500,000 Koch
Group received from New State was not reasonably equivalent value for the $170,000
payment obligation Koch Group assumed.
Jason Bishop, for New State, described restaurant financing as different from other
types of financing beca use restaurants have relatively little asset value but produce a
relatively high cash flow. When evaluating a restaurant ’s financing request, potential
investors examine the restaurant’s debt obligations and “purchase the receivables . . . with
the idea that the restaurant is going to throw off, if they average a 13-percent profit, enough
money to be able to pay us back the receivables . . . while still maintaining their regular
operations.”
Bishop testified that the financing arrangement between New State and Koch Group
“did not vary from the normal . . . industry practices.” He opined that Koch Group received
reasonably equivalent value for its obligations to New State because the agreement
extinguished debt payments of over $7,000 per day, replaced them with lower payments of
approximately $4, 500 per day, thus increasing daily cash flow by $3,000, all while
“extinguish[ing] tax burdens.” Based on a 20-day monthly banking calendar , Bishop
calculated that the agreement improved Koch Group’s cash flow by $60,000 per month.

6
Bishop faulted Koch Group for putting itself in a worse financial position by later
entering into financing agreements with other investors, in contravention of the agreement.
He asserted that Koch Group would “probably still be in business” had it not taken on
additional debt after entering into the agreement with New State.
On cross-examination, Bishop conceded that he did not know whether the
agreement’s true-up provision was ever invoked, and had not analyzed whether Koch
Group was in financial distress and “insolvent from a balance sheet perspective” at the time
it entered the agreement . And he was unaware that Koch Group had “few, if any, other
financing options available to it .” But he still believed Koch Group was in a “good”
financial position because “they were running about 5.7 percent rent to receipts” in an
industry in which “it’s acceptable to go up to ten percent,” and because the receiver was
able to sell the business immediately after establishment of the receive rship. Bishop
described the financing offered by New State as “provided to Koch [Group] in good faith,”3
and approved in accordance with “traditional underwriting” principles. And he insisted the
agreement is “[a]bsolutely not” a loan.
Following the evid entiary hearing , the district court issued an order disallowing
New State’s claim in its entirety. The district court determined that: (1) the agreement
between New State and Koch Group is a loan, not a future-receivables factoring agreement,
despite contract language suggesting otherwise; (2) the agreement is voidable under the

3 When asked about the interest rate that the receiver characterized as roughly 84%, Bishop
said, “I don’t look at it that way. I look at it as a discount rate based off of the receivables
that were sold. So it was a 26-percent discount on the receivables. The issue is i[t] doesn’t
matter whether it takes two years or three months. They still only pay back the $670,000.”

7
Minnesota Uniform Voidable Transactions Act (the Act), Minn. Stat. §§ 513.41-.51 (2018),
because Koch Group did not receive a reasonably equivalent value in exchange for its debt
obligation; and (3) New State is not entitled to an allowance as a creditor because it did not
enter into the agreement in good faith. The district court’s decision was premised, in part,
on credibility determinations regarding the conflicting expert testimony:
Mr. Doyle credibly testified that the Koch Group was unable
to pay its debts and should not have qualified for additional
financing at the time of the Agreement. The conflicting
testimony from Mr. Bishop that the transaction left the Koch
Group in a stronger financial position was less credible because
the Koch Group was forced to obtain additional financing
within three weeks of the transaction, and the company went
into a state court receivership just a few months after that.

New State appeals.
D E C I S I O N
We review a district court’s findings of fact for clear error. Fletcher v. St. Paul
Pioneer Press, 589 N.W.2d 96, 101 (Minn. 1999); see Minn. R. Civ. P. 52.01 (“Findings
of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly
erroneous, and due regard shall be given to the opportunity of the trial court to judge the
credibility of the witnesses.”). Under this standard, we view the evidence in the light most
favorable to the district court’s findings and defer to the district court’s opportunity to
assess witness credibility. In re Stisser Grantor Trust, 818 N.W.2d 495, 507 (Minn. 2012).
Factual findings are clearly erroneous “if the reviewing court is left with the definite and
firm conviction that a mi stake has been made.” Fletcher, 589 N.W.2d at 101. But we
review de novo a district court’s conclusions of law, including interpretation of contracts

8
and statutes. State v. Thonesavanh, 904 N.W.2d 432, 435 (Minn. 2017); Valspar Refinish,
Inc. v. Gaylord’s, Inc., 764 N.W.2d 359, 364 (Minn. 2009).
New State argues that the district court erred by (1) construing the agreement
between Koch Group and New State as a loan rather than a factoring agreement for future
receivables, (2) concluding that the agreem ent is voidable because Koch Group did not
receive reasonably equivalent value in exchange for the transfer under Minn. Stat.
§ 513.44(a)(2) and was insolvent at the time of the transfer within the meaning of Minn.
Stat. § 513.45(a), and (3) voiding the ag reement based on the ground that New State did
not enter into the agreement in good faith. We address each argument in turn.
I. The agreement is a loan subject to the Act.

Generally, “[t]he plain and ordinary meaning of the contract language cont rols,
unless the language is ambiguous.” Bus. Bank v. Hanson, 769 N.W.2d 285, 288 (Minn.
2009). “The cardinal purpose of construing a contract is to give effect to the intention of
the parties as expressed in the language they used in drafting the whole contract.” Art
Goebel, Inc. v. N . Suburban Agencies, Inc. , 567 N.W.2d 511, 515 (Minn. 1997) ; see
Pollock-Halvarson v. McGuire , 576 N.W.2d 451, 455 (Minn. App. 1998) (stating that
“[p]eople have a right to make legal contracts and to expect the courts to honor and give
binding effect to their agreements” and that district courts lack “authority to invalidate
unwise or improvident agreements or to rewrite them so as to achieve a fairer bargai n for
one party or another”), review denied (Minn. May 28, 1998). But courts must also consider
a contract’s “spirit and purpose” and “there can be no doubt that the court may look beyond
the form into which the parties have cast their agreement.” Marso v. Mankato Clinic, Ltd.,

9
153 N.W.2d 281, 28 9 (Minn. 1967) (quotation omitted); see Liona Corp., N.V. v. PCH
Assocs. (In re PCH Assocs. ), 804 F.2d 193, 198 (2d Cir. 1986) (stating that “it would be
inherently inequitable to allow the parties’ choice of label to affect the rights of third party
creditors”). “In fact it is the substance of an agreement rather than its form . . . which must
control its construction.” Marso, 153 N.W.2d at 289 (quotation omitted). When an appeal
presents mixed questions of law and fact, we will “correct erroneous applications of law,
but accord the district court discretion in its ultimate conclusions and review such
conclusions under an abuse of discretion standard.” Safety Ctr., Inc. v. Stier, 903 N.W.2d
896, 899 (Minn. App. 2017) (quotation omitted).
New State contends that the district court erred by treating the agreement as
something other than it is —an agreement to purchase future receivables. The agreement
expressly states that it is a factoring agreement base d on the sale of future accounts
receivable. And it both includes and excludes provisions that are antithetical to its
construction as a loan : t he agreement does not include a f ixed payment term but does
contain a “true-up” provision that allow s for adjustment of payment amounts based on
variations in Koch Group’s actual receivables.
But another important provision of the agreement is consistent with a loan and not
a factoring agreement. The agreement requires Koch Group to “protect” New State against
“default,” and defines default broadly to include Koch Group’s violation of “any term or
covenant in this agreement.” Upon default, Koch Group must pay to New State “[t]he full
uncollected Receipts Purchased Amount plus all fees due under this Agreemen t . . .
immediately.” This provision shifts all risk of non -collection of receivables to Koch

10
Group. “When a buyer of accounts receivable holds substantial recourse against the seller,
thereby shifting all risk of non -collection on the seller, courts hav e routinely held the
transaction to be a financing arrangement and not a sale.” Kerr v. Commercial Credit Grp.,
Inc. ( In re Siskey Hauling Co., Inc. ), 456 B.R. 597, 607 (Bankr. N.D. Ga. 2011); see
Major’s Furniture Mart, Inc. v. Castle Credit Corp. , 602 F.2d 538, 546 (3d Cir. 1979)
(ruling that a purported sale of accounts receivable was a loan because “none of the risks
present in a true sale is present here”).
The record also demonstrates that the parties performed as they would under a loan.
Neither party disputes the fact that Koch Group made 73 identical payments to New State
in the exact amount designated in the agreement, totaling $330,072. And it is undisputed
that neither party invoked the true-up provision to alter the daily payment amount. Doyle’s
report describes the financing as a “short-term loan” that included “a fixed payment due of
$4,528 per day for 147 days with a final payment due on day 148 for the balance.” The
district court credited this testimony, finding “no evidence that . . . the daily payment
amount was going to change.” We defer to the district court’s supported factual
determinations. The court’s reliance on the periodic nature of the payments and the lack
of implementation of the true -up provision is not misplaced —making identical payments
over a fixed period of time is a key feature of an installment-type loan. See Black’s Law
Dictionary 1078 (10th ed. 2014) (defining “installment loan” as “[a] loan that is to be repaid
in usu. equal portions over a specified period”); see also Firstar Eagan Bank, N.A. v.
Marquette Bank Minneapolis, N.A., 466 N.W.2d 8, 11 (Minn. App. 1991) (“It is ordinarily

11
essential to the existence of a loan that there be both an actual delivery of something to
another and a promise of repayment.”), review denied (Minn. Apr. 29, 1991).
Given the conflicting language of the agreement and the largely undisputed
evidence regarding how the parties performed under the agreement, we discern no error in
the district court’s legal conclusion that the agreement is a loan. See Fenway Fin., LLC v.
Greater Columbus Realty, LLC , 995 N.E .2d 1225, 1231 -32 (Ohio Ct. App. 2013)
(considering conflicting provisions in a purported factoring agreement and how the parties
performed under the agreement in determining that t he agreement was actually a loan,
relying on the receivables purchaser’s failure to bear any risk). We conclude that the record
and law support the district court’s determination that the substance of the agreement is a
loan, under which Koch Group’s perf ormance was “functionally a payment of $670,000
amortized in 148 daily installments.”4

4 In arguing that the district court erred in categorizing the agreement as a loan, New State
relies heavily on Colonial Funding Network, Inc. v. Epazz, Inc. , 252 F. Supp. 3d 274
(S.D.N.Y. 2017). In Colonial Funding , the court considered whether “merchant cash
advance agreements,” which authorized a merchant to sell its future receivables in
exchange for money advances from a buyer, was a loan or another type of contr act. 252
F. Supp. 3d at 278-79. The agreements provided for specific daily amounts to be placed in
a designated bank account which the buyer could withdraw “as base payments to be
credited against 15% of daily receipts.” Id. at 279. At month-end, the buyer was to “credit
or debit” the account depending on the difference between the actual receipts and the base
payments. Id. The agreements did not set an interest rate or an end-date for performance.
Id. The court rejected the merchant’s argument that the agreements constituted usurious
loans, because the base payments were “not payable absolutely” and “depended upon a
crucial contingency: the continued collection of receipts by [the merchant].” Id. at 281.
While this case is somewhat factually similar to Colonial Funding, it is different in a crucial
way: the true -up provision was never employed by Koch Group or New State over the
course of 73 payments. And, as the receiver points out, “In purportedly purchasing all of
Koch’s future revenues, but permitting Koch to retain a large percentage of those same
revenues, [New State] was looking to exactly the same source of payment as any other

12
II. The agreement is voidable under the Act.
Having upheld the district court ’s determination that the agreement is a loan, we
consider whether the debt Koch Group incurred is voidable based on constructive fraud.
A. Koch Group did not receive reasonably equivalent value for the loan.
Minn. Stat. § 513.44 provides:
(a) A transfer made or obligation incurred by a debtor is
voidable 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:
. . . .
(2) without receiving a reasonably equivalent value in
exchange for the transfer or obligation, and the debtor:
(i) 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
(ii) intended to incur, or believed or reasonably should
have believed that the debtor would incur, debts beyond the
debtor’s ability to pay as they became due.

. . . .

(c) A creditor making a claim under paragraph (a) has
the burden of proving the elements of the claim by a
preponderance of the evidence.

The Act defines a transfer as “every mode, direct or indirect, absolute or conditional,
voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset.”
Minn. Stat. § 513.41(16).

creditor, and the Agreement functioned exactly as a loan.” For these reasons, Colonial
Funding is not apposite.

13
The parties dispute whether Koch Group received “reasonably equivalent value” for
the debt it incurred. The Act does not define “reasonably equivalent value.” But the term
is derived from bankruptcy law ,5 and “largely [presents] a question of fact, as to which
considerable latitude must be allowed to the trier of facts.” Stanley v. U.S. Bank Nat’l
Assoc. ( In re TransTexas Gas Corp. ), 597 F.3d 298, 306 (5th Cir. 2010) (quotation
omitted). Generally, courts consider whether what the debtor received “is substantially
comparable” to what the creditor transferred. BFP v. Resolution Trust Corp. , 511 U.S.
531, 548, 114 S. Ct. 1757, 1767 (1994); see Barber v. Golden Seed Co., 129 F.3d 382, 387
(7th Cir. 1997) (in deter mining reasonably equivalent value, courts consider several
factors, including the fair market value of “what was transferred and . . . what was
received”; and whether the transaction took place at arm’s length); Harker v. Ctr. Motors,
Inc. (In re Gerdes), 246 B.R. 311, 313 (Bankr. S.D. Ohio 2000) (in determining reasonably
equivalent value, the court should “compare the value received to the value given up by
the debtor”). Caselaw does not require “a dollar-for-dollar exchange,” and “[s]ome courts
have stated that a debtor receives reasonably equivalent value if it receives roughly the
value it gave.” ASARCO LLC v. Americas Mining Corp., 396 B.R. 278, 337 (Bankr. S.D.
Tex. 2008); see also Lindquist v. JNG Corp. (In re Lindell), 334 B.R. 249, 255 (Bankr. D.
Minn. 2005) (stating that courts may consider other factors, including fair -market value,
which is a typical benchmark for exchanges of money and property).

5 11 U.S.C. § 548(a)(1)(B) (2012) (providing that a “trustee may avoid any transfer” if the
debtor “received less than a reasonably equivalent value in exchange for such transfer or
obligation” and was insolvent (emphasis added)).

14
New State argues that the receiver did not meet its burden of proving the $500,000
Koch Group received was not reasonably equivalent to the $670,000 it agreed to pay New
State. We are not persuaded. In his report and testimony at the evidentiary hearing, Doyle
offered two examples of why Koch Group did not receive reasonably equivalent value for
its debt. First, the effective interest rate was excessive. Doyle calculated the effective
interest rate as nearly 84%—an amount that is “significantly higher” than similar types of
loans. Doyle reported that commercial loans such as fact oring agreements do not require
interest rates greater than 25%. Even when compared to equity financing, which involves
unsecured debt, New State’s interest return was “significantly higher than what quasi -
equity or equity sources would expect.” Even Bishop conceded that the interest rate
reflected in the agreement “would absolutely be high” if the agreement is classified as a
loan.
Second, the terms of the agreement were “extremely punitive to Koch Group”
because the “loan permitted [an] insolvent company to continue to operate and to
exacerbate and accelerate the speed and magnitude of [its] decline and losses.” Doyle
testified that he created a pro rata cash-flow analysis for a one-year period and, even though
his estimates of Koch Group’s debts were too conservative, he concluded that “cash flow
available for debt service would be about 900 -plus thousand dollars,” and his estimate of
Koch Group’s debt “was over a million dollars.” See Pioneer Home Builders, Inc. v. Int’l
Bank of Commerce (In re Pioneer Home Builders, Inc.), 147 B.R. 889, 894 (Bankr. W.D.
Tex. 1992) (interpreting “unreasonably small ” assets provision as “a general inability to
generate enough cash flow to sustain operations,” and stating, “a debtor’s unreasonably

15
small capital structure is presumed to lead eventually to insolvency, which is why it serves
as a ground for treating the transfer . . . as fraudulent vis-à-vis other unsecured creditors”).
Doyle also stated that the loan from New State effectively extended the term of Koch
Group’s existing loan and incremental payments from $2,000 to $2,700. Consistent with
this testimony, t he district court found that “Koch Group’s cash flow was unreasonably
small relative to its debt” and it “incurred debts beyond its ability to pay.” 6
In evaluating the opposing expert opinions on matters related to reasonably
equivalent value, the district court acted s quarely within its role as fact -finder. “[W]hen
conflicting opinions of expert witnesses have a reasonable basis in fact, the t rier of fact
must decide who is right,” and “[t]he weight and credibility of expert testimony is for the
fact-finder to determine.” Rainforest Café, Inc. v. State of Wisc. Inv. Bd., 677 N.W.2d 443,
451 (Minn. App. 2004) (quotation omitted). The district court relied on Doyle’s report and
testimony, and rejected Bishop’s opinion t hat Koch Group was in a sound financial
condition when the parties entered into the loan and that the loan benefited Koch Group.
On this record, we conclude that the district court did not clearly err in determining
that Koch Group did not receive reasonably equivalent value for the loan.

6 In examining Koch Group’s overall financial condition, an important factor in
determining reasonably equivalent value, the district court relied on a balance -sheet
analysis proffered by Doyle, rather than the cash-flow considerations urged by Bishop. A
district “court’s me thod of valuation [of a restaurant] must be affirmed if it has an
acceptable basis in fact and principle.” Mitterhauser v. Mitterhauser , 399 N.W.2d 664,
666 (Minn. 1987). Both bases are met here.

16
B. Koch Group was insolvent at the time it entered the agreement with New
State.

Minn. Stat. § 513.45(a) provides:
A transfer made or obligation incurred by a deb tor is
voidable 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 exchang e 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.

The creditor must prove a transfer is voidable under this provision by a preponderance of
evidence. Minn. Stat. § 513.45(c). In addressing this voidability ground, the district court
incorporated its previous analysis regarding reasonably equivalent value and specifically
addressed only the additional element of Koch Group’s solvency.
When a debtor’s balan ce sheets show liabilities exceeding assets, the debtor is
insolvent for purposes of the Act. See Minn. Stat. § 513.42(a) (“A debtor is insolvent if, at
a fair valuation, the sum of the debtor’s debts is greater than the sum of the debtor’s
assets.”).7 The district court relied on this statutory definition in finding Koch Group was
insolvent at the time it entered the agreement. The record supports this determination.
Koch Group’s June 2016 balance sheet , which New State had in its underwriting file,

7 The Act’s definition of insolvency is consistent with ba nkruptcy law. See 11
U.S.C. § 101(32)(A) (2012) (defining “insolvent” as a “financial condition such that the
sum of [an] entity’s debts is greater than all of such entity’s property, at a fair valuation”);
Everett v. Thomas Capital Invs. (In re Pacific Thomas Corp.), 543 B.R. 7, 13 (Bankr. N.D.
Cal. 2015) (“In an action to recover a preference or fraudulent transfer, insolvency may be
determined on the basis of a ‘balance sheet’ test. This correlates with the definition of
‘insolvent’ in § 101(32) that a corporation is insolvent if the sum of the entity’s debts is
greater than all of the entity’s property at a fair valuation.”).

17
demonstrates the company was insolvent within the meaning of the statute . Indeed, the
parties do not dispute that Koch Group was insolvent under the balance -sheet definition.
The district court rejected New State’s contention that it had examined Koch Group’s cash
flow because New State’s underwriting file did not show that it had analyzed “whether the
Koch Group had any money available after it met its operating expenses.” And the court
discounted New State’s alternative cash-flow measure of Koch Group’s financial condition
because “Koch Group took on additional debt . . . in an attempt to improve its cash flow.”
The district court concluded, based on these findings, that Koch Group met the statutory
definition of an insolvent debtor for purposes of appli cation of the Act. The record fully
supports these determinations.
In sum, the district court’s findings that the agreement is voidable under two
provisions of the Act are not clearly erroneous . And the court did not err in applying the
Act to these findings.
III. New State is not a good-faith transferee.
If an agreement is voidable under the Act, it may still be enforced if its proponent
demonstrates by a preponderance of the evidence that it was “a good faith transferee.”
Notwithstanding voidabi lity of a transfer or an
obligation under sections 513.41 to 513.51, a good faith
transferee or obligee is entitled, to the extent of the value given
the debtor for the transfer or obligation, to:
(1) a lien on or a right to retain an interest in the asset
transferred;
(2) enforcement of an obligation incurred; or
(3) a reduction in the amount of the liability on the
judgment.

18
Minn. Stat. § 513.48(d). The party seeking to apply this provision bears the burden of
proof, which must be demonstrated by a preponderance of evidence. Id. (g)(1), (h).
“A party to a contract does not act in bad faith by asserting or enforcing legal and
contractual rights.” Sterling Capital Advisors, Inc. v. Herzog, 575 N.W.2d 121, 125 (Minn.
App. 1998) (quotation omitted). But when a party enters into an agreement with “enough
knowledge of the actual facts to induce a reasonable person to inquire further about the
transaction,” that party lacks good faith under the Act. Plotkin v. Pomona Valley Imports,
Inc. (In re Cohen), 199 B.R. 709, 719 (B.A.P. 9th Cir. 1996). “Such inquiry notice suffices
on the rationale that some facts suggest the presence of others to which a transferee may
not safely turn a blind eye.” Id. For this reason, courts “look to what the [creditor]
objectively ‘knew or should have known’ in questions of good faith, rather than examining
what the [creditor] actually knew from a subjective standpoint.” Hayes v. Palm Seedlings
Partners-A (In re Agric. Research & Tech. Grp.), 916 F.2d 528, 535-36 (9th Cir. 1990).
The district court found that New State knew or should have known of Koch
Group’s dire financial condition, under either a balance -sheet or cash -flow analysis. As
noted above, New State conceded Koch Group’s insolvency based on a balance -sheet
analysis, and the court specifically rejected New State’s cash -flow argument, noting that
“[f]inancing existing debt in a manner that reduces daily payments may improve cash flow,
but reduced debt payment is not ind icative of overall cash on hand. ” Doyle’s testimony
that New State’s underwriting had not considered “whether Koch Group could essentially
pay New State and all the other expenses” supports the district court’s finding. Based on

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the record and the Act, we discern no error by the district court in concluding New State
did not prove that it entered the agreement in good faith.
Affirmed.