Korth v. Luther, 935 N.W.2d 220

Background

Michael Luther had longstanding judgments against him (including from Korth and Atelier) and federal tax liens by the IRS; he settled certain IRS claims for $450,000. Laura Luther loaned Michael $450,000 to pay that settlement and took a blanket security agreement from Michael securing a $450,000 demand note.
UCC financing statements were filed to reflect Laura’s security interest; the loan proceeds were paid directly to the IRS, which then terminated certain tax liens and the IRS action was dismissed.
Korth (and later Atelier) sued under Nebraska’s UFTA seeking to avoid the security agreement as a fraudulent transfer; they alleged the security agreement itself (a blanket security interest) was the transferred “asset.”
The district court held a bench trial, found no actual intent to hinder/delay/defraud and that Laura acted in good faith, dismissed the UFTA claims with prejudice, and awarded Laura attorney fees under Neb. Rev. Stat. § 25-824 as sanctions for frivolous litigation.
On appeal the Nebraska Supreme Court affirmed the dismissals (the UFTA claims) but reversed the sanctions award, holding plaintiffs failed to prove a cognizable “asset” was transferred and that the award of sanctions was an abuse of discretion.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the blanket security agreement constituted a "transfer" of an "asset" under the UFTA	The security agreement itself (a blanket pledge of future and broad intangibles) is the "asset" transferred and therefore avoidable	No specific property or equity was parted with; any interests described were fully encumbered by superior IRS liens, so no UFTA "asset" was transferred	Held: No. Plaintiffs failed as a matter of law to identify an identifiable, legitimate "asset" parted with; a security agreement is the vehicle, not the asset itself, and encumbered property is excluded from being an "asset."
Whether Michael made the transfer with actual intent to hinder, delay, or defraud creditors (§ 36-705(a)(1))	Michael knew of creditors and was judgment‑deficient; giving a security interest to an insider (wife) made collection harder — evidence of fraudulent intent exists	The loan improved Michael's estate by replacing >$1.2M of IRS claims with $450,000 owed to Laura; transfer extinguished superior IRS liens and therefore did not evidence intent to defraud	Court did not reach this as dispositive: because plaintiffs failed to prove a transfer of an asset, their burden under § 36-705(a)(1) was not met; district court’s factual findings on intent were otherwise sustained.
Whether Laura is entitled to the good‑faith defense (§ 36-709(a))	Plaintiffs argued Laura should have known loan would be uncollectible and thus not in good faith	Laura acted to protect her interest, with no evidence she intended to defraud creditors; transaction documented as a loan and used to pay IRS	District court found Laura acted in good faith; Supreme Court affirmed dismissal without deciding the subjective/objective standard because plaintiffs failed the threshold transfer element.
Whether plaintiffs’ suits were frivolous and warranted § 25-824 attorney‑fee sanctions	Plaintiffs’ claims were meritless and, after notice and supporting documents, plaintiffs persisted making the suits frivolous	The claims raised novel legal questions about inchoate/intangible property under the UFTA and were not wholly without any reasonable legal basis	Held: District court abused discretion in awarding sanctions; plaintiffs’ theory—though strained—was not so wholly without merit as to be "frivolous" under § 25-824.

Key Cases Cited

Matter of Holloway, 955 F.2d 1008 (5th Cir. 1992) (discussing avoidance of security interests where specific identified assets were pledged)
In re Bob Nicholas Enterprise, Inc., 358 B.R. 693 (S.D. Tex. 2007) (property requires a legitimate, identifiable claim of entitlement; inchoate expectations insufficient)
In re Fair Finance Co., 834 F.3d 651 (6th Cir. 2016) (security agreements and reachability of assets under fraudulent transfer law)
Holthaus v. Parsons, 238 Neb. 223 (Neb. 1991) (a conveyance cannot be set aside unless it put property beyond the creditor's reach)
Janice M. Hinrichsen, Inc. v. Messersmith Ventures, 296 Neb. 712 (Neb. 2017) (appellate standard for UFTA-equity actions)
Chicago Lumber Co. of Omaha v. Selvera, 282 Neb. 12 (Neb. 2011) (abuse-of-discretion standard for attorney-fee awards for frivolous litigation)
Essen v. Gilmore, 259 Neb. 55 (Neb. 2000) (there must be a "transfer" before a fraudulent transfer claim exists)