United States Bankruptcy Appellate Panel

FOR THE EIGHTH CIRCUIT

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No. 04-6064ND

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In re: William A. Klesalek, *

d/b/a Klesalek Excavating *

*

Debtor. *

 * 

Robert Klesalek, successor personal * Appeal from the United States

representative of the Estate of * Bankruptcy Court for the 

Flora Klesalek, * District of North Dakota

 * 

Plaintiff-Appellee, *

*

Darrell Suchy, Connie Thompson, *

Richard Seeman, *

*

Intervenor Plaintiffs-Appellees, *

*

v. *

*

William A. Klesalek, *

*

Defendant-Appellant. *

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Submitted: January 4, 2006

Filed: January 6, 2006

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Before KRESSEL, Chief Judge, FEDERMAN and MAHONEY , Bankruptcy Judges.

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FEDERMAN, Bankruptcy Judge.
2

This is an appeal from an Order of the United States Bankruptcy Court for the

District of North Dakota issued on October 19, 2004, in which the court ordered

debtor William Klesalek to return two parcels of real estate to the estate of Flora

Klesalek for distribution to her heirs. Such Order did not require the estate to

compensate debtor for funds he had paid Flora to purchase such real estate. For that

reason, we reverse and remand.

FACTUAL BACKGROUND

On April 29, 1996, Flora Klesalek executed her last will and testament naming

Darrell Suchy, Connie Suchy (now Connie Thompson), and Richard Seeman, who

were her niece and nephews, as beneficiaries to receive her farmland, consisting of

1127 acres, and 1/4 interest in a parcel of river bottom property (“the real estate”).

Connie, who was helping care for Flora at the time, was named as personal

representative under the will. About that same time, Connie was also named as

Flora’s attorney-in-fact pursuant to a durable power of attorney. Flora paid Connie

$1,050 per month to act as her attorney-in-fact and caregiver.

In October of 1997, Flora fell and broke her hip and, on October 23, 1997, she

was admitted to the Prairie View Nursing Home in Underwood, North Dakota. At that

point, Connie became unable or unwilling to continue caring for Flora. On November

6, 1997, Flora named William Kleselak, another nephew, as her attorney-in-fact,

replacing Connie. Flora offered to pay William $1,050 per month to assume the

responsibility. On November 27, 1997, Flora also named William as her personal

representative under the will, again replacing Connie. From the time Flora entered the

nursing home, William assisted Flora with the management of her assets and payment

of her bills, and visited her regularly. 
3

On December 24, 1997, Flora sold the farmland to William for $163,400,

pursuant to a contract for deed. William made seven payments to Flora between

December 1997 and June 1998 for a total of $165,413, including interest. William

admitted borrowing $15,000 from Flora’s account to make one of the payments, but

William claims he repaid $14,000 of that amount. On June 12, 1998, when all of the

payments had been made under the contract for deed, Flora signed a general warranty

deed conveying the land to William. In addition, on December 23, 1998, Flora sold

William her 1/4 interest in the river bottom property, for $3,000. 

As attorney-in-fact, William was in charge of all of Flora’s income and

expenses and was a signatory on Flora’s accounts, including an American Express

account. He was also named as a beneficiary on that account. On February 2, 1999,

William withdrew $38,600 from the American Express account to pay Flora’s taxes

totaling $17,627, but he could not account for the remaining $20,973. Pursuant to an

agreement with Flora, he also wrote checks for fence and well improvements made

to the farmland, in the total amount of $12,429.89. In addition, at Flora’s direction,

William issued checks from Flora’s account to William’s two sons totaling $23,000

and $10,000, respectively, for their college education. As payment for the salary and

out-of-pocket expenses Flora agreed to pay him for acting as her attorney-in-fact,

William kept Flora’s social security checks, in the amount of $675 per month, and

wrote himself a check on Flora’s bank account for $500 each month. William

received payments of $31,460, plus $7,458 from social security checks, totaling

$38,918, for the 33 months he was her attorney-in-fact. At the time of Flora’s death,

the American Express account had a balance of approximately $90,000, which

included some of the funds William paid to Flora for the farmland and river bottom

properties.

On July 18, 2000, Flora died in the nursing home at the age of 106. Darrell

Suchy, Richard Seeman, and Connie Thompson, as beneficiaries under Flora’s will,

filed an action in the probate court seeking to have William removed as the personal
1

 Robert, Darrell, Richard, and Connie are collectively referred to as the “Plaintiffs.”

4

representative under the will. The probate court granted that motion and issued letters

testamentary to Robert Klesalek as the successor personal representative of Flora’s

estate. On June 27, 2002, Robert Klesalek, in his capacity as successor personal

representative of Flora’s estate, brought suit in state court against William, alleging

he unlawfully acquired Flora’s property while serving as her attorney-in-fact. Darrell,

Richard, and Connie intervened in that action. In February of 2003, an appraiser

appraised the farmland at $367,869 and the river bottom land at $104,715. On April

7, 2003, prior to trial in the state court action, William filed a Chapter 13 bankruptcy

petition. Robert filed an adversary action in William’s bankruptcy case, and Darrell,

Richard, and Connie again intervened.1

 They requested the bankruptcy court to,

among other things, order William to return title to the two parcels of real estate and

other funds he received to Flora’s estate because, they alleged, he obtained title to

those properties and the other monies through undue influence. As to the real estate,

in addition to its return, they asked for separate relief consisting of an accounting for

all rents, profits, and income received by William from such property while he held

title to it. 

The Plaintiffs conceded that Flora was mentally competent through all of the

transactions. Therefore, they attacked the validity of the transactions between Flora

and William on the ground that William had a relationship of personal confidence

with Flora which gives rise to a presumption of undue influence under North Dakota

law. Following a two-day trial, the bankruptcy court held that a confidential

relationship existed between Flora and William, thereby giving rise to the presumption

of undue influence. The bankruptcy court further found that, as to the transfers of the

farmland and river bottom properties, William failed to rebut the presumption of

undue influence and that, under North Dakota law, the transfers of the real estate

constituted a fraud against Flora’s estate. The bankruptcy court also found that

William was overpaid for his services in acting as Flora’s attorney-in-fact in the
2

In their brief Plaintiffs attempted to “cross-appeal,” contending that the court should

have also awarded them an accounting for the rents, profits, and other income William

received while owning the property. On September 15, 2005, we dismissed the

purported cross-appeal, as untimely and procedurally defective.

3

Gourley v. Usery (In re Usery), 123 F.3d 1089, 1093 (8th Cir. 1997); O'Neal v.

Southwest Mo. Bank (In re Broadview Lumber Co., Inc.), 118 F.3d 1246, 1250 (8th

Cir. 1997) (citing First Nat'l Bank of Olathe, Kansas v. Pontow, 111 F.3d 604, 609

(8th Cir.1997)). Fed. R. Bankr. P. 8013.

4

First Nat’l Bank of Olathe, Kansas v. Pontow (In re Pontow), 111 F.3d 604, 609 (8th

Cir. 1997); Sholdan v. Dietz (In re Sholdan), 108 F.3d 886, 888 (8th Cir. 1997).

5

amount of $4,268. However, as to the other transactions, and as to William’s being

made the beneficiary of the American Express account, the bankruptcy court

specifically held that William successfully rebutted the presumption of undue

influence. Thus, the bankruptcy court ordered William to return title to the real estate

to Flora’s estate for distribution to her heirs and entered judgment against William in

the amount of $4,268 for the overpayment of salary. William appealed the bankruptcy

court’s Order.2

STANDARD OF REVIEW

A bankruptcy appellate panel shall not set aside findings of fact unless clearly

erroneous, giving due regard to the opportunity of the bankruptcy court to judge the

credibility of the witnesses.3

 We review the legal conclusions of the bankruptcy court

de novo.4

DISCUSSION

William does not argue that the bankruptcy court erred in finding that he had

a confidential relationship with Flora, or in finding that he failed to rebut the
5

 N.D. Cent. Code § 59-01-08.

6

 N.D. Cent. Code § 59-01-16; see also Gelking v. Boveff (In re Dinnetz), 532 N.W.2d

672, 674 (N.D. 1995).

7

 N.D. Cent. Code § 59-01-16.

8

 In re Dinnetz, 532 N.W.2d at 675.

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presumption of undue influence as to the transfers of the parcels of real estate, or in

finding that he was required to return title to the real estate to Flora’s estate. He also

does not appeal from the judgment entered against him for the overpayment of salary.

Rather, William asserts that the bankruptcy court erred in failing to order that the

money he paid to Flora to purchase that real estate be repaid to him. 

In determining that the Debtor failed to overcome the presumption of undue

influence, the bankruptcy court relied on various provisions of Chapter 59-01 of the

North Dakota Century Code. Although the bankruptcy court’s application of those

provisions is not at issue here, a summary of the relevant statutes is helpful in

determining whether the court erred in fashioning its remedy. Specifically, section

59-01-08 provides, in relevant part, that, “[e]veryone who voluntarily assumes a

relation of personal confidence with another is deemed a trustee within the meaning

of this chapter.”5

 Finding a confidential relationship under section 59-01-08 triggers

a presumption of undue influence under section 59-01-16.6

 Under that section, all

transactions between the trustee and the trustee’s beneficiary, in which the trustee

gains an advantage, are presumed to have been made without sufficient consideration

by the trustee’s beneficiary and under undue influence.7

 Once this presumption has

been established, the trustee bears the burden of rebutting the presumption.8

 Further,

section 59-01-11 provides:

Neither a trustee nor any of the trustee’s agents may take part in any

transaction concerning the trust in which the trustee or anyone for whom
9

 N.D. Cent. Code § 59-01-11(1).

10 N.D. Cent. Code § 59-01-15; see also Cudworth v. Cudworth, 312 N.W.2d 331, 336

(N.D. 1981).

11 Barker v. Ness, 587 N.W.2d 183, 187 (N.D. 1998).

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the trustee acts as agent has an interest, present or contingent, adverse to

that of the trust’s beneficiary, except as follows:

1. When the beneficiary, having capacity to contract, with

a full knowledge of the motives of the trustee and of all

other facts concerning the transaction which might affect

the beneficiary’s own decision and without the use of any

influence on the part of the trustee, permits the trustee to do

so.9

Section 59-01-15, in turn, makes a violation of section 59-01-11 a fraud against the

beneficiary of the trust.10

Having found that William was in a confidential relationship with Flora and that

he failed to rebut the presumption of undue influence as to the transfers of real estate,

the question here is what is the proper remedy. No one disputes that this is an action

in equity and that, therefore, the remedy should be grounded in equity. 

The bankruptcy court ordered William to return the real estate to Flora’s estate,

but did not order the estate to repay the monies he had paid for such real property.

North Dakota recognizes that if a contract is rescinded due to fraud or undue

influence, “[i]t is a fundamental principle of equity that parties must be restored to

their pre-contractual position” so far as is equitable and reasonably possible.11
12 312 N.W.2d 331 (N.D. 1981).

13 Id. at 336.

14 Id. at 337.

15 532 N.W.2d 676 (N.D. 1995).

8

For example, in Cudworth v. Cudworth,

12 the defendant had been appointed

personal representative of his brother’s intestate estate, the major asset of which was

a tract of land. The personal representative sold the land to his own son, without

offering it for sale to any of the other heirs or placing it on the open market. In order

to purchase the land from the estate, the son obtained a loan for part of the purchase

price and granted a mortgage against the property to FmHA. One of the other

beneficiaries later sued the personal representative to void the sale and the mortgage

that had been placed against the property. The trial court held, among other things,

that the personal representative took part in a transaction (the sale of the land to his

son) in which he had a substantial conflict of interest and that the transaction was a

fraud against the heirs under sections 59-01-11 and 59-01-15.13 The North Dakota

Supreme Court affirmed the judgment of the trial court voiding the deed to the son and

voiding the FmHA mortgage, but remanded the case for modification of the judgment

to provide that the estate pay to FmHA the amount outstanding on the mortgage, and

pay the remainder of the purchase price to the son.14 Thus, the North Dakota Supreme

Court ordered the trial court to put the parties back into their respective pre-contract

positions by requiring the estate to repay the son the price he had paid for the

property. 

Similarly, in Thomas v. Thomas (In re Thomas),15 the North Dakota Supreme

Court considered a buy-sell agreement involving an operating business and a parcel

of land. The court held that the surviving partner had exercised undue influence,

within the meaning of Chapter 59-01, in the purchase of the decreased partner’s share.

Therefore, the court held that the deceased partner’s estate was entitled to recover the
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value of its interest in the assets as of the date of death. Significantly, however, the

court also held that the surviving partner was entitled to an offset for the amounts he

had actually paid to the estate under the buy-sell agreement. Once again, the Supreme

Court ordered that the parties in effect be restored to their pre-contractual positions.

Thus, North Dakota law requires that if a transaction is voided for undue

influence, the court is to take such steps as are needed to return the parties to their

original position. As to the real estate purchased by William, the bankruptcy court

voided the transaction for undue influence, but erred in failing to return William to his

original position.

As to the appropriate remedy, Plaintiffs assert that if William wished to be

repaid the amounts paid by him, upon the voiding of the transaction, then he should

have specifically asked for that relief below. But, as shown, to the extent Plaintiffs

sought to void the transaction for undue influence, North Dakota law requires that the

court put the parties back in their pre-contract positions, if it is possible to do so. As

to the payments made by William, the court had before it evidence from which to

make that determination, and therefore was obligated to apply North Dakota law to

that evidence.

Plaintiffs also argue that, to put the parties back in their pre-contractual

positions, they should have been awarded the rents, profits, and income received by

William after he purchased the property. However, they offered no evidence as to the

amount of such rents, profits, and income, so they are not entitled to such relief.

In the alternative, Plaintiffs assert that in awarding William the American

Express account, and in validating certain other transactions, the bankruptcy court

“struck an equitable compromise that did not call William Klesalek to task on every

fiduciary misdeed related to his land purchase but did require him to return the land

to proper heirs without further compensation to him other than the American Express
16 Brief and Cross-Appeal of Appellees, at 12.

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contract balance.”16 As shown, however, the bankruptcy court specifically held that

William had rebutted the presumption of undue influence as to the American Express

account, and as to all transactions other than those involving real estate. Therefore,

Plaintiffs have no basis to argue that the court intended otherwise. 

For the reasons stated, William Klesalek is entitled to recover the $165,413 paid

by him for the real property, less the $4,268 he was found to have been overpaid by

Flora Klesalek, or a total of $161,145. The Order of the bankruptcy court is

REVERSED AND REMANDED for entry of an Order awarding such sum.

 

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