United States Court of Appeals 

### FOR THE EIGHTH CIRCUIT

___________ No. 96-4267

___________ Phillip Kelly, Trustee, *
* Plaintiff/Appellant, *
* v. *
* David Armstrong, Hannah Armstrong, *
* Defendants/Appellees, *
* Theodore F. Armstrong, *
* Defendant, *
* Appeal from the United States Omaha State Bank, * District Court for the District
* of Nebraska. Defendant/Appellee, *
* Lynn Terry, Special Administrator for * the Estate of Theodore F. Armstrong, * deceased, David Armstrong, Special * Administrator for the Estate of * Theodore F. Armstrong, deceased, *
* Appellees. *

___________ Submitted: September 11, 1997 Filed: April 1, 1998

___________

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Before RICHARD S. ARN OLD, Chief Judge, FLOYD R. GIBSON, and BEAM, Circuit Judges.

___________ BEAM, Circuit Judge.
Phill ip Kelly, trustee of David and Hannah Armstrong's bankruptc y estate, brought this action under 11 U.S.C. § 54 8(a), alleging both actual and co nstructive fraud and seeking to set aside four pre-bankruptc y transfers: (1) the sale of David's stock in a f amily ranching corporation to his father, Theodore; (2) the sale of the Arm strongs' home to Theodore; (3) David's pledge of stock as collateral on loans issued by Omaha State Bank; and (4) David a nd Hannah's pledge of several vehicles as additional collateral on the loans. A jury returned a verdict against Kelly on all four claims. The district court denied his motions for a new trial and fo r judgment as a matter of law, and Kelly appeals. We affirm in part, revers e in part, and remand for a new trial.

I. BACKGROUND

Thi s eleven-year-old case comes to us with a long and comple x history. See Abbott Bank-Hemingford v. Armstron g , 931 F.2d 1233 (8th Cir. 1991) ( Armstrong I ); Abbott Bank-Hemingford v. A rmstrong , 44 F.3d 665 (8th Cir

. 1995) ( Armstrong II ). The facts giving rise to the Armstron g bankruptcy saga are fully recited in our opinionin Armstrong I . Here, we offer only those facts directly relevant to the instant appeal. In October of 1986, shortly before declaring bankruptcy, David an d Hannah Armstrong transferred property in a circumspect series o f transa ctions. First, David transferred 1800 shares and the majorit y int erest in Maverick Land and Cattle Company (Maverick), a closely hel d corporati on in which he and his father, Theodore, were the sol e shareholders, to Theo dore for $79,920. Next, in exchange for a pledge by Theodore of over $600 ,000 worth of securities, Omaha State Bank increased

## Ne braskalaw has been amended to limit the value of exempt annuities to 1 

## $10,000. See Neb. Rev. Stat. § 44-371 (Reissue 1988). Theodore Armstrong died on May 19, 1997. As Special Administrators for his 2 

## estate, Lynn Terry and David Armstrong were substituted for him in this appeal.
-3- Mav erick's credit line from $200,000 to $600,000. Maverick borrowe d aga inst the new credit line to repay Theodore $157,700, in partia l satisf action of an outstanding debt. Soon thereafter, Theodore purchased David and Hannah's residence for that exact amount.

Dav id then pledged his remaining shares of Maverick to Omaha Stat e Bank as additional security on the credit extension. David and Hannah also pledged several of their vehicles to secure the loan, although Omaha State Bank neither required nor requested that they do so. Finally, with th e proceeds from the sale of their house, David and Hannah purc hased annuities that were exempt from execution under Nebraska law. See Neb. Rev. Stat. 1 § 44-371 (Reissue 1984).

Davidand Hannah Armstrong filed their bankruptcy petition on Decembe r 31, 1986. As a result of the foregoing transactions, virtually all o f their assets were encumbered to t he benefit of Omaha State Bank and to the detriment of all other creditors. The Chairman of the Boardof Omaha State Bank, Marvin Schmid, was a personal friend of Theodore's, and Schmid' s former law partner has represented Theodore, David, and Hannah throughout 2 these proceedings.

On e of the disadvantaged creditors, the Abbott Bank-Hemingford , formerly known as the Bank of Hemingford, (Bank) asked the b ankruptcy court to disallow the exemption for the annuities on the grounds that th e Armstrongs had acquired them in a fraudulent transaction. T he court denied the Ba nk's motion, because it found no "extrinsic evidence of fraud" with respect t o that transaction. The Bank then moved the court to deny th e Armstrongs' discharge in bankruptcy, based on the fact that they had

## In t

he interim, the Armstrongs also objected to the Bank's million dollar claim 3 

## against their estate. They argued t hat the claim was extinguished by the Bank's failure to give proper notice of the sale of $950worth of hay and equipment. The bankruptcy court found in favor of the Armstrongs and the district court affirmed. We reversed on appeal, because we concluded that collateral estoppel from our holding in Armstrong Ibarred the lower courts' finding. See Armstrong II , 44 F.3d at 665.
-4- transfer red property with the intent to hinder, delay, or defraud thei r credit ors. The court found that the Armstrongs had acted with fraudulent intent, an d granted the Bank's motion. The district court affirmed bot h conclusions, and we affirmed on appeal. See Armstrong I , 93 1 F.2d at 1237.

Sub sequently, Phillip Kelly, the trustee of the Armstrongs ' 3 bankr uptcyestate, filed this action in district court, seeking to se t asid e each of the following transactions: the sale of David's Maveric k stock to Theodore; the sale of the Armstrongs' house to Theodore; David's ple dge of his remaining Maverick stock to Omaha State Bank; David an d Hannah's pledge of vehicles to Omaha State Bank. On each of his claims , the jury found against Kelly. Kelly now appeals the section 548(a)(1 ) actual fr aud claims as to all four transfers and all defendants, and th e sectio n 548(a)(2) constructive fraud claim with respect to David's pledge of stock to Omaha State Bank, asserting several points of error.

II. DISCUSSION

A. Collateral Estoppel
Kelly asserts that the Armstrongs are precluded from relitigating the issue of fraudulent intent because the bankruptcy court made an earlie r finding that they transferred property with intent to hinder, delay, o r defraud t heir creditors. We do not agree that the bankruptcy finding i s controlling in this case.

## -5- The doctrine of collateral estoppel "has the dual purpose o f protecting litigants from the burden of relitigating an identical issue .

. . and of promoting judicial economy by preventing needless litigation." Parklane Hosiery Co. v. Shore , 439 U.S. 322, 326 (1979). Four requirements must be met before a finding in a previous case is conclusive: (1) th e issue must be identical to that involved in the prior proceeding; (2) the issue m ust have been actually litigated; (3) the issue must have bee n det ermined by a valid and final judgment; and (4) the determination mus t have been essential to the judgment. See Farmland Indus., Inc. v. Morri sonQuirk Grain Corp. , 987 F.2d 1335, 1339 (8th Cir. 1993).

The issue decided in the discharge proceeding is different from th e issue presented inthis case. The bankruptcy court denied the Armstrongs' discharge because it found that they had acted with intent to hinder, de lay, or defraud their creditors. That finding ref ers to the Armstrongs' conduct in the administrat ion of their estate generally. The only conclusion that
necess arilyfollows from the bankruptcy court's finding is that, at som e point during the a ctivity preceding the filing of the bankruptcy petition, the Armstrongs' behavior indicated an intent to hinder, delay, or defraud their creditors. This case involves four distinct transactions, and th e issue is whether any of them, individually, involved fraudulent intent

. That q uestion is not answered by the bankruptcy court's general finding

. Moreover , even if we were to determine that the issues are sufficientl y similar, we still could not justify the use of issue preclusion agains t Theodore or Omaha State Bank, neither of whom were parties to the discharge litigation, and neither of whom had any opportunity to litigate the issue decided in that case. Accordingly, none of t he defendants in this case can be collaterally estopped from litigating the issue of the Armstrongs' in tent in making the contested transfers. B. Burden of Proof
Kelly argues that the district co urt erred in failing to instruct the jurythat, if it were to find multiple badges of fraud with regard to any transfer, the burden would shift

## Rule 301 provides that "a pre sumption imposes on the party against whom it is 4 

## directed the b urden of going forward with evidence to rebut or meet the presumption, butdoes not sh ift to such party the burden of proof in the sense of the risk o f nonpersuasion, which remains throughout the trial upon the party on whom it wa s originally cast."
-6- to the defendants to establish a legitimate supervening purpose for making that transfer. Th e district court instructed the jury that it could "give the prese nce or absence of [badges of fraud] such weight as [the jur y thought] the[ir] p resence or absence deserve[d]." Kelly contends that the
common law of fraudulent conveyances shifts the burden of both production and persuasion to the defendants once multiple badges of fraud have bee n established, and furthermore, that Federal Rule of Evidence 301 should not 4 be applied to change this allocation of burdens. We agree.

In an act ion under 11 U.S.C. § 548(a)(1), it is unlikely that a trustee will be able to present adequate direct evidence to establish the debtor's intent to defraud creditors. See In re Acequia, Inc. , 34 F.3d 800, 80 5-06 (9th Cir. 1994). Therefore, courts look for common indicia, o r badges of fraud, which have frequently bespoken fraudulent intent in th e past. So me badges of fraud are: (1) actual or threatened litigatio n against t he debtor; (2) a transfer of all or substantially all of th e debtor's property; (3) insolvency on the part of the debtor; (4) a special relationship between the debtor and the transferee; and (5) retention of the property by the debtor after the transfer. S ee, e.g. , Max Sugarman Funeral Home, Inc. v. A.D.B. Investors , 926 F.2d 1248, 1254 (1st Cir. 1991); se e also In re Sherman , 67 F.3d 1348, 1354 (8th Cir. 1995) (listing badges of fraud in a fraudulent conveyance case governed by Missouri law). Once a trustee establishes a confluence of several b adges of fraud, the trustee is entitled to a presumption of fraudulent intent. See Acequia , 34 F.3d a t 806; In re Bateman , 646 F.2d 1220, 1223 (8th Cir. 1981). In such cases , "the burden shifts to the transferee to prove some 'legitimate supervening purpose' for the transfers at issue." Acequia , 34 F.3d at 806.

## -7- Federal Rule of Evidence 301 states that a presumption imposes upo n a part y against whom it is directed the burden of production, or goin g forward w ith the evidence, but does not shift the burden of proof, o r pe rsuasion. Long-standing principles of substantive law regardin g presumptions, however, will often trump the provisions of Rule 301. See, e.g. , James v. River Parishes Co. , 686 F.2d 1129, 1133 (5th Cir. 1982 ) (stating that "th[e] inference or presumption of negligence [on an admir alty law issue] . . . i s not governed by Rule 301 . . . [but] is determined, as
a matter of substantive law, in light of the considerations that prompted its adoption"). We have explained in previous cases that, upon a showing of mult iple badges of fraud, "'[t]he burden which shifts . . . is not a burden of going forward with the evidence requiring the bankrupt to explain away natural infer ences, but a burden of proving that he has not committed the objectionable acts with which he has beencharged.'" Bateman , 646 F.2d at 1223 n.4 (quoting Shainman v. Shear's of Affton, Inc. , 387 F.2d 33, 37 (8th Cir. 1967)).

The in struction given by the district court—that badges of fraud, if found, could be given whatever weight the jur y thought they warranted—could potentiallyhave resulted in the jury's improper allocation of the burden of proof. As the case was submitted, the jur y was free to return a verdict in favor of the defendants, despite finding the existence of multiple ba dges of fraud and disbelieving the defendants' explanations for the transfers

. The di strict court's failure to instruct the jury properly regarding th e burden of proof co nstitutes reversible error. See American Eagle Ins. Co. v. Thompson , 85 F. 3d 327, 332 (8th Cir. 1996). Therefore, the four actual fraud cl aims under section 548(a)(1) must be remanded for a new trial.

We have considered the other issues raised by Kelly, including th e district court's denial of his motion for judgment as a matter of law onhis constructive fraud claim under section 548(a) (2), and we conclude that they
are with out merit. Accordingly, we affirm the judgment of the distric t court in all other respects.

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III. CONCLUSION

Fo r the foregoing reasons, the judgment of the district court i s affirmed in part, reversed in part, and remanded for a new trial.

A true copy.
ATTEST:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.