United States Court of Appeals FOR THE EIGHTH CIRCUIT

No. 97-1566

National Credit Union Administration * Board, as conservator for Renville * Farmers Co-op Credit Union, *
* Plaintiff-Appellee, *
* v. * Appeal from the Unite d States
* District Court for the Scott Johnson, * District of Minnesota.
* Defendant-Appellant, *
* Norman Westby, *
* Defendant, *
*

------------------------------- *
* Lindquist & Vennum, P.L.L.P., *
* Appellant. *

Submitted: November 17, 1997 Filed: January 15, 1998

Before BEAM, HEANEY, and JOHN R. GIBSON, Circuit Judges.Bysending the checks through the clearinghouse system, Johnson’s accounts 1
weregiven credit for the deposit of the checks on the day he deposited them, and the debit from the same account would not occur for several days while the checks went
2 HEANEY, Circuit Judge.

Scott Johnson and his counsel, Lindquist & Vennum , P.L.L.P. ( L & V), appeal the district court’s grant of a preliminar y injunction directing L & V to pay $72,325.04 to t he National Credit Union Association Board (NCUAB)

. The law firm received the money from Johnson as a nonr efundable retainer for L & V’s representation o f John son in civil and criminal litigation arising out a chec k-kiting scheme with the Renville Farmers’ Co-o p Credit Union (Credit Union). We reverse.

I.
Johnson bought and s old cattle and hogs. In November 1995, he owned approximately 8,200 head of ca ttle and 950 head of hogs, which he had placed in custom feedlot s thro ughout the Dakotas, Minnesota, and Nebraska. I n addition, he owned approximately 650 cattle at his farm.

In the late 1980s, Johnson began a practice whereb y he woul d overdraw his bank account at the Credit Union , and at the end of the month, he would write c hecks on the
same accou nt to cover the deficiency. He was successful at using the float on the checks to appear to have a balanced account through the assistance of a Credit Union insider wh o processed Johnson’s checks through the check clearinghouse system rather than as same day funds. As 1through the clearinghouse.
3

a result, Johnson avoided detection that his account was overdrawn by appearing to have a positive balance at the end of eac h month. Through this process, Johnson ran up
over $7.9 million in indebtedness to the Credit Union.A security agreement did, in fact, exist regarding Johnson’s a ssets of “livestock, 2 machine ry, equipment and inventory” filed with the Renville County Recorder , although it was not filed in the offic e of the Minnesota Secretary of State. By the time L& V discovered the agreement, the law firm had already commenced it s repre sentationof Johnson. Although the parties contest the validity of the security agreement, we need not address the issue for the purpose of this appeal.
4 After the Minnesota Department of Commerc e (Department) discovered the discrepancy created b y Johnson’s overdrafts, the Department declared the Credit Union i nsolvent on November 17, 1995. The Departmen t firs t appointed the NCUAB as conservator and the n receiver of the Credit Union.

On November 15th or 16th, Johnson received a demand to present a listing of all of his assets to the Credi t Union by 8:00 a.m. on November 17, 1995. Law rence Frank,
an a ttorney who represented Johnson in discussions wit h the examiners, investigators and other officials , promp tlyintroduced Johnson to L & V for the purpose o f having the firm represent Johnson with respect to hi s potential civil and criminal liability arisin g out of the Cre dit Union transactions. L & V consulted Fran k
conc erning whether the Credit Union had a securit y agreement covering Mr. Johnson’s business assets , in cluding his cattle. Frank indicated that based o n asserti ons of the bank examiners and directors of th e Credit Union, including the chairman, no securit y agreement existed. 2

At a m eeting on November 17, 1995, Johnson an d representatives of L & V discussed the terms of a nonrefunda ble retainer agreement, and Johnson gave L & V third-party checks totaling $61,139.81 payabl e to Johnson5

from the sale of cattle and hogs. On November 20, 1995 , John son signed over additional checks he received fro m the sal e of cattle and hogs and miscellaneous source s totaling $11,185.23 also payable to Johnson. On the same day , Johnson and L & V entered into a nonrefundabl e retainer agreement in exchange for the $72,32 5.04 Johnson had given to L & V. The retainer agreement provides:6

We have discussed the retainer necessary for us to u ndertake your representation. By agreein g to re present you, we generally forego th e op portunityto represent any other entity o r ind ividual with respect to your financial an d rel ated issues, without your consent

. Furthermore, we wish to reduce or eliminate the risk of retainer funds being g arnished or levied upon by potential or existing judgmen t creditors. Consequently, we have requested and you h ave agreed to pay us a non-refundabl e retainer of $72,325.04. (Appellant’s App. at 12.)

On November 22, 1995 , Thomas Fabel, an attorney at L & V, had a telephone conversation with Robert Roach, the attorneyfor the NCUAB. Roach advised Fabel that th e NCUAB had found no evidence of any liens or a securit y intere st in Johnson’s assets. Roach told Fabel he wa s inte rested in negotiating with Johnson to recover th e assets because, in the absence of a security interest, it would take too long to obtain prejudgment attachment t o secure amounts allegedly owned by Johnson.

On November 29, 1995, L & V met with Roach, Josep h Visconti, Director of the NCUAB, and an Assistant United States Attorney. At that meeting it was confirmed tha t the NCUAB was not aware of any written loan agreement or other form al security agreement covering the majority of Johnso n’s assets, including the cattle. L & V advise d thos e present that it had a nonrefundable retaine r agree ment with Johnson. This fact was confirmed in a letter by L & V to Roach dated December 1, 1995.7

On Dece mber 6, 1995, Roach confirmed that the NCUA B ha d yet to come across any loan agreement or othe r security i nstrument regarding the cattle, and he did not belie ve the NCUAB would find any such agreements o r instrument s. That same day the NCUAB filed suit against Johnson seeking injunctive relief requesting th e imme diate seizure of Johnson’s assets and recovery o f $7.9 million. The trial court issued an ex parte orde r on December 7 freezing Johnson’s assets and setting aThe FCUA provides: 3

The Board, as conservator or liquidating agent for any insured credi t union , may avoid any transfer of any interest of an institution-affiliate d party, or any person who the Board determines is a debtor of th e institution, in property, or any obligation incurred by suc h party or person, thatwas m ade within 5 years of the date on which the Board become s co nservator

or liquidating agent if such party or person voluntarily o r involuntari ly made such transfer or incurred such liability with the intent to hinder, delay, or defraud the insured credit union or the Board.
12 U.S.C. § 1 787(b)(16)(A). The Board may recover the property or value of th e property exchanged in an avoided transfer under 12 U.S.C. § 1787(b)(16)(B), except in the case where

the transferee took the property “for value, including satisfaction or securing of a present

or antecedent debt, in good faith.” 12 U.S.C. § 1787(b)(16)(C).
8 tempor aryinjunction hearing for December 15. Followin g this h earing, the court issued a temporary restrainin g order freezing all of Johnson’s assets and ordered a prelim inaryinjunction hearing. Prior to that hearin g Johnson and his counsel stipulated to the issuance of a preli minaryinjunction, entered on December 22, 1995 , nami ng the NCUAB as trustee to collect Johnson’s assets

.

Cit ing the Federal Credit Union Act (“FCUA”), 1 2 U.S .C. § 1787(b)(16)(A), on February 9, 1996, the NCUA B 3 demanded that L & V return the funds paid to it by Johnson fo r the nonrefundable retainer agreement. L & V refuse d to return the funds and the NCUAB moved the distri ct court for a n order directing L &V to return the funds an d holding L & V i n contempt. The NCUAB argued that Johnson gave the checks to L & V to hinder, delay, or defraud the Credit Union; that the Credit Union holds a valid security agreement in all of Johnson’s assets; and that L & V ha d9

not received the payment in good faith. L & V arg ued that the court was without jurisdiction because L & V was no t
a party t o the original order, that no one held a senio r secur ityinterest prior to L & V, that Johnson made th e transfer to secure legal10

counsel, and that L & V took the checks for value and i n good faith. The district court granted the NCUAB’ s order, stating that it was persuaded “at this time” that th e nonrefundable retainer fee was transferred with th e intent by Johnson to hinder, delay or defraud the Credit Union

. In support of this finding, the court stated:

The rec ord establishes that L & V was aware o f the clai m made against Johnson’s assets. L & V was informed that the records of the Renville CU showed an overdraft in Johnson’s account o f app roximately$7.9 million, which woul d sufficiently establish Johnson was insolvent

. Furthermore, the language of the retaine r agreement establishes that the inte nt of entering into such a contract was not for th e sole purpose [of] establishing L & V’s availability t o repr esent Johnson, but to “reduce or eliminat e the risk of retainer funds being garnished o r lev ied upon by potential or existing judgmen t creditors.” This evidence is sufficient t o suppo rt a finding that L & V did not take th e checks in good faith.

Na tional Credit Union Admin. Bd. v. Johnson , No. 3-95

- 11 17, Mem. and Order, slip op. at 8 (D. Minn. Jan. 14 , 1997). Johnson and L & V appeal.

II.

We review the district co urt’s grant of a preliminary injunction for an abuse of discretion. Coleman v. Turner , 838 F.2d 1004, 1006 (8th Cir. 1988) (per curiam). In s o doing, we do not “pass . . . judgment on the underlyin g issues,” but rather we “ensure that the injunctiondid not im properlyissue on the basis of any clearly erroneou s fi ndings of fact or any clear error on an issue of la w that may have affected the ultimate balancing of th e11

[factors consid ered for a preliminary injunction].” Olin Water S ervices v. Midland Research Lab., Inc. , 774 F.2 d 303, 307 (8th Cir. 1985).
A court generally conside rs four factors to determine whet her a party is entitled to a preliminary injunction : (1) the threat of irreparable harm to the movant; (2) the balance between the potential harm and any harm tha t granting the injunction will causeThe statute provides that “Rule 65 of the Feder al Rules of Civil Procedure shall 4 apply to [a proce eding placing assets under control of the NCUAB] without regard to the requirement of such rule that the applicant show that the injury, loss or damage is irreparable and immediate.” 12 U.S.C. § 1787(b)(2)(H)(I).
12 to othe r parties to the litigation; (3) the probabilit y that the movant will succeed on the merits; and (4) th e public interest. Dataphase Sys., Inc. v. C.L. Sys ., Inc. , 640 F.2d 109, 1 13 (8th Cir. 1981). Where the NCUAB moves for a preliminary injunction, Congress has expressl y remove d the requirement that the movant show tha t irre parable harm will result without the injunction. 1 2 U.S.C. § 1787(b)(2)(H)(I). 4

The FCUA makes it clear that the NCUAB, a s conservator, is empowered to avoid a transfer made by a pa rtyto hinder, delay, or defraud the Credit Union, an d that the NCUAB may reverse such a transfer unless th e tr ansferee received the property for value and in goo d fait h. See note 3. In this case, the question turn s largel yon whether NCUAB can establish a reasonabl e probability of success on the merits.

Bef ore we consider whether the district court abuse d its discretion, we address L & V’s contention that th e district court lacked jurisdiction to grant injunctiv e relief. L & V argues that the court lacked jurisdictio n because L & V was not made a party to the action. W e reject this argument. The FCUA specifically provides:
(G) Attachment of assets and injunctive relief Subje ct to subparagraph (H), any court o f competent jurisdiction may, at the request of the Board (in the Board’s capacity as conservator or liquidating agent for any insured c redit union or13

in the Board’s corporate capacity i n the exercise of any authority under this section), issue a n ord er in accordance with Rule 65 of the Federa l Ru les of Civil Procedure, including an orde r placing the assets of any person designated b y the Board under the control of the court an d appointing a trustee to hold such assets.14

12 U.S.C. § 1787(b)(2)(G).

We believe that under this section, the district cour t had ju risdiction to issue the preliminary injunction i n accordan ce with Rule 65 of the Federal Rules of Civi l Proce dure. L & V was named and served in the Rule 6 5 procee ding that resulted in the district court orde r requirin g L & V to turn over to the NCUAB the funds tha t it had re ceived as a nonrefundable retainer. L & V doe s not r aise a due process argument, and we do not believ e that one exists because L & V had notice of the pr oceeding and sub mitted affidavits in argument and support of it s po sition. We turn now to the question of whether th e distri ct court abused its discretion in granting th e preliminary injunction.
A. Reasonable Probability of Success

The district court had to decide whether the NCUAB ha d a reasonable probability of success on two closely related issue s: The first is did Johnson transfer the sum o f $72,325 t o L & V to hinder, delay, or defraud the Credi t Union o r the NCUAB; and the second is did L & V take th e property for value and in good faith? Th e FCUA has two important sections dealing with th e NCUA B’s powers with respect to transfers of any propert y within five years of the date that the NCUAB become s conservator of a failing credit union. Section A permits the NCUAB to av oid any transfer of property made with the in tent to burden, delay, or defraud the insured credi t union or the board. Under this section, the inten t of the transferor is the controlling factor. Rare will be th e case in which the transferor admits that he intended t o make an impermissible transfer. Intent will, in mos t instances, have to be proved by extrinsic evidence . Among15

the more common badges of fraudulent intent at the time of a transfer are:16

(1) a ctual or threatened litigation against th e debt or; (2) purported transfer of all o r subst antiallyall of the debtor’s property; (3 ) insolvency or other unmanageable indebtedness on the part of the debtor; (4) a specia l relationship between the debtor and th e transferee; and (5) retention by the debtor o f the property involved in the putative transfer.

. . . . “the confluence of several [badges of fraud] can constitute conclusive evidence of an actua l intent to defraud.”

F.D.I.C. v. Anchor Properties , 13 F.3d 27, 32 (1st Cir

. 1994), (quoting Max Sugarman Funeral Home, Inc. v. A.D.B. Investors , 926 F.2d 1248, 1254-55 (1st Cir. 1991)). I n this c ase there was actual or threatened litigatio n against the debtor and there was insolvency on the part of the d ebtor, but the debtor did not transfer all o r su bstantiallyall of his property. There was no specia l relati onship between the debtor and transferee, and th e debtor did not retain any of the property involved in the transfer.

Her e, Johnson’s intent was to obtain competent lega l representation in a complicated bankruptcy case fraugh t with both criminal and civil issues. There is no evidence that he i ntended to place the money transferred to L & V to put it out of the reach of the NCUAB and credit ors. If the su m transferred was unreasonable, clearly such a n intent can be inferred, but the sum was clearly re asonable in light of the complexity of his legal problems. Thus , the question becomes whether this transfer was ill egal per se under the FC UA simply because the inevitable effect of the transfer will be to reduce the assets available fo r the Credit Union and other creditors. We do not believ e17

th at this result is dictated either by the plain meanin g of the FCUA or the intent of Congress. To put the matter simpl y, the FCUA does not prohibit a debtor of a credi t union to enter into a nonrefundable retainer agreement , provided the payment is a reasonable one; and the NCUA B agrees that for the purposes of this appeal, we shoul d
assume that the retainer was a reasonable one. Clearl y Congress could prohibit such payments, but it has not done
so.18

Th e NCUAB argues that this case should be controlle d by United States v. Monsanto , 491 U.S. 600 (1989). I n that case, the question was whether the federal dru g forf eiture statute gives the district court the power t o fr eeze a defendant’s assets in his possession even if h e wishes to use them to pay for an attorney. The Suprem e Court in a 5-4 vote held that the language of § 85 3 of the forfeiture stat ute was plain and unambiguous. It stated, “sectio n 853(a) provides that a person convicted of th e offenses charged in respondent’s indictment ‘shall forfeit . . . any property that was derived from the commi ssion of these offenses. ” Id. at 607. We recognize that Monsanto gives so me comfort to the NCUAB’s position. We note , however, that the opinion deals only with funds in th e possession of a defendant at the time the forfeitu re order is entered and that the forfeiture requires that th e defend ant be convicted of a crime and the propert y forfeited be derived from the proceeds of the crime o r used to facilit ate the crime. We are reluctant to extend Monsanto to the facts of this case.

Even if we were to hold that Johnson’s intent was a n imperm issible one, there remains the question of whethe r L & V took the $72,325 nonrefundable retainer for valu e and in good faith. There is no question but that L & V took the retainer for value. Indeed, no one argues tha t L & V did not g ive value for the fee. So the question is did it take the payment in good faith? L & V, of course, knew that Johnson was in deep trouble. It knew that i t
was likely that he would be faced with both criminal an d ci vil litigation. It knew that the checks tendered wer e checks that wou ld become part of the bankruptcy estate if it d id not accept them in payment of its retaine r agreement. It inquired as to whether the livestoc k, which Johns on sold, was covered by a security agreement an d19

received a negative answer. So the question is whethe r th is conduct constitutes lack of good faith within th e meaning of the FCUA. We do not believe that it does. L & V clearly was not obligated to represent Johnson unless it could be assured of payment. It reasonably relied o n re presentations to it that the livestock that had bee n sold was not covered by a security agreement. So the y were fac ed with the question of whether the FCUA mad e acceptance of t he retainer an act of bad faith. The FCUA does not specifically define good faith and report ed cases as of the date L & VIn U niversity of Texas v. Camenisch , 451 U.S. 394, 395-96 (1981), th e 5 Supreme Court stated:

The purpose of a preliminary injunction is merely to preserve the relat ivepositions of the parties until a trial on the merits can be held

. Given this limited purpose, and given the haste that is often necessary if those positions are to be preserved, a preliminary injunction is customarily granted on th e basis of procedures that are less formal and evidence that is less complete than i n a trial on the merits. A party thus is not required to pr ove his case in full at a preliminary injunction hearing, . . . and th e findings of

fact and conclusions of law made by a court granting a preliminary injunction are not binding at trial on the merits . . . .
20 accepted the retainer fee indicate only that accep tance of a nonrefundable retainer from a bankrupt is improper only if the retainer was excessive or a means of hiding assets of the bankrupt. See, e.g., FDIC v. Cafritz , 762 F. Supp. 1503, 1507 (D. D.C. 1991). On remand, the matter, of course, will be heard on th e merits

. See Olin Water Servs. v. Midland Researc h Laboratories, Inc. , 774 F.2d 303, 308 (8th Cir. 1985). I f 5 at that time the NCUAB can establish that the fee paid was
an unr easonable one, examined as of the date of th e transfer, then L & V will have to return the nonre fundable retai ner, otherwise it will not. We simply hold as a matter of law that an insolvent debtor in a bankruptc y procee ding may pay a nonrefundable retainer to attorney s of his choice for representation if the amount paid i s reasonable and is not taken from assets that the law firm either knew or should have known were secured at the time they were paid.

B. Balance of Harms

We belie ve that the balance is equal in this case

. Both p arties can financially respond to any judgmen t21

entered by the district court when the matter is heard on the merits.22

C. Public Interest

The final factor is whether granting the injunctio n was in the public interest. For the reasons state d in the
se ction dealing with the probability of success on th e merits, we do not believe that a preliminary injunctio n was in the public interest. Important as it is to protect the asse ts of credit unions from those who attempt t o defraud them, the interests of the public will not b e served by affirming the grant of the preliminar y injunction.

III.

For the foregoing reasons, we determine that th e distri ct court abused its discretion in granting a preliminary injunction in favor of the NCUAB. The court’s order directing L & V to return $72,325.04 to the NCUAB to be held in trus t pending further proceedings is reversed.

A true copy.

Attest.

CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT

.