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 United

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.

 
By sending the checks through the clearinghouse system, Johnson’s accounts 1

were given 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

preliminary injunction directing L & V to pay $72,325.04

to the National Credit Union Association Board (NCUAB).

The law firm received the money from Johnson as a

nonrefundable retainer for L & V’s representation of

Johnson in civil and criminal litigation arising out a

check-kiting scheme with the Renville Farmers’ Co-op

Credit Union (Credit Union). We reverse.

I.

Johnson bought and sold cattle and hogs. In November

1995, he owned approximately 8,200 head of cattle and 950

head of hogs, which he had placed in custom feedlots

throughout the Dakotas, Minnesota, and Nebraska. In

addition, he owned approximately 650 cattle at his farm.

In the late 1980s, Johnson began a practice whereby

he would overdraw his bank account at the Credit Union,

and at the end of the month, he would write checks on the

same account 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 who processed Johnson’s checks through the check

clearinghouse system rather than as same day funds. As 1
through the clearinghouse. 

3

a result, Johnson avoided detection that his account was

overdrawn by appearing to have a positive balance at the

end of each 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 assets of “livestock, 2

machinery, equipment and inventory” filed with the Renville County Recorder,

although it was not filed in the office of the Minnesota Secretary of State. By the time

L & V discovered the agreement, the law firm had already commenced its

representation of 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 Commerce

(Department) discovered the discrepancy created by

Johnson’s overdrafts, the Department declared the Credit

Union insolvent on November 17, 1995. The Department

first appointed the NCUAB as conservator and then

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 Credit

Union by 8:00 a.m. on November 17, 1995. Lawrence Frank,

an attorney who represented Johnson in discussions with

the examiners, investigators and other officials,

promptly introduced Johnson to L & V for the purpose of

having the firm represent Johnson with respect to his

potential civil and criminal liability arising out of the

Credit Union transactions. L & V consulted Frank

concerning whether the Credit Union had a security

agreement covering Mr. Johnson’s business assets,

including his cattle. Frank indicated that based on

assertions of the bank examiners and directors of the

Credit Union, including the chairman, no security

agreement existed. 

2

At a meeting on November 17, 1995, Johnson and

representatives of L & V discussed the terms of a

nonrefundable retainer agreement, and Johnson gave L & V

third-party checks totaling $61,139.81 payable to Johnson
5

from the sale of cattle and hogs. On November 20, 1995,

Johnson signed over additional checks he received from

the sale of cattle and hogs and miscellaneous sources

totaling $11,185.23 also payable to Johnson. On the same

day, Johnson and L & V entered into a nonrefundable

retainer agreement in exchange for the $72,325.04 Johnson

had given to L & V. The retainer agreement provides:
6

We have discussed the retainer necessary for us

to undertake your representation. By agreeing

to represent you, we generally forego the

opportunity to represent any other entity or

individual with respect to your financial and

related issues, without your consent.

Furthermore, we wish to reduce or eliminate the

risk of retainer funds being garnished or levied

upon by potential or existing judgment

creditors. Consequently, we have requested and

you have agreed to pay us a non-refundable

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

attorney for the NCUAB. Roach advised Fabel that the

NCUAB had found no evidence of any liens or a security

interest in Johnson’s assets. Roach told Fabel he was

interested in negotiating with Johnson to recover the

assets because, in the absence of a security interest, it

would take too long to obtain prejudgment attachment to

secure amounts allegedly owned by Johnson.

On November 29, 1995, L & V met with Roach, Joseph

Visconti, Director of the NCUAB, and an Assistant United

States Attorney. At that meeting it was confirmed that

the NCUAB was not aware of any written loan agreement or

other formal security agreement covering the majority of

Johnson’s assets, including the cattle. L & V advised

those present that it had a nonrefundable retainer

agreement with Johnson. This fact was confirmed in a

letter by L & V to Roach dated December 1, 1995. 
7

On December 6, 1995, Roach confirmed that the NCUAB

had yet to come across any loan agreement or other

security instrument regarding the cattle, and he did not

believe the NCUAB would find any such agreements or

instruments. That same day the NCUAB filed suit against

Johnson seeking injunctive relief requesting the

immediate seizure of Johnson’s assets and recovery of

$7.9 million. The trial court issued an ex parte order

on December 7 freezing Johnson’s assets and setting a
The FCUA provides: 3

The Board, as conservator or liquidating agent for any insured credit

union, may avoid any transfer of any interest of an institution-affiliated

party, or any person who the Board determines is a debtor of the

institution, in property, or any obligation incurred by such party or person,

that was made within 5 years of the date on which the Board becomes

conservator or liquidating agent if such party or person voluntarily or

involuntarily 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. § 1787(b)(16)(A). The Board may recover the property or value of the

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

temporary injunction hearing for December 15. Following

this hearing, the court issued a temporary restraining

order freezing all of Johnson’s assets and ordered a

preliminary injunction hearing. Prior to that hearing

Johnson and his counsel stipulated to the issuance of a

preliminary injunction, entered on December 22, 1995,

naming the NCUAB as trustee to collect Johnson’s assets.

Citing the Federal Credit Union Act (“FCUA”), 12

U.S.C. § 1787(b)(16)(A), on February 9, 1996, the NCUAB

3

demanded that L & V return the funds paid to it by Johnson

for the nonrefundable retainer agreement. L & V refused

to return the funds and the NCUAB moved the district court

for an order directing L &V to return the funds and

holding L & V in 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 had
9

not received the payment in good faith. L & V argued that

the court was without jurisdiction because L & V was not

a party to the original order, that no one held a senior

security interest prior to L & V, that Johnson made the

transfer to secure legal
10

counsel, and that L & V took the checks for value and in

good faith. The district court granted the NCUAB’s order,

stating that it was persuaded “at this time” that the

nonrefundable retainer fee was transferred with the intent

by Johnson to hinder, delay or defraud the Credit Union.

In support of this finding, the court stated: 

The record establishes that L & V was aware of

the claim made against Johnson’s assets. L & V

was informed that the records of the Renville CU

showed an overdraft in Johnson’s account of

approximately $7.9 million, which would

sufficiently establish Johnson was insolvent.

Furthermore, the language of the retainer

agreement establishes that the intent of entering

into such a contract was not for the sole purpose

[of] establishing L & V’s availability to

represent Johnson, but to “reduce or eliminate

the risk of retainer funds being garnished or

levied upon by potential or existing judgment

creditors.” This evidence is sufficient to

support a finding that L & V did not take the

checks in good faith.

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

1117, Mem. and Order, slip op. at 8 (D. Minn. Jan. 14,

1997). Johnson and L & V appeal.

II.

We review the district court’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 so

doing, we do not “pass . . . judgment on the underlying

issues,” but rather we “ensure that the injunction did not

improperly issue on the basis of any clearly erroneous

findings of fact or any clear error on an issue of law

that may have affected the ultimate balancing of the
11

[factors considered for a preliminary injunction].” Olin

Water Services v. Midland Research Lab., Inc., 774 F.2d

303, 307 (8th Cir. 1985). 

A court generally considers four factors to determine

whether 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 that

granting the injunction will cause
The statute provides that “Rule 65 of the Federal Rules of Civil Procedure shall 4

apply to [a proceeding 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 other parties to the litigation; (3) the probability

that the movant will succeed on the merits; and (4) the

public interest. Dataphase Sys., Inc. v. C.L. Sys., Inc.,

640 F.2d 109, 113 (8th Cir. 1981). Where the NCUAB moves

for a preliminary injunction, Congress has expressly

removed the requirement that the movant show that

irreparable harm will result without the injunction. 12

U.S.C. § 1787(b)(2)(H)(I).4

The FCUA makes it clear that the NCUAB, as

conservator, is empowered to avoid a transfer made by a

party to hinder, delay, or defraud the Credit Union, and

that the NCUAB may reverse such a transfer unless the

transferee received the property for value and in good

faith. See note 3. In this case, the question turns

largely on whether NCUAB can establish a reasonable

probability of success on the merits. 

Before we consider whether the district court abused

its discretion, we address L & V’s contention that the

district court lacked jurisdiction to grant injunctive

relief. L & V argues that the court lacked jurisdiction

because L & V was not made a party to the action. We

reject this argument. The FCUA specifically provides: 

(G) Attachment of assets and injunctive relief

Subject to subparagraph (H), any court of

competent jurisdiction may, at the request of the

Board (in the Board’s capacity as conservator or

liquidating agent for any insured credit union or
13

in the Board’s corporate capacity in the exercise

of any authority under this section), issue an

order in accordance with Rule 65 of the Federal

Rules of Civil Procedure, including an order

placing the assets of any person designated by

the Board under the control of the court and

appointing a trustee to hold such assets.
14

12 U.S.C. § 1787(b)(2)(G).

We believe that under this section, the district court

had jurisdiction to issue the preliminary injunction in

accordance with Rule 65 of the Federal Rules of Civil

Procedure. L & V was named and served in the Rule 65

proceeding that resulted in the district court order

requiring L & V to turn over to the NCUAB the funds that

it had received as a nonrefundable retainer. L & V does

not raise a due process argument, and we do not believe

that one exists because L & V had notice of the proceeding

and submitted affidavits in argument and support of its

position. We turn now to the question of whether the

district court abused its discretion in granting the

preliminary injunction.

A. Reasonable Probability of Success

The district court had to decide whether the NCUAB had

a reasonable probability of success on two closely related

issues: The first is did Johnson transfer the sum of

$72,325 to L & V to hinder, delay, or defraud the Credit

Union or the NCUAB; and the second is did L & V take the

property for value and in good faith? 

The FCUA has two important sections dealing with the

NCUAB’s powers with respect to transfers of any property

within five years of the date that the NCUAB becomes

conservator of a failing credit union. Section A permits

the NCUAB to avoid any transfer of property made with the

intent to burden, delay, or defraud the insured credit

union or the board. Under this section, the intent of the

transferor is the controlling factor. Rare will be the

case in which the transferor admits that he intended to

make an impermissible transfer. Intent will, in most

instances, have to be proved by extrinsic evidence. Among
15

the more common badges of fraudulent intent at the time of

a transfer are:
16

(1) actual or threatened litigation against the

debtor; (2) purported transfer of all or

substantially all of the debtor’s property; (3)

insolvency or other unmanageable indebtedness on

the part of the debtor; (4) a special

relationship between the debtor and the

transferee; and (5) retention by the debtor of

the property involved in the putative transfer.

. . . .

“the confluence of several [badges of fraud] can

constitute conclusive evidence of an actual

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)). In

this case there was actual or threatened litigation

against the debtor and there was insolvency on the part of

the debtor, but the debtor did not transfer all or

substantially all of his property. There was no special

relationship between the debtor and transferee, and the

debtor did not retain any of the property involved in the

transfer.

Here, Johnson’s intent was to obtain competent legal

representation in a complicated bankruptcy case fraught

with both criminal and civil issues. There is no evidence

that he intended to place the money transferred to L & V

to put it out of the reach of the NCUAB and creditors. If

the sum transferred was unreasonable, clearly such an

intent can be inferred, but the sum was clearly reasonable

in light of the complexity of his legal problems. Thus,

the question becomes whether this transfer was illegal per

se under the FCUA simply because the inevitable effect of

the transfer will be to reduce the assets available for

the Credit Union and other creditors. We do not believe
17

that this result is dictated either by the plain meaning

of the FCUA or the intent of Congress. To put the matter

simply, the FCUA does not prohibit a debtor of a credit

union to enter into a nonrefundable retainer agreement,

provided the payment is a reasonable one; and the NCUAB

agrees that for the purposes of this appeal, we should

assume that the retainer was a reasonable one. Clearly

Congress could prohibit such payments, but it has not done

so.
18

The NCUAB argues that this case should be controlled

by United States v. Monsanto, 491 U.S. 600 (1989). In

that case, the question was whether the federal drug

forfeiture statute gives the district court the power to

freeze a defendant’s assets in his possession even if he

wishes to use them to pay for an attorney. The Supreme

Court in a 5-4 vote held that the language of § 853 of the

forfeiture statute was plain and unambiguous. It stated,

“section 853(a) provides that a person convicted of the

offenses charged in respondent’s indictment ‘shall forfeit

. . . any property that was derived from the commission of

these offenses.” Id. at 607. We recognize that Monsanto

gives some comfort to the NCUAB’s position. We note,

however, that the opinion deals only with funds in the

possession of a defendant at the time the forfeiture order

is entered and that the forfeiture requires that the

defendant be convicted of a crime and the property

forfeited be derived from the proceeds of the crime or

used to facilitate 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 an

impermissible one, there remains the question of whether

L & V took the $72,325 nonrefundable retainer for value

and in good faith. There is no question but that L & V

took the retainer for value. Indeed, no one argues that

L & V did not give 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 it

was likely that he would be faced with both criminal and

civil litigation. It knew that the checks tendered were

checks that would become part of the bankruptcy estate if

it did not accept them in payment of its retainer

agreement. It inquired as to whether the livestock, which

Johnson sold, was covered by a security agreement and
19

received a negative answer. So the question is whether

this conduct constitutes lack of good faith within the

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 on

representations to it that the livestock that had been

sold was not covered by a security agreement. So they

were faced with the question of whether the FCUA made

acceptance of the retainer an act of bad faith. The FCUA

does not specifically define good faith and reported cases

as of the date L & V
In University of Texas v. Camenisch, 451 U.S. 394, 395-96 (1981), the

5

Supreme Court stated: 

The purpose of a preliminary injunction is merely to preserve the

relative positions 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 the basis of procedures that are less formal and evidence that

is less complete than in a trial on the merits. A party thus is not required

to prove his case in full at a preliminary injunction hearing, . . . and the

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 acceptance 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 the

merits. See Olin Water Servs. v. Midland Research

Laboratories, Inc., 774 F.2d 303, 308 (8th Cir. 1985). If

5

at that time the NCUAB can establish that the fee paid was

an unreasonable one, examined as of the date of the

transfer, then L & V will have to return the nonrefundable

retainer, otherwise it will not. We simply hold as a

matter of law that an insolvent debtor in a bankruptcy

proceeding may pay a nonrefundable retainer to attorneys

of his choice for representation if the amount paid is

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 believe that the balance is equal in this case.

Both parties can financially respond to any judgment
21

entered by the district court when the matter is heard on

the merits.
22

C. Public Interest

The final factor is whether granting the injunction

was in the public interest. For the reasons stated in the

section dealing with the probability of success on the

merits, we do not believe that a preliminary injunction

was in the public interest. Important as it is to protect

the assets of credit unions from those who attempt to

defraud them, the interests of the public will not be

served by affirming the grant of the preliminary

injunction.

III.

For the foregoing reasons, we determine that the

district 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 trust pending further proceedings is reversed.

 

A true copy.

Attest.

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