Court Opinion

ID: 3019920
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:21:56.232968+00
Date Added: 2024-06-11T12:46:33.176941
License: Public Domain

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.
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.1 As

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

through the clearinghouse.
                             3
    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

      2
       A security agreement did, in fact, exist regarding Johnson’s assets of “livestock,
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
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:

                            5
    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.

                            6
    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

                           7
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),3 on February 9, 1996, the NCUAB
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

      3
       The FCUA provides:

      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
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

                            9
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

                            10
[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

                           11
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

      4
       The statute provides that “Rule 65 of the Federal Rules of Civil Procedure shall
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
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.

                       13
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

                             14
the more common badges of fraudulent intent at the time of
a transfer are:

                            15
    (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

                            16
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.

                            17
    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

                            18
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

                            19
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).5 If
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

     5
      In University of Texas v. Camenisch, 451 U.S. 394, 395-96 (1981), the
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
entered by the district court when the matter is heard on
the merits.

                           21
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.

                            22