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PHI Financial Services, Inc. v. Johnston Law office, P.C.

Supreme Court of North Dakota

January 26, 2016

PHI Financial Services, Inc., Plaintiff, Appellee, and Cross-Appellant
v.
Johnston Law Office, P.C., Defendant, Appellant, and Cross-Appellee and Choice Financial Group, Defendant, Appellee, and Cross-Appellant

Page 911

Appeal from the District Court of Grand Forks County, Northeast Central Judicial District, the Honorable Thomas E. Merrick, Judge.

Jon R. Brakke (argued) and Neil J. Roesler (on brief), P.O. Box 1389, Fargo, N.D. 58107-1389, for plaintiff, appellee, and cross-appellant.

DeWayne A. Johnston (argued), 221 South Fourth Street, Grand Forks, N.D. 58210, defendant, appellant, and cross-appellee; self represented.

David C. Thompson (appeared), P.O. Box 5235, Grand Forks, N.D. 58206-5235, for defendant, appellant, and cross-appellee.

Richard P. Olson (argued) and Wanda L. Fischer (on brief), P.O. Box 1180, Minot, N.D. 58702-1180, for defendant, appellee, and cross-appellant.

Daniel J. Crothers, Lisa Fair McEvers, John T. Paulson, S.J., Gerald W. VandeWalle, C.J. Opinion of the Court by Crothers, Justice. The Honorable John T. Paulson, S.J., sitting in place of Kapsner, J., disqualified. Sandstrom, Justice, concurring and dissenting.

OPINION

Page 912

Crothers, Justice.

[¶1] Johnston Law Office, P.C. (" Johnston" ) appeals, and PHI Financial Services, Inc. and Choice Financial Group cross-appeal from a judgment awarding PHI $167,203.24 plus interest from Johnston in PHI's action to recover damages for a fraudulent transfer. We affirm in part, reverse in part and remand for further proceedings.

I

[¶2] In 2007 Thomas and Mari Grabanski and John and Dawn Keeley formed Keeley Grabanski Land Partnership for the purpose of purchasing land in Texas. In 2008 the Grabanskis and Keeleys formed G & K Farms (" G & K" ), a North Dakota general partnership, for the purpose of farming the Texas land. G & K was insured under the Supplemental Revenue Assistance Payments Program (" SURE" ), which is administered by the Farm Service Agency of the United States Department of Agriculture and provides financial assistance for crop losses caused by natural disasters.

[¶3] In 2007 and 2008 Choice made a series of loans totaling more than $6.75 million to the Grabanskis and the Keeleys on behalf of G & K. Choice entered into a number of security agreements with G & K and its principals to secure the debt.

Page 913

Among other things, the security agreements granted Choice a security interest in:

" GOVERNMENT PAYMENTS AND INSURANCE PAYMENTS. ALL OF DEBTOR'S NOW EXISTING OR HEREAFTER ACQUIRED RIGHT, TITLE AND INTEREST IN AND OR RIGHT TO RECEIVE ANY PAYMENTS, WHETHER IN CASH, CROPS, OR FARM PRODUCTS FROM OR THROUGH ANY FEDERAL OR STATE GOVERNMENT AGENCY OR PROGRAM, INCLUDING, WITHOUT LIMITATION, ANY PROGRAMS BY OR THROUGH THE COMMODITY CREDIT CORPORATION OR THE FARM SERVICE AGENCY SUCH AS PAYMENTS IN KIND, DEFICIENCY PAYMENTS, LETTERS OF ENTITLEMENT, WAREHOUSE RECEIPTS, STORAGE PAYMENTS, DIVERSION PAYMENTS, DISASTER PAYMENTS, DEFICIENCY PAYMENTS, CONVERSION RESERVE PAYMENTS, CLDAP PAYMENTS, MLA PAYMENTS, AND ALL PRODUCTS AND PROCEEDS THEREOF."

Between March 2007 and February 2008 Choice filed the appropriate UCC financing statements with the Texas Secretary of State, the state where G & K's crops were growing.

[¶4] In 2008 PHI loaned $6.6 million to G & K, the Grabanskis and their various other business entities. PHI entered into security agreements with the debtors which included a provision granting it a security interest in:

" General Intangibles: All general intangibles including, but not limited to, tax refunds, applications for patents, patents, copyrights, trademarks, trade secrets, good will, trade names, customer lists, permits and franchises, all state or federal farm program payments of any nature and the right to receive such payments including, but not limited to, Conservation Reserve Program Payments, Feed Grain Program Payments and Disaster Relief Program Payments."

In September 2008 PHI filed financing statements with the North Dakota Secretary of State, the state in which the debtors were located. In December 2008 and June 2009 Choice filed financing statements with the North Dakota Secretary of State.

[¶5] G & K suffered $2.5 million in losses during 2008, but proceeded to plant crops on the property again in 2009. The Keeleys withdrew from G & K in early 2009. The Grabanskis then formed a new partnership, Texas Family Farms, to farm the property. The Grabanskis and their business entities eventually defaulted on their loans. Johnston represented the Grabanskis in personal bankruptcy proceedings initiated in 2010, and represented them and their business entities during the following two years in numerous lawsuits stemming from the bankruptcy. In March 2011 PHI obtained a judgment for approximately $7.5 million against the Grabanskis and G & K in the United States District Court for the District of North Dakota. In October 2011 G & K received a SURE payment of $328,168 from the federal government for 2009 crop losses. The Grabanskis did not deposit the disaster payment in G & K's North Dakota bank account with Choice because Johnston advised them that Choice would offset the funds against G & K's debt to Choice. On October 11, 2011 G & K deposited the SURE payment in a new Texas bank account. The Grabanskis then transferred $170,400 of the SURE payment from the Texas bank account to Johnston's law office trust account

Page 914

through two transactions. The first check for $150,000, dated October 11, 2011, was for Johnston's attorney fees. The second check for $20,400, dated October 27, 2011, was sent with instructions to forward the money to Tom Grabanski's father, Merlyn Grabanski, to indemnify him for monies paid on behalf of G & K the previous year. Johnston transferred $24,225.37 from the trust account to Merlyn Grabanski and retained the remaining $145,774.63 for legal fees.

[¶6] PHI brought this action against Johnston seeking to recover $170,400 based on theories of conversion and fraudulent transfer. PHI later added Choice as a defendant to determine priority of the competing security interests. The district court granted summary judgment ruling PHI's security interest had priority over the security interest held by Choice. Following a bench trial the court ruled the $24,225.37 transferred to Tom Grabanski's father was a fraudulent transfer and PHI was entitled to recover that amount from Johnston. The court also found the $150,000 payment was fraudulent, but found G & K received reasonably equivalent value for the transfer. The court allowed Johnston to retain $35,000 of the remaining funds, which the court found equaled the value of legal services provided to G & K, but voided the remaining $115,000. A judgment with interest totaling $167,203.24 was entered in favor of PHI.

II

[¶7] " Before we consider the merits of an appeal, we must have jurisdiction." Choice Fin. Grp. v. Schellpfeffer, 2005 ND 90, P 6, 696 N.W.2d 504. Because a final judgment was entered in this case, we treat Johnston's appeal from the memorandum and order for judgment and Choice's cross-appeal from the order denying motions for summary judgment as appeals from the subsequently entered consistent judgment. E.g., Entzel v. Moritz Sport and Marine, 2014 ND 12, P 5, 841 N.W.2d 774. Johnston argues Choice's appeal from the order denying summary judgment and determining priority is untimely because it was not filed within 60 days of entry of the order. We reject the argument because the nonappealable interlocutory order is reviewable as a timely appeal from a final judgment. E.g., Security State Bank v. Orvik, 2001 ND 197, P 6, 636 N.W.2d 664. We conclude we have jurisdiction to consider the issues raised in these appeals.

III

[¶8] Johnston argues the district court erred in holding it liable for any part of the $170,400 the law firm received from G & K's Texas bank account.

[¶9] Under the Uniform Fraudulent Transfer Act, N.D.C.C. ch. 13-02.1, creditors have various remedies to avoid fraudulent transfers. See Watts v. Magic 2 x 52 Mgmt., Inc., 2012 ND 99, P 18, 816 N.W.2d 770; Four Season's Healthcare Ctr., Inc. v. Linderkamp, 2013 ND 159, P 23, 837 N.W.2d 147. Section 13-02.1-04(1), N.D.C.C., provides:

" 1. A transfer made or obligation incurred by a debtor is voidable as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:
a. With actual intent to hinder, delay, or defraud any creditor of the debtor; or
b. Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor was engaged or was about to engage in a business or a transaction

Page 915

for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction or the debtor intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor's ability to pay as they became due."

Section 13-02.1-05(1), N.D.C.C., further provides that " a debtor's transfer of property is constructive fraud as to a creditor if the debtor made the transfer without receiving a reasonably equivalent value in exchange for the transfer and the debtor was insolvent at the time of, or became insolvent as a result of, the transfer." Estate of Bergman, 2004 ND 196, P 10, 688 N.W.2d 187. In Farstveet v. Rudolph, 2000 ND 189, P23, 630 N.W.2d 24, this Court further explained:

" Constructive fraudulent transfers are established conclusively, without regard to the actual intent of the parties, when they concur as provided in N.D.C.C. § 13-02.1-05. UFTA § 4, cmt. (5). 'To void a transfer under this section the following elements must be established: (1) The creditor's claim arose before the transfer; (2) the transfer was made to an insider; (3) the transfer was made for an antecedent debt; (4) the debtor was insolvent at the time; and (5) the insider had reasonable cause to believe the debtor was insolvent.'"

(Internal citation omitted.)

[¶10] Questions regarding actual or constructive fraudulent transfers are questions of fact subject to the clearly erroneous standard of review. See Farstveet, 2000 ND 189, P20, 630 N.W.2d 24. " A finding of fact is clearly erroneous if it is induced by an erroneous view of the law, if there is no evidence to support it, or if, after reviewing all of the evidence, this Court is convinced a mistake has been made." Moody v. Sundley, 2015 ND 204, P 9, 868 N.W.2d 491.

A

[¶11] Johnston argues the district court erred in voiding the $24,225.37 it transferred from its law office trust account to Tom Grabanski's father upon ...


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