Forster v. Theis, A17-0459

• Decision Date: 18 December 2017
• Docket Number: A17-0459
• Citation: 906 N.W.2d 846
• Parties: David FORSTER, et al., Respondents, v. Enid THEIS, et al., Defendants, Dougherty & Associates Financial Advisors, LLC, et al., Appellants.
• Court: Minnesota Court of Appeals

906 N.W.2d 846

David FORSTER, et al., Respondents,

v.Enid THEIS, et al., Defendants,Dougherty & Associates Financial Advisors, LLC, et al., Appellants.

A17-0459

Court of Appeals of Minnesota.

Filed December 18, 2017

Christopher P. Parrington, Andrew R. Shedlock, Kutak Rock, LLP, Minneapolis, Minnesota (for respondents)

Richard C. Landon, Gray, Plant, Mooty, Mooty & Bennett, P.A., Minneapolis, Minnesota; Andrew J. Steil, Christopher W. Harmoning, Gray, Plant, Mooty, Mooty & Bennett, P.A., St. Cloud, Minnesota; and Sheldon R. Brown, Young & Brown, LLP, Annandale, Minnesota (for appellants)

Considered and decided by Florey, Presiding Judge; Rodenberg, Judge; and Kirk, Judge.

KIRK, Judge

In this interlocutory appeal from the district court's denial of summary judgment in a fraudulent-transfer action, appellants, third-party transferees of business ownership and real property interests from a bankruptcy debtor and his wife, argue that respondents, unsecured creditors of the bankruptcy debtor, are barred from pursuing a fraudulent-transfer voidance claim against them in district court under the Minnesota Uniform Fraudulent Transfer Act (MUFTA).¹ Appellants maintain that a bankruptcy trustee has exclusive standing to pursue fraudulent-transfer voidance actions under the federal bankruptcy code on behalf of the bankruptcy estate, and that the bankruptcy court has exclusive subject-matter jurisdiction to hear such actions to the exclusion of individual unsecured creditors.

Because the bankruptcy action is closed and the bankruptcy trustee has not acted to reopen the action in bankruptcy court, we conclude that the district court now has subject-matter jurisdiction to hear an unsecured creditor's fraudulent-transfer voidance action to the extent the claim is allowed under applicable state law. We affirm.

FACTS

Codefendant bankruptcy debtor David Theis and co-appellant business owner and third-party transferee Michael Dougherty are former business partners. In 1995, they formed Theis and Dougherty Financial Services, Inc. (T&D), a financial-services business out of which they conducted investment advising and brokerage activities. In 1999, they formed DM Management Group, LLP (DM), a real-estate business, and in 2001 they formed Securities Monitoring Group, LLC (SMG), an investment-advisory firm. The three businesses were operated out of an office building originally owned by DM in Buffalo, Minnesota. Michael Dougherty and David Theis ended their formal business partnerships around May 2012, and sometime thereafter, Michael Dougherty started a new business, co-appellant business Dougherty & Associates Financial Advisors, LLC (D&A).

Around 2008, respondents unsecured creditors, David and Sandra Forster (the Forsters), became clients of David Theis and T&D. On the advice of David Theis, the Forsters made $415,000 in investments that ultimately resulted in significant financial losses. In April 2009, David Theis began receiving complaints from the Forsters and other clients about his advice. In February 2012, the Forsters filed an arbitration action against David Theis with the Financial Industry Regulatory Authority (FINRA), claiming that he gave them fraudulent advice in recommending investments. In March 2013, the FINRA arbitration panel ruled in favor of the Forsters and awarded them $290,000. On August 20, 2013, the Forsters' FINRA award, plus interest, was converted into a judgment in district court.

On October 14, 2013, David Theis filed for bankruptcy with the U.S. Bankruptcy Court for the District of Minnesota. In his bankruptcy petition, and in his statement of financial affairs accompanying the petition, David Theis listed the Forsters' FINRA judgment as an unsecured nonpriority claim. In August 2014, the bankruptcy court excepted from discharge the Forsters' judgment against David Theis in the bankruptcy action under 11 U.S.C. § 523(a)(4) (2014). The trustee for David Theis's bankruptcy estate filed the final accounting on January 23, 2015, and the bankruptcy action was closed on April 21, 2015.²

In an attempt to collect payment from David Theis on their FINRA judgment, the Forsters engaged in post-judgment discovery in district court. The Forsters uncovered several transfers of business ownership and real property interests made by David Theis to his wife, Enid Theis,³ to Michael Dougherty, or to Michael Dougherty's wife, Correen Dougherty,⁴ and subsequent transfers made by Enid Theis of some of those interests. The Forsters alleged these transfers to be fraudulent, and on October 2, 2015, they filed a fraudulent-transfer voidance claim in Wright County district court against David and Enid Theis, Michael Dougherty, and D&A under MUFTA. Minn. Stat. §§ 513.44, .45 (2014). The Forsters challenged the following transfers, the first six of which occurred before David Theis filed for bankruptcy in October 2013:⁵

1. On December 31, 2009, David Theis transferred his 50% partnership interest in DM to Enid Theis as a "gift."

2. On May 15, 2012, David Theis sold his 50% partnership interests in T&D (for $14,200) and SMG (for a promised $1) to Michael Dougherty.

3. On May 19, 2012, David Theis transferred his 50% co-ownership interest in real property in Idaho to Enid Theis.

4. In 2013, Enid Theis sold the interest in the Idaho property to the property's co-owner, J.B., for approximately $30,000.

5. On June 26, 2013, David and Enid Theis and Michael and Correen Dougherty transferred title to property in Annandale, Minnesota to Correen Dougherty for total consideration of $500 or less.

6. On July 10, 2013, Enid Theis sold the interest in DM to Correen Dougherty and to J.W., a business tenant at the Buffalo office building for $214,000. The sale of DM included the Buffalo office building.⁶

7. On June 2, 2014, David Theis transferred his 50% interest in the Buffalo marital home to Enid Theis for $500.

Michael Dougherty and D&A, and the Forsters, filed cross-motions for summary judgment in September 2016, which the district court denied on January 25, 2017. On January 26, Michael Dougherty and D&A submitted a letter to the district court requesting to file a motion to reconsider, and in relevant part, asking the court to address the issues of standing and subject-matter jurisdiction. The district court subsequently issued an order on February 3, substantively addressing the jurisdictional issues. In its February 3 order, the district court held that it had subject-matter jurisdiction to hear the Forsters' MUFTA claim, and that the Forsters had standing to bring their claim under state law. Michael Dougherty and D&A appeal the district court's jurisdictional rulings.⁷

ISSUE

Did the district court err in concluding that it had subject-matter jurisdiction to hear, and that the Forsters had standing to bring, a fraudulent-transfer voidance claim under state law?

ANALYSIS

I. The district court has subject-matter jurisdiction to hear the Forsters' fraudulent-transfer voidance claim because the Forsters filed their claim in district court after the bankruptcy action was closed.

a. The general rule does not apply because the bankruptcy action is closed.

Michael Dougherty and D&A contend that under the federal bankruptcy code the bankruptcy court has exclusive subject-matter jurisdiction to hear fraudulent-transfer voidance actions and that the authority to void the challenged transfers rests exclusively with the bankruptcy trustee to pursue on behalf of the bankruptcy estate, even after the bankruptcy estate is closed. The Forsters argue that because the bankruptcy action is closed, they have exclusive authority to pursue their claim under MUFTA in state district court.⁸

It is well settled that the bankruptcy trustee is the representative of a bankruptcy estate and "has capacity to sue and be sued." 11 U.S.C. § 323 (2014) ; Leffler v. Leffler , 602 N.W.2d 420, 422 (Minn. App. 1999). Once a bankruptcy petition is filed, "all legal or equitable interests of the debtor in property as of the commencement of the case" become property of the bankruptcy estate, including any causes of action that have accrued to the debtor. Leffler , 602 N.W.2d at 422 (discussing 11 U.S.C. § 541(a)(1) (2014) ). While a bankruptcy action is pending, the bankruptcy trustee may act on behalf of the bankruptcy estate to void fraudulent transfers of the bankruptcy debtor's interests in property that were made before the bankruptcy action was filed. See 11 U.S.C. §§ 548(a)(1), 544(b)(1) (2014).

First, pursuant to 11 U.S.C. § 548(a)(1), a bankruptcy trustee may void a fraudulent transfer made on or within two years of the bankruptcy petition being filed. Second, pursuant to 11 U.S.C. § 544(b)(1), a bankruptcy trustee may void a pre-petition transfer of the bankruptcy debtor's interest in property if an unsecured creditor of the bankruptcy estate would have had an allowable claim to void the transfer, even in part, under applicable state or federal law. In re DLC, Ltd ., 295 B.R. 593, 601, 602 (8th Cir. BAP 2003), aff'd sub nom. Stalnaker v. DLC, Ltd. , 376 F.3d 819 (8th Cir. 2004).

In turn, MUFTA provides a fraudulent-transfer voidance claim to an unsecured creditor of a debtor under state law. See Minn. Stat. § 513.44(a)(1) (2014). In an action for relief, an unsecured creditor may void a fraudulent transfer "to the extent necessary to satisfy the creditor's claim." Minn. Stat. § 513.47(a)(1) (2014). If a transfer is voidable by an unsecured creditor under section 513.47(a)(1), the creditor may recover the value of the asset transferred, or the amount necessary to satisfy its claim, whichever is less, from the first transferee or a person for whose benefit the transfer was made, or from any subsequent transferee other than one who took in good faith. Minn. Stat. § 513.48(b)(1), (2) (2014).

While a bankruptcy action is pending, if an unsecured creditor of a bankruptcy debtor has an allowable claim to void a fraudulent transfer under MUFTA or other applicable state law, federal...