National Credit Union Admin. Bd. v. Johnson, 97-1566

• Decision Date: 15 January 1998
• Docket Number: No. 97-1566,97-1566
• Citation: 133 F.3d 1097
• Parties: NATIONAL CREDIT UNION ADMINISTRATION BOARD, as conservator for Renville Farmers Co-op Credit Union, Plaintiff-Appellee, v. Scott JOHNSON, Defendant-Appellant, Norman Westby, Defendant, Lindquist & Vennum, P.L.L.P., Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1097

133 F.3d 1097

NATIONAL CREDIT UNION ADMINISTRATION BOARD, as conservator for Renville Farmers Co-op Credit Union, Plaintiff-Appellee, v. Scott JOHNSON, Defendant-Appellant Norman Westby, Defendant Lindquist & Vennum, P.L.L.P., Appellant.

No. 97-1566.

United States Court of Appeals Eighth Circuit.

Submitted Nov. 17, 1997.

Decided Jan. 15, 1998.

James A. Lodoen, Minneapolis, MN, argued (Thomas L. Fabel, Minneapolis, MN, on the brief), for defendant-appellant.

Lee A. Henderson, Minneapolis, MN, argued, for plaintiff-appellee.

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 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.

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 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:

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.

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 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 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 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 [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 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...