Good Faith Transfer Or Fraudulent Conveyance?
The North Dakota Supreme Court will hear argument this Monday in an appeal from a judgment holding a law firm liable for a fraudulent conveyance to a client.
The court’s summary of the case
Johnston Law Office, P.C., appeals and PHI Financial Services, Inc., and Choice Financial Group cross-appeal, from a district court judgment awarding PHI $167,203.24 plus interest from Johnston in PHI’s action to recover damages for a fraudulent conveyance.
In 2008 and 2009, PHI loaned $6,500,000 to Tom and Mari Grabanski and businesses they owned, including a partnership called G & K Farms. As collateral, PHI took a security interest in personal property of the debtors, including government agriculture program payments. Choice had also loaned money to Tom Grabanski and G & K, and as collateral for the loans, took a security interest in the personal property of the debtors, including government program payments. The Grabanskis defaulted on their loans and Johnston represented them in bankruptcy proceedings and several lawsuits filed against them. In March 2011, a federal court judgment was entered against G & K and others awarding PHI more than $7,000,000. In October 2011, G & K received a $328,168 government crop disaster payment which was deposited in a Texas bank. G & K distributed the money to various third parties, including $170,400 to Johnston. Johnston retained $145,774.63 and transferred $24,225.37 to Tom Grabanski’s father.
PHI brought this action against Johnston seeking to recover the $170,400 based on theories of conversion and fraudulent conveyance, and later added Choice as a defendant to determine priority of the 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 conveyance. Johnston was allowed to retain funds equal to the value of legal services provided to G & K, but was ordered to return the balance plus interest totaling $137,238.16 to PHI.
On appeal, Johnston argues the district court erred in holding the transfer of funds to Grabanski’s father was a fraudulent conveyance and in voiding a portion of the $145,774.63 in transferred funds because the reasonable value of services provided by Johnston to G & K was the full amount of those funds. Johnston argues the court erred in holding PHI was not barred by res judicata from pursuing Uniform Commercial Code remedies and in ruling PHI held a perfected security interest in the transferred funds. Johnston also argues the court erred in calculating prejudgment interest and Choice’s cross-appeal is untimely. In its cross-appeal, PHI argues the court erred in failing to invalidate the entire $145,774.63 in transferred funds because Johnston did not provide any value to G & K. In its cross-appeal, Choice argues the court erred in ruling PHI’s security interest has priority over its security interest.
The briefs and other information can be found at this link. (Mike Frisch)