Patrick Finn, et al., Respondents (A12-1930), Appellants (A12-2092),
Alliance Bank, Appellant (A12-1930), Respondent (A12-2092), Home Federal Bank, Respondent (A12-2092), KleinBank, Respondent (A12-2092), Merchants Bank N.A., Respondent (A12-2092), M & I Marshall & Ilsley Bank, Respondent (A12-2092), American Bank of St. Paul, et al., Defendants.
Dakota County District Court File No. 19HA-CV-11-2856
Larry B. Ricke, Rodney Honkanen, R. John Wells, Ricke & Sweeney, P.A., St. Paul, Minnesota (for respondents/appellants Patrick Finn, et al.)
Christopher R. Morris, Jessica S. Williams, Bassford Remele, P.A., Minneapolis, Minnesota (for appellant/respondent Alliance Bank)
Kevin M. Decker, Benjamin E. Gurstelle, Briggs and Morgan, P.A., Minneapolis, Minnesota (for respondent Home Federal Bank)
Shari L. J. Aberle, Dorsey & Whitney LLP, Minneapolis, Minnesota (for respondent KleinBank)
Mark A. Merchlewitz, Benson & Merchlewitz, Winona, Minnesota (for respondent Merchants Bank N.A.)
Keith S. Moheban, Peter J. Schwingler, Katherine Devlaminck, Leonard, Street and Deinard, Minneapolis, Minnesota (for respondent M & I Marshall & Ilsley Bank)
Considered and decided by Stauber, Presiding Judge; Hooten, Judge; and Willis, Judge.
Actual-fraud claims under the Minnesota Uniform Fraudulent Transfer Act (the MUFTA), Minn. Stat. §§ 513.41-.51 (2012), are governed by the six-year statute of limitations of Minn. Stat. § 541.05, subd. 1(6) (2012), and accrue upon discovery by the aggrieved party of the facts constituting the fraud.
Constructive-fraud claims brought under the MUFTA are governed by the six-year statute of limitations in Minn. Stat. § 541.05, subd. 1(2) (2012), which does not contain a discovery provision.
These consolidated appeals arise out of a clawback action brought under the MUFTA by appellant-receiver. In one appeal (A12-2092), the receiver challenges the district court's dismissal, on statute-of-limitations grounds, of its claims brought under the MUFTA against defendant-respondents Home Federal Bank, KleinBank, Merchants Bank, and M & I Marshall & Ilsley Bank (respondent banks). In the other appeal (A12-1930), appellant Alliance Bank challenges the district court's grant of summary judgment to the receiver on its MUFTA claims against Alliance. We affirm the district court's dismissal of the receiver's constructive-fraud claims against respondent banks, reverse the district court's dismissal of the receiver's actual-fraud claims against respondent banks and the award of summary judgment against Alliance, and remand for entry of judgment dismissing the claims against Alliance and for further proceedings on the receiver's remaining actual-fraud claims against respondent banks.
Underlying these consolidated appeals are loan participations sold by First United Funding LLC and Corey Johnston to various banks and other financial institutions from 2002 to 2009. During this time, First United and Johnston were engaged in a fraudulent enterprise, in which they oversold participations and sold participations in fictional loans. In 2002, First United was insolvent, and the magnitude of its insolvency increased every year that it was in operation. To pay interest and profits to its investors, First United and Johnston used funds obtained from later investors, which, regardless of the sources, were commingled in First United's bank accounts.
Among the loan participations that First United sold were those to Alliance and respondent banks. Record evidence shows that Alliance purchased a 100% participation interest in a $3, 180, 000 loan that First United made to an Arizona borrower in 2002. The Arizona borrower made payments on the loan to First United from 2002 until 2007, and First United made payments to Alliance. The borrower paid off the loan in 2007, including payment of the principal and an additional $1, 332, 058 in interest and fees. First United, in turn, paid off Alliance's participation interest in 2008, including the principal and $1, 235, 388 in interest and fees, leaving First United with $96, 670.
Criminal Proceedings in Federal Court
In August 2010, the United States Attorney's Office for the District of Minnesota charged Johnston with bank fraud and tax fraud that was related to "operating a Ponzi scheme that resulted in a total estimated loss of $79.5 million for 17 lenders." In September 2010, Johnston pleaded guilty to committing bank fraud and filing false tax returns. Johnston admitted that he "used some of the proceeds" from the oversold loan participations to "repay other loans and perpetuate the scheme" and that he also "diverted other proceeds of the fraud to his personal use and his family's use." He admitted that he ran the Ponzi scheme from 2005 until 2009.
Procedural History of This Case
In October 2009, the Dakota County district court appointed Lighthouse Management Group as the receiver to recover and liquidate First United's remaining assets and distribute them to the banks and financial institutions that lost money by purchasing participation interests in First United loans. The receiver recommended a plan for distributing the funds recovered from First United to the banks and financial institutions. The distribution plan was appealed to this court, and we affirmed it in Community First Bank v. First United Funding, LLC, 822 N.W.2d 306, 309 (2012). In December 2009, the district court expanded the scope of the receiver's appointment and authorized it to "[i]nvestigate and pursue any and all claims that First United or the Receiver may have against any third party, including but not limited to, fraudulent transfer and illegal distribution claims."
The receiver commenced this action in May 2011, seeking to claw back profits received by respondent banks and Alliance. The receiver alleged that First United's Ponzi scheme began in 2002 and ended in 2009, that Alliance and respondent banks purchased loan participations from First United between 2002 and 2004, that "all, or nearly all, of the participation interests sold" by First United were involved in First United's Ponzi scheme, and that Alliance and respondent banks made a profit from their investments in the Ponzi scheme. The receiver also alleged that First United's payments to Alliance ended in 2008, and its payments to respondent banks ended, at the latest, in March 2005. The receiver's complaint brought, relevant to this appeal, four claims against Alliance and respondent banks: (1) that the payments made by First United to Alliance and respondent banks were voidable as actually fraudulent transfers, under Minn. Stat. § 513.44(a)(1); (2) that the payments were voidable as constructively fraudulent transfers, under Minn. Stat. ...