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Forster v. Theis

Court of Appeals of Minnesota

December 18, 2017

David Forster, et al., Respondents,
v.
Enid Theis, et al., Defendants, Dougherty & Associates Financial Advisors, LLC, et al., Appellants.

         Wright County District Court File No. 86-CV-15-4902

          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.

         SYLLABUS

         Once a bankruptcy action is closed, and a bankruptcy trustee's exclusive authority to pursue a claim on behalf of the bankruptcy estate under the federal bankruptcy code has expired, an unsecured creditor may pursue a fraudulent-transfer voidance claim in district court to the extent permissible under state law, so long as the bankruptcy trustee has not affirmatively acted to reopen the action in bankruptcy court.

          OPINION

          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 ...

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