PHI Financial Services, Inc. v. Johnston Law Office, P.C.
2016 ND 20
| N.D. | 2016Background
- G & K Farms (a ND partnership) received a $328,168 federal SURE disaster payment in Oct. 2011 after crop losses; $170,400 of that was transferred from a Texas bank account to Johnston Law Office’s trust account and subsequently disbursed ($150,000 for attorney fees; $20,400 to Merlyn Grabanski, of which $24,225.37 was paid).
- PHI Finance had loaned millions to the debtors and filed UCC financing statements in North Dakota in Sept. 2008 asserting a security interest in government/farm program payments and general intangibles; Choice Financial earlier filed financing statements in Texas and later in North Dakota and claimed interests in crops/proceeds.
- PHI obtained a federal money judgment against the debtors in March 2011; the SURE payment was received after that judgment.
- PHI sued Johnston (conversion/fraudulent transfer) and Choice (to determine priority). The district court found PHI’s security interest superior to Choice’s, voided $24,225.37 paid to Merlyn as a fraudulent transfer, voided $115,000 of the $150,000 attorney fee payment (allowed Johnston to retain $35,000), and entered judgment for PHI totaling $167,203.24 with interest.
- On appeal, the Supreme Court of North Dakota affirmed in part, reversed in part, and remanded: it reversed the finding that Johnston was liable as the first transferee for the $24,225.37 to Merlyn (applying the “mere conduit” analysis for law-firm trust accounts), affirmed the voiding of $115,000 of fees, held PHI’s North Dakota financing statement perfected and superior to Choice, and reversed the prejudgment interest award for recalculation.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Liability of Johnston for $24,225.37 paid to Merlyn (first-transferee) | PHI: Johnston received and disbursed funds and is liable as first transferee under UFTA | Johnston: law firm was a mere conduit; trust account receipt does not create dominion or make it the first transferee | Court: reversed district court — Johnston was a mere conduit re: the Merlyn payment; Merlyn was the first transferee, so Johnston not liable for that transfer |
| Liability for $150,000 attorney-fee payment / reasonably equivalent value | PHI: G & K received no reasonably equivalent value for the transfer | Johnston: was a good-faith transferee and provided reasonably equivalent value (legal services) — complete defense | Court: Johnston was a good-faith transferee as to some value for services to G & K; allowed retention of $35,000 and voided $115,000 (affirmed as to amount not exonerated) |
| Perfection and priority between PHI and Choice in SURE payment | PHI: financing statement in ND describing government payments/general intangibles properly perfected PHI’s interest; PHI filed before Choice in ND | Choice: program payments are crop proceeds located in Texas; because PHI didn’t file in Texas, PHI’s interest was unperfected and Choice has priority | Court: PHI’s security agreement expressly covered government program payments/general intangibles; law of debtor’s location (ND) governed perfection; PHI perfected first in ND and has priority over Choice |
| Res judicata / splitting causes after federal judgment | Johnston: PHI split its causes by obtaining a federal money judgment and then pursuing collateral remedies here | PHI: UCC remedies and money-judgment enforcement are cumulative and permissible | Court: rejected res judicata argument — PHI could pursue UCC remedies after judgment; transfer occurred after the federal judgment so cause not split |
| Prejudgment interest start date | PHI: interest should run from transfer dates when entitlement vested | Johnston: interest should run from later date (judgment or complaint) | Court: PHI’s right to recover vested when Johnston removed attorney-fee funds from the trust account into business account; reversed original interest award and remanded to calculate interest only from when Johnston placed fee funds into business account |
Key Cases Cited
- In re Ogden, 314 F.3d 1190 (10th Cir.) (mere-conduit/initial-transferee dominion test)
- In re Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey, 130 F.3d 52 (2d Cir.) (law-firm receipt does not automatically create initial-transferee liability; dominion/control test)
- Matter of Coutee, 984 F.2d 138 (5th Cir.) (funds in firm trust account held in fiduciary capacity; firm lacked dominion to be initial transferee)
- Bonded Financial Services, Inc. v. European American Bank, 838 F.2d 890 (7th Cir.) (dominion/right to put money to own purposes is key to transferee status)
- Thompson v. Danner, 507 N.W.2d 550 (N.D.) (distinguishing attachment and perfection under UCC)
- In re Kingsley, 865 F.2d 975 (8th Cir.) (federal agricultural program payments characterized as contract rights/accounts/general intangibles under North Dakota law)
- Sweetwater Production Credit Ass’n v. O’Briant, 764 S.W.2d 231 (Tex.) (certain federal program payments may be crop proceeds under Texas law)