Cedar Rapids Lodge & Suites, LLC et al v. Seibert et al
MEMORANDUM OPINION AND ORDER denying 183 Motion to Dismiss for Lack of Jurisdiction; granting 192 Motion to Alter/Amend/Supplement Pleadings(Written Opinion) Signed by Judge Susan Richard Nelson on 02/07/2018. (SMD)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Cedar Rapids Lodge & Suites, LLC,
James T. Rymes, Rhonda Coborn,
Michael Coborn, Scott Shisler, Julie Shisler,
and Pamela J. Cobb Revocable Trust,
Case No: 14-CV-04839 SRN/KMM
John F. Seibert, Julie Kalla-Bargy Seibert, JFS
Development, Inc. f/k/a JCS Development, Inc.,
Trinity Business Consulting Inc., Royal Business
Consulting Corp., and Preferred Business
Amy J. Swedberg, Charles G. Frohman, and Martin S. Fallon, Maslon LLP, 90 South
Seventh Street, Suite 3300, Minneapolis, Minnesota 55402, and Brian D. Thomas, Chloe
F.P. Golden, and Robert H. Miller, Sheehan Phinney Bass & Green P.A., 1000 Elm
Street, Manchester, New Hampshire 03105, for Plaintiffs.
Alexander J. Beeby and Thomas J. Flynn, Larkin Hoffman Daly & Lindgren, Ltd., 8300
Norman Center Drive, Suite 1000, Minneapolis, Minnesota 55437, for Defendants.
SUSAN RICHARD NELSON, United States District Judge
This matter is before the Court on Defendants’ Motion to Dismiss under Rule 12
[Doc. No. 183] (“Motion to Dismiss”) and Plaintiffs’ Motion for Leave to Amend [Doc. No.
192] (“Motion to Amend”). For the reasons set forth below, the Court grants Plaintiffs’
Motion to Amend and denies Defendants’ Motion to Dismiss.
When evaluating a motion to dismiss under Rule 12(b)(6), the Court assumes the
facts in the complaint to be true and construes all reasonable inferences from those facts in
the light most favorable to the plaintiff. Hager v. Ark. Dep’t of Health, 735 F.3d 1009, 1013
(8th Cir. 2013) (citing Gross v. Weber, 186 F.3d 1089, 1090 (8th Cir. 1999)). Thus, the
Court recites the facts as alleged in Plaintiffs’ Complaint. Because the Court determines
that Plaintiffs’ Motion to Amend should be granted in full, see infra Part III.A., it recites the
facts and claims as set forth in the proposed Second Amended Complaint [Doc. No. 192-1]
(“SAC”), noting changes from earlier pleadings where appropriate.
A. The Parties
Plaintiffs are judgment creditors of Defendants John F. Seibert (“John Seibert”) and
JFS Development, Inc. (“JFS Development”). (SAC ¶¶ 1, 3.) Plaintiffs filed this action in
2014, alleging that Defendants had engaged in various fraudulent transfers to prevent
Plaintiffs from collecting their judgment. (See Compl. [Doc. No. 1].)
Defendant John Seibert is a real estate developer residing in Minnesota. (Id. ¶ 4.)
Defendant Julie Kalla-Bargy Seibert (“Julie Seibert”) is his wife, also residing in Minnesota.
(Id. ¶ 8.) JFS Development is a Minnesota hospitality development and management
company owned by John Seibert, which was formally dissolved in 2011. (Id. ¶ 75.)
Defendant Trinity Business Consulting Inc. (“Trinity”) is a Minnesota corporation
incorporated by John Seibert in June 2013. (Id. ¶¶ 7, 339.) Defendant Preferred Business
Consulting Corp. (“Preferred”) is a Minnesota corporation incorporated by John Seibert in
January 2014. (Id. ¶¶ 5, 118.) Defendant Royal Business Consulting Corp. (“Royal”) is a
Minnesota corporation incorporated by John Seibert in August 2014. (Id. ¶¶ 6, 230.)
B. Factual and Procedural Background
In December 2009, Plaintiffs filed a complaint against John Seibert and JFS
Development in Iowa federal district court, alleging, inter alia, fraud, civil racketeering
(RICO violations), and breach of fiduciary duty in relation to a hotel development project in
Cedar Rapids. (Id. ¶ 12.) The Iowa court entered a judgment against John Seibert for
$12,176,735.22 in damages in November 2012, and for $2,150,707.12 in attorneys’ fees and
costs in January 2013. (Id. ¶¶ 13-14.) The Iowa court entered a judgment against JFS
Development for $978,891.39. (Id. ¶ 3.) The Iowa court also issued a $77,928.68 sanctions
judgment against John Seibert during the litigation of the Iowa action. (Id. ¶ 24.)
Plaintiffs had filed for prejudgment attachment of assets owned by John Seibert and
JFS Development in early 2010, but the motion was denied. (Id. ¶¶ 18-19.) During the
three years between the complaint and the judgment in the Iowa action, from late 2009 to
late 2012, John Seibert’s self-reported net worth changed from approximately $5.4 million
to negative $1.3 million. (Id. ¶¶ 15, 21-22.)
Plaintiffs allege that John Seibert liquefied and secreted his assets while publicly
holding himself out to be insolvent. In August 2011, at a hearing on Plaintiffs’ motion for
contempt of court, John Seibert represented to the Iowa court that he was “broke” and could
not pay the $77,928.68 sanctions judgment. (Id. ¶ 30.) The Magistrate Judge in that case
held John Seibert in contempt of court, but declined to incarcerate him, finding a lack of
clear and convincing evidence that he was able to comply with the sanctions order. (Id.
¶ 31.) But Plaintiffs allege that, over the course of 2011, John Seibert was “systematically
liquidating hundreds of thousands of dollars from his business interests and secreting and/or
transferring the cash proceeds.” (Id. ¶ 33.) For example, in May 2011, John Seibert
liquidated his interest in Forest Lake Enterprises, LLC and Forest Lake Operations, LLC,
which operated a Culver’s restaurant in Forest Lake, Minnesota, for $173,125.00. (Id.
¶ 34.) Additionally, in October 2011, John Seibert finalized the sale of his interest in a
family farm and used $150,000.00 of the $158,928.39 proceeds to pay down the mortgage
on his home. (Id. ¶¶ 34, 499.)
After the conclusion of the Iowa action, Plaintiffs took efforts to collect the
judgment. In 2012 and 2013, Plaintiffs obtained charging orders against John Seibert’s 49%
interest in a Culver’s restaurant in Monticello, Minnesota. (Id. ¶¶ 36, 39, 43.) Shortly after
the second charging order, John Seibert secretly transferred his interest to his son-in-law,
Eric Knott, for $10,000.00. (Id. ¶ 46.)
The interest was valued at approximately
$330,750.00 at the time. (Id. ¶¶ 48-52.)
Between 2010 and 2013, Plaintiffs allege, John Seibert transferred $105,324.23 to
his wife Julie Seibert. (Id. ¶ 69.) In 2010, John Seibert liquidated his interest in Coon
Rapids Lodge for $35,132.50, and converted the proceeds into cash and a $30,500.00
cashier’s check made payable to Julie Seibert. (Id. ¶¶ 56-61.) Plaintiffs allege several other
money transfers to Julie Seibert in 2010 and 2011, and also that after John Seibert began
working for BriMark Builders, LLC (“BriMark”) in 2012, he regularly endorsed his
paychecks over to his wife. (Id. ¶¶ 62-68.) John Seibert “retained effective control of these
transferred assets, however, by using Julie Seibert’s credit card to incur his personal
expenses.” (Id. ¶ 71.) Additionally, Plaintiffs allege that JFS Development transferred
$7,418.00 to Julie Seibert on February 14, 2011, without receiving reasonably equivalent
value in exchange. (Id. ¶ 63.)
John Seibert worked for BriMark from May 2012 to August 2014. (Id. ¶¶ 84-121,
155-58.) The President of BriMark, Brian Wogernese, is a longtime friend and business
colleague of John Seibert. (Id. ¶¶ 85, 104.) From May 2012 until June 2013, John Seibert
was paid a bi-weekly salary of $910.00 for his work at BriMark. (Id. ¶ 86.) He routinely
endorsed these checks over to his wife. (Id. ¶¶ 62-68, 88-93.) In June 2013, Plaintiffs
served John Seibert with notice of intent to garnish his wages at BriMark. (Id. ¶ 94.)
Immediately, John Seibert stopped receiving regular salary payments from BriMark and
instead received “reimbursement of expenses” and a series of irregular “commissions” for
executed construction contracts. (Id. ¶¶ 95-98.) One such commission, of $25,927.90, was
paid out in the interim between Plaintiffs’ notice of intent to garnish wages and service of
their first garnishment summons on BriMark.
(Id. ¶ 100.)
After Plaintiffs sent the
garnishment summons to BriMark, Brian Wogernese forwarded to John Seibert an email
that he had received from BriMark’s attorney, urging Wogernese to “come clean and not try
to delay the inevitable” with regard to the garnishment. (Id. ¶ 104.)
Around the same time that Plaintiffs were attempting to garnish his wages with
BriMark, John Seibert incorporated the real estate development corporation Trinity. (Id.
¶ 108.) Julie Seibert was named President and sole shareholder, and John Seibert was
named Vice-President. (Id. ¶¶ 109-10.) Julie Seibert works as a hairdresser and has no
experience or education in real estate development. (Id. ¶ 109.) Plaintiffs allege that John
Seibert began negotiating with BriMark to have his wages paid to Trinity, but abandoned
that course of action to prevent exposing Julie Seibert to liability. (Id. ¶¶ 112-15.)
John Seibert next attempted to be paid by BriMark through his company Preferred,
which he incorporated in January 2014 and of which he was the President and sole
shareholder. (Id. ¶ 118.) Plaintiffs allege that no corporate formalities were observed in the
incorporation of Preferred, and that Preferred’s principal place of business and registered
business address is John Seibert’s home. (Id. ¶¶ 125-26.)
John Seibert negotiated with BriMark to establish a “Sales Representative
Agreement” between Preferred and BriMark, and directed BriMark’s billing department to
make the check for his next expense reimbursement out to Preferred. (Id. ¶¶ 132-33.) John
Seibert ostensibly terminated his employment with BriMark on February 11, 2014, but
continued his development work for the company and began submitting invoices, through
Preferred, as an independent contractor. (Id. ¶¶ 136-42.) Shortly after John Seibert’s
employment with BriMark purportedly ended, however, Plaintiffs discovered that he was
still representing BriMark publicly. (Id. ¶¶ 144-45.) Plaintiffs inquired with BriMark as to
whether John Seibert had been rehired on March 18, 2014, and while BriMark initially
stated that he had not, it official rehired John Seibert ten days later. (Id. ¶¶ 146-55.) John
Seibert worked for BriMark for five more months, and then negotiated an “Agreement of
Resignation and Release” that agreed to pay him $200,000 in installments over a year and a
half, and to pay $20,000 commissions for any of John Seibert’s potential projects that came
to fruition. (Id. ¶ 158-59.) John Seibert did not disclose this agreement to the Plaintiffs.
(Id. ¶ 162.)
After leaving BriMark, John Seibert worked on a number of development projects
through Preferred. Plaintiffs allege that Preferred had between 19 and 26 professional
development projects underway in 2014, with expected payments in that year of $1.4
million. (Id. ¶ 171, 192.) These payments, to the extent they were made, have not been
accounted for. (Id. ¶¶ 172-212.) At some point during 2014, John Seibert took on a partner
in development, Jim Bortz of Cobblestone Hotel Group (which was associated with
BriMark), and split fees with him 50/50. (Id. ¶¶ 192, 194-210.)
In late summer 2014, Plaintiffs became aware that John Seibert was working on
development projects through Preferred. (Id. ¶ 215.) On August 19, 2014, John Seibert
incorporated Royal, installing himself as the CEO and sole shareholder. (Id. ¶¶ 230-31.)
Corporate formalities were not observed, and Royal’s principal place of business and
registered business address are the same as Preferred’s: John Seibert’s home. (Id. ¶¶ 233,
235.) Plaintiffs allege that upon their discovery of John Seibert’s development projects with
Preferred, Preferred fraudulently transferred the development rights to at least 12 pending
projects to Royal, to evade the Plaintiffs’ collection efforts. (Id. ¶ 216.) These projects
were for hotel and large-scale development in Minnesota, Kentucky, Indiana, Ohio, Florida,
and South Dakota, and were at varying stages of development. (Id. ¶¶ 216, 242-46, 25055.) A few months later, in November 2014, Plaintiffs filed their initial Complaint in this
action, alleging fraudulent transfers between John Seibert, JFS Development, Eric and
Jennifer Knott (John Seibert’s son-in-law and daughter), and Julie Seibert. (Compl. ¶¶ 11270.)
Plaintiffs allege that John Seibert avoided receiving value for his development efforts
because of Plaintiffs’ collection efforts against him. While he worked on development
projects through Royal, John Seibert in some instances refrained from signing on as lead
developer, anticipating that he could first settle the instant case and “be released.” (Id.
¶¶ 252, 254-55, 263-64.) When a letter of intent was executed for a project in North Port,
Florida, John Seibert requested that the realtor not use his or Royal’s name in any press
release. (Id. ¶ 259.) In September 2015, John Seibert reached out to SkyWatch Group,
LLC, (“SkyWatch”) to seek a financing package for six projects that he was developing
through Royal. (Id. ¶ 261.) In an email to an individual at SkyWatch, John Seibert stated
that he would ordinarily take an ownership position in the development in lieu of part of his
payment, but that he was prevented from doing so because of Plaintiffs’ judgment and
lawsuit against him. (Id., Ex. 37 [Doc. No. 192-2].) He further stated, “Once we can reach
a settlement, we would be interested in once again exploring that option.” (Id.)
In their Second Amended Complaint, Plaintiffs added allegations that John Seibert
regarded Royal’s projects “as things having economic value, and considered the details and
status of those development projects, including their locations, franchise affiliations,
investor funding and bank relationships” as confidential business information. (Id. ¶ 267.)
Of 22 projects John Seibert identified as pending developments with Royal in February
2016, John Seibert’s records at the time implied that most were funded and expected to
proceed in 2016. (Id. ¶¶ 269-70; Ex. 39 [Doc. No. 192-2].) In the spring and summer of
2016, Plaintiffs allege that John Seibert was actively developing 37 hotel and apartment
projects, at varying stages, through Royal. (Id. ¶ 273; see id. ¶¶ 274-310.) For each of these
projects, Royal’s Business Consulting Development Agreement would have required an
initial $10,000 retainer. (Id. ¶ 322.)
In May 2016, Plaintiffs became aware of Royal and began to levy its stock. (Id.
¶¶ 400-01.) Around this time, Plaintiffs allege that John Seibert began to transfer Royal’s
projects to Trinity, the corporation that he had previously formed with his wife as the
President and sole shareholder. (E.g., id. ¶¶ 400-403.)1 In the spring of 2016, Plaintiffs
allege that John Seibert, acting through Trinity, embarked on a new business relationship
with SkyWatch, under which SkyWatch would pay a monthly fee to Trinity for John
Seibert’s work. (Id. ¶¶ 360, 376, 398.) In an email describing Trinity as a “development
consultant” for SkyWatch, John Seibert listed 11 Trinity/SkyWatch development projects, 6
of which had previously been developed by Royal. (Id. ¶¶ 404-10.) Plaintiffs allege that no
fewer than 20 pending development projects were transferred from Royal to Trinity before
late May 2016, and that each transferred project “involved a collection of valuable work
product,” including connections with individual franchisors, financing banks, property
sellers, and investors. (Id. ¶¶ 412, 419, 424.)
Then, on June 30, 2016, John Seibert declared bankruptcy under Chapter 7. (Id.
¶ 429.) In his bankruptcy schedules, John Seibert failed to disclose that he was Vice-
For example, Plaintiffs allege that Royal worked on a project to develop the
Running Aces hotel and casino. In May 2016, John Seibert attached a Royal “company
profile” in an email to the general manager of Running Aces Harness Racing Facility.
(SAC ¶ 400.) But two weeks later, when preparing to sign a development contract for
Running Aces, John Seibert specified that Trinity would be signing the contract. (Id.
President of Trinity, and did not disclose any relationship with SkyWatch. 2 (Id. ¶¶ 432-36.)
Just a few weeks after producing these schedules to the bankruptcy court, John Seibert
submitted an invoice to SkyWatch for $10,700 for services rendered, instructing SkyWatch
to make the payment to Trinity. (Id. ¶ 448.) John Seibert submitted several more such
invoices after his bankruptcy. (Id. ¶¶ 455-58, 470-71, 474-76.) In their Second Amended
Complaint, Plaintiffs allege several additional payments made to Trinity during 2017, from
the Running Aces casino development contract and from SkyWatch. (Id. ¶¶ 477-86.)
These payments were deposited into Trinity and then a significant portion were later
withdrawn in cash by Julie Seibert. (Id. ¶¶ 485-86.)
Plaintiffs filed an adversary action in John Seibert’s bankruptcy, seeking to classify
the three Iowa judgments as non-dischargeable. (See In re Seibert, No. 16-ap-4103, Compl.
against Debtor John F. Seibert to Determine Dischargeability of Debt [Adversary Doc. No.
1].) While that action was pending, the bankruptcy trustee took over the instant case and
negotiated a partial settlement. The settlement dismissed claims against Defendants Eric
Knott, Jennifer Knott, and Monticello Ventures KS, LLC, in exchange for $200,000.00.
(Decl. of Robert H. Miller [Doc. No. 189] (“Miller Decl.”), Ex. 1 [Doc. No. 189-1] (Notice
of Hr’g and Mot. for Approval of Settlement (“Settlement Mot.”), at 3-4).)3 The Plaintiffs
in this case received $100,000.00 from that settlement and the bankruptcy estate received
John Seibert also failed to disclose Julie Seibert’s relationship to Trinity in his
bankruptcy schedules, listing her occupation as “cosmetologist” and her employer as Vivid
Details Salon, Inc. (Id. ¶¶ 441-42.)
All references to page numbers in this Opinion are those assigned by the CM/ECF
the remaining $100,000.00. (Id., at 4.) In addition, the settlement assigned to the Plaintiffs
“[a]ll known and unknown claims against Julie Seibert in the Fraudulent Transfer
Litigation,” and “[a]ll known and unknown claims against any other third-party that could
be asserted in the Fraudulent Transfer Litigation including, but not limited to, claims against
Trinity Business Consulting, any of the SkyWatch Inn entities, Preferred Business
Consulting Group, Royal Business Consulting and any other entity related to the debtor’s or
Julie Seibert’s pre-petition business activities.” (Id., at 5.) Plaintiffs agreed to seek no
further disbursements from the bankruptcy estate, and to return surplus funds to the
bankruptcy estate should they recover from the assigned claims more than the total of the
Iowa judgments. (Id., at 5-7.) In her motion to the bankruptcy court seeking approval for
this settlement, the trustee stated:
The trustee believes that the settlement is in the best interest of the creditors
and the estate. The trustee believes that resolution will allow her to efficiently
complete the administration of the estate without having to incur the
substantial legal fees anticipated in litigating the remaining claims in the
Fraudulent Transfer Litigation. The trustee believes that litigating the
Fraudulent Transfer Litigation will be lengthy and expensive. The Fraudulent
Transfer Litigation has been pending since November 2014 and the attorneys’
fees incurred are significant . . . . The paramount interest of creditors involves
the trustee recovering the greatest net return possible for the bankruptcy
estate. The interests of creditors will be served by streamlined resolution and
minimization of fees. The trustee also has concerns about the collectability of
any judgment that may be obtained in the Fraudulent Transfer Litigation. The
interest of creditors will also be served by the withdrawal of the Cedar Rapids
Plaintiffs’ claim, which is in excess of $18 million and is the largest
unsecured claim in the case. The trustee believes that the settlement
represents the greatest net return for all creditors.
(Id., at 7.) No response was filed opposing the settlement, and the bankruptcy court
approved it on May 24, 2017. (Id., Ex. 2 (Order dated May 24, 2017).)
In Plaintiffs’ adversary proceeding, the bankruptcy court granted Plaintiffs’ motion
for summary judgment and found two of the three Iowa judgments were excepted from
discharge. (See In re Seibert, No. 16-ap-4103, Mot. for Summ. J. by Plaintiffs [Adversary
Doc. No. 10]; id, Order dated Sept. 28, 2017 [Adversary Doc. No. 26].) John Seibert
appealed that decision, and that appeal is currently pending with this Court. See Seibert v.
Cedar Rapids Lodge & Suites, LLC, No. 17-cv-4756, Notice of Appeal [Bankr. Appeal.
Doc. No. 1].)
C. Plaintiffs’ Claims
Plaintiffs’ Second Amended Complaint alleges that John Seibert made a series of
fraudulent transfers himself and through his alter egos Preferred and Royal, with intent to
hinder, delay, or defraud his creditors. It alleges that Julie Seibert received fraudulent
transfers of cash and stock from John Seibert and JFS Development. It further alleges that
Trinity received a series of fraudulent transfers. Finally, it alleges that John Seibert and
Julie Seibert both participated in a conspiracy to engage in fraudulent transfers.
Count I alleges that John Seibert liquidated his interest in a family farm and
transferred the proceeds into his homestead—exempt from collection efforts—by paying
down his mortgage. Plaintiffs allege that John Seibert did this with intent to hinder, delay,
or defraud the Plaintiffs, in violation of Minn. Stat. § 513.44(a)(1). (SAC ¶¶ 501-06.)
Count II alleges that John Seibert transferred $105,324.23 to Julie Seibert, with intent to
hinder, delay, or defraud the Plaintiffs, in violation of Minn. Stat. § 513.44(a)(1). (Id.
¶¶ 507-11.) Count III alleges that the transfers of money to Julie Seibert were made without
receiving reasonably equivalent value in exchange and left John Seibert under-capitalized
for the business he was pursuing, in violation of Minn. Stat. § 513.44(a)(2). (Id. ¶¶ 512-17.)
Count IV alleges that the transfers of money to Julie Seibert were made without receiving
reasonably equivalent value in exchange and were made while John Seibert was insolvent or
rendered him insolvent, violating Minn. Stat. § 513.45(a). (Id. ¶¶ 518-23.) Count V alleges
that Preferred is John Seibert’s corporate alter ego and that justice requires piercing
Preferred’s corporate form. (Id. ¶¶ 524-28.)
Count VI alleges that Royal is John Seibert’s corporate alter ego and that justice
requires piercing Royal’s corporate form. (Id. ¶¶ 529-33.) Count VII alleges that the
transfer of development projects to Royal was done with intent to hinder, delay, or defraud
Plaintiffs, in violation of Minn. Stat. § 513.44(a). (Id. ¶¶ 534-38.) Count VIII alleges that
the transfer of development projects to Royal was made without receiving reasonably
equivalent value in exchange and left John Seibert (qua Preferred) under-capitalized for the
business he was pursuing, in violation of Minn. Stat. § 513.44(a)(2). (Id. ¶¶ 539-44.) Count
IX alleges that the transfer of development projects to Royal was made without receiving
reasonably equivalent value in exchange and was made while John Seibert (qua Preferred)
was insolvent or rendered him insolvent, violating Minn. Stat. § 513.45(a). (Id. ¶¶ 545-50.)
Count X alleges that the transfer of development projects to Trinity was done with intent to
hinder, delay, or defraud Plaintiffs, in violation of Minn. Stat. § 513.44(a). (Id. ¶¶ 551-55.)
Count XI alleges that John Seibert transferred Royal as a going concern to Trinity, and did
so with intent to hinder, delay, or defraud the Plaintiffs, in violation of Minn. Stat.
§ 513.44(a). (Id. ¶¶ 556-62.)
Count XII alleges that the transfer of development projects to Trinity was made
without receiving reasonably equivalent value in exchange and left John Seibert (qua Royal)
under-capitalized for the business he was pursuing, in violation of Minn. Stat.
(Id. ¶¶ 563-68.)
Count XIII alleges that the transfer of development
projects to Trinity was made without receiving reasonably equivalent value in exchange and
was made while John Seibert (qua Royal) was insolvent or rendered him insolvent, violating
Minn. Stat. § 513.45(a). (Id. ¶¶ 569-73.) Count XIV alleges that John Seibert was the
constructive owner of Trinity’s stock, because he was in full control of the company. Thus,
Count XIV alleges that John Seibert’s direction that all Trinity stock be issued to Julie
Seibert was a fraudulent transfer, intended to hinder, delay, or defraud the Plaintiffs in
violation of Minn. Stat. § 513.44(a). (Id. ¶¶ 574-80.) Count XV alleges that Julie Seibert
agreed and knowingly and willfully conspired to execute the fraudulent transfers described
above. (Id. ¶¶ 581-90.) Count XVI alleges that John Seibert agreed and knowingly and
willfully conspired to execute the fraudulent transfers described above. (Id. ¶¶ 591-600.)
D. Parties’ Motions
Defendants have jointly filed a Motion to Dismiss. Defendants argue that Plaintiffs
lack standing to bring this case because the bankruptcy trustee was prohibited from
assigning the action to Plaintiffs. (Defs.’ Mem. of Law in Supp. of Mot. to Dismiss under
Rule 12 [Doc. No. 185] (“Defs.’ Mem. in Supp.”), at 9-15.) Defendants further argue that,
even if the trustee was empowered to assign the action, the trustee did not assign any claims
against John Seibert. (Id., at 15-16.) Additionally, Defendants claim that the Court lacks
subject-matter jurisdiction because the Complaint does not plead the residency of the
members of Cedar Rapids Lodge & Suites, LLC., and because the trustee’s participation in
the case destroyed diversity. (Id., at 17; Defs.’ Reply in Supp, of Mot. to Dismiss under
Rule 12 [Doc. No. 190] (“Defs.’s Reply”), at 9.)
Defendants also argue that Plaintiffs have failed to state a claim upon which relief
can be granted. Defendants argue that Plaintiffs failed to properly plead their fraudulent
transfer claims. (Defs.’ Mem. in Supp., at 20-26.) Defendants further argue that Plaintiffs’
claims regarding the transfer of development projects do not state a claim for fraudulent
transfer because they do not allege that the transfer of assets occurred. (Id., at 27-31.)
Finally, Defendants assert that conspiracy to commit fraudulent transfer is not a viable cause
of action under Minnesota law. (Id., at 31-33.)
Three months after Defendants filed their Motion to Dismiss, Plaintiffs filed a
Motion to Amend. Plaintiffs argue that motions to amend should be freely granted absent
indicia of bad faith or other good reason, and that no reason exists to withhold leave here.
(Mem. of Law in Supp. of Pls.’ Mot. for Leave to Amend [Doc. No. 194] (“Pls.’ Mem. in
Supp.”), at 3.) Defendants oppose the Motion, arguing that the amendment would be futile
and that justice favors denial. (Mem. of Law in Opp. to Mot. to Amend Compl. [Doc. No.
199] (“Defs.’ Mem. in Opp.”).)
A. Motion for Leave to Amend
Plaintiffs have already amended their complaint once as a matter of course. (See
First Am. Compl. [Doc. No. 163].) After the first amendment, “a party may amend its
pleading only with the opposing party’s written consent or the court’s leave.” Fed. R. Civ.
P. 15(a)(2). Nonetheless, “[t]he court should freely give leave when justice so requires.” Id.
The decision whether to grant leave to amend “is left to the sound discretion of the district
court.” Popoalii v. Corr. Med. Servs., 512 F.3d 488, 497 (8th Cir. 2008). “A court abuses
its discretion when it denies a motion to amend a complaint unless there exists undue delay,
bad faith, repeated failure to cure deficiencies by amendments previously allowed, undue
prejudice to the non-moving party, or futility of the amendment.” Id.
Plaintiffs’ proposed Second Amended Complaint removes five counts that were
present in the First Amended Complaint, and adds two new counts: Counts XI and XIV.
(Compare First Am. Compl. ¶¶ 502-618, with SAC ¶¶ 501-600.) Plaintiffs note that the
requested amendment comports with the governing deadline for the amendment of
pleadings in this case. (See Pls.’ Mem. in Supp., at 3 (citing Pretrial Scheduling Order
Although Plaintiffs’ Motion to Amend was filed after Defendants’ Motion to
Dismiss, Defendants assert that “[t]he essence of the plaintiffs’ allegations remain the
same,” (Defs.’ Mem. in Opp., at 3), and that “the defendants’ arguments made in their
motion to dismiss apply with equal force to the plaintiffs’ latest proposed amendment and
are incorporated herein by reference,” (id., at 8). For the sake of efficiency, and to avoid the
unnecessary parsing of an outdated pleading while addressing Defendants’ Motion to
Dismiss, the Court will therefore address the Motion to Amend first.
Defendants argue that the Court should deny Plaintiffs’ Motion because it fails to
cure the subject-matter jurisdiction and pleading deficiencies of the First Amended
Complaint. (Defs.’ Mem. in Opp., at 7-13.) As will be discussed below, the Court holds
that subject-matter jurisdiction is proper and Plaintiffs have met their pleading standard. See
infra Part II.B. Thus, the Court finds that Plaintiffs’ proposed amendment would not be
Additionally, Defendants argue that justice supports denial of the motion because
Plaintiffs’ assertions are frivolous and Plaintiffs have had years to amend their pleadings
since the case was filed in 2014. (Id., at 15-18.) The Court does not find these arguments
persuasive. Defendants’ points of disagreement with the Second Amended Complaint are
not adequate reasons to deny leave to amend. See Popoalii, 512 F.3d at 497. Plaintiffs have
pointed to the delay caused by hard-fought discovery disputes and John Seibert’s
bankruptcy as reasons that they were unable to amend the complaint until now. (Pls.’ Mem.
in Supp, at 4-5.)
Further, Plaintiffs’ Motion to Amend complies with the governing
deadline for the amendment of pleadings. (See Pretrial Scheduling Order, at 1.) The Court
sees no reason that leave to amend should not be “freely given” here. Fed. R. Civ. P.
Thus, Plaintiffs’ Motion to Amend is granted, and the Court will evaluate
Defendants’ Motion to Dismiss as it applies to the Second Amended Complaint.
B. Motion to Dismiss
1. Legal Standard
Rule 8(a)(2) of the Federal Rules of Civil Procedure states that a complaint “must
contain . . . a short and plain statement of the claim showing that the pleader is entitled to
relief.” Although the complaint need not contain “detailed factual allegations,” it must
plead facts sufficient “to raise a right to relief above the speculative level.” Bell Atl. Corp.
v. Twombly, 550 U.S. 544, 555 (2007). Thus, to survive a motion to dismiss, the plaintiff’s
“obligation to provide the grounds of his entitlement to relief requires more than labels and
conclusions.” Benton v. Merrill Lynch & Co., Inc., 524 F.3d 866, 870 (8th Cir. 2008)
(quotations and citation omitted). Rather, the complaint “must contain sufficient factual
matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009) (quotation and citation omitted). This plausibility standard
is met “when the plaintiff pleads factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged.” Id. The Court assesses
plausibility by drawing “on its judicial experience and common sense.” Id. at 679.
Fraud claims are subject to a higher pleading standard. “In alleging fraud or mistake,
a party must state with particularity the circumstances constituting fraud or mistake.
Malice, intent, knowledge, and other conditions of a person’s mind may be alleged
generally.” Fed. R. Civ. P. 9(b). The 9(b) standard applies to Plaintiffs’ fraudulent transfer
claims that rely upon proving intent to hinder, delay or defraud, but it does not apply to
Plaintiffs’ constructive fraud claims. See Kranz v. Koenig, 240 F.R.D. 453, 455 (D. Minn.
2007) (“Rule 9(b) applies to fraudulent conveyance claims.”); In re RFC & ResCap
Liquidating Tr. Litig., No. 13-cv-3451, 2017 WL 1483374, at *6 (D. Minn. Apr. 25, 2017)
(“Because constructive fraudulent transfer claims—unlike actual fraud—do not rely on
proving intent or a materially false representation, the Court applies the more relaxed
pleading standards of Federal Rule of Civil Procedure 8(a).”). Accordingly, for Counts I,
II, VII, X, XI, and XIV, Plaintiffs must “identify the ‘who, what, where, when, and how’ of
the alleged fraud.” BJC Health Sys. v. Columbia Cas. Co., 478 F.3d 908, 917 (8th Cir.
2007) (quoting Abels v. Farmers Commodities Corp., 259 F.3d 910, 920 (8th Cir. 2001)).
“The level of particularity required depends on, inter alia, the nature of the case and the
relationship between the parties.” Id.
2. Subject Matter Jurisdiction
Defendants argue that the bankruptcy trustee’s assignment of these claims to
Plaintiffs was unlawful because a bankruptcy trustee is not entitled to assign avoidance
powers. (Defs.’ Mem. in Supp., at 11-14.) Defendants also argue that the claims allegedly
assigned by the trustee were not property of the estate that could be transferred under an
approved settlement agreement. (Defs.’ Reply, at 4-5.) Even if the trustee was empowered
to transfer these claims, Defendants assert that the language of the settlement agreement did
not assign any claims against John Seibert. (Defs.’ Mem. in Supp., at 15-16.)
The Court notes that Defendants made no objection to the settlement when it was
submitted for approval to the bankruptcy court, and the time for appeal of that decision has
lapsed. See Fed. R. Bankr. P. 8002(a)(1). Plaintiffs argue that Defendants cannot now
collaterally attack the bankruptcy court’s decision to approve the settlement. (Pls.’ Mem. in
Opp., at 7-8.)
“Standing is a component of subject matter jurisdiction that may be
challenged at any time during the proceeding.” In re Foster, 516 B.R. 537, 544 (B.A.P. 8th
Cir. 2014) (citing Warth v. Seldin, 422 U.S. 490, 498-99 (1975)). Thus, Defendants may
raise this dispositive issue even after failing to object to the settlement when it was entered.
Id.; see also In re Canion, 196 F.3d 579, 585 (5th Cir. 1999) (permitting creditor to
challenge bankruptcy court’s subject-matter jurisdiction over its fraudulent transfer action
after losing on the merits, even though the creditor initially consented to transferring the
case to the bankruptcy court).
The trustee in a Chapter 7 bankruptcy “can commence lawsuits to set aside
prebankruptcy advantages obtained by creditors which offend the bankruptcy policy of fair
1 Richard A. Aaron, Bankruptcy Law Fundamentals § 1.3 (2017).
“avoidance powers” are derived from statute, and most were created specifically for
Chapter 7 bankruptcy proceedings. See 11 U.S.C. §§ 544, 547, 548. But the bankruptcy
trustee is also empowered to step into the shoes of a creditor and bring claims under state
law. Under § 544(b), “the trustee may avoid any transfer of an interest of the debtor in
property or any obligation incurred by the debtor that is voidable under applicable law by a
creditor holding an unsecured claim.” 11 U.S.C. § 544(b). The bankruptcy trustee was
substituted as plaintiff in this case after John Seibert filed bankruptcy, because the trustee
had the power to take over the suit under 11 U.S.C. § 544(b). (See Order Substituting Party
[Doc. No. 72].) The trustee then negotiated a settlement settling some of the claims and
assigning the rest to Plaintiffs.
Defendants argue that the trustee may not transfer avoidance actions because they are
not property of the estate. (Defs.’ Reply, at 4-5.) Courts disagree as to whether § 544(b)
fraudulent transfer claims are property of the bankruptcy estate, but a majority of courts
appear to conclude that they are. The First, Fifth, and Ninth Circuit Courts of Appeals have
held that fraudulent transfer actions are property of the estate. See In re Moore, 608 F.3d
253, 258-61 (5th Cir. 2010); In re Ontos, Inc., 478 F.3d 427, 431 (1st Cir. 2007) (“The
Bankruptcy Code broadly defines the property of the estate to be comprised of all ‘legal or
equitable interests of the debtor in property as of the commencement of the case.’ It is well
established that a claim for fraudulent conveyance is included within this type of property.”
(citation omitted)); In re Lahijani, 325 B.R. 282, 287 (B.A.P. 9th Cir. 2005) (“Causes of
action owned by the trustee are intangible items of property of the estate that may be sold.”
(citing In re P.R.T.C., Inc., 177 F.3d 774, 781 (9th Cir. 1999)); see also Nat’l Tax Credit
Partners, L.P. v. Havlik, 20 F.3d 705, 708-09 (7th Cir. 1994) (stating, in dicta, that the right
to “recoup a fraudulent conveyance, which outside of bankruptcy may be invoked by a
creditor, is property of the estate”).
In Moore, the Fifth Circuit held that a state-law fraudulent transfer action is property
of the bankruptcy estate because it “pursues property in which the debtor retains an
equitable interest.” 608 F.3d at 259 n.7 (quoting In re Bradley, 326 F. App’x 838, 839 (5th
Cir. 2009) (per curiam)); see also In re MortgageAmerica Corp., 714 F.2d 1266, 1275 (5th
Cir. 1983) (“An action under the Fraudulent Transfers Act is essentially one for property
that properly belongs to the debtor and which the debtor has fraudulently transferred in an
effort to put it out of the reach of creditors . . . . The transferee may have colorable title to
the property, but the equitable interest—at least as far as the creditors (but not the debtor)
are concerned—is considered to remain in the debtor so that creditors may attach or execute
judgment upon it as though the debtor had never transferred it.”). In Moore, the Fifth
Circuit also stated an alternative basis for holding that fraudulent transfer claims are
property of the estate. The court held, “[a]lthough fraudulent-transfer claims under Texas
state law could not be brought by the debtor, . . . such claims become estate property ‘once
bankruptcy is under way’ by virtue of the trustee’s successor rights under § 544(b).”
Moore, 608 F.3d at 261 (quoting Havlik, 20 F.3d at 708-09).)
Some courts have held that avoidance actions are not property of the bankruptcy
estate. See In re Petters Co., Inc., 550 B.R. 438, 451 (Bankr. D. Minn. 2016) (“The
statutory powers on which a trustee sues to avoid and recover are not themselves assets of
the estate.” (citing In re Arzt, 252 B.R. 138, 141 (B.A.P. 8th Cir. 2000)); In re DartCo, Inc.,
203 B.R. 285, 295 n.19 (Bankr. D. Minn. 1996) (“[T]echnically speaking, avoidance powers
and rights of recovery under 11 U.S.C. §§ 544-551 are not property of the bankruptcy
estate. . . . Once the trustee exercises avoidance powers, of course, the recovered assets
become property of the estate. . . . However, the right of recovery itself probably cannot be
said to be property reposing in the estate; it is created independently by statute, and lodges
with whomever the statute empowers to wield it.”).
Defendants cite In re Cybergenics Corp., 226 F.3d 237 (3d Cir. 2000), for the
proposition that avoidance claims are not property of the estate. (Defs.’ Reply, at 4.) But
Cybergenics did not quite reach that conclusion. Although the court in Cybergenics held
that a fraudulent transfer claim was not the property of the debtor-in-possession in a Chapter
11 bankruptcy, and thus was not sold off in an auction of the debtor-in-possession’s assets,
it distinguished the assets of the debtor-in-possession from the property of the bankruptcy
estate itself. See 226 F.3d at 246. The Court stated, “‘Cybergenics’ assets’ and ‘property of
the estate’ have different meanings. . . . Issues relating to property of the estate are simply
not relevant to the inquiry into whether the fraudulent transfer claims in the Committee’s
complaints were assets of Cybergenics as debtor or debtor-in-possession.” Id. Although the
court went on to state in dicta that it would not find a fraudulent transfer action to be
property of the estate, the Court considers this case too different from the circumstances
before it to be persuasive. Id., at 246 n.16.
The Eighth Circuit has not explicitly held that avoidance claims are property of the
bankruptcy estate. But in Harstad v. First Am. Bank, 39 F.3d 898 (8th Cir. 1994), it
implicitly accepted that proposition. The Harstad court considered whether a Chapter 11
debtor-in-possession may bring an avoidance action after the confirmation of a plan of
reorganization, which ordinarily “‘vests all of the property of the estate in the debtor.’” Id.,
at 902 (citing 11 U.S.C. § 1141(b)). The court held that the debtor-in-possession’s failure to
preserve the action under 11 U.S.C. § 1123(b)(3) preempted the “general provision of
§ 1141 that dumps all remaining post-confirmation estate property into the lap of the
Id., at 903.
Thus, the Eighth Circuit’s reasoning implicitly accepted the
proposition that an avoidance action is property of the estate that ordinarily reverts back to
the debtor at the approval of a plan of reorganization.
The cases strongly favor finding that the fraudulent transfer claims here were
property of the estate, and the Court so finds. The next issue to consider is whether the
trustee was permitted to transfer those claims to Plaintiffs as a part of the settlement
Courts also disagree as to whether trustees may transfer avoidance claims. The
Ninth Circuit has held that the trustee may transfer any avoidance claims. See Lahijani, 325
B.R. at 288 (citing P.R.T.C., Inc., 177 F.3d at 781). In Moore, the Fifth Circuit held that
trustees can transfer claims that they inherit under 11 U.S.C. § 544(b). 608 F.3d at 261.
Several courts have held that trustees cannot transfer any claims under their
avoidance powers. See In re Boyer, 372 B.R. 102, 105 (D. Conn. 2007) (“The sale or
assignment of avoidance claims to an objecting creditor is not permitted if the creditor
intends to pursue the claims on its own behalf.”), aff’d on other grounds, 328 F. App’x 711
(2d Cir. 2009); In re Waterford Funding, LLC, No. 09-br-22584, 2017 WL 439308, at *3
(Bankr. D. Utah Feb. 1, 2017) (holding that trustee was “legally precluded from” assigning
claims under § 544(b) and § 548); In re Clements Mfg. Liquidation Co., LLC, 558 B.R.
187,189 (Bankr. E.D. Mich. 2016) (“The Court therefore holds that the Chapter 7 trustee in
this case may not assign any of the avoidance actions/powers as he seeks to do in the
proposed settlement.”); In re Carragher, 249 B.R. 817, 820 (Bankr. N.D. Ga. 2000)
(“Absent extraordinary circumstances, a trustee is prohibited from selling, transferring, or
assigning the right to assert and maintain an estate’s avoidance action to an individual
Plaintiffs emphasize, however, that most of these decisions do not distinguish
between avoidance claims that the bankruptcy statute creates specifically for the trustee and
pre-existing claims inherited from creditors under § 544(b). See Boyer, 372 B.R. at 105
(analogizing constructive trust claims to avoidance claims generally); Clements, 558 B.R. at
189 (holding that the trustee may not assign “any of the avoidance actions/powers”);
Carragher, 249 B.R. at 820 (rejecting a proposed settlement that would sell any avoidance
claims of the estate with regard to a specific entity). The Court has found only two cases
holding that trustees do not have the power to transfer, specifically, § 544(b) claims. See
Clements, 558 B.R., at 189; Waterford Funding, 2017 WL 439308, at *3. And § 544(b)
claims are unique among the trustee’s avoidance powers, because they do not create a cause
of action, but allow the trustee to step into the shoes of a creditor with an existing claim.
See Moore, 608 F.3d at 261 (“We focus narrowly on the trustee's ability to sell causes of
action that he has inherited from creditors under § 544(b)—causes of action that exist
independent of the bankruptcy proceeding.”);
Cybergenics, 226 F.3d at 243 (“The
avoidance power provided in section 544(b) is distinct from others because a trustee or
debtor in possession can use this power only if there is an unsecured creditor of the debtor
that actually has the requisite nonbankruptcy cause of action.”).
At the same time, many of the cases Defendants cite as prohibiting transfer of
avoidance powers refer only to statutorily-created actions, making no mention of § 544(b)
claims. See In re Vogel Van & Storage, Inc., 210 B.R. 27, 31-32 (N.D.N.Y. 1997) (holding
that a trustee may not transfer a § 547 preferential transfer action); In re McGuirk, 414 B.R.
878, 879 (Bankr. N.D. Ga. 2009) (holding that the trustee was not permitted to sell its
“unique statutory powers” under §§ 547, 548 and 549); In re Harrold, 296 B.R. 868, 872
(Bankr. M.D. Fla. 2003) (“Concluding the trustee is acting as an individual creditor, the
gravamen of the issue in this case is whether any creditor in a Chapter 7 bankruptcy case
may exercise the avoidance powers afforded to the Chapter 7 Trustee under 11 U.S.C. §§
547 and 548. The answer appears to be a resounding “no.’”).
The Eighth Circuit has not opined on the question of whether a trustee can transfer
§ 544(b) fraudulent transfer claims. The Eighth Circuit has indicated that creditors can
pursue § 548 avoidance claims after showing that a trustee cannot be relied upon to assert
them. In re Lauer, 98 F.3d 378, 388 (8th Cir. 1996). The Eighth Circuit has also stated that
a trustee may grant a creditor derivative standing to use the trustee’s avoidance powers
when the bankruptcy court finds that derivative standing is “necessary and beneficial to the
fair and equitable resolution” of the bankruptcy proceedings. In re Racing Servs., Inc., 540
F.3d 892, 902 (8th Cir. 2008) (quoting In re Commodore Int’l Ltd., 262 F.3d 96, 100 (2d
Cir. 2001)) (emphasis removed).
The Court agrees with the Fifth Circuit’s reasoning in Moore. The court concluded
that “[a]llowing a trustee to sell § 544(b) rights of action is in accord with the trustee’s
existing powers,” such as the ability to authorize creditor suits under a Chapter 11 plan of
reorganization and to authorize derivative exercise of the avoidance powers. Moore, 608
F.3d at 261-62. Additionally, the trustee’s sale of § 544(b) rights of action is subject to
approval by the bankruptcy court, which will consider the “core bankruptcy principles” of
“asset value maximization and equitable distribution” in deciding whether to grant approval.
Id. at 262 n.18. The facts underlying Moore are notably similar to the facts here. The
creditor had a fraudulent transfer and alter ego action pending when the debtor filed Chapter
7 bankruptcy. Id., at 255. Also, this creditor held 86% of the debtor’s unsecured debt,
which eased concerns that transferring the § 544(b) claims would prejudice other creditors.
Id., at 261 n.18. Here, Plaintiffs filed this case over a year before John Seibert filed
bankruptcy, and held the largest unsecured claim in the bankruptcy.
Settlement Mot., at 7.)
Because a full transfer of these claims by assignment confers greater rights than
would a grant of derivative standing, any assignment of § 544(b) claims ought to also meet
the “necessary and beneficial” standard stated in Racing Services. See 540 F.3d at 902. The
trustee’s statements in the Motion for Approval of Settlement satisfy this standard. The
trustee stated that “[t]he interests of creditors will be served by the streamlined resolution
and the minimization of fees,” and by the withdrawal of Plaintiffs’ claim, “which is in
excess of $18 million and is the largest unsecured claim in the case.” (Settlement Mot.,
at 7.) The trustee anticipated that this case would give rise to “substantial legal fees” in a
“lengthy and expensive” litigation, and expressed “concerns about the collectability of any
judgment that may be obtained.” (Id.) Weighing the burdens of pursuing the action against
the advantages of assigning it and resolving the bankruptcy, the trustee decided that
assigning the claims was “in the best interests of the creditors and the estate.” (Id.) The
Court agrees, and will uphold the trustee’s assignment here.
Defendants’ final standing argument is that the trustee’s assignment did not include
claims against John Seibert himself, the debtor. (Defs.’ Mot. in Supp., at 15-16.) The
trustee assigned all known and unknown claims against Julie Seibert, Eric and Jennifer
Knott, and “any other third party that could be asserted in the Fraudulent Transfer
Litigation.” (Settlement Mot., at 5.) Defendants argue that John Seibert, as the debtor in the
bankruptcy, was not a “third party,” and thus claims against him were not included in the
assignment. (Defs.’ Mot. in Supp., at 15-16.)
Plaintiffs respond that John Seibert was a third-party to the settlement agreement in
which these claims were assigned, because his claims were not settled in that agreement.
(Pls.’ Mem. in Opp., at 9.) The Court considers this interpretation to be reasonable, given
that the trustee held out the settlement as an agreement “between the estate and [the
Plaintiffs].” (Settlement Mot., at 8.) Accordingly, for the reasons described above, the
Court finds that Plaintiffs have standing to bring this action.4
In their Motion to Dismiss, Defendants argue that Plaintiffs failed to plead diversity
of citizenship because they did not plead the residency of the members of Cedar Rapids
Lodge & Suites, LLC. (Defs.’ Mem. in Supp., at 17.) Plaintiffs have cured this in their
Second Amended Complaint, which clearly pleads the residency of the members of Cedar
Rapids Lodge & Suites, LLC, none of whom destroy diversity. (See SAC ¶ 9.)
In their reply brief, Defendants raised a new diversity argument, asserting that the
trustee’s residency destroys diversity because she was a party to the action before she
assigned it. (Defs.’ Reply, at 9.) Setting aside the fact that arguments first raised in a reply
brief are generally considered waived, see D. Minn. LR 7.1(c)(3)(B), this argument is
meritless. Defendants’ only support for this argument is a citation to Branson Label, Inc. v.
City of Branson, 793 F.3d 910 (8th Cir. 2015), in which the court determined that parties
had used assignment to improperly manufacture diversity, in violation of 28 U.S.C. § 1359.
Defendants have made no argument, and the Court sees no indication, that the trustee’s
assignment in this case was designed to manufacture diversity. Instead, the trustee assigned
the case back to the parties who initially filed it, who were properly diverse from the start.
Defendants also raise an argument in their Motion to Dismiss that Plaintiffs lack
standing because their judgment debt against John Seibert was discharged in bankruptcy.
(Defs.’ Mem. in Supp., at 16.) Since that brief was filed, however, the bankruptcy court
issued a decision excepting two of the three Iowa judgments from discharge. (See In re
Seibert, No. 16-ap-4103, Mot. for Summ. J. by Plaintiffs; id, Order dated Sept. 28, 2017.)
Accordingly, the Court concludes that diversity confers subject-matter jurisdiction to hear
3. Failure to State a Claim
The Minnesota Uniform Voidable Transfer Act
The Minnesota Uniform Fraudulent Transfer Act (“MUFTA”), or the Minnesota
Uniform Voidable Transfer Act (“MUVTA”), as it is now known, is designed to “prevent
debtors from placing property that is otherwise available for the payment of their debts out
of the reach of their creditors.” Citizens State Bank Norwood Young Am. v. Brown, 849
N.W.2d 55, 60 (Minn. 2014); Minn. Stat. §§ 513.41-.51. “To cover the variety of situations
in which debtors may attempt to place assets beyond the reach of creditors, MUFTA allows
creditors to recover assets that a debtor transfers with fraudulent intent, Minn. Stat.
§ 513.44(a)(1), as well as those transfers that the law treats as constructively fraudulent,
see Minn. Stat. §§ 513.44(a)(2), 513.45.” Finn v. Alliance Bank, 860 N.W.2d 638, 644
To prove a fraudulent transfer under Minn. Stat. § 544(a)(1), MUVTA’s “actual
fraud” provision, Plaintiffs must show “[a] transfer made or obligation incurred by a debtor
. . . with actual intent to hinder, delay, or defraud any creditor of the debtor.” Because
actual intent to defraud is “rarely susceptible of direct proof,” MUVTA specifies that courts
may consider eleven “badges of fraud” to determine whether a transfer was made with
intent to hinder, delay, or defraud. Finn, 860 N.W.2d at 645 (quoting Citizens State Bank,
849 N.W.2d at 60).
The statute specifies that “[i]n determining actual intent under
paragraph (a), clause (1), consideration may be given, among other factors, to whether:
The transfer or obligation was to an insider;
The debtor retained possession or control of the property transferred after
The transfer or obligation was disclosed or concealed;
Before the transfer was made or obligation was incurred, the debtor had
been sued or threatened with suit;
The transfer was of substantially all the debtor's assets;
The debtor absconded;
The debtor removed or concealed assets;
The value of the consideration received by the debtor was not reasonably
equivalent to the value of the asset transferred or the amount of the
The debtor was insolvent or became insolvent shortly after the transfer
was made or the obligation was incurred;
The transfer occurred shortly before or shortly after a substantial debt was
The debtor transferred the essential assets of the business to a lienor that
transferred the assets to an insider of the debtor.
Minn. Stat. § 513.44(b). The Eighth Circuit has indicated that “the presence of three badges
of fraud is sufficient” to state a claim for actual fraudulent transfer. In re Sherman, 67 F.3d
1349, 1357 (8th Cir. 1995).
A plaintiff may also recover for constructive fraud, under Minnesota Statutes
sections 513.44(a)(2) and 513.45(a).
To prove fraudulent transfer under Minn. Stat.
§ 513.44(a)(2)(i), Plaintiffs must show that the debtor made a transfer “without receiving a
reasonably equivalent value in exchange for the transfer or obligation, and the debtor . . .
was engaged or was about to engage in a business or a transaction for which the remaining
assets of the debtor were unreasonably small in relation to the business or transaction.”
Similarly, to prove fraudulent transfer under Minn. Stat. § 513.45(a), Plaintiffs must show
that, after Plaintiffs’ judgment against the debtor arose, the debtor made a transfer or
incurred an obligation “without receiving a reasonably equivalent value in exchange . . . and
the debtor was insolvent at the time or the debtor became insolvent as a result of the
Upon proof of a fraudulent transfer, a creditor’s remedies include the avoidance of
the transfer, an attachment of the asset transferred, and appropriate equitable relief. Minn.
Stat. § 513.47.
Alleged Pleading Deficiencies
Defendants assert that Plaintiffs fail to adequately plead their constructive fraud
claims because they “repeatedly make conclusory statements that Mr. Seibert ‘received less
than reasonably equivalent value in exchange for’ certain transfers without any supporting
allegations about what, or the value of what, Mr. Seibert did or did not receive.” (Defs.’
Mem. in Supp., at 23.) The Court disagrees. That the transferor received less than
reasonably equivalent value is a necessary element in Counts III, IV, VIII, IX, XII, and XIII
of Plaintiffs’ Second Amended Complaint. For each of those counts, Plaintiffs allege that
the underlying transfers were unidirectional, that is, that nothing was received in exchange.
(See SAC ¶¶ 63, 67, 216, 403, 411-12, 434, 583, 593.) These were the transfers of money
to Julie Seibert, John Seibert’s wife, repeatedly over the course of three years, and the
transfers of pending development projects to Royal and, later, to Trinity. Plaintiffs allege
that John Seibert used these transfers to repeatedly and systematically move his assets out of
his creditors’ reach. In light of those allegations, it is plausible that these transfers were not
made in exchange for any consideration.
Plaintiffs have plausibly pleaded that the
transferor “received less than reasonably equivalent value” in their constructive fraud
claims. See Minn. Stat. §§ 513.44(a)(2), 45(a).
Defendants assert that Plaintiffs fail to adequately plead their actual fraud claims
because they fail to make factual allegations supporting their claims of “actual intent to
hinder, delay, or defraud.” (Defs.’ Mem. in Supp., at 23, 26.) Again, the Court disagrees.
Plaintiffs allege sufficient facts to raise a plausible claim that transfers were made with
actual intent “to hinder, delay, or defraud” Plaintiffs. Counts I, II, VII, X, XI, and XIV
require actual intent to hinder, delay, or defraud a creditor. See Minn. Stat. § 513.44(a)(1).
This intent requirement may be plausibly pleaded by pleading badges of fraud. See Finn,
860 N.W.2d at 645. At the outset, the Court notes that all of the transfers Plaintiffs allege to
be fraudulent occurred after the Plaintiffs filed the Iowa action in late 2009. This is a badge
of fraud that applies to all of Plaintiffs’ actual fraud claims. See Minn. Stat. § 513.44(b)(4).
With regard to Count I, Plaintiffs allege that John Seibert sold his interest in a family
farm, an asset that is not exempt from collection, and used the proceeds to pay down the
mortgage on his home, which is exempt. (SAC ¶¶ 503-05.) “[U]nder Minnesota law a
debtor in contemplation of bankruptcy may convert nonexempt property into exempt
property, so long as the conversion does not violate the Uniform Fraudulent Conveyance
Act.” In re Tveten, 402 N.W.2d 551, 556 (Minn. 1987). Plaintiffs allege several badges of
fraud in association with this transfer, including (1) that the transfer was concealed from the
Iowa court, when John Seibert represented that he was “broke” while the sale of his interest
was being finalized, (SAC ¶ 34); (2) that the transfer occurred shortly after John Seibert
incurred a substantial debt (the $77,928.68 sanctions judgment), (id. ¶¶ 24, 34); and (3) that
John Seibert retained possession and control of the asset by converting it to exempt
property, (id. ¶¶ 503-05).
Count II alleges that the transfers of money to Julie Seibert were made with
fraudulent intent. (Id. ¶ 509.) Plaintiffs allege several badges of fraud, including (1) that
Julie Seibert is an insider, (id. ¶ 8; see Minn. Stat. § 513.41(8)(i)(A)); (2) that John Seibert
retained control of the assets by using Julie Seibert’s credit card for his personal expenses,
(SAC ¶ 71); and (3) the transfers occurred over the course of 2010-2013, during which time
John Seibert incurred a substantial debt, the Iowa action judgments, (id. ¶¶ 13-14).
Count VII alleges that John Seibert, through his alter ego Preferred, transferred
pending development projects to Royal with intent to hinder, delay, or defraud Plaintiffs.
(Id. ¶¶ 524-28, 534-38.) Plaintiffs allege several badges of fraud, including (1) that the
transfer was to an insider, (id. ¶ 231; see Minn. Stat. § 513.41(8)(i)(D)); (2) that John
Seibert retained control of the transferred assets, because he is the sole shareholder of Royal,
(SAC ¶ 231); and (3) that John Seibert concealed the assets by avoiding having his name
attached to Royal or to the projects, (id. ¶¶ 259, 263).
Count X alleges that John Seibert, through his alter ego Royal, transferred pending
development projects to Trinity with intent to hinder, delay, or defraud Plaintiffs. (Id.
¶¶ 529-33, 551-55.) Plaintiffs allege several badges of fraud, including (1) that the transfer
was to an insider, (id. ¶¶ 341-42; see Minn. Stat. § 513.41(8)(i)(D)); (2) that John Seibert
retained control of the transferred assets, because he is actually in control of Trinity, (SAC
¶¶ 341-42); and (3) that John Seibert concealed the assets by misrepresenting the number of
development projects pending with Trinity, (id. ¶¶ 459-67).
Count XI alleges that John Seibert, through his alter ego Royal, transferred all of the
assets of Royal as a going concern to Trinity, and did so with intent to hinder, delay, or
defraud Plaintiffs’ collection efforts. (Id. ¶¶ 529-33, 556-62.) Plaintiffs allege several
badges of fraud, including (1) that the transfer was to an insider, (id. ¶¶ 341-42; see Minn.
Stat. § 513.41(8)(i)(D)); (2) that John Seibert retained control of the transferred assets,
because he is actually in control of Trinity, (SAC ¶¶ 341-42); and (3) the transfer was for
little or no consideration, because Royal was left an “empty shell,” (id. ¶¶ 425-26).
Finally, Count XIV alleges that John Seibert was the constructive owner of all
Trinity stock, because of his central role in the operation of the company, and that he
fraudulently transferred Trinity’s stock to Julie Seibert when he caused it to be issued to her.
(Id. ¶¶ 342, 574-80.) Plaintiffs allege several badges of fraud, including (1) that the transfer
was to an insider, (id. ¶ 8; see Minn. Stat. § 513.41(8)(i)(A)); (2) that John Seibert concealed
the assets by failing to disclose Trinity in his bankruptcy schedules, (id. ¶¶ 435-36, 441-42);
and (3) the transfer occurred shortly after a substantial debt was incurred, namely, the Iowa
action judgments against John Seibert, (id. ¶¶ 13-14, 339).
Plaintiffs have alleged several badges of fraud for each claim of actual fraud. And
overall, the Plaintiffs’ allegations paint a picture of calculated and willful concealment.
See supra Part I.B. In light of all these allegations, the Court holds that Plaintiffs have
adequately pleaded their actual fraud claims.
Transfer of Property Interest
Defendants assert that Plaintiffs’ claims against Royal and Trinity should be
dismissed, because the alleged transfers were of nothing more than unearned future income
and unrealized plans for service contracts. (Defs.’ Mem. in Supp., at 27-31.) Defendants
argue that nothing of value was transferred between Preferred, Royal, and Trinity, because
the alleged development projects were nothing more than vague expectations of potential
development contracts. (Defs.’ Reply, at 13-14.)
Plaintiffs respond that MUVTA defines “transfer” broadly, and that it applies to the
transfer of a business’s “intangible assets,” including “research and development, technical
knowledge and methodologies, good will, business relationships, proprietary materials and
confidential business information and established business.” (Pls.’ Mem. in Opp., at 32.)
Plaintiffs argue that John Seibert expressly attached value to the development projects of his
companies, and guarded them as confidential information, as did other developers he
worked with. (Id., at 35-37; see, e.g., SAC ¶¶ 418-24.) Plaintiffs point to the Running Aces
casino and hotel project as illustrative. (Pls.’ Mem. in Opp., at 38-39.) On the eve of John
Seibert’s bankruptcy, the Running Aces representatives were working with Royal on the
development. (See SAC ¶ 400.) But Plaintiffs had recently learned of Royal and levied its
stock. (Id. ¶ 401.) So John Seibert directed the Running Aces representative to put
Trinity’s name on the paperwork. (Id. ¶ 402.) Within two months, John Seibert had
declared bankruptcy and Running Aces had signed a development contract with Trinity.
(Id. ¶¶ 429, 452.)
MUVTA defines a transfer as “every mode, direct or indirect, absolute or
conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest
in an asset.” Minn. Stat. § 513.41(16). It defines an asset as “property of a debtor,” with
three exceptions not relevant here, and defines property as “anything that may be subject of
ownership.” Id. §§ 513.41(2), (12). The Court agrees with Plaintiffs that “assets” under
MUVTA can include intangible business assets, such as confidential information, business
relationships, and good will. See Schwartz v. Virtucom, Inc., No. 08-1059, 2009 WL
1311816, at *4 (Minn. Ct. App. May 12, 2009) (holding, in a MUVTA analysis, that a
company’s “name, established business, good will, and reputation” were “assets with
measurable value”); Quinn v. Elite Custom Transporters & Motorcoaches, LLC, No. 10-cv118, 2011 WL 1869391, at *5 (D. Minn. May 16, 2011) (“[A]s part of the asset transfer
there was also a transfer of goodwill and other intangible assets. . . . [I]t is clear that there
was some value to the intangible assets transferred.”).
Plaintiffs allege that the projects transferred between Preferred, Royal, and Trinity
were valuable assets, encompassing John Seibert’s “relationships with the individual
franchisors, the individual financing banks, the individual sellers of the properties for the
hotel sites, and the investors and investment groups . . . as well as all of his trade secrets,
confidential information, industry knowledge and contacts, intangibles and goodwill.”
(SAC ¶ 418.) That at least some of these projects had real value is demonstrated by the
transfer of the Running Aces project on the eve of the signing of a development contract.
That project translated into real income for Trinity, which it would not have received had
the development stayed with Royal.
(See id. ¶¶ 477-82.)
The Court acknowledges
Defendants’ insistence that the majority of the projects did not translate into a development
contract like the Running Aces project. But it is clear that this issue is more appropriately a
fact question, to be considered after the close of discovery, than a pleading issue. The
Plaintiffs have stated a claim that assets were transferred between Preferred, Royal, and
Conspiracy to Commit Fraudulent Transfer
Finally, Defendants argue that conspiracy to commit fraudulent transfer is not a
viable cause of action, and that Plaintiffs’ Counts XV and XVI should be dismissed. (Defs.’
Mem. in Supp., at 31-33.) Defendants assert that Minnesota law requires conspiracy claims
to be predicated on a tort, and that fraudulent transfer is not a tort. (Id.) Plaintiffs respond
that Minnesota law requires only that conspiracy claims be predicated on an “underlying
civil wrong,” and, alternatively, that fraudulent transfer claims are torts. (Pls.’ Mem. in
Opp., at 40-43.)
Courts in this district have generally followed the rule that, under Minnesota law,
“[a] civil conspiracy claim requires an underlying tort.” Noble Sys. Corp. v. Alorica Cent.,
LLC, 543 F.3d 978, 986 (8th Cir. 2008) (citing D.A.B. v. Brown, 570 N.W.2d 168, 172
(Minn. Ct. App. 1997)); see Woods v. K.R. Komarek, Inc., No 15-cv-4155, 2017 WL
231868, at *6 (D. Minn. May 26, 2017) (dismissing conspiracy counterclaim when
defendant’s tort-based counterclaims, but not its breach-of-contract counterclaim, were
dismissed); Carlson v. A.L.S. Enters., Inc., No. 07-cv-3970, 2008 WL 185710, at *5 (D.
Minn. Jan. 18, 2008) (“‘[A] civil conspiracy claim is merely a vehicle for asserting vicarious
or joint and several liability,’ and hence such a ‘claim’ is dependent upon a valid underlying
tort claim.” (citation omitted)); Stephenson v. Deutsche Bank AG, 282 F. Supp. 2d 1032,
1070 (D. Minn. 2003) (“Conspiracy, under Minnesota law, is based on the commission of
an underlying tort.”).
Plaintiffs argue that Harding v. Ohio Casualty Insurance Co., the leading Minnesota
Supreme Court case on this issue, does not necessarily require an underlying tort for a
conspiracy claim, but only an underlying “civil wrong.” (Pls.’ Mem. in Opp., at 41 (citing
Harding v. Ohio Cas. Ins. Co., 41 N.W.2d 818, 824 (Minn. 1950)).) In Harding, the
Minnesota Supreme Court does appear to use the terms “tort” and “civil wrong”
interchangeably. Id., at 824-25. The Court need not decide whether Harding has been too
narrowly interpreted, however, because it concludes that Plaintiffs’ conspiracy claims are
predicated on an underlying tort.
Courts are split on the question of whether fraudulent transfer can support a claim of
conspiracy. See Sheehan v. Saoud, 650 F. App’x 143, 154 (4th Cir. 2016) (collecting
cases). Several courts have permitted conspiracy claims based on fraudulent transfer. See
Chepstow Ltd. v. Hunt, 381 F.3d 1077, 1090 (11th Cir. 2004) (citing Peoples Loan Co. v.
Allen, 34 S.E.2d 811, 824 (Ga. 1945)); Forum Ins. Co. v. Camparet, 62 F. App’x 151, 152
(9th Cir. 2003) (citing Taylor v. S & M Lamp Co., 12 Cal. Rptr. 323, 327 (Cal. Ct. App.
1961)); Dalton v. Meister, 239 N.W.2d 9, 18 (Wis. 1976); McElhanon v. Hing, 728 P.2d
256, 263 (Ariz. App. 1985), partially vacated on other grounds, 728 P.2d 273 (Ariz. 1986);
Kekona v. Abastillas, No. 24051, 2006 WL 1562086, at *18 (Haw. Ct. App. Jun. 8, 2006),
partially vacated on other grounds, 150 P.3d 823 (Haw. 2006). They generally reason that,
“upon passage of the Uniform Fraudulent Conveyance Act, a conveyance to defraud a
general creditor became a legal wrong, properly the subject of a suit for civil conspiracy.”
McElhanon, 728 P.2d at 293.
Some courts have held that fraudulent transfer is not a tort. Several of these decisions
emphasize that fraudulent transfer, in its constructive fraud form, does not require proof of
intent to defraud. United States v. Neidorf, 522 F.2d 916, 918 (9th Cir. 1975) (“[U]nlike
tort, the liabilities here arise independently of any fraudulent conduct by either the transferee
or the transferor.”); FDIC v. S. Prawer Co., 829 F. Supp. 453, 456 (D. Me. 1993) (“‘[T]he
action is not one for actual fraud where a complete cause of action may be stated by
a showing of the bare facts of a voluntary conveyance resulting in insolvency.’” (quoting
United States v. Franklin Nat’l Bank, 376 F. Supp. 378, 382 (E.D.N.Y. 1973))); see also
Sheehan, 650 F. App’x at 155 (stating, in dicta, that a claim under the actual fraud provision
of the West Virginia Uniform Fraudulent Transfer Act could conceivably support a
conspiracy claim, but that a claim under the constructive fraud provision could not).
While Minnesota courts have not addressed the express question of whether a
MUVTA claim can be the predicate tort for civil conspiracy, they have permitted
conspiracy claims based on common-law fraud. See Mooney v. UnitedHealth Grp. Inc., No.
A13-2093, 2014 WL 3558178, at *5 (Minn. Ct. App. July 21, 2014); Odegard v. Dep’t of
Emp’t & Econ. Dev’t, No. A04-2168, 2005 WL 2129106, at *3 (Minn. Ct. App. Sept. 6,
2005); accord Tuttle v. Lorillard Tobacco Co., 377 F.3d 917, 926 (8th Cir. 2004).
Plaintiffs allege that John and Julie Seibert “agreed and knowingly and willfully
conspired among themselves to hinder, delay, and defraud Plaintiffs in the collection of their
judgment against John Seibert.” (SAC ¶ 582; see also id. ¶¶ 586, 592, 596.) It is clear that
Plaintiffs’ conspiracy claims are based on allegations of actual fraud, through Minn. Stat.
§ 513.44(a)(1), rather than constructive fraud, through Minn. Stat. § 513.44(a)(2) or Minn.
Stat. § 513.45. The actual fraud provision of MUVTA, like common-law fraud, requires
proof of fraudulent intent. Compare Minn. Stat. § 513.44(a)(1) (requiring intent to hinder,
delay, or defraud the creditor), with Martens v. Minn. Mining & Mfg. Co., 616 N.W.2d 732,
747 (Minn. 2000) (stating that common-law fraud requires, inter alia, a false representation
made with intent to induce reliance).
Thus, the concern stated by some courts, that
fraudulent transfer can be proven without proving fraudulent intent, does not apply here.
See Neidorf, 522 F.3d at 918; Prawer, 829 F. Supp. at 456. Relatedly, Defendants also
assert that permitting fraudulent transfer claims to serve as the underlying basis for civil
conspiracy claims would “absurdly” permit causes of action against a non-tortfeasor, as
opposed to the tortfeasor. (Defs.’Mem. in Supp., at 33.) Again, here, the allegations of
actual fraudulent conduct do not lead to such a result.
Defendants rely on the Ninth Circuit’s decision in United States v. Neidorf, 522 F.3d
at 918, to emphasize that fraudulent transfer claims sound in quasi-contract, not tort. But
Neidorf considered whether fraudulent transfer should be subject to the statute of limitations
for tort, not whether fraudulent transfer can support a conspiracy claim. Id. Further, the
Ninth Circuit has recognized conspiracy to commit fraudulent transfer when the state law in
question supports it. See Camparet, 62 F. App’x at 152 (citing Allen, 34 S.E.2d at 824).
Defendants also argue that fraudulent transfer is not a tort because the statutory remedy is
not damages, but access to improperly transferred assets and appropriate equitable relief.
(Defs.’ Mem. in Supp., at 33.) But the creditor’s harm from fraudulent transfer is that it has
been deprived of access to the assets from which it could collect the debt. The relief
provided by MUVTA effectively remedies that harm, by allowing avoidance of the transfer
or attachment of the transferred asset. See Minn. Stat. § 514.47. And while Defendants
contend that “[t]he argument that fraudulent transfer claims sound in tort creates . . . absurd
anomalies,” (Defs.’ Mem. in Supp., at 33), it would be truly anomalous if common-law civil
fraud can serve as the underlying tort for a conspiracy claim, but a similar statutory
allegation of actual fraudulent conduct cannot.
Finally, Defendants argue that Plaintiffs’ conspiracy claims also fail because a
corporation cannot conspire with itself. (Defs.’ Mem. in Supp., at 33 (citing Howard v.
Minn. Timberwolves Basketball Ltd. P’ship, 636 N.W.2d 551, 557 (Minn. Ct. App. 2001)).)
However, unlike the authority on which Defendants rely, which arises under antitrust law,
the allegations here sufficiently plead that John and Julie Seibert were acting as separate
entities, capable of engaging in conspiracy with each other. See Howard, 636 N.W.2d at
The Court concludes that Plaintiffs’ conspiracy claims, as plead, are consistent with
Minnesota law. They are based on a predicate tort, the actual-fraud form of fraudulent
transfer. See Minn. Stat. § 513.44(a)(1). The Court does not address whether a constructive
fraud claim under MUVTA could support a conspiracy claim.
See Minn. Stat.
§§ 513.44(a)(2), 513.45.
Based on the foregoing, and all the files, records, and proceedings herein, IT IS
HEREBY ORDERED THAT:
1. Plaintiffs’ Motion for Leave to Amend [Doc. No. 192] is GRANTED.
2. Defendants’ Motion to Dismiss under Rule 12 [Doc. No. 183] is DENIED.
Dated: February 7, 2017
s/Susan Richard Nelson
SUSAN RICHARD NELSON
United States District Judge
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