Lariat Companies, Inc. v. Barbara Wigley ( 2021 )

United States Court of Appeals
For the Eighth Circuit
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No. 20-3132
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In re: Barbara A. Wigley
lllllllllllllllllllllDebtor
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Lariat Companies, Inc.
lllllllllllllllllllllAppellee
v.
Barbara A. Wigley
lllllllllllllllllllllAppellant
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Appeal from the United States Bankruptcy
Appellate Panel for the Eighth Circuit
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Submitted: May 12, 2021
Filed: October 18, 2021
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Before COLLOTON, WOLLMAN, and KOBES, Circuit Judges.
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WOLLMAN, Circuit Judge.
Debtor Barbara A. Wigley (Barbara) appeals from the judgment of the
bankruptcy appellate panel, which affirmed the bankruptcy court’s determination that
her debt to Lariat Companies, Inc. (Lariat), is excepted from discharge because it was
obtained by actual fraud. Barbara argues that the bankruptcy court committed legal
and factual errors in reaching that conclusion. We affirm.
I. Background
Baja Sol Cantina EP, LLC, entered into a lease agreement with Lariat in late
2008, with Michael Wigley (Michael), Barbara’s husband, personally guaranteeing
the company’s obligations under the lease. Baja Sol was evicted for failure to pay
rent in mid-2010. Lariat thereafter filed suit against Baja Sol and Michael in
Minnesota state court, seeking to recover past-due and future-accruing rent. While
the lease action was pending, Michael transferred some of his assets—namely, his
interest in the Wigleys’ joint checking account and his limited partnership interests
in Spell Capital Funds II and III—to Barbara. The state court entered summary
judgment in favor of Lariat in June 2011, awarding more than $2 million in damages.1
Lariat and other creditors thereafter sued Barbara in state court for fraudulent
transfer of funds under the Minnesota Uniform Fraudulent Transfer Act, Minn. Stat.
§ 513.41 et seq. Michael eventually was joined in the action. In its October 2013
order, the state court found that Michael had transferred assets to Barbara “with actual
intent to hinder, delay, or defraud Lariat; without receipt of reasonably equivalent
1
Lariat had leased the Baja Sol space to another company in July 2011.
Michael did not timely present evidence of a mitigation defense, however, and the
state court thus denied his motion to vacate the summary judgment order. The state
court found that Michael had made a strategic litigation decision to forego engaging
in discovery. Michael did not appeal from the denial of the motion to vacate. See
Lariat Cos., Inc. v. Baja Sol Cantina EP, LLC, No. A12-2202, 2013 WL 4404589, at
*6 n.3 (Minn. Ct. App. Aug. 19, 2013) (unpublished).
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value in exchange for the transfers; and at a time when M. Wigley was insolvent or
became insolvent as a result of the transfers.” The state court entered judgment in
favor of Lariat, holding Barbara and Michael jointly and severally liable for more
than $780,000.
Michael filed for Chapter 11 bankruptcy in February 2014. The bankruptcy
court applied the landlord cap, see 11 U.S.C. § 502(b)(6), to Lariat’s claim, to the
extent the claim involved the Baja Sol lease termination.2 After Michael satisfied the
capped claim of $637,581.07, Barbara moved to vacate the fraudulent transfer
judgment. The state court denied the motion in December 2016. Days later, Barbara
filed for Chapter 11 bankruptcy.
Lariat filed a claim in Barbara’s bankruptcy case for more than $1 million,
which represented the fraudulent transfer judgment and the interest that had accrued.
Over Barbara’s objection, the bankruptcy court determined that Lariat’s discharged
claim in Michael’s bankruptcy case did not extinguish Barbara’s liability to Lariat.
The bankruptcy court concluded that Lariat’s claim in Barbara’s proceeding arose
from a lease termination, however, and thus applied § 502(b)(6)’s landlord cap. See
In re Barbara Wigley, 951 F.3d 967, 972 (8th Cir. 2020) (affirming the bankruptcy
court’s judgment and remanding the matter “to the bankruptcy court to enter an order
that Lariat has a claim against Mrs. Wigley”). Barbara thereafter satisfied Lariat’s
capped claim of $330,886.67.
While Barbara’s objection to Lariat’s claim was pending, Lariat filed a
complaint in bankruptcy court seeking to except its claim from discharge. Lariat
2
The bankruptcy court disallowed Lariat’s claim against Michael’s estate to the
extent it sought relief related to the fraudulent transfer judgment, concluding that the
fraudulent transfer judgment was duplicative of the judgment awarding damages for
breach of lease. See In re Michael Wigley, 533 B.R. 267, 272 (B.A.P. 8th Cir. 2015)
(affirming, in relevant part, the bankruptcy court’s judgment).
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argued that Barbara should be required to pay the entire debt (i.e., the fraudulent
transfer judgment plus interest) and that the debt should remain with Barbara post-
bankruptcy, because it was obtained by “actual fraud.” See 11 U.S.C. § 523(a)(2)(A).
Following a two-day trial, the bankruptcy court entered judgment in favor of Lariat.
It found that Michael had transferred assets to hinder, delay, or defraud his creditors;
that Barbara had participated in the scheme; and that she had “possessed actual
fraudulent intent when receiving the transfers.” The bankruptcy appellate panel
affirmed. In re Barbara Wigley, 620 B.R. 87 (B.A.P. 8th Cir. 2020).
II. Discussion
On appeal from a decision of the bankruptcy appellate panel, we act as a
second reviewing court of the bankruptcy court’s decision. In re Barbara Wigley, 951
F.3d at 970. We thus review the bankruptcy court’s factual findings for clear error
and its legal conclusions de novo. Id.
Section 523(a)(2)(A) excepts from discharge any debt “for money . . . to the
extent obtained by . . . actual fraud.” The term “actual fraud” includes fraudulent
conveyances. See Husky Int’l Elecs., Inc. v. Ritz, 136 S. Ct. 1581, 1586 (2016)
(hereinafter Husky); DZ Bank AG Deutsche Zentral Genossenschaft Bank v. Meyer,
869 F.3d 839, 843–44 (9th Cir. 2017). “[W]hen a debtor transfers property to a third
party without adequate consideration, the transfer is deemed a fraud on the debtor’s
creditors.” McClellan v. Cantrell, 217 F.3d 890, 894 (7th Cir. 2000); see Husky, 136
S. Ct. at 1587 (explaining that “fraud” has long been used “to describe a debtor’s
transfer of assets that . . . impairs a creditor’s ability to collect the debt”). That fraud
“is actual if the debtor intended by the transfer to hinder his creditors.” McClellan,
217 F.3d at 894; see Husky, 136 S. Ct. at 1586 (“[A]nything that counts as ‘fraud’ and
is done with wrongful intent is ‘actual fraud.’”).
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Barbara first argues that the bankruptcy court erred in excepting Lariat’s claim
from discharge because doing so nullified the landlord-cap relief she had been
granted under 11 U.S.C. § 502(b)(6). Barbara maintains that § 502(b)(6) protects
unsecured creditors by “prevent[ing] lessors from receiving windfalls on long-term
leases.” See In re Barbara Wigley, 951 F.3d at 972 (citing S. Rep. No. 95-989, at 63
(1978), which cites Oldden v. Tonto Realty Corp., 143 F.2d 916, 921 (2d Cir. 1944),
and states that § 502(b)(6) was “designed to compensate the landlord for his loss
while not permitting a claim so large (based on a long-term lease) as to prevent other
general unsecured creditors from recovering a dividend from the estate”). Barbara
contends that the bankruptcy court improperly excepted Lariat’s claim under
§ 523(a)(2)(A) “to reach an outcome directly in conflict with the specific mandate of
§ 502(b)(6),” thereby rendering the landlord cap superfluous. Appellant’s Br. 22.
Although Lariat’s claim was partially disallowed against Barbara’s bankruptcy
estate under § 502(b)(6), the landlord cap does not foreclose Lariat’s argument that
the claim should be excepted from discharge under § 523(a)(2)(A).3 As previously
stated, Lariat filed a claim for the amount of the fraudulent transfer judgment plus
interest. Barbara objected, and the bankruptcy court capped Lariat’s claim under
§ 502(b)(6), which established the amount allowed to be paid from the bankruptcy
estate. The application of § 502(b)(6) did not preclude Lariat from seeking to except
its claim from discharge under § 523(a)(2)(A), however. See In re McAlpin, 254 B.R.
449, 454–56 (Bankr. D. Minn. 2000) (concluding that a creditor is not necessarily
3
A claim is deemed allowed unless a party in interest objects. 11 U.S.C.
§ 502(a). As explained in In re Condor Systems, Inc., 296 B.R. 5, 12 (B.A.P. 9th Cir.
2003):
The claim is for the total available under substantive nonbankruptcy
law. In contrast, the cap merely defines how much of the substantive
claim will be “allowed” to be paid by the bankruptcy estate and
mandates “disallowance” of the excess. Taken together, the claim and
cap yield the “allowed” or “allowable” claim.
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barred from seeking to collect a disallowed claim, if the claim was disallowed based
on bankruptcy principles (e.g., § 502(b)(6)) and not on the merits). Accordingly, we
conclude that Lariat’s claim is excepted from discharge under § 523(a)(2)(A) to the
extent that it was obtained by actual fraud. See Grogan v. Garner, 498 U.S. 279, 287
(1991) (“Congress evidently concluded that the creditors’ interest in recovering full
payment of debts in [this category] outweighed the debtors’ interest in a complete
fresh start.”).
Barbara argues that the bankruptcy court erred in concluding that she
committed “actual fraud.” A transferee who receives a fraudulent transfer with the
requisite wrongful intent commits “actual fraud,” and any debts traceable to the
fraudulent transfer are excepted from discharge. See Husky, 136 S. Ct. at 1586. The
transferee’s intent must “involv[e] moral turpitude or intentional wrong.” Id. (quoting
Neal v. Clark, 95 U.S. 704, 709 (1878)). The exception does not cover implied fraud,
which “describe[s] acts of deception that ‘may exist without the imputation of bad
faith or immorality.’” Id. (quoting Neal, 95 U.S. at 709).
The bankruptcy court did not clearly err in finding that Barbara had received
a fraudulent transfer from Michael.4 Barbara testified that the Wigleys began
experiencing financial difficulties in 2008. By the end of 2010, Lariat and other
creditors had filed suit in state court against Michael. The Wigleys had moved from
their family home in early 2011, executing short sales on their residence and an
adjoining lot. In addition, Lariat had filed its motion for summary judgment in the
4
We reject Barbara’s argument that the bankruptcy court erred in considering
the badges of fraud set forth in Minn. Stat. § 513.44(b). See Ritchie Cap. Mgmt.,
LLC v. Stoebner, 779 F.3d 857, 863 (8th Cir. 2015) (affirming the bankruptcy court’s
finding of actual fraudulent intent under the badges of fraud approach); see also In
re Addison, 540 F.3d 805, 813–14 (8th Cir. 2008) (concluding that “the bankruptcy
court properly looked to the badges of fraud enumerated in Minn. Stat. Ann.
§ 513.44(b)” but clearly erred in finding that the debtor had fraudulent intent).
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lease action, which sought more than $2 million in damages. Accordingly, the
Wigleys were in financial distress when Michael transferred his interest in the joint
checking account and his interests in the Spell Capital Funds to Barbara in March
2011. The bankruptcy court found their stated reason for the transfer—estate
planning—not credible in light of the evidence that the Wigleys had not followed
their usual practice of consulting with estate planning professionals, nor were the
transfers made in accordance with their ten-year estate planning cycle. Moreover,
Barbara later used the funds to pay Michael’s creditors, which negated any estate
planning benefit. According to the bankruptcy court’s findings, when asked whether
he had transferred his interests in the Spell Capital Funds in an attempt to avoid
collection activities, Michael “emotionally responded, ‘I was trying to protect myself,
my businesses[,] and my family. Absolutely, I was trying to protect myself, my
businesses, and my family.’”
The record also supports the bankruptcy court’s finding that Barbara
participated in the scheme with the requisite wrongful intent. The Wigleys testified
that they regularly discussed their financial situation and reviewed their accounts
together. Barbara testified that she knew that Michael had been sued, and the
bankruptcy court fairly inferred that it was “unrealistic that a possible judgment of
[more than $2 million] was not discussed, especially given the impact it would have
had on the family’s financial condition.” The bankruptcy court also relied on a letter
that the Wigleys had submitted to the Internal Revenue Services in 2012, explaining
that they were scrambling to cover business expenses and fighting to save their home.
The bankruptcy court did not clearly err in rejecting the assertion that Barbara did not
understand why the funds were being transferred to her and in finding instead that she
decided to protect her husband by receiving the transfers, thereby “help[ing] M.
Wigley evade his creditors.” The evidence thus supports a finding that Barbara
engaged in a “fraud that ‘involv[ed] . . . intentional wrong.’” See Husky, 136 S. Ct.
at 1586 (quoting Neal, 95 U.S. at 709).
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We recognize that the facts of the Wigleys’ fraudulent transfer scheme are not
as egregious as the facts presented in other cases. See id. at 1585 (debtor transferred
large sums of money to other entities he controlled); McClellan, 217 F.3d at 892(debtor purchased machinery from brother for $10, sold the machinery for $160,000,
“and she’s not telling anyone what has happened to that money”). The bankruptcy
court properly applied the law to the facts of this case, however, and the record
reflects that the court’s findings were not clearly erroneous. Because the evidence
supports the findings that Barbara intended to and did commit actual fraud, her
fraudulent transfer judgment is nondischargeable under § 523(a)(2)(A). See Husky,
136 S. Ct. at 1589 (“If that recipient [of a fraudulent transfer] later files for
bankruptcy, any debts traceable to the fraudulent conveyance will be
nondischargeable under § 523(a)(2)(A).” (internal quotation marks and citation
omitted)).
The bankruptcy court’s judgment is affirmed.
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