Julie Rutherford v. Dean Kessel ( 2009 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 08-2264
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Julie Rutherford, *
*
Appellant, *
*
v. *
* Appeal from the United States
Dean Kessel, * District Court for the
* District of North Dakota.
Appellee, *
*
Robert Rutherford; Elizabeth *
McGregor, *
*
Defendants. *
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Submitted: December 12, 2008
Filed: March 30, 2009
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Before WOLLMAN, BYE, and RILEY, Circuit Judges.
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BYE, Circuit Judge.
Julie Rutherford brought this action to quiet title in three condominium
properties she claims to own. These properties were the subject of a North Dakota
state trial court order entered against Rutherford's brother, Robert Rutherford. Such
order held the transfers of ownership between the brother and sister were fraudulent
and therefore null and void. Rutherford appeals the district court's1 determination that
her quiet title action is barred by the doctrine of res judicata. We affirm.
I
On May 27, 2004, Robert Rutherford assaulted Dean Kessel in the latter's home
in Bismarck, North Dakota. Robert was charged with burglary and assault, convicted,
and sentenced to serve four years. Kessel brought a civil action in state court against
Robert for the injuries suffered in the assault. At the outset of the civil action, the
state trial court entered an order enjoining Robert from disposing of his assets. Near
the same time, Kessel discovered three condominiums recorded as being owned by
Robert. On September 21, 2004, Kessel filed and recorded a lis pendens against the
properties, giving notice that a personal injury action had been filed against Robert
and that title to the properties could be affected by a judgment in such action.
In August 2005, Robert informed his sister, Julie, of the civil action brought
against him by Kessel. On October 15, 2005, while Robert was incarcerated, he
appointed Julie his attorney-in-fact. In December 2005, acting pursuant to her
appointment, Julie executed warranty deeds transferring the three condominium
properties to herself. The deeds recorded by Julie show her both as grantor (via her
power of attorney) and as grantee. Julie contends, however, her actual ownership of
two of the properties dates back to February 2000 and February 2001. At those times,
two deeds were recorded showing Robert as the legal title holder, but Julie contends
she was the actual owner. She claims Robert did not provide any consideration for the
deeds and only held legal title in trust for her benefit. With respect to the third
property, Julie contends Robert granted her a security interest in the property in
February 2000 to secure obligations owed to her by him. She contends the December
1
The Honorable Daniel L. Hovland, Chief Judge, United States District Court
for the District of North Dakota.
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2005 transfers pursuant to her power of attorney were to fulfill expressed or implied
agreements between herself and her brother regarding her actual ownership of the
properties.
The personal injury action proceeded to trial in April 2006. During the course
of the trial, Julie sat at defense counsel's table as her brother's representative; he was
still incarcerated. Acting pursuant to her power of attorney, she also controlled certain
aspects of the litigation, such as paying attorney fees. When documentation was
introduced showing Robert owned the three condominium properties, Julie said
nothing about her alleged ownership. The jury found in favor of Kessel and awarded
damages. On April 27, 2006, the state trial court entered a judgment in Kessel's favor
in the amount of $240,415.47, plus interest.
Following the trial, both Kessel and the Rutherfords brought post-judgment
motions. Of particular note, on September 28, 2006, Kessel brought an ex parte
motion to set aside the December 2005 transfers of the three condominium properties,
alleging the transfers were fraudulent. The state trial court granted the motion,
holding that the transfers were null and void and title to the properties remained with
Robert. On October 2, 2006, Kessel provided Robert with notice of the order. Robert,
in turn, forwarded the notice to his sister's attorneys, who received it on October 6,
2006. On that same day, Robert appealed the judgment entered against him in state
trial court to the North Dakota Supreme Court, and Julie filed her quiet title action in
federal district court. The North Dakota Supreme Court subsequently affirmed the
judgment of the state trial court. Kessel v. Rutherford, 734 N.W.2d 342 (N.D. 2007)
(unpublished table disposition).
In the quiet title action, Kessel brought a motion for summary judgment. Kessel
contended, in part, Julie was improperly attempting to seek relief from the ex parte
order of the state trial court and should be barred from doing so because she was in
privity with her brother as a result of the power of attorney to act on his behalf. The
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district court initially denied Kessel's motion, concluding Julie's claims of a property
interest in the three condominium properties was not identical to the issues decided
in the state trial court's ex parte order. In addition, the district court found Julie was
not in privity with her brother, but acknowledged it was a "close question."
After conducting discovery, which included taking Julie's deposition during
which she admitted sitting silently in court when the issue of Robert's ownership of
the three condominiums was discussed, Kessel filed a second motion for summary
judgment. He renewed his argument that Julie should be precluded from challenging
the state trial court's order voiding the transfers of the properties as fraudulent. The
district court revisited Kessel's preclusion arguments, this time finding Julie was in
privity with her brother and concluding the quiet title action was barred by the
doctrine of res judicata. Rutherford v. Rutherford, 552 F. Supp. 2d 980, 989-90 (D.
N.D. 2008). Julie filed a timely appeal to this court.
II
The district court's grant of summary judgment on the issue of res judicata is
reviewed de novo. Morse v. Comm'r, 419 F.3d 829, 833 (8th Cir. 2005). For a claim
to be precluded under the doctrine of res judicata due to a determination reached in
a prior lawsuit, five elements must be satisfied. Those elements are:
(1) the first suit resulted in a final judgment on the merits; (2) the first
suit was based on proper jurisdiction; (3) both suits involve the same
parties (or those in privity with them); and (4) both suits are based upon
the same claims or causes of action. Furthermore, the party against
whom res judicata is asserted must [(5)] have had a full and fair
opportunity to litigate the matter in the proceeding that is to be given
preclusive effect.
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Costner v. URS Consultants, Inc., 153 F.3d 667, 673 (8th Cir. 1998) (internal citations
and quotations omitted). Julie contends none of these five elements are present in this
case, and thus we examine them seriatim.
A. Final Judgment on the Merits
This element is satisfied. The state court action resulted in a final judgment on
the merits. A jury awarded Kessel $240,415.47 plus interest, and a judgment was
entered in his favor in that amount. Rutherford appealed the judgment to the North
Dakota Supreme Court, and it was affirmed. See Kessel v. Rutherford, 734 N.W.2d
342 (N.D. 2007).
Robert did not specifically appeal the ex parte order setting aside the transfer
of the three condominium properties. Relying upon N.D. Cent. Code § 28-27-02(7),
Julie argues the order was not appealable due to its ex parte nature. The statute states
in part: "An order made by the district court or judge thereof without notice is not
appealable[.]" N.D. Cent. Code § 28-27-02(7). The statute, however, goes on to state:
[B]ut an order made by the district court after a hearing is had upon
notice which vacates or refuses to set aside an order previously made
without notice may be appealed to the supreme court when by the
provisions of this chapter an appeal might have been taken from such
order so made without notice, had the same been made upon notice.
Id.
Thus, after receiving notice of entry of the ex parte order, Robert could have
asked the district court to vacate or set aside the ex parte order. If the district court
refused to do so, he could have then appealed the second order. See Beck v. Smith,
296 N.W.2d 886, 888 (N.D. 1980) ("Although an ex parte order is not appealable the
party against whom it is issued can move the district court to vacate the ex parte order,
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and the court's order denying such motion may then be appealable under the terms of
Section 27-28-02(7)."); see also Prod. Credit Ass'n of Minot v. Schlak, 383 N.W.2d
826, 828 (N.D. 1986) ("The terms of Section 28-27-02 prohibit the appeal of an ex
parte order and require an unsuccessful party to obtain a decision based on traditional
adversarial methods, either on a motion to vacate the order or on a motion for
reconsideration.").
After receiving notice of the ex parte order, Robert failed to request a hearing
on the matter, or to ask the district court to vacate the order. If he had done so, he
could have appealed the order. Having failed to request a hearing, and consequently
having failed to appeal the order, Robert is bound by the judgment entered in the state
court suit with respect to the issue of the fraudulent transfers of the condominiums.
B. The State Trial Court's Jurisdiction
Julie contends the state trial court lacked jurisdiction, within the context of the
tort suit between her brother and Kessel, to decide whether the transfer of the three
condominium properties was fraudulent. Relying upon North Dakota statutory law
relating to the execution of judgments, she argues a separate "action" is required to
determine whether she has title to the three properties. See N.D. Cent. Code § 28-25-
14 (governing the procedure on adverse claims and indicating property claims adverse
to a judgment debtor are "recoverable only in an action against such person [brought]
by the receiver") (emphasis added); N.D. Cent. Code § 13-02.1-07(1) (governing the
remedies of creditors under the Uniform Fraudulent Transfer Act and referring to "an
action for relief against a transfer") (emphasis added). She also relies upon a passage
from an 1889 decision of the Supreme Court of Dakota (presiding over the Dakota
territories before North and South Dakota became states) which discussed the
difference between proceedings supplementary to execution of a judgment under the
Code of Civil Procedure and a creditor's bill sustainable in a court of chancery. See
Feldenheimer v. Tressel, 43 N.W. 94, 96 (Dakota 1889) ("[T]he question of title
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cannot be summarily disposed of by the court or judge before whom the proceedings
[supplementary to execution] may be pending. Such questions must be adjudicated
and determined by an action brought for that purpose.") (emphasis added).
The issue in Feldenheimer was whether post-judgment motions to execute on
a judgment entirely supplanted the right of a judgment creditor to bring a separate
action – similar to a creditor's bill historically allowed in a court of equity – to
challenge a fraudulent transfer. In other words, Feldenheimer involved the opposite
of what occurred here. Here, Kessel obtained a judgment at law against Robert
Rutherford and then brought a post-judgment motion in the same action to challenge
a fraudulent transfer. In Feldenheimer, the judgment creditor obtained a judgment at
law against the defendant and then brought a separate action to challenge a fraudulent
transfer. The defendant responded by claiming the judgment creditor's only remedy
was to do what Kessel did in this case, i.e., bring a post-judgment motion in the suit
at law (a proceeding supplementary to execution) to challenge the fraudulent transfer.
The Supreme Court of Dakota rejected the argument, holding the judgment creditor
could bring a separate action similar to a creditor's bill historically brought in
chancery court. The court emphasized the fact, however, that both choices for
remedies were available to the judgment creditor: "[S]upplemental proceedings . . . in
many respects . . . may serve as a substitute for a creditor's bill [but] they are by no
means the exclusive remedy to which the creditor may resort. He may still have his
creditor's suit." Feldenheimer, 43 N.W. at 96.
North Dakota, like most states, has a unified court system. Claims which were
historically viewed as equitable ones, such as a creditor's bill to set aside a fraudulent
transfer, are brought in the same court as those claims historically brought in a court
of law, such as a personal injury tort claim. Thus, the state trial court clearly had
jurisdiction over Kessel's personal injury claim, as well as his fraudulent transfer
claim, as both of those causes of action would be filed in the state district courts.
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North Dakota law did not prohibit Kessel from adjudicating both of his causes
of action against Robert (the tort claim and the fraudulent transfer claim) in the same
lawsuit. The North Dakota Rules of Civil Procedure provide "[a] party may also state
as many separate claims or defenses as the party has [in a single action], regardless of
consistency and whether based on legal or on equitable grounds or on both." N.D. R.
Civ. P. 8(e)(2).
A majority of courts allow a tort plaintiff to challenge a tortfeasor's allegedly
fraudulent transfer of property in the same action as the tort suit. See Travelers
Indem. Co. v. Rubin, 551 A.2d 1220, 1223 (Conn. 1988) ("The plaintiff . . . could
incorporate in a single complaint a claim for damages in tort and a petition that a
fraudulent conveyance made to defeat her claim be set aside."); Downs v. Powell, 108
S.E.2d 715, 718 (Ga. 1959) (holding a tort plaintiff "may proceed in one action against
the tortfeasor and the grantee in such voluntary deed, to obtain (1) a judgment for
damages against the tortfeasor for the negligent tortious homicide of her child, and (2)
a decree adjudging null and void as to her conveyances of real and personal property
executed by the defendant tortfeasor subsequently to the commission of the tort.");
Rachal v. Balthazar, 32 So. 2d 483, 484 (La. Ct. App. 1947) (involving a case in which
a fraudulent conveyance was set aside in favor of a plaintiff in the same lawsuit as the
tort action brought by the plaintiff against the tortfeasor/fraudulent conveyor);
Exchange Nat'l Bank of Tulsa v. Washington, 30 N.Y.S.2d 43, 45 (N.Y. Sup. Ct.
1941) ("[C]reditors may now assail fraudulent conveyances without first obtaining a
judgment, and may assail them in the same suit in which they seek to establish their
debt[.]"); McMakin v. Stratton, 1884 WL 7369, at *3 (Ky. Ct. App. 1884) ("It is
certain that the appellee . . . had the right to combine with his prayer for [a tort]
judgment the further prayer for subjecting the property fraudulently conveyed to the
payment of his debt."); see also Right of Tort Claimant, Prior to Judgment, to Attack
Conveyance or Transfer as Fraudulent, 73 A.L.R. 2d 749 § 4[a] (discussing those cases
in which courts allowed an action for damages to be combined with a claim to set
aside a fraudulent conveyance).
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Thus, we reject Julie's contention the state trial court lacked jurisdiction over
Kessel's fraudulent transfer claim simply because Kessel did not bring the cause of
action in a separate lawsuit.
C. Same Parties or Privies
Julie next contends she was not in privity with her brother with respect to the
state trial court's order concluding the transfer of the three condominium properties
was fraudulent. We disagree.
In general, privity exists if a person is so identified in interest with
another that he represents the same legal right. . . . [Res judicata applies
to] a person who is not technically a party to a judgment, or in privity
with him, but who is, nevertheless, connected with it by his interest in
the prior litigation and by his right to participate therein, at least where
such right is actively exercised by prosecution of the action, employment
of counsel, control of the defense, filing of an answer, payment of
expenses or costs of the action, the taking of an appeal, or the doing of
such other acts as are generally done by parties. Fundamental fairness
underlies any determination of privity.
Hofsommer v. Hofsommer Excavating, Inc., 488 N.W.2d 380, 384 (N.D. 1992)
(internal citations and quotations omitted).
As the district court recognized, Julie was in privity with her brother Robert
with respect to Kessel's tort suit. Robert granted her a power of attorney to act in his
regard. The transfer of property between Robert and Julie was undertaken by Julie
acting in her capacity as Robert's representative. Julie had the right to participate in
the Kessel tort suit pursuant to the power of attorney, and did so. She acted as
Robert's representative by sitting at defense counsel's table during the entire civil trial
in state court. She also paid the attorney fees incurred in defense of the tort suit.
Finally, with respect to the issue of "fundamental fairness" underlying a determination
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of privity, the district court found it significant that Julie "was present in the
courtroom when documentation was presented which showed that Robert Rutherford
owned the condominiums referenced as Parcels 1, 2, and 3 [and] [i]f ownership of the
condominiums had in fact changed, Julie Rutherford had an obligation to 'set the
record straight' rather than allow her brother to testify falsely." Rutherford, 552 F.
Supp. 2d at 986.
Citing Bismarck Public School District No. 1. v Hirsch, 136 N.W.2d 449 (N.D.
1965), Julie argues a grantee is no longer in privity with her grantor upon the delivery
of a deed. That is not the holding in Hirsch. The principle of law recognized in
Hirsch is that "one is not a privy to a judgment where his succession to the rights of
property thereby affected occurred previous to the institution of the suit." Hirsch, 136
N.W.2d at 452 (emphasis added). The holding in Hirsch is irrelevant to this case. The
judgment at issue is the judgment Kessel obtained against Robert in the tort suit. The
tort suit was initiated on September 19, 2004. The transfer of property between Julie
and Robert did not occur prior to the institution of the tort suit, but afterwards, on
December 2, 2005. Thus, the district court did not err in determining that Robert and
Julie were in privity.
D. Same Claims or Causes of Action
Julie next contends that her quiet title action does not involve the same claims
or causes of action adjudicated in Kessel's tort claim. We disagree. The question of
whether Julie's quiet title action is precluded by the state trial court's order "turns on
whether its claims arise out of the same nucleus of operative facts as the prior claim."
Costner, 153 F.3d at 677 (internal quotations and citations omitted). The issue Julie
wants to adjudicate in her quiet title action concerns her alleged ownership in the three
condominium properties. That is the same issue adjudicated in the state trial court's
order declaring null and void the transfers between Robert to Julie. Both suits would
involve the validity of the unilateral conveyance Julie constructed in the midst of the
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personal injury lawsuit between Kessel and her brother. This is precisely the type of
collateral attack upon a prior court's decision which the doctrine of res judicata bars.
E. Notice and Opportunity to be Heard
Finally, Julie contends she did not have an opportunity to be heard in the state
trial court with respect to her claim to title to the three condominium properties. The
issue, however, is not whether Julie had an opportunity to be heard in the state trial
court on this matter, but whether her brother had notice and an opportunity to be
heard. The doctrine of res judicata bars both parties and their privies from relitigating
an issue already decided by a prior court. Thus, as long as Robert had notice and an
opportunity to be heard on the issue of the fraudulent transfer, Julie is also barred from
relitigating the issue because Julie was in privity with her brother.
The ex parte nature of Kessel's fraudulent transfer motion is troubling. There
does not appear to be any emergency, or other reason, which justified bringing the
motion ex parte. Robert was, however, given notice of the entry of the order and had
an opportunity to be heard on the issue by moving to vacate the order or bringing a
motion for reconsideration. See Schlak, 383 N.W.2d at 828. He did not avail himself
of these opportunities, and the state trial court's order became binding against him
when the North Dakota Supreme Court affirmed the judgment. Furthermore, Julie had
actual notice of the entry of the order. Pursuant to her power of attorney, she also
could have brought a motion to vacate the order or a motion for reconsideration in her
capacity as her brother's representative. As a consequence, we conclude Robert had
notice and an opportunity to be heard on the issue of the fraudulent transfer in the state
trial court. Robert is therefore barred from relitigating the issue, and because Julie is
in privity with her brother she is also barred from relitigating the issue.
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III
All of the elements of the doctrine of res judicata are satisfied in this case. We
therefore affirm the judgment of the district court in all respects.
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