In Re Leroy J. Lauer, Debtor. E. Bruce Nangle Cele Nangle, Guardian of the Estate of Timothy Nangle Stephen J. Nangle, Guardian of the Estate of Ellen Nangle Harriet Nangle-Rose v. Leroy J. Lauer Mark Twain Bank, N.A., a National Banking Association, A. Thomas Dewoskin James S. Cole, Trustees

Citation: 98 F.3d 378Docket: 95-1012

Court: Court of Appeals for the Eighth Circuit; December 19, 1996; Federal Appellate Court

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E. Bruce Nangle and others initiated an adversary bankruptcy proceeding against Leroy J. Lauer and Mark Twain Bank, aiming to prevent the discharge of claims against Lauer and seek damages from Mark Twain. The U.S. Bankruptcy Court granted summary judgment in favor of Mark Twain, a decision later affirmed by the U.S. District Court. Nangle appealed to the Eighth Circuit Court of Appeals, which affirmed in part, reversed in part, and remanded the case for further proceedings.

The case originates from a real estate partnership, Crossroads U.S.A. Limited II, where Nangle and others were limited partners. Lauer and Joseph Graves served as general partners. In 1982, the general partners solicited the limited partners to sell their interests, assuring them that the partnership's asset condition remained unchanged. However, within six months, the former limited partners discovered that the Riverheights Retirement Center had already been sold by Lauer and Graves prior to the buyout.

Following the death of Graves in 1983, the former limited partners filed a lawsuit against Lauer and Graves' estate representative in Missouri state court, later adding claims against Mark Twain Bank for three loans secured by partnership assets. Lauer filed for personal bankruptcy in 1986, listing the state lawsuit as a claim against his estate, prompting the plaintiffs to seek a determination that their claim was nondischargeable in bankruptcy.

The complaint alleges that limited partners were misled into selling their interests to general partners due to false statements regarding the limited partnership's assets, particularly concerning the retirement center property. Plaintiffs contend they would not have sold their interests had they been aware that the Riverheights property was exchanged for a tax-exempt industrial revenue bond. Additionally, it is claimed that general partners Lauer and Graves misappropriated partnership assets to secure a personal loan from Mark Twain Bank for the buyout, violating Missouri law and the limited partnership agreement. The lawsuit alleges that Mark Twain Bank knowingly facilitated this breach of fiduciary duty, thereby violating the Uniform Fiduciaries Law of Missouri. The complaint seeks various forms of relief, including nondischarge of Lauer's debt in bankruptcy, damages against Mark Twain, avoidance of its security interest, and an injunction against its enforcement. 

Mark Twain Bank's motion to dismiss was rejected by the bankruptcy court, which later granted summary judgment on several counts of the complaint, ruling that Count II was barred by the statute of limitations, Count III did not present a valid claim, and the plaintiffs lacked standing for Count IV. The plaintiffs appealed to the United States District Court, which affirmed the bankruptcy court's decision. The appellate review standard requires the bankruptcy court to view evidence favorably towards the non-moving party for summary judgment, while the district court conducts a de novo review of legal determinations and checks for clear error in factual findings.

As the second appellate court, an independent review of the bankruptcy court's judgment is conducted, applying the same legal standards as the district court. The focus is on whether there are disputed material facts and if Mark Twain was entitled to judgment as a matter of law. The issues in this appeal are legal rather than factual, with the bankruptcy court granting summary judgment in favor of Mark Twain based on the law rather than disputed facts.

The validity of the plaintiffs' claim for nondischarge in bankruptcy is governed by Missouri state law and the federal bankruptcy code, as all relevant events occurred in Missouri. The courts' determinations of state law are reviewed de novo. The complaint against Mark Twain Bank involves three counts: 

1. **Count II** alleges that Mark Twain Bank (St. Charles) violated the Missouri Uniform Fiduciaries Law by having actual knowledge of fiduciary violations by Lauer and Graves relating to asset misrepresentation.
   
2. **Count III** claims that Mark Twain Bank (Big Bend) violated the same law by making a loan to Lauer secured by partnership assets, further alleging that this loan was made in bad faith as part of an agreement to acquire collateral below market value.

3. **Count IV** contends that by financing the buyout of limited partnership interests and securing partnership assets, Mark Twain Bank violated the Uniform Fiduciaries Law and that the court should void this transfer under Section 548 of the Bankruptcy Code, which allows for the voiding of certain pre-bankruptcy transfers.

The Uniform Fiduciaries Law modifies common law regarding fiduciary duties and relieves banks of the responsibility to inquire into each fiduciary transaction unless there is actual knowledge of a breach or knowledge that constitutes bad faith. A claim under this statute must demonstrate either bad faith or actual knowledge by the bank.

Mark Twain Bank N.A. had actual knowledge of potential breaches of fiduciary duty by its partners, Lauer and Graves, relating to a loan taken out in November 1982 for the purpose of buying out other partners. The bank was aware of the financial difficulties the partnership faced, as evidenced by the sale of a half interest in pledged real estate and the issuance of an I.D.A. Bond. Plaintiffs alleged that the bank violated the Uniform Fiduciaries Law by lending to Lauer and Graves while knowingly allowing them to breach their fiduciary duties to the limited partners of Crossroads.

The bankruptcy court denied the bank's motion to dismiss the claim under the Uniform Fiduciaries Law but ruled that the claim was barred by a two-year statute of limitations stated in Mo.Rev.Stat. 456.630. The court determined that plaintiffs were aware of the wrongdoing by March 1983 but did not file suit until November 1986, making the claim untimely under the two-year limit, which required the action to be filed by March 1985.

While the bankruptcy court's factual findings were accepted, it was argued that the court erred in applying the two-year statute from Section 456.630. This section is not part of the Uniform Fiduciaries Law but rather pertains to the broader context of Trusts and Trustees within Missouri law. Section 456.630 allows for claims of fraud to be filed within two years of discovery but is not applicable to the claims regarding fiduciary duty breaches under the Uniform Fiduciaries Law, which are governed by different statutes.

Section 456.630 of the Missouri Revised Statutes stipulates that claims for fraud must be initiated within two years of discovery. The lower courts found that this statute applies to Count II of the plaintiffs' complaint against Mark Twain, which they characterized as a fraud claim. However, this characterization is disputed. Count II does not explicitly assert fraud; it alleges violations of the Missouri Uniform Fiduciaries Law, specifically that Mark Twain loaned money to Lauer and Graves with actual knowledge of their breach of fiduciary duties to the plaintiffs. The Uniform Fiduciaries Law requires proof of actual knowledge of wrongdoing or bad faith, neither of which necessitates a fraud claim. 

Appellees' attempts to frame the allegations against Mark Twain as fraud are undermined by the fact that Count I, which addresses fraudulent actions by Lauer and Graves, is not part of this appeal and pertains only to their conduct. Count II focuses on Mark Twain's alleged knowledge of Lauer and Graves' fiduciary breaches, not on fraud against Mark Twain. Additionally, appellees' arguments that fraud allegations are required for the bankruptcy proceedings are flawed, as the cited bankruptcy code sections pertain to the debtor's fraud rather than third-party actions. Throughout the various court proceedings, the plaintiffs have consistently maintained that their claims against Mark Twain are based on actual knowledge and bad faith under the Uniform Fiduciaries Law, not on allegations of fraud.

No Missouri court has directly addressed what statute of limitations applies to violations of the Missouri Uniform Fiduciaries Law. However, it is concluded that claims under this law are not classified as fraud, supported by various Missouri cases and relevant decisions from other jurisdictions. Consequently, the limitations period in Section 456.630 is deemed inapplicable. 

The most relevant statute of limitations is found in Mo.Rev.Stat. 516.120, which states that actions under Missouri statutes must be initiated within five years in the absence of a more specific limitation. This five-year limit applies to claims involving personal property or injuries to a person or their rights. Missouri courts have consistently applied this statute to similar claims, such as breach of fiduciary duty, affirming its five-year applicability in multiple cases.

The court acknowledges that the bankruptcy court correctly identified the alleged wrongdoing by Lauer and Nangle occurring around November 1982, discovered in March 1983, and that claims against Mark Twain were filed by November 1986. Given the five-year statute of limitations, the claims against Mark Twain were determined to be timely.

Additionally, the court affirms that Count II of the plaintiffs' complaint meets the requirements for relief under the Uniform Fiduciaries Law, which includes: 1) the defendant engaged with a fiduciary, 2) the fiduciary breached their duty, and 3) the defendant had actual knowledge of the breach or sufficient information to indicate bad faith.

In evaluating the complaint's sufficiency for stating a claim for relief, the allegations are considered in the most favorable light to the plaintiff. Count II asserts that Lauer, as a general partner of Crossroads, had fiduciary duties to the limited partners, including Nangle. The complaint alleges Mark Twain's dealings with Lauer involved lending money secured by partnership assets, despite having knowledge of Lauer's breach of fiduciary duty, particularly through possession of the partnership agreement prohibiting such pledges. Additionally, it notes Mark Twain's awareness of misrepresentations in contracts concerning the partnership's assets.

Under Missouri case law, these allegations are sufficient to establish a claim under the Uniform Fiduciaries Law (UFL). The courts referenced support the assertion that actual knowledge of a fiduciary's breach can lead to liability.

Count III alleges that the December 1985 loan from Mark Twain Bank of Big Bend to Lauer was made in bad faith, allowing the bank to seize collateral for less than its value. This count claims the loan was part of a collusive agreement among the banks and Lauer, intending to disadvantage the appellants upon Lauer's default. While the bankruptcy and district courts found Count III insufficient, it is contended that the allegations, albeit imperfectly drafted, provide a viable claim. If proven, the facts could demonstrate that the banks acted in bad faith under the UFL, particularly if Lauer misrepresented partnership assets and the banks knowingly extended loans with the intent to seize those assets below their fair value.

Appellants are entitled to relief based on pleaded facts, thus the lower court erred in dismissing Count III. Count IV alleges that Mark Twain Bank of St. Charles, N.A. violated Missouri's Uniform Fiduciary Law by knowingly depriving the plaintiffs of their security interest in partnership assets. The appellants sought to void a property transfer to the bank under 11 U.S.C. § 548, which allows certain pre-bankruptcy transfers to be voided if made with intent to hinder, delay, or defraud creditors, or for less than reasonable value. The bankruptcy court ruled that appellants lacked standing to bring this claim, a conclusion affirmed by the court, as § 548 permits such claims to be initiated solely by the bankruptcy trustee unless it is shown that the trustee cannot be relied upon to pursue them. The appellants provided no evidence to suggest the trustee’s inability or unwillingness to act, thus lacking standing. The court held that the bankruptcy court incorrectly ruled Count II as time-barred and Count III as failing to state a claim, but correctly granted judgment on Count IV due to lack of standing. The district court's decision is reversed regarding Counts II and III, affirmed concerning Count IV, and the case is remanded for further proceedings consistent with this opinion. Additionally, the question of E. Bruce Nangle's standing remains unresolved for the bankruptcy court to consider. The adversary complaint includes claims against two affiliated banks, which have been represented collectively in this appeal.

The complaint in bankruptcy consists of four counts against defendant Lauer and Mark Twain. Count I seeks nondischarge of plaintiffs' claims against Lauer, alleging fraudulent actions and violations of fiduciary duties related to the sale and misrepresentation of partnership assets. Count II accuses Mark Twain of violating the Missouri Uniform Fiduciaries Law (UFL) by knowingly dealing with Lauer in ways that breached his fiduciary duties. Count III alleges that Mark Twain acted in bad faith by obtaining partnership assets. Count IV requests the bankruptcy court to void security interests obtained by Mark Twain in violation of Missouri law. The plaintiffs claim actual damages exceeding $500,000.

The UFL does not define "bad faith," but Missouri law interprets it as actions taken dishonestly or in a commercially unjustifiable manner. The case law allows for claims of bad faith to be inferred from the facts pleaded without explicitly stating the term. The bankruptcy court has not yet ruled on whether Count II states a claim for bad faith against Mark Twain (St. Charles), and this issue is deferred to the bankruptcy court for determination.

The appellants contend that the statute of limitations should be tolled for any plaintiffs who were minors at the time of the action. However, since the claims are not time-barred for any plaintiffs, the issue of tolling is not addressed. Count III supports a claim for bad faith against Mark Twain (Big Bend) and may also implicate Mark Twain (St. Charles) due to referenced actions and an alleged agreement between the two banks and Lauer regarding the collateral. This matter, too, is deferred to the bankruptcy court for further consideration.