Opinion
Case No. 20-cv-0219 (WMW)
2020-07-28
Paul HANSMEIER, Appellant, v. Randall SEAVER, Chapter 7 Trustee; and United States of America, Appellees.
Paul Hansmeier, Sandstone, MN, Pro se. Christopher R. Morris, Jeffrey D. Klobucar, Bassford Remele, Minneapolis, MN, Matthew D. Swanson, Fuller, Seaver & Swanson, P.A., Burnsville, MN, Ana H. Voss, Erin M. Secord, United States Attorney's Office, Minneapolis, MN, for Appellees.
Paul Hansmeier, Sandstone, MN, Pro se.
Christopher R. Morris, Jeffrey D. Klobucar, Bassford Remele, Minneapolis, MN, Matthew D. Swanson, Fuller, Seaver & Swanson, P.A., Burnsville, MN, Ana H. Voss, Erin M. Secord, United States Attorney's Office, Minneapolis, MN, for Appellees.
ORDER
Wilhelmina M. Wright, United States District Judge
In this bankruptcy appeal, Appellant Paul Hansmeier challenges the bankruptcy court's dismissal with prejudice of his breach-of-contract claim against Appellee Randall Seaver, Chapter 7 Trustee, for failure to state a claim. For the reasons addressed below, the bankruptcy court's January 7, 2020 dismissal order is affirmed.
BACKGROUND
Hansmeier filed a voluntary petition under Chapter 13 of the Bankruptcy Code on July 13, 2015, in the United States Bankruptcy Court for the District of Minnesota. In November 2015, the United States Trustee moved to convert Hansmeier's bankruptcy case from Chapter 13 to Chapter 7 based on the bad faith of the debtor. The bankruptcy court granted that motion in December 2015 and appointed Seaver as the Chapter 7 Trustee of Hansmeier's bankruptcy estate.
Seaver filed an adversary complaint in the bankruptcy court against Sandipan Chowdhury and Booth Sweet LLP on November 18, 2016, seeking to recover, on behalf of the bankruptcy estate, $71,620.90 that had been paid in satisfaction of a civil judgment that was later vacated. The bankruptcy court granted summary judgment against Chowdhury and Booth Sweet in March 2018 and this Court affirmed. Subsequently, the bankruptcy court and this Court held Chowdhury and Booth Sweet in civil contempt for willfully failing to comply with the bankruptcy court's post-judgment orders. The civil contempt sanctions imposed against Chowdhury and Booth Sweet included monetary sanctions and, after those sanctions failed to secure compliance, the issuance of arrest warrants. Hansmeier and Seaver subsequently executed a settlement agreement with Chowdhury and Booth Sweet (the Chowdhury Settlement). Pursuant to the Chowdhury Settlement, in satisfaction of the underlying $71,620.90 bankruptcy court judgment and monetary sanctions, Chowdhury and Booth Sweet agreed to pay $75,000 to the bankruptcy estate and $75,000 to Hansmeier. Under the terms of the Chowdhury Settlement, Chowdhury and Booth Sweet wired $150,000 to Seaver, who would then be responsible for remitting $75,000 of that payment to Hansmeier.
In a separate criminal proceeding in this District, Hansmeier pleaded guilty in August 2018 to one count of conspiracy to commit mail fraud and wire fraud and one count of conspiracy to commit money laundering. See United States v. Hansmeier , No. 16-cr-0334-JNE-KMM-1, Dkt. 103 (D. Minn. Aug. 17, 2018). On June 14, 2019, United States District Judge Joan N. Ericksen sentenced Hansmeier to 168 months' imprisonment and ordered Hansmeier to pay $1,541,527.37 in restitution to the victims of his fraud. See id. , Dkts. 136, 137 (D. Minn. June 14, 2019). Subsequently, in a June 24, 2019 Order, Judge Ericksen ordered that "Seaver, in his capacity as the Chapter 7 panel trustee of the Bankruptcy Estate of Paul Hansmeier, shall pay over to the Clerk of Court the settlement funds of $75,000.00 held for [Hansmeier] as payment for the criminal monetary penalties owed by [Hansmeier] in this case." See id. , Dkt. 148 (D. Minn. June 24, 2019) (hereinafter, the "Amended Restitution Order"). Seaver complied with the Amended Restitution Order and, consequently, did not remit $75,000 of the Chowdhury Settlement to Hansmeier. Hansmeier did not appeal or otherwise challenge the Amended Restitution Order.
Hansmeier commenced the underlying adversary proceeding, which is the subject of this appeal, by filing an adversary complaint in the bankruptcy court in August 2019. The adversary complaint alleges one count of breach of contract against Seaver arising from his failure to remit $75,000 of the Chowdhury Settlement to Hansmeier. The parties cross-moved for dismissal and summary judgment. At the conclusion of a January 7, 2020 hearing on the parties' motions, the bankruptcy court granted Seaver's motion to dismiss for failure to state a claim and, consequently, denied as moot the parties' remaining motions. In doing so, the bankruptcy court concluded that Seaver's compliance with the Amended Restitution Order rendered Seaver's performance of the remittance requirement in the Chowdhury Settlement impossible and constitutes a complete defense to Hansmeier's breach-of-contract claim as a matter of law. For this reason, the bankruptcy court dismissed Hansmeier's adversary complaint with prejudice. This appeal followed.
Thereafter, Seaver filed a third-party complaint against Appellee United States of America alleging that, if Seaver is held liable to Hansmeier for breach of contract, entry of judgment should be entered against the United States because the United States currently is in possession of the disputed $75,000.
ANALYSIS
In this appeal, Hansmeier challenges the bankruptcy court's dismissal of his breach-of-contract claim for failure to state a claim on which relief can be granted. In bankruptcy proceedings, a district court sits as an appellate court and reviews the bankruptcy court's conclusions of law de novo and its findings of fact for clear error. Reynolds v. Pa. Higher Educ. Assistance Agency , 425 F.3d 526, 531 (8th Cir. 2005). A bankruptcy court's grant of a motion to dismiss for failure to state a claim is subject to de novo review on appeal. In re Behrens , 505 B.R. 234, 236 (B.A.P. 8th Cir. 2014).
Hansmeier's opening brief also purports to challenge a ruling as to subject-matter jurisdiction based on a mistaken understanding of the bankruptcy court's decision. In his reply brief, Hansmeier acknowledges this mistake and withdraws his arguments pertaining to subject-matter jurisdiction.
If a complaint fails to state a claim on which relief can be granted, dismissal is warranted. See Fed. R. Civ. P. 12(b)(6) ; Fed. R. Bankr. P. 7012(b) (providing that Rule 12(b)(6), Fed. R. Civ. P., applies to adversary proceedings). When determining whether a complaint states a facially plausible claim, a district court accepts the factual allegations in the complaint as true and draws all reasonable inferences in the plaintiff's favor. Blankenship v. USA Truck, Inc. , 601 F.3d 852, 853 (8th Cir. 2010). Factual allegations must be sufficient to "raise a right to relief above the speculative level" and "state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). Legal conclusions couched as factual allegations may be disregarded. See Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).
To plead a breach-of-contract claim under Minnesota law, a plaintiff must allege that (1) an agreement was formed, (2) the plaintiff performed any conditions precedent to the plaintiff's demand of performance by the defendant, and (3) the defendant breached the contract. Lyon Fin. Servs., Inc. v. Ill. Paper & Copier Co. , 848 N.W.2d 539, 543 (Minn. 2014). The dispute at issue in this appeal is limited to the third element—whether Seaver, as a matter of law, breached the Chowdhury Settlement. The bankruptcy court concluded that Seaver's compliance with the Amended Restitution Order rendered Seaver's performance under the Chowdhury Settlement impossible and, thus, excused.
In their briefing, the parties also address whether Hansmeier has suffered any damages, given that the disputed $75,000 will reduce his restitution obligation. But the Court need not address this argument, which was not a basis for the bankruptcy court's dismissal of Hansmeier's breach-of-contract claim.
Minnesota law recognizes the impossibility of performance as a defense to a breach-of-contract claim. United Techs. Commcn's Co. v. Wash. Cty. Bd. , 624 F. Supp. 185, 190 (D. Minn. 1985) ; Cent. Baptist Theological Seminary v. Entm't Commc'ns, Inc. , 356 N.W.2d 785, 787–88 (Minn. Ct. App. 1984). A principle that "is akin to the impossibility defense" is the "general principle of the law of contracts that one is not liable in an action for breach where that breach was the result of a court order." United Techs. , 624 F. Supp. at 190 (citing Village of Minneota v. Fairbanks, Morse & Co. , 226 Minn. 1, 31 N.W.2d 920, 925–26 (1948) ). This doctrine, as relevant here, is concisely described in the Restatement (Second) of Contracts:
Where, after a contract is made, a party's performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.
...
If the performance of a duty is made impracticable by having to comply with a domestic or foreign governmental regulation or order, that regulation or order is an event the non-occurrence of which
was a basic assumption on which the contract was made.
Restatement (Second) of Contracts §§ 261, 264 ; accord Village of Minneota , 31 N.W.2d at 925 (applying doctrine of impossibility as described in Restatement (First) of Contracts, which includes impossibility resulting from a court order). Here, Hansmeier argues that the bankruptcy court's dismissal of his breach-of-contract claim based on impossibility was erroneous for several reasons.
Hansmeier argues that Seaver's impossibility defense cannot be established based on the allegations in the complaint because the complaint alleges that the Amended Restitution Order is void and "all of the allegations in Hansmeier's complaint regarding the [Amended Restitution Order] tend to undermine the order." This argument is unavailing for at least three reasons.
First, and most significantly, although a court must accept as true the factual allegations in a complaint when evaluating a motion to dismiss, a court may disregard legal conclusions that are couched as factual allegations. See Iqbal , 556 U.S. at 678, 129 S.Ct. 1937. Hansmeier contends that the bankruptcy court should have accepted the factual allegations in his complaint as true and drawn all reasonable inferences in his favor. But Hansmeier's "allegation" that the Amended Restitution Order is void is a legal conclusion that the bankruptcy court had no obligation to accept as true.
Second, the Amended Restitution Order is a part of the sentencing judgment in Hansmeier's criminal case. See 18 U.S.C. § 3664(k) (authorizing sentencing court to modify restitution order); id. § 3664(o) (providing that a sentence that imposes an order of restitution is a final judgment notwithstanding a subsequent adjustment under Section 3664(k) ). Hansmeier's sentencing judgment currently is on appeal to the United States Court of Appeals for the Eighth Circuit. Hansmeier cites no legal authority, and this Court is aware of none, that would permit either the bankruptcy court or this Court to entertain a collateral attack on the Amended Restitution Order issued by Judge Ericksen. Indeed, Hansmeier tacitly acknowledges this point in his briefing, arguing that the bankruptcy court could have performed a "review" of the Amended Restitution Order without "reversing" or "modifying" the Amended Restitution Order or "chang[ing] what happened in the past." But any such "review" necessarily must be limited to acknowledging the existence and contents of the Amended Restitution Order, which the bankruptcy court did here, and could not include evaluating whether the Amended Restitution Order is void.
The Court is mindful that there are circumstances in which a convicted person may challenge a criminal sentence other than by direct appeal, such as through a habeas petition. See, e.g. , 28 U.S.C. § 2255. This case, however, does not present such circumstances.
Just as Hansmeier's arguments improperly invite this Court to question the validity of the Amended Restitution Order, the United States improperly invites this Court to ratify the validity of the Amended Restitution Order by asserting that Judge Ericksen "clearly had authority to enter the order she did." But this Court has no more authority to ratify the Amended Restitution Order than it does to invalidate the Amended Restitution Order. And for this reason, the Court declines the parties' invitations to do either.
Third, when a party to a contract raises an impossibility defense based on compliance with a regulation or court order, "[i]t is not necessary that the regulation or order be valid." Restatement (Second) of Contracts § 264 cmt. b. Thus, even if Hansmeier were to properly and successfully challenge the validity of the Amended Restitution Order, which he has not done, Seaver would not be precluded from asserting an impossibility defense.
For these reasons, the bankruptcy court did not err by rejecting Hansmeier's challenges to the validity of the Amended Restitution Order.
Hansmeier also contends that Seaver's impossibility defense must be proved and, therefore, cannot be decided on a motion to dismiss. It is true that, because an affirmative defense must be pleaded and proved , a defendant typically "does not render a complaint defective by pleading an affirmative defense." Jessie v. Potter , 516 F.3d 709, 713 n.2 (8th Cir. 2008) (citing Gomez v. Toledo , 446 U.S. 635, 640, 100 S.Ct. 1920, 64 L.Ed.2d 572 (1980) ). But dismissal for failure to state a claim based on an affirmative defense is appropriate only when the defense is established on the face of the complaint. Id. ; accord Story v. Foote , 782 F.3d 968, 975 (8th Cir. 2015) (Bye, J., concurring in part and dissenting in part). As such, a "court is limited to the materials properly before it on a motion to dismiss." Noble Sys. Corp. v. Alorica Cent., LLC , 543 F.3d 978, 983 (8th Cir. 2008). Significantly, however, such materials "may include public records and materials embraced by the complaint." Id. The Amended Restitution Order, which required Seaver to pay Hansmeier's $75,000 share of the Chowdhury Settlement to the Clerk of Court as part of Hansmeier's criminal restitution obligation, is both a public record and necessarily embraced by Hansmeier's breach-of-contract complaint. For this reason, the fact that Seaver pleaded impossibility as a defense did not preclude the bankruptcy court from considering that defense, as well as related materials outside the complaint, in connection with Seaver's motion to dismiss.
Hansmeier nonetheless asserts that, because an impossibility defense requires a "fact-intensive analysis," it was premature for the bankruptcy court to consider the defense on a motion to dismiss. The cases on which Hansmeier relies for this argument involved factual analyses of asserted impossibility or impracticability defenses. See enXco Dev. Corp. v. N. States Power Co. , 758 F.3d 940, 945 (8th Cir. 2014) ; In re Mr. Movies, Inc. , 287 B.R. 178, 186 (Bankr. D. Minn. 2002). But those cases do not hold that an impossibility defense always requires a fact-intensive analysis. Moreover, the circumstances in those cases are distinguishable from the circumstances here. In enXco , the asserted defense was a temporary impracticability (not impossibility) that involved "several delays" over the course of multiple years and a fact-bound dispute as to whether the contractual party "could likely have avoided the circumstances that caused it to fail a condition precedent" during the relevant period of time. 758 F.3d at 945. In Mr. Movies , the asserted impossibility was self-inflicted and, therefore, the defense was inapplicable. 287 B.R. at 186.
Here, by contrast, Seaver's impossibility defense does not require a fact-intensive inquiry. It merely requires evaluating the facts alleged in Hansmeier's complaint together with the existence and contents of the Amended Restitution Order, which may be considered on a motion to dismiss because it is a public record that is necessarily embraced by the complaint. "It is a general principle of the law of contracts that one is not liable in an action for breach where that breach was the result of a court order." United Techs. , 624 F. Supp. at 190 ; accord Restatement (Second) of Contracts § 264. The Amended Restitution Order required Seaver to "pay over to the Clerk of Court the settlement funds of $75,000.00 held for [Hansmeier] as payment for the criminal monetary penalties owed by [Hansmeier]." By complying with the Amended Restitution Order, it was impossible for Seaver to pay Hansmeier his $75,000 share of the Chowdhury Settlement.
Hansmeier contends that Seaver's impossibility defense nonetheless fails because Seaver "could have avoided compliance with the [Amended Restitution Order] if he had defended against it." A party who seeks to justify the non-performance of a contractual obligation based on impossibility arising from a court order "must have observed the duty of good faith and fair dealing" by "attempting, where appropriate, to avoid its application." Restatement (Second) of Contracts § 264 cmt. b; cf. enXco , 758 F.3d at 945 (concluding that the "exercise of appropriate diligence ... could likely have avoided the circumstances that caused [appellant] to fail a condition precedent"). But the impossibility defense applies so long as the party asserting the defense complied in good faith with a court order, regardless of the validity of the order. Restatement (Second) of Contracts § 264 cmt. b.
Here, although the Amended Restitution Order directed Seaver to pay Hansmeier's $75,000 share of the Chowdhury Settlement to the Clerk of Court, the Amended Restitution Order reflects a modification of the restitution payment schedule that is a part of Hansmeier's sentencing judgment. As such, the Amended Restitution Order, similar to a garnishment order, imposed an obligation on Hansmeier via a third party (Seaver) who merely possessed funds that belonged to Hansmeier. Cf. United States v. Quam , 127 F. Supp. 3d 999, 1001–02 (D. Minn. 2015) (addressing authority under Mandatory Victim Restitution Act to enforce restitution orders via writ of garnishment). It is undisputed that these funds belonged to Hansmeier but that Seaver possessed the funds. Hansmeier contends that Seaver should have intervened in Hansmeier's criminal case so as to effectively challenge, on Hansmeier's behalf, Hansmeier's sentencing judgment. But nothing in the record or the Court's legal research demonstrates that it would have been appropriate or feasible for Seaver to attempt to do so. See Restatement (Second) of Contracts § 264 cmt. b (explaining that a party invoking an impossibility defense need only make good faith attempts to avoid compliance with a court order when "appropriate"). Because Seaver's good-faith compliance with the Amended Restitution Order made it impossible for him to pay Hansmeier his $75,000 share of the Chowdhury Settlement, the bankruptcy court correctly concluded that Hansmeier's breach-of-contract claim fails as a matter of law.
ORDER
Based on the foregoing analysis and all the files, records and proceedings herein, IT IS HEREBY ORDERED that the bankruptcy court's January 7, 2020 dismissal order is AFFIRMED.
LET JUDGMENT BE ENTERED ACCORDINGLY.