FARGO, N.D. -- The attorney who has represented former Grafton, N.D., farmer Tom Grabanski in a slew of federal bankruptcy matters relating to farming partnerships in Texas and elsewhere, has asked for dismissal of a legal malpractice charge filed by the court-appointed trustee in the case.
On May 3, Kip Kaler, trustee for Keeley Grabanski Land Partnership, sued Tom Grabanski, Blossom, Texas, and his attorney DeWayne Johnston of Johnston Law Office in Grand Forks, N.D., for breaching their fiduciary responsibilities to the partnership.
On June 3, Johnston moved to dismiss the charges, saying the partnership knew about his legal actions prior to May 2, 2011, and should have acted on any malpractice within a two-year statute of limitations. Grabanski, representing himself, also asked for dismissal.
On June 19, Kaler filed an amended complaint, laying out facts about why the trustee couldn't have known. No court hearings have been set. It is part of a long-standing bankruptcy case that some lawyers involved have said is the most voluminous they've ever seen.
On July 2, Johnston told Agweek he expected he'll have a lawyer in the action by Kaler, but hasn't acquired one. He declined much comment on the situation except to say that it would be "unseemly to comment on ongoing litigation" and that the "cases have not gotten to be any less complicated."
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John and Dawn Keeley and Tom and Mari Grabanski, both then of Grafton, formed Keeley Grabanski Land Partnership in February 2007. In 2008, they formed G&K Farms to operate land owned by KGLP.
After a $2.5 million operating loss in 2008, KGLP sold some land, but not two Texas properties called the Lenth and Unruh parcels. In October 2009, the Keeleys assigned their ownership in KGLP to the Grabanskis (effective in April 2009) with the condition that the Grabanskis would pay all of KGLP's debts, liabilities and expenses.
In 2010, KGLP failed to pay on the Lenth and Unruh payments. Grabanski hired attorney Johnston and filed personal Chapter 11 bankruptcy.
On Dec. 7, 2010, the Keeleys filed an involuntary bankruptcy against KGLP, because they found creditors pursuing them for KGLP debts they thought they were clear of.
They forced the bank ruptcy to avoid foreclosure on the Lenth property. On Feb. 3, 2011, the Keeleys moved for the appointment of an operating trustee for KGLP, alleging the Grabanskis "fraudulently transferred assets out of KGLP and concealed liabilities in order to have KGLP incur additional debt for the Grabanskis' personal benefit." The motion was denied but renewed later.
In March 2011, a company called U.S. Farming offered to purchase the Lenth ($3.5 million) and Unruh ($4.5 million) parcels for a total of $8 million, but Johnston refused the offer. On March 18, 2011, Kaler says Tom Grabanski and "related parties" started planting corn on the Lenth parcel.
Breaking the lease
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In late 2010 or early 2011, Kaler says the Grabanskis offered Louis Slominski Jr., a farmer and friend from North Dakota, a three-year lease on the Lenth and Unruh parcels. KGLP would receive 20 percent of the gross proceeds or a minimum of $300,000 paid on Nov. 1 of each year starting in 2011. Kaler asked Slominski to terminate the lease for 2012 and 2013 because it hindered selling the land. On July 14, 2011, Slominski told Kaler he wouldn't settle "under any circumstances."
On Sept. 26, 2011, Kaler filed a complaint against the Slominskis for fraudulent transfer.
Kaler says that Johnston, despite his claiming his advocacy for KGLP, represented Slominski in the termination action. On March 7, 2012, the bankruptcy court ordered that the Slominski lease was a fraudulent transfer and allowed it to be "set aside."
On Oct. 11, 2011, Kaler was appointed trustee of KGLP. In March 2012, each of the parcels was sold for a total of $7.8 million.
In his original filing, Kaler alleges KGLP incurred "significant administrative expenses" and that "most of those expenses are attributable" to how Grabanski breached his fiduciary duty to the partnership and that Johnston aided and abetted him to act on behalf of the Grabanskis.
Kaler says Johnston failed to disclose his conflicts, failed to disclose his receipt of pre-petition fees to help Grabanski hinder KGLP creditors, and failed to file timely answers, and "otherwise engaged in dilatory conduct to benefit" Grabanski.
No pay on KGLP work
In a similar matter, Johnston was denied payment for his legal work on behalf of the KGLP partnership.
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On May 30, Judge Thad Collins, the Iowa-based federal bankruptcy judge who has been working on the case, denied Johnston's request for payment. Kaler, Choice Financial Group, and the Keeleys all objected, citing "numerous" conflicts of interest.
Judge Collins said Johnston represented both the Grabanskis and KGLP, and that he had "plainly adverse positions." Collins also said Johnston had "conflicting and competing interests."
"In simplest terms, Johnston's representation of Debtor (KGLP) did not pose a potential conflict of interest -- it posed several actual and readily identifiable direct conflicts," Collins wrote. In the individual bankruptcy case, Johnston talked about the two Texas parcels as though the Grabanskis owned them, which they never did.
Collins noted Johnston not only took adversarial positions against KGLP, but went so far as filing adversarial claims -- separate suits -- by others. "It is difficult for this court to imagine how Johnston could have been in more direct and actual conflict with the KGLP estate," Collins wrote.
Collins said he'd warned Johnston of "possible harsh consequences" if he wasn't right in his assertions about a lack of conflict-of-interest. "One of those harsh consequences is coming to pass here," Collins wrote.
