8th Circuit blocks deposition in $1.9M judgment fight

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In Brief

• 8th Circuit upheld denial of request to depose former legal counsel.
• Case stems from two-decade dispute over unpaid $1.9 million judgment.
• Plaintiffs sought financial discovery tied to alleged fraudulent transfers.
• Appeals court also affirmed sanctions over continued discovery efforts.

A judgement creditor has been trying to collect a $1.9 million judgement for more than 15 years, seeking financial records of the debtor’s wife. In an atypical case where the judgment creditor sought to depose its former legal counsel, the 8th U.S. Circuit Court of Appeals affirmed May 7 that plaintiffs could not depose the firm.

Litigation over a real estate development dispute has been ongoing for the past 20 years. In 2007, Lupe Development Partners and Lupe Vice President Steven Minn sued Fred Deutsch and his companies in Minnesota state court, alleging contract breaches in a development project. The court later dismissed Penny Baird, wife of Deutsch, from the case after finding that she never signed a guaranty.

In 2010, the plaintiffs obtained judgments against Deutsch and his entities totaling over $1.9 million. Plaintiffs insist that Deutsch had money to pay the judgement but that he instead transferred funds to family members.

In 2009, Scher Law Firm LLC, representing the plaintiffs, sued Baird and her children in New York state court, alleging they received more than $1 million in fraudulent transfers from Deutsch and his business entities. Plaintiffs alleged that Deutsch transferred over $20 million in proceeds from an office property sale to a shell entity he controlled, and that those funds were used for extravagant gifts to his family. It specifically alleged Baird received more than $1 million used to buy a Paris apartment, along with a diamond ring worth more than $100,000, and that her children received diamonds worth more than $50,000 each. The 2009 case ended in a settlement.

Plaintiffs pursued post-judgment discovery against Deutsch by issuing subpoenas to Baird seeking financial records, bank accounts, and information about alleged fraudulent transfers. In 2013, New York courts quashed these subpoenas, and appellate courts affirmed, holding the requests were not relevant to locating assets.

In 2015, the plaintiffs again retained Scher and filed another fraudulent-conveyance action involving similar allegations, but it was stayed due to bankruptcy proceedings filed by another creditor and later dismissed after procedural failures by plaintiffs and the bankruptcy trustee. In the bankruptcy case, the court ruled Deutsch’s debt to plaintiffs was nondischargeable, leaving him responsible for the Minnesota judgments.

Plaintiffs continued attempting to collect through bankruptcy-related discovery, including additional subpoenas to Baird. In April 2023, plaintiffs served subpoenas in the district court case seeking to locate Deutsch’s assets and enforce the 2010 judgments, but the requests largely duplicated discovery previously quashed in 2012 and 2021 and covered information from 2006 to 2023. The court quashed most of the subpoenas, limited the remainder, and warned that no further discovery into Baird’s finances would be allowed absent new evidence of fraudulent or voidable transactions.

In June 2024, plaintiffs moved for leave to depose Scher, claiming the deposition would uncover new evidence of fraudulent or voidable transactions tied to the 2009 lawsuit and Deutsch’s alleged transfers. They argued the firm held unique information about millions in unaccounted sale proceeds and suspected transactions involving Baird and her children. The magistrate judge denied the motion and imposed limited sanctions on the plaintiffs.

The plaintiffs appealed to the 8th Circuit, claiming that the district court abused its discretion by denying their motion for leave to depose Scher. They also contested that court’s imposition of sanctions against them.

The panel considered whether the 2023 order barring further discovery into Baird’s finances absent new evidence applied to the plaintiffs’ 2024 request. It questioned whether the proposed deposition of Scher constituted financial discovery, which would make the denial of leave a proper exercise of discretion.

“Context is everything in this,” said attorney Heather Marx of Cozen O’Connor, who represented Lupe Development and Minn. “My clients are owed more than $1.9 million in their unpaid judgment.”

“We’re trying to find where that money’s been stashed,” Marx explained. “There was a $23 million transfer that took place, and we are trying to trace those funds.”

Sharon Markowitz of Stinson, who represented Baird, argued, “Plaintiffs told the district court in their briefing that the proposed discovery was ‘not limited’ to Baird’s finances; in other words, it included information about Baird’s finances. They also said that purpose of this discovery was to find evidence of potential fraudulent transactions between Deutsch and Baird.”

“So, it’s no surprise, and certainly no abuse of discretion, that the district court found that the proposed discovery encompassed information about Baird’s finances. The court had already stated that that was prohibited,” Markowitz added.

The 8th Circuit panel affirmed the district court.

“Plaintiffs expressly stated in their memorandum that they seek ‘information’ related to Scher’s ‘investigations into the transfers described’ in the 2009 Lawsuit, as well as ‘information related to [its] financial investigation and tracing of the remaining approximately $19,000,000 in sale proceeds,” Judge Lavenski Smith wrote. “…Scher’s financial investigation of alleged fraudulent transfers between Deutsch and Baird concerns ‘Baird’s finances’—i.e., information about Baird’s money.”

The panel concluded that the district court acted within its discretion in denying leave to depose Scher because plaintiffs offered no new evidence of fraudulent transactions.

It also affirmed the district court’s award of sanctions, which were issued as a deterrence for plaintiffs to continue unwarranted discovery into Baird’s finances. “Plaintiffs showed ‘continual disregard for court warnings not to mistreat Baird,’” Smith avowed.