Carney v. Lopez et al
ORDER granting in part and denying in part 69 Motion to Dismiss; granting in part and denying in part 71 Motion to Dismiss; granting in part and denying in part 72 Motion to Dismiss; granting in part and denying in part 73 Motion to Dismiss; denying 73 Motion to Strike ; denying 71 Motion to Strike. Signed by Judge Stefan R. Underhill on 3/28/2013. (Martin, M.)
UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT
JOHN J. CARNEY, in his capacity as
COURT-APPOINTED RECEIVER for
HIGHVIEW POINT PARTNERS, LLC, et
No. 3:12-cv-00182 (SRU)
FRANK LOPEZ, et al.,
RULING ON MOTIONS TO DISMISS AND TO STRIKE
This case is ancillary to a U.S. Securities and Exchange Commission (“SEC”)
enforcement proceeding against Francisco Illarramendi (“Illarramendi”) for violation of federal
securities laws. The United States District Court for the District of Connecticut created a
receivership estate and appointed John J. Carney (the “Receiver”) as receiver. The Receiver
subsequently filed a complaint against Frank Lopez (“Lopez”), Christopher Luth (“Luth”),
Victor Chong (“Chong”), Carolina Lopez Peláez (“Peláez”), and Carlos Manuel Barrantes Araya
(“Barrantes”) to recover proceeds and other monies for distribution to Illarramendi’s alleged
victims and creditors. Defendants move to dismiss the complaint, alleging that the court lacks
personal jurisdiction and contesting the sufficiency of the pleadings and the claims asserted
therein. Defendants have also moved to strike portions of the Receiver’s complaint.
For the reasons stated below, I grant in part and deny in part the following motions: doc.
69 (Peláez and Barrantes’ motion to dismiss), doc. 71 (Lopez’s motion to dismiss and motion to
strike), doc. 72 (Chong’s motion to dismiss), doc. 73 (Luth’s motion to dismiss and motion to
Standard of Review
A motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6) is designed
“merely to assess the legal feasibility of a complaint, not to assay the weight of evidence which
might be offered in support thereof.” Ryder Energy Distribution Corp. v. Merrill Lynch
Commodities, Inc., 748 F.2d 774, 779 (2d Cir. 1984) (quoting Geisler v. Petrocelli, 616 F.2d
636, 639 (2d Cir. 1980)).
When deciding a motion to dismiss pursuant to Rule 12(b)(6), the court must accept the
material facts alleged in the complaint as true, draw all reasonable inferences in favor of the
plaintiffs, and decide whether it is plausible that plaintiffs have a valid claim for relief. Ashcroft
v. Iqbal, 556 U.S. 662, 678-79 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555-56 (2007);
Leeds v. Meltz, 85 F.3d 51, 53 (2d Cir. 1996).
Under Twombly, “[f]actual allegations must be enough to raise a right to relief above the
speculative level,” and assert a cause of action with enough heft to show entitlement to relief and
“enough facts to state a claim to relief that is plausible on its face.” 550 U.S. at 555, 570; see also
Iqbal, 556 U.S. at 679 (“While legal conclusions can provide the framework of a complaint, they
must be supported by factual allegations.”). The plausibility standard set forth in Twombly and
Iqbal obligates the plaintiff to “provide the grounds of his entitlement to relief” through more
than “labels and conclusions, and a formulaic recitation of the elements of a cause of action.”
Twombly, 550 U.S. at 555 (quotation marks omitted). Plausibility at the pleading stage is
nonetheless distinct from probability, and “a well-pleaded complaint may proceed even if it
strikes a savvy judge that actual proof of [the claims] is improbable, and . . . recovery is very
remote and unlikely.” Id. at 556 (quotation marks omitted).
This action is an effort to recover approximately $35.5 million that Illarramendi diverted
to the defendants in order to sustain his Ponzi scheme. The Receiver alleges that Lopez, Luth,
and Chong (the “HVP Defendants”), fiduciaries of Highview Point Partners, LLP (“HVP
Partners”), an entity subject to the present receivership, 2 helped to conceal the scheme or ignored
conduct that would have ended the scheme. In return, the defendants received transfers that were
made to them under a variety of guises, including salaries, “bonus” payments, and investments in
entities they controlled. The Receiver is also seeking to recover funds transferred to Lopez’s
sister, Peláez, and her husband, Barrantes.
A. The Defendants
HVP Partners was, at most, a five-person operation, made up of: Illarramendi, Lopez, and
Luth, who were founders, principals, and managing members of HVP Partners; Chong, HVP
Partners’ Chief Financial and Chief Compliance Officer; and another employee.3 Lopez was
also a director of three funds managed by HVP Partners (the “HVP Funds”). The HVP
Defendants, through their positions at HVP Partners, controlled the HVP Funds. As a result, the
HVP Defendants had a clear view of the flow of money among the receivership entities, other
third party individuals and entities, and in some cases, facilitated these transactions. Lopez,
All background information is taken from the First Amended Complaint, unless
otherwise noted, and is presumed to be true for purposes of the present motions.
The receivership entities include: HVP Partners; MK Master Investments LP; MK
Investments, Ltd.; MK Oil Ventures LLC; the MK Group; Michael Kenwood Capital
Management, LLC; Michael Kenwood Asset Management, LLC; MK Energy and Infrastructure,
LLC; MKEI Solar, LP; MK Automotive, LLC; MK Technology, LLC; Michael Kenwood
Consulting, LLC; MK International Advisory Services, LLC; MKG-Atlantic Investment, LLC;
Michael Kenwood Nuclear Energy, LLC; MyTcart, LLC; TUOL, LLC; MK Capital Merger Sub,
LLC; MK Special Opportunity Fund; MK Venezuela, Ltd.; and Short Term Liquidity Fund, I,
Neither Peláez nor Barrantes were employees of HVP Partners.
Luth, and Chong have invoked the Fifth Amendment and refused to cooperate in the Receiver’s
Lopez was a resident of New York at all times relevant to this complaint and owns a
residence in Florida. Prior to working at HVP Partners, Lopez worked at an investment bank for
almost twenty years where, at various times, he was a supervisor of Illarramendi. Illarramendi
has testified that, in or about the summer of 2006, he revealed the fraud’s existence to Lopez.
Rather than disclosing the fraud, Lopez conspired to conceal it, telling Illarramendi to “fix the
situation” and agreeing with him not to inform investors or anyone else.
Luth is a resident of Connecticut. Prior to forming HVP Partners with Lopez and
Illarramendi, he held senior positions at major financial institutions. In addition to his role as a
founding member and principal, Luth served as a portfolio manager and “Head Trader” at HVP
Partners, positions in which he was responsible for analyzing and making investments and given
access to the financial information of HVP Partners and the HVP Funds.
Chong is a resident of New York. Before joining HVP Partners, he worked at an
independent investment bank that served Latin American clients. He also worked with
Illarramendi at the U.S. affiliate of Venezuela’s state-owned oil company. As Chief Financial
Officer and Chief Compliance Officer of HVP Partners, Chong was responsible for ensuring that
HVP Partners’ compliance with regulatory requirements and had access to all of the financial
information of HVP Partners and the funds they controlled.
4. Peláez and Barrantes
Peláez and Barrantes are residents of Costa Rica. Receivership entities transferred assets
to a joint bank account they hold in Florida and to a New York account Peláez holds in her own
name. Peláez is also a control person of Underhill Investments, a Panamanian corporation that
served as an intermediary in various transactions with receivership entities.
B. The Scheme
In October 2005, with the complicity of the HVP Defendants, Illarramendi embarked on
an elaborate scheme to hide the “hole” between the real assets held by the funds containing the
investors’ monies entrusted to HVP Partners and the liabilities owed as a result of trading losses
and the efforts to conceal those losses. The scheme involved the use of offshore entities and
bank accounts and a complex web of transfers, loans and transactions with numerous persons
and entities that were often poorly or falsely documented on the books and records of HVP
Partners and related hedge funds. When the entire scheme was revealed, the “hole” amounted to
more than $300 million.
Luth, Lopez, and Illarramendi formed HVP Partners in 2004, each holding a one-third
ownership share. The purpose of HVP Partners was to act as the investment manager of the
Offshore Fund, a hedge fund to be nominally based in the Cayman Islands (which, the Receiver
alleges was actually completely dominated and controlled by HVP Partners, with Lopez as one
of its directors). By January 2006, HVP Partners controlled over $72 million of assets in the
Offshore Fund and decided to establish a “master-feeder” structure. To do so, they created the
Master Fund, which was incorporated in the Cayman Islands, turned the Offshore Fund into an
offshore feeder fund, and created Highview Point L.P., a domestic feeder fund. Lopez was made
a director of the Master Fund and power over the fund was handed to HVP Partners, and thus,
the HVP Defendants.
In October 2005, Illarramendi entered into a failed deal that generated substantial losses.
Rather than disclose the losses to investors, Illarramendi decided to conceal them. He transferred
proceeds received in the transaction to investors other than the Offshore Fund, in amounts
greater than the initial investment to make it appear as if those investors had received profits
rather than suffer losses. This resulted in a cash shortfall that the Offshore Fund absorbed, which
was concealed on the books. The shortfall was approximately $5.2 million, or roughly 10% of
the net asset value reported on the Offshore Funds’ books. The HVP Defendants failed to
oversee Illarramendi’s activities, the Offshore investments, or the books and records of the
Offshore Fund. Lopez and Peláez received approximately $50,000 in false profits from this
Illarramendi subsequently directed another entity, GlobeOp, the HVP Funds’
administrator, to record entries in the books falsely reflecting that $5.2 million in funds had been
transferred to and invested in, Ontime Overseas, Inc. (“Ontime”), another entity. The HVP
Defendants failed to supervise Illarramendi here, too. Illarramendi could not cover the $5.2
million hole and directed Ontime to transfer $7.4 million to the Offshore Fund to make it appear
that the falsely recorded investment in Ontime was being redeemed.
To fund the transfer to Ontime, Illarramendi transferred $5.5 million from the HVP
Partners’ Wachovia Bank account. Illarramendi caused HVP Partners to fund these fraudulent
transfers primarily through a loan to HVP Partners from a bank where Lopez was a director.
Over the next five years, there were a series of additional transactions designed to hide the
losses, including transactions involving “off the books” bank accounts and transactions in the
“Permuta” market.4 From 2005 to 2011, the HVP Defendants received at least $35,299,161
To conceal the shortfall in assets, Illarramendi engaged in transactions that were not
directly or indirectly in improper transfers.
C. Related Proceedings
In March 2011, the United States Attorney for the District of Connecticut filed an
information against Illarramendi, alleging that he had engaged in a fraudulent scheme.
Illarramendi pled guilty and acknowledged as part of that plea that he had engaged in a scheme
to hide from investors and creditors losses he had incurred in a failed transaction and that he had
used money provided by new investors to the HVP Funds to pay out returns he promised to early
investors. He also admitted to disregarding corporate formalities and commingling investments
in various HVP funds. On June 14, 2011, the SEC began a civil enforcement action against
Illarramendi and other defendants, alleging that they misappropriated investor assets in violation
of the securities laws. The SEC also sought an order freezing the assets of those defendants and
the appointment of a Receiver over those assets. In 2011, the Court appointed John J. Carney
(“Carney”) as Receiver over those assets. This action followed.
The Receiver’s complaint contains nine counts: Counts One through Four allege statutory
and common law fraudulent transfer claims; Count Five alleges breach of fiduciary duty; Count
Six alleges unjust enrichment; Count Seven requests the imposition of a constructive trust with
respect to the transfers from Receivership entities to defendants; Count Eight alleges conversion;
and Count Nine requests an accounting of transfers from receivership entities. Defendants move
to dismiss the complaint in its entirety, arguing that the court lacks personal jurisdiction over
recorded in the books and records of HVP Partners, including transactions involving accounts in
the names of shell companies. The accounts were under the control of Illarramendi and HVP
Partners and contained commingled funds from the receivership entities, HVP Funds, and other
third parties. The “Permuta market” or “swap market” was a type of currency exchange market
operating in Venezuela that served as an unofficial market in which parties could buy
certain defendants and contesting the sufficiency of the pleadings and the claims asserted therein.
Defendants have also moved to strike portions of the Receiver’s complaint.
A. Whether this Court Can Exercise Personal Jurisdiction over Peláez and Barrantes
A plaintiff bears the burden of showing that the court has personal jurisdiction over each
defendant. Metro. Life Ins. Co. v. Robertson-Ceco Corp., 84 F.3d 560, 566 (2d Cir. 1996).
Where, as here, there has been no discovery on jurisdictional issues and the court is relying
solely on the parties’ pleadings and affidavits, the plaintiff need only make a prima facie
showing that the court possesses personal jurisdiction over the defendant. Bank Brussels
Lambert v. Fiddler Gonzalez & Rodriguez, 171 F.3d 779, 784 (2d Cir. 1999). The court may
consider affidavits and other evidence submitted by the parties. Ensign-Bickford Co. v. ICI
Explosives USA Inc., 817 F. Supp. 1018, 1026 (D. Conn. 1993). In resolving the personal
jurisdiction issue, a court must “construe the pleadings and affidavits in the light most favorable
to [the plaintiff], resolving all doubts in his favor.” A.I. Trade Fin., Inc. v. Petra Bank, 989 F.2d
76, 79-80 (2d Cir. 1993).
Peláez and Barrantes argue that the Receiver has failed to make a prima facie showing
that this court has personal jurisdiction over them. The Receiver contends that this court has
personal jurisdiction by operation of the federal receivership statute, which provides that:
A receiver appointed in any civil action or proceeding involving property, real,
personal or mixed, situated in different districts shall, upon giving bond as
required by the court, be vested with complete jurisdiction and control of all such
property with the right to take possession thereof.
He shall have capacity to sue in any district without ancillary appointment, and
may be sued with respect thereto as provided in section 959 of this title.
Such receiver shall, within ten days after the entry of his order of appointment,
file copies of the complaint and such order of appointment in the district court for
Venezuelan government bonds in Bolivars and sell them for U.S. dollars.
each district in which property is located. The failure to file such copies in any
district shall divest the receiver of jurisdiction and control over all such property
in that district.
28 U.S.C. § 754. The statute also provides that:
In proceedings in a district court where a receiver is appointed for property, real,
personal, or mixed, situated in different districts, process may issue and be
executed in any such district as if the property lay wholly within one district, but
orders affecting the property shall be entered of record in each of such districts.
Id. at § 1692.
Peláez and Barrantes’ objection to the federal receivership statute as the basis of personal
jurisdiction has two parts. First, they argue that the statute does not confer personal jurisdiction
over them in this court because the Receiver has failed to identify receivership property, or
persons alleged to possess that property in the districts where the Receiver has filed the required
paperwork. Second, they argue that the court cannot exercise personal jurisdiction over them as
a result of the in rem jurisdiction granted by the federal receivership statute.
The first argument is unavailing. The Receiver has alleged that bank accounts held by
Peláez and Barrantes in Florida and New York received transfers from the receivership entities.5
The second argument fares no better; the circuit courts to address the argument have uniformly
rejected it. See SEC v. Bilzerian, 378 F.3d 1100, 1104-05 (D.C. Cir. 2004); Am. Freedom Train
Found. v. Spurney, 747 F.2d 1069 (1st Cir. 1984); Haile v. Henderson Nat’l Bank, 657 F.2d 816,
826 (6th Cir. 1981). The service of a summons and complaint on Peláez and Barrantes pursuant
to Fed. R. Civ. P. 4(k) confers personal jurisdiction over them as long as the Receiver has
complied with section 754 by filing the appropriate documents in the judicial districts where
receivership property is believed to be located.
Peláez and Barrantes jointly hold a bank account at Credit Suisse Bank in Florida and
Peláez holds an account in her own name at Wachovia Bank in New York. Am. Compl. at ¶ 15.
In Bilzerian, the D.C. Circuit outlined the “interplay” between Rule 4(k) and 28 U.S.C.
sections 754 and 1692. 378 F.3d at 1103-06. Following the Circuit’s reasoning in Vision
Commc’ns, the court described how establishing personal jurisdiction in a SEC enforcement
action is a three-step process. 74 F.3d at 290-91. “Step one involves [Rule 4(k)(1)(D)], which
provides that ‘[s]ervice of a summons or filing a waiver of service is effective to establish
jurisdiction over the person of a defendant . . . when authorized by a statute of the United
States.”6 Bilzerian, 378 F.3d at 1103. Step two requires a statute authorizing service of the
defendant outside the relevant court, such as 28 U.S.C. § 1692. Id. Step three, the invocation of
section 1692, requires that a receiver complies with section 754’s filing requirements. Id.
Section 754 is “a stepping stone on the court’s way to exercising in personam jurisdiction.” SEC
v. Vision Commc’ns, Inc., 74 F.3d 287, 290 (D.C. Cir. 1996). Thus, service of summons on a
defendant in a judicial district establishes the court’s jurisdiction pursuant to section 1692 if the
Receiver has complied with section 754’s filing requirement. The Receiver effected service on
Peláez and Barrantes on March 26, 2012 in Connecticut and acceptance of service was
confirmed on March 28, 2012.7 I must, therefore, determine if the Receiver has complied with
The amended complaint states that Peláez, along with her husband, holds a bank account
in Florida to which transfers were made from receivership entities, and holds an account in her
own name at Wachovia Bank in New York to which transfers were made from receivership
entities. As section 754 requires, the Receiver timely filed copies of the receivership order in the
The 2007 Amendment to the Federal Rules of Civil Procedure deleted as redundant
former Rule 4(k)(1)(C), which described service on interpleader claimants. Hence, the former
Rule 4(k)(1)(D) addressed in Bilzerian is now denoted as Rule 4(k)(1)(C).
Service was effected on Peláez and Barrantes via e-mail to their counsel, Mr. Keefe, in
Connecticut. Carney v. Lopez, et al., 03:12-cv-00182-SRU (doc. 42).
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Southern and Eastern Districts of New York, and the Northern, Middle, and Southern Districts of
Florida, among other places. Receiver’s Mem. in Opp’n to Mot. to Dismiss (“Rec. Br”). at 18
Peláez and Barrantes argue that allegations that they hold bank accounts in Florida or
New York to which monies from receivership entities are alleged to have been transferred are
insufficient to establish prima facie that receivership assets are located in either place.
Specifically, they argue that only one of the alleged transfers to the bank accounts from
receivership entities occurred within the applicable statute of limitations. Defendants cite no
case standing for the proposition that a statute of limitations on a receiver’s underlying claims
bars the court’s exercise of personal jurisdiction under the federal receivership statute. In any
event, certain claims the Receiver brings—for example, the unjust enrichment claim and the
request for the imposition of a constructive trust—are not subject to a definite statute of a
limitations. See infra.
Peláez and Barrantes also argue that if the receivership assets alleged by the Receiver to
be held in their bank accounts represent challenged salary and bonus payments to Lopez, Luth,
or Chong and not assets traceable to the allegedly wrongful transfers to Peláez and Barrantes,
then there is no basis for personal jurisdiction over them. Defendants provide no basis for this
contention other than their general opposition to the use of federal receivership statutes to confer
personal jurisdiction. There is no requirement, in order to use the receivership statute to confer
personal jurisdiction, that the receivership property be of a certain size or amount or that
receivership property held in a person’s bank account be traceable to that person in any other
way. The statute requires only that a receiver files the appointment order and complaint in a
judicial district where receivership property is located and properly effects service of process on
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the defendant. The Receiver filed the appointment order and complaint in the Florida judicial
district where he alleges receivership property is located, satisfying section 754, and then
invoked section 1692 to serve Peláez and Barrantes in Connecticut, thereby establishing this
court’s personal jurisdiction over them. Accordingly, I deny Peláez and Barrantes’ motion to
dismiss for lack of personal jurisdiction.
B. Whether the Receiver’s Claims are Subject to Rule 9(b) of the Federal Rules of Civil
Defendants argue that under Rule 9(b) of the Federal Rules of Civil Procedure, the
Receiver must plead each element of the fraudulent conveyance claims with particularity.8 A
fraudulent conveyance plaintiff, however, need only satisfy the particularity requirement with
respect to the requisite mental state, here, actual intent to defraud. Cendant Corp. v. Shelton, 474
F. Supp. 2d 377, 380-81 (D. Conn. 2007) (citing Nat’l Council on Comp. Ins. v. Caro &
Graifman, P.C., 259 F. Supp. 2d 172, 179 (D. Conn. 2003)) (“A plaintiff alleging a fraudulent
conveyance is required to plead only the requisite mental state with particularity.”) “Conclusory
allegations of scienter are sufficient if supported by facts giving rise to a strong inference of
fraudulent intent.” Id. at 381 (citations omitted; quotations omitted). Also, “actual fraudulent
intent may be inferred from the circumstances surrounding the transaction . . . .” Id. Thus, when
reviewing the Receiver’s fraudulent conveyance claims, I apply Rule 9(b) only to assess whether
the plaintiff sufficiently alleged that the defendant had fraudulent intent and, in any event, may
Defendants also argue that many of the Receiver’s allegations are based merely “upon
information and belief” and, thus, are not afforded the assumption of truth with respect to
motions to dismiss fraud claims subject to Rule 9(b). Luth Mem. in Support of Mot. to Dismiss
and to Strike (“Luth Br.”) at 13. Although it is true that “fraud pleadings generally cannot be
based on information and belief,” a plaintiff can base such pleadings on information and belief if
they are “accompanied by a statement of facts upon which belief is founded.” Stern v. Leucadia
Nat. Corp., 844 F.2d 997, 1004 (2d Cir. 1998). In any case, the Receiver’s complaint has alleged
sufficient facts to support those actual fraud claims.
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infer fraudulent intent from facts supporting the Receiver’s allegations. Rule 9(b) is inapplicable
to claims based on a theory of constructive fraudulent transfer, see Cendant, 474 F. Supp. 2d at
380, and, therefore, does not apply to Counts Two and Three of the Receiver’s complaint.
A breach of fiduciary duty claim will implicate the heightened pleading standard of Rule
9(b) only if it includes a fraud claim. Milo v. Galante, 2011 WL 1214769, at *9 (D. Conn. Mar.
28, 2011) (citing In re Xerox Corp. ERISA Litig., 483 F. Supp. 2d 207, 216-17 (D. Conn. 2007)
(breach of fiduciary duty claim); In re Cardiac Devices Qui Tam Litig., 221 F.R.D. 318, 340 (D.
Conn. 2004) (unjust enrichment claim). Although the Receiver’s complaint includes numerous
fraud claims, the breach of fiduciary duty claim is based on the defendants’ “misuse of corporate
assets, self-dealing, mismanagement, corporate waste, failure to prepare, implement and carry
out compliance and supervisory responsibilities and policies, failure to heed red flags, and
breaches of their duty to act with care, loyalty, and good faith and fair dealing . . . .” Am.
Compl. at ¶ 170. The unjust enrichment count does not include a fraud claim. Accordingly,
Counts Five and Six of the Receiver’s complaint are not subject to Rule 9(b).
C. Unclean Hands/In Pari Delicto
Defendants assert that the Receiver’s complaint should be dismissed because the
Receiver has “unclean hands.” See Chong Mem. in Supp. of Mot. to Dismiss (“Chong Br.”) at
28-30. Chong’s assertion is essentially an argument for application of the doctrine of in pari
delicto. It is a “basic principle of agency . . . that the acts of a corporation’s agents are attributed
to the corporation itself.” Harp v. King, 266 Conn. 747, 777-78 (Conn. 2003). The doctrine of in
pari delicto provides that actions brought on illegal or corrupt bargains must fail where the
plaintiff has been a significant participant in the subject wrongdoing, bearing at least equal
responsibility for the violations he seeks to redress. In re Flanagan, 415 B.R. 29, 34 (D. Conn.
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2009). Because the complaint alleges that the receivership entities were under Illarramendi’s
domination and control, defendants argue, under agency principles, his conduct is properly
imputed to the receivership entities, and the Receiver cannot bring a claim against defendants on
HVP Partners’ behalf.
This argument is unpersuasive for at least two reasons. First, and most importantly,
courts refuse to allow corporate insiders to use the in pari delicto defense to bar claims brought
by court-appointed representative of the corporation. See, e.g., In re Mediators, Inc., 105 F.3d
822, 826-827 (2d Cir. 1997); In re Optimal U.S. Litig., 813 F. Supp. 2d 383 (S.D.N.Y. 2011) (“It
bears noting that in pari delicto does not apply to the actions of fiduciaries who are insiders in the
sense that they either are on the board or in management, or in some other way control the
corporation.”) (internal quotations, citations, and emphasis omitted). Second, whether the
doctrine of in pari delicto applies is a question of fact not appropriately resolved at this stage in
the pleadings. See, e.g., Ross v. Bolton, 904 F.2d 819, 824-25 (2d Cir. 1990); Global Crossing
Estate Representative v. Winnick, 2006 WL 2212776, at *15 (S.D.N.Y. Aug. 3, 2006).
Accordingly, defendants’ motions to dismiss the claims on the grounds of in pari delicto are
D. Counts One and Four: Actual Fraud (Section 52-552e(a)(1)) and Common Law
In Count One, the Receiver brings a claim of fraudulent conveyance based on CUFTA’s
provision governing actual fraud, CUFTA Section 52-552e(a)(1), and in Count Four, the
Receiver brings a common law fraudulent transfer claim. To establish a claim for common law
fraudulent transfer, a plaintiff must demonstrate “either (1) that the conveyance was made
without substantial consideration and rendered the transferor unable to meet his obligations; or
(2) that the conveyance was made with fraudulent intent in which the grantee participated.”
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Certain Underwriters at Lloyd’s, London v. Cooperman, 289 Conn. 383, 395 (2008) (quoting
Bizzoco v. Chinitz, 193 Conn. 304, 312 (1984) (emphasis added); see also United States v.
Snyder, 233 F. Supp. 2d 293, 298 (D. Conn. 2002). A plaintiff need only establish one of the
two alternatives, not both.9 Watson v. Watson, 221 Conn. 698, 707 (1992). The Uniform
Fraudulent Transfer Act is “largely an adoption and clarification of the standards of the common
law of [fraudulent conveyances],” thus, I may consider the Receiver’s fraud claims under
CUFTA and the common law together. Certain Underwriters, 289 Conn. at 395.
Defendants argue that the Receiver has failed to state a claim for actual fraud under
section 52-522e(a)(1) because he has not alleged facts showing: (1) that he was a creditor at the
time the alleged fraudulent transfer took place; (2) in which creditor’s shoes the Receiver claims
to stand with respect to each challenged transfer or exactly when each creditor’s claim arose; (3)
that each transfer was made with fraudulent intent; and (4) that the alleged fraudulent transfers
were directly related to the underlying scheme. Defendants make similar arguments against the
Receiver’s common law fraudulent transfer claims.
1. Whether the Receiver has Standing to Bring a CUFTA Claim
CUFTA Section 52-552e(a)(1) provides that “a transfer made or obligation incurred by a
Defendants also argue that the Receiver fails to sufficiently plead the transferees’ intent,
arguing that Illarramendi successfully concealed his activities from them. See, e.g., Chong Reply
Mem. in Support of Mot. to Dismiss at 6. The complaint, however, alleges that Illarramendi
concealed some but not all fraudulent activities from defendants. For example, the complaint
The Fraudulent Scheme began at least as early as October 2005, as a result of a
major trading loss which Illarramendi chose to conceal. From that date,
Illarramendi, with the complicity of the HVP Defendants, embarked on an
elaborate scheme . . . [.]
Am. Compl. at ¶ 5 (emphasis added). Even if the transferees did not share the intent of the
transferor, the transfers here were made without substantial consideration and rendered the
transferor unable to meet its obligations.
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debtor is fraudulent as to a creditor” if:
[T]he creditor’s claim arose before the transfer was made or the obligation was incurred
and if the debtor made the transfer or incurred the obligation . . . [w]ith actual intent to
hinder, delay, or defraud any creditor of the debtor. . . .
Conn. Gen. Stat. § 52-552e(a)(1).
In order to have standing to bring a claim under CUFTA, a claimant must have been a
creditor at the time the alleged fraudulent transfer took place. Chien v. Skystar Bio Pharm. Co.,
623 F. Supp. 2d 255, 267 (D. Conn. 2009); see Conn. Gen. Stat. § 52-552e(a) (“A transfer made
or obligation incurred by a debtor is fraudulent as to a creditor [only if] the creditor’s claim arose
before the transfer was made or the obligation was incurred.”). Defendants argue that the
Receiver has failed to allege precisely in whose shoes he was standing and exactly what time
each purportedly fraudulent transfer occurred. The Receiver has alleged that the fraudulent
scheme began “at least as early as October 5, 2005,” Am. Compl. at ¶ 5, and that the HVP
Defendants “were well rewarded” during this period with transfers from receivership entities,
which “were themselves in furtherance of the Fraudulent Scheme,” Am. Compl. at ¶ 79. The
amended complaint includes a schedule of transfers to defendants made throughout this period.
Thus, although the complaint does not allege exactly when each individual fraudulent transfer
took place, the complaint sufficiently alleges that the receivership entities were creditors when
many of the fraudulent transfers took place. Accordingly, the claim should not be dismissed at
The defendants limit their opposition to the Receiver’s standing to the issue of when a
receivership entity became a creditor rather than if the receivership entities can be creditors at all.
Nevertheless, the Receiver spends much of its opposition brief establishing that, as a general
matter, it has standing to bring creditor claims on behalf of HVP Partners. See Rec. Br. at 6-13.
The Receiver has alleged that the receivership entities were harmed by the fraudulent transfers,
Am. Compl. at ¶¶ 26-27, 79-86, and cites case law from several courts, including the leading
case, Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995), establishing that a Receiver may bring
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2. Whether the Receiver has Sufficiently Pled Fraudulent Intent
CUFTA also requires that a claimant under section 52-552e(a)(1) allege that the debtor
made the transfer “[w]ith actual intent to hinder, delay, or defraud any creditor of the debtor.”
Conn. Gen. Stat. § 52-552e(a). Even assuming that actual intent to defraud must be pled with
specificity, see Nat’l Council, 259 F. Supp. 2d at 179, a pleader may rely on “badges of fraud . . .
[,] circumstances so commonly associated with fraudulent transfers that their presence gives rise
to an inference of intent.” In re Sharp Int’l, 403 F.3d 43, 56 (2d Cir. 2005). Badges of fraud may
include: “a close relationship between the parties to the alleged fraudulent transaction; a
questionable transfer not in the usual course of business; inadequacy of the consideration; . . .
and retention of control of the property by the transferor after the conveyance.” Id. (citations
Defendants argue that the Receiver has not alleged sufficient badges of fraud. Lopez,
Luth, and Chong argue that the only badge present is that they were insiders.11 They also argue
that the Receiver’s allegations that “red flags” should have alerted them, as insiders, to the
fraudulent scheme are insufficient to establish fraudulent intent. See, e.g., Luth Br. at 14-16
(citing Stephenson v. PricewaterhouseCoopers, LLP, 2012 WL 1764191, at *3 (2d Cir. May 18,
2012) (“[P]leading the existence of red flags does not establish that a defendant was aware of
those warning signals.”). In response, the Receiver argues that there is no need to consider
claims on behalf of receivership entities used as instrumentalities in furtherance of a Ponzi
scheme. The Receiver also argues that he has standing as a creditor as a result of his
appointment. Notably, the defendants’ reply briefs do not re-assert a challenge to the Receiver’s
standing to bring these claims. I do not take up these arguments here because defendants have
not raised them in their motion to dismiss.
Lopez, Luth, Chong, and Peláez are insiders of HVP Partners within the meaning of
section 52-552(b)(7) of CUFTA. Furthermore, this argument is entirely unavailing with respect
to Lopez. The Receiver alleges that Lopez had actual knowledge of the fraud and was a coconspirator in the fraudulent scheme. Am. Compl. at ¶ 16.
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badges of fraud because a “Ponzi presumption” applies. Actual intent to defraud is presumed as
a matter of law when the debtor is engaged in a Ponzi scheme because “transfers made in the
course of a Ponzi scheme could have been made for no purpose other than to hinder, delay or
defraud creditors.” In re Manhattan Inv. Fund Ltd., 397 B.R. 1, 8 (S.D.N.Y. 2007); Drenis v.
Haligiannis, 452 F. Supp. 2d 418, 429 (S.D.N.Y. 2006).
Defendants contend that Illarramendi’s fraudulent scheme was not a “classic” Ponzi
scheme and, therefore, the Ponzi presumption does not apply. According to defendants, under the
definition of “Ponzi scheme” set forth in Armstrong v. Collins, 2010 WL 1141158, at *22
(S.D.N.Y. Mar. 24, 2010), the Receiver must show that (1) deposits were made by investors; (2)
the transfers had no legitimate purpose; (3) business operations produced little or no profits or
earnings; and (4) transfers to defendants were made with funds received from new investors.
Defendants argue that the complaint does not allege that HVP Partners conducted little or no
legitimate business operations as represented to investors; business operations produced little or
no profits or earnings; or transfers to the defendants were made with funds received from new
There is some merit to defendants’ argument, if one defines “Ponzi scheme” narrowly. It
may well be true there were some legitimate business purposes entwined in the fraudulent
scheme and not all transfers to the defendants were made with funds received from new
investors. The case law, however, provides a definition of a Ponzi scheme that encompasses
Illarramendi’s conduct. Even Armstrong, the case from which defendants’ definition of a Ponzi
scheme is derived, notes that “[c]ase law has revealed that a clever twist on the Ponzi concept
will not remove a fraudulent scheme from the definition of Ponzi.” 2010 WL 1141158, at *23.
Indeed, there is no single, authoritative definition of a Ponzi scheme. See, e.g., In re Parmalat
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Secs. Litig., 477 F. Supp. 2d 602, 608 n.38 (S.D.N.Y. 2007) (a Ponzi scheme “is a scheme
whereby a corporation operates and continues to operate at a loss. The corporation gives the
appearance of being profitable by obtaining new investors and using those investments to pay for
the high premiums promised to earlier investors. The effect of such a scheme is to put the
corporation farther and farther into debt by incurring more and more liability and to give the
corporation the false appearance of profitability in order to obtain new investors.”) (citing Hirsch
v. Arthur Andersen & Co., 72 F.3d 1085, 1088 n.3 (2d Cir. 1995)); In re Manhattan Inv. Fund
Ltd., 397 B.R. at 12 (“[T]he label ‘Ponzi scheme’ has been applied to any sort of inherently
fraudulent arrangement under which the debtor-transferor must utilize after-acquired investment
funds to pay off previous investors in order to forestall disclosure of the fraud.”) (citations
omitted). The hallmark of a Ponzi scheme is that the entity gives the false appearance of
profitability by seeking investments from new sources rather than earning profits from assets
already invested. This is precisely what happened here, even if the scheme was somewhat
cloaked by purportedly legitimate activities.
Although Illarramendi may not have mouthed the word “Ponzi” when describing his
scheme, he has admitted to conduct described by many courts as amounting to a Ponzi scheme.12
In In re Manhattan, a bankruptcy court reviewed the criminal information to which the alleged
Ponzi scheme mastermind had pled guilty and found “ample support” for characterizing his fraud
as a Ponzi scheme where he admitted to: falsifying the Fund’s performance, sending account
Defendants ask that I take judicial notice of Illarramendi’s plea documents which, they
argue, do not admit to operating a Ponzi scheme. See United States v. Illarramendi, 3:11-cr00041-SRU (doc. 3, Information; doc. 10, Plea Agreement). They also ask that I take judicial
notice of Illarramendi’s purported claims that he was not engaged in a Ponzi scheme. See
Declaration of Francisco Illarramendi, Carney v. Beracha, et al., No. 12-cv-00180-SRU (doc.
100-2); Declaration of Francisco Illarramendi, SEC v. Illarramendi, et al., No. 3:11-cv-00078JBA (doc. 593). I will do so.
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statements to current investors that reflected significant gains, concealing the fund’s true state
from its auditors, and using falsified records to attract new investors. 397 B.R. at 12. There is
similarly ample support here. The criminal information charged Illarramendi with: using money
provided by new investors to pay out returns he promised to earlier investors, creating fraudulent
documents to mislead investors, creditors, and the SEC about the existence of the fund’s assets,
and falsely representing the amount of capital and credit available to the fund. Illarramendi’s
plea agreement includes a stipulation of offense conduct in which he admitted to this charge.
Defendants also argue that the Receiver must allege that the fraudulent transfers were
directly related to the underlying scheme, for example, that that there is a connection between the
fraudulent conduct alleged in the complaint and the transfer of money. See, e.g., Luth Br. at 1617 (citing In re Sharp Int’l, 403 F.3d at 56). The complaint, defendants contend, does not allege
facts suggesting that the transfers between HVP Partners and Luth, Lopez, or Chong, were
incidental to anything more than an ordinary business relationship. Defendants’ reliance on
Sharp Int’l is misplaced if the Ponzi presumption applies.13 In that case, all the Receiver must
show is that the transfers at issue were related to a Ponzi scheme. The Receiver has done so here.
Notwithstanding defendants’ attempts to argue that Illarramendi did not engage in a Ponzi
scheme, I find that a Ponzi presumption applies and, therefore, the Receiver has sufficiently pled
3. Whether the Receiver has Sufficiently Pled Insufficient Consideration
Defendants’ reliance on Sharp Int’l is also misplaced for another reason. The Second
Circuit did not dismiss the fraudulent conveyance claim because the plaintiff failed to allege a
direct connection between the fraudulent transfer and the underlying scheme. Rather, the Second
Circuit affirmed the dismissal of the fraudulent conveyance claim because Sharp’s fraud claim
related to how Sharp raised funds to further its scheme and not to Sharp’s subsequent payment of
part of the proceeds to another entity. In re Sharp Int’l, 403 F.3d at 56-57. Here, the complaint
alleges that the transfers to the defendants were made to further the fraudulent scheme. See Am.
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Defendants argue that the complaint does not allege facts showing the absence of
consideration or that the receivership entities were made insolvent by the transfers. Numerous
courts have held that entities used to further Ponzi schemes are presumptively insolvent. See In
re Carrozzella & Richardson, 286 B.R. 480, 486 (D. Conn. 2002); Armstrong, 2010 WL
1141158; In re Bernard L. Madoff Inv. Securities, LLC, 458 B.R. 87, 118 (Bankr. S.D.N.Y.),
leave to appeal denied, 464 B.R. 578 (S.D.N.Y. 2011). Also, the Receiver’s complaint alleges
that HVP Partners was insolvent at the time it made at least some of the salary and partnership
distributions to defendants. See Am. Compl. at ¶¶ 107-10. In any case, HVP Partners’ ability to
meet its obligations must have been limited, to some extent, by the transfers. Millions of dollars
were transferred to the defendants. It would be inappropriate to dismiss the Receiver’s claim at
this stage without additional factual inquiry. Having satisfied the Ponzi presumption, the
Receiver has sufficiently pleaded the element of fraudulent intent and alleged the insolvency of
the receivership entities. Accordingly, the Receiver has sufficiently stated fraudulent transfer
claims under the common law and under CUFTA.
E. Counts Two and Three: Constructive Fraud (CUFTA §§ 52-522e(a)(2) and 52-522f(a))
If actual intent to defraud creditors cannot be proven under CUFTA Section 52522e(a)(1), a transfer may be avoided under a theory of constructive fraud. The Receiver brings
two constructive fraud claims. CUFTA Section 52-552e(a)(2) provides that “a transfer made or
obligation incurred by a debtor is fraudulent as to a creditor” if:
[T]he creditor’s claim arose before the transfer was made or the obligation was incurred
and if the debtor made the transfer or incurred the obligation . . . without receiving a
reasonably equivalent value in exchange for the transfer or obligation, and the debtor (A)
was engaged or was about to engage in a business or a transaction for which the
remaining assets of the debtor were unreasonably small in relation to the business or
Compl. at ¶¶ 79, 132.
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transaction, or (B) intended to incur, or believed or reasonably should have believed that
he would incur, debts beyond his ability to pay as they became due.
Conn. Gen. Stat. § 52-552e(a)(2). CUFTA Section 52-552f(a) provides that,
A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose
claim arose before the transfer was made or the obligation was incurred if the debtor
made the transfer or incurred the obligation without receiving a reasonably equivalent
value in exchange for the transfer or obligation and the debtor was insolvent at that time
or the debtor became insolvent as a result of the transfer or obligation.
Conn. Gen. Stat. § 52-552f(a).
A constructive fraud claim under section 52-522e(a)(2) differs from CUFTA’s actual
fraud provision in that the claimant must show that the transfer was made without the creditor
receiving a “reasonably equivalent value” in exchange for the transfer. The proof required to
establish that a conveyance was made without substantial consideration is “virtually identical” to
the proof required under section 52-552e(a)(2) of CUFTA to establish that the entity did not
receive reasonably equivalent value. See Nat’l Loan Investors, L.P. v. Lan Assocs. XII, LLP,
2002 WL 1821298, at * 7 (Conn. Super. Ct. June 28, 2002). Hence, the analysis above
concerning the receipt of “reasonably equivalent value” applies here with respect to the
insufficiency of consideration provided in exchange for each transfer.
Defendants argue that the Receiver has failed to plead a plausible claim that the payments
to them were not legitimate salary and distributions for services rendered or were designed to
defraud HVP Partners’ creditors. See, e.g., Luth Br. at 20-21. In In re Churchill, 264 B.R. 303,
308 (S.D.N.Y. 2011), a Southern District of New York bankruptcy court held that failure to
allege “unreasonably high or excessive” payment leads to the conclusion that the defendant
provided reasonably equivalent value for the services. Second, defendants argue the Receiver’s
allegations that defendants failed to exchange reasonably equivalent value necessarily implies
that they knew about or recklessly avoided learning about Illarramendi’s fraud.
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With respect to defendants’ first objection, the Receiver has pled a plausible claim that
the payments made to defendants were designed to defraud HVP Partners’ creditors; that is the
substance of the entire complaint. The Receiver specifically alleges that payments to the
defendants were compensation for their participation in a scheme to defraud the creditors.
Furthermore, the complaint alleges millions of dollars of transfers to defendants in exchange for
failed services and breaches of fiduciary duties, a de facto overpayment. See In re Bernard L.
Madoff Inv. Sec. LLC, 458 B.R. at 113 (“[E]ven if the Defendants’ wages were proportionate to
the wages of senior management in legitimate enterprises . . . the Defendants returned less than
reasonable equivalent value to BLMIS as a result of their alleged lack of faithful service.”).
Defendants’ second objection improperly attempts to import Rule 9(b)’s pleading standards into
a constructive fraud claim. Whether the allegations here would imply transferee’s intent is
irrelevant to the constructive fraud claim. The transferee need only receive a transfer without
providing reasonably equivalent value in exchange, thus fraudulent intent is not required and the
heightened pleading standards of Rule 9(b) do not apply.
Defendants’ strongest argument is that each particular transfer is not fraudulent simply
because the “totality of the enterprise” was fraudulent. Defendants cite In re Churchill Mort.
Inv. Corp., which held that “the fact that the debtor’s enterprise as a totality operated . . . in a
manner that was fraudulent, does not render actually or constructively fraudulent a particular
transaction which in and of itself is not fraudulent in any respect.” 256 B.R. 664, 681 (S.D.N.Y.
2000) (applying New York law). The Churchill Court ignored the trustee’s argument that
commissions paid to brokers who unknowingly solicited new customers for a Ponzi scheme were
not provided for reasonably equivalent value. The court noted that the trustee argued that the
commissions paid were constructively fraudulent simply because the commissions were paid by
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an entity engaged in a Ponzi scheme. The case before this court is distinguishable, however.
The Receiver is not arguing that the payments to defendants were constructively fraudulent
because they were paid by an entity engaged in a Ponzi scheme. The Receiver has also alleged
that the transferees are corporate insiders who, even if unaware of the overall scheme, were
intimately involved in it. In any event, the court in Churchill dismissed the claim without
prejudice to the development of new evidence and assertion of additional fraudulent conveyance
claims. Id. at 684. And, as stated above, I cannot make a finding that defendants’ services
constituted adequate value at this stage in the proceedings, because such a determination
involves factual issues that cannot be resolved on a motion to dismiss. Accordingly, I deny
defendants’ motion to dismiss the Receiver’s constructive fraudulent conveyance claims.
F. Count Five: Breach of Fiduciary Duty
The Receiver alleges that Lopez, Luth, and Chong breached their fiduciary duties to HVP
Partners and the receivership entities. Defendants, again, attempt to subject the Receiver’s claim
to heightened pleading standards. Chong and Luth also argue that the Receiver must allege facts
in support of the claim that a fiduciary duty existed in a particular employee-employer
relationship. In Chong’s case, he argues that the Receiver’s claim is implausible because “other
than alleging Mr. Chong’s job titles . . . the Receiver cites no specific facts alleged anywhere in
the Amended Complaint that describe Mr. Chong’s formal responsibilities with HVP Partners.”
Chong Br. at 22. Luth argues that the complaint improperly lumps Luth together with other
defendants and fails to give adequate notice of the specific acts he has committed. Luth Rep.
Mem. in Support of Mot. to Dismiss and to Strike (“Luth Rep. Br”) at 9.
Chong, unlike the other defendants, challenges the claim on the grounds that the Receiver
must allege facts in support of the claim that a fiduciary duty existed in his particular relationship
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with HVP Partners. Chong Br. at 22 (citing Hoffnaggle v. Henderson, 2003 WL 21150549, at *7
(Conn. Super. Apr. 17, 2003) (“The existence of a fiduciary duty is largely a factual
determination and the extent of the duty and the resulting obligations may vary according to the
nature of the relationship: the obligations do not arise as a result of labeling, but rather by
analysis of each case.”), reconsid. on other grounds, 2003 WL 22206236 (Conn. Super. Sep. 10,
2003)). This is a curious argument, given that Chong was the Chief Financial Officer and Chief
Compliance Officer of HVP Partners. The case Chong relies on, Hoffnagle, involved an
employee of a tax preparation company who the court found had a fiduciary duty to her
employer. The Receiver convincingly argues that “if an employee who prepares tax returns owes
a fiduciary duty to her employer, surely the chief financial officer and chief compliance officer
would owe a much broader duty.” Rec. Br. at 37. Even though the precise nature of Chong’s
fiduciary relationship turns on a factual determination, see Konover Development Corp. v. Zeller,
228 Conn. 206 (1994), I can infer from Chong’s position as Chief Financial Officer and Chief
Compliance Officer of HVP Partners that he bore some fiduciary duty to HVP Partners.
Similarly, Luth is alleged to have been a portfolio manager and “Head Trader” responsible for
trading decisions. Because the existence of a fiduciary duty is a factual determination, I decline
to dismiss the Receiver’s claims against Luth at this stage. Accordingly, I deny the defendants’
motion to dismiss the breach of fiduciary duty claim on these grounds.
G. Count Six: Unjust Enrichment
The Receiver also seeks to recover under a theory of unjust enrichment against
defendants for their “receipt of money from the receivership entities in the form of loans,
payments, bonuses, compensation, and other Transfers.” Am. Compl. at ¶ 175. A plaintiff
seeking recovery for unjust enrichment must prove: (1) that the defendants were benefitted, (2)
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that the defendants unjustly did not pay the plaintiffs for the benefits, and (3) that the failure of
payment was to the plaintiffs’ detriment. Hartford Whalers Hockey Club v. Uniroyal Goodrich
Tire Co., 231 Conn. 276, 282-83 (1994). Defendants incorrectly argue that there must be a
contractual relationship between the parties in order for a plaintiff to recover based on unjust
enrichment. Connecticut courts have recognized unjust enrichment claims in the absence of a
contract. Schirmer v. Souza, 126 Conn. App. 759, 767 (2011) (listing cases). The Receiver has
alleged that the defendants received payments, that they were not entitled to those payments, and
that they received those benefits at the expense of the receivership entities. Thus, the Receiver
has sufficiently pleaded a claim for unjust enrichment.
H. Count Seven: Constructive Trust
The Receiver requests the imposition of a constructive trust with respect to the transfer of
funds, assets, or property from receivership entitles as well as to any profits received by the
defendants in the past or in the future in connection with the receivership entities. Am. Compl.
at ¶ 184. A constructive trust is a remedy, not an independent substantive cause of action. Titan
Real Estate Ventures, LLC v. MJCC Realty Ltd. P’ship., 415 B.R. 29, 44 (D. Conn. 2009) (citing
Macomber v. Travelers Prop. & Cas. Corp., 261 Conn. 620, 623 n.3 (2002)). I may consider
the imposition of a constructive trust as a remedy if the Receiver establishes defendants’ liability.
Thus, I dismiss this claim and convert it to a request for a remedy.
I. Count Eight: Conversion
Conversion is “an unauthorized assumption and exercise of the right of ownership over
property belonging to another, to the exclusion of the owner’s rights” and requires proof that a
defendant’s conduct was not authorized. Mystic Color Lab, Inc. v. Auctions Worldwide LLC,
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284 Conn. 408, 418 (2007); see also Hi-Ho Tower, Inc. v. Com-Tronics, Inc., 255 Conn. 20, 47
The Receiver alleges that defendants converted the assets of the receivership entities
when they received money misappropriated from the receivership entities. Am. Compl. at ¶ 188.
Defendants argue that this allegation is insufficient to show that transfers were not authorized by
HVP Partners or any other entity because the complaint alleges only that Illarramendi controlled
the entities, orchestrated transfers to defendants, and approved the transactions. The Receiver
responds that the allegations (1) that the receivership entities were operated as a Ponzi scheme
and (2) transfers to defendants were made with misappropriated funds are sufficient to plead that
the transfers were unauthorized. It is clear to me that HVP Partners could not authorize any of
the defendants to accept transfers of misappropriated funds. And it is obvious that Illarramendi
could not authorize the defendants to accept transfers enmeshed in his fraudulent scheme. If, as
the complaint alleges, the transfers were made as part of a Ponzi scheme, or at least as part of a
fraudulent scheme, and, therefore, were misappropriated, a reasonable jury could find that
Illarramendi acted outside the scope of his authority when making them. In any event, whether
the transfers were authorized or not presents an issue of fact not appropriately resolved at this
stage in the proceedings.
Additionally, defendants argue that the conversion claim should be dismissed because
excessive compensation is not a proper basis for a conversion claim. To dismiss on this ground
would require me to hold, as a matter of law, that the transfers were bona fide compensation.
That determination involves disputed issues of fact. Defendants also argue that the Receiver has
not alleged that the transferred money is specifically segregated or identifiable.14 To prevail on a
Notwithstanding defendants’ objections, it appears to me that the complaint has
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claim for conversion, a party “must prove a sufficient property interest in the property in
question.” Mystic, 284 Conn. at 419. The Receiver’s documentation of fraudulent transfers in
the amended complaint has sufficiently identified monies subject to the conversion claim.
Accordingly, I deny defendants’ motion to dismiss the Receiver’s claim for conversion.
J. Count Nine: Accounting
The Receiver requests that the defendants provide an accounting of any transfer of funds,
assets, or property received from the receivership entities as well as an accounting of any past
and future profits received in connection with the receivership entities. Defendants argue that a
request for an accounting is a remedy, not a substantive cause of action.15 Each relies on a
footnote in a Connecticut Supreme Court case. See Macomber, 261 Conn. at 623 n.3. The
Receiver responds that an accounting is a recognized action under Connecticut law and that there
is no appellate authority clarifying the Macomber footnote. Additionally, the Receiver argues
that accounting is a cause of action where “the facts create a reasonable doubt whether adequate
relief may be obtained at law.” Receiver Br. at 49 (citing Makert v. Elmatco Prods., Inc., 84
Conn. App. 456, 460 (2004)). I need not resolve today the question whether an accounting is a
valid cause of action. The pendency of that claim will not affect the scope or cost of this
litigation. Accordingly, I deny the motions to dismiss the accounting claim without prejudice to
renewal at summary judgment, by which time the law may have developed further.
sufficiently identified the unauthorized assets. See, e.g., Am. Compl. at ¶¶ 80-86, 88, 91, 94, 9697, 99, 101, 104, 108-09. Also, the cases defendants cite were not resolved before development
of the facts. See In re Flanagan, 415 B.R. 29 (D. Conn. 2009) (affirming grant of summary
judgment); Mystic Color Lab, 284 Conn. 408 (reversing in part judgment of trial court);
Vanguard Engineering, Inc. v. Anderson, 83 Conn. App. 62 (2004) (Appellate Court reversed
judgment and remanded for new trial); Hi-Ho Tower, Inc. v. Com-Tronics, Inc., 255 Conn. 20,
47 (2000) (on appeal after jury trial).
Luth, however, appears to concede that an accounting is a substantive cause of action.
See Luth Br. at 31.
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K. Statute of Limitations
A court may dismiss on statute of limitations grounds where facts supporting a statute of
limitations defense are set forth in papers filed by plaintiff himself. Walters v. Indus. &
Commercial Bank of China, 651 F.3d 280, 293 (2d Cir. 2011). The original complaint was filed
on February 3, 2012 and the amended complaint was filed on June 22, 2012. The transfers that
form the basis of defendants’ liability were made on dates ranging from September 27, 2005 to
March 30, 2011 (Lopez), July 20, 2005 to April 26, 2011 (Luth); July 22, 2005 to the year 2011
(Chong); November 1, 2005 to May 22, 2008 (Peláez and Barrantes). Am. Compl., Ex. A.
Defendants seek to dismiss all or part of each claim as barred by the applicable statutes of
1. Count One: Actual Fraud (§ 52-552e(a)(1))
The HVP Defendants seek to dismiss Count One to the extent the Receiver seeks to avoid
transfers of salary, partnership distributions, or bonuses made before February 3, 2008— four
years before Receiver filed his complaint. The Receiver invokes the so-called “discovery rule”
of sections 52-522e(a)(1) and 52-552j of CUFTA and argues that the applicable statute of
limitations is one year from the appointment of the Receiver. Under the discovery rule, an action
is timely if brought within one year of the date on which the fraud could reasonably have been
discovered by the claimant. See Epperson v. Entm’t Express, Inc., 338 F. Supp. 2d 328, 344 (D.
Conn. 2004), aff’d sub nom. Epperson v. Entm’t Exp., Inc., 159 Fed. App’x 249 (2d Cir. 2005).
The Receiver’s actual fraud claim was brought on February 3, 2012, within one year of the
Receiver’s appointment on February 3, 2011, and is therefore timely. Defendants’ motions to
dismiss the Receiver’s CUFTA actual fraud claims are denied.
2. Counts Two and Three: Constructive Fraud (CUFTA §§ 52-552e(a)(2) and 52552f(a))
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The constructive fraud claims each have a four-year statute of limitations. Conn. Gen.
Stat. § 52-552j(2). The Receiver concedes defendants’ arguments with respect to Counts Two
and Three and only brings claims to recover transfers made within the applicable statute of
limitations, that is, on or after February 3, 2008. Thus, the Receiver’s constructive fraud claims
are timely to the extent they relate to transfers made on or after February 3, 2008.
3. Counts Four, Five, Six, Seven, and Eight: Common Law Fraud, Breach of
Fiduciary Duty, Unjust Enrichment, Constructive Trust, and Conversion
Under Conn. Gen. Stat. § 52-577, tort claims, including common law fraudulent transfer
(Count Four), breach of fiduciary duty (Count Five), and conversion (Count Eight) must be
brought within three years. Defendants argue that the unjust enrichment claim (Count Six) is
also subject to a three-year statute of limitations. The Receiver only brings his common law
fraud claim to recover transfers made during limitations period. Rec. Br. at 50. The unjust
enrichment claim is equitable in nature and, thus, the court need not adhere to definitive statutes
of limitation. See Rossman v. Morasco, 115 Conn. App. 234, cert. denied, 293 Conn. 923 (2009)
(“Although courts in equitable proceedings often look by analogy to the statute of limitations to
determine whether, in the interests of justice, a particular action should be heard, they are by no
means obliged to adhere to those time limitations.”) (citations omitted). Likewise, to the extent it
is imposed by a court acting under its equitable powers, the remedy of constructive trust (Count
Seven) has no statute of limitations. See Cendant Corp., 474 F. Supp. 2d at 383.
As a result, because there were no transfers to Peláez and Barrantes during the three-year
period prior to commencement of this action, Counts Five and Eight against them are dismissed
as time-barred. Counts Five and Eight against the HVP Defendants, however, are timely.
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Defendants’ motions to dismiss the unjust enrichment claim or the request for imposition of a
constructive trust are denied.
4. Count Nine: Accounting
An action for accounting has a statute of limitations of six years. Conn. Gen. Stat. § 52576. Defendants argue that, to the extent it is a cause of action, an accounting is subject to a sixyear statute of limitations and move to dismiss portions of the claim for an accounting with
respect to any transfer of assets occurring prior to February 3, 2006. The Receiver does not
contest defendants’ motion to dismiss that portion of the accounting claim. To the extent that the
Receiver’s accounting claim relates to actions occurring on or after February 3, 2006, it is timely.
L. Luth’s and Lopez’s Motions to Strike
Luth and Lopez move to strike portions of the complaint. Luth asks the court to strike as
immaterial paragraphs 102 to 104 of the complaint, which describe a transaction in which Luth’s
family members were permitted to use receivership entities for personal benefit. Luth Br. at 33.
Those allegations are material to the complaint because they describe a transaction in which Luth
breached a fiduciary duty to HVP Partners in order to enrich his spouse. Lopez moves to strike
“immaterial, impertinent, and scandalous” statements in the complaint, arguing that they are
unnecessary, overblown, irrelevant, and used only to inflame or prejudice the reader. Lopez
Mot. to Dismiss at 1-2; See Lopez Mem. in Support of Mot. to Dismiss and to Strike (“Lopez
Br.”) at 22-24. Although Lopez objects to the Receiver’s alleged “editorializing,” I do not
believe that in view of the other allegations levied in the complaint, the specified allegations
inflame or prejudice the reader sufficiently to justify striking them. Defendants also move to
strike on grounds of prejudice comments concerning their choice to invoke Fifth Amendment
protections. Acknowledgment of the defendants’ invocation of their right against self-
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incrimination to draw an adverse inference, however, is entirely appropriate. See LiButti v.
United States, 107 F.3d 110, 121 (2d Cir. 1997) (“[W]hile the Fifth Amendment precludes
drawing adverse inferences against defendants in criminal cases, it does not forbid adverse
inferences against parties to civil actions when they refuse to testify in response to probative
evidence offered against them.”) (internal quotations and citations omitted); see also In re
Ethylene Propylene Diene Monomer (EPDM) Antitrust Litig., 681 F. Supp. 2d 141, 153 (D.
Conn. 2009). Accordingly, I deny defendants’ motions to strike.
For the reasons stated above, I grant in part and deny in part the following motions: doc.
69 (Peláez and Barrantes’ motion to dismiss), doc. 71 (Lopez’s motion to dismiss and motion to
strike), doc. 72 (Chong’s motion to dismiss), doc. 73 (Luth’s motion to dismiss and motion to
It is so ordered.
Dated at Bridgeport, Connecticut, this 28th day of March 2013.
/s/ Stefan R. Underhill
Stefan R. Underhill
United States District Judge
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