Ashmore v. Cook
Filing
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OPINION AND ORDER granting 10 Motion for Summary Judgment. Signed by Honorable Margaret B Seymour on 12/4/2013.(mdea )
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF SOUTH CAROLINA
COLUMBIA DIVISION
Beattie B. Ashmore, in his Capacity
as Court-Appointed Receiver for the
Three Hebrew Boys,
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) C/A No. 3:13-1449-MBS
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Plaintiff,
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OPINION AND ORDER
vs.
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Feleicia Cook,
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Defendant.
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____________________________________)
On May 30, 2013, Plaintiff Beattie B. Ashmore, in his Capacity as Court-Appointed Receiver
for the Three Hebrew Boys, filed a complaint alleging that Defendant Feleicia Cook profited from
a fraudulent investment scheme orchestrated by Joseph Brunson, Timothy McQueen, and Tony
Pough, also known as the Three Hebrew Boys. See United States v. Brunson, Cr. No. 3:08-615.
Defendant, proceeding pro se, filed an answer on June 21, 2013. This matter now is before the court
on Plaintiff’s motion for summary judgment, which motion was filed on October 22, 2013.
Defendant filed a response in opposition to Plaintiff’s motion on November 7, 2013.
I. FACTS
Beginning in September 2004, Brunson, McQueen, and Pough orchestrated a Ponzi scheme
through Capital Consortium Group (CCG), a business entity purporting to exist as a “ministry” for
the purpose of debt elimination.1 Brunson, McQueen, and Pough offered a mortgage satisfaction
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“‘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.’” In re Deriviam Capital,
LLC, 396 B.R. 184, 188 n.4 (Bankr. D.S.C. 2008) (quoting Hirsch v. Arthur Andersen & Co., 72
program, automobile note satisfaction program, credit card satisfaction program, and other such
schemes through which they promised to pay off debts of participants in exchange for a nominal
investment. For example, a participant with a $50,000 mortgage could provide a $1,500 “processing
fee” and after approximately sixteen months the mortgage would be satisfied. Brunson, McQueen,
and Pough claimed that they were able to obtain such results because participant monies were
deposited into “sweep accounts” that were invested in the foreign exchange market nightly.
Brunson, McQueen, and Pough represented that the foreign exchange market generated returns of
up to 200 percent to 500 percent per night.
Brunson, McQueen, and Pough did deposit some participant funds into sweep accounts at
various banks; however, the accounts were interest-bearing accounts earning no more than five
percent annually. They also deposited funds into other bank accounts through which they funded
a lavish lifestyle. Brunson, McQueen, and Pough initially used a portion of the deposits to pay early
participants. As is typical in a Ponzi scheme, the successful elimination of debt of early participants
made the scheme attractive to new recruits. To facilitate expansion of their scheme, Brunson,
McQueen, and Pough utilized “Independent Representatives” who received fees in exchange for
obtaining additional participants. As of May 2007, Brunson, McQueen, and Pough controlled
accounts containing approximately $17,000,000. They were obligated through their various
programs to eliminate debt totaling over $950,000,000. See generally Superseding Indictment, ECF
No. 84.
Upon motion of the government, the court issued a pre-indictment restraining order on
August 2, 2007. The pre-indictment restraining order barred Brunson, McQueen, and Pough,
F.3d 1085, 1088 n.3 (2d Cir.1995)).
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individually and doing business as various business entities, as well as those in active concert or
participation with them, from transferring or disposing of their property, which included numerous
vehicles, an airplane, and extensive real estate holdings. The pre-indictment restraining order was
extended on August 15, 2007, and the court also appointed Plaintiff as Receiver to assist in the
identification and disposition of assets. Plaintiff’s duties were described by order filed September
5, 2007, as thereafter amended.
Brunson, McQueen, and Pough were indicted on June 20, 2008. A superseding indictment
was filed on August 21, 2008, charging Brunson, McQueen, and Pough with conspiracy to commit
mail fraud, in violation of 18 U.S.C. §§ 1341 and 1349 (Count 1); mail fraud, in violation of 18
U.S.C. § 1341 (Counts 2-36); interstate transportation of stolen goods, in violation of 18 U.S.C. §§
2314 and 2 (Counts 37-46); and engaging in monetary transactions in property derived from unlawful
activities, in violation of 18 U.S.C. §§ 1957 and 2 (Counts 47-58). A jury found Brunson, McQueen,
and Pough guilty on all counts on November 20, 2009. Also on November 20, 2009, the jury
returned a special verdict for forfeiture of property in the amount of $82,000,000.
In this case, Plaintiff contends that Defendant participated in a mortgage payoff program and
a student loan program, and also received long term residual payments. Plaintiff alleges that
Defendant invested or deposited $11,600.00 and received payoffs totaling $112,834.19, which
resulted in a net profit of $101,234.19. Plaintiff asserts causes of action for fraudulent transfer:
violation of the Statute of Elizabeth, S.C. Code Ann. § 27-23-10 (First Cause of Action); unjust
enrichment (Second Cause of Action); imposition of an equitable mortgage/deed of trust (Third
Cause of Action); constructive/resulting trust (Fourth Cause of Action); and equitable lien (Fifth
Cause of Action). Plaintiff moves for summary judgment as to all causes of action, including the
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equitable remedies that flow from the claims asserted in the Third, Fourth, and Fifth Causes of
Action. In response, Defendant admits receiving profits, but states that there are genuine issues of
material fact, and that the actions of Plaintiff seeking summary judgment are unconscionable and
unconstitutional.
II. DISCUSSION
Plaintiff has moved for summary judgment pursuant to Fed. R. Civ. P. 56. Under that
standard, summary judgment is appropriate if “the movant shows that there is no genuine dispute
as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P.
56(a). In considering a summary judgment motion, “[t]he evidence of the non-movant is to be
believed, and all justifiable inferences are to be drawn in his favor.” Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 255 (1986). At the summary judgment stage, it is not the court’s role to “weigh
the evidence and determine the truth of the matter” but instead to determine whether there are
“genuine factual issues that properly can be resolved only by a finder of fact because they may
reasonably be resolved in favor of either party.” Id. at 250. Summary judgment should be granted
if “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party
is entitled to a judgment as a matter of law.” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
Plaintiff’s cause of action under the Statute of Elizabeth and for unjust enrichment are
equitable in nature. Oskin v. Johnson, 735 S.E.2d 459, 463 (S.C. 2012) (noting that an action to set
aside a conveyance under the Statute of Elizabeth is an equitable action); Ellis v. Smith Grading &
Paving, Inc., 366 S.E.2d 12, 14 (S.C. Ct. App. 2011) (observing that unjust enrichment is an
equitable doctrine). A clear and convincing evidentiary standard governs fraudulent conveyance
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claims brought under the Statute of Elizabeth. Oskin, 735 S.E.2d at 463.
A.
Statute of Elizabeth
Plaintiff asserts that the $101,234.19 in profits paid to Defendant should be set aside as a
fraudulent transfer. S.C. Code Ann. § 27-23-10(A) provides:
Every gift, grant, alienation, bargain, transfer, and conveyance of lands, tenements,
or hereditaments, goods and chattels or any of them, or of any lease, rent, commons,
or other profit or charge out of the same, by writing or otherwise, and every bond,
suit, judgment, and execution which may be had or made to or for any intent or
purpose to delay, hinder, or defraud creditors and others of their just and lawful
actions, suits, debts, accounts, damages, penalties, and forfeitures must be deemed
and taken (only as against that person or persons, his or their heirs, successors,
executors, administrators and assigns, and every one of them whose actions, suits,
debts, accounts, damages, penalties, and forfeitures by guileful, covinous, or
fraudulent devices and practices are, must, or might be in any ways disturbed,
hindered, delayed, or defrauded) to be clearly and utterly void, frustrate and of no
effect, any pretense, color, feigned consideration, expressing of use, or any other
matter or thing to the contrary notwithstanding.
Under section 27-23-10, a fraudulent transfer will be set aside if the plaintiff can establish:
(1) the transfer was made by the grantor with the actual intent of defrauding his creditors; (2) the
grantor was indebted at the time of the transfer; and (3) the grantor's intent is imputable to the
grantee. In re Derivium Capital, 396 B.R. at 192 (citing In re J.R. Deans, 249 B.R. 121, 130 (Bankr.
D.S.C. 2000)). The existence of a Ponzi scheme gives rise to a presumption of fraudulent intent on
the part of the proponent of the scheme. See id. at 192-93 (citing cases). This is because the
“perpetrator must know that the scheme will eventually collapse as a result of the inability to attract
new investors. The perpetrator nevertheless makes payments to present investors, which, by
definition, are meant to attract new investors. He must know all along, from the very nature of his
activities, that investors at the end of the line will lose their money.” Armstrong v. Collins, 2010
WL 1141158, *21 (S.D.N.Y. 2010) (quoting In re C.F. Foods, L.P., 280 B.R. 103, 110 (Bankr. E.D.
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Pa. 2002)). Further, the nature of a Ponzi scheme leads ultimately to insolvency because the
proponent incurs debts beyond his ability to pay as they become due. See Finn v. Alliance Bank,
2013 WL 4711157 *9 (Minn. Ct. App. Sept. 3, 2013) (discussing Minnesota Uniform Fraudulent
Transfer Act); see also Armstrong, 2010 WL 1141158 at *21 (citing cases for the proposition that
a Ponzi scheme is insolvent from its inception).
A jury having found Brunson, McQueen, and Pough guilty on the underlying criminal case,
the court concludes that the first and second prongs of the test have been met; i.e., Brunson,
McQueen, and Pough (1) made transfers to Defendant with the intent of defrauding participants in
the Ponzi scheme; and (2) were indebted to participants in the Ponzi scheme at the times they
transferred monies to Defendant. Accordingly, the court turns to the third prong, whether the
fraudulent intent of Brunson, McQueen, and Pough is imputable to Defendant.
Under South Carolina law, “[a]ctual knowledge of, or participation in, the debtor's fraudulent
intention on the part of the transferee need not be established in order to justify a conclusion that the
transaction was illegal. The transaction is subject to attack if at the time of the transfer the transferee
had notice of circumstances which would arouse the suspicion of an ordinarily prudent man and
cause him to make inquiry as to the purpose for which the transfer was being made, which would
disclose the fraudulent intent of the maker.” Coleman v. Daniel, 199 S.E.2d 74, 80 (S.C. 1973)
(citing Hudnal v. Teasdall, 1 McCord 227 (S.C. 1821)).2
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The court notes that, at least for purposes of bankruptcy litigation, the general rule is that “net
winners” of Ponzi schemes, such as Defendant, must disgorge the their winnings. “‘[I]nvestors may
retain distributions from an entity engaged in a Ponzi scheme to the extent of their investments,
while distributions exceeding their investments constitute fraudulent conveyances which may be
recovered by the Trustee.’” In re Dreier LLP, 462 B.R. 474, 485 (Bankr. S.D.N.Y. 2011) (quoting
In re Churchill Mortg. Inv. Corp., 256 B.R. 664, 682 (Bankr. S.D.N.Y. 2000) and citing cases).
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The Receiver has provided evidence that Defendant, like other participants, was required to
execute a “Personal Disclaimer/Waiver” as a condition of participating in any business venture with
CCG. The disclaimer provided, among other things, that the participant would not disclose the
terms, conditions, or particulars of any business dealings with CCG. The disclaimer also required
the participant to declare that he or she was “not in any official capacity relative to my involvement
in business with [CCG] a member, agent, informant, or employee of any kind of investigative, law
enforcement, media, news, postal service or other government agencies within any country, nor am
I acting as proxy to any person or entity serving as a member, agent, informant, or employee of any
kind of investigative, law enforcement, media, news, postal service or other government agencies
within any country.” Personal Disclaimer/Waiver ¶ 6, ECF No. 26-2. In addition, the mortgage
satisfaction agreement required Defendant “to maintain complete and total confidentiality” and
provided that breach of the agreement would subject Defendant to a $1,000,000 penalty. According
to Plaintiff, the return on investment for Defendant during an approximately seventeen month period
was over 800 percent. The court finds by clear and convincing evidence that Defendant was on
notice of circumstances that would arouse the suspicion of an ordinarily prudent person. Plaintiff’s
motion for summary judgment is granted as to this issue.
B.
Unjust Enrichment
Plaintiff alternatively contends that Defendant was unjustly enriched at the expense of the
participants for whose benefit the receivership was established. “‘A party may be unjustly enriched
when it has and retains benefits or money which in justice and equity belong to another.” Inglese
v. Beal, 742 S.E.2d 687, 690-91 (S.C. Ct. App. 2013) (quoting Dema v. Tenet Physician
Servs.–Hilton Head, Inc., 678 S.E.2d 430, 434 (S.C. 2009)). The remedy for unjust enrichment is
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restitution. Id. at 691 (citing Sauner v. Pub. Serv. Auth., 581 S.E.2d 161, 167 (2003)). To recover
restitution in the context of unjust enrichment, the plaintiff must show: (1) he conferred a
non-gratuitous benefit on the defendant; (2) the defendant realized some value from the benefit; and
(3) it would be inequitable for the defendant to retain the benefit without paying the plaintiff for its
value. Id. (citing Campbell v. Robinson, 374 S.E.2d 507, 509 (S.C. Ct. App.1988)).
In this case, Defendant obtained a benefit by receiving payoffs totaling $101,234.19 after
depositing $11,600.00 into the Ponzi scheme, a benefit that was possible because of the monies
contributed by the participants represented by Plaintiff. Further, Defendant realized value from the
benefit because the mortgage on her residence was paid in full, her student loans were paid in full,
and she received monthly residual checks from April 2006 to April 2007.
The court finds that it would be inequitable for Defendant to “enjoy an advantage over later
investors sucked into the Ponzi scheme who were not so lucky.” See In re United Energy Corp., 944
F.2d 589, 596 (9th Cir. 1991). Plaintiff’s motion for summary judgment is granted as to this issue.
IV. CONCLUSION
For the reasons stated, Plaintiff’s motion for summary judgment is granted. The Clerk of
Court shall enter judgment against Defendant in the amount of $101,234.19, with interest at the legal
rate.
IT IS SO ORDERED.
/s/ Margaret B. Seymour
Senior United States District Judge
Columbia, South Carolina
December 4, 2013
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