Wing v. Layton et al
Filing
206
MEMORANDUM OPINION AND ORDER granting 150 Motion to Determine Daubert Issues; denying 152 Motion to Exclude; granting 155 Motion to Determine Daubert Issues; granting 156 Motion for Summary Judgment ; granting 170 Motion to Exclude; granting 188 Motion to Strike. Signed by Judge Dee Benson on 7/12/13. (jlw)
IN THE UNITED STATES COURT FOR THE DISTRICT OF UTAH
CENTRAL DIVISION
ROBERT WING, as Receiver for VesCor
Capital Corp., et al.,
Plaintiff,
MEMORANDUM OPINION AND
ORDER GRANTING PLAINTIFF’S
MOTION FOR
SUMMARY JUDGMENT
vs.
CHRISTOPHER D. LAYTON, et al.,
Case No. 2:08-CV-708
Defendants.
Judge Dee Benson
The plaintiff, Robert G. Wing, as Receiver for VesCor Capital Corp. and numerous other
related entities controlled by Val Southwick and VesCor,1 moves this court for summary
judgment, arguing that the undisputed facts show that payments made by VesCor to Christopher
D. Layton and Layton’s affiliated entities were fraudulent transfers. (Dkt. No. 156.) The
defendants, Christopher D. Layton, ATG Capital, LLC, Cromwell Property Management, LLC,
Icarus Holdings, Inc., Moriarty, LLC, Siena Office Park 2, LLC, Siena Office Park 3, LLC,
Siena Vista, LLC, SOP 871, LLC, SOP Equity, LLC (collectively “Layton”) opposed the
1
Mr. Southwick operated over 150 corporations and limited liability companies. For
simplicity, the court refers to these corporations collectively as VesCor.
1
motion. (Dkt. No. 172.) At oral argument on the motion, M. David Eckersley appeared on
behalf of the Receiver and Matthew L. Lalli appeared on behalf of the defendants. After
considering the parties’ written and oral arguments, the court requested a status conference on
the matter at which time the court asked additional questions and issued a preliminary ruling
from the bench, granting the Receiver’s motion for summary judgment. This Memorandum
Opinion and Order memorializes and explains in greater detail the court’s oral ruling.2
FACTUAL BACKGROUND
This action is one of many arising out of the collapse of an alleged Ponzi scheme
orchestrated and run by Val Edmund Southwick through a complex web of over 150
corporations and limited liability companies known collectively as VesCor.
VesCor described its business as financing, ownership, development, management and
acquisition of commercial and residential real estate in the Western United States. (Dkt. No.
157-1, Amended Expert Report & Disclosure of Gil Miller at 4.) Investors were solicited by
managers of the company itself as well as various outside advisors that were paid commissions
and/or referral fees for attracting new investors. Investors were typically promised safe
investments secured by valid liens on real property. In many cases, VesCor represented that its
total debt was no more than 50% or 65% of the fair market value of its assets. (Id.) Investors
2
The parties filed several additional motions related to the underlying motion for
summary judgment. These include: Receiver’s Motion to Determine Daubert Issues and Request
for Hearing re: Steven G. Black (Dkt. No. 150); Defendants’ Motion to Exclude Unreliable
Opinion Testimony of Gil A. Miller (Dkt. No. 152); Receiver’s Motion to Determine Daubert
Issues and Request for Hearing re: Melinda Harper (Dkt. No. 155); Defendants’ Motion to
Exclude Exhibit X to Plaintiff’s Memorandum in Support of Motion for Summary Judgment
(Dkt. No. 170); and Receiver’s Motion to Strike the Declaration of Stephen Johnson (Dkt. No.
188.) These motions will be addressed, where relevant, within this Opinion.
2
were promised, and in the beginning were often paid, annual interest rates of between 10% and
24% per year, with favorable loan discounts often resulting in significantly higher rates of return.
(Id.)
However, in early 2006, VesCor’s obligations to investors became too great to pay and
VesCor stopped making regular payments of principal and interest to investors. At that time,
VesCor began to sell or attempt to sell properties to continue to pay and repay some investors
and entered into negotiations with other investors. Even so, Southwick maintained that the fair
market value of VesCor’s projects could repay all investors in full. (Id.)
On February 6, 2008, the United States Securities and Exchange Commission filed suit
against Southwick and VesCor, alleging violations of the anti-fraud provisions of the Securities
Act of 1933 and the Securities and Exchange Act of 1934. On March 31, 2008, in a Utah state
court criminal case, Southwick pleaded guilty to nine felony counts of securities fraud. He later
was sentenced to serve the maximum time allowed, nine consecutive 1 to 15 year prison terms.
On May 5, 2008, this court appointed Robert G. Wing as Receiver for VesCor.
Since then, the Receiver, or others on his behalf, has met with and interviewed various VesCor
employees, financial advisors, Southwick, investors and others. The Receiver has also obtained
the services of a forensic accountant, Mr. Gil A. Miller, who reviewed and analyzed various
financial records, tax returns, investor reports and other contemporaneous VesCor records.
After compiling and reviewing the financial and business records for VesCor, the
Receiver asserts that VesCor was in fact a Ponzi scheme. To support this allegation, the
Receiver has released several declarations of his expert, Mr. Miller, the forensic accountant. Mr.
3
Miller’s professional opinion is that VesCor “exhibited characteristics of a Ponzi scheme”
beginning as early as 2000. According to Mr. Miller, although VesCor represented that it was in
the business of real estate development and lending, it never exhibited a successful underlying
business, as demonstrated by continual losses and negative operating case flow. (Dkt. No. 1571, Amended Miller Report at 25.) Moreover, VesCor mischaracterized the nature of investment
opportunities, mischaracterized the risks associated with the investments, and misstated the
security collateralizing the investments. (Id.) According to Mr. Miller, VesCor actively
concealed its losses by paying earlier investors with money raised from later investors. (Id.)
Additionally, the Receiver obtained testimony from former VesCor employees to
establish that the VesCor entities were all part of Southwick’s scheme. For example, a controller
for VesCor, Monique Fisher, testified that VesCor commingled investor money. According to
Ms. Fisher, when there was not enough money in one account to satisfy VesCor’s obligations,
Mr. Southwick would transfer money between accounts in order to meet VesCor’s obligations.
(Dkt. No. 157-13, Monique Fisher Dep. at 15.) In addition, Ms. Fisher testified that new
investor money was routinely used to pay old investors.
Another VesCor controller, Jeff Galyean, stated:
Incoming investments would generally be deposited into one account, then transferred to
the VesCor Capital Corp. bank account. The money in the bank accounts I oversaw was
treated as one pool of cash when expenses came due. Southwick approved expenses, and
the accounting department drew cash from the various accounts in order to meet
VesCor’s obligations. If the entity that owed the obligation did not have enough cash in
its account, money would be transferred from the accounts of other entities with cash to
the entity owing the obligation.
(Dkt. No. 157-14, Jeff Galyean Decla. ¶ 13.)
4
Defendant Christopher Layton and Layton-Related Entities
On September 19, 2008, the Receiver filed the instant case against Christopher D. Layton
and several Layton-related entities, seeking the return of funds Layton received from VesCor
because they were fraudulent transfers. (Complaint ¶¶ 54-59.)
Layton was a Principal of VesCor and began working with Southwick and VesCor in
April 2001. Layton came to VesCor with a prestigious education and employment experience.
He received a Masters in Business Administration from Yale University after matriculating
graduate studies at the London School of Economics and graduating from Brigham Young
University. Layton’s prior employment included Barclays Capital, Seneca Financial and the
Nash Corporation in their respective investment banking and mergers and acquisitions divisions.
According to Layton’s resume and various VesCor records, he was a Principal of the
VesCor Capital group beginning in 2001. (Defs.’ Opp’n Mem. at 56, Southwick Decl. ¶ 13.) He
was also “a member of [VesCor’s] Investment Committee . . . , active in transaction sourcing and
structuring, capital sourcing, mergers and acquisitions, strategy and portfolio management
oversight.” (Pl.’s Mem. in Supp., Ex. H, 12/29/2004 email.) Layton’s responsibilities included
raising capital for VesCor through direct solicitation of investments and issuance of securities to
private investors. According to Layton’s resume, he was a “[l]iason with potential and existing
investors in addition to nurturing commercial and private industry relationships; interface
regularly with legal counsel and investment advisors.” (Dkt. No. 157-1, Amended Miller Report
at 5.)3
3
Layton filed a Motion to Strike Exhibit X to Plaintiff’s Memorandum in Support of
Motion for Summary Judgment. (Dkt. No. 171.) Exhibit X is an unauthenticated copy of Eva
5
Layton was also the Managing Director of a group of companies denominated VesCorp
Capital, LLC (with a “p”, as opposed to VesCor) that began operating around June 2003.
According to Layton, there came a time when Southwick was planning to leave VesCor to serve
a mission for the Church of Jesus Christ of Latter Day Saints. Southwick wanted Layton to take
over VesCor, and the VesCorp companies were established by Southwick and Layton as vehicles
for transferring VesCor assets to Layton. According to Mr. Miller, VesCorp and VesCor
operated as a single economic unit. (Dkt. No. 157-1, Amended Miller Report at 32.) Like
VesCor, VesCorp exhibited the characteristics of a Ponzi scheme from its inception. (Id. at 35.)
VesCorp raised $28 million from investors which did not go to any business activity, but was
used to pay earlier investors in VesCorp or VesCor. (Id. at 32.) VesCorp’s tax returns for 2004
and 2005 report only losses and book value insolvency. (Id. at 34.) According to Mr. Miller,
VesCorp Capital could not meet its obligations and could not generate a profit because it did not
conduct any business designed to make a profit. It took money from investors, giving them
notes in return, and that money was then swallowed up into the VesCor commingled accounts.
(Dkt. No. 157-1, Amended Miller Report at 32-35.)
Layton was paid a six-figure annual salary for his work with VesCor. (Id., Ex. 2.) In
addition, Layton and/or the entities represented to be affiliated with Layton, including ATG
M. Lee’s investor claim form. The claim form was offered by the Receiver to show Ms. Lee’s
contact with Layton, the amount of her investment, and the percentage of return she was
promised. (Pl.’s Mem. in Supp. of Motion for SJ, at 12, ¶ 52.) Layton asserts that the claim
form is inadmissible hearsay and should not be considered with the motion for summary
judgment. (Defs.’ Mem. in Supp. of Mot. to Strike Exhibit X, at 2-3.) The court agrees with
Layton that the claim form submitted as Exhibit X is hearsay and is not the type of statement to
which Rule 803(15) applies. Accordingly, the court GRANTS Layton’s motion to strike the
claim form and all references thereto.
6
Capital, LLC, Cromwell Property Management, LLC, Icarus Holdings, Inc., Moriarty, LLC,
Siena Office Park 2, Siena Office Park 3, SOP 871, and SOP Equity, LLC (collectively the
“Layton Affiliated Entities”), also received various bonuses, commissions, and equity interests
for work on certain VesCor projects.4 In fact, according to the Receiver, most of the money
Layton received from VesCor came from “equity participation” in VesCor’s projects, and the
Receiver alleges that Layton misused his authority as a Principal by diluting company assets
through restructuring entities for his own benefit.
For example, Layton was the manager of the KOJO SeaCliff self-storage project in
Huntington Beach, California (“KOJO”). According to the available records, KOJO was funded
with VesCor investor money. KOJO did not have its own bank account for the first two years of
its existence, until May 2003, and all of its operating costs prior to that time were paid directly
by VesCor. (Dkt. No. 157-71, Miller Report in Response to Harper Report at 15.) Although
Layton managed the project, it was controlled by Southwick, and Southwick signed the income
tax returns. VesCor used the KOJO project to attract new investments, which investments were
simply used to pay the returns of earlier investors. (Dkt. No. 157-1, Amended Miller Report at
10.) When the KOJO SeaCliff project was sold in 2006, Layton received a bonus payment of
$2,387,484.97.
Mr. Layton was also involved with the development of Siena Office Park in Henderson,
Nevada. Siena Office Park was originally purchased in 2001 with money from various VesCor
4
The Receiver, through his expert Mr. Miller, listed the various payments, equity and
disbursements given to Layton and Layton’s affiliated entities in Exhibit 2 to the Amended
Expert Report and Disclosure of Gil A. Miller. (Dkt. No. 157, Ex. 2.). According to this
document, the total disbursements to Layton amount to $14,972,697.05. (Id. at 1.)
7
investors. It was controlled by Southwick and continually funded by VesCor investor funds.
Through the creation of various companies as well as subsequent transfers and assignments,
VesCor ultimately assigned title to three commercial office buildings at Siena Office Park to
Layton. Although two of the buildings have since been sold, Layton continues to claim
ownership of Siena Office Park 871, which has an estimated equity value of $3,650,000. (Dkt.
No. 157-71, Exhibit DDD, Miller Report in Response to Harper Report at 18-19; Dkt. No. 157-1,
Amended Miller Report at 6.)
Layton also acted as the real estate broker for VesCor’s seller-financed purchase of over
5,600 acres of industrial land at Apex Industrial Park, also located in Nevada. Layton was paid
nearly $3 million in commissions for brokering this deal, which was ultimately foreclosed on by
the seller. (Dkt. No. 157-1, Amended Miller Report at 19.)
Ultimately, however, Layton’s experience with Southwick and VesCor came to an
unpleasant end. In a September 2007 email from Layton to Southwick he states: “In absolute
clarity, you cannot say that my silence has not been of enormous value to you. My actions have
served your interests. As I promised, I did not allow you to be left to the wolves or the rats or
the vultures.” Layton continues:
I have tried to share with you the deep sorrow and pain. My family has literally gone
through hell because of this. I look at my little girls and the wonderful souls that they are
and I am ill to think what has become of the young idealist that I once was. I am
ashamed. When you met Jae and I, we were on top of the world; a young Yale graduate,
with a few years on Wall Street and a young wife planning a family. It is now a
nightmare. Personal relationships are in taters [sic] and these are the only things that
matter; relationships are all that can transcend this realm. In a moment of clarity, I
cannot believe I have fallen so far. I truly regret my weakness and am ashamed of it. I
can hardly recognize my spirit.
8
(Pl.’s Mem. in Supp. at 47; Dkt. No. 157-70, Ex. CCC.)
Via this lawsuit, and pursuant to the Uniform Fraudulent Transfer Act (UFTA), the
Receiver is seeking return of the funds VesCor transferred to Layton.5 The Receiver alleges that
VesCor was a Ponzi scheme and therefore the funds Layton received from VesCor were
fraudulent transfers. On September 7, 2012, the Receiver filed the motion for summary
judgment that is now before the court.
DISCUSSION
Summary judgment is appropriate “if the pleadings, the discovery and disclosure
materials on file and any affidavits show that there is no genuine issue as to any material fact and
that the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56( c); see also Utah R.
Civ. P. 56 (c). “A ‘material fact’ is one ‘that might affect the outcome of the suit under the
governing law, and a ‘genuine’ issue is one for which ‘the evidence is such that a reasonable jury
could return a verdict for the nonmoving party.’” Pelt v. Utah, 539 F.3d 1271, 1280 (10th Cir.
2008) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)) (internal citation
omitted).
The Receiver argues that he is entitled as a matter of law to a judgment that the funds
transferred to Layton and the Layton-related entities were fraudulent transfers. More
specifically, the Receiver asserts that he has met his summary judgment burden because he has
provided evidence sufficient to show that VesCor was a Ponzi scheme and therefore, applying
5
Originally, the Receiver sought to clawback all of the funds transferred from VesCor to
Layton. However, at the March 7, 2013 hearing, the Receiver agreed that it would forego the
return of Layton’s annual salary, and would pursue only those transfers Layton received in
addition to his annual salary. (Tr. of March 7, 2013 hearing at 5.)
9
the Ponzi scheme presumption – which this court has adopted in the larger receivership case –
the transfers to Layton are presumed to be fraudulent transfers (i.e., made “with actual intent to
hinder, delay or defraud creditors”). In opposition, Layton argues summary judgment is
inappropriate because there are disputed issues of fact concerning (1) whether KOJO and Siena
Office Park were part of the larger VesCor Ponzi scheme, and (2) whether Layton received the
transfers for reasonably equivalent value and in good faith.
1.
The Ponzi Scheme Presumption Applies
The Receiver’s theory of fraudulent transfer relies on the Ponzi scheme doctrine to
establish that the funds VesCor paid to Layton were fraudulent transfers. See Scholes v.
Lehmann, 56 F.3d 750 (7th Cir. 1995). “Under the [Uniform Fraudulent Transfer Act], a
debtor’s actual intent to hinder, delay, or defraud is conclusively established by proving that the
debtor operated as a Ponzi scheme.” Warfield v. Carnie, No. 3:04-cv-0633, 2007 WL 1112591
*2 (N.D. Tex. Apr. 13, 2007); Donell v. Kowell, 533 F.3d 762, 770 (9th Cir. 2008) (“The mere
existence of a Ponzi scheme is sufficient to establish actual intent to defraud.”) (quoting In re
AFI Holding, Inc., 525 F.3d 700, 703 (9th Cir. 2008)); In re Indep. Clearing House, 77 B.R. 843,
860 (D. Utah 1987) (“One can infer an intent to defraud future undertakers from the mere fact
that a debtor was running a Ponzi scheme. Indeed, no other reasonable inference is possible.”).
As explained in several prior opinions of this court, for purposes of this equity
receivership action, the court has adopted the approach set forth in Scholes v. Lehman, 56 F.3d
750 (7th Cir. 1995). See, e.g., Wing v. Williams, 2011 WL 891121 (D. Utah March 11, 2011);
Wing v. Dockstader, 2010 WL 5020959 (D. Utah Dec. 3, 2010); Wing v. Holder, 2010 WL
10
5021087 (D. Utah Dec. 3, 2010); Wing v. Hammons, 2009 WL 1362389 (D. Utah May 14,
2009); Wing v. Apex Holding Co., 2009 WL 2843343 (D. Utah Aug. 27, 2009). The theory
under Scholes is broad and provides generally that the receiver for corporations that were
operated by a Ponzi scheme principal has standing to assert fraudulent conveyance claims to
recover amounts transferred by the corporations during the course of the Ponzi scheme. Id.
To invoke the Ponzi scheme doctrine, the Receiver has endeavored to prove that VesCor
as a whole operated as a Ponzi scheme. As evidence, the Receiver relies on Mr. Gil A. Miller’s
forensic accounting investigation of VesCor’s financial and business records, and testimony of
VesCor employees and insiders. The sum of this information caused the Receiver’s expert, Mr.
Miller, to conclude that beginning in 2000 VesCor “exhibited characteristics of a Ponzi scheme.”
(Third Decl. of Gil A. Miller ¶8.)6
The Receiver’s evidence on the issue of whether VesCor was a Ponzi scheme has not
been rebutted by any credible evidence presented by Layton. Layton’s accounting expert, Ms.
Harper, expressly acknowledges that she did not conduct a review of the financial and
accounting records of VesCor. She further admits she was not asked to opine about whether
VesCor or VesCorp operated as a Ponzi scheme, and she does not refute Mr. Miller’s analysis.
In fact, the only declaration suggesting VesCor was not a Ponzi scheme comes from Southwick
6
Layton filed a “Motion to Exclude Unreliable Opinion Testimony of Gil A. Miller.”
(Dkt. No. 153.) The court considered, addressed, and denied a nearly identical motion in a
separate VesCor receivership case, Wing v. Fulbright & Jaworski, 2:09-CV-200 (D. Utah). For
the same reasons as the court set forth in that case (which involved the same counsel as this
case), the court denies Layton’s motion. See Wing v. Fullbright & Jaworski, Case No. 2:09-CV200, Dkt. No. 105, Tr. of January 4, 2011 hearing at 86-90 (providing detailed explanation for
denying defendant’s motion to exclude the expert opinions and expert report of Gil A. Miller).
11
himself. This does not raise a genuine issue of fact, and the court finds that the Receiver’s
evidence has been no more controverted in this case than it has in any of the other ancillary cases
along the way. See Wing v. Williams, 2011 WL 891121, at *4 (D. Utah March 11, 2011); Wing
v. Dockstader, 2010 WL 5020959, at *4 (D. Utah Dec. 3, 2010), aff’d Wing v. Dockstader, 2012
WL 2020666 (10th Cir. 2012).
Not surprisingly, rather than attempt to rebut the Receiver’s evidence that VesCor was a
Ponzi scheme, Layton argues that even if VesCor was a Ponzi scheme, the two projects with
which he was most involved – KOJO and Siena Office Park – were both profitable and
independent and were outside of any Ponzi scheme that might have existed. (Defs.’ Opp’n at
123.) The court finds that neither the facts nor the law support Layton’s argument on this point.7
First, the fact that the KOJO and Siena Office Park projects might have been profitable –
which the Receiver strongly disputes – misses the point. The Receiver appears to not dispute
that development activity occurred within the VesCor enterprise. (Pl.’s Reply at 6.) Even so,
seemingly legitimate business activity does not insulate companies from a finding that they were
operated as part of a Ponzi scheme. As the Receiver points out, ponzi schemes sometimes use
7
Layton provided the expert report of accountant Melinda Harper in an attempt to show
that KOJO and Siena Office Park were not part of the VesCor Ponzi scheme. The Receiver then
filed a “Motion to Exclude Testimony and Opinions of Melinda Harper,” asserting that Ms.
Harper is not qualified to render the opinions she offers and that her testimony is not based on
reliable data or methods, and therefore her testimony should be excluded under Fed. R. Evid.
702. (Dkt. No. 158.) The court agrees. Ms. Harper admits she did not conduct a review of the
financial and accounting records of VesCor, KOJO, or Siena Office Park, and she used estimated
operating expenses, despite the availability of actual operating costs in VesCor’s records. In
sum, the court finds Ms. Harper’s opinion and testimony about the independence and
profitability of Siena Office Park and KOJO is based on incomplete data and is, therefore,
neither helpful nor reliable. Accordingly, the Receiver’s motion is GRANTED.
12
legitimate operations to attract investors, but this does not insulate those operations from the
taint of the Ponzi scheme. (Pl.’s Mem. in Supp. at 24.) See, e.g., Jobin v. McKay, 84 F.3d 1330,
1332 (10th Cir. 1996) (Ponzi scheme existed where its perpetrator used the company’s legitimate
operations as a computer sales and leasing company as a front); Sender v. Simon, 84 F.3d 1299,
1302 (10th Cir. 1996) (Ponzi scheme existed in partnership hedge fund where “trading resulted in
net profits in a few years,” though “in most years the Hedged Investments operation realized net
trading losses”). In Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995), Judge Posner analyzed and
rejected a similar argument stating: “It is no answer that some or for that matter all of [phillip’s]
profit may have come from ‘legitimate’ trades made by the corporations. They were not
legitimate. The money used for the trades came from investors gulled by fraudulent
representations.” Id. at 757.
This leads to the related and perhaps more important point: the KOJO and Siena projects
– regardless of their ultimate profitability – were not independent of the larger VesCor scheme.8
The money that funded both KOJO and Siena Office Park came from VesCor’s co-mingled
8
On October 22, 2012, Layton filed the Declaration of Stephen Johnson. (Dkt. No. 173.)
The Johnson Declaration contains, among other things, Mr. Johnson’s opinions concerning the
legal separateness and independence of VesCor companies (particularly KOJO and Siena Office
Park) as well as his opinion that the KOJO and Siena Office Park operations were not
characteristic of a Ponzi scheme. (Dkt. No. 173, Johnson Decla. at 3-5.) The Receiver moved to
strike the Declaration of Stephen Johnson, claiming the declaration was both untimely and an
insufficient expert report. (Dkt. No. 188.) Having reviewed the relevant memoranda, the court
agrees with the Receiver. The court finds the Johnson Declaration to be an untimely expert
report, filed in violation of Rule 26(a), without substantial justification. Additionally, the court
concludes that Mr. Johnson has failed to demonstrate the credentials necessary to opine as to
whether VesCor was a Ponzi scheme, and Mr. Johnson’s declaration contains additional
improper legal conclusions relating to corporate ownership and tax obligations. In sum, the
court agrees with and adopts the reasoning set forth in the Receiver’s Reply Memorandum (Dkt.
No. 193), and GRANTS the Receiver’s Motion to Strike the Declaration of Stephen Johnson.
13
funds. As Mr. Miller opined in his expert report, KOJO and Siena were both controlled by
Southwick and their assets were commingled with the other VesCor companies. Moreover, in
addition to Mr. Miller’s review, an independent audit performed in 2005 by Tanner, L.C., a local
public accounting firm, confirmed that KOJO and Siena were “under common control with
closely related and economically interdependent operations” with other VesCor companies.
(Pl.’s Mem. in Supp., Ex. EE, Tanner Audit.) Similarly, the testimony of both Monique Fisher
and Jeff Galyean provide additional evidence that Southwick pooled all of the money, and the
funds in various bank accounts were treated as a single source of money when expenses came
due. (Pl.’s Reply at 14.)
Based on the foregoing, the court finds there is no genuine issue of fact whether VesCor
– which included KOJO and Siena Office Park – operated as a Ponzi scheme. Applying the
Ponzi scheme doctrine, the Receiver’s unchallenged evidence that VesCor operated as a Ponzi
scheme adequately establishes that the funds Layton received from VesCor were fraudulent
transfers within the meaning of the Uniform Fraudulent Transfer Act. See Wing v. Holder, 2010
WL 5021087 at *2; see also Warfield v. Byron, 436 F.3d 551, 558 (5th Cir. 2006) (citing Scholes
v. Lehmann, 56 F.3d 750, 757 (7th Cir. 1995)).
2.
Affirmative Defense to the Fraudulent Transfers
Having concluded that the Ponzi scheme presumption applies in this case, and therefore
the transfers to Layton are presumed to have been fraudulent, the court turns its attention to
whether Layton has an affirmative defense to the fraudulent transfers. The Uniform Fraudulent
Transfer Act provides an affirmative defense to an otherwise fraudulent transfer if the transferee
14
accepted the transfer in good faith and for a reasonably equivalent value. Utah Code Ann. § 256-9(1). In other words, Layton must show (a) that he received funds from VesCor for
reasonably equivalent value, and (b) that he received the VesCor funds in good faith.
(a)
Reasonably Equivalent Value
According to the Receiver, in addition to Layton’s annual salary, VesCor gave Layton
bonuses, commissions and equity interest in property in an amount totaling approximately $12
million dollars. (Dkt. No. 157-72, Miller in Response to Harper Report, Ex. DDD2 at 19 (setting
forth revised calculation of $12,753,039.61 in net disbursements to Layton – $3,650,000 of
which is an estimate for equity in Siena Office Park 871).) The Receiver asserts that Layton
must return these funds and/or property interests because Layton cannot demonstrate that he
received these additional funds in exchange for “reasonably equivalent value.”9
Layton, on the other hand, argues that he received the bonuses, commissions and/or
equity interests either pursuant to various transaction contracts or agreements with VesCor, or as
a result of “sweat equity” he invested in the projects. According to Layton, his specialized skills
and hard work contributed significantly to the success of the VesCor projects with which he was
involved, and therefore he earned these additional funds and should be entitled to keep the
bonuses, commissions and equity interests he received. (Defs.’ Mem. in Opp’n to S.J. at 11113.)
In support of this claim, Layton relies primarily on the expert report of Mr. Steven G.
9
As explained earlier, at the March 7, 2013 hearing, the Receiver stated that he was
willing to “waive the return of the salary payments made to Mr. Layton,” and is seeking only the
return of financial transfers Layton received from VesCor in excess of his annual salary. (Tr. of
March 7, 2013 hearing at 7.)
15
Black.10 Mr. Black, a real estate lawyer and developer, opines generally that the additional
bonuses, commissions and equity interests Layton received from VesCor were “reasonable” and
consistent with industry practice. (Defs.’ Opp’n to Mot. to Exclude Testimony and Opinions of
Steven G. Black at 3.) Using the KOJO project as an example, Mr. Black opines that Layton
was entitled to a $2.4 million dollar bonus when KOJO was sold, either pursuant to the terms of
an agreement (in which Layton acquired 51% of the equity in KOJO) or as a result of the “sweat
equity” Layton invested in the project.
However, in reaching this conclusion, Mr. Black acknowledged that he did not conduct
any kind of accounting or analysis to determine whether KOJO, in fact, sold for a profit. In the
absence of any such analysis, the court finds Mr. Black had no basis for concluding Layton was
entitled to an equity distribution.11 Additionally, although Mr. Black asserts that regardless of
KOJO’s ultimate profitability Layton was entitled to a bonus because of the “sweat equity” he
invested in the project, Mr. Black offers no guidance or analysis whatsoever as to the value of
“sweat equity.” And, Mr. Black fails to explain how “sweat equity” differs from the work
Layton was hired to perform and for which he earned his annual, six-figure salary.
Similarly, Mr. Black opines that the additional compensation and property Layton
received for his involvement in Siena Office Park was “reasonable.” However, once again, Mr.
10
To the extent Layton also relies on the expert opinion of Melinda M. Harper, the court
has already considered, addressed and granted the Receiver’s Motion to Exclude Testimony and
Opinions of Melinda Harper. See supra n.7.
11
Moreover, the court has already concluded that each of these projects were part of the
larger VesCor entity, and it is undisputed that VesCor generated net operating losses in each year
of its existence. Accordingly, there was no “equity” from which Layton could have received an
equity distribution.
16
Black failed to review or consider the relevant and available documents detailing the manner in
which Layton acquired his interests in Siena. Instead, Mr. Black appears to have relied
exclusively on Layton’s explanation of events. (See Pl.’s Mem. In Supp. Of Mot. To Exclude
Opinions and Testimony of Steven G. Black at 7-9.) Moreover, Mr. Black purports that this
additional compensation was “reasonable” without ever identifying or setting forth the
compensation Layton actually received.
In sum, having reviewed Mr. Black’s expert report, the court finds Mr. Black’s opinions
to be unsupported, unreliable, and therefore unhelpful. As the Receiver explains in his Motion to
Exclude the Testimony of Steven G. Black (Dkt. No. 150), it is not enough for a purported expert
to simply assert that his opinion is based on his “experience.” Rather, “an expert who is relying
‘solely . . . on experience must explain how that experience leads to the conclusion reached, why
the experience is a sufficient basis for the opinion, and how that experience is reliably applied to
the facts.’” Lippe v. Bairnco Corp., 288 B.R. 678, 686 (S.D.N.Y. 2008) (quoting Fed. R. Evid.
702 advisory committee’s note).
In this case, Mr. Black has failed to provide any basis for determining how his experience
purports to provide a “substantial foundation” for the opinion he expresses. See Lifewise Master
Funding v. Telebank, 374 F.3d 917, 928 (10th Cir. 2004). Mr. Black’s report lacks any analysis
of Layton’s actual compensation and it provides no basis for calculating what “reasonable
compensation” would have been for Layton’s efforts. Mr. Black’s opinions are unsupported by
sufficient facts or data about the VesCor projects he reviewed, and he has failed to explain the
methodology or principles he used to form his opinions. Instead, Mr. Black appears to rely
solely on his experience in forming his opinions, yet he does not explain how his experience led
17
him to his conclusions. Because Mr. Black has not gathered sufficient data or employed proper
methodology, the court finds his opinions to be deficient and unreliable. Accordingly, the court
grants the receiver’s motion to exclude Mr. Black’s testimony. (Dkt. No. 150.)
In light of the foregoing, the court concludes that Layton has failed to demonstrate that he
provided reasonably equivalent value for the additional bonuses, commissions and/or equity
interests he received. In so concluding, the court is simply continuing to follow the Scholes
model as it has in prior VesCor receivership cases. For example, in Wing v. Holder, this court
concluded that the Holder Family Trust, one of the early investors in VesCor, could not as a
matter of law demonstrate reasonably equivalent value for monetary returns it received in excess
of its original investment. The court stated: “Payouts of returns on investments in a Ponzi
scheme are not profits from an actual business venture. Instead, ‘they are payouts that deplete
the assets of the scheme operator for the purpose of creating the appearance of a profitable
business venture.” Wing v. Holder, 2010 WL 5021087, at *2-3 (D. Utah Dec. 3, 2010) (quoting
Donnell v. Kowell, 533 F.3d 762, 777 (9th Cir. 2008)). So, although the Holder trust “was putting
real money into [VesCor] and was getting what looked like real profits in return, in fact [it] never
received ‘reasonably equivalent value ‘ for its investment, just cash that was moved around in an
elaborate shell game.” Id.
This court reached a similar conclusion with respect to commissioned sales agents and/or
individuals who received referral fees for bringing new investors to VesCor. See Holder, 2010
WL 5021087 at *2 (“Those who receive money for bringing new investors to a scheme have not
provided reasonably equivalent value within the meaning of the Uniform Fraudulent Transfer
Act”); Wing v. Dockstader, 2010 WL 5020959, at *6 (D. Utah Dec. 3, 2010) (providing that no
18
value is exchanged for efforts which merely serve to further the fraud). In this context, the court
in Holder explained that the defendant sales agent did not provide reasonably equivalent value
for the referral fees he received, but rather “received money for essentially prolonging the fraud
of and on the VesCor entities.” Id. at *2. The court continued: “It takes cheek to contend that in
exchange for the [sales commissions] he received, the [VesCor] scheme benefitted from his
efforts to extend the fraud by securing new investments.” Id. (quoting Warfield v. Byron, 436
F.3d 551, 560 (5th Cir. 2006)); see also Dockstader, 2010 WL 5020959, at *7 (concluding
defendant could not benefit from any agreement he had with VesCor for his contribution in
keeping VesCor’s fraudulent schemes afloat).
Given the facts of this case, and in light of this court’s rulings in other VesCor
Receivership cases, the court agrees with the Receiver’s assertion that Layton is at least as
culpable as VesCor’s winning investors and commissioned sales agents, all of whom have been
required to return transfers they received to the receivership estate. (Pl.’s Reply at 2.)
Therefore, the court concludes that Layton and has not brought forth sufficient evidence to
support a finding that the money and/or equity he received (beyond his annual salary) was for
“reasonably equivalent value.”
(b)
Good Faith
Because the Uniform Fraudulent Transfer Act requires a transferee to show both
reasonably equivalent value and good faith, the court’s prior conclusion – that Layton failed to
show reasonably equivalent value – obviates the need to address whether Layton received the
transfers in good faith. Even so, it is the opinion of this court that, given Layton’s extensive
responsibilities and involvement with Val Southwick and VesCor, no reasonable fact finder
19
could conclude that Layton was not, at the very least, on “inquiry notice,” and therefore he could
not have received the transfers in good faith.
The United States Court of Appeals for the Tenth Circuit has stated: “A transferee who
reasonably should have known of a debtor’s insolvency or of the fraudulent intent underlying the
transfer is not entitled to a finding of good faith.” Jobin v. McKay, 84 F.3d 1330, 1338 (10th Cir.
1996). The Tenth Circuit further explained that “good faith . . . should be measured
objectively,” and “if the circumstances would place a reasonable person on inquiry of a debtor’s
fraudulent purpose, and a diligent inquiry would have discovered the fraudulent purpose, then
the transfer is fraudulent.” Id.
Having reviewed the numerous exhibits filed by the parties in this case, the court finds
Layton’s involvement with Val Southwick and VesCor was substantial. In addition to being a
Principal of VesCor, Layton was also the owner and manager of VesCorp Capital Group, which
by itself raised millions of dollars that were used to repay its own investors, repay the older
investors of VesCor, and prop up other VesCor projects that were losing money. Layton was
also a manager of many VesCor companies and projects, and he signed documents
memorializing investments and purported security for investors. Accordingly, the court
concludes that at a minimum, given his responsibilities at VesCor, Layton reasonably should
have known of its insolvency and fraudulent nature.12 See Jobin, 84 F.3d at 1338 (“A transferee
12
Contrary to Layton’s argument, the court finds that Layton is not similarly situated to
the defendant in Wing v. Williams, 2011 WL 891121 (D. Utah March 11, 2011), especially in
light of the fact that the Receiver has agreed that he is not seeking the return of Layton’s annual
salary. In Williams, that was all the defendant wanted – to keep the hourly wages he earned
while working for VesCor. Id. Although the court recognizes that, like Williams, it might be
possible for Layton to persuade a fact-finder that there was a period of time during which he
20
who reasonably should have known of a debtor’s insolvency or of the fraudulent intent
underlying the transfer is not entitled to a finding of good faith.”).
CONCLUSION
Having determined that (1) Layton has failed to refute the Receiver’s evidence that
VesCor operated as a Ponzi scheme and (2) Layton has failed to satisfy his burden of showing
that he received funds from VesCor for reasonably equivalent value and in good faith, the court
concludes that the transfers from VesCor to Layton were fraudulent transfers within the Uniform
Fraudulent Transfer Act. Therefore, the Receiver’s Motion for Summary Judgment is
GRANTED.
However, the court also concludes that the precise amount of the fraudulent transfers
Layton must return to the Receiver (i.e., the amount of Layton’s liability) is a question requiring
further attention. Accordingly, the court hereby orders the Receiver to submit additional
briefing, within 30 days of the date of this Order, to identify the fraudulent transfers the Receiver
is seeking to recover and the precise amount Layton must return to the Receiver. In the event
these amounts are disputed, Layton shall have 30 days to file a response, and any reply by the
Receiver shall be due 10 days thereafter.
In addition, and as set forth in greater detail above, the court rules as follows: Layton’s
Motion to Exclude Unreliable Opinion Testimony of Gil A. Miller (Dkt. No. 152) is DENIED;
The Receiver’s Motion to Exclude Testimony and Opinions of Melinda Harper (Dkt. No. 155) is
was receiving a salary for doing the very kind of work in which he was trained, and that he was
earning his salary in good faith and for reasonably equivalent value, the Receiver’s decision to
not seek the return of Layton’s salary obviates the need for a trial on this issue.
21
GRANTED; The Receiver’s Motion to Strike the Declaration of Stephen Johnson (Dkt. No. 188)
is GRANTED; the Receiver’s Motion to Exclude Opinions and Testimony of Steven G. Black
(Dkt. No. 150) is GRANTED; and Layton’s Motion to Exclude Exhibit X to Receiver’s Motion
for Summary Judgment (Dkt. No 170) is GRANTED.
IT IS SO ORDERED.
DATED this 12th day of July, 2013.
_________________________________
Dee Benson
United States District Judge
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