Wing v. Buchanan et al
Filing
151
MEMORANDUM DECISION AND ORDER granting 133 Motion to Exclude the testimony of Kelly Johnson granting 134 Motion for Summary Judgment awarding the amount of $6,278,070.00 plus $2,033,147.00 in prejudgment interest, for a total of $8,311,217.00 against the defendants jointly and severally. Signed by Judge Dee Benson on 4/18/14. (jlw)
IN THE UNITED STATES COURT FOR THE DISTRICT OF UTAH
CENTRAL DIVISION
ROBERT G. WING, as Receiver for
VESCOR CAPITAL CORP., et al.,
Plaintiff,
MEMORANDUM DECISION
AND ORDER
vs.
BERNARD C. BUCHANAN, et al.,
Case No. 2:08-CV-803
Defendants.
Judge Dee Benson
Before the court are Plaintiff’s Second Motion for Summary Judgment and Plaintiff’s
Motion to Exclude the Testimony of Mr. Kelly Johnson.
PROCEDURAL HISTORY
On March 7, 2012, this court granted plaintiff’s (hereinafter “the Receiver”) first motion
for summary judgment. (Dkt. No. 34.) That ruling was appealed to the United States Court of
Appeals for the Tenth Circuit. The Tenth Circuit vacated the summary judgment order on statute
of limitations grounds, finding issues of fact regarding when the one-year tolling provision in the
fraudulent transfer statute of limitations began to run. Accordingly, the circuit court remanded
for further proceedings. (Dkt. No. 130.)
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In the present motion for summary judgment, plaintiff takes the position that the court
does not need to deal with the statute of limitations issue addressed by the Tenth Circuit because
plaintiff has chosen to disregard any reliance on the one-year discovery provision and proceed
solely pursuant to the four year statute of limitations under Utah Code Annotated § 25-6-10.
The Receiver asserts that having abandoned altogether the one-year discovery rule of the
Uniform Fraudulent Transfer Act, his Complaint is unquestionably timely and entitles the
Receiver to judgment against the defendants in an amount that is the lesser of (1) the defendants’
total “winnings” or (2) the amount received by the defendants during the four years prior to the
filing of the Complaint. Plaintiff primarily relies on a Ninth Circuit Court of Appeals case,
Donell v. Kowell, 533 F.3d 762 (9th Cir. 2008), in support of this new damages model. Plaintiff
further points out that defendant Buchanan previously agreed that the transfers made to
Buchanan during the four-year period between October 16, 2004 and October 16, 2008, the date
the Complaint was filed, equaled $14,135,106.00. Plaintiff also asserts as undisputed that
Buchanan received total “winnings” of $6,278,070 from VesCor, which is less than
$14,135,106.00. Plaintiff therefore seeks summary judgment in the amount of $6,278,070, plus
prejudgment interest, for a total of $8,311,217.00.
The other issues raised in this second motion for summary judgment are identical to those
raised in the previous motion for summary judgment. They include whether there are genuine
issues of material fact regarding whether the VesCor companies were operating as a Ponzi
scheme and whether it is appropriate to find joint and several liability against the various
Buchanan entities as a matter of law. Also, the Receiver has moved that Mr. Kelly Johnson’s
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proposed expert testimony be formally declared inadmissible under Rule 702 of the Federal
Rules of Evidence.
FACTUAL BACKGROUND
In 1991 Mr. Val Southwick began operating a real estate investment business that
eventually collapsed in 2006 when it became obvious the company could no longer make
payments to its investors. During its history, Southwick caused the formation of some 150
separate corporate entities to manage the affairs of his business. By the time of its and his
downfall in the fall of 2006, according to the conclusion reached by Mr. Gil Miller, the forensic
accounting expert retained by the Receiver to conduct an investigation of the business, the entire
empire, referred to collectively as VesCor, had liabilities of more than $255 million and assets of
only approximately $185 million. (Miller Decl. at 13.) It was also revealed, according to the
same report, that during its existence VesCor had demonstrated all of the essential characteristics
of a Ponzi scheme. It did not at any time generate sufficient income from its real estate
operations to cover operating expenses. It was consistently insolvent, with operating losses and
negative operating cash flows in every year of its existence. It remained in business only on the
basis of receiving new investor money in order to pay old investors and meet enough of its other
obligations to appear viable. Southwick paid himself a large salary – for example, more than $9
million in cash in the period from 2000 to 2006 – and spent some $1.8 million dollars of VesCor
money to purchase luxury automobiles. VesCor never generated profits. Working through his
ever-more-complex and growing network of companies, Southwick repeatedly lied to investors,
promising first-position trust deeds that were never recorded and consistently mischaracterizing
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the nature of, and risks associated with, the business. In financial statements he consistently
overstated investment returns and understated losses. According to Mr. Miller’s report, the
losses were never fully disclosed to investors, or anyone else. VesCor never at any time made
enough money to pay its expenses. Its only lifeline was money from new investors. Despite the
labyrinth of corporate entities he created, Southwick always operated VesCor as one big project,
completely under his control, with its assets commingled and with Southwick operating the
business as one big cash-based empire, freely using any available account that actually had
money to pay whatever debts or obligations were in another account or to a creditor, no matter
how unrelated.
After the collapse of VesCor in 2006, Val Southwick was charged with fraud by the State
of Utah and reached a plea deal. He was sentenced to serve the maximum term allowed, nine
consecutive 1 to 15 year prison terms. He is presently incarcerated at the Utah State Prison. On
February 6, 2008, the United States Securities and Exchange Commission filed a civil action
against Southwick and VesCor, Securities and Exchange Commission v. VesCor Capital Corp. et
al., Case No. 1:08-CV-12 DB, and requested that a receiver be appointed to marshal VesCor’s
assets for the purpose of returning as much restitution as possible to the approximately 800
investors who lost more than $140 million. The motion was granted by this court, pursuant to its
equity powers, in May 2008, and the Receiver, plaintiff in this action, was appointed. Thereafter,
the Receiver brought numerous fraudulent transfer lawsuits against various companies and
individuals, including the Buchanan defendants in this action, seeking the return of fraudulent
transfers pursuant to the Utah Uniform Fraudulent Transfer Act. The defendants in these various
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fraudulent transfer actions fall generally into two categories: (1) non-investors who received
transfers from VesCor, such as real estate companies and lawyers, and (2) investors who made
money from their VesCor investments, the so-called “winners.” The Buchanan defendants fall
into the latter category.
DISCUSSION
Statute of Limitations.
As mentioned above, on remand, the Receiver has elected to rely solely on the four-year
limitations period under the Utah Uniform Fraudulent Transfer Act. The Receiver claims this
eliminates any discussion of the one-year provision that allows a filing beyond four years if the
claimant can demonstrate that the action was commenced within one year after the allegedly
fraudulent transfer was or reasonably could have been discovered. Utah Code Ann. § 25-6-10.
Having elected to forgo any effort to qualify for the one-year protection, the Receiver
asserts that its damages should be calculated as the lesser of (1) the investor’s total winnings or
(2) the amounts transferred to the investor from VesCor in the four years immediately preceding
the date the Complaint was filed. Here, the Receiver claims Buchanan’s total winnings equal
approximately $6 million and that it is undisputed that Buchanan received approximately $14
million in the four years prior to the commencement of this action. Therefore, the Receiver
claims he is entitled to an award of $6,278,070.00, plus prejudgment interest. In Donnell v.
Kowell, the United States Court of Appeals for the Ninth Circuit applied this type of formula in
calculating damages. 533 F.3d 762 (9th Cir. 2008). There appears to be no decision addressing
the issue in the Tenth Circuit.
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This court agrees with the reasoning and holding in Kowell. Throughout the numerous
fraudulent transfer cases that have been presented to the court during its supervision of the
VesCor Receiver, this court has employed the same general approach regarding the amounts
winning investors should be obligated to return to the Receiver in order to achieve a proper and
equitable distribution of VesCor assets to losing investors. Those VesCor investors who received
back more money than they invested have consistently been required to return to the Receiver the
amounts they received from VesCor that exceeded their investments, plus any commissions they
received for finding new investors. See, e.g., Wing v. Dockstader, 2010 WL 5020959 (D. Utah
Dec. 3, 2010); Wing v. Holder, 2010 WL 5021087 (D. Utah Dec. 3, 2010).
The approach taken in Kowell and that proposed by the Receiver is consistent with such a
formula. It is also in harmony with Scholes v. Lehman, 56 F.3d 750 (7th Cir. 1993), and other
cases which this court has previously relied upon in dealing with VesCor.
In his opposition brief, Buchanan has not chosen to attempt to rebut the Receiver’s
argument based on Kowell or otherwise address Kowell in any respect. Nor has he cited any case
law or other authority that would suggest Kowell’s approach is improper. Buchanan does assert
that he should owe nothing under the proposed approach because the amount of his total
investment (approximately $20 million), which dates back to 1996, exceeds the approximate $14
million he was paid by VesCor during the four year period immediately preceding the filing of the
Complaint in this case. Kowell rejected such an argument, and so does this court, finding, as did
the Ninth Circuit, that such an approach would be “unmanageable in practice” and inequitable.
Kowell, 533 F.3d at 774. The Buchanan defendants, like other winners, should be required to
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return their winnings to the Receiver for equitable distribution to all investors.
Ponzi Scheme Evidence and The Receiver’s Motion to Exclude Testimony of Mr.
Johnson.
The Receiver claims he is entitled to summary judgment because his expert’s opinion that
VesCor operated with all of the characteristics of a Ponzi scheme is based on solid principles and
methods and there are insufficient facts presented by defendants to the contrary to constitute a
genuine issue of material fact. As a result, the Receiver claims he is entitled to a presumption that
the transfers to the Buchanan defendants were fraudulent and therefore prevails because under
such circumstances where can be no reasonable value shown for the transfers and a finding of
fraudulent transfer follows as a matter of law. In response, Buchanan claims VesCor was not
always a Ponzi scheme, and relies principally on the opinion of Mr. Kelly Johnson, his proposed
expert. As noted earlier, the arguments advanced by the Buchanan defendants, including those
based on the opinions of Mr. Johnson, are precisely the same arguments that were presented in the
first motion for summary judgment, which the court heard and granted in 2012. The only
difference now is that the Receiver has also filed a separate motion seeking to exclude the
testimony of Mr. Johnson pursuant to Rule 702 of the Federal Rules of Evidence and Daubert v.
Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993).
Finding the landscape unchanged from the earlier motion, the court reaches the same
conclusion and finds, as it did then, that the defendants have failed to present sufficient evidence
to create a genuine issue of material fact as to which a jury could reasonably find that VesCor was
not operating as a Ponzi scheme.
Regarding Mr. Johnson’s proposed expert report, it should be noted that Mr. Johnson’s
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report was first presented to the court in an earlier case, Wing v. Hammonds, in connection with
the Receiver’s motion for summary judgment on the same grounds as in this case. See Wing v.
Hammons, Case No. 2:08-CV-620 DB. The court’s view in both cases is the same: that Mr.
Johnson’s methods, principles and conclusions are unsupported by sufficient facts or data and are
not based on reliable accounting methods or principles sufficient to overcome the Receiver’s
evidence that VesCor was a Ponzi scheme. The court found then, and finds now, that even if a
jury were to hear Mr. Johnson’s testimony it would not have a sufficient basis upon which it
could reasonably find that VesCor was not operating at all pertinent times as a Ponzi scheme.
As the Receiver points out in his briefs, in these earlier cases the court was focused on
whether in any of the fraudulent transfer cases the defendants would present an admissible expert
opinion to counter Mr. Miller’s report and opinion. For example, during the hearing in the earlier
motion in this case, the court addressed the subject as follows:
The Court:
The one thing I expected to see somewhere along the line or thought I
might see was a forensic accountant, which you just described Mr. Johnson
as, who did the same thing as Mr. Miller did and undertook an
investigation of these records that are available and came to me in a
declaration with an opposite point of view. That I have not seen. Nor have
I seen it from Mr. Johnson.
Buchanan’s Counsel: I don’t think I have that person. I don’t think I have a person that can come
in and say it was not a Ponzi scheme.
(Hearing, August 30, 2011.)
Now, however, even though there has been no change to Mr. Johnson’s report or
testimony, it is being offered, it seems, as precisely what it was considered not to be, at least by
counsel, two years ago.
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In addition to seeking an award of summary judgment on the ground that there is no
genuine issue of material fact even with Mr. Johnson’s proposed testimony, the Receiver has
added a formal motion to exclude Mr. Johnson’s testimony pursuant to Rule 702. The court, for
the same reasons expressed earlier, finds Mr. Johnson’s testimony to be unsupported by reliable
principles and methods and that the methods he employs are not reliably applied to the facts of
this case. Accordingly, his report and testimony are inadmissible as evidence.
Mr. Johnson clearly wants to disagree with Mr. Miller but he never quite explains why, at
least not with sufficient facts, data and analysis to qualify under Rule 702. He candidly admits
that VesCor possessed all of the Ponzi scheme characteristics identified by Mr. Miller, but then
simply says he doesn’t agree. He also admits and appears to mostly agree with Mr. Miller’s
finding that VesCor was insolvent, that it paid off old investors almost exclusively with new
investor money, that it did not generate profits, that misrepresentations were frequent, that
investors were repeatedly misled by Southwick about the security of their investments and the
general health of the business, and that Southwick paid himself a generous salary and bought
expensive cars for himself while the enterprise was badly losing money, yet he offers nothing of
substance to contradict this long list of ponzi-like characteristics.
Mr. Johnson does provide evidence, and bases his opinion largely upon it, that VesCor
had an office building, employees and actual real estate projects, but even there he fails to
identify any of these projects as generating anything close to sufficient revenue to pay obligations
to investors. Furthermore, it is not uncommon for a Ponzi scheme to have some actual business
operations.
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Furthermore, there is nothing in Mr. Johnson’s report that attempts to evaluate the
profitability of VesCor’s projects in support of his opinions. Accordingly, the court finds that Mr.
Johnson did not identify sufficient data to support his opinions, did not in any event engage in a
proper analysis, and did not apply reliable principles to support his opinions. See Lippe v.
Bairnco Corp., 288 B.R. 678, 686 (S.D.N.Y. 2003).
Mr. Johnson opines that VesCor was a viable company, but here again, he fails to review
sufficient data, or present, in most instances, any data at all, to justify his opinion. He presents no
scenario in which VesCor operated as a viable company rather than as a Ponzi scheme. As the
Receiver points out, Mr. Johnson “cannot identify value that was ever created from any of
VesCor’s projects, which in his opinion is the measure of viability. This demonstrates that he has
not reliably applied principles and methods to the facts of this case.” (Dkt. No. 133, Receiver’s
Mem. In Support of Mot. to Exclude Johnson Opinions & Testimony at 12.)
Furthermore, Mr. Johnson admitted in his deposition that “it makes sense to perhaps do
some additional analysis.” (Johnson Depo., at pp. 75-76.) However, no such additional analysis
has been attempted.
For these reasons, and those advanced in the Receiver’s brief, the court in its discretion
finds that Mr. Johnson’s testimony is inadmissible under FRE 702 and Daubert.
Joint and Several Liability
In seeking joint and several liability against the Buchanan defendants, the Receiver
presents essentially the same arguments and facts that he presented in the previous summary
judgment motion. Buchanan’s opposition is also similar to the position taken in the earlier
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briefing. For the same reasons the court found the Receiver’s position valid then it reaches the
same conclusion today. The facts demonstrate a commingling by Mr. Buchanan of his
investments by and among himself, his family and the various entities he controlled to such an
extent that it remains virtually “impossible for the court to discern any separate character of the
investments and payments.” Wing v. Buchanan, 2012 WL 775688 at *2 (Reply Br. at 47).
The record shows, without any serious rebuttal, that although Mr. Buchanan used different
companies at different times for both making investments and receiving returns on them, in doing
so he failed to observe any meaningful distinction between the companies or himself. Nor did
Mr. Buchanan manage the accounts in a way that observed any separation. Several examples of
this type of commingling are listed in the Receiver’s opening brief at pages 19 through 21.
Together, they show a lack of separation and a unity of interest, all controlled by Mr. Buchanan,
that makes joint and several liability the appropriate remedy.
CONCLUSION
For the foregoing reasons, the court GRANTS plaintiff’s motion to exclude the testimony
of Kelly Johnson and GRANTS plaintiff’s motion for summary judgment, awarding the amount
of $6,278,070.00 plus $2,033,147.00 in prejudgment interest, for a total of $8,311,217.00 against
the defendants jointly and severally.
DATED this 18th day of April, 2014.
_________________________________
Dee Benson
United States District Judge
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