Klein v. Nelson
Filing
39
ORDER AND MEMORANDUM DECISION granting in part and denying in part 13 Motion for Partial Summary Judgment: granted as to the UFTA claims but denied as to the unjust enrichment claim because that claim is moot. Signed by Judge Tena Campbell on 7/28/15 (alt)
IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH
CENTRAL DIVISION
R. WAYNE KLEIN, as RECEIVER for
NATIONAL NOTE OF UTAH &
NATIONAL NOTE ENTERPRISE
Plaintiff,
ORDER AND
MEMORANDUM DECISION
v.
EDDA NELSON,
Case No. 2:13-cv-497-TC
Defendant.
Plaintiff R. Wayne Klein, in his role as the court-appointed Receiver in a Securities and
Exchange Commission (SEC) enforcement action, seeks to recover $50,051.22 from Defendant
Edda Nelson in this ancillary proceeding.1 In the primary action, National Note of Utah (NNU)
is accused of operating a Ponzi scheme defrauding hundreds of investors. On behalf of the
receivership estate, Mr. Klein filed a motion to recover what he characterizes as false profits. Mr.
Klein brings his claim for recovery of false profits in the amount of $50,051.22 from Ms. Nelson
under the Utah Fraudulent Transfer Act (UFTA).2 He also seeks recovery for unjust enrichment.
Ms. Nelson claims that not all of the transfers were fraudulent, including hers, and that the
Receiver has not made the necessary distinction between valid transfers and avoidable transfers.
1
Mr. Klein is the Receiver of National Note of Utah, LC, its subsidiaries and affiliates, and the assets of Mr. Wayne
LaMar Palmer in the Securities and Exchange Commission v. National Note of Utah, LC et al. action, currently
before Judge Jenkins (No. 2:12-cv-00591).
2
Utah Code Ann. §§ 25-6-1 – 25-6-14 (2013).
1
For the reasons set forth below, the court grants the Receiver’s motion on the UFTA
claims and denies the Receiver’s request for unjust enrichment as moot. The court also denies the
Defendant’s motion for additional discovery.
FACTUAL BACKGROUND
According to NNU, NNU’s business model secured each investor’s principal with real
property in a one page instrument signed before a public notary. This one page instrument
pretended to assure full repayment of the principal and to allow the investor to foreclose on the
property in order to obtain the return of the principal amount. The real property, NNU claims,
was always worth more than the money invested to secure it.
NNU also engaged in actions designed to attract investors. For example, NNU operated
what may have once been legitimate affiliates called NNU Enterprise. Funds from NNU
allegedly were comingled with NNU Enterprise to promote the investment scheme. But because
NNU and NNU Enterprise were insolvent, these businesses had no money to pay investors.
(Doc. No. 13-6 at 3.)
In 2006, Ms. Nelson transferred $150,000 to NNU. In total, NNU transferred
$200,051.12 to Ms. Nelson. Discounting her principal, Ms. Nelson profited by $50,051.22.
The SEC filed a civil enforcement action against NNU in June 2012 and seized NNU’s
assets and records. The SEC accuses Mr. Wayne Palmer, the founder and principal of NNU, of
operating NNU as a classic Ponzi scheme since at least 1994. NNU’s records show that investors
were paid with the funds of new investors. Ms. Nelson’ payments allowed her to recover her
principal investment and an additional $50,051.22.
2
On behalf of the receivership estate, Mr. Klein seeks the return of $50,051.22 in
fraudulently transferred funds to Ms. Nelson who profited from the scheme.
ANALYSIS
I. Summary Judgment Standard
Federal Rule of Civil Procedure 56 permits summary judgment “if the pleadings,
depositions, answers to interrogatories, and admission 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
judgment as a matter of law.” Fed. R. Civ. P. 56(c); see also Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 250-51 (1986). Further, the court must draw all reasonable inferences in favor of
the nonmoving party when examining the record. Anderson, 477 U.S. at 250. While Mr. Klein
bears the burden of demonstrating there are no material facts upon which a jury could find for
Ms. Nelson, Ms. Nelson’s burden is to establish a genuine issue for trial. See Celotex Corp. v.
Catrett, 477 U.S. 317, 322-23 (1986). But “a mere scintilla of evidence supporting the
nonmoving party theory does not create a genuine issue of material fact.” Anderson v. Coors
Brewing Co., 181 F.3d 1171, 1175 (10th Cir. 1999) (emphasis added).
II. Utah Fraudulent Transfer Act (UFTA)
Under the UFTA, the Receiver relies on three alternative sections to establish a fraudulent
transfer. A transfer is fraudulent when the debtor 1) had actual intent to defraud (Utah Code Ann.
§ 25-6-5(1)(a) (2013)); 2) incurred the obligation without receiving a reasonably equivalent
value for the transfer and intended to incur or reasonably should have believed he would incur
debts beyond his ability to pay as they became due (Utah Code Ann. § 25-6-5(1)(b) (2013)); or
3) did not receive a reasonably equivalent value for the transfer and was insolvent at the time of
3
the transfer (Utah Code Ann. § 25-6-6(1)(b) (2013)). Although the Receiver cites all three
sections, the court need only focus on the “actual intent” portion of the statute (Utah Code Ann.
§ 25-6-1(1)(a) (2013)) because the transfer was made in the context of a Ponzi scheme.
III. NNU’s Operation as a Ponzi Scheme
According to Mr. Palmer, who was chiefly responsible for the operation of NNU, NNU’s
business model used loans made to NNU by individuals to pay dividends to earlier loaners.
Although not an accountant, Mr. Palmer states that the Receiver has undervalued the assets of
NNU. Mr. Palmer also claims that the Receiver fails to understand the complexities of the NNU
business model.
Conversely, the Receiver’s expert, a Certified Public Accountant and an expert on
insolvency, determined that NNU could only have paid dividends with the funds of other
investors because NNU was insolvent. Moreover, the Receiver’s expert bases his conclusion that
NNU operated as a Ponzi scheme upon the records of NNU. NNU’s records show that when
money from later investors came into NNU, it was immediately paid to earlier investors.
Whatever legitimate funds NNU and NNU Enterprise may have had were commingled with the
NNU Ponzi operation.
Ponzi schemes operate by attracting capital from one backer and transferring a portion of that
capital to earlier backers. See S.E.C. v. Mgmt. Solutions, Inc., No. 2:11-CV-1165, 2013 WL
4501088, at *14 (D. Utah Aug. 22, 2013). Regardless of the label of the backer or name of the
transferred portion, the essential operation is the same: money from backer C enters the accounts
of the operator; the operator pays a portion of that sum to backers A and B. That business model
4
is a Ponzi scheme by definition. The evidence clearly indicates that NNU was operated as a
Ponzi scheme. No admissible evidence has been presented to the contrary.
IV. The Ponzi Presumption
Under the UFTA, the mere existence of a Ponzi scheme is sufficient to establish a
defendant’s actual intent to defraud. Miller v. Kelley, No.1:12-CV-56, 2014 WL 5437023, at *3
(D. Utah Oct. 27, 2014). The Ponzi Presumption, once established, allows a receiver to reclaim
all transfers to a defendant who received money from the scheme. Id. The central issue before
the court is whether the Ponzi presumption should be applied in this case.
V. The Ponzi Presumption Applies
The facts before the court walk in near lock step with the facts that were before the Miller
court. In Miller, the defendant invested in a Ponzi scheme and received payments from the
operator of the scheme. Id. at *2. The Miller receiver used the principal operator’s records to
establish the existence of a Ponzi scheme. Seeking to recover funds distributed to the defendant
under the UFTA, the Miller receiver petitioned for summary judgment. Id. The Miller defendant
attempted to resist summary judgment by 1) requesting additional time for discovery and 2)
asserting that the Miller receiver had to distinguish between legitimate and fraudulent transfers.
On the discovery issue, the Miller defendant could not identify steps taken to discover facts
before the initial discovery period had concluded. Further, the Miller defendant could not explain
how additional time would allow for the discovery of facts to support his assertions. Id. at *4.
The Miller court denied the defendant’s request for time to conduct additional discovery because
the Miller defendant failed to identify not only which facts were not presently available but also
which facts would be necessary to defeat summary judgment. Id. at *5.
5
Next, citing Management Solutions, the defendant in Miller asserted that the receiver must
distinguish each transaction as either legitimate or fraudulent. According to the Miller defendant,
Management Solutions limited the Ponzi presumption to each transfer and did not apply to the
business venture as a whole because there was an underlying business producing legitimate
sources of revenue. Id.
But the Miller court soundly rejected these arguments. First, Ponzi schemes have been found
even when there is a legitimate business serving as a front for the scheme. Id. at *7 (citing Jobin
v. McKay, 84 F.3d 1330, 1332 (10th Cir. 1996); Sender v. Simon, 84 F.3d 1299, 1301-02 (10th
Cir. 1996)). Second, when there exists a legitimate operation as a front for Ponzi activity and
funds are commingled, the Ponzi presumption applies. See id. Third, the Miller court determined
that Management Solutions was distinguishable because Management Solutions involved a
business that engaged in erratic Ponzi-like activity, whereas the Ponzi operation in Miller
consistently operated at a loss each year, even while making payments to defendants. Id.
Consequently, the Miller court granted the Miller receiver’s motion for summary judgment. Id. at
8.
Here, just as the defendant in Miller invested in a Ponzi scheme and was fortunate enough
not only to recoup the principal investment and a dividend in excess of that principal, Ms. Nelson
was equally fortunate to recover in excess of her principal. And just as the Miller receiver
consulted the records of the operation to establish the transfers were fraudulent and reclaim them
for the receivership estate under the UFTA, Mr. Klein likewise relies on NNU’s records as the
basis for his motion to show that NNU was insolvent and that the transfers were fraudulent under
the UFTA. And just as the Miller receiver petitioned for summary judgment in order to recover
6
an amount in excess of the principal, likewise Mr. Klein moves for summary judgment to
recover false profits from Ms. Nelson for the receivership estate.
VI. Ms. Nelson’s Request for Additional Discovery
Similar to the Miller defendant, Ms. Nelson seeks to delay summary judgment by requesting
a stay to conduct additional discovery. Yet just as the Miller defendant failed to justify additional
time for discovery, Ms. Nelson has not explained which facts are needed for discovery so as to
defeat summary judgment. She has neither adequately explained what steps were taken to
discover those facts, nor explained why such facts could not be presented before the initial close
of discovery. And just as the Miller defendant could not provide facts necessary to defeat
summary judgment, Ms. Nelson relies merely on her own statements and Mr. Palmer’s
unsupported assertions to defeat summary judgment.
VII. Ms. Nelson’s Reliance on Management Solutions
Most interesting of all, Ms. Nelson also stakes her argument on Management Solutions, just
as the Miller defendant did. Ms. Nelson claims at least some of the payments were from
legitimate sources because NNU operated as a legitimate payday loan business at least some of
the time.
Yet the facts do not support Ms. Nelson’s assertion. Unlike the Ponzi operation in
Management Solutions, NNU did not engage in erratic Ponzi-like activity. NNU operated
consistently as a Ponzi scheme and is most comparable to the Ponzi operation in Miller. Just as
the Ponzi operation in Miller never earned enough money to pay its investors, NNU was never
profitable.
7
CONCLUSION
There are no disputed facts in evidence, and the evidence overwhelmingly demonstrates that
the promissory notes issued to Ms. Nelson did not secure real property in exchange for receipt of
Ms. Nelson’s investment. Further, according to NNU’s records and the Receiver’s expert’s
report, NNU did not provide a reasonable equivalent for transfers received, NNU was insolvent,
and NNU used money from later investors to pay earlier investors. That is the very definition of
a Ponzi scheme. The transfer then is fraudulent under the UFTA § 25-6-1(1)(a) (2013) and is
recoverable under the UFTA § 25-6-8(1)(a) (2013).
The Receiver’s Motion for Partial Summary Judgment (Doc. No. 13) is GRANTED as to the
UFTA claims but DENIED as to the unjust enrichment claim because that claim is moot. Ms.
Nelson’s request for additional discovery is DENIED.
ORDERED this 28th day of July, 2015.
BY THE COURT:
TENA CAMPBELL
U.S. District Court Judge
8
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?