Klein v. McDonald
Filing
20
MEMORANDUM DECISION and ORDER granting 19 Plaintiff's Motion for Partial Summary Judgment. Signed by Judge Ted Stewart on 6/18/2015. (blh)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH
MEMORANDUM DECISION AND
ORDER GRANTING PLAINTIFF’S
MOTION FOR PARTIAL SUMMARY
JUDGMENT
R. WAYNE KLEIN, as Receiver,
Plaintiff,
v.
ANALEE MCDONALD, and JOHN DOES
1-5,
Case No. 2:13-CV-498 TS
Defendants.
District Judge Ted Stewart
This matter is before the Court on Plaintiff’s Motion for Partial Summary Judgment.
Defendant has failed to respond and the time for doing so has now passed. For the reasons
discussed below, the Court will grant Plaintiff’s Motion.
I. BACKGROUND
On June 25, 2012, the Securities and Exchange Commission (the “SEC”) filed a
Complaint against National Note of Utah, LC (“National Note”) and Wayne LaMar Palmer
(“Palmer”) commencing a civil enforcement action (the “Civil Enforcement Action”), alleging
that Palmer operated National Note and its affiliated entities (the “NNU Enterprise”) as a Ponzi
scheme and asserting various causes of action for securities fraud. That same day, the Court in
the Civil Enforcement action appointed Plaintiff as the receiver for National Note and at least 41
affiliated entities, and the assets of Palmer. The Receiver is charged with, among other things,
investigating the NNU Enterprise, and he is authorized to bring suit to recover property of the
Receivership Estate.
1
On June 19, 2013, the Receiver commenced the above-captioned case against Defendant.
McDonald was a National Note investor. In total, McDonald transferred $21,400.00 to National
Note. National Note transferred $31,683.44 to McDonald. National Note transferred $10,283.44
more to McDonald than the amount that McDonald transferred to National Note. The Receiver
seeks to recover the $10,283.44 that National Note paid to Defendant prior to the commencement
of the Civil Enforcement Action over and above the amount of the principal investment that
Defendant made in National Note (the “False Profits”).
Plaintiff has presented evidence that National Note was a Ponzi scheme. National Note
raised funds from investors by issuing promissory notes. From at least 1998 through the time
that Defendant received the last transfer in 2010 (the “Applicable Period”), the returns paid to
National Note investors were not financed through the success of a business, but were paid from
sums obtained from other investors. Throughout the Applicable Period, transfers made by
National Note to its investors, including the Defendant, were sourced from cash raised from
other investors.
National Note had additional characteristics of a Ponzi scheme. National Note promised
large, consistent returns, with little or no risk to its investors. National Note generally made
payments to its investors through 2011, thus creating the false impression that profits were being
earned, and thereby attracting additional investors to the scheme. National Note and the NNU
Enterprise were insolvent from at least 1998 through the commencement of the Civil
Enforcement Action in June 2012, including the entire Applicable Period.
2
II. SUMMARY JUDGMENT 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.” 1 In
considering whether a genuine dispute of material fact exists, the Court determines whether a
reasonable jury could return a verdict for the nonmoving party in the face of all the evidence
presented. 2 The Court is required to construe all facts and reasonable inferences in the light most
favorable to the nonmoving party. 3 Pursuant to Rule 56(e), since Defendant has failed to
properly address Plaintiff’s assertions of fact, the Court may consider the facts undisputed for the
purposes of this Motion and may grant summary judgment if the Motion and supporting
materials show that Plaintiff is entitled to judgment.
III. DISCUSSION
Plaintiff seeks summary judgment on his first, second, third, and fifth causes of action.
Plaintiff’s first, second, and third causes of action seek to avoid fraudulent transfers under
various portions of the Utah Fraudulent Transfer Act (“UFTA”). Plaintiff’s fifth cause of action
asserts a claim for unjust enrichment. The Court will discuss each cause of action in turn.
A.
FIRST CAUSE OF ACTION
Section 25-6-5(1)(a) defines a fraudulent transfer as follows:
(1) A transfer made or obligation incurred by a debtor is fraudulent as to a
creditor, whether the creditor’s claim arose before or after the transfer was made
1
Fed. R. Civ. P. 56(a).
2
See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986); Clifton v. Craig, 924
F.2d 182, 183 (10th Cir. 1991).
3
See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986);
Wright v. Sw. Bell Tel. Co., 925 F.2d 1288, 1292 (10th Cir. 1991).
3
or the obligation was incurred, if the debtor made the transfer or incurred the
obligation:
(a) with actual intent to hinder, delay, or defraud any creditor of the debtor[.]
Section 25-6-8(1)(a), in turn, provides for the avoidance of the False Profit fraudulent
transfers, stating as follows:
(1) In an action for relief against a transfer or obligation under this chapter, a
creditor . . . may obtain:
(a) avoidance of the transfer or obligation to the extent necessary to satisfy the
creditor’s claim[.]
Finally, § 25-6-9(2) allows the Receiver to recover the avoided fraudulent transfers from
the Defendant as the first transferee of the False Profits, providing: “[T]o the extent a transfer is
voidable in an action by a creditor under Subsection 25-6-8(1)(a), the creditor may recover
judgment for the value of the asset transferred . . . .”
“Under the UFTA, a debtor’s actual intent to hinder, delay, or defraud is conclusively
established by proving that the debtor operated as a Ponzi scheme.” 4 Thus, “once it is
established that a debtor acted as a Ponzi scheme, all transfers by that entity are presumed
fraudulent.” 5
In this case, the undisputed facts show that National Note was operated as a Ponzi
scheme during the Applicable Period. Thus, the False Profits may be avoided under § 25-65(1)(A) and avoided and recovered from Defendant under §§ 25-6-8(1)(a) and 25-6-9(2).
Therefore, summary judgment is proper on Plaintiff’s first cause of action.
4
SEC v. Madison Real Estate Grp., LLC, 647 F. Supp. 2d 1271, 1279 (D. Utah. 2009);
see also 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.”) (quotation and alteration omitted).
5
Wing v. Dockstader, 482 F. App’x 361, 363 (10th Cir. 2012).
4
B.
SECOND CAUSE OF ACTION
Section 25-6-5(1)(b) defines a transfer as fraudulent as follows:
(1) A transfer made or obligation incurred by a debtor is fraudulent as to a
creditor, whether the creditor’s claim arose before or after the transfer was made
or the obligation was incurred, if the debtor made the transfer or incurred the
obligation:
....
(b) without receiving a reasonably equivalent value in exchange for the transfer or
obligation; and the debtor:
....
(ii) intended to incur, or believed or reasonably should have believed that he
would incur, debts beyond his ability to pay as they became due.
Under this section, a transfer is fraudulent if it is not made for reasonably equivalent
value and the elements of subsection (b)(ii) are shown. Transfers that are fraudulent under § 256-5(1)(b) are avoidable and recoverable from the initial transferee under §§ 25-6-8(1)(a) and 256-9.
There is no evidence that National Note received a reasonably equivalent value in
exchange for the monetary transfers to Defendant in excess of Defendant’s principal investment.
“Where causes of action are brought under UFTA against Ponzi scheme investors, the general
rule is that to the extent innocent investors have received payments in excess of the amounts of
principal that they originally invested, those payments are avoidable as fraudulent transfers.” 6
“If investors receive more than they invested, ‘[p]ayments in excess of amounts invested are
considered fictitious profits because they do not represent a return on legitimate investment
activity.’” 7
6
Donell, 533 F.3d at 770.
7
Id. at 772 (quoting In re Lake States Commodities, Inc., 253 B.R. 866, 872 (Bankr. N.D.
Ill. 2000)).
5
Further, because National Note was operated as a Ponzi scheme, it “[i]ntended to incur,
or believed or reasonably should have believed that [it] would incur, debts beyond [its] ability to
pay as they became due.” 8 Therefore, Plaintiff is entitled to summary judgment on his second
cause of action.
C.
THIRD CAUSE OF ACTION
Section 25-6-6(1) defines a fraudulent transfer as follows:
(1) 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:
(a) the debtor made the transfer or incurred the obligation without receiving a
reasonably equivalent value in exchange for the transfer or obligation; and
(b) the debtor was insolvent at the time of or became insolvent as a result of the
transfer or obligation.
Under this section, a transfer is fraudulent if it is not made for reasonably equivalent
value and the transferor was insolvent or became insolvent as a result of the transfer. Transfers
that are fraudulent under § 25-6-6(1) are avoidable and recoverable from the initial transferee
under §§ 25-6-8(1)(a) and 25-6-9(2).
As discussed above, the False Profits National Note transferred to Defendant are not for
reasonably equivalent value. In addition, Ponzi schemes are insolvent by definition. 9 Further,
Plaintiff has presented undisputed evidence showing that National Note was insolvent during the
Applicable Period, as defined by UFTA § 25-6-3. Therefore, Plaintiff is entitled to judgment on
this cause of action.
8
Donell, 533 F.3d at 770.
9
Klein v. Cornelius, ---F.3d---, 2015 WL 3389363, at *7 (10th Cir. May 27, 2015).
6
D.
FIFTH CAUSE OF ACTION
Unjust enrichment requires the Receiver to prove (1) a benefit conferred on Defendant;
(2) an appreciation or knowledge by Defendant of the benefit; and (3) the acceptance or retention
by Defendant of the benefit under such circumstances as to make it inequitable for Defendant to
retain the benefit without payment of its value. 10
Plaintiff has shown that a benefit was conferred on Defendant and that Defendant had an
appreciation or knowledge of that benefit. In addition, Plaintiff has presented evidence that at
least 554 investors received less than the amount they invested from National Note, with a large
number receiving absolutely no return. The Receiver anticipates that allowable claims against
the Receivership Estate for net principal losses will exceed $59.4 million. The Receiver
anticipates that returns for those investors who have allowable claims will be far less than 100%
of their principal investment. Under these circumstances, it would be inequitable for Defendant
to retain the benefit. Therefore, summary judgment on Plaintiff’s fifth cause of action is
appropriate.
IV. CONCLUSION
It is therefore
ORDERED that Plaintiff’s Motion for Partial Summary Judgment (Docket No. 19) is
GRANTED.
10
Rawlings v. Rawlings, 240 P.3d 754, 763 (Utah 2010).
7
DATED this 18th day of June, 2015.
BY THE COURT:
Ted Stewart
United States District Judge
8
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