RE: LLS America LLC (Kriegman v. Schultz et al, Adv. Proc. No. 11-80130-PCW11)

Filing 126

AMENDED FINDINGS OF FACT AND CONCLUSIONS OF LAW. Signed by Chief Judge Rosanna Malouf Peterson. (MF, Courtroom Deputy)

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UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WASHINGTON

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In Re:
NO: 2:12-CV-6-RMP

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LLS AMERICA, LLC,
Bankr. Case No. 09-06194-FPC11
Debtor,

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BRUCE P. KRIEGMAN, solely in his
capacity as court-appointed Chapter 11
Trustee for LLS America, LLC,

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Adv. Proc. No. 11-80130-FPC11
AMENDED FINDINGS OF FACT
AND CONCLUSIONS OF LAW

Plaintiff,
v.

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THEODORE SCHULTZ,
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Defendants.
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This consolidated action was tried before the Court on September 2, 2014.

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Plaintiff, Bruce P. Kriegman, the court-appointed Chapter 11 Trustee for LLS

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America, LLC (“Trustee”), was represented by Richard L. Mount and Samuel C.

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Thilo of Witherspoon Kelley. The Court hereby amends its prior Findings of Fact

AMENDED FINDINGS OF FACT AND CONCLUSIONS OF LAW ~ 1

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and Conclusions of Law, ECF No. 118, to reflect the Court’s finding that all

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transfers to and from Defendants were in Canadian currency.

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Dillon Jackson and Adam Coady of Foster Pepper appeared telephonically
on behalf of Defendants Geoff Toews, Rory and Cathy Bjarnason, and CLB
Holdings (collectively, “Defendants”).

Foster Pepper previously moved to

withdraw as counsel for all Defendants because Defendant Toews had terminated
them as his counsel and because Defendants Bjarnason and CLB Holdings had
ceased all communication with Foster Pepper. ECF Nos. 56, 100. The Court
denied Foster Pepper’s motions. ECF Nos. 80, 112. At trial, Foster Pepper
explained that it attended trial in order to comply with the Court’s orders but that
it lacked authority to represent Defendants. Defense counsel stated that it knew of
no contact from Defendants. Defendants themselves were not present at trial.

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Having heard witness testimony, having reviewed the admitted exhibits,
and being fully informed, the Court makes the following findings of fact and
conclusions of law:
PREVIOUS RULINGS

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1.

Ponzi Scheme and Insolvency

On July 1, 2013, the Bankruptcy Court issued its Report and
Recommendation Re Plaintiff’s Motion for Partial Summary Judgment on

AMENDED FINDINGS OF FACT AND CONCLUSIONS OF LAW ~ 2

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Common Issues (“Report and Recommendation”) recommending that the District

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Court grant the Trustee’s Amended Motion for Partial Summary Judgment on two

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“Common Issues”: (1) Debtor operated a Ponzi scheme; and (2) Debtor was

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insolvent at the time of its transfers to Defendants. On August 19, 2013, this

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Court adopted the Bankruptcy Court’s Report and Recommendation and entered

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an order granting the Trustee’s Amended Motion for Partial Summary Judgment

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on the Common Issues (“Order Adopting Report and Recommendation”). See

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2:11-cv-00357-RMP, ECF No. 92. Therefore, this Court has determined that

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Debtor operated a Ponzi scheme and was insolvent at the time of each of the

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transfers to Defendants.

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All of the findings and conclusions set forth in the Report and

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Recommendation and the Order Adopting Report and Recommendation are

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incorporated by this reference and are the law of this case.

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2.

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On January 31, 2014, this Court entered its Order Granting Plaintiff’s

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Motion for Omnibus Hearing. ECF No. 55. Pursuant to that Order, the court-

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appointed examiner, Mr. Charles B. Hall, testified at an Omnibus Hearing in open

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court commencing on February 25, 2014. His testimony consists of written direct

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examination testimony that was filed on or about February 17, 2014, and the oral

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testimony that he gave at the Omnibus Hearing. Mr. Hall was cross examined by

Omnibus Hearing for the Testimony of Charles B. Hall

AMENDED FINDINGS OF FACT AND CONCLUSIONS OF LAW ~ 3

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several defense attorneys, including those from Foster Pepper, and by some pro se

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defendants. Mr. Hall’s testimony at the Omnibus Hearing is part of the record in

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this adversary action.

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FINDINGS OF FACT

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1.

Debtor is the Little Loan Shoppe group of companies, which was

formed originally in 1997. PO-1 at 11.

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2.

Debtor operated a Ponzi scheme, whereby investors’ loans were

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sometimes used to pay other investors’ promised returns on investments. PO-1 at

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16.

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3.

Over the course of its existence, Debtor acquired approximately

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$135.4 million in funds invested by individual lenders, documented by promissory

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notes promising interest in the range of 40% to 60% per annum. PO-1 at 7 n.2, 15.

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4.

Defendants are lenders who received payments from Debtor.

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5.

Debtor accumulated payday loan bad debts of approximately $29

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million, which were written off in 2009. PO-1 at 41.
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Debtor was never profitable at any time during its existence and, thus,

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at no time did it generate sufficient profits to pay the amounts due the lenders. PO-

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1 at 16, 53.

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7.

Defendants Rory and Cathy Bjarnason and Geoff Toews made loans

to Debtor. P-23; P-63.

AMENDED FINDINGS OF FACT AND CONCLUSIONS OF LAW ~ 4

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8.

All Defendants received multiple payments from Debtor. P-23; P-33;

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Dozens of the payments that Defendants received were written on

P-63.

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checks showing Debtor’s Spokane address. P-24 at 13-98; P-34 at 1-20; P-64 at

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143-389.

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10.

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Debtor voided approximately 29,000 of the post-dated checks that it

had issued to lenders, including Defendants. PO-1 at 26; P-25; P-35; P-65.
11.

Defendant Toews received promissory notes that were “rolled into”

or renewed into other promissory notes. P-66 at 256-57, 259.
12.

Defendants Bjarnason made a number of loans without receiving any

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promissory note or other written documentation in return. P-26 at 12; see also P-

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20 at 2.

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13.

All of the transfers that the Trustee seeks to avoid were made within

the period of September 1997 to July 21, 2009. P-23; P-33; P-63.
14.

Indicia and characteristics of the Ponzi scheme present in this case

include:
a.

Proceeds received from new investors masked as profits from

running a payday loan business; PO-1 at 16, 22;
b.

Promise of a high rate of return, usually between 40% to as

much as 60%, on the invested funds; PO-1 at 19;

AMENDED FINDINGS OF FACT AND CONCLUSIONS OF LAW ~ 5

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c.

Debtor paid commissions to third parties who solicited new

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lenders, typically 10% annually of the amount received from the new

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lender; PO-1 at 20-21;

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d.

Debtor solicited funds as loans evidenced by promissory notes

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but demonstrated a pattern of “rolling over” the promissory notes when due

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onto new notes instead of paying off the obligation; PO-1 at 26;

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e.

Debtor, throughout its history, made false and misleading

statements to current and potential lenders; PO-1 at 53-54;

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f.

Debtor was insolvent from its inception to the filing of its

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bankruptcy; PO-1 at 67.

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15.

The court-appointed examiner, Charles B. Hall, by way of education,

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experience, and vocation, is qualified to analyze and review the legitimacy of an

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enterprise’s operation and to detect a fraud based on Ponzi scheme operations.

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Mr. Hall’s expert opinion is credible.

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Mr. Curtis Frye’s testimony, which pertained to Debtor’s record

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keeping and the accounting of investment, payments, and consulting

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fees/commissions to Defendants, is credible.

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Defendants received interest and principal payments from Debtor.

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Defendants are “net winners.”

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AMENDED FINDINGS OF FACT AND CONCLUSIONS OF LAW ~ 6

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Defendants were promised high rates of return from Debtor and were

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issued promissory notes with a promised rate of return between 40% and 60% per

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annum. P-26 at 12, 33, 34; P-36 at 10; P-66 at 20.

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21.

There is no evidence that the Bjarnason Defendants or Defendant

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CLB Holdings ever received any account statements or financial statements from

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Debtor. See P-26 at 9-11, 13; P-36 at 8-9, 10-11. Defendant Toews’s response to

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an interrogatory indicates that he was permitted to view a limited number of

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financial statements, but that Debtor did not allow Defendant Toews to remove

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the statements from her custody or to make copies of them. P-66 at 21.

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22.

Defendants received post-dated checks from Debtor. P-26 at 16-17;

P-36 at 13; P-66 at 29.
23.

Defendant Toews loaned funds to Debtor after Debtor had “rolled”

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earlier loans into new promissory notes when payment became due. See P-60 at

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3; P-62 at 1.

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24.

Cathy Bjarnason was the owner of CLB Holdings. P-36 at 8, 17.

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25.

Plaintiff requests the Court to pierce the corporate veil and hold

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Defendant Cathy Bjarnason liable for any judgment that the Court imposes on the

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Defendant CLB Holdings.

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necessary to show that the corporate form should be disregarded. “First, the

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corporate form must be intentionally used to violate or evade a duty; second,

Washington courts have established two factors

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disregard must be ‘necessary and required to prevent unjustified loss to the injured

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party.’” Meisel v. M & N Modern Hydraulic Press Co., 97 Wn. 2d 403, 410

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(1982) (quoting Morgan v. Burks, 93 Wn.2d 580, 587 (1980)).

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26.

A court may pierce the corporate veil under the alter ego theory

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“when ‘the corporate entity has been disregarded by the principals themselves so

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that there is such a unity of ownership and interest that the separateness of the

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corporation has ceased to exist.’” Grayson v. Nordic Constr. Co., 92 Wn.2d 548,

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553 (1979) (quoting Burns v. Norwesco Marine, Inc., 13 Wn. App. 414, 418

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(1975)). See also J. I. Case Credit Corp. v. Stark, 64 Wn. 2d 470, 475 (1964)

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(“[T]here must be such a commingling of property rights or interests as to render

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it apparent that they are intended to function as one, and, further, to regard them as

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separate would aid the consummation of a fraud or wrong upon others.”).

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27.

Undercapitalization of a corporate entity, by itself, does not constitute

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abuse of the corporate form, Norhawk Investments, Inc. v. Subway Sandwich

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Shops, Inc., 61 Wn. App. 395, 399-400 (1991), although “there may be situations

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in which a corporation is so thinly capitalized that it manifests a fraudulent

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intent,” Truckweld Equip. Co., Inc. v. Olson, 26 Wn. App. 638, 645 (1980).

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28.

The Court finds that Defendant Cathy Bjarnason used Defendant

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CLB Holdings as an alter ego.

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indicate that Defendant Cathy Bjarnason used the entity’s coffers as an extension

Defendant CLB Holdings’ banking records

AMENDED FINDINGS OF FACT AND CONCLUSIONS OF LAW ~ 8

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of her personal account. For example, the records show multiple months during

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which funds were transferred from an account in Defendant Cathy Bjarnason’s

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name into CLB Holdings’ account, but the exact same amount was withdrawn

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again shortly thereafter. See, e.g., P-36 at 32, 33, 38, 40, 49. Similarly, transfers

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from Debtor frequently were transferred or withdrawn from Defendant CLB

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Holdings shortly after checks from Debtor had been deposited. See, e.g., P-36 at

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54-55, 69-70, 83, 90, 96. These practices often left only a small amount of funds

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in the entity’s account, which at times contained less than $50.00. See, e.g., P-36

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at 70, 71.

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29.

Defendant Cathy Bjarnason presented no proof to contradict this

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evidence that she disregarded the separate corporate form of CLB Holdings and

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instead treated the company’s assets as her personal funds. Moreover, the Court

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finds that Defendant Cathy Bjarnason must be held liable for any judgment that

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the Court imposes on Defendant CLB Holdings in order to minimize injury to

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other creditors. Accordingly, the Court pierces the corporate veil.

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30.

Defendants Rory and Cathy Bjarnason are net winners.

The

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following summarizes the evidence of investments made by them and the

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payments that they received:

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Total Payments:
Total Investments:
MIMO:

$228,900.00 CAD
$103,000.00 CAD
$125,900.00 CAD

AMENDED FINDINGS OF FACT AND CONCLUSIONS OF LAW ~ 9

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31.

the evidence of investments made by it and the payments that it received:

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Total Payments:
Total Investments:
MIMO:

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$99,250.00 CAD
$0.00
$99,250.00 CAD

Defendant Geoff Toews is a net winner. The following summarizes

the evidence of investments made by him and the payments that he received:
Total Payments:
Total Investments:
MIMO:

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Defendant CLB Holdings is net winner. The following summarizes

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$388,219.39 CAD
$175,000.00 CAD
$213,219.39 CAD

Total transfers to Defendants are as follows:

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• Rory and Cathy Bjarnason for $228,900.00 CAD;

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• CLB Holdings for $99,250.00 CAD;

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• Geoff Toews for $388,219.39 CAD.

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34.

All transfers to Defendants were made with actual fraudulent intent

and in furtherance of a Ponzi scheme.

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CONCLUSIONS OF LAW
1.

This Court has jurisdiction of this proceeding pursuant to 28 U.S.C. §

1334 and 28 U.S.C. § 157(d).

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2.

This Court has jurisdiction over Defendants.

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3.

This action was timely commenced.

AMENDED FINDINGS OF FACT AND CONCLUSIONS OF LAW ~ 10

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4.

At least one unsecured creditor existed who triggered the strong arm

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power of 11 U.S.C. § 544(b)(1) because the creditor did not and should not

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reasonably have discovered the fraudulent nature of Debtor’s Ponzi scheme

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transfers within one year before the bankruptcy petition was filed. See 2:11-cv-

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00362-RMP, ECF No. 197.

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5.

Washington State law governing fraudulent transfers applies.

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6.

Under the statutes relating to fraudulent transfers, 11 U.S.C. § 548

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and RCW 19.40, et seq., payments received from Debtor are recoverable from

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each Defendant by the Trustee, subject to the defense of good faith pursuant to 11

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U.S.C. § 548(c) and RCW 19.40.081(a).
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Transfers made in furtherance of a Ponzi scheme constitute actual

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fraud under the Bankruptcy Code and Washington’s version of the Uniform

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Fraudulent Transfer Act (UFTA). See Bankr. Adv. Proc. No. 11-80299-FPC, ECF

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No. 378 at 21-25. “Where causes of action are brought under UFTA against Ponzi

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scheme investors, the general rule is that to the extent innocent investors have

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received payments in excess of the amounts of principal that they originally

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invested, those payments are avoidable as fraudulent transfers . . . .” Donell v.

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Kowell, 533 F.3d 762, 770 (9th Cir. 2008).

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8.

A transferee of a fraudulent transfer may keep funds that it took for

reasonably equivalent value and in good faith. See 11 U.S.C. § 548(c); RCW

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19.40.081(a). As recipients of transfers that constitute actual fraud, the burden of

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proof in establishing the affirmative defense of good faith is on Defendants. In re

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Agric. Research and Tech. Grp., Inc., 916 F.2d 528, 535 (9th Cir. 1990); 5

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COLLIER ON BANKRUPTCY ¶ 548.09[2][c] at 548-98.2 (16th ed. 2011).

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9.

Although “good faith” is not defined precisely in case law, at least

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one court has noted that the absence of good faith is shown by a transferee who

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knows that a debtor is operating a Ponzi scheme. See In re Agric. Research, 916

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F.2d at 535 (citing In re Indep. Clearing House, 77 B.R. 843, 861 (D. Utah

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1987)). The Ninth Circuit has quoted favorably an explanation in an early case

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that a transferee’s “knowledge or actual notice of circumstances sufficient to put

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him, as a prudent man, upon inquiry as to whether his brother intended to delay or

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defraud his creditors . . . should be deemed to have notice . . . as would invalidate

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the sale as to him.” Id. at 535 (quoting Shauer v. Alterton, 151 U.S. 607, 621

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(1894)).

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10.

Thus, courts measure good faith by an objective standard, looking to

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what a transferee “‘knew or should have known’ in questions of good faith, rather

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than examining what the transferee actually knew from a subjective standpoint.”

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Id. at 536.

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11.

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Under the Bankruptcy Code, Washington’s UFTA, as well as

relevant case law, the Court does not contemplate a recipient’s intent when

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deciding whether to avoid fraudulent transfers. 5 COLLIER

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548.04[2] at 548-63; Thompson v. Hanson, 168 Wn.2d 738, 749 (2010).

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Accordingly, a transfer that constitutes actual fraud is avoided in its entirety

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unless the transferee establishes that a reasonable person in the transferee’s

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position would not and should not have known of the fraud, not simply whether he

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or she actually acted in good faith.

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ON

BANKRUPTCY ¶

Transfers made by Debtor in furtherance of its Ponzi scheme are

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transfers made with actual intent to hinder, delay and/or defraud creditors under

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both state law, RCW Ch. 19.40, and federal law, 11 U.S.C. § 548(a)(1).

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13.

As

discussed

above,

Defendants

terminated

or

stopped

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communicating with their counsel and did not personally attend trial, participate at

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trial, or offer any evidence. Thus, Defendants have not met their burden of

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establishing that they acted in good faith.

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14.

Under RCW 19.40.041(a)(1), RCW 19.40.091(a) and the “strong arm

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powers” that 11 U.S.C. § 544(b)(1) grants to bankruptcy trustees, all of Debtor’s

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transfers to Defendants, regardless of the date of transfer, are hereby set aside and

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avoided.

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15.

The Trustee is entitled to claw back and recover all transfers to

Defendants.

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AMENDED FINDINGS OF FACT AND CONCLUSIONS OF LAW ~ 13

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The Trustee is entitled to repayment of all commissions without any

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right of off set.

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17.

Defendant CLB Holdings, operating through Cathy Bjarnason, was

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the initial transferee of payments received from Debtor, and the Trustee is entitled

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to recover all transfers to Defendants.

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18.

The Trustee is entitled to pre-judgment interest at the applicable

federal rate from July 21, 2009, when the bankruptcy case commenced.
19.

Pursuant to 11 U.S.C. § 548(a), 544, 550 and 551 and RCW

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19.40.041(1) and 19.40.071, the Trustee is entitled to and is granted a judgment

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for the benefit of the Liquidating Trust of Debtor against Rory and Cathy

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Bjarnason in the amount of $228,900.00 CAD, plus pre-judgment interest from

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July 21, 2009, at the applicable federal judgment rate and post-judgment interest

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at the federal judgment rate from the date of judgment to the date the judgment is

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paid in full, see 28 U.S.C. § 1961.

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Pursuant to 11 U.S.C. § 548(a), 544, 550 and 551 and RCW

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19.40.041(1) and 19.40.071, the Trustee is entitled to and is granted a judgment

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for the benefit of the Liquidating Trust of Debtor against CLB Holdings and

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Cathy Bjarnason in the amount of $99,250.00 CAD, plus pre-judgment interest

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from July 21, 2009, at the applicable federal judgment rate and post-judgment

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AMENDED FINDINGS OF FACT AND CONCLUSIONS OF LAW ~ 14

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interest at the federal judgment rate from the date of judgment to the date the

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judgment is paid in full, see 28 U.S.C. § 1961.

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Pursuant to 11 U.S.C. § 548(a), 544, 550 and 551 and RCW

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19.40.041(1) and 19.40.071, the Trustee is entitled to and is granted a judgment

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for the benefit of the Liquidating Trust of Debtor against Geoff Toews in the

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amount of $388,219.39 CAD, plus pre-judgment interest from July 21, 2009, at

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the applicable federal judgment rate and post-judgment interest at the federal

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judgment rate from the date of judgment to the date the judgment is paid in full,

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see 28 U.S.C. § 1961.
22.

The Trustee is entitled to reimbursement of its costs for pursuing this

action.
23.

Trustee is awarded all applicable interest, costs and disbursements of

this action against each Defendant.
IT IS SO ORDERED.
The District Court Clerk is hereby directed to enter this Order and to provide
copies to counsel.
DATED this 13th day of January 2015.
s/ Rosanna Malouf Peterson
ROSANNA MALOUF PETERSON
Chief United States District Court Judge

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AMENDED FINDINGS OF FACT AND CONCLUSIONS OF LAW ~ 15