Summary
holding that receiver had standing to pursue fraudulent transfer claim
Summary of this case from Janvey v. AlguireOpinion
CA No. 3:00-CV-272-R
March 8, 2001
MEMORANDUM OPINION AND ORDER
Before this Court are the Receiver's Motion for Partial Summary Judgment Against Ronald Berglund (the "Receiver's Motion"), filed December 29, 2000 and Respondent Ronald Berglund's ("Berglund") Cross Motion for Partial Summary Judgment (the "Cross Motion"), filed January 16, 2001. For the reasons stated below, the Receiver's Motion is GRANTED and Berglund's Cross Motion is DISMISSED AS MOOT.
I. BACKGROUND
This case centers upon an investment program titled Dennel Finance Limited ("Dennel"), which was operated by Benjamin Cook and others (the "Defendants") for the sole purpose of conducting a Ponzi scheme. Under the scheme, the Defendants collected over $45,000,000, most of which they used to pay returns to earlier investors, to pay commissions to facilitators for recruiting investors, and to purchase personal property and cover personal expenses for themselves.
A Ponzi scheme is a fraudulent investment scheme where money from new investors is used to pay "profits" on the money contributed by earlier investors, without the operation of an actual revenue-producing business other than the raising of new funds by finding more investors. The scheme is named for Charles Ponzi, who was convicted for perpetrating such schemes in the 1920's. Black's Law Dictionary 1180 (7th Ed. 1999).
Berglund worked as a facilitator recruiting new investors for Dennel. The Receiver has alleged that Berglund received a total of $334,982.53 in commissions from Dennel, a fact that Berglund does not dispute.
On March 16, 1999, in Civil Action Number 3:99-cv-0571-R, this Court entered an Order Appointing Temporary Receiver in which the Receiver was appointed for the purpose of collecting, receiving and taking custody of the assets of Dennel. The Receiver was further authorized to initiate lawsuits to recover such assets. On January 31, 2000, this Court entered an Order authorizing the present suit against Berglund and others to seek the recovery of receivership assets.
The Receiver's Motion is based on the claim that the commissions paid to Berglund by Dennel were in fact fraudulent transfers and, as such, Berglund should be forced to return all monies that he received from Dennel. Berglund bases his Cross Motion on all remaining claims that the Receiver has asserted against him. Because the Receiver has agreed to abandon the claims addressed in Berglund's Cross Motion should the Receiver's Motion be granted, the Court will consider the Receiver's Motion first.
II. ANALYSIS OF THE RECEIVER'S MOTION
1. Summary Judgment Standard
"Summary judgment is proper when, viewing the evidence in the light most favorable to the non-movant, `there is no genuine issue of material fact and . . . the moving party is entitled to judgment as a matter of law.'" Wilson Industries. Inc., v. Aviva America. Inc., 185 F.3d 492, 494 (5th Cir. 1999) (quoting Amburgey v. Corhart Refactories Corp.. 936 F.2d 805.809 (5th Cir. 1991)); Fed.R.Civ.P. 56(c). However, all reasonable doubts and inferences must be decided in the light most favorable to the party opposing the motion.See Thornbrough v. Columbus Greenville R.R. Co., 760 F.2d 633, 640 (5th Cir. 1985). Furthermore, as long as there appears to be some evidentiary support for the disputed allegations, the motion must be denied. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49 (1986); Coke v. General Adjustments Bureau, 640 F.2d 584, 595 (5th Cir. 1981) (en banc).
The party moving for summary judgment bears the initial burden of identifying those portions of the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, which it believes demonstrate the absence of a genuine issue of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Where the nonmoving party bears the burden of proof on a claim upon which summary judgment is sought, the moving party may discharge its summary judgment burden by showing that "there is an absence of evidence to support the nonmoving party's case." Id. at 325. Once the moving party satisfies this burden, the nonmoving party may then oppose the motion by going "beyond the pleadings and by [its] own affidavits, or by the `depositions, answers to interrogatories, and admissions on file,' designat[ing] `specific facts showing that there is a genuine issue for trial.'" Id. at 324; Anderson, 477 U.S. at 256. Summary judgment will be granted against "a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322.
2. Standing of the Receiver
In this Court's Order Appointing Temporary Receiver, filed March 16, 1999, the Court authorized the Receiver to "institute, defend, compromise or adjust such actions or proceedings in state or federal courts . . . as may in [the Receiver's] discretion be advisable or proper for the protection of the Receivership Assets . . . [or] for the collection, preservation and maintenance of the Receivership Assets." Pursuant to the authority granted to him by this Order, the Receiver alleges that the payment of commissions to Berglund constituted avoidable fraudulent transfers under the Uniform Fraudulent Transfer Act ("UFTA").
Bergland challenges the right of the Receiver to avoid fraudulent transfers made by Dennel in this case because the UFTA creates a right in creditors to avoid fraudulent transfers made by a debtor. Berglund argues correctly that the Receiver stands in the shoes of Dennel. He goes on to assert that because Dennel is not a creditor, but is rather the debtor in this case, the Receiver does not have standing to sue under the UFTA.
However, a receiver represents not only the entity in receivership, but also the interests of its creditors. See Camerer v. California Sav. Commercial Bank of San Diego, 4 Cal.2d 159, 170 (1935); see also 66 Am. Jur.2d Receivers § 450 (1973). After all, the very purpose of receivership is to secure the assets of the corporation for ultimate payment to the creditors. 66 Am.Jur.2d Receivers § 450. Further, while the general rule is that the receiver may only bring actions that could have been brought by the entity in receivership, "there are certain situations where the receiver is permitted to assert rights and defenses not available to the insolvent." Butcher v. Howard, 715 S.W.2d 601, 604 (Term. App. 1986) (quoting Camerer, 4 Cal.2d at 170). Thus, while the debtor would not be entitled to "set aside a transfer in fraud of his creditors . . . the receiver acting for the creditors may attack it."Id; see also 66 Am. Jur.2d Receivers § 450. Given the foregoing exception, the Court holds that the Receiver has standing to sue to avoid fraudulent transfers on behalf of the creditors of Dennel.
3. The UFTA
Under the UFTA, a debtor makes a fraudulent transfer if the debtor made the transfer "with actual intent to hinder, delay, or defraud any creditor of the debtor . . ." Tex. Bus. Com. Ann. § 24.005 (Vernon 1987). Whether the debtor made the transfer with the requisite intent may be determined by considering a non-exhaustive list of factors, or "badges of fraud." Id. However, in the case of a Ponzi scheme, many courts have found that the debtor's intent to hinder, delay or defraud is established by the mere existence of the Ponzi scheme.E.g., In re Independent Clearing House Co., 77 B.R. 843 (Bankr.D.Utah 1987) (finding the requisite intent to defraud from the fact that the debtor must have known that the Ponzi scheme would inevitably collapse and that later investors to the scheme would lose their investments when the collapse occurred); see also,In re Ramirez Rodriguez, 209 B.R. 424, 434 (Bankr.S.D.Tex. 1997) (holding that, as a matter of law, payments of commissions and profits in a Ponzi scheme constituted transfers made with actual intent to hinder, delay or defraud).
For instance, the court can consider whether the transfer was made to an insider, the transfer was concealed, or the debtor was or quickly became insolvent when the transfer was made.
The intent of the person running a Ponzi scheme when he makes large payments of money to investors or to brokers who bring in more investors is to keep the scheme going. The debtor knows to a substantial certainty that the scheme cannot go on forever and later investors will eventually lose. Thus, when he takes incoming funds and transfers them to early investors and brokers, he is making such transfers with the actual intent to hinder, delay or defraud later investors and creditors.
There is no issue of material fact with regard to whether Dennel was in fact a Ponzi scheme because Berglund does not dispute that the Receiver has substantially established this by his affidavit. Therefore, because Dennel was a Ponzi scheme, as a matter of law the commissions paid to Berglund were made with the intent to hinder, delay or defraud the creditors of Dennel. As such, they are fraudulent transfers that are voidable under the UFTA. Tex. Bus. Com. Ann. § 24.008.
A. Good Faith and Reasonably Equivalent Value
Berglund argues that there are material questions of fact regarding whether the commission payments he received from Dennel were made for reasonably equivalent value. An otherwise fraudulent transfer is not voidable against a person who takes "in good faith and for reasonably equivalent value." Id. at § 24.009.
The language of section 24.009 creates a conjunctive test for determining whether the "good faith and reasonably equivalent value defense" is available to a transferee. Thus, to successfully raise this defense to the voidability of a fraudulent transfer, a party must show that the transfer was taken both in good faith and for reasonably equivalent value. Thus, Berglund must show that there are material questions of fact regarding whether he acted in good faith and whether he provided reasonably equivalent value to Dennel in exchange for the commission payments.
1. Good Faith
The issue of good faith is a "defensive matter as to which the defendants asserting the existence of good faith have the burden of proof." Cohen v. Pomona Valley Imports. Inc., 199 B.R. 709, 718 (B.A.P. 9th Cir. 1996) (discussing UFTA § 8(a) which is identical to § 24.009); see also In re Agricultural Research Technology Group. Inc., 916 F.2d 528, 535 (9th Cir. 1990) (explaining that the burden of establishing good faith falls upon the party asserting the defense). "One lacks the good faith that is essential to the UFTA § 8(a) defense to avoidability if possessed of enough knowledge of the actual facts to induce a reasonable person to inquire further about the transaction." Cohen, 199 B.R. at 719.
Berglund asserts that the Receiver has presented no evidence that Berglund "acted in concert with Cook or other principals of Dennel." Berglund Response at 4. However, it is not the Receiver's burden to show this. The Receiver has proven that the transfers were fraudulently made. If Berglund wishes to raise section 24.009 as a defense he may do so, but the burden falls on him to present facts that support it.
Unfortunately for Berglund, he has failed to present any evidence that he acted in good faith. For that matter, he has not presented any evidence regarding his state of mind at all. Berglund has taken the Fifth Amendment and chosen not to answer any questions regarding his involvement in or his knowledge about Dennel. The Court has no way of knowing whether Berglund should have been induced "to inquire further about the transaction" because he has presented no evidence about what he knew or did not know about Dennel. Based on the lack of evidence that Berglund has presented, no reasonable jury could find that Berglund acted in good faith because he has presented absolutely no evidence that he did so. Thus, Berglund has failed to allege sufficient facts which create a triable issue of fact regarding whether he is entitled to the good faith and reasonably equivalent value defense to the voidability of an otherwise fraudulent transfer.
The Court notes that Berglund has referred to the deposition of Bill Whelan as support for the proposition that Berglund himself was not aware that Dennel was operating as a Ponzi scheme. However, the Court fails to see how the testimony of another individual provides any relevant evidence regarding whether or not Berglund himself was acting in good faith when he accepted the commission payments from Dennel. Such evidence is irrelevant to the present inquiry, which is whether Berglund acted in good faith, given the knowledge available to him at the time he accepted the transfers.
The Court further notes that both the Court and a potential jury are entitled to draw an adverse inference from the fact that Berglund has asserted his Fifth Amendment rights in a civil case. Baxter v. Palmigiano, 425 U.S. 308 (1976). Thus, not only has Berglund failed to produce evidence that he acted in good faith, he has also failed to attempt to rebut the negative inference raised by his assertion of the Fifth Amendment.
2. Reasonably Equivalent Value
Section 24.009 requires both good faith and reasonably equivalent value. Because Berglund has failed to raise a material question of fact regarding whether he acted in good faith in accepting the fraudulent transfers, there is no need to consider whether he gave reasonably equivalent value. He has failed to meet his burden in presenting section 24.009 as a defense to the avoidability of the fraudulent transfers made to him by Dennel. Thus, the Court finds that the commissions paid to Berglund were fraudulent transfers, which are voidable by the Receiver as Berglund has failed to meet his burden in presenting a defense.
III. ANALYSIS OF THE CROSS MOTION
On January 16, 2001, Berglund filed his Cross Motion for summary judgment on all of the Receiver's remaining claims against him. In the Receiver's Response to the Cross Motion, the Receiver states that he will not pursue the remaining claims against Berglund, should the Receiver's Motion for Summary be granted. Because the Court has determined that the Receiver's Motion should be granted, the Court also holds that Berglund's Cross Motion for Summary Judgment be dismissed as moot, as the Receiver has agreed to abandon his remaining claims against Berglund.
IV. Conclusion
For the reasons stated above, the Receiver's Motion is GRANTED and Berglund's Cross Motion is DISMISSED AS MOOT.
It is so ORDERED.