Free Motion for Miscellaneous Relief - District Court of Arizona - Arizona

1 2 3 4 5 6 7 8 9
Guttilla & Murphy, PC
4150 West Northern Ave Phoenix, Arizona 85051 (623) 937-2795

Guttilla & Murphy, PC
Firm No. 00133300 Alisan M. B. Patten (No. 009795) 4150 West Northern Ave. Phoenix, Arizona 85051 (623) 937-2795 [email protected]

Attorneys for the Receiver

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA Lawrence J. Warfield, Receiver, Plaintiff, v. Michael Alaniz, et al. Defendants. ) ) ) ) ) ) ) ) ) ) )

Cause No. CV 03-2390 PHX JAT RECEIVER'S MOTION FOR CLARIFICATION, OR ALTERNATIVELY, MOTION FOR RECONSIDERATION

10 11 12 13 14 15 16 17 18 19 20 21 22 23

This motion seeks clarification of this Court's Order dated August 1, 2006 ("the Order") denying summary judgment to the Receiver on his fraudulent transfer claim. I. Summary of request for clarification. The Receiver respectfully seeks clarification on what appear to be contradictory holdings in the Court's Order. On the one hand the Court appears to have held that the Receiver proved the existence of the MAF1 Ponzi scheme2 and the Court appears to have

The MAF Ponzi scheme was perpetuated by Robert Dillie through his controlled companies, Mid-America Foundation, Inc. and Mid-America Financial Group (referred to hereafter collectively as "MAF"). 2 The uncontradicted material facts establish the existence Ponzi scheme. (See, Receiver's Statement of Facts nos. 1-9 in support of his Motion for Partial Summary Judgment etc.; the lack of any controverting facts presented by Defendants' in Response thereto at pages 1-2 of their Separate Statement of Controverting Facts in Support of Response to Receiver's Statement of Facts in Support of Motion for Partial Summary
Document 510 Filed 08/15/2006 Page 1 of 11

1

Case 2:03-cv-02390-JAT

1 2 3 4 5 6 7 8 9
Guttilla & Murphy, PC
4150 West Northern Ave Phoenix, Arizona 85051 (623) 937-2795

held that the existence of a Ponzi scheme proves as a matter of law the "actual intent" element of a fraudulent transfer claim. On the other hand, the Court also states that Dillie's guilty plea (related to the Mid-America Ponzi scheme) did not establish that the Defendants had an actual intent to defraud. The implication which is repeated in later portions of the Order is that the Plaintiff must prove at trial that Defendants had actual intent to defraud.3 The Receiver, thus, seeks clarification. Whether the Plaintiffs must prove a new element or whether the Defendants must merely prove their affirmative defense is a critical distinction, as discussed further below. II. In order to efficiently and cost-effectively prepare for the upcoming

10 11 12 13 14 15 16 17 18

trial, the Receiver seeks clarification of the Court's ruling. One of the bases of the Receiver's claim for his fraudulent transfer claim, pursuant to A.R.S. § 44-1004(A), is that the existence of a Ponzi scheme establishes that actual fraud of the transferor (MAF and Dillie). As the Court noted in his Order: A section 1004(A)(1) fraudulent conveyance is based on a showing of actual fraud. Thus, a fraudulent transfer under this statutory provision exists where there is "clear and satisfactory evidence of an `actual intent to hinder, delay or defraud any creditor of the debtor' or of a debtor receiving no reasonable consideration for a transfer or obligation." Gerow

Judgment; fn. 1 at page 2 of the Receiver's Reply in Support of his Motion for Partial Summary Judgment on Count Nine etc.; the lack of controverting facts in the Rada 20 Defendants' Separate Statement of Facts in Support of Motion for Summary Judgment; Supplement to Receiver's Statement of Facts In Support of His Motion for Partial 21 Summary Judgment etc.) 3 The Defendants' arguments to the Court, however, were that: they took their 22 commissions in "good faith" which goes to the affirmative defense of "good faith" offered under the fraudulent transfer statute; or, because the Defendants were themselves 23 creditors of Mid-America, the Receiver had not conclusively shown that the commission payments had been made with an actual intent to hinder, delay, or defraud creditors. Case 2:03-cv-02390-JAT Document 510 2Filed 08/15/2006 Page 2 of 11 19

1 2 3

v. Covill, 192 Ariz. 9, 17, 960 P.2d 55, 63 (Ct. App. 1998). Actual intent may be shown by direct proof or by circumstantial evidence from which actual intent may be reasonably inferred. Id. Court's Order, 24:9-15.

4 The Court listed the "badges of fraud" that may be used to prove the element of 5 "actual intent to hinder, delay or defraud" in a fraudulent transfer claim. These badges 6 demonstrate that the "actual intent" element is based on the intent of the transferor not the 7 transferee(s) (Defendants). (After all, the very basis of a fraudulent transfer claim is that 8 the debtor (MAF & Dillie), transferred funds to another with the requisite knowledge or 9
Guttilla & Murphy, PC

intent..4
4150 West Northern Ave Phoenix, Arizona 85051 (623) 937-2795

10 The Court acknowledged that the Receiver was not relying upon the traditional 11 badges of fraud in establishing the "actual intent" element of his fraudulent transfer claim 12 13 14 15 16 17 18 19 20 21 22 23
4

This Court stated the following in its Order: The statute itself provides a non-exclusive list of factors to consider when determining if actual intent to hinder, delay or defraud exits. A.R.S. §441004(B). Those "badges of fraud" are as follows: (1) the transfer or obligation was to an insider; (2) the debtor retained possession or control of the property transferred after the transfer; (3) the transfer or obligation was disclosed or concealed; (4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit; (5) the transfer was of substantially all of the debtor's assets; (6) the debtor absconded; (7) the debtor removed or concealed assets; (8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred; (9) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred; (10) the transfer occurred shortly before or shortly after a substantial debt was incurred; (11) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor. No further evidence of the common law elements of fraud are needed once actual intent is shown. Gerow, 192 at 17, 960 P.2d at 63.

Court's Order, 24:16-26; 25:1-5.
Document 510

Case 2:03-cv-02390-JAT

3Filed 08/15/2006

Page 3 of 11

1 2 3 4 5 6 7 8 9
Guttilla & Murphy, PC
4150 West Northern Ave Phoenix, Arizona 85051 (623) 937-2795

because that element is established as a matter of law when the transferor (MAF & Dillie) made the transfer (in the form of commission payments to the Defendants) in furtherance of a Ponzi scheme: The Plaintiff does not rely on the traditional badges of fraud. Instead, the Plaintiff argues that the fraudulent intent is established as a matter of law when a defendant makes a transfer in furtherance of a Ponzi scheme. Transfers made in furtherance of Ponzi 5schemes have achieved a special status in fraudulent-transfer law. In re Grafton Partners, 321 B.R. 527, 532 (9th Cir. BAP 2005) (proof that the transferor was running a Ponzi scheme can suffice to warrant a finding of actual fraud); In re Cohen, 199 B.R. 709, 717 (9th Cir. BAP 1996) (whether transfers were made with actual intent either to hinder or to delay or to defraud creditors is the same under the Bankruptcy Code and UFTA; proof of a Ponzi scheme is sufficient to establish the operator's actual intent to hinder, delay, or defraud creditors for purposes of actually fraudulent transfers); accord In re Agricultural Research and Tech. Group, Inc. v. Palm Seedlings Partners-A, 916 F.2d 528, 535 (9th Cir. 1990) (debtor's actual intent to hinder, delay or defraud its creditors may be inferred from the mere existence of a Ponzi scheme); In re World Vision, 275 B.R. 641, 656 (Bankr. M.D. Fla. 2002) (in cases involving a Ponzi scheme, the analysis is simplified because fraudulent intent is inferred.) One can infer an intent to defraud future undertakers from the mere fact that an individual was running a Ponzi scheme, because no other reasonable inference is possible. In re Slatkin, 310 B.R. 740, 748 (C.D. Cal. 2004). The orchestrator of the scheme must know all along, from the very nature of his activities, that investors at the end of the
5

10 11 12 13 14 15 16 17 18 19 20 21 22 23

The Court defined a Ponzi scheme as follows: A " Ponzi scheme" is a fraudulent arrangement in which an entity makes payments to investors from monies obtained from later investors rather than from any "profits" of the underlying business venture. In re Cohen, 199 B.R. 709, 717 (9th Cir. BAP 1996). The fraud consists of funneling proceeds received from new investors to previous investors in the guise of profits from the alleged business venture, thereby cultivating an illusion that a legitimate profit-making business opportunity exists and inducing further investment. Id.

Court's Order, p.25, fn. 12.
Document 510

Case 2:03-cv-02390-JAT

4Filed 08/15/2006

Page 4 of 11

1 2 3 4 5 6 7 8 9
Guttilla & Murphy, PC
4150 West Northern Ave Phoenix, Arizona 85051 (623) 937-2795

line will lose their money. Id. Knowledge to a substantial certainty constitutes intent in the eyes of the law, and this knowledge that future investors will not be paid is sufficient to establish his actual intent to defraud them. Id. (Emphasis added.) Court's Order, 25:6-23; 26:1-3. As is clear from the cases cited by the Court, it is the transferor's intent (not the transferee's) that is relevant in proving a fraudulent transfer claim. Additionally, the Defendants never argued to this Court that the basic elements of a fraudulent transfer claim were affected by the transferees' intent. Rather, the Defendants raised an affirmative defense of "good faith" to the fraudulent transfer claim. The Court then referenced the guilty plea agreement wherein Robert Dillie (the orchestrator of the Mid-America Ponzi scheme) pled guilty to three counts of an indictment related to his operation of a Ponzi scheme, the same scheme that laid the basis for the Receiver's fraudulent transfer claim6. The Court then stated that Dillie's guilty plea did not establish that "the Defendants" had an actual intent to defraud. (Court's Order, 26:10-12.) The Court added that that while " . . . Dillie admitted to using MidAmerica to solicit the Defendants to further his Ponzi scheme, there is absolutely no indication by Dillie that the independent brokers, were "running," or "operating," or had any knowledge of the Ponzi scheme or the fact that the investors would not be paid." (Emphasis added.) (Court's Order, 26:24-26.)7 It is this part of the Order that causes the

10 11 12 13 14 15 16 17 18 19

The Court made no mention of the Receiver's Declaration found at exhibit 2 to his Statement of Facts in Support of his Motion for Partial Summary Judgment showing that: 21 (1) Mid-America Foundation was insolvent from the time the first commission in this matter was paid to the Defendants; and (2) Dillie, through Mid-America Foundation, 22 operated a Ponzi scheme where annuity payments on the Mid-America Foundation charitable gift annuities were funded not by investment earnings but by the funds received from subsequent investors. 23 7 The Court also stated: Case 2:03-cv-02390-JAT Document 510 5Filed 08/15/2006 Page 5 of 11 20

6

1 2 3 4 5 6 7 8 9
Guttilla & Murphy, PC
4150 West Northern Ave Phoenix, Arizona 85051 (623) 937-2795

confusion (particularly given the Court's earlier holdings that the "actual fraud" element of a fraudulent transfer claim is established inferentially when a Ponzi scheme exists and the Court also appears to hold that Dillie operated a Ponzi scheme8). It would appear that the most logical way to interpret the Court's opinion is that while the Receiver has established as a matter of law the existence of the Ponzi scheme9,

10 11

Defendants argue that Dillie's guilty plea does not establish that these defendants had an actual intent to defraud. The Court agreed. A plea agreement admitting to the operation of a Ponzi scheme is direct evidence of that individual's intend to defraud. In re Slatkin, 310 B.R. 740, 748 (C.D. Cal. 2004). However, the Rada Defendants have not admitted to operating a Ponzi scheme. In fact, they content (sic) they were completely unaware of Dillie's scheme. (Emphasis Added.) Court's Order, 26:10-15.

12 13 14 15 16 17 18 19 20 21
8

Actually, Defendants never made the argument that Dillie's guilty plea did not establish that they did not have an actual intent to defraud. What they argued was: 1) because the Defendants were creditors, opposed to investors, of MidAmerica, commissions could not have been transferred to them with an actual intent to hinder, delay, or defraud creditors under the Uniform Fraudulent Transfer Act (see, Rada Defendants' Response to Plaintiff's Motion for Partial Summary Judgment 6:8-28, 7:1-10) and 2) the Defendants had an affirmative defense of "good faith for reasonable value" to the fraudulent transfer claim. (See, Rada Defendants' Response to Plaintiff's Motion for Partial Summary Judgment, 7:11-25, pps. 8-12; Rada Defendants' Reply in Support of Motion for Summary Judgment, 3:7-15.) The Receiver has always claimed that it was Robert Dillie who operated the Ponzi scheme using Mid-America Foundation and Mid-America Financial Group as his tools in the scheme to defraud the elderly around the country.
9

The Court also held: Dillie admitted that he was using Mid-America to sell CGAs which he knew would not be paid because of insufficient assets and because the monies 22 collected from the sales were being used for his own personal purposes. According to the indictment, Dillie used Mid-America "to market[] [Charitable Gift Annuities] throughout 23 the United States through a network of commissioned sales brokers," and the Ponzi scheme was promoted by "making at least $3 million in commission payments to brokers Case 2:03-cv-02390-JAT Document 510 6Filed 08/15/2006 Page 6 of 11

1 2 3 4 5 6 7 8 9
Guttilla & Murphy, PC
4150 West Northern Ave Phoenix, Arizona 85051 (623) 937-2795

there remain questions about the Defendants' good faith, for example, did they have knowledge of the Ponzi scheme or engage in other conduct that would deny them the protection of the good faith defense. Since the Defendants' knowledge of the Ponzi scheme is not relevant to the establishment of the "actual intent" element of the fraudulent transfer claim (the Court held that the "actual intent element" is inferred once a Ponzi scheme is established, relying upon numerous cases as cited supra), it would appear that the Court was ruling that the Receiver's motion for summary judgment on his fraudulent transfer claim was denied because there remain factual issues for a jury to decide relating to the Defendants' affirmative "good faith" defense to the fraudulent transfer claim.10 This would appear to be consistent with an earlier part of the Court's opinion discussing the Receiver's request for the imposition of a constructive trust: The Rada Defendants agree that they were hired by Mid-America to sell CGAs and earned commission (sic) based upon a percentage of the sales. However, they allege that they had no actual or constructive knowledge of Dillie's actions or Mid-America's financial problems. The Rada Defendants also argue that the Plaintiff has provided no evidence that Mid-America would have provided truthful financial information to the Rada Defendants had they inquired. The Plaintiff, on the other hand, argues that industry standards required the Defendants to obtain and examine Mid-America's audited financial statements for the past three years before selling the annuities. The Plaintiff's contention

10 11 12 13 14 15 16 17 18 19 20

employed to sell [Charitable Gift Annuities] to investors. (Pages 2 and 5 of the Indictment). Court's Order, 26:16-22. 10 The defense under A.R.S. §44-1008(A) also requires that the Defendants prove that 22 they received the transferred funds "for a reasonably equivalent value." Warfield v. th 23 Byron, 436 F.3d 551, 559 (5 Cir. 2006) (holding that a facilitator in a Ponzi investment scheme does not provide "reasonably equivalent value"). Case 2:03-cv-02390-JAT Document 510 7Filed 08/15/2006 Page 7 of 11 21

1 2 3 4 5 6 7 8 9
Guttilla & Murphy, PC
4150 West Northern Ave Phoenix, Arizona 85051 (623) 937-2795

appears to be supported, at least in part, by the Defendants' own financial expert. The Plaintiff also provided evidence that suggest that a least one of the Rada Defendants did ask for the audited statements, but when Mid-America failed to provide them that Defendants proceeded to sell the annuities anyway. Given the contradicting evidence presented by the parties, the Court finds that there is a material question of fact as to whether the Rada Defendants' conduct in this case is sufficient to support the imposition of a constructive trust. Court's Order, 21:14-28; 22:1-2. Since facts relied upon by the Receiver as referenced in the immediately preceding excerpt are some of the same facts that the Receiver relied upon in making his rebuttal argument to the Defendants' asserted affirmative defense of "good faith," it is logical, when reading the Order in toto, to interpret the Court's Order as holding that fact issues remain for a jury to decide whether the Defendants accepted the fraudulent transfers (i.e., their commission payments) in "good faith" insofar as the fraudulent transfer claim is considered or under equitable conditions insofar as the constructive trust argument is considered. While the end result of the Court's Order may seem to be the same no matter how it is interpreted, i.e., a jury will have to determine fact issues regarding what the Defendants' knew or should have known in regard to the Mid-America Ponzi scheme, understanding the independent rulings supporting this conclusion are extremely important because they affect what evidence must be presented at trial and who carries the burden of proof. Specifically, the Receiver most respectfully asks the Court to clarify whether the Court held that the existence of the Mid-America Ponzi scheme has been established as a
Document 510

10 11 12 13 14 15 16 17 18 19 20 21 22 23

Case 2:03-cv-02390-JAT

8Filed 08/15/2006

Page 8 of 11

1 2 3 4 5 6 7 8 9
Guttilla & Murphy, PC
4150 West Northern Ave Phoenix, Arizona 85051 (623) 937-2795

matter of law thereby negating the need to spend time and money proving this issue at the upcoming trial and whether the Plaintiffs must prove the Defendant's actual fraud as an additional element to its fraudulent transfer claim. III. Alternatively, the Receiver moves the Court to reconsider its Order in a limited fashion. Alternatively, if the Court intended to rule that the Receiver must prove at trial that the Defendants' received the transferred funds with "actual intent to defraud" MAF's creditors, the Receiver respectfully requests this court to reconsider its ruling. The Receiver fully understands that the issue as to what the Defendants knew, or did not know, regarding the Ponzi scheme may still be an issue for the jury insofar as it is relevant to the Defendants' affirmative defense of "good faith" to the fraudulent transfer claim. However, the burden of establishing the Defendants' good faith defense under A.R.S. §44-1008(A) is on the Defendants and not the Plaintiff. The Receiver is mindful of the Court's Rule 16 Order directing the parties' attention to Motorola, Inc. v. J.B. Rodgers Mechanical Contractors, Inc., supra, before filing a motion for reconsideration. This motion falls within the fourth prong of the criteria identified therein, i.e., the Court will consider a motion for reconsideration where the motion is based upon the Court's failure to consider material facts that were presented to it before the Court rendered its decision. Here to the extent the Court finds that the Plaintiff failed to show actual fraud required for its claim, the Court has failed to consider the uncontroverted evidence of the Ponzi scheme. See, footnote # 2. . . . . . .
Document 510

10 11 12 13 14 15 16 17 18 19 20 21 22 23

Case 2:03-cv-02390-JAT

9Filed 08/15/2006

Page 9 of 11

1 2 3 4 5 6 7 8 9
Guttilla & Murphy, PC
4150 West Northern Ave Phoenix, Arizona 85051 (623) 937-2795

Respectfully submitted this 15th day of August, 2006. GUTTILLA & MURPHY, PC s/Alisan M. B. Patten Alisan M. B. Patten Attorneys for the Receiver

A true copy of the foregoing has been filed electronically this 15th day of August, 2006, and following persons designated as ECF Registered Users will be served with notice of same by the Court's ECF system: Burton M. Bentley ECF Registered [email protected] Attorney for Defendants Leonard and Elizabeth Bestgen, Robert Carroll, Rudy and Mary Crosswell, David Cutshall, Charles Davis, Richard Derk, Orville Frazier, Ronald Kerher, Dwight Lankford, John and Candes Rada, Paul Richards, Fera Shivaee, Patrick and Andrea Wehrly and Donald Muchmore Gregory Shebest ECF Registered [email protected] Attorney for Heritage Marketing David L. Kagel John Torbett ECF Registered [email protected] [email protected] Attorneys for Paul Pichie Copy of the foregoing mailed this 14th day of August, 2006, to: Steve A. Bryant Steve Bryant & Associates 3618 Mt. Vernon Street, Suite A Houston, TX 77006 Attorneys for Dwight Lankford

10 11 12 13 14 15 16 17 18 19 20 21 22 23

Case 2:03-cv-02390-JAT

Document 510

10 Filed 08/15/2006

Page 10 of 11

1 2 3 4 5 6 7 8 9
Guttilla & Murphy, PC
4150 West Northern Ave Phoenix, Arizona 85051 (623) 937-2795

Robert Tretiak 4615 N. Ft. Apache Road Las Vegas, NV 89129 Defendant Pro Se Ren Bidwell 3430 Pacific Ave SE Olympia, WA 98501 Defendant Pro Se By _s/Jeanie Knaack
0758-011(54096)

10 11 12 13 14 15 16 17 18 19 20 21 22 23
Case 2:03-cv-02390-JAT Document 510

11 Filed 08/15/2006

Page 11 of 11