Free Reply to Response to Motion - District Court of Arizona - Arizona

1 Burton M. Bentley, Esq. (Bar No. 00980) 2 BURTON M. BENTLEY, P.C. 5343 North 16th Street, Suite 480 3 Phoenix, Arizona 85016 (602) 861-3055 4 (602) 861-3230 fax Attorney for Rada Defendants 5 6 7

IN THE UNITED STATES DISTRICT COURT IN THE DISTRICT OF ARIZONA CAUSE NO. CIV 03 2390-PHX-JAT Plaintiff, vs.

8 LAWRENCE J. WARFIELD, 9 RECEIVER, 10 11 12 13 MICHAEL ALANIZ, et al. 14 15 16 17 18 19 20 21 22

RADA DEFENDANTS' REPLY IN SUPPORT OF MOTION FOR SUMMARY JUDGMENT

(Oral Argument Requested) Defendants.

The following Defendants: Leonard & Betty Bestgen Robert Carroll Rudy & Mary Crosswell Charles Davis Richard Derk Orville Dale Frazier Ronald Kerher Dwight Lankford John & Candes Rada Paul Richard Patrick & Andrea Wehrly

(collectively "Rada Defendants"), by and through counsel undersigned, hereby submit

23 this Reply in Support of their Motion for Summary Judgment pursuant to Federal Rules 24 of Civil Procedure, Rule 56. 25 26

The accompanying Memorandum of Points and Authorities and Rada Defendants'

27 Separate Statement of Controverting Facts ("SSCF") with attached exhibits supports the 28

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Motion and this Reply.

Also incorporated by reference are the Rada Defendants'

previously filed Motion for Summary Judgment, the accompanying Memorandum of

4 Points and Authorities and the Rada Defendants' Separate Statement of Facts in Support 5 6 7

of Motion for Summary Judgment, Plaintiff's Motion for Partial Summary Judgment and accompanying Separate Statement of Facts, Receiver's Response and Opposition to

8 Rada Defendants' Motion for Summary Judgment ("Receiver's Response") . 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

MEMORANDUM OF POINTS AND AUTHORITIES I. Introduction The Rada Defendants' Motion for Summary Judgment ("MSJ") should be granted because the Receiver has shown no genuine issues of material fact exist as to the following: (1) The District Court has no personal jurisdiction over the non-resident Rada

Defendants because the claims do not "arise out of the non-residents' activities in Arizona," but out of their sales activities in other states. No sales occurred in Arizona; (2) The exercise of personal jurisdiction over the non-resident Rada Defendants

would be unreasonable and a violation of due process. Any alleged harm by the sales of CGAs by the non-resident Defendants was created in other states, not Arizona. Arizona

24 citizens were not harmed by the non-resident Defendants' sales activities, and no action 25 26 27 any Arizona governmental agency; 28

was therefore taken against Mid-America Foundation or any of the Rada Defendants by

(3)

The Rada Defendants were employed as independent contractors by legal
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definition; (4) CGAs are not securities under the PPA or any other federal or Arizona law

4 because the Mid-America CGAs were not "pooled income funds," which are regulated 5 6 7

by the PPA; (5) The Receiver erroneously relies upon the argument that the lack of review

8 of an audited financial statement is dispositive of a showing of lack of good faith and the 9 10 11

Receiver has provided not a single citation, not a single cogent or compelling legal argument, not a single statute, not even a good reason to distinguish the Rada

12 Defendants from the commission sales persons that sold Enron or Worldcom shares. 13 14 15 16 17 18 19

There is no requirement that an audited financial statement is required for review by a commission agent prior to the sale of a CGA; (6) The Receiver has no standing to bring a conversion claim and is confused

as to the difference between the law of conversion and the law of disgorgement; and (7) The Statute of Limitations has run on the fraudulent transfer claims because

20 the Receiver's self-described delay in discovering the alleged fraudulent transfers, 21 22 23

despite the wide array of resources at his disposal, was unreasonable under A.R.S. § 441009(A)(1). The Receiver needs a factual excuse for his quite obvious "laches" ­ but

24 none exists. His inaction was truly a lack of due diligence. 25 26 27 28 ///

II.

The District Court Does Not Have Personal Jurisdiction Over the NonResident Rada Defendants.

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A. The Claims Against the Non-Resident Rada Defendants Do Not Arise Out of Any Sales Activity Conducted in Arizona, Thus Any Alleged Harm Took Place Outside the State of Arizona. The Receiver correctly asserts that the Court's exercise of "long-arm" jurisdiction over the non-resident Rada Defendants must comport with due process. (Receiver's Response, pp. 2-3.) In order to meet the requirements of due process mandated by

8 Arizona and Federal law, the Receiver must show that the claims against the non9 10 11

resident Rada Defendants arose out of activities in the forum state.

(Receiver's

Response, p. 3, lns. 16-17.) The Receiver focuses argument upon the Rada Defendants'

12 individual contacts with Mid-America and the receipt of commissions emanating from 13 14 15

Arizona, but paid to the Rada Defendants in their severally domiciled status. This focus is misdirected, incorrect and therefore fails as a legal argument. The

16 "activity" that requires focus under both the Arizona and United States Constitution is 17 18 19

the activity that allegedly caused the harm. Keeton v. Hustler Magazine, Inc., 465 U.S. 770, 774-75, 104 S.Ct. 1473, 79 L.Ed. 2d 790 (1984); Schwarzenegger v. Fred Martin In this case, the sales of CGAs outside of

20 Co., 374 F.3d 797, 803 (9th Cir. 2004). 21 22 23

Arizona caused the harm. None of the non-resident Rada Defendants sold CGAs in Arizona. Thus, no harm was caused in this state, as all annuitants were at all times non-

24 residents of Arizona. 25 26 27 claims that effect them directly. Lake v. Lake, 817 F.2d 1416, 1422 (9
th

Every state court has a sovereign interest in protecting its citizens and in hearing Cir. 1987),

28 citing Burger King Corp. v. Rudzewicz, 471 U.S. 462, 475, 105 S.Ct. 2174, 85 L.Ed. 528

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(1985).

Laws do vary state by state as outlined and argued by the Receiver in his

Motion for Partial Summary Judgment. (MPSJ, pp. 22-33.) Assuming, only for argu-

4 ment, that there was harm committed by the non-resident Rada Defendants that affected 5 6 7

annuitants residing in California, Massachusetts, Maine, Washington, Florida, Texas and South Dakota, then the interest of each individual state must be assessed and weighed Arizona gained dollars. California, Massachusetts,

8 against the interest of Arizona. 9 10 11

Maine, Washington, Florida, Texas and South Dakota lost dollars because of annuitants' losses. The harm did not take place in Arizona due to any act of the Rada Defendants.

12 Only when Dillie stole the cash deposits did the Foundation suffer. See Burger King, 13 14 15

471 U.S. at 477, 105 S.Ct. at 2184, citing "shared interest of the several states in furthering fundamental social policies," and Lake v. Lake, 817 F.2d at 1422 citing

16 "conflicts with sovereignty" criteria in measuring reasonableness under a due process 17 18 19 20 21

analysis (emphasis added). B. The Court's Exercise of Personal Jurisdiction Over the Non-Resident Rada Defendants Would be Unreasonable The exercise of personal jurisdiction over a defendant cannot be the "result of

22 random, fortuitous or attenuated contacts, or based upon the unilateral acts of third 23 24 25 clear that the court ultimately denied jurisdiction over the defendant only when the 26 Receiver could not show that the defendant had committed an intentional act in the 27 28

parties." Lake, 817 F.2d at 1421. In Schwarzenegger v. Fred Martin Motor Co. , it is

forum sufficient to allow personal jurisdiction. Id., 374 F.3d 797 (2004), 807 (9th Cir.
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2004). Attending seminars in Arizona is not sufficient. Renting a car is not sufficient. Questioning Mid-America affiliates at a learning conference is not enough. Signing a

4 contract in Maine, with a domiciled Arizona corporation, to sell a CGA in Maine, is 5 6 7

insufficient. In this case, Dillie is to blame, not the non-resident Rada Defendants who acted as

8 couriers. The agreements between the non-resident Rada Defendants and Mid-America 9 10 11

only addressed contractual disputes that might arise between the individual sales representative and Mid-America, they have no direct or indirect relevance to the annui-

12 tants. It is not enough to engage the Arizona long arm statute. When agreements were 13 14 15

signed with Mid-America, the independent contractors could not have foreseen the theft of $54,000,000 by the man who founded the Foundation. The Receiver has filed claims

16 against the non-resident Rada Defendants for acts that could not possibly harm Arizona 17 18 19

or its residents. The further exercise of personal jurisdiction over the non-resident Rada Defendants is and continues to be a violation of their due process rights, unless

20 jurisdiction arises from a source other than the Arizona long arm statute. 21 22 23 24 25 26 27 28

III.

CGAs Are Not Securities Under Federal or Arizona Law A. The Mid-America CGAs are Not Investment Contracts Under the Howey Test, Nor Are they "Notes" Nor "Evidence of Indebtedness" Because the Purchase of a CGA Has No Expectation of Profit From Inception.

In his MPSJ, and again in his Response, the Receiver refutes case history by claiming that a CGA is an "investment contract" under the Howey test. (MPSJ, p. 18,
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Receiver's Response, pp. 10-11.) In a 1946 decision, the U.S. Supreme Court developed a test regarding the determination of whether a financial instrument could be considered

4 an "investment contract" within the definition of "security" under the '33 Act. 5 6 7

The Supreme Court identified characteristics common to investment contracts holding that "an investment contract for purposes of the '33 Act means a contract,

8 transaction or scheme whereby a person invests his money in a common enterprise and 9 10 11

is led to expect "profits ... solely from the efforts" of the promotion or third party. S.E.C. v. W.J. Howey Co., 328 U.S. 293, 301, 66 S.Ct. 1100, 1104, 90 L.Ed. 1244

12 (1946). In the context of the determination of whether a financial instrument operates as 13 14 15

a "security," the United States Supreme Court has defined profits as "an expectation of income." United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 854-55, 95 S.Ct.

16 2051, 2062 (1975) rehearings denied. There is no "income" derived from a CGA. There 17 18 19 20 21 22 23

is merely a partial return of capital ­ never equal to the purchase price and never dependant upon profits. The CGA is guaranteed by the full faith and credit of the Foundation. The Receiver continuously misses the target by exhorting that CGAs produce income or profits. When an individual purchases a CGA, there is no expectation of a fixed income based upon profits. The monthly payments are calculated solely upon To the contrary, there is no opportunity for gain, financial or The purpose of the CGA is to give the

24 actuarial forecasts. 25 26

otherwise, with the purchase of a CGA.

27 purchaser/annuitant a tax deduction, to collect a periodic payment irrespective of the 28 foundation's profitability, and primarily to make a charitable contribution to the charity

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of choice. It is in fact a losing proposition for the annuitant to buy a CGA as the CGA's value must be undervalued to gain any tax benefits. See 26 U.S.C. § 514(c)(5)(A),

4 which requires that the present value of the annuity cannot be greater than 90% of the 5 6 7 8 9 10 11

amount contributed in exchange for the annuity ­ thereby forcing a charitable gift in an amount not less than 10% of the contribution (commonly referred to as the "10% rule"). To knowingly overpay for the CGA/annuity means that the annuitant must have had a purpose that outweighed any "investment contract" mindset. In fact, no one buys a CGA who does not want to leave his/her residual estate totally and finally to a charity

12 of choice. It is this donative intent, to aid the charity of choice, that drives the sales of 13 14 15 16 17 18 19

CGAs ­ not the benefit theory of investing for profit. There is no profit. There cannot be any profit. Under any interpretation of the Howey test, the investor must have an investment motive and a determination for profit ­ an investment intent as distinguished from a donative intent. CGAs fulfill neither the investments nor profit elements. In the case of

20 Mid-America, had Dillie monitored and nurtured the annuitants' cash as a prudent 21 22 23

fiduciary, there would have been no risk at all to the CGAs. Dillie's dishonesty created the sole risk because ordinarily charitable foundations do not go broke. It takes a

24 catastrophe like the theft of $54 million to take down a charitable foundation. Due 25 26 27 has been used successfully by charities for years; and Congress has specifically 28 exempted CGAs from the '33 Act, and has not seen fit to regulate it as a security; and, in

diligence has never required the kind of inquiry that the Receiver suggests. The CGA

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fact, the IRS (through Congress) has bestowed special tax advantages for persons who purchase CGAs. (See Rada Defendants MSJ, pp. 6-8.) B. CGAs are Not "Pooled Income Funds" as Governed by the PPA; Therefore the PPA Does Not Apply to the Mid-America CGAs. The following table describes the factual differences between a CGA and a pooled income fund:
CHARITABLE GIFT ANNUITY Contribution to a fund Fund assets pooled Fund maintained by a charitable organization Fixed payments based upon actuarial computation, not on performance, and guaranteed. Payments are based upon: Fixed annuities and life expectancy Paid by an insurance company Payments are guaranteed by full faith and credit of 501(c) (3) charities Payments are static For the life of the annuitant POOLED INCOME FUND Contribution to a fund Fund assets pooled Fund maintained by a charitable organization Fluctuating payments based solely upon fund income and never guaranteed. Payments are NOT based upon: Fixed annuities - similar to a mutual fund, charity acts like an investment adviser or investment company and the payee is regulated. Payments are never guaranteed Payments are not static and may fluctuate wildly. For the life of the annuitant

The Mid-America CGAs were contributions to a fund that was pooled, however, the payments were fixed and based upon an actuarial computation, not on performance.

20 The Receiver cited to SEC v. Edwards, 540 U.S. 389, 124 S.Ct. 892, which holds that a 21 22 23 promise of a fixed rate of return does not affect the conclusion that its CGAs were secur24 ities." Receiver's Response, p. 13, lns. 18-19. The financial instrument in the Edwards 25 26 27 ment. Once again, the Mid-America CGAs did not promise profit at all. Mid-America 28 annuitants were not attracted to the CGAs as investments, but as "tax breaks" and a way

"fixed interest instrument" can be held to be a security.

Warfield stated "MAF's

case was a lease back contract for the sale of pay phones promising a profit on an invest-

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to donate money upon death to a charity. The fixed rate of interest is not the only distinguishing feature of a CGA. See discussion of the CGA compared to the pooled income

4 fund and investment contract, supra. As described in the PPA (15 U.S.C. § 78c(3)(b)(2) 5 6 7

and by the Receiver (Receiver's Response at p. 15), pooled income funds are regulated because they operate more like mutual funds, which are investment contracts, rather than

8 like CGAs. (See H.R. Rep. No. 104-333, p. 6 (1995).) The PPA essentially codified 9 10 11

many of the considerations under which the SEC consistently had determined that charitable organizations and their funds would be exempt from the federal securities laws.

12 H.R. Rep. No. 104-333, p. 7-8 (1995). That is still the SEC's opinion. 13 14 15 16 17 18 19 20 21 22 23 24 25

The primary and most important distinction between a CGA and a pooled income fund is as follows: The amount of each annuitant's monthly payment from a CGA is not based upon how well the foundation manages its investment, but upon the transfer of mortality risk from the annuitant to the charitable organization. Only the CGA completely transfers investment risk from the annuitant to the charity. In the case of a pooled income funds: If the underlying assets fail to perform, the annuitant suffers because the annuitant's income stream is measured by the investment performance. In the case of the CGA, the charitable organization suffers, because it must make

26 the annuity payments in the fixed amount regardless of performance of the underlying 27 28

assets. This fundamental distinction reflects the intention of Congress to ensure that
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pooled income finds interest are subject to the federal securities laws, and CGAs are not subject to these laws, and this is clear from a studied reading of the Philanthropy

4 Protection Act of 1995. There is not a single case brought by the SEC in an enforcement 5 6 7 8 9 10 11 12 13

action against any charitable organization that provides CGAs to the public. IV. The Receiver Failed to Meet the Requirements of A.R.S. § 44-1009(A)(1), Thus the Statute of Limitations Has Run on the Fraudulent Transfer Claims Because The Receiver's Had Ample Opportunity and Resources at His Disposal to Discover the Payments of Commissions as Alleged Fraudulent Transfers Long Before He Took Dillie's Deposition, The Receiver's Undue Delay Has Prejudiced the Rada Defendants. A.R.S. § 44-1009(A)(1) governs the time limitation that anyone, including the Receiver, had to file fraudulent transfer claims. The Receiver could have timely filed

14 and later amended the Complaint. There is no excuse for the unreasonably late filing. 15 16 17

The statutes give plaintiffs four years from the date of the alleged fraudulent transfer, or one year from discovery. "[S]tatutes of limitation are used to determine `whether the

18 plaintiff has inexcusably slept on his rights.'" United States v. Northrop Corporation, 19 20 21

91 F.3d 1211, 1217 (9th Cir. 1996), citing Holmberg v. Armbrecht, 327 U.S. 392, 396, 66 S.Ct. 582, 584, 90 L. 3d. 743 (1946). In his Response, the Receiver described a series of

22 events to excuse his lack of due diligence. He was appointed in December 2001. The 23 24 25 what Mid-America did as a 501(c)(3) charitable foundation, and where did its $54 26 million come from! 27 28

very next day he should have discovered the business or operations of Mid-America, and

Instead, the Receiver chose to focus his attention on getting a deposition from
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Dillie as though Dillie would tell the truth. He could have, and should have, questioned everyone on the premises regarding the money that exchanged hands at Mid-America ­

4 its day-to-day activities. The Receiver was given almost unlimited authority by this 5 6 7

Court to investigate the financial activities of Mid-America, starting December 2001. He was not the only person the Receiver could have talked to regarding the financial

8 activities of Mid-America. It was unreasonable for the Receiver to focus his attention on 9 10 11 12 13 14 15

Dillie and wait ­ and wait ­ and wait to discovery that millions had been paid out to commission agents with written contracts. Because he claims this case is ancillary to the SEC case against Dillie, (Receiver's Response, p. 23, lns. 10-14), Warfield should have used the unlimited resources of the SEC. He should have contacted any number of Mid-America employees, including Mr.

16 Gulley, Tom Bishop, Mike Maksudian, Mr. Chant or Mr. Diaz, Nelson Happy, Felicia 17 18 19

Majewski, Julia Erwin, etc., etc., and any member of the Board of Directors or its publicized Trustees. Any one of these people could have and would have given Warfield

20 information about Mid-America's independent contractor sales representatives, who 21 22 23 24 25 26 27 of due diligence. The money trail was self-evident. The fact that files were in Idaho and 28 other places, as the Receiver claims, is completely irrelevant. He very likely had, from

brought in substantially 100% of its revenues. Where did Warfield think the $54 million came from? Warfield is not an amateur at this job of being a "court-appointed receiver." The fact that the SEC had already filed fraud charges against Dillie exposes Warfield's lack

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the investigation the SEC had already conducted to bring criminal charges against Dillie, all or most of the factual issues had already been explored by the SEC. Warfield has no

4 good excuse for sleeping on his rights ­ as a sage jurist commented. 5 6 7 8 9 10 11

V.

The Defendants in this Case are Independent Contractors (and Creditors) of Mid-America, With an Antecedent Debt. They Would Have Had a Claim Against the Receivership if Left Unpaid. An independent contractor is defined by law as "one `who contracts with another

to do something for [the other] but who is not controlled by the other nor subject to the other's right to control with respect the [the] physical conduct in the performance of the

12 undertaking.'" Southeast Arizona Medical Center v. Arizona Health Care Cost Contain13 14 15

ment System Administration, 188 Ariz. 276, 282, 935 P.2d 854, 860 (App. 1996) reconsideration denied 1996, review denied 1997. The Ninth Circuit has defined an indepen-

16 dent contractor as one "who exercising an independent employment, contracts to do a 17 18 19

piece of work according to his own methods and without being subject to the control of the employer except as to the result of the work." Donroy, Ltd. v. United States, 301

20 F.2d 200, 206 (1962). 21 22 23

The employment arrangement the Rada Defendants had with Mid-America meets this test. The persons solicited, the sales pitch, the manner of sale in toto was left to

24 each of the Rada Defendants. The Receiver admits this. (Receiver's Separate Statement 25 26 27

of Facts in Support of Receiver's Response, p. 7-9, ¶¶ 15-19.) In In Re Universal Clearing House Company, the defendants held an antecedent

28 debt as independent contractors. Id., 60 B.R. at 999-1000. In this case, had the Rada

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Defendants not been paid the commissions due by Mid-America, they would have had a valid breach of contract claim against the company, whether the company was rendered

4 insolvent or not. 5 6 7

CONCLUSION The Rada Defendants respectfully ask the Court to take note of the fact that there

8 is a difference between an investment contract, note and evidence of indebtedness and a 9 10 11

CGA, and between a pooled income fund and a CGA, and that the '33 Act and the '34 Act exempt CGAs from the definition of security, even though the Receiver fails to see

12 the very clear differences. The Court should also note that the PPA of 1995 makes a 13 14 15

distinction between a CGA and a pooled income fund and that Congress directed that a pooled income fund and that the PPAs restrictions on the payment of commissions is

16 directed at only the sale of pooled income funds. 17 18 19 20 21 22 23

Therefore, the Rada Defendants ask the Court to find that CGAs are not securities and reverse the finding if required, in SEC v. Dillie. Warfield failed to use due diligence in capturing the facts surrounding, not what Dillie did, but what Mid-America as a charitable foundation did for a living. The Receiver cannot be excused for "sleeping on his rights" and for failing to recognize that

24 Mid-America had hundreds of commissioned salesman all over the United States. He 25 26 27 to understand that Arizona has a statute of limitation that circumscribes what a plaintiff 28 must do, whether he was appointed by the State or Federal court.

failed to recognize and understand that the there may be a claim against them. He failed

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The Court should enforce the statute of limitation that sets forth a valid defense to the Receiver's claims. The Rada Defendants also request that the Court grant summary judgment on the above issues as no genuine issue of material fact exists, and that the Court grant summary judgment on the additional superfluous claims of the Receiver, including the dis-

8 gorgement, conversion and unjust enrichment claims. There are no issues of material 9 10 11

fact that require the Court to do anything further. The only facts not before the Court are whether or not the commissioned agents

12 knew or should have known that the product they were selling had been previously raped 13 14 15

by Dillie and whether they should have exerted further due diligence ­ but that is a jury question. In no event are there any facts to substantiate that any of the Rada Defendants

16 had a "malignant heart" or intent to deceive as required to make a finding that punitive 17 18 19 20 21 22 23 COPY of the foregoing mailed this 16th day of February, 2006, to: 24 Robert Tretiak 25 4615 North Ft. Apache Road Las Vegas, NV 89129 26 Defendant Pro Se 27 /// 28

damages are appropriate. We request the Court make that finding at this time. Dated at Phoenix, Arizona this 16th day of February, 2006.
BURTON M. BENTLEY, P.C. _s/ Burton M. Bentley _________ Burton M. Bentley Attorney for Defendants Rada

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1 David Knutson 2 First Financial Center, Ltd. 119 Third Street, N.E. #333 3 Cedar Rapids, IA 52401 Defendant Pro Se 4 David Tigges 5 First Financial Center, Ltd. 6 119 Third Street, N.E. #333 Cedar Rapids, IA 52401 7 Defendant Pro Se 8 Ren Bidwell 3430 Pacific Avenue SE 9 Olympia, WA 98501 10 Defendant Pro Se 11 Steve A. Bryant. 3618 Mt. Vernon, # A 12 Houston, TX 77006-4238 Co-Counsel for Rada Defendants 13 14 Bruce F. Walters 2606-C West Roosevelt Boulevard 15 Monroe, NC 28110 Pro Per 16 17 18 19 20 21 22 23 24 25 26 27 28

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