Free Response in Opposition to Motion - District Court of Arizona - Arizona

1 Guttilla & Murphy, PC 2 3 4 5 6 7 8 9 10 11
Guttilla & Murphy, PC
4150 West Northern Ave Phoenix, Arizona 85051 (623) 937-2795

Firm No. 00133300 Ryan W. Anderson (No. 020974) 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 RESPONSE AND OPPOSITION TO RADA DEFENDANTS' MOTION FOR SUMMARY JUDGMENT

12 13

14 I. Introduction 15 16 17 18 "Defendants" consist of Defendants Bestgen, Carroll, Crosswell, Davis, Derk, Frazier, Pursuant to Rule 56, Fed. R. Civ. P., the Receiver hereby responds to and opposes the Rada Defendants' Motion for Summary Judgment. The Receiver notes that the

19 Kerher, Lankford, Rada, Richard and Wehrly. This group of Defendants does not include 20 Defendant Bidwell. 21 22 23 this Court should grant summary judgment sua sponte to the Receiver on counts five The Defendants' motion for summary judgment should be denied in full. And,

24 (unjust enrichment) and eleven (equitable disgorgement) of his Complaint. 25 . . . 26 27 28 . . . . . .

Case 2:03-cv-02390-JAT

Document 485

Filed 02/01/2006

Page 1 of 31

1 2 3 4 I.

Memorandum of Points and Authorities Jurisdiction A. The District Court Has Personal Jurisdiction Over All Defendants. Defendants Carroll, Derk, Davis, Frazier, Kerher, Lankford, and Richard ("Non-

5 Resident Defendants") urge the Court to grant summary judgment to Defendants because
1 6 the Court lacks personal jurisdiction over them.

7

When a defendant moves to dismiss a complaint for lack of personal jurisdiction,

8 the plaintiff bears the burden of demonstrating that jurisdiction is appropriate.
th 9 Schwarzengger v. Fred Martin Motor Co., 374 F.3d 797, 800 (9 Cir. 2004). Here, while

10 Non-Resident Defendants have not sought to dismiss the Complaint, the same analysis 11 applies.
Guttilla & Murphy, PC
4150 West Northern Ave Phoenix, Arizona 85051 (623) 937-2795

12

The Non-Resident Defendants argue that the Plaintiff must satisfy a two part test

13 to establish personal jurisdiction over a defendant. The Non-Resident Defendants argue 14 that Plaintiff must show: (i) has the Defendant done business or caused an event to occur 15 in Arizona out of which the claims arise; and, (ii) is the exercise of personal jurisdiction 16 over the Defendants consistent with the requirements of due process. (See Defendants' 17 Motion, 26:16-22). The Non-Resident Defendants' two part test is not the correct 18 analysis for personal jurisdiction. A district court sitting in diversity has personal 19 jurisdiction over a defendant to the extent provided by the law of the forum state. Data
th 20 Disc, Inc. v. Sys. Tech Ass'n, 557 F.2d 1280, 1286 (9 Cir. 1977). Arizona's long arm

21 statute provides for personal jurisdiction within the limits of federal due process Ariz. P. 22 Civ. 4.2(A), Cohen v. Barnard Volger Co., 13 P.3d 758, 760 (Ariz. Ct. App. 2000). 23 Accordingly, this Court should only consider if the exercise of personal jurisdiction over 24 the Defendants comports with due process. Glencore Grain Rotterdam B.V. v. Shivath
th 25 Rai Harnarai Co., 284 F.3d 1114, 1123 (9 Cir 2003). To satisfy constitutional due

26 process concerns, the non-resident Defendants must have at least "minimum contacts" 27 28
1

Defendants Rada, Bestgen and Crosswell conceded that this Court has personal jurisdiction over them. Therefore, the Receiver's response will not address these Defendants.

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1 with the forum state and the exercise of jurisdiction must not offend traditional notions of 2 fair play and substantial justice. Schwarzenegger, 374 F.3d at 801 (quoting Int'l Shoe 3 Co. v. Washington, 326 U.S. 310, 316 (1945)). Finally, the Court may exercise either 4 general or specific jurisdiction over the Defendants. Here, specific jurisdiction exists 5 against the Non-Resident Defendants. 6 7 8 9 10 11
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4150 West Northern Ave Phoenix, Arizona 85051 (623) 937-2795

B.

Specific Jurisdiction exists Against the Non-Resident Defendants Carroll, Derk, Davis, Frazier, Kerher, Lankford, and Richard.

A court exercises specific jurisdiction where the cause of action arises out of, or has a substantial connection to, the defendant's contacts with the forum. Glencoe Grain Rotterdam, B.V., supra, 284 F.3d at 1123. Here each Rada-Defendant overwhelmingly satisfies each prong of the test for analyzing specific jurisdiction: (1) The non-resident defendant must purposefully direct his activities or consummate some transaction with the forum or resident thereof, or perform some act by which he purposefully avails himself of the privilege of conducting activities in the forum thereby invoking the benefit and protections of its laws; The claim must be one which arises out of or relates to the defendants forum-related activities; and The exercise of jurisdiction must comport with fair play and substantial justice, i.e., it must be reasonable.

12 13 14 15 16 17 18

(2) (3)

19 Lake v. Lake, 817 F.2d 1416, 1421 (9th Cir. 1987); Bancroft & Masters, Inc. v. Augusta 20 Nat'l, Inc., 223 F.3d 1082, 1086 (9th Cir. 2000). 21 22 Plaintiff must establish that a defendant either purposefully availed themselves of 23 the privilege of conducting activities in Arizona or purposefully directed their activities 24 toward Arizona. Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985). A showing that 25 a defendant purposefully availed himself of the privilege of doing business in a forum 26 state typically consists of evidence of the Defendant's action in the forum, such as 27 executing or performing a contract there. Schwartzenegger, 374 F.3d at 802. The 28 3
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C.

Purposeful Availment

1 requirement to establish "purposeful availment" ensures that a defendant will not be 2 hauled into court as the result of random or attenuated contacts. Burger King Corp., 471 3 U.S. at 475. 4 It is uncontroverted that MAF, as well as any other Mid-America company

5 detailed herein, was operated in Scottsdale, Arizona. (See, RNSOF, 1-3). Here, each 6 Non-Resident Defendant purposely availed themselves of the privilege of selling MAF 7 CGAs. The Rada Defendants entered into contracts with MAF; received commission 8 payments from Arizona based MAF and/or personally visited or regularly communicated 9 with Arizona based MAF to effectuate the sale of Mid America charitable gift annuities 10 issued out of Arizona. 11
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4150 West Northern Ave Phoenix, Arizona 85051 (623) 937-2795

1.

Defendant Carroll.

12

Defendant Robert Carroll signed a "Mid-America Foundation Gift Annuity Agent

13 Compensation Agreement" with Mid-America Foundation on September 23, 1997. (See,
2 14 ROSOF , ¶F (1)(a) (ii)). Defendant Carroll executed a second contract, an "Associate

15 Agreement" with Mid America Financial Group ("MAFG"), on June 11, 1996. (See, 16 RNSOF 4). Defendant Carroll admitted to the receipt of $83,526.56 in commissions 17 from Arizona. (See, ROSOF, ¶F (1)(a)(iv)). Defendant Carroll's activities in Arizona 18 and contracts with MAF establish that Defendant Carroll purposely availed himself of the 19 privilege of conducting activities in Arizona. 20 21 2. Defendant Derk

Defendant Derk signed a Mid America Charitable Gift Annuity "General Agent"

22 representation agreement with MAFG. (See, ROSOF ¶F (7)(a)(iii)). This "General 23 Agent" contract states it should be enforced under the laws of Arizona. (See, Exhibit 33 24 to ROSOF). Defendant Derk also signed a "Planned Giving Advisor Consultant 25 Agreement" with MAFG in September 2001, wherein, among other things, Defendant 26 Derk consented to the jurisdiction and venue of an appropriate court in Maricopa County, 27 The acronym "ROSOF" refers to the Receiver's original Statement of Facts filed with his Motion for Partial Summary Judgment. The acronym "RNSOF" refers to the 28 Receiver's new statement of facts accompanying this response. 4
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1 Arizona as the proper forum to determine any disputes arising from the contract. (See, 2 RNSOF 5). Defendant Derk admitted to the receipt of $44,850.61 in commissions from 3 Arizona. (See, ROSOF)¶F (7)(a)(v)). Finally, Defendant Derk attended a two day 4 seminar in Arizona, Mid America University, where he was educated about the MAF 5 Charitable Gift Annuity Program. (See, Defendant Derk's Declaration, Exhibit B to 6 Rada Defendants Separate Statement of Facts). Defendant Derk's activities in Arizona 7 and contracts with MAF establish that Defendant Derk purposely availed himself of the 8 privilege of conducting activities in Arizona. 9 10 3. Defendant Davis

Defendant Davis signed a "Marketing and Sales" contract with Mid-America in

11 February 1998". (See ROSOF ¶F 18(a)(iii)). This contract states it should be governed
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4150 West Northern Ave Phoenix, Arizona 85051 (623) 937-2795

12 by Arizona law. Defendant Derk admits to visiting MAF's offices in Arizona on three 13 separate occasions over a three year period. (See, Defendant Davis Declaration, Exhibit 14 B to Rada Defendants' Separate Statement of Facts). Defendant Davis admits to the 15 receipt of $198,743.15 in commissions from the sale of MAF CGAs. (See ROSOF ¶F 16 18(a)(vi)). Finally, Defendant Davis testified that, while in Arizona, he negotiated with 17 Mid America to secure exclusive territorial rights to promote Mid America products in 18 the Northeastern United States. (See, RNSOF 6). Defendant Davis' activities in Arizona 19 and contracts with MAF establish that Defendant Davis purposely availed himself of the 20 privilege of conducting activities in Arizona. 21 22 4. Defendant Frazier

Defendant Frazier admits to the receipt of $40,234.91 in commissions from the

23 sale of three Mid America CGA's. (See ROSOF ¶F 12(a)(v)). Defendant Frazier sold 24 MAF CGA's in exchange for a commission payment on all MAF CGA's sold by him. 25 Defendant Frazier admitted he entered into a contract with MAF to sell MAF CGAs as an 26 agent. (See, Defendants' Separate Statement of Facts, ¶1). In direct opposition to Mr. 27 Frazier's Declaration, Defendant Kerher, a business partner of Defendant Frazier testified 28 that Defendant Frazier visited MAF in Arizona, twice, to obtain information about MAF. 5
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1 (See, RNSOF 8). Defendant Frazier's activities in Arizona and contracts with MAF 2 establish that Defendant Frazier purposely availed himself of the privilege of conducting 3 activities in Arizona. 4 5 5. Defendant Kerher

Defendant Kerher entered into two separate contracts with Mid-America, a

6 Charitable Gift Annuity "General Agent" agreement and an "Independent Associate 7 Agreement". (See, ROSOF ¶F 12(b)(v)). Defendant Kerher testified in detail about his 8 interactions with MAF, including talking to Mid-America employees on the telephone 9 and receiving correspondence from Mid-America by mail. (See, RNSOF 9). Defendant 10 Kerher admits to the receipt of $33,038.55 in commission from the sale of Mid America 11 CGA's. (See ROSOF ¶F 12(b)(vii)). Defendant's Kerher's activities in Arizona and
Guttilla & Murphy, PC
4150 West Northern Ave Phoenix, Arizona 85051 (623) 937-2795

12 contacts with the Arizona based MAF satisfy the purposeful availment test. 13 14 6. Defendant Lankford

Defendant Lankford entered into three separate contracts with Mid-America; a

15 "Sales and Marketing Agreement" between Mid-America Living Trust Associates and 16 Lankford as President of Mid-America Estate Services; a "Mid-America Foundation Gift 17 Annuity Agent Compensation Agreement"; and a Marketing and Sales Agreement 18 between Mid-America Estate Planning and Defendant Lankford. (See, ROSOF ¶F 19 15(a)(ii)(vii)(x)). Defendant Lankford holds an Arizona Insurance license. (See 20 Defendant Lankford Declaration ¶2, Exhibit B to Rada Defendants' Separate Statement 21 of Facts). Defendant Lankford admits to meeting with Robert Dille and other Mid
3 22 America employees in Arizona during the years of 1998, 1999 and 2000 . (See

23 24 25 26 27 28
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Interestingly, Defendant Lankford in his Declaration states he "never had any discussions with Robert Dillie or any other Mid America representative about the day-to-day operations of Mid America. (See Defendant Lankford Declaration ¶5, Exhibit B to Rada Defendants' Separate Statement of Facts). However, Defendant Lankford's deposition is replete with Defendant Lankford's testimony about his conversations with Mid America employees, meetings where Lankford demanding certain financial documents from Mid-America, and discussions of MidAmerica internal matters. (See RNSOF 10-12). Lankford details meetings with Dillie and Mid America employees. (See RNSOF 11). Lankford details conversations with Nelson Happy of Mid-America. (See RNSOF 12). Lankford details conversations with Mid America employees and October 2001 financial statement. (See RNSOF 10).

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1 Defendant Lankford Declaration ¶4, Exhibit B to Rada Defendants' Separate Statement 2 of Facts). Defendant Lankford's significant and continuous contacts with Mid-America, 3 including three separate contracts with Mid-America establishes that Defendant Lankford 4 purposely availed himself of the privilege of conducting activities in Arizona. 5 6 7. Defendant Richard

Defendant Richard signed a "Mid-America Foundation Gift Annuity Agent

7 Compensation Agreement" in November 1997 wherein Defendant Richard agreed to 8 serve as an agent of the Mid-America Foundation. (See ROSOF ¶F 9(c)). Defendant 9 Richard updated his commission agreement with Mid America in 1999 and 2000. (See 10 ROSOF ¶F 9(d)). Defendant Richard sold nine Mid America CGA's and received 11 $143,866.94 in commissions. (See ROSOF ¶F (f)). Defendant Richard signed a
Guttilla & Murphy, PC
4150 West Northern Ave Phoenix, Arizona 85051 (623) 937-2795

12 "Planned Giving Advisor Consultant Agreement" with MAFG in July 2000, wherein, 13 among other things, Defendant Richard consented to the jurisdiction and venue of an 14 appropriate court in Maricopa County, Arizona. (See RNSOF, 13). Accordingly, 15 Defendant Richard's activities and contracts with Mid-America establish that Defendant 16 Richard purposely availed himself of the privilege of conducting activities in Arizona. 17 18 8. Defendant Wehrly

Defendant Wehrly signed a "Seminar Agreement" with Mid America in 1998.

19 (See, ROSOF ¶F17(d)(ii)). Defendant Wehrly signed a "Marketing and Sales 20 Agreement" with Mid America where he agreed to sell Mid America products, including 21 the MAF CGA in exchange for commissions. (See, ROSOF ¶F17(d)(iii)). The 22 commission checks paid on four of the five CGA's sold by Defendant Wehrly were paid 23 to a Southwest Estate Planners Inc. (See, ROSOF ¶F17(d)(iv)). Defendant Wehrly 24 testified at his deposition that he and his wife were the sole shareholders of Southwest 25 Estate Planners. (See, ROSOF ¶F17(d)(iv)). A review of the Arizona Corporation 26 Commission's website details that Southwest Estate Planners Inc. is an Arizona 27 corporation and Defendant Wehrly is the President/CEO. (See, RNSOF 14). 28 Notwithstanding Defendant Wehrly's own admissions that he resided in Arizona from 7
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1 1995-1998 and maintains an Arizona insurance license, it is abundantly clear that 2 Defendant Wehrly's activities in Arizona, contracts with Mid-America, and the receipt by 3 his Arizona corporation of a majority of his commissions establishes that Defendant 4 Wehrly purposely availed himself of the privilege of conducting activities in Arizona. 5 6 7 D. Receiver's Claims Arise out of or Relate to the Non-Resident Defendants Forum Related Activities. The Court should apply a "but for" test to determine whether a particular claim

th 8 arises out of the forum related activities. Ballard v. Savage, 65, F. 3d 1495, 1500 (9 Cir

9 1995). Here, "but for" Defendants contracts, intentional contacts, and the receipt of 10 commissions from Arizona based Mid-America, the Receiver's claims for the return of 11 the fraudulently obtained commissions would not have arisen. It is clear that the receipt
Guttilla & Murphy, PC
4150 West Northern Ave Phoenix, Arizona 85051 (623) 937-2795

12 of the commissions by the Defendants is directly related to the Plaintiff's claims, 13 satisfying the second prong of the test enumerated in Lake v. Lake, 817 F.2d 1416, 1421
th 14 (9 Cir. 1987) and Bancroft & Masters, Inc. v. Augusta Nat'l, Inc., 223 F.3d 1082, 1086 th 15 (9 Cir. 2000). E. The Exercise of Personal Jurisdiction over the Non-Resident 16 Defendants is Reasonable 17 Since the Plaintiff has established the first two prongs of the personal jurisdiction 18 analysis, the Court presumes that the exercise of jurisdiction over the defendants is 19 reasonable. Ballard, 65 F.3d at 1500. There is no argument which can support the 20 position that personal jurisdiction over the Non-Resident Defendants is in anyway 21 unreasonable. Each of the Non-Resident Defendants intentionally chose to do business 22 with the Arizona based MAF, most traveled to Arizona to participate in workshops and 23 other activities, and all of the Non-Resident Defendants accepted commissions for the 24 sale of MAF CGAs. Furthermore, all of the Non-Resident Defendants communicated 25 with Mid-America to facilitate the sale of MAF CGAs to the MAF victims. Finally, all 26 of the Non-Resident Defendants have actively participated in this litigation and all phases 27 of discovery. The Non-Resident Defendants have been represented by Arizona counsel 28

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1 and have propounded and responded to numerous discovery requests. Moreover, each of 2 the Non-Resident Defendants have traveled to Arizona for their depositions. 3 Accordingly, the Non-Resident Defendants are not prejudiced in any way by this suit 4 being brought in the U.S. District Court for the District of Arizona. Since no compelling 5 case can be forwarded that personal jurisdiction over these Defendants is unreasonable, 6 this Court must deny Defendants' motion to dismiss all counts of the Plaintiff's 7 complaint for lack of personal jurisdiction. 8 II. The MAF CGAs Are Securities 9 10 11
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4150 West Northern Ave Phoenix, Arizona 85051 (623) 937-2795

A.

CGAs Fit the Definition of a Security under Federal and State Law as Either an Investment Contract or a Note or Evidence of Indebtedness

Contrary to the Defendants' assertions, MAF CGAs fall within the definition of a security under Securities Act of 1933, the Securities Exchange Act of 1934 or the Arizona Securities Act.4 The CGAs fit the definition of a security either as an investment contract or as a note or evidence of indebtedness. (See, ROSOF F.26.d) B. The Definition of a "Security" is Flexible and Adaptive

12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

The United States Supreme Court has consistently emphasized that the definition of a security is flexible and adaptable to meet the endless variety of new investment products and schemes. The securities laws are intended to reach "novel, uncommon or irregular devices, whatever they appear to be." SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344 (1943). In SEC v. W.J. Howey Co., 328 U.S. 293 (1946), the Supreme Court noted that the definition of a security "embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits." Id. at 299. In defining a note, the Supreme Court concluded that "Congress' purpose in enacting the securities laws was to regulate investments in whatever form they are made and by whatever name they are called." Reves v. Ernst & Young, 494 U.S. 56, 61 (1990). "To that end, (Congress) enacted a broad definition of `security,' sufficient to encompass
4

15 U.S.C. §77b(a)(1), 15 U.S.C. § 78c(a)(10), and A.R.S. § 44-1801(26). 9
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Case 2:03-cv-02390-JAT

1 virtually any instrument that might be sold as an investment." SEC v. Edwards, 540 U.S. 2 389, 393 (2004). 3 4 C. The CGAs are Investment Contracts under Federal and Arizona Law

The MAF CGAs are "securities" because they are investment contracts. An

5 investment contract is a scheme which "involves an investment of money in a common 6 enterprise with profits to come solely from the efforts of others." Securities and 7 Exchange Commission v. W. J. Howey, Co., 328 U.S. 293, 301 (1946). See also, Nutek 8 Information Systems, Inc. v. Arizona Corporation Commission, 194 Ariz. 104, 108, 977 9 P.2d 826, 830 (App. 1998), cert. denied sub nom., AKS Daks Communications, Inc. v. 10 Arizona Corporation Commission, 528 U.S. 932, (1999) (Arizona applies the Howey test 11 in defining investment contract). Here, it is undisputed that MAF Victims paid money to
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4150 West Northern Ave Phoenix, Arizona 85051 (623) 937-2795

12 MAF. In exchange, all funds paid to MAF were to be pooled and each annuitant was 13 promised (under his or her CGA contract) a monthly rate of return on his or her 14 investment, which makes their collective fortunes dependent on the success of a single 15 common enterprise. This horizontal commonality satisfies the common enterprise prong 16 of the Howey test. See Hocking v. Dubois, 885 F.2d 1449, 1459 (9th Cir. 1989)(en banc), 17 cert. denied, 494 U.S. 1078 (1990); Rose v. Dobras, 128 Ariz. 209, 211, 624 P.2d 887, 18 889 (App. 1981). The third prong of the Howey test is satisfied, because MAF managed 19 and invested the funds provided by the Victims who depended on MAF for their 20 promised payments. Accordingly, the MAF CGAs fit the federal definition of a security 21 under Howey, which also meets the Arizona definition of an investment contract. 22 Although the Defendants claim that the charitable motivation took the CGAs out

23 of the category of a security, the MAF sales materials stressed the investment aspects of 24 the CGAs, including referring to the deposit of funds in the CGA as an investment, and 25 the annuity payments as a "return on your investment." The materials also tout tax 26 benefits that are often associated with investment strategies, including savings on income 27 taxes, capital gains, and estate taxes. (See, RNSOF 15). Investors surrendered their 28 10
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1 money and securities believing that they were purchasing a financial instrument that 2 would pay them a guaranteed rate of return and provide tax benefits. 3 That one of the stated purposes of the CGA was to provide funds to charities does

4 not remove the CGA from the definition of an investment contract. Congress specifically 5 addressed this issue in the Philanthropy Protection Act of 1995 ("PPA") by noting that 6 because the donor's funds are pooled in a "common enterprise" with "profits" to come 7 solely from the efforts of those who maintain the fund, an interest in a charitable income 8 fund as evidenced by a CGA or other instruments may be an investment contract. House 9 of Representatives Report 104-333, Philanthropy Protection Act of 1995, p. 6. MAF 10 acknowledged in its contracts that it managed common investment funds subject to the 11 PPA, which specifically includes CGAs. (See, RNSOF 16; see, e.g. 15 U.S.C. § 80aGuttilla & Murphy, PC
4150 West Northern Ave Phoenix, Arizona 85051 (623) 937-2795

12 3(c)(10)). In summary, under federal and Arizona law the MAF CGAs fit the definition
5 13 of an "investment contract" and are subject to securities regulation.

14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

D.

The MAF CGA Fit the Definition of Notes and Evidence of Indebtedness

Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act define a security as including "(a)ny note." Section 2(a)(1) of the Securities Act also lists any "evidence of indebtedness" as a security. Although "evidence of indebtedness" is undefined, commentators argue that the criteria for defining "notes" as securities are helpful in analyzing this type of security. See, 2 Loss & Seligman, Fundamentals of Securities Regulation, 962-64 (3d ed. 1989 & Supp. 2001).

The Defendants' reliance on Corporation Commission v. Equitable Life Assurance Co., 73 Ariz. 171, 239 P.2d 360 (1951) is misplaced. That case did not determine whether an annuity could be subject to securities regulation, but decided that an annuity contract was not a contract of insurance and, therefore, not subject to the Arizona premium tax. The Court, however, did characterize an annuity as "an `investment' of funds." Id at 73 Ariz. 176, 239 P.2d 363. The Defendants also attached to their Motion for Summary Judgment two unpublished memoranda by attorneys for a seller of CGAs to bolster their argument that CGAs are not securities. The memoranda are essentially policy arguments in favor of allowing the payment of commissions, which the PPA prohibits. By providing a limited registration exemption, the Congress has concluded that CGAs and other similar instruments are securities. 11
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Case 2:03-cv-02390-JAT

1

A note is presumed to be a security, unless it resembles certain types of notes

2 identified by the Supreme Court as excluded from the definition of a security. See, Reves
6 3 v. Ernst & Young, 494 U.S. 56, 65 (1990). Moreover, financial instruments are

4 considered to be securities if (1) the seller's motivation is to raise money or finance 5 investments and the buyer's purpose is to make a profit; (2) there is common trading of 6 the instrument for speculation or investment; (3) the public expects that the instrument is 7 a security; and (4) there is no other regulatory scheme to significantly reduce the risk of 8 the instrument, thereby rendering the application of the securities laws unnecessary. 9 The MAF CGAs fit most of the foregoing categories: They were described in the

10 contracts as "general obligations" of the company. (See, RNSOF 17). In applying the 11 family resemblance test, the MAF CGAs do not resemble any of those notes identified in
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12 Reves as excluded from the definition of a security. Although the CGAs ostensibly had a 13 charitable purpose, MAF raised money from investors to fund investments which was its 14 only source of revenue, and in exchange the investors expected to receive income and tax 15 benefits as well as making charitable donations. Other factors would support a 16 reasonable expectation that the CGAs were securities: MAF represented that the CGA 17 assets would be invested in stocks, bonds, money market funds, and federal obligations, 18 not unlike a pooled investment or mutual fund (See, RNSOF 18) and it was exempt from 19 securities registration requirements, which ordinarily is not required unless the instrument 20 is a security (See, RNSOF 19) which provided an exemption from securities registration. 21 Moreover, CGAs are subject to the securities fraud jurisdiction of the Securities and 22 Exchange Commission and state securities regulators (see, House of Representatives 23 24 25 The excluded instruments include "the note delivered in consumer financing, the note secured by a mortgage on a home, the short-term note secured by a lien on a small 27 business or some of its assets, the note evidencing a `character' loan to a bank customer, short-term notes secured by an assignment of accounts receivable, or a note which simply 28 formalizes an open-account debt incurred in the ordinary course of business . . . "; and "notes evidencing loans by commercial banks for current operations." 494 U.S. at 64. 12 26
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1 Report 104-333, Philanthropy Protection Act of 1995, pp. 8-9), and there is no alternative
7 2 comprehensive regulatory regime that adequately protects investors.

3 4

E.

Fixed Interest Instruments Can Be Securities

The Defendants' argument that the CGAs are not securities because they promised

5 a fixed return is simplistic and wrong. See, SEC v. Edwards, 540 U.S. 389 (2004). In 6 that case, the Supreme Court held that a money making scheme is not excluded from the 7 definition of an "investment contract" simply because the scheme promised a contractual 8 entitlement to a fixed, rather than a variable, return. In Edwards, the Court emphasized 9 that "(t)here is no reason to distinguish between promises of fixed returns and promises 10 of variable returns for purposes of the test, so understood. In both cases, the investing 11 public is attracted by representations of investment income . . . ." Id at 394. The Court
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12 rejected the argument that fixed income investments are not securities, because "(u)nder 13 the reading respondent advances, unscrupulous marketers of investments could evade the 14 securities laws by picking a rate of return to promise. We will not read into the securities 15 laws a limitation not compelled by the language that would so undermine the laws' 16 purposes." Id at 394-95. The Court also clarified the meaning of "profits" as used in 17 Howey as "the profits that investors seek on their investment, not the profits of the 18 scheme in which they invest." Id. Therefore, MAF's promise of a fixed rate of return 19 does not affect the conclusion that its CGAs were securities. 20 21 F. MAF was not an Insurance Company and Its CGAs were not Fixed Annuities

The Defendants argue that the MAF CGAs should be treated like fixed annuities

22 issued by a fully regulated insurance company, which would exempt them from securities 23 registration requirements. In assessing the merits of the Defendants' assertions, however, 24 the Court should evaluate the substance of these investment transactions and not their 25 form. Tcherepnin v. Knight, 389 U.S. 332 (1967). In that case the Supreme Court 26 The Defendants also argue that the anti-trust amendments in 15 U.S.C. § 37(b) affects the status of CGAs as securities. Whatever relief Congress gave charitable organizations 28 from anti-trust laws does not affect the limited exemption from the broker-dealer registration of 15 U.S.C. § 78c(3)(b)(2). 13 27
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1 concluded that cases involving securities should be decided on the basis of the economic 2 realities of the transaction. 3 In substance, the MAF CGAs had no resemblance to annuity policies issued by an

4 insurance company. MAF itself never pretended that it was an insurance company or that 5 its CGAs were fixed annuities regulated by government agencies, but rather it 6 characterized the CGAs as interests in collective investment funds (See, RNSOF 19): 7 8 9 Common investment funds managed by our organization are exempt from registration requirements of the Federal securities laws, pursuant to the exemption for collective investment funds and similar funds maintained by charitable organizations under the Philanthropy Protection Act of 1995 (P.L. 104-62).

10 In the same document MAF acknowledged that it was subject to the requirements of the 11 PPA: "Information in this document is provided to you in accordance with the
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12 requirements of that Act." (See, RNSOF 19). In characterizing its assets as a common 13 investment fund, MAF acknowledged that it resembled a mutual fund rather than an 14 insurance company, or that its CGAs more closely resembled a variable annuity than a 15 fixed annuity. See, SEC v. Variable Annuity Life Insurance Co., 359 U.S. 65 (1959). The 16 fixed return feature of the CGAs did not remove them from the definition of a security. 17 SEC v. Edwards, 540 U.S. 389 (2004). 18 The Plaintiff's securities expert also concluded that MAF was not an insurance

19 company and that its CGAs were not fixed annuities: 20 21 22 23 24 25 26 27 28 14
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Discounting the fact that the Mid-America CGA was, in reality, a disguised ponzi scheme, it was more like an investment pool, or a mutual fund, then a fixed annuity. Mid-America was not an insurance company, with a legitimate business and real revenues, which could back its general obligations to investors under the CGA. Rather, investor proceeds were Mid-America's only source of revenue, and the company acknowledged that it needed to invest these proceeds in "stocks, bonds, money market funds, and federal obligations" and "short-term, intermediate, and longterm investments" in order to meet its obligations. This is more like a variable annuity, which typically is deemed a security, then like a fixed annuity. (Plaintiff's Exhibit 170). In order for the MAF CGAs to be exempt from securities registration, they would have to qualify for an exemption under the PPA. Since MAF used unqualified sales agents and

1 paid them commissions, neither MAF nor its CGAs qualified for an exemption from 2 broker-dealer registration. 3 4 5 6 G. Whether or not the Defendants Were "Independent Contractors" the Payment of Commissions Invalidated the Exemption from the BrokerDealer Registration Requirements The Defendants misconstrue the limited exemption from the broker-dealer

7 registration requirements provided by 15 U.S.C. § 78c(3)(b)(2). That section states that 8 the exemption is unavailable unless "each person who, . . ., solicits on behalf of such 9 charitable organization . . . is either a volunteer or is engaged in the overall fund raising 10 activities of a charitable organization and receives no commission or other special 11 compensation based on the number of the value of donations collected for the fund."
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12 Accordingly, persons soliciting funds must either be a volunteer or someone involved in 13 the charitable organizations overall fund raising efforts and not receive performance14 based compensation. The legislative history confirms this interpretation: 15 16 17 18 The exemption from the Exchange Act broker-dealer provisions is subject to the condition, set forth in paragraph (2) of subsection (e), that any person soliciting donations on behalf of such a charitable organization must be either a volunteer or employed in the overall fund-raising activities of a charitable organization, and that such a person must not receive any special compensation based on the number or value of donations collected for the fund.

19 House of Representatives Report 104-333, Philanthropy Protection Act of 1995, p. 14 20 (Emphasis added). Since the Defendants were self-described independent contractors 21 and were neither volunteers nor involved in the overall fund raising efforts, they were not 22 qualified under the registration exemption to solicit investments. Even if they were 23 qualified to solicit investments, their acceptance of commissions violated the terms of the 24 exemption and would in any event trigger the broker-dealer registration requirements. 25 The Defendants also make a policy argument in favor of allowing performance26 based commissions, and they attach some unpublished papers by attorneys apparently 27 representing or employed by a seller of CGAs, which make essentially the same policy 28 argument that commissions should be allowed under an exemption from registration. By 15
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1 enacting the limited exemption prohibiting commissions, the Congress chose the policy 2 that applies to the marketing of CGAs and only Congress can change that policy. 3 4 5 H. Since the CGAs are Securities the Nationwide Service of Process Applies in this Case Under 15 U.S.C. § 78aa, a federal securities violation permits the application of

6 nationwide service of process. Based on the foregoing arguments, the Plaintiff has 7 alleged and proven in its Motion for Summary Judgment that the MAF CGAs were 8 federal securities supporting nationwide service of process. 9 III. Defendants' attack upon the Receivership Order is meritless. 10 The Receiver is an agent of the Court (see generally, Stowell v. Arizona Savings

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

11 and Loan, Assoc. 93 Ariz. 310, 380 P.2d 606 (Ariz. 1963)) and, as such, he is simply 12 carrying out the directions of the Court by pursing his claims seeking the return of 13 commissions which were paid by Dillie to Defendants from MAF funds in order to 14 facilitate Dillie's Ponzi scheme. 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Further, the Defendants' argument that the Receiver is attempting some novel strategy by seeking the return of the commissions is unfounded. See, e.g., In re World 16
Document 485 Filed 02/01/2006 Page 16 of 31
8

Whether the commissions sought by the Receiver should be returned to the Receivership estate as an asset of the estate will determined in the instant plenary proceedings where all due process rights have been, and continue to be, accorded to the Defendants. Thus, the Defendants' attack upon the Receivership Order is meritless. Cf., SEC v. Wencke et al., 783 F.2d 829 (9th Cir. 1986), cert. denied, DeLusignan v. Gould, 107 S.Ct. 77 (1986), where following the placement of certain entities into receivership and the Court's order that the Receiver prosecute all claims of the underlying receivership entities in order to seek the return of receivership assets to the receivership estate, summary proceedings for the disgorgement of stocks and profits therefrom the Receiver claimed were receivership assets was held to be proper even though the recipient had not participated in the original underlying SEC action that gave rise to the appointment of a receiver.8

Case 2:03-cv-02390-JAT

1 IV. The Receiver has standing to bring his claims for declaratory/equitable relief 2 (count five), equitable disgorgement (count 11). 3 It is clear from Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995), cert. denied,

4 African Enterprise, Inc. v. Scholes, 116 S.Ct. 673 (1995), that where a Receiver's claims 5 seek redress for injuries to the underlying receivership entities/persons, the Receiver has 6 standing to bring his claim. (See also, SEC v. Cook, 2001 WL 256172 (D.C. Tex. 2001). 7 Scholes, supra, involved a receiver's fraudulent transfer claims. The Court there 8 held that the receiver had standing to bring claims of fraudulent transfer to seek the return 9 of funds which had been diverted by a Ponzi scheme operator from the underlying 10 receivership entities he had previously controlled where his transfer of corporate funds 11 injured the corporations. The Court noted that the Ponzi scheme operator, as sole
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12 shareholder of the corporations, could have lawfully ratified the diversion of corporate 13 assets but only if creditors were not harmed. Similarly, here, Dillie used MAF funds (via 14 MAF or MAFG) for the purpose of perpetuating his own Ponzi scheme and each transfer 15 of MAF funds rendered MAF or MAFG into further and deeper insolvency. (See, 16 ROSOF A.4, A.6.) 17 The Court in Scholes explained that once a receiver was appointed and the wrong18 doing Ponzi operator was removed from the control of corporations he had previously 19 used as tools in his Ponzi scheme, "[t]he corporations were no more [the wrongdoer's] 20 evil zombies. Freed from his spell they became entitled to the return of the moneys --for 21 the benefit . . . of innocent-investors--that [the wrong-doer] had made the corporations 22 divert to unauthorized purpose." Id., 56 F. 3d at 754. Similarly, here, counts five, ten 23 and eleven are each based upon distinct injury to MAF caused by Dillie's transfer of 24 funds to operate his Ponzi scheme. The Receiver seeks the return of the commissions so 25 they may be equitable distributed to the MAF Victims i.e., creditors of MAF. 26 27 Vision Entertainment, Inc., 275 B.R. 641 (Bankr. Fla. 2002); SEC v. Cook, 2001 WL 28 256172 (D. Ct. Tex. 2001); and In re Randy, 189 B.R. 425 (Bankr. Ill. 1995). 17
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1

Defendants argue for summary judgment on counts five (unjust enrichment) and

2 eleven (equitable disgorgement) on the narrow basis that: 1) the Receiver lacks standing 3 on the unjust enrichment claim because the claim is "personal" to the MAF Victims (i.e., 4 there was no distinct injury to the Receiver); and, 2) imposing a constructive trust over 5 the commissions or ordering the disgorgement of the commissions, is inequitable because 6 the Defendants are "innocent" victims. (Defendants' Motion, pps. 41-42, 49-51, fn. 22.) 7 As to the first argument, Defendants have presented no facts disputing the

8 Receiver's claim that Dillie was operating a Ponzi scheme using MAF and MAFG as his 9 tools (similar to the wrongdoer in Scholes, supra, who also used corporate entities to 10 perpetuate his fraud scheme). (See, ROSOF A. 2-6.) Two things happened when Dillie 11 took moneys from MAF to pay Defendants for facilitating his Ponzi scheme. First, the
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12 Defendants were paid for selling fraudulent CGAs that plunged MAF into deeper and 13 deeper insolvency. (See, ROSOF A.4) Second, the moneys paid to Defendants as 14 commissions also plunged MAF into further insolvency. (See, ROSOF A.6) Thus, the 15 Receiver for MAF has shown undisputed facts proving MAF as well as its creditors were 16 distinctly injured by the payment of commissions to Defendants and, thus, Defendants' 17 argument on standing must fail. 18 The Defendants also argue that the Court should not use its equitable powers to

19 impose a constructive trust over the commissions paid to Defendants because they are
th 9 20 "innocent" relying upon U.S. v. Real Property etc., 89 F.3d 551 (9 Cir. 1996).

21 (Defendants' Motion, pps. 41-42.) The Court in Real Property, supra, refused to allow 22 one victim of a fraud to use tracing fictions to advance its claims to recovered funds over 23 the claims of other fraud victims. The instant matter does not involve competing claims 24 of victims. It does involve the inequity of permitting Defendants to retain commissions 25 they earned through facilitating Dillie's Ponzi scheme by marketing and selling 26 Defendants argue that the Receiver's "constructive trust" claim in count three also must be dismissed because a constructive trust is a remedy not a claim. (Defendants' Motion, 28 p. 39.) The reference to a "constructive trust" in count three should be construed as a request for a remedy for the underlying claim of "secret profits." 18 27
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9

1 fraudulent CGAs to elderly people throughout the United States. (See, ROSOF A.1-6.) 2 The MAF Victims were promised that the MAF CGAs would provide them with a stream 3 of income, tax advantages and would act as a vehicle by which they could make a 4 donation to a charity of their choice upon their death. (See, ROSOF A.1.) Instead, the 5 MAF Victims were scammed. 6 Defendants' argument that they "are `innocent parties' here" and likening

7 themselves to the MAF Victims is unfounded. (Defendants' Motion, 41:19-20.) 8 Apparently, Defendants rest their argument upon a strangely inverted sense of pity rather 9 than facts because the undisputed facts of this case show that the Defendants violate state 10 and federal laws in the sale of the fraudulent CGAs that were enacted to protect
10 11 consumers and they abjectly failed to meet even minimum industry standards of due

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12 diligence by requesting an audited financial statement before selling the CGAs to elderly 13 members of the public. (See, ROSOF F.1.a. i-vi; F. 2.a; F.7.a. i-x; F.8.a.; F.9.a.i.-iv; 14 F.10.a.; F.11.a; F. 12. a. i-vii; F.12. b.i-xii; F.13; F.14; F.15. a. c; F.16; F.22 a-kk; 15 F.24 a-i; F.25 a-d; F.26a-b.) 16 Not a single Defendant took the most basic and elementary step of obtaining and

17 examining an audited financial statement for MAF before selling the MAF CGAs thereby 18 violating industry standards for the proper sale of financial products. (See, ROSOF 19 F.22.a-kk; F.26. a-b) The Receiver's well-qualified expert on industry standards 20 applicable to the sale of the MAF CGAs stated that one of the most important steps that 21 Defendant should have taken before selling the MAF CGAs was obtaining an audited 22 financial statement for MAF for the past three years. (See, ROSOF F.26.a-b.) Had the 23 Defendants simply refused to sell the MAF CGAs without an audited financial statement, 24 the sad debacle foisted upon the elderly Ponzi scheme Victims, in large part, could have 25 been avoided. The Defendants don't dispute that one of them asked for an MAF or 26 MAFG audited financial statement and then proceeded to sell the CGAs despite not 27 Each Defendant violated at least one statute. Some sold securities while unlicensed to do so; some sold CGAs that were not authorized for sale in the particular state in which 28 the Defendant sold MAF CGAs 19
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10

11 1 receiving it; (see, ROSOF F.22.p; F.12.b.vi) ; one asked for the financial statement after

2 selling most of the CGAs though not all (see, ROSOF F.22.z-aa; F.15.a.xiv; F.15.c.i-x); 3 most just didn't even bother to make the request. (see, ROSOF F.22.a; F.22.g; F.22.j; 4 F.22.m; F.22.hh; F.22.ii) 5 Not receiving an audited financial statement upon request is a red flag warning

6 that the financial condition of MAF or MAFG was unverified, and thus, was subject to 7 question. In fact, Defendant Kerher stated that, after selling the MAF CGAs, he stopped 8 selling any additional MAF CGAs based upon his failure to receive audited financial 9 statements from MAF explaining: "Any company Defendant requests something from 10 that does not provide the information or documentation would make Defendant consider 11 looking elsewhere." (See, ROSOF F.22.u.)
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12

The Defendants' failure to acquire an audited financial statement before selling the

13 CGAs should be interpreted as extreme recklessness and callous indifference to the MAF 14 Victims. In fact, Defendant Lankford summed it up best when he testified that he 15 "wanted to see audited financial statements that would show . . . [him] that . . . [his] 16 clients' money was safe." An audited financial statement would have shown "[w]ell , it 17 would have come from an auditing group whether KPMG or any of the other big ones. 18 And it would have shown me the audited returns, the physical returns audited and 19 certified by that accounting group. So . . . [he] would know what they were ­ what their 20 financial position was." (See, ROSOF 15. b. i.) 21 Defendant Lankford also testified that without an audited statement there was no

22 way to confirm the number of dollars MAF stated it had in reserves to cover its charitable 23 gift annuity obligations. "That's why I was screaming for an audited financial 24 statement." (See, ROSOF 15.b.ii.) Unfortunately, Lankford's screaming apparently took 25 place after he had already sold twenty-nine fraudulent MAF CGAs (and before he sold 26 two more still without first acquiring an audited financial statement). (See, ROSOF 27 28 Defendant Kerher stated that he " . . . believed it to be prudent and reasonable to request audited financial statements." (See, ROSOF F. 22. q) 20
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11

Case 2:03-cv-02390-JAT

1 F.15.a.xiv; F.15.b.ii; 15. c.vi.) (See generally, Lankford's testimony and statements 2 regarding audited financial statements at ROSOF F.15. b. i-ii; F. 15. c. i-x.). 3 Defendants' commissions should be returned to the Receiver so he may equitably

4 distribute the moneys to the MAF Victims. See, Burch & Cracchiolo, P.A. v. Pugliani et 5 al., 144 Ariz. 281, 285, 697 P.2d 674, 678 (Ariz. 1985) holding: "A constructive trust is 6 an equitable remedial device, generally used to prevent unjust enrichment. (Citations 7 omitted.) In particular, a constructive trust will arise whenever it is inequitable that
12 8 property should be retained by the legal title holder."

9

In fact, under the undisputed facts of this case, the Court not only should deny the

10 Defendants' motion for summary judgment on the Receiver's equitable claims in counts 11 5 and 11, it should grant summary judgment to the Receiver. See, Kassbaum v.
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th 12 Steppenwolf Productions, Inc., 236 F.3d 487, 494 (9 Cir. 2000), cert. denied.,

13 Steppenwolf Productions, Inc. v. Kassbaum, 122 S.Ct. 41 (2001), holding that "[i]t is 14 generally recognized that a court has the power sua sponte to grant summary judgment to 15 a non-movant when there has been a motion but no cross-motion." See also, Cool Fuel,
th 16 Inc. v. Connett, 685 F.2d 309 (9 Cir. 1982); Jackson v. Nassau County Board of 13 17 Supervisors, 818 F.Supp. 509, 535-536 (D.C. N.Y. 1993).

18 V. The Receiver may bring Count 10 (conversion)14 19 The Defendants argue that they should be granted summary judgment on the 20 Receiver's claim for conversion because the Receiver lacks standing to bring it. Again, 21 the undisputed facts show that MAF suffered a distinct injury based upon the wrongful 22 taking of funds from MAF by Dillie to perpetuate his Ponzi scheme to the financial peril 23 24 See also, Johnson v. American National Insurance Co., 126 Ariz. 219, 613 P.2d 1275 (Ariz. App. 1980); Sadacca v. Monhart, 128 Ill. App.3d 250, 470 N.E. 2d 589, 83 26 Ill. Dec. 463 (Ill. App. 1984).) 13 Last, the Defendants' argument that equitable disgorgement also is not appropriate because some MAF Victims may have been compensated in certain instances is specious. 27 Any such concerns can be addressed in the MAF claims process that is now underway. 14 Although the Defendants treat the arguments as to counts 7, 8, and 10 under the 28 heading of failure to state a claim, in reality, their arguments are based upon standing. 21 25
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12

1 of MAF. These funds were then transferred to the Defendants for facilitating the Ponzi 2 scheme. Accordingly, the Receiver has standing to bring his conversion claim. 3 VI. The Receiver may bring Counts 7 & 8 (federal and state securities violations) 4 The Receiver has standing to bring his claim of federal securities fraud, as alleged 5 in Count Seven, under the holding of Superintendent of Insurance of the State of New 6 York v. Bankers Life and Casualty Co., 404 U.S. 6, 92 S.Ct. 165, 168 (1971). There, the 7 U.S. Supreme Court held that the section 10(b), 15 U.S.C. §78j(b) of the Securities 8 Exchange Act " . . . outlaws the use `in connection with the purchase or sale' of any 9 security [footnote omitted] of `any manipulative or deceptive device or contrivance.' The 10 Act protects corporations as well as individuals who are sellers of a security. (Emphasis 11 added.)" The Defendants don't dispute that they made misrepresentations in the sale of 12 MAF CGAs (see, Defendants' Motion, pps. 22-23). Therefore, they fall within the ambit 13 of the Receiver's standing. 14 The standing of a Receiver to bring securities claims in a case arising out of a 15 Ponzi scheme is not a new concept. See, Marion v. TDI, Inc., 2004 WL 1175740 (D.C. 16 Pa. 2004) holding that a Receiver had standing to bring federal securities fraud claims 17 against sellers of worthless securities in the name of a receivership entity used as part of a 18 Ponzi scheme thereby causing an increase in the liabilities of the receivership entity. 19 Likewise, the same rationale should apply to the state security fraud claim presented in 20 count eight which prohibits the use of any contrivance (e.g., misrepresentation) in the sale 21 of a security. See, A.R.S. §44-1991. 22 When Defendants sold the MAF CGAs through the use of misrepresentations, 23 MAF and MAFG were harmed because each sale continued and deepened their 24 insolvency leaving them unable to pay their lawful creditors. (Cf., Scholes v. Lehmann, 25 supra, holding that transfer of funds from corporation for unauthorized purposes by Ponzi 26 scheme operator harmed corporation where transfers harmed creditors of the corporation; 27 In re Randy, supra, holding that brokers who received commissions for helping to 28 22
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1 perpetuate a Ponzi scheme, knowingly or not, gave no value for the commissions since 2 the underlying contract to sell the fraudulent product was illegal. In essence, Defendants' 3 misrepresentations aided and abetted the Ponzi scheme orchestrated by Dillie in the
15 4 process of which MAF and MAFG were badly abused by Dillie.

5 VII. The Receiver Timely Brought his Claim for Fraudulent Transfer (Count Nine). A. The time limits of A.R.S. §44-1009(A)(1) are not applicable to the 7 Receiver. The Defendants' attempt to avoid the claim of fraudulent transfer (Count 9) under 8 the time limitations set forth in A.R.S. §44-1009(A)(1). To start, these time limitations do 9 not apply to the Receiver. The Receiver's lawsuit against the Defendants emanates from, 10 and his claims are ancillary or supplemental to, an action initiated by the SEC against 11 Robert Dillie in SEC v. Robert R. Dillie et al., CIV-01-2493- PHX (JAT). The SEC 12 action was brought as part of its governmental function to protect the public from the 13 harm done to it by defrauding wrongdoers such as Dillie. 14 15 In a similar case, the Arizona Supreme Court held that the statute of limitations 6

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16 did not run against the Receiver under the common law rule of nullum tempus occurrit
16 17 regi--"time does not run against the king." See, In re Diamond Benefits Life Ins. Co., 17 18 184 Ariz. 94, 907 P.2d 63 (Ariz. 1995). (Whether the time limits placed in A.R.S. §44-

19 20 21 22 23 24 25 26 27 28

Defendants' reliance on Scholes v. Schroeder, 744 F. Supp. 1419 (D.C. Ill. 1990) is misplaced in connection with the Receiver's count eight (state securities fraud) which has no "reliance" requirement. In any event, Scholes v. Schroeder (which pre-dates Scholes v. Lehmann, supra, by five years) states that a claim for federal securities fraud could stand if authority could be provided for the Receiver's bringing of the claim by the "seller" of securities against its own agents for their fraud in the course of selling those securities. That authority is presented in section V of this Response. Last, at pages 23 and 24 of their Motion (Argument 9 b), the Defendants cite Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) and Hochfelder v. Midwest Stock Exchange, 503 F.2d 364 (7th Cir. 1974), apparently in support of their argument that the Receiver lacks standing to sue them under the federal and state securities acts. Neither case addresses the standing issue. 16 The Sixth Circuit Court of Appeals in U.S. v. Weintraub, 613 F.2d 612, 618 (6th Cir. 1979, cert. denied, Weintraub v. U.S., 100 S.Ct. 2987 (1980)), explained the rationale supporting this common law rule is to protect the public. 17 In Diamond Benefits, the question was whether the Receiver fell within the auspices of A.R.S. §12-510 which codified the common law doctrine nullum tempus occurrit regi in cases involving State action. Here, the Receiver is acting under a 23
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15

Case 2:03-cv-02390-JAT

1 1009(A)(1) is a statute of limitation or a statute of repose matters not as the common law
18 2 rule has equal application to both. ) Under the same common law rule, the doctrine of

3 laches, too, does not run against the government. (See, U.S. v. Weintraub, 613 F.2d 612,
th 4 618 (6 Cir. 1979).)

5

In Diamond Benefits, a Deputy Receiver who had been appointed to an insolvent

6 insurance company brought a conversion claim in receivership-related litigation to 7 recover assets of the receivership. The defendant argued that the claim of the Deputy 8 Receiver was barred by the statute of limitations. The Arizona Supreme Court disagreed 9 and held that while the creditors (i.e., policyholders) of the insurer would be benefited by 10 the Receiver's claim so, too, in a larger sense would the public at large. The Receiver was 11 appointed to act as part of a legislative scheme that was designed to safeguard the public
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12 interest from insurers who failed to comply with their obligations under the law. The 13 Deputy Receiver was simply performing his duties as part of this broader framework 14 when he sought his conversion claim seeking the return of receivership assets to the 15 receivership estate. Thus, the Receiver's action was likened to State action so to invoke 16 his exemption from the limitations period applicable to his conversion claim. (See also, 17 Warfield v. Gardner, 346 F.Supp.2d 1033 (D.C. Ariz. 2004) holding that limitations 18 period did not apply to equity Receiver whose appointment was requested by the State 19 following initial action of the State that was based upon state forfeiture and racketeering 20 statutes.) 21 Similarly, here, the federal government has enacted a legislative scheme that is

22 intended to protect the citizens of our nation from those who prey upon them using fraud 23 and deception. (See, RNSOF 21) As part of this legislative scheme, the government (i.e., 24 25 Congressional legislative scheme; however, for purposes of substantive analysis, this is a distinction without a difference. The common law rule nullum tempus occurrit regi 26 applies to the federal as well as the state governments. See, U.S. v. Noojin, 155 F.377 (D.C. Ala. 1907) The substantive analysis of Diamond Benefits, thus, remains instructive. 18 See, People v. Asbestospray Corp., 247 Ill. App.3d 258, 616 N.E.2d 652, 186 Ill. 27 Dec. 462 (Ill. App. 1993), cert. denied, People v. Asbestospray, 152 Ill.2d 564, 622 28 N.E.2d 212, 190 Ill. Dec. 895 (Ill. 1993). 24
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1 the SEC) asked this Court to appoint a Receiver so that the greater purpose of that 2 scheme could be accomplished, i.e., to help provide a remedy for those who were harmed 3 by the fraud. Accordingly, for purposes of the common law rule nullum tempus occurrit 4 regi, the Receiver is acting on behalf of the SEC insofar that his claims are an extension
19 5 of the government's original action designed to safeguard the public interest.

6

The common law rule nullum tempus occurrit regi thus should be held applicable

7 to the Receiver in the instant case just as it was to the Receivers in Diamond Benefits and 8 Warfield v. Gardner, supra. Therefore, the time limitations set forth in A.R.S. §449 1009(A)(1) do not apply to the Receiver. 10 11
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B.

The Receiver met the four year time period.

The Receiver was appointed on December 20, 2001. The Complaint in the instant

12 litigation was filed on December 3, 2003. Since, the four year time limitation for filing 13 the Complaint, assuming arguendo it is applicable to the Receiver, should not commence 14 until the Receiver has been appointed, the fraudulent transfer claim was timely filed. 15 First, the Arizona Supreme Court has not yet definitively determined whether the

16 limitations period set forth in A.R.S. §44-1009(A)(1) is a statute of repose or a statute of 17 limitations. The Arizona Court of Appeals in Division Two, referred to the limitations 18 period as a statute of repose in Moore v. Browning, 203 Ariz. 102, 50 P.3d 852 (Ariz. 19 App. 2002) but that case did not address why the Court referred to the time period as a 20 statute of repose as opposed to a statute of limitations. Instead, the case centered on 21 whether a transfer of funds or the receipt of a judgment by a creditor commenced the 22 running of the four year limitations period. At best, the Court's reference to the 23 limitations period as a "statute of repose" is merely dicta. 24 Additionally, if in the highly unlikely event any moneys were left over in this receivership after distribution to the Victims of the Receivership was completed, the 26 remaining monies would be deposited in the U.S. Treasury in payment of the $120,000 civil penalty that was imposed by the United States District Court in SEC v. Robert R. 27 Dillie et al., supra, since the SEC would be the last creditor of the receivership estate to be paid. (See, RNSOF 20) Accordingly, the public interest, again, would be served via 28 the receivership. 25 25
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19

1

The Court in Hill v. MTLC, 332 B.R. 835 (Bankr. Fla. 2005), however, was asked

2 to determine if Florida's counterpart to A.R.S. §44-1009(A)(1) was a statute of repose or 3 a statute of limitations and held it was the latter because the time for bringing a fraudulent 4 transfer action was not cut off after a specified time strictly measured from the date of 5 the transfer of funds. This comports with Arizona's view of the difference between a 6 statute of limitations and a statute of repose. See, Vales v. Kings Hill Condominium 7 Assoc., 467. Ariz. Adv. Rep. 22, 125 P.3d 381, 384, fn.1 (Ariz. App. 2005). Here, claims 8 made under A.R.S. § 44-1004(A)(1) are not required to be made with a strictly defined 9 time period; rather a plaintiff may bring a claim within four years after the transfer was 10 made or obligation was incurred or, within one year after the fraudulent nature of the 11 transfer or obligation was or through the exercise of reasonable diligence could have been
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12 discovered by the claimant. 13 Accordingly, the time period in A.R.S. §44-1009 (A)(1) is more properly viewed

14 as a statute of limitations subject to equitable tolling which is recognized under Arizona 15 law. "Adverse domination" is a form of equitable tolling that tolls a time limitation 16 period while the plaintiff cannot bring a claim while it is under the domination of another
20 17 in a manner adverse to the plaintiff. There can be no legitimate dispute that MAF and

18 MAFG were under the adverse domination of Dillie who was draining them of MAF 19 monies in order to fund his Ponzi scheme. During this time, Dillie treated MAF monies 20 as his own in furtherance of his Ponzi scheme regardless of the harm to MAF. (See, 21 OSOF A.3-6.) Accordingly, the four year time limitations period in A.R.S. §4422 1009(A)(1) should not commence until fraudulent transfer claims on behalf of MAF and 23 MAFG could be brought, i.e. upon the appointment of the Receiver. (Cf., Quilling v. 24 Grand Street Trust, 2005 WL 1983879 (D.C. N.C. 2005) applying doctrine of adverse 25 domination to toll the one year time limit under California's equivalent of A.R.S. §4426 While no Arizona Court has yet ruled whether this doctrine would be recognized in Arizona, the United States District Court for the District of Arizona has ruled that the 28 Arizona Courts would recognize this doctrine if presented with it. (See, RTC v. Blasdell, 930 F.Supp. 417 (D.C. Ariz. 1994); FDIC v. Jackson, 133 F.3d 694 (9th Cir. 1998).) 26 27
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20

1 1009(A)(1) where the Receiver had been appointed to take over a company that had been 2 used as part of a Ponzi scheme.) 3 4 C. The Receiver met the one year time period.

The Receiver also met the one year requirement set forth in of A.R.S. §44-1009

5 (a)(1). The Receiver made his claim within one year after the claim could reasonably 6 have been discovered. As set forth in detail in the Receiver's Declaration accompanying 7 the Response to Defendants' Facts, the Receiver was unable to uncover the facts showing 8 the fraudulent nature of the commission payments to Defendants prior to the one year 9 period before December, 2003 for numerous reasons including the Receiver was forced 10 to chase MAF business records around the country while they wer