Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_09-cv-00665/USCOURTS-caed-2_09-cv-00665-113/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:77 Securities Fraud

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UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF CALIFORNIA

SECURITIES AND EXCHANGE

COMMISSION,

NO. CIV. S-09-0665 LKK/DAD

Plaintiff,

v.

O R D E R

ANTHONY VASSALLO, KENNETH

KENITZER, and EQUITY 

INVESTMENT MANAGEMENT AND

TRAINING, INC.,

Defendants.

 /

The Securities and Exchange Commission (“SEC”) brought this

suit against Anthony Vassallo, Kenneth Kenitzer, and the company

they operated, Equity Investment Management and Trading, Inc.

(“EIMT”). The Complaint alleges that defendants ran a “Ponzi”

scheme that defrauded investors out of $40 million.1 Without

1

 Defendants are alleged to have violated: Section 17(a) of

the Securities Act of 1933, 15 U.S.C. § 77q(a) (all defendants);

Section 10(b) of the Exchange Act of 1934, 15 U.S.C. § 78j(b), and

Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5 (all defendants, and

aiding and abetting by Kenitzer); Sections 206(1) and (2) of the

Investment Advisers Act of 1940, 17 U.S.C. §§ 80b-6(1) and 80b-6(2)

1

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admitting or denying the allegations of the complaint, Vassallo and

Kenitzer consented to the entry of permanent injunctions, and the

court has entered consent judgments against both.2

Thereafter, EIMT was placed under the control of a Receiver,

Stephen Anderson, who was appointed to marshal the assets of EIMT

for the ultimate benefit of the defrauded investors.3 On July 31,

2009, the appointment of the Receiver was made permanent.4 The

Receiver has now moved for the disgorgement of $100,000 from nonparties Elevate Communications (“Elevate”) and Wright Thurston

(“Thurston”) (collectively, “respondents”). The Receiver alleges

that $100,000 in defrauded investor funds were transferred, without

consideration, from EIMT to Elevate at the direction of Thurston.

For the reasons that follow, the court will grant the

Trustee’s motion as to Elevate, but deny the motion as to Thurston,

without prejudice to its renewal.

I. THE FACTS AND ALLEGATIONS

In December 2008, respondent Wright Thurston (“Thurston”) was

(Vassallo), and Sections 206(4) of that Act, and Rule 206(4)-8

thereunder, 15 U.S.C. § 80b-6(4) and 17 C.F.R. § 275.206(4)-8

(Kenitzer). Dkt. No. 1 (Complaint).

2

 Dkt. Nos. 125 & 127 (Kenitzer Consent & Judgment); 220 & 228

(Vassallo Consent & Judgment).

3

 Dkt. No. 52; see SEC v. Wencke, 577 F.2d 619, 623 (9th Cir.)

(district court acted within its discretion in appointing a

receiver to protect the public investors) cert. denied, 439 U.S.

964 (1978); 15 U.S.C. § 78u(d)(5) (authorizing the district court

to grant equitable relief necessary for the benefit of investors);

28 U.S.C. § 754 (governing the appointment of receivers in federal

courts).

4 Dkt No. 104.

2

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founder, Chief Executive Officer, President and Chairman of the

Board of respondent Elevate Communications (“Elevate”). Thurston

Decl. (Dkt. No. 444) ¶ 1; Anderson Decl. (Dkt. No. 432) ¶ 8. On

December 31, 2008, at Thurston’s direction, Vassallo wired $100,000

from an EIMT account at Wells Fargo Bank to an Elevate account at

the same bank.5 Anderson Decl. ¶ 7; Thurston Decl. ¶ 12. That

$100,000 is the subject of this disgorgement motion.

According to the Receiver, EIMT never received any benefit for

the $100,000 Vassallo wired out of its bank account to Elevate. 

Anderson Decl. ¶ 7. Further, the Receiver’s investigation did not

uncover anything of value that Elevate had provided to EIMT in

exchange for the $100,000, nor that Elevate had made any investment

in EIMT. Id.

In defense, Thurston asserts that the $100,000 payment was a

return of investment made by Elevate and another company he

controlled, Homestead Protection, LLC (aka Homestar Protection,

LLC). Thurston asserts that he attempted to have Elevate invest

$18,000 in EIMT. According to Thurston, Vassallo instructed

Elevate to wire its investment to an account at Bank of America. 

Thurston Decl. ¶ 9. Thurston asserts that he subsequently wired

$18,000 into the account identified by Vassallo. Id. However,

that account did not belong to EIMT. Thurston Decl. ¶ 9. Rather,

Thurston asserts that the account belonged to “Trinity Capital

5

 Anderson’s Declaration states that the transfer occurred at

Thurston’s direction. Thurston’s Declaration does not dispute

this.

3

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Group, Inc.” Thurston Decl. ¶ 9.6 Accordingly, Thurston admits

that he never wired any funds to any account owned by EIMT. See

Thurston Decl. ¶ 9. Thurston admits that after wiring the money

into the Trinity account, he became aware that it “was not an EIMT

account.” Thurston Decl. ¶ 9.7

Thus, Thurston is claiming that he too was a victim of

Vassallo, in that he was deceived into transferring Elevate’s money

to Trinity, rather than to EIMT. However, Thurston’s Declaration

leaves it undisputed that Elevate did not provide anything of value

to EIMT, even if it did invest $18,000 in Trinity.8 Thurston goes

on to assert that he “never personally received any of the

$100,000.00 that was paid to Elevate.” Thurston Decl. ¶ 12.

6

 Thurston claims that he did not determine what entity owned

the bank account until after he had wired the $180,000. Thurston

Decl. ¶ 9. He does not explain why he blindly wired $180,000 into

an unknown bank account, other than that Vassallo told him to do

so.

7 However, he does not say how long after the transfer he

learned this, leaving open the possibility that he knew it before

he received the $100,000 transfer from EIMT. In other words, there

is no dispute that Elevate received $100,000 from EIMT having

provided nothing of value to EIMT. The only question is whether

Thurston knew that Elevate had provided no value to EIMT.

8

 Thurston’s Declaration goes on to claim that Homeland wired

$180,000 to Trinity, also thinking, incorrectly, that it was

investing in EIMT. Thurston also claims that Elevate then

transferred some of the $100,000 to Homeland on the theory that it

had been mistakenly sent to Elevate. The transfer of funds between

Elevate, Homeland and Trinity do not appear to be relevant to this

motion (except possibly to the extent it tends to show the absence

of any formal controls over the money), since it is undisputed that

none of these companies used the alleged $198,000 ($18,000 from

Elevate plus $180,000 from Homeland), to benefit EIMT in any way. 

The circulation of money among these three therefore does appear

to be connected to the transfer of $100,000 to Elevate.

4

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II. STANDARDS

A. Legal Standard for Disgorgement.

1. Authority to Order Disgorgement

“[T]he district court has broad equity powers to order the

disgorgement of ‘ill-gotten gains' obtained through the violation

of federal securities laws.” SEC v. JT Wallenbrock & Associates,

440 F.3d 1109, 1113–14 (9th Cir.2006).9 These powers come

expressly from the federal securities laws, 15 U.S.C. § 78u(d)(5)

(district court may grant “any equitable relief that may be

appropriate or necessary for the benefit of investors”), but more

generally, from “common law principles of equity.” See FTC v.

Network Services Depot, Inc., 617 F.3d 1127, 1141-42 (9th Cir.

2010).

In the Ninth Circuit, this equity power extends to nonparties, often called “nominal defendants,” who are “in possession

of funds to which they have no rightful claim, such as money that

has been fraudulently transferred by the defendant in the

underlying securities enforcement action.” SEC v. Ross, 504 F.3d

1130, 1141 (9th Cir. 2007).10 A disgorgement order will issue

9 Citing SEC v. First Pacific Bancorp, 142 F.3d 1186, 1191

(9th Cir. 1998), cert. denied, 525 U.S. 1121 (1999).

10 Citing SEC v. Colello, 139 F.3d 674, 675 (9th Cir.1998)

(SEC may sue “nominal defendants”). Ross also cites SEC v. Hickey,

322 F.3d 1123, 1130–32 (9th Cir. 2003) (upholding the district

court's exercise of jurisdiction over a corporation nominally owned

by the defendant's mother and into which the defendant had

channeled proceeds of his securities law violations) as amended,

335 F.3d 834; SEC v. Wencke, 783 F.2d 829, 838 (9th Cir.) (holding

that the district court had jurisdiction over the assets of a

corporation into which the defendant in the underlying enforcement

5

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against a non-party “if it is established that the non-party

possesses illegally obtained profits but has no legitimate claim

to them.” Ross, 504 F.3d, 1144 (citation and internal quotations

omitted).11

The key here is that it is the “possession” of ill-gotten

gains that triggers the right to disgorgement, not the commission

of any wrong by the possessor of the funds:

ample authority supports the proposition that

the broad equitable powers of the federal

courts can be employed to recover ill gotten

gains for the benefit of the victims of

wrongdoing, whether held by the original

wrongdoer or by one who has received the

proceeds after the wrong.

SEC v. Colello, 139 F.3d 674, 676 (9th Cir. 1998) (emphasis added).

Although the federal securities laws expressly provide for

whatever “equitable remedy” is needed to benefit the defrauded

investors, the Ninth Circuit looks to the principles of the common

law in determining whether disgorgement is appropriate. See

Network Services, 617 F.3d at 1141-42. The remedy applicable in

these cases is the “constructive trust”:

Constructive trust is a form of remedy that is “flexibly

fashioned in equity to provide relief where a balancing

of interests in the context of a particular case seems

action had funneled proceeds of his securities law violations),

cert. denied, 479 U.S. 818 (1986); and SEC v. Cherif, 933 F.2d 403,

414 (7th Cir. 1991) (discussing “nominal defendants”), cert.

denied, 502 U.S. 1071 (1992).

11 In Ross, the Ninth Circuit found that summary proceedings

were not proper because the sole basis for the disgorgement was the

wrong-doing of the non-parties. 504 F.3d at 1144 (the purpose of

summary proceedings is “simply to ‘obtain equitable relief from a

non-party against whom no wrongdoing is alleged’”).

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to call for it.” It is a creature of the common law,

rather than any federal statute.

Id., 617 F.3d at 1141–1142 (citation omitted). As applicable to

these cases,

At common law, where property has been obtained by

fraud, a court in equity “has jurisdiction to reach the

property either in the hands of the original wrong-doer,

or in the hands of any subsequent holder” and to convey

that property to “the one who is truly and equitably

entitled to the same.” Harris Trust & Sav. Bank v.

Salomon Smith Barney, Inc., 530 U.S. 238, 251 (2000).

Id., 617 F.3d at 1141–1142.12

2. Burdens of Proof

a. Disgorgement

The burden of proving that Elevate received defrauded investor

funds rests with the Receiver. See Colello, 139 F.3d at 678

(district court correctly based its disgorgement order “on the

SEC’s proof of Colello’s receipt of the funds of the victims”);13

12 Respondents rely upon the standards set forth in Donell v.

Kowell, 533 F.3d 762 (9th Cir.), cert. denied, 555 U.S. 1047

(2008). However in Donell, the receiver sought disgorgement of the

winning investor’s funds pursuant to California’s Uniform

Fraudulent Transfer Act, Cal. Civ. Code §§ 3439.04(a)(1)-(2), which

addresses debtor-creditor law. The Receiver in this case, however,

is proceeding under the common-law theory of “constructive trust,”

and the statute governing “Involuntary Trusts,” Cal. Civ. Code §

2224, which provides: “One who gains a thing by fraud, accident,

mistake, undue influence, the violation of a trust, or other

wrongful act, is, unless he or she has some other and better right

thereto, an involuntary trustee of the thing gained, for the

benefit of the person who would otherwise have had it.” 

Respondents have made no attempt to explain why the debtor-creditor

law of Section 3439.04(a) should be applied in this situation, and

accordingly the court declines to do so.

13 This proof was combined with an adverse inference from

Colello’s invocation of his Fifth Amendment privilege. Id.

7

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accord SEC v. Better Life Club of America, Inc., 995 F. Supp. 167,

184 (D.D.C. 1998) (“plaintiff has carried its burden to show that

the $50,000 was gratuitously given to relief defendant Lawson; as

such, it is subject to disgorgement”) aff'd mem., 203 F.3d 54 (D.C.

Cir.), cert. denied, 528 U.S. 867 (1999).

The burden of establishing that Elevate was not entitled to

the defrauded investor funds also appears to rest with the

Receiver: “we emphasize that in the typical case, the creditor

plaintiff must show that the nominal defendant has received ill

gotten funds and that he does not have a legitimate claim to those

funds”). Colello, 139 F.3d at 677 (emphasis in text).14

b. Piercing the Corporate Veil.

The Receiver asserts that the court should pierce Elevate’s

corporate veil to reach Thurston’s assets. It is the Receiver’s

burden to pierce the corporate veil. Gough v. Titus (In re

Christian and Porter Aluminum Co., 584 F.2d 326, 338 (9th

Cir. 1978). And it appears that California law governs the issue:

"We apply the law of the forum state in determining

whether a corporation is an alter ego” of an individual.

14 The burden of proof here is not firmly established in the

cases, and the cases have generally not discussed the burden of

proving lack of entitlement to defrauded investor funds. See

Colello, 139 F.3d at 677 n.3 (“Unfortunately, the cases discussing

the use of nominal defendants are not explicit on this question”

of the burden of proof). In Colello, the cited standard is

arguably dicta, since it did not involve “the typical case.” The

case was atypical because Colello, the nominal defendant, had

invoked his Fifth Amendment privilege, thus preventing the SEC from

meeting what would otherwise be its burden of showing that he was

not entitled to the funds. Id., 139 F.3d at 677-78. Accordingly,

the district court shifted that burden to Colello, a move approved

by the Ninth Circuit. Id., 139 F.3d at 677.

8

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SEC v. Hickey, 322 F.3d 1123, 1128 (9th Cir. 2003), quoting Towe

Antique Ford Found. v. IRS, 999 F.2d 1387, 1391 (9th Cir. 1993). 

Although these cases state the rule without reservations, it

appears that in both cases the forum state was also the state of

incorporation. It is not clear that the same rule would apply if

the states were different. The parties argue that the laws of

California and Utah are the same, and so no choice of law issue

arises.15

Under California law, the court pierces the corporate veil 

(1) if “there is such a unity of interest and ownership that the

individuality, or separateness, of the said person and corporation

has ceased,” and (2) “an adherence to the fiction of the separate

existence of the corporation would ... sanction a fraud or promote

injustice.” Hickey, 322 F.3d at 1128-29 (applying California

law).16

15 However, neither party considers whether the court should

apply a federal common law of veil-piercing, since this is, at

bottom, a case arising under the federal securities law. In

another federal law context, the Supreme Court has noted the

possibility of applying federal common law, without deciding it:

There is significant disagreement among courts and

commentators over whether, in enforcing CERCLA's

indirect liability, courts should borrow state law, or

instead apply a federal common law of veil piercing.

U.S. v. Bestfoods, 524 U.S. 51, 64 (1998).

16 Accord Automotriz Del Golfo De California S. A. De C. V. v.

Resnick, 47 Cal.2d 792, 796 (Cal. 1957) (same); Misik v. D'Arco,

197 Cal. App.4th 1065, 1071-1072 (2nd Dist. 2011) (same); Smith v.

Grand Canyon Expeditions Co., 84 P.3d 1154, 1163 (Utah 2003) (same,

applying Utah law); Seymour v. Hull & Moreland Engineering, 605

F.2d 1105, 1111 (9th Cir. 1979) (same, applying federal common law,

9

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III. ANALYSIS

A. Elevate

The Receiver has established, and Respondents do not dispute,

that EIMT was in possession of defrauded investor funds. It is

further undisputed that EIMT wired $100,000 of those funds to

Elevate. Those funds must be disgorged if the Receiver shows that

Elevate is not entitled to them. In this case, however, Elevate’s

own admissions establish that it did not invest $18,000 in EIMT,

nor provide anything else of value to EIMT. Accordingly, Elevate

must disgorge the $100,000 it received from EIMT, to the Receiver.

B. Thurston

The Trustee asserts that the court should ignore Elevate as

an entity, and order the disgorgement of Thurston’s personal

assets. Thurston, the Trustee argues, “has treated Elevate as his

alter ego,” and it would “promote injustice” to allow Thurston to

escape personal liability. There is much to commend the Trustee’s

assertion, as it is clear that Elevate received the money without

consideration, and Thurston himself appears to concede that Elevate

will not be able to disgorge it.

However, Hickey appears to preclude piercing the corporate

veil in this case. In Hickey, the Ninth Circuit (applying

California law), held that the first part of the test for piercing

the corporate veil required that the individual have some ownership

but adding as a factor, the consideration of “the fraudulent intent

of the incorporators”).

10

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stake in the company, even if it is only one share (or one unit,

in this case). In that case, although the non-party, Hickey,

completely dominated the brokerage company whose corporate veil the

SEC sought to pierce, that was not enough to pierce the veil, since

Hickey had no ownership share. The Ninth Circuit was very clear

about this:

However much control Hickey may have over the Brokerage,

he does not own any part of the Brokerage. According to

the SEC, an individual need not own any part of a

corporation for an alter ego relationship to exist. [¶] 

We disagree with the SEC's argument. Ownership is a

prerequisite to alter ego liability, and not a mere

“factor” or “guideline.”

Hickey, 322 F.3d at 1128.

The Trustee argues that Thurston indirectly owns shares in

Elevate. The Trustee asserts that Stephanie Thurston is Thurston’s

wife, and he has presented evidence that Stephanie Thurston is the

“Manager” of Mommy Fitness, LLC, which in turn, is the majority

unit holder of Elevate.17 Assuming all of this is true, it does

not make Thurston an owner of Elevate for purposes of piercing its

corporate veil. Once again, Hickey is clear about this. In that

case, the Ninth Circuit relied on the reasoning and holding of

Riddle v. Leuschner, 51 Cal.2d 574 (1959). In Riddle, Leuschner’s

wife together with her step-son, owned the corporations at issue,

even though Mrs. Leuschner had reduced her ownership to one (1)

share. Leuschner himself did not own any shares in the company. 

However, Leuschner was the “managing employee of the two companies,

17 See Dkt. No. 447-3 at p.3 (CM/ECF).

11

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and his control over their affairs must be treated as that which

would be exercised by a managing agent.” Id. 51 Cal. 2d at 580.

The California Supreme Court pierced the corporate veil to

reach Mrs. Leuschner’s personal assets even though she owned only

one (1) share of the corporation. Id. 51 Cal. 2d at 580-81.

However, it refused to reach Leuschner’s personal assets

specifically because he owned no shares, and notwithstanding his

managerial control over the companies. Id. It did not consider

Leuschner’s wife’s shares to create in him the indirect ownership

the Trustee asserts here, although it also did not directly address

that possibility.

Based upon the Trustee’s citation to Zaragosa v. Craven, 33

Cal.2d 315, 319-21 (1949), the court infers that he is arguing that

Thurston’s ownership of Elevate units is established by California

community property law. The court notes that the Ninth Circuit has

held, in an alter ego case, that a wife’s community property

interest in her spouse’s stock holdings, “which arises under Cal.

Civ. Code § 5105 (West 1985), is sufficient to satisfy the

ownership requirement” which is the “threshold requirement” for

finding alter ego liability. Firstmark Capital Corp. v. Hempel

Fin. Corp., 859 F.2d 92, 94 (9th Cir. 1988). However, it appears

that Cal. Civ. Code § 5105 – upon which Firstmark relied – has been

repealed, and the parties have not advised the court on the current

state of California community property law, nor whether Mrs.

Thurston’s ownership of Elevate units meets whatever requirements

////

12

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may apply under that law.18

Accordingly, the court is not able to hold Thurston personally

liable as the alter ego of Elevate, based on the Trustee’s showing

to this point. However, even if the Trustee were able to establish

the “threshold” issue of Thurston’s ownership of Elevate, his

showing as to the other factors thus far, is not convincing, as set

forth below (and keeping in mind that the Trustee bears the burden

of proof here).

1. Undercapitalization.

The trustee asserts that Elevate has not been properly

capitalized “since at least as early as June 2009, and likely

earlier.” However, the Trustee’s citation for this assertion is

the Thurston Declaration, ¶ 6 and Exh. 3 & 4. However, Thurston’s

Declaration does not support this assertion. Rather, it states

that although Elevate is currently unable to resolve certain claims

filed against it in court, “From its organization through late

2009, Elevate was a properly capitalized ongoing concern.” 

Thurston Decl. ¶ 5. Nothing in the Declaration or its supporting

materials supports the Receiver’s assertion that Elevate was

inadequately capitalized “as early as June 2009, and likely

////

////

18 For example, although the court makes no ruling on the

subject, it may be that “[I]n California, property acquired prior

to marriage is separate, while property acquired during the

marriage is presumed community property.” Patrick v. Alacer Corp.

201 Cal. App.4th 1326, 1339 (4th Dist. 2011).

13

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earlier.”19 The Receiver bears the burden of establishing

undercapitalization, but he has cited only to evidence (Thurston’s

own Declaration) which fails to support such a claim.20

2. Corporate Formalities.

The Receiver asserts that Elevate failed to observe the

“corporate formalities,” such as stock issuance, keeping of

minutes, regular election of directors, appointment of officers,

occurrence of regular board meetings, or filing of corporate tax

returns. The Receiver provides no legal or factual basis for this

court to conclude that the “corporate formalities” he lists are

actually required of Elevate, which purports to be a Utah limited

liability company.21

Although it appears that California law governs the alter ego

issue, and the court has applied that law above, it would appear

that the specific “corporate formalities” applicable to it are

those required by Utah statutes, under which Elevate is organized. 

See Salt Lake City Corp. v. James, 761 P.2d 42, 46 (Utah Ct. App.

1988), quoting Messick v. PHD Trucking Serv., Inc., 678 P.2d 791,

794 (Utah 1984). It appears that Utah limited liability companies

19 The court infers from the Trustee’s language that he

believes that the undercapitalization had to occur around the time

of the fraudulent activities (since the funds were received in

December 2008, and were emptied out of Elevate from January to June

2009). Neither side offers any argument for or against this view.

20 The Receiver also cites Exh. 4 of the Thurston Decl. That

document is a Utah “Record of Filing,” the significance of which

the Receiver does not explain.

21 The Trustee does not contest Elevate’s status as a Utah

limited liability company.

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are governed by the Utah Revised Uniform Limited Liability Company

Act, U.C.A. § 48-3-101 (1953), et seq. The court’s limited review

of that law does not reveal that the listed formalities are

required of Utah limited liability companies, with the possible

exception of the filing of taxes. See U.C.A. § 48-3-208 (1)(c)

(1953) (“certificate of existence for a limited liability company”

shall include a statement of whether taxes have been paid).22

In addition, the Receiver has not made any showing that

Elevate does not follow the corporate formalities he has listed,

even assuming they are required.23 To the contrary, Thurston’s

submission discloses, among other things: the issuance of “units,”

which are defined as units of ownership in the company; the role

and election of “managers” (the applicable Utah law does not appear

to require “directors”); the appointment of officers, including

Thurston, and the delegation of authority to them; the role of

Manager meetings; and the keeping of official records, including

meeting minutes. The Receiver does not contest any of this, except

by simple assertion.

////

22 Certainly, there are formalities Utah limited liability

companies must meet, but they are not the ones listed by the

Receiver. For example, the company apparently must have an

“operating agreement,” see U.C.A. § 48-3-110 (1953), and

“certificate of organization,” see U.C.A. § 48-3-201 (1953), both

of which Elevate has, according to Thurston’s submission.

23 The Receiver asserts that “there is insufficient evidence

before the Court that Elevate complies with corporate formalities.” 

Reply (Dkt. No. 447) at p.9. This has the burden reversed; it is

the Receiver who bears the burden of showing that Elevate does not

comply with corporate formalities.

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3. Check Writing Authority.

The Receiver asserts that Thurston is a signatory on the

Elevate bank account, and can withdraw or transfer money from the

account. However, the Receiver does not explain the significance

of the Chief Executive Officer being a signatory on the company

bank account. The Trustee does not, for example, assert that

Thurston used this authority to commingle Elevate’s funds with his

own.

4. Guaranty of Loan to Elevate.

The Trustee has provided evidence that on June 22, 2009,

Thurston guaranteed a $305,000 loan to Elevate. See Touchstone

Decl. Exh. 13 (Dkt. No. 447-3). Under California law, such a

guarantee, when considered with other “unity of interest” factors,

is pertinent:

The requisite unity of interest and ownership in

Ethridge's exertion of control over Aqualec is evidenced

by several facts. Ethridge had absolute authority to

act on Aqualec's behalf and was one of five members of

Aqualec's board of directors. Ethridge owned twenty

percent of the corporation's stock and his wife owned

ten percent. In addition, Ethridge does not receive any

compensation for his services as president of the

corporation. The undercapitalization of the corporation

is easily illustrated. Aqualec has no assets and most

of its capitalization came from Ethridge. Further

evidence that Ethridge should be held individually

liable for Aqualec's debt is that Ethridge personally

guaranteed a loan extended to the corporation which was

used partially to pay for the litigation expenses of the

original lawsuit, that Ethridge is now being sued for

collection of the loans he personally guaranteed, and

that until recently, Ethridge was paying the interest on

the Aqualec loan personally. Moreover, there is no

written agreement with respect to the monies expended by

Ethridge with respect to the loan executed between

Ethridge and Aqualec. Additionally, the checks made out

to plaintiff for payment of legal services were drawn on

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Ethridge's personal account.

Nilsson, Robbins, Dalgarn, Berliner, Carson & Wurst v. Louisiana

Hydrolec, 854 F.2d 1538, 1543-44 (9th Cir. 1988) (per curiam)

(emphasis added). Notably, several apparently key factors from

Nilsson are absent here, or at least the Trustee has made no

showing of them: absolute control by the individual; commingling

of funds; undercapitalization; capitalization coming principally

from the individual; and a lack of a written agreement regarding

the guaranteed loan. The Trustee does not explain how the loan,

standing by itself, establishes the unity of interest needed to

pierce the corporate veil.

5. Personal E-mail Account.

The Trustee has provided evidence that Thurston received an

e-mail from Vassallo on his Gmail account. See Anderson Decl. Exh.

6 (Dkt. No. 432-1). However, the Trustee provides no support for

this conclusion that the Gmail account was Thurston’s “personal”

e-mail account, as opposed to his regular business e-mail account. 

Nor is there any evidence that this was the e-mail Thurston

normally used, as opposed to a one-off use captured by the Trustee. 

Nor does the Trustee explain the relevance of a corporate employee

using a personal e-mail, once, for business.

IV. CONCLUSION

The Trustee has made an adequate showing that Elevate received

$100,000 in defrauded investor funds to which it has no legitimate

claim. The Trustee has not shown that Thurston received defrauded

investor funds, nor that this court should pierce Elevate’s

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corporate shield to reach Thurston’s assets. 

Accordingly:

1. The Trustee’s motion for disgorgement is GRANTED as to

Elevate.

2. The Trustee’s motion for disgorgement is DENIED as to

Thurston, WITHOUT PREJUDICE to its renewal upon a proper showing

that Thurston received defrauded investor funds, or that Elevate’s

corporate shield should be pierced to reach Thurston’s personal

assets.

IT IS SO ORDERED.

DATED: May 21, 2012.

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